INNOVATION IN BANKING AND INSURANCE

Presented by : Saurabh Shah*

TAAZA KHABAR*

UPDATES ON RATES*

ParticularsAs on 4th Dec ,2009Bank Rate6%Repo Rate4.75%Reverse Repo Rate3.25%CRR5.00%SLR25%INR/ 1USD46.72PLR11% - 12%Call Rates2.10% - 3.30%SENSEX17,189.31(+64.09)NIFTY5134.65(+0.44%)

CONTENTS*

S.NO.ParticularsRemarks1Evolution and Functioning of BanksSaurabh2Retail BankingPresentation / Saurabh3Financial ServicesSaurabh4DerivativesSaurabh5Credit RiskSaurabh6Technology in Banks and Housing FinanceDrop7Definitions, Nature and Functions of InsuranceSaurabh8Evolution of InsuranceSaurabh9Life InsurancePresentation10Corporate GovernanceSaurabh

SECTOR WISE DISTRIBUTION OF GDP (in percent)*

Chart1

18.517.817

19.519.218.5

626364.5

2006-07

2007-08

2008-09

Sheet1

2006-072007-082008-09

Agriculture18.517.817

Industry19.519.218.5

Services626364.5

To resize chart data range, drag lower right corner of range.

DEFINITION - BANKINGSection 5 (1) (b) of Banking Regulation Act defines banking as the accepting, for the purpose of lending or investment, of deposits of money from public, repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise.

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INDIAN BANKING SYSTEMNon-Scheduled BanksScheduled BanksScheduledCommercialBanksScheduledCo-operativeBanksPublicSectorBanksScheduledUrban Co-op.BanksRegionalRuralBanksPrivateSectorBanksForeign Banks inIndiaNationalizedBanksSBI & itsAssociatesScheduledState Co-op.Banks*

EARLY PHASE FROM 1786 TO 1949 OF INDIAN BANKS : PHASE 1The General Bank of India was set up in the year 1786

The East India Company established Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent units and called it Presidency Banks.

These three banks were amalgamated in 1920 and Imperial Bank of India was established which started as private shareholders banks

Imperial Bank acted as banker to government until the establishment of RBI in 1935 *

CONTD: PHASE 1The Reserve Bank of India began operations as private shareholders' entity on April 1, 1935, which makes it 74 years old. It was nationalized on January 1, 1949.

To streamline the functioning and activities of commercial banks, the Government of India came up with The Banking Companies Act, 1949 which was later changed to Banking Regulation Act, 1949

Reserve Bank of India was vested with extensive powers for the supervision of banking in India as the Central Banking Authority.

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NATIONALIZATION OF INDIAN BANKS AND UP TO 1991 PRIOR : PHASE 2

Imperial Bank was nationalized in under State Bank of India Act 1955 which led to the emergence of State Bank of India and marked the beginning of first phase of nationalization

Seven banks forming subsidiary of State Bank of India was nationalized in 1960 To extend banking facilities on a large scale specially in rural and semi-urban areas. To act as the principal agent of RBI To handle banking transactions of the Union and State Governments all over the country and to help to pursue broad economic objectives *

CONTD..PHASE2SBI along with its associate banks account for 20% of total branches of all commercial banks in India

In1969, major process of nationalization was carried out. 14 major commercial banks in the country were nationalized. Second phase of nationalization was carried out in 1980 with six more banks.

This step brought 80% of the banking segment in India under Government ownership.

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NATIONALIZATION OF COMMERCIAL BANKSOn July 19, 1969, 14 commercial banks got nationalized ObjectivesRemoval of control by a fewProvision of adequate credit for agriculture and small industry and exportGiving a professional bent to managementEncouragement of a new class of entrepreneurs The provision of adequate training as well as terms of service for bank staff*

14 BANKS THAT WERE NATIONALIZED Central Bank of India Bank of Maharashtra Dena Bank Punjab National Bank Syndicate Bank Canara Bank Indian Bank Indian Overseas Bank Bank of Baroda Union Bank Allahabad Bank United Bank of India UCO Bank Bank of India

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MAJOR MILESTONES IN BANKING HISTORY1949 : Enactment of Banking Regulation Act

1955 : Nationalization of State Bank of India 1960 : Nationalization of SBI subsidiaries. 1969 : Nationalization of 14 major banks 1971 : Creation of credit guarantee corporation

1975 : Creation of regional rural banks. 1980 : Nationalization of six banks with deposits over 200 crore.

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NEW PHASE OF INDIAN BANKING SYSTEM REFORMS AFTER 1991-PHASE3

This phase has introduced many more products and facilities in the banking sector in its reforms measure

In 1991, under the chairmanship of M Narasimham, a committee was set up by his name which worked for the liberalization of banking practices

The country is flooded with foreign banks and their ATM stations.

Efforts are being put to give a satisfactory service to customers Phone banking and net banking is introduced. The entire system became more convenient and swift. *

BANKING SECTOR REFORMSMeasures for liberalization, like dismantling the complex system of interest rate controls, eliminating prior approval of the Reserve Bank of India for large loans, and reducing the statutory requirements to invest in government securitiesMeasures designed to increase financial soundness, like introducing capital adequacy requirements and other prudential norms for banks and strengthening banking supervisionMeasures for increasing competition like more liberal licensing of private banks and freer expansion by foreign banks. *

TYPES OF BANKSCommercial BanksCommercial banks operating in India may be categorised into public sector, private sector and Indian or foreign banks depending upon the ownership, management and control.They may also be differentiated as scheduled or non-scheduled, licensed or unlicensed. A commercial bank is run on commercial line that is to earn profits unlike a cooperative bank which is run for the benefit of a group of members of cooperative body e.g. a housing co-operative society. The commercial banks are spread across the length and breadth of the country ad cater to the short term needs of industry, trade and commerce and agriculture unlike the developmental banks which focus on long term needs.

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FUNCTIONS OF COMMERCIAL BANKS*

TYPES OF LENDING*

SECONDARY FUNCTIONSCollection of Cheques Periodic Payment Remittances Other Collections

Issue of Letter of Credit Issue of Travellers Cheque Cash CreditDebit Card ATM E-Banking Safe Deposit Vault Credit Information Bank Guarantee

Agency FunctionsUtility Functions*

SCHEDULED BANKSScheduled Banks are those which are included in second scheduled of Banking Regulation Act 1965, other are non scheduled banks. To be included in scheduled category a bank (i) must have paid up capital and reserves of not less than Rs 5 lakhs (ii) must also satisfy the RBI that its affairs are not conducted in a manner detrimental to the interests of its depositors. Scheduled banks are required to maintain a certain amount of reserves with the RBI, the in return enjoy the facility of financial accommodation and remittance facilities at concessional rates from the RBI*

FOREIGN BANKSForeign Commercial Banks are the branches in India of the joint stock banks incorporated abroad. Besides financing the foreign trade, they undertake banking business within the country as well. There are around 40 foreign banks in India. Standard Chartered Grind lays is the bank with the largest branches in India.Foreign banks have brought latest technology and latest banking practices in India. They have helped made Indian Banking system more competitive and efficient.*

PRIVATE BANKSPrivate Bank is a bank registered as a public limited company under the Companies Act 1956.The RBI may on merit grant a license under the Banking regulation Act 1949 for such a bank. The banks may also be included in Schedule II of the RBI at the appropriate time. While granting a license, preference may be given to those banks the headquarters of which are proposed to be located in a centre which does not have the headquarters of any other bank.

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NON-SCHEDULED BANKS

Those banks which are not included in the second schedule of the Banking Regulation Act 1965 are termed as non scheduled banks. Usually they are small sized institutions which restrict their activities to local areas. Their paid up capital and reserves do not aggregate up to more than Rs 5 lakhs. Their banking activities are also limited e.g. they cannot deal in foreign exchange. The classification of Indian commercial banks into scheduled and non scheduled banks had significance prior to nationalisation but now almost all commercial unscheduled banks have been weeded out.

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REGIONAL RURAL BANKS(RRBS)

RRBs are established under the Regional Rural Bank Act 1976 having a minimum capital of Rs 5 crore in business of (1)granting loans and advances, particularly to small and marginal farmers and agricultural labourers, whether individually or in groups, and to co-operative societies etc

(2)granting of loans and advances particularly to artisans, small entrepreneurs and persons of small means engaged in trade commerce or industry or other productive activities

Of the issued capital 50% is subscribed by the central government, 15% by the State Government and 35% by the sponsor bank.

Apart from subscribing to the share capital, sponsor banks also provide managerial assistance, help in recruitment and training of personnel etc

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CO-OPERATIVE BANK

Co-operative Bank are only partial financial intermediaries which are engaged in financing rural and agriculture development. Co-operative banking is small scale banking carried on a no profit, no loss basis for mutual cooperation and help. They were conceived to supplant money lenders and indigenous bankers by providing adequate short term and long term institutional credit at reasonable rates of interest.

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RESERVE BANK OF INDIAThe Reserve Bank of India began operations as private shareholders' entity on April 1, 1935, which makes it 76 years old. It was nationalized on January 1, 1949.To streamline the functioning and activities of commercial banks, the Government of India came up with The Banking Companies Act, 1949 which was later changed to Banking Regulation Act 1949.Reserve Bank of India was vested with extensive powers for the supervision of banking in India as the Central Banking Authority.

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FUNCTIONS OF RBIMonetary Authority : Formulation and Implementation of monetary policies.Objective-Maintaining price stability and ensuring adequate flow of credit to the productive sectors. Regulator and supervisor of the financial system

Issuer of Currency : Issues and exchanges or destroys currency and coins not fit for circulation. Objective: to give the public adequate quantity of supplies of currency notes and coins and in good quality.

Developmental rolePerforms a wide range of promotional functions to support national objectives.

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Regulator and supervisor of the financial system: Prescribes broad parameters of banking operations within which the country's banking and financial system functionsObjective - maintain public confidence in the system, protect depositors' interest and provide cost-effective banking services to the public.

Manager of Foreign Exchange Manages the Foreign Exchange Management Act, 1999. Objective - to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India.Due to free mobility of capital, there is inter linkage between domestic and international financial markets.

FUNCTIONS OF RBI*

Banker to the government :RBI performs merchant-banking function for the central and the state governments, also acts as their banker.It accepts money in deposit, permits withdrawal of cash by cheque, receives/collects payments to the Governments and transfers funds to various places in the country for the use of the Govt. Borrows on behalf of the Governments.

Banker to banks : RBI maintains banking accounts of all scheduled banks.The Reserve Bank of India acts as the bankers' bank. All the SCBs have to necessarily maintain their Current Accounts with the RBI for maintaining CRR as well as for smooth functioning of Clearing House functions. RBI also lends to the banks through Repos transactions with them.

FUNCTIONS OF RBI*

DEPOSIT ACCOUNTThis is a core activity of the bank. Public deposits comprise the major proportion of a bank working funds which are used primarily to make loans and advances and to purchase securities. The size of deposit is a fair reflection of the confidence, reposed by the public in that bank. The growth and propensity of a bank depends on how they are managed to maximize profits. Banks accept various types of deposits, which are generally categorized as demand or time deposits

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SAVING ACCOUNTSuch accounts are usually maintained by people who wish to save a part of the current income to meet the future needs and also to earn some interest thereon. The banker pays interest against these accounts to the customers though at a lower rate than in case of fixed deposits. Normally, the minimum amount to open an account in a nationalized bank is Rs 100. If cheque books are also issued, the minimum balanceof Rs 500 has to be maintained. However in some private or foreign bank the min.bal.is Rs 500 or more and can be up Rs. 10,000. A Savings account can be opened either individually or jointly with another individual.There are restrictions on the number of withdrawals to be made out.

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Such accounts are opened by business man/ corporate who do not want any restriction on the operation of their account and also wants to enjoy the available overdraft facility. It is running and active account and the banker is under obligation to repay these deposits only when the customer demands payment through a cheque, card, otherwise. As this accounts is a running account, this account does not provide any interest and provides no limit on the number of withdrawals from this account. A min. of Rs. 5000 has to be maintained in this account.

CURRENT ACCOUNT*

AXIS BANK NORMAL CURRENT ACCOUNT ( AS ON AUG 2008)

At a Monthly Average balance of Rs10,000 this account takes you into the all new world of banking.At-Par Cheque FacilityEnjoy the benefits of payable 'At-Par' cheque book at very nominal charges. Issue cheques payable at par at any of our branches / outlets, presently 575 across the country.Inter Branch Cash Deposit FacilityDeposit cash upto Rs. 50,000 per day at a remote branch for instant credit into your account.Home Branch Cash WithdrawalFree upto 50 transactions for unlimited amount per month.*

AXIS BANK NORMAL CURRENT ACCOUNT (AS ON AUG 2008)Demand DraftsAvail Demand Drafts at very nominal charges. You can issue demand drafts at any of our branches / outlets, presently 575 and a wide network of correspondent bank locations.Outstation Cheque CollectionAvail outstation cheques.Local Cheque Deposit FacilityDeposit cheques at any Axis Bank branch and get the credit into your account.

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RECURRING DEPOSIT ACCOUNT In this account a certain fixed amount is to be deposited by the account holder every month for a specified period of time.This account inculcates the habit of regular savings among people. The interest allowed on this account is more than savings account but less than Fixed deposit account. No withdrawals are allowed from this account till maturity.*

FIXED DEPOSIT ACCOUNTIn this account a fixed amount is deposited in a bank for a specified period. The objective of this account is to encourage people to deposit surplus funds and earn higher rate of interest. Banks pay maximum rate of interest on fixed deposit since these amount can be reinvested by the banks at much higher rate. Banks provide loan facility to FD account holders to a maximum limit of 90% of the FD amount @ 2% interest.*

DEMAT ACCOUNT

Dematerialization is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form and credited to the investors account with his Depository Participant (DP).

It is introduced by the commercial banks to keep the record of the shareholdings of the customer regarding the opening stock and the closing stock of the shares.*

FOREIGN DEPOSIT ACCOUNT

A bank normally offers the following foreign accountsNRO Account (Non Resident Ordinary)NRE Account (Non Resident External)NRNR Account (Non-Resident Non Repartriable)FCNR Account (Foreign Currency Non Resident)

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NRO ACCOUNT (NON RESIDENT ORDINARY)

Indian national residing outside India (Other than Nepal & Bhutan) for employment etc

Intention to stay outside for a indefinite period

Maintained in Savings, Current and Fixed Deposits Account in India.

Funds in these accounts are non repatriable, cannot be remitted abroad or transfer to NRE account

Interest on such deposits are taxable

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NRE ACCOUNT (NON RESIDENT EXTERNAL)

Indian national residing outside India (Other than Nepal & Bhutan) for employment etc

Deposits designated in rupees

Maintained in Savings, Current and Fixed Deposits account in India

Intention to stay outside for a indefinite period

Funds in these accounts are repatriable

Interest on these account is tax free*

NRNR ACCOUNT (NON-RESIDENT NON REPATRIABLE)

In this scheme accounts are to be opened in Indian Rupees with the authorized dealers.Authorized dealers are free to fix the maturity period of the deposits between 6 months and 3 years.Individual can withdraw their money at a premature stage.On maturity the principal amount of deposit will not qualify for repatriation outside at any time.Interest accrued is allowed for repatriation.

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FCNR ACCOUNT (FOREIGN CURRENCY NON RESIDENT)

Account in foreign currencies

Can be maintained by NRIs

Permitted to be maintained in Pound Sterling, USD, Deutshe Mark and Japanese Yen

Fixed Deposits of 6 months and above and up to 3 years

Freely Repatriable*

Liabilities of BankShare CapitalReserve FundsDeposits: Constitute 92% of total liabilities of all scheduled commercial banksDemand Deposits Term Deposits

BANKS BALANCE SHEET AND PORTFOLIO MANAGEMENT*

OTHER LIABILITIES OF BANKSAmong other liabilities demand and time deposits from banks amount to three to four percent of total liabilities andBorrowing from other Banks amount to another one or Two percentBorrowings from RBI since 1960s till 1990 have varied between 2.49 and 5.69 percent. However at present they are negligibleApart from RBI, Banks also use non-deposit resources such as borrowings from NABARD, EXIM Bank and bill rediscounted with Financial Institutions*

ASSETS Cash in Hand and Balances with RBIInvestments In government and other approved securities (SLR Securities)Non- SLR Securities( CP, Units of Mutual funds, shares and debentures of PSUs) Private corporate sector.Bank credit : Types of advances provided are loans, cash credit, overdrafts, demand loans, purchase and discounting of commercial bills and installment or hire-purchase credit.*

OFF BALANCE SHEET ACTIVITIESTransactions not appearing on balance sheet are called off balance sheet items.In India the off balance sheet activities of commercial banks include forward exchange contracts, loan commitments guarantees such as Letter of credit whereby bank agrees to pay a specified amount on presentation of evidence of default.Banks interest in saving capital and avoiding reserve requirements is one of the reason for the proliferation of these activities.

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CHARGEIn lay mans term charge simply means individual legal claim. Creditors have first charge, second charge ,pari-passu charge depending upon encumbrance.

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This refers to create a charge over immovable property like Land & Building as a collateral(security).As per sec 58 of the transfer property act 1882 defines mortgage as transfer of an interest in specific immovable property for the purpose of securing money.The transferor is called mortgagor the transferee is called mortgagee.Mortgage deed is the written legal document signed between both parties by which transfer is affected.MORTGAGE*

HYPOTHECATIONHypothecation is another method of creating charge over movable assets like current assets(e.g. book debts, raw material )This method of lending is used by the banks for the purpose of working capital requirement.Neither possession nor ownership of the goods is transferred to the creditor but equitable charge is created at later stage. The goods remains in the possession of the borrower.The charge of hypothecation is converted into pledge and the banker or hypothecator enjoys the power and the rights of the pledge*

LIENLien means to keep or retain the goods belonging to others as a security for the recovery of the reward.There are 2 types of Lien Particular Lien available against specific goods and not all goods.General Lien available against all the goods whether present or past.As per sec 171,Indian contract bankers are given right of the general lien on the banker.The ownership of the goods is with customer and not with the banker.*

PLEDGEGoods delivered to another as a security for money borrowed is called PledgeIt is one type of Bailment. Bailor in this case called the Pledgor and the Bailee is called PledgeeIllustration A borrows Rs. 4000 against security of his jewellery. The bailment of jewellery is a pledge.Pledge can be affected only of movable property and there is only transfer of possession and not that of ownership.

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EVOLUTION OF BANCASSURANCEInsurance Regulatory and Development Authority (IRDA) Act,1999 permitted commercial banks to enter into Insurance business.RBI has issued certain guidelines in this context such as :Min net worth of Rs 500 croresSatisfy the criteria for capital adequacy, profitability, NPA levelMaximum equity holding by banks normally 50% in Joint venture with risk participationBanks not eligible for JV can participate without risk participation up to 10% of net worth or Rs 50 crore whichever is lower. *

In India Banking and Insurance sector are regulated by 2 different entities RBI and IRDA.IRDA has also issued certain guidelines :Each bank that sells insurance must have chief insurance executive to handle all the insurance activities.All the people involved in selling should undergo mandatory training and institute accredited by IRDA.Commercial banks, including cooperative banks and RRBs may become corporate agents for one insurance company. Banks cannot become insurance brokers.EVOLUTION OF BANCASSURANCE*

Selling Insurance Products through Banks

MEANING*

TIE-UPS IN BANCASSURANCE*

INSURANCEBANKS

HDFC Standard Life Insurance Co.UNION Bank of India.

Birla Sun Life InsuranceHDFC Bank, Deutsche Bank etc.

ICICI Prudential Life Insurance Co.ICICI Bank, Citibank, etc

Life Insurance Corporation (LIC)Centurion Bank, Oriental Bank of Commerce, etcSBI Insurance CoState Bank of India, Associate Bank

ADVANTAGES TO BANKS Increased income to banks in form of revenue.

Infrastructure Costs. a) Distribution cost b) Operation Cost

Creating a Universal Banking platform with wider Financial Services.

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ADVANTAGES TO INSURANCE COMPANIESChannel diversification (revenue).Infrastructure and Administrative costsAchieve the geographical reach within minimum time & cost. Wider range of products.

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ADVANTAGES TO CUSTOMERS

One-stop Shop.Convenience.Easy tracking of insurance products along with banking services.

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Currently India contributes 10% of the total premium collected across the whole Asias Life and Non-Life Insurance sector.At it is expected to contribute around 18% by 2010.*

Chart1

18

16

16

14

10

9

9

8

PERCENTAGE

Sheet1

COUNTRIESPERCENTAGE

Malaysia18

Taiwan16

Hong Kong16

Singapore14

India10

Indonesia9

Thailand9

Korea8

QUIZ !!!!!*

FACTS OF BANKS IN INDIA1) The first bank in India to be given an ISO Certification Canara Bank

2) The first bank in Northern India to get ISO 9002 certification for their selected branches Punjab and Sind Bank

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3) The first Indian bank to have been started solely with Indian capital Punjab National Bank

4) India's oldest, largest and most successful commercial bank, offering the widest possible range of domestic, international and NRI products and services, through its vast network in India and overseas. State Bank of India*

5) India's second largest private sector bank and is now the largest scheduled commercial bank in India The Federal Bank Limited

6) Bank which started as private shareholders banks, mostly Europeans shareholders. Imperial Bank of India

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DERIVATIVESIn recent years, financial markets have developed many new products whose popularity has become phenomenal.Derivative products initially emerged, as hedging devices against fluctuations in commodity prices.A derivative is an instrument whose value depends on the values of one or more basic underlying variables called bases. The underlying variables are forex, equity, commodity, bonds, debentures etc.Illustration : Wheat farmers may wish to sell their harvest at a future date to eliminate the risk of a change in prices by that date. The price of this derivative is driven by the spot price of wheat which is the underlying. *

DERIVATIVES In derivative market when enter into a contract to buy or sell particular underlying:Long position means to have a buy position for particular stockShort position means to have a sell position for particular stockBid price (buyers price) is the rate/price at which there is a ready buyer for the stock.Ask price (sellers price) is the rate/ price at which there is seller ready to sell his stock. *

TERMINOLOGIES RELATED TO FUTURES.

Spot price: the price at which an asset trades in the spot market.Futures price: the price at which the futures contract trades in the futures market.Initial margin: the amount that must be deposited in the margin account at the time a futures contract is first entered into is known as initial margin.Maintenance margin: This is somewhat lower than the initial margin. This is set to ensure that the balance in the margin account never becomes negative.

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Marked-to-market (M to M): in the futures market, at the end of each trading day, the margin account is adjusted to reflect the investors gain or loss depending upon the futures closing price. This is called marked-to-market.TERMINOLOGIES RELATED TO FUTURES. *

OPTIONS TERMINOLOGYOption price/premium: Option price is the price which the option buyer pays to the option seller. It is also referred to as the option premium.Strike price: The price specified in the options contract is known as the strike price or the exercise price.

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OPTIONS TERMINOLOGYIn-the-money option:Spot price > Strike Price in case of call option.Spot price < Strike Price in case of put option.If exercised immediately it would lead to positive cash flow.E.g.: Spot value of Nifty is 2157. An investor buys a one-month nifty 2140 call option for a premium of Rs.7. the option is?

Out-of-the-money option:Spot price < Strike price in case of call option.Spot price > Strike price in case of put option.If exercised immediately it would lead to negative cash flow.E.g.: Spot value of Nifty is 2140. An investor buys a one-month nifty 2157 call option for a premium of Rs.7. the option is?

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DerivativesForwardsFuturesSwapsOptions KINDS OF DERIVATIVES*

FORWARD CONTRACT A forward contract is a customized contract between two entities, where settlement takes place on a specific date in the future at todays pre-agreed price. No cash is exchanged when the contract is entered into.

Illustration Shyam wants to buy a TV, which costs Rs 10,000 but he has no cash to buy it outright. He can only buy it 3 months hence. He, however, fears that prices of televisions will rise 3 months from now. So in order to protect himself from the rise in prices Shyam enters into a contract with the TV dealer that 3 months from now he will buy the TV for Rs 10,000. What Shyam is doing is that he is locking the current price of a TV for a forward contract. The forward contract is settled at maturity. The dealer will deliver the asset to Shyam at the end of three months and Shyam in turn will pay cash equivalent to the TV price on delivery.

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FEATURES OF FORWARD CONTRACTThey are bilateral contracts and hence exposed to counterparty risk.Each contract is custom designed, and hence is unique in terms of contract size, expiration date and the asset type and quality.The contract price is generally not available in public domain.On the expiration date, the contract has to be settled by delivery of the asset.If the party wishes to reverse the contract, it has to compulsorily go to the same counter-party, which often results in high prices being charged.

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FUTURES CONTRACTA future contract is similar to Forward account.A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Futures contracts are special types of forward contracts in the sense that the former are standardized exchange-traded contracts.Index futures are all futures contracts where the underlying is the stock index (Nifty or Sensex) and helps a trader to take a view on the market as a whole.*

FEATURES OF FUTURES CONTRACT

The standardized items in a futures contract are: Quantity of the underlyingQuality of the underlyingThe date and the month of deliveryThe units of price quotation and minimum price changeLocation of settlement

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FORWARDS V/S FUTURES*

ForwardsFuturesOTC in natureTraded on organized stock exchangeContract terms are customizedContract terms are standardizedRequires no margin paymentRequires margin paymentSettlement happens at end of periodFollows daily settlementOne delivery date which is specified Range of delivery datesSome credit riskNo credit riskCounterparties have to take exposureClearing house takes the exposure on both the parties

TYPES OF FUTURESThe different types of Futures are but different facets of the same Futures.CurrenciesCommodities.Interest RatesStocksIndex*

OPTIONSOption, as the word suggests, is a choice given to the investor to either honor the contract; or if he chooses not to walk away from the contract.An option gives its owner the right but not the obligation to purchase or sell an asset on or before some date in future.The date when option expires is known as the exercise date, the expiration date or the maturity date.The price at which asset can be purchased or sold is known as strike price. *

TYPES OF OPTIONSCall Option is the right, but not the obligation, to buy the underlying asset by a certain date for a certain price.Put Option is the right, but not the obligation, to sell the underlying asset by a certain date for a certain price.

American options: are options that can be exercised at any time up-to the expiration date. Most exchange-traded options are American.European options: are options that can be exercised only on the expiration date itself.

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SWAPSSWAPS have been termed as private agreement between the two parties to exchange cash flows or payments which will take place in the future.

SWAPS is also called as financial swap in global financial market.

There are different types of swaps such as interest rate swaps, currency swaps, equity swaps etc.

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FEATURES OF SWAPA swap is nothing but the combination of Forwards, so it has all the properties of forward contract.It requires 2 parties with equal and opposite needs.There is no exchange of principal on the other hand fixed interest is exchanged for floating rate of interest.Swaps are in the nature of long term agreement and they are just like long dated forward contracts.

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DERIVATIVES AND BANKSDerivatives are used by banks to hedge risks, to gain access to cheaper money and to make profits.Banks also help customers to cope with financial market volatility by offering various derivatives security services such as forward contract, swaps, options etcThese activities are off balance sheet activities for which capital requirement is low.

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FINANCIAL SERVICESFinancial intermediaries provide key financial services such as merchant banking, leasing, hire purchase, credit-rating, and so on which indirectly deals with the management of money.Financial services rendered by the financial intermediaries bridge the gap between lack of knowledge on the part of investors and increasing sophistication of financial instruments and markets. These financial services are vital for creation of firms, industrial expansion, and economic growth.

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CLASSIFICATION OF FINANCIAL SERVICE INDUSTRY *

SCOPE OF FINANCIAL SERVICESFinancial services covers wide range of activities. They can be broadly classified into:1) Traditional activities Fund based activities Dealing in foreign exchange market activitiesInvolving in equipment leasing ,hire purchase, venture capital, seed capital etcUnderwriting of or investment in shares, debentures, bonds etc of New issue market.Dealing in secondary activitiesParticipating in Money market instruments such as CPs, CDs, T-bills etc

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SCOPE OF FINANCIAL SERVICESNon Fund based activities This activity is also called as Fee based activity e.g. After sales serviceProject finance is arrangement of funds from FIs for the new project or new venture. Funds are also arranged for working capital requirements.Assisting in the procedural clearances from government.Management of pre and post issue of capital through IPO. e.g. Moratorium period 2) Modern ActivitiesManagement of portfolio of large public sector organizationActing as trustees to Debenture holders Planning for Merger and AcquisitionsHedging of risk due to exchange risk, interest rate risk, economic risk and political by using swaps and derivative products.

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NEW FINANCIAL PRODUCTS AND SERVICESMerchant BankingOnly a body corporate other than a non-banking financial company shall be eligible to get registration as merchant banker. Without holding a certificate of registration granted by the Securities and Exchange Board of India, no person can act as a merchant banker. The validity period of certificate of registration is 3 years from the date of issue.

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MERCHANT BANKINGManaging of public issue of capital such as determining the type of securities to be issued

Draft of prospectus and application formsAppointment of Registrar to deal with share application and transfersListing of SecuritiesArrangement of underwritingPlacing of issuesSelection of brokers and bankers to the issuePublicity and advertising agent

Private Placement of Securities*

LOAN SYNDICATIONThis is more or less Consortium BankingMerchant bankers arrange to tie up loans for their clients. This takes place in a series of steps. Firstly, they analyze the pattern of the clients cash flows, based on which the terms of the borrowings can be defined. Then the merchant banker prepares a detailed loan memorandum, which is circulated to various banks and financial institutions and they are invited to participate in the syndicate ( joining together). The banks then negotiate the terms of lending on the basis of which the final allocation is done.

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MUTUAL FUNDThe value associated with each of these units is known as (NAV). Mutual fund issue securities known as units to the investors known as unit holders in accordance with quantum of money invested by them.

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STRUCTURE OF MUTUAL FUNDMutual is a Trust*

WORKING OF MUTUAL FUNDPool their moneyInvest inGeneratesPassed back to*

TYPES OF MUTUAL FUNDS*

OPEN ENDED SCHEMES

Accepts funds from investors on continuous basis.Repurchase facility available. No listing on the stock exchange.Better liquidity due to continuous repurchase. Sale and Repurchase based on NAV *

CLOSED ENDED SCHEMESSchemes are opened for specified time period. Corpus normally does not change throughout the year. Such schemes are normally listed in the stock exchange. Otherwise repurchase facility provided. Liquidity normally at the time of redemption. Long term investment strategies depending on the life of the scheme. Market price may be below or above par.

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GROWTH FUNDSThe aim of growth funds is to provide capital appreciation over the medium to long- term.

Such schemes normally invest a major part of their corpus in equities. Such funds have comparatively high risks.

These schemes provide different options to the investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences.

The mutual funds also allow the investors to change the options at a later date.

Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of time.

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INCOME FUNDSThese funds provide regular and steady income to investors.Such schemes generally invest in fixed income securities such as bonds, corporate debentures and Government securities. Income Funds are ideal for capital stability and regular income.

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BALANCE FUNDSBalanced funds work particularly well during a downturn in equity markets.These funds invest both in equity shares and fixed-income-bearing instruments (debt) in some proportion.While selecting a balanced fund, choose the conventional type 60:40 (equity: debt) with a steady track record. Make sure the fund manager sticks to the 60:40 mandates even during bullish times, when most balanced fund managers succumb to the temptation of over-allocation to equities for higher growth.They are ideal for medium to long-term investors who are willing to take moderate risks.

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MONEY MARKET MUTUAL FUNDSThese mutual funds would invest exclusively in money market instruments.RBI introduced to provide an additional short- term avenue for investment and bring money market within reach of individuals.

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INDEX FUNDSIndex Funds replicate the portfolio of a particular index such as the BSE Sensitive index, S&P NSE 50 index (Nifty), etc these schemes invest in the securities in the same weight age comprising of an index. NAVs of such schemes would rise or fall in accordance with the rise or fall in the index, though not exactly by the same percentage.There are also exchange traded index funds launched by the mutual funds which are traded on the stock exchanges.

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ADVANTAGES OF MUTUAL FUNDSDiversificationMutual funds invest in a number of companies across a broad cross-section of industries and sectors. This diversification reduces the risk because seldom do all stocks decline at the same time and in the same proportionOne achieves this diversification through a mutual fund with far less money than you can do on your own.

Professional managementMutual funds provide the services of experienced and skilled professionals, backed by a dedicated investment research team that analyses the performance and prospects of companies and selects suitable investments to achieve the objectives of the scheme.

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ADVANTAGES OF MUTUAL FUNDSReturn potentialOver a medium to long-term, mutual funds have the potential funds to provide a higher return as they invest in a diversified basket of selected securities.

Reduction in transaction costMutual funds are a relatively less expensive way to invest as compared to directly investing in the capital markets because the benefits of scale in brokerage, custodial and other fees translate into lower costs for investors.

FlexibilityThrough features such as regular investment plans, regular withdrawal plans and dividend reinvestment plans we can systematically invest or withdraw funds according to our needs and convenience.

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ADVANTAGES OF MUTUAL FUNDSChoice of schemesMutual funds offer a family of schemes to suit our varying needs over a life time.

LiquidityIn open-end schemes, the investor gets the money back promptly at net asset value related prices from the mutual fund. In the closed-end schemes, the units can be sold on a stock exchange at the prevailing market price or the investor can avail of the facility of direct repurchased at NAV related prices by the mutual fund.

Well regulatedAll mutual funds are registered SEBI and they function within the provisions of strict regulations designed to protect the interests of investors.*

HIRE PURCHASE V/S LEASE*

LeaseHire PurchaseOwnershipIt rest with lessor. It rest with buyer (hirer)Methods of FinancingIt is a method of financing business assets.It is a method of financing business assets and consumer articles.Salvage valueLessee not the owner does not enjoy the salvage value of the assets.Hirer the owner of the assets enjoys salvage value.TransactionIn this transaction we rent the goods.In this transaction we buy the goods.DepreciationDepreciation & investment allowances cannot be claimed by the lessee. Depreciation & investment allowances can be claimed by the hirer.

Tax benefitsThe entire lease rental is tax deductible expense.Only the interest component of the hire purchase installment tax deductible

VENTURE CAPITAL*

CORPORATE GOVERNANCE*

Corporate Governance and Responsibility issues have come into limelight in India since 1990s because of major corporate debacles and scandals.In nineties immediately after liberalization and opening up of the economy there was a spate of public issues by a large number of companies.Corporate governance has become a buzz word these days mainly due to Globalization. WHY CORPORATE GOVERNANCE???*

WHAT IS CORPORATE GOVERNANCE???The process and responsibility of the Board of Directors in ensuring the management of a corporation conducts business in such a way as to meet the expectations of its various stakeholders

Besides financial returns for shareholders this also includes impact on employees environment and community at large.

According to Cadbury Committee Corporate Governance is a system by which Companies are directed and controlled.*

CONCEPTCorporate governance calls for 3 factors: *

GOODCOMPANY

Excellent Products &ServicesGREATCOMPANY

Excellent Products/services&Makes the world a better place*DIFFERENCE

IMPORTANCE OF CORPORATE GOVERNANCEAs we are increasingly moving towards open and market driven economic systems, a number of companies catering to international markets These companies are required to comply with enhanced disclosure and stringent listing requirements.Institutional investors, both foreign and domestic are becoming important players in the stock market. They are increasingly demanding more information and transparency in operations No. of International events (like joint ventures, mergers, takeovers) are taking place so it is required that proper corporate governance practices should be followed. E.g. Enron and Satyam scandal

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COMMITTEES OF THE BOARDAudit committee is the link between the Board and External Auditors. It reviews the interim and final accounts.

Remuneration committee It chalks out the remuneration or the package of the Directors or top level managers.

Nomination committee These Committee is usually set up to select the new Non executive directors.*

DEFINITIONS, NATURE AND FUNCTION OF INSURANCE*

INSURANCEInsurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for a premium, and can be thought of a guaranteed small loss to prevent a large, possibly devastating large loss.

Insurance isPray for the BestAnd be prepared for the WORST

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HISTORICAL BACKGROUNDOriental Life Insurance Company was started by Europeans in Kolkata in 1818 to cater to the needs of European community.Discrimination among the life of foreigners and Indians with higher premiums being charged for the latter.It was only in the year 1870, Bombay Mutual Life Assurance Society, the first Indian insurance company covered Indian lives at normal rates.The era was however dominated by foreign insurance players like Albert Life Insurance, Royal Insurance, Liverpool and London Globe insurance.The oldest existing insurance company in India is National Insurance Company Ltd, which was founded in 1906 and is doing business even today.

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RELATED ACTS The Insurance Act, 1938

Life Insurance Corporation Act, 1956

General Insurance Business (Nationalization) Act, 1972

IRDA ACT, 1999*

ESSENTIAL OF CONTRACT OF INSURANCEAgreement should be between 2 competent partiesAgreement must be in writing and parties must give free consent.It should not be a bet and an event must involve some amount of uncertainty.Risk should be not very small and should be capable of mathematical estimation to fix the premium.*

ROLES OF INSURANCEProvide protectionDiversification of riskProvide certaintyPrevention of lossesMeans of saving & investmentRisk free tradeLarge number of products

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RELATION Economy growthStandard of living of peopleincreasesAssets of people and Business enterprise increaseDemand for General insurance increases Demand for Life insurance increasesDemand for new types of insurance products increases*

PRINCIPLES OF INSURANCEPrinciples of Utmost good faith - It states that insurance contract must be made in absolute good faith on the part of both the parties.The insured must give insurer complete, true and correct information about the subject matter of the insurance.Material fact should not be hidden. This principle is applicable to all types of insurance contracts.Insurance is for protection and not for profit.*

Principle of Insurable Interest A person must have physical existence of the object of insurance .In simple words insurer must suffer from some kind of Financial loss by the damage to the subject matter of insurance.Ownership is the most important test of Insurable interest. Insurance contracts without insurable interest is void.Insurable interest is not a sentimental concept but a pecuniary interest.

*PRINCIPLES OF INSURANCE

Principle of Indemnity This is one important principle of insurance.This principle suggests that insurance contract is to protect and not to earn profit.Indemnity means security against loss.The amount of compensation in the insurance contract is limited to the amount assured or the actual loss whichever is less. Amount of compensation on the claim will be less than the insurable interest. *PRINCIPLES OF INSURANCE

Principle of Subrogation It is an extension and corollary of the principle of indemnity.It states that once the full compensation is paid by the insurance company all the rights of the insured is transferred to the insurer.The assured will not be able to keep the damaged property because he will realize more than actual loss suffered. This principle prevents the insured from making profit out of loss. In case of partial compensation paid no such rights are exercised by the insurance company.*PRINCIPLES OF INSURANCE

Principle of Contribution There is no restriction as to the number of times the property can be insured.On the occurrence of the loss only the amount of actual loss can be realized from one insure or all the insurers together. This principle is however is not applicable to life insurance contract.

*PRINCIPLES OF INSURANCE

Mitigation Loss According to this principle every insured should take all the necessary steps to minimize the loss.

Risk must attach The subject matter should be exposed to risk. E.g. goods placed in godown cannot take marine insurance policy. They have to be insured against fire or theft. *PRINCIPLES OF INSURANCE

Causa Proxima It means when a loss has been caused by number of causes the proximate cause i.e. nearest cause should be taken into consideration to determine the liability of the insurer.Liability of the insurer is ascertain through this clause.Illustration A cargo has hole in the ship due to negligence of master so sea water entered the ship and cargo got damage. In this case only nearest cause of damage through sea water will be liable for insurance and nit the other.*PRINCIPLES OF INSURANCE

WHAT DOES INSURANCE REALLY COVER?*

HEALTH INSURANCE*

HEALTH INSURANCEThe term Health Insurance is generally used to describe a form of insurance that pays for medical expenses. It is sometimes used more broadly to include insurance covering disability or long-term nursing or custodial care needs. It may be purchased on a group basis (e.g., by a firm to cover its employees) or purchased by individual consumers).Types Of Health Care Insurance Available:Medical Insurance Critical Illness Insurance

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HOME INSURANCE*

HOME INSURANCEHome Insurance is a standard insurance policy to insure home and the things that are kept in it.

It is also called a package policy.

Which means it covers both, damage to your property and liability or legal responsibility for any injury and property damage you or any member of your family cause others.

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COMMERCIAL INSURANCEMarine insuranceFire insuranceAgriculture insuranceShop insurance*

MARINE INSURANCEIt covers the loss or damage of goods at sea.

Marine insurance typically compensates the owner of merchandise for losses sustained from fire, shipwreck, etc.

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FIRE INSURANCEFire Insurance can avoid loss which can be generated from any explosion at your business enterprise.This fire must be a result of actual explosion and the consequential loss must be proximately caused by such explosion.One can go for fire Insurance of a property even if he doesnt own the property.He can insure the property if he holds a mortgage on the property.

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CREDIT RISK*

CREDIT RISKIt is the risk of loss to the bank as a result of a default by the borrower.The amount of risk represented by the outstanding balance and the date of default may differ from the ultimate loss in the event of default because of potential recoveries.Recoveries would depend upon any credit risk mitigators, such as guarantees, either collateral or the third party guarantees, the capabilities of negotiating with the borrower and of funds available, if any, to repay the debt after repayment of other who lenders who may have a priority claim over the borrowers asset / funds.

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DEFAULTThe non payment of obligations (interest on principal), breaking a covenant(formal agreement) or economic default.The default events include a delay in repayments, restructuring of borrower repayments, and bankruptcy.Economic Default It occurs when the economic value of the assets goes below the value of outstanding debts i.e. value of the collateral goes down against the loan amount.In simple words it means that market value of the asset drops below that of liabilities.*

DEFAULT PROBABILITYDefault risk is measured by the probability of default occurring during a given period of time.It depends upon the credit standing of a borrower.Credit standing would depend upon factors such as market outlook for the borrowing company, the size of the company, its competitive factors, the quality of management etc. *

EXPOSURE RISKIt is the risk generated by the uncertainty associated with future amount at risk.All the credit lines which there is a repayment schedule the exposure risk can be considered as small or negligible.Exposure risk arise with derivatives in which the source of uncertainty is not the clients behavior but the market movements.The value of the derivatives depends upon the market movements which changes constantly.The credit risk continuous during the whole life in OTC instruments.The recoveries in the event of default are not predictable.They depend upon the type of default and factors such as guarantees, collateral etc.

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COLLATERAL RISKThe existence of collateral (security or asset given against loan) minimizes credit risk if the collateral can be easily taken possession and sold.Collateralization is an increasingly common way to mitigate the credit risk. It reduces risk because if borrower does not pay the loan the collateral would be confiscated as repayment for the loan.If collateral is used the risk becomes two folds:Uncertainty with respect to sell off or dispose off the collateralUncertainty with respect to its value *

OPERATIONAL RISKIt is the potential risk of loss arising from inadequate or failed internal processes, people and systems from external events. It also includes potential legal risk involving claims, penalties and damages resulting from supervisory decisions.

When Operational risk arises :Internal FraudExternal FraudUnfair employment practicesClients and business practicesIneffective Audit function Satyam scandal *

EXAMINATION PAPER PATTERNQ -1) a) 10 Marks b) 5 Marks - - - - - - - - - - - - - - - - - - - - - - - OR - - - - - - - - - - - - - - - - - - - - - - - - - Q -1) a) 10 Marks b) 5 Marks

Q -2) Mr. Avadesh 15 Marks

Q -3) Mr. Avadesh 15 Marks

Q-4) Short Notes (Any 3 out of 5) 15 Marks*

Thank you*

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