Academic Activity -2

Kalpana Prasad
VU22MGMT0800006
B.COM(AAT)

1. Discuss the unique features and functions of development banks and

their importance in supporting specific sectors of the economy.

Ans. Development banks play a crucial role in fostering economic growth and
supporting specific sectors. Let’s delve into their unique features, functions,
and significance:

Features of Development Banks:

1. Specialization: Development banks are specialized financial institutions

that focus on providing medium and long-term finance to business
units. Unlike commercial banks, they do not accept deposits from the
public.
2. Multi-Purpose: These banks serve as multi-purpose institutions. Their
primary objective is to promote economic development by encouraging
investment and entrepreneurial activity.
3. Development-Oriented: Development banks are essentially
development-oriented. They aim to foster economic progress,
particularly in developing economies.
4. Balanced Regional Growth: They actively promote balanced regional
growth by supporting new and small entrepreneurs across different
regions.
5. Public Interest: Their motive is to serve the public interest rather than
focusing solely on profits.
6. Gap-Fillers: Development banks act as gap-fillers, addressing
deficiencies in existing financial facilities. They complement conventional
channels of finance.
7. Support for Both Sectors: These banks provide financial assistance not
only to the private sector but also to public sector undertakings.
8. Savings and Investment Promotion: They encourage the saving and
investment habit within the community.

Functions of Development Banks:

 1. Financial Gap Fillers: Beyond loans, development banks engage in
various activities. They subscribe to bonds, underwrite shares and
debentures, and guarantee loans from domestic and foreign sources.
2. Promotional Work: Development banks play a promotional role in
industrialization. They support all-round industrial development by
providing financial assistance and promoting investment.
3. Expertise in Specific Sectors: These banks possess in-house expertise in
particular sectors (e.g., science, engineering) and use it to crowd in
private sector investment.
4. Catalytic Role: They often act as first movers, catalyzing investment and
encouraging innovation.
5. Infrastructure Financing: Development banks contribute to
infrastructure financing, which is vital for economic growth.
6. Environmental Sustainability: Some development banks combat climate
change and promote environmental sustainability.

2. Analyse the role of LIC (Life Insurance Corporation of India) in mobilizing

savings and providing long-term investment opportunities for
individuals.

Ans. The Life Insurance Corporation of India (LIC) plays a crucial role in both
mobilizing savings and providing long-term investment opportunities for
individuals. Let’s delve into the specifics:

1. Mobilizing Savings:
o Insurance Policies: LIC gathers funds by issuing insurance policies
to individuals. These policies serve as a means for people to save
and protect their financial future.
o Investment Institution: LIC acts as an investment institution. It
collects money from policyholders and invests it in various
securities and financial markets, both within India and abroad.
o Government Securities: As a rule, LIC is required to invest at least
75% of its funds in Central and State Government securities. This
ensures stability and capital protection for the funds entrusted to
LIC.
o World’s Largest Insurance Company: LIC has become the world’s
largest insurance company in terms of the number of policies
issued. As of 2019, it covers over 13 crore policies, including
individual, group, and social schemes.
2. Long-Term Investment Opportunities:
 o Insurance-Cum-Investment Products: LIC offers a range of
insurance-cum-investment products, such as endowment plans,
money-back policies, and ULIPs (Unit Linked Insurance Plans).
These products allow individuals to save money while also
providing life coverage, making them suitable for long-term
financial planning.
o Infrastructure Investment: The long-term savings generated by
life insurance companies, including LIC, can be made available to
the government for funding infrastructure improvements. Such
investments are crucial for underpinning domestic private sector
growth and attracting foreign companies to the local economy.
3. Objectives of LIC of India:
o Widespread Coverage: LIC aims to spread life insurance widely,
especially in rural areas and among socially and economically
backward classes. It provides adequate financial cover against
death at a reasonable cost.
o Maximizing Savings: By making insurance-linked savings
attractive, LIC maximizes the mobilization of people’s savings.
o Balancing Obligations: While deploying funds, LIC balances the
interests of policyholders (whose money it holds in trust) with the
community as a whole. It prioritizes attractive returns while
considering national priorities.
o Economic Efficiency: LIC conducts business with utmost economy,
recognizing that the money belongs to policyholders.

3. What did you understand about fee- and asset-based financial services?
Explain their significance with examples for each.

Ans. Let’s delve into the concepts of fee-based and asset-based financial
services:

1. Fee-Based Financial Services:

o Definition: Fee-based financial services refer to services where a
fee is charged for professional advice or management, in addition
to any commissions received.
o Who Provides Them: These services are typically offered by
financial planners, investment companies, banks, or other
institutions.
o Compensation Model:
  Financial Planner: Recommends fee-based investments and
receives both a sales commission from the investment
provider and fees from the client.
 Fee-Only Investment: The financial planner is solely
compensated through fees paid by the client.
 Fee-Based Advisor: May charge an annual flat percentage
for all services, and may or may not receive commissions for
recommending fee-based investments.
o Examples:
 Fee-Based Investment: Suppose a financial planner
recommends a mutual fund. They receive a commission
from the fund company and fees from the investor.
 Fee-Only Investment: A financial planner charges an hourly
rate or a flat annual percentage for their services.
o Significance: Fee-based services offer flexibility but can create
conflicts of interest. Clients should understand how their advisor is
compensated1.
2. Asset-Based Financial Services:
o Definition: Asset-based finance involves using specific assets (such
as accounts receivable, inventory, machinery, or real estate) as
collateral to secure loans.
o Who Uses Them: Businesses utilize asset-based financing, not
individuals seeking personal loans.
o Types of Assets Used:
 Accounts Receivable: Outstanding invoices from customers.
 Inventory: Goods held for sale.
 Machinery and Equipment: Physical assets used in business
operations.
 Real Estate: Property owned by the company.
o Examples:
 Purchase Order Financing: An asset-based lender finances
raw material purchases for a company. After filling orders,
the company invoices its customer, and the lender receives
payment directly.
 Working Capital Loans: Companies use asset-based loans
for day-to-day operations, payroll, and short-term working
capital needs.
o Significance: Asset-based financing provides flexibility and
liquidity, but it can come with higher financing costs due to
collateral requirements2.
In summary, fee-based services involve fees and commissions, while asset-
based services use specific assets as collateral for loans. Both play crucial roles
in financial management and business operations.

3. Explain the objectives and characteristics feature of Financial Services.

Ans. Let’s explore the objectives and characteristics of financial services:

1. Objectives of Financial Services:

o Raising Capital: Financial services efficiently raise funds in an
economy. They provide various financial instruments for
individuals, investors, corporations, and institutions to invest their
money and raise capital.
o Encouraging Savings: These services offer convenient investment
options that help people grow their savings. For example, mutual
funds allow individuals to invest and earn reasonable returns.
o Deployment of Funds: Financial services facilitate the proper
allocation of financial resources into productive avenues.
Numerous investment avenues and instruments are available in
the financial market for earning income.
o Minimizing Risk: Risk minimization is a crucial role played by
financial services. They help diversify risk and protect people
against losses through insurance policies.
o Promoting Economic Growth: Financial services contribute to
overall economic growth. Governments can raise both short-term
and long-term funds for various needs, improving infrastructure
and employment opportunities.
2. Characteristics of Financial Services:
o Customer-Centric: Financial services are designed and provided
based on customer needs.
o Intangibility: They are intangible products of financial markets
(e.g., loans, insurance, stocks).
o Concomitant: Often provided simultaneously with other services
(e.g., investment advice with portfolio management).
o Perishable in Nature: Services cannot be stored or saved for
future use.
o Dominance of Human Element: Human expertise plays a
significant role in financial services.
o Advisory: Services often involve expert advice (e.g., financial
planning).
 o Heterogeneity: Services vary due to individual preferences and
requirements.
o Information-Based: Financial services rely on accurate and timely
information.

In summary, financial services play a vital role in raising capital, encouraging

savings, deploying funds, minimizing risk, and contributing to economic
growth. Their characteristics reflect their dynamic and customer-oriented
nature.

4. Evaluate the significance of Non-Banking Financial Companies (NBFCs)

and investment banking in facilitating credit intermediation and capital
market activities.

Ans. Let’s explore the significance of Non-Banking Financial Companies

(NBFCs) and investment banking in credit intermediation and capital market
activities:

1. Non-Banking Financial Companies (NBFCs):

o Definition: NBFCs are financial institutions that provide a wide
range of services similar to traditional banks but do not hold a
banking license. They engage in activities such as lending,
investing, trading in securities, asset management, and more.
o Role and Significance:
 Credit Intermediation: NBFCs play a crucial role in
broadening access to financial services. They complement
traditional banks by serving segments that may not have
easy access to banking services. For instance, they provide
loans to small businesses, self-employed individuals, and
rural communities.
 Financial Inclusion: NBFCs help bridge the gap by offering
credit to underserved populations. They cater to diverse
needs, including vehicle financing, consumer loans, and
microfinance.
 Alternative Investment Opportunities: NBFCs provide
investment avenues beyond traditional banking. Investors
can participate in fixed deposits, bonds, and other financial
products offered by NBFCs.
  Risk Absorption: During financial distress, NBFCs act as
shock absorbers. Their diverse portfolios spread risks,
contributing to overall financial stability.
 Market Efficiency: By providing liquidity and efficient price
discovery, NBFCs enhance capital markets. They attract
both domestic and foreign investors.
o Examples: NBFCs like Bajaj Finance, Mahindra Finance, and
Shriram Transport Finance serve critical roles in India’s financial
landscape123.
2. Investment Banking:
o Definition: Investment banking organizes large, complex financial
transactions such as mergers, acquisitions, and initial public
offerings (IPOs). Investment banks raise capital for companies and
provide advice on financial matters.
o Functions and Significance:
 Capital Raising: Investment banks underwrite debt and
equity securities for corporations. They facilitate IPOs, bond
offerings, and other fundraising activities.
 Mergers and Acquisitions (M&A): Investment bankers
advise on valuations, deal structures, and negotiations
during M&A transactions. They help companies merge,
acquire, or divest assets.
 Market Efficiency: Investment banks enhance market
efficiency by providing continuous buying and selling
opportunities. They tailor recommendations based on the
economic climate.
 Wealth Management: Investment banks offer wealth
management services to high-net-worth clients, including
portfolio management and investment strategies.
 Project Planning: Investment bankers assist corporations
and governments in planning and managing large projects,
identifying risks, and optimizing financial aspects.
o Examples: Prominent investment banks include Goldman Sachs,
Morgan Stanley, JPMorgan Chase, and Deutsche Bank.
o Historical Context: Investment banks were legally separated from
commercial banks in the United States until 1999 when the Glass-
Steagall Act was repealed.
In summary, NBFCs enhance financial inclusion, while investment banking
drives capital market activities, making both indispensable components of a
robust financial ecosystem.