Financial inclusion:

Financial inclusion is the availability of financial services to everyone, regardless of income

or savings. It aims to provide basic financial services to everyone in society, including
disadvantaged people and low-income groups. Financial inclusion includes access to banking,
loans, equity, and insurance products. It also includes access to transactions, payments,
savings, and credit. Financial inclusion is a goal of many international standard-setting bodies
and national governments. It is also seen as a tool for achieving policy goals beyond the
financial sector. Financial inclusion aims to remove barriers that exclude people from
participating in the financial sector

Small Finance Banks (SFBs) are a specific category of banks established by the Reserve
Bank of India (RBI) in consultation with the Government of India. They were created to
promote financial inclusion by providing banking services to unbanked and underserved
sections of the population. SFBs are similar to regular commercial banks in that they can
perform all basic banking activities, including accepting deposits and providing loans.
However, they have a specific focus on serving certain target segments, which include:
1. Small Business Units: SFBs aim to support and provide financial services to small
businesses, including micro, small, and medium-sized enterprises (MSMEs). These
businesses often struggle to access credit and banking services from traditional banks.
2. Small and Marginal Farmers: SFBs extend their services to small and marginal
farmers who have limited access to formal banking services. These banks offer
various agricultural loans and financial products tailored to the needs of farmers.
3. Micro and Small Industries: SFBs play a crucial role in supporting micro and small-
scale industries by offering financing options and banking services that are suitable
for their requirements.
4. Unorganized Entities: SFBs also target unorganized or informal sector entities, such
as self-help groups, street vendors, and other unbanked or underbanked individuals
and groups.
To achieve their mission of financial inclusion, Small Finance Banks typically adopt
innovative and technology-driven approaches to reach out to remote and underserved areas.
They may also offer simplified and easy-to-access banking products to cater to the needs of
their target customer segments.

Banks vs small finance banks:

1. Commercial Banks:
• Commercial banks in India serve a wide range of customers, including
individuals, businesses of all sizes (small, medium, and large enterprises),
government organizations, and other entities.
 • They do not have specific restrictions on the types of customers they can serve
and can provide banking services to a broad and diverse customer base.
• Commercial banks typically offer a wide range of financial products and
services, catering to various customer needs and preferences.
2. Small Finance Banks (SFBs):
• SFBs have a specific mandate to primarily serve unbanked and underserved
segments of the population, including unorganized workers, small
businessmen, small farmers, and micro, small, and medium enterprises
(MSMEs).
• They are designed to focus on financial inclusion and are required to allocate a
significant portion of their lending to these priority sectors.
• While SFBs can offer a range of banking services like commercial banks, they
are expected to tailor their products and services to meet their target customer
segments' unique needs.
while commercial banks have a broad customer base and serve a wide range of customers and
industries, Small Finance Banks are specialized institutions with a mandate to primarily cater
to specific segments of the population that have historically had limited access to formal
banking services. This specialization allows SFBs to focus on promoting financial inclusion
and addressing the unique financial needs of their target customers.

REGULATORY ASPECTS OF SFB’s

The regulatory aspects of SFBs are covered in the RBI's guidelines on the licensing and
operations of small finance banks, which are available on the RBI's website. The following
are some of the key regulatory aspects of SFBs:
• Eligibility: To be eligible for a license to operate as a small finance bank, an entity
must meet the following criteria:
o It must be a non-operative financial holding company (NOFHC) or a non-
banking financial company (NBFC) with a minimum net worth of INR 500
crore.
o It must have a track record of at least 10 years in providing financial services
to small businesses and farmers.
o It must have a sound corporate governance structure.
o It must have a strong risk management framework.
• Capital requirements: SFBs are required to maintain a minimum capital adequacy
ratio (CAR) of 15%. This is higher than the CAR for commercial banks, which is
11.5%. The higher CAR for SFBs is intended to mitigate the risks associated with
their lending to small businesses and farmers.
 • Prudential norms: SFBs are subject to the same prudential norms as commercial
banks, including norms on asset classification, provisioning, and concentration of risk.
In addition, SFBs are also subject to certain specific prudential norms, such as:
o A requirement to lend at least 75% of their adjusted net bank credit (ANBC) to
the priority sector.
o A limit on their exposure to single borrowers and groups of borrowers.
o A requirement to maintain a minimum liquidity ratio of 25%.
The RBI is constantly reviewing the regulatory framework for SFBs to ensure that it is
appropriate for the risks associated with SFBs and that it supports their growth and
development.

NBFC:
An NBFC, or Non-Banking Financial Company, is a financial institution that provides a
variety of financial services but does not have a banking license. This means that they cannot
accept demand deposits from the public, such as checking or savings accounts. NBFCs are
regulated by the Reserve Bank of India (RBI) in India.
TYPES OF NBFC’S:
NBFCs can be classified into two broad categories based on their liability:
• Deposit-taking NBFCs (D-NBFCs): These NBFCs accept deposits from the public,
such as fixed deposits and recurring deposits. They are regulated by the RBI under the
Non-Banking Financial Companies (NBFC) Deposits Acceptance (Reserve Bank)
Directions, 1998.
• Non-deposit-taking NBFCs (ND-NBFCs): These NBFCs do not accept deposits from
the public. They are regulated by the RBI under the Non-Banking Financial
Companies (NBFC) Directions, 1977.
NBFCs can also be classified into different categories based on their activity:
• Asset finance companies (AFCs): These NBFCs provide loans for the purchase of
assets, such as cars, trucks, and machinery.
• Loan companies: These NBFCs provide loans to individuals and businesses for a
variety of purposes, such as personal loans, business loans, and education loans.
• Investment companies: These NBFCs invest in securities, such as stocks, bonds, and
mutual funds.
• Factoring companies: These NBFCs provide short-term financing to businesses by
buying their accounts receivable.
• Housing finance companies: These NBFCs provide loans for home purchases.
• Microfinance institutions (MFIs): These NBFCs provide small loans to low-income
borrowers.
 • Infrastructure finance companies (IFCs): These NBFCs provide loans for
infrastructure projects, such as roads, bridges, and power plants.
• Infrastructure Finance Company (IFC): Circular Infrastructure Finance Company is
an NBFC with the principal business of providing finance to infrastructure projects
meeting the following criteria: It should deploy at least 75 percent of total assets in
infrastructure loans Should have a minimum net owned fund of ₹ 300 Crore Should
have a credit rating of ‘A’ and a CRAR of 15%.
• Infrastructure Debt Fund (IDF): Infrastructure Debt fund is an NBFC which facilitate
the flow of long-term debt into infrastructure projects. It can raise resources through
currency bonds of minimum five years. If you are interested in raising funds and
financing Infrastructure projects like construction of roads, bridges and other
infrastructure projects etc. this is recommended
• Core investment companies (CICs): These NBFCs invest in shares and debt
instruments of other companies.
• Systemically important NBFCs (NBFC-SI): These are NBFCs that are considered to
be systemically important to the financial system. They are subject to stricter
regulations than other NBFCs.

General classifications of NBFC businesses.

• Consumer finance companies: These NBFCs provide financing to individuals for a
variety of purposes, such as personal loans, auto loans, and credit cards. They
typically target borrowers with good credit scores and offer competitive interest rates.
• Business finance companies: These NBFCs provide financing to small businesses for
a variety of purposes, such as working capital loans, equipment loans, and real estate
loans. They typically have more lenient lending criteria than banks and can be a good
option for businesses with limited credit history.
• Captive finance subsidiaries: These NBFCs are owned by a parent company and
provide financing to customers of that company. For example, an automobile
manufacturer might own a captive finance subsidiary that provides loans to customers
who buy its cars. Captive finance subsidiaries can offer competitive interest rates and
terms because they have access to the parent company's resources.

CHALLENGES FACED BY NBFC’S

• Challenge of Funding due to the absence of Refinancing Option: NBFCs typically
rely on debt financing to raise funds. However, they do not have access to the same
refinancing options as banks. This means that they can be more vulnerable to liquidity
shocks.
 • Challenges Related to Obtainment of NBFC license: The RBI has put in place a
number of requirements for NBFCs to obtain a license. These requirements can be
complex and time-consuming to meet.
• Intricate NBFC Compliances in India: NBFCs are subject to a number of regulations
and compliance requirements. These requirements can be complex and costly to
comply with.
• No Versatility in Loan Classification of NPAs: NBFCs are not allowed to classify
loans as non-performing assets (NPAs) as easily as banks. This can make it difficult
for NBFCs to manage their NPAs.
• Absence of a Statutory Recovery Tool: NBFCs do not have a statutory recovery tool
like the Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 (SARFAESI Act) that banks have. This can make it
difficult for NBFCs to recover loans from defaulting borrowers.
• Several Representative Bodies: There are several representative bodies for NBFCs in
India. This can lead to confusion and lack of coordination.
• Absence of Defaulter Database: There is no central defaulter database for NBFCs.
This can make it difficult for NBFCs to assess the creditworthiness of borrowers.
• Stripping of Priority Sector Status to Bank Lending To NBFCs: In 2020, the RBI
stripped NBFCs of their priority sector lending status. This means that banks are no
longer required to lend to NBFCs for priority sector lending purposes. This can make
it more difficult for NBFCs to raise funds.
• Minimum Mandatory Credit Rating for NBFC: The RBI has mandated that all NBFCs
with assets of more than INR 500 crore must obtain a minimum mandatory credit
rating from a credit rating agency. This can be a costly and time-consuming process.

STRUCTURE OF MUTUAL FUNDS:

The structure of mutual funds is a topic that involves the different entities and participants
that are involved in the creation, management, and regulation of mutual funds in India.
According to the web search results, some of the main points about the structure of mutual
funds are:
• The structure of mutual funds in India is a three-tier one that consists of sponsors,
trustees, and asset management companies (AMCs). They are all regulated by the
Securities and Exchange Board of India (SEBI) under the SEBI (Mutual Funds)
Regulations, 1996.
• A sponsor is any person or entity that can set up a mutual fund scheme to generate
income through fund management. A sponsor has to create a public trust under the
Indian Trust Act, 1882 and register it with SEBI. The trust appoints trustees who
oversee the functioning of the AMC, which is created by the sponsor to manage the
funds.
 • A trustee is responsible for protecting the interests of the unit holders and ensuring
compliance with the SEBI regulations. A trustee can be either a board of trustees or a
trust company. A trustee has to provide a half-yearly report on the fund and the AMC
to SEBI.
• An AMC is the investment manager of the mutual fund. It has to be approved by
SEBI and have a net worth of at least Rs.50 crore at all times. An AMC has to invest
seed capital of 1% of the amount raised in all open-ended schemes, subject to a
maximum of Rs.50 lakh. An AMC cannot engage in any other business than financial
advisory and investment management.
• There are other market participants that support the structure of mutual funds, such as
custodians, transfer agents, depository, banks, unit holders, etc. Custodians are
responsible for holding and safeguarding the securities owned by the mutual fund.
Transfer agents are responsible for issuing and redeeming units of the mutual fund
and maintaining records of unit holders. Depository is an entity that holds securities in
electronic form and facilitates transactions between investors and issuers. Banks are
responsible for providing banking services to the mutual fund, such as collection of
subscription money, payment of dividends, etc. Unit holders are the investors who
buy and sell units of the mutual fund schemes.

CLASSIFICATION OF MUTUAL FUNDS

Based on structure:
• Open-ended funds: These funds allow investors to buy and sell shares at any time,
during the trading hours of the stock exchange.
• Close-ended funds: These funds have a fixed number of shares that are issued at the
time of the fund's launch. Shares in close-ended funds can only be bought and sold
through the stock exchange, and they are traded like any other stock.
• Interval funds: These funds combine the features of open-ended and close-ended
funds. They allow investors to buy and sell shares at any time, but they do so at
predetermined intervals, such as once a month or once a quarter.
Based on investment objective:
• Equity funds: These funds invest in stocks. They can be classified into different
categories based on the size of the companies they invest in, such as large-cap funds,
mid-cap funds, and small-cap funds. They can also be classified based on the
geographic region they invest in, such as Indian equity funds, US equity funds, and
European equity funds.
• Debt funds: These funds invest in bonds and other debt securities. They can be
classified into different categories based on the maturity of the debt securities they
invest in, such as short-term debt funds, medium-term debt funds, and long-term debt
funds. They can also be classified based on the credit quality of the debt securities
they invest in, such as high-yield debt funds and investment-grade debt funds.
 • Hybrid funds: These funds invest in a mix of equity and debt securities. They can be
classified into different categories based on the asset allocation between equity and
debt, such as balanced funds and aggressive hybrid funds.
• Money market funds: These funds invest in short-term debt securities, such as
treasury bills and commercial paper. They are considered to be the safest type of
mutual funds.
BASED ON INVESTING STYLE:
ACTIVE FUNDS AND PASSIVE FUNDS

RISKOMETER’S PARAMETERS
MAREKT CAPITALIZATION
VOLATILITY
LIQUIDITY

key metrics used to analyze the performance of mutual funds:

• Expense Ratio: This is the percentage of the fund's assets that are used to pay for
management fees and other expenses. A lower expense ratio means that the fund will
have a higher return for its investors.
• NAV: This stands for net asset value. It is the price of one unit of a mutual fund. The
NAV is calculated by dividing the fund's total assets by the number of outstanding
units.
• Standard Deviation: This measures the volatility of a fund's returns. A higher standard
deviation means that the fund's returns are more volatile and riskier.
• Alpha: This is a measure of the fund's performance relative to the market. A positive
alpha means that the fund has outperformed the market, while a negative alpha means
that it has underperformed the market.
• Beta: This is a measure of the fund's volatility relative to the market. A beta of 1
means that the fund's returns move in line with the market. A beta of less than 1
means that the fund is less volatile than the market, while a beta of more than 1 means
that the fund is more volatile than the market.
• R-squared: This is a measure of the correlation between the fund's returns and the
market's returns. A higher R-squared means that the fund's returns are more closely
correlated with the market's returns.
• Information Ratio: This is a measure of the fund's risk-adjusted performance. It is
calculated by dividing the fund's alpha by its standard deviation.
 • Tracking Error: This is a measure of how closely the fund's returns track the returns of
its benchmark index. A lower tracking error means that the fund is more closely
tracking its benchmark index.
• Performance Ratios: These are ratios that are used to compare the performance of
different mutual funds. Some of the most common performance ratios include the
Sharpe ratio, Treynor ratio, Jensen's alpha, and Sortino ratio.
The specific metrics that are used to analyze the performance of a mutual fund will depend on
the fund's investment objective and strategy. For example, a growth fund will be evaluated on
its ability to generate capital appreciation, while a value fund will be evaluated on its ability
to find undervalued stocks.

principles of insurance:
• Utmost Good Faith: This principle requires that both the insured and the insurer act in
good faith in all dealings with each other. The insured must disclose all material facts
about the risk to the insurer, and the insurer must not make any misrepresentations
about the policy.
• Insurable Interest: This principle requires that the insured have an insurable interest in
the subject matter of the insurance. This means that the insured must have something
to lose if the insured event occurs. For example, an individual cannot take out
insurance on the life of someone they do not know.
• Proximate Cause: This principle states that the insurer is only liable for losses that are
caused by the proximate cause. The proximate cause is the nearest, most direct, and
most likely cause of the loss. For example, if a car accident is caused by a drunk
driver, the insurer is only liable for the losses that are caused by the accident, not for
the losses that are caused by the drunk driver's subsequent actions, such as fleeing the
scene of the accident.
• Subrogation: This principle states that the insurer has the right to recover from the
third party who caused the loss, the amount that it paid to the insured. For example, if
a car accident is caused by a drunk driver, the insurer will pay for the insured's losses.
The insurer then has the right to sue the drunk driver to recover the amount that it paid
to the insured.
• Indemnity: This principle states that the insurer is only liable to reimburse the insured
for their actual losses. The insurer is not liable to make a profit on the insurance
policy. For example, if a car accident causes $10,000 in damages, the insurer is only
liable to pay the insured $10,000. The insurer is not liable to pay the insured more
than $10,000, even if the insured had to pay more for the car repairs.
• Contribution: This principle states that when two or more insurers are liable for the
same loss, each insurer is liable for its proportionate share of the loss. For example, if
two insurers each insure a car for $10,000 and the car is totaled in an accident, each
insurer is liable for $5,000 of the loss.
• Loss Minimization: This principle states that the insured has a duty to take reasonable
steps to minimize their losses. For example, if a car breaks down on the side of the
road, the insured should not abandon the car and leave it there. The insured should
take reasonable steps to get the car towed to a safe location.