INNOVATION IN BANKING AND

INSURANCE
1

Presented by : Saurabh Shah

 TAAZA KHABAR

2
 UPDATES ON RATES

Particulars As on 4th Dec ,2009

Bank Rate 6%
Repo Rate 4.75%
Reverse Repo Rate 3.25%
CRR 5.00%
SLR 25%
INR/ 1USD 46.72
PLR 11% - 12%
Call Rates 2.10% - 3.30%
SENSEX 17,189.31(+64.09)
NIFTY 5134.65(+0.44%)
3
 CONTENTS
S.NO. Particulars Remarks

1 Evolution and Functioning of Banks Saurabh

Presentation /
2 Retail Banking
Saurabh
3 Financial Services Saurabh

4 Derivatives Saurabh

5 Credit Risk Saurabh

6 Technology in Banks and Housing Finance Drop

7 Definitions, Nature and Functions of Insurance Saurabh

8 Evolution of Insurance Saurabh

9 Life Insurance Presentation

4
10 Corporate Governance Saurabh
 SECTOR WISE DISTRIBUTION OF GDP
(in percent)

5
 DEFINITION - BANKING

Section 5 (1) (b) of Banking Regulation Act defines

“banking” as the accepting, for the purpose of lending
or investment, of deposits of money from public,
repayable on demand or otherwise and withdrawable
by cheque, draft, order or otherwise.

6
 INDIAN BANKING SYSTEM

Scheduled Banks Non-Scheduled Banks

Scheduled Scheduled Regional

Commercial Co-operative Rural
Banks Banks Banks

Public Private Foreign Scheduled

Sector Sector Banks in Urban Co-op.
Banks Banks India Banks
7
Scheduled
Nationalized SBI & its
State Co-op.
Banks Associates
Banks
 EARLY PHASE FROM 1786 TO 1949 OF
INDIAN BANKS : PHASE 1

The General Bank of India was set up in the year 1786

The East India Company established Bank of Bengal (1809),

Bank of Bombay (1840) and Bank of Madras (1843) as
independent units and called it Presidency Banks.

These three banks were amalgamated in 1920 and Imperial Bank

of India was established which started as private shareholders
banks

Imperial Bank acted as banker to government until the

establishment of RBI in 1935
8
 CONTD: PHASE 1

The Reserve Bank of India began operations as private
shareholders' entity on April 1, 1935, which makes it 74 years
old. It was nationalized on January 1, 1949.

To streamline the functioning and activities of commercial banks,

the Government of India came up with The Banking Companies
Act, 1949 which was later changed to Banking Regulation Act,
1949

Reserve Bank of India was vested with extensive powers for the
supervision of banking in India as the Central Banking
Authority.
9
NATIONALIZATION OF INDIAN BANKS AND UP TO
1991 PRIOR : PHASE 2

Imperial Bank was nationalized in under State Bank of India Act
1955 which led to the emergence of State Bank of India and marked
the beginning of first phase of nationalization

Seven banks forming subsidiary of State Bank of India was

nationalized in 1960

To extend banking facilities on a large scale specially in rural and
semi-urban areas.

To act as the principal agent of RBI

To handle banking transactions of the Union and State
Governments all over the country and to help to pursue broad
economic objectives
10
 CONTD..PHASE2

SBI along with its associate banks account for 20% of total
branches of all commercial banks in India

In1969, major process of nationalization was carried out. 14 major

commercial banks in the country were nationalized.

Second phase of nationalization was carried out in 1980 with six

more banks.

This step brought 80% of the banking segment in India under

Government ownership.
11
 NATIONALIZATION OF COMMERCIAL BANKS

On July 19, 1969, 14 commercial banks got nationalized

Objectives

Removal of control by a few

Provision of adequate credit for agriculture and small

industry and export

Giving a professional bent to management

Encouragement of a new class of entrepreneurs

The provision of adequate training as well as terms of service

for bank staff

12
 14 BANKS THAT WERE NATIONALIZED

Central Bank of India

Bank of Maharashtra

Dena Bank

Punjab National Bank

Syndicate Bank

Canara Bank

Indian Bank

Indian Overseas Bank

Bank of Baroda

Union Bank

Allahabad Bank

United Bank of India

UCO Bank

Bank of India

13
MAJOR MILESTONES IN BANKING HISTORY

1949 : Enactment of Banking Regulation Act

1955 : Nationalization of State Bank of India

1960 : Nationalization of SBI subsidiaries.

1969 : Nationalization of 14 major banks

1971 : Creation of credit guarantee corporation

1975 : Creation of regional rural banks.

1980 : Nationalization of six banks with deposits over 200 crore.

14
 NEW PHASE OF INDIAN BANKING SYSTEM
REFORMS AFTER 1991-PHASE3

This phase has introduced many more products and facilities in
the banking sector in its reforms measure

In 1991, under the chairmanship of M Narasimham, a

committee was set up by his name which worked for the
liberalization of banking practices

The country is flooded with foreign banks and their ATM

stations.

Efforts are being put to give a satisfactory service to customers

Phone banking and net banking is introduced. The entire

system became more convenient and swift.

15
 BANKING SECTOR REFORMS

Measures for liberalization, like dismantling the complex
system of interest rate controls, eliminating prior approval of
the Reserve Bank of India for large loans, and reducing the
statutory requirements to invest in government securities

Measures designed to increase financial soundness, like

introducing capital adequacy requirements and other
prudential norms for banks and strengthening banking
supervision

Measures for increasing competition like more liberal licensing

of private banks and freer expansion by foreign banks.
16
 TYPES OF BANKS
Commercial Banks

Commercial banks operating in India may be categorised into public
sector, private sector and Indian or foreign banks depending upon
the ownership, management and control.

They may also be differentiated as scheduled or non-scheduled,

licensed or unlicensed.

A commercial bank is run on commercial line that is to earn profits

unlike a cooperative bank which is run for the benefit of a group of
members of cooperative body e.g. a housing co-operative society.

The commercial banks are spread across the length and breadth of
the country ad cater to the short term needs of industry, trade and
commerce and agriculture unlike the developmental banks which 17
focus on long term needs.
FUNCTIONS OF COMMERCIAL BANKS

Primary Functions

Borrowing Lending

18
 TYPES OF LENDING

CASH
CREDIT

BILLS
OVERDRAFT
FINANCE

Lending

TERM RETAIL
FINANCE FINANCE

19
 SECONDARY FUNCTIONS
Agency Functions Utility Functions

Collection of Cheques
Issue of Letter of Credit

Periodic Payment
Issue of Travellers Cheque

Remittances
Cash Credit

Other Collections
Debit Card

ATM

E-Banking

Safe Deposit Vault

Credit Information

Bank Guarantee 20
 SCHEDULED BANKS

Scheduled Banks are those which are included in second
scheduled of Banking Regulation Act 1965, other are non
scheduled banks.

To be included in scheduled category a bank

(i) must have paid up capital and reserves of not less than Rs 5
lakhs

(ii) must also satisfy the RBI that its affairs are not conducted in
a manner detrimental to the interests of its depositors.

Scheduled banks are required to maintain a certain amount of

reserves with the RBI, the in return enjoy the facility of
financial accommodation and remittance facilities at21
concessional rates from the RBI
 FOREIGN BANKS

Foreign Commercial Banks are the branches in India of the
joint stock banks incorporated abroad.

Besides financing the foreign trade, they undertake banking

business within the country as well.

There are around 40 foreign banks in India. Standard

Chartered Grind lays is the bank with the largest branches in
India.

Foreign banks have brought latest technology and latest

banking practices in India. They have helped made Indian

Banking system more competitive and efficient.

22
 PRIVATE BANKS

Private Bank is a bank registered as a public limited company

under the Companies Act 1956.

The RBI may on merit grant a license under the Banking

regulation Act 1949 for such a bank.

The banks may also be included in Schedule II of the RBI at

the appropriate time.

While granting a license, preference may be given to those

banks the headquarters of which are proposed to be located in
a centre which does not have the headquarters of any other
bank.
23
 NON-SCHEDULED BANKS

Those banks which are not included in the second schedule of the
Banking Regulation Act 1965 are termed as non scheduled banks.

Usually they are small sized institutions which restrict their

activities to local areas.

Their paid up capital and reserves do not aggregate up to more

than Rs 5 lakhs.

Their banking activities are also limited e.g. they cannot deal in
foreign exchange.

The classification of Indian commercial banks into scheduled and

non scheduled banks had significance prior to nationalisation but
now almost all commercial unscheduled banks have been weeded24
out.
 REGIONAL RURAL BANKS(RRBS)

RRBs are established under the Regional Rural Bank Act 1976
having a minimum capital of Rs 5 crore in business of
(1)granting loans and advances, particularly to small and
marginal farmers and agricultural labourers, whether
individually or in groups, and to co-operative societies etc
(2)granting of loans and advances particularly to artisans,
small entrepreneurs and persons of small means engaged
in trade commerce or industry or other productive
activities

Of the issued capital 50% is subscribed by the central
government, 15% by the State Government and 35% by the
sponsor bank.

Apart from subscribing to the share capital, sponsor banks
also provide managerial assistance, help in recruitment and
training of personnel etc 25
 CO-OPERATIVE BANK

Co-operative Bank are only partial financial intermediaries
which are engaged in financing rural and agriculture
development.

Co-operative banking is small scale banking carried on a no

profit, no loss basis for mutual cooperation and help.

They were conceived to supplant money lenders and

indigenous bankers by providing adequate short term and long
term institutional credit at reasonable rates of interest.

26
 RESERVE BANK OF INDIA

The Reserve Bank of India began operations as private
shareholders' entity on April 1, 1935, which makes it 74 years
old. It was nationalized on January 1, 1949.

To streamline the functioning and activities of commercial

banks, the Government of India came up with The Banking
Companies Act, 1949 which was later changed to Banking
Regulation Act 1949.

Reserve Bank of India was vested with extensive powers for the
supervision of banking in India as the Central Banking

Authority.
27
 FUNCTIONS OF RBI
Monetary Authority :

Formulation and Implementation of monetary policies.

Objective-Maintaining price stability and ensuring adequate

flow of credit to the productive sectors.

Regulator and supervisor of the financial system

Issuer of Currency :

Issues and exchanges or destroys currency and coins not fit for
circulation.

Objective: to give the public adequate quantity of supplies of
currency notes and coins and in good quality.

Developmental role

Performs a wide range of promotional functions to support 28
national objectives.
 FUNCTIONS OF RBI
Regulator and supervisor of the financial system:

Prescribes broad parameters of banking operations within
which the country's banking and financial system functions

Objective - maintain public confidence in the system, protect
depositors' interest and provide cost-effective banking services
to the public.

Manager of Foreign Exchange

Manages the Foreign Exchange Management Act, 1999.

Objective - to facilitate external trade and payment and

promote orderly development and maintenance of foreign
exchange market in India.

Due to free mobility of capital, there is inter linkage between
domestic and international financial markets.
29
 FUNCTIONS OF RBI
Banker to the government :

RBI performs merchant-banking function for the central and the
state governments, also acts as their banker.

It accepts money in deposit, permits withdrawal of cash by
cheque, receives/collects payments to the Governments and
transfers funds to various places in the country for the use of the
Govt.

Borrows on behalf of the Governments.

Banker to banks :

RBI maintains banking accounts of all scheduled banks.

The Reserve Bank of India acts as the bankers' bank.

All the SCBs have to necessarily maintain their Current

Accounts with the RBI for maintaining CRR as well as for
smooth functioning of Clearing House functions. RBI also lends 30
to the banks through Repos transactions with them.
 DEPOSIT ACCOUNT

This is a core activity of the bank.

Public deposits comprise the major proportion of a bank

working funds which are used primarily to make loans and
advances and to purchase securities.

The size of deposit is a fair reflection of the confidence,

reposed by the public in that bank.

The growth and propensity of a bank depends on how they

are managed to maximize profits.

Banks accept various types of deposits, which are generally

categorized as demand or time deposits
31
 SAVING ACCOUNT

Such accounts are usually maintained by people who wish to
save a part of the current income to meet the future needs and
also to earn some interest thereon.

The banker pays interest against these accounts to the
customers though at a lower rate than in case of fixed deposits.

Normally, the minimum amount to open an account in a
nationalized bank is Rs 100.

If cheque books are also issued, the minimum balance of Rs 500
has to be maintained. However in some private or foreign bank
the min.bal.is Rs 500 or more and can be up Rs. 10,000.

A Savings account can be opened either individually or jointly
with another individual.

There are restrictions on the number of withdrawals to be made 32

out.
 CURRENT ACCOUNT

Such accounts are opened by business man/ corporate who do
not want any restriction on the operation of their account and
also wants to enjoy the available overdraft facility.

It is running and active account and the banker is under

obligation to repay these deposits only when the customer
demands payment through a cheque, card, otherwise.

As this accounts is a running account, this account does not

provide any interest and provides no limit on the number of
withdrawals from this account.

A min. of Rs. 5000 has to be maintained in this account.
33
 AXIS BANK NORMAL CURRENT
ACCOUNT ( AS ON AUG 2008)

At a Monthly Average balance of Rs 10,000 this account takes you
into the all new world of banking.

At-Par Cheque Facility

Enjoy the benefits of payable 'At-Par' cheque book at very nominal

charges. Issue cheques payable at par at any of our branches /
outlets, presently 575 across the country.

Inter Branch Cash Deposit Facility

Deposit cash upto Rs. 50,000 per day at a remote branch for
instant credit into your account.

Home Branch Cash Withdrawal 34

Free upto 50 transactions for unlimited amount per month.

 AXIS BANK NORMAL CURRENT
ACCOUNT (AS ON AUG 2008)
Demand Drafts

Avail Demand Drafts at very nominal charges. You can issue

demand drafts at any of our branches / outlets, presently 575
and a wide network of correspondent bank locations.

Outstation Cheque Collection

Avail outstation cheques.

Local Cheque Deposit Facility

Deposit cheques at any Axis Bank branch and get the credit
into your account.
35
 RECURRING DEPOSIT ACCOUNT

In this account a certain fixed amount is to be deposited by
the account holder every month for a specified period of
time.

This account inculcates the habit of regular savings among

people.

The interest allowed on this account is more than savings

account but less than Fixed deposit account.

No withdrawals are allowed from this account till maturity.

36
 FIXED DEPOSIT ACCOUNT

In this account a fixed amount is deposited in a bank for a
specified period.

The objective of this account is to encourage people to

deposit surplus funds and earn higher rate of interest.

Banks pay maximum rate of interest on fixed deposit since

these amount can be reinvested by the banks at much higher
rate.

Banks provide loan facility to FD account holders to a

maximum limit of 90% of the FD amount @ 2% interest.

37
 DEMAT ACCOUNT

Dematerialization is the process by which physical

certificates of an investor are converted to an equivalent
number of securities in electronic form and credited to the
investor’s account with his Depository Participant (DP).

It is introduced by the commercial banks to keep the record

of the shareholdings of the customer regarding the opening
stock and the closing stock of the shares.

38
 FOREIGN DEPOSIT ACCOUNT

A bank normally offers the following foreign accounts

1. NRO Account (Non Resident Ordinary)

2. NRE Account (Non Resident External)

3. NRNR Account (Non-Resident Non Repartriable)

4. FCNR Account (Foreign Currency Non Resident)

39
 NRO ACCOUNT
(NON RESIDENT ORDINARY)

Indian national residing outside India (Other than Nepal &
Bhutan) for employment etc

Intention to stay outside for a indefinite period

Maintained in Savings, Current and Fixed Deposits Account in

India.

Funds in these accounts are non repatriable, cannot be

remitted abroad or transfer to NRE account

Interest on such deposits are taxable

40
 NRE ACCOUNT
(NON RESIDENT EXTERNAL)

Indian national residing outside India (Other than Nepal &
Bhutan) for employment etc

Deposits designated in rupees

Maintained in Savings, Current and Fixed Deposits account

in India

Intention to stay outside for a indefinite period

Funds in these accounts are repatriable

Interest on these account is tax free 41

 NRNR ACCOUNT
(NON-RESIDENT NON REPATRIABLE)

In this scheme accounts are to be opened in Indian Rupees

with the authorized dealers.

Authorized dealers are free to fix the maturity period of the

deposits between 6 months and 3 years.

Individual can withdraw their money at a premature stage.

On maturity the principal amount of deposit will not qualify

for repatriation outside at any time.

Interest accrued is allowed for repatriation.

42
 FCNR ACCOUNT
(FOREIGN CURRENCY NON RESIDENT)

Account in foreign currencies

Can be maintained by NRIs

Permitted to be maintained in Pound Sterling, USD,

Deutshe Mark and Japanese Yen

Fixed Deposits of 6 months and above and up to 3 years

Freely Repatriable

43
 BANKS BALANCE SHEET
AND PORTFOLIO MANAGEMENT

Liabilities of Bank

Share Capital

Reserve Funds

Deposits: Constitute 92% of total liabilities of all scheduled

commercial banks

Demand Deposits

Term Deposits

44
 OTHER LIABILITIES OF BANKS

Among other liabilities demand and time deposits from banks

amount to three to four percent of total liabilities and

Borrowing from other Banks amount to another one or Two

percent

Borrowings from RBI since 1960s till 1990 have varied between
2.49 and 5.69 percent. However at present they are negligible

Apart from RBI, Banks also use non-deposit resources such as

borrowings from NABARD, EXIM Bank and bill rediscounted
with Financial Institutions

45
 ASSETS

Cash in Hand and Balances with RBI

Investments

In government and other approved securities (SLR

Securities)

Non- SLR Securities( CP, Units of Mutual funds, shares and

debentures of PSUs) Private corporate sector.

Bank credit : Types of advances provided are loans, cash credit,

overdrafts, demand loans, purchase and discounting of
commercial bills and installment or hire-purchase credit.

46
 OFF BALANCE SHEET ACTIVITIES

Transactions not appearing on balance sheet are called off
balance sheet items.

In India the off balance sheet activities of commercial banks

include forward exchange contracts, loan commitments
guarantees such as Letter of credit whereby bank agrees to
pay a specified amount on presentation of evidence of default.

Banks’ interest in saving capital and avoiding reserve

requirements is one of the reason for the proliferation of
these activities.

47
 CHARGE

In lay man’s term charge simply means individual legal claim.
Creditors have first charge, second charge ,pari-passu charge
depending upon encumbrance.

Mortgage Hypothecation

Modes of
Charge

Lien Pledge 48
 MORTGAGE

This refers to create a charge over immovable property like
Land & Building as a collateral(security).

As per sec 58 of the transfer property act 1882 defines

mortgage as “ transfer of an interest in specific immovable
property for the purpose of securing money.

The transferor is called mortgagor the transferee is called

mortgagee.

Mortgage deed is the written legal document signed between

both parties by which transfer is affected.

49
 HYPOTHECATION

Hypothecation is another method of creating charge over movable
assets like current assets(e.g. book debts, raw material )

This method of lending is used by the banks for the purpose of

working capital requirement.

Neither possession nor ownership of the goods is transferred to the

creditor but equitable charge is created at later stage.

The goods remains in the possession of the borrower.

The charge of hypothecation is converted into pledge and the

banker or hypothecator enjoys the power and the rights of the
pledge
50
 LIEN

Lien means to keep or retain the goods belonging to others as a
security for the recovery of the reward.

There are 2 types of Lien

• Particular Lien – available against specific goods and not

all goods.

• General Lien – available against all the goods whether

present or past.

As per sec 171,Indian contract bankers are given right of the

general lien on the banker.

The ownership of the goods is with customer and not with the
banker. 51
 PLEDGE

Goods delivered to another as a security for money borrowed is
called “ Pledge”

It is one type of Bailment. Bailor in this case called the

“ Pledgor” and the Bailee is called “ Pledgee”

Illustration – A borrows Rs. 4000 against security of his

jewellery. The bailment of jewellery is a pledge.

Pledge can be affected only of movable property and there is

only transfer of possession and not that of ownership.

52
 EVOLUTION OF BANCASSURANCE

Insurance Regulatory and Development Authority (IRDA)
Act,1999 permitted commercial banks to enter into Insurance
business.

RBI has issued certain guidelines in this context such as :

• Min net worth of Rs 500 crores

• Satisfy the criteria for capital adequacy, profitability, NPA

level

• Maximum equity holding by banks normally 50% in Joint

venture with risk participation

Banks not eligible for JV can participate without risk

participation up to 10% of net worth or Rs 50 crore whichever is53
lower.
 EVOLUTION OF BANCASSURANCE

In India Banking and Insurance sector are regulated by 2
different entities RBI and IRDA.

IRDA has also issued certain guidelines :

• Each bank that sells insurance must have chief insurance

executive to handle all the insurance activities.

• All the people involved in selling should undergo mandatory

training and institute accredited by IRDA.

• Commercial banks, including cooperative banks and RRBs

may become corporate agents for one insurance company.

• Banks cannot become insurance brokers.

54
 MEANING

FINANCIAL
INTERMEDIARIES

BANKING INSURANCE

BANCASSURANCE

55
Selling Insurance Products through Banks
 TIE-UPS IN BANCASSURANCE

INSURANCE BANKS

HDFC Standard Life Insurance Co. UNION Bank of India.

Birla Sun Life Insurance HDFC Bank, Deutsche Bank etc.

ICICI Prudential Life Insurance Co. ICICI Bank, Citibank, etc

Life Insurance Corporation (LIC) Centurion Bank, Oriental Bank of

Commerce, etc

SBI Insurance Co State Bank of India, Associate Bank 56

 ADVANTAGES TO BANKS

Increased income to banks in form of revenue.

Infrastructure Costs. a) Distribution cost

b) Operation Cost

Creating a Universal Banking platform with wider Financial

Services.

57
ADVANTAGES TO INSURANCE COMPANIES

Channel diversification (revenue).

Infrastructure and Administrative costs

Achieve the geographical reach within minimum time &

cost.

Wider range of products.

58
 ADVANTAGES TO CUSTOMERS

One-stop Shop.

Convenience.

Easy tracking of insurance products along with banking

services.

59
Currently India
contributes 10% of the
total premium
collected across the
whole Asia’s Life and
Non-Life Insurance
sector.

At it is expected to
contribute around 18%
by 2010.

60
QUIZ !!!!!

61
 FACTS OF BANKS IN INDIA

1) The first bank in India to be given an ISO Certification

Canara Bank

2) The first bank in Northern India to get ISO 9002

certification for their selected branches
Punjab and Sind Bank

62
3) The first Indian bank to have been started solely with
Indian capital
Punjab National Bank

4) India's oldest, largest and most successful commercial

bank, offering the widest possible range of domestic,
international and NRI products and services, through
its vast network in India and overseas.
State Bank of India

63
5) India's second largest private sector bank and is now the
largest scheduled commercial bank in India
The Federal Bank Limited

6) Bank which started as private shareholders banks,

mostly Europeans shareholders.
Imperial Bank of India

64
 DERIVATIVES

In recent years, financial markets have developed many new
products whose popularity has become phenomenal.

Derivative products initially emerged, as hedging devices

against fluctuations in commodity prices.

A derivative is an instrument whose value depends on

the values of one or more basic underlying variables
called bases. The underlying variables are forex, equity,
commodity, bonds, debentures etc.

Illustration : Wheat farmers may wish to sell their harvest at

a future date to eliminate the risk of a change in prices by that
date. The price of this derivative is driven by the spot price of 65
wheat which is the “underlying”.
 DERIVATIVES

In derivative market when enter into a contract to buy or
sell particular underlying:

Long position means to have a buy position for particular

stock

Short position means to have a sell position for particular

stock

Bid price (buyers price) is the rate/price at which there is a

ready buyer for the stock.

Ask price (sellers price) is the rate/ price at which there is

seller ready to sell his stock.
66
 TERMINOLOGIES RELATED TO FUTURES.

Spot price: the price at which an asset trades in the spot
market.

Futures price: the price at which the futures contract

trades in the futures market.

Initial margin: the amount that must be deposited in the

margin account at the time a futures contract is first
entered into is known as initial margin.

Maintenance margin: This is somewhat lower than the

initial margin. This is set to ensure that the balance in the
margin account never becomes negative. 67
TERMINOLOGIES RELATED TO FUTURES.

Marked-to-market (M to M): in the futures market,

at the end of each trading day, the margin account is
adjusted to reflect the investor’s gain or loss depending
upon the futures closing price. This is called marked-to-
market.

68
 OPTIONS TERMINOLOGY

Option price/premium: Option price is the price which

the option buyer pays to the option seller. It is also
referred to as the option premium.

Strike price: The price specified in the options contract is

known as the strike price or the exercise price.

69
 OPTIONS TERMINOLOGY

In-the-money option:

Spot price > Strike Price in case of call option.

Spot price < Strike Price in case of put option.

If exercised immediately it would lead to positive cash flow.

E.g.: Spot value of Nifty is 2157. An investor buys a one-
month nifty 2140 call option for a premium of Rs.7. the
option is?

Out-of-the-money option:

Spot price < Strike price in case of call option.

Spot price > Strike price in case of put option.

If exercised immediately it would lead to negative cash flow.

E.g.: Spot value of Nifty is 2140. An investor buys a one-
month nifty 2157 call option for a premium of Rs.7. the
option is? 70
 KINDS OF DERIVATIVES

Swaps Forwards Futures

Derivatives

71

Options
 FORWARD CONTRACT

A forward contract is a customized contract between two
entities, where settlement takes place on a specific date in the
future at today’s pre-agreed price.

No cash is exchanged when the contract is entered into.

Illustration

Shyam wants to buy a TV, which costs Rs 10,000 but he has no cash to
buy it outright.

He can only buy it 3 months hence. He, however, fears that prices of
televisions will rise 3 months from now.

So in order to protect himself from the rise in prices Shyam enters into
a contract with the TV dealer that 3 months from now he will buy the
TV for Rs 10,000.

What Shyam is doing is that he is locking the current price of a TV for a
forward contract. The forward contract is settled at maturity.
72

The dealer will deliver the asset to Shyam at the end of three months
and Shyam in turn will pay cash equivalent to the TV price on delivery.
 FEATURES OF FORWARD CONTRACT

They are bilateral contracts and hence exposed to counter–
party risk.

Each contract is custom designed, and hence is unique in

terms of contract size, expiration date and the asset type and
quality.

The contract price is generally not available in public domain.

On the expiration date, the contract has to be settled by

delivery of the asset.

If the party wishes to reverse the contract, it has to

compulsorily go to the same counter-party, which often
results in high prices being charged. 73
 FUTURES CONTRACT

A future contract is similar to Forward account.

A futures contract is an agreement between two parties to

buy or sell an asset at a certain time in the future at a
certain price.

Futures contracts are special types of forward contracts in

the sense that the former are standardized exchange-traded
contracts.

Index futures are all futures contracts where the underlying

is the stock index (Nifty or Sensex) and helps a trader to take
a view on the market as a whole.
74
 FEATURES OF FUTURES CONTRACT

The standardized items in a futures contract are:

Quantity of the underlying

Quality of the underlying

The date and the month of delivery

The units of price quotation and minimum price change

Location of settlement

75
 FORWARDS V/S FUTURES

Forwards Futures

Traded on organized stock

OTC in nature
exchange

Contract terms are customized Contract terms are standardized

Requires no margin payment Requires margin payment

Settlement happens at end of

Follows daily settlement
period
One delivery date which is
Range of delivery dates
specified

Some credit risk No credit risk

Counterparties have to take Clearing house takes the

exposure exposure on both the parties 76
 TYPES OF FUTURES
The different types of Futures are but different facets of the same
Futures.

Currencies

Commodities.

Interest Rates

Stocks

Index

77
 OPTIONS

‘Option’, as the word suggests, is a choice given to the
investor to either honor the contract; or if he chooses not to
walk away from the contract.

An option gives its owner the right but not the obligation to
purchase or sell an asset on or before some date in future.

The date when option expires is known as the exercise date,

the expiration date or the maturity date.

The price at which asset can be purchased or sold is known

as strike price.

78
 TYPES OF OPTIONS

Call Option is the right, but not the obligation, to buy the
underlying asset by a certain date for a certain price.

Put Option is the right, but not the obligation, to sell the
underlying asset by a certain date for a certain price.

American options: are options that can be exercised at any

time up-to the expiration date. Most exchange-traded options
are American.

European options: are options that can be exercised only

on the expiration date itself.
79
 SWAPS

SWAPS have been termed as private agreement between the two
parties to exchange cash flows or payments which will take place in
the future.

SWAPS is also called as financial swap in global financial market.

There are different types of swaps such as interest rate swaps,

currency swaps, equity swaps etc.

80
 FEATURES OF SWAP

A swap is nothing but the combination of Forwards, so it has
all the properties of forward contract.

It requires 2 parties with equal and opposite needs.

There is no exchange of principal on the other hand fixed

interest is exchanged for floating rate of interest.

Swaps are in the nature of long term agreement and they

are just like long dated forward contracts.

81
 DERIVATIVES AND BANKS

Derivatives are used by banks to hedge risks, to gain access
to cheaper money and to make profits.

Banks also help customers to cope with financial market

volatility by offering various derivatives security services
such as forward contract, swaps, options etc

These activities are off balance sheet activities for which

capital requirement is low.

82
 FINANCIAL SERVICES

Financial intermediaries provide key financial services such
as merchant banking, leasing, hire purchase, credit-rating,
and so on which indirectly deals with the management of
money.

Financial services rendered by the financial intermediaries

bridge the gap between lack of knowledge on the part of
investors and increasing sophistication of financial
instruments and markets.

These financial services are vital for creation of firms,

industrial expansion, and economic growth.
83
 CLASSIFICATION OF
FINANCIAL SERVICE INDUSTRY

Financial Service
Industry

Capital Market Money Market

Intermediaries Intermediaries
(Long term funds) (Short term funds)

84
 SCOPE OF FINANCIAL SERVICES
Financial services covers wide range of activities. They can be
broadly classified into:

1) Traditional activities –

Fund based activities

• Dealing in foreign exchange market activities
• Involving in equipment leasing ,hire purchase, venture
capital, seed capital etc
• Underwriting of or investment in shares, debentures, bonds
etc of New issue market.
• Dealing in secondary activities
• Participating in Money market instruments such as CPs,
CDs, T-bills etc
85
 SCOPE OF FINANCIAL SERVICES
Non Fund based activities
• This activity is also called as “ Fee based activity” e.g. After
sales service
• Project finance is arrangement of funds from FIs for the new
project or new venture. Funds are also arranged for working
capital requirements.
• Assisting in the procedural clearances from government.

• Management of pre and post issue of capital through IPO.

e.g. Moratorium period
2) Modern Activities
• Management of portfolio of large public sector organization

• Acting as trustees to Debenture holders

• Planning for Merger and Acquisitions

• Hedging of risk due to exchange risk, interest rate risk,

economic risk and political by using swaps and 86
derivative products.
 NEW FINANCIAL PRODUCTS AND
SERVICES
Merchant Banking

Only a body corporate other than a non-banking financial

company shall be eligible to get registration as merchant
banker.

Without holding a certificate of registration granted by the

Securities and Exchange Board of India, no person can act as
a merchant banker.

The validity period of certificate of registration is 3 years

from the date of issue.

87
 MERCHANT BANKING

Managing of public issue of capital such as determining the

type of securities to be issued

Draft of prospectus and application forms

Appointment of Registrar to deal with share application
and transfers

Listing of Securities

Arrangement of underwriting

Placing of issues

Selection of brokers and bankers to the issue

Publicity and advertising agent

Private Placement of Securities

88
 LOAN SYNDICATION

This is more or less “Consortium Banking”

Merchant bankers arrange to tie up loans for their clients.

This takes place in a series of steps. Firstly, they analyze the

pattern of the client’s cash flows, based on which the terms of
the borrowings can be defined.

Then the merchant banker prepares a detailed loan

memorandum, which is circulated to various banks and
financial institutions and they are invited to participate in the
syndicate ( joining together).

The banks then negotiate the terms of lending on the basis of

89
which the final allocation is done.
 MUTUAL FUND

The value associated with each of these units is known as (NAV).

Mutual fund issue securities known as units to the investors known as 90
unit holders in accordance with quantum of money invested by them.
 STRUCTURE OF MUTUAL FUND

Trustees are Investors are

legal owners beneficial owners

Mutual is a Trust
91
 WORKING OF MUTUAL FUND

Investors
Passed back to
Pool their money

Fund
Returns
Managers

Invest in
Generates
Securities 92
 TYPES OF MUTUAL FUNDS

Mutual Fund

Structure Investment

Close Open Growth Income Balance Index Money

Ended Ended Fund Fund Fund Funds Market

93
 OPEN ENDED SCHEMES

Accepts funds from investors on continuous basis.

Repurchase facility available.

No listing on the stock exchange.

Better liquidity due to continuous repurchase.

Sale and Repurchase based on NAV

94
 CLOSED ENDED SCHEMES

Schemes are opened for specified time period.

Corpus normally does not change throughout the year.

Such schemes are normally listed in the stock exchange.

Otherwise repurchase facility provided.

Liquidity normally at the time of redemption.

Long term investment strategies depending on the life of the

scheme.

Market price may be below or above par.

95
 GROWTH FUNDS

The aim of growth funds is to provide capital appreciation over
the medium to long- term.

Such schemes normally invest a major part of their corpus in

equities. Such funds have comparatively high risks.

These schemes provide different options to the investors like

dividend option, capital appreciation, etc. and the investors
may choose an option depending on their preferences.

The mutual funds also allow the investors to change the

options at a later date.

Growth schemes are good for investors having a long-term

outlook seeking appreciation over a period of time. 96
 INCOME FUNDS

These funds provide regular and steady income to
investors.

Such schemes generally invest in fixed income securities

such as bonds, corporate debentures and Government
securities.

Income Funds are ideal for capital stability and regular

income.

97
 BALANCE FUNDS

Balanced funds work particularly well during a downturn in
equity markets.

These funds invest both in equity shares and fixed-income-

bearing instruments (debt) in some proportion.

While selecting a balanced fund, choose the conventional type

60:40 (equity: debt) with a steady track record.

Make sure the fund manager sticks to the 60:40 mandates even
during bullish times, when most balanced fund managers
succumb to the temptation of over-allocation to equities for
higher growth.

They are ideal for medium to long-term investors who are 98
willing to take moderate risks.
 MONEY MARKET MUTUAL FUNDS

These mutual funds would invest exclusively in money

market instruments.

RBI introduced to provide an additional short- term avenue

for investment and bring money market within reach of
individuals.

99
 INDEX FUNDS

Index Funds replicate the portfolio of a particular index such

as the BSE Sensitive index, S&P NSE 50 index (Nifty), etc
these schemes invest in the securities in the same weight age
comprising of an index.

NAVs of such schemes would rise or fall in accordance with the

rise or fall in the index, though not exactly by the same
percentage.

There are also exchange traded index funds launched by the

mutual funds which are traded on the stock exchanges.

100
 ADVANTAGES OF MUTUAL FUNDS

Diversification

Mutual funds invest in a number of companies across a broad
cross-section of industries and sectors.

This diversification reduces the risk because seldom do all
stocks decline at the same time and in the same proportion

One achieves this diversification through a mutual fund with
far less money than you can do on your own.

Professional management

Mutual funds provide the services of experienced and skilled
professionals, backed by a dedicated investment research team
that analyses the performance and prospects of companies and
selects suitable investments to achieve the objectives of the
scheme.
101
 ADVANTAGES OF MUTUAL FUNDS
Return potential

Over a medium to long-term, mutual funds have the potential
funds to provide a higher return as they invest in a diversified
basket of selected securities.

Reduction in transaction cost

Mutual funds are a relatively less expensive way to invest as
compared to directly investing in the capital markets because
the benefits of scale in brokerage, custodial and other fees
translate into lower costs for investors.

Flexibility

Through features such as regular investment plans, regular
withdrawal plans and dividend reinvestment plans we can
systematically invest or withdraw funds according to our 102
needs and convenience.
 ADVANTAGES OF MUTUAL FUNDS
Choice of schemes

Mutual funds offer a family of schemes to suit our varying needs
over a life time.

Liquidity

In open-end schemes, the investor gets the money back promptly
at net asset value related prices from the mutual fund.

In the closed-end schemes, the units can be sold on a stock
exchange at the prevailing market price or the investor can avail
of the facility of direct repurchased at NAV related prices by the
mutual fund.

Well regulated

All mutual funds are registered SEBI and they function within
the provisions of strict regulations designed to protect the103
interests of investors.
 HIRE PURCHASE V/S LEASE

Lease Hire Purchase

Ownership It rest with lessor. It rest with buyer (hirer)

It is a method of financing business It is a method of financing business

Methods of Financing
assets. assets and consumer articles.

Lessee not the owner does not

Hirer the owner of the assets
Salvage value enjoy the salvage value of the
enjoys salvage value.
assets.

In this transaction we rent the In this transaction we buy the

Transaction
goods. goods.

Depreciation & investment

Depreciation & investment
allowances can be claimed by the
Depreciation allowances cannot be claimed by
hirer.
the lessee.

Only the interest component of 104

the
The entire lease rental is tax
Tax benefits hire purchase installment tax
deductible expense.
deductible
 VENTURE CAPITAL

Venture Capital is the early financing of new and

young enterprises seeking to grow rapidly.

It is the support by investors of entrepreneurial

talents with finance and business skills to exploit
market opportunities and to obtain capital gains
105
 CORPORATE GOVERNANCE
106
 WHY CORPORATE GOVERNANCE???

Corporate Governance and Responsibility issues

have come into limelight in India since 1990’s
because of major corporate debacles and scandals.

In nineties immediately after liberalization and

opening up of the economy there was a spate of
public issues by a large number of companies.

Corporate governance has become a “ buzz word”

these days mainly due to Globalization.
107
 WHAT IS CORPORATE GOVERNANCE???

The process and responsibility of the Board of

Directors in ensuring the management of a
corporation conducts business in such a way as to
meet the expectations of its various stakeholders

Besides financial returns for shareholders this also

includes impact on employees environment and
community at large.

According to Cadbury Committee “Corporate

Governance is a system by which Companies are
directed and controlled.” 108
 CONCEPT
Corporate governance calls for 3 factors:

Accountability

Transparency

Integrity

109
 DIFFERENCE

GOOD GREAT
COMPANY COMPANY

Excellent Products Excellent

& Products/services
Services &
Makes the world a better
place
110
 IMPORTANCE OF CORPORATE
GOVERNANCE

As we are increasingly moving towards open and market
driven economic systems, a number of companies catering to
international markets

These companies are required to comply with enhanced
disclosure and stringent listing requirements.

Institutional investors, both foreign and domestic are
becoming important players in the stock market.

They are increasingly demanding more information and
transparency in operations

No. of International events (like joint ventures, mergers,
takeovers) are taking place so it is required that proper
corporate governance practices should be followed.

E.g. Enron and Satyam scandal
111
 COMMITTEES OF THE BOARD

Audit committee – is the link between the Board and

External Auditors. It reviews the interim and final accounts.

Remuneration committee – It chalks out the remuneration

or the package of the Directors or top level managers.

Nomination committee – These Committee is usually set up

to select the new Non executive directors.

112
 DEFINITIONS, NATURE AND
FUNCTION OF INSURANCE
113
 INSURANCE

Insurance is defined as the equitable transfer of the risk of a
loss, from one entity to another, in exchange for a premium,
and can be thought of a guaranteed small loss to prevent a
large, possibly devastating large loss.

Insurance is………
is………
Pray for the Best
And be prepared for the WORST
114
 Insurance

Non Life
Life Insurance
Insurance

Traditional Unit Linked

Fire Insurance
Plans Plans (ULIPS)
Marine Insurance
Health Insurance
Other Insurance

115
 HISTORICAL BACKGROUND

Oriental Life Insurance Company was started by Europeans in Kolkata in
1818 to cater to the needs of European community.

Discrimination among the life of foreigners and Indians with higher

premiums being charged for the latter.

It was only in the year 1870, Bombay Mutual Life Assurance Society, the
first Indian insurance company covered Indian lives at normal rates.

The era was however dominated by foreign insurance players like Albert
Life Insurance, Royal Insurance, Liverpool and London Globe insurance.

The oldest existing insurance company in India is National Insurance

Company Ltd, which was founded in 1906 and is doing business even
116
today.
 RELATED ACTS

1. The Insurance Act, 1938

2. Life Insurance Corporation Act, 1956

3. General Insurance Business (Nationalization) Act, 1972

4. IRDA ACT, 1999

117
 ESSENTIAL OF CONTRACT OF
INSURANCE

Agreement should be between 2 competent parties

Agreement must be in writing and parties must give free

consent.

It should not be a bet and an event must involve some amount

of uncertainty.

Risk should be not very small and should be capable of

mathematical estimation to fix the premium.

118
 ROLES OF INSURANCE

Provide protection

Diversification of risk

Provide certainty

Prevention of losses

Means of saving & investment

Risk free trade

Large number of products

119
 RELATION

Economy growth

Assets of people and Standard of living of people

Business enterprise increase increases

Demand for Demand for

General insurance Life insurance
increases increases

Demand for new types of

insurance products increases 120
 PRINCIPLES OF INSURANCE
Principles of Utmost good faith -

o It states that insurance contract must be made in absolute

good faith on the part of both the parties.

o The insured must give insurer complete, true and correct

information about the subject matter of the insurance.

o Material fact should not be hidden. This principle is applicable

to all types of insurance contracts.

o Insurance is for protection and not for profit.

121
 PRINCIPLES OF INSURANCE
Principle of Insurable Interest –

o A person must have physical existence of the object of

insurance .

o In simple words insurer must suffer from some kind of

Financial loss by the damage to the subject matter of insurance.

o Ownership is the most important test of Insurable interest.

o Insurance contracts without insurable interest is void.

o Insurable interest is not a sentimental concept but a pecuniary

interest.

122
 PRINCIPLES OF INSURANCE

Principle of Indemnity –

This is one important principle of insurance.

This principle suggests that insurance contract is to protect and

not to earn profit.

Indemnity means security against loss.

The amount of compensation in the insurance contract is

limited to the amount assured or the actual loss whichever is
less.

Amount of compensation on the claim will be less than the

insurable interest.
123
 PRINCIPLES OF INSURANCE
Principle of Subrogation –

It is an extension and corollary of the principle of indemnity.

It states that once the full compensation is paid by the

insurance company all the rights of the insured is transferred to
the insurer.

The assured will not be able to keep the damaged property

because he will realize more than actual loss suffered.

This principle prevents the insured from making profit out of

loss.

In case of partial compensation paid no such rights are

exercised by the insurance company. 124
 PRINCIPLES OF INSURANCE
Principle of Contribution –

There is no restriction as to the number of times the property

can be insured.

On the occurrence of the loss only the amount of actual loss

can be realized from one insure or all the insurers together.

This principle is however is not applicable to life insurance

contract.

125
 PRINCIPLES OF INSURANCE
Mitigation Loss –

According to this principle every insured should take all the

necessary steps to minimize the loss.

Risk must attach –

The subject matter should be exposed to risk. E.g. goods

placed in godown cannot take marine insurance policy. They
have to be insured against fire or theft.

126
 PRINCIPLES OF INSURANCE
Causa Proxima –

It means when a loss has been caused by number of causes

the proximate cause i.e. nearest cause should be taken into
consideration to determine the liability of the insurer.

Liability of the insurer is ascertain through this clause.

Illustration – A cargo has hole in the ship due to negligence

of master so sea water entered the ship and cargo got
damage. In this case only nearest cause of damage through
sea water will be liable for insurance and nit the other.

127
WHAT DOES INSURANCE REALLY
COVER?

128
 HEALTH INSURANCE

129
 HEALTH INSURANCE

The term Health Insurance is generally used to describe a
form of insurance that pays for medical expenses.

It is sometimes used more broadly to include insurance

covering disability or long-term nursing or custodial care
needs.

It may be purchased on a group basis (e.g., by a firm to cover

its employees) or purchased by individual consumers).

Types Of Health Care Insurance Available:

• Medical Insurance

• Critical Illness Insurance

130
HOME INSURANCE

131
 HOME INSURANCE

Home Insurance is a standard insurance policy to insure
home and the things that are kept in it.

It is also called a package policy.

Which means it covers both, damage to your property and

liability or legal responsibility for any injury and property
damage you or any member of your family cause others.

132
 COMMERCIAL INSURANCE

Marine insurance

Fire insurance

Agriculture insurance

Shop insurance

133
 MARINE INSURANCE

It covers the loss or damage of goods at sea.

Marine insurance typically compensates the owner

of merchandise for losses sustained from fire,
shipwreck, etc.

134
 FIRE INSURANCE

Fire Insurance can avoid loss which can be generated from
any explosion at your business enterprise.

This fire must be a result of actual explosion and the

consequential loss must be proximately caused by such
explosion.

One can go for fire Insurance of a property even if he doesn’t

own the property.

He can insure the property if he holds a mortgage on the

property.

135
 CREDIT RISK
136
 CREDIT RISK

It is the risk of loss to the bank as a result of a default by the
borrower.

The amount of risk represented by the outstanding balance

and the date of default may differ from the ultimate loss in
the event of default because of potential recoveries.

Recoveries would depend upon any credit risk mitigators,

such as guarantees, either collateral or the third party
guarantees, the capabilities of negotiating with the borrower
and of funds available, if any, to repay the debt after
repayment of other who lenders who may have a priority
claim over the borrowers asset / funds. 137
 DEFAULT

The non payment of obligations (interest on principal),

breaking a covenant(formal agreement) or economic default.

The default events include a delay in repayments,

restructuring of borrower repayments, and bankruptcy.

Economic Default – It occurs when the economic value of

the assets goes below the value of outstanding debts i.e. value
of the collateral goes down against the loan amount.

In simple words it means that market value of the asset drops

below that of liabilities.

138
 DEFAULT PROBABILITY

Default risk is measured by the probability of

default occurring during a given period of time.

It depends upon the credit standing of a borrower.

Credit standing would depend upon factors such as

market outlook for the borrowing company, the size
of the company, its competitive factors, the quality of
management etc.

139
 EXPOSURE RISK

It is the risk generated by the uncertainty associated with
future amount at risk.

All the credit lines which there is a repayment schedule the
exposure risk can be considered as small or negligible.

Exposure risk arise with derivatives in which the source of
uncertainty is not the clients behavior but the market
movements.

The value of the derivatives depends upon the market
movements which changes constantly.

The credit risk continuous during the whole life in OTC
instruments.

The recoveries in the event of default are not predictable.

They depend upon the type of default and factors such as 140
guarantees, collateral etc.
 COLLATERAL RISK

The existence of collateral (security or asset given against
loan) minimizes credit risk if the collateral can be easily
taken possession and sold.

Collateralization is an increasingly common way to mitigate

the credit risk.

It reduces risk because if borrower does not pay the loan the
collateral would be confiscated as repayment for the loan.

If collateral is used the risk becomes two folds:

1. Uncertainty with respect to sell off or dispose off the

collateral
141
2. Uncertainty with respect to its value
 OPERATIONAL RISK

It is the potential risk of loss arising from inadequate or
failed internal processes, people and systems from external
events.

It also includes potential legal risk involving claims,
penalties and damages resulting from supervisory decisions.

When Operational risk arises :

1. Internal Fraud

2. External Fraud

3. Unfair employment practices

4. Clients and business practices

5. Ineffective Audit function – Satyam scandal

142
 EXAMINATION PAPER PATTERN
Q -1) a) 10 Marks
b) 5 Marks
- - - - - - - - - - - - - - - - - - - - - - - OR - - - - - - - - - - - - - - - - - - - - - - - - -
Q -1) a) 10 Marks
b) 5 Marks

Q -2) Mr. Avadesh 15 Marks

Q -3) Mr. Avadesh 15 Marks

Q-4) Short Notes (Any 3 out of 5) 15 Marks

143
Thank you

144