TYBMS SEM 6: Finance: Innovative Financial Services (Q.P. April 2024 with Solution)

 Paper/Subject Code: 86005/Elective: Finance: Innovative Financial Services

TYBMS SEM 6: 

Finance:

 Innovative Financial Services

(Q.P. April 2024 with Solution)

Note: 1.Q1is compulsory.

2. Q2 to Q5 are compulsory with internal choice. 

3. Figures to the right indicate full marks.

4. Give working notes, wherever necessary.

Q1. (A) Select the correct answer from the multiple choice questions (Any8)    (8)

1) _________ is a Fees based service.

a. Portfolio Management.

b) Factoring

c) Venture Capital

d) Underwriting

2) _______ factoring is a worldwide system of all factoring documentation required for the paperless trading environment of electronic data.

a) Cross Border

b) Invoice

c) Disclosed 

d) EDI

3) _______ bills are payable immediately 'at sight or on presentation to the drawee.

a) Expired 

b) Usance 

c) Demand 

d) Knight Bill

4) _______  are contracts that derive its value from an underlying asset.

a) Factoring

b) Forfeiting

c) Derivatives

d) Hire Purchase

5) In Hire Purchase depreciation can he claimed by the ________

a) Hirer

b) Vendor

c) Financiers

d) Lessor

(6) In Securitization, issue of securities is done by _______

a) SPV 

b) Underwriter 

c) Depositor

d) Insurer

7) _______ lease is used for short period of lease service

a) Financial

b) operating 

c) Combined

d) Capital

8) _______ is provided at the product development stage.

a) Start up fund

b) Private Equity Fund

c) Seed Fund

d) Mezzanine capital

9) ________ is a boon for a consumer who can enjoy the possession of goods without paying for it immediately.

a) Consumer debit 

b) Consumer credit

c) Consumer contract

d) Consumer asset

10) ________ is NOT a credit rating agency of India.

a) CRISIL

b) ICRA

c) PFRDA

d) CARE

Q-1B) Answer the statement true or false (any 7)

1) NBFCs hold a banking license.

Ans: False

2) Factoring is a fund based financial service.

Ans: True

3) Clean Bills are accompanied with proper documents.

Ans: False

4) Unsubscribed shares of the companies are purchased by brokers.

Ans: True

5) The SARFAESI Act has been enacted to regulate Factoring.

Ans: False

6) Lessee is the person getting the benefit of ässet taken on Lease,

Ans: True

7) NHB is a wholly owned commpany of SEBI.

Ans: False

8) The effective rate of interest on consumer finance is much lower than the rates applicable to business finance.

Ans: True 

9) Credit score shows the credit worthiness of a borrower.

Ans: False

10) Issuers with lower crèdit ratings pay higher interest rates embodying larger risk premiums than high credit rated companies.

Ans: True

Q.2 (A) Describe the role of agencies that provide financial services in the market?(8)

Agencies that provide financial services play a pivotal role in the functioning of financial markets. These agencies include banks, Non-Banking Financial Companies (NBFCs), insurance companies, investment firms, mutual funds, and credit rating agencies. Their contributions can be summarized as follows:

1. Capital Mobilization:
   Financial service providers help mobilize savings from individuals and institutions, channeling them into productive investments. This fosters economic growth and development.

2. Facilitation of Credit:
   Agencies like banks and NBFCs provide loans and credit facilities to individuals and businesses, enabling them to finance operations, invest in projects, and manage cash flows.

3. Risk Management:
   Insurance companies and hedging services help mitigate risks associated with business operations, market fluctuations, and life uncertainties by providing tailored risk coverage.

4. Liquidity Creation:
   These agencies ensure liquidity in the financial system by providing short-term and long-term financing options and enabling smooth trading of assets in the market.

5. Market Efficiency:
   Investment firms and mutual funds promote efficient allocation of capital by directing funds to sectors with the highest potential for returns, enhancing productivity in the economy.

6. Financial Inclusion:
   Financial services expand access to banking, credit, and insurance for underserved populations, reducing economic disparities and fostering inclusivity.

7. Transparency and Trust:
   Credit rating agencies and financial auditors evaluate the creditworthiness of businesses and individuals, increasing market transparency and investor confidence.

8. Innovation and Advisory:
   Agencies often provide innovative products and financial advisory services, helping individuals and businesses make informed decisions about investments, savings, and risk management.

Q.2 (B) How beneficial Forfeiting is for Financial services sector?

Forfeiting is a financial service that involves the purchase of receivables from exporters by a forfeiter, typically a financial institution, in exchange for immediate cash. The receivables are usually guaranteed by a bank, and the forfeiter assumes the risk of non-payment. This service is particularly beneficial to the financial services sector in several ways:

1. Enhances Liquidity:

Forfeiting provides immediate cash flow to exporters by converting credit sales into instant cash. This increases liquidity in the financial system and supports economic activity.

2. Risk Mitigation:

Forfeiters assume the risk of non-payment from foreign buyers, which helps exporters reduce their credit risk. This creates a niche financial service that enhances sector diversification.

3. Facilitates International Trade:

By offering exporters risk-free cash flow and protection against political and economic uncertainties, forfeiting supports global trade, encouraging financial institutions to expand into international markets.

4. Increases Revenue Streams:

Financial institutions offering forfeiting services earn fees and margins from the discounting process, adding to their profitability and diversifying their revenue base.

5. Stimulates Market Growth:

Forfeiting supports businesses, particularly small and medium enterprises (SMEs), by enabling them to compete internationally. This indirectly benefits the financial sector by fostering growth in the broader economy.

6. Promotes Specialization:

Forfeiting encourages financial institutions to develop expertise in assessing credit risk and managing international trade finance, contributing to overall market sophistication.

7. Supports Risk-Free Export Growth:

By absorbing risks such as currency fluctuations and buyer insolvency, forfeiting enhances confidence in export transactions. This supports the growth of export-oriented businesses, leading to more financial transactions and services.

8. Encourages Structured Financing Solutions:

Forfeiting complements other trade finance instruments like factoring, letters of credit, and export credit, allowing financial institutions to offer comprehensive financing packages.

OR

Q.2 (C) Explain the challenges faced by financial services sector in India.  (8 marks)

The financial services sector in India is critical to the economy but faces several challenges due to regulatory, technological, economic, and structural issues. These challenges include:

1. Non-Performing Assets (NPAs):

• High levels of NPAs, particularly in public sector banks, reduce profitability and limit the capacity of financial institutions to extend credit.
• Recovery from bad loans remains a slow and complex process despite reforms like the Insolvency and Bankruptcy Code (IBC).

2. Regulatory Complexity:

• The sector is heavily regulated by multiple bodies like RBI, SEBI, IRDAI, and PFRDA, leading to overlapping jurisdictions and compliance burdens.
• Frequent regulatory changes make it challenging for institutions to adapt swiftly.

3. Financial Inclusion:

• A significant portion of the rural population remains unbanked or underbanked due to poor infrastructure, lack of awareness, and low digital literacy.
• Bridging this gap requires significant investment and innovation in delivery models.

4. Technology and Cybersecurity Risks:

• The rapid digitization of financial services has increased exposure to cybersecurity threats, fraud, and data breaches.
• Many institutions lack robust IT infrastructure to handle these challenges effectively.

5. Rising Competition:

• The entry of fintech companies and neobanks has disrupted traditional banking models, forcing incumbents to innovate while managing costs.
• Balancing the need for digital transformation with the traditional customer base is a challenge.

6. Economic Volatility:

• Economic slowdown, inflation, and currency fluctuations impact credit growth, investment decisions, and the overall profitability of financial institutions.
• Events like the COVID-19 pandemic exacerbated stress in the financial sector.

7. Capital Adequacy:

• Many financial institutions, especially NBFCs, face challenges in maintaining adequate capital buffers to meet regulatory requirements and absorb shocks.
• Funding constraints, particularly for smaller players, limit their ability to grow and compete.

8. Trust and Transparency Issues:

• Scams and frauds in the financial sector, such as those involving major banks or NBFCs, erode public confidence and deter investment.
• Improving governance and risk management remains a key challenge.

9. Cost of Compliance:

• The cost of adhering to anti-money laundering (AML) laws, know-your-customer (KYC) requirements, and other regulatory mandates is high, especially for smaller institutions.

10. Low Penetration of Insurance and Pension Services:

• Insurance and pension penetration remains low, with a lack of awareness, affordability, and cultural factors contributing to underutilization.
• Expanding coverage in rural and semi-urban areas requires innovative approaches.

11. Infrastructure and Logistics Challenges:

• Poor physical and digital infrastructure in remote areas hinders financial service delivery.
• Developing last-mile connectivity is essential for improving financial inclusion.

12. Skilling and Talent Retention:

• A shortage of skilled professionals in areas like risk management, fintech, and analytics hampers the sector's ability to innovate and adapt to new challenges.
• Retaining talent in a competitive market is another issue.

13. Environmental and Social Concerns:

• Institutions face pressure to align with Environmental, Social, and Governance (ESG) criteria, which requires rethinking investment strategies and adopting sustainable practices.

Q.2.(D) Under an advance factoring arrangement, AYM Factors Ltd. has agreed to advance a sum of Rs. 20 Lakhs against the receivable purchased from ABC Lich The factoring agreement provides for an advance payment of 80% of the value of factored receivables and for guaranteed payment after 3 months from the date of purchasing the receivables. The advance carries a rate of interest of 14% pa compounded quarterly and the factoring commission is 2% of the factored receivables. Assume that the interests collected in arrear and the commission is collected in advance Compute the amount actually made available to ABC Ltd.                        (7marks)

To compute the amount actually made available to ABC Ltd., we need to account for the advance payment, factoring commission, and interest on the advance. Here’s the step-by-step calculation:

Step 1: Advance Payment

• Advance percentage = 80% of the value of receivables.
• Value of receivables = Rs. 20 Lakhs.
  $\text{Advance Payment} = 20,00,000 \times 80\% = 16,00,000$
  

Step 2: Factoring Commission

• Factoring commission = 2% of the value of receivables.
• 
  
•   $\text{Factoring Commission} = 20,00,000 \times 2\% = 40,000$
• 
  
The commission is deducted upfront from the advance payment.

Step 3: Interest on the Advance

• The advance carries an interest rate of 14% p.a., compounded quarterly.
• The advance is repaid after 3 months (1 quarter).
• Formula for compound interest for one period (quarterly): $\text{Interest} = \text{Principal} \times \left(1 + \frac{\text{Rate}}{4}\right)^n - \text{Principal}$
  Where:
  • $\text{Principal} = 16,00,000$
    
  • $\text{Rate} = 14\% \text{ p.a.} = 0.14$
    
  • $n = 1 \text{ (one quarter)}$
    

$$\text{Interest} = 16,00,000 \times \left(1 + \frac{0.14}{4}\right)^1 - 16,00,000$$
$$\text{Interest} = 16,00,000 \times 1.035 - 16,00,000 = 16,56,000 - 16,00,000 = 56,000$$

The interest of Rs. 56,000 will be deducted at the time of settlement.

Step 4: Amount Actually Made Available

The actual amount made available to ABC Ltd. is the advance payment minus the factoring commission:

$$\text{Amount Made Available}=16,00,000-40,000=15,60,000$$

• Advance Payment: Rs. 16,00,000
• Factoring Commission: Rs. 40,000 (deducted upfront)
• Interest: Rs. 56,000 (deducted later at settlement)
• Amount Actually Made Available: Rs. 15,60,000

Hence, ABC Ltd. will receive Rs. 15,60,000 initially.

Q.3.(A) Describe the registration process of Stock Brokers.                (8 marks)

The registration process for stock brokers is governed by the Securities and Exchange Board of India (SEBI) under the SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992. The process ensures that stock brokers operate transparently, ethically, and in compliance with regulatory standards. Below is a detailed description of the registration process:

1. Eligibility Criteria

Before applying, the applicant must fulfill the following criteria:

• Legal Entity: The applicant should be an individual, partnership firm, or company incorporated under relevant laws.
• Infrastructure: The applicant must have the necessary infrastructure such as office space, IT systems, and skilled personnel.
• Membership: The applicant must be a member of a recognized stock exchange in India.
• Net Worth: Minimum net worth requirements must be met, as prescribed by SEBI and the respective stock exchange.
• Background: The applicant should not have been convicted of any financial offense or fraud.

2. Application Submission

• Form A: The applicant must submit a completed Form A (application for registration) to SEBI.
• The application must be accompanied by the prescribed fee and supporting documents.

3. Required Documents

The applicant needs to provide the following documents:

1. Identity Proof: PAN card, Aadhaar card, or similar identification.
2. Address Proof: Utility bills, lease agreements, or property ownership documents.
3. Membership Certificate: Proof of membership with a recognized stock exchange.
4. Net Worth Certificate: Certified by a Chartered Accountant (CA).
5. Infrastructure Details: Details of office premises, IT systems, and human resources.
6. Bank Details: A copy of the bank account statement.
7. Compliance Procedures: Details of risk management and compliance policies.

4. Verification by Stock Exchange

• The stock exchange where the applicant is a member conducts a preliminary verification of the documents and credentials.
• Once satisfied, the stock exchange forwards the application to SEBI with its recommendation.

5. SEBI’s Review

• SEBI scrutinizes the application to ensure compliance with the SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992.
• SEBI may request additional information or clarification during this stage.

6. Grant of Registration

• Upon successful verification, SEBI grants the stock broker a Certificate of Registration.
• The broker is then eligible to operate as a stockbroker and can offer trading and advisory services.

7. Post-Registration Obligations

• Code of Conduct: The stockbroker must adhere to SEBI’s code of conduct and follow all ethical guidelines.
• Periodic Reporting: Regular submission of financial and operational reports to SEBI and the stock exchange.
• Renewal: The registration needs to be periodically renewed as per SEBI regulations.

Q.3. (B) Who are the players in Securitization process?                    (7marks)

The securitization process involves multiple parties or players who play specific roles in transforming illiquid assets into tradable securities. Each player has a unique function that helps facilitate the entire securitization transaction. Below are the key players involved in the securitization process:

1. Originator

• Role: The originator is the party that creates or originates the financial assets (e.g., loans, receivables, or mortgages) to be securitized. Typically, the originator is a bank, financial institution, or lending company.
• Responsibilities:
  • Originate or acquire loans or assets (such as mortgages, auto loans, or credit card receivables).
  • Package the assets for securitization.
  • Sell the pooled assets to the Special Purpose Vehicle (SPV).
• Example: A commercial bank that originates home loans and then sells them to be securitized in the form of mortgage-backed securities (MBS).

2. Special Purpose Vehicle (SPV) / Special Purpose Entity (SPE)

• Role: An SPV or SPE is a legal entity created specifically to hold the pooled assets and issue the securitized instruments (securities). It isolates the risk of the securitized assets from the balance sheet of the originator.
• Responsibilities:
  • Acquire the assets from the originator.
  • Issue asset-backed securities (ABS) or mortgage-backed securities (MBS) to investors.
  • Ensure legal and financial separation of the assets from the originator.
  • Collect payments from the underlying assets and distribute them to the investors.
• Example: An SPV that holds a pool of mortgages and issues mortgage-backed securities (MBS) to investors.

3. Arranger / Underwriter

• Role: The arranger (also called an underwriter) is typically an investment bank or a financial institution responsible for structuring the securitization transaction and facilitating the sale of the securities to investors.
• Responsibilities:
  • Structure the deal and design the securitization process (deciding on the type of securities, payment terms, and risk tranching).
  • Market the securities to potential investors.
  • Price the securities and help place them with investors.
  • Often acts as the intermediary between the SPV and the investors.
• Example: An investment bank that structures a collateralized debt obligation (CDO) and markets it to institutional investors.

4. Servicer

• Role: The servicer is responsible for managing the underlying assets (such as loans or receivables) throughout the life of the securitization. The servicer ensures that payments are collected from the borrowers and that the proper flow of funds is maintained to the SPV and investors.
• Responsibilities:
  • Collect payments from the borrowers of the underlying assets (e.g., mortgage or loan payments).
  • Maintain records of the payments and handle the administration of the loan pool.
  • Handle any defaults or delinquencies in the underlying loans.
  • Distribute the payments to the SPV, which then passes them to the investors.
• Example: A servicing company that collects mortgage payments from homeowners and forwards them to the SPV holding the mortgage-backed securities.

5. Credit Rating Agencies (CRAs)

• Role: Credit rating agencies assess the creditworthiness of the asset pool and the securities issued by the SPV. The ratings assigned by CRAs help investors assess the risk associated with the securities.
• Responsibilities:
  • Evaluate the quality of the underlying assets (e.g., mortgages or loans) and the risk of default.
  • Assign ratings to the tranches of the securities issued by the SPV (for example, AAA, BBB, etc.).
  • Provide transparency on the risk profile of the securities.
• Example: Rating agencies like Standard & Poor's, Moody's, and Fitch Ratings assign ratings to mortgage-backed securities or asset-backed securities.

6. Investors

• Role: Investors are the parties that purchase the securities issued by the SPV. They can be institutional investors (e.g., pension funds, insurance companies, mutual funds) or individual investors.
• Responsibilities:
  • Purchase the asset-backed securities (ABS) or mortgage-backed securities (MBS).
  • Receive periodic interest or principal payments from the securities, based on the underlying asset's performance.
• Example: An institutional investor (such as a pension fund) purchasing asset-backed securities (ABS) that are backed by auto loans.

7. Trustee

• Role: The trustee acts as a fiduciary on behalf of the investors in the securitization deal. They ensure that the terms of the securitization agreement are upheld and that the interests of the investors are protected.
• Responsibilities:
  • Monitor the SPV and servicer to ensure they comply with the terms of the securitization.
  • Distribute the funds from the underlying assets to the investors according to the agreed terms.
  • Ensure that the servicer performs its duties correctly and that investors' rights are upheld.
• Example: A trustee ensuring that payments from the underlying mortgage pool are correctly distributed to holders of mortgage-backed securities.

8. Legal Advisors

• Role: Legal advisors assist in the structuring of the securitization transaction and ensure compliance with applicable laws and regulations. They also draft the legal documentation related to the securitization.
• Responsibilities:
  • Draft the securitization agreement, purchase agreements, and other relevant documents.
  • Ensure that the structure complies with relevant regulations, such as the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests (SARFAESI) Act (in India) or Dodd-Frank Act (in the U.S.).
  • Advise the originator, SPV, and other parties on legal and regulatory issues.
• Example: A law firm drafting the legal documentation for an ABS transaction.

9. Accountant / Auditor

• Role: Accountants and auditors ensure the accuracy and transparency of financial statements and disclosures for the securitization process.
• Responsibilities:
  • Perform due diligence to ensure proper valuation of the assets and liabilities involved.
  • Ensure that the accounting treatment for the securitization is in compliance with relevant accounting standards.
  • Audit the transaction to ensure that it complies with applicable laws and regulations.
• Example: A firm of auditors reviewing the financial structure and compliance of a securitization deal.

(OR)

Q.3 (C) Elaborate types of Derivative Contract.          (8 marks)

Derivatives are financial instruments whose value is derived from the value of an underlying asset, index, or rate. They are widely used for hedging, speculation, and arbitrage purposes. The primary types of derivative contracts include forward contracts, futures contracts, options contracts, and swaps. Each type has unique features and applications in financial markets.

1. Forward Contracts

• Definition: A forward contract is a private agreement between two parties to buy or sell an asset at a specified future date for a price agreed upon today. These contracts are customizable and are traded over-the-counter (OTC), meaning they are not standardized or traded on exchanges.
• Key Features:
  • Customizable in terms of asset type, amount, and maturity.
  • No collateral is required, though the parties may choose to settle or hedge the contract before maturity.
  • Counterparty Risk: There is a risk that one party may default on the contract, as these are not centrally cleared.
• Use Cases: Hedging foreign exchange risk, interest rate risk, and commodity price fluctuations.
• Example: A company in the U.S. enters into a forward contract to buy 1,000 barrels of oil at $50 per barrel in six months.

2. Futures Contracts

• Definition: A futures contract is a standardized agreement to buy or sell an asset at a predetermined price at a specific future date. Unlike forward contracts, futures are traded on exchanges such as the Chicago Mercantile Exchange (CME) or the National Stock Exchange (NSE).
• Key Features:
  • Standardized Terms: Contracts are standardized in terms of asset type, quantity, and settlement date.
  • Central Clearing: Futures contracts are cleared through a clearinghouse, reducing counterparty risk.
  • Margin Requirements: A margin (initial deposit) is required to enter into a futures contract, and daily settlements occur through mark-to-market.
• Use Cases: Hedging, speculation, and portfolio diversification. Commonly used for commodities, stock indices, and interest rates.
• Example: A trader buys a futures contract to buy 100 ounces of gold at $1,200 per ounce, which expires in three months.

3. Options Contracts

• Definition: An options contract gives the holder the right, but not the obligation, to buy or sell an underlying asset at a specified price (called the strike price) before or at the expiration date. There are two main types of options: call options (right to buy) and put options (right to sell).
• Key Features:
  • Call Option: Gives the holder the right to buy an asset at a specific price within a certain period.
  • Put Option: Gives the holder the right to sell an asset at a specific price within a certain period.
  • Premium: The buyer of the option pays a premium to the seller for the right to exercise the option.
  • No Obligation: Unlike futures or forwards, the option holder is not obligated to exercise the contract.
• Use Cases: Hedging against price movements, speculative purposes, and income generation (through writing options).
• Example: An investor buys a call option on stock XYZ with a strike price of $100, expiring in 3 months, paying a premium of $5 per share.

4. Swaps

• Definition: A swap is a derivative contract in which two parties agree to exchange future cash flows or financial instruments. The most common types of swaps are interest rate swaps, currency swaps, and commodity swaps.
• Key Features:
  • Customization: Swaps are highly customizable in terms of structure and terms, and they are usually traded OTC.
  • Counterparty Risk: Since swaps are not traded on exchanges, there is counterparty risk unless the contract is cleared through a central counterparty.
  • Types of Swaps:
    • Interest Rate Swaps: One party pays a fixed interest rate and receives a floating rate (or vice versa) based on an underlying benchmark.
    • Currency Swaps: Parties exchange cash flows in different currencies, often to hedge foreign exchange risk.
    • Commodity Swaps: A party agrees to exchange cash flows based on the price of a commodity (like oil, gold, or agricultural products).
• Use Cases: Hedging interest rate, currency, and commodity price risk; managing cash flows.
• Example: A company enters into an interest rate swap where it agrees to pay a fixed rate of 5% on a notional amount and receives a floating rate based on LIBOR.

5. Credit Derivatives

• Definition: Credit derivatives are financial instruments used to manage or transfer the risk of credit exposure between parties. The most common credit derivative is the Credit Default Swap (CDS).
• Key Features:
  • Credit Default Swap (CDS): A contract where the buyer of the swap pays periodic premiums to the seller in exchange for protection against default on a debt instrument.
  • Default Risk: CDS are used to hedge or speculate on the credit risk associated with an underlying borrower (corporation, government, etc.).
• Use Cases: Credit risk management, hedging, and speculation on the likelihood of default by a borrower.
• Example: A bondholder buys a CDS to protect themselves from the possibility that the issuer of the bond will default on its payments.

6. Commodity Derivatives

• Definition: Commodity derivatives are financial instruments whose value is derived from the price of a commodity, such as oil, gold, agricultural products, or metals.
• Key Features:
  • Physical Delivery vs. Cash Settlement: Commodity derivatives may settle either by physical delivery of the commodity or through cash settlement based on the market price.
  • Futures and Options: Commodity derivatives are often traded as futures and options contracts on exchanges like the Multi Commodity Exchange (MCX) or the Chicago Mercantile Exchange (CME).
• Use Cases: Hedging against fluctuations in commodity prices, speculation, and portfolio diversification.
• Example: A farmer sells a futures contract on wheat to lock in a price before harvest to avoid price volatility.

7. Weather Derivatives

• Definition: Weather derivatives are financial instruments used to hedge against the financial risk of weather-related events that affect a company's revenue or costs. These derivatives are based on weather-related indices such as temperature, rainfall, or snowfall.
• Key Features:
  • Non-financial Underlying: The underlying asset is weather-related data or indices, not financial instruments or commodities.
  • Customizable: Weather derivatives are often customized based on location and specific weather conditions.
• Use Cases: Used by companies in industries such as agriculture, energy, and tourism to manage risk related to adverse weather conditions.
• Example: A farmer buys a weather derivative to protect against the risk of low rainfall during the growing season.

Q.3.(D) Why Securitization is not popular in India?      (7marks)

While securitization has gained popularity in several global markets, its adoption in India has been comparatively slow. There are several factors that contribute to the limited popularity of securitization in India, despite the potential benefits it offers to financial markets and institutions. Below are the key reasons:

1. Legal and Regulatory Challenges

• Regulatory Framework: The securitization market in India faces challenges due to a relatively underdeveloped legal and regulatory framework. Although the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests (SARFAESI) Act, 2002 laid the groundwork, there are still issues related to enforcement, creditor rights, and the legal process, which hinder the smooth functioning of securitization transactions.
• Complex Documentation: Securitization transactions require a significant amount of legal documentation, which can be complex and time-consuming, creating obstacles for financial institutions and investors.

2. Lack of Investor Awareness

• Limited Understanding of Securitized Products: Many institutional investors, including mutual funds, insurance companies, and pension funds, have limited understanding of securitized products. This lack of familiarity and knowledge about the risks and benefits associated with such products has deterred widespread participation in the market.
• Trust Issues: There is a perception of risk associated with securitized products due to the complexity of these instruments. This has led to a lack of confidence among potential investors, reducing their interest in participating in securitization.

3. Poor Credit Rating Infrastructure

• Weak Credit Rating Agencies: The credit rating agencies in India have faced criticism for not being able to adequately assess and rate the underlying assets in securitization deals, especially for smaller and riskier assets. This has made it difficult for investors to evaluate the risk associated with securitized products accurately.
• High Default Rates: In India, a relatively high number of defaults in the underlying assets (especially in sectors like real estate or retail loans) contribute to the perceived riskiness of securitized products. Poor credit ratings result in lower investor confidence.

4. Lack of Depth in the Secondary Market

• Limited Liquidity: One of the key features of a well-functioning securitization market is a robust secondary market, where investors can buy and sell securitized assets easily. In India, the secondary market for securitized products is underdeveloped, resulting in low liquidity and making it difficult for investors to exit their positions.
• Absence of Market Makers: There is a lack of market-making institutions or a structured platform where securitized products can be traded, which further limits liquidity and the attractiveness of securitization.

5. Absence of Standardized Products

• Customization of Products: Unlike global markets, where standardized securitized products (e.g., mortgage-backed securities) are commonly traded, Indian securitization deals tend to be more customized and specific to the issuer's requirements. This lack of standardization makes it harder for investors to evaluate the products and increases the complexity of the securitization process.
• Regulatory Barriers to Standardization: There is no unified regulatory framework for standardizing the securitized products, which makes it difficult to create a market for these products. Standardization would make it easier for investors to compare products and enhance liquidity.

6. Limited Participation from Banks and Financial Institutions

• Capital Requirements: Indian banks and financial institutions may be hesitant to securitize their assets due to the capital and risk-weighted asset requirements set by regulatory authorities like the Reserve Bank of India (RBI). Securitization may involve higher capital costs in the short term due to the regulatory framework.
• Reluctance to Transfer Assets: Many banks are reluctant to transfer their performing assets to Special Purpose Vehicles (SPVs) due to concerns about losing control over those assets and a preference for holding onto them on their balance sheets.

7. Poor Asset Quality and Defaults

• High Non-Performing Assets (NPAs): The presence of high levels of non-performing assets (NPAs) in the financial sector makes it difficult for banks and other lenders to bundle loans into tradable securities. High default rates increase the risk associated with securitized assets, leading to lower investor demand and trust in these products.
• Lack of Robust Loan Underwriting: The absence of stringent underwriting standards, particularly for consumer and retail loans, leads to a higher risk of defaults on securitized loans, which discourages investors from entering the market.

8. Taxation Issues

• Complex Taxation Structure: The taxation of securitization transactions in India is considered complex and inconsistent. There are issues related to the tax treatment of income from securitized assets, both at the level of the originator and the investors, which can reduce the attractiveness of securitization as a financial tool.
• Tax Treatment of SPVs: The tax treatment of Special Purpose Vehicles (SPVs), which are set up to hold the securitized assets, is not always clear, adding to the complexity and uncertainty around the securitization process.

9. Slow Development of Infrastructure

• Lack of Infrastructure for Securitization: While the National Stock Exchange (NSE) and other exchanges have begun to list securitized products, the supporting infrastructure, such as platforms for dealing in these products, legal and advisory services, and asset management entities, is still in its early stages. The absence of these facilities slows down the growth of the market.

10. Conservative Nature of Indian Investors

• Preference for Conventional Investments: Indian investors, especially retail investors, are traditionally more conservative and prefer safer investment options such as government bonds or fixed deposits. The complex and relatively riskier nature of securitized products makes them less appealing to a large section of the investor base.

Q.4 (A) State the difference between Financial and Operating Lease.    (8 marks)

	Financial Lease	Operating Lease
1. Ownership of the Asset	In a financial lease, the lessee effectively assumes the risks and rewards of ownership, even though the legal ownership remains with the lessor. At the end of the lease term, the lessee often has the option to purchase the asset for a nominal amount or its residual value.	The lessor retains ownership of the asset in an operating lease. The lessee has the right to use the asset for a specified period but does not bear the risks or rewards associated with ownership.
2. Duration of the Lease	Typically, the duration of a financial lease covers most, if not all, of the useful life of the asset. In many cases, the lease term is longer and can even last for the entire economic life of the asset.	The lease term is usually shorter than the asset's useful life. Once the lease term ends, the asset is either returned to the lessor or renewed for another period.
3. Risk and Maintenance	The lessee assumes most of the risks and responsibilities associated with the asset, including maintenance, insurance, and repair. These risks resemble those of ownership.	The lessor retains the risks and maintenance responsibilities, including costs associated with the asset's upkeep, repairs, and insurance.
4. Accounting Treatment	Under financial accounting standards, the asset is recorded on the lessee’s balance sheet as both an asset and a liability (representing the future lease payments). The lease is treated as a purchase of the asset with long-term financing.	The asset does not appear on the lessee’s balance sheet. Lease payments are treated as operating expenses, and the lease is treated as a rental agreement. Only the lease expenses are shown on the income statement.
5. Lease Payments	Lease payments generally cover the full cost of the asset, plus interest. These payments are structured to finance the purchase of the asset over time, meaning that the lessee is paying off the cost of the asset (including interest).	Lease payments are typically lower than those in a financial lease because they only cover the cost of using the asset during the lease term, not its entire value. The payments are treated as rent.
6. Transfer of Ownership	At the end of the lease term, the lessee often has the option to purchase the asset at a nominal price or its residual value. In many cases, ownership may automatically transfer to the lessee once all payments are made.	The lessee does not have an option to purchase the asset at the end of the lease term, and the asset is usually returned to the lessor.
7. Tax Treatment	In most jurisdictions, the lessee can claim depreciation on the asset as well as interest on lease payments as tax-deductible expenses.	The lessee can generally claim the lease payments as operating expenses, but depreciation is claimed by the lessor (since they retain ownership).
8. Flexibility	The financial lease is less flexible as it often spans a long period, and the lessee is committed to the terms for the lease duration. It is typically suited for assets that will be used long-term.	Operating leases are more flexible, offering shorter lease terms. They are ideal for assets that may become obsolete quickly or are needed for a short-term project or use.
9. Purpose and Usage	Typically used for long-term investments in equipment, machinery, or vehicles that the lessee intends to use for most or all of their useful life.	Commonly used for assets that have a shorter useful life or are needed for temporary or flexible use, such as office space, computers, or vehicles used for a few years.

Q.4 (B) What are the reasons for high demand in Indian Housing Finance Market?        (7 marks)

The Indian housing finance market has experienced significant growth in recent years, driven by various factors that contribute to an increasing demand for housing loans and financial services related to housing. Below are the key reasons for this high demand:

1. Rapid Urbanization

• Migration to Urban Areas: As more people move from rural to urban areas in search of better job opportunities and living standards, the demand for residential properties has risen dramatically. Urbanization has created a growing need for housing, thereby fueling demand for housing finance.
• Increased Housing Needs: The expansion of cities and the rise of new towns and metro areas have increased the demand for affordable housing, with people seeking loans to purchase homes in these developing regions.

2. Government Initiatives and Schemes

• Pradhan Mantri Awas Yojana (PMAY): The Indian government’s initiative to provide affordable housing to all by 2022 has boosted demand for housing finance. Under PMAY, homebuyers can access subsidies on home loan interest rates, making housing more affordable for low- and middle-income groups.
• Interest Subsidies: Various government schemes offer interest subsidies on home loans for economically weaker sections and middle-income groups, making housing loans more attractive and accessible.
• Affordable Housing Push: Government policy and incentives, like the tax benefits under Section 80C and Section 24 of the Income Tax Act, also encourage homeownership, contributing to increased demand for housing finance.

3. Low-Interest Rates

• Attractive Mortgage Rates: The Reserve Bank of India (RBI) has kept interest rates at historically low levels in recent years to boost economic activity. This has made housing loans more affordable for individuals, thereby driving up demand for home loans.
• Subsidized Home Loan Schemes: Various financial institutions and housing finance companies (HFCs) offer home loans at competitive rates, sometimes subsidized under government schemes, making it easier for homebuyers to afford properties.

4. Growing Middle-Class Population

• Increase in Disposable Income: India’s growing middle class has higher disposable incomes and is more willing to invest in homeownership. With rising salaries and a growing number of dual-income households, more people are financially equipped to take on housing loans.
• Social Aspirations: The aspiration to own a house is becoming increasingly prevalent among the Indian middle class, leading to a surge in demand for home loans.

5. Rising Affordability of Homes

• Lower Property Prices: In many areas, especially tier 2 and tier 3 cities, the cost of land and construction has remained relatively affordable, allowing more people to purchase homes.
• Affordable Housing Projects: Many developers are focusing on creating affordable housing units targeted at first-time homebuyers. These projects are often supported by government initiatives and attract more buyers, further increasing demand for home finance.

6. Increase in Housing Supply

• Private Sector Participation: Developers in the private sector are increasingly focusing on residential projects across various price segments, leading to a larger supply of homes. This increased supply of housing drives up demand for home financing.
• Real Estate Development: The real estate sector has grown rapidly, and numerous projects across both metropolitan cities and smaller towns have attracted demand for home loans to fund property purchases.

7. Financial Inclusion and Easier Access to Loans

• Simplified Loan Procedures: With advances in technology, banks and housing finance companies have streamlined the process of applying for housing loans. Digital platforms, easier documentation, and quicker processing have made housing finance more accessible to a larger population.
• Credit Score Awareness: Increased financial literacy has led to more individuals being aware of their creditworthiness, enabling them to obtain loans at better terms. The rise of credit scores and reporting has also expanded access to financing for a larger section of society.
• Expanding Presence of Housing Finance Companies (HFCs): The proliferation of HFCs has made it easier for individuals to access home loans in various parts of the country, even in semi-urban and rural areas.

8. Tax Incentives

• Tax Benefits on Home Loans: The Indian tax system offers attractive tax benefits on home loan repayments, making homeownership more affordable. Deductions under Section 80C (for principal repayment) and Section 24(b) (for interest payment) encourage individuals to opt for home loans.
• Impact of GST: The implementation of GST has streamlined tax structures and helped reduce the overall cost of homeownership, particularly in the construction industry, thus making homes more affordable for buyers.

9. Increasing Number of Nuclear Families

• Shift in Family Structures: As family structures in India shift towards nuclear families, there is a growing need for individual homes. Younger generations are increasingly preferring to live independently, which drives the demand for residential properties and home loans.

10. Strong Investment Potential

• Real Estate as an Investment Option: Real estate is considered a safe and attractive investment avenue in India. This perception of property as a good long-term investment encourages people to purchase homes, often with the help of financing options such as home loans.
• Wealth Creation: Homeownership is viewed as a way to build wealth, with property values appreciating over time. This has led to increased demand for housing finance, especially for those looking to buy homes as an investment.

11. Rising Need for Commercial Real Estate

• Growth in Commercial and Residential Segments: Demand for residential properties is closely tied to the growth of commercial real estate. With businesses expanding and the creation of more job opportunities, there is an increased demand for housing in proximity to commercial hubs.
• Demand from Employers and Employees: Companies offering employee housing loans or incentives to purchase homes near work locations further increase the demand for housing finance.

(OR)

Q.4 (C) Write down the benefits of Leasing service.                (7 Marks)

Leasing has become an important financial tool for businesses and individuals alike, offering a range of advantages compared to traditional methods of purchasing assets. Below are the key benefits of leasing services:

1. Capital Conservation

• Preserves Cash Flow: Leasing allows businesses to acquire assets without making a large upfront investment. Instead of paying the full purchase price, businesses make periodic lease payments, conserving working capital for other operational needs.
• Avoids High Initial Capital Outlay: Leasing reduces the financial burden of having to pay the entire purchase price upfront, which is particularly useful for businesses with limited cash reserves or those wanting to preserve liquidity.

2. Flexibility

• Variety of Lease Terms: Leasing provides flexibility in terms of duration, which can be customized according to the asset’s expected useful life and the business’s needs.
• Options at Lease End: Depending on the lease agreement, businesses may have options to purchase the asset at the end of the lease term, renew the lease, or return the asset.

3. Tax Benefits

• Tax Deductions on Lease Payments: In many cases, lease payments can be deducted as business expenses, reducing taxable income and ultimately lowering the tax burden.
• Off-Balance-Sheet Financing: For operating leases, the leased asset does not appear on the company's balance sheet, helping businesses to maintain better financial ratios, which may be advantageous for securing financing.

4. Access to Latest Technology

• Frequent Upgrades: Leasing enables businesses to access the latest technology or equipment without committing to long-term ownership. When the lease term ends, they can upgrade to newer models, keeping their operations up to date with technological advancements.
• Avoiding Obsolescence: By leasing rather than purchasing, businesses avoid the risks associated with technological obsolescence. They don’t need to worry about the depreciation or disposal of outdated equipment.

5. No Maintenance Worries

• Maintenance and Repair Services: In many lease agreements, the lessor takes responsibility for maintenance and repairs, ensuring the business does not bear the additional costs or downtime associated with keeping the equipment in good working condition.

6. Improved Cash Flow Management

• Fixed Payment Schedule: Lease payments are typically predictable and structured, helping businesses manage their cash flow more effectively by avoiding large, lump-sum payments.
• No Large Down Payment: Unlike purchasing assets, leasing usually requires little or no down payment, which can be a significant advantage when cash flow is tight.

7. Risk Mitigation

• Residual Value Risk: When leasing, businesses are not responsible for the residual value of the asset at the end of the lease term, unlike when they own the asset outright. This protects businesses from the risk of asset depreciation or market conditions that reduce the asset's resale value.
• No Depreciation Concerns: The lessee doesn’t have to worry about the depreciation of the asset’s value over time. The lessor, as the owner, bears the depreciation risk.

8. Easier Access to Financing

• Less Stringent Credit Requirements: Leasing typically has less stringent credit requirements compared to traditional loans. Since the leased asset acts as collateral, the lessor may be more willing to offer a lease agreement even to companies with limited credit history or cash flow.
• Improved Financial Ratios: As lease payments are often off the balance sheet, businesses may improve their debt-to-equity ratios, which can make it easier to access additional financing.

9. Preserves Borrowing Capacity

• Non-Dilutive Financing: Leasing does not require the company to issue equity or take on additional debt, which means the company's borrowing capacity remains intact for other purposes, such as expansion or working capital.

10. Simplified Budgeting

• Predictable Expenses: Lease payments are fixed and predictable, which helps businesses to plan and budget more effectively. The lessee knows the exact amount they need to pay each period and can avoid the unpredictability associated with unexpected repair costs or fluctuating interest rates.

11. Financial and Strategic Advantages

• Strategic Use of Assets: Leasing can help businesses use assets that are strategically important for their operations without the long-term commitment of ownership. It allows companies to focus their financial resources on growing their business rather than tying them up in capital-intensive assets.
• Alternative to Purchase: Leasing offers an attractive alternative to purchasing for businesses that need the equipment for a specific period but do not want to commit to long-term ownership.

Q.4.(D) Mr. Abhyudaya buys a machine on hire purchase basis at the price of Rs. 60 lakhs at the rate of 15% p.a. interest rate. Term of Hire purchase contract is 6 years. Find out instalment payments per annum if:
a) Principal is divided and payable equally over the period of 6 years.
b) Amount of instalment is payable equally over the period of 6 years.
Prepare a table showing principal and interest payments and the total payable over the period of 6 years.                        (8 marks)

To solve this problem, we need to calculate the annual installment payments for Mr. Abhyudaya under two different conditions:

Given Data:

• Machine Price (Principal) = Rs. 60 lakhs
• Interest Rate = 15% per annum
• Term of Hire Purchase = 6 years

Part (a): Principal is divided and payable equally over the period of 6 years

In this case, the principal is split equally over the 6 years, and the interest will be calculated on the outstanding balance each year.

Step 1: Calculate the annual principal payment

Since the principal is divided equally over 6 years:

$$\text{Annual Principal Payment} = \frac{60,00,000}{6} = 10,00,000 \text{ Rs. per year}$$

Step 2: Calculate the interest payments

Interest is calculated on the outstanding principal each year. The outstanding principal decreases as the principal payments are made.

Step 3: Calculate the total installment for each year

The total installment for each year will be the sum of the principal payment and the interest payment.

Part (b): Amount of installment is payable equally over the period of 6 years

In this case, the total amount to be paid, including both principal and interest, is calculated first, and then the same installment amount is paid annually over the 6 years.

Step 1: Calculate the total amount to be paid

We need to calculate the total amount that Mr. Abhyudaya will pay over 6 years. This is essentially a loan amortization problem, where equal payments are made to cover both principal and interest.

We will use the annuity formula to calculate the equal installment payment:

Where:

• $P$ = Principal (Rs. 60,00,000)
• $r$ = Interest rate per period (15% = 0.15)
• $n$ = Number of periods (6 years)
• $\mathrm{A\; = Annual\; installment\; payment<span\; class="katex"><br></span>\; =\; Annual\; installment\; payment}$

Let's first calculate the annual installment.

Part (a): Principal Divided and Payable Equally Over the 6 Years

In this case, the principal is divided equally over the 6 years, with Rs. 10,00,000 payable each year as principal. The interest is calculated on the outstanding principal balance for each year.

• Annual Principal Payment: Rs. 10,00,000
• Interest Payments (calculated on the remaining principal for each year)
• Total Payments (sum of principal and interest each year)

Year	Principal Payment (Rs.)	Interest Payment (Rs.)	Total Payment (Rs.)	Remaining Principal (Rs.)
1	10,00,000	9,00,000	19,00,000	50,00,000
2	10,00,000	7,50,000	17,50,000	40,00,000
3	10,00,000	6,00,000	16,00,000	30,00,000
4	10,00,000	4,50,000	14,50,000	20,00,000
5	10,00,000	3,00,000	13,00,000	10,00,000
6	10,00,000	1,50,000	11,50,000	0

Part (b): Equal Installment Payments Over 6 Years

In this case, the total amount (principal + interest) is divided into equal annual installments. The annual installment is calculated using the annuity formula.

• Annual Installment: Rs. 15,85,421.44 (approximately)
• Principal and Interest Breakdown (calculated for each year)

Year	Principal Payment (Rs.)	Interest Payment (Rs.)	Total Payment (Rs.)	Remaining Principal (Rs.)
1	6,85,421.44	9,00,000	15,85,421.44	53,14,578.56
2	7,88,234.66	7,97,186.78	15,85,421.44	45,26,343.90
3	9,06,469.85	6,78,951.59	15,85,421.44	36,19,874.05
4	10,42,440.33	5,42,981.11	15,85,421.44	25,77,433.74
5	11,99,880.64	3,86,615.06	15,85,421.44	13,77,553.10
6	13,78,627.34	2,06,794.10	15,85,421.44	0

Part (a): In this case, the principal is divided equally over the 6 years, and the interest is calculated on the outstanding balance. The total annual payments (including both principal and interest) decrease each year as the principal reduces.

Part (b): In this case, the total amount, including both the principal and interest, is spread equally over 6 years. The annual payments remain constant, but the breakdown between principal and interest changes each year. The principal repayment increases each year, while the interest portion decreases.

Q.5 (A) Explain in detail frauds and misuses of-Plastic Money.        (8 marks)

Plastic money refers to payment cards such as credit cards, debit cards, and prepaid cards that are used for transactions in place of cash. While these cards offer convenience, security, and ease of use, they also pose significant risks for fraud and misuse. The misuse and fraudulent activities associated with plastic money can be financial and emotional burdens for individuals and businesses alike. Below are the common types of frauds and misuses related to plastic money:

1. Credit Card Fraud

Description: This refers to the unauthorized use of a credit card to make purchases or withdraw money. Fraudsters obtain credit card information through various methods and use it for illegal transactions.

Types of Credit Card Fraud:

• Card Not Present (CNP) Fraud: Fraudsters use stolen card details to make online or phone purchases where the physical card is not required.
• Lost or Stolen Card Fraud: Criminals use a lost or stolen credit card to make unauthorized purchases.
• Card Skimming: Fraudsters install a device (skimmer) on ATMs or point-of-sale (POS) machines to capture the magnetic stripe data from the card.
• Phishing Scams: Fraudsters trick cardholders into providing their card details by impersonating legitimate institutions via emails, phone calls, or fake websites.

Consequences: Unauthorized purchases can lead to financial losses for the cardholder. Though most credit card companies offer fraud protection, victims often face a lengthy resolution process.

2. Debit Card Fraud

Description: Debit card fraud occurs when unauthorized individuals use someone's debit card to withdraw funds or make purchases from their bank account.

Types of Debit Card Fraud:

• ATM Skimming: Fraudsters use hidden devices on ATMs to capture PINs and card details, enabling them to withdraw money from the victim’s bank account.
• Fake Websites: Fraudsters create counterfeit e-commerce websites that look similar to legitimate ones to steal debit card information.
• SIM Swapping: Fraudsters trick telecom service providers into switching the victim's phone number to a new SIM card, enabling them to access banking services that rely on SMS verification.

Consequences: Debit card fraud can lead to the immediate loss of funds from the victim’s account. While banks may refund the stolen amount, the process can be time-consuming and stressful for the victim.

3. Prepaid Card Fraud

Description: Prepaid cards are loaded with a specific amount of money, and fraudsters misuse them in various ways.

Types of Prepaid Card Fraud:

• Fake Prepaid Card Sales: Scammers sell fake prepaid cards or ask consumers to purchase cards and send the details to them, which are later used fraudulently.
• Identity Theft: Fraudsters may use a fake or stolen identity to obtain a prepaid card, using it for illicit activities.
• Overdraft Abuse: Some prepaid cards allow users to withdraw more than the card's balance, leading to overdraft charges or credit exposure.

Consequences: The user may lose the money loaded onto the prepaid card. The fraudster may be difficult to trace, especially if the card was purchased anonymously.

4. Identity Theft and Card Misuse

Description: Identity theft occurs when a person’s personal information (name, address, Social Security number, etc.) is stolen and used to open credit card accounts or perform financial transactions.

How It Happens:

• Phishing & Social Engineering: Fraudsters gather personal details through deceptive practices (e.g., fake surveys, phone calls, etc.).
• Data Breaches: Large-scale data breaches at companies or financial institutions expose sensitive customer data, which can be used for fraudulent activities.
• Social Media Exploitation: Fraudsters may gather personal information from social media profiles to gain access to financial accounts or request fraudulent loans.

Consequences: Victims may face unauthorized use of their cards, damaged credit scores, and a lengthy process to restore their identity and finances.

5. Card Cloning or Duplication

Description: Card cloning occurs when fraudsters create an exact replica (clone) of a victim's plastic money card using the card's magnetic stripe or chip data, typically obtained through skimming devices.

How It Happens:

• ATM Skimming Devices: Fraudsters install devices on ATMs or POS terminals that collect card information and PINs.
• Hacking: Hackers can breach databases containing card details, which are then sold or used to clone cards.

Consequences: The cloned card can be used for unauthorized purchases, leading to financial losses. The victim may not realize their card is cloned until it’s too late.

6. Online Shopping Fraud

Description: This involves fraudsters using stolen plastic card information to make online purchases on fake or unauthorized websites.

How It Happens:

• Fake E-commerce Websites: Fraudsters create websites that mimic legitimate online stores to collect credit card details during a "purchase" process.
• Man-in-the-Middle Attacks: Cybercriminals intercept payment data transmitted over unsecured networks, stealing card details.
• Unsecured Payment Pages: Shopping on websites with unsecured or outdated payment gateways exposes card data to cybercriminals.

Consequences: Fraudulent transactions may lead to loss of money, delayed delivery of goods, or no delivery at all.

7. Carding

Description: Carding is the practice of testing stolen credit card information in small, low-cost online transactions to see if the card is still active.

How It Happens:

• Fraudsters use stolen card details on e-commerce sites to make small purchases, often for digital goods or services.
• The fraudster may use automated tools to quickly test large volumes of stolen cards.

Consequences: The cardholder may face minor unauthorized transactions, but it is a precursor to larger-scale fraud.

8. Friendly Fraud (Chargeback Fraud)

Description: This occurs when the cardholder makes a purchase and later disputes the transaction with the bank, claiming that the charge was unauthorized, even though it was legitimate.

How It Happens:

• The consumer buys goods or services and later requests a chargeback by falsely claiming that the transaction was fraudulent or that they didn’t authorize it.
• Common in online purchases, especially with digital goods and services.

Consequences: The merchant suffers a financial loss, and the fraudster receives a refund while keeping the goods or services.

Prevention and Mitigation Measures

1. Secure Payment Gateways: Use encrypted and secure payment systems, especially for online transactions.
2. Monitoring and Alerts: Cardholders should regularly monitor their statements and set up fraud alerts to detect unauthorized transactions.
3. Use of EMV Chips: EMV (Europay, MasterCard, and Visa) chip technology provides enhanced security compared to magnetic stripe cards.
4. Two-Factor Authentication (2FA): Using additional layers of authentication (e.g., OTPs or biometrics) reduces the risk of fraudulent access to accounts.
5. Regular Cardholder Education: Consumers should be educated about fraud risks, phishing scams, and secure card usage practices.
6. Report Fraud Immediately: If a fraud is detected, immediate reporting to the card issuer can help prevent further misuse and minimize losses.

Q.5 (B) What are the types of Consumer Finance?        (7 marks)

Consumer finance refers to the various financial products and services provided to individuals for personal use, such as buying goods, paying for services, or managing personal expenses. These financial products help consumers to meet their financial needs through borrowing or credit. Below are the main types of consumer finance:

1. Personal Loans

• Description: Unsecured loans provided to individuals for personal use, such as consolidating debt, medical expenses, education, or home renovation.
• Features: Generally offered without collateral, with fixed or variable interest rates and repayment terms.

2. Credit Cards

• Description: A revolving line of credit issued by financial institutions that allows individuals to borrow money up to a certain limit to make purchases or pay for services.
• Features: Provides short-term credit with an option to repay in full or in installments. Interest is charged on the outstanding balance.

3. Auto Loans

• Description: Loans specifically designed for purchasing vehicles. The vehicle itself usually acts as collateral for the loan.
• Features: Offered by banks, financial institutions, or car dealerships, with fixed or variable interest rates and set repayment periods.

4. Home Loans / Mortgages

• Description: Loans extended to individuals for purchasing or refinancing real estate. The property is used as collateral for the loan.
• Features: Typically long-term loans (15 to 30 years) with lower interest rates compared to personal loans due to the secured nature.

5. Student Loans

• Description: Loans provided to students to help pay for their education. These can be federal, state, or private loans.
• Features: Typically have lower interest rates and may offer deferred repayment until after graduation.

6. Payday Loans

• Description: Short-term loans designed to cover immediate expenses until the borrower’s next paycheck.
• Features: High interest rates, and the loan is expected to be repaid in full on the borrower’s next payday.

7. Buy Now, Pay Later (BNPL)

• Description: A type of short-term financing that allows consumers to purchase goods or services and pay for them in installments over time.
• Features: Often interest-free if paid within a specified period, but interest or fees may apply if payments are delayed.

8. Retail Financing / Store Credit

• Description: Financing provided by retailers, typically for the purchase of goods or services at their store.
• Features: May include store-branded credit cards, financing plans, or promotional credit offers, with specific terms such as low or zero-interest for a limited period.

9. Peer-to-Peer (P2P) Lending

• Description: A form of financing where individuals borrow and lend money to each other, usually through online platforms.
• Features: Often lower interest rates compared to traditional loans, but the borrower’s creditworthiness is assessed by the platform.

10. Secured Loans

• Description: Loans where the borrower pledges an asset (e.g., a car or home) as collateral to secure the loan.
• Features: Offers lower interest rates compared to unsecured loans due to the collateral risk for the lender.

(OR)

Q.5 (C) Write short notes on any three            (15 marks)

i. Sub Brokers

A sub-broker is an individual or firm that acts as an intermediary between investors and a stockbroker, assisting clients in buying or selling securities. Sub-brokers are appointed by registered stockbrokers and operate under their guidance. They do not have direct membership with a stock exchange but work under the authority of a registered broker.

Features:

1. Intermediary Role: Sub-brokers help investors access financial markets by linking them with brokers who have membership in stock exchanges.
2. No Exchange Membership: Unlike stockbrokers, sub-brokers do not have direct access to stock exchanges. They work through a main stockbroker who holds the membership.
3. Revenue Sharing: Sub-brokers earn a commission or fee based on the trades or services provided to clients, which is shared with the main stockbroker.
4. Regulation: Sub-brokers must be registered with the Securities and Exchange Board of India (SEBI) and adhere to regulations outlined in the SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992.

Roles and Responsibilities:

• Client Acquisition: Sub-brokers help attract new investors and onboard them to the stock market through the parent broker.
• Advisory Services: They provide investment advice, research, and guidance to clients (under the broker's supervision).
• Trade Execution: Sub-brokers help facilitate the execution of buy and sell orders placed by clients.

Advantages:

• Access to Market: Enables smaller investors to participate in financial markets through intermediaries.
• Business Opportunity: Offers an opportunity for individuals or firms to enter the financial services industry without having direct membership with stock exchanges.

ii. Special Purpose Vehicle

A Special Purpose Vehicle (SPV) is a separate legal entity created by a parent company to achieve a specific business purpose or isolate financial risk. It is established under corporate laws and operates as an independent company, distinct from its parent entity.

Features:

1. Separate Legal Entity: SPVs have their own legal identity, financials, and operations, distinct from the parent organization.
2. Limited Purpose: Typically formed for a specific project, transaction, or to hold particular assets.
3. Risk Isolation: Designed to protect the parent company from risks associated with the SPV’s activities.

Uses of SPVs:

1. Risk Management: To shield the parent company’s assets from risks like bankruptcy or litigation associated with the SPV.
2. Securitization: Used to pool assets like loans or mortgages, convert them into securities, and sell to investors.
3. Project Financing: Commonly used in infrastructure projects to finance and manage large-scale investments.
4. Tax Benefits: Provides tax advantages by operating in jurisdictions with favorable tax laws.
5. Regulatory Compliance: Ensures adherence to specific legal or financial requirements.

Advantages:

• Reduces financial risk for the parent company.
• Facilitates the raising of capital for specific projects.
• Enhances operational flexibility and legal compliance.
• Offers potential tax savings.

Challenges:

• Can be complex to set up and manage.
• Lack of transparency may raise concerns about misuse, as seen in financial scandals like Enron.

iii. Underwriting

Underwriting is a financial service wherein an underwriter assesses and assumes the risk of a financial transaction, such as issuing securities, insurance policies, or loans. Underwriters play a critical role in ensuring that risks are adequately evaluated and mitigated, providing confidence to stakeholders.

Types of Underwriting:

1. Securities Underwriting:

   • Involves assessing the risk of issuing new shares, bonds, or other securities.
   • Underwriters, usually investment banks, buy the securities from the issuing company and sell them to investors, often guaranteeing a minimum subscription.

2. Insurance Underwriting:

   • Determines the risk of insuring individuals or assets and decides on policy terms, conditions, and premiums.
   • This ensures profitability for insurance companies while covering potential losses.

3. Loan Underwriting:

   • Evaluates the creditworthiness of borrowers to approve loans.
   • Banks assess income, credit score, and repayment ability.

Process of Underwriting:

1. Risk Assessment: Analysis of potential risks associated with the transaction or policy.
2. Pricing: Setting terms, premiums, or interest rates to account for the assessed risk.
3. Commitment: Underwriters may guarantee to cover unsold securities or losses.
4. Distribution: Securities are sold to the public, or policies/loans are issued.

Importance of Underwriting:

1. Risk Mitigation: Helps companies or insurers manage potential losses by analyzing and pricing risks accurately.
2. Market Confidence: Assures investors and stakeholders about the soundness of securities or policies.
3. Capital Mobilization: Facilitates raising funds for companies by guaranteeing the success of public issues.

iv. Smart Cards

A smart card is a portable electronic device embedded with an integrated microchip that can store, process, and securely transmit data. These cards are widely used in applications requiring authentication, secure payment, or data storage.

Features:

1. Embedded Chip: Contains a microprocessor or memory chip that enables the card to store and process data.
2. Portability: Compact and easy to carry, similar in size to a credit or debit card.
3. Security: Employs encryption to safeguard sensitive information, making it difficult to tamper with or replicate.
4. Multifunctionality: Supports multiple applications, such as banking, healthcare, transportation, and access control.

Types of Smart Cards:

1. Contact Cards: Require physical contact with a reader to exchange data.
2. Contactless Cards: Use radio frequency (RFID) technology to communicate with the reader without physical contact.
3. Hybrid Cards: Combine both contact and contactless technologies.

Applications:

1. Banking and Payments: Used in credit, debit, and prepaid cards for secure financial transactions.
2. Identity Verification: Employed in national ID cards, passports, and employee access cards.
3. Healthcare: Stores patient information and medical history for quick access.
4. Transportation: Enables seamless payment for public transport systems.
5. Telecommunications: SIM cards in mobile phones are a type of smart card.

Benefits:

• Enhanced data security and reduced fraud.
• Convenient and fast for transactions.
• Multifunctional capabilities in a single card.
• Long lifespan and reliability compared to magnetic stripe cards.

v. Process of Credit Rating

The process of credit rating involves evaluating the creditworthiness of a borrower, such as a company, government entity, or financial instrument, to determine its ability to repay debt obligations. Credit rating agencies like CRISIL, ICRA, and Moody's follow a structured process to assign a credit rating. Below are the key steps:

1. Request for Rating

• The entity seeking a credit rating (issuer) approaches a credit rating agency (CRA) and submits an application.
• The CRA provides a contract outlining the scope, fees, and confidentiality terms.

2. Data Collection

• The issuer submits financial and non-financial information, including:
  • Audited financial statements.
  • Business plans and projections.
  • Industry and market details.
  • Debt repayment history and future obligations.

3. Initial Analysis

• A team of analysts reviews the data to understand the financial health, operational performance, and market position of the entity.
• They also assess external factors like economic conditions, industry trends, and regulatory environment.

4. Management Interaction

• Analysts meet the issuer’s management to clarify doubts, understand the company’s strategy, and assess management quality.
• These interactions help gauge qualitative aspects like governance and decision-making.

5. Rating Committee Review

• The analysis is presented to an independent rating committee.
• The committee evaluates the findings and assigns a preliminary credit rating, ensuring the decision is unbiased and independent.

6. Communicating the Rating

• The assigned rating is communicated to the issuer for acceptance.
• If the issuer disagrees, they can appeal and provide additional data or clarification for reconsideration.

7. Publication of Rating

• Once accepted, the rating is published and made available to stakeholders, including investors and lenders.
• It includes a detailed rationale explaining the factors behind the rating.

8. Monitoring and Surveillance

• The rating is continuously monitored to reflect any significant changes in the issuer’s financial position or market environment.
• Ratings are periodically reviewed and may be upgraded, downgraded, or withdrawn based on new developments.

Elective: Operation Research (CBCGS)
Year	Month	Q.P.	Link
IMP Q.			Solution
Obj. Q			Solution
2019	April	Download	Solution
2019	November	Download	Solution
2022	November	Download	Solution
2023	April	Download	Solution
2023	November	Download	Solution
2024	April	Download	Solution
2024	November		Solution
2025	April

Elective: International Finance (CBCGS)
Year	Month	Q.P.	Link
IMP Q.			Solution
Obj. Q			Solution
2019	April	Download	Solution
2019	November	Download	Solution
2022	November	Download	Solution
2023	April	Download	Solution
2024	April	Download	Solution
2024	November	Download	Solution
2025	April

Elective: Brand Management (CBCGS)
Year	Month	Q.P.	Link
IMP Q.			Solution
Obj. Q			Solution
2019	April	Download	Solution
2019	November	Download	Solution
2023	April	Download	Solution
2024	April	Download	Solution
2024	November	Download	Solution
2025	April		Solution

Elective: HRM in Global Perspective (CBCGS)
Year	Month	Q.P.	Link
IMP Q.			Solution
Obj. Q			Solution
2019	April	Download	Solution
2019	November	Download	Solution
2023	April	Download	Solution
2024	April	Download	Solution
2024	November	Download	Solution
2025	April

Elective: Innovation Financial Service (CBCGS)
Year	Month	Q.P.	Link
IMP Q.			Solution
Obj. Q			Solution
2019	April	Download	Solution
2019	November	Download	Solution
2023	April	Download	Solution
2024	April	Download	Solution
2024	November	Download	Solution
2025	April		Solution

Elective: Retail Management (CBCGS)
Year	Month	Q.P.	Link
IMP Q.			Solution
Obj. Q			Solution
2019	April	Download	Solution
2019	November	Download	Solution
2023	April	Download	Solution
2024	April	Download	Solution
2024	November	Download
2025	April

Elective: Organizational Development (CBCGS)
Year	Month	Q.P.	Link
IMP Q.			Solution
Obj. Q			Solution
2019	April	Download	Solution
2019	November	Download	Solution
2023	April	Download	Solution
2024	April	Download	Solution
2024	November	Download	Solution
2025	April

Elective: Project Management (CBCGS)
Year	Month	Q.P.	Link
IMP Q.			Solution
Obj. Q			Solution
2019	April	Download	Solution
2019	November	Download	Solution
2023	April	Download	Solution
2024	April	Download	Solution
2024	November	Download	Solution
2025	April

Elective: International Marketing (CBCGS)
Year	Month	Q.P.	Link
IMP Q.			Solution
Obj. Q			Solution
2019	April	Download	Solution
2019	November	Download	Solution
2023	April	Download	Solution
2024	April	Download	Solution
2024	November	Download
2025	April

Elective: HRM in Service Sector Management (CBCGS)
Year	Month	Q.P.	Link
IMP Q.			Solution
Obj. Q			Solution
2019	April	Download	Solution
2019	November	Download	Solution
2023	April	Download	Solution
2024	April	Download	Solution
2024	November	Download
2025	April

Elective: Strategic Financial Management (CBCGS)
Year	Month	Q.P.	Link
IMP Q.			Solution
Obj. Q			Solution
2019	April	Download	Solution
2019	November	Download	Solution
2023	April	Download	Solution
2024	April	Download	Solution
2024	November	Download	Solution
2025	April

Elective: Media Planning (CBCGS)
Year	Month	Q.P.	Link
IMP Q.			Solution
Obj. Q			Solution
2019	April	Download	Solution
2019	November	Download	Solution
2023	April	Download	Solution
2024	April	Download	Solution
2024	November	Download	Solution
2025	April

Elective: Workforce Diversity (CBCGS)
Year	Month	Q.P.	Link
IMP Q.			Solution
Obj. Q			Solution
2023	April	Download	Solution
2024	April	Download	Solution
2024	November	Download
2025	April

Elective: Financing Rural Development (CBCGS)
Year	Month	Q.P.	Link
IMP Q.			Solution
Obj. Q			Solution
2023	April	Download	Solution
2024	April	Download	Solution
2024	November	Download
2025	April

Elective: Sport Marketing (CBCGS)
Year	Month	Q.P.	Link
IMP Q.			Solution
Obj. Q			Solution
2023	April	Download	Solution
2024	April	Download	Solution
2024	November	Download
2025	April

Elective: HRM Accounting & Audit (CBCGS)
Year	Month	Q.P.	Link
IMP Q.			Solution
Obj. Q			Solution
2019	April	Download	Solution
2019	November	Download	Solution
2023	April	Download	Solution
2024	April	Download	Solution
2024	November	Download	Solution
2025	April

Elective: Indirect Tax (CBCGS)
Year	Month	Q.P.	Link
IMP Q.			Solution
Obj. Q			Solution
2019	April	Download	Solution
2019	November	Download	Solution
2023	April	Download	Solution
2024	April	Download	Solution
2024	November	Download	Solution
2025	April

Elective: Marketing of Non-Profit Organization (CBCGS)
Year	Month	Q.P.	Link
IMP Q.			Solution
Obj. Q			Solution
2019	April	Download	Solution
2019	November	Download	Solution
2023	April	Download	Solution
2024	April	Download	Solution
2024	November	Download	Solution
2025	April

Elective: Indian Ethos in Management (CBCGS)
Year	Month	Q.P.	Link
IMP Q.			Solution
Obj. Q			Solution
2019	April	Download	Solution
2019	November	Download	Solution
2023	April	Download	Solution
2024	April	Download	Solution
2024	November	Download	Solution
2025	April