Merchant Banking and Financial Services Part B Q&A || MBA

Merchant Banking and Financial Services

Part –B Q&A

1. What are the factors affecting Financial services?

2. Explain the functions of merchant banking?

The functions of merchant banking are listed as follows:

1. Raising Finance for Clients: Merchant Banking helps its clients to raise finance through issue of shares, debentures, bank loans, etc. It helps its clients to raise finance from the domestic and international market. This finance is used for starting a new business or project or for modernization or expansion of the business.
2. Broker in Stock Exchange: Merchant bankers act as brokers in the stock exchange. They buy and sell shares on behalf of their clients. They conduct research on equity shares. They also advise their clients about which shares to buy, when to buy, how much to buy and when to sell. Large brokers, Mutual Funds, Venture capital companies and Investment Banks offer merchant banking services.
3. Project Management : Merchant bankers help their clients in the many ways. For e.g. advising about location of a project, preparing a project report, conducting feasibility studies, making a plan for financing the project, finding out sources of finance, advising about concessions and incentives from the      government.
4. Advice on Expansion and Modernization: Merchant bankers give advice for expansion and modernization of the business units. They give expert advice on mergers and amalgamations, acquisition and takeovers, diversification of business, foreign collaborations and joint-ventures, technology up-gradation, etc.
5. Managing Public Issue of Companies: Merchant bank advice and manage the public issue of companies. They provide following services:
1. Advise on the timing of the public issue.
2. Advise on the size and price of the issue.
3. Acting as manager to the issue, and helping in accepting applications and allotment of securities.
4. Help in appointing underwriters and brokers to the issue.
5. Listing of shares on the stock exchange, etc.
6. Handling Government Consent for Industrial Projects : A businessman has to get government permission for starting of the project. Similarly, a company requires permission for expansion or modernization activities. For this, many formalities have to be completed. Merchant banks do all this work for their clients.
7. Special Assistance to Small Companies and Entrepreneurs: Merchant banks advise small companies about business opportunities, government policies, incentives and concessions available. It also helps them to take advantage of these opportunities, concessions, etc.
8. Services to Public Sector Units: Merchant banks offer many services to public sector units and public utilities. They help in raising long-term capital, marketing of securities, foreign collaborations and arranging long-term finance from term lending institutions.
9. Revival of Sick Industrial Units: Merchant banks help to revive (cure) sick industrial units. It negotiates with different agencies like banks, term lending institutions, and BIFR (Board for Industrial and Financial Reconstruction). It also plans and executes the full revival package.
10. Portfolio Management : A merchant bank manages the portfolios (investments) of its clients. This makes investments safe, liquid and profitable for the client. It offers expert guidance to its clients for taking investment decisions.
11. Corporate Restructuring: It includes mergers or acquisitions of existing business units, sale of existing unit or disinvestment. This requires proper negotiations, preparation of documents and completion of legal formalities. Merchant bankers offer all these services to their clients.
12. Money Market Operation : Merchant bankers deal with and underwrite short-term money market instruments, such as:
1. Government Bonds.
2. Certificate of deposit issued by banks and financial institutions.
3. Commercial paper issued by large corporate firms.
4. Treasury bills issued by the Government (Here in India by RBI).
13. Leasing Services: Merchant bankers also help in leasing services. Lease is a contract between the lessor and lessee, whereby the lessor allows the use of his specific asset such as equipment by the lessee for a certain period. The lessor charges a fee called rentals.
14. Management of Interest and Dividend: Merchant bankers help their clients in the management of interest on debentures / loans, and dividend on shares. They also advise their client about the timing (interim / yearly) and rate of dividend.

3. What are the new financial product and services offered by financial institution?

Financial products refer to instruments that help you save, invest, get insurance or get a mortgage. These are issued by various banks, financial institutions, stock brokerages, insurance providers, credit card agencies and government sponsored entities. Financial products are categorised in terms of their type or underlying asset class, volatility, risk and return.

Types of financial products

  ·         Shares: These represent ownership of a company. While shares are initially issued by corporations to finance their business needs, they are subsequently bought and sold by individuals in the share market. They are associated with high risk and high returns. Returns on shares can be in the form of dividend payouts by the company or profits on the sale of shares in the stock market. Shares, stocks, equities and securities are words that are generally used interchangeably.

  ·         Bonds: These are issued by companies to finance their business operations and by governments to fund budget expenses like infrastructure and social programs. Bonds have a fixed interest rate, making the risk associated with them lower than that with shares. The principal or face value of bonds is recovered at the time of maturity.

   ·         Treasury Bills: These are instruments issued by the government for financing its short term needs. They are issued at a discount to the face value. The profit earned by the investor is the difference between the face or maturity value and the price at which the Treasury bill was issued.

  ·         Options: Options are rights to buy and sell shares. An option holder does not actually purchase shares. Instead, he purchases the rights on the shares.

  ·         Mutual Funds: These are professionally managed financial instruments that involve the diversification of investment into a number of financial products, such as shares, bonds and government securities. This helps to reduce an investor’s risk exposure, while increasing the profit potential.

  ·         Certificate of Deposit: Certificates of deposit (or CDs) are issued by banks, thrift institutions and credit unions. They usually have a fixed term and fixed interest rate.

  ·         Annuities: These are contracts between individual investors and insurance companies, where investors agree to pay an allocated amount of premium and at the end of a pre-determined fixed term, the insurer will guarantee a series of payments to the insured party.

   

   4. Initial public offer through stock exchange through online system. Discuss?

   5. Explain the concept of mutual funds and various types of mutual fund products offered in India?

    A mutual fund is an investment instrument which pools in money from different investors and invests the    collected corpus in a set of different asset classes such as equity, debt, gold, foreign securities etc. Mutual funds     are becoming increasingly popular in India due to the various benefits they come with. Mutual funds feature an     attractive performance history of returns higher than those earned on conventional instruments of investment.     Mutual funds enable investors to create diversified investment portfolios with investments as low as Rs. 500.

 Mutual funds give small or individual investors access to professionally managed portfolios of equities, bonds a    and other securities. Each shareholder, therefore, participates proportionally in the gains or losses of the fund.     Mutual funds invest in a vast number of securities, and performance is usually tracked as the change in the     total market cap of the fund—derived by the aggregating performance of the underlying investments.

Equity Funds: An equity fund is a mutual fund which invests a minimum of 65% of its assets in equity and equity related instruments. It can invest the balance 0%-35% in debt or money market securities. Equity funds are capable of giving relatively high returns as they primarily invest in stocks of companies which are responsive to changes in the stock market and the economy. Due to this reason, equity funds also come with a relatively higher risk quotient. As per SEBI classification, there are 11 types of equity funds. Among them one of the most popular ones is ELSS – Equity Linked Savings Scheme. An ELSS invests a minimum of 80% of its total assets in equities. An ELSS is the only equity fund which is eligible for a tax deduction of up to Rs. 1.5 lakh under section 80C of the Income Tax Act. An ELSS comes with a lock-in period of 3 years.

Debt Funds: A debt fund is a mutual fund which invests a majority of its assets in debt and money market securities. According to the Income Tax Act, a mutual fund which invests less than 65% of its total assets in equities is termed as a debt fund. Debt funds are preferred by investors mainly because they come with relatively lower levels of risk. Since they undertake lower risk, debt funds in India yield returns which though higher than returns offered by fixed return investments, tend to be lower than those provided by equity funds in the long term. As per SEBI classification, there are as many as 16 types of debt funds. The most popular type of debt fund in terms of AUM (Assets under Management) is liquid fund as they are often used by corporations to park their excess cash for short periods. A liquid fund predominantly invests in debt and money market securities with maturities of up to 91 days. Due to the shorter maturity period, liquid funds feature the least amount of risk among all debt funds. Liquid funds generally give returns that are higher than savings accounts and at par with fixed deposits while being a lot more liquid than the latter.

Hybrid Funds: As the name suggests, a hybrid fund is a mutual fund which invests its assets in two or more asset classes including equities, debt, money market instruments, gold, overseas securities, etc. A hybrid fund generally invests in only two asset classes namely equity and debt. The blend of equity and debt enables a hybrid fund to give returns similar to those generated by equity funds while undertaking relatively lower risk levels like debt funds. As per SEBI classification, there are 7 types of hybrid funds. The most popular type of scheme in this category is the Dynamic Asset Allocation Fund. A Dynamic Asset Allocation Fund has the flexibility to invest any amount between 0%-100% of its assets in either equity or debt. Typically this type of fund aims to sell equities and book profits in overvalued equity market conditions while doing the reverse when equity market valuations are attractive. A Dynamic Asset Allocation Fund decreases its debt exposure in undervalued markets and increases its debt holding during a bull run.

   6. What are the functions of credit rating? Explain the benefits of credit rating to rated companies and     investors?

1. SOURCE OF SUPERIOR INFORMATION

Credit rating provides superior information to the investors through a systematic assessment of risks of the investments. Credit rating firms are highly reliable for the following reasons:

1.      Unlike brokers, financial intermediaries, underwriters who have vested interest in an issue, a credit rating agency is independent.

2.      Credit rating agencies employ highly trained staff with professional competence. So, they are able to assess the risks in a better way.

3.      Credit rating agencies have access to confidential information which may not be publicly available.

2. LOW COST INFORMATION SOURCE

Credit evaluation is a process which is highly expensive and time consuming. Credit rating agencies collect, analyse, interpret and summarize complex information in a readily understood form. This source of low cost information is highly welcomed by the investors.

3. BASIS FOR A RISK AND RETURN TRADE OFF

A successful investor is one who trades off/risk and return. He wants his investment to fetch maximum possible return at a given level of risk. Credit rating enables the investors to understand the risk associated with the security which he is likely to buy. Thus, the instrument rated by a credit rating agency enjoys higher confidence from investors.

4. HEALTHY DISCIPLINE ON CORPORATE BORROWERS

Financial discipline is a must for any corporate borrower. Only genuine corporate borrowers with good corporate image can succeed in raising funds from among the public. Credit rating enhances the corporate image of the company through higher credit rating.

5. LEGAL INSURANCE

Credit rating provides legal insurance to the investment trustees. They can guard themselves against any charge of mismanagement of funds by carefully selecting highly rated securities for investment.

6. AIDING PUBLIC POLICY FORMULATION

Credit rating facilitates to impose a restriction on nationalized commercial banks, development banks and other public financial institutions about the composition of funds to be invested. In other words, the kinds of securities eligible for inclusion in different kinds of institutional portfolios can be developed with utmost confidence.

7. MONITORING THE MANAGEMENT ACTIONS

Hiring of credit rating agency indicates that the management is prepared to expose its various activities to an independent scrutiny. So, credit rating lends credence to the efficiency of the management.

Benefits

(1) Safeguards against bankruptcy:

Credit rating of an instrument done by credit rating agency gives an idea to the investors about degree of financial strength of the issuer company which enables him to decide about the investment. Highly rated instrument of a company gives an assurance to the investors of safety of instrument and

 (2) Recognition of risk:

Credit rating provides investors with rating symbols which carry information in easily recognisable manner for the benefit of investors to perceive risk involved in investment. It becomes easier for the investors by looking at the symbol to understand the worth of the issuer company because the instrument is backed by the financial strength of the company which in detail cannot be provided at the minimum cost to each and every one and at the same time they cannot also analyse or understand such information for taking any investment decisions. Rating symbol gives them the idea about the risk involved or the expected advantages from the investment.

(3) Credibility of issuer:

Rating gives a clue to the credibility of the issuer company. The rating agency is quite independent of the issuer company and has no “Business connections or otherwise any relationship with it or its Board of Directors, etc. Absence of business links between the ratter and the rated firm establishes ground for credibility and attract investors.

(4) Easy understand ability of investment proposal:

Rating symbol can be understood by an investor which needs no analytical knowledge on his part. Investor can take quick decisions about the investment to be made in any particular rated security of a company.

(5) Saving of resources:

Investors rely upon credit rating. This relieves investors from the botheration of knowing about the fundamentals of a company, its actual strength, financial standing, management details, etc. The quality of credit rating done by professional experts of the credit rating agency reposes confidence in him to rely upon the rating for taking investment decisions.

(6) Independence of investment decisions:

For making investment decisions, investors have to seek advice of financial intermediaries, the stock brokers, merchant bankers, the portfolio managers etc. about the good investment proposal, but for rated instruments, investors need not depend upon the advice of these financial intermediaries as the rating symbol assigned to a particular instrument suggests the credit worthiness of the instrument and indicates the degree of risk involved in it.

(7) Choice of investments:

Several alternative credit rating instruments are available at a particular point of time for making investment in the capital market and the investors can make choice depending upon their own risk profile and diversification plan. In addition to above, investors have other advantages like: Quick understanding of the credit instruments and weigh the ratings with advantages from instruments; quick decision making for investment and also selling or buying securities to take advantages of market conditions; or, perceiving of default risk by the company.

7. Explain insurance industry in India?

Introduction

The insurance industry of India consists of 57 insurance companies of which 24 are in life insurance business and 33 are non-life insurers. Among the life insurers, Life Insurance Corporation (LIC) is the sole public sector company. Apart from that, among the non-life insurers there are six public sector insurers. In addition to these, there is sole national re-insurer, namely, General Insurance Corporation of India (GIC Re). Other stakeholders in Indian Insurance market include agents (individual and corporate), brokers, surveyors and third party administrators servicing health insurance claims.

Indian Insurance Industry

In India, the insurance industry is as longstanding as the banking industry. But over the past fifteen years, there has been a sea change in the business expansion of the insurance sector. The IRDAI (Insurance Regulatory and Development Authority of India) was established in the year 2000, which opened this sector to private enterprises and allowing Indian companies to partner with foreign establishments. This act has redefined the insurance sector in India making insurance available at reasonable costs.

The insurance industry in India has around 57 insurance companies. Among these, 24 are in the life insurance business and the rest are non-life insurers. The Life Insurance Corporation (LIC) is a sole public sector company in the life insurance business sector. The non-life insurance companies have policies exclusively in personal accident, health, travel insurance segments etc. A few of these companies include Apollo Munich Health Insurance Company Ltd, Star Health, and Allied Insurance Company Ltd, Cigna TTK Health Insurance Company Ltd. etc. The Export Credit Guarantee Corporation of India for Credit Insurance and Agriculture Insurance Company Ltd for crop insurance belong to the public sector.

A Rapidly developing sector with a great future potential

This insurance sector is most developing one in India which fosters a positive market sentiment. There are some major investments and other strong government initiatives that are pushing this sector towards a robust future. An example for this is one of the programs of the government of India, the Pradhan Mantri Vaya Vandana Yojana. It is a pension scheme that provides guaranteed 8 percent annual return to all the senior citizens above the age of 60 years for a policy period of 10 years. The IRDAI is also planning to issue out IPO guidelines for insurance companies that would want to divest through IPOs. The road ahead is certainly quite promising. Currently, India has a 3.42 percent penetration rate in the insurance sector. It is expected to quadruple in size over a period of next ten years.

8. Enumerate the various innovative financial instruments?

Innovative financial instruments are a range of activities such as:

§  participation in equity (risk capital) funds 

§  guarantees to local banks lending to a large number of final beneficiaries, for instance small and medium-sized enterprises (SMEs)

§  Risk-sharing with financial institutions to boost investment in large infrastructure projects (e.g. the Europe 2020 project bonds initiative or the connecting Europe facility financial instruments).

§  The aim is to boost the real economy through increasing the access to finance for enterprises and industry producing goods and services. Spending through innovative financial instruments is another way of spending EU budget than giving grants or subsidies.

9. Define Merchant banking. Discuss in detail the various services rendered by merchant bankers.

Merchant Banking is a combination of Banking and consultancy services. It provides consultancy to its clients for financial, marketing, managerial and legal matters. Consultancy means to provide advice, guidance and service for a fee. It helps a businessman to start a business. It helps to raise (collect) finance. It helps to expand and modernize the business. It helps in restructuring of a business. It helps to revive sick business units. It also helps companies to register, buy and sell shares at the stock exchange.

Corporate Counselling Corporate counselling refers to the activities performed by the merchant banks to provide expertise knowledge to a corporate entity to ensure better performance and also to portray a better image to investors resulting from distribution of dividend and ensuring appreciation in market value of its equity shares. It covers a wide spectrum of services for a business enterprise that includes, providing guidance in connection with government rules and regulations, appraising product lines and analysing their growth and profitability and forecasting future trends in the market.

Project counselling and pre-investment studies for investors Project counselling refers to preparation of project report, decision on financing pattern of project, appraisal of project report and arranging funds with financial institutions or banks, etc. Corporate entities are advised by merchant bankers in respect to preparing project report, which includes technical feasibility, marketing survey and other information relating to project covering management aspects, location, means of financing, projected cost of production, working results, cash flow statements and balance sheets.

Credit syndication and project finance Credit syndication refers to the services rendered by the merchant banks in arranging and raising credit from financial institutions, banks and other leading investment organisations for financing the clients in regards to project cost or in meeting working capital requirements. Basically, credit syndication is the outcome of project counselling process through which various sources of funds could be traced to arrange finance. There are three types of periodic sources of funds, namely, (a) short term funds, (b) medium term funds and (c) long term funds.

Capital Issue management the abolition of the managing agency system, the growth of the public limited companies in numbers and in sizes, the imposition of new rules and regulations regarding the public issues of securities by SEBI have compelled the merchant bankers to play a key role in managing the public issues of corporate houses in India. Merchant bankers in India undertake the capital issue management as the most prolific professional service.

Underwriting of public issues Underwriting is an agreement made between an issuing company and other party called as underwriter who binds himself to accept the under subscription of securities in consideration of certain amount of commission. A fully underwritten public issue spells confidence to the investing public, which generally ensures a good response to the issue. Keeping this in view, companies when float any public issues must have full understanding about such issue. Merchant bankers, managing an issue, have to decide very carefully after going through detail of the issue and also the issue amount to be underwritten.

Portfolio management the general investors are not aware of profitable investment decisions. As such, they face a lot of difficulties in selecting the right opportunity, the right time to get in and get out to have the right return. Portfolio is a combination of securities such as stocks, bonds and money market instruments. The process of blending together the broad assets classes so as to obtain optimum return with minimum risk is referred to as portfolio management.

Venture capital financing Venture capital may be termed as risk capital as risk is involved with such capital investment. Venture capital financing refers to long term equity financing for high risk and high reward projects, which is assisted by merchant bankers. In this form of financing, capital is invested either for starting up a new project or for developing an existing business enterprise with high degree of risks associated with.

Leasing A lease is a contractual arrangement under which one party (the lessee) is allowed by the owner of the asset (the lessor) for using the asset for a stipulated period of time on consideration of the payments of rentals. The terms of payment and other conditions relating to the insurance and maintenance of the asset etc. are, however, mentioned in lease agreement. At the end of the lease period, the lessor takes back the ownership of the asset unless the lease is renewed for further period.

Non-resident investment counselling and management In order to attract non-resident investment in the Indian primary and secondary markets, the merchant bankers have opened up new vistas by providing investment advisory services to the Non-Resident Indians (NRI) and also to the Persons of Indian Origin Residing Abroad (PIORA). The services include, advices on selection of investment, critical evaluation of investment portfolio, securing approval from RBI for the purchase and sale of securities, holding securities in safe custody, maintaining investment records and complying with ceiling requirements, collecting and remitting interest and dividend on investment, and also providing tax consultancy services.

Mutual funds According to SEBI (Mutual Funds) Regulations 1993, mutual fund means a fund established in the form of a trust by a sponsor to raise money by the trustees through the sale of units to the public under one or more schemes for investing in securities in accordance with specific regulations. Mutual fund earns income by way of interest or dividend or both from the securities it holds.

Advisory services for capital re-structuring through mergers, amalgamation and takeovers. Merger and acquisitions have become an integral part of the business houses due to their money making opportunities and means of letting companies stay competitive. A merger is a generic term where two or more companies are combined together to form a single entity. In amalgamation, two or more transferor companies merge to form the transferee company, which ultimately comes into existence.

10. What is credit rating? How is credit rating done in India? Which are the credit rating agencies?

Credit Rating is an assessment of the borrower (be it an individual, group or company) that determines whether the borrower will be able to pay the loan back on time, as per the loan agreement.  Needless to say, a good credit rating depicts a good history of paying loans on time in the past. This credit rating influences the bank’s decision of approving your loan application at a considerate rate of interest. It is usually expressed in alphabetical symbols. Although, it is a new concept in Indian financial market but slowly its popularity has increased. It helps investors to recognize the risk involved in lending the money and gives a fair assessment of the borrower’s creditability.

Credit Rating Process

The rating process begins with the receipt of formal request from a company desirous of having its issue obligations rated by credit rating agency. A credit rating agency constantly monitors all ratings with reference to new political, economic and financial developments and industry trends. The process/ procedure followed by all the major credit rating agencies in the country is almost similar and usually comprises of the following steps.

1. Receipt of the request: The rating process begins, with the receipt of formal request for rating from a company desirous of having its issue obligations under proposed instrument rated by credit rating agencies. An agreement is entered into between the rating agency and the issuer company.

The agreement spells out the terms of the rating assignment and covers the following aspects:

i. It requires the CRA (Credit Rating Agency) to keep the information confidential.

ii. It gives right to the issuer company to accept or not to accept the rating.

iii. It requires the issuer company to provide all material information to the CRA for rating and subsequent surveillance.

2. Assignment to analytical team: On receipt of the above request, the CRA assigns the job to an analytical team. The team usually comprises of two members/analysts who have expertise in the relevant business area and are responsible for carrying out the rating assignments.

3. Obtaining information: The analytical team obtains the requisite information from the client company. Issuers are usually provided a list of information requirements and broad framework for discussions. These requirements are derived from the experience of the issuers business and broadly confirms to all the aspects which have a bearing on the rating. The analytical team analyses the information relating to its financial statements, cash flow projections and other relevant information.

4. Plant visits and meeting with management: To obtain classification and better understanding of the client’s operations, the team visits and interacts with the company’s executives. Plants visits facilitate understanding of the production process, assess the state of equipment and main facilities, evaluate the quality of technical personnel and form an opinion on the key variables that influence level, quality and cost of production.

A direct dialogue is maintained with the issuer company as this enables the CRAs to incorporate non-public information in a rating decision and also enables the rating’ to be forward looking. The topics discussed during the management meeting are wide ranging including competitive position, strategies, financial policies, historical performance, risk profile and strategies in addition to reviewing financial data.

5. Presentation of findings: After completing the analysis, the findings are discussed at length in the Internal

Committee, comprising senior analysts of the credit rating agency. All the issue having a bearing on rating are identified. An opinion on the rating is also formed. The findings of the team are finally presented to Rating Committee.

6. Rating committee meeting: This is the final authority for assigning ratings. The rating committee meeting is the only aspect of the process in which the issuer does not participate directly. The rating is arrived at after composite assessment of all the factors concerning the issuer, with the key issues getting greater attention.

7. Communication of decision: The assigned rating grade is communicated finally to the issuer along with reasons or rationale supporting the rating. The ratings which are not accepted are either rejected or reviewed in the light of additional facts provided by the issuer. The rejected ratings are not disclosed and complete confidentiality is maintained.

8. Dissemination to the public: Once the issuer accepts the rating, the credit rating agencies disseminate it through printed reports to the public.

9. Monitoring for possible change: Once the company has decided to use the rating, CRAs are obliged to monitor the accepted ratings over the life of the instrument. The CRA constantly monitors all ratings with reference to new political, economic and financial developments and industry trends. All this information is reviewed regularly to find companies for, major rating changes. Any changes in the rating are made public through published reports by CRAs. 1. Credit Rating Information Services of India Limited (CRISIL)

2. ICRA Limited

3. Credit Analysis and Research limited (CARE)

4. Brickwork Ratings (BWR)

5. India Rating and Research Pvt. Ltd.

6. Small and Medium Enterprises Rating Agency of India (SMERA)

11. Explain the eligibility norms of the companies issuing securities through an offer document?

SEBI has stipulated the eligibility norms for companies planning an IPO which are as follows:

Entry Norm I (Profitability Route)

a) Net tangible assets of at least Rs. 3 crore in each of the preceding three full years of which not more than 50% are held in monetary assets. However, the limit of 50% on monetary assets shall not be applicable in case the public offer is made entirely through offer for sale.

b) Minimum of Rs. 15 crore as average pre-tax operating profit in at least three years of the immediately preceding five years.

c) Net worth of at least Rs. 1 crore in each of the preceding three full years.

d) If there has been a change in the company’s name, at least 50% of the revenue for preceding one year should be from the new activity denoted by the new name

e) The issue size should not exceed 5 times the pre-issue net worth

12. Explain the factors to be considered before selecting a mutual fund?

a) Investment Objective
before deciding to invest in mutual funds, you need to determine your financial goals (long or short term), the duration for which you want to stay invested and the appetite to take risks. The extent to which an investor is ready to bear the risk will reflect on the returns. An investor must always invest in diversifying the investments in the various baskets of funds. Investments may range from short- to mid- to long-term and hence, requires a thoughtful approach while choosing one. An investment objective helps in deciding the macro-level selection of the mutual fund types. Choosing to invest in long-term or short-term plans, or a mix of both can have an instrumental impact on your investment decision.

b) Consistency in Performance
The potential of any fund is determined by its consistency maintained in the previous years and how the fund has managed to be on top and perform well by delivering excellent and consistent returns despite the benchmark and market cycles faced. The fund’s three and five-year returns must be checked before concluding to its consistency.

c) The Outlook for the Economy
The economic factors directly impact the markets, both national and global, which in turn affects the portfolio, thus affecting the performance of the fund. The fund manager plays a vital role in making the decisions and picking up the stocks that will form the investment portfolio. All of these depends on the economic condition of the country. Various factors affect the economy ranging from government decisions to industrial and market performances. It is a matter of anticipation, and hence, the most desirable option is to diversify the investments keeping in mind the short-term and long-term objectives.

d) Asset Under Management
AUM of a fund is nothing but the fund size. The size of a fund shows the potential of the fund due to which investors are investing majorly in that fund over other funds. This increases the fund exposure, which in turn increases the overall risk. The best and experienced fund managers generally manage the flagship mutual fund schemes with high assets under management.

e) Expense Ratio
The expense ratio is an essential factor to consider while choosing a scheme as they are known to take away a substantial chunk of the returns. As per the industry standards, an expense ratio of 1.5% is a good deal. Higher the AUM, lesser will be the expense ratio.

f) Exit Load
The mutual fund schemes are time-bound. In the event of an early withdrawal from the plan before the maturity period, the investors are required to pay the exit load. Financial needs of individuals are unpredictable, and in case of emergency, one may be required to withdraw from mutual fund schemes prematurely to gain liquidity of assets. It is advisable to avoid plans with stringent exit load and choose schemes with least exit load to reduce its impact on the returns earned.

13. Describe the features of National Housing Bank?

National Housing Bank (NHB) was set up by an Act of Parliament in 1987. NHB is an apex financial institution for housing. It commenced its operations in 9th July 1988. NHB has been established with an objective to operate as a principal agency to promote housing finance institutions both at local and regional levels and to provide financial and other support incidental to such institutions and for matters connected therewith

i. To promote and develop specialised housing finance institutions for mobilising resources and extending credit for housing

ii. To provide refinance facilities to housing finance institutions and scheduled banks

iii. To provide guarantee and underwriting facilities to housing finance institutions

iv. To formulate schemes for mobilisation of resources and extension of credit for housing, especially catering to the needs of economically weaker sections of society

v. To provide guidelines to housing finance institutions to ensure their healthy growth

vii. To co-ordinate the working of all agencies connected with housing

14. What are the methods of venture capital financing in India? Explain the importance of venture capital for the development of a country?

1. Equity All VCFs in India provide equity. The effective control and majority ownership of the firm remain with the entrepreneur. The advantage of equity financing for the company seeking venture finance is that it does not have the burden of serving the capital, as dividends will not be paid if the company has no cash flows. 

2. Conditional Loan a conditional loan is repayable in the form of a royalty after the venture is able to generate sales. No interest is paid on such loans. VCFs charge royalty ranging from 2-15% depending on the factors of the venture such as gestation period, risk, and cash flow patterns etc.

3. Conventional Loan Under this form of assistance, a lower fixed rate of interest is charged till the assisted units become commercially operational, after which the loan carries normal or higher rate of interest. The loan has to be repaid according to a predetermined schedule of repayment as per terms of loan agreement.

4. Income Note A unique way of venture financing in India was the income note. It was hybrid security which combined the features of both conventional and conditional loan. The entrepreneur had to pay both interest and royalty on sales, but at substantially low rates.

5. Participating Debentures A few venture capitalists, particularly in the private sector, introduced innovative financial securities known as participating debentures. Such security carries charges in three phases namely, start-up phase, operational level phase and at full commercialization of operational phase.

6. Cumulative Convertible Preference Shares CCPSs could be particularly attractive in Indian context since CCPS shareholders do not have a right to vote. They are, however, entitled to vote if they do not receive dividend consecutively for two years.

7. Deferred Shares deferred shares are those shares where ordinary share rights are deferred for a certain number of years.

8. Convertible Loan Stock Convertible loan stock is an unsecured long-term loan convertible into ordinary shares and subordinated to all creditors.

9. Special Ordinary Shares Special ordinary shares are the shares having voting rights but without a commitment towards dividends.

10. Preferred Ordinary Shares preferred ordinary shares are the shares with voting rights and a modest fixed dividend right and a right to share in profits.

Importance of venture capital for the development of a country

1. Promotes Entrepreneurs: Just as a scientist brings out his laboratory findings to reality and makes it commercially successful, similarly, an entrepreneur converts his technical know-how to a commercially viable project with the assistance of venture capital institutions.

2. Promotes products: New products with modern technology become commercially feasible mainly due to the financial assistance of venture capital institutions.

3. Encourages customers: The financial institutions provide venture capital to their customers not as a mere financial assistance but more as a package deal which includes assistance in management, marketing, technical and others.

Example: Hot mail dot com. It was a project invented by an young Indian graduate from Bangalore, by name Sabir Bhatia. This project was developed by him due to the financial assistance provided by the venture capital firms in Silicon Valley, U.S.A. His project was later on purchased by Microsoft company, U.S.A. The Chairman of the company, Mr. Bill Gates offered 400 Million US Dollars in hot cash.

4. Brings out latent talent: While funding entrepreneurs, the venture capital institutions give more thrust to potential talent of the borrower which helps in the growth of the borrowing concern.

5. Promotes exports: The Venture capital institution encourages export oriented units because of which there is more foreign exchange earnings of the country.

6. As Catalyst: A venture capital institution acts as more as a catalyst in improving the financial and managerial talents of the borrowing concern. The borrowing concerns will be more keen to become self dependent and will take necessary measures to repay the loan.

7. Creates more employment opportunities: By promoting entrepreneurship, venture capital institutions are encouraging self employment and this will motivate more educated unemployed to take up new ventures which have not been attempted so far.

8. Brings financial viability: Through their assistance, the venture capital institutions not only improve the borrowing concern but create a situation whereby they can raise their own capital through the capital market. In the process they strengthen the capital market also.

9. Helps technological growth: Modern technology will be put to use in the country when financial institutions encourage business ventures with new technology.

10. Helps sick companies: Many sick companies are able to turn around after getting proper nursing from the venture capital institutions.

11. Helps development of Backward areas: By promoting industries in backward areas, venture capital institutions are responsible for the development of the backward regions and human resources.

12. Helps growth of economy: By promoting new entrepreneurs and by reviving sick units, a fillip is given to the economic growth. There will be increase in the production of consumer goods which improves the standard of living of the people.

15. Describe the recent challenges faced by Indian financial services sector?

Non-Performing Assets

• NPAs have become a grave concern for the banking sector in couple of years and impacted credit delivery of banks to a great extent.

• As per a survey, net NPAs amount to only 2.36 percent of the total loans in the banking system. However, if restructured assets are taken into account, stressed assets account will be 10.9 percent of the total loans in the system. As per the International Monetary Fund (IMF), around 37 percent of the total debt in India is at risk.

• India’s largest lender State Bank of India (SBI)reported a massive 67 per cent fall in consolidated net profit at 1259.49 crore rupees in the third quarter of the 2015-16 financial year and classified loans worth 20692 crore rupees as having turned bad.

• As per an estimate, the cumulative gross NPAs of 24 listed public sector banks, including market leader SBI and its associates, stood at 393035 crore rupees as on 31 December 2015.

• The Economic Survey 2015-16 also alarmed the policy makers about growing bad debts with the banks and their potential to disrupt the growth prospects in the future.

• Reduced profits: The banking sector recorded slowdown in balance sheet growth for the fourth year in a row in 2015-16. Profitability remained depressed with the return on assets (RoA) continuing to linger below 1 percent. Further, though PSBs account for 72 percent of the total banking sector assets, in terms of profits it has only 42 percent share in overall profits.

Issue of Monetary Transmission

Like reduced profits, this is also an off-shoot of burgeoning NPAs in the system. With the easing of inflation and moderation in inflationary expectations, the RBI reduced the repo rate by 100 basis points between January and September 2015.

However, change in the key policy rate was not reflected in lending rates as banks are not willing to transmit the benefits of low interest policy regime due to low-availability of liquidity against the backdrop of high NPAs.

Corruption

Scams in the erstwhile Global Trust Bank (GBT) and the Bank of Baroda show how few officials misuse the freedom they granted under the guise of liberalisation for their personal benefit. These scams have badly damaged the image of these banks and consequently there profitability.

Crisis in Management

Public-sector banks are seeing more employees retire these days. So, younger employees are replacing the elder, more-experienced employees. This, however, happens at junior levels. As a result, there would be a virtual vacuum at the middle and senior level. The absence of middle management could lead to adverse impact on banks' decision making process.

16. Describe the constitution and management of Mutual Funds?

In India mutual funds are organized in trust form. The instrument of trust has to be in the form of a deed, duly registered under the provisions of the Indian Registration Act, 1908 executed by the sponsor in favour of the trustees named in such an instru­ment. Trust is a notional entity. It cannot enter into a contract in its own name. It enters into a contract in the name of its trustees.

Constitution and Management of Mutual Funds: Regulation # 1.

Trust Deed to be Registered under the Registration Act:

A mutual fund shall be constituted in the form of a trust and the instrument of trust shall be in the form of a deed, duly registered under the provisions of the Indian Registration Act, 1908 (16 of 1908) executed by the sponsor in favour of the trustees named in such an instrument.

Constitution and Management of Mutual Funds: Regulation # 2.

Contents of Trust Deed:

(a) The trust deed shall contain such clauses as are mentioned in the Third Schedule and such other clauses which are necessary for safeguarding the interests of the unit holders.

(b) No trust deed shall contain a clause which has the effect of-

(i) Limiting or extinguishing the obligations and liabilities of the trust in relation to any mutual fund or the unit holders; or

Constitution and Management of Mutual Funds: Regulation # 3.

Disqualification from being Appointed as Trustees:

(a) A mutual fund shall appoint trustees in accordance with these regulations.

(b) No person shall be eligible to be appointed as a trustee unless-

(i) He is person of ability, integrity and standing; and

(ii) Has not been found guilty of moral turpitude; and

(iii) Has not been convicted of any economic offence or violation of any securities laws; and

(iv) Has furnished particulars as specified in Form C.

Constitution and Management of Mutual Funds: Regulation # 4.

Approval of the Board for Appointment of Trustee:

(a) No trustee shall initially or any time thereafter is appointed without prior approval of the Board.

Constitution and Management of Mutual Funds: Regulation # 5.

Rights and Obligations of the Trustees:

(a) The trustees and the asset management company shall with the prior approval of the Board enter into an investment management agreement.

Constitution and Management of Mutual Funds: Regulation # 6.

Application by an Asset Management Company:

(a) The application for the approval of the asset management company shall be made in Form D.

(b) The provision of regulations 5, 6 and 8 shall, so far as may be, apply to the application made under sub-regulation (1) as they apply to the application for registration of a mutual fund.

Constitution and Management of Mutual Funds: Regulation # 7.

Appointment of an Asset Management Company:

(a) The sponsor or, if so authorised by the trust deed, the trustee shall, appoint an asset management company, which has been approved by the board under sub-regulation (2) or regulation 21.

(b) The appointment of an asset management company can be terminated by majority of the trustees or by seventy five per cent of the unit-holders of the scheme.

(c) Any change in the appointment of the asset management company shall be subject to prior approval of the Board and the unit holders.

Constitution and Management of Mutual Funds: Regulation # 8.

Eligibility Criteria for Appointment of Asset Management Company:

(a) For grant of approval of the asset Management Company the applicant has to fulfill the following:

(i) In case the asset management company is an existing asset management company it has a sound track record, general reputation and fairness in transactions;

(ii) The directors of the asset management company are persons having adequate professional experience in finance and financial services related field and not found guilty of moral turpitude or convicted of any economic offence or violation of any securities laws;

Constitution and Management of Mutual Funds: Regulation # 9.

Terms and Conditions to be Complied with:

The approval granted under sub-regulation (2) of regulation 21 shall be subset to the following conditions, namely:

(a) Any director of the asset management company shall not hold the office of the director in another asset management company unless such person is an independent director referred to in clause (d) of sub-regulation (1) of regulation 21 and approval of the Board of asset management company of such person is a director, has been obtained;

(b) The asset management company shall forthwith inform the Board of any material change in the information o particulars previously furnished, which have a bearing on the approval granted by it;

Constitution and Management of Mutual Funds: Regulation # 10.

Procedure where Approval is not Granted:

Where an application made under regulation 19 for grant of approval does not satisfy the eligibility criteria laid down in regulation 21, the board may reject the application.

Constitution and Management of Mutual Funds: Regulation # 11.

Restrictions on Business Activities of the Asset Management Company:

The asset management company shall -91) not act as a trustee of any mutual fund; (2) not undertake any other business activities except activities in the nature of management and advisory services of offshore funds, pension funds, venture capital funds, management of insurance funds, financial consultancy and exchanges of research on commercial basis if any of such activities are not in conflict with the activities of the mutual fund.

Constitution and Management of Mutual Funds: Regulation # 12.

Asset Management Company and its Obligations:

(a) The asset management company shall take all reasonable steps and exercise due diligence to ensure that the investment of funds pertaining to any scheme is not contrary to the provision of the regulations and the trust deed.

(b) The asset management company shall exercise due diligence and care in all its investment decisions as would be exercised by other persons engaged in the same business.

(c) The asset management company shall be responsible for the acts of commissions or omissions by its employees or the persons whose services have been procured by the asset management company.

Constitution and Management of Mutual Funds: Regulation # 13.

Appointment of Custodian:

(a) The mutual fund shall appoint a custodian to carry out the custodial services for the schemes of the fund and sent intimation of the same to the Board within fifteen days of the appointment of the custodian.

(b) No custodian in which the sponsor or its associates hold 50% or more the voting rights of the share capital of the custodian or where 50 per cent or more of the directors of the custodian represent the interest of the sponsor or its associates shall act as custodian for a mutual fund constituted by the same sponsor or any of its associate or subsidiary company.

Constitution and Management of Mutual Funds: Regulation # 14.

Agreement with Custodian:

The mutual fund shall enter into a custodian agreement with the custodian, which contain the clauses which are necessary for the efficient and orderly conduct of the affairs of the custodian.

Provided that the agreement, the service contract, terms and appointment of the custodian shall be entered into with prior approval of the trustees.

17. Elucidate the various types of securitization Instruments?

Pass through Certificates and Pay through Certificates

There is no uniform name for the securities issued by the special purpose vehicle (SPV) as such securities take different forms. These securities could either represent a direct claim of the investors on all that the SPV collects from the receivables transferred to it: in this case, the securities are called pass through certificates as they imply certificates of proportional beneficial interest in the assets held by the SPV. Alternatively, the SPV might be re-configuring the cash flows by reinvesting it, so as to pay to the investors on fixed dates, not matching with the dates on which the transferred receivables are collected by the SPV. In this case, the securities held by the investors are called pay through certificates.

1. Pass through Certificates

In case of pass through certificates payments to investors depend upon the cash flow from the assets backing such certificates. In other words as and when cash (principal and interest) is received from the original borrower by the SPV it is passed on to the holders of certificates at regular intervals and the entire principal is returned with the retirement of the assets packed in the pool.  The investors in a pass through transaction acquire the receivables subject to all their fluctuations, prepayment etc. The material risks and rewards in the asset portfolio, such as the risk of interest rate variations, risk of prepayments, etc. are transferred to the investors. Thus, pass through have a single maturity structure and the tenure of these certificates is matched with the life of the securitized assets. All investors receive proportional payments – no slower or faster repayment, though in some cases, some investors may be senior over others.

2. Pay through Certificates

On the other hand pay through certificates has a multiple maturity structure depending upon the maturity pattern of underlying assets. Thus, two or three different types of securities with different maturity patterns like short term, medium term and long term can be issued. The greatest advantage is that they can be issued depending upon the investor’s demand for varying maturity pattern. This type of is more attractive from the investor’s point of view because the yield is often inbuilt in the price of the securities themselves i.e. they are offer at a discount to face value as in the casa of deep-discount bonds.

In case of Pay through Certificates, the SPV instead of transferring undivided interest on the receivables issues debt securities such as bonds, repayable on fixed dates, but such debt securities in turn would be backed by the mortgages transferred by the originator to the SPV. The SPV may make temporary reinvestment of cash flows to the extent required for bridging the gap between the dates of payments on the mortgages along with the income out of reinvestment to retire the bonds. Such bonds were called mortgage – backed bonds.

Preferred Stock Certificates

Preferred stocks are instruments issued by a subsidiary company against the trade debts and consumer receivables of its parent company. In other words subsidiary companies buy the trade debts and receivables of parent companies to enjoy liquidity. Thus trade debts can also be securitized through the issue of preferred stocks. Generally these stocks are backed by guarantees given by highly rated merchant banks and hence they are also attractive from the investor’s point of view. These instruments are mostly short term in nature.

Asset Backed Commercial Papers

This type of structure is mostly prevalent in mortgage backed securities. Under this the SPV purchases portfolio of mortgages from different sources (various lending institution) and they are combined into a single group on the basis of interest rate, maturity dates and underlying collaterals. They are then transferred to a Trust which in turn issued mortgage backed certificate to the investors. These certificates are issued against the combined principal value of the mortgages and they are also short term instrument. Each certificate is entitled to participate in the cash flow from underlying mortgages to his investments in the certificates.

Other Types of Securitized Instruments

Apart from the above there is also other type of certificate namely

1.      Interest Only Certificates

2.      Principal Only Certificates.

In the case of interest holding certificate payments are made to investors only from the interest incomes earned from the assets securitized. As the very name suggest payment are made to the investors only from the repayment of principal by the original borrower. In the case of principal only certificates these certificate enables speculative dealings since the speculators know well that the interest rate movements would affect the bond value immediately. For instance the principal only certificate would increase the value when interest rate go down and because of these it becomes advantageous to repay the existing debts and resort to fresh borrowing at lower cost. This early redemption of securities would benefit the investors to a greater extent. Similarly when the interest rate goes up, interest holding certificate holders stand to gain since more interest is available from the underlying assets. One cannot exactly predict the future movements of interest and hence these certificates give much scope for speculators to play the game.

18. What do you mean by E- IPO? List out of its features?

Electronic Initial Public Offers (e-IPOs) allow investors to bid for shares through internet. The market regulator feels e-IPO can help cut cost and paperwork in public issuance to a great extent as it will not require printing of application forms and will help companies reach out to retail investors in small towns.

SEBI has of late been focusing on extensive and integrated use of technology to facilitate and further ease the investor’s process in the securities market. Under the new norms, investors may also get SMS/email alerts on allotment under the IPO on the lines of alerts being sent to investors for secondary market transactions. E-IPOs are also expected to reduce the timeline of the entire process drastically, facilitating listing of shares within two-three days of the close of subscription. At present, it takes up to 12 days for IPO shares to get listed following subscription. As per the buzz in the market, e-IPOs will initially allow investors to place bids through the internet and by using broker terminals across the country against the current practice of filing long documents.

19. Explain various types of Retirement plans and state reasons for its popularity?

1. Pension plan with /without life cover

-Pension plans with life insurance cover offers an assured life cover (i.e. sum assured) in case of death during the accumulation phase (policy term).

-Pension plans without life cover, pay out the corpus built till date to the nominees in case of death of the policyholder during the policy term. There is no life cover (sum assured) in these plans.

2. Immediate Annuity and Deferred Annuity

-In case of Immediate Annuity plans, the premium amount is paid in one lump sum and the annuity/pension commences immediately after paying the premium depending on the payment frequency (Monthly, quarterly, semi-annually or annually).  

-In case of Deferred Annuity, a policyholder pays a regular premium for a certain number of years. This is called the accumulation phase. The money that has accumulated at the end of the accumulation phase is used to buy immediate annuities, which, in turn, generate a regular income for life. For example, if an individual buys a pension plan with tenure of 30 years then his annuity will begin at the end of the 30th year. So deferred annuities are like any other investment product that help you build a corpus by investing regularly.

3. Traditional pension plans and Unit Linked pension plans

During the accumulation phase the individual can choose to invest in a traditional pension plan or a unit-linked pension plan, based on their risk appetite. A traditional pension plan invests most of the funds in Government securities, whereas in a unit-linked retirement plan the investment is in a combination of stocks, bonds, securities, etc.

20. Identify the various types of risk relevant to financial services and discuss the different strategies that are available to manager these risks?

1.      Business Risk: These types of risks are taken by business enterprises themselves in order to maximize shareholder value and profits. As for example, Companies undertake high-cost risks in marketing to launch a new product in order to gain higher sales.

2.      Non- Business Risk: These types of risks are not under the control of firms. Risks that arise out of political and economic imbalances can be termed as non-business risk.

3.      Financial Risk: Financial Risk as the term suggests is the risk that involves financial loss to firms. Financial risk generally arises due to instability and losses in the financial market caused by movements in stock prices, currencies, interest rates and more.

·         Market Risk:

This type of risk arises due to the movement in prices of financial instrument. Market risk can be classified as Directional Risk and Non-Directional Risk. Directional risk is caused due to movement in stock price, interest rates and more. Non-Directional risk, on the other hand, can be volatility risks.

·         Credit Risk:

This type of risk arises when one fails to fulfill their obligations towards their counterparties. Credit risk can be classified into Sovereign Risk and Settlement Risk. Sovereign risk usually arises due to difficult foreign exchange policies. Settlement risk, on the other hand, arises when one party makes the payment while the other party fails to fulfill the obligations.

·         Liquidity Risk:

This type of risk arises out of an inability to execute transactions. Liquidity risk can be classified into Asset Liquidity Risk and Funding Liquidity Risk. Asset Liquidity risk arises either due to insufficient buyers or insufficient sellers against sell orders and buys orders respectively.

·         Operational Risk:

This type of risk arises out of operational failures such as mismanagement or technical failures. Operational risk can be classified into Fraud Risk and Model Risk. Fraud risk arises due to the lack of controls and Model risk arises due to incorrect model application.

·         Legal Risk:

This type of financial risk arises out of legal constraints such as lawsuits. Whenever a company needs to face financial loses out of legal proceedings, it is a legal risk.

Different strategies that are available to manager these risks

1. Accept the Risk
accepting the risk means that while you have identified it and logged it in your risk management software, you take no action. You simply accept that it might happen and decide to deal with it if it does.

This is a good strategy to use for very small risks – risks that won’t have much of an impact on your project if they happen and could be easily dealt with if or when they arise. It could take a lot of time to put together an alternative risk management strategy or take action to deal with the risk, so it’s often a better use of your resources to do nothing for small risks.

2. Avoid the Risk
You can also change your plans completely to avoid the risk. avoid riskThis is a good strategy for when a risk has a potentially large impact on your project. For example, if January is when your company Finance team is busy doing the corporate accounts, putting them all through a training course in January to learn a new process isn’t going to be a great idea. There’s a risk that the accounts wouldn’t get done. It’s more likely, though, that there’s a big risk to their ability to use the new process, since they will all be too busy in January to attend the training or to take it in even if they do go along to the workshops. Instead, it would be better to avoid January for training completely. Change the project plan and schedule the training for February when the bulk of the accounting work is over.

3. Transfer the Risk
Transference is a risk management strategy that isn’t used very often and tends to be more common in projects where there are several parties. Essentially, you transfer the impact and management of the risk to someone else. For example, if you have a third party contracted to write your software code, you could transfer the risk that there will be errors in the code over to them. They will then be responsible for managing this risk, perhaps through additional training.

Normally transference arrangements are written up into project contracts. Insurance is another good example. If you are transporting equipment as part of your project and the van is in an accident, the insurance company will be liable for providing new equipment to replace any that was damaged. The project team acknowledges that the accident might happen, but they won’t be responsible for dealing with sourcing replacement kit, moving it to the right location or paying for it as that is now the responsibility of the insurance company.

4. Mitigate the Risk
Mitigating against a risk is probably the most commonly mitigation of risk used risk management technique. It’s also the easiest to understand and the easiest to implement. What mitigation means is that you limit the impact of a risk, so that if it does occur, the problem it creates is smaller and easier to fix.

For example, if you are launching a new washing machine and the Sales team then have to demonstrate it to customers, there is a risk that the Sales team don’t understand the product and can’t give good demonstrations. As a result, they will make fewer sales and there will be less revenue for the company.

A mitigation strategy for this situation would be to provide good training to the Sales team. There could still be a chance that some team members don’t understand the product, or they miss the training session, or they just aren’t experts in washing machines and never will be, but the impact of the risk will be far reduced as the majority of the team will be able to demonstrate the new machine effectively.

5. Exploit the Risk
Acceptance, avoidance, transference and mitigation are great to use when the risk has a negative impact on the project. But what if the risk has a positive impact? For example, the risk that the new washing machines are so popular that we don’t have enough Sales staff to do the demonstrations? That’s a positive risk – something that would have a benefit to the project and the company if it happened. In those cases, we want to maximize the chance that the risk happens, not stop it from happening or transfer the benefit to someone else!

22. Discuss the methods of retaining the consumers with a brand in financial services?

1. Position Your Brand in Your Customer’s Heart

The emotional attachment that consumers develop with a brand dramatically influences their purchasing decisions.

Standing for something, understanding your customers and backing your brand up with social proof is the perfect recipe for having customers feel a personal commitment and loyalty towards your brand.

Stand For Something: According to the Harvard Business Review, 64% of customers that have strong relationships with brands do so because they identify with the brand’s values. Remember, it’s not a value until it costs you something so don’t be afraid to think big here.

Speak Your Customers’ Language: Understand who your customers are and craft strategies, communication channels, and messages that articulate your brand’s values in a way they understand and relate with.

Social Proof: Amazon Customer Reviews, TripAdvisor, and Yelp are all great examples of common platforms that customers are using to check out your brand’s quality, personality, and values. When customer reviews reinforce the consumer’s feelings, they are more likely to stand by their loyalty to your brand.

2. Provide Proactive Customer Service

It’s easier to prevent fires than to put them out. Proactive customer service is all about preventing fires… and can cost a lot less than reactive service when done right.

Some things to think about when creating a proactive customer service strategy are:

1. Anticipate customer problems: Before you offer your product or service to customers step back and think, “What problems will my customers have?” Take this list of problems and see if you can remove any of them. For the problems you can’t remove come up with a solution before a customer has the problem.

2. Automatically detect problems: Can you tell a customer is going to have an issue before the customer even knows? This is often simpler than you think. It could be as easy as tracking which packages were picked up late by your shipping company or which users experience an error in the app.

3. Proactive Resolution: Once you’ve detected a likely poor customer experience, resolve the issue as fast as possible. Often it’s possible to resolved a customer’s problem before they complain or even know it happen.

According to American Express, “59% of consumers would try a new brand or company for a better service experience.”

3. Consistent Customer Service

Expectation = Reality = A Happy Customer

Omni-channel marketing should aim to create consistent customer experiences across all channels. In other words, the customer experience in your physical store, on your mobile app and when someone visits your website should feel the same.

To create a consistent customer experience, all teams need to work together and be on the same page at all times.

Processes: Many people think of processes as slow and boring. However, when you’re trying to create a consistent experience process is key. This isn’t to say script every customer interaction. You just need to map the key processes such as how much a customer will pay, how a support ticket is handled and what how a return is handled.

Communications: Regardless of if you have an omni-channel customer experience or a single channel communications is key. You need to ensure team members know the processes. If you do have an omni-channel experience it’s important to promote communications between channel managers to ensure they can flag inconsistent experience quickly.

4. Engaging and Personalized Service

Speaking of great customer service, today’s consumer wants to feel like they’re having a conversation with a person, not a robot. Engage customer experiences make the customer feel like they are genuinely interacting with your brand.

Personalized customer services shows that your brand cares about your customer’s individual needs and preferences, and that they are not just another opportunity to make money.

According to Rosetta Consulting, “engaged customers are five times more likely to buy only from the same brand in the future.”

Cheerios, for example, asked their followers to share their day with them on Instagram. In return, Cheerios sent a personalized and encouraging message back.

5. Build Company Credibility

We’ve focused a lot on customer experience specifically when they are interacting with you. However, a customer experience around your brand continues even when you’re not around.

Customer are continually influencing and being influenced by their friends and family. Because of this, it’s important that your company’s brand is credible and viewed in a positive light even when you’re not around.

To build your credibility you need to do two things:

1. Offer quality products or services
2. Offer valuable information, advice, and commentary

If your company is seen as a credible source by consumers:

1. They will trust you, your company, and your products/services
2. They will confidently recommend your company/product to their friends, family, and colleagues

6. Track Customer Satisfaction

“If you can’t measure it, you can’t improve it”
– Peter Drucker

Measuring any strategy is key to its success and it’s no different with customer retention.

A good leading indicator of customer retention it the Net Promoter Score. The Net Promoter Score (NPS) is a tool created by Bain & Company to measure customer loyalty.

How NPS Works:

A Company sends a survey to a customer with one question: “How likely is it that you would recommend Company X or Product X to a friends, family, or colleague?”

Respondents answer with a number from 0-10, with 10 being extremely likely and 0 being extremely unlikely. Customers’ responses are then put into 3 categories

1. Promoters: You’re most loyal customers who will not only promote, but encourage, their friends, family, and colleagues to use your company/product.

2. Passives: Customers that are happy with your company/products, but are passive when it comes to promoting.

3. Detractors: Your most unhappy customers who will talk about your company/product, but in a negative manner.

23. Discuss the five stages in the communication process in promotion financial products?

Marketing communication involves sharing of meaning, information and concepts by the source and the receiver about the products and services and also about the firm selling through the devices of promotion via, advertising, publicity, salesmanship and sales promotion.

In marketing the source is the marketer who desires to promote the product. Marketer delivers a message to a receiver, who is the target market segment. Message is received and integrated by consumers and if their predisposition becomes favourable, they decide to purchase. Feedback is the reverse flow of communication to the marketer.

Marketing communication may be distorted particularly when a message passes through a number of channels. Noise can arise due to faulty transmission, faulty reception. Competitive communication constitutes the most serious noise.

Communication is a process of exchanging verbal and non-verbal messages. It is a continuous process. Pre-requisite of communication is a message. This message must be conveyed through some medium to the recipient.

It is essential that this message must be understood by the recipient in same terms as intended by the sender. He must respond within a time frame. Thus, communication is a two way process and is incomplete without a feedback from the recipient to the sender.

The main components of communication process are as follows:

(i) Context:

Communication is affected by the context in which it takes place. This context may be physical, social, chronological or cultural. Every communication proceeds with context. The sender chooses the message to communicate within a context.

(ii) Sender/Encoder:

Sender/Encoder are a person who sends the message. A sender makes use of symbols to convey the message and produce the required response. Sender may be an individual or a group or an organization. The views, background, approach, skills, competencies and knowledge of the sender have a great impact on the message.

The verbal and non-verbal symbols chosen are essential in ascertaining interpretation of the message by the recipient in the same terms as intended by the sender.

(iii) Message:

Message is a key idea that the sender wants to communicate. It is a sign that elicits the response of recipient. Communication process begins with deciding about the message to be conveyed. It must be ensured that the main objective of the message is clear.

(iv) Medium:

Medium is a means used to exchange/transmit the message. The sender must choose an appropriate medium for transmitting the message else the message might not be conveyed to the desired recipients.

The choice of appropriate medium of communication is essential for making the message effective and correctly interpreted by the recipient.

(v) Recipient/Decoder:

Recipient/Decoder are a person for whom the message is intended/aimed/targeted. The degree to which the decoder understands the message is dependent upon various factors such as knowledge of recipient, their responsiveness to the message, and the reliance of encoder on decoder.

(vi) Feedback:

Feedback is the main component of communication process as it permits the sender to analyse the efficacy of the message. It helps the sender in confirming the correct interpretation of message by the decoder. Feedback may be verbal or non-verbal. It may take written form also in form of memos, reports, etc.

24. Discuss leasing and hire purchase services scenario in India?

Leasing finance becomes widespread and effective financial sources for most of the business concerns. With the significance of lease finance, banks and financial institutions offer leasing financial assistance to the industrial concern.

Leasing activity was initiated in India in 1973. The first leasing company of India, named First Leasing Company of India Ltd. was set up in that year by Farouk Irani, with industrialist A C Muthia. For several years, this company remained the only company in the country until 20^th Century Finance Corporation was set up – this was around 1980.

Private Sector Leasing Company:

Private sector leasing companies also offer financial support to the industrial concerns. The following are the private sector leasing companies in India:

1. Express Leasing Limited
2. 20th Century Leasing Corporation Ltd.
3. First Leasing Company of India
4. Mazda Leasing Limited
5. Grover Leasing Limited

HIRE PURCHASE ACTIVITY IN INDIA

The British concept of hire-purchase has, however, been there in India for more than 6 decates. The first hire-purchase company is believed to be Commercial Credit Corporation, successor to Auto Supply Company. While this company was based in Madras, Motor and General Finance and Instalment Supply Company were set up in North India. These companies were set up in the 1920s and 1930s.

Development of Hire-purchase took two forms: consumer durables and automobiles.

Earlier, the non-banking finance companies were accepting deposits from the public by offering attractive interest rates and were collecting higher interest rates from the buyers of durable goods on hire purchase. But in 1998, certain restrictions were imposed on the acceptance of deposits by non-banking finance companies involved in hire purchase finance. Since then, the acceptance of deposits by these companies has been curtailed, as a result of which there has been some decline in the hire purchase activities in our country.

25. Explain the retention strategies of some non-fund based financial services?

Corporate sector financial requirements range from long term to medium term. In order to satisfy their long term requirements, corporate go to the primary and secondary securities market. However, for meeting their medium term requirements and also the uncovered or under-covered portion of their long term requirements, leads to the emergence of financial services. Financial services means and include not only providing the required funds of the corporate but also rendering finance related fee based advises or providing both. Financial services may be classified into the following which in no way can be put in water tight categories namely,

1. Asset / Fund based Financial Services;

2. Fee based financial services. And

3. Asset / Fund and Fee based financial services.

Under the Fund / Asset based financial services, the service provider provides the required amount of finances in terms of money or in terms of assets or in both the terms. Lease financing, Hire Purchase financing, Bills discounting, are some of the examples under this category. Under the fee based financial services, the services provider provides only expert / consultancy services, without taking any risk, for a nominal fee. Here, the responsibility of the services provider is very much limited. Credit rating, Credit cards, is some of the examples for this category. Under the Asset / Fund and fee based financial services, the service provider provides the funds as well as the assets in accordance with the requirements of the corporate, but at the sometimes charges a nominal sum as fee for the services and expert advises .Factoring, Insurance, Venture capital financing, Stock broking are some of the examples for this category. In the competitive marketing environment of today, even the service providers find it very difficult to survive in the market. This is mainly because of the following factors, namely,

1. There is large flow of money in the economy.

2. There is a large number of service providers, entering and exiting.

3. There is no major regulatory mechanisms in operations, to control and minimize the risks prevalent in the sector,

4. There is constant changes in the economic, political and social regiments resulting in drastic changes becoming effective in the sector

5. The service requirements of the service demanders are also varied, complex and changing. And

6. Heterogeneity prevails in most dealings.

To have a retainable market, it is imperative on the part of the service provider to look into various marketing retention strategies. In order to achieve this, a detailed knowledge about the various financial services is needed. The present chapter unit is a step in this direction.

26. Explain the evolution of financial services in India? What are the problems faced by financial services industry in India?

The financial services sector in India, which accounts for 6 percent of the nation’s GDP, is growing rapidly. Although the sector consists of commercial banks, development finance institutions, nonbanking financial companies, insurance companies, cooperatives, mutual funds, and the new “payment banks,” it is dominated by banks, which holds over 60 percent share.

The Reserve Bank of India (RBI) is the apex bank of the country, controlling all activities in the financial sector. Commercial banks include public sector and private sector banks and are under the regulatory supervision of the RBI. Development finance institutions include industrial and agriculture banks.

Non-banking finance companies (NBFC) provide loans, purchase stocks and debentures, and offer leasing, hire purchase, and insurance services.

Insurance companies function in both public and private sectors and are controlled by the Insurance Regulatory and Development Authority (IRDA).

India also has a vibrant capital market with stocks exchanges controlled by the Securities and Exchange Board of India (SEBI).

According to “India in Business,” a website of the Union Government, India’s banking sector assets were worth $1.8 trillion in the 2014-15 financial year.

According to a report by KPMG-CII, India’s banking sector is on the way to becoming the fifth largest in the world by 2020. The country’s life insurance sector is the biggest in the world, and the market size is expected to touch about $400 billion by 2020.

The assets of the mutual fund industry are worth $190 billion. The pension corpus fund is projected to record $1 trillion by 2025. Reforms to put the financial services industry and the economy on the fast track include measures to make finance available to medium, small, and micro industries.

India once had a heavily government-dominated financial services industry, and most services were provided by nationalised banks. Financial sector reforms were initiated in 1991 with the aim of accelerating economic growth.

In the following years, industry and service sectors were opened up for foreign direct investment. The reforms ended the dominance of the public sector and reduced direct government control on industrial investments.

Financial sector reforms in India have improved resource mobilisations and allocation. The liberalisation of interest rates and the easing of cash reserve norms have helped make funds available to various sectors.

However, prudential norms have been tightened and transparency and regulation increased to avoid a systemic collapse that other countries have suffered.

Some of the issues financial institutions face today include:

·           Promoting growth and sustaining profitability in an environment with low interest rates

·           Rebuilding asset quality and strengthening capital positions

·           Developing new and reliable sources of revenue

·           Increasing the business value of customer relationships, especially when customers have become more demanding

·           Restoring public confidence in the industry

·           Competing with aggressive, innovative non-traditional competitors

·           Incorporating a risk management culture into daily operations

On top of these challenges, financial institutions must deal with regulatory issues, such as the Dodd-Frank Wall Street Reform and Consumer Protection Act. In the aftermath of the financial crisis, regulators continue to implement risk management reforms, like Dodd-Frank, that are designed to create greater transparency and stability in the global banking system. This new environment changes how financial institutions run their businesses and especially how they measure and manage risk.

Technology can help banks and other financial institutions address these industry issues. However, keeping up with technological innovation presents a challenge by itself. According to a PwC CEO Survey, nearly 60% of industry leaders view the speed of technological change as a threat to their growth prospects.

The rapid shift in technology and customer expectations require financial institutions to address projects such as:

·           Mobile Banking – Financial institutions have to develop and implement new digital delivery strategies to remain competitive. At a minimum, they must incorporate mobile banking as a regular delivery channel.

·           Next-Generation Platforms – Many financial institutions rely on legacy systems to conduct operations. To address the issues facing the industry, financial institutions need to quickly migrate their old technology architectures to next-generation capabilities. Viewing new technology as a strategic growth investment rather than an operational expense will demonstrate the value of IT systems throughout an organization.

·           Cyber Security – The PwC CEO Survey found more than 70% of industry leaders believe cyber insecurity is a threat to growth. The ongoing news reports of data breaches at retailers highlight the danger all businesses face.

27. Financial services marketing versus Good Marketing. Comment.

BASIS FOR COMPARISON	PRODUCT MARKETING	SERVICE MARKETING
Meaning	Product marketing refers to the process in which the marketing activities are aligned to promote and sell a specific product for a particular segment.	Service marketing implies the marketing of economic activities, offered by the business to its clients for adequate consideration.
Marketing mix	4 P's	7 P's
Sells	Value	Relationship
Who comes to whom?	Products come to customers.	Customers come to service.
Transfer	It can be owned and resold to another party.	It is neither owned nor transferred to another party.
Returnability	Products can be returned.	Services cannot be returned after they are rendered.
Tangibility	They are tangible, so customer can see and touch it, before coming to the buying decision.	They are intangible, so it is difficult to promote services.
Separability	Product and the company producing it, are separable.	Service cannot be separated from its provider.
Customization	Products cannot be customized as per requirements.	Services vary from person to person, they can be customized.
Imagery	They are imagery and hence, receive quick response from customers.	They are non-imagery and do not receive quick response from customers.
Quality comparison	Quality of a product can be easily measured.	Quality of service is not measurable.

28. Highlight the marketing environment of the liberalised and globalised economy of India?

Impact of globalisation

1. Public-Private partnership

2. Competition in public sector

3. Efficiency

4. Effectiveness

5. Transparency

6. Responsiveness

7. Accountability

8. People participation

9. Business principles

10. Specialisation

11. Use of IT

12. Increase in productivity

13. Decrease in number of employees

Impact of liberalisation

1. Flexibility in policies

2. Increase in production

3. Lessen burden of work on administration

4. Increase in creativity

5. New experiments

6. Loosen the control of administration on economic and commercial activities 

29. Bring out the factors contributing to obsolescence of a product in financial services.

30. Briefly explain the marketing strategies to be followed in a different stages in product life cycle?

Introduction stage is marked with slow growth in sales and a very little or no profit. Note that product has been newly introduced, and a sales volume is limited; product and distribution are not given more emphasis. Basic constituents of marketing strategies for the stage include price and promotion. Price, promotion or both may be kept high or low depending upon market situation and management approach.

Following are the possible strategies during the first stage:

1. Rapid Skimming Strategy:

This strategy consists of introducing a new product at high price and high promotional expenses. The purpose of high price is to recover profit per unit as much as possible. The high promotional expenses are aimed at convincing the market the product merits even at a high price. High promotion accelerates the rate of market penetration, in all; the strategy is preferred to skim the cream (high profits) from market.

This strategy makes a sense in following assumptions:

(a) Major part of market is not aware of the product.

(b) Customers are ready to pay the asking price.

(c) There possibility of competition and the firm wants to build up the brand preference.

(d) Market is limited in size.

2. Slow Skimming Strategy:

This strategy involves launching a product at a high price and low promotion. The purpose of high price is to recover as much as gross profit as possible. And, low promotion keeps marketing expenses low. This combination enables to skim the maximum profit from the market.

This strategy can be used under following assumptions:

(a) Market is limited in size.

(b) Most of consumers are aware of product.

(c) Consumers are ready to pay high price.

(d) There is less possibility of competition.

3. Rapid Penetration:

The strategy consists of launching the product at a low price and high promotion. The purpose is the faster market penetration to get larger market share. Marketer tries to expand market by increasing the number of buyers.

It is based on following assumptions:

(a) Market is large.

(b) Most buyers are price-sensitive. They prefer the low-priced products.

(c) There is strong potential for competition.

(d) Market is not much aware of the product. They need to be informed and convinced.

(e) Per unit cost can be reduced due to more production, and possibly more profits at low price.

4. Slow Penetration:

The strategy consists of introducing a product with low price and low-level promotion. Low price will encourage product acceptance, and low promotion can help realization of more profits, even at a low price.

Assumptions of this strategy:

(a) Market is large.

(b) Market is aware of product.

(c) Possibility of competition is low.

(d) Buyers are price-sensitive or price-elastic, and not promotion-elastic.

Marketing Strategies for Growth Stage:

This is the stage of rapid market acceptance. The strategies are aimed at sustaining market growth as long as possible. Here, the aim is not to increases awareness, but to get trial of the product. Company tries to enter the new segments. Competitors have entered the market. The company tries to strengthen competitive position in the market. It may forgo maximum current profits to earn still greater profits in the future.

Several possible strategies for the stage are as under:

1. Product qualities and features improvement

2. Adding new models and improving styling

3. Entering new market segments

4. Designing, improving and widening distribution network

5. Shifting advertising and other promotional efforts from increasing product awareness to product conviction

6. Reducing price at the right time to attract price-sensitive consumers

7. Preventing competitors to enter the market by low price and high promotional efforts

Marketing Strategies for Maturity Stage:

In this stage, competitors have entered the market. There is severe fight among them for more market share. The company adopts offensive/aggressive marketing strategies to defeat the competitors.

Following possible strategies are followed:

1. To Do Nothing:

To do nothing can be an effective marketing strategy in the maturity stage. New strategies are not formulated. Company believes it is advisable to do nothing. Earlier or later, the decline in the sales is certain. Marketer tries to conserve money, which can be later on invested in new profitable products. It continues only routine efforts, and starts planning for new products.

2. Market Modification:

This strategy is aimed at increasing sales by raising the number of brand users and the usage rate per user. Sales volume is the product (or outcome) of number of users and usage rate per users. So, sales can be increased either by increasing the number of users or by increasing the usage rate per user or by both. Number of users can be increased by variety of ways.

There are three ways to expand the number of users:

i. Convert non-users into users by convincing them regarding uses of products

ii. Entering new market segments

iii. Winning competitors’ consumers

Sales volume can also be increased by increasing the usage rate per user.

This is possible by following ways:

i. More frequent use of product

ii. More usage per occasion

iii. New and more varied uses of product

3. Product Modification:

Product modification involves improving product qualities and modifying product characteristics to attract new users and/or more usage rate per user.

Product modification can take several forms:

i. Strategy for Quality Improvement:

Quality improvement includes improving safety, efficiency, reliability, durability, speed, taste, and other qualities. Quality improvement can offer more satisfaction.

ii. Strategy for Feature Improvement:

This includes improving features, such as size, colour, weight, accessories, form, get-up, materials, and so forth. Feature improvement leads to convenience, versatility, and attractiveness. Many firms opt for product improvement to sustain maturity stage.

Product improvement is beneficial in several ways like:

(1) It builds company’s image as progressiveness, dynamic, and leadership,

(2) Product modification can be made at very little expense,

(3) It can win loyalty of certain segments of the market,

(4) It is also a source of free publicity, and

(5) It encourages sales force and distributors.

4. Marketing Mix Modification:

This is the last optional strategy for the maturity stage. Modification of marketing mix involves changing the elements of marketing mix. This may stimulate sales. Company should reasonably modify one or more elements of marketing mix (4P’s) to attract buyers and to fight with competitors. Marketing mix modification should be made carefully as it is easily imitated.

Marketing Strategies for Decline Stage:

Company formulates various strategies to manage the decline stage. The first important task is to detect the poor products. After detecting the poor products, a company should decide whether poor products should be dropped. Some companies formulate a special committee for the task known as Product Review Committee. The committee collects data from internal and external sources and evaluates products. On the basis the report submitted by the committee, suitable decisions are taken.

Company may follow any of the following strategies:

1. Continue with the Original Products:

This strategy is followed with the expectations that competitors will leave the market. Selling and promotional costs are reduced. Many times, a company continues its products only in effective segments and from remaining segments they are dropped. Such products are continued as long as they are profitable.

2. Continue Products with Improvements:

Qualities and features are improved to accelerate sales. Products undergo minor changes to attract buyers.

3. Drop the Product:

When it is not possible to continue the products either in original form or with improvement, the company finally decides to drop the products.

Product may be dropped in following ways:

i. Sell the production and sales to other companies

ii. Stop production gradually to divert resources to other products

iii. Drop product immediately.

           

31. What pricing strategy you recommend for:

1. a new firm:

New companies set prices according to what the market will bear and to make a reasonable profit. Some pricing strategies of companies are more permanent in nature, while other pricing moves are used temporarily. For example, a clothing store will usually offer a regular retail price on items, but reduce those prices before a seasonal shift. Companies also use different pricing strategies when introducing new products.

Price Skimming

A company will sometimes use a price skimming strategy when introducing a new product, especially when the product is a newer technology. The objective of price skimming is to set a high price initially to help recover the costs of production and advertising. The extra money is then reinvested into producing more product. Demand for the product must be relatively inelastic for a company to use a price skimming strategy, according to NetMBA.com. That is, customers cannot be sensitive to the price of the product. A small company introducing a new type of cell phone is an example of when price skimming may be used. Technical companies can usually count on certain customers, those who always buy first, to purchase their new items.

Penetration Pricing

A company entering an existing and competitive market may use a penetration pricing strategy. The goal of penetration pricing is to set low prices early to attract lots of customers. A company will then strive to product high quality products and offer excellent customer service to retain these customers. Ultimately, the company uses penetration pricing to rapidly increase market share, or the percentage of total sales it holds in the market. From there, the company can build loyalty among its customers. Eventually, a company will need to raise prices because profits margins are too minuscule in penetration pricing.

Return on Investment Pricing

A company will often have a target profit figure--return on investment, or ROI--it wants to earn on a product. Therefore, the company may spend lots of time analyzing the costs that go into making the product and projecting sales figures. For example, if a small software company plans to earn a 20 percent profit on a new database software, it will base its price on how many units it needs to sell to earn a 20 percent profit or return on investment.

Geographical Pricing

Geographical pricing is more discretionary in nature. Companies realize that the cost of living is higher in certain markets in the U.S. In addition, people may earn more in certain areas of the city or state. Therefore, the company may use a geographical pricing structure and set its prices higher in certain markets. Consequently, pricing can become extremely complicated, so the company may need to decentralize marketing and finance departments on a more regional basis. That way each region can track product sales and make pricing changes as needed.

2. a new product:

Study Demand When Setting Price

A company will usually study demand for industry products before setting a new product price. Demand may be relatively elastic in the industry, meaning consumers are sensitive to price changes. Therefore, the quantity that consumers demand will decrease as prices increase. Contrarily, demand may be highly inelastic.

Inelastic demand means consumers are not overly concerned with price. Companies that produce highly technical devices often experience inelastic demand. For example, a small cell phone company may introduce a new type of cell phone. Certain consumers may desire the phone so much that they are not concerned how much it costs.

Types of Pricing Strategies

A company will often use a price skimming or penetration pricing strategy for new products. Companies that use a price skimming strategy will typically set prices relatively high versus competitive products. Contrarily, companies that use a penetration pricing strategy will usually price their new products lower than competitive products. A company may also price its product commensurate with competitive products.

Benefits of Pricing Strategies

A business owner will use a price skimming strategy to quickly recoup product and advertising costs. She may not have access to much business capital. Therefore, she needs the money to produce more products and increase advertising expenditures.

The benefit of a penetration pricing strategy is that it can quickly increase market share, according to Net MBA website. The business owner will deliberately price her products low to achieve a high business volume. Subsequently, her will likely focus on producing high quality products to keep those customers. Meeting competitive prices is just a safe alternative. Consumers are already paying a certain price for existing products.

Pricing Strategies Change

Most initial pricing strategies are temporary. A company cannot continue to keep prices too low or high. The company will risk losing potential customers with high prices and sacrifice profits with low prices. However, a business owner can continue to offer occasional price reductions for new products. For example, some companies offer rebates on new products, where customers will receive money at a future date.

Ask Customers when Setting Prices

The best way to know how to price new products is by asking consumers. Companies often use focus groups and marketing research to determine prices for new products. For example, managers of a small restaurant may interview 10 customers on price in a focus group. Their objective may be to determine how much customers would pay for a new breakfast item.

32. Should marketers use Push or Pull Promotional strategy in financial services?

Push Promotional Strategy

A push promotional strategy works to create customer demand for your product or service through promotion: for example, through discounts to retailers and trade promotions. Appealing package design and maintaining a reputation for reliability, value or style are also used in push strategies. One example of a push strategy is mobile phone sales, where manufacturers offer discounts on phones to encourage buyers to choose

 Their phone. Push promotional strategies also focus on selling directly to customers, for example, through point of sale displays and direct approaches to customers.

Pull Promotional Strategy

A pull promotional strategy uses advertising to build up customer demand for a product or service. For example, advertising children's toys on children's television shows is a pull strategy. The children ask their parents for the toys, the parents ask the retailers and the retailers the order the toys from the manufacturer. Other pull strategies include sales promotions, offering discounts or two-for-one offers and building demand through social media sites such as YouTube.

Combination of Both Strategies

Some companies use a combination of both push and pull strategies. For example, Texas-based textile producer Cotton Incorporated uses a push/pull promotional strategy. They push to create customer demand through constantly developing new products and offering these products in stores; and pull customers towards these products through advertising and promotion deals.

When To Use Each Strategy

Push promotional strategies work well for lower cost items, or items where customers may make a decision on the spot. New businesses use push strategies to develop retail markets for their products and to generate exposure. Once a product is already in stores, a pull strategy creates additional demand for the product. Pull strategies work well with highly visible brands, or where there is good brand awareness. This is usually developed through advertising.

33. What are the kinds of credit cards?

Rewards Credit Cards: A rewards credit card, as the name implies, earns rewards on your purchases. Some cards will pay out at a flat rate of 1%-2%, while others will give an extra bonus in predetermined spending categories. Rewards are paid out in a variety of forms, including checks, gift certificates, airline miles and free hotel stays.

Low Interest Credit Cards: Low interest (or low APR) credit cards are best if you carry some credit card debt month-to-month. Depending on your financial situation, you can choose a card with a reliably low ongoing interest rate, or one that has no interest for an introductory period.

Balance Transfer Credit Cards: Balance transfer cards are meant for those who already have a lot of credit card debt. They allow you to shift your debt from your current card to a new one, and give you a period of 6-21 months to pay it off interest-free. There is usually a one-time balance transfer fee, though, of up to 5%.

Secured Credit Cards: Meant for those with bad credit, secured credit cards require you to post collateral when you open your account, usually equal to or greater than your credit limit. With a secured card, you can build up your credit score and eventually move on to an unsecured card.