Introduction to Traditional financial

services
Innovative financial services
 Financial Services
Financial services are the economic services provided by the finance industry,
which encompasses a broad range of businesses that manage money,
including banks, creditcard companies, insurance companies, accountancy com
panies, consumer-finance companies, stock brokerages, investment funds,
individual managers and some government-sponsored enterprises.
https://www.youtube.com/watch?v=W-1uebUJq4E
 Banking

Capital
Insurance
Market

Financial
Service
Venture Mutual
Capital funds

Merchant
Banking

https://www.youtube.com/watch?v=-JMLdhbUbzE&t=28s
Types of Financial services
 Importance of financial services
• Economic Growth
• Promotion of saving
• Capital Formation
• Creation of employment opportunities
• Contribution to GNP (Gross National Product).
• Provision of liquidity
• Benefit to government
Characteristics of financial service
Introduction to Traditional financial
services
Innovative financial services
 Objectives of financial services
• 1. Mobilization and allocation of savings
• 2. Selection of project and monitoring performance of industries
• 3. Provide for an efficient and effective payment, clearing and settlement system
• 4. Offer portfolio valuation
• 5. Provide advisory services
• 6. Provide for fair and transparent system of financial transactions
• 7. Provide cost efficient and prompt financial services
• 8. Facilitate buying and selling of financial assets
• 9. Promote the process of financial deepening and broadening.
 Financial service market
stock market commodity market
• A financial market is a market in which people trade financial securities and
derivatives at low transaction costs. Some of the securities
include stocks and bonds, raw materials and precious metals, which are
known in the financial markets as commodities.

• https://youtu.be/xXStP80NwuM
• https://www.youtube.com/watch?v=s58-mrPom7Q
Financial market opportunities and threats
Opportunities
• Booming capital market
• Increasing transparency
• Regulatory control over operations
• Innovative products
• Rise in disposable income
• High penetration of private players
• Use of technology
• Generation of employment
Threats
• Poor financial literacy
• Complexity of financial product
• Financial scams
• Too many alternatives to choose
from
• Aggressive marketing tactics
• Misleading advertisement
• Security and privacy threat
• Lack of human touch in case of
online application
 Type of financial market
Financial market

Forex market Capital market Money market Credit market Commodity Market

Primary secondary

• https://youtu.be/28HpCMWfc7k
 Introduction to
traditional financial
service
Chapter 1
Financial services
 Problems of financial services sector

• Lack of Qualified personnel in the financial service sector

• Lack of investor awareness about the various financial service
• Lack of transparency in the disclosure requirement and accounting practices
relating to financial services
• Lack of specialization in different financial services
• Lack of adequate data to take financial service related decisions
• Lack of efficient risk management system in the financial service sector
• Many financial organisations would not recover from the loss of data that cannot
be retrieved which leads to damage of reputation to their customers and suppliers.
• The competition within the financial service sector is very strong
 Non Banking financial companies

• Nonbank financial companies (NBFCs), also known as nonbank financial

institutions (NBFIs) are financial institutions that offer various banking
services but do not have a banking license. Generally, these institutions are
not allowed to take traditional demand deposits—readily available funds,
such as those in checking or savings accounts—from the public. This
limitation keeps them outside the scope of conventional oversight from
federal and state financial regulators.

https://www.youtube.com/watch?v=oduONDgCOEw
NBFC Vs Bank

https://www.youtube.com/watch?v=MpfvZHjWfM4
Retail prime lending rate

Electronic clearance system

 Introduction to
traditional
financial services

Factoring
 Who is a factor??? What is factoring???

• Factor is an intermediary agent that provides cash or financing to

companies by purchasing their accounts receivables. A factor is essentially a
funding source that agrees to pay the company the value of an invoice less a
discount for commission and fees. Factoring can help companies improve
their short-term cash needs by selling their receivables in return for an
injection of cash from the factoring company. The practice is also known as
factoring, factoring finance, and accounts receivable financing.
 Factoring process

inder seller

1,00,000

kashish

• https://youtu.be/IE6OVk7C4dM
 Functions of factor

• Administration of sales register: customer wise sales ledger

• Provision of collection facility: trained manpower with sophisticated
infrastructural backup
• Financing trade bills: 80-85 % of bill payment
• Credit control: in case of non-recourse factoring
• Advisory services: knowledge and experience in finance and credit dealings
 Factor cost

• Fee: collection and advance payment

• Commission: Advice
 Full Advance
factoring Factoring
Type of factoring
• https://youtu.be/W1136Ojzjk4 Mature
factoring .

Disclosed Recourse
factoring factoring

Non Un-Disclosed
recourse factoring
factoring
 Type of factoring

• Recourse and Non-recourse Factoring: In this type of arrangement, the financial

institution, can resort to the firm, when the debts are not recoverable. So, the credit risk
associated with the trade debts are not assumed by the factor. On the other hand, in non-
recourse factoring, the factor cannot recourse to the firm, in case the debt turn out to be
irrecoverable.
• Advance and Maturity Factoring: In advance factoring, the factor gives an advance to the
client, against the uncollected receivables. In maturity factoring, the factoring agency does
not provide any advance to the firm. Instead, the bank collects the sum from the customer
and pays to the firm, either on the date on which the amount is collected from the
customers or on a guaranteed payment date.
Full factoring
Introduction to traditional
financial services
FORFAITING
Forfeiting Meaning
Forfaiting
Benefits of forfaiting
Difference between factoring and forfeiting
INTRODUCTION TO TRADITIONAL
FINANCIAL SERVICES
FORFAITING
QUESTION
SOLUTION
Alternative 1: Alternative 2: Bank =
Factoring= fee + commission bill discounting=Int+ Processing fee+
bad debt

Cost of factoring= fee +commission= bill discounting=Int+ Processing fee+ bad

17,400 (23,200-5,800) debt=17,400
Fee= 48,00,000X 90X 2 X 1 =7,200
100X100X12 Interest= 4,00,000X90X 18X 1 =5,400
Commission= 4,00,000X4/100 =16,000 100X100X12
Total charges= 7,200+16,000= 23,200 Procession fee= 4,00,000X2/100 = 8,000
Less saving on cost Bad debts= 4,00,000X 1/100 = 4,000
Management cost =21,600/12 =(1,800)
Bad Debt= 4,00,000X 1/100 = (4,000)
Saving= (5,800)
QUESTION
Alternative 1: Alternative 2: Bank =
SOLUTION
Factoring= fee + commission bill discounting=Int+ Processing fee+
bad debt

• Alternative
Cost of 1:
factoring= fee bill discounting=Int+ Processing fee+ bad
+commission=5,800 debt= 15,200
• Cost of factoring= fee +commission
Interest= 3,00,000X80X 16X 1 =3,200
100X100X12
• Less saving
Fee= 36,00,000X 80Xon2cost
X 1 =4,800
Procession fee= 3,00,000X1/100 = 3,000
100X100X12
• Alternative
Commission= 2:
3,00,000X4/100 = 12,000
Bad debts= 3,00,000X 3/100 = 9,000
Total cost= 16,800
• Cost of bank
Less saving on cost advance
Management cost =24,000/12 =(2,000)
Bad Debt= 3,00,000X 3/100 = (9,000)
Bill discounting
Chapter 3
Bill discounting meaning

3 months

2 months
Bill discounting process
Parties in bill of exchange
Bill discounting process
Benefits of bill discounting
Sum up

https://www.youtube.com/watch?v=J8VvdxqRh2w
Type of bills
Difference between bill discounting and
factoring
Issue management and
securitisation
UNIT 2
 Merchant bank

 Merchant banking can be defined as

professional service provided by merchant
banks to their clients, concerning their financial
needs, for adequate consideration, in the form
of fee.
 Merchant banks are a specialist in international
trade and thus, excel in transacting with large
enterprises

https://www.youtube.com/watch?v=ggQg
ByQ2i4U&list=RDQMbwzqYkCDOsY&start_ra
dio=1
Categories of Merchant Bank
OBJECTIVES

1. Provide funds to companies — this usually includes loans for startup companies. They decide how
much money a company needs to function through proposals created by these companies. They also
help their clients raise funds through the stock exchange and other activities. Merchant banks act as a
foundation for small scale companies in terms of their finances.
2. Underwriting — this is like insurance where banks sign into documents that agree to provide financial
payment to their clients in case of any damage or losses. This is very important for clients to ensure that
the bank will help them gain more income. If not, in case they would incur losses, the bank will pay them
for the losses.
3. Manage their portfolios — the bank will look into the companies’ assets and will do the computation of
their credits and debits to ensure they are not incurring any losses. They also provide other kinds of
services to check on the liquidation of assets to track the income made by these companies and study
how they can make it better.
4. Offering corporate advisory — they offer advises especially to starting companies and those that
would want to expand. This advice involves financial aid to ensure that the company will be successful
and will not have any problems along the way.
5. Managing corporate issues — help incorporate securities management, they also serve as an
intermediary bank in transferring capitals.
 Services of merchant banker

https://www.youtube.com/watch?v=fTTGALaRZoc
 CHARACTERISTICS OF MERCHANT
BANKING
• High proportion of decision makers as a percentage of total staff.
• Quick decision process.
• High density of information.
• Intense contact with the environment.
• Loose organizational structure
• Concentration of short and medium term engagements
• Emphasis on fee and commission income.
• Innovative instead of repetitive operations
• Sophisticated services on a national and international level.
• Low rate of profit distribution.
• High liquidity ratio
QUALITIES OF A GOOD MERCHANT
BANKERS
• Ability to analyse
• Abundant knowledge
• Ability to built up relationship
• Innovative approach
• Integrity
• Capital Market facilities
• Cooperation and friendliness
• contacts
• Attitude toward problem Solving
 Obligations of Merchant Bankers:

1.Merchant Banker not to Associate with any Business other than that of the Securities Market
2.Maintenance of Book of Accounts, Records, etc
3.Submission of Half-yearly Results
4.Maintenance of Books of Accounts, Records and other Documents
5.Report on Steps taken on Auditor’s Report
6.Appointment of Lead Merchant Bankers
7.Restriction on Appointment of Lead Managers
8.Responsibilities of Lead Managers
9.Lead Merchant Banker not to Associate with a Merchant Banker without Registration
10.Underwriting Obligations
11.Submission of Due Diligence Certificate
12.Documents to be Furnished to the Board
13.Continuance of Association of Lead Manager with an Issue
14.Acquisition of Shares Prohibited
15.Information to the Board
16.Disclosures to the Board
17.Appointment of Compliance Officer
18.Board’s right to Inspect
19.Obligations of Merchant Banker on Inspection by the Board
Issue management and
securitisation
Unit 2
 Underwriter
• Underwriting is the process through which an individual or
institution takes on financial risk for a fee. This risk most typically
involves loans, insurance, or investments. The term underwriter
originated from the practice of having each risk-taker write their
name under the total amount of risk they were willing to accept for
a specified premium.
• 100 lk= 2 underwriter
• 1 underwriter=60 lk

https://www.youtube.com/watch?v=QmJObCXq_Hk
Underwriting process
Type of underwriter

Developmental bank
Commercial bank
Insurance bank
State finance corporation
 Banker to the issue
• Bankers to the issue is the collection of activities which are performed by the banker to an issue such as submission of application,
application with money from investors. To adhere to the rules a certificate has to be obtained by a person from SEBI which grants the
registration on the basis of all the activities performed by the banker to an issue. The requirements are as follows:-
1) The application must be complete and the applicant must have the infrastructure, communication and data processing facilities to run
those activities effectively.
2) Directors of applicant are not involved in any of this application and don’t have any securities market.
3) Banker to an issue also has to take care of some information like number of issues which is coming to the banker, number of application
with the money, dates on which the application is been received and date on which the refund is done to the investors.

What functions do the registrars to the issue perform?

•
Registrar is the person who finalizes the list of eligible allottees after removing the invalid applications. Registrar also make sure that
corporate actions are credited per share and demat account of the application is done and refund orders has been sent to the particular
person to whoever it was concerned. In this process lead manager coordinates with registrar and they in turn look up in things to see that
everything has been followed up properly and the finalization of application collected from bank branches and processing of those
applications are getting done
 Broker to the issue
• Brokers are the persons mainly concerned
with the procurement of subscription to
the issue from the prospective investors.
The appointment of brokers is not
compulsory and the companies are free to
appoint any number of brokers
• As per SEBI, ‘ stock broker’ means a
member of a stock exchange and .,’sub-
broker’ means any person not being a
member of stock exchange who acts on
behalf of a stock broker as an agent or
otherwise for assisting the investors in
buying, selling or dealing in securities
through such stock broker.
 Stock broking
A stockbroker is a professional trader who buys and sells shares on behalf of clients. The stockbroker
may also be known as a registered representative or an investment advisor.

A stockbroker, share holder registered

representative regulated broker, broker-dealer,
or registered investment adviser who may
provide financial advisory and investment
management services and execute transactions such as
the purchase or sale of stocks and
other investments to financial market participants in
return for a commission, markup, or fee, which could be
based on a flat rate, percentage of assets, or hourly rate.
The term also refers to financial companies, offering
such services.

https://www.youtube.com/watch?v=sHp2ruhfxWI
 Registration of stock-brokers, sub-
brokers, share transfer agents, etc.-
• Securities and Exchange Board of India Act, 1992

• 1) No stock-broker, sub-broker, share transfer agent, banker to an issue, trustee of trust deed, registrar to an issue,
(

merchant banker, underwriter, portfolio manager, investment adviser and such other intermediary who may be
associated with securities market shall buy, sell or deal in securities except under, and in accordance with, the
conditions of a certificate of registration obtained from the Board in accordance with the rules made under this Act:
• Provided that a person buying or selling securities or otherwise dealing with the securities market as a stock-broker,
sub-broker, share transfer agent, banker to an issue, trustee of trust deed, registrar to an issue, merchant banker,
underwriter, portfolio manager, investment adviser and such other intermediary who may be associated with
securities market immediately before the establishment of the Board for which no registration certificate was
necessary prior to such establishment, may continue to do so for a period of three months from such establishment
or, if he has made an application for such registration within the said period of three months, till the disposal of such
application.
• (2) Every application for registration shall be in such manner and on payment of such fees as may be determined by
regulations.
• (3) The Board may, by order, suspend or cancel a certificate of registration in such manner as may be determined by
regulations.
• Provided that no order under this sub-section shall be made unless the person concerned has been given a
reasonable opportunity of being heard.
Issue management and
securitisation
Unit 2
 Sub- broker
• Eligibility for registration
• In case of individual:
• A. the applicant is not less than 21years
of age;
• B. the applicant has not been convicted
of any offence involving fraud or
dishonesty;
• C. the applicant has at least passed 12th
standard equivalent examination from
institution recognised by the
government
• The applicant should be fit and a proper
person.
• In case of partnership firm or body
corporate
• the partner or directors the case may be
should fulfil this obligations
 Conditions for registration

• He shall pay fees charged by SEBI

• He shall abide by the rules, regulations and bye-
law of the stock exchange which are applicable to
him.
• He shall take adequate steps for redressal of
grievances, of the investors within one month of
the date of receipt of complaint and keep SEBI
informed about the number, nature and other
particulars of the complaint received from the
investor.
• He is authorised in writing by a stock broker
being a member of a stock exchange for
affiliating himself in buying , selling and dealing
in securities.
 Sub-broker has the following general obligations

• Pay the fees

• Abide by the code of conduct specified
• Enter into an agreement with the stock broker
for specifying the scope of his authority and
responsibility;
• Comply with the rules, regulations and bye law of
the stock exchange.
• The sub-broker shall keep and maintain the
books and documents specified in the regulation.

https://www.youtube.com/watch?v=GzXVfBF2fRE
 Trading and clearing / self clearing member

• A certificate of registration should be

obtained from SEBI to act as a
clearing member.
• A clearing member should pay the
required fee and satisfy the minimum
net worth and deposit requirement
for the segment for which
membership is sought.
 Stock trading
• The act of buying and selling of securities on the stock exchange is known as
stock market trading

https://www.youtube.com/watch?v=p7HKvqRI_Bo
 Steps in stock trading
• Order placing
• Order execution
• Contract note preparation
• Delivery and clearing
• De-mat account credit and debit
• Settlement
• Rolling settlement

https://www.youtube.com/watch?v=2u007Msq1q
o
ISSUE MANAGEMENT
AND SECURITISATION
Derivative trading
 DERIVATIVE

https://www.youtube.com/watch?v=FLGRPYAtReo
 TYPE OF DERIVATIVE

DERIVATIVE TRADING

https://www.youtube.com/watch?v=4vns9LEbEj0
USES OF DERIVATIVE MARKET
 TRADING IN DERIVATIVES MARKET
• Following steps are required to be followed while trading in derivative
market:
• 1. Research
• 2. Arrange for the requisite margin amount
• 3. Conduct the transaction through trading account
• 4. Stock selection
• 5. settlement
Issue management and
securitisation
Unit 2
Securitisation

• Securitization is the financial practice of pooling various types of

contractual debt such as residential mortgages, commercial
mortgages, auto loans or) and credit card debt obligations (or other
non-debt assets which generate receivables selling their related
cash flows to third party investors as securities, which may be
described as bonds, pass-through securities, or collateralized debt
obligations (CDOs).
• 100cr----80cr

https://www.youtube.com/watch?v=kZH4qN4a_lc
Features of securitisation
Process of securitisation
Pass through certificate

• Payment to investor depends upon the cash flow from the asset
backing such certificates. In other words, as and when cash i.e.
principal and interest is received from the original borrower by
the SPV, it is passed on to the holder of the certificate.

• Pay through certificate:

• In case of pay through certificate, it have a multiple maturity
structure depending upon the maturity pattern of underlying
asset. Thus 2 or 3 types of securities with different maturity
pattern like short term, medium term, or long term may be issued
Preferred stock certificates

• There the instrument is mostly short term. Preferred stock

instruments issued by a subsidiary company against the trade
debts and consumer receivable of its parent company.
• Asset Based commercial paper:
This is a certificate issued against the combined principal value of
the mortgages and they are also short term instruments. Each
certificate holder is entitled to participate in the cash flow from
the underlying mortgage to the extent to his investment
leasing
Unit 3
Lessor---------------------lessee
Ownership--------- possession
Lease agreement
Lease rent
Wet lease: all inclusive
Dry lease: only the asset
 An operating lease is a contract that allows for the use of
an asset but does not convey ownership rights of the asset.
Operating leases are considered a form of off-balance-sheet
financing—meaning a leased asset and associated liabilities (i.e.
future rent payments) are not included on a company's balance
sheet.
 Historically, operating leases have enabled American firms to keep
billions of dollars of assets and liabilities from being recorded on
their balance sheets, thereby keeping their debt-to-equity
ratios low.

 A finance lease (also known as a capital lease or a sales lease) is a type
of lease in which a finance company is typically the legal owner of the asset for
the duration of the lease, while the lessee not only has operating control over
the asset, but also some share of the economic risks and returns from the
change in the valuation of the underlying asset.
 A finance lease has similar financial characteristics to hire
purchase agreements and closed-end leasing as the usual outcome is that the
lessee will become the owner of the asset at the end of the lease, but has
different accounting treatments and tax implications. There may be tax benefits
for the lessee to lease an asset rather than purchase it and this may be the
motivation to obtain a finance lease.
 Sale and Leaseback is a simple financial transaction which
allows a person to lease an asset to himself after selling it.
Under the transaction, an asset previously owned by the
seller is sold to someone else and is leased back to the
first owner for a long term.
 The transaction thus allows a person to be able to use the
asset and not own it. One usually makes a leaseback
transaction for high value fixed assets such as real estate
and goods like airplanes and trains. Sale and leaseback is
shortly called as leaseback.
Direct lease
 Direct lease refers to a contractual arrangement between a lessor and a lessee
where the lessor leases out some property (generally equipment) to the lessee.
 There are two types of contract that come under direct lease. The first is the
bipartite agreement where the lessor already owns the property and directly
leases it out to the lessee. The second is a tripartite agreement where the lessor,
usually a bank or a lending institution, purchases the property from a third-party
(usually the manufacturer) and then leases it out to the lessee.
lessor lessee

Financial institution
Assets papers/ lease
agreement papers

Leasing and hire-
purchase
Advantages and disadvantages of leasing
Hire purchase
Features of hire purchase
Advantage of hire purchase
Disadvantage of hire purchase
Difference between leasing and hire-
purchase
Instalment = Principle+ Interest
Cost: 50,00,000
Rate: 15%
Time 5 years

50,00,000/5= 10,00,000
 solution
Opening balance Instalment= Interest= 15% Principle Closing balance=
Principle+ interest OPENING-PRINCIPLE

50,00,000 17,50,000 7,50,000 10,00,000 40,00,000

40,00,000 16,00,000 6,00,000 10,00,000 30,00,000
30,00,000 14,50,000 4,50,000 10,00,000 20,00,000
20,00,000 13,00,000 3,00,000 10,00,000 10,00,000
10,00,000 11,50,000 1,50,000 10,00,000 NIL
solution
Date Opening bal Instalment= Interest Principle Closing balance =
P+I 10% for 6M Op-P
1st April 15 56,25,000 7,50,000 Nil 7,50,000 48,75,000
30th sept 15 48,75,000 11,25,000 2,43,750 8,81,250 39,93,750
31st march 16 39,93,750 11,25,000 1,99,690 9,25,310 30,68,440
30th Sept 16 30,68,440 11,25,000 1,53,420 9,71,580 20,96,860
31th march 17 20,96,860 11,25,000 1,04,840 10,20,160 10,76,700
30th sept 2017 10,76,700 11,25,000 53,835 10,76,700 nil

PXRXT=48,75,000 X10X6 = 2,43,750

100 12

Inst= Int +Principle

Inst-int= Principle
 Machine account in books of Vyas Ltd
Date Particulars Amount Date Particular amount
1st April 15 To Nokia Ltd 56,25,000 31 march 2016 By dep 5,62,500
31 march 2016 By bal c/d 50,62,500
56,25,000 56,25,000
1ap 2016 To bal b/d 50,62,500 31 march 2017 By dep 5,06,250
31 march 2017 By bal c/d 45,56,250

Machine A/C Dr
To Nokia Ltd

Nokia ltd Dr
To cash
 Nokia Account in the books of Vyas ltd
Date Particular Amount Date Particular Amount
1Ap 2015 To cash (Down 7,50,000 1st April 15 By Machine A/c 56,25,000
payment)
30th sept 15 To 11,25,000 30th sept 15 By Int 2,43,750
cash/bank(inst)
31st march 16 To cash / 11,25,000 31st march 16 By Int 1,99,690
bank(inst)
31st march 2016 To bal c/d 30,68,440
TOTAL
30th sept 2016 To cash 11,25,000 1st April 2016 To bal b/d 30,68,440
31st march 2017 To cash 11,25,000 30th sept 2016 By int 1,53,420
31st march 2017 To bal c/d 10,76,700 31st march 2017 By int 1,04,840
INNOVATIVE FINANCIAL SERVICES

HOUSING FINANCE Chapter 8

INTRODUCTION
TOP HOUSING FINANCE COMPANIES
STRUCTURE OF HOUSING FINANCE INDUSTRY IN INDIA
PURPOSE OF HOUSING FINANCE
QUANTUM OF LOAN
INTEREST RATE AND SECURITIES IN HOUSING FINANCE
HOUSING FINANCE POLICY ASPECTS
This policy is an effort of the government to improve housing and habitat conditions by way of
finance allocations in the five –year plans and fiscal measures related to housing announced in the
union budgets.
Some of the policy initiatives are:
1. the National housing bank was established in 1988 and National housing and habitat policy
(NHHP) was formed in 1998 and stressed on removal of legal and financial barriers for facilitating
access to housing loan.
2. the Golden Jubilee Rural Housing Finance Scheme (GJRHFS) was launched in 1997-98 to
provide people living in rural areas an improved access to housing finance.
3. The National Urban Housing and Habitat policy 2007 was formulated and seeks to promote
various types of public private partnership for reaching the goals of “Affordable Housing for All.”
4. A new scheme, Rajiv Awas Yojana (RAY) has been announced to make the country slum free in
the five year period (2010-15)
5. The allocation of Indira Awas Yojana has been increased by 63% TO Rs 8,800 crore in budget
estimates 2009-10. IAY initially launched as sub-scheme and later one continued as sub-scheme of
Jawahar Rozgar Yojana. In 1996 it was delinked from JRY
SOURCES OF FUNDS
Following are the major sources of housing finance:
A. central govt/ budgetary allocation
B. Institutional sources/formal housing finance
C. informal sector
 Housing finance

INNOVATIVE FINANCIAL SERVICES Chapter 8

CENTRAL GOVERNMENT / BUDGETARY ALLOCATION
Housing has been classified as a basic and India and successive governments has
highlighted its priority status. The central government has introduced various housing
schemes and formulates the housing policies from time to time and provide necessary
advisory and render financial assistance in the form of subsidies and loans to state
government and union territories.
INSTITUTIONAL SOURCES/ FORMAL HOUSING FINANCE SYSTEM:

Housing industry consist of organizes and unorganized sector. Organized sector is

governed by National Housing bank (NHB), a subsidiary of RBI. The major financial
institutions, which finance sector may be classified into 2 broad categories depending
upon whether housing finance in their
A. Primary Function
B. Secondary function
A. PRIMARY FUNCTION:
Specialised housing finance institutions have been set up with the sole purpose of
financing house construction or purchase activities.
Example:
1. The Housing and urban Development Corporation (HUDCO)
2. Housing Development and finance corporation Ltd (HDFC)
3. National housing Bank (NHB)
4. PNB Housing finance Ltd
5. ICICI have finance company ltd.
B. SECONDARY FUNCTION
Non- specialize housing finance institutions provide housing finance like commercial
banks. The Reserve bank of India initial efforts to encourage commercial banks in
housing finance came in the form of direct credit. Bank lending under housing
comprises 3 components:
1. Direct lending which entails banks themselves extending housing finance loan.
2. indirect lending where banks lend to approved housing finance companies
3. Investments in mortgage backed securities underlying loans securitized by housing
finance companies.
 HOUSING FINANCE AGENCIES
Housing finance industry has grown significantly in India . The growth of the real estate in India has
witnessed at an exponential rate over last five years with the content rise in demand for industrial and
commercial complexes. Some of the top housing finance companies are:
1. HDFC: Housing Development Finance Corporation Limited (HDFC) is an Indian financial
services company based in Mumbai, India.
It was founded in 1977, as the first specialized mortgage company in India. HDFC was promoted by the
Industrial Credit and Investment Corporation of India (ICICI).
It offers financial assistance for individual for housing purpose like:
1. Buying or construction of houses
2. Extension or improvement of existing house
3. Independent bungalow
4. Acquiring self – contained flat.
2. ICICI home Finance company ltd. (ICICI HFC): ICICI Home Finance Company Limited (ICICI HFC)
is a Housing Finance Company regulated by Reserve Bank of India (RBI) and is a wholly-owned subsidiary
of ICICI Bank Ltd. Formed in 1999. it provides various type of loans for its customers for a tenure upto 20
years
 TOP HOUSING FINANCE COMPANIES
3. IDBI Housing Finance Ltd (IHFL):it was formed in 2000. it offers a range of housing financial solutions to its
customers, including individual housing loan, housing improvement, home extension loan, home Loan for NRI, plot
loan and loan against home.
4. State bank of India home Finance ltd: SBI home finance is the largest mortgages lender in India . SBI Home
Finance ltd was incorporated in 1987 as a private ltd company. It provides loans to all kids of individuals who match
the relevant eligibility criteria including rural customers under different products designed specifically for different
criteria including rural customers
5. Housing urban development corporation (HUDCO): incorporated in 1970 with special emphasis on low cost
housing . It also carryout development of new township and their infrastructural needs. Through its Niwas scheme
it offers housing loans for buying construction housing /flats. Loans are also offered for renovation/ extension/
alteration of existing flat/ houses.
6. LIC Housing Finance Ltd: incorporated in 1989 it is another major player in housing finance sector of India. Is
promoted by LIC.
7. PNB Housing Finance Ltd: it offers a wide range of loans for purchase / construction of property to resident
Indian as well as NRI’s. it also provide loan for repair and renovation
8. GIC Housing Finance Ltd: it was promoted by general insurance corporation of India it offers extensive range of
housing finance solution of its customers through wide network
 Housing finance

INNOVATIVE FINANCIAL SERVICES Chapter 8

National housing Bank
OBJECTIVES OF NHB
 FAIR TRADE PRACTICE CODE OF HFC’S
The NHB has framed guidelines on a fair practice code for HFC’s . The code seeks to promote good and fair practices by
setting minimum standards in dealing with customers, increasing transparency, encourage market forces etc. based on these
guidelines , each HFC may formulate a suitable fair practice code to be followed by it. The guidelines was issued in 2006
under the following sub-heads:
1. objectives and application of code
2. commitment to customers
3. Disclosure and Transparency
4. Advertising, marketing and sales
5. Privacy and confidentiality
6. collection of dues
7. complaints and grievance
8. Know your customer guidelines
9. Deposit Accounts
10. Loans
11. General
INTRODUCTION TO VENTURE CAPITAL
FEATURES OF VENTURE CAPITAL
 High risk: management risk, market risk, Product risk, operational risk.
 High technology: there is a lot of financing of Hi-tech projects which
generally offers higher returns than projects in more traditional areas.
 Equity participation and capital gain: investment is generally in
equity , convertible debentures to ensure higher returns.
 Participation in management: It provides value addition by
managerial support, monitoring and follow up. Monitoring both
Physical and financial investment
 Long term investment: venture capitalist help companies to
grow, but they eventually seek to exit the investment in 3 to 7 years.
 Illiquid Investment: They are illiquid investments that is not
subject to repayment on demand or following a repayment schedule.
STAGES IN VENTURE CAPITAL

SEED EARLY FORMATION LATER

EARLY STAGE FINANCING
Seed capital and R
and D Project/pre-
start ups

Start-up

Second round
finance
 EARLY STAGE FINANCING
1. Seed capital and R and D project/pre-start ups: it is a stage of applied research, where the concept or idea of the
promoters constitute the basis of a pre-commercialisation research project. It may generally lead to a proto-type
which may or may not lead to the business launch.
The main risk at this stage is marketing related, the evaluation of the project by the venture capitalist, he has to evaluate
that the technological skill of the entrepreneur matches with the market opportunities.
2. Start ups : this is the stage where the commercial manufacturing starts. Venture capital has to finance funds for
development and initial marketing.
A new business is launched after the research and development activities are over. At this stage the entrepreneur and his
product and service are still not tried and tested in the market. The involvement of the venture capital in start-up project is
generally low. As the risk perception is high.

3. Second round financing: it refers to the stage when the product is already being launched in the market but has not
earned enough profits to attract the investors. Additional funds are needed at this stage to meet the growing needs of the
business. VC will provide maximum funds at this stage than the previous stages for running of the business.
LATER STAGE FINANCE

Development Expansion Replacement

Buy-outs Turn-arounds
capital finance capital
 LATER STAGE FINANCE
• Development capital: it refers to the financing of the enterprise which has overcome the highly risky stage and has
recorded profits but cannot go public thus needs financial support. Funds are needed for purchase of new equipment,
plant, expansion of marketing and distribution facilities, launching of product into new regions induction of new
management and so on. Time frame is usually 1 to 3 years and require medium risk.
• Expansion finance: venture capitalist perceive low risk in ventures requiring finance for expansion purpose either
growth implying bigger factory, larger warehouse, new factory, new product or new market the time frame is usually 1 to
3 years
• Buy-outs: it refers to the transfer of management control by creating a separate business by separating it from their
existing owner it is of 2 categories:
• Management Buy-outs: (MBO): under this VC’s provide funds to enable the current operating investors to acquire an
existing product line/business. They represent an important part of the activity of VCI’s
• Management Buy-in’s (MBI): Under this the outside group of manages are allowed to buy an existing business. It
involves 3 parties, a management team, a target company and an investor. MBI are more risky than MBI’s hence less
popular.
LATER STAGE FINANCE

• Replacement capital: VCI another aspect of financing is to provide funds for the purchase of existing share
of owners. this may be due to a variant of reasons including personal need of finance, conflict in the family,
or need for association with a well known name, it is usually 1 to 3 years .
• Turnarounds: such form of venture capital financing involving medium to high risk on the time scale of 3
to 5 years .it involves buying the control of a sick company which requires specialised skills in finance and
management.
DIS-INVESTMENT
• The last stage in the venture capital financing is the exit to realize the investment so as to make a profit/ minimize losses. Expected
exit needed to be planned at the time of entry . the exit from the market depends on many factors like: the extent of financial stake,
market condition, stage of competition, nature of venture etc. there are different types of disinvestment alternatives available like:
• Disinvestment of equity/ quasi-equity investment:
1. Going public: higher liquidity of investment, high price of securities compared to private placement, better image, creditability
with public and customer etc. however companies have to follow stringent reporting requirements, exchange regulation and
disclosure requirements also floatation cost of issue is very high and also it creates accountability of shareholders.
2. Sale of shares to employees/entrepreneurs: boost the moral of the existing employees.
3. Trade sales/ sale to another company: it implies sale of entire investee company to another company, the most appropriate
method for such sale would differ from company to company.
4. Selling to a new investor
5. Liquidation
• Exit of debt instruments
Venture capital
Venture
capital
process
 Venture capital process:
• It describes the manner in which venture capital assistance is provided to the
entrepreneurs. The entrepreneur who has an idea which qualifies for venture capital
assistance should contract appropriate venture capitalist.
• The venture capital investment process has 2 aspects:
• The assessment by the entrepreneur as to whom he should contact for assistance
and a comparison of the term and conditions of various venture capitalists and
• Assessment of the entrepreneur and his proposal by the investor. Considering the
type of industry, nature of investment and risk involved in it. The investor generally
apply some criteria for investor.
The investment process involves the knowledge
of the:
• Eligibility criteria for evaluating proposal;
• Screening of venture capitalist by the entrepreneur;
• Screening of entrepreneur and the proposal by the venture capitalist,
• Stages of venture capital financing and
• Types of finance provided by venture capitalist.
 Eligibility criteria for proposals:
• The venture must be technically feasible.
• It should be commercially viable, it includes analysis and assessment of the following:
1. Past history
2. Management
3. Product
4. Market
5. Manufacture
6. Risk.
• Financial analysis : the capitalist assesses the earning growth of the organisation.
• Portfolio analysis: the capitalist also assesses the feasibility of the future portfolio, if the proposal is accepted and loan
granted. The proposal will be considered only if the future portfolio is accepted.
• Disinvestment analysis: it assesses the method, timing and valuation of the company upon investment.
Customer finance and
credit card rating
UNIT 4
Introduction
• Consumer financing is when a
business offers financing to their
customers with help from a
professional finance company. This
allows the consumer to pay for a good
or service they couldn't pay for up front
in cash or credit card. Consumer
finance is helpful for both businesses
and consumer
What is consumer credit???
Debit card
Vs
Credit card Accont
Consumer need for:
 Forms/ types of consumer credit
• Revolving credit: it is ongoing credit arrangement. It is similar to overdraft facility. Here a
limit will be sanctioned to the customer and the customer can avail credit to the extent of
credit limit sanctioned by the financier. Example credit card.
• Cash loan: it is a form of credit , the buyer or customer gets loan amount from bank or non
banking financial institutions for purchasing the required goods from seller.
• Secured credit: in this the financier advances money on the security of appropriate
collateral. The collateral may be in the form of personal or real assets. If the customer
makes any default in payment, the financier has the right to appropriate the collateral.
• Unsecured credit: when the financier lends fund without any security, such advances are
called unsecured customer credit. They are granted only to customer with good credit.
• Fixed credit: in this form of financing, funds are made available to the customer as a term
loan for a fixed period of time i.e for a period of 1 to 5 years. Eg monthly instalments, hire
purchase etc.
 Sources of Consumer finance:

• Traders: they are important sources of consumer finance, they include sales finance companies
and non-banking finance companies.
• Commercial banks: they generally offer greater Varity of credit. They offer credit cards, line of
credit, term loan. Instalment loans, both on secured and unsecured basis.
• Credit card companies: credit card companies facilitate credit purchase of consumer goods
through respective banks which issue credit cards.in this seller issues 3 copies of the bill, one for
the buyer, one for seller and one for the bank, the sellers bank further forwards all the bills to
credit issuing company. The bank debits the account in consumer’s account. Period of 45 days is
given to clear the dues.
• NBFC: non-banking finance companies constitute another important source of finance. These
finance companies charges higher rate of interest
 Sources of Consumer finance:
• Co-operative credit societies: they accept savings from and make loan to member
individuals. People qualify for membership by way of job or organizational affiliations.
• Consumer finance companies: these companies concentrate on making instalment
loans. Finance companies are generally more willing to make relatively small loans that
commercial banks avoid.
• Sales finance companies: these companies are forced to lead money to consumers of an
affiliated company. For example, tata motor credit company act as a credit source to car
buyers at tata dealerships.
• Life insurance company: these companies are a source of credit policies that include a
savings component. Life insurance loans carry relatively low interest rates.
Consumer finance practice in India
• Rapid growth:
• Reduced rate of interest
• Increased income level
• Change in life concept
• Competitors among financiers
• Tie-ups and collaborations
• Credit cards
• Various schemes and offers
• Development of used cars market
Mechanics of consumer finance
• Parties to the transaction
• Structure of credit depends on the form of credit
• Mode of payment
• Payment period and rate of interest
• Security.
 Terms

• Eligibility: bases on his level of income, nature of employment etc

• Tenure: 12 months to 60 months depending on the type of asset
• Guarantee: It is obtained in order to ensure prompt payment of instalment and
security against default risk
• Rate of Interest: effective rate of interest on consumer finance is higher than business
finance.
• Other charges: brokerage, documentation fee, processing fee, management fee,
service charges, collection cost etc.
• Mode of Payment: eg post dated cheques, standing instruction , monthly emi etc
• Credit evaluation:
Customer finance
and credit card
rating
UNIT 4
CUSTOMER FINANCE AND
C
CREDIT CARD RATING
Unit 4
Factors influencing consumer finance:
 Marketing and Insurance of Consumer
finance:
• The privilege of availing credit form a retail store is offer an attraction to
consumer to continue buying from the same store.
• This results in customer loyalty, which is advantageous to retailers. In other
countries, companies go to the extent of advertising in such a manner as to
convert cash customers into credit customers. In the event of promotion
campaigning by finance companies, the demand may come both from the
existing customers with additional credit needs, and from new customers.
• Customer finance insurance:
• It is a common practice in countries like US to grant credit insurance in
respect of finance to customer. This king of insurance is called consumer
credit insurance. The insurance provides a coverage in the eventuality of
consumer default instalment payment.
Consumer Credit Scoring:
As part of the credit worthiness of a consumer, and for ascertaining the acceptability
criteria of consumer, some methods are used. Some of the common methods are:
1. Dunham Greenberg Formula: At this method points are allotted to various aspects of
the consumer’s loan proposal, the total being 100. an applicant is said to be good
credit standing on a score of 70 points or above.
• Specific fixed Formula: According to this method, a score of over 3.5 would indicate an
excellent borrower and a score of over 2.5 indicates a marginal borrower.

• Machinery Risk Formula: This method is prominently use in government offices for
granting loans to employees. According to this method, the loan amount to be
sanctioned is determined as follows:
Down payment + (0.124X Monthly income) + (6.45 X length of service in months)
• 2,00,000+ (.124X20,000)+(6.45X50)
Following arguments can be in favour of consumer finance:
1. Realization of Dreams
2. Production in inflation Situation
3. National Importance:
4. Meeting Emergency:
5. Maximum of revenue
6. Large scale production
7. Exportation:
8. Enjoying possession
9. Enhance living standard
10. Effective stock management
11. Convenient mode
12. Compulsory saving
13. Accelerating industrial investment
Case against consumer finance:
• Artificial Boom
• Bad debts risk
• Costly credit
• Economic instability
• Insolvency
• Risk to traders
• Thoughtless buying
PLASTIC MONEY
Chapter 11
Introduction
Plastic money or polymer money, made out of plastic, is a
new and easier way of paying for goods and services.
Plastic money was introduced in the 1950s and is now an
essential form of ready money which reduces the risk of
handling a huge amount of cash. It includes debit cards,
ATMs, smart cards, etc. Credit cards, variants of plastic
money, are used as substitutes for currency.
Types of card:
◦ Single purpose cards: are generally with magnetic chip recording the amount of funds
therein is designed to facilitate only one type of transaction e.g. telephone calls, public
transportation, laundry, parking facility etc. these are expected to substitute coins and
currency notes.
◦ Closed –system or limited purpose cards: are generally used in a small number of well
identified points of sale within a well-identified location such as corporate/university
campus.
◦ General purpose cards: they are also called multi-purpose cards can perform variety of
functions with several vendors viz: credit card, debit card etc.
Usage of plastic money
◦ Credit cards usage for travel bookings
◦ Electronic transactions grew strongly with the help of RBI: the customers using online
shopping for long switched to net banking than cash on delivery due to convenience
◦ Mobile banking applications become common for all banks:
◦ Security: helplines to stop functioning of cards/ not possible in case of loss of cash
◦ Universal acceptance:
◦ Emergency protection:
◦ Convenience
◦ Simplified record keeping
◦ Hygienic
◦ Environmental friendly
◦ Value added benefits
Advantages
Advantages to customers:

1.Eliminates the need for carrying huge cash: This eliminates the
need for carrying huge load of cash which is risky and inconvenient
too.
2.Risk of Loss or Theft minimized: In case of cash there is a high
risk of losing cash and a chance of cash getting stolen. However, in
case of debit/credit card you can report the matter to the bank and
block the card to avoid misuse.
3.Anytime/Anywhere Access Using cards you have the unique
advantage and convenience of using it anywhere in the country or
even abroad.
4.Credit Facility: In case of credit card you have the option of
buying on credit or paying later. Although the charges are high, it
helps you in case of emergencies and contingencies.
5.Online Payments: You can use cards for online payments, fund
transfers and various other transactions.
6.Customer security and global reach
Advantages
◦ Advantages to Government:
◦ Ease in tax collection
◦ Life-span of plastic more is 4-5 times more than paper currency
◦ Maximise returns through effective resource allocation within the economy.
◦ Can be used to minimize leakage of govt funds
◦ Advantages to Banks:
◦ Can sell other financial products by selling cards
◦ Can improve overall customer satisfaction, resulting in high customer retention
◦ Increase in returns by charging fee through sale of currency
◦ Productivity of employees increase.
 Disadvantages
◦ Some of the drawbacks or risk related to cards are
◦ 1. Non-Acceptance at Small Retail Outlets: Unless you are a person
who shops only in supermarkets and hypermarkets you will be forced to
use cash
◦ 2. Cannot be used for all daily needs : You cannot pay your milkman,
servant, paper wala (newspaper guy), etc by card.
◦ 3. Loss & Misuse : Once a card is lost you have to immediately report it
and get the card blocked to avoid misuse. Sometimes when you are not
aware that you lost the card….the chances of misuse is higher.
◦ 4. Low Value Transactions: As discussed above already there are
cases where small and medium sized retailers don’t accept cards for low
value transactions (say less than Rs.200 or other criteria). You may have
noticed this even in case of outlets like petrol pumps or restaurants.
◦ 5. Service Charges : In some cases the outlets charge additional
service charges for cards. So this can be another burden on your
pocket.
◦ 6. Damage to Card : Sometimes the card’s magnetic strip gets damaged or scratches or cuts
can render the card unusable. So keeping it safe and secure is very important.
◦ 7. Carrying or Keeping the Card
◦ 8. Spending Habits & Other Tips: Whether you use cash or cards, having a control on your
spending is very important. A few pointers would be worth noting.
◦ 9. Impulsive Purchases: Don’t yield to impulsive purchases. Try to see what real benefit or
value are you getting from the purchase. If you can’t live without it you can postpone or keep
the spending on hold.
◦ 10. Peer Pressure: Its okay to spend some money on entertainment, outing, fine dining, etc.
once in a while (say once or twice a month).
◦ 11. Overuse of Cards: I find that people who are finding cards as a convenient medium try to
use it everywhere – left, right and center. Further, they have 3-4 cards which are used one after
the other at different places. I would advice them to have fewer transactions so that it is easier
to keep a check on the transactions every month and easier to pay the bill as well.
◦ 12. Special Offers, Discounts: Some people have this fancy and think that they are smart
when they get special discounts on cards at retail outlets.
 Plastic Money Types
1. Credit Cards: A Credit Card is a plastic card bearing an account number assigned to a cardholder with a credit limit that can
be used to purchased goods and services and to obtain cash disbursement on credit.
2. Debit Cards: Debit Cards are substitutes for cash or cheque payments much the same way that credit cards are.
3. Charge Cards: A charge card means obtaining a very short-term loan for a purchase. It is similar to a credit card, except that
the contract with the card issuer requires that the cardholder must each month pay charges made to it in full there is no
minimum payment other than the full balance. Since there is no loan, there is no official interest. A partial payment results in a
severe late fee and the possible restriction of future transactions and the risk of potential cancellation of the card.
4. Amex Card: International visa and master cards are commonly used by travelers to bear their expenses on their trips. Believe
it or not, most travelers finance their trips with their business credit cards. One of the major reasons because of which this
practice has become common among travelers is currency. It becomes difficult for travelers to go to currency exchange
bureaus and exchange their currencies at very low rates. Therefore, when American Express was founded in 1850, its growth
was very rapid because of the demand of international travelers for American Express cards.
◦ Master Card: A smart card is a plastic card embedded with a computer chip that stores and transacts data between users. This
data is associated with either value or information or both and is stored and processed within the card’s chip, either a memory
or microprocessor. The card data is transacted via a reader that is part of a computing system.
◦ Smart cards: A smart card, chip card, or integrated circuit card (ICC or IC card) is a physical electronic
authorization device, used to control access to a resource. It is typically a plastic credit card-sized card with an
embedded integrated circuit chips Many smart cards include a pattern of metal contacts to electrically connect to the
internal chip. Others are contactless, and some are both. Smart cards can provide personal
identification, authentication, data storage, and application processing. Applications include identification, financial,
mobile phones (SIM), public transit, computer security, schools, and healthcare. Smart cards may provide strong
security authentication for single sign-on (SSO) within organizations. Numerous nations have deployed smart cards
throughout their populations.
◦ In store cards: a card issued by a chain store, shop, or organization, that enables customers to obtain goods and
services for which they pay at a later date.
◦ Kisan Credit Card (KCC) scheme is a credit scheme introduced in August 1998 by Indian banks. ts objective is to
meet the comprehensive credit requirements of the agriculture sector and by 2019 for fisheries and animal husbandry
by giving financial support to farmers. Participating institutions include all commercial banks, Regional Rural Banks,
and state co-operative banks. The scheme has short term credit limits for crops, and term loans. KCC credit holders
are covered under personal accident insurance up to ₹50,000 for death and permanent disability, and up to ₹25,000 for
other risk.
◦ A student credit card is a fully functioning credit card that is simply geared to students who are new to credit. The
benefits of a student credit card can include financial education and resources that are available online, via app or by
phone; support in developing good payment habits, in the form of alerts and reminders from your credit card issuer;
and cash back and other rewards that are specifically geared toward students.
Credit cards and its types
◦ Credit cards’ growing popularity has led to disrupting the space of lending and credits. Many new cards
enter the market frequently with a whole new range of features and benefits. These features and benefits go
a long way in categorizing the cards into different types.
◦ Silver credit card: can be availed by anyone who is under the category of salaried and has a work experience
of around 4-5 years. this card has low membership fee and there is no interest charged for initial months on
balance transfer.
◦ Gold credit card: individuals with higher income can avail a gold card from any bank the applicant should
have a good credit score. Example: PNB Global Gold card, LIC Gold Credit card etc.
◦ Classic credit card: it came with features like global acceptance, revolving credit, cash advance, rewards
programs, supplementary cards, insurance and a dedicated 24X7 customer care helpdesk for customers.
◦ Credit cards for women’s: some banks issue credit cards to female customer and a card is specially
designed for women. These mainly focus on shopping rewards and cash back offers.
◦ Titanium credit cards: it is designed with the privileges and benefits. The key feature of this card is titanium
rewards program that is offered to customers. It includes reward points, redemption of gifts and air miles,
cash back offers etc.
Debit card
 Credit Card Frauds: how to Prevent
Them
1. Sign at the back side: When you receive your new credit card, make sure that you put your usual signatures in permanent ink inside the
space provided on the back side of the card. These signatures provide additional safety for your card.
2. Cut up the old cards: After expiry, all of the old money cards should be cut into several pieces with scissors (preferably from corner to
corner diagonally). This makes the job of card duplicators much harder.
3. Keep your contact details updated with your bank: Make sure that your address and other contact details are up-to-date in the records of
the bank that issued your credit card. It is very important because wrong details may cause your bank to send your replacement card,
monthly statements and other communication to a wrong address.
4. Keep your card in sight: If you are dining in a hotel or restaurant, you must not let the waiter to take your card away for swiping. Ask them
to bring the swiping machine to you or pay up at the counter. Always keep your credit card within your sight.
5. Keep in touch with your bank: Get your mobile phone number registered with the bank and keep it updated in case you change it. Banks
notify you of transactions happening on your card by sending text messages. It is a good idea to have this service activated.
6. Use credit card for small vendors: If you are purchasing something from a not well known vendor, it is better to use credit card instead of
your debit card. If your card gets duplicated, such a card can instantly empty your bank account. In case of a credit card, you don’t pay
directly from your account. And also, you can report an unusual transaction as not been done by you.
7. Keep private information private: You should not disclose private information like date of birth, numbers of various ID cards and other
information that is often used as answers to online security questions.
8. Be wary of impersonators: Sometimes people with intention of stealing credit card details may call you masquerading as your bank’s call
center agent. They will speak in a very call-center agent like tone and will have basic details about you. You should know that your bank’s
call center will never ask for your three digit PIN number given on the backside of your card. If they are asking for it –don’t give them and
call the call center yourself to report the incident.
9. Use a strong password for online banking and card verifications: If you use you credit card for online shopping, you should set strong
passwords to access your bank account as well for any other security measure implemented by your bank / credit card merchants (like
MasterCard, Visa etc.) Weak passwords are biggest cause of online hacking. (use our strong password generator)
Credit rating
CHAPTER 12
 Introduction
• Credit rating is the assessment of a borrower’s credit quality.
Credit rating provide individual and institutional investors with
information that assists them in determining whether issues of
debt obligation and fixed income securities will be able to meet
their obligations with respect to those securities
• A credit rating is a measurement of a person or business entity’s
ability to repay a financial obligation based on income and past
repayment histories. Usually expressed as a credit score, banks
and lenders use a credit rating as one of the factors to determine
whether to lend money.
Meaning and definitions
• Credit rating is an alphanumeric symbol that is used to convey the likelihood of
default of the issuer of a debt instrument.
• Credit rating provide an investor with critical information to enable him/her to take
an informed investment decision based on risk-return preference.
• In India large no of financial products are rated by credit rating agencies some of
them are:
• Debentures, structured financial products
• Commercial paper
• Bank loans
• Fixed deposits and bank certificate of deposits
• Various mutual fund debt schemes
• Initial public offers.
Definition of credit rating:
Origin of the concept of credit rating
Features of credit ratings

1) It is used to estimate the worthiness of the credit for the company, country or any individual
company.

2) Credit rating is been done after considering various factors such as financial, non-financial
parameters, and past credit history.

3) The rating which gets done is simple and it facilitates universal understanding. Credit rating also
makes it widely accepted as the symbols which are used are generalized and made common for all.

4) The process of credit rating is very detailed and it involves lots of information such as financial
information, client's office and works information and other management information. It involves in-
depth study.
 Functions of credit rating:
• 1) Provides superior Information: Provides superior information on credit risk for three reasons: (i) An independent
rating agency, unlike brokers, financial intermediatory, underwriters who have vested interest in an issue, is likely to
provide an unbiased opinion; (ii) Due to professional and highly trained staff, their ability to assess risk is better, and
finally, (iii) the rating firm has access to a lot of information which may not be publically available.

• 2) Low cost information: Rating firm gathers, analyses, interprets and summarizes complex information in a simple
and readily understood formal manner. It is highly welcome by most investors who find it prohibitively expensive and
simply impossible to do such credit evaluation of their own.

• 3) Basis for a proper risk and return: If an instrument is rated by a credit rating agency, then such instrument enjoys
higher confidence from investors. Investors have some idea as to what is the risk associated with the instrument in
which he/she is likely to take, if investment is done in that security.

• 4) Healthy discipline on corporate borrowers: Higher credit rating to any credit investment tends to enhance the
corporate image and visibility and hence it induces a healthy discipline on corporate.

• 5) Formation of public policy: Public policy guidelines on what kinds of securities are eligible for inclusions in
different kinds of institutional portfolios can be developed with greater confidence if debt securities are rated
professionally.
Advantages of credit rating
Disadvantages of credit rating:
Credit rating agencies
Objectives of CRISIL
CARE Rating Ltd
ICRA
Credit rating process