Concept of Under Capitalization The phrase under capitalization should never be misconstrued with inadequacy of capital Gerstenberge says “A corporation may be under capitalized when the rate of profit is exceptionally high in relation to the return enjoyed by similarly situated companies in the same industry or it has too little capital to conduction business”. It’s against over capitalization, under capitalization implies an effective utilization of finance, a high rate of dividend & the enhanced price of share. Here the capital of the company is less in proportion to its total requirements. In this state of affairs the real worth of the assets exceeds their book value and the rate of earning is higher than a corporation is able to offer. When a company succeeds in earning abnormally large income continuously for a pretty long time symptoms of under capitalization gradually develop in the companies. Under capitalization is an index Continue reading
Business Finance
Business Finance is that business activity which is concerned with the acquisition and conservation of capital funds in meeting financial needs and overall objectives of business enterprises.
Credit Risk in E-Banking
Credit risk is the risk to earning and eventually capital, arising from a borrower’s failure to meet the terms of a credit contract with the bank or otherwise to perform as agreed. It is found in all activities where success depends on counterparty, issuer, or borrower performance. It arises any time bank findings are extended, committed, invested, or otherwise exposed through actual or implied contractual agreements, whether on or off the bank’s balance sheet. Internet banking provides the opportunity for banks to expand their geographic range. Customers can reach a given institution from literally anywhere in the world. In dealing with customers over the Internet, absent of any personal contact, it is challenging for institutions to verify the bona fide of their customers, which is an important element in making sound credit decisions. Verifying collateral and perfecting security agreements can also be challenging with out-of-area borrowers. Unless properly managed, Internet Continue reading
Indian Banking Sector Reforms: Licensing of New Banks in the Private Sector
Entry of New Banks in the Private Sector As per the guidelines for licensing of new banks in the private sector issued in January 1993, RBI had granted licenses to 10 banks. Based on a review of experience gained on the functioning of new private sector banks, revised guidelines were issued in January 2001. The main provisions/requirements are listed below: Initial minimum paid-up capital shall be Rs. 200 crore; this will be raised to Rs. 300 crore within three years of commencement of business. Promoters’ contribution shall be a minimum of 40 per cent of the paid-up capital of the bank at any point of time; their contribution of 40 per cent shall be locked in for 5 years from the date of licensing of the bank and excess stake above 40 per cent shall be diluted after one year of bank’s operations. Initial capital other than promoters’ contribution could Continue reading
Problems of Leasing
Leasing has great potential in India. However, leasing in India faces serious handicaps which may mar its growth in future. The following are some of the problems. 1. Unhealthy Competition: The market for leasing has not grown with the same pace as the number of lessors. As a result, there is over supply of lessors leading to competitor. With the leasing business becoming more competitive, the margin of profit for lessors has dropped from four to five percent to the present 2.5 to 3 percent. Bank subsidiaries and financial institutions have the competitive edge over the private sector concerns because of cheap source of finance. 2. Lack of Qualified Personnel: Leasing requires qualified and experienced people at the helm of its affairs. Leasing is a specialized business and persons constituting its top management should have expertise in accounting, finance, legal and decision areas. In India, the concept of leasing business Continue reading
Debt Recovery Agent
The phrase “Debt Recovery Agent” comprises three terms- Debt, Recovery and Agent. Let us understand the meaning of these terms separately, before we explain the meaning of Debt Recovery Agent. Debt: It refers to a sum of money owed by one person or entity (debtor) to another person or entity (creditor). Thus there are two parties to a debt- debtor who receives money by way of a debt; and creditor who lends money to the debtor. To illustrate, if Ram takes a loan of Rs. 3 lacs from a bank for purchasing a car, Ram becomes the debtor (or borrower), the bank is the creditor (or lender) and the loan of Rs. 3 laces is the debt (principal). Ram would be required to repay the loan in equated monthly installment (EMI),comprising the principal and interest, spread over the repayment period of, say, 3 years ( debt Continue reading
Margin trading at stock exchanges
Margin Trading (MT) is an arrangement whereby an investor purchases securities by borrowing a portion of the purchase value from the authorised broker by using securities in his portfolio as collateral. Since April 1, 2004, SEBI has allowed member brokers to provide margin trading facility to their client in the cash market. Only corporate brokers with net worth of at least Rs. 3 crores would be eligible to participate in Mragin Trading. The brokers interested to provide margin trading facility to their clients have to seek approval from the stock exchange. The broker may use his own funds or borrow from scheduled commercial banks/NBFC regulated by the RBI. The total exposure of a broker shall be within self imposed prudential limits and not exceeding 50% of networth. The margin arrangement has to be agreed upon between the broker and the client, subject to SEBI Guidelines, 2004. Initial and maintenance margin Continue reading