Ch- Venture Capital Financing Meaning A form of equity financing , designed specially for funding high risk and

high reward projects .it Plays a important role in financing high tech Projects & helping Research and Development. A typical private equity investment, in a growth oriented small/medium business Dr. Neil Cross : Venture capital investment is defined as the provision of high risk bearing capital, usually in the form of a participation in equity, to companies with high growth potential. The venture company also provides some value added service, in the form of management advice and contribution to overall strategy. Features New Ventures Continuous involvement Mode of Investment Objective High Risk-return ventures. Liquidity Nature of the firms

Venture Capital and Development Capital: - VCC remains interested in the overall management till commencement to production and efficient marketing of the products, thus finally making available an exit route for the liquidating the investments. Development capital is granted in the form of loans for setting up industrial units, and for expansion also. The lender takes special care to ensure the end use of the loan, and requires prompt payment of interest.

Venture capital , Seed Capital and Risk Capital No differences between venture capital, seed capital and Risk capital. Both are components of Venture Capital. Seed and Risk Capital provided by all India financial institutions in the form of promoters contribution to the project.

Seed Capital Start up Financing Financing at the product development, stage includes providing finance for initial marketing, and the establishment of product facilities. Provided to projects which have been selected for commercial production, and where the potential to fulfill effective demand is there. Follow on Financing A later stage of venture capital financing. Provision of capital to a firm, who has previously received external capital, but whose financial needs have subsequently expanded. Considered to be the most attractive stage of venture capital financing. Other forms Expansion financing : - the finance provided to fund the expansion or growth of a company which is breaking even or trading at a small profit. here venture capitalists provide funds for adding production capacity.

Replacement Financing: Also known as money out deal, whereby venture capitalists extend financing for the purchase of the existing shares from an entrepreneur or their associates in order to reduce their holdings in the unlisted company.

Turnaround financing : - provided by venture capitalists in the event of an enterprise becoming unprofitable after the launch of commercial production.Provided in the form of a relief package with specialist skills to recover.

Management Buy Outs (MBOs) acquisition of a company from the existing owners by a team of existing management/employees. The team acquiring is actively involved in running the venture. The owners may or may not be actively involved in running the firm.

Management Buy Ins Involves bringing in management team who are outsiders. Defined as Funds provided to enable a manager or group of managers from outside the company to buy-in the company with the support of venture capital investors.

Mezzanine Finance Is supplied as a layer which ranks behind secured lending but before ordinary share capital. So supplied either as debt or as high ranking equity(preference shares).It is intended as a bridge finance and has a maturity period of less than 2 years. sWhile structuring an MBO the mezzanine finance helps the management to retain greater share of the business, than what they could otherwise afford.

CH - Leasing Lease - definition A lease is an agreement whereby the lessor conveys to the lessee , in return for rent, the right to use an asset for an agreed period of time. Characteristics of lease The Parties The Asset The Term The Lease Rentals Types of Lease Financial Lease Operating Lease Conveyance Type lease Leveraged Lease Sale and Leaseback Partial Pay-Out Lease Consumer Leasing Balloon Lease Close end leasing Swap Leasing

Wrap Leasing Import Leasing Cross Border leasing International Leasing Financial lease... It is non-cancelable in nature. The lessee is responsible for the maintenance of the asset leased. The lease generally provides for the renewal of the lease on expiry of the lease contract. Also called Capital Lease Operating Lease Short term lease on a period to period basis. The lease is cancelable at short notice by the lessee. The lessee has the option of renewing the lease after the expiry of the lease period Asset maintenance and insurance etc. is the responsibility of the lessor and he charges for the same. It is a high risk lease to the lessor, as any time it may be cancelled by the lessee. Sale and Leaseback: Owner of the asset sells it to the lessor, and gets the asset back under the lease agreement. Ownership transfer from the original owner to the lessor, who again leases out the asset.Immediate financing to the seller company, whose funds are tied up in the asset. Types of lease Partial pay out lease: Full payment of the lease in several leases. Consumer Leasing :Leasing of consumer durables like Refrigerator, televisions, etc. Balloon Lease : a lease which has zero residual value at the end of the lease period. i.e. low lease rentals at the inception, high in the mid years, and low again at the end of the lease. Close end leasing : the asset is reverted to the lessor at the end of the lease. Open end leasing : the lessee guarantees a minimum value to the lessor , from the sale of the asset at the end of the lease term. If on sale of the asset, the residual value is less , then lessee pays to the lessor the difference amount. Import Leasing : leasing of imported capital goods. beneficial to the lessee, because arranging other sources of funds takes long. Lenders do not usually finance the import duty which forms sizable portion of the cost. during which the prices of imported goods may rise + fluctuation in exchange rates may happen.

Cross Border Leasing :A lease where the lessor is in one country and lessee in another.The Jurisdiction of lessors and lessees are in two different countries.Eg. Leasing of airplanes. International Leasing :A case where the leasing company is operating in various countries through its branches. International leasing is active in countries like U.S., Japan, HongKong etc. Regulatory framework of leasing Lease Documentation and Agreement Lease Approval Process: Appraisal of the Lease proposal. Sanctioning of the credit amount. Letter of Offer, with stipulated time for acceptance. Acceptance of Offer by lessee within stipulated time, with Board Resolution for acceptance of the offer. Documents required: Purchase Order, Invoice, Bill of Sale from supplier, delivery note, insurance policies, import license, copy of shops and establishments registration certificate, copies of Audited balance Sheet and P&L A/c. for 3yrs, M of A and Articles of Assocation, Provisional results for the first 6 mths, IT returns/Salary certificat CH_ - Factoring and Forfaiting Factoring - Meaning Is a fund based financial service. Institution called Factor which C.S. Kalyansundaram a continuing arrangement under which a financing institution assumes the credit and collection functions for its client, purchases receivables as they arise, maintains the sales ledger, attends to other book keeping duties relating to such accounts and performs other auxiliary functions.

Mechanism

Characteristics The Nature The Assignment Professionalism Less Dependence. Recourse Factoring Types of Factoring Domestic Factoring - Factoring that arises from transactions relating to domestic sales is known as Domestic Factoring. Three Types : Disclosed Factoring, Undisclosed Factoring, Discount Factoring. Disclosed Factoring : Name of proposed Factor mentioned on the invoice, made by the seller of goods. Buyer to pay directly to the Factor.Could be recourse or non Recourse. Undisclosed Factoring : Name of the proposed Factor not disclosed by the seller in the invoice. But all sales realization done by the Factor in the name of the seller. Control of all the monies with the Factor. Quite popular in the U.K. Discount Factoring : Is a process where the Factor discounts the Invoices of the seller at a pre-agreed credit limit with a financing institution. Book debts and receivables serve as securities for obtaining financing accommodation. Export Factoring Where the claims of an exporter are assigned to a bank/financial institution, and the exporter obtains finance on the strength of export documents and guaranteed payments, it is Export Factoring The Factor bank is in the country of the exporter. It admits upto 50-75%, advance on the export claims. If importer does not honor claims, the exporter has to make the payment to the Factor. Export Factoring offered as both Recourse and Non Recourse factoring. Cross Border Factoring It involves the claims of an exporter assigned to a bank/financial institution in the importers country, on the strength of the export documents and guaranteed payments. The Form Fiduciary Position Credit Realizations Compensation Non Recourse

International factoring always works on Non recourse factoring model. They handle the overseas credit sales of the exporter. Complete protection to the exporters against bad debts loss on credit approved sales. Factors take assistance and avail the facilities provided by the exporting country. For the exporter, once the goods are shipped , his sole debtor is the Factor. Methods of dealing: Export factor : exporter informs the the export factor about the export of goods, to an import client, regarding goods sold on credit. Import Factor : export factor writes to the import factor enquiring about the credit worthiness , reputation of the importer. Delivery : exporter delivers the goods to the importer. Then he delivers the relevant documents(invoices, bill of lading, other supporting documents) to the export factor. Credit Information: the export factor works with the import factor , for credit checking, sales ledgering & collection in importers country. Payment: the export factor makes the payment to the exporter upon assignment/collection of export receivables, depending upon the type of factoring arrangement between them. Full Service Factor Also known as Old Line FactoringFactor has no recourse to the seller, in case of default by buyer. With Recourse Factoring: Factor has recourse to the client firm for irrecoverable book debts. Factor entitled to recover dues from advance payment if customer defaults. They charge the client for maintenance of sales ledger, collecting customers debt etc. Without Recourse factoring : Factor does not have recourse to the client (seller) in case of default. Factor bears the loss of irrecoverable debts. For which they charge Del Credere Commission as compensation for the loss. Factor actively involves in the process of grant of credit to customers. Collection /Maturing Factoring No advance payment by the Factor. Payment by the Factor on the Guaranteed date or Date of collection. Guaranteed date fixed after considering the previous ledger experience of the client , and date of collection being reckoned after due date of the invoice. Advantages of Factoring Cost Savings Enhanced Return Credit Discipline Leverage Liquidity Credit Certification

 Information Flow Infrastructure Efficient Production INDIAN FACTORING Features : Domestic Factoring With recourse

Prompt Payment Boon to SSI sector Reduced Risk

undertakes collection & credit services Advance upto 80% of receivables maintenance of sales ledger, with monthly sales and invoice overdue analysis. Factors provide payment reports to the clients. Factors charge by way of service charges/fee without guarantee being insisted upon. Export Factoring: ECGC has been approved by RBI to provide non fund based export factoring service. ECGC grants 100% credit protection to bills drawn on approved overseas buyers through endorsement to the policy. ECGC enters into a tripartite agreement with the exporter and the authorized dealer . OPERATIONAL PROBLEMS Lack of access to common source of information. Lack of experience and database to take on jobs such as credit evaluation of clients. Expensive system of multiple databases maintained by Individual factors. Lack of uniformity in the specialized credit information agencies. High stamp duty on assignment of debt to Factors. High cost of operations and resulting less profitability for the factors. FORFAITING A form of financing of receivables arising from international trade is knows as Forfaiting.

 Bank/financial Inst. Purchases the trade bills/promissory notes without recourse to the seller. Purchase through discounting of the documents . Entire risk of non payment at the time of selection, covered. All risks become the full responsibility of the forfaiter(purchaser). Forfaiter pays cash on discounting the bills/notes, to the seller. Steps Commercial contract signing: between exporter and importer , including basic terms such as cost of forfaiting, margin to cover risk, days of grace, fee to compensate the forfaiter for loss of interest due to payment delays, etc. Transaction Exporter sells and delivers the goods to the importer. Notes Acceptance The importer accepts a series of bills /promissory notes in favour of the exporter for payment including interest charges. The accepted notes sent to the exporter ,with bank guarantee in respect of the promissory notes/bills. Factoring Contract Exporter and forfaiting agent enter into a forfaiting contract .The forfaiter, is usually a reputed bank, including the exporters bank. Sale of notes The exporter sells the notes/bills to the forfaiter(bank) at a discount without recourse. Payment the forfaiter makes payment to the exporter for the face value of the bill/note , less discount charges .The forfaiter may either hold these bills/notes, or sell them in the secondary market Forfaiting in India Permitted since 1992 essentially a method of post shipment export finance. Here also it is non recourse finance, which converts credit sale into cash sale.Does not lock up any bank limits. Considered valuable medium to long term post shipment finance for large size exports

CH - Credit Cards and Debit Cards Meaning of Credit Cards : Any card that is used as a payment device to access the financial resources of the customer is referred to as a credit card. The card may be used during travel , at home, for purchases, or at the ATMs for credit or debit transactions. Also known as Plastic Money and can be used for purchase of all kinds of goods and services. Drivers of Growth in India Rising consumerism Caused by economic reforms, high economic growth and globalization. Improved payment infrastructure: Most Indian banks have been widening their networks of automated teller machines (ATMs) . Banks have also been installing increasing numbers of point of sale (POS) terminals (electronic data-capture swipe machines for accepting debit and credit card payments) at merchant establishments in order to expand their business. In 2006 ATMs 21000, POS:3,00,000. Competition and lower costs: With so many banks offering credit and debit cards, the competition among them to attract potential customers to apply for new cards or to switch their loyalties has intensified. For many types of credit cards, banks no longer charge an annual fee. Credit card holders who make large purchases can pay for these over a period of time through equated monthly installments (EMIs) offered by the card-issuing banks. The interest rate on such EMIs is kept lower than the normal credit card interest rate Modern features of credit cards Owner Identification Credit Limit Wide usage Technology Dependent

Credit Cards -Facilities and Services Risk Coverage Emergency Cash Withdrawal Twenty four hour service

Photocard Option Travel Privileges Credit Line Increase Credit Card Cycle Credit Purchase Credit Card Processing Bill Raising Payment : Issuing bank pays the amount to the merchant establishment. Bill to cardholder Card Payment

Credit Card Structure Issuer Bank Handles all aspects of cardholder relationship includig marketing, card processing, card issuance, incoming interchange , cardholder billing, payments , processing of payments, customer service, collections from defaulters, fraud control etc.

Acquirer Bank The acquirer bank is concerned with the merchant side of the card business. It maintains the merchant relationship and receives all transactions from them. Their functions include, Risk Management (evaluating merchant -applications, credit worthiness and monitoring fraud), Merchant Operations, Merchant Authorizations, Merchant Sales, and Marketing.

Credit Card Frauds Fraudulent applications that result in cards being issued to imposters who have adopted the identity of a real person. Lost, stolen and never received cards Counterfeit merchants Collusive merchants True cardholder where the true cardholder perpetrates the fraud Employee fraud

CH_- Housing Finance Housing Finance: Meaning : A set of all financial arrangements that are made available by Housing Finance Companies (HFCs) to meet the requirements of housing is called Housing Finance Popular Models of land and Housing Town Planning Schemes Prepared by the Town Planning Department for improvement of a certain area.Scheme comprises improvement of roads, open spaces, civic amenities and some social facilities. Development Authority Projects Development Authority have citywide jurisdication while a few have it statewide. ( eg. AUDA, GUDA, HUDA etc.)They carry out projects under the city Master Plan. Projects include housing projects, industrial estates, markets, shopping complexes etc. Land acquired through the Central Land Acquisition Act and funded by the national funding agencies like National Housing Bank, HUDCO. Housing Board Projects State level organization with main objective of developing housing. Done by acquiring land and executing the project on No-Profit-No Loss bases with funds obtained from funding agencies and purchasers themselves. Cooperative Society Projects Popular form of land and housing development where people come together and form a society. Either the land is allotted by the development authorities or sometimes the society arranges for land and constructs houses on its own. Private Real Estate Developers The real estate developer purchases land from the landowner. After getting all the required permissions, the developer does the booking for the houses and collects advance money from the purchasers. The construction is then carried out and handed over to the purchaser-end user. Public Private Partnership Partnership between the government organization and private sector for housing development. Objective being better management, access to capital, speedier delivery and better quality. Slum Board Projects

Built on the lines of Housing Boards, they are state level organizations, which carry out slum clearance and improvements, with emphasis on re-settlement and up gradation. Government Employees Housing Government organizations at state and central level provide housing to their employees as a part of salary perquisites. Examples include Railways, Post and Telegraph Departments, Defence etc.

Housing Finance Institutions: NHB (National Housing Bank)

Till 1988 housing finance provided mostly by the Govt. of IndiaIn 1988 National Housing Bank (NHB) set up as apex institution . A fully owned subsidiary of RBI. Objective to operate as a principal agency to promote housing finance institutions(HFIs) at both local and regional levels. -- also providing finance for housing either directly or indirectly. Guidelines for extending Equity support to HFCs Refinance schemes for HFCs Scope : refinance provided only for direct lending to individuals/groups of individuals. Overdue loans, bought over loans from any other HFCs/banks , loans for purchasing old houses not eligible for refinance Eligibility Criteria : - compliance with NHB Refinance Guidelines, Overdue(3 mths) housing loans not to exceed 10% of total housing demand for preceding 12 mths. - NPAs not more than 5%. Scale of Refinance : for individual housing loans not exceeding Rs.50 lakhs. - For upgradation/repairs refinance restricted to 25% of total refinance obtained. - Refinance provided upto 100% of housing loans sanctioned and disbursed by the HFC. Housing Finance System.

Central and State Government National Housing Bank HUDCO Insurance Organizations/Corporations Commercial Banks Cooperative Banks Specialized Housing Finance Institutions(HFIs). NHB as apex since 1988, has fulfilled the long term need for having a well set housing Financing Industry in India.At present 320 HFCs in India, out of which 26 registered with the NHB, and account for 98% of the total housing loan disbursed.

HUDCO Principal mandate to facilitate the housing conditions of the low income group and economically weaker sections .

Form of Assistance Housing : rural housing, cooperative housing, urban employment through housing and shelter upgradation. Infrastructure: land acquisition, basic sanitation, and environmental improvement of slums. Consultancy services : Building centres for technology transfer, building materials industries, and building technology. Training : provides training in human settlements and technical assistance to all borrowing agencies.

Financial assistance to govt. bodies like state housing boards, rural housing boards, slum clearance boards,etc,. Differential interest rate adopted for various categories of households , which provides an incentive to executing agencies to promote housing for less privileged. The loan terms 10-15 years. In case of EWS sites, where the unit cost is less than Rs.7500/- HUDCO finances the entire project cost.
Extent of financing of the house cost is 90% for EWS, 85% for LIG, 75% for MIG, 60% for HIG. Urban Infrastructure : Also finances the urban infrastructure projects like water supply, sewerage, drainage, solid waste management, transport terminals, roads /bridges etc.

Insurance Organization/Corporations LIC & GIC support housing activity directly and indirectly. They subscribe to the bonds of the State Housing Boards, HUDCO and grant loans to State govt. for rural housing programmes. LIC Home Finance Ltd.(1989), GIC housing Finance Ltd.(1990). Commercial Banks As per RBI guidelines, 1.5 % of incremental deposits to disbursed as housing finance. Of this allocation , 20% to be way of direct housing loans, 30% for indirect lending by way of term loans to housing finance institutions , HFCs, and public housing agencies . Balance 50% , is for subscription to the HUDCO and NHB bonds. Specialized HFIs A Lead player HDFC ltd, other HFCs which are sponsored by banks like SBI Home Finance ltd., Canfin Homes Ltd, Indbank Housing Finance Ltd, Citihome etc. Housing Finance features

For purchase/construction of new house

For Renovation of existing house For upgradation of existing house(will include construction of new floors etc.) For purchase of old house For Purchase of land for residential purpose Buyover of housing loans from other HFIs.

Housing Finance Process Application Form Filling Collection of Identification,Income and Basic Property Document. Collection of Partial Processing Fee. Financial Appraisal : Sanction of Loan Amount and Acceptance of offer by customer. Legal Appraisal of Property Technical Appraisal of Property Disbursement Process

Collection of Original Property Documents and Post Dated Cheques. Collection of Margin Money Payment Receipt from customer Disbursement of Housing Loan in proportion to the Construction completion.
Application Process:

Filling up of application form by all applicants which has details regarding name, DOB, address, family details, property details, employment/business details etc., and signatures of the applicants. Application form is supported by photographs and identification and age proof documents of the applicants. Signatures are matched with signatures on the processing fee cheque, for verification.
Collection of Financial Documents for financial appraisal and loan sanction: Income Proof: (salaried class) For Fixed Income: last month's salary slip or salary certificate, with details of salary break up and deductions. For variable income: last 3-6 months salary slip/certificate with details of variable components of salary, deductions. Additional Income documents :Form 16, Salary Increment letter if any, details of any loans taken from organization or elsewhere, loan repayment certificate/ track record/ account statements, last employment salary proof in case of recent job change.

Bank Statements of all bank accounts for last six months, Credit Card statements of last three months. Income Proof ( Self Employed) All additional documents plus Last 3 years IT returns and Financial statements of the business for the last three years. Concepts of parameters used for Credit Appraisal of Housing Loan EMI (Equated Monthly Installment)

It is equated so that the installment remains the same throughout the tenure of the loan. It consists of Interest and Principal Interest payable on annual rests on the outstanding principal every year.
EMI = P X R (1+R)^N -------------------(I+R)^N-1 x 1/12

EMI CALCULATION : Calculated on annual rests on basis of following formula:

P= Loan amount R = Rate of Interest , N = Loan Tenure in year

IIR (Installment to Income Ratio) IIR = EMI ------------Appraised Income X 100

Maximum permissible range of IIR is 40% This means that upto 40% of the income is treated as one's repayment capacity towards a housing loan obligation. For lower income category lower IIR is considered, depending upon the post loan take home income vis -a vis applicants' liabilities.

FOIR ( Fixed Obligation to Income Ratio) FOIR= EMI Repayments of other loans +EMI of housing loan ------------------------------------- X100 Appraised Income

Thus FOIR is the ratio of the total monthly repayment liabilities of the borrower plus the home loan monthly installment liability of the borrower to the income. The maximum permissible limit of the FOIR is 45%.
LCR (loan to cost ratio) LCR = Loan Amount ----------------- X 100 Total Cost

It is the ratio of the document cost of the property with the loan amount.

Legal and Technical Appraisal Legal Appraisal

Since housing loans are granted normally against the property, therefore the legal title clearence of the property is of primary importance The legal appraisal includes: - Authenticity of the chain of transfer of ownership - the property is clear of all encumberances - the applicant has a clear and marketable title to the property. Undertaken to ascertain the value and cost of property, authenticity and validity of construction, progress of construciton and marketability of property. Will include the sutdy of approved building plan, location of property in authorized area, availability of civic amenities etc.

Technical Appraisal:

Interest Rates on Home Loans Fixed Rate Floating Rate Base Rate

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