PFM-India-Chapter-2

Chapter 2: Sources of Personal Credit / Debt in India You will learn the overall Financial System Structure in India , what role each type plays and what are the various sources of credit/debit available in India. India has a very well structured financial system and though a larger part of it remains organised & regulated still there is an unorganised part as well. If we classify the financial system broadly, we have 5 things to study about : 1. Regulators : The govt backed agencies which act as watchdogs for certain financial businesses. Example – RBI, SEBI, IRDAI etc 2. Financial Institutions : These include the players in the financial system such as Banks, Mutual Fund cos, Insurance cos etc 3. Financial Markets : As the name says markets, so these are places where financial products are traded. Ex – Stock exchanges, money markets etc 4. Financial Instruments : Financial products are forms of investments one can buy such as Bonds, Stocks, Mutual Funds, insurance products, Savings Accounts, Fixed Deposits etc 5. Financial Services : Financial services are the economic services provided by the finance industry, which encompasses a broad range such as banking, credit, consumer finance, leasing, brokerage The Chart below explains you the structure of Indian Financial System. CFP Level 1 - Module 1 - Personal Financial Management - India Page 1

In d ian Fin an cial S y s tem Organised S ector Regulators M/o F inance F inancial RBI Institutions SEBI IRD A F inancial PF RD A Markets Banking Commercials Public Sector Institutions Banks Banks Private Sector Non Banking Small F inance Banks Institutions Banks Payment Banks F oreign Banks Co- operativ e Banks Regional Rural Banks Digi Wallets NBF Cs D ev elopm ent F inance Institutions India Level (IF CI, IDB I, SIDB I, State Level N AB AR D etc) Others (SFC, SIDCs) (ECGC) Capital Markets Primary Equity S econdary D eriv ativ es Commodities Currency D ebt PSU Bond Debt Pvt Corporate D ebt Govt Securities Money Market Treasury Bills Call Money Commercial Bills Commercial papers CoD Term Money F inancial Instruments Primary Equities D ebt Combinations S econdary D eposuts MF Insurance F inancial S erv ices D epository Brokerage Custodial Credit Rating Merchant Banking F actoring Leasing Hire Purchase Portfolio Mgmt Wealth Mgmt Underwriting Unorganised Page 2 S ector CFP Level 1 - Module 1 -MPoneerysLoenndaerlsFinancial Management - India Local Brokers Pawn Brokers Traders Chit funds S ocieties

When it comes to Credit (Loans / Borrowing) there are various ways and sources to get credit or loan or borrow money but all credit transactions can be bifurcated into 2 major types : SECURED / WITH COLLATERAL UNSECURED / COLLATERAL FREE Any loans which has some kind of physical, Any loans which has no physical, material material or financial guarantee with the lender or financial guarantee with the lender rather is called a Secured Loan is given on the presumptive credit of the person is called an Unsecured Loan If we map all the sources of credit/borrowings that an Individual has in India, we get a very large and diversified structure, snapshot of which is as below : Sources of Credit Organised Sector Banks Commercials Banks Public Sector Banks Private Sector Banks Foreign Banks Co-operative Banks Regional Rural Banks Small Finance Banks Payment Banks Digi Wallets Financial Institutions NBFCs Asset Finance Company (AFC) Investment Company (IC) Loan Company (LC) Infrastructure Finance Company (IFC) Systemically Important Core Investment Company (CIC-ND-SI) Infrastructure Debt Fund: Non- Banking Financial Company (IDF-NBFC) Non-Banking Financial Company-Micro Finance Institution (NBFC-MFI) Non-Banking Financial Company – Factors (NBFC-Factors) Mortgage Guarantee Companies (MGC) NBFC- Non-Operative Financial Holding Company (NOFHC) Special Purpose Lending Cos Housing Finance Gold Loan New Age Lenders P2P Lending Crowdfunding Unorganised Sector Money Lenders Pawn Brokers Chit Funds Credit Societies Loans from Employers Friends & Family CFP Level 1 - Module 1 - Personal Financial Management - India Page 3

The credit/lending sources can be categorised first either as Organised (meaning institutional & regulated operations) and Unorganised (meaning a hyperlocal or person based unregulated operations) Now let’s understand each of the above one by one : BANKS Banks are financial institutions which perform deposit and lending functions. There are various types of banks in India and each is responsible to perform different functions. The major functions of banks are almost the same but the set of people each type of bank caters to may differ. The common functions of the banks in India are : 1. Acceptance of deposits 2. Provide demand withdrawal facility 3. Loans facility 4. Transfer of funds 5. Issue of drafts / similar instruments 6. Provide customers with locker facilities 7. Dealing with foreign exchange Besides these there are various utility functions also which are performed by the banks. Every Country has a Central Bank ( Governing Bank as a Regulator for Banking Industry). This Central Bank is known by different names in different countries such as – in USA it is Federal Reserve , in UK it is Bank of England, in India it is Reserve Bank of India (RBI). The main function of RBI is to act as the Government’s Bank and guide and regulate the entire banking institutions in the country. Some of the key functions of RBI are:  Providing guidance to other banks  Issuing currency  Implementing the monetary policies  Supervisor of financial system There are two broad categories under which banks are classified in India- Scheduled & Non Scheduled. Scheduled Banks are the banks which are covered under the second schedule of the Reserve Bank of India Act, 1934. The scheduled banks further can be classified as in Commercial Banks and Co-operative Banks. The Commercial Banks further are classified as Public Sector Banks, Private Banks, Foreign Banks, Rural Banks, Co-operative Banks. Small Finance Banks, Payments Bank & Digi Wallets are the new additions to the banking system of our country. All Commercial Banks are regulated and managed under the Banking Regulation Act, 1949. These are profit making banks based on their business model. Granting loans to the government, general public, and corporate and accepting deposits counts as the primary function. CFP Level 1 - Module 1 - Personal Financial Management - India Page 4

Public Sector Banks are the banks where Government owns the majority stake. There are 12 Public Sector Banks in India which all put together account for the total 3/4th of the banking business in the country. The list of the Public Sector Banks is as below: State Bank of India Punjab National Bank Bank of Baroda Canara Bank Union Bank of India Bank of India Indian Bank Central Bank of India Indian Overseas Bank UCO Bank Bank of Maharashtra Punjab & Sindh Bank On 1st April 2020, merger of some public sector banks were done and accordingly,  Oriental Bank of Commerce (OBC) and United Bank of India merged into Punjab National Bank (PNB),  Syndicate Bank merged into Canara Bank,  Allahabad Bank into Indian Bank,  Andhra Bank and Corporation Bank into Union Bank of India Private Sector Banks are where majority stake and control is with the private shareholders but the banks have to work under the guidelines and monitoring of RBI. There are 22 Private Sector Banks now in the country : Axis Bank Dhanlaxmi Bank IDFC First Bank Kotak Mahindra Bank Bandhan Bank Federal Bank IndusInd Bank Lakshmi Vilas Bank Catholic Syrian Bank HDFC Bank Jammu & Kashmir Bank Nainital Bank City Union Bank ICICI Bank Karnataka Bank RBL Bank DCB Bank IDBI Bank Karur Vysya Bank South Indian Bank Tamilnad Mercantile Bank Yes Bank Foreign Banks are the Banks which are owned, managed & headquartered in a foreign country but when it comes to operating in India, they too have to follow the guidelines of RBI. As of now more than 50 foreign banks have their branches in India and more than 50 foreign banks operate thru their representative offices. Some of the most popular foreign banks in India are – Bank of America, American Express, BNP Paribas, DBS, HSBC, Standard Chartered, Citibank etc. Co-operative Banks are financial entities established on a co-operative basis and belonging to their members. This means that the customers of a co-operative bank are also in a way its owners, because they are the members of the co-operative society. These banks provide a wide range of regular banking and financial services. In India, co-operative banks play a crucial role in rural financing, with funding of areas under agriculture, livestock, milk, personal finance, self-employment, setting up of small-scale units among the few focus points for both urban and rural cooperative banks. CFP Level 1 - Module 1 - Personal Financial Management - India Page 5

They are also a much-needed alternative to the age-old exploitative practice of people approaching the village moneylender. The cooperative banking system came into being with the aim to promote saving and investment habits among people, especially in rural parts of the country. There are close to 30+ State Co-operative Banks and 60+ Urban Co-operative Banks in India. Regional Rural Banks (RRB) banks were established primarily to support the rural areas, marginal farmers, laborers, small enterprises etc. They mainly operate at regional levels at different states and may have branches in urban areas as well. Their main features are: 1. Supporting rural and semi-urban regions financially 2. Pension distribution and Wage disbursement of MGNREGA workers 3. Added banking facilities like locker, chequebook, cards-debit, and credit, kisan credit etc RRBs are normally mapped to a Public Sector Bank for monitoring, audit, clearing and regulatory purposes. Small Finance Banks is a specific segment of banking created by RBI under the guidance of Government of India with an objective of furthering financial inclusion and taking basic banking activities of deposits and lending to un-served and underserved sections including small business units, small and marginal farmers, micro and small industries and unorganized entities etc. Like any other commercial banks, these banks can undertake all basic banking activities including lending and taking deposits but their ticket size is limited/restricted as per the guidelines of RBI. Small Finance Banks is relatively a new concept which was announced in the Union Budget 2014-15, RBI issued the guidelines of Small Finance Bank in 2014 later. As of now, there are 10 Small Finance Banks in India. Au Small Finance Bank ESAF Small Finance Bank Utkarsh Small Finance Bank Capital Small Finance Bank Suryoday Small Finance Bank North East Small finance Bank Fincare Small Finance Bank Ujjivan Small Finance Bank Jana Small Finance Bank Ltd Equitas Small Finance Bank Payments Banks is a new model in Indian Banking, conceptualised by the Reserve Bank of India (RBI). These banks are permitted to accept deposits, which is currently limited to Rs 100,000 per customer and may be increased further. These banks cannot issue loans and credit cards but they do offer Savings & Current accounts. They can also issue ATM cards or debit cards and provide online or mobile banking. Bharti Airtel was the 1st payment bank to go live in India. As of now we have 7 active payments banks in India. Airtel Payments Bank Paytm Payments Bank Jio Payments Bank India Post Payments Bank FINO Payments Bank Aditya Birla Idea Payments Bank NSDL Payments Bank Digital Wallet, also known as an e-wallet, is a software or mobile app based service that allows you to pay for bills, expenses, shopping, etc online. Digital wallets are not only easier to use in some cases but are also generally considered to be more secure than traditional CFP Level 1 - Module 1 - Personal Financial Management - India Page 6

payments. Establishing a Digi Wallet Company requires approval from RBI but the routine operations are not monitored under RBI’s guidelines. However in countries like Singapore, Digi Wallet is also a highly regulated payment mechanism. Some of the most popular Digi Wallets in India are – google pay, amazon pay, PayTM, PhonePe, JioMoney, PayZapp, SBI Yono, Ola Money etc. All of the above offer some or the other forms of lending/credit/ borrowing products &/or debit/deposit/transactions based services. Lets understanding NBFCs (Non Banking Financial Companies) now : Non Banking Financial Company (NBFC) is a company registered under the Companies Act, 2013 of India, which is in the business of loans and advances, acquisition of shares, stock, bonds, hire-purchase, insurance business or chit-fund business. The NBFCs business can not include any principal business of agriculture, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property. The working and operations of NBFCs are regulated by the Reserve Bank of India (RBI) within the framework of the Reserve Bank of India Act, 1934. Let’s also understand the key differences between a Banking Company and Non Banking (NBFC) :  Banks have banking license , NBFC’s don’t have a banking license  NBFCs offer services which includes deposits and advances both  NBFC cannot accept Demand Deposits,  NBFC is not a part of the payment and settlement system of RBI  NBFC cannot issue Cheques/DD drawn on itself like the banks do  Deposit insurance facility of the Deposit Insurance and Credit Guarantee Corporation is not available for NBFC depositors, unlike banks  NBFC is not required to maintain Reserve Ratios as regulated by RBI from time to time (CRR, SLR etc.)  An NBFC cannot indulge Primarily in Agricultural, Industrial Activity, Sale-Purchase, Construction of Immovable Property All NBFCs in India are either Deposit taking or Non-deposit taking. If they are non-deposit taking, ND is suffixed to their name (NBFC-ND). The Non-deposit taking NBFCs are denoted as NBFC-NDSI. Investment and Credit Company – (NBFC-ICC) is a financial institution carrying on as its principal business- asset finance, the providing of finance whether by making loans or advances or otherwise for any activity other than its own and the acquisition of securities. Investment & Credit Company is a new classification made by RBI in 2019. Investment & Credit Company classification was made by RBI by merging three types of NBFCs – Asset Finance Company, Investment Company & Loan Company together. Prior to 2019, when RBI introduced the new classification of NBFC-ICC these 3 classifications existed CFP Level 1 - Module 1 - Personal Financial Management - India Page 7

Asset Finance Company (AFC) were primarily in the business to finance the assets such as machines, automobiles, generators, material equipments, industrial machines, farming machines, auto-rickshaw, vehicles , tractors etc. Investment Company (IC) were in the business of these companies to deal in securities. Loan Companies (LC) were in the business of such companies to make loans and advances (not for assets but for other purposes such as working capital finance etc. Now 2019 onwards, AFC, IC & LC together have been merged and become NBFC-ICC. There are more than 9000 Investment & Credit Companies (ICC) in India. Infrastructure Finance Company (IFC) are the NBFCs which has net owned funds of at least Rs. 300 Crore and has deployed 75% of its total assets in Infrastructure loans are called IFC. There are only 9 ICFs in India currently. Srei Infrastructure Finance Tata Cleantech Capital Power Finance Corp Aseem Infrastructure Finance India Infrastructure Finance PTC India Financial Services L & T Infrastructure Finance Indian Railway Finance Corp REC Limited Systemically Important Core Investment Company (CIC-ND-SI) is systematically important NBFC (assets Rs. 100 crore and above) which has deployed at least 90% of its assets in the form of investment in shares or debt instruments or loans in group companies. Out of the 90%, 60% should be invested in equity shares or those instruments which can be compulsorily converted into equity shares. Such companies do accept public funds. There are more than 250 such NBFCs in India. Infrastructure Debt Fund (IDF-NBFC) is a non-deposit taking NBFC that has Net Owned Fund of Rs 300 crores or more and which invests only in Public Private Partnerships (PPP) and post commencement operations date (COD) infrastructure projects which have completed at least one year of satisfactory commercial operation. This is a debt fund option to infuse funds in the infrastructure sector and fuel growth in the infra development. There are only 4 IDFCs in India currently : India Infra Debt Limited L & T Infra Debt Fund Limited Kotak Infrastructure Debt Fund Limited IDFC Infrastructure Finance Limited Micro Finance Institution (NBFC-MFI) is a non-deposit taking NBFC which has at least 85% of its assets in the form of microfinance in the form of loans given with low income group and without collateral. MFI must also have a minimum net owned funds of Rs. 5 crores. Loan repayments are done on weekly, fortnightly or monthly instalments at the choice of the borrower. CFP Level 1 - Module 1 - Personal Financial Management - India Page 8

Salient Features of Microfinance Borrowers are from the low income group Loans are of small amount – micro loans Short duration loans with ease of payment cycle Loans are offered without collaterals High frequency of repayment Loans are generally taken for income generation purpose Filing the gaps in Financial System & lending MFIs in India can exist & operate in the form of NGOs, NBFCs and non-profit companies also known as section 25 companies. SKS, Annapurna Microfinance, Bandhan financial services, Equitas microfinance etc. are some of the well-known MFIs in the country. Though more than 100 MFIs are currently present across the country but South India has very wide presence of MFIs. Factors (NBFC-Factors) are in the business of acquisition of receivables by way of assignment of such receivables or financing, there against either by way of loans or advances or by creation of security interest over such receivables but does not include normal lending by a bank against the security of receivables etc. These are not individual lending rather institutional or business lending products. The last 2 names Mortgage Guarantee & Financial Holding NBFCs are more on institutional Businesses and don’t relate to individual lending, credit, debit or any other services for that matter. Mortgage Guarantee Companies in a way provide an insurance cover or a Guarantee on the mortgages issues by different banks or NBFCs whereas Financial holding Company as a parent company can float other companies or even establish a bank. There are some credit/lending companies which do a specific product lending only. Some of the most prevalent Special Purpose Lending Companies can be classified as : Housing Finance Companies (HFC) are the forms of non-banking financial company (NBFCs) only but their core business is to finance for the purpose of buying , constructing or renovating houses. However they also provide other loans such as Loan against property, business loans, loans for commercial premises, lease rental discounting on commercial premises etc. HFCs should have a minimum Net Owned fund of Rs. 10 crore and should obtain a certificate of Registration (COR) from the NHB (National Housing Banks) as per National Housing Bank Act-1987, in order to function as an HFC. But in year 2019 budget, Indian Finance Minister Mrs. Nirmala Sitharaman had moved the regulator of the HFCs from National Housing Bank (NHB) to RBI. There are 80+ Housing Finance Companies in India out of which some of the most popular ones are – ICICI Housing Finance, LIC Housing Finance, PNB Housing, HDFC, Indiabulls Housing etc. CFP Level 1 - Module 1 - Personal Financial Management - India Page 9

When looking for a home loan, every borrower must first find out the interest rate. This is because home loan interest rate is one of the major factors. Since Home loans are for a longer tenure so even a small difference in rates can result into a very large amount. It affects the overall cost of the home loan. Higher home loan rates increase the home loan EMI and reduce the ability to take on a larger loan amount. Lower home loan interest rates decrease the loan EMI and increase the possibility to take a larger loan. While applying for a home loan, second most important thing to look at is the type of interest whether it is fixed interest rate or floating interest rate. When you analyse the home loans proposal for your clients, you need to calculate three important numbers. EMI (Equated Monthly Instalments) amount - This amount is to be paid each month till the loan is fully paid. EMI Break-up - It shows the interest portion in each month's EMI. The rest is the principal being repaid each month. You will see that in first few years the amount of interest in the EMI is very high and principle constitutes a very small part. Which also means that paying back a home loan in very early years doesn’t make commercial sense. Amortisation Schedule - The amortisation schedule shows the break-up of the interest paid and principal repaid out of the EMI each month till the end of the tenure. The outstanding balance after paying each month's EMI is also shown in the amortisation schedule. The formula used for arriving at the EMI is: EMI = [P x R x (1+R) ^n] / [(1+R)^ n-1] Here, P= Principal loan amount, R= Rate of interest, n= Number of monthly instalments. Let’s take an example: Loan Amount taken (P)= Rs 50 lakh, Rate of Interest = 9 % p. a Time to Repay = 15 yrs = 9/12= .75 per month, N= 180 months Solution: Since we have to find Monthly Repayment (EMI), so we will need to convert Rate and Time to monthly as well. Hence, the values for computation would become P 5000000 R 9% pa =9/12=.75% per month N 15 yrs =15*12=180 months EMI formula ((500000*.75%*(1+.75%) ^180/((1+.75%)^180-1))) EMI 50713.33 CFP Level 1 - Module 1 - Personal Financial Management - India Page 10

Housing Finance cos do offer a subsidized rate in many cases such as Women, Govt Employees, Employees of a particular co where Bank as a tie-up. The rates also also generally slab based with the first slab starting from 25-30 lacs and then similarly more slabs are there. Not necessarily the lowest slab or the highest slab will carry the lowest interest , rather the rate of interest for the slabs are defined on the basis of ALM (Asses Liability Management) of each bank, but subject to the RBI guidelines. Gold Finance Companies are the companies which offer loan against the physical gold or gold ornaments that you keep with them as a collateral or guarantee. Hence, Gold loan is a type of secured loan where one gets instant funds by keeping their gold as collateral. Thus, allowing people to use their gold which would have been kept away in a locker. A gold loan helps the borrower to monetize his asset in times of need. Since gold loan companies are a regulated and institutionalized mode of borrowing instead of going to the local moneylender or jeweller for a loan, they have become immensely popular with the rural consumer. The cash received can be used for any sort of business purpose like purchase of an asset or paying off a liability or for working capital requirements. As per the RBI, the loan amount cannot be used to buy gold coins or Jewellery or for any other speculative purposes. The primary business of gold loan companies is to keep Gold (bars, bullion, and ornaments) as collateral and provide a loan against the value of this metal at a certain rate of interest and margin to value. They can also diversify into non-core businesses such as home loans, vehicle loans, personal loans, SME finance, Forex services, Micro home finance etc. Muthoot, Mannapuram etc. are some of the well-known Gold Finance companies in India. The interest rate generally lies in the range of 10.5% - 12% p.a. In case of a default, and non-payment of dues after several reminders and notices, the gold finance company can auction the collateral kept with itself and recover the loan amount. As a standard policy the Gold Loan Companies apply some %age of haircut (hypothetical deduction of value of gold) and the loan amount is based according to the gold value after haircut. Peer-to-peer lending, also abbreviated as P2P lending, is the emerging type of lending money to individuals or businesses through online services or apps that match lenders with borrowers. Peer-to-peer or person to person lending companies act as bridge between 2 persons one who want to borrow and one who wants to lend. P2P lending attempts to operate with lower overhead and provide their services more cheaply than traditional financial institutions. As a result, lenders can earn higher returns compared to savings and investment products offered by banks, while borrowers can borrow money at lower interest rates. P2P lending company just takes a small fee for providing the match- making platform and credit checking the borrower. There is the risk of the borrower defaulting on the loans taken out from peer-lending websites. Faircent is India's First RBI registered Peer to Peer Lending platform. Lenden, Paisadukan, Ruppe Circle etc are some of the popular P2P lending platforms and this industry is growing very rapidly. CFP Level 1 - Module 1 - Personal Financial Management - India Page 11

Crowdfunding as the name suggests means raising funding from the group (group of known/unknown persons). It refers to collection of funds from multiple investors via web- based platform or social networking site for a definite objective. Such objective could be projects (for instance, music, film, book publication), benevolent or public-interest cause (for instance, a community based social or co-operative initiative) or a business venture. Small financial contributions from number of persons cumulatively may fulfil the fund requirements of the Investee who otherwise lacked access to such funds. These contributions are sought through an online crowd-funding platform or via social media. Crowdfunding is a form of crowdsourcing and alternative finance. Crowdfunding in India has helped fund individuals, medical patients, NGOs and even social enterprises all with the generosity of thousands of donors online. Some of the most popular crowdfunding platforms in India are – Ketto, WishBerry, Fuel a dream, Milaap etc. Moneylender is an individual or group that usually lends relatively small amounts of money at very high rates of interest. They say they charge more than established banks do because their lending tends to be riskier. Since this is based on individual relationships and the transaction of borrowing and lending is interpersonal, there are no particular laws that exist to regulate these transactions. For most people in rural areas with no bank account, bad credit histories, as well as those with too much debt, who do not have relatives or friends who can offer a loan, going to a moneylender is their only option. Normally the money lenders charge a monthly interest which is approx. 2-3% per month. But there is also a fixed repayment option often termed as five-six, meaning that you borrow Rs 5 (which is x amount) and in return you pay Rs 6 (which is a fixed Y amount) after a pre decided time period/months. Moneylenders give loans both as secured or unsecured on a case to case basis. Throughout history, moneylenders have earned the bulk of their living by preying on vulnerable people, as well as gamblers and compulsive shoppers who have built up considerable debts. For years moneylenders have monopolized rural Indian credit markets. Families have lost land, farmers have been asked to prostitute their wives to pay off debts, and, when all else has failed, they have tied the noose to end their misery. Thanks to their local touch, since they also know the borrower as a part of their community, they can reasonably ensure return of capital and interest. Sometimes even resorting to violence, intimidation or blackmail, they ensure they get their principal repaid with interest. Pawn Broker is an individual or business (pawnshop or pawn shop) that offers secured loans to people, with items of personal property taken as a security or collateral. The items having been pawned to the broker are themselves called pledges or pawns (in Hindi – Girwee). While pawn brokers can typically accept jewelry, electronics, home audio equipment, computers, coins, gold, silver, televisions, etc but any item with a saleable value can be pawned. If an item is pawned for a loan (colloquially hocked or popped), within a certain contractual period of time the Pawn Broker may sell & redeem it for the amount of the loan plus some agreed-upon amount for interest. The amount of time, and rate of interest, is governed by by the pawnbroker's policies. Unlike other lenders, the pawnbroker CFP Level 1 - Module 1 - Personal Financial Management - India Page 12

does not report the defaulted loan on the customer's credit report, since the pawnbroker has physical possession of the item and may recoup the loan value through outright sale of the item. This is very informal, unorganised sort of lending but quite prevalent in many parts of India. Chit Funds is both a savings and credit product. It bears a pre-determined value and is of a fixed duration, mostly two to three years. Each scheme admits a specific number of members whose monthly contributions adds up to the total value of the chit fund at the end of the term. Chit funds are supposed to be micro lending institutions which may be formal/institutional or casual groups amongst friends and relatives that are called subscribers. In India, the Chit Fund act 1982 regulates these organizations. Some chit funds are formed with a specific purpose of helping a certain group of people with a particular activity. A Chit fund is a type of rotating savings and credit association system practiced in India. Chit fund schemes may be organized by financial institutions, or more often it is informally among friends, relatives, or neighbours. In case a Chit Fund is run by a financial institution it runs a little differently whereas the more common chit fund which runs informally among friends, family & society is also know by the Committee in India. A chit fund normally comprises a group of members or subscribers. An organizer, who can be a person or a trusted relative or neighbour or a company brings the group together. All the members of the group pool in the pre-agreed amount at the beginning. The fund starts at an announced date and continues for the number of months equal to the number of subscribers. Each month, the subscribers put in their monthly instalments into the fund. Then, an open auction is conducted to determine the lowest sum a subscriber is willing to take that month. For example, if the monthly instalment is ₹1000 and there are 50 members, the chit fund value in the first month will become ₹50,000. If the auction determines a winner who is willing to accept ₹45,000 for that month, the surplus ₹5,000 is distributed to the other 49 members. The subscriber who won the auction was able to access ₹45,000 in the first month and the others benefited in their share of the ₹5,000 surplus. The process repeats, distributing the auction amount to one member each month. All of the other subscribers, including the ones who took their share in a previous month, continue paying the monthly instalments. Anyone who needs money can bid for the amount in a month and take it. So, the system acts as a borrowing scheme, because subscribers are able to access large sums of money before they've paid the full amount. It also acts as a savings system, because each subscriber contributes every month and may retrieve a large sum in the future while receiving their share of the surpluses. There are some different variations of the chit fund operating system which omit the auction part, instead drawing a winner by picking a chit out of a box. The anem chit fund comes from such a practice only. Credit Societies are urban and rural financial societies that provide loans to members at low rates of interest, protecting the members from massive debts to private moneylending agencies. They serve a basic but highly personalised role of lending. They have deposit schemes too and the he money procured thru deposits is then given on loans to members as personal loans, agricultural loans, housing or vehicle loan, etc. These societies are regularly aided by state and national government subsidies and funding. Some examples are Teachers Co-op Credit society, State Electric Board Employee Co-op Credit Society. Credit Co-op. CFP Level 1 - Module 1 - Personal Financial Management - India Page 13

Society in India has a big role to play in economic development of Low class and middle class peoples. Generally this societies are resisted under District registrar office of state with Registrar of co-op society. For example : State Electric Board Employee co-op Credit Society Telephone Department Employee Co-op. Society ,Government Department Staff co-op. Credit Society ,Postal Department Employees society ,Bank Staff Co-op Credit & consumer Society Loans from Employers is also a very common way of short term lending. Employees of an organisation may often need short term or longer-term loans for wherein they might access their employer for a loan or advance against their salary. Not all employers facilitate this but quite a lot of companies offer these benefits to their employees. The Loans are given for a certain period where the recovery is automatically done by the employers by deducting some part of the salary every month. Generally these are interest free but if the amount is big and the repayment period is also longer the employer may tend to apply some nominal interest as well. The company often charges a lower rate if interest if at all, and may mostly not ask for a collateral to be placed since the employee is working with them. The tenure of the employee working with the organization could be of importance and one of the deciding factors in the amount of loan and tenure. This may or may not involve some paper work, that depends upon the company’s HR policies. Loans from employers could also be taken on payment of interest for longer purposes such as purchase of a house, vehicle, education of self or children, home improvement and so on. Short term reasons could be medical emergency or a child's marriage. The loan is often also disbursed early and is recovered on salary payment days by withholding some portion of the salary payment towards repayment of the loan. Friends & Family are often the 1st sources of borrowing money in need as these loans are normally quickly received and don’t involve the hassles of paperwork. But there are reasons like the amount is high, relatives not having money or not lowering social prestige by borrowing are the most common why people go to banks, NBFCs or other lenders as above. All the Credit/Loan Products that that your clients may have, as explained above can be either Closed- or Open-Ended. On the basis of Repayment, all credits fall into either of these two broad categories:  Closed-end (instalments)  Open-end (revolving) CFP Level 1 - Module 1 - Personal Financial Management - India Page 14

Closed-End Credit means a loan or borrowing which is used for a specific purpose, for a specific amount, and for a specific period of time. Payments are usually of equal amounts or instalments. Mortgage loans and automobile loans are examples of closed-end credit. An agreement, or contract, lists the repayment terms, such as the number of payments, the payment amount, and how much the credit will cost. Open-End Credit Is also known as revolving credit. These are the loans are made on a continuous basis as you purchase items, and you are billed periodically to make at least partial payment. Credit Card is a classic example of Open Ended Credit. Banking Overdraft is another example of open ended credit. In an open ended credit, the maximum ceiling is fixed but you can keep using it as per your need and rotate the time/repayment. The maximum amount of credit that you can use is called your line of credit. ************************************************************************* CFP Level 1 - Module 1 - Personal Financial Management - India Page 15