13

Financial Services
1.Credit Cards as Source of Consumer Finance
(o) Acreit card is a plastic card with specific securityandother features that is isue
by a bank to its customer to enable the latter to use it as a payment medium
(6) A credit card is a card or mechanism which enables cardholders fo purchose
goods, travel and dine in a hotel without making immediate payments
()The card entitlesthe cardholdertocertain creditlimits/funds such that a payment
can be made even if the customer's account does nof have adequafe balance
(d) A credit card is both an instrument of payment and a source of credit.
e)The holders can use the cards to getcredit from banks upto 45 days.
) The credit card relives the consumers from carrying the burden of cash and
ensures safety.
C) Ihe general criterion applied is a person's spending capacity and not merely his
income or wealth.
T h e other criterion is the worthiness ofthe client and his average monthiybalance
0 In case of a credit card parties to 'complete cycle oftransaction are fivein
number. These are
(1) Customer (cardholder) (4) Acquiring Bank
(2) Retailer (5) Clearing Network
(3) Issuing Bank
) Increase in the number of parties means that more time is taken to complete the
payment cycle.

2. Merchant Banker: Meaning and Functions

Meaning (a) The merchant bank is also krnown as investment bank!
(b) Itis an organization that underwrites securities for corporations, advise such clients
on mergers and is involved in wnership of commercial
ventures.
(c) It engages in the business of issue management either by making arrangements
regarding selling, buying or subscribing to securities or acting as managers
consultant, advisor or rendering corporate advisory services in relation to such
issue management.
(d) A set of financial institutions that are engaged in providing specialist services
which generally include acceptance of bils,
corporate finance, portfolio
management and other banking services are known as 'merchant bankers'.
(e) lt should be noted that it is not necessany for a merchant banker to carry out all the
above mentioned activities.
( merchant banker may spEcialize ln one activity and take up other
A
supplementary or supportive to the specialized activity. activities
which may be
Functions (o) Corporate counseling Merges, amalgamations &takeoves
(b) Project counselling (K) Venture capital
(c) Pre-investment studies
) Lease financing
(d) Capital restructuring (m) Foreign currency finance
(e) Credit syndication 8& project finance (n) Fixed deposit banking
174
 Chapter 13 Financial Services 175

)Issue management and underwriting (o) Mutual funds

() Portfolio management
(P) Revival of sick industries
(n) Working capital finance
() Project appraisal
) Acceptance credit & bills
discounting
3. Investment Bank and Commercial Bank: Distinction
Basis
Investment Bank Commercial Bank
Object It is a
financial intermediary set up to
provide investment and advisory services Itisabankestablishedto provide banking
to the companies.
services to the general public.
Service It offers customer specific service. t offers standardized services.
Customer Base Its customer base is
very loW. Its customer base is comparatively
higher.
Associated with if is related to the performance of stock It is more related to nation's economic
market. growth and demand for credit.
Banker to It is banker to few individuals,
companies It is a banker to all citizens of the country.
and government.
Income It generates its income from fees and f generates income from interest and
Commission. fees.

4. Role of Merchant Bankers in Capital Issues

Management of public issues of shares, debentures or offer for sale, has been the
traditional service rendered by merchant bankers. The merchant bankers presence in
all major financial centres as well his long established relationships with the underwiter
and broker fraternities, makes possible the high degree of synchronisation required to
ensure the success of an issue. Some of the services under issue management are
() Deciding on the size and timing of a public issue in the light of the market
condifions.
(b) Preparing the base of successful issue marketing from the initial documentation to
the preparation of the actual launch.
c) Optimum undenwriting support.
(a) Appointment of bankers and brokers as well as issue houses
(e) Professionaliaison with share marketfunctionaries like brokers, portfolio managers
and financial press for pre-selling and media coverage.

Preparation of draft prospectus and ofther documents.

(g) Wide coverage throughout the country for collection of applications.
(h) Preparation of advertising and promotional material.

5. Non-Banking Finance Companies (NBFCs): Categories and Regulations

(a) A NBFC is a company registered under the Companies Act, 2013 engaged in the
Meaning business of loans and advances, acquisition of shares/stocks/bonds/debentures/
securities issued by Government or local authority or other marketable securities
of like nature, leasing, hire-purchase, insurance business, chit business.
a
(b) NBFC does not include any institution whose principal business is that of agriculture
activity, industrial activity, purchase and sale of goods (other than securities)
or
providing any services and sale/purchase/construction of immovable property.

(c) A NBFC which is a company and has principal business of receiving deposits under
any scheme or arrangementin one lumpSum or in instalmentsbyway of contributions
or in any ofher manner, is also a NBFC.
176 Pat tratej FinaricialManajetnat Theny
finance to the
corporate sector
wpplsrmentary
F A He Nomrslty providg under RBi Act, 1934,
Reserve Bank
of India
NeFCs r e raguicstod by the dre GKin to tiatf of banie
9 herce their
activities
Distinction From Bank lrid ond mag investrnernts ond
BFCS therg ore a fow differences os given below
hMvet
(o) NBFC cannot orcept dernand deposit
selernent system
and cannot isou
the payrnent and
NEFCs do not forrn part of
chequen down on itself.
insurance and Credit GUaranfee
Corporation
D e p o s i t inurance facility of Deposit case of banks.
16 riot avalatble to depositors of
NBFCs, uilike in
rneasures
Regulations PEI r9gulates trie NBFCs by taking the following

()Mandatoryregistration
(b)Minirurnowned funids
(c) Authorization to accept public deposits
(d)Prevcribes ceiling of interest rate
(o) Prescribes the pelod of depost
utilizafion of funds
() Precribes the prudential norrns regarding
() Gving directions about investrnent policies
(h) Conducts inspection through its inspectors
and reported by auditors
) Prosclbes the poirits which should be examined

O) 1ssuesguidelines regarding non-performing assets

6. Regulatíon of NBFCs by RBI

companles, Merchant banking companles, exchanges,

Stock
Housing finance
(a) Cornpanles engagedIn the business of stock broking/sub-broking, Venture capital
fundcornpanies, Nidhlcompanies, Insurance comnpanles and Chitfund companles
aro NBFCs but they have been exempted from the requlrement of registration
under section 46-IA of the RBI Act, 1934 subject to certain conditlons.

(b) Housing companles are regulated by Natlonal Housing Bank.

c)Merchant banking companies, Stock exchanges, Companies engoged inthe
business of stock broklng/sub-broklng. Venture capital fund are regulated by
Securitles and Exchange Board of India (SEBI).
(d) nsurance companies are regulated by Insurance Regulatory and Development
Authority (1RDA).
(o) Chit fund companes are regulated by the respective State Governments.
(Nidhlcompanles cro rogulated by Mlnistry of Corporate Affairs, Government ofIndia
() Companlos that do ftnanclal busliness but aro regulated by other regulators are
given speciflc oxemptlon by the Reserve Bank from Its regulatory requrementsfor
avolding duallty of rogulatlon.
h) Mortgago Guarantee Companles have been notfled as NBFCs under RBI Act, 1934.
() Core lnvestrment Cornpanle6 wlth asset size of less than 100 crore, and those witn
aset slzo of 7 100 crore and above but not accesslng publlc funds are exempfeu
frofn reglstratlon wlth the RBI.
() Ihe Retorve Bank has beern glven the powers under the R8I Act, 1934 to reglste
Iay down pollcy, 166e diroctlons, Inspect, regulate, supervlse and exerce
Murvellance over NBF Cs that meef the 50-50 criterla of principal business.
( The Rosorve Bank can penalize NBFCs for vlolating the
the directions or orders Iosuod by RBl under RBI Act. provlislons of the RBI ACT
() Ponal actlon can also result In RBl cancellng the Certificate of
to the NIBFG, or prohblting them from Reglstration Issu
o t s or flincg a winding up pelition accepting deposlts and allenating
 Chapter 13 Financial Services 177

m Financial activity as principal business is when o company's finarncial assets

Constifute more tharn 50 per cent of the total assets and income frorn financial
SSets constitute more than 50 per cent of the gross income. A cornpany which
fuifils both these criteria will be registered as NBFC by RBI.

N o NBFC can commence or carry on business of a NBFC without obtoining a

certificate of registration from RBl and without having a net owned funds of T25 lokrs.

7. Categories of NBFCs

NBCS are categorized () in terms of the type of liabilities into deposit and no-depost
Occepting NBFCs(i) Non deposit taking NBFCs by their size into systermaticallyimporta
and other non-deposit holding companies, and (i) by the kind of actvity they
Conduct. Within this broad categorization the different types of NBFCS are as tollows.
Aset Finance Company t is a compony which is a financial institution carryihg on as its principal business the
financing of physical assets supporting product/econonic activity, Such as automobiles,
fractors, lathe machines, generator sets, earth moving and material handling
equipments, moving on own power and general purpose industrial machines. Principal
business for this purpose is defined as aggregate of financing real/physical Ossets
Supporting economic activity and income arising therefrom is not less than 60% of ts
total assets and total income respectively.
Investment Company Itmeans any company which is afinancial institution carrying on as its principal business
the acquisition of securities.
Loan Company It meansany companywhich is a financial institution caryingon as its principal business
the providing of finance whether by making loans or advances or ofherwise for any
activity other than its own but does not include an Asset Finance Company.
Infrastructure Ita NBFC (o) which deploys at least 75% ofitstotal assets in infrastructure loans, (b) has
Finance Company a minimunm net owned funds of 300 crore, (c) has a minimum credit rating of 'A' or
equivalent, and (d) a CARR of 15%.
Core Investment It is an NBFC carrying on the business of acquisition of shares and securities and holds
Company 90% of its total assets in the form of investment in equity shares, preference shares, debt or
loans in group companies, its asset size ofr 100crore or aboveanditacceptspublicfunds
Factors Factor is a NBFC engaged in the principal business of factoring. The financial assets in
the factoring business should contritbute at least 50% of its tofal assets and its income
derived from factoring business should not belessthan 50% ofits grossincome.
Mcro Financial institution t is a registered non-deposit toking NBFC having not less than 85% of its assets in the
nature of qualifying assets.
Infrastructure Debt Fund It is a company registered as NBFC to facilitate the flow of long-term debt into
infrastructure projects. It raisesresourcesthrough isue of Rupee or Dolar denominated
bonds of minimurn 5 year maturity. Only infrastructure finance companies can sponsor
this fund.
These are financial institutions for which at least 90% of business turnover is mortgage
Mortgage Guarantee
guarantee business or at least 90% of the gross income is from mortgage business and
Company net owned fund is 7 100 crore
a financial instifufion throughwhich promoter/promoter group will be
permitted
Non-operative Financial Ittoisset up a new bank. It is a wholly owned non-cooperative financial holding company
Holding Company which will hold the bank as well as all ofher financial services companies regulated by
RBl or other financial sector regulators, to the extent permissible under the applicable
regulatory prescriptions.

Theoretical Examination Questions

1.Write short notes on 'Credit Cards'. (1) (May 1995)
2. Write short notes on Role of Merchant Bankers in Public Issues'. (4) (Nov. 1995)