J B GUPTA CLASSES

98184931932, drjaibhagwan@gmail.com, www.jbguptaclasses.com Copyright: Dr JB Gupta

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GENERAL TOPICS
Chapter Index
Consumer Finance Credit Cards Inter-Relationship between Investment, Financing and Dividend Decision Impact of Taxation on Corporate Financing Assets Securitization Exchange Traded Funds Economic Value Added Carbon Trading Self-Insurance SEZ Sub-Prime Crisis Private Equity Hedge Funds Embedded Options Curvilinear Break-Even-Analysis Financial Intermediation Share Holder Value Analysis Financial Engineering NBFC Big Ticket Lease Dow Jones Theory Corporate Governance Corporate Social Responsibility Information Technology Investment Banking Retail Banking

Q. No. 1: 1 Write a note on Surge in Consumer Finance.

Answer:
Purchase of consumer goods and services on credit is everyday occurrence, whether it is a major purchase like house or car or a lesser purchase such as electronics items, home appliances, cloths, jewelry, furniture, etc., some type of credit is generally used (particularly by urban middle class). Credit is also used for celebrating festivals, organizing functions and enjoying holidays. The credit may be in the form of (i) credit card (ii) direct borrowings for above-mentioned purposes and (iii) installment finance. Till a few years back, Indians lived by the Maxim stretch your legs according to size of your blanket. The maxim conveys that one should live within one's means, i.e., there should be no borrowings for personal requirements. Assets were created out of savings or inheritance. Good things in life either used to come too late or they never came. All this has changed. There has occurred a change in the mindset of Indians. Now people are borrowing not only for house but also for every single durable item in the house. Following are the reasons for surge in consumer finance: (1) Consumer finance has become affordable. Interest rates have come down. Repayment periods have become larger, resulting in lower amount of period repayments. (2) Consumer finance has become hassle-free. Convenience, tailormade schemes, quick disbursals, timely payment discounts and other value added services have contributed to the growth of consumer finance. (3) Prices of consumer durables have not increased in past few years, rather in some cases the prices have come down. Incomes of people, particularly urban middle class, have increased at a faster rate. The end result is that the consumer goods have affordable. (4) A large number of new goods and services are coming in the market. Electronics media has also created demand for new goods and services. The consumers are lured to buy these items. (5) Improvement in quality of consumer goods and services has also attracted the consumers towards them; this has led to growth in consumer finance.

(6) In the absence of other attractive avenues for lending, virtually every player in the finance market is chasing the consumers in a big way. (7) Producers and sellers are facing competition. They find it difficult to sell their products without consumer finance. Hence, some of them are offering installment finance, others are tying up with finance suppliers. Consumer finance is a win-win situation for finance providers and consumers. Consumers are enjoying king-size life-styles as they are getting consumer finance quite conveniently at affordable terms and conditions and finance providers are making money not only by way of interest but also by way of some commission from those merchant outlets which sell goods and services on the basis of finance provided by them. Consumer finance has the potential of becoming one of the biggest sectors of the economy in future. Encouraging GDP growth, affordable prices and satisfactory quality of consumer durables and quality of services provided by the consumer finance companies will fuel the growth of consumer finance in coming years. Q. No. 2 : Write a note on CREDIT CARDS. CARDS. Answer: A credit card is a form of consumer finance. The credit card customer is the borrower and credit card issuer is the lender. When the credit card customer buys some thing (using credit card), the issuer pays at the rate of on his behalf and sends him a bill around the same time each month. The customer can obtain a cash advance with his credit card at any AUTOMATED TELLER MACHINE. Every card has a credit limit. There are two parts of the credit limit: (1) for cash Advances (2) for other transactions. Every transaction (other than cash advances) on a credit card involves three parties: (1) The credit card issuer (2) The credit cardholder and (3) The party to whom the cardholder is supposed to pay, say the merchant outlet (MO). Examples of MO are: a departmental store, hotel, railways, airlines, etc. On purchase of goods or services, instead of paying cash, the cardholder presents his card to the MO. The MO makes verifications. The MO presents the bills to the card issuer, who pays the amount of the bill to him. At the end of each billing cycle, the value the transaction is included in the statement sent to the cardholder. The credit cardholder is supposed to make payment up to a certain date. If the credit cardholder does not pay by that date, he has to pay interest. On cash advances, interest is charged from the date of cash advance. Besides interest, the credit cardholder has to pay various charges like joining fees (these days most of card issuers have stopped charging this fees), annual fees, transaction fees and cash advance fees. The card issuer also charges

commission from MO. All these items constitute revenue for the card issuer. The rate of interest is quite high, in some cases as high as 3 per cent per month. The card issuer generally associates itself with Master card or Visa card networks. This type of arrangement enlarges the scope and operations of credit card issuer. Visa and Master cards are associated with a large number of banks, which issue their unique version of these cards. They have tie-ups with very large number of MO(s). Discover and American express operate through their own banks, so they are both, networks and issuer, rolled into one. Credit card holders get various types of insurance covers without making any separate payment for these covers. Credit cards have become way of life for many. It is a costly way of borrowing. However, if the cardholder does not carry forward the balance, i.e., makes timely payments, it is not so costly considering the facilities the cardholder enjoys by holding the card. The examples of such facilities are, not carrying cash, statements keep records of spending, various insurance covers, discount offered by MO and free credit period for grace period. It is certainly a convenient, safe and timely help in an emergency. A recent development in the field of credit cards is quite encouraging. It is that the card issuers have began offering a dynamic differential interest rates program linked to their credit history. Under this program, the loyal cardholders with a good credit history will be charged lower rate of interest (the angels get benefit of lower rates, the devils a bad deal). Q. No. 3: 3: Write short note on Inter-relationship between investment, financing and dividend decision. (Nov. 1999) Answer : Financial Management is the process of financial decision-making. There are three categories of financial decisions: (i) financing decisions, (ii) investment decisions, and (iii) dividend decisions. All these decisions are interrelated as each one affects the others and also each one has a single target and that is maximization of wealth of shareholders in the long run (this can be achieved through maximizing EPS while keeping the risk at optimum level). Financing Decision: Financing decision involves estimating the requirement of F funds and raising them at minimum cost of capital while keeping the risk at optimum level. Financing decisions affect investment decisions as investments can be made only if enough funds are raised at reasonable cost of capital. Such decisions also affect dividend decisions as adequate dividend should be provided on equity capital raised, otherwise the market price of the shares will go down.

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Financing decisions are affected by investment decisions as funds are required to be raised only if profitable investment opportunities are present. Such decisions are also affected by dividend decisions as equity funds should be raised only if the company shall be earning on these funds at a rate which is higher than the rate of return expected by equity shareholders (which depends upon dividend decisions). Investment Decision : Such decision involves capital expenditure decision as well as decisions regarding investing in working capital. While making the decisions, it must be ensured that they will earn adequate return on funds invested so that adequate return may be provided to the supplier of funds. Investment decisions affect finance decisions as finance has to be raised only if investment opportunities are there. Such decisions also affect dividend decisions as dividend depends upon the return obtained on these investments. Investment decisions are affected by finance decisions as investments can be made only if finance is available at reasonable cost. Such decisions are also affected by dividend decisions as only that much amount may be paid as dividend for which profitable investment opportunities are not there (Residual theory of dividend). Dividend Decision: Such decisions are concerned with providing return to equity shareholders. Such returns may be provided through dividend or bonus. Dividend decisions affect financing decisions as equity funds should be raised only if the company hopes to be able to provide adequate return to equity shareholders (otherwise the market price of shares will go down which is not liked by any finance manager). Such decisions also affect investment decisions as investment should be made only if the investment will provide adequate (adequate enough to provide return to equity shareholders) return on funds employed. Dividend decisions are affected by investment decisions as dividend depends upon the return provided by the investments. Such decisions are also affected by financing decisions decisions as higher the issue price of equity shares, larger should be the amount of dividend per share. Q. No. 3: Discuss briefly the impact of taxation on corporate financing. (Nov. 1996, May 2000) Answer: Finance managers should base their financing decisions on three considerations : (i) Try to minimize the cost of funds raised (ii) Try to reduce the impact of corporate tax and (iii) Finance risk should be kept at optimal level.(The level of optimum finance risk is determined after considering the operating risk. If operating risk is high, the finance risk may be kept at low level. If operating risk is low, finance risk may be kept at high level.)

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Corporate Financing decisions are affected by corporate taxation. Regarding the impact of corporate taxation on corporate financing, the following points are worth consideration: (i) Debt : Debt is most attractive source of financing from the point of view of corporate taxation as it is allowed as deduction for the purpose of calculating the taxable income. For example, if debt is raised at the interest rate of 10%, the effective cost will be only 6.91 % after considering the tax (including education cess). There is tax saving on debt issue expenses as well. (ii) Equity share capital: capital Return on equity shares can be provided to the shareholders by two ways (i) Dividend and (ii) Bonus shares. The first option is quite inferior option from the angle of taxation. On one hand, the amount of dividend is not allowed as deduction for computing the taxable income of the company, on the other hand the company has to pay an all inclusive corporate dividend tax The dividend is tax exempt in the hands of the receiver of dividend. The second option is not so inferior. Though the amount of bonus shares is not allowed as deduction while calculating taxable income of the company, the company does not have to pay corporate dividend tax. The allottee of bonus shares (i.e. the shareholder) , if needs cash , can sell these shares. If the shares are listed in the stock exchange and these are sold through the stock exchange after paying Security transaction tax (which is quite negligible), the shareholder may not have to pay tax (if from taxation angle, the transaction results in transfer of long term capital asset) or tax at [10 % + education cess], if from the tax angel it is the transfer of short term capital asset. (iii) Preference share capital : Return on preference shares can be provided to the shareholders by way of dividend This is quite inferior way from the angle of taxation. On one hand, the amount of dividend is not allowed as deduction for computing the taxable income of the company, on the other hand the company has to pay an all inclusive corporate dividend tax (corporate dividend tax + education cess) (The dividend is tax exempt in the hands of the receiver of dividend). (iv) Retained earnings: earnings If the company retains the earnings and uses them for further requirements of funds, it does not have to pay any corporate dividend tax. If return on retained earnings is provided to the shareholders by way of dividend, the company has to pay corporate dividend tax. If the same is provided by way of bonus shares, there will be no corporate dividend tax. (v) Depreciation: Depreciation is a resource of funds. It is allowed as deduction for tax purposes. It does not result in cash outflow and hence, and amount equal to depreciation is reinvested in the business.

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Q. No. 4: Write a short note on Asset Securitization. (Nov. 2002) Answer: The term Asset Securitization is used is in two references: (i) The Securities and Reconstruction of Financial Assets and Enforcement of Security Interest, 2002 (popularly known as Securitization Act) (ii) Debt Securitization Under Securitization Act: Banks and FIs in India are facing the severe problem of default (in repayment of loans and payment of interest on loans advanced by them) by a large number of borrowers in spite of the fact that most of these loans and advances are secured against the assets of the borrowers. The issue has become unimaginable and threatening to the very existence of the lenders. In order to help the banks and FIs, the Securities and Reconstruction of Financial Assets and Enforcement of Security Interest, 2002 (popularly known as Securitization Act) was enacted by the parliament. The enactment of this Act has empowered the banks and FIs to attach the assets (on which the lenders have charge) of the defaulters without intervention of time-consuming court procedures. The lenders can issue notices to the defaulters to pay up the dues and the borrowers have to clear their dues within 60 days. Once the borrower receives such notice, the secured assets mentioned in the notice cannot be transferred by the borrower without permission of the lender. The notice requires the borrower that either pay the dues within 60 days or the assets mentioned in the notice will be attached. Besides the assets, the bank can also takeover the management of the borrower establishment. The main purpose of the notice is to bring the defaulters on the negotiation table. (Banks and FIs resort to attachment only as a last resort for two reasons: (i) Sale value of second hand assets is generally very low and (ii) They are not in the business of attachment and sale of assets, they are in the business of financial services.) On receiving the notice, the borrower has the right of filing an appeal against the notice to the Debt Recovery Tribunal (DRT). In this situation, the lenders cannot dispose off the assets mentioned in the notice without permission of DRT. However, it is mandatory for borrowers who prefer an appeal to the Debt Recovery Appellate Tribunal (DRAT), to deposit upfront 50 per cent of the amount decreed by the DRT (Debt Recovery Tribunal). However, the DRT can reduce the upfront payment to 25 per cent. Debt Securitization: Securitization It is a process under which non-marketable assets such as mortgages, automobiles leases and credit card receivables ( such assets are referred as commercial / consumer credits ) are converted into marketable securities that can be traded among the investors. Under this process, the consumer / commercial credits ( which are assets for financing companies

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providing credit ) are sold to a specially formed separate entity called as Special Purpose Vehicle or trust . The SPV / Trust issues securities (promissory notes or other debt instruments) to the investors based on inflows of these assets. The inflows from the assets (i.e. commercial / consumer credits) are collected in a separate bank account. The investors who have invested in promissory notes or other debt instruments (issued by the SPV or Trust) are first to be paid from this account. The securities issued by the SPV / Trust are rated independently by the credit rating agencies i.e. credit rating of these securities is based on cash flow pattern of the underlying assets ( consumer / commercial credits ) and not upon the credit worthiness of the credit originator. It is used mainly by Housing Finance Companies because of the initiative taken by National Housing Bank. Q. No. 5: Write a note on Exchange Traded Funds. (May, 2010) Answer Exchange Traded Funds (ETFs) issue their units, referred as creative units, to the investors. These units represent some commodity or a basket of securities and are traded in the stock exchange throughout the trading day, allowing for intraday trading. Such funds are managed passively. Basket of securities based ETFs Such funds track a benchmark share index i.e. the underlying assets of such funds are shares which constitutes some Shares Index Number/ share price indicator. For example, Dow Jones Industrial average is worlds one of the oldest and most popular share prices indicator. It indicates the change in prices of equity shares of 30 largest and most widely held companies in the USA, these companies are considered as the business leaders of the USA. The average provides a basic signal of performance of the US share markets. Diamonds is an ETF of USA; the equity shares of these 30 companies constitute the underlying asset of the Diamonds. The sponsors of the ETFs are referred as authorized participants. They are institutional investors/ super-rich individuals. They appoint a fund manager for the purpose of constituting an ETF. The authorized participants transfer shares to the fund manager. The total transfer should be in the ratio in which the shares are represented in the share market indicator they want to track. For example, if the ETF is to track the Dow Jones Industrial average, there should be equal number of shares of the 30 companies which constitute the DJIA. These are deposited with the custodian. Now the fund manager will issue the creative units to the authorized participants for the shares they have transferred. Suppose there are 10 authorized participants; they transferred in all 1,00,000 shares of each of the 30 companies. Further suppose that the fund manager issued 1,00,000 creative units , then each creative unit is representing one share of

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each of these 30 companies. If the fund manager issued 2,00,000 creative units, then each creative unit represents 0.50 share of each of these 30 companies. These creative units are issued to the authorized participants in the ratio of the value of the shares they transferred to the fund manager. Now these creative units are listed in the stock exchange. These are traded as the shares are traded. Any one buy/sell these creative units in the exchange at the current market price. The authorized participants can get more creative units issued by transferring the shares to the fund manager or by making payment of these shares. Suppose, originally 1,00,000 shares of each of 30 companies were transferred to the fund manager and for these 100000 creative units were issued. Now suppose some participants transferred 30,000 shares of each of these companies to the fund manager, the fund manager will issue them 30000 creative units. Alternatively, suppose the some of the participants paid the fund manager an amount equal to price of 30000 shares of each of these 30 companies, the fund manager will buy the shares and issue creative units to the authorized participants (who made the payment). The authorized participant (s) can accumulate minimum number ( as decided at the time of formation of the ETF) of creative units and get them converted into the shares they represent. Other investors (who purchase the creative units from the share market) can not get the creative units created or redeemed. In India, the ETFs are listed on NSE. Commodity based ETFs (For example, Gold ETF) In such ETFs, the underlying asset is some asset, say gold. The authorized participants appointed fund manager makes new fund offer to the public, the amount so collected is invested in gold and creative units are issued to the investors. (Generally, each creative unit represents 1 gm of 24 carrot gold). These units are listed, and traded in the stock exchange. After the listing, the authorized participant (s) can transfer gold to the fund manager and get the creative units issued. The authorized participant (s) can accumulate minimum number ( as decided at the time of formation of the ETF) of creative units and get them converted into the gold represented by these units. Other investors (who purchase the creative units from the share market) can not get the creative units created or redeemed. Gold ETFs in India : There are two such ETFs in India. One is managed by UTI Asset management company Pvt. Ltd and the other is managed by Bench market

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Asset management Co. Private Ltd. Both the funds are traded on the NSE. Each unit represents approximately one unit of gold. Gold ETFs offer cost effective, transparent and convenient way of investing in the gold. Q. No. 6: Write short note on Economic Value Added method. . ( Nov. 2001) Answer: EVA is an accounting based technique of measuring the performance of an entity. The entity whose performance is being measured could be a division, department, project or the firm itself. The concept of EVA has been developed and popularized by Stern Steward & co.- a US consulting firm. EVA measures how much an entity has earned over and above its cost of capital1, which includes both debt and equity. Put simply, EVA is net operating profit2 minus an appropriate charge for opportunity cost of all capital invested in an enterprise. As such, EVA is an estimate of true economic profit, or the amount by which earnings exceed or fall short of the required minimum rate of return that that shareholders and lenders could get by investing in other securities of comparable risk. EVA = EBIT TAX on EBIT - [C.E. x WACC] IMPROVEMENT IN EVA Improvement in EVA can be achieved in four ways: (i) (ii) (iii) (iv) Increase operating efficiency. Taking on new investments that promise to earn more than WACC. Get rid of those parts of business that earn less than WACC. WACC is lowered by altering financial strategies. FIVE FEATURES OF EVA (i) (ii) EVA & Financial Management EVA & Incentive compensation

(iii) EVA & Divisional performance (iv) EVA & Goal setting (v) EVA & Market valuation

Weighted average cost of equity and borrowed funds. It is calculated on the basis of current cost and not on the bass of historical cost. 2 Net operating profit = EBIT Tax on EBIT

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EVA & Financial management As per EVA concept, the managers should incorporate two basic principles of finance in their decision making. The first is that the primary financial objective of any company is to maximize the wealth of the shareholders. The second is that it is the continuous improvement in EVA that brings continuous increase in shareholders wealth. EVA & Incentive Compensation The objective of incentive compensation is to make managers behave like owners. They should identify themselves with the fortunes of the company. EVA is a useful tool for incentive compensation. EVA & Divisional Performance EVA is a useful tool for divisional performance appraisal. EVA & Goal Setting Most companies set different goals for different managers. Under EVA, there is only one goal for each manager and that is, improve EVA. EVA based goal (i.e. goal of every manager is to improve the EVA of activities under his control) is simple and can be communicated to, and easily understood by , the managers of different levels. EVA & Market Valuation Market value of a company depends upon its EVA. There is high degree of correlation between EVA growth and market value addition. Increase in EVA results in increase of market value and vice- versa.

Conclusion
The most valuable resource in any company is the creativity and will to succeed that its people possess. EVA equips them with better information and better motivation to succeed. Q . No. 7 : Write short note on Carbon Trading. . Answer: Answer Carbon Trading : The scientists have been warning since 1960 or so that the temperature of the earth is rising and this is quite dangerous. The principal reasons responsible for this are (i) the burning of greater quantities of oil, gas and coal and (ii) cutting down of forests. The industrial and transport units are throwing excessive quantities of six most dangerous gases ( referred as Greenhouse Gases), especially carbon dioxide, in the environment. On the initiative of the UNO, the international community joined hands to find the ways to cope up the problem and an international protocol, known as KYOTO Protocol, was singed. This protocol came into force with effect from 16th December, 2005.

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The Kyoto protocol aims to tackle global warming by setting target levels for nations to reduce greenhouse gas emission worldwide.

Mechanism : Under this approach, the companies with emission levels less than the prescribed level, are issued certificates by the Secretariat of Kyoto Protocol. These certificates are referred as Carbon Credit certificates. These certificates are tradable. The companies having excess emissions may buy these certificates (other wise they have to pay penalty for excess emissions). Carbon trading has come as a wind fall for many Indian Companies. Companies using biogas, solar energy, windmill etc. are making a fortune on account of this system.
Q. No. 8: Write a Short note on Self Insurance. Answer: Self-insurance is a risk management method whereby the business itself assumes the risk directly. This means the business does not buy insurance, saves the cost of insurance premium and pays losses from its own funds. The business sets aside the funds to cover losses, should they arise. The amount set aside is calculated using actuarial valuation and theory of probability. The amount should be enough to cover the future losses. The idea of self-insurance is that retaining the risk (i.e. by not buying insurance) and paying the losses out of own funds, is a cheaper process than buying insurance because the organizations self-insuring does not have to pay the profit component of the insurer. The concept of self-insurance may be advantageous for large sized businesses as only such organizations may be able to bear the losses.

Self-insurance does not work for small organizations as they rarely have enough money to set aside to cover a potential future loss. Organizations going for self-insurance should be more careful about loss prevention programs. For example, installing fire extinguishers, sprinkler system, adding burglar alarm etc. Prevention program is always desirable whether the business buys insurance policy or goes for self-insurance. Q. No. 9: Write a short note on Special Economic Zones. Answer: Special Economic Zones : A Special Economic Zone (SEZ) is a geographical region that has economic laws that are different from and more liberal than a country's economic laws; it is deemed to be foreign territory for the purposes of trade operations, duties and tariffs. Special economic zones are intended to function as zones of rapid economic growth by using tax and business incentives. It is expected that a well-implemented and designed SEZ can bring about many

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desired benefits for a host-country: increases in employment, FDI attraction, general economic growth, foreign exchange earnings, international exposure, and the transfer of new technologies and skills. Hence, many developing countries are also developing the SEZs with the expectation that they will provide the engines of growth for their economies. The SEZ Policy, announced by Government of India enables the creation of SEZs in the country, with a view to provide an internationally competitive and hasslefree environment for exports. These zones are designated duty-free enclaves, and are deemed foreign territories for the purpose of trade operations, duties and tariffs. The Policy offers several fiscal and regulatory incentives to developers of the SEZs as well as units within these zones. The SEZ are of two types : (i) specific products or services zones and (ii) multi-product zones. A Special Economic Zone for multi product shall have an area of 1,000 hectares3 or more but not exceeding 5000 hectares. The Government of Indias policy is being criticized by many economists on the basis of two grounds : (i) To establish the SEZs, the state governments are procuring farmland in coercive ways and handing it over to big business groups. The land procurement process is producing enormous resentment among farmers. (ii) They will also result in huge losses on the exchequer through tax breaks and forgone duties. Q. No. 11: Write a note on Private Equity. Answer: The term Private Equity refers to Private Equity Funds. Owned by private investment organizations, these funds are pools of capital provided by their investors. Such funds are popular in the Europe and the USA, though in most cases these have been registered in tax haven countries like Mauritius etc. The Private Equity Funds invest mainly in the equity shares of unlisted companies.(In some cases, the investment in made in all or substantially all equity shares of a listed company and then the shares are delisted). Private equity is medium to long-term finance provided in return for an equity stake in potentially high growth unquoted companies.4 The funds are not passive investors, they take active part in the management of the companies in which they invest through representation on the Board etc. Studies have shown that private equity backed companies grow faster than other companies as

3 4

One Hectare = 2,50 Acres = 10,000 Square meters. British Venture Capital Association A Guide to private equity

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Private Equity Funds (i) provide not only equity finance but also management, business experience, technology and other helps like getting orders, getting supplies, making human resource available, and (ii) arrange more finance needed in the form of loans, bridge loans etc. The funds make profit by selling the shares, purchased by them, in ways : (i) selling the shares after the Initial Public Offer by the company i.e. after their listing (ii) selling the shares to the acquirer in the case of merger or acquisition (iii) selling back the shares to the promoters when they have sufficient funds to buy them, and (iv) sale of shares to some other buyer, for example some other Private Equity Fund. General partners get three types of fees (i) management fee (as a percentage of the fund's total equity capital) (ii) transaction fees (fees paid to the general partner on making the investment) and (iii) a performance fee, based on the profits generated by the fund. The performance of private equity funds is relatively difficult to track, as private equity firms are under no obligation to publicly reveal the returns that they have achieved from their investments. London-based research and consultancy firm Private Equity Intelligence collects information from (i) the websites of PEFs and (ii) from the investors, where possible using the provisions of Freedom Of Information Act in the USA and similar Acts in the European countries. There are strong prospects for private equity in the rapidly developing markets of India and China, according to Wharton faculty and private equity experts. Q. No. 12: Write a note on Hedge Funds. Answer: Hedge Funds are private investment organizations in Europe and USA. These are generally structured as limited liability partnership with the general partner being the portfolio manager, making the investment decisions, and other partners as the investors. The investor partners are super-rich persons like institutions, professionals and wealthy individuals (minimum investment amount ranging anywhere from $2,50,000 to $1 million). Investment is hedge funds in generally for a lock-in-period of one year so. The funds provided by all the partners, including the general partner, are pooled and invested in various financial assets including derivatives. The investment strategy of such funds in generally aggressive and flexible; the funds take all steps, permissible by law, such as leverage, long, short, swaps, futures, options and other derivatives in both domestic and international markets to get high returns on the investments made by the partners.

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Hedge funds are subject to the same market rules and regulations as any trader. There are no such restrictions on the hedge funds as are applicable to other pooled investments like mutual funds. No registration is required with Securities and Exchange Commission or Financial Services Authorities (unless a general partner manages more than 15 such funds). No special reports have to be submitted, no investor protection guidelines have to be followed. Of course, like mutual funds, hedge funds are subject to the anti-fraud provisions of securities laws. First hedge fund was set up by A.W.Jones in 1949 in the USA. This fund was to protect its investors against risk using various techniques i.e. hedging of risk was the central to its investment strategy. Hence, it was referred as Hedge Fund. Today, the term "hedge fund" refers not so much to hedging techniques, which hedge funds may or may not employ, as it does to their status as private and unregistered investment pools. For the majority of these funds the hedging of risk was not the central to their investment strategy. Hedge funds have generally provided very high returns to their investors even during the periods of falling share prices, though there have been some cases of huge losses, there have been even some of fraud. Such funds are quite popular among such investors who are ready to take high risk in the hope of getting high returns. Many times the investment strategies of hedge funds have caused in volatility in the markets for three reasons (i) they have large amount of funds to invest at their disposal, (ii) they do not have to follow transparent policies and (iii) they follow aggressive policies. There is was domestic/foreign hedge fund in India till Sept. 2007. In October, 2007, SEBI has allowed the foreign hedge funds operations in India. The new development in this field is emergence of funds of hedge funds. These are the organizations which invest in the hedge funds. They attract investment from various investors mainly the small investors. Q. No. 13: Write a note on Embedded Options / Embedded Derivatives.(Nov. .(Nov. 2008). Answer: An embedded option is an option that is part of the structure of a bond. It therefore does not trade by itself, but it does affect the value of the bond of which it is a part. It provides either the bondholder or issuer the right to get some thing done by the other party; the other party is obliged to do that. There are 3 types of embedded options:

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Call option: It is the option with the issuer of the bonds. This option provides the issuer to call back (i.e. to redeem) the bonds before their maturity as per the terms of the call option. For example, the issuer issues the bonds with 7 years maturity. The terms of the issue provides that the issuer has the right (not the obligation) to call back the bonds at any time after 3 years of the date of issue at a premium of 10% of the face value. Indian capital market witnessed the exercise of a call option of very large magnitude by IDBI in the year 2000. IDBI issued deep discount bonds in 1996 offering a return of about 16% with 25 years maturity. The issue received overwhelming response from the investors planning their retirement, education of children etc. The investors got a shocking news in the year 2000 that the IDBI has decided to call back (i.e. to redeem) the bonds. Many investors filed their grievances against IDBI with SEBI, Ministry of Finance etc but these could not be redressed as the offer document clearly mentioned the option clause (which perhaps no body cared to go through). By getting the bonds allotted, the holders write the call option in favour of the issuer. Call option has adverse impact on the value of the bond. Put option : It is an option written by the issuer of the bond in favour of the buyer of the bond. Under this option, the buyer may get the bonds redeemed before the maturity as per the terms of the put option. For example, a company issues 10% Bonds with 10 years maturity. The bonds contain put option under which the Bonder may get the bonds redeemed at any time after three years at a discount of 5% if redeemed after 3 years but up to 5th year, at a discount of 3% if redeemed after 5 years but up to 8th year and at a discount of 1% if after that. By issuing the bonds, the issuer writes the put option in favour of the investor. Put option has positive impact on the value of the bond. Conversion Conversion option : Under this option the bondholder may get his bond amount converted into shares as per the terms of the conversion option. For example, a company issued 10% Debentures of Face value of Rs.100 each, maturity 10 years ; the bond holder is given the option of getting the amount of the bond converted into 4 equity shares of Rs.10 each at a premium of Rs.15 per share at any time after 3 years from the date of the issue. By issuing the bonds, the issuer writes the conversion option in favour of the investor. Conversion option has positive impact on the value of the bond. Q. No. 14: Write Short Note on: Curvilinear Break-even-Analysis (May, 2002) Answer: Break-even point is the sales level at which there is no profit no loss. In other

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words, It is the sales level at which total cost is equal to total sales. For calculating the Break even point, we assume that variable cost per unit, selling price per unit and total fixed cost remain unchanged for different levels of operations. If these assumptions hold good, the relation between sales and cost is linear and there is only one Break-even point. Even if one of the three assumptions do not hold good, the relation between sales and cost is not linear and they be multiple Break-even points. In other words, if one or more of the following conditions are satisfied, the cost-volume relationship is curvilinear ( non-linear) and there may be multiple break- even points. This situation is described as curvilinear Break-even-Analysis. Q. No. 15: Write Short Note on Financial intermediation. . (May , 2002) Answer Financial intermediation is the routing of savings to investments through financial intermediaries. It is a process through which an economy's savings are transformed into capital investments. There are two types of Financial Intermediations : (I) Traditional Financial Inter-mediation; and (II) Contemporary Financial Intermediation. Traditional Financial Intermediation: In this case, the savers/suppliers of funds deposit their money with the financial intermediaries (for example: banks, financial institutions, non-banking financial companies etc.) and the financial intermediaries lend the money in the way they like (subject to some government regulations). In other words, the savers/suppliers of funds have no say or role in the lending by the financial intermediaries. The risk arising out of lending is borne by the intermediaries, i.e. there is no financial risk for the savers/suppliers of the funds (except in case of bankruptcy of the intermediary). The main drawback of this approach is that the difference between cost to the borrower and return to the supplier of funds is substantial, i.e. while the borrower has to pay a quite high interest for the funds borrowed; the suppliers of funds generally get only a fraction of it. Contemporary Financial Intermediation: Contemporary Financial intermediation is aimed at overcoming the limitation of the traditional intermediation. In other words, on the one hand it aims at providing higher return to the suppliers of funds, and on the other, at making funds available to productive investors at minimum cost. The difference between the borrower's cost and lender's return is the fees (and sometimes expenses also) of the intermediary who simply negotiates the deal. Though the risk is borne by the suppliers of funds, it is minimized/optimized through professional competency of the intermediaries. The suppliers of funds can determine the levels of risk they are ready to bear.

18
Examples of such intermediaries are Mutual funds, Issuing and Paying Agents (appointed for issuing commercial papers) and negotiators of large deals of funds Q. No. 16: Write Short Note on: Shareholder value Analysis (May , 2002) Answer Maximization of shareholders' wealth (in the long run) has been accepted as the object of financial management since Adam Smith's days. The shareholders value analysis got recognition only after 1986, when Prof. Rappaport of USA published his book Creating shareholder value. As per the concept of Shareholder Value Analysis (SVA), all business activity should aim to maximise the value of a company's equity shares in the long run. As per SVA, the primary responsibility of management (not only of the finance manager) is create value for the shareholders. All the decisions of the management should have only one target and that is value creation for the shareholders. Critics argue that concentrating on shareholders value will be harmful for other stakeholders like employees, suppliers, customers, society etc. The advocates of the SVA counter this view and express that shareholders value can be created only after meeting the requirement of these stakeholders. (This concept has been used as a shield by a fairly large number of European and US companies while downsizing their human resources). Q. No. 17: Write Short Note on: Financial Engineering. . (May, 2002, N0v. 2008) Answer Financial Engineering is a process that uses science-based mathematical techniques for financial decision-making. It applies quantitative techniques to the theory of finance to optimize the firm's financial transactions. Financial engineering is a subset of finance. The term financial engineering came into use after the Black-Scholes option pricing model was developed in the early 1970s. This scientific breakthrough led to a new way to solve practical financial problems using the quantitative techniques. Later on, the use of computer skills vastly increased the scope of financial engineering. A Nobel Prize for the Black and Scholes Model (on 14th October, 1997) gave further recognition to financial engineering. Decision-makers have to take decisions, and the outcome of their decisions is affected by uncertain future events (on which they have no control). The scientific way of decision making is that the decision should be taken after considering all possible uncertainties. Sometimes, the numbers of uncertainties extend to infinity. Ordinary techniques cannot consider all these uncertainties. Hence, financial engineering is applied. Utilizing various derivatives and other methods, financial engineering aims to precisely control the financial risks that

19
an entity takes on. (Some thinkers on the subject opine that financial engineering is mainly concerned with risk management). It helps in optimum pricing of various financial services and operations, in the face of unlimited uncertainties and combination of uncertainties otherwise their prices cannot be determined. Q. No.18: Write a note on Non-Banking Finance Companies. Answer:

A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 and is engaged in the business of loans and advances, acquisition of shares/stock/bonds/debentures/securities issued by Government or local authority or other securities of like marketable nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, sale/purchase/construction of immovable property. A Residuary non-banking company is also a NBFC. Residuary Non-Banking Company is a class of NBFC which is a company and has as its principal business the receiving of deposits. These companies are required to maintain investments as per directions of RBI, in addition to liquid assets..
NBFCs are doing functions akin to that of banks, however there are a few differences:

i. a NBFC cannot accept demand deposits; ii. it is not a part of the payment and settlement system and as such cannot issue cheques to its customers; and iii. Deposit insurance facility is not available for NBFC depositors unlike in case of banks. It is mandatory that every NBFC should be registered with RBI to commence or carry on any business of non-banking finance company. It should have a minimum net owned fund of Rs raised to Rs 200 lakh All NBFCs are not entitled to accept public deposits. Only those NBFCs holding a valid Certificate of Registration with authorisation to accept Public Deposits can accept/hold public deposits. Presently, the maximum rate of interest a NBFC can offer is 12.50 %. The NBFCs are allowed to accept/renew public deposits for a minimum period of 12 months and maximum period of 60 months. They cannot accept deposits repayable on demand.

RBI regulates the NBFC through the following measures: (i) (ii) Mandatory Registration. Minimum owned funds.

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(iii) (iv) (v) (vi) (vii) (viii) (ix) (x)

Only RBI authorised NBFCs can accept public deposits. RBI prescribes the ceiling of interest rate. RBI prescribes the period of deposit. RBI prescribes the prudential norms regarding utilization of funds. RBI directs their investment policies particularly in case of Residuary Non-banking Company. RBI inspectors conduct inspections of such companies. RBI prescribes the points which should be examined and reported by the auditors of such companies. RBI prescribes the norms for preparation of Accounts particularly provisioning of possible losses.

Q. No. 19: Write a note on Big-Ticket Lease. . Answer: It is a lease in which the asset's capital cost is very large. In other words, lease of the assets of bigger value running into hundreds and thousands crores of rupees is called Big-Ticket lease. Leasing of aircraft, satellites etc. are typical examples. Big-ticket lease can either be operating or finance lease depending upon the terms of the lease agreement. For example, if Air-India takes, say, one hundred planes on lease from Boeing, the media would describe it as a big-ticket lease merely to drive home the huge size of the transaction. (The Hindu Business Line dated 19th June, 2006). This type of lease should be structured by professionals of both the parties, lessee as well as lessor, after considering various aspects like legal, tax, technological aspects, cost of funds etc. Professionals of each side should take care of their client's interests. Generally this type of lease is cross-border lease.

Q. No. 20: Write a note on Dow Jones Theory. Answer: The ideas of Charles Dow, the first editor of the Wall Street Journal, are known as Dow Jones Theory. In 1900 Dow Jones wrote a series of articles emphasizing that the direction of share market appeared to be based on a set of rules. Collectively, these articles and rules became known as The Dow Theory. Dow expressed that the general level and trend of the stock market can be understood with the help of index numbers/averages constructed on the basis of price movements of some important stocks. He believed that the behaviour of

21
these index numbers/averages reflected the hopes and fears of the entire market. (For example, in India, if Sensex rises it is hoped that the market will go up and if Sensex falls it is feared that the share market will go down). He created two averages to understand the price behavior of the stocks in the USA:

(a)Dow (a)Dow Jones Industrial average : It is an average of prices of 30 blue-chip U.S. stocks prevailing in the New York Stock Exchange.8 (b) Dow Jones Transport average: The Dow Jones Transportation Average (DJTA) is the most widely recognized indicator/average of the transportation sector of USA.

Theory 1. A share price reflects everything that is known about a stock. This means that all the positives and all the negatives about a company are assumed to be known by the market and built into the share price. 2. Share market has three well-defined movements which fit into each other: (I) Ripple: It is the daily variation due to difference between buying and selling at that particular time or changes in very short period very short period is known as market period in economics. Such changes are due to instant reactions. Wave: It refers to the movements which cover a period ranging from days to weeks (changes in short period). Such changes are generally referred as corrections. Such changes do not reflect change in fundamentals.

(II)

(III) Tide: It refers to the movement which is a great swing covering from months to years, (Long term trend, also termed as primary trends). Such changes are the results of changes in fundamentals. 3. Primary Trends: Bull markets are broad upward movements of the market that may last several years, interrupted by secondary reactions. Bear markets are long declines interrupted by secondary rallies. These movements are referred to as the primary trends. Bull Markets Bull markets commence with reviving confidence as business conditions improve. Prices rise as the market responds to improved earnings. Rampant speculation dominates the market and price advances are based on hopes and expectations rather than actual results.

22

Dow defined a bull trend as a time when successive rallies in a security price close at levels higher than those achieved in previous rallies and when lows occur at levels higher than previous lows. Bear markets start with abandonment of the hopes and expectations that sustained inflated prices. Prices decline in response to disappointing earnings. Distress selling follows as speculators attempt to close out their positions, and securities are sold without regard to their true value. Bear trend occurs when markets make lower lows and lower highs.

Bear Markets

4. Trends are confirmed by volume: : Dow believed that volume confirmed price trends. When prices move on low volume, there could be many different explanations why. An overly aggressive seller could be present for example. But when price movements are accompanied by high volume, Dow believed this represented the true market view. 5. Trends should be judged with the help of Share price IndexNumbers. The purpose of the Dow Theory is to determine the market's primary trend. Successful investing, according to the Dow Theory, means staying on the right side of the primary trend and ignoring short-term movements. According to Dow, the primary trend cannot be manipulated. Q .No. 21: Write a note on Corporate Governance. Answer: Answer: Corporate governance is commonly referred to as a system by which the corporates are directed and controlled. It is the process by which the corporate's objectives are established, achieved and monitored. Corporate governance is concerned with the relationships and responsibilities between the board, management, shareholders and other relevant stakeholders within a legal and regulatory framework. Corporate governance is to conduct the business of a corporate in such ways that the interest of all its stakeholders (within regulatory frame-work) is served. Corporate Governance is about transparency and accountability. promoting corporate fairness,

Good governance contributes to good performance.

Principles Commonly accepted principles of corporate governance include:

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Organizations should respect the rights of shareholders and help them to exercise their rights. Organizations should recognize that they have legal and other obligations to all legitimate stakeholders. The board needs a range of skills and understanding to be able to deal with various business issues and have the ability to review and challenge management performance. Organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making. Organizations should clarify and make publicly known the roles and responsibilities of board and management to provide shareholders with a level of accountability.

Corporate Governance in India The listed companies are required to comply with the following conditions (popularly known as clause 49 of the listing agreement) as stipulated by the SEBI. (i) COMPOSITION OF BOARD The Board of directors of the company shall have an optimum combination of executive and non-executive directors with not less than fifty percent of the board of directors comprising of non-executive directors. Where the Chairman of the Board is a non-executive director, at least one-third of the Board should comprise of independent directors and in case he is an executive director, at least half of the Board should comprise of independent directors. AUDIT COMMITTEE

(ii)

A qualified and independent audit committee shall be set up with at least three directors as members. Two-thirds of the members of audit committee shall be independent directors. The audit committee should meet at least four times in a year and not more than four months shall elapse between two meetings. DISCLOSURES

Risk Management
The company shall lay down procedures to inform Board members about the risk assessment and minimization procedures.

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Proceeds from public issues, rights issues, preferential issues etc.

When money is raised through issuing the shares, the company shall prepare a statement regarding uses of the funds so raised. This statement shall be certified by the statutory auditors of the company. CEO/CFO CERTIFICATION (a) (b) They have reviewed financial statements and the cash flow statement for the year The CEO and the CFO shall certify to the Board that:

There are, to the best of their knowledge and belief, no transactions entered into by the company during the year which are fraudulent or illegal. REPORT ON CORPORATE GOVERNANCE There shall be a separate section on Corporate Governance in the Annual Reports of the company, with a detailed compliance report on Corporate Governance. The companies shall submit a quarterly compliance report to the stock exchanges within 15 days from the close of a quarter. COMPLIANCE

(i)

(ii)

The company shall obtain a certificate from either the auditors or practicing company secretaries regarding compliance of conditions of corporate governance as stipulated in clause 49 and annex the certificate with the directors' report, which is sent annually to all the shareholders of the company. The same certificate shall also be sent to the Stock Exchanges along with the annual report filed by the company. Q. No. 22 : Write a note on Corporate Social Responsibility. Answer: Answer: Society is not just another stakeholder in corporates. It is the very purpose of the corporates. The existence of the corporates depends upon the society: society buys goods and services produced by the corporates, society provides its savings to the corporates, society supplies human resources to the corporates, and society provides infrastructure and other facilities to the corporates.

Sometimes, the society bears the adverse impact of corporate actions, like

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society's land is acquired to run the commercial activities of the corporates, corporate operations injure the ecology and environment, and small farmers and entrepreneurs lose their livelihoods on account of coporate businesses.

The corporates owe their very existence to the society. The society therefore expects the corporates to operate in a manner that strengthens the society and takes it forward. The conclusion is that the corporates have their social responsibilities. Corporate Social Responsibility is a commitment to improve the wellbeing of community through discretionary business practices and contribution of corporate resources. It is defined as operating a business in a manner that meets or exceeds the expectations the society has from the corporate. It is a way of converting `a good company' to `a great company.' Social responsibilities of the Corporate: Earning profits and acquiring financial strength Efficient use of resources: Produce the goods and services of good quality Take care of environment Providing healthy working environment to the working people. Providing community services like. providing medical check-ups and health services in the neighbourhoods, building community centres, running creches, organising tournaments and entertainment events etc. create goodwill among the members of the community.

Corporate draw a lot from the society. They are expected to deliver a lot to the society. They are interdependent. The well-being of one depends on the well-being of the other. Q. No.: 24 :The information age has given a fresh perspective on the role of finance management and finance managers. With the shift in paradigm it is imperative that the role of the Chief Financial Controller changes from a controller to a facilitator. Explain. Answer Lead us from darkness to light have been the prayer of human beings to God. This prayer has been answered by the information technology which leads us from secrecy to transparency. Information technology has brought a revolution in management functions including the finance function. In pre-IT era, most of the financial information was treated as secret ones and the finance manger (called

26

Controller) was expected to control the finances and in this process he used to keep all the information under secret cover. In the present IT-era, most of the financial information is available to the managers. Capabilities as well as integrity of the mangers and other employees are trusted. Hence, nothing much remains to be controlled. Today's finance manager has two important roles: (i) to facilitate other managers in achieving the objects of the company. For example, he may guide the marketing manager regarding cash discount policies regarding early payments by the customers; he may guide the production manager regarding cost control through bulk purchase or asking for cash discount on early payments to suppliers or for longer credit periods and (ii) the finance manager should concentrate on external finance environment of the company. He may concentrate on cheaper sources of finance, repaying the costlier finance raised earlier. He should take appropriate steps for hedging against adverse movement in foreign exchange rates. He may concentrate on the returns expected by the shareholders particularly about their dividend expectation. He should evaluate more and more investment opportunities. The author or the speaker wants to convey that the IT era has provided the finance manager with an opportunity of thinking and looking big. He need not devote his time on routine matters (IT has reduced the requirement of his time and efforts for such matters; he should concentrate on the bigger issues.) He should help the top management in widening their horizon about the business. Q. No.: 25. Write a detailed note on Investment Banking. (May 2010) Answer Commercial banking refers to raising the funds (mainly through taking deposits) and providing commercial and retail loans. Investment banking provides all the financial services to the corporate, governments and government agencies, other business entities, non-profit organizations and high net worth individuals. They provide total financial services at one-stop shop. Their services include:

(i)

(ii)

issue management public as well right issues equity as well debt (a) advisory services timing, size & composition and pricing of issue (b) preparation of offer documents with due care & diligence and compliance of legal formalities (c) offering the securities to the public/ shareholders (d) underwriting of the securities (e) ensuring smooth completion of the issue (f) Post issue services allotment, exercise of Greenshoe option Management of buy back of shares Buy back is used by cash rich companies to (i) increase the value of shares (ii) avoid hostile takeover (iii) delisting the shares (iv) optimization of the capital structure.

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(a)Compliance of the provisions of Company Law and SEBI regulations (b)Smooth completion of the buy back (iii) Loan syndication (a) negotiation with loan provides like banks, financial institutions (b) preparation of information memorandum (c) presentation of information memorandum (d) negotiating the terms (e) smooth completion of transaction (iv) Private placement of equity as well debt (a) preparation of Information Memorandum (b) legal compliances particularly in case of listed companies (c) placement of the securities to high net worth individuals, financial institutions and other buyers like Private equity (v) Amalgamations and Absorptions Advisory services Valuation of both the companies for deciding the swap ratio Legal compliances meetings of share holders, filing petition with High court Liaison with stock exchange(s) for listing of the securities issued as purchase consideration and delisting of the shares of the amalgamated company Ensuring completion deal (vi) Takeover and acquisition : Advisory services Valuation of both the companies for deciding the swap ratio SEBI compliances meetings of share holders, filing petition with High court Liaison with stock exchange(s) for listing of the securities issued as purchase consideration Ensuring completion deal (vii) Research and develop opinions on securities, markets, and economies (viii) Management of investment portfolios cash rich companies place their surplus cash with the investment banks for investing in various securities for obtaining appropriate return and maintaining the risk at affordable levels. (ix) Trading in the securities. (x) Securitization Debt. The main source of income for the investment banks is the fees they charge for providing the financial services. They also earn income from trading the securities on their own behalf. Q .No. 26; Write a note on Retail Banking. Answer

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Retailing Banking refers to the various services provided by the commercial banks to small customers, mainly individuals. The services include (i) accepting their deposits ( in savings account, fixed deposit accounts, recurring deposit accounts etc with deposit insurance cover ) (ii) providing housing loans, educational loans, auto loans, consumer loans, locker services ( safe vault), depository services, money transfer facilities, internet banking services (iii) issuing debit cards, credit cards, ATM cards etc. and so forth. The retail banking provides multiple services ( As outlined above) at multiple centers ( Branch, extension counters, ATM centers, on-line banking, phone banking, any where banking, direct debits, direct credits etc) to multiples customers ( senior citizens, students, salaried people, self employed professions and other individuals) as per their requirements. Retail banking has witnessed the surge in recent years in India. There are three indicators of this scenario: (i) Retail Loans constitute a large portion of total advances by the banks. (ii) Housing loans have seen phenomenal growth in recent years ( taxbreak has been an important factor in this regard) (iii) The retail loan market has been converted from the lenders market to the borrowers market. (iv) Almost every bank is competing with other banks, to get a larger slice of the retail pie, in this field by way of providing the better quality of services. The reasons behind this surge are: (i) Economic prosperity: With growing Indian economy the income of the urban households, particularly salaried and self-employed professional class, is increasing and they are demanding more and better customized services. The result is that retail banking sector growing at a faster rate. Retail banking services are demanded mainly by the young people. India is in a very advantageous position. About 70 % of the population in India is below 35 year age. This percentage is perhaps highest in the world. The young people have substantial purchasing power; besides they have liberal attitude towards personal loans. They do not have time to stand in queues, so they are willing to pay for time saving services. The spend-now-pay-later credit culture is picking up in India. The households are borrowing not only for consumer durables but also for leisure and pleasure like advances for foreign travels, festivals etc.

(ii)

(iii)

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(iv) The legal procedure in India is in favour of the retail banks advancing the loans ( particularly the law regarding dishonour of the cheques). The ratio of NPAs to retail advances is only a fraction of that of NPAs to all advances, particularly in the sector of housing loans. Advances in information technology techniques have led to spectacular innovations in the field of retail banking in recent years. Retail banking is a profit driver for large sized banks in the big cities, particularly for those banks which have been able to control their costs (using advanced information technology and outsourcing of some of the operations) Decline in interest rates has made the borrowing affordable. Setting up of the Credit Information Bureau (India) Limited (CIBIL) which collects and disseminating credit information pertaining borrowers has given boost of retail banking in India.

(v)

(vi)

(vii) (viii)

Though the retail banking of todays standards was introduced in India in the metro cities by the foreign banks, today they are facing fierce competition not only from private banks like HDFC, ICICI etc but also from nationalized banks like State Bank of India, Allahabad Bank, Bank Of India, Bank of Baroda etc. mainly on account of large branch network spread over the length and width of the country. The banks are bullish on this sector, they are focusing more and more on this sector and are waking up to its potential specially by way of improving the quality of service and cutting the costs.