FSI Final

Jyana Jyothi Vidya Kendra Sirsi - Notes on Financial Services and Institutions
Module 1 Overview of Financial Markets

1. What is Financial Market?
A financial market is a market in which people and entities can trade financial securities, commodities,
and other fungible items of value at low transaction costs and at prices that reflect supply and demand.
Securities include stocks and bonds, and commodities include precious metals or agricultural goods.
There are both general markets (where many commodities are traded) and specialized markets (where only
one commodity is traded). Markets work by placing many interested buyers and sellers, including households,
firms, and government agencies, in one "place", thus making it easier for them to find each other. An
economy which relies primarily on interactions between buyers and sellers to allocate resources is known as a
market economy in contrast either to a command economy or to a non-market economy such as a gift
economy.
2. What are the features of Financial Markets?
Financial markets facilitate:
• The raising of capital (in the capital markets)
• The transfer of risk (in the derivatives markets)
• Price discovery
• Global transactions with integration of financial markets
• The transfer of liquidity (in the money markets)
• International trade (in the currency markets).
• Financial markets can be domestic or they can be international.
3. What are the Types of Financial Markets?
The financial market is broadly divided into 2 types:
1) Capital Market and 2) Money market.

The Capital market is subdivided into 1) Primary market and 2) Secondary market.
Capital market: - Stock markets, which provide financing through the issuance of shares or common stock,
and enable the subsequent trading thereof. Bond markets, which provide financing through the issuance of
bonds, and enable the subsequent trading thereof. Commodity markets, which facilitate the trading of
commodities.
Money market: - A segment of the financial market in which financial instruments with high liquidity and very
short maturities are traded. The money market is used by participants as a means for borrowing and lending
in the short term, from several days to just under a year. Money market securities consist of negotiable
certificates of deposit (CDs), bankers acceptances, U.S. Treasury bills, commercial paper, municipal notes,
federal funds and repurchase agreements (repos).
4. Define Derivative Market.
Derivatives markets are markets that are based upon another market, which is known as the
underlying market. Derivatives markets can be based upon almost any underlying market, including individual
stock markets, stock indices, and currency markets
A security whose price is dependent upon or derived from one or more underlying assets. The
derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in
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the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies,
interest rates and market indexes. Most derivatives are characterized by high leverage.
5. What is Sweat Equity?
Sweat equity is used to describe the non-financial investment that people contribute to the
development of a project such as a start-up business. For example, sweat equity is counted from the founders
of the company, as well as advisors and board members.
Sweat equity is a party's contribution to a project in the form of effort, as opposed to financial equity,
which is a contribution in the form of capital.
6. What are the Features and objectives of Money Market?
Money market is a market for short-term loan or financial assets. It as a market for the lending and
borrowing of short term funds. As the name implies, it does not actually deals with near substitutes for money
or near money like trade bills, promissory notes and government papers drawn for a short period not
exceeding one year. These short term instruments can be converted into cash readily without any loss and at
low transaction cost.
Features of Money Market
 It is market purely for short-term funds or financial assets called near money.
 It deals with financial assets having a maturity period up to one year only.
 It deals with only those assets which can be converted into cash readily without loss and with
minimum transaction cost.
 Generally transactions take place through phone i.e., oral communication. Relevant documents and
written communications can be exchanged subsequently. There is no formal place like stock exchange
as in the case of a capital market.
 Transactions have to be conducted without the help of brokers.
 The components of a money market are the Central Bank, Commercial Banks, Non-banking financial
companies, discount houses and acceptance house. Commercial banks generally play a dominant in
this market.
Objectives of Money Market
 To provide a parking place to employ short-term surplus funds.

 To provide room for overcoming short-term deficits.
 To enable the Central Bank to influence and regulate liquidity in the economy through its intervention
in this market.
 To provide a reasonable access to users of Short-term funds to meet their requirements quickly,
adequately and at reasonable costs.
7. What are the Functions and objectives of Capital Markets?
Capital Market is one of the significant aspect of every financial market. Hence it is necessary to study
its correct meaning. Broadly speaking the capital market is a market for financial assets which have a long or
indefinite maturity.
Functions of Capital Market.
Mobilization of Savings: Capital market is an important source for mobilizing idle savings from the economy.
It mobilizes funds from people for further investments in the productive channels of an economy. In that
sense it activates the ideal monetary resources and puts them in proper investments.
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Capital Formation: Capital market helps in capital formation. Capital formation is net addition to the existing
stock of capital in the economy. Through mobilization of ideal resources it generates savings; the mobilized
savings are made available to various segments such as agriculture, industry, etc. This helps in increasing
capital formation.
Provision of Investment Avenue : Capital market raises resources for longer periods of time. Thus it provides
an investment avenue for people who wish to invest resources for a long period of time. It provides suitable
interest rate returns also to investors. Instruments such as bonds, equities, units of mutual funds, insurance
policies, etc. definitely provides diverse investment avenue for the public.
Speed up Economic Growth and Development : Capital market enhances production and productivity in the
national economy. As it makes funds available for long period of time, the financial requirements of business
houses are met by the capital market. It helps in research and development. This helps in, increasing
production and productivity in economy by generation of employment and development of infrastructure.
Proper Regulation of Funds : Capital markets not only helps in fund mobilization, but it also helps in proper
allocation of these resources. It can have regulation over the resources so that it can direct funds in a
qualitative manner.
Service Provision : As an important financial set up capital market provides various types of services. It
includes long term and medium term loans to industry, underwriting services, consultancy services, export
finance, etc. These services help the manufacturing sector in a large spectrum.
Continuous Availability of Funds: Capital market is place where the investment avenue is continuously
available for long term investment. This is a liquid market as it makes fund available on continues basis. Both
buyers and seller can easily buy and sell securities as they are continuously available. Basically capital market
transactions are related to the stock exchanges. Thus marketability in the capital market becomes easy.
8. What are the Functions of Financial Market?
Important Functions of Financial Market are
Financial market gives strength to economy by making finance available at the right place.
Mobilization of Savings and their Channelization into more Productive Uses: Financial market gives impetus
to the savings of the people. This market takes the uselessly lying finance in the form of cash to places where
it is really needed. Many financial instruments are made available for transferring finance from one side to the
other side. The investors can invest in any of these instruments according to their wish.
Facilitates Price Discovery: The price of any goods or services is determined by the forces of demand and
supply. Like goods and services, the investors also try to discover the price of their securities. The financial
market is helpful to the investors in giving them proper price.
Provides Liquidity to Financial Assets: This is a market where the buyers and the sellers of all the securities
are available all the times. This is the reason that it provides liquidity to securities. It means that the investors
can invest their money, whenever they desire, in securities through the medium of financial market. They can
also convert their investment into money whenever they so desire.
Reduces the Cost of Transactions: Various types of information are needed while buying and selling
securities. Much time and money is spent in obtaining the same. The financial market makes available every
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type of information without spending any money. In this way, the financial market reduces the cost of
transactions.
9. What are Capital Market instruments, Explain them in detail?
The capital market, as it is known, is that segment of the financial market that deals with the effective
channeling of medium to long-term funds from the surplus to the deficit unit. The process of transfer of funds
is done through instruments, which are documents (or certificates), showing evidence of investments. The
instruments traded (media of exchange) in the capital market are:
1. Debt Instruments: A debt instrument is used by either companies or governments to generate funds for
capital-intensive projects. It can be obtained either through the primary or secondary market. The relationship
in this form of instrument ownership is that of a borrower – creditor and thus, does not necessarily imply
ownership in the business of the borrower. The contract is for a specific duration and interest is paid at
specified periods as stated in the trust deed* (contract agreement). The principal sum invested, is therefore
repaid at the expiration of the contract period with interest either paid quarterly, semi-annually or annually.
The interest stated in the trust deed may be either fixed or flexible. The tenure of this category ranges from 3
to 25 years. Investment in this instrument is, most times, risk-free and therefore yields lower returns when
compared to other instruments traded in the capital market. Investors in this category get top priority in the
event of liquidation of a company.
When the instrument is issued by:
• The Federal Government, it is called a Sovereign Bond;
• A state government it is called a State Bond;
• A local government, it is called a Municipal Bond; and
• A corporate body (Company), it is called a Debenture, Industrial Loan or Corporate Bond
2. Equities (also called Common Stock): This instrument is issued by companies only and can also be
obtained either in the primary market or the secondary market. Investment in this form of business translates
to ownership of the business as the contract stands in perpetuity unless sold to another investor in the
secondary market. The investor therefore possesses certain rights and privileges (such as to vote and hold
position) in the company. Whereas the investor in debts may be entitled to interest which must be paid, the
equity holder receives dividends which may or may not be declared.
The risk factor in this instrument is high and thus yields a higher return (when successful). Holders of this
instrument however rank bottom on the scale of preference in the event of liquidation of a company as they
are considered owners of the company.
3. Preference Shares: This instrument is issued by corporate bodies and the investors rank second (after
bond holders) on the scale of preference when a company goes under. The instrument possesses the
characteristics of equity in the sense that when the authorized share capital and paid up capital are being
calculated, they are added to equity capital to arrive at the total. Preference shares can also be treated as a
debt instrument as they do not confer voting rights on its holders and have a dividend payment that is
structured like interest (coupon) paid for bonds issues.
Preference shares may be:
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• Irredeemable, convertible: in this case, upon maturity of the instrument, the principal sum being
returned to the investor is converted to equities even though dividends (interest) had earlier been paid.
• Irredeemable, non-convertible: here, the holder can only sell his holding in the secondary market as
the contract will always be rolled over upon maturity. The instrument will also not be converted to equities.
• Redeemable: here the principal sum is repaid at the end of a specified period. In this case it is treated
strictly as a debt instrument.
4. Derivatives: These are instruments that derive from other securities, which are referred to as underlying
assets (as the derivative is derived from them). The price, riskiness and function of the derivative depend on
the underlying assets since whatever affects the underlying asset must affect the derivative. The derivative
might be an asset, index or even situation. Derivatives are mostly common in developed economies.
Some examples of derivatives are:
• Futures
• Options
• Swaps
• Rights
• Exchange Traded Funds or commodities
10. Explain Government Securities Market, its types and Instruments used in it.
A Government security is a tradable instrument issued by the Central Government or the State
Governments. It acknowledges the Government’s debt obligation. Such securities are short term (usually
called treasury bills, with original maturities of less than one year) or long term (usually called Government
bonds or dated securities with original maturity of one year or more).
In India, the Central Government issues both, treasury bills and bonds or dated securities while the
State Governments issue only bonds or dated securities, which are called the State Development Loans (SDLs).
Government securities carry practically no risk of default and, hence, are called risk-free gilt-edged
instruments.
Instruments
Fixed Rate Bonds – These are bonds on which the coupon rate is fixed for the entire life of the bond. Most
Government bonds are issued as fixed rate bonds.
Floating Rate Bonds – Floating Rate Bonds are securities which do not have a fixed coupon rate. The coupon is
re-set at pre-announced intervals (say, every six months or one year) by adding a spread over a base rate. In
the case of most floating rate bonds issued by the Government of India Floating Rate Bonds were first issued
in September 1995 in India.
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Zero Coupon Bonds – Zero coupon bonds are bonds with no coupon payments. Like Treasury Bills, they are
issued at a discount to the face value. The Government of India issued such securities in the nineties, It has
not issued zero coupon bond after that.
Capital Indexed Bonds – These are bonds, the principal of which is linked to an accepted index of inflation
with a view to protecting the holder from inflation. A capital indexed bond, with the principal hedged against
inflation, was issued in December 1997. These bonds matured in 2002. The government is currently working
on a fresh issuance of Inflation Indexed Bonds wherein payment of both, the coupon and the principal on the
bonds, will be linked to an Inflation Index (Wholesale Price Index).
Bonds with Call/ Put Options – Bonds can also be issued with features of optionality wherein the issuer can
have the option to buy-back (call option) or the investor can have the option to sell the bond (put option) to
the issuer during the currency of the bond. 6.72%GS2012 was issued on July 18, 2002 for a maturity of 10
years maturing on July 18, 2012.
Special Securities - In addition to Treasury Bills and dated securities issued by the Government of India under
the market borrowing programme, the Government of India also issues, from time to time, special securities
to entities like Oil Marketing Companies, Fertilizer Companies, the Food Corporation of India, etc. as
compensation to these companies in lieu of cash subsidies. Why should one invest in Government securities?
11. What is the role of the Clearing Corporation of India Limited (CCIL)?
The CCIL is the clearing agency for Government securities. It acts as a Central Counter Party (CCP) for
all transactions in Government securities by interposing itself between two counterparties. In effect, during
settlement, the CCP becomes the seller to the buyer and buyer to the seller of the actual transaction. All
outright trades undertaken in the OTC market and on the NDS-OM platform are cleared through the CCIL.
Once CCIL receives the trade information, it works out participant-wise net obligations on both the securities
and the funds leg. The payable / receivable position of the constituents (gilt account holders) is reflected
against their respective custodians. CCIL forwards the settlement file containing net position of participants to
the RBI where settlement takes place by simultaneous transfer of funds and securities under the ‘Delivery
versus Payment’ system. CCIL also guarantees settlement of all trades in Government securities. That means,
during the settlement process, if any participant fails to provide funds/ securities, CCIL will make the same
available from its own means. For this purpose, CCIL collects margins from all participants and maintains
‘Settlement Guarantee Fund’.
12. Explain Foreign Exchange Market in Detail.
The foreign exchange market (forex, FX, or currency market) is a global decentralized market for the
trading of currencies. The main participants in this market are the larger international banks. Financial centers
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around the world function as anchors of trading between a wide range of different types of buyers and sellers
around the clock, with the exception of weekends. EBS and Reuters' dealing 3000 are two main interbank FX
trading platforms. The foreign exchange market determines the relative values of different currencies.
The foreign exchange market works through financial institutions, and it operates on several levels.
Behind the scenes banks turn to a smaller number of financial firms known as “dealers,” who are actively
involved in large quantities of foreign exchange trading. Most foreign exchange dealers are banks, so this
behind-the-scenes market is sometimes called the “interbank market,”although a few insurance companies
and other kinds of financial firms are involved. Trades between foreign exchange dealers can be very large,
involving hundreds of millions of dollars.[citation needed] Because of the sovereignty issue when involving
two currencies, Forex has little (if any) supervisory entity regulating its actions.
The foreign exchange market assists international trade and investment by enabling currency
conversion. For example, it permits a business in the United States to import goods from the European Union
member states, especially Eurozone members, and pay euros, even though its income is in United States
dollars. It also supports direct speculation in the value of currencies, and the carry trade, speculation based on
the interest rate differential between two currencies.
The foreign exchange market is unique because of the following characteristics:
1. its huge trading volume representing the largest asset class in the world leading to high liquidity;
2. its geographical dispersion;
3. its continuous operation: 24 hours a day except weekends, i.e., trading from 20:15 GMT on Sunday
until 22:00 GMT Friday;
4. the variety of factors that affect exchange rates;
5. the low margins of relative profit compared with other markets of fixed income; and
6. the use of leverage to enhance profit and loss margins and with respect to account size.
13. What are the Factors that affect foreign exchange Market?
The factors affecting foreign exchange market are
Employment Data: Non-farm payrolls is the name given to the data that pertains to the number of people
who are employed within the US economy, and it is released the first Friday of every month by the Bureau of
Labor Statistics. Strong decreases in employment indicate a contracting economy, while strong increases are
perceived indicators of a prosperous economy.
Interest Rates: This is always a major focus in the forex market. Since the central banks mandate monetary
policy and supply, they are the prime focus of investors and the various market participants.
Inflation: This is the measure of increases or decreases in pricing levels over a period of time. Due to the
immense number of goods and services available in a country, usually a grouping of these goods and services
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are used to measure changes in the pricing. Increases in pricing indicate an increase in the inflation rate which
in turn can devalue that country's currency.
Retail Sales : The measurement of sales recorded by retailers over a period of time is a reflection of either
increased or decreased consumer spending, depending on whether sales are up or down for the comparative
period a year ago. This indicator gives market participants an idea as to how strong or weak the economy is.
Durable Goods: Goods that have a lifespan of three or more years are considered durable goods and they are
measured in quantities that are ordered, shipped, or unfilled over a period of time. These are also an indicator
of economic spending or the lack of it.
Trade and Capital Flows: Currency values can be significantly impacted by monetary flows that result from
certain interactions between countries. When imports exceed exports, there is a tendency for the currency
value to decline. Increased investments in a country can lead to the opposite result.
Macroeconomic and Geopolitical Events: Elections, financial crises, monetary policy changes, and wars can
influence the biggest changes in the Forex market. These events can either change and/or lead to reshaping of
a country's economy.
14. How are exchange rates determined?
Determinants of exchange rates
1. International parity conditions: Relative Purchasing Power Parity, interest rate parity, Domestic Fisher
effect, International Fisher effect. Though to some extent the above theories provide logical
explanation for the fluctuations in exchange rates, yet these theories falter as they are based on
challengeable assumptions [e.g., free flow of goods, services and capital] which seldom hold true in the
real world.
2. Balance of payments model: This model, however, focuses largely on tradable goods and services,
ignoring the increasing role of global capital flows. It failed to provide any explanation for continuous
appreciation of dollar during 1980s and most part of 1990s in face of soaring US current account
deficit.
3. Asset market model : views currencies as an important asset class for constructing investment
portfolios. Assets prices are influenced mostly by people's willingness to hold the existing quantities of
assets, which in turn depends on their expectations on the future worth of these assets. The asset
market model of exchange rate determination states that “the exchange rate between two currencies
represents the price that just balances the relative supplies of, and demand for, assets denominated in
those currencies.”
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Module 2 - Public Issue Management
1. What is Public Issue?
Issue of stock on a public market rather than being privately funded by the companies own
promoter(s), which may not be enough capital for the business to start up, produce, or continue running. By
issuing stock publically, this allows the public to own a part of the company, though not be a controlling
factor.
If a company decides to raise capital by issuing stock, it must file a formal registration statement with
the Securities and Exchange Commission (SEC) that details the business's financial history, current financial
situation, the proposed public issue and future projections. The company must also prepare a preliminary
prospectus that contains information similar to that of the registration statement for potential investors.
2. What is Public Issue Management?
The management of securities of the corporate sector offered to the public on a regular basis, and
existing shareholders on a rights basis, is known as public issue management. Issue management is an
important function if merchant bankers and lead managers.
3. What is Pre- Issue and Post – Issue Management?
Pre issue management is time bound programme and concerned with following:
1. Issue of shares
2. Marketing, Coordination and underwriting of the issue.
3. Pricing of issues
Post issue management is concerned with following:
1. Collection of application forms and amount received
2. Scrutinising application
3. Deciding allotment procedure
4. Mailing of share certificates/refund or allotment orders
4. Define Prospectus?
A formal legal document, which is required by and filed with the Securities and Exchange Commission, that
provides details about an investment offering for sale to the public. A prospectus should contain the facts that
an investor needs to make an informed investment decision. It is Also known as an "offer document.
5.Explain briefly about prospectus?
There are two types of prospectuses for stocks and bonds:
Preliminary and Final.
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The preliminary prospectus is the first offering document provided by a securities issuer and includes
most of the details of the business and transaction in question. Some lettering on the front cover is printed in
red, which results in the use of the nickname "red herring" for this document.
The final prospectus is printed after the deal has been made effective and can be offered for sale, and
supersedes the preliminary prospectus. It contains finalized background information including such details as
the exact number of shares/certificates issued and the precise offering price.
In the case of mutual funds, which, apart from their initial share offering, continuously offer shares for
sale to the public, the prospectus used is a final prospectus. A fund prospectus contains details on its
objectives, investment strategies, risks, performance, distribution policy, fees and expenses, and fund
management.
A red herring prospectus, as a first or preliminary prospectus, is a document submitted by a company

(issuer) as part of a public offering of securities (either stocks or bonds). Most frequently associated with an
initial public offering (IPO), this document, like the previously submitted Form S-1 registration statement,
must be filed with the Securities and Exchange Commission (SEC).
A red herring prospectus is issued to potential investors, but does not have complete particulars on the price
of the securities offered and quantum of securities to be issued.
[1] The front page of the prospectus displays a bold red disclaimer stating that information in the prospectus
is not complete and may be changed, and that the securities may not be sold until the registration statement,
filed with the market regulator, is effective
6. What are the Objectives of Prospectus?
Objectives: Prospectus is issued with the following broad objectives:
 It informs the company about the formation of a new company.

 It serves as written evidence about the terms and conditions of issue of shares or debentures of a
company.
 It induces the investors to invest in the shares and debentures of the company.
 It describes the nature, extent and future prospectus of the company.
 It maintains all authentic records on the issue and make the directors liable for the misstatement in
the prospectus.
7. What are the contents of Prospectus?
Contents: The following important matter is included in the prospectus:
 The prospectus contains the main objectives of the company, the name and addresses of the
signatories of the memorandum of association and the number of shares held by them.
 The name, addresses and occupation of directors and managing directors.
 The number and classes of shares and debentures issued.
 The qualification share of directors and the interest of directors for the promotion of company.
 Particulars about the directors, secretaries and the treasures and their remuneration.
 The amount for the minimum subscription.
 If the company carrying on business, the length of time of such businesses.
 The estimated amount of preliminary expenses.
 Name and address of the auditors, bankers and solicitors of the company.
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 Time and place where copies of balance sheets, profits and loss account and the auditors report may
be inspected.
8. Pricing of a new issue?
The price at which a new security will be distributed to the public prior to the new issue trading on the
secondary market. Also commonly referred to as offering price.
9. Methods of New issue pricing ?
There are two types of public issues i.e. one where the company and lead manager fix a price (called a fixed
price) and other where the company and the lead manager stipulate a floor price or a price band and leave it
to market forces, to determine the final prices (price discovery through book-building process).
Fixed price issue: An issuer company is allowed to freely price the issue. The basis of issue price is disclosed in
the offer document where the issuer discloses, in detail, about the qualitative and quantitative factors
justifying the issue price. The issuer company can mention price band of 20% (cap in the price band should not
be more than 20% of the floor price) in the draft offer document filed with SEBI and actual price can be
determined at a later date before filing of the final offer document with SEBI/ROC.
Book building – This stands for a process by which demand for the securities proposed to be issued is
elicited/ build up and price for securities is assessed on the basis of the bids obtained from the quantum of
securities offered for subscription. This provides an opportunity to the market to discover price for the
securities. The red herring prospectus used in Book building process, does not contain a price. Instead, the
prospects contains either the floor price or a price band along with a range, within which the bids can move.
The applicants bid for the shares, quoting the price and the quantity that they would like to bid at. Only the
retail investors have the option of bidding at cut-off. After completion of the bidding process, the cut off price
is arrived at on the lines of Dutch auction. The basis of allotment is then finalized and letters of allotment or
refund is undertaken. The final prospectus with all the details are filed with RoC to complete the issue
process.
Price band – The red herring prospectus may contain the floor price for the securities or the price band within
which the investors can bid. The spread between the floor and the cap of the price band shall not be more
than 20%. The price band can have a revision and such a revision shall be widely disseminated.
Reservation : A company can reserve some shares for allotment on firm basis for some categories. Allotment
of firm basis indicates that allotment to the investor is on firm basis.
10. What is book Building?
Book building is a process of price discovery. The issuer discloses a price band or floor price before opening of
the issue of the securities offered. On the basis of the demands received at various price levels within the
price band specified by the issuer, Book Running Lead Manager (BRLM) in close consultation with the issuer
arrives at a price at which the security offered by the issuer, can be issued.
11. What is a price band?
The price band is a band of price within which investors can bid. The spread between the floor and the cap of
the price band shall not be more than 20%. The price band can be revised. If revised, the bidding period shall
be extended for a further period of three days, subject to the total bidding period not exceeding thirteen
days.
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12. Who are Merchant Bankers? What are their functions?
Merchant Banking is a combination of Banking and consultancy services. It provides consultancy, to its clients,
for financial, marketing, managerial and legal matters. Consultancy means to provide advice, guidance and
service for a fee. It helps a businessman to start a business. It helps to raise (collect) finance. It helps to
expand and modernize the business. It helps in restructuring of a business. It helps to revive sick business
units. It also helps companies to register, buy and sell shares at the stock exchange.
A merchant bank is a financial institution that provides capital to companies in the form of share
ownership instead of loans. A merchant bank also provides advisory on corporate matters to the firms they
lend to. In the United Kingdom, the term "merchant bank" refers to an investment bank.
In short, merchant banking provides a wide range of services for starting until running a business. It acts as
Financial Engineer for a business. Merchant banking was first started in India in 1967 by Grindlays Bank. It has
made rapid progress since 1970. Their knowledge in international finances make merchant banks specialists in
dealing with multinational corporations.
The functions of merchant banking are listed as follows:
 Raising Finance for Clients : Merchant Banking helps its clients to raise finance through issue of shares,
debentures, bank loans, etc. It helps its clients to raise finance from the domestic and international
market. This finance is used for starting a new business or project or for modernization or expansion of
the business.
 Broker in Stock Exchange : Merchant bankers act as brokers in the stock exchange. They buy and sell
shares on behalf of their clients. They conduct research on equity shares. They also advise their clients
about which shares to buy, when to buy, how much to buy and when to sell. Large brokers, Mutual
Funds, Venture capital companies and Investment Banks offer merchant banking services.
 Project Management : Merchant bankers help their clients in the many ways. For e.g. Advising about
location of a project, preparing a project report, conducting feasibility studies, making a plan for
financing the project, finding out sources of finance, advising about concessions and incentives from
the government.
 Advice on Expansion and Modernization : Merchant bankers give advice for expansion and
modernization of the business units. They give expert advice on mergers and amalgamations,
acquisition and takeovers, diversification of business, foreign collaborations and joint-ventures,
technology upgradation, etc.
 Managing Public Issue of Companies : Merchant bank advice and manage the public issue of
companies. They provide following services:
 Acting as manager to the issue, and helping in accepting applications and allotment of securities.
 Help in appointing underwriters and brokers to the issue.
 Listing of shares on the stock exchange, etc.
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 Handling Government Consent for Industrial Projects : A businessman has to get government
permission for starting of the project. Similarly, a company requires permission for expansion or
modernization activities. For this, many formalities have to be completed. Merchant banks do all this
work for their clients.
 Special Assitance to Small Companies and Entreprenuers : Merchant banks advise small companies
about business opportunities, government policies, incentives and concessions available. It also helps
them to take advantage of these opportunities, concessions, etc.
 Services to Public Sector Units : Merchant banks offer many services to public sector units and public
utilities. They help in raising long-term capital, marketing of securities, foreign collaborations and
arranging long-term finance from term lending institutions.
 Revival of Sick Industrial Units : Merchant banks help to revive (cure) sick industrial units. It negotiates
with different agencies like banks, term lending institutions, and BIFR (Board for Industrial and
Financial Reconstruction). It also plans and executes the full revival package.
 Portfolio Management : A merchant bank manages the portfolios (investments) of its clients. This
makes investments safe, liquid and profitable for the client. It offers expert guidance to its clients for
taking investment decisions.
 Corporate Restructuring : It includes mergers or acquisitions of existing business units, sale of existing
unit or disinvestment. This requires proper negotiations, preparation of documents and completion of
legal formalities. Merchant bankers offer all these services to their clients.
 Leasing Services : Merchant bankers also help in leasing services. Lease is a contract between the
lessor and lessee, whereby the lessor allows the use of his specific asset such as equipment by the
lessee for a certain period. The lessor charges a fee called rentals.
 Management of Interest and Dividend : Merchant bankers help their clients in the management of
interest on debentures / loans, and dividend on shares. They also advise their client about the timing
(interim / yearly) and rate of dividend.
13. Who Is a UNDERWRITER
A company or other entity that administers the public issuance and distribution of securities from a
corporation or other issuing body. An underwriter works closely with the issuing body to determine the
offering price of the securities, buys them from the issuer and sells them to investors via the underwriter's
distribution network.
14. What is Underwriting
Underwriting refers to the process that a large financial service provider (bank, insurer, investment house)
uses to assess the eligibility of a customer to receive their products (equity capital, insurance, mortgage, or
credit). The name derives from the Lloyd's of London insurance market. Financial bankers, who would accept
some of the risk on a given venture (historically a sea voyage with associated risks of shipwreck) in exchange
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for a premium, would literally write their names under the risk information that was written on a Lloyd's slip
created for this purpose.
15. What are the types of forms of Underwriting ?
The 3 main types of underwriting agreements are:
i) Complete underwriting. If the whole issue of shares or debentures of a company is underwritten, it is called
complete underwriting. In such a case the whole issue is underwritten either by an individual/institution
agreeing to take the entire risk or by a number of firms or institutions each agreeing to take the risk to a
limited extent.
ii) Partial underwriting. If part of the issue of shares or debentures of a company is underwritten, it is said to
be partial underwriting. In such a case the part of the issue is underwritten either by an individual/institution
or by a number of firms or institutions each agreeing to take the risk to a limited extent.
iii) Firm underwriting. Firm underwriting means when an underwriter agrees to buy a definite number of
shares or debentures in addition to the shares or debentures he has to take under the underwriting
agreement. In case of firm underwriting the underwriters get issue is over subscribed, the underwriters are
liable to take up the agreed number of shares or debentures.
16. What are the benefits of Underwriting ?
(i) Assurance of Adequate Finance. Underwriting is a guarantee given buy the underwriters to take up the
whole issue or remaining shares, not subscribed by public. In the absence an underwriting agreement, a
company may face a situation where even minimum subscription is not received and, it will have to go, into
liquidation. In case of an existing company, it may have to postpone its projects for which the issue was
meant. As a result of an underwriting contract, a company has not to wait till the shares have been subscribed
before entering into the required contracts for purchase of fixed assets etc. it can go ahead with its plan
confidently. Thus, underwriting agreement assures of the required funds within a reasonable or agreed time.
(ii) Benefit of Expert Advice. An incidental advantage of underwriting is that the issuing company gets the
benefit of expert advice. An underwriter of repute would go into the soundness of the plan put forward by the
company before entering into an agreement and suggest changes wherever necessary, enabling the company
to avid certain pitfalls.
(iii) Increase in Goodwill of the Company. The good underwriters being men or firms of financial integrity an
established reputation. As we have already explained that underwriters satisfy themselves with the financial
integrity of the company and viability of the plan, the investors therefore, runs much less risk when they buy
shares or debentures which have been underwritten by them. They assure of the soundness of eh company.
Thus, good underwriters increase the goodwill of the company.
(iv) Geographical Dispersion of Securities. Generally, underwriters maintain working arrangement wit other
underwriters and broken throughout the country and in other countries too and as such, they are able to tap
the financial resources for the company not only in on particular area but also in other areas as well. In this
way marketability of securities increases and geographical dispersion of shares and debentures in promoted.
(v) Service to Prospective Buyers. Underwriters render useful services to the perspective buyers of securities
by giving them expert advice regarding the safe investment in sound companies. Sometimes they publish
information and their expert opinion in respect of various companies. Thus, they render useful services to the
buyers of securities too.
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17. Who is a Issue Manager ?
The main underwriter or lead manager in the issuance of new equity, debt or securities instruments. In
investment banking, the book runner is the underwriting firm that "runs," or who is in charge, of the books. A
large, leveraged buyout could involve multiple companies, and the book runner works with the other
participating firms. Typically, one company takes the responsibility of "running" or handling the books, and
the book runner is listed first among the other underwriters participating in the issuance. More than one book
runner can manage a security issuance, in which case the involved parties are called "joint book runners."
Also called managing underwriter or syndicate manager
18. What are theFunctions of Issue Managers?
Role of Issue Managers are
The merchant banker as an issue manager is helpful in the following ways:
1) Easy floatation: An issue manager acts as an indispensable pilot facilitating a public / rights issue. This
is made possible with the help of a repository of special skills possessed by him to execute the management of
issue.
2) Financial consultant: An issue manager essentially acts a financial architect, by providing advice
relating to capital structuring, capital gearing and financial planning for the company.
3) Underwriting: An issue manager allows for underwriting the issues of securities made by corporate
enterprises. This ensures due subscription of the issue.
4) Market makers: Merchant bankers, as issue managers often act as the market makers for the issues
lead managed by them. They invest, continue to old and provide, buy and sell quotes for the listed scrips of
the company.
5) Due diligence: The issue manager has to comply with SEBI guidelines. The merchant banker will carry
out activities with due diligence and furnish a Due Diligence Certificate to SEBI. The detailed diligence
guidelines that are prescribed by the Association of Merchant Bankers of India (AMBI) have to be strictly
observed. SEBI has also prescribed a code of conduct for merchant bankers.
6) Coordination: The issue manager is required to co-ordinate with a large number of institutions and
agencies while managing an issue in order to make it successful.
7) Liaison with SEBI: The issue manager, as a part of merchant banking activities, should register with
SEBI. While managing issues, constant interaction with the SEBI is required by way of filing of offer
documents, etc. In addition, they should file a number of reports relating to the issues being managed.
19. What are credit rating agencies?
A credit rating agency (CRA, also called a ratings service) is a company that assigns credit ratings, which rate a
debtor's ability to pay back debt by making timely interest payments and the likelihood of default. An agency
may rate the creditworthiness of issuers of debt obligations, of debt instruments, and in some cases, of the
servicers of the underlying debt,but not of individual consumers.
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20. What are the types of Credit ratings ?
Sovereign credit rating A sovereign credit rating is the credit rating of a sovereign entity, i.e., a national
government. The sovereign credit rating indicates the risk level of the investing environment of a country and
is used by investors looking to invest abroad. It takes political risk into accounts.
Short-term rating A short-term rating is a probability factor of an individual going into default within a year.
This is in contrast to long-term rating which is evaluated over a long timeframe. In the past institutional
investors preferred to consider long-term ratings. Nowadays, short-term ratings are commonly used.[citation
needed]
First, the Basel II agreement requires banks to report their one-year rose if they applied internal-ratings-based
approach for capital requirements. Second, many institutional investors can easily manage their credit/bond
portfolios with derivatives on monthly or quarterly basis. Therefore, some rating agencies simply report short-
term ratings.
Corporate credit ratings The credit rating of a corporation is a financial indicator to potential investors of debt
securities such as bonds. Credit rating is usually of a financial instrument such as a bond, rather than the
whole corporation. These are assigned by credit rating agencies such as A. M. Best, DBRS, Dun & Bradstreet,
Standard & Poor's, Moody's or Fitch Ratings and have letter designations such as A, B, C. The Standard &
Poor's rating scale is as follows, from excellent to poor: AAA, AA+, AA, AA-, A+, A, A-, BBB+, BBB, BBB-, BB+,
BB, BB-, B+, B, B-, CCC+, CCC, CCC-, CC, C, D. Anything lower than a BBB- rating is considered a speculative or
junk bond. The Moody's rating system is similar in concept but the naming is a little different. It is as follows,
from excellent to poor: Aaa, Aa1, Aa2, Aa3, A1, A2, A3, Baa1, Baa2, Baa3, Ba1, Ba2, Ba3, B1, B2, B3, Caa1,
Caa2, Caa3, Ca, C.
21. Short notes on all the Credit Rating Agencies in India
Rating Agencies in India
1. CRISIL Limited (Credit Rating Information Services of India Limited)

2. Fitch Ratings India Private Ltd.
3. ICRA Limited Indian credit ratings agency
4. Credit Analysis & Research Ltd. (CARE)
5. SME Rating Agency of India Ltd. (SMERA)
6. ONICRA Credit Rating Agency (Onida Individual Credit Rating Agency of India)
CRISIL
CRISIL is the largest credit rating agency in India. It was established in 1987. The world’s largest rating agency
Standard & Poor's now holds majority stake in CRISIL. Till date it has rated more than 5178 SMEs across India
and has issued more than 10,000 SME ratings. CRISIL or Credit Rating And Information Services Of India Ltd, is
the leading rating company in India. Besides, CRISIL also deals with matters related to risks and research. It
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also has the credit of being a reputed policy advisory company. A division of Mc Graw Hill companies,
Standard & Poor's, is the major stake holder of CRISIL.
CRISIL has played an important role in India's debt market. Besides, it also extends services to the
international clients.
Services offered by CRISIL (both in the domestic market as well as international markets) include the
following:
 Corporate advisory and infrastructure

 Risk Assessment
 Credit ratings
 Energy
 Fund services
 Risk management
 Conducting extensive research on Indian economy, companies, industries,
 Global Equity research
CRISIL 's rating activities:
Rating of bonds and debentures, which are long term instruments, structured obligations, preference shares
are rated by CRISIL. It also rates fixed deposits. Short term instruments like short term deposits as well as
programs related to commercial paper are also rated by CRISIL.
With regard to ratings of bank loans, the facilities of credit offered to the customers are also rated by CRISIL.
CRISIL has the credit of rating the state governments of Andhra Pradesh, Maharashtra, Karnataka and Gujarat.
It has rated several joint ventures as well as subsidiaries of many multinational companies.
CRISIL also rates real estate projects of several real estate companies. It works in association with the National
Real Estate Development Council. The above mentioned ratings are only a handful. CRISIL has rated several
other institutions and companies functioning in different spheres of the economy.
Fitch Ratings
Fitch Ratings is a global rating agency committed to providing the world's credit markets with independent
and prospective credit opinions, research, and data. Fitch Ratings is headquartered in New York and London
and is part of the Fitch Group.
Fitch Ratings' long-term credit ratings are assigned on an alphabetic scale from 'AAA' to 'D', first introduced in
1924 and later adopted and licensed by S&P. (Moody's also uses a similar scale, but names the categories
differently.) Like S&P, Fitch also uses intermediate +/- modifiers for each category between AA and CCC (e.g.,
AA+, AA, AA-, A+, A, A-, BBB+, BBB, BBB-, etc.).
ICRA
ICRA was established in 1991 by leading Indian financial institutions and commercial banks. International
credit rating agency, Moodys, is the largest shareholder. ICRA has a dedicated team of professionals for the
MSME sector and has developed a linear scale for MSME sector which makes the benchmarking with peers
easier.
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ICRA’s rating process involves:
o Receipt of rating request from an issuer. Please note that ICRA does not assign unsolicited ratings.
o Assigning a rating team – The team usually comprises two members. The composition of the team is
based on the expertise and skills required for evaluating the issuer’s business.
o Collating information – Issuers are provided a list of information requirements and the broad
framework for discussions. These information requirements encompass the rating factors specific to the
issuer’s business. ICRA maintains internal records to support its credit ratings in accordance with our
internal policies and applicable norms from SEBI. ICRA follows strict processes to maintain confidentiality All
information collected as part of the rating process is used only for rating activities and is not disclosed in
ICRA’s publications unless approved by the issuer.
o Meeting key officials and the management team – In addition to the quantitative analysis, rating
involves assessment of several qualitative factors that are likely to have a bearing on credit profile of the
issuer. This requires extensive interactions with issuer’s senior officials and top management specifically
relating to business and financial risk, management’s approach to mitigating risk factors, outlook for the
business, management strategy & future plans, and funding policies. Visit to the ‘Works’ facilitates
understanding of the production process and also helps in assessing the progress of projects under
implementation. Rating team also has discussions with the auditors and key lenders.
o Preview meeting- After the completion of analysis, the findings are discussed at length internally to
validate the identification of all key factors, which have a bearing on the rating. These key rating factors are
also discussed with the top management of the debt issuing entity to elicit their views.
o Rating committee meeting: ICRA’s rating committee is the designated authority for assigning ratings.
The rating team comprising the analysts presents the key rating factors and its analysis, which are discussed in
this committee. The rating committee assigns a rating and all the factors, which influence the rating, are
clearly spelt out.
CARE Ratings
Incorporated in 1993, Credit Analysis and Research Limited (CARE) is a credit rating, research and advisory
committee promoted by Industrial Development Bank of India (IDBI), Canara Bank, Unit Trust of India (UTI)
and other financial and lending institutions. CARE has completed over 7,564 rating assignments since its
inception in 1993.
Small and Medium Enterprises Rating Agency (SMERA)
SMERA a joint initiative by SIDBI, Dun & Bradstreet Information Services India Private Limited (D&B) and
several leading banks in the country. SMERA is the country's first Rating agency that focuses primarily on the
Indian MSME segment. SMERA has completed 7000 ratings.
ONICRA Credit Rating Agency
ONICRA was established in 1993 by Mr. Sonu Mirchandani as a rating agency. It analyzes data and provides
rating solutions for Individuals and Small and Medium Enterprises(SMEs). ONICRA has an extensive experience
in operating a wide range of business processes in areas such as Finance, Accounting, Back-end Management,
Application Processing, Analytics, and Customer Relations. It has rated more than 2500 SMEs.
22. What are Mutual Funds?

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An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of
investing in securities such as stocks, bonds, money market instruments and similar assets. Mutual funds are
operated by money managers, who invest the fund's capital and attempt to produce capital gains and income
for the fund's investors. A mutual fund's portfolio is structured and maintained to match the investment
objectives stated in its prospectus.
23. What are the Objectives of Mutual Funds ?
Here are some of the main forms of mutual fund objectives that we commonly see:
Growth Mutual Funds – Probably the most common mutual fund objective is investing for growth. What
investor doesn’t want growth right? Even income investors want growth. A growth mutual fund simply wants
his assets to appreciate over time. Growth mutual funds are generally invested primarily in the stock market
and include stock market sectors from small to large cap.
Income Mutual Funds – The second more common mutual fund objective is investing for income. Many
investors – typically those who are older and looking for cash flow to supplement their income – want an
income distribution from their investment. Income mutual funds typically will distribute cash payments based
on how many shares you own every month and the income generally varies over time. Most income mutual
funds will invest in all types of bonds as well as some high quality dividend paying stocks and hybrids like
preferred stocks.
Socially Responsible Mutual Funds – Some investors prefer to invest with social responsibility as their focus.
There are various types of socially responsible mutual funds. A socially responsible mutual fund will either
invest FOR an objective (for example green energy) or AGAINST an objective (avoiding alcohol, tobacco and
firearms).
Sector Mutual Funds – Some mutual funds will invest only in a specific sector, such as biotechnology or
healthcare. This provides them exposure to advances in smaller sections of the economy, such as when
money floods into technology sectors due to the advent of a faster computer chip or more stable
programming platform.
24. What are the Characteristics of Mutual Funds?
Potential Depletion of Principal
Mutual funds always involve a certain amount of risk; neither the principal value nor the rate of return is
guaranteed in any way. Both the FINRA (previously known as NASD) and SEC rules require that clients receive
a disclosure that investment in a mutual fund may fluctuate in value, and that there is a risk of potential
depletion of the principal sum invested.
Minimum Initial and Subsequent Investment
Mutual funds must list in the prospectus the required minimum investment that will be accepted by the fund.
The minimum initial investment (anywhere from $250 to $10,000 depending on the fund) may be lowered in
certain instances, such as for IRA (or other retirement) accounts or for investors who elect a systematic
investment plan. The minimum subsequent investment may be set as equal to, or less than, the initial
investment limit.
Dividends and Capital Gains Distributions
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When opening a mutual fund account, the investor must elect how to receive dividends and capital gains
generated by the fund. The options are:
To receive distributions as cash
To reinvest distributions into the fund
To reinvest distributions into a different fund in the same fund family The investor may choose a different
election for the dividends than they do for the capital gains. Regardless of the option selected, distributions
have the same tax consequences for the investor (see the section below on taxation). Also, the investor may
change the election at any time.
25. What are the Different Types Of Mutual Funds:
1) Equity funds (stocks)
2) Fixed-income funds (bonds)
3) Money market funds
All mutual funds are variations of these three asset classes. For example, while equity funds that invest in fast-
growing companies are known as growth funds, equity funds that invest only in companies of the same sector
or region are known as specialty funds.
Money Market Funds
The money market consists of short-term debt instruments, mostly Treasury bills. This is a safe place to park
your money. You won't get great returns, but you won't have to worry about losing your principal. A typical
return is twice the amount you would earn in a regular checking/savings account and a little less than the
average certificate of deposit (CD).
Bond/Income Funds
Income funds are named appropriately: their purpose is to provide current income on a steady basis. When
referring to mutual funds, the terms "fixed-income," "bond," and "income" are synonymous. These terms
denote funds that invest primarily in government and corporate debt. While fund holdings may appreciate in
value, the primary objective of these funds is to provide a steady cashflow to investors. As such, the audience
for these funds consists of conservative investors and retirees.
Balanced Funds
The objective of these funds is to provide a balanced mixture of safety, income and capital appreciation. The
strategy of balanced funds is to invest in a combination of fixed income and equities. A typical balanced fund
might have a weighting of 60% equity and 40% fixed income. The weighting might also be restricted to a
specified maximum or minimum for each asset class.
Equity Funds
Funds that invest in stocks represent the largest category of mutual funds. Generally, the investment objective
of this class of funds is long-term capital growth with some income. There are, however, many different types
of equity funds because there are many different types of equities. A great way to understand the universe of
equity funds is to use a style box, an example of which is below.
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Global/International Funds
An international fund (or foreign fund) invests only outside your home country. Global funds invest anywhere
around the world, including your home country.
It's tough to classify these funds as either riskier or safer than domestic investments. They do tend to be more
volatile and have unique country and/or political risks. But, on the flip side, they can, as part of a well-
balanced portfolio, actually reduce risk by increasing diversification. Although the world's economies are
becoming more inter-related, it is likely that another economy somewhere is outperforming the economy of
your home country.
Specialty Funds
This classification of mutual funds is more of an all-encompassing category that consists of funds that have
proved to be popular but don't necessarily belong to the categories we've described so far. This type of
mutual fund forgoes broad diversification to concentrate on a certain segment of the economy.
Index Funds
The last but certainly not the least important are index funds. This type of mutual fund replicates the
performance of a broad market index such as the S&P 500 or Dow Jones Industrial Average (DJIA). An investor
in an index fund figures that most managers can't beat the market. An index fund merely replicates the
market return and benefits investors in the form of low fees. (For more on index funds, check out our Index
Investing Tutorial.)
26. How does a mutual fund work/operate?
A mutual fund company collects money from several investors, and invests it in various options like stocks,
bonds, etc. This fund is managed by professionals who understand the market well, and try to accomplish
growth by making strategic investments. Investors get units of the mutual fund according to the amount they
have invested. The Asset Management Company is responsible for managing the investments for the various
schemes operated by the mutual fund. It also undertakes activities such like advisory services, financial
consulting, customer services, accounting, marketing and sales functions for the schemes of the mutual fund.
27. What is Net Asset Value?
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Net Asset Value (NAV) is the total asset value (net of expenses) per unit of the fund and is calculated by the
AMC at the end of every business day. In order to calculate the NAV of a mutual fund, you need to take the
current market value of the fund's assets minus the liabilities, if any and divide it by the number of shares
outstanding. NAV is calculated as follows:
28. What are the advantages/Benefits of investing in mutual funds:
Professional Management
When you invest in a mutual fund, your money is managed by finance professionals. Investors who do not
have the time or skill to manage their own portfolio can invest in mutual funds. By investing in mutual funds,
you can gain the services of professional fund managers, which would otherwise be costly for an individual
investor.
Diversification
Mutual funds provide the benefit of diversification across different sectors and companies. Mutual funds
widen investments across various industries and asset classes. Thus, by investing in a mutual fund, you can
gain from the benefits of diversification and asset allocation, without investing a large amount of money that
would be required to build an individual portfolio.
Liquidity
Mutual funds are usually very liquid investments. Unless they have a pre-specified lock-in period, your money
is available to you anytime you want subject to exit load, if any. Normally funds take a couple of days for
returning your money to you. Since they are well integrated with the banking system, most funds can transfer
the money directly to your bank account.
Flexibility
Investors can benefit from the convenience and flexibility offered by mutual funds to invest in a wide range of
schemes. The option of systematic (at regular intervals) investment and withdrawal is also offered to investors
in most open-ended schemes. Depending on one’s inclinations and convenience one can invest or withdraw
funds.
Low transaction cost
Due to economies of scale, mutual funds pay lower transaction costs. The benefits are passed on to mutual
fund investors, which may not be enjoyed by an individual who enters the market directly.
Transparency
Funds provide investors with updated information pertaining to the markets and schemes through factsheets,
offer documents, annual reports etc.
Well regulated
Mutual funds in India are regulated and monitored by the Securities and Exchange Board of India (SEBI), which
endeavors to protect the interests of investors. All funds are registered with SEBI and complete transparency
is enforced. Mutual funds are required to provide investors with standard information about their
investments, in addition to other disclosures like specific investments made by the scheme and the quantity of
investment in each asset class.
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29. What are the disadvantages/Risks of Mutual funds ?
Mutual funds invest in different securities like stocks or fixed income securities, depending upon the fund’s
objectives. As a result, different schemes have different risks depending on the underlying portfolio. The value
of an investment may decline over a period of time because of economic alterations or other events that
affect the overall market..
Risk and Reward: The diversification that mutual funds provide can help ease risk by offsetting losses from
some securities with gains in other securities. On the other hand, this could limit the upside potential that is
provided by holding a single security.
Lack of Control: Investors cannot determine the exact composition of a fund’s portfolio at any given time, nor
can they directly influence which securities the fund manager buys.
Module 3 Factoring and Forfeiting

1. Define Factoring ?
Factoring is a financial transaction in which a business sells its accounts receivable (i.e., invoices) to a third
party (called a factor) at a discount
The three parties directly involved are:
• The one who sells the receivable,
• The debtor (the account debtor, or customer of the seller), and
• The factor.
The receivable is essentially a financial asset associated with the debtor's liability to pay money owed to the
seller (usually for work performed or goods sold). The seller then sells one or more of its invoices (the
receivables) at a discount to the third party, the specialized financial organization (aka the factor), often, in
advance factoring, to obtain cash.
2. Different types of Factoring ?
The different types of Factoring are as follows:
Factoring can be both domestic and for exports. In domestic Factoring, the client sells goods and services to
the customer and delivers the invoices, order, etc., to the Factor and informs the customer of the same.
In return, the Factor makes a cash advance and forwards a statement to the client. The Factor then sends a
copy of all the statements of accounts, remittances, receipts, etc., to the customer. On receiving them the
customer sends the payment to the Factor.
Different types of Domestic Factoring are as follows:

1. Full Factoring This is also known as "Without Recourse Factoring ". It is the most comprehensive type of
facility offering all types of services namely finance sales ledger administration, collection, debt protection and
customer information.
2. Recourse Factoring The Factoring provides all types of facilities except debt protection. This type of service
is offered in India. As discussed earlier, under Recourse Factoring, the client's liability to Factor is not
discharged until the customer pays in full.
3. Maturity Factoring It is also known as "Collection Factoring ". Under this arrangement, except providing
finance, all other basic characteristics of Factoring are present. The payment is effected to the client at the
end of collection period or the day of collecting accounts whichever is earlier.
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4. Advance Factoring This could be with or without recourse. Under this arrangement, the Factor provides
advance at an agreed rate of interest to the client on uncollected and non-due receivables. This is only a pre-
payment and not an advance.
Under this method, the customer is not notified about the arrangement between the client and the Factor.
Hence the buyer is unaware of factoring arrangement. Debt collection is organized by the client who makes
payment of each invoice to the Factor, if advance payment had been received earlier.
6. Invoice Discounting In this arrangement, the only facility provided by the Factor is finance. In this method
the client is a reputed company who would like to deal with its customers directly, including collection, and
keep this Factoring arrangement confidential.
The client collects payments from customer and hands it over to Factor. The risk involved in invoice
discounting is much higher than in any other methods.
The Factor has liberty to convert the facility by notifying all the clients to protect his interest. This service is
becoming quite popular in Europe and nearly one third of Factoring business comprises this facility.
7. Bulk Factoring It is a modified version of Involve discounting wherein notification of assignment of debts is
given to the customers. However, the client is subject to full recourse and he carries out his own
administration and collection.
8. Agency Factoring Under this arrangement, the facilities of finance and protection against bad debts are
provided by the Factor whereas the sales ledger administration and collection of debts are carried out by the
client.
3.What are the features of Factoring ?
Salient Features of Factoring:
(i) Credit Cover: The factor takes over the risk burden of the client and thereby the client’s credit is covered
through advances.
(ii) Case advances: The factor makes cash advances to the client within 24 hours of receiving the documents.
(iii) Sales ledgering: As many documents are exchanged, all details pertaining to the transaction are
automatically computerized and stored.
(iv) Collection Service: The factor, buys the receivables from the client, they become the factor’s debts and the
collection of cheques and other follow-up procedures are done by the factor in its own interest.
(v) Provide Valuable advice: The factors also provide valuable advice on country-wise and customer-wise risks.
This is because the factor is in a position to know the companies of its country better than the exporter
clients.
4. What are the advantages and disadvantages of factoring?
Advantage of Factoring:
1. It is help to improve the current ratio. Improvement in the current ratio is an indication of improved
liquidity. Enables better working capital management. This will enable the unit to offer better credit terms to
its customers and increase orders.
2. It is increase in the turnover of stocks. The turnover of stock into cash is speeded up and this results in
larger turnover on the same investment.
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3. It ensures prompt payment and reduction in debt.
4. It helps to reduce the risk. Present risk in bills financing like finance against accommodation bills can be
reduced to minimum.
5. It is help to avoid collection department. The client need not undertake any responsibility of collecting the
dues from the buyers of the goods.
Disadvantages of Factoring:
1. Factoring is a high risk area, and it may result in over dependence on factoring, mismanagement, over
trading of even dishonesty on behalf of the clients.
2. It is uneconomical for small companies with less turnover.
3. The factoring is not suitable to the companies manufacturing and selling highly specialized items because
the factor may not have sufficient expertise to asses the credit risk.
4. The developing countries such as India are not able to be well verse in factoring. The reason is lack of
professionalism, non-acceptance of change and developed expertise.
5. Problems of Factoring in India
Factoring is one of the upcoming sources of finance for SMEs in India. It is particularly, relevant if a company is
growing on a daily basis and when new customers are added regularly there are chances of ending up with
huge invoices. The notion that SMEs experience disadvantage in relationship with the capital market i.e. the
existence of credit rationing and also finance gaps in their relationship with banking institutions have been
popular for decades. This problem often directs many businesses to look for alternative source of finance like
factoring.
It shows that the demand for factoring services will tend to reflect the impact of acute cash shortage due to
delayed payment by debtors causing liquidity problems. From the research it is also evident that SMEs use
these services during their start-up and growth stage, since this is the stage were organisations find it difficult
to raise finance due to lack of financial data about its performance history.
Even though the service providers of factoring charge 10%-15% of the receivables as their commission still
there are organisations that prefer factoring services.
 Relatively new concept in India.

 Depreciating Rupee
 No ECGC Cover
 High cost of funds
 High minimum cost of transactions (USD 250,000/-)
 RBI Guidelines are vague.
 Very few institutions offer the services in India. Exim Bank alone does.
 Long term advances are not favoured by Banks as hedging becomes difficult.
 Lack of awareness.
6. What is Forfeiting?
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Method of export trade financing, especially when dealing in capital goods (which have long payment periods)
or with high risk countries. In forfeiting, a bank advances cash to an exporter against invoices or promissory
notes guaranteed by the importer's bank. The amount advanced is always 'without recourse' to the exporter,
and is less than the invoice or note amount as it is discounted by the bank. The discount rates depends on the
terms of the invoice/note and the level of the associated risk.
7. What are the features of Forfeiting ?
 Forfaiting eliminates virtually all risk to the exporter, with 100 percent financing of contract value.
 Exporters can offer medium and long-term financing in markets where the credit risk would otherwise
be too high.
 Forfaiting generally works with bills of exchange, promissory notes, or a letter of credit.
 In most cases, the foreign buyers must provide a bank guarantee in the form of an aval, letter of
guarantee or letter of credit.
 Financing can be arranged on a one-shot basis in any of the major currencies, usually at a fixed interest
rate, but a floating rate option is also available.
 Forfaiting can be used in conjunction with officially supported credits backed by export credit agencies
such as the U.S. Export-Import Bank.
8. What are the advantages and Disadvantages of Forfeiting ?

Advantages of forfeiting –
1. Exporter gets better liquidity as the receivables get easily converted into cash on the presentation of the
bill or promissory note.
2. There is no risk of exchange rate fluctuations.
3. It is simple as well as flexible in nature and hence can be altered to suit the requirements of the
exporters.
Disadvantages also of forfeiting
1. From bank point of view there is no legal framework to protect the banker or financial institution doing
forfeiture and hence they face the risk in the form of political, exchange rate risk and other risk
associate with foreign transactions.
2. It is very expensive from exporter point of view because banks take high fees for forfeiture due to high
risks involved in it.
3. There is no secondary market for these types of instruments hence there is lack of liquidity for these
instruments.
9. Difference between Factoring and Forfeiting?
Module 4 Leasing and Hire Purchase

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1. What is Leasing?
A lease is a contractual arrangement calling for the lessee (user) to pay the lessor (owner) for use of an asset.
The narrower term rental agreement can be used to describe a lease in which the asset is tangible property.
Language used is that the user rents the land or goods let or rented out by the owner. The verb to lease is less
precise as it can refer to either of these actions.Examples of a lease for intangible property are use of a
computer program (similar to a license, but with different provisions), or use of a radio frequency (such as a
contract with a cell-phone provider).
2. Features of Leasing?
 Top sales price, even if demand is low: You attract more buyers who are willing to pay a premium
because of the exclusive financing terms and value you're offering.
 Higher than usual rent: Since you are flexible on your financing terms and are offering a tremendous
value, you can demand a higher than usual rent.
 Positive cash flow: Since you can demand a higher than usual rent, your positive cash flow will
increase.
 Non-refundable option money: When a tenant/buyer executes (signs) a Lease 2 Purchase contract, you
receive an non-refundable option deposit that is yours to keep should they default or decide not to
buy.
 Save thousands in fees: Since you are selling your home by owner, you will avoid paying a 5-10%
realtor commission which quickly adds up to thousands of dollars. You will also save on advertising
costs because your home will be sold a lot faster.
 Highest quality tenants, minimum risk: Because you are renting to tenants who have a vested interest
in your home, they think like homeowners and tend to take good care of it.
 No maintenance, no landlording headaches: Tenants who have a vested interest and believe they are a
homeowner may feel a "pride of ownership" that encourages them to pay on time, perform routine
maintenance and make improvements to your home.
 Tax shelter is held intact: Because you remain on the deed until the option is exercised, you maintain
all of the tax benefits of ownership.
 Largest market of buyers: You are marketing your home not only to traditional buyers, but also to
renters and investors. These three groups make up over 95% of people whom buy real estate.
3. Elements of Leasing?
Essential Elements
The essential elements of a lease are as follows:
Parties- The parties to a lease are the lessor and the lessee. The lessor is also called the landlord and the
lessee the tenant.
Subject matter of lease- The subject matter of lease must be immovable property. The word "immovable
property" may not be only house, land but also benefits to arise out of land, right to collect fruit of a garden,
right to extract coal or minerals, hats, rights of ferries, fisheries or market dues. The contract for right for
grazing is not lease. A mining lease is lease and not a sale of minerals.
Duration of lease- The right to enjoy the property must be transferred for a certain time, express or implied or
in perpetuity. The lease should commence either in the present or on some date in future or on the
happening of some contingency, which is bound to happen. Though the lease can commence from a past day,
but that is for the purpose of computation of lease period, as the interest of the lessee begins from the date
of execution. No interest passes to the lessee before execution. In India, the lease may be in perpetuity.
Consideration- The consideration for lease is either premium or rent, which is the price paid or promised in
consideration of the demise. The premium is the consideration paid of being let in possession, such as Salami,
even if it is to be paid in installments.
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Sub-lease- A lessee can transfer the whole or any part of his interest in the property by sub-lease. However,
this right is subject to the contract to the contrary and he can be restrained by the contract from transferring
his lease by sub-letting. The lessee can create sub-leases for different parts of the demised premises. The sub-
lessee gets the rights, subject to the covenants, terms and conditions in the lease deed.
4. Types of Leasing?
Leasing is an old method of financing which is now gaining popularity almost in whole world. Legally, the lease
contract is not a sale of the object, but rather a sale of the usufruct (the right to use the object) for a specified
period of time. Under it, there are two parties one is the owner or lessor of the asset and other is the lessee or
the party that takes the asset on lease. The lessee takes the asset for use for a specified period of time and
makes rental payments. The ownership of the asset rests with the lessor but it is in the possession of lessee
and right of use is also transferred to lessee.
It has following are different types. The two basic types of leasing are: Finance Lease and Operating Lease.
These are explained below:
(1) Finance Lease: Under finance lease all risks and rewards of ownership of asset are transferred to lessee.
The ownership or title may or may not be transferred. A finance lease is somewhat like a hire purchase
agreement. Under finance lease the lessee after paying agreed number of installments, is entitled to exercise
an option to become the owner of asset.
Example: Suppose the AB company takes a new automobile on lease for three year. Also assume that at the
end of three years the AB company will be called to take the ownership of vehicle at no extra cost. Here not
only the vehicle is taken on lease but also the AB company is using the lease agreement as a means of
financing the automobile. This type is called capital lease or finance lease.
(2) Operating Lease: According to International Accounting Standard (IAS-17) the operating lease is one which
is not a finance lease. Under operating lease, the lessor gives the right to lessee to use the asset or property
for a specified period of time, but risks and rewards of ownership are retained by the lesser.
Example: Let up suppose that MY enterprises owns a complete 6th floor in Eden Tower, a multi story building.
Further assume that MY enterprises gives some rooms of this floor on lease to XY corporation.
Now if the value of this building increase due to good business activity then the lessor i.e., MY enterprises can
take the benefit of this increase by either selling out the rooms or by increasing the rental amount. On the
other hand if the building decreases in value than also the MY enterprises will be the sufferer of loss. This type
of leasing is called operating lease.
Besides these two main types, some other types of leasing are explained below:
(3) Sale and Lease Back: Under sale and lease back agreement, an asset is first sold to the financial institution.
The sale is made at the genuine market value. After that the asset is taken back on a lease. This type of leasing
is advantageous for those companies which do not want to show high debt balances in their financial
statement.
(4) Capital Lease: This type of leasing is governed by the financial standard board which is not applicable in
Pakistan. Under this type, when lessee acquires an asset on lease, he simultaneously recognizes it as a liability
in the financial statement.
(5) Leveraged Lease: This type of leasing involves three parties including a lender, a lessor and a lessee. The
lender and lessor join hands to accumulate funds to buy the asset. The asset purchased is then given on the
lease to lessee. The lessee makes periodic payments to the lessor who in turn makes payment to the lender.
(6) Cross Border Leasing: It means to operate lease agreement in other countries. Such type of leasing is very
difficult in present circumstances. The reasons being that different accounting treatments, tax charges and
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incidental criteria prevail in foreign countries. Also the tax rules differ from country to country. So a big
problem arises as how to present such lease agreement in financial statement.
However, as with recent developments the accounting treatments are being made similar for each items all-
around the world by International Accounting Standards and it is hoped that cross border leasing will rapidly
flourish in near future.
5. Advantages and Disadvantages of Leasing?
Advantages And Disadvantages of Leasing are
Advantages Of Leasing
Acquisition of long-term assets requires huge cash outlay which is some times quite beyond the financial
capacity of the actual user. In such a situation, the user can lease such capital assets. Leasing serves as a long-
term funding that can be used for acquisition of capital assets. The advantages of leasing are as follows:
1. Leasing Permits Alternative Uses: A leasing arrangement provides a firm with the use and control over the
assets without incurring huge capital expenditure and requiring to make only periodical rental payments.
Thus, leasing saves funds for alternative uses.
2. Leasing Arrange Faster And Cheaper Credit: Leasing companies are generally more accommodating than
banks and other financial institutes in respect of terms of financing. As such, it has generally been found that
acquisition of assets under leasing arrangement is cheaper and faster as compared to acquisition of assets
through other sources of financing.
3. Leasing Increases Lessee's Capacity To Borrow: Leasing arrangements enable the lessee to use more of its
own funds for working capital purposes instead of using low yielding fixed assets. The debt-equity ratio of
lease does not alter because of assets acquired under lease arrangements. As such lease arrangements can
resort to further borrowings in case the need arises.
4. Leasing Protects against Obsolescence: Lease arrangements helps to protect the lessee against the risk of
obsolescence in respect of the assets which become obsolete at a faster pace.
5. Boon For Small Firm: Acquisition of assets through a leasing arrangement is particularly beneficial to small
firms which can not afford to raise their capacity on account of scarcity of financial resources.
6. Absence Of Restrictive Convenience: The financial institution while lending money usually attach several
restrictions on the borrowers as regards management, debt-equity norms declaration of dividends etc. Such
restrictions are absent in the case of lease financing.
7 Trading On Tax Shield: In case of a non-tax paying lessee, the cost of financing an asset is much higher as
compared to a tax-paying lessee. However, when tax-paying owns the assets, he generally passes a part of the
tax benefit to the lessee by means of lower rental charge. As a result of this favor, the real cost of the asset to
the lessee, work out to be lower than that what it would have been if he were the owner of the assets.
Disadvantages of Leasing
Major disadvantages of leasing are as follows:
1. Deprived On Ownership
In a leasing arrangement, the lessee does not get the ownership of the asset. it gives only the right to use. As
such, the lessee, cannot pledge the asset for securing loan from financial institutions.
2. Deprived Of The Asset IN Case Of Default
In case the lessee makes a default in rental payment, the lessor is entitled to take over the asset and the
lessee has no right to prevent him from doing so.
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6.What are the Legal Aspects of Leasing
Legal aspects of leasing are as follows
As there is no separate statue for equipment leasing in India, the provisions relating to bailment in the Indian
Contract Act govern equipment leasing agreements as well section 148 of the Indian Contract Act defines
bailment as:
“The delivery of goods by one person to another, for some purpose, upon a contract that they shall, when the
purpose is accomplished, be returned or otherwise disposed off according to the directions of the person
delivering them. The person delivering the goods is called the ‘bailor’ and the person to whom they are
delivered is called the ‘bailee’.
The lessor has the duty to deliver the asset to the lessee, to legally authorise the lessee to use the asset, and
to leave the asset in peaceful possession of the lessee during the currency of the agreement.
The lessor has the obligation to pay the lease rentals as specified in the lease agreement, to protect the
lessor’s title, to take reasonable care of the asset, and to return the leased asset on the expiry of the lease
period.
Contents of a lease agreement
 Description of the lessor, the lessee, and the equipment.

 Amount, time and place of lease rentals payments.
 Time and place of equipment delivery.
 Lessee’s responsibility for taking delivery and possession of the leased equipment.
 Lessee’s responsibility for maintenance, repairs, registration, etc. and the lessor’s right in case of
default by the lessee.
 Lessee’s right to enjoy the benefits of the warranties provided by the equipment
manufacturer/supplier.
 Insurance to be taken by the lessee on behalf of the lessor.
 Variation in lease rentals if there is a change in certain external factors like bank interest rates,
depreciation rates, and fiscal incentives.
 Options of lease renewal for the lessee.
 Return of equipment on expiry of the lease period.
 Arbitration procedure in the event of dispute.
7. Defination of Hire Purchase
A system by which a buyer pays for a thing in regular installments while enjoying the use of it.During the
repayment period, ownership (title) of the item does not pass to the buyer. Upon the full payment of the loan,
the title passes to the buyer.
8. Meaning and features of Hire Purchase
Hire purchase is an option for those buyers who cannot pay the whole amount of his or her purchase. Hire
purchase refers to an agreement where the buyer of a good can take goods on a monthly rental basis and
once the rent equals original price of a good in addition to the interest then the buyer may exercise his or her
option to buy the goods at a predetermined price or return the goods to the owner.
Given below are some of the features of hire purchase -
1. The person who has hire the goods will give regular installment or rent to the owner of the good which will
include some portion of principal amount and some portion of interest as agreed by both the parties.
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2. The ownership of good passes only when the person has paid the last installment of the goods which he or
she has hired.
3. Under hire purchase system the buyer can return the goods to the seller if he or she does not want to
continue with the agreement.
4. In case of hire purchase the person who has taken the good on hire cannot transfer the goods to a third
party as he or she does not have the ownership of the goods.
9. What are the advantages and disadvantages of Hire Purchase ?
The Advantages of Hire Purchase Agreements to the consumers
Spread the cost of finance. Whilst choosing to pay in cash is preferable, this might not be possible for
consumer on a tight budget. A hire purchase agreement allows a consumer to make monthly repayments over
a pre-specified period of time;
• Interest-free credit. Some merchants offer customers the opportunity to pay for goods and services on
interest free credit. This is particularly common when making a new car purchase or on white goods during an
economic downturn;
• Higher acceptance rates. The rate of acceptance on hire purchase agreements is higher than other
forms of unsecured borrowing because the lenders have collateral;
• Sales. A hire purchase agreement allows a consumer to purchase sale items when they aren't in a
position to pay in cash. The discounts secured will save many families money;
• Debt solutions. Consumers that buy on credit can pursue a debt solution, such as a debt management
plan, should they experience money problems further down the line.
The Disadvantages of Hire Purchase Agreements to the consumers
• Personal debt. A hire purchase agreement is yet another form of personal debt it is monthly
repayment commitment that needs to be paid each month;
• Final payment. A consumer doesn't have legitimate title to the goods until the final monthly
repayment has been made;
• Bad credit. All hire purchase agreements will involve a credit check. Consumers that have a bad credit
rating will either be turned down or will be asked to pay a high interest rate;
• Creditor harassment. Opting to buy on credit can create money problems should a family experience a
change of personal circumstances;
• Repossession rights. A seller is entitled to 'snatch back' any goods when less than a third of the amount
has been paid back. Should more than a third of the amount have been paid back, the seller will need a court
order or for the buyer to return the item voluntarily.
10. Difference between Hire Purchase and Leasing ?
Difference between Lease and Hire Purchase:
Ownership of the Asset: In lease, ownership lies with the lessor. The lessee has the right to use the
equipment and does not have an option to purchase. Whereas in hire purchase, the hirer has the option to
purchase. The hirer becomes the owner of the asset/equipment immediately after the last installment is paid.
Depreciation: In lease financing, the depreciation is claimed as an expense in the books of lessor. On the other
hand, the depreciation claim is allowed to the hirer in case of hire purchase transaction.
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Rental Payments: The lease rentals cover the cost of using an asset. Normally, it is derived with the cost of an
asset over the asset life. In case of hire purchase, installment is inclusive of the principal amount and the
interest for the time period the asset is utilized.
Duration: Generally lease agreements are done for longer duration and for bigger assets like land, property
etc. Hire Purchase agreements are done mostly for shorter duration and cheaper assets like hiring a car,
machinery etc.
Tax Impact: In lease agreement, the total lease rentals are shown as expenditure by the lessee. In hire
purchase, the hirer claims the depreciation of asset as an expense.
Repairs and Maintenance: Repairs and maintenance of the asset in financial lease is the responsibility of the
lessee but in operating lease, it is the responsibility of the lessor. In hire purchase, the responsibility lies with
the hirer.
Extent of Finance: Lease financing can be called the complete financing option in which no down payments
are required but in case of hire purchase, the normally 20 to 25 % margin money is required to be paid
upfront by the hirer. Therefore, we call it a partial finance like loans etc.
Module 5 - Consumer and Venture Capital Financing

1. DEFINITION OF 'CREDIT CARD'
A card issued by a financial company giving the holder an option to borrow funds, usually at point of sale.
Credit cards charge interest and are primarily used for short-term financing. Interest usually begins one month
after a purchase is made and borrowing limits are pre-set according to the individual's credit rating.
2. What are the Different Types of Credit Cards
Standard Credit Card: This is the most commonly used. One is allowed to use money up to a certain limit. The
account holder has to top up the amount once the level of the balance goes down. An outstanding balance
gets a penalty charge.
Premium Credit Card: This has a much higher bank account and fees. Incentives are offered in this over and
above that in a standard card. Credit card holders are offered travel incentives, reward points, cask back and
other rewards on the use of this card. This is also called the Reward Credit Card. Some examples are: airlines
frequent flier credit card, cash back credit card, automobile manufacturers' rewards credit card. Platinum and
Gold, MasterCard and Visa card fall into this category.
Secured Credit Card: People without credit history or with tarnished credit can avail this card. A security
deposit is required amounting to the same as the credit limit. Revolving balance is required according to the
'buying and selling' done.
Limited Purpose Credit Card: There is limitation to its use and is to be used only for particular applications.
This is used for establishing small credits such as gas credits and credit at departmental stores. Minimal
charges are levied.
Charge Credit Card: This requires the card holder to make full payment of the balance every month and
therefore there is no limit to credit. Because of the spending flexibility, the card holder is expected to have a
higher income level and high credit score. Penalty is incurred if full payment of the balance is not done in
time.
Specialty Credit Card: is used for business purposes enabling businessmen to keep their businesses
transactions separately in a convenient way. Charge cards and standard cards are available for this. Also,
students enrolled in an accredited 4-year college/university course can avail this benefit.
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Prepaid Credit Card: Here, money is loaded by the card holder on to the card. It is like a debit card except that
it is not tied up with a bank account.
3. What are the Advantages and Disadvantages of Credit Cards
 Purchase Power and Ease of Purchase - Credit cards can make it easier to buy things. If you don't like
to carry large amounts of cash with you or if a company doesn't accept cash purchases (for example
most airlines, hotels, and car rental agencies), putting purchases on a credit card can make buying
things easier.
 Protection of Purchases - Credit cards may also offer you additional protection if something you have
bought is lost, damaged, or stolen. Both your credit card statement (and the credit card company) can
vouch for the fact that you have made a purchase if the original receipt is lost or stolen. In addition,
some credit card companies offer insurance on large purchases.
 Building a Credit Line - Having a good credit history is often important, not only when applying for
credit cards, but also when applying for things such as loans, rental applications, or even some jobs.
Having a credit card and using it wisely (making payments on time and in full each month) will help you
build a good credit history.
 Emergencies - Credit cards can also be useful in times of emergency. While you should avoid spending
outside your budget (or money you don't have!), sometimes emergencies (such as your car breaking
down or flood or fire) may lead to a large purchase (like the need for a rental car or a motel room for
several nights.)
 Credit Card Benefits - In addition to the benefits listed above, some credit cards offer additional
benefits, such as discounts from particular stores or companies, bonuses such as free airline miles or
travel discounts, and special insurances (like travel or life insurance.) While most of these benefits are
meant to encourage you to charge more money on your credit card (remember, credit card companies
start making their money when you can't afford to pay off your charges!) the benefits are real and can
be helpful as long as you remember your spending limits.
Disadvantages
 Blowing Your Budget -- The biggest disadvantage of credit cards is that they encourage people to
spend money that they don't have. Most credit cards do not require you to pay off your balance each
month, so even if you only have $100, you may be able to spend up to $500 or $1,000 on your credit
card. While this may seem like 'free money' at the time, you will have to pay it off -- and the longer you
wait, the more money you will owe since credit card companies charge you interest each month on
the money you have borrowed.
 High Interest Rates and Increased Debt -- Credit card companies charge you an enormous amount of
interest on each balance that you don't pay off at the end of each month. This is how they make their
money and this is how most people in the United States get into debt (and even bankruptcy.) Consider
this: If you have a $100 in savings, most banks will give you at the most 2.0 to 2.5% interest on your
money over the course of the year.
 Credit Card Fraud - Like cash, sometimes credit cards can be stolen. They may be physically stolen (if
you lose your wallet) or someone may steal your credit card number (from a receipt, over the phone,
or from a Web site) and use your card to rack up debts. The good news is that, unlike cash, if you
realize your credit card or number has been stolen and you report it to your credit card company
immediately, you will not be charged for any purchases that someone else has made
4. What are the features of Credit Cards?

1. Alternative to cash
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Credit card is a better alternative to cash. It removes the worry of carrying various currency denominations
to pay at the trade counters. It is quite easy and way fast to use a credit card rather than waiting for
completion of cash transactions. As an alternative, credit card helps a cardholder to travel anywhere in the
world without a need to carry an ample amount of cash. It also reduces the possible risk of money theft
and gives its user a complete peace of mind.
2. Credit limit
The credit cardholder enjoys the facility of a credit limit set on his card. This limit of credit is determined by
the credit card issuing entity (bank or NBFC) only after analyzing the credit worthiness of the cardholder.
The credit limit is of two types, viz.,
Normal credit limit, and Revolving credit limit.
Normal credit limit is usual credit given by the bank or NBFC at the time of issuing a credit card.
Revolving credit limit varies with the financial exposure of the credit cardholder.
3. Aids payment in domestic and foreign currency

Credit card aids its cardholder to make payments in any currency of choice. In other words, it gives its
holder a unique facility to make payments either in domestic (native) currency or if necessary, also in
foreign (non-native) currency, that too as and when required.
Credit card reduces the cumbersome process of currency conversion. That is, it removes the financial
complexities often encountered in converting a domestic currency into a foreign currency. It is because of
this feature, a credit cardholder can possibly make payments to merchants present in any corner of the
world.
4. Record keeping of all transactions
Credit card issuing entities like banks or NBFCs keeps a complete record of all transactions made by their
credit cardholders. Such a record helps these entities to raise appropriate billing amounts payable by their
cardholders, either on a monthly or some periodic basis.
5. Regular charges
Regular charges are basic routine charges charged by the credit card issuing entity on the usage of credit
card by its cardholder. These charges are nominal in nature.
The regular charges are primarily classified into two types, viz.,
Annual charges, and Additional charges.
Annual charges are collected on per annum or yearly basis.
Additional charges are collected for other supplementary services provided by the credit card issuing
entity. Such services include, add-on-card (an additional credit card), issue of a new credit card, etc.
6. Grace period
The grace period is referred to those minimum numbers of additional days within which a credit cardholder
has to pay his credit card bill without any incurring interest or financial charges.
5. What is consumer finance/credit?

A consumer finance loan includes funds that are lent or a line of credit that has periodic payments and
terms longer than 60 days. These loans may be secured by personal or real property (e.g. first or second
residential mortgages) or as unsecured loans. A person acting as an agent, broker, or facilitator for a person
that makes such loans must also be licensed as a consumer finance lender.
6. What are the Sources of consumer Credit ?

Sources of Consumer Credit
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Commercial Banks : Commercial banks make loans to borrowers who have the capacity to repay them.
Loans are the sale of the use of money by those who have it (banks) to those who want it (borrowers) and
are willing to pay a price (interest) for it. Banks make several types of loans, including consumer loans,
housing loans and credit card loans.
Credit Unions (CUs) : Credit Unions are nonprofit cooperatives organized to serve people who have some
type of common bond. The nonprofit status and lower costs of credit unions usually allow them to provide
better terms on loans and savings than commercial institutions. The costs of the credit union may be lower
because sponsoring firms provide staff and office space, and because some firms agree to deduct loan
payments and savings installments from members' paychecks and apply them to credit union accounts.
Consumer Finance Companies (CFCs) : Consumer finance companies specialize in personal installment
loans and second mortgages. Consumers without an established credit history can often borrow from CFCs
without collateral. CFCs are often willing to lend money to consumers who are having difficulty in obtaining
credit somewhere else, but because the risk is higher, so is the interest rate.
Sales Finance Companies (SFCs) : If you have bought a car, you have probably encountered the
opportunity to finance the purchase via the manufacturer's financing company. These SFCs let you pay for
big-ticket items, such as an automobile, major appliances, furniture, computers and stereo equipment,
over a longer period of time.
Life Insurance Companies : Insurance companies will usually allow you to borrow up to 80 percent of the
accumulated cash value of a whole life (or straight life) insurance policy. Loans against some policies do not
have to be repaid, but the loan balance remaining upon your death is subtracted from the amount your
beneficiaries receive.
Pawnbrokers : Recently made famous by reality shows, pawnbrokers are unconventional, but common,
sources of secured loans. They hold your property and lend you a portion of its value. If you repay the loan
and the interest on time, you get your property back. If you don't, the pawnbroker sells it, although an
extension can be arranged. Pawnbrokers charge higher interest rates than other lenders, but you don't
have to apply or wait for approval. Pawnbrokers' chief appeal? They rarely ask questions.
Loan Sharks : These usurious lenders have no state license to engage in the lending business. They charge
excessive rates for refinancing, repossession or late payments, and they allow only a very short time for
repayment. They're infamous for using collection methods that involve violence or other criminal conduct.
Steer clear of them. They are illegal, after all.
Family and Friends : Your relatives can sometimes be your best source of credit. However, all such
transactions should be treated in a businesslike manner; otherwise, misunderstandings may develop that
can ruin family ties and friendships.
7. Features of Consumer Finance ?
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Offering consumer financing is shown to provide businesses with many benefits. In fact, we've helped
businesses, big and small, launch successful credit card programs that:
 Provide a wide array of financing options
 Increase foot traffic and repeat business
 Build brand awareness
 Generate customer loyalty
8. What are the Advantages and Disadvantages of Consumer Finance ?

Function : Consumer financing is a type of financing that is offered by credit providers to merchants. The
companies that offer this type of financing are generally the same companies that offer credit cards to the
general public. These companies allow customers to set up accounts through a merchant to buy goods or
services from them. Companies work directly with these credit issuers to offer their customers an
alternative means of payment for their products.
Closing Sales : One of the benefits of offering consumer financing is that it often closes more sales. When a
merchant has the option of offering financing to customers, this will have the effect of increasing closing
percentages. Customers may not be willing to part with their cash quite as easily as they would be willing
to finance a purchase. Most merchants find that when they offer customers financing, the customers begin
to think about buying when they would otherwise not be willing to do so.
Larger Sales : Another benefit of offering consumer financing is that it often leads to larger sales. When
customers find out that financing is an option, they start to think about what they could buy in addition to
what they originally planned on buying. Customers may only have a certain amount of cash that they can
use, but they will gladly charge the rest of their purchase on consumer financing in many cases. This
increases sales volume and leads to a bigger average sale.
Costs : One of the big drawbacks of offering consumer financing is that it can increase your costs. The
companies that offer this type of financing are in it to make a profit. They will charge the business a
percentage of each transaction that is processed on the consumer financing. This comes directly out of
your profit on the sale. While the increase in business may be worth it, this can make the sales that you
close less profitable.
Considerations: To make consumer financing work for your business, you need to set up some rules
associated with it. For example, if you have a sales force to sell your products, setting up minimum dollar
amounts for sales can be beneficial. You may also want to institute a policy that only allows jobs that are
sold above a certain profit margin to go on the financing. By setting up some rules in advance, you can
avoid losing money on the consumer financing.
9. What are the different types of Consumer finance/Credit?

The different types of consumer finance are as follows
Non-Installment Credit - Non-installment credit is offered for short term use usually for a period of one
month and an individual is required to pay back the money before the expiry of credit period given to him.
It is the simplest type of consumer credit among the three. An individual has to pay a lump sum amount of
credit instead of making monthly payments of a specified figure. Depending on the company which is
offering the credit, non-installment credit can also be secured or unsecured and is a good choice for those
individuals who find it hard to make regular repayments after a fixed interval.
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Installment Closed-End Credit - Installment closed-end credit is used for a defined time period and
amount. This type of credit is for specific purposes and allows consumers to purchase a single item or a few
commodities. Repayments on this type of consumer credit are usually made in equal installments.
Installment closed-end credit is also called a non-revolving credit and in times of recession, the amount of
this type of credit remains relatively same and does not decline.
Revolving Open-End Credit - Revolving open-end credit is a type of consumer credit typically found in most
credit cards. This means that you are given a credit limit by credit card companies and a consumer must
repay a part of credit at the end of a credit period. The payment consists of the amount actually borrowed
plus the interest charge. The period is usually about one month and if an individual doesn’t pay the debt in
full, a higher interest rate will be charged to him. A person has a specific amount of credit he or she can use
or not use for different purchases. However, this type of consumer credit does not close until credit card
companies offering the credit choose to close the account. This is what makes it a revolving credit as it
usually doesn’t close. Revolving open-end credit is designed to be used repeatedly, with a predefined credit
limit approved by credit card companies. Common examples of revolving-open end credit are credit cards
and home-equity line of credit.
10. DEFINITION OF 'VENTURE CAPITAL'

Money provided by investors to startup firms and small businesses with perceived long-term growth
potential. This is a very important source of funding for startups that do not have access to capital markets.
It typically entails high risk for the investor, but it has the potential for above-average returns.
11. What are the Features of Venture Capital Financing
Under venture capital finance the lender provides financial support to a company which is in early stage of
development, though it involves risk but at the same time is has the potential for generating abnormal
returns for venture capitalist. Given below are some of the features of venture capital –
1. Venture capital involves not only investing money but also active participation in the management of the
company by the person who has made investments in the company.
2. Venture capitalist divests his or her holding once the investments has generated returns in accordance
with the venture capitalist desired return.
3. Venture Capital Financing is in the form of equity participation rather than giving it as loan or debt.
4. Venture Capital Financing is usually done for companies which are small level or medium level and also
relatively newly formed companies are the preferred choice of venture capitalist.
5. Venture capitalist does Venture Capital Financing in order to make a capital gain on equity investment at
the time of exit.
12. What is the role of venture capital financing?
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 Indian business landscape has always been active with startup formation. While a couple of decades
back, such startup activity was led by family business houses, many of the successes in the last ten
years have come out of professionals and first-generation entrepreneurs. The same time period has
seen an emergence of venture capital industry in India. The mutual reinforcement of these two
developments is hard to miss – independent startup activity has created a space for venture capital,
as much as deriving strength from it.
 Indian startup fraternity has always had the complaint that the best talent in India is not attracted
by startups. I believe that this is largely a function of the risks and rewards that startups have
represented. It is not surprising that in an environment, where doing a startup may involve peddling
family jewels, not many first-time entrepreneurs may come forward. Risk capital fills that gap in the
ecosystem by providing the initial support.
 More importantly, it amplifies the potential rewards by providing growth capital once an idea takes
off. This decrease in risk perception, and increase in potential upside, is a key driver to new
entrepreneurs starting their businesses. Beyond entrepreneurs, the notion of capital exit as an
integral milestone for startups, creates a currency to attract next line of talent – It is not surprising
that most venture backed companies tend to have stock options as a cornerstone to attract talent.
 India is an early venture market. As a result, even when extremely experienced entrepreneurs form
startups, they are often under-exposed to the nuances of high growth businesses, creating and
realizing strategic value, or being able to tap into a recruiting network. Venture capital players often
have the scale within their portfolio to build experience and relationships in these areas, and hence
are able to bring those learnings and networks to bear for their portfolio companies.
 The experience of global venture capital players such as Canaan, extend beyond the geography or
time constraints of the Indian market, and the partnership as a whole can bring a rich set of
learnings to the table.
 Another element of India being an early venture market is that the bridges between the industry
and startups are missing. Again, several venture capital firms are beginning to invest in building
these relationships to the benefit of their portfolio companies. In my own experience, I have seen
this to be extremely valuable to the industry as well, because it exposes them to the innovation that
is happening right around the corner.
13. What are the different methods of Venture Financing

Venture finance, conceptually being risk finance, should be available in the form of equity or quash-equity
(conditional or convertible loans). A straight or conventional loan, involving fixed payments, would be
unsuitable form of providing assistance to a new, risky venture. New ventures have the problem of cash
flows in the initial years of their development; hence they are not able to service debt. However, the
requirement for this kind of assistance could still arise in a few cases, particularly during the second stage
of financing after the venture has taken off. Venture capital financing in India in the past took three forms:
equity, conditional loans and income notes. Conventional loan has been a quite popular source of funds
made available by VCFs in India in the past.
Equity
All VCFs in India provide equity. Generally, their contribution may not exceed 49 per cent of the total equity
capital. Thus, the effective control and majority ownership of the firm may remain with the entrepreneur.
When a venture capitalist contributes equity capital, he acquires the status of an owner, an becomes
entitled to a share in the firm’s profits as much as he is liable for losses.
Conditional loan
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A conditional loan is repayable in the form of a royalty after the venture is able to generate sales. No
interest is paid on such loans in India, VCFs charged royalty ranging between 2 and 15 per cent gestation
period, cost-flow patterns, risk and other factors of the enterprise. Some VCFs gave a choice to the
enterprise of paying a high rate of interest (which could be well above 20 per cent) instead of royalty on
sales once it becomes commercially sound. Some funds recovered only half of the loan if the venture
failed.
Income note
A unique way of venture financing in India was income note. It was a hybrid security which combined the
features of both conventional loan and conditional loan. The entrepreneur had to bay both interest on
royalty on sales, but at substantially low rates. Some venture funds provided funding equal to about 80
percent of a project’s cost for commercial application of indigenous technology adapting imported
technology to wider domestic applications. Funds were made available in the form of unsecured loans at a
lower rate of interest during development phase and at a higher rate after development. In addition to
interest charges, royalty on sales could also be charged.
14. Explain the process of Venture Capital financing

The Stages in Venture Capital (VC) Investing
Seed - The first stage of venture capital financing. Seed-stage financings are often comparatively modest
amounts of capital provided to inventors or entrepreneurs to finance the early development of a new
product or service. These early financings may be directed toward product development, market research,
building a management team and developing a business plan.
A genuine seed-stage company has usually not yet established commercial operations - a cash infusion to
fund continued research and product development is essential. These early companies are typically quite
difficult business opportunities to finance, often requiring capital for pre-startup R&D, product
development and testing, or designing specialized equipment.
Seed-stage VC funds will typically participate in later investment rounds with other equity players to
finance business expansion costs such as sales and distribution, parts and inventory, hiring, training and
marketing.
Early Stage - For companies that are able to begin operations but are not yet at the stage of commercial
manufacturing and sales, early stage financing supports a step-up in capabilities. At this point, new
business can consume vast amounts of cash, while VC firms with a large number of early-stage companies
in their portfolios can see costs quickly escalate.
Start-up - Supports product development and initial marketing. Start-up financing provides funds to
companies for product development and initial marketing. This type of financing is usually provided to
companies just organized or to those that have been in business just a short time but have not yet sold
their product in the marketplace. Generally, such firms have already assembled key management,
prepared a business plan and made market studies. At this stage, the business is seeing its first revenues
but has yet to show a profit. This is often where the enterprise brings in its first "outside" investors.
First Stage - Capital is provided to initiate commercial manufacturing and sales. Most first-stage companies
have been in business less than three years and have a product or service in testing or pilot production. In
some cases, the product may be commercially available.
Formative Stage - Financing includes seed stage and early stage.
Later Stage - Capital provided after commercial manufacturing and sales but before any initial public
offering. The product or service is in production and is commercially available. The company demonstrates
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significant revenue growth, but may or may not be showing a profit. It has usually been in business for
more than three years.
Third Stage - Capital provided for major expansion such as physical plant expansion, product improvement
and marketing.
Expansion Stage - Financing refers to the second and third stages.
Mezzanine (bridge) - Finances the step of going public and represents the bridge between expanding the
company and the IPO
Balanced-stage financing refers to all the stages, seed through mezzanine.
15. What are the advantages and Disadvantages of Venture Capital Financing
Advantages of VC funding
 Since VC funding is not a loan scheme, there is no repay schedule; which means you don’t have to
repay debt as a cost of doing business.
 Many VCs have consultants and professionals on their staff that have deep knowledge of specific
markets. These experts can help your business avoid many of the pitfalls that are usually associated
with start-ups.
 Being an entrepreneur does not automatically make you a good business manager. However, since
VCs will hold a percentage of equity in your business, they will most likely have a say in how it is
managed. So if you are really not a good manager, this can be a significant benefit.
 Because they are obligated to make profit from their investment in your business, VCs often provide
HR consultants (who are specialists in hiring talents) to hire the best staff for your business. This can
help you avoid hiring the wrong people.
Disadvantages of VC funding
 Some VC firms require much more ROI than expected. In many cases, it can be as much 60 percent
of the equity in your company. This, in effect, means the VC firm is controlling your business; not
you, the owner.
 Usually, VC firms will want to add a member of their team to your company’s management team.
While this is generally to ensure the success of your business, it can create internal problems.
 Another big problem you will most likely face when you opt for VC funding is that you will give up
many key decisions on how your company will operate. This is because the VC firm will require to
be informed of any major decision you make, and they usually have the power to override such
decisions.
 Though they generally treat information confidentially, VC firms usually refuse to sign a non-
disclosure agreement due to the legal ramifications of doing so. This can put your ideas at risk,
especially when it’s new.
 Because they are keen on making profit, and they invest huge funds (which means they take large
risks), venture capitalists take too long to decide whether to invest in your business or not.
Module 6 – Housing Finance

1. Define Housing Finance
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A type of seller financing in which a firm extends customers a loan, allowing them to purchase its goods or
services. In-house financing eliminates the firm's reliance on the financial sector for providing the customer
with funds to complete a transaction.
2. List the Housing Finance Institutions in India

The List of Housing Finance Institutions in India are
 Housing Development Finance Corporation Limited (HDFC)
 State Bank of India Home Finance (SBI)
 Housing Urban Development Corporation (HUDCO)
 LIC Housing Finance Limited
 ICICI Home Finance Company Limited
 IDBI Homefinance Limited (IHFL)
 PNB Housing Finance Limited
 Dewan Housing Finance Corporation Limited (DHFL)
 GIC Housing Finance Limited
 Can Fin Homes Limited (CFHL)
3. Explain the Major issues of Housing Finance in India

A number of housing clusters have mushroomed in and around various metropolitan centres in
haphazard and unplanned manner, without a proper layout and devoid of service lines and other essential
facilities. These unauthorized developments are encroachments on land parcels belonging to Govt. bodies,
public- private-institutions or areas meant to be green belts.
The removal/ re-settlement of these overcrowded un-hygienic clusters, commanding massive vote
banks, is a serious challenge to correcting these aberrations for a planned growth of cities, especially in our
democratic set-up? Therefore, massive concerted effort needs to be made with best of administrative
actions and deft political handling for the sake of our future generations.
Non availability of developed land and ineffective and unfavorable land management.There is dearth
of developed and serviced land parcels at reasonable rates, especially to meet the needs of most needy
section of society. The slum clusters currently inhabited by these deprived sections are located in high land
cost neighborhoods near central business districts of the metropolitan centres. These land parcels dotted
with shanties apart from being eye sores and not properly serviced also mean in-appropriate and gross
under utilization of precious land banks.
There is lack of development and enforcement of master planning for long–term growth of cities with
earmarked areas for different sectors of growth like light/heavy industry, commercial, Education, health,
housing forests and parks etc. serviced by appropriate infrastructure and transportation system. Therefore
earmarking of appropriately serviced land with needed infrastructure and growth promoting land
management policy are the urgent need of the time.
Lack of Financial Resources
The assessment of housing shortage and requirement of funds for the same, as per National Housing Bank,
for the period 2007-12 has been depicted in chart hereunder.
The National Housing Bank (NHB) and NCAER estimate the market size of the underserved segment at over
a 100 million households. Most of this population have limited or no access to affordable housing or
housing finance despite being able to afford simple habitable units.
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The International Finance Corporation (IFC), the private sector arm of the World Bank Group, however, has
indicated that estimated investments to meet this housing requirement through 2012 as close to $80
billion. IFC is a leader in sustainable investment in emerging markets. IFC promotes private sector
development and economic growth as a way to reduce poverty and improve people's lives.
A number of Housing Finance Companies and Microfinance institutions have shown interest in
entering/expanding housing finance product offerings. However, such institutions have limited experience
in managing long-term collateralized financial products and require substantial assistance in capacity
building.
IFC provides advisory services by establishing partnerships with donors, governments, and the private
sector to design and deliver technical assistance programs and advisory services that promote
entrepreneurship, improve the investment climate, mobilize private sector investment and enhance the
competitiveness of micro, small and medium enterprises.
4. What is NHB ?
National Housing Bank (NHB), a wholly owned subsidiary of Reserve Bank of India (RBI), was set up by an
Act of Parliament in 1987. NHB is an apex financial institution for housing. It commenced its operations in
9th July 1988. NHB has been established with an objective to operate as a principal agency to promote
housing finance institutions both at local and regional levels and to provide financial and other support
incidental to such institutions and for matters connected therewith
5. What are the Important Objectives of National Housing Bank

The NHB started its operation from July, 1988. The Golden Jubilee Rural Housing Finance Scheme is being
implemented through scheduled banks, HFCs and co-operative sector institutions. NIIB is wholly owned by
Reserve Bank of India, which contributed the entire paid-up capital.
(a) To promote a sound, healthy viable and cost effective housing finance system to cater to all segments
of the population and to integrate the housing finance system with the overall financial system.
(b) To promote a network of dedicated housing finance institutions to adequately serve various regions and
different income groups.
(c) To augment resources for the sector and channelise them for housing.
(d) To make housing credit more affordable.
(e) To regulate the activities of housing finance companies based on regulatory and supervisory authority
derived under the Act.
(f) To encourage augmentation of supply of buildable land and also building materials for housing and to
upgrade the housing stock in the country.
(g) To encourage public agencies to emerge as facilitators and suppliers of serviced land, for housing.
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(i) Against a target of 3.50 lakh dwelling units set by the Government of India for the year 2009-10,
3,87,546 units were financed during the period.
Objectives of Small Industries Development Bank of India (SIDBI):
The SIDBI was established as a wholly owned subsidiary of Industrial Development Bank of India (IDBI) and
started its operations on April 2, 1990. It took over the responsibility of administering Small Industries
Development Fund and National Equity Fund which were earlier administered by IDBI.
It is engaged in providing assistance to the small scale industrial sector in the country through other
institutions like state finance corporations, commercial banks and state industrial development
corporations. The financial assistance sanctioned and disbursed by SIDBI during the financial year 2009-10
aggregated to Rs. 421 crore during the financial year 2009-10. Functions of SIDBI
(i) SIDBI refinances loans extended by the primary lending institutions to small scale industrial units, and
also provides resources support to them.
(ii) SIDBI discounts and rediscounts bills arising from sale of machinery to or manufactured by industrial
units in the small scale sector.
(iii) SIDBI extends seeds capital/soft loans assistance under National Equity Fund, Mahila Udyam Nidhi and
Mahila Vikas Nidhi and seed capital schemes through specified lending agencies.
6. ROLE OF NATIONAL HOUSING BANK IN HOUSING FINANCE BUSINESS

The National Housing Bank (NHB) is an apex level financial institution catering to the housing sector in the
country. It was established on July 9, 1988. It works as a facilitator in promoting housing finance
institutions or providing assistance to other institutions of such type. It is headquartered in Delhi and has
offices in all the major cities of India. NHB has 9 departments which are NHB Residex Cell, Regulation and
Supervision, Refinancing operations, Direct finance operations, Enabling processes, Information
Technology, Resource mobilization and management, Development and risk management, Board and CMD
secretariat.
The main objectives of NHB are as follows:

• To promote a sound, healthy, viable and cost effective housing finance system to cater to all segments of
the population and to integrate the housing finance system with the overall financial system.
• To promote a network of dedicated housing finance institutions to adequately serve various regions and
different income groups.
• To augment resources for the sector and channelize them for housing.
• To make housing credit more affordable.
• To regulate the activities of housing finance companies based on regulatory and supervisory authority
derived under the Act.
• To encourage augmentation of supply of buildable land and also building materials for housing and to
upgrade the housing stock in the country.
• To encourage public agencies to emerge as facilitators and suppliers of serviced land, for housing.
7. Refinance support to Housing Finance Company
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Main Features of the Scheme are
Availability of funds to the lending institutions for their lending to public agencies, private
agencies/developers/builders etc. for their projects for affordable housing at concessional rates of interest
Refinance at fixed / floating rates
Available on pan India basis
Details of the Scheme
1. Purpose
The Scheme will provide refinance assistance to eligible Primary LendingInstitutions (PLIs) in respect of their
loans extended to public agencies, private agencies / developers / builders for their affordable housing
projects.
2. Eligibility Criteria
The eligibility of the PLIs to avail refinance under this Scheme will be the same as the eligibility criteria
prescribed for availing refinance under the Regular Refinance Scheme, as applicable to the respective
category of PLIs.
3. Eligibility Criteria for Implementing Agencies
(a) Public agencies viz. Housing Boards, Development Authorities, Slum Improvement / Clearance Board,
Improvement Trust etc.
(b) Private Developers/Builders etc. conforming to the following criteria
Developers / builders undertaking low cost affordable housing projects should be a company registered under
the Companies Act, 1956 Such developers / builders should have minimum 5 years’ experience in undertaking
residential projects, and should have good track record in terms of quality and delivery The developers /
builders should not have defaulted in any of their financial commitments to banks / financial institutions or
any other agencies The project should not be a matter of litigation The project should be in conformity with
the provisions of master plan / development plan of the area.
(c) Eligible Projects
The housing projects of the public agencies and of private developers (either of their own or under PPP model
or joint venture) satisfying the following criteria would be eligible for NHB’s refinance
(i) Projects with at least 60% of the permissible FSI for units of carpet 60 m and cost of the unit (having
carpet area upto 60 m) .
Slum improvement / rehabilitation projects conforming to the parameters to be set by the Central Sanctioning
and Monitoring Committee of the Affordable Housing in Partnership Scheme (AHP)constituted under the
Chairmanship of Secretary, HUPA
(ii) Promoter’s contribution - minimum 20% of project outlay (applicable to private agencies)
(iii) Minimum asset coverage of 1.33:1 based on market/ book value of the project whichever is lower; as
certified by a valuer (applicable toprivate agencies).
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(d) Extent of Refinance Refinance under the Scheme will be available only in respect of that portion of the
project which conforms to eligibility criteria laid down in 4(i) to 4(iii) above. The refinance would be available
to the extent of project cost apportioned for affordable housing viz. in terms of proportion of the sum
ofcarpet area for units having individual carpet area not exceeding 60 m to 2 total carpet area under the
project.
(e) Tenure of Refinance The tenure of the refinance under the Scheme will be co-terminus with the PLI’s loan
to the agency subject to maximum tenure of 5 years. In the event of the agency prepaying the loan to the PLI
at any point of time, the refinance outstanding in respect of that loan will also have to be prepaid to NHB.
(f) Rate of Interest Refinance under the Scheme would be available on fixed as well as floating rates of
interest Refinance on fixed rates would be subject to reset after such period of time as may be agreed to
between NHB and the PLI at the time of disbursement Refinance on floating rates would be linked to NHB’s
Prime Lending
Rate (NHB’s PLR) Refinance under the Scheme would be extended at concessional rates of
interest. The interest on refinance would be compounded monthly and repayable quarterly. Payment of
interest shall commence from the first day of the quarter immediately succeeding the date of disbursement of
refinance. The interest rates for fresh disbursements under the Scheme would besubject to revision by NHB
from time to time. Interest rates applicable on the date of the disbursement of refinance will be charged from
the primary lending institutions.
(g) Repayment of Refinance Repayment of principal would be on quarterly basis. The principal would be
repaid in equal quarterly instalments. Repayment of principal shall commence after one clear calendar
quarter from the date of release. e.g. In case of refinance disbursed on 19-03-2013, the repayment of
principal will start on 01-07-2013.
(h) Prepayment Prepayment of refinance under the Scheme will be accepted subject to the PLI giving two
months’ notice to NHB about the intention to prepay the refinance and upon payment of such prepayment
levy as may be prescribed by NHB.
(i) Security Security to be obtained from agencies - The loans extended to agencies would be secured by
mortgagable title over the project land / property / project receivable and / or other collateral security. The
repayment to PLIs would be ensured by routing of all cash flows under the escrow account in favour of the
PLI. The credit risk of the loan to the agency will be fully taken by the PLI and the refinance sought from NHB
would be repayable irrespective of the primary loan account remaining regular or otherwise.
Security for Refinance - The security structure for refinance will be asapplicable to the respective institution in
accordance with the provisions of the NHB’s refinance policy.
8. What do you mean by Securitization
"Securitization" refers to the process of turning assets into securities -- financial instruments that can be
readily bought and sold in financial markets, the way stocks, bonds and futures contracts are traded. When
used in relation to real estate, securitization means taking mortgages issued by banks and other lenders and
converting them into securities that can be sold to investors.
9. DEFINITION OF 'SECURITIZATION'
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The process through which an issuer creates a financial instrument by combining other financial assets and
then marketing different tiers of the repackaged instruments to investors. The process can encompass any
type of financial asset and promotes liquidity in the marketplace.
10. What are the Features of Securitization
A securitized instrument, will generally have the following features:
Marketability: The very purpose of securitization is to ensure marketability to financial claims. Hence, the
instrument is structured in such a way as to be marketable. This is one of the most important features of a
securitized instrument, and the others that follow are mostly imported only to ensure this feature.
Marketability involves two concepts: (1) the legal and systematic possibility of marketing the instrument; (2)
the existence of a market for the instrument.
As far as the legal possibility of marketing the instrument is concerned, traditional mercantile law took a
contemporaneous view of marketable documents. In most jurisdictions in the world, laws dealing with
marketable instruments (also referred to as negotiable instruments) were mostly limited in relation to what
was then in circulation.
Merchantable Quality: To be market acceptable a securitized product should be of saleable quality. This
concept, in case of physical goods, is something which is acceptable to merchants in normal trade. When
applied to financial products, it would mean that the financial commitments embodied in the instruments are
secured to the investors’ satisfaction. To the investors satisfaction is a relative term and therefore, the
originator of the securitized instrument secures the instrument based on the needs of the investors.
For widely distributed securitized instruments, evaluation of the quality, and its certification by an
independent expert, viz., rating is common. The rating is for the benefit of the lay investor, who otherwise not
expected to be in a position to appraise the degree of risk involved.
Wide Distribution: The basic purpose of securitization is to distribute the product. The extent of distribution
which the originator would like to achieve is based on a comparative analysis of the costs and the benefits
that can be achieved Wider distribution leads to a cost benefit, in that the issuer is able to market the product
with lower return, and hence, lower financial cost to him. But a wide investor base involves the high cost of
distribution and servicing.
Commoditization: Securitization is the process of commoditization, where the basic idea is to take the
outcome of this process into the capital market. Thus, the result of every securitization process, whatever
might be the area to which it is applied, is to create certain instruments which can be placed in the market.
11. What is the Need For Securatisation
Securitisation is one way in which a company might go about financing its assets. There are generally seven
reasons why companies consider securitisation:
1. to improve their return on capital, since securitisation normally requires less capital to support it than
traditional on-balance sheet funding;
2. to raise finance when other forms of finance are unavailable (in a recession banks are often unwilling to
lend - and during a boom, banks often cannot keep up with the demand for funds);
3. to improve return on assets - securitisation can be a cheap source of funds, but the attractiveness of
securitisation for this reason depends primarily on the costs associated with alternative funding sources;
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4. to diversify the sources of funding which can be accessed, so that dependence upon banking or retail
sources of funds is reduced;
5.to reduce credit exposure to particular assets (for instance, if a particular class of lending becomes large in
relation to the balance sheet as a whole, then securitisation can remove some of the assets from the balance
sheet);
6. to match-fund certain classes of asset - mortgage assets are technically 25 year assets, a proportion of
which should be funded with long term finance; securitisation normally offers the ability to raise finance with
a longer maturity than is available in other funding markets;
7. to achieve a regulatory advantage, since securitisation normally removes certain risks which can cause
regulators some concern, there can be a beneficial result in terms of the availability of certain forms of finance
(for example, in the UK building societies consider securitisation as a means of managing the restriction on
their wholesale funding abilities).
12. What are the Instruments of securitization
Master trust
A master trust is a type of SPV particularly suited to handle revolving credit card balances, and has the
flexibility to handle different securities at different times. In a typical master trust transaction, an originator of
credit card receivables transfers a pool of those receivables to the trust and then the trust issues securities
backed by these receivables. Often there will be many tranched securities issued by the trust all based on one
set of receivables. After this transaction, typically the originator would continue to service the receivables, in
this case the credit cards.
A second risk is that the total investor interests and the seller's interest are limited to receivables generated
by the credit cards, but the seller (originator) owns the accounts. This can cause issues with how the seller
controls the terms and conditions of the accounts. Typically to solve this, there is language written into the
securitization to protect the investors and potential receivables.
A third risk is that payments on the receivables can shrink the pool balance and under-collateralize total
investor interest. To prevent this, often there is a required minimum seller's interest, and if there was a
decrease then an early amortization event would occur.
Issuance trust
In 2000, Citibank introduced a new structure for credit card-backed securities, called an issuance trust, which
does not have limitations, that master trusts sometimes do, that requires each issued series of securities to
have both a senior and subordinate tranche. There are other benefits to an issuance trust: they provide more
flexibility in issuing senior/subordinate securities, can increase demand because pension funds are eligible to
invest in investment-grade securities issued by them, and they can significantly reduce the cost of issuing
securities. Because of these issues, issuance trusts are now the dominant structure used by major issuers of
credit card-backed securities.
Grantor trust
Grantor trusts are typically used in automobile-backed securities and REMICs (Real Estate Mortgage
Investment Conduits). Grantor trusts are very similar to pass-through trusts used in the earlier days of
securitization. An originator pools together loans and sells them to a grantor trust, which issues classes of
47 Sumesh Mirashi
securities backed by these loans. Principal and interest received on the loans, after expenses are taken into
account, are passed through to the holders of the securities on a pro-rata basis.
Owner trust
In an owner trust, there is more flexibility in allocating principal and interest received to different classes of
issued securities. In an owner trust, both interest and principal due to subordinate securities can be used to
pay senior securities. Due to this, owner trusts can tailor maturity, risk and return profiles of issued securities
to investor needs. Usually, any income remaining after expenses is kept in a reserve account up to a specified
level and then after that, all income is returned to the seller. Owner trusts allow credit risk to be mitigated by
over-collateralization by using excess reserves and excess finance income to prepay securities before
principal, which leaves more collateral for the other classes.
13. What are the Advantages and Disadvantages of Securitization ?
The Securitization structure is intended to provide significant advantages such as:
1. The Receivables are moved "off balance sheet" and replaced by a cash equivalent (less expenses of the
Securitization), thus improving the Originator's balance sheet. Securitisation can enhance managerial control
over the size and structure of a firm's balance sheet. For example, accounting de-recognition of assets (i.e.,
removal from the balance sheet) can improve gearing ratios as well as other measures of economic
performance (e.g., Return on Equity). Financial institutions use securitisation to achieve capital adequacy
targets, particularly where assets have become impaired.
2. More efficient financing for some private-sector institutions, securitisation is used to lower the firm's
weighted-average cost of capital. This is possible because equity capital is no longer required to support the
assets. Furthermore, highly rated debt can be issued into deep capital markets with investor demand driving
down financing costs. Securitisation also releases capital for other investment opportunities. This may
generate economic gains if external borrowing sources are constrained, or if there are differences between
internal and external financing costs.
3. The originator does not have to wait until it receives payment of the receivables (or, in a "future flow"
securitization, until it even generates them) to obtain funds to continue its business and generate new
receivables. In many cases this is essential and a role otherwise filled by more traditional methods of
financing, including factoring (in some ways securitization is a very sophisticated form of factoring). This is
more significant when the receivables are relatively long term, such as with real property mortgages, auto
loans, student loans, etc. and not as significant with short term receivables, such as trade and credit card
receivables.
4. The securities issued in the securitization are more highly rated by participating rating agencies (because of
the isolation of the receivables in a "bankruptcy-remote" entity), thus reducing the cost of funds to the
originator when compare to traditional forms of financing. In instances where the receivables bear interest,
there is usually a significant spread between the interest paid on the securities and the interest earned on the
receivables. Ultimately, the originator receives the benefit of the spread. In addition, the originator usually
acts as servicer and receives a fee for its services.
5. Better risk management: securitisation often reduces funding risk by diversifying funding sources. Financial
institutions also use securitisation to eliminate interest rate mismatches. For example, banks can offer long-
term fixed rate financing without significant risk by passing the interest rate and other market risk to investors
seeking long-term fixed rate assets. Securitisation has also been used successfully to give effect to sales of
48 Sumesh Mirashi
impaired assets. Securitisation also benefits investors. It enables them to make their investment decisions
independently of the credit-standing of the originator, and instead to focus on the degree of protection
provided by the structure of the SPV and the capacity of securitised assets to meet the promised principal and
interest payments. Securitisation also creates more complete markets by introducing new categories of
financial assets that suit investors risk preferences and by increasing the potential for investors to achieve
diversification benefits. By meeting the needs of different 'market segments', securitisation transactions can
generate gains for both originators and investors.
6. In non-revolving structures, and those with fixed interest rate receivables, assets and related liabilities can
be matched, eliminating the need for hedges.
7. Because the originator usually acts as servicer and there is normally no need to give notice to the obligors
under the receivables, the transaction is transparent to the originator's customers and other persons with
whom it does business.
Like every financial structure, a securitization structure also can have his disadvantages, such as:
1. The synchronisation of the interest generated by the pool and the interest paid to the investors is a very
arduous and tedious process.
2. The transfer of mortgages may be difficult for legal, regulatory or tax reasons. In the Netherlands and in
other European countries such transactions have to satisfy the requirements of regulatory authorities.
3. The complexity of the transaction requires a very highly sophisticated documentation, which covers
every potential risk. The numerous participants and opinions as well as the voluminous documentation are
very time consuming and costly.
49 Sumesh Mirashi

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Jyana Jyothi Vidya Kendra Sirsi - Notes on Financial Services and Institutions

Module 1 Overview of Financial Markets

2. What are the features of Financial Markets?

Financial markets facilitate:

• The raising of capital (in the capital markets)

• The transfer of risk (in the derivatives markets)

• Global transactions with integration of financial markets

• The transfer of liquidity (in the money markets)

• International trade (in the currency markets).

• Financial markets can be domestic or they can be international.

3. What are the Types of Financial Markets?

The financial market is broadly divided into 2 types:

1) Capital Market and 2) Money market.

4. Define Derivative Market.

5. What is Sweat Equity?

6. What are the Features and objectives of Money Market?

Features of Money Market

Objectives of Money Market

 To provide a parking place to employ short-term surplus funds.

7. What are the Functions and objectives of Capital Markets?

Functions of Capital Market.

8. What are the Functions of Financial Market?

Important Functions of Financial Market are

9. What are Capital Market instruments, Explain them in detail?

When the instrument is issued by:

• The Federal Government, it is called a Sovereign Bond;

• A state government it is called a State Bond;

• A local government, it is called a Municipal Bond; and

• A corporate body (Company), it is called a Debenture, Industrial Loan or Corporate Bond

Preference shares may be:

Some examples of derivatives are:

• Exchange Traded Funds or commodities

12. Explain Foreign Exchange Market in Detail.

The foreign exchange market is unique because of the following characteristics:

The factors affecting foreign exchange market are

14. How are exchange rates determined?

Determinants of exchange rates

2. What is Public Issue Management?

3. What is Pre- Issue and Post – Issue Management?

2. Marketing, Coordination and underwriting of the issue.

Post issue management is concerned with following:

1. Collection of application forms and amount received

3. Deciding allotment procedure

4. Mailing of share certificates/refund or allotment orders

5.Explain briefly about prospectus?

There are two types of prospectuses for stocks and bonds:

Preliminary and Final.

A red herring prospectus, as a first or preliminary prospectus, is a document submitted by a company

6. What are the Objectives of Prospectus?

Objectives: Prospectus is issued with the following broad objectives:

 It informs the company about the formation of a new company.

7. What are the contents of Prospectus?

Contents: The following important matter is included in the prospectus:

8. Pricing of a new issue?

9. Methods of New issue pricing ?

10. What is book Building?

11. What is a price band?

The functions of merchant banking are listed as follows:

13. Who Is a UNDERWRITER