Category Archives: FINANCE

Going by experience and common sense, it seems that there cannot be any human activity that does not expose the people involved in that activity to some form of risk or the other. Whether it is the common activity of taking food and the possibility that bits of it may get lodged in the windpipe, or it relates to taking a vital investment decision, everywhere we find that risk is unavoidable. Therefore, we can say, “risk taking is a way of life”. It is said: “ a person who does not take risk in life, risks everything in life”.

Financial Risk Management

Introduction: Going by experience and common sense, it seems that there cannot be any human activity that does not expose the people involved in that activity to some form of risk or the other. Whether it is the common activity of taking food and the possibility that bits of it may get lodged in the windpipe, or it relates to taking a vital investment decision, everywhere we find that risk is unavoidable. Therefore, we can say, “risk taking is a way of life”. It is said: “ a person who does not take risk in life, risks everything in life”.

In this article, we shall discuss some of the basic concepts of financial risks faced by banks and how effectively they are being managed. Till the late eighties, banks in India were following more or less a traditional approach, confining themselves to the basic banking, namely, getting deposits from the public and lending to the business and industry to make a profit out of the differential in interest. In the recent years, the following factors have forced the banks to look beyond traditional banking to broad-base their activities and also for product innovation. •

Deregulation • Liberalisation • Globalisation • Disintermediation • Increasing bankruptcies/conditions of financial distress in the corporate sector • Entry of new banks • Growth of technology •

New products introduced by competitors Broad-basing and innovation essentially mean taking new responsibilities and exposures, which have in-built uncertainties. Banks, while adapting to the changing environment, have to necessarily build a structure which will ensure that they pass through all the uncertainties by guarding themselves against the possible losses. What is the broad meaning of risk (acceptable to the banks/financial institutions)?

The loss suffered by an organisation (in normal circumstances) can be broadly classified into expected loss and unexpected loss. Based on past experience, a statistical measure of loss expected to be incurred in similar situations in future can be rationally thought of. However, unexpected losses are difficult to measure. Unexpected losses are also caused by probable events but their occurrence is uncertain. Nevertheless, unexpected loss can be calculated if the probability distribution of expected loss is known. Risks have been classified in a number of ways, depending on the basis of classification.

For instance, risks can be divided into balance sheet risks and off-balance sheet risks. Risks can also be classified as systemic and non-systemic or controllable and non-controllable. Systemic risks are basically risks associated with the system within which the organisation functions. For an industrial unit, risks associated with the related industry segment are systemic risks since all similarly placed industrial units within that segment are uniformly exposed to the same risks. Systemic risks are largely non-controllable. In contrast, non-systemic risks are organisation-specific and can be controlled in good measure.

Whether it is traditional banking or modern banking, what are the financial risks that banks face in their operations? •

Funds lent or invested may not be recovered – Risk of Default, Transaction Risk, Counter-party Risk or simply, Credit Risk. • Funds lent or invested are recovered, but not when due – Liquidity Risk or Re-pricing Risk • Funds lent or invested may lose value over a period of time because of certain economic factors – Market Risk (Interest Rate Risk, Exchange Risk, Price Risk) • Certain operational mishaps or acts of God (and also acts of man!) may turn into financial loss –

Operational Risk Before proceeding to discuss the risks confronting banks in the Indian context, let us briefly peep into the international arena, because Indian banking industry is in the process of adapting itself to changes at the global level. The Latin American debt crisis of 1980s, the global property downturn of 1990s, the Asian financial crisis of 1997 – all took a heavy toll on the banking and financial industry.

After each crisis, the predictable reaction of the industry was to tighten the standards in the disbursement of advances, thereby restricting the growth in lending. If we look at the response of the banking industry to the changing environment in the economy, it is almost similar through out the world. When excessive opportunity for growth is seen in a particular segment, all banks participate with enthusiasm as if there would be no end to the potential. The moment the cycle turns, they immediately react with strong corrective measures to ensure that the same situation does not affect them again. B

ut, unfortunately, different events strike them in different ways at different times. We can see a cycle, as explained here under, which needs to be corrected. Assume non-viable exposures Go for aggressive marketing Slip into loss Lose market share Impose restrictions Shy away from normal risks With a view to taking care of such situations and to ensure that the banking industry globally is able to withstand any financial crisis, the Basel Committee on Banking Supervision suggested Capital Standards in 1988 and after acceptance of the Standards by most of the countries, it became a Capital Accord, coming into force in 1992.

This mainly achieved two purposes: 1) To withstand any sudden financial shock of loss, a bank should have adequate capital to serve as a cushion. At that time, credit risk was perceived as a major risk. Therefore, Basel Committee suggested that a minimum capital to risk-weighted assets ratio of 8% be uniformly maintained by all commercial banks, in particular by the internationally active banks. 2) As the standard was to be made applicable to all the countries, the term Capital also was defined and made applicable uniformly. Initially, only credit risk was covered by the Accord.

Subsequently, in 1996, the Accord was partially amended to include market risk. The amendment which came into force at the end of 1997. It separates bank’s assets into two categories, namely, the trading book (financial instruments intentionally held for short-term sale and typically marked-to-market), and the banking book (other instruments, meant to be held to maturity). A capital charge for market risk of trading book and the currency and commodity risk of the banking book was also added. Almost simultaneously, it was realised that there was a need to issue specific guiding principles for management of operational risk also. On a review of the Accord, the Basel Committee noted two important factors: a)

The uncertainty faced by banks is not confined to only credit risk. Banks may incur loss on account of operational risks for which also they need to have adequate capital. b) In the existing Accord, the committee has not made any distinction between a highly rated borrower and a not-so-well rated borrower while specifying risk weights for assessing credit risk.

The Accord follows more or less a broad-brush approach as there is no incentive for banks to go in for high quality financial exposures and also no disincentive for those banks who indulge in risky financial exposures. To take care of these aspects, the Basel Committee released a consultative paper in June 1999, which proposed a new approach, built around the following three mutually reinforcing pillars of performance:

 Economic Capital (Minimum Capital Requirements)  Supervisory Review Process, and  Market Discipline.

Investment in IPOs in the Indian Capital Market

Investment is adding funds to another company in order to make it more profitable than original sum added into it. It is one class of increasing money with multiple effects without moving into traditional forms of entering into financial markets. IPOs are opportunities for companies to get additional supply of money legally through stock markets which runs with rules and regulations of the nation and world and provides opportunities for both the host company as well as that of investors to invest and finds out that buy purchasing shares of companies that would multiply their incomes in times to come.

Investment in IPOs comes in two different aims. The first aim can to have to buy some shares and increase the invested money so that sudden benefits will come as compared to investment into deposits into banks or financial institutions. All of financial institutions runs with the principle that regulates by Reserve Bank of India and for this additional benefits in savings scheme is not possible.

That is why investment in IPOs or Indian capital market is one of perceivably better options so that ultimately incur of benefits might be there due to the presence of rise of values of shares in stock market. For this it is important to keep looking deeper into how share market of specific nation is performing and how the specific company is performing and what is the balance sheet of that company and how it is performing in the last few years as all of these are vital to think about investing into any of these companies so that ultimate benefits will come to yours investment.

Do take note that what is national stability of the central or federal government and how these businesses are performing and how the policies are good for companies or how they perform with these existing policies so that ultimately these companies perform good or bad during long term financial standings. What is the specific performance of the company in which you intend to invest or buy their IPOs or share to say in normal terms how that specific company’s performance in the times of financial crisis and how that company has its internal financial stability to power over these crisis.

When you want to invest in company en do the complete and overall research over that company and for this it is important to move forward and find out whether you want to invest in some of IPOs of that company or do you wants to be stockholder so that buy the percentages of shares of that company. In both the situations we look these portions of ideas into two different and divergent ways. Above we discuss in detail about how individual share holders can buy IPOs of any company to multiple their money within shortest possible of time if the IPOs of that specific company goes upward trends.

In the second way, another company can buy in large number of stocks so that percentages of shares can be bought so that stockholder can have some sort of decision making into the top management space that means it can be done from foreign companies and with this we come forward to find that all of these need national policies and other formats of whether the host company, wants to disinvestment the shares and stocks so that good amount of money can be done and that can make the company grow further and can move into the stage of towards the number uno in the times of competitive market.

Similar Categories:

Shoppng Mall

What are examples of financial services?

Financial services are a vast area covering almost any activity pertaining to the making and preserving of money. These services can very broadly, be divided into two types – fund / asset based services and fee / advisory services. Further sub-categories are retail and corporate. There is necessarily some degree of overlap between these categories, due either to the volumes handled or because of the intricacies involved.

The growing complexity of financial services and the depth of knowledge required to manage this complexity has been the prime driver for specialization Consequently, the range of financial services available today appears to be a virtual maze as illustrated below :

These individual segments are in themselves, very broad categories and each category comprises of a large number of distinct services. Like a Banyan tree, various branches have grown in complexity and have virtually become trees on their own.


At the retail level, these services stretch from the universal ATM to payment of telephone, electricity, and medical bills, to even payment of Income Tax. The varieties of payments that can be made through this medium are endless. In many countries, even taxi fare is paid through Credit / Debit Cards. Some of the widely used services are :

  1. Automatic Teller Machines

The difference between credit cards and debit or charge cards is that in the former the Card Issuing Company extends credit to the user from the point of purchase to the point of payment. The user need not have requisite money at the time of purchase and is given time to arrange for adequate funds. In the latter case, the user’s account will be debited on use of the card and should have sufficient balance at the time of use to cover the amount spent. This curbs the tendency to over-spend.

Prepaid Cash Card are similar to pre-paid cards used for mobiles phones i.e. they can be purchased for a predetermined amount and used either for making payments or for drawing cash from ATMs. Prepaid cards have proved quite useful to students as safety is ensured by limiting the amount that can be accessed through the card.


    Financial Companies / Banks offer pre-paid drafts / TCs in addition to their regular channels for remitting funds. With the coming of age of Credit / Debit cards, TCs have lost much of their relevance as a safe mode of carrying money. However, they are still used extensively by international travelers, due to their widespread acceptability.


    The large number of mutual funds which have cropped up in the last two decades is evidence of the growing maturity of the retail investor, who is no longer satisfied with the plain vanilla products offered by Banks earlier, i.e. fixed deposits and savings accounts. Mutual funds offer a wide range of investments in debt and equity markets promising substantially higher returns by way of revenue in addition to gains from capital increase in value of investment.

Portfolio management is of two types. In the first category, i.e. advisory, the portfolio manager merely proffers advice regarding the investment options available to his client and it is upto the client to take or refuse the advice. In the second category the client hands over a part of or even his entire portfolio of securities / funds to the fund manager who then makes the investment, monitors the value, takes a decision to disinvest or continue and delivers the net gains periodically to the client.

Private banking, which is an offshoot of portfolio management, pertains to provision of custom-tailored services to high net-worth individuals based on a thorough understanding of the client’s financial goals. The services can include planning for wealth management (tax optimisation, estate and local or cross border retirement planning) investment management, art banking etc. etc. All these activities are normally fee based. However in some cases, fees are fixed on the basis of a percentage of the profits made on the portfolio.

Although, the list appears to be small, this is one of those branches, which has become a full tree in itself. The sub-branches are many and quite specialised covering almost all aspects, e.g. insurance for loss of life, health, medical expenditure, accident, property, vehicle, household goods, jewelry, travel, etc. and almost all imaginable risks like fire, theft, floods, riots, earthquake, etc.

Products too have become increasingly complex and life insurance today, has moved away from covering risk to life and limb alone to becoming complex investment instruments providing a variety of saving / tax benefits.


    Consumer credit has spread rapidly from metros to even remote rural areas. Today, housing and consumer finance is driving the growth of credit in the economy – a natural outcome as the country’s economic development gathers momentum.

The variety of consumer credit available is quite mind boggling, ranging from housing finance to loans for travel, wedding, education, medical expenditure, purchase of all manner of goods and services. The low level of overall default and simplicity of assessment has made consumer credit the most active arena of intense competition between various banks and other financial agencies.


    Custodial services range from providing lockers to maintenance of securities. Financial firms also provide individual accounting solutions / services on a regular retainership basis. Occasionally Banks, and frequently financial / legal firms are appointed as trustees to look after the financial interest of particular person(s) for a specified period.


    At the Corporate level, receivable management is the neural network, which controls the overall activity of the unit. Banks normally advance against various types of receivables. Additionally, factoring firms discount bills of corporates either with or without recourse for a pre-determined fee.

Forfaiting is similar to factoring except that it is restricted to export receivables and is without recourse to the seller i.e. exporter, and generally used for medium and long term export bills.

Apart from providing direct advances against receivables, several financial institutions e.g. SIDBI, IDBI etc. re-discount bills of corporates already discounted by a primary lender.

Escrow services are provided for collection of cash funds from a large number of sources e.g. toll collections. Most receivable services are fee based although the practice of up-front discount is also fairly common.


    The crux of financial services pertains to deployment of short and long term surplus funds and to raising suitable funds to meet requirements for different tenors. Every investment opportunity pre-supposes a funding option and they come together as part of financial services. An effective financial system requires a well-diversified structure with appropriate market instruments catering to the requirements of various categories of investors and borrowers.

Financial firms / Banks advise their clients how to invest their surplus funds or raise resources appropriate to the tenor of their requirements. They also actively participate in the process of raising funds and investing them – either on behalf of their clients or on their own accord. Over a period of time, specialized services have developed in order to cater to increasingly complex requirements. Amongst all financial services, this area is witnessing the greatest amount of innovation & customization.

The aim of Venture Capital funds is to invest in new / unproven technologies which carry a high risk, in the hope that they will become commercially successful eventually. These funds have further developed specialization in different segments e.g. software, hardware, travel & hospitality industry, etc. Quite often, in addition to money, VC funds also provide expertise, marketing design / strategy and occasionally even manage these operations at the nascent stage.

Some lease finance firms have also evolved into specialty firms focusing on core areas e.g. medical equipment, earth moving / project equipment with long-term leases, etc. etc. whereas others cover the whole gamut of fixed assets.

Cash management services too have developed considerable variety and range from simple collection accounts to daily / weekly sweep accounts, lock box accounts and controlled disbursement accounts. Increasingly sophisticated technology is enabling customization of such services, helping companies to reduce the amount of their float funds and improve overall efficiency of fund utilization.

Another benefit of technological development in the field of finance has been the electronic transfer of funds. This has greatly facilitated the direct payment of dividend warrants / interest payments from a single source to a large number of recipients.


    Merchant Banking covers an enormous variety of activities – each requiring a degree of in-depth knowledge and specialisation distinct from regular banking / financial activities. Originally, most Merchant Bankers started out with a mandate to arrange and manage public issue of equity for corporates. Now, there is little they do not do – apart from direct financing / investments. Corporate advisory services are all encompassing, and can cover any aspect – from financial advice to business restructuring.


  3. SWAPS
    The second most important are of financial services pertains to the managing and mitigation of financial risk inherent in all financial activity. Hedges, Swaps, Options, Derivatives – all are designed to cover different types of future risk due to the uncertainty of the economic environment.

These activities range from the basic forward contract hedge, employed for covering the risk of adverse foreign exchange rate movement to complex derivatives used for mitigating possible changes of either the principal value of the financial instrument or its’ income value, or both. Derivatives & Swaps are also used for mitigating the risk of concentration of exposure to a particular industry or segment.

Underwriting is normally done to cover the risk of inadequate response to a public issue, but may be extended to cover other risks related with the issue also.


    There is a host of financial firms providing niche or highly specialized services, including ratings of corporates on financial & industry parameters, preparation of detailed industry profiles, etc. Most such services are fee based, but many are also public services available in the form of subscription or distributed as regular publications. Many of these services are also available on customized basis.

Sources & References:

Related Posts:

Goods and Services Tax in India

Last updated on July 10th, 2019 at 02:27 pm

In India prior to GST implementation numerous indirect taxes exists. GST has replaced al of thee redundant nd recurring indirect taxes and becomes a single tax system which is implemented indirectly. GST implemented on first July 2017 and prior to it was passed from parliament on 29th March 2017. It is a value addition tax which aims to increase utility of tax system and unified it so that it will be beneficial both to customers as well as companies.

This tax is levied on supply chain management of goods and services. It unifies all of these taxation system into one single unit and then it aims to provide multiple level of management so as to reduce the number of tax buder and in this way, it decreases the tax levied and provide faster movement of products in supply chain management.

Prior to GST the taxes levied on products becomes high an on single products there are instances of two VAT such as during buying of raw materials and warehousing of products. IN this way, unnecessarily the rice of products go to an astronomical units and in this way inside product range the price increases to multiple times.

With GST taxes levies at each point of sale not each point of manufacturing and in this way, the tax systems became unified and it comes to one single unit and in this way customers find it easier to access it and the price front of the prodics reduced to bare minimal leles and as we see we experience vast decrease of costs with it.

GST is levied on the products s and when there is addition of monetary values and irrespective of stages as when the supplier buys maida and sugar and add to make biscuit and this means here is the value addition so that there is levy of GST and in this ay , tax is levied upon actual value addition instead of each and every points to make it more transparent and removes obstacles of red tapism in each and every stage of product compositions.

According to it as and when in which destination the product is consumed or being used then the entire tax revenue will go to that state instead of the state that is manufacturing the product. As we do see the state which buys the product which means is providing value addition and that means the tax is levied from that and go to that state. In this ay, actual use of the products ad the residing state gets the actual product value of GST.

At first in this matter the opposition parties make the hue crya over it but it always the sraight forward idea the people from which state is buying the product then the taxes collected from GST goes to that state and in this ay, the state in whcih we are residing get the maximum value of it and instead can use that find to utilise benefits of people in the longer ranges.

It makes easiercorporates and organisations to file tax system online and in this ay, any third party benefitaro removes and the red tapisms and other facts of organisational tax systems removes completely. In thi way, a complete transparency of tax systems and its benefits come into the fore and that makes the entire taxatio system a clean financial system all over entire nation. It stops multiple checks and balances while logisitics of products and in this ay logitics ecomes faster and it reaches to different destiantions within shortest possible of time.

Many unorganised sector also comes into taxation system as they many a times do not participate in it and that makes the reduction of revenues to government and with it comes the faster movement and deeper integration of each and every segment of government without a doubt.

Related Posts:

Trade Finances and Foreign Direct Investment

Last updated on April 25th, 2019 at 10:39 am

Corporates are big private entities which generates large-scale employment, and help to induce the good amount of an economic boost to country. Corporates works with resources of the nation and empower with the good amount of social service and betterment of citizens.

In this article we will understand what are the various foreign funding options for corporates. At what time, corporates should go for this option. Is it at the start of business point or is it at the peak of business points or when there is loss and what point of time business should go for foreign funding.

First take the example of Jio which is one of the brightest spot in Indian corporate history. First it started a fourth generation of internet. It is pricing war and Jio won it full-heartedly. It is a wonderful story of complete development of how a corporate and its aggressive pricing policy helps to spread this corporate in its complete maximum.

After takeover of most of corporate entities and putting behind every top team to further backwards, it is now also making this pricing policy to work in its complete freedom. In its latest news in the April 2019, Jio is planning to take future upgrade through Japanese company.

In its state of absolute benefits company like Jio is now venturing into  the stage to make it more upgrade towards achieving the latest technological innovations to make it most of complete up gradation.

What it makes is that it is the futuristic policy that makes, companies to go for foreign funding to make it most of the wonderful journey as that will not only, make futuristic up gradation and make company future proof against cut throat competition.

Similarly, those companies do not see, their future and only wants to get profits through other corrupt practices then the future of these companies stays in the complete vacuum. That is why first every corporate should stay at the state of absolute self-sufficient and then move towards the state of complete up gradation so that after taking help of foreign funding still the control is with the native company.


At every point of time no companies should ever endeavour to manage their finances through foreign funding. First each and every companies must move for their betterment and the sources and ideas that comes infront to make the company most sociable and most prominent to make it the most profitable entities.

Only the need for up-gradation through looking out to seal for future upgrades must make the companies to go for foreign funding options to upgrade companies for betterment of its functions. It makes these future functions to its complete maximum, and that makes foreign funding to its absolute profitablility.

With due course of time any of companies or corporate should never ever engage themselves in to the state of absolute difficulties as absolute dependances on foreign funds should not be there at any point of time.

with due course of time most of we have seen an absolute development of ideas where one needs to be self-sufficient and later on should move towards the most of the times where there should not be need but the want to make better for your organisation in terms of technology and for betterment of futuristic happenings where makes the future of companies for betterment of corporate.

Related Posts:

Basel II Risk Management

Last updated on April 26th, 2019 at 07:41 am

Basel Accords are suggestions and rules and regulations with which banking industries should perform. Banking rules and regulations begin with Basel I, Basel II and now Basel III. During the year 2015 when this article wrote by me during that time Basel II was used by many banks and now slowly they are moving to the Basel III.

The Basel committee comprised of G-20 countries and other prominent countries of reserve banks heads or central banks’ head. The suggestions of this committee are for recommendation only but most of the member nations find it easy and good at administration to implement these policies.

These policies update itself through more and more Basel accords that are going to the stage of understanding present-day banking rules and regulations. Many organisations and nation tend to implement these suggestions or at times mould it with their national concern to make a better place for most the people who use banking standards.

It tires to advice banking industries to have minimum capital levels so that it can fight against any such emergencies of liquidity of funds. it removes competitive spirits among bank of different nations and thus create one of most standardise banking management.

In the Basel I accord the existing capitals such as shares, bank reserves comes into mind when calculating banking reserves. In Basel II hybrid capitals of banks such as time duration of loans, and other banking liquidity measurements come into force. In this Basel accord risk of capitals comes into consideration while calculating liquidity ration of banks.

It looks for credit rating and the higher it is safer for banks and the lower is vice versa. Banks are physical institution and in order to observe and manage absolute risks one need to understand the physical risks such as whether the building of bank is of its own or is at rented and then what are cash flow in terms of liquidity risks and what is the current liquidity value, and legal risks in terms of bad loans and how much time it is taking to solve this.

All of these comes under financial statements, calculate risk exposures and assessment of risks and management of it provide adequacy of judgement for calculation of capital adequacy that is maintained inside the banking system.

Related Posts:
1 2 3