Technology in Banking, Leasing and Hire

Purchase
SESSION 9: JULY 01, 2019
Core Banking
There is a central database for the bank and transactions
are done centrally.
Offers integrated products and services to the customers
(Deposits, loans, credit/debit cards etc of the same
customer can be integrated).
Multiple delivery channels like branch, ATMs, Internet,
Mobile banking etc. are driven by the centralized server.
Business components of Core Banking
Retail customer banking modules
Deposits, loans, bills, remittances, locker, clearing etc.
Trade finance/ forex modules
Government Business Modules.
Corporate Finance and Service branch modules
Interface with treasury, accounting, MIS, HR, Credit appraisal, etc.
Benefits of core banking
New and innovative banking products.
24 X 7 global access.
Enables centralized management and control.
Cheaper, since it require less manpower to run
the systems.
Faster and cheaper customer service.
Distribution Channels under Core
Banking
Branch banking network
ATMs
Cash deposit machines
Internet banking
Mobile banking
Business Correspondent
POS terminals
Remittance Facilities
Apart from accepting deposits and lending money, Banks also carry
out, on behalf of their customers the act of transfer of money - both
domestic and foreign - from one place to another. This activity is
known as "remittance business".
Remittance Facilities - Domestic
Cheque clearing
Demand Draft
Telegraphic Transfers
RTGS (Real Time Gross Settlement)
NEFT (National Electronic Funds Transfer)
Internet banking transfer
Mobile banking transfers
Remittance Facilities – Foreign Currency
Telegraphic Transfers (inward & outward remittances).
Foreign Currency cheques collection.
Foreign currency demand drafts.
Money changers like Western Union and UAE Exchange.
SWIFT
Society for Worldwide Interbank Financial Telecommunication.
An organisation founded in Brussels in 1973 to establish some common processes and standards
for financial transactions.
A SWIFT transfer is a type of international money transfer sent via the SWIFT international
payment network.
The SWIFT organisation provides a secure network that allows more than 10,000 financial
institutions in 212 different countries to send and receive information about financial
transactions to each other.
The SWIFT network does not actually transfer funds, but instead it sends payment orders
between institutions’ accounts, using SWIFT codes.
As long as your bank is affiliated with SWIFT then the network can be used to quickly and
securely communicate a wire transfer.
Merchant Banking
Merchant banking is basically service banking which
provides non financial services such as:
◦ issue management,
◦ portfolio management,
◦ asset management,
◦ underwriting of new issues,
◦ to act as registrar & share transfer agents, trustees, provide
leasing, project consultation, foreign credits, etc.
Merchant Banking in India
In India, the first merchant banking services were started
only in 1967 by National Grindlays Bank followed by Citi
Bank in 1970.
In 1972 State Bank of India started a merchant banking
division, followed by ICICI LTD in 1973.
Nowadays, most of the public sector, private sector,
commercial banks and financial institutions have
established a separate division of merchant banking services
Categories of Merchant Bankers
Functions of Merchant Bankers
1. Management, Marketing and Underwriting of new issues.
2. Project finance and project promotion services.
3. Syndication of credit and other facilities.
4. Leasing including project leasing.
5. Corporate advisory services.
6. Investment advisory services.
7. Facilitating bought out deals.
8. Sourcing / advising venture capital.
9. Promoting mutual funds and off shore funds.
Functions of Merchant Bankers
10. Investment Management.
11. Investment services for non resident Indians.
12. Management dealing in commercial paper.
13. Treasury management.
14. Stock broking.
15. Foreign Collaboration and foreign currency finance.
16. Counselling to Small Scale Industries.
17. Capital Structure counselling to cooperative sectors.
18. Meeting the working capital needs.
SEBI Guidelines for Merchant Bankers
Should be a corporate entity, registered with SEBI,
complying with the licensing requirements set forth by SEBI
Minimum net-worth requirements as per categories 1, 2, 3,
and 4
Should comply with all the regulations put forth by SEBI for
merchant bankers from time to time.
Should allow for SEBI inspection.
Leasing & Hire Purchase
Lease Defined
Lease is a contract under which a lessor, the owner of the assets,
gives right to use the asset to a lessee, the user of the assets, for an
agreed period of time for a consideration called the lease rentals.
In up-fronted leases, more rentals are charged in the initial years
and less in the later years of the contract. The opposite happens in
back ended leases.
Primary lease provides for the recovery of the cost of the assets and
profit through lease rentals during a period of about 4 or 5 years. It
may be followed by a perpetual, secondary lease on nominal lease
rentals.
17
 Types of Leases
1. Operating Lease
2. Financial Lease
3. Sale-and-lease-back

18
 Operating Lease
Short-term, cancelable lease agreements are called operating lease.
Tourist renting a car, lease contracts for computers, office
equipments and hotel rooms.
The Lessor is generally responsible for maintenance and insurance.
Risk of obsolescence remains with the lessor.

19
Financial Lease
Long-term, non-cancelable lease contracts are
known as financial lease.
Examples are plant, machinery, land, building, ships
and aircrafts.
Amortise the cost of the asset over the terms of the
lease–Capital or Full pay-out leases.

20
 Sale and Lease Back
Sometimes, a user may sell an (existing) asset owned by him to the
lessor (leasing company) and lease it back from him. Such sale and
lease back arrangements may provide substantial tax benefits.
Eg: In April 1989, Shipping Credit and Investment Corporation of
India purchased Great Eastern Shipping Company bulk carrier, Jag
Lata, for Rs 12.5 Cr and then leased it back to GESC on a 5 years
lease, the rentals being Rs 28.13 Lakh per month.

21
 Cash Flow Consequences of a Financial
Lease
Avoidance of the purchase price
Loss of depreciation tax shield
After–tax payments of lease rentals

22
 Commonly Used Lease Terminology
1. Leveraged Lease: Lessor puts some of his money and borrows the rest
2. Cross-border lease: Lessor and lessee in different countries
3. Closed and open ended lease: Fixed rent Vs. cost plus lease
4. Direct lease: Lessor and lessee are two separate entities
5. Sale and lease back: Sell the asset to the lessor and lease it back
6. Master lease: umbrella lease
7. Percentage lease: Base rent + a percentage of revenue from lease
8. Wet and dry lease: Wet: with crew, maintenance and insurance of the aircraft
9. Net net net lease: rent plus three additional expenses on the leased equipment

23
Myths about Leasing
Leasing Provides 100% Financing
Leasing Provides Off-the-Balance-Sheet Financing
Leasing Improves Performance
Leasing Avoids Control of Capital Spending

24
 Advantages of Leasing
1. Convenience and Flexibility
2. Shifting of Risk of Obsolescence
3. Maintenance and Specialized Services

25
Hire Purchase–Conditions
The owner of the asset (the Hirer or the manufacturer) gives the possession of
the asset to the Hirer with an understanding that the Hirer will pay agreed
instalments over a specified period of time.
The ownership of the asset will transfer to the hirer on the payment of all
instalments.
The Hirer will have the option of terminating the agreement any time before the
transfer of ownership of assets. ( Cancellable Lease)

Hire purchase financing

26
Difference between Leasing and Hire
Purchase Financing

27
 Instalment Sale
Instalment Sale is a credit sale and the legal ownership of the asset
passes immediately to the buyer as soon as the agreement is made
between the buyer and the seller.
Except for the timing of the transfer of ownership, instalment sale
and hire purchase are similar in nature.

28