FMS MODULE 4 NOTES.pdf calicut university
- 2. Financial Institutions •A financial institution is an organization which makes the smooth operation of the financial system possible. •The Financial Institutions act as a mediator between the investor and the borrower. •Financial institutions bring together lenders and borrowers through offering various financial instruments.
- 3. Types of financial institutions • Banking institutions • Commercial Banks • Co-operative banks • Developmental Financial institutions • IDBI, IFCI, SFCs, ICICI, UTI, SIDBI, Mudra Bank etc. • Non-banking Institutions • Loan companies • Mutual funds • Insurance Companies • Lease financing companies • Factor • Venture capital etc.
- 4. Types of Banking Institutions (Functional Classification) 1. Commercial banks/Deposit banks • Commercial banks are banks that accepts deposits on various a/cs and lend funds to trade / commerce / industries / small business / agriculture etc., by way of loans/ODs/CCs • It consist of Scheduled and Non-scheduled banks. • It perform many subsidiary functions such as agency services, general utility services, innovative services etc. • It include public sector banks, private sector banks and foreign banks
- 5. 2. Co-operative banks • A co-operative bank is a small-sized, financial entity, where its members are the owners and customers of the Bank. •It is registered under the Cooperative Societies Act of 1912 or concerned state co-operative acts. •It consist of both scheduled and non-scheduled banks. Scheduled banks are regulated by RBI • The structure of cooperative network in India can be divided into 2 broad segments- Urban Cooperative Banks & Rural Cooperatives.
- 6. Functions of Commercial Banks •Principal/primary/fundamental Functions •Subsidiary/secondary/ supplementary Functions •Innovative Functions/ Modern functions
- 7. Principal functions •Two ‘acid test’ functions of commercial banks are •Accepting deposits and •Lending or advancing loans Other basic functions are ❑Credit creation, ❑Promotion of cheque system(cashless system) and other payment systems ❑Investment in securities
- 8. Secondary/ Subsidiary Functions of Commercial Banks •Agency Services •General Utility services
- 9. Agency services • Collection of credit instruments(Cheques, drafts, bill of exchange, promissory notes etc on behalf of customers) • Collection of dividend (On behalf of customers) • Act as a trustee/executer • Undertake management of money and property • Act as trustee or executer after death • Execution of standing orders (To pay inurance premium, rent etc) • Purchase and sale of securites • Act as representative/c orrespondent • Prepare IT return, correspondence with IT authorities • Deals foreign exchange (Buy and sell foreign exchange on behalf of customers)
- 10. General Utility Services • Safe custody of valuables (Locker facility) • Issue letter of credit (On request of importer) • Issue travellers' cheque • Enable tourists to get fund in all places • Provide information – about merchants and business • Act as referees • Supply information about the financial standing of their customers on enquiries made by other businessmen • Underwrite shares and debentures • Collection of statistics In relation with industry, commerce etc. • Deals in foreign currencies
- 11. Innovative Functions • Automated Teller Machine • Cash Deposit Machine • Core banking • Debit cards • Credit cards • Tele-banking • Online banking • Mobile banking • Electronic Fund transfer (NEFT/RTGS/IMPS) • Electronic clearing services
- 13. Developmental Financial Institutions (Development Banks) •These are institutions that provide medium term and long term financial assistance to industry, agriculture and other key areas. •They are responsible for the promotion and development of industrial, agricultural and service sectors. •They are generally promoted or assisted by the Government. •They are classified into two categories • All India Financial institutions • State level institutions
- 14. Objectives and functions of Developmental Institutions • Promote and develop industrial, agricultural and service sectors • Promote and develop MSME (micro, small, & medium enterprises) • Promote and develop housing sector in India • Enhance foreign trade of India • Provide medium term and long term loans to industries, agriculture, service sectors and other key sectors. • Balanced regional development • Underwrite shares and debentures • Guaranteeing for loans • Provide technical assistance • Contribute to the growth of capital market
- 15. Industrial Development Bank of India (IDBI) • established in July 01, 1964 under the act of parliament as a subsidiary of RBI • It was the apex institution which finance, promote and develop industries in India. • In 1976, ownership passed to Government and became an autonomous body. • To keep up with reforms in financial sector, IDBI reshaped its role from a development finance institution to a commercial institution • It became IDBI ltd October 01, 2004. • Converted into a commercial bank (Public sector) in 2005 • In 2019, 51% of the share acquired by LIC from the Government and hence notified as a Private sector commercial bank by RBI
- 16. Industrial Finance Corporation ofIndia (IFCI) • Established in 1948 under an Act of Parliament (IFCI Act 1948) Amended in 1960, 1973 & 1986 • The first Development Financial Institution in the country • Cater to the long-term finance needs of the industrial sector • Converted to Joint-Stock Company 1993 & renamed as IFCI Ltd. • Products and services include Financial Products, Project Development, Corporate Advisory services etc.
- 17. Objectives of IFCI •The main objective of IFCI is to provide medium- and long-term financial assistance to large scale industrial undertakings, particularly when - ordinary bank accommodation does not suit the undertaking or - finance cannot be profitably raised by the concern by the issue of shares.
- 18. Functions of IFCI • The corporation grants loans and advances to industrial concerns. • Granting of loans both in rupees and foreign currencies. • The corporation underwrites the issue of stocks, bonds, shares etc. • The corporation can grant loans only to public limited companies and co-operatives but not to private limited companies or partnership firms. • Guaranteeing loan • Underwriting shares and debentures • Provide technical consultancy
- 19. Industrial Credit and Investment Corporation of India (ICICI) • ICICI was established in 1955 as a developmental financial institution & a public limited company. • Incorporated to finance small and medium industries in the private sector. • ICICI Bank was established in 1994. • In march 2002, ICICI merged with ICICI Bank and became first universal bank in India. (ICICI personal finance services & ICICI capital services Ltd also merged with ICICI Bank)
- 20. National Bank for Agriculture and Rural Development (NBARD) • National Bank for Agriculture and Rural Development (NABARD) was established on July 12, 1982 • It is the apex banking institution to provide finance for Agriculture and rural development. • It is an apex institution in rural credit structure for providing credit for promotion of agriculture, small scale industries, cottage and village industries, handicrafts etc.
- 21. Functions of NABARD •Act as an apex institution for agriculture and rural development •Refinance agricultural and rural credit by financial institutions •Loans to state government for development of rural infrastructure •Direct lending •Credit planning and monitoring for rural areas •Assist in policy formulation of Government & RBI •Support to research and rural innovations •Co-ordinate the operations of rural credit agencies
- 22. Small Industries Development Bank of India (SIDBI) • Set up on April 2, 1990 under an Act of Indian Parliament • Acts as the Principal Financial Institution for the Promotion, Financing and Development of the Micro, Small and Medium Enterprise (MSME) sector and for Co-ordination of the functions of the institutions engaged in similar activities. • The objectives of SIDBI are Financing, Promotion, Development and Co-ordination. • Established as a wholly owned subsidary of IDBI • Currently the ownership is held by 34 Government of India owned / controlled institutions
- 23. Functions of SIDBI • Refinances loans that are extended to the small-scale industrial units • Discounts and rediscounts bills. • Helps in expanding marketing channels for the products of MSME • Offers services like factoring, leasing etc. to MSME • Promotes employment-oriented industries particularly in semi-urban areas • Initiate modernization and technological up-gradation of MSME units. • Support services
- 24. Micro Units Development and Refinance Agency Bank (MUDRA Bank) • Public sector non-banking financial institution in India • Launched on 8th April 2015 under Pradhan Mantri MUDRA Yojana scheme. • Provides soft loans to small manufacturing units, shopkeepers, fruit and vegetable vendors, artisans, repair shops, service firms etc. • It is a refinance agency. • Headquarters is in Mumbai.
- 25. •Loans upto 10 lakhs •Loan is provided through commercial banks, RRBs, small finance banks, co-operative banks, NBFCs and MFIs. •Mudra has created 3 products, Shishu, Kishore and Tarun. Shishu – Covering loans upto ₹50,000 Kishore – Loans above ₹50,000 – upto ₹5 Lakh Tarun – Loans above ₹5 lakhs up to ₹10 lakhs
- 26. Export Import Bank of India •Public sector institution set up in January 1982 •It is an export finance and development institution of the country •It act as an apex institution responsible for assisting and supporting institutions engaged in the field of foreign trade in India
- 27. Objectives and Functions of EXIM Bank • Promote foreign trade in India • Co-ordinating other institutions engaged in export finance • Financial assistance to exporters and importers • Offer limited merchant banking activities • Technical assistance to firms engaged in foreign trade • Globalization of Indian business
- 28. National Housing Bank (NHB) •Started functioning in 1988 •Wholly owned by RBI •Apex institution in the areas of housing finance •Principal agency to promote housing finance institutions in India
- 29. Objectives and Functions of NHB • Promote and develop specialized housing finance institutions • Extent re-finance facilities to housing finance institutions • Provide guarantee to housing finance • Extent credit for housing • Provide guidelines to housing finance institutions • Technical and administrative assistance to housing finance institutions
- 30. State Financial Corporations • In order to provide medium and long term credit to industrial undertakings, State financial Corporations Act 1951 was passed in the parliament to start State Level Financial Corporations. • The shares are subscribed by the State Government, RBI, Commercial Banks, Co-operative banks, other financial institutions and the public. • The First State Financial Corporation was set up in Punjab in the year 1953 • There are 18 SFCs in India including Kerala Financial Corporation (KFC)
- 31. Functions of SFCs • The SFCs grant loans mainly for acquisition of fixed assets like land, building, plant and machinery. • The SFCs provide financial assistance to industrial units whose paid- up capital and reserves do not exceed Rs. 3 crore (or such higher limit up to Rs. 30 crore as may be specified by the central government). • The SFCs underwrite new stocks, shares, debentures etc., of industrial concerns. • The SFCs guarantee loans raised by industrial concerns from commercial banks and cooperative banks repayable within a period of 20 years.
- 33. NBFC •Non banking financial institution is a company that offer bank related financial and other services without holding a banking license. •They are companies registered under Companies Act. •Section 45 I (c) of RBI Act 1934: A company engaged in the business of • Loans and advances • Acquisition of securities • Leasing and hire purchase • Insurance business • Chit business etc.
- 34. Features of NBFC • NBFCs are engaged in various businesses such as lending, investment, housing finance, insurance, factoring etc. • Some NBFCs Provide banking services without holding bank license • NBFC cannot accept demand deposit • NBFC cannot participate in the payment and settlement system • NBFC cannot issue cheque drawn on itself • Deposit insurance (DICGC) is not available for NBFC • NBFCs are registered under companies act • Their principal business cannot be any agriculture activity, industrial activity or sale, purchase or construction of immovable property • FDI is allowed up to 100%
- 35. CLASSIFICATION ON THE BASIS OF REGULATIVE FRAMEWORK (Modern Classification)
- 37. Regulated by RBI 1. Asset Finance Companies(AFCs), 2. Loan Companies(LCs), 3. Investment Companies (ICs), 4. Infrastructure Finance Companies(IFCs), 5. Core Investment Companies(CICs), 6. Infrastructure Debt Funds (IDF-NBFCs), 7. NBFC-Microfinance Institutions (NBFC-MFIs), 8. Factoring companies(FCs), 9. Mortgage Guarantee Companies (MGCs) and 10. Residuary Non- Banking Companies(RNBCs).
- 38. Main Types of NBFCs
- 39. Factors (NBFC-Factors): •NBFC-Factor is a non-deposit taking NBFC engaged in the principal business of factoring •A factor is a financial intermediary that purchases receivables from a company for commission or fee. •.The financial assets and income in the factoring business should constitute at least 50 percent of its total assets / income. •SBI is the first bank in India started factoring business.
- 40. Factoring Vs Forfaiting Factoring • Financing receivables • Trade receivables on ordinary goods • Not 100% finance (80-90) • No secondary market • Recourse or non-recourse Forfaiting • Financing receivables in export/import • Trade receivables on capital goods • 100% finance • Secondary market • Non-recourse (The company has no liability with any uncollected invoices)
- 41. Example •Assume a factor has agreed to purchase an invoice of ₹1 crore from Clothing Manufacturers Inc., representing outstanding receivables from Behemoth Co. •The factor may discount the invoice by say 4%, and will advance ₹7,20,000 to Clothing Manufacturers Inc. The balance of ₹2,40,000 will be forwarded by the factor to Clothing Manufacturers Inc. upon receipt of the ₹1 crore from Behemoth Co. •The factor's fees and commissions from this factoring deal amount to ₹40,000.
- 42. Regulated by SEBI Merchant Banking Companies: • Ministry of Finance notified merchant banking as “any person who is engaged in the business of issue management either by making arrangement regarding selling, buying or subscribing to the securities as manager, consultant, advisor in relation to such an issue management” • Many Indian banks (ICCI, SBI, PNB) have merchant banking divisions. • Eg. SBI Capital markets Ltd, ICICI securities Ltd, Bajaj capital Ltd, Reliance securities Ltd.
- 43. Services provided by merchant bankers • Project counselling • Management of IPO & FPO • Managers, consultants and advisors to the issue • Underwriting of public issue • Portfolio management • Offshore finance • Non-resident investment • Loan syndication • Corporate counselling
- 44. Venture Capital Fund Company • It is a financial institution which provide capital fund to risky projects of business firms. • Regulated by Venture Capital fund regulation 1996 of the SEBI. • Venture capital fund is invested as equity shares and not as any type of loan. • Venture capital fund is a private equity capital provided as seed funding at early stages of companies with high growth potential. • Apart from capital, VCFC provide technical and managerial expertise. • Eg. Accel partners, Blume ventures, Brain capital
- 45. Stages in venture capital financing • Pre-seed capital- it provides the initial funding necessary to launch a business. money raised in pre-seed funding stage are used for market research and development of ideas • Seed capital – It provides funding for hiring of developers, product development etc. • Series A – It provide funding to help startups grow and expand their operations. Funds may be used for aggressive marketing, further research etc. • Series B- Series B funding usually involves a larger investment from venture capital. Fund may be used to expand market, hire additional staff, new product development, diversification etc. • Series C – Series C funding is available to those successful business firms who have established a good customer base. The funds may be utilized for hiring data scientists, partnering with other companies, development of new technologies, acquisition of supporting firms etc.
- 46. SEBI Regulations •Venture capital fund should be established in the form a trust, company, or a body corporate. •It should be registered with SEBI •Venture capital funds can be invested in those companies whose shares are not listed on a stock exchange. •Minimum investment would not be less than 5 lakhs.
- 47. Stock Broking • Stock broker is an NBFC which helps investors to buy and sell securities through a stock exchange. • A broker is a registered member of the stock exchange and SEBI. • Individual investors need to place orders only through their registered stock broker. • A stock broker may also be a Depository participant. (For details see – Capital Market) • Two types of brokers are full service brokers and discount brokers.
- 48. Collective investment schemes (Section 11AA , sub-section (2) of SEBI Act) •Any scheme offered by a company under which the contributions of investors are pooled, managed and invested with a view to receive profit, income or other gains. •Collective Investment Management Company is an NBFC incorporated under Companies Act and registered with SEBI. •It is not a deposit, insurance contract, pension scheme or chit fund. •Investors do not have day to day control over the management of the scheme.
- 49. PENSION FUND •Pension fund is a fund from which pensions are paid, accumulated from contributions from employers, employees, or both. •It is also called superannuation fund •It provides income after retirement •Two types of pension funds are • Defined benefit fund (guaranteed fixed income) • Defined contribution fund (income depends on the performance of the fund)
- 50. •Pension plans have two stages • Accumulation stage (pay regular premium or contributions) • Vesting stage –retiree will start receiving pension or annuities •Tax deduction is allowed under section 80 ccc up to 1.5 lakhs for contribution. •Withdrawals are not tax free. Only one-third of the corpus that is distributed to the retiree (soon after reaching the retirement age) by the pension plan is tax-free.
- 51. Types of pension plans available in India •Plans sponsored by insurance companies • Invest in debt • Defined benefit •Unit linked • Invest in debt and equity •National Pension system •Atal Pension Yojana •Provident fund (Employee Provident fund, Voluntary Provident Fund, Public Provident Fund etc (PPF: 500 to 1.5 lakh in an year)
- 52. MUTUAL FUND
- 53. Mutual Fund • Mutual fund is a professionally managed type of collective investment scheme • Common pool of funds contributed by investors and invested in accordance to the scheme objectives. • It pools money from many investors and invests in stock, bonds, short- term money market instruments etc. • In India, mutual funds are regulated by Mutual fund regulation of SEBI 1996. • However, Mutual funds investing money market has to comply with both RBI and SEBI requirement. • NFO • New Fund Offer : The launch of a new mutual fund scheme
- 54. Structure of Mutual fund in India • As per SEBI mutual fund regulation 1996, a mutual fund must be in a 3 tiered structure. Sponsor (First Tier) - A company or bank Public Trust (2nd Tier) Asset Management Company (3rd Tier) (Mututal fund)
- 55. • Investments are held in a trust of which the investors alone are the joint beneficial owners. • Trustees oversee the management through investment managers. • Custodian is the bank or company that maintains a mutual fund's assets, including its portfolio of securities or some record of them. • Fund manager makes all the decisions pertaining to the purchase and sale of these securities. They are professionals who know the markets and conduct the large amount of research and analysis done before investments are made.
- 56. Net Asset Value (NAV) • A mutual fund's price per unit • It is calculated by dividing the total value of all the securities in its portfolio, less any liabilities, by the number of units outstanding. • NAV = Value of Net Asset Outstanding Number of Units • NAV per share is computed once a day based on the closing market prices of the securities
- 57. Classification of Mutual Funds Classification of Mutual Funds Based on Structure Based on Investment Objective Based on Investment Style Open Ended Funds Closed Ended Funds Interval Funds Debt Funds Equity Funds Hybrid Funds Passive Funds Active Funds
- 58. Open Ended Funds: These are funds that can be bought and sold at any time at its current NAV. Closed ended funds: These are funds that can be bought only on NFO period and the selling is allowed after a stipulated period. Interval funds: These are funds having the common feature of open ended and close ended. These are closed ended but becomes open-ended at specific intervals.
- 59. Debt funds: These are funds that invest in debt instrument such as debenture, bonds, treasury bills etc. These are low risk funds. Equity funds: These are funds that invest in equity shares of companies. These are high risky funds. Hybrid funds: These are funds that invest in both equity and debt instruments.
- 60. Passive funds: These are funds that invest in those securities which are included in benchmark stock indices. Active funds: These are funds that invest in all securities that may offer a better return than stock indices
- 61. Other types •Solution Oriented Schemes •Children Education Fund •Retirement fund •Other schemes •Overseas fund •Fund of fund etc.
- 62. Equity Linked Saving Scheme (ELSS) •Equity schemes where investors get tax benefits up to Rs. 1.5 Lakh under section 80 C of the Income Tax Act •Lock in period of three years •Can be invested as SIP also.
- 63. Investment Modes in Mutual Funds •One time investment. •Usually, large sum of money is invested in one go. •Investor faces risk of volatility in markets. Lump-sum Investment •Regular Investment in specific intervals such monthly, quarterly, half-yearly. •Made on specific dates e.g. 1st, 5th, 10th, 15th of every month. Systematic Investment Plan (SIP)
- 64. Systematic Investment Plan (SIP) •Smart mode for investing money in mutual fund. •Invest a certain pre-determined amount at a regular interval. •Helps to invest in stock market without wrestling with the market mood. •Minimum investment of rs.500 & in multiples of hundred. (Some private mutual funds allow 50 rupees onwards) •Like a recurring deposit
- 65. Association of Mutual Funds in India (AMFI) •It is an association of SEBI registered mutual funds in India •Incorporated in 1995 as a non-profit organisation •It is an industry standard organisation working for the development of mutual fund business by improving ethical and professional standards. •Now (Jan 2023) 42 Asset Management Companies are members.
- 66. Systematic Transfer Plan (STP) •A systematic Transfer Plan is an automated way of transferring funds from one mutual fund scheme to another. •It is usually preferred by investors who have a lump sum amount saved but want to avoid market timing.
- 67. Systematic Withdrawal Plan (SWP) •A Systematic Withdrawal Plan (SWP) is a facility that allows an investor to withdraw money from an existing mutual fund at predetermined intervals. •SWP helps investors to create a regular flow of income from their investments.
- 68. Advntages/Benefits of mutual funds •Professional Management: Mutual funds are managed by professional people and experienced fund managers. •Diversification: Mutual funds invest in diversified portfolio and thereby risk can be minimized •Liquidity : Mutual funds units can be converted into cash easiy •Convenience in payment: People can invest any amount ranging from rs.500 per month
- 69. Advntages/Benefits of mutual funds •Minimum cost or expense: Mutual fund expense ratio is minimum (not exceeding 2.25%) •Long term wealth maximization: Mutual fund is a good investment that can be used for long term wealth maximization. •Best suitable for financial Illiterates and busy people: Mutual fund is best suitable to those who have no sufficient knowledge in stock market or no time to analyse the market.
- 70. Advntages/Benefits of mutual funds •Tax benefits – Some mutual funds such as ELSS (Equity linked savings scheme) offer tax benefits •Helps to achieve financial goals: Different types of mutual funds are available to achieve different financial goals of public. •Safety and security – Mutual funds are regulated and controlled by SEBI •Disciplined investment : SIP mode of investment provide the benefit of disciplined investment
- 71. Insurance companies • Insurance corporations are financial intermediaries which offer insurance services for providing financial protection from possible hazards in the future. • Insurance companies include • Life insurance companies – Offer life insurance policies such as endowment policy, whole life policy etc. • General Insurance companies – offer non-life insurance such as Mediclaim, personal accident, fire insurance, motor insurance etc. • They are regulated by Insurance Regulatory and Development Authority of India (IRDAI)
- 72. Objectives and functions of Insurance (Insurance companies) • Provide financial protection • Risk sharing • Prevention of losses • Mobilizes and channelizes savings • Provide capital to industries • Prevention of losses • Promote economic development
- 73. Types of Insurance (Modern Classification) Insurance Life Non-life (Whole life, Endowment & Term insurance) Insurance of Insurance of Insurance of Insurance of Person Property Liability Interest Health insurance Personal accident Fire insurance Marine insurance Burglary insurance Motor insurance etc Motor third party Employees liability Professional indemnity Public liability etc. Fidelity guarantee insurance
- 74. Lease Financing •Lease financing is a contractual agreement between the owner of the asset who grants the other party the right to use the asset in return for a periodic payment •The owner of the party is known as Lessor and the user of the asset under such agreement is known as lessee and the rental paid is known as lease rental.
- 75. Operating Lease and Financial Lease Financial Lease • Way of providing finance to the asset • Lease period covers full economic life of asset • Lease rent cover the original cost of the asset during lease period. • Lessee is responsible for maintenance and repair Operating Lease • Way of using asset for short period. • Lease period covers a part of economic life. • Lease rent does not cover the full cost of the asset . • Lessor is responsible for maintenance.
- 76. Merits of Lease financing •1. Cheap source—It enables the lessee to acquire the asset with a lower investment only. •2. No dilution of ownership—It provides the finance without diluting the ownership or control of the business. •3. Easy replacement of asset—The risk of obsolescence is borne by the lesser. This allows greater flexibility and cheap financing to the lessee to replace the asset. •4. Tax benefits—Lease rentals paid by the lessee are deductible for computing tax liabilities. It further reduces the cost of taking asset on lease.
- 77. Hire purchase •A hire purchase is an installment plan, whereby a customer acquire an asset by paying an initial installment and repaying the balance of the price of the asset plus interest over a period of time. •In a hire purchase agreement, ownership of asset is not transferred to the purchaser until all payments are made.
- 78. Mortgage Guarantee Company •It is an NBFC engaged in the business of mortgage guarantee •Mortgage guarantee is a guarantee provided by the company for the repayment of an outstanding loan by pledging the property. •Mortgage is a pledge of property to secure payment of a debt •Financial mortgage market is the market where mortgage guarantee is offered by companies.