Investment Banking and Financial Services: Session 3

Investment Banking and Financial Services
Session 3 – Financial Services
Session Delivered By:

Reshma K.J.
reshma.ms.mc@msruas.ac.in
1
Faculty of Management and Commerce © Ramaiah University of Applied Sciences
Session Objectives
At the end of Session Students will be able to :

 Discuss functioning of Fund based and fee based services
 Discuss process of credit rating of financial instruments
22
Faculty
FacultyofofManagement
Managementandand
Commerce
Commerce ©. RamaiahUniversity
©Ramaiah University of Applied
AppliedSciences
Sciences
Session Contents
Fund based services

Fee based services
Process of credit rating of financial instruments
3
Faculty of Management and Commerce © Ramaiah University of Applied Sciences
Financial Services
• Financial services is concerned with design and delivery of

advice and financial products to individuals and
businesses within the area of banking and related
institutions, personal financing planning
4
Faculty of Management and Commerce ©. Ramaiah University of Applied Sciences
Financial Services (Contd..)
• Financial services refer to services provided by the finance industry
• The finance industry encompasses a broad range of organizations

that deal with the management of money
Ex: banks, credit card companies, insurance companies,
5
Meaning and Concept
Financial services are services that ensure the smooth
flow of financial activities in the economy
It includes banking, insurance, stock broking and
investment services as well as business and
professional services.
Cater the need of financial institutions, financial
markets and financial instruments
66
Faculty
Managementandand
Commerce
AppliedSciences
Sciences
Meaning and Concept
• Financial Services help to raise the required funds and ensure their efficient
deployment
• To ensure an efficient management of funds, services such as, factoring of
debtors, parking of short term funds in money market
• This sector provides services such as banking, insurance, credit rating, lease
financing, factoring, venture capital, mutual funds, merchant banking, stock
lending, depository services, housing finance
7
Characteristics of Financial Services
• Customer-Specific: Focused, need of the customer, due regard to

cost, liquidity and maturity consideration
• Intangibility: Quality and innovativeness of their services to build
up their credibility
• Innovation: Production of new and innovative financial services and
supplying of these services are to be performed simultaneously
8
Characteristics of Financial Services (Contd..)
• Tendency to Perish: Proper synchronization of demand and supply

• People based services: People incentive and hence its subjected to variability of
performance or quality of service
• Market Dynamics: Constantly redefined and refined taking into consideration of
various dynamics in financial services
9
Types of Financial Services
• Financial services industry classifying the financial services under

three broad categories:
1. Fee Based/Advisory services
2. Asset/Fund Based services
10
Financial Services
Classification of financial services
• Fund Based Services

• Fee Based Services
11
Fund Based Services
The firm raises funds through equity, debt, and deposits and invests
these funds in securities or lends to those who are in need of
capital
12
Fund Based Services includes
Includes :
– Leasing and Hire Purchase
– Hire Purchase
– Housing Finance
– Credit Cards
– Venture Capital
– Factoring
– Insurance
– Bill Discounting
13
Equipment Leasing/ Lease Financing
• To start and sustain in the business one need finance

• The feasibility study process involved
 Making the list of all assets

 Identifying the sources of supply
 Estimating the cost of acquisition when the asset are acquired
• Investment requirement as well entrepreneur fear will increase

• To scare away the fear emphasis should be given to resources and
not to the ownership
14
Equipment Leasing
• A lease transaction is a commercial arrangement whereby an

equipment owner or Manufacturer conveys to the equipment user
the right to use the equipment in return for a rental
• In other words, lease is a contract between the owner of an asset
(the lessor) and its user (the lessee) for the right to use the asset
during a specified period in return for a mutually agreed periodic
payment (the lease rentals)
15
Equipment Leasing/ Lease Financing
• Lease transaction is a commercial agreement

• Right to use the equipment in return for a rental
• Lessor, Lessee and Lease rental

• Plays an important role in the development of the country
• Lease agreement are basically of two types
 Financial Lease
 Operating Lease
16
Hire Purchase
• Transaction where the goods are purchased and sold on the term
that:
 Payments will be made in installments
 The possession of the goods is given to the buyer immediately

 The ownership in the goods will remain with the vendor till the last
installment is paid
 The seller can repossess the goods in case of default in payment in
any installment
 Each installment is treated as heir charges till the last installment
17
Hire Purchase
• A system by which a buyer pays for a thing in regular installments
while enjoying the use of it. During the repayment period,
ownership (title) of the item does not pass to the buyer
• Upon the full payment of the loan, the title passes to the buyer
• A method of buying an article by making regular payments for it
over several months or years. The article only belongs to the person
who is buying it when all the payments have been made
18
Consumer Credit
• Consumer credit is basically the amount of credit used by
consumers to purchase non-investment goods or services that are
consumed and whose value depreciates quickly
• This includes automobiles, but excludes debts taken out to
purchase real estate or margin on investment accounts
• For example, a mortgage for purchasing a house is not consumer
credit. However, the 52 inch television you put on your credit card
is consumer credit
19
Venture Capital
• Venture Capital represents financial investment in a highly risk
projects
• Objective of earning high rate of interest
• It is a fund that is available for investment in an enterprise which
offers the probability of profit along with the possibility of loss
• Venture is a course of proceeding associated with risk whose
outcome is uncertain
• Capital means the financial resources to start an enterprise.
20
Housing Finance
• Till 1970 the responsibility to provide finance for house building

rested I the hands of the government
• National Housing Bank by RBI in 1988 as a fund based financial
service provider
• NHB is the apex housing finance institution in the country
• HDFC, ICICI Housing, LIC Housing Finance are some of the examples
21
Housing Finance
• Housing finance is what allows for the production and consumption

of housing
• It refers to the money we use to build and maintain the nation’s
housing stock
• Also refers to the money we need to pay for it, in the form of rents,
mortgage loans and repayments.”
22
Insurance Services
• Is a contract where by the insurer agrees in consideration of a sum

of money to make the loss suffered by the insured against a
specified risk such as fire or compensate the beneficiaries on the
happening of specified event such as accident or death.
• The contract in the black and white between the insurer and the
insured is called the policy
23
Factoring
• Factoring is a financial transaction whereby a business sells its

accounts receivable (i.e., invoices) to a third party (called a factor)
at a discount
• Factoring is a financial transaction where by a business sell its
account receivables to a third party (called a factor) at a discount in
exchange for immediate money with which to finance continued
business
24
Bills Discounting
• While discounting , banks buy the bill before it is due and credit the
value of the bill after a discount charge to the customer's account
• There are two types of bill discounting –
• Import Bill Discount is a kind of short-term finance offered by the
bank to the importer according to his demand upon receiving the
bills under the letter of credit and the import collection items
• Export Bill Discounting is financing of money in transit supplied by
the bank
25
Fee Based Services
• The services wherein financial institutions operate in specialized
fields to earn a substantial income in the form of fees or dividends
or brokerage on operations
• The major fee based financial services are as follows:
• – Issue Management
• – Corporate Advisory Services
• – Credit Rating
• – Mutual Funds
• – Stock Broking Services
26
Fee Based Services
Includes:
– Issue Management
– Corporate Advisory Services
– Credit Rating
– Mutual Funds
27
Stock Broking
• The process of investing in the share market, either individually or

through a broker is known as stock broking
• This is primarily done by opening a Demat account
• If done through a broker, he opens an account, helping to operate
through online stock broking facility
28
Stock broker
• Licensed agent who has to pass certain qualifying tests to be

certified to offer securities investment advice to investors
• He or she may
– counsel what and when to buy

– counsel whether to hold or sell securities,
– execute buy-sell orders on behalf of the investors, and
– charge a percentage of the transaction amount and brokerage fee

for the services rendered
29
Custodial Services
• Services provided by the custodian
• An intermediary who keeps the accounts of its clients

• Safe custody of the share certificate of the clients
• Also acts as an trustee and provide the services such as transfer of
Share certificate, Collection of dividends etc
• Updates the investment status of the client
30
Corporate Restructuring
• Process involved in changing the organization of the business
• Redesigning one or more aspects of the business

• Implemented due to number of factors
• Positioning of the company to more profitable, to address
challenges , survive currently in adverse economic conditions
31
CREDIT RATING
• It is the opinion of the rating agency on the relative ability and willingness of the issuer of
the debt instrument to meet the debt obligations as and when they arise
• For the investor it is an indicator expressing the underlying credit quality of issue programme
• In India there are three major credit rating agencies namely
• CRISIL [Credit Rating Information Services of India limited.]
• ICRA [Investment information and credit rating agency of India limited]
• CARE [Credit Analysis and Research in Equities.]
3232
Faculty
Managementandand
Commerce
AppliedSciences
Sciences
Credit Rating
• It is an opinion on the future ability and legal obligation of an issuer

to make timely payments of principal and interest on a specific
fixed income security
• As per credit rating agencies regulations 1999 rating means
– An opinion regarding securities

–Expressed in the form of standard symbols
– Assigned by a credit rating agency
– Used by an issuer of such securities

33
CRISIL rates a wide range of entities, including
• CRISIL: Credit Rating Information Services if India limited.]
• Industrial companies , Banks , Non-banking financial companies

(NBFCs) ,Infrastructure entities , Microfinance institutions ,
Insurance companies , Mutual funds , State governments , Urban
local bodies
34
Credit Rating
• Refers to an expression of an opinion through symbols about

the credit worthiness of the issue of securities with regard to
a debt instrument
• It is the assignment of a symbol of the current opinion of the
rating agency
• Based on the relative ability and willingness of the issuer of
debt instrument to make timely repayment of the interest and
principal
35
Credit Rating (Contd..)
• Good rating helps the corporate borrowers to raise funds at a

cheaper rate
• In determining the rating, both qualitative and quantitative
analysis is employed by the credit rating agency
• The judgment given is essentially qualitative in nature
• Credit rating does not amount to a recommendation to
purchase, subscribe, and hold a debt instrument
36
What is Credit Rating?
 A current opinion on the relative creditworthiness

of debt
 An issue specific evaluation
 Aimed at differentiating credit quality
37
What Credit Rating is not ?
Not an audit of the issuing company
Not a one time assessment of creditworthiness of the issuer

Not a general purpose certification of goodness of a
company
Not a recommendation to buy, hold or sell the rated security
38
Credit Rating Agency
• CRISIL: Credit Rating and Information Service of India

Limited is the India’s first credit rating agency (1987)
• ICRA: Investment Information and Credit Rating Agency
of India Ltd (1990)
• CARE: Credit Analysis and Research Ltd (1993)
39
Why Credit Rating ?
 Independent & unbiased evaluation of credit quality

 Increased accessibility to funds from the capital markets
for infrastructure projects
 Helps the investors in pricing the debt offer
 Increased marketability of debt issues by municipal
entities
 Improved visibility - facilitate flow of international capital
 Indicative of transparency
40
Why Credit Rating ? (Contd..)
 Benchmarking with other municipal entities and corporate
entities - highlights strengths and weaknesses
 Use of market borrowings to bridge demand-supply gap in
critical infrastructure can accelerate economic growth in the
municipal area
 Municipal corporations like Ahmedabad, Bangalore & Nasik
have used market borrowings to fund capital expenditure
 Helps in monitoring overall debt level & finances
41
Assessment Framework for Banks & FI’s
Framework for assessment:
RRESOURCES
ESOURCES
CCAPITAL
APITAL AASSET
SSET
ADEQUACY
ADEQUACY QUALITY
QUALITY
CREDIT
CREDIT
RATING
RATING
LLIQUIDITY
IQUIDITY
//ALM
ALM
M
MANAGEMENT
ANAGEMENT
EEARNINGS
ARNINGS
42
Credit Rating Symbol
Separate sets of symbols are used for:
1. Long Term debt instruments

2. Medium Term debt instruments
3. Short-term debt instruments
43
Credit Rating Symbol (Contd..)
• Long- term instruments include debentures, bonds etc of

companies
• Medium-term instruments include public deposit and other
medium duration securities
• Short-term instruments include commercial papers and other type
of short-term securities
44
Symbols for Long Term
Terminology CRISIL ICRA Rating CARE Rating
Rating
Highest AAA LAAA Case AAA
High AA LAA Case AA
Adequate A LA Case A
Moderate BBB LBBB Case BBB
Inadequate BB LBB Case BB
Risky B LB-Risky Case B-Risky
LC-Substantial Risk Case C-High Risk
LD-Expected to Default Case D-Likely to Default
45
Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
Symbols for Medium Term
Terminology CRISIL Rating ICRA Rating CARE Rating
Highest FAAA MAAA Case AAA
High FAA MAA Case AA
Adequate FA MA Case A
Inadequate FBB MB Case BBB
Risk Prove FB MC Case BB
Default FD MD Case B-Risky
Expected Case C-High Risk
Case D-Likely to Default
46
Faculty of Management and Commerce ©Ramaiah University of Applied Sciences
Symbols for Short Term
• CRISIL : P1 to P5
• ICRA : A1 to A5
• CARE : PR1 to PR5
47
Credit Rating Procedure
Issuer company appoints a rating agency
Rating agreement is entered into
Analytical team is assigned the work of Rating
Meeting with issuer
48
Collection of data
Rating exercise by the analytical team

1
Meeting with Issuer for resolving
questions
Analyses of new and emerging facts
Preparing of Rating Profile
49
Notification of Rating Discussion to the
Issuer
Communication of Rating symbol to
Issuer
Acceptance
Formal Notification
Surveillance
50
Functions of Credit Rating Agencies
• Superior information
• Low cost information

• Basis of proper risk, return and trade off
• Healthy discipline on corporate borrowers
• Formulation of public policy guidelines
51
Benefits of Credit Rating
• Low cost Information

• Quick investment decision
• Independent investment decision
• Investors Protection
52
Benefits to Investors
• Provides guidance for ascertaining the risk involved in the

issue
• Provides a better choice among available investment
options
• Enables quick decisions and easy understanding of
investment opportunities
53
Benefits to Investors (Contd..)
• Inform investors about the financial strength of the issuer

and the risks involved along with its safety
• Rating ensures a fair assessment of the credibility of the
issuer company
• Relieves the investors from collecting information about
the issuer or the security
54
Benefits of Issuers
• Good rating enhances the goodwill and reputation of the issuer

company
• Highly rated instruments carry lesser returns
• Reduces the effective cost of borrowings for the issuer company
• Rating acts as a marketing device
• The issue is exposed to a wider investor base
55
Credit Rating Agencies in India
• CRISIL- Credit Rating Information Services Limited

• ICRA-Investment Information and Credit Rating Agency of
India
• CARE-Credit Analysis and Research
• DCR India-Duff Phelps Credit Rating Pvt. LTD.
56
CRISIL
• The first credit agency floated on January 1, 1988

• Jointly started by ICICI and UTI with an equity capital of Rs. 4
crores
• India's leading rating agency, and is the fourth largest in the
world
• Has over a 60% share of the Indian Ratings market
• CRISIL Ratings is the agency of choice for issuers and investors
57
CRISIL (Contd..)
• CRISIL Ratings is a full service rating agency
• Offers a comprehensive range of rating services

• CRISIL Ratings provides the most reliable opinions on risk
by combining its understanding of risk and the science of
building risk frameworks, with a contextual understanding
of business
58
CRISIL (Contd..)
• The principal objective of CRISIL is to rate the debt

obligations of Indian companies
• Its rating guides the investors about the risk of timely

payment of interest and principal on a particular debt
instrument
59
CRISIL (Contd..)
• CRISIL's rating process ensure that all assigned ratings are based
on the highest standards of independence and analytical rigor
• The rating committee comprises members who have the
professional competence and no interest in the entity being
rated
• A team of analysts carries out the credit analysis
60
CRISIL Rating Process
61
ICRA
• ICRA Limited is an Associate of Moody's Investors Service

• Incorporated in 1991 as an independent and professional
company
• Leading provider of investment information and credit
rating services in India
• Major shareholders include Moody's Investors Service,
leading Indian financial institutions and banks
62
ICRA (Contd..)
• With the growth and globalisation of the Indian capital markets

leading to an exponential surge in demand for professional credit
risk analysis, ICRA has been proactive in widening its service
offerings, executing assignments including credit ratings, equity
gradings, specialised performance gradings and mandated studies
spanning diverse industrial sectors
63
ICRA (Contd..)
• ICRA is a leading credit rating agency

• Has expertise in virtually every sector of the Indian economy
• ICRA has broad-based its services for the corporate and financial
sectors, both in India and overseas
• Currently offers its services under the following banners:
– Rating Services Information
– Grading and Research Services
– Advisory Services
– Economic Research Outsourcing
64
ICRA (Contd..)
• Set up by Industrial Finance Corporation of India on 16th

January 1991
• Public limited company with an authorized share capital
of 10 crores
• The initial paid up capital of Rs. 3.50 crores was
subscribed by IFC, UTI, LIC, GIC SBI and others
65
CARE (Contd..)
• Credit Analysis and Research Limited (CARE)
• Promoted in 1993 jointly with investment companies,

banks and finance companies
• Services offered by CARE are Credit rating Information
Service, Equity Research, etc.
66
Summary
• Financial services is concerned with design and delivery of advice

and financial products to individuals and businesses
• Insurance, Mutual funds, Stock brocking,credit rating etc. are
examples for financial services
• The financial services can be classified in to fee based ,fund based
and insurance services
67
Summary (Contd..)
• Credit rating is an expression of an opinion about a

company’s financial position
• CRISIL, ICRA, CARE are some of the famous credit rating
companies
• Credit rating is beneficial to both investors and issuers
68

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Investment Banking and Financial Services

Session 3 – Financial Services

Session Delivered By:

At the end of Session Students will be able to :

Fund based services

• Financial services is concerned with design and delivery of

• Financial services refer to services provided by the finance industry

• The finance industry encompasses a broad range of organizations

Ex: banks, credit card companies, insurance companies,

• Customer-Specific: Focused, need of the customer, due regard to

• Tendency to Perish: Proper synchronization of demand and supply

• Financial services industry classifying the financial services under

2. Asset/Fund Based services

Classification of financial services

• Fund Based Services

• To start and sustain in the business one need finance

 Making the list of all assets

 Estimating the cost of acquisition when the asset are acquired

• Investment requirement as well entrepreneur fear will increase

• A lease transaction is a commercial arrangement whereby an

• Lease transaction is a commercial agreement

• Lessor, Lessee and Lease rental

 The possession of the goods is given to the buyer immediately

• Till 1970 the responsibility to provide finance for house building

• Housing finance is what allows for the production and consumption

• Is a contract where by the insurer agrees in consideration of a sum

• Factoring is a financial transaction whereby a business sells its

• The process of investing in the share market, either individually or

• Licensed agent who has to pass certain qualifying tests to be

– counsel what and when to buy

– charge a percentage of the transaction amount and brokerage fee

• Services provided by the custodian

• An intermediary who keeps the accounts of its clients

• Process involved in changing the organization of the business

• Redesigning one or more aspects of the business

• It is an opinion on the future ability and legal obligation of an issuer

– An opinion regarding securities

– Used by an issuer of such securities

• CRISIL: Credit Rating Information Services if India limited.]

• Industrial companies , Banks , Non-banking financial companies

• Refers to an expression of an opinion through symbols about

• Good rating helps the corporate borrowers to raise funds at a

 A current opinion on the relative creditworthiness

 Aimed at differentiating credit quality

Not an audit of the issuing company

Not a one time assessment of creditworthiness of the issuer

Not a recommendation to buy, hold or sell the rated security

• CRISIL: Credit Rating and Information Service of India

 Independent & unbiased evaluation of credit quality

Separate sets of symbols are used for:

1. Long Term debt instruments

3. Short-term debt instruments

• Long- term instruments include debentures, bonds etc of

• CARE : PR1 to PR5

Issuer company appoints a rating agency

Rating agreement is entered into

Analytical team is assigned the work of Rating

Meeting with issuer

Rating exercise by the analytical team

Preparing of Rating Profile

• Low cost information

• Formulation of public policy guidelines

• Low cost Information