Amity Campus

Uttar Pradesh
India 201303
ASSIGNMENTS
PROGRAM: BFIA
SEMESTER-II

MANAGEMENT OF FINANCIAL SERVICES

Subject Name:
Study COUNTRY:

SOMALIA

Roll Number (Reg. No.):

BFIA01512010-2013019

Student Name:

MOHAMED ABDULLAHI KHALAF

INSTRUCTIONS
a) Students are required to submit all three assignment sets.
ASSIGNMENT

DETAILS

MARKS

Assignment A

Five Subjective Questions

10

Assignment B

Three Subjective Questions + Case Study

10

Assignment C

Objective or one line Questions

10

b) Total weight-age given to these assignments is 30%. OR 30 Marks

c) All assignments are to be completed as typed in word/pdf.
d) All questions are required to be attempted.
e) All the three assignments are to be completed by due dates and need to be
submitted for evaluation by Amity University.
f)

The students have to attach a scanned signature in the form.

Signature : _________________________
Date: 23 April, 2013
( ) Tick mark in front of the assignments submitted

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Assignment A

Assignment B

Assignment C

Management of Financial Services

Assignment A
Q: 1). Factoring provides resources to finance receivables and facilitates
their collection. Explain.
Answer:
Receivables constitute a significant portion of current assets of any firm. But, for
investment in receivables, a firm has to incur certain costs such as costs of financing
receivables and costs of collection from receivables. Furthermore, there is a risk of bad
debts also. It is, therefore, very essential to have a proper control and management of
receivables. In fact, maintaining of receivables poses two types of problems; (i) the
problem of raising funds to finance the receivables, and (ii) the problems relating to
collection, delays and defaults of the receivables. A small firm may handle the problem
of receivables management of its own, but it may not be possible for a large firm to do
as efficiently as it may be exposed to the risk of more and more bad debts. In such a
case, a firm may avail the services of specialized institutions engaged in receivables
management, called factoring firms.
Factoring may be defined as the relationship created by an agreement between the
seller of goods/services and a financial institution called the factor, whereby the later
purchases the receivables of the former and also controls and administers the
receivables of the former. It is a continuous relationship between financial institution
(the factor) and a business concern selling goods and/or providing service (the client)
to a trade customer on an open account basis, whereby the factor purchases the
clients book debts (account receivables) with or without recourse to the client thereby controlling the credit extended to the customer and also undertaking to
administer the sales ledgers relevant to the transaction.
The term factoring has been defined in various countries in different ways due to
non-availability of any uniform codified law. It can be defined as an arrangement in
which receivables arising out of sale of goods/ services are sold to the factor as a
result of which the title to the goods/services represented by the said receivables
passes on to the factor. Hence the factor becomes responsible for all credit control,
sales accounting and debt collection from the buyer (s).

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Factoring means arrangement between a factor and his client which includes at least
two of the following services to be provided by the factor:
o
o
o
o

Finance
Maintenance of accounts
Collection of debts
Protection against credit risks.

Factoring provides resources to finance receivables as well as facilitates the collection

of receivables. Factoring involves the outright sale of receivables at a discount to a
factor to obtain funds. Factoring can broadly be defined as an agreement in which
receivables arising out of sale of goods or services are sold by a firm to the 'factor' as a
result of which the title of the goods or services represented by the said receivables
passes on to the factor. From then on, the factor becomes responsible for all credit
control, sales accounting and debt collection from the buyers. In other words,
factoring paves the way by which receivables can be used for financing.
The factor helps the client in adopting better credit control policy. The main functions
of a factor is to collect the receivables on behalf of the client and to relieve him from all
the botherations/problems associated with the collection. This way the client can
concentrate on other major areas of his business on one hand and reduce the cost of
collection by way of savings in labor, time and efforts on the other hand. The factor
possesses trained and experienced personnel, sophisticated infrastructure and
improved technology which helps him to make timely demands on the debtors to make
payments.
Functions of a Factor:
o
Financing facility/trade debts: The main function of a factor is the purchase
of accounts receivables from his client at a price. The receivables then are assigned to
the factor and he grants advances based on the receivables. Where the debts are
factored with recourse, the finance provided would become refundable by the client in
case of non-payment of the buyer. However, where the debts are factored without
recourse, the factors obligation to the seller becomes absolute on the date of the
invoice whether or not the buyer makes the payment.
o
Maintenance and administration of sales ledger: Another function of a factor
includes maintenance of the clients sales ledger. Once a sale transaction is done, the
invoice is sent to the buyer of the goods and a copy to the factor. Each receipt is
matched with the specific invoice and thus on any date the ledger gives information
about the specific invoices that are outstanding and the ones that are settled. Thus
the ledger is maintained by the factor under the open item method. Periodically the
factor also performs the function of sending reports to their customers regarding the
status of the ledgers.
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o
Providing collection facility: The collection problems of the customers are
solved due to the existence of the factor. The factor undertakes the collection
responsibility and employs his manpower and time to collect the receivables payment.
Thus he saves the valuable time of his customer who can concentrate more on his
main work of sales. The factor uses sophisticated infrastructural back-up and this
makes him efficient to collect the receivables in time and even for the payer, it is a
credit issue for him if he fails to meet the settlement date.
o
Control and restriction of credit and assumption of credit risk: One of the
important functions of a factor is the assumption of credit risk, especially when the
receivables are factored without recourse. The factor fixes the credit limit for the
approved customers in consultation with his clients. He undertakes to purchase all
the receivables of those customers within this fixed limit and he assumes the risk of
default in payment by the customer. Thus the client of the factor is benefitted in two
ways: factoring relieves the client of his collection work and he provides information on
the credit worthiness of each individual customer of the client so that he can exercise
better credit control hence forth.
o
Providing Advisory Services: The factor provides a variety of incidental
advisory services to their clients like:
a)

What is the perception of the client's products?

b)
What are the changes in the marketing strategies and what are the
emerging trends?
c)
Audit of the procedures followed for invoicing, delivery and dealing with
sales returns.
d)
Introduction to the credit department of a bank or subsidiaries of banks
engaged in leasing, hire-purchase and merchant banking.
Q: 2). Investment in Mutual fund is indirect in nature. Examine it in the
light of features of mutual funds.
Answer:
Investment in Mutual fund is indirect in nature, the term itself gives some hint about
its nature. Mutual means combined and Funds means money. So, mutual funds
are the collective investment contributed by many investors and managed by
professional individual or company (your fund manager). The fund manager invests
this combined money in stocks, bonds, short-term money market instruments, and/or
other securities.
Unlike most other financial products like provident fund, insurance and post office
schemes, Top Mutual Funds not only provides convenience while investing money, but
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it also offers a variety of features that benefit investors. A few of most common features
and benefits of top mutual funds are highlighted.
Micro SIP/Chota SIP
Top Mutual Fund Companies offer its investors an option to invest extremely small
amounts such as Rs 100/-, Rs 500/-, Rs 1000/- each month depending on
individuals capacity into many of its mutual fund schemes. This is for Daily Wage
Workers, Rickshaw Taxi Drivers, Labourers who wish to invest into Mutual Funds.
Flexibility of Dates
Investor can invest in top Mutual Fund Scheme on their choice of dates. Many large
Mutual Fund companies offer multiple dates for investing into its top performing
mutual fund schemes. E.g few dates would be 1st, 5th, 10th, 15th, and 25th of each
month. This makes regular investments on salary dates possible.
Timely Payments through ECS
Investors in Mutual Funds need not worry about making timely payments each month
through opting for ECS Payment Method. This ensures regular, hassle free, timely and
correct monthly payments. This feature is useful for people who are busy or travel a
lot, as he does not have time to keep track of his monthly payments.
Investing Through POA (Power of Attorney)
Investments in Mutual Funds can be done through Assignment of a Power of Attorney
for effective financial planning. Army Personnel, Officers posted on-duty at far off
places, owners/directors of limited companies, Non-Resident Indians, Resident Indian
posted onsite/outside India can invest through the convenience of POA.
Top-up Facility for Mutual Funds
Apart from regular payments investors can also invest via top-up facility. The amount
of SIP can be increased at fixed intervals. The Top-up amount has to be in multiples of
Rs 500/- depending upon fund. The frequency is fixed at Yearly and Half-Yearly Basis.
Direct Credit of Dividend Payments
Asset Management Companies offer direct credit of dividend payment proceeds to
investors bank accounts in order to ensure faster processing and timely credits of
dividend amount.
Direct Credit of Redemption Payments
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When a mutual fund is sold the money is directly credited to investors bank account
to facilitate quick withdrawal of funds.
Trigger/SWP/AEP Plans
In case price of investment goes up, investors can set automatic triggers to sell or
transfer the portion of the increased value. This is to ensure that the profits are
booked from increased valuation on their Mutual Fund Investment. E.g Trigger can be
set to Sell/Transfer if the NAV appreciates by 12%, 20%, 50% and 100%.
Register Multiple Bank Accounts
As a Mutual Fund investor you can register up to 5 different bank accounts in your
portfolio. So in case if you have to close or transfer any one of the accounts the other
can be utilized.
Q: 3). What do you mean by Merchant banking? Explain various services that
comes under the ambit of merchant banking.
Answer:
A merchant bank is a financial institution which provides capital to companies in the
form of share ownership instead of loans. A merchant bank also provides advisory on
corporate matters to the firms they lend to. In the United Kingdom, the term
"merchant bank" refers to an investment bank.
A merchant banker is a financial intermediary who helps to transfer capital from those
who possess it to those who need it. Merchant banking includes a wide range of
activities such as management of customer securities, portfolio management, project
counseling and appraisal, underwriting of shares and debentures, loan syndication,
acting as banker for the refund orders, handling interest and dividend warrants etc.
Thus, a merchant banker renders a host of services to corporate, and thus promote
industrial development in the country.
Merchant banking may be defined as an institution which covers a wide range of
activities such as underwriting of shares, portfolio management, project counseling,
insurance etc. They render all these services for a fee.
The merchant bankers as sponsors of capital issues is reflected in their major
services/functions such as, determining the composition of the capital structure (type
of securities to be issued), draft of prospectus (offer documents) and application forms,
compliance with procedural formalities, appointment of registrars to deal with the
share application & transfers, listing of securities, arrangement of underwriting/subPage 7 of 37

underwriting, placing of issues, selection of brokers & bankers to the issue, publicity
& advertising agents, printers, and so on.
Registration
SEBI (Merchant Bankers) Regulation Act, 1992 defines a Merchant Banker as any
person who is engaged in the business of issue management either by making
agreements regarding selling, buying or subscribing to securities or acting as manager,
consultant, advisor or rendering corporate advisory service in relation to such issue
management.
At present no organization can act as a Merchant Banker without obtaining a
certificate of registration from the SEBI. However, it must be noted that a
person/organization has to get him registered under these regulations if he wants to
carry on or undertake any of the authorized activities, i.e., issue management
assignment as manager, consultant, advisor, underwriter or portfolio manager. To
obtain the certificate of registration, one had to apply in the prescribed form and fulfill
two sets of norms
a) Operational capabilities
b) Capital adequacy norms
Compulsory Registration
Merchant bankers require compulsory registration with the SEBI to carry out their
activities. Earlier they fell under four categories.
Classification of Merchant Bankers
Category I Merchant Bankers. These merchant bankers can act as issue manager,
advisor, consultant, underwriter & portfolio manager.
Category II merchant Bankers. Such merchant bankers can act as advisor,
consultant, underwriter & portfolio manager. They cannot act as issue manager of
their own but can act co-manager.
Category II Merchant Bankers. They are allowed to act as advisor, consultant &
underwriter only. They can neither undertake issue management of their own nor do
they act as co-manager. They cannot undertake the activities of portfolio management
also.
Category IV Merchant Bankers. A category IV Merchant Banker can merely act as
consultant or advisor to an issue of capital.
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Q: 4). Elaborate the present Indian financial services sector with their role in
economic development.
Answer:
The Indian financial services industry has undergone a metamorphosis since 1990.
During the late seventies & eighties, the Indian financial services industry was
dominated by commercial banks and other financial institution which cater to the
requirements of the Indian industry. The economic liberalization has brought in a
complete transformation in the Indian financial services industry.
The term Financial Services in a broad sense means mobilizing and allocating
savings. Thus it includes all activities involved in the transformation of savings into
investment. The financial service can also be called financial intermediation.
Financial intermediation is a process by which funds are mobilized from a large
number of savers and make them available to all those who are in need of it and
particularly to corporate customers. Thus, financial service sector is a key area and it
is very vital for industrial developments. A well-developed financial services industry is
absolutely necessary to mobilize the savings and to allocate them to various investable
channels and thereby to promote industrial development in a country. Financial
services, through network of elements such as financial institution, financial markets
and financial instruments, serve the needs of individuals, institutions and corporate.
It is through these elements that the functioning of the financial system is facilitated.
Considering its nature and importance, financial services are regarded as the fourth
element of the financial system.
FEATURES OF FINANCIAL SERVICE
Customer-Oriented: Like any other service industry financial service industry is
also a customer-oriented one. That customer is the king and his requirements must be
satisfied in full should be the basic tenant of any financial service industry. It calls for
designing innovative financial products suitable to varied risk-return requirements of
customer.
Intangibility: Financial services are intangible and therefore, they cannot be
standardized or reproduced in the same form. Hence, there is a need to have a track
record of integrity, reputation, good corporate image and timely delivery of services.
Simultaneous Performance: Yet another feature is that both production and
supply of financial services have to be performed simultaneously. Therefore, both
suppliers of services and consumers should have a good rapport, clear-cut perception
and effective communication.
Dominance of Human Element: Financial services are dominated by human
element and thus, they are people-intensive. It calls for competent and skilled
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personnel to market the quality financial products. But, quality cannot be

homogenized since it varies with time, place and customer to customer.
Perishability: Financial services are immediately consumed and hence inventories
cannot be created. There is a greater need for balancing demand and supply properly.
In other words, marketing and operations should be closely inter-linked.
IMPORTANCE OF FINANCIAL SERVICES
Economic Growth: The financial service industry mobilizes the savings of the
people and channels them into productive investment by providing various services to
the people. In fact, the economic development of a nation depends upon these savings
and investment.
Promotion of Savings: The financial service industry promotes savings in the
country by providing transformation services. It provides liability, asset and size
transformation service by providing large loans on the basis of numerous small
deposits. It also provides maturity transformation services by offering short-term
claim to savers on their liquid deposit and providing long-term loans to borrowers.
Capital Formation: The financial service industry facilitates capital formation by
rendering various capital market intermediary services capital formation in the very
basis for economic growth. It is the principal mobilizer, of surplus funds to finance
productive activities and thus it promotes capital accumulation.
Provision of Liquidity: The financial service industry promotes liquidity in the
system by allocating and reallocating savings and investment into various avenues of
economic activity. It facilitates easy conversion of financial asset into liquid cash at the
discretion of the holder of such assets.
Financial Intermediation: The financial service industry facilitates the function of
intermediation between savers and investors by providing a means and a medium of
exchange and by undertaking innumerable services.
Contribution to GNP: The contribution of financial services to GNP has been going
on increasing year after year in almost all countries in recent times.
Creation of Employment Opportunities: The financial service industry creates
and provides employment opportunities to millions of people all over the world.
SOURCES OF REVENUE
Accordingly, there are two categories of sources of income for a financial service
company namely: fund based &fee- based. Fund-based income comes mainly from
interest spread, lease rentals, income from investments in capital market and real
estate. On the other hand, fee based income has its sources in merchant banking,
advisory services, custodial services, loan syndication etc. income has its sources in
merchant banking, advisory services, custodial services, loan syndication etc. A major
part of income is earned through fund-based activities. At the same time, it involves a
large share of expenditure in the form of interest & brokerage. It means that such
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companies should have to compromise the quality of its investment. On the other hand
fee-based income does not involve much risk.
CLASSIFICATION OF FINANCIAL SERVICES

Fund-based Activities

Fee-based
Activities
1 .Issue Management
2 .Portfolio Management
3 .Capital Restructuring
4 .Loan Syndication
5 .Merger & Acquisition
6 .Corporate Counseling
7 .Foreign Collaborations

OBJECTIVES OF FINANCIAL SERVICES

Fund raising: Financial services help to raise the required funds from a host of
investors, individuals, institution and corporate. For this purpose, various
instruments of finance are used.
Funds deployment: An array of financial services is available in the financial
markets which help the players to ensure an effective deployment of funds raised.
Services such as bill discounting, parking of short-term funds in the money market,
credit rating &securitization of debts are provided by financial services firms in order
to ensure efficient management of funds.
Specialized services: The financial service sector provides specialized services
such as credit rating, venture capital financing, lease financing, mutual funds, credit
cards, housing finance, etc. besides banking and insurance. Institutions and agencies
such as stock exchanges, non-banking finance companies, and subsidiaries of
financial institutions, banks & insurance companies also provide these services.
Regulation: There are agencies that are involved in the regulation of the financial
services activities. In India, agencies such as the Securities and Exchange Board of
India (SEBI), Reserve Bank of India (RBI) and the Department of Banking and
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Insurance of the Government of India, regulate the functioning of the financial service
institutions.
Economic growth: Financial services contribute, in good measure, to speeding up
the process of economic growth & development.
CAUSES OF FINANCIAL INNOVATION
Financial intermediaries have to perform the task of financial innovation to meet the
dynamically changing needs of the economy. There is a dire necessity for the financial
intermediaries to go for innovation due to following reasons:
Low profitability: The profitability of the major financial intermediary, namely
banks has been very much affected in recent times. There is a decline in the
profitability of traditional banking products. So, they have compelled to seek out new
products which may fetch high returns.
Keen competition: The entry of many financial intermediaries in the financial
sector market has led to severe competition among themselves. This keen competition
has paved the way for the entry of varied nature of innovative financial products so as
to meet the varied requirements of the investors.
Economic liberalization: Reform of the financial sector constitutes the most
important component of Indias programme towards economic liberalization. The
recent economic liberalization measures have opened the door to foreign competitors to
enter into our domestic market. Deregulation in the form of elimination of exchange
controls and interest rate ceilings have made the market more competitive. Innovation
has become a must for survival.
Improved communication technology: The communication technology has
become so advanced that even the worlds issuers can be linked with the investors in
the global financial market without any difficulty by means of offering so many options
and opportunities. Hence, innovative products are brought into the domestic market in
no time.
Customer service: Nowadays, the customers expectations are very great. They
want newer products at lower cost or at lower credit risk to replace the existing ones.
To meet this increased customer sophistication, the financial intermediaries are
constantly undertaking research in order to invent a new product which may suit to
the requirement of the investing public. Innovations thus help them in soliciting new
business.
Global impact: Many of the providers and users of capital have changed their roles
all over the world. Financial intermediaries have come out of their traditional approach
and they are ready to assume more credit risks. As a consequence, many innovations
have taken place in the global financial sector which has its own impact on the
domestic sector also.
Investor awareness: With a growing awareness amongst the investing public, there
has been a distinct shift from investing the savings in physical assets like gold, silver,
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land etc. to financial assets like shares, debentures, mutual funds etc. To meet the
growing awareness of the public, innovation has become the need of the hour.
PRESENT SCENARIO OF FINANCIAL SERVICES
Conservatism to dynamism: At present, the financial system in India is in a
process of rapid transformation, particularly after the introduction of reforms in the
financial sector. The main objective of the financial sector reforms is to promote an
efficient, competitive and diversified financial system in the country. This is essential
to raise the allocative efficiency of available savings and to promote the accelerated
growth of the economy as a whole. The emergence of various financial institution and
regulatory bodies has transformed the financial services sector from being a
conservative industry to a very dynamic one.
Emergence of Primary Equity Market: The capital markets have become a
popular source of raising finance. The aggregate funds raised by the industries have
gone from Rs. 5976 crore in 1991-92 to Rs. 32382 crore in 2006-07. Thus the primary
market has emerged as an important vehicle to channelize the savings of the
individuals and corporates for productive purposes and thus to promote the industrial
& economic growth of our nation.
Concept of Credit Rating: The investment decisions of the investors have been
based on factors like name recognition of the company, reputation of promoters etc.
now, grading from an independent agency would help the investor in his portfolio
management and thus, equity grading is going to play a significant role in investment
decision making.
Now it is mandatory for non-banking financial companies to get credit rating for their
debt instruments. The major credit rating agencies functioning in India are:
i.
Credit Rating Information Services of India Ltd.
ii.
Credit Analysis and Research Ltd.
iii.
Investment Information and Credit Rating Agency.
iv.
Duff Phelps Credit Rating Pvt. Ltd.
Process of Globalization: The process of globalization has paved the way for the
entry of innovative financial products into our country. The government is very keen in
removing all obstacles that stand in the way of inflow of foreign capital. India is likely
to enter the full convertibility era soon. Hence, there is every possibility of introduction
of more and more innovative financial services in our country.
Process of Liberalization: The government of India has initiated many steps to
reform the financial services industry. The Government has already switched over to
free pricing of issues from pricing issues by the Controller of capital issues. The
interest rates have been deregulated. The private sector has been permitted to
participate in banking and mutual funds and the public sector undertakings are being
privatized. The financial service industry in India has to play a positive and dynamic
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role in the years5 India has to play a positive and dynamic role in the years to come by
offering many innovative products to suit to the varied requirements of the millions of
prospective investors spread throughout the country.
Q: 5). Differentiate between factoring and forfeiting services & comment over
emerging trends of other financial services.
Answer:
Factoring and forfeiting are services in international market given to an exporter or
seller. Its main objective is to provide smooth cash flow to the sellers.
The differences between factoring and forfeiting include:
o

Factoring is for transactions of short-term maturities not exceeding six months.

It is more related to receivables against commodity sales while forfeiting is
usually for international credit transactions of long-term maturity periods
ranging between 90 days up to 5 years.
Factoring can be with resource or without resource depending on the terms of
transaction between the seller and the factor, but forfaiting is 100 per cent
financing without resource to the exporter.

The cost (charge) of factoring is usually borne by the seller, while in forfaiting
the cost consists of three elements: discount rate, commitment fees and
handling fees which are ultimately borne by the importer.

In factoring, the factor handles the entire sales ledger at a predetermined price.
Factoring requires the assignment of whole turnover with a buyer on a
continuous basis. Factoring is a continuous and revolving facility. Under
forfaiting, the complete sales ledger of the exporter is not handled by the
forfaiter. Forfaiting, structuring, and costing is tailor-made and a case-to-case
basis.

The fundamental difference between factoring and forfaiting is the difference in

the risk profiles of the receivables, which has implications for the cost of
services.

In international factoring, there is two factor systems: the export factor and the
import factor with no bank involved in the transaction, while in forfaiting, there
is a forfaiter and a bank involved in the transaction.

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Assignment B
Q: 1). Venture Capital funds provide finance to venture capital undertakings
through modes/instruments. Describe these instruments in detail. What
are the alternatives available to a venture capitalist to exit from an
invested company? Discuss.
Answer:
Venture Capital has emerged as a new financial method of financing during the 20th
century. Venture capital is the capital provided by firms of professionals who invest
alongside management in young, rapidly growing or changing companies that have the
potential for high growth. Venture capital is a form of equity financing especially
designed for funding high risk and high reward projects.
The venture capital funds provide finance to venture capital undertakings through
different modes/instruments which are traditionally divided into two types: (i) Equity
and (ii) debt instruments. Investment is also made partly by way of equity and partly
as debt. The venture capital funds select the instrument of finance taking into account
the stage of financing, the degree of risk involved and the nature of finance required.
These instruments are detailed below:
1) Equity Instruments: Equity instruments are ownership instruments and
bestow the right of the owner on the investor/Venture Capital Funds. They are:
i) Ordinary Shares on which no dividend is assured. Non-Voting equity shares
may also be issued, which carry a little higher dividend, but no voting rights are
enjoyed by the investors. There may be different variants of equity shares also,
e.g. deferred equity shares on which the ordinary shares rights are deferred till
a certain period or happening of an event. Moreover, preferred ordinary shares
carry an additional fixed income.
ii) Preference Shares carry an assured dividend at a specified rate. Preference
shares may be cumulative/non-cumulative, participating preference shares
which provide for an additional dividend, after payment of dividend to equity
shareholders. Convertible preference shares are exchangeable with the equity
shares after a specified period of time.
Thus, the venture capital fund can select the instrument with flexibility.
2) Debt Instruments: Venture Capital Funds prefer debt instruments to ensure a
return in the earlier years of financing when the equity shares do not give any
return. The debt instruments are of various types, as explained below:
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i) Conditional Loans: On conditional loans, no interest rate as lower rate of

interest and no payment period is prescribed. The Venture Capital Funds
recover their funds, along with the return thereon by way of share in the sales
of the undertaking for a specified period of time. This preference is predetermined by Venture Capital Funds. The recovery by the Venture Capital
Funds depends upon the success of the business enterprise. Hence, such loans
are termed as Conditional Loans.
ii) Convertible Loans: Sometimes loans are provided with the stipulation that
they may be converted into equity at a later stage at the option of the lender or
as agreed upon between the two parties.
iii) Conventional Loans: These loans are the usual term loans carrying a
specified rate of interest and are repayable in instalments over a number of
years.
Exit Routes
The venture capital company/fund after financing a venture capital undertaking
nurtures it to make it a successful proposition, but it does not intent to retain its
investment therein forever. As the venture capital undertaking starts its commercial
operations and reaches the profit-earning stage, the venture capitalist endeavors to
disinvest its investment in the company at the earliest. The primary aim of the venture
capitalist happens to realize appreciation in the value of the shares held by him and
thereafter to finance another venture capitals undertaking. This is called the Exit
Route. There are several alternatives before venture capitalist to exit from an investee
company, as stated below:
i) Initial Public Offering: When the shares of the investee company are listed
on the stock exchange(s) and are quoted at premium, the venture capitalist
offers his holdings for public sale through public issue.
ii) Buy back of Shares by the Promoters: In terms of the agreement entered
into with the investee company, promoters of the company are given the first
opportunity to buy back the shares held by the venture capitalist, at the
prevailing market price. In case they refuse to do so, other alternatives are
restored to by the venture capitalist.
iii) Sale of Enterprise to another Company: Venture capitalist can recover his
investments in the investee company by selling the holdings to outsider who is
interested in buying the entire enterprise from the entrepreneur.
iv) Sale to New Venture Capitalist: A venture capitalist can sell his equity
holdings in the enterprise to a new venture capital company, who might be
interested in buying the ownership portion of the venture capital. Such sale
may be distress sale by the venture capitalist to realize the investments and exit
from the enterprise. Alternatively, such sale may be for inducting a willing
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venture capitalist who wishes to take the existing liability in the company to
provide second round of funding.
v) Self-liquidating Process: In case of debt financing by the venture capitalist,
the process is self-liquidating in nature, as the principal amount, along with
interest is realized in instalments over a specified period of time.
vi) Liquidation of the Investee Company: If the investee company does not
become profitable and successful and incurs loses, the venture capitalist
resorts to recover his investment by negotiating or settlement with the
entrepreneur. Failing which the recovery is restored to by means of winding up
of the enterprise through the court.
Q: 2). Discuss the Credit rating methodology used by rating companies in
India. Name different types of securities which need credit rating.
Answer:
Rating methodology used by the major Indian credit rating agencies is more or less the
same. The rating methodology involves an analysis of all the factors affecting the
creditworthiness of an issuer company e.g. business, financial and industry
characteristics, operational efficiency, management quality, competitive position of the
issuer and commitment to new projects etc. A detailed analysis of the past financial
statements is made to assess the performance and to estimate the future earnings.
The companys ability to service the debt obligations over the tenure of the instrument
being rated is also evaluated.
In fact, it is the relative comfort level of the issuer to service obligations that determine
the rating. While assessing the instrument, the following are the main factors that are
analyzed into detail by the credit rating agencies.
1) Business Risk Analysis
2) Financial Analysis
3) Management Evaluation
4) Geographical Analysis
5) Regulatory and Competitive Environment
6) Fundamental Analysis
These are explained as under:
I. Business Risk Analysis

Page 17 of 37

Business risk analysis aims at analyzing the industry risk, market position of the
company, operating efficiency and legal position of the company. This includes an
analysis of industry risk, market position of the company, operating efficiency of the
company and legal position of the company.
a. Industry risk: The rating agencies evaluates the industry risk by taking into
consideration various factors like strength of the industry prospect, nature and basis
of competition, demand and supply position, structure of industry, pattern of business
cycle etc. Industries compete with each other on the basis of price, product quality,
distribution capabilities etc. Industries with stable growth in demand and flexibility in
the timing of capital outlays are in a stronger position and therefore enjoy better credit
rating.
b. Market position of the company: Rating agencies evaluate the market standing of
a company taking into account:
i. Percentage of market share
ii. Marketing infrastructure
iii. Competitive advantages
iv. Selling and distribution channel
v. Diversity of products
vi. Customers base
vii. Research and development projects undertaken to identify obsolete products.
viii. Quality Improvement programs etc.
c. Operating efficiency: Favorable locational advantages, management and labor
relationships, cost structure, availability of raw-material, labor, compliance to
pollution control programs, level of capital employed and technological advantages etc.
affect the operating efficiency of every issuer company and hence the credit rating.
d. Legal position: Legal position of a debt instrument is assessed by letter of offer
containing terms of issue, trustees and their responsibilities, mode of payment of
interest and principal in time, provision for protection against fraud etc.
e. Size of business: The size of business of a company is a relevant factor in the rating
decision. Smaller companies are more prone to risk due to business cycle changes as
compared to larger companies. Smaller companies operations are limited in terms of
product, geographical area and number of customers. Whereas large companies enjoy
the benefits of diversification owing to wide range of products, customers spread over
larger geographical area.
Page 18 of 37

Thus, business analysis covers all the important factors related to the business
operations over an issuer company under credit assessment.
II. Financial Analysis
Financial analysis aims at determining the financial strength of the issuer company
through ratio analysis, cash flow analysis and study of the existing capital structure.
This includes an analysis of four important factors namely:
a) Accounting quality
b) Earnings potential/profitability
c) Cash flows analysis
d) Financial flexibility
Financial analysis aims at determining the financial strength of the issuer company
through quantitative means such as ratio analysis. Both past and current
performance is evaluated to comment the future performance of a company. The areas
considered are explained as follows.
a. Accounting quality: As credit rating agencies rely on the audited financial
statements, the analysis of statements begins with the study of accounting quality. For
the purpose, qualification of auditors, overstatement/ understatement of profits,
methods adopted for recognizing income, valuation of stock and charging depreciation
on fixed assets are studied.
b. Earnings potential/profitability: Profits indicate companys ability to meet its fixed
interest obligation in time. A business with stable earnings can withstand any adverse
conditions and also generate capital resources internally. Profitability ratios like
operating profit and net profit ratios to sales are calculated and compared with last 5
years figures or compared with the similar other companies carrying on same
business. As a rating is a forward-looking exercise, more emphasis is laid on the
future rather than the past earning capacity of the issuer.
c. Cash flow analysis: Cash flow analysis is undertaken in relation to debt and fixed
and working capital requirements of the company. It indicates the usage of cash for
different purposes and the extent of cash available for meeting fixed interest
obligations. Cash flows analysis facilitates credit rating of a company as it better
indicates the issuers debt servicing capability compared to reported earnings.
d. Financial flexibility: Existing Capital structure of a company is studied to find the
debt/equity ratio, alternative means of financing used to raise funds, ability to raise
funds, asset deployment potential etc. The future debt claims on the issuers as well as
Page 19 of 37

the issuers ability to raise capital is determined in order to find issuers financial
flexibility.
III. Management Evaluation
Any companys performance is significantly affected by the management goals, plans
and strategies, capacity to overcome unfavorable conditions, staffs own experience
and skills, planning and control system etc. Rating of a debt instrument requires
evaluation of the management strengths and weaknesses.
IV. Geographical Analysis
Geographical analysis is undertaken to determine the locational advantages enjoyed
by the issuer company. An issuer company having its business spread over large
geographical area enjoys the benefits of diversification and hence gets better credit
rating.
A company located in backward area may enjoy subsidies from government thus
enjoying the benefit of lower cost of operation. Thus geographical analysis is
undertaken to determine the locational advantages enjoyed by the issuer company.
V. Regulatory and Competitive Environment
Credit rating agencies evaluate structure and regulatory framework of the financial
system in which it works. While assigning the rating symbols, CRAs evaluate the
impact of regulation/deregulation on the issuer company.
VI. Fundamental Analysis
Fundamental analysis includes an analysis of liquidity management, profitability and
financial position, interest and tax rates sensitivity of the company. This includes an
analysis of liquidity management, profitability and financial position, interest and tax
rates sensitivity of the company.
1) Liquidity management involves study of capital structure, availability of
liquid assets corresponding to financing commitments and maturing
deposits, matching of assets and liabilities.
2) Asset quality covers factors like quality of companys credit risk
management, exposure to individual borrowers and management of problem
credits etc.
3) Profitability and financial position covers aspects like past profits, funds
deployment, revenues on non-fund based activities, addition to reserves.

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4) Interest and tax sensitivity reflects sensitivity of company following the

changes in interest rates and changes in tax law.
Fundamental analysis is undertaken for rating debt instruments of financial
institutions, banks and non-banking finance companies.
Q: 3). What are the advantages that accrue from branding of financial
services? Illustrate with the help of examples, some of the pitfalls
associated with umbrella branding.
Answer:
Advantages that accrue from branding of financial services are
BUYER BENEFITS
o
o
o
o
o
o
o
o

Product identification
Shorthand cue of features and benefits
Distinguishes products of similar type
Reduces buyer search time
Increases buyer assurance
Assists in quality evaluation
Psychological reward
Brand association

SELLER BENEFITS
o
o
o
o
o
o
o
o

Product awareness
Helps launch new product
Secures demand
Facilitates repeat purchase
Fosters brand loyalty
Enables premium pricing
Provides equity value
Offers proprietary brand assets

Page 21 of 37

CASE STUDY
The banking industry is transformed, global forces for change include technological
innovation; the deregulation of financial services at the national level and opening-up
to international competition and changes in corporate behavior, such as growing
disintermediation and increased emphasis on shareholder value. Indian banking
system and financial system has as a whole had to be strengthened so as to be able to
compete. India has had more than decade of financial sector reforms during which
there has been substantial transformation and liberalization of the whole financial
system. It is an appropriate time to take stock and assess the efficacy of our approach.
It is useful to evaluate how the financial system has performed in an objective
quantitative manner.
There has been importance because India's path of reforms has been different from
most other emerging market economies: it has been a measured, gradual, cautious,
and steady process, devoid of many flourishes that could be observed in other
countries. The Indian debt market ranks third in Asia, after Japan and South Korea,
in terms of issued amount. Outstanding size of the debt floatation as a proportion of
GDP, however, is not very high in India. Moreover, although in terms of the primary
issues Indian debt market is quite large, the Government continues to be the large
borrower, unlike in South Korea where the private sector is the main borrower. The
corporate debt market in the country is still at nascent stage. Factors such as lack of
good quality issuers, institutional investors, supporting infrastructure and high cost of
issuance, market fragmentation, etc. have been identified as the reason for lack of
depth of the corporate debt market in India.
Competition is sought to be fostered by permitting new private sector banks and liberal
entry of branches of foreign bank. Competition is sought to be fostered in rural and
semi-urban areas also by encouraging Local Area Banks. Some diversification of
ownership in select public sector banks has helped the process of autonomy and thus
some response to competitive pressures and competition induced by the new private
sector banks has clearly re-energized the Indian banking sector as a whole: new
technology is now the norm, new products are being introduced continuously, and new
business practices have become common place.
The principles underlying these guidelines would also be applicable as appropriate to
public sector. More important, this suggests that the competitive nature of the Indian
banking system is not significantly different from banking system in other countries,
particularly in view of the fact that nearly 75 percent of banking system assets is with
state owned banks. The validation of monopolistic competition during the second subperiod suggests that the recent trends toward consolidation led to more rather than
less competition in the banking sector.
Page 22 of 37

The using Indian banking industry as one case study, there will propose and test
hypotheses regarding the possibility of relationship between three elements of bank
related reforms like, fiscal reforms, financial reforms and private investment
liberalization and bank efficiency. Bank efficiency is measured using data envelopment
analysis or DEA and the relationship between the measured efficiency and India bank
specific characteristics and environmental factors associated with reform is examined
using estimations. Negative relationship between the presence of foreign banks and
bank efficiency is found, which we attribute to a short-run increase in costs due to the
introduction of new banking technology by foreign banks.
Questions:
Q: 1). List the various factors behind Indian Banking Sector reforms and its
impact.
Answer:
Factors behind Indian Banking Sector reforms include:
o

Technological innovation; the deregulation of financial services at the national

level and opening-up to international competition and changes in corporate
behavior, such as growing disintermediation and increased emphasis on
shareholder value.
To be able to compete: Indian banking system and financial system has as a
whole had to be strengthened so as to be able to compete.

Ongoing Reforms: India has had more than decade of financial sector reforms
during which there has been substantial transformation and liberalization of
the whole financial system.

Time: It is an appropriate time to take stock and assess the efficacy of our
approach.

Benefits: It is useful to evaluate how the financial system has performed in an

objective quantitative manner.

Q: 2). As per the above case, what is negative relationship?

Answer:
Negative relationship between the presence of foreign banks and bank efficiency is
found, which we attribute to a short-run increase in costs due to the introduction of
new banking technology by foreign banks.
Q: 3). Comment over presence of Foreign Banks in Indian market.
Page 23 of 37

Answer:
Foreign banks are those banks whose branch offi ces are in India but they are
incorporated outside India, and have their head offi ce in a foreign country.
These banks were allowed to set up their subsidiaries in India from the year
2002. They have to operate their business by following all the rules and
regulations laid down by the RBI - Reserve Bank of India. They have to pay
more attention to the priority sector by giving them a special place in bank
lending. These banks are expected to follow all the banking regulations, just
like any other domestic banks. The foreign banks can operate in India only, if
they have a sound financial status. They must have a minimum of 25 million
US dollars in minimum 3 branches. The first branch and the second branch
must have 10 million US dollars each. The third branch should have a
minimum of 5 million US dollars. The foreign banks are permitted to open up
more branches in the country, if the performance of the bank is more than
satisfactory and it matches the criteria laid adopted by the domestic banks.
There are 40 foreign banks from 21 different countries operating in India. The
business is conducted with the help of more than 205 branches. These
branches are located in more than 15 states which includes union territories.
Apart from these banks there are representative branches operating in India
from 12 different countries.
Foreign banks who wish to open up branches in India have to apply to the RBI.
These banks should be able to satisfy the RBI regulations. The banks should
also get permission from their home country to set up branches in India. Other
factors that are considered while approving the application of setting up the
presence of foreign banks in India are as follows:
Financial soundness of the foreign banks
Economic and political relations between the home country of the
foreign banks and India.

International ranking of the bank

Home country ranking of the bank

International presence of the bank

Rating given to the bank by international rating agencies

Foreign banks have played an important role in the Indian economy, especially
in the priority sectors. Globalization has compelled the banking sector to reach
out to more customers in order to expand their business. This meant opening
banking businesses even in the foreign countries. Many of the private banks
were interested in expanding their business all over the world. They opened up
branches across the globe to serve large number of customers, and also
Page 24 of 37

improve service to the existing customers. This change was a blessing for India.
Currently, the foreign banks are growing tremendously in India.
The services provided by these banks are very impressive. The presence of
these banks in India brought a lot of technical development. Banks of all
categories, be it a domestic bank or an international bank, started using the
latest technologies to provide better service to the customers. The technological
development saved a lot time of the customers as well as the bankers. They
introduced innovative and unique banking practices in India.
The previous years witnessed cut throat competition in the banking sector with
the presence of foreign banks. The competition has compelled banks to come
up with something new that no other bank can provide to the customers.
Banks are partially a part of the service industry. The main objective of all the
banks was to provide a better service to a large number of customers and look
after their financial requirements. Customer satisfaction was a priority for
domestic banks as well as the foreign banks.
Here is a list of some foreign banks operating in India

HSBC - Hong Kong and Shanghai Banking Corporation

ABN Amro Bank NV

Barclays Bank

Deutches Bank

Standard Charted Bank

National Australia Bank

Banca di Roma

Depfa Bank PLC

Banco Bibao Vizcaya Argentina SA

Citibank NA

BNP Paribas

American Express Bank Ltd.

Abu Dhabi Commercial Bank Ltd.

State Bank of Mauritius Ltd.

DBS Bank Ltd.

Bank of Ceylon

Scotia Bank
Page 25 of 37

JP Morgan Chase Bank

Taib Bank

China Trust Commercial Bank

Arab Bangladesh Bank Ltd.

Bank of Muscat S.A.O.G

Bank of America NA

Oman International Bank S.A.O.G

Overseas Chinese Banking Corporation Ltd.

UFJ Bank Ltd. (The Sanwa Bank Ltd.)

The Siam Commercial Bank

Page 26 of 37

Assignment C
Q: 1). All of the following are financial intermediaries except
a) Insurance companies
b) Pension funds
c) Mutual funds
d) None of the above ().
Q: 2). Lease which includes a third party (a lender) is known as:
a) Sale and leaseback
b) Direct lease
c) Inverse Lease
d) Leveraged Lease ().
Q: 3). Financial instruments issued by government agencies or corporations that
promise to pay certain amounts of money to the holder on specific future dates
are called:
a) Venture Capital.
b) Preferred stock.
c) Equity Shares.
d) Bonds ().
Q: 4). The purpose of financial markets is to:
a) Increase the price of common stocks.
b) Lower the yield on bonds.
c) Allocate savings efficiently ().
d) Control inflation.
Q: 5). Financial intermediaries:
a) channel funds from savers to borrowers
Page 27 of 37

b) greatly enhance economic efficiency

c) have been a source of many financial innovations
d) Have done all of the above ().
Q: 6). __________ are the economies Central nervous system.
a) Financial Instruments
b) Financial Markets ().
c) Financial Institutions
d) Financial Companies

Page 28 of 37

Q: 7). Financial markets and institutions

a) Involve the movement of huge quantities of money.
b) Affect the profits of businesses.
c) Affect the types of goods and services produced in an economy.
d) Do all of the above ().
Q: 8). All merchant bankers have to be registered with.
a) RBI.
b) SEBI ().
c) AMFI
d) All of the above
Q: 9). A mutual fund can operate as a venture capital fund.
a) True ().
b) False
c) Cannot say
d) None of the above
Q: 10).

How are funds allocated efficiently in a market economy?

a) The most powerful economic unit receives the funds.

b) The economic unit that is willing to pay the highest expected return
receives the funds ().
c) The economic unit that considers itself most in need of funds receives them.
d) Receipt of the funds is rotated so that each economic unit can receive them in
turn.
Q: 11).

. Funds do not have a fixed date of redemption.

a) Open ended funds ().

b) Closed ended funds
c) Diversified funds
d) Both a & b
Page 29 of 37

Q: 12).

In lease system, interest rate is calculated on:

a) Cash down payment

b) Cash price Outstanding ().
c) Hire purchase price
d) None of the above
Q: 13).

A short term lease which is of tern cancellable is known as:

a) Finance lease
b) Net lease
c) Operating lease ().
d) Leveraging lease
Q: 14).

Which of the following is not a usual type of lease arrangement?

a) Sale & leaseback

b) Goods on Approval ().
c) Leverage Lease
d) Direct lease
Q: 15).

Under income-tax provisions, depreciation on lease asset is allowed to:

a) Lessor ().
b) Lessee
c) Any of the two
d) None of the two
Q: 16). A lease which is generally not cancellable and covers full economic life
of the asset is known as:
a) Sale & leaseback
b) Operating lease
c) Finance lease ().
d) Economic lease
Q: 17).

One difference between Operating & Finance lease is:

Page 30 of 37

a)

There is often an option to buy in operating lease

b)

There is often a call option in financial lease

c)

An operating lease is generally cancellable by lessee ().

d)

A financial lease in generally cancellable by lessee.

Q: 18).

C.R.A. is banking parlance stands for

a) Credit Rating Association

b) Credit Rating Agency
c) Credit Risk Assessment ().
d) None of these
Q: 19).

From the point of view of the lessee, a lease is a:

a) Working capital decision

b) Financial decision ().
c) Buy or make decision
d) Investment decision
Q: 20).
lessee?

Which of the following is not true for a Lease or Buy decision for the

a) Helps in project selection

b) Helps in project financing
c) Helps in project location
d) All of the above ().
Q: 21).

Bad debt cost is not borne by factor in case of

a) Pure factoring
b) Without recourse
c) With recourse ().
d) None of the above
Q: 22). If a company sells its receivable to another party to raise funds, it is
known as
Page 31 of 37

a) Securitization
b) Factoring ().
c) Pledging
d) None of the above
Q: 23).

For a lessor, a lease is a

a) Investment decision ().

b) Financing Decision
c) Dividend Decision
d) None of the above
Q: 24).

Which of the following is true for mutual funds in India?

a) Exit load is not allowed

b) Entry load is allowed
c) Entry load is not allowed ().
d) Exit load allowed is some cases
Q: 25).

Debt/Income funds invest in

a) Tax saving schemes

b) Money Market Instruments
c) High Rate fixed income bearing instruments
d) Both debt and equity ().
Q: 26). Which one of the following is not a feature or characteristics of hire
purchase?
a) A small initial outlay (deposit) is required
b) The user of the asset never becomes the owner ().
c) The hirer can use the asset immediately (or within a few days) of agreement
d) Regular interest and capital payments (e.g. monthly) are made by the user to
the hire purchase company

Page 32 of 37

Q: 27). Which of the following is not a service provided by factoring

companies?
a) The provision of finance
b) Bond issuance facilities ().
c) Sales ledger administration
d) Credit insurance
Q: 28).

Which of the following is not regulated by SEBI

a) Foreign institutional investors

b) Foreign direct investment
c) Mutual funds
d) Depositories ().
Q: 29).
lease?

Which one of the following most accurately describes an operating

a) A short term leasing contract in which the lessee conveys the right to the lessor
to receive interest payments from an asset leased out to another firm.
b) A short-term leasing contract or a contract which can be terminated at short
notice. The lessor conveys the right to use equipment in return for regular
rental payments.
c) A lease agreement in which a firm sells equipment to a finance house,
which then permits the firm to continue to use it in return for regular
rental payments ().
d) A lease agreement in which the finance provider expects to recover the full cost
(or almost the full cost) of the equipment, plus interest, over the period of the
lease
Q: 30).

Mutual Funds provide the benefits of ________.

a) Portfolio management
b) Diversification
c) Investment Avenues
d) All of the above ().
Page 33 of 37

Q: 31).

Mutual Funds investor can not earn following return

a) Dividend
b) Capital Gain
c) Increase in NAV
d) Fixed interest earning ().

Page 34 of 37

Q: 32).

The major difference between hire purchase (HP) and leasing is:

a) With HP, the user of the equipment generally owns it eventually after a set
number of payments, whereas with leasing the user never owns the
equipment ().
b) HP is easy to arrange at point of sale, whereas leasing involves a prolonged legal
process.
c) The effective rate is much higher on HP than on leasing.
d) In HP the payments are made annually, whereas with leasing monthly
payments are more common.
Q: 33).

Mutual funds are valued with help of their

a) NAVs ().
b) NFO
c) IPO
d) None of the above
Q: 34).

One of the following, what is not true in respect of factoring?

a) Continuous Arrangement between factor and seller

b) Sale of receivables to the factor
c) Factor provides cost free finance to seller ().
d) None of the above
Q: 35).

An asset management company is formed

a) To manage banks assets

b) To manage mutual funds investments ().
c) To construct infrastructure projects
d) To run a stock exchange
Q: 36).

Which of the following is not an advantage of Hire Purchase?

a) Hire purchase is often available when other sources of finance are not

Page 35 of 37

b) Hire purchase agreements can be cancelled at short notice with no penalty

().
c) Hire purchase is easy to arrange
d) Hire purchase usually represents a fixed rate form of finance
Q: 37).

Balanced funds provide:

a) Steady return ().

b) High return
c) Increase volatility
d) None of the above

Page 36 of 37

Q: 38).

Prime duty of merchant banker is:

a) Maintaining records of clients

b) Giving loans to clients
c) Working as a capital market intermediary ().
d) None of the above
Q: 39).

Basic objective of a money market mutual fund is:

a) Guaranteed rate of return

b) Investment in short term securities
c) Both a & b ().
d) None of a & b
Q: 40). Mutual funds that charge a sales commission when shares are
purchases are called
a) No-load funds
b) Loaded funds ().
c) Sinking funds
d) Sinking-charge funds

Page 37 of 37