Key Banking Concepts: Understanding Financial Services
Here is a brief overview of the requested banking concepts:
– Issue Management: Issue management refers to the process of managing new securities issues by companies to raise capital from the public. It involves planning, promoting, underwriting, pricing, and distributing securities. Issue managers coordinate with regulators, stock exchanges, and investors to ensure smooth and successful capital raising, often aided by merchant bankers.
– Underwriting Services: Underwriting is a service where an investment bank or financial institution guarantees the purchase of unsold shares during a new issue of securities. This reduces the risk for the issuing company by ensuring the entire issue amount is raised. Underwriters may either fully or partially subscribe to unsold securities and then sell them in the market.
– Corporate Debt Restructuring (CDR): CDR is the process of renegotiating the terms of debt agreements between corporate borrowers and lenders when the borrower is facing financial distress. The goal is to improve the financial viability of the company by extending repayment periods, reducing interest rates, converting debt to equity, or rescheduling payments, thereby avoiding bankruptcy and facilitating business continuity. CDR involves negotiations among the company, lenders, and other stakeholders to find sustainable debt servicing solutions.
Here is an overview of Project Counselling, Portfolio Management, and Loan Syndication:
– Project Counselling: This service involves assisting businesses in the planning and evaluation of new projects. It includes preparing detailed project reports, assessing technical and financial feasibility, advising on the financing pattern, helping obtain necessary approvals and licenses, and arranging funds from financial institutions. Project counselling ensures the viability and smooth implementation of projects.
– Portfolio Management: Portfolio management refers to the professional management of a variety of securities and assets to meet specified investment goals. It involves selecting investments, balancing risks and returns, diversification, and continuous monitoring of the portfolio. The objective is to optimize investment returns according to the investor’s risk appetite and time horizon.
– Loan Syndication: Loan syndication is the process where a group of banks or financial institutions collectively provide a large loan to a single borrower, typically for large projects. It spreads the risk among multiple lenders and provides the borrower with access to larger sums of funds than any one lender could offer alone. Merchant bankers or financial intermediaries often coordinate the syndication process, handling negotiations and documentation.
Mutual Funds are investment vehicles that pool money from multiple investors to invest in a diversified portfolio of securities like stocks, bonds, and money market instruments. They offer professional management, diversification, and liquidity to investors.
Advantages
– Professional management by experts
– Diversification reduces risk
– Liquidity through easy buying and selling of units
– Economies of scale lead to lower transaction costs
– Access to a wide range of securities even with small investments
Mutual Fund Schemes
– Growth Schemes: Focus on capital appreciation by investing mainly in equities.
– Income Schemes: Aim to provide regular income through dividends by investing in debt securities.
– Balanced Schemes: Invest in a mix of equity and debt to balance risk and return.
– Gilt-Edged Schemes: Invest primarily in government securities, offering safety and steady returns.
– Equity-Linked Savings Schemes (ELSS): Tax-saving schemes investing predominantly in equities with a lock-in period.
– Money Market Mutual Funds: Invest in short-term money market instruments like T-bills and commercial papers, providing high liquidity and safety.
Factoring Services:
Factoring is a financial service where a business sells its receivables (invoices) to a third party, called a factor, to get immediate cash flow. The primary functions of a factor include:
– Financing: Providing immediate funds by purchasing the receivables.
– Administrative: Managing sales ledger, sending account statements to clients, and collection of receivables.
– Warranty: Guaranteeing payment to the seller by bearing the credit risk of the receivables.
Types of Factoring include:
– Full-service factoring covering financing, collection, and credit risk coverage.
– Non-recourse factoring where the factor assumes the credit risk.
– Seller-based factoring where the factor takes over credit collection operations.
Credit Rating Services in India:
Credit rating agencies assess the creditworthiness of companies and debt instruments by analyzing factors like payment history, financial condition, and repayment ability. They help investors and lenders make informed decisions.
– ICRA and CRISIL are among the leading credit rating agencies in India.
– CRISIL, established in 1987 and a part of S&P Global, provides ratings, research, and risk solutions.
– ICRA, set up in 1991 and associated with Moody’s, also plays a major role in rating services.
– These agencies enhance market transparency, reduce information asymmetry, and influence borrowing costs for rated entities.