CU-MBA-SEM-III-Management of Financial Services-Second draft (1)

MASTER OF BUSINESS ADMINISTRATION SEMESTER-III MANAGEMENT OF FINANCIAL SERVICES MBA501

CHANDIGARH UNIVERSITY Institute of Distance and Online Learning Course Development Committee Prof. (Dr.) R.S.Bawa Pro Chancellor, Chandigarh University, Gharuan, Punjab Advisors Prof. (Dr.) Bharat Bhushan, Director – IGNOU Prof. (Dr.) Majulika Srivastava, Director – CIQA, IGNOU Programme Coordinators & Editing Team Master of Business Administration (MBA) Bachelor of Business Administration (BBA) Coordinator – Dr. Rupali Arora Coordinator – Dr. Simran Jewandah Master of Computer Applications (MCA) Bachelor of Computer Applications (BCA) Coordinator – Dr. Raju Kumar Coordinator – Dr. Manisha Malhotra Master of Commerce (M.Com.) Bachelor of Commerce (B.Com.) Coordinator – Dr. Aman Jindal Coordinator – Dr. Minakshi Garg Master of Arts (Psychology) Bachelor of Science (Travel &Tourism Management) Coordinator – Dr. Samerjeet Kaur Coordinator – Dr. Shikha Sharma Master of Arts (English) Bachelor of Arts (General) Coordinator – Dr. Ashita Chadha Coordinator – Ms. Neeraj Gohlan Academic and Administrative Management Prof. (Dr.) R. M. Bhagat Prof. (Dr.) S.S. Sehgal Executive Director – Sciences Registrar Prof. (Dr.) Manaswini Acharya Prof. (Dr.) Gurpreet Singh Executive Director – Liberal Arts Director – IDOL © No part of this publication should be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording and/or otherwise without the prior written permission of the authors and the publisher. SLM SPECIALLY PREPARED FOR CU IDOL STUDENTS Printed and Published by: TeamLease Edtech Limited www.teamleaseedtech.com CONTACT NO:01133002345 For: CHANDIGARH UNIVERSITY 2 Institute of Distance and Online Learning CU IDOL SELF LEARNING MATERIAL (SLM)

First Published in 2021 All rights reserved. No Part of this book may be reproduced or transmitted, in any form or by any means, without permission in writing from Chandigarh University. Any person who does any unauthorized act in relation to this book may be liable to criminal prosecution and civil claims for damages. This book is meant for educational and learning purpose. The authors of the book has/have taken all reasonable care to ensure that the contents of the book do not violate any existing copyright or other intellectual property rights of any person in any manner whatsoever. In the event the Authors has/ have been unable to track any source and if any copyright has been inadvertently infringed, please notify the publisher in writing for corrective action CONTENT 3 CU IDOL SELF LEARNING MATERIAL (SLM)

Unit 1 - Financ ia l Systems ____________________________________________ 5 Unit- 2 - Basics Of Financ ia l Service s __________________________________ 16 Unit 3 - Financ ia l Service s ___________________________________________ 27 Unit 4 - Challe nges & Innova tio n ______________________________________ 36 Unit 5 - Merchant Banking ___________________________________________ 49 Unit 6 - Portfo lio Manage me nt ________________________________________ 54 Unit 7 - Merchant Banking In India ____________________________________ 59 Unit 8 - Insura nce ___________________________________________________ 65 Unit 9 - Banking ____________________________________________________ 83 Unit- 10 Mutua l Funds _______________________________________________ 97 Unit 11 - Risk In Financ ia l Servic es____________________________________ 114 Unit 12 - Leasing & Hire Purchase _____________________________________ 132 Unit 13 - Debt Securitiza tio n _________________________________________ 153 Unit 14 - Credit Rating_______________________________________________ 167 Unit 15 - Surve illa nce Of Sebi & Rbi __________________________________ 189 4 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 1 - FINANCIAL SYSTEMS Structure 1.0 Learning Objectives 1.1 Introduction 1.2 Financial Assests 1.3 Primary Market 1.4 Secondary Market 1.5 Money Market 1.6 Capital Market 1.7 Financial Instruments 1.8 Summary 1.9 Keywords 1.10 Learning Activity 1.11 Unit End Questions 1.12 References 1.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  Describe nature of Financial System  Identify scope of Financial System  Benefits of Financial System  Process of Financial System 1.1 INTRODUCTION A financial system is a term that includes financial institutions, financial markets, financial instruments, and financial services that help with money movement. The financial system is made up of savers, arbitrators, instruments, and money. The foundation for evaluating economic growth is critical since it promotes the economy of a stable financial system. Proper money circulation is needed for the country's economic growth. A \"financial system\" is a set of interconnected components that includes specialised and non- specialized financial institutions, organised and unorganised financial markets, financial instruments, and financial services. The aim of the financial system is to make money flow more easily in an economy. It is concerned with issues such as money, finance, and credit. Money is a term that refers to a medium of exchange or a payment process. Credit refers to the amount of debt that is repaid, as well as the interest. Finance refers to the monetary resources of a state, a corporation, or an entity, including their own funds and debts. 5 CU IDOL SELF LEARNING MATERIAL (SLM)

Long-term economic stability is a corollary of a well-organized financial system. The financial sector organises funds and channels them into productive work, affecting the economy's growth rate. Economic growth is stifled by the absence of an effective financial system. Money, credit, and finance are three interrelated factors that the financial system deals with in general. Functions and Role of the financial system, market is given below. • Funds are pooled. • Creation of capital. • Assists with payment. • Liquidity is given. • Short- and long-term requirements • Risk Control Features • Better Choices • Finances the government's requirements, as well as. • Growth of the economy Figure 1.1 Financial Systems 6 1.2 FINANCIAL ASSETS CU IDOL SELF LEARNING MATERIAL (SLM)

A financial asset is a liquid asset with a contractual right or ownership claim as its source of value. Financial assets include currency, securities, bonds, mutual funds, and bank deposits, among others. Financial assets, unlike land, buildings, goods, or other tangible physical assets, do not have an underlying physical value or even a physical shape. Rather, their worth is determined by factors such as supply and demand in the market where they trade, as well as the level of risk they bear. Understanding a Financial Asset: The majority of the assets are classified as physical, financial, or intangible. Real assets are tangible assets whose value is derived from substances or resources such as precious metals, property, real estate, and agricultural commodities such as soybeans, wheat, oil, and iron. Intangible assets are intangible properties that are not tangible. Patents, trademarks, and copyrights are examples. Financial assets are in the middle of the three types of assets. With only the specified value on a piece of paper, such as a dollar bill, or a listing on a computer screen, financial assets can appear intangible—non-physical. The paper or listing, on the other hand, represents a claim to possession of an entity, such as a public corporation, or legal agreements to payments, such as bond interest income. A legal claim on an underlying asset gives financial assets their worth. The underlying asset may be tangible or intangible. Commodities, for example, are the physical commodities that underpin financial instruments like commodity futures, contracts, and exchange-traded funds (ETFs). Similarly, real estate is the real asset correlated with real estate investment trust (REIT) securities (REITs). REITs are financial instruments that hold a portfolio of properties and are publicly traded. For tax purposes, the Internal Revenue Service (IRS) expects companies to declare both financial and real assets as tangible assets. The tangible asset cluster is distinct from the intangible asset cluster. Common Types of Financial Assets As Financial assets, according to the widely cited definition from the International Financial Reporting Standards (IFRS), include: • Cash • An entity's equity instruments • A receivable is a contractual right to obtain a financial asset from another person (for example, a stock certificate). • The legal right to swap financial assets or liabilities with another person on advantageous terms. • A contract under which the entity's own equity instruments are used to settle the transaction 7 CU IDOL SELF LEARNING MATERIAL (SLM)

. Figure1.2 Financial Assets 1.3 PRIMARY MARKET A primary market is where securities are produced for the first time and sold to investors. A stock exchange issues new shares in this market, allowing the government and businesses to collect money. There are three parties involved in any transaction in this market. A business, investors, and an underwriter will all be part of it. An initial public offering (IPO) is when a business issues security in the primary market, and the selling price of the new issue is decided by a concerned underwriter, who may or may not be a financial institution. A new issue offering is often facilitated and monitored by an underwriter. In the primary market, investors buy newly issued securities. The Securities and Exchange Board of India regulates such a market (SEBI). The issuer of securities may be looking to grow its activities, finance other business goals, or expand its physical presence, among other things. Checks, bills, government bonds or corporate bonds, as well as company stocks, are examples of primary market securities. Functions of Primary Market The functions of such a market are manifold –  New issue offer The primary market arranges for the sale of a new issue that has never been exchanged on another exchange. It's also known as a New Issue Market because of this. Organizing new problem offers necessitates a thorough examination of project feasibility, among other things. Considerations of promoters' equity, liquidity ratio, debt-equity ratio, and foreign exchange requirement are all part of the financial arrangements for the purpose.  Underwriting services When it comes to launching a new topic, underwriting is crucial. In a primary market, an underwriter's position involves purchasing unsold shares if it is unable to sell the necessary number of shares to the public. Underwriting commissions may be earned by a financial institution acting as an underwriter. Investors rely on underwriters to determine if taking a 8 CU IDOL SELF LEARNING MATERIAL (SLM)

risk is worthwhile in terms of returns. An underwriter can purchase the entire IPO issue and then sell it to investors.  Distribution of new issue In a main marketing sphere, a new problem is also circulated. A new brochure is issued to start the distribution process. It invites the general public to purchase a new issue and provides detailed details on the business, issue, and underwriters involved. 1.4 SECONDARY MARKET A secondary market is a marketplace where investors can buy and sell company stock. As a result, investors can buy and sell shares freely without the involvement of the issuing firm. The issuing company will not engage in income generation during these investor transactions, and share valuation will instead be dependent on its market results. In this market, income is generated by selling shares from one investor to another. Entities that are functional in a secondary market include – • Private investors. • Advisory service providers and brokers, which include, for example, commission brokers and security dealers. • Non-banking financial institutions, insurance companies, banks, and mutual funds are examples of financial intermediaries. Functions of Secondary Market A stock exchange gives investors a place to trade bonds, stocks, debentures, and other financial instruments. Transactions can be done at any time, and the market allows for active trading, which allows for quick buying and selling with little price variation between transactions. There is also a level of consistency in trading, which increases the liquidity of the assets exchanged in this market. To liquidate their shares, investors find a suitable forum, such as a structured market. They will sell the shares they own on a variety of stock exchanges. A secondary market is a system for evaluating the price of commodities in a transaction based on supply and demand. The price of transactions is available in the public domain, allowing investors to make informed decisions. It also serves as a connection between savings and investment and is representative of a country's economy. Savings are mobilized by investments in the form of securities. 9 CU IDOL SELF LEARNING MATERIAL (SLM)

1.5 MONEY MARKET The money market is a subset of the stock market that deals in high-liquid, short-maturity financial instruments. The money market has developed into a part of the capital market for the purchase and selling of short-term securities with maturities of one year or less, such as Treasury bills and commercial papers. Trading takes place on the money market, and is a wholesale process. It is used by participants to borrow and lend money for a set period of time. In the money market, negotiable instruments include Treasury bills, commercial records, and certificates of deposit. Many participants, including companies, sell commercial papers on the open market to raise funds. The money market is considered a safe place to invest due to the high liquidity of securities. Default on securities such as commercial papers is one possibility that investors should be aware of. The money market is made up of various financial institutions and brokers who may invest in or lend securities. It's a safe place to put your liquid assets money. Unlike capital markets, which are arranged in a formal fashion, the money market is unregulated and unorganized. The money market provides investors with a lower rate of return, but it does so by still providing a diverse selection of products. 1.6 CAPITAL MARKET A stock market is a place where capital providers and those who require capital meet to save and invest. As a result, it is a location where various organizations exchange various financial instruments. There are two types of capital markets:  Public  Private. Equity and debt instruments such as equity shares, preference shares, debentures, notes, and other securities are bought and sold in the capital market. Functions of Capital Market: • It serves as a link between savers and investors; • It serves as a link between savers and investors; • Increases economic growth. • Savings mobilisation to fund long-term investments • Makes it easier to trade shares. 10 CU IDOL SELF LEARNING MATERIAL (SLM)

• Transaction and information costs are kept to a minimum. • Encourages a wide variety of profitable asset ownership. • Fast financial instrument valuations • It provides protection against market or price risks by derivative trading. • Assists with transaction settlement • An increase in the efficiency of capital allocation • Funds are still available. For businesses, the stock market is the best source of funding. It gives all investors a range of investment options, which facilitates capital growth. 1.7 FINANCIAL INSTRUMENTS A financial instrument is a contract between two or more entities or parties that has monetary value. They can be developed, exchanged, resolved, or changed according to the needs of the parties involved. In other words, a financial instrument is any commodity that carries capital and can be exchanged in the market. Cheques, securities, bonds, futures, and options contracts are examples of financial instruments. Financial Instruments: An Overview Derivative instruments and cash instruments are the two most common types of financial instruments. Derivative instruments are those whose features and value are derived from underlying entities such as interest rates, indexes, or properties, among other items. The output of the underlying variable can be used to determine the value of such instruments. They can also be compared to other securities like bonds and stocks. On the other hand, cash instruments are classified as instruments that can be easily transferred and priced in the market. Deposits and loans, for example, are typical examples of cash instruments on which the lenders and borrowers must agree. Some Subcategories Financial instruments can also be divided into two categories: equity-based and debt-based financial instruments. 11 CU IDOL SELF LEARNING MATERIAL (SLM)

Securities, such as stocks and bonds, are examples of equity-based financial instruments. Often included in this group are exchange-traded derivatives such as equity futures and stock options. Debt-based financial instruments, on the other hand, are short-term securities with a maturity of one year or less, such as commercial paper (CP) and Treasury bills (T-bills). Certificates of deposit (CDs) and other cash instruments fall under this group as well. Exchange-traded options, such as short-term interest rate futures, are included in this group as well. Securities such as bonds fall under this category because the maturity period on long-term debt-based financial instruments extends a year. Bond futures and options are two examples of exchange-traded derivatives. 1.8 SUMMARY A mechanism that aims to build and provide a natural, smooth, efficient, and cost-effective connection between depositors and investors in the so-called financial system. Financial institutions, financial insurance, financial markets, and financial instruments are all part of the financial sector. These elements are intertwined and work in concert with one another. A financial asset is one that is used to create or use properties, as well as to shape new assets. Financial intermediaries cover all types of financial institutions and investment institutions that facilitate financial transactions in the financial markets. The financial markets facilitate the acquisition and selling of financial claims, properties, services, and securities. There are two types of financial markets: regulated and unregulated. Economic claims, such as financial assets and shares traded on the stock exchange, are referred to as financial instruments. Financial instruments may be listed as primary or secondary securities. With the adoption of the mixed economy theory in order to achieve socio-economic and political goals, the development of the financial system took a different turn. To ensure that the financial flow is in the right direction, the government has begun to create new financial institutions and has begun to gradually nationalise some financial institutions. India's financial structure is more advanced and integrated today than it was 50 years ago, but there are still some flaws. 1.9 KEYWORDS  (IFRS) International Financial Reporting Standards  (REITs) Real estate investment trusts  (IPO) Initial public offering  (IRS) Internal Revenue Service  (SEBI) Securities and Exchange Board of India 12 CU IDOL SELF LEARNING MATERIAL (SLM)

1.10 LEARNING ACTIVITY 1. Examine the recent development in leasing ___________________________________________________________________________ ___________________________________________________________________________ 2. Examine the various share issue pricing models ___________________________________________________________________________ ___________________________________________________________________________ 1.11 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1.Define financial instruments? What are their characteristics? 2.Trace out the development of the financial system in India. 3.“Inspite of suitable legislative measures, the Indian financial system remains weak. “Comment. Long Questions 1. Discuss the classification of Indian financial markets and explain the features of each market. 2. Classify the various financial intermediaries functioning in the Indian financial system and bring out their features. 3.Discuss in detail about Financial instruments and its categories? 4.Discuss in detail about Money markets and capital Market. B. Multi-Choice questions 1. The following is a feature of every financial market: a. It determines the level of interest rates. b. It allows common stock to be traded. c. It allows loans to be made. d. It channels funds from lenders-savers to borrowers-spenders. 2. The basic role of financial markets is to a. bringing together people with funds to lend and people who want to borrow funds. 13 CU IDOL SELF LEARNING MATERIAL (SLM)

b. assuring that the swings in the business cycle are less pronounced. c. assuring that governments need never resort to printing money. d. both (A) and (B) of the above. E) both (B) and (C) of the above. 3. Which of the following is considered to be a form of direct financing? a. A corporation’s stock is traded in an over-the-counter market. b. People buy shares in a mutual fund. c. A pension fund manager buys commercial paper in the secondary market. d. An insurance company buys shares of common stock in the over-the-counter markets. e. None of these 4. Which of the following is considered to be a form of direct financing? a. A corporation’s stock is traded in an over-the-counter market. b. A corporation buys commercial paper issued by another corporation. c. A pension fund manager buys commercial paper from the issuing corporation. d. Both (A) and (B) of these. 5. Which of the following markets are primary? a. The New York Stock Exchange b. The U.S. government bond market c. The over-the-counter stock market d. The options markets Answers 1 – d, 2 – a, 3 – c, 4 – d, 5 – a, 1.12 REFERENCES Text Books:  Bhole, L.M., Financial Institutions & Markets. Tata McGraw Hill, New Delhi  Khan, M.Y. Financial Services Tata McGraw Hill, New Delhi  Meir, Kohn, Financial Institutions & Markets, Tata McGraw Hill, New Delhi  Prasanna Chandra: Financial Management, Tata McGraw Hill. Reference Books: 14 CU IDOL SELF LEARNING MATERIAL (SLM)

 Kothari, C.R., Investment Banking & Customer Services Arihant Publishers, Jaipur  Sharpe, William F. etc. Investment. New Delhi, PHI  Pandey, I.M., Financial Management, Vikas Publishing House, New Delhi 15 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT-2 - BASICS OF FINANCIAL SERVICES Structure 2.0 Learning Objectives 2.1 Concept 2.2 Function 2.3 Characteristics 2.4 Types 2.5 Scope 2.6 Summary 2.7 Keywords 2.8 Learning Activity 2.9 Unit End Questions 2.10 References 2.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  Describe nature of financial services  Identify scope of financial services  Benefits of financial services  Process of financial services 2.1 CONCEPT OF FINANCIAL SERVICES The term \"financial services\" refers to the economic services offered by a variety of financial institutions that deal with money management. It is an intangible financial market asset such as loans, insurance, stocks, credit cards, and so on. Institutions such as banks, insurance companies, pension funds, credit unions, brokerage firms, and consumer finance companies provide financial services. It is an essential part of the financial system that allows financial transactions to take place in a given economy. Financial services are critical for economic development because they connect those who need funds with those who can provide them. It enables people to enhance their living conditions by allowing them to buy different items on a hire purchase basis. By insuring people against risks, financial services serve as a buffer against risk arising from 16 CU IDOL SELF LEARNING MATERIAL (SLM)

various unexpected activities. These programmes are consumer-oriented since they are planned and delivered in response to customer needs. 2.2 FUNCTIONS OF FINANCIAL SERVICES 1. Facilitates payment systems: Financial services are essential for the smooth transfer of funds between people. It allows people to buy things without difficulty. Financial instruments that make transactions easier include credit cards, debit cards, bills of exchange, and checks. 2. Effective Fund Distribution: These intangible assets aid in the effective distribution of funds. People use financial services to invest their perfect lying money in more profitable investment strategies. 3. Maintains Liquidity: Financial services aid in the preservation of adequate funds in an economy. It connects those who need funds with those who can provide funds because they have ample savings. People can easily obtain required funds using a variety of resources such as loans and credit cards. 4. Improves people's living standards: These programmes are critical in increasing people's living standards. Customers can conveniently buy expensive items using the hire purchase method when they use these facilities. People may benefit from the advantages of high- quality and luxurious products. 5. Facilitates trade: Financial services support a country's domestic and international trade. In the financial industry, factoring and forfaiting firms facilitate both the export of goods to international markets and the selling of items in the domestic market. In addition, trade operations in the country are supported by insurance and banking facilities. 6. Increase Job Opportunities: Another essential role of financial services is the creation of employment opportunities. A significant number of people are employed by various financial institutions to sell these services. They compensate their workers from the profits made from the sale of these financial services. 7. Balanced Regional Growth: Financial services contribute to the country's balanced regional development. These services enable all main sectors of the economy, such as the primary, secondary, and tertiary sectors, to obtain the funds they need. As a result, regional differences emerge, and a country's growth becomes more balanced. 2.3 CHARACTERISTICS OF FINANCIAL SERVICES 1. Customer-centered: They are typically focused on the customer. Before settling on a financial plan, the companies that provide these services thoroughly research their customers' needs, taking into account prices, liquidity, and maturity. Financial services companies keep in contact with their clients on a daily basis in order to design items that are customized to their unique needs. Financial service providers conduct market research on a regular basis so that they can sell new products well ahead of demand and pending legislation. Newer innovations are being used to launch creative, customer-friendly products and services, 17 CU IDOL SELF LEARNING MATERIAL (SLM)

indicating that financial service providers are concentrating their efforts on developing firm/customer-specific services. 2. Intangibility: In today's intensely competitive global marketplace, brand recognition is extremely important. Financial institutions that offer financial products and services will not be effective unless they have a positive reputation and enjoy the confidence of their clients. To establish reputation, organizations must concentrate on the quality and innovation of their services. 3. Concurrent: The development of financial services and the distribution of these services must be achieved at the same time. Both of these functions, namely the development of new and creative services and the provision of these services, must be carried out at the same time. 4. The proclivity to perish: Unlike most services, they have a proclivity to perish and hence cannot be stored. Customers expect them to supply exactly what they need. As a result, financial institutions must ensure that demand and supply are in line. 5. People-Based Services: Since financial services marketing is people-intensive, it is subject to variance in efficiency or service quality. Personnel in their organizations must be chosen based on their suitability and adequately qualified in order to carry out their duties efficiently and effectively. 6. Market Dynamics: Market dynamics are heavily influenced by social factors such as disposable income, standard of living, and educational developments affecting different consumer groups. As a result, they must continually redefine and adapt their strategies in light of market dynamics. When developing new services, the institutions delivering them could be proactive in anticipating what the consumer wants, or reactive to the needs and wants of their customers. 1. Banking 2. Professional Advisory 3. Wealth Management 4. Mutual Funds 5. Insurance 6. Stock Market 7. Treasury/Debt Instruments 8. Tax/Audit Consulting 9. Capital Restructuring 10. Portfolio Management These financial services are explained below: 1. Banking: 18 CU IDOL SELF LEARNING MATERIAL (SLM)

The banking sector is India's financial services industry's backbone. There are a number of public (27), private (21), international (49), regional rural (56) and urban/rural cooperative (95,000+) banks in the country. Individual Banking (checking accounts, savings accounts, debit/credit cards, and so on) is one of the financial services provided in this section. • Commercial Banking (merchant services, checking accounts and savings accounts for businesses, treasury services, etc.) • Financing (business loans, personal loans, home loans, automobile loans, working-capital loans, etc.) The Reserve Bank of India (RBI) is in charge of managing and sustaining the banking sector's liquidity, capitalization, and financial health. 2. Professional Advisory: India has a large number of professional financial advisory service providers that provide a wide range of services to individuals and businesses, including investment due diligence, mergers and acquisitions advice, valuation, real estate consulting, risk consulting, and taxation advice. A Wide Range of Providers, From Individual Domestic Consultants to Large Multi-National Organizations, Make These Offerings. 3. Wealth Management: FINANCIAL services provided in this category include managing and investing customers' wealth through a variety of financial instruments, such as debt, equity, mutual funds, insurance products, derivatives, structured products, commodities, and real estate, based on their financial targets, risk profiles, and time horizons. 4. Mutual Funds: Professional investment services are provided by mutual fund service providers for funds that are made up of various asset groups, mainly debt and equity-linked assets. As opposed to the stock market and debt options, mutual fund solutions have a lower buy-in. These products are very common in India because they have lower risks, tax advantages, steady returns, and diversification assets. Due to its success as a low-risk wealth multiplier, the mutual funds segment has seen double-digit growth in assets under management over the last five years. 5. Coverage This segment's financial services are broadly divided into two categories: • General Liability Insurance (automotive, home, medical, fire, travel, etc.) • Insurance for your life (term-life, money-back, unit-linked, pension plans, etc.) Individuals and businesses may use insurance to protect themselves from unforeseen events and incidents. The essence of the commodity, time horizons, consumer risk assessment, insurance, and many other important qualitative and quantitative factors all affect pay-outs. In India, insurance companies are well-represented in the life insurance (24) and general 19 CU IDOL SELF LEARNING MATERIAL (SLM)

insurance (39) groups. The Insurance Regulatory and Development Authority of India regulates the insurance industry (IRDAI). 6. The Stock Exchange Customers on the Indian stock exchanges (National Stock Exchange and Bombay Stock Exchange) can invest in a variety of equity-linked items through the stock market division. Customers' returns are dependent on capital appreciation (increases in the valuation of the stock solution and/or dividends) and company pay-outs to investors. 7. Treasury/Debt Instruments Investments in government and private-sector bonds are among the services provided in this section (debt). The bond issuer (borrower) promises the lender fixed payments (interest) and principal redemption at the end of the investment period. Listed bonds, non-convertible debentures, capital-gain bonds, GOI savings bonds, tax-free bonds, and other instruments fall under this category. 8. Tax and auditing recommendations This section covers a wide selection of financial resources in the fields of tax and auditing. Person and company clients may be segmented in this services domain. They are as follows: • Individual Taxes (determining tax liability, filing tax-returns, tax-savings advisory, etc.) • Business Taxes (determining tax liability, transfer pricing analysis and structuring, GST registrations, tax compliance advisory, etc.) Service providers in the auditing sector include services such as statutory audits, internal audits, service tax audits, tax audits, process/transaction audits, risk audits, and stock audits, among others. These services are essential to ensure the qualitative and quantitative smooth operation of business organisations, as well as to mitigate danger. More details on Indian taxes can be found here. 9. Restructuring of Resources These services are mainly provided to businesses, and they include reorganising capital structure (debt and equity) to improve profitability or respond to crises such as bankruptcy, volatile markets, liquidity shortages, or hostile takeovers. Structured transactions, lender agreements, accelerated M&A, and capital raising are common financial solutions in this segment. 10. Portfolio Management is number ten. Portfolio managers evaluate and optimise investments for clients across a wide range of assets. This category provides a highly specialised and tailored range of solutions that allow clients to achieve their financial goals through portfolio managers that analyse and optimise investments for clients across a wide range of assets (debt, equity, insurance, real estate, etc.). These programmes are both discretionary (investment only at the discretion of the fund 20 CU IDOL SELF LEARNING MATERIAL (SLM)

manager with no client intervention) and non-discretionary (investment only at the discretion of the fund manager with no client intervention) (decisions made with client intervention). 2.4 TYPES OF FINANCIAL SERVICES 1. Wealth Management: There are several different types of financial services to choose from. However, if you want to save your hard-earned money while still receiving a fantastic return, wealth management is the way to go. This type of financial service helps people manage and invest their money in a variety of financial instruments. Insurance products, mutual funds, equity, debt, and an individual's financial objectives are examples of financial instruments. 2. Banking: No matter what the case, the Indian banking sector has always stood the test of time and emerged victorious. The Reserve Bank of India (RBI) oversees this sector's capitalization, liquidity, and financial health. It is also taking a number of steps to rebuild the domestic banking sector. In India, the banking industry has chosen novel banking models such as payment and small finance banks. India currently has 21 private sector banks, 27 public sector banks, 56 regional rural banks, 49 international banks, and over 95,000 urban/rural cooperative banks. This industry provides a wide range of financial services, including personal banking, business banking, and loans. India recently ranked fifth in the Faster Payments Innovation Ranking (FPII). 3. Insurance-related services: Insurance is one of the most important types of financial services because it assesses the risk involved in insuring a customer. It also works as a consultant for investment banks, providing advice on loan risks. In India, the IRDAI oversees this operation. There are two types of insurance available: general insurance and life insurance. It provides people with much- needed protection from unknown dangers. Several firms currently sell insurance in India under the categories of 24 life insurance and 39 general insurance. 4. Accounting and Tax Services: Then it comes to various types of financial services, tax and accounting services are extremely relevant. This service is divided into two categories: individual tax and company tax. The accountants here are in charge of financial statements such as the cash flow statement, balance sheet, and income statement, all of which are prepared in accordance with GAAP guidelines. They not only look at the incomes, liabilities, and estimated expenses, but they also look at the liabilities. Accountants also conduct auditing, which is an extra section of accounting. Internal auditing, statutory auditing, tax auditing, stock auditing, and risk 21 CU IDOL SELF LEARNING MATERIAL (SLM)

auditing are only a few of the services available. These systems ensure that a company's operations operate smoothly. 5. Mutual Funds: Mutual funds are classified as financial services because they provide investment services that cover a wide range of debts, properties, and equity-linked assets. This investment is divided into several categories, each of which is headed by a specialist. Mutual funds are thought to be the better choice for those who choose to spend a small amount of money rather than a large sum. Since there are several partners, the risk is lower than for other investments. 6. Portfolio Management Services: Portfolio Management Services provide the development and maintenance of an investment portfolio. Professional fund managers handle these investments on behalf of other people. Individuals can also choose to create and manage their own portfolio account. The aim of this service is to increase the expected returns from the invested amount while keeping the risk in mind. It is, in essence, a long-term plan that allows people to achieve their financial objectives. The fund managers concentrate on HNIs and evaluate different forms of assets such as debt, insurance, real estate, and equity. 7. The Stock Exchange: The stock market is regarded as a crucial component of financial services. It entails a variety of operations, such as the purchase, sale, and insurance of publicly traded corporations. This practise can be carried out from a number of stock exchange locations in a country where stock and shares are exchanged. When it comes to India's capital market, the Securities and Exchange Board of India is in control. This component contains all of the Indian stock market's potential investment options for residents of India. Everyone expects returns when they spend, but in this case, individuals are entitled to profit/benefits based on capital appreciation. 2.5 SCOPE OF FINANCIAL SERVICES Financial Services consist of wide range of activities which are broadly classified into 2: – i) Traditional Activities. ii) Modern Activities. 22 CU IDOL SELF LEARNING MATERIAL (SLM)

Figure 2.1 – Financial Services Traditional Activities Financial intermediaries have historically offered a wide variety of services related to capital and money market transactions. These services are classified into 2 groups: – Fund based activities and Non-fund based activities. Fund Based Activities. Activities involving the acquisition of funds and assets for clients are referred to as fund- based activities. Primary and secondary trading operations, investing in money market instruments, foreign exchange market activities, and engaging in hire buy, venture capital, and equipment leasing are all examples of fund-based activities. Non-fund-based Activities These services are referred to as fees-based services because they are offered by financial intermediaries on a non-fund basis. Non-fund-based operations are proprietary services rendered to customers by financial institutions in exchange for fees, commissions, dividends, and brokerage. Portfolio management, issue management, stock broking, merchant banking, credit rating, debt and capital reconstruction, bank guarantee, and other services are included.’ Modern Activities Financial intermediaries also provide a wide variety of financial services in addition to conventional services. The majority of these activities fall under the category of non-fund related activities. Few of the modern activities are listed below: – • Merger and acquisition preparation, as well as assisting in their successful completion. • Assisting business customers with capital reconstruction. • Helping sick businesses with recovery and restoration. • Managing the portfolios of major public-sector companies. 23 CU IDOL SELF LEARNING MATERIAL (SLM)

• Making suggestions for improving management style and process in order to achieve better performance. • Acting as trustees for the holders of debentures. • Offering project advisory services that include everything from project planning to capital raising. 2.6 SUMMARY Credit services are an essential component of the financial system. Financial services cater to the needs of individuals, organizations, and companies across a network of components. Prior to economic liberalization, the Indian Financial Service Sector was characterized by a number of factors that slowed its development. Financial services encompass a wide range of operations that can be categorized into two categories: traditional and modern. In the changed economic environment, many financial intermediaries have begun to expand their operations in the financial services field by offering a variety of new products. As a result, the financial services sector has emerged as the sunrise market with the highest growth rate. However, in order to meet the economy's ever-increasing financial demands, the financial services industry must overcome a number of obstacles. 2.7 KEYWORDS  (IRDAI) Insurance Regulatory and Development Authority of India  (NSE) National Stock Exchange  (BSE) Bombay Stock Exchange  (FPII) Faster Payments Innovation Index  (M&A) Merger & Acquisition 2.8 LEARNING ACTIVITY 1. Identify and record data of 25 Top companies of Indian origin listed in BSE. ___________________________________________________________________________ ___________________________________________________________________________ 2. Visit a Bank and understand the process followed in Opening up Current Account & process Working Capital Loan. ___________________________________________________________________________ ___________________________________________________________________________ 24 CU IDOL SELF LEARNING MATERIAL (SLM)

2.9 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Discuss briefly about Non-Fund based Financial services 2. Discuss briefly about Mutual Funds 3. Discuss briefly about Insurance related Financial services Long Questions 1. Define a financial service industry and discuss the various services rendered by it. 2. “Financial intermediaries have to perform the task of financial innovation to meet the dynamically changing needs of the economy”. Discuss. 3. Discuss some of the innovative financial instruments introduced in recent times in the financial service sector. 4. Critically analyse the present position of the financial service sector in India and state the challenges it has to face in the years to come. B. Multi Choice Questions 1. The ___________ services are offered to international investors. a. Custodial Services b. Financial Services c. Factoring Services d. Call Centre Services 2. The purchase of __________ by a financial service firm is the core theme of forfaiting. a. Trade bill b. Export bill c. Import bill d. GST Bill 25 CU IDOL SELF LEARNING MATERIAL (SLM)

3. _______is an important category of financial services that assesses the risk involved in insuring any customer. a. Banking b. Insurance c. Portfolio Management d. Customer Management 4. Individual tax and ________ are two categories of tax and accounting services. a. Business Tax b. Income Tax c. Value Added Tax d. Service Tax 5. _____________was listed in the financial services groups since they provide investment services for divergent loans, properties, and equity-linked assets. a. Wealth Management b. Insurance c. Mutual Funds d. Current Account Answers 1 – b, 2 – a, 3 – a, 4 – b, 5 – a 2.10 REFERENCES Text Books:  Bhole, L.M., Financial Institutions & Markets. Tata McGraw Hill, New Delhi  Khan, M.Y.Financial Services Tata McGraw Hill, New Delhi  Meir, Kohn, Financial Institutions & Markets, Tata McGraw Hill, New Delhi  Prasanna Chandra: Financial Management, Tata McGraw Hill. Reference Books:  Kothari, C.R., Investment Banking & Customer Services Arihant Publishers, Jaipur  Sharpe, William F. etc. Investment. New Delhi, PHI  Pandey, I.M., Financial Management, Vikas Publishing House, New Delhi 26 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 3 - FINANCIAL SERVICES Structure 3.0 Learning Objectives 3.1 Introduction 3.2 Fund Based Services 3.3 Non-Fund Based Services 3.4 Asset/Fund Based Services 3.5 Non-Fund Based/Fee Based Financial Services 3.6 Summary 3.7 Keywords 3.8 Learning Activity 3.9 Unit End Questions 3.10 References 3.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  Describe nature of financial services  Identify scope of financial services  Benefits of financial services  Process of financial services 3.1 INTRODUCTION TO FINANCIAL SERVICES The word \"financial services\" refers to the economic services that a number of financial institutions provide in the area of money management. Loans, insurance, securities, credit cards, and other intangible financial market assets are examples. Financial services are provided by institutions such as banks, insurance companies, mutual funds, credit unions, brokerage firms, and consumer finance companies. It is a critical component of the financial system that enables financial transactions in a given economy. Financial services are important for economic growth because they link those who need money with those who can give it. It allows people to improve their living conditions by encouraging them to rent rather than buy various things. Financial services function as a hedge against risk resulting from a variety of unpredictable events by insuring people against 27 CU IDOL SELF LEARNING MATERIAL (SLM)

risks. Since they are designed and delivered in response to customer needs, these programmes are consumer-oriented. 3.2. FUND BASED SERVICES Financial services cover a broad range of topics. This is due to the fact that it encompasses a wide variety of programmes. Financial services can be divided into two categories: There are two types of services: fund-based and non-fund-based (or fee-based services) The following are examples of asset-based or fund-based services: 1. Subsidizing 2. Taking part in secondary market transactions 3. Investing in money market instruments such as CPs, CDs, and so on. 4. Leasing or financing of equipment 5. Rent-to-own 6. Investing in startups 7. Discounting of bills. 8. Insurance providers. 9. The Factoring Process 10. Betrayal 11. Housing finance 12. Mutual funds 3.3. NON-FUND BASED SERVICES Customers today aren't satisfied with just getting money. They have higher expectations of financial service providers. As a result, non-fund operations are often provided by financial service firms or financial intermediaries. Fee-based services are another name for these types of services. The following are some of them: 1. The process of securitization 2. Commercial banking 3. Credit score 4. Syndication of loans 5. Programs linked to business opportunities 28 CU IDOL SELF LEARNING MATERIAL (SLM)

6. Project consulting services 7. International companies and NRIs are served. 8. Portfolio management 9. Acquisitions and mergers 10. Capital reorganisation 11. Debenture trusteeship 12. Facilities of a custodian 13. Investing in stocks 3.4. ASSET/FUND BASED SERVICES 1. Equipment leasing/lease financing: A lease is an arrangement in which a business obtains the right to use a capital asset such as equipment in return for the payment of lease rentals. The individual (or company) who obtains the right is referred to as the lessee. He is not given ownership of the property. Only the right to use the asset is transferred to him. Lessor refers to the individual (or company) who grants the right. 2. Consumer credit and hire purchase: Hire purchase is a leasing option. The term \"hire purchase\" refers to a contract in which items are bought and sold on the condition that payment be made in instalments. The buyer only receives custody of the goods. He isn't given possession. Only after the last instalment is paid does he become the beneficiary. The seller has the right to repossess the goods if the buyer fails to pay any instalment. Interest is included in each instalment. 3. Bill discounting: Finance companies commonly offer bill discounting as a fund-based financial service. A time bill's holder does not have to wait until the maturity or due date to receive payment. If he runs out of money, he can bargain with his banker for a discount. After deducting a certain amount, the banker credits the net sum to the customer's account (discount). As a result, the bank collects the bill and credits the customer's account with the bill's value minus the discount. On the due date, the drawee makes payment to the banker. If he doesn't pay, the banker will go after the customer who discounted the fee for reimbursement. Bill discounting, in a nutshell, is the practise of lending money against the security of a bill of exchange. 4. Venture capital: Venture capital is basically capital that is available for the purpose of funding new business projects. It entails lending money to start-up businesses. It's when you put money into a high-risk project with the aim of making a lot of money. In a nutshell, venture capital refers to long-term risk capital offered in the form of equity financing. 5. 5. Housing finance: Housing finance simply applies to the provision of funds for the 29 CU IDOL SELF LEARNING MATERIAL (SLM)

construction of homes. With the establishment of National Housing Bank (NHB) by the RBI in 1988, it became a fund-based financial service in India. It is the country's premier housing finance institution. Several specialist financial institutions/companies have entered the field of housing finance up to now. HDFC, LIC Housing Finance, Citi Home, Ind Bank Housing, and others are among the institutions. 6. Insurance services: Insurance is a two-party deal. The insured is one party, and the insurer is the other. The person whose life or property is insured with the insurer is referred to as the insured. In other words, the individual whose risk is insured is referred to as the insured. The insurer is the business to which the insured transfers his or her risk. In other words, the person who insures the liability of the insured is referred to as the insurer. As a consequence, insurance is a legal arrangement between the insurer and the insured. It is an arrangement under which the insurance agent agrees to compensate the insured if a certain incident occurs in exchange for a fee. It is an arrangement between an insurer and an insured in which the insurer agrees to reimburse the insured for any losses incurred as a result of the risk insured against. “Insurance is a mechanism by which uncertainties are made certain,” says Mc Gill. “Insurance is a scheme whereby individuals jointly share the losses of risks,” says Jon Megi. 7. 7. As a result, insurance is a device that spreads the risk of a loss incurred by an unknown occurrence among a large number of people who are vulnerable to it and who willingly come together to protect themselves against it. The ‘insurance policy' is the agreement that includes all of the terms and conditions of insurance (i.e. the written contract). The term \"sum guaranteed\" refers to the amount for which an insurance policy is purchased. The monetary sum in exchange for which the insurer offers to cover the loss is referred to as the \"insurance premium.\" The insured must pay this fee on a regular basis. It may be charged on a monthly, quarterly, half-yearly, or annual basis. 8. Factoring: Factoring is a business transaction in which a factor purchases account receivables (receivables resulting from credit sales of products or services) and pays the supplier or creditor immediately in cash. As a result, it is a transaction in which a financial institution or bank purchases a firm's (client's) account receivables. As a result, the factor lends money to the client (supplier) for account receivables. The factor is in charge of collecting the debts owed to the company. The risk is borne by the financial institution (factor). The factor charges a fee for this type of service, as well as for the interest, in the interim. Factor age is the term for this fee or bill. 9. Forfaiting: Forfaiting is a form of financing for foreign trade receivables. It is a non- recourse acquisition of receivables resulting from the export of goods and services by a banker or other financial institution. The exporter relinquishes his right to obtain future payment from the buyer of the goods supplied to the forfeiter. Forfaiting is a tactic that 30 CU IDOL SELF LEARNING MATERIAL (SLM)

allows an exporter to sell his products on credit while still receiving payment well ahead of schedule. In a nutshell, forfaiting is the method of a forfeiter (financing agency) discounting an export bill and paying the exporter cash on the spot. The exporter does not need to be worried about the collection of the export bill. He should focus solely on export trade. 10. Mutual fund: Mutual funds are financial intermediaries that pool people's assets and invest them in a combination of corporate and government bonds. This portfolio of shares is actively operated by mutual fund managers, who receive income from dividends, interest, and capital gains. The profits are ultimately distributed to mutual fund investors. 3.5. NON-FUND BASED/FEE BASED FINANCIAL SERVICES 1. Merchant banking: Merchant banking is a form of service banking that focuses on non-fund services such as arranging funds rather than supplying them. The merchant banker merely serves as a middleman. Its main function is to transfer money from those who own it to those who need it. Today, a merchant banker is an organisation that understands the needs of promoters and financial institutions, banks, stock exchanges, and capital markets on the one hand, and financial institutions, banks, stock exchanges, and money markets on the other. “Any individual who is engaged in the business of issue management either by making arrangements about selling, purchasing, or subscribing to securities or acting as manager, consultant, advisor, or providing corporate advisory services in relation to such issue management,” according to the SEBI (Merchant Bankers) Rule, 1992. 2. Credit rating: 1. A credit rating is a rating agency's professional assessment of a debt instrument's issuer's ability and capacity to meet financial obligations on time and in full. It evaluates an issuer's ability and willingness to repay both interest and principal over the term of a graded instrument. It's a financial and market analysis of a company's prospects. In a nutshell, credit rating is a means of assessing a company's creditworthiness through an independent entity. 3. Stock broking: In recent years, stock broking has developed into a specialised advisory service. A person who is a member of a reputable stock exchange is referred to as a stock broker. He is a stock and securities trader who buys, sells, and exchanges stocks and securities. Each person who wishes to work as a stock broker must first register with the SEBI. As a shareholder, he will be bound by the stock exchange's rules, regulations, and by-laws. 4. Custodial services: Custodial services are the services provided by a custodian in the most specific sense (custodian services). A custodian is an organisation or person to 31 CU IDOL SELF LEARNING MATERIAL (SLM)

whom security owners entrust the safekeeping of their assets. Someone who looks after public property or securities is known as a custodian. Custodians act as intermediaries between businesses and their clients (i.e. security holders), as well as between businesses and other organisations (financial institutions and mutual funds). Custodians and actual owners of shares or properties have agreed to act as custodians for those who hand over their assets. The role of a custodian is to keep the securities or documents secure. A custodian's job is potentially hazardous and costly. The remuneration he gets for delivering these facilities is known as custodial charges. Custodial service is described as the act of keeping securities secure for and on behalf of another individual for a fee known as custodial charges. 5. Loan syndication: A loan syndication arrangement is one in which a consortium of banks pool their capital to provide funding for a single loan. In a loan syndication, a consortium of 10 to 30 banks join together to provide funds, with one of the banks serving as the lead manager. The corporate enterprises select the lead bank based on their confidence in the lead manager. A single bank is unable to provide a large loan. As a result, many banks band together to form a syndicate. Loan syndication is the term for this. As a result, loan syndication and consortium funding are somewhat close. 6. Securitisation (of debt): The bank's assets are the loans it makes to its clients. They're referred to as loan assets. Loan properties, unlike investment assets, are not tradable or transferable. As a result, loan reserves aren't liquid. The issue is how to make a bank's loan liquid. The solution to this dilemma is to turn the loans into marketable securities. Loans are now liquid. They acquire the trait of marketability. This is accomplished via the securitization process. Securitization is a modern financial term. Present or prospective cash flows are converted into marketable securities that can be sold to investors. It is the method of turning financial assets into shares, such as loan receivables, credit card balances, recruit buy debtors, lease receivables, exchange debtors, and so on. As a result, securitization can be used to finance any asset with stable cash flows. Securitisation is the method of converting an illiquid asset into a security that can be exchanged on the open market later. In a nutshell, securitization is the process of converting illiquid, non-marketable assets into securities that are liquid and tradeable. It is the method of turning a lending institution's assets into negotiable instruments. Factoring is not the same as securitisation. Factoring is the process of transferring debts without converting them into marketable securities. Securitization, on the other hand, often entails the conversion of illiquid assets into liquid assets that can be sold to investors. 3.6 SUMMARY Financial services are an integral part of the overall financial system. Via a network of components, financial services cater to the needs of individuals, organisations, and 32 CU IDOL SELF LEARNING MATERIAL (SLM)

companies. Prior to economic liberalisation, the Indian Financial Services Sector was plagued by a slew of issues that stifled its expansion. Financial services encompass a wide variety of operations that can be divided into two categories: traditional and modern. Many financial intermediaries have begun to broaden their operations in the financial services sector as a result of the changing economic climate by providing a range of new products. As a result, the financial services market has become the fastest-growing sunrise industry. However, the financial services industry faces numerous challenges in meeting the economy's ever-increasing financial demands. 3.7 KEYWORDS  Equipment leasing/Lease financing: A lease is an agreement under which a firm acquires a right to make use of a capital asset like machinery etc  (NHB) National Housing Bank  (SEBI) Security Exchange Board of India  Forfaiting is a form of financing of receivables relating to international trade  Venture capital simply refers to capital which is available for financing the new business ventures 3.8 LEARNING ACTIVITY 1. Examine the process involved in Credit Rating of Individual / Institutions ___________________________________________________________________________ ___________________________________________________________________________ 2. Identify 3 Top Credit rating agencies in India and study their growth ___________________________________________________________________________ ___________________________________________________________________________ 3.9 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1.Explain briefly about Securitization 2.Discuss briefly about Loan Syndication 3.Describe briefly about forfaiting. 33 CU IDOL SELF LEARNING MATERIAL (SLM)

Long Questions 1. Explain in detail about the fund based or asset-based services in Financial Services? 2. Discuss about Differences between Fund Based and Non-Fund Based Financial Services. 3. Explain Insurance Services and how does it benefit customers in detail. 4. List down 10 non-fund-based services in the market. 5. How does Securitization differ from factoring? B. Multi Choice Questions 1. Both fund-based and fee-based financial services are referred to as. a. Higher purchase b. underwriting c. Factoring d. Securitisation 2. ___________ is a transaction in which items are bought and sold with the expectation that payment will be made in instalments. a. Hire purchase b. underwriting c. Factoring d. Securitisation 3. _______means supplying funds for the construction of a home. With the establishment of National Housing Bank (NHB) by the RBI in 1988, it became a fund-based financial service in India. a. Venture Capital b. Housing Finance c. Insurance Services d. SEBI 4. _____________means a rating agency's expert opinion on the issuer of a debt instrument's relative willingness and capacity to fulfil financial obligations on time and in full. a. Credit rating b. Stock Broking c. Merchant Banking d. Business Banking 34 CU IDOL SELF LEARNING MATERIAL (SLM)

5. ___________ means a rating agency's expert opinion on the issuer of a debt instrument's relative willingness and capacity to fulfil financial obligations on time and in full. a. Credit rating b. Stock Broking c. Merchant Banking d. Corporate Rating Answers 1 – a, 2 – c, 3 – b, 4 – a, 5 – a 3.10 REFERENCES Text Books:  Bhole, L.M., Financial Institutions & Markets. Tata McGraw Hill, New Delhi  Khan, M.Y.Financial Services Tata McGraw Hill, New Delhi  Meir, Kohn, Financial Institutions & Markets, Tata McGraw Hill, New Delhi  Prasanna Chandra: Financial Management, Tata McGraw Hill. Reference Books:  Kothari, C.R., Investment Banking & Customer Services Arihant Publishers, Jaipur  Sharpe, William F. etc. Investment. New Delhi, PHI  Pandey, I.M., Financial Management, Vikas Publishing House, New Delhi 35 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 4 - CHALLENGES & INNOVATION Structure 4.0 Learning Objectives 4.1 Introduction 4.2 Challenges Faced by Financial Sectors 4.3 New Financial Product & Services 4.4 Innovative Financial Instrument 4.5 Money Management 4.6 Summary 4.7 Keywords 4.8 Learning Activity 4.9 Unit End Questions 4.10 References 4.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  Describe nature of Challenges & innovations involved in financial services  Identify scope of Challenges & innovations involved in financial services  Benefits of Challenges & innovations involved in financial services  Process of Challenges& innovations involved in financial services 4.1 INTRODUCTION TO CHALLENGES & INNOVATION The word \"financial services\" refers to the economic services that a number of financial institutions provide in the area of money management. Loans, insurance, securities, credit cards, and other intangible financial market assets are examples. Financial services are provided by banks, insurance companies, mutual funds, credit unions, brokerage firms, and consumer finance companies. In today's world, financial services face unique challenges, and various innovations are being introduced to enhance the financial transaction process. Financial services are critical for economic growth because they connect those who need money with those who can provide it. It allows people to improve their living conditions by encouraging them to rent rather than buy various things. Financial services function as a hedge against risk resulting from a variety 36 CU IDOL SELF LEARNING MATERIAL (SLM)

of unpredictable events by insuring people against risks. Since they are designed and implemented in response to customer needs, these programmes are consumer-oriented. 4.2. CHALLENGES FACED BY THE FINANCIAL SERVICE SECTOR The Financial Service Sector faces numerous challenges in meeting the economy's ever- increasing financial demand. The Following are some of the most important challenges: 1. In the financial services industry, there is a scarcity of skilled employees. 2. Investors are unaware of the numerous financial services available. 3. A lack of clarity in financial services disclosure standards and accounting procedures. 4. There is a lack of specialization in various financial services (specialization only in one or two services). 5. Insufficient data for making financial services decisions. 6. In the financial services industry, there is a lack of an appropriate risk management system. With the rising demands of consumers, the aforementioned problems are likely to multiply. However, India's financial system is currently undergoing rapid transformation, especially following the implementation of new economic reforms. 4.3 NEW FINANCIAL PRODUCT & SERVICES Financial services are becoming increasingly important around the world. People expect a Financial Service Company to play a very diverse role not only as a supplier of finance but also as a departmental store of finance in these days of complex finance. The free market idea has gained a lot of popularity since the implementation of economic emancipation policies and the opening of the economy to multinationals. As a result, both corporate and individual customers are subjected to the phenomenon of volatility and ambiguity, and they expect the financial services industry to innovate new products and services to meet their diverse needs. New instruments and goods are evolving in the stock market as a result of developments. The capital and money markets are being increasingly expanded and deepened. Furthermore, with the introduction of new products and creative capital market operating strategies, the international capital market has undergone systemic change. Many financial intermediaries, including banks, have already begun to diversify their financial services offerings by providing a wide range of new products. As a result, the world of financial intermediation has become more sophisticated and innovative. Some of them are discussed below: 37 CU IDOL SELF LEARNING MATERIAL (SLM)

Merchant Banking: A merchant banker is a type of financial intermediary who assists in the transfer of capital from those who have it to those who need it. Merchant banking encompasses a broad variety of operations, including portfolio management, project counselling and valuation, underwriting of shares and debentures, loan syndication, serving as a banker for refund requests, and managing interest and dividend warrants, among others. As a result, a merchant banker provides a variety of services to corporations, promoting the country's economic growth. Loan Syndication: This is analogous to what is known as \"consortium funding.\" However, as a lead-manager, the merchant banker takes on this responsibility. It refers to a loan negotiated by a bank's lead manager for a borrower, who is typically a large corporation or government agency. Other banks that are willing to lend will enter the loan by contributing a sum that is acceptable for their lending policies. Since a single bank cannot provide such a large loan, many banks join forces to form a syndicate. It also helps syndicate members to share the credit risk associated with a specific loan among themselves. Leasing: A lease is an arrangement under which a corporation or a business obtains the right to use a capital asset such as equipment in exchange for the payment of a predetermined fee known as \"rental charges.\" The lessee does not own the asset, but he can use it and have complete control over it. He will be responsible for all maintenance, repair, and operating costs. Equipment leasing is very common in countries like the United States, the United Kingdom, and Japan, with leasing companies financing approximately 25% of plant and equipment. Many financial institutions in India have also joined the equipment leasing market. Commercial banks have also been given permission to engage in this activity through the formation of subsidiary companies. Mutual Funds: A mutual fund is a financial service firm that raises money by pooling people's assets. It is invested in a diversified portfolio in order to distribute and reduce risk. The fund offers an investment option for small investors who are unable to engage in large company equities. It provides low risk, consistent returns, high liquidity, and long-term capital appreciation. Factoring: Factoring is the method of a financial service firm overseeing a client's revenue ledger. In other terms, it's a contract in which a financial broker takes on the credit risk of recovering book debts on behalf of its customers. The element assumes full responsibility for recovering the book debts. His services are equivalent to those of a del credre agent who collects debts. A factor, on the other hand, provides credit records, collects debts, tracks the sales ledger, and provides debt financing. As a result, he offers a range of resources in addition to financing. 38 CU IDOL SELF LEARNING MATERIAL (SLM)

Forfeiting: Forfeiting is a technique in which a forfeiter (financing agency) discounts an export bill and pays ready cash to the exporter, allowing the exporter to focus on the export front rather than worrying about export bill collection. The forfeiter does so without recourse to the exporter, and the exporter is shielded from the possibility of importer non-payment of debts. Venture Capital: Another form of funding that includes equity participation is venture capital. A venture capitalist invests in a project that has the potential to be a game-changer. It's the polar opposite of traditional \"security-based financing.\" Fresh concepts and technical advances are given a lot of publicity. The financial intermediary provides funds not only for \"start-up capital,\" but also for \"growth capital.\" Custodial Services: It's a new line of business that has recently gained traction. A financial intermediary, in this case, primarily provides services to clients, especially foreign investors, for a fee. Foreign investors benefit from custodial services, which include the safekeeping of shares and debentures, the collection of interest and dividends, and the tracking of business developments and corporate securities. Corporate Advisory Service: Financial intermediaries, especially banks, have established corporate advisory service branches to provide services to their corporate clients exclusively. Some banks, for example, have issued computer terminals to their corporate customers so that they can perform some of their vital banking transactions from the comfort of their own offices. This service is highly beneficial to consumers as new sources of financing, such as Euro loans and GDRs, become available to corporate customers. Securitisation: Securitisation is the mechanism by which a financial institution transforms its illiquid, non-negotiable, and high-value financial assets into small-value securities that can be exchanged and transferred. A financial institution may have a significant portion of its assets locked up in long-term assets such as real estate, equipment, and other non-negotiable assets. Securitisation would aid the financial institution in raising cash against such assets by selling small-value securities to the public in such cases. They can be traded in the market just like any other safe. It is ideally suited to housing finance firms whose loans are often long-term in nature and whose funds are invested in real estate for a long time. The only way to transform these illiquid assets into liquid assets is to securitize them. Derivative Security: A derivative protection is one whose value is determined by the values of other basic variables that support it. These factors are, in most situations, nothing more than the values of traded securities. A derivative protection is primarily used as a risk control tool, and it is resorted to by the investment manager to cover the risk of price fluctuations. A derivative protection is derived from other trading securities backing it, much as a forward contract is a derivative of a spot contract. The 39 CU IDOL SELF LEARNING MATERIAL (SLM)

value of a derivative security is, of course, calculated by the prices of the underlying securities. Derivatives aid in the breakdown of risks into different elements, such as credit risk, interest rate risk, and exchange rate risk. It allows for the precise identification and pricing of different risk components. If possible, I even traded them. Derivatives are a good option for financial intermediaries because they will become more important in the near future. Some derivatives are currently in use in India. New Products in Forex Market: In the forex markets of developing countries, new products have also appeared. Any of these products have yet to be fully introduced into Indian markets. The following are the most important among them: (i) Forward Contracts: A forward trade is one in which a foreign currency is delivered at a predetermined future date for a predetermined amount. It may have a set maturity date, such as May 31st, or a flexible maturity date, such as May 1st to May 31st. There is a moral obligation to uphold this contract at all costs, or else there will be a penalty. Only legitimate business transactions are allowed to use forward contracts. It can be used for other transactions as well, such as interest payments. (ii) Options: It is a contract in which the holder of the option has the right to buy or sell a certain sum of currency against another currency at a fixed rate on a future date according to his option, as the name implies. Under call options, the customer has the option to purchase, while under put options, the customer has the option to sell. Trading options can lead to speculation, which is why there are so many restrictions in India. (iii) Futures: It's a deal in which the parties agree to buy or sell a certain amount of foreign currency at a specified price on a specified exchange at a future date. In contrast to options, there is a contractual commitment to buy or sell foreign exchange at a fixed rate at a future date. It can only be exchanged on a stock exchange. (iv) Swaps: A swap is a financial transaction in which a financial intermediary buys and sells a specified foreign currency for various maturity dates at the same time—for example, buying spot and selling forward or vice versa for various maturities. Swaps will result in the simultaneous buying and sale of the same foreign currency of the same value for different maturities to reduce exposure risk. It can also be used to enter any existing arbitrage operations between two countries. It can also be applied to the interest rate market. (v) Lines of Credit (LOC): It is a novel financing method for the importation of goods and services with payment conditions that are postponed. A letter of credit (LOC) is an agreement between a financing institution/bank in one country and another institution/bank/agent in another country to facilitate the sale of goods and services in order for importers to import without deferred payment terms. This could be backed up by a guarantee from the importing country's institution/bank. Since the funds are paid out of the 40 CU IDOL SELF LEARNING MATERIAL (SLM)

pool account with the financing agency and debited to the account of the borrower agency/importer whose contract for availing the facility has already been authorised by the financing agency on the advice of the overseas institution, the LOC aids exporters in receiving payment as soon as the goods are delivered. It functions as a type of financing for the necessary goods to be imported for a set period of time and on a set of terms. The most important gain is that it saves a significant amount of time and resources in terms of shared checking of bonafides, sources of funding, and so on. It is a currency exchange source. 4.4 INNOVATIVE FINANCIAL INSTRUMENT (i) In recent years, creativity has been a driving force behind the remarkable 41 success of many financial services firms, and it now plays a central role in both strategy and policy decisions. This has allowed them to stay on top of changing times and customer demands. As a result, many novel financial instruments have recently entered the financial market. Any of them have been addressed in the following paragraphs: (ii) Commercial Paper: A paper is a money market product that can be sold for a limited period of time. It has the appearance of an unsecured promissory note with a 3 to 6-month fixed maturity. This can be used by both banking and non- banking firms to collect short-term debt. It also has a competitive interest rate. Commercial papers are sold at a lower price than their face value and redeemed at the same price. Because of its large denomination, it is only appropriate for institutional and corporate investors. (iii) Treasury Bill: A treasury bill is a central government-issued money market instrument. It's sometimes sold at a discount and then redeemed at face value. The government recently issued short-term Treasury bills with maturities of 182 days and 364 days. (iv) Certificate of Deposit: Scheduled commercial banks have been granted permission to issue certificates of deposit with no interest rate restrictions. This is a money market instrument that, unlike a fixed deposit receipt, is negotiable and thus provides full liquidity. As a result, it also has a secondary sector. Because of the large denomination, it is only appropriate for institutional and corporate investors. (v) Inter-bank Participations (IBPs): Only scheduled banks are eligible to participate in the interbank participation programme, which lasts between 91 and 180 days. This may be either \"at risk\" or \"at no risk\" involvement. However, only a few banks have issued IBPs with interest rates ranging from 14 to 17 percent per year so far. This is a money market instrument as well. (vi) Zero Interest Convertible Debenture/Bonds: These instruments bear no CU IDOL SELF LEARNING MATERIAL (SLM)

interest until they are converted, as their name implies. After a period of time, these instruments are converted into equity securities. (vii) Deep Discount Bonds: In the case of deep discount bonds, there will be no interest charges as well. As a result, they are sold at a significant discount to their face value. The Industrial Development Bank of India, for example, released deep discount bonds in February 1996. Each bond, with a face value of Rs.2,00,000 and a maturity period of 25 years, was issued at a deeply discounted price of Rs.5300. Of course, there are provisions for early withdrawal or redemption, in which case the bond's considered face value is decreased proportionately. Any individual may be given this bond. (viii) Index-Linked Guilt Bonds: These are instruments with a predetermined maturity date. Their maturity value is determined by the index in effect at the time of maturity. As a consequence, they are deflationary devices. (ix) Option Bonds: These bonds may be cumulative or non-cumulative, depending on the holder's choice. Cumulative bonds collect interest and are only repaid when they reach maturity. Non-cumulative bonds, on the other hand, pay interest on a regular basis. The prospective investor must exercise this option at the time of investment. (x) Secured Premium Notes: These are instruments with a three-year interest-free period. In other words, companies with high capital-intensive investments can use this type of financing because the interest is only paid after three years. (i) Medium Term Debentures: Debentures are usually repayable only after a long period of time. These debentures, on the other hand, have a medium- term maturity. They are extremely liquid because they are secured and negotiable. In Germany, these types of debt instruments are very common. (ii) Variable Rate Debentures: Debt securities with a variable rate are known as variable rate debentures. They have a compound rate of interest, but it is not a fixed rate of interest. It varies from time to time according to a pre- determined formula, such as the one we use to calculate Dearness Allowance. (iii) Non-Convertible Debentures with Equity Warrants: Debentures are usually repaid on the maturity date. However, unlike planned insurance plans, these debentures are redeemed in full at a premium in instalments. Instalments are due at the end of the fifth, sixth, seventh, and eighth years from the date of allotment. (iv) Equity with 100% Safety Net: Some firms provide a \"100% safety net\" to the general public. It simply implies that they guarantee the issue price. If 42 CU IDOL SELF LEARNING MATERIAL (SLM)

the problem price is Rs.40 per share (nominal value of Rs.10 per share), the company is willing to buy it back at that price at any time, regardless of market conditions. That is, even though the stock price drop to Rs.30/-, the company will get it back at Rs.40/- because there is a 100 percent safety net. (v) Cumulative convertible Preference Shares: These instruments, along with their capital and accrued dividends, must be converted into equity shares within 3 to 5 years of their issue date, at the discretion of the issuing company. The key aim of implementing it is to provide an investor with a guaranteed minimum return as well as the chance of equity appreciation. In India, this instrument is not widely used. (vi) Convertible Bonds: A convertible bond is one that can be completely or partially exchanged into equity shares at a predetermined time. Compulsory convertible bonds are those that must be exchanged within 18 months of issuance. There are convertible bonds available that can be converted within 36 months. There are also bonds with ‘call' and ‘put' features that allow for conversion after 36 months. (vii) Debentures with ‘Call’ and ‘Put’ Feature: Debentures with a ‘Call' and ‘Put' feature are sometimes released. When debentures have a 'Call feature,' the issuing company has the option to redeem the debentures at a fixed price before the maturity date. The business offers the holder of debentures with \"Put functions\" the right to obtain redemption at predetermined times and at predetermined rates. (viii) Easy Exit Bond: As the name suggests, this bond allows small investors to encash the bond at any time after 18 months from the date of issue, allowing for a quick exit. It has a 10-year maturity period and a call option at any time after the first five years. This form of bond was recently issued by the IDBI with a face value of Rs.5000 per bond. (ix) Retirement Bond: This form of bond allows an investor to receive a guaranteed monthly income for a set period of time after the ‘wait period' he specifies has expired. During the 'wait time,' no payment will be made. The higher the monthly salary, the longer the waiting period. Aside from that, the investor will receive a lump sum payment at the end of the term. The IDBI, for example, has issued Retirement Bond ‘96, which provides a fixed monthly income for ten years after the completion of the waiting period. This is a bond that can be offered to anybody. (x) Regular Income Bond: This bond provides a competitive interest rate that is paid half-yearly and has the option to be redeemed early. The investor is guaranteed a steady and predictable income. The IDBI, for example, has 43 CU IDOL SELF LEARNING MATERIAL (SLM)

released the Regular Income Bond '96, which pays a 16 percent annual 44 interest rate. It can be redeemed at the end of each year after three years from the date of allotment. (xi) Infrastructure Bond: It's a form of debt instrument intended to provide investors with tax relief. The funds received from the sale of this bond would be used to encourage investment in some infrastructure sectors. Sec. 88, Sec. 54 EA, and Sec. 54EB of the Income Tax Act include tax cuts. For the first time, HUDCO has released such bonds. It has a face value of Rs.1000 and a 15 percent annual interest rate that is paid semi-annually. This bond will be listed on major stock exchanges as well. (xii) Carrot and Stick bonds: Stick bonds allow the issuer to call the bond at a specified premium if the common stock is trading at a specified percentage above the strike price. Carrot bonds have a low conversion premium to promote early conversion, and sticks allow the issuer to call the bond at a specified premium if the common stock is trading at a specified percentage above the strike price. (xiii) Convertible Bonds with a Premium put: These are bonds with a put option, which ensures the bond holder will redeem the bonds for more than their face value. (xiv) Debt with Equity Warrant: Bonds with warrants for the purchase of shares are often issued. These warrants may be traded separately. (xv) Dual Currency Bonds: This category includes bonds that are denominated in one currency, pay interest in that currency, and are redeemable in another currency. They make interest rate arbitrage between two markets much easier. (xvi) ECU Bonds (European Currency Unit Bonds): These bonds are denominated in a pool of currencies from the European Union's ten member countries. At the holder's discretion, they pay principal and interest in ECUs or any of the ten currencies. (xvii) Yankee Bonds: Bonds issued in the United States are known as Yankee bonds, while those issued in Japan are known as Samurai bonds. (xviii) Flip-Flop Notes: It's a type of debt instrument that allows investors to move between two different types of securities, such as a long-term bond and a short-term fixed-rate note. (xix) Floating Rate Notes (FRNs): These are debt instruments that allow for interest rate changes on a regular basis. (xx) Loyalty Coupons: These are rights granted to debt holders for a period of CU IDOL SELF LEARNING MATERIAL (SLM)

two to three years to swap their debt for discounted equity securities. The original subscriber must keep the debt instruments for the specified duration in order to apply for this facility. (xxi) Global Depository Receipt (GDR): A global depository receipt is a dollar- denominated instrument that can be exchanged on a stock exchange in Europe, the United States of America, or both. It denotes a certain number of underlying stock shares. The underlying equity shares of the GDR are denominated in rupees, despite the fact that the GDR is quoted and traded in dollars. The company issues the shares to a third party known as a depository, in whose name the shares are registered. Following that, the GDRs are released by the depository. 4.5 MONEY MANAGEMENT Money management refers to the processes of budgeting, saving, investing, spending, or otherwise controlling an individual's or group's capital use. The concept is most often associated with an investment manager who makes investment decisions for large pools of money in financial markets, such as mutual funds or pension schemes. Money management is a broad term that encompasses a wide range of services and products provided by the investment industry as a whole. Consumers have access to a variety of resources and apps that enable them to manage virtually every aspect of their personal finances on their own. If an investor's net worth rises, he or she will seek the advice of a financial planner for sound financial planning. Financial advisors are typically associated with private banking and investment services, and they assist clients with extensive money management plans that may include estate planning, retirement planning, and other issues. Money management for investment companies is also an essential aspect of the entire investment industry. Individual investors have a variety of mutual fund options to choose from, covering all of the equity market's investable asset classes. Investment company fund managers, which have investment solutions for public retirement plans, endowments, foundations, and other entities, also sponsor institutional clients' capital management. 4.6 SUMMARY Financial services are an essential component of the financial system as a whole. Financial services respond to the needs of individuals, organisations, and businesses across a network of components. The challenges, on the other hand, are enormous, and they are being addressed day by day through technological advancements. The Indian Financial Services Sector was troubled by a slew of issues that stifled its expansion prior to economic liberalisation. Financial services cover a wide range of activities that can be classified into two groups: traditional and modern. Many financial intermediaries have started to expand 45 CU IDOL SELF LEARNING MATERIAL (SLM)

their financial services by offering a variety of new products as the economy has changed. As a result, the service sector has become the sunrise industry with the highest growth rate. However, meeting the economy's ever-increasing financial demands presents various challenges for the financial services industry. 4.7 KEYWORDS  (GDR) Global Depository Receipt  (FRNs) Floating Rate Notes  (LOC) Lines of Credit  Factoring: refers to the process of managing the sales ledger of a client by a financial service company  Forward Contracts: A forward transaction is one where the delivery of a foreign currency takes place at a specified future date for a specified price. 4.8 LEARNING ACTIVITY 1. Identify 5 New Financial Products introduced by State Bank of India since 2018. ___________________________________________________________________________ ___________________________________________________________________________ 2. List down the financial challenges faced by Vijaya Bank. ___________________________________________________________________________ ___________________________________________________________________________ 4.9 UNIT END QUESTIONS A. Descriptive Questions 46 Short Questions 1. Explain briefly about Global depository receipts 2. Describe briefly about Zero coupon bonds and Yankee bonds 3. Explain briefly about challenges faced by Financial services sector Long Questions 1. Explain in detail the challenges faced by the financial sectors? 2. Describe in detail about merchant banking? 3. Discuss in detail how Line of Credit (LOC) help exporters? CU IDOL SELF LEARNING MATERIAL (SLM)

4. Discuss in detail about Commercial paper? 5. Describe in detail the Products in Forex Market? B. Multi Choice Questions 1. _________is a security whose value depends upon the values of other basic variables backing the security. a. Derivative Security b. Custodial Services c. Corporate Advisory Service d. Company Services 2. ______is a technique by which a forfeiter (financing agency) discounts an export bill and pay ready cash to the exporter who can concentrate on the export front without bothering about collection of export bills. a. Factoring b. Forfeiting c. Leasing d. Renting 3. Mutual Funds ensures ____risk, steady returns, high liquidity and better capital appreciation in the long run. a. Low Risk b. High Risk c. Zero Risk d. Double Risk 4. LOC means a. Letter other than credit b. Letter of Credit c. Line of Credit d. Letter of Confirmation 47 CU IDOL SELF LEARNING MATERIAL (SLM)

5. The lessee ____ acquire any ownership to the asset, but he can use it and have full control over a capital Asset. a. Can b. May. c. Cannot d. will not Answers 1 – a, 2 – b, 3 – c, 4 – c, 5 – a, 4.10 REFERENCES Text Books:  Bhole, L.M., Financial Institutions & Markets. Tata McGraw Hill, New Delhi  Khan, M.Y.Financial Services Tata McGraw Hill, New Delhi  Meir, Kohn, Financial Institutions & Markets, Tata McGraw Hill, New Delhi  Prasanna Chandra: Financial Management, Tata McGraw Hill. Reference Books:  Kothari, C.R., Investment Banking & Customer Services Arihant Publishers, Jaipur  Sharpe, William F. etc. Investment. New Delhi, PHI  Pandey, I.M., Financial Management, Vikas Publishing House, New Delhi 48 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 5 - MERCHANT BANKING Structure 5.0 Learning Objectives 5.1 Meaning and Definition 5.2 Objectives 5.3 Difference between Merchant Bank and Commercial Bank 5.4 Summary 5.5 Keywords 5.6 Learning Activity 5.7 Unit End Questions 5.8 References 5.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  Describe nature of Merchant Banking  Identify scope of Merchant Banking  Benefits of Merchant Banking  Process involved in Merchant Banking 5.1 MEANING AND DEFINITION OF MERCHANT BANKING Non-banking financial activity is known as merchant banking. However, it has a banking- like function. It's a type of financial service. It encompasses the full spectrum of financial services. In different countries, the term merchant banking is used differently. As a result, there isn't a single definition for merchant banking. The process of transferring capital from those who own it to those who use it is known as merchant banking. “A merchant bank is an organisation that underwrites securities for corporations, advises such clients on mergers, and is involved in the ownership of commercial ventures,” according to Random House Dictionary. These organisations include \"banks that are not merchants,\" \"merchants who are not bankers,\" and \"houses that are neither merchants nor banks.\" “A merchant banker has been defined as any person engaged in the business of issue management either by making arrangements regarding selling, buying, or subscribing to securities or acting as manager, consultant advisor, or rendering corporate advisory services in relation to such issue 49 CU IDOL SELF LEARNING MATERIAL (SLM)

management,” according to the SEBI (Merchant Bankers) Rules 1992. In a nutshell, a merchant bank is an organisation that underwrites securities and advises clients on issues such as corporate mergers and commercial venture ownership. As a result, merchant banking encompasses a wide range of activities such as customer service management, portfolio management, credit syndication, acceptance credit, counselling, insurance, and feasibility report preparation, among others. A merchant banker does not have to engage in all of the aforementioned activities. A merchant banker may focus on one activity while also engaging in other activities that are complementary or supportive of the specialised activity. 5.2 OBJECTIVES Here are some of the objectives of merchant banks: a. Provide funds to companies — This usually involves loans for new enterprises. They use proposals produced by these companies to determine how much money a company requires to operate. They also assist their clients in raising funds through the stock market and other means. In terms of funding, merchant banks serve as a base for small businesses. b. Underwriting — This is similar to insurance, in which banks sign documents agreeing to compensate their customers financially in the event of harm or loss. Clients must be confident that the bank will assist them in increasing their profits. If they do not, and they suffer losses, the bank will compensate them. c. Manage their portfolios — The bank would examine the companies' assets and compute their credits and debits to ensure that they do not suffer any losses. They also offer other services such as checking on the liquidation of properties, tracking the income generated by these businesses, and determining how they can improve it. d. Offering corporate advisory — They specialise in advising start-up businesses and others looking to grow. This guidance provides financial support to ensure the company's success and prevent any issues along the way. e. Managing corporate issues — They assist in the incorporation of securities management and act as an intermediary bank in the transfer of capitals. 5.3 DIFFERENCE BETWEEN MERCHANT BANK AND COMMERCIAL BANK Commercial banks are not the same as merchant banks. The following are some of the main distinctions between merchant and commercial banks: 1. Commercial banks are primarily concerned with debt and debt-related financing. Credit proposals, credit appraisals, and loan sanctions are the focus of their operations. Merchant bankers, on the other hand, specialise in equity and equity-related financing. They mostly 50 CU IDOL SELF LEARNING MATERIAL (SLM)