Banking Financial Services and Insurance

Participant
Handbook
Banking Financial Services

and Insurance (BFSI)
Certificate Programme in BCBF
Table of Content
Session
Topic
Day - 1
Page No.
1
D1S1
Ice Breaker
D1S2
Program Objectives, Expectations, Career Progression
D1S3
Financial Inclusion: relevance for Rural development, various initiatives by Govt and
Non Govt agencies
D1S4
Introduction to BFBC Model - Roles and Responsibilities of BFBC in Financial Inclusion
D1S5
Introduction to Banking: Principles of Banking, Functions of Banks
D1S6
Roles and Responsibility of a BC, Compensation Details of the BC's; Documentation

required from a BC for their own enrollment & Benefits of Certification Program
D1S7
Other functions of bank, (practice of account opening form of deposit accounts), About
KYC forms and KYC Submission
D1S8
Question & Answer Session
D1S9
Planning and Time management, Performance Reporting (daily), Discussion on Monthly

targets (message or missed call to SSC (Sub Cluster Coordinators), Communication from
BCs, Cash management (closing balance for the day)
D1S10
Learning Confirmation - 1
Day - 2
15
D2S1
Recap
D2S2
Introduction of Enrollment Software, Procedure for enrollment of Customer & Able to

do troubleshooting
D2S3
Banker-Customer relationship, Principles and AML(Anti-money laundring), Submission

and Uploading documents and data
D2S4
Nomination of CSP
D2S5
D2S6
Enrollment Process flow Bartronics introduction Authorization of BC from Branch

Manager, Opening of Current account of BC, Passbook distribution, Coordination with
BM
D2S7
Software Training Practice Session - I (Hands on Training)
D2S8
2011 IL&FS Skills Development Corporation Limited
Participant Handbook
Day - 4
21
D4S1
Relationship Management, Customer Satisfaction, Principles of Effective, Communication, Setting Goals, Case Study: Group Discussions
D4S2
Micro Finance: Delivery models; SHGs: Role, structure, composition and functions
D4S3
D4S4
Financial Education and Financial Counseling: Roles of BFBC
D4S5
Role Play in Financial Counseling
D4S6
Cash Flow and Cash, Budgeting Techniques, How to identify fake notes
D4S7
Software Training Practice Session - III
D4S8
Certificate Progamme in BCBF
D1S1
Dear Participant,
Welcome to this specialized training program for Business Facilitators/Business Correspondents.
Why are we here?
1.
To meet the requirements of the IIBF Certification Process.
2.
To learn and practice from each other the best methods used
Who has created this program?

IL&FS ETS, training specialists, have studied the general profiles of the participants and created a
program that is participatory, enjoyable, easily understood and provides plenty of room for practice.
It is based on the syllabus given by IIBF in their Handbook on Inclusive Growth through Business
Correspondent available from Laxmann publications.
Who are your trainers?
Your trainers for this batch are
Name
Background
What are the rules for getting a Certificate?

1.
We must complete 5 days of training no absenteeism is allowed.
2.
e must prepare a Demand Draft in the name of IIBF, Mumbai this is the exam fee. Who will
W
pay this examination fee?
3.
We must fill in the Registration Form. What are the rules for the examination?
4.
We must practise and sit for the Examination according to dates given by IIBF.
5.
If we pass the examination then we will be issued a Certificate.
6.
T he internal assessment carries 40 marks which must be completed at the end of the training
itself. After the internal assessment the Final test also will be administered by IIBF for 60 marks
as per the requirement of the training institution.
7.
For internal evaluation 4 different types of activities/tests may be considered as under
Role play/interactions 5 marks
Participation in class room activities/attentiveness 5 marks
Form filling exercise 10 marks
Quiz/Objective tests 20 marks 20 questions for 30 minutes
What will we learn in this course?

1.
Knowledge on banking & finance
2.
Skill sets on role of Business Correspondent/Business Facilitator (BC/BF)
3.
Right approach towards understanding and appreciating the need for financial inclusion in rural areas
4.
Communication techniques required to relate with rural clients

1
D1S2
Assessment Profile of participants
In the table below, tick off the items in which you have good knowledge. Mark the items which you
would like more information or need practice.
Item
Topic
Personal skills required for this job
Communication Skills required for rural

clients
Interpersonal skills
Difference between BC & BF
Skills for filling up of A/C opening, loan

and document forms
How Banks operate, the DepositLending cycle
Types of customers, accounts, interest
Account opening, KYC norms
Banker-customer relationship types
10
Need of BC/BF in unbanked rural areas
11
Different channels of using a bank
12
Anti-money laundering function
13
Concept of Farm Loans how banks

earn money
14
Types of Retail Loans and their features
15
Security creation and charge
16
Asset classification
17
Why do Banks require the BC/BFs?
Need
Good
Need
knowledge Practice Information
18
Different types of skills required by BC/

BFs
19
Dealing with difficult debtors skills of

persuasion
20
Policy, processes and procedures of

debt recovery; strategies for recovery
21
RBI Norms and other agencies
22
ITES Functions of Bank
23
Fair Practice Codes, International Codes
D1S3
What is financial inclusion?
Financial services being made available to the low-income group at a low cost is known as Financial
Inclusion. Banks engage intermediaries to provide such financial services/products through the use of
BF and BC. Majority of poor people live in rural India. They do not get banking services. These poor
people are excluded from these opportunities.
Reasons for financial exclusion
In India there are still vast rural areas where there are no bank branches. The main reasons are listed
below:
Transaction cost of banks: The credit requirement of marginal farmers, agricultural

labourers, and petty traders are often small and frequent. The cost structure and formal
banking system make the transaction costs very high.
Poor credit discipline: The borrowers in rural areas cannot clearly distinguish between
Grants provided by the Government and credit. It so happens that the poor gets bank
loans for purposes for which they have no training or skills or without any capacity to
handle the amount. This makes monitoring of borrower accounts more difficult.
Adequacy of manpower in the rural branches: There are very few takers for rural postings
in banks. This leads to low motivational level in the staff.
Difficulty to relate: The poor in the rural areas too find it difficult to relate to the urbanoriented staff of the bank branches in their area.
Bank branches at distant locations: The customers have to travel a long distance to reach
a bank branch and also incur out-of-pocket expenses to reach there.
Cooperative societies not efficient: Most of the cooperatives are either defunct or
inefficient and financially not strong enough to handle large credit disbursement.
These have increased the service/product cost of both banks and borrowers and banks are reluctant
towards their objective of financial inclusion in villages.
Various financial institutions have taken initiatives to overcome the problems of financial exclusion.
1.
Initiatives of Reserve Bank of India
Introduction of basic no-frills savings account either with nil or very low balances.
3
2.
Simplified general purpose credit card (GCC/Kisan Cards) facility.
Introduction of pilot project for 100 per cent financial inclusion in one district each in all
states and union territories
A committee on Financial Sector Plan has been set up for North-Eastern Region
Relaxation of Know Your Customer (KYC) norms followed by banks for opening of accounts
Each rural bank branch have been asked to cover 100 new borrowers every year
Initiatives of NABARD
The most significant contribution of NABARD is the SHG-bank linkage programme. NABARD is
providing supports to the intermediaries in extending financial credit to this section of people.
3.
Business Facilitator and Business Correspondent Model

In order to ensure financial inclusion the banks have been allowed to use the service of NGOs,
SHGs, MFIs and other CSOs. These are the intermediaries who provide financial and banking
services through the use of Business Facilitator and Business Correspondent model. This
approach has changed the scenario of financial inclusion.
4.
Watershed Development Approach

The watershed development approach was adopted by NABARD with community participation.
This enables increasing crop production which in turn leads to higher employment and income
generation opportunities.
5.
Tribal Development Programme

NABARD in collaboration with NGOs in Gujarat have been closely associated with implementation
of an Adivasi Development Programme.
The programme was later extended to Maharashtra also. The central focus of this programme is
on Wadi, that is small orchard. The other development interventions include soil conservation,
water resource development, community health, sanitation and women and children
development.
D1S4
What are Business Facilitator (BF) model and Business Correspondent (BC) model?
Business Facilitator Model (BF): Under this model banks use intermediaries [such as, NGOs,
cooperatives, panchayats etc] to provide banking services to the unbanked areas [areas with no banks
branches].
Business Correspondent Model (BC): Under this model banks use intermediaries to provide banking
services to the unbanked areas outside the bank premises.
Difference between BF and BC
The scope of activities of a BC will include all that is done by a BF and also the following:
giving out small value loans
recovery of loan
collection of interest
collection of small value deposits
sale of micro insurance, mutual fund, pension products etc.
receipt and delivery of small value payments
Why BF/BC is needed in the present scenario:

It is estimated that 51% of the Indian farm households do not get any access to institutional credit.
Therefore, there is an urgent need of fund to carry on their agricultural and other activities. Recently
Government of India has insisted that the banks open 12.5 million new accounts each year.
The banks cannot handle it single handedly, not even by branch expansion, as shown by their past
performance.
In view of the above, the business facilitators/correspondents models with appropriate technology
have been set up for the purpose of providing banking services to the rural people.
These agents may not be regular employees of banks but work on a contract basis for taking the banking
services to the unbanked centres.
Eligibility Criteria:
For Business Facilitator (BF)
1.
2.
Institutions:
A voluntary or registered organisation
If registered, should have authority to work as BF. This should be as per the objective
clause in case of Non-Banking Financial Company (NBFC)
The credentials of the promoters and the employees of the organisation should be checked
The institution or its employees should not be a defaulter to any bank
Should not be attached as Business Facilitator in more than one bank and should sign an
agreement stating they would not join any other organisation during the period they work
for the Bank
In case of registered organisations, the latest audit report/balance sheet may also be
checked
Individuals:
Permanent resident of the village/area of operation and/or continuously staying in the

area of operation for more than three years
Minimum education level SSC passed
Aged between 21 and 50 years (In deserving cases like teachers, ex-bank employees etc,
the age criteria may be flexible)
Should not be a defaulter of any bank
Should not be engaged by more than one bank as Business Facilitator
No criminal case against him/her in any court of law
For Business Correspondent (BC)

Business Correspondents should generally be institutions.
TT
Should be registered organisations such as
Non-Government Organisations (NGO)/Microfinance Institutions (MFI) setup under

Societies/ Trust Act
Societies registered under Mutually Aided Cooperative Societies Act or the Cooperative
Societies Acts of States.
5
Companies incorporated under Section 25 of the Companies Act, 1956
Registered NBFCs not accepting public deposits
Post offices
Registered Village Organisations
TT
They should have authority to work as business correspondents in the objective clause
TT
The credentials of the office bearers should be verified
TT
The institution and/or its office bearers should not be the defaulters to any bank/financial
institution
TT
In case of registered institutions, the latest audit report/balance sheet may also be checked
Individuals like retired bank/government employees and ex-servicemen can be appointed as Business
Correspondents.
Role of a Business Facilitator/Business Correspondent
Following are the major roles of BF/BC in rural development:
TT
Has to be an intermediary between the Bank and the villagers
TT
Has to gather information from the prospective borrowers
TT
Has to be an information assimilator
TT
Has to counsel customer on financial needs and educate customers on products and services
available from the Bank
TT
Should not overlook or hide any vital and material information to the customer
TT
Should give to the farmers and others complete, factual and truthful Information about the Bank
TT
Should protect and respect the privacy of the customer
TT
Should not compromise his/her personal interest to that of the Bank
TT
Should treat all customers alike
TT
Identification of prospective borrowers
TT
Determining suitability of the activities chosen by them and advising the branch thereof
TT
Educating the prospective borrowers on the loan and savings product suitable for them
TT
Helping the prospective borrowers/customers in filling loan, deposit, account opening and
document forms
TT
Collection of application forms and initial scrutiny thereof
TT
Verification of primary information given therein
TT
Ensuring that KYC norms have been complied with
TT
Processing of loan application with the help of Banks template
TT
Post sanction and pre and post disbursement verification and monitoring
TT
Follow-up relating to recovery
TT
Giving inputs to farmers and villagers on skill development and micro enterprises
TT
Formation/Bank Linkage of SHG
TT
Establishment of Farmers Clubs
TT
Receipt and delivery of small value remittances, other payment instruments, balance enquiry
and outstanding loan enquiry etc.
D1S5
Lending giving loans and advances
Banks also give LOANS and ADVANCES. Part of the funds that the bank gets from deposits are given
out by a bank as loans and advances. The DEBTORS pay Interest on the money borrowed. This interest
collected by the bank is much higher than what is paid out to the Depositors.
Transfer of Funds
People do not have to mail cash through the postal system. Banks have branch networks spread across
cities, regions and states in the country and arrangements with banks in other countries as well. The
banks send their customers funds (remit) by mail, telegraphic or electronic funds transfer or by issuing
bank drafts. Banks charge fees for this service.
Other Services
Banks give other services for which they charge commission or fees. This is called non-interest income
or FEE-BASED INCOME. Some of these services are safe deposit lockers, safe custody of valuables,
issuing of travelers cheques, letters of credit and guarantee, collection off out-station cheques, giving
opinion reports on their customers, agency services for government business, etc.
Quick Questions
How does a bank earn profit?
TT
The funds that the bank gets from deposits are given out by a bank as loans and advances.
TT
The bank earns interest that the debtors pay on this loan or advance.
TT
So, the bank earns profits from the difference of the interest it takes from the debtors and that
TT
it gives to the depositor. The interest income from these forms a large part of a banks profit.
Why should care be taken while giving loans?

Some portion of loans may turn into non-performing assets(NPAs). NPA means that the interest or
installment of the loan is overdue. This causes loss of income for the bank. So, giving loans needs care,
caution and monitoring by the bank.
What is the structure of the Banking System in India?
Banks can generally be classified into various sub-categories as follows.
7
Public Sector banks:

TT
State Bank and its Banking Subsidiaries:
TT
Nationalised Banks
TT
Regional Rural Banks
The State Bank Group and Nationalized banks: This group of 27 banks has the largest number of
branches in metro/ urban/rural areas throughout the country. The group contributes to about 75% of
the total deposits and about 70% of total advances of all commercial banks in India.
Private Sector banks
Foreign Banks: These are the banks incorporated abroad but granted license by RBI to do banking
business in India through their Indian branches.
Indian Private Sector banks: These are incorporated in India and their shareholdings are with the
public and large business houses.
Regional Rural Banks (RRBs): These are also scheduled banks, but, they are small localized banks
operating in rural areas of some districts. RRBs are owned jointly by State Govt, Central Govt and
sponsoring Public Sector Bank.
Cooperative Bank
TT
State cooperative bank
TT
Cities cooperative bank
Cooperative banks are registered under cooperative registrar it undertaken by state
government (Central government if the branches of the bank is in more than one state. Its
small in size than any Asset/ Commercial bank.)
Assets and debtors of cooperative bank are lesser than commercial banks Cooperative
banks work of policy of cooperation and profit and un-profit policy
Types of Accounts
What are the different types of Demand Deposits?

Current Accounts
Current accounts form a large portion of demand deposits of a bank. Current accounts can be opened
by individuals, business entities (firms, company), institutions, government bodies/ departments,
societies, liquidators, receivers, trusts, etc. The main features of current accounts are:
TT
There are no restrictions on the number and amount of withdrawals / deposits.
TT
Cheque book facility is provided to each current account. All current accounts are non-interest
bearing.
TT
Overdraft is a facility whereby banks honour cheques drawn by current account customers even
when the balance in the account is less than the amount of the cheques. Regular Overdraft
(permanent) facility is given as per agreement made beforehand. In this case the bank honours
cheques drawn in more than the credit balance but not more than the overdraft limit. The bank
charges agreed interest on the overdraft portion of drawings.
TT
The account holder gets periodically from the bank branch statements of accounts for
reconciliation and record.
Savings Bank Accounts:
9
Savings bank accounts are intended for keeping savings of individuals and small businesses for meeting
their future money needs. Interest is given by banks on these accounts with a view to encourage saving
habit in the community. The Savings bank accounts are of two types:
a.
Cheque book facility accounts in which withdrawals are permitted by cheques drawn in favour
of self or other parties.
b.
Non-cheque book facility accounts where withdrawals are permitted to the account holders only
at the bank branch which has the account by filling up a withdrawal form or letter along with the
account passbook.
The main features of Savings bank accounts are as follows:

TT
Withdrawals are permitted on demand of the account holder by presentment of cheques or

withdrawal form/letter.
TT
Banks put some restrictions on the number of withdrawals per month/ quarter, amount of
withdrawal per day, minimum balance to be maintained in the account on all days, etc. and levy
fee/ penalty for violations of these rules.
TT
The bank pays interest on the minimum balance maintained in the account during the specified
period of every month, example, from 10th to the last day of the month.
TT
Interest on savings bank account continues to be regulated by the Reserve Bank of India.
TT
No overdraft in excess of the credit balance in savings bank account is permitted.
TT
Most banks provide to savings bank account holder a passbook where date-wise debit/credit
transactions and credit balances are shown as per the customers ledger account maintained by
the bank.
Call Deposit
An investment account offered through banks which allow investors instant access to their accounts.
Withdrawals and deposits can be made any time. Rules and benefits differ depending upon the bank
offering the account.
What are the different types of Term Deposits?
Fixed Deposits:
10
TT
These are repaid on the fixed maturity date with the principal and agreed interest rate for the
period and no operations are allowed against the deposit. The main features are as follows:
TT
Fixed deposits are for specified periods at specified interest rates and cannot be changed even
though the interest rate changes.
TT
Banks offer varying interest rates for different maturities as decided by their Boards.
TT
Those term deposits which are held for periods of 6 months and less are called Short Term
TT
Deposits or Short Deposits.
TT
A deposit receipt is issued by the bank branch accepting the fixed deposit- mentioning the
depositors name, principal amount, maturity period and interest rate, dates of the deposit and
its maturity etc.
TT
Many banks prepay fixed deposits, if they decide to accommodate customers request.
TT
Banks calculate and credit the interest payable on the deposits on a quarterly basis. However, for
the convenience of the depositors banks pay interest at different desired intervals.
Recurring Deposits:
The main features are:
TT
The customer deposits into the account a fixed sum at pre-fixed frequency
TT
The interest rate payable on recurring deposits is pre-fixed and it is generally a little lower than
the fixed deposit rate for the same period.
TT
The total amount deposited along with the interest is repaid on the maturity date. The depositor
may be allowed to take advance against the deposits or to have the deposit pre- paid before the
maturity.
What are Hybrid Deposits or Flexi Deposits?

These deposits are a combination of demand and fixed deposits for meeting customers financial needs
in a flexible manner.
TT
Only one savings/ current account is opened and the term deposits issued under the scheme are
only on the banks books as no term deposit receipts are issued to the customer. Once deposits
in savings/current account cross a pre-agreed level, such surplus amount is automatically
transferred to term deposit.
The main advantages of the flexi-deposits to a customer are:

TT
The customer opens only one account (savings or current) under the scheme
TT
Advantage of higher interest earning
Exercise: Write down one advantage and one disadvantage of each of the types of deposits.
Deposit Type
Advantage
Disadvantage
Savings Bank Account

Current Account
Fixed Deposit
Recurring Deposit
Who can open Deposit Accounts?
Individual: Any person who is major (adult) and of sound mind can open a bank account, Savings or
fixed deposit account. Bank account of minor child can also be opened and operated by the guardian.
Many banks also minor children above specified age to open savings account in their single name and
also operate it, with some limitations.
Joint bank account: More than one person can have a Joint bank account.
Illiterate Person: Illiterate person who cannot sign can open only savings account (without cheque
facility) or fixed deposit account. Withdrawals are allowed only if the person produces passbook,
verifying the thumb impression and after proper identification by bank officials.
Nomination:
Nomination facility is available to all deposit accounts. Depositor(s) may nominate any person(s)
preferably relative for his/her/their deposit accounts. In case of death of the sole depositor or all
depositors the amount lying in the account will be returned to the nominee without any further legal
formality.
11
Interest Calculation
What is Interest?
Interest is the price that someone pays for the temporary use of others funds. Its value is calculated
as a percentage of some amounts. Banks charge interest on Loans and also pay interest on some types
of Deposits.
Why do banks charge interest?
Without interest, lenders would not be willing to lend and depositors would be less willing to save. To
repay a loan, a debtor has to pay interest, as well as the principal, the amount originally borrowed.
Similarly, a bank pays interest at agreed rated to the deposits accepted by it to encourage people to
leave their money at the bank.
Types of Interest calculations:
Simple interest: Simple interest is a fixed percentage of the amount borrowed for a period. The interest
calculated on a principal sum, not on earned interest.
Rahul has deposited Rs. 10,000 for 2 years and the rate of simple interest is 10% per annum. After 2
years, the interest he will get is,
Interest = Rs. 10,000 x 10/100 x 2 years = Rs. 2,000
Compound interest: Interest which is calculated not only on the initial principal but also on the added
interest of previous periods. So, the interest gets compounded along with the principal.
In the next case, Rahul has deposited the same amount of Rs. 10,000 in a fixed deposit account for two
years where the bank will pay compound interest of 10% per annum.
After the first year, the interest he will get is, Interest = Rs. 10,000 x 10/100 x 1 year = Rs. 1,000
Now, his principal amount becomes Rs. 10, 000 + Rs. 1,000 = Rs. 11,000
After the second year, the interest he will get is, Interest = Rs. 11,000 x 10/100 x 1 year = Rs. 1,100
Total interest he gets is Rs. 1,000 + Rs. 1,100 = Rs. 2,100
Fixed and floating interest rates: In fixed rate, the rate of interest, once fixed, will not change during
the entire period of loan. In floating rate, the rate of interest changes, depending upon the market
condition. This is decided at the time of making the loan agreement.
Front ended interest: In this case, the interest (flat rate) is collected in the beginning and the customer
gets net amount.
Jaya takes a loan of Rs 1000 @ 10% interest.
The Bank disburses only Rs 900 since they take out the 10% in the beginning.
Flat rate of interest: In this case, the bank will calculate interest on the original amount lent. The
interest will not be calculated on the reducing amount even though the debtor repays in installments.
Usually the EMIs are calculated as though the principal is also being paid back.
Closing or Stopping Accounts
When can the bank close or stop a deposit account?
12
TT
Closure at customers request: A customer can close a deposit account if he/ she is not satisfied
with the services of the bank or for any other reason e.g. transfer to another place.
TT
Closure of accounts by bank: A banker may close account or stop operation on a customers
deposit account when
On receipt of notice of death
A joint account may also be closed on the death of any one of the account holders and fresh
account opened in the names of the surviving account holders, to avoid legal problems.
Stopping of operations:
Garnishee order or order of courts: If a bank receives order of a court, a garnishee order, or by Income
Tax department, the bank would immediately note a caution in the account and stop payment
of cheques or debits to the account, until the order is lifted in writing. The account operations are
stopped for temporary period of the court order and it is not closed.
Instruments of Transacting
What are the instruments of transacting?
TT
Cheques A cheque is a bill of exchange drawn on a specific banker and not payable unless
demanded. This is exclusive to the banking system and no other institution can operate this
system. A cheque has three parties, the drawer the account holder signing the cheque, the
drawee always the bank and the payee who will receive the amount
TT
Drafts A cheque drawn by one bank against funds deposited into its account at another bank,
authorizing the second bank to make payment to the individual named in the draft. It can also
be from one branch to another branch of bank.
TT
Pay Order Pay Order, or Bankers Cheque is payable at the same centre/branch from which it
was issued. Issuing branch [drawer branch] and paying branch [drawee branch] is one and same.
What is a Cheque?
A cheque is a bill of exchange drawn on a specific banker and not payable unless demanded. This
is exclusive to banking system and no other institution can operate this system. A cheque has three
parties, the drawer, is the account holder signing the cheque, drawee is always the bank and the payee
who will receive the amount
Types of transactions
Clearing: when the cheque is presented locally, the transfer of funds is done across the banks
immediately.
Collection: when the cheque is sent to another city or town, the receiving bank has to verify by sending
the cheque to the original bank; then the money is transferred. Nowadays, with some of the technologyenabled banks, this can be done very fast as the banks have networks across all cities and towns.
What are the features of a cheque?
TT
In writing: A cheque should be in writing (in pen).
TT
Drawers signature: The cheque has to be signed in ink, by the account holder, as per the
specimen signature. If the signature does not match the cheque may be returned by the bank to
protect the customer from possible forgery.
TT
Date of cheque: A cheque has to be dated. A cheque is paid on or within 6 months of the date
mentioned.
TT
Amount of cheque: There are two spaces for writing the amount of the cheque, in figure and also
in words. Generally, both these should be filled up and should not differ.
TT
General Crossing: A cheque may be crossed by the drawer and holder by drawing on its face
two parallel transverse lines simply, either with or without words not negotiable or account
payee. In these cases, the drawee bank shall not pay it otherwise than to a banker. The effect of
such a crossing is that the cheque will not be payable in cash but through the bank by credit to
the account of the payee
13
TT
Special Crossing: It consists of an addition of the name of the banker across the face of the
cheque with or without two parallel transverse lines. In this case the drawee bank shall not pay
the cheque otherwise than to the banker to whom it is crossed or his agent.
TT
Endorsements: A cheque, payable to order, can be negotiated only by endorsement and delivery.
Endorsement is made on the back of the instrument or by attaching a slip of paper if the space
on the instrument is not enough.
Which features of a cheque a BF/BC should always check when collecting cheques for loan recovery?
Tick the ones which you always check yourself.
TT
The cheque should be drawn on local banks. Out-station cheques can be taken only when the
TT
Banks branches are networked under CBS.
TT
The cheques should be crossed Account Payee and not Bearer.
TT
The cheques should be duly signed by the borrower.
TT
The Banks name and the debtors account number should be clearly mentioned.
TT
In case of Credit Card dues, the Card Issuing Banks name and the Credit Card number should be
mentioned clearly.
TT
No third party cheques like the cheques endorsed in favour of the borrower can be accepted.
TT
The date should be filled up. If it is dated a few days before the date of receiving the cheque it
can be overlooked but post dated cheques should not be accepted.
TT
The amount of the cheque in words and figure should match.
TT
No torn or damaged cheques should be accepted.
D1S6
What are basic Functions of banks?
It has been discussed what are basic functions of bank. The basic functions of banks are:
a.
Accept deposits from Customers.
b.
Lends money to individuals & to the other entities like partnership firms / companies for their
business
The above functions have been already discussed in earlier session.

What are the other functions of banks and their benefits?
Beside the basic functions banks are providing various other services required to cater the changing
economic and financial activities of the world. These are the fee based services provided by the banks
Following are some common Other Functionsof banks:
1.
Safe deposit lockers:

Banks provide safe deposit lockers to the customers who hire them on lease basis for keeping
their valuables. The customers pay rent for this service. The Safe Deposit Locker is operated
jointly by the customer and Bank Manager/authorized official.
2.
Payment of utility bills

Under this service the banks arrange payment of customers utility bills electricity, phones,
school fees etc. on behalf of its customers.
3.
Accepts Income tax and other Government payments

On behalf of the Governments banks accept Income tax, Sales tax and other Governments
payments from the customers.
14
4.
Fund/Money transfers
Customers can transfer their fund to any other place and customers. Fund is immediately
transferred through NEFT (National Electronic Fund Transfer) and RTGS (Real Time Gross
Settlement) systems of banks. Banks also provide service in collection of cheques, bills etc. on
behalf of the customers.
5.
Deals in foreign currency

In perspective of globalization of word economy banks can deal in the foreign currency
transactions on behalf of their customers.
6.
Demat account
Through this account the customers can transact their stocks. They can purchase and sell their
Shares, securities and other stocks.
7.
Safe Custody
The customers deposit certain valuables, bonds, securities or other documents with the bank for
their safe custody. Bank is a custodian of the valuables, bonds etc. of the customers.
Key Words
Clearing
Collection
Cheques
Drawers
signature
crossing of cheque
Endorsement
Customer
Drafts
Bearer
Pay Order
Account Payee
Nationalised
Banks
Scheduled
Banks
Public Sector
banks
Foreign Banks
Cooperative
Banks
Private sector
banks
Regional Rural
Banks
Funds
Remittance
Deposit-taking
Lending
Electronic
Banking
Fee-based
income
Advances/
Loans
Term Deposits
Recurring
Deposits
Demand
Deposits
Fixed and
floating
interest rates
Savings Bank
Current Accounts
Accounts
Hybrid Deposits or
Call money
deposit
Simple interest
Compound
interest
Front ended
interest
Flat rate of
interest
NPA
Flexi Deposits
Principal
D2S3
Who is a customer?
Anyone conducting a banking transaction with a bank is a bank customer. It could be an individual,
a group, a firm, a company, a trust, an institution or a government/semi-government/local selfgovernment organization.
15
Different types of Banker-Customer Relationship

Bank
Relationship
Customer
Debtor - Creditor
Debtor
When a customer deposits money with the bank, the customer

becomes a lender and the bank becomes borrower. The relationship
is that of a Debtor and Creditor
Creditor
Creditor - Debtor
Creditor
When the bank lends money to the customer, the customer is the
borrower and the bank is the lender. The relationship, therefore,
is that of a Creditor and Debtor. The Customer/Borrower executes
documents and offers security to the Bank before utilising
the loans.
Debtor
Bailee - Bailor
Bailee
When a customer deposits certain valuables, bonds, securities

or other documents with the bank, for their safe custody, the
bank besides becoming a trustee , also becomes a bailee and the
customer is the bailor.
Bailor
Agent - Principal
Agent
One of the additional services rendered by the bank is remittances,

collection of cheques, bills, etc., on behalf of the customers. It
further undertakes to pay regularly electricity bills, telephone bills,
insurance premia, club fees, etc. In all such cases, the bank acts as
an agent, his principal being the customer.
Principal
Lessor - Lessee
Lessor
The banks provide safe deposit lockers to the customers who hire
them on lease basis. The relationship, therefore, is that of lessor and
lessee.
Lessee
Trustee - Beneficiary
When a trust is created appointing the bank as a trustee, the
relationship is that of a trustee and a beneficiary
Trustee
16
Beneficiary
Banks Obligation to Maintain Secrecy of Accounts

Why should the Bank keep accounts information secret?
TT
When a person opens an account in a bank he has an assurance that all the information about
his account remains between the banker and account holder. It is one of the main duties of the
banker to maintain complete secrecy about his customers account. This duty continues even
after the customers account is closed.
TT
However, there are some situations in which the banker is needed to make disclosures about a
customers account. Examples, when
Needed under legal acts like Income Tax Act, Companies Act, Reserve Bank of India Act,
etc.
If a customer allows, this information can be disclosed.
In the banking business it is common courtesy among the bankers that whenever a bank
asks another about proposed sureties or acceptors such information is shared.
A banker can disclose information when it is essential to protect his own interest, legally.
Banker may be required to make disclosure in the interest of the nation and public at large.
Key Words
Bailor
Bailee
Debtor
Creditor
Agent
Principal
Trustee
Beneficiary
Lessor
Lessee
Opening an Account: KYC
1.
What does a person do to open a bank account?
A person who wants to open a deposit account has to fill up and sign the account opening or application
form as given by the bank and submit:
TT
Introduction from an acceptable person,
TT
acceptable proof of his/ her identity and home address,
TT
his/ her photographs,
TT
the first minimum deposit in the account (fixed by the bank)
2.
Why does a bank need Introduction / identity and residence proof?

If the bank opens an account witho\ut proper introduction, it will not get the protection of law
and it may be held responsible for loss caused to others by this customer depositing forged or
stolen cheques in his account and withdrawing the deposits.
3.
What documents are needed to prove identity?

Banks take direct proof of the identity of the person (e.g. passport, driving license, ration card,
voters ID card, Income Tax PAN No.) and also proof of his home address. They keep attested
photo copies of these documents along with the account opening form.
4.
What are Know Your Customer (KYC) guidelines of RBI?

In 2002, RBI has issued an official order to all banks for following the procedure of, know your
customer(KYC) for all of their new and existing domestic and non-resident customers. KYC
establishes the identity and home address of the customers by document proof. One of the main
objectives of KYC process is to prevent misuse of the banking system for money laundering and
financing of terrorist and anti-national activities.
17
KYC norms are:

a.
Identity Proof [What constitutes ID proof?]
b.
Introduction [Who can introduce? Why?]
c.
Residence Proof [What constitutes residence proof?]
d.
Specimen signature [Purpose of this? When is the specimen signature taken - always in the
presence of the banker?]
e.
Individuals, Joint, Minor, Illiterate Persons, Nominees [Who are these? Get the participants to
state in clear terms that these are.]
f.
KYC Norms relaxed for No-frills savings account:
Any one of the followings is to be complied:

A.
Introducers signature with account number
Or
B.
Any one of the followings to proof identification:
5.
i.
Election ID card
ii.
Government ID car
iii. Driving License
iv. Employers ID card
v.
Passport
vi. Certification by Head of Village Council/VDB
Why is a Specimen Signature kept by the bank?
A customer is recognized mainly by his/ her signature on the cheques/ vouchers and these are
compared with the specimen signature on record to verify the genuineness of the customers
signature.
6.
What is a Power of Attorney? Why is it needed?

At times a depositor would like to do the bank operations through another person. Banks accept
this arrangement. A power of attorney is a document, duly stamped given by a customer to his
banker, authorizing his attorney or agent named in the document to operate the account.
7.
Who can open Deposit Accounts?

Individuals: Any person who is major (adult) and of sound mind can open a bank account, Savings
or fixed deposit account. Bank account of minor child can also be opened and operated by the
guardian. Many banks also allow minor children above specified age to open savings account in
their single name and also operate it, with some limitations. More than one person can have a
joint bank account.
Illiterate Persons: Illiterate persons who cannot sign can open only savings account (without
cheque facility) or fixed deposit account. Withdrawals are allowed only if the person produces
passbook, verifying the thumb impression and after proper identification by bank officials.
8.
How does nomination help?

The effect of a valid nomination is that in case of death of the sole depositor or all depositors, the
amount lying in the account will be returned to the nominee without any further legal formality.
18
Anti Money Laundering

What is money laundering?
Money laundering is a process by which the origin of funds generated by illegal means (drug trafficking,
illegal arms trade, corruption, extortion etc) is concealed.
Criminals try to disguise the origins of money obtained through illegal activities so that it looks like it
was obtained from legal sources. Otherwise, they cant use the money because it would connect them
to the criminal activity and the money would be seized by the law keepers.
What are the phases of money laundering?
The process of money laundering can be said to be in three phases as under:
9.
Placement: refers to the initial point of entry for funds derived from criminal activities.
10.
L ayering: refers to creating complex networks of transactions which attempt to obscure the link
between the initial entry point, and the end of the transaction cycle.
11.
Integration: refers to the return of funds to the lawful economy for later withdrawal.
Purpose: The purpose is to route the moneys so generated through the banking systems of various
countries so that the same can be transferred to various people legally and moneys can be invested in
legitimate activities. By routing the money through the banking system it becomes clean white (gets
laundered).
Danger: This has become a danger to the humanity because of usage of this by terrorists.
What is the role of banks in preventing money-laundering?
Banks should take steps to prevent the first stage itself which means do not accept funds the sources
of which are not satisfactorily explained.
This can be done only if banks know the financial details of the customer. That is why these are called
KNOW YOUR CUSTOMER (KYC) guidelines. Banks are required to know the actual identity and also his/
her financial background before accepting as a customer.
Important elements of KYC guidelines are
TT
Customer acceptance policy
TT
Customer identification procedures
TT
Monitoring of transactions
TT
Risk management
While banks should try not to inconvenience the customers in general, they are required to divide
the customers in to various risk categorise and specify criteria for each group for accepting them as
customers.
Customer identification should be generally from reliable independent source documents. The
documents which are proof of identity are to the bank:
TT
Passport
TT
Permanent account number (PAN)
TT
Voter identity card
TT
Driving license
TT
Identity card issued by the employer if acceptable
For proof of home address copy of latest Telephone bill, electricity bill or statement of a bank account
19
are accepted.
Banks should monitor the transactions in the accounts and report any suspicious transactions to the
authority.
20
TT
Banks are required to monitor the transactions in new accounts at least for a period of six months
and report any suspicious transactions to the designated authority.
TT
In the case of other accounts banks should monitor the transactions and if there is any suspicion
about any account being used for money laundering activity it should be reported to the
Government without alerting the customer.
TT
Any cash transaction valued more than Rs 10 lacs is required to be reported to the RBI on a
fortnightly basis.
D4S1
What is Communication?
Communication is the process of exchanging information, ideas and thoughts etc. between at least two
persons in order to create common understanding. In recovery process communication takes place
between the debtor and the debt recovery agent. Communication is of two types:
TT
Verbal communication by spoken words,
TT
Non-verbal communication e.g. face language (facial expressions, eye contact), voice language
(voice tone, voice pitch), and body language (body position, body movement): All or any of these
communicate some message (whether intended or unintended) to the receiver.
What makes a communication effective?

Following are the main principles of effective communication, which should be followed by a recovery
agent (communicator) in communications with the debtor (receiver)
Tick the items which you are doing well.
Your language (verbal as well as body language) should be civil and courteous.
The objective of the communication should be clear.
The language used by you should be easily understood by the receiver
Be watchful and sensitive to the receivers response
The non-verbal communication (or body language) is not adverse to the debtor.
The agent should ensure that he has conveyed the intended message to the debtor.
What are the traits of a good communicator? Tick the items which you are doing well.
One who speaks slowly and clearly
One who looks the receiver in the eye when speaking
One who does not use too much jargon or technical terms
One who waits to confirm that the receiver has understood
One whose body language and tone of voice is friendly even when conveying harsh instructions or
reprimands
What are the traits of a poor communicator? Tick the items which apply to you.
one who assumes to know what the other party means
one who does not clarify a message
one who does not ask when he has not understood
one who does not analyse the information received
What are the Components of Communication?
Communication involves everything from speaking, listening, reading and writing to body language
and the expressions on our faces. It can be verbal or non-verbal. It is important to maintain eye
contact, read body gestures, look at the person you are communicating to and practice such active
listening techniques like rephrasing what you hear to be certain that you have understood correctly.
TT
Communication should be short, crisp and clear because
It saves your time
21
TT
It saves the other persons time
It is the quickest way to getting the work done
If communication is effective
There will be fewer misunderstandings between individuals
It will create a pleasant work atmosphere
It will help each person to maintain self esteem, especially a debtor
What are the ways to improve your communication skills?

Tick the items you want to work on
TT
Verbal
Make your point clearly, use the exact words you mean
Demonstrate wherever you can using bodily gestures
Use simple language, not jargon the other person must understand
Listen to the speaker not only the words but also the hidden meaning
Do not assume you know what he is going to say
TT
Vocal
Listen to the persons tone of voice; is there some other meaning? Is he getting upset? Is he losing
hope?
TT
Visual
Maintain eye contact and have a pleasant expression

Be aware of your body language. You may just say something simple but if your body language is
aggressive, he may get offended.
TT
Written
Be sure you understand what is written, especially in collection information

If you write something be careful about the wording it may be used against you.
Copy down addresses and numbers carefully and check back to see if you have copied correctly.
22
Listening
Listening Effectiveness Checklist
Please go through the checklist, and choose one or two items, where you need to sharpen your listening
skills to achieve greater personal effectiveness.
Rate these items by using a rating scale 1 to 5 in the relevant box under the rating column where
1 = NEVER, 2 = RARELY, 3 = OFTEN, 4 = MOSTLY 5 = ALWAYS.
Sr.No.
Item
1.
When others are talking, I genuinely make efforts to understand the ideas
and feelings that the other person is trying to communicate.
2.
While someone is talking to me, I focus on what the other person is saying
and avoid doing anything else (answering the phone, starting another
conversation, thinking about other issues etc.).
3.
I always encourage the speaker to talk by showing interest, smiling,

nodding, etc.
4.
I consciously try to pay attention to the other persons words to learn more
about how he feels about the situation he is describing.
5.
I deliberately make efforts to try to learn something from each person I

meet, irrespective of the background and subject of the conversation.
6.
When the subject is difficult for me to understand, I make best efforts to

ensure that I do not to switch off from the conversation.
7.
I ask questions to clarify my understanding when I dont fully understand

the speakers message.
8.
During conversations, I repeat back to the other person what has been
said in my own words to ensure that I have understood correctly.
9.
I always ensure that I dont interrupt the speaker while he is in the middle
of his message. I always allow the other person to complete his message
before I respond to what he has said
10.
I keep notes of important points to help me remember what the other

person wants me to do.
Rating
Score
The higher your score, the better the listener you are likely to be. Which of these items are most
important for your job as Debt Recovery Agent? Tick the items that are most important for you.
23
Listening Skills
A good recovery agent should be a good listener also. A good listener is one who is attentive while
receiving the communication with positive facial and body expressions.
Who is a good listener? Tick the ones which you do well.
Hear correctly what the debtor is saying.
Listen patiently to the debtor
Do not show anger or disapproval at what the debtor is saying.
Normally allow the debtor to complete his point of view and do not interrupt unless it is very
essential.
Such interruption is always by saying words like Excuse me or May I ?
What are the importances of good listening?
Good listening improves flow of communication, creates better understanding and facilitates
smooth recovery.
It also helps to create better relations between the recovery agent and the debtor.
Body language
Body language starts with the way we are dressed creates an impression on the mind of the customer
(including agents who are over-dressed). Dressing should be appropriate to the situation simple,
clean.
What is grooming? Why should you be well groomed?
What are the behaviours that give a good impression? Tick the ones which you do well.
Smile, even if the person is being rude, your smile can make him feel better.
Lean towards the person, give full eye contact when listening.
Do not use strong, hurried gestures or show you are upset.
Offer to keep notes, refer to documents (this gives the impression that you are interested in solving
the problem, based on facts).
Keep your voice low dont let the person feel you are telling the neighbours about his problem.
This will help him to build confidence.
Never threaten or use force of any type.
24
Interpersonal skills are what are demonstrated when interacting with people. It shows acceptance by
the other person and willingness to talk and solve problems.
For debt recovery agents good inter-personal relationship is as important as good communication and
effective listening skill. To be successful in his job a recovery agent should show the following:
TT
Communicate and listen properly and effectively.
TT
Show empathy and respect to the other party, in spite of the fact that he/ she is a debtor.
TT
Do not make the debtor feel anxious, insecure or threatened by your communication- verbal or
non-verbal. On the contrary, try to remove such uneasiness.
TT
Give all the information the debtor wants in connection with the debt and its repayment.
What are the differences in the following types of behaviour: Passive, Aggressive, Assertive?
Aggressive Behaviour
Assertive
Behaviour
Lets others make his

decisions for him,
doesnt express feelings,
ideas, wants, puts self
down, in a conflict runs
away or gives in, uses
apologetic words, hedges,
uses an indirect manner
(hoping someone will guess
what she wants), cries,
pleads, is hesitant, has
downcast eyes
Is inappropriately honest,
puts others down,
ignores rights of others,
dominates, chooses
for others, attacks and
blames, overreacts in
situations, uses loaded
and superior words, is
sarcastic, loud, makes
rigid demands, points
finger
Is appropriately
honest, expresses
wants and feelings
directly, chooses for
himself, is empathic,
evaluates and acts,
is spontaneous,
exercises his
personal rights
and respects rights
of others, uses
objective words,
listens, makes direct
eye contact, has firm
and warm voice,
uses I statements
Reasons
To avoid conflict and

unpleasant, risky situations
To express hostility
and anger, to achieve
objectives (in the short run
at least)
To achieve
objectives, to have
positive feelings
about himself
Feelings about
self that
accompany
this behaviour
Low self-confidence and low

self-esteem, hurt, helpless,
anxious, powerless, possibly
resentful and angry (at a
later time), guilty, inhibited
High or low self-esteem,

hostile, superior,
righteous, alienated,
defensive, frustrated,
bitter, tense
Self-respect,
confident,
selfsufficient,
powerful, relaxed
Passive Behaviour
Characteristics
25
Feelings of
others when
a person
engages in this
behaviour
Guilty, angry, disrespectful

irritated, frustrated,
superior
Body language
that indicates
this behaviour
slumped shoulders,
wringing hands, looking
at the floor, giggling,
whispering, apologetic
expression
Hurt, humiliated,
defensive, vengeful, and
angry
Respectful,
respected,
threatened
(occasionally)
threatening posture,
pointing finger, yelling or
loud voice, demeaning
posture, staring or glaring
good eye contact,

relaxed posture,
confident expression,
tactfulness,
initiative, slow, even
tone voice
D4S2
What is Micro Finance?
Micro Finance, as defined by Dr. Md. Yunus, Nobel Prize winner, is the availability of loans to rural
people without obtaining collateral for income generating purposes in order to reduce the poverty
level. It is a comprehensive financial service to rural people for their empowerment.
What is Micro Credit?
Micro credit is a small amount of money lent to a poor person. It is also termed as collateral free loans.
Scenario
In India nearly 4 out of 10 Indian live below poverty line. The banks have not been able to bring vast
segments of the population into the fold of basic banking services. There is growing need to evolve a
system to target these people living below poverty line. To fill this gap Micro finance institutions (MFI)
have emerged as key providers of financial services for the poor through Microfinance delivery models.
What is Micro Finance Delivery Model?
Micro Finance institutions are using various finance/credit lending methods for the poor people. These
could be categorized as under:
a.
Group Model: Individual poor people coming together voluntarily for their common
purpose of income generation. The group models basic approach lies in the fact that
the collective responsibility and security overcome shortcomings and weaknesses of the
individual level.
b.
Individual Model: It is a model wherein micro credits/loans are directly lent to the
individual/borrower. It does not include the formation of group or generating peer
pressures to ensure repayment.
c.
Intermediaries: In this model there is an organization between the lenders and borrowers.
The intermediary plays an important role of generating awareness, educating and
counseling the borrowers about savings, credit etc.
Who are the Intermediaries?
26
1.
Non-Government Organizations (NGO)
2.
Micro enterprise
3.
Commercial banks- for government and NABARD schemes
4.
Individuals
Non-Government Organisations (NGOs) have emerged as key players in the field of microfinance.
What is Self Help Group?

A Self Help Group is small, economically homogeneous informal group of poor people voluntarily
coming together with the common goal of socio-economic empowerment. Micro finance through
SHGs offers the best form of credit reaching the unreached and under-reached.
Common goal
TT
To save small amount regularly (Thrift Fund)
TT
Mutually agreeing to contribute to a common thrift fund
TT
To meet emergency needs on mutual help basis
TT
To have collective decision making
TT
To solve conflicts through collective leadership
TT
To provide terms & conditions decided by them.
What should be the structure of SHG?

TT
roup members must consist of 5 to 20 persons from the financial, social, religious and ethnic
G
homogeneous families.
TT
T hrift Fund at some fixed rate per month/week per member is to be collected and deposited
with the Bank.
TT
The group shall not consist of more than one member from the same family.
TT
A person should not be a member of more than one group.
TT
The group should devise a code of conduct (Group Management Norms) to bind itself.
TT
T he group should develop financial management norms covering the loan sanctioning procedure,
repayment schedule and interest rates.
27
TT
The group thrift fund should be used to advance loans to members.
TT
T he group should have an account in the name of the group. It should preferably be in the service
area bank branch. The amount left after disbursing loan and regular collection of repayment and
thrift fund contribution should be deposited in this account.
TT
The group must maintain basic books of accounts and records.
What are the books of accounts and records to be maintained?

A group must maintain the following basic Books and Registers:
1.
Minutes Book
2.
Attendance Register
3.
Loan Ledger
4.
Thrift Fund Ledger
5.
General Ledger
6.
Cash Book
7.
Bank Pass Book
8.
Individual Member Pass Book
What should be the role of a SHG?

The major roles of a SHG:
TT
To open a Savings Bank account in the name of the group as per resolution. The group leader
TT
President, Secretary and Treasurer are to operate the account jointly (normally by any two)
TT
To mobilize the resource of individual members for their collective economic development
TT
To mobilize fund from financial institutions for members
TT
To inculcate a habit of savings
TT
To create awareness about rights and responsibilities
TT
To assist the members financially in time of need
TT
To identify problems, analyzing and finding solution in the group meeting
TT
To act as a medium for socio- economic development of the village
TT
To develop linkage with the institutions of NGOs
TT
To organize training for skill development
TT
To help the recovery of loans
TT
To build up teamwork
TT
To develop leadership qualities
TT
To achieve the above roles a group should perform certain functions.
What will be the groups major functions?
28
1.
The group should evolve rules and regulations to develop a well-managed Self Help Group. These
groups are adopted after discussions with all members for compliance in full.
2.
The group should meet regularly, preferably weekly. Their discussions should have the following
points:
sanctioning loan to the members
fixing repayment schedules
appropriate rate of interest
collection of contributions
repayment of installments
3.
The SHG has to pass a resolution in the meeting signed by all members indicating their decision
taken in the groups meeting.
4.
Simple and clear accounts and books for all transactions have to be maintained and kept up to
date. Generally all registers, books of accounts resolution are to be written during the course of
the meetings.
Eligibility Criteria for NGOs and MFIs

Following are the conditions for indirect finance to SHGs through above intermediaries:
TT
GO/MFI must be registered under the society/Trust/Company/Partnership or Co- operative act.
TT
it should submit audited balance sheet for three years.
TT
The Bye-laws NGO/Trust must provide for borrowing for SHG activities. This should be supported
by a resolution to borrow from bank and a statement of credit required by SHG.
What should be the maximum limit of Credit?

The amount of Credit should not exceed Rs. 50000/- per borrower either directly or through SHG. In
case of SHG set up by self-employed ventures there is no upper ceiling on loan.
A micro enterprise in manufacturing sector is one where the investment in plant & machinery does
not exceed Rs. 10 lac.
Key Words
Microfinance
Micro credit
Bank Linkage
Thrift Fund
Entrepreneurship
Development
Below Poverty
Line (BPL)
Above Poverty
Line (APL)
Financial Inclusion
Self-Help Group
Team Work
Joint Liability Group
Skill development
29
D4S4
What is Financial Literacy?
Financial literacy is the ability to understand the money matters or financial services that are most
suitable for ones need.
What is Financial Education?
Financial education is giving knowledge of inputs on finance and money and its products which help
people to take decision.
Who needs financial education and why?
It is estimated that nearly 45% of the adult population, majority of which are in rural India, have no
access to modern financial and banking services from formal financial institutions and banks. This large
area remains excluded from financial services.
The rural people are poor and illiterate and they do not have any idea or knowledge about banking
services. The people of this area need awareness of the banking services and products. To extend
financial services/products to these people or to include them into the financial fold of the banks is
termed as Financial inclusion. Financial inclusion is nothing but making available financial services/
products to the poor who remains excluded from financial services of banks.
These poor and rural people need financial education. Without the knowledge on financial products it
will not be possible for them to use various financial services and products according to their suitability
and need.
What is the scope of Financial Education?
The delivery of financial education includes three key areas.
TT
TT
TT
Building Skills
To understand financial products available
Knowledge of numeracy
To develop skill in managing money
Increasing Knowledge
To develop knowledge inputs on finance and financial products
To make them aware of different financial institutions
Developing understanding
To understand the types of products and their sources
To develop skill for budgeting and planning
What is Financial Counseling?

A large portion of population especially in rural areas is illiterate and remains away from channels of
banking finance available. Moreover, the existing formal education system does not cover aspects of
financial importance such as family budgeting, savings, financial planning and the like. These people
need help and guidance from the well knowledgeable financial counselors in the use of financial
products.
Financial Counselors should have a good communication skill which is the process of exchanging
information, ideas and thoughts between at least two persons in order to create common understanding.
Following are the components of communication 30
TT
I nterviewing: It is the communication most often between two persons with a predetermined
and specific purpose, usually involving questions and answers, to gather meaningful information.
TT
Counseling: It is to provide help and guidance to the client.
TT
dvising: The counselor is to hear clients first in order to completely understand their situation
A
and assess their goals, and then to advise and explain what alternatives or options are available.
TT
E thical Behavior: It is also effective way of communication to earn and maintain trust then to
develop a reputation for ethical and professional behavior.
What are the Roles of BF/BC in Financial Education and Financial Counseling?
TT
To earn the trust of the customers and villagers and maintain it.
TT
To provide financial information and products and where they are available.
TT
To counsel the stressed borrower and provide suitable way to reduce his difficulties.
TT
S elling of multiple products of financial products of financial institutions including interest rates
and other changes.
TT
To identify the prospective deposit customers and counsel them to invest in suitable schemes.
TT
T o assist the customers in filling of different types of account opening, loan application and
document forms.
TT
T o identify the prospective borrowers and determine the suitability of the activities chosen by
them for bank finance.
TT
To meet their total financial requirements of the customers for their different activities.
TT
To assist in completing all banks formalities.
TT
To counsel the customers and help to prepare Cash Flow working and cash budget for customers
future operation.
TT
To educate on managing savings and avenues of investment.
TT
To counsel on management of existing debt of the borrowers.
TT
To recover banks dues.
Key Words
communication
TT
Financial
Financial
(credit)
(credit)
counselor
counseling
financial
advising
cash flow
Financial
Financial
Literacy
Education
cash budget
To help in preparing budget, planning and investment of the customers especially of SHGs.
31
D4S6
What is the meaning of Cash Flow?
The actual inflow (income) and outflow (expenditure) of CASH is known as Cash Flow. Total inflows and
outflows of cash during a period is called a cash flow statement of the activity(ies)
What is Budgeting Technique?
TT
Budgeting is a process of making an estimate for future operation of customers.
TT
T his technique of Cash Flow workings is used to ascertain the actual cash requirements of an
enterprise for farming, manufacturing or service oriented. This technique is also called debt
management.
Importance of Cash Flows

TT
o enterprise or economic activity can sustain itself for long if its cash inflows are less than the
N
cash outflows for a reasonably long period.
TT
The Cash Flow statement is a reliable indicator of the profit earning capacity of an enterprise.
TT
T he Cash Flow is of great significance for a micro/small enterprise or a farmer. Negative cash
flows can seriously cause its capacity to continue the working capital cycle, i.e., purchase of
inputs, processing or cultivating as the case maybe.
TT
ash flows are also very important for a bank. Cash flow statement of an enterprise helps banks
C
in fixing loans, rescheduling of payment of interests and installments.
TT
ash flow analysis is used to ascertain the actual cash requirements of the enterprise. It helps
C
the entrepreneur and banker to take credit and credit-related decisions by predicting and
determining the peak borrowing levels of the enterprise.
TT
statement of negative Cash flow also helps an enterprise to take appropriate measures to
A
improve its cash flows and prepare proper budget for its future operations.
How is a Cash Flow Statement Prepared?

The main items which affect the cash flow, in case of a micro/small enterprise or individual are:
TT
urchase of inputs Normally, a micro/small enterprise or a farmer purchases the inputs

P
against cash payment. They hardly get credit from the suppliers. It affects the working capital
requirements.
TT
S ales Micro/small enterprises sell their output on cash basis. Sometimes they may have to sell
some portion of their output on credit. It increases the required working capital.
TT
I nventory/Raw material For running the business/farming activity, building an inventory may
be necessary.
TT
ther Expenses It may be necessary to have cash for recurring expenditures like labour,
O
electricity, transport, repair charges etc.
TT
apital expenditure - Capital expenditure is the expenditure on fixed assets like machinery, shed,
C
irrigation equipment, wells, live stock etc. Normally such expenditure is incurred by arranging
long term funds.
TT
ank Loan Receipt of loan is inflow of cash while the repayment of loan and payment of interest
B
are outflows.
Example:
TT
32
A farmer, owning 5 acres of land, approached the bank for purchasing a pump set and agricultural
inputs like seeds, fertilizers, pesticides etc. After discussing with the farmer and basing on the
market enquiries, the data was prepared
Amount available with the farmer: Nil
Cost of pump set: Rs. 5000
Cost of inputs: Rs. 10000
Cost of sowing: Rs. 2000
Harvesting expenses: Rs. 3000
Time for the crop to be ready: 5 months
Further time taken to sell the produce and realize the amount: 1 month
Monthly expenses for family sustenance: Rs. 1000. There are no other sources of income.
Total amount to be realized from the crop: Rs. 40000
The field officer, while preparing the cash flow statement, provided for both the term loan and working
capital (crop loan) and prepared the following cash flow statement.
Inflows
1.
Opening balance (own funds)
2.
3.
4.
Term loan
Sales
Working capital loan
5000
10000
2000
2000
2000
4000
40000
-
1000
1000
1000
Outflows
1. Capital expenditure
2.
Purchase of inputs
5000
7000
3.
Sowing and harvesting cost
2000
3000
4.
Household expenses
1000
1000
1000
1000
1000
1000
5.
Payment of interest on loan
1000
6.
Repayment of Term loan
7.
installment
1000
8.
Repayment of Working capital
20000
17000
Closing balance
TT
[Note: The initial working capital requirements were estimated by providing an amount equal to
or slightly more than the difference between cash outflows and inflows.]
Sources of Funds for Banks and their deployment

The main source of funds for lending or investments is deposits from the public which are repayable
whenever demanded by the depositors. Besides, banks have certain legal obligations to keep a portion
33
of deposit amount with RBI in the form of CASH & SECURITIES. So, the banker while lending should
follow sound principles of lending and should assess the importance of finance to be lent on the basis
of accepted norms.
Principles of Lending
A.
Cardinal Principles of lending: The business of lending is not without certain inherent risks,
especially when the lending banks depend largely on borrowed funds. The cardinal principles of
lending are therefore as follows:
TT
Safety
Safety of fund is the most important principle of good lending. When a banker lends, he has
to ensure that the advance is safe and that the money lent will come back. The banker is a
custodian of public funds which is to be repaid in accordance with the tenure of the deposit.
The repayment of loan depends upon the borrowers:
i.
ii.
iii.
apacity to pay
C
Willingness to pay
Income generation
The banker must therefore take utmost care in ensuring that the business for which a loan is
sought is a sound one and the borrower is capable of taking collateral securities for the loans.
TT
Liquidity
It is to be seen that money lent is not going to be locked up for a long time. The money should
return to the bank as per the repayment schedule.
TT
Profitability
A fair return on investment is essential in the case of lending by banks. It is, therefore, advisable
to have a customer profitability analysis (CAP) done when the banker is engaged in more than
one service or business for a customer.
TT
Productive purposes
Loans for non-productive purposes cannot be granted. Although the earnings on non- productive
business may be higher, even then bank cannot resort to non-productive loans being contrary to
the National interests.
TT
Diversification of risks
By diversification of risk it is meant that the banker should not grant advances to only a few
borrowers or few activities undertaken in an area. Diversification will help avoid concentration
of advances in the hands of few people, or purposes or a limited geographical area.
TT
Security
The security offered against the loans may consist of a large variety of items. It may be a piece of
land, building, gold ornaments, insurance policies etc. The security is only a cushion to fall back
upon in case of need. Collateral security alone should not form the sole consideration for judging
the suitability of a loan. The security, if accepted, must be adequate and readily marketable, easy
to handle and free from encumbrances.
B.
Types of Loans and Advances: The types of loans that a borrower needs will depend upon the
need of the borrower for meeting day to day expenses or for investment in plant and machinery.
TT
Term Loans
The investment loans are utilized for establishing expanding or modernizing farming and service
enterprise by acquisition of fixes assets.
34
Term loans usually are of medium or long term duration and are repayable in quarterly or half
yearly installments over an agreed period of time.
Term loans are secured by mortgage or hypothecation of plant and machinery etc.
TT
Working Capital Loan (Short Term Loan)

Working capital loan is utilized for cultivation and operating purposes resulting in the creation of
current assets for production and the sale of final produces or finished goods. It is also known as
Crop Loan. Working capital loans are secured by hypothecation of raw material/standing crop/
finished goods etc.
Credit Appraisal
A banker has to ensure that the money lent is repaid or recovered and interest is paid regularly by the
borrower which depends on the cash flow of the borrower, appropriateness of the terms of credit,
adequacy of collateral etc. the process of evaluating before giving the loan is known as credit appraisal.
In the credit appraisal process, the banker makes an attempt to find the answer to the following
questions:
TT
Whether the farmer or other entrepreneur requires funds?
TT
What is the volume of funds required?
TT
What are the income levels of the borrower before and after the credit disbursal?
TT
Will the venture/activity generate enough surplus to pay the interest?
TT
What are the chances that the loan will become an NPA?
Priority Sector Lending

There are large numbers of people who have no access to funds to take up ventures or economic
activity. Therefore, India has adopted the concept of Priority Sector Lending where credit access to
technologists, poor and small business people with relaxation of certain norms.
Categories of Priority Sector:
i.
griculture (Direct and Indirect Finance):

A
Direct loans are made to individual farmers, self-help groups (SHGs) or joint liability groups (JLGs)
of individual farmers and to others.
Indirect finance to agriculture includes loans given to companies/persons for agricultural allied
activities such as cold storage, stores for agricultural inputs, manufacture of equipments and
farm machineries etc.
ii.
Small Enterprises (Direct and Indirect Finance):

Direct finance to small enterprises includes all loans given to micro and small (manufacturing)
enterprises engaged in the manufacture/production, processing or preservation of goods, and
micro and small (service) enterprises and those whose investment in plant and machinery and
equipment (original cost excluding land and building and such items) does not exceed Rs. 5 crore
and Rs. 2 crore respectively for small enterprises and Rs. 25 lacs and Rs. 10 lacs respectively for
micro (tiny) enterprises.
iii.
Retail Trade:
It includes retail traders/private retail traders dealing in essential commodities (fair price shops)
and consumer cooperative stores.
35
iv.
Micro Credit:
Provision of credit and other financial services and products of very small amounts not exceeding
Rs. 50000 per borrower, either directly or through a SHG/JLG mechanism or to NBFC/MFI/NGO
on lending up to Rs. 50000 per borrower, will constitute micro credit.
v.
E ducational Loans:
Education loans include loans and advances granted to individuals for educational purposes, up
to Rs. 10 lacs for studies in India and Rs. 20 lacs for studies abroad.
vi.
Housing Loans:
Loans up to Rs. 20 lacs to individuals for purchase/construction of a dwelling unit per family
(excluding loans granted by banks to their own employees) and loans given for repairs to
damaged dwelling units of families up to Rs. 1 lac in rural and semi-urban areas and up to Rs. 2
lacs in urban and metropolitan areas.
Differential Rate of Interest (DRI)

Under DRI scheme finance is provided to the weaker sections at a low rate of interest.
Target for financing under DRI is one percent of total advances outstanding as on the end of the
previous year.
Not less than 40% of the total advance under DRI scheme go to SC/ST.
At least two-thirds of DRI advances should be granted through rural and semi-urban branches.
Weaker Sections
The weaker sections under priority sector include the following:
36
TT
S mall and marginal farmers with land holding of 5 acres and less, landless labourers, tenant
farmers and share croppers.
TT
Artisans, village and cottage industries where individual credit limits do not exceed Rs. 50000
TT
Beneficiaries of Swarnjayanti Gram Swarozgar Yojana (SGSY)
TT
Schedule castes and schedule tribes
TT
Beneficiaries of DRI scheme
TT
Beneficiaries under Swarnjayanti Shahari Rozgar Yojana (SJSRY)
TT
Beneficiaries under the Scheme of Liberation and Rehabilitation Scavengers (SLRS)
TT
Advance to Self-Help Groups (SHGs)
TT
L oans to the distressed poor to prepay their debt to informal sector, against appropriate collateral
or group security.
Agricultural Finance
Types of loan
Purpose
Eligibility
Period
Crop loan/
working
capital loan
The purpose of the

crop loan is to facilitate
the agriculturists to
carry on seasonal
operations i.e. to
meet the expenses
for raising of seasonal
crops
Agriculturists,
tenant
farmers
and share
croppers
who actually
cultivate the
lands
Normal
period of
loan may
not exceed
one year.
Sugarcane
crop loans are
for 18 months
Kisan Credit
Card (KCC)
Kisan credit cards are

issued to farmers to
meet their cultivation
needs including
purchase, inputs and
other short-term
requirements together
with working capital
requirements for allied
activities
including consumption
and non- farm
activities in flexible and
cost effective manner.
An improvement of the
cash credit system is
the kisan credit card
scheme
Owner,
cultivators,
or those
engaged
in allied
activities
are eligible
for kisan
credit cards.
Farmers
cultivating on
authorized
leased lands
are also
eligible.
Documents/
security
Short-term loans:
a.
b.
Demand
Promissory
Note, Loan
agreement,
Hypothecation
of crops, Crop
Insurance.
Demand
Promissory
Note, Loan
agreement,
Card is
normally valid
for 3 years
subject to
annual review
Crop Insurance.
Submission
of land records.
It could be
hypothecation
of standing
crops and/
or mortgage/
charge of land
37
Demand
Promissory
Term Loans
Agricultural term
loans are provided
for the purchase of
assets and creation of
assets connected with
rural activities under
agricultural and allied
activities
All
categories of
farmers and
agricultural
laborers are
eligible for
term loans
Repayable
over a period
of time
exceeding 3
years
Note, Loan
agreement,
Crop Insurance.
Land records,
hypothecation
of the assets
created,
insurance of the
assets
Demand
Promissory
Land Development
Loans
Loans are given for

land development
projects
All farmers
owning
agricultural
land are
eligible
Repayable
over a period
of time
exceeding 3
years
Note, Loan
agreement,
Crop Insurance.
Borrower has
to produce a
report on the
estimated cost
by an engineer
Demand
Promissory
Note, Loan
agreement,
Minor Irrigation
38
Credit for the creation

of irrigation facilities
from underground/
surface water sources
are covered under the
scheme
All those
farmers who
are having
known source
of water
unstable for
irrigation
purpose
Crop Insurance.
Repayable
over a period
of time
exceeding 3
years
Estimate for
the civil works,
quotations for
the assets to be
purchased,
land records,
geologist
certificate,
feasibility
certificate from
electricity board
Farm
Mechanisation
Credit for the purchase

of farm equipments
and machinery for
agricultural operation
Farmers
owning a
minimum of
5 to 8 acres
of perennially
irrigated lands
are eligible for
loan
Demand
Promissory
Repayable
over a period
of time
exceeding 3
years
Note, Loan
agreement,
Crop Insurance.
Land records,
quotations,
Hypothecation of
assets
Demand
Promissory
Note, Loan
agreement, Crop
Insurance.
Loans for
Horticultural Loan
Land Purchase
Loan
development of fruit
orchards
Loan to small and

marginal farmers/
landless labourers
for purchase of
agricultural land
All farmers
having
cultivable
lands
Small/
marginal
farmers,

tenants, share
croppers
subject to
land holding
criteria
Repayable
over a period
of time
exceeding 3
years
Water and soil

test report,
feasibility
certificate
from the local
horticulture
department,
records of land,
quotation/
estimate,
mortgage of land
Demand
Promissory
Repayable
over a period
of 10 years
Note, Loan
agreement,
Crop Insurance.
Mortgage of land
to be purchased
39
40
Debt Recovery
Certificate Programme in Debt Recovery
Table of Content
Debt Recovery Agents Certificate Training : Facilitators Manual
15
Page No.
Module
35
1
Confidential
Debt Recovery Agents Certificate Training : Facilitators Manual
Module
Page No.
53
79
Certificate Program in Debt Recovery
Debt Recovery Agents Certificate Training

1.1
Introduction
Introduction
Your Name :
Dear Participant,
Welcome to this specialized training program for Recovery Agents.
Why are we here?
1. To meet the requirements of the Reserve Bank and the IIBF Certification Process.
2. To learn and practice from each other the best methods used in debt recovery
Who has created this program?
IL&FS ETS, training specialists, have studied the general profiles of the participants and
created a program that is participatory, enjoyable, easily understood and provides plenty of
room for practice. It is based on the syllabus given by IIBF in their Handbook on Debt
Recovery available from Taxmann publications.
Who are your trainers?
Your trainers for this batch are
Name
Background
What are the rules for getting a Certificate?

1. We must complete 100 hours of training no absenteeism is allowed.
2. We must prepare a Demand Draft in the name of IIBF, Mumbai this is the exam fee. Who
will pay this examination fee? _______________________________________.
3. We must fill in the Registration Form. What are the rules for the examination?
____________________________________________________________________.
4. We must practise and sit for the Examination according to dates given by IIBF.
5. If we pass the examination (50%+) then we will be issued a Certificate. After a certain cut off
date we will not be allowed to continue DRA work without a certificate.
6. What happens if we fail? We are allowed to try twice more, but each time there is a fresh
examination fee of Rs 1200.
What will we learn in this course?
1. Personal Effectiveness Skills and understanding of our Job Requirements
2. Information about Banking practices and the effect on the DRA
3. Loans, Assets and Collections.
4. Functions of the Debt Recovery Agent, Rights and Duties of the DRA.
5. Legal aspects, Rules, Processes, Codes which are required to do our work better.
1
Module 1 Notes
M1-1
2011 IL&FS Skills Development
Corporation Limited

In the table below, tick off the items in which you have good knowledge. Mark the items which you
would like more information or need practice.
Good
knowledge
Item
Topic
Personal skills required for this job
Communication Skills for debt recovery
Normal functions of the DRA
How Banks operate, the Deposit- Lending cycle, position of

the DRA
Types of customers, accounts, interest
Account opening, KYC norms
Banker-customer relationship types
Payment and settlement functions of banks
10
Different channels of using a bank
11
Anti-money laundering function
12
Concept of Loans how banks earn money
13
Types of Retail Loans and their features
14
Security creation and charge
15
Asset classification
16
Why do Banks require the DRAs?
17
Meaning of debt recovery, agents, agency
18
Reasons for default in loans
19
Different types of skills required by DRAs
20
Dealing with difficult debtors skills of persuasion
21
Policy, processes and procedures of debt recovery;

strategies for recovery.
22
RBI Norms, Banking Code of Conduct
23
Additional Functions, Rights and Duties of the DRA
24
Fair Practice Codes, International Codes
Module 1 Notes
M1-2
Need Practice
Need
Information
1.3
Personal Effectiveness
Personal Effectiveness
What is Personal Effectiveness?

Personal effectiveness means making the most of all personal resources at our disposal - our personal
talents, energy and time to achieve our goals. What are your goals as a DRA?
Think about and discuss all the special talents that are required for your work are you effectively
using these?
Now fill in the table below after thinking about it carefully. What are you going to learn during the rest
of this course?
Areas in which Effectiveness
can be achieved
My Personal Strengths what

others think I am good at.
My Areas for Improvement

what I would like to learn.
Knowledge : what are the

things I need to know to do
my work effectively?
Skills : what operations and

techniques are needed to
effectively collect debts?
Attitude : What do I think

about the clients? What do
they think about me?
Some behavioural areas that can improve personal effectiveness are:
Better communication skills listening, speaking, writing, positive body language
Proper grooming and dressing, good business etiquette
Interpersonal skills managing conflict, persuading, motivating, influencing
Managing time and increasing productivity
Consistently following Rules, Processes and Procedures
Do you think these things are worth learning? Why or why not?
__________________________________________________________________________
__________________________________________________________________________
Module 1 Notes
M1-3

2.1
Communcation and Presentation
Communication and Presentation
What is Communication?
Communication is the process of exchanging information, ideas and thoughts etc. between at
least two persons in order to create common understanding. In recovery process communication
takes place between the debtor and the debt recovery agent. Communication is of two types:
Verbal communication by spoken words,
Non-verbal communication e.g. face language (facial expressions, eye contact), voice
language (voice tone, voice pitch), and body language (body position, body movement):
All or any of these communicate some message (whether intended or unintended) to the
receiver.
What makes a communication effective?

Following are the main principles of effective communication, which should be followed by a
recovery agent (communicator) in communications with the debtor (receiver).
Tick the items which you are doing well.
Your language (verbal as well as body language) should be civil and courteous.
The objective of the communication should be clear.
The language used by you should be easily understood by the receiver.
Be watchful and sensitive to the receivers responses
The non-verbal communication (or body language) is not adverse to the debtor
The agent should ensure that he has conveyed the intended message to the
debtor.
What are the traits of a good communicator? Tick the items which you are doing well.
One who speaks slowly and clearly
One who looks the receiver in the eye when speaking
One who does not use too much jargon or technical terms
One who waits to confirm that the receiver has understood
One whose body language and tone of voice is friendly even when conveying
harsh instructions or reprimands
What are the traits of a poor communicator? Tick the items which apply to you.
one who assumes to know what the other party means
one who does not clarify a message
one who does not ask when he has not understood
one who does not analyse the information received
Module 1 Notes
M1-4

What are the Components of Communication?
Communication involves everything from speaking, listening, reading and writing to body
language and the expressions on our faces. It can be verbal or non-verbal. It is important to
maintain eye contact, read body gestures, look at the person you are communicating to and
practice such active listening techniques like rephrasing what you hear to be certain that you
have understood correctly.
Communication should be short, crisp and clear because

-
It saves your time
It saves the other persons time
It is the quickest way to getting the work done
If communication is effective
-
There will be fewer misunderstandings between individuals
It will create a pleasant work atmosphere
It will help each person to maintain self esteem, especially a debtor
What are the ways to improve your communication skills?

Tick the items you want to work on
Verbal
Make your point clearly, use the exact words you mean
Demonstrate wherever you can using bodily gestures
Use simple language, not jargon the other person must understand
Listen to the speaker not only the words but also the hidden meaning
Do not assume you know what he is going to say
Vocal
Listen to the persons tone of voice; is there some other meaning? Is he getting
upset? Is he losing hope?
Visual
Maintain eye contact and have a pleasant expression
Be aware of your body language. You may just say something simple but if
your body language is aggressive, he may get offended.
Written
Be sure you understand what is written, especially in collection information
If you write something be careful about the wording it may be used against
you.
Copy down addresses and numbers carefully and check back to see if you have
copied correctly.
5
Module 1 Notes
2011 IL&FS Skills M1-5

Development Corporation Limited
Listening
2.3
Listening
Listening Effectiveness Checklist

Please go through the checklist, and choose one or two items, where you need to sharpen your listening
skills to achieve greater personal effectiveness.
Rate these items by using a rating scale 1 to 5 in the relevant box under the rating column where
1=NEVER, 2=RARELY, 3=OFTEN, 4=MOSTLY 5 = ALWAYS.
Sl.No.
Item
Rating
1.
When others are talking, I genuinely make efforts to understand the

ideas and feelings that the other person is trying to communicate.
2.
While someone is talking to me, I focus on what the other person is

saying and avoid doing anything else (answering the phone, starting
another conversation, thinking about other issues etc.).
3.
I always encourage the speaker to talk by showing interest, smiling,

nodding, etc.
4.
I consciously try to pay attention to the other persons words to learn

more about how he feels about the situation he is describing.
5.
I deliberately make efforts to try to learn something from each person

I meet, irrespective of the background and subject of the
conversation.
6.
When the subject is difficult for me to understand, I make best efforts

to ensure that I do not to switch off from the conversation.
7.
I ask questions to clarify my understanding when I dont fully

understand the speakers message.
8.
During conversations, I repeat back to the other person what has

been said in my own words to ensure that I have understood
correctly.
9.
I always ensure that I dont interrupt the speaker while he is in the

middle of his message. I always allow the other person to complete
his message before I respond to what he has said
10.
I keep notes of important points to help me remember what the other

person wants me to do.
Score
The higher your score, the better the listener you are likely to be. Which of these items are most
important for your job as Debt Recovery Agent? Tick the items that are most important for you.
Module 1 Notes
M1-6
Listening Skills
A good recovery agent should be a good listener also. A good listener is one who is attentive while
receiving the communication with positive facial and body expressions.
Who is a good listener? Tick the ones which you do well.
Hear correctly what the debtor is saying.
Listen patiently to the debtor
Do not show anger or disapproval at what the debtor is saying.
Normally allow the debtor to complete his point of view and do not interrupt unless it is
very essential.
Good listening improves flow of communication, creates better understanding and facilitates
smooth recovery.
3.1
Body language
(including agents who are over-dressed). Dressing should be appropriate to the situation simple, clean.
What is grooming? Why should you be well groomed? ____________________________________
___________________________________________________________________________________
Offer to keep notes, refer to documents (this gives the impression that you are interested
in solving the problem, based on facts).
Keep your voice low dont let the person feel you are telling the neighbours about his
problem. This will help him to build confidence.
Module 1 Notes
M1-7

Participant
Handbook
Good
listening improves flow of communication, creates better understanding and facilitates
smooth recovery.
3.1
Body Language
Body language
(including agents who are over-dressed). Dressing should be appropriate to the situation simple, clean.
What is grooming? Why should you be well groomed? ____________________________________
___________________________________________________________________________________
Offer to keep notes, refer to documents (this gives the impression that you are interested
in solving the problem, based on facts).
Keep your voice low dont let the person feel you are telling the neighbours about his
problem. This will help him to build confidence.
Module 1 Notes
M1-7
3.3
Interpersonal skills are what are demonstrated when interacting with people. It shows acceptance by the
other person and willingness to talk and solve problems.
For debt recovery agents good inter-personal relationship is as important as good communication and
effective listening skill. To be successful in his job a recovery agent should show the following:
Communicate and listen properly and effectively.
Show empathy and respect to the other party, in spite of the fact that he/ she is a debtor.
Do not make the debtor feel anxious, insecure or threatened by your communication- verbal or
non-verbal. On the contrary, try to remove such uneasiness.
Give all the information the debtor wants in connection with the debt and its repayment.
What are the differences in the following types of behaviour: Passive, Aggressive, Assertive?
Passive Behaviour
Aggressive Behaviour
Assertive Behaviour
Characteristics
Lets others make his

decisions for him, doesnt
express feelings, ideas,
wants, puts self down, in a
conflict runs away or gives in,
uses apologetic words,
hedges, uses an indirect
manner (hoping someone will
guess what she wants), cries,
pleads, is hesitant, has
downcast eyes
Is inappropriately honest,
puts others down, ignores
rights of others, dominates,
chooses for others, attacks
and blames, overreacts in
situations, uses loaded and
superior words, is sarcastic,
loud, makes rigid demands,
points finger
Is appropriately honest,
expresses wants and feelings
directly, chooses for himself,
is empathic, evaluates and
acts, is spontaneous,
exercises his personal rights
and respects rights of others,
uses objective words, listens,
makes direct eye contact, has
firm and warm voice, uses I
statements
Reasons
To avoid conflict and

unpleasant, risky situations
To express hostility and

anger, to achieve objectives
(in the short run at least)
To achieve objectives, to
have positive feelings about
himself
Feelings about
self that
accompany this
behaviour
Low self-confidence and low

self-esteem, hurt, helpless,
anxious, powerless, possibly
resentful and angry (at a later
time), guilty, inhibited
High or low self-esteem,

hostile, superior, righteous,
alienated, defensive,
frustrated, bitter, tense
Self-respect, confident, selfsufficient, powerful, relaxed
Feelings of others
when a person
engages in this
behaviour
Guilty, angry, disrespectful

irritated, frustrated, superior
Hurt, humiliated, defensive,

vengeful, and angry
Respectful, respected,
threatened (occasionally)
Body language
that indicates this
behaviour
slumped shoulders, wringing

hands, looking at the floor,
giggling, whispering,
apologetic expression
threatening posture, pointing

finger, yelling or loud voice,
demeaning posture, staring
or glaring
good eye contact, relaxed

posture, confident
expression, tactfulness,
initiative, slow, even tone
voice
Module 1 Notes
M1-8
4.1
DebtRecovery
RecoveryAgent
Agent
Debt
What are the meanings of the terms Debt, Recovery and Agent?
Debt: It refers to a sum of money that the debtor owes to the creditor. Thus there are two parties to a
debt debtor who receives money by way of a debt; and creditor who lends money to the debtor.
Example: Ram takes a loan of Rs. 3 lacs from a bank for purchasing a car, Ram becomes the debtor (or
borrower), the bank is the creditor (or lender) and the loan of Rs 3 lacs is the debt (principal). Ram
would be required to repay the loan in equated monthly installment (EMI), comprising the principal and
interest, spread over the repayment period of, say, 3 years (debt tenor).
Recovery: It means collection of money from the debtor by, or on behalf of the creditor, after it has
become due for payment in accordance with the debt terms agreed between the creditor and the debtor.
In the above example, if Ram (debtor) fails to pay the agreed installment (EMI) on the due date, the bank
may send him notice to remind him to pay the agreed amount within a stipulated period. It is to be noted
here that a debt becomes payable by the debtor only on or after the due date, but not before that date.
Agent: A person employed to do any act for another, or to represent another, in dealings with third
person is an agent. The person for whom such acts are done, or who is represented, is called the
Principal. An agent has thus an authority to do acts on behalf of the principal within the limits of the
authority.
Why the need of Recovery Agent is increasing?
Banks, Debt Recovery & Role of Debt Recovery Agents
Banks collect funds (deposits) from the members of public and pay interest to them and lend these funds
(deposits) to different class of people as loans and advances and charge interest on these funds.
The rate of interest charged on advances is higher than the rate of interest applied to the depositors and
the difference between these rates brings major income for the banks. While banks pay interest to its
depositors on due dates there is no guarantee that all its borrowers will repay the loan installments and
interest on due dates on their own.
This has been happening in the retail segment where number of accounts as also the volume of loans is
ever increasing giving rise to more number of NPAs.
This necessitates stepping up of recovery process.
And because these retail segment borrowers are not maintaining their accounts with lender banks and are
widely dispersed banks find it more feasible to outsource the debt collection function and deploy their
experienced staff for productive activities. This is how the debt recovery agent comes into picture.
Who are the Debt Recovery Agents (DRAs)?
Debt Collection Agencies work for the banks by charging flat fee or a percentage of amount recovered.
They are governed by the terms and conditions of the Agency Agreement.
These Agencies appoint individuals for recovery of debts who are called Debt Recovery Agents.
These Debt Recovery Agents recover the outstanding debts from the borrowers who have not paid loan
installments.
Module 1 Notes
10
M1-9
Example: Raju has taken a car loan. The Bank engages Agency X for collecting dues from Karan (and
other debtors) after they remain unpaid on due dates. Agency X employs Agent Y to follow up with
Karan. Here, Car loan is a debt, Karan is a Debtor, Bank is a creditor and Y is a Debt Recovery Agent.
Please note the full forms of,
DCA - Debt Collection Agencies
DRA - Debt Recovery Agents
What are the basic personal attributes required to be a successful DRA?
The personal attributes necessary for a successful DRA are,
DRA Qualities
Polite
Understanding
Well dressed
Helpful
Friendly
Trustworthy
Firm
DRA Skills
Listens Carefully
Encourages
Explains
Persuades
Speaks well
Negotiate
Follows rules
What is the difference between Collection and Recovery?

All borrowers are not defaulters. As per the terms and conditions of the loan agreement a debtor is
supposed to pay the EMI (Equated Monthly Installment) as and when it falls due for payment. When it is
paid on due date it falls under the category of collection where repayment comes without any
reminder/notice etc.
Collection function precedes recovery and includes repayment made by the borrower in due course of
time without any reminder and initial process of reminders etc. In general recovery starts once the
efforts of collection of dues have not been fruitful and the debt has become overdue.
Key Words
Debt
DCA
Defaulters
4.2
Recovery
Agent
Collection
Work of DRA
How is the recovery done by the DRAs ?

Having failed in their attempts to collect the overdues by means of normal reminders the job is assigned
to the DRAs who normally follow the below mentioned steps:
Telephone calls
Letters
Module 1 Notes
Personal visits
M1-10
11
time without any reminder and initial process of reminders etc. In general recovery starts once the
efforts of collection of dues have not been fruitful and the debt has become overdue.
Key Words
Participant
Handbook
DCA
4.2
Debt
Recovery
Agent
Collection
Defaulters
WorkofofDRA
DRA
Work
How is the recovery done by the DRAs ?
Debt Recovery
Agents
Having failed in their attempts to collect the overdues
by means of
normalCertificate
reminders theTraining
job is assigned
to the DRAs who normally follow the below mentioned steps:
Telephone calls
Personal visits
The above methods prove fruitful where borrowers could be reached at their residential addresses and
in
Letters
coaxed
to making payment. But there is a category of hardcore borrowers who could neither be traced
nor coaxed, if traced , in to making payment. Then what? Certain debt collection agencies have that
expertise.
Module
1 Notes
M1-10
4.3
Functions
ofDRA
DRA11
Functions of
There are two classes of functions that DRAs perform : Normal Functions and Specialized functions.
The Specialized functions will be done later in this course.
What are the Normal Functions of a DRA? Tick the ones you are familiar with.
Collecting dues receivable
Remitting collected funds
Book-keeping
Documenting and reporting
Collecting Dues Receivable

Collecting dues receivable is the core function of a DRA. Receivables mean the sums of money
which have become due in the loan or advances accounts and are payable by the debtors to the
creditors as per the agreements entered between the two parties. Thus the receivables in a loan or
advance account will have the following features:
Existence of loan or advance agreement between the bank and debtor
Repayment obligation of the debtor to repay the loan/advance, in part or whole, to the Bank, as
per the agreement.
Due date on or after which the dues can be collected.
The required particulars of the debtors and receivables to be collected from them are provided by the
bank to the agency, along with copies of the relative loan agreements.
Thus the DRA is legally entitled to collect the specified receivables from the debtors on behalf of the
principal (creditor bank), in terms of:
the loan agreement, and
the debt collection agency agreement.
Remitting Collected Funds
12
The Debt Recovery Agent should periodically remit the funds collected (cheques/drafts/cash)
along with duplicate statement of date wise collections to the principal (bank) as per the agency
arrangement.
DRA should retain acknowledged copy of such statement for his record/future reference and
also for claiming his agreed fees or commission from the principal (bank).
4.4
Functions of DRA 2
Functions of DRA 2
Functions of DRA - Book-keeping, documenting, reporting.

Book Keeping
Every DRA has to take care of the reporting necessities of the principal. Further, book keeping has to be
segregated and kept for each Bank. The following are the minimum requirement of book keeping for a
DRA. Tick the documents that you maintain or which are maintained by your Agency.
Record of lists of debtors received from the principal (bank) as well as details of collections
remitted to the principal (bank) should be properly maintained date wise.
Ledger account of each debtor showing amounts receivable/amounts collected/amounts remitted

to the principal (bank) should also be maintained date wise. DRA cannot adjust his fees or
commission against the collections made.
Though the principal (bank) is supposed to give copy of loan agreement between the debtor and
the bank to the DRA for the purpose of collection of dues, in terms of legal provisions and as
also in terms of Code of banks commitment to customers under the (BCSBI) bank has to
maintain secrecy and confidentiality about customers accounts s and records. Hence DRA
should take all the precautions in this regard.
Documenting and Reporting

In terms of agency agreement DRA should periodically report to the principal the following information:
Important developments and events pertaining to disputed and difficult cases.
Record of conversations the DRAs have with the customers during recovery process.
Account statement showing dues receivable, amount collected and remitted and balance yet to
be collected debtor-wise.
Key Words
Communication
Interpersonal Skill
Customer
Debtor
Personal
effectiveness
Body language
Assertive behaviour
Aggressive
behaviour
Passive Behaviour
Listening skills
Empathy
Grooming
Dressing
Collections
Remitting funds
Book keeping
Documenting
Module 1 Notes
M1-12
Etiquette
Reporting
13

Paperwork
required?
Who is a DRA?
Rules & Policies
Duties & Functions
Special skills &

strategies
Guidelines for
process
Use this space to record your

new learning from this module
Module 1 Notes
14
M1-13

5.2
The Banking Story
The Banking Story
What are the main functions of a Bank?

The main functions of all Banks are:
Deposit Taking
Lending
Funds Remittance
Deposit-taking
A bank accepts money from its customers. Customers trust the bank to pay back the money
when it is needed or when demanded (these deposits are also called Demand Deposits).
These funds may be kept in CURRENT ACCOUNTS. Here, no interest is paid
The funds may be kept in the SAVINGS ACCOUNTS. A small percentage of interest is
paid.
Depositors can also keep their money for a fixed time in TERM DEPOSITS (such as Fixed
Deposits, Recurring Deposits). In Term Deposits the amount invested is repayable after the
fixed time period is over.
Deposits form the largest portion of a banks funds. The advantages to the customers are safety,
ease of access, interest earning, Income Tax rebates, records and statements of account
maintained by the bank, cheque book facility.
Lending giving loans and advances
Banks also give LOANS and ADVANCES. Part of the funds that the bank gets from deposits
are given out by a bank as loans and advances. The DEBTORS pay Interest on the money
borrowed. This interest collected by the bank is much higher than what is paid out to the
Depositors.
Funds Remittance
People do not have to mail cash through the postal system. Banks have branch networks spread
across cities, regions and states in the country and arrangements with banks overseas as well.
The banks send (remit) funds of their customers by mail, telegraphic or electronic funds transfer
or by issuing bank drafts. Banks charge fees for this service.
Other Services
Banks give other services for which they charge commission or fees. This is called non-interest
income or FEE-BASED INCOME. Some of these services are safe deposit lockers, safe
custody of valuables, issuing of travelers cheques, letters of credit and guarantee, collection of
out-station cheques, giving opinion reports on their customers, agency services for government
business, etc.
Quick Questions
How does a bank earn profit?
The funds that the bank gets from deposits are given out by a bank as loans and
advances.
15
Module 2 Notes
M2-1
The bank earns interest that the debtors pay on this loan or advance.
So, the bank earns profits from the difference of the interest it takes from the debtors and
that it gives to the depositor. The interest income from these forms a large part of a
banks profit.
Why should care be taken while giving loans?

Some portion of loans may turn into non-performing assets (NPAs). NPA means that the
interest or installment of the loan is overdue. This causes loss of income for the bank. So,
giving loans needs care, caution and monitoring by the bank.
Key Words
Deposit-taking
Lending
Funds Remittance
interest
Electronic Banking
Debtor
Loans
Advances
fee-based income
NPA
What is the structure of the Banking System in India?

Banks can generally be classified into various sub-categories as follows.
BANKS
IN
INDIA
Commercial
banks
Public sector
banks
Private
sector banks
Regional
Rural
banks
Co-op
banks
Local
Area banks
Urban
Co op
banks
Agri
Co op banks
Land
development
banks
Public Sector banks:
State Bank and its Banking Subsidiaries:
Nationalised Banks
The State Bank Group and Nationalized banks: This group of 27 banks has the largest
number of branches in metro/ urban/rural areas throughout the country. The group contributes
to about 75% of the total deposits and about 70% of total advances of all commercial banks in
India.
Private Sector banks
Foreign Banks: These are the banks incorporated abroad but granted license by RBI to do
banking business in India through their Indian branches.
16
Module 2 Notes
M2-2

Indian Private Sector banks: These are incorporated in India and their shareholdings are with
the public and large business houses.
Regional Rural Banks (RRBs): These are also scheduled banks, but, they are small localized
banks operating in rural areas of some districts. RRBs are owned jointly by State Govt, Central
Govt and sponsoring Public Sector Bank.
Cooperative Banks:
State Co-operative Banks
Urban Co-operative Banks

-
Cooperative banks are registered under the Registrar of Cooperatives and their
main regulator is the State government (or Central government in cases of the
cooperative banks operating in more than one State).
Cooperative banks size of assets/ liabilities is much smaller as compared to

commercial banks. Cooperative banks operate on no profit no loss principle
of cooperation.
Key Words
Scheduled Banks
Public Sector banks
Private sector banks
Nationalised Banks
Foreign Banks
Cooperative Banks
17
Module 2 Notes

M2-3
5.3
Types of Accounts, Types of Customers
Types of Accounts, Types of Customers
Deposits
Demand
Deposits
Repayable on
demand by the
customers
Call Money
Deposit
Current account
Deposits
Term Deposits
Repayable on
maturity dates as
agreed between
customers and
banker
Savings Bank
Deposits
Fixed Deposits
Hybrid Deposits
Combine the
features of
demand and
term deposits
Recurring
Deposits
What are the different types of Demand Deposits?

Current Accounts
Current accounts form a large portion of demand deposits of a bank. Current accounts can be
opened by individuals, business entities (firms, company), institutions, government bodies/
departments, societies, liquidators, receivers, trusts, etc. The main features of current accounts
are:
There are no restrictions on the number and amount of withdrawals / deposits.
Chequebook facility is provided to each current account. All current accounts are noninterest bearing.
Overdraft is a facility whereby banks honour cheques drawn by current account

customers even when the balance in the account is less than the amount of the cheques.
Regular Overdraft (permanent) facility is given as per agreement made beforehand. In
this case the bank honours cheques drawn in more than the credit balance but not more
than the overdraft limit. The bank charges agreed interest on the overdraft portion of
drawings.
The account holder gets periodically from the bank branch statements of accounts for
reconciliation and record.
Savings Bank Accounts:

Savings bank accounts are intended for keeping savings of individuals and small businesses for
meeting their future money needs. Interest is given by banks on these accounts with a view to
encourage saving habit in the community. The Savings bank accounts are of two types:
18
Module 2 Notes
M2-4

(a) Chequebook facility accounts in which withdrawals are permitted by cheques drawn in
favour of self or other parties.
(b) Non-cheque book facility accounts where withdrawals are permitted to the account holders
only at the bank branch which has the account by filling up a withdrawal form or letter
along with the account passbook.
The main features of Savings bank accounts are as follows:
Withdrawals are permitted on demand of the account holder by presentment of cheques

or withdrawal form/letter.
Banks put some restrictions on the number of withdrawals per month/ quarter, amount
of withdrawal per day, minimum balance to be maintained in the account on all days,
etc. and levy fee/ penalty for violations of these rules.
The bank pays interest on the minimum balance maintained in the account during the
specified period of every month, example, from 10th to the last day of the month.
Interest on savings bank account continues to be regulated by the Reserve Bank of

India.
No overdraft in excess of the credit balance in savings bank account is permitted.
Most banks provide to savings bank account holder a passbook where date-wise
debit/credit transactions and credit balances are shown as per the customers ledger
account maintained by the bank.
Call Deposit
An investment account offered through banks which allow investors instant access to their
accounts. Withdrawals and deposits can be made any time. Rules and benefits differ depending
upon the bank offering the account.
What are the different types of Term Deposits?
Fixed Deposits:
These are repaid on the fixed maturity date with the principal and agreed interest rate for the
period and no operations are allowed against the deposit. The main features are as follows:
Fixed deposits are for specified periods at specified interest rates and cannot be
changed even though the interest rate changes.
Banks offer varying interest rates for different maturities as decided by their Boards.
Those term deposits which are held for periods of 6 months and less are called Short
Term Deposits or Short Deposits.
A deposit receipt is issued by the bank branch accepting the fixed deposit- mentioning
the depositors name, principal amount, maturity period and interest rate, dates of the
deposit and its maturity etc.
Many banks prepay fixed deposits, if they decide to accommodate customers request.
Banks calculate and credit the interest payable on the deposits on a quarterly basis.
However, for the convenience of the depositors banks pay interest at different desired
intervals.
19
Module 2 Notes

M2-5

Recurring Deposits:
The main features are:
The customer deposits into the account a fixed sum at pre-fixed frequency
The interest rate payable on recurring deposits is pre-fixed and it is generally a little
lower than the fixed deposit rate for the same period.
The total amount deposited along with the interest is repaid on the maturity date. The
depositor may be allowed to take advance against the deposits or to have the deposit
pre-paid before the maturity.
What are Hybrid Deposits or Flexi Deposits?

These deposits are a combination of demand and fixed deposits for meeting customers
financial needs in a flexible manner.
Only one savings/ current account is opened and the term deposits issued under the
scheme are only on the banks books as no term deposit receipts are issued to the
customer. Once deposits in savings/current account cross a pre-agreed level, such
surplus amount is automatically transferred to term deposit.
The main advantages of the flexi-deposits to a customer are:
The customer opens only one account (savings or current) under the scheme
Advantage of higher interest earning
Exercise: Write down one advantage and one disadvantage of each of the types of deposits.
Deposit Type
Advantage
Disadvantage
Savings Bank Account

Current Account
Fixed Deposit
Recurring Deposit
Key Words
Demand Deposits
Current Accounts
Savings Bank
Accounts
Recurring Deposits
Fixed Deposits
Hybrid Deposits or
Flexi Deposits
Call money deposit
20
Module 2 Notes
M2-6
Term Deposits
5.4
1. What does a person do to open a bank account?

A person who wants to open a deposit account has to fill up and sign the account opening or
application form as given by the bank and submit:
Introduction from an acceptable person,
acceptable proof of his/ her identity and home address,
his/ her photographs,
the first minimum deposit in the account (fixed by the bank)
2. Why does a bank need Introduction / identity and residence proof?

If the bank opens an account without proper introduction, it will not get the protection of law
and it may be held responsible for loss caused to others by this customer depositing forged or
stolen cheques in his account and withdrawing the deposits.
3. What documents are needed to prove identity?
Banks take direct proof of the identity of the person (e.g. passport, driving license, ration card,
voters ID card, Income Tax PAN No.) and also proof of his home address. They keep attested
photo copies of these documents along with the account opening form.
4. What are Know Your Customer (KYC) guidelines of RBI?
In 2002, RBI has issued an official order to all banks for following the procedure of know your
customer (KYC) for all of their new and existing domestic and non-resident customers. KYC
establishes the identity and home address of the customers by document proof. One of the main
objectives of KYC process is to prevent misuse of the banking system for money laundering
and financing of terrorist and anti-national activities.
5. Why is a Specimen Signature kept by the bank?
A customer is recognized mainly by his/ her signature on the cheques/ vouchers and these are
compared with the specimen signature on record to verify the genuineness of the customers
signature.
6. What is a Power of Attorney? Why is it needed?
At times a depositor would like to do the bank operations through another person.. Banks accept
this arrangement. A power of attorney is a document, duly stamped given by a customer to his
banker, authorizing his attorney or agent named in the document to operate the account.
7. Who can open Deposit Accounts?
Individuals: Any person who is major (adult) and of sound mind can open a bank account,
Savings or fixed deposit account. Bank account of minor child can also be opened and operated
by the guardian. Many banks also allow minor children above specified age to open savings
account in their single name and also operate it, with some limitations. More than one person
can have a joint bank account.
21
Module 2 Notes

Corporation Limited
M2-7

Illiterate Persons: Illiterate persons who cannot sign can open only savings account (without
cheque
facility)
or fixed
deposit
account.
are open
allowed
only
if theaccount
person produces
Illiterate
Persons:
Illiterate
persons
who Withdrawals
cannot sign can
only
savings
(without
passbook,
verifying
the thumb
impression
and after proper
bankperson
officials.
cheque
facility)
or fixed
deposit
account. Withdrawals
are identification
allowed only by
if the
produces
passbook,
verifying
the thumb
8. How does
nomination
help?impression and after proper identification by bank officials.
8.
How
does
help? is that in
The
effect
of nomination
a valid nomination
the
in nomination
the accountiswill
The amount
effect oflying
a valid
that be
in
formality.
the
amount lying in the account will be
formality.
case of death of the sole depositor or all depositors,

returned
to the
without any
legal
case
of death
of nominee
the sole depositor
or allfurther
depositors,
returned to the nominee without any further legal
Key Words
Introduction
Specimen Signature
Key Words
Power of Attorney
Introduction
Nomination
Specimen Signature
Illiterate persons
Power of Attorney
Nomination
Illiterate persons
6.3
6.3
Know Your
Customer
(KYC)
Know Your
Identity and
residence
proof
Identity and
Customer
(KYC)
Photo Identity
residence proof
Photo Identity
InterestCalculation
Calculation
Interest
What is Interest?
What
InterestisisInterest?
the price that someone pays for the temporary use of others funds. Its value is
calculated
as aprice
percentage
of somepays
amount.
chargeuse
interest
on Loans
Interest
is the
that someone
for theBanks
temporary
of others
funds.and
Its also
valuepay
is
interest on as
some
types of Deposits.
calculated
a percentage
of some amount. Banks charge interest on Loans and also pay
interest
somecharge
types ofinterest?
Deposits.
Why doon
banks
Why
do interest,
banks charge
Without
lendersinterest?
would not be willing to lend and depositors would be less willing to
save.
To
repay
a
loan,
a
debtor
interest,
as well
the principal,
Without interest, lenders wouldhas
notto
bepay
willing
to lend
and as
depositors
wouldthe
beamount
less willing to
originally
borrowed.
a bank
pays
interest
agreed
rated
to the deposits
accepted by
save.
To repay
a loan,Similarly,
a debtor has
to pay
interest,
asatwell
as the
principal,
the amount
it
to
encourage
people
to
leave
their
money
at
the
bank.
originally borrowed. Similarly, a bank pays interest at agreed rated to the deposits accepted by
it
to encourage
people
to leave their money at the bank.
Types
of Interest
calculations:
Types
InterestSimple
calculations:
Simpleofinterest:
interest is a fixed percentage of the amount borrowed for a period. The
interest
on a principal
not on
earned interest.
Simple calculated
interest: Simple
interest sum,
is a fixed
percentage
of the amount borrowed for a period. The
interest calculated
on a principal
sum,
onand
earned
interest.
Rahul has deposited
Rs. 10,000
for 2not
years
the rate
of simple interest is 10% per annum. After
2Rahul
years,
thedeposited
interest he
get is,for 2 years and the rate of simple interest is 10% per annum. After
has
Rs.will
10,000
Interest
=
Rs.
10,000
x
10/100
2 years, the interest he will get xis,2 years = Rs. 2,000
Interest
= Rs. 10,000
x 10/100
x 2 years
= Rs. 2,000
Compound
interest:
Interest
which
is calculated
not only on the initial principal but also on the
added
interest
of
previous
periods.
So,
the
interest
getsonly
compounded
with but
the principal.
Compound interest: Interest which is calculated not
on the initialalong
principal
also on the
added interest
of
previous
periods.
So,
the
interest
gets
compounded
along
with
the
principal.
In the next case, Rahul has deposited the same amount of Rs. 10,000 in a fixed deposit account
for
twonext
yearscase,
where
the bank
will pay compound
annum.
In the
Rahul
has deposited
the sameinterest
amountofof10%
Rs.per
10,000
in a fixed deposit account
After
theyears
first year,
hepay
will compound
get is,
for two
wherethe
theinterest
bank will
interest of 10% per annum.
Interest
Rs.year,
10,000
10/100 he
x 1will
yearget= is,
Rs. 1,000
After
the=first
thexinterest
Now,
his
principal
amount
becomes
Rs.
10,
+ Rs. 1,000 = Rs. 11,000
Interest = Rs. 10,000 x 10/100 x 1 year = Rs.000
1,000
After the
the interest
will10,
get000
is, + Rs. 1,000 = Rs. 11,000
Now,
his second
principalyear,
amount
becomesheRs.
Interest
Rs. 11,000
10/100
x 1 he
yearwill= get
Rs. is,
1,100
After
the=second
year,xthe
interest
Total
interest
he
gets
is
Rs.
1,000
+
Rs.
1,100
= Rs. 2,100
Interest = Rs. 11,000 x 10/100 x 1 year = Rs. 1,100
22
Totalfloating
interest he
gets is Rs.
1,000In+ Rs.
1,100
= Rs.
Fixed and
interest
rates:
fixed
rate,
the2,100
rate of interest, once fixed, will not change
duringand
the entire
period
of loan.
In floating
depending
the
Fixed
floating
interest
rates:
In fixed rate,
rate, the
the rate
rate of
of interest
interest,changes,
once fixed,
will notupon
change
market
condition.
This
is
decided
at
the
time
of
making
the
loan
agreement.
during the entire period of loan. In floating rate, the rate of interest changes, depending upon the
market condition. This is decided at the time of making the loan agreement.
Module 2 Notes
M2-8
Module 2 Notes
M2-8

Front ended interest: In this case, the interest (flat rate) is collected in the beginning and the
customer gets net amount.
Front ended
interest:
InRs
this
case,
the interest.
interest (flat rate) is collected in the beginning and the
Jaya takes
a loan of
1000
@ 10%
customerThe
gets
netdisburses
amount.only Rs 900 since they take out the 10% in the beginning.
Bank
takes a loanInofthis
Rs 1000
10%bank
interest.
Flat rateJaya
of interest:
case,@the
will calculate interest on the original amount lent.
The Bank
only Rs 900on
since
take outamount
the 10% even
in the beginning.
The interest
will disburses
not be calculated
thethey
reducing
though the debtor repays in
instalments.
Usually the
EMIs
arethe
calculated
as calculate
though the
principal
is also
beingamount
paid back.
Flat
rate of interest:
In this
case,
bank will
interest
on the
original
lent.
The interest will not be calculated on the reducing amount even though the debtor repays in
instalments. Usually the EMIs are calculated as though the principal is also being paid back.
6.4
6.4
When can the bank close or stop a deposit account?

Closure at customers request: A customer can close a deposit account if he/ she is not
When can
the bank
or stopof
a deposit
satisfied
withclose
the services
the bankaccount?
or for any other reason e.g. transfer to another
place.
Closure at customers request: A customer can close a deposit account if he/ she is not
satisfied
with
the services
of the
ormay
for any
other
reason
to another
Closure of
accounts
by bank:
A bank
banker
close
account
or e.g.
stoptransfer
operation
on a
place.
customers deposit account when
Closure
of accounts
bank:ofAdeath
banker may close account or stop operation on a
- On
receipt ofbynotice
customers deposit account when
A joint account may also be closed on the death of any one of the account
- holders
On receipt
notice account
of death opened in the names of the surviving account
andof fresh
avoid legal
- holders,
A joint to
account
may problems.
also be closed on the death of any one of the account
holders and fresh account opened in the names of the surviving account
Stopping of operations:
holders, to avoid legal problems.
Garnishee order or order of courts: If a bank receives order of a court, a garnishee order, or
Stopping
operations:
by IncomeofTax
department, the bank would immediately note a caution in the account and
stop
payment order
of cheques
or debits
to the
until theorder
orderof
is alifted
in awriting.
Theorder,
account
Garnishee
or order
of courts:
If account,
a bank receives
court,
garnishee
or
operations
for temporary
the court order
it is not closed.
by
Income are
Taxstopped
department,
the bank period
would of
immediately
noteand
a caution
in the account and
stop payment of cheques or debits to the account, until the order is lifted in writing. The account
operations are stopped for temporary period of the court order and it is not closed.
Key Words
Simple interest
Compound interest
Fixed and floating

interest rates
Front ended interest
FlatKey
rateWords
of interest
Principal
Simple
interest
Rate of interest
Compound
interest
Fixed and floating

interest rates
Front ended interest
Flat rate of interest
Principal
Rate of interest
23
Module 2 Notes

M2-9
Practice examples
6.5
Practice examples
Cases for discussion

Case 1
A
Yusuf comes to the bank with Rs 15,000 in cash and

wants to open an account. He would like to have
that money available whenever he needs it. Also, he
wants to earn interest on the money. What kind of
account can he open?
The bank has mentioned that he needs to maintain a

minimum balance of Rs 3000. How much money
can he draw from the bank?
He would like his wife to be able to draw money over

the counter. What should he do?
He frequently travels to nearby towns where he might

need money. Suggest some alternatives.
Case 2
A
Mr. Sundar Lal and his wife want to open an account

that both can draw money from. What account
should they open?
They would like their son to receive the money in

case they both die. What is the status of the son?
Sundar Lal produces his documents as required but

his wife says she lives in the same house so she has
no other documents. What is the document needed?
Case 3
A
Kuldeep has a shop of electronic goods. He has to

do lot of transactions by cheque. He wants to open a
bank account for his business which would give him
overdraft facility. What type of account should he
open?
24
Module 2 Notes
M2-10

B
What is the rate of interest he would get for this

account?
What other benefits would he get from this type of

account?
Case 4
A
Preeti has received a good performance bonus from

office and wants to keep this in the bank. She would
not need to withdraw this money for the next 6
months at least and expects to get interest. What
type of account should she open?
In case there is any emergency, will Preeti be able to

withdraw the money before 6 months?
In this case is the bank debtor or creditor?
Case 5
A
Rup Chand comes into the bank with some money

and says he wants to open an account. He can
neither read nor write. Can he open an account?
What kind?
What should be done to get his specimen signature?
How can he withdraw money from the account (since

he has no cheque book)?
Case 6
A
Lalita gets a fixed salary every month. From this she

can save Rs 5000. She would like to earn the
maximum interest and she will not need this money
for a year at least. Advise Lalita what she can do.
25
Module 2 Notes

M2-11

B
During the period of this transaction Lalita needs to

spend some money on a short vacation. Can she use
money from her deposit? How much?
What would be the features of opening 12 FDs of Rs

5000 each over the year?
26
Module 2 Notes
M2-12
7.1
Banker-Customer
Banker-CustomerRelationships
Relationships
Who is a customer?
Anyone conducting a banking transaction with a bank is a bank customer. It could be an
individual, a group, a firm, a company, a trust, an institution or a government/semigovernment/local self-government organization.
Different types of Banker-Customer Relationship
Bank
Debtor
Creditor
Bailee
Agent
Relationship
Debtor - Creditor
When a customer deposits money with the bank, the customer
becomes a lender and the bank becomes borrower. The
relationship is that of a Debtor and Creditor
Creditor - Debtor
When the bank lends money to the customer, the customer is
the borrower and the bank is the lender. The relationship,
therefore, is that of a Creditor and Debtor. The
Customer/Borrower executes documents and offers security to
the Bank before utilising the loans.
Bailee - Bailor
When a customer deposits certain valuables, bonds, securities
or other documents with the bank, for their safe custody, the
bank besides becoming a trustee , also becomes a bailee and
the customer is the bailor.
Agent - Principal
One of the additional services rendered by the bank is
remittances, collection of cheques, bills, etc., on behalf of the
customers. It further undertakes to pay regularly electricity
bills, telephone bills, insurance premia, club fees, etc. In all
such cases, the bank acts as an agent, his principal being the
customer.
Customer
Creditor
Debtor
Bailor
Principal
Lessor - Lessee
The banks provide safe deposit lockers to the customers who
hire them on lease basis. The relationship, therefore, is that of
lessor and lessee.
Lessee
Lessor
Trustee - Beneficiary
When a trust is created appointing the bank as a trustee, the
relationship is that of a trustee and a beneficiary
Beneficiary
Trustee
27
Module 2 Notes
M2-13
Corporation Limited

7.2
7.2
Debt Secrecy
Recovery
Agents
Certificate Training
Banks
Obligation
Accounts
Banks
ObligationtotoMaintain
Maintain
Secrecyof
of
Accounts
Banks Obligation to Maintain Secrecy of Accounts
Why should the Bank keep accounts information secret?
When a person opens an account in a bank he has an assurance that all the information
aboutthe
hisBank
account
remains
between
the banker
and account holder. It is one of the main
Why should
keep
accounts
information
secret?
duties of the banker to maintain complete secrecy about his customers account. This
When a person opens an account in a bank he has an assurance that all the information
duty continues even after the customers account is closed.
about his account remains between the banker and account holder. It is one of the main
duties
However,
there
are some
situations
in which
the banker
needed
to make
disclosures
of the
banker
to maintain
complete
secrecy
aboutishis
customers
account.
This
aboutcontinues
a customers
duty
evenaccount.
after theExamples,
customerswhen
account is closed.
- Needed
under
legal
acts like in
Income
Companies
Reserve
Bank of
However,
there are
some
situations
whichTax
the Act,
banker
is neededAct,
to make
disclosures
India Act, etc.
about a customers
account. Examples, when
-
7.3
7.3
If
a customer
thislike
information
canAct,
be disclosed.
Needed
underallows,
legal acts
Income Tax
Companies Act, Reserve Bank of
India
Act,
etc.
In the banking business it is common courtesy among the bankers that
whenever
a bank
about
sureties or acceptors such
If
a customer
allows,asks
this another
information
canproposed
be disclosed.
information is shared.
In the banking business it is common courtesy among the bankers that
A banker can
disclose
when
it is essential
his such
own
whenever
a bank
asks information
another about
proposed
sureties toor protect
acceptors
interest, legally.
information
is shared.
Banker
may
requiredinformation
to make disclosure
interesttoofprotect
the nation
and
A
banker
canbedisclose
when it inis the
essential
his own
public atlegally.
large.
interest,
- Banker mayof
be Transacting
required to make disclosure in the interest of the nation and
Instruments
public at large.
Instruments
InstrumentsofofTransacting
Transacting
What are the instruments of transacting?
Cheques A cheque is a bill of exchange drawn on a specific banker and not payable
unless
demanded. This
is exclusive to the banking system and no other institution can
What are
the instruments
of transacting?
operate this system. A cheque has three parties, the drawer the account holder
Cheques A cheque is a bill of exchange drawn on a specific banker and not payable
signing the cheque, the drawee always the bank and the payee who will receive the
unless demanded. This is exclusive to the banking system and no other institution can
amount
operate this system. A cheque has three parties, the drawer the account holder
Drafts
cheque the
drawn
by one
bankthe
against
funds
intowill
its receive
accountthe
at
signing -theA cheque,
drawee
always
bank and
thedeposited
payee who
another
amount bank, authorizing the second bank to make payment to the individual named in
the draft. It can also be from one branch to another branch of bank.
Drafts - A cheque drawn by one bank against funds deposited into its account at
Pay
Order
Pay
Order, or
payable
at thetosame
centre/branch
from
another
bank,
authorizing
theBankers
second Cheque
bank to is
make
payment
the individual
named
in
which
it was
issued.
Issuing
[drawer
branch]branch
and paying
branch [drawee branch]
the
draft.
It can
also be
from branch
one branch
to another
of bank.
is one and same.
Pay Order Pay Order, or Bankers Cheque is payable at the same centre/branch from
What iswhich
a Cheque?
it was issued. Issuing branch [drawer branch] and paying branch [drawee branch]
is
one
and
A cheque is a bill same.
of exchange drawn on a specific banker and not payable unless demanded.
28
This isisexclusive
to banking system and no other institution can operate this system. A cheque
What
a Cheque?
has three parties, the drawer, is the account holder signing the cheque, drawee is always the
A cheque is a bill of exchange drawn on a specific banker and not payable unless demanded.
bank and the payee who will receive the amount
This is exclusive to banking system and no other institution can operate this system. A cheque
has three parties, the drawer, is the account holder signing the cheque, drawee is always the
bank and the payee who will receive the amount
Module 2 Notes
M2-14

Types of transactions
Clearing: when the cheque is presented locally, the transfer of funds is done across the banks
immediately.
Collection: when the cheque is sent to another city or town, the receiving bank has to verify by
sending the cheque to the original bank; then the money is transferred. Nowadays, with some
of the technology-enabled banks, this can be done very fast as the banks have networks across
all cities and towns.
What are the features of a cheque?
In writing: A cheque should be in writing (in pen).
Drawers signature: The cheque has to be signed in ink, by the account holder, as per
the specimen signature. If the signature does not match the cheque may be returned by
the bank to protect the customer from possible forgery.
Date of cheque: A cheque has to be dated. A cheque is paid on or within 6 months of

the date mentioned.
Amount of cheque: There are two spaces for writing the amount of the cheque, in
figure and also in words. Generally, both these should be filled up and should not
differ.
General Crossing: A cheque may be crossed by the drawer and holder by drawing on
its face two parallel transverse lines simply, either with or without words not
negotiable or account payee. In these cases, the drawee bank shall not pay it
otherwise than to a banker. The effect of such a crossing is that the cheque will not be
payable in cash but through the bank by credit to the account of the payee
Special Crossing: It consists of an addition of the name of the banker across the face of
the cheque with or without two parallel transverse lines. In this case the drawee bank
shall not pay the cheque otherwise than to the banker to whom it is crossed or his agent.
Endorsements: A cheque, payable to order, can be negotiated only by endorsement and

delivery. Endorsement is made on the back of the instrument or by attaching a slip of
paper if the space on the instrument is not enough.
Which features of a cheque a DRA should always check when collecting cheques for loan
recovery? Tick the ones which you always check yourself.
The cheque should be drawn on local banks. Out-station cheques can be taken only
when the Banks branches are networked under CBS.
The cheques should be crossed Account Payee and not Bearer.
The cheques should be duly signed by the borrower.
The Banks name and the debtors account number should be clearly mentioned.
In case of Credit Card dues, the Card Issuing Banks name and the Credit Card number
should be mentioned clearly.
No third party cheques like the cheques endorsed in favour of the borrower can be
accepted.
The date should be filled up. If it is dated a few days before the date of receiving the
cheque it can be overlooked but post dated cheques should not be accepted.
29
Module 2 Notes

M2-15


Key Words
Key Words
crossing of cheque
crossing of cheque
Bailee
Bailee
Lesee
Lesee
Pay Order
Pay Order
8.1
8.1
Clearing
Clearing
endorsement
endorsement
Bailor
Bailor
Trustee
Trustee
Account Payee
Account Payee
Collection
Collection
Customer
Customer
Agent
Agent
Beneficiary
Beneficiary
Bearer
Bearer
Date of cheque
Date of cheque
Debtor
Debtor
Principal
Principal
Cheques
Cheques
Drawers signature
Drawers signature
Creditor
Creditor
Lessor
Lessor
Drafts
Drafts
What are the channels of transacting?

e-banking: Banking through internet can help transaction in the following cases,
e-banking: Banking through internet can help transaction in the following cases,
- Electronic bill presentment and payment
- Electronic bill presentment and payment
- Funds transfer between a customer's own checking and savings accounts, or to
- Funds
between
a customer's own checking and savings accounts, or to
anothertransfer
customer's
account
another customer's account
- During purchase or sale
- During purchase or sale
- Loan applications and transactions, such as repayments
- Loan applications and transactions, such as repayments
Mobile banking: Mobile banking (also known as M-Banking, mbanking, SMS Banking
Mobile
Mobile
banking (also
known
as M-Banking,
mbanking,
SMS Banking
etc.)
is abanking:
term used
for performing
account
transactions,
payments
via a mobile
device
etc.)
used
for performing account transactions, payments via a mobile device
such is
as aa term
mobile
phone.
such as a mobile phone.
Phone Banking It is a service provided by a bank which allows its customers to
Phone
It is
a service
providedMost
by atelephone
bank which
allowsuse
its an
customers
to
performBanking
transactions
over
the telephone.
banking
automated
performanswering
transactions
overwith
thephone
telephone.
Most
telephone
banking the
use customer
an automated
phone
system
keypad
response.
For security,
must
phone
answering
system
with
phone
keypad
response.
For
security,
the
customer
must
first authenticate identity. It offers services like account balance information and list
of
first
identity.
It offers
like funds
accounttransfers
balance between
information
and list of
latestauthenticate
transactions,
electronic
billservices
payments,
a customer's
latest
transactions,
electronic bill payments, funds transfers between a customer's
accounts,
etc.
accounts, etc.
Customers can also speak to a live representative. Phone banking can also help in loan
Customers caninvestment
also speakpurchases
to a live representative.
Phone
banking
canorders,
also help
in loan
applications,
and redemptions,
cheque
book
debit
card
applications,
investment
purchases
and
redemptions,
cheque
book
orders,
debit
card
replacements, change of address, etc.
replacements, change of address, etc.
ATM An automated teller machine (ATM) is a computerized telecommunications
ATM
An provides
automated
machine
is ainstitution
computerized
devicethat
theteller
customers
of (ATM)
a financial
withtelecommunications
access to financial
device
that
provides
the
customers
of
a
financial
institution
with
financial
transactions in a public space without the need for a human clerk access
or banktoteller.
On
transactions
a public
without
the need
a human
clerk ATM
or bank
teller. On
most moderninATMs,
the space
customer
is identified
byfor
inserting
a plastic
card.
most modern ATMs, the customer is identified by inserting a plastic ATM card.
Debit Card - A debit card is a plastic card which provides an alternative payment
Debit
- A debit
is a purchases.
plastic cardInwhich
provides
an alternative
methodCard
to cash
when card
making
this card
is that
the accountpayment
of the
method
to iscash
when
making
purchases.
In this
card is that the account of the
cardholder
debited
as soon
as each
transaction
is made
cardholder is debited as soon as each transaction is made
Key Words
Key Words
ATM
ATM
Cheques
Cheques
Debit Card
Debit Card
e-banking
e-banking
30
Module 2 Notes
Module 2 Notes
M2-16
M2-16
Mobile banking
Mobile banking
Phone Banking
Phone Banking

8.2
Anti
Money Laundering
Anti Money Laundering
What is money laundering?

Money laundering is a process by which the origin of funds generated by illegal means (drug
trafficking, illegal arms trade, corruption, extortion etc) is concealed.
Criminals try to disguise the origins of money obtained through illegal activities so that it looks
like it was obtained from legal sources. Otherwise, they can't use the money because it would
connect them to the criminal activity and the money would be seized by the law keepers.
What are the phases of money laundering?
The process of money laundering can be said to be in three phases as under:
1. Placement: refers to the initial point of entry for funds derived from criminal activities.
2. Layering: refers to creating complex networks of transactions which attempt to
obscure the link between the initial entry point, and the end of the transaction cycle.
3. Integration: refers to the return of funds to the lawful economy for later withdrawal.
Purpose: The purpose is to route the moneys so generated through the banking systems of
various countries so that the same can be transferred to various people legally and moneys can
be invested in legitimate activities. By routing the money through the banking system it
becomes clean white (gets laundered).
Danger: This has become a danger to the humanity because of usage of this by terrorists.
What is the role of banks in preventing money-laundering?
Banks should take steps to prevent the first stage itself which means do not accept funds the
sources of which are not satisfactorily explained.
This can be done only if banks know the financial details of the customer. That is why these are
called KNOW YOUR CUSTOMER( KYC) guidelines. Banks are required to know the actual
identity and also his/her financial background before accepting as a customer.
Important elements of KYC guidelines are
Customer acceptance policy
Customer identification procedures
Monitoring of transactions
Risk management
While banks should try not to inconvenience the customers in general, they are required to
divide the customers in to various risk categorise and specify criteria for each group for
accepting them as customers.
Customer identification should be generally from reliable independent source documents. The
documents which are proof of identity are
Passport
Driving license
Permanent account number (PAN)
Voter identity card
Identity card issued by the

employer if acceptable to the bank
Module 2 Notes

M2-17
31

For proof of home address copy of latest Telephone bill, electricity bill or statement of a bank
account are accepted.
For proof of home address copy of latest Telephone bill, electricity bill or statement of a bank
Banks should
monitor the transactions in the accounts and report any suspicious transactions to
account
are accepted.
the authority.
Banks should monitor the transactions in the accounts and report any suspicious transactions to
Banks are required to monitor the transactions in new accounts at least for a period of
the authority.
six months and report any suspicious transactions to the designated authority.
Banks are required to monitor the transactions in new accounts at least for a period of
six
In the
case and
of other
banks should
monitor
transactionsauthority.
and if there is any
months
reportaccounts
any suspicious
transactions
to the designated
suspicion about any account being used for money laundering activity it should be
In the case of other accounts banks should monitor the transactions and if there is any
reported to the Government without alerting the customer.
suspicion about any account being used for money laundering activity it should be
reported
Any cashtotransaction
valuedwithout
more than
Rs 10thelacs
is required to be reported to the RBI
the Government
alerting
customer.
on a fortnightly basis.
Any cash transaction valued more than Rs 10 lacs is required to be reported to the RBI
on a fortnightly basis.
Customer
Key Words
money laundering
KYC
Key Words
Layering
money laundering
Integration
KYC
Layering
Integration
8.4
8.4
identification
Customer
identification
Placement
Placement
AML Case Studies
AML
AMLCase
CaseStudies
Studies
1. The Great Indian Bank received a customer account opening form for processing. There
was introduction from another existing customer of the bank as address proof, as the
1. The Great Indian Bank received a customer account opening form for processing. There
customer did not have any address proof. The introducer has a savings account. Customer
was introduction from another existing customer of the bank as address proof, as the
has provided driving license with photograph which did not match with current photograph.
customer did not have any address proof. The introducer has a savings account. Customer
The introducers savings account has huge cash turnover and he has introduced many
has provided driving license with photograph which did not match with current photograph.
account holders.
The introducers savings account has huge cash turnover and he has introduced many
Should
the Bank open the account?
account
holders.
Is there the
anyBank
possibility
of money
laundering in this case?
Should
open the
account?
Is there any possibility of money laundering in this case?
32
Module 2 Notes
M2-18
Module 2 Notes
M2-18

2. The bank receives a request letter from a customer to close ten fixed deposit accounts. It is
a premature closure (before maturity). On scrutiny the bank found the fixed deposits were
made in cash for more than Rs. 80,000. The trend analysis in the customers account
showed previous transactions of similar nature. The customer is a running a small book
selling shop.
Is there a reason for suspicion as to source of funds?
What should the Bank do?
3. ABC, a customer approaches you for opening a Savings Account. He produces voters ID
Card and ration card as KYC documents. He mentions that monthly credit in the account
will be mostly in cash and he would withdraw most of the money for expenses. You inform
him of the banks QAB (Quarterly Average Balance) requirement and also ask him for the
source of his funds. ABC refuses to divulge the source of funds and expresses his inability
to open account on the ground of inability to maintain the QAB.
What are the problems here?
Will he be able to open this account in another bank?
33
Module 2 Notes

M2-19

34
Module 2 Notes
M2-20
10.2
How do Banks Earn Money?
The members of public and trading concerns keep money in the Bank for safety,
liquidity and interest.
The funds that the Bank gets from deposits are given out by a Bank as loans and
advances at a higher rate of interest.
The Bank earns interest that the debtors pay on this loan or advance.
So, the Bank earns from the difference of the interest it takes from the debtors and what
it gives to the depositor. The interest income from these forms a large part of a Banks
profit.
Net Interest Income (NII) = (Interest earned on Loans Interest paid on Deposits).
This NII goes towards costs of running the Bank and the excess is recorded as the profit
of the Bank.
10.3
10.2
Customer Segments
Customer
Segments
Who are the target customers of retail loans?

The members of public and trading concerns keep money in the Bank for safety,
Home loans to salaried and self-employed professionals. Home loans account for about
liquidity and interest.
half of total retail loans.
The funds that the Bank gets from deposits are given out by a Bank as loans and
Auto loans (car and two wheelers) to salaried and self-employed professionals. This
advances at a higher rate of interest.
sub-segment accounts for about one third of total retail loans.
The Bank earns interest that the debtors pay on this loan or advance.
Loans / advances against shares to high net worth individuals (HNIs), businessmen
So,
the Bank
earns women)
from theand
difference
(includes
business
traders,of the interest it takes from the debtors and what
it gives to the depositor. The interest income from these forms a large part of a Banks
Personal loans to salaried, self-employed professionals and traders/ businessmen. These
profit.
loans, for consumption needs and unsecured (i.e. without ant tangible security), are
Net
Interest
Income
= (Interest
on Loans
Interest
paid
on Deposits).
granted
on the
basis (NII)
of income
flows earned
or net worth
of the
individual
borrowers.
This
goes
towards costs
of running
the Bank
andclass
the excess
is through
recordedreceivables.
as the profit
CreditNII
card
receivables.
Target
the growing
middle
and earn
of
the Bank.
Credit
card companies are mostly subsidiaries or affiliates of the banks.
For lending purpose, customers will be falling in three categories:

Retail-All
individual
customers
10.3
Customer
Segments
SME or SEG Small and medium enterprises
Corporate Large corporates

Who are the target customers of retail loans?
Home loans to salaried and self-employed professionals. Home loans account for about
half of total retail loans.
Auto loans (car and two wheelers) to salaried and self-employed professionals. This
sub-segment accounts for about one third of total retail loans.
Loans / advances against shares to high net worth individuals (HNIs), businessmen
(includes business women) and traders,
3Personal
salaried,
self-employed
andLimited
traders/ businessmen. These
Module
Notes loans to
M3-1 professionals
2011
IL&FS
Skills Development
Corporation
loans, for consumption needs and unsecured (i.e. without ant tangible security), are
granted on the basis of income flows or net worth of the individual borrowers.
35

Customers
Customers
Retail
Retail
SEG-Small Enterprises
SEG-SmallGroup
Enterprises
Group
Professionals
Non-professionals
Professionals
This
segment generally
takessegment
loans like generally
Office and
This
loan etc
Medical
Equipment
takes
loans
like Office
and
Non-professionals
This segment
generally
takesThis
tradesegment
loans etc generally
Medical Equipment loan etc

10.4
10.4
Corporate
Corporate
takes trade loans etc
How are Loans repaid?
How
are
Loans
repaid?
How
are
Loans
repaid?
What is Equated Monthly Instalment (EMI)?
This is the most common method of repaying loans. An equal amount repaid periodically
comprising interest and Principal over the period of the loan or debt. The composition of
What is
Equated Monthly Instalment (EMI)?
interest (decreasing) and instalment of Principal (increasing) changes while the amount remains
This is the
thesame.
most common method of repaying loans. An equal amount repaid periodically
Example:
Ajay has
a housing
loanthe
for Rs.
10 Lacs
interest
of 10.5%
per annum
comprising
interest
andtaken
Principal
over
period
of at
theanloan
orrate
debt.
The composition
of
in 15 years.
EMI is going
to be Rs. 11,054
for (15x12)changes
=180 months.
interestrepayable
(decreasing)
and His
instalment
of Principal
(increasing)
while the amount remains
EMI are used to pay off both interest and Principal each month, so, when Ajay is paying this
the same.
amount every month, he is paying back a part of the 10 Lacs Principal as well as the interest
Example:
Ajay has taken a housing loan for Rs. 10 Lacs at an interest rate of 10.5% per annum
generated.
repayable
inis15
years.
His EMI
is going
toInbefixed
Rs.rate,
11,054
forof(15x12)
=180
months.
What
fixed
and floating
interest
rates?
the rate
interest, once
fixed,
will
not change during the entire period of loan. In floating rate, the rate of interest changes,
EMI are
used to pay off both interest and Principal each month, so, when Ajay is paying this
depending upon the market condition. Home Loans may follow either method depending on the
amountagreement.
every month, he is paying back a part of the 10 Lacs Principal as well as the interest
generated.
What is front ended interest? In this case, the interest (flat rate) is collected in the beginning
and the customer gets net amount. Example: If a person takes a loan of Rs 100 at 10%, the bank
What is
fixed and floating interest rates? In fixed rate, the rate of interest, once fixed, will
takes out Rs 10 and loans Rs 90. The person has to pay back Rs 100 on the Rs 90 loaned.
not change during the entire period of loan. In floating rate, the rate of interest changes,
What is flat rate of interest? In this case, the Bank will calculate interest on the original
depending upon the market condition. Home Loans may follow either method depending on the
amount lent. The interest will not be calculated on the reducing amount even though the debtor
agreement.
repays in instalments. Example: if a loan of Rs 10,000 is taken for a period of 1 year at a flat
interest of 10% - the total repayable is Rs 11,000.
What is front ended interest? In this case, the interest (flat rate) is collected in the beginning
is Reducing
Balance?
HereExample:
the interest isIfcalculated
on the
amount
and theWhat
customer
gets net
amount.
a persononly
takes
a loan
ofofRsPrincipal
100 at 10%, the bank
remaining. Example: if a loan of Rs 10,000 is taken for a period of a year at 10% on reducing
takes out
Rs 10
and quarter
loans Rs
90. The
person
pay calculation
back Rs 100
on2.5%
the on
Rs 90 loaned.
balance
.. every
the person
repays
2500.has
The to
interest
will be
whatever sum is remaining. So, the interest will be 2.5% of 10000 + 2.5% of 7500 + 2.5% of
What is
flat rate of interest? In this case, the Bank will calculate interest on the original
5000 + 2.5% of 2500 by the end of the year.
amount lent. The interest will not be calculated on the reducing amount even though the debtor
Module 3 Notes
M3-2
repays in instalments. Example: if a loan of Rs 10,000 is taken for a period of 1 year at a flat
interest of 10% - the total repayable is Rs 11,000.
What is Reducing Balance? Here the interest is calculated only on the amount of Principal
remaining. Example: if a loan of Rs 10,000 is taken for a period of a year at 10% on reducing
balance .. every quarter the person repays 2500. The interest calculation will be 2.5% on
whatever sum is remaining. So, the interest will be 2.5% of 10000 + 2.5% of 7500 + 2.5% of
5000 + 2.5% of 2500 by the end of the year.
Module 3 Notes
36
M3-2

11.2
What are Retail Loans?

11.2
What
are
Retail
Loans?
What
are
Retail
Loans?
Retail loans are those loans issued to individuals for meeting needs such as housing, education,
11.2
What
are Retail
Loans?
buying
consumer
durables
(like TV,
refrigerator, washing machine, music system etc.) and
meeting personal needs.
Retail loans are those loans issued to individuals for meeting needs such as housing, education,
Retail
loanstypes
aredurables
those
loans
issued
to individuals
for meeting
such asmusic
housing,system
education,
What
are
the
of Retail
Loans?
buying
consumer
(like
TV,
refrigerator,
washingneeds
machine,
etc.) and
buying
consumer
durables (like TV, refrigerator, washing machine, music system etc.) and
meeting
personal
needs.
meeting personal needs.
WhatWhat
are the
types of Retail Loans?
are the types of Retail Loans?
Retail
Loans
Retail
Retail
Loans
Loans
Housing
Loans
Housing
Vehicle
Loans
Vehicle
Housing
Loans
Vehicle
Loans
Loans
Loans
Loans for
Personal/
Overdrafts
Education
Credit
purchase
Loans for of
ConsumptiEducationloansOverdrafts
Card dues
consumer
Personal/
Credit
purchase
of
Loans
for Consumpti
Card dues
on Loans loans
consumer
durables
Overdrafts
Education
Credit
Loans
purchase
durables of on Personal/
Consumpti
Card
dues
loans
consumer
on
Loans
durables
Housing
Loans:
These
givenforfor
purchase
ofhouse
flat, house
and construction
of
Housing
Loans:
Theseare
arethe
the loans
loans given
purchase
of flat,
and construction
of
Loans
also
givenfor
for repairing
repairing oror
making
changes
in thein
oldthe
residence.
house.house.
Loans
are are
also
given
making
changes
old residence.
Vehicle Loans: Auto loans for car, two/three wheeler come under this division. Vehicles
Vehicle
Loans:
loans
for loans
car, two/three
come
under
thisand
division.
Vehicles
Housing
Loans:Auto
These
are the
given forwheeler
purchase
of flat,
house
construction
of
bought for commercial use like taxis or trucks come under Commercial Vehicle Loan.
bought Loans
for commercial
use like
or trucks
come changes
under Commercial
Vehicle Loan.
house.
are also given
for taxis
repairing
or making
in the old residence.
Loans for purchase of consumer durables: These loans are for purchase of consumer
Loansdurables
for
purchase
ofloans
consumer
durables:
These
loans
areunder
for purchase
of of
consumer
Vehicle
Loans:
for car,machine,
two/three
wheeler
come
this
Vehicles
like Auto
refrigerator,
washing
music
system,
kitchen
gadget
etc. division.
In case
the
term
loans
the goods are
hypothecated
in trucks
the favour
of system,
the
Bank.Commercial
durables
like
refrigerator,
machine,
music
kitchen gadget
etc. InLoan.
case of the
bought
for
commercial
usewashing
like taxis
or
come
under
Vehicle
term loans the goods
are hypothecated
the are
favour
of the which
Bank.are not specific.
(Personal)
Loans: Thesein
loans
for purposes
LoansConsumption
for purchase
of consumer
durables:
These
loans are
for purchase of consumer
Generally the purpose does not include purchase or goods or property. These are generally
Consumption
(Personal)
Loans:
loans
are for
purposes
are
not
durables
likeany
refrigerator,
washing
machine,
music
system,
kitchen
gadget
etc.specific.
In case of the
without
tangible security,
they These
are
granted
to
people
with
good
netwhich
worth.
Examples:
Generally
the
purpose
does
not
include
purchase
or
goods
or
property.
These
are
generally
term
loans
the
goods
are
hypothecated
in
the
favour
of
the
Bank.
marriage expenses, vacations, medicals, emergencies.
without
any tangible
security,
they are
granted
to people
with good
net worth.
Examples:
Education (Personal)
loans: LoansLoans:
offered to
students
to help
in payment
the costs
professional
Consumption
These
loans
are for
purposesof which
areofnot
specific.
marriage
expenses,
vacations,
medicals,
emergencies.
education.
These loans
usually
a lower
interestor
rategoods
than other
loans.
Generally
the purpose
does
not carry
include
purchase
or property.
These are generally
Overdrafts:
Overdrafts
are
given
the
Current accounts.
this
facility,
the the
customer
can
Education
Loans
offered
students
to people
help By
inwith
payment
of
costs
of professional
without
any loans:
tangible
security,
theyinto
are
granted
good net
worth.
Examples:
over-draw
(i.e.
in
excess
of
the
credit
balance)
up
to
a
specific
limit.
Interest
is
charged
only
on
education.expenses,
These loans
usuallymedicals,
carry a lower
interest rate than other loans.
marriage
vacations,
emergencies.
the debit balances, generally on daily balance basis. The interest rate is highest in retail loans
Overdrafts:
Overdrafts
areoffered
given in
the
Current
By and
thisearn
facility,
the
customer
can
segment.loans:
It allows
traders/business
people
to use money
in advance
backcosts
in time.
Education
Loans
to
students
to accounts.
help
in payment
ofitthe
of professional
over-draw
(i.e.
in
excess
of
the
credit
balance)
up
to
a
specific
limit.
Interest
is
charged
only
on
education.
These
loans
usually
carry
a
lower
interest
rate
than
other
loans.
Credit Card dues: Credit cards are cards that may be used repeatedly to borrow money or buy
the debit
balances,
generally
on daily
basis.
The
rate isStatement
highestdate
in retail loans
products
and services
on credit.
Credit balance
card allows
certain
freeinterest
credit period.
Overdrafts: Overdrafts are given in the Current accounts. By this facility, the customer can
(monthly)
is fixed.
It shows particulars
of all to
purchases
made in
viaadvance
the credit and
card earn
duringitthe
segment.
It allows
traders/business
people
use money
back in time.
over-draw
(i.e.
in excess
ofpayments
the credit
balance)
to a payable.
specificItlimit.
is to
charged
only on
previous
monthly
period,
made
and the up
balance
allowsInterest
individuals
buy
Credit
Card
dues:
Credit
cards
are
cards
that
may
be
used
repeatedly
to
borrow
money
or buy
the
debit
balances,
generally
on
daily
balance
basis.
The
interest
rate
is
highest
in
retail
loans
now and pay later or to pay back with interest later. Credit Card dues become loans only when
they and
are
overdue.
products
services
on credit. Credit
cardtoallows
certaininfree
creditand
period.
date
segment.
It allows
traders/business
people
use money
advance
earn Statement
it back in time.
(monthly)
is
fixed.
It
shows
particulars
of
all
purchases
made
via
the
credit
card
during
the
Module
Notes Credit cards are cards that
M3-3may be used repeatedly to borrow money or buy
Credit
Card3 dues:
previous monthly period, payments made and the balance payable. It allows individuals to buy
products and services on credit. Credit card allows certain free credit period. Statement date
now and pay later or to pay back with interest later. Credit Card dues become loans only when
(monthly) is fixed. It shows particulars of all purchases made via the credit card during the
they are overdue.
previous monthly period, payments made and the balance payable. It allows individuals to buy
now
and3pay
later or to pay back with interest
later. Credit Card dues become loans only when
Module
Notes
M3-3
they are overdue.
Module 3 Notes
M3-3
37
The Features of Retail Loans
38
Type
Housing loan
Purpose
Purchase/ construction/ up-gradation/ extension etc of houses
Period of
Loan/Term
Medium (3-5 years) to very long period (15-20 years)
Interest
Fixed / floating rate. Cheapest among retail products
Security
Mortgage of the land/house or other immovable property by the borrower in

favour of the Bank
Registration
The mortgage charge is registered with Registrar of Properties
Guarantee
Taken in cases where margin is low or net worth of the borrowers is assessed
as inadequate
Repayment and
Remarks
Generally in equal monthly instalments throughout the loan term
Type
Vehicle Loans
Purpose
Purchase of vehicles (2/3/4 wheelers) for own use or as taxis
Period of
Loan/Term
3-5 years generally, depending on the estimated cash flows and nature/ cost
of vehicle
Interest
Generally floating rate; the rate is higher than housing loan
Security
Hypothecation of the vehicle purchased in favour of the Bank
Registration
Hypothecation charge is registered with the Road Transport Commissioners

office
Guarantee
Surety or personal guarantee is stipulated in case of taxis
Repayment and
Remarks
EMI. Can be more frequent
Type
Loans for purchase of consumer durables
Purpose
Purchase of consumer durables like gadgets etc.
Period of
Loan/Term
18- 48 months, depending on the cost/ nature of the product and cash flows of
the borrower
Interest
Floating. The rate is higher than home/ vehicle loans
Security
Hypothecation of the assets purchased
Registration
Not applicable
Guarantee
Generally not required, unless cash flow of the borrower is not adequate
Repayment and
Remarks
EMI. Can be of other frequency.
Module 3 Notes
M3-4
Debt Recovery Agents Certificate

Training
Certificate Program
in Debt Recovery
Type
Consumption (Personal) Loans
Purpose
Travel, marriage or other function/ event requiring large expenses
Period of
Loan/Term
Short-term loan or Demand loan or overdraft
Interest
Floating basis. The rate is higher than other loans in retail segment
Security
No tangible security, but it may be asked for in cases where the net worth/
cash flows are not adequate
Registration
Not applicable
Guarantee
Required, if net worth / cash flows are not adequate and tangible security is
not available
Repayment and
Remarks
Remarks: Granted mostly to salaried and self-employed professionals,

businessmen in high income brackets
Type
Education loans
Purpose
Payment of the costs of professional education
Period of
Loan/Term
Medium
Interest
Choice between fixed and floating rate. Private or Foreign Banks charge fixed
interest rate.
Security
Unsecured
Registration
Not applicable
Guarantee
Not applicable
Repayment and
Remarks
EMI. Repayment starts 1 year after course completion / 6 months after

obtaining employment (whichever earlier)
Type
Overdrafts
Purpose
Omnibus or general purpose, for meeting contingencies and ad hoc cash

requirement
Period of
Loan/Term
Payable on demand of the Bank
Interest
Floating basis. Highest rate in Personal (or retail) segment
Security
Unsecured. But liquid security (e.g. fixed deposit receipts, bonds) is asked for
in cases of large sum/ long period requirements, etc.
Registration
Not applicable
Module 3 Notes
M3-5
39
Guarantee
Generally not required if above said security requirements are met.
Repayment and
Remarks
Remarks: Documentation is very easy and quick for existing account holders
Type
Credit Card dues
Purpose
Borrow money or buy products and services on credit
Period of
Loan/Term
Free credit period: Up to 45-60 days from purchase date (depending on the
billing cycle).
Interest
20-24% p.a. on the over-due amount, plus service tax
Security
Unsecured
Registration
Not applicable
Guarantee
Not applicable
Repayment and
Remarks
One time or fixed date of

payment
each month
Debt
Recovery
Agents Certificate Training
Understanding
Retail
Loans
Exercise
Understanding
Retail
Loans
Exercise Understanding Retail Loans
For each of the following cases fill in the cell on the right with information
For each of the following cases fill in the cell on the right with information
What kind of loan can be given to this person for this purpose?
What kind of loan can be given to this person for this purpose?
What are the types of interest that might be charged high, low, EMI?
What are the types of interest that might be charged high, low, EMI?
What kind of guarantee is required who can be a guarantor?
What kind of guarantee is required who can be a guarantor?
1. Rohan is getting married he
1. Rohan is getting married he
needs money to spend a large
needs money to spend a large
amount on the wedding
amount on the wedding
reception.
reception.
2. Lakhan Lakhpatis son has
managed to get admission into a
prestigious management college
but he has to pay a years fee in
advance.
advance.
3. Satish wants to purchase a
computer for his family.
40
4. Rohans brother has come to

Amirpur and wants to start some
Amirpur
and wants to start some
Module
3 Notes
business.
He would like to
business. He would like to
purchase a taxi and use it to earn
money through hire.
money through hire.
M3-6

advance.


Amirpur and wants to start some
business. He would like to
money through hire.
5. The owners of Shopping Mall

want to stock up a lot of gift
items before the Diwali. They
need to purchase these items in
Hong Kong and Taiwan . They
will need a sum of money to pay
cash to bring in these items.
6. Khubsoorat Factory wants to

give a bonus to all their staff
before the Diwali. They will be
able to earn it back through end
Module 3 Notes

M3-7
of year profits.
7. Nilima Lakhpati, Lakhans

daughter, has got a job in the
Shopping Mall as a Sales
Manager. Someone from the
Bank calls to offer her a Credit
Card.
8. Satish decides to purchase a plot

of land to build his own house.
41
11.3
Growth
of of
Retail
Loans
Growth
Retail
Loans
What does Retail Banking Include?

Business with individual customers in the following areas:
Liabilities
Definition: The Banks define
any money it has to pay back
to depositors as Liability.
Assets
Definition: The Banks
classify recoverable loans as
Assets of different types
according to how they are
being paid back.
Other (Fee-based)
Definition: The services that
the Banks render in exchange
of a certain amount of fee.
Deposits
Loans
Credit Cards
Borrowings
Advances
Remittances
Mortgages, Hypothecations
Mutual Funds
Insurances
Safe Deposit Vaults
Services
Fixed Deposits, Current

Account, Savings Account
Retail Banks can now deal with customers in multiple ways:
Multiple Products (deposits, credit cards, insurance, investments and securities)
Multiple Channels of Contact (call centre, branch, Internet and kiosk)
Multiple Types of customers (eg. General consumers, small business, corporate)
Why has there been a growth in Retail loans?

There has been a high growth of Retail loans both in the number and amount especially in
recent years. The main reasons for the spurt in growth are:
More surplus cash: Fast growing population of earning members, more working
women, rising income levels of middle and higher classes.
Growing consumerism: more need for vehicles, housing, consumer goods and
willingness to take loans for these.
Migration to cities: Need for urban lifestyle and housing.
Joint family is becoming nuclear: rapid growth in the number of nuclear families has
given rise to consumer needs.
Growth in credit cards usage: it is easy to carry and offers credit period plus loans for
repayment of credit dues.
What are the Risks?

Delinquency : Due to growth in Retail Loans risk for the Bank is growing delinquency or
non-payment of dues. It is expressed as a number. It is generally measured on the basis of Days
from Payment Due (DPD) and Total Principal Outstanding (POS).
42
Module 3 Notes
M3-9
11.4
Credit Cards
Credit
Cards
What is a Credit Card?

A credit card is a small plastic card issued to users. The issuing Bank grants a facility of credit
to the customer by which he can borrow money or buy products and services on credit. A free
credit period of upto 45-60 days from purchase date (depending on the billing cycle) is given.
Statement date (monthly) is fixed. It shows particulars of all purchases made via the credit card
during the previous monthly period, payments made and the balance payable.
Description of a Credit Card: A credit card is small plastic card around 8.5 cm by 5.5 cm. It
has the name and the account number of the holder embossed on it. In addition, the end of the
month up to which the card is valid will also be embossed and has a specimen signature panel
on the reverse. In addition to the number of the reverse of the card contain a three-digit number
which is to be kept in confidence and used as a measure to establish that the user is in
possession of the card while carrying out the transaction. The name of the company like VISA
or Master Card who run credit card operations is also mentioned on the front face of the card.
The card issuer should normally get the card holder to sign on the specimen signature panel in
his presence before parting with the credit card.
The limit up to which the cardholder can make purchases in a month is also informed to the
cardholder; this limit is called the card-limit. A part of this limit is permitted to be used for
withdrawing cash for emergency purposes and service fee for such withdrawals is levied. Many
Banks also have credit cards, also act as ATM cards.
Who are the parties involved in a Credit Card business?
There are a number of parties involved in the credit card business. They are,
Card Holder: The person on whose name the card has been issued.
Card Issuing Bank: This is the Bank which identifies the customer and issues the card.
This Bank raises a bill on the customer according to the billing schedule. The customer
does not need to have a savings account with the Bank.
Merchant: is the person or concern who/which has accepted payment through credit
card.
Merchant Bank and Acquiring Bank: Once the card is swiped in the shop, the merchant
will seek credit from his/her Bank. The Bank which reimburses the merchant is known
as the merchant Bank.
Collecting Bank: The Merchant Bank will claim the payment from the card issuing
Bank called the collecting Bank.
Companies like VISA and Master Card run credit card operations and they capture all
deals and settle the dues among the different parties in the chain.
What are the other types of cards?

Charge card: In such cards transactions are added over a period of time generally a month
and the total amount charged, i.e. debited to the account
Debit card: Debit cards are same as the credit cards. The only difference in this card is that
the account of the cardholder is debited as soon as each transaction is made. The
cardholder has an existing account with the issuing Bank.
Module 3 Notes
M3-10
43
Companies like VISA and Master Card run credit card operations and they capture all
deals and settle the dues among the different parties in the chain.
Participant
What areHandbook
the other types of cards?
Charge card: In such cards transactions are added over a period of time generally a month
and the total amount charged, i.e. debited to the account
Debit card: Debit cards are same as the credit
cards.
The onlyAgents
difference
in this cardTraining
is that
Debt
Recovery
Certificate
the account of the cardholder is debited as soon as each transaction is made. The
cardholder has an existing account with the issuing Bank.
Module 3 Notes
M3-10
Key Words
vehicle loan
personal loan
consumer durable
loan
education loan
credit card dues
housing loan
mortgage
hypothecation
secured loan
unsecured loan
EMI
interest
terms of payment
security
guarantee
credit cards
MAD
TAD
Net Interest
Income
Retail loans
Asset
Acquiring
Bankthe Credit
Collecting
Understanding
Card Bank
Member card
Liability
Delinquency
Merchant Bank
Charge card
Debit card
Smart card
Recovery
Agents Training
Certificate
DebtDebt
Recovery
Agents Certificate
Front Face of a Credit Card

Understanding the Credit Card
Understanding the Credit Card
Reverse Side of a Credit Card
44
Training
ProgramTraining
in Debt Recovery
Debt Recovery AgentsCertificate
Certificate
12.2
Loans-Types
of of
Security
Creations
Loans-Types
Security
Creation
Loans are of two types secured and unsecured.

Secured loan: A secured loan is a loan in which the borrower promises some asset (e.g. a car or
property) as collateral for the loan. This then becomes a secured debt to the creditor who gives
the loan. In case the borrower fails to pay back, the creditor takes possession of the asset used
as collateral and may sell it to fulfil the debt by regaining the amount of money lent to the
borrower. The security or charge can be created by mortgage, hypothecation or pledging.
Unsecured loan: An unsecured loan is a loan that is not backed by collateral. Unsecured loans
are based only upon the borrower's credit rating. As a result, they are often much more difficult
to get than a secured loan. Unsecured loans also have the greater number of defaults in
repayment.
What is Security creation?
Banks need a reasonably sure way of getting the loans repaid. They need to create security.
How are loans made secure?
Basic checks like identity proof, residence proof should be taken to prove how genuine
the borrower is.
Cash flow is examined. Loan should be granted after checking the applicants capacity
to repay the loan.
Depending on the case, mortgage or hypothecation should be made in case of home or

vehicle (movable assets) loans.
Rules for security:

During the period of loan (till repayment)
It is the duty of the debtor to maintain the asset.
The asset should be clear of encumbrances.
He should make sure that all applicable taxes, duties, any government levies, charges
are paid time to time.
The debtor should ensure that the asset is insured (if insurable), especially in case of
motor vehicles. He should also ensure to renew the insurance once the policy has
lapsed. These clauses are mentioned in the agreement.
The creditor upon serving a notice has the right to inspect the asset anytime.
Upon loss theft or damage of the asset the debtor should inform the creditor about the
same.
Module 3 Notes
M3-14
45

Types of Security
Types of Security
Security
Types of Security
Security
Security
Securing the
loan
Securing the
loan
Creating
Security
Securing the
loan
Creating
Security
Creating
Security
done
Can
done
CanCan
be be
done
Canbebedone
done Can be
Can
be done
Hypothecatio Hypothecatio
Pledge
by
by
by
by
by
by Mortgage Mortgage
n
Checking
Checking
taking a
n
Checking
Checking
taking a
Credit
cash
flow
Guarantor
CanCredit
be done
Can
be
done
Can
be
done
cash flow
Guarantor
What
an immovable property
to a lender as a Hypothecatio
Mortgage
by is Mortgage? Pledging
by of the documents of by
security for a loan.
n as a
Checking
Checkingof the documents
taking of
a an immovable property to a lender
What
is Mortgage? Pledging
forIt ais loan.
a transfercash
of charge,
from the owner
to the mortgage lender, on the condition that
Credit
flow
Guarantor
security
this will be returned to the owner of the real estate when the loan is repaid.
It is
a Debtor
transfer
ofand
charge,
from
the owneroftoanthe
mortgageproperty
lender, on
condition
The
owns
uses
property.
What is Mortgage?
Pledging
of the
the
documents
immovable
to the
a lender
as a that
this
will
to the owner of the real estate when the loan is repaid.
What
is aHypothecation?
Right of ownership of assets as guarantee to secure a loan without
security
for
loan.be returned
transfer of Debtor
possession to theand
Bank.
thethe
property.
ItThe
is a transferowns
of charge,uses
from
owner to the mortgage lender, on the condition that
The borrower retains legal ownership of the asset and can use it but provides the lender
this
willa be
returned
toover
thethe
owner
ofuntil
the the
real
estate
when
the loantoissecure
repaid.a loan without
What is
Hypothecation?
Right
of
ownership
ofdebt
assets
as
guarantee
with
security
interest
property
is paid
off.
transfer
of
possession
to
the
Bank.
The
registration
the property
is in
the name of the Bank
The
Debtor
ownsofand
uses the
property.
Lakhan
Lakhpati
gets legal
loan from
Bank for of
buying
aasset
lorry.and
hypothecated
the lorry
borrower
retains
can use to
it but
provides
thewithout
lender
WhatExample:
is The
Hypothecation?
Right
of ownership
ownership
ofthe
assets
as He
guarantee
secure
a loan
to thewith
Bankaassecurity
security. interest over the property until the debt is paid off.
transfer of possession to the Bank.
What is Pledge? Something delivered as security for the payment of a debt or fulfilment of a
Theand
registration
of the
property
inorthe
name
of and
the Bank
subject to
forfeiture
on
failure
tois
pay
the
promise.
promise,
The
borrower
retains
legal
ownership
offulfill
the
asset
can use it but provides the lender
with
a security
interest
over
the
property
debt aislorry.
paid off.
Lakhan
There
is physical
transfer
of the
charge.
Example:
Lakhpati
gets
loan
from
Bankuntil
for the
buying
He hypothecated the lorry
to the
Bank
as
security.
loan availed by pledging gold.
Example:
The registration
of the property is in the name of the Bank
What
is the difference
betweendelivered
Mortgage, Hypothecation
andthe
Pledge?
What
is Pledge?
Something
as Bank
security
of ahypothecated
debt or fulfilment
of a
Example:
Lakhan Lakhpati
gets loan from
forfor
buyingpayment
a lorry. He
the lorry
there
is
transfer
of
interest
in
the
immovable
property
till
the
re-payment
In
a
mortgage
subject
to forfeiture on failure to pay or fulfill the promise.
topromise,
the Bankand
asthe
security.
of
loan. The ownership papers of the property are kept with the Bank till repayment
is made.
There
is physical
transfer
of theascharge.
What is Pledge?
Something
delivered
security for the payment of a debt or fulfilment of a
promise,
and
subject
to forfeiture
on gold.
failure to pay or fulfill the promise.
Example:
loan
availed
by pledging
Module 3 Notes
M3-15
isThere
is physicalbetween
transfer of
the charge.
What
the difference
Mortgage,
Hypothecation and Pledge?
Example:
availed by
pledging
gold.of interest in the immovable property till the re-payment
there
is transfer
Inloan
a mortgage
of
the
loan.
The
ownership
papers ofHypothecation
the property areand
keptPledge?
with the Bank till repayment
What is the difference between Mortgage,
is made.
In a mortgage there is transfer of interest in the immovable property till the re-payment
of the loan. The ownership papers of the property are kept with the Bank till repayment
Module 3 Notes
M3-15
is made.
46
Module 3 Notes
M3-15
Pledge
Pledge

Hypothecation involves movable property, which is given as security for the loan.
Possession of movable property remains with the debtor. The registration papers are in
the
Hypothecation
name of the involves
Bank. movable property, which is given as security for the loan.
Possession of movable property remains with the debtor. The registration papers are in
In
caseofofthe
pledge
thethe
name
Bank.too, movable property is the security. Here, the creditor is given
possession of the movable property. Example: Jewellery which is pledged stays
physically
In the casewith
of pledge
too, movable property is the security. Here, the creditor is given
the Bank.
possession of the movable property. Example: Jewellery which is pledged stays
What is physically
Collateral?
with the Bank.
In
lending
agreements
What is Collateral? collateral is a borrower's pledge of specific property to a lender in
addition to the security, to secure repayment of a loan. Example: Bonds, shares, Insurance
In lending agreements collateral is a borrower's pledge of specific property to a lender in
certificates.
addition to the security, to secure repayment of a loan. Example: Bonds, shares, Insurance
13.2
certificates.Asset Classification
13.2
Asset
Classification
Asset
Classification
Banks classify recoverable loans as Assets of different types according to how they are being
paid back.
Banks classify recoverable loans as Assets of different types according to how they are being
Assets
or loans into four types:
paid back.
or
Standard
Assets
Assets
loans into
four types:
Substandard
Assets
Standard Assets
Doubtful
Assets
Substandard
Assets
Loss
Assets
Doubtful
Assets
An
either NPA (Non- Performing Asset) or non-NPA. While the Standard Assets are
asset
Lossis Assets
not NPAs, all three remaining assets are grouped under NPA category. In other words, NPA
An asset
either
NPA (Non- Performing
Asset)
or non-NPA.
category
hasisthree
sub-categories:
Substandard,
Doubtful
and LossWhile
assets.the Standard Assets are
not NPAs, all three remaining assets are grouped under NPA category. In other words, NPA
category has three sub-categories: Substandard, Doubtful and Loss assets.
Type of Asset
Due for
Features
Type of Asset
Standard Assets
Standard Assets
Due for
Paid back
regularly
Paid back
regularly
Give their interest andFeatures

Principal instalments on time.
Called performing assets as they generate regular
Give their
and return
Principal
on time.
interest
to theinterest
Bank and
the instalments
due Principal.
Calledcan
performing
assets as they generate regular
Banks
earn profits.
interest to the Bank and return the due Principal.
Banks can earn profits.
What is an NPA?
A
loanisthat
not producing its stated Principal and interest payments and so an asset which is
What
an is
NPA?
not producing income is called a Non-performing Asset (NPA).
A loan that is not producing its stated Principal and interest payments and so an asset which is
If
EMIs remaining
one after
another,
not3 producing
income unpaid
is calledcontinuously
a Non-performing
Asset
(NPA).then their loan would fall in the
category of NPA (over-dues for more than 90 days). The following three NPA categories of
If 3 EMIs
remaining
continuously
one afterinanother,
their
loan would
fall due
in the
debtors
is marked
by unpaid
delay/ avoidance/
resistance
paymentthen
of the
overdue
amount,
to
category
of
NPA
(over-dues
for
more
than
90
days).
The
following
three
NPA
categories
of
their financial difficulty or as they are not interested to pay or other reasons.
debtors is marked by delay/ avoidance/ resistance in payment of the overdue amount, due to
their financial difficulty or as they are not interested to pay or other reasons.
Module 3 Notes
Module 3 Notes
M3-16
M3-16
47
Type of Asset
Due for
Substandard
Assets
For more than

90 days but
less than or
equal to 12
months
It is considered NPA
Doubtful Assets
Sub-standard
category for a
period of 12
months
Called doubtful, since their recovery seems doubtful
on the basis of the facts, condition and values of the
security for the loan
Considerable
period of time
Loss has been identified by the Bank or auditors, or
the RBI inspection
The amount has not been written off wholly.
Loss assets are considered not collectable.
Loss Assets
Features
They are of little value as assets.

However, there may be some recovery value in the
long term, in some cases.
Because of the non performance or non receipt of interest and/or Principal, the Banks money in
the form of funds get blocked. Then, it is not available for further banking business and thus the
profit margin of the Banks goes down.
13.3 TheThe
Bucket
System
Bucket
System
What are Buckets in Loan Recovery?
It is a term used by Banks to indicate the period of default.
Time bucket classification could vary from bank to bank. Generally, the first bucket
includes those accounts which are overdue for a period of less than 91 days. As and
when the default period increase the banks will move the dues to next bucket. It is often
said that the account has slipped into the next bucket or roll forward
The classification into time buckets is for the purpose of focusing on recovery and to
ensure that the accounts do not go into higher buckets. The accounts in higher buckets
call for different collection strategies than those which are in a lower bucket.
Some important terms:

Roll back: A delinquent account rolls back from a higher bucket in the previous month to a
lower bucket in the current month. This happens when part payment is made.
48
Roll Forward: A delinquent account rolls forward to a higher bucket in the current month from
a lower bucket in the previous month. This happens when no payment is made during that time
frame.
Module 3 Notes
M3-17
Debt
Debt Recovery
Recovery Agents
Agents Certificate
Certificate Training
Training
Normalisation:
Normalisation: When
When all
all outstanding
outstanding EMIs
EMIs are
are paid
paid by
by the
the customer
customer in
in aa particular
particular bucket
bucket the
the
case
is
said
to
have
normalised.
case is said to have normalised.
Stabilisation:
Stabilisation: When
When the
the delinquent
delinquent account
account remains
remains in
in the
the same
same bucket
bucket in
in two
two consecutive
consecutive
months
(the
delinquent
customer
pays
one
instalment)
then
the
account
is
said
to
months (the delinquent customer pays one instalment) then the account is said to stabilize.
stabilize.
Key
Key Words
Words
Sub
Sub standard
standard
asset
asset
loss
loss asset
asset
doubtful
doubtful asset
asset
standard
standard asset
asset
NPA
NPA
bucket
bucket
Secured
Secured loan
loan
Unsecured
Unsecured loan
loan
Mortgage
Mortgage
Hypothecation
Hypothecation
Pledge
Pledge
Collateral
Collateral
Asset
Asset
NPA
NPA
Roll
Roll back
back
Roll
Roll Forward
Forward
Normalisation
Normalisation
Stabilisation
Stabilisation
13.4
13.4
Case
Studies
Case
Studies
Case
Studies
Situations
Situations for
for discussion:
discussion:
Case
Case 11
Ismail
Ismail had
had taken
taken aa loan
loan for
for his
his sisters
sisters wedding
wedding
back.
But,
due
to
some
problems
about
two
years
about two years back. But, due to some problems
he
he is
is not
not being
being able
able to
to give
give the
the refund
refund instalments
instalments
for
last
1
year
4
months.
What
kind
of
asset
for last 1 year 4 months. What kind of asset is
is this
this
to
the
bank?
to the bank?
Is
Is there
there any
any role
role of
of aa DRA
DRA in
in this
this case?
case?
Is
Is this
this loan
loan secured?
secured?
Case
Case 22
Mohan
Mohan had
had taken
taken aa loan
loan about
about 33 years
years back
back for
for
For
more
than
last
two
years
his
business.
he is
is
his business. For more than last two years he
not
being
able
to
give
his
instalments
as
his
not being able to give his instalments as his
business
business has
has suffered
suffered loss
loss and
and is
is almost
almost closed
closed
down.
If
the
person
cannot
pay
the
loan
down. If the person cannot pay the loan at
at all
all
what
kind
of
asset
is
it
for
the
Bank?
what kind of asset is it for the Bank?
How
How is
is the
the class
class of
of Asset
Asset determined
determined in
in this
this
case?
case?
Case
Case 33
Ramchand
Ramchand has
has taken
taken housing
housing loan
loan from
from aa Bank
Bank
and
his
EMI
is
Rs.
15,000/-.
He
pays
this
and his EMI is Rs. 15,000/-. He pays this EMI
EMI
every
every month
month regularly
regularly in
in the
the first
first week
week of
of the
the
month
as
soon
as
he
gets
his
salary.
What
kind
month as soon as he gets his salary. What kind of
of
asset
asset is
is his
his loan
loan to
to the
the Bank?
Bank?
49
Module
Module 3
3 Notes
Notes

Corporation Limited
M3-18
M3-18

What security does the Bank have in this case?
Is there any role of a DRA in this case?
Case 4
Ganesh has bought a taxi financed by the bank.
What type of loan has he taken?
To whom does the taxi belong till the loan is
repaid?
Is this mortgage, hypothecation, pledge?
If his taxi gets damaged what should he do
immediately?
Case 5
Shalini has done shopping for her wedding from
Paradise Shopping Centre through her Credit
Card from MNO Bank. Paradise Shopping Centre
does its banking transactions through WW Bank.
Who is the Collecting Bank in this case?
Who is the Issuing Bank in this case?
Who is the Merchant Bank in this case?
Who is the Merchant?
Is there any limit up to which Shalini can make
purchases with this card?
Case 6
Suhail has taken loan for buying a motor car. He
paid his first two EMI in time but now for last three
months, he has not being able to pay his EMI.
What kind of asset is his loan to the Bank?
What security does the Bank have in this case?
Is there any role of a DRA in this case?
Case 7
Rajiv has taken a loan for his daughters
marrriage. What type of loan is this?
Is this a secured loan?
50
Module 3 Notes
M3-19

What rate of interest is charged for this loan?

newspace
learning
from this
Use this
to record
yourmodule
51
Module 3 Notes
Module 3 Notes

M3-20
M3-20


Module 3 Notes
52
M3-20

15.1
Growing NPAs
Growing NPAS
Please fill up the space provided with the most common reasons of default for specific types of
loans
Type of Loan
Reasons for default
Housing Loan
Vehicle Loan
Personal Loan
Loans for
Consumer
Durable
Education
Loan
Overdrafts
Credit Cards
Dues
53
Module 4 Notes

Corporation Limited
M4-1
15.2
Need
for agency
Need for agency
How do NPAs cause loss of Banks Principal?

If the debtor does not pay back the interest and/or Principal, the Banks money get blocked and
is not available for further Banking business. So, not only does the profit margin of the Bank
goes down but the Principal of the Bank also gets lost.
Growing NPAs in Retail loans-External agents:
There is a fast growth of non-payment of loans. Therefore, there is a rise of Non Performing
Assets (i.e. Principal and/ or interest in default for more than 90 days) or those which might be
NPAs. Many Banks have started outsourcing debt collection function, instead of doing it
internally by their own staff.
What are the Debt Collection Agencies?
Debt Recovery Agents are employed by Debt Collection Agencies who work for Banks. They
have to follow some terms and conditions. Debt Collection Agencies are third-party businesses
that collect due of loans and advances for Banks in exchange for a fee.
Who are Debt Recovery Agents (DRA)?
A person engaged by Bank for collecting specified loans, or advances or other kind of debts
from the debtors (or borrowers) following some rules is a Debt Recovery Agent.
Example: Ram has taken a car loan. The Bank engages Agency X for collecting dues from Ram
(and other debtors) after they remain unpaid on the due dates. Agency X employs Agent Y to
follow up with Ram. So, Y will be called a Debt Recovery Agent (DRA).
For best results in this area, the Debt Recovery Agents should understand their contribution to
the Banks profit & loss, the regulations governing their work as DRAs, their duties and
responsibilities as well as their rights, soft-skills and strategies needed for collections as well as
the reporting and monitoring process.
Paperwork
required?
Who is a DRA?
Rules & Policies
Duties &
Functions
Special skills &

strategies
Guidelines for
process
54
Module 4 Notes
M4-2

What are the advantages of Debt Collection Agencies (DCAs)?
By assigning debt recovery function to DCAs banks can utilize their staff for
What are
the advantages
of Debt Collection
Agencies (DCAs)?
developing
more remunerative
new business.
By
assigning
debt recovery
function
DCAs banks can utilize their staff for
DCAs
being specialists
bring
in moretorecoveries
developing more remunerative new business.
Skillfully negotiated debt recovery can save on litigation costs
DCAs being specialists bring in more recoveries
There are few disadvantages such as cost involvement and bank loosing potential customers
Skillfully
negotiated
debt recovery can save on litigation costs
due to bad
behavior
of the DCAs.
There are few disadvantages such as cost involvement and bank loosing potential customers
Debt Recovery
Debt Collection
dueKey
to bad
behavior of the DCAs.
NPA
Words
Agents
Agencies
Key Words
15.3
15.3
Debt Recovery
Agents
Soft skills - Empathy
Debt Collection
Agencies
NPA
Do you think if you know and follow the rules, regulations and the process you will be a
successful DRA?
Do
thinkhelp
if you
know
and follow
rules,effectiveness
regulations and
process
you
will isbe a
No,you
the rules
in the
process
but thethe
personal
and the
the skill
of the
DRA
successful
DRA? Therefore success in recovery will depend on compliance of norms as well
equally important.
as
arepersonal
complimentary
to each
other
and will
bring
good
No,collection
the rules skills
help inand
thestrategy.
process Both
but the
effectiveness
and
the skill
of the
DRA
is
recoveryimportant.
by a goodTherefore
combination
of these
two. will depend on compliance of norms as well
equally
success
in recovery
as
collection
skillsinclude:
and strategy. Both are complimentary to each other and will bring good
Collection
Skills
recovery by a good combination of these two.
Communication skill
Collection Skills include:
Listening skill
Communication skill
Inter-personal skill
Listening skill
Persuasive skill and
Inter-personal skill
Negotiation skill
Persuasive skill and
Negotiation skill
55
Module 4 Notes
Module 4 Notes
M4-3
M4-3

15.4
Case Study
Case Study
Cash-Safe Bank had granted a personal loan of Rs. 80,000 to Anil, a lower middle class
individual, for consumption needs. The loan was to be repaid in installments by Anil. The loan
was without any tangible security and also without any third party guarantee. The borrower
Anil could not repay some installments in time and therefore the loan became overdue.
The Cash-Safe Bank gave Anils case to recovery agent, Raja, along with some other overdue
loans for recovery. Raja called Anil a couple of times and also visited him at his residence. As
Anil was not able to repay the amount in default, Raja used abusive and harsh language in front
of his wife and daughters. During one of the visits Raja and his colleagues forcibly took away
some of the belongings at Anils house in front of his family and also used threatening language
for payment of the dues. The neighbours too became aware of this as the rowdy group of Raja
and his friends visited Anils place frequently. Anil felt very humiliated and also depressed.
Raja refused to even listen to his explanation.
One day, seeing that he was unable to repay the dues, Anil committed suicide. He left a suicide
note, blaming Raja for harassing him endlessly. He mentioned the insults and abuses he had
suffered at the hands of Raja and his friends in front of his wife and daughters. He also
mentioned the threat Raja gave that he would suffer dire consequences if he failed to repay the
overdue amount by that date.
Following the suicide death of Anil, the local police arrested Raja and his colleagues (who used
to accompany Raja during his visits) on charges of abetment of suicide. A case was also filed
against the Cash-Safe Bank, which had to pay an ex-gratia payment of Rs 15 lacs to Anils
family. The Bank has also been questioned by the Reserve Bank of India and the Banking
Codes and Standard Board of India about its recovery practices and due diligence norms in
engaging recovery agents. The incident has also been published in the press and has damaged
the Banks reputation in the public eye.
Questions to be discussed by your group:
a. Was the recovery process used by Raja the correct way to proceed?
b. What do you think could be wrong with the methods used?
c. Do you think that Anil was able to pay the debt?
d. Why did he commit suicide?
e. Could this have been avoided?
f.
What was the damage caused to each of the parties in this case? Anil, his
family, Raja, his friends, the Cash-Safe Bank?
g. What measures should Cash-Safe Bank take to avoid these kinds of damages?
56
Module 4 Notes
M4-4
16.1
Difficult debtors
Difficult debtors
Who are difficult debtors? How to deal with them?

Debtors who can pay but do not want to pay are called difficult debtors or willful
defaulters. Such debtors have means and assets to pay the debt but do not want to pay.
Generally,
They would avoid responding to the calls of the recovery agents on one pretext or
another.
They would avoid meeting the recovery agent, by canceling the appointment at the last
hour and repeat this avoidance.
In such cases the agent should
Document every effort made to contact
Record the responses of the debtor during calls and personal visits with the knowledge
of the debtor.
Send letters by email/ registered post giving full details of dues and efforts made to
contact him by calls, visits which proved futile.
In spite of the above efforts if the borrower does not respond positively a legal notice should be
sent to him directing him to pay the dues within a specified period failing which a suit would be
filed to recover the dues with higher interest and the legal costs.
This may bring pressure on the debtor but if he still fails to repay the dues then the steps should
be take to repossess the security if any or a suit should be filed to recover the dues.
Case Study
Shravan receives a phone call at 8:00 p.m. from a person who identifies himself as a recovery
agent for ABC Bank. "I've had a difficult time locating you, Mr. Shravan" he says, "I'm calling
you about the money you own to ABC Bank. You must pay or we will be forced to take strong
action against you."
Shravan objects, stating he has never purchased anything through the credit card.
Analyse the situation and suggest what the DRA is required to do at this point?
a. Is this a case of a difficult debtor? Could it be true that Shravan knows nothing about
the dues? How can you find out?
b. Should the DRA inform Shravan about the previous efforts to locate or contact him?
c. What else can the DRA do over the phone? [Request a meeting to discuss the evidence
and offer to help resolve the problem.]
57
Module 4 Notes

M4-5
16.2
Other Soft skills
Other Soft skills
Persuasive Skill
The debt recovery agent who has good communication skill and good listening skill is able to
persuade a debtor to repay the dues by establishing a good rapport and winning the trust of the
debtor.
Following are some of the elements of persuasion a debt recovery agent may follow in
persuading the debtor to pay the dues and should:
Explain that the bank lends money out of the deposits collected from the public and the
repayments of the loans by the particular debtor and others as per the loans terms
would enable the bank to pay the deposits when demanded by the depositors.
Explain your duty of collection of dues on behalf of the principal and that you have no
authority to waive/ reduce or postpone the recovery, which only the principal can do.
Show interest / concern for the debtor by understanding his/ her problems and say that
you would try to give assistance to the extent possible.
Explain that non-payment may adversely impact the debtors credit history, which may
make his/ her future borrowing with any bank costlier and difficult. This should induce
the debtor to pay.
Also explain the debtor politely that non payment of dues will not only amount to
breach of loan agreement but would result in higher rate of interest, penalties, legal
action and repossession of security.
Negotiation Skill
Banks may delegate powers of compromise to the recovery agents who have proven expertise
in negotiating and recovering a large portion of the doubtful debts, described as follows:
Where the security documents are missing or barred by law of limitation
Where assets charged to the bank have deteriorated in quantity and quality and do not
cover fully the outstanding dues in the debtor/s account.
Where the dues are totally unsecured.
In such cases the recovery agent is granted specific power to negotiate with the debtor in terms
of the agency agreement and may relate to reduction of interest or principal or both and its
percentage to total dues. Before finalizing the deal the agent may seek final approval by the
principal, then sign the negotiated settlement and effect the recovery for a fee which is higher
than in normal recovery cases.
Key Words
DCA
Communication
skill
Persuasive skill
Negotiation skill
difficult debtors
58
Module 4 Notes
M4-6
Listening skill
Inter-personal
skill
16.3
Case
CaseStudies
Studies
Situations for discussion:

Case 1
A
Sheela works in a hospital

and has shifting duty. Can a
DRA visit her in a time that is
outside the banks prescribed
timing, since she is available
only at that time?
She has requested not to give

her a call between 1 pm to 4
pm as she has emergency
duty. Any other time is okay
for her. Should the DRA
accept such request?
Sheela is confused about

some details of the loan
repayment. She requested the
DRA to explain it over phone.
Should this request be
honoured?
Generally Sheela receives her

salary at around 5th of a
month. She has requested the
DRA to collect it around 8th.
Should a DRA take this into
consideration?
Case 2
A
Pavan Singh has not paid 6 of

his EMI on the vehicle loan
he has taken for his
autorickshaw. DRA Rajan
will go to his place for a
follow up visit. At what time
should Rajan visit?
How should Rajan start his

conversation?
During the talk Rajan comes
59
Module 4 Notes

Corporation Limited
M4-7

to know Pavan Singhs
mother has passed away a day
before. What should he do?
Case 3
A
DRA Arjun is dealing with a

case where the due of an
unsecured loan is not paid
EMI for 5 months. The
customer has requested for a
months time and promises to
be regular after that. What
should Arjun do?
Unfortunately, the customer

falls seriously ill in the next
month. What should Arjun
do?
After getting well the

customer promised Arjun to
give him a due check, if
Arjun can visit him at 10 pm
at night. Should Arjun go?
The customer requests Arjun

to cut down the due amount
because of his poor financial
condition. What should Arjun
do?
Case 4
A
Prakash Singh is a defaulter

and he is avoiding all
attempts of the DRA to
contact him. What kind of
debtor is he, normal, difficult
or doubtful?
What steps should the DRA

take?
Prakash does not respond

back even after this. What
should be done?
60
Module 4 Notes
M4-8

Case 5
A
DRA Nikunj is angry with a

debtor. He promises Nikunj a
cheque every day but once
Nikunj reaches his place he
gives some excuse. With the
monthly target this is very
disturbing for him. He goes to
the debtors house one very
early morning and threats
him. Why was Nikunj wrong?
Since he was in a bad mood

he was quite rude in the next
visit he made to another
debtor. This was the first visit
and the debtor felt offended.
Why was Nikunj wrong in
this case?
Case 6
A
Rajen has taken a home loan.

Due to his daughters
marriage he has cash shortage
and is not paying his EMI.
When a DRA contacted and
persuaded him, he started
regularizing the repayment.
What kind of debtor is he,
normal, difficult or doubtful?
Shaktis shop was doing very

badly and ultimately was
closed down. He has no
resource by which he can pay
the whole amount of the
heavy loan. He can still try to
pay some percentage of it
with time. What kind of
debtor is he, normal, difficult
or doubtful?
Khushi had taken a personal

loan. She is not paying the
EMI though she is doing well
in her business and is
maintaining a good lifestyle.
What kind of debtor is she,
Module 4 Notes

M4-9
61

normal, difficult or doubtful?
Case 7
A
DRA Manulal does not keep a

date record of efforts made
for recovery. His fellow DRA
Ramlal said that it is not a
correct method. Why?
Ramlal also told that Manulal

should listen to the debtors
explanation attentively. Why
is it important?
1.
Case 8
A
DRA Govind is repeatedly

harassed by a debtor, Harish
who is not paying his dues
for 6 months. He does not
pick up calls on his mobile
phone. He is never available
at his home number. What
message should Govind leave
at his home? What caution
should he take?
When reachable over phone

Harish uses abusive
language. What steps should
Govind take?
When Govind visited his

place the home was locked.
Can he leave all the details of
the overdue and messages
with the next-door
neighbour?
Govind is agitated due to the

hassles of Harish and has
decided to call him from an
unknown number and
threaten him of serious
consequences. Is the decision
right?
62
Module 4 Notes
M4-10

Case 9
A
DRA Viren has gone to see a

film with his friends. On the
way is the home of a debtor
whom he is supposed to visit
the day after. It is 6 pm. Can
he visit the customer? Explain
the answer.
He is wearing jeans and tshirt and hasnt shaven for

two days. Can he visit the
customer? Explain the
answer.
When his friends asked him

about why he wanted to visit,
he did not give them the
details. Was there any need
for him to be secretive?
Case 10
A
DRA Sudhakar is good in his

work. What method does he
follow in remitting funds?
When asked, he told his

colleague that DRA cannot
adjust his fees or commission
against the collections made.
Is he correct?
What documents and reports

does Sudhakar give to bank
regularly?
In one of the cases, Sudhakar

did follow ups and tried all
official methods in vain. He
now thinks the bank should
initiate legal action on this.
Can he recommend this to the
bank? Can Sudhakar provide
any other help on this?
He was running fever one

day, so he gave his collection
works to friend DRA Imran
63
Module 4 Notes

M4-11

without informing the bank.
Was this a right step?
Case 11
A
Mr. Sharma is a long

absconding debtor of CashSafe Bank. Can the Debt
Collection Agency help the
Bank?
Why banks engage Debt

Collection Agencies (DCA)
for debt recovery?
Case 12
A
Badal is a new DRA. He has

been given a case where the
due of a loan is unpaid for
last 3 and a half month. What
should be his steps of action?
What details of Badal should

the bank provide to the
customer?
What details of the customer

should bank provide Badal?
When should Badal give a

call to the customer? What
are the things that Badal
should mention in this first
call to the customer?
64
Module 4 Notes
M4-12
17.1
Regulations
Regulations
What are the Essential Features and Legal Aspects of Debt Recovery Arrangement?
Debt recovery arrangement (or agreement) between bank and the debt recovery agent is a
contract of agency.
There are two parties in a contract of Agency viz. Principal & Agent
In such contract of agency there is an express agreement in writing mentioning all the
terms and conditions of the arrangement. This agreement requires acceptance by the
Principal as well as the Agent.
In the absence of such express agreement, the relationship between the principal and the
agent is ascertained by facts and circumstances of the case.
Such contract is called implied agency contract. There is also an agency contract called
agency by ratification.
In case of Debt Recovery Agents Bank is the Principal. DRA acts on behalf of the
Principal while dealing with third party
Both the Principal and the Agent should be major and of sound mind.
As per the contract of Agency DRA receives commission or fees for the services he
renders to the principal.
All the authorized lawful acts of the agent are binding on the principal. These acts
should be in conformity with the regulatory guidelines of the Reserve Bank of India.
Example: Karan has taken a vehicle loan from the bank but failed to pay 4 EMIs. Bank
appointed agency X for collecting dues from Karan. Agency X employs Agent Rajeev to collect
dues from Karan. Agent Rajeev calls up Karan takes his appointment and visits him at
appointed time to collect the dues. He behaves rudely on the phone and also during his visit.
In this case Rajeev has legally done the right thing by giving a call and fixing up an
appointment but his rude behaviour is not legally correct and is excess of the authority. This
will not bind the bank and the responsibility for the consequences will be on the agent
exclusively.
Legal and Regulatory Framework for Debt Recovery
RBI is the regulatory authority for banks and NBFCs. They issue the guidelines on DRAs from
time to time and the banks / NBFCs and also by their recovery agents have to comply it. RBI
takes a serious view of the violations of its directives and can impose ban / penalties on the
violating bodies.
Discuss the Legal Aspects of Agency Contract
Agency forms the legal basis of the relationship between the DRA and the financial . We may
explain the basic legal aspects of an agency contract with reference to Indian Contract Act.
Agency is a relationship that exists between two persons. One is called Principal and the other
Agent. The Principal (Bank) allows the agent to represent him or act on his behalf. The agent
also consents to represent the principal and to act on his behalf. Any person other than the
principal and the agent is referred as third party, who is affected by the acts of the agent done
on behalf of the principal.
Module 4 Notes

Corporation Limited
M4-13
65
In a contract of agency, both the parties to the contract, namely the Principal and the
agent, have to be major (above 18 years of age) and of sound mind.
Most agency contracts contain a remuneration clause on the basis of which the recovery
agent will receive his fee for the services.
An agents authority may be expressed (where it is given by words spoken or written),

or implied (where it is inferred from circumstances of the case).
In respect of the acts, which the Principal consents that he shall do, the agent is said to
have authority to act. This authority constitutes a power to affect the Principals legal
relations with third parties.
An agent, has authority to do every lawful thing which is necessary in order to do such
act.
What are the features of Debt Recovery Arrangement?

Debt recovery arrangement (or agreement) between a financial institution and a DRA is a
contract of agency. The features are,
a) It is a contract of agency between a credit institution (principal) and the debt recovery
agency or agent. The agent can be a natural person (major and of sound mind) or an entity
(a firm or a company duly constituted as per relevant laws and regulations).
b) The debt recovery arrangement between the principal and the agent can be created in three
ways:
It is usually created by an express agreement. This is in writing, expressing terms and

conditions of the arrangement (agency by agreement).
In cases where there is no express agreement, the relationship between the principal and
agent is ascertained by facts and circumstances of the case (implied agency).
In some cases, the agents work done on behalf of the principal and with full knowledge
of the principal may not have been initially authorized by the principal. If the principal
subsequently ratifies the actions, such post-facto ratification will bind the parties
concerned (agency by ratification).
c) The debt recovery agreement, like any other contract, requires acceptance by the principal
and agent. The accepted agreement is legally binding on both the parties.
d) The objective and tasks of the recovery agents will be generally mentioned in the debt
recovery agreement. These must be lawful, i.e. in accordance with the laws of the country
and regulations of the industry.
e) The acts of an agent performed within the authority delegated by the agency agreement will
be legally binding between the principal and the third parties. However, the actions of an
agent outside the authority, or in excess of the authority, will not bind the principal and the
responsibility for the consequences will be on the agent exclusively. This aspect will be
further explained in a subsequent unit dealing with rights and duties of agents.
The agency agreement regarding debt recovery contains the main terms and conditions agreed
by the principal (say, a bank) and the agent. These may be called as the main elements of the
debt recovery arrangement and would generally include:
1. Specific tasks to be done e.g. the amount to be recovered in default and the broad time
frame.
66
Module 4 Notes
M4-14

2. Debt Recovery Policy and Procedure of the bank
3. Code
of Conduct
in recovery
process:of
this
include dress code, verbal and written
2.
Debt Recovery
Policy
and Procedure
themay
bank
communication rules.
3. Code of Conduct in recovery process: this may include dress code, verbal and written
4. Duties
of the agent.
communication
rules.
5.
of the
the agent,
4. Rights
Duties of
agent. including the commission/ fees payable by the principal to the agent for
the recovery of debt / other services.
5. Rights of the agent, including the commission/ fees payable by the principal to the agent for
The
Recovery
and
Code of Conduct will be according to the guidelines of the
the Debt
recovery
of debtPolicy
/ other
services.
RBI. If, these are not incorporated, one should ask for clarification from the principal, as
The Debt
Policy
and Code of
will
betheir
according
following
theRecovery
regulations
is compulsory
forConduct
the banks
and
DRAs.to the guidelines of the
RBI. If, these are not incorporated, one should ask for clarification from the principal, as
The Debt Recovery
Agreement
serves asfor
thethe
contractual
following
the regulations
is compulsory
banks andarrangement
their DRAs.that is legally binding on
both. This may vary from bank to bank in details. The agreement should be strictly followed.
The Debt Recovery Agreement serves as the contractual arrangement that is legally binding on
both. This may vary from
to bank in details. The agreement should be strictly followed.
Debt bank
Recovery
Principal
Agent
Code of Conduct
Key Words
Arrangement
Debt Recovery
Principal
Agent
Code of Conduct
KeyRecovery
Words
Debt
Arrangement
Policy and
Debt
Recovery
Procedure
Policy and
Procedure
17.2
Debt Recovery Processes
17.2
Debt
DebtRecovery
RecoveryProcesses
Processes
Debt recovery processes (or methods) can be typically of following kinds, each involving
different procedure:
Debt recovery processes (or methods) can be typically of following kinds, each involving
Normal
different recovery
procedure:process: The debtors are willing to pay the dues smoothly without resistance:
Difficultrecovery
recoveryprocess:
process:The
Thedebtors
debtorsare
arewilling
not willing
to the
paydues
(i.e. smoothly
recalcitrant
defaulters)
and
Normal
to pay
without
resistance:
who intentionally resist or avoid recovery efforts: the recovery agent would need to apply
Difficult
recovery
process:against
The debtors
are not willing
to payin(i.e.
recalcitrant
defaulters)
special
process
of recovery
the recalcitrant
defaulters,
consultation
with
the bank.and
who intentionally resist or avoid recovery efforts: the recovery agent would need to apply
Assets
process: Ifagainst
the recalcitrant
debtors
do not eventually
pay thewith
dues,
special possession
process of recovery
the recalcitrant
defaulters,
in consultation
thethe
bank.
movable assets charged to the bank by way of hypothecation or pledge, can be possessed by the
Assets
process:
If thethereafter
recalcitrant
debtorsordootherwise
not eventually
the dues,
the
bank orpossession
the recovery
agent and
auctioned
sold topay
recover
the dues.
movable assets charged to the bank by way of hypothecation or pledge, can be possessed by the
Legal
process:
Theand
intervention
of the courtorisotherwise
required sold
to possess
mortgaged
bank orrecovery
the recovery
agent
thereafter auctioned
to recover
the dues.
immovable property by the bank or its recovery agent. Also if the charged assets do not exist, or
Legal
recovery
process:
intervention
is required
mortgaged
the debt
is unsecured,
theThe
debtor
will haveoftothe
be court
sued for
recoverytoofpossess
the dues
by the bank/
immovable
property
by
the
bank
or
its
recovery
agent.
Also
if
the
charged
assets
do not exist, or
recovery agent.
the debt is unsecured, the debtor will have to be sued for recovery of the dues by the bank/
Normal
Procedure
recoveryRecovery
agent.
As
mentioned
above,
this procedure will generally apply to the debtors who are willing to pay
Normal
Recovery
Procedure
the dues with normal recovery process.
As mentioned above, this procedure will generally apply to the debtors who are willing to pay
Thedues
recovery
been authorized
the
with agent
normalhas
recovery
process. by the bank to collect the past due debt from the
particular customer
The recovery agent has been authorized by the bank to collect the past due debt from the
The
customer
has been notified by the bank of the details (name, telephone number etc) of the
particular
customer
recovery agent for collection of the past-due debt.
The customer has been notified by the bank of the details (name, telephone number etc) of the
recovery agent for collection of the past-due debt.
Module 4 Notes

M4-15
67

Making customer calls. This is the first step in recovery procedure and following rules should
be followed generally:
Calls are made from the same number as advised by the bank to the customer.
The agent discloses his identity and authority at the first instance.
The agent contacts the debtor between 0700 hours and 1900 hours, unless the special situation
of his/her business or occupation requires the bank to contact at a different time. Under no
circumstances, can the customer be called beyond 2100 hours.
The agent should, as far as possible, honour the customers requests to avoid calls at a
particular time or at a particular place. Inappropriate occasions such as bereavement in the
family or illness, will be avoided for making calls/visits to collect dues
All calls where the customer becomes abusive or threatening should be appropriately
documented.
Customers questions should be answered in full. They should be provided with information
requested and given assistance in making recovery. Minor issues should be resolved.
How often to call customer? The collection call is done to bring to the Customers notice the
obligation and to seek a commitment to pay on a specified date. Once a promise is elicited, a
call may be made to serve as a reminder and for confirmation of payment.
In case of the commitment not forthcoming from the customer or it has been broken, calls may
be made at reasonable frequency, based on amount owed, product, aging of debt and past
history. Excessive number of calls or calls closely bunched together in the same day may be
construed as harassment and should be avoided.
If the customer is not available during a few calls made by the agent, a message may be left to
an adult family member as follows Please leave a message that ABC (name of agent) had
called and request the customer (name) to call ABC back at the given phone number. The
message should not indicate that the customer ABC has overdue amount, or the call originated
from a Recovery agency.
Visit to customer: This would be the second step in the normal collection process.
A customer should be visited for debt collection only after these conditions are satisfied:
The debtor has not paid the due amount within the days of grace and the dues are still
outstanding against him/ her.
The debtor has been notified of the amount due and also of the name of the collection agent.
The collection agent has taken an appointment from the debtor for the visit (at a particular place
and at a particular date / time).
68
Module 4 Notes
M4-16
17.3
Guidelinesfor
for Behaviour
Behaviour during
during Visits
Visits
Guidelines
a. During visit, the agent should have a proper dress and appearance, or wear the dress
prescribed by the principal and follow the timing and place of the visit as per the principals
or RBI / IBA code.
b. On meeting, the agent should greet the customer (like good morning/ eveningsir/ madam
etc). The agent should thereafter show his ID card and authority given by the principal for
debt collection from the debtor. Only after these initial formalities, the conversation
regarding debt collection should start.
c. The time of visiting the customer will be generally during 0700 hours to 2100 hours. Visits
earlier or later than the prescribed time may be made only under the following conditions:
When the customer has expressly consented to that timing.
When attempts to contact the customer have resulted in information that the customer is
normally only available outside these hours and no alternate telephone number to
contact him / her.
When due to nature of the customers employment i.e. working in shifts e.g. call centre,
hotel, he/she is usually available outside these hours.
d. The agent should respect privacy of the debtor.

e. During the visit, due respect and courtesy should be shown to the customer and the
interactions should be civil and polite as per the principals policy.
f.
During interactions with the debtor, the agent must not use threats verbally or by body
language. Under no circumstances, any physical violence be used in debt collection process.
g. Conversation with the debtor should be recorded (audio/ video) as per the principals policy
regarding documentation, particularly when the debtor disputes the dues or does not show
proper conduct. This would provide safeguard to the agent against false accusation by
mischievous / recalcitrant debtors.
17.4
Dos and Don'ts of Debt Recovery
What are the important Dos for debt recovery?

1. Always follow the recovery policy, procedure etc prescribed by the principal.
2. Have a positive attitude
3. The DRA should be within the authority given in the recovery arrangement
4. Call to the debtor between 0700 hours and 2100 hours.
5. Make calls from the same number as advised by the bank to the customer.
6. Disclose your identity and authority at the first instance.
7. Show decent behaviour or language during calls and visits to the debtor.
8. Maintain the privacy of the debtors family members, friends / colleagues.
69
Module 4 Notes
M4-17
Corporation Limited
language. Under no circumstances, any physical violence be used in debt collection process.
g. Conversation with the debtor should be recorded (audio/ video) as per the principals policy
regarding
documentation, particularly when the debtor disputes the dues or does not show
Participant
Handbook
proper conduct. This would provide safeguard to the agent against false accusation by
mischievous / recalcitrant debtors.
17.4
Dosand
andDonts
Don'tsof
ofDebt
Debt Recovery
Recovery
Dos
What are the important Dos for debt recovery?

1. Always follow the recovery policy, procedure etc prescribed by the principal.
2. Have a positive attitude
3. The DRA should be within the authority given in the recovery arrangement
4. Call to the debtor between 0700 hours and 2100 hours.
5. Make calls from the same number as advised by the bank to the customer.
6. Disclose your identity and authority at the first instance.
7. Show decent behaviour or language during calls and visits to the debtor.
8. Maintain the privacy of the debtors family members, friends / colleagues.

9. Keep the customers debts/ dues / account information confidential.
Module
Notes the customers requests to avoid
M4-17calls at a particular time or at a particular
10. 4Honour
place.
11. Dont make calls/visits in the inappropriate occasions such as bereavement in the
family or illness.
12. DRA should document all calls or visits where the customer becomes abusive or
threatening
13. Answer the Customers questions in full
14. Leave a message with an adult member of family if the customer is not available during
a few calls made by the agent
15. Before making call DRA should know about history of customers payment record,
reasons for delay or non payment, customers grievance/dispute or cash flow problem
faced by the customer
16. Follow up progressively
17. During visit, the agent should have a proper dress and appearance, or wear the dress
prescribed by the principal
18. On meeting, the agent should greet the customer, show his ID card and authority given
by the principal for debt collection from the debtor before the discussion starts
19. The time of visiting the customer will be generally during 0700 hours to 2100 hours.
Visits earlier or later than the prescribed time may be made only if the customer is not
available and has agreed to meet at a different time
What are the 10 important Donts for debt recovery?
1. Dont violate the recovery policy, procedure etc prescribed by the principal.
2. Dont exceed the authority given in the recovery arrangement
3. Dont make a call to the debtor before 0700 hours or after 2100 hours.
70
4. Dont make anonymous calls or bunched calls to the debtor, which may be perceived as
harassment.
5. Dont conceal your identity during calls and visits or other interaction with the debtor.
6. Dont show uncivil / indecent / dirty behavior or language during calls and visits to the
18. On meeting, the agent should greet the customer, show his ID card and authority given
by the principal for debt collection from the debtor before the discussion starts
19. The time of visiting the customer will be generally during 0700 hours to 2100 hours.
Visits earlier or later than the prescribed time may be made only if the customer is not
available and has agreed to meet at a different time
What are the 10 important Donts for debt recovery?
1. Dont violate the recovery policy, procedure etc prescribed by the principal.
2. Dont exceed the authority given in the recovery arrangement
3. Dont make a call to the debtor before 0700 hours or after 2100 hours.
4. Dont make anonymous calls or bunched calls to the debtor, which may be perceived as
harassment.
5. Dont conceal your identity during calls and visits or other interaction with the debtor.
6. Dont show uncivil / indecent / dirty behavior or language during calls and visits to the
debtor.
7. Dont harass / humiliate / threaten the debtor verbally or physically.
8. Dont intrude into the privacy of the debtors family members, friends / colleagues.
9. Dont disclose the customers debts/ dues / account information to unauthorized
persons.
10. Dont forget that the debtor is a human
being
and has to Agents
be treatedCertificate
with fairness
and
Debt
Recovery
Training
courtesy, despite the fact that he/ she is a debtor.
Example:
Rajnath has not paid 4 EMIs. The bank has entered into an express agreement with Agent X
stating terms and conditions of the recovery policy of the bank within the regulatory guidelines
of RBI & IBA.
If Agent X
Module 4 Notes
M4-18
Makes calls from the same number as advised by the bank to the customer.
Answers the customers questions in full
All the above acts of DRA are in accordance to the agency agreement as also regulatory
guidelines of RBI and IBA and hence the Bank, RBI and IBA cannot take action against the
DRA.
On the other hand, if Agent X
Keeps calling Rajnath continuously 5 to 6 times during the day
Calls Rajnath at 6 in the morning and 11.30 at night
Says he is the officer of the local police station while calling Rajnath
Shouts on the phone in abusive language at Rajnath
Forces his way into Rajnaths house in his absence and threatens his family members
and also loudly discusses about Rajnaths dues with relatives who were visiting
Rajnaths seriously ill daughter.
All the above acts of DRA are against the agency agreement as also regulatory guidelines of
RBI and IBA and hence the Bank, RBI and IBA can take action against Agent X (DRA).
71
18.1
Recoverystrategies
strategies
Recovery
Policy, Processes and Procedure Of Debt Recovery

While laying down the policy and procedure for collection of past due debts in conformity with
the legal and regulatory framework banks should abide by:
The RBI directives on recovery of debts, including recovery agents engaged by the
bank
The Model Policy on Collection of Dues and Repossession of Security framed by

the Indian Banks Association.
The principles of debt recovery policy:
Dignity and respect to customers
Courtesy, fair treatment and persuasion in interaction with customers
Due notice to the customers of details of recovery agents engaged
Recovery agents must carry appropriate authorization letter issued by the bank and
must show it to the customer on demand.
Conversation with the customer must be recorded
Simple business language must be used in all verbal/written communication with

the customer.
Privacy and confidentiality of the customers dues and other records should be
maintained
No misleading statements or misrepresentation be made to the customers.
Debt recovery agents should read, understand and abide by the policy guidelines
prior to beginning collections on debts owed by the customers.
Failure to comply may result in termination of employment/business

Strategy for Recovery
Following are the guidelines which can help recovery agent to devise strategy for recovery.
Collection process should be in terms agency agreement with the bank and comply
Regulatory/legal guidelines.
1. The collection timing should be synchronized to the cash inflow pattern of the debtors: For
example, recovery from salaried employees should be timed when salary is received by or
credited to the debtors account, normally at the month-end (where salary is paid monthly).
2. Adopt different collection strategy for different debtor types: Three types of debtors have
been described and they need different strategies for recovery success:
Normal debtors, i.e. who can pay and will pay if reminded or / and persuaded to
pay.
Difficult debtors, i.e. those who can pay, but will not pay
Doubtful debtors, i.e. those who can pay the reduced amount as negotiated with
them.
72
Module 4 Notes
M4-20

3. While different strategies are required for different types of debtors, the following are the
points to
be followed
in all kinds
of recovery
strategies:
3. common
While different
strategies
are required
for different
types
of debtors, the following are the
common
points
to
be
followed
in
all
kinds
of
recovery
strategies:
Good rapport should be established with the debtor by good
communication/listening
and persuasive
resulting
into good inter-personal
Good
rapport should be established
with skill
the debtor
by good
relationship.
communication/listening and persuasive skill resulting into good inter-personal
relationship.
KYC norms should be followed strictly
KYC
be followed
strictlyabout agency/loan agreement as well as
Agentnorms
shouldshould
have detailed
knowledge
debtor.should have detailed knowledge about agency/loan agreement as well as
Agent
debtor.
4. Date record
of efforts made for recovery should be maintained so that it can be:
4. Date record
of efforts
made forinrecovery
should
Produced
as evidence
court where
suitbeismaintained
to be filed so that it can be:
18.2
18.2
Produced
as evidence in
where suit is to be filed
Reported periodically
to court
the principal.
Reported periodically to the principal.
Telephone Collection Calls

TelephoneCollection
CollectionCalls
Calls
Telephone
Getting paid on time by customers / debtors is an important component in the success of any
recovery
agent.
calls pay/ debtors
import role
If handled
effectively
thesuccess
task ofofrecovery
Getting paid
on Telephone
time by customers
is anhere.
important
component
in the
any
agent
becomes
easy. Following
are the role
important
to remember
handling
the
recovery
agent.very
Telephone
calls pay import
here. Ifpoints
handled
effectivelywhile
the task
of recovery
debtor
through
telephone
calls:
agent becomes very easy. Following are the important points to remember while handling the
debtor
through
telephoneBefore
calls: a call is made agent must know history of customers payment
Know your
customer:
record,
reasons
for delayBefore
or nonapayment,
customers
grievance/dispute
cash flowpayment
problem
Know your
customer:
call is made
agent must
know history oforcustomers
faced
by
the
customer.
This
will
help
recovery
agent
to
devise
a
suitable
recovery
strategy.
record, reasons for delay or non payment, customers grievance/dispute or cash flow problem
faced
the customer.
ThisGood
will communication
help recovery agent
devise
suitable
strategy.
Have by
a positive
attitude:
skillto
will
helpathe
agent recovery
to be positive
and
more assertive
persuading
the communication
debtor to listen to
himwill
andhelp
understanding
to pay
Have
a positiveinattitude:
Good
skill
the agent tothe
be need
positive
andthe
dues.
more assertive in persuading the debtor to listen to him and understanding the need to pay the
dues.
Be an active listener: This is yet another good quality of the agent that will create
understanding
in the mind
that
thequality
agent isofempathetic
to his
problem
Be
an active listener:
Thisofisthe
yetdebtor
another
good
the agent that
will
create
understanding
in the mindQuestions
of the debtor
theyou
agent
is empathetic
to histo-day?
problem or will you
Ask the right questions:
likethat
will
be mailing
the cheque
be
payment
this week?
willlike
elicit
positive
response
the time
frame. or will you
Asksending
the right
questions:
Questions
will
you be
mailingabout
the cheque
to-day?
be
sending
payment this week?
will elicit call
positive
about
the have
time aframe.
Follow
up progressively:
Each collection
to theresponse
customer
should
theme. Example:
Follow
progressively:
Each
collectionsome
call to
the customer
should
theme. the
Example:
Call
#1.up
Benefit
of the doubt.
Remember
customers
/ debtors
willhave
pay abecause
recovery
agent brought
the matter
to theirsome
attention.
Call
#1. Benefit
of the doubt.
Remember
customers / debtors will pay because the
recovery
agentand
brought
the matter
to their
attention.
Call #2. Firm
assertive.
If the first
style
doesnt work, the next call will be designed to
cause
theFirm
customer
to pay you
to get
offdoesnt
their back.
Call #2.
and assertive.
If the
firstyou
style
work, the next call will be designed to
cause
the
customer
to
pay
you
to
get
you
off
their
back.
Call #3. Tell them their future. Some customers / debtors will only pay when the consequence
of nonpayment
is explained
to them.
recovery /agent
have
toonly
makepay
a third
a past due
Call
#3. Tell them
their future.
Some Ifcustomers
debtors
will
whencall
theabout
consequence
bill,
that
is
the
time
to
apply
this
kind
of
pressure.
of nonpayment is explained to them. If recovery agent have to make a third call about a past due
bill,
thatkeep
is theyour
time word:
to apply
this kind
Always
Agent
mustof
atpressure.
all times maintain what he tells the customer and must
act
accordingly.
By word:
doing so
agent
willatensure
thatmaintain
customerwhat
will he
nottells
takethe
him
for granted.
Always
keep your
Agent
must
all times
customer
and must
act
accordingly.
doing
so if
agent
will ensure
that customer
will notortake
him forasgranted.
Always
remain By
calm:
Even
the customer
becomes
angry, hostile
offensive,
some times
he
will, agent
must
always
polite
and fairangry,
but firm
and or
stay
focused as
andsome
theretimes
will
Always
remain
calm:
Evenremain
if the calm,
customer
becomes
hostile
offensive,
be will,
positive
result.
he
agent
must always remain calm, polite and fair but firm and stay focused and there will
be positive result.
Module 4 Notes
Module 4 Notes

M4-21
M4-21
73

Get a commitment: Agent must put his best efforts through all his skills and succeed in getting
a commitment of full payment at once or at least in parts.
Summarize carefully: At the end of the call, recovery agent should summarise the gist of the
assurance of customer . The recovery agent has to summarize the agreement carefully, going
over each point. If the solution was complex, the summary may be put in writing for his record.
Effective, not efficient: It should be remembered that calls should be effective not efficient. It
is not important as to how many calls an agent has made but it is important to know the number
of calls that resulted into payment.
Key Words
Normal recovery
process
Difficult recovery
process
Guidelines for
Behaviour
dress and
appearance
time of visiting
Privacy
Courtesy
Follow-up
Strategy for
Recovery
Normal debtors
Difficult debtors
Doubtful debtors
Date record
18.3
Telephone
Practice Collection Calls
Role Play: The Spender at Maldives

Two participants should enact this role play according to the descriptions given. Others should
record their observations.
Mr. Spender (tourist to Maldives)
Mr. Kishen (Recovery Agent )
The February credit card statement has

arrived in the mail from the bank.
Your primary objective is to obtain

payment.
You have spent a luxurious vacation at

Maldives where you stayed in 5 star
hotels, rented a personal speed boat for
cruising around, ate out at lavish exotic
restaurants.
You use every means you can think of to

collect the debt, including threatening the
customer.
You are not willing to listen to the

customer
Because your bills this month are higher

than usual, you are unable to pay the
"minimum amount" now due.
You have always paid your bills on time

in the past.
Notes for the Customer
74
You probably should not have taken the vacation or indulged in so much of luxury if
you couldn't afford to pay the bill.
Notify the bank as soon as you realize you cannot repay as agreed (before you receive
the bill, if possible).
Indicate to the bank the reason for your bill-paying problem, your intention to repay,
and when they can expect repayment.
Module
Notes
M4-22 card until your payments are up to date.
4Do
not make additional purchases through
than usual, you are unable to pay the

"minimum amount" now due.
You have always paid your bills on time

in the past.
Notes for the Customer
You probably should not have taken the vacation or indulged in so much of luxury if
you couldn't afford to pay the bill.
Notify the bank as soon as you realize you cannot repay as agreed (before you receive
the bill, if possible).
Indicate to the bank the reason for your bill-paying problem, your intention to repay,
and when they can expect repayment.
Do not make additional purchases through card until your payments are up to date.
If the agent cannot or will not re-negotiate then you must reduce your living expenses
and make a repayment schedule you could try to get EMIs.
Notes for the Recovery agent
You may be violating the Fair Practices and be subject to legal penalties if you harass,
abuse, or otherwise treat a consumer unfairly.
You may threaten the debtor only with consequences that you or the bank usually take
if payment is not received.
The intention is to keep the customer and also maintain a good image of the bank.
If the customer notifies you of a bill-paying problem, see if you can renegotiate
payment terms.
Training
If the problem seems to be temporaryDebt
and ifRecovery
the customerAgents
has paidCertificate
previous bills
on
time, eventual payment is likely.
By accepting a smaller or later payment, you will be helping your customer and at the
same time maintaining his/her goodwill.
Module 4
M4-23
ByNotes
accepting a smaller or later payment,
you will be helping your customer and at the
same
Since time
the borrower
is paying
interest on the credit, your loss will not be much.
maintaining
his/heryou
goodwill.
18.4
18.4
Since the borrower is paying you interest on the credit, your loss will not be much.
Code of Conduct
Code
of Conduct
Code of Conduct
The BCSBIs Code of Banks Commitment to Customers (CBCC) governs all the banks that
are members of the board. The CBCC seeks:
The BCSBIs Code of Banks Commitment to Customers (CBCC) governs all the banks that
To promote
good and
banking
practices by setting minimum standards in dealing
are members
of the board.
Thefair
CBCC
seeks:
with customers.
To promote good and fair banking practices by setting minimum standards in dealing
To
transparency so that customers can have a better understanding of what to
withincrease
customers.
reasonably expect from the banks services.
To increase transparency so that customers can have a better understanding of what to
To
promoteexpect
fair and
cordial
relationship
between the customer and the bank.
reasonably
from
the banks
services.
To
customers
informationbetween
as private
confidential.
To keep
promote
fair and personal
cordial relationship
theand
customer
and the bank.
To keep
followcustomers
defined process
in accordance
the laws
the land for recovery of over
To
personal
informationwith
as private
andofconfidential.
dues when customer fails to repay the overdue loans which will include sending
reminders/notices/personal
To follow defined process invisits
accordance
with the laws
of the land for recovery of over
and repossessing
of security
What are
the important provisions
of the
reminders/notices/personal
visits
andCBCC?
repossessing of security
are
When
customer fails
to adhereoftothe
repayment
What
the important
provisions
CBCC? schedule a defined process in accordance
with the laws of the land will be followed for recovery of dues.
When customer fails to adhere to repayment schedule a defined process in accordance
IL&FS
Development
Corporation
Limited
The
involve
reminding
the customer
by sending
him notice or by making
withprocess
the lawswill
of2011
the
land
will Skills
be followed
for recovery
of dues.
personal visits and /or repossession of security if any.
The process will involve reminding the customer by sending him notice or by making
75
To promote fair and cordial relationship between the customer and the bank.
To keep customers personal information as private and confidential.
To follow defined process in accordance with the laws of the land for recovery of over
reminders/notices/personal visits and repossessing of security
What are the important provisions of the CBCC?
When customer fails to adhere to repayment schedule a defined process in accordance

with the laws of the land will be followed for recovery of dues.
The process will involve reminding the customer by sending him notice or by making
personal visits and /or repossession of security if any.
Banks collection policy to be built on courtesy, fair treatment and persuasion.
All the members of the staff of the bank or any person authorized to represent bank in collection
or/and security repossession would follow the following guidelines:
Customer would be contacted at the place of his choice and in the absence of any
specified place at the place of his residence and if he is unavailable at place of his
residence, at the place of business/occupation.
Identity and authority to represent would be made known to the customer at the first
instance.
Customers privacy would be respected.
Interaction with the customer would be in a civil manner.
Normally banks representatives will contact customers between 0700 hrs and 1900 hrs,
unless the special circumstances of customers business or occupation require
otherwise.
Customers requests to avoid calls at a particular time or at a particular place would be

honored as far as possible.
Time and number of calls and contents of conversation would be documented.
All assistance would be given to resolve disputes or differences regarding dues in a

mutually acceptable and in an orderly manner.
During visits to customers place for dues collection, decency and decorum would be
M4-24
maintained.
Inappropriate occasions such as bereavement in the family or such other calamitous

occasions would be avoided for making calls/visits to collect dues.
Banks will follow a security repossession policy in consonance with the law. A copy of
the policy will be made available on request.
Module 4 Notes
Key Words
BCSBI
CBCC

76
maintained.
Inappropriate occasions such as bereavement in the family or such other calamitous

occasions would be avoided for making calls/visits to collect dues.Certificate Program in Debt Recovery
Banks will follow a security repossession policy in consonance with the law. A copy of
the policy will be made available on request.
Key Words
BCSBI
CBCC

Module 4 Notes
M4-25
77


Module 3 Notes
78
M3-20

19.3
Legal aspects
19.3
Legal aspects
Legal aspects
All agreements between Banks and their Agencies are based on two documents
All agreements
Banks
and30.11.2007
their Agencies
based
on two documents
The RBIbetween
Guidelines
(Draft
and are
Final
24.04.2008).
The
Guidelines
(Draft 30.11.2007
and Final
24.04.2008).
CodeRBI
of Banks
Commitment
to Customers
(CBCC)
published by Banking
Codes
Standards
Board oftoIndia
(July 2006).
Code ofand
Banks
Commitment
Customers
(CBCC) published by Banking
Codes and
Standards
Board
of Indiais(July
2006).
Some features
of each
of these
documents
included
here:
Some
of each of these documents is included here:
RBIsfeatures
Guidelines
RBIs
Guidelines
due diligence for engagement of recovery agents
due
diligence
forthe
engagement
of recovery
agents
proper
training to
recovery agents
to handle
with care and sensitivity, their
responsibilities
as
also
the
hours
of
calling,
privacy
customer
information
etc.
proper training to the recovery agents to handle withofcare
and sensitivity,
their
responsibilities
as also
the hours
of calling,
of employees
customer information
100
hours training
to recovery
agents
as wellprivacy
as to the
engaged byetc.
service
providers.
100 hours
training to recovery agents as well as to the employees engaged by
service
providers.
Recovery
methods practiced by recovery agents should be in conformity with
the
code
of
collection
of the Banking
Codes
and should
Standards
Board
of India.
Recovery methods
practiced
by recovery
agents
be in
conformity
with
the
code
collection
of the to
Banking
Codeswhile
and Standards
Board
India.
Legal
andofproper
procedure
be followed
re-possessing
theofproperty
hypothecated
or mortgaged
bank
Legal and proper
procedure to
to the
be followed
while re-possessing the property
hypothecated
or mortgaged
the bank
Bank should provide
copy oftonotice
sent earlier to the defaulting borrower, to
the
agent
Bank should provide copy of notice sent earlier to the defaulting borrower, to
the
agent
There
should proper mechanism at each bank to attend to customers complaints
regarding
recovery
There should
properprocess
mechanism at each bank to attend to customers complaints
regarding
process of its directives RBI may impose ban on the bank
In cases ofrecovery
serious violations
in
recruiting
recovery
agents partially
or fully.RBI may impose ban on the bank
In cases of serious violations
of its directives
19.4 in recruiting
Practice recovery agents partially or fully.
19.4
Practice
Practice
Cash-Safe Bank asks a recovery agent Rocky to recover the dues of Rs. 2 lacs from a debtor
Mr.
Aiyer by
using
or muscle
declinestheto dues
pay by
certain
agent
Cash-Safe
Bank
asksthreats
a recovery
agentpower,
Rockyiftoherecover
of aRs.
2 lacsdate.
fromThe
a debtor
Rocky
does
recover
the
dues
in
full,
but
by
using
muscle
power
against
Mr.
Aiyer,
who
suffers
Mr. Aiyer by using threats or muscle power, if he declines to pay by a certain date. The agent
physical
injury
and the
mental
of recovery.
Aiyer
a case
Rocky does
recover
duestrauma
in full,inbutthebyprocess
using muscle
power Mr.
against
Mr.files
Aiyer,
who against
suffers
Rocky
for
damages
on
account
of
the
injury
and
mental
torture
suffered
by
him
and
caused
by
physical injury and mental trauma in the process of recovery. Mr. Aiyer files a case against
Rocky.
Thedamages
court awards
damages
of Rs
4 lacs
to mental
Mr. Aiyer
against
Rocky,
pay itby
to
Rocky for
on account
of the
injury
and
torture
suffered
by who
him has
andtocaused
Mr.
Aiyer.
Rocky. The court awards damages of Rs 4 lacs to Mr. Aiyer against Rocky, who has to pay it to
Mr.
AfterAiyer.
carefully going through the case study, answer the following, giving reasons for your
answers,
including
the through
provisions
the law:
After carefully
going
theofcase
study, answer the following, giving reasons for your
answers,
the provisions
law:threats and muscle power against Mr. Aiyer, and, if
a) including
Whether Rocky
was rightofinthe
using
not,
why?
a) Whether Rocky was right in using threats and muscle power against Mr. Aiyer, and, if
not, why?Rocky is entitled to be indemnified by Cash-Safe Bank for Rs 2 lacs
b) Whether
plusislegal
expenses
by Rocky
the case? Bank for Rs 2 lacs
b) damages
Whether paid
Rocky
entitled
to beincurred
indemnified
by in
Cash-Safe
damages paid plus legal expenses incurred by Rocky in the case?
79
Module 5 Notes
Module 5 Notes

M5-1
M5-1

DRA : Practice
Situations for discussion
Possible responses
Agent X tells the customer that he

has not paid his dues. Customer
objects and says that he has. Agent
X checks the customers receipt and
finds that the last payment has not
been updated by previous DRA.
Agent Y arrives at office of a
debtor. He asks the secretary for
him by name and insists on meeting
him. When asked who he is, Agent
Y pretends to be a family member
who has come from abroad.
Agent Z calls up the customers
house and gets his minor daughter
on the phone. He finds out that the
customer is having guests for
dinner. He then decides to visit at
that time to embarrass the customer
into paying.
Agent P tells a debtor, If you dont
pay me now I will have your name
published in the papers; later some
of my boys will pick you up, take
you to an unknown location and I
cant say what they will do
Agent Q tells a debtor who is
having problems paying, Dont
worry, you give me one EMI today
and I will work out that you dont
have to pay back the enhanced
interest rates on the rest.
Agent R goes to see a customer.
The customer asks him to check
what is the break up of dues, what
has already been collected. Agent R
has no idea. He says he only has
the total due.
80
Agent S meets a customer who tells

him, Last time one of your agents
came I mentioned clearly that I was
in financial difficulties and that I
would pay in the next month. Why
Module 5 Notes
M5-2

are you harassing me?
are you harassing me?
Agent T collects a large amount of
Agent
collectsand
a large
dues inTcheques
cashamount
from of
dues
in of
cheques
and cash
from The
several
the debtors
he visits.
several
of
the
debtors
he
visits.
The
weekend is coming, so he feels that
weekend
coming,
so he
feels
he can useissome
of this
cash
andthat
he
can
use
some
of
this
cash
and
return it the next week.
return it the next week.
20.1
20.1
Additional functions of the DRA
Additionalfunctions
functions of
of the
the DRA
DRA
Additional
What are the Specialised Functions of a DRA?

What are the Specialised Functions of a DRA?
Credit Counseling/Debt Counseling
Credit Counseling/Debt Counseling
Re-possessing security
Re-possessing security
Compiling opinion reports
Compiling opinion reports
Initiating legal action
Initiating legal action
Tracing debtors
Tracing debtors
Credit Counseling/Debt Counseling:
Credit Counseling/Debt Counseling:
This is a process of educating the borrower about how to avoid falling in debt trap and also how
This
is a process
of burden
educating
borrowercommitments
about how toin
avoid
falling
in debt trap
how
to manage
the debt
andthe
repayment
respect
of multiple
debtsand
andalso
often
to
manage
the
debt
burden
and
repayment
commitments
in
respect
of
multiple
debts
and
often
involves negotiating with the banks to draw a debt management plan (DMP).
involves negotiating with the banks to draw a debt management plan (DMP).
Debt Management Plan
Debt Management Plan
It offers reduced payments, fees and interest to help the debtor repay the debts. In such cases
It offers reduced
and interest into
to help
debtorpayment
repay thewhich
debts.isInusually
such cases
multiple
monthlypayments,
payments fees
are consolidated
onethe
monthly
less
multiple
monthly
payments
are
consolidated
into
one
monthly
payment
which
is
usually
than the sum of the individual payments made by the debtor previously. This reduction isless
in the
than
the individual payments made by the debtor previously. This reduction is in the
rangethe
of sum
10 toof50%.
range of 10 to 50%.
Rephasement: The second feature of a DMP is a reduction in interest rates charged by
Rephasement:
The second
of acredit
DMPcard
is a reduction
in interest
charged
by rate
creditors.
A customer
with afeature
defaulted
account will
often berates
paying
an interest
creditors. A customer
withUpon
a defaulted
card
account
often
be paying
an interest
rate
approaching
30% 42.5%.
joiningcredit
a DMP,
credit
cardwill
banks
sometimes
lower
the annual
approaching
30%
42.5%.
Upon
joining
a
DMP,
credit
card
banks
sometimes
lower
the
annual
percentage rates charged to 15-20%, and a few eliminate interest altogether.
percentage rates charged to 15-20%, and a few eliminate interest altogether.
Example:
Example:
For example, a customer with an account with a monthly payment of Rs.12000 which has not
For example,
a customer
with anbeaccount
withby
a monthly
payment
has not
been
paid in two
months might
considered
the creditor
to be of
60 Rs.12000
days past which
due. After
been
paid
in
two
months
might
be
considered
by
the
creditor
to
be
60
days
past
due.
After
joining the DMP and making three consecutive monthly payments, the creditor could reage the
joining the
DMP and
making
threeThereafter
consecutive
the creditor
could reage
the
account
to reflect
a current
status.
themonthly
monthlypayments,
payment due
on the statements
would
account
to
reflect
a
current
status.
Thereafter
the
monthly
payment
due
on
the
statements
would
be the monthly payment negotiated by the DMP. It merely gives a fresh start and an opportunity
be the
the DMP.
It history.
merely gives a fresh start and an opportunity
for
themonthly
customerpayment
to beginnegotiated
building aby
positive
credit
for the customer to begin building a positive credit history.
81
Module 5 Notes
Module 5 Notes

M5-3
M5-3

Case Study
Rajeshwar is heavily indebted. How can the recovery agent counsel him to manage his debt?
Borrower to prioritise his debts
Rajeshwar should list all his debts, ranking them according to the rate of interest. He
should concentrate on paying off the higher interest debts first. Once the highest-rate
debt is paid off, add the total he was paying on this debt, to the next one on his list.
This way, he will have more to pay off each debt on his list, with the benefit that
these payments are already built into his budget.
Be sure to continue to pay the minimum amount owing on his remaining debts.
Talk to bank
Most banks would rather find a suitable repayment plan for the borrower, than have
his payments overdue or worse, lose his debt altogether. If he cant make his
payments or are struggling to make the payments on time, it is important that he
contact the bank..
Explain to the bank that he wants to pay in full, but that he need more time to pay.
Provide full details of his situation, and emphasize the positives. Explain that he is
taking steps to reduce his spending, and show his budget plus a suggested
repayment plan showing a specific amount allocated to repaying each bank.
It is likely that bank will revise his repayments and/or extend the time he has to pay.
Consolidate your debts
Debt consolidation involves combining all his debts into one loan. This can have
many advantages including reducing his minimum monthly repayment, establishing
a payment structure that will see the loan paid off in a structured way, setting a fixed
monthly payment that helps with budgeting.
Key Words
RBI Guidelines
Opinion reports
Rephasement
CBCC
82
Module 5 Notes
M5-4
due diligence
Credit
Counseling
Re-possession
Re-possession
20.2
Re-possessing Security
Depending on the types of loans , creditworthiness of the borrowers and the rules of the banks
loans are granted against certain types of securities viz.
Hypothecation
Pledge
Mortgage
In case of hypothecation goods (movable) remain in the possession of the debtor (customer)
who creates a legal charge on them in favour of the creditor (bank) for securing the loan
granted. This facility is given to valued customers only. In case the customer fails or refuses to
repay the overdue loan bank can take possession of the security hypothecated after complying
legal provisions and sell the goods to recover its dues.
Similarly in case of pledge though the possession of goods (movable) is with the bank, legal
provisions are required to be followed for selling the goods pledged to recover its dues.
In both the above cases re-possession of the security can be taken without intervention of the
court.
Where security is by way of mortgage (of immovable properties only) courts intervention is
must for re-possession and sale of mortgaged property to recover banks dues.
Compiling Opinion Reports
Where the borrower is not willing to repay the loan despite vigorous follow-up DRAs can find
out from their own sources information about the availability of the realizable assets belonging
to him as well as to his guarantors.
Initiating Legal Action
DRA can also recommend initiation of legal action and bank can avail of DRAs services in
initiating legal action against the borrower/guarantor thereby saving time and money involved
in pursuing such cases by banks themselves.
Tracing Debtors
Some times defaulters are either missing or not traceable. In such cases banks can engage
services of debt collection agencies that have nation wide presence large resources and
computerized data base to track such missing debtors. This can save considerable money and
time for the banks.
83
Module 5 Notes

Corporation Limited
M5-5
21.1
Rightsand
and Duties
Duties of
of Recovery
Recovery Agents
Agents
Rights
Rights and duties of agents are governed by the Contract Act. Recovery Agents act
as agents for and on the authority of the Principal (bank or other institution).
The rights and duties of Recovery Agents is of an agent. and governed by the
Contract Act provisions and also the regulatory guidelines of RBI and IBA.
These can be modified by an agreement between the Principal and Recovery Agent
to the extent which the law allows.
What are the Rights of DRAs?
Right to remuneration
Right to retainer
Right to compensation
Right to indemnity
Right to remuneration:
In terms of agency agreement an agent is entitled to a fixed amount of fee or percentage of the
amount as his remuneration. This will further depend on the type of cases handled by an agent.
The Contract Act does not give this as a right.
Right to retainer:
In terms of the Contract Act a recovery agent has to remit the entire amount collected to the
principal with the right to retain any portion of the amount so collected as his expenses and
fees/remuneration unless otherwise provided for in the agency agreement.
Right to compensation:
If an agent suffers injury due to neglect of the Principal he has the right to get compensated.
This is not usually applicable in case of debt recovery agents and banks.
Right to indemnity:
When agent has acted lawfully within the scope of authority granted to him by the principal and
such act has taken place during the course of agency business the agent is entitled to be
indemnified by the principal for the loss if any suffered by the agent.
What are the Duties of DRAs?
Duty to Follow Instructions
Duty to Follow Trade Customs
Duty to Exercise Care And Skill
Duty to Communicate
Duty to Render Accounts
Duty to Remit Money
Duty Not to Delegate
Duty of Confidentiality
84
Module 5 Notes
M5-6

Duty to Follow Instructions:
The agent is appointed by the principal for carrying out certain tasks on behalf of principal for a
fee or commission. It is therefore the foremost duty of the agent to carry out the instructions of
his principal. While doing so the agent should bear in mind the following points:
The instructions of the principal should be clear, unambiguous and lawful.
The agent cannot be held responsible by the principal for not carrying out such
unlawful instructions.
If the agent acts contrary to the lawful instructions/directions of the principal, he may
be held liable to the principal for the loss suffered by the principal due to such
actions of the agent.
Duty to Follow Trade Customs:

Though the recovery agent has to discharge his duties according to the terms of the agency
agreement with the principal, while doing so the agent should follow the RBI/IBA guidelines
even if they are not mentioned in the agency agreement.
Duty to Exercise Care and Skill:
The agent must take all care and use his skill to discharge the duties entrusted to him by the
principal as if he is managing his own business.
Duty to Communicate:
In case of any doubt or difficulty the agent must always consult his principal and carry out his
instructions and should never do anything on his own in such circumstances.
Duty to Render Accounts:
The agent must always keep his principals accounts ready so that he can render them when
demanded by his principal. He must keep the principals money separate from his own.
Duty to Remit Money:
As per the agency agreement the agent must periodically remit money collected to his principal.
Duty Not to Delegate:
The agent must himself discharge the duties entrusted to him by his principal and should not
engage anybody else to do it on his behalf.
Duty of Confidentiality:
As the banks are required to maintain confidentiality in respect of the information of their
customers accounts the agent must take utmost care in handling such information while dealing
with customers on behalf of his principal and ensure that strict confidentiality is maintained by
him also about the affairs of the customers accounts.
Key Words
Re-possession
Opinion Reports
85
Module 5 Notes

M5-7

Test your understanding of the Rights and Duties by completing the worksheet below.
RIGHTS AND DUTIES WORKSHEET
No
Description
Right / Duty
Any money collected on behalf of the Bank must be

deposited with the Bank at the predecided intervals
If there is no provision in the agreement, an agent can

retain some money from the collection for expenses
incurred during collection.
Banks have to keep their customers affairs private and

therefore even the agents have to respect this privacy.
The agent has to carry out the instructions of the Bank

according to the law and codes of conduct of RBI and
IBA.
Unless the contract allows it, the agent cannot hand

over his duties and responsibility to any other third
party.
An agent must keep all documents and accounts ready

for the Bank to inspect or act upon.
If the agreement does not specify, the agent has to

follow the commercial customs and industry practice
(like RBI norms).
If a DRA has acted within the law and sustains some

injury or loss during the course of duty, he has the right
to be protected by the Principal. This doesnt apply if
he acts outside the law.
An agent has to conduct his activities with the same

concern and skills as though it were his own business.
10
If someone suffers injury due to neglect of the Principal

usually not applicable in case of debt recovery the
Principal has to pay for treatment of that injury.
11
When there is a problem or some doubt the agent

should get in touch with his principal to sort it out.
12
According to the Contract Act there is no duty for the

Principal to pay the Agent. This comes in the
agreement between parties.
86
Module 5 Notes
M5-8

21.2
International Best
Best Practices
Practices in
in Recovery
Recovery
International
Countries in the West have been involved in debt collection for a longer time than we have.
There are some agencies that specialize in different types of debts. The practices are well
established and conducted professionally one reason is that the borrowers are protected by
consumer associations who can take action against any breach of law or regulations.
PRACTICES IN USA
The Fair Debt Collection Practices Act (FDCPA) is a Federal Act, which seeks to promote fair
debt collection practices by trying to eliminate abusive practices in the collection of consumer
debts. The Act has:
Prescribed guidelines for conduct of debt collection business
Defined rights of consumers involved with debt collectors.
Prescribes penalties and remedies for violations of the provisions of the Act.
FDCPA allows aggrieved consumers to file private lawsuits against a collection agency that
violates the Act. Alternately, Federal Trade Commission or the State Attorney General may
take action against a non-compliant collection agency. Fines can be levied and the agencys
operations can be restricted or even closed by FDCPA.
WHAT DEBT COLLECTORS CANNOT DO
Below is an illustrative list of prohibited acts for debt collectors in USA (source Wikipedia).
Debt collectors are NOT allowed to do the following:
Hours for phone contact: contacting consumers by telephone outside of the hours of
8:00 a.m. to 9:00 p.m.
Contact after being asked to stop: contacting consumers in any way (other than
litigation) after receiving written notice that said consumer wishes no further contact
or refuses to pay the alleged debt, with certain exceptions, including advising that
collection efforts are being terminated or that the collector intends to file a lawsuit or
pursue other remedies where permitted.
Contacting consumers at their place of employment after having been told verbally
or in writing that this is not acceptable.
Contacting consumer after request for validation: contacting the consumer or the
pursuing collection efforts by the debt collector after receipt of a consumer's written
request for verification of a debt (or for the name and address of the original creditor
on a debt) and before the debt collector mails the consumer the requested verification
or original creditor's name and address.
Misrepresentation or deceit: misrepresenting the debt or using deception to collect

the debt, including a debt collector's misrepresentation that he or she is an attorney or
law enforcement officer.
Publishing the consumer's name or address on a "bad debt" list.
Seeking unjustified amounts, which would include demanding any amounts not
permitted under an applicable contract or as provided under applicable law.
87
Module 5 Notes

M5-9
Threatening arrest or legal action that is either not permitted or not actually
contemplated.
Abusive, profane language used in the course of communication related to the debt.
Contact with third parties: revealing or discussing the nature of debts with third
parties (other than the consumer's spouse or attorney) or threatening such action.
Contact by embarrassing media, such as communicating with the consumer by post

card or using letterhead that makes it clear that the communication is from a debt
collector.
Reporting false information on a consumer credit report or threatening to do so in the

process of collection.
What Debt Collectors should do according to FDCPA?

FDCPA requires debt collectors to:
Identify themselves and notify the consumer, in every communication, that the
communication is from a debt collector, and that information received will be used to
effect collection of the debt
Give the name and address of the original creditor (company to which the debt was
originally payable) upon the consumer's written request made within 30 days of
receipt of the validation notice;
Notify the consumer of their right to dispute the debt, in part or in full, with the debt
collector.
Provide verification of the debt If a consumer sends a written dispute or request for
verification within 30 days of receiving the validation notice, then the debt collector
must either mail the consumer the requested validation information or cease
collection efforts altogether. Such asserted disputes must also be reported by the
creditor to a credit bureau that reports the debt.
File a suit in a proper venue - a debt collector may file a lawsuit, if at all, only in a
Recovery
Agents Certificate Training
place where the consumer lives or Debt
has signed
the contract.
PRACTICES IN UK
In UK, debt collection agencies are licensed and regulated by the Office of Fair Trading (OFT).
OFT has set out guidelines on how debt collection agencies can operate. The guidelines are not
law, but are based on interpretations of the legal cases.
OFT also lists examples of unfair practices in debt collections. These include:
88
misrepresenting enforcement powers (e.g. claiming that property may be seized),
falsely claiming to be acting in an official capacity,
harassment, claiming unenforceable or excessive charges,
misrepresenting the legal position to a debtor,
falsely claiming that a court judgment has been obtained when it has not.
Abusive and deceptive conduct. These have been also listed by OFT
The debt collectors do the job of collecting receivables of banks, credit card companies, other
financial companies and also manufacturing companies. Certain debt collection agencies do
consulting jobs in difficult cases and also the specialized jobs mentioned below:
Module
5 Notes
M5-10
Legal proceedings
in cases where the debtor
is unwilling to pay or refuses to pay the over-due
debt. These include filing suits, making legal appearance in courts, bankruptcy and winding-up

misrepresenting enforcement powers (e.g. claiming that property may be seized),
Abusive and deceptive conduct. These have been also listed by OFT
The debt collectors do the job of collecting receivables of banks, credit card companies, other
companies
Abusive and
conduct. These
have beenCertain
also listed
OFT
financial
anddeceptive
also manufacturing
companies.
debtbycollection
agencies do
consulting
jobs in difficult
also the receivables
specialized of
jobs
mentioned
The
debt collectors
do the cases
job ofand
collecting
banks,
credit below:
card companies, other
financial
companiesinand
also
manufacturing
Certain
collection
agencies
do
Legal proceedings
cases
where
the debtor iscompanies.
unwilling to
pay ordebt
refuses
to pay the
over-due
consulting
in difficult
cases making
and alsolegal
the specialized
mentioned
below: and winding-up
debt. Thesejobs
include
filing suits,
appearancejobs
in courts,
bankruptcy
proceedings.
Legal
proceedings in cases where the debtor is unwilling to pay or refuses to pay the over-due
debt. These
include
filingwhere
suits, the
making
legal
appearance
courts, bankruptcy
winding-up
Tracing
agents
in cases
debtor/
guarantor
haveindisappeared
and are and
not traceable
at
proceedings.
the
recorded addresses. The hidden assets of the debtors/guarantors are also traced out/
unearthedagents
and advised
to where
the principal
for recovery
action.
services
Tracing
in cases
the debtor/
guarantor
have These
disappeared
andare
aredone
not nationwide,
traceable at
based
on
their
nationwide
database
and
network.
the recorded addresses. The hidden assets of the debtors/guarantors are also traced out/
unearthed
and advised to
theinformation
principal foron
recovery
action. These services
are done viability
nationwide,
Credit Referencing:
The
the credit-worthiness
and financial
of
based
on their
nationwide
database
network. furnished from the in-house database and past
individuals
/ firms/
companies
can and
be promptly
records.
Credit Referencing: The information on the credit-worthiness and financial viability of
individuals
/ firms/ companies
can be promptly
furnished
from the
21.3
Various
Codes Governing
Debt
Collection
inin-house
India database and past
records.
Various
in India
India
Various Codes
Codes Governing
Governing Debt
Debt Collection
Collection in
21.3
The main codes which govern types of debt collection are:
RBI Draft guidelines on Recovery Agents by Banks [Details given earlier]

The main codes which govern types of debt collection are:
IBA Model policy on collection of dues and repossession of security
RBI Draft guidelines on Recovery Agents by Banks [Details given earlier]
Code of conduct for Debt Recovery Agents
IBA Model policy on collection of dues and repossession of security
Fair Practice code for Credit Card operations
Code of conduct for Debt Recovery Agents
The Fair Practice code for Lenders.
Fair Practice code for Credit Card operations
The Fair Practice code for Lenders.Debt Recovery Agents Certificate Training
IBA MODEL POLICY ON COLLECTION OF DUES & RE-POSSESSION OF

SECURITY
1.
Introduction:
The debt collection policy of the bank is built around dignity and respect to customers.
Bank will not follow policies that are unduly coercive in collection of dues.
Module 5
Notes
The
policy is built on courtesy, fair M5-11
treatment and persuasion. The bank believes in
following fair practices with regard to collection of dues and repossession of security
and
thereby fostering customer confidence
Module 5
Notes
M5-11 and long-term relationship.
The repayment schedule for any loan sanctioned by the bank will be fixed taking into
account paying capacity and cash flow pattern of the borrower. The bank will explain to
the customer upfront the method of calculation of interest and how the Equated
Monthly Installments (EMI) or payments through any other mode of repayment will be
appropriated against interest and principal due from the customers. The bank would
expect the customers to adhere to the repayment schedule agreed to and approach the
bank for assistance and guidance in case of genuine difficulty in meeting repayment
obligations.
Banks Security Repossession Policy aims at recovery of dues in the event of default
and is not aimed at whimsical deprivation of the property. The policy recognizes
fairness and transparency in repossession, valuation and realization of security. All the
practices adopted by the bank for follow up and recovery of dues and repossession of
security will be inconsonance with the law.
89
the customer upfront the method of calculation of interest and how the Equated
Monthly Installments (EMI) or payments through any other mode of repayment will be
appropriated against interest and principal due from the customers. The bank would
expect the customers to adhere to the repayment schedule agreed to and approach the
bank for assistance and guidance in case of genuine difficulty in meeting repayment
obligations.
Banks Security Repossession Policy aims at recovery of dues in the event of default
and is not aimed at whimsical deprivation of the property. The policy recognizes
fairness and transparency in repossession, valuation and realization of security. All the
practices adopted by the bank for follow up and recovery of dues and repossession of
security will be inconsonance with the law.
2.
General Guidelines:
All the members of the staff or any person authorized to represent our bank in
collection or/and security repossession would follow the guidelines set out below:
a.
The customer would be contacted ordinarily at the place of his/her choice and in
the absence of any specified place, at the place of his/her residence and if
unavailable at his/her residence, at the place of business/occupation.
b.
Identity and authority of persons authorized to represent bank for follow up and
recovery of dues would be made known to the borrowers at the first instance. The
bank staff or any person authorized to represent the bank in collection of dues
or/and security repossession will identify himself / herself and display the
authority letter issued by the bank upon request.
c.
The bank would respect privacy of its borrowers.
d.
The bank is committed to ensure that all written and verbal communication with
its borrowers will be in simple business language and bank will adopt civil
manners for interaction with borrowers.
e.
Normally the banks representatives will contact the borrower between 0700 hrs
and 1900 hrs, unless the special circumstance of his/her business or occupation
requires the bank to contact at a different time.
f.
Borrowers requests to avoid calls at a particular time or at a particular place

would be honored as far as possible.
g.
The bank will document the efforts

for the recovery
dues and the
copies
Debtmade
Recovery
Agents of
Certificate
Training
of communication set to customers, if any, will be kept on record.
h.
All assistance will be given to resolve disputes or differences regarding dues in a

mutually acceptable and in an orderly
Module 5 Notes
M5-12 manner.
i.
3.
Inappropriate occasions such as bereavement in the family or such other

calamitous occasions will be avoided for making calls/visits to collect dues.
Giving notice to borrowers

While written communications, telephonic reminders or visits by the banks
representatives to the borrowers place or residence will be used as loan follow up
measures, the bank will not initiate any legal or other recovery measures including
repossession of the security without giving due notice in writing. Bank will follow all
such procedures as required under law for recovery/repossession of security.
4.
Repossession of Security
Repossession of security is aimed at recovery of dues and not to deprive the borrower
of the property. The recovery process through repossession of security will involve
repossession, valuation of security and realization of security through appropriate
means. All these would be carried out in a fair and transparent manner. Repossession
will be done only after issuing the notice as detailed above. Due process of law will be
followed while taking repossession of the property. The bank will take all reasonable
care for ensuring the safety and security of the property after taking custody, in the
ordinary course of the business.
90
5.
Valuation and Sale of Property
3.
h.
All assistance will be given to resolve disputes or differences regarding dues in a

mutually acceptable and in an orderly manner.
i.
Inappropriate occasions such as bereavement in the family or such other

calamitous occasions will be avoided for making calls/visits to collect dues.
Giving notice to borrowers

While written communications, telephonic reminders or visits by the banks
representatives to the borrowers place or residence will be used as loan follow up
measures, the bank will not initiate any legal or other recovery measures including
repossession of the security without giving due notice in writing. Bank will follow all
such procedures as required under law for recovery/repossession of security.
4.
Repossession of Security
Repossession of security is aimed at recovery of dues and not to deprive the borrower
of the property. The recovery process through repossession of security will involve
repossession, valuation of security and realization of security through appropriate
means. All these would be carried out in a fair and transparent manner. Repossession
will be done only after issuing the notice as detailed above. Due process of law will be
followed while taking repossession of the property. The bank will take all reasonable
care for ensuring the safety and security of the property after taking custody, in the
ordinary course of the business.
5.
Valuation and Sale of Property

Valuation and sale of property repossessed by the bank will be carried out as per law
and in a fair and transparent manner. The bank will have right to recover from the
borrower the balance due if any, after sale of property. Excess amount if any, obtained
on sale of property will be returned to the borrower after meeting all the related
expenses provided the bank is not having any other claims against the customer.
6.
Opportunity for the borrower to take back the security

As indicated earlier in the policy document, the bank will resort to repossession of
security only for the purpose of realization of its dues as the last resort and not with
intention of depriving the borrower of the property. Accordingly the bank will be
willing to consider handing over possession of property to the borrower any time after
repossession and before concluding sale transaction of the property, provided the bank
dues are cleared in full. If satisfied with the genuineness of borrowers inability to pay
the loan installments as per the schedule which resulted in the repossession of security,
the bank may consider handing over the property after receiving the installments in
arrears. However, this would be subject to the bank being convinced of the
arrangements made by the borrower to ensure timely repayment of remaining
installments in future.
Module 5 Notes
M5-13
91
22.1
Code
Agents
Code of
of Conduct
Conduct for
for Debt
Debt Recovery
Recovery Agents
Introduction
The Code of Conduct for Debt Recovery Agents ( DRAs) of Banks (hereinafter referred to as
the Code) is built around THE dignity and respect to customers. All customers (including
customers who are late in paying or in default) must be treated with respect, dignity, courtesy
and fairness in debt collection efforts.
It is imperative that all persons involved in collection related activities follow this Code. All
Debt Recovery Agents must agree to abide by this Code of Conduct.
This Code applies to all DRAs who may be engaged to collect customer debts on behalf of
banks All the practices adopted by the bank for follow up and recovery of dues and
repossession of security will be in consonance with the law.
1. General Guidelines
i.
The DRA must identify himself / herself as a representative of the Bank and should
always inform to the customer or his appointed representative or blood relatives at the
beginning of every interaction.
ii. Customers are to be treated with dignity. DRAs should always remain professional
during telephone conversations and visits.
iii. The DRA is strictly prohibited from making telephone calls without meaningful
disclosure of the callers identity. No written or verbal threats, abuse or rudeness is
permitted. Collection staff / Agent should use only acceptable business language, even
if the other party does not follow the same..
iv. DRA, being responsible persons, deserves to be treated with dignity. They may refer
the customer to management, or end calls when a customer becomes abusive or
threatening. Customers should be informed prior to termination of such calls. All calls
where the customer becomes abusive or threatening should be appropriately
documented.
v. The customer should be contacted at the address registered with the Bank or at his/her
business / occupation address or place of residence. Only if the customer is unavailable
at any of such places, then he/she should be contacted at such places and at such times
as the customer is actually present / available or can be traced to.
vi. DRA should, as far as possible, use the language which the customer is comfortable
with.
vii. Customers are entitled to privacy and the DRA should respect this right.
viii.DRA should ensure that that all written and verbal communication with its borrowers
will be in simple language understandable to them..
ix. Customers should be called between 10:00 Hrs and 17:00 Hrs unless the special
circumstance of borrowers business or occupation or other engagements requires the
bank to contact him/her at a different time. Customer requests to avoid calls at a
particular time or at a particular place should be honoured as far as possible.
92
Module 5 Notes
M5-14

x. DRA should endeavor to answer customers queries and render assistance to resolve
issues.
xi. DRA will document the efforts made for the recovery of dues and the copies of
communication, if any, sent to the customers will be kept on record.
xii. Inappropriate occasions such as bereavement in the family or such other calamitous
occasions will be avoided for making calls / visits to collect dues.
xiii. Giving notice to borrowers / Repossession of Security : While written
communications, telephonic reminders or visits by the banks representatives to the
borrowers place or residence will be used as loan follow up measures, the DRA will not
intimate any legal or other recovery measures including repossession of security
without giving due notice in writing. DRA will deliver written notices or proceed with
the repossession of security only after being duly authorised by the Bank at appropriate
levels. Repossession of Security will be strictly done in accordance with the laid down
process and as per the banks Policy on Collection of Dues and Security Repossession.
2. No misleading statements/misrepresentation are permitted.
Collection staff / Agent should not i.
Mislead the customer on the action proposed and consequences thereof;
ii. Mislead the customer about their true business or organization name, or falsely
represent or imply that the Collection staff / Agent is an attorney (lawyer), government
official, officer of any court etc.;
iii. Threaten with imprisonment or even mention imprisonment unless legal action planned
or currently underway could result in imprisonment;
iv. Threaten with arrest/detention by the police unless, prima facie, the customers actions
indicate criminal intent that could lead the police to arrest/detain for example, if a
customer has sold the automobile financed or has falsified documents at the time of
application, the customer may be prosecuted leading to arrest/detention.
3. Gifts or bribes
A DRA should not accept gifts from customers or bribes of any kind. Any DRA offered a bribe
or payment of any kind by a customer must report the offer to his/her management.
4. Precautions to be taken on visits
i.
Respect personal space maintain adequate distance
ii. Not enter the customers residence against his/her wishes or when they are told the
customer is not at home;
iii. Not to restrict the customers movement or restrain him/her from entering or leaving
the house/room;
iv. Not remain in the customers house if he/she were to leave for any reason including to
collect money from a bank/elsewhere;
v. Respect the customers privacy do not embarrass the customer in the presence of
his/her neighbors;
vi. If the customer is not present and only minors/elderly/infirm are present at the time of
the visit, the Collection Staff / Agent should end the visit with a request that the
customer call back. He should not enter the house unless invited. He should not wait for
Module 5 Notes

M5-15
93

the customer in the customers residence unless specifically asked to do so by the
customer or family.
5. If the customer declines to pay, the DRA should
i.
If the customer declines to pay, the consequences of such a decision are to be explained
to him/her: Respect personal space - maintain adequate distance from the prospect. This
may include
Impact on credit history
Possible inclusion in negative list of Credit Reference Agencies / Indian Banks

Association
Possible legal action and its impact
Cost of defending legal action, if such action is contemplated.
ii. Should the customer refuse to pay on the account, such accounts must be referred to the
Supervisor. The Supervisor shall, after discussing with the Agency Manager allocate
the account appropriately. Further calls on the customer who communicates in writing
his/her refusal to pay may follow an escalation matrix as below:
Agency Manager
Branch Manager
Zonal office
Head Office
Key Words
FDCPA
OFT
94
Module 5 Notes
M5-16
IBA
22.2
Fair
FairPractice
Practice Code
Code for
for Credit
Credit Card
Card Operations
Operations
This is a voluntary code adopted by the Credit Card issuing member banks/institutions or their
associates which is expected to provide a benchmark for service standards in their dealings with
individual customers. The code details the obligations the card issuers undertake while issuing
credit cards and is also expected to help the credit card users in knowing their rights and also
measures they should take to protect their interests. The card issuers who adopt this code will
place the same on their website and also give a copy to card users when demanded.
This code will supplement and not replace the fair practice code recommended by IBA.
Unless stated otherwise , all parts of this code apply to all the credit card products and services
whether the card issuers provide them across the counter, over the phone, on internet or by any
other method and the standards of the code are governed by the following key commitments of
the card issuers:
(In the code you denotes the credit card customer and we the credit card issuer.)
Key commitments:
We promise to:
1. Act fairly and reasonably in all our dealings with you by:
Meeting the commitments and standards in this code, for the products and services
we offer, and in the procedures and practices our staff/agents follow.
Making sure our products and services meet relevant laws and regulations
Ensuring that our dealings with you will rest on ethical principles of integrity and
transparency.
Not engaging in any unlawful or unethical consumer practice.
2. Help you to understand how our credit card products and services work by giving you the
following information in a simple language:
What are the benefits to you
How you can avail of the benefits
What are their financial implications
Whom you can contact for addressing your queries and how.
3. Deal quickly and effectively with your queries and complaints by:
Offering channels for you to route your queries
Listening to you patiently
Accepting our mistakes if any
Correcting mistakes/implementing changes to address your queries
Communicating our response to you promptly
Telling you how to take your complaint forward if you are not satisfied with the
response
95
Module 5 Notes

M5-17

4. Publicize this code, by making it available for public access on our website and make
copies available for you on request.
Information:
When you apply for credit card we will give you the details of requirements,
documentation (KYC), fees and charges.
We will verify your details through phone or physical visits before issuing you a
credit card.
When we decide to issue you credit card we will give you a user manual as also the
details of credit cards working and various charges including annual fee that we
will charge. We will give you more details if you disown any transaction shown in
your credit card bill. We will also tell you the possible loss on your card if it is
lost/misused.
Tariff (fees/charges/interest):
We will give you all the details of fees/charges/interest when we issue you a credit card.
Marketing ethics/Telemarketing/collection of dues/confidentiality of account etc. will be
governed by the provisions of RBI/IBA guidelines discussed earlier.
Account Operations
Your credit card and PIN will be separately mailed to you.
You will regularly receive an account statement every month. Notice of any
changes in fees and charges will be sent at least a month in advance. Please get in
touch with us in case the statement/information is not received.
We will advise you about precautions to be taken to protect your credit card and
PIN.
We have a grievance redressal cell to attend to your complaints and if your not
satisfied with our decision we will guide you to approach Banking Ombudsman.
Lastly if you want to terminate your credit card you can do so by giving notice to
that effect to us and following the procedure laid down by us in our service guide.
We also may terminate your credit card if in our opinion, you are in breach of
cardholder agreement.
96
Module 5 Notes
M5-18
22.3
FairPractice
Practice Code
Code for
for Lenders
Lenders
Fair
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest
Act enacted by Government of India in 2002 allows banks to take possession of assets of
defaulting borrowers charged to the banks, without intervention of the court. The Reserve Bank
of India in consultation with Government of India and some banks and financial institutions
finalized the fair practice code. Accordingly all banks have framed their own set of Fair
Practices Code and implemented it from 01/11/2003. The details are as under:
Applications for loans and their processing
Loan appraisal and terms/conditions
Disbursement of loans including changes in terms and conditions
Post disbursement supervision
Applications for loans to priority sector upto Rs. 2-lacs should give details of:
Processing fees/charges
Amount of refundable amount in case of rejection of application
Pre-payment option etc.
Acknowledgement for receipt of such loan applications should also give time
frame for disposal of such loan applications
Bank/Financial institutions should scrutinize such loan applications within a

reasonable time and call for additional details/documents if required, immediately.
In case of rejection of such applications banks/financial institutions should convey

to the loan applicant in writing the reason/s for such rejection.
There should be proper appraisal of loan application:
With due diligence on creditworthiness of the borrower.
Credit limit and terms and conditions thereof should be conveyed to the borrower.
A copy of loan agreement along with all enclosures mentioned in loan agreement
should be given to the borrower.
Discretionary powers such as reduction in drawing limit return of cheque issued for
non business purpose drawings within sanctioned limit only, account subject to
periodical review, and disallowance of operation in the account due to non
compliance of terms of sanction should be clearly mentioned in loan agreement.
Disbursement of loans should be in conformity with:
Terms and conditions governing sanction of such loan
Change in terms and conditions of sanction such as interest rate, service charges
should be notified to the lender and effected prospectively.
Post-Disbursement supervision should include the following:
It should be constructive and should take care of genuine difficulty of the borrower.
97
Module 5 Notes

Corporation Limited
M5-19
In case of decision to recall/accelerate payment or performance under the

agreement or seeking additional security, lender must give prior notice to the
borrower.
All securities charged to the bank should be released unless there is other claim or
right of set of to be exercised of course with prior notice to the borrower.
Key Words
KYC
The Securitisation and Reconstruction

of Financial Assets and Enforcement
of Security Interest Act

98
Module 5 Notes
M5-20
Mutual Fund Distribution
Certificate Programme in Mutual Fund Distribution
Table of Content
Welcome Note . ........................................................................................................................... 1
General Instructions...................................................................................................................... 3
Weightage of chapters as per NISM............................................................................................... 5
NISM Examination........................................................................................................................ 7
1.
Concept and Role of a Mutual Fund....................................................................................13

Introduction.................................................................................................................. 13
Types of Mutual Funds.................................................................................................. 23
2.
Fund Structure and Constituents.........................................................................................39
3.
Legal and Regulatory Environment......................................................................................51

Role of Regulators in India............................................................................................ 51
Investors Rights and Obligations.................................................................................. 63
4.
Offer Document..................................................................................................................75
5.
Fund Distribution and Channel Management Practices........................................................85

Distribution Channels................................................................................................... 85
Channel Management Practices.................................................................................... 93
6.
Accounting, Valuation and Taxation....................................................................................99

Accounting.................................................................................................................... 99
Valuation.................................................................................................................... 111
Taxation...................................................................................................................... 119
3
7.
Investment Plans and Services..........................................................................................127

Investor Services......................................................................................................... 127
Investment Plans and Services.................................................................................... 141
8.
Return, Risk and Performance of Funds.............................................................................149

Drivers of Return in a Equity & Debt Scheme............................................................... 149
Computing Returns..................................................................................................... 159
Risk............................................................................................................................. 165
Measures of Risk......................................................................................................... 173
Benchmarks and Performance.................................................................................... 179
Performance Measurement........................................................................................ 187
9.
Scheme Selection for a Client............................................................................................193
10. Selecting the Right Investment Products for Investors.......................................................203

Types of Assets........................................................................................................... 203
11. Financial Planning.............................................................................................................211

12. Risk Profiling and Asset Allocation....................................................................................223
13. Questions for Practice.......................................................................................................233
Welcome Note
Dear Participant,
Welcome to the certificate programme in Mutual Fund distribution. After completing this programme,
you will join the Banking and Insurance industry as a Mutual Fund Distributor. You will primarily sell
mutual fund investments to various investors and handle investors queries. To be a good mutual fund
distributor you have to be well informed about the market and as well as the client requirements.
To ensure that you have the required knowledge to be a Mutual Fund Distributor, you have to undergo
the NISM examination. Each topic covered in this training programme comply with the NISM syllabus.
Read each module carefully, log your key learnings and attempt the worksheet questions in the end.
The knowledge you acquire from this training programme is essential as it will help you in clearing the
exam.
All the best!
1
General Instructions
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
Greet your Trainer and the other participants when you enter class.
Be regular. Candidates who fall short of the required attendance will not be certified.
Inform your Trainer if, for any reason, you need to miss class.
Always be punctual for every class.
Pay attention to what your instructor is saying or showing.
If you do not understand, put up your hand and seek clarification.
Make sure you do all the exercises given at the end of each module. It will help you understand
the concept better.
Practise new skills you have learnt as many times as possible. Seek the help of your Trainer or
fellow participants.
Take all necessary safety precautions, as instructed by your Trainer, while working with electricity
and with tools.
Make sure you are neatly attired and presentable at all times.
Participate actively in all the activities, discussions and games during training.
Take bath daily. Wear clean clothes and comb your hair before you come to class.
The three most important words you must always remember and use in your daily conversations
are PLEASE, THANK YOU and SORRY.
3
Symbols Used in This Manual

Symbol
Meaning
Time
Objectives
Pre-requisite Knowledge
Module Overview
Theory
Procedure
Key Learnings
Worksheets
Tips
Notes
4
Weightage of chapters as per NISM

Chapter
Weightage
Concept and role of a Mutual Fund
Fund Structure and Constituents
Legal and Regulatory Environment
10
Offer Document
Fund Distribution and Channel Management Practices
Accounting, Valuation and Taxation
10
Investment Plans and Services
12
Return, Risk and Performance of Funds
10
Scheme Selection for a Client
10
Investment Product for Investors Types of Assets
Financial Planning
Risk Profiling and Asset Allocation
5
NISM Examination
After completing this module, you will be able to:
TT
describe what the NISM is about
TT
explain the rules of the NISM exam
Session Plan
1
Module Overview
About NISM
Rules of NISM
Important Tips
Key Learnings
Worksheet
Module Overview
Today there are a great number of mutual fund services being offered to the public by individuals
and company employees. It is important to ensure that all these distributers have a minimum level of
mutual fund knowledge. The NISM examination tests all individuals and employees and certifies that
they are equipped to sell and distribute mutual funds.
In this module, you will learn about the NISM examination and the rules to keep in mind before taking it.
About NISM
Rohit Sharma is very eager to learn. He wants to be a mutual funds distributor and he knows he cannot
be one without taking the NISM examination. But what is the need for the exam? He asks his friend
Puneet who took the exam last year.
Rohit: Why do I need to take an exam to sell and distribute mutual funds? Why cant I just go and sell
them to people?
Puneet: Rohit, there are so many people who want to sell mutual funds! Not all of them know enough
about mutual funds to sell them to investors. The NISM exam checks that all mutual fund distributors
have a certain level of knowledge of mutual funds.
Rohit: Ohh, I see now. So the NISM exam helps to protect investors by making sure that the distributors
have the necessary knowledge.
Puneet: Thats right! This way we can also make sure that a certain quality is maintained when mutual
fund services are provided.
7
Now that Rohit knows why the NISM exam is so important, he is eager to get back to studying for it!
Take a quick look at what the NISM exam is about:
TT
NISM is a certification examination for mutual fund distributors (MFDC).
TT
I t ensures that all those seeking to sell mutual funds have the same common benchmark of
knowledge.
TT
It helps to improve the quality of mutual funds services provided.
Rules of NISM
Rohit was busy studying for the NISM exam, when he realised that he didnt know any of the exam
rules! How many questions does this exam have? Are there any other rules that he should know about?
Luckily, Puneet is able to help him out!
Puneet: Here are the rules for the NISM examination Rohit. All the rules are very simple. Take a look.
TT
The minimum education level is 12th standard pass
TT
NISM is an online examination
TT
The exam will be for a duration of 2 hours
TT
The exam will consist of 100 questions of one mark each
TT
The total number of marks is 100
TT
Each question will have 4 answer options
TT
A minimum score of 50% is required to pass
TT
To select an answer, tick one of the four options
TT
I ncorrect answers lead to negative markings (25% of the marks to be deducted for each incorrect
answer)
TT
Calculators are allowed for numerical workings
Rohit felt very relieved after reading these rules. They are so simple to understand! Now that he is
prepared with the rules, he can focus on studying for the exam.
Important Tips
Puneet: So, the NISM is like any other examination. The general test taking rules apply here too! So
remember:
TT
Always stay calm throughout the duration of the exam.
TT
Pace yourself so that you can attempt all questions.
TT
ont waste time on questions that you are unsure of. Leave them for the time being and
D
continue with the rest of the questions. You can come back to the unanswered question later.
You can also change the answer before you finally submit the paper.
Key Learnings
Summarise your learnings here. Write your answers in the spaces provided.
1.
What is the purpose of the NISM examination?
2.
Who should take the NISM examination?
3.
What is the NISM question format?
9
Worksheet
1.
Read the following questions. Tick on the correct option given below.
a.
b.
c.
How many answer options does each question have?

i.
ii.
iii.
iv.
How should an answer option be selected?

i.
By circling the option
ii.
By underlining the option
iii.
By ticking the option
iv.
By crossing out the option
What is the percentage of negative marks per incorrect answer?

i.
100%
ii.
75%
iii.
50%
iv.
25%
Notes
10
11
Answers: NISM Examination
12
Question Number
Answer
Concept and Role of a Mutual Fund - Introduction

TT
describe the concept and operation of a mutual fund
TT
list the advantages and disadvantages of a mutual fund
Session Plan
1
Module Overview
Basic Concepts of a Mutual Fund (MF)
Mutual Fund Operation Flow Chart
Advantages and Disadvantages
Key Learnings
Worksheet
Module Overview
The mutual fund industry has grown much larger in recent years. Today there are a large number
of individuals involved in the selling of different mutual fund schemes, and a very large number of
individuals who want to invest in them. Before distributing or investing in mutual funds, it is important
to understand what such funds are about.
In this module, you will learn the concept and role of a mutual fund, and get a better understanding of
this investment product.
Basic Concepts of a Mutual Fund (MF)

Rohit Sharma has just begun studying for the NISM examination. He knows the exam is about mutual
funds...but what are mutual funds? He reads the meaning of a mutual fund:
A mutual fund is an investment vehicle. It consists of money that has been pooled together by a large
number of investors. The mutual fund scheme then invests in predetermined objectives such as bonds,
stocks, money market instruments etc.
Rohit reads the definition a second time, but it still doesnt help him understand what it means.
Investment vehicle, mutual fund scheme, predetermined objectives...what do all these things mean?
He decides to ask his friend Puneet, a mutual funds distributor, for help.
Rohit: Puneet...Im trying to understand mutual funds but I am confused. There are too many words
that I dont understand! It says that a mutual fund is an investment vehicle. It also talks about mutual
fund schemes and predetermined objectives. What does all this mean?
13
Puneet: Relax Rohit! These words may sound big but they have a very simple meaning. An investment
vehicle is just a product that investors use to get a return. After all, the whole point of a mutual fund is
for investors to make money by investing in different securities.
Rohit: Oh I see. So several investors collectively pool in money. Then what happens? What is a mutual
fund scheme?
Puneet: That is nothing but the common pool of money. The money that has been collected by the
investors is called the mutual fund scheme.
Rohit: Oh! And predetermined objectives? What are they?
Puneet: That means objectives that have been decided in advance. The investors decide what type
of securities they want to invest in, before investing in the mutual fund. Once the money has been
collected, the AMC invests it in whatever they had all agreed upon.
Rohit: Oho! Now this makes sense! I am going to write down what I just learned.
Rohit realised that mutual funds are very simple to understand. Take a look at what he understood
about mutual funds:
Aim of a Mutual Fund: To help investors earn an income through various opportunities in the security
markets
Meaning of a Mutual Fund:
TT
A mutual fund is a product used by investors to make a return.
TT
Investors get together and create a common pool of money.
TT
T he common pool of money, called a mutual fund scheme, invests in securities that were
disclosed in advance.
Rohit: I have another question Puneet. It says that a mutual fund requires a group of investors. So if I,
along with two of my friends decide to invest in a certain mutual fund scheme, can just the three of us
invest in it?
Puneet: No Rohit, a mutual fund requires at least twenty investors. This is one of the rules of a mutual
fund. There are certain other rules that must also be followed for mutual funds. Take a look at some of
these rules:
Rules of a Mutual Fund:
TT
It is an indirect and collective method of investment.
TT
I t requires a minimum of twenty investors and none of the investors can hold more than 25% of
the total investments.
TT
The investments are made by professional fund managers.
TT
The objectives of the investments are always predetermined and diversified.
TT
The schemes can be structured for any type of investment objective.
TT
Investments are limited to marketable securities.
TT
It does not hold any long term assets of liabilities.
TT
Fund ownership is mutual, beneficial and proportionate to each investors contribution.
Rohit: Puneet, I just realised that mutual funds are very easy to understand, once we know the meaning
of the different terms used.
14
Puneet: Thats right Rohit. There are many terms that are used quite commonly when referring
to mutual funds. In fact, while I was studying for the mutual funds exam, I made a list of the most
commonly used terms and wrote down their meanings. I still have that list...here you go.
There are a number of terms that are commonly used with regards to mutual funds. Puneet gave Rohit
a list of commonly used terminology, which turned out to be really helpful. Why dont you take a look
at the list too!
Mutual Fund Terminology:
TT
A scheme that is made available to investors for investment

purpose, for the first time. The value of the units that are offered
to investors for purchase at the time of New Fund Offer is called
the face value. Usually the Face Value is RS. 10 per unit. However,
when investors buy units after the NFO, the purchase price is linked
to its NAV.
TT
This is the value of number of units into the face value. It varies
according to the nature of the fund. The unit capital is also reffered
to as the corpus of the fund.
Portfolio
TT
This is a collection of secuities.
Marking to Market
TT
This involes valuing an investment portfolio at the current market

price.
Unrealised Gain or
Unrealised Loss
TT
The gain or loss in the value of a security, before it is sold (on paper
only).
Realized capital gains/

Losses
TT
The gain or losses earned when schemes purchase or sell

investments
TT
Investments owned by the scheme may be quoted in the market

at higher than the cost paid. Such gains in values on securiies held
are called valuation gains. Similarly, there can be valuation losses
when securities are quoted inthe market at aprice below the cost
at which the scheme acquired them.
Total Assets
TT
The total value of a portfolio at market price.
Assets Under
Management (AUM)
TT
The sum of total assets plus current assets.
TT
The sum of total assets plus current assets plus accrued income
after subtracting current liabilities and accrued expenses.
TT
This is the value per unit at the current market price. It can be
calculated by dividing net assets by the units outstanding. The net
assets may increase and decrease depending on:
New Fund Offer
Unit Capital
Valuation gains/losses
Net Assets
Net Assets Value (NAV)
T he entry and exit of investors

The income from dividends, interest and expenses
Unrealised gains or losses
Realised gains or losses
15
TT
positive profitability metric means that investments have been

A
handled profitably.
Profitability Metric:
(A) + Interest income
(B) + Dividend income
Profitability Metric
(C) + Realised capital gains

(D) + Valuation gains
(E) Realised capital losses
(F) Valuation losses
(G) Scheme expenses
Mutual Fund Operation Flow Chart

Rohit: Hey friends! To make mutual funds even simpler to understand, I drew the mutual fund operation
as a basic flowchart. Now I can explain it in four easy stages! Take a look!
Investors
Pool their
money with
Passed Back to
Returns
Fund Manager
Invest in
Generates
Securities
Stages of a mutual fund operation:
16
Stage 1
A group of investors pool their money together for the purpose of investment.
Stage 2
The fund manager invests the money collected in predetermined securities

after proper research.
Stage 3
The value of the securities fluctuates as per market conditions. If the

securities appreciate, it results in positive returns.
Stage 4
The returns are given back to the investors as dividend and capital
appreciation.

Rohit was almost done learning about mutual funds, when a sudden thought struck him. Mutual funds
sound great, but surely they have some disadvantages? He was quite right! Mutual funds have both pro
and cons; take a look at some of them!
Advantages
Professional Management
Affordable Portfolio
Diversification
TT
Investors get a chance to increase their income with the help of

professional management.
TT
Professional management helps investors:
Invest as per their investment objective

Invest on the basis of suitable research
Follow sound investment processes
TT
Mutual fund schemes offer investors a wide range of securities

to invest in, regardless of the investment size. This greatly
reduces investment risk.
TT
Since a large number of investors pool in money collectively,

it is possible for mutual funds to provide certain services to its
investors such as:
Economies of Scale
Providing professional management

Reducing costs by spreading expenses across investors
Negotiating better terms with brokers, bankers and other
service providers
Liquidity
TT
Investors can get back the value of their investment amount

from the mutual fund itself.
Tax Deferral
TT
Investors have the option to let their money grow in a scheme

for a number of years, thus deferring tax liability.
TT
Certain mutual fund schemes reduce the taxable income of

investors by allowing the amount invested to be deducted from
the income liable to tax.
TT
Investors do not need to pay tax on dividends received from

mutual fund schemes.
TT
However, dividends from certain categories of schemes are

subject to dividend distribution tax, which is paid by the
scheme before the dividend is distributed to the investor. Long
term capital gains arising out of sale of debt and liquid funds
are subject to long term capital gains tax, which may be taxed
at a different (and often lower) rate of tax.
TT
Investors are given the option to structure their investments

according to their liquidity preference and tax position.
Tax Benefits
Convenient Options
17
Investors are also allowed to:
TT
Convenient Options
Investment Comfort
Withdraw a part of their investment amount

Make additional investments to their account
Set up systematic transactions
TT
After investors make an initial investment with a mutual fund,

the investment process for future investments is very simple.
TT
SEBI protects mutual fund investors by ensuring that strict

policies and processes are followed with regards to mutual
fund structure and activities.
TT
Mutual funds help investors:
Regulatory Comfort

Systematic Approach to
Investments
Invest regularly through a Systematic Investment Plan

(SIP)
Withdraw amounts regularly through a Systematic
Withdrawal Plan (SWP)
Move money between different schemes through a
Systematic Transfer Plan (STP)
Disadvantages
Lack of Portfolio Customisation
TT
Unit holders do not get to decide which securities or

investments should be bought by the scheme.
TT
With more than 800 mutual fund schemes offered by over

40 mutual funds, as well as numerous scheme options,
investors find it difficult to make a selection.
TT
Individual investors have no control over scheme expenses.

Such expenses are shared by all the unit holders in
proportion to their unit holdings.
Choice Overload
No Control Over Costs
Checklist of Learning points
18
TT
Mutual Funds are a vehicle to mobilize moneys from investors, to invest in diferent markets and
securities
TT
The primary role of mutual funds is o assist investors in earning an income or building their
wealth, by participating in the opportunities available in the securities markets.
TT
In order to accommodate investor preferences, mutual funds mobilize different pools of money.
Each such pool of money is called a mutual fund scheme. Mutual funds address diffential
expectations between investors witjin a scheme, by ofering various options, such as dividend
payout option, dividend reinvestment option and growth option. An investor buying into a
scheme gets to select the preffered option also.
TT
The investments that an investor makes in a scheme is translated into a certain number of
Units in the scheme. The number of units multiplied by its face value (Rs. 10) is the capital of
the scheme - its Unit Capital.
TT
When the portability metric is positive, the true worth of a unit, also called Net Asset Value
(NAV) goes up.
TT
When a scheme is first made available for investmet, it is called a New Fund Offer (NFO).
TT
The money mobilized from investors is invested by the scheme as per the investment objective
commited. Profits or losses, as the case might be, belong to the investors. The investor does not
however bear a loss higher than he amount invested by him.
TT
The relative size of mutual fund companies is assessed by their assets under management (AUM).
The AUM captures the impact os the profitability metric and the flow of unit-holder money to
or from the scheme.
TT
Investor benefits from mutual funds include professional management, portfolio diversification,
economies of scale. liquidity, tax deferral, tax benefits, convenient options, investment comfort,
regulatory comfort and systematic approach to investing.
TT
Limitations of mutual funds are lack of portfolio customization and an overload of schemes and
scheme variants.
Key Learnings
1.
What is a mutual fund?
2.
What is the aim of a mutual fund?
3.
Note down five rules of a mutual fund.
4.
Write down three advantages and disadvantages of mutual funds.
19
Worksheet
1.
a.
2.
3.
Provide two reasons that can lead to an increase or decrease in net assets.
Fill in the blanks.

a.
The total value of a portfolio at market price is called
b.
c.
A scheme that is made available to investors for investment purposes, for the first time is
called
.
is a collection of securities.
Match the terminology with its formula.

a.
Net Assets
i.
Net Assets Units Outstanding
b.
Unit Capital
ii.
Total Assets + Current Assets
c.
Assets Under
Management
iii.
Total assets + Accrued Income Current Liabilities

Accrued Expenses
d.
Net Asset Value
iv.
Number of Units x Face Value
Notes
20
21
Answers: Concept and Role of a Mutual Fund

Question Number
Answer
a.
The entry and exit of investors

The income from dividends, interest and expenses
Unrealised gains or losses

Realised gains or losses
22
a.
Total assets
b.
Portfolio
c.
New Fund Offer
a.
iii
b.
iv
c.
ii
d.
Types of Mutual Funds

After completing this module you will be able to:
TT
list the different types of mutual funds
TT
briefly describe the various types of mutual funds
Session Plan
1
Module Overview
By Structure
By Nature
By Investment Objective
Key Learnings
Worksheet
Module Overview
Mutual funds are financial products used by investors for the purpose of making positive returns. There
are numerous mutual fund schemes available for investment purposes. These schemes are categorised
into types on the basis of structure, nature and investment objective.
In this module, you will learn about the types of mutual funds by structure, nature and investment
objective.

Rohit Sharma is reading about the different types of mutual funds. He thinks to himself:
There seem to be many different types of funds. Some funds invest in only in debt, some only in equity,
and some in a mixture of both. Some have a low risk, and some have a high risk! Out of all these types,
which is the best type of mutual fund?
He decides to get his friend Puneets opinion on this.
Rohit: Puneet, you are a mutual fund distributor. According to you, which is the best type of mutual
fund?
Puneet: Well Rohit, there is no such thing as a best type of mutual fund. There is only the best type of
fund for you. And what is best for you, depends entirely on your investment preferences and your risk
bearing capacity.
Rohit: What do you mean?
23
Puneet: It all depends on your requirements. Are you looking for something stable? If so, then you
should invest in debt securities like bonds or government securities, as they are quite safe.
And if you are okay with some risk, for the chance of getting higher returns, then you should look at
investing in equity. Your choice of fund also depends on whether you are looking for a long term or
short term investment.
Rohit: I see! So thats why there are so many different mutual fund schemes. They each cater to
different risk appetites and investment objectives.
Puneet: Thats right Rohit! There are 1309 mutual fund schemes by 44 AMCs. Thats why they have
been categorised into types in the following way:
By
Structure
Mutual
Funds
By
Investments
Objectives
By
Nature
Puneet: Each of these three categories contains its own type of mutual funds. Lets learn more about
these types.
By Structure
Puneet: There are three types of mutual funds by structure.
Mutual Funds
by Structure
Open-Ended
Funds
Closed
Ended Funds
Interval Funds
24
Puneet: Both open-ended funds and closed-ended funds have different investment objectives in terms
of liquidity and maturity period. Take a look at the features of open-ended funds:
Open - Ended Funds
TT
Open for subscription throughout the year.
TT
No fixed maturity year.
TT
Can be easily bought and sold at Net Asset Value (NAV) price.
TT
Extremely liquid.
TT
Unit capital will fluctuate.
TT
When existing investors buy additional units or new investors buy units of the open-ended
scheme, it is called a purchase transaction. It happens at a price, which is equal to the NAV.
Note: SEBI has abolished entry load since 1st August 2009 from all mutual fund schemes. Prior to that
date, the purchase transactions were happening at a price linked to the NAV.
TT
When investors choose to return any of their units to the scheme and get back their equivalent
value, it is called a re-purchase transaction. This happens at a re-purchase price that is linked
to the NAV.
Puneet: Now take a look at the features of closed-ended funds:

Closed - Ended Funds
TT
Open for subscription only during new fund offer (NFO).
TT
Fixed maturity period, usually between 3 to 15 years
TT
After initial public issue, units can be bought and sold on the stock exchange.
TT
Unit capital will be fixed.
Puneet: Now take a look at the features of interval funds:

Interval Funds
TT
Combines features of open-ended and close-ended schemes.
TT
Mostly close-ended but become open-ended at predetermined intervals.
TT
Minimum duration of interval period is 15 days.
TT
Redemption/repurchase of units is allowed only during specified transaction period.
TT
As per revised SEBI regulations, specified transaction period must be for a minimum of 2
working days.
Rohit: I see! Now I understand the difference between these types of funds. Can you tell me about the
other types of funds too?
Puneet: Sure! Lets take a look at the next type mutual funds by nature.
25
By Nature
Puneet: The following are mutual funds by nature
Mutual Funds
by Nature
Equity Funds
Debt Funds
Balace Funds
Gold Funds
Real Estate
Mutual Funds
Active Funds
Passive Funds
Puneet: Lets take a closer look at each of these funds. Lets start with equity funds.
Rohit: Let me guess! Equity funds invest in equity!
Puneet: Haha, yes you have guessed correctly! People who are willing to take risks, and have long term
objectives, invest in equity funds. Take a look at the features of equity funds:
Equity Funds
TT
Invests mainly in equity holdings.
TT
The fund structure depends on the type of scheme and the fund managers perception of
different stocks.
Puneet: Equity funds have a number of different schemes
26
Diversified
Equity
Funds
Sector
Funds
Arbitrage
Funds
Examples
of Equity
funds
Equity Income
/Dividend Yield
Schemes
Thematic
Funds
Equity Linked
Saving Schemes
Puneet: Here are some of the most important features of each of them!
TT
Invest in diversified stocks from different companies, across

various categories or sectors.
TT
Reduced risk due to diversification.
TT
Invest only in securities belonging to the particular sector

mentioned in the offer documents.
TT
Returns are as per the sector or industry performance.
TT
Riskier than diversified funds. Example - banking fund.
TT
Invest according to an investment theme.
TT
Investment is wider than a sector fund but narrower than a

diversified equity fund.
TT
Offers tax benefits to investors.
TT
Investment has a 3 year lock-in period.
TT
Invest in securities where there is less share fluctuation and

the dividend represents a bigger proportion of the share
return.
TT
It is assumed that the NAV of such schemes will not fluctuate

as much as other equity scheme categories.
TT
These funds take opposite positions in different markets/

securities in order to offset the risk while earning a return.
TT
The aim of such funds is to help investors take positions or

protect their risk in another security.
TT
Traded in exchanges like NSE, BSE.
Diversified Equity Fund
Sector Funds
Thematic Funds
Equity Linked Savings
Scheme (ELSS)
Equity Income/Dividend
Yield Schemes
Arbitrage Funds
27
Puneet: Mutual funds do not invest only in equity. There are also funds that invest in debt securities.
These are known as debt funds. The main debt paper issuers are government authorities, private
companies, banks and financial institutions.
Those with limited or no risks and short term objectives, invest in debt funds. Take a look at the features
of debt funds:
Debt Funds
TT
Low risk as the investments are in debt instruments.
TT
Generate a stable income for investors.
Puneet: There are a number of schemes that fall under this type of fund.
Gift Funds
Liquid
Funds
Income
Funds
Examples
of Debt
Funds
Short Term
Plan
MIPs
Puneet: Here are the most important features of each of these funds!
Gilt Funds
Income Funds
TT
Referred as Goverment of India debt papers.
TT
Invest in Goverment issued securities only.
TT
Low risk as the papers are government backed.
TT
No default risk, but possible interest rate risk.
TT
Invests mainly in different debt instruments such as bonds,

goverment securities and corporate debentures.
TT
Invests in equity and debt markets.
TT
Invest mainly in debt instruments with minimum equity

investment.
TT
Slighter higher risk return ratio as compared to other debt

funds.
MIPs
28
Short Term Plans
Liquid Funds
TT
Invests mainly in short term papers like Certificate of

Deposits (CDs) and Commercial Papers (CPs).
TT
Some amount of investment in corporate debentures.
TT
Investment period is 3 to 6 months.
TT
Also known as Money Market Schemes.
TT
Offer easy liquidity and capital preservation.
TT
Invests in short-term instruments such as Treasury Bills,

inter-bank call money market, CPs and CDs.
TT
Invest period ranges from 1 day to 3 months.
TT
Safest type of mutual fund
TT
Fund manager has to invest the funds maturing in less than

61 days.
Puneet: There are also funds called Hybrid Funds.

Types of Hybrid
Funds
Monthly
Income Plan
Capital Protected
Schemes
Monthly Income Plan
TT
Such plans aim to declare a dividend every month.
TT
Investments are mostly in debt securities.
TT
Small percentage is invested in equity shares to boost the schemes yield.
Puneet: Hybrid Funds have a very popular category called Balanced Funds. Take a look at the main
features of these funds:
Balance Funds
TT
Invest in equity as well as debt funds.
TT
Aim is to provide investors with the benefits of equity and debt: equity provides growth and
debt provides stability.
TT
Allocation between equity and debt can be fixed or flexible.
TT
Allocation information and details of the investment style can be found in the Scheme
Information Document.
Rohit: What about Capital Protected Schemes? Can you tell me about them?
Puneet: Capital Protected Schemes are close-ended schemes. They are designed in a way that investors
will get back their principal, no matter what happens in the market. Take a look at the main features
of these funds:
29
Capital Protected Schemes

TT
Close-ended schemes.
TT
Designed to ensure that investors get back their principal, regardless of market outcome.
TT
Investments are usually made in Zero Coupon Government Securities whose maturity is
aligned to the schemes maturity.
Puneet: The next type of fund is gold funds. Gold is one of the most important asset classes. There are
two types of gold funds:
Gold Funds
Gold Exchange
Traded Funds
Gold Sector
Funds
Rohit: How do these funds work? Do investors actually buy and sell gold?
Puneet: No Rohit. There is no physical delivery of gold involved in such funds. For instance, in the case
of Gold Exchange Traded Funds, the units of the funds are backed by gold, which is the underlying
asset. The investors purchase and sell gold by trading ETFs on a stock exchange.
Rohit: I get it! So investors can take part in the gold bullion market without gold actually changing
hands!
Puneet: Thats right! Gold fund investment is easier and more affordable than investment in bullion,
gold coins, gold futures or jewellery.
Take a look at the important features of Gold Exchange Traded Funds:
Gold Exchange Traded Funds
TT
No Physical delivery of gold.
TT
Fund units are backed by gold.
TT
Usually held in demat form.
TT
Investors receive a securities certificate that defines the gold ownership.
Rohit: What about the second type of gold fund?

Puneet: The Gold Sector Fund invests in gold, gold trading companies and gold mining companies that
extract, process and market gold. Here are the most important features of this fund:
Gold Sector Funds
TT
Open-ended mutual fund scheme.
TT
Invest in gold, gold trading companies and gold mining companies.
Rohit: Got it! Now tell me about Real Estate Mutual Funds!
Puneet: Just like their name suggests, Real Estate Mutual Funds invest in real estate! These funds must
30
follow two conditions set by SEBI. Take a look at the features of this type of fund:
Real Estate Mutual Funds
TT
They ared closed - ended mutual fund schemes.
TT
They invest in real estate.
Rohit: And what about Active and Passive Funds?

Puneet: Active Funds are funds where the fund manager has the option to select the investment
portfolio. Take a look at the features of this type of fund:
Active Funds
TT
Fund manager can select the investment portfolio within the broad framework of the schemes
investment objective.
TT
Fund manager has a greater role which leads to increased fund expenses.
TT
Active funds are expected to perform better than the market.
Puneet: Passive funds are also called index schemes. These funds invest on the basis of a specified
index, whose performance it wants to monitor. Take a look at the features of this type of fund:
Passive Funds
TT
Passive Funds invest on the basis of a specified index, whose performance it wants to monitor.
TT
Each share in the schemes portfolio is in the same proportion as the share weightage in the
specified index.
TT
Passive Fund performance is usually the same as the performance of the specified index.
TT
Fund Manager has no role in deciding investments which leads to low running costs.
Puneet: This brings us to the end of types of mutual funds by nature!

Rohit: These types of funds are so interesting! I wonder what is the last type of fund like?
Puneet: There is no need to wonder Rohit.! I will tell you!
Mutual Funds by Investment Objective

Puneet: There are three different types of mutual funds by investment objective.
Mutual Funds
by Investment
Objective
Growth
Funds
Value Funds
Fund of Funds
Rohit: The first type is growth funds. What do these funds invest in?
31
Puneet: Growth funds are one of the main types of mutual funds. They invest in companies that are in
the expansion phase. Because of this, they have no dividend payout expectation. These companies also
have an above-average growth in earnings. The earnings are reinvested into expansion, acquisitions,
research and development. So these funds generate reasonable returns.
Take a look at the main features of these funds:
Growth Funds
TT
Diversified portfolio of stocks.
TT
Volatile - has a certain level of risk.
TT
Holding period ranges from 5 - 10 years.
TT
Main aim is capital appreciation with limited or no dividend payouts.
Rohit: Got it! What is the next type of fund?

Puneet: The next type of fund is value funds. These funds are also one of the main types of funds. They
are equity funds. Read on to learn more about them:
Value Funds
TT
Equity funds.
TT
Mainly hold undervalued stocks that have a high chance of paying dividends.
TT
The focus is not always on stocks with low price/ earning ration. This is more likely to happen
in the case if an undervalued company.
Puneet: The last type of fund by investment objective is Fund of Funds. These funds invest in....
Rohit: I know, I know! Mutual funds!
Puneet: Well done! Thats absolutely right! The aim of mutual funds is to provide investors with a
diversified portfolio of stocks and debt, thereby reducing long-term risk. The Fund of Funds go one step
further by investing in mutual funds. Take a look at the important features of these funds:
Fund of Funds
TT
Invest in different mutual fund schemes.
TT
Diversification is at the mutual fund level.
Commodity Funds
Commodities, as an asset class, include:
TT
food crops like wheat and gram
TT
spices like pepper and turmeric
TT
fibres like cotton
TT
industrial metals like copper and aluminium
TT
energy products like oil and natural gas
TT
precious metals (bullion) like gold and silver
The investment objective of commodity funds would specify which of these commodities it proposes
to invest in. In India, mutual fund schemes are not permitted to invest in commodities other than Gold
32
International Funds
Funds that invest outside the country. For instance, a mutual fund may offer a scheme to investors
in India , with an investment objective to invest abroad.
Puneet: Next, Let us learn more about Exchange Traded Funds
Exchange Traded Funds
Exchange Traded funds (ETF) are open-ended funds, whose units are traded in a stock exchange.
it allows investors to buy and sell units from the mutual fund, is made available only to very large
investors in an ETF. In order to facilitate such transactions in the stock market, the muual fund
appoints some intermediaries as market makers, whose job is to offer a price quote for buying and
selling units at all times.
Fund of Funds
TT
Invest in different mutual fund schemes.
TT
Diversification is at the mutual fund level.
Puneet: As of 31 March, 2012, the AUM of the industry has reached Rs. 5,87,217 from 1,309 schemes
offered by 44 mutual funds. Take a look at how these were distributed. (Source: www.amfiindia.com)
Open End
Closed End
Interval Fund
TOTAL
% to Total
Income
1,47,772
1,35,099
7,973
2,90,844
50
Equity
1,58,403
29
1,58,432
87
Balance
16,250
11
16,261
Liquid/Money
Market
80,354
80,354
14
Gilt
3,659
3,659
<1%
ELSS - Equity
21,149
2,495
23,644
Gold ETF
9,886
9,886
Other ETFs
1,607
1,607
<1%
Fund of Funds
Investing Overseas
2,530
2,530
<1%
4,41,610
1,37,634
7,973
5,87,217
100
Total
(In Rs Crore)
Puneet: In certain advanced countries, mutual fund AUM is a multiple of bank deposits. However
in India, the mutual fund AUM is not even 10% of bank deposits. This points to the countrys huge
potential for growth.
Rohit: Now I know all about the different types of mutual funds! Im going to go pen down all the
important things that I just learned. Thanks for all your help Puneet!
33
Mutual Funds by Investment Objective
34
TT
Open-ended funds are open for investors to enter or exit at any time and do not have a fixed
maturity. Investors can acquire new units from the scheme through a sale transaction at their sale
price, which is linked to the NAV of the scheme. Investors can cell their units to the scheme through
the a re-purchase transaction at their re-purchase price, which again is linked to the NAV.
TT
Close-ended funds have a fixed maturity and can be bought and sold in a stock exchange.
TT
Interval funds combine features of both open-ended schemes.
TT
Actively manage funds invest on the basis of a specified index, whose performance it seeks to track.
TT
Gilt funds invest in only treasury bills and government securities
TT
Diversified debt funds on the other hand, invest in a mix of government and non-government
debt securities
TT
Junk bond schemes or high yield bond schemes invest in companies that are of poor credit quality.
TT
Fixed maturity plans are a kind of debt fund where the investment portfolio is closely aligned to
the maturity of the scheme.
TT
Floating rate funds invest largely in floating rate debt securities.
TT
Liquid schemes or money market schemes are a variant of debt schemes that invest only in debt
securities of less than 61-days maturity.
TT
Diversified equity funds invest in a diverse mix of securities that cut across sectors.
TT
Sector funds invest in only a specific sector.
TT
Thematic funds invest in line with an investment theme. The investment is more broad-based
than a sector fund; but narrower than a diversified equity fund.
TT
Equity Linked Savinds Schemes (ELSS) offer tax benefits to investors.
TT
Equity income/Divedend Yield Schemes invest in shares that fluctuate less, and therefore
dividends represent a significant part of the returns of those shares.
TT
Monthly Income Plans seeks to declare a dividend every month.
TT
Capital Protected Schemes are close-ended schemes, which are structured to ensure that
investors get their principal back, irrespective of what happens to the market.
TT
Gold funds invest in Gold and Gold related securities. They can be structured as Gold Sector
Funds and Gold ETF Schemes.
TT
Real estate funds invest in real estate.
TT
Commodity funds invest in asset classes like food crops, spices, fibres, industrial metals, energy
products or precious metals as may be permitted by their investment charter.
TT
international funds invest in securities abroad. They are often structured as feeder funds linked
to a host fund.
TT
Fund of funds invest in other funds.
TT
Exchange Traded Funds are open-end funds that trade in the stock exchange.
Key Learnings
1.
How are mutual funds categorised?
2.
Write down two features of open-ended and closed-ended funds.
3.
Note down one SEBI regulation for real estate mutual funds.
4.
Write down four examples of equity funds.
5.
What are the two types of gold funds?
35
Worksheet
1.
a.
Fill in the Blanks

i.
Balance funds invest in
ii.
iii.
iv.
v.
b.
and
Fund of funds invest in

.
Value funds invest in
stocks.
The main aim of growth funds is
with little or no
payout.
Real estate mutual funds must invest minimum
of its corpus in
finished real estate assets.
Complete the table.
By Structure
By Nature
Open-Ended Funds
By Investment Objective
Growth Funds
Balance Funds
Gold Funds
2.
Multipal choice questions

a.
Units of
i.
ii.
iii.
iv.
b.
36
True
False
High yeild bond schemes invest in junk bonds.

i.
ii.
e.
True
False
Sector funds invest in a diverse range of sectors.

i.
ii.
d.
Sector funds
Arbitrage funds
Close ended funds
Liquid funds
Open-ended schemes generally offer exit option to investors through a stock exchange.
i.
ii.
c.
must be listed on the stock exchange
True
False
Investment objective is closely linked to

i.
ii.
iii.
iv.
Scheme
Option
Plan
SIP
Notes
37
Answers: Types of Mutual Funds

Question
Number
Answer
a.
i.
ii.
iii.
iv.
v.
Equity, debt
Mutual funds
Undervalued
Capital appreciation, dividend
35%
b.
1
By Structure
By Nature
Open-Ended Funds
Equity Funds
Growth Funds
Closed-Ended Funds
Debt Funds
Value Funds
Balance Funds
Fund of Funds
Gold Funds
Real Estate Mutual
Funds
38
By Investment
Objective
a.
iii
b.
ii
c.
ii
d.
e.
Fund Structure and Constituents

TT
explain the fund structure
TT
describe the role and functions of the constituents of a mutual fund
Session Plan
1
Module Overview
Structure of Mutual Funds
Sponsor
Trustee
AMC
Custodian
Other Service Providers
Key Learnings
Worksheet
Module Overview
A mutual fund is an investment vehicle used by groups of investors to make returns. The investors
pool money collectively and the AMC invests in certain securities. All mutual funds follow a certain
structure. This structure is regulated by SEBI (Mutual Fund) Regulations, 1996.
In this module, you will learn about the fund structure. You will also learn about the (intermediaries)
constituents of a mutual fund.
Structure of Mutual Funds

Rohit Sharma is reading about mutual funds. He comes across the following information:
In India, mutual funds are created as a Public Trust, which falls under the Indian Trusts act, 1882. A trust
is created by a mutual fund sponsor. The sponsor is responsible for appointing trustees, who in turn
appoint the Asset Management Company (AMC).
Rohit feels a bit lost. What do these terms mean? And what is their role in a mutual fund? Looks like it
is time for him to ask his friend Puneet, a mutual funds distributor, some questions!
Rohit: Puneet, who can be a sponsor? Why does it appoint trustees? And what is the role of an Asset
Management Company?
Puneet: Haha, slow down Rohit! Those are a lot of questions! The answers to them are very simple...
but before I answer them, you need to learn about the structure of a mutual fund.
39
Rohit: What is that?

Puneet: Rohit, every mutual fund must have a certain structure. This structure is regulated by SEBI
(Mutual Fund) Regulations, 1996. The structure is as follows:
Structure of a Mutual
Fund
Sponsor
Trustee
Asset Management
Company
Custodian
RTA
Rohit: I see. So these entities form the structure of a mutual fund.
Puneet: Thats right. And each of these entities has its own role and functions. Lets take a look at each
of these in detail. This Example will help you understand better.
Mutual Fund Trust
SBI Mutual Fund
Sponsor
State Bank of India
Trustee
SBI Mutual Fund Trustee Company Private Limited
AMC
Custodian
SBI Funds Management Private Limited

HDFC Bank Limited, Mumbai
CITI BANK N.A., Mumbai
Stock Holding Corporation of India Ltd., Mumbai
Bank Nova Scotia (custodian for Gold)
RTA
40
Computer Age Management Services Pvt.Ltd
Sponsor
Puneet: The sponsor is the promoter of the mutual fund. The sponsor can be a bank, a financial
institution or a corporate.
Rohit: Can any bank, financial institute or corporate become a promoter?
Puneet: Good question Rohit! And the answer is yes, if they fulfil certain prerequisites then they can
become sponsors like SBI, PNB, Fidelity etc. Take a look at these prerequisites!
Sponsors Must.....
TT
Have a track record of minimum five years in financial services.
TT
Have made a profit in at least three of those five years, including the last year.
TT
Contribute not less than 40% of the capital of the AMC.
TT
Latest net worth should be more than the amount that the sponsor contributes to the capital
of the AMC.
TT
The sponsor should have earned profits, after providing for depreciation and interest, in three
of the previous five years, including the latest year.
Rohit: So without fulfilling these requirements, an entity cannot become a sponsor. But if these
requirements are fulfilled, what does a sponsor do?
Puneet: A sponsor is responsible for performing certain very important functions. Here are some of the
most important functions of a sponsor.
The sponsor...
TT
Creates a Public Trust, which falls under the Indian Trust Act, 1882.
TT
Appoints trust as a mutual fund, and registers it with SEBI.
TT
With the approval of SEBI, appoints trustees to manage the trust.
TT
Creates an Asset Management Company, which falls under the Companies Act, 1956.
TT
With the approval of SEBI, appoints the company directors.
Rohit: Wow! The sponsor is responsible for a lot of things!

Puneet: Thats right. Now lets look at the next entity the trustee.
Trustee
Puneet: The sponsor, along with SEBI approval, appoints a board of trustees. Trustees are appointed in
a fiduciary capacity.
Rohit: What does that mean?
Puneet: It means their role is to protect the interests of the investors or unit holders of the fund. The
trustees ensure that the trust funds are invested in accordance with the mandate and objective of the
investors. They are legal guardians.
Rohit: That sounds like a very important job!
41
Puneet: It is! Thats why no major decisions can be made without trustee approval. Trustees also
perform many other important functions. Take a look!
Trustees ensure that...
TT
All mutual fund activities are as per SEBI (Mutual Fund) regulations, 1996.
TT
The systems and procedures of the Asset Management Company should be followed.
TT
All Asset Management Company schemes have trustee approval.
TT
The net worth of the Asset Management Company follows SEBI norms.
TT
The activities of the Asset Management Company are provided to SEBI every six months.
TT
The formation of the other fund constituents takes place.
TT
The Asset Management Company exercises the required due diligence when appointing the
constituents and business associates.
Puneet: For proper functioning of the trustees, certain rules must be followed at all times.
Rules for Trustees
TT
Evary trustee has to be a person of ability, integrity and standing.
TT
A person who is guilty of moral turpitude cannot be appointed trustee.
TT
A person convicted of any economic offence or violation of any securities laws cannot be
appointed as trustee.
TT
At least four trustees, two-thirds of whom must belong to the board of trustees, must remain
independent, i.e. not associated with the sponsor.
TT
The same trustee cannot be appointed to more than one mutual fund.
TT
A trust must be executed in favour of the trustees, by the fund sponsor. The trust is created
through a document referred to as the Trust Deed.
Asset Management Company (AMC)

Puneet: Now lets look at the next entity the Asset Management Company also known as AMC. AMCs
are registered with SEBI and formed as private limited companies. They are supervised by the trustees
and subject to SEBI regulations.
Asset Management Companies are divided into three parts:
Asset
Management
Company
Bank Sponsored
Institutions
Private Sector
Rohit: What is the role of an Asset Management Company?

Puneet: Asset Management Companies perform some important functions. Take a look at some of
their most important roles!
42
Asset Management Companies...

TT
Manage the trust funds. They receive a fee for handling the funds as per with the investors
requirements.
TT
Account for the operational aspects of the mutual fund.
TT
Appoint other constituents such as the custodian, registrar, transfer agent, bankers, security
dealers, fund accountants etc.
Puneet: Just like trustees, AMCs must also follow certain rules.
Rules for Asset Management Companies
TT
The directors of the assets management company need to be persons having adequate
professional experience in finance and financial services related field.
TT
The directors as well as key personnel of the AMC should not have ben found guilty of moral
turpitude or convicted of any economic offence or violation of any securities laws.
TT
Key personnel of the AMC should not have worked for any asset management company or
mutual fund or any intermediary during the period when its registration was suspended or
cancelled at any time by SEBI.
TT
Prior approval of the trustees is required, before a person is appointed as director on the
board of the AMC.
TT
An AMC cannot invest in its own schemes, unless the intention to invest is disclosed in the
Offer Document. Further, the AMC cannot charge any fees for the investment.
TT
The appointment of an AMC can be terminated by a majority of the trustees, or by 75% of

the Unit-holders. However, any changes in the AMC is subject to prior approval of SEBI and
the Unit-holders.
TT
The net worth of an AMC must be minimum Rs. 10 crores at all times.
TT
Minimum 40% of the AMC capital must be contributed by the sponsor.
TT
50% of the AMC directors must be independent.
TT
The AMC is forbidden to have any other business interest.
TT
The same AMC cannot be the trustee or AMC of other mutual funds.
TT
The AMC must report to the trustees on a quarterly basis.
TT
AMCs are only allowed to be engaged in the portfolio advisory and management business.
Puneet: Operations of AMCs are headed by a Managing Director, Executive Director or Chief Executive
oficer. Some of the other business heads are:
Chief Investment Officer (CIO), who is responsible for overall investment of the fund. Fund managers
assist the CIO. As per SEBI regulations, every scheme requires a fund manager, though the same fund
manager may manage multiple schemes.
Securities Analysts support the fund managers through their research inputs. These analysts come from
two streams, Fundamental Analysis and Technical Analysis. Some mutual funds also have an economist
to analyse the economy.
Secirities Dealers help in puting the transactions though in the market.
Chief Marketing Officer (CMO), who is responsible for mobilizing money under various schemes. Direct
Sales Team (who generally focus on large investors), Channel Managers (who manage the distributors)
and Advertising and Sales Promotion team support the CMO.
43
Chief Operations Officer (COO) handles all operational issues.

Compliance Officer needs to ensure all the legal cmpliances. In Offer Documents of new issues, he
signs a due-diligence certificate to the ffect that all regulations have been complied with, and that all
the intermediaries mentioned in the offer document have the requisite statutory registrations and
approvals.
In order to ensure independence, the Compliances Officer reports directly to the head of the AMC.
Further, he works closely wih the Trustees on various compliance and regulatory issues.
Custodian
Puneet: Another service provider is the custodian. The custodian has a very important role. It is
responsible for the safety of the securities that are in material form so it safeguards the funds and
assets of the investors. Besides this, it also performs a number of other functions.
Take a look at some of these functions!
Functions of Custodians
TT
They take delivery of the securities and ensure that the securities are transferred in the name
of the mutual fund.
TT
They maintain the investment records of the mutual fund.
TT
They collect, and also account for, the dividends and interest receivables on mutual fund
investments.
TT
They keep the accounts, transactions and balance sheets of the securities portfolio up to date.
TT
They monitor numerous corporate actions such as bonus and right issue, stock split, buy back,
open offers and more.
Other Service Providers

Puneet: There are also a number of other service providers. Take a look at some more information
about them.
Registrar and Transfer

Agents (RTA)
Auditors
44
TT
Responsible for maintaining investor records.
TT
Appointed by the AMC.
TT
Must be registered with SEBI.
TT
Manages the sale and purchase of units.
TT
Keeps the accounts of unit holders.
TT
Responsible for the audit of accounts.
TT
Scheme accounts must be maintained independently of AMC

accounts.
TT
Auditor of scheme accounts must be different from AMC auditor.
Fund Accountants
Distributors
Collecting Bankers
KYC Registration
Agencies
TT
Calculates the NAV by gathering information about each schemes

assets and liabilities.
TT
AMC can perform this function in-house, or through a service

provider.
TT
Distributors key role is to sell appropriate types of units to the

scheme investors.
TT
Distributors must pass the prescribed certification test.
TT
They must register with AMFI.
TT
Collection bankers are appointed by the AMC.
TT
They look after the bank accounts containing the investors money.
TT
As per SEBI regulations, there must be a unified KYC for the

securities market.
TT
KYC Registration Agencies must be registered with SEBI.
TT
All new investors, joint holders, PoW holders etc must comply with
the latest KYC guidelines.
Rohit: Now I know the structure of a mutual fund as well as a little bit about its constituents! Thanks
for all your help Puneet!
Checklist of Learning Points

TT
Mutual Funds in India are govened by SEBI (Mutual Fund) Regulations, 1996, as amended till
date.
TT
Thhe regulations permit mutual funds to invest in securities includung money market instruments,
of gold or gold related insstruments or real estate assets.
TT
Mutual funds are constituted as Trusts. The mutual fund trust is created by one or more sponsors,
who are the main persons behind invest in various schemes of the mutual fund operation.
TT
Every trust has beneficiaries, in the case of mutual fund trust, are the investors who invest in
various schemes of the mutual fund.
TT
In order to perform the trusteeship role, either individuals may be appointed as trustees or a
Trustee company may be appointed. When indivisuals are appointed trustees, they are jointly
referred to as Board of trustees. A trustee company functions through its Board of Directors.
TT
Day to day management of the schemes is handled by an AMC. The AMC is appointed by the
Sponsor or the Trustees.
TT
Investors invest in various scheme of the mutual fund. The record of investors and their unitholding may be maintened by the AMC itself, or it can appoint a Registrar & Transfer Agent (RTA).
TT
The sponsors needs to have a minimum 40% share holding in the capital of the AMC.
TT
The sponsor has to appoint at least 4 trustees - atleast two third of them need to be independent.
Prior approval of SEBI needs to be taken, before a person is appointed as Trustee.
TT
AMC should have networth of at least Rs 10 crore. At least 50% of the directors should be
independent directors. Prior approval of the trustees is required, before a person is appointed as
director on the Board of the AMC.
45
Key Learnings
46
1.
What is the structure of a mutual fund?
2.
What are two requirements for being a sponsor?
3.
Note down four functions of a trustee.
4.
Note down three rules for an Asset Management Company.
5.
Note down two functions of a custodian.
Worksheet
1.
a.
b.
c.
2.
3.
Sponsors must have a track record of minimum how many years in financial services?
i.
ii.
iii.
iv.
How often should the activities of the Asset Management Company be provided to SEBI?
i.
Every four months
ii.
Every six months
iii.
Every eight months
iv.
Every ten months
What is the minimum percentage of the AMC capital that must be sponsor contributed?
i.
10%
ii.
25%
iii.
40%
iv.
55%
Fill in the blanks.

a.
The sponsor is the
b.
Trustees are appointed in a
c.
Asset Management Companies manage the
d.
The custodian safeguards the
of the mutual fund.

capacity.
.
and
of the investors.
Multipal choice Question

a.
The assests of the mutual fund are held by

i.
ii.
iii.
iv.
AMC
Trustees
Custodian
Registrar
47
b.
Minimum networth requirment for AMC is

i.
ii.
iii.
iv.
c.
AMC directors are appointed with the permission of Trustees

i.
ii.
d.
True
False
Most investor service centres are offices of

i.
ii.
iii.
iv.
e.
Rs. 10crore
Rs. 5crore
Rs. 4crore
Rs. 2crore
Trustees
Registrar
Custodian
Fund Accountant
Fund accounting activity of a scheme is to be compulsorily outsourced

i.
ii.
True
False
Notes
48
49
Answers: Fund Structure and Constituents

Question Number
1
50
Answer
a.
iv.
b.
ii.
c.
iii.
a.
Promoter
b.
Fiduciary
c.
Trust funds
d.
Funds, assets
a.
iii
b.
c.
d.
ii
e.
ii
Legal and Regulatory Environment - Role of

Regulator in India
TT
list the various regulatory agencies
TT
state the roles of the regulatory agencies
TT
state the roles of the self-regulatory organisations
TT
state the role of AMFI as a regulatory body
TT
recall the AMFI code of ethics
Session Plan
1
Module Overview
Regulatory Agencies
Self-Regulatory Organisations
Role of AMFI
AMFI Code of Ethics (ACE)
AGNI
Guidelines for Circulation of Unauthenticated News
Due Diligence Process by AMCs for Distributors of Mutual Funds
Key Learnings
10
Worksheet
Module Overview
In order to ensure the safety of the public with regards to financial dealings, a number of regulatory
agencies have been created. The job of such agencies is to monitor and regulate the activities of
different financial institutions, and thus ensure that the standards for good practices are followed at
all times.
In this module, you will learn about these different regulatory agencies, specifically the mutual fund
industry body AMFI.
Regulatory Agencies
Rohit Sharma is making a note of the regulatory agencies in India. He sees that one of the most
important regulatory bodies in India is SEBI. Rohit knows that SEBI regulates mutual funds.
51
He also finds that besides SEBI there are a number of other important regulatory agencies. Take a look!
TT
Regulates all funds except offshore funds
TT
Regulates mutual funds, custodians, registrar, transfer

agents
TT
Regulates liquid funds invested in MM instruments
TT
Regulated by SEBI
TT
Have their own listing, trading and margining rules, i.e., NSE,
BSE
TT
Regulates the money market, government securities and

foreign exchange market
TT
Regulates issues regarding the AMC ownership by banks
MOF
TT
Supervises RBI and SEBI
Security Appelate Tribunal
TT
Listens to appeals against SEBI decisions
TT
Overseas compliance by companies
TT
Ensures that the AMC and Trustee Company comply with

the Indian Companies Act, 1956
TT
The annual accounts of the AMC and Trustee Companies are

filed with the ROC
TT
Supervises the Registrar of Companies
TT
Monitors the Mutual Fund Trustees
Public Trustees
TT
Listens to complaints against Mutual Fund Trustees and

Trustee Company for non-compliance with the Indian Trust
Act, 1882
Charity Commissioner
TT
Supervises the Public Trustees
SEBI
Stock Exchanges
RBI
Registrar of Companies (ROC)
Department of Company
Affairs
Rohit has finally finished his list of regulatory agencies! He shows this information to Puneet, his friend
who distributes mutual funds.
Puneet: Great work Rohit! But what about the second tier regulatory mechanisms?
Rohit: Second tier? What do you mean?
Puneet: Besides these regulatory agencies, we also have second tier regulatory mechanisms called
self-regulatory organisations (SRO). Let me tell you a little about them...
Self-Regulatory Organisations (SRO)

Puneet: Self-regulatory organisations, or SROs, regulate the workings of groups of people. These
organisations are second tier regulatory mechanisms.
Rohit: Oh I see. How have these organisations come about?
Puneet: They are created by market participants.
52
Rohit: And what powers do they have?

Puneet: Registered SROs are given powers by the regulator to carry out certain functions.
Powers of
Registered SROs
Enforce Rules
Seek
Information
Conduct
Inspections
Award
Penalties
Puneet: Tell me Rohit, can you name an SRO?

Rohit: Let me think. How about....AMFI!
Puneet: Nice try Rohit, but I am afraid you are wrong. Though the Association of Mutual Funds in India,
or AMFI was incorporated in 1995, it has still not been declared a self-regulatory organisation. Mutual
funds are regulated directly by SEBI without SRO interference.
Rohit: I see. Then how about stock exchanges? Are they self-regulatory organisations?
Puneet: Yes they are! All stock exchanges, like the NSE and BSE are SROs! They are monitored by SEBI.
This means Close-Ended Funds or ETFs that are listed on the Stock Exchange must follow the listing
agreement requirements of the Stock Exchanges.
Rohit: Now I have a good idea of what SROs are about!
TT
SROs are second tier regulatory mechanisms
TT
They regulate the workings of groups of people
TT
They are created by market participants
TT
Registered SROs are given powers by the regulator
TT
All stock exchanges are SROs and are supervised by SEBI (like NSE, BSE etc.)
TT
Mutual funds are supervised by SEBI directly
TT
AMFI is not an SRO
Puneet: Thats right! Let me tell you a little more about AMFI.
53
Role of AMFI
Puneet: As I mentioned earlier, AMFI is not a self-regulated organisation. It is an industry association.
It is governed by a Board of Directors made up of mutual fund members.
The Association of Mutual Funds has to perform certain roles.
Role of AMFI
TT
Promotes the interests of mutual fund and unit holders
TT
Interacts with SEBI, RBI, the Government and Regulators regarding mutual fund related
matters
TT
Sets ethical and professional standards for all mutual fund related operations
TT
Increases public awareness of the mutual fund industry
TT
Promotes best business practices and the code of conduct for all those engaged in mutual
fund and AMC activity
TT
Implements certification programs for intermediaries and those engaged in the selling of
mutual funds and AMFI Registration Number (ARN)
TT
Disseminates mutual fund industry information
TT
Develops a group of professional agents for distribution
Rohit: Wow! AMFI has some very important roles! No wonder it is such an important entity.
Puneet: Yes, it certainly is important. But Rohit, these roles are not the only important function of
AMFI. AMFI also lays down a code of ethics! Let me tell you about this code.

Puneet: The AMFI Code of Ethics, also called ACE, lays down the standards of good practices that must
be followed by all AMCs. It lists a code of ethics that covers a range of important areas. As per SEBI
(Mutual Funds) Regulation, 1996, all Asset Management Companies and Trustees must follow the
Code of Conduct as laid down in the Fifth Schedule to the Regulation. Take a look at a few of these
codes of conduct.

Integrity
Due Diligence
54
TT
ll business conducted by members and their key personnel should

A
follow the highest standards of integrity and fairness.
TT
T he organisation, operation, management and selection of securities

of mutual funds must be in the best interests of the unit holders.
TT
embers must always provide high service standards and exercise

M
due diligence and independent professional judgement.
TT
embers must have and utilise resources and procedures that are
M
capable of effectively carrying out Asset Management activities.
Disclosures
TT
embers must provide all unit holders with timely, accurate and easy
M
to understand information.
TT
I f members purchase/sell securities to associates or unit holders,

they must provide transaction details to the Board of Trustees, and to
the unit holders.
TT
embers must not use any unethical practices to sell investors any
M
products or schemes.
TT
embers must not exaggerate the performance of products or

M
schemes.
TT
Members must ensure that:
Professional Selling
Practices
TT
I nvestors receive true and accurate product/scheme

information

Investors are aware of scheme related risks before making
investment decisions

Copies of prospectus, memoranda etc is provided to investors
when required by them

Mutual fund units are allotted fairly and application money is
promptly refunded

Investor complaints are handled quickly and fairly
When members provide communications to investors/selling agents:
Investment Practices
The mutual fund scheme must not be presented as a new

share issue
They must not promote unrealistic expectations
They must not guarantee returns unless it is stated in the
schemes offer document
They must clearly convey a schemes market and investment
risk
They must not encourage investors by offering benefits not
related to the scheme
They must not misrepresent information by misleading or
omitting facts
TT
embers must manage schemes as per the stated fundamental

M
investment objectives and policies.
TT
embers must make investment decisions that benefit the unit

M
holders.
TT
embers must avoid conflicts of interest when managing scheme

M
affairs and must ensure that the interest of the unit holders comes first.
TT
embers must not create a false market, rig or manipulate prices, or

M
pass on price sensitive information with respect to securities.
TT
embers must not make changes to a schemes fundamental

M
attributes without first seeking the approval of the unit holders,
unless such changes are the cause of changes in the regulations.
Operations
55
Reporting Practices
TT
embers must follow standardised valuation policies that can be

M
compared. These must be as per the SEBI Mutual Fund Regulations.
TT
embers must ensure that cash and securities accounts are

M
segregated on a scheme-wise basis.
TT
embers must not make statements/carry out any actions that may
M
harm, or be disadvantageous to the interests of other members with
regards to market players or investors, when competing for funds to
invest in.
TT
embers must follow the word and spirit stated in the Statutes, Rules
M
and Regulations.
TT
embers must distribute the AMFI Code to all the people who fall
M
under it.
TT
Members must make it mandatory for the code to be followed.
TT
embers must ensure that all officers and employees sign a statement
M
declaring that they have received and read a copy of the code.
TT
ertain terms have been defined in the code, and these terms should
C
be used as per the definitions laid down, unless stated otherwise.
Unfair Competition
Observance of
Statutes, Rules and
Regulations
Enforcement
Definitions
Rohit: This code has listed some very important ethical standards.
Puneet: Thats right Rohit. That is why it is so important that all the AMCs follow this code of ethics in
their operations, as well as in their dealings with investors, intermediaries and the public.
AMFI Guidelines and Norms for Intermediaries (AGNI)

Puneet: AMFI also lays down guidelines and norms for intermediaries. Take a look at some of them.
AMFI Guidelines and Norms for Intermediaries (AGNI):
56
TT
Take required steps to ensure that the interest of the clients comes first.
TT
E nsure that the SEBI Mutual Fund Regulations and guidelines for selling, distribution and
advertising practices are followed.
TT
Provide complete and up to date scheme information to investors.
TT
ring to attention a schemes risks, do not misrepresent or exaggerate facts, and urge investors
B
to make informed investment decisions by reading SID/KIM.
TT
Provide investors with all material information.
TT
Avoid guaranteeing or indicating the returns of any scheme, unless stated in the SID.
TT
Maintain the infrastructure required for AMCs to provide investors with high service standards.
TT
void conspiring with clients to carry out wrong business practices and avoid malpractices for
A
the purpose of commission.
Guidelines for Circulation of Unauthenticated News

Puneet: SEBI has sent all market intermediaries a set of guidelines with regards to the distribution of
unverified news through different communication channels. These guidelines are as follows:
TT
roper internal codes of conduct and controls should be laid down by market intermediaries
P
registered by SEBI.
TT
ccess to blogs/chat sites/ messenger sites and so on should either be restricted or should not
A
be allowed.
TT
L ogs of blogs/chat sites/ messenger sites etc should be viewed as records and should be saved in
the manner specified by the regulation governing the concerned intermediary.
TT
E mployees should be informed that they can only forward market related news once the news
has been seen and approved by the Compliance Officer of the concerned intermediary.
Due Diligence Process by AMCs for Distributors of Mutual Funds

Rohit: Puneet, I heard that SEBI has recently mandated AMCs to lay down a due diligence process.
What is this for?
Puneet: The purpose of the due diligence process is to regulate distributors who qualify for any one of
these criteria:
TT
Multiple point presence (more than 20 locations)
TT
AUM raised above Rs. 100 crores across the industry, including high networth individuals (HNIs)
TT
Commission of over Rs. 1 crore p.a. received, across the industry
TT
Commission of over Rs. 50 lakh p.a. received, from a single Mutual Fund
Puneet: The due diligence process deals with satisfying fit and proper criteria that incorporates factors
like:
TT
Business model, experience and business proficiency
TT
ecords of regulatory/statutory levies, fines and penalities, legal suits, compensations made to
R
customers, causes and results of corrective action
TT
Review of associates and subsidiaries on the above mentioned factors
TT
rganisational controls that make sure that there is a separation between the sales and
O
relationship management personnel and the following processes:
ustomer risk/Investment objective evaluation

C
Mutual Fund scheme evaluation and determining its appropriateness to different customer
risk categories
Categorising customer relationships and transactions as advisory and execution only
Advisory - where a distributor represents to offer advice while distributing the

product, it will be subject to the principal of appropriateness of products to
that customer category. Appropriatenessis defined as selling only that product
categorization that is indentifies as best suited for investors within a defined upper
selling of risk appetite.No exception shall be made.
57
Execution Only - in case of transactions that are not booked as advisory, it shall
still require:

The distributor has information to believe that the transaction is not
appropriate for the customer, a written communication be made to the
investor regarding the unsuitability of the product.

A customer confirmation to the effect that the transaction is execution only
notwithstanding the advice of in-appropriateness from that distributor be
obtained prior to the execution of the transaction.

That on all such execution only transactions, the customer is not required to
play the distributor anything other than the standard flat transaction charge.
There shall be no third categorization of customer relationship/transaction.

While selling Mutual Fund products of the distributors/group/affiliate/associates,
the distributor shall make disclosure to the customer regarding the conflict of
interest arising from the distributor selling of such products.

TT
SEBI regulates mutual funds, depositories, custodians and registrars & transfer agents in the
country.
TT
AMFI is an industry body, but not a self regulatory organization.
TT
The AMFI Code of Ethics sets out the standards of good practices to be followed by the Asset
Management Companies in their operations and in their dealings with investors, intermediaries
and the public.
TT
AMFI has framed AGNI, a set of guidelines and code of conduct for intermediaries, consisting
of individual agents, brokers, distribution houses and banks engaged in selling of mutual fund
products.
Key Learnings
1.
58
Name four regulatory agencies in India.
2.
What powers do registered SROs have?
3.
Note down four functions of AMFI.
4.
List four standards covered in the AMFI Code of Ethics.
Worksheet
1.
a.
b.
Which of the following is a SRO?

i.
SEBI
ii.
Stock Exchange
iii.
AMFI
iv.
Reserve Bank of India
What is AMFI?
i.
Self-regulated organisation
ii.
Financial institutions
iii.
Industry association
iv.
Government body
59
2.
3.
Fill in the blanks.

a.
AMFI is governed by
b.
SEBI regulates all funds except
c.
SROs are
funds.
regulatory mechanisms.
Match the entity with its role.

a.
SROs
i.
Promotes the interests of mutual fund and unit holders
b.
SEBI
ii.
Regulates the money market
c.
AMFI
iii.
Regulates the workings of groups of people
d.
RBI
iv.
Lays down the standards of good practices for AMCs
e.
ACE
v.
Regulates mutual funds
Notes
60
61
Answers: Legal and Regulatory Environment

Question Number
1
62
Answer
a.
ii.
b.
iii.
a.
A board of directors
b.
Offshore
c.
Second tier
a.
iii
b.
c.
d.
ii
e.
iv
Investors Rights and Obligations

TT
state the rights and obligations of investors
Session Plan
1
Module Overview
Investors Rights
Limitations of Rights of Unit Holders
Investors Obligations
Unclaimed Amounts
Proceeds of Illiquid Securities
Can a Mutual Fund Scheme go bust?
Key Learnings
10
Worksheet
Module Overview
Ignorance is never bliss, a fact that holds true even when it comes to mutual fund investments. Before
investing in mutual funds, all potential investors should protect themselves by knowing their rights.
Along with rights, investors also have certain obligations, and it is equally important for investors to
know about both.
In this module you will learn about the rights, as well as the obligations, of investors.
Investors Rights
Rohit Sharma was at home reading about mutual funds when he heard the door bell ring. He opened
the door to find his friend Sheetal looking extremely distraught.
Sheetal: Oh Rohit! Im in a real fix!
Rohit: What happened Sheetal?
Sheetal: I need to file my statement of returns in the next 10 days and I completely forgot about it! I
have just asked for my statements to be sent to me today! How will I ever file them in time!
Rohit: Dont worry Sheetal! As an investor, you have the right to receive the statement of accounts
within five working days of your request!
63
Sheetal: Really?? Thats great! But...do you have any idea how much they cost? I hope they are not too
expensive...
Rohit: They are totally free! You have the right to receive the statements free of charge! And this is not
your only right....
You see Sheetal, investors have many rights when it comes to mutual funds. Broadly speaking, investors
rights can categorised in the following manner:
Right to
Terminate the
AMC
Right to
Proportionate
Beneficial
Ownership
Right to
Timely
Service
Investors
Rights
Right to
Wind Up a
Scheme
Right to
Information
Right to
Approve change in
Fundamental
Attributes
Sheetal: What does this mean?

Rohit: Let me explain with the help of some common situations. I will point out the rights we have for
each situation!
Situation
Investors Right
Investor wants his proceeds to go to a

particular individual after his demise.
Investor has the right to appoint a nominee, who will

receive the proceeds of the folio on the demise of the
investor.
Investors can appoint up to 3 nominees.
64
Investor wants a change of broker.
Investor has the right to request a change of broker, either

by writing a letter to the mutual fund, or by going directly,
without providing a No Objection Certificate (NOC).
Investor requires his demat holdings.
Investor has the right to receive demat statements. This

can be achieved through request to the DP.
Investor is dormant, i.e., no transactions

have been made in the last 6 months.
Investor still has the right to receive the statement of

accounts along with portfolio statements.
Investor has requested an email copy of

the statement of accounts.
Investor has the right to receive a soft copy of the

statement of accounts, on a monthly basis.
Investor wants to pledge units.
Investor has the right to pledge the units held. This is

usually done to provide security to a financier.
Sheetal: Oh I see what you mean!

Rohit: We also have certain rights specifically relating to timely service. Take a look.
Investors Right to Timely Service

Situation
Investors Right
Investor faces a delay in receiving dividend

warrants or redemption/repurchase cheques.
Investor has the right to receive interest at the

rate of 15% p.a., paid by the AMC if payment is
received after 10 days.
Investor specifically requests a statement of

accounts.
Investor has the right to receive the statement of

accounts within 5 working days, free of charge.
Investor requests a unit certificate.
Investor has the right to receive unit certificates

within 30 days of the request.
Sheetal is amazed at the rights that investors have! But Rohit has not finished yet!
Rohit: We also have rights with respect to the management of the fund. This gives us a lot of rights with
regards to winding up schemes, terminating the AMC, approving changes in the fundamental attributes
and more.
Investors Rights to Fund Management

Situation
There is a proposed change in fundamental
attitudes like change in the sponsor or the AMC.
Investor Rights
Investors have a right to know about this change,
which should be informed to them in writing.
Investors also have the right to exit the scheme,
without any exit load, for minimum 30 days after
the change being declared.
Investors want to terminate or wind up a scheme.
Investors have the right to terminate or wind up

a scheme, if a resolution is passed by minimum
75% of the unit holders of the scheme.
Trustees want to terminate or wind up a scheme.
If trustees want to terminate or wind up a

scheme, investors have the right to be asked for
consent.
Sheetal: Amazing! I had no idea that we had so many rights.

Rohit: Thats not all Sheetal. Investors also have the right to certain information. There are also rules
regarding the frequency and the manner in which that information must be disclosed.
65
Investors Rights Information Disclosure

Information that must be disclosed
Rules for Disclosure

Must be published every day in minimum 2
national newspapers
NAV
Must be updated on both, the AMFI and AMC

websites by 9 p.m.
NAV, sale price and re-purchase price
Note: For Fund of Funds this is 10 a.m. of the

next day
Details of portfolios
Must be disclosed to investors in the prescribed

format every 6 months (within 1 month from the
end of each half-year)
Portfolio of closed-ended debt funds and interval

funds
Must be published on the website within the last

3 working days of the month
Portfolio summary
Although a voluntary industry practice, the

summary must be disclosed to investors through
a factsheet, every month
Scheme-wise annual report
Must be mailed to investors within the last 6

months of the financial year
Rohit: Investors also have the right to inspect key documents. This does not include investment strategy
documents. Take a look at these key documents.
Key
Documents
Trust Deed
R & T Agent
Agreement
Investment
Management
Agreement
Custodial Services
Agreement
Memorandum and
Articals of Association
of the AMC
66

Rohit: As investors we have many rights, but there are also some limitations to our rights as unit holders.
Sheetal: Can you tell me about some of the limitations?
Rohit: Sure. Take a look at some important limitations that you should always keep in mind.

Investors cannot sue the
trust
The principle of caveat

emptor applies to mutual
fund investments
Proposed investors cannot
proceed against the AMC or
trustees
Investors cannot avail
of protection under the
Companies Act, 1956
TT
According to the law, a trust is a notional entity, and therefore

it cannot be sued.
TT
However, investors can sue trustees.
TT
Caveat emptor means let the buyer beware. This principle is

applicable to mutual fund investments.
TT
This means unit holders cannot ask for legal protection by

claiming to be unaware of law provisions or matters that are
clearly mentioned in the Offer Document.
TT
Proposed investors are investors who have not invested in

the scheme. Such investors do not have the right to proceed
against the AMC or trustees.
TT
Protection under the Companies Act, 1956 is only applicable to

shareholders and those who invest in company fixed deposits.
TT
Those who invest in schemes do not fall under either of these

two categories and therefore are not safeguarded under such
protection.
Sheetal: Incredible! I think I should find out more about my rights before I make any more investments.!
Rohit: Thats a good idea Sheetal! It is always wise to know your rights.! But dont forget...along with
power comes responsibility.! These rights go hand in hand with certain obligations. It is our duty to
recognise these obligations and abide by them.
Rohit: Investors have certain obligations that they must adhere to.
TT
Read the Offer Document
TT
Understand the factors that may cause risk
TT
Monitor their investments - this responsibility lies solely with the investor
TT
Ask for any information that is required
TT
KYC and PAN card is compulsory, except in the case of micro-SIP
Sheetal: You know Rohit, all these obligations are actually in our best interests.
Rohit: You are absolutely correct Sheetal! Thats why we must take these obligations seriously. So
remember be aware of your rights as well as your obligations. They are both equally important.
67
Unclaimed Amounts
Sheetal: I have a question Rohit. What happens if a mutual fund has dividends that unclaimed?
Rohit: All unclaimed dividend and redemption amounts must be redistributed in the money market by
the mutual fund. The AMC can recover expenses like investment management and advisory fees on the
management of the unclaimed amounts, at a maximum rate of 0.50% p.a.
The way for an investor to recover unclaimed amounts depends on when the investor makes the claim.
The investor claims the money
within 3 years
The investors claims the money
after 3 years
TT
Payment depends on the current NAV. This means the

income earned is added to the unclaimed money.
TT
Payment depends on the NAV at the end of 3 years.
Proceeds of Illiquid Securities

Sheetal: Rohit, what would happen if a security was treated as non-recoverable when the scheme
wound up, and then at a later date the security yielded a higher amount to the scheme?
Rohit: Sometimes schemes can be treated as wholly or partly non-recoverable at the time of maturity
or at the time of the winding up of the scheme. If such a security yields a igher amount at a later date,
then it has to be treated in the following manner:
TT
I f the amounts are considerable and recovered within 2 years, then the amount must be paid to
the old investors.
TT
I n other cases the amount must be transferred to the Investor Education Fund managed by each
mutual fund.
Can a Mutual Fund Scheme go bust?

While the AMC Managers the investments of the scheme, the assets of the scheme are held by the
Custodian. Both operate under the overall control of the Trustees. This system of checks and balances
protects the investors from misappropriation of funds, fraud etc.
Even if some sponsors wish to move out of the business, they need to bring in some other sponsor,
acceptable to SEBI, before they can exit. The new sponsor would need to put in place the entire
framework of Trustrees, AMC etc. Therefore, unlike the occasional experience of vanishing companies
in shares, mutual funds cannot vanish.
It is also pertinent to note that the custodian has custody of the investment in a scheme. As seen in unit
2, the custodian is independent of the sponsor and the AMC. This ensures structural protection of the
scheme asseets for the benefit of investors.
Further, in the event of a change in sponsorship that an investor is not comfortable with, the option of
exiting from the scheme with the full NAV is available for 30-day period.
These structural requirements ensure that the investor is fully protected from most of the contingencies
that can be envisaged.
68

TT
Statement of accounts is to be sent to investors within 5 days of closure of the NFO.
TT
Investor can ask for a Unit Certificate for a Unit Holding. This is different from a Statement of
Account.
TT
NAV has to be published daily, in at least 2 newspapers.
TT
NAV and Re-purchase Price is to be updated in the website of AMFI and the mutual fund.
TT
The investor/s can appoint a nominee, who will be entitles to the Units in the event of the
demise of the investor/s.
TT
The investor can also pledge the units. This is normally done to offer security to a financier.
TT
Dividend warrants have to be dispatched to investors within 30 days of declaration of the

dividend.
TT
Redemption / re-purchase cheques would need to be dispatched to investors within 10 working

days from the date of receipt of request.
TT
Unit-holders have proportionate right to the beneficial ownership of the assets of the scheme.
TT
Invetsors can choose to change their distributor or go direct. In such cases, AMCs will need to
comply, without insisting on No Objection Certificate from the existing distributor.
TT
Investors can choose to hold he units in dematerialised form. The mutual fund / AMC is bound
to co-ordinate with the RTA and Depository to facilitate this.
TT
In the case of unit-holding in demat form, the demat statement given by the Depository
participant would be treated as compliance with the requirement of Statement of Account.
TT
The mutual fund has to publish a complete statement of the scheme portfolio and the unaudited
financial results, within 1 month from the close of each half year. In lieu of the advrtisement, the
mutual fund may choose to send the portfolio statement to all Unit-holders.
TT
Debt - oriented, close-ended / interval, schemes plants need to disclose their portfolio in their
website every month, by the 3rd working day of the succeeding month.
TT
Scheme-wise Annual Report to an abridged summary has to be mailed to all unit-holders within
6 months of the close of the financial year.
TT
The Annual Report of AMC has to be displayed on the website of the mutual fund. The Schemewise Annual Report will mention that Unit-holders can ask for a copy of the AMCs Annual
Report.
TT
The trustees / AMC cannot make any change in the fundamental atributes of a scheme, unless
the requisite processes have been cmplied. This includes option to dissenting unit-holders to exit
at the prevaling Net Asset Value, without any exit load. This exit window has to be open for at
least 30 days.
TT
The appointment of the AMC for a mutual fund can be terminated by a majority of the trustees
or by 75% of the Unit-holders (in practice, units-holding) of the Scheme.
TT
75% of the Unit-holders (in practice, units-holding) can pass a resoution to wind-up a scheme.
TT
If an investor feels that the trustees have not fulfilled their obligations, then he can file a suit
against the trustees for breach of trust.
69
TT
Under the law, a trust is a notional entity. Therefore, investors cannot sue the trust (but they can
file suits against trustees).
TT
The principal of caveat emptor (let the buyer beware)applies to mutual fund investments.
TT
The investor can claim his money from the scheme within 3 years . Payment will be based on
prevaling NAV. If the investor claims the money after 3 years, then payment is based on the NAV
at the end of 3 years
TT
If a security that was written off earlier is now recovered, within 2 years of closure of the scheme,
and if the amounts are substantial, then the amount is to be paid to the old investors. In other
cases, the amount is to be transferrd to the Investor Education Fund maintained by each mutual
fund.
TT
PAN No. and KYC documentation is compulsory for mutual fund investments. Only exception is
micro-SIPs.
TT
Investors need to give their bank account details along with the redemption request.
TT
Adequate safeguards exits to protect the investors from the possibility of a scheme going bust.
Key Learnings
70
1.
How should details of portfolios be disclosed?
2.
How should details of portfolios be disclosed?
3.
hat rights do investors have when there is a proposed change in fundamental

W
attitudes?
4.
Note down the rights of investors regarding a change in broker.
5.
Note down two obligations of investors.
71
Worksheet
1.
a.
b.
2.
3.
I nvestors can terminate a scheme, provided a resolution is passed by those holding what
percentage of the unit-holding of the scheme?
i.
25%
ii.
55%
iii.
75%
iv.
95%
T he NAV, sale price and re-purchase price must be updated on the AMFI and AMC websites
by what time?
i.
6 p.m.
ii.
9 p.m.
iii.
8 a.m.
iv.
11 a.m.
Fill in the blanks.

a.
Investors have the right to receive a unit certificate within

days of the request.
b.
Investors have the right to inspect key documents except
c.
If trustees want to terminate a scheme, investors have the right to be
d.
Investors are obligated to
Multilpe Choise Questions.

a.
SEBI regulates
i.
ii.
iii.
iv.
b.
Mutual Funds
Depositories
Registrar & Transfer Agents
All the above
Investment objective defines the broad investment charter

i.
ii.
72
their investments.
True
False
working
.
.
c.
Statment of Account is to sent to investors within

i.
ii.
iii.
iv.
d.
e.
3
5
7
15
Within
i.
ii.
iii.
iv.
days of NFO closure
days of divident declaration, warrants will have to be sent to investors
7
10
15
30
Unit holder can hold their units in demat from

i.
ii.
True
False
Notes
73
Answers: Investors Rights and Obligations

Question Number
1
74
Answer
a.
iii.
b.
ii.
a.
30.
b.
Investment strategy documents
c.
Asked for consent
d.
Monitor
a.
iv
b.
c.
ii
d.
iv
e.
Offer Document
TT
identify the importance of an Offer Document
TT
name the parts of an Offer Document
TT
discuss the contents of an Offer Document
Session Plan
1
Module Overview
What is the Offer Document
Contents of Scheme Information Document (SID)
Contents of Statement of Additional Information (SAI)
Update of SID
Contents of Key Information Memorandum (KIM)
Key Learnings
Worksheet
Module Overview
Before making an investment decision, all investors should be aware of the important facts relating to
the scheme in question. All the information regarding the scheme is laid out in the mutual fund Offer
Document. It is very important that investors read this document carefully, so that they can make an
informed decision at the time of investment.
In this module, you will learn the meaning of an Offer Document. You will also learn about the
information contained in an Offer Document.
What is the Offer Document

Rohit: Puneet, can you tell me what an Offer Document is?
Puneet: Sure! The Offer Document is a legal document that provides investors with the details of any
NFO.
The Offer Document provides information like:
TT
The nature of the scheme
TT
The investment objectives of the scheme
TT
The term of the scheme

75
These are called the fundamental attributes of the scheme. The AMC cannot change these attributes
without going through certain legal processes. The AMC also needs the permission of the investors.
Rohit: So the Offer Document provides all the important information relating to the scheme, so that
investors can make an informed decision. I can see why it is so important! I hope all investors read this
document before investing.
Puneet: Actually, reading the Offer Document is compulsory for all those investing for the first time.
In fact, all investors have to sign a form declaring that they have read and understood this document.
So now you have a good idea of what the offer document is all about. Take a look at its main points!
Features of an Offer Document
TT
A mutual fund offer document is a legal document
TT
It is issued by the AMC on behalf of the trustees and duly examined by SEBI
TT
It is a prospectus that invites the public to subscribe to the units of a scheme
TT
It reveals the fundamental attributes of a scheme
TT
First time investors must read the offer document before investing
TT
Investors must sign a form stating that they have read and understood the offer document
TT
Three dates are relevant for the NFO of an open-endd scheme:

NFO Open Date - This is the date from which investors can invest in the NFO
NFO Close Date - This is the date upto which investors can invest in the NFO
Scheme Re-opening Date -This the date from which the investors can offer their units for repurchase to the scheme(at the re-ourchase price); or by new units of the scheme (at the sale
price. The AMC announces Sale and Re-purchase prices from the Scheme Re-opening Date.
Note: Close-ended Scheme have an NFO Open Date and NFO Close Date. But, they have no Scheme
Re-Opening Date, because the scheme does not sell or re-purchase units.
Unde the SEBI guidelines, NFOs other than ELSS can remain open for a maximum of 15 days.
Allotment of units or refund of moneys, as the case may be, should be done within 5 business days
of closure of the scheme.
Puneet: The Offer Document has two parts.
Mutual Fund Offer Document
Scheme Information
Document ( SID )
Statement of Additional
Information ( SAI )
Puneet: Both these documents are prepared as per formats set by SEBI, and then submitted to SEBI.
Lets look at the Scheme Information Document in detail.
76
Contents of Scheme Information Document (SID)

Puneet: The Scheme Information Document, also called SID, contains details of the scheme.
This document must be approved by SEBI before the scheme is launched.
Rohit: Where can I find this document? I would like to take a look at it.
Puneet: You can find it on the mutual fund website. Every mutual fund must provide the option to
download the Scheme Information Document on its website.
Rohit goes onto a mutual fund website and downloads the document.
Puneet: Take a look at the cover page first.
Cover Page
TT
Mutual Fund Name
TT
Scheme Name
TT
Scheme Type
TT
Asset Management Company Name
TT
Face Value of Units
TT
Relevent NFO Dates
TT
Name and Contact Information of AMC and Trustee company
TT
Mandatory Statement
TT
Standard Clauses
Puneet: Take a look at some of the standard clauses.

Standard Clauses:
The particulars of the Scheme have been prepared in accordance with the Securities and Exchange
Board of India (Mutual Funds) Regulations 1996, (herein after referred to as SEBI (MF) Regulations)
as amended till date, and filed with SEBI, along with a Due Diligence Certificate from the AMC. The
units being offered for public subscription have not been approved or recommended by SEBI nor has
SEBI certified the accuracy or adequacy of the Scheme Information Document.
The investors are advised to refer to the Statement of Additional Information (SAI) for details of
______________ Mutual Fund, tax and Legal issues and general information on www._____________.
(website address).
SAI is incorporated by reference (is legally a part of the Scheme Information Document). For a free
copy of the current SAI, please contact your nearest Investor Service Centre or log on to our website.
Puneet: The SID must have certain mandatory disclosures on its cover page. It also contains certain
other content. Take a look.
77
Other Content
TT
Table of Contents
TT
Highlights
TT
Introduction

TT
Risk Factors
Standard
TT
Scheme-specific

TT
Provisions regarding minium no. of investors in the scheme

Any other special considerations
Definations
Due Diligence Certificate (issued by the AMC)
Information about the scheme
TT
Units and Offer
TT
Fees & Expenses
TT
Rights of Unit-holders
TT
Penalties, Litigation etc.
Rohit: Now I understand what a Scheme Information Document is all about!

Features of a Scheme Information Document
TT
Contains details relating to the scheme
TT
Requires SEBI approval before the scheme is launched
TT
Must be downloadable on the mutual fund website
TT
Must provide certain mandatory disclosures on its cover page
Update of SID
Regular
If a scheme is launched in the first 6 months of the financial year (say, April 2010), then the first update
of the SID is due within 3 months of the end of the financial year (i.e. by June 2011).
If a scheme is launched in the seond 6 months of the financial year(say, October 2010), then the first
update of the SID is due within 3 months of the end of the next financial year (i.e by June 2012).
Thereafter, SID is to be updated every year.
Need-based
In case of change in the fundamental attributes, the SID has to be updated immediately after the lapse
of the time period given to existing investors to exit the scheme.
In case of any other changes
TT
78
It will be printed on a separate piece of paper (addendum) and distributed along with the SID,
until the SID is updated.
TT
If a change is superseded by a further change (for instance, change in load), then addenda is
not are rquired for thesuperseded change i.e. addenda is only required to disclose the latest
position.
TT
The change is to be advertised in an English newspaper having nation-wide circulation, and in a

newspaper of the language of the region where the head of the mutual fund is located.
TT
The change is to be mentioned in the websie of the mutual fund.
Contents of Statement of Additional Information (SAI)

Puneet: The Statement of Additional Information (SAI) contains statutory information about the mutual
fund that is offering the scheme.
Contents of Statement of Additional Information (SAI):
TT
Information about Sponsors, AMC and Trustee Company
TT
Condensed financial information for schemes launched in the last 3 financial years
TT
How to apply
TT
Rights of unit holders
TT
Investment valuation norms
TT
Tax, Legal and General Information
Puneet: Investors can download the SAI from the mutual fund websites. The AMFI website allows
investors to access the SAI of all the mutual funds. Investors also have the right to ask for a printed
copy of the SAI.
Regular update is to be done by the end of 3 months of every financial year.
Material changes have to be updated on an ongoing basis and uploaded on the websites of the mutual
fund and AMFI.
Now let me tell you about another important document - The Key Information Memorandum.
Contents of Key Information Memorandum (KIM)

Puneet: The Key Information Memorandum, also called the KIM, basically summarises the SID and the
SAI. According to SEBI regulations, the KIM must be sent along with all application forms.
Take a look at the information contained in a KIM.
Contents of the KIM
79
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
Asset Management Company Name

Mutual Fund Trustee Name
Fund Manger Name
Scheme Name
Dates of NFO Opening, Closing and Re-Opening
Plans and Options
Risk Profile of Scheme
Issue Price of Units
Minimum Amount for Initial Purchase
Additional Purchase
and Repurchase
Benchmark, Loads and Expenses
Dividend Policy
Performance of Reopened Schemes Against Benchmarks of last 1, 3, 5 Years and
Since Inception
Contact Details of Registrar for Investor Grievances
Puneet: The scheme/plan must have minimum 20 investors. No single investor should account for
more than 25% of the corpus of the scheme/plan.
KIM is to be updated at least once a year.
As in the case of SID, KIM is to be revised in the case of change in fundamental attributes. Other
changes can be disclosed through addenda attached to the KIM.
Rohit: These documents contain so much valuable data! Thanks for showing these to me Puneet!
80
TT
Under the SEBI guidelines, NFOs other than ELSS can remain open for a maximum of 15 days.
Allotment of units or refund of moneys, as the case may be, should be done within 5 business
days of closure of the scheme. Further, open-ended schemes have to re-open for sale / repurchase within 5 business days of the allotment.
TT
Investors get to know the details of any NFO through the Offer Document, which is one of the
most important sources of information about the scheme for investors. investments by the
visitors are governed by the principle of caveat emptor i. e. let the buyer beware.
TT
Mutual Fund Offer Documents have two parts: (a) Scheme Information Document (SID), Which
has details of the scheme (b) Statement of Additional Information (SAI), which has statutory
information about the mutual fund that is offering the scheme.
TT
In practice, SID and SAI are two separate documents, though the legal technicality is that SAI is
part of the SID. Both documents need to be updated regularly.
TT
Offer Documents in the market are vetted by SEBI, though SEBI does not formally approve
them.
TT
KIM is essentially a summary of the SID and SAi. It is more easily widely distributed in the market.
As per SEBI regulations, every applications form is to be accompanied by the KIM.
TT
Debt funds have to make additional disclosures related to credit evaluation policy, sectors and
types of investments (within specified limits)
TT
Mutual Funds/AMCs ned to disclose portfolio (along wih ISIN) as on the last day of the month for
all their schemes on their website, in a user-friendly and downloadable format, on or before the
tenth day of the succeeding month.
TT
Mutual funds/AMCs are to make half yearly disclosures of their unaudited financial results on
their respective website in a user-friendly and downloadable format.
Key Learnings
1.
What is the purpose of an Offer Document?
2.
Name the two parts of an Offer Document.
3.
Note down five topics covered in a Scheme Information Document.
4.
List five topics covered in the Key information Memorandum.
81
Worksheet
1.
2.
3.
Fill in the blanks.

a.
The Scheme Information Document contains
b.
The
c.
The Offer Document is a
d.
Investors must sign a form declaring they have

the Offer Document.
e.
The Key Information Memorandum summarises the

.
must be sent with all application forms.

document, duly examined by
and
and
Match the columns.

a.
Offer Document
i.
Summarises the SID and the SAI
b.
Scheme Information Document
ii.
Reveals fundamental attributes of

the scheme
c.
Key Information Memorandum
iii.
Provides scheme details
Multipal Choise Questios

a.
NFOs other than ELSS can be open for a maximum of:

i.
ii.
iii.
iv.
b.
c.
e.
True
False
Offer documents of mutual fund schemes are apporved by SEBI

i.
ii.
d.
7 days
10 days
15 days
30 days
Legally, SAI is part of SID

i.
ii.
82
of the scheme.
True
False
Application from is attached to

i.
SID
ii.
SAI
iii.
KIM
iv.
none of the above
KIM has to be updated every 6 months

i.
True
ii.
False
Notes
83
Answers: Offer Document

Question Number
84
Answer
a.
Details
b.
Key Information Memorandum (KIM)
c.
Legal, SEBI
d.
Read, Understood
e.
Scheme Information Document (SID), Statement of

Additional Information (SAI)
a.
ii
b.
c.
iii
a.
iii
b.
c.
ii
d.
iii
e.
ii
Fund Distribution - Distribution Channels

TT
identify those who can invest in mutual funds
TT
explain the role of distribution channels
Session Plan
1
Module Overview
Who Can Invest in Mutual Funds
Role of Distribution Channels
Key Learnings
Worksheet
Module Overview
In order to be a distributer of mutual funds, one must be aware of who is allowed to invest in these
funds. Investing in mutual funds has become a very common practice these days. However, it may
surprise you to know that in India, certain individuals and entities are not allowed to invest in mutual
funds.
In this module, you will learn who can invest in mutual funds. You will also learn about the role of the
distribution channel.

Rohit is flipping through a magazine when he comes across an article on Tom Cruise. It says Tom Cruise
may be visiting Mumbai soon!
Rohit: Hey Puneet! Tom Cruise is planning to visit Mumbai! Maybe you should see if he is interested in
investing in mutual funds.
Rohit was joking, but he got a surprising answer!
Puneet: Well, even if Tom Cruise wanted to invest in mutual funds here, he would not be able to.
Rohit: Why not?
Puneet: Because Tom Cruise is a foreign citizen. And in India, foreign citizens cannot invest in mutual
funds.
Rohit: Are you sure? I thought everyone could invest in mutual funds.
85
Puneet: No Rohit. Only certain individuals and entities can invest in these funds. They fall under three
categories:
Mutual Fund
Investors
Categories
Residents
Non Residents
Foreign Entities
Puneet: Take a look at the individuals and entities allowed to make mutual fund investments in India.
Residents
TT
Resident Individuals/HUF
TT
Indian Companies
TT
Partnership Firms
TT
Indian Trusts/Charitable Institutions
TT
Insurance Companies
TT
Banks
TT
Financial Institutions
TT
NBFCs
TT
Provident Funds
TT
Mutual Funds
Non Residents
TT
NRIs & Persons of Indian Origin
TT
Overseas Corporate Bodies (OCBs)
Foreign Entities
TT
FIIs registered with SEBI
Rohit: I see! Looks like I have a lot to learn before I become a mutual funds distributer.
Puneet: Dont worry Rohit, all in good time! Becoming a distributor requires hard work...but it is worth
it. The distribution channel, of which you will someday be a part, plays such an important role in mutual
fund investment.
Rohit: Really? Can you tell me more about this role?
Puneet: Sure!
86

Puneet: Distribution channels play a very important role. It is through these channels that mutual
fund schemes reach investors. Distribution channels have changed over time. Take a look at how these
channels operate in the past, and how they have evolved today.
Distribution
Channels
Traditional Distribution
Channels
Newer Distribution
Channels
Individual
Internet
Institutional
Channels
Stock Exchanges
Traditional Distribution Channels
Individual
TT
Individual agents distributed units of Unit Trust of India and Life

Insurance Corporation insurance policies.
TT
They facilitated investments in Governments Small Savings Schemes

and also sold Fixed Deposits and Public Issues of company shares,
directly or as sub-brokers.
TT
Investment products were advertised in the mass media by product

managers, after which the agents individually approached investors.
TT
The agents collected the signed application forms and cheques from
the investors.
TT
There was a close relationship between the individual agent and the
investor; investors usually considered their agents to be part of the
family.
87
TT
Due to the start of many new insurance and mutual fund companies,
the creation of more investment products, the increased product
knowledge and awareness of investors and new technologies, newer
distribution methods were required.
TT
Institutional channels were created specifically for the distribution

of a wide range of financial products.
TT
They comprised of brokerage firms and other securities distribution

companies and banks.
TT
These channels used methods like brand building, standardised

processes and sharing of technology.
TT
This resulted in lots of individual agents choosing to associate with

institutional channels to provide their customers with the benefit of
the latest technologies and services.
TT
This led to the distribution setup changing to include Independent

Financial Advisors (IFAs), Non-bank distributors and bank distributors.
Institutional Channels
Newer Distribution Channels

TT
T he Internet has made it possible for mutual funds to contact

investors directly, leading to optimisation of distribution related
commission costs.
TT
T his has led to much easier transactions for investors, who no longer
have to deal with paperwork or go through distributors.
TT
The biggest need of investors now is sound financial advice.
TT
ith this in mind, many professional distributors have recently

W
started to provide value added services and are trying to foster
better customer relationships.
TT
S tock exchanges are able to reach investors all over India with their
large network of brokers and trading terminals.
TT
T his approach is cost effective, and results in high volumes and low
margins which benefits the country.
TT
ecently, SEBI has made it easier for mutual fund units to be bought
R
and sold through stock exchanges.
Internet
Stock Exchanges
Rohit: How interesting! The distribution channels have really changed over the years! Thank you for
telling me about this!
Puneet: I have some more interesting information to share with you Rohit! Have you heard about KYD
requirements?
88
Pre-requisites to become Distributor of a Mutual Fund

Puneet: In order to be eligible to sell or market mutual funds, the following are compulsary:
TT
The individual needs to pass the Certifying Examination prescribed by SEBI.Distributor/employees

who were above the age of 50 years, and had at least 5 year of experience as on September 30,
2003 were exempted. But they need to attend a prescribed refresher course.
TT
AMFI has started the KYC process to verify the accuracy of the information given in the registration
documents and to verify the ARN holders. The process verifies documents and also has a biometric process. The process takes place in the following stages:
Submission of Documents
Bio-Metric Process
Acknowledgement
TT
Self-attested PAN card copy and address proof documents must

be submitted with the application form at the CAMS-PoS.
TT
The impression of the right hand index finger of the ARN holder
must be taken.
TT
This bio-metric process takes place at the PoS during document

submission time.
TT
If the distributors are non-individuals, the bio-metric process will

be carried out on specified authorised individuals.
TT
The CAMS-PoS sends an acknowledgement confirming that the

KYD process has been completed.
TT
A photocopy of this acknowledgement must be sent to all the

AMCs who have empanelled the distributor.
TT
Puneet: After passing the examination and completing KYD requirement, the next stage is to
register with AMFI. On registration, AMFI allots an AMFI Registration Number (ARN). Individuals
from the exempted category desribed above can obtain the ARN without passing the Certifiying
Examination, provided they have attended the prescibed refresher course.
TT
Armed with the ARN No., the IFA / distributor / stock exchange broker can get empanelled with
any number of AMCs. Alternatively, they can become agents of a distrubutor who is already
empanelled with AMCs. Empanelment with the AMC, or enrolment as an agent of an empanelled
distributor is compulsory to be able to sell mutual fund schemes and earn the commissions.
Institutions that are into distribution of mutual fund need to register with AMFI. Besides, all their
employees who are into selling mutual funds need to have an ARN.
Conditions for Empanelment

Empanelment with an AMC is a simple process. There is a standard Request for Empanelment Form to
be filled. This provides for baisc detail, such as
TT
Personal Information of applicant - Name of person, age, Trade Name, Contact Information, ARN,
PAN, Income tax category (such as Resident Individual, Company, Non-Resident Indian, Foreign
Company)
TT
Names and contact information of key people handling sales and operations
89
TT
Business details, such as office area, number of branches, number of employees, geographical
area covered, years of experience, number of investors, number of agents / sub-brokers, fund
houses already empanelled in, size of AUM etc.
TT
Bank details and preferences regarding Direct Credit of brokrage in the bank account
TT
Preferences regarding receiving information from the AMC
TT
Nominee
TT
The applicant also needs to sign a declaration, which provides for the following:
Correctness and completeness of information provided

Commitment to keep all the transactional informatin confidential
Commitment to abide by instructions given, as also statutory codes, guidelines and
circulars
Not to issue advertisement or publicity material other than that provided by the AMC or
pre-appoved by the AMC
Ensure that the risk factors are mentioned along with peformance and other related
information
Provide all the information and documents that the AMC may ask from time to time
Ensue that all emlpoyes who are engaged in selling or marketing of mutual funds have an
ARN.
Undertake not to rebate commission back to investors, or attract investors through
temptation of rebate / gifts, pass back of commission etc.
Power to the AMC to terminate the empanelment at any time
Some AMCs directly empanel only distributors who are likely to generate adequate
business - and request others to work under one or the other empanelled distributors.
At times, AMCs link the levels of commission to the volumes generated. In such cases, an
agent might find it beneficial to work under an established distributor.
Checklis of Learning Points
90
TT
The changing competitive context has led to the emergence of institutional channels of
distribution, to supplement the individuals who distribute mutual funds. Institutional channels
build their reach through employees, agents and sub-brokers.
TT
AMC keep exploring newer channels of distribution to increase the size of assets managed.
TT
The internet has inceased the expectations of advice that investors have from their distributiors.
TT
The stock exchange brokers have become a new channel for distribution of mutual funds. These
brokers too need to pass the prescribed test, get the AMFI Registration No. and get themselves
empanelled with AMCs whose schemes they want to distribute.
Key Learnings
1.
Name four types of residents that can invest in mutual funds in India.
2.
Briefly explain the role of distribution channels.
3.
Give an example of a non resident that can invest in mutual funds in India.
4.
Give an example of a foreign entity that can invest in mutual funds in India.
Worksheet
1.
2.
Fill in the blanks.

a.
The majority of investments are at the
b.
In India,
level.
cannot invest in mutual funds.
Match the category to the individual or entity belonging to it.

a.
Resident
i.
Person of Indian Origin
b.
Non Resident
ii.
FII registered with SEBI
c.
Foreign Entity
iii.
Charitable Institution
91
Notes
Answers: Fund Distribution

Question Number
1
92
Answer
a.
Retail
b.
Foreign citizens
a.
iii
b.
c.
ii
Channel Management Practices

TT
explain the channel management practices
Session Plan
1
Module Overview
Key Learnings
Worksheet
Module Overview
Today, the mutual fund industry has become increasingly widespread. This has necessitated the
emergence of various channels of distribution, for the purpose of helping individual distributers provide
mutual funds to investors.
In this module, you will learn about the management practices that must be followed by these
distribution channels.

Rohit: Puneet, are there any SEBI regulations regarding the minimum or maximum commission that
distributors can earn?
Puneet: No, Rohit. There are no SEBI regulations regarding the minimum or maximum commission that
distributors can earn. But SEBI has set down limits regarding the total expenses in a scheme. These
limits include commission. If the expenses go beyond this limit, the excess amount will have to be
borne by the AMC. The scheme cannot be charged the extra amount.
Rohit: Can you tell me about the different kinds of commission?
Puneet: There are two types of commission that can be earned by distributors.
93
Types of Commission
Initial or Upfront
Commission
Trail Commission
Puneet: Take a look at who pays these commissions to the distributors!
Initial or Upfront Commission
Trail Commission
Paid by the investor.
Paid quarterly by the AMC.
Paid to the distributor directly.
Paid to the distributor as long as the investor money

remains in the fund.
It is on the amount gathered by the distributor.
It is calculated as a percentage of the net assets

determined by the units sold by the distributor.
SEBI has mandated Mutual Funds / AMCs to disclose on their respective websites the total commission
and expenses paid to distributiors who satisfy one or more of the following conditions with respect to
non-institutional (retail and HNI) investors:
i.
ii.
iii.
iv.
Multiple point of presence (more than 20 locations)

AUM raised over Rs.100 crore across industry in the non institutional category but including high
networth individuals (HNIS).
Commission received of over Rs.1 crore p.a. across industry
Commission received of over Rs.50 lakh from a single Mutual Fund/AMC.
Mutual Funds / AMCs shall also submit the above data to AMFI. AMFi shall disclose the conslidated
data in this regard on its website.
Puneet: The agents and sub-brokers work under large distributors. This creates a multi-level distribution
channel. There are also practices that are followed regarding such channels.
Practices Followed for Multi-Level Distribution Channels
TT
The distributors are responsible for the actions of the agents and sub-brokers
TT
The AMC is not bound by the actions of the distributors, their agents or sub-brokers
TT
All those selling mutual fund units must abide by ACE and AGNI
Rohit: I also read that SEBI has regulated certain sales practices. Can you tell me about these practices?
Puneet: Of course!
SEBI Regulated Sales Practices
TT
Distributors can only claim commission for clients investments, not on their own investments
TT
hen recommending schemes to investors, distributors must disclose commissions earned on

W
similar schemes
TT
Entry load is not allowed (it has been banned since August 1, 2009)
TT
Commission cannot be shared with investors
Puneet: Besides these regulations, SEBI has also laid down a code that must be followed with regards
to advertising.
94
The SEBI Advertising Code States that...

TT
All advertisements should be factually accurate
TT
Advertisements should not be based on assumptions
TT
Advertisements that are misleading should be avoided
TT
Advertisements must advise the public to read the offer documents before investing
TT
T he disclosure to read the offer document carefully should be present for minimum five seconds
in all advertisements
TT
oardings/posters must contain the statement Mutual Fund investments are subject to market
H
risks, read the offer document carefully before investing. The statement should be displayed in
black letters, on a white background. The words should be minimum 8 inches in height, or should
cover 10% of the display area.
TT
When launching or re-launching schemes, product launch advertisements should be used
TT
Tombstone advertisements are not required to mention risk factors
TT
Advertising of liquid scheme performances can be done by Simple Annualisation
Puneet: The distribution channels also have to follow certain practices when it comes to performance
advertisements.
Practices for Performance Advertisements
TT
For schemes lasting over a year, the compounded annualised yields must be advertised
TT
fter a scheme is launched, the yields must be declared in the first, third and fifth year and since
A
inception
TT
For schemes that are under a year, no annualisation of returns are required
TT
In the case of comparisons, appropriate benchmarks and identical time periods must be used
TT
All risk factors must be disclosed
TT
All rankings and ratings must be explained
TT
The declared dividend must be shown as rupees per unit, along with the current NAV
TT
F or schemes that have been in existence for less than a year, past performance will not be
provided
Puneet: So you see Rohit, distribution channels have to follow quite a few practices. And all these
practices are important for effective management.

TT
The scheme application forms carry a suitable disclosure to the effect that the upfront commission
to distributors to will be paid by th investor directly to the distributor, based on his assessment of
various factors including the service rendered by the distributor.
TT
AMCs pay a trail commission for the period the investment is held in the scheme.
TT
Since trail commission is calculated as a percentage on AUM, distributors get the benefit of
valuation gains in the market.
95
Key Learnings
1.
Note down two practices followed for commission structures.
2.
Note down two practices followed for multi-level distribution channels.
3.
Note down two SEBI regulated sales practices.
4.
Note down two regulations of the SEBI Advertising Code.
Worksheet
1.
Tick the correct options.

a.
Who pays trail commission?

v.
vi.
vii.
viii.
2.
Fill in the blanks.

a.
For performance advertisements, the declared dividend must be shown as

along with the current
.
b.
Distributors can only claim commission for
c.
d.
96
Distributor
AMC
SEBI
Client
investments.
advertisements are not required to mention risk factors.

Advertisements must advise the public to read the
before investing.
3.
Multipal Choise Questions

a.
Institutional distributors build reach through

i.
ii.
iii.
iv.
b.
The maximum intial commission that an AMC can pay to distributor is:
i.
ii.
iii.
iv.
c.
True
False
Stock exchange brokers are permitted to distribute mutual funds without the rquirement
of passing the certifying test
i.
ii.
e.
Nil
0.05%
1%
2%
The distributor can charge a fee from the investor.

i.
ii.
d.
Employees
Agents
Sub-brokers
Any of the above
True
Flase
Trail commissions are linked to valuation of porfolio in the market

i.
ii.
True
False
Notes
97
Answers: Channel Management Practice

Question Number
1
98
Answer
a.
a.
Rupees per unit, NAV
b.
Clients
c.
Tombstone
d.
Offer documents
a.
iv
b.
c.
d.
ii
e.
Accounting
TT
explain the different terms associated with accounting
Session Plan
1
Module Overview
NAV
Factors Affecting NAV
Load
Transaction Charges
Contingent Deferred Sales Charge (CDSC)
Initial Issue Expenses
Expenses in a Mutual Fund and Expenses that Cannot be Charged
Dividends and Distributable Returns
10
Key Learnings
11
Worksheet
Module Overview
To properly understand a schemes performance, mutual fund investors and distributors must be
familiar with some commonly used accounting terms. They must also understand the basics of mutual
fund accounting policies and requirements.
In this module, you will learn about some important accounting terms and what they mean in relation
to a mutual fund.
NAV
Rohit takes a look at some of the papers in front of Puneet.
Rohit: Puneet, a lot of these papers mention something called NAV. What is that?
Puneet: NAV stands for Net Asset Value.
Rohit: Oh I see. How is the NAV calculated?
Puneet: Before you learn to calculate the NAV, you need to know the meaning of three terms:
99
TT
Assets
TT
Liabilities
TT
Net Assets
Puneet: Take a look at what these terms comprise of:

Market Value of Investments + Receivables + Accrued Income + Other Assets
Assets
Liabilities
Accrued Expenses + Payables + Other Liabilities
Net Assets
Assets + Income Liabilities Expenses
Puneet: To find the NAV, simply calculate the net assets of the scheme and divide it by the number of
units outstanding.
NAV =
Net Assets of the Scheme

No. Of Units Outstanding
Puneet: So if a mutual fund has the following figures:

Total Assets: Rs. 28,00,000
Liabilities: Rs. 8,00,000
Outstanding Units : 2,00,000
Puneet: We would calculate the NAV as:
NAV =
28,00,000 - 8,00,000
2,00,000
NAV = Rs. 10
Rohit: That is really simple! Tell me more about the NAV!
Mark to Market
The process of valuing each security in the investment portfolio of the scheme at its market value is
called mark to market i.e. marking the securities to their market value.
The NAV is meant to reflect to true worth of each unit of the scheme, because investors buy or sell units
on the basis of the information contained in the NAV. If the investments are not marked to market,
then the investment portfolio will end up being valued at the cost at which wach security was bought.
Valuing shares of a company at their acquisition cost, say Rs 15, is meaningless, if those shares have
appreciated to say Rs. 50. If schemes were to sell the shares at the same time, it would recover Rs. 15
to Rs. 50, then it is meaningful for the investors.
100

Puneet: The NAV is affected by five main factors. Take a look at these factors.
Factors
Affecting
NAV
Purchase
& Sales of
Investment
Securities
Increase or
Decrease in
Market Price of
Assests
Re-Purchase &
Sale of Units
Cannot impact
the NAV by>2%
Cannot impact
the NAV by>2%
Valuation of
Assets
Includes all
investments
Actual of
Income &
Expense
Cannot impact
the NAV by>1%
Puneet: Sometimes the NAV needs to be adjusted to arrive at the final price. This adjustment is called
load. Let me tell you more about load.
Load
Puneet: Load is an amount that is charged to investors to compensate for all the sales and distribution
related expenses of the units.
Earlier investors were charged an entry load when they bought units. However, as on August 1, 2009,
entry load has been stopped. Now investors are only charged an exit load. Lets take a look at what exit
loads are about.
Exit Load:
TT
Also called Repurchase Load
TT
Charged when investors redeem units
TT
Charged when funds repurchase units
TT
Reduces the returns of investors
TT
Maximum exit load (open-ended funds) is 7%
Puneet: Remember, exit loads should be equal for all investors regardless of their investment value.
However, some exit loads may differ depending on the holding period of the investor.
101
Transaction Charges
Puneet: Rohit, did you know that SEBI has made certain allowances to help spread mutual fund
products in urban areas and smaller towns? It allows a transaction charge to be paid to mutual fund
distributors for every subscription that is above Rs. 10,000. This allowance also helps people with small
savings potential.
Rohit: I had no idea! Tell me more about transaction charges.
Puneet: Well, SEBI does not allow transaction charges on direct investments. If there is any transaction
charge, it has to be deducted from the subscription amount by the AMC and paid to the distributor.
Rohit: And what if there is any balance amount?
Puneet: If there is a balance amount, it must be invested.
Rohit: How much are the transaction charges?
Puneet: The transaction charges depend on the type of investor.
Type of Investor
Transaction Charges in Rs. For purcahse/

subscription of Rs. 10,000 and above
First time mutual fund investor
Rs. 150/-
Investor other than first time mutual

fund investor
Rs. 100/-
Rohit: Are transaction charges deducted for investments through SIPs?

Puneet: Yes they are, provided the total commitment, ie, amount per SIP instalment x number of
instalments equals to Rs. 10,000 or more. The transaction charges in this case will be deducted in four
equal instalments.
Rohit: I see. And are there any situations wherein transaction charges cannot be charged?
Puneet: Thats a very good question Rohit! And the answer is yes. Transaction charges cannot be
deducted in the following situations:
TT
I f the investor submits the purchase/subscription at the assigned collection centres or via the
AMCs website, which do not go through any distributor.
TT
If the purchase/subscription is made through a distributor for an amount under Rs. 10,000.
TT
I f the transactions are Switches, STPs etc where there is no extra cash flow at a Mutual Fund level
similar to a purchse/subscription.
TT
If the purchases/subscriptions are made through any stock exchange.
Contingent Deferred Sales Charge (CDSC)

Puneet: Some exit loads change depending on the number of years that the investor has been with the
fund. Such exit loads are called Contingent Deferred Sales Charges or CDSCs. In this case the longer the
time period, the lower the CDSC.
Take a look at the CDSC of a fund for the first five years from the date of investment.
102
Time Period
Maximum CDSC
Year 1
4%
Year 2
3%
Year 3
2%
Year 4
1%
Year 5
Nil
Rohit: I see! So in year 1, which is the shortest time period, the CDSC is the highest at 4%. And as the
years increase, the CDSC gets lower till it eventually becomes nil!

Puneet: As you can see, mutual funds incur certain expenses in the course of their operations. These
expenses are regulated by SEBI.
Mutual funds bear two types of expenses:
Types of MF Expenses
Recurring Expenses
Puneet: Lets take a look at these expenses in detail!

Initial Expenses
TT
One-time expenses at the time of New Fund Offer
TT
New issue expenses must be borne by the AMC, not the investor
TT
Examples: Advertisements, commissions
Recurring Expenses
TT
Used to manage the money collected by the investors
TT
Charged on accrual basis
TT
Reduced from scheme assets before calculating the NAV
TT
Examples: Service tax, listing fees
Puneet: SEBI has imposed the certain annual limits on recurring expenses (including management fees)
for schemes other than index funds. Take a look at these limits.
Net Assets (Rs. Crore)
Equity Schemes
Debt Schemes
Up to Rs. 100 crores
2.50 %
2.25 %
Next Rs. 300 crores
2.25 %
2.00 %
103
Next Rs. 300 crores
2.00 %
1.75 %
Excess over Rs. 700 crores
1.75 %
1.50 %
Puneet: Rohit, can you think of any other mutual fund expenses?
Rohit: Yes I can.! In fact, I have made a list.! Take a look.!
Expenses incurred by Mutual Funds
TT
Investment Managment Fee to the AMC
TT
Custodian Fees
TT
Trustee Fees
TT
R & T Agent Fees
TT
Audit Fee
TT
Legal Fee
TT
Marketing and Distribution Costs
TT
Brokerage and Transaction Costs
TT
Fund Transfer Costs
TT
Investor Communication Costs
TT
Account Statements, Cheques, Warrants Costs
TT
Mandatory Advertising and Communication Costs
Rohit: Looks like mutual funds have to incur every kind of expense.
Puneet: Actually Rohit, there are certain expenses that cannot be charged to mutual funds.
Mutual Funds Cannot be Charged...
TT
Penalties and fines for breaking the law
TT
Interest on delayed payments to investors
TT
Legal, marketing and publication expenses that dont relate to any scheme
TT
Fund accounting fees
TT
Investment and general management fees
TT
Corporate advertising and infrastructure expenses
TT
Fixed asset depreciation and software development expenses
Rohit: So mutual funds are responsible for certain fees and costs, but at the same time they are also
protected from certain expenses.
Dividends and Distributable Returns

Puneet: For a scheme to be sure about the capital gains, the securities need to be sold. In other words
the capital gains need to be realised. SEBI guidelines have specified that dividends must be paid out of
distributable reserves.
104
Rohit: How do we calculate distributable reserves?

Puneet: I will show you.
To calculate distributable returns:
TT
T reat all the profits earned as available for distribution. The profits earned are based on the
accrual of income and expenses.
TT
Ignore the valuation gains. However, make sure you adjust all valuation losses against the profits.
TT
eep in mind that the portion of sale price on new units which is attributable to valuation gains
K
is not considered a distributable reserve.
Rohit: I can see that this is a conservative approach to calculating distributable reserves.
Puneet: You are absolutely correct Rohit. Following such a conservative approach ensures that the
dividend is paid out of actual profits, after accounting for all possible losses.
Ky Accounting and Reporting Requirement

TT
The accounts of the scheme need to be maintained distinct from the accounts of the AMC. The
auditor for the AMC has to be different from that of the scheme.
TT
Norms are prescribed on when interest, dividend, bonus issues, right issues etc. should be
reflected for in accounts.
TT
NAV is to be calculated upto 4 decimal places in the case of index funds, liquid funds and other
debt funds.
TT
NAV for equity and balanced funds is to be calculated upto at least 2 decimal places.
TT
Investors can hold their units even in a fraction of 1 unit; however, current stock exchange trading
systems may restrict transaction on the exchange to whole units.
Checklist of learning points

TT
The unit holders funds in the scheme are commonly referred to as net assets.
TT
Net assets includes the amount originally invested, the profits booked in the scheme, as well
as appreciation in the investment portfolio. It goes up when the market goes up, even if the
investments have not been sold.
TT
A scheme cannot show better profits by delaying payments. While calculating profits, all the
expenses that relate to a period need to be considered, irrespective of whether or not the
expense has been paid. This is known as accrual principle.
TT
In the market, when people talk of NAV, they refer to the value of each unit of the scheme. Higher
the interest, dividend and capital gain earned by the scheme, higher would be the NAV. Higher
the appreciation in the investment portfolio, higher would be the NAV. Lower the expenses,
higher would be the NAV.
TT
The difference between the NAV and repurchase price is called exit load.
TT
Schemes can also calibrate the load when investors offer their units for repurchase. Investors
would be incentivized to hold their units longer, by reducing the load as the unit holding period
increased. Such structures of loads are called Contingent Deferred Sales Charge (CDSC).
105
TT
SEBI has banned entry load.
TT
AMCs can deduct Transaction Charges from subscriptions/purchases over Rs.10,000 in case of
distributors who have opted to receive transaction charges.
TT
Initial issue expenses need to be met by the AMC. There are limits to the recurring expenses that
can be charges to the scheme. These are linked to the nature of the schemes and its net assets.
TT
Dividends can be paid out of distributable reserves.
TT
NAV is to be calculated upto 4 decimal places in the case of index funds, liquid funds and other
debt funds.
TT
NAV for equity and balanced funds is to be calculated upto at least 2 decimal place.
TT
Investors can hold their units even in a fraction of 1 unit. However, current stock exchange trading
systems may restrict transacting on the exchange to whole units.
Key Learnings
106
1.
What factors affect NAV?
2.
What is load?
3.
Explain Contingent Deferred Sales Charges.
4.
Note down five expenses incurred by mutual funds.
Worksheet
1.
a.
b.
2.
3.
4.
Who bears the initial issue expenses?

i.
SEBI
ii.
RBI
iii.
AMC
iv.
AMFI
Mutual Funds have to follow the accounting policies set by whom?

i.
AMFI
ii.
GOI
iii.
RBI
iv.
SEBI
Fill in the blanks.

a.
Exit loads should be

value.
for all investors regardless of their
b.
The two types of expenses incurred by mutual funds are

expenses.
c.
Exit load is charged when investors
expenses and
units.
Match the term with its formula.

a.
Net Assets
i.
Net Assets No. of Outstanding Units
b.
Net Asset Value
ii.
Accrued Expenses + Payables + Other Liabilities
c.
Assets
iii.
Asset + Income Liabilities Expenses
d.
Liabilities
iv.
Market Value of Investments + Receivables + Accrued

Income + Other Assets
Multipale Choise Questions

a.
Net assests of a scheme is nothing but its investment portfolio

i.
ii.
True
False
107
b.
The difference between NAV and re-purchase price is

i.
ii.
iii.
iv.
c.
NAV of income funds is to be calculated upto

i.
ii.
iii.
iv.
d.
4
3
2
1
True
False
Wealth tax is payable at the applicable rates on equity mutual fund units.
i.
ii.
True
False
Notes
108
decimals
Securities Transaction Tax is applicable to Equit Schemes

i.
ii.
e.
Entry load
Exit load
Expense
Dividend stripping
109
Answers: Accounting
Question Number
1
110
Answer
a.
iii.
b.
iv.
a.
Equal, Investment
b.
Initial Issue, Recurring
c.
Redeem
a.
iii
b.
c.
iv
d.
ii
a.
ii
b.
ii
c.
d.
e.
ii
Valuation
TT
explain how securities are valued
Session Plan
1
Module Overview
Valuation of Equity Securities
Valuation of Debt Securities
Yield to Maturity (YtM)
Reporting Requirements
Accounting Policies
Specific Disclosures
Key Learnings
Worksheet
Module Overview
The valuation of a portfolio is one of the most important factors that drives the NAV. However, the
valuation of securities is subjective, which makes it difficult to compare NAVs across schemes. In order
to decrease the level of subjectivity, and make it easier to compare the NAVs of different schemes,
certain guidelines have been laid down with respect to valuation.
In this module, you will learn about the various guidelines that have been laid down to valuate different
securities.

Rohit is reading about the valuation of equity investments. He finds that there are different types of
equity securities...and these securities are all valued differently.
Types of Equity
Securities
Traded
Securities
Non Traded
Securities
Thinly Traded
Securities
111
Rohit decides to discuss the valuation of these securities with Puneet.

Rohit: Puneet, if I wanted to buy securities that are traded on the stock exchange, how would I find the
price of the securities?
Puneet: To buy traded securities you would have to look at their closing price on the stock exchange.
Traded securities are valued in the following way:
Valuation of Traded Securities:
TT
Traded securities are valued at their last closing price (Mark to Market) on the stock exchange
TT
S ecurities that are not being traded are valued at the last quoted traded price on the stock
exchange (Price must not be older than 30 days before the valuation)
Rohit: And what about securities that are not traded or thinly traded? How are they valued?
Puneet: Non traded or thinly securities are valued differently from traded securities. Take a look:
Valuation of Non Traded/Thinly Traded Securities:
TT
If equity securities are non traded or thinly traded, a formula is used to valuate the shares
TT
The formula for valuation is based on:
E arnings per share of the company

Book value of the shares
Valuation of similar shares in the market
Puneet: Now you know how equity securities are valued. But do you know how debt securities are
valued? Let me tell you about them!

Puneet: There are several types of debt securities.
Types of Debt
Securities
Thinly Traded Debt

Securities
Other Securities
Government
Securities
Corporate Bonds
Puneet: Lets take a look at how non traded debt securities valued.
112
Valuation of Non Traded Debt Securities:

TT
Non traded debt securities are valued as per the yield matrix
TT
The yield matrix is created by an authorised valuation agency
TT
T he yield matrix provides an approximate yield for different types of debt securities. This
approximation is based on:
T he credit rating of the security

The maturity profile of the security

Puneet: Another important factor is the yield to maturity. This is the internal rate of return offered by
bonds. This return is realised by investors when they:
Buy a bond at a certain price
Receive all the coupon payments
Reinvest the coupons at the same YtM rate
Receive the principal at maturity

Puneet: The calculation of the internal rate of return is based on three factors:
Internal Rate
of Return is Based on
Coupon Rate
Purchase Price
Period to
Maturity
Rohit: Are there any requirements to be followed?
Puneet: Yes, there are some important reporting requirements that must be followed.
113
Reporting Requirements:
TT
The accounts must be audited within 6 months after their closure
TT
T he unaudited, abridged accounts must be published within 30 days of the close of the halfyear
TT
The accounts summary must be mailed to all investors
Puneet: Another requirement is that certain documents must be filed with SEBI.
Filed with SEBI
Copy of the Annual

Report
6 Monthly Unaudited
Reports
Quarterly Movement of
the Funds Net Assets
and Quarterly Portfolio
Statements
Accounting Policies
Puneet: There are also certain accounting policies that must be followed. These policies are:
TT
In accordance with SEBI guidelines, all investments must be marked to market
TT
No unrealised appreciation can be distributed
TT
Profit and loss must be on an average cost basis
TT
Dividend must be on ex-dividend date
TT
Sales and purchases must be accounted for on the trade date
TT
rokerage and stamp duties must be capitalised and added to the acquisition cost or sales
B
proceeds
Puneet: Besides these requirements, there are also certain disclosures that must be made.
Puneet: Take a look at the specific disclosures that must be made:
Specific Disclosures:
114
TT
T he entire portfolio must be disclosed every 6 months (As per industry practice, this is disclosed
monthly)
TT
All expenditures exceeding 10% of the total expenses must be disclosed
TT
The number of investors holding unit capital in excess of 25% must be disclosed
TT
Non Performing Assets, their percentage of the total assets, and provisioning must be disclosed
Key Learnings
1.
Explain the valuation of traded securities.
2.
Note down how thinly traded debt securities are valued.
3.
Write down the steps for investors to realise Yield to Maturity.
4.
Note down two reporting requirements.
115
Worksheet
1.
Fill in the blanks.

a.
2.
is the internal rate of return offered by bonds.
b.
An asset is termed a Non Performing Asset when the

has not been received.
c.
In accordance with SEBI guidelines, all investments must be
d.
The number of investors holding unit capital in excess of

disclosed.
e.
Profit and loss must be on an
and/or
.
must be
Match the columns.

Match the security with its valuation
a.
Government
Security
i.
Valued on the basis of capital earnings
b.
Corporate Bonds
ii.
Valued by the AMC (If trading is suspended for more

than 30 days)
c.
Thinly Traded Debt

Securities
iii.
Valued by the CRISIL Gilt Valuer
d.
Thinly Traded
Equities
iv.
Valued by adding values traded across exchanges
e.
Non Traded Equity

Securities
v.
Valued by the CRISIL Bond Valuer
Notes
116
117
Answers: Accounting
Question Number
118
Answer
a.
Yield to Maturity
b.
Interest, Principal Amount
c.
Marked to Market
d.
25%
e.
Average Cost Basis
a.
iii
b.
c.
iv
d.
ii
e.
Taxation
explain how taxation is done for mutual funds
TT
Session Plan
1
Module Overview
Treatment of Capital Gains
Mutual Fund Taxation
Tax Provision for Equity
Tax Provision for Other Funds
Tax Deducted at source (TDS)
Wealth Tax
Key Learnings
10
Worksheet
Module Overview
Mutual funds are pass through vehicles. Investors are the real owners. This is why investors have to pay
taxes on different slabs and different situations.
In this module, you will learn about the treatments and provisions for taxation on mutual funds.

Rohit opens his book on mutual funds and finds the following line: Capital gains are subject to taxation.
What are capital gains, wonders Rohit. Looks like it is time to ask Puneet some more questions.
Rohit: Puneet, what are capital gains?
Puneet: The profit made from the sale of an investment is called capital gains. There are two types of
capital gains.
Types of Capital
Gains
Long Term Capital

Gains
Short Term Capital

Gains
119
Mutual Fund Taxation

Puneet: Mutual fund trusts are not subject to taxation. However, tax on the profits of mutual funds
must be paid by the trustee company. The taxation charged on mutual fund schemes depends to a
certain extent, on the schemes nature.
Equity-oriented Scheme:
TT
I n such schemes minimum 65% of the assets are invested in equity shares, belonging to domestic
companies.
TT
The percentage is calculated by:
alculating the average of the opening and closing percentage on a monthly basis
C
Averaging the value for all 12 months of the financial year
Money Market Mutual Funds/Liquid Schemes

TT
Such schemes are in accordance with the SEBI definition for income tax
TT
T his means the schemes are formed with the aim that they will only invest in money market
instruments (short term debt securities).
Equity - oriented scheme

Short Term Capital Gains
15% + surcharge + education

cess
Debt - oriented scheme

Added to the income of individuals.
Calculated according to the tax
bracket of the individual.
20% with the cost inflation index
benefit or
Long Term Capital Gains
Securities Transaction
Tax (STT - This is a tax on
the value of transaction
in equity shares,
derivates and equity
mutual fund units.)
No capital gains tax payable.
10% without the cost inflation index

benefit, depending on which option
is most beneficial.
On purchase - 0.125%
On sale - 0.125%
On sales of future & options 0.017%
STT on investors in equity oriented schemes of mutual fund

On purchase of the units in stock exchange
0.125%
On sale of the unis stock exchange
0.125%
On re-purchase of units (by AMC)
0.250%
Puneet: Lets take a look at how non traded debt securities valued.
120
Nil

Puneet: Take a look at the diagram for the tax provision for equity funds.
Equity (>65%)
Capital
Gain
Dividend
Investor
Tax Free
DDT
Short Term
Long Term
15%
Nil
Tax Free

Puneet: Now take a look at the diagram for the tax provision for debt funds.
Others
Dividend
Investor
Tax Free
Capital Gain
DDT
Short Term
Other Debt Funds

Individual & HUF
-12.5% + Surcharge +
Education Cess Others
- 30% + surcharge +
Education Cess
As Per
Tax Slab
long Team
Option 1
10% + education cess
Money Market Mutual

Fund / Liquid Schemes
Individual & HUF -25% +
Surcharge + Education Cess
Others - 30% + surcharge +
Education Cess
Option 2
20% + educaion cess
After Indexation
This additonal tax on income distributed is not payable on dividend distrubuted by equity - oriented
mutual funds.
121
Tax Deducted at Source (TDS)

Rohan: Puneet, can you tell me about tax deducted at source? How does it affect resident and nonresident investments?
Puneet: In the case of resident investors, there is no tax deducted at source on the dividend distribution
or re-purchase proceeds. However, tax can be withheld in certain cases with regards to non-resident
investments.
Different rates of withholding tax have been set down by income tax regulations. These rates depend on:
TT
The nature of the investor: Whether the investors is Indian, Foreign and Individual or Institutional
TT
The nature of the investment: Whether it is in equity or in debt
TT
The nature of the income: Whether it is dividend or capital gain
Rohit: What about the Double Taxation Avoidance Agreements that the Government of India has
entered into with a number of countries? Can you tell me what that agreement is about?
Puneet: The Double Taxation Avoidance Agreements (DTAA) also lay down rates for withholding tax.
For non-resident investors, the withholding tax applicable is the tax that is lowest between the tax
specified in the income tax regulations and the tax specified in the DTAA of the investors country of
residence. However, the investor must prove to the mutual fund that he is eligible to the concessional
rate that is listed in the DTAA.
Wealth Tax
Rohit: And what about wealth tax?
Puneet: Investments made in mutual fund units are not subject to wealth tax.

An investor in an equity oriented mutual fund scheme
TT
Would pay STT on the value of the transactions of the sale (0.125%) and purchase (0.125%) of
units in the stock exchange; or on re purchase (0.25%)
TT
Would be exempt from capital gains tax, if the units were held for 1 year or less
TT
Would pay capital gains tax at 15 %, if the units were held for 1 year or less
TT
Will receive any dividend free of tax; the scheme too will not incur any tax on the dividend
distribution
An investor in a debt oriented mutual fund scheme
122
TT
Would not bear any STT
TT
Would bear a tax on long term capital gains at the lower of 20% with indexation or 10% without
indexation
TT
Would wear a tax on short term capital gains, as per the investors tax slab
TT
Will receive any dividend free tax, but scheme would have paid a tax on dividend distribution.
Key Learnings
1.
hat are the requirements for long term capital gains to be exempt from tax for
W
equity?
2.
hat are the requirements for short term capital gains to be exempt from tax for
W
equity?
3.
Note down the classification of mutual funds for taxation.
4.
What is the taxation on long term capital gains from debt mutual funds?
123
Worksheet
1.
2.
Fill in the blanks.

a.
Investments made in mutual fund units are not subject to
b.
Profit on investments held for

capital gains.
c.
Securities Transaction Costs is

of equity.
d.
Long term capital gains for debt funds are subject to

indexation.
e.
Profit on investments held for

capital gains.
% and
Securities Transaction Tax is applicable to equity schemes

i.
ii.
b.
True
False
Wealth tax is payable at the applicable rates on equity fund units

iii.
iv.
True
False
Notes
124
is called short term
Read the following questions and choose the correct answer.

a.
% on purchase
% tax after
is called long term
125
Answers: Taxation
Question Number
126
Answer
a.
Wealth tax
b.
Less than 12 months
c.
0.125, 0.17
d.
20
e.
More than 12 months
a.
b.
ii
Investor Services
After completing this module you will be able to:
TT
list those who are eligible to invest in mutual funds in India
TT
describe the documentation required for mutual fund investment
TT
explain the process for implementation of sales and re-purchase transactions
Session Plan
1
Module Overview
Eligibility to Invest
Sources of Information on Eligibility
KYC Requirements for Mutual Fund Investors
Uniform Know Your Client (KYC) Requirements for the Securities Markets
PAN Requirements for Micro-SIPs
Additional Documentation Requirements Applicable for Institutional Investors
Demat Account
Transactions with Mutual Funds
10
Key Learnings
11
Worksheet
Module Overview
Today, lots of people are interested in investing in mutual funds. However, in order to invest in these
funds, it is necessary for distributors as well as potential investors to be aware of who all are eligible to
invest in mutual funds in India. Distributors and investors should also be aware of the documentation
process as well as the process for sales and purchase of mutual funds.
In this module, you will learn about who can invest in mutual funds in India. You will also learn about
the documents required to purchase mutual funds and the process for selling or purchasing mutual
funds in India.
127
Eligibility to Invest
Rohit: Puneet, I thought I would revise some of the information that I have recently learned. Can you
go through some of the information with me?
Puneet: Sure Rohit. What would you like to start with?
Rohit: Let me start be seeing if I can recall who can invest in mutual funds in India. I know eligible
mutual fund investors in India fall under two categories.
Eligible Investors
Individual Investors
Non-Individual
Investors
Rohit: Individual investors invest for their own benefit, or for the benefit of their family. Non-individual
investors on the other hand invest on behalf of the company that they represent.
Puneet: Thats right. Can you give me examples of individual and non-individual investors?
Rohit: Yes. I have listed some eligible investors under each of these categories. Lets take a look at it.
Individual Investors
TT
TT
TT
128
Resident Indian adult

individuals (above the
age of 18)
Minors (below the age of
18)
Hindu Undivided Families
(HUF)
TT
Non-Resident
(NRIs)
Indians
TT
Persons of Indian Origin

(PIO)
TT
Foreign investors
Non-Individual Investors
TT
Companies/Corporate bodies registered in India
TT
Registered societies and co-operative societies
TT
Religious and charitable trusts
TT
Trustees of private trusts
TT
Partners of partnership firms
TT
Association of persons or body of individuals
TT
Banks
TT
Financial/Investment institutions
TT
Other mutual funds registered with SEBI
TT
Foreign Institutional Investors (FIIs) registered with SEBI
TT
International multilateral agencies approved by the

Government of India
TT
Army
TT
Navy
TT
Air force
TT
Para-Military Units and other eligible institutions
TT
Scientific and industrial research organisations
TT
Universities and educational institutions
Puneet: Excellent work Rohit! Did you know that certain individuals and entities were not allowed to
invest in mutual funds in India until quite recently?
Rohit: I didnt know that! Which are these investors and entities?
Puneet: The following were not allowed to invest in India till recently:
TT
Individuals who are foreign nationals (exception being NRIs/PIOs/OCI card holders).
TT
Entities that are not Indian residents as per FEMA (exception being entities registered as FIIs with
SEBI, or having sub-accounts with SEBI-registered FIIs)
TT
Overseas Corporate Bodies (OCBs)
Qualified Foreign Investors (QFIs) who meet KYC requirements can now invest in equity and debt
mutual fund schemes through direct and indirect routes
Sources of Information on Eligibility

Rohit: Which schemes can all these investors invest in?
Puneet: Usually eligible individual investors can invest in any mutual funds scheme. The only exceptions
are if the mutual fund offers a specific scheme or a plan within a scheme that is not meant for individual
investors.
Rohit: And what about non-individual investors?
Puneet: Eligible non-individual investors can invest in mutual funds, but it is always best to check the
Who can invest section section of the Offer Document to be sure. This is especially recommended
for first time investors. Keep in mind that some schemes only allow certain classes of non-individual
investors to invest in them.
Examples:
TT
Certain gilt schemes have specific plans that only allow Provident Funds, Superannuation and
Gratuity Funds, Pension Funds, Religious and Charitable Trusts and Private Trusts to invest.
TT
Exchange Traded Funds only allow authorised participants and large investors to invest in them.
TT
The stock exchange allows all eligible investors to buy units of the ETF.
KYC Requirements for Mutual Fund Investors

Rohit: I heard that all investments of Rs. 50,000 and above must be compliant with the regulations stated
in the Anti-Money Laundering Act, 1992, as well as SEBI circulars. Are there any other requirements for
mutual fund investors?
Puneet: Yes, there are Rohit. The regulations have been revised and certain investors must be KYC
complaint, regardless of the investment amount. These investors are:
TT
Non-individual investors (companies, partnership firms, trusts, HUF)
TT
Non-Resident Indians
TT
Investors coming through channel distributors
129
Puneet: SEBI is trying to ensure that AMCs can carry out all financial and non-financial investor
transactions. Thats why SEBI has made it a rule that:
TT
All new folios/accounts can be opened only after all investor related documents like account
opening documents, PAN, KYC, PoA (if applicable) and specimen signature is available with
AMCs/RTAs rather than only with the distributor.
TT
For existing folios, it is the responsibility of the AMC to update all investor related documents like
account opening documents, PAN, KYC, PoA (if applicable) and specimen signature.
Rohit: What documents do mutual fund investors need to submit?

Puneet: Since January 1st, 2011, it is mandatory that all mutual fund investments must be in line
regulatory requirements such as Know Your Customer (KYC). For investments to be KYC compliant,
certain information must be provided.
KYC Requirements:
TT
Identity proof must be provided by the client
TT
Residence proof must be provided by the client
TT
Permanent Account Number (PAN card) must be provided by the client
TT
Photograph of the client must be provided
TT
ll original documents along with a copy must be submitted by the client to an identified service
A
provider, like CSDL Ventures Ltd (CVL)
Rohit: What happens once the KYC is completed?

Puneet: Once KYC is done, it is valid across all mutual funds. Investors simply have submit a copy of the
KYC acknowledgement and the application form in order to invest in a mutual fund scheme!
Rohit: Who all need to be KYC compliant?
Puneet: Besides investors, the following also need to be KYC complaint:
KYC is compulsory for...
TT
All joint holders also in a folio
TT
Guardians, in cases where the investor is a minor
TT
I nvestor and the Power of Attorney (POA) holder, in cases where the investment is made by
Power of Attorney
Puneet: KYC is also available for NRIs. However, it is not available for HUFs, non individuals and PIOs.
Uniform Know Your Client (KYC)

Requirements for the Securities Markets
Rohit: Puneet, if I wanted to open an account with a stock broker, what KYC process would I have to
follow?
Puneet: SEBi has recently made the account opening process for investors with regards to stock brokers,
a lot easier. A KYC form has been recommended to gather basic investor details. Investors also have
to fill in another form that asks for additional details that are specifically for stock exchange dealings.
In an effort to unify the securities markets, the same KYC form and supporting documents will also be
used by SEBI registered intermediaries like:
130
TT
Depository Participants
TT
Mutual Funds
TT
Portfolio Managers
TT
Collective Investment Schemes
TT
Venture Capital Funds
Puneet: All extra information gathered by the market intermediaries will be added to Part II of the
form which is prescribed by Depositories for their depository participants and by AMFI for all mutual
funds. The Portfolio Managers, Venture Capital Funds and Collective Investment Schemes will gather
all required extra information relating to their area of activities.
These new measures have introduced the concept of In-Person Verification (IPV), which is now
compulsory for mutual fund investments.
PAN Requirements for Micro-SIPs

Rohit: Puneet, are PAN cards compulsory for all mutual fund investments?
Puneet: Yes, they are Rohit. The only exception to the rule is Micro-SIPs.
Rohit: What are Micro-SIPs?
Puneet: Micro-SIPs are SIPs where the annual investment is not more than Rs. 50,000. Individuals,
minors and sole-proprietary firms do not have to provide a PAN card when investing in Micro-SIPs. They
simply have to submit the Micro-SIP application along with one photo identification document.
List of Photo Identification Documents:
TT
Voter Identity Card
TT
Driving Licence
TT
Government/Defense Identification Card
TT
Passport
TT
Photo Ration Card
TT
Photo Debit Card
TT
Employee ID cards issued by companies registered with the Registrar of Companies
TT
Photo identification issued by Bank Managers of Scheduled Commercial Banks/Gazetted Officer/

Elected Representative to the Legislative Assembly/Parliament
TT
ID card issued to employees of Scheduled Commercial/State/District Co-operative Banks
TT
Senior citizen/Freedom fighter ID card issued by the Government
TT
Cards issued by universities/deemed universities or institutes under statutes like ICAI, ICWA and
ICSI
TT
Permanent Retirement Account No (PRAN) card issued to New Pension System (NPS) subscribers
by CRA (NSDL)
TT
Any other photo ID card issued by Central Government/State Governments/ Municipal

authorities/Government organisations like ESIC/EPFO
131
Puneet: Investors must also keep the following rules in mind:

TT
All documents provided must be current and valid.
TT
The document copy must be self attested by the investor or attested by the ARN holder
mentioning the ARN number.
TT
Investor declarations must be provided stating that they do not have any existing Micro-SIPs that
add up to investments of more than Rs. 50,000 in a year.
TT
This relaxation in documents for Micro-SIPs is only available for NRIs. It cannot be availed of by
PIOs, HUFs and non-individuals.
Additional Documentation Requirements

Applicable for Institutional Investors
Rohit: I know that institutions can invest in mutual funds. But institutions are not real people! So how
do they make investments?
Puneet: Like you said, institutions are not real people and therefore they cannot make investments.
The investments are made by authorised individuals, acting on behalf of the institutions. Thats why
institutional investors need to submit certain additional documents.
Additional Documents to be submitted by Institutional Investors
Eligibility for the investing institution to invest
Authorisation for the investing institution to

invest
Authorisation for the official to sign the
documents on behalf of the investing
institutions
TT
This means the incorporation documents

of all eligible companies/trusts must
provide for investments of this type.
TT
In certain states, the Charity Commissioner

must allow Religious and Charitable Trusts
to make such investments.
TT
This is usually in the form of a Board

Resolution.
TT
This is normally provided for in the Board

Resolution.
Puneet: These additional documents must be provided by institutional investors, along with the
required KYC documents.
Demat Account
Rohit: I have heard the word dematerialisation very often but I dont know what it means.
Puneet: Dematerialisation is a process in which investments that are held by investors in the physical
form, i.e, paper, are converted into the digital form.
Rohit: Why does this process take place?
Puneet: Because when investments are in demat form, the investors purchases and sales of investments
can be automatically added and subtracted from their investment demat account. This removes the
need for carrying out huge amounts of paperwork. There are many more advantages for carrying out
dematerialisation.
132
Advantages of carrying out dematerialisation:

TT
L ess paperwork with regards to buying and selling units. This also holds true for accepting or
delivering the units.
TT
onus and rights units that the investors are entitled to are directly credited into the investors
B
demat accounts.
TT
hanges in address and other information only need to be provided to the Depository Participant.
C
It does not need to be given separately to every company or mutual fund that the investors have
invested in.
Puneet: Today, most stock exchange transactions have to be settled in demat form.
Rohit: Who initiates the demat facility?
Puneet: Usually the mutual fund initiates the demat facility. It ties up with a Depository like National
Securities Depository Ltd or Central Depository Securities Ltd. Investors can approach a Depository
Participant, usually a bank or a broking house and demat their investment holding. In order to do this,
an investor has to compulsorily open a demat account, for which they will have to provide the required
KYC documentation.
Rohit: What happens if investors want to change the demat units back into the physical form?
Puneet: Investors have the option to convert demat units into the physical form if they so wish. This
process is called re-materialisation.
Transactions with Mutual Funds

Rohit: Puneet, what are the different transactions with mutual funds?
Puneet: The transactions for mutual funds are as follows:
Time
stamping
Cut-off time
Fresh
purchase
Additional
purchases
Transactions
with Mutual
Funds
Payment
mechanism
for repurchase
of units
Repurchase
of units
Allotment
of units
to the
investor
Online
transactions
Payment
mechanism
for purchase/
additional
purchase
133
Puneet: Lets look at all these transactions in detail.

Fresh Purchase:
TT
Application forms are provided by the AMCs, distributors and ISCs.
TT
Application forms can also be downloaded from the concerned AMCs websites.
TT
T he regular application form which also contains the KIM is created specifically for fresh
purchases, i.e., cases when the investor does not have an investment account (folio) with that
particular mutual fund.
TT
t the time of investing, investors must confirm that their investment amount is above the
A
minimum investment limit set by the mutual fund for the scheme.
Additional Purchases:
TT
I nvestors that have an existing folio with a mutual fund do not have to provide the full application
form and documentation for additional purchases.
TT
They only need to fill the transaction slip and submit it with the requisite payment.
TT
T he transaction slip can be used to make changes in information, for example, changes in the
investors address.
TT
ost mutual funds send a transaction slip with the investors folio number pre-printed on it,
M
along with the Statement of Account.
TT
lank transaction slips (without the pre-printed folio number) are provided by branches of the
B
AMC, distributors and ISCs. Such slips can also be downloaded from the net.
Online Transactions:
TT
Existing investors can avail of online transaction facilities.
TT
I nvestors must fill the required details in an application form, after which the registrar allots a
user name and password.
TT
T he investor uses the user name and password to make additional purchases of mutual fund
units or to request re-purchase of units held in the mutual fund.
TT
Certain distributors provide online transaction facilities to investors, through their websites.
TT
Payment Mechanism for Purchase/Additional Purchase:
TT
utual funds usually do not accept cash, but an exception was recently made by SEBI in order
M
to spread the reach of mutual fund products for small investors (these investors may not be tax
payers or have PAN/bank accounts).
TT
S mall investors like farmers, small traders/businessmen/workers are now allowed to make cash
payments of up to Rs. 20,000 in mutual fund transactions, per investor, per mutual fund per
financial year.
TT
epayment of such investments is through redemptions, dividends etc, and all such payments
R
must be made through banking channels.
TT
In all other cases, application money should come through normal banking channels via:
134
heque
C
Demand draft
Real Time Gross Settlement (RTGS)
National Electronic Funds Transfer (NEFT)
S WIFT transfer
Electronic Clearing Service (ECS)
Standing Instructions
Application Supported Block Amount This is a facility where the investment application
is accompanied by an authorization to the bank to block the amount of application money
in the investors bank account. The benefit of ASBA is that the money goes out of the
investors bank account only on allotment.
Allotment of Units to the Investor:

TT
T he investment amount divided by the sales price gives the number of units bought by the
investor.
TT
T his means if an investor has invested Rs. 20,000 in a scheme where the applicable sales price is
Rs. 2, the investor will be allotted 10,000 units (20,000 2).
TT
I n a rights issue the rights price is clear at the time of investment. The investment amount divided
by the rights price equals to the number of units bought by the investor. It should however be
kept in mind that rights issues are common for shares but are not very applicable for mutual fund
scheme units.
TT
I n a bonus issue the investor does not make any payment. New units are allotted by the fund for
free.
Re-Purchase of Units:
TT
Open-ended scheme investors can offer the mutual fund units for re-purchase.
TT
To carry out re-purchase, a transaction slip needs to be filled out.
TT
Investors can fix the re-purchase amount or the number of units offered for re-purchase.
TT
The re-purchase price is the applicable NAV minus the exit load.
TT
I f the investor has specified the re-purchase amount, then that amount divided by the repurchase price would equal to the number of units that would be reduced from his folio.
TT
I f the investor has specified the re-purchase units, then those many units would be reduced
from his folio. To get the payment amount, the number of units re-purchased would have to be
multiplied by the re-purchase price.
TT
hile carrying out the re-purchase, if the investment holding in the portfolio is less than the
W
minimum limit set by the mutual fund for the scheme, then all the units may be re-purchased.
The investment folio of the investor would then be closed.
Payment Mechanism for Repurchase of Units:

TT
I nvestors can receive money due to them from the scheme on re-purchase of units through a
number of methods like:

TT
TT
heque
C
Direct credit
For non-resident investors, the AMC makes the payment in rupees.
I f the investment has been made on a repatriable basis, and the investor wants to transfer money
abroad, then the costs resulting from converting rupees into any foreign currency would be paid
by the investor.
135
Cut-Off Time:
TT
The sales and re-purchase prices are a function of the applicable NAV.
TT
T o remain fair to investors, SEBI has recommended a cut-off timing to determine the applicable
NAV. These provisions are applied uniformly across all mutual funds.
Uniformly Applicable Provisions

Type of Scheme
Equity oriented funds and debt
funds (except liquid funds) in
respect of purchases under Rs.
2 lacs
Transaction
Equity oriented funds and debt

funds (except liquid funds) in
respect of transactions above
Rs. 2 lacs
TT
Applicable NAV
Same day NAV if received
before cut-off time.
Purchases
3:00 pm
Switch in
Next business day NAV for

applications received after
cut-off time.
Purchases
Previous day NAV if received

before cut-off time and funds
are realised.
2:00 pm
Liquid Fund
Equity oriented funds, debt

funds, liquid funds
Cut-Off
Time
Switch in
If received after cut-off time,

NAV of the day previous to
funds realisation.
Redemptions
Same day NAV if received

before cut-off time.
3:00 pm
Switch out
Next business day NAV for

applications received after
cut-off time.
Purchases
Irrespective of the time of

receipt of application.
3:00 pm
Switch in
NAV of the business day on

which the funds are available
for utilisation before the
cut-off time of that day is
applicable.
T he NAV applicable for switch-in transactions to liquid funds is the NAV of the day preceding the
day of the application, provided:

TT
T he application is received before the cut-off time

The funds are credited to the schemes account before the cut-off time
The funds are available for utilisation with using any credit facilities
These cut-off timing are not applicable for NFOs and International Schemes.
Time Stamping:
TT
ut-off timings will only work if there is a fool proof method of capturing the exact time at which
C
the sales and re-purchase applications are received. This is ensured in the following ways:
136
utual funds disclose the official Points of Acceptance (PoAs) and their address in the SID
M
and their websites.
ll transaction requests must be submitted at the PoAs.

A
The Points of Acceptance have time stamping machines with a tamper-proof seal.
Applications are numbered in order from the first machine number to the last, before a
new numbering cycle is begun.
Application for purchase of units is stamped with automatically generated required
information like location code, machine identifier, serial number, date and time.
Reverse of the payment instrument, acknowledgement issued to the investor and
application for re-purchase and investors acknowledgement are stamped with the same
information.
Applications for non-financial transactions are stamped. In this case data stamping is more
crucial than time stamping.
In the case of online transactions, the relevant web server time is used to determine the
NAV for sales and re-purchase transactions.
Checklist of learning points

TT
Individual and non-individual investors are permitted to invest in mutual funds in India. Foreign
nationals, foreign entities and OCBs are now permitted to invest.
TT
All investments need to meet uniform KYC guidelines given by SEBI, effective January 1, 2012
TT
Besides KYC, non individual investors need to provide additional documentation to support their
investment.
TT
Demat makes it possible to trade in Units in the stock exchange.
TT
Full application form is to be filled for a first time investment in a mutual fund through the off line
route. Thereafter, additional investments in the same mutual fund are simpler. Only transaction
slip would need to be filled.
TT
Investors can pay for their Unit purchases through cheque/DD, net based remittances, ECS /
Standing Instructions or ASBA. M Banking is likely to increase in importance in the coming days.
TT
Transaction slip can be used for re- purchase. Investors can indicate the amount to re-pirchase or
the number of units to be re-purchased.
TT
Cut-off timings have been specified for different types of schemes and different contexts to
determine the applicable NAV for sale and re purchase transactions.
TT
Time Stamping is a mechanism to ensure that the cut off timing is strictly followed.
137
Key Learnings
138
1.
Name three individual investors and three non-individual investors.
2.
What are the PAN requirements for Micro-SIPs?
3.
What is dematerialisation?
4.
What is time stamping?
Worksheet
1.
2.
Fill in the blanks.

a.
Mutual fund investors have to be

investment amount.
compliant, regardless of the
b.
Broadly, mutual fund investors must submit proof of identity,

photograph and
.
c.
The only exception for PAN card is in the case of
d.
Converting demat units into physical form is called
e.
The facility of
,
.
.
is given to existing mutual fund investors.
Read the following questions and choose the correct answer.

a.
Foreign nationals are freely permitted to invest in Indian mutual funds.

i.
ii.
b.
PAN Card is not required for mutual investment below Rs. 20,000, where payment is in
cash
i.
ii.
c.
True
False
Investments in mutual funds can be made using

i.
ii.
iii.
iv.
d.
True
False
Cheque/DD
Remittance
ASBA
Any if the above
Cut off timing guidelines are not applicable for

i.
ii.
iii.
iv.
NFOs
International funds
Both the above
None of the above
Notes
139
Answers: Investor Services

Question Number
1
140
Answer
a.
b.
a.
Offer document
b.
Key Information Memorandum
c.
New subscriptions, Redemptions
d.
Collection centres, AMC offices
e.
Salient features
a.
ii
b.
c.
iv
d.
e.
Investment Plans and Services

TT
explain the different investment plans and services
Session Plan
1
Module Overview
Systematic Investment Plan (SIP)
Rupee Cost Averaging
Systematic Withdrawal Plans (SWP)
Systematic Transfer Plans (STP)
Other Services Available Under Mutual Funds
Key Learnings
Worksheet
Module Overview
Mutual funds offer many different investment plans and services. With the variety of investment plans
being offered, it is guaranteed that there is a scheme that will interest every kind of investor. In order
for investors to select the best scheme for themselves, and for distributors to suggest the best scheme
to investors, it is important for both to know what these different types of investment plans are, and
what they are about.
In this module, you will learn about the different kinds of investment plans being offered by mutual
funds. You will also learn about the other services offered by them.

Rohit has met up with Puneet and a few other friends for lunch. Knowing that Puneet is a mutual funds
distributor, his friends start asking him for investment advice. But Puneet is no longer the only mutual
funds expert. Rohit now knows quite a bit about mutual funds too! Lets see what sort of questions the
friends ask and how Puneet and Rohit help them out.
Amit: Hey Puneet...I really want to start investing my money. Only thing is, I wont be able to invest a
huge amount of money at one time. But I will be able to invest a part of my salary every month. What
sort of investment plan do you suggest?
Puneet: I think a Systematic Investment Plan would be the best option for you, Amit. This plan is also
known as the Rupee Cost Averaging approach, because it allows investors to average their acquisition cost.
141
Amit: What are the other features of this plan? Also, I dont want the hassle of writing a cheque or
going to the bank to deposit money for the investment every month. So is there a way to transfer the
money automatically for this plan?
Rohit: Actually Amit, there is! In a SIP, you can directly debit the amount from your salary account or
any bank account! Its really convenient!
Puneet: Rohit is right Amit! The SIP fits all your requirements! Take a look at the features of this plan.
Features of a Systematic Investment Plan:
TT
A fixed amount is invested regularly, at periodic intervals.
TT
Promotes disciplined saving in regular phases.
TT
mount can be transferred through Post-Dated Cheques (PDCs), ECS or even via direct debit
A
from the investors salary or bank account.
TT
Investors get the benefit of Rupee Cost Averaging.
TT
Investors are not forced to make all their investments when the market is at its highest.
Puneet: Well done Rohit! You are learning fast!

Sheeba: I also want to invest my money! Can you tell me about any other schemes similar to the SIP?
Rohit: Have you heard of Rupee Cost Averaging? This is also a good investment technique. Take a look.
Features of Rupee Cost Averaging:
TT
Investments must be made at specific intervals and on specific dates.
TT
It can be initiated with a New Fund Offer.
TT
ayment can be made by post-dated cheques, electronic clearing services or a standing

P
instruction for direct transfer.
Systematic Withdrawal Plans (SWP)

Soham: I want to know what my father can invest in. You know he has been retired since a year now.
He needs a safe plan where he can get back a fixed income, preferably every month.
Rohit: How about a Systematic Withdrawal Plan? I think this plan will meet your fathers requirements
perfectly! Take a look!
Features of a Systematic Withdrawal Plan:
142
TT
Reduces the risk of redeeming all the units at the time of a market trough.
TT
Liquid enough to satisfy regular expenditures.
TT
Systematic withdrawals are made at periodic intervals.
TT
Withdrawals are made from the funds investment accounts.
TT
Amount withdrawn is treated as redemption of units at the applicable NAVs.
TT
Investors are provided with the amount, periodicity (normally monthly) and period of their plan.
TT
Certain schemes allow only the appreciation or the dividend to be transferred.
TT
No dividend tax is charged.
TT
Debt schemes are subject to Income Distribution Tax.

Puneet: Sohams father also has another good option. He can opt for a Systematic Transfer Plan. This is
a variation of the Systematic Withdrawal Plan.
Rohit: You are absolutely right Puneet! A STP allows the investor to switch between investment options
without withdrawing any money. This makes it quite safe and also results in quite a decent return!
Puneet: Exactly! Take a look at what this plan is all about!
Features of a Systematic Transfer Plan:
TT
A specific amount is transferred at periodic intervals.
TT
The amount is transferred by selling units of one scheme and buying units of another scheme.
TT
The schemes belong to the same fund family.
TT
The redemption or investment is at the applicable NAV
TT
Minimum balance must be maintained.
TT
Cost effective and convenient.
Other Services Available Under Mutual Funds

Christa: Mutual funds are really useful. They offer us so many investment plans that help us to save.
Puneet: Yes, Christa you are right, But you know, mutual funds also offer us many other helpful services
besides investment.
Christa: Really? Like what?
Puneet: Take a look!
143
Triggers
TT
Provides automated purchase, redemption, switch or dividend decisions
Pledging
TT
Funds can be borrowed from Banks, NBFCs, etc by pledging mutual fund
units
TT
Account statements show the units purchased, units redeemed or

transferred between schemes, distributions and reinvestments and the
investors current holding in units and in amount
TT
As per SEBI regulations, funds must send investors their annual financial
statements within six months of the end of the accounting year
TT
Available for open and close-ended funds that are not listed on the stock
exchange
TT
The nominee gets the benefit on the death of the unit holder
TT
Email/SMS is sent confirming transactions carried out, within 5 business

days of the transaction taking place
TT
Transaction details include basic information like allotment date, units

alloted and NAV
TT
Every calendar month, a Consolidated Account Statement (CAS) is sent

via post/email, on or before the 10th of the suceeding month
TT
If there are no transactions for 6 months, a CAS containing information

of all mutual fund holdings across schemes is sent at the end of every
6 months, via post/email by the 10th day of the month following the 6
month period
TT
Provides Statement of Account and Investment Certificate
TT
Allows online access to investment information for investors
TT
Provides daily NAV through SMS /E-mail
TT
Internet/E-mail transactions
Periodic
Statements
Nomination
Facility
Consolidate
Account
Statements (CAS)
Other Services
144
TT
A constant amount is regularly invested in SIP, withdrawn in SWP and transferred between
schemes in STP. These minimize the risk of timing the decisions wrongly.
TT
Triggers are another way of bringing discipline into investing
TT
Nomination and Pledge options are available for mutual fund investors.ss
Key Learnings
1.
Note down two features of a Systematic Investment Plan.
2.
Note down two features of an Automatic Reinvestment Plan.
3.
Note down two features of a Systematic Withdrawal Plan.
4.
Note down two features of a Systematic Transfer Plan.
145
Worksheet
1.

a.
2.
What benefit do investors get with a Systematic Investment Plan?

i.
Value Cost Averaging
ii.
Average Percentage Return
iii.
Weighted Average
iv.
Fill in the blanks.

a.
In an Automatic Reinvestment Plan, dividend is

net asset value price.
b.
In a Systematic Withdrawal Plan, the amount withdrawn is treated as

at the applicable NAVs.
c.
In a Systematic Transfer Plan, the amount is transferred by

scheme and
of another scheme.
d.
In a Systematic Investment Plan the amount is transferred via

investors salary or bank account.
Notes
146
at the
of one
from the
147
Answers: Investment Plans and Services

Question Number
1
148
Answer
a.
iv.
a.
Reinvested, Ex-dividend
b.
Redemption of units
c.
Selling units, Buying units
d.
Direct debit
Drivers of Return in a Equity & Debt Scheme

TT
explain how to manage a stock portfolio
TT
the return aspect of a equity scheme
TT
explain the return aspect of a debt scheme.
Session Plan
1
Module Overview
Equity Scheme - Securities Analysis Disciplines
Investment Styles - Growth and Value
Portfolio Building Approach: Top-Down and Bottom-Up
Debt Security Types
Risks of Investing in Debt Securities/Bonds
Measures of Bond Yields, Yield Spread, Credit Risk
Gold Scheme
10
Key Learnings
11
Worksheet
Module Overview
Equity portfolio management involves the selection of different equities, or stocks, for an investment
portfolio. In order to create a stable equity portfolio for an investor, with maximum growth and
minimum risk, a portfolio manager must have a good understanding of stocks, the stock market and
the strategies followed to beat the market.
In this module, you will learn how to create a sound equity investment strategy.
Equity Scheme - Securities Analysis Disciplines

Puneet: The portfolio is the main driver of returns in a mutual fund scheme. The underlying factors are
different for each asset class.
Securities Analysis Disciplines
There are two types of quantitative approaches to securities analysis:
149
Quantitative Approaches
to Securities Analysis
Fundemental
Analysis
Technical
Analysis
Puneet: Before learning about these approaches, you must know there are two ways a fund is managed
Active and Passive.
Fund Management
Style
Active
TT
T he aim of this management style is to outperform the

index by altering weighting to sectors, stock selection and
market timing.
TT
Stocks selection is on the basis of research and analysis.
TT
This management style replicates a chosen index.
TT
It provides index linked returns with some tracking error.
Active Fund Management Style
Passive Fund Management Style
Passive
Puneet: Now that you the difference between active and passive funds let us discuss the approaches to
securities analysis in detail. A passive fund maintains a portfolio that is in line with the index it mirrors.
Therefore, a passive fund manager does not need to go through this process of securities analysis but
securities analysis is an important aspect of actively managed scheme.
Fundamental Analysis It entails review of the companys fundamentals viz. financial statements,
quality management, competitive position in its product / service market etc.
The analyst sets price targets, based on financial parameters like:
Earnings per Share (EPS): Net profit after tax / No. of equity shares
This tells investors how much the company earned for each equity share that they own.
Price to Earnings Ratio (P/E Ratio): Marked Price/EPS
When investors buy shares of a company, they are essentially buying into its future earnings. P/E ratio
indicates how much investors in the share market are prepared to pay, in relation to the companys
earnings. This ratio is normally calculated based on a projected EPS for a future period (also called
forward EPS).
A simplistic view is that low P/E means that a share is cheap and therefore should be bought; the
corollary being that high P/E means that a share is expensive and therefore should be sold.
Book Value per Share: Net Worth/ No. of equity shares
This is an indicator of how much each share is worth, as per the companys own books of accounts.
The accounts represent perspective, and are a function of various accounting policies adopted by the
company.
150
Price to Book Value: Market Price / Book Value per Share

An indicator of how much the share market is prepared to pay for each share of the company, as
compared to its book value.
Such financial parameters are compared across companies, normally within a sector. Accordingly,
recommendations are made to buy/ hold/ sell the shares of the company.
Technical Analysis - Technical analysts believe that price behavior of a share, and the volume traded
are a reflection of investor sentiment, which in turn will influence future price share. Technical analysts
therefore study price volume charts of the companys shares to decide support levels, resistance levels,
break outs, etc.
Investment Styles Growth and Value

Growth investment style entails investing in high growth stock i.e. stocks of companies that are likely to
grow much faster than the economy. Many market players are interested in accumulating such growth
stocks. Therefore, valuation of these stocks tends to be on the higher side. Further, in event of a market
correction, these stocks tend to decline more.
Value investment style is an approach of picking up stocks, which are valued lower, based on
fundamental analysis. The belief is that the market has not appreciated some aspect of the value in a
companys share and hence is cheap. When the market recognizes the intrinsic value, then the price
would shoot up. Such stocks are also called value stocks.
Portfolio Building Approach: Top-Down and Bottom-Up

Rohit: I know there is a portfolio building approach called top-down and bottom-up...but I have no idea
what it means. Puneet, do you know what this approach is about?
Puneet: Yes, Rohit it is very easy to understand. Lets begin with the top down approach.
Top-Down Approach:
TT
T he portfolio manager selects the distribution of the investible corpus between countries and
sectors.
TT
Next, the good stocks within the specified sectors are identified for investment.
TT
In this approach sector allocation is of prime importance.
Rohit: Got it. What about the bottom-up approach?

Puneet: The bottom-up approach is different from the top-down approach.
Bottom-Up Approach:
TT
Country-allocation and sector-allocation are not given too much importance in this approach.
TT
S tocks that are identified as good are selected for investment. This is why this approach is also
known as stock picking.
TT
I n this approach stock selection is of prime importance. The stock selection decisions lead to
sector allocation.
Rohit: I see. Puneet, which of these two approaches is best?

Puneet: There is no best approach Rohit. Both these approaches have their advantages.
151
TT
The top-down approach reduces the risk of being stuck with a large exposure in a poor sector.
TT
T he bottom-down approach makes certain that good stocks are picked, regardless of how well
the sectors are doing.
Puneet: So you see, the most important thing to keep in mind is that the chosen approach should be
carried out in a professional manner.
Debt Security Types

Rohit is learning about debt security. He knows that debt securities are issued by companies to raise
capital. But he would like to know more about these securities. Luckily for him, he can ask his friend
Puneet!
Rohit: Puneet, can you tell me a little bit about debt securities?
Puneet: Sure Rohit! When we invest in debt securities, we get returns in the form of interest and capital
gain or loss. There are three main types of debt securities.
Debt Security
Types
Liquid
Securities
Money Market
Securities
Debt
Securities
Puneet: Lets take a look at each of these types in more detail.

Liquid Securities:
TT
Maturity period is less than 91 days.
TT
Can be very easily converted into cash.
TT
Examples: Treasury bills of 91 days maturity etc.
Money Market Securities:

TT
High liquidity and very short maturities.
TT
Used for short term borrowing and lending.
TT
Maturity period ranges from few days to just under a year.
TT
E xamples: Commercial papers (CPs), certificates of deposits (CDs), treasury bills, call money and
repos.
Debt Securities:
152
TT
Also called fixed income securities.
TT
The borrower is the issuer.
TT
The lender is the buyer (financier).
TT
Maturity period is more than 1 year.
TT
Examples: Government securities, PSU bonds, FI bonds, bank bonds, corporate debentures.
The return that an investor earns or is likely to earn on a debt security is called its yield. The
yield would be a combination of interest paid by the issuer and capital gain or capital loss.
Debt securities may be issued by Central Government, State Government, Banks, Financial
Institutions, etc.
TT
Securities issued by the Government are called Government Securities or G Sec or Gilt.
TT
Treasury Bills are short term debt instruments issued by Reserve Bank of India on behalf of the
Government of India.
TT
Certificate of Deposit
TT
Commercial papers
TT
Bond/ Debentures
Risks of Investing in Debt Securities/Bonds

Puneet: Though debt securities are much safer than equity securities, they are still subject to certain risks.
Rohit: What type of risks?
Puneet: They are mainly subject to two types of risks.
Risk
Credit Risk
Interest Risk
Puneet: Credit risk is also known as default risk. This risk occurs when the issuer of the bond is unable
to repay the principal amount or pay the interest amount.
Credit Risk:
TT
Also called default risk.
TT
I t is the risk that the issuer of the bond will be unable to repay the principal and/or interest
amount.
TT
The higher the credit risk of the issuer, the lower the price and the higher the bond yield.
TT
Certain companies provide credit ratings based on the quality and safety of the issuers finances.
TT
I nvestors interested in purchasing debt securities should refer to the credit rating of those
securities, before making investment decisions.
Rohit: And what is interest rate risk?

Puneet: Portfolios are exposed to interest rate risk due to the uncertainty of future interest rates. The
prices of bonds are sensitive to changes in interest rates. When interest rates rise, the price of bonds
will fall.
Interest Rate Risk:
TT
It is a risk caused by the uncertainty of future interest rates.
153
TT
Rising interest rates lead to falling bond prices.
TT
The longer the duration of a bond, the greater the interest rate risk.
Measures of Bond Yields, Yield Spread, Credit Risk

Puneet: Since bonds are subject to risks, it is important for investors to understand how safe their
investments are. They can find this out by looking at the following three areas in relation to a bond:
TT
The yield
TT
The yield spread
TT
The credit risk
Rohit: Can you tell me more about these?

Puneet: Sure! Lets start with yield. Yield is the income return on an investment. It is made up of the
interest paid by the issuer and capital gain.
Rohit: I see. And what about yield spread?
Puneet: Yield spread is the difference between two bonds of AAA credit rating. For instance, a corporate
bond of 12% versus another corporate bond of AAA credit rating of 9% gives a 3% yield spread.
Rohit: Why is that?
Puneet: Thats because corporate bonds are exposed to default risk, also known as credit risk.
Puneet: The yield, yield spread and credit risk are all measured. Lets take a look at their measures.
Measures of Yield
TT
Current yield
TT
Yield to maturity
Measures of Yield Spread

yield
Measures of Credit Risk
TT
Additional
G-sec yield
over
TT
TT
The borrower pays it to

the account for his default
risk
Assessed by the ratings of

credit rating companies like
CRISIL, ICRA, CARE and Fitch
TT
The higher the credit rating,

the lower the spread
TT
The lower the credit rating, the

higher the spread
Gold Scheme
Puneet: Gold is a truly international asset, whose quality can be objectively measured. The value of
gold in India depends on the international price of gold, the exchange rate for converting the currency
into Indian rupees and any duties on the import of gold.
Global Price of Gold
Gold is seen as a safe asset class. Therefore, whenever there is political or economic turmoil, gold
prices shoot up.
Most countries hold a part of their foreign currency reserves in gold. Similarly, institutions like the
International Monetary Fund have large reserves of gold. When they come to the market to sell, gold
prices weaken. Purchases of gold by large countries tend to push up the price of gold.
154
Strength of Rupee
Economic research into inflation and foreign currency flows helps analysts anticipate the likely trend of
foreign currency rate.
When the rupee becomes stronger, the same foreign currency can be bought for fewer rupees.
Therefore, the same gold price, translates into a lower rupee value for gold portfolio. This pushes down
the returns in the gold fund. A weaker rupee, on the other hand, pushes up the rupee value of the gold
portfolio and consequently the returns in gold would be higher.

TT
T he portfolio is the main driver of returns in a mutual fund scheme. The underlying factors are
different for each asset class.
TT
F undamental Analysis and Technical Analysis are two disciplines of securities analysis.
Fundamental Analysis entails review of the companys fundamentals viz. financial statement,
quality of management, competitive position in its product/ service market, etc. technical
analysts study price volume charts of the companys share prices.
TT
I t is generally agreed that longer term investment decisions are best taken through a fundamental
analysis approach, while technical analysis comes in handy for shorter term speculative decisions,
including intra day trading. Even where a fundamental analysis-based decision has been taken
on a stock, technical analysis might help decide when to implement the decision i.e. the timing.
TT
rowth investment style entails investing in high growth stocks. Value investment style entails
G
investing in high growth stocks. Value investment style is an approach of picking up stocks, which
are valued lower, based on fundamental analysis.
TT
The returns in a debt portfolio are largely driven by interest rates and yield spreads.
Key Learnings
1.
Explain Fundamental Analysis and Technical Analysis.
2.
Name the types of debt securities.
155
3.
What is interest rate risk?
4.
Explain yield spread.
5.
What are the measures of credit risk?
Worksheet
1.

a.
What is the yield spread for a corporate bond of 15% versus a G-sec of 10%?
i.
ii.
iii.
iv.
b.
What type of risk are corporate bonds exposed to?

i.
ii.
iii.
iv.
c.
I nterest rate risk

Liquidity risk
Inflation risk
Default risk
What is the maturity period of liquid securities?

i.
ii.
iii.
iv.
156
5%
2
5%
150%
1.5%
ore than 91 days

M
Less than 365 days
Less than 91 days
More than 365 days
d.
Fundamental analysis is evaluation of the strength of the companys price-volume charts.

i.
ii.
e.
In a top down approach, sector allocation precedes stock selection.

i.
ii.
f.
T rue
False
Which of the following is a truly international asset class?

i.
ii.
iii.
iv.
2.
T rue
False
eal Estate
R
Equity
Debt
Gold
Fill in the blanks.

a.
Yield is the
on an investment.
b.
The higher the credit risk of the issuer, the

the bond yield.
c.
The longer the duration of a bond, the greater the
the price and the

.
Notes
157
Answers: Debt Portfolio Management

Question Number
158
Answer
a.
ii
b.
iv
c.
iii
d.
ii
e.
f.
iv
a.
Income return
b.
Lower, Higher
c.
Interest rate risk
Computing Returns
TT
calculate different types of returns on mutual funds
Session Plan
1
Module Overview
Simple Return
Annualised Return
Compounded Return
Compounded Annual Growth Rate (CAGR)
Key Learnings
Worksheet
Module Overview
Investment performances are evaluated on the basis of their returns or losses. There are many different
types of investments and many different ways to calculate returns.
In this module, you will learn how to compute returns. You will also learn about the most common
methods of computing and when to use them.
Simple Return
Rohits father has made a number of investments over the years. Rohit wants to calculate the returns for
some of these investments, but he has a problem. There are so many methods of computing returns!
Which one should he use? Luckily, Puneet is there to help him out!
Rohit: My father invested in a growth option when its NAV was Rs. 20. Now 7 months later its NAV is
Rs. 24. How do I find the return on this investment?
Puneet: Since this is a growth option, you can find out by using Simple Return! As per SEBI, Simple
Returns must be used to represent returns for periods less than one year for all funds except Liquid
Funds.
Rohit: I see. How do I calculate it?
Puneet: We can calculate it using the following formula:
159
Simple Return =
(NAV at the end) - (NAV at the start) X 100

(NAV at the start)
After putting in the values we get:

Simple Return
(24) - (20) X 100
(20)
Simple Return = 20%

Puneet: So you have an Simple Return of 20%! Take a look at the features of Simple Return.
Simple Return:
TT
s per SEBI, Absolute Returns must be used to represent returns for periods less than one
A
year
TT
Used for all funds except Liquid Funds
TT
Can only be calculated for growth options
Annualised Return
Rohit: My father has invested in two growth options. He has held the first option for 8 months and the
second option for 6 months. The first option has given a return of 7% so far and the second option has
given a return of 5% so far. How do I compare these returns?
Puneet: These are growth options so you can compare them by using Annualised Return. Annualisation
is used to compare the returns of two different time periods. SEBI permits the annualisation of returns
from Liquid Funds, for periods less than a year.
Rohit: Can you show me how to calculate it?
Puneet: Sure! It can be calculated using the following formula:
Annualised Return = Absolute Return x the Annualising Factor 365/n or 12/n
Investment 1
Investment 2
7% x 12
5% x 12
= 10.5%
= 10%
Puneet: So you have Annualised Returns of 10.5% and 10%! Take a look at the features of Annualised
Return.
Annualised Return:
160
TT
Used to compare the returns of two different time periods
TT
SEBI permits the annualisation of returns from Liquid Funds, for periods less than a year
TT
Calculated only for growth options
Compounded Return
Rohit: Lets look at my fathers next investment. He invested Rs. 2,000 in a growth option and reinvested
the returns. In 2 years time, this investment has grown to Rs. 8,000. How do I calculate the return?
Puneet: Since it is a growth option, you can calculate the returns using Compounded Returns. It is used
for calculating returns that have been reinvested.
Rohit: What is the formula for calculating it?
Puneet: Compounded Return can be calculated using the following formula:
( )
1/n
Compounded Return = LV - 1
IV
Where:
LV
Value at the end
IV
Value at the start
Holding period in years
1/2
Compounded Return = 8000 - 1 = 1

2000
This is equivalent to 1 X100 = 100%
Puneet: So you have Compounded Returns of 100%! Take a look at the features of Compounded Return.
Compounded Return:
TT
Used for calculating returns that have been reinvested
TT
Calculated only for growth options
Compounded Annual Growth Rate (CAGR)

Rohit: Lets calculate the returns for one last investment! My father bought 100 units of a debt fund at
Rs. 10.5 on January 6, 2011. On June 30, 2011 he received dividends at the rate of 10%. The ex-dividend
NAV was Rs. 10.25. On March 12, 2012, the funds NAV was Rs. 12.25. How do I find the return?
Puneet: Since this a debt option, you can calculate returns using the Compounded Annual Growth Rate
or CAGR. Remember, to calculate CAGR it must be assumed that the dividends were reinvested at the
ex-dividend NAV.
Rohit: And how do we calculate it?
Puneet: CAGR can be calculated using the following formula:
()
1/n
Compounded Annual Growth Rate = V1 - 1

V0
161
Where:
V1
Final value of investment
V0
The initial value of the investment
Holding period
The initial value of the investment= 10.5 x 100 = Rs. 1050

Number of units reinvested = 100/10.25 = 9.756 units
Final value of investment = 109.756 x 12.25 = Rs. 1344.51
Holding period = 6/01/11 - 12/3/12 = 431 days
CAGR = [(1344.51/1050)365/431 - 1 ]x 100 = 23.29%
Puneet: So you have a Compounded Annual Growth Rate of 23.29%! Take a look at the features of
Compounded Annual Growth Rate.
Compounded Annual Growth Rate:
TT
sed for calculating returns when its assumed that the dividends were reinvested at the exU
dividend NAV
TT
Calculated only for debt options

Returns can be measured in various ways Simple Returns, Annualised Returns, Compounded Returns,
and Compounded Annual Growth Rate. CAGR assumes that all dividend payout are re invested in the
scheme at the ex- dividend NAV.
Key Learnings
1.
162
As per SEBI, when must Absolute Return be used?
2.
When would you use Annualised Return to compute investment performance?
3.
List the computing methods that can be used only for growth options.
Worksheet
1.
2.
Fill in the blanks.

a.
Annualised Return is used to compare the returns of
b.
Absolute Return is used for all funds except
c.
SEBI permits the annualisation of returns from Liquid Funds for periods
d.
Compounded Return is used for calculating returns that have been
e.
Absolute Return can only be calculated for
.
.
.
options.
Match the columns.

(NAV at the end) - (NAV at the start) X 100
a.
Absolute Return
i.
b.
Annualised Return
ii.
(LV/IV)1/n-1
c.
Compounded Return
iii.
Absolute Return x the Annualising Factor 365/n or

12/n
(NAV at the start)
163
Notes
Answers: Computing Returns

Question Number
164
Answer
a.
Two different time periods
b.
Liquid Funds
c.
Less than a year
d.
Reinvested
e.
Growth
a.
b.
iii
c.
ii
Risk
TT
explain the types of risks faced by different mutual fund schemes
Session Plan
1
Module Overview
When Does Risk Arise
Drivers of Risk in a Scheme
Risks in Equity Funds
Risks in Debt Funds
Risks in Other MF Schemes
Key Learnings
Worksheet
Module Overview
All mutual fund schemes face a certain amount of risk. Some schemes may be riskier and some may be
safer, but there is an element of risk in all investments.
In this module, you will learn about the different types of risks faced by mutual fund schemes.

Rohit knows that certain investments are riskier than others. But what does risk actually mean? He
decides to ask his friend Puneet.
Rohit: Puneet, people talk about risk all the time. But what is risk?
Puneet: Risk arises when the actual returns are different from the returns that were expected. Both
equity and debt schemes face risk. Lets look at what causes risk in mutual fund investments.
165

Puneet: Mutual funds are exposed to certain risks.
Mutual Fund
Risks
Portfolio Risk
Market Risk
Interest Rate
Risk
Liquidity Risk
Credit Risk
Liquid Assets
in Scheme
Liability in
Scheme
Puneet: Lets take a closer look at each of these risks.

TT
ccurs from price changes caused by changes in the

O
underlying fundamental and technical factors.
TT
ccurs when bad news regarding a company leads to a fall in

O
its stock prices, which in turn, negatively impacts the holdings
of the fund.
TT
ccurs when interest rates rise, which causes the price of

O
bonds to fall as bond prices and interest rates are inversely
related.
Liquidity Risk
TT
Occurs when buying and selling is unable to take place easily.
Credit Risk
TT
ccurs due to default in the payment of interest or principal,

O
or both, by an issuer of debt securities.
TT
S chemes keep a certain part of their assets in liquid form

because:
Market Risk
Interest Rate Risk
Liquid Assets in the Scheme

TT
Liabilities in the Scheme
166
T hey think the market is over-heated and would rather

sell their investments and keep the returns in liquid
form, until they can buy again
OR
T hey want liquidity for emergencies like paying

upcoming dividend or re-purchase expectations
Liquid assets usually provide a lower return, so they tend to
pull down scheme returns, if other market assets do better.
TT
Liquid assets help save the scheme from distressed

investment sales.
TT
S chemes have liabilities other than to the unit holders,

known as outside liabilities.
TT
S chemes must compulsorily pay outside liabilities, regardless

of the performance of the assets.
TT
I f the assets perform badly, and the outside liabilities are

high, it results in risk for the mutual fund.

Puneet: Now lets take a look at the risks faced specifically by equity funds.
Generic
Equity markets seek the value in real economy. In performing this role, the following significant risks
come up:
The real economy goes through cycles.
In the long run, equity market are a good barometer of real economy but in the short run, markets
can get over optimistic or over pessimistic, leading to spells of greed and fear.
Portfolio Specific
Sector Funds
TT
Deal with concentration risk.
Diversified Funds
TT
Not as risky as sector funds.
TT
They are a type of sector fund.
TT
Not as risky as sector funds.
TT
More risky than diversified equity funds.
TT
Invest in mid-caps funds which are not very liquid and not well
researched.
TT
Are more riskier during economic turmoil.
TT
Open to high risk of misjudgement.
TT
These are equity funds with the lowest risk offering returns.
TT
They are more in line with money market returns than equity market
returns.
Thematic Funds
Mid-Cap Funds
Contra Funds
Arbitrage Funds
Risks in Debt Funds

Puneet: Just like equity funds, debt funds also face certain risks. Here are some risks faced specifically
by debt funds.
Generic
Debt fluctuates in value, with changes in yield in the overall market.
Government or any other policies are unpredictable and they affect the interest rates.
Debt market, especially the nongovernment segment, is not as vibrant and liquid as the equity market.
Therefore, there is the possibility of not finding a buyer for the securities held.
167
Portfolio Specific
Short Maturity
Securities
TT
Low fluctuation in value.
TT
Level of fluctuation is lower than that of longer maturity schemes.
Liquid Schemes
TT
Have the least interest rate risk.
TT
Riskier than liquid schemes due to interest rate risk.
TT
The longer the period of maturity, the higher the risk.
TT
No default risk.
Fixed Maturity Plans
TT
May be subject to credit risk.
Capital Protection
Oriented Schemes
TT
These schemes are not capital guaranteed due to credit risk.
TT
SEBI does not allow these schemes as there is a limit on the amount
of investment in unrated or below investment grade bonds.
Gilt Schemes
High Yield Bond

Schemes

Puneet: Equity and debt funds are not the only mutual fund schemes. There are other mutual fund
schemes as well.
Other MF Schemes
Balanced Funds
Gold Funds
Real Estate Funds
Puneet: These other schemes face risks as well. Lets take a look at these schemes and the level of risk
faced by them.
Risks in Balanced Funds

TT
Invest in a mixture of equity and debt.
TT
Less risky than Equity Funds.
Risks in Gold Funds
168
TT
Give great returns when currency weakens or country is in a state of war.
TT
Investors should be aware of the difference between Gold Sector Fund and ETF Gold.
Risks in Real Estate Funds

TT
The asset class is less liquid (it is a local asset).
TT
Has low transparency and a high transaction cost.
TT
Riskier compared to other funds.
TT
Depends on economy growth or slowdown.
Derivatives
Rohit: What are derivatives Puneet?
Puneet: Derivatives are instruments that get their value from the value of one or more underlying
exposures.
Rohit: What do you mean by underlying exposures?
Puneet: Underlying exposures could be shares, exchange rates, interest rates, commodities, precious
metals etc.
Puneet: Take a look at some commonly used derivatives.
Commonly Used
Derivatives
Forwards
Futures
Option
Swap
Rohit: What are derivatives used for?

Puneet: Derivatives can be used for two purposes:
TT
To hedge against risk
TT
To re-balance the portfolio
Unit Holder Churn

Rohit: What happens if an investor in an open-ended scheme offers his units for repurchase?
Puneet: In that case, the scheme would have to pay the investor. Sometimes, especially if market
conditions are difficult, the re-purchases may exceed the level of liquid assets. In such cases the inflows
must be generated by selling new units.
This means the scheme will be forced to sell investments in its portfolio to increase liquidity. Because
of the urgency in getting liquidity, the scheme may have to sell assets at a rate lower than their intrinsic
value. This results in retail investors suffering through no fault of their own.
Rohit: That sounds like a bad situation! Isnt there something investors can do to protect themselves?
169
Puneet: There is! Investors can exercise greater care when it comes to schemes with not very diverse
unit holdings. Also, SEBI has laid down the 20:25 rule to protect investors.
Rohit: What is the 20:25 rule?
Puneet: The 20:25 rule states that every scheme must have minimum 20 investors, and no investor
should be allowed to represent more than 25% of a schemes net assets.
Rohit: That is a good rule! Im glad SEBI is around to help out investors!

Risk in mutual fund schemes would depend on the nature of portfolio, its liquidity, outside
liabilities and composition of unit holders.
TT
Key Learnings
170
1.
Name the risk drivers of a scheme.
2.
What is the risk faced by contra funds?
3.
When does risk arise?
4.
What is interest rate risk?
Worksheet
1.
2.
Fill in the blanks.

a.
Liquidity risk occurs when

place easily.
and
is unable to take
b.
Sector funds face
c.
Fixed maturity plans are subject to
d.
Arbitrage funds have the
e.
High yield bond schemes are not allowed by SEBI as there is a limit on the amount of
investment in
or
grade bonds.
risk.
risk.
risk offering returns.
Match the columns.

a.
Liquid Schemes
i.
Riskier during economic turmoil
b.
Real Estate Funds
ii.
Riskier than other funds
c.
Mid-Cap Funds
iii.
Remain stable when financial markets are in chaos
d.
Gold Funds
iv.
Have the least risk
Notes
171
Answers: Risk
Question Number
172
Answer
a.
Buying, Selling
b.
Concentration
c.
Credit
d.
Lowest
e.
Unrated, Below investment
a.
iv
b.
ii
c.
d.
iii
Measures of Risk
TT
identify the different measures of risk used for mutual funds
Session Plan
1
Module Overview
Measures of Risk
Measures of Risk: Variance
Measures of Risk: Standard Deviation
Measures of Risk: Beta
Measures of Risk: Modified Duration
Measures of Risk: Weighted Average Maturity
Key Learnings
10
Worksheet
Module Overview
All mutual funds have risk, but this risk can be measured with the help of certain instruments.
In this module, you will learn how mutual fund risk is measured.
Measures of Risk
Rohit: Puneet, I know that all mutual fund schemes have risk. But is there any way to measure such
risk?
Puneet: Yes Rohit, there is a way! Risk means the possibility of fluctuation in returns. These fluctuations
are used to measure risk. This is done by working out periodic returns and measuring their fluctuations.
Rohit: So you mean we have find out returns on a daily, weekly, fortnightly, monthly, etc basis and then
measure their fluctuations?
Puneet: Correct! After that, the fluctuation is gauged against itself, or against another index. There are
a number of risk measures that are used frequently.
173
Measures of
Risk
Variance
Standard
Daviation
Beta
Modified
Duration
Weighted Average
Maturity
Measures of Risk: Variance

Puneet: Variance measures the fluctuations found in the periodic returns of scheme, in comparison to
its own average return.
Lets take a look at the returns of two schemes and their average return.
Scheme I:
5%, 4%,
5%, 6%
Average = 5%
Scheme II:
5%, -10%, 20%, 5%
Average = 5%
Puneet: Though both schemes have the same average return, variance also looks at the stability in the
returns of each scheme.
Puneet: Lets take a closer look at each of these risks.
Rohit: Ah, I get it! Here the returns of scheme I are clearly more stable than the returns of scheme II.
So Scheme I with its stable returns is less risky than Scheme II which has high variances.
Puneet: You got it! Take a look at some important points for variance.
Variance:
TT
easures the fluctuations found in the periodic returns of scheme, in comparison to its own
M
average return.
TT
Variance looks at the stability in the returns of each scheme.
TT
Variance is used as a risk measure for debt as well as equity funds.
Measures of Risk: Standard Deviation

Puneet: Next, we have the risk measure standard variation. Standard Deviation measures the
fluctuations in periodic returns of a scheme in comparison to its own average return.
Take a look at the important points for Standard Deviation.
Standard Deviation:
174
TT
easures the fluctuations in periodic returns of a scheme in comparison to its own average
M
return.
TT
In mathematical terms, Standard Deviation is equal to the square root of Variance.
TT
T he higher the standard deviation, the greater the volatility in the returns, and therefore the
greater the risk.
TT
Standard Deviation is used as a risk measure for debt as well as equity funds.
Measures of Risk: Beta

Rohit: The next measure of risk is Beta. What does Beta measure?
Puneet: Beta measures the market risk, or the systematic risk of an equity fund. It also measures how
sensitive a funds returns are, to changes in the market index.
Beta = 1
Beta < 1
Beta > 1
TT
The fund moves with the market.
TT
Example: Passive Fund (Index Fund)
TT
Fund is not as volatile as the market.
TT
Example: Defensive Fund
TT
Fund is more volatile than the market.
TT
The more the market rises, the higher the returns.
TT
The more the market falls, the greater the losses.
TT
Example: Aggressive Growth Fund
Puneet: Take a look at the important points for Beta.

Beta:
TT
Beta measures the market risk, or the systematic risk of an equity fund.
TT
It measures how sensitive a funds returns are, to changes in the market index.
TT
Beta can only be used to measure the risk of equity funds.
Measures of Risk: Modified Duration

Puneet: Now let me tell you about the risk measure Modified Duration. It is used to measure the risk
in debt funds in consideration of market factors.
Take a look at the important points for Modified Duration.
Modified Duration:
TT
odified Duration is used to measure the interest rate risk in debt funds in consideration of
M
market factors.
TT
It measures how sensitive the value of a Debt Fund is to changes in interest rates.
TT
The higher the Modified Duration, the greater the market risk of the Debt Fund and vice versa.
Measures of Risk: Weighted Average Maturity

Puneet: The last measure of risk is Weighted Average Maturity. The Weighted Average Maturity of
debt securities in a Schemes portfolio measures how sensitive the scheme is to changes in interest
rate.
175

Fluctuation in returns is a measure of risk. Variance and Standard Deviation are risk measures
for all kinds of schemes; beta is relevant for equity; modified duration and weighted average
maturity are applicable for debt schemes.
TT
Key Learnings
176
1.
List the measures of risk.
2.
What does variance measure?
3.
What does beta measure?
4.
What does standard deviation measure?
Worksheet
1.
2.
Fill in the blanks.

a.
Variance looks at the
in the returns of each scheme.
b.
The higher the standard deviation,
c.
When Beta is less than 1, the fund is
d.
Modified Duration measures how sensitive the value of a Debt Fund is to
e.
Beta measures the
the volatility in the returns.

the market.
, or the
of an equity fund.
Match the columns.

a.
Gilt Fund
i.
Composite Bond Fund Index
b.
Debt Fund
ii.
Treasury Fund Index
c.
CRISIL
iii.
Government Security Index
d.
NSE
iv.
Liiquid Fund Index
Notes
177
Answers: Measure of Risk

Question Number
178
Answer
a.
Stability
b.
Greater
c.
Not as volatile as
d.
Changes in interest rates
e.
Market risk, Systematic risk
a.
iii
b.
c.
iiii
d.
ii
Benchmarks and Performance

TT
benchmark the performance of mutual funds
Session Plan
1
Module Overview
SEBI Guidelines
For Debt Funds and Equity Funds
Benchmarks for Other Schemes
Key Learnings
Worksheet
Module Overview
Mutual fund investors must be aware of the performance of mutual funds, as well the performance of
mutual fund managers. The performance of mutual fund managers is measured against returns, while
benchmarks are used to measure the performance of mutual funds.
In this module, you will learn how to measure the performance of fund managers. You will also find out
how the performance of mutual funds is tracked.
SEBI Guidelines
Rohit read the following line in his mutual funds book: Benchmarks are standards used to measure the
performance of mutual funds. Now that Rohit has a basic idea of what benchmarks are, he would like
to learn more about them.
Rohit: Hey Puneet! I just came across benchmarks in my book. Can you tell me more about them?
Puneet: Sure Rohit! Benchmarks are used to measure mutual fund performance. These benchmarks
must follow certain SEBI guidelines.
Rohit: Can you tell me a little about these SEBI guidelines?
Puneet: Sure! Take a look!
179
SEBI Guidelines for Benchmarks:

TT
Benchmarks should reflect the asset allocation.
TT
Benchmarks used should be the same as those stated in the offer document.
TT
Growth Funds must use a broad based index.
TT
Bond Funds must use a bond market index.
TT
Balanced Funds must use a tailor-made index.
TT
Liquid Funds must use money market benchmarks like MIBOR etc.
For Debt Funds and Equity Funds

Puneet: Both Debt Funds and Equity Market Funds are measured against certain benchmarks. As
per SEBI regulations, mutual funds must specify the benchmark used for every scheme in the Offer
Document and Key Information Memorandum.
Benchmarks for Equity Schemes
Puneet: The benchmarks used for equity funds depend on the funds scheme type, choice of investment
universe, choice of portfolio concentration and underlying exposure.
Scheme Type
Index
Sectoral Indices like:
Sector Funds
TT
BSE Bankex
TT
BSE FMCG Index
TT
CNX Infrastructure Index
TT
CNX Energy Index
Diversified Index like:
Diversified Funds
TT
BSE Sensex
TT
S&P CNX Nifty
TT
BSE 200
TT
BSE 500
TT
CNX 100
TT
S&P CNX 500
Choice of Investment Universe
Index
Mid-Cap Indices like:
Diversified Funds (Mid-Cap)
180
TT
CNX Midcap
TT
Nifty Midcap 50
TT
BSE Midcap
Large-Cap Indices like:

Diversified Funds (Large Cap)
TT
BSE Sensex (Based on 30 large companies)
TT
S&P CNX Nifty (Based on 50 large companies)
Choice of Portfolio
Concentration
Index
Narrow Indices like:
Diversified Equity Funds with few

Stocks
TT
BSE Sensex
TT
NSE Nifty
Broader Indices like:

Diversified Equity Funds with large
number of companies
TT
BSE 100 (Based on 100 stocks)
TT
BSE 200 (Based on 200 stocks)
TT
S&P CNX 500 (Based on 500 stocks)
Underlying Exposure
Index
Arbitrage Fund
TT
Short Term Money Market Index
Benchmarks for Debt Schemes

Puneet: SEBI guidelines lay down that debt and balanced schemes must be developed by research and
rating agencies suggested by AMFI. In keeping with this, a number of indices have been developed by
CRISIL, ICICI Securities and NSE.
Gives the values of:
TT
CRISIL Gilt Bond Index
TT
AAA Corporate Bond Index
TT
Other Debt Indices are:
CRISIL
CRISIL CompBEX Composite Bond index

CRISIL LiquiFEX Liquid Fund Index
CRISIL STBEX Short-Term Bond Index
CRISIL Debt Hybrid Index 60:40
CRISIL Debt Hybrid Index 75:25
ICICI Securities Sovereign Bond Index (I-Bex) (Based on government

securities)
ICICI Securities
TT
It has three sub indices:
TT
Si-Bex (1 3 years)
TT
Mi-Bex (3 7 years)
TT
Li-Bex (more than 7 years)
181
TT
MIBOR (Mumbai Inter-Bank Offered Rate) (Based on short term

money market)
TT
Government Securities Market Indices which are available for

variations like:
NSE
Composite
1 3 years
3 8 years
8 plus years
Treasury Bills index
Benchmarks for Other Schemes

Puneet: Take a look at the benchmarks for other schemes.
Balanced Funds
TT
These invest in a mixture of debt and equity.
Gold ETF
TT
The benchmark for such funds is the price of gold.
TT
Real estate indices have been developed by a number of real estate

services companies.
TT
These real estate indices have shorter histories and are not yet as widely
accepted as equity indices.
TT
The benchmark for such funds depends on where the scheme invests.
TT
Example: The benchmark of a scheme that is considering investing in

China could be the Chinese index Hang Seng.
Real Estate Funds
International
Funds
182
TT
Benchmarking is a form of relative returns comparison. It helps in assessing under performance

or out performance.
TT
Choice of benchmark depends on scheme type, choice of investment universe, choice of portfolio
concentration and the underlying exposure.
Key Learnings
1.
Note down three SEBI guidelines for benchmarks.
2.
Note down three measures of risk adjusted returns.
3.
Note down four sources for tracking mutual funds.
4.
Briefly describe absolute and relative returns.
183
Worksheet
1.

a.
Balanced funds must use:

i.
ii.
iii.
iv.
2.
bond market index

A
A market value-weighted index
A tailor made index
A broad based index
Fill in the blanks.

a.
Higher returns mean a fund manager has
b.
Benchmarks should reflect the
c.
CRISIL evaluates the
d.
The principle of risk adjusted return is that returns should be in proportion to the
.
e.
Absolute returns are returns
Notes
184
.
.
and ranks the
185
Answers: Benchmark and Performance

Question Number
1
186
Answer
a.
a.
Outperformed
b.
Asset allocation
c.
Fund performance, Scheme by performance
d.
Risk taken by the fund manager
e.
Earned by the schemes
Performance Measurement
TT
explain the different mutual fund performance measures
Session Plan
1
Module Overview
Quantitative Measure of Fund Managers Performance
Need for Measuring performance
Measures of Risk-Adjusted Returns: Sharpe Ratio
Measures of Risk-Adjusted Returns: Treynor Ratio
Measures of Risk-Adjusted Returns: Alpha
Key Learnings
Worksheet
Module Overview
Measuring fund performance is important to make the right investment decisions. Performance
measures can be used easily for all types of funds.
In this module, you will learn how to measure the performance of a fund.
Quantitative Measure of Fund Managers Performance

Puneet: Besides measuring the performance of mutual funds, it is also important to measure the
performance of fund managers.
Rohit: How do we do that?
Puneet: This is done through returns. There are two types of returns:
TT
Absolute returns
TT
Relative returns
Lets take a look at both these types of returns!
Absolute returns
Relative returns
The schemes returns are compared with the returns of:
Returns earned by the schemes.
TT
Benchmark
TT
Peer group
TT
Other such financial products

187
Rohit: I read that AMCs and Trustees must conduct periodic reviews of relative returns in line with the
SEBI guidelines.
Puneet: Thats correct! There is also a relationship between the schemes returns and the fund
managers performance.
Schemes Returns
Fund Managers Performance
Higher returns compared to benchmark
Fund manager has outperformed
Lower returns compared to benchmark
Fund manager has underperformed
Puneet: Remember, the out performance or under performance must be validated by conducting
deeper performance reviews.
Rohit: I got it! Lets take a quick look at what we just covered!
TT
A fund managers performance is measured through absolute and relative returns.
TT
Absolute returns are returns earned by the schemes.
TT
T o find the relative returns, the schemes returns are compared with the benchmark, peer
group or other such financial products returns.
TT
MCs and trustees must conduct periodic reviews of relative returns in line with the SEBI
A
guidelines.
TT
Higher returns mean a fund manager has outperformed.
TT
Lower returns as compared to the benchmark mean the fund manager has underperformed.
Need for Measuring Performance

Rohit is reading about measures of risk adjusted returns. He notices that these measures are ratios.
Rohit wants to learn more about them.
Rohit: Puneet, I have noticed that some ratios are used as measures of risk adjusted returns. What are
these ratios and why are they being used?
Puneet: Rohit, it is important to evaluate the performance of the fund manager of a scheme. The
performance can be evaluated in two ways. One method is by relative returns comparison. However,
the problem with this method is that it does not account for the difference in the level of risk between
two schemes that have the same investment objective.
The second method is evaluating the performance of the fund manager through the risk reward
relationship. The basis of this approach is that the return should be equal to the risk taken.
Rohit: So you mean a fund manager who has taken a higher risk should have a higher reward to justify
the level of risk taken?
Puneet: Exactly! It also means that it is justified for a fund manager to provide a lower return if he has
taken a lower level of risk! This type of evaluation takes place through Risk-Adjusted Returns. Take a
look at three of the most common measures of Risk-Adjusted Returns.
188
Measures of
Risk-Adjusted
Returns
Treynor
Ratio
Sharp Ratio
Alpha
Measures of Risk-Adjusted Returns: Sharpe Ratio

Puneet: One of the ratios commonly used to measure fund performance is called the Sharpe Ratio. The
Sharpe Ratio measures fund performance in terms of total risk.
Rohit: How do we calculate this ratio?
Puneet: To calculate the Sharpe Ratio, use the formula:
Sharpe Ratio = Rs Rf / sd
Where:
Rs Rf
SD
Risk premium (difference between two returns)

Standard deviation
Puneet: So if the risk free return is 5%, and a scheme with a standard deviation of 0.5 earns a return of
7%, the Sharpe Ratio will be calculated as:
Sharpe Ratio = (7% - 5%) / 0.5
Sharpe Ratio = 4%
Puneet: Remember, the higher the Sharpe Ratio, the better the scheme performance.
Sharpe Ratio:
TT
Measures fund performance in terms of total risk.
TT
Higher the Sharpe Ratio, the better the scheme performance.
TT
Formula: Sharpe Ratio = Rs Rf / SD
Measures of Risk-Adjusted Returns: Treynor Ratio

Puneet: Another ratio used to measure fund performance is the Treynor Ratio. Treynor Ratio is a
calculation of risk-premium per unit of risk.
Rohit: When do we use this ratio?
Puneet: This comparison is used for diversified equity funds.
Rohit: And how do we calculate this ratio?
Puneet: To calculate the Treynor Ratio, use the formula:
189
Treynor Ratio = Rf Rs / Beta

Puneet: So if the risk free return is 5%, and a scheme with Beta of 1.2 earns a return of 8%, the Treynor
Ratio will be calculated as:
Treynor Ratio = (8% - 5%) / 1.2
Treynor Ratio = 2.5%
Puneet: Remember, the higher the Treynor Ratio, the better the scheme performance.
Treynor Ratio:
TT
Measures fund performance in terms of market risk.
TT
Used for diversified equity funds.
TT
Formula: Treynor Ratio = Rf Rs / Beta
Measures of Risk-Adjusted Returns: Alpha

Puneet: Alpha is another performance measurement tool that is frequently used. It measures the
performance of the fund manager. It is the difference between a schemes actual return and its
benchmark. Positive Alpha indicates out-performance by the fund manager.
Rohit: When do we use Alpha?
Puneet: Alpha should be used for diversified equity schemes.
Alpha:
TT
Measures the performance of the fund manager.
TT
Difference between a schemes actual return and its benchmark return.
TT
Should ideally be used for diversified equity schemes.
190
TT
Sharpe ratio, Treynor ratio and Alpha are bases to evaluate a fund managers performance based
on risk adjusted returns.
TT
Quantitative measures are based on historical performance, which may or may not be replicated
in future. Scheme evaluation is an art, not science.
Key Learnings
1.
What can measurement of fund performance be used for? Give three examples.
2.
What does the Sharpe Ratio measure?
3.
What is Alpha? Explain it in brief.
4.
What is the Treynor Ratio used for?
Worksheet
1.
Fill in the blanks.

a.
Positive Alpha indicates
by the fund manager.
b.
Alpha should only be used for
c.
The Treynor Ratio measures fund performance in terms of
d.
The
e.
The formula for Sharpe Ratio is
f.
The formula for Treynor Ratio is
schemes.
.
measures fund performance in terms of total risk.
191
Notes
Answers: Perfomance Measurement

Question Number
1
192
Answer
a.
b.
c.
a.
Income return
b.
Lower, Higher
c.
Interest rate risk

TT
explain how to help clients select appropriate schemes
Session Plan
1
Module Overview
Key Learnings
Worksheet
Module Overview
With so many schemes available for investment, investors today are quite confused as to which scheme
should be selected. This is where the role of a mutual funds distributor comes in. Distributors of mutual
funds must be aware of how to guide investors towards selecting the best scheme for themselves.
In this module, you will learn how to select an appropriate scheme for a client.

It is time for Rohit to put all he has learned so far into practice. Now that he knows so much about
mutual funds and the different types of schemes, he wants to select a scheme for himself. The only
problem is there are so many schemes to choose from! How is he supposed to decide which scheme
to choose? Rohit knows only one person who can help him with this dilemma his intelligent friend
Puneet, the mutual funds distributor!
Rohit: Puneet, I want to select a scheme but there are just so many options! Can you help me make a
selection?
Puneet: Sure Rohit! I have helped many clients select schemes! Today, you can be my client! Choosing
a scheme is very easy as long as you follow the steps for scheme selection.
193
Steps for Scheme

Selection
Select the right option

within the scheme
Select a scheme within

the category
Decide on the scheme

category
Step 1: Decide on the scheme category
Puneet: When selecting a scheme for a client, the first thing you need to identify is the clients risk
profile. In this case, you are the client so I would need to look at your risk profile!
Rohit: What happens next?
Puneet: After that, I would need to compare your risk appetite against the risk and return drivers of
the different schemes.
Rohit: Can we go over the risks and returns of the schemes again?
Puneet: Of course! Take a look at the risk-return hierarchy of different schemes. This will help you easily
compare the risk level and returns of the schemes!
Risk Level
High
Debt
Funds
Equity
Funds
Hybrid
Funds
High Yeild Debt Funds
Balance Funds based on

Flexible Asset Allocation
Sector Funds
Growth
Funds
Diversified Equity Funds
Balanced Funds based on Fixed Asset

Allocation
Monthly Income Plans
Capital Protection Oriented Finds
Diversified Debt Funds
Gift Funds
Money Market Funds/ Liquid Scheme
Low
194
Returns
Index Funds
Value Funds
Equity Income Funds/Dividend Yield Funds
Puneet: Lets look at the different schemes under equity funds first. When investing in equity, it is
important to keep in mind that the markets are more predictable in the long run, than in the short run.
So we should look at equity funds only when we have a suitably long investment horizon.
Rohit: What is a suitably long investment horizon?
Puneet: I would say at least three years. A five year horizon or more would be best as such a long term
period would give the investor at least one chance to sell at good profits. So, the longer the time period,
the lower the risk of loss. Similarly, if the investment period is short, say below two years, investing in
equities is not a good idea.
Rohit: I see. So now that I know about the riskreturn of equity schemes, what comes next?
Puneet: Next, we look at several broad, equity scheme categories. Each of these categories has a role
to play in the selection of an investors portfolio.
Equity Scheme Categories

Fund
Active or Passive
Open-Ended or
Closed-Ended
Diversified, Sector or
Thematic
Large-Cap versus MidCap/Small-Cap Funds
Growth or Value Funds
Features
TT
Active funds have a higher management cost and a higher risk.
TT
Active Funds may or may not generate higher returns.
TT
Passive Funds normally generate returns that match the market.
TT
Open-ended schemes are very liquid.
TT
The net assets of open-ended schemes fluctuate heavily because of

large sales or repurchases.
TT
Closed-ended schemes are liquid through their stock exchange

listings; however, they are not very actively traded.
TT
Diversified funds are less risky due to their exposure to multiple

sectors.
TT
In Diversified Funds, it is the fund managers job to increase the

exposure of well performing sectors.
TT
In Sector Funds, it is the investors job to select the sector fund.
TT
Large-cap companies do better during economic turmoil as they

have greater resources.
TT
Most mid-cap/small-cap companies do not survive during economic

turmoil as they have limited resources.
TT
In recovering economies, the front-line stocks become expensive

while mid-cap/small-cap funds perform quite well.
TT
Growth Funds usually offer good returns at the start of a bull run.
TT
Value Funds provide better returns over a longer period of time.
TT
When the market goes down, the rate of decline in Growth Funds is
much more than that of Value Funds and vice versa.
TT
The size of a fund should be studied in comparison with the

proposed investment background.
TT
A small fund size will miss the benefit of economies of scale.
Fund Size
195
Portfolio Turnover
Arbitrage Funds
Domestic Equity
versus International
Equity Funds
TT
Portfolios that are churned often have increased broking costs and
are a sign of unstable investment management.
TT
Portfolio Turnover Ratio = Value of Purchases + Sale of Securities

during a period divided by the average size of net assets of the
scheme during the period.
TT
Arbitrage Funds are not meant for equity risk exposure.
TT
They ride on tax benefits offered by equity schemes.
TT
Indian investors who invest in equities abroad are exposed to:
TT
The international equity market.
TT
The exchange rate of the rupee.
TT
Investors may consider foreign investments if:
The overall returns are good.

There is a chance of increasing diversification, thus reducing
risk.
Puneet: Now lets take a look at debt funds. Debt funds are not as risky as equity funds. These funds
can be structured in different ways to meet the needs of investors. Just like with equity funds, even
debt funds have a number of categories which play a role in the selection of an investors portfolio.
Debt Scheme Categories

Fund
Regular Debt Funds versus
MIPs
Features
Regular Debt Funds have no equity exposure.
MIPs have slight equity exposure.
Open-Ended Funds are best for investors who could require their
funds at any given time.
Open-Ended Funds versus

FMP
FMPs are best for:

Investors with investment horizons that match the scheme maturity
period.
Investors requiring predictable returns that are better than those
offered by fixed deposits.
Gilt Funds versus Diversified

Debt Funds
Diversified Debt Funds that are able to manage their credit risk
properly can generate better returns than those of Gilt Funds.
Long-Term Debt Funds fluctuate more and therefore have more
volatile NAVs than Short-Term Debt Funds.
Long-Term Debt Fund versus

Short-term Debt Fund
Long-Term Debt Funds should be chosen when interest rates are

expected to fall.
Short-Term Debt Funds should be chosen when interest rates are
expected to rise.
196
Money Market Funds/Liquid

Schemes
Regular Debt Funds versus

Floaters
TT
Liquid Schemes have:
TT
The lowest risk.
TT
Lower returns.
TT
Regular Debt Funds are exposed to NAV fluctuations.
TT
Floaters usually have stable NAVs.
TT
It is best to opt for floaters if the future of interest rates in

uncertain.
Rohit: Lastly we have balanced funds and gold funds. I can tell you about these funds! Balance funds
are especially for investors who want to invest in equity as well as debt securities! where as gold funds
are for investors who want to invest in gold shares of gold mining and other gold processing companies.
Puneet: Thats exactly right! Such investments are simpler as there are limited decisions to be made
regarding scheme selection. At the same time, schemes that are structured as flexible asset allocation
scemes can be very risky, so investors need to be a little cautious.
Rohit: How are such funds taxed?
Puneet: The tax depends entirely on the investment portfolio of the scheme. It could be taxed as a debt
scheme or an equity scheme.
Step 2: Select a scheme within the category
Puneet: The next step is to select a scheme within the category. In order to do this, we need to consider
some very important parameters.
Parameter
What to Look For
Value System of AMC
TT
Investors should select AMCs that have strong value

systems.
Experience of Fund Manager
TT
The more experience a fund manager has, the better.
Fund Age
TT
Funds with long histories are preferred over funds with

small track records.
Scheme Running Expenses
TT
The lower the expenses, the better.
Tracking Error
TT
Funds with lower tracking errors are preferred.
Regular Income Yield in

Portfolio
TT
Investors should look for schemes that have consistent

income yield in their portfolios.
TT
Investors should look at expert opinions on all these

factors.
TT
Schemes with lower loads are preferred.
Risk, return, risk-adjusted

returns and their rankings and
ratings
Loads
Step 3: Select the right option within the scheme

Puneet: After looking at these parameters, investors should select the best possible option within a
scheme. To do this they need to look at the underlying returns in a scheme, that is, the returns they
would receive from:
197
TT
Dividend payout
TT
Dividend reinvestment
TT
Growth option
Puneet: Take a look at the features of each of these.

Dividend Payout:
TT
Benefit of money flow to the investor.
TT
Depends entirely on distributable surplus.
TT
For debt schemes:
S ubject to dividend distribution tax which reduces NAV.

Better suited for high tax bracket investors than pensioners with lower or no taxable
income.
Puneet: Since this option depends on whether there is enough surplus for dividend declaration, a
better option would be to invest in a SWP for the same amount, rather than opt for the dividend payout
option. However, keep in mind that selling units under SWP may be subject to STT in equity schemes,
and capital gains tax in equity and debt schemes, though it does not have any dividend distribution tax
on the repurchase proceeds.
Dividend Reinvestment:
TT
Does not provide cash flows.
TT
Does not allow money to grow in the fund without annual taxation.
TT
For equity schemes:
S ubject to STT.
No distribution tax.
Puneet: Therefore, depending on the set-off benefit, it may be wiser for investors to receive money in
the form of dividends for equity schemes, instead of by re-purchasing units.
Growth Option:
TT
Allows money to grow in the fund without annual taxation.
Puneet: So you see, in order to make a selection, we need to focus on the investors taxation and
liquidity needs. Only then can the correct decision be made!
Rohit: I get it now! Selecting a scheme for a client is really quite simple once you understand the
process! Thanks again Puneet!

TT
The sequence of decision making in selecting a scheme is:

TT
198
S tep 1 Deciding on the scheme category;

Step 2 Selecting a scheme within the category;
Step 3 Selecting the right option within the scheme
While investing in equity funds, a principle to internalize is that markets are more predictable
in long term, than in short term. So, it is better to consider equity funds, when the investment
horizon is adequately long.
TT
I n an actively managed diversified fund, the fund manager performs the role of ensuring higher
exposure to the better performing sectors or stocks. An investor, investing or taking money out
of a sector fund has effectively taken up the role of making the sector choices.
TT
I t can be risky to invest in mid cap/ small cap funds during periods of economic turmoil. As
the economy recovers, and investors start investing in the market, the valuations in front line
stocks turn expensive. At this stage, the mid cap/ small cap funds offer attractive investment
opportunities. Over longer periods, some of the mid/ small cap companies have the potential to
become large cap companies thus rewarding investors.
TT
rbitrage funds are not meant for equity risk exposure, but to lock into a better risk return
A
relationship than liquid funds and ride on the tax benefits that equity schemes offer.
TT
T he comparable for a liquid scheme in the case of retail investors is a savings bank account.
Switching some of the saving bank deposits into liquid schemes can improve the returns for him.
Businesses, which in any case do not earn a return on their current account, can transfer some
of the surpluses to liquid schemes.
TT
alanced schemes offer the benefit of diversity of asset classes within the scheme. A single
B
investment gives exposure to both debt and equity.
TT
Investors need to understand the structure of the gold schemes more closely, before investing.
TT
E quity investors would like to convince themselves that the sectors and companies where the
scheme has taken higher exposure are sectors/ companies that are indeed promising.
TT
ebt investors would ensure that the weighted average maturity of the portfolio is in line with
D
their view on interest rates.
TT
I nvestors in non gilt debt schemes will keep an eye on credit quality of the portfolio and watch
out for sector concentration in the portfolio, even if the securities have a high credit rating.
TT
ny cost is a drag on investors returns. Investors need to be particularly careful about the cost
A
structure of debt schemes.
TT
mong index schemes, tracking error is a basis to select the better scheme. Lower the tracking
A
error, the better it is. Similarly, Gold ETFs need to be selected based on how well they track gold
prices.
TT
S eeking to be invested in the best fund in every category in every quarter is neither an ideal
objective, nor a feasible target proposition. Indeed, the costs associated with switching between
schemes are likely to severely impact the investors returns.
TT
T he underlying returns in a scheme, arising out of its portfolio and cost economics, is what is
available for investors in its various option viz. Dividend payout, dividend re-investment and
growth options.
TT
ividend payout option has the benefit of money flow to the investor; growth option has the
D
benefit of letting the money grow in the fund on gross basis. Dividend reinvestment option
neither gives cash flows nor allows the money to grow in the fund on gross basis.
199
Key Learnings
1.
What are the steps for scheme selection?
2.
Name four equity scheme categories.
3.
Name four debt scheme categories.
4.
Name three parameters for selecting a scheme within a category.
Worksheet
1.

a.
A good investment horizon for equity funds would be:

i.
ii.
iii.
iv.
200
years
5
2 years
1 year
A few months
b.
Balanced funds are for investors who want to invest in:

i.
ii.
iii.
iv.
2.
E quity
Debt
Equity and debt
Debt and gold
Fill in the blanks.

a.
Funds with
tracking errors are preferred.
b.
3.
schemes have the lowest risk.
c.
Diversified funds are less risky due to their exposure to
sectors.
d.
Long-Term Debt Funds should be chosen when interest rates are expected to
.
e.
Dividend Reinvestment does not allow money to grow in the fund without
.
Multiple Choice Question

a.
Equity markets are more predictable in long term.

i.
ii.
b.
Arbitrage funds are meant to give better equity risk exposure.

i.
ii.
c.
E quity scheme
Balanced scheme
Gilt fund
Saving bank account
Which of the following aspects of portfolio would an investor in a debt scheme give most
importance?
i.
ii.
iii.
iv.
e.
T rue
False
The comparable for a liquid scheme is

i.
ii.
iii.
iv.
d.
T rue
False
S ector selection
Stock selection
Weighted average maturity
Number of securities in portfolio
Mutual funds ranking and rating amount to the same.

i.
ii.
T rue
False
201
Notes
Answers: Scheme Selection for a Client

Question Number
1
202
Answer
a.
b.
iii
a.
Lower
b.
Liquid
c.
Multiple
d.
Fall
e.
Annual taxation
a.
b.
ii
c.
iv
d.
iii
e.
ii
Selecting the Right Investment Products for

Investors - Types of Assets
TT
explain the different types of assets
Session Plan
1
Module Overview
Physical Assets
Financial Assets
How to Compare Products
Why is Mutual Fund the Best Option
New Pension Scheme
Key Learnings
Worksheet
Module Overview
Investors can invest in physical as well as financial assets. It is the role of distributors and financial
advisors to educate investors on both these types, and help them make the right investment choice.
In this module, you will learn the difference between physical and financial assets. You will also learn
about various investment alternatives in the context of mutual funds.
Physical Assets
Rohit has saved up a lot of money and wants to invest it. He had decided to invest it all in mutual funds,
when he overheard a very interesting conversation between his mother and his grandmother.
Grandmother: Did you hear about the Sanghvi family next door?! They are moving to a penthouse in
that new complex at Jamshed Baug!
Mother: Flats in that complex are really expensive! And Mr. Sanghvi is retired. How are they able to
afford it?
Grandmother: I heard their son made some investments in property a few years ago. Looks like the
investments paid off!
Rohit was amazed. He had not even considered investing in property! Were property investments
better than mutual fund investments? He had to ask Puneet and find out!
203
Rohit: Puneet, I just heard about someone who invested in property. Can you tell me more about such
investments? How are they different from mutual fund investments?
Puneet: Well, Rohit, unlike mutual funds, property is a physical asset.
Rohit: What is a physical asset?
Puneet: A physical asset has value. It can be touched, felt and used.
Features of Physical Assets:
TT
Physical assets are those that can be touched.
TT
They are exposed to dangers like theft, fire and floods.
TT
Examples Paintings, buildings, gold, real estate etc.
Puneet: Though gold and real estate are physical assets, they can be invested through funds.
Rohit: How do you feel about investing in gold as a physical asset?
Puneet: It is not very safe to hold gold in its physical form. There is always the fear that it will be stolen.
Take a look at some factors that one should consider before investing in physical gold.
Gold as a Physical Asset:
TT
Holding gold in its physical form is risky.
TT
Physical gold can be lost or stolen.
TT
May have to pay rent for a locker to store it in.
TT
Wealth tax must be paid on it.
TT
Nomination facilities are not offered to investors.
Rohit: And what about real estate as a physical asset?

Puneet: In its physical form, real estate too has a number of disadvantages.
Real Estate as a Physical Asset:
TT
Requires a large investment amount.
TT
It is exposed to several risks:

TT
isk of damage or destruction by fire.

R
Risk of concentration as maintaining a diversified portfolio may be difficult.
Risk of encroachment if land is vacant.
Risk of lessee not vacating the property and/or not paying rent.
It is a less liquid investment.
TT
Has a high stamp duty and registration charge.
Financial Assets
Rohit: Puneet, you said earlier that unlike mutual funds, property is a physical asset. So what type of
asset is a mutual fund?
Puneet: Mutual funds are financial assets! Financial assets are assets that provide investors with
intangible benefits.
204
Rohit: So you mean such assets cannot be touched or felt?

Puneet: Thats right!
Features of Financial Assets:
TT
Financial assets cannot be touched.
TT
They are investments for the purpose of future cash flows and capital gain.
TT
They are not exposed to physical harm.
TT
They help to finance the economy.
TT
They are preferred by the government over physical assets.
TT
Examples Shares, debentures, fixed deposits, bank accounts, mutual fund schemes etc.
Rohit: Puneet, you had said that gold and real estate can also be invested through funds.
Puneet: Yes, thats right. Gold can be invested through Gold ETFs, Gold Futures and Gold Sector Funds,
while real estate can be invested through real estate funds. Lets take a look at their features.
Gold ETFs
TT
Gold ETFs are open-ended.
TT
They can be held for an indefinite period of time.
Gold Futures:
TT
Gold Futures can be held for a maximum of 3 months.
TT
They are exposed to the risk of high leveraging.
Gold Sector Funds:

TT
Gold Sector Funds invest in shares of companies engaged in gold mining and processing.
TT
S hare prices depend more on the profitability and gold reserves of the companies, than on gold
prices.
TT
NAV of such funds do not closely reflect the prices of gold.
Real Estate Funds:

TT
The ticket size is flexible.
TT
The risks can be handled by professional managers.
TT
Real estate mutual funds can be invested in:
S hares of real estate companies.

Debt papers of real estate companies.
Shares, debentures, securitised papers of housing finance companies.
Puneet: Other financial assets are bank deposits and debt schemes.
Bank deposits:
TT
Maximum insurance offered is up to Rs. 1 lac.
TT
Depositors are allowed to prematurely withdraw their deposits with a penalty.
Mutual fund debt schemes:

TT
T here is a possibility of higher returns in mutual funds. Keep in mind that even a G-sec can
provide a return ranging from 15% to 20% when interest rates fall.
205
TT
Not subject to tax on year to year accruals.
TT
Mutual funds have the facility to switch across different mutual fund schemes.

Rohit: There are so many products for investors to choose from! Is there any way to compare these
products?
Puneet: Yes! We can compare these products by their investment nature, and by their current
performance and suitability.
Comparison of products is done by:
TT
Investment Nature

TT
haracteristics
C
Benefits
Risks
Current performance and suitability
T axability
Age
Risk profile
Why is Mutual Fund the Best Option

Rohit: So Puneet, what do you think is the best option?
Puneet: Definitely mutual funds! Even though the other financial assets have certain benefits, mutual
funds have some very strong advantages that pull them to the top of the investment list!
Mutual Funds...
TT
Combine the advantages of each of the investment products.
TT
Dispense the short comings of the other options.
TT
Adjust returns for market movements.
Rohit: You have convinced me! I am going to go ahead and invest my money in mutual funds! See you
later!
New Pension Scheme

Rohit: Puneet, which authority regulates the New Pension Scheme?
Puneet: The Pension Funds Regulatory and Development Authority (PFRDA) is the regulator for the
New Pension Scheme. Two kinds of pension accounts are being considered:
206
Kinds of Pension Accounts

Tier I (Pension Account)
Tier II (Savings Account)
TT
This type of pension account is non-withdrawable.
TT
This type of pension account is withdrawable to meet financial

emergencies.
TT
An active Tier I account is necessary in order to open a Tier II

account.
Rohit: How do investors invest in these pension schemes?

Puneet: Investors can invest through Points of Presence (POP). They can divide their investments
between three kinds of portfolios.
Kinds of Portfolios for Investment

Asset Class E
TT
I nvestment is mainly in equity market

instruments.
Asset Class C
TT
I nvestment is made in Debt Securities (except

Government Securities).
TT
Investment is in Government Securities.
TT
Investment is made in Debt Securities

(except Government Securities).
Puneet: Investors can also choose to invest in a life-cycle fund. In this case, the system will select a mix
of investments between the three asset classes, depending on the investors age.
Rohit: Who manages the asset class options?
Puneet: All three asset class options are managed by six Pension Fund Managers (PFMs). The money of
the investors can therefore be distributed between 3 portfolios x 6 PFMs = 18 alternatives.
Rohit: How are the New Pension Scheme choices as compared to mutual funds?
Puneet: The New Pension Scheme does not provide as many choices as mutual funds. However,
the advantage of the New Pension Scheme is that it provides the convenience of a single Personal
Retirement Account Number (PRAN). This can be applied across all the PFMs that are holding the
investors investments. Also, the POPs provide services related to the money invested with any of the
PFMs.

TT
hysical asset like land, building and gold have value and can be touched, felt and used. Financial
P
assets have value, but cannot be touched, felt or used as part of their core value. Shares,
debentures, fixed deposits, bank accounts and mutual fund schemes are all examples of financial
assets that investors normally invest in.
TT
T he difference in comfort is perhaps a reason why nearly half the wealth of Indians is locked in
physical assets.
TT
T here are four financial asset alternative to holding. However, mutual fund schemes and gold
deposit schemes are exempted from wealth tax.
TT
eal estate in physical form has several disadvantages. Therefore, investors worldwide prefer
R
financial assets as a form of real estate investment.
207
TT
Bank deposits and mutual fund debt schemes have their respective merits and demerits.
TT
ension Funds Regulatory and Development Authority (PFRDA) is the regulator for New Pension
P
Scheme. Two kinds of pension accounts are envisaged: Tier I, is non withdrawal. Tier II is
withdrawal to meet financial contingencies. An active Tier account is a pre-requisite for opening
a Tier II account.
TT
T he NPS offers fewer portfolio choices than mutual funds. However, NPS offers the convenience
of a single Personal Retirement Account Number (PRAN), which is applicable across all the PFMs
where the investors money is invested. Further, the POPs offer services to money invested with
any of the PFMs.
Key Learnings
208
1.
What are physical assets?
2.
What are financial assets?
3.
Explain how products can be compared.
4.
Provide two reasons why mutual funds are the best option.
Worksheet
1.

a.
Which of the following are physical assets?

i.
ii.
iii.
iv.
b.
The maximum insurance offered by bank deposits is:

i.
ii.
iii.
iv.
2.
3.
Bank accounts
Debentures
Paintings
Shares
4 lacs
3 lacs
2 lacs
1 lac
Fill in the blanks.

a.
Financial assets help finance the
b.
Gold Futures can be held for a maximum of
months.
c.
Real estate funds do not have the facility to
d.
Mutual fund debt schemes are not subject to tax on
e.
Physical assets are preferred by investors as they are
Multipale Choise Questions

a.
Gold futures are superior to ETF Gold as a vehicle for life long investment in gold.
i.
ii.
b.
As regards wealth tax, ETF Gold is superior to physical gold.

i.
ii.
c.
T rue
False
The New Pension Scheme is regulated by

i.
ii.
iii.
iv.
d.
T rue
False
S EBI
IRDA
PFRDA
AMFIs
An investor under the new pension scheme can choose which of the following asset
classes.
i.
ii.
iii.
iv.
E quities
Corporate debt
Government securities
Any of the above
209
Notes
Answers: Types of Assets

Question Number
1
210
Answer
a.
iii
b.
iv
a.
Economy
b.
Three
c.
Switch across deposit schemes
d.
Year to year accretions
e.
Tangible
a.
ii
b.
c.
iii
d.
iv
Financial Planning
TT
explain the importance of financial planning
Session Plan
1
Module Overview
What is Financial Planning
Why Financial Planning
Life Cycle Stages of Investors
Wealth Cycle Stages of Investors
Who is a Financial Planner
Qualities of a Good Financial Planner
10
Benefits of Financial Planning
11
Six Steps of Financial Planning
12
Strategies for Investors
13
Key Learnings
14
Worksheet
Module Overview
All individuals have their own hopes and dreams. For most of these wishes to turn into reality, certain
financial commitments need to be made and seen through. This requires effective financial planning.
In this module, you will understand the importance of financial planning. You will also learn how to
carry out financial planning.
What is Financial Planning

Rohit has big news! He rushes to tell his friend Puneet about it. Lets see what has happened!
Rohit:Puneet! Guess what! Remember that girl that my grandmother introduced to me few months
ago?
Puneet: Who, Rhea?
Rohit: Yes, thats the one! Things have really clicked between us and we have decided to get engaged
after three months! The wedding will be early next year!
211
Puneet: Thats great news Rohit! Im very happy for you!

Rohit: Thank you, Im really excited about it...but...
Puneet: Whats wrong Rohit?Why do you look so tense?
Rohit: Well, Im going to get engaged in a few months which is great... and Im excited about my
marriage too but... Im also scared. Marriage is such a huge change. My expenses are going to increase.
I will also have to start saving more! In a few years I will have to support a family! How am I supposed
to manage all this? Im just really worried about my future.
Puneet:Relax Rohit! I know the solution to your problem! You just need to do some financial planning!
Rohit: What is financial planning?
Puneet:Financial planning means planning your finances in such a way that you can achieve all your
financial goals. This means that you have to plan in such a way that you have the right amount of
money, at the right time in the future!
Why Financial Planning

Puneet: Financial planning is extremely important for all individuals.
Financial planning includes:
TT
Identifying the financial needs and dreams of individuals
TT
Converting the needs and dreams into monetary goals at various times in the future
TT
lanning financial investments in such a way that they satisfy the future financial needs, thus
P
achieving the individuals different goals at the right time
Rohit: This sounds great...but I dont know how to go about doing all this! Honestly, it sounds quite
overwhelming!
Puneet: That is where I come in! As a mutual fund distributor, Im just the person to help you out!
Financial planning is not meant to be undertaken by investors on their own...they are supposed to be
assisted by fund distributers.
Financial planning by a fund distributor is important because:
TT
Investors may not be able to follow the required calculations.
TT
Investors may have difficulty understanding taxation.
TT
Investors may require guidance regarding how to invest and where to invest.
TT
Investors require advice on the best source of borrowing and for investing.
TT
Investors may require guidance in planning for contingencies.
TT
Investors may need help for their retirement and real estate financial planning.
TT
Investors may need help creating a goal-oriented financial plan. This is a financial plan for a
specific goal related to a particular aspiration.
There are alternate financial planning approaches too. An alternate approach is a comprehensive
financial plan where all the financial goals of a person are taken together and the investment strategies
are worked out on that basis.
Puneet: So dont worry Rohit! I will be your financial planner!
212

Rohit: Okay Mr. Financial Planner! What happens next? What is the first step towards creating a
financial plan?
Puneet: Well, to start with, it is a good idea to understand the life cycle of investors.
Life Cycle Stages
of Investors
Childhood
Young Unmarried
Young Married
Equity
Debt
Married with
Young Children
Married with
Older Children
Pre-Retierment
Retierment
As age increases investment in debt increases and in equity decreases.
Puneet: Lets take a look at these stages in more detail.
Stages
Financial Needs
TT
At this stage, the children are

dependents and not earning
members.
TT
Primary focus is on education.
Stage 1:
Childhood
Investment Preferences
TT
Since children are

dependents, their
sources of income are
pocket money, cash gifts
and scholarships.
213
Stage 2:
Young Unmarried
TT
This is the start of the earning

phase.
TT
The habit of saving must be

inculcated.
TT
Care should be taken to live a

sustainable lifestyle.
TT
Investing in equity SIPs

and Whole-Life insurance
plans are recommended.
i.
Both spouses working:

Insurance should
be taken but it is
not crucial.
One spouse working:

Life insurance
for the earning
spouse is crucial.

Health insurance
policies should
also be looked
into.

Term insurance
should be
considered.
Young married can be of two types:

i.
Stage 3:
Young Married
ii.
TT
Stage 4:
Married with
Young Children
Stage 5:
Married with
Older Children
Stage 6:
Pre-Retirement
Stage 7:
Retirement
214
Both spouses working:

Financial situation is
usually comfortable.

Plans can be made
to rent or purchase
a house in line with
personal desires.
One spouse working:

Financial situation is
not as comfortable.

Theres a possibility that
the earning member
may be unable to pay
the insurance premia.

Expenses may compete
with the cost of basic
needs.
The need for insurance
increases with every child.
TT
The financial planner should

provide advice regarding the
insurance coverage level and
policy mix that is best for the
family.
TT
During this stage the children

start to settle down in terms of
marriage, housing etc, which
leads to increased costs.
TT
The children should be

contributing members of the
family by this stage.
TT
Loans taken previously should

have been paid off by this
stage.
TT
The family should have enough

corpus to receive interest that
pays for regular expenses.
TT
Capital should be utilised only

for emergencies.
ii.
TT
Investments should
be made to cover
education expenses from
pre-school to higher
education.
TT
Previous investments in
growth assets like shares
and real estate would
come in use now.
TT
This is the time to begin

retirement planning.
TT
There should be
investments of some
portion in growth assets
like shares to safeguard
against inflation.

Puneet: To create a financial plan, we also need to understand the wealth cycle stages of investors.
Lets take a look at these stages.
Wealth Cycle Stage
of Investors
Accumulation
Transition
Inter-Generation
Transfer
Reaping/
Distribution
Sudden
Wealth
Stages
Stage 1:Accumulation
Stage 2:Transition
Stage 3:
Inter-Generational
Transfer
Investment
Preferences
Financial Needs
TT
This is the wealth building stage in an

investors life.
TT
This phase ranges from young unmarried

to pre-retirement.
TT
During this stage there should be long

term investments for identified goals.
TT
At this point in life, the pre-specified

goals of investors are very close.
TT
This usually results in investors increasing

the amount of liquid assets in their
portfolio.
TT
Investors realise the importance of

creating a will.
TT
There is a need for long term investment

for inheritance purposes.
TT
Individuals
should opt for
investing in
growth funds.
TT
Investors
should invest in
balanced funds.
TT
Investments
should be in
growth funds.
TT
Depends upon
the beneficiaries
financial stage.
215
Stage 4:
Reaping/Distribution
Stage 5:Sudden
Wealth
TT
At this stage investors require regular

income.
TT
There is a need for higher liquidity.
TT
When individuals receive sudden wealth,

the unexpected wealth should be
invested rather than squandered.
TT
Investments
should be in
liquid and debt
funds.
TT
It is advisable
to first block
the money by
investing it in a
liquid scheme.

Rohit:Puneet, you said that you would be my financial planner. But what exactly is the role of financial
planners? What do they do?
Puneet:A financial planner is a person who helps investors attains their life goals by using the financial
planning process.
Financial Planners:
TT
Use the financial planning process.
TT
Help to determine goals.
TT
Identify the financial planning needs of individuals.
TT
Differentiate between needs and desires.
TT
Recognise the immediate priorities of investors.
TT
Identify products that suit investor needs.
TT
Educate investor about saving and investments.
Qualities of a Good Financial Planner

Rohit:Puneet, how does one select a good financial planner? Are there any qualities that a good
financial planner must have?
Puneet: Yes, Rohit there are! Effective financial planners must have certain characteristics.
Good Financial Planners must:
216
TT
Build and maintain client trust.
TT
Attain required knowledge of available financial products and options.
TT
Develop familiarity with taxation and estate planning issues.
TT
Understand the different life stages of investors.
TT
Promote independent judgement and balanced thinking.
TT
Remain organised while working.
TT
Ensure regular client contact.
TT
Focus on the overall financial health of clients.
Benefits of Financial Planning

Rohit: I can see why financial planning is so important now! I may not be able to achieve my financial
goals without financial planning.
Puneet: That is not the only reason why financial planning is important! Besides achieving your financial
goals, financial planning also provides a lot of other benefits!
Benefits of financial planning:
TT
F inancial planning results in an awareness of the current tax rates which leads to tax efficient
financial plans.
TT
It provides clear direction, resulting in effective financial decisions.
TT
I t explains to investors how each of their financial decisions has an impact on other parts of their
finances.
Rohit: Amazing! I cant wait to get started!
Six Steps of Financial Planning

Puneet: The process of financial planning is very easy to understand. It can be broken down into six
simple steps! Take a look!
Six Steps of
Financial Planinng
Establish and Define
the Client-Planner
Relationship
Gather Client Data,
Define Client Goals
Analyse and
Evaluate the Clients
Financial Status
Develop and Present
Financial Planning
Recommendations
and/ or Options
Implement
Financial Planning
Recommendations
Monitor Financial
Planning
Recommendations
217

Puneet: Financial planning is not just the job of fund distributors. Investors too have an important role
to play. For financial planning to be effective, investors should try to implement certain strategies.
Strategies for investors:
TT
Investors should try to embrace the power of compounding by:

TT
S tarting early
Ensuring expectations are realistic
Investing regularly
Investors should also follow effective and useful strategies like:
upee Cost Averaging: This is a system of investing in which money is regularly reinvested
R
into the same fund.
Value Averaging: In this system, investors set a monthly target growth rate or target amount
on their portfolios. The contribution for the next month is then adjusted depending on the
gain or loss made in the previous month.
Jacobs Rebalancing Strategy:
Grahams 50:50 Rebalancing Strategy

TT
F inancial planning is a planned and systematic approach to provide for the financial goals that
will help people realize their aspirations and feel happy.
TT
T he costs related to financial goals, in todays terms, need to be translated into the rupee
requirement in future. This is done using the formula A = P x (1 + i)n .
TT
T he objective of financial planning is also to let the investor know in advance, if some financial
goal is not likely to be fulfilled.
TT
T he process of financial planning helps in understanding the investor better, and cementing
the relationship with the investors family. This becomes the basis for a long term relationship
between the investor and financial planner.
TT
goal oriented financial plan is a financial plan for a specific goal. An alternate approach is a
A
comprehensive financial plan where all the financial goals of a person are taken together, and
the investment strategies worked out on that basis.
TT
T he Certified Financial Planning Board of Standard (USA) proposes the following sequence of
steps for a comprehensive financial plan.

TT
218
E stablish and define the Client Planner Relationship

Gather client data, define financial goals
Analyse and evaluate clients financial status
Develop and present financial planning recommendations and/or options
Implement the financial planning recommendation
Monitor the financial planning recommendations
Life cycle and wealth cycle approaches help understand the investment better.
Key Learnings
1.
What is financial planning?
2.
Note down two qualities of good financial planners.
3.
Note down two benefits of financial planning.
4.
Note down two strategies that should be followed by investors.
219
Worksheet
1.
Write the steps in the blanks provided.

a.
2.
What are the steps of financial planning?

a.
In the retirement stage, what assets should investors invest in?

i.
ii.
iii.
iv.
b.
I n the married with young children stage, investments should be made to cover which
expenses?
i.
ii.
iii.
iv.
3.
F ood
Education
Clothing
Housing
Match the columns.

a.
220
rowth
G
Balanced
Debt
Liquid
Match the wealth cycle stage to the correctinvestment preference.
a.
Accumulation
i.
Liquid and Debt Funds
b.
Transition
ii.
Growth Funds
c.
Reaping/Distribution
iii.
Liquid Funds
d.
Sudden Wealth
iv.
Balanced Funds
Notes
221
Answers: Financial Planning

Question Number
222
Answer
a.
Establish and Define the Client-Planner Relationship
b.
Gather Client Data, Define Client Goals
c.
Analyse and Evaluate the Clients Financial Status
d.
Develop and Present Financial Planning Recommendations
e.
Implement Financial Planning Recommendations
f.
Monitor Financial Planning Recommendations
a.
b.
a.
ii
b.
iv
c.
d.
iii
Risk Profiling and Asset Allocation

TT
explain the risk profile of investors
TT
select an asset allocation mix for investors
TT
recommend a model portfolio to investors
Session Plan
1
Module Overview
Need for Risk Profiling
Factors Influencing Risk Appetite
Asset Allocation
How to Choose the Right Mutual Fund
Fund Selection Criteria both Debt and Equity
Five Steps Approach for Risk Tolerance and Portfolio Build Up
Key Learnings
Worksheet
Module Overview
One of the most important aspects of financial planning is understanding the risk profile of investors.
The risk profile is critical for determining the type of funds an investor should invest in.
Investors portfolios can be distributed across different asset classes such as equity, debt, gold, real
estate etc. This distribution across various asset classes is known as asset allocation.
Investors also have different risk appetites. This means that there is no single portfolio that can be
used for all investors. For this reason, model portfolios have been created which showcase the most
appropriate asset allocation mix for various levels of risk.
In this module, you will learn how to identify the risk profile of investors. You will also learn about asset
allocation for different investors, based on their profiles as well as how to build a model portfolio for
investors.

As Rohit reads about different mutual fund schemes, he notices once again that the various schemes
have different levels of risk. This makes sense to Rohit because not all investors want the same amount
of risk different investors are comfortable with different levels of risk.
Suddenly an important question strikes Rohit What if an investor has misjudged the amount of risk
223
he thinks he is comfortable with? As mutual fund advisors, shouldnt financial distributors ensure that
investors are taking the right amount of risk? Rohit decides to visit Puneet and get an answer to his
question. Lets see what Puneet says.
Puneet: You are absolutely right Rohit. As you know, fund distributors help investors with their financial
planning. Part of this role means distributors must ensure that the risk investors are willing to take, is
also the same level of risk that they should be taking.
This means that distributors must understand the risk appetite of investors. This is known as risk
profiling, and it is very important. In fact, if an investors risk appetite has not been profiled, no
investment advice should be given!
Investment advice can only be given to an investor after:
TT
The risk appetite of the investor has been understood.
TT
The risk level of the investment options has been taken into consideration.

Rohit: Puneet, you mentioned that distributors must understand the risk appetite of investors. What
are the factors that influence this risk appetite?
Puneet: There are three main factors that influence risk appetite.
Factors that Influence
Risk Appetite
Family Information
Personal
Information
Financial
Information
Puneet: Lets take a close look at each of these three factors.

Family Information
Factor
224
Influence on Risk Appetite
Number of earning members
The risk appetite increases with every additional earning family

member.
Number of dependent members
The risk appetite reduces with every additional dependent

member.
Life expectancy
The longer the life expectancy, the higher the risk appetite.
Personal Information
Factor
Age
The lower the age, the higher the acceptable level of risk.
Employability
The more qualified and skilled the employee, the higher the acceptable level
of risk.
Nature of Job
The greater the job stability, the higher the acceptable level of risk.
Psyche
The more daring and adventurous the personality of an individual, the better
the ability to accept the consequences of risk.
Financial Information
Factor
Capital Base
The higher the capital base, the greater the ability to take a higher amount
of risk.
Regularity of Income
The more regular the income, the higher the acceptable amount of risk.
Asset Allocation
Rohit is now reading about asset allocation. He reads The distribution of an investors portfolio between
various asset classes is called asset allocation.
This brings Rohit to a big question - Why do so many investors choose to invest in a mix of different
assets instead of investing in any one asset class? He decides to ask his friend Puneet.
Puneet: The answer to that is simple Rohit! Have you ever heard the proverb Dont put all your eggs in
one basket? It is the same principle! If an investor invests everything in one asset class, and that asset
class doesnt perform well, then the investor stands to make a huge loss. Therefore, it is important to
invest in different asset class. This distribution of an investors portfolio between different asset class
is known as asset allocation.
Rohit: I see. While if the assets are allocated and one asset does badly, the investor has other assets to
make up for that one loss.
Puneet: Exactly! This is called balancing. Balanced funds that adopt such stable asset allocation policies
are said to be operating within a fixed asset allocation framework.
At an individual level, difference is made between Strategic and Tactical Assets Allocation.
Strategic Asset Allocation is the ideal that comes out of the risk profile of the individual. Risk profiling
is key to declining on the strategic asset allocation. The most simplistic risk profiling thumb rule is to
have as much debt in the portfolio, as the number of years of age. As the person grows older, the debt
component of the portfolio keeps increasing. This is a example of strategic asset allocation.
Tactical Asset Allocation is the decision that comes out of calls on the likely behavior of the market.
An investor who decides to go overweight on equities i.e. take higher exposure to equities, because of
expectations of buoyancy in industry and share markets, is taking a tactical asset allocation call.
Rohit: So how do we allocate assets for investors?
Puneet: Allocating assets depends on the investor class. Take a look at this model portfolio. It will give
you a good idea of how assets should be allocated.
225
Investor Class
Diversified
Equity
Schemes
Sector
Funds
Gold
ETF
Diversified
Debt
Funds
Liquid
Schemes
Young call centre/BPO

employee with no
dependents
50% (preferably through

SIP)
20%
10%
10%
10%
Young married single

income family with two
school-going kids
35%
10%
15%
30%
10%
Single income family

with grown-up children
who are yet to settle
down
35%
15%
15%
20%
15%
Couple in their seventies with no immediate

family support
15%
10%
30%
15%
30%
Gilt
Funds
How to Choose the Right Mutual Fund

Rohit is reading about model portfolios. He knows that the model portfolio for an investor depends on
the investors risk appetite. Financial planners need to select the right asset allocation mix, based on
this risk appetite.
Rohit wants to know how to choose the right mutual fund for a model portfolio. Luckily for him, Puneet
has the answer.
Puneet: In order to select the right mutual fund AMC and the right mutual fund scheme, certain
questions need to be answered.
Questions to ask to select the right mutual fund AMC:
TT
hat is the management and scheme performance track record of the mutual fund house in the
W
last couple of years?
TT
Will the mutual fund house be able to provide efficient, prompt and personalised service?
TT
oes the mutual fund house have transparent operations? Does it disclose the performance of
D
its schemes frequently and clearly?
Questions to ask to select the right mutual fund scheme:
226
TT
Why does the investor want to invest?
TT
How risk averse is the investor?
TT
Does the investor want a steady return or just growth in principal?
TT
Does the investor require guidance from a financial advisor?
Fund Selection Criteria Both Debt and Equity

Puneet: Financial planners also need to select the right equity and debt funds for a model portfolio. To
select these funds they need to look at certain fund criteria.
Selection Criteria for Equity Funds
TT
Percentage holding in cash
TT
Concentration in portfolio
TT
Market capitalisation of the fund
TT
Portfolio turnover
TT
Risk Statistics
eta
B
Ex-Marks
Gross dividend yield
Funds with low beta, high ex-marks and high gross dividend yield is preferable
Selection Criteria for Debt Funds
TT
A smaller or new debt fund may not necessarily be risky
TT
Total return rather than YTM is important
TT
Expenses are very important
TT
Credit quality of securities
TT
Average maturity
TT
Interest rate risk
TT
Modified duration
Five Steps Approach for Risk Tolerance and Portfolio Build Up

Rohit: Puneet, can you explain how to develop a portfolio?
Puneet: Sure Rohit. A great portfolio can be constructed in five easy steps.
227
Five Steps Approach

Analyse, Define
Objectives, Target
Returns and Set Goals
Risk and Return

Assessment
Build a Customised
Portfolio
Performance Review
Rebalance the
Portfolio
Step 1: Analyse, Define Objectives, Target Returns and Set Goals
TT
nalyse and confirm the funds available for investment after all commitments have been
A
handled.
TT
Define the objectives. This includes risk and return assessment.
TT
Time frames. Keep in mind the tax perspectives.
TT
Various investment options.
Step 2: Risk and Return Assessment

TT
The investor or client must honestly answer the attached investor profile questionnaire.
TT
T his determines the risk profile which is required to carry out asset allocation and build a
customised portfolio.
Step 3: Build a Customised Portfolio

TT
Consider the different investment options and select specific mutual fund schemes.
TT
The schemes should fit the clients investment style and the suggested asset allocation.
Step 4: Performance Review

TT
Review the performance of the various investments, periodically.
TT
Reviews can take place on a quarterly, half yearly, annual etc basis.
Step 5: Rebalance the Portfolio

TT
T he portfolio may need to be rebalanced if certain investments do not provide expected returns
as per the benchmark.
TT
T his could occur due to reasons like market conditions, diversification, sectoral demand and
other such factors.
Rohit: Puneet, thank you for all you help. Thanks to your explanations and guidance, I now feel confident
enough to take the NISM examination!
Puneet: Anytime Rohit! All the best for the exam. Im sure you will be an excellent mutual funds
distributor very soon!
228

TT
There are differences between investors with respect to the levels of risk they are comfortable with.
TT
Risk profiling is an approach to understand the risk appetite of investors an essential pre
requisite to advice investors on their investments. Risk profilers have their limitations.
TT
Risk profile is influence by personal information, family information and financial information.
TT
Spreading ones exposure across different asset classes (equity, debt, gold, real estate etc.)
TT
Some international researches suggests that asset allocation and investment policy can better
explain portfolio performance, a compared to being exposed to the right asset classes is a more
critical driver of portfolio profitability than selection of securities within an asset class (stock
selection) and investment timing.
TT
Strategic asset allocation is the ideal that comes out of the risk profile of the individual. Tactical
asset allocation is the decision that comes out of calls on likely behavior of the market.
TT
Financial planners often work with model portfolios the asset allocation mix that is most
appropriate for different risk appetite levels. The financial planner would have a model portfolio
for every distinct client profile.
Key Learnings
1.
What are the factors that influence risk appetite?
2.
When can investment advice be given to an investor?
3.
What is asset allocation?
4.
Note down two questions that should be asked to select the right mutual fund.
5.
List the five steps that should be taken for portfolio build up.
229
Worksheet
1.
Write the steps in the blanks provided.

a.
The risk appetite
b.
The
c.
The greater the job stability, the
d.
The
e.
T he more daring the personality of an individual, the

to accept the consequences of risk.
f.
The more
g.
T he portfolio may need to be

provide
h.
2.
the life expectancy, the higher the risk appetite.

the acceptable level of risk.
the age, the higher the acceptable level of risk.

the ability
the income, the higher the acceptable amount of risk.

if certain investments do not
as per the benchmark.
T o build a customised portfolio the different

in order to select specific
should be considered
.
i.
T he investor or client must honestly answer the attached

determines the
.
j.
When determining time frames the
as this
should be kept in mind.
Read the following questions and tick the correct answer.

a.
Risk appetite of investors is assessed through

i.
ii.
iii.
iv.
b.
c.
isk appetizers
R
Asset allocators
Risk profilers
Financial plan
The objective of asset allocation is risk management.

i.
ii.
T rue
False
The asset allocation that is worked out for an investor based on risk profiling is called
i.
ii.
iii.
iv.
230
with every additional earning family member.
T actical asset allocation

Fixed asset allocation
Flexible asset allocation
Strategic asset allocation
d.
Model portfolios are a waste of time for financial planners.

i.
ii.
e.
T rue
False
How much equity would you suggests for a young well settled unmarried individual?
i.
ii.
iii.
iv.
00%
1
80%
60%
40%
Notes
231
Answers: Risk Profiling and Asset Allocation

Question Number
232
Answer
a.
Increases
b.
Longer
c.
Higher
d.
Lower
e.
Better
f.
Regular
g.
Rebalanced, Expected returns
h.
Investment options, Mutual fund schemes
i.
Investor profile questionnaire, Risk profile
j.
Tax perspectives
a.
iii
b.
c.
iv
d.
ii
e.
ii
Questions for Practice

1.
Net Assets Rs.500cr. Total transaction value is Rs. 1000cr. What is portfolio Turnover Ratio?
1,000
500
= 2 Times
Total Transaction
Net Assets
2.
Average Net Assets=Rs.3000cr Total Transaction of a scheme=Rs.10000cr. What is portfolio

turnover ratio?
P.T.R = 1,000
3000
= 3.33
3.
In a balanced fund with Net Assets of Rs.750cr. What is the expenses that can be charged.
100 X 2.5% = 2.500
300 X 2.25% = 6.750
300 X 2.00% = 6.000
50 X 1.75 % = 0.875
16.125
4.
A Scheme portfolios market value is Rs.152cr, dividend accrued but not received =Rs.8cr
Liabilities = Rs.2cr. Total No. of standing out units = 75 lakhs Calculate NAV.
(152+8)-2= 158cr
NAV = Net Assets
No. of Units
= 158
0.75
= 210.66
5.
An investor invests Rs.100000 in 365 days FMP and got Rs. 107750. What would be the capital
gain in this case?
Capital Gain = (Maturity Amount-Amount Invested)
= Rs. 107750-100000
= Rs. 7750
233
6.
An investor plans to invest Rs 12000 in a scheme whose NAV is Rs.12. How many Units he will
be allotted?
No. of Units = Investment Amount
NAV
= 12000/12
= 1000
7.
What would be the redemption value of a unit whose NAV is Rs 15 and Exit load is 1%?
Redemption value = NAV-Exit Load
Exit Load = (1% of NAV)
= 15 X 1/100
= 0.15
= 15-0.15
= 14.85
8.
Mr. A holds 2000 Units the scheme declares bonus 1:4. How many units will A get, if one New
Unit is given for every 4 Existing Units?
2000 X New Units/Old Units
= 2000 X
= 500
9.
If the post Tax return on An Investor is 8% and the inflation rate is 6%. What is the real rate of
return.
Real Rate of Return = [(1+ Post Tax Return)/(1+Inflow)]-1
= [(1+0.8)/(1+0.6)]-1
= 1.0188679-1
= 0.188 X 100
= 1.88%
10. If absolute return is 2.4% over 50 days Annualized Return would be____
Annualized Return = Simple Return X 365 / No. of Days Returning
= 2.4% X 365/50
= 0.24 X 365/50
= 0.1752
11. What are the recurring expenses on first Rs.100cr of Equity Scheme?
Rs.2.5cr
12. A Company has issued Rs.10cr. Equity shares. It earns profits of Rs.105cr on which it has paid Tax
of Rs. 5cr and Distributed Dividend of Rs.20cr. What is EPS?
234
ESP = Net Profit after Tax / No. of Shares

= Rs.100cr / 10cr
= Rs.10
Net Profit before Tax = 105cr
Less Tax =
Rs.100cr
13. A person Requires Rs.100000 for a specific goal after 3 years we want to know what he needs to
invest @5% Return. The formula would be
PV = FV/(1+i)n
= 100000 / (1+0.05)3
235
236
Participant Feedback Note
and Business Facilitation
Business Correspondence
1.0
10th Pass
Version No.
Pre-requisites to Training
Training Outcomes
NSDC
Name of Client
TT
17-01-2013
Meet the requirement of IIBF certification process required for Business Correspondent and Business
Facilitator.
After completing this programme, participants will be able to:
Version Update Date
Certificate programme in Business Correspondence and Business Facilitation
Program Name
Session Plan Design
Banking Financial Services and Insurance (BFSI)
Ice Breaker
Program
Objectives,
Expectations,
Career Progression
Relevance
for Rural
development,
Various initiatives
by Government
and Non
Government
Agencies
Program
Objectives and
Expectations
Financial
Inclusions
Session
Ice Breaker
Module
Sr. No.
Session Plan
TT
TT
TT
TT
TT
TT
TT
TT
TT
Day 1
define Financial Inclusion

describe/list the
importance of financial
inclusion in zero or less
banking areas
state the importance
of intermediaries for
ensuring financial
inclusion
list the various
initiatives introduced
by government or nongovernment agencies
To list the program

objectives
To list the expectations
from the program
To list the problems
faced by the agents and
villagers
To introduce themselves
To share their profiles,
work in groups and
communicate properly
Objectives
TT
TT
TT
Trainer-led
discussion
Trainer-led
discussion
Acivity
Methodology
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
Flex chart
Class cards
Participant handbook
Trainers Guide
Flex Chart
Trainers Guide
Identity card for the

participants
Flip charts for basic rules
Trainers Guide
Tools
60 minutes
15 minutes
15 minutes
Duration
Introduction to
BFBC Model
Roles and
Responsibility of a
BC, Compensation
Details of the BCs;
Documentation
required from
a BC for their
own enrolment
& Benefits of
Certification
Program
Principles of
Banking, Functions
of Banks
Roles and
Responsibilities of
BFBC in Financial
Inclusion
Introduction to
Banking
Session
Module
Sr. No.
recall the roles &

responsibilities of BC
do important documents
for enrolment of BC
state benefits of the
certification program
list what is Banking &

main functions of a Bank
list types of accounts for
deposits and loans
list the structure of the
Indian Banking System
discuss the other
functions and optional
channels of the bank
define and differentiate

Business Facilitator (BF)
model and Business
Correspondent (BC)
model
list the Eligibility Criteria
list the Roles and
Importance of BC and BF
TT
TT
TT
TT
TT
TT
Trainer-led
discussion
Activity
Trainer-led
discussion
Activity
Trainer-led
discussion
Role Play
Methodology
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
Objectives
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
Flex chart
Marker (4 different
colours)
Trainers Guide
Flex charts
Class cards
Trainers Guide
Flex chart
Class card
A4 Sheet
Trainers Guide
Tools
60 minutes
60 minutes
45 minutes
Duration
Recap
Introduction
of Enrolment
software
Banker-Customer
relationship,
Principles and
AML(Anti-money
laundering),
Submission
and Uploading
documents and
data
Evaluation
Recap
Enrolment
software
BankerCustomer
relationship
10
Learning
Confirmation - I
Performance
Reporting
Planning
and Time
Management
Question and
Answers Session
Session
Other functions of
Bank and KYC
Module
Sr. No.
Session Plan
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
banker-customer
relationship.
secrecy of customers
identity
KYC principles
meaning of AML
practice with help of case
and forms
know about Enrolment

software
know about customers
enrolment process
revise the learning of

previous day.
Day 2
confirm the days learning
know about daily

reporting
get understanding of
nature of work (goal)
revise the topics learnt

for the day
know more about

functions of a bank
know more about KYC
norms
Objectives
TT
TT
TT
TT
TT
TT
TT
TT
Trainer-led
discussion
Activity
Trainer-led
discussion
Trainer-led
discussion
Theory
Question
Paper
Trainer-led
discussion
Activity
Trainer-led
discussion
Methodology
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
Flex charts
Class Cards
Trainers Guide
Flex chart
Trainers Guide
Trainers Guide
Question Paper
Trainers Guide
Trainers Guide
Trainers Guide
Flex charts
Trainers Guide
Tools
60 minutes
120
minutes
15 minutes
30 minutes
60 minutes
15 minutes
60 minutes
Duration
Recap
POS Machine
Enrolment
process flow
Software Training
Practice Session - II
POS Machine
Recap
Enrolment process
flow
Question and
Answers Session
Session
Nomination of CSP
Module
Sr. No.
have hands on practice

on the POS Transaction
software
know about POS machine

know uses of POS
machine
know the use of POS
machine for transaction
process
revise the learning of

previous day
Day 3
understand the complete

process from enrolment
to opening of a new
account
know about the roles of a
branch manager

for the day
Understand the hierarchy

and selection procedure
Understand prospective
level and performance
qualities
Understand their roles as
CSP
TT
TT
TT
TT
TT
TT
Practical
Trainer-led
discussion
Trainer-led
discussion
Trainer-led
discussion
Activity
Trainer-led
discussion
Methodology
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
Objectives
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
POS Transaction Software

Trainers Guide
Flex charts
Trainers Guide
Trainers Guide
Flex charts
Trainers Guide
Trainers Guide
Flex charts
Trainers Guide
Tools
120
minutes
180
minutes
15 minutes
60 minutes
15 minutes
60 minutes
Duration
10
Learning
confirmation - III
Relationship
management,
customer
satisfaction,
Principles
of Effective
Communication,
Setting Goals,
Evaluation
Relationship
management
Live Demo
of Banking
Transactions
by Technology
Provider
Doubt Clarification
Live Demo
of Banking
Transactions
by Technology
Provider
Session
Module
Sr. No.
Session Plan
TT
TT
TT
TT
TT
TT
TT
TT
improve areas of skills:

study in a meeting,
objections raised by
customers, identify the
necessities, overview of
benefits
introduce self - basic
communication skill
share views about
communication,
understand the barriers
identify and solve the
problems of villagers
improve the skills to work
in a group and discuss the
same
Day 4
confirm the days learning
ensure the clarity of

concepts
see live demonstration of

Banking Transactions by
technology provider.
Objectives
TT
TT
TT
TT
TT
Case Study:
Group
Discussion
Role Play
Theory
Question
Paper
Trainer-led
discussion
Demonstration
Methodology
TT
TT
TT
TT
TT
TT
TT
Class Card
Trainers Guide
Question Paper
Trainers Guide
Trainers Guide
Trainers Guide
Tools
90 minutes
30 minutes
15 minutes
60 minutes
Duration
Financial
Education
and Financial
Counselling
Micro Finance
Module
Sr. No.
Role Play
in Financial
Counselling
Roles of BF/
BC in Financial
Counselling
Question and
Answers Session
Delivery models
Session
counsel on different
products
know what is financial

literacy and importance
of this in financial
inclusion
know financial education
and its three main topics
know important
components of financial
counseling
know role of BF/BC as a
financial counselor

for the day
Know about micro credit

and micro finance
know about difference
between them
role of micro finance in
uprooting poverty
know about role,
structure, constitution
and functions of SHG
group
TT
TT
TT
TT
Role Play
Case Study:
Group
Discussion
Activity
Trainer-led
discussion
Methodology
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
Objectives
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
Class card
Trainers Guide
Trainers Guide
Trainers Guide
Trainers Guide
Flex charts
Case study
Tools
60 minutes
60 minutes
15 minutes
45 minutes
Duration
11
12
What CSP offers to

customers?
Agriculture and
other priority
sector advances in
Banks
Software Training
Practice Session
- IV
What CSP offers

to customers?
Principles of
Lending
Software
Training
Doubt Clarification
Cash Flow and

Cash budgeting
techniques, How
to identify fake
notes
Cash Flow and

Cash budgeting
techniques,
Session
Module
Sr. No.
Session Plan
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
ensure the clarity of

concepts
have hands training about

transaction process on
POS software
know about deposits and

lending cycle of a bank S.L.R., C.R.R. and profits
know types of lending
and advances
know principles of
lending to priority sector
know about various

additional services
offered by CSP to their
customers
Day 5
know meaning of cash

flow
know importance of cash
flow for a farmer or a
businessman and a bank
know how is cash flow
statement prepared
know its relation with
credit administrator
and monitoring banks
advances
Objectives
TT
TT
TT
TT
TT
Trainer-led
discussion
Practical
Trainer-led
discussion
Trainer-led
discussion
Trainer-led
discussion
Methodology
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
Trainers Guide
POS Transaction Software
Class card
Flex charts
Trainers Guide
Flex charts
Trainers Guide
Worksheet
Trainers Guide
Tools
15 minutes
60 minutes
60 minutes
30 minutes
60 minutes
Duration
Debt Recovery
1.0
12th Pass
Version No.
Training Outcomes
NSDC
Name of Client
17-01-2013
Meet the requirements of the Reserve Bank and IIBF Certification Process
Version Update Date
Certificate Programme in Debt Recovery
Program Name
Session Plan Design
15
16
Module 1
Module
Session Plan
Introduction to Soft
Skills and Need for
Training
What is Personal
Effectiveness
Who am I? Why am I
here?
Introduction, General
Guidelines
Session
TT
TT
TT
TT
TT
TT
Concept of Skills as being

learned.
Different types of Soft skills and
their application in the work of
the DRA. Wish List.
Establish the need to learn what,
why and how.
Defining PE through Knowledge,

Skills and Attitudes, SWOT, SelfEsteem and Motivation
Participant Expectations and

Challenges Nature of the
work, Sharing Successess and
Challenges
Introduction to the Program and

Trainers. The IIBF Certification
Process. Rules for Certification.
Course Overview, purpose and
methodology
Objectives
TT
TT
TT
TT
TT
Trainer-led
discussion
Activity
Trainer-led
discussion
Trainer-led
discussion
Trainer-led
discussion
Methodology
TT
TT
TT
TT
TT
TT
TT
TT
TT
Flipchart
Trainer Guide
Handouts M1 - 3
Trainer Guide
Handouts M1 - 2
Chart 1.1.
Trainer guide
Handouts, M1-1, Chart 1.1.

Trainer guide
Tools
60 minutes
60 minutes
60 minutes
60 minutes
Duration
Module 3
Module 2
Module
Practice Session
Interpersonal Skills
Practice Session
Body language
Practice Session
Listening
Practice Session
Communication and
presentation
Session
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
Role Play
Trainer-led
discussion
Activity
Trainer-led
discussion
Activity
Trainer-led
discussion
Activity
Trainer-led
discussion
Activity
Methodology
Interpersonal skills - preference

for action.
Body language - dressing and

grooming. Effect on banks image
Listening skills - exercises on

listening.
Presenting oneself - basic

communication stills
Attitudes towards
communication, understanding
barriers.
Objectives
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
60 minutes
60 minutes
Role play situations

Trainer Guide
60 minutes
60 minutes
60 minutes
60 minutes
60 minutes
60 minutes
Duration
HB 10.4
Trainer Guide
Trainer Guide
Trainer Guide
Class Cards
Trainer Guide
Worksheet
HD 10.3
Trainer Guide
Class Cards
Trainer Guide
Tools
17
18
Module 4
Module
Session Plan
Functions of DRA 2
Functions of DRA I
Work of DRA
Debt Recovery Agent
Session
TT
TT
TT
TT
Functions: Book-keeping,
documenting and reporting
TT
TT
TT
Nature of the DRAs work-mind

map
Functions of the DRA: Collecting
& remitting - the issues involved.
TT
What is Debt, Recovery, Agency

and Agent? Collection and
Recovery - a distinction
Objectives
Group
activity
Role Play
Activity
Activity
Methodology
TT
TT
TT
TT
TT
TT
TT
TT
TT
60 minutes
60 minutes
Blank sheets
Sample documents
Trainer Guide
60 minutes
Mind map
Trainer Guide
Role Cards
Trainer Guide
60 minutes
Duration
Handout and class cards

Trainer Guide
Tools
Module 5
Module
Opening an Account:
KYC
Types of Accounts,
Types of Customers
The Banking Story
TT
TT
TT
TT
TT
Deposit accounts, types of

deposits, rules and regulations
concerning opening/closing of
accounts, types of customers,
KYC information - types of
documents required.
Role play
Role play
Trainer-led
discussion
Test
Methodology
TT
TT
TT
Venous types of customers who

can open accounts
Types of accounts and the
benefits of each
how banks operate with

reference to the Deposit and
Lending cycle, how banks earn
money, how they pay interest
and the importance of Lending.
Position of DRA in maintaining
flow of money in the bank
20 multiple choice questions
Learning Confirmation
TT
Objectives
Session
TT
TT
TT
TT
TT
TT
TT
TT
Class card
Trainer Guide
Role Cards
Trainer Guide
60 minutes
60 minutes
60 minutes
60 minutes
Test paper
Trainer Guide
Handouts
Trainer Guide
Duration
Tools
19
20
Module 6
Module
Session Plan
Practice examples
Closing or Stopping
Accounts
Other Deposits
Review of Rank
Operations, Accounts
and KYC
Session
TT
TT
TT
TT
TT
Practice cases on types of

accounts, interest earned,
closure
Reasons why deposit accounts

are closed by customers, by
the bank or why usage can be
stopped
Learn the differences between

different forms of Interest
calculations, interest calculations
practice.
Features of other types of

deposits - Fixed Deposits,
Recurring Deposits - benefits and
drawbacks.
Learning confirmation + position

of the DRA
Objectives
TT
TT
TT
TT
TT
TT
TT
TT
Trainer-led
discussion
Case studies
Trainer-led
discussion
Trainer-led
discussion
Activity
Trainer-led
discussion
Role Play
Trainer-led
discussion
Methodology
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
Cases
Trainer Guide
Situations
Handouts
Trainer Guide
Trainer Guide
Charts
Class Cards
Trainer Guide
Charts
Trainer Guide
Tools
60 minutes
60 minutes
60 minutes
60 minutes
60 minutes
Duration
Module 7
Module
DRA Functions
Revisited
Payment and
Settlement Functions,
funds remittance
Banks obligation
secrecy of accounts
Banker-Customer
Relationship
Session
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
Trainer-led
discussion
Trainer-led
discussion
Activity
Trainer-led
discussion
Role play
Trainer-led
discussion
Activity
Methodology
Compare Bank functions with

DRA functions
Understanding how instruments

such as Cheques work the
clearing and collection functions
Demand drafts and their
functions
Level of trust that a customer

has in the bank
Circumstances under which a
bank can reveal information
Terminology of the different

kinds of relationships the Bankers
have with type of Customers
based on their accounts.
Objectives
TT
TT
TT
TT
TT
TT
TT
Trainer Guide
Sample Cheques
Trainer Guide
Class cards
Trainer Guide
Flip chart
Trainer Guide
Tools
60 minutes
60 minutes
60 minutes
60 minutes
Duration
21
22
Module 9
Module 8
Module
Session Plan
Loan Functions of a
Bank an intro
Real Stories-successes
and failures
Assessment of Module
2
Module 2 Test Paper
Preparation for Test
Cases
Banks Responsibility
AML Act
Anti Moneylaundering
Customer Interface,
various channels
Session
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
To set the tone for

understanding the loan functions
overall
To set the stage for the Loan

function and to bring the
participants own experience into
play
Correction and understanding

of the right answers, recording
scores and giving feedback;
dealing with new concepts, if any
Learning Confirmation M2 Banking 50 questions
Preparation for multi-choice

questions etc.
Knowledge of how cases are

dealt with.
The banks responsibility in

prevention of laundering
Understand how money

laundering takes place, how it
affects the country
Several ways in which Banking

sectors can be used - the
different channels. Advantages
and disadvantages
Objectives
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
Trainer-led
discussion
Trainer-led
discussion
Role play
Trainer-led
discussion
Test
Trainer-led
discussion
Case studies
Trainer-led
discussion
Role play
Trainer-led
discussion
Role play
Activity
Methodology
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
Trainer Guide
Trainer Guide
60 minutes
60 minutes
60 minutes
60 minutes
Test paper
Trainer Guide
Answer sheet for facilitator
Trainer Guide
60 minutes
60 minutes
Mock Test paper
Trainer Guide
Handouts
Trainer Guide
60 minutes
60 minutes
Story
Class cards
Trainer Guide
Class cards
Trainer Guide
60 minutes
Duration
Class cards
Trainer Guide
Tools
Module 11
Module 10
Module
Preview of Session 12
Credit Card Friend

or Foe?
The Retail Loans

Success Story
Retail Loans
Review of Session on
Loans
How Loans are Repaid
Customer Segments
How Banks Earn

Money
Keyword Activity
Session
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
Trainer-led
discussion
Trainer-led
discussion
Activity
Role Play
Role play
Case studies
Group
discussion
Quiz
Trainer-led
discussion
Trainer-led
discussion
Activity
Trainer-led
discussion
Activity
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
Trainer Guide
Class cards
Trainer Guide
Class cards
Trainer Guide
15 minutes
60 minutes
60 minutes
60 minutes
60 minutes
Quiz questions
Trainer Guide
Trainer Guide
60 minutes
60 minutes
60 minutes
60 minutes
Duration
Handout Notes
Trainer Guide
Class Card
Trainer Guide
Class card
Trainer Guide
Trainer Guide
Trainer-led
discussion
Activity
TT
Tools
Methodology
Preparation for next session
Understanding of how Credit

Cards work the advantages
and disadvantages of credit cards
Growth of retail loans In banking

sector
Reasons for the growth of retail
loans
What are retail loans?

Types and classes of retail loans.
Learning confirmation of basic

Loans concepts, customer etc
Understanding of the advantages

and disadvantages of loan
repayment methods
General knowledge of the

different types of customers who
take loans from the Bank
Understanding Net interest

Income and the position of the
DRA in maintaining this balance
with the Bank
Revision of keywords covered in

the previous Module
Objectives
23
24
Module 13
Module 12
Module
Session Plan
Quiz
Case Studies
The Bucket Systern
Asset Classification
Review of Sessions on
Loans
Role Plays
Understanding Loans
and Security
Types of Security
Review of Retail Loans
Session
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
Open Format Quiz on Modules

1-3
Learning Confirmation of the

different aspects of Loans
Further classification of Loan

customers into buckets how
customers can move from one
bucket to another and the
implications for DRAa.
To revise the difference between

Assets and Liabilities
To understand how Banks classify
assets into Standard and NPA5
(RBI Guidelines)
TT
TT
TT
TT
TT
TT
TT
Understanding of the Banks risk

in giving out loans
Learning confirmation
TT
TT
TT
TT
Application of secured and

unsecured loans and security
applications
To understand the need for

security creation and the process
for different kinds of loans,
explanation of terms
Learning Confirmation of Session

on Loans
Objectives
TT
TT
TT
Activity
Trainer-led
discussion
Quiz
TT
TT
TT
TT
TT
TT
TT
TT
TT
Trainer-led
discussion
Group
discussion
Trainer-led
discussion
Role play
Activity
Trainer-led
discussion
Role Plays
Trainer-led
discussion
Methodology
60 minutes
60 minutes
Trainer Guide
Quiz cards
60 minutes
Trainer Guide
Trainer Guide
60 minutes
60 minutes
Flipchart
Trainer Guide
Class card
Trainer Guide
60 minutes
60 minutes
60 minutes
60 minutes
Duration
Trainer Guide
Trainer Guide
Trainer Guide
Trainer Guide
Tools
Module 15
Module 14
Module
Case studies
Soft skills - empathy
Need for agency
Default in Retail
Loans, Growing
NPAs and need for
understanding
Revision of Functions
of DRA, Personal
Effectiveness
Expectations of
Module 4
Assessment
Written Test on
Module 3
Session
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
soft skills required for the job

Cases to introduce empathy
through listening.
Case study
Role play
Trainer-led
discussion
Trainer-led
discussion
Role Plays
Trainer-led
discussion
Trainer-led
discussion
Trainer-led
discussion
Test
Methodology
TT
TT
TT
TT
TT
TT
TT
TT
Need for understanding and

empathy - introduction to
essential
need for DR agency to handle

default-. Reasons for default in
various products.
Retails loans - reasons for loans,

growth story revisited, general
reasons for defauk. differences In
the various retail products
Revise the content covered

in sessions 1-3; take stock of
individual personal effectiveness
skills gained.
understand the position of the

modules and where we have
reached
Check on Learning Confirmation

I record scores, discuss answers
and daffy new concepts
Learning Confirmation
Objectives
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
Trainer Guide
Trainer Guide
Trainer Guide
Trainer Guide Handout
Trainer Guide Charts

Handouts
Trainer Guide
60 minutes
60 minutes
60 minutes
60 minutes
60 minutes
60 minutes
60 minutes
60 minutes
Test paper
Trainer Guide
Answer sheet
Trainer Guide
Duration
Tools
25
26
Module 18
Module 17
Module 16
Module
Session Plan
Code of Banks
commitment
Practice
Phone Strategies
Recovery strategies
Dos and Donts
DRA Visits - Behaviour

guidelines
Policies, processes,
procedures
Regulations
Case studies
Soft skills
Difficult debtors
Session
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
Banking Code of Conduct
Role plays to practise procedures

along with soft skills
Telephone Collection Calls
Strategies for Recovery guidelines. Cases involving

different kinds of loans.
Dos and Donts of debt recovery

based on Norms and codes
Guidelines for behaviour during

visits
Processes and procedures of

debt recovery.
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
Case Studies and practice with

Soft Skills
Legal and regulatory norms +
recap on the basis of loans
TT
TT
Skills of Persuasion and

Negotiation
Dealing with difficult debtors steps in handlig debtors. Cases of

negative behavior
Objectives
TT
TT
Trainer led
discussion
Activity
TT
Trainer led
discussion
Role plays
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
Trainer led
discussion
Trainer led
discussion
Role play
Trainer led
discussion
Trainer led
discussion
Case study
Role play
Case study
Methodology
60 minutes
Chart
Blank paper
Trainer Guide
Trainer Guide Handouts
Trainer Guide
60 minutes
60 minutes
60 minutes
60 minutes
60 minutes
Role cards
Trainer Guide
Trainer Guide
60 minutes
60 minutes
Trainer Guide
Trainer Guide
60 minutes
60 minutes
Trainer Guide
Role card
Trainer Guide
60 minutes
Duration
Trainer Guide
Tools
Module 20
Module 19
Module
Revision
Legal action, debtors,

reports
Re-possession
Debt & Credit

Counselling
Practice
Legal aspects
Discussion of answers
Written Test on
Module 4
Session
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
Trainer led
discussion
Trainer led
discussion
TT
TT
TT
TT
TT
Trainer led
discussion
Activity
Trainer led
discussion
Activity
TT
TT
TT
TT
TT
TT
Case study
Group
discussion
Role play
Trainer led
discussion
Test
Methodology
General revision of all functions

of the DRA
Initiating legal acton, tracing

debtors, filing opinion reports
Re-possession of securities procedures
Additional functions of the DRA

- debt and credit counselling
(stories)
Case Study on legal aspects
Legal support and aspects RBI

Norms
Clarification of concepts
earning Confirmation 4 (50 Q en

Deht Recovery, 50 previous)
Objectives
Trainer Guide Mindmap

Handout
Trainer Guide Chart
Trainer Guide Chart
Trainer Guide Chart
Trainer Guide Chart

Role cards
60 minutes
60 minutes
60 minutes
60 minutes
60 minutes
60 minutes
60 minutes
60 minutes
Trainer Guide
Test paper
Trainer Guide Answer
sheet for facilitator
Duration
Tools
27
28
Module
22-25
Module 22
Module 21
Module
Session Plan
TT
Fair practices - credit

card
Question Paper Formative (3 nos)
Written Test on
Module 5
Open Quiz
TT
TT
TT
TT
TT
Code of Conduct for

DRA
Fair practices - lenders
TT
TT
TT
Various Codes and

Policies
International Best
Practices
Rights and Duties
Session
Learning Confirmation and

Practice
Learning Confirmation 5-50

marks (30 + 20)
Open Quiz format: complete

revision M1-5
Fair practices - lenders
Fair practices - credit card
Code of Conduct for DRA
IBA Model Policy
Best practices In USA and UK,

compare to India
Rights and Duties of DRA
Objectives
TT
TT
TT
TT
TT
TT
TT
TT
TT
Test
Test
Quiz
Trainer led
discussion
Trainer led
discussion
Trainer led
discussion
Trainer led
discussion
Trainer led
discussion
Trainer led
discussion
Methodology
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
Trainer Guide
Test papers
Trainer Guide
Test paper
Trainer Guide
Quiz card
Trainer Guide
Trainer Guide
Trainer Guide Worksheet
Tools
60 minutes
60 minutes
60 minutes
60 minutes
Duration
Mutual Fund Distribution
29
30
Session Plan
Minimum qualification 12th Pass from any stream / Graduates from any stream
Training Outcomes
1.0
Version No.
17-01-2013
NSDC
Name of Client
TT
TT
TT
TT
Pass the NISM MFDC Certification exam with excellent marks

Knowledge of Mutual Fund Industry
Sell the mutual fund investments to several investors
Handle Mutual Fund customer queries
Version Update Date
Program Name
Session Plan Design
31
32
ILFS Skills
Set Expectations
About ILFS Skills
Programme
Objectives
NISM Examination
Concept and Role

of a Mutual Fund Introduction
Icebreaker
Icebreaker
Mutual Fund Operation Flow

Chart
Basic Concepts of a Mutual Fund

(MF)
Rules of NISM
About NISM
Introductions
Introduction
Session
Module
Sr.
No.
Session Plan
TT
TT
TT
TT
TT
TT
TT
TT
TT
To build rapport with

fellow participants and
Trainer
To describe the concept

and operations of a
mutual fund
To list the advantages
and disadvantages of a
mutual fund
To explain the rules of

the NISM exam
To describe what the
NISM exam
To state the terminal

goals of the
programme
To set expectations and
ground rules
To familiarize the
participants about ILFS
skills
To introduce both the

trainer and participants
with each other
Day 1
Objectives
TT
TT
TT
TT
TT
TT
TT
TT
Activity
Multimedia
driven lesson
Trainer led
discussion
Multimedia
driven lesson
Trainer led
discussion
Trainer led
discussion
Trainer led
discussion
Activity
Methodology
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
20
minutes
Power Point
Presentation
Participant
Handbook
Trainers Guide
Interactive
Game
30
minutes
30
minutes
20
minutes
Participant
Handbook
Trainer Guide
Power Point
Presentation
Power Point
Presentation
Participant
Handbook
Trainers Guide
Annexure - 1
Multimedia
15
minutes
20
minutes
Time
Trainers Guide
Paper
Pencil
Trainers Guide
Tools
Formative
Assessment -1
Types of Mutual
Funds
Module
Fund Structure
and Constituents
Sr.
No.
Formative Assessment
Custodian
AMC
Trustee
Sponsor
TT
TT
TT
TT
TT
To test the participant

on the knowledge
gained
To explain the fund

structure
To describe the role
and functions of the
constituents of a
mutual fund
To list the different

types of mutual funds
To briefly describe the
various types of mutual
funds
Objectives
TT
TT
TT
TT
TT
Formative
evaluation
Multimedia
driven lesson
Trainer led
discussion
Multimedia
driven lesson
Trainer led
discussion
Methodology
By Investment: Growth Fund,

Value Fund, Fund of Funds, No
Load Fund, Commodity Funds,
International Funds, Exchange
Trade Funds
By Nature: Equity Fund, Debt

Fund, Balanced Funds, Gold
Funds, Real Estate Mutual Funds,
By Structure: Open ended,

Closed ended
Session
TT
TT
TT
TT
TT
TT
TT
Assessment
Guide
Power Point
Presentation
Participant
Handbook
Trainers Guide
Power Point
Presentation
Participant
Handbook
Trainers Guide
Tools
20
minutes
30
minutes
45
minutes
Time
33
34
Module
Legal and
Regulatory
Environment Role o Regulators
in India
Investors Rights &

Obligations
Formative
Assessment - 2
Offer Document
Sr.
No.
10
11
12
13
Session Plan
Contents of Key Information

Memorandum (KIM)
Contents of Scheme Information

Document (SID)
What is the OD
Can Mutual Fund go Bust?
Investors Rights
Regulatory Agencies
Session
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
To identify the
importance of an offer
document.
To name the parts of an
offer document
To discuss the contents
of an offer document

on the knowledge
gained
To state the rights and

obligations of investors
To list the various

regulatory agencies
To state the roles of the
regulatory agencies
To state the roles of
the self-regulatory
organisations
To state the role of
AMFI as a regulatory
body
To recall the AMFI code
of ethics
Objectives
TT
TT
TT
TT
TT
TT
TT
Multimedia
driven lesson
Trainer led
discussion
Formative
evaluation
Multimedia
driven lesson
Trainer led
discussion
Multimedia
driven lesson
Trainer led
discussion
Methodology
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
Power Point
Presentation
Participant
Handbook
Trainers Guide
Annexure -2, 3, 4
Assessment
Guide
Power Point
Presentation
Power Point
Presentation
Participant
Handbook
Trainers Guide
Power Point
Presentation
Participant
Handbook
Trainers Guide
Tools
45
minutes
20
minutes
30
minutes
40
minutes
Time
Channel
Management
Practices
Formative
Assessment - 4
16
17
TT
TT
TT
TT
TT
To test the participants
To explain the channel

management practices
To identify those who

can invest in mutual
funds
To explain the role of
distribution channels

on the knowledge
gained
Objectives
TT
TT
TT
TT
TT
TT
Formative
evaluation
Multimedia
driven lesson
Trainer led
discussion
Multimedia
driven lesson
Trainer led
discussion
Formative
evaluation
Methodology
Fund Distribution
- Distribution
Channels
15
Session
Formative
Assessment - 3
Module
14
Sr.
No.
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
30
minutes
Power Point
Presentation
Participant
Handbook
Trainers Guide
Assessment
Guide
Power Point
Presentation
20
minutes
30
minutes
20
minutes
Assessment
Guide
Power Point
Presentation
Power Point
Presentation
Participant
Handbook
Trainers Guide
Time
Tools
35
36
Accounting
Valuation
Module
Sr.
No.
Session Plan
Accounting Policies
Non-Performing Assets (NPA)
Expenses in a Mutual Fund

& Expenses That Cannot be
Charged
Contingent Deferred Sales

Charge (CDSC)
Load
NAV
Importance of Accounting
Session
TT
TT
To explain how
securities are valued
To explain the different

terms associate with
accounting
Day 2
Objectives
TT
TT
TT
TT
Multimedia
driven lesson
Trainer led
discussion
Multimedia
driven lesson
Trainer led
discussion
Methodology
TT
TT
TT
TT
TT
TT
Power Point
Presentation
Participant
Handbook
Trainers Guide
Power Point
Presentation
Participant
Handbook
Trainers Guide
Tools
25
minutes
25
minutes
Time
Taxation
Formative
Assessment - 5
Investor Services
Investment Plans
and Services
Module
Sr.
No.
TT
TT
TT
TT
To explain the different

investment plans and
services
Explain the procedure

for purchase of mutual
fund units
To explain how taxation

is done for mutual
funds
Objectives
TT
TT
TT
TT
TT
TT
TT
Multimedia
driven lesson
Trainer led
discussion
Multimedia
driven lesson
Trainer led
discussion
Formative
evaluation
Multimedia
driven lesson
Trainer led
discussion
Methodology
Other Services Available Under MF
Systematic Withdrawal Plans

(SWP)
Automatic Reinvestment Plan

(ARP)
Procedure for Purchase of MF

Units
Investor Should Statement of

Account to be Received
Timely Payment of Redemption
Importance of Investor Services
Classification of MF for Taxation
MF Taxation
Session
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
Power Point
Presentation
Participant
Handbook
Trainers Guide
Power Point
Presentation
Participant
Handbook
Trainers Guide
Multimedia
Annexure - 5, 6
Assessment
Guide
Power Point
Presentation
Power Point
Presentation
Participant
Handbook
Trainers Guide
Tools
20
minutes
20
minutes
20
minutes
30
minutes
Time
37
38
Formative
Assessment - 6
Drivers of Return
in a Equity and
Debt Scheme
Computing
Returns
Risk
10
Module
Sr.
No.
Session Plan
Risks in Debt Funds
Compounded Annual Growth

Rate (CAGR)
Compounded Return
Annualized Return
Absolute Return
Debt Scheme
Portfolio Building Approach
Investment Style
TT
TT
TT
TT
Drivers of Return in a Equity and

Debt Scheme.
Equity Scheme
TT
Session
Explain the types of

risks faced by different
mutual fund schemes
Calculate different
types of returns on
mutual funds
Explain the return

aspect of a Equity
Scheme
Explain the return
aspect of a Debt
Scheme
Objectives
TT
TT
TT
TT
TT
TT
TT
Multimedia
driven lesson
Trainer led
discussion
Multimedia
driven lesson
Trainer led
discussion
Multimedia
driven lesson
Trainer led
discussion
Formative
evaluation
Methodology
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
Power Point
Presentation
Participant
Handbook
Trainers Guide
Power Point
Presentation
Participant
Handbook
Trainers Guide
30
minutes
30
minutes
1 hour
20
minutes
Assessment
Guide
Power Point
Presentation
Participant
Handbook
Trainers Guide
Time
Tools
Module
Measures of Risk
Benchmarks and
Performance
Sr.
No.
11
12
Sources for Tracking MF

Performance
Risk Adjusted Returns
TT
TT
To benchmark
performance of MFs
Identify the different

measures of risk used
for mutual funds
Objectives
TT
TT
TT
TT
Multimedia
driven lesson
Trainer led
discussion
Multimedia
driven lesson
Trainer led
discussion
Methodology
Quantitative Measure of Fund

Managers Performance
SEBI Guidelines
For Debt Funds and Money

Market Funds
Weighted Average Maturity
Modified Duration
Beta
Weighted Average Maturity
Modified Duration
Beta
Standard Deviation
Variance
Measures of Risk:
Session
TT
TT
TT
TT
TT
TT
Power Point
Presentation
Participant
Handbook
Trainers Guide
Power Point
Presentation
Participant
Handbook
Trainers Guide
Tools
30
minutes
30
minutes
Time
39
40
Performance
Measurement
Formative
Assessment - 7
Scheme Selection
for a Client
Formative
Assessment - 8
14
15
16
P/E Ratio
Alpha
Treynor Ratio
Sharpe Ratio
Different Performance
Measures:
Need for Measuring

Performance
13
Session
Module
Sr.
No.
Session Plan
TT
TT
TT
TT

on the knowledge
gained
Explain how to
help clients select
appropriate schemes

on the knowledge
gained
To explain the need

for measuring
performance of MFs
Objectives
TT
TT
TT
TT
TT
TT
Formative
evaluation
Multimedia
driven lesson
Trainer led
discussion
Formative
evaluation
Multimedia
driven lesson
Trainer led
discussion
Methodology
TT
TT
TT
TT
TT
TT
TT
TT
TT
TT
20
minutes
30
minutes
Power Point
Presentation
Participant
Handbook
Trainers Guide
Assessment
Guide
Power Point
Presentation
20
minutes
30
minutes
Time
Assessment
Guide
Power Point
Presentation
Power Point
Presentation
Participant
Handbook
Trainers Guide
Tools
Types of Assets
Formative
Assessment - 9
18
Module
17
Sr.
No.
TT
TT

on the knowledge
gained
Explain the different

types of assets
Objectives
TT
TT
TT
Formative
evaluation
Multimedia
driven lesson
Trainer led
discussion
Methodology
Why is MF the Best Option
Financial Assets
Select the Right Investment

Product
Physical Assets
Session
TT
TT
TT
TT
TT
Assessment
Guide
Power Point
Presentation
Power Point
Presentation
Participant
Handbook
Trainers Guide
Tools
20
minutes
20
minutes
Time
41
42
Module
Financial Planning
(FP)
Formative
Assessment - 10
Sr.
No.
Session Plan
Case Studies
Five Steps Approach for Risk

Tolerance and Portfolio Build Up
Fund Selection Criteria both

Debt and Equity
How to Choose the Right MF
Asset Allocation
Investor Profile Questionnaire
Six Steps of FP
Benefits of FP
Qualities of a Good Financial

Planner
Who is a Financial Planner
Why FP
What is FP
Session
TT
TT

on the knowledge
gained
To explain the
importance of FP
Day 3
Objectives
TT
TT
TT
Formative
evaluation
Multimedia
driven lesson
Trainer led
discussion
Methodology
TT
TT
TT
TT
TT
Assessment
Guide
Power Point
Presentation
Power Point
Presentation
Participant
Handbook
Trainers Guide
Tools
20
minutes
20
minutes
Time
Module
Risk Profiling and

Assets Allocation
Formative
Assessment - 11
Summative
Assessment - 1
Summative
Assessment - 2
Summative
Assessment - 3
Discussion Time
Sr.
No.
Discussion Time
Model Protfolio
Assets Allocation
Risk Profiling
Session
To tell the correct

answer to the
participants

on the knowledge
gained

on the knowledge
gained

on the knowledge
gained

on the knowledge
gained
To explain the risk

profiling of investors
To select an asset
allocation mix of
investors
To recommended a
model protfolio to
investors
TT
TT
TT
TT
TT
TT
TT
Teach back
session
Summative
evaluation
Summative
evaluation
Summative
evaluation
Summative
evaluation
Multimedia
driven lesson
Trainer led
discussion
Methodology
TT
TT
TT
TT
TT
TT
TT
TT
Objectives
TT
TT
TT
TT
TT
TT
TT
TT
TT
Assessment
Guide answer
keys
Assessment
Guide
Assessment
Guide
Assessment
Guide
Assessment
Guide
Power Point
Presentation
Power Point
Presentation
Participant
Handbook
Trainers Guide
Tools
15
minutes
2 hours
2 hours
2 hours
20
minutes
45
minutes
Time
43
44
Session Plan
IL&FS Skills Development Corporation Limited

(A Joint Initiative with National Skill Development Corporation)
Mumbai Office: IL&FS Education & Technology Services Ltd.,
Aditya Textile Industrial Compound, Corduroy Building, 2nd Floor, Safed Pool,
Andheri-Kurla Road, Mumbai - 400 072. Tel.: 022-6870 9292. www.ilfseducation.com
Regd. Office: IL&FS Skills Development Corporation Limited,
2nd Floor, Niryat Bhawan, Rao Tula Ram Marg, Opposite Army Hospital Research & Referral,
New Delhi - 110 057, India. www.isdc.in or email to us on info@isdc.in

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Participant

Banking Financial Services

Certificate Programme in BCBF

Program Objectives, Expectations, Career Progression

Introduction to BFBC Model - Roles and Responsibilities of BFBC in Financial Inclusion

Introduction to Banking: Principles of Banking, Functions of Banks

Roles and Responsibility of a BC, Compensation Details of the BC's; Documentation

Question & Answer Session

Planning and Time management, Performance Reporting (daily), Discussion on Monthly

Introduction of Enrollment Software, Procedure for enrollment of Customer & Able to

Banker-Customer relationship, Principles and AML(Anti-money laundring), Submission

Question & Answer Session

Enrollment Process flow Bartronics introduction Authorization of BC from Branch

Software Training Practice Session - I (Hands on Training)

2011 IL&FS Skills Development Corporation Limited

Question & Answer Session

Financial Education and Financial Counseling: Roles of BFBC

Role Play in Financial Counseling

Software Training Practice Session - III

Certificate Progamme in BCBF

To meet the requirements of the IIBF Certification Process.

Who has created this program?

What are the rules for getting a Certificate?

We must complete 5 days of training no absenteeism is allowed.

If we pass the examination then we will be issued a Certificate.

For internal evaluation 4 different types of activities/tests may be considered as under

Role play/interactions 5 marks

Participation in class room activities/attentiveness 5 marks

Form filling exercise 10 marks

Quiz/Objective tests 20 marks 20 questions for 30 minutes

What will we learn in this course?

Knowledge on banking & finance

Skill sets on role of Business Correspondent/Business Facilitator (BC/BF)

Communication techniques required to relate with rural clients

Personal skills required for this job

Communication Skills required for rural

Difference between BC & BF

Skills for filling up of A/C opening, loan

How Banks operate, the DepositLending cycle

Types of customers, accounts, interest

Account opening, KYC norms

Banker-customer relationship types

Need of BC/BF in unbanked rural areas

Different channels of using a bank

Anti-money laundering function

Concept of Farm Loans how banks

Types of Retail Loans and their features

Security creation and charge

Why do Banks require the BC/BFs?

Certificate Progamme in BCBF

Different types of skills required by BC/

Dealing with difficult debtors skills of

Policy, processes and procedures of

RBI Norms and other agencies

ITES Functions of Bank

Fair Practice Codes, International Codes

Transaction cost of banks: The credit requirement of marginal farmers, agricultural

Initiatives of Reserve Bank of India

Simplified general purpose credit card (GCC/Kisan Cards) facility.

Business Facilitator and Business Correspondent Model

Watershed Development Approach

Tribal Development Programme

giving out small value loans

collection of small value deposits