Professional Documents
Culture Documents
FINANCIAL SYSTEM
It deals abt various financial institutions, with their financial services, financial markets which
enable individual ,business & government concerns to raise finance and various instruments
issued in the financial markets for the purpose of raising financial resources. Basically a financial
system constitutes the following
1 financial institution consist of various banking & non banking institutions which mobilize the
savings through financial markets by using various fin instruments & in the process utilizes the
services of financial service providers
2 financial markets consist of capital market (primary market & secondary market) ,money market
(mainly deals with short term funds, which includes org & un org sectors)), foreign exchange
market ( includes authorized dealers, money changers, foreign banks, importers & exporters), govt
securities (includes treasury bills & bonds)
3 financial instruments includes both product & instruments .Products represents credit cards &
debit cards were as instruments include Negotiable instruments, commercial papers bill of lading,
LOC, travelers cheques
4 financial services-it provides different types of finance through various credit instruments,
financial products & services
Evolution of Financial services in India
The stage of Infancy existed btw 1960-1980
-merchant bankers providing a wide range of services, starting from project appraisal to
arranging funds
-investment co’s such as the UTI,LIC,GIC made their mark in the first stage of financial
services
-leasing made its mark in the closing years of the 1970’s
Modern financial services -during later part of the 1980’s
-OTC, share transfer, pledging of shares, mutual funds, factoring, discounting, VC,credit
rating etc.
The third Flush in financial services includes setting up of new institution & paving the
way for innovating new instruments & also their flotation
-Setting up of depositories will promote the concept of paperless trading & will result in to
dematerialization of shares
-on line trading
-the creation of SEBI can be hailed a a path breaking development in terms of
regulation, growth of development of FS
-permission to foreign financial institutions to operate in capital mkt
-public enterprises disinvestment create pressure on the FS firm to gain expertise in
valuation,financial,finanacial & legal restructuring ,& taking the public sector firms in
commercial & capital mkt
-FS firms are now scouting for funds abroad to finance the Indian corporate
sector
-Securitization
-Setting up of derivative mkt. Next Lect
Importance of financial services Next Lect
-promoting investment
-promoting savings
-minimizing the risk
-maximizing the returns
-ensures greater yield
-economic growth
-economic development
-benefit to govt
-expands activities of financial institutions
-capital market
-promotion of domestic & foreign trade
-balanced regional development
Scope of FS- FS offered are mainly 2 types
-Fee based- merchant banking, broking services, credit rating, MF, portfolio
mgt services, underwriting
-fund based factoring,leasing,hire purchases, housing finance, bill
discounting, VC , etc
Fund based services
Hire purchase- a hire purchase agreement is defined as a peculiar kind of transaction in which the
goods are let on hire with an option to the hirer to purchase them with the following stipulations
-payment to be made in installments over a specified period
-the possession is delivered to the hirer at the time of entering in to the contract
-the property in the goods passes to the hirer on payment of the last installment
-each installment is treated as hire charges so that if default is made in payment of any
installment the seller becomes entitled to take away the goods &
-the hirer is free to return the goods with out being required to pay any further installments falling
due after the return.
PARTIES TO THE HIRE PURCHASE
-SELLER
-HIRER/PURCHASER
-FINANCIER
Hire purchase Vs installment
Call option the buyer is able to purchase the good at any time during the term of agreement in HP
Right of termination buyer has the right to terminate the agreement at any time b4 the payment of the
last installment while In installment the buyer is committed to pay the full amt
Ownership of the product -in HP the ownership passes only when the last installment amt is paid or
when the buyer exercises the option to purchase /on payment of the last installment while in
installment ownership passes with the payment of first installment amt to the buyer.
Leasing Vs HP
-ownerships with the lessor. lessee only uses the asset
-depreciation-lessor records the depreciation in his book while in HP the hirer records
the depreciation
-magnitude of funds -leasing cost of acquisition very high products involved are air
craft, ships air conditioning plants & so on .While in HP relatively low cost equipments
being offered like automobiles ,office equipments, generators etc.
-extent-leasing no down payment is to be made.Whlie in HP a margin equal to20-25% of
the cost of the equipment is to paid by the hirer initially which would be returned back
once the last installment is been made by the hirer
-maintenance-of equipment to be borne by the hirer itself. In Financial lease-to be
borne by the lesse were as in operating lease it is to be borne by the lessor.
-tax benefits- hirer is allowed to charge depreciation claim & finance charge. seller is
allowed to claim any interest on borrowed fund for the acquisition of asset against
taxable income. while a lessor is allowed to claim depreciation & the lesse is allowed
to claim the rentals & the lessee is allowed to claim the rental & maintenance cost
against taxable income.
Leasing is a contract where by the owner of an asset (lessor) grants to another
party ( lessee) the exclusive right to use the asset, usually for an agreed
period of time, in return for the payment of a rent.
-the doesn’t own the equipment & hence he cannot claim depreciation & investment
allowance
-however lease rentals could be written off a eligible expenditure from profits for IT
purposes
Types of leasing
-sale & lease back- suppose a sale of ship take place btw a ship builder & shipping
company which is having a fleet of ships. The ship builder who was the seller ,now
takes the ship back frm the shipping company on a lease As a lessor it give the
same to an oil company for transporting oil. Her the oil company becomes the
lessee. This is called sale & lease back.
Financial lease- In fl the ownership is ultimately transferred to the lesse at the end of the
lease period. When the total lease amt is paid including the profit for the lessor is
been realized.
Operating lease- An equipment is purchased & provided on lease to the lesseee for
use .The lessee has the option to cancel the contract & at the same time .the lessor
has the option to sell the asset to any other person. The cost of the equipment is not
fully recovered by the lease rentals & the lease period is normally shorter than the
economic life o f the asset. Ownership of the asset is not transferred to the lessee
like the FL
Reasons for leasing
S T leasing is convenient, shifting the risk of tech obsolescence, maintenance provided,
tax shields can be used the lessor deducts the depreciation frm taxable income.
Lesse is able to save considerable amount of capital which otherwise will be locked
up in the asset.
Other types of leasing
-leveraged & non leveraged- The value of the asset leased may be of huge
amount which may not be possible for the lessor to finance. So, the lessor involves one more
financier who will have a charge on the leased asset
-conveyance type lease here the lease will be fir a longer period with a clear
intention of conveying the ownership of the title of the lease
-specialized service lease here the lessor is a specialist of the asset which
he s leasing out. He not only leases out but also gives specialized personalized
service to the lessee goods include electronic goods, automobiles, air conditioners
etc.
-Net & non net lease net lease lessor is not concerned with maintenance expenditure.
While in non net lease lessor is concerned with maintenance ,insurance, & other incidental
expenses.
.
-Sales aid lease- in which the lessor enters in to any tie up
arrangement with manufacturer for the marketing is called sales aid lease
-Cross border lease- lease across national frontiers are called cross
borer lease .Shipping, air service, etc will come under this category
-Tax oriented lease were the lease is not a loan on security but
qualifies as a lease, it will come under this category.
-Import lease here the equipment leased will be more or less imported but
the lessor or lessee may belong to same country.
Central st pub authorities com co other NBFC’s Housing fin co’s NBHF co’s
-registration
-net owned fund
-period of funds
-celing on deposits
-formats for application foprm
-receipts to deposit
-register of deposits
-report of board of directors
-interest & brokerage
-investment in liquid asset
-maintenance of
accounts &
auditors report
-sending of
periodical returns
-advertisements
Funding of housing finance institution
Financial conditions to be fulfilled by housing financial institutions are
share capital, contribute to their share capital, refinance,activty norm, lending
norm with regard to target group, rates of interests & other charges, ceiling
on administrative cost, quarterly returns
Some of the major housing financial institutions in India
- HDFC- Housing development finance corporation (1977)
-HUDCO-Housing and urban development corporation(1970)
HDFC
MAIN OBJECTIVES
-TO INCREASE THE # OF RESIDENTIAL HOUSES IN THE COUNTRY BY PROVIDING
HOUSING FINANCE IN A SYSTEMEATIC & PROFFESSIONAL MANNER
-to promote home ownership
-To increase the flow of funds to housing sector
-strengthening housing finance by improving domestic financial mkt & fs
-developing close relationship with individual households ie providing direct housings
loans to individuals
-to maintain its position as the premier housing finance institution in the country
-to transform various idea in to viable & creative solutions that is building houses on the
basis of cost, utility,& modernization.
-to provide consistently high returns to shareholders
Diversifying the activities to client base by entering in to mutual funds,leasing,commercial
banking, insurance etc.
-to align with national priorities & adopt flexible housing finance policy by providing more
houses to weaker sections of the society.
HUDCO
Objectives
-providing long term finance for construction of houses
-undertaking housing in Urban, rural, semi urban areas
-undertaking urban development programmes by way of sanitation,
water facilities etc.
-setting up satellite towns
-promoting building materials industries
-to promote state housing boards by contributing to the debentures &
bonds
-to promote city improvement Trusts, Cantonment boards & other
development authorities such as slum clearance boards
To promote housing facilities for lower income groups & economically
weaker sections EWS
-to co ordinate with other housing finance agencies such as co
operatives, insurance companies etc.
Housing finance by HUDCO
Though it does not directly finance individual borrowers, it provides refinance facility to
the state govt agencies such as
-state housing boards
-Rural housing boards
-Slum clearance boards
-Development authorities
-City improvement trust
-Municipal corporations
-Town panchayaths
-Primary co operative societies
EWS 90
LIG 85
MIG 75
HIG 60
Factoring it is a specialized activity where by a firm converts its
receivables in to cash by selling them to a factoring organisation.The factor
assume the risk associated with the collection of receivables and in the
event of nonpayment by the cutomer/debtors,bears the risk of a bad debt
loss. There are three parties to factoring viz: (factor) financial institution,
business concern (client),& the customer who are the consumers of
goods. hence when a company assigns the B/R a factor undertakes the
whole activities wrt to the concerned debtor. At the time of sale the factor
pays 80% of of invoice to seller & balance amt is paid once the factor
realizes the amt from the customer & for this service they charge a
commission from the seller.
Types of factoring
Full factoring -here collection of debts & sales ledger maintenance are done by
the factor & factor undertakes the credit risk.
With recourse factoring -credit risk taken by the client
Without recourse- the factor will be bearing the risk in case of non realization of
money.
Maturity factoring -the factor makes payment only on the maturity of the bill or
at the end of the collection period to the supplier.
Advance factoring- the factor provides advance against uncollected debts at an
interest to the supplier /seller. Normally ,this may be 60% to 75% of the debt
amount.
Disclosed factoring- the name of the factor is disclosed in the invoice by he
supplier asking the buyer to make the payment to the factor.
Undisclosed factoring- the name of the factor is not disclosed The entire
realization is done in the name of the supplier but the control of all money
remains with the factor.
Export factoring- exporter is been provided with the finance by undertaking the
bills of the customer.
Import factoring in which the factor In the importing company undertakes to
collect & control funds due frm the importer.
Factoring in India
Some of the major factoring firms in India are
-SBI factors & commercial services LTD 1991
-Canara banks factor Ltd 1991
-Fair growth factors LTD 1992(Pvt Sector)
FORFIETIING
Forfeiting is a form of financing of receivables pertaining to international trade.
It denotes the purchase of trade bills/promissory notes by a bank/financial
institution without recourse to the seller. The purchase is in the form of
discounting the documents covering the entire risk of non payment in
collection. All risks & collection problems are fully the responsibility of the
purchaser ( forfeiter) who pays cash to seller by discounting the bills/notes.
The silent features of forfeiting are
-commercial contract btw exporter & importer
-deliver of goods frm exporter to importer
-cash payment by forfeiter to exporter
-presentation of bill by the forfeiter on maturity date to importers bank.
-Payment of bills by importers bank to forfeiter.
DIFEERENCE BTW FACTORING & FORFIETING
FACTORING FORFIETING
St credit transaction long term
Can be with or with out recourse without recourse
Cost borne by the seller borne by the forfeiter.
BILL DISCOUNTING
A TRADING B/E IS DISCOUTNED WITH THE BANK BY THE SELLER IN
order to realize fast cash. All the bills are with recourse that is if the drawee
or the buyer fails to pay the amt the liability of payment falls on to the buyer.
its a financial arrangement which is shot term in nature. The credit
worthiness of the drawer with the bank is responsible for the bill discount
facility.
According to section 5 of the Negotiable Instruments Act defines a bill as an
instrument in writing containing an unconditional order, signed by the
maker, directing certain person to pay certain some of money only to or to
order of certain person or the bearer of the instrument.
Advantages
• To investors
-ST source of finance
-no tax at source is deducted since it is not a lending
-affordable discount rate
• To banks
-certainty of payment
-profitability
-banks are able to sell these bills in the money market to even out their liquidity
Classification of B/E
On the basis of place
-Inland bill -parties to this bill are from the same country (trade bill/accommodation bill)
-foreign bill- parties to this bill is from different countries( trade bill)
On the basis of purpose
-Trade bill which arises out of genuine transaction
-Accommodation bill- is meant for raising funds amg parties & it is for the purpose of
discounting in the money market.
On the basis of documents accompanied with the bill
-D/A Bill-Documents against acceptance of bill. The exporter sends to the importer
along with the bill the following documents
-bill of lading
- consular invoice
-Certificate of origin
-Marie/air insurance policy
-Invoice
The above documents along wt the bill are sent to the importer for the acceptance
Soon after the importers acceptance the documents are handed over to the
importer by which the importer is enable to take delivery of goods. On the
date of maturity the importer will make the payment.
-D/P Bill documents against payment bill -the above mentioned documents
are handed over to the importer soon after the payment is made by the
importer
On the basis of parties/payee
Order bill- when a bill is payable to a specific person whose name is appearing
on the bill it is called an order bill
Bearer bill -is payable to any person who is in possession of the bill legally on
the date of maturity &to whom the payment will be made by the drawee
On the basis of time
-Time bill a bill payable aftera specific date/time s known as time bill
-demand bill –a bill payable on demand is a demand bill.
-take hold of all securities in the country listed in a particular stock exchange
-Speedy transaction & accuracy
-Security holders can sell & buy securities by which liquidity is brought to the securities
-blank transfers are avoided & holding of shares in benami names are avoided.
- It Registration & stamp charges For the sale of securities could be easily collected
by the govt which was evaded frm the previous system
- It promotes more activity in the capital market as trading in genuine shares is
ensured under this system.
- It avoids use of stationary & prevents delay in registration of transfer s
- Dividend & interest on securities are properly distributed through this system & in the
case of convertible debentures on the due date ,the securities are converted in to
the company shares.
- It also act as collateral security for raising of loans frm any financial institution.
Structure of depository system
The depository system
1Central depository- is an org with which all shares, belonging to the shareholder are kept & the
electronic system takes care of them.
2Share registrar share registrar s an authority who controls the issue of securities. Along with this
,the transfer agent arranges for the transfer of securities in the case of buying & selling of
securities.
3clearing & settlement corporation -this agency settles the transfer of funds btw the seller & the
buyer.
4Depository participants ( DP )-DP is a representative in the depository system on behalf of the
shareholder & he only intimates to the shareholder periodically the securities account held by the
customer. As per the SEBI guidelines, financial institutions, banks, stock brokers etc can be
depository participants. An id account number is given by the DP to every shareholder when
he/she open the account for demating the securities.
Procedure in Depositary system
-Notification by stock exchange-the stock exchange concerned where the
shares are listed will come out with a notification for the dematting of the
shares
-dematting form-The share holder will obtain the dematerialization request
form from DP. This form will contain details abt the name of the company,
folio number & the distinctive number of the shares which are given for
dematting .The form will be signed by either the single owner if it is held so
or by joint owners when they are held jointly
-Registering of shares-When the DP hands over the securities to the
depository the securities will be sent to the share registrar who will register
the depository name & the particulars of shares. But b4 doing this the
ownership of the securities is verified with the co & hence this procedure
will take some time.
-Crediting the investor account. in the last stage ,the depositary will inform the
DP the details of shares registered in the name of the share holder
concerned .On the basis , the DP will send the statement of account, to the
customer shareholder
Shareholder opening a/c with depository p
1 2
5 DP
4 3 participant
early stage financing later stage financing turn around stage financing
MBO MBI
Early stage financing
-seed capital – mainly provided for testing the product & examining the commercial
viability o f the product. It is more of a product development & all the finance required
at this stage is provided by VC
-Start up once the product is tested in the market & after being satisfied with its
acceptability by the market financing will be provided for further development of the
product. The start up could be classified in to 4
-a new high tech introduced by the entrepreneur
-a new business started by a well experienced & established entrepreneur
-new projects started by existing co’s eg: retail business started by HLL
-a new company promoted by existing company here the vc finances for those co’s which
have a first rated mgt which may have a second rated product
-Second round finance
The borrowing concern has successfully launched the product in the market
which is evident frm its acceptability. However the business has not become
commercially successful for want of some more finance so VC provides
more funds than at the initial stage.
Later stage financing The business concern has now become
established but still is not able to go for a public issue of shares .At this
stag the VC institution will provide finance
Mezzanine capital- this finance is used by the borrowing concern for purchase
of plant & machinery, repayment of past debt, & entering new areas
Bridge capital- medium term finance ranging frm 1 to 3 years & used for the
growth of the business
Eg –extending bridge loans for acquiring other firms
Buy outs-
MBO management buy outs-in this the VC is used for removing the external
control on the mgt of the company by acquiring all the shares & the voting
rights
MBI management buy in-in this funds are provided for an out side group to
buy an ongoing company
TURN AROUNDS
Financial turn around -with the financial assistance frm VC if a company is
able to improve it’s conditions financially it s called financial turn around
Mgt turn around -similarly when the mgt of the company makes a turn
around by becoming self dependent & is able ot face the challenge of the
business .it is called mgt turn around.
Exit Alternatives VC co’s like to recover their investments once the venture
has a commercial run. various alternatives are
-initial public offerig
-Buy back of shares by the promoters
-Sale of enterprise to another company
-Sale to new investor
Importance of VC
-Promoting entrepreneurs
-promoting products
-encouraging customers
-bringing out latent talents
-promotion of exports
-catalyst
-more employment opportunities
-financial ability
-Technological growth
-Sick companies
-Development of backward areas
-Growth of economy
Origin of VC in India
-the concept of VC formalized after world war ii with the involvement of few
American wealthy family groups to invest their funds in new technology
providing high returns, growth & prosperity.
-R S Bhatt committee in 1972 highlighted the problems of new entrepreneurs &
technologist ,in setting up industries.
-1975 the concept of VC was introduced in India by IFCI
-1976 IDBI introduced seed capital scheme
-1986 ICICI launched VC scheme to encourage new techno crafts with
inherent high risk
-1989 UTI sponsored ‘Venture capital unit scheme’
ANZ Grind lays Bank in 1987 set up first pvt VC fund
-1989 Canbank VC fund
-1990 Gujrath VC Ltd
-1991 20 th Century capital corporation
-1994 SIDBI Venture Capital Fund
1995 Gujarat venture capital fund
Different types of VC in India
-VC promoted by development banks
-State level VF Co’s
-Commercial banks promoted VC ‘s
-Pvt sector VC Co’s
-Foreign venture capital funds.
Insurance
Insurance is a contract btw 2 parties viz insured & the insurer. Insured is the
person who insures his life/property & the insurer is the company which
undertakes to compensate the loss incurred by the insured for a
consideration called premium .The contract of insurance is also called a
contract of indemnity except life insurance, as the insured is only
compensated & not allowed to earn any profit from the contract.
Functions
-insurance spreads risk
-helps to acquire property /assets
-Creates funds for investments
Characteristics/principles of Insurance
Insurable interest -A person can enter In to a contract of insurance only when he
has some insurable interest on the life /property which is insured. Insurable interest
basically means that non existence / any injury /damage caused to a property/life
should bring a loss or effects the life of that person which can be estimated in terms
of money.
Contract of “uberrimae fidei” /contract of utmost good faith .both the parties to
the contract ie; insured & the insurer should disclose all the factors associated with
the insurance contract. No disclosure of facts or declaration of false info will make
the contract void and null.
Indemnity The contact of insurance is a contract of indemnity .This means that the
insurer will compensate the insured to the extent of loss suffered by him .Marine fire
are contracts of indemnity as the insurer compensates him to the extent of loss
suffered by him Where as life is not a contract of indemnity but a contract of
Guarantee
Mitigation of loss Every party to the contract should take adequate steps to
minimize the loss
Causa proxima The cause for the accident should be a direct cause for which an
insurance is taken & it should not be a remote cause
Subrogation means stepping in to those of another person When the
insurance company pays full compensation to the insured it takes over the
ownership of the goods insured & will enjoy complete right of taking
necessary legal action against the person who is responsible for the loss as
may be taken by the original owner of the goods.
Contribution-if the insured has undertaken insurance ith more than one
insurance company, then he cannot claim compensation frm every insu
com with which he has insured.Under the doctrie of contribution, when an
insu com compensates ,it will be indeminkfied by other insu co to the extent
of policy aken by the insured.The bsic concept of contribution is to ensure
that nobody enjoys profit but the loss is shared by various ins co’s
according to the respectve policy amt.
Reinsurance-When an insurance company insures with another insurance
company it is termed as re insurance.Here the original insrer ge insured
with other insurance co’s.
Double insurance When the insured insures with more than one insurance
company it is called double insurance
Nomination In life insurance the insured will be nominating a person who
will be receiving the policy amt incase of the death of the insured. The
nomination can be altered.
Assignment- a policy can be assigned to a creditor as a security for the
loan obtained. Once a policy is assigned the nomination gets cancelled.
When an assignment take place the same is to be informed to the ins
company & in the case of the insured event the amt is handed over to the
creditor.
Types of insurance
Marine loss
Total Loss
Actual total loss the ship along with cargo is totally destroyed & it is beyond
retrieval.
Constructive total loss -the damage caused to the ship /cargo may not be
total but the repair to be incurred either to the ship/cargo will go beyond the
actual cost of the ship/cargo. It is not worthy to undertake repair of either
ship /cargo
Partial Loss
Particular avg loss- the loss has to be borne by a particular interest such as eihther the
shipping company/particular cargo owner. If due to violence of sea certain cargo gets
damaged, it is to be borne by particular cargo owner.
General avg loss When the loss s suffered due o a general avg act it is termed the
same. For eg: When a ship is abt to sink due to excess weight in an effort to avoid
sinking, certain cargo on board may be thrown in to sea. This is called Jettisoning of
cargo. By doing so the interest of the majority of cargo owners is protected but at the
cost of few cargo owners In such a situation the loss suffered by the particular cargo
owner will be borne on a proportion by the other cargo owners whose interest have
been protected along with the insurance company.
Special clauses in Marine insurance Policy
Inchmaree clause -to cover risk that arises due to negligence of ship crew or due to
defective machinery such as hull /boiler etc.this clause should be incorporated.
FC & S Clause -Free from capture or seizure the insu company will not be liable for
the loss due to capture /seizure of the vessel
Suing & labouring clause- If the insured undertakes such acts by which the los
incurred is reduced, the expenses incurred towards such act can be recovered from
the insurer if this clause s inserted
FPA & F AA Clause- Free from particular avg clause & Free from all avg clause it
frees the insu com from paying the liability depending upon the respective clauses.
Excepted Peril Clause -certain risk may be exclude frm the coverage of insurance
such as risks frm pirates/pilferages at the port etc
Arbitration clause this clause provides an opportunity for the insurance company t&
the insured to settle their disputes through arbitration procedure.
Salvage clause -this provides the insurance co an opportunity to salvage materials frm the
damaged good/ships after indemnifying the insured.
Intermediaries
-insurance broker are persons licensed by IRDA who for remuneration arranges
contracts with insurance/reinsurance companies on behalf of his clients. There are 3
categories of insurance brokers
-Direct broker/insurance agents
-reinsurance broker he is a person who arranges reinsurance for direct
insurers with insurance/reinsurance companies.
-composite broker a combination of direct broker & reinsurance
broker that is he arranges insurance for clients with insurance companies
and / reinsurance
Insurance Agents
An insurance agent is a licensed agent with the IRDA who receives/agrees to
receive payment by way of commission/other remuneration in consideration
of his soliciting/procuring insurance business, including continuance,
renewal or revival of policies. An IRA would issue a license to act as an
insurance agent on payment of fee not exceeding Rs 250.
-pass SSLC or HSE
-attending practical training approved and notified by IRDA ( 3 to 4 weeks)
-pass the pre recruitment examination
-requisite knowledge to solicit & procure insurance business
-capable of providing the necessary service to policy holders
-should not be minor, unsound mind, not violate the code of conduct specified
by IRDA
-the license will be valid for 3 years
-an insurance agent is not eligible to be director of insurance company.
CODE OF CONDUCT WRT INSURANCE AGENTS
1Every agents should-
-identify himself and the insurance company of whom he is an insurance agent
-disclose his license to the prospect customer
-disseminate the requisite info in respect of the insu products on demand
-disclose the scale of commission in respect of insu products if asked
-indicate the premium to b e charged
-inform the prospect abt the acceptance or rejection of proposal
-render necessary assistance for settlement of claims
-advice with respect to nomination, assignment, change of address etc.
2 No insurance agent should:
-solicit /procure insurance without holding license
-Induce to omit any material information
-Induce to submit wrong information
-behave in a discourteous manner
-interfere with any proposal introduced by other insu agent
-offer different rates, advantages, terms & conditions other than offered by the
insurer
-demand or receive a share or proceedings frm the beneficiary under the
insurance contract.
-become or remain as a director of any insu co.
CLAIM PROCEDURE
Life insurance
-upon receiving claim process without delay, additional documents should be
raised with In 15 days of the receipt of claim
-claim should be paid or disputed within 30 days
-complete investigation if any at the earliest ,in any case not later than 6
months
- Interest to be paid for delayed payment
Gen insurance
-give notice to the insurer, surveyor has to be appointed with in 72 hrs
-surveyor should inform I writing the insured abt the delay if any
-rejection of a claim, if any, within a period of 30 days
Actuary
The person who determines rates & premiums and over all controller of
insurance company /insurer
- A highly skilled mathematician who is involved in all phases of insurance
co operations
- Actuary studies important statistical data on births ,deaths, marriages,
disease, employment, retirement & accident based on this info the actuary
determines the rates
- -calculates premium that will make the business profitable, enable the co to
compete effectively with other insures& allow the co to pay claims &
expenses
- -professional certification & passing examination by society of actuary
- -in property & liability insurance rates are based on co’s past loss
experience & industry statistics
- Statistics on hurricane ,tornadoes, fires diseases, crime rates, trafiic
accidents & cost of living are carefully analyzed
Insurance Pricing
Rates must be high enough to pay all claims & earn a profit for the insurer
Regulatory objectives & business objectives
Regulatory objectives
-the rates charged should be high enough to pay all losses & expenses
-the rates should not be so high that policy holder are paying more than the
actual value of their protection
- Exposures that are similar with respect to loses & expenses should no be
charged substantially different rates
Business objectives
-simplicity
-stability rate should be stable over short periods so that consumer satisfaction
can be maintained
-responsiveness the rates should be responsive overtime to changing loss
exposures & changing economic conditions
-encouragement of loss control-rating systems provide a strong financial
incentive to the insured to engage in loss control
Basic Rating Methods for gen insurance
1 Judgment rating -means that each exposure is individually evaluated & the rate is
determined largely by judgment
-used when the loss exposures are so diverse that a class rate cannot be calculated or
when credible loss statistics are not available – used In marine insurance
2 class rating- means that exposures with similar characteristics are placed in the
same underwriting class,& each is charged the same rate .Methods of determining
class rates
-Pure premium method= incurred losses & loss adjustment expenses
No of exposure units
Gross rate =Pure premium
1 –Expense ratio
-Loss ratio =the actual loss ratio is compared with the expected loss ratio, & the rate is
adjusted accordingly
Rate change =A-E Where A = actual loss ratio, E = expected loss
E
ratio
3 merit rating- class rates are adjusted upward /downward based on
individual loss experience
-Schedule rating - in which each exposure is individually rated, used In
commercial property insurance
-Experience rating- the class rates are adjusted upward /downward based on
past loss experience ,mainly used in workers compensation .
-Retrospective rating - a provisional premium is paid at the beginning of the
policy period ,at the end of the period, a final premium is calculated based
on actual losses that occur during the policy period used in physical
damaging ,burglary etc.
Rate making in Life insurance
Net single premium – the present value of the future death benefit
-it is that amt ,which together with compound interest, will be sufficient to pay
death claims
-mortality & investment income are considered
-insu co expenses or the loading element are considered when the gross
premium is calculated
Characteristics of FS
-FS are customer oriented
-they are intangible in nature
-inseparability
-perishability
-People based service
-dynamism
Fee based services
Credit rating
-provides a relative ranking of credit quality of debt/finacial instruments or their
grading according to investment qualities
-an expression of an opinion through symbols abt credit quaality of the issuer
of securities or co with reference to a particular instrument.
-it doesn’t amt to a recommendation
-provides risk evaluation
Doesn’t indicate mkt risk/forecast future mkt price
Origin of credit rating-first CR was set up in New york in 1847
In India first CR agency Credit rating & information service of india ltd (CRISIL)
WAS SET UP IN 1987
-Investment information & CR agency of India Ltd (ICRA) 1994
-Credit Analysis & Research Ltd (CARE 1994
-Duff & Philps Credit rating P Ltd 1996 in asociation with NBFC’s
Importance Of CR
-to the investors
*risk recognition
*fair assessment of issuers credibility
*info abt financial strength of issuer
*provides better choice amg available investment proposal
-To issuers
*wider investor base is exposed
*CR act as a mkt ing tool
*highly rated instruments may require lesser interest
*reputation & good will
Process of CR
issuer co appoints rating agency
Depts of RBI
Functions of RBI
Traditional functions
-issue of currency
- banker to govt
-banker’s bank
-credit control measures
-Rbi act as lender of last resort
-exchange control
-clearing house
Promotional functions
-branch expansion policy
-industrial & agricultural finance
Protecting the interest of depositors & creditors
Supervisory Functions
-RBI guide the commercial banks & supervises their functions too.
COMMERCIAL & CO OPERATIVE BANK
Commercial banks
Primary functions
-Traditional functions of the bank accepting deposits, discounting of bills &
lending loans
Secondary functions include agency services & general utility services
Most modern functions of the bank-includes ATM,home banking,green
card,factoring,MF,Electronic clearing sysytem, ,gold /platinum card,e-
banking,gold banking etc
Co operative banks