Programme : MBA (Financial Services)

Semester :I
Course Code : FSC111
Course Title : Financial Services
Unit Number :1
Title of the unit :Introduction to Financial
Services and Factoring
Module Name :Banking and NBFCs, Concepts
Module Number : 02
 Outline

• Banking and Non-Banking Finance Companies

(NBFCs)
• Financial services offered by Banks and NBFCs
 Learning outcomes
• On completion of this module, students should
be able to –
– Differentiate between a banking company and an
NBFC.
– Explain bank guarantee, letter of credit, export
credit, bancassurance, as financial services.
 Banks and their financial services

• Accepting deposits and lending of loans.

• Payment processing and fund transfer.
• Issue of drafts, cheques, credit cards, currency
exchange, etc.
• Bank guarantee, letter of credit, bills discounting.
• Sale, distribution or brokerage of financial
products.
 Banking Institutions - Classification

• Commercial banks
• Co-operative banks
• Regional Rural Banks
• Foreign banks
• Scheduled and non-scheduled banks
• Public sector and private sector banks
 Non-Banking Financial Institutions
• Group of heterogeneous entities providing
various financial services
• Accept deposits and lend loans.
• Investments and securities market services.
• Asset finance, housing finance, consumer
finance, and microfinance institutions.
• Merchant banking, venture capital, stock-
broking, insurance and others.
Non-Banking Financial Institutions
 Banks vs NBFCs

• NBFCs cannot accept demand deposits

• NBFCs do not form part of payment and
settlement system.
• NBFCs cannot provide cheques facility.
• NBFC depositors do not get insurance benefit on
deposits.
• NBFCs have multiple regulators.
 Banks vs NBFCs

• Tenure of deposits – 12 to 60 months.

• Interest rate on fixed deposits capped by RBI
 Bank Guarantee

Bank
Payment in
Provides BG case of
Request for BG
default

Delivers goods
Buyer Seller
Makes payment

Wants to make payment in future Cannot trust the buyer

 Bank Guarantee

• Specifications
– Parties
– Validity period
– Amount of guarantee
– Events under which it can be invoked
– Collaterals
– Fees
 Letter of Credit Shipping Payment
documents demand
Payment
Sends LC Advising
Issuing Bank
Bank
Checks authenticity
Payment
Shipping Sends LC Shipping Payment
documents Request LC documents

Buyer Ships goods Seller

(Importer) (Exporter)

Confirming Nominated
Trust deficit
Bank Bank
 Export Credit

• Pre-shipment credit
• Post-shipment credit
• Buyer’s credit
• Line of credit
 Bancassurance
• Selling of insurance through bank branches
 Bancassurance

• Cost-effectiveness
• Facilitates marketing of insurance
• Commission based income to bank
• Combines marketing capabilities with
distribution network advantage
 Bancassurance models
• Pure distributor
– Only selling of insurance products
• Strategic alliance
– Involvement in product development and service terms
• Joint venture
– Separate entity jointly setup by bank and insurance company
• Financial service group
– Acquisition of one entity by the other to create conglomerate
Factoring
 What is factoring?

• Agreement in which receivables arising out of

sale of goods/services are sold by a firm to the
“factor” as a result of which the title to the
goods/services represented by the said
receivables passes on to the factor.
 What is factoring?

• Factoring is a service involving the purchase by

a financial organization, called a factor, of
receivables owed to manufacturers and
distributors by their customers, with the factor
assuming full credit and collection
responsibilities.
Robert W. Johnson
 What is factoring?

• Factoring is an asset-based means of financing

by which the factor buys up the book debts of
a company on a regular basis, paying cash
down against receivables, and then collects
amounts from the customers to whom the
company has supplied goods
Kohok
 Mechanism of factoring
Payment of balance amount
Factor
Monthly
Statements
Sends copies of invoices, Pre-Payment Payment on
Delivery challan, etc. of 80% due dates

Orders goods on credit

Seller Buyer
•Delivers goods with invoice
•Instructions to pay to factor
 Terms and conditions of factoring

• Agreement of factoring.
• Assignment of debts in favour of factor.
• Conditions of buying and selling have been
complied with and transaction is complete.
• Payments arising out of bills free from
encumbrances.
 Terms and conditions of factoring

• Selling limits for the client.

• Circumstances and Conditions of recourse to
the client.
• Details of payment to the factor.
 Functions of a factor

• Purchase and collection of debts.

• Sales ledger management.
• Credit control and credit protection
• Provision of finance
• Advisory services