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Financial services

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Financial services

  1. 1. 1 UIS18E01 & FINANCIAL SERVICES Dr. Ramu Vasu, Assistant Prof., SRMIST-CHENNAI Week 1
  2. 2. 2 FINANCIAL SERVICES
  3. 3. 3 UNIT - I Financial services - meaning and Scope – Types of financial services – Fund and Non-fund based activities- Financial services and economic environment – Players in Financial Services Sector (Banks, NBFCs, Micro Financing Institutions, etc.)- Challenges facing the financial service sector – Modern trends in financial service.
  4. 4. Basic Concepts 4 Finance is regarded as the life blood of a business enterprise. This is because in the modern money – oriented economy, finance is one of the basic foundations of all kinds of economic activities. Finance – An overview - Meaning
  5. 5. Basic Concepts 5 What are Products and Services? A product is a tangible item that is put on the market for acquisition, attention, or consumption, while a service is an intangible item, which arises from the output of one or more individuals. Service – An overview - Meaning
  6. 6. 6 FINANCIAL SERVICES
  7. 7. Basic Concepts 7 What are Products and Services? A product is a tangible item that is put on the market for acquisition, attention, or consumption, while a service is an intangible item, which arises from the output of one or more individuals. Service – An overview - Meaning
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  9. 9. 9
  10. 10. • Financial services refer to services provided by the finance industry. • Services that are financial in nature. • The finance industry encompasses a broad range of organizations that deal with the management of money. • Among these organizations are banks, credit card companies, insurance companies, consumer finance companies, stock brokerages, investment funds and some government sponsored enterprises. Introduction
  11. 11. DEFINITION OF FINANCE According to Khan and Jain, “Finance is the art and science of managing money”. 11
  12. 12. Financial Service 12 Financial Service as a part of financial system provides different types of finance through various credit instruments, financial products and services.
  13. 13. financial system 13 A financial system is a set of institutions, such as banks, insurance companies, and stock exchanges, that permit the exchange of funds. ... Borrowers, lenders, and investors exchange current funds to finance projects, either for consumption or productive investments, and to pursue a return on their financial assets.
  14. 14. 14
  15. 15. Financial Institution A financial institution is a company that focuses on dealing with financial transactions, such as investments, loans, and deposits. 15
  16. 16. Financial Institution Types 16 1.Commercial Banks. 2.Brokerages. 3.Investment Companies. 4.Insurance Companies.
  17. 17. Financial Market 17 Financial Market refers to a marketplace, where creation and trading of financial assets, such as shares, debentures, bonds, derivatives, currencies, etc. take place. It plays a crucial role in allocating limited resources, in the country's economy.
  18. 18. Financial Market 18 Financial Market refers to a marketplace, where creation and trading of financial assets, such as shares, debentures, bonds, derivatives, currencies, etc. take place. It plays a crucial role in allocating limited resources, in the country's economy.
  19. 19. Financial Market 19
  20. 20. Financial Instruments 20 A financial instrument is a monetary contract between parties. We can create, trade, or modify them. We can also settle them. A financial instrument may be evidence of ownership of part of something, as in stocks and shares. Bonds, which are contractual rights to receive cash, are financial instruments.
  21. 21. Financial Instruments 21 In Financial Instruments, Are 1. Cheques, 2. Bills, 3. Promissory Notes, 4. Debt Instruments, 5. Letter Of Credit, Etc.
  22. 22. Financial Products 22 Financial products are investments and securities that are created to provide buyers and sellers with a long term or short term financial gain. Financial products enable risks to be spread, and liquidity to circulate around an economy.
  23. 23. Financial Products 23 In financial products, are 1. Mutual funds, 2. Extending various types of investment opportunities. 3. Credit cards and debit cards, etc.
  24. 24. In services 24 1. Leasing, 2. Factoring, 3. Hire Purchase Finance Etc.,
  25. 25. In services 25 1. Leasing, 2. Factoring, 3. Hire Purchase Finance Etc.,
  26. 26. 26 FINANCIAL SERVICES
  27. 27. TYPES OF FINANCIAL SERVICES • Fund or asset based financial services • Fee based financial services
  28. 28. Fund Based Services • The firm raises funds through debt, equity, deposits and the bank invests the funds in securities or lends to those who are in need of capital. • The following are some of these fund-based services such as: –Leasing and Hire Purchase –Housing Finance –Credit Cards –Venture Capital –Factoring –Forfeiting –Bill Discounting –Insurance
  29. 29. Leasing • A lease transaction is a commercial arrangement whereby an equipment owner or Manufacturer conveys to the equipment user the right to use the equipment in return for a rental. • In other words, lease is a contract between the owner of an asset (the lessor) and its user (the lessee) for the right to use the asset during a specified period in return for a mutually agreed periodic payment (the lease rentals).
  30. 30.  The finance industry encompasses a broad range of organizations that deal with the management of money.  Among these organizations are Asset Management Companies like leasing companies, merchant bankers and Liability Management Companies like discounting houses and acceptance houses, and general financial institutions like banks, credit card companies, insurance companies, consumer finance companies, stock exchanges. FINANCIAL SERVICES: MEANING
  31. 31. The term ‘Financial Services’ in a broad sense means “mobilizing and allocating savings.” Thus, it includes all activities involved in the transformation of savings into investment. 31
  32. 32. Following are some of the examples of financial services:  Leasing,  credit card services,  factoring, portfolio management,  financial consultancy services,  Underwriting,  discounting and rediscounting of bills,  Depository services,  housing finance,  Hire purchases,  Mutual Fund management. The financial services can also be called ‘financial intermediation’.  It is the process by which funds are mobilized from a large number of savers and make them available to all those who are in need of it.
  33. 33. The financial intermediaries in India can be classified as: Capital Market Intermediaries which constitutes Term Lending Institutions and Investing Institutions which mainly provide long term funds. Money Market Intermediaries which consists of commercial banks, Cooperative Banks, and other financial agencies which supply only short term funds. Classification of Financial Services Industry
  34. 34. Financial Services offered are mainly 2 types - -Fee based merchant banking, broking services, credit rating, portfolio management services, underwriting, etc. -Fund based factoring, leasing, hire purchases, housing finance, bill discounting, Venture Capital, etc. Types of Financial Services
  35. 35. Leasing
  36. 36.  A lease may be defined as :  a contractual arrangement / transaction in which  a party owning an asset / equipment (lessor)  provides the asset for use to another / transfer the right to use the equipment to the user (lessee)  over a certain / for an agreed period of time  for consideration in form of / in return for periodic payment (rental)  at the end of the period of contract (lease period) ,the asset /equipment reverts back to the lessor  unless there is a provision for the renewal of the contract. Meaning
  37. 37.  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. Parties In Leasing
  38. 38.  The Parties  The Asset  The Term  The Lease Rentals Characteristics of a lease
  39. 39. 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
  40. 40. Hire Purchase
  41. 41. It is defined as a peculiar kind of transaction in which the goods are let on hire with an option to the hirer to purchase them with the following stipulations: -payment to be made in installments over a specified period -the possession is delivered to the hirer at the time of entering in to the contract -the property in the goods passes to the hirer on payment of the last installment -each installment is treated as hire charges so that if default is made in payment of any installment the seller becomes entitled to take away the goods & -the hirer is free to return the goods with out being required to pay any further installments falling due after the return. Meaning
  42. 42.  Goods are let out on finance by a finance company to the hire purchaser customer.  Buyer is required to pay an equal amount of periodic installments during a given period.  Ownership transfers at the payment of the last installment.  The hirer is required to make a down payment of 20-25% of the cost and pay the balance amount along with interest in advance or arrears over a time period of 36-48months. Various Aspect of HP Transaction
  43. 43.  The interest on each hire purchase installment is computed on the basis of flat rate of interest is applied to the declining balance of original loan amount to determine the interest component of the installment for a given flat rate of interest, equivalent effective rate of interest is higher.
  44. 44. Leasing VS Hire Purchase
  45. 45. Factoring
  46. 46. Meaning Undertakes the task of realizing ‘receivables’, i.e. accounts receivables, book debts, bills receivables etc . Also manages the sales registers, sundry debts of the commercial firms/trading agents , for a commission.
  47. 47. …Mechanism Merchant Customer Factor Credit Transaction (1) Agreement(2) Factor Financing (5) Handing over Inovice(4) Factoring Contract for sale of receivables.(3) Receiving Payment(6)
  48. 48. Mechanism  Seller does not maintain a collection/credit department.  After sale, a copy of the invoice, delivery challan, the agreement, other papers are handed over to the Factor.  The Factor receives payment from the buyer on the due date as agreed, whereby the buyer is reminded of the due date payment amt. for collection.  The Factor remits the money collected to the seller after deducting its own service charges at the agreed rate.  Thereafter the seller closes all transactions with the Factor.  The seller passes on papers to the Factor for recovery of the amount.
  49. 49. Types of Factoring  Domestic Factoring  Export Factoring  Cross Border Factoring
  50. 50. WHAT IS VENTURE CAPITAL Money provided by investors to startup firms and small businesses with perceived long-term growth potential.
  51. 51. Venture Capital Financing
  52. 52.  Bank of England Quarterly Bulletin : Venture capital is an activity by which investors support entrepreneurial talent with finance and business skills to exploit market opportunities and thus obtain long-term capital gains.  Venture Capitalists generally:  Finance new and rapidly growing companies.  Purchase equity securities.  Assist in the development of new products or services.  Add value to the company through active participation.
  53. 53. Financial Stage Period (Funds locked in years) Risk Perception Activity to be financed For supporting a Seed Money 7-10 Extreme concept or idea or R&D for product development Initializing operations Start Up 5-9 Very High or developing prototypes Start commercials First Stage 3-7 High production and marketing Stages & Risk of Financing
  54. 54. Financial Stage Period (Funds locked in years) Risk Perception Activity to be financed Second Stage 3-5 Sufficiently high Expand market and growing working capital need Third Stage 1-3 Medium Market expansion, acquisition & product development for profit making company Fourth Stage 1-3 Low Facilitating public issue
  55. 55. Deal origination Screening Due diligence (Evaluation) Deal structuring Post investment activity Exit plan VC Investment Process
  56. 56.  A legal contract between two parties whereby one party called insurer undertakes to pay a fixed amount of money on the happening of a particular event, which may be certain or uncertain. The other party called insured ,pays in exchange a fixed sum , called premium. Definition
  57. 57. Types Of Insurance
  58. 58.  Till end of FY 1999-2000, two state-run insurance companies, Life Insurance Corporation (LIC); General Insurance Corporation (GIC) were the monopoly insurance provider in India.  Under GIC there were four subsidiaries: National Insurance Company Ltd. Oriental Insurance Company Ltd. New India Assurance Company Ltd. United India Insurance Company Ltd. ORIGIN AND GROWTH OF INSURANCE SECTOR
  59. 59.  In fiscal 2000-01, the Indian federal government lifted all entry restrictions for private sector investors.  Foreign investment insurance market was also allowed with 26 percent cap.  GIC was converted into India's national reinsurer, from December 2000.  All the subsidiaries working under the GIC umbrella were restructured as independent insurance companies.
  60. 60.  Insurance Regulatory and Development Authority (IRDA) is an autonomous apex statutory body which regulates and develops the insurance industry in India. IRDA batted for a hike in the foreign direct investment (FDI) limit to 49 per cent in the insurance sector from the erstwhile 26 per cent. The FDI limit in insurance sector was raised to 49% in July 2013. IRDA
  61. 61. Mutual Fund Services
  62. 62. A mutual fund is a pool of money from numerous investors who wish to save or make money. Investing in a mutual fund can be a lot easier than buying and selling individual stocks and bonds on your own. Investors can sell their shares when they want. What is a Mutual Fund?
  63. 63. Professional Management Each fund's investments are chosen and monitored by qualified professionals who use this money to create a portfolio. Fund Ownership As an investor, you own shares of the mutual fund, not the individual securities. All shareholders share in the fund's gains and losses on an equal basis, proportionately to the amount they've invested. What is a Mutual Fund?
  64. 64. Mutual Funds are Diversified By investing in mutual funds, you could diversify your portfolio across a large number of securities so as to minimize risk. By spreading your money over numerous securities, which is what a mutual fund does, you need not worry about the fluctuation of the individual securities in the fund's portfolio. What is a Mutual Fund?
  65. 65.  Mutual funds Schemes can be segregated into two heads – 1. Schemes according to Maturity Period:  Open-ended Fund/ Scheme  Open-ended schemes are those schemes where investors can redeem and buy new units all throughout the year as per.  Close-ended Fund/ Scheme  The fund is open for subscription only during a specified period at the time of launch of the scheme. Investors can invest in the scheme at the time of the initial public issue and there after they can buy or sell the units of the scheme on the stock exchanges where the units are listed. Types Of Mutual Fund Schemes
  66. 66. 2. Schemes according to Investment Objective: Growth / Equity Oriented Scheme Income / Debt Oriented Scheme Balanced Fund Money Market Mutual Fund (are low risk funds offers highest possible current income consistent with preservation of capital)
  67. 67.  All mutual funds in India today are regulated by SEBI.  The Association of Mutual Funds of India (AMFI) is a self-governing association of Indian Mutual Funds that regulates its members' sales, distribution and communication practices. Investors can invest in Indian mutual funds directly or through distributors under codes of practice developed by AMFI. Regulation & Distribution
  68. 68. Housing Finance
  69. 69.  Housing finance connotes 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 and up gradation of a house/flat. Meaning
  70. 70.  Create & meet a growing housing demand  Reduce poverty  Prevent slum proliferation  Engine of equitable economic growth  Take part in financial sector liberalization Importance
  71. 71.  The following is the list of different types of Home Loans you can avail from the market:  Home Purchase Loans  Home Construction Loans  Home Improvement Loans  Home Extension Loans  Home Conversion Loans  Land Purchase Loans  Stamp Duty Loans  Bridge Loans  Balance Transfer Loans Types Of Home Loan
  72. 72. Consumer Credit • Consumer credit is basically the amount of credit used by consumers to purchase non-investment goods or services that are consumed and whose value depreciates quickly. •This includes automobiles, recreational vehicles (RVs), education,boat and trailer loans but excludes debts taken out to purchase real estate or margin on investment accounts. •For example, a mortgage for purchasing a house is not consumer credit. However, the 52 inch television you put on your credit card is consumer credit.
  73. 73. Hire Purchase • A system by which a buyer pays for a thing in regular installments while enjoying the use of it. During the repayment period, ownership (title) of the item does not pass to the buyer. Upon the full payment of the loan, the title passes to the buyer. • A method of buying an article by making regular payments for it over several months or years. The article only belongs to the person who is buying it when all the payments have been made
  74. 74. Factoring • Factoring is a financial transaction whereby a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount.
  75. 75. Advantages of Factoring • Time Savings. Factoring can save you time and effort that would otherwise be spent on collecting from customers. • Good Use for Growth. The instant cash to generate growth, maybe hiring another salesperson who will bring in more business. Or buying an advertisement that will reach new customers. Or buying a piece of equipment that will accelerate production. • Doesn’t Require security. Unlike traditional bank loans, factoring doesn’t require to risk your home or other property as collateral. • Qualify for More Funding. Factoring firms will typically give a cash advance on up to 80% of receivables. That may be more than be able to get from a bank.
  76. 76. Forfaiting • It is a form of financing of receivables relating to international trade. • It is a form of supplier credit in which an exporter surrenders possession of export receivables, which are usually guaranteed by a bank on the importer’s country. • Forfaiting is a mechanism of financing exports: – by discounting export receivables – evidenced by bills of exchanges or promissory notes – without recourse to the seller (viz; exporter) – carrying medium to long-term maturities – on a fixed rate basis upto 100% of the contract value.
  77. 77. Bills Discounting • While discounting , banks buy the bill before it is due and credit the value of the bill after a discount charge to the customer's account. • There are two types of bill discounting – Import Bill Discount is a kind of short-term finance offered by the bank to the importer according to his demand upon receiving the bills under the letter of credit and the import collection items. – Export Bill Discounting is financing of money in transit supplied by the bank.
  78. 78. • According to the Indian Negotiable Instruments Act, 1881 – The bill of exchange is 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 to the order of, a certain person, or to the bearer of that instrument. Bills Discounting
  79. 79. • Housing finance is what allows for the production and consumption of housing. • It refers to the money we use to build and maintain the nation’s housing stock. • But it also refers to the money we need to pay for it, in the form of rents, mortgage loans and repayments.” Housing Finance
  80. 80. Venture Capital Financing • It is a fund that is available for investment in an enterprise which offers the probability of profit along with the possibility of loss. • Venture is a course of proceeding associated with risk whose outcome is uncertain. • Capital means the financial resources to start an enterprise.
  81. 81. Fee Based Services • The services wherein financial institutions operate in specialized fields to earn a substantial income in the form of fees or dividends or brokerage on operations. • The major fee based financial services are as follows: – Issue Management – Corporate Advisory Services – Credit Rating – Mutual Funds – Asset Securitization – Stock Broking Services
  82. 82. Stock Broking • The process of investing in the share market, either individually or through a broker is known as stock broking. • This is primarily done by opening a Demat account. • If done through a broker, he opens an account, helping to operate through online stock broking facility.
  83. 83. Stock broker • Licensed agent who has to pass certain qualifying tests to be certified to offer securities investment advice to investors. • He or she may – counsel what and when to buy – counsel whether to hold or sell securities, – execute buy-sell orders on behalf of the investors, and – charge a percentage of the transaction amountants brokerage fee for the services rendered.
  84. 84. Credit Rating • It is an opinion on the future ability and legal obligation payments of an issuer to of principal and make timely interest on a – specific fixed income security. • As per credit rating agencies regulations 1999 rating means –An opinion regarding securities –Expressed in the form of standard symbols –Assigned by a credit rating agency –Used by an issuer of such securities
  85. 85. FINANCIAL SERVICES AND ECONOMIC ENVIRONMENT
  86. 86. The growth of financial services in a country needs proper economic environment. – This consists of various economic factors such as (A) Favourable Economic System, – (B) Economic Laws, – (C) Economic Policies, – (D) Economic Planning, And – (E) Economic Condition. 89
  87. 87. A) Favourable Economic System – Financial Services provide financial assistance according to the requirements of different business activities. A business may function under different forms of organizations, such as sole trader, partnership firm, joint stock companies (or) by multinational corporation etc. It may also be undertaken by the government by way of public sector enterprises. 90
  88. 88. B) Economic Laws : – (1) Industries and Regulation Act for promoting proper investment. – (2) Companies Act for regulating proper management of companies – (3) Securities (contract and regulation) Act for streamlining transactions in stock exchange. – (4) Consumer Protection Act to safeguard the interests of consumers. – (5) Foreign Exchange Regulation Act for regulating foreign investment, which is now called Foreign Exchange Management Act (FEMA). 91
  89. 89. C) Economic Policies : – In economy policy, we deal with aspects connected with improving the economic conditions of the country. – The government will adopt such policies which 1. promote investment, 2. production, 3. employment, 4. foreign trade which will lead to economic growth. 92
  90. 90. C) Economic Policies Cont… – For their purpose, the policy will be aimed at encouraging investment, both from domestic and foreign country. – Increase of production in agriculture, industry and service sectors has to be taken up through proper pricing policy, procurement policy, allowance and subsidies, tax concessions, etc. 93
  91. 91. D) Economic Planning : – In economic planning, accounting decides a particular course (or) path for its development. – Planning fixes the rate of growth of the economy and accordingly links all the physical, fiscal and monetary resources to achieve the desired growth. – The purpose of economic planning is to achieve rapid economic growth in all the sectors of the economy so that the people in the country experience a higher standard of living. 94
  92. 92. E) Economic Condition : – Financial Services can be active only under favourable economic conditions. If there is depression with falling prices and closing down of production, financial services will not be any scope. – So, a controlled inflation with more scope for investment and production will be ideal for the expansion of financial services. 95
  93. 93. Macro Economic Aggregates and Policies : – Here, we deal with various macro economic factors which not only influence the economic condition of the country but also the working of financial services in the country. – Economic factors at the national level, influencing the economic condition of the country can be stated as macro economic aggregates. There are – 1. Savings of the economy. – 2. Investment 96
  94. 94. Macro Economic Aggregates and Policies : Cont… – 3. Economic growth – 4. Capital Formation 12. Capital inflow – 5. Capital output ratio 13. Per capita income as an indicator of economic 6.Population growth development – 7. Growth of foreign trade – 8. Balance of payments – 9. Foreign debt – 10. Exchange rate stability – 11. Employment level 97
  95. 95. Players in Financial Services Sector Introduction – The economy is made up of many different segments called sectors. These sectors are comprised of different businesses that provide goods and services to consumers. The companies that are grouped together in a sector provide a similar product or service. – For instance, companies that offer agricultural services make up the agricultural sector. 98
  96. 96. Players in Financial Services Sector Introduction – Corporations that provide mobile or cellular telephone services are part of the telecommunications sector. This article looks at the financial services sector, one of the most important segments of the economy. 99
  97. 97. Major Players in the financial services industry – The ocean of financial service sector comprises of the following major players who mold the economy of any country. 100
  98. 98. Major Players in the financial services industry cont…1. Banks Financial service sector comes under the tertiary sector in which banks play a major role. For the growth of financial services industry, banks are led by the central bank of the country followed by commercial banks, co-operative banks, development banks, foreign banks, etc. 101
  99. 99. 2. Hire Purchase Financier 2. Hire purchase financier is also a player in the financial service sector as he enables the consumer to buy the product on credit basis. 3. Leasing companies through financial and operating lease ensure the acquiring of assets by producers on a long-term basis at a reasonable charge. 102
  100. 100. – 4. Factoring enables the seller to obtain 80% value of sales from the financial companies undertaking factoring services. – 6. Book-builders help companies in allotting shares to different categories of investors. – 7. Mutual funds ensure investment by the public and also ensure tax relief to the investor. – 8. Credit cards, another important player in the financial services, ensure the circulation of plastic money and enable purchase on credit by the consumer. 103
  101. 101. – 9. Credit rating companies play an important role by giving different credit ratings to companies to mobilize public deposits. – 10. Housing finance companies and insurance companies also promote investment in the economy as they also form a part of the players in the financial services. – 11. Asset liability management company enables mutual funds to undertake proper investment in different types of companies. – 12. Finance companies in general and also as a part of non- banking finance companies provide additional funds to the above players so that there is more activity in the economy. 104
  102. 102. Players in Financial Services Sector –Banks, –NBFCs, –Micro Financing Institutions 105
  103. 103. Banks - Banks perform various roles in the economy. – First, they restore the information problems between investors and borrowers by monitoring the latter and ensuring a proper use of the depositors' funds. – Second, they provide intertemporal smoothing of risk that cannot be diversified at a given point in time as well as insurance to depositors against unexpected consumption shocks. Because of the maturity mismatch between their assets and liabilities, however, banks are subject to the possibility of runs and systemic risk. 106
  104. 104. Banks – Third, banks contribute to the growth of the economy. – Fourth, they perform an important role in corporate governance. The relative importance of the different roles of banks varies substantially across countries and times but, banks are always critical to the financial system 107
  105. 105. Nonbank Financial Companies (NBFCs) Definition – Nonbank financial companies (NBFCs), also known as nonbank financial institutions (NBFIs) are entities that provide certain bank-like and financial services but do not hold a banking license. – NBFCs are not subject to the banking regulations and oversight by central bank and state authorities adhered to by traditional banks. 108
  106. 106. NON BANKING FINANCE COMPANIES (NBFCS)
  107. 107. What is NBFC?  A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 and is engaged in the business of Loans , Advances, Acquisition of  Nonbank financial companies (NBFCs), also known as nonbank financial institutions (NBFIs) are entities that provide certain bank-like and financial services but do not hold a banking license.  NBFCs are not subject to the banking regulations and oversight by federal and state authorities adhered to by traditional banks.
  108. 108. BANKS NBFCS Definition Banking is acceptance of deposits withdraw able by cheque or demand; NBFC cannot accept demand deposits NBFC are companies carrying financial business Scope of business Scope of business of the bank is limited by sec 16(1) of BR Act. There is no bar on NBFC carrying activity other then financial activity. Major limitation on Business No non banking activity are carried. Cannot provide checking facilities. Foreign investment Up to 74% is allowed to private sector bank Up to 100% is allowed Need for a license License norms are tightly controlled and generally it is perceived to be quite difficult to get a license for a bank It is comparatively much easier to get a registration as an NBFC. Regulations BR Act and RBI Act lay down the stringent control over the bank. Much lesser control over NBFC NBFC’s Versus Bank’s
  109. 109. REGULATIONS  In terms of Section 45-IA of the RBI Act, 1934, it is mandatory that every NBFC should be registered with RBI to commence or carry on any business of non-banking financial institution. However, to obviate dual regulation, certain categories of NBFCs which are regulated by other regulators are exempted from the requirement of registration with RBI viz. Venture Capital Fund/Merchant Banking companies/Stock broking companies registered with SEBI.  Should have a minimum net owned fund of Rs 25 lakh (raised to Rs 200 lakh wef April 21, 1999).  NBFC have to maintain 10 and 15 per cent of their deposits in liquid assets effectively from January 1 and April 1,1998, respectively.  All NBFCs are not entitled to accept public deposits. Only those NBFCs holding a valid Certificate of Registration with authorization to accept Public Deposits can accept/hold public deposits.
  110. 110. REGULATIONS  They have to create reserve fund and transfer not less than 20 per cent of their net deposits to it every year.  The NBFCs are allowed to accept/renew public deposits for a minimum period of 12 months and maximum period of 60 months. They cannot accept deposits repayable on demand.  NBFCs cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time. The present ceiling is 11 per cent per annum.  They have to obtain a minimum credit rating from anyone of the three credit rating agencies.  NBFCs cannot offer gifts/incentives or any other additional benefit to the depositors.
  111. 111. Role of NBFCs  Development of sectors like Transport & Infrastructure  Substantial employment generation  Help & increase wealth creation  Broad base economic development  Major thrust on semi-urban, rural areas & first time buyers / user.  To finance economically weaker sections
  112. 112. IMPORTANCE OF NBFCs  In the present economic environment it is very difficult to cater need of society by Banks alone so role of Non Banking Finance Companies and Micro Finance Companies become indispensable.  The role of NBFCs as effective financial intermediaries has been well recognised as they have inherent ability to take quicker decisions, assume greater risks, and customise their services and charges more according to the needs of the clients.
  113. 113.  At present, NBFCs in India have become prominent in a wide range of activities like hire-purchase finance, equipment lease finance, loans, investments, etc.  To help in developing the large number of industries as well as entrepreneur in different sectors of different areas.  To cover all the areas which is being untouched or uncovered by RBI or other FCIs.
  114. 114. Types of NBFC
  115. 115. MUTUAL BENEFIT FINANCIAL COMPANY (MBFC)  Nidhis or Mutual Benefit Finance Companies are one of the oldest forms of non-financial companies. It is a company structure in which the company's owners are also its clients.  That is, the mutual company's profits are distributed to its participating customers each year in proportion to their individual exposures to the company.  Many insurance companies are structured as mutual companies.
  116. 116.  Some of the important objectives of Nidhis are to enable the members to save money, to invest their savings and to secure loans at favorable rates of interest.  They work on the principles of complete mutuality of interest and are generally well-managed.  The Government has granted certain concessions under Section 620A of the Companies Act, 1956.  Primarily regulated by Department of Company Affairs (DCA) under the directions / guidelines issued by them under Section 637 A of the Companies Act, 1956.  The Government of India constituted an Expert Committee in March 2000 (Chairman: Shri
  117. 117. 120 Micro Financing Institutions
  118. 118. Flow of Presentation Elements of Microfinance History of Microfinance Microfinance Approach Need forMicrofinancing W hy do MFIs charge such high interest rates to poor people? Impact of Microfinance overpoverty Current Scenario of Micro - financing inIndia Challenges in the Indiancontext
  119. 119. Elements of Microfinance • Microfinance • Microcredit • Microsavings • Microinsurance • Remittances
  120. 120. Microfinance : “It is a provision of a broad range of financial services such as deposits, loans, payment services, money transfers, and insurance to poor and low-income households and their micro-enterprises.” Microcredit : Microcredit is the extension of very small loans (microloans) to the unemployed, to poor entrepreneurs and to others living in poverty who are not considered bankable.
  121. 121. Micro insurance : Financial arrangement to protect low-income people against specific perils in exchange for regular premium payments proportionate to the likelihood and cost of the risk involved Micro savings : Deposit services that allow one to store small amounts of money for future use. Often without minimum balance requirements, savings accounts allow households to save in order to meet unexpected expenses. Remittances : Transfers of funds from people in one place to people in another, usually across borders to family and friends.
  122. 122. History of Microfinance THE PIONEERS : Grameen Bank ACCION International FINCA International
  123. 123. History of Microfinance in India Microfinance has been in practice for ages (though informally). Legal framework for establishing the co-operative movement set up in 1904. Reserve Bank of India Act, 1934 provided for the establishment of the Agricultural Credit Department. Nationalization of banks in 1969 Regional Rural Banks created in 1975. NABARD established as an apex agency for rural finance in 1982.
  124. 124. Microfinance Approach Poor are Bankable; successful initiatives in micro finance demonstrate that the borrowers are not 'weaker sections' in need of charity, but can be treated as responsible people on business terms for mutual profit. They have the inherent capacity to save small amounts regularly and are willing to save provided that they are motivated and facilitated to do so.
  125. 125. Microfinance Approach Easy access to credit is more important than cheap subsidized credit which involves lengthy bureaucratic procedures. Peer pressure' in groups helps in improving recoveries.
  126. 126. Need for Micro financing •Who are client’s of microfinance? . In Rural area, . In Urban area, . Others. •How it helps the poor people? •When is microfinance NOT an appropriate tool
  127. 127. COMPARISON OF GROWTH RATE OF BORROWERS PER MFIs
  128. 128. Types of Organizations and Composition of the Sector Formal sector The formal sector comprises of the banks such as NABARD, SIDBI and other regional rural banks (RRBs). provide credit for assistance in agriculture and micro- enterprise development and primarily targets the poor. Their deposits at around Rs. 350billion and of that, around Rs. 250billion has been given as advances. They charge an interest of 12-13.5% but if we include the transaction costs they come out to be as high as 21-24%.
  129. 129. (Microfinance Institution) MFIs –A microfinance institution (MFI) is an organization that provides financial services targeted to the poor. While every MFI is different, all share the common characteristic of providing financial services to a client poorer and more vulnerable than traditional bank clients. Year Outreach Outstanding 2001 3 64 2002 10 215 2003 11 327 2004 37 433 2005 67 1095 Client outreach in lakhs, outstanding in crores.
  130. 130. Self Help Groups (SHGs) SHGs is group of rural poor who have volunteered to organize themselves into a group for eradication of poverty of the members. They agree to save regularly and convert their savings into a Common Fund known as the Group corpus.  A self-help group may consist of 10 to 20 persons.  All members should belongs to B P L families, but in some exceptional cases they can be from families above the poverty line.  The group should be able to collect the minimum voluntary saving amount from all the members regularly in group meetings.  The group should develop financial management norms covering t the l oan sanction procedure, repayment schedule and interest rates.  50% of the groups formed in each block should be exclusively for the women.
  131. 131. Figure are outstanding loans in Rs.crore 5000 4000 3000 2000 1000 0 2001 2002 2004 2005 2003 Year SGHs MFIs SHG and MFI are primary resource of lending the poor in rural area
  132. 132. Why do MFIs charge such high interest rates to poor people?
  133. 133. Current Scenario of Micro - financing in India Estimated that 350 million people live Below Poverty Line. This translates to approximately 75 million households. Annual credit demand by the poor in the country is estimated to be about Rs. 60,000 crores. Cumulative disbursements under all microfinance programs is only about Rs. 5000 crores.(Mar.04) Total outstanding of all microfinance initiatives in India estimated to be Rs. 1600 crores. (March 04) Only about 5 % of rural poor have access to microfinance.
  134. 134. Challenges in the Indian context Appropriate legal structures for the structured growth of MF operations Finding adequate levels of equity for the new entities to leverage loan funds Ability to access loan funds at reasonably low rates of interest. Ability to attract and retain professional and committed human resources. Design of apt MIS including user friendly software for tracking accounts and operations. Appropriate loan products for different segments. Contd….
  135. 135. Contd…… Ability to innovate, adapt and grow. Bring out a compendium of small and micro enterprises for the MF clients. Identify and prepare a panel of locally available trainers. Ability to train trainers. Capacity to provide backward linkages or create support structures for marketing. There is a break-even point in loan and deposit sizes below which banks lose money on each transaction they make. Poor people usually fall below it. Designing financially sustainable models
  136. 136. Challenges facing in the financial service sector – 1.Cybercrime In Finance – 2. Regulatory Compliance In Finance – 3. Big Data Use In Finance – 4. AI Use In Finance – 5. Fintech Disruption Of The Financial Service Industry – 6. Customer Retention In The Financial Services Industry – 7. Employee Retention In The Financial Service Industry 139
  137. 137. Modern trends in financial service. – These trends include the ongoing digital transformation, the emergence of FinTech companies, the increasing role of Artificial Intelligence (AI) and robotics, and re-thinking the concept of money. – The Frontiers of Innovation: AI & Blockchain. According to a report from Synechron, blockchain and artificial intelligence (AI) will continue to disrupt the financial services industry. Synechron also predicts that robo-investors will become the centralized fintech platform for wealth managers. 140
  138. 138. 141

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