FM302-MANAGEMENT OF

FINANCIAL SERVICES


FINANCE SPECILIZATION
Mr.LALIT TANK
Asst. Professors, MBA Department,
Bhagawan Mahavir College of Management, Surat
Email id: lalittank@gmail.com
COURSE CONTENTS
Module No.1
Introduction to Indian Financial system
Reserve bank and financial system.
structure of banking and non-banking
companies.
Introduction to different markets- Capital,
Money, Primary, Secondary Markets.
Module No.2
Asset/Fund based financial services
Leasing, hire purchase
Module No.3
Consumer credit, factoring and forfeiting , Bill
discounting, Housing finance, Insurance
services, venture capital financing, Mutual fund
services
Module No.4
Merchant banking services :
all services related to issue management
Module No.5
Credit rating, Stock broking, depositories,
custodial services and short selling and
securities lending and borrowing services,
Credit cards.

CHAPTER -1
INTRODUCTION TO INDIAN
FINANCIAL SYSTEM

INDIAN FINANCIAL SYSTEM

The economic development of a nation is
reflected by the progress of the various economic
units, broadly classified into corporate sector,
government and household sector. While
performing their activities these units will be
placed in a surplus/deficit/balanced budgetary
situations.

Constituents of a Financial System

Financial System
An institutional framework existing in a country to enable
financial transactions.
Three main parts
Financial assets (loans, deposits, bonds, equities, etc.)
Financial institutions (banks, mutual funds, insurance
companies, etc.)
Financial markets (money market, capital market, forex market,
etc.)
Regulation is another aspect of the financial system (RBI,
SEBI, IRDA, FMC)

Financial assets/Instruments
Enable channelizing funds from surplus units to deficit
units
There are instruments for savers such as deposits,
equities, mutual fund units, etc.
There are instruments for borrowers such as loans,
overdrafts, etc.
Like businesses, governments too raise funds through
issuing of bonds, Treasury bills, etc.
Instruments like PPF, KVP, etc. are available to savers who
wish to lend money to the government
Financial Institutions
Includes institutions and mechanisms which
Affect generation of savings by the community
Mobilization of savings
Effective distribution of savings
Institutions are banks, insurance companies,
mutual funds- promote/ mobilize savings
Individual investors, industrial and trading
companies- borrowers

Financial Markets
Money Market- for short-term funds (less
than a year)
Organised (Banks)
Unorganised (money lenders, chit funds, etc.)

Capital Market- for long-term funds
Primary Issues Market
Stock Market
Bond Market


Function of the Financial System
Prevision of liquidity
liquidity refers to cash or money and other assets
which can be converted into cash readily without loss
of value and time.

Mobilization of savings




Weaknesses of India financial system
Lack of co-ordination between different
financial institutions.
Monopolistic market structures
-LIC in life insurance
-UTI in mutual fund
Dominance of development banks in industrial
financing
Inactive and erratic capital market
Imprudent financial practice

Reserve Bank of India
(RBI)
Establishment of RBI
The reserve bank of India was established
on April 1,1935 in accordance with the provisions of
the reserve bank of India Act, 1934.
The central office of the reserve bank was
initially in Calcutta but was permanently moved to
Mumbai in 1937. the central office is where the
governor sits and where policies are formulated.
Objectives of RBI
To maintain the internal value of the nations
currency.
To preserve the external value of the currency
To secure reasonable price stability.
To promote economic growth with rising
levels of employment, out and real income
Functions of a RBI
Monetary policy functions
Currency issue and management
Maintaining value of currency
Anchor economic growth expectation
Monetary regulation and management
Regulation of interest rates
Financial sector regulation and supervision
Exchange management and control
Credit control
Liquidity management
Clearing and settlement
Development of financial market
Policy oriented research
Collection of data and publication of reports
Institution building
Role of the Reserve Bank of India
Banker to the government
Banker to the banks
Banks supervision
Monetary regulation and management
Foreign exchange and management
Promotional functions





Supervisory/regulatory function of RBI
Licensing of banks
Approval of capital, reserves and liquid assets of
banks
Branch licensing policy
Inspection of banks
Control over management
Audit
Credit information service
Deposit insurance
Training and banking education


RBI ORGANISATION STRUCTURE
Introduction to different
Markets
Capital Market, Money Market,
Primary Market, Secondary Market
Money Market
The market for dealing with financial assets
and sec. which have a maturity period of up to
one year.
RBI defines the money market as A market
for short term financial assets that are close
substitutes for money, facilitates the exchange
of money for new financial claims in primary
market as also for financial claims, already
issued, in the secondary market

Money Market Instruments
Money market instruments are those which
have maturity period of less than one year.
The most active part of the money market is
the market for overnight call and term money
between banks and institutions and repo
transactions
Call money/repo are very short-term money
market products
Money Market Instruments
Certificates of Deposit
Commercial Paper
Inter-bank participation certificates
Inter-bank term money
Treasury Bills
Bill rediscounting
Call/notice/term money
CBLO (Collateralized Borrowing and Lending Obligation)
Market Repo
Features of a money market
Market purely for short term funds or financial assets
Its deals with financial assets having maturity period up
to one year.
it deals with those assets which can be convert in to
cash readily without loss and mini transaction cost
Transaction have to be conducted without the help of
brokers

Objectives of money market
To provide a parking place to employ short-term
surplus
To provide room for overcoming short-term
deficits.
To enable the central bank to influence and
regulate liquidity in the economy through its
intervention in this market.
To provide reasonable access to the users of
short-term funds to meet requirements.


Characteristics of a Developed
Money Market
Highly organized banking system
Presence of a central bank
Availability of proper credit instrument
Existence of sub-brokers
Sufficient resources
Existence of secondary markets
Demand and supply of funds


Importance of Money Market
Development of money market
Development of capital market
Smooth functioning of commercial banks
Effective central bank control
Formulation of suitable monetary policy
Non-inflation source of finance to
government

Composition of Money Market
The money market consist of following sub market.

Call money market
Commercial bills market
Acceptance market
Treasury bill market

Call money market
The call money market refers to the market
for extremely short period loans, say one day
to fourteen days.
These loans are repayable on demand at
the option of either the lender or the
borrower.


Advantages of call money market
High liquidity
High profitability
Maintenance of statutory reserve ration
(SRR)
Safe and cheap
Assistance to central bank operation

Drawbacks of call money market
Uneven development

Lack of integration

Volatility in call money rates


Commercial bills market or discount
Market
Definition
An instrument in writing containing
an unconditional order, signed by the maker,
directing a certain person to pay a certain sum
of money only to ,or the order of certain
person or to the bearer of the instrument.

Types of bills
Many types of bills are in circulation in a
bill market
Demand bills are also called sight bills. these bills are
payable immediately as soon as they are presented
to the drawer no time of payment is specified and
hence they are payable at sight.
Documentary bill
when bills have to be accompanied by
document of title to goods like railway receipt, lorry
receipt, bill of lading etc.the bills are called doc.bills.

Inland and foreign bills
inland bills are those drawn upon a person
resident in India and are payable in India. foreign bills are
drawn outside India and they may be payable either in
India or outside India.
Export bills and import bills
export bills are those drawn by Indian exporters on
imports outside India and importer bills are drawn on
Indian importers in India by exporters outside India.
Indigenous bills
indigenous bills are those drawn and accepted
according to native custom or usage of trade.


Advantages of Commercial bills market
Liquidity
Self-liquidating and negotiable asset
Certainty of payment
Ideal investment
Simple legal remedy
High and quick yield
Easy central bank control
Drawbacks of Commercial bills market
Absence of bill culture
Absence of rediscounting among banks
Stamps duty
Absence of secondary market
Difficulty in ascertaining genuine trade bills
Limited foreign trade
Absence of acceptance service
Attitude of banks


Treasury bill market
A treasury bill nothing but a promissory
note issued by the Govt. under discount for a specified
period stated therein. the govt.promises to pay the
specified amount mentioned therein to the bearer of
the instrument on the due date.

T.B are issued only by the RBI on behalf of the
govt. TB are issued for meeting temporary govt.
deficits.

Types of Treasury bill
There are two types of TB
ordinary treasury bills are issued to the
public and other financial institution for
meeting the short term financial requirements
of the central govt.
ad hocs treasury are always issued in favor
of the RBI only.

Importance of TB
Safety
Liquidity
Ideal short-term investment
Ideal fund management
Statutory liquidity
Source of sort term funds
Non-inflationary monetary tool
Hedging facility
Defects of TB
poor yield
absence of competitive bids
absence of active trading







Commercial papers (CP)
A Cp Is an unsecured promissory note issued with a fixed
maturity by a company approved by RBI, negotiable by
endorsement and delivery, issued in bearer form and issued at
such discount on the face value as may be determined by the
issuing co.
Short-term borrowings by corporate, financial institutions,
primary dealers from the money market
Can be issued in the physical form (Usance Promissory Note) or
demat form
Introduced in 1990
When issued in physical form are negotiable by endorsement
and delivery and hence, highly flexible
Issued subject to minimum of Rs. 5 lacs and in the multiple of
Rs. 5 lacs after that
Maturity is 7 days to 1 year
Unsecured and backed by credit rating of the issuing company
Issued at discount to the face value

Certificate of deposit
CD are short term deposits instruments issued
by bank and financial institutions t raise large sums
of money.
Repo instrument.
Repurchase transaction the borrower parts
with securities to the lender with an agreement to
repurchase them at the end of the fixed period at a
specified price.
At the end of the period the borrower will
repurchase the securities at the predetermined
price.


Capital Markets
What is Capital Market
It is an organized market mechanism for effective and efficient
transfer of money capital or financial resources from the investing class
to the entrepreneur class in the private and public sector of the
economy.
Capital market for long term funds.
The capital market provides long term debt and equity finance for
govt. and corporate.
Capital market facilitates the dispersion of business ownership and
reallocation of financial resources among corporate and industries.

Dimensions of capital market
The capital market is directly responsible for the
following activities.
Mobilization or concentration of national saving
for economic development.
Mobilization and import of foreign capital and
foreign investment capital plus skill to fill up the
deficit in the required financial resources to
maintain the expected rate of economic growth.
Productive utilization of resources
Directing the flow to funds of high yields and also
strive for balanced and diversified
industrialization.

Capital market mechanism
Individuals
Institutions
Government
Capital Market
Stock exchange
New issue market
Finance and
investment corp.
Individuals
Institutions
Government
Supply of
funds
Investors
Lenders
Sellers of money
capital
Entrepreneurs
Borrowers
Clearing house for
long term or
permanent finance
Buyers of money
capital
Middlemen
Demand for
funds
Capital Market Structure
Marketable Securities
Non-Marketable Securities
Govt.
securities
Corporate
securities
PSUs Bonds
UTI Mutual
Funds
Bank
Deposits
Deposits
with
Companies
Loans and
advances of
banks and
FIs.
POC and
deposits
New Issues
Market
players
original
Stock market
intermediaries
New Issues
Market
players for
Issues
Special features of the Indian capital
market
Greater reliance on debt instrument as against
equity and in particular borrowing from financial
institution.
Issues of debenture, particularly convertible
debentures with automatic or compulsory from
conversion into equity without the normal option
given to investors.
Avoidance of underwriting by some cos. Reduce.
Fast growth of mutual funds and subsidiaries of
banks for financial services.
Capital market instruments
Equity shares
Preference shares
Non-voting equity shares
Cumulative convertible preference shares
Company fixed deposits
Debentures/ bonds
Global depository receipts

Structure of Capital Markets
Primary Markets Secondary Markets
When companies need financial resources for
its expansion, they borrow money from
investors through issue of securities.
The place where such securities are traded by
these investors is known as the secondary
market.
Securities issued
a) Preference Shares
b) Equity Shares
c) Debentures
Securities like Preference Shares and
Debentures cannot be traded in the secondary
market.
Equity shares is issued by the under writers
and merchant bankers on behalf of the
company.
Equity shares are tradable through a private
broker or a brokerage house.
People who apply for these securities are:
a) High networth individual
b) Retail investors
c) Employees
d) Financial Institutions
e) Mutual Fund Houses
f) Banks
Securities that are traded are traded by the
retail investors.
One time activity by the company. Helps in mobilizing the funds for the investors
in the short run.
What is Commodity market
Commodity markets are markets where raw or
primary products are exchanged.

It covers physical product (food, metals,
electricity)markets but not the ways that
services, including those of governments, nor
investment nor debt, can be seen as a
commodity.

History of Commodity Market
Modern Commodity Market have their roots in the
trading of agricultural products.
Wheat and corn, cattle and pigs, were widely traded
using standard instruments in the 19th century in the
United States.
Historically, in ancient times Sumerian use of sheep
or goats, or other peoples using pigs, rare seashells, or
other items as commodity money, have traded
contracts in the delivery of such items, to render trade
itself more smooth and predictable.

Size of the Market
The trading of commodities includes physical
trading of food items, Energy and Metals, etc. and
trading of derivatives.
In the five years up to 2007, the value of global
physical exports of commodities increased by
17% while the notional value outstanding of
commodity
OTC derivatives increased more than 500% and
commodity derivative trading on exchanges more
than 200%.

Agricultural contracts trading grew by 32% in
2007, energy 29% and industrial metals by
30%.
Precious metals trading grew by 3%, with
higher volume in New York being partially
offset by declining volume in Tokyo.
OTC trading accounts for the majority of
trading in gold and silver

List of Traded Commodity
Agricultural (Grains, and Food and Fiber)
Livestock & Meat
Energy
Precious metals
Industrial metals
Precious Metal:- Gold, Platinum, Palladium, Silver.
Industrial Metals:- Copper, Lead, Zinc, Tin,
Aluminium, Aluminium alloy, Nickel, Aluminium
alloy, Recycled steel.

Commodity Exchanges
Abuja Securities and Commodities Exchange
Bhatinda Om & Oil Exchange Bathinda
Brazilian Mercantile and Futures Exchange
Chicago Board of Trade
Chicago Mercantile Exchange
Commodity Exchange Bratislava, JSC
Dalian Commodity Exchange
Dubai Mercantile Exchange
Intercontinental Exchange

Recent trends in Commodity Market
The 2008 global boom in commodity prices - for
everything from coal to corn was fueled by heated
demand from the likes of China and India.

Speculation in forward markets.
Farmers are expected to face a sharp drop in crop
prices as a result of bad rainfall.
Other commodities, such as steel, are also expected to
fall due to lower demand

Assignment -1
Q-1 Write in detail about Commodities market

LAST DATE OF SUBMISSION :8/10/2010
LEASING
Meaning of Leasing
Lease may be define as a contractual arrangement/
transaction in which a party owning an asset/equipment
provides the asset for use to another /transfer the right
to use the equipment to the user over certain/ for an
agreed period of time for consideration in form of /in
return for periodic payment (rental) with or without a
further payment (premium).

Lease is a contract whereby the owner of an asset grants
to another party the exclusive right to use the asset
usually for an agreed period of time in return for the
payment of rent.
PARTIES IN LEASING
Leasing essentially involves the divorce of
ownership from the economic use of an
asset/equipment.
LESSOR: Lessor is the owner of the asset that
is being leased.
LESSEE: Lessee is the receiver of the services
of the asset under a lease contact.
Essential elements of leasing
Parties to the contract
Asset : The asset, property or equipment to be
leased is the subject matter of a contract of leasing
finance.
Ownership separated from user:
Term of lease: lease term is the period for which the
lease agreement remains in operation.
Lease rentals: lease rental is the consideration which
the lessee pays to the Lessor for the lease
transaction.
Modes of terminating lease.
Classification of Lease
1. Financial lease and operating lease
2. Sales and lease back and direct lease
3. Single investor lease and leveraged lease
4. Domestic lease and international lease

1.Financial lease and operating lease
In a finance lease the Lessor transfers to the lessee,
substantially all the risks and rewards incidental to the
ownership of the asset whether or not the title is eventually
transferred.
In such leases, the lessor is only a financier and is usually not
interested in the assets.
It is for this reason that the such lease are also called as fully
payout leases as they enable a lessor to recover his
investment in the lease and derive a profit.
Assets included under such lease, are ships, aircraft, railway
wagons, lands, building heavy machinery and so on.
Features of finance lease
The lessee select the equipment according to his requirements, from
its manufacturer or dist.
The lessee negotiates and settles with the manfuct.or dist, the price,
the delivery schedule, installation, term of warranties, maintenance
and payment and so on.
The lessor purchases the equipment either directly from manfct. Or
dist. Or from the lessee after the equipment is delivered.
The lessor then leases out the equipment to lessee. The lessor retains
the ownership while lessee is allowed to use the equipment.
A finance lease provide a right or option, to purchase the equipment
at a future date. This practice is rarely found in India.
The lease is originally for a non-cancellable period is called the
primary lease period. The lease is subject to renewal for the
secondary lease period.
The lessee is entitled to exclusive and peaceful use of equipment.




Operating lease
An operating lease is one which is not a
finance lease. In an operating lease, the lessor
does not transfer all the risks and rewards
incidental to the ownership of the asset and
the cost of the asset is not fully amortised
during the primary lease period.
The lessor provides services attached to the
leased asset, such as repair and technical
advice. for this reason it called service lease
Features of operating lease
An O.L is generally for a period significantly shorter
than the economic life of the leased asset.
Lease period are shorter than expected life of the
asset, the lease rentals are not sufficient to totally
amortise the cost of the assets.
The lessor does not rely on the single lessee for
recovery of his investment.
O.L normally include maintenance clause requiring
the lessor to maintain the lease assets and provide
services such as insurance, support staff, fuel etc.
Examples of operating lease
Providing mobile cranes with operators
Chartering of aircraft and ships, including the
provision of crew, fuel, support service.
Hiring of computers with operators
Hiring a taxi for a particular travel, which
includes service of driver, provision for
maintenance, fuel, repairs.

2.Sale and lease back and direct
lease
It is an indirect form of leasing
The owner of an equipment/asset sells it to a leasing
co.(lessor) which leases it back to the owner(lessee).
Example: this type of leasing is the sale and lease back of safe
deposits vaults by bank under which banks sell them in their
custody to a leasing co.at a market price substantially higher
than the book value. The leasing co. turn offers these lockers
on long term basis to the bank.
The bank sub-lease the lockers to its customers.
The lease back arrangement in sale and lease back type of
leasing can be in the form of finance lease or operating.

Direct lease
In direct lease, the lessee, and the owner of the equipment are
two different entities. A direct lease can be two types.
Bipartite:
1.Equipment supplier cum lessor.
2. Lessee such a type of lease is typically structured as an operating
lease with in-built facilities. like upgradition of equipment
(upgrade lease).addition to the original equipment configuration.
The lessor maintains the asset and if necessary, replace, it with a
similar equipment in working condition (swap lease).
Tripartite: such type of lease involves 3 different parties in the
lease agreement: equipment, supplier, lessor, lessee.
an innovative variant of tripartite lease is the sales-aid lease
under which the equipment supplier arranges for lease finance in
various form.
3.Single investor lease and
leveraged lease.
Single investor lease there are only two
parties to the lease transaction, the lessor and
lessee. The leasing co.(lessor) funds the entire
investment by an appropriate mix of debt and
equity funds.
The debts raised by the leasing co. to finance
the asset are without recourse to the lessee.
That is in the case of default in servicing the
debt by the leasing co. the lender is not
entitled to payment from the lessee.
Leveraged lease
There are three parties to the transaction
1. Lessor (equity investor)
2. Lender (loan participant)
3. Lessee.
A leveraged lease is a lease in which the lessor puts up some of the
money required to purchase the asset and borrows the rest from
a lender. The lender is given a senior secured interest on the asset and
an assignment of the lease and lease payments. The lessee makes
payments to the lessor, who makes payments to the lender.
The term may also refer to a lease agreement wherein the lessor, by
borrowing funds from a lending institution, finances the purchase of
the asset being leased.
The lessor pays the lending institution back by way of the lease
payments received from the lessee. Under the loan agreement,
the lender has rights to the asset and the lease payments if the lessor
defaults.



Domestic lease and international
lease
Domestic lease : a lease transaction is
classified as domestic if all parties to the
agreement, namely, equipment supplier,
lessor and the lessee, are domiciled in the
same country.
International lease: if the parties to the lease
transaction are domiciled in different
countries, it is knows as international lease.
Import lease : In an import lease, the lessor
and the lessee are domiciled in different same
country but the equipment supplier is located
in a different country. The lessor imports the
asset and leases it to the lessee.
Cross border lease: when the lessor and the
lessee are domiciled in different countries, the
lease is classified as cross-boarder lease. The
domicile of the supplier is immaterial.
The domestic and international leases are
differentiated on the basis of risk.

Profile/structure of leasing
Major players can be categorized into 6 groups
Independent leasing cos.: a major part of their income is
derived from leasing. Some of them have financial/technical
collaboration with overseas partners. They offer their services
through direct advertisement, personal contacts, lease
brokers including foreign banks and merchant banks.
Other finance cos:
Manufacturer- lessors:
Financial institutions:
In-house lessors
Commercial banks


Salient features of the lease
structures in India
By and large, the structured lease fall in the
category of finance lease. operating lease is
not very popular primarily because of the
virtual non-existence of resale market for
most of the used equipments.
The lease agreements do not provide for
transfer of ownership to the lessee as such
transactions are classified as hire purchase
from the tax angle.

The lease rentals are structured so as to
recover the entire investment cost during the
primary period.
The lease rentals are payable generally in
equated/level monthly instalments at the
beginning of every month.
Sale and lease back type of transactions are
rare. Most of the are direct lease.
By and large equipment leases are for capital
investment not exceeding Rs.100 lakh.


Advantages of leasing
To the lessee.
1. Financing of capital goods.
2. Additional source of finance.
3. Less costly
4. Ownership preserved
5. Avoids conditionality
6. Flexibility in structuring of rentals
7. Simplicity
8. Tax benefits
9. Obsolescence risk is averted.

Advantages to the lessor
Full security
Tax benefit
High profitability
Trading on equity
High growth potential
Limitations of leasing
Restrictions on use of equipment
Limitations of financial lease
Loss of residual value
Consequences of default
Understatement of lessees asset
Double sales-tax
Special provisions to leasing contract/transactions.
Leasing as a bailment agreement
Liabilities of lessee (Bailee-whom the goods are delivered)
-Reasonable care
-Not to make unauthorized use
-To return the goods
-Not to set up an adverse title
-To pay the lease rental
-To insure and repair the goods.
Liabilities of lessor (bailor-who delivers the goods):
-Delivery of goods
-Peaceful possession
-Fitness of goods
-To disclose all defects

Remedies for Breach
Remedies to the lessor:
-Forfeiture
-Damages
-Repossession
Remedies to the lessee.
-Insurance of leased asset and claims necessity
-Risk insured
-Insurable interest
-claims (treatment of claim proceeds)
-sub-lease of leased asset right to sub lease
-effect of sub lease
-effect of termination of main lease

Lease documentation and
agreement
Proposes and essential requirement
- The person executing the document should
have the legal capacity to do; the doc. Should
be in prescribed format; properly stamped,
witnessed, and duly executed and stamped
should be registered with appropriate
authorities.

Master lease and supplemental
lease agreements
The lease agreement specifies the legal rights
and obligations of the lessor and lessee.
Usually a master lease agreement is signed
which stipulates all the conditions that govern
the lease. It specify the all the detail of
equipment detail credit limit rental profile
other details.

Clauses in lease agreement
Nature of the lease
Description of equipment
Delivery and re-delivery
Period
Lease rentals
Use
Title : ownership of
equipment
Repairs and maintenance
Alteration
Peaceful possession
Charges
Indemnity clause
Inspection
Prohibition of sub leasing
Events of default and
remedies
Applicable law