ASSINMENT ON

FINANCIAL PRODUCTS

Submitted To: Dr. Gurmeet Singh

Submitted By: Payal Gundaniya

Enroll no: 17P161

PGDM: 2017-19

Sem-4

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1. Explain the Portfolio Management Schemes (PMS), Hedge Funds, Venture Capital &
Private Equity Funds of Mutual Funds.

Portfolio Management Schemes (PMS)

PMS is an investment facility offered by financial intermediaries generally to high networth
investors. There is no concept of a NFO. The PMS provider keeps receiving money from
investors. Unlike mutual funds, which maintain their investment portfolio at the scheme
level, the PMS provider maintains a separate portfolio for each investor.
An investor who chooses to operate multiple PMS accounts will need to go through a
separate KYC process with each intermediary. Each will provide a separate statement of
the investor’s account in their own format. The facility of Consolidated Account Statement
is not available.

SEBI has set the minimum investment limits under PMS (Rs. 5 lakh presently). Many PMS
providers operate with much higher minimum investment requirements.
The cost structure for PMS, which is left to the PMS provider, can be quite high. Besides a
percentage on the assets under management, the investor may also have to share a part
of the gains on the PMS portfolio; the losses are however borne entirely by the investor.
PMS have an unconstrained range of investments to choose from. The limits, if any, would
be as mentioned in the PMS agreement executed between the provider and the client.
PMS are regulated by SEBI, under the SEBI (Portfolio Managers) Regulations, 1993.
However, since this investment avenue is meant only for the high networth investors, the
mutual fund type of rigorous standards of disclosure and transparency are not applicable.
The protective structures of board of trustees, custodian etc. is also not available. Investors
therefore have to take up a major share of the responsibility to protect their interests.

Hedge Funds
These are a more risky variant of mutual funds which have become quite popular

Hedge Funds
These are a more risky variant of mutual funds which have become quite popular
internationally. Like PMS, hedge funds too are aimed at high networth investors. They
operate with high fee structures and are less closely monitored by the regulatory
authorities.

From a fund management perspective, the risk in hedge funds is higher on account of the
following features:
• Borrowings
Normal mutual funds accept money from unit-holders to fund their investments.
Hedge funds invest a mix of unit-holders’ funds (which are in the nature of capital)
and borrowed funds (loans).

• Risky investment styles

Hedge funds take extreme positions in the market, including short-selling of
investments.

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In a normal long position, the investor buys a share at say, Rs. 15. The worst case is
that the investor loses the entire amount invested. The maximum loss is Rs. 15 per
share.
Suppose that the investor has short-sold a share at Rs. 15. There is a profit if the
share price goes down. However, if the share price goes up, to say, Rs. 20, the loss
would be Rs. 5 per share. A higher share price of say, Rs. 50 would entail a higher loss
of Rs. 35 per share. Thus, higher the share price more would be the loss. Since there
is no limit to how high a share price can go, the losses in a short selling transaction
are unlimited.
Under SEBI’s mutual fund regulations, mutual funds are not permitted to borrow to invest.
Borrowing is permitted only for investor servicing (dividend or re-purchases). Further, the
borrowing is limited to 20% of the net assets, and cannot be for more than 6 months at
a time. Similarly, mutual funds are not permitted to indulge in short-selling transactions.
Such stringent provisions have ensured that retail investors are protected from this risky
investment vehicle.

Venture Capital Funds & Private Equity Funds

These funds largely invest in unlisted companies. Venture capital funds invest at an earlier
stage in the investee companies’ life than the private equity funds. Thus, they take a
higher level of project risk and have a longer investment horizon (3 – 5 years).
Venture Capital Funds are governed by the SEBI (Venture Capital) Regulations, 1996.
Under these regulations, they can mobilise money only through a private placement.
Investors can be Indians, NRIs or foreigners. Every investor has to invest a minimum of
Rs. 5 lakh in the fund.

2. Explain in brief the SEBI’s Regulations regarding limits to investment by Mutual Fund
Schemes.

SEBI (Mutual Funds) Regulations, 1996 has laid down the limits to investment by mutual fund
schemes. Some of these are discussed below.

Equity
• A scheme cannot invest more than 10% of its assets in a single company’s shares or
share-related instruments. However, sector funds can have a higher investment in a
single company, as provided in their Scheme Information Document.
Index funds invest as per the index they track. In the index construction, a single
company may have a weightage higher than 10%. In such cases, the higher single
company investment limit would be applicable.
The 10% limit is applicable when the scheme invests. Breach of the limit on account
of subsequent market movements is permitted. For example, a scheme with net
assets of Rs. 100 crores may have invested Rs. 10 crores in a single company, XYZ.
Later, on account of market movements, the net assets of the scheme increase to
Rs. 102 crores, while the value of the investment in XYZ company goes up to Rs. 11
crores. XYZ company now represents Rs. 11crores ÷ Rs. 102 crores i.e. 10.78%. The

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scheme is not obliged to sell any shares of XYZ company to fall within the 10% limit.
However, fresh purchases of XYZ company’s shares would need to be suspended, until
the investment value goes below 10% of the scheme’s net assets.
• Mutual funds are meant to invest, primarily in listed securities. Therefore, investment
in unlisted shares is restricted as follows:
o Open-ended schemes: 5% of Net Assets
o Close-ended schemes: 10% of Net Assets
• Unlisted securities or securities issued through private placement by an associate or
a group company of the sponsor are not a permissible investment.
• Mutual fund schemes cannot invest more than 25% of their net assets in listed
securities of group companies of the sponsor of the Asset Management Company.
• All the schemes of a mutual fund put together cannot control more than 10% of the
voting rights of any company.
• Mutual fund schemes cannot charge management fees on their investment in other
mutual fund schemes (of the same asset management company or other asset
management companies). Such investment is also subject to a cap of 5% of the net
assets of the fund. This is not applicable to fund of funds schemes.

Debt
• Mutual fund schemes can invest in debt securities, but they cannot give loans.
• A scheme cannot invest more than 15% of its net assets in debt instruments issued
by a single issuer. If prior approval of the boards of the Asset Management Company
and the Trustees is taken, then the limit can go up to 20%. If the paper is unrated,
or rated below investment grade, then a lower limit of 10% is applicable.
These limits are exempted for money market securities and government securities.
However, the exemption is not available for debt securities that are issued by public
bodies / institutions such as electricity boards, municipal corporations, state transport
corporations, etc. guaranteed by either state or central government.
• Investment in unrated paper and paper below investment grade is subject to an
overall cap of 25% of net assets of the scheme.
• Liquid funds can only invest in money market securities of upto 91 days maturity.
• The following regulations are applicable for investment in short term deposits:
o “Short term” means not more than 91 days
o The deposits can only be placed in scheduled banks
o The deposits are to be held in the name of the specific scheme
o Not more than 15% of the net assets of the scheme can be placed in such short
term deposits. With the permission of trustees, the limit can go up to 20%
o Short term deposits with associate and sponsor scheduled commercial banks
together cannot exceed 20% of the total short term deposits placed the mutual
fund
o Not more than 10% of the net assets are to be placed in short term deposits of
any one scheduled bank including its subsidiaries
o The funds are not to be placed with a bank that has invested in that scheme
o The Asset Management Company cannot charge investment management and
advisory fee on such deposits placed by liquid and debt funds
• Transactions in government securities are to be settled in demat form only

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• Inter-scheme transfers are to be effected at market value only
• Unlisted securities or securities issued through private placement by an associate or
a group company of the sponsor are not a permissible investment.
• Mutual fund schemes cannot invest more than 25% of their net assets in listed
securities of group companies of the sponsor of the Asset Management Company.

Derivatives
Mutual Funds are permitted to invest in financial derivatives traded in the stock exchange,
subject to disclosures in the Scheme Information Document. The permitted derivatives
include stock futures, stock options, index futures, index options and interest rate
futures.
They can also enter into forward rate agreements and interest rate swaps (for hedging)
with banks, primary dealers (PDs) and financial institutions (FIs). Exposure to a single
counter-party cannot however exceed 10% of net assets of the scheme.
Mutual funds can also invest in derivatives traded on exchanges abroad, for hedging and
portfolio balancing with the underlying as securities.
The following limits have been stipulated by SEBI:
• Gross exposure through debt, equity and derivatives cannot exceed 100% of the net
assets of the scheme.
• The exposure in derivative transactions is calculated as follows:
o Long Futures - Futures Price x Lot Size x Number of Contracts
o Short Futures - Futures Price x Lot Size x Number of Contracts
o Option Bought - Option Premium Paid x Lot Size x Number of Contracts
Mutual funds are not permitted to sell options or buy securities with embedded written
options.
• In the exposure calculations, positions that are in the nature of a hedge are
excluded.

Gold
Gold ETFs invest primarily in gold and gold-related instruments. Gold-related instruments
are defined to mean instruments that have gold as the underlying, and specified by
SEBI.
If the gold acquired by the gold exchange traded fund scheme is not in the form of
standard bars, it is to be assayed and converted into standard bars which comply with the
good delivery norms of the London Bullion Market Association (LBMA).
Until the funds are deployed in gold, the fund may invest in short term deposits with
scheduled commercial banks.

The fund may also maintain liquidity, as disclosed in the offer document, to meet re-
purchase / redemption requirements.

Real Estate
Real estate mutual funds are permitted to invest in direct real estate assets, as well as
real estate securities.
Direct investment in real estate has to be in cities with population over a million.

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Construction has to be complete and the asset should be usable. Project under construction
is not a permitted investment. Similarly, investment cannot be made in vacant land,
agricultural land, deserted property or land reserved or attached by the government or
any authority.

The real estate asset should have valid title deeds, be legally transferable and free from
encumbrances, and not be the subject matter of any litigation.
The following SEBI limits are applicable:
• At least 75% of the net assets is to be invested in direct real estate, mortgage backed
securities and equity shares or debentures of companies engaged in dealing in real
estate assets or in undertaking real estate development projects.
• At least 35% has to be invested in direct real estate.
• The combined investment of all the schemes of a mutual fund:
o In a single city cannot exceed 30% of the net assets
o In a single real estate project cannot exceed 15% of the net assets
o Cannot exceed 25% of the issued capital of any unlisted company.

International Investments
Indian mutual fund schemes are permitted to take exposure to the following international
investments:
• American Depository Receipts (ADRs) and Global Depository Receipts (GDRs) issued
by Indian or foreign companies
• Equity of overseas companies listed on recognized stock exchanges overseas
• Initial and follow on public offerings for listing at recognized stock exchanges
overseas
• Government securities issued by countries that are rated not below investment
grade
• Foreign debt securities (short term as well as long term with rating not below investment
grade by accredited/ registered credit rating agencies) in countries whose currencies
are fully convertible
• Money Market Instruments rated not below investment grade
• Repos in form of investment, where the counterparty is rated investment grade or
above. However, borrowing of funds through repos is not allowed
• Derivatives traded on recognized stock exchanges overseas only for hedging and
portfolio balancing with securities as the underlying
• Short term deposits with banks overseas where the issuer is rated not below investment
grade
• Units / securities issued by overseas mutual funds or unit trusts, registered with
overseas regulators, that invest in:
o The above securities; or
o Real estate investment trusts (REITs) listed on recognized stock exchanges
overseas
o Unlisted overseas securities not more than 10% of the scheme’s net assets.
The mutual fund needs to appoint a dedicated Fund Manager for overseas investments
(other than for investment in units / mutual funds / unit trusts

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3. Explain the Index Funds, Exchange Traded Funds (ETF) & Arbitrage Funds of Mutual
Funds

Index Funds
Every mutual fund scheme has to disclose its benchmark – a standard against which the
scheme’s performance can be compared. For instance, diversified equity funds use S&P
CNX Nifty as a benchmark. Equity schemes that propose to go beyond large cap companies
can opt for S&P CNX 500. CNX Midcap 100 can be considered for equity schemes that
invest mainly in mid cap companies. Similarly, there are sectoral indices for sector funds
and debt indices for debt funds.
Fund managers who operate on the mandate of “beating the benchmark” are said to run
active schemes or managed schemes. They seek to perform better than the benchmark.
The danger with active management is that the fund manager can also get beaten by
the benchmark. The fund manager seeks to beat the benchmark through superior stock
selection. But if the investment portfolio fares poorly, as compared to the benchmark,
then the relative performance suffers.
Active management also calls for higher investment in stock analysis. This is passed on to
the actively managed schemes through higher investment advisory fees.
Some investors are satisfied with the benchmark returns. However, buying all the shares
that go into the benchmark, in the same proportion as in the benchmark, requires large
investment. Retail investors may not be able to do this.
Alternatively, the investor can buy futures contracts on the benchmark. For instance, Nifty
Futures. But here again, the investment requirement is high. Further, futures are typically

Exchange Traded Funds (ETFs)

Despite its best efforts, the index scheme performance may not be perfectly in line with
the index. The gap in the performance between the index scheme and the index is called
‘tracking error’. This is caused by several factors:
• Timing differences
As discussed in NCFM’s Workbook titled Securities Market (Advanced) Module, the
NAV at which investors are allotted units, depends on the time stamp on the investor’s
application and timing of receipt of funds. For example, an investor whose application
is received before 3 p.m. is allotted units at the closing NAV of the application date.
Although the units would have been allotted on the basis of the same day’s NAV, the
scheme itself will receive funds only after a couple of days. By the time the scheme
receives funds and invests, the market may have changed. If the market goes higher
at the time of investment, then the scheme performance suffers.
• Liquidity
The S&P CNX Nifty only comprises 50 stocks. The scheme however invests in the
50 stocks, plus money in the bank. The liquidity needs of the scheme determine the
money it keeps in the bank. This portfolio difference from the Nifty causes a gap
between the scheme performance and index performance.

• Costs

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The index fund will charge investment advisory fees, albeit lower than in actively
managed schemes. Similarly, there are other costs like registrar fees, trustee fees,
brokerage etc.

Arbitrage Funds
In an arbitrage, the investor takes opposite positions in two transactions. The net effect is
that no new position is created, but a spread is earned on the difference between the two
transactions.
For instance, shares of a company may be bought in the cash market, and futures (with
underlying as the same number of shares on the same company) are sold. The cash and
futures positions balance each other.
Normally, the futures price would be higher than the cash price. The difference in prices
is the riskless profit earned from the arbitrage. The difference tends to capture the cost
of funds for the period of the contract, though at times it may be higher or lower than the
funding cost. In periods of extreme volatility, the futures price can be much higher than
the cash price for the same underlying.
Arbitrage funds focus on such arbitrage transactions. The returns are closer to liquid
funds, which capture the short term funding cost in the market. It can be higher in volatile
market conditions.
As will be seen in Chapter 11, equity funds are more tax efficient than debt funds. The
interesting aspect of arbitrage funds is that the return profile is closer to a debt fund.
On account of the compensating positions taken, the market risk is negligible – lesser
than in a normal debt fund. Yet, they offer the tax efficiency of equity funds, because the
positions taken are in the equity market.

4. Discuss in brief about the Monthly Income Plans (MIP) & Fixed Maturity Plans (FMP)
& Capital Protection Orientation Schemes of Mutual Funds.

Monthly Income Plans (MIP)

Monthly Income Plans maintain a portfolio that is debt-oriented. Equity component is as
low as 15-20%. The high debt component, with its daily interest accrual, balances the
volatility risks on the low equity component. The nature of equity and debt investments
made is also safer in MIP. With such a portfolio structure, the MIP hopes to pay a monthly
income to investors.
Mutual fund schemes offer income to investors through declaration of dividend. As discussed
in the previous chapter, dividend can only be declared if the scheme has distributable
reserves. There are occasions where on account of significant decreases in MTM valuation,
the scheme will not have the distributable reserves to distribute a dividend. Portfolio
losses may be higher than the income accrual. In such cases, the scheme cannot declare
a dividend. Therefore, investor needs to be clear that there is no guarantee regarding the
monthly income.
The MIP portfolio, with low allocation to equity, is appropriate for most risk averse investors.
They need to take exposure to equity to protect themselves against inflation. The MIP
portfolio with its relatively low NAV volatility is appropriate for such investors.
However, MIP is not appropriate for investors who depend on the monthly income to

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meet their regular expenses. Such investors should rely on safer investments (like Post
Office Monthly Income Scheme) that assure a monthly income to meet their monthly
expenses.

Fixed Maturity Plans (FMP)

A major risk in debt investments is the price risk arising out of changes in yields in
the market. As discussed in the next chapter, Weighted Average Maturity and Modified
Duration are measures of this risk.
This price risk is a market phenomenon. Until maturity, debt securities trade in the market
at prices that fluctuate with interest rates. However, on maturity, the issuer redeems the
instrument at the agreed value. The redemption amount, which is paid by the issuer, is
not a function of the market. The only uncertainty is the one created by credit risk. Will
the issuer be able to pay the redemption amount?
Thus, on maturity of a debt instrument, the market risk is no longer a factor. A scheme
that invests all its moneys for the same maturity as the scheme’s own maturity will thus
be able to eliminate the market risk on maturity. FMPs are structured in this manner.
FMPs are close-ended scheme. Their Scheme Information Document will not only mention
the maturity of the scheme, but also the credit rating of the instruments it will invest in.
Suppose, an FMP is offered for 3 years, and it proposes to invest in only AAA securities.

Capital Protection Oriented Schemes

Like MIPs and other hybrid funds, Capital Protection Oriented Schemes too, invest in a mix
of debt and equity securities. However, the investment philosophy here is different. The
portfolio of capital protection oriented schemes is structured to ensure that the investor
at least gets back the capital invested.
These schemes are offered as close-ended schemes. Suppose a capital protection oriented
scheme of 7 years is offered to investors. If yields on government securities of the same
maturity are 8%, then Rs. 58.35 invested today in government securities will grow to Rs.
100 in 7 years.
The mutual fund scheme will therefore allocate 58.35% of the amount collected from
investors, to government securities. Sovereign securities do not have a credit risk – and
market risk too is eliminated by matching the scheme’s maturity with its investment
maturity. Thus, the scheme is in a position to assure investors that they will at least get
their capital back at the end of 7 years.

5. What is Financial Planning? Explain in brief the steps of Financial Planning.

Everyone has needs and aspirations. Most needs and aspirations

call for a financial commitment. Providing for this commitment
becomes a financial goal. Fulfilling the financial goal sets people
on the path towards realizing their needs and aspirations. People
experience happiness, when their needs and aspirations are
realized within an identified time frame.
For example, a father wants his son, who has just passed his 10th
standard Board examinations, to become a doctor. This is an

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aspiration. In order to realize this, formal education expenses,
coaching class expenses, hostel expenses and various other
expenses need to be incurred over a number of years. The
estimated financial commitments towards these expenses become
financial goals. These financial goals need to be met, so that the
son can become a doctor.

Financial planning is a planned and systematic approach to

provide for the financial goals that will help people realise their
needs and aspirations, and be happy.

6. Explain the Steps of recommending model portfolios & Financial Plans.

Since investors’ risk appetites vary, a single portfolio cannot be

suggested for all. Financial planners often work with model
portfolios – the asset allocation mix that is most appropriate for
different risk appetite levels. The list of model portfolios, for
example, might read something like this:
Young call centre / BPO employee with no dependents
50% diversified equity schemes (preferably through SIP); 20%
sector funds; 10% gold ETF, 10% diversified debt fund, 10% liquid
schemes.
Young married single income family with two school going kids
35% diversified equity schemes; 10% sector funds; 15% gold ETF,
30% diversified debt fund, 10% liquid schemes.
Single income family with grown up children who are yet to settle
down
35% diversified equity schemes; 15% gold ETF, 15% gilt fund,
15% diversified debt fund, 20% liquid schemes.
Couple in their seventies, with no immediate family support
15% diversified equity index scheme; 10% gold ETF, 30% gilt
fund, 30% diversified debt fund, 15% liquid schemes.
As the reader would appreciate, these percentages are illustrative
and subjective. The critical point is that the financial planner should
have a model portfolio for every distinct client profile. This is then
tweaked around based on specific investor information. Thus, a
couple in their seventies, with no immediate family support but
very sound physically and mentally, and a large investible
corpus might be advised the following portfolio, as compared with
the previous model portfolio.
20% diversified equity scheme; 10% diversified equity index
scheme; 10% gold ETF, 25% gilt fund, 25% diversified debt fund,
10% liquid schemes.

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7. Explain the various types of property insurance.

“a promise of compensation for specific potential future

losses in exchange for a periodic payment”. Insurance is designed to protect the financial
well-being of an individual, company or other entity in the case of unexpected loss. Some
forms of insurance are required by law, while others are optional. Agreeing to the terms of
an insurance policy creates a contract between the insured and the insurer. In exchange for
payments from the insured (called premiums), the insurer agrees to pay the policy holder a
sum of money upon the occurrence of a specific event. In most cases, the policy holder pays
part of the loss (called the deductible) and the insurer pays the rest. Examples include car
insurance, health insurance, disability insurance, life insurance, etc.

Commercial Property Insurance

All business owners should feel compelled to buy a commercial property insurance policy. With
an investment like your own business, it goes without saying that you need to make sure that
safety systems are put in place in case the worst happens. When you open a business, your
likelihood of being sued raises significantly. Whether or not this happens to you, being ready for
this unfortunate event means purchasing a business insurance policy that includes commercial
property insurance. If it helps you to understand the importance of property insurance for a
business, think of everything that can happen on your property and multiply it by two. Anything
for which you could be sued on your private property at your home could also happen at your
businesses, plus more. Be prepared and buy a commercial property insurance to protect your
business.
Flood Insurance

Again, many people don’t know that their regular property insurance doesn’t include coverage
for flood damage. While homeowner’s insurance will cover for some natural disasters, other
natural disasters, including floods, may be left out. Whether you’re insuring a home, vehicle, or
business, make sure that you have complete understanding of your coverage and make sure that
you ask about flood insurance. Floods may not be common in every part of the country, but if
your home or business is located near a body of water, be it a lake, an ocean, a river, or a stream,
consider adding flood insurance to your property insurance. If you aren’t sure whether or not
your insurance provider offers flood insurance, just ask! Your local insurance provider will be
more than happy to answer any questions that you may have about your property insurance
policy.

Natural Disaster Insurance

If you have property insurance, you may be covered for natural disaster insurance. However, it’s
always smart to ask your insurance provider what your policy entails. Hail, hurricanes,
tornadoes, earthquakes, and many other types of inclement weather can have a serious effect on
your property and it is important that you are properly prepared for anything that nature may
have in store. Investing in property insurance is a surefire way to protect your finances from
disaster.

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 8. Explain the personal & Liability Insurance products & Personal Accident Insurance
(PA)

Personal liability occurs in the event an accident, in or out of your home, that results in bodily
injury or property damage that you are held legally responsible for. Personal liability claims
could include medical bills, legal fees and more if a guest is injured on your property, as well as
coverage for accidental damage you are legally responsible for on someone else’s property. If
you have personal liability coverage, you may be able to avoid paying out of pocket for incidents
like these, up to your coverage limits. That’s why personal liability coverage is an important
component of your homeowners insurance or renters insurance policy.
Now that you know the definition of personal liability insurance, here's a real life example: let's
say a guest visits your home and while walking through your garage is hit by a falling ladder.
The guest suffers a broken arm and sues you for damages – which can be thousands of dollars.
This is where personal liability insurance can kick in. Personal liability will cover the costs of
medical bills, as well as your legal defense fees, up to the limit of your liability coverage.
However, personal liability coverage may also be able to cover an incident that occurs outside
your home or property.

What does personal liability insurance cover?

Under your basic homeowners insurance or renters insurance policy, personal liability coverage
may protect you under the following circumstances, up to your policy limits:

 Lawsuits you may face if an accident occurs

 Bodily injury to an individual
 Property damage that occurs as a result of your negligence
If the liability limits of your policy don’t meet your needs, you may want to consider additional
coverage such as personal umbrella liability insurance, which provides an extra layer of personal
liability protection. This will help to cover costs if there's a serious auto accident or accident on
your property that exceed the limits of your liability coverage.

A personal accident (PA) insurance is an annual policy which provides compensation in the
event of injuries, disability or death caused solely by an accident.

The plan is designed to pay out if you are severely injured or die in an accident, where
policyholders receive a tax-free lump sum in the unfortunate events that are included in the
policy.

Some insurers would include the following statements in their definition of a personal accident
insurance:

1) Any untoward events that are unintentional and unexpected,

2) Violent, accidental, external and visible events

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3) Sudden and unforeseen events.

If you are asking yourself this question, chances are you have heard about it in other insurance
products. Some medical insurance policies and travel insurance policies do offer some form of
accidental death/ injuries coverages.

You might also be familiar with your monthly SOCSO contribution of 0.5% of your salary.
SOCSO provides coverage for any work-related injuries and accidents. However, it is important
to note that these coverages are limited to certain parts like medical expenses and ambulance fees
or to specific accidents like SOCSO.

9. Explain in brief the Public Liability Insurance, Product Liability Insurance &
Professional Indemnity Insurance
Public liability insurance is the most common type of insurance taken out by small businesses,
but with a range of cover options available, it's just as well-suited to larger firms.

Public liability insurance may be a confusing concept at first, but by researching precisely what
liability insurance covers, you can find out just how much cover you should take out to safeguard
your business in the public sphere.

While public liability insurance is not a legal requirement for some businesses, it should be
considered essential if members of the public will be interacting with your company in any way -
from customers receiving deliveries to clients visiting your office or work premises. This means
that even home-based businesses should consider public liability insurance if their home office is
also used as a meeting place.

Product liability insurance is a type of business insurance that can cover the cost of
compensation claims if someone is injured or their property is damaged by a product that you’ve
sold. In certain situations you may be liable even if you haven’t actually manufactured the
product.

Product liability insurance can pay the legal fees and compensation costs if someone sues you for
injury or damage.

Professional liability insurance (PLI), also called professional indemnity insurance (PII) but
more commonly known as errors & omissions (E&O) in the US, is a form of liability
insurance which helps protect professional advice- and service-providing individuals and
companies from bearing the full cost of defending against a negligence claim made by a client,
and damages awarded in such a civil lawsuit. The coverage focuses on alleged failure to perform
on the part of, financial loss caused by, and error or omission in the service or product sold by
the policyholder. These are causes for legal action that would not be covered by a more general
liability insurance policy which addresses more direct forms of harm. Professional liability
insurance may take on different forms and names depending on the profession, especially
medical and legal, and is sometimes required under contract by other businesses that are the
beneficiaries of the advice or service.

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 Coverage sometimes provides for the defense costs, including when legal action turns out to be
groundless. Coverage does not include criminal prosecution, nor a wide range of potential
liabilities under civil law that are not enumerated in the policy, but which may be subject to other
forms of insurance. Professional liability insurance is required by law in some areas for certain
kinds of professional practice.

10. Briefly discuss the types of Term Insurance Plans & Whole Life Plans

There are two major types of life insurance—term and whole life. Whole life is sometimes called
permanent life insurance, and it encompasses several subcategories, including traditional whole
life, universal life, variable life and variable universal life. In 2016, about 4.3 million individual
life insurance policies bought were term and about 6.4 million were whole life, according to the
American Council of Life Insurers.
Life insurance products for groups are different from life insurance sold to individuals. The
information below focuses on life insurance sold to individuals.
Term

Term Insurance is the simplest form of life insurance. It pays only if death occurs during the term
of the policy, which is usually from one to 30 years. Most term policies have no other benefit
provisions.
There are two basic types of term life insurance policies: level term and decreasing term.
 Level term means that the death benefit stays the same throughout the duration of the policy.
 Decreasing term means that the death benefit drops, usually in one-year increments, over the
course of the policy’s term.
In 2003, virtually all (97 percent) of the term life insurance bought was level term.
For more on the different types of term life insurance, click here.
Whole life/permanent

Whole life or permanent insurance pays a death benefit whenever you die—even if you live to
100! There are three major types of whole life or permanent life insurance—traditional whole
life, universal life, and variable universal life, and there are variations within each type.
In the case of traditional whole life, both the death benefit and the premium are designed to stay
the same (level) throughout the life of the policy. The cost per $1,000 of benefit increases as the
insured person ages, and it obviously gets very high when the insured lives to 80 and beyond.
The insurance company could charge a premium that increases each year, but that would make it
very hard for most people to afford life insurance at advanced ages. So the company keeps the
premium level by charging a premium that, in the early years, is higher than what’s needed to
pay claims, investing that money, and then using it to supplement the level premium to help pay
the cost of life insurance for older people.
By law, when these “overpayments” reach a certain amount, they must be available to the
policyholder as a cash value if he or she decides not to continue with the original plan. The cash
value is an alternative, not an additional, benefit under the policy.
In the 1970s and 1980s, life insurance companies introduced two variations on the traditional
whole life product—universal life insurance and variable universal life insurance.

11. Briefly discuss the Endowment Plans, Child Plans of Life Insurance.

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An endowment policy is essentially a life insurance policy which, apart from covering the life of
the insured, helps the policyholder save regularly over a specific period of time so that he/she is
able to get a lump sum amount on the policy maturity in case he/she survives the policy term.
This maturity amount can be used to meet various financial needs such as funding one's
retirement, children's education and/or marriage or buying a house.

Child life insurance is a form of permanent life insurance that insures the life of a minor. It is
usually purchased to protect a family against the sudden and unexpected costs of a child’s
funeral or burial and to secure inexpensive and guaranteed insurance for the lifetime of the
child. It offers guaranteed growth of cash value, which some carriers allow to be withdrawn
(collapsing the policy) when the child is in their early twenties. Child life insurance policies
typically offer the owner the option to purchase, or in some cases obtain additional guaranteed
insurance when the child reaches maturity.
Child life insurance policies typically:

 Are issued with face values between $5,000 and $50,000.

 Are always issued without a required medical examination.
 Have zero investment and zero interest rate risk associated with cash value growth.
 Provide insurance coverage for a designated beneficiary.
Child life insurance should not be confused with juvenile life insurance, which is issued with
much larger face values (normally $100,000 - $10,000,000) and is generally purchased for
college savings, lifetime savings, estate planning and guaranteed insurability.
Child life insurance has been criticized for causing a motive for murder of insured children. 45
coroners have stated that child life insurance is a motive to murder. The Friendly Societies Act
1875 provided for payments on the death of children to pay the expenses of their burial. The
coroner, Mr Braxton Hicks, wrote a letter to the Times in 1889 denouncing the practice of
insuring children's lives because the insurances act as a temptation to the parents to neglect them,
or feed them with improper food, and sometimes even to kill them.
12. What is Annuity? Discuss the types of annuity plans.

An annuity is a financial product that pays out a fixed stream of payments to an individual,
primarily used as an income stream for retirees. Annuities are created and sold by financial
institutions, which accept and invest funds from individuals and then, upon annuitization, issue a
stream of payments at a later point in time. The period of time when an annuity is being funded
and before payouts begin is referred to as the accumulation phase. Once payments commence,
the contract is in the annuitization phase

Annuity Types

Annuities can be structured according to a wide array of details and factors, such as the duration
of time that payments from the annuity can be guaranteed to continue. Annuities can be created
so that, upon annuitization, payments will continue so long as either the annuitant or their spouse
(if survivorship benefit is elected) is alive. Alternatively, annuities can be structured to pay out
funds for a fixed amount of time, such as 20 years, regardless of how long the annuitant lives.

15
Annuities can also begin immediately upon deposit of a lump sum, or they can be structured as
deferred benefits. An example of this type of annuity is the immediate payment annuity in which
payments begin immediately after the payment of a lump sum. Deferred income annuities are the
opposite of an immediate annuity because they don't begin paying out after the initial investment.
Instead the client specifies an age at which he or she would like to begin receiving payments
from the insurance company.

Annuities can be structured generally as either fixed or variable. Fixed annuitiesprovide regular
periodic payments to the annuitant. Variable annuities allow the owner to receive greater future
cash flows if investments of the annuity fund do well and smaller payments if its investments do
poorly. This provides for a less stable cash flow than a fixed annuity, but allows the annuitant to
reap the benefits of strong returns from their fund's investments.

One criticism of annuities is that they are illiquid. Deposits into annuity contracts are typically
locked up for a period of time, known as the surrender period, where the annuitant would incur a
penalty if all or part of that money were touched. These surrender periods can last anywhere
from two to more than 10 years, depending on the particular product. Surrender fees can start out
at 10% or more and the penalty typically declines annually over the surrender period.

While variable annuities carry some market risk and the potential to lose principal, riders and
features can be added to annuity contracts (usually for some extra cost) which allow them to
function as hybrid fixed-variable annuities. Contract owners can benefit from upside portfolio
potential while enjoying the protection of a guaranteed lifetime minimum withdrawal benefit if
the portfolio drops in value. Other riders may be purchased to add a death benefit to the contract
or accelerate payouts if the annuity holder is diagnosed with a terminal illness. Cost of living
riders are common to adjust the annual base cash flows for inflation based on changes in the CPI.

13. Explain what is Group Insurance? Discuss the types of Group Insurance Plans.

Group insurance is an insurance that covers a defined group of people, for example the
members of a society or professional association, or the employees of a particular employer.
Group coverage can help reduce the problem of adverse selection by creating a pool of people
eligible to purchase insurance who belong to the group for reasons other than the wish to buy
insurance, which might be because they are a worse than average risk. Grouping individuals
together allows insurance companies to give lower rates to companies, "Providing large volume
of business to insurance companies gives us greater bargaining power for clients, resulting in
cheaper group rates."

Group insurance may offer life insurance, health insurance, and/or some other types of personal
insurance.
When most people think group insurance, they usually think of big-shot companies who are able
to pay the full premium amounts for each and every employee. However, there are other, more
flexible options for group healthcare plans that will fit your business. Our insurance agents are
experts in every type of group health insurance plan and can walk you through the perfect
coverage that will work well for your business and your employees. Call 770.497.1200 now
or fill out our online form to compare quotes on the best group health insurance plans.

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Fully Insured Employer Groups or Large Employer Groups

The company usually chooses some form of HMO or PPO (more on those in a minute) and pays
a fixed annual rate to cover monthly employee premiums. If the employer chooses to only pay a
part of the premium for their employees instead of the full amount, the employee portion is the
only amount that will change based on the number of employees that participate in the plan that
year.

Small Employer Group

Insurance companies can sometimes break down Large Employer Groups into Small Employer
Groups to more accurately predict the risk of covering the larger group as a whole. The smaller
employer groups allow insurance companies to save money because instead of estimating the
costs of insuring a large group, they can break down specific costs of insuring multiple small
groups.

However, you don’t have the be a part of a big corporation to reap the benefits of a Small
Employer Group plan. Insurers can also offer these rates to singular small businesses by
grouping businesses of a similar industry together under one plan. This allows each of those
small businesses to partner with the insurance carrier and still receive cheaper rates on plans with
higher coverage

14. Explain the different kinds of deposit products of banks.

Bank deposits consist of money placed into banking institutions for safekeeping. These deposits
are made to deposit accounts such as savings accounts, checking accounts and money market
accounts. The account holder has the right to withdraw deposited funds, as set forth in the terms
and conditions governing the account agreement.

Savings Account

BREAKING DOWN Bank Deposits

The deposit itself is a liability owed by the bank to the depositor. Bank deposits refer to this
liability rather than to the actual funds that have been deposited. When someone opens a bank
account and makes a cash deposit, he surrenders legal title to the cash, and it becomes an asset of
the bank. In turn, the account is a liability to the bank.

There are several different types of deposit accounts including current accounts, savings
accounts, call deposit accounts, money market accounts and certificates of deposit (CDs).

Current Account/Demand Deposit Account

A current account, also called a demand deposit account, is a basic checking account. Consumers
deposit money which they can withdraw as desired on demand. These accounts often allow the
account holder to withdraw funds using bank cards, checks or over-the-counter withdrawal slips.

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In some cases, banks charge monthly fees for current accounts, but they may waive the fee if the
account holder meets other requirements such as setting up direct deposit or making a certain
number of monthly transfers to a savings account.

Savings Accounts
Savings accounts offer account holders interest on their deposits. However, in some cases,
account holders may incur a monthly fee if they do not maintain a set balance or a certain
number of deposits. Although savings accounts are not linked to paper checks or cards like
current accounts, their funds are relatively easy for account holders to access. In contrast, money
market accounts offer slightly higher interest rates than savings accounts, but account holders
face more limitations on the number of checks or transfers they can make from these accounts.

Call Deposit Accounts

Financial institutions refer to these accounts as interest-bearing checking accounts, Checking
Plus or Advantage Accounts. These accounts combine the features of checking and savings
accounts, allowing consumers to easily access their money but also earn interest on their
deposits.

Certificates of Deposit/Time Deposit Accounts

Like a savings account, a time deposit account is an investment vehicle for consumers. Also
known as certificates of deposit (CD), time deposit accounts tend to offer a higher rate of return
than traditional savings accounts, but the money must stay in the account for a set period of time.
In other countries, time deposit accounts feature alternative names such as term deposits, fixed-
term accounts and savings bonds.

Federal Deposit Insurance Corporation

The Federal Deposit Insurance Corporation (FDIC) provides deposit insurance that guarantees
the deposits of member banks for at least $250,000 per depositor, per bank. Member banks are
required to place signs visible to the public stating that "deposits are backed by the full faith and
credit of the United States Government."

Money Market Account

A money market account is an interest-bearing account that typically pays a higher interest rate
than a savings account and provides the account holder with limited check-writing ability. A
money market account thus offers the account holder benefits typical of both savings and
checking accounts. This type of account is likely to require a higher balance than a savings
account and is Federal Deposit Insurance Corporation (FDIC) insured.

15. Explain in brief the Fund Based & Non-fund based services of banks.

Fund-based Services

Banks accept deposits and raise other debt and equity funds with the intention of deploying
the money for a profit.
The income that a bank earns, as a percentage of its loans and investments, is its Gross
Yield.

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The interest it pays as a percentage of the resources mobilised is its cost of funding.
Gross Yield less the Cost of Funding represents its Gross Spread.
Gross Spread less Administrative and Other Costs is its Net Spread.
Fund-based services are thus a key determinant of the bank’s spreads. The lending takes
several forms.
For Business
• Bank Overdraft – a facility where the account holder is permitted to draw more funds that
the amount in his current account.
• Cash Credit – an arrangement where the working capital requirements of a business are
assessed based on financial projections of the company, and various norms regarding
debtors, inventory and creditors. Accordingly, a total limit is sanctioned. At regular
intervals, the actual drawing power of the business is assessed based on its holding of
debtors and inventory. Accordingly, funds are made available, subject to adherence to
specified limits of Current Ratio, Liquid Ratio etc.
Funding could come from a consortium of bankers, where one bank performs the role of
lead banker. Alternatively, the company may make multiple banking arrangements.
• Bill Purchase / Discount – When Party A supplies goods to Party B, the payment terms
may provide for a Bill of Exchange (traditionally called hundi).
A bill of exchange is an unconditional written order from one person (the supplier of the
goods) to another (the buyer of the goods), signed by the person giving it (supplier),
requiring the person to whom it is addressed (buyer) to pay on demand or at some fixed
future date, a certain sum of money, to either the person identified as payee in the bill of
exchange, or to any person presenting the bill of exchange.
o When payable on demand, it is a Demand Bill
o When payable at some fixed future date, it is a Usance Bill.
The supplier of the goods can receive his money even before the buyer makes the
payment, through a Bill Purchase / Discount facility with his banker. It would operate
as follows:
o The supplier will submit the Bill of Exchange, along with Transportation Receipt to his
bank.
o The supplier’s bank will purchase the bill (if it is a demand bill) or discount the bill (if
it is a usance bill) and pay the supplier.
o The supplier’s bank will send the Bill of Exchange along with Transportation Receipt
to the buyer’s bank, who is expected to present it to the buyer:
For payment, if it is a demand bill
For acceptance, if it is a usance bill.
o The buyer will receive the Transportation Receipt only on payment or acceptance, as
the case may be.
• Term Loan / Project Finance – Banks largely perform the role of working capital financing.
With the onset of universal banking, some banks are also active in funding projects. This
would entail assessing the viability of the project, arriving at a viable capital structure,
and working out suitable debt financing facilities. At times, the main banker for the
business syndicates part of the financing requirement with other banks.

For Individuals
Bank credit for individuals could take several forms, such as:

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• Credit Card – The customer swipes the credit card to make his purchase. His seller will
then submit the details to the card issuing bank to collect the payment. The bank will
deduct its margin and pay the seller. The bank will recover the full amount from the
customer (buyer). The margin deducted from the seller’s payment thus becomes a profit
for the card issuer.
So long as the customer pays the entire amount on the due date, he does not bear any
financing cost. He may choose to pay only the minimum amount specified by the bank. In
that case, the balance is like a credit availed of by him. The bank will charge him interest
on the credit.
Such a mechanism of availing of credit from the credit card is called revolving credit.
It is one of the costliest sources of finance – upwards of 3% p.m. Besides, even for a few
days of delay in payment, the bank charges penalties. Similarly, penalties are charged if
the credit card outstanding crosses the limit specified by the bank.
Owners of many unorganized businesses (who find it difficult to avail of normal bank
credit) end up using the credit card to fund their business in this manner – undesirable,
but at times, inevitable.
• Personal Loan – This is a form of unsecured finance given by a bank to its customer based
on past relationship. The finance is given for 1 to 3 years. Cheaper than credit card, but
costly. It is not uncommon to come across interest rates of 1.5% p.m. plus 2-3% upfront
for making the facility available plus 3-5% foreclosure charges for amounts pre-paid on
the loan.
At times, banks convert the revolving credit in a credit card account to personal loan.
Such a conversion helps the customer reduce his interest cost and repay the money
faster. This is however a double edged sword. Once the credit card limit is released,
customers tend to spend more on the card and get on to a new revolving credit cycle.
• Vehicle Finance – This is finance which is made available for the specific purpose of buying
a car or a two-wheeler or other automobile. The finance is secured through hypothecation
(discussed in next Chapter) of the vehicle financed. The interest rate for used cards can
go close to the personal loan rates. However, often automobile manufacturers work out
special arrangements with the financiers to promote the sale of the automobile. This
makes it possible for vehicle-buyers to get attractive financing terms for buying new
vehicles.
• Home Finance – This is finance which is made available against the security of real
estate. The purpose may be to buy a new house or to repair an existing house or some
other purpose. The finance is secured through a mortgage (discussed in next Chapter) of
the property.
The finance is cheaper than vehicle finance. As with vehicle finance, real estate developers
do work out special arrangements with financiers, based on which purchasers of new
property can get attractive financing terms.

Non-Fund-based Services
These are services, where there is no outlay of funds by the bank when the commitment is
made. At a later stage however, the bank may have to make funds available.
Since there is no fund outflow initially, it is not reflected in the balance sheet. However, the
bank may have to pay. Therefore, it is reflected as a contingent liability in the Notes to the
Balance Sheet. Therefore, such exposures are called Off Balance Sheet Exposures.

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When the commitment is made, the bank charges a fee to the customer. Therefore, it is also
called fee-based business.
For Business
• Letter of Credit - When Party A supplies goods to Party B, the payment terms may
provide for a Letter of Credit.
In such a case, Party B (buyer, or opener of L/C) will approach his bank (L/C Issuing
Bank) to pay the beneficiary (seller) the value of the goods, by a specified date, against
presentment of specified documents. The bank will charge the buyer a commission, for
opening the L/C.
The L/C thus allows the Part A to supply goods to Party B, without having to worry about
Party B’s credit-worthiness. It only needs to trust the bank that has issued the L/C. It
is for the L/C issuing bank to assess the credit-worthiness of Party B. Normally, the L/C
opener has a finance facility with the L/C issuing bank.
The L/C may be inland (for domestic trade) or cross border (for international trade).
• Guarantee – In business, parties make commitments. How can the beneficiary of the
`commitment be sure that the party making the commitment (obliger) will live up to the
commitment? This comfort is given by a guarantor, whom the beneficiary trusts.
Banks issue various guarantees in this manner, and recover a guarantee commission
from the obliger. The guarantees can be of different kinds, such as Financial Guarantee,
Deferred Payment Guarantee and Performance Guarantee, depending on how they are
structured.
• Loan Syndication – This investment banking role is performed by a number of universal
banks.

16. Explain the Money Remittance Services of banks.

Demand Draft / Banker’s Cheque / Pay Order

Suppose A needs to make a payment to B. In the normal course, A would sign a cheque for
the requisite amount and give it to B.
• If it is a bearer cheque, B can go to A’s bank and withdraw the money.
• If it is a crossed cheque, A will deposit the cheque in his bank account.
B wants to be sure that the money would be received i.e. the cheque would not be bounced
for any reason. In such a situation, B will insist on a Demand Draft / Banker’s Cheque. If both
A and B are in the same city, then the bank would issue a Pay Order.
A will have to buy the instrument from a bank, bearing the prescribed charges. A will then
send it to B, who will deposit it in his bank account
National Electronic Funds Transfer (NEFT)
National Electronic Funds Transfer (NEFT) is a nation-wide system that facilitates individuals,
firms and corporates to electronically transfer funds from any bank branch to any individual,
firm or corporate having an account with any other bank branch in the country.
In order to issue the instruction, the transferor should know not only the beneficiary’s bank
account no. but also the the IFSC (Indian Financial System Code) of the concerned bank.
IFSC is an alpha-numeric code that uniquely identifies a bank-branch participating in the NEFT
system. This is a 11 digit code with the first 4 alpha characters representing the bank, and the

21
last 6 numeric characters representing the branch. The 5th character is 0 (zero). IFSC is used
by the NEFT system to route the messages to the destination banks / branches.
Once the NEFT instruction has been issued, it will be effected between the concerned banks in
the next settlement. During weekdays, between 9am and 7 pm, there are 11 settlements i.e.
every hour. On Saturdays, there are 5 hourly settlements between 9am and 1 pm.
The beneficiary can expect to get credit on the same day, for the first nine batches on week
days (i.e., transactions from 9 am to 5 pm) and the first four batches on Saturdays (i.e.,
transactions from 9 am to 12 noon). For transactions settled in the last two batches on week
days (i.e., transactions settled in the 6 and 7 pm batches) and the last batch on Saturdays
(i.e., transactions handled in the 1 pm batch) beneficiaries can expect to get credit either on
the same day or on the next working day morning (depending on the type of facility enjoyed
by the beneficiary with his bank).
There is no limit to the amount that can be transferred under NEFT. However, for transfers
above Rs1lakhs, RTGS (discussion follows) is a superior form of funds transfer.

Real Time Gross Settlement (RTGS)

RTGS transfers are instantaneous – unlike National Electronic Funds Transfer (NEFT) where
the transfers are batched together and effected at hourly intervals.
As with NEFT, the transferor needs to know the IFSC Code and the beneficiary’s bank account
no.
RBI allows the RTGS facility for transfers above Rs1lakhs. The RBI window is open on
weekdays
from 9 am to 4.30 pm; on Saturdays from 9 am to 12.30 pm.
4.3.4 Society for Worldwide Interbank Financial Telecommunications (SWIFT)
SWIFT is solely a carrier of messages. It does not hold funds nor does it manage accounts on
behalf of customers, nor does it store financial information on an on-going basis.
As a data carrier, SWIFT transports messages between two financial institutions. This activity
involves the secure exchange of proprietary data while ensuring its confidentiality and
integrity.
SWIFT, which has its headquarters in Belgium, has developed an 8-alphabet Bank Identifier
Code (BIC). For instance HDFCINBB stands for:
• HDFC = HDFC Bank
• IN = India
• BB = Mumbai
Thus, the BIC helps identify the bank. A typical SWIFT instruction would read as follows:
Please remit [amount in US$] by wire transfer
To HDFC Bank Mumbai Account Number V801-890-0330-937
with Bank of New York, New York [Swift code IRVTUS3N]
for further credit to account number XXXXXXXXXXXXXX of Advantage-India Consulting
Pvt.
Ltd
with HDFC Bank, Ghatkopar East Branch, Mumbai 400077, India
HDFC Bank’s Swift code is HDFCINBBXXX
Internationally, funds are remitted through such SWIFT instructions.

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17. What is Mortgage? Explain in brief the different types of mortgages.

The term mortgage is defined in the Transfer of Property Act, 1882 as follows:
A mortgage is the transfer of interest in specific immoveable property for the purpose of
securing the payment of money advanced or to be advanced by way of loan, on existing
or future debt or the performance of an engagement which may give rise to a pecuniary
liability.
The person transferring the property is the mortgager; the transferee is the mortgagee.
The mortgage is generally created through a mortgage deed. However, there are exceptions
as will clear from the following discussion on different kinds of mortgages. These kinds of
mortgages are again defined in the Transfer of Property Act, 1882.

Simple Mortgage
The mortgage is simple because possession of the mortgaged property is not handed over to
the mortgagee. However, the mortgager accepts personal liability to pay the mortgage money
(principal plus interest).
If the mortgager does not pay the dues, the mortgagee has the right to approach court for
a decree to sell the mortgage property. This right of the mortgagee may be expressed in the
mortgage deed or implied.
As is logical, the mortgagee does not have the right to receive rent or any other proceeds from
the property. These would belong to the mortgager.
Registration is mandatory if the principal amount secured is Rs100 or above.

Mortgage through Conditional Sale

Here, the mortgager “sells” the mortgage property, but subject to conditions:
• The sale becomes absolute only if the mortgager defaults on paying the dues by a
specified date; or
• The sale becomes void if the mortgager pays the dues by the specified dates. In that
case, the mortgagee will transfer the property back to the mortgager.
A legal technicality is that the mortgagee cannot sue to sell the property, but he can sue to
forclose the mortgage deed. Once court grants the foreclosure, the mortgager loses the right
to claim the property. Thereafter, the mortgagee can sell the property to recover his dues.
In a standard form of such a mortgage, there is no personal liability on the mortgager to pay
the dues [he only (presumably) has an interest in paying it, so that he will get the property
back]. If he does not pay, and the asset sale does not fully cover the mortgagee’s dues, he
cannot claim the balance from the mortgager. Therefore, bankers typically are not comfortable
with such a mortgage.

Usufructuary Mortgage
This is a mortgage where the mortgagee has the right to recover rent and other incomes from
the mortgaged property, until the dues are cleared. Thus, repayments come from the property
rather than from the mortgager.
The transfer of possession from the mortgager to the mortgagee may be express or implied.
Thus, legal possession is more important than physical possession. For example, physical
possession may be with a tenant who pays the rent.
As with Conditional Sale, there is no personal obligation on the mortgager to pay. The banker

23
has to keep holding the property for an indeterminate period of time, until the dues are
cleared. Therefore, bankers are not comfortable with such mortgages.

English Mortgage
In this form of mortgage, the mortgager transfers the property to the mortgagee absolutely.
However, the mortgagee will have to re-transfer the mortgaged property to the mortgager, if
the dues are paid off.
Since the mortgager assumes personal liability to repay, the mortgagee can sue the mortgager
for recovery of dues or seek a court decree to sell the property. This gives comfort to the
banker.

Equitable Mortgage / Mortgage by Deposit of Title Deeds

As is clear from the name, the mortgager merely deposits the title deeds to immoveable
property with the mortgagee, with the intention of creating a security.
Such mortgages can only be created in Mumbai, Chennai or Kolkatta. The mortgaged property
may be located anywhere, but the mortgage creation has to be in any of these three cities.
Benefit of this kind of mortgage is that stamp duty is saved. Further, it is less time consuming
to create.
The risk is that a fraudulent mortgager may obtain multiple title deeds, and create multiple
ssmortgages, thus adding to the complexity of the banker when it comes to recovering money.

Anomalous Mortgage
A mortgage which does not fall strictly into any of the above mortgages is an anomalous
mortgage. For instance, in a usufructuary mortgage, the mortgager may take personal
obligation to pay the dues.
The mortgage creation format is one of the key conditions in the sanction letter of the lender
/ term sheet that the lender and borrower sign to freeze the terms of their arrangement.

18. Explain the BASEL Framework in brief.

Established on 17 May 1930, the BIS is the world's oldest international financial organisation.
It has its head office in Basel, Switzerland and two representative offices: in the Hong Kong
Special Administrative Region of the People's Republic of China and in Mexico City.
BIS fosters co-operation among central banks and other agencies in pursuit of monetary and
financial stability. It fulfills this mandate by acting as:
• a forum to promote discussion and policy analysis among central banks and within the
international financial community
• a centre for economic and monetary research
• a prime counterparty for central banks in their financial transactions
• agent or trustee in connection with international financial operations
Every two months, the BIS hosts in Basel, meetings of Governors and senior officials of
member central banks. The meetings provide an opportunity for participants to discuss the
world economy and financial markets, and to exchange views on topical issues of central bank
interest or concern. The Basel Committee on Banking Supervision comprises representatives

24
from Argentina, Australia, Belgium, Brazil, Canada, China, France, Germany, Hong Kong SAR,
India, Indonesia, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, Russia, Saudi
Arabia, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, the United Kingdom and
the United States.
BIS also organises frequent meetings of experts on monetary and financial stability issues,
as well as on more technical issues such as legal matters, reserve management, IT systems,
internal audit and technical cooperation.
BIS is a hub for sharing statistical information among central banks. It publishes statistics on
global banking, securities, foreign exchange and derivatives markets.
Through seminars and workshops organised by its Financial Stability Institute (FSI), the BIS
disseminates knowledge among its various stake-holders.
The role of BIS has been changing in line with the times. Initially, it handled the payments that
Germany had to make consequent to the First World War. Following the Second World War and
until the early 1970s, it focused on implementing and defending the Bretton Woods system.
In the 1970s and 1980s, it had to manage the cross-border capital flows following the oil crises
and the international debt crisis. The economic problems highlighted the need for effective

supervision of internationally active banks. This culminated in the Basel Capital Accord on
international convergence of capital measurement and capital standards, in 1988.

Basel Accords
The Basel Accord of 1988 (Basel I) focused almost entirely on credit risk. It defined capital,
and a structure of risk weights for banks. Minimum requirement of capital was fixed at 8%
of risk-weighted assets. The G-10 countries agreed to apply the common minimum capital
standards to their banking industries by end of 1992. The standards have evolved over time.
In 1996, market risk was incorporated in the framework.
In June 2004, a revised international capital framework was introduced through Basel II.
The following year, an important extension was made through a paper on the application
of Basel II to trading activities and the treatment of double default effects. In July 2006, a
comprehensive document was brought out, which integrated all applicable provisions from the
1988 Accord, Basel II and the various applicable amendments.
The Basel II framework is based on three pillars:
• The first Pillar – Minimum Capital Requirements
Three tiers of capital have been defined:
o Tier 1 Capital includes only permanent shareholders’ equity (issued and fully paid
ordinary shares and perpetual non-cumulative preference shares) and disclosed
reserves (share premium, retained earnings, general reserves, legal reserves)
o Tier 2 Capital includes undisclosed reserves, revaluation reserves, general provisions
and loan-loss reserves, hybrid (debt / equity) capital instruments and subordinated
term debt. A limit of 50% of Tier 1 is applicable for subordinated term debt.
o Tier 3 Capital is represented by short-term subordinated debt covering market risk.
This is limited to 250% of Tier 1 capital that is required to support market risk.
• The second Pillar – Supervisory Review Process
Four key principles have been enunciated:
o Principle 1: Banks should have a process for assessing their overall capital adequacy
in relation to their risk profile and a strategy for maintaining their capital levels.

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o Principle 2: Supervisors should review and evaluate the bank’s internal capital
adequacy assessments and strategies, as well as their ability to monitor and ensure
their compliance with regulatory capital ratios. Appropriate corrective action is to be
taken, if required.
o Principle 3: Supervisors should expect banks to operate above the minimum regulatory
capital ratios and should have the ability to require banks to hold capital in excess of
the minimum.
o Principle 4: Supervisors should seek to intervene at an early stage to prevent capital
from falling below the minimum levels required to support the risk characteristics of
a particular bank and should require rapid remedial action if capital is not maintained
or restored.
• The third Pillar – Market Discipline
This is meant to complement the other two pillars. Market discipline is to be encouraged
by developing a set of disclosure requirements that will allow market participants to
assess key pieces of information on the scope of application, capital, risk exposures,
risk assessment processes and overall capital adequacy of the institution. The bank’s
disclosures need to be consistent with how senior management and the Board of Directors
assess and manage the risks of the bank.
The capital adequacy requirement was maintained at 8%. However, the whole approach
is considered to be more nuanced than Basel I.
The stresses caused to institutions and the markets during the economic upheaval in
the last couple of years, created a need for further strengthening of the framework. At
its 12 September 2010 meeting, the Group of Governors and Heads of Supervision, the
oversight body of the Basel Committee on Banking Supervision, announced a substantial
strengthening of existing capital requirements. These capital reforms, together with the
introduction of a global liquidity standard, deliver on the core of the global financial
reform agenda (Basel III).
Basel III is a comprehensive set of reform measures to strengthen the regulation,
supervision and risk management of the banking sector. These measures aim to:
• improve the banking sector's ability to absorb shocks arising from financial and economic
stress, whatever the source
• improve risk management and governance
• strengthen banks' transparency and disclosures.
The reforms target:
• bank-level, or micro-prudential regulation, which will help raise the resilience of individual
banking institutions to periods of stress.
• macro-prudential, system wide risks that can build up across the banking sector as well
as the pro-cyclical amplification of these risks over time.

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