Winword Format

8/2/2019 Winword Format

1/62

N.R.Institute of Business Management Page 1

Research Topic:Consumer Behaviour Towards Third Party Products (TPP) In Indian Banking Industry

Problem Statement:Indian economy was suffering from ongoing recession and very low inflation rate. This

had resulted into extreme liquidity crunch in the market.Flow of money in the market had slowed down and as a result people had reduced theirinvestment. So need has arisen to know the consumer behaviour towards their investment in thethird party products provided by banks which includes insurance, mutual funds, demat services,etc. in order to study the growth of Indian Banking Industry and the overall economy.

Research Objectives:Macro Objective:To study the Consumer Behaviour Towards Third Party Products (TPP) In IndianBanking Industry

Micro Objectives:

To know the acceptance of third party products in banking industry by the consumersTo find out the percentage of income that respondents invest in various third partyproductsTo know the preference of investors towards various instruments of third party productsTo determine the criteria considered by the investors while investing in the third partyproductsTo find out the satisfaction level of the customers regarding the services provided by thebanks in their third party products investmentN.R.Institute of Business Management Page 2

Importance/ Benefit of the study:Due to bearish trend prevailing in the market since 2 years, the attitude of the investors

has changed and they have gone into their shell and such declining market trend has forced themto drop out. Moreover recession and low inflation rate prevailing in the Indian economy hasaugmented this process. So the main aim of the study is to create awareness among the investorsabout the bullish trend prevailing in market since few months.The another benefit of the study is by knowing the consumers behaviour towards thethird party products investment in Indian Banking Industry, researchers will find out the trendsthat will affect the market and forecast the problems that will be faced by the economy in thenear future.

Research Design:Population: Respondents of the Ahmedabad city for their survey

Sample Size:300 sampling units

Sampling Method: Convenience sampling

Data Sources:Primary Source:QuestionnaireSecondary Sources:BooksWebsites


2/62

ReportsResearch PapersN.R.Institute of Business Management Page 3

Statistical Tools Used:1) Kruskal Wallis test: Criteria considered for TPP Investment and Occupation

Criteria considered for TPP Investment and AgeCriteria considered for TPP Investment and Monthly Income2) Mann-Whitney U test: Criteria considered for TPP Investment and Gender3) Z-Test: To find out the proportion of investors who prefer balanced type of fundLimitations of The Study:The main limitation is that the scope of the researchers study will be Ahmedabad city.So the population considered may not be the actual representative of the population of thenation.Another limitation is the time span available with researchers for conducting the research.The information given by the respondents regarding their income and other personal

details can be biased.N.R.Institute of Business Management Page 4

INDIAN BANKING INDUSTRYBanking in India has its origin as early as the Vedic period. It is believed that the transaction frommoney lending to banking must have occurred even before the great Hindu jurist, who has devoted asection of his work to deposit his advances and laid down rules relating to rate of interest. During theMogul period, the indigenous bankers played a very important role in lending money and financingforeign trend commerce. During the day of East India Company, it was the turn of the agency houses tocarry on banking business. The general bank of India was the first joint stock bank to be established in theyear 1786, the other which followed where the bank of Hindustan and Bengal bank. The bank ofHindustan is reported to have continued till 1906 while the other two failed in mean time. In the first halfof the 19 century the East India Company established three banks, the bank of Bengal in 1809, the bank

of Bombay in 1840,the bank of Madras in 1843. These three banks also known as residency bank, whereindependent units and functioned well. These tree banks where amalgamated in 1920 and new bank, theimperial bank of India was established on 27th jan,1921.with passing of the State Bank of India Act in1955 the undertaking of the imperial bank of India was taken by the newly constituted State Bank ofIndia. The reserve bank which is the central bank was creatsd in 1935 by passing reserve bank of India act1934.in the wake of the Swadeshi movement, a number of banks with Indian management wereestablished in the country namely, Punjab National Bank Ltd, Bank of India Ltd. Canara Bank Ltd, IndianBank Ltd, Bank of Baroda Ltd, Central Bank of India Ltd. On July 19,1969,14 major banks of the countrywere nationalized and 15th April 1980 six more commercial private industry banks were also taken overby the government.

HISTORY OF BANKING IN INDIAThere are three different phases in the history of banking in India.Pre-Nationalization EraNationalization StagePost Liberalization Era1) Pre-Nationalization Era:In India the business of banking and credit was practiced even in very early times. Theremittance of money through Hundies, an indigenous credit instrument, was very popular. TheN.R.Institute of Business Management Page 5

Hundies were issued by bankers known as Shroffs, Sahukars, Shahus or Mahajans in different


3/62

parts of the country.The modern type of banking, however, was developed by the Agency Houses of Calcuttaand Bombay after the establishment of Rule by the East India Company in 18 th and 19thcenturies.During the early part of the 19th Century, the volume of foreign trade was relatively

small. Later on as the trade expanded, the need for banks of the European type was felt and thegovernment of the East India Company took interest in having its own bank. The government ofBengal took the initiative and the first presidency bank, the Bank of Calcutta (Bank of Bengal)was established in 1800. In 1840, the Bank of Bombay and in 1843, the Bank of Madras was alsoset up.These three banks also known as Presidency Bank. The Presidency Banks had theirbranches in important trading centers but mostly lacked in uniformity in their operationalpolicies. In 1899, the Government proposed to amalgamate these three banks into one so that itcould also function as a Central Bank, but the Presidency Banks did not favor the idea. However,the conditions obtaining during world war period (1914-1918) emphasized the need for a unifiedbanking institution, as a result of which the Imperial Bank was set up in 1921. The Imperial

Bank of India acted like a Central bank and as a banker for other banks.The RBI (Reserve Bank of India) was established in 1935 as the Central Bank of theCountry. In 1949, the Banking Regulation Act was passed and the RBI was nationalized andacquired extensive regulatory powers over the commercial banks. In 1950, the Indian Bankingsystem comprised of the RBI, the Imperial Bank of India, Cooperative banks, Exchange banksand Indian Joint Stock banks.2) Nationalization Stage:After Independence, in 1951, the All India Rural Credit survey, committee of Directionwith Shri. A. D. Gorwala as Chairman recommended amalgamation of the Imperial Bank ofIndia and ten others banks into a newly established bank called the State Bank of India (SBI).The Government of India accepted the recommendations of the committee and introduced the

State Bank of India bill in the Lok Sabha on 16th April 1955 and it was passed by Parliament andN.R.Institute of Business Management Page 6got the presidents assent on 8th May 1955. The Act came into force on 1st July 1955, and theImperial Bank of India was nationalized in 1955 as the State Bank of India.The main objective of establishing SBI by nationalizing the Imperial Bank of India wasto extend banking facilities on a large scale more particularly in the rural and semi-urban areasand to diverse other public purposes.3) Post-Liberalization Era:By the beginning of 1990, the social banking goals set for the banking industry mademost of the public industry resulted in the presumption that there was no need to look at thefundamental financial strength of this bank. Consequently they remained undercapitalized.

Revamping this structure of the banking industry was of extreme importance, as the health of thefinancial industry in particular and the economy as a whole would be reflected by itsperformance.The need for restructuring the banking industry was felt greater with the initiation of thereal industry reform process in 1992. the reforms have enhanced the opportunities and challengesfor the real industry making them operate in a borderless global market place. However, toharness the benefits of globalization, there should be an efficient financial industry to support thestructural reforms taking place in the real economy. Hence, along with the reforms of the real


4/62

industry, the banking industry reformation was also addressed.The route causes for the lackluster performance of banks, formed the elements of thebanking industry reforms. Some of the factors that led to the dismal performance of banks were.Regulated interest rate structureLack of focus on profitability

Lack of transparency in the banks balance sheetLack of competitionExcessive regulation on organization structure and managerial resourceN.R.Institute of Business Management Page 7

BANKING IN INDIA1) Overview of Banking:Banking Regulation Act of India, 1949 defines Banking as accepting, for the purpose oflending or of investment of deposits of money from the public, repayable on demand orotherwise or withdrawable by cheque, draft order or otherwise. The Reserve Bank of India Act,1934 and the Banking Regulation Act, 1949, govern the banking operations in India.2) Organizational Structure of Banks in India:

3) Broad Classification of Banks in India:The RBI: The RBI is the supreme monetary and banking authority in the country and hasthe responsibility to control the banking system in the country. It keeps the reserves ofall scheduled banks and hence is known as the Reserve Bank.Public Industry Banks: State Bank of India and its Associates (8)Nationalized Banks (19) Regional Rural Banks Sponsored by Public Industry Banks (196)Reserve Bank of IndiaCommercial Banks Co-operative Banks Development BanksNationalized Private Short-termcreditLong-termcreditAgriculturalCreditUrbanCreditEXIM Industrial AgriculturalN.R.Institute of Business Management Page 8

Private Industry Banks: Old Generation Private Banks (22) Foreign New Generation Private Banks (8) Banks in India (40)Co-operative Industry Banks: State Co-operative Banks Central Co-operative Banks Primary Agricultural Credit Societies Land Development Banks State Land Development Banks


5/62

Development Banks: Development Banks mostly provide long term finance for settingup industries. They also provide short-term finance (for export and import activities) Industrial Finance Co-operation of India (IFCI) Industrial Development of India (IDBI) Industrial Investment Bank of India (IIBI)

Small Industries Development Bank of India (SIDBI)National Bank for Agriculture and Rural Development (NABARD)N.R.Institute of Business Management Page 9

Current scenarioThe industry is currently in a transition phase. On the one hand, the PSBs, which are themainstay of the Indian Banking system, are in the process of shedding their flab in terms ofexcessive manpower, excessive non Performing Assets and excessive governmental equity,while on the other hand the private industry banks are consolidating themselves through M&A.PSBs, which currently account for more than 78 percent of total banking industry assetsare saddled with NPAs (a mind-boggling Rs 830 billion in 2000), falling revenues fromtraditional sources, lack of modern technology and a massive workforce while the new private

industry banks are forging ahead and rewriting the traditional banking business model by way oftheir sheer innovation and service. The PSBs are of course currently working out challengingstrategies even as 20 percent of their massive employee strength has dwindled in the wake of thesuccessful Voluntary Retirement Schemes (VRS) schemes.The private players however cannot match the PSBs great reach, great size and access tolow cost deposits. Therefore one of the means for them to combat the PSBs has been through themerger and acquisition (M& A) route. Over the last two years, the industry has witnessed severalsuch instances. For instance, HDFC Banks merger with Times Bank ICICI Banks acquisitionof ITC Classic, Anagram Finance and Bank of Madura. Centurion Bank, Indusind Bank, Bank ofPunjab, Vysya Bank are said to be on the lookout. The UTI bank- Global Trust Bank mergerhowever opened a Pandoras box and brought about the realization that was not in the

functioning of many of the private industry banks.Private industry Banks have pioneered internet banking, phone banking, anywherebanking, mobile banking, debit cards, Automatic Teller Machines (ATMs) and combined variousother services and integrated them into the mainstream banking arena, while the PSBs are stillgrappling with disgruntled employees in the aftermath of successful VRS schemes. Also,following Indias commitment to the WTO agreement in respect of the services industry, foreignbanks, including both new and the existing ones, have been permitted to open up to 12 branchesa year with effect from 1998-99 as against the earlier stipulation of 8 branches.N.R.Institute of Business Management Page 10

A talk of government diluting their equity from 51 percent to 33 percent in November2000 has also opened up a new opportunity for the takeover of even the PSBs. The FDI rules

being more rationalized in Q1FY02 may also pave the way for foreign banks taking the M& Aroute to acquire willing Indian partners. Meanwhile the economic and corporate industryslowdown has led to an increasing number of banks focusing on the retail segment. Many ofthem are also entering the new vistas of Insurance. Banks with their phenomenal reach and aregular interface with the retail investor are the best placed to enter into the insurance industry.Banks in India have been allowed to provide fee-based insurance services without riskparticipation invest in an insurance company for providing infrastructure and services supportand set up of a separate joint-venture insurance company with risk participation.


6/62

In the days to come, banks are expected to play a very useful role in the economicdevelopment and the emerging market will provide ample business opportunities to harness.Human Resources Management is assuming to be of greater importance. As banking in Indiawill become more and more knowledge supported, human capital will emerge as the finest assetsof the banking system. Ultimately banking is people and not just figures.

FUTURE SCENARIOLiberalization and de-regulation process started in 1991-92 has made a sea change in the bankingsystem. From a totally regulated environment, we have gradually moved into a market drivencompetitive system. Our move towards global benchmarks has been, by and large, calibrated andregulator driven. The pace of changes gained momentum in the last few years. Globalizationwould gain greater speed in the coming years particularly on account of expected opening up offinancial services under WTO. Four trends change the banking industry world over, viz. 1)Consolidation of players through mergers and acquisitions, 2) Globalisation of operations, 3)Development of new technology and 4) Universalisation of banking. With technology acting asa catalyst, we expect to see great changes in the banking scene in the coming years. TheCommittee has attempted to visualize the financial world 5-10 years from now. The picture thatemerged is somewhat as discussed below. It entails emergence of an integrated and diversified

N.R.Institute of Business Management Page 11financial system. The move towards universal banking has already begun. This will gather furthermomentum bringing non-banking financial institutions also, into an integrated financial system.The traditional banking functions would give way to a system geared to meet all the financialneeds of the customer. We could see emergence of highly varied financial products, which aretailored to meet specific needs of the customers in the retail as well as corporate segments. Theadvent of new technologies could see the emergence of new financial players doing financialintermediation. For example, we could see utility service providers offering say, bill paymentservices or supermarkets or retailers doing basic lending operations. The conventional definitionof banking might undergo changes.The competitive environment in the banking industry is likely to result in individual playersworking out differentiated strategies based on their strengths and market niches. For example,

some players might emerge as specialists in mortgage products, credit cards etc. whereas somecould choose to concentrate on particular segments of business system, while outsourcing allother functions. Some other banks may concentrate on SME segments or high net worthindividuals by providing specially tailored services beyond traditional banking offerings to satisfythe needs of customers they understand better than a more generalist competitor.Retail lending will receive greater focus. Banks would compete with one another to provide fullrange of financial services to this segment. Banks would use multiple delivery channels to suit therequirements and tastes of customers. While some customers might value relationship banking(conventional branch banking), others might prefer convenience banking (e-banking).One of the concerns is quality of bank lending. Most significant challenge before banks is themaintenance of rigorous credit standards, especially in an environment of increased competitionfor new and existing clients. Experience has shown us that the worst loans are often made in

the best of times. Compensation through trading gains is not going to support the banks forever.Large-scale efforts are needed to upgrade skills in credit risk measuring, controlling andmonitoring as also revamp operating procedures. Credit evaluation may have to shift from cashflow based analysis to borrower account behavior, so that the state of readiness of Indian banksfor Basle II regime improves. Corporate lending is already undergoing changes. The emphasis infuture would be towards more of fee based services rather than lending operations. Banks willcompete with each other to provide value added services to their customers.N.R.Institute of Business Management Page 12Mergers and acquisitions would gather momentum as managements will strive to meet the


7/62

expectations of stakeholders. This could see the emergence of 4-5 world class Indian Banks. AsBanks seek niche areas, we could see emergence of some national banks of global scale and anumber of regional players.Corporate governance in banks and financial institutions would assume greater importance in thecoming years and this will be reflected in the composition of the Boards of Banks..Technology as an enabler is separately discussed in the report. It would not be out of place,

however, to state that most of the changes in the landscape of financial industry discussed abovewould be technology driven. In the ultimate analysis, successful institutions will be those whichcontinue to leverage the advancements in technology in re-engineering processes and deliverymodes and offering state-of-the-art products and services providing complete financial solutionsfor different types of customers.N.R.Institute of Business Management Page 13

Industry Analysis mainly comprises of following three analyses:Five Force analysisPEST AnalysisSWOT Analysis

FIVE FORCE ANALYSIS

N.R.Institute of Business Management Page 141) Threat of New Entrants:The average person can't come along and start up a bank, but there are services, such as internetbill payment, on which entrepreneurs can capitalize. Banks are fearful of being squeezed out of thepayments business, because it is a good source of fee-based revenue. Another trend that poses a threat iscompanies offering other financial services. What would it take for an insurance company to start offeringmortgage and loan services? Not much. Also, when analyzing a regional bank, remember thatthe possibility of a mega bank entering into the market poses a real threat.2) Power of Suppliers:The suppliers of capital might not pose a big threat, but the threat of suppliers luring away humancapital does. If a talented individual is working in a smaller regional bank, there is the chance that personwill be enticed away by bigger banks, investment firms, etc.3) Power of Buyers:The individual doesn't pose much of a threat to the banking industry, but one major factoraffecting the power of buyers is relatively high switching cost. If a person has a mortgage, car loan, creditcard, checking account and mutual funds with one particular bank, it can be extremely tough for thatperson to switch to another bank. In an attempt to lure in customers, banks try to lower the price ofswitching, but many people would still rather stick with their current bank. On the other hand, largecorporate clients have banks wrapped around their little fingers. Financial institutions - by offering betterexchange rates, more services, and exposure to foreign capital markets - work extremely hard to gethighmargincorporate clients.4) Availability of Substitutes:

As you can probably imagine, there are plenty of substitutes in the banking industry. Banks offera suite of services over and above taking deposits and lending money, but whether it is insurance, mutualfunds or fixed income securities, chances are there is a non-banking financial services company that canoffer similar services. On the lending side of the business, banks are seeing competition rise fromunconventional companies. Sony (NYSE: SNE), General Motors (NYSE:GM) and Microsoft(NASDAQ:MSFT) all offer preferred financing to customers who buy big ticket items. If car companiesare offering 0% financing, why would anyone want to get a car loan from the bank and pay 5-10%interest?N.R.Institute of Business Management Page 15


8/62

5) Competitive Rivalry:The banking industry is highly competitive. The financial services industry has been around forhundreds of years and just about everyone who needs banking services already has them. Because of this,banks must attempt to lure clients away from competitor banks. They do this by offering lower financing,preferred rates and investment services. The banking industry is in a race to see who can offer both thebest and fastest services, but this also causes banks to experience a lower ROA. They then have anincentive to take on high-risk projects. In the long run, we're likely to see more consolidation in thebanking industry. Larger banks would prefer to take over or merge with another bank rather than spendthe money to market and advertise to people.N.R.Institute of Business Management Page 16

PEST ANALYSIS1) Political Environment:Government and RBI policies affect the banking industry. Sometimes looking into the politicaladvantage of a particular party, the Government declares some measures to their benefits like waiver ofshort-term agricultural loans, to attract the farmers votes. By doing so the profits of the bank get affected.Various banks in the cooperative industry are open and run by the politicians. They exploit these banksfor their benefits. Sometimes the government appoints various chairmen of the banks. Various policies

areframed by the RBI looking at the present situation of the country for better control over the banks.

2) Economical Environment:Banking is as old as authentic history and the modern commercial banking are traceable toancient times. In India, banking has existed in one form or the other from time to time. The present era inbanking may be taken to have commenced with establishment of bank of Bengal in 1809 under thegovernment charter and with government participation in share capital. Allahabad bank was started in theyear 1865 and Punjab national bank in 1895, and thus, others followedEvery year RBI declares its 6 monthly policy and accordingly the various measures and rates areimplemented which has an impact on the banking industry. Also the Union budget affects the bankingindustry to boost the economy by giving certain concessions or facilities. If in the Budget savings areencouraged, then more deposits will be attracted towards the banks and in turn they can lend more money

to the agricultural industry and industrial industry, therefore, booming the economy. If the FDI limits arerelaxed, then more FDI are brought in India through banking channels.3) Social Environment:Before nationalization of the banks, their control was in the hands of the private parties and onlybig business houses and the effluent sections of the society were getting benefits of banking in India. In1969 government nationalized 14 banks. To adopt the social development in the banking industry it wasnecessary for speedy economic progress, consistent with social justice, in democratic political system,which is free from domination of law, and in which opportunities are open to all. Accordingly, keeping inmind both the national and social objectives, bankers were given direction to help economically weakersection of the society and also provide need-based finance to all the industrys of the economy withflexible and liberal attitude. Now the banks provide various types of loans to farmers, working women,N.R.Institute of Business Management Page 17professionals, and traders. They also provide education loan to the students and housing loans, consumerloans, etc.Banks having big clients or big companies have to provide services like personalized banking totheir clients because these customers do not believe in running about and waiting in queues for gettingtheir work done. The bankers also have to provide these customers with special provisions and at timeswith benefits like food and parties. But the banks do not mind incurring these costs because of the kind ofbusiness these clients bring for the bank. Banks have changed the culture of human life in India and havemade life much easier for the people.


9/62

4) Technological Environment:Technology plays a very important role in banks internal control mechanisms as well as servicesoffered by them. It has in fact given new dimensions to the banks as well as services that they cater to andthe banks are enthusiastically adopting new technological innovations for devising new products andservices.The latest developments in terms of technology in computer and telecommunication haveencouraged the bankers to change the concept of branch banking to anywhere banking. The use of ATMand Internet banking has allowed anytime, anywhere banks facilities. Automatic voice recorders nowanswer simple queries, currency accounting machines makes the job easier and self-service counters arenow encouraged. Credit card facility has encouraged an era of cashless society. Today MasterCard andVisa card are the two most popular cards used world over. The banks have now started issuing smartcardsor debit cards to be used for making payments. These are also called as electronic purse. Some of thebanks have also started home banking through telecommunication facilities and computer technology byusing terminals installed at customers home and they can make the balance inquiry, get the statement ofaccounts, give instructions for fund transfers, etc. Through ECS we can receive the dividends and interestdirectly to our account avoiding the delay or chance of loosing the post.Today banks are also using SMS and Internet as major tool of promotions and giving great utilityto its customers. For example SMS functions through simple text messages sent from your mobile. Themessages are then recognized by the bank to provide you with the required information.All these technological changes have forced the bankers to adopt customer-based approachinstead of product-based approach.N.R.Institute of Business Management Page 18

SWOT ANALYSIS1) Strengths:Indian banks have compared favorably on growth, asset quality and profitability with otherregional banks over the last few years. The banking index has grown at a compounded annual rateof over 51 per cent since April 2001 as compared to a 27 per cent growth in the market index forthe same period.Policy makers have made some notable changes in policy and regulation to help strengthen the

industry. These changes include strengthening prudential norms, enhancing the payments systemand integrating regulations between commercial and co-operative banks.Bank lending has been a significant driver of GDP growth and employment.The vast networking & growing number of branches & ATMs. Indian banking system hasreached even to the remote corners of the country.The government's regular policy for Indian bank since 1969 has paid rich dividends with thenationalization of 14 major private banks of India.In terms of quality of assets and capital adequacy, Indian banks are considered to have clean,strong and transparent balance sheets relative to other banks in comparable economies in itsregion.India has 88 scheduled commercial banks (SCBs) - 27 public industry banks (that is with theGovernment of India holding a stake)after merger of New Bank of India in Punjab National Bank

in 1993, 29 private banks (these do not have government stake; they may be publicly listed andtraded on stock exchanges) and 31 foreign banks. They have a combined network of over 53,000branches and 17,000 ATMs. According to a report by ICRA Limited, a rating agency, the publicindustry banks hold over 75 percent of total assets of the banking industry, with the private andforeign banks holding 18.2% and 6.5% respectively.Foreign banks will have the opportunity to own up to 74 per cent of Indian private industry banksand 20 per cent of government owned banks.

2) Weaknesses:


10/62

PSBs need to fundamentally strengthen institutional skill levels especially in sales and marketing,service operations, risk management and the overall organisational performance ethic &strengthen human capital.Old private industry banks also have the need to fundamentally strengthen skill levels.N.R.Institute of Business Management Page 19The cost of intermediation remains high and bank penetration is limited to only a few customer

segments and geographies.Structural weaknesses such as a fragmented industry structure, restrictions on capital availabilityand deployment, lack of institutional support infrastructure, restrictive labor laws, weak corporategovernance and ineffective regulations beyond Scheduled Commercial Banks (SCBs), unlessindustry utilities and service bureaus.Refusal to dilute stake in PSU banks: The government has refused to dilute its stake in PSUbanks below 51% thus choking the headroom available to these banks for raining equity capital.Impediments in industryal reforms: Opposition from Left and resultant cautious approach fromthe North Block in terms of approving merger of PSU banks may hamper their growth prospectsin the medium term.3) Opportunity:The market is seeing discontinuous growth driven by new products and services that includeopportunities in credit cards, consumer finance and wealth management on the retail side, and infee-based income and investment banking on the wholesale banking side. These require newskills in sales & marketing, credit and operations.Banks will no longer enjoy windfall treasury gains that the decade-long secular decline in interestrates provided. This will expose the weaker banks.With increased interest in India, competition from foreign banks will only intensify.Given the demographic shifts resulting from changes in age profile and household income,consumers will increasingly demand enhanced institutional capabilities and service levels frombanks.New private banks could reach the next level of their growth in the Indian banking industry bycontinuing to innovate and develop differentiated business models to profitably serve segmentslike the rural/low income and affluent/HNI segments; actively adopting acquisitions as a means togrow and reaching the next level of performance in their service platforms. Attracting, developingand retaining more leadership capacityForeign banks committed to making a play in India will need to adopt alternative approaches towin the race for the customer and build a value-creating customer franchise in advance ofregulations potentially opening up post 2009. At the same time, they should stay in the game forpotential acquisition opportunities as and when they appear in the near term. Maintaining afundamentally long-term value-creation mindset.Reach in rural India for the private industry and foreign banks.N.R.Institute of Business Management Page 20With the growth in the Indian economy expected to be strong for quite some time-especially in itsservices industry-the demand for banking services, especially retail banking, mortgages andinvestment services are expected to be strong.The Reserve Bank of India (RBI) has approved a proposal from the government to amend theBanking Regulation Act to permit banks to trade in commodities and commodity derivatives.Hybrid capital: In an attempt to relieve banks of their capital crunch, the RBI hasallowed them to raise perpetual bonds and other hybrid capital securities to shore up theircapital. If the new instruments find takers, it would help PSU banks, left with littleheadroom for raising equity. Significantly, FII and NRI investment limits in thesesecurities have been fixed at 49%, compared to 20% foreign equity holding allowed inPSU banks.


11/62

4) Threats:Threat of stability of the system: failure of some weak banks has often threatened the stability ofthe system.Rise in inflation figures which would lead to increase in interest rates.Increase in the number of foreign players would pose a threat to the PSB as well as the privateplayers.N.R.Institute of Business Management Page 21

Introduction:With the interest income coming under pressure, banks are urgently looking forexpanding fee-based income activities. Banks are increasingly getting attracted towards activitiessuch as marketing mutual funds and insurance policies, offering credit cards to suit differentcategories of customers and services such as wealth management and equity trading. These areindeed proving to be more profitable for banks than plain vanilla lending and borrowing. Thisactivities provided to the customers are known as Third Party Productsby banks.There are many Third Party products provided by private as well as public Industry banksnowadays. Some of them are as under

InsuranceMutual fundsDemat Account ServicesLet us see all this products in detail.N.R.Institute of Business Management Page 22

1) INSURANCEToday concept of Bancassurance is getting very common, selling Insurance ofanother company to the Bank customers.Introduction:With the opening up of the insurance industry and with so many players entering theIndian insurance industry, it is required by the insurance companies to come up with innovative

products, create more consumer awareness about their products and offer them at a competitiveprice. New entrants in the insurance industry had no difficulty in matching their products withthe customers' needs and offering them at a price acceptable to the customer.But, insurance not being an off the shelf product and one which requiring personalcounseling and persuasion, distribution posed a major challenge for the insurance companies.Further insurable population of over 1 billion spread all over the country has made the traditionalchannels of the insurance companies costlier. Also due to heavy competition, insurers do notenjoy the flexibility of incurring heavy distribution expenses and passing them to the customer inthe form of high prices.With these developments and increased pressures in combating competition, companiesare forced to come up with innovative techniques to market their products and services. At this

juncture, banking industry with it's far and wide reach, was thought of as a potential distributionchannel, useful for the insurance companies. This union of the two industrys is what is known asBancassurance.Meaning of Bancassurance:Bancassurance is the distribution of insurance products through the bank's distributionchannel. It is a phenomenon wherein insurance products are offered through the distributionchannels of the banking services along with a complete range of banking and investmentproducts and services. To put it simply, Bancassurance, tries to exploit synergies between both


12/62

the insurance companies and banks.Bancassurance if taken in right spirit and implemented properly can be win-win situationfor the all the participants' viz., banks, insurers and the customers.N.R.Institute of Business Management Page 23

Advantages of Bancassurance:

a) Advantages to banksProductivity of the employees increases.By providing customers with both the services under one roof, they can improve overallcustomer satisfaction resulting in higher customer retention levels.Increase in return on assets by building fee income through the sale of insuranceproducts.Can leverage on face-to-face contacts and awareness about the financial conditions ofcustomers to sell insurance products.Banks can cross sell insurance products Eg: Term insurance products with loans.b) Advantages to InsurersInsurers can exploit the banks' wide network of branches for distribution of products. The

penetration of banks' branches into the rural areas can be utilized to sell products in thoseareas.Customer database like customers' financial standing, spending habits, investment andpurchase capability can be used to customize products and sell accordingly.Since banks have already established relationship with customers, conversion ratio ofleads to sales is likely to be high. Further service aspect can also be tackled easily.c) Advantages to consumersComprehensive financial advisory services under one roof. i.e., insurance services alongwith other financial services such as banking, mutual funds, personal loans etc.Enhanced convenience on the part of the insuredEasy access for claims, as banks is a regular go.Innovative and better product rangesN.R.Institute of Business Management Page 24

Bancassurance in India:Bancassurance in India is a very new concept, but is fast gaining ground. In India, thebanking and insurance industrys are regulated by two different entities (banking by RBI andinsurance by IRDA) and bancassurance being the combinations of two industrys comes under thepurview of both the regulators. Each of the regulators has given out detailed guidelines for banksgetting into insurance industry. Highlights of the guidelines are reproduced below:a) RBI guideline for banks entering into insurance industry provides three options for

banks. They are:

Joint ventures will be allowed for financially strong banks wishing to undertake insurance

business with risk participation;For banks which are not eligible for this joint-venture option, an investment option of upto 10% of the net worth of the bank or Rs.50 crores, whichever is lower, is available;Finally, any commercial bank will be allowed to undertake insurance business as agent ofinsurance companies. This will be on a fee basis with no-risk participation.b) The Insurance Regulatory and Development Authority (IRDA) guidelines for the

Bancassurance are:

Each bank that sells insurance must have a chief insurance executive to handle all the


13/62

insurance activities.All the people involved in selling should under-go mandatory training at an instituteaccredited by IRDA and pass the examination conducted by the authority.Commercial banks, including cooperative banks and regional rural banks, may becomecorporate agents for one insurance company.

Banks cannot become insurance brokers.Issues to be tackled:Given the roles and diverse skills brought by the banks and insurers to a Bancassurancetie up, it is expected that road to a successful alliance would not be an easy task. Some of theissues that are to be addressed are:N.R.Institute of Business Management Page 25

The tie-ups need to develop innovative products and services rather than depend on thetraditional methods. The kinds of products the banks would be allowed to sell are anothermajor issue. For instance, a complex unit-linked life insurance product is better soldthrough brokers or agents, while a standard term product or simple products like autoinsurance, home loan and accident insurance cover can be handled by bank branches

There needs to be clarity on the operational activities of the Bancassurance i.e., who willdo the branding, will the insurance company prefer to place a person at the bank branch,or will the bank branch train and put up one of its own people, remuneration of thesepeople.Even though the banks are in personal contact with their clients, a high degree of proactivemarketing and skill is required to sell the insurance products. This can beaddressed through proper training.There are hazards of direct competition to conventional banking products. Bankpersonnel may become resistant to sell insurance products since they might think theywould become redundant if savings were diverted from banks to their insurancesubsidiaries.

Critical Success Factors:Strategies consistent with the bank's vision, knowledge of target customers' needs,defined sales process for introducing insurance services, simple yet complete productofferings, strong service delivery mechanism, quality administration, synchronizedplanning across all business lines and subsidiaries, complete integration of insurance withother bank products and services, extensive and high-quality training, sales managementtracking system for reporting on agents' time and results of bank referrals and relevantand flexible database systems.Another point is the handling of customers. With customer awareness levels increasing,they are demanding greater convenience in financial services.The emergence of remote distribution channels, such as PC-banking and Internetbanking,

would hamper the distribution of insurance products through banks.The emergence of newer distribution channels seeking a market share in the network.N.R.Institute of Business Management Page 26

Key Challenges in the Indian context:Creating an environment of top level involvement of bank management.Bringing relevance, motivation and skill development at the operating level at bankbranches.Resolving possible conflicts of interest between the bank and the insurer.


14/62

Setting up distribution procedures consistent with the manual systems in most banks.Some of the Bancassurance tie-ups in India:Insurance Company Bank

Birla Sun Life Insurance Co. Ltd.Bank of Rajasthan, Andhra Bank, Bank of Muscat,

Development Credit Bank, Deutsche Bank and Catholic SyrianBankDabur CGU Life InsuranceCompany Pvt. LtdCanara Bank, Lakshmi Vilas Bank, American Express Bank andABN AMRO BankHDFC Standard Life InsuranceCo. Ltd. Union Bank of IndiaICICI Prudential Life InsuranceCo Ltd.Lord Krishna Bank, ICICI Bank, Bank of India, Citibank,

Allahabad Bank, Federal Bank, South Indian Bank, and Punjaband Maharashtra Co-operative Bank.Life Insurance Corporation ofIndiaCorporation Bank, Indian Overseas Bank, Centurion Bank,Satara District Central Co-operative Bank, Janata Urban CooperativeBank, Yeotmal Mahila Sahkari Bank, Vijaya Bank,Oriental Bank of Commerce.Met Life India Insurance Co. Ltd. Karnataka Bank, Dhanalakshmi Bank and J&K BankSBI Life Insurance Company Ltd. State Bank of IndiaBajaj Allianz General Insurance

Co. Ltd. Karur Vysya Bank and Lord Krishna BankNational Insurance Co. Ltd. City Union BankRoyal Sundaram GeneralInsurance CompanyStandard Chartered Bank, ABN AMRO Bank, Citibank, Amexand Repco Bank.United India Insurance Co. Ltd. South Indian BankN.R.Institute of Business Management Page 27

Conclusion:With huge untapped market, insurance industry is likely to witness a lot of activity - be itproduct innovation or distribution channel mix. Bancassurance, the emerging distribution

channel for the insurers, will have a large impact on Indian financial services industry.Traditional methods of distributing financial services would be challenged and innovative,customized products would emerge.Banks will bring in customer database, leverage their name recognition and reputation atboth local and regional levels, make use of the personal contact with their clients, which a newentrant cannot, as they are new to the industry.In customer point of view, a plethora of products would be available to him. Morecustomized products would come into existence and that too all within a hands reach.


15/62

Finally Success of the bancassurance would mostly depend on how well insurers andbanks understand each other's businesses and seize the opportunities presented, weeding outdifferences that are likely to crop up.N.R.Institute of Business Management Page 28

2) MUTUAL FUNDS

Introduction of Mutual Fund:Mutual fund is a trust that pools the savings of a number of investors who share acommon financial goal. This pool of money is invested in accordance with a stated objective.The joint ownership of the fund is thus Mutual, i.e. the fund belongs to all investors. Themoney thus collected is then invested in capital market instruments such as shares, debenturesand other securities. The income earned through these investments and the capital appreciationsrealized are shared by its unit holders in proportion the number of units owned by them. Thus aMutual Fund is the most suitable investment for the common man as it offers an opportunity toinvest in a diversified, professionally managed basket of securities at a relatively low cost. AMutual Fund is an investment tool that allows small investors access to a well-diversifiedportfolio of equities, bonds and other securities. Each shareholder participates in the gain or loss

of the fund. Units are issued and can be redeemed as needed. The funds Net Asset value (NAV)is determined each day.Suppose you want to read a book, which costs Rs.1000/-. However, you do not haveRs.1000/- to spare for that book. The best alternative you can resort to, other than obviouslyborrowing it from somebody, is to make a group of friends who are interested in reading thatsame book. Then, the group can contribute some amount each and purchase the book, which youcan read it in turn. Thus, you are able to get the benefits out of the book and that too by payingonly a part of the price. Moreover, the book would always remain with you unlike the case if youhad borrowed it from someone. This same logic goes into investing in a mutual fund, wheresmall amounts from large investors are pooled together to create a diversified portfolio of assetsfor "mutual" benefits of all investors.

Investments in securities are spread across a wide cross-section of industries andindustrys and thus the risk is reduced. Diversification reduces the risk because all stocks may notmove in the same direction in the same proportion at the same time. Mutual fund issues units tothe investors in accordance with quantum of money invested by them. Investors of mutual fundsare known as unit holders.N.R.Institute of Business Management Page 29

When an investor subscribes for the units of a mutual fund, he becomes part ownerof the assets of the fund in the same proportion as his contribution amount put up with thecorpus (the total amount of the fund). Mutual Fund investor is also known as a mutual fundshareholder or a unit holder.Any change in the value of the investments made into capitalmarket instruments (such as shares, debentures etc) is reflected in the Net Asset Value

(NAV) of the scheme. NAV is defined as the market value of the Mutual Fund scheme'sassets net of its liabilities. NAV of a scheme is calculated by dividing the market value ofscheme's assets by the total number of units issued to the investors.N.R.Institute of Business Management Page 30

Advantages of Mutual Funds:

Professional Management: The basic advantage of funds is that, they areprofessional managed, by well qualified professional. Investors purchase funds becausethey do not have the time or the expertise to manage their own portfolio. A mutual fund is


16/62

considered to be relatively less expensive way to make and monitor their investments.Diversification: Purchasing units in a mutual fund instead of buying individual stocksor bonds, the investors risk is spread out and minimized up to certain extent. The ideabehind diversification is to invest in a large number of assets so that a loss in anyparticular investment is minimized by gains in others.

Economies of Scale: Mutual fund buy and sell large amounts of securities at a time,thus help to reducing transaction costs, and help to bring down the average cost of theunit for their investors.Liquidity: Just like an individual stock, mutual fund also allows investors to liquidatetheir holdings as and when they want.Simplicity: Investments in mutual fund is considered to be easy, compare to otheravailable instruments in the market, and the minimum investment is small. Most AMCalso have automatic purchase plans whereby as little as Rs. 2000, where SIP start withjust Rs.50 per month basis.History of the Indian mutual fund industry:The mutual fund industry in India started in 1963 with the formation of Unit Trust ofIndia, at the initiative of the Government of India and Reserve Bank. Though the growth wasslow, but it accelerated from the year 1987 when non-UTI players entered the Industry.In the past decade, Indian mutual fund industry had seen a dramatic improvement, bothqualities wise as well as quantity wise. Before, the monopoly of the market had seen an endingphase; the Assets Under Management (AUM) was Rs67 billion. The private industry entry to thefund family raised the Aum to Rs. 470 billion in March 1993 and till April 2004; it reached theheight if Rs. 1540 billion.N.R.Institute of Business Management Page 31

The Mutual Fund Industry is obviously growing at a tremendous space with the mutualfund industry can be broadly put into four phases according to the development of the industry.Each phase is briefly described as under.First Phase 1964-87:Unit Trust of India (UTI) was established on 1963 by an Act of Parliamentby the Reserve Bank of India and functioned under the Regulatory andadministrative control of the Reserve Bank of India. In 1978 UTI was de-linkedfrom the RBI and the Industrial Development Bank of India (IDBI) took over theregulatory and administrative control in place of RBI. The first scheme launched byUTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6,700 crores of assetsunder management.Second Phase 1987-1993 (Entry of Public Industry Funds):1987 marked the entry of non- UTI, public industry mutual funds set up by

public industry banks and Life Insurance Corporation of India (LIC) and GeneralInsurance Corporation of India (GIC). SBI Mutual Fund was the first non- UTIMutual Fund established in June 1987 followed by Canbank Mutual Fund (Dec 87),Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89),Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established itsmutual fund in June 1989 while GIC had set up its mutual fund in December1990.At the end of 1993, the mutual fund industry had assets under management ofRs.47, 004 crores.


17/62

Third Phase 1993-2003 (Entry of Private Industry Funds):1993 was the year in which the first Mutual Fund Regulations came intobeing, under which all mutual funds, except UTI were to be registered andgoverned. The erstwhile Kothari Pioneer (now merged with Franklin Templeton)was the first private industry mutual fund registered in July 1993.

N.R.Institute of Business Management Page 32The 1993 SEBI (Mutual Fund) Regulations were substituted by a morecomprehensive and revised Mutual Fund Regulations in 1996. The industry nowfunctions under the SEBI (Mutual Fund) Regulations 1996. As at the end ofJanuary 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores.Fourth Phase since February 2003:In February 2003, following the repeal of the Unit Trust of India Act 1963UTI was bifurcated into two separate entities. One is the Specified Undertaking ofthe Unit Trust of India with assets under management of Rs.29,835 crores as at theend of January 2003, representing broadly, the assets of US 64 scheme, assuredreturn and certain other schemes

The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB andLIC. It is registered with SEBI and functions under the Mutual Fund Regulations.consolidation and growth. As at the end of September, 2004, there were 29 funds,which manage assets of Rs.153108 crores under 421 schemes.Types of Mutual Fund:1) Based on their structure:

Open-ended funds: Investors can buy and sell the units from the fund, at any point oftime.Close-ended funds: These funds raise money from investors only once. Therefore, afterthe offer period, fresh investments can not be made into the fund. If the fund is listed on astocks exchange the units can be traded like stocks (E.g., Morgan Stanley Growth Fund).

Recently, most of the New Fund Offers of close-ended funds provided liquidity windowon a periodic basis such as monthly or weekly. Redemption of units can be made duringspecified intervals. Therefore, such funds have relatively low liquidity.N.R.Institute of Business Management Page 33

2) Based on their investment objective:

I. Equity funds: These funds invest in equities and equity related instruments. Withfluctuating share prices, such funds show volatile performance, even losses. However,short term fluctuations in the market, generally smoothens out in the long term, therebyoffering higher returns at relatively lower volatility. At the same time, such funds canyield great capital appreciation as, historically, equities have outperformed all assetclasses in the long term. Hence, investment in equity funds should be considered for a

period of at least 3-5 years. It can be further classified as:Index funds- In this case a key stock market index, like BSE Sensex or Nifty is tracked.Their portfolio mirrors the benchmark index both in terms of composition and individualstock weight ages.Equity diversified funds- 100% of the capital is invested in equities spreading acrossdifferent industrys and stocks.Dividend yield funds- it is similar to the equity diversified funds except that they investin companies offering high dividend yields.


18/62

Thematic funds- Invest 100% of the assets in industrys which are related through sometheme. e.g. -An infrastructure fund invests in power, construction, cements industrys etc.Industry funds- Invest 100% of the capital in a specific industry. e.g. - A bankingindustry fund will invest in banking stocks.ELSS- Equity Linked Saving Scheme provides tax benefit to the investors.

II. Balanced fund: Their investment portfolio includes both debt and equity. As a result, onthe risk-return ladder, they fall between equity and debt funds. Balanced funds are theideal mutual funds vehicle for investors who prefer spreading their risk across variousinstruments. Following are balanced funds classes:Debt-oriented funds: Investment below 65% in equities.Equity-oriented funds: Invest at least 65% in equities, remaining in debt.III. Debt fund: They invest only in debt instruments, and are a good option for investorsaverse to idea of taking risk associated with equities. Therefore, they invest exclusively infixed-income instruments like bonds, debentures, Government of India securities; andN.R.Institute of Business Management Page 34money market instruments such as certificates of deposit (CD), commercial paper (CP)

and call money. Put your money into any of these debt funds depending on yourinvestment horizon and needs.Liquid funds: These funds invest 100% in money market instruments, a large portionbeing invested in call money market.Gilt funds ST: They invest 100% of their portfolio in government securities of and Tbills.Floating rate funds : Invest in short-term debt papers. Floaters invest in debt instrumentswhich have variable coupon rate.Arbitrage fund: They generate income through arbitrage opportunities due to mispricingbetween cash market and derivatives market. Funds are allocated to equities,derivatives and money markets. Higher proportion (around 75%) is put in moneymarkets, in the absence of arbitrage opportunities.Gilt funds LT: They invest 100% of their portfolio in long-term government securities.Income funds LT: Typically, such funds invest a major portion of the portfolio in longtermdebt papers.MIPs: Monthly Income Plans have an exposure of 70%-90% to debt and an exposure of10%-30% to equities.FMPs: Fixed monthly plans invest in debt papers whose maturity is in line with fund.3) Other Schemes:

Tax Saving Schemes: Tax-saving schemes offer tax rebates to the investors under taxlaws prescribed from time to time. Under Sec.88 of the Income Tax Act, contributionsmade to any Equity Linked Savings Scheme (ELSS) are eligible for rebate.Index Schemes: Index schemes attempt to replicate the performance of a particular indexsuch as the BSE Sensex or the NSE 50. The portfolio of these schemes will consist ofonly those stocks that constitute the index. The percentage of each stock to the totalholding will be identical to the stocks index weightage. And hence, the returns from suchschemes would be more or less equivalent to those of the Index.Industry Specific Schemes: These are the funds/schemes which invest in the securitiesof only those industrys or industries as specified in the offer documents. e.g.N.R.Institute of Business Management Page 35Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks,etc. The returns in these funds are dependent on the performance of the respective


19/62

industrys/industries. While these funds may give higher returns, they are more riskycompared to diversified funds. Investment strategies:Systematic Investment Plan: under this a fixed sum is invested each month on a fixeddate of a month. Payment is made through post dated cheques or direct debit facilities.The investor gets fewer units when the NAV is high and more units when the NAV is

low. This is called as the benefit of Rupee Cost Averaging (RCA).Systematic Transfer Plan: under this an investor invest in debt oriented fund and giveinstructions to transfer a fixed sum, at a fixed interval, to an equity scheme of the samemutual fund.Systematic Withdrawal Plan: if someone wishes to withdraw from a mutual fund thenhe can withdraw a fixed amount each month.Risk v/s. Return:N.R.Institute of Business Management Page 36

Working of mutual fund:The entire mutual fund industry operates in a very organized way. The investors, knownas unit holders,handover their savings to the AMCs under various schemes. The objective of the

investment should match with the objective of the fund to best suit the investors needs. TheAMCs further invest the funds into various securities according to the investment objective.The return generated from the investments is passed on to the investors or reinvested asmentioned in the offer document.N.R.Institute of Business Management Page 37

Guidelines of the SEBI for Mutual Fund Companies:To protect the interest of the investors, SEBI formulates policies and regulates the mutualfunds. It has notified regulations in 1993 (fully revised in 1996) and issues guidelines from timeto time.SEBI approved Asset Management Company (AMC) manages the funds by makinginvestments in various types of securities. Custodian, registered with SEBI, holds the securities

of various schemes of the fund in its custody. According to SEBI Regulations, two thirds of thedirectors of Trustee Company or board of trustees must be independent.The Association of Mutual Funds in India (AMFI) reassures the investors in units ofmutual funds that the mutual funds function within the strict regulatory framework. Its objectiveis to increase public awareness of the mutual fund industry. AMFI is engaged in upgradingprofessional standards and in promote industry practices in diverse areas such as valuation,disclosure etc.Documents required (PAN mandatory):

1. Proof of identity:Photo PAN cardIn case of non-photo PAN card in addition to copy of PAN card any one of the following:

driving license/passport copy/ voter id/ bank photo pass book.2. Proof of address (any of the following):Latest telephone bill, latest electricity bill, Passport, latest bank passbook/bank accountstatement, latest Demat account statement, voter id, driving license, ration card, rentagreement.Offer document:

An offer document is issued when the AMCs make New Fund Offer(NFO). Its advisableto every investor to ask for the offer document and read it before investing. An offer document


20/62

consists of the following:N.R.Institute of Business Management Page 38

Standard Offer Document for Mutual Funds (SEBI Format)Summary InformationGlossary of Defined Terms

Risk DisclosuresLegal and Regulatory ComplianceExpensesCondensed Financial Information of SchemesConstitution of the Mutual FundInvestment Objectives and PoliciesManagement of the FundOffer Related Information.Key Information Memorandum:

A key information memorandum, popularly known as KIM, is attached along with themutual fund form. And thus every investor get to read it. Its contents are:

Name of the fund.Iestment objectiveAset allocation pattern of the scheme.Risk profile of the schemePlans & optionsMinimum application amount/ no. of unitsBenchmark indexDividend policyName of the fund manager(s)Expenses of the scheme: load structure, recurring expensesPerformance of the scheme (scheme return v/s. benchmark return)

Year- wise return for the last 5 financial year.


Distribution channels:Mutual funds posses a very strong distribution channel so that the ultimate customersdoesnt face any difficulty in the final procurement. The various parties involved in distributionof mutual funds are:Direct marketing by the AMCs: the forms could be obtained from the AMCs directly.The investors can approach to the AMCs for the forms. some of the top AMCs of Indiaare; Reliance ,Birla Sunlife, Tata, SBI magnum, Kotak Mahindra, HDFC, Sundaram,ICICI, Mirae Assets, Canara Robeco, Lotus India, LIC, UTI etc. whereas foreign AMCsinclude: Standard Chartered, Franklin Templeton, JP Morgan, HSBC, DSP Merill Lynch,

etc.Broker/ sub broker arrangements: the AMCs can simultaneously go for broker/sub-brokerto popularize their funds. AMCs can enjoy the advantage of large network of thesebrokers and sub brokers.eg: SBI being the top financial intermediary of India has thegreatest network. So the AMCs dealing through SBI has access to most of the investors.Individual agents, Banks, NBFC: investors can procure the funds through individualagents, independent brokers, banks and several non- banking financial corporations too,whichever he finds convenient for him.


21/62

Costs associated:1. Expenses:AMCs charge an annual fee, or expense ratio that covers administrative expenses, salaries,advertising expenses, brokerage fee, etc. A 1.5% expense ratio means the AMC charges Rs1.50for every Rs100 in assets under management. A fund's expense ratio is typically to the size of the

funds under management and not to the returns earned. Normally, the costs of running a fundgrow slower than the growth in the fund size - so, the more assets in the fund, the lower shouldbe its expense ratio.2. Loads:Entry Load/Front-End Load (0-2.25%)- its the commission charged at the time of buyingthe fund to cover the cost of selling, processing etc.N.R.Institute of Business Management Page 40

Exit Load/Back- End Load (0.25-2.25%)- it is the commission or charged paid when aninvestor exits from a mutual fund, it is imposed to discourage withdrawals. It may reduceto zero with increase in holding period.Performance measures:

Equity funds: the performance of equity funds can be measured on the basis of: NAVGrowth, Total Return; Total Return with Reinvestment at NAV, Annualized Returns andDistributions, Computing Total Return (Per Share Income and Expenses, Per ShareCapital Changes, Ratios, Shares Outstanding), the Expense Ratio, Portfolio TurnoverRate, Fund Size, Transaction Costs, Cash Flow, Leverage.Debt fund: Likewise the performance of debt funds can be measured on the basis of:Peer Group Comparisons, The Income Ratio, Industry Exposures and Concentrations,NPAs, besides NAV Growth, Total Return and Expense Ratio.Liquid funds: The performance of the highly volatile liquid funds can be measured on thebasis of: Fund Yield, besides NAV Growth, Total Return and Expense Ratio.Concept of benchmarking for performance evaluation:

Every fund sets its benchmark according to its investment objective. The fundsperformance is measured in comparison with the benchmark. If the fund generates a greaterreturn than the benchmark then it is said that the fund has outperformed benchmark , if it is equalto benchmark then the correlation between them is exactly 1. And if in case the return is lowerthan the benchmark then the fund is said to be underperformed.Some of the benchmarks are :1. Equity funds: market indices such as S&P CNX nifty, BSE100, BSE200, BSE-PSU, BSE 500index, BSE bankex, and other industryal indices.2. Debt funds: Interest Rates on Alternative Investments as Benchmarks, I-Bex Total ReturnIndex, JPM T-Bill Index Post-Tax Returns on Bank Deposits versus Debt Funds.3. Liquid funds: Short Term Government Instruments Interest Rates as Benchmarks, JPM TBillIndex

To measure the funds performance, the comparisons are usually done with:Funds from the same peer group.Other similar products in which investors invest their funds.N.R.Institute of Business Management Page 41

Performance:Every investor investing in the mutual funds is driven by the motto of either wealthcreation or wealth increment or both. Therefore its very necessary to continuously evaluate thefunds performance with the help of factsheets and newsletters, websites, newspapers and


22/62

professional advisors like SBI mutual fund services. If the investors ignore the evaluation offunds performance then he can loose hold of it any time. In this ever-changing industry, he canface any of the following problems:Variation in the funds performance due to change in its management/ objective.The funds performance can slip in comparison to similar funds.

There may be an increase in the various costs associated with the fund.Beta, a technical measure of the risk associated may also surge.The funds ratings may go down in the various lists published by independent ratingAgencies.It can merge into another fund or could be acquired by another fund house.Association of Mutual Funds in India (AMFI):With the increase in mutual fund players in India, a need for mutual fund association inIndia was generated to function as a non-profit organization. Association of Mutual Funds inIndia (AMFI) was incorporated on 22nd August, 1995.AMFI is an apex body of all AssetManagement Companies (AMC) which has been registered with SEBI. Till date all the AMCsare that have launched mutual fund schemes are its members. It functions under the supervision

and guidelines of its Board of Directors.Association of Mutual Funds India has brought down the Indian Mutual Fund Industry toa professional and healthy market with ethical lines enhancing and maintaining standards. Itfollows the principle of both protecting and promoting the interests of mutual funds as well astheir unit holders.N.R.Institute of Business Management Page 42

Objectives:

The Association of Mutual Funds of India works with 30 registered AMCs of thecountry. It has certain defined objectives which juxtaposes the guidelines of its Board ofDirectors. The objectives are as follows:-This mutual fund association of India maintains a high professional and ethical standards

in all areas of operation of the industry.It also recommends and promotes the top class business practices and code of conductwhich is followed by members and related people engaged in the activities of mutualfund and asset management. The agencies who are by any means connected or involvedin the field of capital markets and financial services also involved in this code of conductof the association.AMFI interacts with SEBI and works according to SEBIs guidelines in the mutual fundindustry.Association of Mutual Fund of India do represent the Government of India, the ReserveBank of India and other related bodies on matters relating to the Mutual Fund Industry.It develops a team of well qualified and trained Agent distributors. It implements a

programme of training and certification for all intermediaries and other engaged in themutual fund industry.AMFI undertakes all India awareness programme for investors in order to promoteproper understanding of the concept and working of mutual funds.At last but not the least association of mutual fund of India also disseminate informationon Mutual Fund Industry and undertakes studies and research either directly or inassociation with other bodies.The sponsorers:


23/62

1. Bank SponsoredSBI Fund Management Ltd.BOB Asset Management Co. Ltd.Canbank Investment Management Services Ltd.UTI Asset Management Company Pvt. Ltd.

N.R.Institute of Business Management Page 432. InstitutionsGIC Asset Management Co. Ltd.Jeevan Bima Sahayog Asset Management Co. Ltd.3. Private IndustryIndian -BenchMark Asset Management Co. Pvt. Ltd.Cholamandalam Asset Management Co. Ltd.Credit Capital Asset Management Co. Ltd.Escorts Asset Management Ltd.JM Financial Mutual Fund

Kotak Mahindra Asset Management Co. Ltd.Reliance Capital Asset Management Ltd.Sahara Asset Management Co. Pvt. LtdSundaram Asset Management Company Ltd.Tata Asset Management Private Ltd.Predominantly India Joint Ventures:-Birla Sun Life Asset Management Co. Ltd.DSP Merrill Lynch Fund Managers LimitedHDFC Asset Management Company Ltd.Predominantly Foreign Joint Ventures:ABN AMRO Asset Management (I) Ltd.

Alliance Capital Asset Management (India) Pvt. Ltd.

Deutsche Asset Management (India) Pvt. Ltd.Fidelity Fund Management Private LimitedFranklin Templeton Asset Mgmt. (India) Pvt. Ltd.HSBC Asset Management (India) Private Ltd.ING Investment Management (India) Pvt. Ltd.Morgan Stanley Investment Management Pvt. Ltd.Principal Asset Management Co. Pvt. Ltd.N.R.Institute of Business Management Page 44

Prudential ICICI Asset Management Co. Ltd.Standard Chartered Asset Mgmt Co. Pvt. Ltd.

Mutual fund companies in India:ABN AMRO Mutual FundBirla Sun Life Mutual FundBank of Baroda Mutual Fund (BOB Mutual Fund)HDFC Mutual FundHSBC Mutual FundING Vysya Mutual FundPrudential ICICI Mutual Fund


24/62

Sahara Mutual FundState Bank of India Mutual FundTATA Mutual FundKotak Mahindra Mutual FundUnit Trust of India Mutual Fund

Reliance Mutual FundStandard Chartered Mutual FundFranklin Templeton India Mutual FundMorgan Stanley Mutual Fund IndiaAlliance Capital Mutual FundBenchmark Mutual FundChola Mutual FundLIC Mutual FundGIC Mutual FundCanbank Mutual FundN.R.Institute of Business Management Page 45

3) DEMATERIALISATIONDefinition:Dematerialisation is the process of converting physical shares (share certificates) into anelectronic form. Shares once converted into dematerialised form are held in a Demat account.Dematerialisation Process:An investor having securities in physical form must get them dematerialised, if he intendsto sell them. This requires the investor to fill a Demat Request Form (DRF) which is availablewith every DP and submit the same along with the physical certificates. Every security has anISIN (International Securities Identification Number). If there is more than one security than theequal number of DRFs has to be filled in. The whole process goes on in the following manner:N.R.Institute of Business Management Page 46

Things investors should know about account opening and dematerialisation:1) Providing the bank account details at the time of account opening

It is mandatory for an investor to provide his bank account details at the time of opening a demataccount. This is done to safeguard investor's own interests. There are two major reasons for this:The interest and dividend warrants can't be en-cashed by any unauthorizedperson, as the bank account number is mentioned on it.It is convenient and time saving, as dividends and interests given by thecompanies can be directly credited to the investor's bank account (through ECSfacility, wherever available).2) Change in bank account details

It is possible for an investor to make changes to the details of his bank account. The

investor must inform any change in his bank account details to his DP. This enables him toreceive the cash corporate benefits (such as dividends, interests) directly into his account in timeand discourages any unauthorized use by any second party.3) Change in the address of investor as provided to the DP

Any change in your address should be immediately informed to DP. This enables DP tomake necessary changes in the records and informing the concerned companies about the same.4) Opening multiple accounts

An investor is allowed to open more than one account with existing DP or with different


25/62

DPs.5) Minimum balance of securities required in demat account

There is no stipulated minimum balance of securities to be kept in a demat account.6) Account opening and ownership pattern of securities

One must make sure to open a demat account in the same ownership pattern in which the

physical securities are held. For example: If you have two share certificates, one in yourindividual name (say 'X') and the other held jointly with some other individual (say 'XY'), then insuch a case you will have to open two different accounts in respective ownership patterns (one inyour name i.e. 'X' and the other account in the name of 'XY').N.R.Institute of Business Management Page 47

7) Same combination of names on certificates but different sequence of names on the

certificates or demat account

Regulations provide that the client receives a contract note indicating details like ordernumber, trade number, time, price, brokerge, etc. within 24 hours.of the trade. In case of anydoubts about the details of the contract note, you (investor) can avail the facility provided byNSE, wherein you can verify the trades on your websitewww.nseindia.com/content/equities/eq_trdverify.htm. The Exchange generates and maintains anaudit trail of orders/trades for a number of years.and you can counter check detais of order/tradewith the Exchange.8) Holding a joint account on "Either or Survivor" basis like a bank account

No investor can open a demat account on "E or S" basis like a bank account.9) Allowing somebody else to operate your Demat account

It is possible for an account holder (Beneficiary Owner) to authorize some other person tooperate the demat account on his behalf by executing a power of attorney. After submitting thepower of attorney to the DP, that person can operate the account on behalf of the beneficiaryowner (BO).10) Addition/deletion of the names of the account holders after opening the account

It is not possible to make changes in the names of the account holders of a BO account. Anew account has to be opened in a desired holding/ownership pattern.11) Closing a demat account and transfer of securities to another account with same or

different DP

An investor, if he wants, can also close his demat account with one DP and transfer allthe securities to another account with existing or a different DP. As per a SEBI circular issued onNovember 09, 2005, there are no charges for account closure or transfer of securities by aninvestor from one DP to another12) Freezing/Locking a demat account

The account holder can freeze his demat account for a desired time period. A frozenaccount prevents securities to be transferred out of (Debit) and transferred into (Credit) theaccount.N.R.Institute of Business Management Page 4813) Dematerialised shares do not have any distinctive number

Dematerialised securities are fungible assets. Therefore they are interchangeable andidentical.14) Rematerialisation

The process of getting the securities in an electronic form, converted back into thephysical form is known as Rematerialisation. An investor can rematerialise his shares by fillingin a Remat Request Form (RRF). The whole process goes on as follows:


26/62


Note:Depository - An organization that facilitates holding of securities in the electronic formand enables DPs to provide services to investors relating to transaction in securities.There are two depositories in India, namely NSDL and CDSL. As per a SEBI guideline,

the minimum net worth stipulated for a depository is Rs.100 crore.NSDL/CDSL - The securities are held in depository accounts, like the funds are held inbank accounts. There are two depositories in India namely NSDL and CDSL. NSDL(National Securities Depository limited) was established in August 1996 and is the firstdepository in India. CDSL (Central Depository Securities Limited) is the other depositoryand was established in 1999.DP (Depository Participant) - A Depository Participant can be a financial organizationlike banks, brokers, financial institutions, custodians, etc., acting as an agent of theDepository to make its services available to the investors. There are a total of 538 DPsregistered with SEBI, as on March 31, 2006 and each DP is assigned a uniqueidentification number known as DP-ID.

Demat account is a safe and convenient means of holding securities just like a bankaccount is for funds. Today, practically 99.9% settlement (of shares) takes place on demat modeonly. Thus, it is advisable to have a Beneficiary Owner (BO) account to trade at the exchanges.N.R.Institute of Business Management Page 50

Bank Account Vs Demat Account

S.No.Basis OfDifferentiation Bank Account Demat Account1. Form of

Holdings/Deposits Funds Securities

2. Used for Safekeeping of money Safekeeping of shares3. Facilitates Transfer of money (withoutactually handling money)Transfer of shares (withoutactually handling shares)4. Where to open A bank of choice A DP of choice (can be abank)5. Requirement of

PAN NumberNot Mandatory Mandatory (effective fromApril 01, 2006)6. Interest accrual on

holdings

Interest income is subject tothe applicable rate of interestNo interest accruals onsecurities held in demataccount7. Minimum balance

requirement


27/62

AQB* maintainance isspecified for certain bankaccountsNo such requirement8. Either or Survivor

facility Available Not available*AQB - Average Quarterly BalanceS. No. BASIS OFSIMILARITY PARTICULARS1. Security and

Convenience

Both are very safe and convenient means ofholding deposits/securities2. Number of accountsNo legal barrier on the number of bank or demataccounts that can be opened3. Transfer of deposits

(funds or securities)Funds/securities are transferred only at theinstruction of the account holder4. Physical transfer of

money/securities

Physical transfer of money/securities is notinvolved5. Nomination Facility AvailableN.R.Institute of Business Management Page 51

Benefits Of Demat Account:A safe and convenient way of holding securities (equity and debt instruments both).

Transactions involving physical securities are costlier than those involving dematerialisedsecurities (just like the transactions through a bank teller are costlier than ATMtransactions). Therefore, charges applicable to an investor are lesser for each transaction.Securities can be transferred at an instruction immediately.Increased liquidity, as securities can be sold at any time during the trading hours(between 9:55 AM to 3:30 PM on all working days), and payment can be received in avery short period of time.No stamp duty charges.Risks like forgery, thefts, bad delivery, delays in transfer etc, associated with physicalcertificates, are eliminated.Pledging of securities in a short period of time.

Reduced paper work and transaction cost.Odd-lot shares can also be traded (can be even 1 share).Nomination facility available.Any change in address or bank account details can be electronically intimated to allcompanies in which investor holds any securities, without having to inform each of themseparately.Securities are transferred by the DP itself, so no need to correspond with the companies.Shares arising out of bonus, split, consolidation, merger etc. are automatically credited


28/62

into the demat account of the investor.Shares allotted in public issues are directly credited into demat account of the applicants

in quick time.Opening a Demat Account:To start dealing in securities in electronic form, one needs to open a demat account with a

DP of his choice. An investor already having shares in physical form should ensure that he getsthe account opened in the same set of names as appearing on the share certificate; otherwise anew account can be opened in any desired pattern by the investor.Choose a DPN.R.Institute of Business Management Page 52

Fill up an account opening form provided by DP, and sign an agreement with DP in astandard format prescribed by the depository.DP provides the investor with a copy of the agreement and schedule of charges for hisfuture reference.DP opens the account and provides the investor with a unique account number, alsoknown as Beneficiary Owner Identification Number (BO ID).

Documents to be attached:Passport size photographsProof of residence (POR) - Any one of Photo Ration Card with DOB / Photo DrivingLicense with DOB / Passport copy / Electricity bill / Telephone billProof of identity (POI) - Any one of Passport copy / Photo Driving License with DOB /Voters ID Card / PAN Card / Photo Ration Card with DOBPAN cardN.R.Institute of Business Management Page 53

Survey Analysis:Demographic Profile:

GenderEXHIBIT I

Frequency PercentMale 228 76.0Female 72 24.0Total 300 100.0FIGURE I


AgeEXHIBIT II

Frequency Percent20 years - 35 Years 133 44.336 Years- 50 Years 116 38.751 years - 65 Years 39 13.0Above 65 Years 12 4.0Total 300 100.0FIGURE II


OccupationEXHIBIT III


29/62

Frequency PercentSelf Employed 62 20.7Government Employee 55 18.3Private Industry Employee 140 46.7Professionals 43 14.3

Total 300 100.0FIGURE IIIN.R.Institute of Business Management Page 56

Monthly IncomeEXHIBIT IV

Frequency Percent0 Rs.- 15000 Rs. 73 24.315001 Rs.- 30000 Rs. 136 45.330001 Rs.- 45000 Rs. 64 21.3Above 45000 Rs. 27 9.0Total 300 100.0FIGURE IV


1. In which bank you have your account?EXHIBIT 1Frequency Percent

SBI 112 24BOB 71 15ICICI 98 21HSBC 51 11Axis 63 13Others 76 16FIGURE 1.1

N.R.Institute of Business Management Page 58FIGURE 1.2

INTERPRETATION :From the above table and the column graph we can conclude that if we talk about apublic Industry majority of the respondents are having their account in SBI while if we talkabout a private Industry maximum number of respondents have preferred ICICI while theother banks are able to serve more or less the same number of customers.The pie-chart indicates that 24% of the share is enjoyed by SBI while with no muchdifference 21% is enjoyed by ICICI. HSBC is having the least share in the pie of just 11%but is not too far as compared to other banks.N.R.Institute of Business Management Page 59

2. Are you aware about the Third Party Products?EXHIBIT 2Frequency Percent

Yes 242 80.7No 58 19.3Total 300 100FIGURE 2.1N.R.Institute of Business Management Page 60


30/62

FIGURE 2.2

INTERPRETATION :From the above table and the column graph we can interpret that 242 out of 300respondents of Ahmedabad city are aware about the third party products while only 58respondents have no idea regarding the same.

The pie-chart clearly indicates that the respondents who know about the third partyproducts consists of 81 % while the respondents having no knowledge of these products are19 %. Here we can observe that the awareness of the third party products is quite satisfactoryas it consists of 81 % of the total respondents under survey but still even the remaining 19 %should be made aware regarding the dealing through third party products as even they play amajor role in the investment market.N.R.Institute of Business Management Page 61

If yes, then have you ever invested for the Third Party Products?EXHIBIT 2.1Frequency Percent

Yes 224 92.6

No 18 7.4Total 242 100Missing 58Grand Total 300FIGURE 2.1.1N.R.Institute of Business Management Page 62FIGURE 2.2.1

INTERPRETATION :The table and the column graph indicate that 224 respondents out of 242 has investedin the third party products while 18 respondents are aware about the products but had notinvested yet.The above pie-chart shows that out of the respondents who are aware about the third

party products, majority of them had invested in it which consists of 93 % while only 7 % areyet to invest. From this result we can conclude that the investment in the third party productsare not so risky as it seems to be as large number of respondents has opted for it.N.R.Institute of Business Management Page 63

3. Do you think Banks need to deal with the Third Party Products ?EXHIBIT 3Frequency Percent

Yes 177 73.1No 65 26.9Total 242 100Missing 58

Grand Total 300FIGURE 3.1N.R.Institute of Business Management Page 64FIGURE 3.2

INTERPRETATION :Above column graph interprets that 177 respondents thinks that banks should dealwith the third party products while 65 respondents out of 300 respondents thinks that thebanks should not deal in this products.


31/62

The pie-chart shows that 73 % of the respondents are in favour of the banks dealing inthe third party products as they think that banks can provide better facilities in this productswhile only 27 % of respondents thinks that dealing in the third party products is not a job ofthe banks and so it should concentrate only to its banking services.N.R.Institute of Business Management Page 65

4. In which products have you invested through banks?EXHIBIT 4FIGURE 4.1Frequency Percent

Insurance 150 47Mutual Funds 121 38Demat Account Services 40 13Other 7 2N.R.Institute of Business Management Page 66FIGURE 4.2

INTERPRETATION :The table and graph very clearly show that the respondents are more inclined towardsthe investment in Insurance as 150 respondents has invested in it as a third party productwhich includes both life insurance and general insurance while Demat services offered bythe