CU- SEM III -BCM112- Management of Financial Institutions and Services

finance company. But in leasing, the Ownership will pass on when the lessor has acquired enough money from the lessee, which is equivalent to the value of the goods or equipment. Hire Purchase agreement is more common with the consumer durable goods. But lease agreement is entered more among business concerns.  SALES TAX Sales tax is paid by the buyer on the total value of goods in a hire purchase. Sales tax depends on the actual value at the time of sale in leasing.  PAYMENT DEFAULTS Any default in payment of installment enables the seller / finance company to seize the goods from the purchaser / hirer. On the termination of lease agreement if it is a operating lease, the equipment is taken back by the lessor. In the case of financial lease, the equipment can be sold for a particular value to the lessee.  INTEREST RATES The interest rate charged on HP is on a flat rate which is distributed for the entire period of HP agreement and collected along with the principal amount on the equated monthly instalment basis. In leasing, Interest does not form a major part of lease agreement, but the lease charges will include interest also as a part of it.

11.5 SUMMARY  Lease financing is one of the important sources of medium- and long-term financing where the owner of an asset gives another person, the right to use that asset against periodical payments.  Lessor: Real owner of the asset, who can be an individual or firm. The lessor grants the right to use the asset, for a fixed consideration over the period of lease  Lessee: The one who legally acquires the right to use the asset or equipment on the payment of recurring rentals which are to be paid over the term of the lease  There are certain terms and conditions in the contract that exists between the parties, which are written in a legal document called as a lease agreement.  A lease contract can be classified on various characteristics in following categories: 1. Finance Lease and Operating Lease 2. Sales & Lease Back and Direct Lease 3. Single Investor and Leveraged Lease 4. Domestic and International Lease  A Finance lease is mainly an agreement for just financing the equipment/asset, through a lease agreement.  An operating lease is one in which the lessor does not transfer all risks and rewards incidental to the ownership of the asset and the cost of the asset is not fully amortized during the primary lease period.  In direct lease, the lessee and the owner of the equipment are two different entities. A direct lease can be of two types: Bipartite and Tripartite lease.  Single Investor Lease : This is a bipartite lease in which the lessor is solely responsible for financing part. The funds arranged by the lessor (financier) have no recourse to the lessee.

 Domestic Lease : A lease transaction is classified as domestic if all the parties to such agreement are domiciled in the same country.  Discharge of Contracts: A contract me by discharged in following ways – By performance, by frustration (impossibility of performance), by mutual agreement, by operation of law and by remission.  Indemnity: A contract of indemnity is one whereby a person promises to make good the loss caused to him by the conduct of the promisor himself or any third person.  Guarantee: A contract of guarantee is a contract, whether oral or written, to perform the promise or discharge the liability third person in case of his default.  Bailment: The provisions of the law of contract relating to bailment are specifically applicable to leasing contracts. 11.6 KEY WORDS/ABBREVIATIONS Lease Lessor Lessee Finance Lease Guarantee financing and Operating Lease Single Domestic Sales & Lease Bower-Herringer- Indemnity Investor and and Back and Williamson Leveraged Method International Direct Lease Lease Lease Bailment Indian Motor Present Value Cost of Stamp Act Vehicles Method Capital Method Act

11.7 LEARNING ACTIVITY Activity 1: Who are the parties involved in lease agreement? Activity 2: Visit two Finance companies of your choice and identify various items for which they provide lease financing. Activity 3: Which type of lease would be suitable for acquisition of the following assets or equipments? Justify. 11.8 UNIT END QUESTIONS (MCQ AND DESCRIPTIVE) A. Descriptive Types Questions 1. Define Lease Financing? 2. Explain in detail about the types of Lease. 3. Explain in detail about the Documentation and agreement process of different types of Lease? 4. Discuss the Merits and Demerits of Leasing? 5. Describe the evaluation methods of Leasing? 6. Define Hire Purchase? 7. Explain in details about the features and characteristics of Hire Purchase? 8. Describe the advantages and disadvantages of Hire Purchase? 9.Difference between Hire purchase and Leasing? 10. Mention two features of finance lease. B. Multiple Choice Questions

1. ____________ is one of the important sources of medium- and long-term financing. a. Lease Financing b. Hire Purchase c. Rental Financing d. All of the above. 2. Real owner of the asset, who can be an individual or firm a. Lessee b. Government c. Lessor d. None of the above 3. The one who legally acquires the right to use the asset or equipment on the payment of recurring rentals which are to be paid over the term of the lease. a. Lessee b. Government c. Lessor d. None of the above 4. __________is mainly an agreement for just financing the equipment/asset, through a lease agreement. a. Operating Lease b. Finance Lease c. Lessee d. Single Investor. 5. A direct lease can be of two types a. Finance lease and operating lease b. Direct lease and indirect lease c. Bipartite and Tripartite lease d. Single investor lease and Domestic Lease. 11.9 REFERENCES

Text Books: T1 Fabozzi - Foundations of Financial Markets and Institutions (Pearson Education,3rdEd.). T2 Khan M Y - Financial Services (Tata Mc Graw Hill). Reference Books: R1 Machiraju H R - Indian Financial System (Vikas Publication). R2 Bhole L M - Financial Institutions and Markets (Tata McGraw-Hill).

UNIT - 12: OTHER FINANCIAL SERVICES Structure 12.0. Learning Objectives 12.1. Introduction 12.2. Definition of Factoring and Its Types. 12.3. Process and Mechanism of Factoring. 12.4. Limitations of Factoring 12.5. Definition of Forfaiting and its salient features 12.6. Bill Counting and Its Importance. 12.7. Consumer Credit and its advantages and Disadvantages. 12.8. Plastic money and its salient features. 12.9. Advantages and Disadvantages of Plastic Money. 12.10. Summary 12.11. Key Words/Abbreviations 12.12. Learning Activity 12.13. Unit End Questions (MCQ and Descriptive) 12.14. References 12.0 LEARNING OBJECTIVES After studying this unit, students will be able to: • Describe the components of factoring and its types • Explain the process and mechanism of factoring. • Describe the limitations of factoring. • Describe the Forfaiting and its salient features. • Understand the process of Bill counting and its importance. • Explain the Consume credit process. • Understand the Plastic money and its features.

12.1 INTRODUCTION 12.1 Introduction Factoring is an arrangement under which the factor purchases the account receivables (arising out of credit sale of goods/services) and makes immediate cash payment to the supplier or creditor. Thus, it is an arrangement in which the account receivables of a firm (client) are purchased by a financial institution or banker. Thus, the factor provides finance to the client (supplier) in respect of account receivables. The factor undertakes the responsibility of collecting the account receivables. The financial institution (factor) undertakes the risk. For this type of service as well as for the interest, the factor charges a fee for the intervening period. This fee or charge is called factorage. Forfaiting: Forfaiting is a form of financing of receivables relating to international trade. It is a non-recourse purchase by a banker or any other financial institution of receivables arising from export of goods and services. The exporter surrenders his right to the forfaiter to receive future payment from the buyer to whom goods have been supplied. Forfaiting is a technique that helps the exporter sells his goods on credit and yet receives the cash well before the due date. In short, forfaiting is a technique by which a forfaitor (financing agency) discounts an export bill and pay ready cash to the exporter. The exporter need not bother about collection of export bill. He can just concentrate on export trade. Like securitization factoring also is a financial innovation. Factoring provides resources to finance receivables. It also facilitates the collection of receivables. The word factor is derived from the Latin word facere. It means to make or do or to get things done. Factoring simply refers to selling the receivables by a firm to another party. The buyer of the receivables is called the factor. Thus factoring refers to the agreement in which the receivables are sold by a firm (client) to the factor (financial intermediary). The factor can be a commercial bank or a finance company. When receivables are factored, the factor takes possession of the receivables and generally becomes responsible for its collection. It also undertakes administration of credit i.e. credit control, sales accounting etc. Thus factoring may be defined as selling the receivables of a firm at a discount to a financial organisation (factor). The cash from the sale of the receivables provides finance to the selling company (client). Out of the difference between the face value of the receivables and what the factor pays the selling company (i.e. discount), it meets its expenses (collection, accounting etc.).

The balance is the profit of the factor for the factoring services. 12.2 DEFINITION OF FACTORING AND ITS TYPES Factoring can take the form of either a factoring agreement or an assignment (pledging) agreement. The factoring agreement involves outright sale of the firm’s receivables to a finance company (factor) without recourse. According to this agreement the factor undertakes the receivables, the credit, the collection task, and the risk of bad debt. The firm selling its receivables (client) receives the value of the receivables minus a commission charge as compensation for the risks the factor assumes. Thereafter, customers make direct payments to the factor. In some cases receivables are sold to factor at a discount. In this case factor does not get commission. The discount is its commission. From this its expenses and losses (collection, bad debt etc.) are met. The balance represents the profit of the factor. In an assignment (pledging) agreement, the ownership of the receivables is not transferred; the receivables are given to a finance company (factor) with recourse. The factor advances some portion of the receivables value, generally in the range of 50 – 80%. The firm (client) is responsible for service charges and interest on the advance (due to the factor) and losses due to bad debts. According to this arrangement, customers make direct payment to the client. It should be noted that both factoring and securitisation provide financing source for receivables. In factoring, the financing source is the factor. But in securitisation, the public (investors) who buys the securities is the factoring source. Objectives of Factoring : Factoring is a method of converting receivables into cash. There are certain objectives of factoring. The important objectives are as follows: 1. To relieve from the trouble of collecting receivables so as to concentrate in sales and other major areas of business. 2. To minimize the risk of bad debts arising on account of non-realisation of credit sales. 3. To adopt better credit control policy.

4. To carry on business smoothly and not to rely on external sources to meet working capital requirements. 5.To get information about market, customers’ credit worthiness etc. so as to make necessary changes in the marketing policies or strategies. Types of Factoring : There are different types of factoring. These may be briefly discussed as follows: 1. Recourse Factoring: In this type of factoring, the factor only manages the receivables without taking any risk like bad debt etc. Full risk is borne by the firm (client) itself. 2. Non-Recourse Factoring: Here the firm gets total credit protection because complete risk of total receivables is borne by the factor. The client gets 100% cash against the invoices (arising out of credit sales by the client) even if bad debts occur. For the factoring service, the client pays a commission to the factor. This is also called full factoring. 3. Maturity Factoring: In this type of factoring, the factor does not pay any cash in advance. The factor pays clients only when he receives funds (collection of credit sales) from the customers or when the customers guarantee full payment. 4. Advance Factoring: Here the factor makes advance payment of about 80% of the invoice value to the client. 5. Invoice Discounting: Under this arrangement the factor gives advance to the client against receivables and collects interest (service charge) for the period extending from the date of advance to the date of collection. 6. Undisclosed Factoring: In this case the customers (debtors of the client) are not at all informed about the factoring agreement between the factor and the client. The factor performs all its usual factoring services in the name of the client or a sales company to which the client sells its book debts. Through this company the factor deals with the customers. This type of factoring is found in UK. 7. Cross boarder factoring: It is similar to domestic factoring except that there are four parties, viz,

a) Exporter, b) Export Factor, c) Import Factor, and d) Importer. It is also called two-factor system of factoring. Exporter (Client) enters into factoring arrangement with Export Factor in his country and assigns to him export receivables. Export Factor enters into arrangement with Import Factor and has arrangement for credit evaluation & collection of payment for an agreed fee. Notation is made on the invoice that importer has to make payment to the Import Factor. Import Factor collects payment and remits to Export Factor who passes on the proceeds to the Exporter after adjusting his advance, if any. Where foreign currency is involved, factor covers exchange risk also. 12.3 FACTORING – PROCESS AND ITS FUNCTION Process of Factoring (Factoring Mechanism): The firm (client) having book debts enters into an agreement with a factoring agency/institution. The client delivers all orders and invoices and the invoice copy (arising from the credit sales) to the factor. The factor pays around 80% of the invoice value (depends on the price of factoring agreement), as advance. The balance amount is paid when factor collects complete amount of money due from customers (client’s debtors). Against all these services, the factor charges some amounts as service charges. In certain cases the client sells its receivables at discount, say, 10%. This means the factor collects the full amount of receivables and pays 90% (in this case) of the receivables to the client. From the discount (10%), the factor meets its expenses and losses. The balance is the profit or service charge of the factor. Thus there are three parties to the factoring. They are the buyers of the goods (client’s debtors), the seller of the goods (client firm i.e. seller of receivables) and the factor. Factoring is a financial intermediary between the buyer and the seller. Features (Nature) of Factoring:

From the following essential features of factoring, we can understand its nature: 1. Factoring is a service of financial nature. It involves the conversion of credit bills into cash. Account receivables and other credit dues resulting from credit sales appear in the books of account as book credits. 2. The factor purchases the credit/receivables and collects them on the due date. Thus the risks associated with credit are assumed by the factor. 3. A factor is a financial institution. It may be a commercial bank or a finance company. It offers services relating to management and financing of debts arising out of credit sales. It acts as a financial intermediary between the buyer (client debtor) and the seller (client firm). 4. A factor specialises in handling and collecting receivables in an efficient manner. 5. Factor is responsible for sales accounting, debt collection, credit (credit monitoring), protection from bad debts and rendering of advisory services to its clients. 6. Factoring is a technique of receivables management. It is used to release funds tied up in receivables (credit given to customers) and to solve the problems relating to collection, delays and defaults of the receivables Functions of a Factor: Factor is a financial institution that specialises in buying accounts receivables from business firms. A factor performs some important functions. These may be discussed as follows: 1. Provision of finance: Receivables or book debts is the subject matter of factoring. A factor buys the book debts of his client. Generally a factor gives about 80% of the value of receivables as advance to the client. Thus the nonproductive and inactive current assets i.e. receivables are converted into productive and active assets i.e. cash. 2. Administration of sales ledger: The factor maintains the sales ledger of every client. When the credit sales take place, the firm prepares the invoice in two copies. One copy is sent to the customers. The other copy is sent to the factor. Entries are made in the ledger under open-item method. In this method each receipt is matched against the specific invoice. The customer’s account clearly shows the various open invoices outstanding on any given date. The factor also gives periodic reports to the client on the current status of his receivables and the amount received from customers. Thus the factor undertakes the responsibility of entire sales administration of the client.

3. Collection of receivables: The main function of a factor is to collect the credit or receivables on behalf of the client and to relieve him from all tensions/problems associated with the credit collection. This enables the client to concentrate on other important areas of business. This also helps the client to reduce cost of collection. 4. Protection against risk: If the debts are factored without resource, all risks relating to receivables (e.g., bad debts or defaults by customers) will be assumed by the factor. The factor relieves the client from the trouble of credit collection. It also advises the client on the creditworthiness of potential customers. In short, the factor protects the clients from risks such as defaults and bad debts. 5. Credit management: The factor in consultation with the client fixes credit limits for approved customers. Within these limits, the factor undertakes to buy all trade debts of the customer. Factor assesses the credit standing of the customer. This is done on the basis of information collected from credit relating reports, bank reports etc. In this way the factor advocates the best credit and collection policies suitable for the firm (client). In short, it helps the client in efficient credit management. 6. Advisory services: These services arise out of the close relationship between a factor and a client. The factor has better knowledge and wide experience in the field of finance. It is a specialised institution for managing account receivables. It possesses extensive credit information about customer’s creditworthiness and track record. With all these, a factor can provide various advisory services to the client. Besides, the factor helps the client in raising finance from banks/financial institutions. 12.3 LIMITATIONS OF FACTORING The main limitations of factoring are outlined as below: 1. Factoring may lead to over-confidence in the behaviour of the client. This results in overtrading or mismanagement. 2. There are chances of fraudulent acts on the part of the client. Invoicing against non- existent goods, duplicate invoicing etc. are some commonly found frauds. These would create problems to the factors. 3. Lack of professionalism and competence, resistance to change etc. are some of the

problems which have made factoring services unpopular. 4. Factoring is not suitable for small companies with lesser turnover, companies with speculative business, companies having large number of debtors for small amounts etc. 5. Factoring may impose constraints on the way to do business. For non - recourse fac–oring most factors will want to pre- approve customers. This may cause delays. Further ,the factor will apply credit limits to individual customers. 12.4 DEFINITION OF FORFAITING AND ITS SALIENT FEATURES Generally there is a delay in getting payment by the exporter from the importer. This makes it difficult for the exporter to expand his export business. However, for getting immediate payment, the concept of forfeiting shall come to the help of exporters. The concept of forfaiting was originally developed to help finance German exports to Eastern block countries. In fact, it evolved in Switzerland in mid 1960s. Meaning of Forfaiting : The term ‘forfait’ is a French world. It means ‘to surrender something’ or ‘give up one’s right’. Thus forfaiting means giving up the right of exporter to the forfaitor to receive payment in future from the importer. It is a method of trade financing that allows exporters to get immediate cash and relieve from all risks by selling their receivables (amount due from the importer) on a ‘without recource’ basis. This means that in case the importer makes a default the forfaitor cannot go back to the exporter to recover the money. Under forfaiting the exporter surrenders his right to a receivable due at a future date in exchange for immediate cash payment, at an agreed discount. Here the exporter passes to the forfaitor all risks and responsibilities in collecting the debt. The exporter is able to get 100% of the amount of the bill immediately. Thus he gets the benefit of cash sale. However, the forfaitor deducts the discount charges and he gives the balance amount to the exporter. The entire responsibility of recovering the amount from the importer is entrusted with the forfaitor.

The forfaitor may be a bank or any other financial institution. In short, the non- recourse purchase of receivables arising from an export of goods and services by a forfaitor is known as forfaiting. Forfaiting is not the same as international factoring. The tenure of forfaiting transaction is long. International factoring involves short term trade transactions. In case of forfaiting, political and transfer risks are also borne by the forfaitor. But in international factoring these risks are not borne by the factor. Characteristics of Forfaiting : The main characteristics of forfaiting are: 1. It is 100% financing without recourse to the exporter. 2. The importer’s obligation is normally supported by a local bank guarantee (i.e., ‘aval’). 3. Receivables are usually evidenced by bills of exchange, promissory notes or letters of credit. 4. Finance can be arranged on a fixed or floating rate basis. 5. Forfaiting is suitable for high value exports such as capital goods, consumer durables, vehicles, construction contracts, project exports etc. 6. Exporter receives cash upon presentation of necessary documents, shortly after shipment. 12.5 BILL DISCOUNTING ITS IMPORTANCE Bill discounting is book debt financing. This is done by commercial banks. Meaning of Bills Discounting : When goods are sold on credit, the receivables or book debts are created. The supplier or seller of goods draws a bill of exchange on the buyer or debtor for the invoice price of the goods sold on credit. It is drawn for a short period of 3 to 6 months. Sometimes it is drawn for 9 months. After drawing the bill, the seller hands over the bill to the buyer. The buyer accepts the same. This means he binds himself liable to pay the amount on the maturity of the bill. After accepting the bill, the buyer (drawee) gives the same to the seller (drawer). Now the bill is with the drawer. He has three alternatives. One is to retain the bill till the due date and present the bill to the drawee and receive the amount of the bill. This will affect the working capital position of the creditor. This is because he does not get immediate payment. The second alternative is to

endorse the bill to any creditors to settle the business obligation. The third or last alternative is to discount the bill with his banker. This means he need not wait till the due date. If he is in need of money, he can discount the bill with his banker. The banker deducts certain amount as discount charges from the amount of the bill and balance is credited in the customer’s (drawer’s or holders) account. Thus the bank provides immediate cash by discounting trade bills. In other words, the banker advances money on the security of bill of exchange. On the due date, the banker presents the bill to the drawee and receives payment. If the drawee does not make payment, the drawer has to make payment to the banker. Here the bank is the financier. It renders financial service. In short, discounting is a financial service. 12.6 CONSUMER CREDIT AND ITS ADVANTAGES AND DISADVANTAGES Consumer credit is personal debt taken on to purchase goods and services. A credit card is one form of consumer credit. Although any type of personal loan could be labelled consumer credit, the term is usually used to describe unsecured debt that is taken on to buy everyday goods and services. It is not usually used to describe the purchase of a house, for example, which is considered a long-term investment and is usually purchased with a secured mortgage loan. Consumer credit is also known as consumer debt. KEY TAKEAWAYS  Instalment credit is used for a specific purpose and is issued for a set period of time.  Revolving credit is an open-ended loan that may be used for any purchase.  The disadvantage of revolving credit is the cost to those who fail to pay off their entire balances every month and continue to accrue additional interest charges.  The average American had a credit card balance of $6,200 in 2019, according to Experian.

UNDERSTANDING CONSUMER CREDIT Consumer credit is extended by banks, retailers, and others to enable consumers to purchase goods immediately and pay off the cost over time with interest. It is broadly divided into two classifications: instalment credit and revolving credit. Instalment Credit Instalment credit is used for a specific purpose and is issued at a defined amount for a set period of time. Payments are usually made monthly in equal instalments. Instalment credit is used for big-ticket purchases such as major appliances, cars, and furniture. Instalment credit usually offers lower interest rates than revolving credit as an incentive to the consumer. The item purchased serves as collateral in case the consumer defaults.The average American had a credit card balance of $6,200 in 2019, according to Experian. REVOLVING CREDIT Revolving credit, which includes credit cards, may be used for any purchase. The credit is \"revolving\" in the sense that the line of credit remains open and can be used up to the maximum limit repeatedly, as long as the borrower keeps paying a minimum monthly payment on time. It may, in fact, never be paid off in full as the consumer pays the minimum and allows the remaining debt to accumulate interest from month to month. Revolving credit is available at a high interest rate because it is not secured by collateral. SPECIAL CONSIDERATIONS Consumer credit use reflects the portion of a family or individual's spending that goes to goods and services that depreciate quickly. It includes necessities such as food and discretionary purchases such as cosmetics or dry-cleaning services. Consumer credit use from month to month is closely measured by economists because it is considered an indicator of economic growth or contraction. If consumers overall are willing to borrow and confident, they can repay their debts on time, the

economy gets a boost. If consumers cut back on their spending, they are indicating concerns about their own financial stability in the near future. The economy will contract. ADVANTAGES OF CONSUMER CREDIT Consumer credit allows consumers to get an advance on income to buy products and services. In an emergency, such as a car breakdown, that can be a lifesaver. Because credit cards are relatively safe to carry, America is increasingly becoming a cashless society in which people routinely rely on credit for purchases large and small. Revolving consumer credit is a highly lucrative industry. Banks and financial institutions, department stores, and many other businesses offer consumer credit. DISADVANTAGES OF CONSUMER CREDIT The main disadvantage of using revolving consumer credit is the cost to consumers who fail to pay off their entire balances every month and continue to accrue additional interest charges from month to month. The average annual percentage rate on all credit cards was 20.21% as of August 2020. Department store credit cards averaged 24.22%. A single late payment can boost the cardholder's interest rate even higher. 12.7 PLASTIC MONEY AND ITS SAILIENT FEATURES Plastic money is a term that is used predominantly in reference to the hard plastic cards we use everyday in place of actual bank notes. They can come in many different forms such as cash cards, credit cards, debit cards, pre- paid cash cards and store cards. Cash Cards - A card that will allow you to withdraw money directly from your bank via an Authorised Teller Machine (ATM) but it will not allow the holder to purchase anything directly with it. Credit Cards - Again this card will permit the card holder to withdraw cash from an ATM, and a credit card will allow the user to purchase goods and services directly, but unlike a Cash Card the money is basically a high interest loan to the card holder, although the card holder can avoid any interest charges by paying the balance off in full each month. Debit Cards - This type of card will directly debit money from your bank account, and

can directly be used to purchase goods and services. While there is no official credit facility with debit cards per se, as it is linked to the bank account the limit is the limit of what is in the account, for instance if an overdraft facility is available then the limit will be the extent of the overdraft. Pre-paid Cash Cards - As the name suggests the user will add credit to the card themselves, and will not exceed that amount. These are usually re-useable in that they can be 'topped up' however some cards, usually marketed as Gift Cards are not re-useable and once the credit has been spent they are disposed of. Store Cards - These are similar in concept to the Credit Card model, in that the idea is to purchase something in store and be billed for it at the end of the month. These cards can be charged at a very high interest rate and can are limited in the places they can be used, sometimes as far as only the store brand that issued it. SECURITY FEATURES OF PLASTIC MONEY 1. CVV (Card Verification Value) or CSC (Card Security Code) is the three digit number usually mentioned at the back of a MasterCard or a Visa card. 2. It is an added security feature for card users who stand protected from fraudulent transactions even if their 16-digit card number is stolen. For instance for card absent transactions like on line payments it is mandatory to put the CVV number which proves that the right bank customer is using it. 3. The 16-digit card number is extremely vital as it helps identify the card service provider. For Visa the starting number is 4, for MasterCard it is 5 and for American Express it is either 34 or 37. For Discover cards it is 6, for other petroleum cards it is 7 and for airline cards it is 1. It also helps identify the bank which issued the card and contains a unique number to identify the customer. Hence, customers are advised against sharing the 16-digit number. 4. Most debit and credit cards come with expiry dates requiring one to renew the card every few years. Once a fresh card is issued by name, the delivery address and KYC details are refreshed again, updating the bank’s database and also preventing fraudulent use.

5. Magnetic stripe is the black colour strip at the back of the card. The older range of cards needed to be swiped on a point of sales (PoS) terminal. 6. The magnetic stripe which needed to be swiped contains data around the card number which helps the merchant identify the customer, card service provider and bank. Magnetic stripe can be easily duplicated by a cloning machine inserted in a compromised PoS terminal, as was seen in the case of Target, a massive retail chain of the US where customer’s bank details were stolen through a compromised PoS machine. 7. In order to avoid such cases of compromise the RBI has instructed all banks to move to chip and pin based cards and not to issue magnetic stripe cards. In this case, a smart chip is inserted into the card which creates a unique token every time the card is used at a PoS terminal or for online transactions. 8. This is a far higher level of security than magnetic stripe since even if in some instance the card is compromised the data stolen will be virtually useless as it changes with every transaction. In case of magnetic cards the strip details remain unchanged for all transactions. 12.8 ADVANAGES AND DISADVANTAGES OF PLASTIC MONEY Advantages of Plastic Money: The advantages of using plastic money instead of cash. Cards fit into the wallet easily: It is essential that we need to have some sort of money in hand always as we never know when a need arises. But carrying a lot of cash in hand is not at all a wise idea. Also, who would want to carry a lot of cash in hand and make their wallet bulge out. In such situations, plastic money comes for help. Your wallet will remain perfect and your cash needs will also be sorted out. If required you can take cash using plastic cards. Also, it is safe when you have a card with you as even if it is lost, you can always call the bank and ask them to block it. This avoids misusing the card by any. But when it is cash, you are not left with that option and you will end up losing your money. Cards are waterproof hence you don't have to get panicked even if water spilled over your wallet. They are strong and durable. Crime rates will decrease: We are living in a world where thefts and crimes are on the

increase. Keeping cash in hand is not a safe thing to do. It will not give you peaceful nights. So be practical and opt for plastic money. You do not have to worry when someone runs away with your wallet, as long as you only have plastic money in it. The guy needs, PIN number to use it hence he can't take the cash or swipe it. As soon as you know that you are pickpocketed, you can call the bank and ask them to block or cancel the card. If it was actual cash in its place, then it is easy for the thief. He can easily take the cash and throw the wallet somewhere. But with plastic money, his job has become a difficult one. He needs to know cracking techniques to find the PIN number to use the cards. Hence worries associated with theft will be less in case of plastic money. Another merit is that the fingerprints on a plastic card are more clear than that on bank notes. Provides credit facility: How about having a card that provides you a credit facility? That sounds good right? With the advent of credit cards you can purchase anything today and you are given sufficient time to pay for it. Only with plastic money, you avail this credit facility. The advantage of having this facility is that you need not go behind people to borrow money in case of emergencies, instead, you can use the card in your hand. Also, you get ample amount of time to repay the amount. It is like a best buddy who helps you in case of financial needs. Purchase today and pay later, isn't that a benefit you are getting? This factor is one of the main reasons why people are attracted towards credit cards. Tracking transactions becomes easy: Having a track of your daily or monthly transactions is always good. By using the plastic money you are automatically keeping a track of all your transactions. You can verify it later if required. When we are using bank notes, we might forget later for what we spend it, unless you have the habit of noting down every cash transaction you make. This is not the case with plastic cards. The banks normally send the statement of debit or credit card to its customers on a monthly basis which will have the list of all your transactions for that particular month. This transaction history might help us at times when we misplace a bill. We can show the transaction details to prove that we have made a purchase. Also, for us to have a check of our expenses or any particular transaction made in the past, these statements are useful. 0% Installment options: Certain credit cards provide its customers the facility to convert their purchases from selected outlets to installment options of 3, 6 or 12 months at 0% interest rate. The customer is given the option to select the period of installment which cannot be changed later. If you have selected 6 months installment plan and paid it off

within 5 months, then you will have to pay an extra fee. Therefore, be careful and pay only according to the installment period selected. It is an amazing facility offered by the banks as it helps you to purchase that thing you wish today and pay in equal installments within a period of specific time. Will you avail this facility if you are using cash? A big No is the answer. Therefore, this is indeed an advantage of plastic money. Convenience of making payments from home: In olden days when there was no plastic money, we need to go personally to each place to make a payment be it utility payments or booking tickets. But now you can pay at your own convenience sitting at home with the use of plastic money. For example, you need to go to the travel agency to pay cash for your ticket, instead, you can book your ticket online. Also when a travel agency is involved, they charge commission or fee but when you are booking the ticket directly from the airline's website, you are saving on it. Plastic cards can also be used for online purchases. We can see many online shops coming up these days. If you find something interesting on a website and would want to have it, you can always purchase it anytime using plastic money. Another advantage is that certain websites do not charge you the service fee if you are making payment through plastic money as the payment is done upfront. A service fee will be charged in cash on delivery option. Plastic money can be used 24 * 7 for online purchases. Is internationally acceptable: One of the main advantages of plastic money is that the same card can be used locally as well as internationally. For example, you can get rid of the hassle of converting the cash into the currency of the country you are planning to travel. If you have an international debit or credit.card, you can make your purchases with that card itself. So the problem of running out of cash will not happen even if you are abroad and that helps you to have a safe journey without worrying about the cash and budget. Sometimes we end up not buying something that we actually like due to insufficient cash but when you have a credit card with you, you can always purchase it and pay later. Especially from abroad as it is not practically possible to visit the country again to buy stuff. Disadvantages of Plastic Money: Like everything, plastic money also has its own merits and demerits. We should wisely use it keeping all the below points in mind. If you are clever, you can make use of the cards but not everyone can be clever. So for those who are not well aware of the cards and its disadvantages should always be careful to avoid themselves being in trouble. Many people play with cards and might not end up paying a single penny as interest. Never

follow them as not everyone is smart with cards and we might end up losing money. Just plastic money won't help always: Plastic money is not a complete replacement for cash. In certain places, we need cash itself. While buying fish from the market or when paying to the newspaper boy, we need cash itself as they do not carry POS machine to swipe the plastic money. Similarly, we pay money at religious places for offerings, there also they do not take plastic money. Unless we have the facility to use plastic money everywhere, we cannot replace cash completely. Still, there are small retail shops which do not take plastic money. In villages, hardly we find any shops that accept plastic money. It makes us necessary to carry some cash always for our safety. Plastic Money is also not 100% safe: There is a certain amount of risk involved in transactions which involves plastic money as well. Especially when doing online shopping. We are exchanging the details relating to our card over the internet which is not always a safe place. Some websites are just set up to steal our financial information and loot money thereby. We should not fall in to such scams and hackers. One should be a smart online shopper in this world. Minimum purchase requirements: One of the major disadvantages of using plastic money is that one needs to make a minimum purchase in order to swipe their card. For instance, if the minimum purchase is Rs. 50.00; and we have purchased items for only Rs. 40.00, you can't use your card for this transaction unless you purchase for Rs. 50.00. In this case, you will have to purchase something unnecessary to make it Rs. 50.00. If we had sufficient cash in hand, we could have avoided spending extra Rs. 10.00 Service charge in certain cases: When we are using plastic money instead of cash, in certain cases the bank charges a service charge for the purchase of certain items. For instance, in some countries, the service charge is levied on card transactions when you purchase gold from jewelry. When paying cash, this additional charge will not be taken. Card too can get damaged: Imagine a situation wherein you have made a purchase and when at the counter you realize that your card is damaged or when trying to swipe, the transaction is not getting proceed due to some chip error or damage. You will definitely wish if you had some cash in hand. These cases occur only when plastic money is used. It might be a rare case but the possibility cannot be completely ignored. Interest, for non payment: A credit card allows you to purchase today and pay for at a later period of time. It gives you a credit period, but if we fail to make the payment within

the due date, interest will be charged. When we are using cash, we are not taking any credit from the bank, hence non-payment does not occur. 12.9 SUMMARY  Factoring: is a financial service covering the financing and collection of accounts receivables in domestic as well as international trade.  Factor: acts as agent in realizing credit sales from buyer and passes an the realized sum to seller after deducting his commission.  Forfaiting: denotes the purchase of trade bills or promissory notes by a bank or a financial institution without recourse to seller.  There are five parties in a transaction of forfaiting. These are i. Exporter ii. Importer iii. Exporter’s bank iv. Importer’s bank v. The forfeiter.  Major Factoring Companies in India Can Bank Factors Limited SBI Factors and Commercial Services Pvt. Ltd. The Hongkong and Shanghai Banking Corporation Ltd India Factoring and Finance Solutions Pvt Ltd Global Trade Finance Pvt. Limited Foremost Factors Ltd. Export Credit Guarantee Corporation of India Ltd. Citibank NA, India Ltd.  A factor offers the following services: (i) Collection facility of accounts receivables (ii) Sales-ledger administration (iii) Credit protection (iv) Short-term funding (v) Advisory services.  Forfaiting is a source of trade finance which enables exporters to get fknds from the forfeiter on transferring the right to recover the debts from the importer.  Bill discounting is a source of short-term trade finance. It is known as acceptance credit, where on party accepts liability of trade towards third Party.

12.10 KEY WORDS/ABBREVIATIONS Factoring Bill Discounting Forfaiting Consumer Plastic Money Credit securitization pledging Cross boarder Exporter Revolving factoring credit Instalment CVV (Card Magnetic credit Verification CSC (Card stripe Point of Sale Security (PoS) terminal Value) Code) 12.11 LEARNING ACTIVITY Activity 1 : Comment on factoring and Forfaiting services in India. Activity 2 : \"Despite various measures taken by the RBI, the commercial bill market is not developed in India\". Comment on this and give the reasons for the same. 12.12 UNIT END QUESTIONS (MCQ AND DESCRIPTIVE) 1. What do you mean by factor and factoring services? 2. What do you mean by without recourse and maturity factoring? 3. Explain the benefits and disadvantages of factoring services. 4. Explain the mechanism of factoring services.

5. Explain the various types of export factoring arrangement. 6. Define Forfaiting services? 7. What are the differences between factoring and Forfaiting services? 8. Explain the benefits of finance through bill discounting. B. Multiple Choice Questions 1. Finance is not available in the following factories service _________ a. Without Recourse factoring b. With recourse factoring c. Maturity factoring d. All of the Above 2. Sales Ledger Administration is available in the following factoring services_____ a. Without Recourse factoring b. With recourse factoring c. Invoice discounting d. Maturity Factoring. 3. Credit Protection is available in ______ a. Without Recourse factoring b. With recourse factoring c. None of the above d. All of the above. 4. Under forfaiting the client is able to get credit facility to the extent of_______ a. 100% of the value of the export bill b. 80% of the value of the export bill c. 90% of the value of the export bill d. 50% of the value of the export bill. 5. Full service factoring is often_________ a. Recourse factoring b. Non-recourse factoring c. Agency factoring d. Maturity Factoring 6. The Idea of providing factoring services was first thought of in India by_____. a. Tandem committee

b. Malhotra committee c. Vaghul committee d. Narasimhan Committee 12.13 REFERENCES Text Books: T1 Fabozzi - Foundations of Financial Markets and Institutions (Pearson Education,3rdEd.). T2 Khan M Y - Financial Services (Tata Mc Graw Hill). Reference Books: R1 Machiraju H R - Indian Financial System (Vikas Publication). R2 Bhole L M - Financial Institutions and Markets (Tata McGraw-Hill).