Fee Based Services Fee based financial services are those services wherein financial institutions operate in specialized

fields to earn a substantial income in the form of fees or dividends or brokerage on operations. The major fee based financial services are as follow: a) Issue Management b) Corporate Advisory Services c) Credit Rating d) Mutual Funds e) Asset Securitization f) Stock Broking Services Fund Based Services In fund-based services the firm raises funds through debt, equity, deposits and the bank invests the funds in securities or lends to those who are in need of capital. We will be discussing here some of these fund-based services such as: a) Leasing and Hire Purchase b) Housing Finance c) Credit Cards d) Venture Capital e) Factoring f) Forfeiting g) Bill Discounting h) Insurance

Venture capital (VC) is financial capital provided to early-stage, high-potential, high risk, growth startup companies. The venture capital fund makes money by owning equity in the companies it invests in, which usually have a novel technology or business model in high technology industries, such as biotechnology, IT, software, etc. The typical venture capital investment occurs after the seed funding round as growth funding round (also referred to as Series A round) in the interest of generating a return through an eventual realization event, such as an IPO or trade sale of the company. Venture capital is a subset of private equity. Therefore, all venture capital is private equity, but not all private equity is venture capital. In addition to angel investing and other seed funding options, venture capital is attractive for new companies with limited operating history that are too small to raise capital in the public markets and have not reached the point where they are able to secure a bank loan or complete a debt offering. In exchange for the high risk that venture capitalists assume by investing in smaller and less mature companies, venture capitalists usually get significant control over company decisions, in addition to a significant portion of the company's ownership (and consequently value). Venture Capital is a form of "risk capital". In other words, capital that is invested in a project (in this case - a business) where there is a substantial element of risk relating to the future creation of profits and cash flows. Risk capital is invested as shares (equity) rather than as a loan and the investor requires a higher"rate of return" to compensate him for his risk. The main sources of venture capital in the UK are venture capital firms and "business angels" private investors. Separate Tutor2u revision notes cover the operation of business angels. In

these notes, we principally focus on venture capital firms. However, it should be pointed out the attributes that both venture capital firms and business angels look for in potential investments are often very similar. Venture capital provides long-term, committed share capital, to help unquoted companies grow and succeed. If an entrepreneur is looking to start-up, expand, buy-into a business, buy-out a business in which he works, turnaround or revitalise a company, venture capital could help do this. Obtaining venture capital is substantially different from raising debt or a loan from a lender. Lenders have a legal right to interest on a loan and repayment of the capital, irrespective of the success or failure of a business . Venture capital is invested in exchange for an equity stake in the business. As a shareholder, the venture capitalist's return is dependent on the growth and profitability of the business. This return is generally earned when the venture capitalist "exits" by selling its shareholding when the business is sold to another owner. Venture capital in the UK originated in the late 18th century, when entrepreneurs found wealthy individuals to back their projects on an ad hoc basis. This informal method of financing became an industry in the late 1970s and early 1980s when a number of venture capital firms were founded. There are now over 100 active venture capital firms in the UK, which provide several billion pounds each year to unquoted companies mostly located in the UK.

Venture capital financing Venture capital financing is a type of financing by venture capital: the type of private equity capital is provided as seed funding to early-stage, high-potential, growth companies and more often after the seed funding round as growth funding round (also referred as series A round) in the interest of generating a return through an eventual realization event such as an IPO or trade sale of the company. Overview To start a new startup company or to bring a new product to the market, the venture needs to attract funding. There are several categories of financing possibilities. Smaller ventures sometimes rely on family funding, loans from friends, personal bank loans or crowd funding. More ambitious projects that need more substantial funding may turn to angel investors private investors who use their own capital to finance a ventures need, or Venture Capital (VC) companies that specialize in financing new ventures. VC firms may also provide expertise the venture is lacking, such as legal or marketing knowledge. Venture capital financing process There are five common stages of venture capital financing

1. 2. 3. 4. 5.

The Seed stage The Start-up stage The Second stage The Third stage The Bridge/Pre-public stage

The number and type of stages may be extended by the VC firm if it deems necessary; this is common[citation needed]. This may happen if the venture does not perform as expected due to bad management or market conditions (see: Dot com boom). The following schematics shown here are called the process data models. All activities that find place in the venture capital financing process are displayed at the left side of the model. Each box stands for a stage of the process and each stage has a number of activities. At the right side, there are concepts. Concepts are visible products/data gathered at each activity. This diagram is according to the modeling technique founded by Professor Sjaak Brinkkemper of the University of Utrecht in the Netherlands. The Seed Stage This is where the seed funding takes place. It is considered as the setup stage where a person or a venture approaches an angel investor or an investor in a VC firm for funding for their idea/product. During this stage, the person or venture has to convince the investor why the idea/product is worthwhile. The investor will investigate into the technical and the economical feasibility (Feasibility Study) of the idea. In some cases, there is some sort of prototype of the idea/product that is not fully developed or tested. If the idea is not feasible at this stage, and the investor does not see any potential in the idea/product, the investor will not consider financing the idea. However if the idea/product is not directly feasible, but part of the idea is worth for more investigation, the investor may invest some time and money in it for further investigation.

Example A Dutch venture named High 5 Business Solution V.O.F. wants to develop a portal which allows companies to order lunch. To open this portal, the venture needs some financial resources, they also need marketeers and market researchers to investigate whether there is a market for their idea. To attract these financial and non-financial resources, the executives of the venture decide to approach ABN AMRO Bank to see if the bank is interested in their idea. After a few meetings, the executives are successful in convincing the bank to take a look in the feasibility of the idea. ABN AMRO decides to put a few experts for investigation. After two weeks time, the bank decides to invest. They come to an agreement of invest a small amount of money into the venture. The bank also decides to provide a small team of marketeers and market researchers and a supervisor. This is done to help the venture with the realization of their idea and to monitor the activities in the venture. Risk At this stage, the risk of losing the investment is tremendously high, because there are so many uncertain factors. Research by J.C. Ruhnka and J.E. Young shows that the risk of losing the investment for the VC firm is around 66.2% and the causation of major risk by stage of development is 72%[citation needed]. The Harvard report by William R. Kerr, Josh Lerner, and Antoinette Schoar, however, shows evidence that angel-funded startup companies are less likely to fail than companies that rely on other forms of initial financing. The Start-up Stage The Start-up Stage If the idea/product/process is qualified for further investigation and/or investment, the process will go to the second stage; this is also called the start-up stage. At this point many exciting things happen. A business plan is presented by the attendant of the venture to the VC firm. A management team is being formed to run the venture. If the company has a board of directors, a person from the VC firms will take seats at the board of directors. While the organisation is being set up, the idea/product gets its form. The prototype is being developed and fully tested. In some cases, clients are being attracted for initial sales. The management-team establishes a feasible production line to produce the product. The VC firm monitors the feasibility of the product and the capability of the management-team from the board of directors. To prove that the assumptions of the investors are correct about the investment, the VC firm wants to see result of market research to see whether the market size is big enough, if there are enough consumers to buy their product. They also want to create a realistic forecast of the investment needed to push the venture into the next stage. If at this stage, the VC firm is not satisfied about the progress or result from market research, the VC firm may stop their funding

and the venture will have to search for another investor(s). When the cause relies on handling of the management in charge, they will recommend replacing (parts of) the management team.

Example Now the venture has attracted an investor, the venture needs to satisfy the investor for further investment. To do that, the venture needs to provide the investor a clear business plan how to realise their idea and how the venture is planning to earn back the investment that is put into the venture, of course with a lucrative return. Together with the market researchers, provided by the investor, the venture has to determine how big the market is in their region. They have to find out who are the potential clients and if the market is big enough to realise the idea. From market research, the venture comes to know that there are enough potential clients for their portal site. But there are no providers of lunches yet. To convince these providers, the venture decided to do interviews with providers and try to convince them to join. With this knowledge, the venture can finish their business plan and determine a pretty good forecast of the revenue, the cost of developing and maintaining the site and the profit the venture will earn in the following five years. After reading the business plan and consulting the person who monitors the venture activities, the investor decides that the idea is worth for further development.

Risk At this stage, the risk of losing the investment is shrinking, because the uncertainty is becoming clearer. The risk of losing the investment for the VC firm is dropped to 53.0%, but the causation of major risk by stage of development becomes higher, which is 75.8%. This can be explained by the fact because the prototype was not fully developed and tested at the seed stage. And the VC firm has underestimated the risk involved. Or it could be that the product and the purpose of the product have been changed during the development.[2] The Second Stage The Second Stage At this stage, we presume that the idea has been transformed into a product and is being produced and sold. This is the first encounter with the rest of the market, the competitors. The venture is trying to squeeze between the rest and it tries to get some market share from the competitors. This is one of the main goals at this stage. Another important point is the cost. The venture is trying to minimize their losses in order to reach the break-even. The management team has to handle very decisively. The VC firm monitors the management capability of the team. This consists of how the management team manages the development process of the product and how they react to competition. If at this stage the management team is proven their capability of standing hold against the competition, the VC firm will probably give a go for the next stage. However, if the management team lacks in managing the company or does not succeed in competing with the competitors, the VC firm may suggest for restructuring of the management team and extend the stage by redoing the stage again. In case the venture is doing tremendously bad whether it is caused by the management team or from competition, the venture will cut the funding.

Example The portal site needs to be developed. (If possible, the development should be taken place in house. If not, the venture needs to find a reliable designer to develop the site.) Developing the site in house is not possible; the venture does not have this knowledge in house. The venture decides to consult this with the investor. After a few meetings, the investor decides to provide the venture a small team of web-designers. The investor also has given the venture a deadline when the portal should be operational. The deadline is in three months. In the meantime, the venture needs to produce a client portfolio, who will provide their menu at the launch of the portal site. The venture also needs to come to an agreement on how these providers are being promoted at the portal site and against what price. After three months, the investor requests the status of development. Unfortunately for the venture, the development did not go as planned. The venture did not make the deadline. According to the one who is monitoring the activities, this is caused by the lack of decisiveness by the venture and the lack of skills of the designers. The investor decides to cut back their financial investment after a long meeting. The venture is given another three months to come up with an operational portal site. Three designers are being replaced by a new designer and a consultant is attracted to support the executives decisions. If the venture does not make this deadline in time, they have to find another investor. Luckily for the venture, with the come of the new designer and the consultant, the venture succeeds in making the deadline. They even have two weeks left before the second deadline ends.

Risk At this stage, the risk of losing the investment still drops, because the venture is capable to estimate the risk. The risk of losing the investment for the VC firm drops from 53.0% to 33.7%, and the causation of major risk by stage of development also drops at this stage, from 75.8% to 53.0%. This can be explained by the fact that there is not much developing going on at this stage. The venture is concentrated in promoting and selling the product. That is why the risk decreases. The Third Stage The Third Stage This stage is seen as the expansion/maturity phase of the previous stage. The venture tries to expand the market share they gained in the previous stage. This can be done by selling more amount of the product and having a good marketing campaign. Also, the venture will have to see whether it is possible to cut down their production cost or restructure the internal process. This can become more visible by doing a SWOT analysis. It is used to figure out the strength, weakness, opportunity and the threat the venture is facing and how to deal with it. Except that the venture is expanding, the venture also starts to investigate follow-up products and services. In some cases, the venture also investigates how to expand the life-cycle of the existing product/service. At this stage the VC firm monitors the objectives already mentioned in the second stage and also the new objective mentioned at this stage. The VC firm will evaluate if the management team has made the expected reduction cost. They also want to know how the venture competes against the competitors. The new developed follow-up product will be evaluated to see if there is any potential.

Example Finally the portal site is operational. The portal is getting more orders from the working class every day. To keep this going, the venture needs to promote their portal site. The venture decides to advertise by distributing flyers at each office in their region to attract new clients. In the meanwhile, a small team is being assembled for sales, which will be responsible for getting new lunchrooms/bakeries, any eating-places in other cities/region to join the portal site. This way the venture also works on expanding their market. Because of the delay at the previous stage, the venture did not fulfil the expected target. From a new forecast, requested by the investor, the venture expects to fulfil the target in the next quarter or the next half year. This is caused by external issues the venture does not have control of it. The venture has already suggested to stabilise the existing market the venture already owns and to decrease the promotion by 20% of what the venture is spending at the moment. This is approved by the investor. Risk At this stage, the risk of losing the investment for the VC firm drops with 13.6% to 20.1%, and the causation of major risk by stage of development drops almost by half from 53.0% to 37.0%. However at this stage it happens often that new follow-up products are being developed. The risk of losing the investment is still decreasing. This may because the venture rely its income on the existing product. That is why the percentage continuous drop.[4]

The Bridge/Pre-public Stage The Bridge/Pre-public Stage In general this stage is the last stage of the venture capital financing process. The main goal of this stage is to achieve an exit vehicle for the investors and for the venture to go public. At this stage the venture achieves a certain amount of the market share. This gives the venture some opportunities; for example:

Hostile take over Merger with other companies Keeping away new competitors from approaching the market Eliminate competitors

Internally, the venture has to reposition the product and see where the product is positioned and if it is possible to attract new Market segmentation. This is also the phase to introduce the follow-up product/services to attract new clients and markets. As we already mentioned, this is the final stage of the process. But most of the time, there will be an additional continuation stage involved between the third stage and the Bridge/pre-public stage. However there are limited circumstances known where investors made a very successful initial market impact might be able to move from the third stage directly to the exit stage. Most of the time the venture fails to achieves some of the important benchmarks the VC firms aimed.

Example Now the site is running smoothly, the venture is thinking about taking over the competitors website happen.nl. The site is promoting restaurants and is also doing business in online

ordering food. This proposal is being protested by the investor, because it may cost a lot of the ventures capital. The investor suggests a merge instead. To settle down their differences, the venture requested an external party to investigate into the case. The result of the investigation was a take-over. After reading the investigation, the investor agrees to it and happen.nl is being taken over by the venture. With the take-over of a competitor, the venture has expanded its services. Seeing the ventures result, the investor comes to the conclusion that the venture still have not reach the target that was expected, but seeing how the business is progressing, the investor decides to extend its investment for another year. Risk At this final stage, the risk of losing the investment still exists. However, compared with the numbers mentioned at the seed-stage it is far lower. The risk of losing the investment the final stage is a little higher at 20.9%. This is caused by the number of times the VC firms may want to expand the financing cycle, not to mention that the VC firm is faced with the dilemma of whether to continuously invest or not. The causation of major risk by this stage of development is 33%. This is caused by the follow-up product that is introduced.[5] At Last As mentioned in the first paragraph, a VC firm is not only about funding and lucrative returns, but it also offers knowledge support. Also, as can be seen below, the amount of risk (of losing investment value) decreases with each additional funding stage Stage at which investment made Risk of loss Causation of major risk by stage of development The Seed-stage The Start-up Stage The Second Stage The Third Stage The Bridge/Pre-public Stage 66.2% 53.0% 33.7% 20.1% 20.9% 72.0% 75.8% 53.0% 37.0% 33.0%

Credit rating A credit rating evaluates the credit worthiness of a debtor, especially a business (company) or a government. It is an evaluation made by a credit rating agency of the debtor's ability to pay back the debt and the likelihood of default. Credit ratings are determined by credit ratings agencies. The credit rating represents the credit rating agency's evaluation of qualitative and quantitative information for a company or government; including non-public information obtained by the credit rating agencies analysts. Credit ratings are not based on mathematical formulas. Instead, credit rating agencies use their judgment and experience in determining what public and private information should be considered in giving a rating to a particular company or government. The credit rating is used by individuals and entities that purchase the bonds issued by companies and governments to determine the likelihood that the government will pay its bond obligations. A poor credit rating indicates a credit rating agency's opinion that the company or government has a high risk of defaulting, based on the agency's analysis of the entity's history and analysis of long term economic prospects. Corporate credit ratings The credit rating of a corporation is a financial indicator to potential investors of debt securities such as bonds. Credit rating is usually of a financial instrument such as a bond, rather than the whole corporation. These are assigned by credit rating agencies such as A. M. Best, Dun & Bradstreet, Standard & Poor's, Moody's or Fitch Ratings and have letter designations such as A, B, C. The Standard & Poor's rating scale is as follows, from excellent to poor: AAA, AA+, AA, AA-, A+, A, A-, BBB+, BBB, BBB-, BB+, BB, BB-, B+, B, B-, CCC+, CCC, CCC-, CC, C, D. Anything lower than a BBB- rating is considered a speculative or junk bond.[8] The Moody's rating system is similar in concept but the naming is a little different. It is as follows, from excellent to poor: Aaa, Aa1, Aa2, Aa3, A1, A2, A3, Baa1, Baa2, Baa3, Ba1, Ba2, Ba3, B1, B2, B3, Caa1, Caa2, Caa3, Ca, C. A. M. Best rates from excellent to poor in the following manner: A++, A+, A, A-, B++, B+, B, B-, C++, C+, C, C-, D, E, F, and S. The CTRISKS rating system is as follows: CT3A, CT2A, CT1A, CT3B, CT2B, CT1B, CT3C, CT2C and CT1C. All these CTRISKS grades are mapped to one-year probability of default. Credit rating agencies The largest credit rating agencies (which tend to operate worldwide) are Dun & Bradstreet, Moody's, Standard & Poor's and Fitch Ratings. Other agencies include A. M. Best (U.S.), Baycorp Advantage (Australia), Egan-Jones Rating Company (U.S.), Global Credit Ratings Co. (South Africa),Levin and

Goldstein(Zambia),Agusto & Co(Nigeria), Japan Credit Rating Agency, Ltd. (Japan).[10], Muros Ratings[11] (Russia alternative rating agency), Rapid Ratings International (U.S.), Credit Rating Information and Services Limited[12][13](Bangladesh) and Public Sector Credit Solutions (U.S.).

Credit Rating is an estimate of the credit worthiness of an individual, corporation, or a country. It is an opinion made by credit evaluators of a borrowers potential to repay debt. Every rating grade comes with its probability of default, which in turn assists investor/lender to take informed investment decision. Rating is arrived after considering various financial, nonfinancial parameters, past credit history and future outlook. There are various types of ratings viz. Issuer Rating/ Obligor Rating, Bank loan Rating, Issue based Ratings, Project Rating etc. Based on type of borrower/issuer, Ratings can be classified as Individual Rating, Corporate Rating, Bank/Financial Institutions Rating, SME Rating, MFI Rating etc. Credit rating agency A credit rating agency (CRA) is a company that assigns credit ratings for issuers of certain types of debt obligations as well as the debt Uses of ratings Credit ratings are used by investors, issuers, investment banks, broker-dealers, and governments. For investors, credit rating agencies increase the range of investment alternatives and provide independent, easy-to-use measurements of relative credit risk; this generally increases the efficiency of the market, lowering costs for both borrowers and lenders. This in turn increases the total supply of risk capital in the economy, leading to stronger growth. It also opens the capital markets to categories of borrower who might otherwise be shut out altogether: small governments, startup companies, hospitals, and universities. Credit rating agencies in India CIBIL CRISIL High Mark Credit Information Services ICRA Limited SME Rating Agency of India

CIBIL is India's first credit information bureau. It's a repository of information, which contains the credit history of commercial and consumer borrowers. CIBIL provides this information to its members in the form of credit information reports.[5] As on September 2009, CIBIL has an information base on over 160 million consumer trades, and 4 million commercial trades which continues to grow at a fast pace and shares credit information with its 175 member base on the principle of reciprocity.CIBILs members include all leading banks, financial institutions, non-banking financial companies, housing finance companies, state financial corporations and credit card companies.

Credit Information Bureau (India) Limited or CIBIL is a Credit Information Company (CIC) founded in August 2000. Post Inception, we have come to play a critical role in Indias financial system. Whether it is to help loan providers manage their business or help consumers secure credit faster and at better terms, the use of CIBILs products have led to a massive change in the way the credit life cycle is managed by both loan providers and consumers.

History and origin The need of credit information system was increasingly felt in order to enable informed credit decisions and aid fact based risk management. It was also imperative to arrest accretion of fresh non-performing assets (NPAs) in the banking system through an efficient system of credit information on borrowers as a first step in credit risk management. In this context, the requirement of an adequate, comprehensive and reliable information system on the borrowers through an efficient database system was keenly felt by the Reserve Bank of India Government as well as credit institutions. A Working Group with representatives from select public sector banks, IDBI, ICICI, Indian Banks' Association and Reserve Bank was constituted by the Reserve Bank in the year 1999, to explore the possibilities of setting up a Credit Information Bureau (CIB). The Working Group had recommended setting up a CIB under the Companies Act, 1956 with equity participation from commercial banks, FIs and NBFCs registered with the Reserve Bank. As per the recommendations made by the Working Group, Credit Information Bureau (India) Ltd., (CIBIL) was set up in January 2000. CIBIL was promoted by the State Bank of India, Housing Development Finance Corporation Limited, Dun & Bradstreet Information Services India Private Limited and Trans Union International Inc. In 2004, SBI and HDFC divested a part of their stake in CIBIL to other

shareholders: leading banks and financial institutions in the country.The current shareholding pattern is as follows Percent Shareholding 19.98% 10% 5% 2.5% 0.01% TransUnion International Inc State Bank of India, HDFC Bank, ICICI Bank Bank of Baroda, Bank of India, HSBC, Indian Overseas Bank, Punjab National Bank, Union Bank of India, Citicorp Finance (India) Ltd., Central Bank of India, Standard Chartered Bank Sundaram Finance Ltd., GE Strategic Investments India Dun & Bradstreet Information Services India Pvt. Ltd. Entity / Entities

TransUnion and Dun & Bradstreet are the technical and equity partners of CIBIL. TransUnion is one of the largest consumer credit bureaus in the world. Dun & Bradstreet is worlds leading source of commercial information and insights on businesses. Aid in improving credit in India According to the World Bank over the last few years several reforms have improved the environment for getting credit in India. Credit Information Bureau (India) Limited, a private partnership between several commercial banks and credit information service providers, has started to increase the amount of credit information available in the country. CIBILs coverage has more than doubled in the last few years. Credit Information Reports The data that CIBIL collects is used in creating credit information reports, also known as CIRs. These reports contain the basic borrower information (such as names, DOB's and addresses), past payment history, overdue amounts, records of all the credit facilities availed by the borrower, suit-filed status and number of inquiries made on that borrower, by different Members.

CIBIL collects and maintains records of an individuals payments pertaining to loans and credit cards. These records are submitted to CIBIL by banks and other lenders, on a monthly basis. This information is then used to create Credit Information Reports (CIR) and credit scores which are provided to lenders in order to help evaluate and approve loan applications. CRISIL Credit Rating and Information Services of India Ltd. (CRISIL) (BSE: 500092, NSE: CRISIL) is India's leading Ratings, Research, Risk and Policy Advisory Company based in Mumbai.[3] CRISILs majority shareholder is Standard & Poor's, a division of The McGrawHill Companies and the world's foremost provider of financial market intelligence. CRISIL pioneered ratings in India more than 25 years ago, and is today the undisputed business leader[citation needed], with the largest number of rated entities and rating products: CRISIL's rating experience covers more than 45000 entities, including 30,000 small and medium enterprises (SMEs).[citation needed] CRISIL offers domestic and international customers (CRISIL Global Research and Analytics consisting of Irevna and Pipal Research caters to international clients) with independent information, opinions and solutions related to credit ratings and risk assessment; energy, infrastructure and corporate advisory; research on India's economy, industries and companies; global equity research; fund services; and risk management.

CRISIL Businesses RATINGS

India's first, largest, and most prominent credit rating agency Rs. 36 trillion of debt rated Market share in bank loan ratings exceeds 50 per cent Rates two-thirds of bonds outstanding in India Highest number of outstanding SME ratings in India

GLOBAL RESEARCH & ANALYTICAL

Largest and top ranked provider of high-end research and analytics to the worlds largest financial institutions and leading global corporations Works with 12 of the top 15 global investment banks Client list includes 30 Fortune 500 companies, across a range of industries

RESEARCH

India's largest independent research house, providing comprehensive research coverage to more than 1200 Indian and global customers Provides coverage on 70 industries 90 per cent of India's commercial banks are our customers Largest independent equity research house in India Official provider of valuations to all mutual funds in India Helps Employees' Provident Fund Organisation (EPFO) select fund managers

CRISIL Risk and Infrastructure Solutions (CRIS)

Offers a wide range of solutions focused on infrastructure policy, corporate advisory, integrated risk management and associated consulting services Serves a variety of clients, including government bodies, multilaterals, banks and infrastructure companies Practical and innovative solutions in 31 countries Client roster includes 50 financial institutions in India and abroad Flagship product, RAM, is Indias leading internal risk rating solution

* Wholly-owned subsidiary of CRISIL CRISIL Rating Process

CRISIL's ratings process is designed to ensure that all ratings are based on the highest standards of independence and analytical rigour. From the initial meeting with the management to the assignment of the rating, the rating process normally takes three to four weeks. However, CRISIL has sometimes arrived at rating decisions in shorter timeframes, to meet urgent requirements. The process of rating starts with a rating request from the issuer, and the signing of a rating agreement. CRISIL employs a multi-layered, decision-making process in assigning a rating.

CRISIL has revised the symbols and definitions of its long-term and short-term credit ratings on debt instruments, structured finance instruments, and debt mutual fund schemes. This is in compliance with a June 15, 2011, Securities and Exchange Board of India (SEBI) circular, Standardisation of Rating Symbols and Definitions, which mandates the use of common rating symbols and rating definitions by all credit rating agencies (CRAs). As per the circular, all CRAs are required to revise their rating symbols and definitions as recommended by SEBI. Accordingly, CRISIL has effected changes in rating symbols and definitions with effect from July 11, 2011. The rating symbols and definitions of the following class of instruments have been revised: Long-term debt instruments; Short-term debt instruments; Long-term structured finance instruments; Short-term structured finance instruments;

Long-term mutual fund schemes; and Short-term mutual fund schemes.

High Mark Credit Information Services High Mark Credit Information Services is credit information company based in Mumbai.It keep a record of loan repayment history on credit facilities extended to an individual across the board. This helps lenders analyse the risk profile of individuals before extending credit.This also keeps non-performing loans in check.

Anil Pandya, Chairman Ajay Kohli, CEO Founded in 2007 and Licensed by The Reserve Bank of India (RBI) in late 2010; High Mark is India's Newest and Fastest Growing Credit Bureau (CIC). High Mark, a next generation credit bureau, is backed by an illustrious community of promoterinvestors to provide its customers (in banking, financial services, insurance, telecom, and other sectors) the country's absolute best in bureau services, risk management, and analytic solutions.

SME Rating Agency of India SME Rating Agency of India Limited (SMERA) is a third party rating agency exclusively set up for micro, small and medium enterprises (MSME) in India for ratings on creditworthiness. It provides ratings which enable MSME units to raise bank loans at competitive rates of interest.[3]. However, its registration with Securities Exchange Board of India SEBI as a Credit Rating Agency and accreditation by Reserve Bank of India RBI in September 2012 as an external credit assessment institution (ECAI) to rate bank loan ratings under Basel II guidelines has paved way for SMERA to rate/grade various instruments such as: IPO, Bonds, Security Receipts, Bank Loan Instruments etc. The agency was founded in 2005 by Small Industries Development Bank of India (SIDBI),[Dun & Bradstreet Information Services India Private Limited (D&B) and several leading Govt., Public, Private and MNC banks in the country. SMERA is known to have one of the most progressive HR policies for employees in the Indian corporate sector. SMERA being a service organization endeavors to attract highly motivated self starters with a strong customer focus, strong team spirit and sharp business acumen.

SMERA is committed to creating and maintaining a culture that fosters an inclusive, diverse workforce and an environment in which every employee has the opportunity to demonstrate his or her potential by performing to meet the challenges ahead. 1) SMERA has pioneered SME ratings in the country and has till date completed over 18,000 ratings across sectors and geographies on a PAN India basis. SMERA Ratings have gained wide acceptability and are now an integral part of the risk assessment process within the lending and investing community. 2) The Association of Development Financing Institutions in Asia and the Pacific (ADFIAP) has awarded SIDBI with "Outstanding Development Project Award" for setting up SMERA. The award was given under the SME Development Category during the 30th ADFIAP Annual Meeting held on May 10, 2007 at Hanoi, Vietnam. 3) SMERA has also been registered under Securities and Exchange Board of India (Credit Rating Agencies) Regulations, 1999 making it only the sixth rating agency in India to rate issues such as IPO, bonds, commercial papers, security receipts and others.

Mr. Rakesh Rewari, Chairman, Mr. Parag Patki, CEO SMERA completes 18000 ratings

SMERA is the country's first Rating agency that focuses primarily on the Indian Micro, Small and Medium Enterprise (MSME) segment. SMERA's primary objective is to provide Ratings that are comprehensive, transparent and reliable. This would facilitate greater and easier flow of credit from the banking sector to MSMEs.

SMERA offering: 1. SMERA Credit Ratings provides a comprehensive and independent third-party evaluation of the overall condition of the applicant. Currently, SMERA offers Obligor Ratings which takes into account the financial and non-financial factors that have bearing on the credit worthiness of the applicant. 2. At present, SMERA offers following products:
o o o o o o

MSME Rating Greenfield & Brownfield Grading Microfinance Institutions (MFI) Rating Green Rating Risk Management Solutions Maritime Training Institutions (MTI) Rating

3. SMERA Rating endeavors to enhance the market standing of the applicant amongst lenders, trading partners and prospective customers.

OVERVIEW OF SMERAs RATING PROCESS SMERA Rating is a comprehensive assessment of the enterprise, taking into consideration the overall financial performance (profitability and growth ratios, gearing levels, liquidity ratios, etc - size and industry specific) and non-financial performance (management experience and qualifications, certifications, customer and supplier base, constitution, etc.) of the MSME vis-vis other peers of similar size in the industry. The entire Rating process is transparent, reliable, time bound and customer friendly. The Rating process begins with the receipt of rating mandate along with the application form and ends with the dispatch of the Rating report and Rating certificate. The Rating process in brief is enumerated below:

SMERAs Rating Process

ICRA Limited ICRA Limited (ICRA) is one of India's premier financial information services company. It offers credit rating information and professional financial consulting services across India, as well as in the Asia-Pacific region through its subsidiaries. History ICRA Limited, was established in 1991, and was originally named Investment Information and Credit Rating Agency of India Limited (IICRA India). It was a joint-venture between Moody's and various Indian commercial banks and financial services companies. The company changed its name to ICRA Limited, and went public on 13 April 1997, with a listing on the Bombay Stock Exchange and the National Stock Exchange. Moody's continues to be the largest single shareholder in ICRA. ICRA has a pan-India presence and has offices in 8

locations. Apart from the four metros, it has offices in Pune, Ahmedabad, Bangalore and Hyderabad.

CRA Limited (formerly Investment Information and Credit Rating Agency of India Limited) was set up in 1991 by leading financial/investment institutions, commercial banks and financial services companies as an independent and professional Investment Information and Credit Rating Agency. Today, ICRA and its subsidiaries together form the ICRA Group of Companies (Group ICRA). ICRA is a Public Limited Company, with its shares listed on the Bombay Stock Exchange and the National Stock Exchange. Alliance with Moodys Investors Service The international Credit Rating Agency Moodys Investors Service1 is ICRAs largest shareholder. The participation of Moodys is supported by a Technical Services Agreement, which entails Moodys providing certain high-value technical services to ICRA. Specifically, the agreement is aimed at benefiting ICRAs in-house research capabilities, and providing it with access to Moodys global research base. The agreement also envisages Moodys conducting regular training and business seminars for ICRA analysts on various subjects to help them better understand and manage concepts and issues relating to the development of the capital markets in India. Besides this formal training programme, the agreement provides for Moodys advising ICRA on Rating-products strategy, and the Ratings business in general.

Rating Services As an early entrant in the Credit Rating business, ICRA Limited (ICRA) is one of the most experienced Credit Rating Agencies in the country today. ICRA rates rupee denominated debt instruments issued by manufacturing companies, commercial banks, non-banking finance companies, financial institutions, public sector undertakings and municipalities, among others. ICRA also rates structured obligations and sector-specific debt obligations such as instruments issued by Power, Telecom and Infrastructure companies. The other services offered include Corporate Governance Rating, Stakeholder Value and Governance Rating, Credit Risk Rating of Debt Mutual Funds, Rating of Claims Paying Ability of Insurance Companies, Project Finance Rating, and Line of Credit Rating. ICRA, along with National Small Industries Corporation Limited (NSIC), offers a Performance and Credit Rating Scheme for Small-Scale Enterprises in India. The service is aimed at enabling Small and Medium Enterprises (SMEs)

improve their access to institutional credit, increase their competitiveness, and raise their market standing.

Grading Services The Grading Services offered by ICRA employ pioneering concepts and methodologies, and include Grading of: Initial Public Offers (IPOs); Microfinance Institutions (MFIs); Construction Entities; Real Estate Developers and Projects; Healthcare Entities; and Maritime Training Institutes. In IPO Grading, an ICRA-assigned IPO Grade represents a relative assessment of the fundamentals of the issue graded in relation to the universe of other listed equity securities in India. In MFI Grading, the focus of ICRAs grading exercise is on evaluating the candidate institutions business and financial risks. The Grading of Construction Entities seeks to provide an independent opinion on the quality of performance of the entities graded. Similarly, the Grading of Real Estate Developers and Projects seeks to make property buyers aware of the risks associated with real estate projects, and with the developers ability to deliver in accordance with the terms agreed. ICRAs Healthcare Gradings present an independent opinion on the quality of care provided by healthcare entities. In the education sector, ICRA offers the innovative service of Grading of Maritime Training Institutes in India.

The purpose of a housing finance system is to provide the funds which home-buyers need to purchase their homes. This is a simple objective, and the number of ways in which it can be achieved is limited. Notwithstanding this basic simplicity, in a number of countries, largely as a result of government action, very complicated housing finance systems have been developed. However, the essential feature of any system, that is, the ability to channel the funds of investors to those purchasing their homes, must remain.

Housing finance is a relatively new concept in India comparing to other financial services that are widely available in the country since a long year back. However, the speedy development in housing and various housing activities have understandably led to the growth of Indian housing finance market. As a result, a number of players have barged into the market. Here, find the list of top 10 housing finance companies in India.
It was in the year 1970 when Housing and Urban Development Corporation (HUDCO) was established to finance various housing and urban infrastructure activities. However, the Housing Development Finance Corporation (HDFC) was the India's first private sector housing finance company came into existence in 1977. Since then, the housing finance in India has been flying high. It's expected to grow at a growth rate of 36% in the coming years. As the commercial banks started expanding housing-related disbursements, the market share also started growing up. In 2000, the Indian housing finance companies accounted for 70 per cent of the disbursements, while their collective share decreased to 36 per cent within 5 years. In 2005, banks accounted for 64 per cent of the disbursements.

National Housing Bank (NHB) is a statutory organization that was established on July 9, 1988 under the National Housing Bank Act, 1987. It is the apex level financial institution for the housing sector in the country and a wholly owned subsidiary of the Reserve Bank of India. The head office of NHB is located in New Delhi. It has a regional office at Mumbai and a Representative office at Hyderabad, Bangaluru, Chennai, Kolkata, Lucknow & Ahmedabad. NHB aims to facilitate the promotion of Housing Finance Institutions and provides financial and other support to such institutions. NHB also raises resources for the housing sector towards increasing new housing stock and provides refinance to a large set of retail lending institutions such as Banks, HFCs, Co-operative Sector Institutions, Housing Agencies or to any authority established by or under any Central or State Act in order to benefit the masses both in urban and rural areas. The regulatory and supervisory authority of NHB over the activities of housing finance companies is derived from the NHB Act. As per the provisions of the Act, NHB is empowered to grant Certificate of Registration to companies for commencing/carrying on the business of a housing finance institution.

The Sub-Group on Housing Finance for the Seventh Five Year Plan (1985-90) identified the nonavailability of long-term finance to individual households on any significant scale as a major lacuna impeding progress of the housing sector and recommended the setting up of a national level institution. The Committee of Secretaries considered' the recommendation and set up the High Level Group under the Chairmanship of Dr. C. Rangarajan, the then Deputy Governor, RBI to examine the proposal and

recommended the setting up of National Housing Bank as an autonomous housing finance institution. The recommendations of the High Level Group were accepted by the Government of India. The Honble Prime Minister of India, while presenting the Union Budget for 1987-88 on February 28, 1987 announced the decision to establish the National Housing Bank (NHB) as an apex level institution for housing finance. Following that, the National Housing Bank Bill (53 of 1987) providing the legislative framework for the establishment of NHB was passed by Parliament in the winter session of 1987 and with the assent of the Honble President of India on December 23, 1987, became an Act of Parliament. The National Housing Policy, 1988 envisaged the setting up of NHB as the Apex level institution for housing. In pursuance of the above, NHB was set up on July 9, 1988 under the National Housing Bank Act, 1987. NHB is wholly owned by Reserve Bank of India, which contributed the entire paid-up capital. The general superintendence, direction and management of the affairs and business of NHB vest, under the Act, in a Board of Directors. The Head Office of NHB is at New Delhi.

NHB supports housing finance sector by: Extending refinance to different primary lenders in respect of Eligible housing loans extended by them to individual beneficiaries, for project loans extended by them to various implementing agencies. Lending directly in respect of projects undertaken by public housing agencies for housing construction and development of housing related infrastructure. Guaranteeing the repayment of principal and payment of interest on bonds issued by Housing Finance Companies. Acting as Special Purpose Vehicle for securitising the housing loan receivables.
Refinance Operations Project Finance Guarantee Securitisation

Statistical Information

NHB collects primary data regarding housing finance sanctioned and disbursed by the housing finance companies approved by NHB for its refinance support and public sector banks on a quarterly basis. Besides, the Bank obtains housing finance data pertaining to the banking sector and the cooperative sector from the Reserve Bank of India and National Cooperative Housing Federation of India on a regular basis. Besides, the Bank monitors the progress under the Golden jubilee Rural Housing Finance Scheme (GJRHFS) in a quarterly manner.

List of Top Housing Finance Companies in India

Find below a list of some of the top housing finance companies of India:

Housing Development Finance Corporation Limited (HDFC) Housing Development Finance Corporation Ltd (HDFC) is one of the leaders in the Indian housing finance market with almost 17% market share as on March 2010. Serving more than 38 lakh Indian customers as on March 2011, HDFC also offers customized solutions that fit to the need of the customer. In the FY 2010-11, it registered a net profit of `4528.41 crore. It also registered a net profit of ` 971 crore in the quarter ended September 30, 2011.

State Bank of India Home Finance (SBI) State Bank of India is another major player in the Indian housing finance market with 17% of the market share, same as HDFC's share as on March 2010. The SBI Housing Loan schemes are specifically designed to meet the varied requirements of the customers. It offers home loan for various purposes including new house/flat, purchase of land, renovation/alteration/extension of existing house/flat etc. SBI Home Finance registered a net profit of ` 24.63 crore in the year ended March 31, 2009.

Housing Urban Development Corporation (HUDCO) Through its Niwas scheme, HUDCO offers housing loans for the buying/constructing house/flat. Loans are also offered for renovation/extension/alteration of existing house/flat. In the financial year 2009-10 (ended on March 31, 2010), HUDCO registered a net profit of ` 495.31 crore, comparing to ` 400.99 crore of the previous year.

LIC Housing Finance Limited LIC Housing Finance is another major player in housing finance sector in India with about 8% of market share. Promoted by Life Insurance Corporation of India, LICHFL has an extensive distribution network with a strong brand presence. Recently, the company has been awarded Consumer Superbrand 2009/10 Status by Superbrands Council. In the last financial year (ended on March 31, 2011), LICHFL earned a net profit of ` 974.49 crore, comparing to ` 662.18 in the previous FY. It also registered a net profit of ` 256.50 crore in April- June quarter of 2011.

ICICI Home Finance Company Limited ICICI is the third largest housing finance company in India with almost 13% market share. It offers various types of home loans for its customers which may have tenure up to 20 years. The home loan interest rate is connected to the ICICI Bank Floating Reference Rate (FRR/PLR). Here it can be added here that, the PLR has been increased to 17.5% from its previous rate of 17% since February 23, 2011. As on March 31, 2010, ICICI HFC has 2009 branches with an asset of ` 363400 crore. The net profit of the company rose 45.19% to Rs 233.29 crore in the year ended March 2011 compared to Rs160.68 crore profit it earned during the previous year.

IDBI Homefinance Limited (IHFL) Founded in January 10, 2000, IDBI Homefinance Limited has become one of the major players in the Indian housing finance market with about 4% market share as on March 2010. It offers a range of housing financial solutions to its customers including Individual Home Loans, Home Improvement Loan, Home Extension Loan, Home Loans for NRIs, Plot Loans, and Loan Against Home etc. The home loan advances of IHFL as of March 2010 were Rs 3,537 crore compared to Rs 3,089 crore in the previous year. In the financial year 2010-11, IDBI Bank registered a profit of ` 1650 crore, comparing to a net profit of ` 1031 crore in the previous financial year.

PNB Housing Finance Limited PNB Housing Finance Limited offers a wide range of loans for purchase/construction of property to resident Indians as well as NRIs. It also offers housing finance for renovations, repairs and enhancement of immovable properties. In the last financial year (ended on March 31, 2011), PNB Housing Finance Limited registered a net profit of ` 69.37 crore, which is 3.93% more than the net profit of its previous financial year of ` 66.75 crore.

Dewan Housing Finance Corporation Limited (DHFL) Dewan Housing Finance Corporation Limited is one of the largest housing finance solution providers in India with an extensive network of 74 branches, 78 service centers and 35 camps spread across the nation. For the year ended March 31, 2011, DHFL registered a net profit of Rs 265.13 crore which is a growth of 75.9% over net profit of Rs 150.69 crore in the previous fiscal. In the quarter ended on September 30, 2011, DHFL earned a profit (after tax) of ` 71.89 crore.

GIC Housing Finance Limited GIC Housing Finance Limited, one of the leading housing finance companies in India, was initially established as GIC Grih Vitta Limited on December 12, 1989. Promoted by General Insurance Corporation of India, GIC Housing Finance Limited offers extensive range of housing finance solutions to its customers through its wide network of 24 Business Centers and 3 Collection Centers across the nation. In the financial year 2010-11, GIC Housing Finance Limited registered a profit (after tax) of ` 113.76 crore. Furthermore, in the quarter ended June 30, 2011, it registered a profit of ` 1756 lakhs.

Can Fin Homes Limited (CFHL) Can Fin Homes Limited is another big player in the Indian housing finance market with an extensive network of 40 branches. It is also the first and one of the biggest bank-sponsored (sponsored by Canara Bank) housing finance companies in India. In the financial year 2010-11, Can Fin Homes Limited registered a net profit of ` 4201.6 lakhs. It also registered a net profit of ` 814 lakh in the quarter ended on September 30, 2011.

Macroeconomic Background On the back of economic reforms undertaken in 1991, India has grown at an average rate of over 5% through the nineties peaking at about 8% in FY04. It is currently the fourth largest (in PPP terms) economy

in the world with GDP output at USD 554 billion. Indias services led-growth strategy is well documented and is a departure from the rest of Asias manufacturing-led model for growth. Both domestic and global demand for Indias services remains robust with globally competitive firms emerging from the countrys historically protected private sector. With still much scope for reform, Indias healthy progress in liberalization, private sector-led development, and newly established political support (irrespective of the ruling party) for economic and structural reforms suggest that India could well be setting up the necessary conditions to support the type of long-term growth path over the next 2-3 decades. Inflation through the nineties hovered between 7% and 13%; however, that has been reigned in and is currently about 5%. Interest rates have substantially fallen from close to 18% in the mid nineties to about 7% last fiscal. Forex reserves are about USD 135 billion and covers 12 months of imports. Demographics The population of India is over 1 billion and accounts for one sixth of the entire worlds population. The population is second only to China with one quarter of the worlds youth living in India. 54% of the Indian population is below the age of 25. In 2001 the productive population (age 25-44) was 278 million which, by 2013, will grow to 369 million; a growth of 33%. This explosive growth will result in higher demand for housing loans in the foreseeable future. According to the 2001 Census of India the total number of households in India is 191 million, up from 147 million in 1991. Much in line with world trends of falling household size, in India, the average household size has fallen from 5.71 in 1991 to 5.34 in 2001. This trend is expected to continue as individuals migrate to urban centres in search of work, coupled with movement away from the joint family system to single family households that is further accelerating lower household sizes. Housing Market The Indian housing industry is highly fragmented, with the unorganized sector, comprising small builders and contractors, accounting for over 70% of the housing units constructed and the organized sector accounting for the rest. The organized sector comprises large builders and government or governmentaffiliated entities. The housing market witnessed a frenzied boom in the early nineties on the back of a booming stock market and a liberalization process that was kicked off in 1991. The stock market and real estate markets crashed in quick succession - 1994 and 1995 respectively, followed by a prolonged period of about 8 years of little or no appreciation in real estate. The crash, accentuated by high inflation and high interest rates, not only kept speculative inflows out but also kept genuine home seekers at bay. However, some reversal in that trend is being witnessed as the past 2-3 years has seen real estate prices inch up on the back of demand led by low interest rates and the software services sector boom currently underway. According to the Census of 2001 there were 249 million occupied houses in total, up from 108 in 1991, representing a CAGR of 8.71%. In 2001 there were 178 million in rural areas and 71 million in urban centres. The tenth Five Year Plan document on urban development has estimated an additional requirement of about 4.5 million houses each year during the Plan period (2002-07). This is in addition to the current shortfall of about 19.4 million units compared to the shortfall of 18.5 million in 1991. Out of the total shortfall of 19.4 million, 14.9 million is in rural areas and the balance 4.5 million in urban centres. Total new house completions in FY04 were estimated at 4.5 million units.

Housing Finance The value of total residential mortgage debt moved up from USD 1.84 billion in 1994 to USD 12.26 billion in 2004; a CAGR of 21%. The housing finance market has recorded robust growth in the last 5 years, clocking an annual growth rate of about 40% between FY99 and FY04. Residential mortgage debt as a percentage of GDP was a mere 0.58% in 1994 which has moved up to 2.21% in FY04, still miniscule when compared to about 45% in the EU, 70% in the US and upwards of 30% in East Asian economies. Interest rates on housing loans have fallen from a peak of 17% in 1996 to 7.5% last fiscal making owning a home more affordable. This combined with increasing loan tenures, increasing loan-to-value ratio and a rise in the installment-to-income ratio are precipitating high growth rates in the housing finance market. The organized lenders in the housing finance industry, comprising 30% of housing units constructed, arecurrently concentrated in the urban markets, with a greater presence in the major metros and Tier 1 cities.They are however, moving to the Tier 2 cities and smaller towns but are yet to venture into the rural markets.Also, salaried borrowers constitute the bulk of the clientele for the financier in comparison to the selfemployedborrowers, who constitute a miniscule proportion. As a segment, the self-employed category ismuch bigger than the salaried segment, but the organized lenders have, historically, been concentrating on the salaried borrowers due to the lower risks associated with them. Traditionally housing finance was dominated by a handful of private sector institutions. These Housing Finance Companies (HFCs) commanded 70% market share in FY99, which has subsequently fallen to 50% in FY04 as a direct result of policy changes that permitted the entry of banks into this industry. Banks now control 40% of this market and continue to show explosive growth on account of government policy that categorizes this lending under priority sector lending and the low NPA levels experienced in this industry. Government Policy & Objectives Public investment in housing according to the Sixth-Five-Year-Plan has grown from USD 1 billion to USD 90 billion in the Tenth-Five-Year-Plan; a CAGR of 45%. Prior to that, the Government of India was generally not supportive of housing finance through its policies. This however, has changed. Besides a larger allocation of public funds, fiscal incentives and tax rebates on principal repayment and Equated monthly installments (EMIs) have reduced the tax adjusted EMI to income ratio that is further tilting the buy versus rent decision in favour of buying. A welcome move recently announced by the government is that 100% Foreign Direct Investment (FDI) inIndia would be allowed in townships, housing, built-up infrastructure and construction-development projects,which could include housing, commercial premises, hotels, resorts, hospitals, educational institutions,recreational facilities, city and regional level infrastructure. However, a lot remains to be achieved withregard to issues surrounding regularization of land records, urban land ceiling act, rent control act etc, that continue to stymie the explosive growth being witnessed in the housing finance market.

Established in 1914, the International Union for Housing Finance (IUHF) is a worldwide housing finance network organisation which enables its members to:

keep up-to-date with the latest developments in housing finance from around the world; and learn from each others experience.

The Union covers 42 different countries through its 91 members, which range from national banking associations or mortgage lending institutions to independent consultants, academics, government agencies and international institutions specialised in housing finance.

Introduction Bill discounting, as a fund-based activity, emerged as a profitable business in the early nineties for finance companies and represented a diversification in their activities in tune with the emerging financial scene in India. In the post-1992 (scam) period its importance has substantially declined primarily due to restrictions imposed by the Reserve Bank of India. The purpose of the Chapter is to describe bills discounting as an asset-based financial service. The aspects of bills discounting covered include its concept, advantages and disadvantages, bills market schemes, procedures and processing, post-securities scam position and some gray-areas.
Bill discounting is a major activity with some of the smaller Banks. Under this type of lending, Bank takes the bill drawn by borrower on his (borrower's) customer and pays him immediately deducting some amount as discount/commission. The Bank then presents the Bill to the borrower's customer on the due date of the Bill and collects the total amount. If the bill is delayed, the borrower or his customer pays the Bank a pre-determined interest depending upon the terms of transaction.

Bill Discounting is a process where the financial institution gets the Bill of Exchange (Cheque / PO /DD etc.) before its maturity date and below its par value. Hence the amount or cash realized may vary depending upon the number of days until maturity and the risk involved. Discounting the bill of exchange is practiced to get the same immediately encashed before the maturity date. The liability in case of dishonor of the bill remains with the person in whose favor the bill is generated. A commercial bill discount is an act by which the legal holder of a commercial bill (including banker's acceptance draft and commercial acceptance draft) transfers it to bank to acquire cash before its maturity date.

Bill Discounting : Documents The borrower and/or the guarantors have to provide the following documents to the banks or the lending institutions while submitting Bill Discounting Application. Certain documents may be demanded by the bank or the lending institutions in post sanction phase or on periodical basis

Address Proof : Latest Electricity/Telephone Bill or Receipt of Maintenance Charges or Valid Passport or Voters Identity Card or Purchase/Lease Deed/ Leave & License Agreement of Residence or Office Premises. Identity Proof : Valid Passport, PAN Card, Voters Card, Any other photo identification issued by Government Agencies. Business Proof : VAT/CST Registration No. or MIDC Agreement or SSI Permanent Registration Certificate or Warehouse Receipts or Shop & Establishment Act Certificate or Copy of Lease Agreement along with the latest Rent paid Receipt. Business Profile on Companys Letterhead. Partnership deed in case of partnership firms. Certificate of incorporation, Date of Commencement of Business and Memorandum of Title Deeds, Form 32 in for Addition or Deletion of Directors in case of companies.

Last three years Trading, Profit & Loss A/c. and Balance Sheets (duly signed by a Chartered Accountant wherever applicable)

Last one years Bank statement of the Firm. If existing loan, then sanctioning letter and repayment schedule of the same. Firm/Companys PAN Cards. Individual Income Tax Returns of the Individual/Partners/Directors for last three years. Last one years Bank statement of Individuals, Partners, Directors. SEBI formalities in case of listed companies. Share Holding pattern of Directors duly certified by a Chartered Accountant. List of the Existing Directors of the company from the Registrar of the Companies. Written & approved confirmation of having No Legal Suit filed against any of the directors. If any such legal suit or proceedings are pending then the details of such legal suit or proceeding.

Bill Discounting : Process The following are the sequence of steps taken by the banks on receipt of completed application forms. 1. Application form is accepted and acknowledged. 2. Personal interview /discussions is held with the customers by the banks officials. 3. Bank's Field Investigation team visits the business place/work place of the applicant. (All the documents submitted are verified by the bank with the originals so as to ensure the authenticity of the same.) 4. Bank verifies the track record of the applicant with the common information sharing bureau (CIBIL). 5. In case of fresh projects the bank analyses the back ground of the applicant/firm/company and the Technical feasibility/financial viability of the project based on various parameters and also the existing market conditions. 6. Depending on the size of the project the file is put up for sanction to the appropriate level of authority. SANCTION AND DISBURSEMENT :

1. On approval/sanction, the sanction letter, is issued specifying the terms and conditions for the disbursement of the loan. The acceptance to the terms of sanction is taken From the Applicant. 2. The processing charges as specified by the bank have to be paid to proceed further with the disbursement procedure. 3. The documentation procedure takes place viz.Legal opinion of various property documents and also the valuation reports.(Original Documents to title of the immovable assets are to be submitted) 4. All the necessary documents as specified by the legal dept., according to the terms of sanction of the loan of the bank are executed. Disbursement of the loan takes place after the Legal Dept. Certifies the Correctness of execution documents.

Types of Bills There are various types of bills. They can be classified on the basis of when they are due for payment, whether the documents of title of goods accompany such bills or not, the type of activity they finance, etc. Some of these bills are: Demand Bill This is payable immediately at sight or on presentment to the drawee. A bill on which no time of payment or due date is specified is also termed as a demand bill. Usance Bill This is also called time bill. The term usance refers to the time period recognized by custom or usage for payment of bills. Documentary Bills These are the B/Es that are accompanied by documents that confirm that a trade has taken place between thebuyer and the seller of goods. These documents include the invoices and other documents of title such as railway receipts,lorry receipts and bills of lading issued by custom officials.Documentary bills can be further classified as: (i) Documents against acceptance (D/A) bills and (ii) Documents againstpayment (DIP) bills. D/ A Bills In this case, the documentary evidence accompanyingthe bill of exchange is deliverable against acceptance by thedrawee. This means the documentary bill becomes a clean billafter delivery of the documents.be held by the bank Dr the finance company till the maturity ofthe B/E. Clean Bills These bills are not accompanied by any documentsthat show that a trade has taken place between the buyer and theseller. Because of this, the interest rate charged on such bills is higher than the rate charged on documentary bills.Creation of a B/E Suppose a seller sells goods or merchandiseto a buyer. In most cases, the seller would like to be paidimmediately but the buyer would like to pay only after sometime, that is, the buyer would wish to purchase on credit. Tosolve this problem, the seller draws a B/E of a given maturity on the buyer. The seller has now assumed the role of a creditor; and is called the drawer of the bill. The buyer, who is thedebtor, is called the drawee. The seller then sends the bill to thebuyer who acknowledges his responsibility for the payment of the amount on the terms mentioned on the bill by writing hisacceptance on the bill. The acceptor could be the buyer himselfor any third party willing to take on the credit risk of the buyer. Discounting of a B/E The seller, who is the holder of anaccepted B/E has two options: 1. Hold on to the B/E till maturity and then take the payment from the buyer.

2. Discount the B/E with a discounting agency. Option (2) is by far more attractive to the seller. The seller can take over the accepted B/E to a discountingagency bank, NBFC, company, high net worth individual] andobtain ready cash. The act of handing over an endorsed B/E for ready money is called discounting the B/E. The marginbetween the ready money paid and the face value of the bill iscalled the discount and is calculated at a rate percentage per annum on the maturity value.The maturity a B/E is defined as the date on which payment will fall due. Normal maturity periods are 30,60,90 or 120 days but bills maturing within 90 days seem to be the most popular.

Factoring is a financial transaction whereby a business sells its accounts receivable (i.e., invoices) to
a third party (called a factor) at a discount. In "advance" factoring, the factor provides financing to the seller of the accounts in the form of a cash "advance," often 70-85% of the purchase price of the accounts, with the balance of the purchase price being paid, net of the factor's discount fee (commission) and other charges, upon collection from the account client. In "maturity" factoring, the factor makes no advance on the purchased accounts; rather, the purchase price is paid on or about the average maturity date of the accounts being purchased in the batch. Factoring differs from a bank loan in several ways. The emphasis is on the value of the receivables (essentially a financial asset), whereas a bank focuses more on the value of the borrower's total assets, and often also considers, in underwriting the loan, the value attributable to non-accounts collateral

owned by the borrower. Such collateral includes inventory, equipment, and real property,[1][2] That is, a bank loan issuer looks beyond the credit-worthiness of the firm's accounts receivables and of the account debtors (obligors) thereon. Secondly, factoring is not a loan it is the purchase of a financial asset (the receivable). Third, a nonrecourse factor assumes the "credit risk", that a purchased account will not collect due solely to the financial inability of account debtor to pay. In the United States, if the factor does not assume credit risk on the purchased accounts, in most cases a court will recharacterize the transaction as a secured loan. It is different from forfaiting in the sense that forfaiting is a transaction-based operation involving exporters in which the firm sells one of its transactions,[3] while factoring is a Financial Transaction that involves the Sale of any portion of the firm's Receivables.[1][2] Factoring is a word often misused synonymously with invoice discounting, known as "Receivables Assignment" in American Accounting ("Generally Accepted Accounting Principles"/"GAAP" propagated by FASB)[2] factoring is the sale of receivables, whereas invoice discounting is borrowing where the receivable is used as collateral.[2] However, in some other markets, such as the UK, invoice discounting is considered to be a form of factoring involving the assignment of receivables and is included in official factoring statistics.[4] It is therefore not considered to be borrowing in the UK. In the UK the arrangement is usually confidential in that the debtor is not notified of the assignment of the receivable and the seller of the receivable collects the debt on behalf of the factor. The three parties directly involved are: the one who sells the receivable, the debtor (the account debtor, or customer of the seller), and the factor. The receivable is essentially a financial asset associated with the debtor's liability to pay money owed to the seller (usually for work performed or goods sold). The seller then sells one or more of its invoices (the receivables) at a discount to the third party, the specialized financial organization (aka the factor), often, in advance factoring, to obtain cash. The sale of the receivables essentially transfers ownership of the receivables to the factor, indicating the factor obtains all of the rights associated with the receivables.[1][2] Accordingly, the factor obtains the right to receive the payments made by the debtor for the invoice amount and, in nonrecourse factoring, must bear the loss if the account debtor does not pay the invoice amount due solely to his or its financial inability to pay. Usually, the account debtor is notified of the sale of the receivable, and the factor bills the debtor and makes all collections; however, non-notification factoring, where the client (seller) collects the accounts sold to the factor, as agent of the factor, also occurs. There are three principal parts to "advance" factoring transaction; (a) the advance, a percentage of the invoice face value that is paid to the seller at the time of sale, (b) the reserve, the remainder of the purchase price held until the payment by the account debtor is made and (c) the discount fee, the cost associated with the transaction which is deducted from the reserve, along with other expenses, upon collection, before the reserve is disbursed to the factor's client. Sometimes the factor charges the seller (the factor's "client") both a discount fee, for the factor's assumption of credit risk and other services provided, as well as interest on the factor's advance, based on how long the advance, often treated as a loan (repaid by set-off against the factor's purchase obligation, when the account is collected), is outstanding.[5] The factor also estimates the amount that may not be collected due to non-payment, and makes accommodation for this in pricing, when determining the purchase price to be paid to the seller. The factor's overall profit is the difference between the price it paid for the invoice and the money received from the debtor, less the amount lost due to non-payment.[2] In the United States, under the Generally Accepted Accounting Principles receivables are considered sold, under Statement of Financial Accounting Standards No. 140, when the buyer has "no recourse,".[6] Moreover, to treat the transaction as a sale under GAAP, the seller's monetary liability under any "recourse" provision must be readily estimated at the time of the sale. Otherwise, the financial transaction is treated as a loan, with the receivables used as collateral.

Factoring in India

What is factoring? Factoring is a financial option for the management of receivables. In simple definition it is the conversion of credit sales into cash. In factoring, a financial institution (factor) buys the accounts receivable of a company (Client) and pays up to 80%(rarely up to 90%) of the amount immediately on agreement. Factoring company pays the remaining amount (Balance 20%-finance cost-operating cost) to the client when the customer pays the debt. Collection of debt from the customer is done either by the factor or the client depending upon the type of factoring. We will see different types of factoring in this article. The account receivable in factoring can either be for a product or service. Examples are factoring against goods purchased, factoring for construction services (usually for government contracts where the government body is capable of paying back the debt in the stipulated period of factoring. Contractors submit invoices to get cash instantly), factoring against medical insurance etc. Let us see how factoring is done against an invoice of goods purchased.

Characteristics of factoring 1. Usually the period for factoring is 90 to 150 days. Some factoring companies allow even more than 150 days. 2. Factoring is considered to be a costly source of finance compared to other sources of short term borrowings. 3. Factoring receivables is an ideal financial solution for new and emerging firms without strong financials. This is because credit worthiness is evaluated based on the financial strength of the customer (debtor). Hence these companies can leverage on the financial strength of their customers. 4. Bad debts will not be considered for factoring. 5. Credit rating is not mandatory. But the factoring companies usually carry out credit risk analysis before entering into the agreement. 6. Factoring is a method of off balance sheet financing. 7. Cost of factoring=finance cost + operating cost. Factoring cost vary according to the transaction size, financial strength of the customer etc. The cost of factoring vary from 1.5% to 3% per month depending upon the financial strength of the client's customer. 8. Indian firms offer factoring for invoices as low as 1000Rs

9. For delayed payments beyond the approved credit period, penal charge of around 1-2% per month over and above the normal cost is charged (it varies like 1% for the first month and 2% afterwards).

Different types of Factoring 1. Disclosed and Undisclosed 2. Recourse and Non recourse A single factoring company may not offer all these services. Disclosed In disclosed factoring client's customers are notified of the factoring agreement. Disclosed type can either be recourse or non recourse. Undisclosed In undisclosed factoring, client's customers are not notified of the factoring arrangement. Sales ledger administration and collection of debts are undertaken by the client himself. Client has to pay the amount to the factor irrespective of whether customer has paid or not. But in disclosed type factor may or may not be responsible for the collection of debts depending on whether it is recourse or non recourse. Recourse factoring In recourse factoring, client undertakes to collect the debts from the customer. If the customer don't pay the amount on maturity, factor will recover the amount from the client. This is the most common type of factoring. Recourse factoring is offered at a lower interest rate since the risk by the factor is low. Balance amount is paid to client when the customer pays the factor. Non recourse factoring In non recourse factoring, factor undertakes to collect the debts from the customer. Balance amount is paid to client at the end of the credit period or when the customer pays the factor whichever comes first. The advantage of non recourse factoring is that continuous factoring will eliminate the need for credit and collection departments in the organization.

Factoring companies in India

Canbank Factors Limited:

http://www.canbankfactors.com http://www.sbifactors.com http://www.hsbc.co.in/1/2/corporate/trade-and-factoring-

SBI Factors and Commercial Services Pvt. Ltd:

The Hongkong and Shanghai Banking Corporation Ltd:

services
Foremost Factors Limited:

http://www.foremostfactors.net http://www.gtfindia.com

Global Trade Finance Limited:

Export Credit Guarantee Corporation of India Ltd:

https://www.ecgc.in/Portal/productnservices/maturity/mfactoring.asp
Citibank NA, India:

http://www.citibank.co.in http://www.sidbi.in/fac.asp

Small Industries Development Bank of India (SIDBI): Standard Chartered Bank:

www.standardchartered.co.in

Introduction Receivables constitute a significant portion of current assets of a firm. But, for investment in receivables, a firm has to incur certain costs such as costs of financing receivables and costs of collection from receivables. Further, there is a risk of bad debts also. It is, therefore, very essential to have a proper control and management of receivables. In fact, maintaining of receivables poses two types of problems; (i) the problem of raising funds to finance the receivables, and (it) the problems relating to collection, delays and defaults of the receivables. A small firm may handle the problem of receivables management of its own, but it may not be possible for a large firm to do so efficiently as it may be exposed to the risk of more and more bad debts. In such a case, a firm may avail the services of specialised institutions engaged in receivables management, called factoring firms. Meaning and Definition Factoring may broadly be defined as the relationship, created by an agreement, between the seller of goods/services and a financial institution called .the factor, whereby the later purchases the receivables of the former and also controls and administers the receivables of the former. Factoring may also be defined as a continuous relationship between financial institution (the factor) and a business concern selling goods and/or providing service (the client) to a trade customer on an open account basis, whereby the factor purchases the clients book debts (account receivables) with or without recourse to the client - thereby controlling the credit extended to the customer and also undertaking to administer the sales ledgers relevant to the transaction. The term factoring has been defined in various countries in different ways due to non-availability of any uniform codified law. The study group appointed by International Institute for the Unification of Private Law (UNIDROIT), Rome during 1988 recommended, in simple words, the definition of factoring as under: Factoring means an arrangement between a factor and his client which includes at least two of the following services to be provided by the factor: Finance Maintenance of accounts Collection of debts Protection against credit risks.

The above definition, however, applies only to factoring in relation to supply of goods and services in respect of the following: i. To trade or professional debtors ii. Across national boundaries iii. When notice of assignment has been given to the debtors. The development of factoring concept in various developed countries of the world has led to some consensus towards defining the term. Factoring can broadly be defined as an arrangement in which receivables arising out of sale of goods/ services are sold to the factor as a result of which the title to the goods/services represented by the said receivables passes on to the factor. Hence the factor becomes responsible for all credit control, sales accounting and debt collection from the buyer (s). Factoring in India Banks do provide non-banking financial services such as housing finance, leasing and hirepurchase, factoring and forfaiting. An amendment was made in the Banking Regulation Act in 1983, whereby banks were permitted to provide theseservices either through their own departments or divisions or through their subsidiaries. Direct and indirect lending services were provided by setting up merchant banking and mutual funds subsidiaries. Factoring and forfaiting services were of recent origin following the recommendation of the Kalyansundarm Committee, set up by the RBI in 1988. The Committee was constituted to examine the feasibility of factoring services in India, their constitution, organizational setup and scope of activities. The group recommended setting up of specified agencies or subsidiaries for providing the factoring services in India. While attempting to assess the potential demand for factoring services in India, the study group under the leadership of Mr. C. S. Kalyansundram estimated the value of outstanding open account credit sales available for financing during 1989-90 at Rs. 12,000 crores in respect of SSI and Rs. 4500 crores for medium and large scale sector. Assuming only 50% of the above business will be available for factoring, the aggregate potential demand for factoring was expected to be around Rs. 4000 cores per annum mainly emerging from the SSI and large and medium companies. Major Players The first factoring company was started by the SBI in 1991 namely Factors and Commercial Ltd. (SBI FACS) followed by Canara Bank and PNB, setting the subsidiaries for the purpose. While the SBI would provide such services in the Western region, the RBI has permitted the Canara Bank and PNB to concentrate on the Southern and Northern regions of the country, for providing such services for the customers. The major players since 1991 are Canbank Factors, SBI Factors and later Foremost Factors. The new entrants in the market include ICICI, HSBC and Global Trade Finance. Canback Factors leads in the domestic market with about .65%-70%of the share. The Vaghul Committee Report on Money Market Reforms has stressed on the need for factoring services to be developed in India as part of the money market instruments. Many new

instruments had already been introduced like Commercial Paper (CP), Pm1icipation Certificates (PC), Certificates of Deposits etc. but the factoring service has not developed to any significant extent in India. Advantages Firms resorting to factoring also have the added attraction ofready source of short-term funds. This form of financeimproves the cash flow and is invaluable as it leads to a higherlevel of activity resulting in increased profitability.By offloading the sales accounting and administration, themanagement has more time for planning, running andimproving the business, and exploiting opportunities, Thereduction in overheads brought about by the factors administrationof the sales ledger and the improved cash flows becauseof the quicker payments by the customers result in interestsavings and contribute towards cost savings. Disadvantages Factoring could prove to be costlier to in-house managementof receivables, specially for large firms which have access tosimilar sources of funds as the factors themselves and which on account of their size have well organised credit and receivablemanagement. Factoring is perceived as an expensive form of financing andalso as finance of the last resort. This tends to have a deleteriouseffect on the creditworthiness of the company in themarket. Nature of Factoring Factoring is a tool of receivable management employed to release funds tied up in credit extended to customers. 1. Factoring is a service of financial nature involving theconversion of credit bills into cash. Accounts receivables,bills recoverable and other credit dues resulting from credit sales appear in the books of account as book credits. 2. The risk associated with credit are taken over by the factor which purchases these credit receivables without recourse and collects them when due. 3. A factor performs at least two of the following functions: i. Provides finance for the supplier including loans and advance payments. ii. Maintains accounts, ledgers relating to receivables. iii. Collects receivables. iv. Protects risk of default in payments by debtors. 4. A factor is a financial institution which offers services relating to management and financing of debts arising out of credit sales. It acts as another financial intermediary between the buyer and seller. 5. Unlike a bank, a factor specialises in handling and collecting receivables in an efficient manner. Payments are received by the factor directly since the invoices are assigned in favor of the factor. 6. Factor is responsible for sales accounting, debt collection and credit control protection from bad debts, and rendering of advisory services to their clients. 7. Factoring is a tool of receivables management employed to release funds tied up in credit extended to customers and to solve the problems relating to collection, delays and defaults of the receivables.

Mechanism of Factoring Factoring business is generated by credit sales in the normal course business. The main function of factor is realisation of sales. Once the transaction takes place, the role of factor step in to realise the sales/collect receivables. Thus, factor act as a intermediary between the seller and till and sometimes along with the sellers bank together. The mechanism of factoring is summed up as below: i. An agreement is entered into between the selling firm and the firm. The agreement provides the basis and the scope understanding reached between the two for rendering factor service. ii. The sales documents should contain the instructions to make payment directly to the factor who is assigned the job of collection of receivables. iii. When the payment is received by the factor, the account of the firm is credited by the factor after deducting its fees, charges, interest etc. as agreed. iv. The factor may provide advance finance to the selling firm conditions of the agreement so require Parties to the Factoring There are basically three parties involved in a factoring transaction. 1. The buyer of the goods. 2. The seller of the goods 3. The factor i.e. financial institution. The three parties interact with each other during the purchase/ sale of goods. The possible procedure that may be followed is summarised below. The Buyer 1. The buyer enters into an agreement with the seller and negotiates the terms and conditions for the purchase of goods on credit. 2. He takes the delivery of goods along with the invoice bill and instructions from the seller to make payment to the factor on due date. 3. Buyer will make the payment to the factor in time or ask for extension of time. In case of default in payment on due date, he faces legal action at the hands of factor. The Seller 1. The seller enters into contract for the sale of goods on credit as per the purchase order sent by the buyer stating various terms and conditions. 2. Sells goods to the buyer as per the contract. 3. Sends copies of invoice, delivery challan along with the goods to the buyer and gives instructions to the buyer to make payment on due date. 4. The seller sells the receivables received from the buyer to a factor and receives 80% or more payment in advance. 5. The seller receives the balance payment from the factor after paying the service charges.

The Factor 1. The factor enters into an agreement with the seller for rendering factor services i.e. collection of receivables/debts. 2. The factor pays 80% or more of the amount of receivables copies of sale documents. 3. The factor receives payments from the buyer on due dates and pays the balance money to the seller after deducting the service charges Types of Factoring A number of factoring arrangements are possible depending upon the agreement reached between the selling firm and the factor. The most common feature of practically all the factoring transactions is collection of receivables and administration of sale ledger. However, following are some of the important types of factoring arrangements. 1. Recourse and Non-recourse Factoring In a recourse factoring arrangement, the factor has recourse to the client (selling firm) if the receivables purchased turn out to be bad, Let the risk of bad debts is to be borne by the client and the factor does not assume credit risks associated with the receivables. Thus the factor acts as an agent for collection of bills and does not cover the risk of customers failure to pay debt or interest on it. The factor has a right to recover the funds from the seller client in case of such defaults as the seller takes the risk of credit and creditworthiness of buyer. The factor charges the selling firm for maintaining the sales ledger and debt collection services and also charges interest on the amount drawn by the client (selling firm) for the period. Types of Factoring A number of factoring arrangements are possible depending upon the agreement reached between the selling firm and the factor. The most common feature of practically all the factoring transactions is collection of receivables and administration of sale ledger. However, following are some of the important types of factoring arrangements. 1. Recourse and Non-recourse Factoring In a recourse factoring arrangement, the factor has recourse to the client (selling firm) if the receivables purchased turn out to be bad, Let the risk of bad debts is to be borne by the client and the factor does not assume credit risks associated with the receivables. Thus the factor acts as an agent for collection of bills and does not cover the risk of customers failure to pay debt or interest on it. The factor has a right to recover the funds from the seller client in case of such defaults as the seller takes the risk of credit and creditworthiness of buyer. The factor charges the selling firm for maintaining the sales ledger and debt collection services and also charges interest on the amount drawn by the client (selling firm) for the period. MANAGEMENT OF FINANCIAL SERVICES commission or fees charged for the services in case of nonrecourse factoring is higher than under the recourse factoring. The additional fee charged by the factor for bearing the risk of bad debts/non-payment on maturity is called del credere commission. 2. Advance and Maturity Factoring

Under advance factoring arrangement, the factor pays only a certain percentage (between 75 % to 90 %) of the receivables in advance to the client, the balance being paid on the guaranteed payment date. As soon as factored receivables are approved, the advance amount is made available to the client by the factor. The factor charges discount/interest on the advance payment from the date of such payment to the date of actual collection of receivables by the factor. The rate of discount/interest is determined on the basis of the creditworthiness of the client, volume of sales and prevailing short-term rate. Sometimes, banks also participate in factoring transactions. A bank agrees to provide an advance to the client to finance a part say 50% of the (factored receivables - advance given by the factor). For example Assume total value of the factored debt/receivable is Rs. 100 A factor finances 80 % of the debt. Rs. 80 Balance value of debt Rs. 20 Say, bank finances 50% of the balance i.e. Rs. 10. Thus, the factor and the bank will make a pre-payment of Rs. 90 (i.e. 90% of the debt) and the clients share is only 10% of the investment in receivables. In case of maturity factoring, no advance is paid to client and the payment is made to the client only on collection of receivables or the guaranteed payment data as the case may be agreed between the parties. Thus, maturity factoring consists of the sale of accounts receivables to a factor with no payment of advance funds at the time of sale.

3. Conventional or Full Factoring Under this system the factor performs almost all services of collection of receivables, maintenance of sales ledger, credit collection, credit control and credit insurance. The factor also fixes up a draw limit based on the bills outstanding maturitywise and takes the corresponding risk of default or credit risk and the factor will have claims on the debtor as also the client creditor. It is also known as Old Line Factoring. Number of other variety of services such as maturity-wise bills collection, maintenance of accounts, advance granting of limits to a limited discounting of invoices on a selective basis are provided. In advanced countries, all these methods are popular but in India only a beginning has been made. Factoring agencies like SBI Factors are doing full factoring for good companies with recourse. 4. Domestic and Export Factoring The basic difference between the domestic and export factoring is on account of the number of parties involved. In the domestic factoring three parties are involved, namely: The import factor acts as a link between export factor and the importer helps in solving the problem of legal formalities and of language. 1. Customer (buyer) 2. Client (seller) 3. Factor (financial intermediary)

All the three parties reside in the same country. Export factoring is also termed as crossborder/international factoring and is almost similar to domestic factoring except that there are four parties to the factoring transaction. Namely, the exporter (selling firm or client), the importer or the customer, the export factor and the import factor. Since, two factors are involved in the export factoring, it is also called two-factor system of factoring. Two factor system results in two separate but inter-related contracts: 1. between the exporter (client) and the export factor. 2. export factor and import factor.

The import factor acts as a link between export factor and the importer helps in solving the problem of legal formalities and of language. He also assumes customer trade credit risk, and agrees to collect receivables and transfer funds to the export factor in the currency of the invoice. Export/International factoring provides a non-recourse factoring deal. The exporter has 100 % protection against bad debts loss arising on account of credit sales. 5. Limited Factoring Under limited factoring, the factor discounts only certain invoices on selective basis and converts credit bills into cash in respect of those bills only. 6. Selected Seller Based Factoring The seller sells all his accounts receivables to the factor along with invoice delivery challans, contracts etc. after invoicing the customers. The factor performs all functions of maintaining the accounts, collecting the debts, sending reminders to the buyers and do all consequential and incidental functions for the seller.The sellers are normally approved by the factor before entering into factoring agreement.

7. Selected Buyer Based Factoring The factor first of all selects the buyers on the basis of their goodwill and creditworthiness and prepares an approved list of them. The approved buyers of a company approach the factor for discounting their purchases of bills receivables drawn in the favour of the company in question (i.e. seller). The factor discounts the bills without recourse to seller and makes the payment to the seller. 8. Disclosed and Undisclosed Factoring In disclosed factoring, the name of the factor is mentioned in the invoice by the supplier telling the buyer to make payment to the factor on due date. However, the supplier may continue to bear the risk of bad debts (i.e. non-payments) without passing to the factor. The factor assumes the risk only under nonrecourse factoring agreements. Generally, the factor lays down a limit within which it will work as a non-recourse. Beyond this limit the dealings are done on recourse basis i.e. the seller bears the risk. Under undisclosed factoring, the name of the factor is not disclosed in the invoice.

But still the control lies with the factor. The factor maintain sales ledger of the seller of goods, provides short-term finance against the sales invoices but the entire transactions take place in the name of the supplier company (seller). Functions of a Factor The purchase of book debts or receivables is central to the function of factoring permitting the factor to provide basic services such as : 1. Administration of sellers sales ledger. 2. Collection of receivables purchased. 3. Provision of finance. 4. Protection against risk of bad debts/credit control and credit protection. 5. Rendering advisory services by virtue of their experience in financial dealings with customers.