National Institute of Business Management

Chennai - 020
FIRST SEMESTER EMBA/ MBA
Subject : Financial Management

Attend any 4 questions. Each question carries 25

marks
(Each answer should be of minimum 2 pages / of 300
words)

1. Explain the objectives of financial management,

interphase between finance and other functions.
2. Explain the Indian Financial Systems.
3. Explain debentures as instruments for raising long-
term debt capital.
4. What are Inventories? Explain.
5. Explain the different sources of cash.
6. What is cash budget and proforma balance sheet?
Explain.

25 x 4=100 marks
 ANSWER
1. Explain the objectives of financial management,
interphase between finance and other functions.

Finance is the study of money management, the

acquiring of funds (cash) and the directing of these funds to
meet particular objectives. Good financial management
helps businesses to maximize returns while simultaneously
minimizing risks.

Financial management is an integral part of overall

management and not merely a staff function. It is not only
confined to fund raising operations but extends beyond it to
cover utilisation of funds and monitoring its uses. These
functions influence the operations of other crucial functional
areas of the firm such as production, marketing and human
resources. Hence, decisions in regard to financial matters
must be taken after giving thoughtful consideration to
interests of various business activities. Finance manager has
to see things as a part of a whole and make financial
decisions within the framework of overall corporate
objectives and policies.
Let us discuss in greater detail the reasons why knowledge
of the financial implications of their decisions is important for
the non-finance managers. One common factor among all
managers is that they use resources and since resources are
obtained in exchange for money, they are in effect making
the investment decision and in the process of ensuring that
the investment is effectively utilized they are also
performing the control function.
Marketing-Finance Interface
There are many decisions, which the Marketing Manager
takes which have a significant location, etc. In all these
matters assessment of financial implications is inescapable
impact on the profitability of the firm. For example, he
should have a clear understanding of the impact the credit
extended to the customers is going to have on the profits of
the company. Otherwise in his eagerness to meet the sales
targets he is liable to extend liberal terms of credit, which is
likely to put the profit plans out of gear. Similarly, he should
weigh the benefits of keeping a large inventory of finished
goods in anticipation of sales against the costs of
maintaining that inventory. Other key decisions of the
Marketing Manager, which have financial implications, are:
Pricing
Product promotion and advertisement
Choice of product mix
Distribution policy.
Production-Finance Interface
As we all know in any manufacturing firm, the Production
Manager controls a major part of the investment in the form
of equipment, materials and men. He should so organize his
department that the equipments under his control are used
most productively, the inventory of work-in-process or
unfinished goods and stores and spares is optimized and the
idle time and work stoppages are minimized. If the
production manager can achieve this, he would be holding
the cost of the output under control and thereby help in
maximizing profits. He has to appreciate the fact that
whereas the price at which the output can be sold is largely
determined by factors external to the firm like competition,
government regulations, etc. the cost of production is more
amenable to his control. Similarly, he would have to make
decisions regarding make or buy, buy or lease etc. for which
he has to evaluate the financial implications before arriving
at a decision.
Top Management-Finance Interface
The top management, which is interested in ensuring that
the firms long-term goals are met, finds it convenient to use
the financial statements as a means for keeping itself
informed of the overall effectiveness of the organization. We
have so far briefly reviewed the interface of finance with the
non-finance functional disciplines like production, marketing
etc. Besides these, the finance function also has a strong
linkage with the functions of the top management.
Strategic planning and management control are two
important functions of the top management. Finance
function provides the basic inputs needed for undertaking
these activities.
Economics Finance Interface
The field of finance is closely related to economics. Financial
managers must understand the economic framework and be
alert to the consequences of varying levels of economic
activity and changes in economic policy. They must also be
able to use economic theories as guidelines for efficient
business operation. The primary economic principle used in
managerial finance is marginal analysis, the principle that
financial decisions should be made and actions taken only
when the added benefits exceed the added costs.
Accounting Finance Interface
The firms finance (treasurer) and accounting (controller)
activities are typically within the control of the financial vice
president (CFO). These functions are closely related and
generally overlap; indeed, managerial finance and
accounting are often not easily distinguishable. In small firms
the controller often carries out the finance function, and in
large firms many accountants are closely involved in various
finance activities. However, there are two basic differences
between finance and accounting; one relates to the
emphasis on cash flows and the other to decision making.

2. Explain the Indian Financial Systems.

Economic growth and development of any country

depends upon a well-knit financial system. Financial
system comprises, a set of sub-systems of financial
institutions financial markets, financial instruments and
services which help in the formation of capital. Thus a
financial system provides a mechanism by which
savings are transformed into investments and it can be
said that financial system play an significant role in
economic growth of the country by mobilizing surplus
funds and utilizing them effectively for productive
purpose.

The financial system is characterized by the presence

of integrated, organized and regulated financial
markets, and institutions that meet the short term and
long term financial needs of both the household and
corporate sector. Both financial markets and financial
institutions play an important role in the financial
 system by rendering various financial services to the
community. They operate in close combination with
each other.
Financial System
The word "system", in the term "financial system", implies a
set of complex and closely connected or interlined
institutions, agents, practices, markets, transactions,
claims, and liabilities in the economy. The financial
system is concerned about money, credit and finance-the
three terms are intimately related yet are somewhat
different from each other. Indian financial system consists
of financial market, financial instruments and financial
intermediation
Role/ Functions of Financial System:
A financial system performs the following functions:
* It serves as a link between savers and investors. It
helps in utilizing the mobilized savings of scattered
savers in more efficient and effective manner. It
channelises flow of saving into productive investment.
* It assists in the selection of the projects to be financed
and also reviews the performance of such projects
periodically.
* It provides payment mechanism for exchange of goods
and services.
* It provides a mechanism for the transfer of resources
across geographic boundaries.
* It provides a mechanism for managing and controlling
the risk involved in mobilizing savings and allocating
credit.
* It promotes the process of capital formation by bringing
together the supply of saving and the demand for
investible funds.
* It helps in lowering the cost of transaction and increase
returns. Reduce cost motives people to save more.
* It provides you detailed information to the operators/
players in the market such as individuals, business
houses, Governments etc.
Components/ Constituents of Indian Financial
system:
The following are the four main components of Indian
Financial system
1. Financial institutions
2. Financial Markets
3. Financial Instruments/Assets/Securities
4. Financial Services.
Financial institutions:
Financial institutions are the intermediaries who
facilitates smooth functioning of the financial system by
making investors and borrowers meet. They mobilize
savings of the surplus units and allocate them in
productive activities promising a better rate of return.
Financial institutions also provide services to entities
seeking advises on various issues ranging from
restructuring to diversification plans. They provide whole
range of services to the entities who want to raise funds
from the markets elsewhere. Financial institutions act as
financial intermediaries because they act as
middlemen between savers and borrowers. Were these
financial institutions may be of Banking or Non-Banking
institutions.
Financial Markets:
Finance is a prerequisite for modern business and
financial institutions play a vital role in economic system.
It's through financial markets the financial system of an
economy works. The main functions of financial markets
are:
1. to facilitate creation and allocation of credit and
liquidity;
2. to serve as intermediaries for mobilization of savings;
3. to assist process of balanced economic growth;
4. to provide financial convenience
Financial Instruments
Another important constituent of financial system is
financial instruments. They represent a claim against the
 future income and wealth of others. It will be a claim
against a person or an institutions, for the payment of the
some of the money at a specified future date.
Financial Services:
Efficiency of emerging financial system largely depends
upon the quality and variety of financial services provided
by financial intermediaries. The term financial services
can be defined as "activites, benefits and satisfaction
connected with sale of money, that offers to users and
customers, financial related value"
Pre-reforms Phase
Until the early 1990s, the role of the financial system in
India was primarily restricted to the function of
channeling resources from the surplus to deficit sectors.
Whereas the financial system performed this role
reasonably well, its operations came to be marked by
some serious deficiencies over the years. The banking
sector suffered from lack of competition, low capital base,
low Productivity and high intermediation cost. After the
nationalization of large banks in 1969 and 1980, the
Government-owned banks dominated the banking sector.
The role of technology was minimal and the quality of
service was not given adequate importance. Banks also
did not follow proper risk management systems and the
prudential standards were weak. All these resulted in
poor asset quality and low profitability. Among non-
banking financial intermediaries, development finance
institutions (DFIs) operated in an over-protected
environment with most of the funding coming from
assured sources at concessional terms. In the insurance
sector, there was little competition. The mutual fund
industry also suffered from lack of competition and was
dominated for long by one institution, viz., the Unit Trust
of India. Non-banking financial companies (NBFCs) grew
rapidly, but there was no regulation of their asset side.
Financial markets were characterized by control over
pricing of financial assets, barriers to entry, high
transaction costs and restrictions on movement of
funds/participants between the market segments. This
apart from inhibiting the development of the markets also
affected their efficiency.
Financial Sector Reforms in India
It was in this backdrop that wide-ranging financial sector
reforms in India were introduced as an integral part of the
economic reforms initiated in the early 1990s with a view
to improving the macroeconomic performance of the
economy. The reforms in the financial sector focused on
creating efficient and stable financial institutions and
markets. The approach to financial sector reforms in India
was one of gradual and non-disruptive progress through a
consultative process. The Reserve Bank has been
consistently working towards setting an enabling
regulatory framework with prompt and effective
supervision, development of technological and
institutional infrastructure, as well as changing the
interface with the market participants through a
consultative process. Persistent efforts have been made
towards adoption of international benchmarks as
appropriate to Indian conditions. While certain changes in
the legal infrastructure are yet to be effected, the
developments so far have brought the Indian financial
system closer to global standards.
The reform of the interest regime constitutes an integral
part of the financial sector reform. With the onset of
financial sector reforms, the interest rate regime has
been largely deregulated with a view towards better price
discovery and efficient resource allocation. Initially, steps
were taken to develop the domestic money market and
freeing of the money market rates. The interest rates
offered on Government securities were progressively
raised so that the Government borrowing could be carried
out at market-related rates. In respect of banks, a major
effort was undertaken to simplify the administered
structure of interest rates. Banks now have sufficient
flexibility to decide their deposit and lending rate
structures and manage their assets and liabilities
accordingly. At present, apart from savings account and
NRE deposit on the deposit side and export credit and
small loans on the lending side, all other interest rates
are deregulated. Indian banking system operated for a
long time with high reserve requirements both in the form
of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio
(SLR). This was a consequence of the high fiscal deficit
and a high degree of monetisation of fiscal deficit. The
efforts in the recent period have been to lower both the
CRR and SLR. The statutory minimum of 25 per cent for
SLR has already been reached, and while the Reserve
Bank continues to pursue its medium-term objective of
reducing the CRR to the statutory minimum level of 3.0
per cent, the CRR of SCBs is currently placed at 5.0 per
cent of NDTL.
As part of the reforms programme, due attention has
been given to diversification of ownership leading to
greater market accountability and improved efficiency.
Initially, there was infusion of capital by the Government
in public sector banks, which was followed by expanding
the capital base with equity participation by the private
investors. This was followed by a reduction in the
Government shareholding in public sector banks to 51 per
cent. Consequently, the share of the public sector banks
in the aggregate assets of the banking sector has come
down from 90 per cent in 1991 to around 75 per cent
in2004. With a view to enhancing efficiency and
productivity through competition, guidelines were laid
down for establishment of new banks in the private
sector and the foreign banks have been allowed more
liberal entry. Since 1993, twelve new private sector banks
have been set up. As a major step towards enhancing
competition in the banking sector, foreign direct
investment in the private sector banks is now allowed up
 to 74 per cent, subject to conformity with the guidelines
issued from time to time.

4. What are Inventories? Explain.

Inventory is the raw materials, work-in-process products and

finished goods that are considered to be the portion of a
business's assets that are ready or will be ready for sale.
Inventory represents one of the most important assets of a
business because the turnover of inventory represents one
of the primary sources of revenue generation and
subsequent earnings for the company's shareholders.
BREAKING DOWN 'Inventory'
Inventory represents finished goods or goods in different
stages of production that a company keeps at its premises.
Inventory can also be on consignment, which is an
arrangement when a company has its goods at third-party
locations with ownership interest retained until goods are
sold. Inventory is reported on a company's balance sheet
under the current assets category, and it serves as a buffer
between manufacturing and order fulfillment. When an
inventory is sold, its carrying cost goes into the cost of goods
sold on the income statement.
Types of Inventory
There are three components typically classified under the
inventory account: raw materials, work in progress and
finished goods. Raw materials represent goods that are used
in the production as a source material. Examples of raw
materials are metal bought by car manufacturers, food
ingredients held by food preparation companies and crude
oil held by refineries.
Work in progress includes goods that are in the process of
being transformed during manufacturing and are about to be
converted into finished goods. For example, a half-
assembled airliner or a ship that is being built would be work
in process.
Finished goods are products that have gone through the
production and ready for sale, such as completed airliners,
ready-to-ship cars and electronics. Retailers who buy and
resell goods typically call inventory "merchandise," which
includes finished goods bought from producers and can be
resold immediately. Examples of merchandise include
electronics, clothes and cars held by retailers.
Valuing Inventory
Accountants value inventory using one of the three methods.
The first-in, first-out (FIFO) method says that the cost of
goods sold is based on the cost of materials purchased the
earliest, while the carrying cost of remaining inventory is
based on the cost of materials bought the latest. The last-in,
first-out (LIFO) method states that the cost of goods sold is
valued using cost of materials bought latest, while the value
of remaining inventory is based on materials purchased
earliest. The weighted average method requires valuing both
inventory and the cost of goods sold based on the average
cost of all materials bought during the period.
Importance of Inventory Management
Possessing a high amount of inventory for a long time is
usually not advantageous for a business because of costly
storage, the possibility of obsolescence and spoilage costs.
However, possessing too little inventory isn't beneficial
either, since the business runs the risk of losing out on
potential sales and potential market share as well. Inventory
management forecasts and strategies, such as a just-in-time
(JIT) inventory system, can help minimize inventory costs
because goods are created or received only when needed.
Defining Inventory
Inventory is an idle stock of physical goods that contain
economic value, and are held in various forms by an
organization in its custody awaiting packing, processing,
transformation, use or sale in a future point of time.
Any organization which is into production, trading, sale and
service of a product will necessarily hold stock of various
physical resources to aid in future consumption and sale.
While inventory is a necessary evil of any such business, it
may be noted that the organizations hold inventories for
various reasons, which include speculative purposes,
functional purposes, physical necessities etc.
From the above definition the following points stand out with
reference to inventory:
All organizations engaged in production or sale of
products hold inventory in one form or other.
Inventory can be in complete state or incomplete state.
Inventory is held to facilitate future consumption, sale
or further processing/value addition.
All inventoried resources have economic value and can
be considered as assets of the organization.
Different Types of Inventory
Inventory of materials occurs at various stages and
departments of an organization. A manufacturing
organization holds inventory of raw materials and
consumables required for production. It also holds inventory
of semi-finished goods at various stages in the plant with
various departments. Finished goods inventory is held at
plant, FG Stores, distribution centers etc. Further both raw
materials and finished goods those that are in transit at
various locations also form a part of inventory depending
upon who owns the inventory at the particular juncture.
Finished goods inventory is held by the organization at
various stocking points or with dealers and stockiest until it
reaches the market and end customers.
Besides Raw materials and finished goods, organizations also
hold inventories of spare parts to service the products.
Defective products, defective parts and scrap also forms a
part of inventory as long as these items are inventoried in
the books of the company and have economic value

5. Explain the different sources of cash.

Financing is needed to start a business and ramp it up to

profitability. There are several sources to consider when
looking for start-up financing. But first you need to consider
how much money you need and when you will need it.

The financial needs of a business will vary according to the

type and size of the business. For example, processing
businesses are usually capital intensive, requiring large
amounts of capital. Retail businesses usually require less
capital.
Debt and equity are the two major sources of financing.
Government grants to finance certain aspects of a business
may be an option. Also, incentives may be available to
locate in certain communities and/or encourage activities in
particular industries.

Equity Financing
Equity financing means exchanging a portion of the
ownership of the business for a financial investment in the
business. The ownership stake resulting from an equity
investment allows the investor to share in the companys
profits. Equity involves a permanent investment in a
company and is not repaid by the company at a later date.

The investment should be properly defined in a formally

created business entity. An equity stake in a company can be
in the form of membership units, as in the case of a limited
liability company or in the form of common or preferred
stock as in a corporation.
Companies may establish different classes of stock to control
voting rights among shareholders. Similarly, companies may
use different types of preferred stock. For example, common
stockholders can vote while preferred stockholders generally
cannot. But common stockholders are last in line for the
companys assets in case of default or bankruptcy. Preferred
stockholders receive a predetermined dividend before
common stockholders receive a dividend.

Personal Savings
The first place to look for money is your own savings or
equity. Personal resources can include profit-sharing or early
retirement funds, real estate equity loans, or cash value
insurance policies.

Life insurance policies - A standard feature of many life

insurance policies is the owners ability to borrow against the
cash value of the policy. This does not include term
insurance because it has no cash value. The money can be
used for business needs. It takes about two years for a policy
to accumulate sufficient cash value for borrowing. You may
borrow most of the cash value of the policy. The loan will
reduce the face value of the policy and, in the case of death,
the loan has to be repaid before the beneficiaries of the
policy receive any payment.

Home equity loans - A home equity loan is a loan backed by

the value of the equity in your home. If your home is paid
for, it can be used to generate funds from the entire value of
your home. If your home has an existing mortgage, it can
provide funds on the difference between the value of the
house and the unpaid mortgage amount. For example, if
your house is worth $150,000 with an outstanding mortgage
of $60,000, you have $90,000 in equity you can use as
collateral for a home equity loan or line of credit. Some
home equity loans are set up as a revolving credit line from
which you can draw the amount needed at any time. The
interest on a home equity loan is tax deductible.

Friends and Relatives

Founders of a start-up business may look to private financing
sources such as parents or friends. It may be in the form of
equity financing in which the friend or relative receives an
ownership interest in the business. However, these
investments should be made with the same formality that
would be used with outside investors.

Venture Capital
Venture capital refers to financing that comes from
companies or individuals in the business of investing in
young, privately held businesses. They provide capital to
young businesses in exchange for an ownership share of the
business. Venture capital firms usually dont want to
participate in the initial financing of a business unless the
company has management with a proven track record.
Generally, they prefer to invest in companies that have
received significant equity investments from the founders
and are already profitable.

They also prefer businesses that have a competitive

advantage or a strong value proposition in the form of a
patent, a proven demand for the product, or a very special
(and protectable) idea. Venture capital investors often take a
hands-on approach to their investments, requiring
representation on the board of directors and sometimes the
hiring of managers. Venture capital investors can provide
valuable guidance and business advice. However, they are
looking for substantial returns on their investments and their
objectives may be at cross purposes with those of the
founders. They are often focused on short-term gain.

Venture capital firms are usually focused on creating an

investment portfolio of businesses with high-growth potential
resulting in high rates of returns. These businesses are often
high-risk investments. They may look for annual returns of
25 to 30 percent on their overall investment portfolio.

Because these are usually high-risk business investments,

they want investments with expected returns of 50 percent
or more. Assuming that some business investments will
return 50 percent or more while others will fail, it is hoped
that the overall portfolio will return 25 to 30 percent.

More specifically, many venture capitalists subscribe to the

2-6-2 rule of thumb. This means that typically two
investments will yield high returns, six will yield moderate
returns (or just return their original investment), and two will
fail.

Angel Investors
Angel investors are individuals and businesses that are
interested in helping small businesses survive and grow. So
their objective may be more than just focusing on economic
returns. Although angel investors often have somewhat of a
mission focus, they are still interested in profitability and
security for their investment. So they may still make many of
the same demands as a venture capitalist.

Angel investors may be interested in the economic

development of a specific geographic area in which they are
located. Angel investors may focus on earlier stage financing
and smaller financing amounts than venture capitalists.

Government Grants
Federal and state governments often have financial
assistance in the form of grants and/or tax credits for start-
up or expanding businesses.

Equity Offerings
In this situation, the business sells stock directly to the
public. Depending on the circumstances, equity offerings can
raise substantial amounts of funds. The structure of the
offering can take many forms and requires careful oversight
by the companys legal representative.

Initial Public Offerings

Initial Public Offerings (IPOs) are used when companies have
profitable operations, management stability, and strong
demand for their products or services. This generally doesnt
happen until companies have been in business for several
years. To get to this point, they usually will raise funds
privately one or more times.

Warrants
Warrants are a special type of instrument used for long-term
financing. They are useful for start-up companies to
encourage investment by minimizing downside risk while
providing upside potential. For example, warrants can be
issued to management in a start-up company as part of the
reimbursement package.

A warrant is a security that grants the owner of the warrant

the right to buy stock in the issuing company at a pre-
determined (exercise) price at a future date (before a
specified expiration date). Its value is the relationship of the
market price of the stock to the purchase price (warrant
price) of the stock. If the market price of the stock rises
above the warrant price, the holder can exercise the warrant.
This involves purchasing the stock at the warrant price. So,
in this situation, the warrant provides the opportunity to
purchase the stock at a price below current market price.

If the current market price of the stock is below the warrant

price, the warrant is worthless because exercising the
warrant would be the same as buying the stock at a price
higher than the current market price. So, the warrant is left
to expire. Generally warrants contain a specific date at which
they expire if not exercised by that date.

Debt Financing
Debt financing involves borrowing funds from creditors with
the stipulation of repaying the borrowed funds plus interest
at a specified future time. For the creditors (those lending
the funds to the business), the reward for providing the debt
financing is the interest on the amount lent to the borrower.

Debt financing may be secured or unsecured. Secured debt

has collateral (a valuable asset which the lender can attach
to satisfy the loan in case of default by the borrower).
Conversely, unsecured debt does not have collateral and
places the lender in a less secure position relative to
repayment in case of default.

Debt financing (loans) may be short term or long term in

their repayment schedules. Generally, short-term debt is
used to finance current activities such as operations while
long-term debt is used to finance assets such as buildings
and equipment.

Friends and Relatives

Founders of start-up businesses may look to private sources
such as family and friends when starting a business. This
may be in the form of debt capital at a low interest rate.
However, if you borrow from relatives or friends, it should be
done with the same formality as if it were borrowed from a
commercial lender. This means creating and executing a
formal loan document that includes the amount borrowed,
the interest rate, specific repayment terms (based on the
projected cash flow of the start-up business), and collateral
in case of default.

Banks and Other Commercial Lenders

Banks and other commercial lenders are popular sources of
business financing. Most lenders require a solid business
plan, positive track record, and plenty of collateral. These
are usually hard to come by for a start- up business. Once
the business is underway and profit and loss statements,
cash flows budgets, and net worth statements are provided,
the company may be able to borrow additional funds.

Commercial Finance Companies

Commercial finance companies may be considered when the
business is unable to secure financing from other
commercial sources. These companies may be more willing
to rely on the quality of the collateral to repay the loan than
the track record or profit projections of your business. If the
business does not have substantial personal assets or
collateral, a commercial finance company may not be the
best place to secure financing. Also, the cost of finance
company money is usually higher than other commercial
lenders.

Government Programs
Federal, state, and local governments have programs
designed to assist the financing of new ventures and small
businesses. The assistance is often in the form of a
government guarantee of the repayment of a loan from a
conventional lender. The guarantee provides the lender
repayment assurance for a loan to a business that may have
limited assets available for collateral. The best known
sources are the Small Business Administration and the USDA
Rural Development programs.

Bonds
Bonds may be used to raise financing for a specific activity.
They are a special type of debt financing because the debt
instrument is issued by the company. Bonds are different
from other debt financing instruments because the company
specifies the interest rate and when the company will pay
back the principal (maturity date). Also, the company does
not have to make any payments on the principal (and may
not make any interest payments) until the specified maturity
date. The price paid for the bond at the time it is issued is
called its face value.

When a company issues a bond it guarantees to pay back

the principal (face value) plus interest. From a financing
perspective, issuing a bond offers the company the
opportunity to access financing without having to pay it back
until it has successfully applied the funds. The risk for the
investor is that the company will default or go bankrupt
before the maturity date. However, because bonds are a
debt instrument, they are ahead of equity holders for
company assets.

Lease
A lease is a method of obtaining the use of assets for the
business without using debt or equity financing. It is a legal
agreement between two parties that specifies the terms and
conditions for the rental use of a tangible resource such as a
building and equipment. Lease payments are often due
annually. The agreement is usually between the company
and a leasing or financing organization and not directly
between the company and the organization providing the
assets. When the lease ends, the asset is returned to the
owner, the lease is renewed, or the asset is purchased.
A lease may have an advantage because it does not tie up
funds from purchasing an asset. It is often compared to
purchasing an asset with debt financing where the debt
repayment is spread over a period of years. However, lease
payments often come at the beginning of the year where
debt payments come at the end of the year. So, the business
may have more time to generate funds for debt payments,
although a down payment is usually required at the
beginning of the loan period.