BFSI

Conceptual one-liner.

  1. Transfer from two different currencies is called Swap Transaction.
  2. Transfer between securities and cash is called Reverse Repo.
  3. In demand deposit you can withdraw money at any point in time.
  4. In time deposit you can withdraw money over a fixed period of time.
  5. Savings account is for individuals and current accounts for business. In the individual account the number of restriction on the withdrawal is 
  6. Fixed deposit is non-transferable, it cannot be endorsed which means writing name on back and handing it to someone else. 
  7. Certificate of deposit is sometimes transferable. It can be endorsed in someone else’s name. 
  8. Zero coupon deposits have no interest. On maturity obtained is 1000 INR and in investment is 910 INR. The instrument is purchased at a discount. Interest earned is 90/910*100. The need for such a product. The benefit of this is that the bank need not have money to pay any interest in between. Also the bank is free from the hassles of paying taxes to the government.
  9. In the range accrue deposit, if the anticipation comes true the bank offers interest at an enhanced rate. 
  10. Fund transfer services provided by banks to customers is an example of agency (finance/assurance/agency/utility) function of a bank.
  11. Commercial Banks perform all the banking activities and provide all kinds of banking products.
  12. Thomas takes a loan from ICICI bank. This loan is liabilities (assets/liability) for Thomas whereas the same is assets (assets/liability) for ICICI bank.
  13. Lesser the money supply in the economy, higher the CRR
  14. Higher the loan to value ratio, higher the risk and thus, higher the rate of interest
  15. Capital market is a combined name for debt market and equity market.
  16. Services such as issuance of letter of credit, dealing in foreign exchange can be categorised under which function of a bank. Utility
  17. These banks have been established with an aim of financial inclusion to sections of the economy not being sold by other banks, such as small business units, small and marginal farmers, micro and small industries and the unorganised sector entities. Small Finance Banks
  18. The process of identifying customers deposit accounts that are considered abandoned and re-emitting the funds to the appropriate state if the customer cannot be contacted to reactivate the account is known as escheatment
  19. Which certificate of deposit allows the bank/financial instrument to redeem the certificate of deposit? Negotiable
  20. Is overdraft a revolving loan. State yes/no.
  21. This is a company registered under the companies act, 1956 engaged in the business of loans and advances question, acquisition of securities issued by government or local authority or other marketable securities of alike nature, leasing, how are you – purchase, insurance business, check it does not include in institution was busy business in that agriculture activity, industrial activity, purchase of sale of any goods (other than securities) of providing any services and sale/purchase/construction of immovable property. NBFC
  22. A minimum percentage of deposits that commercial bank has to maintain in the form of liquid cash, gold or other securities is SLR
  23. Name the agreement involving the sale of securities by one party to another with a promise to repurchase the securities at a specified price and on a specified future date.
  24. Banks may provide extension of credit to customers when the savings or current account balance is zero. What is the term as? Repurchase agreement 
  25. Credit card is an example of which kind of loan/facility? Revolving 
  26. State two types of demand deposits. Savings and current account
  27. State in brief and feature of a scheduled bank. Schedule bank can borrow from RBI 
  28. State any two functions of RBI. The Reserve Bank uses refinance to relieve liquidity shortages in the system, control monetary and credit conditions, and direct credit to selective sectors. It regulates the money market. The money market is a market for financial assets that are close substitutes for money. It is a market for overnight to short-term funds and instruments having a maturity period of one or less than one year. It is not a physical location (like the stock market), but an activity that is conducted over the telephone. As the Reserve Bank maintains banking accounts of all scheduled banks, it has powers to collect credit information from banking companies and appoint any bank as its agent.
  29. (100 – margin person) indicates margin to value ratios.
  30. Mortgage of the loans taken by Mary have a covenant restricting the interest-rate on low to a maximum of 8%. This is a capped interest rate loan.
  31. What all are working capital facilities?
  32. When a corporate customer wants a holiday in repayment of loan, it is called moratorium period.
  33. Pari passu charge means all the lenders have an equal right in proportion of the loan to the borrower. True or false?
  34. A corporate is expecting a large loan from the IMF after three months. Can it apply for this type of loan for meeting the fund requirement IMF disperses alone? Bridge loan
  35. A loan taken by depositing called ornaments in the bank is pledge.
  36. When the banks make a formal group for lending to a single corporate, the arrangement is known as consortium banking.
  37. Cash credit facility provided by banks against invent trees of the borrower is working capital facility.
  38. SEBI caters to the needs of each of the following entities which constitute the market issuer of securities. SEBI regulates the capital market.
  39. When he employs or executives who have access to the strategic information about the company, use the same for trading in the company’s stock or securities, it is called insider trading.
  40. In this type of life insurance, there is no savings and a profit aspect involved. Death risk cover is provided to the policyholder where the death benefit is paid to the nominee appointed by the policyholder. If the assurer survives the entire policy term, then nothing is paid back. Which insurance policy is this? Term life insurance
  41. Bill discounting is financing non-LC usance bills.
  42. The bank guarantee is a non-fund based facility. True 
  43. The purpose of this type of bank guarantee is to make sure the counterparty compliance with the terms of contract. Earnest money deposit.
  44. State true or false: SEBI has three functions rolled into one body: “quasi – legislative, quasi judicial and quasi – executive. True
  45. Index fund is a passively managed fund. 
  46. This type of NBFC finances physical assets supporting productive/economic activities, including automobiles, tractors and generators. I said finance company
  47. State true or false: money laundering and taxation are synonymous. False.
  48. Which of the following is not a negotiable instrument? Bill of purchase

Explain in detail the working of repo and reverse repo?

By reducing or increasing the rate of interest at which RBI extends financial accommodation to banks, can be used as an effective tool for either increasing or decreasing lendable funds availability at the hands of banks. Therefore this was one of the tools through which credit can be controlled by RBI. Repo Rate also known as the benchmark interest rate is the rate at which the RBI lends money to the banks for a short term. The 6-member monetary policy committee has kept the current repo rate at 4%.

Reverse Repo Rate is the short term borrowing rate at which RBI borrows money from banks. Reverse repos are also employed to inject liquidity in the call market.

Example: let us assume there are two banks: silver bank and gold bank. The Silver bank has securities and the Gold bank has surplus cash. It can be possible for the bank and require something it does not have from the other bank. Silver might require cash and Gold bank might require securities. So the banks buy and sell transactions. Reverse repo means repurchase. In the first leg it is taking something and in the second leg it is giving something back. Reason why Silver did it, because it wasn’t complying with CRR (Cash reserve Ratio) requirements. The securities can be very good and give profit, so it doesn’t want to give it away. So it takes cash in the first leg as it requires cash for a short period of time. After compiling with the CRR, the Silver bank can 

The Gold Bank might be facing a shortage of securities for a short period of time, so it will give cash and take security. Short selling is selling security that one doesn’t have. Regulation allows it to sell, but at the end of the day and before the market closes it has to be bought back. When the price falls, the security can be purchased.

How do treasury bills help generate money supply and economy?

A preference shares on which dividends are paid in line with the interest rate on Treasury bills. The rate at which a central bank discounts bills, such as treasury bills. A market for borrowing and lending money, through Treasury bills, certificates of deposit, etc. Discount window is a way in which the Reserve Bank of India grants loans to a bank by giving advances on the security of Treasury bills which the bank is holding. It’s an example of the money market. As it is an instrument which is issued for a period less than a year.

A treasury bill is a part of the Money Market. The Reserve Bank of India, banks, mutual funds, financial institutions, primary dealers, provident funds, corporates, foreign banks, and foreign institutional investors are all participants in the T-bills market. The state governments can invest their surplus funds as non-competitive bidders in T-bills of all maturities.

The sale of T-bills is conducted through an auction. The method helps in price discovery, a process wherein prices in the market reflect the relative cost of production and consumption utilities with a view to achieving the optimum allocation of resources in the economy. In case of auctions, competitive bids are submitted by the participants to the Reserve Bank and the bank decides the cut-off yield/price and makes the allotment on such a basis. For an auction to be meaningful, it is necessary that auctions are conducted on a competitive bidding basis. For this purpose, the participation should be large and varied in nature. A wider participation in auctions results in increased competition, yielding better prices and improving the auction results. Primary dealers, banks, corporates, mutual funds, and others participate in the competitive bids.

Insurance 

Justify the existence of the insurance industry when individuals can open a recurring deposit account in any bank.

Insurance limits, pools, and trades the risks involved in mobilizing savings and allocating credit. An efficient financial system aims at containing risk within acceptable limits. It reduces risk by laying down rules governing the operation of the system. Risk reduction is achieved by holding diversified portfolios and screening of borrowers. Market participants gain protection from unexpected losses by buying financial insurance services. Risk is traded in the financial markets through financial instruments such as derivatives. Derivatives are risk shifting devices, they shift risk from those who have it but may not want it to those who are willing to take it.

Insurance may be described as a social device to reduce or eliminate risk of loss to life and property. Insurance is a collective bearing of risk. Insurance spreads the risks and losses of few people among a large number of people as people prefer small fixed liability instead of big uncertain and changing liability. Insurance is a scheme of economic cooperation by which members of the community share the unavoidable risks. The risks which can be insured against include fire, the perils of sea, death, accidents, and burglary. The members of the community subscribe to a common pool or fund which is collected by the insurer to indemnify the losses arising out of risks. Insurance cannot prevent the occurrence of risk but it provides for the losses of risk. It is a scheme which covers large risks by paying small amount of capital. Insurance is also a means of savings and investment.

Insurance involves four aspects

•  An asset

•  The risk insured against 

•  The principle of pooling 

  •   The contract

“Insurance is a facility made available by fortunate many for the unfortunate few.” Do you agree with it? Justify your answer. Do you think the same principle will prevail in health insurance as well? Explain your say.

Insurance will pay the insured person the benefit when an misfortune occurs like death, accident, theft, fire, employers’ liability insurance or health issues, etc. All-in-one is an insurance policy which covers all risks. The borrower pays interest on the mortgage in the usual way, but does not repay the capital. Instead, he or she takes out an endowment assurance (a life insurance) policy, which is intended to cover the total capital sum borrowed. When the assurance matures, the capital is in theory paid off, though this depends on the performance of the investments made by the company providing the endowment assurance and the actual yield of the policy may be less or more than the sum required. A mortgage where the borrower repays both interest and capital is called a ’repayment mortgage’.

Explain the following provisions under negotiable instrument act, 1881.

Cheque: It is a note to a bank asking them to pay money from your account to the account of the person whose name is written on the note. Cheque is payable to the bearer the cheque will be paid to the person who holds it, not to any particular name written on it. Cheque with the amount of money and the payee left blank, but signed by the drawer is called blank cheque. A cheque can be endorsed on the back to show that you accept it. To sign on the front of a cheque to show that you authorise the bank to pay the money from your account. A check account is similar to an account in a bank from which the customer can withdraw money when he or she wants. Current accounts do not always pay interest. 

Liability of a drawer and Ravi

Drawer is the person who writes a cheque or a bill asking a drawee to pay money to a payee. If a bank has taken a loan from other banks or RBI. These are sources of money for a bank. In return from whom it’s the loan is taken to expect dividends or capital appreciation. Capital appreciation is an increase in share price. 

liabilities 

assets

Liability is something somebody has to pay or somebody owes somebody. 

If the RBI gives a loan to the bank, the bank expects an interest.

Liabilities have a credit side.

Asset for a bank is the loan they have given. 

If the vendor takes a loan from a bank, it is credited to him. 

the loan amount is debited from the bank. 

Deposits that are accepted by the back or shareholders money is called liability of a bank. Hence, it is the liability of the vendor to payback the bank. 

They have a debit side.

If a customer deposits money in a bank they expect interest, hence bank is liable to pay.

Dishonour by non-acceptance and dishonour by non-payment.

The cheque bounces cases can neither be constituted nor be continued against companies which are facing insolvency proceedings and are protected under a provision of Insolvency and Bankruptcy Code putting a moratorium on legal proceedings against them. 

The broker may liquidate the securities if the client fails to meet the margin call made by the broker or fails to deposit the cheques on the day following the day on which the margin call has been made or where the cheque deposited by the client has been dishonoured. 

Section 138/141 of cheque bounce case of the Negotiable Instruments Act. 

Explain in detail the provision of RBI act, 1934 relating to the issue of currency notes in India as under sections 24, 22, 25 and 33.

The Reserve Bank is a major player and it moderates liquidity and volatility in the market through repos and refinance operations and changes in the procedures for maintenance of the CRR. acts as the sole currency authority under Section 22 for the issue of bank notes on which there would be no stamp duty. It issues notes in the following denominations: `2, `5, `10, `20, `50, `100, `500, and `1,000. The Government of India issues one rupee coins and one rupee notes but they are put into circulation only through the RBI.

The RBI acts as a depository-cum-clearing house and settlement is through accounts maintained with the RBI called the subsidiary general ledger (SGL) accounts.

In terms of section 22, of the RBI Act, RBI has the sole right to issue bank notes in India. Such

bank notes are issued by a department of RBI known as Issue Department, which is a separate

and wholly distinct department from the Banking Department which is responsible for banking

business of the RBI.

• The design, form and material of bank notes are to be approved by the Central Government on the

basis of recommendations of the Central Board of the RBI.

• Every bank note shall be a legal tender at any place in India. On recommendation of the Central

Board, the Central Government may declare any series of bank notes of any denomination to

be not a legal tender.

• Under the RBI Act, RBI has the power to recommend to Central Government various

denominations of banknotes, not exceeding ten thousand rupees.

• The issue department keeps its assets, which forms the backing for note issuance, distinctly

separate from that of the assets of the banking department.

The assets of the Issue Department against which notes are issued to public consist of gold coin,

gold bullion, foreign securities, rupee coin and rupee securities.

• Within RBI, the Department of Currency Management (‘DCM’) has the responsibility of

administering the functions of currency management.

• Currency management basically relates to the issue of notes and coins and retrieval of unfit notes

from circulation. The currency management infrastructure consists of a network of 19 issue offices,

4,034 currency chests (including sub-treasury offices and a currency chest of the Reserve Bank at Kochi), and 3,707 small coin depots of commercial, cooperative and regional rural banks (‘RRB’s) spread across the country.

• Hub & Spoke model: Fresh note remittances are sent to larger currency chests, which meet the currency needs of a designated area (e.g. district). These chests are identified as hub chests and, in turn, supply notes to smaller currency chests in their vicinity which act like spokes in the distribution model. Fresh notes are distributed to every issue office of the RBI as per an allocation plan.

Calculate NAV for a mutual fund. The original number of units sold is 500. Investment of the mutual fund is given in the table below.

Investments in mutual funds are highly liquid. Liquidity depends on the types of schemes like open ended funds or close ended schemes.

In the dividend option, the profits are stripped from NAV and given. 

If the market value of a fund’s portfolio increases, after deduction of expenses and liabilities, then the value (NAV) of the fund and its shares increases. NAV is the value of the assets held by a mutual fund, divided by the number of shares.

The higher NAV reflects the higher value of your investment.

Net Asset Value= Value/number of shares

S.No.

Company Name

Numbers of shares*Price per share= Q

Q/n

1

MNO

124500

2

TECHN

178000

3

TBS

316250

4

ABC Software

980000

5

PQR Technologies 

140000

NVR= 1738750/500

= 3477.5

State and explain in detail all the provisions of the RBI act, 1934 pertaining to note issues in India. State the provisions of the RBI act, 1934 that allows the government of India to introduce the Rs.2000 currency note in India, demonetised rupees thousand and introduced Rs.500 notes in new form.

RBI regulates money market in India vide powers vested in it by virtue of Sections 45K, 45L and 45W of the RBI Act 1934.India has a complex banking structure with Reserve Bank of India (‘RBI’) playing the pivotal role of Central bank of this country. Apart from its statutory functions (as enshrined in The RBI Act 1934) the RBI regulates Commercial banks, Cooperative banks, Development Banks, All-India Financial Institutions as well as Non- Banking Financial Companies.

Explain the following terms/concepts associated with the Indian capital market

Small investors are the pillars of Indian capital markets. The capital market is of two types: debt market and equity market.

  1. High net worth individuals: The deposits serve as relationship instruments, issued by banks on a discretionary basis to high net worth clients. Certificates of deposit (CDs) are unsecured, negotiable, short-term instruments in bearer form, issued by commercial banks and development financial institutions. A retail individual investor who bids in excess, the bid will be segregated under the high net worth individual (HNI) category or non-institutional investor (NII) category. In the primary capital market, corporations can raise resources through public issues, rights issues, and private placement. These investors are selected clients such as financial institutions, corporates, banks, and high net worth individuals.
  2. Retail individual investor: Commercial paper is a good instrument to raise short-term finances but this instrument is still in an under- developed state in India. The reasons are as follows. Even though the minimum size of investment is `5 lakh, retail investors see little scope in investing their money. All investors, including retail investors are allowed to invest in Indian Depository Receipts (IDRs). The minimum investment limit has been reduced from `2,00,000 to `20,000. SEBI has allowed companies to give discount of upto 10 per cent to retail investors in public offers. This move would enable companies to obtain a more diversified shareholding and a good response from retail shareholders in a period of dull primary market scenario. alter- nate payment system, called additional mode of payment through ASBA, exempts retail investors from making full advance payment and instead let the amount to be retained in bank accounts till the comple- tion of allotment. 
  3. Application supported by blocked amount
  4. Book running lead managers
  5. Follow on Public offering
  6. Prospectors: The fund-raising in the primary market is done by the public issue by prospectus. Public issue is the long-term flow of funds from the surplus sector to the government and corporate sector. 
  7. Floor price: It’s the minimum bid. In case of Reverse Booking, the promoter/acquirer shall open an escrow account and deposit therein the total estimated amount of consideration calculated on the basis of floor price and number of equity shares outstanding with public shareholders.
  8. High Networth Individuals are widely defined as those having an investible surplus of more than 5 crores. By 2017, there were close to 2,70,000 HNIs in India. This number is predicted to touch 9,50,000 by 2027. HNIs have a combined wealth of almost $ 1.5 trillion or 58% of India’s GDP. It is estimated that there are more than 80,000 HNIs based out of Mumbai and Delhi alone. India’s ultra-high-networth individuals (UHNWIs) population, those with assets over $30 million, is expected to grow by 63 per cent in the next five years to 11,198, cited the Wealth Report 2021 from Knight Frank. At present, India is home to 6,884 UHNWIs and 113 billionaires. The billionaires club in India is expected to increase significantly by 43 per cent to 162 by 2025. The growth will outpace the global average growth of 24 per cent and Asia average of 38 per cent during the period.  According to the report, an individual requires $ 60,000 to join the wealthiest 1 per cent club in India. The wealth growth forecasts predict India’s threshold of 1 per cent wealthiest club to almost double in the next five years. 
  9. ‘Retail individual investor’ means an investor who applies or bids for securities of or for a value of not more than Rs. 2,00,000. All applicants, other than QIBs or individuals applying for less than Rs. 2,00,000 are considered as NIIs.
  10. ASBA provides an alternative mode of payment in issues whereby the application money remains in the investor’s account till finalization of basis of allotment in the issue. ASBA process facilitates investors bidding with multiple options, to apply through Self Certified Syndicate Banks (SCSBs), in which the investors have bank accounts. SCSBs are those banks which satisfy the conditions laid by SEBI. SCSBs would accept the applications, verify the application, block the fund to the extent of bid payment amount, upload the details in the web based bidding system of NSE, unblock once basis of allotment is finalized and transfer the amount for allotted shares, to the issuer.
  11. A book runner is the primary underwriter or lead coordinator in the issuance of new equity, debt, or securities instruments. In investment banking, the book runner is the lead underwriting firm that runs or is in charge of the books during the issuance of new equity of a client firm.
  12. Follow-on public offering (FPO) refers to the shares issued by a listed company. These are the additional shares issued by the listed company after an initial public offering (IPO). Since FPOs follow an IPO, they are also known as secondary offerings
  13. .
  14. An interest rate floor is the lower range of rates that is agreed upon, when a floating rate loan product is purchased from a lending institution. They are also found in many derivative products and are often used when calculating and projecting risk. When traders or borrowers seek to understand their downside limit, the interest rate floor can help them understand the level of risk they are taking on and the type of hedge they may wish to take on.

7. Floor price:

Retail Loans:

They have a concept called Mortgage or home equity.

Mortgages are written instruments using real property to secure repayment of a debt.

The process of originating, processing, underwriting, closing and funding a mortgage occurs in the in the primary market. This is where borrowers and mortgage loan originators come together to negotiate terms and effectuate mortgage transactions.

Category: Funded, secured, non-revolving.

One such negotiating term is the floor rate mortgage.

Define a cheque as per section 6 of the negotiable instruments act, 1881. What are the penalties for the dishonour of negotiable instruments ment under 138 of the negotiable instrument act, 1881? Do you think an “I own you on You” condition must be satisfied to recover the money from the issuer of the dishonoured check? Write the reason why a cheque could be returned unpaid?

Negotiable Instruments Act offers protection to a paying bank in terms of Section 85 & 85 A in respect of Cheques and DDs provided these instruments are paid in due course. When banks act with negligence while paying a NI, disregarding the provisions of the NI Act, they stand to lose the protection of the Act and are liable to the parties concerned thereof as borne out in various judgments of courts. A paying banker is also affected by the provisions of Consumer Protection Act in addition to that of NI Act. 

What is the cash reserve ratio? Explain the methodology involved in the maintenance of CRR by banks in India.

Cash Reserve Ratio (Sec 42 of RBI Act). 

In terms of Section 42 of the RBI Act every scheduled bank in India is required to maintain an average daily balance of the amount of Cash Reserves with RBI as a percentage of Total Net Demand and Time Liabilities in India. Reserve Bank notifies the percentage of CRR to be maintained by banks at regular intervals through gazette notifications. In terms of Section 42 of the RBI Act every scheduled bank in India is required to maintain an average daily balance of the amount of Cash Reserves with RBI as a percentage of Total Net Demand and Time Liabilities in India. Reserve Bank notifies the percentage of CRR to be maintained by banks at regular intervals through gazette notifications.

CRR is an inflexible instrument of monetary policy as it does not distinguish between banks having surplus cash balances from those that are deficient. However, the CRR will continue to be used in both direc- tions for liquidity management in addition to other instruments.

Define the negotiable instruments as defined under the negotiable instruments act, 1881. State their features.

Instrument is writing containing unconditional undertaking signed by the maker to pay a certain sum of money to a certain person or a bearer of the instrument. It is a promissory note.

Sketch the structure of the financial institutions in India.

Financial Institutions/ Development Banks 

The emerging economies of the post-colonial era, assumed responsibilities of national economic development activities such as industrial, financial, infrastructure, agricultural, exports etc. themselves. The basic emphasis of a DFI is to offer cheaper long-term financial assistance “for activities or sectors of the economy where the risks may be higher than that the ordinary financial system is willing to bear.” Financial institutions which were created to address these issues of economic importance are called Developmental Financial Institutions (‘DFI’).

In India soon after independence RBI was entrusted with the responsibility of appropriate institutions in the preferred sectors as per plans of the Government. The need of the hour was to establish institutions to cater to the demand for long-term finance by the industrial sector. This was followed by the formation of Industrial Finance Corporation of India (IFCI) in the year 1951.

These are intermediaries that mobilize savings and facilitate the allocation of funds in an efficient manner. Financial institutions can be classified as banking and non-banking financial institutions. Banking institutions are creators and purveyors of credit while non-banking financial institutions are purveyors of credit. While the liabilities of banks are part of the money supply, this may not be true of non-banking financial institutions. In India, non-banking financial institutions, namely, the developmental financial institutions (DFIs), and non-banking financial companies (NBFCs) as well as housing finance companies

(HFCs) are the major institutional purveyors of credit.

Financial institutions can also be classified as term-finance institutions such as the Industrial Development Bank of India (IDBI), the Industrial Credit and Investment Corporation of India (ICICI), the Indus- trial Financial Corporation of India (IFCI), the Small Industries Development Bank of India (SIDBI), and the Industrial Investment Bank of India (IIBI).

Financial institutions can be specialized finance institutions like the Export Import Bank of India (EXIM), the Tourism Finance Corporation of India (TFCI), ICICI Venture, the Infrastructure Develop- ment Finance Company (IDFC), and sectoral financial institutions such as the National Bank for Agricul- tural and Rural Development (NABARD) and the National Housing Bank (NHB).

Investment institutions in the business of mutual funds Unit Trust of India (UTI), public sector and private sector mutual funds and insurance activity of Life Insurance Corporation (LIC), General Insur- ance Corporation (GIC) and its subsidiaries are classified as financial institutions.

There are state-level financial institutions such as the State Financial Corporations (SFCs) and State Industrial Development Corporations (SIDCs) which are owned and managed by the State governments. In the post-reforms era, the role and nature of activity of these financial institutions have undergone a tremendous change. Banks have now undertaken non-bank activities and financial institutions have taken up banking functions. Most of the financial institutions now resort to financial markets for raising funds.

  1. Banking: 
  2. Non-banking: Technically a NBFC has also been defined by RBI as “ ….when a company’s financial assets constitute more than 50 per cent of the total assets and income from financial assets constitute more than 50 per cent of the gross income. A company which fulfills both these criteria will be registered as NBFC by RBI”.

Scheduled Banks

1.    A scheduled bank is one which is enlisted under the second schedule of RBI Act and must have a minimum capital of Rs 5 lac and maintain reserves as per the Direction of RBI.

2.    They can member of clearing houses in various centres

3.    They can borrow from RBI under certain conditions.

Commercial Banks

A Commercial bank is a type of bank that provides services such as accepting deposits, making business loans, and offering basic involvement products that is operated as business for profit.

Private Sector Banks

1.    The banks that came into existence subsequent to Narasimham Committee Report I and revised RBI guidelines in 1993 are known as new generation private sector banks.

2.    Narasimham Committee I recommended to allow private and foreign banks into industry as a part of economic liberalization policy of Government of India.

3.    In deference to the recommendations of the committee, the RBI formulated guidelines for the establishment of the private sector banks on January 1993.

4.    These guidelines prescribed that the private banks should be established as public limited companies under the then Indian Companies Act 1956

5.    Housing Development Finance Corporation Limited (HDFC) was the first private bank in India to receive license from RBI, to set up a bank in the private-sector in India.

Foreign Banks:

Foreign banks too started setting up their branches in India during late 19th century.

The post-liberalization era saw several foreign banks enter India for business opportunities.

Regional Rural Banks

After nationalization, there was a perceived feeling that there were cultural issues that made it difficult for commercial banks to lend to farmers.

The main objective for establishing these banks were “to develop the rural economy and to create a supplementary channel to the ‘Cooperative Credit Structure’” so as to expand the scope of institutional credit for rural and agriculture sector.

Co-operative Banks

The beginnings of Indian Co-operative credit institutions can be traced back to the great Bengal famine of 1840s.

Non-Scheduled Banks

• Non-scheduled banks are those which are not listed in the Second schedule of the RBI Act, 1934 having a reserve capital of less than 5 lakh rupees.

• Unlike scheduled banks, they are not entitled to borrow from the RBI for normal banking purposes, except, in emergencies.

• They need not maintain the reserves with RBI but they can maintain the same with themselves. They are not allowed to become members of clearing houses.

Payment Banks

• RBI accorded ‘in-principle’ licences to the following eleven entities to launch payments banks. –

— Aditya Birla Nuvo

– Airtel M Commerce Services

– Cholamandalam Distribution Services

 – India Post

 – FinoPayTech

– National Securities Depository

n  Paytm

 • The “in-principle” license was valid for 18 months within which the entities must fulfill the requirements and they were not allowed to engage in banking activities within the period. RBI later granted full licenses under Section 22 of the Banking Regulation Act, 1949 after it is satisfied that the conditions have been fulfilled.

Small Finance Banks

Small finance banks have been established with an aim of financial inclusion “to sections of the economy not being served by other banks, such as small business units, small and marginal farmers, micro and small industries and unorganized sector entities.”

• In September 2015, RBI issued 10 provisional licenses to entities. These entities are: – Ujjivan Small Finance Bank – Jana Small Finance Bank – Equitas Small Finance Bank – AU Small Finance Bank – Capital Small Finance Bank 32 Small Finance Banks – Fincare Small Finance Bank – ESAF Small Finance Bank – North East Small Finance Bank – Suryoday Small Finance Bank – Utkarsh Small Finance Bank

Development Bank

Non-Banking Financial Companies (NBFC)

A company under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature but does not include any institution whose principal is that of agriculture activity, industrial activity, purchase or sale of goods or providing any services and sale/purchase/construction of immovable property. A non-banking financial company called Residuary non-banking company.

All-India Financial Institutions

Prepare and amortisation schedule for a personal loan of Rs.55,000 extended for a year at 14% by a financial institution. (Hint – calculation must be done by reducing balance method)

Reducing balance method

55000

7700

47300

47300

6622

40678

40678

5694.92

34983.08

Here Amortisation is happening by reducing the amount of depreciation with each passing iteration. Here it is a year.

Define bank as under section 5 (B) of the banking regulation act, 1949.

The Banking Regulation Act, 1949 applies to the whole of India including Jammu and Kashmir. The Act was initially brought into force as the Banking Companies Act, 1949, and later renamed Banking Regulations Act, 1949 w.e.f. 01.03.1966.

Broadly speaking, the Act regulates the entire activities of banking right from licensing, restrictions on shareholding, directors, voting rights etc.

Section 5(l)(b) of the Banking Regulation Act defines banking as ‘the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise.’

Mutual funds 

State the phases of growth of the Indian mutual fund industry. Mention a feature of each of these phases.

Mutual Funds are institutions that pool investment money from purchases of its shares & use the money to acquire portfolios of securities consistent with the fund’s investment objective. Investors who buy shares of a mutual fund become part owners of a large number of securities, thereby lessening their individual risk.

Who invests in mutual funds: Individuals, banks, pension plans, corporations. 

Justify the existence of the mutual fund industry when individual investors can directly access the capital market.

The capital market comprises the primary capital market and the secondary capital market.  The capital formation function like  creation of net fixed assets and incremental change in inventories enables companies to invest the proceeds of a primary issue in creating productive capacities, increasing efficiency, and creating jobs which, in turn, generate wealth. Returns in the stock market depend on macroeconomic factors. Favourable macroeconomic factors help firms earn higher returns, which, in turn, create favourable conditions for the secondary market. This in turn, influences the market price of the stock.

Mutual fund is a non-risk financial product. An investor can invest directly in individual securities or indirectly through a financial intermediary. 

An average investor lacks the knowledge of capital market operations and does not have large resources to reap the benefits of investment. He requires the help of an expert. It is not only expensive to hire the services of an ‘expert’ but it is more difficult to identify a real expert.

Mutual funds are managed by professional managers who have the requisite skills and experience to analyse the performance and prospects of companies. They make possible an organized investment strategy, which is hardly possible for an individual investor.

Its types are:

Equity funds

  1. Equity Diversified Funds
  2. Thematic Funds 
  3. Sector Funds 
  4. Index Funds 
  5. Multi-class Funds

Money market funds

  1. Short term funds
  2. Ultra short term income funds
  3. Liquid funds

Debt funds

  1. Gilt Funds
  2. Municipal Bond Funds
  3. Income Funds

Hybrid funds

Others

  1. Fund of funds
  2. Arbitrage funds
  3. Exchange Traded Funds

Calculate EMI for financial assistance of Rs.55,000 for purchase of a refrigerator, at 14% for a year –

  1. When taken from a bank (reducing balance method)
  2. When taken from the HP company (flat method)

Case study 

Term loan case study

General Motors wants to purchase a welding robot for it’s assembly line. A robot manufactured by RobotWorx costs $50,000. General Motors wants a term loan from HSBC. The loan will be repaid over a period of 5 years in EMI. Margin is 10%. Interest @ 10% pa.

If you were HSBC, what questions will you ask General Motors before giving the loan? Cash flow for Settlement and collateral for pre-settlement risk. All term loans having average residual maturity of 5 years and above.

Bridge loan case study

  Power Grid requires funds for installing power transmission lines/towers. It makes an IPO of $100 Million for funding this requirement. Though the IPO is oversubscribed, the funds will become available only after all the legal formalities of allotment are completed. It is presumed that this will take 2 months. The project can not start for the next two months for want of funds. Midland Bank is the banker to the issue.

Solution: Powergrid approaches HSBC for a bridge loan.

Bridge loans to companies against expected equity flows/issues for periods not exceeding one year.

Project loan case study

IRB Infrastructure Developers Ltd. is awarded the contract to construct Mumbai Pune Expressway on BOOT (Build, Own, Operate, Transfer) basis. The cost of construction is $10 million. 

The cost is to be recovered over a period of 10 years by charging a toll. IRB approaches HSBC for a project loan.

‘Project Loan’ would mean any term loan which has been extended for the purpose of setting up an economic venture.

For all projects financed by the FIs/banks after May 28, 2002, the ‘Date of Completion’ and the ‘Date of Commencement of Commercial Operations’ (DCCO), of the project should be clearly spelt out at the time of financial closure of the project and the same should be formally documented.

All project loans have been divided into the following two categories:

(a) Project Loans for infrastructure sector

(b) Project Loans for non-infrastructure sector

This is done because the completion of projects is delayed for legal and other extraneous reasons like delays in Government approvals etc. All these factors, which are beyond the control of the promoters, may lead to delay in project implementation and involve restructuring/reschedulement of loans by banks.

Securitization case study

Let’s presume that 5 borrowers have taken home loans from HDFC Ltd. The loans have a remaining maturity of 5 years. Each of them pays an EMI of $10,000 per month. This totals to $ 3 Million over five years. HDFC either wants to reduce the credit risk or wants to encash the receivables under EMI.

Solution: 

• It approaches HSBC for structured finance. HDFC pays $50,000 per month to HSBC. HDFC approaches HSBC for structured finance. HSBC conducts due diligence and approves finance

HSBC makes a discounted upfront payment of $2,353,268 to HDFC. 

NHB launched the pilot issues of MBSs in August 2000. The primary lenders create mortgages against loans provided by them to the purchasers of houses. The mortgages held as assets generate cash flows represented by repayment of both principal as well as interest on the loans. The secondary mortgage mar- ket involves the conversion of mortgages into financial instruments and the sale of these instruments to prospective investors. The cash flows which come as repayments from the borrowers to the originators, are transferred to a third party with simultaneous transfer of assets to an intermediary agency known as special-purpose vehicle (SPV) designated for the purpose of managing the bought-over pool of mortgages.

The securitization process of MBSs is as follows:

  1. Assignment of retail-housing loans along with the underlying mortgages from the HFCs to NHB.
  2. The loans, repayable in EMIs, are packaged and offered to investors as pass-through certificates (PTCs) by NHB, acting as an issuer and trustee. The housing loans, which constitute the receiva- bles to be securitized, are held by NHB–SPV Trust set up by NHB. The PTCs are in the nature of trust certificates and represent a proportionate, undivided beneficial interest in the pool of hous- ing loans. They are tradable securities without any recourse to the originator or the SPV. NHB issues Class-A and Class-B PTCs. Class-A PTCs are allotted to investors and Class-B PTCs are subscribed entirely by the originators. Class-B PTCs are subordinated to Class-A PTCs and act as a credit enhancement for Class-A PTC holders. Credit enhancement is an additional credit sup- port and may be provided in various forms, such as setting aside a cash pool, limited corporate

guarantee and third-party guarantee.

  1. Issue opens and NHB receives application money.
  2. Issue closes and NHB, and the issue arrangers finalize the allotment and issue-allotment letter to investors.

Benefits of securitization

  1. Improves capital-adequacy ratio through transfer of risk weighted assets.
  2. Helps develop a long-term debt market in India.
  3. Aids asset–liability management through deployment of long-term funds in the housing sector.
  4. Enables a better-spread management and facilitates improvement of returns on assets and equity.
  5. A new source of fee-based income.
  6. Offers a viable and sustainable, market-oriented, fund-raising mechanism with the potential of integrating housing market with the domestic as well as international capital markets. In the past few years, the housing-finance industry has integrated, in some measure, with the capital market, through the securitization route. This integration has established functional links between savers, home-loan borrowers, financiers and capital-market investors.

This market has a huge growth potential to serve as an important funding source for the housing sector.

Export Pre-shipment Credit

Sony (Exporter), Japan receives an order from Sheraton (Importer), Dubai for export of 500 LCD TVs. Sheraton will pay Sony after delivery of all the TVs. Sony requires finance for producing TVs and thus, approaches Citi Bank for EPC.

  1. Sony receives an export order from Sheraton
  2. Sony approaches Citi for EPC
  3. Citi sanctions EPC
  4. Using the funds, Sony procures raw material and produces LCD TVs
  5. TVs are shipped to Dubai
  6. Sony receives payment
  7. Sony repays Citi

  Bill Collection

Ferrari (Italy) gets an order from Tata Motors (India) for supply of auto-components. The parties have limited comfort with each other. Thus, Ferrari wants to send the documents through its bank. Ferrari banks with HSBC, Italy and Tata Motor banks with State Bank of India.

  1. Contract: Ferrari and Tata Motors have a contract.
  2. Carrier: Ferrari sends carrier to Tata Motors
  3. Documents: Ferrari sends documents to HSBC.
  4. Documents: HSBC sends documents to SBI.
  5. Acceptance / Payment: SBI sends documents to Tata Motors.
  6. Documents: Ferrari sends carrier to Tata Motors
  7. Goods: Ferrari sends goods to Tata Motors
  8. Payment: SBI makes payment to HSBC. 
  9. Payment: HSBC makes payment to Ferrari.

Bill Discounting

 Ferrari (Italy) gets an order from Tata Motors (India) for supply of auto-components. Credit period of 60 days is granted to Tata Motors. However, Ferrari immediately needs money. Thus, Ferrari wants its bank to discount the bill and credit its account.

  1. Contract
  2. Carrier
  3. Documents
  4. Payment
  5. Documents
  6. Acceptance
  7. Documents
  8. Goods
  9. Payment
  10. Payment

  Non-LC Usance Bills are submitted to bank and payment to exporter is made on submission of documents.

Bill Purchase

Ferrari (Italy) gets an order from Tata Motors (India) for supply of auto-components. Ferrari immediately needs money. Thus, Ferrari wants its bank to purchase bill and credit its account.

Non-LC Sight Bills are submitted to the bank and payment to exporter is made on submission of documents.

  1. Contract: Ferrari and Tata Motors have a contract.
  2. Carrier: Ferrari sends carrier to Tata Motors
  3. Documents: Ferrari sends documents to HSBC.
  4. Payment: HSBC makes payment to SBI. 
  5. Documents: HSBC gives documents to SBI.
  6. Payment: Tata Motors pays to SBI. 
  7. Document: SBI sends document to Tata Motors 
  8. Goods: Ferrari ships goods to Tata Motors.
  9. Payment: SBI pays HSBC. 

Factoring

Ferrari (Italy) has a rate contract with Tata Motors (India) for supply of auto-components. Ferrari has factoring arrangement with HSBC

  1. Documents
  2. AssignInvoice
  3. Assign Invoice 
  4. Payment: HSBC makes payment to Ferrari 
  5. Payment: Tata Motor makes payment to SBI
  6. Payment: SBI makes payment to HSBC

 Reverse Factoring

  Reverse Factoring / Supply Chain Factoring:

• In case of reverse factoring, a solution is initiated by the importer / purchaser to support its suppliers.

• This is generally done where the purchaser has better credit in the market than its suppliers.

• This allows suppliers to finance their receivables more easily and at a lower interest rate

Varroc Lighting (supplier) has a rate contract with Ford Motors (purchaser) for supply of lights for cars. Ford has reverse factoring arrangement with Bank of America under which Varroc Lighting is covered.

Solution: Varroc ships to Ford. Ford makes payment to Bank of America and gets the invoice approved. Bank of America pays Varroc. 

Letter of Credit (LC) / Documentary Credit

Ferrari (Italy) gets an order from Tata Motors (India) for supply of auto-components. The parties do not have any prior commercial relationship. Thus, Ferrari is not sure whether Tata Motors will make payment on time. Also, Tata Motors is not sure if Ferrari will deliver goods after receiving money. Ferrari banks with HSBC, Italy and Tata Motor banks with State Bank of India.

  1. Contract: There’s a contract between LC and Tata Motors 
  2. LC Application: Tata Motors gives the LC application to SBI
  3. LC: SBI gives letter of credit to HSBC.
  4. Carrier: Ferrari ships to Tata Motors
  5. Documents: Ferrari gives documents to HSBC.
  6. Documents: HSBC gives documents to SBI.
  7. Acceptance / Payment: Tata Mail accepts and does payment to SBI
  8. Documents: SBI provides documents to Tata Motors.
  9. Documents: Tata Motors provides documents to Ferrari.
  10. Goods: Ferrari sends goods to Tata Motors.
  11. Payment: SBI makes payment to HSBC.
  12. Payment: HSBC makes payment to Ferrari.

Bank Guarantee (BG)

Contract of Guarantee is a contract to perform the promise, or discharge the liability, of a third person in case of his default.

Parties to BG:

– Bank (Surety)

– Person in respect whose default guarantee is given (principal debtor)

– Person to whom guarantee is given (creditor)

IBM wants to purchase diesel generator sets (DG).

Solution: 

Contract Stage

Purpose / Risk to be covered

Type of BG

Tendering process

• Only strong parties participate in the tendering process

• IBM is protected in case the selected parties does not enter in to contract

Earnest Money Deposit

Contracting

Counterparty complies with the terms of contract

Performance

Advance payment

Goods are supplied as required post payment of advance.

Advance

Retention release

Retention = Money withheld till end of warranty period. In case the supplier demands release of retention before the end of period, BG may be taken.

Retention

Enabling market evaluation of associated risks; by withdrawing regulatory restrictions such as bank guarantees in respect of commercial papers.

In reverse booking, where the shareholders bid price for their shares. 

The escrow account shall consist of either cash deposited with a scheduled commercial bank, or a bank guarantee in favour of the merchant banker, or a combination of both. the acquiring company shall open an escrow account and deposit therein the total estimated amount of consideration calculated on the basis of floor price and number of equity shares outstanding with public shareholders.