Fee-Based Services of Banks

Samir K Mahajan

Service Provided Bank

Fund-Based

services

FEE- Based services

A GLIMPSE ON SERVICES PROVIDED BY BANK

Samir K Mahajan

A glimpse on services provided by bank(contd.)

FUND-BASED SERVICES

relate those activities which results in immediate actual outflow of cash and immediatedepletion of actual liquidity of a banker.

include granting of loans and advances, and making investment inshare/debentures/bond.

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A glimpse on services provided by bank(contd.)

FEE-BASED SERVICES include non-fund based credit assistance (such as letter of credit or bank guarantee) and other fee-based functions of the bank.

may not involve immediate fund outflow, and hence may not affects banker’s liquidity.

Fee-based credit facility (letter of credit or bank guarantee) may crystallize into fund-based advances. Most of the contingent liabilities of bank more prominently letters of creditand bank guarantees fall under this category.

bank earns a series non-interest income in the form of fees or commissions and servicecharges etc. out of fee-based services.

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Fee based Services of Banks: Components

Non-fund based working capital financing through

issue of letter of credit and bank guarantee

General Utility Function Agency function

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LETTERS OF CREDIT AND BANK GUARANTEE

Letters of credit are used primarily in international trade for transactions between aseller /supplier(exporter) in one country and a customer/buyer (importer) inanother.

A letter of credit is a letter from a bank guaranteeing that a buyer's payment to theseller will be received on time and for the correct amount. In the event that thebuyer is unable to make payment on the purchase, the bank will be required tocover the full or remaining amount of the purchase.

The bank also acts on behalf of the buyer (holder of letter of credit) by ensuring thatthe supplier will not be paid until the bank receives a confirmation that the goodshave been actually shipped.

Non-fund based working capital

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LETTERS OF CREDIT(contd.)

FLOW CHART OF LETTER OF CREDIT

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BANK GUARANTEE

BANK GUARANTEE is a guarantee from a bank on behalf of its customer usually a corporateensuring that the liabilities of the customer (debtor) will be met on time. If the debtor fails tosettle a debt, the bank will cover it.

The bank guarantee is one such innovative financial instrument whereby, if the beneficiary(creditor) perceives that there has been a breach of contract by the other party(debtor/thecustomer of the bank), he can encash the guarantee, and avail of the amount immediately,without having to undergo the hassles of litigation.

Non-fund based working capital

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Bank Guarantee(contd.)

FLOW CHART OF BANK GUARANTEE

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AGENCY FUNCTION/SERVICES On BEHALF Of THE CUSTOMERS

Fund remittance/transfer facilities from one place to another trough cheque, drafts, pay orders

Collection and payment of credit instruments like cheque, bill of exchange, promissory notes etc

Execution of standing orders such as making various period payments like subscriptions, rents, premiums on behalf of customers

Purchase and sale of securities on behalf of customers

Acting as trustee and executors in case of wills of customers

Collection of interest and dividend on behalf of customers

Income tax consultancy Samir K Mahajan

BancassuranceFactoringLeasingCredit Rating Demat Account Portfolio managementMutual FundsMerchant BankingSafety Locker facilityTravelers' chequesBroking servicesForeign ExchangeGift Cheques

GENERAL UTILITY SERVICES

Payment Mechanism or Money Transfer ATM facilitiesCredit cards/Debit Card facilities Advice on Financial MattersProvides Trade Information

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BANCASSURANCE

Bancassurance means selling insurance product through banks. Banks andinsurance company come up in a partnership wherein the bank sells the tiedinsurance company's insurance products to its clients.

bancassurance arrangement benefits both the firms.

bank earns fee amount from the insurance company and the insurance firmincreases its market reach and customers.

bank acts as an intermediary between prospective customers of insuranceproduct and the insurance company.

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FACTORING

Factoring is a financial transaction in which a business sells its account receivable (e.g., invoices, bills ) to a third party (called a factor) at a discount. Bank can also assumesthe role of a factor. FACTORING may be in advance or at maturity.

o In "advance" factoring, the business owner sells his receivables to the factor whomakes an advance of 70-85% of the purchase price of the receivable amount. Thefactor collects the full amount from the customer in due course and pays the balancedue-amount to the business owner after deducting his commission and othercharges.

o In "maturity" factoring, the factor makes no immediate advance on the receivables;but sees that the buyer/customer pays the invoiced amount within the stipulatedtime i.e. on maturity. If the customer fails to make payment within the stipulatedtime, the factor makes payment to the client and proceeds to collect the paymentfrom the customer.

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FACTORING FLOW CHART

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LEASING

A lease is a contractual arrangement calling for the lessee/user to pay (rental) the

lessor /owner( say the bank) for use of an asset/tangible property for agreed period of

time and consideration.

Leasing promotes investment in capital equipment (specially expensive equipments )

for start-up or growing business.

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GENERAL UTILITY SERVICES(contd.)

LEASING FLOW CHART

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GENERAL UTILITY SERVICES(contd.)

CREDIT RATING

Credit rating is an opinion of relative capacity of a borrowing entity to service its debtobligations within a specified time period and with particular reference to the debt instrumentbeing rated.

Bank also does credit rating

Prominent credit rating agencies in India are CRISIL Limited , ICRA Limited, CARE Ratings ,Fitch Ratings India Private Limited

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GENERAL UTILITY SERVICES(contd.)

DEMAT ACCOUNT

In India’s banking terminology, the term DEMAT Account refers to a deposit made at an Indianfinancial institution that can be used for investing in shares of stocks and other financial assets.Securities such as: share, bonds etc are held electronically in a DEMAT Account, therebyeliminating the need for physical paper certificates.

DEMAT is short for “Dematerialized” and such accounts require that an investor open anaccount with an investment broker (it may be a bank) linked to a savings or other fundedaccount.

Access to a DEMAT Account requires both an Internet and transaction password, and suchaccounts allow for the transfer (buying and selling) of securities without any physicalcertificates changing hands.

Operative India since 1996

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GENERAL UTILITY SERVICES(contd.)

DEMAT ACCOUNT FLOW CHART

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MERCHANT BANKING

Merchant banking may be defined as an ‘institution deals mostly in (but is not limited

to) international finance, long-term loans for companies and underwriting of shares,

portfolio management, project counseling, and so on. They render all these services for

a fee.

Merchant banks do not provide regular banking services to the general public

ORIGIN :

The term merchant banking originated from the London who started financing foreign

trade through acceptance of bills

Later they helped government of under developed countries to raise long term funds

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Merchant banking Services includes the following

Raising Finance for ClientsMerchant Banking helps its clients to raise finance through issue of shares, debentures, bankloans, etc. It helps its clients to raise finance from the domestic and international market. Thefinance raised is used for starting a new business or project or for modernization, diversificationor expansion of the business.

Merchant banking contd.

Samir K Mahajan

Merchant banking Services includes the following contd.

Managing Public Issue of Companieso Pre-issue activities: Advise on the timing ( opening and closing) of the public issue, launching of publicity

campaign Advise on the size , price , marketing of the issue

o Post-issue activities acting as manager to the issue, and helping in accepting (collecting) applications, screening

of application, and deciding on the allotment of securities mailing of allotment letters, share certificates and refund orders listing of shares on the stock exchange, etc

Merchant banking contd.

Samir K Mahajan

Underwriting of public issuesUnderwriting is an insurance/guarantee given to the company which makes public issues in caseof the public issue fails. A merchant bank acts as one of the underwriters (5 percent of totalunderwriting commitment or Rs. 25 lakhs which ever is less) and also help in appointing underwritersand brokers to the issue. Raising of external resources is easy for the issues backed by well-knownunderwriters.

Managers, consultants or advisers to the issueSEBI insist that all issues should be managed by at least one authorized merchant banker but not morethan two. For an issue of upto 100 crores , a maximum of four merchant bankers shall be appointed.They help in listing of shares in stock exchange, completion of formalities under Companies Act etc.

Merchant banking

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Broker in Stock ExchangeMerchant bankers also take form of a brokers in the stock exchange. They buy and sell shares on

behalf of their clients. Lot of research is done by these merchant bankers on equity shares. Theyalso advise their clients about which shares to buy, when to buy, how much to buy and when tosell.

Project ManagementMerchant bankers offer help to their clients in every way possible. For e.g. They advise aboutlocation of a project, preparing a project report, conducting feasibility studies, making a plan forfinancing the project, finding out sources of finance, advising about concessions and incentivesfrom the government which the companies are not aware of.

Merchant banking

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Advice on Expansion and ModernizationMerchant bankers give advice for expansion and modernization, diversification of business,

foreign collaborations and joint-ventures, technology upgradation, etc. of the business units.

Corporate Restructuring

They give expert advice on mergers / amalgamations(combination of two or more companiesinto a single company where one survives and other loses its existence), and acquisitions/take-over (purchase by one company acquiring, controlling interest in the share capital of anothercompany) of existing business units, sale of existing units or disinvestment.

Merchant banking

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Handling Government Consent for Industrial ProjectsA company requires permission start his business or for expansion or modernizationactivities. For this, many formalities have to be completed. Merchant bankers advice onthese matters and do all this work for their clients.

Money Market OperationMerchant bankers deal with and underwrite short-term money market instruments, such as:Government Bonds., Certificate of deposit issued by banks and financial institutions,Commercial paper issued by large corporate firms, Treasury bills.

Merchant banking

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Merchant banking

Offshore FinanceoLong term foreign currency loanoJoint venture abroadoFinancing exports and importsoForeign collaboration arrangement

Other servicesoAssist the corporate clients in the management of Interest and Dividendo Leasing ServicesoPortfolio managementoSpecial Assistance to Small Companies and EntrepreneursoRevival of Sick Industrial Units

Samir K Mahajan

Merchant banking

Institutions Providing Merchant Banking Services In India

oCommercial banks

oForeign banks like National Grindlays Bank, Citibank, HSBC bank etc..

oDevelopment banks like ICICI,IFCI,IDBI etc..

oSFCs , SIDCs

oPrivate firms like JM Financial and Investment service , DSP Financial Consultants, CeatFinancial Services, Kotak Mahindra, VMC Project Technologies, Morgan Stanley, JardieFleming, Klienwort Benson etc…

Samir K Mahajan