Fund based financial services provide financing through the use of company assets. They include venture capital, leasing, factoring, forfaiting, housing finance, and infrastructure financing. Venture capital finances new businesses and ideas. Leasing allows use of an asset in exchange for periodic payments. Factoring converts receivables into immediate cash. Forfaiting finances international trade receivables. Housing finance provides loans for housing construction, purchase, and repairs. Infrastructure financing develops projects like roads, railways, and airports.

1. FUND BASED FINANCIAL SERVICES
Prepared by,
Deepthi R

2. Financial services
Financial services also called financial intermediation is a process by which
funds are mobilized from a large number of savers and make them available to
all those who are in need of it and particularly to corporate sector.
 Financial services means “ mobilising and allocating sales”.
 The financial services industry in India can be classified as capital market
intermediaries and money market intermediaries.
 Capital market intermediaries consists of term lending institutions and
investing institutions which provide long term funds.
 Money market intermediaries provide short term funds, which consists of
commercial banks cooperative banks etc.

3. Classification of Financial services
Fund based Services Fee based Services
1. Venture capital 1. Issue management
2.Leasing 2. Portfolio management
3. Factoring 3. Corporate Counseling
4. Forfaiting 4. Loan syndication
5. Housing Finance 5. Corporate Restructuring
6. Infrastructure Financing 6. Credit Rating
7. Hire purchase 7. Stock broking
8. Bill discounting
9. Insurance services

4. Fund based financial services
Fund Based Financial Services (FBFS) are the Financing methods that are driven
by the assets of companies. They are used for creating assets with the support of
assets, where funds are transformed into assets.
Features
 Financing expansion
 Developing new business
 Benefit of purchase discount
 Improved reputation
 Dynamism

5. Venture capital
Venture capital is a type of private equity capital. It is a way in which investors
support entrepreneurial talent with finance and business skills to exploit market
opportunities and thus to obtain long-term capital gains.
Venture capital is a long term risk capital to finance high technology project
which involves high risk, but at the same time has strong potential for growth.
Venture capital is defined as, “ an investment in a growth oriented small or
medium business to enable investors to accomplish corporate objectives in
return, for minority shareholding in the business.”

6. Features of VC
1. Equity participation
2. Emphasis on risky projects
3. Commercialisation of new ideas
4. Promotes entrepreneurship
5. Continuous involvement
6. Objective of investment (profit+ capital appreciation)
7. Scope
8. Recipient.

7. Types of Venture capital funding
 Seed capital: It is the initial money provided to an entrepreneur at the
conception stage, so that he can conduct a more thorough research and
investigation. It is the first stage in the capital raising process of a start-up. It
is the initial money required by a budding entrepreneur who is conceived with
the idea of starting a business or developing a new product.
 Start up Capital: It is the money provided to an entrepreneur for
implementing the idea of starting the business. 2nd stage of Venture capital
requirement.
 Early Stage Capital: It is provided to set up initial operation and basic
production. Eg. Product development, commercial manufacturing, marketing,
sales promotion and distribution.

8.  Expansion Capital: This capital is required at the stage of expansion,
diversification and entering into new markets.
 Late stage Capital: This capital is required by those companies which have
achieved impressive sales and revenue. The capital may be required for
increasing capital level, increasing market share and for improving working
capital position.
 Bridge Financing: It is a short term interim financing option, extending from
certain weeks to two or three years, pending the arrangement of larger or lon
term Financing.

9. Venture capital process
1. Deal Origination
2. Screening
3. Evaluation
4. Deal Negotiation
5. Post investment Activity
6. Exit plan.

10. Major players in Indian market
 Sequoia Capital
 Accel
 Hellion venture partners
 Nexus venture partners
 Venture east
 Intel capital India
 Blume Ventures
 Inventus Capital Partners.

11. LEASING
 Leasing is an agreement between two persons where by one person
arranges to buy some fixed assets for the use of another person who inturn
agrees to make periodic payment in the form of rent for the use of the asset.
 The person who buys the asset and gives it on lease is called the lessor and
the person who agrees to use the property on lease basis and make regular
periodic payment in the form of rent is called the Lessee.
 At the end of the lease period, the asset comes back to the lessor, unless
there is a provision for renewal of the contract.
According to James C. Van Horne “Lease is a contract whereby the owner of an
asset grants to another party the exclusive right to use the asset usually for an
agreed period of time in return for the payment of rent.”

12. Types of Leasing
1. Financial Leasing (Full payout lease)
2. Operating Lease
3. Leverage lease
4. Sale and lease back
5. Cross border leasing
6. Domestic leasing
7. Wet lease and dry lease
8. Vendor leasing
9. Direct leasing
10. Single investor leasing.

13. 1. Financial leasing
A financial lease is one which transfers substantially all the risk and rewards
incidental to ownership to the lessee.
 Also known as Capital lease, long-term lease, Net lease, close lease etc.
 Irrevocable and non-cancellable contractual agreement.
 Lessee uses the asset, maintains it, insures it and avails after sales services.
 Lessee bears the risk of obsolescence.

14. Conditions to be satisfied by a finance lease
1. The ownership of the asset is transferred to the lessee by the end of the lease
term.
2. The lessee has the option to purchase the asset at a price which is expected
to be sufficiently lower than the fair market value at the date.
3. The lease term is for the Major part of the economic life of the asset even if
it’s title is not transferred.
4. The present value of the minimum lease payments amounts to atleast the fair
value of the leased assets at the inception of the lease.
5. The leased asset is of a specialised nature such that only the lessee can use it
without major modifications being made

15. Features of financial lease
 Selection
 Negotiation
 Purchase by lessor
 Ownership retained by lessor
 Option to purchase in future
 Period of lease
 Right to use the asset.

16. OPERATING LEASE
An operating lease is one which does not transfer substantially all the risk and
reward incidental to the ownership to the lessee.
 Also known as Service leas, Short-term lease, or True lease.
 Contractual period is less than the expected economic life of the equipment.
 Lease is for limited period
 Risk of obsolescence on lessor
 Eg.: Hiring a vehicle for a particular travel, providing mobile cranes with
operators etc.

17. Features of Operating lease
 Shorter period
 Not fully amortized.
 Several lease for same assets.
 Residual value.
 Loss of obsolescence
 Maintenance

18. Difference between Financial lease and
Operating lease

19. Leverage Lease : A leveraged lease is a lease agreement that is financed
through the lessor with help from a third-party financial institution. Here
an asset is rented with borrowed funds. Leveraged lease agreement
involves three parties- the lessee, the lessor and the lender.
Sale and Lease back: It is a type of leasing in which a firm which a firm
has an asset sells it to the leasing company and gets it back on lease. In
most of the cases lessee pays all maintenance expenses, property taxes
and insurance. It is beneficial to both lessor and lessee, lessee gets
immediate cash and lessor gets tax benefits.
Cross border Lease: It relates to a Lease transaction between a lessor
and lessee domiciled in different countries.
Domestic Lease: It relates to a transaction between a lessor and lessee
domiciled in the same country.

20. Wet lease and Dry lease: A wet lease is one where the lessor is responsible for
full control and maintenance of leased asset. A dry lease involves the payment of
insurance and maintenance costs by the lessee.
Vendor leasing: A Vendor leasing is one where the retail vendors tie up with the
lease finance companies which give financing option to the customers of the
vendors to purchase a product.
Direct Leasing: It is a financing arrangement by which the lessor buys the
property and rents it directly to the lessee.
Single investor leasing: Under this type of leasing all the money required to
purchase the equipment comes from the same source.

21. Functions of Lessor
 Provision of credit facility
 Absorbing obsolescence and risk
 Comprehensive package: general maintenance, accounts etc.

22. Advantages of leasing
Advantages to Lessee
 Efficient use of funds
 Permits Alternative use of funds
 Faster and cheaper credit.
 Flexibility
 Enhanced borrowing capacity
 Boon to small firms.
 Protection from obsolescence
 Cent percent financing
 Off balance sheet financing

23. Advantages to Lessor
 Stable business
 Wider distribution
 Sale of supplies
 Second hand market
 Tax benefits
 Absorbing obsolescence risks
 Fillip to capital market
 Easy finance

24. Limitations
 Not a suitable mode of finance
 Non availability of certain tax benefits
 Loses the advantage of potential capital gain
 High cost of financing
 Heavy penalty
 Loss to the lessor
 Lessee is not entitled to any protection
 Unnecessary complications
 Costly option
 Double sales tax
 Unfavorable gearing
 No working capital

25. Factoring
Factoring is a specialised financial technique, whereby, a firm converts it’s
receivables in to cash by selling them to factoring organizations.
Definition: According to V.A.Avadhani, “Factoring is a service of financial nature
involving the conversion of credit bills into cash.”
Parties to Factoring services:
1. Factor: The financial institution which undertakes the responsibility of
collecting the book debts of his clients.
2. Client: The business firm which sells goods or providing services to its
customers on credit basis.
3. Customers: Customers are persons who buy goods on credit or availsome
services from a business firm.

26. Objectives of Factoring
 To improve efficiency
 Improve credit standing facility
 Flexibility
 Improved cash flows
 Better purchase planning
 Avoid bad debts
 Ensure better management of receivables.

27. Features/Characteristics of Factoring
 The Nature
 Form
 Assignment
 Fiduciary position
 Professionalism
 Credit Realisation
 Less Dependence
 Recourse Factoring
 Compensation

28. Functions of Factor
 Administration of Sales ledger
 Collection of receivables
 Provision of Finance
 Protection against Risk
 Advisory services

29. Types/Forms of Factoring
1. Full Service Factoring or Without Recourse Factoring
2. With Recourse Factoring
3. Maturity factoring
4. Bulk factoring
5. Invoice Factoring
6. Agency Factoring
7. Suppliers’ Guarantee Factoring
8. Limited Factoring
9. Buyer Based Factoring
10. Seller Based Factoring
11. Domestic Factoring
12. International factoring

30. Forfaiting
Forfaiting is a form of financing of receivables relating relating to international
trade. It is non recourse purchase by a bank or any other financial institution,
receivables arising from export of goods and services.
Forfaiting is a mechanism, in which an exporter surrenders his right to receive
payment against the goods delivered or services rendered to the importer, in
exchange for the instant cash payment from a forfaiter.
Forfaiting is defined as, “a form of financing of receivables arising from
international trade”.

31. Importance/ Benefits of forfaiting
 Immediate fund
 Gains to banks
 Discounting
 Less risk
 Letter of Credit
 More convenience to exporters

32. Differences between Factoring and
Forfaiting

33. Infrastructure Financing
Infrastructure Financing means raising of funds and financing infrastructure
projects for developing, Operating and maintaining any infrastructure facility.
Eg.: Roads, Railways, water systems, airport, cable, telephone etc.
According to RBI, “Infrastructure financing refers to any credit facility extended
by banks and financial institutions for developing, Operating and maintaining any
infrastructure facility.

34. Features of Infrastructure financing
 Capital intensive
 Initial costs
 Low Operating cost.
 Repayment
 Project risk

35. Types of Infrastructure financing
 Economic
 Social
 Commercial

36. Limitations of Infrastructure Financing
 High time lag
 Local revenue
 Project risk

37. Housing Finance
Housing Finance refers to all the financial arrangements to provide the funds
which home-seekers need to construct or purchase or develop their own homes.
Housing Finance is defined as “the set of all financial arrangements that are
made available by Housing Finance Companies (HFCs) to meet the requirements
of housing.
Features
 Mortgage loans
 Purpose- construction, purchase, repairs, renovation and furnishing.
 Presence of physical property
 Charge on the property

38.  Ownership interest in the property
 Eligibility for availing loan
 Types of lenders
 Long term loans
 Criteria for determining amount of loan.
 Principal
 Time value of money
 Interest
 Tax concession
 Speciality

39. Importance of Housing Finance
 Employment opportunities
 Development of auxiliary industries
 Prevent s migration of labour
 More infrastructure facilities
 Creation of townships
 Vertical expansion

40. Types of Housing Finance
 Home purchase loans
 Home construction loan
 Home extension loan
 Home conversion loan
 Land purchase loans
 Stamp duty loans
 Bridge loans
 NRI Home loan

41. Housing Finance Institutions in India
1. Housing and Urban Development Corporation
HUDCO is a public sector company fully owned by Govt. of India and is
incorporated on April 25, 1970.
 Objective- providing long-term finance for construction of house, undertaking
urban development programs and infrastructure facilities.
 Working under the administrative control of Ministry of Housing and Urban
Poverty Alleviation.

42. Objectives of HUDCO

43. 2. Housing Development Finance
Corporation (HDFC)
 Promoted by ICICI was founded in 1977
 First specialised mortgage company in India
 Innovative institution and market leader in the housing finance company
 Loan can be availed up to a maximum of 85% of the cost of the property
 Maximum loan to an individual can be 25 lakh.
 Objectives:
1. To finance mainly low and middle income group of people to purchase or construct a single
family dwelling unit primarily for self occupation
2. Granting loans to the co-operative sector for housing their employees

44. 3 Insurance Organisations/Corporation
 The LIC and GIC support housing activity both directly and indirectly.
 LIC promoted subsidiary for the purpose, namely LIC Home Finance Ltd.
 GIC supports housing almost exclusively indirectly by subscribing to
bonds/debentures floated by the HUDCO and state housing boards.
 A housing finance subsidiary called GIC Housing Finance Ltd., was setup in
July 1990 to enable it to lend directly to individuals.

45. 4. National Housing Bank
 The NHB is the apex institution for the regulation and supervision of housing
finance companies operating in India.
 NHB was promoted by RBI in July 1988as it’s wholly owned subsidiary.
 H.O.: New Delhi
 NHB is headed by a full time Chairman and Managing Director, supported by
Executive directors, Head of departments and other officers under them

46. ROLE/FUNCTIONS OF NHB
1. Promotional Function
2. Regulatory Function
3. Financing Function
4. Mobilization Function
5. Co-ordination Function
6. Asset Securitization function.

47. Securitisation Process
Securitisation of a debt/loan is a technique by which a long-term, non-
negotiable and high valued financial asset is converted into securities of small
values which can be tradable in the market just like shares.
 It is the process of pooling and repackaging of illiquid financial asset into
marketable securities that can be sold to investors.
 Securitisation is defined as, “ the process of liquidating the illiquid and long
term assets like loans and receivables of financial institutions, by issuing
marketable securities against them by Special Purpose Entities (SPE’s).
 2 types- Mortgage Based Securitisation and Asset Backed Securitisation

48. Players in securitisation
 Originator
 Special Purpose Vehicle (SPV)
 Credit Enhancer
 Credit Rating Agency
 Insurance Company/ Underwriters
 Obligors
 Investor

49. Stages in the Securitisation Process
1. Identification stage
2. Transfer stage
3. Issue stage
4. Credit Rating stage
5. Redemption Stage

50. Benefits/Objectives of Securitisation
 Additional source of fund
 Greater profitability
 Enhances Capital Adequacy Ratio
 Spreading of credit risk
 Lower cost of funding
 Provision of multiple instruments
 Higher rate of return
 Prevention of idle capital
 Better than traditional instruments
 Other benefits

51. Questions

53. Essay questions