MANAGING BANKS AND FINANCIAL INSTITUTIONS

Presented By:
Bavesetty Sushmitha
Designation :ASSISTANT
PROFESSOR
Lecture Details:
Department: DMS
College:GIET(A)
MANAGING BANKS AND FINANCIAL INSTITUTIONS
MBFI/MBA
UNIT I
Financial System in India: Introduction - Evolution of Banking - Phases of
development - RBI and the Financial System - Committees on Banking
Sector Reforms - Prudential Banking -- RBI Guidelines and directions.
 Financial Activities
1. Lending
2. Purchasing/Buying
3. Investing
4. Borrowing
5. Selling
6. Foreign Exchange

Financial system:
Definition: A financial system is set of institution such as banks,
insurance companies and stock exchanges that permit the exchange of
funds
 Financial Activities
• Financial systems deals with the financial transactions and exchange of
money through investors, lenders and borrowers.
• It exist on or at firm level, regional level and global level

• The financial system of a country is an important tool for economic

development of the country, as it helps in creation of wealth by linking
savings with investments. It facilitates the flow of funds from the
households(savers) to business firms(investors) to aid in wealth creation and
development of both the parties
• Definition: According to Robinson, the primary function of a financial system
is “to provide a link between savings and investment for creation of wealth
and to permit portfolio adjustment in composition of existing wealth”
 Features of Financial System

Features of Financial system:

 It plays a vital role in economic development of a country
 It encourages both savings and investment
 It links savers and investors
 It helps in capital formation
 It helps in allocation of risk
 It facilities expansion of financial markets
 Functions of Financial system
 Financial system bridges the gap between savings and investment
through efficient mobilization and allocation of surplus funds
 Financial system helps a business in capital formation
 Financial system helps in minimizing risk and allocating risk
efficiently
 Financial system helps a business to liquidate tied up funds
 Financial system facilitates financial transactions through provision
of various financial instruments
 Financial system facilitate trading of financial assets/instruments by
developing and regulating markets
Structure of the Financial system
 Financial Institutions
Financial Institutions: Financial Institutions are intermediaries of financial markets
which facilitate financial transactions between individual and financial customers
Financial Institutions are categorized into two:
i) Banking Institutions: These are banks and credit unions that collect money from
the public in return of interest on money deposits and use that money to
advance loans to financial customers
ii) Non-Banking Financial Institutions: These are the brokerage firms, insurance and
mutual funds companies that can collect money deposits but can sell financial
products to financial customers
Financial institutions may be classified into three categories:
a) Regulatory : It includes institutions such like SEBI, RBI, IRDA which regulate the
financial markets and protect the interest of investors
 Financial Institutions
b) Intermediaries: It includes commercial banks such as SBI,PNB
that provide short term loans and other financial services to
individuals and corporate customers
c) Non-Intermediaries: It includes financial institutions like
NABARD, IDBI that provide long-term loans to corporate customers
2) Financial Markets: It refers to any market place where buyers
and sellers participate in trading of assets such as shares, bonds,
currencies and other financial instruments
Financial market may be divided into two:
a) Capital market: It deals in long term securities having maturity
period of more than one year,
b) Money market: It deals with short-term debt instruments
having maturity period of less than one year
 Structure of the Financial system
3. Financial Assets/Instruments: Financial assets includes cash deposits, cheques, loans,
accounts receivable and other financial instruments to provide a claim against financial
institution to pay either a specific amount on a certain future date or to pay the principal
amount along with interest

4. Financial Services: Financial Services are concerned with the design and delivery of financial
instruments and advisory services to individuals and business within the area of banking and
related institutions, personal financial planning, leasing, investment, assets, insurance etc.
It involves provision of a wide variety of fund/assets based and non-fund based/ advisory
services and includes all kinds of institutions which provide intermediate financial assistance
and facilitate financial transactions between individuals and corporate customers.
 Structure of the Financial system
Treasury bills: They are issued by the central Govt of India and known to be the
safest money market instruments available.
• Traded duration of treasury bills is 15days-365 days
Types of Treasury bills:
• 15days
• 184days
• 364days

Certificate of deposits : It is a money market instrument which is issued in

dematerialized form.
. Governed by the RBI
. Are issued at minimum of Rs.1,00,000/- and there on in the multiples of
Rs.4,00,000.
 Structure of the Financial system
Commercial paper: It is unsecured money market instruments which are issued by
large corporation to obtain funds to meet short term debts.
Minimum maturity period : 7 days
Maximum maturity period :< 1year from the date of issue.

Capital market: Capital market deals in financial security for the medium and long
term debts more than 1year

i)Stock market: A stock market/equity market/share market is the aggregation of

buyers and sellers of stocks of shares which represents ownership claim on
businesses.
ii) Debt market : Debt market is a market where debt instrument are traded. Debt
instruments are assets that require a fixed payment to the owner. Example: Bonds,
Mortgage.
 Structure of the Financial system
iii) Derivatives market: It is a financial market for derivative financial
instruments like future contract or options, which are derived from
other form of assets.
Primary market: The primary market is where securities are created.
• It is in this market where new form of stocks and bonds are sold to
the public.
Example : Initial public offering(IPO).

Secondary market: Secondary market is where investors buy and sell

securities they already own
Example: Stock market NSE,BSE
 Indicators of Financial development

1.Finance ratio: This ratio total issue primary and secondary claims to
National income.

2.Finance inter-relation ratio: This is the ratio of financial assets to

physical assets in the economy.

3.New Issue ratio : This is the ratio of primary issues which indicates
how far investment has been financed by direct issue to the savers by
the investing sectors.

4.Intermediation ratio: This is the ratio of secondary issues to the

primary issues which indicates the extent of development of financial
institutions.
 Financial system and Economic development
• Economic development of any country is depended on its financial system which
Includes Banks, stocks, market, insurance companies.
• The financial system plays a key role in the employment growth in an economy.
• Businesses and industry of the finance by financial system which lead to the growth
in employment generation which in turn increases economic activities.

Financial Reforms after 1991

• LPG- Liberalization Privatization Globalization
Aim of the Financial Sector Reforms:
• The major aim of the financial sector reforms are to allocate the resources proficiently
increasing the return on investment to improve the growth of real
sector in the economy.
 Financial Sector Reforms
• The new processes introduced by the Govt of India under reforms are
intended
• To upturn the operational efficiency of the financial sector.
The major delineations: The major delineations of the financial sector reforms in
India were found as under
1. To create an efficient profitability and productive financial sector.
2. Preparing the financial system for increase internal competition.
3. Promoting financial stability.
4. Enabling the process of price discovery by the market determination of the
interest rates that improves the efficiency of resources.
5. Remove the erst while existing financial repression
Financial repression: It is a method for Govt to increase tax income and
domestically
Held debt.
 Financial Sector Reforms
Financial reforms after 1991: classified into four categories:
1.Banking sector reforms 2. Government debt reforms
3.Forex market reforms 4. Other reforms

1. Banking Sector reforms:

• In August 1991, the Govt of India appointed a committee on financial system under the chairmanship of
M.Narasimham.
• On the recommendations of Narasimham committee, following measures were under taken by Govt in
1991:
a)Lowering Statutory liquidity ratio(SLR) & Cash Reserve ratio(CRR):
SLR has been reduced from 38.8% in the year 1991 to 25% in 1997.(current rate:
b) The higher SLR means reduction of profits of the banks.
c) The CRR is the minimum deposit that the bank has to maintain with the RBI.
d) The CRR has been brought down from 15% in 1991 to 4.1% in June 2003.
 Financial Sector Reforms
• Debts: It is mandatory requirement for all the banks to make 100%
provisions for all NPA (Non-performing assets).
• De-regulation of interest rates: The Narasimham committee advocated that the interest
rate should be allowed to be determined by market forces. Since 1992,
Interest rates had become much simplier
• Competition from new private sector banks: New private sector banks were introduced
and new banks were allowed to raise capital contribution from foreign
Institutional investors up to 20% and from NRI’s up to 40%.This has led to increase
competition in a business sector.
• Access to capital market: The companies act was amended to enable the banks to
Raise the capital through public issues(IPO).
 Financial Sector Reforms
2. Government debt market reforms:
• Many different reforms have been introduced in securities debt market after 1991.
• Debt market deals with tradable debt instruments issued by the Government for making its
financial requirements.
• Debt market, stock market and derivatives market-capital market.
3. Forex market reforms:
• The foreign exchange market in India has been characterized
by heavy control since 1950’s with increasing trade controls.
• Forex was made available through a complex license system undertaken by RBI.
Thus, the major task before the Govt was to move away from the system of total control to a
market based exchange rate system.
• This transformation in 1993 has paved a way for introduction of forex reforms in an
Indian market.
 Financial Sector Reforms
• Under these reforms authorized dealers of foreign exchange as well as banks have been
given greater autonomy to carry out different range of activities.
4. Other reforms:
• Several measures have been introduced for non-banking financial intermediaries
(NBFC) including those involved in public deposits activities have been brought under the
supervision of the RBI.
• Till 1990’s insurance business was under public ownership after the introduction of IRDA act
in the year 1992.
• Many changes have been introduced that is privatization of insurance.
• SEBI: It was established in the year 1988 and was statutory powers in April 1992,SEBI act. As
a regulator for equity market and to improve the market efficiency and integration of
national markets and to prevent unfair practices regarding trading.
 Financial Sector Reforms
• The Financial reform process had the effect of putting an end to the monopoly
of UTI( united trust of India) by opening up of mutual funds to the private
sector in 1992.
• Another development which took place in 1992 was the entry of foreign
institutional investors.
• The Indian corporate sector has been granted permission to tap international
capital markets through American depository, receipts, foreign currency
convertible bonds and global depository receipts, moreover overseas
corporate bodies and NRIs were allowed to invest in Indian companies.
Rajan Committee:
• It is constituted by the Govt of India in the year 2007 for proposing the next
generation of financial sector reforms in India.
• The committee on financial sector reforms headed by the Raghuram Rajan
have
 Financial Sector Reforms
• suggested a shift a true auction method for securities besides seeking a reduction in
the period between auction and listing.
• Better exchange rate system to manage exchange rates.
• The committee suggested that the insurance companies and provident funds to be invested abroad including foreign
Govt securities.
• All regulations related to trading including those on Govt bonds should be supervised by SEBI to strength the
interconnected markets and to improve liquidity and increase competition.

Recent developments in the Financial System:

Some of the important recent financial developments:
1. Establishment of NITI Aayog: National institution for transforming India.
• This scheme was established by the central govt in Jan 2015 to replace the planning commission.
• The NITI aayog with the Prime Minister as its chairperson is expected to provide
Recent developments in the Financial System
Strategic and technical advice to the states on various issues.

New 5yr foreign trade policy(FTP) for 2015-2020:

• This was introduced with a framework for increasing exports
• To generate employment
• To increase value addition in the country keeping in view, Make in India
vision.
• Two new schemes were introduced under this policy:
i) Merchandise exports from India scheme:
• For the export of specified goods to specified market
ii) Service export from India scheme:
• For increasing the exports of notified services
 Recent developments in the Financial System
Gold monetization scheme:
• The union cabinet approved the introduction of this scheme announced in 2015-
16
budget.
• The scheme aims to mobilize the Gold held by households and institution in the
country and to use this Gold productively.
• The long term objective of this scheme is reduce the country’s reliability on the
import of Gold t meet domestic demands.

Pradhan Mantri Jan Dhan Yojana(PMJDY):

• The Govt launched PMJDY in august 2014.
• The PMJDY aims to promote financial inclusion by providing each channel all
Central and State Govt benefits to the beneficiaries through this bank accounts
 Recent developments in the Financial System
Reserve Bank of India:
• Established in 1935 by the Banking regulation act 1934 with a capital of 5crores
• Nationalized on Jan 1st 1949
• Supreme monitory authority of India
• Responsible for printing currency notes except 1 Rupee coin
• Managing supply of money in Indian economy
• Also known as Central Bank of India

Functions of RBI:
1)Issue of Currency notes:
i) The RBI has the monopoly for priniting the currency notes in the country.
ii) It has the sole right to issue currency notes of various denominations except 1
rupee note/coin(issued by ministry of finance)
 Functions of RBI
iii) The RBI has adopted the minimum reserve system for issuing/printing currency notes
in India. Since 1957, it maintains gold and foreign exchange reserves of Rs 200 crores of
which at least 115 crores should be in gold coins/ gold bullion and remaining in the form
of foreign exchange reserve(foreign currency)
2. Banker to Govt:
i) It acts as the banker, agent, advisor to the Govt of India.\
ii) It performs all the banking functions of the State and Central Govt
iii) It also renders useful advise to the Govt on matters related to economic and monetary
policies
3. Bankers Bank:
i) RBI performs the same functions for other commercial banks as the other banks
Ordinarily perform for their customers.
ii) RBI leads money to all the commercial banks
 Functions of RBI
4) Controller of credit:
i) The RBI undertakes the responsibility of controlling credit created by the
commercial banks.
ii) It uses two methods to control the extra flow of money in the economy and are
called as quantitative and qualitative techniques to control and regulate the credit
flow in the country
iii) When RBI observes that the economy has sufficient money supply and it may
create inflationary situation in the country
iv) If the supply of money increase than inflation starts raising.
5) Custodian of foreign reserves:
i) For the purpose to maintain the foreign exchange rates stable.
 Functions of RBI

iv) It sells the foreign currency in a foreign currency market when it supply decreases
in the economy and vice-versa
6. Acts as a facilitator:
The commercial banks approach the reserve bank during emergencies to tide over finance
difficulties and the RBI comes to their recuse though it may charge a higher rate of interest.
7. Other functions:
i) It performs a number of functions like buying and selling of Govt securities(T-bills)
ii) Giving loans to the Government for buying and selling
iii)Collecting and publishing economic data
 Monetary policy
Definition:
Monetary policy is how a central bank or other agency governs the supply of money and
interest rates an economy in order to influence output, employment and prices.

Objectives of Monetary Policy:

i) High employment:
a)Any Govt is committed to promote high employment as it is a desirable goal of monetary
policy for 2main resources.
b)High unemployment causes financial distress in an economy
c)When unemployment rate is high it indicates lower GDP( as loss of output)

ii) Price stability :

a)It is desirable in a developing country like India because a rise in price level inflation
creases considerable uncertainty.
b)Inflation also makes it difficult to plan for the future.
 Monetary policy
iii) Interest rate stability:
a)Stability in interest rate is desirable because fluctuations in interest rate can create
uncertainty in an economy and make it more and more difficult to plan for the future.
b)Fluctuations in interest rates also effects the consumers willingness to buy durable goods.
iv) Stability of financial markets :
a)The major reason for the creation of central banks is that it can promote a more stable
financial system as it helps in preventing financial crisis.
b)The central bank is the ultimate source of funds in the money market.
v) Stability in foreign exchange:
a)With the increasing importance of international trade to the Indian economy the value of
the rupee relative to other currency has became a major consideration for RBI.
b)A raise in the value of rupee makes Indian industries less competitive
 Monetary policy
with those abroad and declines in the value of the rupee stimulate inflation in
India
vi) Economic Growth:
The goal of study economic growth because business are more likely to invest capital
equipment to increase productivity which in the effects the economic growth.

Techniques of monetary policy:

a)Quantitative/General methods:
i) Bank rate/Discount rate
ii) Open market operations
iii) Variable reserve ratio
iv) Change of liquidity
 Recent changes in Monetary policy
b) Qualitative/Selective method:

i)Ceiling on credit
ii) Margin requirements
iii) Discriminating interest rate
iv) Directives
v) Repo and reverse repo rates

Recent changes in Monetary policy:

Bank rate policy
i) Open market operations
ii) CRR( Cash reserve ratio)
iii) SLR ( Statutory liquidity ratio)
iv) LAF ( liquidity adjustment facility
v) Provision of micro finance
 SEBI
Securities Exchange Board of India: Established in the year 1988 but it got legal status/statutory power in
the year 1992

Role of SEBI:
• Promoting investors, investment and protecting them
 Promoting and regulating self regulatory organization/stock exchanges
 Undertaking inspection and enquiries
 Conducting audits of the stock exchanges, intermediaries or any other organization associated with the
securities market.

Functions of SEBI:
i) Protective functions:
a)Checks in price rigging
b)Prevents insider trading
c)Prohibits fraud lent unfair practices
 SEBI
2) Developmental functions
3) Regulatory functions

Non-Statutory Financial Organization (NSFO):

• The financial system has a strong group of financial institutions which are different in nature from
banks and financial intermediaries such institutions are called as Non-Statutory financial
organization
• Development banks, special development financial institutions like NABARD, IFC(Industrial
finance corporation), SFC(State financial corporation)

Role of NSFO’s:
• Planning, promoting and developing activities related to NSFO’s till the gaps in various sectors
• Coordinating the working of institution engaged in financing, promoting or developing industries.
• Conducting promotional services such as undertaking feasibility studies and providing technical,
financial & managerial assistance for the implementation of new projects
 NSFO’s
Industrial Finance Corporation of India(IFCI): Established in 1948

Role of IFCI:
• To be a solution provider to various financial needs(loans and advances)
• To remain competitive, competent to the economic growth
• To design customer focused solutions
• Acting as an agent to the Central Govt with respect to sanctioning loans to industrial
units.

Industrial Re-construction Bank of India(IRBI): Established in the year 1985

• The IRBI provides financial assistance to sick and closed industrial unit.

Role of IRBI:
• To provide financial managerial and technical assistance to sick industrial units
• To undertake leasing business
 NSFO’s
Role of IRBI:
• To provide financial managerial and technical assistance to sick industrial units
• To undertake leasing business
• To provide consultancy services to the banks in the matter of sick units
• To secure the assistance of other financial institutions and Govt agencies for the
revival of sick Industrial units.

Infrastructure Development Finance Company (IDFC) :

• Established on 30th Jan 1997
• It is a specialized institute to facilitate the flow of private finance to commercially
viable infrastructure projects such as Telecom, Power, Roads, Railways, port.

Role of IDFC:
• To provide long term finance for infrastructure development
• Support and advisory services to other institutions
 NABARD
National Bank for Agriculture and Rural Development:
• Established in July 12 1982
• Headquarters: Mumbai
• NABARD is an apex development financial institution in India
• The bank has been entrusted with matters concerning policy planning and operations in
the field of credit for agricultural and other economic activities in rural areas in India.
Role of NABARD:
• NABARD is the most important institution of the country which undertakes the development
of agricultural sector, small scale industry located in the rural areas.
• NABARD reaches out to allied economies, supports and promotes integrated development.
• Serves as an apex financial agency for the institution providing investments and production
credits for promoting various deep activities in rural areas.
 NABARD

• Undertakes monitoring and evaluation of projects refinancing

• Involves in the development of institutions which help the rural economy
• Provides training facilities to the institutions for the rural upliftment
• Regulates and supervise the co-operative banks and regional rural banks
activities through out India.
Small Industrial Development Bank of India SIDBI:
Established on April 2, 1990
Headquarters: Lucknow
• SIDBI objective is to provide refinance facilities and short term lending to
Industries and serves as the principal financial institution is the micro small
and medium enterprises sector(MSME)
 SIDBI
Role OF SIDBI:
• SIDBI is active in the development of micro finance institution for providing credit
facilities and assists in extending micro finance through finance institution
• Its promotional development program focuses on rural enterprises and
entrepreneurship development
• It operates a refinance program in order to increase and support money supply to the
micro small and medium enterprises msme sector
State Finance Corporation(SFC):
• In order to meet the varied financial needs of small and medium sized industries, the
Govt of India passed the SFC act in 1951 which empowers the State Govt to establish
such corporations in their states
• The first SFC was established in 1953 in Punjab
• In undivided AP it was started in the year 1956
 SFC
• Sfc provides financial assistance to industrial units in backward areas

Role of SFC:
• SFC’s provides finance to industrial unit of backward areas
• Provides assistance to the industrial units located the backward areas in the form of
soft loans at concessional rates, lower margins, reduced service charges
• In order to encourage self employment SFC’s have formulated schemes of assistance
to technician entrepreneurs
• Major beneficiaries of the financial assistance of Sfc’s have been the food processing
industries, chemical industries, textile and metal products
 UNIT II

• Organization, Structure and Functions of RBI and Commercial Banks:

Introduction - Origination, Structure and Functions of RBI and Commercial
Banks - Role of RBI and Commercial Banks - Lending and Operation policies -
Banks as Intermediaries - NBFCs - Growth of NBFCs - FDI in Banking Sector
Banking Regulations - Law and Practice-UPI-NPCI.
 Commercial Banks

• Commercial banks are banks which accept deposits of money from the public
for the purpose of lending or investment with an aim of earning profits
• Commercial banks are business entities which are involved in finances,
financial instruments and provide financial services for a price which may be
in the form of interest, commission, dividend or discount
Example: SBI, Andhra bank, Canara bank

The commercial banks perform two main functions:

i) Accepting deposits
ii) Giving loans
 Commercial Banks

I Primary functions:
i)Accept deposits : a) Current deposits b) Fixed deposits c) Savings deposits
ii) Grant loans: a) Cash credit b) Bank loans c) Bank overdrafts
d) Discounts
II Secondary Functions:
a) Agency Functions: i) Collecting cheques ii) Collecting Income iii) Paying expenses
b) General Utility Functions :i) Locker facilities ii) issuing traveller’s cheque iii) Foreign
exchange iv) Transfer of funds
c) Other Functions:
a) Debt cards b) Credit cards c) Internet banking d) E-banking
 Commercial Banks

Scheduled Banks:
Scheduled banks in India refers to those banks which have been
included in the second schedule of the RBI act 1934, which have a paid
up capital of an aggregate value of at least 5lakhs
Non-Scheduled Banks:
Banks which are not under the second schedule of the RBI act 1934 are
called as Non-Scheduled banks
• The cash reserve requirements they will maintain for themselves
 Structure of Commercial Banks

Competition:
Definition: It may be defined as the ability of an organization to gain superiority over
others in market.
Problems of Competition in Indian Banking:
• Interest rates on deposits were completely controlled by monetary authorities till
1991
• Banks were obliged to provide finance to Govt by purchasing Govt securities
• They were subjected to finance important sector and sick units

Oligopolistic: The banking market is oligopolistic in nature( A competitive oligopoly is a

market that is dominated by only a few large firms 2-4 firms)
 Commercial Banks

Interest rate: It is the price that the tender impose on the money borrowed
to borrower for a period of time and rate of interest depends on the maturity
of financial instruments
Interest rate: i) Short-term rate :Call rate, Bank rate
• Call rate: It is a interest rate on a type of short term loan that bank gives
to broker who lend the money to investors to fund the margin account
• Margin a/c: It is a brokerage account in which the broker lends the
customers cash to purchase stock for any other financial securities
ii) Medium term rate : F.D rate
iii) Long term rates : Deposit rate
 Spreads

Spreads: Auction traders consider to take advantage of a raising stock price while managing
risk to opt for a spread strategy
• Spread brings limited profits and limited losses to both buyers and sellers. This implies
that, when profits are limited there is a scope to reduce cost on the other hand, limited
losses would result in reduction of risk. It is neither highly risky nor highly profitable to
the users
a) Bull Spread:
• When the trader assumes to increase the prices in future then he purchases large
quantity at a low price and sells at a higher price in future to earn profits. This is called
Bull Spread also known as Call Spread
b) Bear Spread:
• When investors assumes to decrease the prices in future it is termed as Bear Spread
 Non Performing Assets

NPA: An asset is said to be NPA, if it remains due for over a period of 90days
• NPAs are listed in balance sheet
• Banks usually categorize loans as Non performing after 90days of non-payment of
interest or principal for the said period 90days
Type of NPAs:
• Sub-Standard Assets( less than 12months)
• Doubtful Assets(more than 12months)
• Loss Assets( Assets written off): Loss assets or assets with losses identified by the bank,
RBI inspectors, auditors and not fully written off in the books of accounts
Bank capital: It reflects the net worth of the bank. It consists of both assets and liabilities
 Capital Adequacy

Capital adequacy:
• Banks need capital to run the daily operations and to meet unexpected losses. Thus
banks are supposed to maintain adequate levels of capital with themselves. This is
known as capital adequacy requirement
Norms of Capital adequacy of banks:
• This norms are defined by Basel Committee under the supervision of RBI and Basel
committee has introduced the bank capital management system called Basel Capital
Accord in the year 1988
Capital Market Supports:
In order to meet the obligations to creditors, banking firm require periodical liquidation
of assets. If there is a substantial decrease in the value of the assets, banks should use the
capital funds to meet the obligation, otherwise the bank is said to be insolvent.
Recent innovation in Banking Sector

Important innovations in the banking sector:

i) Arrival of card based payments-ATM, debit card, credit card
ii) Introduction of electronic clearing service(ECS)
iii) Real time gross settlement(RTGS) was introduced in March 2004
iv) Introduction of NEFT(National Electronic Fund Transfer) 2005
v) Introduction of CTS(Cheque Truncation System) in 2008

Recent Innovations in Indian Banking Sector:

• Banking sector has witnessed a number of changes since 1980
• The banking sector in India observe great emphasis being levied on technology
• Banks being use technology to provide better quality services at greater speed
 Recent Innovations in the Banking Sector

• Technological improvement has paved way for new innovations in banking sector

ECS: It is a retail payment system that can be used to make bill payments of similar nature
especially where each individual payment of repetitive nature
RTGS: It is an electronic form of funds transfer where the transmission takes place on a real
time bases
NEFT: It is an electronic transfer of money from one bank or branch to another. NEFT also
helps in transfer of funds without having a bank account
CTS: It is a cheque clearing system under taken by the RBI for quicker cheque clearance. In
this process an electronic image of the cheque is transferred with essential data. CTS is more
advance and secure. It reduces operational cost and risks. It is quite easy & quick
 E-Banking

Forms of Electronic Banking:

• Phone banking/Tele banking
• Internet banking
• Mobile banking
• ATM
E-banking: Electronic banking is a major innovation in banking industry
• E-banking means provision of banking products & services by banks
directly to customers through electronic delivery channels that is
through E-banking
 E-Banking

Benefits of E-banking:
• E-banking provides a better brand image to the bank.
• It is very quick and easy and continuous process provides access to
information 24/7
• Operational cost of the banks would come down
• There is more scope for offering differential services under e-banking

Risk management by Bank in India:

Types of risk faced by banks
1.Financial risk : Two types a) Credit risk b) Market risk
 Risk Mgt by Banks in India

• Operational risk
• Strategic risk
• Liquidity risk
• Foreign exchange risk

Risk Management: Risk can be defined as a chance or probability of deviation from the
expected results arises due to internal and external factors. Risk management is a proactive
strategy to plan, lead, organize and control a wide variety of risk faced by banks.
1.Financial risk: It is defined as any risk which results from any business transactions under
taken by a bank which is exposes to potential loss
 Risk Mgt by banks in India

i) Credit Risk: It can be defined as a potential of a bank borrowers who fail to meet his
obligation. According to the agreed terms, loans of the largest credit risk in all the banks.
ii) Market Risk: It can be defined possibility of loss to the bank on account of moment in
market prices. Market risk is a risk where bank earnings and capital is depend upon the
changes in the interest rates of prices of securities
2. Operational Risk: It is a risk of loss resulting from inadequate or fail internal process,
people and systems on from external sources
3. Strategic risk: It is the risk that arises from that inability to implement appropriate business
plans, strategies, decisions with regard to changing business environment
4. Liquidity risk: It arises when the bank is not able to produce cash to meet with any
increase in the value of asset or decreasing the liability
 Risk mgt by banks in India

5. Foreign Exchange risk: Fluctuations in the currency rate due to

uncertainty in the global market which could be due to demand and
supply, interest rates, trade deficit all this contribute to foreign exchange
risk faced by banks
6. NPA’s & Interest rates: Also considered as risk factors faced by the
banks
Risk management procedure:
Step by Step process: Risk Identification-> Risk assessment &
management-> Risk Control-> Risk monitoring->Risk return trade off
 Co-operative Banks

• Registered under co-operative societies act and governed by banking regulation act
1949 & Banking Law act 1965
• Co-operative banks were started under the co-operative societies act 1904
• The main objective was to establish co-operative credit societies to encourage farmers,
artisans self employment groups and persons or individuals
Definition: Co-operative banks are the financial institutions that offer the lending facility to
the small business mainly in rural, semi-urban areas
• They provide most services such as savings and current account opening, loans or
mortgages, safe deposit lockers to customers
• Co-operative banks primarily finance to a agricultural based activities
Tier Structure of Co-operative banks
RBI

NABARD

State Cooperative Banks Urban Cooperative Bank State Land Development

(SCB) (UCB) Bank (SLDB)

District Level
District level
Central Land
Central Cooperative Bank
Development Bank
(CCB)
(CLDB)

Village Level
Village Level
Primary Land
Primary Agricultural
Development Banks
Credit Societies (PACS)
(PLDB)

Branches of (SLDBS)
 Tier Structure of Co-operative banks

• State level co-operative banks: The state level co-operative banks comprises of
SCB,UCB,SLDB
• District level comprises of CCB,CLDB : The land development banks SLDB,CLDB,PLDB and
branches of SLDB comprise the long-term credit structure
• PLDBs are similar to primary co-op agriculture rural development banks and SLDBs are
similar to State co-op agriculture and rural development banks
Role of Co-operative banks:
• Co-operative banks aim at providing credit facility to farmers at lesser rate of interest
• Co-operative banks participate in rural and micro finance.
 Tier Structure of Co-operative banks

They work towards the upliftment of rural people and weaker section
• This banks primarily offer personal banking and financial services to small
businessmen and small scale units
Initiative by Govt to strengthen co-operative banks by RBI & Govt of India:
i) Re-organization of PACS and this scheme was implemented in the states
which gave its acceptance
ii) 15 point program for the enhancement of PACS was carried out in 16
districts which resulted in mobilization of deposits, issue of loans and
collection of due from members
iii) 175 CCBS and 7 SCBs were recognized as weak bank and a rehabilitation
program was conducted to uplift the banks
 NBFI

iv) A 12 point action program was initiated by NABARD to provide

support to weak banks
v) A revival package was declared in all the states by the Govt of india
in the year 2006
Non-banking Financial Institutions:
UTI ( Unit Trust of India)
• Set up on 01.02.1964 under the UTI act 1963
• UTI was the idea of the then Finance minister T.T.Krishnamachari
 NBFI

Definition: UTI is controlled or governed by Govt of India and it is a statutory

public sector financial institution. It operate functions on the principles of “No
Profit” “No loss”
Objective of UTI:
• Intermediary to fulfill the twin objectives
a) Mobilizing retail savings
+
a) b) Investing those savings => In the capital market and passing on the
benefits earned/accrued to the investors
Structure of UTI
Under the provision of UTI act 1963

Chairman of the board of UTI

Appointed by the Govt of India

Perform its functions

 Functions of UTI

1. Mobilizing savings of small investors and channelized

savings into productive investments
2. Encourage savings of people from lower and middle class
groups
3. Convert the small savings into industrial finance
4. To grant loans and advances to investors
5. To provide liquidity to all units
6. Buy or sell or dealing foreign currency
 Mutual Funds

Mutual Funds:
• Mutual funds is an investment security that enables the investors to pool
their money together into professional managed investment.
• Mutual funds can be invested in stocks, bonds, cash or a combination of
other assets.
• The first company that dealt with mutual funds was UTI in the year 1964.
Later on, in 1987 SBI mutual fund was introduced
Why MF?
• Professionally managed
• Investment diversification
• Liquidity
• Better investment option
MF companies are regulated by AMFI (Association of Mutual funds in India)
 Types of Mutual Funds

Mutual funds are divided into two types:

i) Open ended MF : Accept funds from investors and sell
shares to the investors. They are not traded in open market.
In open ended schemes of mutual funds duration is not
specified for redemption. The main advantage of open
ended MF is liquidity

ii) Close ended MF: This funds issue a fixed number of units
that are traded on the stock market. This funds has a fixed
maturity period and they are listed on stock exchange. The
main advantage of close ended MF are the market forces of
demand and supply
 AMFI
Association of Mutual Funds in India:
It is the body which regulates the Mutual fund companies in India
Incorporated on 22nd Aug 1995
Objective:
• To monitor and control all the activities related to Mutual funds in India
• Promote and protect the interest of Mutual Fund’s customers and
shareholders
Role of AMFI:
• It is the regulatory frame work of mutual funds in India
• Monitor the Mutual funds
• Advice about Mutual funds
• Conduct exam for having qualified distributor for MF
 Growth of Mutual Funds in India

• Phase-I (1964-87) : The concept of MF emerged with the establishment of UTI

in the year 1964
• The first unit scheme is the open ended scheme
• Phase II (1987-92) : The second phase started with the entry of MF which was
sponsored by Nationalized banks and Insurance companies such as LIC,GIC
• Phase III (1992-97) : After the introduction of LPG policy, the doors of MF was
opened for private, multi-national companies Ex: ICICI, HDFC
• Phase IV (1997-till date): The MF industry witnessed increase in the flow of
funds by 1999-2000 the sales of MF picked up
 Insurance Industry in India

Insurance sector:
• Robust demand
• Attractive opportunities
• Policy support
• Increasing investment
 Insurance sector

Insurance sector is divided into two:

1) Life insurance-> Public Sector-> LIC
Life insurance-> Private sector-> Birla Sun life insurance
2) General Insurance: Public Sector-> GIC
Private Sector-> ICICI Lombard general insurance
Challenges of Insurance industry:
• Cut-throat competition
• New entrants
• Customers switching to other companies
• Managing risk
 IRDA

Insurance Regulatory Development Authority -IRDA

• Started in the year 2000

Objectives:
• To protect the interest of policy holders
• To promote, regulate and ensure orderly growth of the insurance
industry
• To monitor and regulate the activities of insurance business across
India
UNIT III

Risk Management in Banks : Introduction - Asset/Liability

Management Practices - Credit Risk Management –CAMEL
approche-5C of credit-causes of merging banks- Credit Risk
Models - Country Risk Management - Insurance Regulations
and Development Authority (IRDA)
 Financial Market

1. Money market: It is a place where short-term surface investible funds at a disposal of the
financial institution. It meets the short term requirements of the borrower and provide
liquidity or cash to lenders
a) Call Money: It consists of overnight financing and money needed at short notice for a
period up to 14days
• When the money lend for one day or overnight it is known as “ Call Money”.
• If it is exceeding more than 1day and less than 14days it is known as Notice money
Functions of Call Money Market:
i) Development of trade and industry
ii) Development of capital market
iii) Smooth functioning of commercial banks
iv) Effective central bank control
 Functions of Call Money Market

5. Formulation of suitable monetary policy through its intervention in this

market
6. Addresses temporary mismatch of fund

• Banks have to maintain a mandatory minimum cash reserve known as

CRR and have to maintain sufficient SLR for their day to day operations
• Call money market serves this purpose of meeting the short term
requirements of banks
 Commercial Bills Market

• Also known as discount market

• It is the short-term money market instrument traded in money market
• It is also a negotiable instrument
• It is a self-liquidating, instrument with low risk
• Maturity period of the bill may vary from 3-6months
• It enhances the liability to make payment on a fixed date when the goods
are bought on credit
 Treasury Bills Market

• Introduced in 1917 by the Govt of India

• These are the short-term money market instrument traded in money
market
• Only Central Govt have a right to issue and subscribe capital from public
• It is a negotiable instrument
• Traded duration:75days-365days
• Higher denomination value
• Issued at discount and redeemed at par value/face value
• Issued for 15days, 184days,364days
• It is a secured investment
 Certificate of Deposits

• Introduced in the year 1989

• It provides highest liquidity
• Issued by scheduled commercial banks
• Deals with higher value of denomination
• It is also a negotiable instrument
• Short-term market instrument traded in money market
• There is no regulation on interest rate
• This instrument can be traded in secondary market
 Commercial Papers

• Introduced in the year 1990

• Short-term money market instrument traded in the market
• Traded duration 3months-6months
• It is also a negotiable instrument
• This commercial paper can raise volume of denominal of exchange
• Only big enterprises called institutional investors can participate
• This can be discounted at certain value and redeemed face value
• Issued by Banking and Non-Banking institutions
 Capital Market

• Capital market is a market for long term funds for both debt(over a year) and
equity based securities are bought and sold
Capital market:
i) industrial securities ii) Govt securities market iii) Long term loans market
Role of Capital Market:
i) Capital formation
ii) Mobilization of savings
iii) Provision of investment avenue
iv) Increase in economic growth
 Capital Market

• Providing services such as underwriting and advisory services( process of selling

securities on behalf of client)
• Provision of long-term loan to start-ups

Various measures taken recently to vibrant capital market

i) Free pricing
ii) Introduction of book building
iii) Electronic trading
iv) Instruments and market participants
v) Improvement in trading, clearing and settlement system
 Government Securities

vi) Increased de-materialization

vii) Focusing on fair trade practices
viii) Impact on changing structure

Govt securities: (Treasury bills, Government bonds)

• A Govt securities is a bond or other type of debt obligation that is issued by
Govt of India with a promise of repayment upon the security’s maturity date
Features:
• They are considered as low-risk investment
 Government Securities

• The term ranges from 92 days to 30years

• They are liquid and secured in nature
• Interest on dividends are tax exempted
3 types of Government Securities:
i) Stock certificate: Not available in India
ii) Promissory Note : Only available here
iii) Bearer bond : Not available in India

• Listing of securities: The securities that are traded on stock exchange are said to be
listed or quoted.
 Government Securities
• Stock exchange establish their listing requirement for trading the
securities. These requirements may change periodically for widening the
group of shareholders and to reduce the presence of bulk amount of
shares with the management group of the companies
Trading and settlement of securities:
• The business transactions in the stock exchange involves the following
stages:
Stage 1 -> Order placement with brokers
Stage 2 -> Order execution
Stage 3 -> Reporting the deal to the client
Stage 4 -> Settlement of transactions 1-7days
 Role of SEBI in Capital Market

• SEBI was set up on 12th April 1992, SEBI Act

Role of SEBI:
• To protect the rights and interests of shareholders
• To prevent insider trading and mal practices
• To control major acquisition of shares and take over of organization
• To control and monitor stock exchange business
• To promote the development of securities for the business
• To provide advisory and consultancy services
• To conduct awareness programs in investors and encourage them to invest in
securities
 Role of SEBI in Capital Market

Role of SEBI in capital market :

• Capital market -> a) Primary market b) Secondary market
a) Primary market:
• The fresh securities issued in exchange of funds through public issues and private
placement
• They may issues securities at face value or at discount/premium
• They issue shares in domestic market
Issues : a) Public Issue b) Right issue c) Private placement preferential shares
a) Public Issue -> i) IPO (Initial Public Offering) for unlisted companies
ii) FPO ( Further Public Offering) for listed companies-> I) Fresh issue
II) Offer for sale
 Issues

a) Public issues can be classified into IPO and FPO

I) IPO: When an unlisted company makes either a fresh issue of security or an
offer for sale of its existing securities to the public or an offer for sale to the
public through an offer document
II) FPO: When already listed company makes either a fresh issue of securities
to the public or an offer for sale to the public through an offer document
b) Right Issue: It is when the listed company which proposes to issue fresh
securities to its existing share holders the right issues normally offered in a
particular rate to the number of securities held prior to the issue. This type of
issues is best suited for the company which would like to raise capital through
existing shareholders
 Issues

c) Private placement or preferential issue:

It is a issue of shares which are of convertible securities of a company to a
selected group of existing investors or individual under 81 of the company
act
Role of SEBI in Secondary market:
Secondary market is the place for the sale and purchase of existing
securities. The securities are traded, cleared and as per prescribed
regulatory
 CCIL

The Clearing Corporation of India Limited (CCIL):

• Set up by RBI on 30th April 2001
• Began its operations on 15th Feb 2002
• It is the first clearing house of India for Government securities
• Forex and other market segments
Role of CCIL:
i) Clearing & Settlement of Securities
ii) Clearing & Settlement of Forex
iii) Collateralized borrowing and lending obligation
UNIT IV

Financial Institutions and Development Banking

Introduction - Origin, Growth and Lending Policies of
Terms lending Institutions - Working of IDBI - IFCI -
STCs - SIDBI - LIC - GIC - UTI - Role of Financial
Institutions in Capital Market. Legal issues of LIC
 Lease Finance
Lease Finance:
Leasing is an agreement which is made between two parties that
is the leasing company or lessor and the user or lessee where in
the former make arrangement to buy capital equipment for the
usage for agreed period in return for the payment of rent

Leasing agreement involves 2parties:

i) Lessor (Owner of the asset)
ii) Lessee ( Who gets right to use the asset)
 Lease Finance
Steps in Leasing transactions:
1.Lessee identifies the equipment and the supplier or lessor of the asset
2. Lessee enters into agreement with lessor containing:
. The Basic period
. Timing and amount of rent
. Details of renewal option, if any
. Details of maintenance and repairs, taxes
3. After signing the above agreement, Lessor request the supplier to deliver the
asset to the lessee
 Advantages of Leasing
1. Liquidity: The lessee can use the asset to earn without investing money in the asset. He can employ his funds for working
capital needs.
2. Convenience: Leasing is the easiest method of financing fixed assets. No mortgage or hypothecation is required. Restrictions
involved in long-term borrowing from financial institutions are avoided. Formalities involved in leasing are much less
than in case of borrowing from financial institutions
3. Hidden Liability: Lease obligations are not reported as a liability in the company’s balance sheet. On the other hand, loans
raised to buy assets are reported as liability. Thus, leasing helps the lessee to report a better debt-equity ratio.
4. Time Saving: The asset is available for use immediately without loss of time in applying for the loan, wanting for approval
and sanction, etc. Lease rentals can be matched with cash flows of the lessee.
5. No Risk of Obsolescence: The risk of the asset becoming obsolete due to technological advancements is borne by the lessor.
6. Cost Saving: Lease rentals are deductible from taxable income. The lessee has lower obligation in bankruptcy than under
debt financing.
7. Flexibility: Leasing arrangement is more flexible. The rental schedule can be adjusted to accommodate genuine needs and
problems of the less.
 Disadvantages of Leasing
• If the lessee not able to make the rental payments then lessor would suffer the
loss particularly when an asset is less liquid in nature
• Certain tax benefits such as subsidy may not be available on leased equipment
• The value of real asset such as land and building may increase during lease
period
• The lease finance is not suitable for new projects, cash generation may start only
after certain period
 Types of Lease
1. Financial Lease
2. Operating Lease
3. Leverage Lease
4. Sale & Lease back
5. Cross Border Lease
6. Direct Lease
 Types of Lease
Financial Lease:
• It is like an installment loan with the legal commitment to pay for the entire cost of
equipment plus interest over a specified time period
• The lessee commits to a series of payment which in total the cost of equipment
• The contract period ranges from medium to long term
• The contract are usually non-cancellable
• Aircrafts, Land and building and heavy machinery are leased
• The lessee fulfills the financial function
 Lease Finance
Operating Lease:
• It is a rental agreement where the lessee is not committed to pay
more than the original cost of equipment
• It provides maintenance expenses and taxes to be borne by lessor
• The contract period range from immediate to short-term
• The contracts can be cancelled either by the lessee or by the lessor
• Computers, office equipments, trucks, automobiles are leased
• The lessor fulfills the service function
 Types of Lease
Leverage Lease:
• It is used for financing those assets which require huge finance/capital
• It involves 3parties: i) Lessee ii) Lessor iii) Lender
i) The lessee acquires the asset as per term of lease agreement but finances only a part
of total investment say 20% to 50%

Sale & Lease Back:

• The firm which has an asset and sold it to the leasing company and get its back on
lease
• The asset is generally sold at market value the firm receives the sale price in cash and
gets right to use the asset during the leasing period
 Types of Lease
Cross Border Lease:
• It is also known as Transactional leasing
• It relates to lease transactions between lessor and lessee
domiciled different countries and it include export
leasing/International leasing
Direct Lease:
• It is one of the type of lease finance where in lessor purchases
the asset and transfer’s it to the lessee under the lease agreement
• A manufacturer can act as lessor and deliver the assets to the
lessee
 Legal aspects of Leasing
Legal aspects of Leasing:
• There is no separate statutory body for equipment leasing in
India
• The provisions related to bailment in the Indian contract act
govern equipment leasing agreement as well as section 148 of
Indian contract act
• The obligations of lessor and lessee are similar to those of the
bailer and bailee which was defined by the section 150,168 of
ICA
 Evaluation & Growth of Leasing Industry in India

• Leasing activity was initiated in India in 1973

• The first leasing company – First leasing company of India Ltd”
• The industry entered 3rd staged in growth phase in late 1982
• Industrial credit & Investment corporation entered into leasing sector in 1983 giving boost to
the industry
• In the meantime, International financial corporation announced its decision to open 4 leasing
joint ventures in India
• An amendment of Banking Regulation Act,1949 facilitated commercial banks to enter into
leasing business
• In 1986, SBI started leasing operations
• The number of leasing companies increased to 400 by 1990
 Hire Purchasing
Definition: Hire Purchase System is a system under which money is paid for goods by means of
periodical installments with the view of ultimate purchase. All money being paid in the mean time is
regarded as payment of hire and the goods become the property of the buyers only when all the
installments have been paid”—Carter
According to Stephenson “The hire-purchase is a form of trade in which credit is granted to the
customer on the security of a lien on the goods”.
• Hire purchase is a mode of financing the price of the goods to be sold on a future date
• In a hire purchase transaction, goods are let on hire, the purchaser makes the payment in
installments
• Payment to be made in installment over a period of time
• The ownership would be transferred to the hirer immediately after entering into the contract
• The buyer can exercise the option of return of goods
 Advantages of Hire Purchase system
i) Convenience in Payment: The buyer is greatly benefited as he has to make the payment in
installments. This system is greatly advantageous to the people having limited income.
ii) Increased Volume Of Sales: This system attracts more customers as the payment is to be
made in easy installments. This leads to increased volume of sales.
iii) Increased Profits: Large volume of sales ensures increased profits to seller.
iv) Encourage Savings: It encourages thrift among buyers who are forced to save some portion of
their income for the payment of installments.
v) Helpful For Small Traders: This system is a blessing for the small manufacturers and traders.
They can purchase machinery and other equipment on installment basis and in turn sell to the
buyer charging full price.
vi) Earning of Interest: The seller gets the installment which includes original price and interest.
The interest is calculated in advance and added in total installments to be paid by the buyer.
vii) Lesser Risk: From the point of view of seller, this system is greatly beneficial as he knows
that if the buyer fails to pay one installment, he can get it back.
 Disadvantages of Hire Purchase System
1. Higher Price: A buyer has to pay higher price for the article purchased which includes cost plus
interest. The rate of interest is very high.
2. Artificial Demand: Hire purchase system creates artificial demand for the product. The buyer is
tempted to purchase the products, even if he does not need or afford to buy the product.
3. Heavy Risk: The seller runs a heavy risk under such system, though he has the right to take back the
articles from the defaulting customers. The second hand goods fetch little price.
4. Difficulties in Recovery of Installments: It has been observed that the
sellers do not get the installments from the purchasers on time. They may choose wrong buyers which
may put them in trouble. They have to waste time and incur extra expenditure for the recovery of the
installments. This sometimes led to serious conflicts between the buyers and the sellers.
5. Break Up Of Families: The system puts a great financial burden on the families which cannot afford
to buy costly and luxurious items. Recent studies in western countries have revealed that thousands of
happy homes and families have been broken by hire purchase buying’s.
 Hire Purchasing
Hire Purchasing: Mathematics of purchases
• Computation of interest where the division of installment amount= principal +
interest
• Interest amount is computed in terms of = Interest rate on outstanding principal
amount starting of each period
• Principal amount is calculated= Difference between installment amount period
and interest amount per period
 Factoring
Definition: Factoring is an agreement in which receivables arising out of sale of
goods are sold by a firm(client) to the factor(financial intermediary) as a result od
which the title to the goods represented as said receivables are passed on to the
factor
3 parties involved:
i) Seller (Client)
ii) Buyer(Customer)
iii) Financial Intermediary(Factor)
 Mechanism of Factoring
A factoring contract for sale of receivables:
• It starts with a credit sale and agreement between the client and the buyer
• The client(seller)
• Sells good on credit to buyer/customer
• Prepares invoice, delivery challan,factoring agreement and other documents
• Hands over the documents to factor(Financial institution/Banks)
• Receives payment in advance up to 80% of cost of good by factor
• Makes an advance payment to factor on receiving all the documents( invoice,challan, agreement)
• Prepares and sends periodical account statements to customer
Process of Factoring
 Mechanism of Factoring
• Receives payment from customer/buyer on due date
• Remits the balance(20%) from the money collected to the client/seller after
deducting its commission, fees, service charges
Factoring in India :
• Kalyana Sundram committee recommended introduction of factoring in the
year 1989
• Banking Regulation act 1949, was amended in 1991 for Banks setting up
Factoring services
• RBI has permitted banks to undertake factoring services through subsidiaries
• SBI/Canara bank have set up their first factoring subsidaries:
• SBI factors Ltd (Apr,1991) and CanBank Factors Ltd( Aug 1991)
 Functions of Factoring
i) Credit administration: Factor provides full credit administrative services helps and
advise sellers from the stage of deciding credit expansion to customers to the final stage
of book debt collection
ii) Credit protection: Where individual book debts are due from the customers the factor
and undertakes all collection related activities wherever necessary
iii) Advisory services: Advices the client regarding credit worthiness of a buyer, potential
customers, market trends
iv) Short-term finance: Provides money in advance up to 80% of the receivables
v) Collection facilities: collect money on behalf of the client and remits the money back
after deducting his charges
 Advantages of Factoring
To Client/Seller:
1. The client gets immediate cash on sale which can be invested
2. Protects the client against credit risk( risk of non-payment by
buyer)
3. Allows the client to offer lucrative credit schemes to customers
and increase his sales and profit
4. Reduces the financial burden of the client and relieves him
maintaining accounts and collection of receivables
5. Acts as an additional source of finance for the client and allows
him to explore new markets
 Advantages of Factoring
To Customers/buyers
1. Allows customers to save bank charges and
expenses
2. Allows customers to purchase expensive products
through flexible credit schemes
3. The factoring procedure is simple and easy than
applying for a bank loan, it saves time, money and
effort
 Limitations of Factoring
1. Factoring is a high risk area, and it may result in over dependence on factoring,
mismanagement, over trading of even dishonesty on behalf of the clients
2. It is uneconomical for small companies with less turnover
3. The factoring is not suitable to the company’s manufacturing and selling highly specialized
items because the factor may not have sufficient expertise to assess the credit risk
4. The developing countries such as India are not able to be well verse in factoring due to lack
of professionalism, non-acceptance of change and developed expertise
 Types of Factoring
Types of Factoring:
i) Recourse Factoring
ii) Non-Recourse Factoring
iii) Maturity Factoring
iv) Cross border Factoring
v) Recourse Factoring:

• Upto 75% to 85% of Invoice receivable are factored

• Interest is charged from the date of advance to the date of collection
• Credit risk is with the client
 Types of Factoring
i) Recourse Factoring:
. Recourse factoring is an agreement between the client and the factor in which the client is
required to buy back the unpaid bills receivable from the factor.
. The credit risk stays with the client in case of non-payment by the debtor
. Upto 75% to 85% of Invoice receivable are factored
. Interest is charged from the date of advance to the date of collection
. Credit risk is with the client in case of non-payment
. In India, Recourse factoring is more prevalent
 Types of Factoring
ii) Non-Recourse Factoring:
. Non-recourse factoring allows a company to sell its invoices to a factor
without the obligation of absorbing any unpaid invoices.
. Involves a true sale of receivable
. Credit risk is with the factor
. Rate of commission is very high
. Factor purchases receivable on the condition that the factor has no recourse to the client if the debt
turns out to be non-recoverable
. This is more popular in USA,UK
. The major benefit is that it brings more clarity and strength to company’s balance sheet
 Types of Factoring

iii) Maturity Factoring:

• In this type of factoring, factor does make any advance payment to the client
• Payment made on guaranteed/fixed date or on collection of receivables
• Guaranteed payment date is usually fixed taking into account previous collection experience
of the client
• Nominal commission is charged
• No risk involved to factor
 Types of Factoring
4) Cross border Factoring:
. Also called as two-factor system of factoring
. In cross-border factoring 4parties are involved
a)Exporter b) Importer c) Export Factor d) Import Factor
. Exporter(Client) enters into factoring arrangement with export factor in his
country and assigns to him export receivables
. Export factor enters into arrangement with Import factor and has arrangement
for credit evaluation and collection of payment for an agreed fee
. Notation is made on the invoice that importer has to make payment to the import factor
. Import factor collects payment and remits to export factor who passes on the proceeds to the
Exporter after adjusting his advance, if any
. Factor covers exchange risk also as foreign currency is involved
 Why use Factoring
. Through the use of Factoring, receivables are instantly converted
into cash leading to improved cash flows that can help funding
of future growth
. Facilitates an efficient follow up of payment from buyers, which is
made possible through relationships developed by factors with
client’s buyers.
. Provides credit protection for export sales which enables to do
business with buyers who are unwilling to open Letters of credit
. Provides services such as advisory services, credit assessment.
 Consumer Credit

Consumer credit is the short/medium term loan issued for personal consumption of goods
and services or repayment of the debts caused from the consumption through commercial
channels

Types of Consumer Credit:

a) Installment credit
b) Non-Installment Credit : 3types
i) Single payment ii) Open-ended credit iii) Service credit
 Consumer Credit

a) Installment credit :The borrowed party has to repay the

owed amount including interest in particular or specific
number of equal installment for the agreed period of time
b) Non-Installment Credit :
i) Single payment : This is the simplest among all the three
non installment credit option where the payment can be done
or made or one-go
ii)Open-ended credit: Here the credit is extended prior to any
transaction to make sure that the borrower will not apply for
the credit each time
iii)Service credit: Consumers are given service credit
through public utilities Doctors, Dentists, Physicians
 Consumer Credit

Advantages of Consumer Credit:

• It allows the customers to enjoy the goods and services
• It transfers the ownership on the first installments
• It provides greater options to the consumer to repay the
product
• It provides flat interest rate

Disadvantages of Consumer Credit:

• It is not possible for the consumer to sell or hypothecate
the goods or services
• Incase of default of the consumer, It is a loss to the seller
 Forfeiting

• Forfeiting is derived from a French word “forfeit” meaning

“ surrender of rights”
• Forfeiting is a form of financing of receivables arising from
international trade
• Purchase is through discounting of the documents covering
the entire risk of non-payment at the time of collection.
• Within this arrangement, a bank/financial institution
undertakes the purchase of trade bills/promissory notes
without recourse to the seller
• All risks become the full responsibility of the
purchaser(Forfeiter)
• Forfeiter pays cash to the seller after discounting the bills
 Forfeiting
• Forfeiting is a mechanism of financing exports
i) By discounting export receivables
ii) By Bills of exchange or promissory notes
iii) Without recourse to the seller via exporter
iv) Carrying medium to long term maturities
v) On a fixed rate basis( discount)
vi) Up to 100percent of the contract value
Forfeiting Process
 Forfeiting Process
1. Before resorting to forfeiting, the exporter approaches the forfeiting company
with the details of his export and the details of the importer and the importing
country.
2. On approval by the forfeiter, along with the terms and conditions, a sale
contract is entered into between the exporter and importer
3. On execution of the export, the exporter submits the bill to the forfeiter and
obtains payment. In this way, three parties involved in the forfeiting process
are the i) Exporter ii) Importer and iii) Forfeiter
4. If the exports are done against the Document Acceptance bill, it has to be
signed by the importer and since the importer’s bank has guaranteed through
L/C, it will be easy for the forfeiter to collect payment
5. All the trade documents, connected with exports, are handed over by the
exporter to his bank which in turn hands over the documents to the importer’s
bank.
 Forfeiting Process
6. The proof of all these documents will be submitted by the exporter to the forfeiter who will make
payment for the export
7. The cost of the forfeiting is included in the bill. The exporter may not lose much as the interest will be
included in the invoice and recovered from the importer. However, the forfeiter is exposed to the risk
of fluctuations in the exchange rate and interest rate.
Features of Forfeiting:
• Forfeiting can be used to finance any export transaction
• This technique is highly useful because of offered interest rate and no currency risk involved
• Exporters can use forfeiting in place of any other credit transaction or insurance coverage for buying
or selling of goods
•
Forfeiting in India
For a long time, Forfeiting was unknown to India. Export Credit Guarantee
Corporation was guaranteeing commercial banks against their export finance.
However, with the setting up of export-import banks, since 1994 forfeiting is
available on liberalized basis.
• The Exim bank undertakes forfeiting for a minimum value of Rs. 5 lakhs.
For this purpose, the exporter has to execute a special Pronote in favor of the
Exim bank. The exporter will first enter into an agreement with the importer
as per the quotation given to him by the Exim bank. The Exim bank on its
part, gets quotation from the forfeiting agency abroad. Thus, the entire
forfeiting process is completed by exporter agreeing to the terms of the Exim
bank and signing the Pro-note
• Forfeiting business in India will pick up only when there is trading of foreign
bills in international currencies in India for which the value of domestic
currency has to be strengthened. This would be possible only with increasing
exports. At present, India’s share stands at 1.7 percent in the world exports.
Perhaps, this will bring a push to the forfeiting market.
 Advantages of Forfeiting
1. It provides immediate funds to the exporter who is saved from the risk of the
defaulting importer.
2. It is an earning to commercial banks who by taking the bills of highly valued
currencies can gain on the appreciation of currencies.
3. The forfeiter can also discount these bills in the foreign market to meet more
demands of the exporters.
4. There is very little risk for the forfeiter as both importer’s bank and exporter’s banks
are involved.
5. Letter of Credit plays a major role for the forfeiter. Moreover, he enters into an
agreement with the exporter on his terms and conditions and covers his risks by
separate charges.
6. As forfeiting provides 100% finance to exporter against his exports, he can
concentrate on his other exports.
 Disadvantages of Forfeiting
The following are some of the disadvantages of forfeiting.
1. Forfeiting is not available for deferred payments especially while exporting capital goods for
which payment will be made on a deferred basis by the importer.
2. There is discrimination between Western countries and the countries in the Southern
Hemisphere which are mostly underdeveloped (countries in South Asia, Africa and Latin
America).
3. There is no International Credit Agency which can guarantee for forfeiting companies which
affects long-term forfeiting.
4. Only selected currencies are taken for forfeiting as they alone enjoy international liquidity.
 Venture Capital Financing
Venture Capital Financing:
The money provided by investors to start up firms and small business with perceived
long term growth potential

Features:
i) Long time horizon
ii) Lack of liquidity
iii) High risk
iv) Capital gains
 Venture Capital Financing
Advantages:
i) No collateral required : If you have a business plan along with the business model and
profitability then angel investors or venture capitalists invest in your project without any
collateral.
ii) No repayment period : Unlike debt financing, you need not pay any fixed monthly or
yearly payments to make it happen. This enables a company to manage funds efficiently for
expansion of business or purchase of machinery to boost production.
iii) More cash on hand : You have more cash on hand and no loan burden. So, you as the
company can declare a dividend to the shareholders in accordance with the profitability of
the company.
iv) Long term planning : Since the investors do not expect the immediate return on their
investment, you can manage the funds efficiently which will yield better returns in the near
future.
 Venture Capital Financing
Disadvantages of venture capital financing:
i) Complex process: In order to raise funds you need to approach
venture capitalists or angel investors by submitting a robust
business model, future revenue projection, whether your
venture will succeed in the future, profitability, etc. So, raising
a fund from venture capitalists is quite a long and complex
process.
ii) Share of Profit of the company: Since equity gives an
ownership right and voting right to the shareholders, the
dividend paid to the shareholders is more than the interest
payable in the case of debt financing.
iii) Loss of control : Since the shareholders are the owners of the
company, you need to consent or consult with the shareholders
in the case of differences of opinions among the shareholders.
 Methods of Evaluating VCF
1.Equity Financing: A firm needs funds for a longer period to survive
and grow, but as venture capital firm is a new company the firm is not
able to give timely returns to its investors, for which equity financing
proves beneficial. The investor’s contribution is not more than 49% of the
total stake, and so the ultimate power remains with the entrepreneur.
2.Conditional Loan: Conditional loans are the one that does not carry
interest and are repayable to the lender in the form of royalty after the
venture capital undertaking is able to make revenue. The royalty rate may
vary from 2% to 15%, on the basis of factors such as gestation period,
external risk and cash flow patterns.
3.Income Note: A form of hybrid financing, that combines the
characteristics of the traditional loan and conditional loan, on which the
venture capital firm pays both royalty and interest, but at low rates.
 Methods of Evaluating VCF
4. Participating Debentures: The interest on participating debentures is payable
at three various rates, as per the phase of operation:
i) Start-up phase — Nil
ii) Initial operations phase — Low rate of interest
iii)After a particular level of operations – High rate of interest

5. Convertible loans: The loans which are convertible into equity when interest
on the loan is not paid within the stipulated period.
Conclusion: Venture Capital provides long term funding to unquoted companies
to grow and succeed. Raising venture capital is a bit different from borrowing
money from lenders because lenders have the right to interest on the loan and
capital repayment. On the other hand, venture capital investment provides
equity stake to the investor, and the return on investment relies on the growth
and profitability.
 Stages of Venture Capital Financing

Venture capital financing is quite helpful to nurture and grow a start-up into a profitable
venture. Here are the different stages of venture capital financing
i) Seed Stage :As the term suggests the start-up will grow by making use of the capital
invested by angel investors or venture capitalists. In this stage, an investor
investigates the business plan and the potential of the product or service to succeed
in the future, which is to be delivered by the entrepreneur.
ii) Start-up Stage: If the idea/product has the potential to cater or solve any problem
then the entrepreneur needs to submit the business plan along with,
• In-depth analysis of revenue model i.e. how the company generates revenue,
• Current competition in the peer industry or sector
• Details of the management such as CEO, CIO, Director of the company and their
work experience part from educational qualification
• Size and potential of the desired market.
 Stages of Venture capital Financing

After analyzing the above-mentioned points, venture capitalists decide whether they are
going to invest. At this stage, the risk factor is quite high because there is an inherent risk
of losing the invested capital if the business does not succeed. The money invested by the
venture capitalists will be used for the development of product or services and marketing
strategies.
iii) Early-stage/First stage :This stage is also known as the emerging stage. The capital
received from the venture capitalists goes into manufacturing products or delivering
services by setting up an office to capture the market shares from the competitors in the
industry. Venture capitalists have a close eye on the management to know the capacity of
the management and how they can tackle the competition from the peer companies. In this
stage, the capital is invested to grow inventory to increase sales.
 Stages of Venture Capital Financing

iv) The Expansion stage/Second stage/Third stage: In this stage, the capital is provided
for marketing and promotion of the product, expansion, and acquisition to keep up with
the demand of the product.
• Venture capitalists funding in the emerging stage is largely used for market expansion
by setting up a new factory or acquisition of factory and product diversification.
• Venture capitalists intend to invest in this stage since the chances of failure in the
emerging stage are quite low. Apart from this venture capitalists have an option to
analyze the past performance data i.e. sales, profit, etc., management team, and audited
financial data of previous years.
v) The Bridge Stage/ IPO stage : This is the last stage of the venture capital financing
process. At this stage, the company gains a certain amount of market share
 Stages of Venture Capital Financing

• In this stage, the companies give the venture capitalists

an opportunity to book the profit for the risk they have
taken, and exit from the company by selling their
share/stake when the company announces initial public
offering. The fund raised from Initial Public Offering
can be used for
• Mergers and acquisitions.
• Reduction of price and other strategies to drive out
peer competitors.
• Introduction of products or services to attract new
customers and markets
 Housing Finance
Housing Finance means providing finance or loans for
meeting the various needs relating to housing,
namely:

a) Purchase of a flat or house

b) Acquisition of a plot
c) Construction of a house
d) Extension of a house
e) Repairs, renovation of a house/flat
 Importance of Housing Finance
• Create and meet a growing housing demand
• Reduce poverty
• Promote economic growth
• Since housing drives economic activity with both backward and
forward linkages, it is considered as an important family
investment activity.
• It is an integral part of the infrastructure sector. Construction
of houses provides jobs and higher tax revenues for local, state
and central governments.
 National Housing Bank(NHB)
• National Housing Bank (NHB) was set up in July 1988 with the equity support
from the RBI and is intended to act as the apex institution for coordinating and
developing the housing finance schemes.
• Later, the UTI set up in 1989, a Housing Construction Investment fund for direct
investment in construction projects and real estate development.
• The entry of LIC and GIC and many banks like SBI and Canara Bank through their
subsidiaries has been started to be another landmark in the promotion of
housing industry.
• The setting up of National Housing Bank as a fully owned subsidiary of the RBI,
and as an apex institution was the culmination of the fulfillment of a long
overdue need of the housing finance industry in India.
• The system has also been characterized by the emergence of several specialized
financial institutions, which have considerably strengthened the organization of
the housing finance system in the country.
 Housing Finance in India
• In 1985, RBI made many recommendations for liberalization in
the housing finance system based on the report of Chakraborthy
Committee.
• In 1987, HFC's amended the Insurance Act of India to allow the
Life Insurance Corporation (LIC) and the General Insurance
Corporation (GIC) to enter the housing finance business.
• In 1988, the National Housing Bank was set up as a subsidiary
of the RBI to act as an apex regulatory and promotional agency.
• In 1989, the RBI allowed Commercial banks to issue large
loans for housing without imposing rigid restrictions on interest
rate or loan quantity ceiling
 Housing Finance in India
• In 1990's the pace set in the earlier decades was carried forward. Many
HFCs were set up under the directions of the NHB.
• The process of liberalization covered the retail housing finance sector
substantially. The most significant change was the enhancement of the
amount set aside by the commercial banks for their lending to the
housing sector from 1.5 per cent to 3 per cent( Union budget 1999-
2000)
Types of Housing Home:
1. Home purchase loans
2. Home Improvement Loans
3. Land Purchase Loans
4. Balance Transfer Loans
5. Loans to NRIs
 Issues of Housing Finance in India
• The housing sector of India has been stressed out from the time of
independence. Builders and developers have also confronted several
problems.
• The following are some of the major issues of the Indian housing financial
sector:
1. Traditional Laws: There are few legislations which restrict the growth and
development of housing finance in India. For example, the old Urban Land
Ceiling Regulation Act has not been successful in the Indian housing finance
system. It resulted only in increase of land price, inadequate land supply for
housing development and financing.
2. Improper Title: Improper title to the property is another major issue. Nearly
90% of the Indian lands are without a proper title.
3. High Stamp Duty: The expenditure involved in transferring the land, stamp
duty, the registration charges are very high. Apart, from this, the method
followed is also not transparent
 Issues of Housing Finance in India

4. Outdated Rented Laws: Majority of the urban properties are out of the
market due to the outdated tenancy and rental control laws. The rental
laws needs to be updated from time to time in order to safeguard the
owner and the property from the tenant.
5. Foreclosure Laws: Inspite of low levels of closure laws being present yet
these laws are regarded as outdated. The laws for non-payment of
EMI(Equated Monthly Installment and the foreclosure and repossession
of the property should be reviewed from time to time
6. Improper Infrastructure: It is the common and the major problem of
Indian cities. It is the duty of both the central and state governments to
make a provision of adequate electricity, water and roads to cope up with
the growing population.
 Issues of Housing Finance in India
4. Outdated Rented Laws: Majority of the urban properties are out of
the market due to the outdated tenancy and rental control laws. The
rental laws needs to be updated from time to time in order to
safeguard the owner and the property from the tenant.
5. Foreclosure Laws: In spite of low levels of closure laws being present
yet these laws are regarded as outdated. The laws for non-payment of
EMI(Equated Monthly Installment and the foreclosure and
repossession of the property should be reviewed from time to time
UNIT V
New Financial Instruments and Institutions : Private Banks - Old
generation and New generation private banks - Foreign Banks - NSE -
Depositories - DFHI - New Equity and Debt Instruments - SEBI and
RBIguidelines.
 Merchant Banking
• The Merchant banks are the financial institution which provides financial services, solutions and advice to
corporate houses
• A Merchant bank is a financial institution providing capital to companies in the form of share ownership
instead of loans.
• A merchant bank also provides advisory on corporate matters to the firms in which they invest.
Definition: The Ministry of Finance in India defines Merchant Banker as “ any person who is engaged in the business
of issue management either by making arrangements regarding buying, selling or subscribing to the securities as a
manager, consultant , adviser in relation to such an issue management”.
Origin:
• Merchant banking came to India through Grindlays bank in the year 1967 and Citi bank in 1970
• SBI started the merchant banking division in the year 1972
 Merchant Banking in India
Origin:
• Merchant banking came to India through Grindlays bank in the year 1967 .
• Grindlays started its operations with management of capital issues, recognized
the requirements of upcoming class of Entrepreneurs for diverse financial
services ranging from product planning and system design to market research.
• Citibank set up its merchant banking division in India in 1970
• SBI started the merchant banking division in the year 1972
• After that, there were many banks which set up the merchant bank division such
as; ICICI, Bank of Baroda, Canara Bank
• The merchant bank got more importance in the year 1983 when there was a
huge boom in the primary market where the companies were going for new
issue.
• As of now, there are 135 merchant bankers who are registered with SEBI in India.
It includes public, private sector and foreign players
 Merchant Banking Services
The following are the major services provided by merchant bankers to customers:
i) Issue management: This service deals with issuing equity shares, preference
shares and debentures that acts as a partner for a high net-worth client by
issuing shares and debentures to the general public.
ii) Portfolio Counseling: It is a service where a merchant bank invests in different
kind of financial instruments on behalf of clients as well as manages the whole
investment.
iii) Project Counseling: Project Counseling also involves filling up application forms
and trying to fund projects through banks or financial institutions.
iv) Loan syndication : In this case the bank provides term loans for the projects
that need money.
v) Underwriting Services: This is one of the main services offered by merchant
bankers. It is a guarantee that states that if the subscription is below a specified level,
then the merchant banker has to subscribe to the said amount.
 Functions of Merchant Bankers
The important functions of merchant banking are discussed below:
i) Raising funds for clients: Merchant banking helps clients to raise funds by
issuing shares, debentures and bank loans. This helps clients raise funds both in
the domestic as well as international market.
ii) Handling Government consent for industrial projects: Any business requires
Government permission for starting a project. Companies also require
permission for expansion or modernization activities. Merchant banks do all this
for their clients.
iii) Brokers in stock exchange: The merchant bankers act as brokers of a stock
exchange. These brokers buy and sell shares on behalf of their clients.
iv) Advice on expansion and modernization: The banks have executives who
advice their customers on the expansion and modernization of businesses. They
give expert advice on mergers and acquisitions and takeovers.
v) Managing public issue of companies: Merchant bankers advice and manage
public issue of companies.
 Functions of Merchant Bankers
• Services to private sector units: Merchant banks offer many services to public
sector units and public utilities. They help in raising long term capital, marketing
of securities and foreign collaboration and also managing long term finance.
• Special assistance to small companies: Merchant banks advice small companies
on business opportunities, government benefits, incentives and policies.
• Management of interest and dividends: Merchant bankers help their clients in
the management of interest on debentures and dividends on shares. They also
provide expert advice to the client on the rate of dividend and timing.
• Money market operation: Merchant bankers deal with short term money market
instruments like commercial paper issued by large corporate firms, government
bonds and treasury bills issued by RBI
• Leasing services: Merchant bankers also help in leasing services where the lessor
allows the use of specific assets to the lessee for a certain period on behalf of
fees or rentals.
 Lead Manager
• A lead manager is under an obligation to accept a minimum underwriting obligation of 5% of total

underwriting commission or 25 lakhs whichever is less .

• If he is not able to comply with the above provision. It is his duty too to make arrangements with another
merchant bankers associated with that issue to underwrite the said amount.
• In case of development, the lead manager has to ensure the collection of the specified amount from the
underwriters.
• Every lead manager is responsible for ensuring timely refund of excess application money received from the
applicants.
• It is the lead manager duty to mail the share or debenture certificate immediately on allotment/ inform it to
the depository participant.
• Every lead manager has to submit all the particulars of an issue, draft prospectus or letter of offer to the SEBI
at least two weeks before the date of filling with the registrar of companies or regional stock exchange or
both.
 Role of Lead Managers
• Lead managers are independent financial institution appointed by the company going public.
• Companies appoint more than one Lead manager to manage big IPO’s
 Underwriting
• Underwriting is the process through which an individual or institution takes on financial risk for a fee. This
risk most typically involves loans, insurance, or investments.
• The term underwriter originated from the practice of having each risk-taker write their name under the
total amount of risk they were willing to accept for a specified premium.
• Although the mechanics have changed over time, underwriting continues today as a key function in the
financial world.
• Underwriters assess the degree of risk of insurers' business.
• Underwriting helps to set fair borrowing rates for loans, establish appropriate premiums, and create a
market for securities by accurately pricing investment risk.
• Underwriting ensures that a company filing for an IPO will raise the amount of capital needed, and
provides the underwriters with a premium or profit for their services.
• Underwriters are important in a financial world.
• They basically help in lowering the risk of the other party, but for a fee, commission or interest.
 How Underwriting Works
• Underwriting involves conducting research and assessing the degree of risk each applicant or entity brings to
the table before assuming that risk.
• This check helps to set fair borrowing rates for loans, establish appropriate premiums to adequately cover the
true cost of insuring policyholders, and create a market for securities by accurately pricing investment risk. I
• If the risk is deemed too high, an underwriter may refuse coverage.
• Risk is the underlying factor in all underwriting. In the case of a loan, the risk has to do with whether the
borrower will repay the loan as agreed or will default.
• With insurance, the risk involves the likelihood that too many policyholders will file claims at once.
• With securities, the risk is that the underwritten investments will not be profitable.
• Underwriters evaluate loans, particularly mortgages, to determine the likelihood that a borrower will pay as
promised and that enough collateral is available in the event of default
 How Underwriting Works
• In the case of insurance, underwriters seek to assess a policyholder's health and other factors and to spread
the potential risk among as many people as possible. Underwriting securities, most often done via Initial
Public offering (IPOs) helps to determine the underlying value of the company compared to the risk of funding
its IPO.
• Use software to evaluate risk
• Vetting potential borrowers based on their background, assets, income and other factors
• Approving and declining applications based on research and valuations
 Registration of Underwriters

Eligibility:
SEBI grants a certificate of registration to act as an underwriter based on the following
criteria:
i) Candidate should hold a certificate obtained from the Board
ii) Should have sufficient Infrastructure
iii) Past Experience in Underwriting for a minimum period of 2years
iv) Capital adequacy of a min of Rs.20lakhs
v) Any merchant banker or stock brokers holding certificate of registration as per section 12 shall be permitted
to function as an underwriter without obtaining a separate license from SEBI.
 Registration of Underwriters
• The SEBI has set the some requirements for registration of underwriters:
• Should meet the eligibility criteria
• Filling Form A with all the details as mentioned
• Fill the non-refundable fee of Rs 25000
• The board will review all the details provided in the form and recheck if the applicant is eligible for the
registration and satisfies all eligibility criteria
• Grants “Certificate of Registration” in Form B