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INNOVATION IN BANKING AND

INSURANCE

Presented by : Saurabh Shah
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TAAZA KHABAR
2
UPDATES ON RATES
Particulars As on 4th Dec ,2009
Bank Rate 6%
Repo Rate 4.75%
Reverse Repo Rate 3.25%
CRR 5.00%
SLR 25%
INR/ 1USD 46.72
PLR 11% - 12%
Call Rates 2.10% - 3.30%
SENSEX 17,189.31(+64.09)
NIFTY 5134.65(+0.44%)
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CONTENTS
S.NO. Particulars Remarks
1 Evolution and Functioning of Banks Saurabh
2 Retail Banking
Presentation /
Saurabh
3 Financial Services Saurabh
4 Derivatives Saurabh
5 Credit Risk Saurabh
6 Technology in Banks and Housing Finance Drop
7 Definitions, Nature and Functions of Insurance Saurabh
8 Evolution of Insurance Saurabh
9 Life Insurance Presentation
10 Corporate Governance Saurabh
4
SECTOR WISE DISTRIBUTION OF GDP
(
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r
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e
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t
)

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

6
INDIAN BANKING SYSTEM
Non-Scheduled Banks Scheduled Banks
Scheduled
Commercial
Banks
Scheduled
Co-operative
Banks
Public
Sector
Banks
Scheduled
Urban Co-op.
Banks
Regional
Rural
Banks
Private
Sector
Banks
Foreign
Banks in
India
Nationalized
Banks
SBI & its
Associates
Scheduled
State Co-op.
Banks
7
EARLY PHASE FROM 1786 TO 1949 OF INDIAN
BANKS : PHASE 1
The General Bank of India was set up in the year 1786

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

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

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


8
CONTD: PHASE 1
The Reserve Bank of India began operations as private
shareholders' entity on April 1, 1935, which makes it 74 years old. It
was nationalized on January 1, 1949.

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

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




9
NATIONALIZATION OF INDIAN BANKS AND UP TO 1991
PRIOR : PHASE 2
Imperial Bank was nationalized in under State Bank of India Act 1955
which led to the emergence of State Bank of India and marked the
beginning of first phase of nationalization

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


10
CONTD..PHASE2
SBI along with its associate banks account for 20% of total branches
of all commercial banks in India

In1969, major process of nationalization was carried out. 14 major
commercial banks in the country were nationalized.

Second phase of nationalization was carried out in 1980 with six
more banks.

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




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NATIONALIZATION OF COMMERCIAL BANKS
On July 19, 1969, 14 commercial banks got nationalized
Objectives
Removal of control by a few
Provision of adequate credit for agriculture and small industry
and export
Giving a professional bent to management
Encouragement of a new class of entrepreneurs
The provision of adequate training as well as terms of service
for bank staff
12
14 BANKS THAT WERE NATIONALIZED
Central Bank of India
Bank of Maharashtra
Dena Bank
Punjab National Bank
Syndicate Bank
Canara Bank
Indian Bank
Indian Overseas Bank
Bank of Baroda
Union Bank
Allahabad Bank
United Bank of India
UCO Bank
Bank of India

13
MAJOR MILESTONES IN BANKING HISTORY
1949 : Enactment of Banking Regulation Act

1955 : Nationalization of State Bank of India

1960 : Nationalization of SBI subsidiaries.

1969 : Nationalization of 14 major banks

1971 : Creation of credit guarantee corporation

1975 : Creation of regional rural banks.

1980 : Nationalization of six banks with deposits over 200 crore.

14

NEW PHASE OF INDIAN BANKING SYSTEM REFORMS
AFTER 1991-PHASE3

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

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

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

Efforts are being put to give a satisfactory service to customers

Phone banking and net banking is introduced. The entire system
became more convenient and swift.
15
BANKING SECTOR REFORMS
Measures for liberalization, like dismantling the complex system
of interest rate controls, eliminating prior approval of the Reserve
Bank of India for large loans, and reducing the statutory
requirements to invest in government securities
Measures designed to increase financial soundness, like
introducing capital adequacy requirements and other prudential
norms for banks and strengthening banking supervision
Measures for increasing competition like more liberal licensing of
private banks and freer expansion by foreign banks.
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TYPES OF BANKS
Commercial Banks
Commercial banks operating in India may be categorised into public
sector, private sector and Indian or foreign banks depending upon the
ownership, management and control.
They may also be differentiated as scheduled or non-scheduled,
licensed or unlicensed.
A commercial bank is run on commercial line that is to earn profits
unlike a cooperative bank which is run for the benefit of a group of
members of cooperative body e.g. a housing co-operative society.
The commercial banks are spread across the length and breadth of the
country ad cater to the short term needs of industry, trade and
commerce and agriculture unlike the developmental banks which focus
on long term needs.

17
FUNCTIONS OF COMMERCIAL BANKS
Primary Functions
Borrowing Lending
18
TYPES OF LENDING
Lending
CASH
CREDIT
OVERDRAFT
RETAIL
FINANCE
TERM
FINANCE
BILLS
FINANCE
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SECONDARY FUNCTIONS
Collection of Cheques
Periodic Payment
Remittances
Other Collections

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


Agency Functions Utility Functions
20
SCHEDULED BANKS
Scheduled Banks are those which are included in second
scheduled of Banking Regulation Act 1965, other are non
scheduled banks.
To be included in scheduled category a bank
(i) must have paid up capital and reserves of not less than Rs 5
lakhs
(ii) must also satisfy the RBI that its affairs are not conducted in a
manner detrimental to the interests of its depositors.
Scheduled banks are required to maintain a certain amount of
reserves with the RBI, the in return enjoy the facility of financial
accommodation and remittance facilities at concessional rates from
the RBI
21
FOREIGN BANKS
Foreign Commercial Banks are the branches in India of the joint
stock banks incorporated abroad.
Besides financing the foreign trade, they undertake banking
business within the country as well.
There are around 40 foreign banks in India. Standard Chartered
Grind lays is the bank with the largest branches in India.
Foreign banks have brought latest technology and latest banking
practices in India. They have helped made Indian Banking system
more competitive and efficient.
22
PRIVATE BANKS
Private Bank is a bank registered as a public limited company
under the Companies Act 1956.
The RBI may on merit grant a license under the Banking
regulation Act 1949 for such a bank.
The banks may also be included in Schedule II of the RBI at the
appropriate time.
While granting a license, preference may be given to those banks
the headquarters of which are proposed to be located in a centre
which does not have the headquarters of any other bank.

23
NON-SCHEDULED BANKS

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

24
REGIONAL RURAL BANKS(RRBS)

RRBs are established under the Regional Rural Bank Act 1976
having a minimum capital of Rs 5 crore in business of

(1)granting loans and advances, particularly to small and
marginal farmers and agricultural labourers, whether
individually or in groups, and to co-operative societies etc
(2)granting of loans and advances particularly to artisans, small
entrepreneurs and persons of small means engaged in trade
commerce or industry or other productive activities

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

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

25
CO-OPERATIVE BANK

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

26
RESERVE BANK OF INDIA
The Reserve Bank of India began operations as private
shareholders' entity on April 1, 1935, which makes it 76 years old. It
was nationalized on January 1, 1949.
To streamline the functioning and activities of commercial banks,
the Government of India came up with The Banking Companies
Act, 1949 which was later changed to Banking Regulation Act 1949.
Reserve Bank of India was vested with extensive powers for the
supervision of banking in India as the Central Banking Authority.

27
FUNCTIONS OF RBI
Monetary Authority :
Formulation and Implementation of monetary policies.
Objective-Maintaining price stability and ensuring adequate flow of
credit to the productive sectors.
Regulator and supervisor of the financial system

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

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






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

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

FUNCTIONS OF RBI
29
Banker to the government :
RBI performs merchant-banking function for the central and the
state governments, also acts as their banker.
It accepts money in deposit, permits withdrawal of cash by cheque,
receives/collects payments to the Governments and transfers funds
to various places in the country for the use of the Govt.
Borrows on behalf of the Governments.

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


FUNCTIONS OF RBI
30
DEPOSIT ACCOUNT
This is a core activity of the bank.
Public deposits comprise the major proportion of a bank working
funds which are used primarily to make loans and advances and
to purchase securities.
The size of deposit is a fair reflection of the confidence, reposed
by the public in that bank.
The growth and propensity of a bank depends on how they are
managed to maximize profits.
Banks accept various types of deposits, which are generally
categorized as demand or time deposits

31
SAVING ACCOUNT
Such accounts are usually maintained by people who wish to save
a part of the current income to meet the future needs and also to
earn some interest thereon.
The banker pays interest against these accounts to the customers
though at a lower rate than in case of fixed deposits.
Normally, the minimum amount to open an account in a
nationalized bank is Rs 100.
If cheque books are also issued, the minimum balance of Rs 500
has to be maintained. However in some private or foreign bank the
min.bal.is Rs 500 or more and can be up Rs. 10,000.
A Savings account can be opened either individually or jointly with
another individual.
There are restrictions on the number of withdrawals to be made
out.

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

CURRENT ACCOUNT
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AXIS BANK NORMAL CURRENT ACCOUNT (
AS ON AUG 2008)

At a Monthly Average balance of Rs 10,000 this account takes you
into the all new world of banking.
At-Par Cheque Facility
Enjoy the benefits of payable 'At-Par' cheque book at very nominal
charges. Issue cheques payable at par at any of our branches /
outlets, presently 575 across the country.
Inter Branch Cash Deposit Facility
Deposit cash upto Rs. 50,000 per day at a remote branch for instant
credit into your account.
Home Branch Cash Withdrawal
Free upto 50 transactions for unlimited amount per month.
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AXIS BANK NORMAL CURRENT
ACCOUNT (AS ON AUG 2008)
Demand Drafts
Avail Demand Drafts at very nominal charges. You can issue
demand drafts at any of our branches / outlets, presently 575
and a wide network of correspondent bank locations.
Outstation Cheque Collection
Avail outstation cheques.
Local Cheque Deposit Facility
Deposit cheques at any Axis Bank branch and get the credit into
your account.


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RECURRING DEPOSIT ACCOUNT
In this account a certain fixed amount is to be deposited by the
account holder every month for a specified period of time.
This account inculcates the habit of regular savings among
people.
The interest allowed on this account is more than savings
account but less than Fixed deposit account.
No withdrawals are allowed from this account till maturity.
36
FIXED DEPOSIT ACCOUNT
In this account a fixed amount is deposited in a bank for a
specified period.
The objective of this account is to encourage people to deposit
surplus funds and earn higher rate of interest.
Banks pay maximum rate of interest on fixed deposit since
these amount can be reinvested by the banks at much higher
rate.
Banks provide loan facility to FD account holders to a
maximum limit of 90% of the FD amount @ 2% interest.
37
DEMAT ACCOUNT

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

It is introduced by the commercial banks to keep the record of
the shareholdings of the customer regarding the opening stock
and the closing stock of the shares.
38
FOREIGN DEPOSIT ACCOUNT

A bank normally offers the following foreign accounts
1. NRO Account (Non Resident Ordinary)
2. NRE Account (Non Resident External)
3. NRNR Account (Non-Resident Non Repartriable)
4. FCNR Account (Foreign Currency Non Resident)

39
NRO ACCOUNT
(NON RESIDENT ORDINARY)

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

Intention to stay outside for a indefinite period

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

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

Interest on such deposits are taxable

40
NRE ACCOUNT
(NON RESIDENT EXTERNAL)

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

Deposits designated in rupees

Maintained in Savings, Current and Fixed Deposits account in
India

Intention to stay outside for a indefinite period

Funds in these accounts are repatriable

Interest on these account is tax free
41
NRNR ACCOUNT
(NON-RESIDENT NON REPATRIABLE)

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

42
FCNR ACCOUNT
(FOREIGN CURRENCY NON RESIDENT)

Account in foreign currencies

Can be maintained by NRIs

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

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

Freely Repatriable
43
Liabilities of Bank
Share Capital
Reserve Funds
Deposits: Constitute 92% of total liabilities of all scheduled
commercial banks
Demand Deposits
Term Deposits


BANKS BALANCE SHEET
AND PORTFOLIO MANAGEMENT
44
OTHER LIABILITIES OF BANKS
Among other liabilities demand and time deposits from banks
amount to three to four percent of total liabilities and
Borrowing from other Banks amount to another one or Two percent
Borrowings from RBI since 1960s till 1990 have varied between 2.49
and 5.69 percent. However at present they are negligible
Apart from RBI, Banks also use non-deposit resources such as
borrowings from NABARD, EXIM Bank and bill rediscounted with
Financial Institutions
45
ASSETS
Cash in Hand and Balances with RBI
Investments
In government and other approved securities (SLR Securities)
Non- SLR Securities( CP, Units of Mutual funds, shares and
debentures of PSUs) Private corporate sector.
Bank credit : Types of advances provided are loans, cash credit,
overdrafts, demand loans, purchase and discounting of commercial
bills and installment or hire-purchase credit.
46
OFF BALANCE SHEET ACTIVITIES
Transactions not appearing on balance sheet are called off
balance sheet items.
In India the off balance sheet activities of commercial banks
include forward exchange contracts, loan commitments
guarantees such as Letter of credit whereby bank agrees to pay
a specified amount on presentation of evidence of default.
Banks interest in saving capital and avoiding reserve
requirements is one of the reason for the proliferation of these
activities.

47
CHARGE
In lay mans term charge simply means individual legal claim.
Creditors have first charge, second charge ,pari-passu charge
depending upon encumbrance.

Mortgage Hypothecation
Lien Pledge
Modes of
Charge
48
This refers to create a charge over immovable property like
Land & Building as a collateral(security).
As per sec 58 of the transfer property act 1882 defines mortgage
as transfer of an interest in specific immovable property for the
purpose of securing money.
The transferor is called mortgagor the transferee is called
mortgagee.
Mortgage deed is the written legal document signed between
both parties by which transfer is affected.
MORTGAGE
49
HYPOTHECATION
Hypothecation is another method of creating charge over movable
assets like current assets(e.g. book debts, raw material )
This method of lending is used by the banks for the purpose of
working capital requirement.
Neither possession nor ownership of the goods is transferred to the
creditor but equitable charge is created at later stage.
The goods remains in the possession of the borrower.
The charge of hypothecation is converted into pledge and the banker
or hypothecator enjoys the power and the rights of the pledge
50
LIEN
Lien means to keep or retain the goods belonging to others as a
security for the recovery of the reward.
There are 2 types of Lien
Particular Lien available against specific goods and not all
goods.
General Lien available against all the goods whether
present or past.
As per sec 171,Indian contract bankers are given right of the
general lien on the banker.
The ownership of the goods is with customer and not with the
banker.
51
PLEDGE
Goods delivered to another as a security for money borrowed is
called Pledge
It is one type of Bailment. Bailor in this case called the
Pledgor and the Bailee is called Pledgee
Illustration A borrows Rs. 4000 against security of his jewellery.
The bailment of jewellery is a pledge.
Pledge can be affected only of movable property and there is only
transfer of possession and not that of ownership.

52
EVOLUTION OF BANCASSURANCE
Insurance Regulatory and Development Authority (IRDA) Act,1999
permitted commercial banks to enter into Insurance business.
RBI has issued certain guidelines in this context such as :
Min net worth of Rs 500 crores
Satisfy the criteria for capital adequacy, profitability, NPA level
Maximum equity holding by banks normally 50% in Joint
venture with risk participation
Banks not eligible for JV can participate without risk participation up
to 10% of net worth or Rs 50 crore whichever is lower.
53
In India Banking and Insurance sector are regulated by 2 different
entities RBI and IRDA.
IRDA has also issued certain guidelines :
Each bank that sells insurance must have chief insurance
executive to handle all the insurance activities.
All the people involved in selling should undergo mandatory
training and institute accredited by IRDA.
Commercial banks, including cooperative banks and RRBs
may become corporate agents for one insurance company.
Banks cannot become insurance brokers.
EVOLUTION OF BANCASSURANCE
54
BANCASSURANCE
BANKING
INSURANCE
FINANCIAL
INTERMEDIARIES
Selling Insurance Products through Banks

MEANING
55




TIE-UPS IN BANCASSURANCE

INSURANCE


BANKS

HDFC Standard Life Insurance Co.

UNION Bank of India.

Birla Sun Life Insurance

HDFC Bank, Deutsche Bank etc.

ICICI Prudential Life Insurance Co.

ICICI Bank, Citibank, etc

Life Insurance Corporation (LIC)

Centurion Bank, Oriental Bank of
Commerce, etc
SBI Insurance Co

State Bank of India, Associate Bank

56
ADVANTAGES TO BANKS
Increased income to banks in form of revenue.

Infrastructure Costs. a) Distribution cost
b) Operation Cost

Creating a Universal Banking platform with wider Financial
Services.

57
ADVANTAGES TO INSURANCE COMPANIES
Channel diversification (revenue).
Infrastructure and Administrative costs
Achieve the geographical reach within minimum time & cost.
Wider range of products.


58
ADVANTAGES TO CUSTOMERS



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

59
Currently India
contributes 10% of the
total premium collected
across the whole Asias
Life and Non-Life
Insurance sector.
At it is expected to
contribute around 18%
by 2010.
60
QUIZ !!!!!
61
FACTS OF BANKS IN INDIA
1) The first bank in India to be given an ISO Certification
Canara Bank

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

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

4) India's oldest, largest and most successful commercial
bank, offering the widest possible range of domestic,
international and NRI products and services, through its
vast network in India and overseas.
State Bank of India
63
5) India's second largest private sector bank and is now the
largest scheduled commercial bank in India
The Federal Bank Limited

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

64
DERIVATIVES
In recent years, financial markets have developed many new
products whose popularity has become phenomenal.
Derivative products initially emerged, as hedging devices against
fluctuations in commodity prices.
A derivative is an instrument whose value depends on the
values of one or more basic underlying variables called
bases. The underlying variables are forex, equity,
commodity, bonds, debentures etc.
Illustration : Wheat farmers may wish to sell their harvest at a
future date to eliminate the risk of a change in prices by that date.
The price of this derivative is driven by the spot price of wheat
which is the underlying.
65
DERIVATIVES
In derivative market when enter into a contract to buy or sell
particular underlying:
Long position means to have a buy position for particular
stock
Short position means to have a sell position for particular
stock
Bid price (buyers price) is the rate/price at which there is a
ready buyer for the stock.
Ask price (sellers price) is the rate/ price at which there is
seller ready to sell his stock.
66
TERMINOLOGIES RELATED TO FUTURES.

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

67
Marked-to-market (M to M): in the futures market, at the
end of each trading day, the margin account is adjusted to
reflect the investors gain or loss depending upon the
futures closing price. This is called marked-to-market.
TERMINOLOGIES RELATED TO FUTURES.

68
OPTIONS TERMINOLOGY
Option price/premium: Option price is the price which the
option buyer pays to the option seller. It is also referred to as
the option premium.
Strike price: The price specified in the options contract is
known as the strike price or the exercise price.

69
OPTIONS TERMINOLOGY
In-the-money option:
Spot price > Strike Price in case of call option.
Spot price < Strike Price in case of put option.
If exercised immediately it would lead to positive cash flow.
E.g.: Spot value of Nifty is 2157. An investor buys a one-month
nifty 2140 call option for a premium of Rs.7. the option is?

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

70
Derivatives
Forwards
Futures Swaps
Options
KINDS OF DERIVATIVES
71
FORWARD CONTRACT
A forward contract is a customized contract between two entities,
where settlement takes place on a specific date in the future at
todays pre-agreed price.
No cash is exchanged when the contract is entered into.

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

72
FEATURES OF FORWARD CONTRACT
They are bilateral contracts and hence exposed to counterparty
risk.
Each contract is custom designed, and hence is unique in terms
of contract size, expiration date and the asset type and quality.
The contract price is generally not available in public domain.
On the expiration date, the contract has to be settled by delivery
of the asset.
If the party wishes to reverse the contract, it has to compulsorily
go to the same counter-party, which often results in high prices
being charged.

73
FUTURES CONTRACT
A future contract is similar to Forward account.
A futures contract is an agreement between two parties to buy
or sell an asset at a certain time in the future at a certain price.
Futures contracts are special types of forward contracts in the
sense that the former are standardized exchange-traded
contracts.
Index futures are all futures contracts where the underlying is
the stock index (Nifty or Sensex) and helps a trader to take a
view on the market as a whole.
74
FEATURES OF FUTURES CONTRACT

The standardized items in a futures contract are:
Quantity of the underlying
Quality of the underlying
The date and the month of delivery
The units of price quotation and minimum price change
Location of settlement

75
FORWARDS V/S FUTURES
Forwards Futures
OTC in nature
Traded on organized stock
exchange
Contract terms are customized Contract terms are standardized
Requires no margin payment Requires margin payment
Settlement happens at end of
period
Follows daily settlement
One delivery date which is
specified
Range of delivery dates
Some credit risk No credit risk
Counterparties have to take
exposure
Clearing house takes the exposure
on both the parties
76
TYPES OF FUTURES
The different types of Futures are but different facets of the same
Futures.
Currencies
Commodities.
Interest Rates
Stocks
Index
77
OPTIONS
Option, as the word suggests, is a choice given to the investor
to either honor the contract; or if he chooses not to walk away
from the contract.
An option gives its owner the right but not the obligation to
purchase or sell an asset on or before some date in future.
The date when option expires is known as the exercise date, the
expiration date or the maturity date.
The price at which asset can be purchased or sold is known as
strike price.
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TYPES OF OPTIONS
Call Option is the right, but not the obligation, to buy the
underlying asset by a certain date for a certain price.
Put Option is the right, but not the obligation, to sell the
underlying asset by a certain date for a certain price.

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

79
SWAPS
SWAPS have been termed as private agreement between the two
parties to exchange cash flows or payments which will take place in
the future.

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

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


80
FEATURES OF SWAP
A swap is nothing but the combination of Forwards, so it has all
the properties of forward contract.
It requires 2 parties with equal and opposite needs.
There is no exchange of principal on the other hand fixed
interest is exchanged for floating rate of interest.
Swaps are in the nature of long term agreement and they are
just like long dated forward contracts.

81
DERIVATIVES AND BANKS
Derivatives are used by banks to hedge risks, to gain access to
cheaper money and to make profits.
Banks also help customers to cope with financial market
volatility by offering various derivatives security services such
as forward contract, swaps, options etc
These activities are off balance sheet activities for which capital
requirement is low.

82
FINANCIAL SERVICES
Financial intermediaries provide key financial services such as
merchant banking, leasing, hire purchase, credit-rating, and so
on which indirectly deals with the management of money.
Financial services rendered by the financial intermediaries bridge
the gap between lack of knowledge on the part of investors and
increasing sophistication of financial instruments and markets.
These financial services are vital for creation of firms, industrial
expansion, and economic growth.

83
CLASSIFICATION OF
FINANCIAL SERVICE INDUSTRY

Financial Service
Industry
Capital Market
Intermediaries
(Long term funds)
Money Market
Intermediaries
(Short term funds)
84
SCOPE OF FINANCIAL SERVICES
Financial services covers wide range of activities. They can be
broadly classified into:
1) Traditional activities
Fund based activities
Dealing in foreign exchange market activities
Involving in equipment leasing ,hire purchase, venture capital,
seed capital etc
Underwriting of or investment in shares, debentures, bonds etc
of New issue market.
Dealing in secondary activities
Participating in Money market instruments such as CPs, CDs,
T-bills etc

85
SCOPE OF FINANCIAL SERVICES
Non Fund based activities
This activity is also called as Fee based activity e.g. After
sales service
Project finance is arrangement of funds from FIs for the new
project or new venture. Funds are also arranged for working
capital requirements.
Assisting in the procedural clearances from government.
Management of pre and post issue of capital through IPO. e.g.
Moratorium period
2) Modern Activities
Management of portfolio of large public sector organization
Acting as trustees to Debenture holders
Planning for Merger and Acquisitions
Hedging of risk due to exchange risk, interest rate risk,
economic risk and political by using swaps and
derivative products.




86
NEW FINANCIAL PRODUCTS AND SERVICES
Merchant Banking
Only a body corporate other than a non-banking financial
company shall be eligible to get registration as merchant banker.
Without holding a certificate of registration granted by the
Securities and Exchange Board of India, no person can act as a
merchant banker.
The validity period of certificate of registration is 3 years from
the date of issue.

87
MERCHANT BANKING
Managing of public issue of capital such as determining the
type of securities to be issued

Draft of prospectus and application forms
Appointment of Registrar to deal with share application and
transfers
Listing of Securities
Arrangement of underwriting
Placing of issues
Selection of brokers and bankers to the issue
Publicity and advertising agent

Private Placement of Securities
88
LOAN SYNDICATION
This is more or less Consortium Banking
Merchant bankers arrange to tie up loans for their clients.
This takes place in a series of steps. Firstly, they analyze the
pattern of the clients cash flows, based on which the terms of the
borrowings can be defined.
Then the merchant banker prepares a detailed loan memorandum,
which is circulated to various banks and financial institutions and
they are invited to participate in the syndicate ( joining together).
The banks then negotiate the terms of lending on the basis of
which the final allocation is done.

89
MUTUAL FUND
The value associated with each of these units is known as (NAV). Mutual
fund issue securities known as units to the investors known as unit holders
in accordance with quantum of money invested by them.

90
STRUCTURE OF MUTUAL FUND
Trustees are
legal owners
Investors are
beneficial owners
Mutual is a Trust
91
WORKING OF MUTUAL FUND
Investors
Fund
Managers
Securities
Returns
Pool their money
Invest in
Generates
Passed back to
92
Mutual Fund
Structure
Close
Ended
Open
Ended
Investment
Growth
Fund
Income
Fund
Balance
Fund
Index
Funds
Money
Market
TYPES OF MUTUAL FUNDS
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OPEN ENDED SCHEMES

Accepts funds from investors on continuous basis.
Repurchase facility available.
No listing on the stock exchange.
Better liquidity due to continuous repurchase.
Sale and Repurchase based on NAV
94
CLOSED ENDED SCHEMES
Schemes are opened for specified time period.
Corpus normally does not change throughout the year.
Such schemes are normally listed in the stock exchange.
Otherwise repurchase facility provided.
Liquidity normally at the time of redemption.
Long term investment strategies depending on the life of the
scheme.
Market price may be below or above par.

95
GROWTH FUNDS
The aim of growth funds is to provide capital appreciation over the
medium to long- term.

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

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

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

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

96
INCOME FUNDS
These funds provide regular and steady income to investors.
Such schemes generally invest in fixed income securities
such as bonds, corporate debentures and Government
securities.
Income Funds are ideal for capital stability and regular
income.

97
BALANCE FUNDS
Balanced funds work particularly well during a downturn in equity
markets.
These funds invest both in equity shares and fixed-income-
bearing instruments (debt) in some proportion.
While selecting a balanced fund, choose the conventional type
60:40 (equity: debt) with a steady track record.
Make sure the fund manager sticks to the 60:40 mandates even
during bullish times, when most balanced fund managers
succumb to the temptation of over-allocation to equities for higher
growth.
They are ideal for medium to long-term investors who are willing
to take moderate risks.


98
MONEY MARKET MUTUAL FUNDS
These mutual funds would invest exclusively in money market
instruments.
RBI introduced to provide an additional short- term avenue for
investment and bring money market within reach of individuals.

99
INDEX FUNDS
Index Funds replicate the portfolio of a particular index such as
the BSE Sensitive index, S&P NSE 50 index (Nifty), etc these
schemes invest in the securities in the same weight age
comprising of an index.
NAVs of such schemes would rise or fall in accordance with the
rise or fall in the index, though not exactly by the same
percentage.
There are also exchange traded index funds launched by the
mutual funds which are traded on the stock exchanges.

100
ADVANTAGES OF MUTUAL FUNDS
Diversification
Mutual funds invest in a number of companies across a broad
cross-section of industries and sectors.
This diversification reduces the risk because seldom do all stocks
decline at the same time and in the same proportion
One achieves this diversification through a mutual fund with far
less money than you can do on your own.

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

101
ADVANTAGES OF MUTUAL FUNDS
Return potential
Over a medium to long-term, mutual funds have the potential
funds to provide a higher return as they invest in a diversified
basket of selected securities.

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

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



102
ADVANTAGES OF MUTUAL FUNDS
Choice of schemes
Mutual funds offer a family of schemes to suit our varying needs
over a life time.

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

Well regulated
All mutual funds are registered SEBI and they function within the
provisions of strict regulations designed to protect the interests of
investors.
103
HIRE PURCHASE V/S LEASE
Lease Hire Purchase
Ownership It rest with lessor. It rest with buyer (hirer)
Methods of Financing
It is a method of financing business
assets.
It is a method of financing business
assets and consumer articles.
Salvage value
Lessee not the owner does not enjoy
the salvage value of the assets.
Hirer the owner of the assets enjoys
salvage value.
Transaction In this transaction we rent the goods. In this transaction we buy the goods.
Depreciation
Depreciation & investment
allowances cannot be claimed by the
lessee.
Depreciation & investment
allowances can be claimed by the
hirer.

Tax benefits
The entire lease rental is tax
deductible expense.
Only the interest component of the
hire purchase installment tax
deductible
104
VENTURE CAPITAL
Venture Capital is the early financing of new and
young enterprises seeking to grow rapidly.
It is the support by investors of entrepreneurial
talents with finance and business skills to exploit
market opportunities and to obtain capital gains
105
CORPORATE GOVERNANCE
106
Corporate Governance and Responsibility issues
have come into limelight in India since 1990s
because of major corporate debacles and scandals.
In nineties immediately after liberalization and
opening up of the economy there was a spate of
public issues by a large number of companies.
Corporate governance has become a buzz word
these days mainly due to Globalization.
WHY CORPORATE GOVERNANCE???
107
WHAT IS CORPORATE GOVERNANCE???
The process and responsibility of the Board of
Directors in ensuring the management of a
corporation conducts business in such a way as to
meet the expectations of its various stakeholders

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

According to Cadbury Committee Corporate
Governance is a system by which Companies are
directed and controlled.
108
CONCEPT
Accountability
Transparency
Integrity
Corporate governance calls for 3 factors:

109
GOOD
COMPANY

Excellent Products
&
Services
GREAT
COMPANY

Excellent
Products/services
&
Makes the world a better
place
110
DIFFERENCE
IMPORTANCE OF CORPORATE GOVERNANCE
As we are increasingly moving towards open and market driven
economic systems, a number of companies catering to
international markets
These companies are required to comply with enhanced
disclosure and stringent listing requirements.
Institutional investors, both foreign and domestic are becoming
important players in the stock market.
They are increasingly demanding more information and
transparency in operations
No. of International events (like joint ventures, mergers,
takeovers) are taking place so it is required that proper
corporate governance practices should be followed.
E.g. Enron and Satyam scandal

111
COMMITTEES OF THE BOARD
Audit committee is the link between the Board and External
Auditors. It reviews the interim and final accounts.

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

Nomination committee These Committee is usually set up to
select the new Non executive directors.
112
DEFINITIONS, NATURE AND FUNCTION
OF INSURANCE
113
INSURANCE
Insurance is defined as the equitable transfer of the risk of a
loss, from one entity to another, in exchange for a premium,
and can be thought of a guaranteed small loss to prevent a
large, possibly devastating large loss.

Insurance is
Pray for the Best
And be prepared for the WORST

114
Insurance
Life Insurance Non Life Insurance
Unit Linked
Plans (ULIPS)
Traditional
Plans
Fire Insurance
Marine Insurance
Health Insurance
Other Insurance
115
HISTORICAL BACKGROUND
Oriental Life Insurance Company was started by Europeans in Kolkata in
1818 to cater to the needs of European community.
Discrimination among the life of foreigners and Indians with higher
premiums being charged for the latter.
It was only in the year 1870, Bombay Mutual Life Assurance Society, the
first Indian insurance company covered Indian lives at normal rates.
The era was however dominated by foreign insurance players like Albert
Life Insurance, Royal Insurance, Liverpool and London Globe insurance.
The oldest existing insurance company in India is National Insurance
Company Ltd, which was founded in 1906 and is doing business even
today.

116
RELATED ACTS

1. The Insurance Act, 1938

2. Life Insurance Corporation Act, 1956

3. General Insurance Business (Nationalization) Act, 1972

4. IRDA ACT, 1999
117
ESSENTIAL OF CONTRACT OF INSURANCE
Agreement should be between 2 competent parties
Agreement must be in writing and parties must give free consent.
It should not be a bet and an event must involve some amount of
uncertainty.
Risk should be not very small and should be capable of
mathematical estimation to fix the premium.
118
ROLES OF INSURANCE
Provide protection
Diversification of risk
Provide certainty
Prevention of losses
Means of saving & investment
Risk free trade
Large number of products

119
RELATION
Economy growth
Standard of living of people
increases
Assets of people and
Business enterprise increase
Demand for
General insurance
increases
Demand for
Life insurance
increases
Demand for new types of
insurance products increases
120
PRINCIPLES OF INSURANCE
Principles of Utmost good faith -
o It states that insurance contract must be made in absolute good
faith on the part of both the parties.
o The insured must give insurer complete, true and correct
information about the subject matter of the insurance.
o Material fact should not be hidden. This principle is applicable to
all types of insurance contracts.
o Insurance is for protection and not for profit.
121
Principle of Insurable Interest
o A person must have physical existence of the object of insurance .
o In simple words insurer must suffer from some kind of Financial
loss by the damage to the subject matter of insurance.
o Ownership is the most important test of Insurable interest.
o Insurance contracts without insurable interest is void.
o Insurable interest is not a sentimental concept but a pecuniary
interest.

122
PRINCIPLES OF INSURANCE
Principle of Indemnity
This is one important principle of insurance.
This principle suggests that insurance contract is to protect and not
to earn profit.
Indemnity means security against loss.
The amount of compensation in the insurance contract is limited to
the amount assured or the actual loss whichever is less.
Amount of compensation on the claim will be less than the
insurable interest.
123
PRINCIPLES OF INSURANCE
Principle of Subrogation
It is an extension and corollary of the principle of indemnity.
It states that once the full compensation is paid by the insurance
company all the rights of the insured is transferred to the insurer.
The assured will not be able to keep the damaged property
because he will realize more than actual loss suffered.
This principle prevents the insured from making profit out of loss.
In case of partial compensation paid no such rights are exercised
by the insurance company.
124
PRINCIPLES OF INSURANCE
Principle of Contribution
There is no restriction as to the number of times the property
can be insured.
On the occurrence of the loss only the amount of actual loss can
be realized from one insure or all the insurers together.
This principle is however is not applicable to life insurance
contract.

125
PRINCIPLES OF INSURANCE
Mitigation Loss
According to this principle every insured should take all the
necessary steps to minimize the loss.

Risk must attach
The subject matter should be exposed to risk. E.g. goods
placed in godown cannot take marine insurance policy. They
have to be insured against fire or theft.
126
PRINCIPLES OF INSURANCE
Causa Proxima
It means when a loss has been caused by number of causes the
proximate cause i.e. nearest cause should be taken into
consideration to determine the liability of the insurer.
Liability of the insurer is ascertain through this clause.
Illustration A cargo has hole in the ship due to negligence of
master so sea water entered the ship and cargo got damage. In
this case only nearest cause of damage through sea water will
be liable for insurance and nit the other.
127
PRINCIPLES OF INSURANCE
WHAT DOES INSURANCE REALLY
COVER?
128
HEALTH INSURANCE
129
HEALTH INSURANCE
The term Health Insurance is generally used to describe a form
of insurance that pays for medical expenses.
It is sometimes used more broadly to include insurance covering
disability or long-term nursing or custodial care needs.
It may be purchased on a group basis (e.g., by a firm to cover its
employees) or purchased by individual consumers).
Types Of Health Care Insurance Available:
Medical Insurance
Critical Illness Insurance

130
HOME INSURANCE
131
HOME INSURANCE
Home Insurance is a standard insurance policy to insure home
and the things that are kept in it.

It is also called a package policy.

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

132
COMMERCIAL INSURANCE
Marine insurance
Fire insurance
Agriculture insurance
Shop insurance
133
MARINE INSURANCE
It covers the loss or damage of goods at sea.

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

134
FIRE INSURANCE
Fire Insurance can avoid loss which can be generated from any
explosion at your business enterprise.
This fire must be a result of actual explosion and the
consequential loss must be proximately caused by such
explosion.
One can go for fire Insurance of a property even if he doesnt
own the property.
He can insure the property if he holds a mortgage on the
property.

135
CREDIT RISK
136
CREDIT RISK
It is the risk of loss to the bank as a result of a default by the
borrower.
The amount of risk represented by the outstanding balance and
the date of default may differ from the ultimate loss in the event
of default because of potential recoveries.
Recoveries would depend upon any credit risk mitigators, such
as guarantees, either collateral or the third party guarantees, the
capabilities of negotiating with the borrower and of funds
available, if any, to repay the debt after repayment of other who
lenders who may have a priority claim over the borrowers asset /
funds.

137
DEFAULT
The non payment of obligations (interest on principal), breaking a
covenant(formal agreement) or economic default.
The default events include a delay in repayments, restructuring
of borrower repayments, and bankruptcy.
Economic Default It occurs when the economic value of the
assets goes below the value of outstanding debts i.e. value of
the collateral goes down against the loan amount.
In simple words it means that market value of the asset drops
below that of liabilities.
138
DEFAULT PROBABILITY
Default risk is measured by the probability of default
occurring during a given period of time.
It depends upon the credit standing of a borrower.
Credit standing would depend upon factors such as
market outlook for the borrowing company, the size of
the company, its competitive factors, the quality of
management etc.
139
EXPOSURE RISK
It is the risk generated by the uncertainty associated with future
amount at risk.
All the credit lines which there is a repayment schedule the
exposure risk can be considered as small or negligible.
Exposure risk arise with derivatives in which the source of
uncertainty is not the clients behavior but the market movements.
The value of the derivatives depends upon the market
movements which changes constantly.
The credit risk continuous during the whole life in OTC
instruments.
The recoveries in the event of default are not predictable.
They depend upon the type of default and factors such as
guarantees, collateral etc.


140
COLLATERAL RISK
The existence of collateral (security or asset given against loan)
minimizes credit risk if the collateral can be easily taken
possession and sold.
Collateralization is an increasingly common way to mitigate the
credit risk.
It reduces risk because if borrower does not pay the loan the
collateral would be confiscated as repayment for the loan.
If collateral is used the risk becomes two folds:
1. Uncertainty with respect to sell off or dispose off the collateral
2. Uncertainty with respect to its value
141
OPERATIONAL RISK
It is the potential risk of loss arising from inadequate or failed
internal processes, people and systems from external events.
It also includes potential legal risk involving claims, penalties
and damages resulting from supervisory decisions.

When Operational risk arises :
1. Internal Fraud
2. External Fraud
3. Unfair employment practices
4. Clients and business practices
5. Ineffective Audit function Satyam scandal
142
EXAMINATION PAPER PATTERN
Q -1) a) 10 Marks
b) 5 Marks
- - - - - - - - - - - - - - - - - - - - - - - OR - - - - - - - - - - - - - - - - - - - - - - - - -
Q -1) a) 10 Marks
b) 5 Marks

Q -2) Mr. Avadesh 15 Marks

Q -3) Mr. Avadesh 15 Marks

Q-4) Short Notes (Any 3 out of 5) 15 Marks
143





Thank you
144