FIN – 319

Investment Banking and Financial Services

 NEWS
• HDFC Bank engaged with regulators for
compliance of reserve norms post
merger
• https://economictimes.indiatimes.com/mar
kets/stocks/news/fpis-pull-out-rs-7013-cr-
from-indian-mkts-so-far-this-
month/articleshow/81492699.cms
 NEWS
• Fintech firms seek to build on Digital
Banking Units in bid to boost digital
infrastructure
• https://economictimes.indiatimes.com/indu
stry/banking/finance/fintech-firms-seek-to-
build-on-digital-banking-units-in-bid-to-
boost-digital-
infrastructure/articleshow/94918622.cms
 Learning Outcomes
• To understand the basics of financial system

• To appraise the role of financial services in

India financial system
 Indian Financial System – An
Overview

• The services that are provided to a person

by the various Financial Institutions like
banks, insurance companies, pensions,
funds, etc. constitute the financial system.
 features of the Indian Financial
system
• It plays a vital role in the economic
development of the country as it
encourages both savings and investment
• It helps in mobilising and allocating one’s
savings
• It facilitates the expansion of financial
institutions and markets
• Plays a key role in capital formation

• It helps forms a link between the investor

and the one saving

• It is also concerned with the Provision of

funds
• The financial system of a country mainly
aims at managing and governing the
mechanism of production, distribution,
exchange and holding of financial assets
or instruments of all kinds.
Components of Indian Financial
System

• There are four main components of the

Indian Financial System. This includes:

– Financial Institutions
– Financial Assets
– Financial Services
– Financial Markets
 Financial Institutions
• The Financial Institutions act as a
mediator between the investor and the
borrower. The investor’s savings are
mobilised either directly or indirectly via
the Financial Markets.
 Example
• The best example of a Financial Institution
is Bank. People with surplus amounts of
money make savings in their accounts,
and people in dire need of money take
loans. The bank acts as an intermediate
between the two.
•
 Functions

• A short term liability can be converted into

a long term investment

• It helps in conversion of a risky investment

into a risk-free investment
• Also acts as a medium of convenience
denomination, which means, it can match
a small deposit with large loans and a
large deposit which small loans
 Types
• Banking Institutions or Depository
Institutions

• This includes banks and other credit unions which

collect money from the public against interest
provided on the deposits made and lend that
money to the ones in need
• Non-Banking Institutions or Non-
Depository Institutions

• Insurance, mutual funds and brokerage companies

fall under this category. They cannot ask for
monetary deposits but sell financial products to
their customers.
 Financial Institutions can be
classified into three categories
• Regulatory

• Intermediates

• Non Intermediates
 Financial Assets
• The products which are traded in the
Financial Markets are called the Financial
Assets. Based on the different
requirements and needs of the credit
seeker, the securities in the market also
differ from each other.
 Important Financial Assets
• Call Money – When a loan is granted for
one day and is repaid on the second day,
it is called call money. No collateral
securities are required for this kind of
transaction.
• Notice Money – When a loan is granted
for more than a day and for less than 14
days, it is called notice money. No
collateral securities are required for this
kind of transaction.
• Term Money – When the maturity period
of a deposit is beyond 14 days, it is called
term money.
• Treasury Bills – Also known as T-Bills,
These are Government bonds or debt
securities with maturity of less than a year.
Buying a T-Bill means lending money to
the Government.
• Certificate of Deposits – It is a
dematerialised form (Electronically
generated) for funds deposited in the bank
for a specific period of time.
• Commercial Paper – It is an unsecured
short-term debt instrument issued by
corporations.
 Quiz
• Which are the components of IFS?

1. Financial Institutions
2. Financial Assets
3. Financial Services
4. All of the above
• Which of these is not a type of Financial
Assets?
1. Cheque
2. Call Money
3. Notice Money
4. Treasury Bill
5. Commercial Paper
Latest News
 Link
• https://www.financialexpress.com/industry/
banking-finance/rbi-finds-rs-519-crore-
provisioning-divergence-by-central-bank-
of-india-in-fy20/2214867/
 Financial Services
• Services provided by Asset Management
and Liability Management Companies.
They help to get the required funds and
also make sure that they are efficiently
invested.
 The financial services in India
include
• Banking Services

– Any small or big service provided by banks

like granting a loan, depositing money, issuing
debit/credit cards, opening accounts, etc.
• Insurance Services
• Services like issuing of insurance, selling policies,
insurance undertaking and brokerages, etc. are all
a part of the Insurance services

• Investment Services
• It mostly includes asset management
• Foreign Exchange Services
• Exchange of currency, foreign exchange, etc. are a
part of the Foreign exchange services
 Financial Markets
• The marketplace where buyers and sellers
interact with each other and participate in
the trading of money, bonds, shares and
other assets is called a financial market.
• The financial market can be further divided
into four types:
• Capital Market
• Money Market
• Foreign exchange Market
• Credit Market
 Capital Market
• Designed to finance the long term
investment, the Capital market deals with
transactions which are taking place in the
market for over a year. The capital market
can further be divided into three types:
• Corporate Securities Market

• Government Securities Market

• Long Term Loan Market

 Money Market
• Mostly dominated by Government, Banks
and other Large Institutions, the type of
market is authorised for small-term
investments only. It is a wholesale debt
market which works on low-risk and highly
liquid instruments. The money market can
further be divided into two types:
• Organised Money Market

• Unorganised Money Market

 Foreign exchange Market
• One of the most developed markets
across the world, the Foreign exchange
market, deals with the requirements
related to multi-currency. The transfer of
funds in this market takes place based on
the foreign currency rate
 Credit Market
• A market where short-term and long-term
loans are granted to individuals or
Organisations by various banks and
Financial & Non-Financial Institutions is
called Credit Market
 Financial Intermediaries
• A financial intermediary is a firm or an
institution that acts an intermediary
between a provider of service and the
consumer.
• It is the institution or individual that is in
between two or more parties in a financial
context. In theoretical terms, a financial
intermediary channels savings into
investments.
 Financial Intermediation
• Financial intermediaries work in the
savings/investment cycle of an
economy by serving as conduits to
finance between the borrowers and the
lenders.
 Role of the Financial
Intermediaries

• The reason for the all-pervasive nature of

the financial intermediaries like banks and
insurance companies lies in their
uniqueness
 Asset vs Fee based
• Financial intermediaries like banks are
asset based or fee based on the kind of
service they provide along with the nature
of the clientele they handle.
• Asset based financial intermediaries are
institutions like banks and insurance
companies whereas fee based financial
intermediaries provide portfolio
management and syndication services.
End of lecture
 FIN – 319
Investment Banking and Financial Services
 Learning Outcomes
• To study the structure of financial services
sector of India.

• To analyse some latest development in

financial services sector in India

• To study major reforms in financial services

sector in India
Latest News
 Link for news
• http://newsonair.com/News?title=Budget-
2021-introduces-various-reforms-in-
financial-sectors%2C-says-Finance-
Minister&id=409039
• India has a diversified financial sector
undergoing rapid expansion, both in terms
of strong growth of existing financial
services firms and new entities entering
the market.
 Structure
• The sector comprises commercial banks,
insurance companies, non-banking
financial companies, co-operatives,
pension funds, mutual funds and other
smaller financial entities.
• financial sector in India is predominantly a
banking sector with commercial banks
accounting for more than 64% of the total
assets held by the financial system.

• However, the remaining is covered by

other non banking financial institutions.
 Market Size
• As of November 2020, Assets Under
Management (AUM) managed by the
mutual fund industry stood at Rs. 30 lakh
crore (US$ 407.39 billion).
• Inflow in India's mutual fund schemes via
the Systematic Investment Plan (SIP)
route reached Rs. 82,453 crore (US$
11.70 billion) in 2019

• Equity mutual funds registered a net inflow

of Rs. 8.04 trillion (US$ 114.06 billion) by
end of December 2019.
• Another crucial component of India’s
financial industry is the insurance industry.
Insurance industry has been expanding at
a fast pace. The total first year premium of
life insurance companies reached Rs. 2.59
lakh crore (US$ 36.73 billion) in FY20.
Recent Developments
Government Initiatives
 Major reforms in Financial
services sector
• The financial sector reforms refer to steps
taken to reform the banking system,
capital market, government debt market,
foreign exchange market etc. An efficient
financial sector is necessary for the
mobilization of households savings and to
ensure their proper utilisation in productive
sectors.
Before 1991 vs After 1991
Narasimham Committee
report, 1991
Reforms in the government
debt market
End of lecture
 FIN – 319
Investment banking and Financial services
 Learning Outcomes
• To understand the concept of factoring.

• To understand the difference between factoring

and forfeiting.
Latest News
 Link for news
• https://www.cnbctv18.com/economy/govt-
releases-new-public-sector-enterprise-
policy-says-the-ongoing-strategic-
divestment-of-cpses-wont-be-affected-by-
it-8216331.htm
 Link for news
• https://economictimes.indiatimes.com/nri/
migrate/indian-american-chief-economist-
sp-kothari-to-leave-sec-by-end-of-
january/articleshow/79913447.cms
 Questions?
• What about the risk in case of credit
sales?
• Who will protect the seller from bad debts?
• Can seller sells his debts/credit sales?
• How the mechanism of buying others
debts works?
 Factoring
Buyer/ Seller/

(Commission
agent)
 Learning outcome
• Familiar with the risk of debts?
• Explore the risk takers available in the
market?
• Discussion on risk management
mechanism?
 Video resource
• https://www.youtube.com/watch?v=iS3qLL
-F_Lg
 Factoring-Basics
• Regular flow of working capital is needed for
smooth functioning.

• Purchaser often delays their payment resulting

blockage in working capital.

• So Expediting the collection of account

receivables could alleviate the difficulties.

• Therefore Factoring is a financial service

designed to arrange payment of receivable in a
better manner.
 Concept
• Factor is derived from Latin word factor which means to
Make or to do or get things done.

• According to International Institute for Unification of

Private Law (UNIDROIT) Rome --
Factoring means as arrangement between factor and that
includes
at least two services to be provided :
(i) Finance, (ii) Maintenance of accounts (iii) Collection of
debts (iv) Protection Against Risk.

Thus, it is package of service providing integrated receivable

management.
 Origin
• The RBI issued guide line in July 1990 to
enable statutory framework to enable bank
to carry out factoring.

• Banks are permitted to set up

subsidiary/investing factoring company jointly
with other bank with prior approval of Bank.
They are allow to form factoring department.
They can also invest in share of factoring
subsidiary. It should not exceed 10% of capital
& revenue.
 Process of Factoring
Main function of factoring is realization of credit sales.

• Once sale of transaction is completed between buyer &

sellers.
• Seller/Enter agreement with factor where by factor will
provide facility of debt collection.
• Invoice is send to factor generally 80% of invoice value is
given as advance by factor. Rest 20% is paid against the
realization.
• Factor collects service charges and discount charge
(comparable to Bank interest rate) from seller.
• Factor provides periodic statement.
• Maximum period is 150 days. Maximum grace period is 60
days.
 Factoring
• Factoring refers to sale of accounts
receivables by the client (a firm) to the factor (a
bank).

• It unlocks firms’ cash that gets tied up in

receivables.

• Factoring can be done with recourse or without

recourse.
• Reverse factoring is also available for account
payable
 Types of Factoring
Recourse Factoring :
• Factor has recourse to the client (seller of
goods) if importer(buyer of goods) become
insolvent.
• Risk of account receivables purchased
from client becoming bad is borne by client
himself.
• Seller has to bear whole loss
• Cost is less
 Cont....
Non Recourse Factoring :
• no recourse to the client if the debt /
account receivables purchased turns out
be bad or irrecoverable.
• Factor can not claim the amount from the
client.
• As factor bear the risk of non payment,
commission charged for the services is
higher than recourse type of factoring.
 Functions and Benefits
• Functions :

• Assumption of Credit risk.

• Maintenance of Sales Ledger
• Collection of Account Receivable
• Finance of Trade debts.
• Providing Advisory Services
• Credit Analysis of Customer

• Benefits :
• Immediate cash flow
• Invoice Processing
• Less Cost
• Source of Finance
• Credit Screening

• Cost of Factoring-Finance charge of 2 to 5%over prime rate of interest

plus service charge of .1 to 2% of invoice value.
• Plus penal charge of 1% for 30 days and 2% beyond 30 days
 BASIS FOR
FACTORING FORFAITING
COMPARISON
Meaning Factoring is an arrangement Forfaiting implies a
that converts your transaction in which the
receivables into ready cash forfaiter purchases claims
and you don't need to wait from the exporter in return for
for the payment of cash payment.
receivables at a future date.

Maturity of Involves account receivables Involves account receivables

of short maturities. of medium to long term
receivables maturities.

Goods Trade receivables on Trade receivables on capital

ordinary goods. goods.
Finance up to 80-90% 100%

Type Recourse or Non-recourse Non-recourse

Cost Cost of factoring borne by Cost of forfaiting borne by

the seller (client). the overseas buyer.

Negotiable Does not deals in negotiable Involves dealing in

instrument. negotiable instrument.
Instrument
 Forfaiting
• Forfaiting is the discounting of international
trade receivables on a without recourse
basis.
• It involves purchasing of an exporter's
receivables (the amount importers owe the
exporter) by the forfaiter at a discount.
• The forfaiter pays cash to the exporter, and
the importer is obliged to pay its debt to the
forfaiter.
• What factoring is to a domestic credit sale
transaction, forfaiting is to an international
transaction.
End of Lecture
 FIN – 319
Investment Banking and Financial Services
 Learning Outcomes
• To study the concept of leasing

• To study the various types of leasing

 Leasing

Important to think

• Do we need to invest where we can avoid?

• Can we get ready material in the industry so
that i will not buy the same?
• Shall i need to put my money for all buying?
• Either somebody will give me money for my
requirement?
 Leasing

Learning Outcomes

• All investment are not required.

• Ready material is available in the industry so
no need to buy. Hiring/leasing is the option.
• No need to put your money for all buying.
• So many are there in the market to give you
money for your requirement.
 Leasing
• Lease is a contract between owner of the
asset(lessor) and the user of the
asset(Lessee) under which lessor gives
the right to use the asset for the agreed
period of time and consideration, called
lease rentals.

• Only for tangible assets.

 Types of Leasing
• Financial lease- means capital lease or
financing capital equipments. Non-
Revocable type
• Operating lease- Assets usage
transferred for short period. Like aircraft .
Revocable type.
• Sale and leaseback- Owner has right to
retain possession and use of the property
• Leverage lease- third party is involved
 Cont....
• Close and open-ended lease- In close
ended asset get transfer to lessor at the
end but in open ended lessee has option
to purchase
• Upfront lease-Higher charges at the initial
years and less in later years. In Back-end
lease- Less rentals at the initials and more
in later years.
 Cont...

• 3N Lease (Net and Net-net lease)-Lessee

is responsible for maintenance, insurance
and taxes of the property
• Cross-border lease- International lease.

• Wet lease- Aircrafts with complete crew

• Dry lease- Aircrafts alone.
 Advantages
• No large outlay
• Tax advantage
• Budgeting
• Hedge against risk of obsolescene
 Disadvantage
• No ownership
• Long-term expense
• Cost of maintenance
• Restrictions of use
• Termination of contract