Q.1. HOW TECHNOLOGY CAN REDEFINE FINANACIAL SERVICES ?

Ans. Progressive financial services companies are on the lookout for new technologies
to improve efficiency and speed of service, as well as provide better customer
experience. Exponential growth in information technology has prompted companies
to leverage digitization of banking technology to transform the financial services
industry through customer experience management.

The financial services industry is looking at improving online customer service

enabled by competition with consumer brands like Amazon, Facebook, and Google.
Importantly, most financial services executives feel improving the customer
experience to be the top driver of digitization in banking.

The advent of smart analytics allows financial services companies to mine the wealth
of consumer data to understand and service customers better. Technology has also
helped organizations develop innovative financial services. The development of better
payment systems is a key challenge for organizations. There is also the possibility
that robo-advisory will be a significant application in the future. Similarly, blockchain-
based services will gain in popularity in the coming years.

Digitization of financial services is an ongoing revolution. Enterprises have the choice

of making innovation the focus of a stand-alone organization or they may integrate it
throughout their organization. This demands “great engineering.” Firms will do well
to have a full stack of engineers who can introduce dynamism to deal with innovation
while adopting a start-up approach.

Financial services organizations can tap the potential of the cloud to make processes
more transparent and collaboration easier.

Evolving technologically is at the heart of efforts to serve customers better through

customer experience management. Adopting new banking technology is, therefore,
critical for financial services organizations to thrive.
1. Hybrid Cloud

According to IBM, cloud computing has quickly become mainstream in banking, with most
banks searching for the optimal mix of traditional IT, public and private clouds. Over time, more
and more banks are moving to an enterprise-wide hybrid cloud strategy.

“With hybrid cloud, banks have the flexibility and benefits of both private and public cloud,
while addressing data security, governance and compliance,” states IBM. The benefits of a
hybrid cloud include reduced costs, improved operational efficiency and enhanced innovation.

It was found that at least 75% of bankers said their most successful cloud initiatives had already
achieved expansion into new industries, creation of new revenue streams, and expansion of
their product/services portfolio.

2. API Platforms

The combination of open platform banking and open APIs will change the entire banking
ecosystem as we know it, from the products and services offered, to the delivery channels used
and underlying partnerships that will shape innovation and customer experiences in the future.
With public APIs, customers will have more options to interact with their bank.

In this scenario, the bank will serve as a platform, on top of which third-party companies can
build their own applications using the bank’s data. Looking forward, the business model of
retail banks, where checking accounts are used as a ‘hook’ to attract customers for more
profitable lending products, may become unsustainable.

3. Robotic Process Automation (RPA)

Across financial services, robotic process automation (RPA) has helped banks and credit unions
accelerate growth by executing pre-programmed rules across a range of structured and
unstructured data. This intelligent automation gives processes the power to learn from prior
decisions and data patterns to make decisions by themselves – reducing the cost of
administrative and regulatory processes by at least 50% while improving quality and speed.
Robotic process automation in banking also simplifies compliance by keeping detailed logs of
automated processes, automatically generating the reports an auditor needs to see, and
eliminating human error. Since it’s intuitive and easy to re-configure software robots at any time,
tweaking processes to fit new or updated regulations is never difficult.

4. Instant Payments

Technology has changed consumer and business expectations in payments. Instant payment
options are available in many markets despite the lack of immediate payment infrastructures. In
some countries, banks offering alternatives to immediate payments actively market apps to their
own customers, and in some countries banks even partner together to offer an immediate P2P
payment experience to a wider customer base.

The availability of an instant payments platform offers banks an enticing opportunity to achieve
the transaction speed consumers expect of their banking experience and increase the customer
satisfaction. With instant payments, more transactions will be made digitally instead of in cash,
which means that payments will become less expensive and more user friendly. Finally, by
expanding and combining instant capabilities with solutions in e- and m-commerce banks and
credit unions could develop an innovative portfolio of new services.

5. Artificial Intelligence (AI)

Heightened interest in AI has occurred because of both capabilities and business needs. The
explosive growth of structured and unstructured data, availability of new technologies such as
cloud computing and machine learning algorithms, rising pressures brought by new
competition, increased regulation and heightened consumer expectations have created a ‘perfect
storm’ for the expanded use of artificial intelligence in financial services.

The benefits of AI in banks and credit unions are widespread, reaching back office operations,
compliance, customer experience, product delivery, risk management and marketing to name a
few. Suddenly, banking organizations can work with large histories of data for every decision
made.

For those firms not adopting AI, challenges such as fear of failure, siloed data sets
and regulatory compliance are cited. Two of the biggest challenges that remain in banking is the
absence of people experienced in data collection, analysis and application and the existence of
data silos. The good news is that many data firms now have the capability to do a ‘workaround’,
collecting data from across the organization.

6. Block chain
Experts say block chain could have a transformational impact on the banking industry. Many
see banks adopting block chain technology to improve efficiency, cost-effectiveness, and security
throughout the entire spectrum of financial services.

Some financial institutions have already started testing the use of block chain for inter-bank
transfers, with others testing in the space of payments, fraud reduction, know your customer,
and loan processing. Many see tremendous benefits to streamlining and automating processes
through smart contracts. In the end, regulators will need to create clear guidelines for banks
using block chain technology.

7. Prescriptive Security

The nature and incidence of cyber risk is unique and changing without notice, meaning that
typical approaches to risk management may not be appropriate. The potential sources of cyber
threats and the attack footprint are impossible to eliminate, requiring organizations to be nimble
in their approach to cyber security.

More and more, advanced analytics, real-time monitoring, AI and other tools are used to detect
potential threats and stop them before they strike. In the short-term, digital disruption may
result in new risks and increased instability in the financial system, but in the long term,
prescriptive security may improve its effectiveness.

Which technology do most financial institutions expect to implement?

Cloud computing is the best bet for financial services companies to achieve this
transformation. The research shows that, for the most part, they are ahead of other
businesses when it comes to cloud implementation. In fact, over half of the companies
surveyed say that they will have cloud technology in place within a year.

However, they still show a preference for private cloud infrastructure, most likely due
to security and compliance concerns. The best way to overcome these obstacles is to
take a hybrid or multi-cloud approach, while using modern, container-based
application architectures. By partnering with third-party managed service providers,
financial services organisations can rely on these partners to fill any skills gaps.

In fact, 60 per cent of financial services companies surveyed by 451 Research said they
expect to use a mix of clouds in combination with one another – slightly higher than
the number for other businesses (58 per cent). This will allow the financial services
industry to execute workloads in different environments which meet their business
requirements, achieving both agility, cost efficiency, compliance and support.

Q.2. Give a detailed account of the regulatory framework available for merchant
banking in India ? what are the activities connected with issue management and

underwriting of merchant bankers?

Ans. History of Merchant Banking in India:

Merchant banking services, in India, were started only in 1967 by National Grindlays.
Bank followed by Citi Bank in 1970. The State Bank of India was the first Indian
commercial bank to set up a separate merchant banking division in 1972.

Later, the ICICI set up its merchant banking division in 1973 followed by a number of
other commercial banks like Canara Bank, Bank of Broada, Bank of India, Syndicate
Bank, Punjab National Bank, Central Bank of India, UCO Bank, etc.
Thus, at present merchant banking services in our country are provided by the
following types of organisations:

(i) Commercial banks and their subsidiaries.

(ii) Foreign banks including National Grindlays Bank, Citi Bank, Hongkong Bank etc

(iii) All India Financial Institutions and Development Banks such as, ICICI, IFCI, IDBI.

(iv) State Level Financial Institutions, such as, State Industrial Development
Corporations (SIDC’s) and State Financial Corporations.

(v) Private Financial Consultancy Firms and Brokers, such as J.M. Financial and
Investment Services Ltd.; DSP Financial Consultants, Fnam Financial Consultants,
Kotak Mohindra, Ceat Financial Services, etc.

Merchant Banking Regulations:

SEBI (Merchant Bankers’) Regulation Act, 1992 defines a ‘merchant banker’ as “any
person who is engaged in the business of issue management either by making
arrangements regarding selling, buying or subscribing to securities or acting as
manager, consultant, adviser or rendering corporate advisory service in relation to
such issue management”.

At present no organisation can act as a ‘merchant banker’ without obtaining a

certificate of registration from the SEBI.

However, It must be noted that a person/ organisation has to get himself registered
under these regulations if he wants to carry on or undertake any of the authorised
activities, i.e., issue management assignment as manager, consultant, advisor,
underwriter or portfolio manager.

To obtain the certificate of registration, one had to apply in the prescribed form and
fulfill two sets of norms (i) operational capabilities and (ii) capital adequacy norms.
Classification of Merchant Bankers:

The SEBI has classified ‘merchant bankers’ under four categories for the purpose of
registration:

1. Category I Merchant Bankers:

These merchant bankers can act as issue manager, advisor, consultant, underwriter
and portfolio manager.

2. Category II Merchant Bankers:

Such merchant bankers can act as advisor, consultant, underwriter and portfolio
manager. They cannot act as issue manager of their own but can act co-manager.

3. Category III Merchant Bankers:

They are allowed to act as underwriter, advisor and consultant only. They can neither
undertake issue management of their own nor they act as co-manager. They cannot
undertake the activities of portfolio management also.

4. Category IV Merchant Bankers:

A category IV merchant banker can merely act as consultant or advisor to an issue of

capital.

Capital Adequacy Norms:

SEBI has prescribed capital adequacy norms for registration of the various categories
of merchant bankers. The capital adequacy is expressed in terms of minimum net
worth, i.e., capital contributed to the business plus free reserves.

The following are the capital adequacy norms as laid down by SEBI:
ISSUE MANAGEMENT

Issue management refers to managing issues of corporate securities like equity shares,
preference shares and debentures or bonds. It involves marketing of capital issues, of existing
companies including rights issues and dilution of shares by letter of offer.

In addition to these, the merchant bankers also assist the corporate units on the designing of a
sound capital structure acceptable to the financial institutions. further they also advise the
issuing company whether to go for a fresh issue, additional issue, bonus issue, right issue or
combination of these. In brief, managing public issue is a complicated and technical job. It
involves various strategic decisions and coordination of various agencies.

Q.3. Briefly explain hire purchase finance services. what are the advantages of leasing
difference between sale and lease?

Ans. Meaning:
Hire purchase is a method of financing of the fixed asset to be purchased on future
date. Under this method of financing, the purchase price is paid in installments.
Ownership of the asset is transferred after the payment of the last installment.

Features of Hire Purchase:

The main features of hire purchase finance are:
1. The hire purchaser becomes the owner of the asset after paying the last installment.

2. Every installment is treated as hire charge for using the asset.

3. Hire purchaser can use the asset right after making the agreement with the hire
vendor.
4. The hire vendor has the right to repossess the asset in case of difficulties in
obtaining the payment of installment.

Advantages of Hire Purchase:

i. Financing of an asset through hire purchase is very easy.

ii. Hire purchaser becomes the owner of the asset in future.

iii. Hire purchaser gets the benefit of depreciation on asset hired by him/her.

iv. Hire purchasers also enjoy the tax benefit on the interest payable by them.

Disadvantages of Hire Purchase:

i. Ownership of asset is transferred only after the payment of the last installment.

ii. The cost of financing through hire purchase is very high.

Leasing means an agreement between the leasing company (called lessor) and the user
(called lessee), under which the former undertakes to buy the capital equipment for
use by the latter.

The lessor remains owner of the asset during the specified period. The lessee has to
pay rentals to the lessor.

Advantages:
Leasing offers the following advantages:
1. Liquidity:
The lessee can use the asset to earn without investing money in the asset. He can
employ his funds for working capital needs.

2. Convenience:
Leasing is the easiest method of financing fixed assets. No mortgage or hypothecation
is required. Restrictions involved in long-term borrowing from financial institutions
are avoided. Formalities involved in leasing are much less than in case of borrowing
from financial institutions.

3. Hidden Liability:
Lease obligations are not reported as a liability in the company’s balance sheet. On the
other hand, loans raised to buy assets are reported as liability. Thus, leasing helps the
lessee to report a better debt-equity ratio.

4. Time Saving:
The asset is available for use immediately without loss of time in applying for the loan,
wanting for approval and sanction, etc. Lease rentals can be matched with cash flows
of the lessee.

5. No Risk of Obsolescence:
The risk of the asset becoming obsolete due to technological advancements is borne by
the lessor.

6. Cost Saving:
Lease rentals are deductible from taxable income. The lessee has lower obligation in
bankruptcy than under debt financing.

Q.4. Notes on

a) Leasing

A “lease” is defined as a contract between a lessor and a lessee for the hire of a
specific asset for a specific period on payment of specified rentals.

The maximum period of lease according to law is for 99 years. Previously land or real
estate, mines and quarries were taken on lease. But now a day’s plant and equipment,
modem civil aircraft and ships are taken.
A lease can be defined as an arrangement between the lessor (owner of the asset) and
the lessee (user of the asset) whereby the lessor purchases an asset for the lessee and
allows him to use it in exchange for periodical payments called lease rentals or
minimum lease payments (MLP). Leasing is beneficial to both the parties for availing
tax benefits or doing tax planning.

b) Factoring and Forfaiting

Definition of Factoring

Factoring is defined as a method of managing book debt, in which a business receives

advances against the accounts receivables, from a bank or financial institution (called
as a factor). There are three parties to factoring i.e. debtor (buyer of goods), the client
(seller of goods) and the factor (financier). Factoring can be recourse or non-recourse,
disclosed or undisclosed.

Definition of Forfaiting

Forfaiting is a mechanism, in which an exporter surrenders his rights to receive

payment against the goods delivered or services rendered to the importer, in exchange
for the instant cash payment from a forfaiter. In this way, an exporter can easily turn a
credit sale into cash sale, without recourse to him or his forfaiter.

C) Securitization

securitization is the process of pooling and repackaging of homogeneous illiquid

assets into liquid marketable securities that can be sold to investors.

Benefits

Reduction of risk
illiquid securities converted into liquid securities
Credit enhancement
D) Venture capital

Venture capital is a form of private equity and a type of financing that investors
provide to startup companies and small businesses that are believed to have long-term
growth potential. Venture capital generally comes from well-off investors, investment
banks and any other financial institutions. However, it does not always take a
monetary form; it can also be provided in the form of technical or managerial
expertise.

Though it can be risky for investors who put up funds, the potential for above-average
returns is an attractive payoff.

Q.5. Discuss the impact of COVID 19 on financial services. what are the steps taken
by government to face it ?

Ans. COVID-19 raises a range of financial services issues which firms and businesses
will be managing through over the next weeks and months.

Financial reporting & audit

As well as practical questions about how in progress audits and other engagements
will be finalised amid practical difficulties around obtaining information and
travelling some of the key issues to consider will be the impact of coronavirus and the
associated regulatory and government measurement on decisions around:

 Going concern status, including how forecasts are affected.

 Classification of forbearance activities and deferment.

 Whether activities constitute a significant increase in credit risk under IFRS 9
and therefore would lead to a larger number of assets moving to stage 2 provisioning.
The German Banking Association for example is expected to lobby the government for
an exemption from IFRS 9.

Business continuity

Firms should ensure that their business continuity plans are up to date and that staff
are briefed on what to expect. This should include:

 Staff welfare, including mental health impacts, any concentration of employees

with young children or other caring responsibilities (should schools close etc.).

 Process resilience and compliance, for example in the event of needing to work
remotely, or in partial teams.

 Communication with customers and support mechanisms.

 Supply chains, contracts and impact on outsourced arrangements, with

particular regard to cloud providers where supply is concentrated among a small
number of firms.

Risk management

Operational, liquidity, credit, insurance and market risk will all be exacerbated by
COVID-19. Institutions need to modify their approaches in terms of:

 Balance sheet and valuations for example the impact of reduced stock market
valuation on insurers, reduced assets under management and credit valuations.

 Income and potential liquidity stresses.

 Continuity of records and backups in the event of disrupted suppliers, systems

and/or displaced staff.

Economic support
The Bank of England’s extensive package of measures give banks the capacity to
support viable businesses and ensuring that individuals are not adversely affected.
The rate cut of 0.5% combined with the SME term funding scheme and reduction of
the counter cyclical buffer should in combination give banks the confidence to lend to
those who most need it to cope with the COVID-19 induced shock. The challenge will
be how to use this capacity quickly and to best effect.

Additional measures announced as part of the budget mean that cash flow constraints
will be eased for businesses, particularly the smallest businesses through grants,
deferrals of tax payments and refunding of statutory sick pay. The government also
announced the coronavirus business interruption loan scheme. Loans to SMEs of up to
£1.2m will have up to 80% of losses guaranteed by the government. As with the Bank
of England actions, the challenge will be ensuring that these measures reach those
who need support in a timely way.

Immediate response

Banks have already taken a series of actions in reaction to the spread of COVID-19.
Common steps we’ve seen include establishing a central task force, curtailing travel,
suspending large-scale gatherings, segregating teams, making arrangements for
teleworking, and refreshing external-vendor-interaction policies.

Beyond these immediate and basic actions, banks should prioritize three measures
tailored to the particular combination of biological and market stresses and how they
affect the global market. These points draw on the experience of China, Italy, and
several other countries, acknowledging that differences exist in economic and political
structures, healthcare systems, and social and cultural norms among these countries.
1. Normalize workforce measures for multimonth sustainability

As a top priority, nearly all firms have already taken proactive measures to protect
their people and to contain the spread of COVID-19. These include restricting travel
and taking other prevention-oriented policies, emphasizing workplace hygiene,
offering alternative ways of working, and initiating proactive communication.

Measures include restricting travel and taking other prevention-oriented policies,

emphasizing workplace hygiene, offering alternative ways of working, and initiating
proactive communication.
However, health measures to contain propagation may take months, not days or
weeks, as we’ve seen in China. Therefore, banks will need to make sure the measures
they have put in place are sustainable—and designed to get the best out of their
people, while preserving their mental and financial well-being over such a period.
Further, specific consideration will be required for contingent and contract workers,
who might be most immediately impacted.

Because banks are providers of essential services to customers and communities, and
the markets more broadly, they will need to adopt a carefully segmented approach to
workforce management, informed by service criticality and exposure risk (Exhibit 2).
Particularly careful attention is required for those in the workforce who provide
critical services that are either customer facing or that require infrastructure only
available at work premises. These include, for example, branch employees, some call-
center support, sales and trading personnel, employees in the Treasury function, as
well as some facilities and custodial staff. Korea’s Shinhan bank directed 150 of its call-
center staff to work remotely, to handle activities that do not require access to
customer information, such as queries on financial products. More detailed requests
they forward to colleagues who continued working in the office.
2. Provide essential banking services to retail consumers

People will continue to need essential banking services through these trying times.
Banks should continue branch and ATM operations with the appropriate safeguards,
while encouraging widespread use of remote services. This approach will account for
needs and preferences across all consumer segments, including the older part of the
population that is both more vulnerable to COVID-19 and less likely to adopt digital
channels.

Institutions can continually monitor and assess consumer demand for in-person
services to adjust capacity and minimize risks. For example, in some areas of China,
banks observed limited demand for services other than ATM access and so were able
to close most of their branch locations without disrupting customer service. Banks in
several regions, including Hong Kong, Italy, and Germany, have also closed (some)
branches to restrict staffing and hours when the risk to the public and employees was
deemed to outweigh the need to maintain the branch. In Korea, which has adopted
aggressive virus testing, branches have tended to remain open unless active cases are
detected.

Physical locations that adopt rigorous yet consumer friendly approaches to disease
containment both safeguard health and inspire confidence in the system. Examples
borne from experience include evident deep cleaning of all branches and ATMs,
alternatives to in-person sign-offs, and further leveraging branches with remote
advisory capabilities.

GOVT. response

The Covid-19 pandemic is a serious threat to many lives and livelihoods in India.
Sensing the gravity of the situation, Prime Minister NarendraModi announced a three-
week lockdown for the entire country on Tuesday till April 14. On Thursday, finance
minister NirmalaSitharaman announced a ₹1.7 lakh crore Covid-19 mitigation
economic relief package under the PM GaribKalyanYojana (PMGKY).
For the next three months, the package offers the following: additional 15 kg grain
(rice or wheat) and 3 kg of dal free to 80 crore poor Indians; ex gratia ₹1,500 (₹500
over the next three months) to 20 crore Jan Dhan account-holding women; free
liquefied petroleum gas (LPG) to 8.64 croreUjjwala beneficiaries; addition support of
an extra one-time ₹1,000 to the three crore senior citizens, widows and divyangs
(differently abled). Besides, the five crore families of MGNREGA workers will receive
increased wage support of up to ₹2,000.

The government will expedite payment of the first instalment (₹2,000) due in 2020-21
in April itself under the PradhanMantriKisanSammanNidhi (PM-KISAN). For the
organised sector worker, GoI will pay the Employees’ Provident Fund (EPF)
contributions of both sides for 80 lakh employees of small companies who earn up to
₹15,000 a month.

The package will surely help the 800 million poor — landless workers, small and
marginal farmers in rural areas, the aged, poor women and construction workers — to
mitigate the hardship caused by the Covid-19 lockdown.

However, it can be recalibrated for better effect. For instance, five crore families of
MGNREGA workers with proper identification are unquestionably poor, as are the
families of 3.5 c ..

RBI to inject Rs 30k cr into market for financial stability amid Covid-19
The Reserve Bank of India (RBI) will inject liquidity of Rs 30,000 crore through open
market operations next week to maintain financial stability in the system in the wake
of the coronavirus outbreak.

The RBI has decided to conduct purchase of government securities under open market
operations (OMOs) for an aggregate amount of Rs 30,000 crore in two tranches of Rs
15,000 crore each in March, the central bank said in a statement.

The auctions would be conducted on March 24 and March 30, it said.

It said, "With the COVID-19 related dislocations, stress in certain financial market
segments is still severe and financial conditions remain tight. The RBI's endeavour is
to ensure that all markets segments function normally with adequate liquidity and
turnover."

The central bank infused Rs 10,000 crore through open market operations on Friday.
It will purchase securities with a coupon rate of 6.84 per cent (maturity December 19,
2022); 7.72 per cent (May 25, 2025); 8.33 per cent (July 9, 2026) and 7.26 per cent
(January 14, 2029).

The RBI said there is no notified amount against any of these securities within the
aggregate ceiling of Rs 15,000 crore set for the operation.

The Reserve Bank reserves the right to decide on the quantum of purchase of
individual securities, accept offers for less than or higher than the aggregate amount of
Rs 15,000 crore (including due to rounding off) and also to accept or reject any or all
the offers either wholly or partially without assigning any reason.

Earlier on Monday, RBI Governor Shaktikanta Das said the regulator has "enough
policy tools and stands ready to take any measures" needed to help the economy tide
over the impact of the coronavirus pandemic.