Financial services

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UIS18E01 &
FINANCIAL
SERVICES
Dr. Ramu Vasu,
Assistant Prof., SRMIST-CHENNAI
Week 1

3 UNIT - I
Financial services - meaning and Scope – Types of
financial services – Fund and Non-fund based
activities- Financial services and economic
environment – Players in Financial Services Sector
(Banks, NBFCs, Micro Financing Institutions, etc.)-
Challenges facing the financial service sector –
Modern trends in financial service.

Basic Concepts
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Finance is regarded as the life blood of a
business enterprise. This is because in the
modern money – oriented economy, finance is
one of the basic foundations of all kinds of
economic activities.
Finance – An overview - Meaning

Basic Concepts
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What are Products and Services? A product is a
tangible item that is put on the market for
acquisition, attention, or consumption, while
a service is an intangible item, which arises from
the output of one or more individuals.
Service – An overview - Meaning

Basic Concepts
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What are Products and Services? A product is a
tangible item that is put on the market for
acquisition, attention, or consumption, while
a service is an intangible item, which arises from
the output of one or more individuals.
Service – An overview - Meaning

• Financial services refer to services provided by the finance
industry.
• Services that are financial in nature.
• The finance industry encompasses a broad range of organizations
that deal with the management of money.
• Among these organizations are banks, credit card companies,
insurance companies, consumer finance companies, stock
brokerages, investment funds and some government sponsored
enterprises.
Introduction

DEFINITION OF FINANCE
According to Khan and Jain,
“Finance is the art and science
of managing money”.
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Financial Service
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Financial Service as a part of financial
system provides different types of finance
through various credit instruments, financial
products and services.

financial system
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A financial system is a set of institutions, such as banks,
insurance companies, and stock exchanges, that permit
the exchange of funds. ... Borrowers, lenders, and investors
exchange current funds to finance projects, either for
consumption or productive investments, and to pursue a
return on their financial assets.

Financial Institution
A financial institution is a
company that focuses on dealing
with financial transactions, such
as investments, loans, and
deposits.
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Financial Institution Types
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1.Commercial Banks.
2.Brokerages.
3.Investment Companies.
4.Insurance Companies.

Financial Market
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Financial Market refers to a marketplace, where
creation and trading of financial assets, such as
shares, debentures, bonds, derivatives, currencies,
etc. take place. It plays a crucial role in allocating
limited resources, in the country's economy.

Financial Market
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Financial Market refers to a marketplace, where
creation and trading of financial assets, such as
shares, debentures, bonds, derivatives, currencies,
etc. take place. It plays a crucial role in allocating
limited resources, in the country's economy.

Financial Instruments
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A financial instrument is a monetary contract
between parties. We can create, trade, or
modify them. We can also settle them.
A financial instrument may be evidence of
ownership of part of something, as in stocks
and shares. Bonds, which are contractual rights
to receive cash, are financial instruments.

Financial Instruments
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In Financial Instruments, Are
1. Cheques,
2. Bills,
3. Promissory Notes,
4. Debt Instruments,
5. Letter Of Credit, Etc.

Financial Products
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Financial products are investments and
securities that are created to provide buyers
and sellers with a long term or short term
financial gain. Financial products enable risks
to be spread, and liquidity to circulate around
an economy.

Financial Products
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In financial products, are
1. Mutual funds,
2. Extending various types of investment
opportunities.
3. Credit cards and debit cards, etc.

In services
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1. Leasing,
2. Factoring,
3. Hire Purchase Finance Etc.,

In services
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1. Leasing,
2. Factoring,
3. Hire Purchase Finance Etc.,

TYPES OF FINANCIAL SERVICES
• Fund or asset based financial services
• Fee based financial services

Fund Based Services
• The firm raises funds through debt, equity, deposits and the bank invests
the funds in securities or lends to those who are in need of capital.
• The following are some of these fund-based services such as:
–Leasing and Hire Purchase
–Housing Finance
–Credit Cards
–Venture Capital
–Factoring
–Forfeiting
–Bill Discounting
–Insurance

Leasing
• A lease transaction is a commercial arrangement
whereby an equipment owner or Manufacturer
conveys to the equipment user the right to use the
equipment in return for a rental.
• In other words, lease is a contract between the owner
of an asset (the lessor) and its user (the lessee) for the
right to use the asset during a specified period in return
for a mutually agreed periodic payment (the lease
rentals).

 The finance industry encompasses a broad range of organizations that
deal with the management of money.
 Among these organizations are Asset Management Companies like
leasing companies, merchant bankers and Liability Management
Companies like discounting houses and acceptance houses, and general
financial institutions like banks, credit card companies, insurance
companies, consumer finance companies, stock exchanges.
FINANCIAL SERVICES: MEANING

The term ‘Financial Services’ in a broad sense
means “mobilizing and allocating savings.” Thus,
it includes all activities involved in the
transformation of savings into investment.
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Following are some of the examples of financial
services:
 Leasing,
 credit card services,
 factoring, portfolio management,
 financial consultancy services,
 Underwriting,
 discounting and rediscounting of bills,
 Depository services,
 housing finance,
 Hire purchases,
 Mutual Fund management. The financial services can also be called ‘financial
intermediation’.
 It is the process by which funds are mobilized from a large number of
savers and make them available to all those who are in need of it.

The financial intermediaries in India can be classified as:
Capital Market Intermediaries which constitutes Term
Lending Institutions and Investing Institutions which mainly
provide long term funds.
Money Market Intermediaries which consists of
commercial banks, Cooperative Banks, and other financial
agencies which supply only short term funds.
Classification of Financial Services
Industry

Financial Services offered are mainly 2 types -
-Fee based merchant banking, broking services, credit rating, portfolio
management services, underwriting, etc.
-Fund based factoring, leasing, hire purchases, housing finance, bill
discounting, Venture Capital, etc.
Types of Financial Services

 A lease may be defined as :
 a contractual arrangement / transaction in which
 a party owning an asset / equipment (lessor)
 provides the asset for use to another / transfer the right to use
the equipment to the user (lessee)
 over a certain / for an agreed period of time
 for consideration in form of / in return for periodic payment (rental)
 at the end of the period of contract (lease period) ,the asset
/equipment reverts back to the lessor
 unless there is a provision for the renewal of the contract.
Meaning

 Leasing essentially involves the divorce of ownership from the
economic use of an asset/equipment.
 LESSOR: Lessor is the owner of the asset that is being leased.
 LESSEE: Lessee is the receiver of the services of the asset under a
lease contact.
Parties In Leasing

 The Parties
 The Asset
 The Term
 The Lease Rentals
Characteristics of a lease

Classification of Lease
1. Financial lease and operating lease
2. Sales and lease back and direct lease
3. Single investor lease and leveraged lease
4. Domestic lease and international lease

It is defined as a peculiar kind of transaction in which the goods are let on hire with an
option to the hirer to purchase them with the following stipulations:
-payment to be made in installments over a specified period
-the possession is delivered to the hirer at the time of entering in to
the contract
-the property in the goods passes to the hirer on payment of the last installment
-each installment is treated as hire charges so that if default is made in payment of any
installment the seller becomes entitled to take away the goods &
-the hirer is free to return the goods with out being required to pay
any further installments falling due after the return.
Meaning

 Goods are let out on finance by a finance company to the hire purchaser
customer.
 Buyer is required to pay an equal amount of periodic
installments during a given period.
 Ownership transfers at the payment of the last installment.
 The hirer is required to make a down payment of 20-25% of the cost and pay the
balance amount along with interest in advance or arrears over a time period of
36-48months.
Various Aspect of HP Transaction

 The interest on each hire purchase installment is computed on the basis
of flat rate of interest is applied to the declining balance of original loan
amount to determine the interest component of
the
installment for a given flat rate of interest, equivalent
effective rate of interest is higher.

Meaning
Undertakes the task of realizing ‘receivables’, i.e. accounts
receivables, book debts, bills receivables etc .
Also manages the sales registers, sundry debts of the commercial
firms/trading agents , for a commission.

…Mechanism
Merchant Customer
Factor
Credit Transaction (1)
Agreement(2)
Factor
Financing (5)
Handing over Inovice(4)
Factoring Contract for sale of receivables.(3)
Receiving
Payment(6)

Mechanism
 Seller does not maintain a collection/credit department.
 After sale, a copy of the invoice, delivery challan, the agreement, other papers
are handed over to the Factor.
 The Factor receives payment from the buyer on the due date as agreed,
whereby the buyer is reminded of the due date payment amt. for collection.
 The Factor remits the money collected to the seller after deducting its own
service charges at the agreed rate.
 Thereafter the seller closes all transactions with the Factor.
 The seller passes on papers to the Factor for recovery of
the amount.

Types of Factoring
 Domestic Factoring
 Export Factoring
 Cross Border Factoring

WHAT IS VENTURE CAPITAL
Money provided by investors to startup firms and small businesses with
perceived long-term growth potential.

 Bank of England Quarterly Bulletin : Venture capital is an activity by which investors
support entrepreneurial talent with finance and business skills to exploit market
opportunities and thus obtain long-term capital gains.
 Venture Capitalists generally:
 Finance new and rapidly growing companies.
 Purchase equity securities.
 Assist in the development of new products or services.
 Add value to the company through active participation.

Financial Stage Period (Funds locked
in years)
Risk Perception Activity to be
financed
For supporting a
Seed Money 7-10 Extreme concept or idea or
R&D for product
development
Initializing operations
Start Up 5-9 Very High or developing
prototypes
Start commercials
First Stage 3-7 High production and
marketing
Stages & Risk of Financing

Financial Stage Period (Funds locked in
years)
Risk Perception Activity to be
financed
Second Stage 3-5 Sufficiently high
Expand market and
growing working capital
need
Third Stage 1-3 Medium
Market expansion,
acquisition & product
development for profit
making company
Fourth Stage 1-3 Low Facilitating public issue

Deal origination
Screening
Due diligence (Evaluation)
Deal structuring
Post investment activity
Exit plan
VC Investment Process

 A legal contract between two parties whereby one party called insurer
undertakes to pay a fixed amount of money on the happening of a
particular event, which may be certain or uncertain. The other party
called insured ,pays in exchange a fixed sum , called premium.
Definition

 Till end of FY 1999-2000, two state-run insurance companies, Life
Insurance Corporation (LIC); General Insurance Corporation (GIC)
were the monopoly insurance provider in India.
 Under GIC there were four subsidiaries:
National Insurance Company Ltd.
Oriental Insurance Company Ltd.
New India Assurance Company Ltd.
United India Insurance Company Ltd.
ORIGIN AND GROWTH OF
INSURANCE SECTOR

 In fiscal 2000-01, the Indian federal government lifted all entry
restrictions for private sector investors.
 Foreign investment insurance market was also allowed with 26 percent
cap.
 GIC was converted into India's national reinsurer, from December 2000.
 All the subsidiaries working under the GIC umbrella were restructured as
independent insurance companies.

 Insurance Regulatory and Development Authority
(IRDA) is an autonomous apex statutory body which regulates and
develops the insurance industry in India.
IRDA batted for a hike in the foreign direct investment (FDI) limit to 49
per cent in the insurance sector from the erstwhile 26 per cent. The FDI
limit in insurance sector was raised to 49% in July 2013.
IRDA

A mutual fund is a pool of money from numerous investors who wish to
save or make money. Investing in a mutual fund can be a lot easier than
buying and selling individual stocks and bonds on your own. Investors
can sell their shares when they want.
What is a Mutual Fund?

Professional Management
Each fund's investments are chosen and monitored by qualified
professionals who use this money to create a portfolio.
Fund Ownership
As an investor, you own shares of the mutual fund, not the individual
securities. All shareholders share in the fund's gains and losses on an
equal basis, proportionately to the amount they've invested.

Mutual Funds are Diversified
By investing in mutual funds, you could diversify your portfolio across a
large number of securities so as to minimize risk. By spreading your
money over numerous securities, which is what a mutual fund does, you
need not worry about the fluctuation of the individual securities in the
fund's portfolio.

 Mutual funds Schemes can be segregated into two heads –
1. Schemes according to Maturity Period:
 Open-ended Fund/ Scheme
 Open-ended schemes are those schemes where investors can redeem
and buy new units all throughout the year as per.
 Close-ended Fund/ Scheme
 The fund is open for subscription only during a specified period at the time of launch of the
scheme. Investors can invest in the scheme at the time of the initial public issue and there after
they can buy or sell the units of the scheme on the stock exchanges where the units are listed.
Types Of Mutual Fund Schemes

2. Schemes according to Investment Objective:
Growth / Equity Oriented Scheme
Income / Debt Oriented Scheme
Balanced Fund
Money Market Mutual Fund (are low risk funds offers highest possible
current income consistent with preservation of capital)

 All mutual funds in India today are regulated by SEBI.
 The Association of Mutual Funds of India (AMFI) is a self-governing
association of Indian Mutual Funds that regulates its members' sales,
distribution and communication practices. Investors can invest in Indian
mutual funds directly or through distributors under codes of practice
developed by AMFI.
Regulation & Distribution

 Housing finance connotes finance (or loans) for meeting the
various needs relating to housing, namely:
 a) Purchase of a flat or house.
 b) Acquisition of a plot.
 c) Construction of a house.
 d) Extension of a house.
 e) Repairs, renovation and up gradation of a
house/flat.
Meaning

 Create & meet a growing housing demand
 Reduce poverty
 Prevent slum proliferation
 Engine of equitable economic growth
 Take part in financial sector liberalization
Importance

 The following is the list of different types of Home Loans you can avail from the
market:
 Home Purchase Loans
 Home Construction Loans
 Home Improvement Loans
 Home Extension Loans
 Home Conversion Loans
 Land Purchase Loans
 Stamp Duty Loans
 Bridge Loans
 Balance Transfer Loans
Types Of Home Loan

Consumer Credit
• Consumer credit is basically the amount of credit used by consumers
to purchase non-investment goods or
services that are consumed and whose
value depreciates quickly.
•This includes automobiles, recreational vehicles (RVs), education,boat
and trailer loans but excludes debts
taken out to purchase real estate or margin on
investment accounts.
•For example, a mortgage for purchasing a house is not consumer credit.
However, the 52 inch television you put on your credit card is consumer
credit.

Hire Purchase
• A system by which a buyer pays for a thing in regular installments
while enjoying the use of it. During the repayment period,
ownership (title) of the item does not pass to the buyer. Upon the
full payment of the loan, the title passes to the buyer.
• A method of buying an article by making regular payments for it
over several months or years. The article only belongs to the
person who is buying it when all the payments have been made

Factoring
• Factoring is a financial transaction whereby a
business sells its accounts receivable (i.e.,
invoices) to a third party (called a factor) at a
discount.

Advantages of Factoring
• Time Savings. Factoring can save you time and effort that would otherwise be spent on
collecting from customers.
• Good Use for Growth. The instant cash to generate growth, maybe hiring another
salesperson who will bring in more business. Or buying an advertisement that will reach new
customers. Or buying a piece of equipment that will accelerate production.
• Doesn’t Require security. Unlike traditional bank loans, factoring doesn’t require to risk your
home or other property as collateral.
• Qualify for More Funding. Factoring firms will typically give a cash advance on up to 80% of
receivables. That may be more than be able to get from a bank.

Forfaiting
• It is a form of financing of receivables relating to international
trade.
• It is a form of supplier credit in which an exporter surrenders
possession of export receivables, which are usually guaranteed
by a bank on the importer’s country.
• Forfaiting is a mechanism of financing exports:
– by discounting export receivables
– evidenced by bills of exchanges or promissory notes
– without recourse to the seller (viz; exporter)
– carrying medium to long-term maturities
– on a fixed rate basis upto 100% of the contract value.

Bills Discounting
• While discounting , banks buy the bill before it is due and
credit the value of the bill after a discount charge to the
customer's account.
• There are two types of bill discounting
– Import Bill Discount is a kind of short-term finance offered by the
bank to the importer according to his demand upon receiving the
bills under the letter of credit and the import collection items.
– Export Bill Discounting is financing of money in transit supplied by
the bank.

• According to the Indian Negotiable Instruments 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, a certain
person, or to the bearer of that instrument.
Bills Discounting

• Housing finance is what allows for the production and
consumption of housing.
• It refers to the money we use to build and maintain the
nation’s housing stock.
• But it also refers to the money we need to pay for it, in the
form of rents, mortgage loans and repayments.”
Housing Finance

Venture Capital Financing
• It is a fund that is available for investment in an enterprise
which offers the probability of profit along with the possibility
of loss.
• Venture is a course of proceeding associated with risk whose
outcome is uncertain.
• Capital means the financial resources to start an enterprise.

Fee Based Services
• The services wherein financial institutions operate in specialized
fields to earn a substantial income in the form of fees or dividends
or brokerage on operations.
• The major fee based financial services are as follows:
– Issue Management
– Corporate Advisory Services
– Credit Rating
– Mutual Funds
– Asset Securitization
– Stock Broking Services

Stock Broking
• The process of investing in the share market, either
individually or through a broker is known as stock broking.
• This is primarily done by opening a Demat account.
• If done through a broker, he opens an account, helping to
operate through online stock broking facility.

Stock broker
• Licensed agent who has to pass certain qualifying tests to be
certified to offer securities investment advice to investors.
• He or she may
– counsel what and when to buy
– counsel whether to hold or sell securities,
– execute buy-sell orders on behalf of the investors, and
– charge a percentage of the transaction amountants brokerage fee for the
services rendered.

Credit Rating
• It is an opinion on the future ability and legal
obligation
payments
of an issuer to of
principal and
make timely
interest on a
– specific fixed income security.
• As per credit rating agencies regulations 1999 rating means
–An opinion regarding securities
–Expressed in the form of standard symbols
–Assigned by a credit rating agency
–Used by an issuer of such securities

FINANCIAL SERVICES AND
ECONOMIC ENVIRONMENT

The growth of financial services in
a country needs proper economic
environment.
– This consists of various economic factors such as
(A) Favourable Economic System,
– (B) Economic Laws,
– (C) Economic Policies,
– (D) Economic Planning, And
– (E) Economic Condition.
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A) Favourable Economic System
– Financial Services provide financial assistance according to the
requirements of different business activities. A business may function
under different forms of organizations, such as sole trader, partnership
firm, joint stock companies (or) by multinational corporation etc. It may
also be undertaken by the government by way of public sector
enterprises.
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B) Economic Laws :
– (1) Industries and Regulation Act for promoting proper investment.
– (2) Companies Act for regulating proper management of companies
– (3) Securities (contract and regulation) Act for streamlining transactions in
stock exchange.
– (4) Consumer Protection Act to safeguard the interests of consumers.
– (5) Foreign Exchange Regulation Act for regulating foreign investment, which
is now called Foreign Exchange Management Act (FEMA).
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C) Economic Policies :
– In economy policy, we deal with aspects connected with improving the
economic conditions of the country.
– The government will adopt such policies which
1. promote investment,
2. production,
3. employment,
4. foreign trade which will lead to economic growth.
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C) Economic Policies Cont…
– For their purpose, the policy will be aimed at encouraging
investment, both from domestic and foreign country.
– Increase of production in agriculture, industry and
service sectors has to be taken up through proper pricing
policy, procurement policy, allowance and subsidies, tax
concessions, etc.
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D) Economic Planning :
– In economic planning, accounting decides a particular course (or) path for
its development.
– Planning fixes the rate of growth of the economy and accordingly links all
the physical, fiscal and monetary resources to achieve the desired growth.
– The purpose of economic planning is to achieve rapid economic growth in
all the sectors of the economy so that the people in the country
experience a higher standard of living.
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E) Economic Condition :
– Financial Services can be active only under favourable
economic conditions. If there is depression with falling
prices and closing down of production, financial services
will not be any scope.
– So, a controlled inflation with more scope for investment
and production will be ideal for the expansion of financial
services.
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Macro Economic Aggregates
and Policies :
– Here, we deal with various macro economic factors which not
only influence the economic condition of the country but also the
working of financial services in the country.
– Economic factors at the national level, influencing the economic
condition of the country can be stated as macro economic
aggregates. There are
– 1. Savings of the economy.
– 2. Investment
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Macro Economic Aggregates
and Policies : Cont…
– 3. Economic growth
– 4. Capital Formation 12. Capital inflow
– 5. Capital output ratio 13. Per capita income as an indicator of economic
6.Population growth development
– 7. Growth of foreign trade
– 8. Balance of payments
– 9. Foreign debt
– 10. Exchange rate stability
– 11. Employment level
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Players in Financial Services Sector
Introduction
– The economy is made up of many different segments
called sectors. These sectors are comprised of different
businesses that provide goods and services to consumers.
The companies that are grouped together in a sector
provide a similar product or service.
– For instance, companies that offer agricultural services
make up the agricultural sector.
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Introduction
– Corporations that provide mobile or cellular telephone
services are part of the telecommunications sector. This
article looks at the financial services sector, one of the
most important segments of the economy.
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Major Players in the financial services industry
– The ocean of financial service sector comprises of
the following major players who mold the
economy of any country.
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Major Players in the financial services industry
cont…1. Banks
Financial service sector comes under the tertiary sector in
which banks play a major role. For the growth of financial
services industry, banks are led by the central bank of the
country followed by commercial banks, co-operative banks,
development banks, foreign banks, etc.
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2. Hire Purchase Financier
2. Hire purchase financier is also a player in the financial service
sector as he enables the consumer to buy the product on credit
basis.
3. Leasing companies through financial and operating lease ensure
the acquiring of assets by producers on a long-term basis at a
reasonable charge.
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– 4. Factoring enables the seller to obtain 80% value of sales from the
financial companies undertaking factoring services.
– 6. Book-builders help companies in allotting shares to different categories
of investors.
– 7. Mutual funds ensure investment by the public and also ensure tax relief
to the investor.
– 8. Credit cards, another important player in the financial services, ensure
the circulation of plastic money and enable purchase on credit by the
consumer.
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– 9. Credit rating companies play an important role by giving
different credit ratings to companies to mobilize public deposits.
– 10. Housing finance companies and insurance companies also
promote investment in the economy as they also form a part of
the players in the financial services.
– 11. Asset liability management company enables mutual funds to
undertake proper investment in different types of companies.
– 12. Finance companies in general and also as a part of non-
banking finance companies provide additional funds to the above
players so that there is more activity in the economy.
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–Banks,
–NBFCs,
–Micro Financing Institutions
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Banks - Banks perform various roles in the economy.
– First, they restore the information problems between investors
and borrowers by monitoring the latter and ensuring a proper
use of the depositors' funds.
– Second, they provide intertemporal smoothing of risk that
cannot be diversified at a given point in time as well as
insurance to depositors against unexpected consumption
shocks. Because of the maturity mismatch between their assets
and liabilities, however, banks are subject to the possibility of
runs and systemic risk.
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Banks
– Third, banks contribute to the growth of the economy.
– Fourth, they perform an important role in corporate
governance. The relative importance of the different roles
of banks varies substantially across countries and times
but, banks are always critical to the financial system
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Nonbank Financial Companies
(NBFCs) Definition
– Nonbank financial companies (NBFCs), also known as nonbank
financial institutions (NBFIs) are entities that provide certain
bank-like and financial services but do not hold a banking
license.
– NBFCs are not subject to the banking regulations and oversight
by central bank and state authorities adhered to by traditional
banks.
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NON BANKING
FINANCE
COMPANIES
(NBFCS)

What is NBFC?
 A Non-Banking Financial Company (NBFC) is a company registered under the
Companies Act, 1956 and is engaged in
the business of Loans , Advances, Acquisition of
 Nonbank financial companies (NBFCs), also
known as nonbank financial institutions (NBFIs)
are entities that provide certain bank-like and
financial services but do not hold a banking
license.
 NBFCs are not subject to the banking regulations
and oversight by federal and state authorities
adhered to by traditional banks.

BANKS NBFCS
Definition Banking is acceptance of deposits withdraw able by
cheque or demand; NBFC cannot accept demand
deposits
NBFC are companies carrying financial
business
Scope of business Scope of business of the bank is limited by sec 16(1) of
BR Act.
There is no bar on NBFC carrying activity
other then financial activity.
Major limitation on Business No non banking activity are carried. Cannot provide checking facilities.
Foreign investment Up to 74% is allowed to private sector bank Up to 100% is allowed
Need for a license License norms are tightly controlled and generally it is
perceived to be quite difficult to get a license for a bank
It is comparatively much easier to get a
registration as an NBFC.
Regulations BR Act and RBI Act lay down the stringent control over
the bank.
Much lesser control over NBFC
NBFC’s Versus Bank’s

REGULATIONS
 In terms of Section 45-IA of the RBI Act, 1934, it is mandatory that every
NBFC should be registered with RBI to commence or carry on any business of
non-banking financial institution. However, to obviate dual regulation, certain
categories of NBFCs which are regulated by other regulators are exempted
from the requirement of registration with RBI viz. Venture Capital
Fund/Merchant Banking companies/Stock broking companies registered with
SEBI.
 Should have a minimum net owned fund of Rs 25 lakh (raised to Rs 200 lakh
wef April 21, 1999).
 NBFC have to maintain 10 and 15 per cent of their deposits in liquid assets
effectively from January 1 and April 1,1998, respectively.
 All NBFCs are not entitled to accept public deposits. Only those NBFCs
holding a valid Certificate of Registration with authorization to accept Public
Deposits can accept/hold public deposits.

REGULATIONS
 They have to create reserve fund and transfer not less than 20 per cent of
their net deposits to it every year.
 The NBFCs are allowed to accept/renew public deposits for a minimum
period of 12 months and maximum period of 60 months. They cannot
accept deposits repayable on demand.
 NBFCs cannot offer interest rates higher than the ceiling rate prescribed by
RBI from time to time. The present ceiling is 11 per cent per annum.
 They have to obtain a minimum credit rating from anyone of the three
credit rating agencies.
 NBFCs cannot offer gifts/incentives or any other additional benefit to the
depositors.

Role of NBFCs
 Development of sectors like Transport &
Infrastructure
 Substantial employment generation
 Help & increase wealth creation
 Broad base economic development
 Major thrust on semi-urban, rural areas & first time
buyers / user.
 To finance economically weaker sections

IMPORTANCE OF NBFCs
 In the present economic environment it is very difficult to
cater need of society by Banks alone so role of Non
Banking Finance Companies and Micro Finance
Companies become indispensable.
 The role of NBFCs as effective financial intermediaries
has been well recognised as they have inherent ability to
take quicker decisions, assume greater risks, and
customise their services and charges more according to
the needs of the clients.

 At present, NBFCs in India have become prominent in a wide
range of activities like hire-purchase finance, equipment
lease finance, loans, investments, etc.
 To help in developing the large number of industries as well
as entrepreneur in different sectors of different areas.
 To cover all the areas which is being untouched or uncovered
by RBI or other FCIs.

MUTUAL BENEFIT FINANCIAL
COMPANY (MBFC)
 Nidhis or Mutual Benefit Finance Companies are one
of the oldest forms of non-financial companies. It is a
company structure in which the company's owners are
also its clients.
 That is, the mutual company's profits are distributed
to its participating customers each year in proportion
to their individual exposures to the company.
 Many insurance companies are structured as mutual
companies.

 Some of the important objectives of Nidhis are to enable
the members to save money, to invest their savings and
to secure loans at favorable rates of interest.
 They work on the principles of complete mutuality of
interest and are generally well-managed.
 The Government has granted certain concessions under
Section 620A of the Companies Act, 1956.
 Primarily regulated by Department of Company Affairs
(DCA) under the directions / guidelines issued by them
under Section 637 A of the Companies Act, 1956.
 The Government of India constituted an Expert
Committee in March 2000 (Chairman: Shri

120
Micro
Financing
Institutions

Flow of Presentation
Elements of Microfinance
History of Microfinance
Microfinance Approach
Need forMicrofinancing
W hy do MFIs charge such high interest rates to poor people?
Impact of Microfinance overpoverty
Current Scenario of Micro - financing inIndia
Challenges in the Indiancontext

Elements of Microfinance
• Microfinance
• Microcredit
• Microsavings
• Microinsurance
• Remittances

Microfinance :
“It is a 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.”
Microcredit :
Microcredit is the extension of very small loans
(microloans) to the unemployed, to poor
entrepreneurs and to others living in poverty
who are not considered bankable.

Micro insurance :
Financial arrangement to protect low-income people against specific perils
in exchange for regular premium payments proportionate to the likelihood
and cost of the risk involved
Micro savings :
Deposit services that allow one to store small amounts of money for future
use. Often without minimum balance requirements, savings accounts allow
households to save in order to meet unexpected expenses.
Remittances :
Transfers of funds from people in one place to people in another, usually
across borders to family and friends.

History of Microfinance
THE PIONEERS :
Grameen Bank
ACCION International
FINCA International

History of Microfinance in India
Microfinance has been in practice for ages (though
informally).
Legal framework for establishing the co-operative movement
set up in 1904.
Reserve Bank of India Act, 1934 provided for the
establishment of the Agricultural Credit Department.
Nationalization of banks in 1969
Regional Rural Banks created in 1975.
NABARD established as an apex agency for rural finance in
1982.

Microfinance Approach
Poor are Bankable; successful initiatives in micro
finance demonstrate that the borrowers are not
'weaker sections' in need of charity, but can be
treated as responsible people on business terms
for mutual profit.
They have the inherent capacity to save small
amounts regularly and are willing to save provided
that they are motivated and facilitated to do so.

Microfinance Approach
Easy access to credit is more important than
cheap subsidized credit which involves
lengthy bureaucratic procedures.
Peer pressure' in groups helps in improving
recoveries.

Need for Micro financing
•Who are client’s of microfinance?
. In Rural area,
. In Urban area,
. Others.
•How it helps the poor people?
•When is microfinance NOT an appropriate tool

COMPARISON OF GROWTH RATE OF BORROWERS PER MFIs

Types of Organizations and Composition of the
Sector
Formal sector
The formal sector comprises of the banks such as NABARD, SIDBI and other
regional rural banks (RRBs).
provide credit for assistance in agriculture and micro- enterprise development
and primarily targets the poor.
Their deposits at around Rs. 350billion and of that, around Rs. 250billion has
been given as advances. They charge an interest of 12-13.5% but if we
include the transaction costs they come out to be as high as 21-24%.

(Microfinance Institution) MFIs
–A microfinance institution (MFI) is an organization that provides
financial services targeted to the poor. While every MFI is
different, all share the common characteristic of providing
financial services to a client poorer and more vulnerable than
traditional bank clients.
Year Outreach Outstanding
2001 3 64
2002 10 215
2003 11 327
2004 37 433
2005 67 1095
Client outreach in lakhs, outstanding in crores.

Self Help Groups (SHGs)
SHGs is group of rural poor who have volunteered to organize
themselves into a group for eradication of poverty of the members.
They agree to save regularly and convert their savings into a
Common Fund known as the Group corpus.
 A self-help group may consist of 10 to 20 persons.
 All members should belongs to B P L families, but in some
exceptional cases they can be from families above the poverty line.
 The group should be able to collect the minimum voluntary saving
amount from all the members regularly in group meetings.
 The group should develop financial management norms covering t
the l oan sanction procedure, repayment schedule and
interest rates.
 50% of the groups formed in each block should be exclusively for
the women.

Figure are outstanding loans in Rs.crore
5000
4000
3000
2000
1000
0
2001 2002 2004 2005
2003
Year
SGHs
MFIs
SHG and MFI are primary resource of lending the poor in rural area

Why do MFIs charge such high interest
rates to poor people?

Current Scenario of Micro - financing in India
Estimated that 350 million people live Below Poverty Line.
This translates to approximately 75 million households.
Annual credit demand by the poor in the country is
estimated to be about Rs. 60,000 crores.
Cumulative disbursements under all microfinance programs
is only about Rs. 5000 crores.(Mar.04)
Total outstanding of all microfinance initiatives in India
estimated to be Rs. 1600 crores. (March 04)
Only about 5 % of rural poor have access to microfinance.

Challenges in the Indian context
Appropriate legal structures for the structured growth of MF
operations
Finding adequate levels of equity for the new entities to leverage
loan funds
Ability to access loan funds at reasonably low rates of interest.
Ability to attract and retain professional and committed human
resources.
Design of apt MIS including user friendly software for tracking
accounts and operations.
Appropriate loan products for different segments.
Contd….

Contd……
Ability to innovate, adapt and grow.
Bring out a compendium of small and micro enterprises for the MF clients.
Identify and prepare a panel of locally available trainers.
Ability to train trainers.
Capacity to provide backward linkages or create support structures for
marketing.
There is a break-even point in loan and deposit sizes below which banks lose
money on each transaction they make. Poor people usually fall below it.
Designing financially sustainable models

Challenges facing in the financial
service sector
– 1.Cybercrime In Finance
– 2. Regulatory Compliance In Finance
– 3. Big Data Use In Finance
– 4. AI Use In Finance
– 5. Fintech Disruption Of The Financial Service Industry
– 6. Customer Retention In The Financial Services Industry
– 7. Employee Retention In The Financial Service Industry
139

Modern trends in financial service.
– These trends include the ongoing digital transformation, the emergence
of FinTech companies, the increasing role of Artificial Intelligence (AI)
and robotics, and re-thinking the concept of money.
– The Frontiers of Innovation: AI & Blockchain. According to a report from
Synechron, blockchain and artificial intelligence (AI) will continue to
disrupt the financial services industry. Synechron also predicts that
robo-investors will become the centralized fintech platform for wealth
managers.
140

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