1. Unit 4 Financial Services -I Success Publication
4.2 Various Financial Services
4.3 Leasing
4.4 Hire purchase
4.5 Factoring, Forfaiting and Bill Discounting
4.6 Insurance

2. Introduction
Financial services constitute an important component of the financial system. Financial services, through the network of elements such as financial institutions, financial markets and financial instruments, serve the needs of individuals, institutions and corporate.
It is through these elements that the functioning of the financial system is facilitated. Considering its nature and importance, financial services are regarded as the fourth element of the financial system.
In fact, an orderly functioning of the financial system depends, to a great deal, on the range and the quality of financial services extended by a host of providers.

3. 4.1 Financial Services
Services that are offered by financial companies connote ‘financial services. Financial companies include both Asset Management Companies and Liability Management Companies. Asset Management Companies include leasing companies, mutual funds, merchant bankers and issue/portfolio managers. Liability Management Companies comprise of the bill discounting and acceptance houses.
A) Meaning:
Financial services refer to services provided by the financial institutions in a financial system. The finance industry encompasses a broad range of organizations that deal with the management of money. Among these organizations are Asset Management Companies like leasing companies, merchant bankers and Liability Management Companies like discounting houses and acceptance houses.

4. Scope of Financial Services
B) Scope of Financial Services:
Financial services cover a wide range of activities. They can be broadly classified into namely :
Scope of Financial Services
Traditional Activities
Modern Activities

5. 4.1 Financial Services 1) Traditional Activities:
These are activities which comprise of both capital and money market. They come under two categories:
a) Fund Based Activities:
The traditional services which come under fund based are the following:
i) Underwriting of or investment in shares, debentures, bonds etc.
ii) Dealing in secondary market activities.
ii) Participating in money market instruments like commercial papers
iv) Involving in equipment leasing, hire purchase, venture capital, seed capital etc.
v) Dealing in foreign exchange market activities.

6. 4.1 Financial Services b) Non-Fund Based Activities:
Today, customers whether individual or corporate are not satisfied with mere provision of finance they expect more from financial service companies. They include the following:
i) Managing the capital issues.
ii) Making arrangements for the placement of capital and debt instruments with investment institutions.
2) Modern Activities:
Besides the above traditional services, the financial intermediaries render innumerable services in recent times. Most of them are of the non-fund based activity. They are also referred to as new financial products and services.

7. 4.1 Financial Services b) Non-Fund Based Activities:
Today, customers whether individual or corporate are not satisfied with mere provision of finance they expect more from financial service companies. They include the following:
i) Managing the capital issues.
ii) Making arrangements for the placement of capital and debt instruments with investment institutions.
2) Modern Activities:
Besides the above traditional services, the financial intermediaries render innumerable services in recent times. Most of them are of the non-fund based activity. They are also referred to as new financial products and services.

8. 4.1 Financial Services B) Evolution of Financial Services:
The evolution of financial services in India has taken place under the various stages. It is outlined below:
1) Merchant Banking Era:
The period between 1960 and 1980 may be called the ‘merchant banking era'.
2) Investment Companies Era:
This era marked the setting up of a variety of investment institutions and banks.
3) Modern Services Era:
This stage marked the launch of a variety financial products and services during the eighties.

9. 4.1 Financial Services 4) Depository Era:
In order to integrate the Indian financial sector industry with the global financial services industry, depositories were set up.
5) Legislative Era:
Several legislations were introduced in order to allow for broad-based development in the financial services sector.
6) Fill Era:
The economic reform measures initiated by the government necessitated greater free play for various participants.

10. Hire Purchase & Consumer Credit
Equipment
Hire Purchase & Consumer Credit
Bill Discounting
Venture Capital
Housing Finance
Insurance Services
Factoring
Forfaiting
Mutual Fund
Credit Rating
Credit Cards
Consumer Finance
4.2 Various Financial Services

11. 4.2Various Financial Services
Financial service institutions render a wide variety of services to meet the requirements of individual users. These services may be summarized as below:
1) Equipment Leasing/Lease Financing:
A lease is an agreement under which a firm acquires a right to make use of a capital asset like machinery etc.
2) Hire Purchase and Consumer Credit:
Hire purchase is an alternative to leasing. Hire purchase is a transaction where goods are purchased and sold on the condition that payment is made in instalments.
3) Bill Discounting:
Discounting of bill is an attractive fund based financial service provided by the finance companies.

12. 4.2 Various Financial Services
4) Venture Capital:
Venture capital simply refers to capital which is available for financing the new business ventures. It involves lending finance to the growing companies.
5) Housing Finance:
Housing finance simply refers to providing finance for house building. It emerged as a fund based financial service in India with the establishment of National Housing Bank (NHB) by the RBI in 1988.
6) Insurance Services:
Insurance is a contract between two parties. One party is the insured and the other party is the insurer.

13. 4.2 Various Financial Services
7) Factoring:
Factoring is an arrangement under which the factor purchases the account receivables (arising out of credit sale of goods/services) and makes immediate cash payment to the supplier or creditor.
8) Forfaiting:
Forfaiting is a form of financing of receivables relating to international trade. It is a non-recourse purchase by a banker or any other financial institution of receivables arising from export of goods and services.
9) Mutual Fund:
Mutual funds are financial intermediaries which mobilise savings from the people and invest them in a mix of corporate and government securities.

14. 4.2 Various Financial Services
10) Credit Rating:
Credit rating means giving an expert opinion by a rating agency on the relative willingness and ability of the issuer of a debt instrument to meet the financial obligations in time and in full.
11) Credit Cards:
Credit cards provide convenience and safety to the buying process. One of the important reasons for credit cards to become popular is the sea change witnessed in consumer behavior.
12) Consumer Finance:
The services of banks which facilitate finance for purchasing consumer durables is called consumer loan or credit or finance.

15. 4.3 Leasing
Leasing industry plays an important role in the economic development of a country by providing money incentives to lessee.
A) Meaning:
Leasing is a process by which a firm can obtain the use of a certain fixed assets for which it must pay a series of contractual, periodic, tax deductible payments. The lessee is the receiver of the services or the assets under the lease contract and the lessor is the owner of the assets.
B) Definitions:
The International Accounting Standard N0.17 (IAS - N0.17) :
“Leasing is an agreement whereby the Lessor conveys, to the lessee in return for rent, the right to use an asset for an agreed period of time."

16. 4.3 Leasing C) Types of Leasing: Types of Leasing: Financial Lease
Operational Lease
Sale and Lease Back
Leveraged Leasing
Direct Leasing
First Amendment Lease
Full Payout Lease
Guideline Lease
Net Lease
Open-end Lease
Sales-type Lease
Synthetic Lease
Tax Lease
True Lease

17. 4.3 Leasing Lease is of different types. These are discussed below:
1) Financial Lease:
Long-term, non-cancellable lease contracts are known as financial leases.
2) Operational Lease:
An operating lease stands in contrast to the financial lease in almost all aspects. This lease agreement gives to the lessee only a limited right to use the asset.
3) Sale and Lease Back:
It is a sub-part of finance lease. Under this, the owner of an asset sells the asset to a party (the buyer), who in turn leases back the same asset to the owner in consideration of lease rentals.

18. 4.3 Leasing 4) Leveraged Leasing:
Under leveraged leasing arrangement, a third party is involved beside lessor and lessee.
5) Direct Leasing:
Under direct leasing, a firm acquires the right to use an asset from the manufacture directly.
6) First Amendment Lease:
The first amendment lease gives the lessee a purchase option at one or more defined points with a requirement that the lessee renew or continue the lease if the purchase option is not exercised.  

19. 4.3 Leasing 7) Full Payout Lease:
A lease in which the lessor recovers, through the lease payments, all costs incurred in the lease plus an acceptable rate of return, without any reliance upon the leased equipment's future residual value.
8) Guideline Lease:
It is a lease written under criteria established by the IRS to determine the availability of tax benefits to the lessor.
9) Net Lease:
It is a lease wherein payments to the lessor do not include insurance and maintenance, which are paid separately by the lessee.
10) Open-end Lease:
It is a conditional sale lease in which the lessee guarantees that the lessor will realize a minimum value from the sale of the asset at the end of the lease.

20. 4.3 Leasing 11) Sales-type Lease:
It is a lease by a lessor who is the manufacturer or dealer, in which the lease meets the definitional criteria of a capital lease or direct financing lease.
12) Synthetic Lease:
A synthetic lease is basically a financing structured to be treated as a lease for accounting purposes, but as a loan for tax purposes.
13) Tax Lease:
It is a lease wherein the lessor recognizes the tax incentives provided by the tax laws for investment and ownership of equipment.
14) True Lease:
It is a type of transaction that qualifies as a lease under the Internal Revenue Code. It allows the lessor to claim ownership and the lessee to claim rental payments as tax deductions.

21. 4.3 Leasing Lease Selection Order & Delivery Lease Contract
D) The Leasing Process:
Lease Selection
Order & Delivery
Lease Contract
Lease Period

22. 4.3 Leasing 1) Lease Selection:
The first step in a leasing transaction is the selection of the asset to be taken out on lease basis.
2) Order & Delivery:
Based on the selection made by the lessee, the lessor goes about placing an order for the manufacture of the asset to be leased.
3) Lease Contract :
Both the parties sign a lease agreement setting out the details of the terms of the lease contract.
4) Lease Period:
During the currency of the lease period, the lessee will make lease payment at regular intervals as agreed upon between the parties.

23. 4.3 Leasing Advantages to Lessor: E) Advantages of Leasing:
Leasing as a financial service offers the following potential advantages both to the lessor and lessee:
Advantages to Lessor:
Advantages to Lessor:
Stable Business
Wider Distribution
Sale of Supplies
Second-hand Market
Tax Benefits
Absorbing Obsolescence Risks
Fillip to Capital Market
Easy Finance
Other Benefits

24. 4.3 Leasing i) Stable Business :
Leasing mechanism provides for a continuous and stable manufacturing business for the lessor.
ii) Wider Distribution :
Leasing allows for capturing a wider distribution network by the lessor. This assumes significance given the fact that the lessees do not have to allocate funds for heavy capital investments.
iii) Sale of Supplies :
Depending on the nature of the leasing arrangement, the lessor has to ensure the supply of spare parts and components required for the maintenance of the asset leased. This would augment the sale by the lessor-manufacturer.

25. 4.3 Leasing iv) Second-hand Market :
In the case of operating lease, where the asset leased by the lessee is reverted to the lessor, it is possible for the lessor to either lease out the asset again, or to sell it in the open market. This creates a second-hand market for the used asset.
v) Tax Benefits :
There is relative tax benefit for the receipt of lease rentals. For instance, sales tax payable on lease rentals is lower than the direct tax payable on revenue receipts on the sale of the asset.
vi) Absorbing Obsolescence Risks :
In the case of a non-cancelable financial lease, the risk of obsolescence arising from the usage of the asset has to be borne by the lessee.

26. 4.3 Leasing vii) Fillip to Capital Market :
Leasing companies as intermediaries of finance, give an impetus to investment activity, and facilitate the flow of savings into real investments.
vii) Easy Finance :
The availability of easy and convenient finance has proved to be a great stimulant for the increase in demand for capital equipment.
ix) Other Benefits :
In addition to the benefits discussed above, the lessor commands some of the following benefits too: Advantage of collateral security on the lease payments by the lessee

27. 4.3 Leasing Advantages to Leases: 2) Advantages to Leases:
Efficient Use of Funds
Cheaper Source
Flexible Source
Enhanced Borrowing Capacity
Off-balance Sheet Financing
Tax Benefits
Favorable Terms
Guards Against Obsolescence
Avoidance of Initial Cash Outlay
Better Liquidly

28. 4.3 Leasing i) Efficient Use of Funds :
Leasing arrangements allow the lessee to acquire the use of the asset without having to own it. This dispenses with the need for capital investment.
ii) Cheaper Source :
Leasing, as a mode of financing the use of capital assets, is found to be less expensive, as compared to other modes such as the buying option, etc.
iii) Flexible Source :
Leasing of equipment is a highly flexible source of financing, as compared to other methods.
iv) Enhanced Borrowing Capacity :
Leasing is considered advantageous to the lessee since it helps enhance the ability to borrow in a diversified way.

29. 4.3 Leasing v) Off-balance Sheet Financing :
The biggest advantage claimed by lease financing is that the asset acquired, and the corresponding liability, need not be shown in the balance sheet.
vi) Tax Benefits :
The extent of benefit that would be derived by owning an asset, by way of depreciation tax shield is less than the benefit to the lessee by way of lease rentals.
vii) Favorable Terms :
The terms of financial arrangements with institutions are usually restrictive and disadvantageous to loanees.
viii) Guards Against Obsolescence :
In the case of operating lease, the lessee can be protected from the risk of obsolescence of the asset leased.

30. 4.3 Leasing ix) Avoidance of Initial Cash Outlay :
Leasing provides 100 percent financing and the benefit of using the finances without having to borrow. The initial investment required is thus avoided in a leasing arrangement.
x) Better Liquidly ‘:
Sale and Lease-back' arrangements provide the advantage of better liquidity, since it enables the lessee to make a sale of the asset owned to the prospective lessor, and then take the asset back on lease. This helps a lessee-firm to overcome a liquidity crunch by being in a position to sell and realize cash. This helps overcome working capital crises.

31. 4.3 Leasing F) Limitations of Lease Financing:
Disguised Debt Financing
Costly Option
Loss of Tax Shield
Double Sales-tax
Loss of Residual Value
Unfavorable Gearing
No Ownership
Risk of Default
No Working Capital
Indiscriminate Finance
Long-term Venture

32. 4.3 Leasing
Although leasing is claimed to be possessing certain overriding advantages over the traditional buy-and-use mode of financing, it is fraught with various limitations as discussed below:
1) Disguised Debt Financing:
Evidence has been gained through studies that lease financing is another form of debt financing.
2) Costly Option:
When the leasing company acts only as a financial intermediary, and borrows fiom the market at prevailing or even higher interest rates, leasing may prove to be a costlier exercise as compared with a straight borrowing.
3) Loss of Tax Shield:
If depreciation rates are higher and leasing is preferred over buying, it may result in loss of depreciation tax shield for the lessee.

33. 4.3 Leasing 4) Double Sales-tax:
Depending on the prevailing sales tax laws in various states, there are possibilities of the lease rental revenues attracting sales tax twice, once at the time of the sale and again when the asset is leased out.
5) Loss of Residual Value:
There is a loss of residual value for the lessee. since the leased asset has to be returned to the lessor at the end of the lease period.
6) Unfavorable Gearing:
Like any other borrowing, leasing also creates fixed obligations. This results in an increase in the capital gearing of the company.
7) No Ownership:
Unfortunately leasing does not provide the advantage of ownership to the users.

34. 4.3 Leasing 8) Risk of Default:
If the lessor has borrowed funds in hypothecation in order to acquire the asset for being leased out and if there is a default in the repayment of instalments, the asset may be taken over by the financial institution.
9) No Working Capital:
Leasing provides a mechanism only for long-term capital requirements.
10) Indiscriminate Finance:
Lease companies provide lease financial assistance to the lessee, sometimes too enthusiastically, without considering their requirements, project feasibility, repayment capability, etc.
11) Long-term Venture:
The lessor is in a relatively disadvantageous position, since funds are required to be invested for a longer term.

35. 4.3 Leasing
F) Financial Implications:
For Lessee
For Lessor

36. 4.3 Leasing F) Financial Implications:
Lease transactions would have accounting and financial implications for both the lessors and the lessees as detailed below:
For Lessee:
Tax shield on lease rentals is available as business expenditure
Depreciation tax shield is not available
Tax shield on lease rentals represents a cash inflow
Tax shield on depreciation represents cash outflow (cash inflow foregone)
For Lessor:
Depreciation tax shield is available
Tax shield on lease rentals is not available as business expenditure
Tax shield on depreciation represents cash inflow l
Tax shield on lease rentals represent a cash outflow (cash inflow foregone)
Net salvage value of an equipment is treated as a post-tax cash flow

37. 4.4 Hire Purchase
Hire/purchase is an agreement to the sale of an asset subject to the following conditions: the goods are delivered at the beginning of the agreement on the basis that the hirer will pay an agreed amount in periodical instalments mutually agreed upon; after the last instalment is paid, the title of ownership will pass to the hirer; the hirer can terminate the agreement by paying all the balance instalments and taking the title of the asset.

38. 4.4 Hire Purchase Concept and Meaning:
Hire purchase is a type of instalment credit under which the hire purchaser, called the hirer, agrees to take the goods on hire at a stated rental, which is inclusive of the repayment of principal as well as interest, with an option to purchase. The hire purchase system is regulated by the Hire Purchase Act This Act defines a hire purchase as “An agreement under which goods are let on hire and under which the hirer has an option to purchase them in accordance with the terms of the agreement and includes an agreement under which:
The owner delivers possession of goods thereof to a person on condition that such person pays the agreed amount in periodic instalments.
The property in the goods is to pass to such person on the payment of the last of such instalments.

39. 4.4 Hire Purchase Concept and Meaning:
Hire purchase is a type of instalment credit under which the hire purchaser, called the hirer, agrees to take the goods on hire at a stated rental, which is inclusive of the repayment of principal as well as interest, with an option to purchase. The hire purchase system is regulated by the Hire Purchase Act This Act defines a hire purchase as “An agreement under which goods are let on hire and under which the hirer has an option to purchase them in accordance with the terms of the agreement and includes an agreement under which:
The owner delivers possession of goods thereof to a person on condition that such person pays the agreed amount in periodic instalments.
The property in the goods is to pass to such person on the payment of the last of such instalments.

40. 4.4 Hire Purchase B) Difference between Hire Purchase and Leasing:
Points
Hire Purchase (HP)
Leasing
Ownership
The hirer of the goods not becomes owner till the payment of specified instalments.
In lease, ownership rests with the lessor throughout.
Method of financing
HP is financing both business and non-business assets.
Leasing is a method of financing business assets.
Depreciation
In HP, depreciation and IA can be claimed by the hirer.
In leasing, depreciation and investment allowances cannot be claimed by the lessee
Tax benefits
Only the interest component of the HP instalment is tax deductible.
The entire lease rental is tax deductible expense.
Salvage value
The hirer, in HP, being the owner of the asset, enjoys salvage value of the asset.
The lessee, not being the owner of the asset, doesn’t enjoy the salvage value of the asset.
Deposit
20% deposit is required in HP.
Lessee is not required to make any deposit.
Extent of Finance
HP requires 20 to 25% down payment.
In lease financing is 100 % financing since it is required down payment,
Maintenance
Cost of maintenance hired assets is borne by hirer.
Cost of maintenance of the leased asset (other than financial lease) is borne by the lessor.
Reporting
HP asset is a balance sheet item in the books of hirer.
leased assets are shown as off- balance sheet item (shown as Foot note to BS)

41. 4.4 Hire Purchase C) Interest Calculation :
The total payment made under hire-purchase system is more than cash price. In fact, this excess of payment over the cash price is interest. It is very essential to calculate interest because the amount paid for interest is charged to revenue and the asset is capitalized at cash price. Thus normally all instalments will include a part of cash price and a part of interest on the outstanding balance. However the amount paid at the time of agreement (down payment) will not include any interest.

42. Add-on Rate of Interest Effective Rate of Interest
4.4 Hire Purchase
1) Rate of Interest:
The type of interest rates popularly used in hire purchase financing is as follows:
Rate of Interest:
Add-on Rate of Interest
Flat Rate of Interest
Effective Rate of Interest

43. 4.4 Hire Purchase i) Add-on Rate of Interest:
Add-on rate of interest refers to that rate of interest which is chargeable in hire purchase as a percent of the original cash price of the asset. In other words, the hire purchase agreement will not specify a rate, but will only specify the total quantum of interest.
ii) Flat Rate of Interest:
It is the discount rate applied to a figure from which the amount of discount is deducted at the outset.
iii) Effective Rate of Interest:
Effective rate of interest also known as true rate of interest, is the rate of interest, arrived at by trial and error, at which the total present value of the stream of instalments is equal to the cash price of the asset bought on hire purchase.
Effective rate of Interest = Trial rate at which NPV of future HP instalments is Zero

44. Effective Rate of Interest (ERI) Sum-of-years Digits Method
4.4 Hire Purchase
2) Methods of Interest Calculation:
In the comparative evaluation between leasing and hire purchase, calculation of interest and the split of the instalment amount into ‘interest and principal' components assume importance, especially where the flat rate of interest only is available in the problem.
Effective Rate of Interest (ERI)
Sum-of-years Digits Method
Straight-Line Method

45. 4.5Factoring, Forfaiting and Bill Discounting
Services used for financing short-term, trade are factoring, Forfeiting, and bill discounting. Factoring services have become quite popular all over the world now, with more than 900 companies offering these services. Factoring is a contract like any other sale purchase agreement regulated under the law of contract. Forfeiting is a source of trade finance which enables exporters to get funds from the institution called forfeited on transferring the right to recover the debts from the importer. Another source of short-term trade financing is bill discounting in which one party accepts the liabilities of trade towards the third party.

46. 4.5 Factoring, Forfaiting and Bill Discounting
A) Factoring:
Business enterprises are always looking for selling the debtors for cash, even at a discount. This is possible through a financial service.
1) Meaning:
Like securitisation factoring also is a financial innovation. Factoring provides resources to finance receivables. It also facilitates the collection of receivables. The word factor is derived from the Latin word facere. It means to make or do or to get things done.
2) Definition:
Peter M. Discos:
"a continuing legal relationship between a financial institution (the factor) and a business concern (the client) selling goods or providing services to trade customers, whereby the factor purchases the clients’ book debts, either with or without recourse to the client, and in relation thereto, controls the credit extended to customers, and administers the sales ledger".

47. 4.5 Factoring, Forfaiting and Bill Discounting
3) Scope of Factoring:
Administration of Sales Ledger
Collection of Receivables
Provision of Finance
Protection Against Risk
Advisory Services
Credit Management

48. 4.5 Factoring, Forfaiting and Bill Discounting
i) Administration of Sales Ledger:
The factor assumes the entire responsibility of administering sales ledger. The factor maintains sales ledger in respect of each client.
ii) Collection of Receivables:
The factor helps the client in adopting better credit control policy. The main services of a factor are to collect the receivables on behalf of the client and to relieve him from all the botherations/ problems associated with the collection.
iii) Provision of Finance:
Finance, which is the lifeblood of a business, is made available easily by the factor to the client.

49. 4.5 Factoring, Forfaiting and Bill Discounting
iv) Protection Against Risk:
This service is provided where the debts are factored without recourse. The factor fixes the credit limits (i.e. the limit up to which the client can sell goods to customers) in respect of approved customers.
v) Advisory Services:
These services arise out of the close relationship between a factor and a client. Since the factors have better knowledge and wide experience in field of finance, and possess extensive credit information about customer’s standing, they provide various advisory services.
vi) Credit Management:
The factor in consultation with the client fixes credit limits for approved customers.

50. Advantages of Factoring
4.5 Factoring, Forfaiting and Bill Discounting
4) Advantages of Factoring:
Advantages of Factoring
Cost Savings
Leverage
Enhanced Return
Liquidly
Credit Discipline
Cash Flows
Credit Certification
Prompt Payment
Information Flow
Infrastructure
Better Linkages
Boon to SSI Sector
Efficient Production
Reduced Risk
Export Promotion

51. 4.5 Factoring, Forfaiting and Bill Discounting
i) Cost Savings:
Factoring allows for the elimination of trade discounts. Besides,· it also helps in reduction of administrative cost and burden, facilitating cost savings.
ii) Leverage:
Another advantage of factoring is that it helps improve the scope of operating leverage.
iii) Enhanced Return:
Factoring is considered attractive to users as it helps enhance return. ·
iv) Liquidly:
Factoring enhances liquidity of the firm by ensuring efficient working capital management.
v) Credit Discipline:
Factoring brings about better credit discipline amongst customers due to regular realization of dues.

52. 4.5 Factoring, Forfaiting and Bill Discounting
vi) Cash Flows:
Accelerated cash flows help the client meet liabilities promptly, as and when they arise.
vii) Credit Certification:
The Factor’s acceptance of the client‘s receivables is tantamount to credit certification by the factoring agency.
viii) Prompt Payment :
Factoring facilitates prompt payments and credits by providing insurance against bad debts.
ix) Information Flow:
Factoring ensures constant flow of critical information for the purpose of decision making and follow-up. It therefore helps eliminate delays and wastage of man-hours.
x) Infrastructure :
Factoring acts as a stimulant to go in for sophisticated infrastructure towards high-level specialization in credit control and sales ledger administration.

53. 4.5 Factoring, Forfaiting and Bill Discounting
xi) Better Linkages:
Factoring allows for the promotion of linkages between bankers and Factors.
xii) Boon to SSI Sector:
Factoring arrangements work as a boon to the SSI sector, which invariably faces the problem of inadequate working capital.
xiii) Efficient Production:
The Factor undertakes the responsibility of credit control, sales ledger administration and debt collection problems.
xiv) Reduced Risk:
Factoring allows for reduction in the uncertainty and risk associated with the collection cycle.
xv) Export Promotion:
Factoring facilities are designed to help exporters avail of financial assistance on attractive terms, which in turn allows for promotion of exports.

54. 4.5Factoring, Forfaiting and Bill Discounting
5) Limitations of Factoring:
The main limitations of factoring are outlined as below:
Factoring may lead to over-confidence in the behaviour of the client. This result in overtrading or mismanagement.
There are chances of fraudulent acts on the part of the client. Invoicing against non-existent goods, duplicate invoicing etc.
Lack of professionalism and competence, resistance to change etc. are some of the problems which have made factoring services unpopular.
Factoring is not suitable for small companies with lesser turnover, companies with speculative business, companies having large number of debtors for small amounts etc.
Factoring may impose constraints on the way to do business. For non - recourse factoring most factors will want to pre- approve customers. This may cause delays. Further, the factor will apply credit limits to individual customers.

55. 4.5Factoring, Forfaiting and Bill Discounting
B) Forfaiting:
Generally there is a delay in getting payment by the exporter from the importer. This makes it difficult for the exporter to expand his export business.
1) Meaning of Forfaiting:
The term ‘forfait’ is a French world. It means ‘to surrender something’ or ‘give up one’s right’. Thus forfaiting means giving up the right of exporter to the forfaitor to receive payment in future from the importer.
2) Definitions:
Clifford Gomez:
Forfaiting has been defined as a "non-recourse purchase by a banker or any other financial institution, of receivables arising from export of goods and services."

56. 4.5 Factoring, Forfaiting and Bill Discounting
3) Advantage of forfaiting:
The following are the benefits of forfaiting:
i) The exporter gets the full export value from the forfaitor.
ii) It improves the liquidity of the exporter. It converts a credit transaction into a cash transaction.
iii) It is simple and flexible. It can be used to finance any export transaction. The structure of finance can be determined according to the needs of the exporter, importer, and the forfaitor.
iv) The exporter is free from many export credit risks such as interest rate risk, exchange rate risk, political risk, commercial risk etc.
v) The exporter need not carry the receivables into his balance sheet.

57. 4.5 Factoring, Forfaiting and Bill Discounting
vi) It enhances the competitive advantage of the exporter. He can provide more credit. This increases the volume of business.
vii) There is no need for export credit insurance. Exporter saves insurance costs. He is relieved from the complicated procedures also.
vii) It is beneficial to forfaitor also. He gets immediate income in the form of discount. He can also sell the receivables in the secondary market or to any investor for cash.

58. 4.5 Factoring, Forfaiting and Bill Discounting
4) Limitations of Forfaiting:
i) From bank point of view there is no legal framework to protect the banker or financial institution doing forfeiture and hence they face the risk in the form of political, exchange rate risk and other risk associate with foreign transactions.
ii) It is very expensive from exporter point of view because banks take high fees for forfeiture due to high risks involved in it.
iii) There is no secondary market for these types of instruments hence there is lack of liquidity for these instruments.

59. 4. 5 Factoring, Forfaiting and Bill Discounting
C) Bills Discounting:
Bill discounting is book debt financing. This is done by commercial banks.
1) Meaning of Bills Discounting:
When goods are sold on credit, the receivables or book debts are created. The supplier or seller of goods draws a bill of exchange on the buyer or debtor for the invoice price of the goods sold on credit. It is drawn for a short period of 3 to 6 months. Sometimes it is drawn for 9 months. After drawing the bill, the seller hands over the bill to the buyer. The buyer accepts the same. This means he binds himself liable to pay the amount on the maturity of the bill. After accepting the bill, the buyer (drawee) gives the same to the seller (drawer). Now the bill is with the drawer. He has three alternatives. One is to retain the bill till the due date and present the bill to the drawee and receive the amount of the bill.

60. 4. 5 Factoring, Forfaiting and Bill Discounting
2) Advantages of Bill Discounting/Bill Financing:
i) It offers high liquidity. The seller gets immediate cash.
ii) The banker gets income immediately in the form of discount.
iii) Bills are not subject to any fluctuations in their values.
iv) Procedures are simple.
v) Even if the bill is dishonored, there is a simple legal remedy. The banker has to simply note and protest the bill and debit in the customer’s account.
vi) The bills are useful as a base for the maintenance of reserve requirements like CRR and SLR.

61. Limitations of Bill Discounting/Bill Financing:
4. 5 Factoring, Forfaiting and Bill Discounting
3) Limitations of Bill Discounting/Bill Financing:
Limitations of Bill Discounting/Bill Financing:
Absence of Bill Culture
Absence of rediscounting among banks
Stamp duty
Absence of secondary market
Difficulty in ascertaining genuine trade bills
Limited foreign trade
Absence of acceptance services
Attitude of banks

62. 4.6 Insurance
Insurance is a contract between two parties. One party is the insured and the other party is the insurer. Insured is the person whose life or property is insured with the insurer. That is, the person whose risk is insured is called insured. Insurer is the insurance company to whom risk is transferred by the insured. That is, the person who insures the risk of insured is called insurer. Thus insurance is a contract between insurer and insured. It is a contract in which the insurance company undertakes to indemnify the insured on the happening of certain event for a payment of consideration. It is a contract between the insurer and insured under which the insurer undertakes to compensate the insured for the loss arising from the risk insured against.

63. 4.6 Insurance A) Definitions of Insurance: 1) Mc Gill,
“Insurance is a process in which uncertainties are made certain”.
2) Jon Megi,
“Insurance is a plan wherein persons collectively share the losses of risks”.
B) Overview of Insurance:
The economic growth and increase in population have made the countries. such as India and China as the most lucrative insurance markets in the world. Before I999, Indian market was a monopoly with the state-run Life Insurance Corporation of India (LIC). the major player in life insurance sector and the General Insurance Corporation of India (GIC). with its four subsidiaries in the general sector.

64. 4.6 Insurance
1) History:
The insurance industry has a long history. Life insurance, in its existing form, came to India from the UK in The Indian Life Insurance Companies Act of 1912 was the first measure to regulate the life insurance business. Later in 1928, the Insurance Companies Act was passed, which the government amended in On 1 September I956, all the insurance companies were nationalized.
2) Globalization and Liberalization:
The wave of globalization and liberalization is in full swing in the Indian markets. The insurance sector, being one of the most affected markets. has experienced a plethora of new relationships in the last couple of years. There are a few forces acting on the industry that have brought about significant changes in the behaviour of insurance policies.

65. 4.6 Insurance C) Types of Insurance: 1) Life Insurance
Life insurance includes ordinary life, annuities and pensions. The risks of death due to any reason both natural and unnatural are covered during the policy period. There are two main life insurance products -term insurance and pure endowment. All other policies are variations of these two basic policies. Term insurance is taken for a particular period lf death takes place during the term, the claim is paid. lf death does not take place nothing is paid to the insured. In India, most of the products are endowment-type where the savings component is predominant. Under this, every policy will result in a claim either by maturity or by death claims. lf death does not occur, the policy expires on a specified date i.e. date of maturity Premium rates are based on three variables: mortality rate, interest rate and expenses.

66. Advantages of Life Insurance:
Life Insurance is not an Investment
Tax Advantage
Advantage of Term Insurance
Flexibility in Coverage
Government Regulation provides Safety
Universal and Variable Life Insurance Advantages

67. 4.6 Insurance i) Life Insurance is not an Investment:
Life Insurance is an Expense and not an Asset. It is an expense just like your health insurance to make sure in case of serious illness you are covered and not in a position to pay the costs of your illness leading to your life ending in a bad manner.
ii) Tax Advantage:
A number of countries allow you to offset the premiums that pay for life insurance in your taxable income. Also the maturity amount that you get is also not taxable in a number of places. Insurance is widely used by financial advisors to reduce your tax burden.
iii) Advantage of Term Insurance:
While Insurance Companies sell a wide variety of insurance products like term, variable, universal insurance most are complex and intended to fleece customers.

68. 4.6 Insurance iv) Flexibility in Coverage:
Life Insurance is supposed to cover you till the time you have enough of a corpus for your dependents. You can take life insurance for 5,10,15,20 year. This also depends on your age but you get the basic idea.
v) Government Regulation provides Safety:
The government heavily regulates the insurance sector making sure that your insurance company has enough assets to cover your liability.
vi) Universal and Variable Life Insurance Advantages:
While in my opinion both of these 2 types of insurance are a complete waste of time and money they offer the advantage in some specific niche cases.

69. Buying Life Insurance when you have no Need Buying Expensive Policies
b) Disadvantages of Life Insurance:
Buying Life Insurance when you have no Need
Buying Complex Life Insurance Products like ULIPs, Endowment, Child Plans etc which give sub optimal returns
Buying Expensive Policies

70. 4.6 Insurance i) Buying Life Insurance when you have no Need:
People buy insurance when they have no need for example an old woman buying life insurance.
ii) Buying Complex Life Insurance Products like ULIPs, Endowment, Child Plans etc which give sub optimal returns:
Millions of people every year buy insurance products without understanding it. Most of the complex products give suboptimal returns and have no suitability for the buyers.
iii) Buying Expensive Policies:
People have little clue and don’t compare life insurance products even from the same provider. Sometimes they buy insurance policies which are far too expensive leading to heavy burden which is unnecessary.

71. 4.6 Insurance 3) Scope of life Insurance:
All life insurance and all health insurance in connection with loans or other credit transactions shall be subject to the provisions of this subtitle, except health insurance in connection with a loan or other credit transaction of more than five (5) years' duration or life insurance in connection with a loan or other credit transaction of more than ten (10) years' duration; nor shall insurance be subject to the provisions of this subtitle, where the issuance of such insurance is an isolated transaction on the part of the insurer not related to an agreement or a plan for insuring debtors of the creditor.
4) General Insurance:
Man has always been in search of security and protection from the beginning of civilization. The urge in him lead to the concept of insurance. The basis of insurance was the sharing of the losses of a few amongst many.