Investment Banking PDF

Investment Banking Investment banks are financial intermediaries in the business of providing investment and advisory services to companies, governments and investors.  Investment Banking Investment banks issue securities on behalf of both pu...

Investment Banking Investment banks are financial intermediaries in the business of providing investment and advisory services to companies, governments and investors.  Investment Banking Investment banks issue securities on behalf of both public as well as private companies, trade securities in the primary and secondary markets on behalf of individual and institutional investors, manage portfolios for high net-worth clients and corporates, and provide financial advisory services to corporates, private equity groups, public entities, non-profit clients and institutional investors.  Investment Banking Investment banking differs from commercial banking in the sense that they do not accept deposits and grant retail loans. While commercial banks mobilise savings in the form of deposits and lend these funds to individuals, corporates and government, investment banks bring both the lender as well as the borrower together and help the lenders invest directly in the business of the borrowers. The services of commercial banks are accessible by all, while investment banks serve mainly the large companies and high net- worth individuals.  Functions of Investment Banks Initial Public Offering (IPO) Underwriting Mergers and Acquisitions (M&A) Financial Advice to Investors Assisting Investors Helping Govt. in disinvestment of PSUs  Functions of Investment Banks They help public as well as private corporates in issuing securities in the primary market, provide guarantee by standby underwriting and act as intermediaries in trading for clients. They help government in the disinvestment of public-sector enterprises. They give companies advice on mergers and acquisitions (M&A)—both sell side as well as buy side, divestitures, corporate restructuring and spin-offs. They provide financial advice to investors and assist them in purchasing securities, managing financial assets and trading. Types of Investment Banks Full service global investment banks Regional investment banks Boutique firms  Full Service Global Investment Banks Full-service global-investment banks which operate on a global basis and provide a complete set of services to their clients. These are large investment firms that serve large corporates, usually multinational corporations. Jefferies, Goldman Sachs, JP Morgan Chase & Co. and Kotak Investment Banking are some of the full-service investment banks.  Regional Investment Banks Regional-investment banks concentrated in a particular region with specialised geographic knowledge and a variety of product offerings. These firms are also known as ‘speciality investment banks.’ Simmons & Company is the only independent investment bank specialising in the entire spectrum of the energy industry in Europe.  Boutique Firms Boutique firms are small investment banks organised at a local level and specialise in a particular industry or product. They are independent firms whose focus is on advisory services such as M&A. Because of their expertise, they are better advisors in particular deals. They provide personalised services to their clients and try to be more of partners rather than merely being advisors.  Boutique Firms Avendus Capital, a boutique- investment-banking outfit in India, has carved a niche in the small and middle-market M&A space and private-equity transactions. Veda, a Chennai-based boutique-investment bank, provides advisory services in venture capital (VC), private equity (PE) and M&A, to emerging corporates and established groups in the manufacturing, technology, consumer products and services domains. Montague Partners is a boutique-investment bank founded in 1989 and headquartered in San Francisco. The firm works with privately-owned middle-market companies throughout the United States, in a range of industries, specializing in M&A and private placements of debt and equity. Investment Banking Services FUND-RAISING ADVISORY SERVICES SERVICES  Depositories and Custodians Technology has changed the face of the Indian stock markets in the post-liberalisation era. Competition amongst the stock exchanges, increase in the number of players, and changes in the trading system have led to a tremendous increase in the volume of activity. The traditional settlement and clearing system have proved to be inadequate due to operational inefficiencies. Hence, there has emerged a need to replace this traditional system with a new system called the ‘depository system’.  Depositories and Custodians Depository, in very simple terms, means a place where something is deposited for safekeeping. A depository is an organisation which holds securities of a shareholder in an electronic form and facilitates the transfer of ownership of securities on the settlement dates.  Depositories and Custodians The depository system revolves around the concept of paperless or scripless trading because the shares in a depository are held in the form of electronic accounts, that is, in dematerialised form. This system is similar to the opening of an account in a bank wherein a bank will hold money on behalf of the investor and the investor has to open an account with the bank to utilize its services.  Depositories and Custodians Cash deposits and withdrawals are made in a bank, in lieu of which a receipt and bank passbook are given, while in depositories, scrips are debited and credited and an account statement is issued to the investor from time to time. An investor in a bank deals directly with the bank while an investor deals through a depository participant (DP)/ broker in a depository.  Depositories and Custodians A depository also acts as a securities bank, where dematerialised physical securities are held in custody. An effective and fully developed depository system is essential for maintaining and enhancing market efficiency, which is one of the core characteristics of a mature capital market.  Difference Between a Demat Share and a Physical Share A demat share is held by the depository on behalf of the investor whereas a physical share is held by the investor himself. The holding and handling of a demat share is done electronically, whereas a physical share is in the form of a paper. The demat share can be converted into a physical share on request. This is referred to as the rematerialisation of the share.  Difference Between a Demat Share and a Physical Share The interface between the depository and the investor is provided by a market intermediary called the depository participant (DP) with whom an investor has to open an account and give all instructions. The demat share does not have a folio number, distinctive number, or certificate number like a physical share.  Difference Between a Demat Share and a Physical Share Though there is no stamp duty on the transfer of demat shares from one account to another, the depository participant charges a transaction fee and levies asset holding charges. There is, however, no difference between demat shares and physical shares as far as the beneficial interests of ownership of securities are concerned. The owner is entitled to exactly the same benefits of ownership of a security no matter in what form it is maintained.  Depositories and Custodians India has two primary depositories: NSDL (National Securities Depository Limited) and CSDL (Central Depository Services Limited).  NSDL & CDSL Safeguard electronic shares. Hold securities ((like shares, debentures, bonds, government securities, mutual fund units, etc.) in electronic form just like banks hold funds. A demat account cannot be opened directly with NSDL and CDSL. The demat account has to be opened only through a depository participant (DP). The National Securities Depository Limited First Depository in India Registered on June 7, 1996 Commenced operations in November 1996 Promoted by The Industrial Development Bank of India (IDBI), The Unit Trust of India (UTI), The National Stock Exchange of India Limited (NSE), and The State Bank of India (SBI) The National Securities Depository Limited The Indian capital market took a major step in its rapid modernisation when the National Securities Depository Limited (NSDL) was set up as the first depository in India. The NSDL, promoted by the Industrial Development Bank of India (IDBI), the Unit Trust of India (UTI), the National Stock Exchange of India Limited (NSE), and the State Bank of India (SBI) was registered on June 7, 1996, with the SEBI and commenced operations in November 1996. The National Securities Depository Limited The NSDL is a public limited company formed under the Companies Act. The NSDL interacts with investors and clearing members through market intermediaries called depository participants (DPs). The NSDL performs a wide range of securities-related functions through the DPs. Central Depository Services (India) Limited Second depository in India: The CDSL is the second depository set up by the Bombay Stock Exchange (BSE) and co-sponsored by the State Bank of India, Bank of India, Bank of Baroda, HDFC Bank, Standard Chartered Bank, Union Bank of India, and Centurion Bank. March 22, 1999: The CDSL commenced operations on March 22, 1999.  Credit Rating Numerical representation of Creditworthiness: A credit rating is a numerical representation of an entity’s creditworthiness, encompassing individuals, businesses, and governments. Risk Assessment: It is a key indicator for lenders and investors to assess the risk of extending credit. Ranging from AAA to D, with AAA representing the highest reliability and D indicating the lowest Credit Rating Assessment of a Borrower’s borrower’s credit expected capability quality to repay the debt  Credit Rating In the post-reforms era, with increased activity in the Indian financial sector both existing and new companies are opting for finance from the capital market. The competition among firms for a slice of the savings cake has increased. New instruments have been designed by companies to attract investors to subscribe to their issues. The market is flooded with a variety of new and complex financial products.  Credit Rating These new instruments are embodied with complex features very difficult for an ordinary investor to understand and analyse. Besides this, investors no longer evaluate the creditworthiness of the borrowers by their names or size. Credit rating agencies have come into existence to assist the investors in their investment decisions, by assessing the creditworthiness of the borrowers.  Credit Rating Credit rating is the assessment of a borrower’s credit quality. Credit rating performs the function of credit risk evaluation reflecting the borrower’s expected capability to repay the debt as per terms of issue. Credit rating is merely an indicator of the current opinion of the relative capacity of a borrowing entity to service its debt obligations within a specified time period and with particular reference to the debt instrument being rated. Credit rating is not a recommendation to buy, hold or sell. It is a well- informed opinion made available to the public, and might influence their investment decisions.  Credit Rating Information Services of India Ltd. (CRISIL) Investment Information and Credit Credit Rating Agency of India Ltd. (ICRA) Rating Credit Analysis and Research Ltd. (CARE)  ICRA ICRA Limited was set up in 1991 by leading financial/investment institutions, commercial banks and financial services companies as an independent and professional investment Information and Credit Rating Agency. Today, ICRA and its subsidiaries together form the ICRA Group of Companies (Group ICRA). ICRA is a Public Limited Company, with its shares listed on the BSE & NSE. The international Credit Rating Agency Moody’s Investors Service is ICRA’s largest shareholder. Rating Symbols AAA AA A BBB BB B C D  Rating Symbols AAA: Highest safety in terms of timely payment of interest and principal AA: High safety in terms of timely payment of interest and principal A: Adequate safety in terms of timely payment of interest and principal BBB: Moderate safety in terms of timely payment of interest and principal BB: Inadequate safety in terms of timely payment of interest and principal B: High Risk in terms of timely payment of interest and principal C: Substantial Risk in terms of timely payment of interest and principal D: Default in terms of timely payment of interest and principal  Borrowers: Why do Credit Lenders and Rating Investors: Matter? Economic Stability:  Why do Credit Rating Matter? Borrowers: A high credit rating opens doors to favourable lending terms, lower interest rates, and increased access to financial services. Lenders and Investors: Guide them in making informed decisions about extending credit or investing in financial instruments. Economic Stability: Gauge Financial system’s health; Positive credit ratings can attract foreign investment, bolster economic growth, and enhance a country’s global financial standing.  Factoring and Forfaiting With the advent of globalisation and liberalisation, competition among firms—both domestic and international— has increased. Globally, mergers and acquisitions are a common phenomena. Indian corporates have to guard against hostile takeovers. Both environmental and technological changes are rapid and a firm’s strategy has to constantly keep pace with these changes.  Factoring and Forfaiting There has been a slowdown in economic activity globally. Financial markets all over the world are facing rough weather. In this scenario, management of cash and receivables is of utmost importance to both corporate giants and small firms. Many business have collapsed for want of liquidity.  Factoring and Forfaiting The key to success lies in converting credit sales into cash within a short period of time. There are many traditional methods such as cash credit, bills discounting, and consumer credit through financial intermediaries that help in raising short-term funds against credit sales or receivables. Financial services, such as factoring and forfaiting, have come into existence to assist the financing of credit sales and, thereby, help the business unit to tide over the liquidity crunch.  Factoring Factoring is a continuing arrangement between a financial intermediary known as the factor and a business concern (the client) whereby the factor purchases the client’s accounts receivable/ book debts either with or without recourse to the client. This relation enables the factor to control the credit extended to the customer and administer the sales ledger.  Factoring Factoring is a collection and finance service designed to improve the client’s (seller’s) cash flow by turning his credit sales invoices into ready cash. Factoring is an activity of managing the trade debts of a business concern. The factor controls the credit extended to the customers and administers the sales ledger. Factoring Mechanism  Factoring Mechanism 1. Customer places an order with the client for goods and/or service on credit; client delivers the goods and sends invoice to customers. 2. Client assigns invoice to factor. 3. Factor makes prepayment upto 80 per cent and sends periodical statements. 4. Monthly statement of accounts to customer and follow-up. 5. Customer makes payment to factor. 6. Factor makes balance 20 per cent payment on realisation to the client.  Forfaiting Forfaiting is the discounting of international trade receivables on a 100 per cent. Forfaiting converts the exporter’s credit sale into a cash sale. By transforming the exporter’s credit into a cash transaction, it protects the exporter from all the risks associated with selling overseas on credit.  Forfaiting Trade receivables, include bills of exchange, promissory notes, book receivables and deferred payments under letters of credit. The exporter surrenders trade receivables to the forfaiting agency, which pays him in cash after deducting some charges. The forfaiting agency then collects the dues from the importer on expiry of the same period. Thus, forfaiting enables exporters to offer longer-term financing to importers of capital goods.  Housing Finance The concept of housing finance was pioneered by Housing Development Finance Corporation (HDFC) in October 1977. It was not only a trend-setter for housing finance in the whole Asian continent, but also built up the industry by setting rules, policies and procedures to protect the interests of the customers.  Housing Finance Housing finance is a business of financial intermediation wherein the money raised through various sources such as public deposits (which are subject to the regulatory stipulations of NHB), institutional borrowings (from banks), refi nance from NHB and their own capital, is lent to borrowers for purchasing a house.  Housing Finance These intermediaries lend money by accepting mortgage by deposit of title deeds of the residential property. If the borrower fails to pay according to the contract, the lender has the right to sell off the mortgaged property by the intervention of the court.  National Housing Bank It is the apex-level financial institution for the housing sector. The National Housing Bank (NHB) is a wholly owned subsidiary of the RBI and the regulator of non-banking HFCs. The NHB was established on July 9, 1988, under an Act of the Parliament, namely, the National Housing Bank Act, 1987, to function as a principal agency to promote HFIs and to provide financial and other support to such institutions.  Leasing and Hire Purchase There are various forms of financing business assets. An entrepreneur may finance business assets through his own funds or borrowed funds. An alternative form of financing or acquisition of an asset/assets emerged in the early 1950s in the United States, wherein without owning the asset and raising funds either through equity or debt, including loan, an entrepreneur gets the right to use the asset. This alternative form of financing is known as ‘leasing.’  Leasing and Hire Purchase Lease is a method of acquiring right to use an equipment or asset for a consideration. Lease can be defined as ‘a contract between owner of an asset (lessor) and the user of the asset (lessee), under which the lessor gives the right to the lessee to use the asset or equipment for agreed period of time and consideration called “lease rental”.’  Leasing and Hire Purchase Leasing is suitable for financing most investments such as agricultural equipments, medical equipments, construction equipments, office equipments, machinery, aircraft, high-value cars,  Leasing and Hire Purchase Leasing is suitable for financing most investments such as software, green energy and windmills, corporate jets, telecom towers, satellite, mining equipments and alternate energy, and is also available to a broad range of businesses such as corporates, hospitals, educational institutions and government agencies.  Leasing and Hire Purchase As per the Sale of Goods Act, a ‘sale’ means a transfer of property in goods. A lease, on the other hand, is merely a transfer of the right to use the goods and is therefore not a sale. A lease transaction is a deemed sale under the law.  Rights, Obligations and Responsibilities of the Lessor Obligation of acquiring the lease asset according to the lessee’s specification. Right of ownership of the leased asset. Right to claim depreciation on the asset. Right to ensure that the asset is put to fair use and within the limitations contained in the agreement. Right to recover the rentals and other sums payable by the lessee under the agreement. Right to sue in case of conversion of the asset by the lessee.  Rights, Obligations and Responsibilities of the Lessor Obligation of acquiring the lease asset according to the lessee’s specification. Right to terminate the lease contract in case of misuse of leased goods by the lessee or if the lessee does not pay the lease rentals. Right to reimbursement of damages in case of misuse of leased assets. Right to the recovery of the leased asset in the event of the lessee’s failure to pay the lease rentals or lessee’s bankruptcy. Responsibility towards the lessee for legal deficiencies of the leased asset (if the third person exercises a right over the lease asset, which excludes, diminishes or limits lessee’s unrestricted possession of the asset) and responsibility towards the lessee for  Rights, Obligations and Responsibilities of the Lessee Obligation to pay the lease rentals periodically as specified in the lease agreement. Obligation to keep the asset insured at all times for an amount equal to the full insurable value of the asset. Obligation to return the leased asset to the lessor upon expiration or earlier termination of this lease agreement. Right to use and operate the asset during the lease period, according to the terms of the lease agreement.  Rights, Obligations and Responsibilities of the Lessee Right to terminate the financial lease contract if the asset has not been delivered in line with the contract (if the supplier does not deliver the asset, delivers the asset with delay or if the asset has a material deficiency). Right of damage compensation and termination of the lease rental payment until the delivery of the leased asset is in line with the lease contract. Responsibility for the damage caused by using the lease asset. Responsibility for a sudden devastation or damage of the leased asset from the moment of taking over the asset.  Types of Lease Financial Lease (also known as Capital Lease) Operating Lease Sale and Leaseback Leverage Leasing Close and Open-ended Lease Upfront and Back-end Lease Percentage Lease 3N (Net and Net-net) Lease Cross-border Lease  Financial Lease Financial lease is also known as Capital lease. A financial lease is a lease that transfers substantially all the risks and rewards incident to the ownership of an asset to the lessee, though the lessor is the legal owner in substance. In financial lease, the asset is leased for a long period. Generally, the time duration is equal to the economic life of the asset. This lease is non-cancellable in nature.  Operating Lease A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incident to ownership. An operating lease is a lease in which the period of lease is short when compared to the useful life of the asset or the equipment being leased. For instance, an aircraft which has an economic life of 25 years may be leased to an airline for 5 years on an operating lease. The lease period being short, the lessor will recover the cost of the asset from multiple lessees.  Sale and Lease Back (SLB) In this type of lease, the owner of an asset sells that asset to the lessor and then gets the asset back on lease from the lessor. The purpose of the leaseback is to free up the original owner’s capital while allowing the owner to retain possession and use of the property. A sale and leaseback can be beneficial to both the buyer as well as the seller. The seller gets a lumpsum of cash quickly which improves the liquidity. And the lessor gets the benefit in terms of tax credit and a flow of regular income.  Leverage Leasing Under leveraged-leasing arrangement, a third party is involved besides the lessor and the lessee. The lessor borrows a part of the purchase cost (say 80%) of the asset from the third party, that is, the lender and the asset so purchased is held as a security against the loan. The lender is paid off from the lease rentals directly by the lessee and the surplus after meeting the claims of the lender goes to the lessor. Close- In a close-ended lease, the asset and gets transferred to the lessor, at the end of the lease-contract Open- period, whereas in an open-ended ended lease, the lessee has the option of purchasing the asset. Lease Up front and Back-end Lease In an upfront lease, higher lease rentals are charged in the initial years and lower rentals in the later years of contract. Whereas, in the back-end lease, in the initial years, the lease rentals are less but increase in the later years.  In the percentage lease, the lessee needs to pay fix-lease Percentage rentals plus some Lease percentage of the previous year’s gross revenue. 3N Lease (Net and Net-net Leases) In the Net and Net-net leases, the lessee is responsible for maintenance, insurance and taxes of the property. Cross Border Lease Also known as International lease. In this lease the lessee and the lessor are situated in two different countries. Commonly-used Lease Terminology Wet Lease Dry Lease  Commonly-used Lease Terminology Wet Lease: A wet lease is a leasing arrangement whereby one airline (lessor) provides an aircraft, complete crew, maintenance and insurance (also known as an ACMI lease) to another airline (lessee),who pays by hours operated. Dry Lease: ‘Dry lease’ refers to leasing the aircraft alone. A wet lease without crew is occasionally referred to as a ‘moist lease.’  Advantages of Leasing No Large Outlay Tax Advantages Budgeting Hedge Against Risk of Obsolescence  Disadvantages of Leasing No ownership Long-term expense Cost of maintenance Restrictions on use of equipment Termination of the contract in case of default  Hire Purchase (HP) A type of credit arrangement where an individual or business can purchase goods by making an initial down payment and then paying the remainder of the purchase price in installments over a specified period. Under this agreement, the buyer doesn’t own the asset until all installments are fully paid. Often used for acquiring cars, machinery, electronics, and other durable goods where the buyer needs immediate use of the asset but prefers to pay over time.  Hire Purchase (HP) Advantages: Low Initial Cost Flexible Payments Disadvantages Higher Overall Cost Risk of Repossession  Financial Inclusion Financial inclusion refers to making financial services accessible and affordable to all individuals, especially those who are typically underserved, such as low-income groups, rural populations, and marginalized communities. It aims to ensure that everyone has access to financial products and services that are essential for their economic well-being and development, such as savings accounts, loans, insurance, and payment systems.  Financial Inclusion The Asian Development Bank (ADB) has defined financial inclusion as ‘provision of a broad range of financial services such as deposits, loans, payment services, money transfers, and insurance to poor and low income households and their micro-enterprises.’  Benefits of Financial Inclusion Financial inclusion is an avenue for bringing the savings of the poor into the formal financial intermediation system. Large number of low-cost deposits help banks manage liquidity risks. It provides opportunities to the poor to build savings, make investments and avail credit.  Benefits of Financial Inclusion Financial inclusion helps transfer payments such as social security, national rural employment guarantee programme (NREGA) wages into the bank accounts of beneficiaries through the ‘electronic benefi t transfer’ (EBT) method. It helps the poor insure themselves against income shocks and equip them to meet emergencies such as illness or loss of employment.  Microfinance Regional Rural Bank and Cooperative Bank Rural credit by commercial bank Shortcomings  Microfinance Microfinance: An alternative mechanism Microfinance is the provision of financial services to the poor. The Task Force on Supportive Policy and Regulatory Framework for Microfinance (NABARD), 1999, defines microfinance as ‘provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi-urban or urban areas for enabling them to raise their income levels and improve living standards.’ Microfinance is a holistic concept—it includes not only micro-credit but also support services such as savings, insurance, payments, market and technical assistance, and capacity building.  Microfinance The clients of microfinance are landless labourers engaged in agriculture, mining and construction, small and marginal farmers, rural artisans and weavers, self-employed in urban informal sector, self-employed in non-farm activities.  Microfinance In 1976, Dr Mohammed Yunus, a professor in Chittagong University, Bangladesh, came up with the concept of lending to groups of poor women. This group was loaned money without any collateral, but with higher interest rates of 20–24 per cent. If any one member defaulted, the group was denied access to further credit. This joint liability put a social pressure which produced a very high repayment rate of 98 per cent. The success of this pilot project inspired him to set up a Grameen Bank for providing banking services to the poor.  Microfinance Microfinance in India evolved to fill the gaps created by the formal banking institutions. The microfinance movement had already begun in India in the 1970s. Shri Mahila SEWA (Self-Employed Women’s Association) Sahakari Bank in Ahmedabad (Gujarat) and Working Women’s Forum in Tamil Nadu were the pioneers. The SEWA Bank was set up in 1974 as an Urban Cooperative Bank providing banking services to the poor self-employed women.  Microfinance The SEWA Bank is the biggest poor women’s bank in the world and the first microfinance institution (MFI) to be set up in India.  Features of Microfinance in India The borrowers are from low-income backgrounds Loans availed under microfinance are usually of small amounts, i.e., microloans The loan tenure is short Microfinance loans do not require any collateral These loans are usually repaid at higher frequencies The purpose of most microfinance loans is income generation  Financial regulation encompasses the rules, laws, and guidelines Financial imposed by governments or Regulation regulatory authorities to oversee and control financial institutions and markets.  Financial Regulation The aim of financial regulation is to ensure the stability, integrity, transparency, and fairness of financial systems. This framework protects consumers, maintains investor confidence, prevents financial crimes, and reduces systemic risk, which can lead to economic crises. Main Objectives of Financial Regulation 1 2 3 4 Protecting Maintaining Ensuring Reducing Consumers Market Financial Financial and Investors Integrity Stability Crime  The Reserve Bank of India (RBI) The Reserve Bank of India is the central bank of India. The Reserve Bank of India was established by legislation in 1934 through the Reserve Bank of India Act, 1934. It started functioning from April 1, 1935. Its central office is at Mumbai since 1937. Though originally privately owned, since nationalisation in 1949, it is fully owned by the Government of India.  Main Functions of RBI To formulate, implement, and monitor the monetary policy. To prescribe broad parameters of banking operations within which the country’s banking and financial system functions. To facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India.  Main Functions of RBI To issue and exchange or destroy currency and coins not fit for circulation. To perform a wide range of promotional functions to support national objectives. To maintain banking accounts of all scheduled banks.  Role of RBI in India Monetary Authority of the Country Regulator and Supervisor of the Financial System Banker to the Government Manager of Exchange Control Issuer of Currency Developmental Role Banker to the Banks  Monetary Authority of the Country Monetary policy-making is the central function of the Reserve Bank. The broad objectives of monetary policy in India are (a) maintaining price stability and (b) ensuring adequate flow of credit to productive sectors to assist growth. Monetary policy creates conditions for growth by influencing the cost and availability of money and credit. Monetary policy represents policies, objectives, and instruments directed towards regulating money supply and the cost and availability of credit in the economy. Regulator and Supervisor of the Financial System The objectives of the Reserve Bank as a regulator and supervisor of the financial system are to maintain public confidence in the system, protect depositors’ interest and provide cost-effective banking services to the public. In order to attain these objectives, the bank prescribes broad parameters of banking operations within which the country’s banking and financial system functions. Regulator and Supervisor of the Financial System The RBI regulates and supervises the banking system in India under the provisions of the Banking Regulation Act, 1949, and the Reserve Bank of India Act, 1934.  Banker to the Government The Reserve Bank manages the public debt of the central and the state governments and also acts as a banker to them under the provisions of the Reserve Bank of India Act. The RBI provides a range of banking services such as acceptance of money on government account, payment/withdrawal of funds, and collection and transfer of funds by various means throughout India. The governments principal accounts are maintained at Central Accounts Section (CAS), Nagpur.  Manager of Exchange Control The function of the Reserve Bank is to develop and regulate the foreign exchange market. The bank’s role is to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India. The foreign exchange transactions are regulated under the Foreign Exchange Management Act, 1999.  Issuer of Currency Note issue and currency management. The Government of India issues one rupee coins and one rupee notes but they are put into circulation only through the RBI. Currency management involves efforts to achieve self-sufficiency in the production of currency notes and coins with a judicious denomination mix, improvement in the efficiency of distribution networks and withdrawal and destruction of notes, technology upgradation and enhancement in the security features of currency notes.  Issuer of Currency Holds the sole authority to issue currency notes in India.  Issuer of Currency Bank notes are printed at four notes presses, of which the Currency Note Press, Nasik, and Bank Note Press, Dewas (MP), are owned by the central government and the presses at Mysore and Salboni (WB) are owned by the Bharatiya Reserve Bank Note Mudran Limited, a wholly-owned subsidiary of the Reserve Bank.  Developmental Role The RBI helped to set up a number of development financial institutions such as the Industrial Development Bank of India, the National Bank for Agriculture and Rural Development, the Industrial Reconstruction Bank of India, the National Housing Bank, and, recently, the Infrastructure Development Finance Company Limited to provide project and infrastructure finance. It has also helped to set up the Unit Trust of India, the Discount and Finance House of India, and the Securities Trading Corporation of India to promote and foster financial markets  Banker to the Banks As the Reserve Bank maintains banking accounts of all scheduled banks, it has powers to collect credit information from banking companies and appoint any bank as its agent. The central bank provides a variety of financial facilities and accommodations to scheduled banks. It takes care of temporary liquidity gaps in the banking system through refinancing schemes. It acts as lender of last resort to foster financial stability.  IRDAI The Insurance Regulatory and Development Authority of India (IRDAI) IRDAI is an autonomous and statutory body which is responsible for managing and regulating insurance and re- insurance industry in India. It is a 10-member body- a chairman, five full-time members and four part-time members. It was constituted under an Act of Parliament in 1999 and the agency's headquarters is in Hyderabad.  IRDAI Insurance is a growing sector in India. The insurance industry in India is vast and there are various insurance companies that deal with different types of insurances including life insurance and general insurance. These companies need a regulatory body to manage their work. The Insurance Regulatory and Development Authority or IRDA operates with the objectives of promoting competition to enhance customer satisfaction with increased customer choice and lower premiums while ensuring financial security of the insurance market.  IRDAI IRDA works as the head of the insurance industry in India and regulates all the rules and guidelines for different insurance companies in the country. All these companies had their own set of rules and guidelines which led to confusion in the market. So to bring a set model of rules and guidelines to be followed by all insurance companies, the insurance regulatory and development authority or IRDA was established.  IRDAI IRDA is responsible for the insurance industry in the country and it runs the insurance industry by setting certain rules and regulations which all members and insurance companies have to follow. IRDA ensures that no insurance company can deny claims to the policy holders unless they fall beyond the scope of cover. To ensure fair practice in the industry the IRDA also calls for monthly or annual audits from the insurance companies. It also regulates the rates and terms set by the insurance companies to ensure equality among all consumers.  IRDAI IRDA also works to solve any disputes or misunderstandings that may arise between the insurance company and the policyholder regarding the concerned policy.  Functions of IRDAI To issue, renew, modify, withdraw, suspend, or cancel registrations is one of the important functions of the Insurance Regulatory and Development Authority or IRDA. To protect policyholders interests which gives them a sense of security and confidence regarding the policy they have invested in. To specify the qualifications, code of conduct and training for intermediaries and agents, so as to ensure that only the best and talented people are involved in the process.  Functions of IRDAI To inspect and investigate insurers, intermediaries, and other relevant organisations. To adjudicate disputes between insurers and intermediaries or insurance intermediaries. To specify the form and manner in which the books of accounts are to be maintained, and statements of accounts shall be rendered by insurers and other insurance intermediaries. To encourage the systemic growth of the insurance industry in order to benefit the common people who invest in the policies.  SEBI It is a statutory regulatory body that was established by the Government of India in 1992 for protecting the interests of investors investing in securities along with regulating the securities market. SEBI also regulates how the stock market and mutual funds function. SEBI (Mutual Fund) Regulation 1996  SEBI The capital market, i.e., the market for equity and debt securities is regulated by the Securities and Exchange Board of India (SEBI). The SEBI has full autonomy and authority to regulate and develop the capital market. The government has framed rules under the Securities Contracts (Regulation) Act (SCRA), the SEBI Act and the Depositories Act.  SEBI The SEBI has framed regulations under the SEBI Act and the Depositories Act for registration and regulation of all market intermediaries, for prevention of unfair trade practices, and insider trading. Under the acts, the Government and the SEBI issue notifications, guidelines, and circulars which need to be complied with by market participants. All the rules and regulations are administered by the SEBI.  Objectives of SEBI Investor Protection: This is one of the most important objectives of setting up SEBI. It involves protecting the interests of investors by providing guidance and ensuring that the investment done is safe. Preventing the fraudulent practices and malpractices which are related to trading and regulation of the activities of the stock exchange To develop a code of conduct for the financial intermediaries such as underwriters, brokers, etc. To maintain a balance between statutory regulations and self regulation.  Functions of SEBI Protective Function Regulatory Function Development Function  Protective Function of SEBI Prohibits insider trading Check price rigging Promoting fair practices Financial education provider  Regulatory Function of SEBI Regulatory functions involve establishment of rules and regulations for the financial intermediaries along with corporates that helps in efficient management of the market.  Regulatory Function of SEBI SEBI has defined the rules and regulations and formed guidelines and code of conduct that should be followed by the corporates as well as the financial intermediaries. Regulating the process of taking over of a company. Conducting inquiries and audit of stock exchanges. Regulates the working of stock brokers, merchant brokers.  Developmental Function of SEBI Developmental function refers to the steps taken by SEBI in order to provide the investors with a knowledge of the trading and market function.  Developmental Function of SEBI Training of intermediaries who are a part of the security market. Introduction of trading through electronic means or through the internet by the help of registered stock brokers. By making the underwriting an optional system in order to reduce cost of issue.  SIDBI Small Industries Development Bank of India (SIDBI) set up on 2nd April 1990 under an Act of Indian Parliament. It acts as the Principal Financial Institution for Promotion, Financing and Development of the Micro, Small and Medium Enterprise (MSME) sector as well as for co-ordination of functions of institutions engaged in similar activities  SIDBI The Shares of SIDBI are held by the Government of India and twenty-two other institutions / public sector banks / insurance companies owned or controlled by the Central Government  NABARD National Bank for Agriculture and Rural Development An apex development bank in India. Established in 1982, by an act of Parliament. Its primary mandate is to facilitate credit flow for the promotion and development of agriculture, small-scale industries, cottage and village industries, handicrafts, and other rural crafts.  NABARD National Bank for Agriculture and Rural Development In an effort to improve the financial operations, promote sustainable agriculture, and enhance rural development, the government of India established NABARD NABARD is the main regulatory body in the country’s rural banking system and is considered as the peak development finance institution which is established and owned by the government of India. This bank aims to provide and regulate credit to the rural areas, which will be a first step towards enhancing the rural development in the country.  NABARD NABARD has been given many responsibilities related to the formulation of policies, planning, and operations in agriculture and financial development. NABARD carries these responsibilities efficiently and works towards promoting and developing main industries in the rural areas like the agriculture industry, cottage industries, other small scale industries, and rural crafts in an effort to create better infrastructure and better employment opportunities for the people living in these regions. Functions of NABARD Credit functions Financial functions Supervisory functions Development functions  Credit Functions of NABARD As the main provider of credit facilities in rural areas, the National Bank for Agriculture and Rural Development or NABARD performs the credit functions. Under these functions, the bank provides, regulates, and monitors the credit flow in the rural parts of the nation.  Financial Functions of NABARD By performing the financial functions, NABARD provides loans to these client banks and institutions like handicraft industries, food parks, processing units, artisans and many more.  Supervisory Functions of NABARD NABARD is the apex institution that looks after agriculture and rural development. This is why the responsibility of monitoring and regulating all the development activities and projects fall on this institution. Given this role, the NABARD performs supervisory functions in which it has to keep a check on all the client banks, institutions, credits and non-credits societies that are a part of the developmental tasks taking place in the rural areas.  Development Functions of NABARD The primary role of NABARD is to focus on developing sustainable agriculture and promote rural development, the bank performs development functions in an effort to stay true to this role. Under developmental functions, the NABARD helps rural banks prepare action plans for the developmental activities. Banking and Non-Banking Financial Institutions  NBFC LIC Housing Finance Bajaj Finance Mahindra & Mahindra Financial Services L&T Finance Indiabulls Housing Finance Piramal Capital & Housing Finance Cholamandalam Investment and Finance Co. Shanghvi Finance Pvt. Ltd Muthoot Finance PNB Housing Finance Tata Capital Financial Services Aditya Birla Finance HDB Financial Services Bajaj Housing Finance  Banking vs. Non-Banking The difference between a Bank and NBFC is that the former is a government-authorised financial intermediary, while the latter operates without having a bank license.  Banking vs. Non-Banking Banks are regulated under the Reserve Bank of India Act, 1934 and the Banking Regulation Act, 1949. NBFCs are regulated as per provisions of the Companies Act of 1956 or the Companies Act of 2013 and are usually regulated by the Reserve Bank of India Act of 1934.  Banking vs. Non-Banking Banks' primary business is accepting deposits and offering loans. Banks accept deposits that are repayable on demand, whereas NBFCs are not permitted to enter into the business of accepting such deposits. Banks must mandatorily maintain ratios like Cash Reserve Ratios (CRR) and Statutory Liquidity Ratios (SLR). Whereas NBFCs don't need to maintain such ratios.  Banking Institutions The banking sector is the lifeline of any modern economy. It is one of the important financial pillars of the financial system which plays a vital role in the success/failure of an economy. Banks are one of the oldest financial intermediaries in the financial system. They play an important role in the mobilisation of deposits and disbursement of credit to various sectors of the economy.  Banking Institutions Countries with a well-developed banking system grow faster than those with a weaker one. The banking system reflects the economic health of the country. The strength of economy of any country basically hinges on the strength and efficiency of the financial system, which, in turn, depends on a sound and solvent banking system.  Banking Institutions A sound banking system efficiently deploys mobilised savings in productive sectors and a solvent banking system ensures that the bank is capable of meeting its obligation to the depositors. The banking sector is dominant in India as it accounts for more than half the assets of the financial sector.  Bank You need to store your cash you choose a bank. You need a loan you choose a bank. You need to transfer the money you do it via bank.  Bank According to some, the English word "bank" is derived from the Italian word "banco," the Latin word "bancus" and the French word "banque", which mean a bench.  Bank A financial institution authorised to accept deposits and provide credits. Banks of a country are usually regulated by a central bank or the national government, in India all the banks are regulated by the central bank, the Reserve Bank of India (RBI).  Deposits Credit Creation Functions of a Bank Lending of funds Ancillary functions  Deposits Deposit is a term used to denote the money kept or held in any bank account, especially to accumulate interest. The fund used as a security to get the goods delivered can also be called a deposit. Any transaction processed to transfer money to an entity for safeguarding can be referred to as a deposit.  Deposits Deposits are the main source of funds for commercial banks. The amount mobilised as deposits is then lent in the form of advances. The higher the amount of deposits mobilised, the higher is the amount of funds lent. The growth of deposits depends on savings. Savings held in the form of currency or gold and jewellery are unproductive.  Deposits For economic growth to take place, it is essential that these savings are mobilised and channelised for capital formation which, in turn, accelerates economic growth. Banks are important financial intermediaries between savers and borrowers. Banks mobilise savings by accepting deposits. Deposits may be categorised into (i) demand deposits and (ii) time deposits.  Deposits Demand deposits are deposits which can be withdrawn without notice and can be repaid on demand. Current accounts and savings accounts are classified as demand deposits. Time deposits are deposits which are repayable after a fixed date or after a period of notice. Fixed deposits, recurring/cumulative deposits are classified as time deposits.  Credit Creation Banks are creators of credit. The creation of credit is an important function of a bank and this function distinguishes banks from the non-banking institutions. Banks create deposits in the process of their lending operations. When the bank mobilises savings, it lends the amount that remains after providing for reserves. The amount lent is either deposited in the same bank or in some other bank.  Credit Creation When a bank extends overdraft facility or discounts a bill of exchange, the bank first of all credits this amount in the account of the customer, who creates a deposit. The bank, after keeping aside a certain portion of this deposit in the form of reserves, lends this amount. This process continues and repeats in all the banks or in the banking system as a whole. This leads to the creation of credit, which, in turn, increases the liabilities and assets in the banking system.  Credit Creation For instance, a bank receives Rs. 1,000 in the form of deposits. The bank after keeping aside, say, 10 per cent in the form of reserves, lends the remaining amount, i.e., Rs. 900. The amount lent is either deposited in the same bank or in some other bank.  Credit Creation The bank again, after keeping aside reserves of 10 per cent, lends the remaining amount, i.e., Rs. 810. This process continues and repeats in all banks simultaneously leading to creation of credit. Credit creation leads to an increase in the total amount of money for circulation.  Lending of Funds Commercial banks mobilise savings from the surplus-spending sector and lend these funds to the deficit spending sector. They facilitate not only flow of funds but also flow of goods and services from producers to consumers through this function of lending. Commercial banks facilitate the financial activities of not only the private sector but also of the government.  Lending of Funds Funds are lent in the form of cash credit, overdraft, and loan system. Banks discount bills of exchange, give venture capital, and guarantees. Loans and advances form around 50 per cent of the aggregate deposits of commercial banks.  Ancillary Functions of a Bank Besides the primary functions of mobilising deposits and lending funds, banks provide a range of ancillary services, including transfer of funds, collection, foreign exchange, safe deposit locker, gift cheques, and merchant banking. Thus, banks provide a wide variety of banking and ancillary services.  Types of Banks There are various types of banks and each is responsible to perform different functions. Each of them has a role in managing the financial system of a country.  Central Bank Cooperative Banks Commercial Banks Types of Regional Rural Banks (RRB) Banks Local Area Banks (LAB) Specialised Banks Small Finance Banks Payments Banks  Central Bank Each country has a central bank that regulates all the other banks in that particular country. The main function of the central bank is to act as the Government’s Bank and guide and regulate the other banking institutions in the country.  Central Bank The central bank of the country may also be known as the banker’s bank as it provides assistance to the other banks of the country and manages the financial system of the country, under the supervision of the Government.  Guiding other banks Functions Issuing currency of Central Bank Implementing the monetary policies Supervisor of the financial system  Central Bank Cooperative Banks Commercial Banks Types of Regional Rural Banks (RRB) Banks Local Area Banks (LAB) Specialised Banks Small Finance Banks Payments Banks Cooperative Banks Co-operative Banks are small financial institutions that offer lending facilities to small businesses in both urban and non-urban regions.  Cooperative Banks Co-operative banking involves small financial institutions established by a group to meet the capital needs of their specific community. Owned and controlled by their members, these banks operate on the principle of cooperation. Members pool resources to provide banking services such as loans and savings accounts.  Cooperative Banks In India, co-operative banks are registered under the States Co- operative Societies Act and regulated by the RBI under the Banking Regulations Act, 1949, and the Banking Laws (Co- operative Societies) Act, 1955.  Cooperative Banks These banks are organised under the state government’s act. They give short term loans to the agriculture sector and other allied activities. The main goal of Cooperative Banks is to promote social welfare by providing concessional loans.  Cooperative Banks Scheduled Urban Cooperative Banks Non-Scheduled Urban Cooperative Banks State Cooperative Banks District Cooperative Banks  Commercial Banks Commercial Banks refer to those banks under the banking system in India that run on a commercial basis. It means that they operate and offer services to earn a profit.  Organised under the Banking Regulation Act 1949 They have a unified structure and Commercial are owned by the government, Banks state, or any private entity. Most individuals conduct their banking at a commercial bank.  They lend to all sectors ranging from rural to urban. These banks do not charge Commercial concessional interest rates Banks unless instructed by the RBI Public deposits are the main source of funds for these banks  Commercial Banks Public sector Private Foreign Banks sector Banks Banks  Public Sector Bank (PSB) A bank where the majority stakes are owned by the Government or the central bank of the country. Public sector banks constantly work in the public interest by introducing schemes for customers’ benefit. They also charge less for their services than private banks. Besides working in the public interest, nationalised banks in India also earn huge profits.  Public Sector Banks State Bank of India Canara Bank Bank of India Punjab National Bank Bank of Baroda Bank of Maharashtra Union Bank of India Central Bank of India Indian Bank UCO Bank Indian Overseas Bank Punjab and Sind Bank  Private Sector Bank A bank where the majority stakes are owned by a private organisation or an individual or a group of people. Private Sector Banks HDFC Bank ICICI Bank Yes Bank Axis Bank IDBI Bank Bandhan Bank and others Foreign Banks The banks with their headquarters in foreign countries and branches in India, fall under this type of bank.  Foreign Banks A foreign bank branch operates under the regulations of both its home country and the country in which it is located. According to the Department of Financial Resources, Government of India, there are currently 45 foreign banks operating in India in 2024. Foreign Banks HSBC CITI Bank Deutsche Bank Standard Charted Bank Woori Bank Royal Bank of Scotland DBS (Development Bank of Singapore) Barclays Bank Bank of America Bank of Bahrain and Kuwait Doha Bank  These are special types of commercial Banks that provide concessional credit to agriculture and rural sector. Regional Rural Banks RRBs are registered under a Regional Rural Bank Act. (RRB) The first RRB was established in 1975, and was named the Prathama Bank of Moradabad, Uttar Pradesh.  Better suited than the commercial banks or co- operative banks in meeting the needs of rural areas. Regional Rural The RRBs were established “with a view to Banks developing the rural economy by providing, for the purpose of development of agriculture, (RRB) trade, commerce, industry and other productive activities in the rural areas, credit and other facilities, particularly to small and marginal farmers, agricultural labourers, artisans and small entrepreneurs, and for matters connected therewith and incidental thereto”.  Functions of RRB Granting loans and advances to small and marginal farmers and agricultural laborers‚ whether individually or in groups, and to cooperative societies‚ including agricultural marketing societies‚ agricultural processing societies‚ cooperative farming societies‚ primary agricultural credit societies or farmers’ service societies‚ primary agricultural purposes or agricultural operations or other related purposes. Granting loans and advances to artisans‚ small entrepreneurs and persons of small means engaged in trade‚ commerce‚ industry or other productive activities‚ within its area of operation.  The main objectives of setting up the RRB is to provide credit and other facilities‚ especially to the small and marginal farmers‚ agricultural labourers artisans and small entrepreneurs in rural areas. Regional Rural Each RRB is sponsored by a public sector Banks bank, which provides assistance in several ways‚ viz., subscription to its share capital‚ (RRB) provision of such managerial and financial assistance as may be mutually agreed upon and help the recruitment and training of personnel during the initial period of its functioning. Challenges Faced by RRBs  Local Area Banks Local Area Banks are such banks that are set up for a small area and operate in that area. Local Area Banks function just like the other big banks, which means completing the financial requirements, for example, storing money, lending money, withdrawing money, etc., of the area that’s provided to each Local Area Bank. These are organised by the private sector Earning profit is the main objective of Local Area Banks  Local Area Banks started in India in 1996, as a scheme of the union budget to make small private banks for people in those areas who Local don’t have access to banks. Area Banks The license of these banks is issued by RBI.  Coastal Local Area Bank Ltd Krishna Bhima Samruddhi Local Area Bank Ltd Local Area Capital Local Area Bank Ltd Banks Subhadra Local Area Bank Ltd. Kolhapur  Specialised Banks Several specialised banks cater to specific demands and provide full support for beginning a business in particular industries. They are referred to as specialised banks since they specialise in a specific area or activity. These include Small Industries Development Bank of India (SIDBI) Export Import Bank of India (EXIM) National Bank for Agricultural & Rural Development (NABARD)  SIDBI Small Industries Development Bank of India (SIDBI) set up on 2nd April 1990 under an Act of Indian Parliament. It acts as the Principal Financial Institution for Promotion, Financing and Development of the Micro, Small and Medium Enterprise (MSME) sector as well as for co-ordination of functions of institutions engaged in similar activities  SIDBI The Shares of SIDBI are held by the Government of India and twenty-two other institutions / public sector banks / insurance companies owned or controlled by the Central Government.  Export-Import Bank EXIM Established in 1982 EXIM Bank is a wholly- owned subsidiary of the Indian Government.  NABARD is India’s apex development bank, established in 1982 under an Act of Parliament to promote sustainable and NABARD equitable agriculture and rural development.  Small Finance Banks (SFBs) This type of bank looks after the micro industries, small farmers, and the unorganised sector of the society by providing them loans and financial assistance. These banks are governed by the central bank of the country.  Small Finance Banks (SFBs) SFBs were introduced with the objective of furthering financial inclusion by primarily extending basic banking services to unserved and underserved sections including small and marginal farmers, small business units, micro and small industries and unorganised entities. SFBs offer all basic banking services including lending and taking deposits.  Small Finance Banks (SFBs) A majority of our population lives in rural areas. And it is a challenge to extend banking services to the remotest locations in India. The expansion of SFB aims to provide access to bank credit and services to unbanked and under-banked regions of India. SFBs offer basic banking services such as Savings Accounts, Current Accounts, Fixed Deposits, Recurring Deposits, Loans, etc.  Small Finance Banks (SFBs) AU Small Finance Bank Capital Small Finance Bank Jana Small Finance Bank Suryoday Small Finance Bank Ujjivan Small Finance Bank Utkarsh Small Finance Bank  Small Finance Banks (SFBs) AU Small Finance Bank Capital Small Finance Bank Jana Small Finance Bank Suryoday Small Finance Bank Ujjivan Small Finance Bank Utkarsh Small Finance Bank Ltd. (USFBL)  Payments Banks A newly introduced form of banking, the payments bank have been conceptualised by the Reserve Bank of India. People with an account in the payments bank cannot apply for loans or credit cards under this account. Options for online banking, mobile banking, the issue of ATM, and debit card can be done through payments banks.  Payments Banks A payments bank is like any other bank, but operating on a smaller scale without involving any credit risk. In simple words, it can carry out most banking operations but can’t advance loans or issue credit cards. It can accept demand deposits, offer remittance services, mobile payments/transfers/purchases and other banking services like ATM/debit cards, net banking and third party fund transfers.  Payments Banks Airtel Payments Bank India Post Payments Bank Fino Payments Bank Jio Payments Bank Paytm Payments Bank NSDL Payments Bank  Banking Ombudsman Banking Ombudsman Scheme Banking Ombudsman Scheme is a mechanism created by the RBI to address the complaints raised by bank customers. It is run by the RBI directly to ensure customer protection in the banking industry.  Banking Ombudsman The Banking Ombudsman does not charge any fee for filing and resolving customers' complaints. You can file a complaint before the Banking Ombudsman if the reply is not received from the bank within one month after the concerned bank has received your complaint, if the bank rejects the complaint, or if you are not satisfied with the reply given by the bank.  Insurance is a contract, represented by a policy, in which a policyholder Insurance receives financial protection or reimbursement against losses from an insurance company.  Insurance Insurance is a contract (policy) in which an insurer indemnifies another against losses from specific contingencies or perils. Most people have some insurance: for their car, their house, their healthcare, or their life.  Insurance Insurance policies hedge against financial losses resulting from accidents, injury, or property damage. Insurance also helps cover costs associated with liability (legal responsibility) for damage or injury caused to a third party.  Insurance There are many types of insurance policies. Life, health, homeowners, and auto are among the most common forms of insurance. The core components that make up most insurance policies are the premium, policy limits, and deductible. Insurance Policy Components Three Components 1. Premium 2. Policy Limit 3. Deductible  A policy’s premium is its price, typically a monthly Insurance cost. Policy Components: Premium Often, an insurer takes multiple factors into account to set a premium.  Insurance Policy Components: Premium Auto insurance premiums: Your history of property and auto claims, age and location, creditworthiness, and many other factors that may vary by state. Home insurance premiums: The value of your home, personal belongings, location, claims history, and coverage amounts. Health insurance premiums: Age, gender, location, health status, and coverage levels. Life insurance premiums: Age, gender, tobacco use, health, and amount of coverage.  Insurance Policy Components: Premium Much depends on the insurer's perception of your risk for a claim. Ex: Suppose you own several expensive automobiles and have a history of reckless driving. In that case, you will likely pay more for an auto policy than someone with a single midrange sedan and a perfect driving record. Different insurers may charge different premiums for similar policies.  The policy limit is the maximum Insurance Policy amount an insurer will pay for a Components: Policy Limit covered loss under a policy.  Insurance Policy Components: Policy Limit Maximum may be set per period (e.g., annual or policy term), per loss or injury, or over the life of the policy, also known as the lifetime maximum.  Insurance Policy Components: Policy Limit Typically, higher limits carry higher premiums. For a general life insurance policy, the maximum amount that the insurer will pay is referred to as the face value. Insurance Policy Components: Deductible The deductibles is a specific amount you pay out of pocket before the insurer pays a claim.  Insurance Policy Components: Deductible For example, a $1,000 deductible means you pay the first $1,000 toward any claims. Suppose your car's damage totals $2,000. You pay the first $1,000, and your insurer pays the remaining $1,000. Policies with high deductibles are typically less expensive because the high out-of-pocket expense generally results in fewer small claims.  Insurance Policy Components: Deductible Deductibles serve as deterrents to large volumes of small and insignificant claims. Deductibles in insurance act as an obstacle to raising small and ingenuine claims just because there is insurance coverage.  Insurance Policy Components: Deductible A health insurance deductible is the proportion of the medical/hospitalisation expenses that you have to pay out of your pocket before you can make an insurance claim. The insurance company will pay the claim amount to you or directly to the hospital only when the deductible amount is paid.  Insurance Policy Components: Deductible In other words, the insurance company will only cover the claim if it is over and above the deductible amount. Any claim below the insurance deductible will be rejected. The deductible amount is added as a clause in health insurance plans to ensure there are no frauds or scams and only genuine claims are raised by customers.  Insurance Policy Components: Deductible Consider a scenario where you have to undergo surgery that costs ₹1,20,000. In this case, you will be admitted to the hospital and will eventually raise a claim to cover the expenses of your treatment. However, your insurance policy has a deductible of ₹20,000. So, you will have to pay ₹20,000 out of your own pocket, and the insurance company will pay the remaining value of ₹1,00,000.  Insurance Policy Components: Deductible Now in another scenario, you have a minor procedure in the hospital that costs ₹15,000 only. Since this amount is less than the deductible amount of ₹20,000, you will have to bear the entire expenses, i.e., ₹15,000, on your own. You will not be able to raise a claim at all because the value of the claim is less than the deductible.  Health Insurance Home Insurance Important Types of Auto Insurance Insurance Life Insurance Travel Insurance  Concept of Mutual Fund Association of Mutual Funds in India (AMFI) defines Mutual fund as “a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities” The income earned through these investments and the capital appreciation realised is shared by its unit holders in proportion to the number of units owned by them. Investors of mutual funds are known as unitholders. Workflow of a Mutual Fund  Mutual Fund Mutual funds are ideal for investors who: lack the knowledge or skill / experience of investing in stock markets directly. want to grow their wealth, but do not have the inclination or time to research the stock market. wish to invest only small amounts. Evolution of Mutual Funds in India  Evolution of Mutual Funds in India MF: Mutual Fund UTI: Unit Trust of India AUM: Asset Under Management LIC: Life Insurance Corporation of India GIC: General Insurance Corporation of India NAV: Net Asset Value AMC: Asset Management Company Kothari Pioneer (Now Merged with Franklin Templeton Mutual Fund in 2002) Components of Mutual Fund Industry in India Components of Mutual Fund Industry in India Also known as constituents of Mutual Funds SEBI (Mutual Funds) Regulations, 1996 Securities and Exchange Board of India (SEBI) The Key Constituents of Indian Mutual Funds are: Sponsor Trustees Asset Management Company Custodians and Depositories Registrar and Transfer Agents Sponsor A person who, acting alone or in combination with another body corporate, establishes a mutual fund.  Sponsor The Sponsor is the main body that establishes the Mutual fund. Akin to a promoter of company. Sponsor gets the mutual fund registered with SEBI. The Sponsor(s) carry out the process by approaching the SEBI for registration of a mutual fund and provides the funding.  Sponsor The sponsor forms a trust, appoints a board of trustees, and has the right to appoint the AMC or fund manager.  Trustees The MF can be managed by a board of trustees or a trust company. The trustees act as a protector of unit holders’ interests. A trust is created by the fund sponsor in favour of the trustees, through a document called a trust deed. The trust is managed by the trustees and they are answerable to investors. They can be seen as primary guardians of fund and assets.  Trustees They do not directly manage the portfolio of securities and appoint an AMC (with approval of SEBI) for fund management. If an AMC wishes to float additional or different schemes, it need to be approved by the trustees. Trustees play a critical role in ensuring full compliance with SEBI’s requirements.  Asset Management Company (AMC) The AMC is appointed by trustees for managing fund schemes and corpus. An AMC functions under the supervision of its own board of directors and also under the directions of trustees and SEBI.  Asset Management Company (AMC) The major obligations of AMC include: ensuring investments in accordance with the trust deed, providing information to unit holders on matters that substantially affect their interests, adhering to risk management guidelines as given by the Association of Mutual Funds in India and SEBI, timely disclosures to unit holders on sale and repurchase, NAV, portfolio details, etc.  Net Asset Value (NAV) The performance of a mutual fund scheme is denoted by its NAV per unit. NAV per unit is the market value of securities of a scheme divided by the total number of units of the scheme on a given date. For example, if the market value of securities of a mutual fund scheme is ₹200 lakh and the mutual fund has issued 10 lakh units of ₹ 10 each to the investors, then the NAV per unit of the fund is ₹ 20 (i.e., ₹200 lakh/10 lakh). Since market value of securities changes every day, NAV of a scheme also varies on day-to-day basis.  Custodians and Depositories The custodian is appointed by trustees for safekeeping of physical securities while dematerialised securities holdings are held in a depository through a depository participant. They work under the instructions of the AMC, although under the overall direction of trustees. They also collect & track dividends & interests received on the Mutual Fund investment.  Registrar and Transfer Agents (RTA) Responsible for issuing and redeeming units of the mutual fund as well as providing other related services, such as preparation of transfer documents and updating investor records. The RTA maintains and updates all the investors records. Its functions includes processing of investor application, purchase and redemption transactions by investors in various schemes and plans. A fund can carry out these activities in-house or can outsource them.  Example Sponsor - SBI Trustee - SBI MF Trustee Co. Pvt. Ltd. AMC - SBI Funds Management Ltd. Custodian - HDFC Bank Ltd., SBI-SG Global Securities Services Private Limited Registrar & Transfer Agent - Computer Age Management Services Ltd, Datamatics Business Solutions Ltd. Types of Mutual Fund  Types of Mutual Fund based on Structure Open-ended Funds allow investors to buy and sell units continuously, providing liquidity. These funds are suitable for investors looking for flexibility in terms of entry and exit points and they are commonly used for long-term wealth creation. Closed-ended Funds have a fixed maturity period and a limited number of units. Investors can buy units only during the initial offer period and they can trade these units on stock exchanges. These funds are ideal for those seeking long-term investments with potential tax benefits. Interval Funds combine features of open and closed-ended funds. They allow periodic redemption requests, typically at predetermined intervals. This structure suits investors looking for a balance between liquidity and long-term investments.  Types of Mutual Fund Based on Objective Growth Funds focus on capital appreciation by primarily investing in stocks of companies with high growth potential. They are suited for long-term investors seeking substantial returns. Income Funds emphasise regular income generation by investing in bonds, fixed-income securities or dividend- yielding stocks. They suit investors looking for a steady income stream.  Types of Mutual Fund Based on Objective Balanced fund invests in equity, debt and other asset classes, depending on the investment objective of the scheme. Money Market fund invests in money market instruments with a maturity period of up to 1 year while maintaining a high level of liquidity. Tax Saving fund: Equity-Linked Saving Schemes (ELSS) are great options to save taxes Exchange Traded Fund: Traded on the stock exchange, these give investors extensive exposure to stock markets abroad and specialised sectors. These are a mix of open and closed-ended mutual funds.  Types of Mutual Fund Based on Objective Index funds track a specific index like Nifty or Sensex. These funds are passively managed, meaning the fund manager invests in the same securities as the underlying index, in the same proportion, without changing the portfolio composition. Sector Funds invest your money in a particular sector. Specific Schemes Types of Mutual Fund based on Geographical Off Shore funds are mutual fund schemes that invest in overseas or international markets. They are also referred to as foreign funds or international funds. Domestic funds  ESG Fund Environmental, social, and governance (ESG) funds are investments that consider environmental, social, and governance factors when making investment decisions. ESG equity funds are mutual funds that invest in companies with strong ESG practices.  Types ESG Fund Green Funds Social Impact Funds Ethical Funds Sustainable Development Goals (SDG) Funds  Types ESG Fund Green Funds: Invest in companies committed to environmental sustainability. Social Impact Funds: Invest in companies with a positive social impact, such as those working to improve access to education or healthcare. Ethical Funds: Invest in companies that adhere to high ethical standards, such as avoiding child labor or environmental pollution. Sustainable Development Goals (SDG) Funds: Invest in companies working towards the United Nations' 17 Sustainable Development Goals, which include combating climate change and achieving gender equality.  Fund Manager A fund manager should be a highly competent individual in fund management. The role of a fund manager is pivotal in either making or breaking your investment. The fund manager play decisive role in the performance of mutual fund.  Research on Various Funds and Stocks Meeting the Reporting Requirements Role of a Complying with Regulatory Fund Authorities Manager The Protection of Wealth Monitor the Growth and Performance of the Fund  Mutual funds have both Mutual advantages disadvantages compared to and Fund direct investing in individual securities.  Professional Management Liquidity Economies of Scale Advantages Divisibility of Investing Government regulated industry in a Mutual Fund Tax benefits in certain cases Diverse range of products to choose from Convenience of investment without skills & technical know-how, etc. Disadvantages of Investing in a Mutual Fund Risk: Like any other investment a mutual fund carries its own inherent risk including market risk, interest rate risk, and credit risk amongst others. Fluctuating Returns Excessive Diversification Sometimes prevents from getting big returns. Costs Exit fees are charged for leaving before designated time. Fund administration fees. Misleading Advertisements  AMFI The Association of Mutual Funds in India (AMFI) AMFI: Association of all the Asset Management Companies (AMC) of SEBI registered mutual funds in India AMFI was incorporated on August 22, 1995, as a non-profit organisation. As of now, 44 AMCs that are registered with SEBI are AMFI’s members.  AMFI AMFI is dedicated to develop India’s Mutual Fund Industry on professional, healthy and ethical lines. To enhance and maintain standards in all areas. With a view to protecting and promoting the interests of mutual funds and their unit holders.  Objectives of AMFI To maintain high professional and ethical standards of industry. To recommend and promote best business practices and code of conduct to be followed. To interact and represent to SEBI on all matters concerning the mutual fund industry. To undertake nation-wide investor awareness programme of mutual funds.  Objectives of AMFI To disseminate information on Mutual Fund Industry and to undertake studies and research directly and/or in association with other bodies. To take regulate conduct of distributors including disciplinary actions (cancellation of AMFI Registration Number, ARN) for violations of Code of Conduct. To protect the interest of investors/unit holders.  Mutual Fund Factsheet (MFF) MFF is a basic document that gives an overview of a mutual fund/scheme. It represents the crucial details of a MF through descriptions, figures and illustrations to make it easy for investors to understand. MFF allows investor to be aware and up to date on the key facts of a fund.  Mutual Fund Factsheet For potential investors, this is a necessary and easy report to read before delving more deeply. MFF gives the following information on fees, risk assessment and returns. All the fund houses send MFFs to their existing investors. Moreover, they also need to make it available on their official websites for easy access by potential investors.  Basic Fund Information Details About the Fund Components Manager of Mutual Fund Factsheet Portfolio Allocation Performance Analysis  Components of Mutual Fund Factsheet Basic Fund Information: The fund’s investment objective Category Type of Scheme AUM Benchmark Index The minimum amount of investments required for a lump sum or a Systematic Investment Plan (SIP). Exit load Riskometer  Components of Mutual Fund Factsheet Details About the Fund Manager: Fund manager’s qualifications and experience. It may also contain information about historical returns of the funds managed by the fund manager.  Components of Mutual Fund Factsheet Portfolio Allocation: In which assets is the money being invested? What percentage of net assets is invested in which assets/securities? In which industries/ sectors is the money being invested? What percentage of net assets is invested in which industries? What percentage of net assets is invested in which companies? How much cash is idle?  Components of Mutual Fund Factsheet Performance Analysis: The details of the fund’s historical performance. This part includes a comparison of scheme returns, SIP returns, returns against the benchmark, and the overall return of the market for one year, three years, five years, ten years or more.  Standard Deviation Beta Key Ratios in Sharpe Ratio a Mutual Funds R-squared Factsheet Expense Ratio  Standard Deviation: Measure of volatility. It shows how far the fund’s returns can deviate from the average returns generated Key by the fund. Ratios in Beta: a Mutual Measure of volatility in mutual fund returns compared to the benchmark. Funds Sharpe Ratio: Factsheet Metric showing the return generated by the mutual fund over a risk-free rate. It indicates whether a mutual fund is performing well or not for the risk it inherently carries.  Key Ratios in a Mutual Funds Factsheet R-squared: Metric that explains a fund’s performance compared to the benchmark. Its value ranges from 0 to 100 bps, where a value near 100 shows the fund’s performance has a high correlation with the index it follows and vice versa. Expense Ratio: Measures expenses incurred for the mutual fund compared to the total value of assets in the funds. Total expenses include administrative expenses, management and distribution costs.  A financial instrument is a real or virtual document representing a Financial Instruments legal agreement that involves any kind of monetary value.  Financial Instruments Contractual monetary assets that can be purchased, traded, created, modified, and even settled for.  Financial Instruments In terms of contracts, there is a contractual obligation between involved parties during a financial instrument transaction. For example, if a company were to pay cash for a bond, another party is obligated to deliver a financial instrument for the transaction to be fully completed. One company is obligated to provide cash, while the other is obligated to provide the bond.  Financial Instruments Basic examples of financial instruments are cheques, bonds, securities. These financial instruments collectively facilitate the flow of capital, stimulating economic progress.  Equities Capital Market Instruments Bonds Derivatives  Capital Market Instruments Equities: Often referred to as stocks or shares, represent an ownership stake in a company. Investing in equities gives investors a claim on part of the company's earnings and assets. For example, if you own a share of a company like Apple, you effectively own a tiny fraction of that business.  Capital Market Instruments Bonds: Bonds are debt securities. Governments and corporations issue bonds to borrow money from investors for a specified period. You're essentially lending money to the issuer when you purchase a bond. For instance, buying a US government bond is akin to lending money to the US government. The issuer promises to repay the bond's face value upon maturity and often makes periodic interest payments.  Capital Market Instruments Derivatives: Derivatives, another type of financial instrument, derive their value from underlying assets like stocks, bonds, commodities, currencies, interest rates, or market indexes. Options, futures, and swaps are common types of derivatives. They serve as tools for hedging risk or speculating on future price movements.  Treasury bills (T-bills) Call/notice money market—Call (overnight) and short notice (up to 14 days) Money Commercial Papers (CPs) Market Instruments Certificates of Deposits (CDs) Commercial Bills (CBs) Collateralised Borrowing and Lending Obligation (CBLO) 9  Treasury Bills Treasury bills are short-term instruments issued by the Reserve Bank on behalf of the government to tide over short-term liquidity shortfalls. This instrument is used by the government to raise short- term funds to bridge seasonal or temporary gaps between its receipts (revenue and capital) and expenditure. They form the most important segment of the money market not only in India but all over the world as well.  Treasury Bills T-bills are repaid at par on maturity. The difference between the amount paid by the tenderer at the time of purchase (which is less than the face value) and the amount received on maturity represents the interest amount on T-bills and is known as the discount. Tax deducted at source (TDS) is not applicable on T- bills.  Features of Treasury Bills They are negotiable securities. They are highly liquid as they are of shorter tenure. There is an absence of default risk. They have an assured yield, low transaction cost, and are eligible for inclusion in the securities for SLR purposes.  Features of Treasury Bills The purchases and sales are effected through the Subsidiary General Ledger (SGL) account. At present, there are 91-day, 182-day, and 364-day T-bills. The 91-day T-bills are auctioned by the RBI every Friday and the 364-day T-bills every alternate Wednesday, i.e., the Wednesday preceding the reporting Friday. Treasury bills are available for a minimum amount of Rs. 25,000 and in multiples thereof.  Statutory Liquidity Ratio Statutory Liquidity Ratio or SLR is a minimum percentage of deposits that a commercial bank has to maintain in the form of liquid cash, gold or other securities. It is basically the reserve requirement that banks are expected to keep before offering credit to customers. These are not reserved with the Reserve Bank of India (RBI), but with banks themselves. The SLR is fixed by the RBI. CRR (Cash Reserve Ratio) and SLR have been the traditional tools of the central bank's monetary policy to control credit growth, flow of liquidity and inflation in the economy.  Participants in the T-Bills Market The Reserve Bank of India Banks Mutual funds, Financial institutions, Primary dealers, Provident funds, Corporates, Foreign banks, and Foreign institutional investors The state governments can invest their surplus funds as non-competitive bidders in T- bills of all maturities.  Commercial paper is an Commercial unsecured, short-term debt Paper (CP) instrument issued by corporations.  Commercial Paper (CP) Introduced in India in 1990 To enabling highly rated corporate borrowers to diversify their sources of short-term borrowings. It's typically used to finance short-term liabilities such as payroll, accounts payable, and inventories. It is usually issued at a discount from face value. It involves a specific amount of money that is to be repaid by a specific date.  Features of Commercial Paper (CP) A short-term debt instrument CP can be issued for maturities between a minimum of 15 days and a maximum upto one year from the date of issue. If the maturity date is a holiday, the company would be liable to make payment on the immediate preceding working day. CP can be issued in denominations of Rs. 5 lakh or multiples thereof.  Features of Commercial Paper (CP) CP is typically issued by highly rated corporations. Only large corporations with strong credit ratings issue commercial paper because CP is an unsecured instrument. It is usually issued at a discount. The interest earned on a commercial paper is the difference between the face value and the purchase price.  Features Commercial Paper (CP) The issuer guarantees the buyer to pay a fixed amount in future in terms of liquid cash and no assets. A company can directly issue the paper to investors, or it can be done through banks/dealer banks.  Advantages of Commercial Paper (CP) Contributes Funds – It contributes extra funds as the cost of the paper to the issuing company is cheaper than the loans of the commercial bank. Flexible – It has a high liquidity value and flexible maturity range giving it extra flexibility. Reliable – It is reliable and does not have any limiting condition.  Advantages of Commercial Paper (CP) Save Money – On commercial paper, companies can save extra cash and earn a good return. Lasting Source of Funds– Maturity range can be customised according to the firm’s requirement, and matured papers can be paid by selling the new commercial paper.  Commercial Bills (CB) A commercial bill is a short-term and negotiable instrument with low risk. CB is primarily used for financing short-term working capital needs. CB is also called bills of exchange  Commercial Bills (CB) CB is used when the selling of goods takes place on credit. This makes the buyer liable for paying the amount on a particular date and time. Here, the seller has two options: they can wait for the specific future date or use exchange bills to acquire a credit amount.  Commercial Bills (CB) The seller generally draws the commercial bills on the purchaser for goods value. If the seller requires funds, they draw a bill sent for acceptance to the buyer. The buyer then accepts the bill with a promise to pay the amount on the specified date.  Commercial Bills (CB) In many cases, the seller might also produce the bill in the bank. The financial institution will charge a specific commission with a promise to pay if the buyer fails. If the seller decides to draw a commercial bill and the purchaser accepts the same, the bill becomes marketable. This bill is further known as a trade bill. Before the bill’s maturity date, it can be discounted in the bank by the seller. Accepting a trade bill at any commercial bank is called a commercial bill.  Certificate of Deposit (CD) A certificate of deposit (CD) is