Month: September 2022

• Controlling costs: Cost accounting helps the management foresee the cost price and selling price of a product or a service, which helps them, formulate business policies. With cost value as a reference, the management can come up with techniques to control costs with an aim to achieve maximum profitability.
• Showing profitable and non-profitable activities: This information helps the management put an end to non-profitable activities while developing and expanding the profitable ones.
• Determining the total per-unit cost: Cost accounting techniques help in determining the total per-unit cost of a product or a service, so that the business can fix the selling price for it.
• Comparing costs over time: The data in the cost sheets prepared for various time periods helps in comparing the cost for the same product or a service over a period of time.

1. Help to understand the value of inputs and outputs in production process.
2. Helps the management to find the actual cost per unit of each product.
3. It helps to find out cost at various stages of its production.
4. It reveals the profit and loss of each activity.
5. Helps the management to take decisions.
6. Comparison of performance is possible.
7. It contributes to the building up of good organizational structure
8. Efficient communication system.
9. Avoidance of wastage.
10. Data are useful to the government.

NBFCs (Non Banking Financial Companies) play an important role in promoting inclusive growth in the country, by catering to the diverse financial needs of bank excluded customers. Further, NBFCs often take lead role in providing innovative financial services to Micro, Small, and Medium Enterprises (MSMEs) most suitable to their business requirements. NBFCs do play a critical role in participating in the development of an economy by providing a fillip to transportation, employment generation, and wealth creation, bank credit in rural segments and to support financially weaker sections of the society. Emergency services like financial assistance and guidance is also provided to the customers in the matters pertaining to insurance.

NBFCs are financial intermediaries engaged in the business of accepting deposits delivering credit and play an important role in channelizing the scarce financial resources to capital formation. They supplement the role of the banking sector in meeting the increasing financial needs of the corporate sector, delivering credit to the unorganized sector and to small local borrowers. However, they do not include services related to agriculture activity, industrial activity, sale, purchase or construction of immovable property. In India, despite being different from banks, NBFC are bound by the Indian banking industry rules and regulations.

NBFC focuses on business related to loans and advances, acquisition of shares, stock, bonds, debentures, securities issued by government or local authority or other securities of like marketable nature, leasing, hire-purchase, insurance business, chit business.

The banking sector would always be the most important sector in the field of business because of its credibility in supporting manufacturing, infrastructural development and even being the backbone for the common man’s money. But despite this, the role of NBFCs is critical and their presence in a country would only boost the economy in the right direction.

Game Changers

• Size of sector: The NBFC sector has grown considerably in the last few years despite the slowdown in the economy.
• Growth: In terms of year-over-year growth rate, the NBFC sector beat the banking sector in most years between 2006 and 2013. On an average, it grew 22% every year. This shows, it is contributing more to the economy every year.
• Profitability: NBFCs are more profitable than the banking sector because of lower costs. This helps them offer cheaper loans to customers. As a result, NBFCs’ credit growth; the increase in the amount of money being lent to customers is higher than that of the banking sector with more customers opting for NBFCs.
• Infrastructure Lending: NBFCs contribute largely to the economy by lending to infrastructure projects, which are very important to a developing country like India. Since they require large amount of funds, and earn profits only over a longer time-frame, these are riskier projects and deters banks from lending. In the last few years, NBFCs have contributed more to infrastructure lending than banks.
• Promoting inclusive growth: NBFCs cater to a wide variety of customers – both in urban and rural areas. They finance projects of small-scale companies, which is important for the growth in rural areas. They also provide small-ticket loans for affordable housing projects. All these help promote inclusive growth in the country.

NBFCs aid economic development in the following ways

• Mobilization of Resources: It converts savings into investments
• Capital Formation: Aids to increase capital stock of a company
• Provision of Long-term Credit and specialised Credit
• Aid in Employment Generation
• Help in development of Financial Markets
• Helps in Attracting Foreign Grants
• Helps in Breaking Vicious Circle of Poverty by serving as government’s instrument

Financial activity as principal business is when a company’s financial assets constitute more than 50 per cent of the total assets and income from financial assets constitute more than 50 per cent of the gross income. A company which fulfils both these criteria will be registered as NBFC by RBI. The term ‘principal business’ is not defined by the Reserve Bank of India Act. The Reserve Bank has defined it so as to ensure that only companies predominantly engaged in financial activity get registered with it and are regulated and supervised by it. Hence if there are companies engaged in agricultural operations, industrial activity, purchase and sale of goods, providing services or purchase, sale or construction of immovable property as their principal business and are doing some financial business in a small way, they will not be regulated by the Reserve Bank. Interestingly, this test is popularly known as 50-50 test and is applied to determine whether or not a company is into financial business.

The Reserve Bank has been given the powers under the RBI Act 1934 to register, lay down policy, issue directions, inspect, regulate, supervise and exercise surveillance over NBFCs that meet the 50-50 criteria of principal business. The Reserve Bank can penalize NBFCs for violating the provisions of the RBI Act or the directions or orders issued by RBI under RBI Act. The penal action can also result in RBI cancelling the Certificate of Registration issued to the NBFC, or prohibiting them from accepting deposits and alienating their assets or filing a winding up petition.

NBFCs lend and make investments and hence their activities are akin to that of banks; however there are a few differences as given below:

• NBFC cannot accept demand deposits;
• NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself;
• Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.

The Bank has issued detailed directions on prudential norms, vide Non-Banking Financial (Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007, Non-Systemically Important Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2015 and Systemically Important Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2015. Applicable regulations vary based on the deposit acceptance or systemic importance of the NBFC.

The directions inter alia, prescribe guidelines on income recognition, asset classification and provisioning requirements applicable to NBFCs, exposure norms, disclosures in the balance sheet, requirement of capital adequacy, restrictions on investments in land and building and unquoted shares, loan to value (LTV) ratio for NBFCs predominantly engaged in business of lending against gold jewellery, besides others. Deposit accepting NBFCs have also to comply with the statutory liquidity requirements.

Sources of business funding for NBFCs

Non-Banking Financial Companies can raise funds through various sources with deposits; some of them include:

• Long term loans at low-interest rates: Once NBFC creates an amount required for deployment in its course of operations, it can apply for a long term loan from the bank. It is beneficial for NBFC’s as banks lend at much lower interest rates owing to the nature of CASA deposits. Such type of loans can be secured or unsecured through Government Securities and its repayment can be made in a structured or bullet schedule. NBFC must record the repayment of long term loans in the Balance Sheet along with the asset section. NBFC’s must have a good credit rating to raise a large sum of funds at competitive interest rates.
• Foreign Direct Investment (FDI): One of the best funding options for NBFC is foreign investment. In 1991, the era of post-liberalization in the Indian economy, a tremendous increase of foreign investors in the NBFC was perceived. Recently, up to 100%, foreign investment is permitted under the automatic route in FDI. Thus, foreign investors don’t require approval from RBI or FIPB and invest directly in NBFC’s.
• Issue Commercial Paper for small-term loans: Non-Banking Financial Companies can raise the required funds by issuing Commercial Paper. It is a short term unsecured Promissory Note issued by the financial Companies that have tenure of 3 to 12 months. NBFC’s with a minimum net worth of INR100 crores are eligible to list Commercial Papers as per Reserve Bank of India.
• Issue Bonds: NBFC’s can avail considerable money at the lowest costs by issuing Bonds. It is a common practice that helps to reduce the rate on the sources of funds. The coupon rate on the Bonds is selected to reflect the rating profile of NBFC. The maturity profile of Bonds corresponds to the repayment of interest schedules made by the NBFC’s. Bonds can also be issued to the retail investors, which is a huge advantage for NBFC’s during Bond placement.
• Securitization of loans: NBFC’s have raised INR 2.36 lakh crore between the period of October 2018 and September 2019 by selling their loans in the market through Securitization. HFC’s and NBFC’s heavily rely upon Securitization as an effective tool to manage liquidity, raise funds and correct ALM mismatch.

NBFCs that can avail automatic route in FDI

Non-Banking Financial Companies that offer the following services can have an access to the automatic route in FDI:

• Merchant Banking
• Asset Management
• Factoring
• Underwriting
• Portfolio Management Services
• Stock Broking
• Venture Capital
• Custodian Services
• Leasing & Finance
• Housing Finance
• Credit Card Business
• Financial Consultancy
• Micro and Rural Credit
• Non-fund based activities
• Investment Advisory Services
• Forex Broking
• Credit Rating
• Money Changing Activities

A robust banking and financial system are essential components to channelize the growth of an economy. NBFC’s are financial intermediaries that play a vital role in developing Indian economy. It offers credit facilities to remote areas and supports those individuals who are often overlooked by the banks. Non-Banking Financial Companies underpins the weaker sections of the society, thereby bringing equilibrium in the nation. This write-up underlines the role of NBFC in the economic development of India.

NBFC Marketing is the procedure in which the activities are operated by a Non-Banking Financial Company are marketed to potential and upcoming customers of the Non-Banking Financial Company. There is no specific procedure to consider for NBFC Marketing. But, Non-Banking Financial Companies are becoming essential in the customer’s eyes considering the development of technology and AI (Artificial Intelligence). There are various ways to consider marketing the potential financial products of the Non-Banking Financial Company.

The key goal of setting up this prestigious sector has not been profitability. These institutions work with the sole aim of making financial services accessible to one and all. The unique objective set them apart from the banks and made them the prime drivers of growth.

NBFC sector plays an extremely crucial role in the development of the country’s core infrastructure. By offering quicker funds and credit to the Indian trade and commerce industry, these entities are enabling the nation-wide growth of large infrastructure projects. Furthermore, small businesses, start-ups, and MSMEs/SSIs are dependent on funds offered by NBFCs. As these small businesses expand their operations, their need for skilled and unskilled labor goes up to fulfill the increase in operations. Thus, indirectly, each new NBFC registration creates more job opportunities at the macro-economic level.

The customer base of NBFC vs bank is pretty wide. NBFCs cater to the urban, as well as unorganized rural areas, offering loans to satisfy different requirements. Whereas banks provide finance to the organized sector only. This has resulted in the amount of money lent by the NBFCs to the consumers has been phenomenally more as against banks. Over the last few years, consumer lending has seen a continuous rise, with NBFCs catering to a large portion. With the growth in the economy, the requirement for loans is bound to surge. And NBFCs, along with banks, can give a strong push to the growth and development of the Indian economy.

Growth of NBFC & Their Role

In the last two decades, the capital market in India has witnessed significant ups and downs. The volume of capital market transactions has increased sharply. The functioning diversified. New financial institutions like merchant banks, mutual funds, and venture capital companies have come up and become essential. New financial instruments, such as Fully and Partly Convertible Debentures (FCDs and PCDs), commercial papers, CDs, etc., have emerged. These reflect the growing diversification and measure of the sophistication of the financial services sector catering to the needs of growth capital and money markets. The volume of new issues is presently between Rs. 15,000 crores and Rs.20,000 crores. The number of shareholders runs into several million, indicating the growth of the cult of equity. Commercial banks that deal in the money market are entering the capital market through their merchant banks and mutual funds subsidiaries. They are going to leasing and venture finance also.

They are responsible for providing financial services but are not regulated by a separate governing body and do not hold a full-fledged license for conducting banking operations. Unlike banks, they do not accept demand drafts and are not a part of the Payment and Settlement system.

Further, NBFCs often take a lead role in providing innovative financial services to Micro, Small, and Medium Enterprises (MSMEs) most suitable to their business requirements. An NBFC would often take a lead in innovating and customizing the financial services to fund various industries. Such as transportation, employment generation, wealth creation, bank credit in rural segments, and aid financially weaker sections of the society. Their role in providing assistance and guidance during emergencies cannot be ignored either.

NBFC Role in Revolutionising the Economy

• Growth: In terms of year-on-year (YoY) growth rate, the NBFC sector beat the banking sector in contributing to the economy every year. On average, this segment grew by 22% every year, in its initial stages. Despite the slowdown in the economy and various setbacks faced in the last few years, the sector is still growing and enhancing operations.
• Profitability: NBFCs have been more profitable than the banking sector because of lower costs. This enabled them to offer cheaper credit to customers. As a result, the amount of money lent to customers by NBFCs is higher than that of the banking sector with more customers opting for NBFCs.
• Enhancing the Financial Market: An NBFC caters to the urban and rural poor companies and plays a complementary role in financial inclusion. These financial companies bring much-needed diversity to the market by diversifying the risks, increasing liquidity in the markets thereby bringing efficiency and promoting financial stability to the financial sector. They highlight the public issues of corporations as well as providing funds needed by the start-up companies as capital. The financial market is dependent on the functions that are taken care of by these lending companies.
• Infrastructure Lending: NBFCs by lending to infrastructure projects, contribute largely to the economy. This is very important for the growth of a developing country like India. The amount involved is quite large, the projects being risky, with no surety of returns, and profits occurring after a longer time-frame. These factors deter banks from financing these projects. Since their inception, NBFCs have contributed more to infrastructure lending than banks.
• Promoting Inclusive Growth: All the top NBFC in India cater to a wide variety of customers; both in urban and rural areas. They finance projects of small-scale companies, which is important for the growth in rural areas. They also provide small-ticket loans for affordable housing projects. Microfinance provided by them plays an important role to attain stable financial inclusions. All these activities by the institution with an NBFC License help promote inclusive growth in the country.
• Upliftment in the Employment Sector: With the growth in operations of the small industries and businesses, the policies of NBFCs are uplifting the job situation. More opportunities for employment are arising with the influence of the NBFCs in the private as well as government sectors. The business activities in the private sector provide more employment opportunities and occupation practices. And NBFC plays a key role in their growth and stability.
• Mobilization of Assets: With more public preferring to deposit in NBFCs because of their higher rate of interest, NBFCs allow mobilization of resources; funds, and capitals. Due to their easier norms for investing, these companies create a balance between intra-regional income and asset distribution. Turning the savings into investments, these companies contribute to economic development as compared to traditional bank practices. Proper organization of capital helps in the development of the trade and industry, leading to economic progress. They operate not intending to maximize their profit and are, therefore, engaged in activities that generate zero or very low revenue.
• Financing for Long-Term: NBFC plays a key role in providing firms with funds through equity participation. As against traditional banks, NBFCs supply long-run credit to the trade and commerce industry. They facilitate to fund large infrastructure projects and boost economic development. Long-term finance permits growth with stable and soft interest rates. The economy thrives when businesses of SSIs and MSMEs flourish.
• Raising the Standard of Living: NBFCs collaborate with the government for the upliftment of the society. The NBFCs attract deposits from the general public and convert it into capital for industrial and other sectors for smooth economic development. The rise in businesses consequently raises the demand for workforce and creates employment opportunities raises the purchasing power of individuals and, subsequently, raising demands. This works to upgrade the living standards of a society. Also, foreign deposits are attracted to these financial institutions and support economic process and development.
• Innovative Products: NBFCs, by being flexible in terms of lending and investment opportunities than banks, are more proactive in innovating financial products. This facilitates their growth in an exceedingly prudent manner. They fine-tune their selling campaigns in regard to their target customers. These corporations are the game changers within the developing economy. For instance, the factorization & bill payment service has been revolutionized. NBFC P2P is a relatively new segment in India that is already creating waves by providing considerably higher margins and facilitating loans at a lower cost.

Cash and liquidity management is a sub-function of treasury management that aims to convert sales to available cash as soon as possible and at the lowest processing cost.

It’s a crucial component in treasury operations; operations which are concerned with maximising the benefits of surplus funds and minimising the cost of shortfalls through careful investment and considered borrowing.

Individuals and businesses have a wide range of offerings available across the financial marketplace to help with all types of cash management needs. Banks are typically a primary financial service provider for the custody of cash assets. There are also many different cash management solutions for individuals and businesses seeking to obtain the best return on cash assets or the most efficient use of cash comprehensively.

Cash Management Involve:

Cash management deals with all aspects of working capital management and involves many different tasks. The roles and responsibilities of this department include:

• Forecasting the cash requirements of the business and preparing budgets.
• Establishing necessary banking relationships and providing working capital finance security.
• Managing the credit collection.
• Ensuring that shortfalls are avoided or minimised and that the business can always meet its financial obligations.
• Releasing trapped cash
• Extracting liquidity from working capital
• Releasing working capital

Functions of cash management

In an ideal scenario, an organization should be able to match its cash inflows to its cash outflows. Cash inflows majorly include account receivables and cash outflows majorly include account payables.

Practically, while cash outflows like payment to suppliers, operational expenses, payment to regulators are more or less certain, cash inflows can be tricky. So the functions of cash management can be explained as follows:

Inventory management

Higher stock in hand means trapped sales and trapped sales means less liquidity.  Hence, an organization must aim at faster stock out to ensure movement of cash.

Receivables Management

An organization raises invoices for its sales. In these cases, the credit period for receiving the cash can range between 30 – 90 days. Here, the organization has recorded the sales but has not yet received cash for the transactions. So the cash management function will ensure faster recovery of receivables to avoid a cash crunch.

If the average time for recovery is shorter, the organization will have enough cash in hand to make its payments. Timely payments ensure lesser costs (interests, penalties) to the organization. Receivables management also includes a robust mechanism for follow-ups. This will ensure faster recovery and it will also assist the business to predict bad debts and unforeseen situations.

Payables Management

While receivables management is one of the primary areas in the cash management function,  payables management is also important. Payables arise when the organization has made purchases on credit and needs to make payments for the same within a fixed time. 

An organization can take short-term credit from banks and financial institutions. However, these credit facilities come at a cost and therefore, an organization must ensure that they maintain a good liquidity position; this will help in timely repayments of debts.

Forecasting

While planning investments, the managers need to be very careful as they need to plan for future contingencies and also ensure profitability. For this, they must use efficient forecasting and management tools. When the cash inflows and outflows are efficiently managed it gives the firm good liquidity.

Short-term investments

Avoiding cash crunch, insolvency and ensuring financial stability are the main criterias of cash management. But it is equally important to invest the surplus cash in hand wisely. Despite being a liquid asset, idle cash does not generate any returns. While investing in short-term investments an organization must ensure liquidity and optimum returns.

Therefore, this decision needs to be taken with prudence.  Here, the quantum/amount of investment needs to be calculated and decided carefully. This caution is necessary because an organization cannot invest all the available funds. Businesses need to reserve cash for contingencies (cash in hand) too.

Other functions

Cash management also includes monitoring the bank accounts, managing electronic banking, pooling and netting of assets, etc. So the cash management for treasury can also be a core function. Although for large corporates this function is managed by softwares, small businesses have to monitor it manually and ensure liquidity at all times.

To add, large businesses have access to credit facilities at competitive rates. For small businesses that access is not available.  Therefore cash management is vital for them. However, even large corporations need to monitor their systems time and again to avoid a situation of bankruptcy.

Phases of Cash and Liquidity Management

The first phase of cash and liquidity management involves maximising liquidity through releasing and centralising cash. The second phase involves maximising the returns on any cash surplus in the concentrated cash pool or minimising the cost of funding any shortfalls. Together, both phases work to increase the profitability of the business.

Releasing Trapped Cash

As the name suggests, trapped cash is simply cash that is trapped in one location and can’t be moved to the centralised treasury. This occurs when there are regulations and constraints which limit cross-border money movement something which is often seen in emerging markets. This blog explains in more detail what these in-country restrictions include.

As we mentioned earlier, the difficult and important job of releasing trapped cash falls to the cash and liquidity management function. Fortunately, there are several methods that can be used to do this intercompany transfers, transfer pricing, and payment of dividends to name a few and companies will typically explore various avenues in their efforts to do this.

Local financial authorities in many countries have banned or blocked the use of these methods, but new techniques are constantly being developed.

Releasing Working Capital

The cash management function is also concerned with releasing working capital which may be tied up in assets like accounts receivables.

In order to do this, they aim to do three things: maximise their DSO (Days Sales Outstanding) and minimise their DIO (Days of Inventory) and DPO (Days Payables Outstanding).

We can use these three factors to determine the DCC (Days Cash Conversion) through a simple calculation:

In other words, the goal is to make payments as late as possible, collect payments as early as possible, and keep inventories as tight as possible.

Seasonality and Working Capital

Seasonality can have a huge effect on working capital. During periods of slow sales, there may be a lesser influx of cash which can affect the amount of working capital a business has available.

Similarly, a seasonal surge in sales requires larger inventory stocks, which must be ordered in advance. The cost of increasing inventory stocks may put additional strain on working capital during periods in which there is less available to them.

To combat the negative effects this can have on the profitability of the business, the cash management function must ensure they have accurate annual cash flow forecasts. They can then use this information to set limits for the amount of cash the business must hold back throughout the year and more effectively manage accounts receivable.

If the cash management function fails to effectively anticipate and prevent a shortfall in working capital, they may fall back on short-term financing options.

Bank deposits consist of money placed into banking institutions for safekeeping. These deposits are made to deposit accounts such as savings accounts, checking accounts, and money market accounts. The account holder has the right to withdraw deposited funds, as set forth in the terms and conditions governing the account agreement.

The deposit itself is a liability owed by the bank to the depositor. Bank deposits refer to this liability rather than to the actual funds that have been deposited. When someone opens a bank account and makes cash deposit, he surrenders the legal title to the cash, and it becomes an asset of the bank. In turn, the account is a liability to the bank.

Deposits of banks are classified into three categories:

(1) Demand deposits that is repayable on customers’ demand. These comprise the following:

• Current account deposits
• Savings bank deposits
• Call deposits

(ii) Term deposits that are repayable on maturity dates as agreed between the customers and the banker. These comprise the following:

• Fixed deposits
• Recurring deposits

(iii) Hybrid deposits or flexi deposits, which combine features of demand and term deposits. Lately, these deposits have been introduced by some banks to satisfy customers’ financial needs and convenience and are known by different names in different banks.

Demand and time deposits of a bank constitute its demand and time liabilities that the bank reports every week (on every Friday) to the RBI.

Types of Bank Deposits

Current (Demand Deposit) Account

A current account, also called a demand deposit account, is a basic checking account. Consumers deposit money and the deposited money can be withdrawn as the account holder desires on demand. These accounts often allow the account holder to withdraw funds using bank cards, checks, or over-the-counter withdrawal slips. In some cases, banks charge monthly fees for current accounts, but they may waive the fee if the account holder meets other requirements such as setting up direct deposit or making a certain number of monthly transfers to a savings account.

Savings Accounts

Savings accounts offer account holders interest on their deposits. However, in some cases, account holders may incur a monthly fee if they do not maintain a set balance or a certain number of deposits. Although savings accounts are not linked to paper checks or cards like current accounts, their funds are relatively easy for account holders to access.

In contrast, a money market account offers slightly higher interest rates than a savings account, but account holders face more limitations on the number of checks or transfers they can make from money market accounts.

Call Deposit Accounts

Financial institutions refer to these accounts as interest-bearing checking accounts, Checking Plus, or Advantage Accounts. These accounts combine the features of checking and savings accounts, allowing consumers to easily access their money but also earn interest on their deposits.

Certificates of Deposit/Time Deposit Accounts

Like a savings account, a time deposit account is an investment vehicle for consumers. Also known as certificates of deposit (CD), time deposit accounts tend to offer a higher rate of return than traditional savings accounts, but the money must stay in the account for a set period of time. In other countries, time deposit accounts feature alternative names such as term deposits, fixed-term accounts, and savings bonds.

Mobilization funding provides the capital needed to cover costs before work begins on a project or prior to invoicing. This can include such things as the transfer of both equipment and manpower, the installation of equipment at the project site, personnel lodging and allowance, insurance, and payroll.

Similar to purchase order financing, mobilization funding provides a financial cushion so you are able to keep your projects moving effectively and efficiently from invoice to invoice. This funding option allows contractors to take on larger projects, while giving peace of mind that there will be monetary coverage for materials and labor from start to finish.

• Economy consists of huge number of enterprises and individuals, requirements of all of them differ. Some have surplus cash to save, while some other needs cash.
• Some firms/individuals wants to make good there short term liquidity requirements, some wants money for long term capital investment.
• So distinction can be made as to period for which one intends to lend or borrow. In this sense financial market is categorized into money market and capital markets. In Money market, period involved (for funds movement) is 1 year or less, while in capital markets period is generally more than 1 year.
• As economy of the country grows, highly specialized institutions comes up which caters exclusively to capital needs and banks continues its money market business. These institutions are known as Capital Market intermediaries.
• These are intermediaries like insurance companies, housing finance companies, pension funds, and investment funds etc. which mobilize savings and fund long term investments.
• Financial market is a market where financial instruments are exchanged or traded and helps in determining the prices of the assets that are traded (also called the price discovery process). These facilitate trade in financial assets by providing platform for coming together of buyers and sellers or Borrowers or Lenders.
• Stock exchanges are ‘markets’ (or mandis) where prospective buyer and seller meets and item traded is Shares, debentures, bonds etc. In early days, there was physical interface between two parties; there were mediators in stock exchanges, which for a commission used to negotiate the deal.
• In present times stock markets indicate health of an economy. They are primary means of mobilization of long term savings and investment and fixed capital formation. Further, when volume of trade in markets is significant, it leads to transparent price discovery.
• There are other forms of savings under which small denominations of savings gets together to form significant investment figures. These are mainly Insurance, Provident fund and pension Savings (also called contractual savings). These have an important social security angle, but here focus is on resource mobilization through them.
• These funds have long maturity (repayment) period so they are better placed to cater need of projects with long gestation periods like infrastructure.
• Angel investors who invest in small start-ups or entrepreneurs are another important source of resource mobilization in an economy. Often, angel investors are among an entrepreneur’s family and friends. The capital angel investors provide may be a onetime investment to help the business propel or an ongoing injection of money to support and carry the company through its difficult early stages.
• Insurance: Insurance is service in which individual economic risk is spread over large number of people. Any loss that can be quantified in money can be insured. For e.g. Life Insurance provides risk cover on life of a person. Life cannot be quantified in itself, but economic hardships on survivors of a deceased breadwinner can be undoubtedly quantified in money terms, so this way life insurance can be done.
• Mutual Funds: Different shares in the market carry different kind and degree of risks. So an investors instead of putting all eggs in one basket, diversifies its portfolio. He attempts to minimize his risk and maximize return by investing in both debt and equity and further within equity, he picks up various sectors; infra, textile, IT, Cement, Housing, banking etc.
• Venture Capital (VC) which is a type of private equity, a form of financing that is provided by firms or funds to small, early-stage, emerging firms that are deemed to have high growth potential, or which have demonstrated high growth (in terms of number of employees, annual revenue, or both).
• Venture capital firms or funds invest in these early-stage companies in exchange for equity, or an ownership stake, in the companies they invest in. Venture capitalists take on the risk of financing risky start-ups in the hopes that some of the firms they support will become successful. Thus VC are another important source of resource mobilization in an economy.