Unit 3

Banking

The term bank is either derived from Old Italian word banca or from a French word banque both
mean a Bench or money exchange table. In olden days, European money lenders or money
changers used to display (show) coins of different countries in big heaps (quantity) on benches or
tables for the purpose of lending or exchanging. According to some authorities, the work “Bank”
itself is derived from the words “bancus” or “banqee,” that is, a bench.

Introduction to Banking Structure

The existing banking structure in India evolved over several decades, is elaborate and has been
serving the credit and banking services needs of the economy. There are multiple layers in
today’s banking structure to cater to the specific and varied requirements of different customers
and borrowers. The structure of banking in India played a major role in the mobilization of
savings and promoting economic development. In the post-financial sector reforms (1991) phase,
the performance and strength of the banking structure improved perceptibly. Financial soundness
of the Indian commercial banking system compares favorably with most of the advanced and
emerging countries.

Structure of Banking in India

A bank is a financial institution that provides banking and other financial services to their
customers. A bank is generally understood as an institution which provides fundamental banking
services such as accepting deposits and providing loans. There are also nonbanking institutions
that provide certain banking services without meeting the legal definition of a bank. Banks are a
subset of the financial services industry.
Indian banking industry has been divided into two parts, organized and unorganized sectors. The
organized sector consists of Reserve Bank of India, Commercial Banks and Cooperative Banks,
and Specialized Financial Institutions (IDBI, ICICI, IFC etc).

Reserve Bank of India (RBI)

The country had no central bank prior to the establishment of the RBI. The RBI is the supreme
monetary and banking authority in the country and controls the banking system in India. It is
called the Reserve Bank’ as it keeps the reserves of all commercial banks.

Scheduled & Non –scheduled Banks

A scheduled bank is a bank that is listed under the second schedule of the RBI Act, 1934. In
order to be included under this schedule of the RBI Act, banks have to fulfill certain conditions
such as having a paid up capital and reserves of at least 0.5 million and satisfying the Reserve
Bank that its affairs are not being conducted in a manner prejudicial to the interests of its
depositors. Scheduled banks are further classified into commercial and cooperative banks. Non-
scheduled banks are those which are not included in the second schedule of the RBI Act, 1934.
At present these are only three such banks in the country.
Commercial Banks

Commercial banks may be defined as, any banking organization that deals with the deposits and
loans of business organizations. Commercial banks issue bank checks and drafts, as well as
accept money on term deposits. Commercial banks also act as moneylenders, by way of
installment loans and overdrafts. Commercial banks also allow for a variety of deposit accounts,
such as checking, savings, and time deposit. These institutions are run to make a profit and
owned by a group of individuals.

Scheduled Commercial Banks (SCBs):

Scheduled commercial banks (SCBs) account for a major proportion of the business of the
scheduled banks. SCBs in India are categorized into the five groups based on their ownership
and/or their nature of operations. State Bank of India and its six associates (excluding State Bank
of Saurashtra, which has been merged with the SBI with effect from August 13, 2008) are
recognised as a separate category of SCBs, because of the distinct statutes (SBI Act, 1955 and
SBI Subsidiary Banks Act, 1959) that govern them. Nationalized banks and SBI and associates
together form the public sector banks group IDBI ltd. has been included in the nationalized banks
group since December 2004. Private sector banks include the old private sector banks and the
new generation private sector banks- which were incorporated according to the revised
guidelines issued by the RBI regarding the entry of private sector banks in 1993.

Foreign banks are present in the country either through complete branch/subsidiary route
presence or through their representative offices.

Types of Scheduled Commercial Banks

Public Sector Banks

These are banks where majority stake is held by the Government of India.
Examples of public sector banks are: SBI, Bank of India, Canara Bank, etc.

Private Sector Banks

These are banks majority of share capital of the bank is held by private individuals. These banks
are registered as companies with limited liability. Examples of private sector banks are: ICICI
Bank, Axis bank, HDFC, etc.

Foreign Banks

These banks are registered and have their headquarters in a foreign country but operate their
branches in our country. Examples of foreign banks in India are: HSBC, Citibank, Standard
Chartered Bank, etc.

Regional Rural Banks

Regional Rural Banks were established under the provisions of an Ordinance promulgated on the
26th September 1975 and the RRB Act, 1976 with an objective to ensure sufficient institutional
credit for agriculture and other rural sectors. The area of operation of RRBs is limited to the area
as notified by GoI covering one or more districts in the State.

RRBs are jointly owned by GoI, the concerned State Government and Sponsor Banks (27
scheduled commercial banks and one State Cooperative Bank); the issued capital of a RRB is
shared by the owners in the proportion of 50%, 15% and 35% respectively.

Prathama bank is the first Regional Rural Bank in India located in the city Moradabad in Uttar
Pradesh.

Type of Major Shareholders Major Players

Commercial
Banks

Public Sector Government of India SBI, PNB, Canara Bank, Bank of

Banks Baroda, Bank of India, etc

Private Sector Private Individuals ICICI Bank, HDFC Bank, Axis

Banks Bank, Kotak Mahindra Bank, Yes
 Bank etc.

Foreign Banks Foreign Entity Standard Chartered Bank, Citi

Bank, HSBC, Deutsche Bank,
BNP Paribas, etc.

Regional Rural Central Govt, Andhra Pradesh Grameena Vikas

Banks Concerned State Govt and Bank, Uttranchal Gramin Bank,
Sponsor Bank in the ratio of Prathama Bank, etc.
50 : 15 : 35

Cooperative Banks

A co-operative bank is a financial entity which belongs to its members, who are at the same time
the owners and the customers of their bank. Co-operative banks are often created by persons
belonging to the same local or professional community or sharing a common interest. Co-
operative banks generally provide their members with a wide range of banking and financial
services (loans, deposits, banking accounts, etc.).

They provide limited banking products and are specialists in agriculture-related products.

Cooperative banks are the primary financiers of agricultural activities, some small-scale
industries and self-employed workers.

Co-operative banks function on the basis of “no-profit no-loss”.

Anyonya Co-operative Bank Limited (ACBL) is the first co-operative bank in India located in
the city of Vadodara in Gujarat.

The co-operative banking structure in India is divided into following main 5 categories:

• Primary Urban Co-op Banks

 • Primary Agricultural Credit Societies

• District Central Co-op Banks

• State Co-operative Banks

• Land Development Banks

NBFCs: Types and Overview of regulations for NBFCs in India

RBI has differentiated NBFCs based on different activities which they perform and whether they
accept deposit or not. RBI licenses all Different types of Non-Banking Financial Companies.
Various types of NBFC are Asset Finance Company, Investment Company, Investment
Company, Infrastructure Finance Company, Housing Finance Company, Micro Finance
Company etc.
Non-banking financial company (NBFC) is a company which is registered under the companies
act, 2013 and they also have to attain the license from RBI as explained in section 45-I of
Reserve Bank of India Act, 1934. For a layperson, NBFC is financial companies that provide a
different kind of banking services, but they do not have a Banking License. Role of NBFC in
recent times has become important according to its size in the Indian economy.

Types of NBFC Based on Their Activity:

1. Asset Finance Company
According to RBI, any non-banking company can act as an asset finance company, on
condition; that the income arising from the aggregate physical assets supporting the economic
activity should not be less than 60% of its total assets and total income. Asset finance company
can either be deposit-taking or non-deposit taking. All deposit-taking NBFC’s have to register
themselves with RBI as per given RBI regulation.
2. Investment Company
In layman term, Investment Company is a company whose main business is managing and
holding securities for investment. These companies invest funds on behalf of their clients who, in
return are expected to share the profits and losses. These companies exist only to invest.
3. Loan Company
Loan companies under NBFC provide loans and advances for working capital finance. A
financial company would only be considered Loan Company if their 50%of total assets are in
lending and 50%of total income arises from the assets which are lent. The known loan company
registered as NBFC is LIC Finance Limited.
4. Infrastructure Finance Company
Infrastructure finance companies provide infrastructure loans for the development of transport,
water &sanitation, energy, communication, social and commercial infrastructure. The companies
need to follow the following stipulations to be considered as infrastructure finance company they
need to deploy at least minimum of 75% of total assets in infrastructure loans, and the net worth
of the company must be Rs. 300 crore. The minimum credit rating of the company should be
at 'A' or equivalent of CRISIL, FITCH, ICRA, CARE, or an equivalent rating by any other
crediting rating agencies. A certificate must support the request for registering a (non-banking
companies) NBFC's as infrastructure finance company from their auditors confirming the asset
pattern of the company of the latest financial year. The famous infrastructure finance company
is IndiaBulls Housing Finance.
5. Core Investment Company
Core investment companies are the non-banking financial company doing the business of
acquisition of securities and shares, and they hold 90% of its asset in the form of bonds, equity
shares, preference shares. These companies need to invest not less than 60 per cent in the equity
shares of group companies.
6. Micro Finance Company
There are many microfinance companies in India, which play some crucial role in the
development of India. Microfinance companies are those financial institutions that offer small-
scale financial services in the form of credit and savings, to the poor in rural, semi-urban areas.
Micro financial services are meant to help them in economic activities, increasing savings and
supporting self-empowerment. Microfinance company is a non-deposit taking firm regulated
by reserve bank of India act, 1934. These companies are entitled to provide loans up to Rs.50,
000 to individual coming under low-income group living in rural or semi-urban areas. A
company to be registered NBFC’s-MFC, they should have minimum net capital of Rs.5 crore
after incorporation as a private limited company having equity share capital.
7. Housing Finance Company
Housing finance companies have mention housing finance as the main clause in its main
memorandum of association.NBFC’s have complemented commercials bank in providing mid-
term capital loans to individual or firms; their flexibility and less stringent regulation provide
them competing for an edge over commercial banks.

Types of NBFC Company on the Basis of Deposits They Hold

1. The Deposit Accepting NBFC’s
Deposit accepting firm is required to register themselves with RBI as per the regulations laid
down in the RBI act, 1934. NBFC’s before incorporation need to register themselves under
companies act, 2013 and also attain a certificate of registration from RBI and if the company
accepts deposit from the public, they need to follow particular additional regulation prescribed
by RBI. A certain type of deposit accepting NBFC’s are
 (a) Loan Companies.
 (b) Investment Companies
 (c) Asset Finance Companies
2. Non-Deposit Accepting NBFC’s
Non-deposit accepting NBFC does also need to register themselves. It is a misconception that
NBFC’s not accepting public deposit need not register themselves, RBI will any NBFC operating
without registration as per there recent guidelines. The only difference between NBFC’s
accepting deposit and NBFC’s not accepting deposit is that the prior has to follow certain extra
guideline after registering themselves.
Governance Over NBFCs:

The Managing structure for NBFCs is based on the following three characteristics:
  (a) The size of NBFC
 (b) Type of activity
 (c) The acceptance of public deposits.
Governance over NBFC’s is done through on-site inspection based on Capital, Assets,
Management, Earnings, Liquidity, Systems and Procedures method. Off-site observation is done
through periodic control returns.
To review this regulatory framework and supervision of NBFCs, the Government of India
appointed a committee which has submitted its report in October 1998. The recommendations
made by the committee covering different aspects like the upper limit on public deposits,
investments in real estate and shares, registration, and inspection of disclosures.

Specialized Financial Services

Microfinance
Microfinance is a way in which loans, credit, insurance, access to savings accounts, and money
transfers are provided to small business owners and entrepreneurs in the underdeveloped parts of
India.
The beneficiaries of microfinance are those who do not have access to these traditional financial
resources. Interest rates on microloans are generally higher than that on traditional personal
loans.
Types of Microfinance
Microfinance includes the following products:
 Microloans - Microfinance loans are significant as these are provided to borrowers with
no collateral. The end result of microloans should be to have its recipients outgrow
smaller loans and be ready for traditional bank loans.
 Microsavings – Microsavings accounts allow entrepreneurs operate savings accounts
with no minimum balance. These accounts help users inculcate financial discipline and
develop an interest in saving for the future.
 Microinsurance - Microinsurance is a type of coverage provided to borrowers of
microloans. These insurance plans have lower premiums than traditional insurance
policies.
In some situations, recipients of microloans are expected to take some training courses, such as
cash flow management or book-keeping.
Importance of Microfinance
Almost half of the population of our country does not have a basic savings account. However,
this segment requires financial services so that their aspirations such as building of assets and
protection against risk can be fulfilled.
Microfinance provides access to capital for individuals who are financially underserved. If
microfinance institutions were not offering loans to this segment of the society, these groups
would have resorted to borrowing money from friends or family members. The probability of
them opting for fast cash loans or payday advances (that bear huge interest rates) are also high.
Microfinance helps these groups invest wisely in their businesses, and hence, is in alignment
with the government’s vision of financial inclusion in the country.
Key Features of Microfinance
Some of the significant features of microfinance are as follows:
 The borrowers are generally from low income backgrounds
 Loans availed under microfinance are usually of small amount, i.e., micro loans
 The loan tenure is short
 Microfinance loans do not require any collateral
 These loans are usually repaid at higher frequencies
 The purpose of most microfinance loans is income generation
Microfinance Channels
Microfinance in India operates primarily through two channels:
 SHG-Bank Linkage Programme (SBLP) - This channel was initiated by NABARD in the
year 1992. This model encourages financially backward women to come together to form
groups of 10-15 members. They contribute their individual savings to the group at regular
intervals. Loans are provided to members of the group from these contributions. SHGs
are also offered bank loans at later stages, and these loans can be used for funding income
generating activities.
This model has achieved a lot of success in the past and it has also gained a lot of popularity for
contributing to the empowerment of women in the country. Once these self-sustaining groups
reach stability, they function almost independently with minimal support
from NABARD, SIDBI, and NGOs.
 Microfinance Institutions (MFIs) - These institutions have microfinance as their primary
operation. These lend through the concept of Joint Liability Group (JLG), i.e., an
informal group that consists of 5-10 members who seek loans either jointly or
individually.
Role of Microfinance Institutions (MFIs)
Microfinance services are offered by the following sources:
 Formal institutions, i.e., cooperatives and rural banks
 Semiformal institutions, i.e., non-government organisations
 Informal sources, such as shopkeepers and small-scale lenders
Institutional microfinance encompasses the services provided by both formal and semiformal
institutions.
A microfinance institution specialises in banking services for low-income individuals and
groups. These institutions access financial resources from mainstream financial entities and
provide support service to the poor. Microfinance institutions are hence, emerging as one of the
most effective tools in reducing poverty in India.
While several MFIs are well-run with great historical records, others are operationally self-
sufficient.
The different types of institutions offering microfinance in India are:
 Commercial banks
 Credit unions
 Non-governmental organisations (NGOs)
 Sectors of government banks
 Cooperatives
Microfinance institutions act as a supplement to the services offered by banks. Apart from
offering micro credit, financial services such as insurance, savings, and remittance are provided.
Non-financial services such as training, counselling, and supporting borrowers are offered in the
most convenient manner as well.
Points to note:
 The borrower gets the above-mentioned services at their convenience
  The repayment schedule is also decided by the borrower
 Interest rates charged by MFIs are usually higher than that of traditional banks
 Interest rates vary widely based on the loan purpose and borrower history
Microfinance Companies in India
Some of the microfinance companies that offer loans to the unbanked and under-banked
population in India are as follows:
 Arohan Financial Services Pvt Ltd
 BSS Microfinance Pvt Ltd
 Cashpor Micro Credit
 Equitas Microfinance Pvt Ltd
 Asirvad Microfinance Pvt Ltd
 Bandhan Financial Services Pvt Ltd
 Disha Microfin Pvt Ltd
 Annapurna Microfinance Pvt Ltd
 ESAF Microfinance and Investments Pvt Ltd
 Fusion Microfinance Pvt Ltd
Lenders Offering Microfinance Loans to MFIs
 Reliance Money – Reliance Money offers microfinance solutions at great interest rates by
partnering with microfinance institutions (MFIs). The documentation required for this is
limited. Wholesale funding is provided to MFIs for on-lending. The lender also helps
with guarantees so that MFIs are able to get loans from alternative sources.
 ICICI Bank – ICICI Bank has been partnering with MFIs for at least 10 years to provide
microfinance loans to these institutions. Currently the bank is focussing on the following:
 Setting up a profitable and healthy lending business with select MFIs
 Investing that enables the healthy growth of the microfinance industry in India.
The financing offered by ICICI Bank to MFIs are predominantly term loans. The bank also
provides Pass Through Certificates. Other value-added facilities such as cash management
services, salary/savings accounts, and customised current accounts are offered to MFIs for
treasury and staff products.
 State Bank of India (SBI) – SBI offers loans to microfinance institutions and NGOs that
act as intermediaries for financing the needs of eligible entrepreneurs in the lower
 segment of the society. These term loans can be repaid every month, quarter, or at
intervals of 6 months. The total repayment period cannot be more than 3 years and cash
credit loans should be renewed on an annual basis.
 Axis Bank – Axis Bank offers loans to microfinance institutions that financially empower
low-income earners and micro-entrepreneurs. The bank has partnered with several MFIs
across the country. Term loans are offered by the bank to MFIs that extend this to the
eligible borrowers.
 DCB Bank – DCB Bank offers two types of products as part of microfinancing. These are
term loans and loans to MFIs for on-lending purposes.
Documents Required for a Microfinance Loan
Although the documentation required for getting a microfinance loan varies between lenders, the
following are the documents that are usually needed:
 Updated application form
 PAN card, copy of Passport, ration card
 Proof of office address
 Passport-size photos of the applicants and co-applicants
 Certified copies of AOA/MOA/Partnership deed
 Track record of repayment
 Audited financials of the previous 2 years
 ITR of partners/directors for the previous 2 years
 Bank account statements for the past 6 months
 Proforma invoice to the equipment that is to be financed
 For lawyers, CAs, architects, and doctors - Professional qualification certificates
Criticism of Microfinance
Microfinance has been lauded by many, as it is a clear passage to end the cycle of poverty, aid
the marginalised sections, decrease unemployment, and improve their earning power. However,
it has also received criticism from certain corners, as it was argued that microfinance actually
makes poverty worse. The fact that some borrowers of microfinance use these loans to pay off
their existing debts or fund their basic necessities reinforce these arguments.
The situation is more adverse in countries like South Africa where majority of microfinance
loans are consumed by the borrower for basic necessities. When borrowers do not generate new
income from the initial loan, they are forced to take out more loans to repay the former. This
simply snowballs into a bigger debt trap

Venture Capital

Venture capital is a type of private equity capital typically provided by outside investors to new
businesses. Generally made as cash in exchange for shares in the investee company, venture
capital investments are usually high risk, but offer the potential for above-average returns. A
venture capitalist is a person who makes such investments. A venture capital fund is a pooled
investment scheme that primarily invests the financial capital of third-party investors in
enterprises that are too risky for the standard capital markets or bank loans. Venture capital can
also include managerial and technical expertise. Most venture capital comes from a group of
wealthy investors, investment banks and other financial institutions that pool such investments or
partnerships. This form of raising capital is popular among new companies, or ventures, with
limited operating history, who cannot raise funds through a debt issue. The drawback of this
form of entrepreneurship is that the investors get a say in the management of the company apart
from the equity holding. Laws relating to venture capital funds in India SEBI (Venture capital
funds) Regulations 1996.

The venture capital fund regulations by the Securities and Exchange Board of India are a
comprehensive set of laws to be followed by the venture capital funds in India. From the
registration of venture capital funds to the action to be taken in case of default, the regulation has
been divided in VI chapters.

An entrepreneur, with a good technical knowledge, raising of capital in the conventional method
will be very difficult. So, by a new technique of financing, long term capital is provided to small
and medium sector through an institutional mechanism. So capital assistance against high growth
oriented along with managerial assistance was felt necessary. This gave to the birth of Venture
Capital Assistance.
Meaning of Venture Capital: It is a long term capital invested in companies which involves
high risk. The financing involves high risk but is compensated by high return.

Features of Venture Capital

The following are the features of venture capital
1. It is the financing of capital for new companies.
2. This finance can also be loan-based or in convertible debentures
3. Providers of venture capital aim at capital gain due to the success achieved by the borrowing
concern.
4. Venture capital is always a long-term investment and made in companies which have high
growth potential.
5. The venture capital provider take part in the business of borrowing concern simultaneously
provides managerial skill.
6. Venture capital financing contains risks. But the risk is compensated with a higher return.
7. It involves financing mainly small and medium size firms, which are in their early stages.
When the assistance of venture capital, these firms will stabilize and later can go in for
traditional finance.

Objectives of Venture Capital

• To finance new companies who find it difficult to go to capital market
• To provide long term finance to small and medium scale industries
• To provide managerial assistance
• To bring in rapid growth in the business

Helion Venture Partners

Investing in technology-powered and consumer service businesses, Helion Ventures Partners is a
$605 Mn Indian-focused, an early to mid-stage venture fund participating in future rounds of
financing in syndication with other venture partners.
People You Should Know: Sandeep Fakun, Kanwaljit Singh.
Investment Structure: Invests between $2 Mn to $10 Mn in each company with less than $10
Mn in revenues.
Industries: Outsourcing, Mobile, Internet, Retail Services, Healthcare, Education and Financial
Services.
Startups Funded: Yepme, MakemyTrip, NetAmbit, Komli, TAXI For Sure, PubMatic.

Accel Partners
Accel Partners founded in 1983 has global presence in Palo Alto, London , New York, China and
India. Typical multi-stage investments in internet technology companies are made by Accel
partners.
People You Should Know: Subrata Mitra, Prashanth Prakash and Mahendran Balachandran
Investment Structure: Invests between $0.5 Mn and $50 Mn in its portfolio companies.
Industries: Internet and Consumer Services, Infrastructure, Cloud -Enabled Services, Mobile
and Software.
Startups
Funded: Flipkart, BabyOye, Freshdesk, BookMyShow, Zansaar, Probe,Myntra, CommonFloor.

Blume Ventures
Venture capital firm, Blume Venture Advisor funds early-stage seed, startups, pre-series A,
series B and late stage investments. Blume backs startups with both funding as well as active
mentoring and support.
People You Should Know: Karthik Reddy and Sanjay Nath.
Investment Structure: Provides seed funding investments between $0.05 Mn – $0.3 Mn in seed
stage. Also, provides follow-on investments to portfolio companies ranging from $.5Mn to
$1.5Mn.
Industries: Mobile Applications, Telecommunications Equipment, Data Infrastructure, Internet
and Software Sectors, Consumer Internet, Media, Research and Development
Startups Funded: Carbon Clean Solutions, EKI Communications, Audio
Compass,Exotel, Printo.

Sequoia Capital India

Sequoia Capital India specializes in investments in startup seed, early, mid, late, expansion,
public and growth stage companies.
People You Should Know: Shailesh Lakhani and Shailendra Singh.
Investment Structure: SCI invests between $100,000 and $1 Mn in seed stage, between $1 Mn
and $10 Mn in early stage and between $10 Mn and $100 Mn in growth stage companies.
Industries: Consumer, Energy, Financial, Healthcare, Outsourcing, Technology.
Startups Funded: JustDial, Knowlarity, Practo, iYogi, bankbazaar.com

Nexus Venture Partners

Nexus Venture Partners is a venture capital firm investing in early stage and growth stage
startups across sectors in India and US.
People You Should Know: Suvir Sujan and Anup Gupta
Investment Structure: Invests between $0.5 Mn and $10 Mn in early growth stage companies.
Also, makes investments upto $0.5 Mn in their seed program.
Industries: Mobile, Data Security, Big Data analytics, Infrastructure, Cloud, Storage, Internet,
Rural Sector, Outsourced Services, Agribusiness, Energy, Media, Consumer and Business
services, Technology.
Startups Funded: Snapdeal, Housing, Komli, ScaleArc, PubMatic, Delhivery.

Inventus Capital Partners

With the sole goal of making new entrepreneurs successful, Inventus is a venture capital fund
managed by entrepreneurs and industry-operating veterans.
People You Should Know: Samir Kumar and Kanwal Rekhi
Investment Structure: The firm does not invest in capital intensive companies. It typically leads
the first venture round with $1 Mn to $2 Mn and as the businesses grow, it invests from $0.25
Mn up to $10 Mn.
Industries: Consumer, Hotels, Restaurants and Leisure, Media, Internet and Catalog Retail,
Healthcare, Information Technology, Hardware and Equipment, Telecommunications etc.
Startups Funded: Poshmark, Savaari, Farfaria, Policy Bazaar.com, Insta Health
Solutions, CBazaar.

Private Placement
A method of marketing of securities whereby the issuer makes the offer of sale to individuals and
institutions privately without the issue of a prospectus is known as ‗Private Placement Method‗.
This is the most popular method gaining momentum in recent times among the corporate
enterprises. Under this method, securities are offered directly to large buyers with the help of
shares brokers. This method works in a manner similar to the ‗Offer for Sale Method whereby
securities are first sold to intermediaries such as issues houses, etc. They are in turn placed at
higher prices to individuals and institutions. Institutional investors play a significant role in the
realm of private placing. The expenses relating to placement are borne by such investors.
Advantages
1. Less expensive as various types of costs associated with the issue are borne by the issue
houses and other intermediaries.
2. Less troublesome for the issuer as there is not much of stock exchange requirements
connecting contents of prospectus and its publicity etc. to be complied with.
3. Placement of securities suits the requirements of small companies.
4. The method is also resorted to when the stock market is dull and the public response to the
issue is doubtful.

Disadvantages
1. Concentration of securities in a few hands.
2. Creating artificial scarcity for the securities thus jacking up the prices temporarily and
misleading general public.
3. Depriving the common investors of an opportunity to subscribe to the issue, thus affecting
their confidence levels.

Private Equity
A Private Equity Fund, also known as Private Equity, is equity capital which comprises of
investors who invest directly in private companies. This equity capital is not listed on the stock
exchange and usually follows a general investment criteria of investing in varied industries or
follow a industry specific criteria. Considering that holding periods for private equity funds are
long, therefore, private equity capital is raised from institutional and retail investors who can
afford to invest large sums of money for longer time periods. This capital can further be utilized
for large scale purposes like making acquisitions, expansion of working capital within an owned
company, funding of new technology, to strengthen the company’s balance sheet, etc. the
investing term for these funds can be anywhere between 10 to 13 years, after the expiry of which
the fund is closed and the funds are returned back to the partners.

Private Equity Funds function on the following investment ideas:

Venture Capital – Private Equity capital can be used to fund the companies which are still in
the initial stages of formation and do not have access to traditional financing means or to
financial markets.
Growth Capital – Private Equity Funds can be used to finance expansion activities of a
recognized private company which is short of required assets, as a result of which , it is not in a
position to use its existing assets to avail conventional means of financing required for growth.
Leveraged Or Management Buyouts – Private Equity Funds are used along with additional
leverage which is placed on the organization so that the existing management can work towards
the target.
Turnaround / Distress Situations – Private Equity Capital can serve as an important source of
funding when the company is not able to overcome its existing debt. In this case, the fund capital
can be used to stabilize the company’s balance sheet, along with the help of turnaround strategies
conducted by the management.

What is Private Equity driven by?

 Raising capital - A firm or a company agrees to sell some of its shares to private equity
firms due to many reasons. One reason is, the firm may require a high capital inflow for
long-term to run its business. Therefore, instead of waiting for a long duration to gather
enough capital, it may opt to sell a part of its shares.
 Increasing regulation of public markets - Public shareholdings are controlled by a lot
of regulations and hence, companies prefer to take the private equity route to finance
their business operations.
 Funding the private equity boom - Private equity has been one of the most profitable
trends in recent times and this segment is strengthened by the financial companies who
structure the private equity deals. These financial companies leverage the expertise of
underwriters like investment banks to ensure that the private equity segment remains
profitable.
Advantages of Investing in Private Equity Funds
Some of the notable advantages of investing in a Private Equity Fund are:
Untapped Potential – The arena of potential company investments for private equity a vastly
uncharted and untapped territory. There are several option looming in the horizon, from unlisted
privately owned companies which have just begun expanding, unpopular divisions of larger
organizations or even companies which aren’t doing well on the stock market and make them
private.
Stringent Company Selection Process – Firms which handle private equity investments are
highly selective and spend a considerable amount of resources to assess the potential companies
which they could invest in. This also involves an understanding of the risks involved and how to
ease the same. From scores of potential companies, managers can be highly selective and choose
one company which possesses all the required characteristics.
Clear Accountability – Management teams of private equity owned companies are accountable
to an engaged professional shareholder who has the right to protect their shareholding and act
accordingly.
Securitization & Asset Reconstruction Company
Definition: Securitization is a process by which a company clubs its different financial
assets/debts to form a consolidated financial instrument which is issued to investors. In return,
the investors in such securities get interest.

Description: This process enhances liquidity in the market. This serves as a useful tool,
especially for financial companies, as its helps them raise funds. If such a company has already
issued a large number of loans to its customers and wants to further add to the number, then the
practice of securitization can come to its rescue.

In such a case, the company can club its assets/debts, form financial instruments and then issue
them to investors. This enables the firm to raise capital and provide more loans to its customers.
On the other hand, investors are able to diversify their portfolios and earn quality returns.
The leading problem in the country right now is alarming volume of Non-Performing Assets
with the banking system. Several attempts were made to tackle NPAs. A serious such step was
the creation of dedicated institutions called Asset Reconstruction Companies or ARCs that
purchases bad assets or NPAs from banks at a negotiable price and helps banks to clean up their
balance sheets (by removing the NPAs). Performance of the ARCs are under evaluation in the
context of the mounting NPAs. At the same time, the new Insolvency and Bankruptcy Act will
give a critical role to the ARCs in settling the bad assets through the insolvency process.
What are ARCs?
An Asset Reconstruction Company is a specialized financial institution that buys the NPAs or
bad assets from banks and financial institutions so that the latter can clean up their balance
sheets. Or in other words, ARCs are in the business of buying bad loans from banks.
ARCs clean up the balance sheets of banks when the latter sells these to the ARCs. This helps
banks to concentrate in normal banking activities. Banks rather than going after the defaulters by
wasting their time and effort, can sell the bad assets to the ARCs at a mutually agreed value.
Overview of Credit Information Reporting
What is a Credit Information Report or CIR?
A Credit Information Report or CIR plays a key role in the lender’s decision when you apply for
credit. It is therefore important to monitor it on a regular basis to ensure that the credit
information report is up-to-date and to check for any inaccuracies in your CIR. Your credit
score and Credit Information Report is a measure of your credit worthiness.
Your Credit Information Report contains details of your credit history and track record in taking
and repaying loans from banks and NBFC’s. Credit Bureaus like CIBIL™, Equifax and Experian
consolidate every individual’s borrowings, credit history sourced from different member credit
institutions such as banks and other NBFC’s into a single report called as CIR.
A Credit Information Report (CIR) is a report on past repayment performance as reported by
various member banks and financial institutions about an individual. It is important that you
monitor your CIR from time to time. There are a number of things you can do to improve your
credit profile: It provides information on prompt payment, as well as defaulted payments. The
Credit Information Report (CIR) additionally has a list of enquiries made on your account by
various member banks / financial institutions/NBFCs for the purpose of approving a credit
facility.
What is the use of a Credit Information Report?
As your credit history plays a key role in your ability to obtain credit, it is important to
understand the information that is shared by the lenders with a credit information company also
known as credit bureaus. Understanding your credit history enables you to take control of your
financial situation. So it is a good idea to keep your CIR updated and correct, as it makes it easier
for banks to approve your loans.
Make sure that you repay on time: If you have a good repayment history, this helps boost
your credit score, with which you are likely to get the most competitive terms from loan
providers.
Make full payments towards your credit card bills, on time everytime.
Check your CIR on a regular basis. It always makes sense to get a copy of your Credit
Information Report before you apply for credit so that you know where you stand. If you find
any discrepancy, file a dispute immediately and get it corrected.