FM302-

MANAGEMENT OF
FINANCIAL
SERVICES
Mr.LALIT TANK
Asst. Professors, MBA Department,
Bhagawan Mahavir College of Management,
Surat
Email id: lalittank@gmail.com

FINANCE
 COURSE CONTENTS
Module No.1
Introduction to Indian Financial system
Reserve bank and financial system.
structure of banking and non-banking
companies.
Introduction to different markets- Capital,
Money, Primary, Secondary Markets.
Module No.2
Asset/Fund based financial services
Leasing, hire purchase
 Module No.3
Consumer credit, factoring and
forfeiting , Bill
discounting, Housing finance, Insurance
services, venture capital financing,
Mutual fund services
Module No.4
Merchant banking services :
all services related to issue management
Module No.5
Credit rating, Stock broking, depositories,
custodial services and short selling and
securities lending and borrowing
services, Credit cards.
 CHAPTER -1
INTRODUCTION TO
INDIAN FINANCIAL
SYSTEM
 INDIAN FINANCIAL
SYSTEM
The economic development of a nation is
reflected by the progress of the various
economic units, broadly classified into
corporate sector, government and
household sector. While performing their
activities these units will be placed in a
surplus/deficit/balanced budgetary
situations.
Constituents of a Financial
System
 Financial System
An institutional framework existing in a
country to enable financial transactions.
Three main parts
Financial assets (loans, deposits, bonds, equities,
etc.)
Financial institutions (banks, mutual funds,
insurance companies, etc.)
Financial markets (money market, capital market,
forex market, etc.)
Regulation is another aspect of the financial
system (RBI, SEBI, IRDA, FMC)
Financial assets/Instruments
Enable channelizing funds from surplus units to
deficit units
There are instruments for savers such as
deposits, equities, mutual fund units, etc.
There are instruments for borrowers such as
loans, overdrafts, etc.
Like businesses, governments too raise funds
through issuing of bonds, Treasury bills, etc.
Instruments like PPF, KVP, etc. are available to
savers who wish to lend money to the
government
 Financial Institutions
Includes institutions and mechanisms which
Affect generation of savings by the community
Mobilization of savings
Effective distribution of savings
Institutions are banks, insurance
companies, mutual funds- promote/
mobilize savings
Individual investors, industrial and trading
companies- borrowers
 Financial Markets
Money Market- for short-term funds
(less than a year)
Organised (Banks)
Unorganised (money lenders, chit funds,
etc.)

Capital Market- for long-term funds

Primary Issues Market
Stock Market
Bond Market
 Function of the Financial
System
Prevision of liquidity
liquidity refers to cash or money and other
assets which can be converted into cash
readily without loss of value and time.

Mobilization of savings
Weaknesses of India financial
system
Lack of co-ordination between
different financial institutions.
Monopolistic market structures
-LIC in life insurance
-UTI in mutual fund
Dominance of development banks in
industrial financing
Inactive and erratic capital market
Imprudent financial practice
Reserve Bank of India
(RBI)
 Establishment of RBI
The reserve bank of India was established on
April 1,1935 in accordance with the provisions
of the reserve bank of India Act, 1934.
The central office of the reserve bank was
initially in Calcutta but was permanently
moved to Mumbai in 1937. the central office
is where the governor sits and where policies
are formulated.
 Objectives of RBI
To maintain the internal value of the
nations currency.
To preserve the external value of the
currency
To secure reasonable price stability.
To promote economic growth with
rising levels of employment, out and
real income
 Functions of a RBI
Monetary policy functions
Currency issue and management
Maintaining value of currency
Anchor economic growth expectation
Monetary regulation and management
Regulation of interest rates
Financial sector regulation and supervision
Exchange management and control
Credit control
Liquidity management
Clearing and settlement
Development of financial market
Policy oriented research
Collection of data and publication of reports
Institution building
 Role of the Reserve Bank of
India
Banker to the government
Banker to the banks
Banks supervision
Monetary regulation and
management
Foreign exchange and management
Promotional functions
 Supervisory/regulatory
function of RBI
Licensing of banks
Approval of capital, reserves and liquid
assets of banks
Branch licensing policy
Inspection of banks
Control over management
Audit
Credit information service
Deposit insurance
Training and banking education
RBI ORGANISATION
STRUCTURE
 Introduction to
different Markets
Capital Market, Money
Market,
Primary Market, Secondary
Market
 Money Market
The market for dealing with financial
assets and sec. which have a maturity
period of up to one year.
RBI defines the money market as A
market for short term financial assets
that are close substitutes for money,
facilitates the exchange of money for
new financial claims in primary market
as also for financial claims, already
issued, in the secondary market
 Money Market Instruments
Money market instruments are those
which have maturity period of less
than one year.
The most active part of the money
market is the market for overnight call
and term money between banks and
institutions and repo transactions
Call money/repo are very short-term
money market products
 Money Market Instruments
Certificates of Deposit
Commercial Paper
Inter-bank participation certificates
Inter-bank term money
Treasury Bills
Bill rediscounting
Call/notice/term money
CBLO (Collateralized Borrowing and Lending
Obligation)
Market Repo
 Features of a money market
Market purely for short term funds or
financial assets
Its deals with financial assets having
maturity period up to one year.
it deals with those assets which can be
convert in to cash readily without loss and
mini transaction cost
Transaction have to be conducted without
the help of brokers
 Objectives of money
market
To provide a parking place to employ
short-term surplus
To provide room for overcoming short-
term deficits.
To enable the central bank to influence
and regulate liquidity in the economy
through its intervention in this market.
To provide reasonable access to the users
of short-term funds to meet requirements.
 Characteristics of a
Developed Money
Market
Highly organized banking system
Presence of a central bank
Availability of proper credit
instrument
Existence of sub-brokers
Sufficient resources
Existence of secondary markets
Demand and supply of funds
 Importance of Money
Market
Development of money market
Development of capital market
Smooth functioning of commercial
banks
Effective central bank control
Formulation of suitable monetary policy
Non-inflation source of finance to
government
 Composition of Money
Market
The money market consist of following
sub market.

Call money market

Commercial bills market
Acceptance market
Treasury bill market
 Call money market
The call money market refers to
the market for extremely short
period loans, say one day to fourteen
days.
These loans are repayable on
demand at the option of either the
lender or the borrower.
Advantages of call money
market
High liquidity
High profitability
Maintenance of statutory
reserve ration (SRR)
Safe and cheap
Assistance to central bank
operation
Drawbacks of call money
market
Uneven development

Lack of integration

Volatility in call money

rates
Commercial bills market or
discount Market
Definition
An instrument in writing
containing an unconditional order,
signed by the maker, directing a
certain person to pay a certain
sum of money only to ,or the
order of certain person or to the
bearer of the instrument.
 Types of bills
Many types of bills are in
circulation in a bill market
Demand bills are also called sight bills.
these bills are payable immediately as
soon as they are presented to the drawer
no time of payment is specified and hence
they are payable at sight.
Documentary bill
when bills have to be
accompanied by document of title to
goods like railway receipt, lorry receipt, bill
of lading etc.the bills are called doc.bills.
 Inland and foreign bills
inland bills are those drawn upon a person
resident in India and are payable in India.
foreign bills are drawn outside India and they
may be payable either in India or outside India.
Export bills and import bills
export bills are those drawn by Indian exporters
on imports outside India and importer bills are
drawn on Indian importers in India by exporters
outside India.
Indigenous bills
indigenous bills are those drawn and accepted
according to native custom or usage of trade.
Advantages of Commercial bills
market
Liquidity
Self-liquidating and negotiable
asset
Certainty of payment
Ideal investment
Simple legal remedy
High and quick yield
Easy central bank control
Drawbacks of Commercial bills
market
Absence of bill culture
Absence of rediscounting among banks
Stamps duty
Absence of secondary market
Difficulty in ascertaining genuine trade
bills
Limited foreign trade
Absence of acceptance service
Attitude of banks
 Treasury bill market
A treasury bill nothing but a
promissory note issued by the Govt. under
discount for a specified period stated
therein. the govt.promises to pay the
specified amount mentioned therein to the
bearer of the instrument on the due date.

T.B are issued only by the RBI on behalf

of the govt. TB are issued for meeting
temporary govt. deficits.
 Types of Treasury bill
There are two types of TB
ordinary treasury bills are issued to
the public and other financial
institution for meeting the short term
financial requirements of the central
govt.
ad hocs treasury are always issued
in favor of the RBI only.
 Importance of TB
Safety
Liquidity
Ideal short-term investment
Ideal fund management
Statutory liquidity
Source of sort term funds
Non-inflationary monetary tool
Hedging facility
Defects of TB
poor yield
absence of competitive bids
absence of active trading
 Commercial papers (CP)
A Cp Is an unsecured promissory note issued with a
fixed maturity by a company approved by RBI,
negotiable by endorsement and delivery, issued in
bearer form and issued at such discount on the face
value as may be determined by the issuing co.
Short-term borrowings by corporate, financial
institutions, primary dealers from the money market
Can be issued in the physical form (Usance
Promissory Note) or demat form
Introduced in 1990
When issued in physical form are negotiable by
endorsement and delivery and hence, highly flexible
Issued subject to minimum of Rs. 5 lacs and in the
multiple of Rs. 5 lacs after that
Maturity is 7 days to 1 year
Unsecured and backed by credit rating of the
issuing company
Issued at discount to the face value
 Certificate of deposit
CD are short term deposits instruments
issued by bank and financial institutions t
raise large sums of money.
Repo instrument.
Repurchase transaction the borrower
parts with securities to the lender with an
agreement to repurchase them at the end
of the fixed period at a specified price.
At the end of the period the borrower will
repurchase the securities at the
predetermined price.
 Capital Markets
What is Capital Market
It is an organized market mechanism for effective
and efficient transfer of money capital or financial
resources from the investing class to the entrepreneur
class in the private and public sector of the economy.
Capital market for long term funds.
The capital market provides long term debt and equity
finance for govt. and corporate.
Capital market facilitates the dispersion of business
ownership and reallocation of financial resources among
corporate and industries.
 Dimensions of capital
market
The capital market is directly responsible
for the following activities.
Mobilization or concentration of national
saving for economic development.
Mobilization and import of foreign capital
and foreign investment capital plus skill
to fill up the deficit in the required
financial resources to maintain the
expected rate of economic growth.
Productive utilization of resources
Directing the flow to funds of high yields
and also strive for balanced and
diversified industrialization.
 Capital market mechanism
Supply of Middlemen Demand
funds for funds

Capital
Individuals Individuals
Market Institution
Institution Stock exchange
s s
New issue
Governme Governme
market
nt nt
Finance and
Investors Entrepreneurs
investment
Borrowers corp. Buyers of
Lenders
Sellers of money Clearing house money capital
capital for long term or
permanent
 Capital Market Structure

Marketable Securities Non-Marketable

Securities
New Issues
Market
Govt. players Bank
securities original Deposits

Deposits
Corporate with
securities Stock Companie
market s
Loans and
intermediari advances
PSUs es
Bonds of banks
New Issues and FIs.
Market
UTI players for POC and
Mutual Issues deposits
Funds
 Special features of the Indian
capital market
Greater reliance on debt instrument as
against equity and in particular borrowing
from financial institution.
Issues of debenture, particularly convertible
debentures with automatic or compulsory
from conversion into equity without the
normal option given to investors.
Avoidance of underwriting by some cos.
Reduce.
Fast growth of mutual funds and subsidiaries
of banks for financial services.
Capital market instruments
Equity shares
Preference shares
Non-voting equity shares
Cumulative convertible preference
shares
Company fixed deposits
Debentures/ bonds
Global depository receipts
 Structure of Capital Markets
Primary Markets
When companies need financial resources
for its expansion, they borrow money
from investors through issue of securities.
Secondary Markets
The place where such securities are
traded by these investors is known as the
secondary market.

Securities issued Securities like Preference Shares and

a)Preference Shares Debentures cannot be traded in the
b)Equity Shares secondary market.
c)Debentures
Equity shares is issued by the under Equity shares are tradable through a
writers and merchant bankers on behalf private broker or a brokerage house.
of the company.
People who apply for these securities are: Securities that are traded are traded by
a)High networth individual the retail investors.
b)Retail investors
c)Employees
d)Financial Institutions
e)Mutual Fund Houses
f)Banks

One time activity by the company. Helps in mobilizing the funds for the
investors in the short run.
What is Commodity market
Commodity markets are markets where
raw or
primary products are exchanged.
It covers physical product (food,
metals, electricity)markets but not the
ways that services, including those of
governments, nor investment nor debt,
can be seen as a commodity.
 History of Commodity
Market
Modern Commodity Market have their roots in the
trading of agricultural products.
Wheat and corn, cattle and pigs, were widely
traded using standard instruments in the 19th
century in the United States.
Historically, in ancient times Sumerian use of sheep
or goats, or other peoples using pigs, rare
seashells, or
other items as commodity money, have traded
contracts in the delivery of such items, to render
trade
itself more smooth and predictable.
 Size of the Market
The trading of commodities includes physical
trading of food items, Energy and Metals, etc.
and trading of derivatives.
In the five years up to 2007, the value of
global
physical exports of commodities increased by
17% while the notional value outstanding of
commodity OTC derivatives increased
more than 500% and
commodity derivative trading on exchanges
more
than 200%.
 Agricultural contracts trading grew by
32% in 2007, energy 29% and
industrial metals by 30%.
Precious metals trading grew by 3%,
with higher volume in New York being
partially offset by declining volume in
Tokyo.
OTC trading accounts for the majority
of trading in gold and silver
 List of Traded Commodity
Agricultural (Grains, and Food and Fiber)
Livestock & Meat
Energy
Precious metals
Industrial metals
Precious Metal:- Gold, Platinum, Palladium,
Silver.
Industrial Metals:- Copper, Lead, Zinc, Tin,
Aluminium, Aluminium alloy, Nickel, Aluminium
alloy, Recycled steel.
 Commodity Exchanges
Abuja Securities and Commodities
Exchange
Bhatinda Om & Oil Exchange Bathinda
Brazilian Mercantile and Futures
Exchange
Chicago Board of Trade
Chicago Mercantile Exchange
Commodity Exchange Bratislava, JSC
Dalian Commodity Exchange
Dubai Mercantile Exchange
Intercontinental Exchange
 Recent trends in Commodity
Market
The 2008 global boom in commodity prices - for
everything from coal to corn was fueled by
heated
demand from the likes of China and India.

Speculation in forward markets.

Farmers are expected to face a sharp drop in crop
prices as a result of bad rainfall.
Other commodities, such as steel, are also
expected to
fall due to lower demand
 Assignment -1
Q-1 Write in detail about
Commodities market

LAST DATE OF SUBMISSION :

8/10/2010
LEASING
 Meaning of Leasing
Lease may be define as a contractual arrangement/
transaction in which a party owning an
asset/equipment provides the asset for use to
another /transfer the right to use the equipment to
the user over certain/ for an agreed period of time for
consideration in form of /in return for periodic payment
(rental) with or without a further payment (premium).

Lease is a contract whereby the owner of an asset

grants to another party the exclusive right to use the
asset usually for an agreed period of time in return for
the payment of rent.
 PARTIES IN LEASING
Leasing essentially involves the
divorce of ownership from the
economic use of an asset/equipment.
LESSOR: Lessor is the owner of the
asset that is being leased.
LESSEE: Lessee is the receiver of
the services of the asset under a
lease contact.
 Essential elements of
leasing
Parties to the contract
Asset : The asset, property or equipment to be
leased is the subject matter of a contract of
leasing finance.
Ownership separated from user:
Term of lease: lease term is the period for which
the lease agreement remains in operation.
Lease rentals: lease rental is the consideration
which the lessee pays to the Lessor for the lease
transaction.
Modes of terminating lease.
 Classification of Lease
1. Financial lease and operating lease
2. Sales and lease back and direct
lease
3. Single investor lease and leveraged
lease
4. Domestic lease and international
lease
1.Financial lease and operating
lease
In a finance lease the Lessor transfers to the lessee,
substantially all the risks and rewards incidental to
the ownership of the asset whether or not the title is
eventually transferred.
In such leases, the lessor is only a financier and is
usually not interested in the assets.
It is for this reason that the such lease are also
called as fully payout leases as they enable a
lessor to recover his investment in the lease and
derive a profit.
Assets included under such lease, are ships,
aircraft, railway wagons, lands, building heavy
machinery and so on.
 Features of finance lease
The lessee select the equipment according to his requirements, from
its manufacturer or dist.
The lessee negotiates and settles with the manfuct.or dist, the price,
the delivery schedule, installation, term of warranties, maintenance
and payment and so on.
The lessor purchases the equipment either directly from manfct. Or
dist. Or from the lessee after the equipment is delivered.
The lessor then leases out the equipment to lessee. The lessor retains
the ownership while lessee is allowed to use the equipment.
A finance lease provide a right or option, to purchase the equipment at
a future date. This practice is rarely found in India.
The lease is originally for a non-cancellable period is called the
primary lease period. The lease is subject to renewal for the
secondary lease period.
The lessee is entitled to exclusive and peaceful use of equipment.
 Operating lease
An operating lease is one which is not a
finance lease. In an operating lease, the
lessor does not transfer all the risks and
rewards incidental to the ownership of the
asset and the cost of the asset is not fully
amortised during the primary lease period.
The lessor provides services attached to
the leased asset, such as repair and
technical advice. for this reason it called
service lease
Features of operating lease
An O.L is generally for a period significantly
shorter than the economic life of the leased asset.
Lease period are shorter than expected life of the
asset, the lease rentals are not sufficient to totally
amortise the cost of the assets.
The lessor does not rely on the single lessee for
recovery of his investment.
O.L normally include maintenance clause
requiring the lessor to maintain the lease assets
and provide services such as insurance, support
staff, fuel etc.
Examples of operating lease
Providing mobile cranes with operators
Chartering of aircraft and ships,
including the provision of crew, fuel,
support service.
Hiring of computers with operators
Hiring a taxi for a particular travel,
which includes service of driver,
provision for maintenance, fuel, repairs.
 2.Sale and lease back and
direct lease
It is an indirect form of leasing
The owner of an equipment/asset sells it to a leasing co.
(lessor) which leases it back to the owner(lessee).
Example: this type of leasing is the sale and lease back
of safe deposits vaults by bank under which banks sell
them in their custody to a leasing co.at a market price
substantially higher than the book value. The leasing co.
turn offers these lockers on long term basis to the bank.
The bank sub-lease the lockers to its customers.
The lease back arrangement in sale and lease back
type of leasing can be in the form of finance lease or
operating.
 Direct lease
In direct lease, the lessee, and the owner of the equipment are
two different entities. A direct lease can be two types.
Bipartite:
1.Equipment supplier cum lessor.
2. Lessee such a type of lease is typically structured as an operating
lease with in-built facilities. like upgradition of equipment
(upgrade lease).addition to the original equipment configuration.
The lessor maintains the asset and if necessary, replace, it with a
similar equipment in working condition (swap lease).
Tripartite: such type of lease involves 3 different parties in the
lease agreement: equipment, supplier, lessor, lessee.
an innovative variant of tripartite lease is the sales-aid lease under
which the equipment supplier arranges for lease finance in various
form.
 3.Single investor lease and
leveraged lease.
Single investor lease there are only two
parties to the lease transaction, the lessor
and lessee. The leasing co.(lessor) funds the
entire investment by an appropriate mix of
debt and equity funds.
The debts raised by the leasing co. to finance
the asset are without recourse to the lessee.
That is in the case of default in servicing the
debt by the leasing co. the lender is not
entitled to payment from the lessee.
 Leveraged lease
There are three parties to the transaction
1. Lessor (equity investor)
2. Lender (loan participant)
3. Lessee.
Aleveraged leaseis aleasein which thelessorputs up some of the
money required to purchase theassetand borrows the rest from
alender. The lender is given a senior secured interest on the asset and
an assignment of the lease and lease payments. The lessee makes
payments to the lessor, who makes payments to the lender.
The term may also refer to a lease agreement wherein the lessor, by
borrowing funds from a lending institution, finances the purchase of the
asset being leased.
The lessor pays the lending institution back by way of the lease
payments received from the lessee. Under the loan agreement,
thelenderhas rights to the asset and the lease payments if the lessor
defaults.
 Domestic lease and
international lease
Domestic lease : a lease transaction
is classified as domestic if all parties
to the agreement, namely, equipment
supplier, lessor and the lessee, are
domiciled in the same country.
International lease: if the parties to
the lease transaction are domiciled in
different countries, it is knows as
international lease.
 Import lease : In an import lease, the lessor
and the lessee are domiciled in different same
country but the equipment supplier is located in
a different country. The lessor imports the asset
and leases it to the lessee.
Cross border lease: when the lessor and the
lessee are domiciled in different countries, the
lease is classified as cross-boarder lease. The
domicile of the supplier is immaterial.
The domestic and international leases are
differentiated on the basis of risk.
 Profile/structure of leasing
Major players can be categorized into 6 groups
Independent leasing cos.: a major part of their
income is derived from leasing. Some of them have
financial/technical collaboration with overseas
partners. They offer their services through direct
advertisement, personal contacts, lease brokers
including foreign banks and merchant banks.
Other finance cos:
Manufacturer- lessors:
Financial institutions:
In-house lessors
Commercial banks
Salient features of the lease
structures in India
By and large, the structured lease fall in
the category of finance lease. operating
lease is not very popular primarily
because of the virtual non-existence of
resale market for most of the used
equipments.
The lease agreements do not provide for
transfer of ownership to the lessee as
such transactions are classified as hire
purchase from the tax angle.
 The lease rentals are structured so as to recover
the entire investment cost during the primary
period.
The lease rentals are payable generally in
equated/level monthly instalments at the
beginning of every month.
Sale and lease back type of transactions are
rare. Most of the are direct lease.
By and large equipment leases are for capital
investment not exceeding Rs.100 lakh.
 Advantages of leasing
To the lessee.
1.Financing of capital goods.
2.Additional source of finance.
3.Less costly
4.Ownership preserved
5.Avoids conditionality
6.Flexibility in structuring of rentals
7.Simplicity
8.Tax benefits
9.Obsolescence risk is averted.
 Advantages to the lessor
Full security
Tax benefit
High profitability
Trading on equity
High growth potential
 Limitations of leasing
Restrictions on use of equipment
Limitations of financial lease
Loss of residual value
Consequences of default
Understatement of lessees asset
Double sales-tax
 Special provisions to leasing
contract/transactions.

Leasing as a bailment agreement

Liabilities of lessee (Bailee-whom the goods are
delivered)
-Reasonable care
-Not to make unauthorized use
-To return the goods
-Not to set up an adverse title
-To pay the lease rental
-To insure and repair the goods.
Liabilities of lessor (bailor-who delivers the goods):
-Delivery of goods
-Peaceful possession
-Fitness of goods
-To disclose all defects
 Remedies for Breach
Remedies to the lessor:
-Forfeiture
-Damages
-Repossession
Remedies to the lessee.
-Insurance of leased asset and claims necessity
-Risk insured
-Insurable interest
-claims (treatment of claim proceeds)
-sub-lease of leased asset right to sub lease
-effect of sub lease
-effect of termination of main lease
 Lease documentation and
agreement
Proposes and essential requirement
- The person executing the document
should have the legal capacity to do;
the doc. Should be in prescribed
format; properly stamped, witnessed,
and duly executed and stamped
should be registered with appropriate
authorities.
 Master lease and
supplemental lease
agreements
The lease agreement specifies the
legal rights and obligations of the
lessor and lessee. Usually a master
lease agreement is signed which
stipulates all the conditions that
govern the lease. It specify the all
the detail of equipment detail
credit limit rental profile other
details.
Clauses in lease agreement
Nature of the lease
Repairs and
Description of maintenance
equipment Alteration
Delivery and re- Peaceful possession
delivery Charges
Period Indemnity clause
Inspection
Lease rentals
Prohibition of sub
Use leasing
Title : ownership of Events of default and
equipment remedies
Applicable law