Non-banking financial company

Finance may be defined as the art and service of managing money. The two major areas of finance are.

1) Financial management managerial finance corporate finance.

II) Finance services.

Financial management is concerned with duties of the financial manager in the business firm who perform such varied tasks as budgeting financial forecasting,cash management credit administration investment analysis funds management and so on financial services is concerned with the design and delivery of advice and financial products to individuals and business within the areas of banking and related institution.

Personal financial planning investment real assets and so on. A wide variety of funds assets based and non- fund based advisory services are provided mainly by the non-banking finance compsnies(NBFCs).

Non-banking financial company(NBFC)

It means i) A financial institution that is a company.

ii) A non-banking institution that business is the receiving of deposits under any scheme arrangements in any other manner or lending in any manner.

iii) Such other non-banking institution class of institution as the RBI may specify with the prior approval of the government and by notification in the official Gazette

Scope of NBFC

The direction supply to a NBFC which is defined to include only non-banking institution that is any purchase  finance investment loan of mutual benefit financial company and an equipment leasing company but excludes an insurance company stock exchange .

Stockbroking company merchant banking company.The directions are ads not applicable to NBFCs that do not accept/hold public deposit.NBFCs have to pass a resolution in a meeting of the have neither accepted nor would accept any public deposit doing the year to the effect that they have neither accepted nor would accept any public deposit during the year.

Repayment of deposit by a non problem NBFC

A non-problem NBFC may

1)Permit premature repayment of a public deposit at its sole direction.

2)Grant a laon upto 75 percent of the deposit after 3 month from the date of deposit at a rate of interest percent points above the rate of interest payable on the deposits.

Repayment by a problem NBFC

A problem NBFC means a NBFC which

i) Has refused to meet within 5 days lawful demand for repayment of a matured deposit.

ii) Intermate the company law Board under section 58-AA of the companies act about its default to a depositor in repayment of any part of it’s any interest on it.

iii) approaches the RBI for withdrawal of liquid asset securities to meet deposit obligation, or for any relief relaxation from the provisions of the RBI public.

iv) It has been identified by the RBI to be ment of public deposits/dues. Such a company may, to enable a depositor to meet expenses of an emergent nature l, prematurely(a) repay a tiny deposit that is aggregate amount not exceeding Rs.10000 in the name of the sole/first named depositor in all the branches of the NBFC) in entirely upto rs.percentage points above the rate of interest payable on the deposit.

For the purpose of premature repayment, all deposit accounts standing to the credit of sole first a named depositor should be clubbed and treated as one account. Where an NBFC prematurely repays a public deposit for any of the reason. a) after 3 months but more than 6 months not interest b) after 6 months but before maturity 2 percent lower than the interest applicable to a deposit for the period for which the concerned deposit has run. If no rate has been specified for that period l, 3 percent lower than the minimum rate at which public deposit is are accepted by the NBFC.

Deposits Receipts- All NBFC have to furnish deposit joint deposits or their agents with a receipt of the deposit stating the date of deposit name of the depositors, the amount of deposit (in words and figure), rate of interest and date of maturity. It must be signed by an officer who can act on behalf of the company in this regard.

Register of deposits- All NBFCs have to keep register of deposit, containing cache depositor particular as detailed below .

a) Name and address,

b) Date and amount of each deposit

C) Duration and due date of each deposit.

d) Date and amount of accrued interest premium on each deposit.

e) Date of claim made by depositor,

f) Date and amount of each repayment of principal/ interest.

g) Reason for delay in repayment beyond five working days and

h) Any other particulars relating to the deposits.

USA bank risk and return

The ability of commercial bank in the united states to engage in securities activities. It either directly or indirectly through affiliates of parent holding companies. It has been restricted through much of U.S. history but the boundaries of the restrictions have varied both through time and according to regulatory jurisdiction.

Restriction were imposed by some reasons.

->Fears of potential conflict of interest.

->Fear that commercial banks would have excessive economic power.

->Assume adverse effect on bank safety.

->A desire to protect non bank dealers.

Commercial bank or commercial bank holding companies or their risk and return moderate increase in private securities activities have not increased either the riskiness or the failure rate of commercial bank in the past, nor do, they promise to do so in the future.

The area of discussion.

The Nature of bank risks

Financial risk may be defined as the probability(uncertainty) of realizing a (outcome) an investment. It is lower than the investor expected at the time the investment was made. As losses net of gains must be charged against an institution’s capital (net worth). Sufficiently large losses can drive it into economic insolvency.Thus excessively risk activities relative to an institution’s capital to assets ratio can have an adverse impact on its safety and soundness.

The riskiness of a bank’s  activities depends both on the riskiness of all of the individual activities conducted in its asset, liability and off-balance sheet.

Portfolio and on the interaction or covariance of the returns on these activities through time.That is the riskiness of the over all bank can not be determine by simply summing the risk of its individual activities.

Bank would never want to eliminate all risks

They could do so only at the expense of lower return rather, well managed bank seek to control their risk exposure through risk management.

Risk management involves selecting individual activities with know risk and return portfolio. Combining them through diversification so as to obtain the highest overall net income gains.

Possible while exposing the bank to an aggregate risk exposure  that is consistent with the banks capital position.

The risk that banks generally assume are follows.

1)Credit risk

2)Interest risk

3)Liquidity risk

4)Foreign risk

5)Operation risk

6)Regulatory risk

7)Legal risk

8)Black box risk

Evaluation of the riskiness of securities activities

In theory,securities activities can increase,decrease,or not change the risk exposure of commercial banks. Bank holding companies.The potential impact be measured in two basic ways.

Change in volatility and return

A number of studies seek to measures the impact risk if banks were permitted to engage. In addition securities activities.Either through hypothetical acquisitions of existing investment firms or through expansion of the same activities as under taken by existing securities dealer.

Basically, these studies  the change in measures of volatility and return. It would occur if banks generally would hypothetically acquire different percentage of investment banking activities.

Most of the studies estimate the total risk by calculating the covariance of returns.Banking and other activities that might be combined with banking.Some studies also estimate the additional revenue earned by summing the revenue from the activities.

Several of the papers that use market return on the share of commercial  banks and securities companies do not include measures of capital available to absorb losses.They provide useful information only if the correlation of return implies smaller risk.Other studies relate risk to capital by calculating “Z” score,which measures the probability that a reduction in return might exceed a firm’s capital.

All the studies suffer from an additional serious shortcoming.They fail account for the fact that both commercial banks and investment bank hold, underwriter and trade U.S. government and municipal general obligation bond.

Change in the failure puts of banks engaging in securities

Thought history,few if any U.S. commercial bank  have failed because their involvement in securities activities before or after glass-stegall.J.F.I.O connor.Connor is the comptroller of the currency from 1933 to 1938 cut to  give the reason for the failure of call 2955 national banks that failed from 1865 through 1936, including the depression years 1929 to 1933.

Securities were not a sufficiently frequent reason to be classified separately the among the seven categories of the reason listed for the reason listed for these failure.

->It was strongly asserted at the time that banks involvement in securities understanding and trading was an important case of the great number of banks failures, experienced during the great depression.

->Securities purchased by smaller banks from banks that dealt in securities was a cause of the smaller banks’failures.

->Major cause of bank failures of commercial bank in easy 1930 had been the extensive investment of bank assets in long-term securities.

Three risk need to be considered

>Underwriting risk-Securities underwriting is riskless when the issue is underwritten on a “best offers”basis.In these situation, the underwriter contracts to market the issue and is not liable if the amount obtained is less than the amount expected.

When underwriters purchase and then sell the issue they may incurr risk.

->Dealing risk-Securities hold for trade could pose additional risk to the extent that the market values of the securities might decline.These potential costs are offset by gains in these values.

Both stock  and bond price are volatile and dealers at times have experienced large losses an net.

Banks already can assume as much interest risk as they wish through dealing and investing in government securities and colaterlized mortgage obligation.

->Brokerage risk– Securities brokerage activity at banks is likely to increase were commercial banks permitted to underwrite and sell securities without limit however, this activity involves to price risk.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Banker to an issue

The bankers to an issue engaged in activities such as acceptance of applications along with application money from the investor. In respect of an issue of capital and refund of application money.

The term issue means an offer of sales purchase of a security by and body corporate person/group of persons on his/its/their behalf to or form the public the holders of securities of the body corporate person group of persons.

Registration process of banker an issue

To carry on the activity as a banker to issue a person must obtain a certificate of registration from the SEBI

The SEBI grants registration on the basis of call the activities relating to bankers to an issue in particular with reference to the following requirements.

a)The application has the necessary infrastructure communication and data processing facilities and manpower to effectively discharge his activities.

b)The application any of the directors of the applicant not involved in any litigation connected with the securities market. It has not been convicted of any economic offense.

c)The applicant is a scheduled bank.

d)Grant of certificate is in the interest of the investors.

e)The applicant is a fit and proper person.

A banker to an issue can apply for the renewal of his registration three months before the expiry of the certificate.

Condition of registration

The registration of a banker to an issue would be subject to the same condition as are applicable to the merchant.

                      Obligation and Responsibilities

Furnish information -> When required a banker to an issue has to furnish to the SEBI the following information.

a) The number of issues for which he engaged as a banker to an issue.

b)The number of applications/details of the application money received.

c)The dates on which applications from investors forwarded to the issuing company 100 issues.

d)The dates amount of refund to the investor.

2)Books of account document->A banker to an issue is required to maintain books of accounts/records documents for a minimum period of three years in respect of interalia, the number of applications received, the names of the investor, the time within which the applications received were forwarded to the issuing of the investor to the issue and dates and amounts of refund money to  investor.

3)Agreement with issuing companies:-Every banker to an issue enters into an agreement with the issuing company. The agreement provides for the number of collection centers at which applications received forwarded to the issuing company.

4)Discounting action by the RBI-If the RBI takes any disciplinary action against a banker to an issue in relation. To the issue payment, the latter should immediately inform the SEBI. If the bankers prohibited from carrying on his activities as a result of the disciplinary action.

                        Code of conduct

1)Make all efforts to protect the interest of investors.

2)In the conduct of its business, observe high standards of integrity and fairness in the conduct of its business.

3)Fulfill its obligation in a prompt, ethical, and professional manner.

4)At all times exercise due diligence ensures proper care and exercise independent professional judgment.

5)Endeavour to ensure that

(a)Inquires from an investor adequately dealt.

(b)Grievances of investors redressed in a timely and appropriate manner.

c)Where a complaint not remedied promptly, the investor advised of any further steps which may be available to the investor. It is under the regulatory.

6)Be prompt in disbursing dividends, interest, or any such accrual income received or collected by him on behalf of his clients.

7)Not make any exaggerated statement of whether oral written to the client, either about its qualification or capability to render certain services or its achievements in regard to service rendered to other clients.

8)Always endeavor to render the best possible advice to the clients having regard to the client’s needs and the environments and his own professional skill.

9)Avoid conflict of interest and make adequate disclosure of his interest.

10)Put in place a mechanism to resolve any conflict of interest situation that may arise in the conduct of its business or where any conflict of interest arises, should take reasonable steps to resolve the same in an equitable manner.

11)Make appropriate disclosure to the client of its possible source or potential areas of conflict of duties and interest. While it is acting as a banker which would impair its ability to render a fair, objective, and unbiased services.

12)Not discriminate amongst its clients, save and except on ethical and commercial considerations.

13)Ensure that the SEBI  promptly informed about any action, legal proceedings,etc. Initiated against it in respect of any material breach of non-compliance by it, of any law, rules direction of the SEBI.

14)Not make any untrue statement or suppress any material fact in any document. Reports, papers, or information furnished to the SEBI.

15)Not neglect or fail or refuse to submit to the SEBI or other agencies with which it registered. It like document correspondence, and paper or any part thereof as demanded requested from time to time.

16)Provide adequate freedom and powers to its compliance officer for the effective discharge of its duties.

17)Ensure that any person it employs or appoints to conduct a business is fit and power and otherwise qualified to act. In the capacity so employed or appointed.

18)Ensure that the senior management, particular decision-makers have access to all relevant information about the business on a timely basis.

19)Not be a party to or instrumental for
(a) creation of a false market
(b)price rigging or manipulation or
(c)the passing of unpublished price sensitive information in respect of securities listed and proposed to be listed in  stock exchange.To any person or intermediary.

 

 

 

Bill Discounting

Bill Discounting, as a fund based activity. According to Indian negotiable act 1881, “The bill of exchange is an instrument in writing containing an unconditional order, signed by the maker

Directing a certain person to pay a certain sum of money only to, or to the order of the certain person, or to the bearer of that instrument.

Bill discounting is an asset-based financial service. The aspect of bill discounting covered include its  advantages and disadvantages. Bill markets schemes, procedures and processing,post-securities scam position, and some grey-areas.The main points also summarised.

Creation of Bill discounting

Suppose a seller sells goods or merchandise to a buyer who would like to pay only after some time. That is the buyer would wish to purchase on credit.To solve this problem the seller draws a B/E of a given maturity on the buyer.
The buyer who is the debtor called the drawee. The seller then sends the bill to the buyer. The buyer acknowledges his responsibility for the payment of the amount on the terms mentioned on the bill by writing his acceptance on the bill. The acceptor could be the buyer himself or any third party willing to take on the credit risk of the buyer.

Discounting of bill of exchange

The seller,who is the holder of an accepted B/E has two option.
1)Hold on to B/E till maturity and then take the payment from the buyer.
2)Discount the B/E with a discounting agency.

The margin between the ready money paid and the face value of the bill called the discount and calculated at a rate percentage per annum on the maturity value.
Types of Bill
Bill classified in the basis of when they are due for payment.following are the type of bill.
1)Demand bill-This is payable immediately the drawee, when “due date” or time not specified on bill .such a type of bill called demand bill.
2)Usance bill-When time period recognized by custom or usage for payment of bills that is a usance bill also called time bill.
3)Documentary bills-When trade takes place between a buyer and the seller of goods.B/E accompained by the documents that contain included invoices and railway receipts, lorry receipts, and bill of lading issued by customs officials.

Advantage of bill discounting

The advantage of bill discounting to investors and banks and finance companies are as follows.
To investors
1)Short-term sources of finance.
2)Bills discounting being in the nature of transaction is outside the purview of section 370 of the Indian Companies Act 1956. It restricts the amount of loans that can be given by group companies.
3)Since it is not a lending, no tax at source deducted while making the payment charges which is very convenient. Not only from a cash flow point of view but also from the point of view of companies that do not envisage tax liabilities.
4)Rates of discount are better than those available on ICDs
5)Flexibility, not only in the quantum of investments but also in the duration of investments.

Factoring V/S bill discounting

Factoring should be distinguished from bill discounting. Bill discounting or invoice discounting consists of the client drawing bills of exchange for goods and services on the buyer. Discounting it with a bank for a charge,like factoring, bill discounting is a method of financing.

Bill discounting has the following limitation in companies to factoring.
i)Bills discounting is a sort of borrowing while factoring is the efficient.  Specialized management of book debts along with enhancing the client’s liquidity.

ii)The client has to undertake the collection of book debt. Bill discounting is always ‘with recourse’ and as such the client not protected from bad-debts.

iii)Bills discounting is not a convenient method for companies having a large number of buyer. Small amounts since it is quite inconvenient to draw a large  number of bills.

Hire purchase

In hire purchase, the goods are let on hire. The purchase price to pay in installment.
A hire purchase agreement is defined as a particular kind of transaction in which the goods are let on hire with an option to the hirer to purchase them.

Following stipulation in hire purchase system.

1)In a specific time period payment made in installment.
2)Possession delivered to the hirer at the time of entering the contract.
3)The property in the goods passes to the hirer on payment of the last installment.
4)Each installment treated as hire charges so that if default made in the payment of any installment the seller becomes entitled to take away the goods and services.
5)The hire/purchase is free to return the goods without required to pay any further installment due after the return.

Hire purchase v/s installment  payment
In an installment sale, the contract of sale entered into, the goods delivered and the ownership transferred to the price of the goods paid in specified installments over a  definite period.

 The distinction between hire purchase and installment purchase 
1)The first difference  based on the call option(to purchase the goods and services time during the term of the agreement and the right of the hirer terminate the agreement at any time before the payment of the last installment(right of termination)

2)In installment sale, the ownership in the goods passes on to the purchaser simultaneously with the payment of the first installment, whereas in hire purchase the ownership transferred to the hirer only when he exercises the option to purchase on payment of the last installment.

                 Legal framework of hire purchase

This act passed in 1972.An amendment bill introduced in 1989 to amend some of the provisions.
Act contains a provision for regulating
1)The format contents of the hire purchase agreement.
2)Warrants and the condition underlying thee hire purchase agreement.
3)Selling on hire purchase charges.
4)Rights and obligations of the hirer and the owner.

In absence of any specific law, the hire purchase transaction governed by the provision of the Indian contract Act and sales of Good Act.
1)An aspect of bailment of goods covered by the contract Act
2)An element of sale when the option to purchase exercised by the hirer is trending purchase which covered by the sale of a good act.

                      Sales of goods act

In the absence of any specific law, this transaction governed by the provision of the Indian contract act and the sales of goods act. This transaction agreement has two aspects.
i)An aspect of the bailment of goods covered by the contract act.
ii) An element of sale when the option to purchase exercised by the hirer intending purchase which covered by the sales of Goods Act.

A contract for sales of goods
A contract of sales of goods is a contract where the seller transfer or agrees to transfer the property in goods to the buyer for a price. It includes both an actual sale and an agreement to sell which vastly differ from the seller to the buyer the contract called a sale.
Where the transfer of property in the goods is to take place at a future time or subject to some conditions to be fulfilled later, called an agreement to sell.

 

                               Essential ingredients of sale

A contract of sale is constituted of the following elements.
a)Two parties->namely, the buyer and the seller, both competent to contract to effectuate the sale.
b)Goods->The subject -matter to be transferred from the seller to the buyer.
c)Money consideration->For the goods, known as ‘price’.
d)Transfer of ownership->The general property in the goods from the seller to the buyer.
e)Essential of valid contract-Under the  Indian Contract Act.

 

Financial services

Financial services is an intermediary activity involved in security the saving of the public fund and facilitating them to be available to the needy for investment.The presence of well organized financial system is highly imperative for the development of any country.Financial system is the nerve point which are accelerate the economic growth.

Role of financial services
Saving culture
Investment opportunity
Neutralizing the risk
Enhancing the return
Economic development

Type of financial service
Saving oriented service
Investment related service
Facilitating service
Income related service

Classification of financial services
Financial services offered not only lending and deposit money but also serve many more thing like easy banking,investment.This era of digitalization.Technology made services more easy and advanced like mobile banking and e-wallets.

Classifying services
Fund based activities
Dealing with security market services
Underwriting of share debenture and bond
Participating in new issue market new issue market
Dealing in foreign exchange market

Non-fund based activities
Financial institution provide services on fee basis that is called non-fund based activity.Financial product are taken by clients only when they are suitably supported with the services.Capital market consist of term lending institution and investing institution which mainly provide long term fund.Money market consist of commercial bank,co-operative bank.Financial services industry include all kind of organization which facilitate services for both individuals and corporate customer.