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The following points highlight the top thirteen financial services rendered by public sector banks of India. The services are:- 1. Merchant Banking 2. Leasing 3. Venture Capital 4. Mutual Funds 5. Factoring 6. Housing 7. New Technology in Banking Mechanisation 8. Customer Service 9. Banking Ombudsman 10. Credit Cards 11. Installation of ATMs 12. Hire-Purchase Business 13. Consumer Credit.
Service # 1. Merchant Banking:
Merchant banking includes such services as management of public issues, loan syndication, financial and management consultancy, project counselling, mergers and acquisitions, management of non-resident investments, etc.
The credit for starting merchant banking in India goes to foreign banks like Grindlays Bank, Citibank, etc. At present, a number of public sector banks are performing merchant banking services which are the subsidiaries of banks. Some of these are SBI Capital Markets Limited, Bank of Baroda Merchant Bank Division, Canbank Financial Services Ltd., All bank Finance Ltd., Union Bank of India Merchant Bank Division, PNB Capital Services Ltd., BOI Finance Ltd., etc.
Service # 2. Leasing:
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Leasing is an instrument of corporate finance whereby industries enter into a contractual arrangement with a leasing company to use an asset (i.e. plant, equipment, transportation facilities or any other services) in return for rent for an agreed period of time. Leasing companies also provide finance to industries. Equipment leasing and financial leasing in India have been in the hands of private companies since 1973.
It is only recently with the establishment of merchant banking subsidiaries that public sector banks have made their entry into the leasing business. As at the end of June 1991, there were nine equipment leasing-cum-merchant banking subsidiaries set up by Indian banks. But they have yet to make a niche for themselves in a very competitive leasing market where about 400 private leasing companies are operating.
Service # 3. Venture Capital:
Venture capital relates to finance provided to small/medium business units promoted by firms or individuals having sound project ideas. These projects involve new technology or products but the promoter lacks financial resources to promote his project.
Venture capital provided by banks or financial institutions imply equity investment in the initial stages of the company. Financial institutions like ICICI, IDBI, UTI and IFCI have been the pioneers in promoting venture capital finance in India. Of the banks, SBI Capital Markets Limited has been in the forefront in providing assistance to industries under its Equity Support and Venture Capital Schemes.
Service # 4. Mutual Funds:
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Mutual funds mobilise savings from the public and invest them in different types of securities in the stock markets and thus help both the investor and the industry. Mutual funds earn interest, dividend and capital gains from such investments and distribute them to small investors as return. Thus they provide safety, liquidity and growth to investors.
They provide stability to share prices by buying them when they are falling and selling them when they are rising. They provide safety and income to investors and resources to entrepreneurs for the growth of industry.
The UTI was the first mutual fund set up in India in 1964. In recent years a number of public sector banks have set up mutual funds as their subsidiaries. These banks are Indian Bank, Bank of India, SBI, Canara Bank, Bank of Baroda, PNB, etc. The SBI group also launched the India Magnum Fund in 1989, a maiden offshore fund which was privately placed with institutional investors and others primarily in the USA.
Service # 5. Factoring:
A ‘Factor’ is a commission agent who besides offering funds to its clients, undertakes management of accounts receivables, collection of debts and safety against risk of default. Factoring agencies ensure smooth of cash flows. The factor undertakes collection of a client’s (say a small scale unit) debts and finances it on the basis of accounts receivables.
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In fact, debts are assigned to the factor which are collected in due course. The factor, in turn, receives the service charge by way of discount or rebate deducted from the bills. In short, factoring is a collection and finance service designed to improve the cash flow of small firms by turning their sales invoices into ready cash.
The Vaghul Committee recommended the introduction of factoring services with a view to undertaking the collection of dues on behalf of suppliers in the small scale sector. The Kalyana sundaram Committee examined the feasibility of factoring services and recommended their introduction in India.
The Banking Regulation Act was amended in July 1990 for this purpose and the RBI directed that factoring be done by banks through separate subsidiaries. Accordingly, the State Bank of India launched a new subsidiary called the SBI Factors and Commercial Services Ltd on 30 July, 1991.
The aim is to render factoring services to the industrial and commercial units in Western India, covering the States of Maharashtra, Gujarat, Goa, Madhya Pradesh and the Union Territories of Daman, Diu, Dadra and Nagar Haveli.
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Similarly, the Canara Bank launched its factoring subsidiary, the Canbank Factoring Ltd. on 24 August, 1991 to serve units in Southern India and the Punjab National Bank and Allahabad Bank have come forward to set up factoring agencies in Northern India and Eastern India respectively.
Its Working:
Factoring in India involves the following procedure:
The factoring service buys invoices on a continuing basis, prepays up to 80 per cent of the value of the invoices immediately, performs the accounting function of sales ledger maintenance and the collection function of realising invoices purchased. The suppliers invoice their customers in the usual way but only add that the debt due on the invoice must be paid to the Factor.
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The suppliers offer the assigned invoices to the Factor with a schedule of offer, accompanied by a copy of the receipted delivery of the challan. The Factor provides prepayment up to 80 per cent of the value of each invoice.
When the Factor collects the debts, the supplier receives an official notification and personalised statement of accounts from the former. When the supplier settles the invoice, the Factor pays, the supplier the remaining 20 per cent of the invoice value. To keep the supplier informed of the factored invoices, the Factor sends monthly statements of accounts.
The Factor charges discount on the prepayment drawn by its client. The discount rate which is comparable to bank lending rate is collected monthly on actual drawings, in the prepayment account. In addition, there is a service charge (or fee) which varies between one and five per cent depending on the services availed of and the volume of transactions made.
Its Benefits. Factoring benefits the supplier, his banker and his customer. The supplier converts his invoice into instant cash up to 80 per cent of its value, without having to wait for the usual 30 or more credit days. His bank can leave the post-sale finance to the factor and concentrate only on inventory finance.
The factor need not accept a bill of exchange. He has just to abide by a notice on the invoice to pay money direct to the Factor. But it will take some time before full factoring is started in India where the risk is entirely borne by the Factor. For the present, there is recourse factoring where, in case of default, the risk ultimately devolves on the supplier.
Service # 6. Housing:
Habitat banking is fast catching up in India. For meeting the requirements of housing finance, a National Housing Bank (NHB) was established as an apex institution in 1988. It has been providing assistance through a number of schemes. These include: Home Loan Account Scheme, liberalised lending by commercial banks, and refinance facilities. Besides, the banking sector has been involved substantially in housing finance in recent years. Commercial banks provide finance to low and middle income groups to purchase or construct houses or flats.
Interest rates are fixed by the RBI and NHB for the loans advanced by commercial banks and housing finance institutions. Effective 5 June, 1991, banks were allowed to provide housing finance to builders by way of term loans for periods ranging from 3 to 5 years, linked to specific projects for development of plots together with construction of flats/houses under the refinance scheme of the NHB. A number of public sector and private sector banks have promoted housing finance companies such as SBI, Bank of Baroda, Andhra Bank, Central Bank of India, Vijaya Bank etc.
Service # 7. New Technology in Banking Mechanisation:
Another innovation in Indian banking has been the use of new technology in banking mechanisation. Majority of Indian banks, have provided Electronic Accounting Machines and Advance Ledger Posting Machines in their branches. Banks have taken up the project of total computerisation of operations of their branches.
About 260 offices of banks have been hooked through BANKNET, a data communication network for the Reserve Bank and public sector banks at Mumbai, New Delhi, Chennai, Kolkata, Bangalore, Hyderabad and Nagpur. Banks have been asked to introduce Magnetic Ink Character Recognition (MICR) cheques.
The RBI is providing MICR-based cheque clearing facilities at Mumbai, Chennai, Kolkata, New Delhi and Nagpur. Several banks are using SWIFT (Society for Worldwide Inter-bank Financial Telecommunications) network and have installed hardware and software required for connecting to SWIFT. With a view to further improving the communication network in regard to speed, dependability and security, a number of banks have installed satellite disk antennae at their offices in many cities.
When fully operational, these would form part of the Remote Area Business Message Network (RABMN) and would be used to transmit messages including SWIFT messages, between bank offices in India and abroad. A number of banks have started Electronic Clearing Service which is being used by several corporate bodies to effect dividend/interest to their shareholders/ customers.
Service # 8. Customer Service:
Improvement in the level of customer satisfaction has been another innovation of banking services. To ensure efficient customer service, banks collect feedback on a regular basis through visits of senior officials from controlling offices to their branches. To elicit customer reactions about the quality of service rendered, the system of holding Customer Meets at regular intervals at branches has been evolved.
Some banks have formed Customer Service Committees and Customer Councils. Banks have put up ‘Complaints and Suggestions’ boxes at all branches which are dealt with promptly. Some of the banks have also introduced courier system to expedite collections, remittances and transfer of accounts of customers.
Service # 9. Banking Ombudsman:
For expeditious and inexpensive settlement of customer complaints against deficiency in banking services, including non-observance of the RBI directives on loans and advances, etc., the Banking Ombudsman has been appointed on a full time basis each at Mumbai, Delhi, Bhopal, Chandigarh, Hyderabad, Patna, Jaipur, etc. The scheme covers all scheduled commercial banks, except RRBs and PCBs.
Service # 10. Credit Cards:
The credit card is now-a-days an integral part of better customer service. Under the credit scheme, card holders are allowed credit facilities for a specified period of time without obtaining any security from them. The card holders can purchase commodities and pay for services such as hotel bills, railway and airways tickets, etc. without making cash payments.
The bank issuing the credit card is able to make increased earnings by way of commission from dealers and interest from card holders. The credit card system has become an aggressive area of business for Indian banks.
Major public sector and private sector banks have come out with their credit cards. Some of them have been permitted by the RBI to have tie-up arrangements with other banks in India and abroad. This has facilitated wider use of cards nationally and internationally.
Service # 11. Installation of ATMs:
Several banks have installed Automated Teller Machines (ATMs) at licensed branches and extension counters where clients can withdraw cash 24 hours a day up to a certain ATMs.
Service # 12. Hire-Purchase Business:
On the recommendations of the Reserve Bank, the Government of India notified on 7 September, 1990 hire-purchase as a permissible form of business for banks to engage in. Accordingly, Canara Bank, State Bank of India, Punjab National Bank and Indian Bank have been permitted to engage in hire-purchase business through their respective merchant banking subsidiaries.
Service # 13. Consumer Credit:
Consumer credit is also developing as a profitable area of business for banks in India. Banks help the middle class customers to purchase durable consumer goods such as motor vehicles, refrigerators, TVs, etc. The banks earn interest on such credits. The consumer goods industry gets a boost in its sales which in turn help in increasing employment opportunities.
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