Fee-Based Services of Banks Samir K Mahajan

Service Provided Bank A GLIMPSE ON SERVICES PROVIDED BY BANK Fund-Based FEE- Based services Samir K Mahajan

A glimpse on services provided by bank(contd.) FEE-BASED SERVICES include non-fund based credit assistance (such as letter of credit or bank guarantee) and other fee-based functions of the bank. may not involve immediate fund outflow, and hence may not affects banker’s liquidity. Fee-based credit facility (letter of credit or bank guarantee) may crystallize into fund-based advances. Most of the contingent liabilities of bank more prominently letters of credit and bank guarantees fall under this category. bank earns a series non-interest income in the form of fees or commissions and service charges etc. out of fee-based services. FUND-BASED SERVICES relate those activities which results in immediate actual outflow of cash and immediate depletion of actual liquidity of a banker. include granting of loans and advances, and making investment in share/debentures/bond. Samir K Mahajan

Fee based Services of Banks: Components General Utility Function Non-fund based working capital financing through issue of letter of credit and bank guarantee General Utility Function Agency function Samir K Mahajan

LETTERS OF CREDIT AND BANK GUARANTEE Non-fund based working capital LETTERS OF CREDIT AND BANK GUARANTEE Letters of credit are used primarily in international trade for transactions between a seller /supplier(exporter) in one country and a customer/buyer (importer) in another. A letter of credit is a letter from a bank guaranteeing that a buyer's payment to the seller will be received on time and for the correct amount. In the event that the buyer is unable to make payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase. The bank also acts on behalf of the buyer (holder of letter of credit) by ensuring that the supplier will not be paid until the bank receives a confirmation that the goods have been actually shipped. Samir K Mahajan

FLOW CHART OF LETTER OF CREDIT LETTERS OF CREDIT(contd.) FLOW CHART OF LETTER OF CREDIT Samir K Mahajan

Non-fund based working capital BANK GUARANTEE BANK GUARANTEE is a guarantee from a bank on behalf of its customer usually a corporate ensuring that the liabilities of the customer (debtor) will be met on time. If the debtor fails to settle a debt, the bank will cover it. The bank guarantee is one such innovative financial instrument whereby, if the beneficiary (creditor) perceives that there has been a breach of contract by the other party(debtor/the customer of the bank), he can encash the guarantee, and avail of the amount immediately, without having to undergo the hassles of litigation. Samir K Mahajan

FLOW CHART OF BANK GUARANTEE Bank Guarantee(contd.) FLOW CHART OF BANK GUARANTEE Samir K Mahajan

AGENCY FUNCTION/SERVICES On BEHALF Of THE CUSTOMERS Fund remittance/transfer facilities from one place to another trough cheque, drafts, pay orders Collection and payment of credit instruments like cheque, bill of exchange, promissory notes etc Execution of standing orders such as making various period payments like subscriptions, rents, premiums on behalf of customers Purchase and sale of securities on behalf of customers Acting as trustee and executors in case of wills of customers Collection of interest and dividend on behalf of customers Income tax consultancy Samir K Mahajan

GENERAL UTILITY SERVICES Bancassurance Factoring Leasing Credit Rating Demat Account Portfolio management Mutual Funds Merchant Banking Safety Locker facility Travelers' cheques Broking services Foreign Exchange Gift Cheques Payment Mechanism or Money Transfer  ATM facilities Credit cards/Debit Card facilities  Advice on Financial Matters Provides Trade Information Samir K Mahajan

bancassurance arrangement benefits both the firms.  Bancassurance means selling insurance product through banks. Banks and insurance company come up in a partnership wherein the bank sells the tied insurance company's insurance products to its clients. bancassurance arrangement benefits both the firms. bank earns fee amount from the insurance company and the insurance firm increases its market reach and customers. bank acts as an intermediary between prospective customers of insurance product and the insurance company. Samir K Mahajan

FACTORING Factoring is a financial transaction in which a business sells its account receivable (e.g. , invoices, bills ) to a third party (called a factor) at a discount. Bank can also assumes the role of a factor. FACTORING may be in advance or at maturity. In "advance" factoring, the business owner sells his receivables to the factor who makes an advance of 70-85% of the purchase price of the receivable amount. The factor collects the full amount from the customer in due course and pays the balance due-amount to the business owner after deducting his commission and other charges. In "maturity" factoring, the factor makes no immediate advance on the receivables; but sees that the buyer/customer pays the invoiced amount within the stipulated time i.e. on maturity. If the customer fails to make payment within the stipulated time, the factor makes payment to the client and proceeds to collect the payment from the customer. Samir K Mahajan

FACTORING FLOW CHART Samir K Mahajan

LEASING A lease is a contractual arrangement calling for the lessee/user to pay (rental) the lessor /owner( say the bank) for use of an asset/tangible property for agreed period of time and consideration. Leasing promotes investment in capital equipment (specially expensive equipments ) for start-up or growing business. Samir K Mahajan

GENERAL UTILITY SERVICES(contd.) LEASING FLOW CHART Samir K Mahajan

GENERAL UTILITY SERVICES(contd.) CREDIT RATING Credit rating is an opinion of relative capacity of a borrowing entity to service its debt obligations within a specified time period and with particular reference to the debt instrument being rated. Bank also does credit rating Prominent credit rating agencies in India are CRISIL Limited , ICRA Limited, CARE Ratings , Fitch Ratings India Private Limited Samir K Mahajan

GENERAL UTILITY SERVICES(contd.) DEMAT ACCOUNT In India’s banking terminology, the term DEMAT Account refers to a deposit made at an Indian financial institution that can be used for investing in shares of stocks and other financial assets. Securities such as: share, bonds etc are held electronically in a DEMAT Account, thereby eliminating the need for physical paper certificates. DEMAT is short for “Dematerialized” and such accounts require that an investor open an account with an investment broker (it may be a bank) linked to a savings or other funded account. Access to a DEMAT Account requires both an Internet and transaction password, and such accounts allow for the transfer (buying and selling) of securities without any physical certificates changing hands. Operative India since 1996 Samir K Mahajan

DEMAT ACCOUNT FLOW CHART GENERAL UTILITY SERVICES(contd.) DEMAT ACCOUNT FLOW CHART Samir K Mahajan

MERCHANT BANKING Merchant banking may be defined as an ‘institution deals mostly in (but is not limited to) international finance, long-term loans for companies and underwriting of shares, portfolio management, project counseling, and so on. They render all these services for a fee. Merchant banks do not provide regular banking services to the general public ORIGIN : The term merchant banking originated from the London who started financing foreign trade through acceptance of bills Later they helped government of under developed countries to raise long term funds Samir K Mahajan

Merchant banking Services includes the following Merchant banking contd. Merchant banking Services includes the following Raising Finance for Clients Merchant Banking helps its clients to raise finance through issue of shares, debentures, bank loans, etc. It helps its clients to raise finance from the domestic and international market. The finance raised is used for starting a new business or project or for modernization, diversification or expansion of the business. Managing Public Issue of Companies Pre-issue activities: Advise on the timing ( opening and closing) of the public issue, launching of publicity campaign Advise on the size , price , marketing of the issue Post-issue activities acting as manager to the issue, and helping in accepting (collecting) applications, screening of application, and deciding on the allotment of securities mailing of allotment letters, share certificates and refund orders listing of shares on the stock exchange, etc Samir K Mahajan

Underwriting of public issues Merchant banking Underwriting of public issues Underwriting is an insurance/guarantee given to the company which makes public issues in case of the public issue fails. A merchant bank acts as one of the underwriters (5 percent of total underwriting commitment or Rs. 25 lakhs which ever is less) and also help in appointing underwriters and brokers to the issue. Raising of external resources is easy for the issues backed by well-known underwriters. Managers, consultants or advisers to the issue SEBI insist that all issues should be managed by at least one authorized merchant banker but not more than two. For an issue of upto 100 crores , a maximum of four merchant bankers shall be appointed. They help in listing of shares in stock exchange, completion of formalities under Companies Act etc. Broker in Stock Exchange Merchant bankers also take form of a brokers in the stock exchange. They buy and sell shares on behalf of their clients. Lot of research is done by these merchant bankers on equity shares. They also advise their clients about which shares to buy, when to buy, how much to buy and when to sell. Samir K Mahajan

Advice on Expansion and Modernization Merchant banking Project Management Merchant bankers offer help to their clients in every way possible. For e.g. They advise about location of a project, preparing a project report, conducting feasibility studies, making a plan for financing the project, finding out sources of finance, advising about concessions and incentives from the government which the companies are not aware of. Advice on Expansion and Modernization Merchant bankers give advice for expansion and modernization, diversification of business, foreign collaborations and joint-ventures, technology upgradation, etc. of the business units. Corporate Restructuring They give expert advice on mergers / amalgamations(combination of two or more companies into a single company where one survives and other loses its existence), and acquisitions/take-over (purchase by one company acquiring, controlling interest in the share capital of another company) of existing business units, sale of existing units or disinvestment. Samir K Mahajan

Handling Government Consent for Industrial Projects Merchant banking Handling Government Consent for Industrial Projects A company requires permission start his business or for expansion or modernization activities. For this, many formalities have to be completed. Merchant bankers advice on these matters and do all this work for their clients. Money Market Operation Merchant bankers deal with and underwrite short-term money market instruments, such as: Government Bonds., Certificate of deposit issued by banks and financial institutions, Commercial paper issued by large corporate firms, Treasury bills. Offshore Finance Long term foreign currency loan Joint venture abroad Financing exports and imports Foreign collaboration arrangement Samir K Mahajan

Special Assistance to Small Companies and Entrepreneurs Merchant banking Other services Assist the corporate clients in the management of Interest and Dividend Leasing Services Portfolio management Special Assistance to Small Companies and Entrepreneurs Revival of Sick Industrial Units Institutions Providing Merchant Banking Services In India Commercial banks Foreign banks like National Grindlays Bank, Citibank, HSBC bank etc.. Development banks like ICICI,IFCI,IDBI etc.. SFCs , SIDCs Private firms like JM Financial and Investment service , DSP Financial Consultants, Ceat Financial Services, Kotak Mahindra, VMC Project Technologies, Morgan Stanley, Jardie Fleming, Klienwort Benson etc… Samir K Mahajan