MANAGEENT OF FINANCIAL SERVICES

(UNIT: 1)

1. Regulatory framework for financial services:

What are Financial Regulatory Bodies?

A financial regulatory body is one of the public authorities in the country responsible for exercising autonomous
authority over particular areas wherein people are engaged in any activity, in a supervisory or regulatory
capacity.
A financial regulatory body is set up by legislative act in order to set standards in a specific field of activity or
operations in the private sector of the economy, and to then implement those standards.
Regulatory interventions function outside the executive observation.
In simpler terms, financial regulation is a kind of regulation or supervision that covers the financial institutions to
certain requirements, guidelines, and restrictions. For that, financial regulatory bodies are set up. They can be
either a government or a non-government organization.
The main aim of the financial regulators is to maintain the stability and integrity of the financial system in the
country.
Financial regulation also influences the structure of banking sectors by increasing the diverse financial products
available. Financial regulation forms one of the three legal categories that comprise the content of financial law,
and other two being case law and market practices.

Several bodies set up the regulatory framework of the Indian financial system. They
are all there to ensure parity and responsibility among participants in that particular
sub-sector. Every regulator is instrumental in making sure that the interests of the
investors and all other parties are not compromised and that there is fairness in the
financial system of India.

Financial Regulators In India

 SEBI: The market regulator in the Indian capital market is the Securities and
Exchange Board of India (SEBI).
 IRDAI: The Insurance Regulatory and Development Authority (IRDA) does
the same for the insurance sector. 
 RBI: Reserve Bank of India (RBI) conducts the country’s monetary policy.
 PFRDA: Pension Funds Regulatory and Development Authority (PFRDA)
regulates pensions.
 MCA: Ministry of Corporate Affairs (MCA) regulates the corporate sector.
We will look at the role of these financial regulators in detail and some bodies that are
not regulatory but important to their respective sub-sectors, such as the Association of
Mutual Funds in India (AMFI).

RBI
The RBI’s primary responsibility is to ensure price stability in the economy and
control credit flow in the various sectors of the economy. Commercial banks and the
non-banking financial sector are most affected by the RBI’s pronouncements since
they are at the forefront of lending credit. The RBI is the money market and the
banking regulator in India.

Its functions include:

 Printing and circulating currency throughout the country

 Maintaining banking sector reserves by setting reserve ratios
 Inspecting bank financial statements to keep an eye on any stresses in the
financial sector
 Regulating payments and settlements as well as their infrastructure
 Instrumental in deciding interest rates and maintaining inflation rates in the
country
 Managing the country’s foreign exchange (FX) reserves
 Regulating and controlling interest rates, which affects money market liquidity
SEBI
Established in 1992, SEBI was a response to increasing malpractices in the capital
markets that eroded investors’ confidence in the market back then. As a statutory
body, its functions include protective as well as regulatory ones.

Protection: To protect investors and other participants by preventing insider trading,

price rigging, and other malfeasances

Regulation: To implement codes of conduct and guidelines for the various market
participants; auditing various exchanges, registering brokers, investment bankers;
deciding on the various fees and fines

 SEBI has the power to supervise the stock exchanges’ functioning.

 It regulates the business of exchanges.
 It has complete access to the exchanges’ financial records and the companies
listed on the exchange.
 It oversees the listing and delisting process of companies from any exchange in
the country.
 It can take disciplinary action, including fines and penalties against
malpractices.
 It also promotes investor education.
 It undertakes inspection, conducts audits and inquiries when it spots any
wrongdoing.
IRDA
Set up in 1999, the IRDA regulates the insurance industry and protects the interests of
insurance policyholders. Since the insurance sector is a constantly changing scene,
IRDA advisories are critical for insurance companies to keep up with changes in rules
and regulations.

The IRDA has strict control over insurance rates, beyond which no insurer can go.

The IRDA specifies the qualifications and training required for insurance agents and
other intermediaries, which then have to be followed by the insurer. It can levy fees
and modify them as well, as per the IRDA Act. It regulates and controls premium
rates and terms and conditions that insurers are allowed to provide. Any benefit
provided by an insurer has to be ratified by the IRDA. This regulator also provides the
critical function of grievance redressal in an industry where claims can be disputed
endlessly.

PFRDA
The PFRDA was set up in 2013 as the sole regulator of India’s pension sector. Its
services extend to all citizens, including non-resident Indians (NRIs). Its main
objective is to ensure income security for senior citizens. To this end, it regulates
pension funds and protects pension scheme subscribers.

PFRDA regulates the pension schemes: NPS and Atal Pension Yojana. PFRDA Act is
applicable to these schemes.

The PFRDA scope includes:

 Setting up guidelines for investing in pension funds

 Settling disputes between intermediaries and pension fund subscribers
 Increasing awareness about retirement and pension schemes
 Investigating intermediaries and other participants for malpractice
Ministry of Corporate Affairs (MCA)
The MCA concerns itself with administering the Companies Act and its various
iterations. It sets up the rules and regulations for the lawful functioning of the
corporate sector.

Apart from the Companies Act, MCA also administered the Limited Liability
Partnership Act, 2008. It oversees all Acts and rules that regulate the functioning of
the corporate sector in India. 

Its objective is to help the growth of companies. The MCA’s Registrar of Companies
authorizes company registrations as well as their functioning as per law.

Non-Statutory Bodies
Of the various entities discussed here, the Association of Mutual Funds in India
(Amfi) is different as it is a non-statutory body. Set up in 1995, it is a non-profit entity
that is self-regulatory. Its main aim is the development of the mutual fund industry in
the country.

One of the main things it does is make mutual funds more accessible and transparent
to the public. To this end, it has done well in spreading awareness and critical
information about mutual funds to the investing public.

Practically all asset management companies and other financial entities involved in
mutual funds are members of AMFI and adhere to the AMFI code of ethics. All
members have to follow this code.
The AMFI’s most crucial function is to update net asset values (NAVs) of funds,
which it does daily on its website. 

Like the AMFI, other such non-regulatory bodies nevertheless influence corporate
behaviour due to their influence.

One such body is the non-profit National Association of Software and Services
Companies (NASSCOM), which serves the $194 billion Indian IT sector. 

Similarly, the Federation of Hotels & Restaurant Associations of India (FHRAI)

“lobbies for better privileges and more concessions” for the hotel and restaurant
industry in the country. Many such entities in the country cater to their specific
sectors, using the weight of their membership and bully pulpit to ensure high
standards of behaviour and service.

Objectives of Financial Regulatory Bodies in India

 
Following are the prime objectives of the financial regulators in India:
o
o Financial Stability: protection and enhancement of financial stability in the country
o Consumer Protection: protecting the appropriate degree of consumers
o Market Confidence: maintaining the confidence in the financial system
o Reduction in financial fraud/ crimes: reducing the possibilities of businesses to face finance-related
crimes or frauds

Key Takeaways
 The RBI prints currency and distributes it across the country. It also manages
the country’s foreign exchange reserves. It sets interest rates for banks to lend,
thus controlling credit.
 The SEBI is the capital market watchdog. It protects investors as well as
regulates how the exchanges and capital market functions. It levies fines and
punishments on bad actors. It has the power to change laws on the stock
exchanges’ functioning. It can conduct hearings and pronounce judgments on
cases.
 The IRDA keeps tabs on the country’s insurance sector. It regulates insurance
premiums as well as the products that companies offer customers. One of its
primary functions is complaint redressal.
 The PFRDA regulates the pension fund sector. Its main objective is income
security for senior citizens, and it regulates how the pension funds can invest
 their monies. Its brief includes increasing awareness of pension schemes in the
country.
 The MCA sets up the rules and regulations for the lawful functioning of the
corporate sector.
 The AMFI is a non-statutory body set up to ensure best practices in the mutual
fund sector. Its main aim is the development of the mutual fund industry in the
country.
Following are the different financial regulatory bodies in India and there headquarters:
Regulatory Body Sector Headquarters

Reserve Bank of India (RBI) Banking & Finance, Monetary Policy Bombay

Securities & Exchange Board of India (SEBI) Securities (Stock) & Capital Market Bombay

Insurance Regulatory & Development Authority Insurance Hyderabad

(IRDAI)

Pension Fund Regulatory & Development Authority Pension New Delhi

(PFRDA)

National Bank for Agriculture and Rural Development Financing Rural Development Bombay
(NABARD)

Small Industries Development Bank of India (SIDBI) Financing Micro, Small, and Medium-scale Lucknow
Enterprises

National Housing Bank (NHB) Financing Housing New Delhi

Association of Mutual Funds (AMFI) Mutual Funds Bombay

Factors Affecting Financial System:

o
o Demand and supply is one of the factors
o Lack of right and constructive approach to rule-making
o Financial and digital literacy among the people of the nation
o Existence of monopoly in the market
o Launching innovative solutions for supporting public good investments like the UPI (Unified Payment Interface), etc.

What Are Financial Systems?

A financial system is an economic arrangement wherein financial institutions facilitate the transfer of funds and
assets between borrowers, lenders, and investors. Its goal is to efficiently distribute economic resources to promote
economic growth and generate a  return on investment (ROI) for market participants.
The market participants may include investment banks, stock exchanges, insurance companies, individual
investors, and other institutions. It functions at corporate, national, and international levels and is governed by
various rules dictating the eligibility of participants and the use of funds for different purposes. Aside
from financial institutions, financial markets, financial assets, and financial services are the components of
the financial system.
 Key Takeaways
 A financial system consists of individuals like borrowers and lenders and institutions like banks, stock
exchanges, and insurance companies actively involved in the funds and assets transfer.
 It gives investors the ability to grow their wealth and assets, thus contributing to economic development.
 It serves different purposes in an economy, such as working as payment systems, providing savings options,
bringing liquidity to financial markets, and protecting investors from unexpected financial risks.
 A specific set of rules drafted under different government policies is required for a stable financial system
operating at corporate, national, and international levels.

Explanation
In any functional economy, economic resources are limited, with individuals having unlimited wants and desires.
This problem, referred to as scarcity, is one of the significant drivers of an economy. However, it challenges an
economy in determining when, where, to whom to distribute its resources. Consequently, it resulted in a
financial system structure capable of efficiently allocating economic resources to stimulate growth. Also, it
allows participants to benefit by:

 Providing a way of making payments (banks)

 Giving participants a way of earning interest in the form of time value (investment institutions)
 Protecting them against financial risks (insurance)
 Collecting and distributing financial information (credit agencies)
 Governing regulations to maintain stability (central banks and governments)
 Maintaining liquidity and converting investments into cash (banks and financial institutions)
Financial institutions are at the core of the financial system, giving individuals the ability to save and invest
whenever and wherever they want. Investors put their money in these institutions, which offer them a reward
for saving and use it to lend to borrowers. The borrowers can use these funds to build goods and services or
fund other projects. All this activity helps promote economic growth – either by creating additional jobs or
generating a profit and contributing back to the economy.
The money or funds flow from the lender to the borrower in one of two ways:

1. Market-Based
2. Centrally Planned
In a market-based economy, borrowers, lenders, and investors can obtain funds by trading securities, such
as stocks and bonds in the financial markets. The law of supply and demand will determine the price of these
securities. With a centrally planned economy, governing authority or central planner makes the investment
decisions. In most instances, there will be a mix of both types of economies.

Components of Financial Systems

There are several financial system components to ensure a smooth transition of funds between lenders,
borrowers, and investors.
 Financial Institutions
 Financial Markets
 Tradable or Financial Instruments
 Financial Services
 Currency (Money)
#1 – Financial Institutions

Financial institutions act as intermediaries between the lender and the borrower when providing financial
services. These include:

 Banks (Central, Retail, and Commercial)

 Insurance Companies
 Investment Companies
 Brokerage Firms
#2 – Financial Markets

These are places where the exchange of assets occurs with borrowers and lenders, such as stocks,
bonds, derivatives, and commodities.
Financial markets help businesses to grow and expand by allowing investors to contribute capital. Investors
invest in company stock with the expectation of it producing a return in the future. As the business makes a
profit, it can then pass on the surplus to the investors.

#3 – Financial Instruments

Tradable or financial instruments enable individuals to trade within the financial markets. These can include
cash, shares of stock (representing ownership), bonds, options, and futures.
 #4 – Financial Services

Financial services provide investors a way of managing assets and offer protection against systemic risk. These
also ensure individuals have the appropriate amount of capital in the most efficient investments to promote
growth. Banks, insurance companies, and investment services would be considered financial services.
#5 – Currency (Money)

A currency is a form of payment to exchange products, services, and investments and holds value to society.

Examples
Financial systems are an essential part of an economy, and without them, the flow of funds would cease to exist.
It keeps evolving considering the regional or global economic situations.

An example of this is the G20’s virtual summit held in March 2020, discussing the role and significance of the
global approach to the financial crisis caused by the corona virus pandemic. The center of discussion was the
ability of the global financial system to operate effectively and efficiently. Financial markets have mitigated
systemic risk due to the improved financial market infrastructures, systemically important financial market
utilities, risk management standards, and centralized clearing houses.
Here is another example to understand its importance in everyday life.

Business Loans

 When a business requires capital to fund new projects or develop new technology, it applies for a business
loan. There are several options to get it done, such as getting a line of credit or an installment loan.
 To qualify for the loan, the lender looks at several business components like its credit score or balance sheet to
determine the systemic risk of giving out the loan.
 The financial institution (bank) then allocates the necessary funds to the business. The business can use the
money to fund a future project to generate additional income.
 The bank then requires the business to make payments towards the loan, including interests for its time value. 

Functions of Financial Systems

A financial system allows its participants to prosper and reap the benefits. It also helps in borrowing and
lending when needed. In simpler words, it will circulate the funds to different parts of an economy. Here are
some of the financial system functions:
1. Payment System – An efficient payment system allows businesses and merchants to collect money in
exchange for their products or services. Payments can be made with cash, checks, credit cards, and even crypto
currency in certain instances.
2. Savings – Public savings allow individuals and businesses to invest in a range of investments and see them
grow over time. Borrowers can use them to fund new projects and increase future cash flow, and investors get a
return on investment in return.
3. Liquidity – The financial markets give investors the ability to reduce the systemic risk by providing liquidity. It
thus allows for easy buying and selling of assets when needed.
4. Risk Management – It protects investors from various financial risks through insurances and other types of
contracts.
5. Government Policy – Governments attempt to stabilize or regulate an economy by implementing specific
policies to deal with inflation, unemployment, and interest rates.

6. Scope of Financial Services

The scope / functions of financial service is as follows:

1) Gross Domestic Product (GDP): 

The gross domestic product refers to the financial value of all the finished
goods and services manufactured inside the country in a specific time
period. The financial service contributes to the GDP of the country.

2) Employment: 
 The financial service requires various kinds of financial institutions
which need different kinds of skilled manpower which indirectly lead to
increase in the employment of the country.

3) Foreign Direct Investment (FDI): 

The financial service helps in increasing the foreign direct investment in
the country which helps in increasing the growth of the country.

4) Mobilizing of Funds: 
The financial service helps in increasing the investment opportunity among
the public leading to mobilizing the funds of the public.

5) Long-Term Loan: 
The long-term loan is basically required by the industries. The financial
service helps in providing cheap and long-term loan to industries.

6) Insurance: 
There are various types of financial services. Among them the most
important is insurance. The insurance financial protection to the
consumers.

Nature of Financial Services 

The natures of financial services are given below:

1) Intangibility: 
The financial services are intangible in nature. The companies need to
build goodwill and confidence in the clients for producing better and
efficient financial services. The quality and innovations plays an important
role for building reliability among the customers.

2) Customer Orientation: 
The financial institution selling financial services needs to study the
demand of the customers. By the help of various studies, the financial
institutions make different strategies relating to the costs, liquidity and
maturity consideration of the financial products. Hence, financial services
are customer-oriented.

3) Inseparability: 
The financial institutions and its customers cannot be separated from
each other while producing and supplying of financial services as both
the functions of financial service is done at the same time.

4) Perish ability: 
Financial services cannot be stored as they need to be created and delivered
to the target customers as per their requirements. So, it is important for
financial institutions to assure that there is match of demand and supply of
financial services.

5) Dynamism: 
The financial service should be dynamic so that they can be changed
according to the socio-economic changes in the economy like disposable
income, standard of living, level of education, etc. The financial services
should be efficient so that the new services can be made by studying the
future wants of the marker.

6) Derivatives and Catalysts: 

The financial services are derivatives of financial market. So, they also
act as a catalyst in the market operation. It starts the market operations
and help in increasing the investment by increasing the saving for a high
rate of capital formation. They help in various financial products which
are derived from various financial transactions.

7) Act as Link: 
The financial services bridge the gap between investors and borrowers.
They give profit bearing investment to the investors by which they can also
minimize the risk. The investors have the options of high risk and high
profits, low risk and low profit or get a regular income on acceptable risk.
 The borrowers are also given many financial services for fulfilling the
financial needs by lowering the cost of funds and also making the
repayments according to the income pattern.

8) Distribution of Risks: 
The financial services distribute the funds in the profitable manner so that
the investors can diversify their risk in different financial services for
getting maximum rate of return. The various experts in the market help the
investors for proper selection of the portfolio for getting maximum return.

(UNIT: 2)

What is Financial Risk Management?

Financial Risk Management is the process of identifying risks, analyzing them and making investment decisions based on either
accepting, or mitigating them. These can be quantitative or qualitative risks, and it is the job of a Finance manger to use the available
financial instruments to hedge a business against them. In banking for instance, the Basel Accords are a set of regulations adopted by
international banks that help to track report and expose credit, marketing and operational risks.
There are several different types of Risks that finance mangers need to account for before proposing investment strategies, and this
article covers a few of them in detail.

Financial Risk Management #1: Operational Risk

Operational risk – as defined by the Basel II framework – is the risk of indirect or direct loss caused by failed or inadequate internal
people, system, processes or external events. It includes other risk types such as security risks, legal risks, fraud, environmental risks and
physical risks (major power failures, infrastructure shutdown etc.). Unlike other types of risk, Operational risks are not revenue driven,
incurred knowingly or capable of being completely eliminated. As long as people, processes and systems remain imperfect and inefficient,
the risk remains.
However, in terms of Financial Risk Management, Operational risks can be managed to within acceptable levels of risk tolerance. This is
done by determining the costs of proposed improvements against their benefits.

Financial Risk Management #2: Foreign Exchange Risk

Foreign Exchange Risk is also known as currency risk, FX risk or exchange rate risk. It is incurred when a financial transaction is made
in a currency other than the operating currency – which is often the domestic currency – of a business. The risk arises as a result of
unfavorable changes in the exchange rate between the transactional currency and operating currency.

An aspect of Foreign Exchange Risk is Economic Risk or Forecast Risk; the degree to which an organization’s product or market value
is affected by unexpected exchange-rate fluctuations. Businesses whose trade heavily relies on the import and export of goods, or who
have diversified into foreign markets are more susceptible to Foreign Exchange Risk.

Financial Risk Management #3: Credit Risk

Credit risk is the risk that a borrower or client defaults on their debts or outstanding payments. With borrowed money, in addition to
the loss of principal, additional factors such as loss of interest, increasing collection costs etc., must be taken into account when
establishing the extent of the Credit Risk. Financial analysts use Yield Spreads as a means to determine Credit Risk levels in a market.

One of the simplest ways of mitigating Credit Risk is to run a credit check on a prospective client or borrower. Other means is to
purchase insurance, hold assets as collateral or have the debt guaranteed by a third-party. Some methods corporations use to mitigate
Credit Risk arising from non-payment of client dues, is to request for advance payments, payment on delivery before handover of goods
or to not provide any lines of credit until a relationship has been established.

Financial Risk Management #4: Reputational Risk

Reputational Risk is also known as Reputation Risk and it is the loss of social capital, market share or financial capital arising from
damage to an organization’s reputation. Reputation Risk is very difficult to predict or realize financially, as Reputation is an intangible
asset. It is however intrinsically tied to Corporate Trust and is the reason why Reputation damage can hurt an organization financially.
Criminal investigations into a company or its high-ranking executives, ethics violations, lack of sustainability policies or issues related to
safety and security of product, customer or personnel are all examples of what can damage an entity’s reputation.

The growth of technology and the influence of social media can now amplify minor issues on a global scale. This has led to boycotts as a
form of consumer protest. In extreme cases, Reputational Risk can even lead to corporate bankruptcy. For this reason, more
organizations are dedicating assets and resources to better manage their reputation.
Stock Exchange

Stock Exchange market is a vital component of a stock market. It facilitates the

transaction between traders of financial instruments and targeted buyers. A stock
exchange in India adheres to a set of rules and regulations directed by Securities and
Exchange Board of India or SEBI. The said authoritative body functions to protect the
interest of investors and aims to promote the stock market of India.

What is the Stock Exchange?

The stock exchange in India serves as a market where financial instruments
like stocks, bonds and commodities are traded.

It is a platform where buyers and sellers come together to trade financial tools during
specific hours of any business day while adhering to SEBI’s well-defined guidelines.
However, only those companies who are listed in a stock exchange are allowed to
trade in it.

Stocks which are not listed on a reputed stock exchange can still be traded in an ‘Over
The Counter Market’. But such shares would not be held high in esteem in the stock
exchange market.

How Does it Work?

Mostly, a stock exchange in India works independently as no ‘market makers’ or
‘specialists’ are present in them.

The entire process of trading in stock exchange in India is order-driven and is

conducted over an electronic limit order book.

In such a set-up, orders are automatically matched with the help of the trading
computer. It functions to match investors’ market orders with the most suitable limit
orders.

The major benefit of such an order-driven market is that it facilitates transparency in

transactions by displaying all market orders publicly.

Brokers play a vital role in the trading system of the stock exchange market, as all
orders are placed through them.
Both institutional investors and retail customers can avail the benefits associated with
direct market access or DMA. By using the trading terminals provided by stock
exchange market brokers, investors can place their orders directly into the trading
system.

Benefits of Listing with Stock Exchange

Listing with a stock exchange extends special privileges to company securities. For
instance, only listed company shares are quoted on a stock exchange.

Being listed on a reputed stock exchange is deemed beneficial for companies,

investors and the public in general and they tend to benefit in these following ways –

Only stocks listed with a reputable stock exchange are considered to be higher in
value. Companies can cash in on their market reputation in the stock exchange
market by increasing their number of shareholders. Issuing shares in the market for
shareholders to acquire is a potent way of increasing shareholder base and base, which
in turn increases their credibility.

 Accessing capital
One of the most effective ways of availing cheap capital for a company is by issuing
company shares in the stock exchange market for shareholders to acquire. Listed
companies can generate comparatively more capital through share issuance owing to
their repute in a stock exchange market and use it to keep their company afloat and its
operations running.

 Collateral value
Almost all lenders accept listed securities as collateral and extend credit facilities
against them. A listed company is more likely to avail a faster approval for their credit
request; as they are deemed more credible in the stock exchange market.

 Liquidity
Listing helps shareholder avail the advantage of liquidity better than other
counterparts and offers them ready marketability. It allows shareholders to estimate
the value of investment owned by them.

Additionally, it permits share transactions with a company and helps them to even out
the associated risks. It also helps shareholders to improve their earnings from even the
slightest increase in overall organisational value.

 Fair price
The quoted price also tends to represent the real value of a particular security in
a stock exchange in India.

The fact that the prices of listed securities are set as per the forces of demand and
supply and are disclosed publicly, investors are assured to acquire them at a fair price.

Investment Methods
Investors can invest in a stock exchange of India through these two ways –

1. Primary market – This market creates securities and acts as a platform where
firms float their new stock options and bonds for the general public to acquire.
It is where companies enlist their shares for the first time.
2. Secondary market – The secondary market is also known as the stock market; it
acts as a trading platform for investors. Here, investors trade in securities
without involving the companies who issued them in the first place with the
help of brokers. This market is further broken down into – auction market and
dealer market.

Major stock exchanges in India

There are two major types of Stock Exchanges in India, namely the –

Bombay Stock Exchange (BSE): This particular stock exchange was established in

1875 in Mumbai at Dalal Street. It renowned as the oldest stock exchange not just in
Asia and is the ‘World’s 10th largest Stock Exchange’.

The estimated market capitalisation of Bombay Stock Exchange as of April stands at

$ 4.9 Trillion and has around 6000 companies publicly listed under it. The
performance of BSE is measured by the Sensex, and it reached its all-time high in
June in 2019, when it touched 40312.07.

National Stock Exchange (NSE): The NSE was established in 1992 in Mumbai and is
accredited as the pioneer among the demutualised electronic stock exchange markets
in India. This stock exchange market was established with the objective to eliminate
the monopolistic impact of the Bombay Stock exchange in the Indian stock market.

The estimated market capitalisation of National Stock Exchange as of March 2016

was US$ 4.1 trillion and was acclaimed as the 12th largest stock exchange in the
world. NIFTY 50 is NSE’s index, and it is extensively used by investors across the
globe to gauge the performance of the Indian capital market.
WHAT ARE MUTUAL FUNDS?
A mutual fund is a pool of money managed by a professional Fund Manager.

It is a trust that collects money from a number of investors who share a common investment
objective and invests the same in equities, bonds, money market instruments and/or other
securities. And the income / gains generated from this collective investment is distributed
proportionately amongst the investors after deducting applicable expenses and levies, by
calculating a scheme’s “Net Asset Value” or NAV. Simply put, the money pooled in by a large
number of investors is what makes up a Mutual Fund.

Here’s a simple way to understand the concept of a Mutual Fund Unit.

Let’s say that there is a box of 12 chocolates costing ₹40. Four friends decide to buy the same,
but they have only ₹10 each and the shopkeeper only sells by the box. So the friends then decide
to pool in ₹10 each and buy the box of 12 chocolates. Now based on their contribution, they
each receive 3 chocolates or 3 units, if equated with Mutual Funds.
And how do you calculate the cost of one unit? Simply divide the total amount with the total
number of chocolates: 40/12 = 3.33.
So if you were to multiply the number of units (3) with the cost per unit (3.33), you get the initial
investment of ₹10.

This results in each friend being a unit holder in the box of chocolates that is collectively owned
by all of them, with each person being a part owner of the box.

Next, let us understand what is “Net Asset Value” or NAV. Just like an equity share has a traded
price, a mutual fund unit has Net Asset Value per Unit. The NAV is the combined market value
of the shares, bonds and securities held by a fund on any particular day (as reduced by permitted
expenses and charges). NAV per Unit represents the market value of all the Units in a mutual
fund scheme on a given day, net of all expenses and liabilities plus income accrued, divided by
the outstanding number of Units in the scheme.

Mutual funds are ideal for investors who either lack large sums for investment, or for those who
neither have the inclination nor the time to research the market, yet want to grow their wealth.
The money collected in mutual funds is invested by professional fund managers in line with the
scheme’s stated objective. In return, the fund house charges a small fee which is deducted from
the investment. The fees charged by mutual funds are regulated and are subject to certain limits
specified by the Securities and Exchange Board of India (SEBI).

India has one of the highest savings rate globally. This penchant for wealth creation makes it
necessary for Indian investors to look beyond the traditionally favoured bank FDs and gold
towards mutual funds. However, lack of awareness has made mutual funds a less preferred
investment avenue.

Mutual funds offer multiple product choices for investment across the financial spectrum. As
investment goals vary – post-retirement expenses, money for children’s education or marriage,
house purchase, etc. – the products required to achieve these goals vary too. The Indian mutual
fund industry offers a plethora of schemes and caters to all types of investor needs.
Mutual funds offer an excellent avenue for retail investors to participate and benefit from the
uptrend’s in capital markets. While investing in mutual funds can be beneficial, selecting the
right fund can be challenging. Hence, investors should do proper due diligence of the fund and
take into consideration the risk-return trade-off and time horizon or consult a professional
investment adviser. Further, in order to reap maximum benefit from mutual fund investments, it
is important for investors to diversify across different categories of funds such as equity, debt
and gold.

While investors of all categories can invest in securities market on their own, a mutual fund is a
better choice for the only reason that all benefits come in a package.

TYPE OF MUTUAL FUND SCHEMES

Mutual Fund schemes could be ‘open ended’ or close-ended’ and actively managed or passively managed.

OPEN-ENDED AND CLOSED-END FUNDS

An open-end fund is a mutual fund scheme that is available for subscription and redemption on every business
throughout the year, (akin to a savings bank account, wherein one may deposit and withdraw money every day). An
open ended scheme is perpetual and does not have any maturity date.

A closed-end fund is open for subscription only during the initial offer period and has a specified tenor and fixed
maturity date (akin to a fixed term deposit). Units of Closed-end funds can be redeemed only on maturity (i.e., pre-
mature redemption is not permitted). Hence, the Units of a closed-end fund are compulsorily listed on a stock
exchange after the new fund offer, and are traded on the stock exchange just like other stocks, so that investors
seeking to exit the scheme before maturity may sell their Units on the exchange.

ACTIVELY MANAGED AND PASSIVELY MANAGED FUNDS

An actively managed fund is a mutual fund scheme in which the fund manager “actively” manages the portfolio and
continuously monitors the fund's portfolio, deciding on which stocks to buy/sell/hold and when, using his
professional judgment, backed by analytical research. In an active fund, the fund manager’s aim is to generate
maximum returns and out-perform the scheme’s bench mark.

A passively managed fund, by contrast, simply follows a market index, i.e., in a passive fund , the fund manager
remains inactive or passive inasmuch as, she does not use her judgment or discretion to decide as to which stocks to
buy/sell/hold , but simply replicates / tracks the scheme’s benchmark index in exactly the same proportion.
Examples of Index funds are an Index Fund and all Exchange Traded Funds. In a passive fund, the fund manager’s
task is to simply replicate the scheme’s benchmark index i.e., generate the same returns as the index, and not to out-
perform the scheme’s bench mark.

Why do people buy mutual funds?

Mutual funds are a popular choice among investors because they generally offer the following features:

 Professional Management. The fund managers do the research for you. They select the securities and
monitor the performance.
 Diversification or “Don’t put all your eggs in one basket.” Mutual funds typically invest in a range of
companies and industries. This helps to lower your risk if one company fails.
 Affordability. Most mutual funds set a relatively low dollar amount for initial investment and subsequent
purchases.
 Liquidity. Mutual fund investors can easily redeem their shares at any time, for the current net asset value
(NAV) plus any redemption fees.
 What types of mutual funds are there?
Most mutual funds fall into one of four main categories – money market funds, bond funds, stock funds, and target
date funds. Each type has different features, risks, and rewards.

 Money market funds have relatively low risks. By law, they can invest only in certain high-quality, short-
term investments issued by U.S. corporations, and federal, state and local governments.
 Bond funds have higher risks than money market funds because they typically aim to produce higher
returns. Because there are many different types of bonds, the risks and rewards of bond funds can vary
dramatically.
 Stock funds invest in corporate stocks. Not all stock funds are the same. Some examples are:
o Growth funds focus on stocks that may not pay a regular dividend but have potential for above-
average financial gains.
o Income funds invest in stocks that pay regular dividends.
o Index funds track a particular market index such as the Standard & Poor’s 500 Index.
o Sector funds specialize in a particular industry segment.
 Target date funds hold a mix of stocks, bonds, and other investments. Over time, the mix gradually shifts
according to the fund’s strategy. Target date funds, sometimes known as lifecycle funds, are designed for
individuals with particular retirement dates in mind.

What is a Merchant Bank?

A merchant bank is a financial institution that provides banking and financial solutions to High
Net-worth Individuals (HNIs) and large corporations. They provide services like underwriting,
fundraising, issue management, loan syndication, portfolio management, and financial advice.
Merchant banks don’t serve the general public; they facilitate multi-national companies in cross-
border trade. A merchant banker plays varied roles for clients—banker, financial advisor, broker,
lender, consultant, debenture trustee, underwriter, and portfolio manager. The banks do not
provide regular banking services like a checking account.

Key Takeaways
 A merchant bank is a financial institution that provides services like fund-raising, venture capital
financing, underwriting, loan syndication, investment advice, portfolio management, and issue
management.
 They are often confused with investment banks, which serve bigger entities like huge
corporations, institutional investors, and governments.
 Merchant banks work with private corporate entities that are not big enough to release an initial
public offering (IPO). They act as financial intermediaries to promote new enterprises.
 Merchant Banks Explained
Merchant banks offer financial services to wealthy individuals and mid-sized corporations. They
underwrite securities, raise venture capital, and raise funds. They do not provide basic banking
services.
Among all the services, the focus is on financial advice. These banks primarily earn from the fee
paid for advisory services. In addition, the bank invests depositors’ assets in financial portfolios
—based on expected returns and risk-taking capacity.

Now, let us understand the brief history—merchant banking started in the 17th and 18th
centuries—in France and Italy. By the end of18 th century, these banks became popular in Europe;
they facilitated distant payments, currency exchange, and issued bills of exchange. The US
introduced such banks in the 19th century—JP Morgan and Citi Bank.

Features
Following are characteristics that differentiate it from other financial institutions:
 These banks serve huge corporations and high net-worth individuals instead of the general
public;
 They are innovative and have a loose organizational structure;
 Despite high liquidity measures, their profit distribution is low;
 Since they have many decision-makers, the decision-making process is prompt;
 They offer services at domestic and international levels;
 These banks possess strong databases and high-density information;
 They make money in the form of fees and commissions.

Merchant Bank Functions

The banks extend a variety of services and charge a fee. The services differ from those offered by
regular banks.

Let us understand each service in detail:

1. Project Counselling: Merchant bankers assist their clients at every stage of the project—idea
generation, report creation, budgeting, and financing. This is especially the case with new
entrepreneurs.
2. Leasing Services: The banks extend leasing facilities—clients lease assets and equipment to
generate rental income.
3. Issue Management: High net-worth individuals employ merchant banks to issue equity shares,
preference shares, and debentures to the general public.
4. Underwriting: The banks also facilitate equity underwriting. They assess the price and risk
involved in particular security and initiate public issue and distribution of stocks.
5. Fund Raising: Through various facilities like underwriting and securities issuance, bankers help
the private companies generate capital from international and domestic markets.
6. Portfolio Management: On behalf of clients, these bankers invest in different kinds of financial
instruments.
7. Loan Syndication: They finance term loans to back projects that need funding.
8. Promotional Activities: Merchant banks are financial intermediaries that promote new
enterprises.

Examples
Some of the oldest banks offering merchant banking services include Citi Bank and JP Morgan.
Other institutions include Bank of America, Merrill Lynch, Goldman Sachs, Morgan Stanley,
Barclays Capital, Credit Suisse, Deutsche Bank AG, Evercore, Jefferies International Ltd, Lazard,
RBC Capital Markets, SG CIB, Stifel, USBank, and UBS Investment Bank.

Merchant Bank Vs. Investment Bank

Both offer financial and advisory services to their clients, but their scope of operation is different.
Merchant banks work with private corporate entities that are not big enough to release an initial
public offering (IPO).
On the other hand, investment banks work with bigger clients to release IPOs. Investment banks
are large enough to expend time, effort, and money to raise capital via traditional channels—
they serve institutional investors and the government. In addition, investment banks help
companies with mergers, acquisitions, capital restructuring, and conducting investment
research.
Merchant bankers facilitate private equity investments—they ensure private placement of the
corporate securities in front of a preferred group of investors or institutions.

Frequently Asked Questions (FAQs)

How to get a merchant account?

To open a merchant account, follow these instructions:

• Get a business license, open up a business bank account, and ascertain the firm’s business
structure;
• Then, setup up compliant policies, refund policies, privacy policy, and other terms and
conditions;
• Follow the Payment Card Industry (PCI) compliance, collect the necessary documents, and
submit the merchant account application online;
• Initiate the underwriting process and check for the processing fee charged by the particular
bank.

What are merchant banking services?

The banks offer a variety of facilities like underwriting, credit syndication, issue management,
portfolio management, venture capital financing, corporate counseling, project counseling,
international fund transfer, and promotional activities.

Is PayPal a merchant account?

Yes, PayPal is a merchant account—users can make international payments for a certain
processing fee. Moreover, it provides a line of credit and business loans.

(UNIT: 4)

Difference between Hire Purchasing and Leasing

Nowadays, if you want to use an asset, you don’t need to purchase it from the seller. There are many
offers whereby, you can use the asset just by paying the price for using it, such as Hire Purchasing and
Leasing. The former is a business deal in which the purchaser of the asset, pays a small amount at the
beginning and the rest of the price in installments. On the contrary, the latter is an agreement between
two parties in which the Lessor purchases the asset and permits the lessee, use the asset for the
payment of monthly rentals.
Both Hire-Purchase and Lease are the commercial arrangement, whereby the asset does not require the
customer to own the asset for using it, but they are not one and the same. The fundamental differences
between Hire-Purchasing and Leasing are discussed in this article, take a read.

Definition of Hire Purchasing

Hire Purchasing is an agreement, in which the hire vendor transfers an asset to the hire purchaser, for
consideration. The consideration is in the form of Hire Purchase Price (HPP) which includes cash down
payment and instalments. The hire purchase price is normally higher than the cash price of the article
because interest charges are included in that price.  The instalment paid by the hirer at periodical
intervals up to a specified period. The instalment is a sum of finance charges i.e. interest and the capital
payment i.e. principal.
Under Hire Purchase transaction only the possession of the assets is transferred to the hirer. However,
there is a condition of the transfer of ownership, i.e., hire-purchaser ought to pay all the instalments due
on the asset transferred. By virtue of this, if the hire purchaser is unable to pay the outstanding
instalments, then the hire vendor can repossess the asset without paying any compensation to the hirer.
The recording of accounting transactions in the books of hire vendor and hire purchaser is different. The
method of accounting used by the parties is as under:
 In the books of hire vendor:
o Interest Suspense Method
o Sales Method
 In the books of hire-purchaser:
o Interest Suspense Method
o Cash Price Method

Definition of Leasing
A contract in which one party (Lessor) permits to use the asset for a specified period to another party
(lessee) in exchange for periodic payments for a specified time is known as Leasing. Accounting standard
– 19 deals with leases which apply to all the enterprises, subject to certain exemption.
At regular intervals, the lessee pays a sum to the Lessor which is known as Lease Rents, as a
consideration for using the asset owned by the Lessor. In addition to this, the Lessor also gets a terminal
payment known as Guaranteed Residual Value (GRV). The aggregate of the lease rent and
guaranteed residual value is known as Minimum Lease Payments (MLP). If the Lessor receives, the
amount more than the guaranteed residual value is known as Unguaranteed Residual Value. There are
two ways of leasing the asset, which is as under:
 Operating Lease: The lease which covers only a small part of the useful life of the asset is
Operating Lease. In this kind of lease, there is no transfer of risk and rewards.
 Finance Lease: A lease agreement to finance the use of the asset for the maximum part of its
economic life is known as Finance Lease. All the risk and rewards incidental to the ownership is
transferred to the lessee with the transfer of the asset.

Conclusion
In hire purchasing, the hirer has to pay an advance along with periodical instilment as consideration, but
in the case of leasing the lessee has to pay lease rentals at specified intervals. With this article excerpt,
hopefully, you’ve got the necessary differences between hire-purchasing and leasing.
Difference between Hire Purchase and Leasing
There are many things that we aspire for. Electronic gadgets are one of them. We wish to buy expensive things like homes,
cars, smart phones, headsets, etc., to enjoy its benefits. Now, these electronic items and houses are very expensive. Some
people can afford it, while some cannot. People who can afford it make direct payments to the seller. But there are several
options of payment for the ones who cannot afford it at the present moment. One of the options is EMI. For instance, in
order to buy an expensive Smartphone one can make a down payment that is less than 50% of the actual cost. The rest of
the money is provided to the seller on a monthly basis. Nowadays, EMIs come with 0% interest, i.e., one does not have to
pay the interest rate on an expensive item. EMI is one of the options available to people.
Now, let us talk about the other options of buying as well. There are two significant types of making transactions and
purchasing things, i.e., hire purchasing, and leasing. Both are different in several aspects, but let us start with the meanings
of these terms.

Hire Purchase
Hire purchase is defined as the transaction wherein the products are bought and sold on several terms like the payment will
be made in installments, the goods bought will readily be given to the buyer, the ownership of the product remains with
the seller until the last installment is paid, and every installment is treated as a hire rate till the payment of the last
installment. Hire purchase is undertaken when the buyer cannot afford to pay the entire amount of a product. A percentage
of an amount is kept as a deposit, and the monthly rent is paid for the product hired. Once the installments are complete,
the ownership of the product is given to the buyer. Well, there are two significant kinds of hire purchase, i.e., customer
hire-purchase and industrial hire purchase. In the consumer hire purchase, the purchaser hires the products for non-
business purposes (personal uses). A seller is a person and not a company or a business. On the other hand, in industrial
hire purchase, the seller is a company or an industry that allows the buyer to hire the products for business purposes. For
instance, hiring machines for a factory is an example of industrial hire purchase.
Leasing
A lease is defined as a legal/ contractual agreement wherein the lessee pays the Lessor to use a particular product. Assets
like houses, properties, buildings, etc., come under the contractual agreement of leasing. Apart from the buildings,
mechanical equipments are also leased. Leasing can basically be defined as the contract between a lessee and a Lessor
wherein the lessee agrees to rent a product, property, or equipment owned by the Lessor. The payment is made by the
lessee in a specific time period. There is no extension in the time period for the payment of particular equipment or
property. One of the common examples of the lease is when a tenant rents your property for a specific period of time.
Lessee is the receiver of goods and services, and the Lessor is the owner of the product. One of the features of leasing is
that the lessee selects the product/ property/ equipment from the Lessor, and the lessee uses the asset during the lease.

S.NO HIRE PURCHASE LEASING

.

1. Hire purchase is defined as the transaction wherein the products are sold on On the other hand, leasing is defined as the legal
several basic terms. agreement wherein the lessee pays the lessor to
use a particular asset.

2. Hire purchase has terms like the payment has to be made in installments, the Leasing is a contract mentioning the specific time
product has to be readily provided to the buyer, etc. period for which the property/ equipment has been
leased.

3. The money is provided on a monthly basis. The payment is made in a specific time period
within which the asset is used.

4. There are two significant kinds of hire purchase, i.e., consumer hire purchase There are different types of leases. They are:
and industrial hire purchase.
o Financial Lease
 o Sales Aid Lease
o Operating Lease
o Specialized Service Lease
o Cross Border Lease
o Small Ticket & Big Ticket Lease

5. There is no specific accounting standard in hire purchase. The accounting standard is AS-19 in leasing.

6. A down payment is required in hire purchasing. There is no down payment required in leasing.

7. The installments are provided in principal plus interest format. The installments are provided on the basis of the
cost of using an asset.

8. The ownership of the product is transferred from the seller to the purchaser The transfer of ownership depends upon the type
once the last installment is paid. of lease one is taking.

9. The repairing and maintenance of the product/ good depend upon the buyer. The repairing and maintenance of a product/ good
depend upon the lease type.

10. Initial payment along with installment is provided in hire purchase. The lease rentals are provided in leasing.

11. Hire purchasing is of short-term duration. Leasing is of a longer duration.

12. Examples: Examples:

o Cars o Land
o Truck o Property
o Lorry o Building
o Smart Phone o Equipment

Now, there are certain differences between hire purchasing and leasing. So, let us have a look at them.
So, these are some of the significant contrasting points between hire purchase and leasing. Now, there are certain characteristics of hire
purchase and leasing. So, let us have a look at them.

Characteristics of Hire Purchase

1. The payment is made by the buyer to the seller, who might be a person, business, or company.
2. The installments have to be provided within a specific time frame.
3. The possession of goods is immediately given to the buyer.
4. The ownership of the product remains with the seller until the last installment is paid.
5. The vendor can take back the products in case the payment is not made on time.
6. The installments include the principal amount along with interest.

Characteristics of Leasing
1. There are two parties in the contractual agreement, i.e., the lessee and the Lessor.
 2. The time duration of the lease cannot be canceled.
3. The payment is made to the Lessor in response to the lease rentals.
4. The ownership of a particular property is with the Lessor, and the use of the product is allowed to the lessee.
5. After the time period ends, the lease can be renewed.
6. In order to transfer the ownership, the lessee has to make payment for the property/ equipment.

Debt Securitization Intro and Process of Debt

Securitization

Understanding The Process of Debt Securitization, Debt Securitization is a very important topic that is easy to
understand but many students generally skip this topic by presuming that it is difficult. As per the oxford advanced
learner dictionary, the meaning of the word debt is “a sum of money that somebody owes”, “a situation of owing
money, especially when you cannot pay.” Now check more details about “Understanding The Process of Debt
Securitization” from below

Understanding The Process of Debt Securitization

What is securitisation?
Securitization refers to pooling debts into homogeneous groups and selling the amount realized from them in the
form of securities to investors.

Debt Securitization:
Debt securitization is a method of reusing funds. It is a process where loans are converted and sold in the form of
assets. In simple words, prime banking institution issues loans to several intermediaries’ banks. These banks, also
known as special purpose vehicles (SPV), further converts this loan in the form of debt securities and sells it to
various other buyers in the form of marketable securities. However, these buyers should be qualified buyers (they
are also known as institutional buyers). Debt securitization helps in better balance sheet management.
In the above table state bank is performing the function of originator. Bank A, Bank B, Bank C is performing the
function of special purpose vehicle. This function is known as pooling function. Institutional buyers are getting
marketable securities. Thus, they are also known as qualified institutional buyers.

What are the parties involved in debt securitization?

 Originator: This is the party that initiates the entire debt securitization transaction. It holds the financial
assets that need to be securitized.
 Special Purpose Entity (SPE): The party which acquires the asset in debt securitization is known as SPE.
It is also responsible for holding the asset till maturity. It acts as a trust and is responsible for converting
loans into marketable securities.
 Investor: It is the person who finances the acquisition of securitized assets by subscribing to marketable
securities issued by a special purpose entity. These investors generally include institutional investors such
as insurance companies and others. However, they need to qualify for acquiring marketable securities.

What are the functions of debt securitization?

The origination function: Let us suppose I am a banking company and I am giving some loan to a borrower. Of
course, the loan will be given by me for some consideration, say, some asset. Thus, I will record an asset in my
books. The financial asset that comes into existence is known as the origination function.
 The pooling function: Different loans are converted into homogenous groups and are transferred in favor of special
purpose vehicles. This special purpose vehicle acts as a trustee. This pooling of assets in favor of special purpose
vehicle is known as pooling function.

What is a Credit Rating?

(Source: financeseva)

A credit rating is a way of assessing the creditworthiness of entities such as individuals, groups, businesses,
non-profit organizations, governments, and even countries. Special credit rating agencies analyze their
financial risk to see whether or not these borrowers will be able to pay back loans on time.
The credit rating agencies compile this rating using a detailed report that takes into consideration various
factors such as lending and borrowing history, ability to repay the debt, past debts, future economic potential,
and more.
A good credit rating improves credibility and indicates a good history of paying back loans on time in the past. It
helps banks and investors decide about approving loan applications and the rate of interest offered.

Types of Credit Rating

The various credit agency agencies use similar alphabetical symbols to determine credit ratings. However,
these ratings are also grouped into two types of grades – ‘investment grade’ and/or ‘speculative grade’.
 Investment grade: These ratings refer to the fact that the investment made is solid, and the borrower will most likely meet
the repayment terms. Thus, they are often priced less.
 Speculative grade: These ratings show that the investments are at a higher risk, and they often have higher interest rates.
 Is there a Difference between Credit Rating and Credit
Score?

Sometimes, the terms credit score and credit rating are used interchangeably, but they are not the same thing.
As mentioned above, a credit rating is used to determine the creditworthiness of a business or a company
rather than individuals. This essentially means the probability of them defaulting on payments. The rating is
usually shown as a series of alphabetical symbols, and it is calculated using corporate financial instruments.
However, a credit score is a number, usually between 300 and 900, that is given to individuals to rate their
creditworthiness. It is calculated by credit bureaus based on the person’s credit information report, and plays a
role in determining whether or not they are approved for loans and credit cards.

What is the Importance of Credit Rating?

Since a credit rating is an assessment of a borrower's creditworthiness, a higher credit rating suggests that the
company or entity is more likely to repay the borrowed credit. On the other hand, a lower credit rating might
mean that they have a higher probability of turning into a defaulter. This can make it difficult for them to borrow
money, as lenders will consider them high-risk borrowers.
However, there are other ways that credit rating is important:
For Lenders
 Lenders and investors can make better and more sound investment decisions by taking into account the risk of the entity
who is borrowing the money.
 When lenders know the credit rating of potential borrowers, they can be assured that their money will be paid back in time,
with the correct amount of interest.
For Borrowers
 When companies have a higher credit rating, they will be seen as lower risk and therefore get loan applications approved
more easily.
 Lenders like banks and financial institutions will also offer loans at a lower interest rates for entities that have a higher
credit rating.
Thus, having a higher credit rating can help a company raise money and expand, while also reducing the cost
of borrowing. And, for lenders, these ratings can help them obtain more detailed financial information and
encourage better accounting standards.

What are the Credit Rating Agencies in India?

Credit ratings are evaluated by credit agencies. In India, credit rating agencies are regulated by the SEBI
(Credit Rating Agencies) Regulations, 1999, part of the Securities and Exchange Board of India Act, 1992.
Some of the top credit rating agencies in India are:
Credit Rating Information Services of India Limited (CRISIL)
This was one of the first credit rating agencies in India, established in 1987. It rates companies, banks, and
organizations using their strengths, market share, market reputation board, etc. The company also operates in
the USA, UK, Hong Kong, Poland, Argentina and China and offers 8 types of credit ratings ranging from AAA –
D.
Investment Information and Credit Rating Agency of India (ICRA) Limited
Established in 1991, ICRA offers comprehensive ratings to corporates for a variety of situations, such as bank
loans, corporate debt, mutual funds, and more.
Credit Analysis and Research Limited (CARE)
From April 1993, CARE has been offering a range of credit rating services. These include areas like debt, bank
loans, corporate governance, recovery, financial sector and more. Their rating scale also includes two
categories – long term debt instruments and short-term debt ratings.
India Rating and Research Private Limited
Known formerly as Fitch Ratings India Pvt. Ltd., this company offers credit ratings to evaluate the credibility of
corporate issuers, financial institutions, project finance companies, managed funds, urban local bodies, etc.
Acuité Ratings & Research
Formerly Small Medium Enterprises Rating Agency of India Limited or (SMERA Ratings Ltd.) this credit rating
agency was established in 2011. It has two divisions – SME Ratings and Bond Ratings, and also offers 8
formats of credit rating ranging from AAA – D.
Brickwork Ratings India Private Limited
This credit rating agency rates bank loans, municipal corporations, real estate investments, NGOs, capital
market instruments, SMEs, etc.
To check a company’s credit rating, one needs to contact one of the above credit rating agencies.

Rating Scale Symbol

Lowest credit risk / Excellent credit rating AAA

Very low credit risk / Very good credit rating AA

Low credit risk / Good credit rating A

Moderate credit risk / Average credit rating BBB

High credit risk / Low credit rating B

Very high credit risk / Poor credit rating C

Defaulted D
 What are the Different Credit Rating Scales?

The various credit rating agencies offer similar ranges of rating (from AAA – D) to represent a company’s
creditworthiness and the risk they pose to investors for long-term and mid-term debt instruments.

What are the Factors that affect Credit Rating?

There are a number of factors that can affect the credit ratings of a company, including:
The company’s financial history:
 Lending and borrowing history
 Past debt
 Payment history
 Financial statements
 Level and type of current debt
The company’s future economic potential:
 Ability to repay the debt
 Projected profits
 Current performance
A credit rating is an assessment of creditworthiness for any entity that wants to borrow money. This includes
corporations, NGO's, provincial authorities, or governments. These ratings are assigned by verified credit rating
agencies that assess the company’s financial history and its ability to repay borrowed debts.
Since it is used by lenders and investors to decide whether or not to approve loans or join in business ventures,
it is important to have a good credit rating as it can help a company raise money, reduce interest rates, and
also encourages better accounting standards.
What is a credit score?
A credit score is a number that is determined by lenders and financial institutions. It is meant to show a
person's “creditworthiness” or their ability to repay a debt, loan, or mortgage.
In India, there are four credit bureaus that prepare this credit score – TransUnion CIBIL, Experian, CRIF
Highmark, and Equifax.

How does a Credit Score work?

A person’s credit score is usually expressed as a three-digit number between 300-900 (with 900 being the
highest score possible) based on their individual history of repayment, credit files, loan history and more.
Banks and other lending institutions will check this number when you apply for a loan to determine your credit
risk. This refers to the likelihood that you will pay your bills on time and can decide whether or not you will be
approved for a loan.
Your credit score will also affect the loan amounts that might be approved, as well as the interest rate for the
same. In case your credit score is very low, the lender may even reject your loan application.

How is your Score Calculated?

 As we have already mentioned, an individual’s credit score is a number between 300-900 (with 900 being the
highest score possible). Small businesses can also have credit scores, and these are calculated on a range
from 0 to 300.
Credit scores are calculated by an algorithm. This uses information such as your payment history, the amount
of your debt, and the length of your credit history. The factors that are taken into account include:
 Payment history 
 Credit utilization
 Credit duration
 New credit enquiries
 Credit mix

What to know about Credit Scores in India?

In India, the Reserve Bank of India (RBI) has licensed four credit information companies:
 TransUnion Credit Information Bureau (India) Limited (CIBIL) – this is one of the first credit information companies in
India and their credit score ranges (or CIBIL score as it is popularly known) between 300 and 900.
 CRIF Highmark – this full-service credit information bureau was founded in 2007. CRIF credit scores range between 300
to 900.
 Experian – this multinational credit reporting company started in India in 2010. Credit scores for Experian range between
300 and 850.
 Equifax – this credit information company is a joint venture with Equifax Inc. USA and leading financial institutions in
India. The credit score for Equifax ranges between 300 and 850.
Banks and financial institutions can enquire with these authorized credit bureaus and obtain an abridged credit
report of you or your business’s credit history when evaluating your loan application.

What is a Good Credit Score?

 
Different credit bureaus use different scoring models while calculating credit scores, so yours may vary based
on which credit bureau furnishes your credit report. In general, credit score ranges are as follows:

300-579 Poor

580-669 Fair

670-739 Good

740-799 Very good

800-850 Excellent

A credit score above 700-750 is generally considered good.

However, every lending institution has their own risk grading. For example, one bank may consider a score
above 700 to be good, while another bank may prefer a score above 750. In general, a score of 750 to 800
should be considered good in most situations.
 Why do you need a Good Credit Score?

Since banks and other lending institutions use your credit score to assess how worthy you are of credit
approvals, it is important to have a good credit score.
If you have a higher credit score, it means that you have demonstrated responsible credit behaviour in the past.
This may help potential lenders have more confidence in approving requests for loans and other credit. You
might also get other benefits, such as lower interest rates, better terms of repayment, and a quicker loan
approval process.
Different lenders may also emphasise different aspects of your credit score, such as your income or your
payment history.

How to check your Credit Score?

The Reserve Bank of India has made it mandatory for all four licensed credit information companies to allow
you to check your credit score online and for them to provide one free credit score report each year.
Here is how you can check it for free:
 Step 1: Go to the credit rating company’s website, such as the CIBIL website, or the CRIF Highmark website
 Step 2: Login using your login credentials, or create an account using your information (such as your name, contact
number, and email address)
 Step 3: Fill out the provided form with your details, including your PAN number or UID
 Step 4: Once this has been completed, submit the form
 Step 5: You should then receive an email to your registered email-id so that your identity can be verified
 Step 6: Once verified, you may be asked for additional information that may be required, such as questions about your
loans and credit cards.
 Step 7: After this is completed, your credit report will be delivered to your registered email-id.
If you wish to check your credit score more than once a year, certain credit bureaus will let you do so with paid
monthly reports. Additionally, a good time to check your credit score before applying for a loan or for a credit
card.

How to improve your Credit Score?

To ensure that your credit score remains high and avoid weak scores, it is important to know which factors can
affect it. These may include avoiding things like late or missed payments and high credit utilization (or using too
much of your credit card limit). 
Here are some ways to improve your credit score:
 Pay your equated monthly instalments (EMIs) and credit card dues on time.
 Do not use too much of your credit card limit, and keep your Credit Utilization Ratio (CUR) within 30 percent.
 Avoid applying for multiple loans or credit cards within a short period of time.
 Review your credit report regularly so that you know exactly what to expect.
 Unless it is absolutely necessary, do not cancel your old credit cards, as older cards can assure lenders that you have been
paying your bills on time.
A credit score is a number that essentially estimates your ability as a borrower to pay back debts, credit card
bills, or loans, i.e., your “credit risk”.
A higher credit score can help you get many benefits, such as lower interest rates.  On the other hand, a weak
credit score (which is a result of factors like missed payments, or overutilization of credit card limits) can mean
that your loan applications might get rejected.
You can make sure your credit score remains good so that you will be able to access these credit opportunities
whenever needed.

Credit Card
A card that allows the owner to make cash-less purchases

What is a Credit Card?

A credit card is a simple yet no-ordinary card that allows the owner to make purchases without bringing out
any amount of cash. Instead, by using a credit card, the owner borrows funds from the issuing company, which
is often a bank, to make purchases whether online or onsite.
In exchange for the credit, the card owner has to return the full amount borrowed within a given period of time
to avoid incurring additional charges. Beyond that time, a percentage of the owed balance
amount, interest, needs to be paid, along with the owed balance amount.

Credit Card vs. Debit Card

Both a credit card and the debit card are useful tools that give the owners the power to make purchases
without taking out some physical bills from their wallets. The two cards also require the signature of the
cardholders when making transactions.
Moreover, debit cards can be used to buy at some merchants where credit cards cannot be used. However,
there are differences between these two cards, and the most obvious is the source of the funds used for the
purchases.
 A credit card uses funds from the bank that is verified using the owner’s credit line. When applying for
a card, identification is made in order to create an account with the credit card holder’s name.
Meanwhile, the debit card takes the money straight from the card owner’s bank account.
 A credit card holder receives a statement of account each month, detailing the purchases or cash
advance loans made on the card. The debit card holder does not receive any billing statement because
the money used for making purchases was already taken at the time of purchase from his or her bank
account.
 A credit card can incur charges, especially if the amount borrowed is not returned in full within the
given grace period. The debit card does not charge any fee because the purchases are paid in real-time
through the owner’s bank account.

Types of Credit Cards

There are numerous types of credit cards that are available for use. However, we will stick to the five most
commonly used types.

#1 Regular credit cards

Regular credit cards are the simplest type of credit card. They don’t offer perks and rewards. They are ideal for
parents who want to provide their children with the convenience of using a credit card.
One benefit of regular credit cards that they have a predetermined credit limit, which allows the user to control
their use of the card. Once the purchases have reached the limit, no further purchases can be made, and they
will need to make payments first in order to open up the card again.
#2 Balance transfer credit cards
This type of card is an option offered to those who have a balance on existing cards. The debt is paid off with
the new card and the owner pays the debt to the new card at ideally lower interest rates.

#3 Student credit cards

A student credit card is specifically designed for individuals who need a credit card but do not have a credit
history yet. It requires a higher approval rating compared to standard or regular cards.

#4 Charge cards
Charge cards are beneficial in the sense that they do not charge interest or fees simply because the balance
needs to be paid in full at the end of every month. However, in the event of a failed payment, charges are
made, or the card may be revoked, depending on the terms and conditions set by the financial company.

#5 Subprime credit cards

This type of card is considered to be among the worst and most scheming type of cards, as it targets individuals
with a bad credit history. Its fees are exorbitant, but people still use them because of the lack of choices and
opportunities to open a credit line elsewhere.
Even if there are already federal laws regulating the fees subprime credit cards can charge, they seem to find
ways and loopholes that let them continue their scheme.

Best Card to Use

People with credit cards will agree about how easy it is to make purchases with it. In fact, it is so much easier
than using a debit card. However, between the two, using a debit card is still better and safer because of the
fact that it charges no interest and the user will never go beyond his means.
Meanwhile, below are several instances when using the credit card over the debit card is better:

#1 Renting a hotel room

The credit card is a better option here because it also allows the hotel to charge further any room service or
food ordered by the cardholder.

#2 Rewards
There are many credit cards that offer rewards such as travel incentives or free miles and cash-back rewards.

#3 Cash-less transactions anywhere

When traveling, it is not only inconvenient but also unsafe to bring cash everywhere. Using a card is less bulky
as travelers don’t need to bring bills around.

#4 Emergency payments
Making unplanned payments is perhaps the best part of owning a credit card – having the power to make
emergency payments even in the absence of cash. One example is an accident or a trip to the emergency room.

Final Thoughts
Credit cards are useful tools for making purchases. However, users must be extremely careful because
overusing them may bring them deep into a debt hole. Responsible usage should always be practiced.
Top 10 Types of Financial Services Offered in India

The term "financial services" is an umbrella concept for a range of financial services provided by the industry. Owing to its
sheer massiveness in the number of services provided and the demand drivers, the financial services sector in India is
witnessing an upward trajectory. With numerous job opportunities available, a simple financial analysis course can put you
on the track to success in the field of finance as a financial analyst. 

What are financial services?

All services related to money are considered financial services. Banking, mortgages, credit cards, payment services, tax
preparation and planning, accounting, and investing are types of financial services industries. Financial services are
frequently the exclusive domain of businesses and professionals.

Why Financial Services are Important?

Efficient operation of the economy depends on the financial services. Financial services enable people to make big
purchases and save for the future. It allows for the free flow of capital and market liquidity. The economy expands, and
businesses in this area are better able to manage risk when the sector is robust. It also allows a proper framework to
function during financial planning. It’s a high-growth sector with ample job opportunities. The current financial regulatory
framework is often criticized due to its incompleteness, demanding it to be reformed.

Understanding the Indian Financial System

The Indian financial system is primarily divided into two segments: banks and non-banking financial institutions. These two
segments also come with subcategories. Under banks are the commercial and cooperative ones. The commercial banks are
divided into schedule and non-schedule banks. The schedule banks consist of public sector banks, private sector banks,
foreign banks, regional rural banks, small financial banks, and payment banks. Whereas local area banks are classified as
non-scheduled banks.

The non-banking financial institutions, or NBI, consist of All India Financial Institutions (AIFI), NBFCs, Primary Dealers,
Credit Information Companies. All India Financial Institution consist of bodies such as NABARD, EXIM, NHB, SIDBI, and
MUDRA. 

Types of Financial Services in India

The Indian financial services industry consists of many segments and crucial sub-segments. Here are some of the major
types of financial services in India:

 Banking
The financial services sector in India is anchored by the banking sector. Numerous banks from the public, private,
foreign, regional rural, and urban/rural cooperative sectors exist throughout the nation. Individual banking,
business banking, and loans are some of the financial services provided under this segment. The Reserve Bank of
India (RBI) oversees and maintains the liquidity, capitalization, and financial stability of the banking system.

 Professional Advisory
In India, there is a strong presence of professional financial advising service providers who offer a variety of
services to both people and businesses, including investment due diligence, M&A counseling, valuation, real
estate consulting, risk consulting, and tax consulting. Numerous service providers, from small domestic consulting
firms to huge multinational corporations, provide these services. This is one of the more common types of areas in
financial services.

 Wealth Management
According to the clients' financial objectives, risk tolerance, and time horizons, financial services offered within this
segment include managing and investing customers' wealth across a variety of financial instruments,
encompassing real estate, commodities, loans, stock, mutual funds, insurance, derivatives, and structured goods.
Any finance enthusiast must also familiarize them self with the advantages of financial risk management. 
  Mutual Funds
Providers of mutual funds offer expert investment services for funds made up of several asset classes, usually
debt and equity-linked assets. Due to their typically lower risks, tax advantages, predictable returns, and qualities
of diversification, these products are particularly popular in India. Due to its popularity as a low-risk wealth
multiplier, the mutual fund market has seen double-digit growth in assets under management over the last five
years.

 Insurance
This type of financial service falls under personal finance. General insurance and Life insurance are the two main
categories of financial services offered in this market area. Solutions for insurance give people and businesses
protection from accidents and unanticipated events. Pay-outs for these products depend on a number of important
qualitative and quantitative factors, including the product's type, time horizons, customer risk assessment,
premiums, and others. The Insurance Regulatory and Development Authority of India (IRDAI) oversee the
insurance industry. 

 Stock Market
The stock market segment offers a variety of equity-linked investment solutions for users of the National Stock
Exchange and Bombay Stock Exchange in India. Customers' returns are based on capital appreciation, which is
growth in the equity solution's value and/or dividends, as well as payments made by businesses to their investors.

 Treasury/Debt Instruments
Investments in bonds issued by governments and commercial organizations are among the services provided in
this category (debt). At the conclusion of the investment period, the bond issuer (borrower) gives the investor fixed
payments (interest) and principal repayment. Listed bonds, non-convertible debentures, capital-gain bonds, Gold
savings bonds, tax-free bonds, etc. are some examples of the different types of instruments in this area.

 Tax/Audit Consulting
This market encompasses a broad range of financial services in the areas of tax and auditing. Based on the
clientele they serve, businesses and individuals, this service domain can be divided into: individual tax (calculating
tax obligations, submitting tax returns, receiving tax-savings advice, etc.); Business tax (Determining tax liabilities,
structuring and analyzing transfer prices, registering for GST, providing tax compliance advice, etc.). Services in
the auditing sector include statutory audits, internal audits, service tax audits, tax audits, process and transaction
audits, risk audits, stock audits, etc. 

 Capital Restructuring
These services, which are largely provided to businesses, include changing capital structures (debt and equity) in
order to increase profitability or address emergencies like bankruptcies, volatile markets, liquidity shortages, or
hostile takeovers. In this market, complex deals, lender negotiations, rapid M&A, and capital rising are typical
examples of financial solutions. The types of financial solutions in this segment typically include structured
transactions, lender negotiations, accelerated M&A and capital rising. 

 Portfolio Management
Through portfolio managers who assess and optimize investments for customers across a wide range of assets,
this segment offers a highly specialized and tailored variety of solutions that help clients achieve their financial
goals. These services are non-discretionary and broadly targeted at HNIs.

Top Financial Services companies

 Mahindra and Mahindra Financial Services Ltd.

 HDB Finance Services

 Bajaj Finance Ltd.

 IDFC First Bank Ltd.

 Muthoot Finance Ltd.

 Tata Capital Financial Services Ltd.

  Aditya Birla Finance Ltd.

 Cholamandalam Investment & Finance Company Limited

 L&T Finance Holdings Ltd.

(UNIT: 5)

Insurance Companies vs. Banks: What's the Difference?

Both banks and insurance companies are financial institutions, but they don’t have as much in common as you
might think. Although they do have some similarities, their operations are based on different models that lead to
some notable contrasts between them.

KEY TAKEAWAYS
 Banks and insurance companies are both financial institutions, but they have different business models
and face different risks.
 While both are subject to interest rate risk, banks have more of a systemic linkage and are more
susceptible to runs by depositors.
 While insurance companies’ liabilities are more long-term and don’t tend to face the risk of a run on their
funds, they have been taking on more risk in recent years, leading to calls for greater regulation of the
industry.

Insurance Companies
Both banks and insurance companies are financial intermediaries. However, their functions are different. An
insurance company ensures its customers against certain risks, such as the risk of having a car accident or the risk
that a house catches on fire. In return for this insurance, their customers pay them regular insurance premiums.
Insurance companies manage these premiums by making suitable investments, thereby also functioning as financial
intermediaries between customers and the channels that receive their money. For instance, insurance companies
may channel the money into investments such as commercial real estate and bonds.
Insurance companies invest and manage the monies they receive from their customers for their own benefit.
Their enterprise does not create money in the financial system.

Banks
Operating differently, a bank takes deposits and pays interest for their use, and then turns around and lends out the
money to borrowers who typically pay for it at a higher interest rate. Thus, the bank makes money on the difference
between the interest rate it pays you and the interest rate that it charges those who borrow money from it. It
effectively acts as a financial intermediary between savers who deposit their money with the bank and investors
who need this money.
Banks use the monies that their customers deposit to make a larger base of loans and thereby create money. Since
their depositors demand only a portion of their deposits every day, banks keep only a portion of these deposits in
reserve and lend out the rest of their deposits to others.

Key Differences
Banks accept short-term deposits and make long-term loans. This means that there is a mismatch between their
liabilities and their assets. In case a large number of their depositors want their money back, for example in a bank
run scenario, they might have to come up with the money in a hurry.
For an insurance company, however, its liabilities are based on certain insured events happening. Their customers
can get a payout if the event they are insured against, such as their house burning down, does happen. They don’t
have a claim on the insurance company otherwise.
 
Insurance companies tend to invest the premium money they receive for the long-term so that they are in a position
to meet their liabilities as they arise.
While it is possible to cash in certain insurance policies prematurely, this is done based on an individual’s needs. It
is unlikely that a very large number of people will want their money at the same time, as happens in the case of a
run on the bank. This means that insurance companies are in a better position to manage their risk.
Another difference between banks and insurance companies is in the nature of their systemic ties. Banks operate
as part of a wider banking system and have access to a centralized payment and clearing organization that ties
them together. This means that it is possible for systemic contagion to spread from one bank to another because of
this sort of interconnection. U.S. banks also have access to a central bank system, through the Federal Reserve,
and its facilities and support.
Insurance companies, however, are not part of a centralized clearing and payment system. This means that they
are not as susceptible to systemic contagion as banks are. However, they don’t have any lender of last resort, in the
sort of role that the Federal Reserve serves for the banking system.

Special Considerations
There are risks pertaining to both interest rates and to regulatory control that impact both insurance companies and
banks, although in different ways.

Interest Rate Risk

Changes in interest rates affect all sorts of financial institutions. Banks and insurance companies are no exceptions.
Considering that a bank pays its depositors an interest rate that is competitive, it might have to hike its rates if
economic conditions warrant. Generally, this risk is mitigated since the bank can also charge a higher interest rate
on its loans. Changes in interest rates could also adversely impact the value of a bank’s investments.
Insurance companies are also subject to interest rate risk. Since they invest their premium monies in various
investments, such as bonds and real estate, they could see a decline in the value of their investments when interest
rates go up. And during times of low-interest rates, they face the risk of not getting a sufficient return from their
investments to pay their policyholders when claims come due.

Regulatory Authority
In the United States, banks and insurance companies are subject to different regulatory authorities. National banks
and their subsidiaries are regulated by the Office of the Comptroller of the Currency (OCC).
In the case of state-chartered banks, they are regulated by the Federal Reserve Board for banks that are members
of the Federal Reserve System. As for other state-chartered banks, they fall under the purview of the Federal
Deposit Insurance Corporation, which insures them. Various state banking regulators also supervise the state
banks.
Insurance companies, however, are not subject to federal regulatory authority. Instead, they fall under the purview
of various state guaranty associations in the 50 states. In case an insurance company fails, the state guaranty
company collects money from other insurance companies in the state to pay the failed company’s policyholders.

Venture Capital

Venture capital (VC) is a form of private equity funding that is generally provided to
start-ups and companies at the nascent stage. VC is often offered to firms that show
significant growth potential and revenue creation, thus generating potential high
returns.

How Does Venture Capital Work?

Entities offering VC invest in a company until it attains a significant position and then
exits the same. In an ideal scenario, investors infuse capital in a company for 2 years
and earn returns on it for the next 5 years. Expected returns can be as high as 10x of
the invested capital.
Financial venture capital can be offered by –

 Venture capital firms,

 Investment banks and other financial institutions,
 High net worth individuals (Angel investors), etc.
Venture capital firms create venture capital funds – a pool of money collected from
other investors, companies, or funds. These firms also invest from their own funds to
show commitment to their clients.

Who are Venture Capitalists?

Venture capitalists are those people who invest in early-stage companies having
promising futures. A venture capitalist can be a sole investor or a group of investors
who come together through investment firms.

When Should One Go for Venture Capital Funding?

 At the stage of expansion
If your next plan is to expand your business, opting for funding through venture
capitalists is a good option. Doing so can help you encash their business, financial and
legal expertise which is usually required while business expansion.

 Requirement of strong mentoring

A venture capitalist brings in a lot of expertise, knowledge, and networking along
with his capital investment. You can utilize their guidance to build your own network,
promote your business with their direction and ultimately make it reach bigger
heights.

 At the time of competition

Once a start-up has gained a substantial reach and is most likely to face competition in
the real market, it is the correct time to go for venture capital funding for surviving
and giving tough competition to others.

Types of Venture Capital

VC can be categorized as per the stage in which it is being invested. Generally, it is of
the following 6 types –

# Type Definition 
1 Seed funding As the same suggests, seed funding or seed capital is the
capital invested to help entrepreneur(s) conduct initial
activities for setting up a company. This can include
product research & development, market research,
business, business plan creation, etc.

Seed funding may also be provided by the owners

themselves or their family members and friends.

2 Start-up Start-up capital is often used interchangeably with seed

capital funding. However, there are minor differences.

Usually, business owners avail start-up capital after

they have completed the processes that involve seed
funding. It can be used to create a product prototype,
hire crucial management personnel, etc.

3 First stage, First stage is provided to businesses that have a product

first round or and want to start commercial manufacturing, sales, and
series A marketing.

4 Expansion As the name suggests, expansion capital is the fund

funding required by a company to expand its operations. The
funds can be used to tap new markets, create new
products, invest in new equipment and technology, or
even acquire a new company.

5 Late-stage Late-stage funding is offered to businesses that have

funding achieved success in commercial manufacturing and sales.
Companies in this stage may have tremendous growth in
revenue but not show any profit.

6 Bridge Also known as mezzanine financing, bridge funding helps

funding a company to meet its short-term expenses necessary to
create an initial public offering (IPO).
Features of Venture Capital
Some of the features of venture capital are –

 Not for large-scale industries – VC is particularly offered to small and medium-
sized businesses.
 Invests in high risk/high return businesses – Companies that are eligible for VC
are usually those that offer high return but also present a high risk.
 Offered to commercialize ideas – Those opting for VC usually seek investment
to commercialize their idea of a product or a service.
 Disinvestment to increase capital – Venture capital firms or other investors may
disinvest in a company after it shows promising turnover. The disinvestment
may be undertaken to infuse more capital, not to generate profits.
 Long-term investment – VC is a long-term investment, where the returns can
be realized after 5 to 10 years.

Advantages and Disadvantages of VC

Advantages – 

 Help gain business expertise 

One of the primary advantages of venture capital is that it helps new entrepreneurs
gather business expertise. Those supplying VC have significant experience to help the
owners in decision making, especially human resource and financial management.

 Business owners do not have to repay 

Entrepreneurs or business owners are not obligated to repay the invested sum. Even if
the company fails, it will not be liable for repayment.

 Helps in making valuable connections

Owing to their expertise and network, VC providers can help build connections for the
business owners. This can be of immense help in terms of marketing and promotion.

 Helps to raise additional capital 

VC investors seek to infuse more capital into a company for increasing its valuation.
To do that, they can bring in other investors at later stages. In some cases, the
additional rounds of funding in the future are reserved by the investing entity itself.

 Aids in upgrading technology

VC can supply the necessary funding for small businesses to upgrade or integrate new
technology, which can assist them to remain competitive.

Disadvantages –

 Reduction of ownership stake

The primary disadvantage of VC is that entrepreneurs give up an ownership stake in
their business. Many a time, it may so happen that a company requires additional
funding that is higher than the initial estimates. In such situations, the owners may end
up losing their majority stake in the company, and with that, the power to make
decisions.

 Give rise to a conflict of interest 

Investors not only hold a controlling stake in a start-up but also a chair among the
board members. As a result, conflict of interest may arise between the owners and
investors, which can hinder decision making.

 Receiving approval can be time-consuming 

VC investors will have to conduct due diligence and assess the feasibility of a start-up
before going ahead with the investment. This process can be time-consuming as it
requires excessive market analysis and financial forecasting, which can delay the
funding.

 Availing VC can be challenging 

Approaching a venture capital firm or investor can be challenging for those who have
no network.

In 2019, the total value of venture capital deployed throughout India was worth $10
billion. This is an increase of 55% compared to the previous year and is currently the
highest.

VC was introduced in the country back in 1988, after economic liberalization. IFC,
ICICI, and IDBI were the few organizations that established venture capital funds and
targeted large corporations. The formalization of the Indian VC market started only
after 1993.

Difference Between Bill Discounting and Factoring

Bill Discounting and Factoring are two types of short-term finance through which the financial requirements of a
company can be fulfilled quickly. The former is related to the borrowing from the commercial bank while the
latter is associated with the management of book debts.
he term factoring includes entire trade debts of a client. On the other hand, bill discounting includes only
those trade debts which are supported by account receivables. In short, bill discounting, implies the advance
against the bill, whereas factoring can be understood as the outright purchase of trade debt.
So, there exist a fine line of differences between bill discounting and factoring, which are explained in the article
provided below.

Comparison Chart
BASIS FOR
BILL DISCOUNTING FACTORING
COMPARISON

Meaning Trading the bill before it A financial transaction in

becomes due for payment
at a price less than its face
value is known as Bill
Discounting.
which the business
organization sells its book
debts to the financial
institution at a discount is
known as Factoring.

Arrangement The entire bill is discounted The factor gives maximum

and paid, when the
transaction takes place.
part of the amount as
advance when the transaction
takes place and the remaining
amount at the time of
settlement.

Parties Drawer, Drawee and Payee Factor, Debtor and Client

Type Recourse only Recourse and Non Recourse

Governing The Negotiable Instrument No such specific act.

statute Act, 1881

Financier's Discounting Charges or Financier gets interest for

Income interest financial services and
commission for other allied
services.

Assignment of No Yes
Debts
Definition of Bill Discounting
Bill Discounting is a process of trading or selling the bill of exchange to the bank or financial institution before it
gets matured, at a price which is less than its par value. The discount on the bill of exchange will be based on
the remaining time for its maturity and the risk involved in it.
First of all the bank satisfies himself regarding the credibility of the drawer, before advancing money. Having
satisfied with the creditworthiness of the drawer, the bank will grant money after deducting the discounting
charges or interest. When the bank purchases the bill for the customer, it becomes the owner of the respective
bills. If the customer delays the payment, then he has to pay interest as per prescribed rates.
Further, if the customer defaults payment of the bills, then the borrower shall be liable for the same as well as
the bank can exercise Pawnee’s rights over the goods supplied to the customer by the borrower.

Definition of Factoring
Factoring is a transaction in which the client or borrower sells its book debts to the factor (financial institution) at
a discount. Having purchased the receivables the factor finances, money to them after deducting the following:
 An appropriate margin (reserve)
 Interest charges for the financial services
 Commission charges for the supplementary services.
Now, the client forwards the collection from the customer to the financial institution or he gives the instruction to
forward the payment directly to the factor and settles the balance dues. The bank provides the following
services to the client: Credit Investigation, Debtors Ledger Maintenance, Collection of Debts, Credit Reports on
Debtors and so on.

Graphical Representation of Factoring

The types of factoring are as under:
 Disclosed Factoring: All the parties know about the factoring arrangement.
 Undisclosed Factoring: The parties do not know about the factoring arrangement.
 Recourse Factoring: In the case of default in payment by the customer the borrower pays the amount
of bad debts.
 Non-recourse Factoring: The factors himself bears the amount of bad debt, and that is why the
commission rate is higher.

Key Differences between Bill Discounting and

Factoring
The following are the major differences between bill discounting and factoring:
 Selling of bills at a discount to the bank, before its maturity is known as Bill Discounting. Selling of the
debtors to a financial institution at a discount is Factoring.
  The bill is discounted, and the whole amount is paid to the borrower at the time of the transaction.
Conversely, the maximum part of the amount is provided as an advance, and the rest of the amount is
given as balance when the dues are realized.
 The parties to bill discounting are a drawer, Drawee, and payee whereas the parties to factoring are
the factor, debtor, and borrower.
 The bill discounting is always recourse, i.e. if the customer defaults in payment of debt, then the
payment is made by the borrower. On the other hand, the factoring can be recourse and nonrecourse.
 The Negotiable Instrument Act, 1881 contains the rules relating to bills discounting. In contrast to
factoring which is not covered under any act?
 In bill discounting the financier gets the discounting charges for financial services, but in the case of
factoring the factor gets interest and commission.
 In factoring, the debts are assigned which is not done in bill discounting.

Conclusion
In bill discounting, bills are traded while in the case of factoring accounts receivable are sold. There is a big
difference between these two topics. In bill discounting the bank provides a particular service of financing, but if
we talk about factoring additional services are also provided by the financier.
(UNIT: 3)

MANAGING OF ISSUE SHARES AND BONDS

MOBILISING OF FIXED DEPOSITS-INTER-
CORPORATE LOANS.