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The Modern Banking Functions are Fund based and Non-Fund based functions. These functions of a bank are those in which banks extend various services to their customers or add their commitments to certain transactions undertaken by their clients and charge their fees/ commissions for the services rendered bythem/ their commitments added to the transactions undertaken by the clients. The activities popularly known as Non-fund facilities provided by Banks. The major non-fund based facilities that are considered as a part of regular credit facilities are Letter of Credit and Bank Guarantee. As a part of their Non -fund based functions banks allow Letter of Credit and Bank Guarantee facilities for their customers to meet their requirements. Thus, we conclude that the Letter of credit and Bank guarantee comes in a plethora of confusing forms NDGUISES. It is understood in different ways in different parts of the world. But, once the basics are understood, it is wonderfully adaptable and uniquely user friendly tool

Introduction to Indian Financial System

Financial system consists of two words i.e. Finance & system. Finance means study of money, its nature, its creation, behaviour, regulations and administration and system means set of instructions, markets, practices, transaction, claims & liabilities in the economy. Hence financial system refers to area in which all those activities, bodies and instruments dealing in finance are organized in to a system. Indian Financial System includes many institutions and mechanism that effect the generation of savings and distribution of savings amongst all those who demand these funds for investment purpose. Thus financial system is a broader term which brings under its fold financial markets and financial institutions which support the system and major assets/instruments traded in the system. An efficient functioning of financial system facilitates free flow of funds to more productive activities and promotes faster economic growth. Hence financial system plays a crucial role in converting savings into investment and making surplus money available to core sectors of economy i.e. agriculture, industry, infrastructure development and thereby helps in overall development of economy.

Features of Financial Services

i) Customer-Specific:- Financial services are usually customer focused. The firms providing these services, study the needs of their customers in detail before deciding their financial strategy, giving due regard to costs, liquidity and maturity considerations. Financial services firms continuously remain in touch with their customers, so that they can design products which can cater to the specific needs of their customers. The providers of financial services constantly carry out market surveys, so they can offer new products much ahead of need and impending legislation. Newer technologies are being used to introduce innovative, customer friendly products and services which clearly indicate that the concentration of the providers of financial services is on generating firm/customer specific services. ii) Intangibility:- In a highly competitive global environment brand image is very crucial. Unless the financial institutions providing financial products and services have good image, enjoying the confidence of their clients, they may not be successful. Thus institutions have to focus on the quality and innovativeness of their services to build up their credibility.

iii) Concomitant:- Production of financial services and supply of these services have to be concomitant. Both these functions i.e. production of new and innovative financial services and supplying of these services are to be performed simultaneously. iv) Tendency to Perish:- Unlike any other service, financial services do tend to perish and hence cannot be stored. They have to be supplied as required by the customers. Hence financial institutions have to ensure a proper synchronization of demand and supply. v) People based services:- Marketing of financial services has to be people intensive and hence its subjected to variability of performance or quality of service. The personnel in financial services organisation need to be selected on the basis of their suitability and trained properly, so that they can perform their activities efficiently and effectively. vi) Market Dynamics:- The market dynamics depends to a great extent, on socioeconomic changes such as disposable income, standard of living and educational changes related to the various classes of customers. Therefore financial services have to be constantly redefined and refined taking into consideration the market dynamics. The institutions providing financial services, while evolving new services could be proactive in visualising in advance what the market wants, or being reactive to the needs and wants of their customers. Thus, Indian Financial consists of following :1. Financial markets 2. Financial institutions/intermediaries 3. Financial assets/instruments

Financial markets can be further divided into :1. Organized sector 2. Unorganized sector

Organized sector markets can be further divided into:1. Money Market 2. Capital Market (Primary Market & Secondary Market)

Financial institutions / Intermediaries can also be divided into :Regulatory Bodies Key regulatory bodies are : RBI Securities & Exchange Board of India (SEBI) Insurance Regulatory & Development Authority (IRDA) Govt. of India (Dept. of Banking & Insurance, Ministry of Finance) Intermediaries Which may be :1. Money Market Intermediaries. 2. Capital market intermediaries

Financial Intermediaries:-

Financial intermediaries in capital market and money market. The term financial intermediary includes all kinds of organizations which Intermediate and facilitate transactions of both individual and corporate customers as well as transactions of both banking and non banking nature. Thus intermediaries refers to all kinds of financial institutions as well investing institutions which facilitate financial transactions in financial markets. These intermediaries & transactions may be in the organized sector or unorganized sector. These intermediaries may also be classified into two:1. Capital Market Intermediaries 2. Money Market Intermediaries 1. Capital Market Intermediaries : are those which mainly provide long term funds to individuals and corporate customers. They consist of term lending institutions, Development banks, financial corporations and investment institutions like LIC.

2. Money Market Intermediaries : are those which supply only short term funds to individuals and corporate customers. They consist of commercial banks and cooperative. Charts showing details of following types of institutions working as intermediaries in above both types are enclosed in annexures. Types of financial intermediaries:- Commercial banks - Cooperative banks - Development banks

Reforms Taken Place In Financial Sector

From the year 1991-92 and onwards lot of reforms have taken place in financial sector in India. Some important reform measures are listed below:1. The Reserve Bank of India has introduced the system of deregulation of interest rates and as a result banks are free to decide their interest rates on deposits and loans and advances. 2. Introduction of Liberalization, Privatization and globalization (LPG) in economy has also effected financial sector. There is a greater increase in participation of private sector in banking, mutual fund and public sector undertakings. 3. Disinvestment from public sector undertakings is another key step taken by Govt. of India towards privatization. For this purpose, a statutory body in the name of Disinvestment Commission was established in 1996 and even a Contract Committee on Disinvestment (CCD) was constituted to decide matters pertaining to disinvestment in public sector undertakings.

4. Free pricing of issues was introduced by SEBI and issuing companies were brought out of controller of capital issues in this regard. This has resulted in lot of new issues coming in the market and capital market has been activated a lot . SEBI has also liberalized other stringent conditions to boost up capital market. 5. Liberalized tax structure has started giving lot of relief in direct and indirect taxes to entrepreneurs particularly in remote and hard areas. 6. Recognized credit rating agencies have started working in financial sector for looking after the interest of investors as well as making the task of issuing companies easy. 7. There is a lot of emphasis on financial inclusion by Govt. and as a result banking sector is making serious efforts to bring more people in banking network. Even the policy of zero balance has been introduced by banks to make financial inclusion policy a success. 8. Due to these reforms and need of investors, new and innovative financial instruments are coming in market.

Challenges Before Financial Services Sector

Some of the important challenges faced by financial services sector are as follows:1. Lack of qualified personnel: There is a dearth of qualified and trained personnel & it is a important impediment in the growth of financial service sector. A proper and comprehensive training need to be given to various financial intermediaries. 2. Lack of investors awareness : Many innovative financial products/instruments are coming in market but the investors are not aware about their advantages. Hence, financial intermediaries need to educate investors about various products. 3. Lack of specialization : Each financial intermediary is dealing in different financial service lines without specializing in one or two areas as is the condition in foreign countries. Hence financial intermediaries have to go for such specialization.

4. Lack of recent data : Most of the intermediaries do not spend more time on research and lack adequate data base required for financial creativity. 5. Lack of efficient risk Management system: With the opening up of economy to Multinationals and exposure of Indian companies to international competition, much importance is given to foreign portfolio flows involving multi currency transactions exposing the client to exchange rate risk, interest rate risk, economic and political risk. Hence it is essential that they should introduce futures, options , swaps and other derivative products which are necessary for an effective risk management system.

Key Activities Performed By Banks

The Banking Regulation act 1949 defines banking as accepting for the purpose of lending or investment of deposits of money from public, repayable on demand or otherwise and with drawable by cheque , draft, order or otherwise. The key activities which a bank performs can easily be derived from this definition which are as follows:- Accepting deposits from public - Advancing loans/investment of deposit money. - Deposits are repayable only on demand. - Allowing withdrawal of deposits through various modes. Different type of deposits accepted by bank are mainly of following types. - Saving deposit - Current deposit - Fixed deposit - Recurring deposit

- Deposits under various deposit schemes like deposits from retiring Govt. employees, public sector employees etc. Another key area of activity is lending money to public which may be against security or unsecured loans. The secured loans may be against: - Commodities - Financial instruments - Real Estate - Document of title - Consumer durable goods, automobiles Other type of loans given by banks are ;- Cash credit account - Overdraft - Bill discounting - Term loans - Education loans Another key activity is investment of money. Here it would be pertinent to mention that as per BR Act, banks are required to maintain statutory liquid ratio (SLR) under which banks are required to invest 25% of its total time and demand liabilities in Govt. or Govt. approved securities. Further, as per RBI Act, banks are required to keep 5% in the form of cash Reserve Ratio (CRR) with R.B.I raised to 5.75% . Besides these two statutory investments, banks are investing money in other avenues which are known as non-SLR investments. Besides above three key activities i.e. accepting deposits, lending to public and investment of deposits, banks are undertaking various other activities such as:- Transfer money from one place to other (remittance facility) - Acting as Trustees - Keeping valuables in safe custody - Collection business - Working as an agent of customers - Govt. business In addition to above, banks are providing various services to customers e.g. debit card, credit card etc

Risk under financial services.

Types of risks are faced by financial institutions while providing financial activities:1. Credit Risk : The risk of default by the borrowing firm. There can be a systematic credit risk which is associated with general economy-wide macroeconomic conditions effecting all borrowers e.g. economic recession, downfall of capital market due to some internal reason in the country. 2. Liquidity risk : It arises when all liability claim holders seek to withdraw funds which can lead to solvency problem for a financial institution. 3. Interest rate risk : This risk arises when a financial institution mismatches its assets and liabilities. 4. Market risk : This risk arises due to sudden changes in interest rates, exchange rates in the market.

5. Off-balance risks : Risk relating to contingent assets and liabilities e.g. risk in case of letter of credit issued but due to some problems, financing institutions is required to make payment. 6. Foreign exchange risk: Which arises due to changes in exchange rates. 7. Insolvency risk :- Due to continuation of one or more of above risk, such risk may arise in a financial institution. All these risks are inter related and to minimize such risks, financial institutions have started recruiting Chief Risk Officers (CROs) who can keep track on these risks.

Changing perception of intermediaries regarding financial services

Financial intermediaries are coming out with innovative financial instrument in the market which are more investor friendly and these products are offering multiple benefits to the investor. These innovative products are more : Safe Economical Less risky Providing good return Package of return is attractive as it provides multiple benefits. Highly liquid i.e easily convertible into cash. Less time consuming on maturity Procedure of converting them into cash is less cumbersome.

Hence growing need for innovations has assumed great importance in recent times. This process of innovation is also called financial engineering. The term financial engineering is the design, development and the implementation of

innovative financial instruments and processes and formulation of creative solutions to problems in finance. To quote some examples, many financial institutions have come out with saving plans where money can be taken back after 3 years lock in period with guarantee bonus, benefits under income tax, coupled with insurance benefit, health insurance and accident insurance benefit. The Financial instruments are not only attractive but also the procedure is being constantly simplified with quick/fast services through rise of modern technology. This change in perception of financial intermediaries like banks, insurance companies, particularly in private sector is visible. The degree of competition and privatization has forced even public sector financial intermediaries to change their perception and come out with innovative products.

Non-Fund based activities

Non-Fund based activities/services are those where funds are not involved and financial institution gets income in the form of fee such as:- Commission on demand draft. - Guarantee/Letter of credit - Managing capital issue (pre-issue & post issue management services) - Advisory/Consultancy services - 0020Project preparation/appraisal/arranging finance through projects from financial institutions - Assisting in the process of getting clearances from Govt/Govt bodies. Modern activities/services provided by financial institutions are like advisory role in corporate restructuring, acting as trustees for debentures, rehabilitation and restructuring sick units, portfolio management of large corporate risk.

The credit facilities given by the banks where actual bank funds are not involved are termed as 'non-fund based facilities'. These facilities are divided in three broad categories as under: Co-acceptance of-bills/deferred payment guarantees. Units for the above facilities are also simultaneously sanctioned by banks while sanctioning other fund based credit limits. Facilities for co-acceptance of bills/deferred payment guarantees are generally required for acquiring plant and machinery and may, technically be taken as a substitute for term loan which would require detailed appraisal of the borrower's needs and financial position in the same manner as in case of any other term loan proposal. The co-acceptance limits may also sanctioned under IDBI's Bill Rediscounting Scheme.

RBI Guidelines On Non-Fund Based Faciuties

Reserve Bank of India has also issued detailed guidelines to commercial banks in respect of non-fund based credit facilities. Some of the important points to be kept in view in this regard are discussed below:-

Letters of Credit

Letter of credit is, a method of settlement of payment of a trade transaction and is widely used to finance purchase of machinery and raw material etc. It contains a written undertaking given by the bank on behalf of the purchaser to the seller to make payment of a stated amount on presentation of stipulated documents and fulfilment of all the terms and conditions incorporated therein. All letters of credit

in India relating to the foreign trade i.e., export and import letters of credit are subject to provisions of 'Uniform Customs & Practice for Documentary Credits' (UCPDC). The latest revision of these provisions effective from 1st January, 1994 has been issued by International Chamber of Commerce as its publication No. 500 of 1994. These provisions neither have the status of law or automatic application but parties to a letter of credit bind themselves to these provisions by specifically agreeing to do so. These provisions have almost universal application and help to arrive at unambiguous interpretation of various terms used in letters of credit and also set the obligations, responsibilities and rights of various parties to a letter of credit. Inland letters of credit may also be issued subject to the provisions of UCPDC and it is, therefore, important that customers should be fully aware of these provisions and shall also understand complete L/C mechanism as these transactions will find increasing use in the coming days. Complete text of UCPDC is not being reproduced. However, important articles have been given as extracts wherever necessary. An attempt has been made to explain the L/C mechanism in full as there are some inherent risks and wrong notions while dealing with these transactions.


The prime obligant in a letter of credit is the issuing bank. It has the initial responsibility of ensuring that the applicant is both creditworthy. The latter consideration is important to all parties to a trade transaction, as so much depends on trust. Fraud is the constant companion of trade finance. It has a duty of care and information. As mentio ned above, banks see more trade transactions than their customers and can advise on methods and warn of dangers. Then, once a credit is opened, the bank is placing itself as a substitute for the buyer (applicant) and must pay if the conditions of the credit are fulfilled. The advising bank has the obligation of authenticating the credit once it has received it and passing it promptly on to the beneficiary (UCP article 7). It also has the responsibility of authenticating and advising all amendments. The confirming bank takes over the payment responsibilities of the issuing bank as far as the beneficiary is concerned, although it still has the obligation of the issuing bank for ultimate reimbursement. Whichever bank has responsibility

for deciding whether documents are in order and should be either paid (if sight) or taken up (if usance) , takes on a heavy set of obligations, which are dealt with at length in UCP article 18 9, 13, and 14, although there are some useful disclaimers for the banks to shelter behind in article 15, 16, 17, and 18.

key provisions from these articles

Banks have to examine documents within seven banking days after receipt of the documents at their counters.(Article13b).Banks will examine documents with reasonable care to ensure that they comply on their face with the requirements of the credit, such documents not to be inconsistent with each other. (Article13a).Banks examining documents should determine their credit compliance on the basis of the documents alone.(Article14b). This provision appears to protect the banks but they use these to look behind sets of documents. Fraud negates all obligations. There are strict procedures in advising and dealing with discrepancies found in documents. (Article14d, e and f). Banks have the protection of the disclaimer provisions, which cover the following: banks are not responsible for the genuineness or contents of any document submitted. (Article15).Banks are not responsible for losses etc. arising from transmission problems . (Art16). Force Majeur . (Article17).Banks are not responsible for the failing of their correspondent banks . (Art18a and b).The applicant is responsible for all banks charges and other costs at home or abroad even if they are supposed to be paid by the other party. Art 18c).The applicant is responsible for any adverse consequences of

foreign laws . (Art 18d).The various banks have responsibilities between each other. These mostly relate to payment. (Article 19)If the buyer and seller feel after all this that the banks have little to do, it is worth adding that most banks taketheir responsibilities more seriously than the foregoing implies. It is well worth also adding that, give the flexibility of interpretation available to the bank that checks the documents, it is important to each party that 19

Parties to a Letter of Credit

1. Applicant/Opener:- It is generally the buyer of the goods who gets the letter of credit issued by his banker in favour of the seller. The person on whose behalf and under whose instructions the letter of credit is issued is known as applicant/ opener of the credit. 2. Opening bank/issuing bank:- The bank issuing the letter of credit. 3. Beneficiary:- The seller of goods in whose favour the letter of credit is issued. 4. Advising Bank:- Notification regarding issuing of letter of credit may be directly sent to the beneficiary by the opening bank. It is, however, customary to advise the letter of credit through sane other bank operating at the place/country of seller. The bank which advises the letter of credit to the beneficiary is known as advising bank.

5. Confirming Bank:- A letter of credit substitutes the credit worthiness of the buyer with that of the issuing bank. It may sometimes happen especially in import trade that the issuing bank itself is not widely known in the exporter's country and exporter is not prepared to rely on the L/C opened by that bank. In such cases the opening bank may request other bank usually in the country of exporter to add its confirmation which amounts to an additional undertaking being given by that bank to the beneficiary. The bank adding its confirmation is known as confirming bank. The confirming bank has the same liabilities towards the beneficiary as that of opening bank. 6. Negotiating Bank:- The bank who negotiates the documents drawn under letter of credit and makes payment to beneficiary. The function of advising bank, confirming bank and negotiating bank may be undertaken by a single bank only.

Letter of Credit Mechanism

Any business/industrial venture will involve purchase transactions relating to machine/other capital goods and raw material etc., and also sale transactions relating to its products. The customer may, therefore, find himself on either side of a L/C transaction at different times depending upon his position at that particular moment. He may be an applicant for a letter of credit for his purchases while be the beneficiary under other letter of credit for his sale transaction. It is, therefore, necessary that complete L/C mechanism covering the liabilities and rights & both the applicant and the beneficiary are understood for maximum advantage. The complete mechanism of a letter of credit may be divided in three parts as under:

1. Issuing of Credit:- Letter of credit is always issued by the buyer's bank (issuing bank) at the request and on behalf and in accordance with the instructions of the applicant. The letter of credit may either be advised directly or through some other bank. The advising bank is responsible for transmission of credit and verifying the authenticity of signature of issuing bank and is under no commitment to pay the seller. The advising bank may also be required to add confirmation and in that case will assume all the liabilities of issuing bank in relation to the beneficiary as stated already. Refer to diagram given below for complete process of issuance of credit. 2. Negotiation of Documents by beneficiary:- On receipt of letter of credit, the beneficiary shall arrange to supply the goods as per the terms of L/C and draw necessary documents as required under L/C. The documents will then be presented to the negotiating bank for payment/acceptance as the case may be. The negotiating bank will make the payment to the beneficiary and obtain reimbursement from the opening bank in terms of credit. The entire process of negotiation is diagrammatically represented as under: 3. Settlement of Bills Drawn under Letter of Credit by the opener:- The last step involved in letter of credit mechanism is retirement of documents received under L/C by the opener, On receipt of documents drawn under L/C, the opening bank is required to closely examine the documents to ensure compliance of the terms and conditions of credit and present the same to the opener for his scrutiny. The opener should then make payment to the opening bank and take delivery of documents so that delivery of goods can be obtained by him. This aspect of L/C transaction is represented as under:1.Bank should normally open letters of credit for their own customers who enjoy credit facilities with them Customers maintaining current account only and not enjoying any credit limits should not be granted L/C facilities except in cases where no other credit facility is needed by the customer. 2.The request of such customer for sanctioning and opening of letter of credit should be properly scrutinised to establish the genuine need of the customer. The customer may be, required to submit a complete loan proposal Including financial statements to satisfy the bank about his, needs and also his financial resources, to mire the bills drawn under

3.Where a customer enjoys credit facilities with some other bank, the reasons for his approaching the bank for sanctioning L/C limits have to be clearly stated. The bank opening L/C on behalf of such customer should invariably make a reference to the, existing banker of the customer. 4.all cases of opening of letters of credit, the bank has to ensure that the customer is able to retire the bills drawn under L/C as per the financial arrangement already finalised.

A contract of guarantee can be defined as a contract to perform the promise, or discharge the liability of a third person in case of his default. The RBI guidelines for sanctioning guarantee facilities have already been discussed earlier in this chapter. Reserve Bank lays a great emphasis on banks to make prompt payment to the beneficiaries in terms of guarantees issued by them as and when such guarantees are invoked. Other important points/ precautions in respect of availing of these facilities from banks are discussed here under:1.The conditions relating to obligant being a customer of the bank enjoying credit facilities as in case of letters of credit are equally applicable for guarantees also. In fact, guarantee facilities also cannot be sanctioned in isolation.

2.Financial guarantees will be issued by the banks only if they are satisfied that the customer will be in a position to reimburse the bank in case the guarantee is invoked and the bank is required to make the payment in terms of guarantee. 3.Performance guarantee will be issued by the banks only on behalf of those customers with whom the bank has sufficient experience and is satisfied that the customer has the necessary experience and means to perform the obligations under the contract and is not likely to commit any default. 4.As a rule, banks will guarantee shorter maturities and leave longer maturities to be guaranteed by other institutions. Accordingly, no bank guarantee will normally have a maturity of more than 10 years. 5.banks should not normally issue guarantees on behalf of those customer's

Co-acceptance of Bills
1. Limits for co-acceptance of bills will be sanctioned by the banks after detailed appraisal of customer's requirement is completed and the bank is fully satisfied about the genuineness of the need of the customer. Further customers who enjoy other limits with the bank should be extended such limits. 2. Only genuine trade bills shall be co-accepted and the banks should ensure that the goods covered by bills co-accepted are actually received in the stock accounts of the borrowers. The valuation of goods as mentioned in the accompanying invoice should be verified to see that there is no overvaluation of stocks. 3. The banks shall not extend their co-acceptance to house bills/ accommodation bills drawn by group concerns on one another.

4. Before discounting/purchasing bills co-accepted by other banks for Rs.2 lakh and above from a single party, the bank should obtain written confirmation of the concerned controlling office of the accepting bank. 5. When the value of total bills discounted/purchased (which have been co-accpted by other banks) exceed Rs.20 lakh for a single borrower/ group of borrowers prior approval of the Head Office of the co-accepting bank shall be obtained by the discounting bank in writing. 6. Banks are precluded from co-accepting bills drawn under Buyer's Line of Credit schemes of financial institutions like IDBI, SIDBI, PFC etc. Similarly banks should not co-accept bills drawn by NBFCs. Further, banks should not extend co-acceptance on behalf of their buyers/constituents under the SIDBI scheme. 7. However, banks may co-accept bills drawn, under Seller's Line of Credit schemes for Bill Discounting operated by the financial institutions like IDBI, SIDBI, PFC etc. without any limit subject to buyer's capacity to pay and the compliance with exposure norms applicable to the borrower. 8. Where banks open L/C and also co-accept bills drawn under such L/C, the discounting banks, before discounting such co-accepted bills, must ascertain the reason for co-acceptance of bills and satisfy themselves about the genuineness of the transaction. 9. Co-acceptance facilities will normally not be sanctioned to customers enjoying credit limit with other banks. Operational aspects of IDBI bills rediscounting scheme have already been discussed and similar procedure shall be adopted while allowing co acceptance facilities which are not covered under the scheme. Important operational aspects in respect of letter of credit facilities and issuance of guarantees will be discussed in this chapter.

Corporate restructuring

Corporate restructuring is the process of redesigning one or more aspects of a company. The process of reorganizing a company may be implemented due to a number of different factors, such as positioning the company to be more competitive, survive a currently adverse economic climate, or poise the corporation to move in an entirely new direction. Here are some examples of why corporate restructuring may take place and what it can mean for the company. Restructuring a corporate entity is often a necessity when the company has grown to the point that the original structure can no longer efficiently manage the output and general interests of the company. For example, a corporate restructuring may call for spinning off some departments into subsidiaries as a means of creating a more effective management model as well as taking advantage of tax breaks that

would allow the corporation to divert more revenue to the production process. In this scenario, the restructuring is seen as a positive sign of growth of the company and is often welcome by those who wish to see the corporation gain a larger market share. Corporate restructuring may take place as a result of the acquisition of the company by new owners. The acquisition may be in the form of a leveraged buyout, a hostile takeover, or a merger of some type that keeps the company intact as a subsidiary of the controlling corporation. When the restructuring is due to a hostile takeover, corporate raiders often implement a dismantling of the company, selling off properties and other assets in order to make a profit from the buyout. What remains after this restructuring may be a smaller entity that can continue to function, albeit not at the level possible before the takeover took place. In general, the idea of corporate restructuring is to allow the company to continue functioning in some manner. Even when corporate raiders break up the company and leave behind a shell of the original structure, there is still usually the hope that what remains can function well enough for a new buyer to purchase the diminished corporation and return it to profitability.

Portfolio management

A Portfolio Management refers to the science of analyzing the strengths, weaknesses, opportunities and threats for performing wide range of activities related to the ones portfolio for maximizing the return at a given risk. It helps in making selection of Debt Vs Equity, Growth Vs Safety, and various other tradeoffs. Major tasks involved with Portfolio Management are as follows:

Taking decisions about investment mix and policy Matching investments to objectives

Asset allocation for individuals and institution Balancing risk against performance

There are basically two types of portfolio management in case of mutual and exchange-traded funds including passive and active.

Passive management involves tracking of the market index or index investing. Active management involves active management of a funds portfolio by manager or team of managers who take research based investment decisions and decisions on individual holdings.

Facts about Portfolio:

There are many investment vehicles in a portfolio. Building a portfolio involves making wide range of decisions regarding buying or selling of stocks, bonds, or other financial instruments. Also, one needs to make decision regarding the quantity and timing of the buy and sell. Portfolio Management is goal-driven and target oriented. There are inherent risks involved in the managing a portfolio.

The basics and ideas of Investment Portfolio Management are also applied to portfolio management in other industry sectors.

Hedging is the process of managing the risk of price changes in physical material by offsetting that risk in the futures market. Hedging can vary in complexity from a relatively simple activity, through to a highly complex strategies, including the use of options. The ability to hedge means that industry can decide on the amount of risk it is prepared to accept. It may wish to eliminate the risk entirely and can generally do so quickly and easily using the LME. Managing price risk means achieving greater control of either the cost of inputs, or

revenues from sales, or both; planning for the future based on assured costs and revenues; and eliminating concerns that a sharply adverse move in the price of material could turn an otherwise flourishing and efficient business into a loss maker. Hedging by trade and industry is the opposite of speculation and is undertaken in order to eliminate an existing physical price risk, by taking a compensating position in the futures market. Speculators come to the futures market with no initial risk. They assume risk by taking futures positions. Hedgers reduce or eliminate the chance of further losses or profits, while the speculators risk losses in order to make profits. Before starting a hedging programme it is essential to assess the risk due to exposure to the price of physical material. Once the hedger has an understanding of the tools available at the LME, it is relatively easy to select the appropriate action to manage this risk. It is important that this action is properly managed at all times and that the appropriate controls and approval procedures are in place. It is generally advisable to work with an LME broker so that expert advice can be taken in devising a hedging programme.

Bank of baroda offers non fund based products to its clients as follows :a) Letter of Credit : We offer import as well as domestic Letter of Credit facility to our clients for procurement of goods on DA/DP basis as per their needs at very competitive rates. Considering our international network of branches / offices coupled with worldwide correspondent relationship arrangements, our clients enjoy market acceptability and comfort in business deals. b) Bank Guarantee : We offer Bank Guarantee facility to our clients guaranteeing their performance / financial obligations in the domestic as well as international market. c) LC Advising / Confirming Services : In case of Letters of Credit received by our clients, we offer LC advising as well as LC confirmation services under our correspondent relationships with domestic as well as international banks.

d) Co-acceptance facilities : Sometimes in business deals on credit basis, buyers are required to offer adequate comforts to the sellers such as bank guarantee or coacceptance of bills by the bankers. Bank of Baroda offers co-acceptance of bills facility to the top rated clients. e) Bancassurance : Bank of Baroda has tie-up arrangement with National Insurance Company (NIC), under which we arrange for issuance of general insurance policies to our clients thereby taking away their worries of timely and adequate insurance cover of the assets. f) Solvency Certificate : We provide Solvency Certificate to our clients in case it is required for providing to Government authorities, other corporates in business deals / bids etc. g) Credit Reports : We provide Credit Reports on our clients to other banks/FIs and we also obtain Credit information required by our clients on their counter parties, through our correspondent relationship.


The traditional services which come under fund based activities are the following:a) Underwriting of or investment in shares, debentures, bonds, etc of new issues (primary markets activities) b) Dealing in secondary market activities. c) Participating in money market instrument like commercial papers, certificate of deposits, treasury bills, discounting of bills etc d) Involving in equipments leasing, hire purchases, venture capital seeds capital etc.

e) Dealing in foreign exchange market activities

Fund based Limit:

Fund based limits can be categorized as sources of actual finance. Here banks allocate certain fund towards the borrower or forwards certain credit to the borrower. Fund based limits consist of various lending facilities:

1. Term Loans 2. Working Capital Term Loans 3. Cash Credit / Overdraft 4. Discounting of bills

5. Pre shipment Credit 6. Export Packing Credit 1. Term Loans:Term Loans are generally taken to acquire capital assets. The repayment is in the form of either installments (Actual + Interest) or EMI. Repayment of Term Loan is through future earnings from the Capital Asset acquired. The purpose of the term loan is defined well in advance. 2. Working Capital Term Loans:When contribution to working capital has to be brought immediately; working capital term loans are used. Generally organizations availing working capital limits under the second method of financing use working capital term loan as a source of quick finance. The interest rate applicable is around 1% higher then the cash credit account. Working capital term loans are financed on the basis of recommendation by Tandon committee. 3. Cash Credit Facility:Cash Credit Facility is generally granted under the running account facility. Availed for maintenance of inventory and day to day business activities; Cash Credit Facility, or CC limit is generally used to meet a major part of working capital requirement. 4. Discounting Of Bills:A borrower obtains credit from banks against the bills he possesses. The bank here discounts the bill i.e. purchases the bill after analyzing the credit worthiness of the drawer. The borrower gets discounted amount of the bill. (Full amount of bill Discount charges of bank) Discounted amount of bill. 5. Pre- Shipment Credit:All credit facilities sanctioned to exporters for producing / manufacturing / processing/ packing / warehousing / shipping the goods for exports are termed as Pre -Shipment Credit. The credit limits for pre-shipment advance are considered simultaneously along with other facilities and it is generally made a sub-limit within the overall cash credit limit sanctioned to the borrower. The assessment of working capital requirement may be based upon the export orders on hand with the exporter besides his capacity to meet that commitment. The exporters, to whom this facility is allowed, will be required to produce letters of

credit/firm export orders within a reasonable period of time. Pre-Shipment Credit limits can be extended through the running account facility. No repayment of preshipment advance can be effected from local funds in which case the advance will not be treated as pre-shipment advance and no benefits of concessional rate will be available to such an advance from the date of original advance. Quantum of advances and interest rate structure is based on the commodity to be exported and the current PLR. Advance is granted for a period of 180 days and if the export is not executed by that time a further extension of 90 days can be given. 6. Export Packing Credit:Packing credit may be taken as equivalent to cash credit in domestic business except that cash credit facility is sanctioned as a continuous/running facility whereas packing credit advance is disbursed for a specific purpose to enable the exporter to meet a specific export obligation. The procedure and techniques adopted by bank are same as other advances. The repayment of packing credit advance can be only from the proceeds of the bills drawn under the export order/L/C against which the pre-shipment advance was granted to the exporter by the bank. Packing credit advance will be treated as a separate loan and no running account facility will be permitted. The repayment of packing credit account will also be required to be done on separate loan account basis. Advance is granted for a period of 180 days and if the export is not executed by that time, the export should be completed within 360 days. Quantum of advances and interest rate structure is based on the commodity to be exported and the current PLR. The packing credit may initially be clean at the time of disbursement; may be covered by hypothecation charge over the raw material, semi-finished and finished goods later; hypothecation charge be converted to pledge of finished goods meant for exports or may even be covered by document of title to goods (LR/RR) if the goods are sent for shipment to a port city. ECGC Guarantee Most of the banks cover their packing credit advances under Packing Credit. Guarantee of Export Credit Guarantee Corporation of India Ltd. (ECGC). ECGC issues packing credit guarantees on each exporter individually and also has the system of issuing a guarantee in favor of the bank on whole turnover basis. Premium on the guarantee is generally recovered from the exporter. The rates of premium on individual guarantees are higher in comparison to rates on Whole Turnover Packing Credit guarantee issued to banks. It is necessary to obtain this information from the bank as cost of additional premium for individual guarantee may sometimes be quite heavy depending upon the turnover in the account.

Guarantees issued by ECGC are in addition to various policies issued by ECGC in favor of exporters to cover the risk of non-payment or other political risk involved in export trade. Full details of these policies may be obtained from any office of ECGC.

Types of fund based activities

a)Hire purchase :-Hire purchase (abbreviated HP, colloquially sometimes never-never) is the legal term for a contract, in which persons usually agree to pay for goods in parts or a percentage at a time. It was developed in the United Kingdom and can now be found in Australia, China, India, Jamaica, Japan, Malaysia, New Zealand, and South Africa. It is also called closed-end leasing. In cases where a buyer cannot afford to pay the asked price for an item of property as a lump sum but can afford to pay a percentage as a deposit, a hire-purchase contract allows the buyer to hire the goods for a monthly rent. When a sum equal to the original full price plus interest has been paid in equal installments, the buyer may then exercise an option to buy the goods at a predetermined price (usually a nominal sum) or return the goods to the owner. In Canada and the United States, a hire purchase is termed an installment plan; other analogous practices are described as closed-end leasing or rent to own.

If the buyer defaults in paying the installments, the owner may repossess the goods, a vendor protection not available with unsecured-consumer-credit systems. HP is frequently advantageous to consumers because it spreads the cost of expensive items over an extended time period. Business consumers may find the different balance sheet and taxation treatment of hire-purchased goods beneficial to their taxable income. The need for HP is reduced when consumers have collateral or other forms of credit readily available. b)Venture capital:- Venture capital (VC) is financial capital provided to earlystage, high-potential, high risk, growth startup companies. The venture capital fund makes money by owning equity in the companies it invests in, which usually have a novel technology or business model in high technology industries, such as biotechnology, IT, software, etc. The typical venture capital investment occurs after the seed funding round as growth funding round (also referred to as Series A round) in the interest of generating a return through an eventual realization event, such as an IPO or trade sale of the company. Venture capital is a subset of private equity. Therefore, all venture capital is private equity, but not all private equity is venture capital.

c)Working Capital Finance:- We offer working capital facilities - both fundbased and fee-based. Fund-based working capital products include cash credit, overdraft, bill discounting, short-term loans, export financing (pre-shipment as well as post-shipment). Fee based facilities include letters of credit and bank guarantees. Working Capital facilities are provided to finance the day-to-day business requirements. Funding requirements are structured to finance procurement of raw materials/stores and payment towards manufacturing costs and other overheads. Sales are financed against sundry debtors/ receivables. The Bank offers a combination of operative cash credit and working capital demand loan to meet the domestic working capital requirements of our clients. d) Short Term Finance:- The Bank offers short-term loans for a period ranging from 3 months to 12 months to sound corporates for meeting their specific shortterm working capital requirements. The funds are provided with interest rates either linked to our BPLR or at a fixed rate with varying repayment patterns. e) Bill Discounting:- This product enables corporates to fund their operating cycle

right from the stage of procurement to sale. Bill Financing is extended by IndusInd Bank to its clients at competitive rates. Letter of credit backed bill discounting and clean bill discounting are the convenient mode of financing for domestic trade transactions. BOE could be broadly classified into Demand and Usance bills and are further classified into clean and documentary bills f) Export Finance:- As an important incentive to the exporters community for boosting exports, financial assistance in Rupees is extended to exporters on priority basis on relatively liberal terms. Such finance is provided both at pre-shipment stage (as working capital finance) and at post-shipment stage (to bridge the time lag between the shipment of goods and the realisation of proceeds). Interest charged on export credit is exempted from the purview of interest tax. g) Term Lending:- We offer term loans to both Industrial as well as Infrastructure sectors promoted by strong business houses. These loans are for a period of 3-5 years with a moratorium period. Interest rates could be fixed or floating linked to the bank's BPLR. h) Buyers Credit / Suppliers Credit:- This facility provides total flexibility to corporates to utilise the line (sanctioned limit) of credit. The terms of the line of credit are either predetermined or negotiated at the time of availment. This facility is used as and when the client has a requirement i) Asset based financing Two Wheeler Loan Construction Equipments