FINANCIAL MARKETS AND SERVICES
Module - I
INDIAN FINANCIAL SYSTEM- AN OVERVIEW
An efficient, articulate and developed financial system is
indispensable for the rapid economic growth of any country/
economy. However, their institutional structure, operating
policies, regulatory/legal framework differ widely, and are largely
influenced by the prevailing politico-economic environment. The
liberalization/deregulation/globalization of the Indian economy
since the early nineties has had important implications for the
future course of development of the financial system/sector.
The evolution of the Indian financial system falls, from the
viewpoint of exposition, into three distinct phases:
1. Pre-Independence Period
2. Between 1951 and the mid-eighties reflecting the imperatives
of planned economic growth and
3. After the early nineties responding to the requirements of
liberalized/deregulated/globalised economic environment
Phase I: Pre-Independence
The organization of the Indian financial system before
independence had a close resemblance with the theoretical model of
a financial organization in a traditional economy, as formulated by
R.L.Bennett. A traditional economy, according to him, “is one in
which the per capita output is low and constant”. According to
L.C.Gupta: “The principal features of the pre-independence
industrial financing organization are the closed-circle character
of industrial entrepreneurship; a semi- organized and narrow
industrial securities market, devoid of issuing institutions and
the virtual absence of participation by intermediary financial
institutions in the long-term financing of the virtual absence of
participation by intermediary financial institutions in the
long-term financing of the industry. As a result, the industry had
very restricted access to outside saving. The fact that the
industry had no easy access to the outside savings is another way
of saying that the financial system was not responsive to
opportunities for industrial investment. Such a financial system
was clearly incapable of sustaining a high rate of industrial
growth of new and innovating enterprises.
Phase II: 1951 to Mid-Eighties
In pursuance of the broad economic and social aims of the state
to secure economic growth with social justice as enshrined in the
Indian Constitution, under the Directive Principles of state
policy, the scheme of planned economic development was initiated in
1951.
With the adoption of mixed economy as the pattern of industrial
development, in which a complementary role was conceived for the
public and private sectors, there was a need for an alignment of
the financial mechanism with the priorities laid down by the
government’s economic policy.
The main elements of the financial organization in planned
economic development could be categorized into four broad
groups:
i. Public/government ownership of financial institutions,
ii. Fortification of the institutional structure,
iii. Protection to investors and
iv. Participation of financial institutions in corporate
management.
i) Public Ownership of Financial Institutions
One aspect of the evolution of the financial system in India
during this phase was the progressive transfer of its important
constituents from private ownership to public control.
Nationalization: The nationalization of the Reserve Bank of
India (RBI) in 1948 marked the beginning of the transfer of
important financial intermediaries to Government control. This was
followed in 1956 by the setting up of the State Bank of India (SBI)
by taking over the then Imperial Bank of India. In the same year,
245 life insurance companies were nationalized and merged into the
state-owned monolithic Life Insurance Corporation of India
(LIC).
RBI 1948
SBI 1956 (take-over of Imperial Bank of India)
LIC 1956 (Merges of over 250 Life Insurance Companies)
Banks 1969 (14 major banks with Deposits of over Rs. 50Crs
nationalized)
1980 (6 more Banks)
Insurance 1972 (General Insurance Corp. GIC by New India,
Oriental, united and National)
New Institutions: in addition to nationalization, the control of
public authorities on the sources of credit and finance led to the
creation of a battery of new institutions in the public sector. A
number of powerful special-purpose financial institutions
designated as development banks/development finance
institutions/term-lending institutions were set up. Another step of
considerable significance was the creation of an investment trust
organization-the Unit Trust of India-in the public sector. Thus,
the public sector occupied a commanding position in the industrial
financing system in India, that is, virtually the entire
institutional structure was owned and owned and controlled by the
Government.
ii) Fortification of Institutional Structure
The most significant element in the emergence of a fairly well
developed financial system in India during the second phase was the
strengthening of its institutional structure. The fortification of
the institutional structure of the Indian financial system was
partly the result of modification in the structure and policies of
the existing financial institutions.
Development Banks: They grew into a massive source of industrial
finance, and as the most important supplier of capital during the
period under reference; they could be appropriately designated as
the backbone of the system of industrial financing in India. The
structure of development banking consisted of both all India as
well as state- level institutions.
The IFIC (Industrial Finance Corporation of India) was
established to give medium and long-term credit to industrial
enterprises in circumstances where normal banking accommodation was
inappropriate, or recourse to the capital issue method
impracticable, thus envisaging the role of a gap-filler. State
Financial Corporation’s (SFC’s), were organized to assist the
small/medium enterprises.
The establishment of the Industrial Credit and Investment
Corporation of India (ICICI) Ltd, in 1995 represented a landmark in
the diversification of development banking in India
The most important event in the sphere of development banking in
India took place in 1964, when the IDBI was established as a
subsidiary of the Reserve Bank of India. It was delinked from the
Reserve Bank of India in 1976 and was converted into a holding
company. At the state level, the machinery of the State Industrial
Development Corporations (SIDCs)/State Industrial Investment
Corporations (SIICs) were geared up to meet the financial needs.
The Industrial reconstruction Corporation of India (IRCI) Ltd was
jointly set up by the IDBI, banks and LIC to look after the
rehabilitation of the sick mills. It was renamed as the Industrial
Reconstruction Bank of India (IRBI) in 1984. It was converted into
a full-fledged public financial institution (PFI) and was renamed
as the Industrial Investment Bank of India (IIBI) in 1997. Finally,
another institutional innovation was the setting up of the Small
Industrial Development Bank of India (SIDBI) as a subsidiary of the
IDBI, for fostering the development of small and medium
enterprises.
Life Insurance Corporation of India: Another development in the
direction of fortifying the structure of the industrial financing
organization in India during this phase was the coming into being
of the Life Insurance Corporation (LIC) in 1956, as a result of the
amalgamation of 245 life insurance companies into a single
monolithic state- owned institution. The setting up of the LIC was
a notable feature in the evolution of the post-1951 organization of
industrial financing in India because it transferred an important
savings institution from private to public ownership.
The LIC emerged as the single largest reservoir of long –term
savings in India.
Unit Trust of India: The establishment of the Unit Trust of
India (UTI) in 1964 was the culmination of a long overdue need of
the capital market in India. The objective of setting up the UTI
was to enable the small investors to share in industrial
prosperity, through indirect holding of equities, and to mobilize
the saving of the relatively small investors.
Commercial Banks: A beginning was made with the modification in
the monetary and credit policies of the RBI in the form of
instruments such as selective credit controls, moral suasion and
other such macro-type controls to encourage the banks to reorient
their operational policies to the finance for industry.
· Diversification in Forms of Financing: Since the mid- sixties,
the commercial banks in India were officially encouraged to enter
new forms of financing of which two deserve specific mention: (i)
Term-lending and (ii) Underwriting of new issues of corporate
securities by industrial enterprises. The lending banks were
provided refinancing facilities against approved term loans from
the Refinance Corporation of India (RCI) Ltd. Apart from term loans
and underwriting of issue of capital, the banks also widened their
range of financial assistance to the industry partly to direct
subscription to the shares and debentures of the corporate
enterprises and partly to their lending against such
securities.
· Enlargement of Functional Coverage: The commercial banks were
further directed to channelize their resources to small scale
industries, exports and agriculture, i.e., the neglected (later
priority and now directed) sectors of the Indian economy. RBI
introduced a policy of granting additional rights to the banks to
borrow to from it at concessional rates in case they increased the
quantum of lending to the small industries. An important measure
taken to facilitate credit for exports was the setting up of the
Export Risk Insurance Corporation in1957. In 1964, it was renamed
as the Export Credit and Guarantee Corporation (ECGC) Ltd.
· The important elements of the elaborate legislative code
adopted by the Government are briefly recapitulated below:
· Companies Act: The enactment of the Companies Act, 1956
represented an important stage in the development of corporate
enterprises in India. The Act made considerable changes in the
matter of prospectus, allotment of shares, terms and conditions on
which companies were floated, and the capital structure of
companies.
· Securities Contracts (Regulation) Act: The Securities
Contracts (Regulation) Act, 1956 provided for reforms in stock
exchange trading methods and practices which were the subjects of
controversy in the past. The scheme of regulation included the
provision that only recognized stock exchanges will be permitted to
function and that the Government was empowered to withdraw the
recognition in the interest of the trade or in public interest.
· Monopolies and Restrictive Trade Practices Act: The Monopolies
and Restrictive Trade Practices Act came into force from June 1,
1970 with the following objectives: (a) to ensure that the
functioning of the economic system did not result in concentration
of economic power and (b) To control such monopolistic and
restrictive trade practices that were injurious to public
welfare.
· Foreign Exchange Regulation Act: The Foreign Exchange
Regulation Act (FERA), 1973, regulated foreign investment with the
aim of diluting the equity holding in foreign companies. It was
also a step in the direction of engendering confidence among the
investing public in industrial securities.
iv) Participation in Corporate Management
A development of considerable significance in the Indian
financial system in this phase of its evolution was the
participation of the financial institutions in the management of
the assisted concern. The problem, during the eighties, was the
potential control of the public financial institutions over private
industrial enterprises through their shareholding. There were
numerous cases where the institutional equity holdings had become
so large that the management’s tenure in office became dependent on
their direct and indirect support. In several large companies,
these institutions, particularly the LIC and the UTI, were able to
exercise considerable pressure on the management by virtue of the
voting powers they had, to secure board representation for
themselves, and initiate other changes in the composition of the
Board of Directors and in the appointment of the Chief Executive.
Most companies needed to approach one or more financial
institutions for underwriting or loan. In the Indian financial
system between 1951 and the mid-eighties, an institutional
structure with considerable strength and repute capable of
supplying industrial capital to various enterprises in diverse
forms was gradually built up. With setting up of a variety of newer
institutions, the whole financial system had come under the
ownership and control of public authorities so that the public
sector occupied a commanding position in the distribution of credit
and finance to private industrial enterprises in India.
Organizational Deficiencies
Certain weakness still persisted in the pre-1990 organization of
the Indian financial system. These pertained to: i) Institutional
structure, ii) Problem of small scale and new enterprises, iii) New
issue market organization.
i) Institutional structure: The structure of Indian financial
system was heavily dominated by the two categories of financial
institutions:
a) Commercial banks, LIC, GIC, and UTI
b) Development finance institutions, namely, IDBI, IFCI, ICICI,
SFC’s and so on
Since, the development banks provided most of the funds in the
form of term loans, there was a preponderance of debt in the
financial structure of industrial enterprises and the share of
equity capital was both low and declining.
ii) Problem of Small and New Enterprises: Another weakness in
the organization of the Indian financial system was its inability
to meet the financing needs of small and new enterprises. The
holdings in small enterprises did not fit into their investment
requirements, because of the difficulty of administration and the
lack of marketability. Apart from institutional obstacles, such
enterprises also faced operational obstacles in terms of the
prohibitively high cost of rising capital.
iii) New Issue Market Organization: The new issue market in
India also suffered from serious institutional lacunae. There was
practically no institutional arrangement for the origination of
issue of capital. The underwriting facility to issue of capital,
though fairly pervasive, was of limited complexion in the sense
that it was synonymous with an amount of money which each
underwriter was prepared to guarantee in case of unsatisfactory
public response.
Phase III: Post-Nineties
The organization of the Indian financial system, since the
mid-eighties in general, and the launching of the new economic
policy in 1991 in particular, has been characterized by profound
transformation. Major economic policy changes such as
macro-economic stabilization, delicensing of industries, trade
liberalization, currency reforms, reduction in subsidies, financial
sector/capital market/banking reforms, privatization/disinvestments
in public sector units, tax reforms and company law reforms in
terms of simplifications and debureaucratisation were gradually
implemented, and they have had far reaching impact on the structure
of the corporate industrial sector in India.
The notable developments in the organization of the Indian
financial system during this phase are briefly outlined below with
reference to:
i) Privatization of financial institutions
ii) Reorganization of institutional structure
iii) Investor protection
i) Privatization of Financial Institutions
Practically the entire financial system was under the state
ownership and control till the mid-eighties, steps were initiated
during this phase to privatize important financial institutions.
The IDBI and IFCI Ltd offered their equity to private investors.
Private mutual funds have been set up under the guidelines
prescribed by the SEBI. A number of private banks under RBI
guidelines have also come into existence. With setting up of the
Insurance Regulatory and Development Authority (IRDA), private
insurance companies sponsored by both domestic and foreign
promoters have re-emerged on the Indian financial scene. With the
establishment of Pension Fund Regulation and Development Authority
(PFRD) private entities are poised to enter nineties, has been
dismantled in a phased manner mainly through the establishment of
private financial institutions such as banks, mutual funds and
insurance companies. This is, indeed, a revolutionary change in the
organization of the Indian financial system.
ii) Reorganization of Institutional Structure
Apart from the entry of private financial institutions, the
institutional structure of the Indian financial system has
undergone an outstanding transformation to reflect the capital
market orientation in its evolution.
Development/ Public Financial Institutions (DFIs/PFIs):
In financing of industry by these institutions in the
traditional form of rupee/ foreign currency term loans for project
finance, underwriting, direct description, lease financing, and so
on, they also started providing core working capital to industry.
The term-lending institutions was the growing focus on non-fund
based financial activities/services such as merchant banking and
project counseling, portfolio management services, mergers and
acquisition, and so on. The pattern of financing of the development
banks, which consisted predominantly of funds from the Government
and the RBI, was progressively geared to accessing the capital
market through issue of capital to the public, issue of innovative
floating interest rate bonds, and other types of bonds without
Government guarantee.
Commercial Banks: In the context of the changed perspective in
terms of the deregulated/liberalized/globalised economic
environment, the post-1991 era of Indian banking is characterized
by prudential/viable/profitable banking. By the mid-nineties, a
geographically wide and functionally diverse banking system had
emerged as reflected in the phenomenal branch expansion especially
in the rural and semi-urban and unbanked areas, phenomenal growth
in deposits, and increase in the share of the priority sector in
total bank lending. But there was a decline in productivity and
efficiency of the banking system and a serious erosion of its
profitability with implication of its viability itself. Therefore,
the Narsimhan Committee was set up which had examined the second
generation of reforms in terms of three broad interrelated issues:
(i) Action that should be taken to strengthen the foundation of the
banking system, (ii) Streamlining procedures, upgrading technology
and human resource development and, (iii) Structural changes in the
system.
Non-Banking Financial Companies (NBFCs): The NBFCs constitute a
significant element of the organization of the financial system.
They broaden the range of financial services. The important
fund/asset based activities of NBFCs are equipment leasing,
hire-purchase, bills discounting, loan or investment, venture
capital, house finance, factoring and forfeiting, stock broking,
merchant banking and so on. Their fee based or advisory services
include issue management, portfolio management, corporate
counseling, loan or lease syndication, merger and acquisition and
so on.
Mutual Funds: A remarkable development in the reorientation of
the Indian financial system in the post 1991 years is reflected in
the structural growth of mutual funds industry. The present
structure comprises of domestic mutual funds sponsored by the UTI,
bank subsidiaries, insurance organizations, private sector with
foreign collaboration and foreign institutional investors. They
offered a wide variety of schemes focusing on income, growth, tax
savings, insurance- linkage and special categories like children
and senior citizens, sector-specific, money market mutual’s to suit
the investment requirement of the heterogeneous category of
investors.
Securities or Capital Market: From being a marginal institution
in the mid- eighties, the securities market has emerged as the most
important mechanism for allocating resources in the economy during
this period. The structure of both the segments of the
market-primary or new and secondary or stock exchange- has
witnessed significant changes. The secondary market which
represented an institutional mechanism that was inadequate,
non-transparent, hardly regulated and rarely geared to investors’
protection till the early nineties, has also witnessed notable
developments. A few stock exchanges, dominated by the Bombay Stock
Exchange (BSE Ltd. now) provided the trading platforms for the
secondary market transactions.
Money Market: Till the early nineties, the money market in India
had narrow base and a limited number of participants, which was
restricted to the banks and the LIC and UTI. In the post-1990
period and particularly in the context of a deregulated economic
environment, a sophisticated and articulate money market has
emerged in the country. A notable development had been the
emergence of specialized institutions, namely, Primary Dealers
(PDs), and money market mutual funds (MMMFs). Alongside activating
the existing instruments through a modification in the procedures,
deregulated of interest rates and enlargement of participants, a
number of inter-related sub-markets, namely Call or notice market,
Commercial bills market, T-bills market, Commercial papers (CPs)
market, Certificates of deposits (CDs) market, and Repo market.
There are also indications of a trend towards an integration of the
forex and the money market.
Protection of Investors: Securities and Exchange Board of
India
The securities market witnessed a spectacular growth, both in
terms of its ability to mobilize resources and to allocate it with
some efficiency. The corporate sector has come to rely on the
securities market increasingly, to finance its long term
requirements of fund. To help sustain this growth investors’ right
must be fully protected, trading mal-practices must be prevented
and structural and inadequacies of the market must be removed.
The Capital Issues (Control) Act was repealed in 1992 and the
Office of the Controller of Capital Issues (CCIs) was abolished.
The Securities and Exchange Board of India (SEBI) was set up in
April 1988 and acquired a statutory status in 1992. It has emerged
as an autonomous and independent statutory body with a definite
mandate which requires it to: (i) protect the interest of the
investors in securities; (ii) promote the development of securities
market; and (iii) regulate the securities market. The SEBI
prohibits fraudulent and unfair trade practices, including insider
trading. In order to ensure investor protection and to safeguard
the integrity of the markets there is a comprehensive surveillance
system.
CAPITAL MARKET
Definition: “By capital market, I mean the market for all the
financial instruments, short term and long term, as also
commercial, industrial and Government paper”.
- H.T.Parkekh
Meaning: It is a market for financial assets which have a long
or indefinite maturity. Generally, it deals with long term
securities which have a maturity period of above one year.
Functions:
a) It deals in long term and medium term funds.
b) It is concerned with the transfer of long term and medium
term funds from investing parties and commercial enterprises.
c) It facilitates large scale mobilization of savings and
financial resources.
d) It helps in procuring foreign capital for the quicker
economic development of a country.
e) It facilitates acceleration of capital formation.
f) It provides profitable investment opportunities to the small
savers and investors.
g) It ensures effective allocation of mobilised financial
resources among projects which yield highest returns or which
contribute to balanced economic development.
h) It ensures ready and continuous market for long term
funds.
Capital market may be divided into three namely:
· Industrial securities market
· Government securities market
· Long term loans market
I. Industrial Securities Market
It is a market for industrial securities like Equity shares,
Preference shares and Debentures or bonds. It is a market where
industrial concerns raise their capital or debt by issuing
appropriate instruments. It can be subdivided into two. They
are:
i. Primary Market or New issue Market
ii. Secondary Market or Stock Exchange
Primary Market: It is a market for new issues or new financial
claims. Hence, it is also called New Issue market. The Primary
market deals with those securities which are issued to public for
the first time. Here, the borrowers exchange new financial
securities for long term funds.
Functions:
a) It is concerned with long term funds or capital.
b) Securities are issued by industrial and commercial companies
directly to investors.
c) It transfers resources from savers to the users.
d) Funds raised in the primary market are utilized by the
issuing companies for investment on fixed capital i.e., fixed
assets
e) It does not cover long term loans from financial
institutions.
f) It promotes capital market formation directly.
Secondary Market: It is a market for secondary sale of
securities. Such shares are quoted in the stock exchange and it
provides a continuous and a regular market for buying and selling
of securities.
Relationship between Primary market and Secondary market:
· Both the markets together constitute the capital market which
is an integral part of the economy of the country.
· New securities first placed in the primary market are then
disposed off subsequently in the secondary market.
· Since the stock exchange help in continuous purchase and sale
of securities, many new issues are placed.
· Both markets move in the same direction and are dependent on
each other.
· Both are susceptible to the influence of environmental
conditions.
Differences between Primary and Secondary Market:
Primary Market
i. New issues of securities are dealt in primary market.
ii. Securities are exchanged between companies and
investors.
iii. It promotes capital formation directly.
iv. Securities are only bought by the investors from companies,
and they are not sold.
v. The prices of securities dealt in primary market are
determined by the management of issuing companies.
vi. Securities are issued to investors for the first time.
Secondary Market
i. Existing securities are dealt in secondary market.
ii. Securities are exchanged between investors.
iii. It promotes capital formation indirectly.
iv. Securities are bought and sold.
v. The prices of securities are dealt in the secondary market
determined by the demand for the supply of securities
vi. Securities can be bought and sold any number of times.
Instruments of Capital Market
Some of the common Primary and Secondary Market Instruments:
· Equity Shares
· Preference Shares
· Deferred share
· Debentures
· Hybrid Securities
· Bonds
· Derivatives
Equity Shares:
· Equity is the residual interest in the Net Asset i.e. (Assets
- Liabilities)
· It represents permanent ownership capital of a Company which
cannot be redeemed in its lifetime.
· Equity includes reserves and surplus.
· Equity Shares holders have right vote in all resolutions at
the meetings and have control over the functioning of the
Company.
· They have a claim on profit of a Company.
· The Equity Shares Holders have liability limited to the value
of Shares purchased.
· Equity Shares possess an unlimited potential for Dividend and
price appreciation bearing the risk on the other hand.
Preference Shares:
Preference Shares capital means the part of Share Capital of the
Company which fulfills both the conditions:
1. Carries preferential rights in respect of dividend at fixed
rate
2. Has preferential right in respect of repayment of capital at
the time of winding up.
Generally they do not have any voting rights but can vote on the
matters directly relating to their rights.
Types of Preference Shares:
1. Cumulative preference Shares - They carry the right to
accumulate dividends as arrivers if the Company fails to pay
dividend in particular year (all preference Shares are always
presumed to be cumulative unless the contrary is stated in AOA or
in terms of issue).
2. Non- Cumulative Preference Shares - Such Shares do not carry
the right to accumulate dividend to subsequent years.
3. Redeemable Preference Shares - The paying back of capital is
called redemption. Capital received on such Shares is repayable
after expire of prescribed time (not greater than 20 years).
4. Irredeemable Preference Shares - The capital is not repayable
during life time of the Company but repayable only on the date of
winding up (however currently no Company can issue irredeemable
preference Shares).
5. Participating preference Shares - They participate in surplus
profit over and above the fixed rate of dividend (such excess
profit is distributed after certain percentage of dividend has been
paid to Equity Shares holders also).
6. Non-Participating preference Shares:-They are entitled only
to a fixed rate of Dividend and do not participate in surplus
profit.
7. Convertible Preference Shares - They have right of conversion
in to Equity Shares.
8. Non-Convertible Preference Shares - They have no right of
conversion in to Equity Shares. It may be noted that if AOA is
silent, all preference Shares are deemed to be non convertible
preference Shares.
Deferred Shares:
· A method of stock payment to directors and executives of a
company through the deposit of shares into a locked account. The
value of these shares fluctuates with the market and cannot be
accessed by the beneficiary for the purpose of liquidation until
they are no longer employees of the company.
· A share generally issued to company founders that restricts
their receipt of dividends until dividends have been distributed to
all other classes of shareholders
· Subordinate to all other classes of common and preferred
stock, these shares are last in line when a company goes bankrupt
and liquidates all assets.
· These are different from phantom stocks because they don't
allow for payment in cash. Also, rather than actual deposits of
securities, companies sometimes maintain bookkeeping entries of
cash equaling an offsetting security position. When the executive
or director leaves the company, the cash is converted into stocks
at market value.
· No longer commonly used, these shares provided its holders
with large dividend payouts only after all other classes of
shareholders are paid. Holders of deferred shares had access to all
the remaining profits after all obligations were met.
Debentures:
· The term Debenture is derived from Latin term “Debere” meaning
“to Owe”. So literally, debenture means a document acknowledging a
debt.
· It is a debt security issued by a Company usually on a medium
or long term (i.e. 7 to 10 yrs).
· As per companies act 1956, “Debentures” includes debenture
stoke, bonds and any other security of a Company whether
constituting a charge on the asset of the Company or not (secured
or unsecured).
· The Company agrees to pay interest which is a charge against
profit.
· Holders have no voting rights and can generally transfer their
debentures.
· After the maturity debt are redeemed at par or at premium by
the issuer.
· The issuing Company needs to take compulsory credit rating
from approved agencies.
· There are no restrictions for issue of debentures at a
discount.
· Interest is payable even if there is no profit.
Types of Debentures:
1. Registered Debentures
2. Unregistered or Bearer Debentures
3. Secured Debentures
4. Unsecured Debentures
5. Redeemable Debentures
6. Irredeemable Debentures
7. Convertible Debentures
8. Non-convertible Debentures
Registered Debentures:-Registered Debentures are those
debentures in respect of which the names of debenture holders are
entered in the register of debenture holders kept by the Company
and payment of interest and repayment of principle amount are made
only to those person whose names are recorded in the register of
debenture holder.
Unregistered or Bearer Debentures:-In this case the names of the
holder of debentures are not entered in the register of debenture
holders maintained by the Company and payment of interest and
repayment of principle amount are made to the bearer or holder of
these debenture.
Secured Debentures - Mortgage is the other name for the Secured
Debentures. These Debentures are secured by a charge on the asset
of the Company. The charge may be fixed or specify or a floating
charge. If the charge is on some fixed or specific immovable
property of the Company, it is called a fixed charge. Same way if
the charge is not on any specific immovable property of the Company
but on the assets of the Company in general, then it’s called a
floating charge.
Unsecured Debentures - Simple, Naked are the other names of
unsecured debentures. These are the Debentures which are issued
with the mere promise to pay the interest and to repay the
principle without any charge on the asset of the Company.
Redeemable Debentures:-Redeemable Debentures are those
Debentures which are repayable on a certain date or after a
specified period.
Irredeemable Debentures - The term Irredeemable Debentures does
not mean that these debentures are not be repaid at all. It only
means that there is no time specified or fixed for the repayment of
the Debentures. They are repaid at the time of liquidation.
Convertible Debentures - These Debenture are in which an option
is given to the holders to convert their debentures into preference
or equity Shareswholly or partly after a specified period. These
have become more popular these days.
Non-convertible Debentures - These Debenture are not convertible
into preference or equity Shares at the option of the Debenture
holder. It may be noted that unless the Debenture are specifically
issued as convertible all Debenture are non-convertible.
Hybrid Securities:
· Securities which have both the characteristics of Securities
and Equity Shares.
· Generally they are issued as a debt security which after
certain number of years converted into an Equity Shares.
· Convertible debenture is an example for Hybrid Securities.
· Hybrid securities pay a predictable (fixed or floating) rate
of return or dividend until a certain date, at which point the
holder has a number of options including converting the securities
into the underlying share.
· A hybrid security is structured differently and while the
price of some securities behaves more like fixed interest
securities, others behave more like the underlying shares into
which they convert.
Examples
· A convertible bond is a bond (i.e. a
loan to the issuer) that can be converted into
common shares of the issuer. A convertible bond can be
valued as a combination of a straight bond and an option to
purchase the company's stock.
· An income security is a hybrid between a stock and a
bond. The bond portion pays interest, and the stock portion pays
dividends. Income securities are popular in Canada.
· A PIK loan may carry a
detachable warrant (the right to purchase a certain
number of shares of stock or bonds at a given price for a certain
period of time) – the loan is the debt (Bond), while the warrant is
the equity.
Bonds:
· Certificates that represent money a government or corporation
has borrowed from other entities. Loans can be raised from public
by issuing Bonds by Public Ltd Companies.
· It is a marketable long term debt security which the issue is
obliged to repay with coupon (interest)
· Bonds have a maturity period after which it is redeemed by
issuer
· Holders do not have a equity stake, they are only lenders to
the issuing company
· Bonds have to be rate by specialized credit rating
agencies
· They are more secure than debentures but carry lower interest
rates
· Bonds are normally issued in different denominations ranging
from Rs. 100 to 1000 and carry different rates of coupon
· Bonds are either secured or unsecured
· From investor point of view Bonds offer a more attractive
prospect than preference Shares.
Types of Bonds:
1. Deep discount/ Zero-coupon Bonds – It is a form of
zero-interest Bond. These Bonds are sold at a discounted value and
on maturity face value is paid to the investors. In such Bonds,
there is no interest payout during lock-in period. It is sold by
the issuing Company at a discount. The difference between the
discounted value and face value represents the interest to be
earned by the investor on such Bonds.
2. Double Option Bonds - These have been recently issued by the
IDBI. The face value of each Bond is Rs. 5000/- the Bond carries an
interest at 15% per annum compounded half yearly from the date of
allotment. The Bond has the maturity period of 10 yrs.
3. Option Bonds - These are cumulative and non-cumulative Bonds,
where interest is payable on maturity or periodically. Redemption
premium is also offered to attract investor. These are recently
issued by ICICI & IDBI.
4. Inflation Bonds - These Bonds are in which interest rate is
adjusted for Inflation. Thus, the investor gets interest which is
free from effect of inflation. For example, if the interest rate is
11% and the inflation is 5% the investor will earn 16% meaning
there by that the investor is protected again inflation.
5. Floating Rate Bond - As the names suggest is Bond where the
interest rate is not fixed and it is allowed to float depending
upon the market condition. This has become more popular as a money
market instrument and has been successfully issued by financial
institution like IDBI, ICICI etc.
6. Junk Bond -A colloquial term for a high-yield or
non-investment grade bond.
Junk bonds are so called because of their higher default risk in
relation to investment-grade bonds. Junk bonds are risky
investments, but have speculative appeal because they offer much
higher yields than safer bonds.
7. Putable bond :-
Retractable bond is other name of it.
The holder of the putable bond has the right, but not the
obligation, to demand early repayment of the principal.
This type of bond protects investors: if interest rates rise
after bond purchase, the future value of coupon payments will
become less valuable. Therefore, investors sell bonds back to the
issuer and may lend proceeds elsewhere at a higher rate
8. Callable bond:-A callable bond (also called redeemable bond)
is a type of bond that allows the issuer of the bond to retain the
privilege of redeeming the bond at some point before the bond
reaches its date of maturity.
On the call date(s), the issuer has the right, but not the
obligation, to buy back the bonds from the bond holders at a
defined call price
9. Guaranteed Bond - A debt security that offers a secondary
guarantee that interest and principal payment will be made by a
third party, should the issuer default due to reasons such as
insolvency or bankruptcy. A guaranteed bond can be municipal or
corporate, backed by a bond insurer, a fund or group entity, or a
government authority.
International Instruments:
Some of the Financial Instruments dealt with in the
international market are briefly described below:
1. Euro Bond - These are the debt instruments which are not
denominated in the currency if the country in which they are
issued. E.g., A Yen note floated in Germany, such Bonds are
generally issued in a bearer form rather than as registered Bond
and in such case they do not contain the investor names or the
country of their origin.
2. Foreign Bonds - These are the debt instruments issued by
Foreign Government. Such Bonds are exposed to default risk,
especially they the Corporate Bonds. These Bonds are denominated in
the currency of the Country where they are issued, however incase
these Bonds are issued in a Currency other than the investors home
currency. They are exposed to exchange rate risk.
3. Fully Hedged Bonds - As mentioned above in Foreign Bonds the
risk of Currency fluctuation exists. These Bonds eliminate the risk
by selling in forward markets the entire stream of principle and
interest payment.
4. Foreign Euro Bonds - In domestic capital markets of various
countries the Bonds issues refer to above are know by different
names, such as Yankee Bonds in US, Swiss Frances in Switzerland,
Bulldogs in UK.
5. Euro Convertible Zero Bonds - These Bonds are structured as a
convertible Bond. No interest is payable on the Bonds. But the
conversion of Bonds takes place on maturity at a pre-determined
price.Usually there is a 5 years maturity period and they are
treated a deferred equity issue.
6. Euro Bonds with equity warrants - These Bonds carry a coupon
rate determined market rates. The warrants are detachable. Pure
Bonds are traded at a discount.
Derivative Instruments
· Derivatives are financial instruments whose value depend on
the value of some underlying asset
· The underlying assets can be shares, commodities, interest
rates, Index etc..
· Derivatives contract provides risk hedging mechanism in
variety of ways
· The transaction are settled by offsetting /squaring
transactions in the same derivative
· The difference in value is settled in cash
· Derivatives are only secondary market instruments
· Various participants are hedgers, speculators and
arbitrageurs
Types of derivatives
Derivatives can be classified into different groups as
follows:
· Commodity and financial derivatives
· Basic and complex derivatives
· Exchange traded and OTC derivatives
Financial derivatives
· Forwards
· Futures
· Options
· Swaps
Forwards
· It is an agreement between two parties to buy and sell an
asset at a futures date at a price agreed today.
· Forward contracts are common in agricultural products
· There is no standard form, it differs according to the
suitability and requirements of the parties involved
· These cannot be transferred hence not trade in stock exchanges
–OTC derivatives
· Both the parties to the forward have an obligation to
perform
Problems of forward contracts:
· Forwards are not standardized which results in excessive
flexibility and generality
· Cannot be traded in stock exchanges so highly illiquid
· Counter party risk is high, hence unreliable
Futures
· It is a financial security issued by an organized exchange to
buy or sell underlying assets at an agreed price.
· The agreed upon price is called “futures price”
· Futures contracts are standardized and exchange traded
· Buying a future is “going long” and selling is “going
short”
· Future price=spot price +cost of carrying
· The obligation of buyer or seller is to the clearing house in
fulfilling the contract
· The clearing house takes margin which eliminates default to
some extent
Option
· It is an agreement that gives the option buyer the right but
not the obligation to purchase or sell the underlying asset at a
specified price by or before a fixed date in future
· Buyer of an option at a price is called holder of an
option
· Price at which an option is brought is called premium
· The seller of an option for a premium is called the
writers
· The price specified in the contract is striking or exercise
price
· Kinds of option : call option , put option , American option ,
European option
Swaps
· It can be defined as the exchange as the exchange of one
stream of future cash flow with another stream of cash flow with
different characteristics
· It is an agreement between two parties to exchange cash flow
& no principal is exchanged
· Swaps are of 2 types -: currency swaps & interest rate
swaps
· Currency swap is an agreement to exchange currencies at a
specified exchange rate
· Interest rate swap is an agreement whereby one party exchange
one set of interest payments for another
· Swaps are executed through an intermediary who connects the
needs of two parties
MONEY MARKET
A well organised money market is the basis for an effective
monetary policy. The smooth functioning of money market ensures the
flow of funds to the most important uses. The money market is a
market for overnight to short-term funds, and for short term money
and financial assets that are close substitutes for money.
“Short-term”, in the Indian context, generally means a period up to
one year; “close substitute for money” denotes any financial asset
that can be quickly converted into money with minimum transaction
cost and without loss in value.
Meaning of Money Market: The term money market refers to the
institutional facilities or arrangements available for borrowing
and lending of short term funds. In other words, the money market
comprises of all the facilities for borrowing and lending money for
a short period. Thus, money market refers to money for short term
funds.
Definition of Money Market: According to G. Crowther, “The money
market is the collective name given to the various firms and
institutions that deal in the various grades of near-money”.
According to the Reserve Bank of India the money market, “is the
centre for dealings, mainly of a short term character, in money
assets; it meets the short term requirements of most of the
borrowers and provides liquidity or cash to the lenders. It is the
place where short term surplus investible funds at the disposal of
the financial and other institutions and individuals are bid by
borrowers, again comprising institutions and individuals and also
the government.”
Features of Money Market:
The few most important features of money market are as
follows:
1. Short period: In the money market the operations (raising and
development of funds) are for a short duration (normally up to one
year), in the capital market they are for longer
durations/periods
2. Source of working capital: As a corollary, the money market
is the institutional source of working capital to the industry, the
focus of the capital market being on financing fixed
investments.
3. Large number of participants: Moreover, there are large
numbers of participants in the money market. In fact, the larger
the number of participants, the greater is the depth of the
market.
4. Wholesale market: In addition, the money market is a
wholesale market. The volume of funds/financial assets representing
the money traded in the market is very large, which underscores the
needs for the skilled professional operators.
5. Same day settlement: Also, unlike the other markets
(exchanges), trading in the money market in conducted on the
telephone, followed by the written confirmation from both the
borrowers and the lenders.
6. Flexibility: Due to greater flexibility in the regulatory
framework, there is a greater scope for innovative dealings..
7. Sub-markets: Finally the money market consists of a number of
interrelated sub-markets such as the call market, the commercial
bill (bill) market, the Treasury bill market, the commercial paper
market, the certificates of deposit market and so on.
The important functions of money market are as follows:
1. It provides an outlet to commercial banks and non banking
financial companies to park their short-term funds.
2. It provides funds for industry, trade and commerce.
3. It supplies short-term funds to the government.
4. It facilitates successful functioning of the central
bank.
5. It helps in the development of the capital market.
Difference between Money Market and Capital Market:
Money Market
Capital Market
1. Market for short term loans.
2. Deals in near money assets.
3. Includes commercial banks.
4. Loans maximum for 6
Months.
5. Transactions in short term
Instruments.
6. Arranges small amount of
Funds.
7. Funds supplied for working
Capital.
8. Rate of interest generally high.
1. Market for long term loans.
2. Deals in shares and
Debentures.
3. Includes share market too.
4. Loans for long Period.
5. Deals in long term
Instruments.
6. Arranges large amount of
Funds.
7. Funds supplied for fixed
Capital.
8. Rate of interest generally low.
Money Market Instruments:
1. Call/Notice Money Market: The component of the money market
in India deals with the (borrowed and lent) overnight/one-day
(call) money and notice money for period up to 14 days. It
primarily serves the purpose of balancing the short-term liquidity
position of banks. The call money market is a market for short term
funds repayable on demand and with maturity period varying from one
day to a fortnight. When money is borrowed/lent for a day, it is
known as call money. When money is borrowed/lent for more than a
day and up to 14 days, it is known as notice money. No collateral
security is required to cover these transactions. It is basically
an over-the-counter (OTC) market without the intermediation of
brokers. Call money is required by banks to meet their CRR
requirement.
2. Treasury bills: Treasury bills of the Central Government have
been issued since the inception of the Bank. They were issued for
91 days. The sales were occasionally suspended. Treasury bills are
claim against the government. They are negotiable securities and
since they can be rediscounted with the Bank they are highly
liquid. Their other features are:
· Absence of default risk
· Easy availability
· Assured yield
· Low transaction cost
· Eligibility for inclusion in the securities for SLR purposes
and
· Negotiable capital depreciation
There were 14 days, 91 days and 364 days treasury bills in vogue
in 1997. They are not issued in scrip form. The purchases and sales
are affected through the Subsidiary General Ledger Account.
3. Term Money Market: The term money market in India has been
dormant. The factors that have inhibited the development of term
money market are statutory pre-emption on interbank liabilities,
regulated interest rate structure, high degree volatility in the
call money rates, availability of sector specific refinance, cash
credit system of financing, absence of Asset Liability management
practices among banks and inadequate development of money market
instruments. RBI has gradually removed most of the constraints in
the past decade. The volume of transactions has picked up in
response to policy measures to develop the market segments.
4. Certificate of Deposits (CD): CDs are similar to the
traditional term deposits but are negotiable and can be traded in
the secondary market. It is often a bearer security and there is a
single payment, principal and interest, at the end of the maturity
period. The bulk of the deposits have very short duration of 1.3 or
6 months. For long term CDs there is a fixed coupon or a floating
rate coupon. For CDs with floating rate coupons, the life of CD is
subdivided into sub periods of usually 6 months. Interest is fixed
at the beginning of each period and is based on LIBOR or US
Treasury Bill rate or prime rate.
In India Certificate of deposits are being issued since 1989, by
banks, either directly to the investors or through the dealers. CDs
are documents of title to time deposits with banks. CDs are
marketable or negotiable short- term instruments in bearer form and
are known as Negotiable Certificates of Deposit.
5. Commercial Paper: Commercial Paper was introduced in January
1990, to enable highly-rated corporate borrowers to diversify their
sources of short-term borrowings and also provide an additional
instrument to the investor. The guidelines issued by the RBI
regulating the issue of commercial paper apply to all non-financial
companies.
Issue of commercial paper: Commercial paper can be issued by a
company whose,
I. Tangible net worth (paid up capital plus free reserve) is not
less than Rs.5 crores;
II. Fund-based working capital limits are not less than Rs.4
crores;
III. Shares are listed on a stock exchange.
6. Commercial Bill Market: Trade bills are drawn by the seller
(drawer) on the buyer (drawee) for the value of goods delivered to
him. Commercial banks as a part of the working capital limits grant
a component for discounting such bills. Normally, 20 percent margin
is kept and the trade bill when presented by the constituent
enjoying working capital credit limits along with bill limit
component, the bank discounts the bill and credits the proceeds to
his account. These bills can be for 30 days, 60 days or 90 days
depending on the credit extended in the industry to which the
constituent belongs. Interest is charged for the time it takes to
collect the bill.
7. Money Market Mutual Funds: Money Market Mutual Funds (MMMFs)
enable small investors to participate in the money market. The
investors can realise through MMMFs, market-related yield.
The MMMFs can be set up by scheduled commercial banks and public
financial institutions. They are allowed to be set up as a separate
entity in the form of Trust. Only individuals can subscribe to
MMMFs. The minimum lock-in period is 15 days. There should be no
guarantee of minimum return. Reserve requirements will not apply to
MMMFs.
The portfolio of MMMFs consists of short-term money market
instruments. Investors can obtain a yield close to money market
rates by investing in MMMFs.
MMMFs are also permitted to offer cheque writing facility to
investors. MMMFs were brought within the purview of SEBI
regulations. Banks and FIs were required to seek clearance from RBI
for setting up MMMFs.
8. Repos/ Reverse Repos: Repo/ reverse repo is a transaction in
which two parties agree to sell and repurchase the same security.
The seller sells specified securities, with an agreement to
repurchase the same at a mutually decided future date and price.
Likewise, the buyer purchases the securities, with an agreement to
resell the same to the seller on an agreed date and at a
predetermined price. The same transaction is repo from the view
point of the seller of the securities and reverse repo from the
view point of the buyer of the securities.
9. RBI Repos: With the objectives of improving short-term
management of liquidity in the system and to even out interest
rates in the call/notice money market, Reserve Bank of India has
been undertaking repos (through auctions) since December 1992. Only
banks and institutions having current account and SGL Account with
RBI at Mumbai were eligible to participate in the repos auctions.
The repos were described to be in the form of sale of dated
government securities by the RBI for very short periods with a
confirmed buy-back provision. Shorter period repos provide greater
maneuverability to Reserve Bank in deciding the quantum of
liquidity to be absorbed and the repo rate depending upon demand
and supply conditions.
FINANCIAL SERVICES
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.
Types of Financial Services
i. Asset / Fund based financial services and
ii. Non-fund / Fee based financial services
i) ASSET / FUND BASED FINANCIAL SERVICE
This involves provision of funds against assets, bank deposits,
etc. Fund based income comes mainly from interest spread (the
difference between the interest earned and interest paid), lease
rentals, income from investments in capital market, real estate,
etc.
Various Asset/Fund Based Services:
· Underwriting - The process by which investment bankers raise
investment capital from investors on behalf of corporations and
governments that are issuing securities (both equity and debt). The
word "underwriter" is said to have come from the practice of having
each risk-taker write his or her name under the total amount of
risk that he or she was willing to accept at a specified premium.
New issues are usually brought to market by an underwriting
syndicate in which each firm takes the responsibility (and risk) of
selling its specific allotment.
· Money Market - A segment of the financial market in which
financial instruments with high liquidity and very short maturities
are traded. The money market is used by participants as a means for
borrowing and lending in the short term, from several days to just
under a year. Money market securities consist of negotiable
certificates of deposit (CDs), bankers, acceptances, U.S. Treasury
bills, commercial paper, municipal notes, federal funds and
repurchase agreements (repos).
· Equipment 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” for a long-term.
· Venture Capital - Venture capital (VC) is financial capital
provided to early- stage, high-potential, high risk, growth startup
companies. The venture capital fund makes money by owning equity in
the companies it invests in, which usually have a novel technology
or business model in high technology industries, such as
biotechnology, IT, software, etc.
· Insurance Services - Insurance is a form of risk management in
which the insured transfers the cost of potential loss to another
entity in exchange for monetary compensation known as premium.
· Hire Purchase - Hire purchase is a mode of financing the price
of the goods to be sold on a future date. In a hire purchase
transaction, the goods are let on hire, the purchase price is to be
paid in installments and hirer is allowed an option to purchase the
goods by paying all the installments.
Non-Fund Based/Fee Based Financial Service
Fee based financial services are those services wherein
financial institutions operate in specialized fields to earn a
substantial income in the form of fees or dividends or brokerage on
operations.
Fee based income does not involve much risk. But, it requires a
lot of expertise on the part of a financial company to offer such
fee-based services Examples ◦ Corporate advisory services ◦ Bank
guarantees ◦ Merchant banking ◦ Issue management ◦ Loan syndication
◦ Credit rating ◦ Stock Broking ◦ M & A, Capital restructuring,
etc. Non-fund based services are also called Services in form of
Advices.
· Merchant banking ◦ A merchant banker is a financial
intermediary who helps to transfer capital from those who possess
it to those who need it. ◦ 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 interest and dividend warrants
· Project counseling - Project counseling services may be
rendered independently or maybe, it relates to project finance and
broadly covers the study of the project and offering advisory
assistance on the project viability and procedural steps for its
implementation broadly including following aspects:- general review
of the project ideas/ project profile, advice on procedural aspects
of project implementation, review of technical feasibility of the
project on the basis of the report prepared by own experts r by the
outside consultants, selecting Technical consultancy Organization
(TCO) for preparing project reports and market survey, or review of
the project reports or market survey report prepared by the TCO,
preparing project report form financial angle, and advice and act
on various procedural steps including obtaining government consents
for implementation of projects. This assistance can include
obtaining of the following approvals/licenses/permission/grants etc
form the govt. agencies viz. letter of intent, industrial license
and DGTD registration and government approval for foreign
collaboration.
· Portfolio Management - refers to the professional management
of securities and other assets also referred to as "asset
management" and "wealth management." Portfolio management includes
a range of professional services to manage an individual's and
company's securities, such as stocks and bonds, and other assets,
such as real estate. The management is executed in accordance
with a specific investment goal and investment profile and takes
into consideration the level of risk, diversification, period of
investment and maturity (i.e. when the returns are needed or
desired) that the investor seeks. In cases of sophisticated
portfolio management, services may include research, financial
analysis, and asset valuation, monitoring and reporting. The fee
for portfolio management services can vary widely among management
companies. In terms of structure, fees may include an
asset-based management fee, which is calculated on the basis of the
asset valuation at the beginning of the service. Since this
fee is guaranteed to the manager, it is typically a lower
amount. Alternatively, the fee may be tied to profits earned
by the portfolio manager for the owner. In such cases, the
risk-based fee is usually much higher.
· Loan syndication
· Similar to consortium financing.
· Taken up by the merchant banker as a lead manager
· It refers to a loan arranged by a bank called lead manager for
a borrower who is usually a large corporate customer or a
government department.
· It also enables the members of the syndicate to share the
credit risk associated with a particular loan among them selves
· Credit rating
· Evaluates the credit worthiness of a debtor, especially a
business (company) or a government
· It is an evaluation made by a credit rating agency of the
debtor’s ability to pay back the debt and the likelihood of
default
· Some credit rating agencies; ICRA, CRISIL, S&P, Moody’s
and so on
· Corporate Advisory Service
Business advisory services involves advises about current and
future business prospects of a client, with the aim of advancing
their business or company. This service is used by all types of
businesses and includes examining the legal, tax, finance, market
and risk factors involved to start up a business or making new
changes to the existing business. Business advisory services are
given by organizations with experience in company formation.
· Bank Guarantees
Bank Guarantee is a contract to perform the promise or discharge
the liability of a third person in case of his default. IndusInd
Bank sanctions Bank Guarantee limit to facilitate issue of
guarantees on behalf of its clients. Various types of guarantees
offered are – financial, performance, bid bond, tenders, customs,
etc. Our guarantees are well accepted. Our overseas correspondent
bank alliances also enable us to issue guarantees overseas for
participation in global tenders, etc.
· Issue management
Project issues must be identified, managed and resolved
throughout the project in order for the project to be successful.
Issue management plays an important role in maintaining project
stability and efficiency throughout the project lifecycle. It
addresses obstacles that can hinder project success and/or block
the project team from achieving its goals. These obstacles can
include such factors as differences of opinion, situations to be
investigated, emerging or unanticipated responsibilities. The
purpose of issue management is to identify and document these
issues and to resolve them by reviewing and carefully considering
all relevant information
· Mergers and Acquisitions
Others Services
· Credit cards: A card issued by a financial company giving the
holder an option to borrow funds, usually at point of sale. Credit
cards charge interest and are primarily used for short-term
financing. Interest usually begins one month after a purchase is
made and borrowing limits are pre-set according to the individuals
credit rating. Card holders normally must pay for credit card
Purchases within 30 days of purchase to avoid interests and/or
penalties.
· Debit cards: An electronic card issued by a bank which allows
bank clients access to their account to withdraw cash or pay for
goods and services. This removes the need for bank clients to go to
the bank to remove cash from their account as they can now just go
to an ATM or pay electronically at merchant locations. This type of
card, as a form of payment, also removes the need for checks as the
debit card immediately transfers money from the clients account to
the business account
· Smart cards: A smart card, typically a type of chip card, is a
plastic card that contains an embedded computer chip–either a
memory or microprocessor type– that stores and transacts data. This
data is usually associated with either value, information, or both
and is stored and processed within the cards chip. The card data is
transacted via a reader that is part of a computing system. Systems
that are enhanced with smart cards are in use today throughout
several key applications, including healthcare, banking,
entertainment, and transportation
· Safe lockers: Strong storage container maintained in the vault
area of a bank and rented to bank customers for safekeeping of
valuables. These boxes are said to be impervious to fire, flood,
and theft, and their contents are covered by the banks insurer.
Access to individual boxes is secured through two different keys:
one kept by the customer, the other by the bank.
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