FINANCIAL SERVICES Books to refer: B santhanam M Y k. HAN
FINANACIAL SERVICES FINANCIAL SYSTEM It deals abt various financial institutions, with their financial services, financial markets which enable individual , business & government concerns to raise finance and various instruments issued in the financial markets for the purpose of raising financial resources. Basically a financial system constitutes the following 1 financial institution consist of various banking & non banking institutions which mobilize the savings through financial markets by using various fin instruments & in the process utilizes the services of financial service providers 2 financial markets consist of capital market (primary market & secondary market) , money market (mainly deals with short term funds, which includes org & un org sectors)), foreign exchange market ( includes authorized dealers, money changers, foreign banks, importers & exporters), govt securities (includes treasury bills & bonds) 3 financial instruments includes both product & instruments. Products represents credit cards & debit cards were as instruments include Negotiable instruments, commercial papers bill of lading, LOC, travelers cheques 4 financial services-it provides different types of finance through various credit instruments, financial products & services
Evolution of Financial services in India The stage of Infancy existed btw 1960 -1980 -merchant bankers providing a wide range of services, starting from project appraisal to arranging funds -investment co’s such as the UTI, LIC, GIC made their mark in the first stage of financial services -leasing made its mark in the closing years of the 1970’s Modern financial services -during later part of the 1980’s -OTC, share transfer, pledging of shares, mutual funds, factoring, discounting, VC, credit rating etc. The third Flush in financial services includes setting up of new institution & paving the way for innovating new instruments & also their flotation -Setting up of depositories will promote the concept of paperless trading & will result in to dematerialization of shares -on line trading -the creation of SEBI can be hailed a a path breaking development in terms of regulation, growth of development of FS -permission to foreign financial institutions to operate in capital mkt -public enterprises disinvestment create pressure on the FS firm to gain expertise in valuation, financial, finanacial & legal restructuring , & taking the public sector firms in commercial & capital mkt
-FS firms are now scouting for funds abroad to finance the Indian corporate sector -Securitization -Setting up of derivative mkt.
Importance of financial services -promoting investment -promoting savings -minimizing the risk -maximizing the returns -ensures greater yield -economic growth -economic development -benefit to govt -expands activities of financial institutions -capital market -promotion of domestic & foreign trade -balanced regional development Scope of FS- FS offered are mainly 2 types -Fee based- merchant banking, broking services, credit rating, MF, portfolio mgt services, underwriting -fund based factoring, leasing, hire purchases, housing finance, bill discounting, VC , etc
Fund based services Hire purchase- a hire purchase agreement is defined as a peculiar kind of transaction in which the goods are let on hire with an option to the hirer to purchase them with the following stipulations Ø -payment to be made in installments over a specified period Ø -the possession is delivered to the hirer at the time of entering in to the contract Ø -the property in the goods passes to the hirer on payment of the last installment Ø -each installment is treated as hire charges so that if default is made in payment of any installment the seller becomes entitled to take away the goods & Ø -the hirer is free to return the goods with out being required to pay any further installments falling due after the return. PARTIES TO THE HIRE PURCHASE -SELLER -HIRER/PURCHASER -FINANCIER Hire purchase Vs installment Call option the buyer is able to purchase the good at any time during the term of agreement in HP Right of termination buyer has the right to terminate the agreement at any time b 4 the payment of the last installment while In installment the buyer is committed to pay the full amt Ownership of the product -in HP the ownership passes only when the last installment amt is paid or when the buyer exercises the option to purchase /on payment of the last installment while in installment ownership passes with the payment of first installment amt to the buyer.
Leasing Vs HP -ownerships with the lessor. lessee only uses the asset -depreciation-lessor records the depreciation in his book while in HP the hirer records the depreciation -magnitude of funds -leasing cost of acquisition very high products involved are air craft, ships air conditioning plants & so on. While in HP relatively low cost equipments being offered like automobiles , office equipments, generators etc. -extent-leasing no down payment is to be made. Whlie in HP a margin equal to 20 -25% of the cost of the equipment is to paid by the hirer initially which would be returned back once the last installment is been made by the hirer -maintenance-of equipment to be borne by the hirer itself. In Financial lease-to be borne by the lesse were as in operating lease it is to be borne by the lessor. -tax benefits- hirer is allowed to charge depreciation claim & finance charge. seller is allowed to claim any interest on borrowed fund for the acquisition of asset against taxable income. while a lessor is allowed to claim depreciation & the lesse is allowed to claim the rentals & the lessee is allowed to claim the rental & maintenance cost against taxable income.
Leasing is a contract where by the owner of an asset (lessor) grants to another party ( lessee) the exclusive right to use the asset, usually for an agreed period of time, in return for the payment of a rent. -the doesn’t own the equipment & hence he cannot claim depreciation & investment allowance -however lease rentals could be written off a eligible expenditure from profits for IT purposes Types of leasing -sale & lease back- suppose a sale of ship take place btw a ship builder & shipping company which is having a fleet of ships. The ship builder who was the seller , now takes the ship back frm the shipping company on a lease As a lessor it give the same to an oil company for transporting oil. Her the oil company becomes the lessee. This is called sale & lease back. Financial lease- In fl the ownership is ultimately transferred to the lesse at the end of the lease period. When the total lease amt is paid including the profit for the lessor is been realized. Operating lease- An equipment is purchased & provided on lease to the lesseee for use. The lessee has the option to cancel the contract & at the same time. the lessor has the option to sell the asset to any other person. The cost of the equipment is not fully recovered by the lease rentals & the lease period is normally shorter than the economic life o f the asset. Ownership of the asset is not transferred to the lessee like the FL
Reasons for leasing S T leasing is convenient, shifting the risk of tech obsolescence, maintenance provided, tax shields can be used the lessor deducts the depreciation frm taxable income. Lesse is able to save considerable amount of capital which otherwise will be locked up in the asset. Other types of leasing -leveraged & non leveraged- The value of the asset leased may be of huge amount which may not be possible for the lessor to finance. So, the lessor involves one more financier who will have a charge on the leased asset -conveyance type lease here the lease will be fir a longer period with a clear intention of conveying the ownership of the title of the lease -specialized service lease here the lessor is a specialist of the asset which he s leasing out. He not only leases out but also gives specialized personalized service to the lessee goods include electronic goods, automobiles, air conditioners etc. -Net & non net lease lessor is not concerned with maintenance expenditure. While in non net lease lessor is concerned with maintenance , insurance, & other incidental expenses. .
-Sales aid lease- in which the lessor enters in to any tie up arrangement with manufacturer for the marketing is called sales aid lease -Cross border lease- lease across national frontiers are called cross borer lease. Shipping, air service, etc will come under this category -Tax oriented lease were the lease is not a loan on security but qualifies as a lease, it will come under this category. -Import lease here the equipment leased will be more or less imported but the lessor or lessee may belong to same country. -International lease almost same as cross border lease
Tax benefits The lesse can claim lease rentals as tax deductible expenses The lease rentals received by the lessor are tax deductible under the head profit & gains of business. Housing finance Structure of housing finance industry housing finance Formal sec informal sector household savings disposal of existing properties borrowing frm friends relatives & money lenders Govt Central st banking pub authorities com co other non banking NBFC’s Housing fin co’s NBHF co’s LIC/GIC specialized insti HDFC
Advantages of housing finance -employment for large masses -industries such a cement brick manufacturing, sanitary products , electrical fitting, glass industries, experience more demand -rural housing develops not only rural areas but prevents migration of labor to urban areas -the creation of more houses results in building up more infrastructure facilities such as road , electricity generation, drinking water facilities, etc. -factories & industrial establishment creates town ships by providing more housing facilities to their employees. This reduces congestion in urban area.
NHB national housing bank is the principal housing fin agency in the country It came in to exixtence in tn 1987 Functions performed by NHB Growth of housing finance institution control of housing finance institution -registration -net owned fund -period of funds -celing on deposits -formats for application foprm -receipts to deposit -register of deposits -report of board of directors -interest & brokerage funding of housing finance institution
-investment in liquid asset -maintenance of accounts & auditors report -sending of periodical returns -advertisements Funding of housing finance institution Financial conditions to be fulfilled by housing financial institutions are share capital, contribute to their share capital, refinance, activty norm, lending norm with regard to target group, rates of interests & other charges, ceiling on administrative cost, quarterly returns
Some of the major housing financial institutions in India - HDFC- Housing development finance corporation (1977) -HUDCO-Housing and urban development corporation(1970) HDFC MAIN OBJECTIVES -TO INCREASE THE # OF RESIDENTIAL HOUSES IN THE COUNTRY BY PROVIDING HOUSING FINANCE IN A SYSTEMEATIC & PROFFESSIONAL MANNER -to promote home ownership -To increase the flow of funds to housing sector -strengthening housing finance by improving domestic financial mkt & fs -developing close relationship with individual households ie providing direct housings loans to individuals -to maintain its position as the premier housing finance institution in the country -to transform various idea in to viable & creative solutions that is building houses on the basis of cost, utility, & modernization. -to provide consistently high returns to shareholders Diversifying the activities to client base by entering in to mutual funds, leasing, commercial banking, insurance etc. -to align with national priorities & adopt flexible housing finance policy by providing more houses to weaker sections of the society.
HUDCO Objectives -providing long term finance for construction of houses -undertaking housing in Urban, rural, semi urban areas -undertaking urban development programmes by way of sanitation, water facilities etc. -setting up satellite towns -promoting building materials industries -to promote state housing boards by contributing to the debentures & bonds -to promote city improvement Trusts, Cantonment boards & other development authorities such as slum clearance boards To promote housing facilities for lower income groups & economically weaker sections EWS -to co ordinate with other housing finance agencies such as co operatives, insurance companies etc.
Housing finance by HUDCO Though it does not directly finance individual borrowers, it provides refinance facility to the state govt agencies such as -state housing boards -Rural housing boards -Slum clearance boards -Development authorities -City improvement trust -Municipal corporations -Town panchayaths -Primary co operative societies The loans granted are repayable in a period of 10 to 15 years INCOME CATEGORY EWS LIG MIG HIG EXTENT OF FINANCING OF THE HOUSE COST(%) 90 85 75 60
Factoring it is a specialized activity where by a firm converts its receivables in to cash by selling them to a factoring organisation. The factor assume the risk associated with the collection of receivables and in the event of nonpayment by the cutomer/debtors, bears the risk of a bad debt loss. There are three parties to factoring viz: (factor) financial institution, business concern (client), & the customer who are the consumers of goods. hence when a company assigns the B/R a factor undertakes the whole activities wrt to the concerned debtor. At the time of sale the factor pays 80% of of invoice to seller & balance amt is paid once the factor realizes the amt from the customer & for this service they charge a commission from the seller. Types of factoring Full factoring -here collection of debts & sales ledger maintenance are done by the factor & factor undertakes the credit risk. With recourse factoring -credit risk taken by the client Without recourse- the factor will be bearing the risk in case of non realization of money. Maturity factoring -the factor makes payment only on the maturity of the bill or at the end of the collection period to the supplier.
Advance factoring- the factor provides advance against uncollected debts at an interest to the supplier /seller. Normally , this may be 60% to 75% of the debt amount. Disclosed factoring- the name of the factor is disclosed in the invoice by he supplier asking the buyer to make the payment to the factor. Undisclosed factoring- the name of the factor is not disclosed The entire realization is done in the name of the supplier but the control of all money remains with the factor. Export factoring- exporter is been provided with the finance by undertaking the bills of the customer. Import factoring in which the factor In the importing company undertakes to collect & control funds due frm the importer.
Factoring in India Some of the major factoring firms in India are -SBI factors & commercial services LTD 1991 -Canara banks factor Ltd 1991 -Fair growth factors LTD 1992(Pvt Sector) FORFIETIING Forfeiting is a form of financing of receivables pertaining to international trade. It denotes the purchase of trade bills/promissory notes by a bank/financial institution without recourse to the seller. The purchase is in the form of discounting the documents covering the entire risk of non payment in collection. All risks & collection problems are fully the responsibility of the purchaser ( forfeiter) who pays cash to seller by discounting the bills/notes. The silent features of forfeiting are -commercial contract btw exporter & importer -deliver of goods frm exporter to importer -cash payment by forfeiter to exporter -presentation of bill by the forfeiter on maturity date to importers bank. -Payment of bills by importers bank to forfeiter.
DIFEERENCE BTW FACTORING & FORFIETING FACTORING FORFIETING St credit transaction long term Can be with or with out recourse without recourse Cost borne by the seller borne by the forfeiter. BILL DISCOUNTING A TRADING B/E IS DISCOUTNED WITH THE BANK BY THE SELLER IN order to realize fast cash. All the bills are with recourse that is if the drawee or the buyer fails to pay the amt the liability of payment falls on to the buyer. its a financial arrangement which is shot term in nature. The credit worthiness of the drawer with the bank is responsible for the bill discount facility. According to section 5 of the Negotiable Instruments Act defines a bill as an instrument in writing containing an unconditional order, signed by the maker, directing certain person to pay certain some of money only to order of certain person or the bearer of the instrument.
Advantages • To investors -ST source of finance -no tax at source is deducted since it is not a lending -affordable discount rate • To banks -certainty of payment -profitability -banks are able to sell these bills in the money market to even out their liquidity
Classification of B/E On the basis of place -Inland bill -parties to this bill are from the same country (trade bill/accommodation bill) -foreign bill- parties to this bill is from different countries( trade bill) On the basis of purpose -Trade bill which arises out of genuine transaction -Accommodation bill- is meant for raising funds amg parties & it is for the purpose of discounting in the money market. On the basis of documents accompanied with the bill -D/A Bill-Documents against acceptance of bill. The exporter sends to the importer along with the bill the following documents -bill of lading - consular invoice -Certificate of origin -Marie/air insurance policy -Invoice The above documents along wt the bill are sent to the importer for the acceptance
Soon after the importers acceptance the documents are handed over to the importer by which the importer is enable to take delivery of goods. On the date of maturity the importer will make the payment. -D/P Bill documents against payment bill -the above mentioned documents are handed over to the importer soon after the payment is made by the importer On the basis of parties/payee Order bill- when a bill is payable to a specific person whose name is appearing on the bill it is called an order bill Bearer bill -is payable to any person who is in possession of the bill legally on the date of maturity &to whom the payment will be made by the drawee On the basis of time -Time bill a bill payable after a specific date/time s known as time bill -demand bill –a bill payable on demand is a demand bill. • Depositories is an organization which hold the securities of a shareholder in electronic form at the request of the shareholder.
Features of a depository -take hold of all securities in the country listed in a particular stock exchange -Speedy transaction & accuracy -Security holders can sell & buy securities by which liquidity is brought to the securities -blank transfers are avoided & holding of shares in benami names are avoided. - It Registration & stamp charges For the sale of securities could be easily collected by the govt which was evaded frm the previous system - It promotes more activity in the capital market as trading in genuine shares is ensured under this system. - It avoids use of stationary & prevents delay in registration of transfer s - Dividend & interest on securities are properly distributed through this system & in the case of convertible debentures on the due date , the securities are converted in to the company shares. - It also act as collateral security for raising of loans frm any financial institution.
Structure of depository system The depository system Central depository share registrar transfer agent clearing & settlement corporation depository participant 1 Central depository- is an org with which all shares, belonging to the shareholder are kept & the electronic system takes care of them. 2 Share registrar s an authority who controls the issue of securities. Along with this , the transfer agent arranges for the transfer of securities in the case of buying & selling of securities. 3 clearing & settlement corporation -this agency settles the transfer of funds btw the seller & the buyer. 4 Depository participants ( DP )-DP is a representative in the depository system on behalf of the shareholder & he only intimates to the shareholder periodically the securities account held by the customer. As per the SEBI guidelines, financial institutions, banks, stock brokers etc can be depository participants. An id account number is given by the DP to every shareholder when he/she open the account for demating the securities.
Procedure in Depositary system -Notification by stock exchange-the stock exchange concerned where the shares are listed will come out with a notification for the dematting of the shares -dematting form-The share holder will obtain the dematerialization request form from DP. This form will contain details abt the name of the company, folio number & the distinctive number of the shares which are given for dematting. The form will be signed by either the single owner if it is held so or by joint owners when they are held jointly -Registering of shares-When the DP hands over the securities to the depository the securities will be sent to the share registrar who will register the depository name & the particulars of shares. But b 4 doing this the ownership of the securities is verified with the co & hence this procedure will take some time. -Crediting the investor account. in the last stage , the depositary will inform the DP the details of shares registered in the name of the share holder concerned. On the basis , the DP will send the statement of account, to the customer shareholder
Shareholder opening a/c with 1 5 depository p 2 DP 4 Registrar & transfer agent 3 participant
Depository system in India In order to introduce depository system in India govt introduced Depository Act 1996 -enabled BSE & NSE to set up their depositories -NSE-National securities depository ltd(NSDL)1996 -BSE. Central depository services Ltd) CDSL 1999 -the magnitude of transactions of NSDL could be judged by the volume of transactions undertaken by the NSE -which has gone up to more than 70000 per annum -The total # of DP has increased to 125 & it has more than 1500 locations through out India. There are more than 30 lakhs clients with DP’s. -compared to NSDL actives in CDSL is slightly on the lessor side which is evident from he value of securities & the # of beneficiaries. The annual turn over in BSE is around 65 000 crores. -Rolling settlement was made possible with the help of depository system which was first introduced by NSE. RS is nothing but the investors would receive payment on the 5 th day aft 3 er a sale transaction. Were as it was possible to make the payment on 12 th or 8 th day of transaction which is termed as weekly settlement.
Weakness in Depository system -increasing costs -Regulations of SEBI over depository system has not been very effective -depositories must be made compulsory for all companies, but it is held as an option for some of the companies. Only when it is made compulsory there will be uniformity in the transactions in stock market. -Public Knowledge of Depository's still elementary stage which is evident frm the fact that still one fourth of securities is yet to be demated. -discrimination btw dematted & physical shares will effect transactions in the market this has to be avoided.
Venture financing – -implies long term investment generally in high risk industrial projects with high reward possibilities -the investment may be btw start up & commencement of commercial production -expectation of higher gin motivates the investor to invest in the risky ventures generally utilize new technology with higher probability of failure than success -defined as the organized financing of relatively new enterprise to achieve substantial capital gains -provides equity finance in relatively new companies, when it is too early to go to the capital mkt. It can be loan /convertible debt the basic objective of VF is to earn capital gain at the time of exit -long term investment in growth oriented SME’s -substantial degree of involvement of The VF with the promoters to provide business/mgr skill -VF involves high risk –return spectrum -involves the financing of SME’s through early stages of their development until thy are established & are able to raise finance frm finance mkt.
Stages in VC Financing early stage financing Seed start up capital later stage financing second round turn around stage financing financial turn around Messanine capital bridge capital buy outs MBO MBI mgt turn around
Early stage financing -seed capital – mainly provided for testing the product & examining the commercial viability o f the product. It is more of a product development & all the finance required at this stage is provided by VC -Start up once the product is tested in the market & after being satisfied with its acceptability by the market financing will be provided for further development of the product. The start up could be classified in to 4 -a new high tech introduced by the entrepreneur -a new business started by a well experienced & established entrepreneur -new projects started by existing co’s eg: retail business started by HLL -a new company promoted by existing company here the vc finances for those co’s which have a first rated mgt which may have a second rated product -Second round finance The borrowing concern has successfully launched the product in the market which is evident frm its acceptability. However the business has not become commercially successful for want of some more finance so VC provides more funds than at the initial stage.
Later stage financing The business concern has now become established but still is not able to go for a public issue of shares. At this stag the VC institution will provide finance Mezzanine capital- this finance is used by the borrowing concern for purchase of plant & machinery, repayment of past debt, & entering new areas Bridge capital- medium term finance ranging frm 1 to 3 years & used for the growth of the business Eg –extending bridge loans for acquiring other firms Buy outs. MBO management buy outs-in this the VC is used for removing the external control on the mgt of the company by acquiring all the shares & the voting rights MBI management buy in-in this funds are provided for an out side group to buy an ongoing company
TURN AROUNDS Financial turn around -with the financial assistance frm VC if a company is able to improve it’s conditions financially it s called financial turn around Mgt turn around -similarly when the mgt of the company makes a turn around by becoming self dependent & is able ot face the challenge of the business. it is called mgt turn around. Exit Alternatives VC co’s like to recover their investments once the venture has a commercial run. various alternatives are -initial public offerig -Buy back of shares by the promoters -Sale of enterprise to another company -Sale to new investor
Importance of VC -Promoting entrepreneurs -promoting products -encouraging customers -bringing out latent talents -promotion of exports -catalyst -more employment opportunities -financial ability -Technological growth -Sick companies -Development of backward areas -Growth of economy
Origin of VC in India -the concept of VC formalized after world war ii with the involvement of few American wealthy family groups to invest their funds in new technology providing high returns, growth & prosperity. -R S Bhatt committee in 1972 highlighted the problems of new entrepreneurs & technologist , in setting up industries. -1975 the concept of VC was introduced in India by IFCI -1976 IDBI introduced seed capital scheme -1986 ICICI launched VC scheme to encourage new techno crafts with inherent high risk -1989 UTI sponsored ‘Venture capital unit scheme’ ANZ Grind lays Bank in 1987 set up first pvt VC fund -1989 Canbank VC fund -1990 Gujrath VC Ltd -1991 20 th Century capital corporation -1994 SIDBI Venture Capital Fund 1995 Gujarat venture capital fund
Different types of VC in India -VC promoted by development banks -State level VF Co’s -Commercial banks promoted VC ‘s -Pvt sector VC Co’s -Foreign venture capital funds.
Insurance is a contract btw 2 parties viz insured & the insurer. Insured is the person who insures his life/property & the insurer is the company which undertakes to compensate the loss incurred by the insured for a consideration called premium. The contract of insurance is also called a contract of indemnity except life insurance, as the insured is only compensated & not allowed to earn any profit from the contract. Functions -insurance spreads risk -helps to acquire property /assets -Creates funds for investments
Characteristics/principles of Insurance Ø Insurable interest -A person can enter In to a contract of insurance only when he has some insurable interest on the life /property which is insured. Insurable interest basically means that non existence / any injury /damage caused to a property/life should bring a loss or effects the life of that person which can be estimated in terms of money. Ø Contract of “uberrimae fidei” /contract of utmost good faith. both the parties to the contract ie; insured & the insurer should disclose all the factors associated with the insurance contract. No disclosure of facts or declaration of false info will make the contract void and null. Ø Indemnity The contact of insurance is a contract of indemnity. This means that the insurer will compensate the insured to the extent of loss suffered by him. Marine fire are contracts of indemnity as the insurer compensates him to the extent of loss suffered by him Where as life is not a contract of indemnity but a contract of Guarantee Ø Mitigation of loss Every party to the contract should take adequate steps to minimize the loss Ø Causa proxima The cause for the accident should be a direct cause for which an insurance is taken & it should not be a remote cause
Ø Subrogation means stepping in to those of another person When the insurance company pays full compensation to the insured it takes over the ownership of the goods insured & will enjoy complete right of taking necessary legal action against the person who is responsible for the loss as may be taken by the original owner of the goods. Ø Contribution-if the insured has undertaken insurance ith more than one insurance company, then he cannot claim compensation frm every insu com with which he has insured. Under the doctrie of contribution, when an insu compensates , it will be indeminkfied by other insu co to the extent of policy aken by the insured. The bsic concept of contribution is to ensure that nobody enjoys profit but the loss is shared by various ins co’s according to the respectve policy amt. Ø Reinsurance-When an insurance company insures with another insurance company it is termed as re insurance. Here the original insrer ge insured with other insurance co’s.
Ø Double insurance When the insured insures with more than one insurance company it is called double insurance Ø Nomination In life insurance the insured will be nominating a person who will be receiving the policy amt incase of the death of the insured. The nomination can be altered. Ø Assignment- a policy can be assigned to a creditor as a security for the loan obtained. Once a policy is assigned the nomination gets cancelled. When an assignment take place the same is to be informed to the ins company & in the case of the insured event the amt is handed over to the creditor.
Types of insurance Life insurance Whole endowment General insurance marine fire vehicle health open voyage time mixed specific valued floating avg comprehensive third party
Life insurance -not a contract of indemnity -the event insured is sure to happen -the payment is assured -policies are issued for a much longer period -can be surrendered -both protection & investment -doctrine of subrogation will not apply Fire insurance -indemnify the insured against the consequences of a fire or the loss o injury arising there from during an agreed period & up to certain amt -fire must be caused accidentally & not intentionally -All general principles of insurance apply to fire insurance
Marine insurance -to indemnify the insured against marine loses that is to say, the loses incidental to marine adventure -Two broad categories of marine, -cargo insurance, hull insurance Types of life insurance policies ü Whole life policy- A whole life policy is one were the policy amt is payable only after the death of the policy holder to his nominees. ü Endowment policy- is different from whole life a the premium is payable for a certain period after which the policy amt is payable to policy holder if he survives( maturity date) ü Annuity-Premium is paid in regular installment over a certain period or the premium may be paid in bulk that is in lump sum. When the insured reaches a certain age, he policy amt will be payable either in monthly , quarterly or annual installment.
Types of Marine insurance policies ü Open policy were the actual value of the policy is not mentioned & hence is called unvalued policy. The value of the object is ascertained subsequently at the time of claim. How ever the policy will have certain minimum value to start with. This one is most popular with shipping companies. ü Voyage policy This policy taken for a particular voyage in which the route to be followed has to be mentioned. IN case of any problem in the normal route, there will be a deviation & in case an accident occurs during such deviation, the insurance companies will not indeminify. Hence a deviation clause should be incorporated in the policy. ü Time policy -This policy is taken frm midnight of a particular date to some other date which may cover months /year. These kinds of policies are popular amg charter party agreement were the entire ship is given on hire to some other party. Those who take ship on hire under charter party agreement will insure it up to the period for which the hire exist. ü Mixed policy it is a combo of time & voyage policies. ü Comprehensive policy All types of risks arising frm the sea voyage is covered under this policy.
Types of fire insurance policies ü Specific policy in this the policy amt is clearly specified in case of total loss of insured property. Even there is an under valuation of the policy it will not affect the claim. ü Valued policy The value of the goods is clearly mentioned & the nature of goods is also mentioned. It will hold good irrespective of any change n the value of the goods insured ü Floating policy The policy is taken to cover a particular period & the value of goods will be mentioned with changes in stock position. A single policy is taken , covering goods lying in different parts of the ciy /country. Hence its called floating policy ü Average policy –in this an avg is worked out btw the insured & insurer for bearing the loss. In case of total loss, the entire claim amt will be given. For eg in the case of a fire the value of goods destroyed may be more , but the insured value may be less. Hence, the insured & the insurer agree to share the loss on an avg basis.
Types of vehicle insurance ü Comprehensive policy here the insured s not only insuring the vehicle , but also against injury death damage caused to any third party. ü Third party policy under this policy oly damage to a third party is covered Types of health insurance policies & other insurance policies ü Employee state insurance is (ESI) a kind of insurance in which all the employees in the organized sector are covered fr the risks arising out of various kinds of occupational hazards For this reason both employer & employee contribute to the ESI ü Rural insurance In order to popularize insurance in rural India , the regulatory authority for insurance IRDA has made it compulsory for the insurance companies that a part of their business should cover rural areas also.
ü Fidelity guarantee insurance this policy s taken by the employer to safe guard himself from the falsification, fraud or defalcation by the employee ü Burglary insurance theft ü Credit insurance loss arising out of non recovery of book debts is covered. Important terminologies associated with Life, Marine, & Fire insurance Life insurance v Surrender value when insured is unable to pay the premium & thereby wants to discontinue the insurance contract, he may surrender the policy to the insurer. For every policy there will be a minimum period for which the policy must run for becoming eligible to claim surrender value. v Paid up value Even while discontinuing the policy, the policy holder instead of getting back the money may allow the policy to continue till its maturity date with out paying further premium. By paid up value, the proportion of premium paid towards the policy amt will be taken & on the date of maturity, the same proportion will be paid to the policy holder along with interest.
v Double accident benefit policy-here the policy holder may take up an insurance policy were in if the insured die prior to the maturity of the policy due to an accident, then the policy amt payable to his dependents, whomsoever he has nominated will get double the amt of the policy. v With profit & without profit policy if an insurance policy is taken which is with profit policy, the policy holder/his dependents in case of his death will be given in addition to the policy amt profit earned by the company frm investments made in different companies. The premium payable for this policy is generally high. In case of with out profit policy no profit will be accruing only the policy amt will be available to the policy holder or his dependents. Marine insurance v Warranty & conditions in marine policies under warranty it is implied that certain conditions will be fulfilled. It could be expressed /implied. v Sea worthiness- for a voyage policy the ship must be sea worthy b 4 undertaking any voyage. The ship must be in a condition to undertake not only he voyage but also of withstanding any sea perils such as hurricanes, piracy etc. v Deviation if a ship deviates frm the normal route with a different route any damages occurred in that route will not be the liability of the insurer Unless & until the deviations are justified due to following
-in order to save human life -to save the vessel -to minimize damage likely to be caused to the cargo -to avoid any natural calamities.
Classification of Marine losses Marine loss Total loss Actual constructive partial loss particular avg general avg Total Loss Actual total loss the ship along with cargo is totally destroyed & it is beyond retrieval. Constructive total loss -the damage caused to the ship /cargo may not be total but the repair to be incurred either to the ship/cargo will go beyond the actual cost of the ship/cargo. It is not worthy to undertake repair of either ship /cargo Partial Loss
Particular avg loss- the loss has to be borne by a particular interest such as eihther the shipping company/particular cargo owner. If due to violence of sea certain cargo gets damaged, it is to be borne by particular cargo owner. General avg loss When the loss s suffered due o a general avg act it is termed the same. For eg: When a ship is abt to sink due to excess weight in an effort to avoid sinking, certain cargo on board may be thrown in to sea. This is called Jettisoning of cargo. By doing so the interest of the majority of cargo owners is protected but at the cost of few cargo owners In such a situation the loss suffered by the particular cargo owner will be borne on a proportion by the other cargo owners whose interest have been protected along with the insurance company. Special clauses in Marine insurance Policy ü Inchmaree clause -to cover risk that arises due to negligence of ship crew or due to defective machinery such as hull /boiler etc. this clause should be incorporated. ü FC & S Clause -Free from capture or seizure the insu company will not be liable for the loss due to capture /seizure of the vessel ü Suing & labouring clause- If the insured undertakes such acts by which the los incurred is reduced, the expenses incurred towards such act can be recovered from the insurer if this clause s inserted ü FPA & F AA Clause- Free from particular avg clause & Free from all avg clause it frees the insu com from paying the liability depending upon the respective clauses. ü Excepted Peril Clause -certain risk may be exclude frm the coverage of insurance such as risks frm pirates/pilferages at the port etc ü Arbitration clause this clause provides an opportunity for the insurance company t& the insured to settle their disputes through arbitration procedure.
ü Salvage clause -this provides the insurance co an opportunity to salvage materials frm the damaged good/ships after indemnifying the insured. ü Memorandum /N B( Nota bene) Clause -this clause is inserted in the policy by isu co to inform the insured that certain percentage of loss is permissible in the case of transporting cargo such s sugar , hemp etc. These are likely to reduce in their weight due to moisture in the air. The ins com will agree for compensating the loss only when the percentage of loss suffered is much more than the normal loss expected. ü Collision/running down clause this clause will cover if ship collide with each other Insertion of this clause will enable the insu com to compensate three fourth the loss suffered by the insured. ü Continuation clause renewal of time policy so that the insured get a continuous insurance benefit from the insurance company but the insured has to additional premium for the insertion of his clause ü PPI Clause Policy proof of interest -generally a marine insurance policy expects insurable interest at the time of accident & not at the time of commencement of the policy. In the case of loss or damage to the ship, it is expected that the insured must show proof of interest to te marine insu co. The insertion of this clause exempts the insured from the proof of interest.
Fire insurance - Reinstatement/replacement the insertion of this clause in a fire insurance will make the insurance company compensate he insured by replacement of the property destroyed or damaged Cover note As the fire insurance are for a short period not exceeding 1 year there may be delay in issuing policy. In such case a cover note will be issued by insurance company till the policy is issued. The issue of cover note commences the insurance contract & it covers the risk of fire.
Insurance Development & Regulatory Authority of India (IRDA) 1999 Controls all the insurance business in India. Until 1999 insurance services were provided by LIC & GIC to provide better insurance cover to citizens & also to augment the flow of long term source of financing infrastructure, opened up the insurance sector in 1999 IRDA Act was enacted in 1999. Duties of IRDA -regulates insurance companies -Promotes insurance companies -Ensures growth of insurance & re insurance companies. Intermediaries -insurance broker are persons licensed by IRDA who for remuneration arranges contracts with insurance/reinsurance companies on behalf of his clients. There are 3 categories of insurance brokers -Direct broker/insurance agents -reinsurance broker he is a person who arranges reinsurance for direct insurers with insurance/reinsurance companies.
-composite broker a combination of direct broker & reinsurance broker that is he arranges insurance for clients with insurance companies and / reinsurance Insurance Agents An insurance agent is a licensed agent with the IRDA who receives/agrees to receive payment by way of commission/other remuneration in consideration of his soliciting/procuring insurance business, including continuance, renewal or revival of policies. An IRA would issue a license to act as an insurance agent on payment of fee not exceeding Rs 250. -pass SSLC or HSE -attending practical training approved and notified by IRDA ( 3 to 4 weeks) -pass the pre recruitment examination -requisite knowledge to solicit & procure insurance business -capable of providing the necessary service to policy holders -should not be minor, unsound mind, not violate the code of conduct specified by IRDA -the license will be valid for 3 years -an insurance agent is not eligible to be director of insurance company.
CODE OF CONDUCT WRT INSURANCE AGENTS 1 Every agents should-identify himself and the insurance company of whom he is an insurance agent -disclose his license to the prospect customer -disseminate the requisite info in respect of the insu products on demand -disclose the scale of commission in respect of insu products if asked -indicate the premium to b e charged -inform the prospect abt the acceptance or rejection of proposal -render necessary assistance for settlement of claims -advice with respect to nomination, assignment, change of address etc. 2 No insurance agent should: -solicit /procure insurance without holding license -Induce to omit any material information -Induce to submit wrong information -behave in a discourteous manner -interfere with any proposal introduced by other insu agent -offer different rates, advantages, terms & conditions other than offered by the insurer
-demand or receive a share or proceedings frm the beneficiary under the insurance contract. -become or remain as a director of any insu co. CLAIM PROCEDURE Life insurance -upon receiving claim process without delay, additional documents should be raised with In 15 days of the receipt of claim -claim should be paid or disputed within 30 days -complete investigation if any at the earliest , in any case not later than 6 months - Interest to be paid for delayed payment Gen insurance -give notice to the insurer, surveyor has to be appointed with in 72 hrs -surveyor should inform I writing the insured abt the delay if any -rejection of a claim, if any, within a period of 30 days
Actuary The person who determines rates & premiums and over all controller of insurance company /insurer - A highly skilled mathematician who is involved in all phases of insurance co operations - Actuary studies important statistical data on births , deaths, marriages, disease, employment, retirement & accident based on this info the actuary determines the rates - -calculates premium that will make the business profitable, enable the co to compete effectively with other insures& allow the co to pay claims & expenses - -professional certification & passing examination by society of actuary - -in property & liability insurance rates are based on co’s past loss experience & industry statistics - Statistics on hurricane , tornadoes, fires diseases, crime rates, trafiic accidents & cost of living are carefully analyzed
Insurance Pricing Rates must be high enough to pay all claims & earn a profit for the insurer Regulatory objectives & business objectives Regulatory objectives -the rates charged should be high enough to pay all losses & expenses -the rates should not be so high that policy holder are paying more than the actual value of their protection - Exposures that are similar with respect to loses & expenses should no be charged substantially different rates Business objectives -simplicity -stability rate should be stable over short periods so that consumer satisfaction can be maintained -responsiveness the rates should be responsive overtime to changing loss exposures & changing economic conditions -encouragement of loss control-rating systems provide a strong financial incentive to the insured to engage in loss control
Basic Rating Methods for gen insurance 1 Judgment rating -means that each exposure is individually evaluated & the rate is determined largely by judgment -used when the loss exposures are so diverse that a class rate cannot be calculated or when credible loss statistics are not available – used In marine insurance 2 class rating- means that exposures with similar characteristics are placed in the same underwriting class, & each is charged the same rate. Methods of determining class rates -Pure premium method= incurred losses & loss adjustment expenses No of exposure units Gross rate =Pure premium 1 –Expense ratio -Loss ratio =the actual loss ratio is compared with the expected loss ratio, & the rate is adjusted accordingly Rate change =A-E Where A = actual loss ratio, E = expected loss E ratio
3 merit rating- class rates are adjusted upward /downward based on individual loss experience -Schedule rating - in which each exposure is individually rated, used In commercial property insurance -Experience rating- the class rates are adjusted upward /downward based on past loss experience , mainly used in workers compensation. -Retrospective rating - a provisional premium is paid at the beginning of the policy period , at the end of the period, a final premium is calculated based on actual losses that occur during the policy period used in physical damaging , burglary etc. Rate making in Life insurance Net single premium – the present value of the future death benefit -it is that amt , which together with compound interest, will be sufficient to pay death claims -mortality & investment income are considered -insu co expenses or the loading element are considered when the gross premium is calculated
Characteristics of FS -FS are customer oriented -they are intangible in nature -inseparability -perishability -People based service -dynamism
Fee based services Credit rating -provides a relative ranking of credit quality of debt/finacial instruments or their grading according to investment qualities -an expression of an opinion through symbols abt credit quaality of the issuer of securities or co with reference to a particular instrument. -it doesn’t amt to a recommendation -provides risk evaluation Doesn’t indicate mkt risk/forecast future mkt price Origin of credit rating-first CR was set up in New york in 1847 In India first CR agency Credit rating & information service of india ltd (CRISIL) WAS SET UP IN 1987 -Investment information & CR agency of India Ltd (ICRA) 1994 -Credit Analysis & Research Ltd (CARE 1994 -Duff & Philps Credit rating P Ltd 1996 in asociation with NBFC’s
Importance Of CR -to the investors *risk recognition *fair assessment of issuers credibility *info abt financial strength of issuer *provides better choice amg available investment proposal -To issuers *wider investor base is exposed *CR act as a mkt ing tool *highly rated instruments may require lesser interest *reputation & good will Process of CR issuer co appoints rating agency Businaee analysis fin analysis funda analysis mgt analysis Industry risk, mkt position Operation efficiency a/c quality earnings cash flow CAR asset quality liquidity profitability past track regulation objectives philosophy willingness to pay regulatory& competiive analysis impact of competition
Rating Symbols Of CRISIL Debt category Long term instrument Debt instument deb, bonds Rating Symbols AAA AA A BBB Remarks highest safety high safety adequate safety moderate safety
Financial Institutions RBI Mgt of RBI Depts of RBI
Functions of RBI Traditional functions -issue of currency - banker to govt -banker’s bank -credit control measures -Rbi act as lender of last resort -exchange control -clearing house Promotional functions -branch expansion policy -industrial & agricultural finance Protecting the interest of depositors & creditors Supervisory Functions -RBI guide the commercial banks & supervises their functions too.
COMMERCIAL & CO OPERATIVE BANK Commercial banks Primary functions -Traditional functions of the bank accepting deposits, discounting of bills & lending loans Secondary functions include agency services & general utility services Most modern functions of the bank-includes ATM, home banking, green card, factoring, MF, Electronic clearing sysytem, , gold /platinum card, ebanking, gold banking etc
Co operative banks
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