Month: December 2021

Management Notes

Credit Rating Agencies, Credit Rating Process, Credit Rating Symbols

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Credit Rating Agencies (CRAs) are organizations that assess and evaluate the creditworthiness of individuals, corporations, and governments. They provide independent assessments of the credit risk associated with debt securities, loans, and other financial instruments. Their primary function is to assign ratings that reflect the likelihood of a borrower defaulting on its financial obligations.

The ratings help investors make informed decisions about the risks involved in lending money or investing in bonds, stocks, or other securities. CRAs typically use a letter-based rating system, where AAA represents the highest credit quality, and ratings decrease to reflect higher risk.

In India, prominent credit rating agencies include CRISIL, ICRA, CARE Ratings, and Fitch Ratings. These agencies assess a variety of factors such as financial health, management quality, industry conditions, and market trends when determining a rating. A good credit rating can lower borrowing costs, while a poor rating can make it more expensive or difficult to secure funding.

Functions of Credit Rating Agencies:

  • Credit Assessment

One of the core functions of CRAs is to assess the creditworthiness of an issuer or a debt instrument. This involves analyzing the issuer’s financial health, business performance, credit history, and the external economic environment. Based on this evaluation, CRAs assign a credit rating that indicates the likelihood of the issuer defaulting on their financial obligations. These ratings guide investors on the relative safety of investing in certain debt securities.

  • Providing Ratings

CRAs provide ratings for a variety of financial products, including corporate bonds, municipal bonds, government securities, and structured financial products. They assign ratings based on their analysis, using a scale ranging from high-quality, low-risk ratings (e.g., AAA) to low-quality, high-risk ratings (e.g., D or default). These ratings help investors understand the level of risk involved in investing in specific securities, allowing for better risk management.

  • Monitoring and Surveillance

Credit ratings are not static; they can change based on new information or changes in the issuer’s financial position. CRAs continuously monitor the financial status of rated entities and securities. If an issuer’s financial situation deteriorates or improves, CRAs may revise the ratings accordingly. This ongoing surveillance provides real-time insights into the credit quality of investments, ensuring investors are updated with the latest risk assessments.

  • Facilitating Capital Access

Credit ratings play a vital role in helping issuers access capital markets at favorable terms. Companies and governments with higher credit ratings tend to pay lower interest rates on bonds and loans because they are seen as less risky. By providing an objective evaluation of credit risk, CRAs enable issuers to attract investors and raise capital more effectively. This, in turn, aids in economic development by facilitating business expansion and infrastructure projects.

  • Promoting Transparency

By providing credit ratings, CRAs contribute to greater transparency in the financial markets. They help standardize the assessment of credit risk, allowing investors to compare the risk profiles of different investment options. These ratings reduce information asymmetry between issuers and investors, ensuring that investors are making well-informed decisions based on reliable and transparent data.

  • Supporting Regulatory Frameworks

Credit rating agencies also play an essential role in the regulatory landscape. In many jurisdictions, financial regulations require institutional investors (such as banks, insurance companies, and pension funds) to consider credit ratings when making investment decisions. By adhering to rating agency assessments, these investors can comply with regulatory requirements that ensure they maintain a balanced and diversified portfolio, minimizing systemic risks in the financial system.

Credit Rating Process:

The credit rating process is a structured methodology followed by credit rating agencies (CRAs) to assess the creditworthiness of an issuer or a specific debt instrument. This process involves several steps that evaluate financial stability, business risk, and other factors that affect the issuer’s ability to meet its debt obligations.

1. Request for Rating

The credit rating process begins when an issuer, such as a corporation, government, or financial institution, requests a credit rating from a CRA. This request may involve a new issue of debt, such as bonds, or a review of an existing debt instrument. The issuer may also approach the CRA for a rating on their long-term or short-term financial instruments.

2. Gathering Information

Once the request is made, the CRA gathers comprehensive information from the issuer. This typically includes financial statements, annual reports, projections, management details, and any other relevant data. The agency also collects qualitative data such as industry trends, management quality, and the company’s competitive position in its sector. Other macroeconomic factors, such as interest rates, government policies, and geopolitical conditions, may also be considered in the analysis.

3. Analysis of Information

The CRA conducts a detailed analysis based on the gathered information. This analysis includes a financial assessment of the issuer’s historical performance, profitability, liquidity, leverage, cash flow, and other financial metrics. They also assess the company’s business environment, operational risks, and future growth potential. Additionally, the CRA may look into the issuer’s industry stability, market share, and competitive advantage.

4. Rating Committee

After completing the analysis, a rating committee within the CRA reviews all the information and determines the appropriate credit rating. The committee evaluates the issuer’s credit risk based on predefined rating criteria and benchmarks. The committee also considers factors such as the issuer’s ability to meet short-term and long-term obligations and the overall financial health of the organization. The committee’s decision is based on a consensus approach, ensuring that the rating reflects a balanced and accurate assessment.

5. Assigning the Credit Rating

Once the committee reaches a decision, the CRA assigns a credit rating to the issuer or the debt instrument. The rating scale usually includes categories such as AAA (highest quality) down to D (default). Ratings may be assigned on a long-term or short-term basis. Long-term ratings reflect the issuer’s ability to meet obligations over an extended period, while short-term ratings assess the ability to meet obligations within one year.

6. Rating Publication

After the rating is finalized, the CRA publishes it through press releases, financial reports, and on their website. The rating is made available to investors, analysts, and other stakeholders, providing valuable insights into the credit risk associated with the issuer. This publication helps investors make informed decisions about whether to invest in the issuer’s debt instruments.

7. Monitoring and Surveillance

Credit ratings are not static and can change over time based on new information or changes in the issuer’s financial condition. CRAs continuously monitor the rated entities and their financial performance. They track developments such as changes in revenue, profitability, debt levels, and external factors like changes in interest rates or economic conditions. If the CRA identifies significant changes that impact the credit risk, it may revise the rating.

8. Rating Review and Revisions

CRAs periodically review their ratings based on the surveillance process. If the issuer’s financial health improves or worsens, the rating may be upgraded or downgraded, respectively. Ratings are also updated if there is a material change in the company’s business model, market conditions, or management structure. Issuers may request a review of their rating at any time if they believe their financial position has changed, and they may provide updated information to the CRA.

9. Post-Rating Communication

Once a rating is assigned and published, CRAs maintain communication with the issuer. The issuer may request clarifications or an explanation of the rating rationale. CRAs also provide guidance on factors that may influence future rating actions, including financial strategies, industry trends, or operational improvements. Issuers are encouraged to maintain transparency with CRAs and update them on any significant developments.

Credit Rating Symbols:

Credit rating symbols are standardized notations used by credit rating agencies (CRAs) to convey the creditworthiness of an issuer or a debt instrument. These symbols are assigned after evaluating an entity’s financial stability, risk profile, and its ability to meet debt obligations. The symbols vary slightly across different rating agencies, but they generally follow a similar structure.

1. Long-Term Rating Symbols

Long-term ratings assess the issuer’s ability to meet its debt obligations over an extended period (typically more than one year). The symbols used for long-term ratings are as follows:

AAA (Triple A)

  • Represents the highest level of creditworthiness.
  • Indicates that the issuer has an extremely low risk of defaulting on its debt obligations.
  • Commonly used for sovereign governments with a stable financial outlook.

AA (Double A)

  • Slightly lower than AAA but still denotes a very strong ability to meet debt obligations.
  • Issuers in this category have a low default risk.

A

  • Represents a strong creditworthiness, though there is slightly more risk than in the AA category.
  • Still considered a low-risk investment, though economic or business changes could have a moderate impact on repayment.

BBB

  • Denotes an adequate level of creditworthiness, with moderate credit risk.
  • These issuers have the capacity to meet obligations, but risks related to market or economic changes may affect their ability to do so.

BB and below

  • These ratings indicate a higher level of risk.
  • BB, B, CCC, CC, and C ratings are assigned to entities with a higher likelihood of default.
  • D represents default, where the issuer has failed to meet its debt obligations.

2. Short-Term Rating Symbols

Short-term ratings assess an issuer’s ability to meet debt obligations that are due within a year. These ratings are commonly used for instruments like commercial papers or short-term bonds.

  • A-1

Indicates the highest creditworthiness in the short-term, with the lowest risk of default.

  • A-2

Slightly lower than A-1 but still represents strong short-term creditworthiness.

  • A-3

Represents a good short-term ability to meet obligations but with a higher level of risk than A-1 and A-2.

  • B and below

These ratings indicate a higher probability of default in the short term.

3. Modifiers

Some agencies use modifiers (such as “+” or “-“) to further refine the rating.

“+” or “-” Modifiers

  • For example, a rating of AA+ or AA- provides more granular information. AA+ is slightly higher than AA, and AA- is slightly lower.
  • These modifiers help investors understand the relative position of an issuer within the rating category.

4. Other Symbols

Some credit rating agencies use additional symbols to indicate specific conditions or outlooks:

Outlook Ratings

  • Positive Outlook: Indicates a potential upward movement in the credit rating.
  • Negative Outlook: Indicates a potential downward movement in the credit rating.
  • Stable Outlook: Suggests that the rating is unlikely to change in the near future.

Watchlist

Some agencies may place an issuer on “Credit Watch” if there is a possibility of a significant change in its credit rating.

Agencies:

  • ICRA (Investment Information and Credit Rating Agency of India Limited)

ICRA is a credit rating agency in India that provides ratings, research, and risk management services. Established in 1991, ICRA is an associate of Moody’s Investors Service. It offers credit ratings for debt instruments, commercial papers, and long-term loans across various sectors, including banking, finance, and infrastructure. ICRA’s ratings are widely used by investors, issuers, and financial institutions to gauge the credit risk associated with entities. The agency also offers specialized services in risk management, financial modeling, and portfolio management.

  • CARE (Credit Analysis and Research Limited)

CARE is a leading credit rating agency in India, founded in 1993. It provides credit ratings, research, and risk analysis services across various sectors, including corporate, financial institutions, and government entities. CARE’s ratings are aimed at helping investors, lenders, and other stakeholders assess the creditworthiness of borrowers. The agency also offers research and risk management services to enhance decision-making processes. CARE is widely trusted in India for its comprehensive ratings and research, which help in identifying investment risks and promoting financial stability.

  • Moody’s

Moody’s is an international credit rating agency headquartered in New York. It provides credit ratings, research, and risk analysis for companies, governments, and financial institutions globally. Founded in 1909, Moody’s is known for its in-depth analysis of credit risks and its ability to assess the financial health of a wide range of entities. Moody’s assigns ratings on a scale from Aaa (highest quality) to C (default). Moody’s services are vital to investors who rely on credit ratings to evaluate investment risks and make informed decisions in global markets.

  • S&P (Standard & Poor’s)

S&P is a global financial services company known for providing credit ratings, research, and risk analysis. Established in 1860, S&P is one of the largest credit rating agencies in the world and is part of S&P Global. It offers ratings on a wide range of instruments, including sovereign debt, corporate bonds, and mortgage-backed securities. S&P’s ratings range from AAA (highest quality) to D (default). S&P’s ratings are widely used by investors, financial institutions, and governments to assess credit risk and make informed investment decisions.

Management Notes

Credit Rating, Meaning, Origin, Features, Agencies, Regulatory Framework, Advantages

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Credit rating is an evaluation of the creditworthiness of an individual, corporation, or country, assessing the likelihood of repaying debt obligations. It is typically represented by a letter grade (e.g., AAA, BB, etc.), with higher ratings indicating a lower risk of default. Credit rating agencies, such as Standard & Poor’s, Moody’s, and Fitch, conduct these assessments based on factors like financial history, economic conditions, and debt levels. A good credit rating enables access to favorable loan terms, while a poor rating may result in higher interest rates or difficulty obtaining credit.

Origin of Credit rating

The origin of credit rating dates back to the late 19th century, primarily in the United States, when the need for assessing credit risk in financial transactions became increasingly apparent. The first formal credit rating agency was founded in 1909 by John Moody. Moody’s Investors Service initially focused on evaluating railway bonds, a vital sector at the time, to help investors make informed decisions.

As the economy grew, so did the complexity of financial markets. In 1916, Standard & Poor’s (S&P) was established, and it began rating corporate bonds and government securities. Together with Moody’s, these agencies helped bring transparency to financial markets, offering independent assessments of the creditworthiness of borrowers.

In the 1930s, Fitch Ratings joined the ranks, further expanding the industry’s reach. These agencies played an essential role in post-World War II financial markets, aiding in the recovery and growth of international economies by providing reliable credit information.

Today, credit rating agencies have become integral to global finance, offering credit ratings not only for corporations but also for countries, municipalities, and various financial instruments. Their evaluations influence investor decisions, determine loan terms, and help manage risk in financial markets.

Features of Credit Rating

  • Independent Assessment

Credit ratings are provided by independent agencies that evaluate the creditworthiness of borrowers, such as individuals, companies, or governments. These ratings are unbiased and objective, offering a third-party perspective on an entity’s ability to meet its financial obligations. Independent assessments help investors make informed decisions by providing an impartial view of the borrower’s financial health and stability. As a result, credit ratings are a critical tool in financial markets for assessing risk and managing investments effectively.

  • Rating Scale

Credit ratings use a standardized rating scale to denote an entity’s creditworthiness. Typically, this scale ranges from high ratings like “AAA” or “Aaa” (indicating low default risk) to lower ratings such as “D” (indicating default). The ratings also include intermediate levels such as “BBB” or “Baa,” which reflect varying degrees of credit risk. Each credit rating agency may have slight variations in its system, but the general idea is to categorize borrowers based on their likelihood of repayment.

  • Forward-Looking Assessment

Credit ratings are forward-looking, meaning they consider the future ability of an entity to repay its debts, rather than just past performance. Agencies evaluate factors like economic trends, business strategies, and potential changes in financial conditions. For example, the ratings may factor in projections about the company’s future cash flows, market conditions, and any other external influences that could affect its ability to meet financial obligations. This future-oriented approach helps investors assess potential risks that could emerge in the coming years.

  • Influence on Borrowing Costs

A key feature of credit ratings is their direct impact on borrowing costs. Entities with higher ratings (e.g., “AAA”) can generally borrow money at lower interest rates, as lenders view them as less risky. Conversely, borrowers with lower ratings face higher interest rates, as they are perceived as riskier. This reflects the relationship between risk and return—lenders require higher compensation for taking on more risk. As such, credit ratings directly influence the cost of financing for businesses, governments, and individuals.

  • Subject to Periodic Reviews

Credit ratings are not static; they are subject to periodic reviews. Rating agencies reassess entities’ creditworthiness on an ongoing basis, considering changes in financial conditions, economic environment, and market conditions. If an entity’s financial position improves or deteriorates, its credit rating may be upgraded or downgraded accordingly. This dynamic nature of credit ratings ensures that investors have access to the most up-to-date and relevant information about a borrower’s ability to repay debts.

  • Impact on Market Perception

Credit rating has a significant impact on market perception. A high rating can enhance an entity’s reputation, making it easier for them to attract investors, secure funding, and engage in business relationships. On the other hand, a downgrade or low rating may result in a loss of investor confidence, making it harder for the entity to raise funds or attract capital. Thus, credit ratings influence not only the financial decisions of investors but also the entity’s standing in the market.

  • Regulatory Importance

Credit ratings hold significant regulatory importance in various financial markets. Many institutional investors, such as banks, insurance companies, and pension funds, are legally required to invest only in securities with a certain credit rating. For example, highly rated bonds are often considered safe assets for holding in regulatory capital reserves. In some jurisdictions, regulatory frameworks stipulate that financial institutions must follow credit rating guidelines to ensure financial stability and protect investors.

  • Transparency and Disclosure

Credit rating agencies are required to maintain transparency and disclose their methodology, which helps stakeholders understand how ratings are assigned. This includes explaining the criteria used in the evaluation process, the data sources, and the assumptions made in the analysis. The transparency of these processes is crucial to maintaining trust in the credit rating system. Clear and accessible ratings data allows investors to make well-informed decisions, and it also helps ensure that credit ratings are consistent and reliable across different sectors and regions.

Agencies of Credit Ratings

1. CRISIL (Credit Rating Information Services of India Limited)

Established in 1987, CRISIL is India’s first credit rating agency and a global analytical company. It provides ratings, research, and risk policy advisory services. Owned by S&P Global, CRISIL offers credit ratings to corporates, banks, and financial institutions, helping investors assess creditworthiness. It also publishes sectoral reports and economic research. CRISIL plays a key role in enhancing transparency and accountability in financial markets. Its ratings are used widely for debt instruments, mutual funds, and structured finance. CRISIL’s strong methodologies and international linkages make it a trusted name in India and globally.

Functions of CRISIL

  • Credit Assessment: Evaluates the financial strength and repayment capacity of companies and securities.

  • Rating Issuance: Assigns ratings to bonds, debentures, and commercial papers based on risk analysis.

  • Research Services: Offers market research, risk analysis, and economic insights.

  • Advisory Services: Guides companies on risk management, financial strategies, and capital market operations.

2. ICRA (Investment Information and Credit Rating Agency)

ICRA was founded in 1991 and is a prominent credit rating agency headquartered in India. It was established by leading financial institutions and is partially owned by Moody’s Investors Service. ICRA provides credit ratings, performance assessments, and advisory services for various entities, including companies, banks, and governments. It helps investors make informed financial decisions by evaluating the risk level associated with bonds and financial instruments. ICRA also publishes research and sectoral analysis. Its credibility, analytical rigor, and independent approach make it one of the most trusted names in India’s financial ecosystem.

Functions of ICRA

  • Credit Rating Services: ICRA assigns ratings to bonds, debentures, loans, commercial papers, and structured finance instruments based on credit risk.

  • Research and Analysis: Provides economic research, industry studies, and market insights.

  • Risk and Advisory Services: Offers guidance on risk management, corporate governance, and financial strategies.

  • Assessment of SMEs and Infrastructure Projects: Evaluates credit risk for small enterprises and large infrastructure projects.

3. CARE (Credit Analysis and Research Limited)

CARE Ratings was incorporated in 1993 and is one of India’s largest credit rating agencies. It provides credit ratings for a broad range of financial instruments including bonds, debentures, commercial papers, and bank loans. CARE’s evaluations are crucial for companies seeking capital, as they influence investor decisions and borrowing costs. CARE is known for its independent analysis, transparent methodologies, and sector-specific expertise. Besides ratings, it also offers industry research and valuation services. The agency helps improve market efficiency and investor protection by providing timely and reliable credit risk assessments.

4. Brickwork Ratings

Established in 2007, Brickwork Ratings is a SEBI-registered credit rating agency in India, backed by Canara Bank. It provides credit ratings for banks, NBFCs, corporate bonds, SMEs, and municipal corporations. Brickwork Ratings aims to strengthen India’s financial system by offering independent, credible, and timely credit opinions. The agency also contributes to financial market development by providing educational content and research. With a focus on financial inclusion, it has a significant presence in rating SMEs and local bodies. Brickwork uses robust methodologies, ensuring transparency and accuracy in its assessments. It plays a growing role in India’s rating industry.

Regulatory Framework of Credit Rating

In India, the regulatory framework for credit rating is primarily governed by the Securities and Exchange Board of India (SEBI). SEBI, which is the apex regulator of the securities market in India, oversees and regulates credit rating agencies (CRAs) under the SEBI (Credit Rating Agencies) Regulations, 1999. These regulations establish guidelines for the registration, functioning, and responsibilities of CRAs in India.

The credit rating agencies must register with SEBI before they can operate in the Indian market. They are also required to adhere to certain operational standards, including disclosure requirements, transparency in rating processes, and regular updating of ratings.

National Stock Exchange of India (NSE) and Bombay Stock Exchange (BSE) also play important roles in ensuring that credit ratings are publicly available, providing a platform for investors and other market participants to access rating information for decision-making.

Additionally, the Reserve Bank of India (RBI) regulates the credit ratings of entities in the banking and financial sectors. These frameworks ensure the credibility and integrity of the ratings, providing investors with reliable information to assess the creditworthiness of different entities, thus contributing to the stability and transparency of India’s financial markets.

Advantages of Credit Rating

  • Helps in Accessing Capital Markets

Credit ratings improve a company’s access to capital markets. By obtaining a good credit rating, companies can attract more investors, facilitating the raising of funds through bonds or other financial instruments. This easier access to capital helps organizations to expand, invest in new projects, or reduce borrowing costs. A strong rating demonstrates to investors that the company is financially stable and capable of meeting its debt obligations, making them more willing to invest.

  • Lower Borrowing Costs

One of the significant advantages of a high credit rating is the ability to secure lower borrowing costs. Lenders and investors perceive low-rated borrowers as high-risk, requiring higher interest rates to compensate for that risk. Conversely, businesses with high ratings can borrow money at lower rates, reducing the overall cost of financing. This lower cost of borrowing can significantly improve profitability, as businesses can invest at more favorable terms, allowing for more efficient financial management.

  • Enhances Credibility and Reputation

A strong credit rating enhances a company’s credibility and reputation in the market. It signals to investors, creditors, and customers that the business is financially sound, trustworthy, and reliable in fulfilling its financial obligations. This reputation helps build stronger relationships with suppliers, investors, and other stakeholders, as they are more likely to engage in transactions with businesses they consider financially stable. A high credit rating also boosts confidence in the company’s long-term prospects.

  • Facilitates Better Terms and Conditions

Companies with high credit ratings are more likely to negotiate favorable terms with suppliers, banks, and creditors. These businesses can obtain longer repayment periods, lower interest rates, and other beneficial terms that improve their cash flow and financial flexibility. As they are viewed as low-risk, lenders and suppliers may offer more lenient payment terms, helping businesses manage their working capital more efficiently and effectively. This can contribute to greater operational efficiency and reduce financial strain.

  • Improves Investor Confidence

A strong credit rating boosts investor confidence, making it easier for companies to attract equity investments. Investors are more likely to invest in companies with solid ratings because they view them as lower-risk and better-positioned for financial stability. As investors seek stable returns, a company’s credit rating serves as a key factor in assuring them that their investments are safe. Strong ratings also ensure smoother relationships with venture capitalists, private equity firms, and institutional investors.

  • Risk Management and Planning

Credit ratings help businesses with better risk management and financial planning. By understanding their rating, businesses can assess the impact of various financial decisions and market conditions on their creditworthiness. A poor rating may alert companies to financial instability, prompting corrective actions like improving debt management or increasing cash reserves. Conversely, a strong rating allows businesses to explore growth opportunities with greater confidence. Regular monitoring of credit ratings enables companies to anticipate market changes and align their strategies accordingly.

Management Notes

Marketing and Insurance of Consumer Finance

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Marketing

Customer Outreach

Customer outreach is one of the oldest and simplest marketing strategies for banks and financial institutions to adopt. However, it’s also one of the most effective. Customer outreach is quite simply the concept of reaching out to customers to fill existing needs surrounding education, awareness, and help. This scales to a small organization in the form of free consultations and webinars and to larger ones in the form of financial education such as debt management programs or financial education in schools.

Social Media

61% of the India population is on a social media account and many use social for up to 4-5 hours per day. Your smart and consistent use of one or more social media platforms is a valuable financial marketing strategy that you cannot afford to ignore. Millennials, Generation Z, and even Baby Boomers use social media platforms to connect with brands, learn from peers, and follow current events and news. Maintaining a steady presence on one or more sites with a strategy in place to offer value to followers will help you to build brand trust, create marketing opportunities, and grow your customer base.

Self-Service and Digitization

Where baby boomers and previous generations largely preferred to receive products through sales representatives who could advise them and set up personalized (or not) accounts for them, millennials and Generation Z often want to do everything themselves with as little contact with human representatives as possible. Setting up and promoting digitized financial products and customer service or experience portals that enable customers to sign up for services online, change products and services online, and view their information without going into a branch is an effective and increasingly necessary trend for financial organizations. However, it is not a marketing strategy that applies to every organization, as you may not sell products only services.

Digital Storytelling

Storytelling is still one of the most effective marketing mediums, whether on social media, video, ads, or cross-channel platforms extending into the real world. Here, your marketing strategy should encompass telling a story that captures interest and evokes emotion to interest, excite, and move the viewer. Here, your goal is to create relatable and shareable content which can educate, entertain, or help the reader in some way and hopefully manage all three at once.

Automation and Big Data

Most financial organizations have more data than they know what to do with, but that is quickly changing. Today, customer experience platforms and automation tools make it easier than ever to utilize and apply data as part of your marketing strategy for financial services. For example, big data can tell you who is saving up for a big purchase and most likely to need pre-approval for a loan, big data can help you identify and offer services before or after they are needed, it can help you to target specific customers for additional customer service or digital financial education, and can help you to cut down on needed customer service.

Insurance

CCI covers your payments in the event of death, permanent disability or loss of income due to injury, illness or involuntary unemployment. Your CCI policy may pay the outstanding balance owed in a lump sum or cover your repayments for a period of time.

If a claim is approved, the insurer pays the money to the lender, not to the consumer.

CCI may also include merchandise protection cover, which covers damage, loss or theft of merchandise purchased with the loan product. It can also include stolen credit card cover, which provides a lump sum benefit if your credit card is stolen.

Consumer credit insurance (CCI) covers you if something happens to you that affects your ability to meet your credit repayment.

You may be offered CCI cover by your lender when it approves your credit (such as a credit card, personal loan or mortgage). Check that the lender’s product suits your needs it is wise to get other quotes as you might find a CCI policy that suits you better through another insurer.

Types:

Credit Disability Insurance

This coverage pays your minimum payment to your credit card issuer if you become disabled. You may have to be disabled for a certain amount of time before the insurance will kick in. There may be a waiting period before the benefit pays out. You can’t add this insurance and make a claim on the same day.

Credit Life Insurance

Credit life insurance pays off your credit card balance if you die. This prevents your loved ones from having to pay your balance out of your estate.

Credit Unemployment Insurance

Credit unemployment insurance makes your minimum payment for you if you lose your job through no fault of your own. The benefit doesn’t kick in if you quit or you’re fired. You may have to be out of work for a certain amount of time before the insurance takes over your payments.

Trade Credit Insurance

Trade credit insurance protects businesses that sell goods and services on credit. It shields them against the risk that clients won’t pay what they owe due to insolvency. A few other events may also be covered. Most consumers won’t need this type of insurance.

Credit Property Insurance

This protects any personal property you’ve used to secure a loan if that property is destroyed or lost due to theft, accident, or a natural disaster.

University of Mumbai BMS Notes

Performance of Credit Cards and Debit Cards

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Key Performance Indicators, popularly known as KPIs, are very important in the evaluation of business performance on different levels. They basically represent a set of measures that focus on important aspects of business performance for the overall success of the business. KPIs in the credit world are invaluable for the following reasons:

  • They help a business to stay focused on productivity.
  • They give you an insight into the overall health of your portfolio.
  • Through the generated data, you can get easy and actionable insights that will drive your business to profitability.

There is so much risk-taking in a credit card business. Since companies are always at risk of losing a high amount of money, they have to constantly evaluate just how safe the business is. They also need to evaluate the information protection measures in order to improve their system stability and the security of the business.  For every financial institution, it is important to always evaluate its credit risk from the expected revenue and the expected loss. Every part of credit card processing needs to be gauged to track down how each operation has been occurring after a certain period of time.

Performance of Debit Cards

Building Customer Loyalty

A growing body of research shows that highly active debit cards drive overall customer engagement, strengthening a bank’s relationship with its customers and increasing their loyalty.

Optimizing debit portfolios and driving debit card usage can pay dividends beyond the value of additional transactions. A highly engaged current-account consumer can generate substantially more revenue for a bank by remaining more loyal and adopting multiple banking products.

Highly-engaged debit consumers are also big e-commerce shoppers, using both debit and credit cards, and they’re more prone to want the latest technologies. According to Digital Transactions, a recent survey by Auriemma Consulting Group found that the use of debit cards is increasing for online and big-ticket purchases, a sign of rising consumer trust in e-commerce and confidence in personal finances.

Cross-Sell Opportunities

At the same time, debit can boost cross-sell opportunities for banks. The more a customer uses a debit card, the stronger their relationship is with the bank, and the greater the chance that they will expand the relationship to additional products and act as a brand advocate. As a result, banks can more easily migrate customers from initial checking and savings accounts to credit, loans, investments and new technologies like contactless and digital wallets. For example, if a highly-engaged debit customer decides to buy a home, the bank holding the debit account is more likely to be top of mind when shopping for a mortgage.

University of Mumbai BMS Notes

Prevention of Frauds and Misuse, Consumer Protection. Indian Scenario

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Debit card fraud occurs when a criminal gains access to your debit card number and in some cases, personal identification number (PIN) to make unauthorized purchases or withdraw cash from your account. There are many different methods of obtaining your information, from unscrupulous employees to hackers gaining access to your data from a retailer’s insecure computer or network. Fortunately, it doesn’t take any special skills to detect debit card fraud.

When your debit card is used fraudulently, the money goes missing from your account instantly. Payments you’ve scheduled or checks you’ve mailed may bounce, and you may not be able to afford necessities. It can take a while for the fraud to be cleared up and the money restored to your account.

Credit card fraud is an inclusive term for fraud committed using a payment card, such as a credit card or debit card. The purpose may be to obtain goods or services or to make payment to another account, which is controlled by a criminal. The Payment Card Industry Data Security Standard (PCI DSS) is the data security standard created to help financial institutions process card payments securely and reduce card fraud.

Credit card fraud can be authorised, where the genuine customer themselves processes a payment to another account which is controlled by a criminal, or unauthorised, where the account holder does not provide authorisation for the payment to proceed and the transaction is carried out by a third party. In 2018, unauthorised financial fraud losses across payment cards and remote banking totalled £844.8 million in the United Kingdom. Whereas banks and card companies prevented £1.66 billion in unauthorised fraud in 2018. That is the equivalent to £2 in every £3 of attempted fraud being stopped.

Credit cards are more secure than ever, with regulators, card providers and banks taking considerable time and effort to collaborate with investigators worldwide to ensure fraudsters aren’t successful. Cardholders’ money is usually protected from scammers with regulations that make the card provider and bank accountable. The technology and security measures behind credit cards are becoming increasingly sophisticated making it harder for fraudsters to steal money.

Protection

Go Paperless

Signing up for paperless bank statements will eliminate the possibility of having bank account information stolen from your mailbox. Shredding existing bank statements and debit card receipts using a paper shredder when you’re done with them will significantly reduce the possibility of having bank account information stolen from your trash.

Get Banking Alerts

In addition to checking your balance and recent transactions online daily, you can sign up for banking alerts. Your bank will then contact you by email or text message when certain activity occurs on your accounts, such as a withdrawal exceeding an amount you specify or a change of address.

Don’t Make Purchases with Your Debit Card

Use a credit card, which offers greater protection against fraud, rather than a debit card.

Destroy Old Debit Cards

Some shredders will take care of this for you; otherwise, your old card floating around puts your information at risk.

Don’t Keep All Your Money in One Place

If your checking account is compromised, you want to be able to access cash from another source to pay for necessities and meet your financial obligations.

Stick to Bank ATMs

Bank ATMs tend to have better security (video cameras) than automated teller machines at convenience stores, restaurants, and other places.

Beware of Phishing Scams

When checking your email or doing business online, make sure you know who you’re interacting with. An identity thief may set up a phishing web site that looks like it belongs to your bank or another business you have an account with. In reality, the scammer is looking to get access to your personal information and may attempt to access your bank account.

Use a Secured Network

Don’t do financial transactions online, when using your mobile devices or computer in a public place or over an unsecured network.

Protect Your Computer and Mobile Devices

Use firewall, anti-virus, and anti-spyware software on your computer and mobile devices, while keeping it updated regularly.

Card information is stored in a number of formats. Card numbers formally the Primary Account Number (PAN) are often embossed or imprinted on the card, and a magnetic stripe on the back contains the data in a machine-readable format. Fields can vary, but the most common include Name of the card holder; Card number; Expiration date; and Verification CVV code.

In Europe and Canada, most cards are equipped with an EMV chip which requires a 4-to-6-digit PIN to be entered into the merchant’s terminal before payment will be authorized. However, a PIN isn’t required for online transactions. In some European countries, if you don’t have a card with a chip, you may be asked for photo-ID at the point of sale.

In some countries, a credit card holder can make a contactless payment for goods or services by tapping their card against a RFID or NFC reader without the need for a PIN or signature if the cost falls under a pre-determined limit. However, a stolen credit or debit card could be used for a number of smaller transactions prior to the fraudulent activity being flagged.

Card issuers maintain several countermeasures, including software that can estimate the probability of fraud. For example, a large transaction occurring a great distance from the cardholder’s home might seem suspicious. The merchant may be instructed to call the card issuer for verification or to decline the transaction, or even to hold the card and refuse to return it to the customer.

Management Notes

Smart Cards Features, Types, Security Features and Financial Applications

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A smart card, chip card, or integrated circuit card (ICC or IC card) is a physical electronic authorization device, used to control access to a resource. It is typically a plastic credit card-sized card with an embedded integrated circuit (IC) chip. Many smart cards include a pattern of metal contacts to electrically connect to the internal chip. Others are contactless, and some are both. Smart cards can provide personal identification, authentication, data storage, and application processing. Applications include identification, financial, mobile phones (SIM), public transit, computer security, schools, and healthcare. Smart cards may provide strong security authentication for single sign-on (SSO) within organizations. Numerous nations have deployed smart cards throughout their populations.

The universal integrated circuit card, or SIM card, is also a type of smart card. As of 2015, 10.5 billion smart card IC chips are manufactured annually, including 5.44 billion SIM card IC chips.

Magnetic stripe technology remains in wide use in the United States. However, the data on the stripe can easily be read, written, deleted or changed with off-the-shelf equipment. Therefore, the stripe is really not the best place to store sensitive information. To protect the consumer, businesses in the U.S. have invested in extensive online mainframe-based computer networks for verification and processing. In Europe, such an infrastructure did not develop — instead, the card carries the intelligence.

The microprocessor on the smart card is there for security. The host computer and card reader actually “talk” to the microprocessor. The microprocessor enforces access to the data on the card. If the host computer read and wrote the smart card’s random access memory (RAM), it would be no different than a diskette.

Smarts cards may have up to 8 kilobytes of RAM, 346 kilobytes of ROM, 256 kilobytes of programmable ROM, and a 16-bit microprocessor. The smart card uses a serial interface and receives its power from external sources like a card reader. The processor uses a limited instruction set for applications such as cryptography.

The most common smart card applications are:

  • Credit cards
  • Electronic cash
  • Computer security systems
  • Wireless communication
  • Loyalty systems (like frequent flyer points)
  • Banking
  • Satellite TV
  • Government identification

Features

Secure data storage. Smart cards provide a way to securely store data on the card. This data can only be accessed through the smart-card operating system by those with proper access rights. This feature can be utilized by a system to enhance privacy by storing personal user data on the card rather than in a central database, for example. In this situation, the user has better knowledge and control of when their personal data is being granted access and who is involved.

Authentication. Smart cards provide ways to authenticate others who want to gain access to the card. These mechanisms can be used to validate users, devices, or applications wishing to use the data on the card’s chip. These features can protect privacy by ensuring that a banking application has been authenticated as having the appropriate access rights before accessing financial data or functions on the card, for example.

Encryption. Smart cards provide a robust set of encryption capabilities, including key generation, secure key storage, hashing, and digital signing. These capabilities can be used to protect privacy in many ways. For example, a smart-card system can produce a digital signature for an e-mail message, providing a way to validate the e-mail’s authenticity. This protects the message from being tampered with, and also provides the recipient with assurance about origination. The fact that the signing key originated from a smart card adds credibility to the origin and the intent of the signer.

Secure communications. Smart cards provide secure communication between the card and reader. Similar to security protocols used in many networks, this feature allows smart cards to send and receive data in a secure, private manner.

Biometrics. Smart cards provide ways to securely store biometric templates and perform biometric matching functions. These features can be used to improve privacy in systems that use biometrics.

Strong device security. Smart-card technology is extremely difficult to duplicate or forge, and has built-in tamper resistance. Smart-card chips include a variety of hardware and software capabilities that detect and react to tampering attempts, and help counter possible attacks.

Personal device. A smart card is, of course, a personal and portable device associated with a particular cardholder. The smart-card plastic is often personalized, providing an even stronger binding to the cardholder. These features, while somewhat obvious, can be leveraged to improve privacy. For example, a healthcare application might elect to store prescription information on the card vs. on paper to improve the accuracy and privacy of patient prescriptions.

Types

Contact less Smart Card:

This type of smart card establishes connection with the card reader without any physical contact. It consists of an antenna by means of which it is used to communicate using radio frequency band with the antenna on the reader. It receives power from the reader via the electromagnetic signal.

Contact Smart Card:

This type of smart cards is embedded with electrical contacts which are used to connect to the card reader where the card is inserted. The electrical contacts are deployed on a conductive gold-plated coating on the card surface.

Dual-interface cards:

This type of smart card is equipped with both contact less and contact interfaces. This type of card enables secure access to the smart card’s chip with either the contact less or contact smart card interfaces.

Memory based smart card:

This type of smart cards are embedded with memory circuits. It stores, reads and writes data to a particular location. It is straight memory card which is only used to store data or a protected memory card with a restricted access to the memory and which can be used to write data. It can also be a rechargeable or a disposable card which contains memory units which can be used only once.

Microprocessor based smart card:

This type of smart cards consists of microprocessor embedded onto the chip in addition to the memory blocks. It also consists of specific sections of files related with a particular function. It allows for data processing and manipulations and can be used for multi functioning.

Hybrid smart card:

Hybrid smart card embedded with both memory and microprocessor. Two different chips are used for different applications connected to a single smart card based on the different functionality as the proximity chip is used for physical access to prohibited areas while the contact smart card chip is used for sign in authentication.

Security Features

Laser Engraving:

Using different laser types with varying wavelengths, names, card numbers or other inscriptions can be engraved into cards in a manner that is easy on the card material. Through engraving, labelling is not removable. The process of engraving labels has simple and variable programming.

Ghost Images:

A ghost image is a semi-visible graphic, usually another photo of the cardholder, which is applied to the card. Sometimes ID numbers or logos with reduced transparency are also printed into the background of the card. The process is inexpensive and can be copied only with great difficulty.

Photos:

The most obvious and widely used security feature for personal identification is a passport photo. These are applied to the card in high quality through color printing, usually using the inkjet drop-on-demand method or sometimes through laser engraving and other techniques. Passport photos have the great advantage of functioning without a reading device. In addition, supplemental bio-metric data can be added to photos on driver’s licenses or ID cards to render them machine-readable.

Signature:

In addition to photos, reference signatures on cards are also a common safety feature, including when paying by debit or credit card. Security signature fields increase the copy protection in that the signing area can be damaged obviously by friction or contact with chemicals.

Financial Applications

Healthcare

With health care data rapidly increasing, smart cards assist with maintaining the efficiency of patient care and privacy safeguards. The cards allow medical facilities to safely store information for a patient’s medical history, instantly access the information and update it if needed and reduce health care fraud. Instant patient verification provides for immediate insurance processing. In addition, smart cards enable compliance with government initiatives, such as organ donation programs.

Computer & Network Security

Microsoft Windows, new versions of Linux and Sun Microsystems have begun using smart cards as a replacement for user names and passwords. Understanding that Public Key Infrastructure (PKI)-enhanced security is needed, a smart card badge is becoming the new standard. Using smart cards, users can be authenticated and authorized to have access to specific information based on preset privileges.

Banking & Retail

Some of the most common uses for smart cards are ATM cards, credit cards and debit cards. Many of these cards are “chip and PIN” cards that require the customer to supply a four- to six-digit PIN number, while others are known as “chip and signature” cards, needing only a signature for verification.

Other financial and retail uses for smart cards include fuel cards and public transit/public phone payment cards. They can also be used as “electronic wallets” or “purses” when the chip is loaded with funds to pay for small purchases such as groceries, laundry services, cafeteria food and taxi rides. Cryptographic protocols protect the exchange of money between the smart card and the machine, so no connection to a bank is needed.

Mobile Communications

For digital mobile phones, smart cards can also be used as identification devices. These cards are known as Subscriber Identity Molecules (SIM) cards. Each SIM card has a unique identifier that manages the rights and privileges of each subscriber and makes it easy to properly identify and bill them.

University of Mumbai BMS Notes

Credit Rating Agencies in India, Limitations of Rating

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Credit Rating Agencies in India

Infomerics Valuation and Rating Private Limited

An RBI-accredited and SEBI-registered credit agency, Infomerics Valuation and Rating Private Limited saw its inception by eminent finance professionals and is now run under the leadership of Mr. Vipin Mallik. The credit bureau strives to offer an unbiased and detailed analysis and evaluation of credit worthiness to NBFCs, banks, corporates and small and medium scale units. It is through their rating and grading system that they determine the credit worthiness of an organisation. Infomerics helps in reducing any kind of information asymmetry amongst investors and lenders. Keeping transparency as it is core value, the credit bureau makes sure to deliver comprehensive and accurate reports and records of all their clients.

India Rating and Research Pvt. Ltd

India Ratings is a wholly-owned subsidiary of the Fitch Group. It offers credit ratings for insurance companies, banks, corporate issuers, project finance, financial institutions, finance and leasing companies, managed funds, and urban local bodies. In addition to SEBI, the company is recognised by the Reserve Bank of India and National Housing Bank.

Credit Analysis and Research limited (CARE)

Launched in 1993, CARE offers credit rating services to areas such as corporate governance, debt ratings, financial sector, bank loan ratings, issuer ratings, recovery ratings, and infrastructure ratings. Headquartered in Mumbai, CARE offers two different categories of bank loan ratings, long-term and short-term debt instruments. The company also offers ratings for Initial Public Offerings (IPOs), real estate, renewable energy service companies (RESCO), financial assessment of shipyards, Energy service companies (ESCO) grades various courses of educational institutions. CARE Ratings has also ventured into valuation services and offers valuation of equity, debt instruments, and market linked debentures. Moreover, the company has launched a new international credit rating agency ‘ARC Ratings’ by teaming up with four partners from South Africa Brazil, Portugal, and Malaysia. ARC Ratings has commenced operations and completed sovereign ratings of countries, including India.

Credit Rating Information Services of India Limited (CRISIL)

CRISIL is one of the oldest credit rating agencies in India. It was launched in the country in 1987 following which the company went public in 1993. Headquartered in Mumbai, CRISIL ventured into infrastructure rating in 2016 and completed 30 years in 2017. CRISIL acquired 8.9% stake in CARE credit rating agency in 2017. It launched India’s first index to benchmark performance of investments of foreign portfolio investors (FPI) in the fixed-income market, in the rupee as well as dollar version in 2018. The company’s portfolio includes, mutual funds ranking, Unit Linked Insurance Plans (ULIP) rankings, CRISIL coalition index and so on.

Acuite Ratings & Research Limited

Acuité Ratings & Research Limited is a full-service Credit Rating Agency registered with the Securities and Exchange Board of India (SEBI). The company received RBI Accreditation as an External Credit Assessment Institution (ECAI), for Bank Loan Ratings under BASEL-II norms in the year 2012. Since then, it has assigned more than 8,300 credit ratings to various securities, debt instruments and bank facilities of entities spread across the country and section of industries. It has its Registered and Head Office in BKC, Mumbai.

Brickwork Ratings (BWR)

Brickwork Rating was established in 2007 and is promoted by Canara Bank. It offers ratings for bank loans, SMEs, corporate governance rating, municipal corporation, capital market instrument, and financial institutions. It also grades NGOs, tourism, IPOs, real estate investments, hospitals, IREDA, educational institutions, MFI, and MNRE. Brickwork Ratings is recognised as external credit assessment agency (ECAI) by Reserve Bank of India (RBI) to carry out credit ratings in India.

ICRA Limited

ICRA Limited is a public limited company that was set up in 1991 in Gurugram. The company was formerly known as Investment Information and Credit Rating Agency of India Limited. Before going public in April 2007, ICRA was a joint venture between Moody’s and several Indian financial and banking service organisations. The ICRA Group currently has four subsidiaries – Consulting and Analytics, Data Services and KPO, ICRA Lanka and ICRA Nepal. At present, Moody’s Investors Service, the international Credit Rating Agency, is ICRA’s largest shareholder. ICRA’s product portfolio includes rating for corporate debt, financial rating, structured finance, infrastructure, insurance, mutual funds, project and public finance, SME, market linked debentures and so on.

Limitations of Rating

Biased rating and misrepresentations:

In the absence of quality rating, credit rating is a curse for the capital market industry, carrying out detailed analysis of the company, should have no links with the company or the persons interested in the company so that the reports impartial and judicious recommendations for rating committee.

Concealment of material information:

Rating Company might conceal material information from the investigating team of the credit rating company. In such cases quality of rating suffers and renders the rating unreliable.

Human bias:

Finding off the investigation team, at times, may suffer with human bias for unavoidable personal weakness of the staff and might affect the rating.

Down grade:

Once a company has been rated and if it is not able to maintain its working results and performance, credit rating agencies would review the grade and down grade the rating resulting into impairiring the image of the company.

Reflection of temporary adverse conditions:

Time factor affects’ rating, sometimes, misleading conclusions are derived. For example, company in a particular industry might be temporarily in adverse condition but it is given a low rating. This adversely affects the company’s interest.

Rating is no guarantee for soundness of company:

Rating is done for a particular instrument to assess the credit risk but it should not be construed as a certificate for the matching quality of the company or its management. Independent views should be formed by the user public in general of the rating symbol.

Static study:

Rating is done on the present and the past historic data of the company and this is only a static study. Prediction of the company’s health through rating is momentary and anything can happen after assignment of rating symbols to the company.

Dependence for future results on the rating, therefore defeats the very purpose of risk indicativeness of rating. Many changes take place in economic environment, political situation, government policy framework which directly affect the working of a company.

University of Mumbai BMS Notes

Guidelines for Asset Liability Management System in HFC, Fair Trade Practice Code for HFC’s, Housing Finance Agencies

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Guidelines for Asset Liability Management System in HFC

Housing Finance Companies (HFCs) are exposed to credit and market risks in view of the asset-liability transformation. With liberalisation in Indian financial markets over the last few years and growing integration of the domestic markets with external markets, the risks associated with the operations of an HFC have become complex and large, requiring strategic management.

HFCs are operating in a fairly deregulated environment and are required to determine on their own, interest rates on advances and deposits, subject to the ceiling on maximum rate of interest they can offer on deposits, on a dynamic basis. The interest rates on investments of HFCs in government and other securities are also now market related. Intense competition for business involving both the assets and liabilities has brought pressure on the managements of HFCs to maintain a good balance amongst spreads, profitability and long-term viability. These pressures call for structured and comprehensive measures and not just ad hoc action. The managements of HFCs have to base their business decisions on a dynamic and integrated risk management system and process driven by corporate strategy. HFCs are exposed to several major risks in the course of their business; Credit risk, Interest rate risk, equity/commodity price risk, liquidity risk and operational risk. It is, therefore, important that HFCs introduce effective risk management systems that address the issues relating to interest rate and liquidity risks.

  • ALM Information System

⇒ Management Information Systems 9- n

⇒ Information availability, accuracy, adequacy and expediency

  • ALM Organisation

⇒ Structure and responsibilities

⇒ Level of top management involvement

  • ALM Process

⇒ Risk parameters

⇒ Risk identification

⇒ Risk measurement

⇒ Risk management

⇒ Risk policies and tolerance levels

a) Successful implementation of the risk management process would require strong commitment on the part of the senior management in the HFC, to integrate basic operations and strategic decision making with risk management. The Board should have overall responsibility for management of risks and should decide the risk management policy of the HFC and set limits for liquidity, interest rate, exchange rate and equity price risks.

b) The Asset-Liability Committee (ALCO) consisting of the HFC’s senior management including the Chief Executive Officer (CEO) should be responsible for ensuring adherence to the limits set by the Board as well as for deciding the business strategy of the HFC (on the assets and liabilities sides) in line with the HFC’s budget and decided risk management objectives.

c) The ALM Support Groups consisting of operating staff should be responsible for analysing, monitoring and reporting the risk profiles to the ALCO. The staff should also prepare forecasts (simulations) reflecting the impact of various possible changes in market conditions on the balance sheet and recommend the action needed to adhere to HFC’s internal limits.

  • Liquidity risk management
  • Management of market risks
  • Funding and capital planning
  • Profit planning and growth projection
  • Forecasting and analysing ‘what if scenario’ and preparation of contingency plans

Fair Trade Practice Code for HFC’s

Housing Finance Companies (HFCs) which are a part of the financial system contribute to the economic growth by increasing the outreach of the housing credit delivery mechanism. To provide for transparency in transactions between the institutions and the end users and also to provide for well-informed business relationships, some broad guidelines have been considered necessary. In this backdrop, the National Housing Bank, has framed the Guidelines on Fair Practices Code for HFCs to serve as a part of best corporate practices and to provide transparency in business practices. This Code has been formulated by the EHFL to achieve the following objectives:

  • To promote good and fair practices by setting minimum standards in dealing with customers.
  • To increase transparency so that the customer can have a better understanding of the services that can be expected from the Company.
  • To encourage market forces, through competition, to achieve higher operating standards.
  • To promote a fair and cordial relationship between the Company and its customers.
  • To foster confidence in the housing finance system.

Transparency

The Company shall at all times abide to act in fair, reasonable and transparent manner in all its dealings with the customer by safeguarding that:

  • The Company fulfils the commitments and standards of this Code for the products and services offered by it and in the procedures and practices that its staff follows
  • The products and services of the Company meet all the relevant laws and regulations in letter and spirit
  • The dealings with its customers are based on the ethical principles of integrity and transparency.

Advertising, Marketing & Sales

  • The Company shall ensure that all advertising and promotional material is clear, and not misleading.
  • The Company shall ensure that any advertising in any media and promotional literature that draws attention to a service or product of the Company and includes a reference to an interest rate, shall also indicate whether other fees and charges will apply and that full details of the relevant terms and conditions, if any, shall be made available on request.
  • In case of availing third party services for providing support services, the Company shall ensure that such third parties handle customer’s personal information (if any available to such third parties) with the same degree of confidentiality and security as the Company would.
  • The Company ensures to provide the information on interest rates, common fees and charges through putting up notice(s) at its branches/offices; through telephone or help-line; on company’s website; through designated staff/ help desk or by providing service guide / tariff schedule.
  • The Company shall communicate to the customer from time to time, on various features of the products availed by them. Information about the other products/services or promotional offers in respect of its products/services of the Company may be conveyed to customers only if he / she has given his / her consent to receive such information / service, including, by way of an email or by registering for the same on the Company’s website or on customer service number of the Company.
  • The Company shall ensure the Code of Conduct the Direct Selling Agencies (DSAs) whose services are availed by the Company to market products / services, amongst other matters, specifically requires the DSAs to identify themselves while approaching a customer for selling the products personally or via phone.
  • The Company shall ensure that in the event of receipt of any complaint from the customer that the Company’s representative/ courier or DSA has engaged in any improper conduct or acted in violation of this Code, appropriate steps shall be initiated to investigate and handle the complaint and to make good the loss caused, if any.

Loan Application & Processing

a) Loan application forms should include necessary information which affects the interest of the borrower, so that a meaningful comparison with the terms and conditions offered by other HFCs can be made and informed decision can be taken by the borrower. The loan application form may indicate the list of documents required to be submitted with the application form.

b) The Company should devise a system of giving acknowledgement for receipt of all loan applications. Preferably, the time frame within which loan applications will be disposed of should also be indicated in the acknowledgement.

Guarantors

  • Whether the Company will have recourse to his / her other monies in the Company if he/ she fails to pay up as a Guarantor.
  • Whether his/her liabilities as a guarantor is limited to a specific quantum or are, they unlimited
  • Time and circumstances in which his/ her liabilities as a guarantor will be discharged; and the Company shall keep them informed of any material adverse change in the known financial position of the borrower to whom they stand as a guarantor.
  • In case the guarantor refuses to comply with the demand made by the creditor /lender, despite having sufficient means to make payment of the dues, such guarantor would also be treated as a willful defaulter.

Housing Finance Agencies

State Housing Finance Agencies (HFAs) are state-chartered authorities established to help meet the affordable housing needs of the residents of their states. Although they vary widely in characteristics such as their relationship to state government, most HFAs are independent entities that operate under the direction of a board of directors appointed by each state’s governor. They administer a wide range of affordable housing and community development programs.

At the center of HFA activity within the states and NCSHA’s work in Washington are three federally authorized programs:

  • The Housing Bonds
  • The Housing Credit
  • The HOME Investment Partnerships (HOME) program.
University of Mumbai BMS Notes

Disinvestment mechanisms, Venture Capital Investment process, Indian Scenario

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An important aspect of venture capital investing is the exit strategies. Venture capital funds primarily invest with an exit in mind after a few years. After successfully funding at seed, pre-production, production and expansion stages, a venture capitalist will start assessing exit strategies. The exit in the form of disinvestment or liquidation is the last and final stage of the venture capital funding.

The key types of liquidation/disinvestments are trade sales, sale of quoted equity post initial public offering (IPO), and write-offs. Let’s look at each of these in detail:

  • Trade Sales: In this type of strategy the private company is sold or merged with an acquirer for stocks, cash, or a combination of both.
  • IPO: If the company has done well, the venture capital investors will take the IPO route, by issuing shares registered for public offering. The venture capital investors and other private investors will get their portion of shares who can put them in the open marketplace for trading after an initial lock-in period.
  • Write-offs: These are voluntary liquidations that may or may not result in any proceeds.
  • Buy-back: In this method the entrepreneur buys-back the investment share from the venture capitalists and takes it back to being a privately held company. Investors who invest in a venture capital fund get distributions of public stock or cash from realized venture capital investments. Sometimes the fund may require further investments from limited partners. At other times, they may make cash or share distributions at random times during the lifetime of the fund. Investors can sell their interests to another buyer if they find one.

Venture Capital Investment process

Deal origination

Origination of a deal is the primary step in venture capital financing. It is not possible to make an investment without a deal therefore a stream of deal is necessary however the source of origination of such deals may be various. One of the most common sources of such origination is referral system. In referral system deals are referred to the venture capitalist by their business partners, parent organisations, friends etc.

Screening

Screening is the process by which the venture capitalist scrutinises all the projects in which he could invest. The projects are categorised under certain criterion such as market scope, technology or product, size of investment, geographical location, stage of financing etc. For the process of screening the entrepreneurs are asked to either provide a brief profile of their venture or invited for face-to-face discussion for seeking certain clarifications.

Evaluation

The proposal is evaluated after the screening and a detailed study is done. Some of the documents which are studied in details are projected profile, track record of the entrepreneur, future turnover, etc. The process of evaluation is a thorough process which not only evaluates the project capacity but also the capacity of the entrepreneurs to meet such claims. Certain qualities in the entrepreneur such as entrepreneurial skills, technical competence, manufacturing and marketing abilities and experience are put into consideration during evaluation. After putting into consideration all the factors, thorough risk management is done which is then followed by deal negotiation.

Deal Negotiation

After the venture capitalist finds the project beneficial he gets into deal negotiation. Deal negotiation is a process by which the terms and conditions of the deal are so formulated so as to make it mutually beneficial. The both the parties put forward their demands and a way in between are sought to settle the demands. Some of the factors which are negotiated are amount of investment, percentage of profit held by both the parties, rights of the venture capitalist and entrepreneur etc.

Post investment activity

Once the deal is finalised, the venture capitalist becomes a part of the venture and takes up certain rights and duties. The capitalist however does not take part in the day-to-day procedures of the firm; it only becomes involved during the situation of financial risk. The venture capitalists participate in the enterprise by a representation in the Board of Directors and ensure that the enterprise is acting as per the plan.

Exit plan

The last stage of venture capital investment is to make the exit plan based on the nature of investment, extent and type of financial stake etc. The exit plan is made to make minimal losses and maximum profits. The venture capitalist may exit through IPOs, acquisition by another company, purchase of the venture capitalists share by the promoter or an outsider.

Venture Capital in India

  • Low level financing for proving and fructifying a new idea.
  • Start-up financing where the new firms need funds for expense relating marketing and product development.
  • First round financing which includes manufacturing and early sales funding
  • Second round financing, which includes operational capital given for early stage companies which are selling products but not returning a profit
  • Third round financing, which is also called a Mezzanine financing and includes the money needed to expand a newly beneficial company
  • Fourth round financing also called Bridge financing and includes the financing the going public process.
University of Mumbai BMS Notes

Housing Finance in India; Growth Factors, Housing Finance Institutions in India

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Urban Land Ceiling and Regulation Act (ULCRA) of 1976 has been wrongly implemented and is the main culprit of the spiralling real estate prices. Land is not available to housing due to restrictions placed on conversion of agricultural land to non-agricultural land. The land prices in Bombay, Calcutta and Delhi are very high as compared to cities in the west like London and Washington. A boost to housing can rejuvenate the economy since has the maximum propensity to generate income and demand for materials, equipment and services. Moreover, funds allocated to shelter, return in the shape of income and demand to other sectors. To boost growth in the housing sector, there is an imperative need to have greater access to credit for housing in a regulated fashion. This necessitates a good housing finance system. Housing finance companies need to be recognized as being part of the total financial system, and should be given a level playing field.

Amidst liberalization, certain provisions of the Companies Act 1956, such as restrictions on inter-corporate loans and deposits continue to discriminate housing finance companies against other NBFC’s. Also certain tax laws such as deduction of tax at source, and restrictions acceptance of cash as deposits are disadvantages to housing finance companies. RBI has put housing finance on priority as core sector lending. In the developed countries, the flow of housing finance forms a substantial share of the total finance system. In fact, the savings for housing is among the single largest source of funds in their entire financial system.

Thus, it is imperative that India priorities the housing sector in order to enable a varied advantage to the economy in the form of employment, non-inflationary growth and reduced pressure on the balance of payments. The housing sector in India has been put under a lot of strain since Independence. Builders and developers too face varied problems.

Growth Factors

The Pradhan Mantri Awas Yojana (PMAY) aims to build over 2 crore affordable homes across 305 rural and urban centres.

Under this scheme, which is a part of the Housing for All vision, people can avail interest subsidy of 4% on loans up to Rs 9 lakh and 3% for loans up to Rs 12 lakh. There is also a 3% interest subsidy on a Rs 2 lakh loan for a new home in the rural areas.

The subsidies, which have made home loans affordable for the low-income group, have greatly helped people working in the unorganised sector, according to Arvind Hali, chairman of ART Affordable Housing Finance.

The government help has also resulted in housing finance companies disbursing more loans. To lend perspective, loans up to Rs 2 lakh witnessed the maximum year-over-year (Y-O-Y) growth of 10.4% in FY 2016-17.

New Dynamics:

An important development in the housing finance business has been the entry of new players. The relatively low risk in a housing portfolio has spurred new entrants in the last few years. Arguably the most significant entrant has been ICICI Home Finance. Among non-banking finance companies, Sundaram Finance and Tata Finance have launched housing finance subsidiaries in the recent past, while banks shown increased interest in acquiring housing assets.

The entry of new players and the consequent increase in competition has been followed by an interesting trend. The interest rates of most housing finance companies (HFC) move in unison, thereby suggesting that interest rate is not likely to be a competitive tool. The high level of competition has made it impossible for an HFC, with branches across the country, to charge an interest rate higher than the competition. Commercial banks are an exception to the rule, in the sense that they always charge lower than the competition.

Budgetary Support:

Tax benefits, a low interest rate regime and high salary levels among certain sections are chiefly responsible for fuelling fast growth in the housing financial services sector. Tax benefits for housing finance contribute to housing development. For this purpose, RBI maintains a soft interest rate regime. The bank rate of interest is constantly being slashed so that it acts as a stimulant for housing demand.

Similarly, a sharp increase in size of pay packets has played an important role in making a house affordable. Regardless of salary levels, if the cost of a house comes down, it would pep up the demand for housing finance. There is reason to believe that we are witnessing a gradual movement towards loosening the restrictions that increase the cost of a house.

Housing Finance Institutions in India

The below-mentioned list of housing finance companies have been granted Certificate of Registration (COR) with permission to accept public deposits –

  • Aadhar Housing Finance Limited (Formerly: DHFL Vysya Housing Finance Limited)
  • Housing and Urban Development Corporation Limited
  • Housing Development Finance Corporation Limited
  • Can Fin Homes Limited
  • Cent Bank Home Finance Limited
  • Manipal Housing Finance Syndicate Limited
  • PNB Housing Finance Limited
  • Dewan Housing Finance Corporation Limited
  • ICICI Home Finance Company Limited
  • LIC Housing Finance Limited
  • Sundaram Home Finance Limited

Listed below are the Housing Finance Companies having valid Certificate of Registration that can accept public deposits with prior permission obtained from the National Housing Bank for accepting public deposits:

  • National Trust Housing Finance Limited
  • Saral Home Finance Limited.
  • GIC Housing Finance Limited
  • Ind Bank Housing Limited
  • REPCO Home Finance Limited
  • L&T Housing Finance Limited
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