UNIT 5

INSURANCE AND OTHER FEE BASED FINANCIAL SERVICES

UNIT 5 INSURANCE AND OTHER FEE BASED FINANCIAL
SERVICES

Insurance Act, 1938 –IRDA – Regulations – Products and services –

Venture Capital Financing –Bill discounting –factoring – Merchant
Banking
Insurance Act 1938
 INSURANCE ACT
1938
RDA)REGULATIONS PRODUCTS & SERVICE
The Insurance Act of 1938 is a significant
piece of legislation that regulates the
insurance industry in India. The Act was
enacted to safeguard the interests of the
policyholders and ensure the sound
development of the insurance sector in the
country.
Purp
ose:
The primary objectives of the Insurance Act, 1938 are:
1.Regulation of Insurance Business: The Act provides a legal
framework for the regulation and control of insurance business
in India. 2.Protection of Policyholders: One of the key aims is to
protect the interests of policyholders by ensuring fair
treatment, disclosure of terms and conditions, and financial
stability of insurance companies.
3.Promotion of a Competitive Insurance Industry: The Act aims
to foster a competitive insurance market while preventing
unfair practices and promoting the growth of the insurance
industry.
• Licensing of Insurers: The Insurance Act mandates that
insurance companies must obtain a license from the
Insurance Regulatory and Development Authority of
India (IRDAI) to operate in the country.
• Capital Requirements: Insurance companies are
required to maintain a minimum level of paid-up
capital to ensure financial stability.
• Solvent and Sound Condition: Insurers must operate in
a solvent and sound condition, meeting financial and
prudential norms.
• Control over Investments: The Act outlines guidelines for
the investment of insurance funds, ensuring that these
investments are secure and in the best interests of
policyholders.
• Provisions for Agents and Intermediaries: The Act
contains provisions related to insurance agents
and intermediaries, defining their roles,
responsibilities, and remuneration.
• Policyholder's Rights: The Act specifies the
rights and privileges of policyholders,
including the terms of the contract,
premiums, and claim settlements.
• Regulation of Tariffs: The Act empowers the
IRDAI to regulate insurance tariffs and
premiums to prevent
anti-competitive practices.
• Amendments and Regulatory Authority: The Act
can be amended to adapt to changing
circumstances, and the IRDAI is the regulatory
authority responsible for overseeing and
enforcing its provisions.
Amendments:
Over the years, the Insurance Act has undergone several
amendments to address emerging challenges and align with
the evolving needs of the insurance industry. These
amendments aim to enhance regulatory mechanisms,
improve consumer protection, and foster a more dynamic and
competitive insurance sector.

In Topic Conclusion:
The Insurance Act, 1938, plays a crucial role in shaping and
governing the insurance landscape in India. It provides the
legal foundation for the functioning of insurance companies,
ensuring the protection of policyholders and the overall
stability and growth of the insurance sector.
HISTORY OF IRDA
•T h e I R D A A c t , 1 9 9 9 w a s p a s s e d a s p e r t h e m a j
o r recommendation of the Malhotra Committee report (1994)
which recommended establishment of an independent
regulatory authority for insurance sector in India.
•Later, it was incorporated as a statutory body in April, 2000.
•The IRDA Act, 1999 also allows private players to enter the
insurance sector in India besides a maximum foreign equity of 26
per cent in a private insurance company havin
g operations in India.
Insurance Regulatory and
Development Authority
(IRDA)
•Insurance Regulatory and Development Authority (IRDA)

is a statutory body which regulates and develops the

insurance industry both (Life and Non-Life Insurance
Companies) in India.
•Agency operates from its headquarters at Hyderabad,

Telengana where it shifted from Delhi 2001.

MISSION
To protect the interests of the policyholders, to regulate,
promote and ensure orderly growth of the insurance industry and
for matters connected therewith or incidental thereto.
Objectives Of The
IRDA:
—To promote orderly growth of insurance industry in the country,

including registration of the insurance companies.

—To administer the provisions of the insurance act.

—To protect interests of policy holders and investors.

—To device control activities needed for smooth functioning of

the insurance companies including investment of funds and the

solvency requirements to be maintained by insurance companies
Composition Of
Authority
As per the section 4 of IRDAI Act' 1999, Insurance Regulatory
and Development Authority of India (IRDAI, which was
constituted by an act of parliament) specify the composition of
Authority
1) A Chairperson :
 having Knowledge in Life, general Insurance
 Shall hold an office for the term of 5 yrs.
 the age of retirement is 65 years.
2) Not more than five whole time Members :
 having Knowledge in Life, general Insurance
 Shall hold an office for the term of 5 yrs.
 the age of retirement is 62 yrs.
3) Not more than four -part time members
These persons shall be appointed by the Central Govt.irulai-
Functions of IRDA:
As defined by the IRDA act, 1999, IRDA performs the following
broad functions:
 Ensure orderly growth of the insurance industry .
 Protect interest of policy holder.
Inspect and audit of insurance companies and other related
agencies.
 Re-insurance limit monitoring
Screening of accounting standards, transparency requirements
in reporting.
 Publish information about the industry.
 Prescribe qualification and training needs of agents.
 Monitor investment
Duties and Responsibilities of IRDA:
Issue to the applicant a certificate of registration, renew, modify,
withdraw, suspend or cancel such registration
Protection of the interests of the policy holders in matters concerning
assigning of policy, nomination by policy holders, settlement of
insurance claim, surrender value of policy and other terms and
conditions of contracts of insurance
 specifying the code of conduct for surveyors and loss assessors.
 promoting efficiency in the conduct of insurance business
promoting and regulating professional organizations connected with the
insurance and re-insurance business
calling for information from, undertaking inspection of, conducting
enquiries and investigations including audit of the insurers, intermediaries,
insurance intermediaries and other organizations connected with the
insurance business;
TYPES OF INSURANCE
PRODUCTS UNDER
THE INSURANCE ACT
1938
The Insurance Act of 1938 in Indi
a i s a comprehensive legislation that
governs the insurance sector in the country. It
covers various types of insurance products that
insurers can offer to individuals and
businesses. Some of the key types of insurance
products regulated under the Insurance Act of
1938 include:
Life Insurance: This type of insurance provides financial coverage
to the insured's family or beneficiaries in case of the insured's death.
It could also include investment components that offer returns over
time. Life insurance policies can vary significantly in terms of their
period, coverage amount, and details based on the specific plan and
the insurance provider. Here are some common aspects related to
life insurance policies:
 Policy Period
 Coverage
 Amount
 Premiums
 Riders and Additional Benefits
 Maturity Benefits
 Surrender Value
 Free Look Period
Underwriting
and
Documentation
General Insurance: General insurance encompasses a broad spectrum
of non-life insurance products. It includes various types of insurance
such as health insurance, motor insurance, property insurance (fire,
burglary, etc.), travel insurance, liability insurance, and more.
 Health Insurance
 Motor Insurance
 Home Insurance
 Travel Insurance
 Property Insurance
 Liability Insurance
 Marine Insurance
 Crop Insurance
 Commercial Insurance
Health Insurance: This insurance type specifically covers medical expenses
incurred due to illnesses, accidents, surgeries, hospitalizations, and sometimes
preventive care. It could cover individuals, families, or groups. Health
insurance policies can vary widely in terms of their coverage period, the
insured amount, and specific details based on the insurance provider and the
plan chosen. Here are some common aspects related to health insurance
policies:
1.Policy Period

2.Sum Insured

3.Premiums

4.Coverage Details

5.Network Hospitals

6.Pre-existing Conditions and Waiting Periods

7.Co-payment and Deductibles

8.Renewal Terms

9.Exclusions
Motor Insurance: Under the general insurance category, motor insurance
includes policies for cars, two-wheelers, commercial vehicles, etc. It typically
includes coverage against damages due to accidents, theft, and
liabilities towards third parties. Motor insurance, which includes coverage
for vehicles such as cars, motorcycles, trucks, and commercial vehicles, can
have varying details in terms of its coverage period, insured amount, and
specific policy details. Here are the common aspects related to motor
insurance policies: 1.Policy Period
2.Insured Amount (Coverage)

3.Premiums

4.Coverage Details

5.Add-On Covers

6.No-Claim Bonus (NCB)

7.Deductibles

8.Renewal Terms
Property Insurance: Property insurance covers losses and damages
to physical assets like buildings, homes, offices, factories, and their
contents due to unforeseen events like fire, natural disasters, theft,
etc. Property insurance covers a range of insurance products that
protect against damage or loss to property and its contents. Here are
details regarding property insurance, including amount, coverage,
and other specifics:
1.Policy Period

2.Coverage Amount

3.Premiums

4.Coverage Details

5.Add-On Covers

6.Deductibles

7.Exclusions

8.Renewal Terms
Liability Insurance: Protects against legal liabilities arising from
personal or professional negligence, errors, or omissions.
Examples include professional liability insurance, product liability
insurance, and public liability insurance. Liability insurance
offers protection against legal liabilities arising from negligence,
errors, or omissions that result in injury or damage to others. Here
are details regarding liability insurance, including amount,
coverage, and period: 1.Coverage Amount
2.Premiums

3.Coverage Details

4.Add-On Covers

5.Limits of Liability

6.Policy Period

7.Exclusions
Travel Insurance: Designed for travelers, this insurance covers various risks
associated with travel, such as trip cancellations, medical emergencies, lost
baggage, and other travel-related issues. Travel insurance provides coverage for
various risks associated with traveling. Here are details regarding the amount,
coverage, and period of travel insurance:
1.Coverage Amount

2.Premiums
• Medical Coverage
3.Coverage Details:
• Trip Cancellation/Interruption
• Baggage and Personal Belongings
• Travel Delays or Missed Connections
• Emergency Assistance Services
4.Policy Period

5.Exclusions

6.Renewal and
Extension
Rural Insurance: It includes insurance products specifically tailored for the rural
population, covering agricultural assets, livestock, crops, and other rural-specific
risks. Rural insurance encompasses insurance products specifically tailored for the
rural population, primarily focusing on the agricultural sector and rural livelihoods.
Here are details regarding the amount, coverage, and period of rural insurance:
1.Coverage Amount

2.Premiums

3.Policy Period
• Crop Insurance
4.Coverage Details:
• Livestock Insurance
• Rural Property Insurance
• Government-Sponsored
Schemes
5.Community-Based Insurance

6.Renewal and Claims

Process.
Commercial Insurance: This type of insurance caters to businesses and covers a range of risks associated with
commercial operations, such as business interruption, marine insurance, trade credit insurance, etc. Commercial
insurance encompasses various insurance products designed to protect businesses against a wide range of risks. Here
are details regarding the amount, coverage, and period of commercial insurance:
1.Coverage Amount

2.Property Insurance
• Business Interruption Insurance
3.Liability Insurance
• Professional Liability
• Insurance Cyber Insurance
• Workers' Compensation Insurance
• Commercial Auto Insurance
4.Premiums

5.Policy Period
• Property Insurance
6.Coverage Details:
• Liability
• Insurance
• Business Interruption Insurance
Workers' Compensation Insurance
7.Policy Customization

8.Renewal and Claims Process

REGULATIONS IN PREMIUM AND UNDERWRITING
GUIDELINES
WHAT IS INSURANCE
PREMIUM ?
An insurance premium is the amount of money an individual or
business pays for an insurance policy. Insurance premiums are paid
for policies that cover healthcare, auto, home, and life insurance.
Once earned, the premium is income for the insurance company. It
also represents a liability, as the insurer must provide coverage for
claims being made against the policy. Failure to pay the premium on
the individual or the business may result in the cancellation of the
policy.
TYPES OF INSURANCE PREMIUM :

1)
LIFE
L
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i
n
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r
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p
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e
m
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m
s
a
r
e
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m
i
n
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3) AUTO
When you are purchasing auto insurance, the insurance company will be
looking at your driving records, such as violations, parking tickets, license
suspensions, and driving accidents. A driver with a clean driving record will
be charged with a smaller premium than a driver with a record consisting of
accidents and violations.

4)
HOMEOWNERS
Homeowners’ insurance premiums are determined by the age, size, value,
and location of the property. Houses located in areas that are more prone to
extreme weather conditions, such as hurricanes or tornadoes, will tend to
have higher insurance premiums.

5)
RENTERS
The
amoun
t of
premiu
m you
need to
pay
will
depend
on the
amoun
t of
coverage and deductible. It will also depend on your location, credit score,
and how many insurance claims you’ve filed in the past. The more
coverage you get, the more expensive the premium will be.
WHAT DETERMINES AN INSURANCE PREMIUM?

Type of Insurance Coverage: A more comprehensive

insurance policy that provides you more coverage than another
policy will result in a more expensive premium.

Amount of Insurance Coverage: Premiums are less expensive if the amount

of coverage is less.

 Insurance History (and any past claims made)

Personal Information: The policyholder’s age, place of residence, marital

status, lifestyle, medical history, credit history, driving record, and
employment status
PRINCIPLES ON CHARGING PREMIUM FOR HEALTH INSURANCE COVERAGE

IRDAI (Health Insurance) Regulations, 2016 at Regulation 10 have

specified certain principles on pricing of Health Insurance
Products offered by Life, General and Health Insurers.

A ) Insurers shall ensure that the premium for a health insurance policy shall
be based on,
i. Age: for individual policies and group policies.
ii. Other relevant risk factors as applicable

B ) For provision of cover under family floater, the impact of the multiple
incidence of rates of all family members proposed to be covered shall be
considered.
c) The premiums filed shall ordinarily be not changed for a period of three
years after a product has been cleared in accordance to the product filing
guidelines specified by the Authority. Thereafter the insurer may revise the
premium rates depending on the experience subject to (d) (e) and (f)
hereunder. However, such revised rates shall not be changed for a further
period of at least one year from the date of launching the revision.

In terms of Regulation 8(e) of the IRDAI (Health Insurance) Regulations 2016,

the insured shall be informed in writing of any underwriting loading charged
over and above the premium as filed with the Authority and specific consent for
such loadings shall be obtained before issuance of the policy.

The Premium rate shall be unchanged for all group products and for all
individual and family floater products, other than travel insurance products,
offered by General and Health Insurers, for the term of the policy. For
further information, Regulation 10 (d) (e) and (f) of IRDAI (Health
Insurance) Regulations 2016 may be referred.

Premiums can be collected in advance maximum upto a period of 90 days

before the renewal date.
 UNDERWRITING GUIDELINES

UNDERWRITING IN
INSURANCE
Insurance
underwriting is the
process of
evaluating a risk to
determine
if the insurance company will insure it and, if yes, then pricing it.
Underwriting began as a manual process based entirely on developed
acumen. Today, that process also involves the use of tools such as data
analytics and artificial intelligence.

UNDERWRITING
GUIDELINES :
 One life insurance plan can be selected at a time with or
without riders, e.g. waiver of premium rider, accidental rider,
hospital and surgical rider, hospital benefit rider, dread disease
rider, term life rider, payer benefit rider, etc.
Proposed Insured's ages are from 1 month 1 day to 70 years of age's 70
years of age is only acceptable for certain insurance plans.

The underwriting acceptance is based on various risk factors, e.g.

health status, occupation, life style, financial risk factor, etc.

UNDERWRITING DOCUMENTS
REQUIRED
If the proposed Insured is aged between 1 month 1
day and 15 years:
 Insurance application for juvenile (aged below 16
years)
 Copy of birth certificate or copy of valid ID Card
Copy of health check-up documentation at the
insured age of 1 year old.
 Authorization of the juvenile's parent to disclose
the proposed Insured's medical treatment history
 Agent's report
 Temporary binding receipt
 If the proposed Insured is aged 16 years and above:
Insurance application (aged 16 years & above)
 Copy of valid ID card
 Authorization of the Insured
 Agent's report
 Temporary binding receipt

UNDERWRITING TIME
FRAMES
The company will issue a policy within 15 days from the
date of document completion for a standard rate case.

If any additional documents or information is required, the company

will notify the proposed Insured by letter within 30 days from the date
of the application's submission.

Once the Insured receives a policy with the 'free look' form and finds
that it is correct, the Insured has to sign the 'free look' form and return it
to the company within 15 days from the date of receiving the policy.
The claim and settlement process in the insurance
industry, including the procedures outlined in the
Insurance Act, 1938, is a crucial aspect that ensures
policyholders receive the benefits they are entitled to in
the event of a covered loss. The process may vary slightly
depending on the type of insurance (life, health, property,
etc.) and the specific terms and conditions of the
insurance policy.
1. Notification of Claim:
•Intimation: The policyholder or the beneficiary must notify the insurance
company about the occurrence of an event covered by the policy. This
should be done as soon as possible after the event.
2. Claim Documentation:
•Submission of Documents: The claimant is required to submit
relevant documents to support the claim. These documents
may include:
• Filled claim form
• Incident report
• Medical reports (if applicable)
• Death certificate (in case of life insurance)
• Police report (in case of theft or accident)
3. Claim Processing:
•Initial Review: The insurance company conducts an initial review of
the claim documents to assess their completeness and validity.
•Investigation: Depending on the nature of the claim, the insurer may
conduct an investigation to verify the details and circumstances of the
claim.

4. Assessment and Approval:

•Claim Assessment: The insurer evaluates the claim based on the policy
terms and conditions, the provided documents, and any additional
investigation findings.
•Approval: If the claim is deemed valid, the insurer approves the claim and
determines the amount to be paid.

5. Surveyor's Involvement (if applicable):

•Appointment of Surveyor: In cases of significant losses (e.g., property
damage), the insurer may appoint a surveyor to assess the extent of the
loss.
•Surveyor's Report: The surveyor provides a detailed report to the insurer,
aiding in the assessment and settlement of the claim.
6. Claim Settlement:
•Payment: Once the claim is approved, the insurer disburses the claim
amount to the policyholder or the beneficiary. The payment can be a
lump sum or in instalments, depending on the policy terms.

7. Rejection or Dispute Resolution:

•Communication of Rejection: If the claim is rejected, the insurer
communicates the reasons for the rejection to the claimant.
•Dispute Resolution: Policyholders have the option to dispute claim
rejections. They can approach the insurance ombudsman or other
grievance redressal mechanisms.

8. Record-keeping and Compliance:

•Documentation: Insurers maintain proper records of the claims process,
including documents submitted, investigation reports, and settlement
details.
•Regulatory Compliance: The entire process must comply with the
regulations outlined by the relevant insurance regulatory authority.
Intermediaries and agents play a significant role in the
insurance industry by facilitating the connection between
insurance companies and policyholders. Their functions
encompass a range of activities, from educating customers
about insurance products to assisting in the claims process.
• Distribution of Insurance Products:
•Product Knowledge: Intermediaries and agents are knowledgeable about
various insurance products and help customers understand the features,
benefits, and terms of different policies.
•Matching Needs: They assess the needs of customers and recommend
insurance products that align with their requirements.
• Customer Education and Awareness:
•Educational Role: Intermediaries provide information about the
importance of insurance, risk management, and the financial
implications of being insured.
•Policy Explanation: They explain complex insurance terms and
conditions to customers, ensuring they have a clear understanding
of their coverage.
• Policy Sales:
•Selling Policies: Intermediaries and agents are responsible for selling
insurance policies on behalf of insurance companies.
•Customized Solutions: They assist in tailoring insurance solutions to meet the
specific needs of individual customers or businesses.
• Policy Servicing:
•Policy Changes: Intermediaries help policyholders with modifications to
their policies, such as updating beneficiary information or making changes
to coverage.
•Renewals: They remind customers about policy renewals and assist in the
renewal process.
• Risk Assessment:
•Underwriting Assistance: Intermediaries may assist in the underwriting
process by providing insurers with relevant information about the risk
profile of the insured.
•Risk Management: They advise clients on risk management strategies to
mitigate potential losses.
• Claims Assistance:
•Claims Reporting: Intermediaries help policyholders in reporting
claims to the insurance company.
•Claims Advocacy: They advocate on behalf of policyholders during
the claims process, ensuring a fair and efficient resolution.
• Compliance and Documentation:
•Ensuring Compliance: Intermediaries ensure that all transactions and
interactions with customers comply with regulatory requirements.
•Documentation: They assist in the completion of necessary documentation
for policy issuance, modifications, and claims.
• Relationship Management:
•Client Relationships: Intermediaries build and maintain long-term
relationships with clients, offering ongoing support and addressing
concerns.
•Customer Advocacy: They act as advocates for customers, helping to
resolve issues and ensure a positive customer experience.
• Professional Ethics:
•Ethical Standards: Intermediaries are expected to adhere to ethical
standards, promoting fair and transparent dealings between insurers
and policyholders.
On Topic Conclusion:
Intermediaries and agents serve as a vital link between insurance
companies and customers. Their roles extend beyond sales to
encompass education, risk assessment, claims assistance, and
ongoing support. The professionalism, knowledge, and ethical
conduct of intermediaries contribute significantly to the overall
effectiveness and credibility of the insurance industry.
SOLVENC
Y
MARGINS
As per the IRDAI's mandate, the minimum solvency ratio
insurance companies must maintain is 1.5 to lower risks. In terms
of solvency margin, the required value is 150%. The solvency
margin is the extra capital the companies must hold over and
above the claim. The solvency ratio helps us assess a company's
ability to meet its long-term financial obligations. To calculate the
ratio, divide a company's after-tax net income – and add back
depreciation– by the sum of its liabilities (short-term and long-
term)
SOLVENCY
MARGINS
FORMULA
Solvency Ratio = (Net Income + Depreciation) /
Liabilities .The solvency ratio formula compares a
company's cash flow against the money it owes as
the total sum assured. The higher the solvency
ratio, the more assets there are compared to
obligations.
PARTICULARS COMPANY X COMPANY Y
NET INCOME 3000 5000
DEPRECIATION 1500 4000
LIABILITIES 2000 10000

SOLVENCY RATIO FORMULA : (NET

INCOME+DEPRECIATRION)/LIABIL
ITIES

SOLVENCY RATIO OF COMPANY

X= (3000+1500)/2000
=
2.25
SOLVENCY RATIO OF COMPANY Y=
(5000+4000)/10000
=
0.9
HIGH
SOLVENCY
RATIO
A high solvency ratio is usually good as it means the
company is usually in better long-term health compared to
companies with lower solvency ratios. On the other hand, a
solvency ratio that is too high may show that the company is
not utilizing potentially low-cost debt as much as it should.
Solvency refers to the business' long-term financial position,
meaning the business has positive net worth and ability to
meet long-term financial commitments, while liquidity is the
ability of a business to meet its short-term obligation
EXAMPLES OF
SOLVENCY
RATIO
 FINANCIAL
SOUNDNE
SS
Due to the emergence of private and foreign companies in this sector there is need for
evaluation of soundness and profitability due to the reasons, firstly, insurers are large
investors in financial markets, secondly, insurers often have close links to banks and
financial institutions, any adverse effect on life . Insurance promotes financial stability
among households and firms by transferring risks to an entity better equipped to
withstand them; it encourages individuals and firms to specialize, create wealth and
undertake beneficial projects they would not be otherwise prepared to consider
FINANCIAL
SOUNDNESS
CHARACTERISTICS
They are relevance, reliability, objectivity,
ability to be understood, comparability,
realism, consistency, timeliness, economy of
presentation, and completeness. The
qualitative characteristics of financial
reporting are very much important to the
external users in making their economic
decisions.
INDICATORS OF
FINANCIAL
SOUNDNESS
Financial soundness indicators (FSIs)
are indicators compiled to monitor the health and
soundness of financial institutions and markets,
and of their corporate and household counterparts.
Indicators of capital adequacy, asset quality
(lending institutions), and profitability were
deemed the most useful, followed by indicators of
liquidity and sensitivity to market risk
FINANCIAL
SOUNDNESS ALSO
HELP FOR
• BUDGETING
• SAVINGS AND
• INVESTMENT DEBT
• MANAGEMENT
• CREDIT SCORE
• MANAGEMENT
• EMERGENCY FUNDS
RETIREMENT PLANNING
FINANCIAL LITERACY
OVERVIEW OF
FINANCIAL
SOUNDNESS
• PRACTICAL ISSUES: CHOSSING FSI PEER GROUPS
• RISKS ASSESSED WITH FSIs
• LINKS BETWEEN FSIs
• LINKS BETWEEN FSIs AND OTHER SURVELLIANCE TOOLS
• FINANCIAL STABILITY REVIEW
• KEY CHALLENGES IN USING FSIs
POLICYHOLDER PROTECTION AND HEALTH
INSURANCE REGULATIONS
 POLICYHOLDER PROTECTION
Policyholder protection refers to measures and safeguards put in place to
ensure the rights and interests of individuals who hold insurance policies.
This concept is applicable across various types of insurance, including
health insurance, life insurance, property insurance, and more. The goal
is to create a fair and transparent insurance environment that
protects consumers from unfair practices and ensures they receive
the benefits they are entitled to.
KEY ELEMENTS OF POLICY HOLDER PROTECTION:
• Transparency and Disclosure
• Fair treatment
• Claims handling
• Financial stability and solvency
• Privacy protection
• Complaints handling
The most important regulations governing protection of policyholders interest
is the Insurance Regulatory and Development Authority of India (Protection
of Policyholders’ Interests) Regulations, 2002.
IRDA works as regulator of Insurance Business in India and keep revising its
policies to safeguard interest of Policy Holder. Moreover, they keep releasing
Public Interest campaigns on all media. For last 10 years, they had been
telling all public that IRDA does not call any Policy Holders. In spite of this,
public falls to the trap and looses their hard earned money.
In 2017, IRDA released their new regulation for protection of Policy
holders:
 Each Insurer would have a Board Approved policy to protect interest of
Policy Holder.
 All Insurance product should have a unique Identification number. All
features and benefits should be clearly explained.
 All proposal should be submitted in approved forms and Insurer should
send a Policy Document within 30 days of acceptance of Proposal.
 An insurer or intermediary must offer all transparent information under
the preview that Insurance is a matter of solicitation.
 All balance money should be transferred back to proposer within 15
days. Insurer cannot keep any suspense money for over 15 days.
 All policy details including details of intermediary must be
mentioned on proposal form.
 Moreover, IRDA has an IGMS system where all policyholders can
register the insurance complaint. All Insurers are bound to offer a reply
within a stipulated time frame.
 HEALTH INSURANCE
Health insurance is a type of coverage that pays for medical and surgical
expenses incurred by the insured individual. It provides financial protection
by covering a portion or all of the costs associated with medical care,
including hospitalization, doctor visits, prescription medications,
preventive care, and other healthcare services. Health insurance is
designed to help individuals manage the high costs of medical
treatments and services, thereby promoting access to necessary
healthcare.
COMPONENTS OF HEALTH INSURANCE REGULATIONS

 Minimum coverage requirements

 Guaranteed renewability
 Premium rate regulations
 Consumer disclosures
 Children’s health insurance program (CHIP)
CROFINANCE AND RURAL
INSURANCE

Microfinance and insurance are two distinct financial services that play
crucial roles in addressing the needs of individuals and businesses,
particularly in developing economies. While microfinance focuses on
providing financial services such as loans, savings, and other basic
financial products to low-income individuals, insurance is designed to
mitigate risk by providing financial protection against unexpected events.
Microfinance:
•Financial Inclusion: Microfinance institutions (MFIs) aim to promote financial
inclusion by providing small loans, savings, and other financial services to
people who lack access to traditional banking.
•Poverty Alleviation: Microfinance is often seen as a tool for poverty
alleviation, as it enables entrepreneurs and small businesses to access
capital and improve their economic situations.

Microinsurance:
•Risk Mitigation: Microinsurance is designed to protect low-income
individuals against various risks, such as health emergencies, crop failure,
property damage, or loss of income.
•Affordability: Microinsurance products are tailored to be affordable for
individuals with limited financial means, and they often involve lower
premiums and simplified claims processes.
•Social Impact: By providing insurance coverage, microinsurance contributes
to the resilience of communities, helping them recover from setbacks and
avoid falling deeper into poverty due to unexpected events.
• Integration of Microfinance and Microinsurance:
1. Combined Services: Some microfinance institutions offer
microinsurance products alongside their financial services to
provide a more comprehensive suite of offerings to their clients.
2. Risk Management: Integrating microinsurance with microfinance can
help clients manage risks associated with their business or personal
lives, enhancing the overall impact of financial services.
• Challenges:
1. Awareness and Education: Lack of awareness and understanding
of insurance products among low-income populations can be a
barrier to the successful implementation of microinsurance.
2. Regulatory Environment: Developing appropriate regulatory
frameworks for microinsurance is crucial to ensure consumer
protection and the sustainability of these initiatives.
Rural insurance refers to insurance products and services that are
specifically designed to meet the needs of individuals and businesses in
rural or agricultural areas. This type of insurance is tailored to address
the unique risks and challenges faced by rural communities, where
livelihoods often depend on agriculture and other primary economic
activities.
• Agricultural Insurance:
• One of the primary components of rural insurance is agricultural
insurance, which protects farmers against losses caused by events
such as crop failure, natural disasters, pests, or diseases. Crop
insurance, livestock insurance, and other agricultural-related
coverage
• Livestock are common in rural insurance offerings.
Insurance:
• Rural insurance may include coverage for livestock, providing
compensation to farmers in the event of the death or loss of their
animals due to accidents, diseases, or other covered perils.
• Property Insurance:
• Rural insurance can cover property, including homes, farm
buildings, and equipment. This helps rural residents protect their
assets from risks like fire, theft, or damage caused by natural
disasters.
• Government Initiatives:
• In many countries, governments play a role in promoting rural
insurance through subsidies, incentives, or by establishing special
programs to increase insurance penetration in rural areas. These
initiatives are often driven by the recognition of the importance of
agriculture in the overall economy.
• Community-Based Approaches:
• Some rural insurance programs are implemented through
community-based models, involving collaboration between local
communities, non-governmental organizations (NGOs), and
insurance providers to tailor solutions to the specific needs of the
community.
• Education and Awareness:
• Increasing awareness and educating rural populations about the
benefits of insurance is crucial. Many rural communities may be
unfamiliar with insurance products, and efforts to inform and
educate are essential for successful implementation.
 INNOVATIONS IN
INSURANCE
Some recent innovations in insurance
•PRODUCTS
include the use of telematics for
products
personalized auto insurance rates,
parametric insurance that pays out based
on predefined triggers like weather events,
and blockchain technology for transparent
and efficient policy management.
Additionally, there's a growing trend in
incorporating artificial intelligence for risk
assessment and chatbots for customer
support in the insurance industry.
1. Usage-Based Insurance (UBI):

Policies that adjust premiums based on the

policyholder's behavior, such as driving habits
or health monitoring.

2. Cyber Insurance:

With the increasing threat of cyber-attacks,

insurance products covering financial losses due
to cyber incidents have gained prominence.
3. Peer-to-Peer Insurance:

Platforms that allow groups of individuals

to pool their resources to create self-insurance
communities, promoting trust and transparency.

4. Artificial Intelligence in Underwriting:

AI is being used to analyze vast amounts of

data quickly, improving underwriting accuracy
and efficiency.
5. On-Demand
Insurance:
Policies that can be activated or deactivated by
the policyholder as needed, catering to specific
events or time frames.

6. Blockchain for Smart Contracts:

Utilizing blockchain technology for creating

and managing smart contracts, streamlining
policy administration and claims processing.
7. Parametric Health Insurance:

Policies that pay out a predetermined amount

based on the occurrence of specific health events,
bypassing the need for traditional claims
processing.

8. Climate Risk Insurance:

Addressing the increasing impact of climate

change by offering insurance products
specifically designed to cover losses related to
weather events.
9. Product Bundling:

Insurers offering bundled packages that

combine various coverage types to provide
more comprehensive protection.

10.Augmented Reality (AR) for

Claims Processing:

AR technology is being explored to assess

damages remotely, speeding up the claims
process and reducing the need for physical
inspections.
3 LEVELS OF INNOVATIONS
IN INSURANCE
MARKET CONDUCT
AND ETHICS
 FAIR MARKET CONDITIONS
IN
INSURANCE
Fair market conditions in insurance refer to a
balanced and competitive environment where insurance
products and services are priced reasonably based on
risk assessments. In such conditions, insurers
compete fairly, considering factors like coverage,
customer needs, and industry standards. This fosters a
healthy marketplace, ensuring that consumers have
access to a variety of affordable insurance options while
insurers can maintain profitability. Fair market conditions
are essential for a sustainable and equitable insurance
industry.
 Fair market conditions in insurance involve competitive
pricing, transparent policies, and accessible coverage
options. Insurers assess risks accurately, leading to
reasonable premiums. Regulations ensure ethical
practices, preventing unfair advantages. A balanced
market fosters consumer choice, innovation, and
ensures that insurance products meet the needs of
policyholders without exploitation.
 REGULATORY GUIDELINES
Insurance regulatory guidelines are rules set by
government bodies to ensure fair and secure insurance
practices. They define how insurance companies
operate, protect policyholders, and maintain financial
stability. Guidelines cover aspects like solvency, customer
protection, and market conduct. Insurers must comply
with these rules to guarantee reliability and
transparency. Authorities regularly update guidelines to
adapt to evolving market dynamics and safeguard the
interests of both insurers and policyholders.
 ETHICAL PRACTICE IN
INSURANCE
INDUSTRY
Ethical practices in the insurance industry involve
prioritizing honesty, transparency, and fairness to build
trust with policyholders. Insurers should provide clear
and accurate information, avoid misleading marketing,
and ensure that policies meet customers' needs. Ethical
behavior extends to fair claims handling, respecting
privacy, and maintaining confidentiality.
 Upholding professional standards, preventing
conflicts of interest, and adhering to legal and
regulatory requirements are essential. By fostering
ethical conduct, insurers not only enhance their
reputation but also contribute to a more trustworthy
and sustainable industry, promoting long-term
relationships with customers and stakeholders.
 FUNCTIONS
 Consumer Protection
 Transparency and
Disclosure
 Fair Competition
 Claims Handling
 Confidentiality and
Privacy
 Professional Integrity
 Compliance with
Regulations
 Social Responsibility
 Technology in
Insurance
Services
S.J.SUBHARANJANI
Telematics
Telematics is a technology that gathers, transmits,
and analyzes data from remote objects like
vehicles or equipment by combining
telecommunication and informatics. It allows
remote monitoring, tracking, and management of
these objects via the use of sensors, GPS, cellular
networks, and data analysis
Chatbots
Chatbots will interact with the customers,
especially for monotonous activities, by reducing
the intervention of the insurance company
employees. So, the insurance company’s
employees can focus generating new business,
customer service, etc insurance companies can
minimize the expenditure on a few processes and
activities that would increase the revenues and
profits of the company.
Social
Media
The customer’s activities on social media
can be analyzed, and insurance companies
can use the analyzed data, especially
during claims processing.Social media and
its role in the insurance industry are
evolving beyond marketing strategies and
clever advertisements.
Self-service
for
Policyholders
In the era of digitalization, it comes as no
surprise that consumer preferences are
shifting toward self-service capabilities.
More and more people expect their
insurance service providers to offer a
self-service portal enabling them to
manage their policies, make payments,
submit claims, etc.
Artificial
Intelligence
Artificial intelligence and natural language
processing enable insurers to create
personalized customer experiences by
processing massive amounts of consumer data
automatically. These technologies not only
improve claims turnaround cycles but also
fundamentally change the entire underwriting
process.
VENTURE
CAPITAL
 Investments or Capital the
entrepreneurs obtain from affluent
investors/venture capitalists
VENTURE CAPITAL

• To provide entrepreneurs with the support

• To create up scalable business with sustainable growth
• Focusing on outstanding returns on investment
• Higher RISKS and Higher RETURN
• Equity & equity related investment in a growth
oriented small/medium business.
• Return for monetary shareholding in the
business/irrevocable right to acquire it.
• High expectations for large gains.
• Investment in new companies when it is too early
to go to the capital market to raise funds.
Features

• New ventures
• High-risk investment
• High Tech projects
• Participation in Management
• Length of investment
• Nature of the firms
• Not for Large size firms
Importance
• Helps to new products with modern technology to become
commercially feasible
• Promotes EOU to earn more foreign exchange
• Supports in management, assists in technology
• Strengthen the capital market
• Promotes new and modern technology
• Sick companies rejuvenate through nursing fund
Disclosure of Information

• Brief history of business or project

• Career history of entrepreneur & key managers
• Description of product or service to be
manufactured.
• Description of market for the product, competition
& growth prospects.
• Technical process involved & proposed deal
structure.
Process

• Deal originations
• Screening(Scope, market & research, technology, size of
investment, expected Growth rate)
• Evaluation ( detailed study of documents, Track record,
project capacity, Entrepreneur quality, technical
competence, marketing ability etc.,)
• Deal negotiations
• Post Investment Activity
• Exit Plan
Different ways of venture financing
• Seed Capital
• Start-up Financing
• Early Stage Financing
• Follow on financing
• Expansion Financing
• Replacement Financing
• Turn around Financing
• Management Buy-outs
• Management Buy-ins
• Mezzanine Finance
• Management Buy-outs: The acquisition of a company
from the existing owners by a team of existing
management/employees
• Management Buy-ins: Bringing in a management team
comprising of outsiders, who are strangers to a
company.
Benefits

• Making the expansion easier

• Participation of Experts in management
• Improves the management efficiency
• No obligation to repay
• Value added services
Limitations

• Complex process
• Dilution of control
• Slow in decisions
• Less confidential
• Lengthy process and time consumption
• Long period
Methods of Exit

• IPO Method
• Sale of shares Method
• Trade Sales
• Liquidation
 BILL
DISCOUNTING
• Bill Discounting is short-term finance for traders wherein they can sell
unpaid invoices, due on a future date, to financial institutions in lieu of a
commission.

• The Bank purchases the bill (Promissory Note) before its due date and
credits the bill’s value after a discount charge to the customer’s account.

• The Bank will realize the bill amount on the bill’s due date directly from the
debtor.

• This helps the traders optimize their cash flows and business (payment)
cycles without disturbing their balance sheets. Lenders usually offer tenors
of up to 180 days while offering bill discounting facilities.
ADDITIONAL INFO:

• ICICI Bank Ltd, India’s largest private sector bank by

consolidated assets, announced that it has
successfully executed the country’s first digitized
invoice discounting transaction on the “Receivables
Exchange of India Limited” (RXIL), India’s first TReDS
(Trade Receivables Discounting System) exchange.
 TYPES OF
BILL DISCOUNTING
 Standard Bill Discounting

Also known as disclosed bill discounting, this financing

option involves the discounting of bills, recovery of
money, and other discounting processes, with both the
stakeholders, the exporter and importer, being aware of
the discounting company's presence in their trade
agreement.
At the end of the due date, the company may approach
the client's customer to recover their client's bill money.
 Undisclosed Invoice Discounting
• In this kind of discounting, also known as
confidential invoice discounting, the discounting
company or bank carries out the functions of
funding and recovery for their clients without
their customers knowing about it.
• When the bill due date approaches, the
customer is supposed to make their payment
into a controlled, confidential account that the
discounting company can access. This service is
more expensive to purchase than the one in
which the client's customer is aware of the
discounting company's presence in the equation.
 Full Turnover Invoice Discounting
Also known as whole turnover invoice discounting,
this option involves businesses selling their entire
sales ledger to an invoicing or discounting company.
In fact, several companies may automate the
process, so as soon as a bill of exchange is received,
businesses can discount it for cash.
Although this may take away an element of control
from the hands of businesses, it also streamlines the
finance-raising process. With whole turnover invoice
discounting, businesses do not have to spend hours
applying for discounting at their bank.
Partial Turnover Invoice Discounting
Also known as selective invoice discounting, this is
like a subset of whole turnover invoice discounting.
In selective invoice discounting, businesses can
choose which receivables they want to sell to the
invoice company.
As opposed to the whole turnover method, which
is continuity-focused, this invoicing type is more
control and confidentiality-driven.
 Clean Bill Discounting
This is the type of bill discounting option in which a
discounting company receives clean bills, or, in other
words, bills that do not need to be accompanied by other
documents while being issued, from a business before
releasing funds against them.

LC-Backed Bill Discounting

As its name implies, an LC-backed bill discounting
transaction involves discounting companies offering
funds to sellers against the Letters of Credit received
from their buyers over an international trade transaction.
• Kerala Financial Corporation launches MSME
bill discounting platform
 KFC partnered with Receivables Exchange of
India Ltd to start the platform, which aims to
ensure liquidity to MSMEs by discounting their
outstanding bills.
 KFC said it has partnered with Receivables
Exchange of India Ltd (RXIL), a Reserve Bank of
India-approved company, to start the platform.
RXIL is a venture of the Small Industries
Development Bank of India (SIDBI) and the
National Stock Exchange of India (NSE).
 KFC will pay the eligible amount to the
supplier within 48 hours. The departments will
get 180 days to repay the money to KFC.
PROCESS OF BILL
DISCOUNTING
• 1. Submission of Documents: The seller submits relevant
documents, such as invoices, shipping documents, and the bill of
exchange, to the financial institution for review.

• 2. Creditworthiness Assessment: The financial institution assesses

the creditworthiness of the seller and the buyer to determine the
risk involved in discounting the bill.

• 3. Discount Rate Negotiation: The discount rate, which represents

the interest charged by the financial institution, is negotiated
between the seller and the institution.
• 4. Acceptance of Terms: Upon agreement on terms, the seller accepts the
discounting terms, including the discount rate and the maturity date of the
bill.

• 5. Verification of Documents: The financial institution verifies the

authenticity and accuracy of the submitted documents to ensure
compliance with the agreed-upon terms.

• 6. Endorsement of Bill: The seller endorses the bill of exchange,

transferring the rights to the financial institution, which becomes the new
holder of the bill.

• 7. Payment: The financial institution provides an upfront payment to the

seller, which is the discounted value of the bill.
• 8. Collection of Payment: On the maturity date, the financial institution
collects the full face value of the bill from the buyer.

• 9. Handling Defaults: In case of non-payment by the buyer, the financial

institution may hold the seller responsible or initiate legal actions to
recover the amount.

• 10. Settlement: After collecting the payment from the buyer, the
financial institution deducts the discounted amount and any fees before
remitting the remaining funds to the seller.
Advantages and
Disadvantages of
bill discounting
ADVANTAGES OF BILL DISCOUNTING

IMPROVED CASH FLOW

Bill discounting allows businesses to
convert their accounts receivable into
immediate cash, providing a quick infusion of
funds.
Impact: Helps in meeting short-term financial
obligations and operational expenses.
ENHANCED LIQUIDITY
By converting trade receivables into cash,
businesses maintain better liquidity, ensuring
they have funds readily available for various
needs.
Impact: Increases financial flexibility and the
ability to seize new opportunities.
RISK MITIGATION
Transfers credit risk to the financial
institution or discounting service, reducing
the impact of non-payment or delayed
payment by customers.
Impact: Improves the predictability of cash
flows and protects against bad debt.

WORKING CAPITAL MANAGEMENT

Bill discounting supports effective
working capital management by releasing
tied-up funds, allowing for more efficient
allocation of resources.
Impact: Optimizes the balance between
current assets and liabilities.
QUICK ACCESS TO FUNDS
Provides a rapid source of funds without
the need for lengthy approval processes,
making it suitable for businesses in need of
immediate liquidity.
Impact: Enables swift responses to financial
challenges or investment opportunities.
DISADVANTAGES OF BILL DISCOUNTING

COSTS AND FEES

The process of bill discounting involves
fees and interest charges, which can increase
the overall cost of financing for the business.
Impact: May reduce the net amount received
from the discounted bills.

IMPACT ON RELATIONSHIPS
Discounting bills may affect relationships
with customers who may perceive the business
as financially strained or less flexible in
payment terms.
Impact: Potential strain on customer-supplier
relationships.
DEPENDENCY ON FINANCIAL
INSTITUTIONS
Businesses become dependent on
financial institutions or discounting services,
limiting autonomy and flexibility.
Impact: Reduced control over financial
decision-making.

CREDITWORTHINESS CONCERNS
Depending on the terms, bill discounting
may affect the creditworthiness of a business,
potentially influencing its ability to secure
future financing.
Impact: Long-term implications for borrowing
capacity.
COMPLEXITY AND UNDERSTANDING
The process of bill discounting can be
complex, requiring a thorough understanding
of financial terms and conditions.
Impact: Businesses may face challenges if they
don't fully comprehend the terms of the
arrangement.
Factoring allows a business to obtain
immediate capital or money based on the
future income attributed to a particular amount
due on an account receivable or a business
invoice. Accounts receivables represent money
owed to the company from its customers for
sales made on credit.
Functions of a Factor

◙ Control & Credit Protection:

Based on data collected on timeliness of payments, volumes for
each customer, Factor provides specialized service to client on
the extent of credit that client can effectively provide its
customers. Client can update his credit policy and handle higher
volumes with confidence.

◙ Advisory Functions:
As a credit specialist, based on comprehensive studies of
economic conditions, Factor can advise client regarding
impending developments & trends in client’s industry.
Additional technical inputs on work load analysis, machinery
replacement programmes, etc are also given.
Types of factoring
On the basis of default risk:

Recourse factoring:
In this type of factoring, the factor does not take on
the risk of default. If the debtor fails to repay the
invoice, the liability falls on the business firm itself.
If the debtor fails to pay the invoice, the
business must buy back the debt from the factor.
Non-Recourse Factoring:

The liability of bad debt remains with the factor,

and they cannot reclaim the money from the business
in case the debtor defaults.
Non-recourse factoring provides more
protection to the business. In this arrangement, the
factor assumes the risk of non-payment by the debtor.
If the debtor fails to pay, the business is usually not
responsible for repurchasing the debt.
On the basis of disclosure:

Disclosed Factoring:
When the factor’s name is mentioned in the
invoice by the debtor, and the debtor is fully aware that
the invoice is being prefinanced by the factor.
Undisclosed Factoring:
The name of the factor is not mentioned, and the
debt is repaid to the business – but the invoice and
control is with the factor.
On the basis of trade:

Domestic Factoring:
When all three parties (factor, firm and debtor)
reside and operate in the same country.
Export Factoring:
Where one or more parties operate or reside
overseas. In export factoring, there are four parties
involved: exporter/seller, importer/buyer, export factor
and import factor.
On the basis of payment:

Advance Factoring:
The factor gives the business an advance
payment in exchange for the accounts receivable.
Maturity Factoring:
The factor makes the payment only on the date
of maturity of the invoice. Businesses opt for this
method to insulate themselves from credit risk.
Cross- border factoring:

Cross-border factoring is a financial

arrangement that involves the purchase of receivables
(invoices) by a factor in one country from a seller in
another country. This form of factoring is particularly
relevant when businesses engage in international trade
and want to improve their cash flow by obtaining
immediate funds for their invoices.
 PROCESS
OF
FACTORING
• Application and Due Diligence:
The business interested in factoring submits an
application to a factoring company. The factor then
conducts due diligence to assess the creditworthiness of
the business and its customers. This involves reviewing
financial statements, credit histories, and the aging of
accounts receivable

• Agreement and Contract Signing:

If the factor is satisfied with the due diligence, both
parties enter into a factoring agreement. This contract
outlines the terms and conditions of the factoring
arrangement, including the fees, advance rates, and
other relevant details.
• Notification to Customers:
The business notifies its customers that their invoices will
be handled by the factor. The factor may send a notice of
assignment, informing customers to make payments
directly to the factor.

• Verification of Invoices:
The factor verifies the authenticity of the invoices and the
goods or services provided by the business. This may
involve contacting the customers to confirm the invoices
and their payment status
• Advance Payment:
Once the verification process is complete, the factor provides an
advance payment to the business, typically a percentage (e.g.,
70-90%) of the total invoice value. The specific advance rate
depends on the agreement between the business and the factor.

• Collection of Receivables:
The factor assumes responsibility for collecting payments from
the business's customers. This includes managing accounts
receivable and following up with customers for timely payments.

• Reserve Amount:
The remaining percentage of the invoice value, after deducting
the advance and any fees, is held in a reserve account by the
factor. This amount is released to the business once the
customer pays the invoice in full, minus the factor's fees.
• Fee Deduction:
The factor deducts its fees from the reserve amount.
Factoring fees typically include a discount fee (interest on the
advance), a service fee, and other potential charges.

• Remittance to the Business:

After deducting fees, the factor remits the remaining balance
from the reserve account to the business. This is the final
payment the business receives for the factored invoices.

• Ongoing Relationship:
The business and the factor maintain an ongoing
relationship. The factor continues to handle the collection of
invoices, and the business can use factoring as a recurring
source of working capital.
 Factoring provides businesses with a quick and
efficient way to access cash, improve liquidity,
and outsource the management of accounts
receivable. The specific details of the factoring
process may vary depending on the terms
agreed upon in the factoring.
ADVANTAGES OF FACTORING
• 1) Immediate Cash Flow: This sort of financing shortens the cash collection period. It
facilitates quick cash realization by selling receivables to a factor. The availability of liquid
cash can often be the factor for grabbing and giving up an opportunity. The cash boost given by
factoring is readily available for capital expenditures, completing a new order, or meeting an
unexpected condition.
• 2) Focus on Business Operations and Growth: By selling off invoices, business owners may
relieve themselves of the burden of collecting payments from customers. Receivables
department resources can be focused on business operations, financial planning, and future
growth.
• 3) Bad Debt Evasion: There are two sorts of factoring: with recourse and without recourse. In
the case of bad debts, the factor bears the loss without recourse factoring. As a result, once the
seller sells its receivables, it has no responsibility to the factor.
• 4) Quick Finance Arrangement: Factors provide funds more quickly than banks. Compared
to other financial institutions, factoring provides a faster application, less documentation, and
faster settlement of funds.
• 5) No requirement for security: The advances are made based on the strength
of the receivables and their creditworthiness. Factors, unlike cash credit and
overdraft, do not require any collateral security to be pledged or hypothecated.
New enterprises and startups with significant receivables can readily qualify
for advances. Factoring, unlike typical bank loans, does not necessitate the use
of your house or other property as security.
• 6) Customer Analysis: Factors give significant guidance and insights to the
seller on the credit quality of the party from whom receivables are due. It helps
in the negotiation of better terms between the parties in futures contracts.
• 7) Time Savings: Factoring can save the firm time and effort that would
otherwise be spent collecting from consumers. That energy can be applied to
other business-building tasks such as sales, marketing, and customer
development.
• 8) Cheap source of finance: It is a cheap source of finance than any other
means such as banking.
• 9) No charge on Assets: It does not create any charge on the assets.
DISADVANTAGES OF FACTORING

• 1) Expensive: This can be an expensive source of

finance when the invoices are numerous and smaller in
amount.
• 2) Higher interest rate: The advance provided is
generally available at a higher interest cost than the usual
rate.
• 3) Involvement of third party: The factor is the third
party to the customer who may not feel comfortable
while dealing with it.
 DIFFERENCE BETWEEN
BILL DISCOUNTING AND FACTORING
 CRITERIA BILL DISCOUNTING FACTORING

Nature of Transaction Short-term financing against the Sale of accounts receivable or invoices to
discounted value of a bill of exchange or a third-party (factor) at a discount
promissory note

Parties Involved Involves the drawer of the bill (seller), Involves the seller (client), the buyer
the drawee (buyer), and a financing (debtor), and the factor (financing
institution company)

Financing Provides immediate cash flow by Provides immediate cash flow by selling
receiving a discounted value of the bill invoices or accounts receivable to the
from the financing institution factor

Ownership of The seller retains ownership of the bill The factor takes ownership of the
Receivables and is responsible for collecting payment accounts receivable and is responsible for
from the buyer collecting payment
 CRITERIA BILL DISCOUNTING FACTORING

Risk and The seller remains responsible for The factor assumes the risk of non-
Responsibility credit risk, collection, and credit payment and is responsible for credit
control control and collection

Invoice The financing institution generally The factor verifies the authenticity and
Verification verifies the authenticity and validity of the invoices
acceptance of the bill

Relationship The seller maintains a direct The factor may establish a direct
with Buyer relationship with the buyer, who is relationship with the buyer for payment
obligated to pay the bill collection
 CRITERIA BILL DISCOUNTING FACTORING

Repayment The seller repays the financing The factor collects payment directly
institution after the buyer settles the from the buyer and deducts the amount
bill on its due date advanced to the seller

Focus Focuses on short-term financing and Provides comprehensive accounts

working capital needs of the seller receivable management, credit
protection, and working capital solutions

Control of The seller maintains control over the The factor assumes control over
Collections collections and is responsible for collections and follows up with the
pursuing payment buyer for payment
 CRITERIA BILL DISCOUNTING FACTORING

Confidentiality The transaction details are The factor may have direct contact
generally kept confidential with the buyer, and the transaction
between the financing institution details may not be confidential
and the seller

Financing Fees The financing institution charges The factor charges fees based on the
interest or discount fees based on invoice value, creditworthiness, and
the bill's value and services provided
creditworthiness
1

MERCHANT
◤
BANKING
 2
CONTE
Introduction ◤
Concept &Evolution NT Types
Advantages
Regulatory framework of Disadvantages
Merchant Banking in India Current example of
Function Merchant Banking
Other Activities Conclusion
INTRODUCTI
3

◤
ON

Merchant banking involves financial services provided

by banks to businesses, such as advisory services,
capital raising, and investment management. In simpler
terms, it’s like a financial partner for companies, helping
them with various money-related aspects to support
their growth and operations.
4

A merchant bank, also known as an investment bank, is

a financial institution that provides various financial
services to corporations, governments, and high-net-
worth individuals. The concept and evolution of
merchant banking have undergone significant changes
over time. Here is an overview of the concept and
evolution:
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Concept & Evolution
Concept of Merchant Banking:

Corporate Finance: Merchant banks assist companies in

raising capital through various means, such as issuing stocks
or bonds. They also provide financial advice on mergers
and acquisitions, restructuring, and other strategic financial
decisions.

Investment Banking: Merchant banks often engage in

investment banking activities, which include underwriting
securities, facilitating mergers and acquisitions, and
providing advisory services related to capital markets.

Risk Management: Merchant banks help businesses manage

financial risks by offering services such as derivatives
trading, hedging strategies, and risk assessment. This is
particularly important for companies operating in volatile
markets.
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Advisory Services: Merchant banks provide

strategic advice to their clients on matters such as
business expansion, market entry, and financial
restructuring. They leverage their expertise to guide
clients in making sound financial decisions.

Wealth Management: Some merchant banks offer

wealth management services, catering to high-net-
worth individuals and families. This may include
investment advisory, estate planning, and other
personalized financial services
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◤ Evolution of Merchant Banking:

1. 1950s-1960s:
-Merchant banks initially focused on underwriting and
syndication of loans. They played a key role in helping
businesses raise capital through the issuance of securities.

2. 1970s-1980s:
-The role of merchant banks expanded to include advisory
services for mergers and acquisitions (M&A). They began to
provide strategic financial advice to corporations involved
in complex financial transactions.

3. 1990s-Present:
-Merchant banks continued to evolve, and their role became
more diversified. They played a crucial role in the globalization
of financial markets and the rise of cross-border transactions.
-The distinction between commercial banking and merchant
banking became less defined as some traditional banks also
started offering merchant banking services.
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◤
4. Integration of Services:
- Merchant banks started integrating various financial
services to provide comprehensive solutions to their
clients. This integration often includes investment
banking, asset management, and advisory services.

5. Regulatory Changes:
-Regulatory changes in the financial industry
influenced the structure and operations of merchant
banks. Compliance with regulations became a crucial
aspect of their functioning.

6. Technological Advances:
- Like other sectors of finance, merchant banking
has been impacted by technological advances.
Electronic trading, digital financial services, and data
analytics have become integral to the operations of
merchant banks.
T Y PES OF
1 5

Merchant banking encompasses a range of financial services, and

MERCHANT ◤ the types of activities undertaken by merchant banks can be
broadly categorized into the following:
BANK
1. Corporate Finance:
-Assisting companies in raising capital through various means,
including the issuance of stocks and bonds.
- Providing financial advice on mergers and acquisitions,
divestitures, and other strategic transactions.

2. Investment Banking:
- Underwriting of securities, including stocks and bonds.
- Facilitating mergers and acquisitions (M&A) transactions.
- Providing advisory services related to capital markets and
financial transactions.

3. Advisory Services:
-Offering strategic advice to businesses on matters such as
expansion, market entry, and financial restructuring.
- Providing guidance on corporate governance and
regulatory
compliance.
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◤

4. Private Equity:
- Investing in private companies by taking ownership
stakes.
- Facilitating private equity transactions and
connecting investors with investment opportunities.

5. Wealth Management:
- Offering personalized financial services to high-
net-worth individuals and families.
- Providing investment advisory services, estate
planning, and other wealth-related services.

6. Risk Management:
- Assisting businesses in managing financial risks
through derivative trading and hedging strategies.
- Conducting risk assessments and advising on risk
mitigation measures.
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◤

7. Trade Finance:
-Providing services to facilitate international trade, including
letters of credit, export and import financing, and trade-related
advisory services.

8. Asset Management:
-Managing investment portfolios on behalf of institutional
clients, pension funds, and other entities.
- Making investment decisions based on clients' financial
goals and risk tolerance.

9. Custodial Services:
-Safeguarding and managing financial assets on behalf of
institutional clients.
- Offering services such as securities custody, settlements,
and
safekeeping.
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◤

10. Project Finance:

-Structuring and financing large-scale projects,
such as infrastructure and energy projects.
- Assessing the financial viability and risks
associated with project investments.

11. Venture Capital:

-Investing in early-stage companies with high
growth potential.
- Providing funding, mentorship, and strategic
guidance to startups.

12. Development Finance:

-Supporting economic development projects, often
in emerging markets.
- Funding initiatives that contribute to
infrastructure
development and overall economic growth.
 ◤
O t her Activities ofHedging
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Merchant
Services: Banking
Assisting clients in managing and mitigating risks
associated with currency fluctuations, interest rates, and
commodity prices through hedging strategies.

Bridge Financing:

Providing short-term financing to bridge the gap

between the need for immediate capital and the
availability of long-term financing. This is often used in
merger and acquisition transactions.

Real Estate Financing:

Offering financing solutions for real estate projects,

including property development and acquisition
financing.
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0
◤
Mergers and Acquisitions (M&A) Advisory:

Advising clients on strategic mergers, acquisitions, and

divestitures, including valuation, negotiation, and deal
structuring.
Initial Public Offerings (IPOs):

Assisting companies in the process of going public by

managing the initial public offering of their shares on a
stock exchange.

Factoring and Forfaiting:

Factoring involves the purchase of accounts receivable

from businesses to provide them with immediate cash.
Forfaiting involves the purchase of trade receivables,
typically export receivables, at a discount.
FUNCTIONS
2 OF
1
MERCHANT
◤

BANKING
The primary function of merchant banking is
to offer
businesses.
a comprehensiveThis includes
range of
activities
underwriting, financial
advisory services,
services to
project
mergers andfinancing,
acquisitions, and like
managing portfolios. banks act as
investment
financial Merchant
intermediari aiding companies
various financi
es, transactio and strategiin
alto enhance
ns their c
decision overall
performance and financi
s
growth. al
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• Portfolio Management
2 • Issuing Securities
◤
• Developing Innovative
Business Strategies
• Raising funds for clients
• Promotional activities
• Leasing Services

• Advising on mergers and

acquisitions
• Providing debt financing
• Key to economic growth
• Giving expert guidance and
advice
• Underwriting
Loan Syndication
Money Market Operation
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A d vantages of Merchant Banking
2 3

• You will receive corporate counselling.

• You will receive honest project feedback.
• You may be able to restructure your
capital.
• You receive portfolio management.
• You can have currency exchanges
managed for your company.
• You are able to protect your IP.
• You can receive immediate debt funding
through
a merchant bank.
• You receive lease financing services.
• You’ll receive issue management
assistance.
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D i sadvantages of Merchant Banking
2 4

• Your account will be more expensive than a

traditional bank account.
• You have size considerations which must be
met.
• You will always have the risk of a mixed chance
for
success.
• You may not receive complete funding
• You may not have access to every potential
product.
• You will be investigated as part of the funding
process.
• You do not have a guarantee of a renewal or
extension.
• You may have added reporting requirements to
meet.
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1.SEBI allows 39 entities to use e-KYC
current News
5
◤
Aadhaar authentication services in securities
market

Future of Merchant Banking –

The Global Merchant Banking Services

market is anticipated to rise at a
considerable rate during the forecast period,
between 2022 and 2030. In 2021, the
market is growing at a steady rate and with
the rising adoption of strategies by key
players, the market is expected to rise over
the projected horizon.
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1.Company A wants to raise funds worth Examples of
6
₹10,000 Crore from◤ the market and
decides to issue debentures and Merchant Banking
preference shares worth the same
amount. Now, they hire Merchant Bank Z
to oversee the issue and sale of shares.
Merchant Bank Z will use its expertise to
create a detailed action plan and budget
for the entire exercise.
They will also hire and coordinate with
equity underwriters, who will use their
own distribution networks to sell the
debentures and preference shares of
Company A to investors. As part of the
action plan, Merchant Bank Z may also
hire advertising and marketing agencies
to drum up support and publicity before
and after the issue of shares. In addition,
this merchant bank will obtain
2 Historically, some well-known financial institutions with active
8 merchant banking activities include:

1.Goldman Sachs: Goldman Sachs has been actively involved in

•investment banking, including merchant banking and private equity.
2.JPMorgan Chase:JPMorgan Chase is a global financial
institution that provides various financial services, including investment
banking and merchant banking.
3.Morgan Stanley:Morgan Stanley is known for its
involvement in investment banking and merchant banking
services.
4.Barclays:Barclays, a British multinational bank, has a
history of
•engaging in merchant banking activities.