SEMESTER 2: MBA 2021–23

Course: Indian Financial System and Financial Markets (IFSFM)

COURSE CODE: 21MBACC201

MODULE 4: FINANCIAL SERVICES

FACULTY: DR. FIRDAUS KHAN 1

ADJUNCT PROFESSOR,
FINANCE AREA

CMS Business School, JAIN (Deemed-to-be University)

 MODULE 4: FINANCIAL SERVICES

▪ Small Savings, Provident Funds, Pension Funds, Insurance Companies, Mutual Funds
and NBFC Non-Bank Financial intermediaries – Leasing, Hire purchase, Credit
rating, Factoring, Forfaiting, Non–Bank Statutory Financial Organisations*

(* These topics are categorized as ‘Self-learning’ topics *)

▪ Learning Outcome: At the end of this module, student will be able to assess the
impact of financial services

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 SMALL SAVINGS

▪ Small in amount at individual level

▪ Mobilise largest volume of savings

▪ Great significance in India

▪ Directly available to central government as its budgetary resources

▪ Many options, amicable features

▪ Excellent tax benefits

▪ Nominee benefits

▪ Some are covered by insurance

▪ Liquid in nature

▪ Mitigate inflationary pressures

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 SMALL SAVINGS - INSTRUMENTS

▪ Post Office Savings Account (since 1896)

▪ Min Rs. 20;

▪ Post Office Recurring Deposit Account (RD)

▪ Min Rs. 20;

▪ Post Office Monthly Income Scheme Account (MIS)

▪ Post Office Time Deposit Account (TD)

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 SMALL SAVINGS - INSTRUMENTS

▪ Senior Citizen Savings Scheme (SCSS)

▪ National Savings Certificates (NSC)

▪ Kisan Vikas Patra (KVP)

▪ Sukanya Samriddhi Accounts

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 PROVIDENT FUNDS

▪ For salaried class, contractual obligation

▪ Provides for old age and emergencies
▪ PPF for non salaried class
▪ Many types – GPF, EPF, PPF, etc.

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 GENERAL PROVIDENT FUND (GPF)

▪ Temporary, re-employed and permanent government servants

▪ Monthly
▪ Rate – not less than 6%
▪ Advances against specific purposes

CONTRIBUTORY PROVIDENT FUND (CPF)

▪ To non-pensionable government servant
▪ Monthly
▪ Rate – not less than 10%

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 EMPLOYEE PROVIDENT FUND (EPF)
▪ Employee PF Act, 1952
▪ Employers and Employees at equal rate – min is 12%
▪ Monthly
▪ Interest Rate – linked to 10-yr yield of Govt. bond
▪ Advances against specific purposes
▪ Nominee facility
▪ UAN – Universal Account Number – permanent across jobs
▪ PF + Interest during retirement

PUBLIC PROVIDENT FUND (PPF) - 1968

▪ Opened at head PO
▪ Monthly: 500 – 1.5 Lakhs
▪ Rate – not less than 8%
▪ Not for NRIs
▪ A 15 years’ scheme – serves LT invt goals
▪ Tax exemptions
▪ Nominee facility
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 QUIZ
▪ Employees/Users can withdraw from GPF on account of the following purposes:
▪ Education
▪ Illness
▪ Purchase of L&B
▪ All of these

▪ Answer: All of these

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 PENSION FUNDS

▪ A financial intermediary or an organization, trust that manages the assets and pays benefits to old

retirees is called a Pension Fund (PNF)

▪ Pension plans are also known as retirement plans

▪ The main objective behind a pension plan is to have a regular income post-retirement

▪ also come with insurance cover

▪ usually Long Term Plans. Investments in these Plans can be made either monthly or quarterly

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 CATEGORIES OF PENSION FUNDS
1. The funds that are sponsored by insurance companies wherein the corpus is invested in debt
funds and better suited for conservative investors

2. Unit Linked Plans wherein the funds are invested in both equities and debt. Further, this
category allows the investors to create a balanced portfolio with its balanced approach

3. National Savings Scheme is the government sponsored fund. Here the funds are either debt
securities or government securities.

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1. Guaranteed Monthly Income: Plans like Immediate Annuity allows you to receive monthly
or annual income as soon as you invest. The pension can be paid either for a fixed period of
time or until death. The same depends solely on the type of plan you choose.
2. Tax Benefits: The tax exemption is 10% to 40% under section 80C of the Income Tax Act.
Tax exemption depends on the plan you choose. It is always advisable to start planning your
retirement early so as to reap maximum tax benefits.
3. Vesting Age: Vesting age is where you start receiving a monthly Pension. The minimum
vesting age in most plans is 40 to 50 years and the maximum vesting age is up to 75 years.
Between the vesting age, one can decide at which age you would want to start receiving a
pension.
4. Surrender Value: Every Plan has a maturity date. It is very important to wait for the plan you
have purchased to complete its maturity date so you get the maximum benefit out of it. There
are times when you still want to surrender due to some unforeseen emergencies, the same can
be done and you would still receive the surrender value of the same provided the plan has
crossed the minimum duration. This feature is only available in Pension plans that include life
insurance plan benefits.

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 INSURANCE COMPANIES

▪ Financial risk management tool

▪ Premium covers – pure premium + admin cost + marketing cost
▪ Economic and social welfare
▪ Privatization – year 2000 onwards
▪ 50+ companies in Life and Gen Insurance space in India
▪ Popular terms: Sum assured, surrender value, life of policy, moral hazard, maturity,
etc.

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 INSURANCE COMPANIES – PRINCIPLES

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▪ Principle of Utmost Good Faith: The fundamental principle is that both the parties in an insurance
contract should act in good faith towards each other, i.e. they must provide clear and concise
information related to the terms and conditions of the contract.

▪ Principle of Proximate Cause (‘Causa Proxima’ or the nearest cause). This principle applies when the
loss is the result of two or more causes. The insurance company will find the nearest cause of loss to the
property. If the proximate cause is the one in which the property is insured, then the company must pay
compensation. If it is not a cause the property is insured against, then no payment will be made by the
insured.

▪ Principle of Insurable Interest: The person who is taking insurance should have some insurable interest
in that thing which is getting insured. So if there will be financial loss to the person if the insured object
gets destroyed. If this is not the case, insurance cannot be taken. So when a breadwinner takes life
insurance for his life, it makes sense because incase the person dies, there will be financial loss to
family.

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▪ Principle of Indemnity says that Insurance is not to make profit, but only to compensate you against the
losses incurred. It’s an assurance to restore the same position which was there before the loss. So the
compensation paid cannot be more than the losses incurred.

▪ Principle of Contribution: This principle is just a corollary of the principle of indemnity. As per this
principle, the insured company are liable to pay only their own contribution and they have right to
recover back the excess money paid from other insurer.

▪ Principle of Subrogation: Once the insured is paid for the losses due to damage to his insured property,
then the ownership right of such property shifts to the insurer. So if your car / bike / house / valuables
which you have insured is fully damaged and once you get compensation from insurance company, then
they get the ownership of the item and now they can sell off the remains to recover their dues by that
process. You can’t benefit from the remains of that item.

▪ Principle of Loss minimization: As per this principle, it’s the insured duty & responsibility to take all
actions to minimize the losses if it’s in their control. The insured person should take all necessary steps
to control and reduce the losses if possible

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 RISK MANAGEMENT PROCESS – INSURANCE COMPANY

Risk
Identification

Periodic Risk
review of Risk assessment

Risk Risk
reduction treatment

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 MUTUAL FUNDS
▪ A mutual fund is a type of financial vehicle made up of a pool of money collected from many

investors to invest in securities like stocks, bonds, money market instruments, and other
assets.

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▪ https://www.goodreturns.in/personal-finance/planning/7-best-midcap-mutual-funds-that-gave-
up-to-60-returns-in-1-year-1208941.html
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 TOP FUNDS IN INDIA

• SBI Mutual Fund.

• ICICI Prudential Mutual Fund.
• HDFC Mutual Fund.
• DSP BlackRock Mutual Fund.
• Aditya Birla Sun Life Mutual Fund.
• Kotak Mutual Fund.
• L&T Mutual Fund.
• Tata Mutual Fund.
https://www.fincash.com/l/best-mutual-fund-investment-companies

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 NBFC NON-BANK FINANCIAL CORPORATIONS

▪ NBFC is a company registered under the Companies Act,1956

▪ Engaged in the business of loans and advances, acquisition of shares /stocks /bonds /debentures /securities
issued by Government or local authority or other marketable securities of a like nature, leasing,
hire-purchase, insurance business, chit business.

▪ Does not include any institution whose principal business is that of agriculture activity, industrial activity,
purchase or sale of any goods (other than securities) or providing any services and sale/purchase
/construction of immovable property.

▪ A non-banking institution which is a company and has principal business of receiving deposits under any
scheme or arrangement in one lumpsum or in instalments by way of contributions or in any other manner, is
also a non-banking financial company (Residuary non-banking company).

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 NBFC NON-BANK FINANCIAL CORPORATIONS

▪ https://www.nelito.com/blog/the-top-10-nbfcs-in-india.html This website lists top 10 NBFCs.

▪ Power Finance Corporation Limited

▪ Shriram Transport Finance Company Limited

▪ Bajaj Finance Limited

▪ Mahindra & Mahindra Financial Services Limited

▪ Muthoot Finance Ltd

▪ HDB Finance Services

▪ Cholamandalam

▪ Tata Capital Financial Services Ltd

▪ L & T Finance Limited

▪ Aditya Birla Finance Ltd.

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 RPLR: Retail Prime Lending Rate

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 CLASSIFICATION OF NBFCs
Broad categorization of different types of NBFCs are as follows:
▪ 1. Asset Finance Company(AFC)
▪ 2. Loan Company (LC)
▪ 3. Infrastructure Finance Company (IFC)
▪ 4. Core Investment Company (CIC)
▪ 5. Leasing and Hire purchase Company
▪ 6. Infrastructure Debt Fund (IDF)
▪ 7. Non-Banking Financial Company - Micro Finance Institution (NBFC-MFI)
▪ 8. Non-Banking Financial Company – Factors (NBFC-Factors)

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 TOP 50 NBFCs IN INDIA - 2020

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 ADVANTAGES - NBFCs

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 NBFC – LEASING & HP

▪ There are two basic types of leasing structures in use:

▪ An operating lease is a contract that allows the lessor, as owner, to retain legal ownership of
an asset but allows the lessee to enjoy the economic use of the asset for a predetermined period
before returning the asset to the lessor. At the end of the lease period, the asset continues to be
owned by the lessor.

▪ In a finance lease, the lessor is the owner of the asset; however, at the end of the lease period
ownership is typically transferred to the lessee on the payment of a residual value price of the
asset which is usually pegged at 10% of the original asset cost, or less. Thus, a finance lease is
essentially a finance transaction dressed up as a lease

▪ https://www.ifc.org/wps/wcm/connect/098d9d0e-a553-4d2a-9b46-bf1701b19bf4/Ev
olution+of+Leasing+in+India_Aug+30+2019.pdf?MOD=AJPERES&CVID=mQ-Gi0B

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 NBFCS – LEASING & HIRE PURCHASE
▪ A high capital investment in several industries
▪ An increase in the presence of MNCs which operate on an asset-light business model
▪ An increasing usage of big ticket plant & equipment that come with high technological
obsolescence, and
▪ Emergence of professional lease providers with specialised expertise in asset management and
residual value risk management

▪ https://www.moneycontrol.com/stocks/marketinfo/totassets/nse/finance-leasing-hir
e-purchase.html
▪ Top Leasing and HP companies in India

▪ https://mynewcar.in/blog/auto-news/best-top-5-leasing-companies-in-india

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 CREDIT RATING

▪ A credit rating is a measurement of a person or business entity's ability to repay a financial

obligation based on income and past repayment histories. Usually expressed as a credit score,
banks and lenders use a credit rating as one of the factors to determine whether to lend
money.

https://corporatefinanceinstitute.com/resources/kno
wledge/finance/credit-rating/

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 KEY POINTS

• A credit score plays a key role in a lender's decision to offer credit.

• The FICO (Fair Issac Corporation) scoring system is used by many financial institutions.
• Factors considered in credit scoring include repayment history, types of loans, length of
credit history, and an individual's total debt.
• One metric used in calculating a credit score is credit utilization or the percentage of
available credit currently being used.
• It is not always advisable to close a credit account that is not being used since doing so can
lower a person's credit score.
• Credit scores are applicable to all kinds of financial instruments, business organisations,
individuals, even countries.

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 USERS OF CREDIT RATINGS

▪ Credit ratings are used by investors, intermediaries such as investment banks, issuers of debt, and businesses and corporations.
• Both institutional and individual investors use credit ratings to assess the risk related to investing in a specific issuance, ideally
in the context of their entire portfolio.

• Intermediaries such as investment bankers utilize credit ratings to evaluate credit risk and further derive pricing of debt issues.

• Debt issuers such as corporations, governments, municipalities, etc., use credit ratings as an independent evaluation of their
creditworthiness and credit risk associated with their debt issuance. The ratings can, to some extent, provide prospective
investors with an idea of the quality of the instrument and what kind of interest rate they should be expecting from it.

• Businesses and corporations that are looking to evaluate the risk involved with a certain counterparty transaction also use credit
ratings. They can help entities that are looking to participate in partnerships or ventures with other businesses evaluate the
viability of the proposition.

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 FACTORING

▪ A service to collect accounts receivables.

▪ In domestic and international trade
▪ The agency rendering the service is called a ‘factor’
▪ Factoring – is the service

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 FORFAITING

▪ When the exporter transfers his right to receive payment in favour of forfeiture, the
transaction is called forfaiting.

▪ It’s a method of discounting international trade bills

▪ On non recourse basis
▪ Highly effective sales tool
▪ Involves documentation

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 NBFSO – Self Learning Portion

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 NON–BANK STATUTORY FINANCIAL ORGANISATIONS* (NBSFO)
▪ The number and diversity of NBSFOs is so great that any single classificatory appellation cannot accurately reflect the nature of these
institutions. They are also known as Development Banks.

▪ Industrial Financial Corporation of India (IFCI) Set up in 1948 Medium and long term loan to large industries in the private sector. It
provides direct rupee and foreign currency loans.
▪ ICICI Set up in 1955. Medium and long term financing Its foreign currency loans business is much greater than that of other FIs. Diversified
financial services eg: ICICI Trust Ltd. ICICI investors services ltd. Etc.

▪ IDBI 1964 It is the central institution in the field of industrial finance. Provide credit for establishment of new industries.
Export-Import Bank (EXIM) 1982 Direct loans in India and outside for the purpose of exports and imports. It is the coordinating agency in
the field of international finance, it undertake development of merchant banking activities in relation to export oriented industries.
▪ Infrastructure Leasing & Financial Services Ltd (IL and FS) 1988 Financing of large infrastructure projects like roads, bridges, power
plants. Equipment leasing of infrastructure development.
▪ Tourism Finance Corporation of India (TFCI) 1989 Development of tourism and tourism related activities, facilities and services.

▪ NABARD 1982 It oversees the entire rural credit system. Coordinating agency in respect of agriculture and other rural development activities.
Provides credit for SSIs, Cis, handicrafts etc. It aims at the prosperity of rural areas through integrated rural development.

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 EXIM BANK -
▪ Premier export finance institution of India Set up in 1982 under the Export-Import Bank of India Act 1981 Enhance
exports Integrate foreign trade and investment with the economic growth Catalyst in the promotion of cross border trade
and investment

▪ Objective … for providing financial assistance to exporters and importers, and for functioning as the principal financial
institution for coordinating the working of institutions engaged in financing export and import of goods and services
with a view to promoting the countrys international trade…

▪ Genesis: Set up by an act of parliament in 1981 Wholly owned by the government of India Commenced operations in
march 1982 Apex financial institution

▪ Finance and Services

1. Export Credit: Pre-shipment credit, Suppliers credit, For project exporters, etc.
2. Finance for export oriented units Term finance, Working capital finance (for exporting and non-exporting companies),
export finance

3. Overseas investment finance: Finance for Indian Company's equity participation in the overseas Joint Venture/ Wholly
Owned Subsidiary, Direct finance, Debt component, etc. 4. Small and Medium Enterprises (SME) finance: Information
dissemination, capacity building - quality, safety, export marketing, etc., financial advisory services such as loan
syndication, etc.

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 NABARD
▪ Apex Development Bank Facilitating credit flow Promotion and Development of agriculture, small-scale
industries, cottage and village industries, handicrafts, rural crafts

▪ Mission Promoting sustainable and equitable agriculture and rural development through effective credit
support, related services, institution building and other innovative initiatives

▪ Objectives Will be an apex organisation; policy, planning operational aspects for promotion of Agriculture,
Small Scale Industries, etc. Serve as a refinancing institution for institutional credit Provide direct lending
Organic links with the Reserve Bank

▪ Major activities Preparation of Potential Linked Credit Plans Refinancing banks Providing loans to
Government organizations Supporting credit innovations of NGOs Extending formal banking services to the
unreached rural poor Promoting participatory watershed development On-site inspection of cooperative banks

▪ Functions All matters concerning policy, planning, operations in the field of credit for agriculture and other
economic activities in rural areas improving absorptive capacity of the credit delivery co-ordinates the rural
financing activities Prepares rural credit plan

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 REFERENCES
▪ Basic text by L M Bhole & Jitendra Mahakud
▪ Images courtesy: Google Images
▪ Websites of Financial organisations like Post office, NBFCs, etc.
▪ https://www.linkedin.com/pulse/types-leasing-players-india-nidhi-bothra/
▪ Cleartax.in

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