Financial Institutional Service concept-The Non banking financial Institutions

Reserve bank has been provided with statutory frame work to control credit. The Reserve bank’s powers to control the banking system and credit are fairly comprehensive.

RBI has various weapons of control and through using them; it hopes to achieve its monetary policy. These weapons of control are broadly.

Two quantitative and qualitative controls.

Quantitative controls:-

          Quantitative control are used to control the inflationary credit and indirectly to control the inflationary and deflationary pressures caused by expansion and contraction of credit.

          Quantitative control are also known as “general credit control “ and consists of bank rate policy, open market operations and cash reserve ration etc..

Bank rate policy:-

          Bank rate is defined as the standard rate at which the reserve bank is prepared to by or rediscount bills of exchange or other commercial papers eligible for purchase.

Open market operations:-

          The technique of open market operations as instrument of credit control is supervisor to bank rate policy. The need for open market operation was felt only when the bank rate policy turned out to be a rather weak, instrument of monetary control.

          Open market operation is mainly related to the sale of government securities. Open market operations are used to provide seasonal finance to banks.

          During the slack reason, banks invest their surplus resources in government securities in government securities and during the busy reason, they shell the securities. When commercial banks sell the securities and during the busy season, they sell the securities. When commercial banks sell the securities and when bank is improved and they can expand their credit to need growing demands.

Cash reserve ratio:-

          CRR is a very effective instrument of credit control.

Under the RBI act 1934, every commercial bank has to keep certain minimum cash reserves with RBI initially, it was 5% against demand deposits and 2% against time deposits. These are known as statutory cash reserves. Since 1962, RBI was empowered to vary the cash reserve requirements between 3% and 15% of the total demand and time deposits.

Open market operations:-

          The technique of open market operations as an instrument of credit control is superior to bank rate policy. The need for open market operation was felt only when the bank rate policy turned out to be a rather weak, instrument of monetary control.

          Open market operation is mainly related to the sale of government season, banks invest their surplus resources in government securities. When commercial banks sell the securities. When  commercial banks sell the securities and when RBI purchases them, the reserve position of bank is improved and they can expand their credit to meet growing demands.

Cash reserve ration:-

          CRR is very effective instrument of credit control.

Under the RBI act 1934, every commercial banks has to keep certain minimum cash reserves with RBI initially, it was 5% against demand deposits and 2% against time deposits. These are known as statuary cash reserves. Since 1962, RBI was empowered to vary the cash requirement between 3% and 15% of the total demand and time deposits.

Statutory liquidity requirement:-[SLR]

          A part from cash reserve requirements which commercial banks have to keep with RBI (under RBI act 1934 all commercial banks have to maintain)(under section 24 of banking regulation act 1949) liquid assets in the form of cash, gold and unencumbered approved securities equal to not less than 25% of their total demand and time deposit liability. This is known as the statutory liquidity requirement. The is in addition statutory cash reserve requirements.

Selective and direct credit control:-

          Generally RBI uses there kinds of selective credit control.

I.        Minimum margins for leading against specific securities.

II.      Ceiling on the amount of credit for certain purpose.

III.   Discriminatory rate of interest charged on certain types of advances.

One form of selective credit control was the credit authorization scheme introduced by RBI, in November 1965. Under the scheme, the commercial banks hand to obtain RBI’s authorization before sanctioning and fresh credit of 1 crore of more to any single party. This was later raised gradually to 6 crores in April 1986 in respect to borrowers in private as well as public sector.

Moral suasion:-

          A part from the above mentioned instruments of credit control are designed specifically to curb excess flow of credit in selected areas without affection other types of credit.

Qualitative controls:-

          These are also known as selective credit controls the qualitative controls are designed specially to curb excess flow of credit in selected areas without affecting other types of credit. Quantitative controls include the following measures.

Margin requirements:-

          Margins means the difference between the value of security and the loan advanced suppose the traders anticipate a rise in the price to rise. They would like to stock rise by taking loans from the commercial banks for this purpose

          Suppose, the banks keep a margin of 10% it means that against the rise worth 10000/- the banks can now grant advances worth 7500/- only thus , credit creating power of the banks but also restrict unnecessary hoarding of essential commodities.

Regular of consumer credit :-

           During the inflationary conditions, the central bank may ask the commercial banks not to grant loan and advances to the consumer likewise during the business depression the central bank.

Securities exchange board of India[SEBI]:-

          The SEBI was established on April 12, 1988 through an administrative order, but it became a statutory and really powerful organization only since 1992 through an ordinance issued on 30^th January 1992. The ordinance was replaced by the SEBI act on 4^th April 1992.

The SEBI is under the overall control of the ministry of finance, and has its head office at Mumbai. It has become a very important constitute of the financial regulatory frame work in India.

Constitution and Organization:-

          The working of SEBI is managed through its board. The board shall consists of the following 6 member namely-

●      A chairman.

●      Two members nominated by the ministers of the central Govt. Dealing with finance and law.

●      One member nominated by the reserve bank of India.

●      Two members, to be appointed by the central Govt. Who are professionals and have experience or special knowledge relating to securities market.

Departments of SEBI:-

          It has divided its activities into four operation department namely primary market department, issue management and Intermediaries department, secondary market department, and institutional department also headed by officials of the rank of exchange directors. All these department are sub-divided into divisions each headed by a division chief with specific responsibilities.

Primary market department:-

            Primary market department deal with policies, intermediaries, SRO’s and investor’s grievance. Further a policy matters and regulatory issues relation to primary market, market intermediaries, matters pertaining to SRO’s and redressed of investor grievances are within the preview of this dept.

Issue management and  intermediaries department:

          It takes care of vetting of offer documents and other things like registration, regulation and monitory of issue related intermediaries.

The secondary market dept:

          This dept concerned with the policies operations and exchange administration, new investment product, price monitoring, market surveillance and insider trading.

Institutional investment dept:

          This department looks after the mutual funds and foreign institutional investment, merges and acquisitions, researches and publications ad international relations.

          The legal dept under the supervision of the general counsel takes of all the legal matters of SEBI.

          The investigation dept carries out inspections and investigations under the supervision of the chief of investigation.

Functions of SEBI:

Protection of investors interest:

          SEBI frames rules and regulations to protect the interest of investors. It monitors whether the rules and regulations are being followed by the concerned parties i.e issuing companies, mutual funds, brokers and others. It handles investors grievances of complain against broker, securities issuing companies and other.

Guidelines on capital issues:

          The guidelines are applicable to

First public issue of new companies.

First public issue by existing private closely held companies

public issue by existing listed companies.

To regulate working of mutual funds:

          SEBI has laid down rules and regulations to be followed by mutual funds. SEBI has prescribed the SEBI(mutual funds) regulations, 1993. The regulations are to be followed by all mutual in India.

Restrictions on insider trading:

          SEBI restricts insider trading activity. It prohibits dealing, communication or counselling on matters relating to insider trading. SEBI regulations states that no insider shall either on his own behalf or on behalf of any other person, deal in securities of a company listed on any stock exchange on the basis of any unpublished price sensitive information.

Regulates merchant banking:

          SEBI has laid down regulations in respect of merchant. Banking activities in India. The regulations are in respect of registration, code of conduct to be followed and submission of half yearly results and so on.

Regulates stock brokers activities:

          SEBI has also laid down regulations in respect of brokers and such brokers. No broker or sub broker can buy, sell or deal in securities without being a registered member of SEBI.

Portfolio management:

          SEBI also enacted regulations to regulate the working of portfolio managers. It has laid down that no person of institution can operate as a portfolio manager with out the registration. The portfolio manger has to follow the relevant regulations laid down by SEBI.

To regulate the take overs and mergers:

          SEBI has issued a set of guidelines to protect the interest of the investors in the case of take overs and mergers.

Research and Publicity:

          SEBI also conducts surveys in respect of investments and opportunities. In 1990-91 SEBI along with Bombay  stock exchange and others conducted a survey called “survey on Indian share owners”

          It publishes to monthly bulletins called ‘SEBI market review’ and ‘SEBI News letter’

Other functions:

SEBI’s functions

Regulatory                                                                    Developmental

a.       Registration of brokers, sub brokers and others. b.       Registration of collective investment schemes and mutual funds. c.        Regulations of stock exchange. Self regulatory Organization’s (SRO’s)

a.       Investors education b.       Training of intermediaries. c.        Promotion of fair products. Code of conduct for regulators organisations

I.        It prohibits fraudulent and unfair trade practices relating to securities market.

II.      It promotes and regulates self regulatory organizations

III.   It promotes investors education and also training of intermediaries in securities market.

IV.    It conducts inspection, inquiries and audits of stock exchange and intermediaries and self regulatory organization in securities market.

SEBI has regional offices at Calcutta, Chennai, and Delhi. It has also formed two non statutory advisory committees namely, the primary market advisory committee and secondary market advisory committee with members from market players, recognized investor associations and other eminent persons.

          SEBI is a member of IOSCO (International organization of securities commissions) an international body comprising of security regulations from over 100 countries. It participates in the development committee of IOSCO which provides a platform from regulators from emerging markets to share their views and experiences.

MUTUAL FUNDS

structure and functioning of unit trust of India and mutual funds:

          A mutual fund is a pure intermediary which performs a basic function of buying and selling securities on behalf of its unit holders which the latter also can perform that not as easily, conveniently, economically and profitability.

          MF’s proposed by a sponsor has to be set up as a trust under the Indian trust act 1882. The UTI how ever was set up a special UTI act 1963. All mutual funds has to be registered with SEBI.

          Mutual funds or unit trusts are financial institutions which raise money by issuing equity units or shares and invest the funds so collected in common stock, bonds or money market instruments essentially they are aimed at the small investor who does not have the expertise to manage his or her own investment portfolio nor sufficient capital to effectively diversify the portfolio to minimize un systematic risk. Thus a mutual fund offers both diversification benefits as well as investment management expertise.

Organization:

          Organization in which 5 key parties or players or special bodies are involved.

a.       The sponsor

b.       The board of trustees(BOT)

c.        Trust company(tc)

d.       The asset management company(AMC)

e.        The custodian

f.        The unit holder

The UTI was established in 1964 and had a monopoly of the mutual fund business till about 1986. The total no. of mutual funds was 32 in 1997 and 38 in 2003. It of them are public sector and others belong to the private sector.

UTI now has many as 19 associates group institutions which include UTI securities exchange ltd. UTI bank, UTI investors securities ltd.

Evaluation of UTI:

MFI has gone through 4 phases of evaluation

1^st phase – 1964-86     -- UTI is the monopoly

2^nd phase – 1987-92    -- public sector banks and financial institutions.

3^rd phase – 1992-2003  --  private sector and foreign participation.

4^th phase – 2003          --   UTI 1 and UTI 2

Types of mutual funds:

Functional classification:

Open-Ended funds  [OEF’s]:

            Under open ended funds the investors can buy the units of the funds at any time directly from the mutual fund and can sell to the fund this type of fund is called open ended because the pool of funds is open for additional sales and repurchase.

Close-ended funds [CEF’s] :

            Close end fund company has a fixed amount for sale of units to investors for a specified period. After its initial offering the further sales are closed and it cannot sell any more it growth in terms of no. of shares is limited.

Geographical classification of MF’s:

Domestic Mutual funds [DMF’s]:

            If the mutual funds are issued and operated with in the political territories of country, they are called DMF’s.

Off shore Mutual Funds [OMF’s]:

            Off shore mutual funds are issued to foreigners they are cross boarder funds issued with an object of attracting foreign investment.

Portfolio classification MF’s: Depending upon the investment portfolio, there are a large variety of MF’s.

Money market mutual funds (MMMF’s):

These funds are invested in short term assets such as certificate of deposits, commercial papers etc..

Dual purpose funds:

Dual purpose funds offer half of the units to those investors who wish to have regular income and those demand capital gain.

Balance funds:

Those MF’s which invest both in equity and debt are called balanced funds.

Leveraged funds:

Leveraged funds are borrowed funds such MF’s use borrowed funds to increase the size of the portfolio.

Real Estate funds:

It is a closed end type of fund these funds invest in real estate ventures.

Equity funds:

Equity funds are those funds which invest a large share of investments in equity related investments. These funds have freedom to invest both primary and secondary markets for equity.

Gilt funds;

Gilt funds invest only in govt. Securities therefore they do not carry any credit risk. These funds invest in short and long term securities issued by the govt.

Advantages of mutual funds:

●      Reduce risk in investment

●      Helps investors in financial planning

●      Diversity investments

●      Enjoy the benifits of professional skills

●      Mutual funds are highly liquid

●      Investors are free from tension and strain

●      Provide complete information

●      Reduce transaction cost

Disadvantages of mutual funds:

●      mutual fund investment also carry certain risks

●      mutual fund companies invest the funds in stock market securities only

●      mutual funds are unable to design the schemes according to the changing requirements and demands of investments

●      single mutual fund is unable to introduce the required number of schemes with varied portfolio

Mutual funds development in India:

              MF’s in India was launched with the establishment of UTI in 1964 under UTI act 1963. This is the public enterprise allowed to act as financial intermediary to mobilize savings through the sale of units and to invest these funds in corporate securities. UTI introduced a number of schemes such as monthly income plan, children’s plan, equity schemes, off shore funds, India growth fund etc..

              During 1987 – 1993 MF’s industry developed a several banks and private enterprisers entered into the mutual fund market of India. SBI mutual fund was first non UTI fund in India. SBI also launched off shore mutual fund in 1988 called Indian Magnum Mutual Fund, new York. Later Canara bank, Punjab national bank, Bank of India, Indian bank, GIC and LIC also established MF’s.

              During 1993-99 MF market was open private sector, both India and foreign. During 1999-2005 there was a rapid growth MF market in India.

Commercial paper:

              Commercial paper is quite a new instrument in the money market. CP’s are short term usance promissory notes with fixed maturity issued mostly by leading, nationally reputed credit worthy and highly rated large corporations. CP’s are introduced in India 1990’s.

              Other well known names of CP’s are industrial paper, financial paper and corporate paper. It is a liability of the business or industrial or commercial or manufacturing concern it is known as industrial or commercial paper. If it is the liability of the financial company it can be called a finance paper. CP’s can be issued for maturities between a minimum of 15 days and a maximum upto 1year from the date of issue.

              Individuals, Banking companies, other corporate bodies, Registered or incorporated bodies, Non Resident Indians [NRI’s] and Foreign Institutional investors[FII’s] etc can invest in CP’s. However amount invested by single investor should not be less than 5lakhs face value.

Features of commercial paper:

●      They are negotiable by endorsement and delivery and hence they are flexible as well as liquid instruments. CP can be issued with varying maturities as required by the issuing company.

●      They are unsecured instruments as they are not backed by any assets of the company which is issuing the commercial paper.

●      They can be sold either directly by the issuing company to the investors or else issuer can sell it to the dealer who in turn will sell it into the market.

●      It helps the highly rated company in the sense they can get cheaper funds from commercial paper rather than borrowing from the banks.

Growth and structure of commercial papers in India:

              The introduction of CP’s in India is the sequel to the work done and the frame work suggested by the working group on money market in 1987. Subsequently the RBI announced in March 1989 its decision to introduce a scheme under which certain borrowers could issue CP’s in the Indian money market. This was followed by an RBI notification regarding guidelines to issue CP’s which came into effect from 1^st January 1990.

              Any private sector or public sector company can issue CP’s provided it satisfies certain conditions. Any person bank, company and other registered incorporated bodies as well as union corporate bodies can invest in CP’s.

              CP’s are issued at a discount to their face value and the discount rate is freely determined in the market. CP’s are freely transferable and negotiable.

              Guidelines in respect of the sale of  CP’s the guidelines/norms issued by the authorities in respect of the sale of CP’s have undergone changes over the years. Those which are in force in 1997-98 can be broadly described as follows.

a.       The tangible net worth of the issuing company should not be less than 4crore.

b.       The fund based working capital limit of the company should not be less than 4crore.

c.        The company can issue CP’s to the extent of 75% of working capital limit.

            FIS                                                        Unit – 5

                                                                    Insurance

Life insurance & it’s objectives:

            Life insurance is a contract for payment of a sum of money to the person assured. Usually the contract provides for the payment of an amount on the date of maturity or at specified dates at periodic intervals or at unfortunate death, if it occurs earlier. Among other things, the contract also provides for the payment of premium periodically to the corporation by the assured.

            Life insurance in short is concerned with two hazards that stand across the life path of every person. That of dying permanently leaving a dependent family to fend for itself and that of living to old age without visible means of support.

Objectives of LIC:

●      To spread life insurance and provide life insurance protection to the masses at reasonable cast.

●      To mobilize peoples savings through insurance linked saving schemes.

●      To invest the funds to serve the best interests of both the policy holders & the nation.

●      The conduct business with maximum economy, remembering that the money belongs to the policy holders.

●      To innovate and adopt to meet the changing life insurance needs of the community.

●      To promote amongst all agents & employees of corporation a sense of pride & job satisfaction through dedicated service to achieve the corporate objectives.

Various plans of LIC:

Basic life insurance plan:

Whole life assurance plan:

            A low cost insurance plan where sum assured is payable on death of the life assured & premium are payable through out life.

 Endowment assurance plan:

Under this plan sum assured is payable on the date of maturity or on death of the life assured if earlier

Both these plans are available with facility of paying the premiums for a limited periods.

Term assurance plans:

 Two-year temporary assurance plan:

            Term assurance for 2 years is available under this plan. Sum assured is payable only on death of life assured during the term.

 Convertible term assurance plan:

            It provides term assurance for 5 to 7 years with an option to purchase a new ltd payment.

 Bima sandesh:

            This is basically a term assurance plan with the provision for return of premiums paid on surveying the term.

  Bima kiran:

            This plan is an improved versions of bima sandesh with an added attraction of loyalty addition in built accident covers & free cover after maturing provide the policy is then in full force.

plans for children:

            Various children assurance plans are available CDA,CPA, Jeevan Balya, New CDA & Jeevan kishore.

            Jeevan sukanya is a plan especially designed for girls children’s money back assurance plan is especially designed to provide for children’s higher educational  expenses.

Pension plans:

            These plans provide for either immediate or deferred pension for life. The pension payments are made till the death of the annuitant.

Jeevan sarita:

            Joint life last survival annuity cum-assurance plan[for husband & wife] where claim amount is payable partly in lump sum & partly in the form of an annuity with return of balance sum assured on the death of survivor.

Re-insurance:

            In contrast to the direct insurance re-insurance is whole sale business. It arises out of need to reduce the risk bearind burden by the insuring company. By sharing the risk with other company.

            Insurance company can not undertake every risk & it has it’s own capacity. Some time in the course of business. They may undertake such responsibility where the risk involved may be two heavy for the company. To safe guard the companys interest it may insure the same risk with other insurer. This is called re- insurance.

Meaning:

            Re- insurance is one insurer purchasing the risk from the other insurer, who insured  the risk from an insured. Thus re-insurance is insurance of insurance. Re-insurer is a secondary insurer of all primary insurers.

Features:

            The object of re-insurance is spreading the risk it has following features.

●      It is primarily a whole sale insurance where one insurance company insures with other insurance company.

●      The insurance company may insure the same risk wholly or partially.

The main benefit under these schemes [ after super annotation at 60 years of age or after 33 years of service] is in the form of a pension of 50% of the average basic salary during the last 10 months of employement.

Privately administered super annotation fund:

            The private sector has kept out in respect of setting up & running of pension funds. They have been run by the government or semi government organizations alternatively the employer can have a super annotation scheme with the LIC & pay suitable contribution for the employees in service for LIC has introduced 4 pension yojana (VPBY), new jeevan alshay(NJA), new jeevan dhara (NJD), new jeevan suraksha(NSJ).

            If any employer set up a privately administered super annotation fund, it is stipulate that he can accumulate funds in the form of an irrecoverable trust fund during the employement period of the employee concerned, but when the pension becomes payable, suitable annuities have to be purchased from the LIC.

Current pension schemes:

Government employees pension scheme:

            The government employee’s pension scheme (GEPS) which has been made mandatory from 1995. It is a subset of employees provident fund (EPF) it provides

a.       Super annotation pension

b.       Retirement pension

c.        Permanent total disability pension

d.       Widow or widower’s pension

e.        Orphan pension the central government.

Contributes an amount equivalent to 1.16% of workers salary. The scheme provides minimum pension of 500/- per month & maximum pension of 60% of the salary. All assets & liabilities of the while family this GEPS 1995 scheme.

            After the introduction of this scheme, the employees. Who had enrolled in the LIC pension schemes will also obtain pension benefits from GEPS, which is also known as employee pension scheme [EPS] 1995 scheme.

            After the introduction of the scheme the employees who had.

BEPs & IEPs:

            Bank employees pension schemes (BEPS) 199 & insurance employees pension scheme (IEPS) 1993 are for the benefit of the employees of public sector banks & government owned insurance companies respectively. They are financed by the entire employer’s portion of the PF contributions which is 10% of the basic salary.

Defined contribution pension plans [DCPP’s]:

            DCPP’s popular in US, do not guarantee the amout of final benefit. Which the employees would get after they retire. In Dcpp the employee and employer make a predetermined contribution each year and these funds are invested over the period of time till the retirement of employee.

Pay As-You-Go pension plan:

            In most European countries, including france & germany pensions are paid through pay GPP. Under which the current employees pay a percentage of their income top provide for the on & this along with the contribution of state goes as a pension that sustains the older generaton.

Pension funds:

Pension funds have grown rapidly to become the primary vehicke of retirement benefit of retirement saving & retirement  income in many countries. A pension plan (PP) is an arrangement to provide income to participants in the plan when they retire. PP’s generally sponsored by private employers, government as an employer & labour unions.

Classification of pension plans:

            The financial intermediary or an organization or a institution, of a trust that manages the assets & pays benefits to the old & retires is called a pension fund(PNF).

Defined benefits pension plan:

            Under DBPP, the final pension is pre-defined based on the final salary & the period of service. Most of the pension plans offered by public sector enterprises & the government as employer in India. Are of DBPP varity this type ensures predictable amount of pension to the employ for all the year after their retirement & it is guaranteed by the state.

            The firms with DBPP typically establish legally separate trust fund & the trustees invested employer’s contributions in shares and bonds and other organizations related to the insurance sector.

●      IRDA specifies the terms and pattern in which books of accounts are to be maintained & statement of accounts shall be provided by insurers & others insurance mediatiors.

●      It is meant to specify the proportion of premium income of the insurer to finance policies.

●      IRDA also specifies the share of life insurance business & general insurance business to be accepted by the insurer in the rural or social sector.

Impact of IRDA on Indian insurance sector:

            The generation of IRDA has brought revolutionary changes in the insurance sector . in last 10 years of it’s establishment the insurance sector has seen tremendous growth. When IRDA came into being. Only players in the insurance industry where LIC & GIC however is last decade 23 new players have emerged in the field of insurance. The IRDA also successfully deals with any discrepancy in the insurance sector.

Insurance regulatory & development authority:

            Insurance regulatory & development authority is under govt of India. In order to protect the invest of the policy holders & to regulate promote & ensure orderly growth of the insurance industry. It is basically a ten members team comprising of a chairman, 5 full time members & partime members all appointed by “govt of India”.

            This organization came into being in 1999 after the bill of IRDA was passed in the Indian parliament.

Power & function of IRDA:

●      It issues the applicants in insurance are a certificate of registration as well as renewal modification, withdrawl, suspension or cancellation of such registrations.

●      It protects the interest of the policy holders in any insurance company in the matters related to the assignment of policy.

●      IRDA is also entitled to for asking information undertaking inspection & investigating the audit of the insurers, mediators, insurance intermediaries.

●      It is the most international segment of the insurance business.

●      The objective of re-insurance is to safeguard it’s interest by sharing the risk with others.

●      Re-insurance can be applied to all kinds of insurance.

●      Re- insurer is not liable to insured because there is no contract between insurer & the insured.

●      Re-insurer pays the claim only when the insurer pay to the insured.

●      Re- insurer is subject to all the conditions in the original policy. It is co existence with the original policy.

●      If original policy comes to and end, the policy of re-insurance also comes end.

Types of re-insurance:

proportional from of re-insurance

non—proportional form of re-insuance.

Proportional form of re-insurance:

In this method amount retained amount ceded will represent the fixed share of risk, covered by the direct insurer. This method is 2 types.

quota method of re-insurance                                          share surplus method of re-insurance

Quota method of re-insurance:

            Under this method the ceding office is bound to re-insurance such proportions of every risk as per the agreement.

Share surplus method of re-insurance:

            When a risk is proposed the ceding office has a free choice with in the liability specifie in the agreement.

Non-proportional re-insurance:

            The ceding office will under write it’s retention as a form of firs loss insurance. It bears losses up to certain figure, there are different types of non-proportional re-insurance. Such as excess of loss method excess of loss Raton method, pools method of re- insurance etc.