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Wednesday, April 2, 2008

Development Banking for CS Final

Just get the essence of the subject like this...Its like...the
following points are nothing but the reproduction of the material but
its concise and you can read it many a times, making your CS Final
Exams, just a flow of writin...Every exam in CS Final is very
interestin Provided, u have the right approach to study it. Do
comment your understanding & needs. You have every right to
critically review my writing, only then I can improve, please help.

DEVELOPMENT BANKING – the gap filler

It is a multi-purpose financial institution. Financial institution
concerned with providing all types of financial assistance to business
units, in the form of loans, underwriting, investment, guarantee
operations & promotional activities – economic development in general
& industrial development.

I. EVOLUTION:
1. Institutionalism (1948-55)
2. Expansion (1955-64)
I. CONSOLIDATION & INNOVATION (1964-76):
1. Introduction of Consortium financing;
2. Industry potential survey & concessional finance for Backward areas;
3. Introduction of Loan convertibility clause, merchant banking, etc…
4. Creation of Technical consultancy organisation & Management
Development Institute (MDI, Gurgaon).
I. STABILITY & GROWTH (1976-84): Increased sanctioning & disbursement
of loans; creation of Entrepreneurship Development Institute of India,
1983.
I. DIVERSIFICATION & CHANGE (1984-92):
1. Increase in project financing and fund & fee based services;
2. Introduction of Credit Rating Agencies (CRA);
3. Guidelines for appointment of nominee directors.
I. RE-ORIENTATION (1992 onwards):
1. Establishment of commercial banks, investment banks & mutual funds;
2. IFCI which was formed as a statutory corporation is converted into company.

SNO. DEVELOPMENT BANKING; COMMERCIAL BANKING
1. Project oriented; Security oriented;
2. Influencing & collecting savings & re-channelising them to people
in need; It has an additional function of generating money;
3. Liabilities are not converted into cash-on-demand; Substantially
there are demand deposits & only banks are authorised to accept
deposits withdrawable by cheque;
4. For medium & long term needs; For short term credit requirements;
5. Funds drawn from budgetary resources of Central Government, RBI
borrowings, foreign lines of credit & bond borrowings; Funds from
deposits of public & corporate sector (demand deposits).
6. CREDIT FUNCTION; Also MONETARY FUNCTION.


GROWTH OF DEVELOPMENT BANKING – for long term investment credit;
FOR i) Industry: IDBI, SIDBI, IFCI, ICICI [(P) sector], IIBI, SFC, SIDC;
ii)Agriculture: NABARD;
iii)Exports: EXIM;
iv) Housing: NHB;
v) Infrastructure: IDFC;
In economic development of a country, development banking act as
"partners in progress" & proceed on "anticipated income theory" i.e.,
dues are expected to be realised out of the anticipated income of the
borrowers. The common functions include, Direct Investment /
Underwriting / Guaranteeing / Securing…

INDUSTRIAL FINANCIAL CORPORATION OF INDIA LTD (IFCI) – 1948
Making medium & long term credit more readily available to eligible
industrial concerns in India when, normal banking accommodation is
"inappropriate" OR recourse to capital market is "impracticable".

NODAL AGENCY for "sugar development fund" & "jute modernisation fund".

FUNCTIONS:
1. Financial assistance to industrial concerns for new, expansion,
diversification & modernisation projects in corporate & co-operative
sector;
2. Merchant banking (fund & fee), foreign & rupee currency loans;
3. Underwriting/direct subscription/guarantees;
4. Subsidiaries include IFCI financial/custodial/investor service;
5. Established MDI, Gurgaon for management training.


STATE FINANCE CORPORATION (SFC) ACT 1951: for meeting term credit
needs of small & medium industries. It complements IFCI. It raises
resources as 'trustee securities', borrows up to 2x(paid-up) from RBI,
borrow from SG/FI/Scheduled Commercial Banks within the prescribed
limits. The business includes factoring, money market, endorsing
letter of credit, trustee for debenture holders, etc…


PRIME LENDING RATE: interest rate at which bank or financial
institution is willing to lend to its prime customers (near zero
risk), so that the earnings from lending will cover, all costs &
expenses and leave adequate enough margin to service its capital. It
can be short term (<=3years) or long term (>3years). The components
include,
1. Fund cost (Deposits + Own funds); 2. Staff cost (Fund mobilisation
+ loans/advances); 3. Overheads; 4. Write-off bad & doubtful debts; 5.
Premium for Asset-Liability mismatch.
INDUSTRIAL CREDIT & INVESTMENT CORPORATION OF INDIA (ICICI) 1955: as a result of international co-operative effort (by World Bank with GOI
support) to foster private investment in India & to promote industries
in (P) sector.

FUNCTIONS: (as a Universal Bank)
1. Underwriting/direct subscription/guaranteeing/merchant banking, etc…
2. Merchant banking & Project Counselling for NRIs.
3. Foreign currency assistance for 3crores project.
4. Provides risk & loan capital for creation/expansion/modernisation
of Productive Facilities & encourages others to invest.
5. Credit facilities to indigenous manufacturers & equipment leasing services.

INDUSTRIAL DEVELOPMENT BANK OF INDIA (IDBI) – 1964 as a Wholly Owned
Subsidiary (WoS) of RBI, later converted into autonomous body to serve
as an APEX institution for term finance in an industry.

FUNCTIONS:
1. Established National Securities Depository Ltd., & Entrepreneurial
Development Institute at Ahmedabad.
2. Planning, promoting, co-ordinating,… the working of & assisting the
development of & to fill gaps.
3. Conducting surveys, R&D, techno-economic studies & Investment research.
4. Re-discounting to push up sales by Indigenous manufacturers.
5. Advise Government in disinvestment.
6. Entered International market with floating rate note issue.
7. Direct loans under Project Finance Scheme for 5crores with
convertibility up to 20% of loans into equity.

SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA (SIDBI): an APEX bank for
tiny, small & cottage sector, established as a WoS of IDBI & it
administers SID fund & National Equity fund.

FUNCTIONS:
1. Direct assistance through project, equipment & infrastructure financing;
2. Indirect financing through 100% refinancing if repayment on
quarterly basis to loans for a period of 25years;
3. Equity type assistance including Seed Capital scheme, self
employment for ex-servicemen, et al.
4. Commercial exploitation of lab-tested technology in association
with CSIR (Council for Scientific & Industrial Research).

INDUSTRIAL INVESTMENT BANK OF INDIA (IIBI), 1997 as a Government
Company; an AIFI (All India Financial Institution) providing financial
assistance to SICK & Non-Sick industries (medium & large scale)
needing modernisation, diversification & technological updation by way
of term loans, bridging urgent liquidity gaps, etc… The ancillary
services include Consultancy (Viability Report), Merchant banking
(Scheme of M&A) & equipment leasing. The repayment period of 10years
is based on surplus generation capacity. The schemes include Short
term loans, Short term Working capital loans & Asset credit scheme.


VENTURE CAPITAL: provides initial support to new companies (with sound
project ideas) using high technology & have potential for high profits
but suffer from capital inadequacy.

SEBI (VENTURE CAPITAL FUNDS (VCF) REGULATIONS), 1996:
1. Venture fund incorporated in India can exit the company within
1year of going public or stay invested, foregoing the Tax Pass Through
Benefit (TPTB).
2. Foreign funds not incorporated in India have no TPTB though
registered with SEBI.
3. Acquisition of shares will be exempt form Takeover Code.
4. Investor in Venture Fund for 5lakhs & Minimum corpus of the fund to
be 5crores & investment in a company up to 25%.
5. Mutual fund can invest till 5% (Corpus) in open-ended schemes & 10%
(Corpus) in close-ended schemes.
6. VCF can invest in IPO as QIB (Qualified Institutional Buyer).

EXPORT IMPORT (EXIM) BANK 1982 established as a statutory corporation
from IDBI providing financial assistance to exporters/importers & to
promote country's international trade. The operations include deferred
payment @ post-shipment stage, multi-currency financing for project
exporters & term loans to SEZ.

FUNCTIONS:
I. Loans to Indian companies:
1. Direct financial assistance through Risk syndication facility;
2. Facilities for deemed exports & overseas investment financing;
3. Pre-shipment credit if cycle time of export contract is >3months;
II. Loans to foreign Government & Financial Institution:
1. Overseas Buyers Credit: Foreign importers for Indian goods/services;
2. Line of Credit (LoC) to foreign government & re-lending facility to
bank overseas;
Foreign BuyerBANK OverseasEXIM (Intermediary)Suppliers.
III. Loans to commercial bank in India:
1. Export bills re-discounting; 100% re-finance of export credit;
2. Guaranteeing of obligation for execution of export contracts & also
in-principle approval for such contracts at bid stage if its worth
beyond 2crores.

Joint venture with Global Trace Finance for forfeiting & factoring;
Got award for "Export Development" from ADFIAP Awards, 2002;
Book for "Business practises of Successful Indian Exporters";
"EXIMius centre" at Bangalore;

UNIT TRUST OF INDIA (UTI) 1963 as statutory public sector investment
institution.
STEP1: Mobilise savings through sale of units under schemes;
STEP2: Invest in good companies;
STEP3: Distribute tax-free dividend to unit-holders.

TRIPLE ADVANTAGE to small investors as to SAFETY, STEADY RETURN &
LIQUIDITY, also benefit of leaving task of portfolio management to
experts.

SCHEMES include OPEN ENDED – tailored to suit the needs of different
categories of peoples & different purposes; CLOSE ENDED – Income &
Growth schemes. Thus, SUPER MARKET for instruments.

SUGGESTIONS of Deepak Parekh Committee: for sustaining investor
confidence & strengthening about US64 scheme by taking a) Measures to
provide financial support by enhancing promoter's stake, GOI
participation, etc…; b) Measures for qualitative changes in funding of
UTI through independent trustees in Board, reconstitute AMC,
NAV-driven schemes, etc...

LIFE INSURANCE CORPORATION (LIC) 1956: accumulate in the form of "life
fund" & is the single largest investor to subscribe/underwrite/provide
term loans;

Accretion to "Controlled Fund" invested as per Insurance Act, 1938:
<=20% in CG Marketable securities; <=25% (including above) as loan to
National Housing bank; <=50% (including above) in CG/SG securities;
<=75% (including above) in Social Oriented sectors; Balance (25%) as
per commercial judgement subject to Prudential Norms.

Investment for General Insurance Corporation (GIC) being <=20% in
CG/SG securities; <=15% to housing loans; <=55% to market sector &
Balance to Social Oriented Sectors.


NATIONAL BANK FOR AGRICULTURAL & RURAL DEVELOPMENT (NABARD) 1981 by merging agricultural credit & rural planning cell of RBI &
Agricultural Refinance Development Corporation (ARDC) as APEX
Development bank for promotion of agriculture, SSI, cottage & village
industries & economic activities in rural areas.

FUNCTIONS
*. CREDIT FUNCTION:
1. Refinance <=18months for seasonal agriculture, marketing of inputs,
& other production & marketing activities; conversion & rescheduling
of loans <=7years from out of "National Rural Credit
(Stabilisation/Long term operations) Fund".
2. Medium/Long term credit assistance to Banks/FI.
3. Incorporated the "Co-operative Development Fund" & Rural
Infrastructure Development Fund (RIDF) for quicker completion of
on-going projects.
*. DEVELOPMENT FUNCTION:
1. Assist & act as agents to Government & RBI for rural development efforts;
2. Assist SG to contribute to share capital of eligible institutions.
*. REGULATORY FUNCTION:
1. For Regional Rural Banks & Co-operative banks, NOT being Primary banks;
2. Undertake inspection & required to file returns & documents.

NATIONAL HOUSING BANK (NHB) 1987: Principal Agency of APEX institution
in housing finance & support services.

FUNCTIONS:
1. Promotion & Development: Equity support & conducts training;
2. Regulation & Supervision: S24 – power to inspect & call
information; S30 – regulate/prohibit issue of
Prospectus/Advertisement; S31 – collect information & issue
directions.
3. Financing: Equity & Re-financing for Land development & shelter
projects, Infrastructure projects & Slum re-development schemes;
front-end charge up to 2% of sanctiond amount.
4. Housing Finance Company (HFC) accepts deposits from public
(12-84months) & can give interest <=15% p.a. but such limit will not
apply if Net Owned Funds (NoF) >= 50lakhs.
5. HFC should have a minimum credit rating of "A" grade.
The major amendment being on default of loan, apply to Recovery
Officer, NOT under Transfer of Property Act.


LOAN SYNDICATION:
STEP1: When prospective borrower, approaches the Financial Institution
(Lead Manager/Mandated Institution) & request it to arrange for
credit;
STEP2: Such financial institution prepares Information Memorandum with
details of projects, credit requirements, terms, etc…
STEP3: Such information memorandum is for Prospective Lenders to
participate in credit offer;
STEP4: Such prospective lenders do Independent Evaluation of Borrower,
Project & Credit offer;
STEP5: Meeting of Financial Institution (FI) & prospective lenders for
finalisation & appoint Agent FI by entering into agreement with limits
for agency services;
STEP6: Such Agent FI communicates to borrower who then offers his
written consent & then executes documents based on "Single Window
Clearance".
STEP7:
Credit deposition by FIDisbursement of amountRepaymentProrata entitlement.

METHODS – Loan Syndication:
1. Direct Lending: Executing Independent loan agreement & Several liability;
2. Participation Method: Agent FI is the only lending bank.

Thats it...this chapter...come on...u r nearin Victory.....Enjoy passin...Vj

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