FINANCIAL SERVICES Non-fund based Services

Financial services refer to services provided by the 1. Securitisation

finance industry. Financial services may be defined 2. Merchant banking
as the products and services offered by financial 3. Credit rating
institutions for the facilitation of various financial 4. Loan syndication
transactions and other related activities. 5. Business opportunity related services
6. Project advisory services
Functions of financial services 7. Services to foreign companies and NRIs.
8. Portfolio management
1. Facilitating transactions 9. Merger and acquisition
2. Mobilizing savings 10. Capital restructuring
3. Allocating capital funds 11. Debenture trusteeship
4. Monitoring managers 12. Custodian services
5. Transforming risk 13. Stock broking

Characteristics or Nature of Financial Services Capital Market Services

1. Intangibility Capital market simply refers to a market for long

2. Inseparability term funds. It is a market for buying and selling of
3. Perishability equity, debt and other securities. Generally, it deals
4. Variability with long term securities that have a maturity period
5. Dominance of human element of above one year.
6. Information based Characteristics of Capital Market
Importance of Financial Services 1. It is a vehicle through which capital flows
from the investors to borrowers.
1. Economic growth
2. Deals with long term securities.
2. Promotion of savings
3. It deals in many types of financial
3. Capital formation
instruments.
4. Creation of employment opportunities 4. All operations in the new issues and existing
5. Contribution to GNP securities occur in the capital market.
6. Provision of liquidity 5. It functions through a number of
Types of Financial Services/ Scope of Financial intermediaries
Services Functions of a Capital Market
The financial services can be broadly classified into 1. Mobilise long term savings for financing
two: (a) fund based services and (b) non-fund long term investments.
services (or fee-based services) 2. Provide risk capital in the form of equity
Fund based Services or quasi-equity to entrepreneurs.
The fund based or asset based services include the 3. Provide liquidity
following: 4. Improve the efficiency of capital
1. Underwriting allocation through a competitive pricing
2. Dealing in secondary market activities mechanism.
3. Participating in money market instruments like 5. Enable quick valuation of instruments
CPs, CDs etc. 6. Provide insurance against market risk
4. Equipment leasing or lease financing through derivative trading and default
5. Hire purchase risk through investment protection fund.
6. Venture capital 7. Direct the flow of funds into efficient
7. Bill discounting.
channels through investment and
8. Insurance services
9. Factoring disinvestment and reinvestment.
10. Forfaiting
11. Housing finance 12. Mutual fund

1
Major Players or Participants (or Functions / Services of NSDL
Intermediaries) in the Capital Market
1. Maintenance of individual investors’ beneficial
1. Merchant bankers holdings in an electronic form.
2. Registrars to the issue 2. Trade settlement
3. Bankers 3. Automatic delivery of securities to the clearing
4. Brokers corporation
5. Underwriters 4. Dematerialisation and rematerialisation of
securities.
Procedure for Dealing at Stock Exchange 5. Allotment in the electronic form in case of IPOs.
(Trading Mechanism or Method of Trading on a 6. Distribution of dividend
Stock Exchange)
7. Facility for freezing / locking of investor accounts
1. Selection of a broker 8. Facility for pledge and hypothecation of
2. Placing an order securities.
3. Making the contract 9. Internet based services such as SPEED-c and
4. Contract Note IDeAS
5. Settlement
Central Depository Services (India) Ltd. (CDSL)
Rolling Settlement The CDSL is the second depository set up by the
Bombay Stock Exchange and co-sponsored by the
Rolling settlement has been introduced in the place SBI, Bank of India, Union bank of India, and
of account period settlement. Under this system of Centurian Bank. The CDSL commenced operations
settlement, the trades executed on a certain day are on March 22, 1996. The CDSL was set up with the
settled based on the net obligations for that day. objectives of providing convenient, dependable and
secure depository services at affordable cost to all
market participants. All leading stock exchanges
Depository Services such as Bombay Stock Exchange, National Stock
A depository is an organization which holds Exchange, and Kolkata Stock Exchange etc. have
securities in electronic book entries at the request of established connectivity with CDSL.
the shareholder through the medium of a depository Securities Exchange Board of India (SEBI)
participant. A depository keeps the scrips on behalf Securities and Exchange Board of India (SEBI) is
of the investors. It undertakes the custodian role. the nodal agency to regulate the capital market and
Financial services relating to holding, maintaining other related issues in India. It was established in
and dealing securities in electronic form by a 1988 as an administrative body and was given
financial intermediary known as depository are statutory recognition in January 1992 under the
called depository services. SEBI Act 1992 which came into force on January
Constituents of Depository System 30, 1992.
There are four players in the depository system. The major objective of the SEBI may be
They are : (1) Depository Participant, (2) Investor summarised as follows:
(Beneficial owner), (3) Issuer, and (4) Depository. • To provide a degree of protection to the
investors and safeguard their rights and to
National Securities Depository Ltd. (NSDL)
ensure that there is a steady flow of funds in
NSDL was registered by SEBI on June 7, 1996 as the market.
India’s first depository to facilitate trading and • To promote fair dealings by the issuer of
settlement of securities in the dematerialized form. It securities and ensure a market where they
was promoted by IDBI, UTI and NSE (National can raise funds at a relatively low cost.
Stock Exchange). The objective is to provide
electronic depository facilities for securities traded • To regulate and develop a code of conduct
in the equity and debt markets in the country. NSDL for the financial intermediaries and to make
has been set up to cater to the demanding needs of them competitive and professional.
the Indian capital markets. • To provide for the matters connecting with
or incidental to the above.
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 Powers and functions of the SEBI 2. Growth fund
3. Conservative fund
Functions: • On the basis of Investment
1. Equity fund
1. Protective Function 2. Bond fund
2. Regulatory Function 3. Balanced fund
3. Development Function 4. Money market mutual fund
5. Taxation fund
Powers: 6. Leveraged fund
1. Quasi-Judicial 7. Index bond fund

2. Quasi-Executive OBJECTIVES OF MUTUAL FUNDS

1. To mobilise savings of people.
3. Quasi-Legislative 2. To offer a convenient way for the small investors
to enter the capital and the money market.
FUND INVESTMENTS 3. To tap domestic savings and channelize them for
Meaning of Mutual Funds profitable investment.
4. To enable the investors to share the prosperity of
Small investors generally do not have adequate time, the capital market.
knowledge, experience and resources for directly
entering the capital market. Hence they depend on 5. To act as agents for growth and stability of the
an intermediary. This financial intermediary is capital market.
called mutual fund. 6. To attract investments from the risk aversers.
7. To facilitate the orderly development of the
Features of Mutual Funds capital market.
Mutual fund possesses the following features:
1. Mutual fund mobilizes funds from small as well Advantages (Importance) of Mutual Funds
as large investors by selling units.
1. Mobilise small savings
2. Mutual fund provides an ideal opportunity to
2. Diversified investment
small investors an ideal avenue for investment.
3. Mutual fund enables the investors to enjoy the 3. Provide better returns
benefit of professional and expert management of 4. Better liquidity
their funds. 5. Low transaction costs
4. Mutual fund invests the savings collected in a 6. Reduce risk
wide portfolio of securities in order to maximize 7. Professional management
return and minimize risk for the benefit of investors. 8. Offer tax benefits
5. Mutual fund provides switching facilities to 9. Support capital market
investors who can switch from one scheme to 10. Promote industrial development
another. 11. Keep the money market active
6. Various schemes offered by mutual funds provide
tax benefits to the investors. PROBLEMS OF MUTUAL FUNDS IN INDIA
7. In India mutual funds are regulated by agencies 1. Liquidity crisis.
like SEBI. 2. Lac of innovation.
8. The cost of purchase and sale of mutual fund units 3. Inadequate research.
is low. 4. Conventional pattern of investment.
9. Mutual funds contribute to the economic 5. No provision for performance guarantee.
development of a country. 6. Inadequate disclosures.
7. Delays in service.
TYPES OF MUTUAL FUNDS 8. No rural sector investment base.
(CLASSIFICATION OF MUTUAL FUNDS) 9. Poor risk management.
Mutual Funds Valuation of Mutual Funds
• On the basis of Operation
1. Open ended Net Asset Value
2. Close ended
• On the basis of Return NAV or Net Asset Value is the market value of the
1. Income fund securities held by the scheme. NAV= Market or Fair
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Value of Scheme's investments + Current Assets - is called an exchange traded fund because it's traded
Current Liabilities and Provision NAV / Number of on an exchange just like stocks
Units outstanding under Scheme on the Valuation
Types of ETFs
Date
1. Bond ETFs
Underlying Valuation Methodology
2. Stock ETFs
The valuation of investments shall be based on the 3. Industry ETFs
principles of fair valuation i.e. valuation should 4. Commodity ETFs
reflect the realizable value of the securities/assets. 5. Currency ETFs
6. Inverse ETFs
The valuation norms of each of the asset class is as
follows: How to Begin Investing in ETFs
1. Valuation of Traded Securities - equity /
equity related security (such as convertible 1. Find an investing platform
debentures, equity warrants, etc.)/preference 2. Research ETFs
shares 3. What is your time frame for investing?
2. Valuation of Exchange Traded Fund (ETF) 4. Are you investing for income or growth?
5. Are there particular sectors or financial
3. Valuation of Debt & Money Market
instruments that excite you?
Instruments
6. Consider a trading strategy
4. Valuation of money market and debt
securities with residual maturity of < 60
days Exchange Traded Mutual Funds
5. Valuation of money market and debt Funds
securities with residual maturity of > 60 ETFs are a type of index Mutual funds are pooled
days funds that track a basket investments into bonds,
of securities. securities, and other
PENSION FUND instruments that provide
returns.
Pension funds, which are also known as retirement
funds, is a kind of savings scheme where you (as an ETF prices can trade at a Mutual fund prices trade at
premium or at a loss to the net asset value of the
employee) invest a small portion of your
the net asset value of the overall fund.
income/salary into a designated savings plan. The fund.
main objective of this plan is to get a steady flow of
income after you complete your active years of ETFs are traded in the Mutual funds can be
markets during regular redeemed only at the end of
service. hours just like stocks are. a trading day.
BENEFITS OF INVESTING IN PENSION Some ETFs can be Some mutual funds do not
FUNDS purchased commission- charge load fees, but most
free and are cheaper than are more expensive than
TYPES OF PENSION FUNDS IN INDIA mutual funds because ETFs because they charge
they do not charge administration and
1. NPS
marketing fees. marketing fees.
2. Public Provident Fund (PPF)
3. Employee Provident Fund (EPF) ETFs do not involve Mutual funds own the
4. Annuity plans with life cover actual ownership of securities in their basket.
securities.
A. Deferred Annuity
B. Immediate annuity ETFs diversify risk by Mutual funds diversify risk
tracking different by creating a portfolio that
Exchange Traded Fund (ETF) companies in a sector or spans multiple asset classes
industry in a single fund. and security instruments.
An exchange traded fund (ETF) is a type of security
that tracks an index, sector, commodity, or other ETF trading occurs in- Mutual fund shares can be
kind, meaning they redeemed for money at the
asset, but which can be purchased or sold on a stock
cannot be redeemed for fund's net asset value for that
exchange the same way a regular stock can. An ETF cash. day.

4
Because ETF share Mutual funds offer tax 1. Corporate counselling
exchanges are treated as benefits when they return 2. Project counselling
in-kind distributions, capital or include certain 3. Pre-investment studies
ETFs are the most tax- types of tax-exempt bonds in 4. Loan syndication
efficient amongst all their portfolio. 5. Issue management
three types of financial (a) Public issue through prospectus
instruments. (b) Marketing and underwriting
(c) Pricing of issues
6. Underwriting of public issue
Module III 7. Portfolio management
INVESTMENT BANKING AND 8. Merger and acquisition
MERCHANT BANKING 9. Foreign currency financing
10. Working capital finance
Meaning and Definition of Merchant Banking 11. Acceptance credit and bill discounting
Merchant banking is non-banking financial activity. 12. Venture financing
But it resembles banking function. It is a financial 13. Lease financing
service. It includes the entire range of financial 14. Relief to sick industries
services. 15. Project appraisal
The term merchant banking is used differently in Objectives of Merchant Banking
different countries. According to Random House
Dictionary, “merchant bank is an organization that 1. To help for capital formation.
underwriters securities for corporations, advices 2. To create a secondary market in order to boost the
such clients on mergers and is involved in the industrial activities in the country.
ownership of commercial ventures. These 3. To assist and promote economic endeavour.
organizations are sometimes banks which are not 4. To prepare project reports, conduct market
merchants and sometimes merchants who are not research and pre-investment surveys.
bankers and sometimes houses which neither 5. To provide financial assistance to venture capital.
merchants nor banks”. 6. To build a data bank as human resources.
Difference between Merchant Bank and 7. To provide housing finance.
Commercial Bank 8. To provide seed capital to new enterprises.
COMMERCIAL MERCHANT 9. To involve in issue management.
10. To act as underwriters.
BANK BANK 11. To identify new projects and render services for
Commercial bank is Merchant bank getting clearance from government.
a banking company refers to the 12. To provide financial clearance.
established by a financial 13. To help in mobilizing funds from public.
number of people for institution, that 14. To divert the savings of the country towards
productive channel.
providing the basic specializes in 15. To conduct investors conferences.
banking functions international trade
i.e. accepting and provide and Role of Merchant Bankers in Managing Public
Issue
deposits and lending array of services
money to general to its clients. 1. Easy fund raising
public. 2. Financial consultant
Regulated by Rules and 3. Underwriting
Banking Regulation regulations 4. Due diligence
5. Co-ordination
Act, 1949. designed by
6. Liaison with SEBI
SEBI.
General banking Consultancy type Setting up and management of merchant banks
business business in India
a) Institutional Base
Functions (Services) of Merchant Bankers (Scope b) Banker Base
of Merchant Banking)
c) Broker Base
5
 d) Private Base LEASE FINANCE AND VENTURE
Categories of Merchant Banks CAPITAL FINANCE
a) Category – I: To carry on any activity Meaning of leasing
relating to issue management and act as Leasing is a process by which a firm can obtain
adviser, consultant manager, underwriter and the use of a certain fixed assets for which it must
portfolio manager for capital issues. pay a series of contractual, periodic, tax
b) Category – II: To act as adviser, consultant,
deductible payments. The lessee is the receiver
co-manager, underwriter and portfolio of the services or the assets under the lease
manager for capital issues. contract and the lessor is the owner of the assets.
c) Category – III: To act as underwriter, The relationship between the tenant and the
adviser, and consultant to an issue.
landlord is called a tenancy, and can be for a
d) Category – IV: To act only as adviser or fixed or an indefinite period of time (called the
consultant to an issue. term of the lease). The consideration for the
Weakness of merchant banks / Problems of lease is called rent.
merchant banks
Importance of Lease Financing
➢ They need to innovate and deliver new
1. Lease finance is easy to get than getting loan
financial product to stay one step a head of
for buying all fixed assets.
the market.
2. Monthly rent payment for lease finance will be
➢ Providing integrated view to the clients
operating expenses. It will be allowed to
➢ Outsourcing / off sharing of business
deduct total income. So, company can get tax
➢ Risk management
benefits in lease financing.
Regulations by SEBI on Merchant Banking 3. It can show as invisible debt of company out
Reforms for the merchant bankers of its balance sheet.
4. flexible way of finance
1. Multiple categories of merchant banker will
be abolished and there will be only one The advantages of leasing
equity merchant banker.
2. The merchant banker is allowed to perform 1. Leasing helps to possess and use a new
underwriting activity. For performing piece of machinery or equipment
portfolio manager, the merchant banker has without huge investment.
to seek separate registration from SEBI. 2. Leasing enables businesses to preserve
3. A merchant banker cannot undertake the precious cash reserves.
function of a non banking financial 3. The smaller, regular payments required
company, such as accepting deposits, by a lease agreement enable businesses
financing others’ business, etc. with limited capital to manage their cash
4. A merchant banker has to confine himself flow more effectively and adapt quickly
only to capital market activities. to changing economic conditions
Recognition by SEBI on merchant bankers
4. Leasing also allows businesses to
1. Considering how much the merchant are upgrade assets more frequently ensuring
professionally competent. they have the latest equipment without
2. Whether they have adequate capital having to make further capital outlays
3. Track record, experience and general reputation 5. It offers the flexibility of the repayment
of merchant bankers. period being matched to the useful life
4. Quality of staff employed by merchant of the equipment
bankers, their adequacy and available 6. It gives businesses certainty because
infrastructure are taken into account. asset finance agreements cannot be
cancelled by the lenders and repayments
are generally fixed.
Module IV
Limitation of leasing

6
TYPES OF LEASE maintenance, which are paid separately by
1. Financial lease the lessee.
2. Operating lease 5) Open-end Lease: A conditional sale lease in
3. Sale and lease back which the lessee guarantees that the lessor
4. Leveraged leasing will realize a minimum value from the sale
5. Direct leasing. of the asset at the end of the lease.
1) Financial lease
Long-term, non-cancellable lease contracts are Differences between financial lease and operating
known as financial leases. The essential point of lease
financial lease agreement is that it contains a FINANCE LEASE OPERATING LEASE
condition whereby the lessor agrees to transfer the A commercial A commercial
title for the asset at the end of the lease period at a arrangement in which arrangement in which the
nominal cost. the lessor allows the lessor allows the lessee to
2) Operational lease lessee to use the asset use the asset for a term
An operating lease stands in contrast to the financial for the maximum part smaller than the
lease in almost all aspects. This lease agreement of its economic life economic life of the asset
gives to the lessee only a limited right to use the against payment of against the payment of
asset. The lessor is responsible for the upkeep and rentals is known as rentals is known as
maintenance of the asset. The lessee is not given any finance lease. operating lease.
uplift to purchase the asset at the end of the lease Loan Agreement Rental Agreement
period. Normally the lease is for a short period and The lease term of The lease term of
even otherwise is revocable at a short notice. finance lease is longer operating lease is short.
as compared to
3) Sale and lease back
operating lease.
It is a sub-part of finance lease. Under this, the
Rests with the lessee Rests with the lessor
owner of an asset sells the asset to a party (the
From the lessor to the Does not transfers from
buyer), who in turn leases back the same asset to the
lessee, with the transfer the lessor to the lessee,
owner in consideration of lease rentals. of asset. with the transfer of the
4) Leveraged leasing asset
Under leveraged leasing arrangement, a third party Cost of Repairs and Cost of Repairs and
is involved beside lessor and lessee. The lessor Maintenance are to be Maintenance are to be
borrows a part of the purchase cost (say 80%) of the borne by the lessee. borne by the lessor
asset from the third party i.e., lender and the asset so
purchased is held as security against the loan.
5) Direct leasing VENTURE CAPITAL
Under direct leasing, a firm acquires the right to use The money invested in new, high risk and high
an asset from the manufacture directly. The return firms is called venture capital. Venture
ownership of the asset leased out remains with the capitalists not only provide money but also help the
manufacturer itself entrepreneur with guidance in formalizing his ideas
Other types of leasing: into a viable business venture. Venture capital is the
1) First Amendment Lease: The first money and resources made available to start up
amendment lease gives the lessee a purchase firms and small business with exceptional growth
option at one or more defined points with a potential
requirement that the lessee renew or Characteristics of Venture Capital
continue the lease if the purchase option is 1) It is basically equity finance
not exercised. 2) It is a long term investment in growth-
2) 2) Full Pay out Lease: A lease in which the oriented small or medium firms.
lessor recovers, through the lease payments, 3) Investment is made only in high risk projects
all costs incurred in the lease plus an with the objective of earning a high rate of
acceptable rate of return, without any return.
reliance upon the leased equipment's future 4) The venture capital funds have a continuous
residual value. involvement in business after making the
3) Guideline Lease: A lease written under investment.
criteria established by the IRS to determine Types of Venture Capitalists
the availability of tax benefits to the lessor. 1. Venture capital funds set up by angel
4) Net Lease: A lease wherein payments to the investors (angels)
lessor do not include insurance and
7
 2. Venture capital subsidiaries of Corporations 2. Funds are not loans
3. Private capital firms/funds 3. Angel investors do not only provide
Methods or Modes of Venture Financing money
(Funding Pattern)/Dimensions of Venture Disadvantages of angel funding
Capital 1.Higher risks
1) Equity 2.Pressure can be quite difficult to handle
2) Conditional loan
3) Income note Crowd funding
4) Conventional loan Raising funds or capital from individuals or
Stages of Venture Capital Financing organizations that invest in (or donate to) projects in
1. Early stage financing return for a potential profit or a reward is called
(a) Seed financing crowdfunding.
(b) Start up finance/first stage financing Advantages of crowdfunding
(c) Second stage financing 1. Keeping equity
2. Later stage financing 2. Low financial risk
(a) Third stage/development financing 3. Tapping into an existing community
(b) Turnarounds
Shortcomings of crowdfunding
(c) Fourth stage financing/bridge financing
1. Sustainability problem
(d) Buy-outs
2. It may take some time (and money).
Advantages of Venture Capital
1. It is long term equity finance.
3. Idea theft
2. The venture capitalist is a business partner
3. The venture capitalist is able to provide
strategic operational and financial advice to Module V
the company. CREDIT RATING AND
4. The venture capitalist has a network of FACTORING SERVICES
contacts that can add value to the company Credit rating is a numerical representation of the
5. Venture capital fund helps in the creditworthiness of an individual or a business. The
industrialization of the country. credit rating is a key aspect that makes or breaks a
6. It helps in the technological development of loan application. The credit rating/score acts as an
the country. indicator stating if the borrower has defaulted on
7. It generates employment. loan payments before and if he is worth trusting with
8. It helps in developing entrepreneurial skills. the new loan. A credit score is a 3-digit number that
Risk Capital represents the creditworthiness of the borrower.
Risk capital refers to funds allocated to speculative Credit rating is the analysis of the possible credit
activity and used for high-risk, high-reward risks associated with granting a financial instrument
investments. Any money or assets that are exposed to an individual or a company. Based on the credit
to a possible loss in value is considered risk capital, score, a lender determines whether the borrower can
but the term is often reserved for those funds repay the loan amount or not.
earmarked for highly speculative investments. In the Objectives of Credit Rating
context of venture capital, risk capital may also refer 1. Provide superior information to the
to funds invested in a promising, but still unproven, investors at a low cost
startup 2. Provide a sound basis for proper risk-return
Angel Investment structure
Angel investments are made by wealthy individuals 3. Subject borrowers to a healthy discipline
(such as accredited investors) that invest their 4. Assist in the framing of public policy
personal money into a company in exchange for guidelines on institutional investment.
equity in that company. This is the basic principle of Methodology of Credit Rating
angel investing. 1. Business Analysis or Company Analysis
Angel investors help startups during the seed stages, 2. Economic Analysis
so there is a higher risk in angel investments since 3. Financial Analysis
they are connected to unproven business models. 4. Management Evaluation
Advantages of angel funding: 5. Geographical Analysis
6. Fundamental Analysis
1. Great for companies that need quick capital Credit Rating Agency (CRA)
fast.
8
A credit rating agency (CRA) evaluates and assesses In addition to registering with SEBI, Brickwork
an individual’s or a company’s creditworthiness. Ratings (BWR) is accredited by RBI and
The credit rating agency does not provide any empanelled by NSIC, NCD, MSME ratings and
decision to financial institutions on whether an grading services. It has received accreditation from
entity should get a credit facility or not; rather it NABARD for MFI and NGO grading. Brickwork is
provides the report and additional inputs making it also authorised to grade companies seeking credit
easier for the lender to analyse and an informed facilities from IREDA, Renewable Energy Service
decision. Providing Companies (RESCOs) and System
Credit Rating Agencies in India Integrators (SIs). Canara Bank was the leading
There are several credit rating agencies in India, promoter and strategic planner for Brickwork.
such as CRISIL Ltd, India Ratings and Research Pvt SMERA Ratings Limited
Ltd, ICRA Limited, CARE, Brickwork Ratings SMERA analyses and establishes the credibility of
India Pvt Ltd, SMERA Ratings Limited, and existing micro, small, and medium enterprises
Infometrics Valuation and Rating Pvt Ltd. (MSMEs). MSMEs can improve, grow, and avail
According to SEBI, the following credit rating cheaper/faster loans.
agencies are registered and authorised to compute Infometrics Valuation and Ratings Pvt Limited
and share credit score/report with the financial This SEBI-registered, RBI-accredited credit rating
institutions and applicants. agency was founded by finance professionals,
Credit Rating Information Services of India former bankers, and administrative services
Limited personnel. It evaluates entities such as banks, non-
Credit Rating Information Services of India Limited banking financial companies, large corporates, and
(CRISIL), one of the oldest credit rating agencies, small and medium scale units (SMUs).
was set up in 1987. The agency stepped on to Benefits of Credit rating:
infrastructure rating in 2016. CRISIL has been Benefits of credit ratings from the point of view
operational in countries such as the USA, UK, of investors:
Poland, Hong Kong, China, and Argentina in 1. The investors can choose their investments
addition to India. on the basis of good credit ratings
India Ratings and Research Pvt Ltd. (Ind-Ra) 2. As the credit rating is done by professionals,
India Ratings and Research, a wholly-owned the investors can rely on the credit rating.
subsidiary of Fitch Group, provides accurate and 3. A comparative study between different
timely credit opinions on the country’s credit credit instruments enables the investors to
market. The firm covers corporate issuers, financial choose their investments.
institutions, managed funds, urban local bodies, 4. Even unknown securities could be purchased
project finance companies, and structured finance based on credit rating. It also enables the
companies. The headquarters is in Mumbai and the investors to go for a diversified investment
other branch offices are in Ahmedabad, Delhi, 5. Liquidity, safety and profitability are duly
Chennai, Bengaluru, Hyderabad, Pune, and Kolkata. considered through credit rating mechanism
ICRA Limited by investors
The Investment Information and Credit Rating Benefits of good credit ratings from the point of
Agency (ICRA), a joint venture of Moody’s and view of companies
Indian Financial and Banking Service Organisation 1. Companies will be able to raise funds from
was established in 1991. The organisation is known the market as their debt instruments are
for assigning corporate governance rating, backed by good credit rating
performance rating, mutual funds ranking, and more 2. Credit rating acts as a motivation for
CARE Limited companies to either improve their position or
Credit Analysis and Research Limited (CARE) is a maintain their existing position, if they are in
credit rating agency that is operational since April a higher level of credit rating.
1993. The agency provides a credit rating that helps 3. In the market, companies with a higher
corporates to raise funds for their investment rating will be in a position to provide better
requirements. Investors can make decisions based on liquidity for their credit instruments.
credit risk and risk-return expectations. In addition 4. When companies are raising funds in the
to the head office in Mumbai, the firm has regional overseas market, credit rating enables them
offices in New Delhi, Pune, Kolkata, Chandigarh, to mobilize more funds
Jaipur, Ahmedabad, Bengaluru, Chennai, 5. Good Credit rating will provide better
Coimbatore, and Hyderabad. security from the lenders’ point of view.
Brickwork Ratings India Pvt Ltd
9
Benefits of credit ratings from the point of view 3. Collection of receivables
of Regulating authorities 4. Protection against risk
1. The regulatory authorities can discipline 5. Credit management
financial institutions by insisting on good 6. Advisory services
credit rating before going for public issue Advantages of Factoring
2. By imposing various conditions in credit 1. Improves efficiency
rating, the financial soundness of the 2. Higher credit standing
companies is maintained. 3. Reduces cost
3. Good Credit rating also provides authority, 4. Additional source
responsibility and accountability to the 5. Advisory service
regulating authorities. 6. Acceleration of production cycle
FACTORING 7. Adequate credit period for customers
factoring refers to the agreement in which the 8. Competitive terms to offer
receivables are sold by a firm (client) to the factor Limitations of Factoring
(financial intermediary). The factor can be a 1. Factoring may lead to over-confidence in the
commercial bank or a finance company. Thus behaviour of the client. This results in
factoring may be defined as selling the receivables overtrading or mismanagement
of a firm at a discount to a financial organisation 2. There are chances of fraudulent acts on the
(factor). The cash from the sale of the receivables part of the client.
provides finance to the selling company (client) 3. Lack of professionalism and competence,
Objectives of Factoring resistance to change etc. are some of the
1. To relieve from the trouble of collecting problems which have made factoring
receivables so as to concentrate in sales and services unpopular.
other major areas of business. 4. Factoring is not suitable for small companies
2. To minimize the risk of bad debts arising on with lesser turnover, companies with
account of non-realisation of credit sales speculative business, companies having
3. To adopt better credit control policy. large number of debtors for small amounts
4. To carry on business smoothly and not to etc
rely on external sources to meet working 5. Factoring may impose constraints on the
capital requirements. way to do business.
FORFAITING
forfaiting means giving up the right of exporter to
the forfaitor to receive payment in future from the
Types of Factoring importer. It is a method of trade financing that
1. Recourse Factoring allows exporters to get immediate cash and relieve
2. Non-Recourse Factoring from all risks by selling their receivables (amount
3. Maturity Factoring due from the importer) on a ‘without recource’
4. Advance Factoring basis. This means that in case the importer makes a
default the forfaitor cannot go back to the exporter
5. Invoice Discounting to recover the money. Under forfaiting the exporter
6. Undisclosed Factoring surrenders his right to a receivable due at a future
7. Cross boarder factoring date in exchange for immediate cash payment, at an
Features (Nature) of Factoring agreed discount.
1. Factoring is a service of financial nature. Characteristics of Forfaiting
2. The factor purchases the credit/receivables 1. It is 100% financing without recourse to the
and collects them on the due date. exporter
3. factor is a financial institution 2. The importer’s obligation is normally
4. A factor specialises in handling and supported by a local bank guarantee
collecting receivables in an efficient manner. 3. Receivables are usually evidenced by bills of
5. Factor is responsible for sales accounting, exchange, promissory notes or letters of
debt collection, credit (credit monitoring), credit.
protection from bad debts and rendering of 4. Finance can be arranged on a fixed or
advisory services to its clients. floating rate basis.
Functions of a Factor 5. Exporter receives cash upon presentation of
1. Provision of finance necessary documents, shortly after shipment.
2. Administration of sales ledger Advantages of Forfaiting
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1. The exporter gets the full export value from
the forfaitor
2. It improves the liquidity of the exporter
3. It is simple and flexible
4. The exporter is free from many export credit
risks such as interest rate risk, exchange rate
risk, political risk, commercial risk etc.
5. The exporter need not carry the receivables
into his balance sheet.
6. It enhances the competitive advantage of the
exporter
7. There is no need for export credit insurance
8. It is beneficial to forfaitor also

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