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FINANCIAL SERVICE MANAGEMENT (As per the Revised Syllabus of Mumbai University for T.Y. BBI, Semester V, w.e.f. 2014-2015) E. Gordon M.Com., M.Phil. Former Professor and Head, Dept. of Commerce, A.N.J.A. College, Sivakasi. Dr. K. Natarajan M.Com., M.Phil., Ph.D. Former Principal, S.V.N. College, Madurai. Director, Management Studies, Sri Kaliswari College, Sivakasi. MUMBAI NEW DELHI NAGPUR BENGALURU HYDERABAD CHENNAI PUNE LUCKNOW AHMEDABAD ERNAKULAM BHUBANESWAR INDORE KOLKATA GUWAHATI

Authors No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording and/or otherwise without the prior written permission of the publisher. First Edition : 2015 Published by : Branch Offices : Mrs. Meena Pandey for Himalaya Publishing House Pvt. Ltd., “Ramdoot”, Dr. Bhalerao Marg, Girgaon, Mumbai – 400 004. Phone: 022–23860170/23863863, Fax: 022–23877178 E–mail:; Website: New Delhi : “Pooja Apartments”, 4–B, Murari Lal Street, Ansari Road, Darya Ganj, New Delhi – 110 002. Phone: 011–23270392, 23278631; Fax: 011–23256286 Nagpur : Kundanlal Chandak Industrial Estate, Ghat Road, Nagpur – 440 018. Phone: 0712–2738731, 3296733; Telefax: 0712–2721216 Bengaluru : No. 16/1 (Old 12/1), 1st Floor, Next to Hotel Highlands, Madhava Nagar, Race Course Road, Bengaluru – 560 001. Phone: 080–22286611, 22385461, 4113 8821, 22281541 Hyderabad : No. 3–4–184, Lingampally, Besides Raghavendra Swamy Matham, Kachiguda, Hyderabad – 500 027. Phone: 040–27560041, 27550139 Chennai : New–20, Old–59, Thirumalai Pillai Road, T. Nagar, Chennai – 600 017. Mobile: 9380460419 Pune : First Floor, "Laksha" Apartment, No. 527, Mehunpura, Shaniwarpeth (Near Prabhat Theatre), Pune – 411 030. Phone: 020–24496323/24496333; Mobile: 09370579333 Lucknow : House No 731, Shekhupura Colony, Near B.D. Convent School, Aliganj, Lucknow – 226 022. Phone: 0522–4012353; Mobile: 09307501549 Ahmedabad : 114, “SHAIL”, 1st Floor, Opp. Madhu Sudan House, C.G. Road, Navrang Pura, Ahmedabad – 380 009. Phone: 079–26560126; Mobile: 09377088847 Ernakulam : 39/176 (New No: 60/251) 1st Floor, Karikkamuri Road, Ernakulam, Kochi – 682011. Phone: 0484–2378012, 2378016 Mobile: 09387122121 Bhubaneswar : 5 Station Square, Bhubaneswar – 751 001 (Odisha). Phone: 0674–2532129, Mobile: 09338746007 Indore : Kesardeep Avenue Extension, 73, Narayan Bagh, Flat No. 302, IIIrd Floor, Near Humpty Dumpty School, Indore – 452 007 (M.P.). Mobile: 09303399304 Kolkata : 108/4, Beliaghata Main Road, Near ID Hospital, Opp. SBI Bank, Kolkata – 700 010, Phone: 033–32449649, Mobile: 7439040301 Guwahati : House No. 15, Behind Pragjyotish College, Near Sharma Printing Press, P.O. Bharalumukh, Guwahati – 781009, (Assam). Mobile: 09883055590, 08486355289, 7439040301 DTP by : HPH, Editorial Office, Bhandup (Nalini) Printed at : Rose Fine Art, Mumbai. On behalf of HPH.

Preface Consequent upon the restructuring of the commerce and management curricula by the Mumbai University, many new subjects on thrust areas have recently been introduced. One such broad areas is the ‘Financial Service Sector’ which comprises of financial products and services and their management. Today, one can witness far-reaching changes and innovative developments in the financial markets in terms of products and instruments, adoption of modern technologies, establishment of specialised institutions, streamlining of the regulatory framework by regulatory bodies and so on. In the aftermath of this changing financial scenario, students are badly in need of a suitable text book covering all these aspects and incorporating the latest developments in the respective fields. Realising the imperative need to bring out a suitable book on ‘Financial Service Management’ tailored to meet the specific requirements of students of Mumbai University, a modest attempt has been made to present this edition in the hands of our academic community. The specialty of this volume is that all matters are presented in simple language notwithstanding the technical nature of the subject. Utmost care has been taken to provide a lucid exposition and clarity of the subject at all stages. All latest developments have been duly covered and above all, it is most student-friendly. To facilitate recapitualation and better grasp of the subject, a large number of knowledge as well as higher abilities type questions are given at the end of each chapter. We wish to express our thanks to Ms. Nimisha, Production Manager and all the members of the Himalaya Publishing House Pvt. Ltd. for their wholehearted support and cooperation in bringing out this edition elegantly and in time. Critical comments and constructive suggestions for the improvement of this book are most welcome and will be greatly appreciated. Sivakasi June, 2015 E. Gordon K. Natarajan

Syllabus Financial Service Management Unit 1 (15 Lectures) Financial Services Meaning – Classification – Scope – Fund Based Activities – Non-fund Based Activities – Modern Activities – Sources of Revenue – Causes for Financial Innovation – New Financial Products and Services – Innovative Financial Instruments – Challenges Facing the Financial Sector Saving Mobilisation. Merchant Banking Definition – Origin – Merchant Banking in India – Merchant Banks and Commercial Banks – Services of Merchant Banks – Qualities Required of Merchant Bankers in Market-making Process – Progress of Merchant Banking in India – Problems – Scope of Merchant Banking in India. Leasing and Hire Purchase Definition – Steps in Leasing Transactions – Types of Lease – Financial Lease – Operating Lease – Leverage Lease – Sales and Lease Back – Cross-border Lease – Advantages and Disadvantages of Lease – Structure of Leasing industry – Hire Purchase and Credit Sale – Hire Purchase and Installment Sale – Hire Purchase and Leasing – Origin and Development – Banks and Hire Purchase Business. Unit 2 (15 Lectures) Mutual Fund Introduction to Mutual Fund – Structure of Mutual Fund in India – Classification of Mutual Fund – AMFI Objectives – Advantages of Mutual Fund – Disadvantages of Mutual Fund – NAV Calculation and Pricing of Mutual Fund – Mutual Funds Abroad – Mutual Funds in India – Reasons for Slow Growth – Future of Mutual Funds Industry. Factoring and Forfaiting Factoring – Meaning – Modus Operandi – Terms and Conditions – Functions – Types of Factoring – Factoring vs. Discounting – Cost of Factoring – Benefits – Factoring in India – International Factoring – Definition – Types of Expert Factoring – Factoring in Other countries – EDI Factoring – Factoring – Definition – Factoring vs. Forfeiting – Working of Forfeiting – Cost of Forfeiting – Benefits of Forfeiting – Drawbacks – Forfeiting in India. Unit 3 (15 Lectures) Securitisation of Debt What is Securitisation? – Definition – Securitisation vs. Factoring – Modus Operandi – Role of Merchant Bankers – Role of Other Parties – Structure for Securitisation – Securitisable Assets – Benefits of Securitization – Conditions for Successful Securitisation – Securitisation Abroad –

Securitisation in India – Reasons for Unpopularity of Securitisation – Future Prospects of Securitisation. Derivatives Meaning – Types of Financial Derivatives – Options – Futures – Forwards – Swaps – Futures and Options Trading System – Clearing Entities and their Role. Unit 4 (15 Lectures) Credit Rating Definition and Meaning – Functions of Credit Rating – Origin – Credit Rating in India – Benefit of Credit Rating – Credit Rating Agencies in India. CRISIL–IICRA–CARE– Limitations of Rating – Future of Credit Rating in India Treasury Management Introduction – Scope – Objectives – Functions – Treasury Management in Bank and Corporate – Cost Centre vs. Profit Centre Treasury – Centralised vs. Decentralised Treasury. Depositories and Pledge Overview of Depository System – Key Features of Depository System in India – Depository – Bank Analogy – Legal Framework – Eligibility Criteria for a Depository – Agreement between Depository and Issuers – Right and Obligations of Depositories – Services of Depository Records to Maintained by Depository and Functions of Depository – Organisation and Functions of NSDL – Pledge and Hypothecation – Procedure for Pledge/Hypothecation – Procedure of Confirmation of Creation of Pledge/Hypothecation by Pledgee – Closure of a Pledge/Hypothecation by Pledgor – Invocation of Pledge by Pledgee. Total: (60 Lectures)

Scheme of Examination Credit Based Grading System Scheme of Examination Internal Assessment – 25% 25 Marks Semester End Examinations – 75% 75 Marks Question Paper Pattern Duration: 2½ Hrs. Maximum Marks: 75 All Questions are Compulsory Carrying 15 marks each. Particulars Questions to be Set: 05 Marks Q.1 A 8 Marks B 7 Marks OR Q.1 Q.2 A 8 Marks B 7 Marks A 8 Marks B 7 Marks OR Q.2 Q.3 A 8 Marks B 7 Marks A 8 Marks B 7 Marks OR Q.3 Q.4 A 8 Marks B 7 Marks A 8 Marks B 7 Marks OR Q.4 Q.5 A 8 Marks B 7 Marks Write Short Notes (Any Three out of Five) 15 Marks Or/Either Q.5 Explain the Concept (Any Five out of Eight) 15 Marks

Contents 1. Financial Services 1 – 21 2. Merchant Banking 22 – 37 3. Hire Purchase 38 – 44 4. Leasing 45 – 61 5. Mutual Funds 62 – 92 6. Discounting, Factoring and Forfaiting 93 – 118 7. Securitisation of Debt 119 – 135 8. Derivatives 136 – 161 9. Credit Rating 162 – 176 10. Treasury Management 177 – 186 11. Depository System and Pledge 187 – 204

Detailed Contents 1. Financial Services 1 – 21 Meaning, Scope and Innovations – Meaning of Financial Services – Features of Financial Services – Importance of Financial Services – Classification of Financial Service Industry – Scope of Financial Services – Causes for Financial Innovation – Financial Services and Promotion of Industries – New Financial Products and Services – Innovative Financial Instruments – Classification of Equity Shares – Challenges Facing the Financial Service Sector – Present Scenario – Questions. 2. Merchant Banking 22 – 37 Introduction – Definition – Origin – Merchant Banking in India – Merchant Banks and Commercial Banks – Services of Merchant Banks – Merchant Bankers as Lead Managers – Qualities Required for Merchant Bankers – Guidelines for Merchant Bankers – Merchant Bankers’ Commission – Merchant Bankers in the Market-making Process – Progress of Merchant Banking in India – Problems of Merchant Bankers – Scope for Merchant Banking in India – Questions. 3. Hire Purchase 38 – 44 Features of Hire Purchase Agreements – Legal Position – Hire Purchase Agreement – Hire Purchase and Credit Sale – Hire Purchase and Installment Sale – Hire Purchase and Leasing – Origin and Development – Banks and Hire Purchase Business – Bank Credit for Hire Purchase Business – Questions. 4. Leasing 45 – 61 Concept of Leasing – Steps Involved in Leasing Transaction – Types of Lease – Installment Buying, Hire Purchase and Leasing – Advantages of Leasing – Disadvantages of Leasing – History and Development of Leasing – Legal Aspects of Leasing – Contents of a Lease Agreement – Income Tax Provisions Relating to Leasing – Sales Tax Provisions Pertaining to Leasing– Accounting Treatment of Lease – Method of Ascertaining Lease Rentals – Other Factors Influencing Buy/Borrow or Lease Decision – Structure of Leasing Industry – Problems of Leasing – Prospects – Questions. 5. Mutual Funds Introduction – Scope of Mutual Fund – Definition – Origin of the Fund – Types of Funds/Classification of Funds – Importance of Mutual Funds – Risks – Organisation of the Fund – Operation of the Fund – Facilities Available to Investors – Net Asset Value – Performance Evaluation of Mutual Funds – Sharpe’s Model for Evaluation – Treynor’s Model for Evaluation – Jenson Model – Other Parameters of Performance – Investor’s Rights – General Guidelines – Selection of a Fund – 62 – 92

Commercial Banks and Mutual Funds – Mutual Funds Abroad – Mutual Funds in India – Reasons for Slow Growth – Future of Mutual Fund Industry – Questions. 6. Discounting, Factoring and Forfaiting 93 – 118 Introduction – Discounting – Factoring – Meaning – Definition – Modus Operandi – Terms and Conditions – Functions – Types of Factoring – Factoring vs. Discounting – Cost of Factoring – Costing and Pricing Technique – Benefits – Factoring in India – International Factoring – Factoring in Other Countries – Accounting Treatment in the Books of Factor and Firm – EDI Factoring – Forfaiting – Working of Forfaiting – Benefits of Forfaiting – Forfaiting in India – Questions. 7. Securitisation of Debt 119 – 135 What is Securitisation? – Securitisation vs. Factoring – Modus Operandi – Structure for Securitisation/Types of Securities – Securitisable Assets – Benefits of Securitisation – Securitisation and Banks – Conditions for Successful Securitisation – Securitisation Abroad – Securitisation in Indian Context – New Guidelines on Securitisation – Legal Framework for Securitisation – Causes for the Unpopularity of Securitisation in India – Prospects of Securitisation – Questions. 8. Derivatives 136 – 161 Kinds of Financial Derivatives – Features of Forward Contracts – Financial Forwards – Futures – Types of Futures – Forwards vs. Futures Contract – Advantages – Options – Types of Options – Features of Option Contract – Benefits – Swaps – Credit Default Swaps – Credit Default Swap vs. Insurance – Types of Credit Default Swap – Advantages – Clearing Entities – Margining Systems Importance of Derivatives – Inhibiting Factors – Recent Developments – Indian Scenario – Non-deliverable Forward Market – Trading in Volatility Index Futures – Questions. 9. Credit Rating 162 – 176 Meaning of Credit Rating – Functions of Credit Rating – Origin – Credit Rating in India – Benefits of Credit Rating – Benefits to Rated Companies – Credit Rating Agencies in India – SEBI Guidelines 1999 – New Symbols of Credit Rating – Practical Problems – Future of Credit Rating in India – Questions. 10. Treasury Management 177 – 186 Meaning – Scope of Treasury Management – Objectives – Functions – Bank Treasury vs. Corporate Treasury – Cost Centre vs. Profit Centre – Centralised vs. Decentralised Treasury – Questions.

11. Depository System and Pledge 187 – 204 Definition and Meaning – Objectives of a Depository – Rights and Obligations of Depositories/Depository Participants – Eligibility Criteria for Depository Participant – Interacting Institutions – Depository Process – Trading in a Depository System – Depositories in the International Market – Depository System in India – SEBI (Depositories and Participants) Regulation Act, 1996 – Depository Process in India – Benefits of Depository System – National Securities Depository Ltd. (NSDL) – Central Depository Services (India) Ltd. (CDSL) – Drawbacks – Remedial Measures – Pledge and Hypothecation – Questions.

FINANCIAL SERVICES 1 MEANING, SCOPE AND INNOVATIONS The Indian financial service industry has undergone a metamorphosis since 1990. During the late seventies and eighties, the Indian financial service industry was dominated by commercial banks and other financial institutions which cater to the requirements of the Indian industry. In fact, the capital market played a secondary role only. The economic liberalisation has brought in a complete transformation in the Indian financial services industry. Prior to the economic liberalisation, the Indian financial service sector was characterised by so many factors which retarded the growth of this sector. Some of the significant factors were: (i) Excessive controls in the form of regulations of interest rates, money rates, etc. (ii) Too many control over the prices of securities under the erstwhile controller of capital issues. (iii) Non-availability of financial instruments on a large-scale as well as on different varieties. (iv) Absence of independent credit rating and credit research agencies. (v) Strict regulation of the foreign exchange market with too many restrictions on foreign investment and foreign equity holding in Indian companies. (vi) Lack of information about international developments in the financial sector. (vii) Absence of a developed government securities market and the existence of stagnant capital market without any reformation. (viii) Non-availability of debt instruments on a large-scale. However, after the economic liberalisation, the entire financial sector has undergone a sea-saw change and now we are witnessing the emergence of new financial products and services almost everyday. Thus, the present scenario is characterised by financial innovation and financial creativity and before going deep into it, it is imperative that one should understand the meaning and scope of financial services. MEANING OF FINANCIAL SERVICES In general, all types of activities which are of a financial nature could be brought under the term ‘financial services’. The term ‘Financial Services’ in a broad sense means ‘mobilising and allocating savings’. Thus, it includes all activities involved in the transformation of saving into investment. The ‘financial service’ can also be called ‘financial intermediation’. Financial intermediation is a

process by which funds are mobilised from a large number of savers and make them available to all those who are in need of it and particularly to corporate customers. Thus, financial service sector is a key area and it is very vital for industrial developments. A well developed financial service industry is absolutely necessary to mobilise the savings and to allocate them to various investable channels and thereby to promote industrial development in a country. FEATURES OF FINANCIAL SERVICES Financial services have certain basic features as stated below: (i) Customer-oriented: Like any other service industry financial service industry is also a customer-oriented one. That customer is the king and his requirements must be satisfied in full should be the basic tenent of any financial service industry. It calls for designing innovative financial products suitable to varied risk-return requirements of customers. Above all, there should be timely delivery of services. (ii) Intangibility: Financial services are intangible and therefore, they cannot be standardised or reproduced in the same form. Hence, there is a need to have a track record of integrity, reputation, good corporate image and timely delivery of services. (iii) Simultaneous Performance: Yet another feature is that both production and supply of financial services have to be performed simultaneously. Therefore, both suppliers of services and consumers should have a good rapport, clear-cut perception and effective communication. (iv) Dominance of Human Element: Financial services are dominated by human element and thus, they are people-intensive. It calls for competent and skilled personnel to market the quality financial products. But, quality cannot be homogenised since it varies with time, place and customer-tocustomer. (v) Perishability: Financial services are immediately consumed and hence inventories cannot be created. There is a greater need for balancing demand and supply properly. In other words, marketing and operations should be closely interlinked. IMPORTANCE OF FINANCIAL SERVICES Financial services cater to the requirements of both individual and corporate customers. In fact, the successful functioning of any financial system depends upon the range of financial services offered by vendors of services. Financial services can be defined to include not only the provision of a financial service but also the sale of a financial product or both. The importance of financial services can be realised from the following: (i) Economic growth: The financial service industry mobilises the savings of the people and channels them into productive investment by providing various services to the people. In fact, the economic development of a nation depends upon these savings and investment. (ii) Promotion of savings: The financial service industry promotes savings in the country by providing transformation services. It provides liability, asset and size transformation service by providing large loans on the basis of numerous small deposits. It also provides maturity transformation services by offering short-term claim to savers on their liquid deposit and providing long-term loans to borrowers.

(iii) Capital formation: The financial service industry facilitates capital formation by rendering various capital market intermediary services. Capital formation is the very basis for economic growth. It is the principal mobiliser, of surplus funds to finance productive activities and thus, it promotes capital accumulation. (iv) Provision of liquidity: The financial service industry promotes liquidity in the system by allocating and reallocating savings and investment into various avenues of economic activity. It facilitates easy conversion of financial assets into liquid cash at the discretion of the holder of such assets. (v) Financial intermediation: The financial service industry facilitates the function of intermediation between savers and investors by providing a means and a medium of exchange and by undertaking innumerable services. (vi) Contribution to GNP: The contribution of financial services to GNP has been going on increasing year-after-year in almost all countries in recent times. (vii) Creation of employment opportunities: The financial service industry creates and provides employment opportunities to millions of people all over the world. CLASSIFICATION OF FINANCIAL SERVICE INDUSTRY The financial intermediaries in India can be traditionally classified into two: (i) Capital market intermediaries, and (ii) Money market intermediaries. The capital market intermediaries consist of term lending institutions and investing institutions which mainly provide long-term funds. On the other hand, money market intermediaries consists of commercial banks, cooperative banks and other agencies which supply only short-term funds. Hence, the term ‘financial services industry’ includes all kinds of organisations which intermediate and facilitate financial transactions of both individuals and corporate customers. SCOPE OF FINANCIAL SERVICES Financial services cover a wide range of activities. They can be broadly classified into two namely: (i) Traditional activities (ii) Modern activities Traditional Activities Traditionally, the financial intermediaries have been rendering a wide range of services encompassing both capital and money market activities.

They can be grouped under two heads, viz.; (i) Fund-based activities, and (ii) Non-fund-based activities. Fund-based Activities The traditional services which come under fund-based activities are the following: (i) Underwriting of or investment in shares, debentures, bonds, etc., of new issues (primary market activities). (ii) Dealing in secondary market activities. (iii) Participating in money market instruments like commercial papers, certificate of deposits, treasury bills, discounting of bills, etc. (iv) Involving in equipment leasing, hire purchase, venture capital, seed capital, etc. (v) Dealing in foreign exchange market activities. Non-fund-based Activities Financial intermediaries provide services on the basis of non-fund-based activities also. This can also be called ‘fee-based’ activity. Today, customers whether individual or corporate are not satisfied with mere provision of finance. They expect more from financial service companies. Hence, a wide variety of services, are being provided under this head. They include the following: (i) Managing the capital issues, i.e., management of pre-issue and post-issue activities relating to the capital issue in accordance with the SEBI guidelines and thus enabling the promoters to market their issues. (ii) Making arrangements for the placement of capital and debt instruments with investment institutions. (iii) Arrangement of funds from financial institutions for the clients’ project cost or his working capital requirements. (iv) Assisting in the process of getting all government and other clearances. Modern Activities Besides the above traditional services, the financial intermediaries render innumerable services in recent times. Most of them are in the nature of nonfund-based activity. In view of the importance, these activities have been discussed in brief under the head ‘New financial products and services’. However, some of the modern services provided by them are given in brief hereunder: (i) Rendering project advisory services right from the preparation of the project report till the raising of funds for starting the project with necessary government approval. (ii) Planning for mergers and acquisitions and assisting for their smooth carry out. (iii) Guiding corporate customers in capital restructuring. (iv) Acting as trustees to the debentureholders. (v) Recommending suitable changes in the management structure and management style with a view to achieving better results.

(vi) Structuring the financial collaboration/joint ventures by identifying suitable joint venture partner and preparing joint venture agreement. (vii) Rehabilitating and reconstructing sick companies through appropriate scheme of reconstruction and facilitating the implementation of the scheme. (viii) Hedging of risks due to exchange rate risk, interest rate risk, economic risk and political risk by using swaps and other derivative products. (ix) Managing the portfolio of large Public Sector Corporations. (x) Undertaking risk management services like insurance services, buyback options, etc. (xi) Advising the clients on the question of selecting the best source of funds taking into consideration the quantum of funds required, their cost, lending period, etc. (xii) Guiding the clients in the minimisation of the cost of debt and in the determination of the optimum debt-equity mix. (xiii) Undertaking services relating to the capital market such as: (a) Clearing services, (b) Registration and transfers, (c) Safe custody of securities, (d) Collection of income on securities. (xiv) Promoting credit rating agencies for the purpose of rating companies which want to go public by the issue of debt instruments. Sources of Revenue Accordingly, there are two categories of sources of income for a financial service company namely: (i) fund-based, and (ii) fee-based. Fund-based income comes mainly from interest spread (difference between the interest paid and earned), lease rentals, income from investments in capital market and real estate. On the other hand, fee-based income has its sources in merchant banking, advisory services, custodial services, loan syndication, etc. In fact, a major part of the income is earned through fundbased activities. At the same time, it involves a large share of expenditure also in the form of interest and brokerage. In recent times, a number of private financial companies have started accepting deposits by offering a very high rate of interest. When the cost of deposit resources goes up, the lending rate should also go up. It means that such companies should have to compromise the quality of its investments. Fee-based income, on the other hand, does not involve much risk. But, it requires a lot of expertise on the part of a financial company to offer such fee-based services. Causes for Financial Innovation Financial intermediaries have to perform the task of financial innovation to meet the dynamically changing needs of the economy and to help the investors cope with an increasingly volatile and uncertain marketplace. There is a dire necessity for the financial intermediaries to go for innovation due to the following reasons:

(i) Low profitability: The profitability of the major financial intermediary, namely the banks has been very much affected in recent times. There is a decline in the profitability of traditional banking products. So, they have been compelled to seek out new products which may fetch high returns. (ii) Keen competition: The entry of many financial intermediaries in the financial sector market has led to severe competition among themselves. This keen competition has paved the way for the entry of varied nature of innovative financial products so as to meet the varied requirements of the investors. (iii) Economic liberalisation: Reform of the financial sector constitutes the most important component of India’s programme towards economic liberalisation. The recent economic liberalisation measures have opened the door to foreign competitors to enter into our domestic market. Deregulation in the form of elimination of exchange controls and interest rate ceilings have made the market more competitive. Innovation has become a must for survival. (iv) Improved communication technology: The communication technology has become so advanced that even the world’s issuers can be linked with the investors in the global financial market without any difficulty by means of offering so many options and opportunities. Hence, innovative products are brought into the domestic market in no time. (v) Customer service: Nowadays, the customer’s expectations are very great. They want newer products at lower cost or at lower credit risk to replace the existing ones. To meet this increased customer sophistication, the financial intermediaries are constantly undertaking research in order to invent a new product which may suit to the requirement of the investing public. Innovations, thus, help them in soliciting new business. (vi) Global impact: Many of the providers and users of capital have changed their roles all over the world. Financial intermediaries have come out of their traditional approach and they are ready to assume more credit risks. As a consequence, many innovations have taken place in the global financial sector which have its own impact on the domestic sector also.

2. Merchant Banking 22 - 37 Introduction - Definition - Origin - Merchant Banking in India - Merchant Banks and Commercial Banks - Services of Merchant Banks - Merchant Bankers as Lead Managers - Qualities Required for Merchant Bankers - Guidelines for Merchant Bankers - Merchant Bankers' Commission - Merchant Bankers in the

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