Evolution Of Financial Services

EVOLUTION OF FINANCIAL SERVICES

KINDS OF FINANCIAL SERVICES

• MORTGAGE & CAR LOANS

CH 13

• HOUSING / VEHICLE FINANCE

CH 9

MORTGAGE • Transfer of interest by pledging a property as security against a loan or advance • Transferor is Mortgager & transferee is Mortgagee • There is transfer of interest (right to sell) & not ownership (sell) • There should be a specific immovable property • That property is provided as security • Money advanced is consideration • Parties should be competent • Mortgage by deposit by title deeds doesn’t require registration

TYPES OF MORTGAGE • SIMPLE – Without delivering possession – Mortgager binds himself to pay money – Agree that if he fails, mortgagee can sell that property • USUFRUCTUARY – Delivers possession – Authorises mortgagee to retain possession & enjoy rent/profits – Allow to appropriate that rent in lieu of mortgage money • ENGLISH MORTAGE – Transfers the property absolutely to mortgagee – Retransfer to mortgager on payment of mortgage money

TYPES OF MORTGAGE • EQUITABLE MORTAGE (EM) – Deposit of title deeds – Doesn’t require registration – Mortgager delivers the lender titles of property – No public notice is required – Common & Indian bank does this type of Mortgage

HYPOTHECATION • Product of trade usage • Kind of pledge where pledged goods remains in possession of pledger (borrower) • Hypothecator( borrower) holds such goods as an agent & not as owner, liable to return in case of default • In case of default lender cannot seize goods directly but he has to obtain consent of borrower or court’s order • Hypothecatee (lender) is not in actual possession of goods but has to grant the use of those goods to borrower

HYPOTHECATION & PLEDGE • Pledged goods are stored in lock & key of bank & remain in bank’s possession. Borrower has to take permission of bank if withdrawals or addition is required • While Hypothecated goods are allowed to kept in premises of borrower & are in constructive notice of bank by way of returns filed by borrower • Pledged goods are in actual possession of the bank while hypothecated goods are in possession of borrower

KINDS OF FINANCIAL SERVICES

• LEASING

CH 3 , 4 , 5

• HIRE PURCHASE

CH 6

LEASE • Transfer of right in immovable property by lessor to lessee enjoy possession for limited period of time (asset reverts back to owner if lease is not renewed) • Consideration is called as lease rent • Dealt with TOPA • Example plots allotted by Development Authority • In sale ownership is transferred while in lease only interest to enjoy possession is transferred • Parties should be competent of contract • Subject matter should be immovable property

EVOLUTION OF LEASE • 1973 FLCI ( First leasing company of India ) • 1979 Twentieth Century Leasing limited • 1980s – Tandon & chore Committee forced companies to divert LT funds in WC & this forced Manufacturing companies to find alternative means • Advantages – – – –

Easy documentation Fewer restrictive covenants No dilution of ownership Availability of 100% finance

• 1983 - Industrial Credit & Investment Corporation of India (ICICI) • 1985 – 300 companies started operating including IFCI & IDBI

EVOLUTION OF LEASE • In 1983 RBI Act was amended & Banks could form subsidiaries viz SBI Capital Markets Ltd , PNB Financial Services Ltd , Can Bank Financial services Ltd • ILFS formed by CBI ,HDFC & UTI • Leasing Corporation of India by BOI & TCFCL • India Equipment Leasing Company Ltd by SBI & Sundaram Finance • Stan Chart Bank , first private foreign bank promoted Cholamandalam Investment & Finance Company • This competition brought fall in Lease rates & many small companies entered in Bill discounting & consumer finance • Industrial policy 1991 & abolition of MRTP allowed 51 % foreign equity • 1994 RBI permitted all Banks to start Leasing & HP • Post liberalization – GE increase number of foreign firms

HIRE PURCHASE • Selling goods by owner & finance their price • Goods are lent on hire & price is paid in installment • Hirer (who acquire possession of goods) may purchase goods after paying all installments • HP contracts are governed by Indian Contract Act 1872 • It is cancelable lease contract with call (purchase) option • In loan/hypothecation ownership is transferred in beginning, In lease it is not at all transferred while in HP it is transferred at option of hirer at last installment.

KINDS OF FINANCIAL SERVICES • CONSUMER CREDIT CH 7 – Asset based financing plans that are offered primarily to individuals for acquiring consumer durables – Paying down payment / taking delivery / paying interest & balance • INVESTMENT BANKING

– – – – – – –

Advising about raising of funds – its source & time Administrating documentation/prospectus/legal frame work Underwriting Distributes securities / printing / allotment Investment management guaranteeing returns Merger / acquisition Pension plans , hedging risks , real estate , foreign currency

KINDS OF FINANCIAL SERVICES • COMMERCIAL BANKING • VENTURE CAPITAL – Providing seed / start up & first stage financing or funding expansion of potential companies with equity – Seeing unexpected growth in US , India in 1985 conceptualised it in its Long term Fiscal policy – Promoted by Banks /FI /private sector • INSURANCE & M/F CH 14 – – – –

First MF was UTI US 64, Then SBI & Canera Bank broke monopoly 1993 – First private MF Kothari Mutual Now every MF floated should have at least one AMC

KINDS OF FINANCIAL SERVICES • CREDIT RATING CH 11 – Rating of Financial instruments & Risk – Parameter includes track record ,Financials & range of products – USA 1986 Henry Poor – India 1988 CRISIL & CARE • BILL DISCOUNTING – Financing the receivables • STOCK BROKING • FACTORING CH 8 • Transfer of receivables & related book keeping to intermediary known as Factor • PLASTIC MONEY – credit card / debit card/ other cards