FINANCIAL SERVICES

Books to refer:
B santhanam
M Y kHAN

FINANACIAL SERVICES
FINANCIAL SYSTEM
It deals abt various financial institutions, with their financial services, financial markets which
enable individual ,business & government concerns to raise finance and various instruments
issued in the financial markets for the purpose of raising financial resources. Basically a financial
system constitutes the following
1 financial institution consist of various banking & non banking institutions which mobilize the
savings through financial markets by using various fin instruments & in the process utilizes the
services of financial service providers
2 financial markets consist of capital market (primary market & secondary market) ,money market
(mainly deals with short term funds, which includes org & un org sectors)), foreign exchange
market ( includes authorized dealers, money changers, foreign banks, importers & exporters), govt
securities (includes treasury bills & bonds)
3 financial instruments includes both product & instruments .Products represents credit cards &
debit cards were as instruments include Negotiable instruments, commercial papers bill of lading,
LOC, travelers cheques
4 financial services-it provides different types of finance through various credit instruments,
financial products & services

Evolution of Financial services in India

The stage of Infancy existed btw 1960-1980
-merchant bankers providing a wide range of services, starting from project appraisal to
arranging funds
-investment cos such as the UTI,LIC,GIC made their mark in the first stage of financial
services
-leasing made its mark in the closing years of the 1970s
Modern financial services -during later part of the 1980s
-OTC, share transfer, pledging of shares, mutual funds, factoring, discounting, VC,credit
rating etc.
The third Flush in financial services includes setting up of new institution & paving the
way for innovating new instruments & also their flotation
-Setting up of depositories will promote the concept of paperless trading & will result in to
dematerialization of shares
-on line trading
-the creation of SEBI can be hailed a a path breaking development in terms of
regulation, growth of development of FS
-permission to foreign financial institutions to operate in capital mkt
-public enterprises disinvestment create pressure on the FS firm to gain expertise in
valuation,financial,finanacial & legal restructuring ,& taking the public sector firms in
commercial & capital mkt

-FS firms are now scouting for funds abroad to finance the Indian corporate
sector
-Securitization
-Setting up of derivative mkt.

Importance of financial services

-promoting investment
-promoting savings
-minimizing the risk
-maximizing the returns
-ensures greater yield
-economic growth
-economic development
-benefit to govt
-expands activities of financial institutions
-capital market
-promotion of domestic & foreign trade
-balanced regional development
Scope of FS- FS offered are mainly 2 types
-Fee based- merchant banking, broking services, credit rating, MF, portfolio
mgt services, underwriting
-fund based factoring,leasing,hire purchases, housing finance, bill
discounting, VC , etc

Fund based services

Hire purchase- a hire purchase agreement is defined as a peculiar kind of transaction in which the
goods are let on hire with an option to the hirer to purchase them with the following stipulations
-payment to be made in installments over a specified period
-the possession is delivered to the hirer at the time of entering in to the contract
-the property in the goods passes to the hirer on payment of the last installment
-each installment is treated as hire charges so that if default is made in payment of any
installment the seller becomes entitled to take away the goods &
-the hirer is free to return the goods with out being required to pay any further installments falling
due after the return.
PARTIES TO THE HIRE PURCHASE
-SELLER
-HIRER/PURCHASER
-FINANCIER
Hire purchase Vs installment
Call option the buyer is able to purchase the good at any time during the term of agreement in HP
Right of termination buyer has the right to terminate the agreement at any time b4 the payment of
the last installment while In installment the buyer is committed to pay the full amt
Ownership of the product -in HP the ownership passes only when the last installment amt is paid or
when the buyer exercises the option to purchase /on payment of the last installment while in
installment ownership passes with the payment of first installment amt to the buyer.

Leasing Vs HP
-ownerships with the lessor. lessee only uses the asset
-depreciation-lessor records the depreciation in his book while in HP the hirer records
the depreciation
-magnitude of funds -leasing cost of acquisition very high products involved are air craft,
ships air conditioning plants & so on .While in HP relatively low cost equipments
being offered like automobiles ,office equipments, generators etc.
-extent-leasing no down payment is to be made.Whlie in HP a margin equal to20-25% of
the cost of the equipment is to paid by the hirer initially which would be returned back
once the last installment is been made by the hirer
-maintenance-of equipment to be borne by the hirer itself. In Financial lease-to be
borne by the lesse were as in operating lease it is to be borne by the lessor.
-tax benefits- hirer is allowed to charge depreciation claim & finance charge. seller is
allowed to claim any interest on borrowed fund for the acquisition of asset against
taxable income. while a lessor is allowed to claim depreciation & the lesse is allowed
to claim the rentals & the lessee is allowed to claim the rental & maintenance cost
against taxable income.

Leasing is a contract where by the owner of an asset (lessor) grants to another

party ( lessee) the exclusive right to use the asset, usually for an agreed
period of time, in return for the payment of a rent.
-the doesnt own the equipment & hence he cannot claim depreciation & investment
allowance
-however lease rentals could be written off a eligible expenditure from profits for IT
purposes
Types of leasing
-sale & lease back- suppose a sale of ship take place btw a ship builder & shipping
company which is having a fleet of ships. The ship builder who was the seller ,now
takes the ship back frm the shipping company on a lease As a lessor it give the
same to an oil company for transporting oil. Her the oil company becomes the
lessee. This is called sale & lease back.
Financial lease- In fl the ownership is ultimately transferred to the lesse at the end of the
lease period. When the total lease amt is paid including the profit for the lessor is
been realized.
Operating lease- An equipment is purchased & provided on lease to the lesseee for
use .The lessee has the option to cancel the contract & at the same time .the lessor
has the option to sell the asset to any other person. The cost of the equipment is not
fully recovered by the lease rentals & the lease period is normally shorter than the
economic life o f the asset. Ownership of the asset is not transferred to the lessee
like the FL

Reasons for leasing

S T leasing is convenient, shifting the risk of tech obsolescence, maintenance provided,
tax shields can be used the lessor deducts the depreciation frm taxable income.
Lesse is able to save considerable amount of capital which otherwise will be locked

up in the asset.
Other types of leasing
-leveraged & non leveraged-

The value of the asset leased may be of huge

amount which may not be possible for the lessor to finance. So, the lessor involves one more
financier who will have a charge on the leased asset

-conveyance type lease here the lease will be fir a longer period with a clear
intention of conveying the ownership of the title of the lease

-specialized service lease here the lessor is a specialist of the asset which
he s leasing out. He not only leases out but also gives specialized personalized
service to the lessee goods include electronic goods, automobiles, air conditioners
etc.

-Net & non net lease net lease

lessor is not concerned with maintenance expenditure.

While in non net lease lessor is concerned with maintenance ,insurance, & other incidental
expenses.

-Sales aid lease- in which the lessor enters in to any tie up

arrangement with manufacturer for the marketing is called sales aid lease

-Cross border lease- lease across national frontiers are called cross
borer lease .Shipping, air service, etc will come under this category

-Tax oriented lease were the lease is not a loan on security but
qualifies as a lease, it will come under this category.

-Import lease here the equipment leased will be more or less imported but
the lessor or lessee may belong to same country.

-International lease almost same as cross border lease

Tax benefits
The lesse can claim lease rentals as tax deductible expenses
The lease rentals received by the lessor are tax deductible under the head profit & gains
of business.

Housing finance
Structure of housing finance industry
housing finance
Formal sec

informal sector
household savings disposal of existing properties borrowing frm friends
relatives & money lenders

Govt
Central st

banking
pub authorities

com co other

non banking
NBFCs Housing fin cos NBHF cos
LIC/GIC

specialized insti
HDFC

Advantages of housing finance

-employment for large masses
-industries such a cement brick manufacturing, sanitary products ,electrical
fitting, glass industries, experience more demand
-rural housing develops not only rural areas but prevents migration of labor to
urban areas
-the creation of more houses results in building up more infrastructure facilities
such as road ,electricity generation, drinking water facilities, etc.
-factories & industrial establishment creates town ships by providing more
housing facilities to their employees. This reduces congestion in urban area.

NHB national housing bank is the principal housing fin agency in the country It came in
to exixtence in tn1987
Functions performed by NHB

Growth of
housing finance

control of housing finance

institution

institution
-registration
-net owned fund
-period of funds
-celing on deposits
-formats for application foprm
-receipts to deposit
-register of deposits
-report of board of directors
-interest & brokerage

funding of housing
finance institution

-investment in liquid asset

-maintenance of
accounts &
auditors report
-sending of
periodical returns
-advertisements
Funding of housing finance institution
Financial conditions to be fulfilled by housing financial institutions are
share capital, contribute to their share capital, refinance,activty norm, lending
norm with regard to target group, rates of interests & other charges, ceiling
on administrative cost, quarterly returns

Some of the major housing financial institutions in India

- HDFC- Housing development finance corporation (1977)
-HUDCO-Housing and urban development corporation(1970)
HDFC
MAIN OBJECTIVES
-TO INCREASE THE # OF RESIDENTIAL HOUSES IN THE COUNTRY BY PROVIDING
HOUSING FINANCE IN A SYSTEMEATIC & PROFFESSIONAL MANNER
-to promote home ownership
-To increase the flow of funds to housing sector
-strengthening housing finance by improving domestic financial mkt & fs
-developing close relationship with individual households ie providing direct housings
loans to individuals
-to maintain its position as the premier housing finance institution in the country
-to transform various idea in to viable & creative solutions that is building houses on the
basis of cost, utility,& modernization.
-to provide consistently high returns to shareholders
Diversifying the activities to client base by entering in to mutual funds,leasing,commercial
banking, insurance etc.
-to align with national priorities & adopt flexible housing finance policy by providing more
houses to weaker sections of the society.

HUDCO
Objectives
-providing long term finance for construction of houses
-undertaking housing in Urban, rural, semi urban areas
-undertaking urban development programmes by way of sanitation,
water facilities etc.
-setting up satellite towns
-promoting building materials industries
-to promote state housing boards by contributing to the debentures &
bonds
-to promote city improvement Trusts, Cantonment boards & other
development authorities such as slum clearance boards
To promote housing facilities for lower income groups & economically
weaker sections EWS
-to co ordinate with other housing finance agencies such as co
operatives, insurance companies etc.

Housing finance by HUDCO

Though it does not directly finance individual borrowers, it provides refinance facility to
the state govt agencies such as
-state housing boards
-Rural housing boards
-Slum clearance boards
-Development authorities
-City improvement trust
-Municipal corporations
-Town panchayaths
-Primary co operative societies

The loans granted are repayable in a period of 10 to 15 years

INCOME CATEGORY
EWS
LIG
MIG
HIG

EXTENT OF FINANCING OF THE HOUSE

COST(%)
90
85
75
60

Factoring it is a specialized activity where by a firm converts its

receivables in to cash by selling them to a factoring organisation.The factor

assume the risk associated with the collection of receivables and in the
event of nonpayment by the cutomer/debtors,bears the risk of a bad debt
loss. There are three parties to factoring viz: (factor) financial institution,
business concern (client),& the customer who are the consumers of
goods. hence when a company assigns the B/R a factor undertakes the
whole activities wrt to the concerned debtor. At the time of sale the factor
pays 80% of of invoice to seller & balance amt is paid once the factor
realizes the amt from the customer & for this service they charge a
commission from the seller.
Types of factoring
Full factoring -here collection of debts & sales ledger maintenance are done by
the factor & factor undertakes the credit risk.
With recourse factoring -credit risk taken by the client
Without recourse- the factor will be bearing the risk in case of non realization of
money.
Maturity factoring -the factor makes payment only on the maturity of the bill or
at the end of the collection period to the supplier.

Advance factoring- the factor provides advance against uncollected debts at an

interest to the supplier /seller. Normally ,this may be 60% to 75% of the debt
amount.
Disclosed factoring- the name of the factor is disclosed in the invoice by he
supplier asking the buyer to make the payment to the factor.
Undisclosed factoring- the name of the factor is not disclosed The entire
realization is done in the name of the supplier but the control of all money
remains with the factor.
Export factoring- exporter is been provided with the finance by undertaking the
bills of the customer.
Import factoring in which the factor In the importing company undertakes to
collect & control funds due frm the importer.

Factoring in India
Some of the major factoring firms in India are
-SBI factors & commercial services LTD 1991
-Canara banks factor Ltd 1991
-Fair growth factors LTD 1992(Pvt Sector)
FORFIETIING
Forfeiting is a form of financing of receivables pertaining to international trade.
It denotes the purchase of trade bills/promissory notes by a bank/financial
institution without recourse to the seller. The purchase is in the form of
discounting the documents covering the entire risk of non payment in
collection. All risks & collection problems are fully the responsibility of the
purchaser ( forfeiter) who pays cash to seller by discounting the bills/notes.
The silent features of forfeiting are
-commercial contract btw exporter & importer
-deliver of goods frm exporter to importer
-cash payment by forfeiter to exporter
-presentation of bill by the forfeiter on maturity date to importers bank.
-Payment of bills by importers bank to forfeiter.

DIFEERENCE BTW FACTORING & FORFIETING

FACTORING
FORFIETING
St credit transaction
long term
Can be with or with out recourse
without recourse
Cost borne by the seller
borne by the forfeiter.
BILL DISCOUNTING
A TRADING B/E IS DISCOUTNED WITH THE BANK BY THE SELLER IN
order to realize fast cash. All the bills are with recourse that is if the drawee
or the buyer fails to pay the amt the liability of payment falls on to the buyer.
its a financial arrangement which is shot term in nature. The credit
worthiness of the drawer with the bank is responsible for the bill discount
facility.
According to section 5 of the Negotiable Instruments Act defines a bill as an
instrument in writing containing an unconditional order, signed by the
maker, directing certain person to pay certain some of money only to or to
order of certain person or the bearer of the instrument.

Advantages
To investors
-ST source of finance
-no tax at source is deducted since it is not a lending
-affordable discount rate
To banks
-certainty of payment
-profitability
-banks are able to sell these bills in the money market to even out their liquidity

Classification of B/E
On the basis of place
-Inland bill -parties to this bill are from the same country (trade bill/accommodation bill)
-foreign bill- parties to this bill is from different countries( trade bill)
On the basis of purpose
-Trade bill which arises out of genuine transaction
-Accommodation bill- is meant for raising funds amg parties & it is for the purpose of
discounting in the money market.
On the basis of documents accompanied with the bill
-D/A Bill-Documents against acceptance of bill. The exporter sends to the importer
along with the bill the following documents
-bill of lading
- consular invoice
-Certificate of origin
-Marie/air insurance policy
-Invoice
The above documents along wt the bill are sent to the importer for the acceptance

Soon after the importers acceptance the documents are handed over to the
importer by which the importer is enable to take delivery of goods. On the
date of maturity the importer will make the payment.
-D/P Bill documents against payment bill -the above mentioned documents
are handed over to the importer soon after the payment is made by the
importer

On the basis of parties/payee

Order bill- when a bill is payable to a specific person whose name is appearing
on the bill it is called an order bill
Bearer bill -is payable to any person who is in possession of the bill legally on
the date of maturity &to whom the payment will be made by the drawee

On the basis of time

-Time bill a bill payable after

a specific date/time s known as time bill

-demand bill a bill payable on demand is a demand bill.

Depositories is an organization which hold the

securities of a shareholder in electronic form at the request of the

shareholder.

Features of a depository

-take hold of all securities in the country listed in a particular stock exchange
-Speedy transaction & accuracy
-Security holders can sell & buy securities by which liquidity is brought to the securities
-blank transfers are avoided & holding of shares in benami names are avoided.
- It Registration & stamp charges For the sale of securities could be easily collected
by the govt which was evaded frm the previous system
- It promotes more activity in the capital market as trading in genuine shares is
ensured under this system.
- It avoids use of stationary & prevents delay in registration of transfer s
- Dividend & interest on securities are properly distributed through this system & in the
case of convertible debentures on the due date ,the securities are converted in to
the company shares.
- It also act as collateral security for raising of loans frm any financial institution.

Structure of depository system

The depository system
Central
depository

share registrar
transfer agent

clearing &
settlement
corporation

depository
participant

1Central depository- is an org with which all shares, belonging to the shareholder are kept & the

electronic system takes care of them.

2Share registrar share registrar s an authority who controls the issue of securities. Along with this
,the transfer agent arranges for the transfer of securities in the case of buying & selling of
securities.
3clearing & settlement corporation -this agency settles the transfer of funds btw the seller & the
buyer.
4Depository participants ( DP )-DP is a representative in the depository system on behalf of the
shareholder & he only intimates to the shareholder periodically the securities account held by the
customer. As per the SEBI guidelines, financial institutions, banks, stock brokers etc can be
depository participants. An id account number is given by the DP to every shareholder when
he/she open the account for demating the securities.

Procedure in Depositary system

-Notification

by stock exchange-the stock exchange concerned where the

shares are listed will come out with a notification for the dematting of the
shares
-dematting form-The share holder will obtain the dematerialization request form
from DP. This form will contain details abt the name of the company, folio
number & the distinctive number of the shares which are given for dematting
.The form will be signed by either the single owner if it is held so or by joint
owners when they are held jointly
-Registering of shares-When the DP hands over the securities to the
depository the securities will be sent to the share registrar who will register
the depository name & the particulars of shares. But b4 doing this the
ownership of the securities is verified with the co & hence this procedure
will take some time.
-Crediting the investor account. in the last stage ,the depositary will inform the
DP the details of shares registered in the name of the share holder
concerned .On the basis , the DP will send the statement of account, to the
customer shareholder

Shareholder opening a/c with

1
5

depository p
2

DP

Registrar & transfer agent

3 participant

Depository system in India

In order to introduce depository system in India govt introduced Depository Act
1996
-enabled BSE & NSE to set up their depositories
-NSE-National securities depository ltd(NSDL)1996
-BSE.Central depository services Ltd) CDSL1999
-the magnitude of transactions of NSDL could be judged by the volume of
transactions undertaken by the NSE
-which has gone up to more than 70000 per annum
-The total # of DP has increased to 125 & it has more than 1500 locations
through out India. There are more than 30 lakhs clients with DPs.
-compared to NSDL actives in CDSL is slightly on the lessor side which is
evident from he value of securities & the # of beneficiaries. The annual turn
over in BSE is around 65 000 crores.
-Rolling settlement was made possible with the help of depository system which
was first introduced by NSE.RS is nothing but the investors would receive
payment on the 5 th day aft3er a sale transaction. Were as it was possible
to make the payment on 12th or 8th day of transaction which is termed as
weekly settlement.

Weakness in Depository system

-increasing costs
-Regulations of SEBI over depository system has not been very effective
-depositories must be made compulsory for all companies, but it is held as an option for
some of the companies. Only when it is made compulsory there will be uniformity in
the transactions in stock market.
-Public Knowledge of Depository's still elementary stage which is evident frm the fact
that still one fourth of securities is yet to be demated.
-discrimination btw dematted & physical shares will effect transactions in the market this
has to be avoided.

Venture financing
-implies long term investment generally in high risk industrial projects with high
reward possibilities
-the investment may be btw start up & commencement of commercial
production
-expectation of higher gin motivates the investor to invest in the risky ventures
generally utilize new technology with higher probability of failure than
success
-defined as the organized financing of relatively new enterprise to achieve
substantial capital gains
-provides equity finance in relatively new companies, when it is too early to go
to the capital mkt.It can be loan /convertible debt the basic objective of VF is
to earn capital gain at the time of exit
-long term investment in growth oriented SMEs
-substantial degree of involvement of The VF with the promoters to provide
business/mgr skill
-VF involves high risk return spectrum
-involves the financing of SMEs through early stages of their development until
thy are established & are able to raise finance frm finance mkt.

Stages in VC Financing
early stage financing

Seed start up
capital
around

later stage financing

second
round

turn around stage financing

financial
turn around

Messanine
capital

bridge
capital

buy outs

MBO

MBI

mgt
turn

Early stage financing

-seed capital mainly provided for testing the product & examining the commercial
viability o f the product. It is more of a product development & all the finance required
at this stage is provided by VC
-Start up once the product is tested in the market & after being satisfied with its
acceptability by the market financing will be provided for further development of the
product. The start up could be classified in to 4
-a new high tech introduced by the entrepreneur
-a new business started by a well experienced & established entrepreneur
-new projects started by existing cos eg: retail business started by HLL
-a new company promoted by existing company here the vc finances for those cos which
have a first rated mgt which may have a second rated product

-Second round finance

The borrowing concern has successfully launched the product in the market
which is evident frm its acceptability. However the business has not become
commercially successful for want of some more finance so VC provides
more funds than at the initial stage.

Later stage financing

The business concern has now become

established but still is not able to go for a public issue of shares .At this stag
the VC institution will provide finance
Mezzanine capital- this finance is used by the borrowing concern for purchase
of plant & machinery, repayment of past debt, & entering new areas
Bridge capital- medium term finance ranging frm 1 to 3 years & used for the
growth of the business
Eg extending bridge loans for acquiring other firms
Buy outsMBO management buy outs-in this the VC is used for removing the external
control on the mgt of the company by acquiring all the shares & the voting
rights
MBI management buy in-in this funds are provided for an out side group to
buy an ongoing company

TURN AROUNDS
Financial turn around -with the financial assistance frm VC if a company is
able to improve its conditions financially it s called financial turn around
Mgt turn around -similarly when the mgt of the company makes a turn
around by becoming self dependent & is able ot face the challenge of the
business .it is called mgt turn around.

Exit Alternatives VC cos like to recover their investments once the venture
has a commercial run. various alternatives are
-initial public offerig
-Buy back of shares by the promoters
-Sale of enterprise to another company
-Sale to new investor

Importance of VC
-Promoting entrepreneurs
-promoting products
-encouraging customers
-bringing out latent talents
-promotion of exports
-catalyst
-more employment opportunities
-financial ability
-Technological growth
-Sick companies
-Development of backward areas
-Growth of economy

Origin of VC in India
-the concept of VC formalized after world war ii with the involvement of few
American wealthy family groups to invest their funds in new technology
providing high returns, growth & prosperity.
-R S Bhatt committee in 1972 highlighted the problems of new entrepreneurs &
technologist ,in setting up industries.
-1975 the concept of VC was introduced in India by IFCI
-1976 IDBI introduced seed capital scheme
-1986 ICICI launched VC scheme to encourage new techno crafts with
inherent high risk
-1989 UTI sponsored Venture capital unit scheme
ANZ Grind lays Bank in 1987 set up first pvt VC fund
-1989 Canbank VC fund
-1990 Gujrath VC Ltd
-1991 20 th Century capital corporation
-1994 SIDBI Venture Capital Fund
1995 Gujarat venture capital fund

Different types of VC in India

-VC promoted by development banks
-State level VF Cos
-Commercial banks promoted VC s
-Pvt sector VC Cos
-Foreign venture capital funds.

Insurance
Insurance is a contract btw 2 parties viz insured & the insurer. Insured is the
person who insures his life/property & the insurer is the company which
undertakes to compensate the loss incurred by the insured for a
consideration called premium .The contract of insurance is also called a
contract of indemnity except life insurance, as the insured is only
compensated & not allowed to earn any profit from the contract.
Functions
-insurance spreads risk
-helps to acquire property /assets
-Creates funds for investments

Characteristics/principles of Insurance
Insurable interest -A person can enter In to a contract of insurance only when he
has some insurable interest on the life /property which is insured. Insurable interest
basically means that non existence / any injury /damage caused to a property/life
should bring a loss or effects the life of that person which can be estimated in terms
of money.
Contract of uberrimae fidei /contract of utmost good faith .both the parties to
the contract ie; insured & the insurer should disclose all the factors associated with
the insurance contract. No disclosure of facts or declaration of false info will make
the contract void and null.
Indemnity The contact of insurance is a contract of indemnity .This means that the
insurer will compensate the insured to the extent of loss suffered by him .Marine fire
are contracts of indemnity as the insurer compensates him to the extent of loss
suffered by him Where as life is not a contract of indemnity but a contract of
Guarantee
Mitigation of loss Every party to the contract should take adequate steps to
minimize the loss
Causa proxima The cause for the accident should be a direct cause for which an
insurance is taken & it should not be a remote cause

 Subrogation means stepping in to those of another person When the

insurance company pays full compensation to the insured it takes over the
ownership of the goods insured & will enjoy complete right of taking
necessary legal action against the person who is responsible for the loss as
may be taken by the original owner of the goods.
Contribution-if the insured has undertaken insurance ith more than one
insurance company, then he cannot claim compensation frm every insu
com with which he has insured.Under the doctrie of contribution, when an
insu com compensates ,it will be indeminkfied by other insu co to the extent
of policy aken by the insured.The bsic concept of contribution is to ensure
that nobody enjoys profit but the loss is shared by various ins cos
according to the respectve policy amt.
Reinsurance-When an insurance company insures with another insurance
company it is termed as re insurance.Here the original insrer ge insured with
other insurance cos.

 Double insurance When the insured insures with more than one insurance
company it is called double insurance
Nomination In life insurance the insured will be nominating a person who
will be receiving the policy amt incase of the death of the insured. The
nomination can be altered.

Assignment- a policy can be assigned to a creditor as a security for the

loan obtained. Once a policy is assigned the nomination gets cancelled.
When an assignment take place the same is to be informed to the ins
company & in the case of the insured event the amt is handed over to the
creditor.

Types of insurance
Life insurance

Whole endowment

General insurance

marine

fire

vehicle

health

open voyage time mixed

specific valued floating avg
comprehensive third party

Life insurance
-not a contract of indemnity
-the event insured is sure to happen
-the payment is assured
-policies are issued for a much longer period
-can be surrendered
-both protection & investment
-doctrine of subrogation will not apply

Fire insurance
-indemnify the insured against the consequences of a fire or the loss o injury arising there
from during an agreed period & up to certain amt
-fire must be caused accidentally & not intentionally
-All general principles of insurance apply to fire insurance

Marine insurance
-to indemnify the insured against marine loses that is to say, the loses incidental to
marine adventure
-Two broad categories of marine,-cargo insurance, hull insurance

Types of life insurance policies

Whole life policy- A whole life policy is one were the policy amt is payable
only after the death of the policy holder to his nominees.
Endowment policy- is different from whole life a the premium is payable for
a certain period after which the policy amt is payable to policy holder if he
survives( maturity date)
Annuity-Premium is paid in regular installment over a certain period or the
premium may be paid in bulk that is in lump sum. When the insured reaches
a certain age, he policy amt will be payable either in monthly ,quarterly or
annual installment.

Types of Marine insurance policies

Open policy were the actual value of the policy is not mentioned & hence
is called unvalued policy. The value of the object is ascertained
subsequently at the time of claim. How ever the policy will have certain
minimum value to start with. This one is most popular with shipping
companies.
Voyage policy This policy taken for a particular voyage in which the route to
be followed has to be mentioned. IN case of any problem in the normal
route, there will be a deviation & in case an accident occurs during such
deviation, the insurance companies will not indeminify.Hence a deviation
clause should be incorporated in the policy.
Time policy -This policy is taken frm midnight of a particular date to some
other date which may cover months /year. These kinds of policies are
popular amg charter party agreement were the entire ship is given on hire to
some other party. Those who take ship on hire under charter party
agreement will insure it up to the period for which the hire exist.
Mixed policy it is a combo of time & voyage policies.
Comprehensive policy All types of risks arising frm the sea voyage is
covered under this policy.

Types of fire insurance policies

Specific policy in this the policy amt is clearly specified in case of total loss of
insured property. Even there is an under valuation of the policy it will not affect the
claim.
Valued policy The value of the goods is clearly mentioned & the nature of goods is
also mentioned. It will hold good irrespective of any change n the value of the goods
insured
Floating policy The policy is taken to cover a particular period & the value of goods
will be mentioned with changes in stock position. A single policy is taken ,covering
goods lying in different parts of the ciy /country. Hence its called floating policy
Average policy in this an avg is worked out btw the insured & insurer for bearing
the loss. In case of total loss, the entire claim amt will be given. For eg in the case of
a fire the value of goods destroyed may be more ,but the insured value may be less.
Hence, the insured & the insurer agree to share the loss on an avg basis.

Types of vehicle insurance

Comprehensive policy here the insured s not only insuring the vehicle ,
but also against injury death damage caused to any third party.
Third party policy under this policy oly damage to a third party is covered
Types of health insurance policies & other insurance policies
Employee state insurance is (ESI) a kind of insurance in which all the
employees in the organized sector are covered fr the risks arising out of
various kinds of occupational hazards For this reason both employer &
employee contribute to the ESI
Rural insurance In order to popularize insurance in rural India , the
regulatory authority for insurance IRDA has made it compulsory for the
insurance companies that a part of their business should cover rural areas
also.

 Fidelity guarantee insurance this policy s taken by the employer to safe

guard himself from the falsification, fraud or defalcation by the employee
Burglary insurance theft
Credit insurance loss arising out of non recovery of book debts is covered.

Important terminologies associated with

Life, Marine, & Fire insurance
Life insurance
Surrender value when insured is unable to pay

the premium & thereby

wants to discontinue the insurance contract, he may surrender the policy to
the insurer. For every policy there will be a minimum period for which the
policy must run for becoming eligible to claim surrender value.
Paid up value Even while discontinuing the policy, the policy holder
instead of getting back the money may allow the policy to continue till its
maturity date with out paying further premium. By paid up value, the
proportion of premium paid towards the policy amt will be taken & on the
date of maturity, the same proportion will be paid to the policy holder along
with interest.

 Double accident benefit policy-here the policy holder may take up

an insurance policy were in if the insured die prior to the maturity of the policy due to an
accident, then the policy amt payable to his dependents, whomsoever he has nominated will get
double the amt of the policy.

With profit & without profit policy

if an insurance policy is
taken which is with profit policy, the policy holder/his dependents in case of
his death will be given in addition to the policy amt profit earned by the
company frm investments made in different companies. The premium
payable for this policy is generally high. In case of with out profit policy no
profit will be accruing only the policy amt will be available to the policy holder
or his dependents.

Marine insurance
Warranty & conditions in marine policies under

warranty it is implied that certain conditions will be fulfilled. It could be expressed

/implied.

Sea worthiness- for a

voyage policy the ship must be sea worthy b4

undertaking any voyage. The ship must be in a condition to undertake not only he
voyage but also of withstanding any sea perils such as hurricanes, piracy etc.

Deviation if a ship deviates frm the normal route

with a different route any

damages occurred in that route will not be the liability of the insurer Unless & until the
deviations are justified due to following

-in order to save human life

-to save the vessel
-to minimize damage likely to be caused to the cargo
-to avoid any natural calamities.

Classification of Marine losses

Marine loss
Total loss

Actual

partial loss

constructive

particular avg

general avg

Total Loss
Actual total loss the ship along with cargo is totally destroyed & it is beyond
retrieval.
Constructive total loss -the damage caused to the ship /cargo may not be
total but the repair to be incurred either to the ship/cargo will go beyond the
actual cost of the ship/cargo. It is not worthy to undertake repair of either
ship /cargo
Partial Loss

Particular avg loss- the loss has to be borne by a particular interest such as eihther the
shipping company/particular cargo owner. If due to violence of sea certain cargo gets
damaged, it is to be borne by particular cargo owner.
General avg loss When the loss s suffered due o a general avg act it is termed the
same. For eg: When a ship is abt to sink due to excess weight in an effort to avoid
sinking, certain cargo on board may be thrown in to sea. This is called Jettisoning of
cargo. By doing so the interest of the majority of cargo owners is protected but at the
cost of few cargo owners In such a situation the loss suffered by the particular cargo
owner will be borne on a proportion by the other cargo owners whose interest have
been protected along with the insurance company.

Special clauses in Marine insurance Policy

Inchmaree clause -to cover risk that arises due to negligence of ship crew or due to
defective machinery such as hull /boiler etc.this clause should be incorporated.
FC & S Clause -Free from capture or seizure the insu company will not be liable for
the loss due to capture /seizure of the vessel
Suing & labouring clause- If the insured undertakes such acts by which the los
incurred is reduced, the expenses incurred towards such act can be recovered from
the insurer if this clause s inserted
FPA & F AA Clause- Free from particular avg clause & Free from all avg clause it
frees the insu com from paying the liability depending upon the respective clauses.
Excepted Peril Clause -certain risk may be exclude frm the coverage of insurance
such as risks frm pirates/pilferages at the port etc
Arbitration clause this clause provides an opportunity for the insurance company t&
the insured to settle their disputes through arbitration procedure.

 Salvage clause

-this provides the insurance co an opportunity to salvage materials frm

the damaged good/ships after indemnifying the insured.

Memorandum /N B( Nota bene) Clause -this clause is inserted in the policy

by isu co to inform the insured that certain percentage of loss is permissible in the
case of transporting cargo such s sugar ,hemp etc.These are likely to reduce in their
weight due to moisture in the air. The ins com will agree for compensating the loss
only when the percentage of loss suffered is much more than the normal loss
expected.
Collision/running down clause this clause will cover if ship collide with each
other Insertion of this clause will enable the insu com to compensate three fourth the
loss suffered by the insured.

Continuation clause renewal of time policy so that the insured get a

continuous insurance benefit from the insurance company but the insured
has to additional premium for the insertion of his clause
PPI Clause Policy proof of interest -generally a marine insurance policy

expects insurable interest at the time of accident & not at the time of commencement
of the policy. In the case of loss or damage to the ship, it is expected that the insured
must show proof of interest to te marine insu co .The insertion of this clause exempts
the insured from the proof of interest.

Fire insurance
-

Reinstatement/replacement
the insertion of this clause in a fire insurance
will make the insurance company compensate he insured by replacement
of the property destroyed or damaged
Cover note As the fire insurance are for a short period not exceeding 1 year there may
be delay in issuing policy. In such case a cover note will be issued by insurance
company till the policy is issued. The issue of cover note commences the insurance
contract & it covers the risk of fire.

Insurance Development & Regulatory Authority of India (IRDA) 1999

Controls all the insurance business in India. Until 1999 insurance services
were provided by LIC & GIC to provide better insurance cover to citizens
& also to augment the flow of long term source of financing infrastructure,
opened up the insurance sector in 1999 IRDA Act was enacted in 1999 .
Duties of IRDA
-regulates insurance companies
-Promotes insurance companies
-Ensures growth of insurance & re insurance companies.

Intermediaries
-insurance broker are persons licensed by IRDA who for remuneration arranges
contracts with insurance/reinsurance companies on behalf of his clients. There are 3
categories of insurance brokers
-Direct broker/insurance agents
-reinsurance broker he is a person who arranges reinsurance for direct
insurers with insurance/reinsurance companies.

-composite broker a combination of direct broker & reinsurance

broker that is he arranges insurance for clients with insurance companies
and / reinsurance

Insurance Agents
An insurance agent is a licensed agent with the IRDA who receives/agrees to
receive payment by way of commission/other remuneration in consideration
of his soliciting/procuring insurance business, including continuance,
renewal or revival of policies. An IRA would issue a license to act as an
insurance agent on payment of fee not exceeding Rs 250.
-pass SSLC or HSE
-attending practical training approved and notified by IRDA ( 3 to 4 weeks)
-pass the pre recruitment examination
-requisite knowledge to solicit & procure insurance business
-capable of providing the necessary service to policy holders
-should not be minor, unsound mind, not violate the code of conduct specified
by IRDA
-the license will be valid for 3 years
-an insurance agent is not eligible to be director of insurance company.

CODE OF CONDUCT WRT INSURANCE AGENTS

1Every agents should-identify himself and the insurance company of whom he is an insurance agent
-disclose his license to the prospect customer
-disseminate the requisite info in respect of the insu products on demand
-disclose the scale of commission in respect of insu products if asked
-indicate the premium to b e charged
-inform the prospect abt the acceptance or rejection of proposal
-render necessary assistance for settlement of claims
-advice with respect to nomination, assignment, change of address etc.
2 No insurance agent should:
-solicit /procure insurance without holding license
-Induce to omit any material information
-Induce to submit wrong information
-behave in a discourteous manner
-interfere with any proposal introduced by other insu agent
-offer different rates, advantages, terms & conditions other than offered by the
insurer

-demand or receive a share or proceedings frm the beneficiary under the

insurance contract.
-become or remain as a director of any insu co.
CLAIM PROCEDURE
Life insurance
-upon receiving claim process without delay, additional documents should be
raised with In 15 days of the receipt of claim
-claim should be paid or disputed within 30 days
-complete investigation if any at the earliest ,in any case not later than 6
months
- Interest to be paid for delayed payment
Gen insurance
-give notice to the insurer, surveyor has to be appointed with in 72 hrs
-surveyor should inform I writing the insured abt the delay if any
-rejection of a claim, if any, within a period of 30 days

Actuary
The person who determines rates & premiums and over all controller of
insurance company /insurer
- A highly skilled mathematician who is involved in all phases of insurance
co operations
- Actuary studies important statistical data on births ,deaths, marriages,
disease, employment, retirement & accident based on this info the actuary
determines the rates
- -calculates premium that will make the business profitable, enable the co to
compete effectively with other insures& allow the co to pay claims &
expenses
- -professional certification & passing examination by society of actuary
- -in property & liability insurance rates are based on cos past loss
experience & industry statistics
- Statistics on hurricane ,tornadoes, fires diseases, crime rates, trafiic
accidents & cost of living are carefully analyzed

Insurance Pricing
Rates must be high enough to pay all claims & earn a profit for the insurer
Regulatory objectives & business objectives
Regulatory objectives
-the rates charged should be high enough to pay all losses & expenses
-the rates should not be so high that policy holder are paying more than the
actual value of their protection
- Exposures that are similar with respect to loses & expenses should no be
charged substantially different rates
Business objectives
-simplicity
-stability rate should be stable over short periods so that consumer satisfaction
can be maintained
-responsiveness the rates should be responsive overtime to changing loss
exposures & changing economic conditions
-encouragement of loss control-rating systems provide a strong financial
incentive to the insured to engage in loss control

Basic Rating Methods for gen insurance

1 Judgment rating -means that each exposure is individually evaluated & the rate is
determined largely by judgment
-used when the loss exposures are so diverse that a class rate cannot be calculated or
when credible loss statistics are not available used In marine insurance
2 class rating- means that exposures with similar characteristics are placed in the
same underwriting class,& each is charged the same rate .Methods of determining
class rates
-Pure premium method= incurred losses & loss adjustment expenses
No of exposure units
Gross rate =Pure premium
1 Expense ratio
-Loss ratio =the actual loss ratio is compared with the expected loss ratio, & the rate is
adjusted accordingly
Rate change =A-E
Where A = actual loss ratio, E = expected loss
E
ratio

3 merit rating- class rates are adjusted upward /downward based on individual
loss experience
-Schedule rating - in which each exposure is individually rated, used In
commercial property insurance
-Experience rating- the class rates are adjusted upward /downward based on
past loss experience ,mainly used in workers compensation .
-Retrospective rating - a provisional premium is paid at the beginning of the
policy period ,at the end of the period, a final premium is calculated based
on actual losses that occur during the policy period used in physical
damaging ,burglary etc.

Rate making in Life insurance

Net single premium the present value of the future death benefit
-it is that amt ,which together with compound interest, will be sufficient to pay
death claims
-mortality & investment income are considered
-insu co expenses or the loading element are considered when the gross
premium is calculated

Characteristics of FS
-FS are customer oriented
-they are intangible in nature
-inseparability
-perishability
-People based service
-dynamism

Fee based services

Credit rating
-provides a relative ranking of credit quality of debt/finacial instruments or their
grading according to investment qualities
-an expression of an opinion through symbols abt credit quaality of the issuer
of securities or co with reference to a particular instrument.
-it doesnt amt to a recommendation
-provides risk evaluation
Doesnt indicate mkt risk/forecast future mkt price
Origin of credit rating-first CR was set up in New york in 1847
In India first CR agency Credit rating & information service of india ltd (CRISIL)
WAS SET UP IN 1987
-Investment information & CR agency of India Ltd (ICRA) 1994
-Credit Analysis & Research Ltd (CARE 1994
-Duff & Philps Credit rating P Ltd 1996 in asociation with NBFCs

Importance Of CR
-to the investors

*risk recognition
*fair assessment of issuers credibility
*info abt financial strength of issuer
*provides better choice amg available investment proposal
-To issuers
*wider investor base is exposed

*CR act as a mkt ing tool

*highly rated instruments may require lesser interest
*reputation & good will
Process of CR
issuer co appoints rating agency
Businaee analysis

fin analysis

funda analysis

mgt
analysis

Industry risk,
mkt position
Operation efficiency

a/c quality
earnings
cash flow

CAR
asset quality
liquidity
profitability

past track
regulation
objectives
philosophy
willingness to pay

regulatory&
competiive
analysis
impact of competition

Rating Symbols Of CRISIL

Debt category
Long term instrument

Debt instument
deb,bonds

Rating Symbols
AAA
AA
A

Remarks
highest safety
high safety
adequate

safety
BBB
safety

moderate

Financial Institutions
RBI
Mgt of RBI

Depts of RBI

Functions of RBI
Traditional functions
-issue of currency
- banker to govt
-bankers bank
-credit control measures
-Rbi act as lender of last resort
-exchange control
-clearing house
Promotional functions
-branch expansion policy
-industrial & agricultural finance
Protecting the interest of depositors & creditors
Supervisory Functions
-RBI guide the commercial banks & supervises their functions too.

COMMERCIAL & CO OPERATIVE BANK

Commercial banks
Primary functions
-Traditional functions of the bank accepting deposits, discounting of bills &
lending loans
Secondary functions include agency services & general utility services
Most modern functions of the bank-includes ATM,home banking,green
card,factoring,MF,Electronic clearing sysytem, ,gold /platinum card,ebanking,gold banking etc

Co operative banks