OMTEX CLASSES TYBMS - SEM V - SSM

Compiled by Kripa Kalro

SECTOR 3: BANKING AND FINANCIAL

SERVICES
CHAPTER CONTENTS:

 4 Characteristics
 Innovations
 Technology
 Users
 Segmentation
 8 P`s
 PEST Analysis
 Additional matter
INTRODUCTION:
The banking sector in India has been widening its scope due to liberalization. Banks
today are not mere suppliers of money. They have become providers of services such as
selling insurance, mutual funds, investment opportunities etc. In the past, the banks did
not find any attraction in the Indian Economy because of low level of economic activities
and few business prospects. Today we find positive changes in the National Business
Development Policy. The private sector banks failed in serving the society. This resulted
in nationalization of 14 commercial banks in 1969. Nationalization of commercial banks
paved the way for development of Indian Economy and canalized financial resources for
the upliftment of the weaker sections of the society. The involvement of Public Sector
Banks transformed Indian Economy. It was felt the bankers review their services not
only as financial intermediary but also as a pacesetter.

BANKING STRUCTURE IN INDIA

In India banks are classified in various categories according to differ rent criteria.
The following charts indicate the banking structure:

Reserve Bank of India

Commercial Banks Co-operative Banks Development Banks

Nationalized Private Short-term Long-term

credit credit

Agricultural Urban EXIM Industrial Agricultural

Credit Credit

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4 CHARACTERISTICS OF BANKING INDUSTRY

1) Intangibility: A person who is new to a bank and wants to open up an account in the
bank cannot feel or taste it and ascertain whether the bank is good or bad before opening
an account. He has to experience it, feel how the service is, how humbly do people or the
staff members behave with him, is his money invested or put in a safe account or not. It is
only then he would come to know about the services. Financial services are generally
intangible but the service providers go to considerable lengths to tangibilise the service
for customers. Regular bank statements, credit cards, and insurance policy are all
example of the way in which the banking services are presented to the customer. They
can enhance the image of the service and the provider can bestow status or implied
benefits upon the user as with a gold carpet. Physical reminders of the service product,
brand name and value serve to reassure the customer and help the banks positioning.

2) Inconsistency: This refers to variability that a company or an organization may

depend on Inconsistency. For a bank, a new customer may not get the same type of
service as much as a regular customer may get. This may be the case because the staff
members know the person well as he comes often but they don‟t know that person who
does not come in again and again. Also another point for inconsistency is that the service
delivery by different people that is service is delivered differently from different types of
people. Like in case of a bank, different staff members would provide different services.
In the bank a person may be busy and may not attend to a customer as may be a person
with the same work may attend to him with great enthusiasm. Example: “PUNJAB
NATIONAL BANK” that promotes itself as “crown of quality for customer who is
the king” and is an ISO 9002 certified bank. Thus it has to have consistency and quality
to serve its customers.

3) Inseparability: Inseparability is that characteristics of a service indicating that it

cannot be separated from creator-seller of the product. Many services are created,
delivered and consumed simultaneously through interaction between customers and
service producers. This is a source of major limitation for the bank. But technology has in
a big way helped the banks to cope with this problem.

Production of services, when it comes to banks can be performed in the following 3

ways:

(i) Co- production: In this case both the service provider and the customer work together
to produce services. When a customer wants to withdraw cash from the banking
premises, then both the customer and the service provider needs to be present.

(ii) Isolated production: It is that part of service that is done outside to an organization.
E.g. Tele-Banking.

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(iii) Self Service production: In this case, the customer uses the equipments of the
service providers and self serves it. Eg. ATM.

4) Perishability: Inventory relates to the perishable characteristics of the service

marketing. If a customer starts his day at eight in the morning and ends it at four, but if
bank is open only from 9:00 a.m. to 1:00 p.m. in the afternoon, then one might not be
able to attend it. The demand for banking services also fluctuates by day and hour. The
day before the holiday, weekend, most Mondays and Saturdays, pension and salary days
are heavier than normal banking hours. So service faces a lot of problem from inventory
as it cannot be stored, saved and then used later.

INNOVATIONS IN BANKING INDUSTRY

• ATM machines
• Tele banking
• Internet banking
• Credit cards
• Debit cards
• Mobile banking
• Smart cards
• E- cash
• Auto- swift facility
• Cross channel banking

TECHNOLOGIES IN BANKING INDUSTRY

• Database of customers: birthdays, anniversaries, preferences
• Wi-fi
• ATM machines
• Tele banking
• Internet banking
• Mobile banking
• M- Commerce
• ECS (Electronic Clearing System)
• RTGS (Real Time Gross Settlement)

USERS OF BANKING INDUSTRY

The users/customers continue a place of outstanding significance. The line of services,

the placing and development of services, the offering of services, the pricing strategies or
the interests charged for the services made available and the promotional strategies
depend substantially upon the nature and type of users using the services of an
organization.

Types of Users:
General Users: Persons having an account in the bank and using the banking facilities at
the terms and conditions fixed by a bank.

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Industrial Users: The industrialists, entrepreneurs having an account in the bank and
using the credit facilities and other services for the establishment and the expansion of
their business.
Prospects: It is necessary to clarify the term „Prospects!‟ The general industrial prospects
do not use banking services at present but they have the potential to become a costumer if
induced or motivated in a right fashion.

MARKET SEGMENTATION FOR BANKS

An organization is supposed to enter to the changing needs of customers; it is natural that

all customers have their own likes and dislikes. They have some uniqueness which
throws a big imprint on their lifestyles. This makes the task of understanding a bit
difficult. It has the context that we go through the problem of market segmentation in the
banking service. In the banking services, the banking organizations are supposed to
satisfy different types of customers living in different segments. The segmentation of
market makes the task of bank professionals easier. If the market segmentation is done in
a right fashion, the task of satisfying the customers is simplified considerably. The
modern marketing theories advocate the formulation of marketing policies and strategies
for each segment which an organization plans to solicit.

CRITERIA FOR SEGMENTATION

Segmentation in a right fashion makes the way for profitable marketing. This helps policy
planners in formulating and innovating the policies and at the same time also simplifies
the task of banking professionals while formulating and innovating the strategic decision.
The following criterion makes the segmentation right.

1. ECONOMIC SYSTEM:
An important criterion for market segmentation is the economic system in which we
find agricultural sector, industrial sector, services sector, household sector, and rural
sector requiring the weight age while segmenting.

A). AGRICULTURAL SECTOR: In the agricultural sector, there are four categories
since the needs of all categories can‟t be identical.

The mechanization of agriculture, the improved or scientific system of cultivation, the

help of nature , the magnitude of risk, the availability of infrastructural facilities influence
the level of expectations vis-à-vis the needs and requirements. The banking organizations
are supposed to know and understand the changing requirements of different categories
of farmers.

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B). INDUSTRIAL SECTOR: The banking organizations are supposed to have an in-
depth knowledge of the changing needs and requirements of the industrial sector. The
large –sized, small- sized co-operative and tiny industries use the services of the banks.
The expectation of all the categories can‟t be uniform. The banking organizations are
supposed to have an in-depth knowledge of the changing needs and requirements of the
industrial segment. The emerging tends in competition, the pressure of inflation, the use
of sophisticated technologies, and the business regulations are some of the important
aspects influencing the hierarchy of needs.
Large Sized

Small Sized
Industrial Sector
Co-operative

Tiny
C). SERVICES SECTOR: It is an important sector to the economy where the banking
organizations get profitable business. The two categories of organizations such as profit-
making and non- profit making are found important in the very context. The banking
organizations need to identify the changing needs and requirements of the services sector
with the frequent use of IT and with the mounting pressure of inflation and competition,
we find a change in the hierarchy of needs.

PROFIT MAKING ORG

BANK INSURANCE,
TRANSPORT HOTEL,
TOURISM, PERSONAL
CARE, CONSULTANCY
ELECTRICITY
PERSONAL
MULTIPLE
SERVICE SEGMENT
SEGMENT S
NOT FOR PROFIT MAKING
EDUCATION, HOSPITAL,
RELIGIOUS
POLITICAL AND SOCIAL
WELFARE.

2). HOUSEHOLD SEGMENT:

This also constitutes an important sector where different income groups have different
needs and requirements. In the below figure we can see the different segments of
household sector.

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A). HOUSEHOLD SEGMENT: The high income group, middle income group,
subsistence level group and marginal income group have different hierarchy of needs
which influence the level of their expectations.

B). GENDER SEGMENT: In the gender segment we find male and female having
different needs and requirements. The banking organizations are supposed to identify the
level of expectations of both sexes as shown in the below figure.
Gender Segment

Some of the women are housewives and therefore they have different needs and
requirements whereas some of them are working ladies having different needs and
requirements.

C). PROFESSION SEGMENT: In the profession segment, we find different categories

of professions and therefore we find a change in their needs and requirements. As shown
in the below figure.

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TECHNOCRA
TS

BUREAUCRA
TS

PROFESSION CORPORATE PUBLIC/

SEGMENT PRIVATE
Executives
INTELLECTS FORMAL/INF
ORMAL
WHITE -
COLLAR

EMPLOYEES
BLUE – COLLAR

The technocrats, bureaucrats, corporate executives, intellects, white-collar and blue collar
employees have different needs and requirements and therefore the banking organizations
should know their expectations.

3. INSTITUTIONAL SECTOR

In this sector we find different categories of organizations. Some of the organizations are
known as charitable organizations, some of them are cultural/ social organizations, some
of them are industrial and many of them are profit making and many are philanthropic
and many of them are related to trade and commerce. It is natural that the needs and
requirements vis-à-vis the level of expectations can‟t be identical in all cases. To satisfy
and to increase the market share it is imperative that the banking organizations are
familiar with changing needs and requirements. The emerging trends in the social
transformation process determine the hierarchy of needs.

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ISM/ 8 P`s WITH REFERENCE TO BANKING

I. PRODUCT

Levels of service

Core Expected Augmented Potential

Product Product Product Product
The basic Timely service Goods waiting Mobile and
necessity to use Long banking rooms internet
banking hours Extensive ATM Banking
services in Low interest network New Schemes
order to handle rates Promotional tailored for
finance more Discounts specific
efficiently customers

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Service Flower

II. PRICE

The price mix in the banking sector is nothing but the interest rates charged by the
different banks. In today‟s competitive scenario where customer is the king the banks
have to charge them interest at the rate in force on accordance with the RBI directives.
Banks also compete in terms of annual fees for services lie credit cards, DMAT etc.
another important part of the banks pricing policy today is the interest charged on the
Home Loans and Car Loans. With India‟s economy progressing there are more and more
buyers seeking these loans but at a very competitive interest rate. While framing a pricing
policy different pricing methods can be used:

Value pricing: This type of pricing is mainly done by banks having unique or different
products or schemes. They usually charge a combination of high and low prices depending on
the customer loyalty as well as the products. This type of pricing strategy is usually coupled
with promotion programmes.
Cost plus pricing: In cost plus pricing a detailed analysis of cost structure of various bank
products and services is done.
Going rate pricing: The most pricing technique is going rate pricing. In going rate pricing the
banks bases its price largely depending on the competitor‟s prices. The banks however have to
stay within the RBI directives and compete. The banks may charge higher or lower than their
competitor
Market oriented approach: This indicates what the market can bear or accept as in case of a
corporate client who may not be price sensitive as against an individual client.
Competitive based pricing: In competitive based pricing, the price is decided on the
competitor‟s price.

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III. PLACE

Some of the important factors affecting the location analysis of a bank are:
• The Trade Area:
• Population Characteristics:
• Commercial Structure
• Industrial Structure
• Banking Structure
• Proximity of other convenient outlets
• Real Estate Rates
• Proximity to public transportation
• Drawing Time
• Location of Competition
• Visibility

IV. PROMOTION

Banking services can be promoted in two ways:

a) Personal promotion: the bank marketers get the best opportunity to tangibilize the
product through personal selling; persuasion is more effective with direct contact. It
helps in creating impulse buying. Now a Tele-Sale is also popular.
b) Impersonal promotion: i.e. advertising, publicity and sales promotion measures.
Banks use all types of advertisement such as newspapers, radio, television,
magazines and hoardings. Also sales promotion devices such as Point of Purchase
Material, brochures and advertisement specialist like ball pens, calendars, dairies
etc.

Banks also use sponsorships, celebrities for opening a savings week. Publicity is a
major strength as a promotional tool than advertising, as customer tends to believe a news
item rather than an advertisement. Word Of Mouth promotion is yet another important
promotional tool, as it is a better persuader and convincer than advertising and personal
selling, as bank services are narrated by customers themselves. Besides, as Social Welfare
and Corporate Social Responsibly are important as a part of banking services.

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V. PEOPLE

People are the employees that are the service providers. In a banking sector the service
provider plays a very important and determinant role in rendering the customers a
satisfactory and a good service. It is extremely essential that the service provider
understands what his customers expects from him. In banking sector the customer needs to
be guided in a lot of matters which is possible only with the help of the service provider.
The position in the eyes of the customer will be perceived by appearance, attitude and
behavior of the customer contact employees. Not only the customers contact employee
influence the customers but also the customer base of the organization does so.

VI. PHYSICAL EVIDENCE

Physical evidence is the overall layout of the place. How the entire bank has been
designed. Physical evidence refers to all those factors that helps make the process much
easier and smoother. Most of the private and foreign banks portray a new welcoming and
friendly look to the customer. Flashy cheque books with the name of the account holder
printed, imaginative design of the bank brochure, statement of accounts with details of
transactions are other tangible aspects.

Logos, symbols, attractive brand names etc. add to the customer‟s perception of service
quality. There is an urgent need to implement technologies in order to raise productivity as
well as to enable the banking system to cope with the increasing complexities of business.
For example in case of HDFC, ICICI and Citibank portray a new welcoming and
friendly look to the customers rather than drudgery banking counters. The physical
evidence would be the placement of the customer service executive‟s desk, or the location
of the place for depositing Cheques. It is very necessary the place is designed in such a
manner so as to ensure maximum convenience to the customer and cause no confusion to
him.

VII. PROCESS
Moments of Truth:
• Customer enters branch (Watchman)
• Security check (Security Man)
• Inquiry by customer (Banker)
• Interaction with banker (Banker)
• Fills form (Banker)
• Told will receive welcome kit (Banker)
• Customer leaves (Watchman)

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Blue print of Banking Process

VIII. PRODUCTIVITY AND QUALITY

RELIABILITY lockers, Transfers, cheque drop box

ASSURANCE Union Bank of India, “Good people to bank with”

“good

TANGIBLES Gate of bldg, surrounding area, park, car park,

Welcome Desk, Cheque books
EMPATHY Loss of cheque/ credit card.

RESPONSIVENESS Turn Around time taken to solve customer queries/

complaints

PEST ANALYSIS

1) Political Analysis:

THE INDIAN BANKING INDUSTRY IS GOVERNED BY THE BANKING

REGULATION ACT OF INDIA, 1949.

THE INTEREST RATE SCENE: Following the East Asian crisis in 1997-98, the RBI
has always shown its intention to steadily reduce the interest rate resulting in a narrow
difference between global and domestic rates.

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GOVERNMENT POLICY: In the pre-liberalization era, the banks used to function in a
highly regulated environment with administered interest rates, quantitative restrictions on
credit flows, etc. These restrictive regulatory norms led to credit rationing and
unproductive use of credit and low level of growth. Since 1991, banks have been
following flexible interest rates. Interest rates have been deregulated and banks are free to
fix their prime lending rates.
IMPLICATIONS OF SOME RECENT POLICY MEASURES: The move to
increase the foreign direct investment limits has been perceived as a welcome
announcement to foreign players waiting to get a foothold in the Indian markets. With
the liberalization of the public sector, the public sector banks found it extremely
difficult to compete with the new private sector/foreign banks.
ENVIRONMENTAL REGULATIONS: Banks should start taking cognizance of
Environmental Impact Assessment (EIA) and Environmental Audit (EA) in their
assessment for funding because -
• The bank will have to assist the government in putting the India in their league of
the environmental conscious countries of the globe in a view of their continuing
support to social cause in the past too.
• The growth of exports-manufacturing of eco-friendly - finance by bank needed.
• The success of the local population control equipment industry.

2) Economic Analysis:

The main economic factors that should be monitored with regard to banking sector
are as follows:

• Personal & household disposable incomes

• Employment levels
• The rate of inflation
• Income tax level & taxation structures
• Savings , investment levels and trends
• Stock market performance
• Consumer spending and consumer credit

3) Social Environment Analysis:

Many demographic factors have an important bearing on financial services markets.

• Changing attitude towards consumer credit and debt

• Changing employment patterns
• Number of working women
• Degree of acceptability of innovative products
• Attitudes of local population towards foreign companies and products.

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• Peculiar socio-cultural differences affecting business prospects adversely.
• Life style of people

4) Technological Environment Analysis:

Technology has a major impact on many industries including financial services and
banking in particular. ATM services which not only provide cash but also allow for bill
payments, deposits and instant statements are widely used. From the customers view
point technology has played a major role in the development of the process whereby the
service is delivered. Automated queuing systems have made visits to the bank easier
and more convenient. Phone banking and E - Banking services are now being used in
place of traditional branch based - service process Technology has also played a major
role within organizations, bringing out far better efficiency through computerized records
and transaction systems and also in business development, through setting up of detailed
customer database for effective segmentation and targeting.

Main technological developments fall within these categories:

• Process development
• Information storage and handling
• Database system

Some of the technological innovations are: Automatic teller machine (ATM), Net
banking, Phone banking, Mobile banking, Smart cards, Electronic transfer, Electronic
cheques, and Bank net, sophisticated software to analyze, keep track of and cure
customer grievances.

ADDITIONAL MATTER

1) RETAIL BANKING: It is that part of the bank that provides and offers products and
services primarily to individual customers, professionals, self employed individuals or
some business. The focus is on creating that meets the need of the target customers and
are profitable for the bank as well. The approach to retail banking product is more on a
mass production basis wherein all risk and operation are based on and geared to cater a
large number of customers. This is therefore significantly different from corporate
banking or wholesale banking where focus is on large sized customer accounts rather
than large number of accounts. Understanding retail banking will help in servicing your
customer better as it would give you a perspective and insight into how such products are
structured and specific requirements for each set of products. This would help you to
advice your customers in a more informed manner besides making you more informed
customers.

2) AUTOMATED TELLER MACHINE (ATM): This trend in banking has evolved

from a cash economy to a cheque economy and there on to the plastic card economy. One
of the channels of banking service delivery is the ATM whose primary use is to dispense
cash upon insertion of a plastic card and its unique PIN or personal identification number.

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Current and savings account holders of a bank who hold a certain minimum balance in
the account are issued with an ATM card. The card is a plastic card with a magnetic strip
with the account number of the individual. When the card is inserted into the ATM, the
machine sensing equipment identifies the account holder and asks for his or her
identification PIN number. This number is not even known to the bank staff and is unique
and secret to the individual. The bank generally restricts the maximum amount and the
frequency with which one can withdraw cash. The amount withdrawn is immediately
debited to the concerned account through accounting entries pre- programmed on the
ATM. Similarly cash and cheques can be deposited through the ATM for credit to an
account.

The advantages of an ATM over personal teller are:

• ATMs can be accessed round the clock
• No employee interface is necessary.
• Cash and cheques can be deposited and statements of accounts requirements, transfer
of funds etc. can be effected.
• It offers a cost-effective solution alternative to labour costs.
• Automatic and instantaneous accounting is possible.
• It eliminates the need for the customers to travel to the branch where his or her
account is maintained, if ATMs are conveniently located and networked.

3) INTERNET BANKING: One of the channels of service delivery to a banking

customer is through the internet. The access to account information and as well as
transaction is offered through the world wide network of computers on the internet. Every
bank has a special firewalls and its own security measures to protect the account from
non-authentic use by unauthorized users. Each account holder is provided with a PIN
number similar to that of an ATM PIN. A high level of security may be reached by an
electronic fingerprint. The fingerprint is taken before and after the transaction. Account
querying as well as transaction is possible on the internet banking platform. The
accounting is instantaneous and funds transfer can be affected immediately.

It offers the following advantages:

• At present, though cash transactions are not possible are not possible the next
phase of evolution internet banking will allow those as well. Complex products
may be offered in an equivalent quality with lower cost to more potential
customers.
• There may be contacts from any place on the earth and any time of the day or
night.

4) TELEBANKING: It is a banking service offered by banks to enable customers to

access their account for information or transaction. Similar to the ATM pin a telephone
pin (T-PIN) is provided to each account holder. The customer can call the exclusive tele-
banking numbers and provide the details to identify himself or herself to the automated
voice. Typically, the bank account number and the T-PIN are asked for. The customer is
given access to his account or transact on his account when the respective number
matches the computerized system. Though cash withdrawal and deposit are not enabled

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through this service, many banks offer cash delivery or collection service to certain
classes of customers.

5) NON PERFORMING ASSETS (NPA): Non Performing Asset means an asset or

account of borrower, which has been classified by a bank or financial institution as sub-
standard, doubtful or loss asset, in accordance with the directions or guidelines relating to
asset classification issued by RBI.
Non-performing asset (NPA) is a loan or an advance where;
• Interest and /or installment of principal remain overdue for a period of more than
90 days in respect of a Term Loan,
• The account remains 'out of order' for a period of more than 90 days, in respect of
an overdraft/ cash Credit(OD/CC),
• The bill remains overdue for a period of more than 90 days in the case of bills
purchased and discounted,
• Interest and/ or installment of principal remains overdue for two harvest seasons
but for a period not exceeding two half years in the case of an advance granted for
agricultural purpose, and
• Any amount to be received remains overdue for a period of more than 90 days in
respect of other accounts.

6) CUSTOMER RELATIONSHIP MANAGEMENT (CRM): It is a term applied to

processes implemented by a bank to handle their contact with their customers. CRM
software is used to support these processes, storing information on customers and
prospective customers. Details on any customer contacts can also be stored in the system.
The rationale behind this approach is to improve services provided directly to customers.
IT Places the customer at the heart of the banks processes, activities and culture to
improve his satisfaction of service and, in turn, maximize the profits for the bank.
A successful CRM strategy aims at understanding the needs of the customer and
integrating them with the bank‟s strategy, people, and technology and business process.

7) ISLAMIC BANKING: Islamic banking refers to a system of banking or banking

activity that is consistent with Islamic law (Sharia) principles and guided by Islamic
economics. In particular, Islamic law prohibits usury, the collection and payment of
interest, also commonly called riba in Islamic discourse. In addition, Islamic law
prohibits investing in businesses that are considered unlawful, or haraam (such as
businesses that sell alcohol or pork, or businesses that produce media such as gossip
columns or pornography, which are contrary to Islamic values). In the late 20th century, a
number of Islamic banks were created, to cater to this particular banking market.

8) SWIFT: The Society for Worldwide Interbank Financial Telecommunication

(SWIFT) handles the registration of SWIFT codes. Bank Identifier Codes (BICs) are
often called SWIFT addresses or codes. A SWIFT code is a standard format of Bank
Identifier Codes approved by the International Organization for Standardization (ISO). It
is the unique identification code of a particular bank. These codes are used when
transferring money between banks, particularly for international wire transfers, and also

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for the exchange of other messages between banks. The codes can sometimes be found
on account statements. The SWIFT code is 8 or 11 characters, made up of:

• 4 characters - bank code (only letters)

• 2 characters - ISO 3166-1 alpha-2 country code (only letters)
• 2 characters - location code (letters and digits) (if the second character is '1', then
it denotes a passive participant in the SWIFT network)
• 3 characters - branch code, optional ('XXX' for primary office) (letters and digits)

Where an 8-digit code is given, it may be assumed that it refers to the primary office

9) MERCHANT BANKING: A merchant banker is a financial intermediary who helps

transfer capital from those who possesses it to those who need it. According to SEBI, “a
merchant banker is a person who is engaged in the business of issue management either
by making arrangement regarding selling, buying or subscribing to securities as manager,
advisor, consultant or rendering corporate advisory service in relation to such issue
management.” Merchant banking includes a wide range of activities such as management
of customer securities, portfolio management, project counseling and appraisal,
underwriting of shares and debentures, loan syndication, acting as banker for the refund
orders, handling interests and dividend warrants etc. Thus, a merchant banker renders a
host of services to corporate and thus promotes industrial development in the country.

Services of Merchant Banks:

• The services of merchant bankers are described in detail in the following way:
• Project Counseling:
• Issue Management:
• Underwriting of Public Issue:
• Managers, Consultants or Advisers to the Issue:
• Portfolio Management:
• Advisory Service Relating to Mergers and Takeovers:
• Off Shore Finance:
• Loan Syndication:
• Corporate Counseling:

10) FACTORING: Factoring refers to the process of managing the sales ledger of a
client by a financial service company. In other words, it is an arrangement under which a
financial intermediary assumes the credit risk in the collection of book debts for its
clients. The entire responsibility of collecting the book debts passes on to the factor. A
factor provides credit information, collects debts, monitors the sales ledger and provides
finance against debts. Thus he provides a number of services apart from financing.

Functions of a Factor:
Financing facility / Trade debts
Maintenance /administration of sales ledger
Collection facility of accounts receivable

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Assumption of credit risk / credit control & credit restriction
Provision of advisory services

While factoring is well developed in the western countries, in India there are only two
factors, the SBI Factoring and Commercial Services Ltd. And Canbank Factoring Ltd.,
have been permitted by the RBI to operate in the western region and southern region
respectively.

Factoring offers the following advantages which make it quite attractive:

1. Factoring assures a definite pattern of cash inflows from credit sales
2. Continuous factoring may virtually eliminate the need for the credit and collection
department.

As against these advantages, the limitations of factoring re:

1. The cost of factoring tends to be higher than other forms of short-term borrowings
2. Factoring is perceived as a sign of financial weakness.

11) LEASING: A lease is an agreement under which a company or a firm acquires a

right to make use of a capital asset like machinery, on payment of a prescribed fee called
“Rental Charges.” The lessee cannot acquire ownership of the asset, but he can use it and
have full control over it. He is expected to pay for all the maintenance charges and
repairing and operating costs.

12) SECURITIZATION: Securitization is a technique whereby a financial company

converts its liquid, non-negotiable and high value financial assets into securities of small
value which are made tradable and transferable. A financial institution may have a lot of
its assets blocked up in assets like real estate, machinery etc, which are long term in
nature and which are non-negotiable. In such cases, securitization would help the
financial institution to raise cash against such assets by means of issuing small securities
of small values to the housing finance companies, whose loans are always long term in
nature and their money is locked up for a considerable long period in real estate.
Securitization is the only answer to convert these ill-liquid assets into liquid assets.

Example of securitization in India: The National Housing Bank (NHB) launched the
first issue of MBS, based on the assets of HDFC and LIC Housing Finance in August‟00
for Rs 137 crore. NHB had been working for years on its pilot project for creating
liquidity from the huge pool of housing mortgages in the country. Under the scheme,
HDFC got Rs 90 crore of its housing loan bond securitised, while LIC Housing Finance
Rs 48 crore, the transaction involved in assignment of retail housing loans from both
housing finance to NHB

13) VENTURE CAPITAL (also known as VC or VENTURE): Is a type of private

equity capital typically provided to immature, high-potential, growth companies in the
interest of generating a return through an eventual realization event such as an IPO or
trade sale of the company. Venture capital investments are generally made as cash in

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exchange for shares in the invested company. Venture capital typically comes from
institutional investors and high net worth individuals and is pooled together by dedicated
investment firms. Venture capital is most attractive for new companies with limited
operating history that are too small to raise capital in the public markets and are too
immature to secure a bank loan or complete a debt offering. In exchange for the high risk
that venture capitalists assume by investing in smaller and less mature companies,
venture capitalists usually get significant control over company decisions, in addition to a
significant portion of the company's ownership (and consequently value).

14) MUTUAL FUNDS: A mutual fund refers to a fund raised by a financial service
company by pooling the savings of the public. It is invested in a diversified portfolio with
a view of spreading and minimizing risk. The fund provides Investment Avenue for small
investors who can participate in the equities of big companies. It ensures low risks, steady
returns, high liquidity and better capital appreciation in the long run.

BENEFITS OF INVESTING IN MUTUAL FUND:

Mutual funds offer several benefits to an investor that unmatched by the other investment
options. The major benefits are good post – tax returns and reasonable safety, the other
benefits in investing in mutual funds are: -
Professional management: Mutual funds employ the services of experienced and skilled
professional and dedicated investment research team. The whole team analyses the
performance and balance sheet of companies and selects them to achieve the objectives
of the scheme.
Potential return: Mutual funds have the potential to provide a higher return to an investor
than any other option over a reasonable period of time.
Diversification: Mutual funds invest in a number of companies across a wide cross
section of industries and sectors.
Liquidity: The investor can get the money promptly at the net asset value related prices
from the mutual funds open – ended schemes. In close – ended schemes, the units can be
sold on a stock exchange at the prevailing market price.
Transparency: Mutual funds have to disclose their holding, investment pattern and the
necessary information before all investors under a regulation framework.
Flexibility: Investment in mutual funds offers a lot of flexibility with features of schemes
such as regular investment plan, regular withdrawal plans and dividend reinvestment
plans enabling systematic investment or withdrawal of funds.
Affordability: Small investors with low investment fund are unable to high – grade or
blue chip stocks. An investor through mutual funds can be benefited from a portfolio
including of high priced stock.
Well regulated: All mutual funds are registered with SEBI (Securities and Exchange
Board of India), and SEBI acts a watchdog, so the mutual funds are well regulated.
Disadvantages of Mutual Funds
• No control over costs

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• No Tailor made Portfolios
• Managing a portfolio of funds

15) BANK MARKETING: It is an approach to marketing service profitability. It helps

to maintain the commercial liability. Today Bank Marketing is a social process, it focuses
on managerial application to marketing services, it is fair way of making profits and
professional tested skill to excel competition.

The causes of Bank Marketing can be seen as:

 Rising customer needs and expectations due to improvements in general standard
of living.
 Entry of foreign and private sector banks in India.
 Economic liberalization of Indian economy.
 Phenomenal growth of competition due to economic liberalization.
 Rise in the Indian middle class with considerable resources.
 Government intervention in protecting the interests of consumers.

16) AML POLICY: In terms of the Guidelines issued by the Reserve Bank of India on
Know Your Customer (KYC) Standards and Anti Money Laundering (AML) measures,
Banks are required to put in place a comprehensive policy framework covering KYC
Standards and AML Measures. The guidelines issued by the Reserve Bank of India take
into account the recommendations made by the Financial Action Task Force (FATF) and
inter government agency, on AML Standards and on combating financing terrorism. The
guidelines also incorporate aspects covered in the Basel Committee document on
customer due diligence which is a reflection of the International Financial Community‟s
resolve to assist law enforcement authorities in combating financial crimes The objective
of KYC guidelines is to prevent banks from being used, intentionally or unintentionally,
by criminal elements for money laundering activities. Section 3 of the Prevention of
Money Laundering (PML) Act 2002 has defined the “Offence of money laundering” as:
“Whosever directly or indirectly attempts to indulge or knowingly assists or knowingly is
party or is actually involved in any process or activity connected with the proceeds of
crime and projecting it as untainted property shall be guilty of offence of money
laundering”. Money launders use the banking system for cleansing „dirty money‟
obtained from criminal activities with the objective of hiding/disguising its source. The
process of money laundering involves creating a web of financial transactions so as to
hide the origin and true nature of these funds. Therefore banks come out with a policy
known as the AML Policy to overcome problems faced due to laundering of funds using
the banking channel.

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