Month: July 2020

The Life Insurance Corporation was incorporated and started on 19th January 1956. This was done by a merger of 16 insurance company and 75 provident societies on that day. The LIC Act was passed by the Parliament on 18th June 1956, which then came into effect from 1st July 1956.

Life Insurance Corporation has started its journey as a corporate firm from 1st September 1956. Its all working is governed by the LIC Act.

One of the core functions of LIC is an investment. It is an investment institution. Its main function is to gather money from the people and invest it into the different securities and financial markets in India and abroad.

As a rule, LIC is required to invest at least 75% of the funds in Central and State Government securities. Thus LIC is the largest investment institution in India as on date.

It gathers the funds from the people by issuing insurance policies and invest that funds into financial markets in India. It also provides term loan and bonds to gather money from the market.

Not only that, the LIC has become the world’s largest insurance company in terms of a number of policies issued. As of 2019, the total coverage of policies including individual, group and other social schemes has crossed 13 crores.

Objectives of LIC of India

• Spread Life Insurance widely and in particular to the rural areas and to the socially and economically backward classes with a view to reaching all insurable persons in the country and providing them adequate financial cover against death at a reasonable cost.
• Maximize the mobilization of people’s savings by making insurance-linked savings adequately attractive.
• Bear in mind, in the investment of funds, the primary obligation to its policyholders, whose money it holds in trust, without losing sight of the interest of the community as a whole; the funds to be deployed to the best advantage of the investors as well as the community as a whole, keeping in view national priorities and obligations of attractive return.
• Conduct business with utmost economy and with the full realization that the money belongs to the policyholders.
• Act as trustees of the insured public in their individual and collective capacities.
• Meet the various life insurance needs of the community that would arise in the changing social and economic environment.
• Involve all people working in the Corporation to the best of their capability in furthering the interests of the insured public by providing efficient service with courtesy.
• Promote amongst all agents and employees of the Corporation a sense of participation, pride and job satisfaction through discharge of their duties with dedication towards achievement of Corporate Objective.

Functions of LIC

• The main function of LIC is to collect the savings of the people through a life insurance policy and invest that money in various financial markets.
• One of the main functions of LIC is to invest fund into government securities so as to protect the capital of the people who have given their money to LIC.
• LIC has to issue an insurance policy at affordable rates to people.
• LIC provides direct loans to industries at lower interest rates. The rate of interest is as low as 12% for the entire tenure.
• It is one of the major stakeholders in many of the blue-chip companies in the Indian stock market.
• It also provides refinancing activities through SFCs in different states and cities.
• It also invests in the various corporates via bonds and securities, thus supports corporate funding in an indirect way.
• It also gives loan to the various national projects which are important for economic growth.
• It provides financial supports to socially-oriented projects like electrification, sewage, and water channelizing, etc
• It also gives a housing loan at reasonable rates.
• It is the main channel between savings and investment for the people in India.

Activities of LIC

The LIC subscribes to and underwrites the shares, bonds and debentures of several financial corporations and companies and grants term-loans. It maintains a relationship with other financial institutions such as IDBI, UTI, IFCI, etc. for coordination of its investment.

The LIC is a powerful factor in the securities market in India. It subscribes to the share capital of companies, both preference and equity and also to debentures and bonds. Its shareholding extends to a majority of large and medium sized non-financial companies and is significant in size.

It is no doubt to say that the LIC acts as a kind of downward stabilizer of the share market, as the continuous inflow of fresh funds enables it to buy even when the share market is weak.

Investment Policy

The investment policy of the LIC of India should bring a fair return to policy holders consistent with safety. Since the funds at the disposal of the LIC are in the nature of the trust money, they should be invested in such securities which do not diminish in value and give the highest possible return.

In other words, principles of safety, yield, liquidity and distribution should be taken into consideration while investing insurance funds. The way in which these funds are invested is a great significance not only to policy holders but also to the entire economy.

India’s diverse and comprehensive financial services industry is growing rapidly, owing to demand drivers (higher disposable incomes, customized financial solutions, etc.) and supply drivers (new service providers in existing markets, new financial solutions and products, etc.). The Indian financial services industry comprises several key subsegments. These include, but are not limited to- mutual funds, pension funds, insurance companies, stock-brokers, wealth managers, financial advisory companies, and commercial banks- ranging from small domestic players to large multinational companies. The services are provided to a diverse client base- including individuals, private businesses and public organizations.

10 Types of Financial Services:

• Banking
• Professional Advisory
• Wealth Management
• Mutual Funds
• Insurance
• Stock Market
• Treasury/Debt Instruments
• Tax/Audit Consulting
• Capital Restructuring
• Portfolio Management

These financial services are explained below:

1. Banking

The banking industry is the backbone of India’s financial services industry. The country has several public sector (27), private sector (21), foreign (49), regional rural (56) and urban/rural cooperative (95,000+) banks. The financial services offered in this segment include:

• Individual Banking (checking accounts, savings accounts, debit/credit cards, etc.)
• Business Banking (merchant services, checking accounts and savings accounts for businesses, treasury services, etc.)
• Loans (business loans, personal loans, home loans, automobile loans, working-capital loans, etc.)

The banking sector is regulated by the Reserve Bank of India (RBI), which monitors and maintains the segment’s liquidity, capitalization, and financial health.

2. Professional Advisory

India has a strong presence of professional financial advisory service providers, which offer individuals and businesses a wide portfolio of services, including investment due diligence, M&A advisory, valuation, real-estate consulting, risk consulting, taxation consulting. These offerings are made by a range of providers, including individual domestic consultants to large multi-national organizations.

3. Wealth Management

Financial services offered within this segment include managing and investing customers’ wealth across various financial instruments- including debt, equity, mutual funds, insurance products, derivatives, structured products, commodities, and real estate, based on the clients’ financial goals, risk profile and time horizons.

4. Mutual Funds

Mutual fund service providers offer professional investment services across funds that are composed of different asset classes, primarily debt and equity-linked assets. The buy-in for mutual fund solutions is generally lower compared to the stock market and debt products. These products are very popular in India as they generally have lower risks, tax benefits, stable returns and properties of diversification. The mutual funds segment has witnessed double-digit growth in assets under management over the last five years, owing to its popularity as a low-risk wealth multiplier.

5. Insurance

Financial services offerings in this segment are primarily offered across two categories:

• General Insurance (automotive, home, medical, fire, travel, etc.)
• Life Insurance (term-life, money-back, unit-linked, pension plans, etc.)

Insurance solutions enable individuals and organizations to safeguard against unforeseen circumstances and accidents. Payouts for these products vary across the nature of the product, time horizons, customer risk assessment, premiums, and several other key qualitative and quantitative aspects. In India, there is a strong presence of insurance providers across life insurance (24) and general insurance (39) categories. The insurance market is regulated by the Insurance Regulatory and Development Authority of India (IRDAI).

6. Stock Market

The stock market segment includes investment solutions for customers in Indian stock markets (National Stock Exchange and Bombay Stock Exchange), across various equity-linked products. The returns for customers are based on capital appreciation growth in the value of the equity solution and/or dividends and payouts made by companies to its investors.

7. Treasury/Debt Instruments

Services offered in this segment include investments into government and private organization bonds (debt). The issuer of the bonds (borrower) offers fixed payments (interest) and principal repayment to the investor at the end of the investment period. The types of instruments in this segment include listed bonds, non-convertible debentures, capital-gain bonds, GoI savings bonds, tax-free bonds, etc.

8. Tax/Audit Consulting

This segment includes a large portfolio of financial services within the tax and auditing domain. This services domain can be segmented based on individual and business clients. They include:

• Tax: Individual (determining tax liability, filing tax-returns, tax-savings advisory, etc.)
• Tax: Business (determining tax liability, transfer pricing analysis and structuring, GST registrations, tax compliance advisory, etc.)

In the auditing segment, service providers offer solutions including statutory audits, internal audits, service tax audits, tax audits, process/transaction audits, risk audits, stock audits, etc. These services are essential to ensure the smooth operation of business entities from a qualitative and quantitative perspective, as well as to mitigate risk. You can read more about taxation in India.

9. Capital Restructuring

These services are offered primarily to organizations and involve the restructuring of capital structure (debt and equity) to bolster profitability or respond to crises such as bankruptcy, volatile markets, liquidity crunch or hostile takeovers. The types of financial solutions in this segment typically include structured transactions, lender negotiations, accelerated M&A and capital raising.

10. Portfolio Management

This segment includes a highly specialized and customized range of solutions that enables clients to reach their financial goals through portfolio managers who analyze and optimize investments for clients across a wide range of assets (debt, equity, insurance, real estate, etc.). These services are broadly targeted at HNIs and are discretionary (investment only at the discretion of fund manager with no client intervention) and non-discretionary (decisions made with client intervention).

Importance

It is the presence of financial services that enables a country to improve its economic condition whereby there is more production in all the sectors leading to economic growth.

The benefit of economic growth is reflected on the people in the form of economic prosperity wherein the individual enjoys higher standard of living. It is here the financial services enable an individual to acquire or obtain various consumer products through hire purchase. In the process, there are a number of financial institutions which also earn profits. The presence of these financial institutions promote investment, production, saving etc.

Hence, we can bring out the importance of financial services in the following points:

Importance of Financial Services

• Vibrant Capital Market.
• Expands activities of financial markets.
• Benefits of Government.
• Economic Development.
• Economic Growth.
• Ensures Greater Yield.
• Maximizes Returns.
• Minimizes Risks.
• Promotes Savings.
• Promotes Investments.
• Balanced Regional Development.
• Promotion of Domestic & Foreign Trade.

Ensures greater Yield

As seen already, there is a subtle difference between return and yield. It is the yield which attracts more producers to enter the market and increase their production to meet the demands of the consumer. The financial services enable the producer to not only earn more profits but also maximize their wealth.

Financial services enhance their goodwill and induce them to go in for diversification. The stock market and the different types of derivative market provide ample opportunities to get a higher yield for the investor.

Maximizing the Returns

The presence of financial services enables businessmen to maximize their returns. This is possible due to the availability of credit at a reasonable rate. Producers can avail various types of credit facilities for acquiring assets. In certain cases, they can even go for leasing of certain assets of very high value.

Factoring companies enable the seller as well as producer to increase their turnover which also increases the profit. Even under stiff competition, the producers will be in a position to sell their products at a low margin. With a higher turnover of stocks, they are able to maximize their return.

Minimizing the risks

The risks of both financial services as well as producers are minimized by the presence of insurance companies. Various types of risks are covered which not only offer protection from the fluctuating business conditions but also from risks caused by natural calamities.

Insurance is not only a source of finance but also a source of savings, besides minimizing the risks. Taking this aspect into account, the government has not only privatized the life insurance but also set up a regulatory authority for the insurance companies known as IRDA, 1999 (Insurance Regulatory and Development Authority).

Promoting savings

Financial services such as mutual funds provide ample opportunity for different types of saving. In fact, different types of investment options are made available for the convenience of pensioners as well as aged people so that they can be assured of a reasonable return on investment without much risks.

Promoting investment

The presence of financial services creates more demand for products and the producer, in order to meet the demand from the consumer goes for more investment. At this stage, the financial services comes to the rescue of the investor such as merchant banker through the new issue market, enabling the producer to raise capital.

The stock market helps in mobilizing more funds by the investor. Investments from abroad is attracted. Factoring and leasing companies, both domestic and foreign enable the producer not only to sell the products but also to acquire modern machinery/technology for further production.

Expands activities of Financial Institutions

The presence of financial services enables financial institutions to not only raise finance but also get an opportunity to disburse their funds in the most profitable manner. Mutual funds, factoring, credit cards, hire purchase finance are some of the services which get financed by financial institutions.

The financial institutions are in a position to expand their activities and thus diversify the use of their funds for various activities. This ensures economic dynamism.

Benefit to Government

The presence of financial services enables the government to raise both short-term and long-term funds to meet both revenue and capital expenditure. Through the money market, government raises short term funds by the issue of Treasury Bills. These are purchased by commercial banks from out of their depositors’ money.

In addition to this, the government is able to raise long-term funds by the sale of government securities in the securities market which forms apart of financial market. Even foreign exchange requirements of the government can be met in the foreign exchange market.

Economic development

Financial services enable the consumers to obtain different types of products and services by which they can improve their standard of living. Purchase of car, house and other essential as well as luxurious items is made possible through hire purchase, leasing and housing finance companies.

According to E.R.A. Seligman, “The term consumer credit refers to a transfer of wealth, the payment of which is deferred in whole or in part, to future, and is liquidated piecemeal or in successive fractions under a plan agreed upon at the time of the transfer”.

According to Reavis Cox, consumer credit is ‘”a business procedure through which the consumers purchase semi-durables and durables other than real estate, in order to obtain from them a series of payments extending over a period of three months to five years, and obtain possession of them when only a fraction of the total price has been paid”.

Introduction to Consumer Finance

During earlier times the trend of people was to save first and spend later. But today it has been changed to spend today and pay later. The culture, life style, spending pattern, priority of needs etc. have been changed far and wide. Earlier people used to borrow money for construction of a house, to start a business or to purchase some land, or needs of that order. But today people need money for acquiring consumer durables also.

It is felt sometimes that people give more emphasis to amenities than for permanent assets like land, house etc. A stylish house in a posh area, a car, computer, television, stereo system, a cooking range, washing machine, grinder, mobile phone etc. which only a minority used 10 years back have become part of life (or ambition) of an average civilian. As they need money for satisfying these needs naturally facilities to finance also emerge.

The branch of banking which facilitate finance for purchasing consumer durables is called ‘consumer finance’ or ‘consumer credit’. Today it has become part of life of an average Indian as they need credit in large quantity to meet their needs of various kinds. This emerging set of wants and consequent need for funds multiplies the scope and role of consumer finance.

Considering the busy nature of borrowers, fanciers provide customer friendly products and services at their doorstep on easy terms. As India is a country with billions of spend thrift untapped population, who are competing each other in acquiring newer and newer consumer durables and as an element of prestige is linked in owning these assets, it is sure that, without any set back, ‘Consumer Finance’ will have brighter future and will hit better targets in the forthcoming era of consumerism.

Meaning and Concept of Consumer Finance

Consumer finance refers to the raising of finance by individuals for meeting their personal expenditure or for the acquisition of durable consumer goods. It is an important asset based financial service in India. This include credit merchandising, deferred payments, installment buying, hire purchase, pay-out of income scheme, pay-as-you earn scheme, easy payment, credit buying, installment credit plan, credit cards, etc.

Consumer durables include Cars, Two Wheelers, LCD TVs, Refrigerators, Washing Machines, Home Appliances, Personal Computers, Cooking Ranges, and Food Processors etc. Under consumer finance scheme, the consumer or buyer pays a part of the purchase price in cash at the time of the delivery of the asset, the balance with interest over a pre­determined period of time.

The objective of consumer finance is to provide credit easily to the consumer at his door steps. Both private and public sector finance companies provide consumer finance to purchase ‘consumer goods and construction of such goods (building materials, iron rods, cement etc.). Multinational finance companies are also engaged in consumer finance in India. Usually the credit/finance is extended for a period of 2 to 5 years.

Features of Consumer Credit

1. Consumer credit is a method of financing semi-durables and durables.
2. It assists consumers to acquire assets.
3. Consumers get possession of the assets immediately when a fraction of the price is paid.
4. The balance payment is payable in installments over an agreed span of time.
5. The duration of the finance normally ranges between three months to five years,
6. It is an agreement between parties to the contract.
7. When there are only two parties to the contract, it is called a Bipartite Agreement (the customer and the dealer cum financier) and where there are three parties, such agreements are called Tripartite Agreements (the customer, the dealer and the financier.)
8. The structure of financing may by way of hire-purchase, conditional sale or credit sale. In the case of both hire purchase and conditional sale, ownership of the asset is transferred only on completion of all the terms of agreement. But in the case of credit sale ownership is transferred immediately on payment of first installment.
9. Generally advances are made on the security of the asset itself and
10. It involves down payment normally ranging from 20 to 25% of the asset price.

Forms/Types of Consumer Credit

Following are the different forms for financing consumers:

1. Revolving Credit

It is an ongoing credit arrangement. It is similar to overdraft facility. Here a credit limit will be sanctioned to the customer and the customer can avail credit to the extent of credit limit sanctioned by the financier. Credit Card facility is an excellent example of revolving credit.

2. Cash Loan

In this form, the buyer consumer gets loan amount from bank or non- banking financial institutions for purchasing the required goods from seller. Banker acts as lender. Lender and seller are different. Lender does not have the responsibilities of a seller

3. Secured Credit

In this form, the financier advances money on the security of appropriate collateral. The collateral may be in the form of personal or real assets. If the customer makes default in payments, the financier has the right to appropriate the collateral. This kind of consumer credit is called secured consumer credit.

4. Unsecured Credit

When financier advances fund without any security, such advances are called unsecured consumer credit. This type of credit is granted only to reputed customers.

5. Fixed Credit

In this form of financing, finance is made available to the customer as term loan for a fixed period of time i.e., for a period of one to five years. Monthly installment loan, hire purchase etc. are the examples.

Advantages of Consumer Finance

1. Compulsory Savings

Consumer credit promotes compulsory savings habit among the people. To make periodical installments knowingly or unknowingly, people cut short their other expenditures and save. These savings ultimately fetch them ownership of an asset in course of time. Thus consumer credit adds to the savings habit of people.

2. Convenience

Considering the nature and type of customers, consumer credit facility offers schemes to the convenience and satisfaction of the customers. Walk in and drive out, pay as you earn, everything at the door step, one time processing etc. are examples.

3. Emergencies

Consumer credit facility is available to meet personal requirements like family requirements, festival requirements, emergencies etc. The credit facility is not strictly restricted to purchasing of consumer durables alone. In ordinary course of life people come across number of urgent financial requirements, for which consumer credit offers a better solution.

4. Assists to Meet Targets

In all business activities, there will be targets to be achieved by the executives. Most people abstain/ postpone purchasing for want of sufficient fund. When the dealer themselves arrange for fund people get attracted and purchase take place in large quantity. Thus it assists to meet sales targets and profit targets.

5. Assists to Make Dreams to Reality

A car, a TV, a washing machine, a computer, a laptop, a mobile phone, etc. is undoubtedly a dream of an average human being. But people may not purchase because of fund problem. In those cases consumer credit facilitates an opportunity to possess and own those dreams on convenient terms.

6. Enhances Living Standard

Consumer credit enhances living standard of the people by providing latest articles and amenities at reasonable and affordable terms.

7. Accelerates Industrial Investments

Demand for consumer durables enhances further investment in the consumer durables industry. Thus provides more and more employment opportunities in the country.

8. Promotes Economic Development

Demand for consumer durables, further investments in consumer durables industry, increased living standard of people, improved employment opportunities and income etc. improves economic development of the country.

9. Economies of Large Scale Production

Increased demand leads to large scale production. Large scale operations lead to the economies of large scale operation. This in turn leads to lower prices.

10. National Importance

Consumer credit is of national importance in India. Unless there is such a convenient mode of financing, total demand for consumer durables will be far lesser. Poor demand lead to lower production, which in turn lead to poor employment opportunity and lower income level. All these finally land the economy in trouble.

Disadvantages of Consumer Finance

Following are the disadvantages of consumer finance:

1. Promotes Blind Buying

Facility to purchase at somebody else’s money tempts people to buy and buy goods blindly. This may land these people to debt trap within a short while.

2. Leads to Insolvency

Blind buying of goods make these people insolvent/bankrupt within a shorter span of time. This ultimately spoils their life in the long run.

3. Consumer Credit is Costlier

Along with the convenience that it offers it charge the customer for all these conveniences offered. Thus it becomes costlier when compared to other forms of finance.

4. Artificial Boom

The economic development posed by the impact of consumer credit is not real but artificial. Economy will take years to stabilize the artificial boom claimed by the proponents of consumer credit.

5. Bad Debts Risk

By whatever name called credit is always risky so is the case with consumer credit as well. Defaults are a major threat to consumer credit. Once there is a default, repossession and other legal formalities are difficult.

6. Causes Economic Instability

Artificial boom and depression leads to economic instability and causes chaos in the economic progress. It will be difficult for the real ordinary business man to identify real progress and artificial progress.