UNIT I
FINANCIAL MARKET
Syllabus
Financial Market in India – Financial Sector Reforms – Money Market –
Capital Market – Bond Market – Types of Bonds.
1 What is Indian Financial Market?
What does the India Financial market comprise of? It talks about the primary market, FDIs, alternative
investment options, banking and insurance and the pension sectors, asset management segment as well.
With all these elements in the India Financial market, it happens to be one of the oldest across the globe
and is definitely the fastest growing and best among all the financial markets of the emerging economies.
The history of Indian capital markets spans back 200 years, around the end of the 18th century. It was at
this time that India was under the rule of the East India Company. The capital market of India initially
developed around Mumbai; with around 200 to 250 securities brokers participating in active trade during
the second half of the 19th century.
2 What is the Scope of the India Financial Market?
The financial market in India at present is more advanced than many other sectors as it became organized
as early as the 19th century with the securities exchanges in Mumbai, Ahmedabad and Kolkata. In the
early 1960s, the number of securities exchanges in India became eight - including Mumbai, Ahmedabad
and Kolkata. Apart from these three exchanges, there was the Madras, Kanpur, Delhi, Bangalore and Pune
exchanges as well. Today there are 23 regional securities exchanges in India.
The Indian stock markets till date have remained stagnant due to the rigid economic controls. It was only
in 1991, after the liberalization process that the India securities market witnessed a flurry of IPOs serially.
The market saw many new companies spanning across different industry segments and business began to
flourish.
The launch of the NSE (National Stock Exchange) and the OTCEI (Over the Counter Exchange of India)
in the mid 1990s helped in regulating a smooth and transparent form of securities trading.
The regulatory body for the Indian capital markets was the SEBI (Securities and Exchange Board of
India). The capital markets in India experienced turbulence after which the SEBI came into prominence.
The market loopholes had to be bridged by taking drastic measures.
Potential of the India Financial Market India Financial Market helps in promoting the savings of the economy - helping to adopt an effective
channel to transmit various financial policies. The Indian financial sector is well-developed, competitive,
efficient and integrated to face all shocks. In the India financial market there are various types of financial
products whose prices are determined by the numerous buyers and sellers in the market. The other
determinant factor of the prices of the financial products is the market forces of demand and supply. The
various other types of Indian markets help in the functioning of the wide India financial sector.
3 What are the Features of the Financial Market in India?

India Financial Indices - BSE 30 Index, various sector indexes, stock quotes, Sensex charts, bond
prices, foreign exchange, Rupee & Dollar Chart

Indian Financial market news

Stock News - Bombay Stock Exchange, BSE Sensex 30 index, S&P CNX-Nifty, company
information, issues on market capitalization, corporate earning statements

Fixed Income - Corporate Bond Prices, Corporate Debt details, Debt trading activities, Interest
Rates, Money Market, Government Securities, Public Sector Debt, External Debt Service

Foreign Investment - Foreign Debt Database composed by BIS, IMF, OECD,& World Bank,
Investments in India & Abroad

Global Equity Indexes - Dow Jones Global indexes, Morgan Stanley Equity Indexes

Currency Indexes - FX & Gold Chart Plotter, J. P. Morgan Currency Indexes

National and Global Market Relations

Mutual Funds

Insurance
4 What is Capital market?
Introduction
There are 22 stock exchanges in India, the first being the Bombay Stock Exchange (BSE), which began
formal trading in 1875, making it one of the oldest in Asia. Over the last few years, there has been a rapid
change in the Indian securities market, especially in the secondary market. Advanced technology and
online-based transactions have modernized the stock exchanges. In terms of the number of companies
listed and total market capitalization, the Indian equity market is considered large relative to the country’s
stage of economic development. The number of listed companies increased from 5,968 in March 1990 to
about 10,000 by May 1998 and market capitalization has grown almost 11 times during the same period.
The debt market, however, is almost nonexistent in India even though there has been a large
volume of Government bonds traded. Banks and financial institutions have been holding a substantial part
of these bonds as statutory liquidity requirement. The portfolio restrictions on financial institutions’
statutory liquidity requirement are still in place. A primary auction market for Government securities has
been created and a primary dealer system was introduced in 1995. There are six authorized primary
dealers. Currently, there are 31 mutual funds, out of which 21 are in the private sector. Mutual funds were
opened to the private sector in 1992. Earlier, in 1987, banks were allowed to enter this business, breaking
the monopoly of the Unit Trust of India (UTI), which maintains a dominant position.
Before 1992, many factors obstructed the expansion of equity trading. Fresh capital issues were
controlled through the Capital Issues Control Act. Trading practices were not transparent, and there was a
large amount of insider trading. Recognizing the importance of increasing investor protection, several
measures were enacted to improve the fairness of the capital market. The Securities and Exchange Board
of India (SEBI) was established in 1988. Despite the rules it set, problems continued to exist, including
those relating to disclosure criteria, lack of broker capital adequacy, and poor regulation of merchant
bankers and underwriters. There have been significant reforms in the regulation of the securities market since
1992 in conjunction with overall economic and financial reforms. In 1992, the SEBI Act was enacted giving
SEBI statutory status as an apex regulatory body. And a series of reforms was introduced to improve
investor protection, automation of stock trading, integration of national markets, and efficiency of market
operations. India has seen a tremendous change in the secondary market for equity. Its equity market will
most likely be comparable with the world’s most advanced secondary markets within a year or two. The
key ingredients that underlie market quality in India’s equity market are:
• exchanges based on open electronic limit order book;
• nationwide integrated market with a large number of informed traders and fluency of short or
long positions; and
• no counterparty risk.
Among the processes that have already started and are soon to be fully implemented are electronic
settlement trade and exchange-traded derivatives. Before 1995, markets in India used open outcry, a
trading process in which traders shouted and handsignaled from within a pit. One major policy initiated by
SEBI from 1993 involved the shift of all exchanges to screen-based trading, motivated primarily by the
need for greater transparency. The first exchange to be based on an open electronic limit order book was
the National Stock Exchange (NSE), which started trading debt instruments in June 1994 and equity in
November 1994. In March 1995, BSE shifted from open outcry to a limit order book market. Currently, 17
of India’s stock exchanges have adopted open electronic limit order. Before 1994, India’s stock markets
were dominated by BSE. In other parts of the country, the financial industry did not have equal access to
markets and was unable to participate in forming prices, compared with market participants in Mumbai
(Bombay). As a result, the prices in markets outside Mumbai were often different from prices in Mumbai.
These pricing errors limited order flow to these markets. Explicit nationwide connectivity and
implicit movement toward one national market has changed this situation (Shah and Thomas, 1997). NSE
has established satellite communications which give all trading members of NSE equal access to the
market. Similarly, BSE and the Delhi Stock Exchange are both expanding the number of trading terminals
located all over the country. The arbitrages are eliminating pricing discrepancies between markets. Despite
these big improvements in microstructure, the Indian capital market has been in decline during the last
three years. The amount of capital issued has dropped from the level of its peak year,1994/95, and so have
equity prices. In 1994/95, Rs276 billion was raised in the primary equity market. This figure fell to Rs208
billion in 1995/96 and to Rs142 billion in 1996/97. The BSE-30 index or Sensex, the sensitive index of
equity prices, peaked at 4,361 in September 1994 and fell during the following years. A leading
cause was that financial irregularities and overvaluations of equity prices in the earlier years had eroded
public confidence in corporate shares. Also, there was a reduced inflow of foreign investment after the
Mexican and Asian financial crises. In a sense, the market is now undergoing a period of adjustment.
Thus, it is time for regulatory authorities to make greater efforts to recover investors’ confidence and to
further improve the efficiency and transparency of market operations. The Indian capital market still faces
many challenges if it is to promote more efficient allocation and mobilization of capital in the economy.
First, market infrastructure has to be improved as it hinders the efficient flow of information and effective
corporate governance. Accounting standards will have to adapt to internationally accepted accounting
practices. The court system and legal mechanism should be enhanced to better protect small shareholders’
rights and their capacity to monitor corporate activities. Second, the trading system has to be made more
transparent. Market information is a crucial public good that should be disclosed or made
available to all participants to achieve market efficiency. SEBI should also monitor more closely cases of
insider trading. Third, India may need further integration of the national capital market through
consolidation of stock exchanges. The trend all over the world is to consolidate and merge existing stock
exchanges. Not all of India’s 22 stock exchanges may be able to justify their existence. There is a pressing
need to develop a uniform settlement cycle and common clearing system that will bring an end to
unnecessary speculation based on arbitrage opportunities. Fourth, the payment system has to be improved
to better link the banking and securities industries. India’s banking system has yet to come up with good
electronic funds transfer (EFT) solutions. EFT is important for problems such as direct payments of
dividends through bank accounts, eliminating counterparty risk, and facilitating foreign institutional
investment. The capital market cannot thrive alone; it has to be integrated with the other segments of the
financial system.
The global trend is for the elimination of the traditional wall between banks and the securities
market. Securities market development has to be supported by overall macroeconomic and financial sector
environments. Further liberalization of interest rates, reduced fiscal deficits, fully market-based issuance
of Government securities, and a more competitive banking sector will help in the development of a
sounder and a more efficient capital market in India. Capital Market Reforms and Developments
Reforms in the Capital Market Over the last few years, SEBI has announced several far-reaching reforms
to promote the capitalmarket and protect investor interests. Reforms in the secondary market have focused
on three main areas: structure and functioning of stock exchanges, automation of trading and post trade
systems, and the introduction of surveillance and monitoring systems. (See Appendix 1 for a listing of
reforms since 1992). Computerized online trading of securities, and setting up of clearing houses or
settlement guarantee funds were made compulsory for stock exchanges. Stock exchanges were permitted
to expand their trading to locations outside their jurisdiction through computer terminals. Thus, major
stock exchanges in India have started locating computer terminals in far-flung areas, while smaller
regional exchanges are planning to consolidate by using centralized trading under a federated structure.
Online trading systems have been introduced in almost all stock exchanges. Trading is much more
transparent and quicker than in the past.
Until the early 1990s, the trading and settlement infrastructure of the Indian capital market was
poor. Trading on all stock exchanges was through open outcry, settlement systems were paper-based, and
market intermediaries were largely unregulated. The regulatory structure was fragmented and there was
neither comprehensive registration nor an apex body of regulation of the securities market. Stock
exchanges were run as “brokers clubs” as their management was largely composed of brokers. There
was no prohibition on insider trading, or fraudulent and unfair trade practices (see Appendix 2).
Since 1992, there has been intensified market reform, resulting in a big improvement in securities trading,
especially in the secondary market for equityMost stock exchanges have introduced online trading
and set up clearing houses/corporations. A depository has become operational for scripless trading
and the regulatory structure has been overhauled with most of the powers for regulating the capital
market vested with SEBI. The Indian capital market has experienced a process of structural transformation
with operations conducted to standards equivalent to those in the developed markets. It was opened
up for investment by foreign institutional investors (FIIs) in 1992 and Indian companies were allowed
to raise resources abroad through Global Depository Receipts (GDRs) and Foreign Currency Convertible
Bonds (FCCBs). The primary and secondary segments of the capital market expanded rapidly, with
greater institutionalization and wider participation of individual investors accompanying this growth.
However, many problems, including lack of confidence in stock investments, institutional overlaps, and
other governance issues, remain as obstacles to the improvement of Indian capital market efficiency.
Stock Market
PRIMARY MARKET
Since 1991/92, the primary market has grown fast as a result of the removal of investment restrictions
in the overall economy and a repeal of the restrictions imposed by the Capital Issues Control Act. In
1991/92, Rs62.15 billion was raised in the primary market.
5 What is Bond market ?
The need for a liquid and efficient Indian rupee debt market to fund infrastructure and other term
finance is well accepted . But very little has happened. It is difficult to imagine an efficient debt market
with an illiquid and inefficient sovereign bond market. The sovereign bond market sets the benchmark for
pricing across the credit-risk spectrum. Liquidity and efficiency in a financial market can be measured
using three parameters :
Immediacy: Ability to execute trades of a small size immediately without moving the price adversely
Depth: Impact cost suffered when doing large trades
Resilience: Speed with which prices and liquidity of the market revert to normal conditions after a large
trade has taken place.
India’s sovereign bond market satisfies the immediacy and depth conditions only for “on-the -run”
government bonds (i.e., the most recently-issued government bond of a specific maturity). Otherwise, the
domestic sovereign bond market is largely inefficient. Except for about 8-10 securities at a time for which
two way quotes are available in the market, other parts of the yield curve represent securities that are not
actively traded. Activity is concentrated in a few securities due to the market confidence in them and the
ability to liquidate positions quickly for these specific bonds at a fair value.
The absence of market making activity in other securities or the non-availability of any reasonable quote
discourages trading in such securities. Perceived inability to offload holdings at around stop loss levels, if
required, works as an effective deterrent . The depth of the secondary market as measured by the ratio of
turnover to average outstanding stocks is extremely low in India at roughly 5% compared with 20% in a
developed market like the US.
Non availability of reliable hedging instruments such as rupee derivatives restricts the possibility of
hedging positions in the derivatives market. Absence of speculators at retail level deprives the market of
the cushioning effect in cases of movements without adequate change in fundamentals.
For a start, RBI, as the banker to the government , should start extinguishing illiquid securities by buying
them back. Fresh issuance at different tenors should be done only in the liquid, ‘popular’ securities so that
there is a single security at each tenor that represents the tenor and also has critical mass. Second,
differences in coupon for securities of the same tenor tend to drive the price and yield differences across
securities. This has to be addressed. Finally, the sovereign bond issue structure has to be aligned not just
with the government's preference for duration but also with a focus on deepening the government market.
This means issuing securities at each critical tenor, not just the tenors that are compatible with the
government’s borrowing.
The need to maintain SLR requirements by banks (the largest holder of sovereign bonds) means that banks
become a captive market for government securities and this dilutes market pricing. Thus, government
bonds are not necessarily transacted at a market clearing rate. For example, auctions may be cancelled
because rates are not deemed appropriate, or the debt manager( in this case RBI) fixes a minimum reserve
price for the auction, or keeps the right to allocate less than the amount announced if price dispersions are
too high.
6 What is Indian Financial Sector Reforms?
Introduction
At the outset, I am thankful to the Institute of International Bankers for giving me this opportunity of
addressing the Annual Washington Conference 2007. The banking system in India has undergone
significant changes during last 15 years. There have been new banks, new instruments, new windows, new
opportunities and, along with all this, new challenges. While deregulation has opened up new vistas for
banks to augment revenues, it has also entailed greater competition and consequently greater risks. The
traditional face of banks as mere financial intermediaries has since altered and risk management has
emerged as the defining attribute. Financial sector reforms introduced in the early 1990s as a part of the
structural reforms have touched upon almost all aspects of banking operations. For a few decades
preceding the onset of banking and financial sector reforms in India, banks operated in an environment
that was heavily regulated and characterised by sufficient barriers to entry, which protected them
against too much competition. This regulated environment set in complacency in the manner in
which banks operated and responded to the customer needs. The administered interest rate
structure, both on the liability and the assets sides, allowed banks to earn reasonable spread
without much efforts. Despite this, however, banks’ profitability was low and NPLs level was
high, reflecting lack of efficiency. Although banks operated under regulatory constraints in the
form of statutory holding of Government securities (statutory liquidity ratio or SLR) and the cash
reserve ratio (CRR) and lacked functional autonomy and operational efficiency, the fact was that
most banks did not operate efficiently.
While the broad objectives of the financial sector reforms, thus, were to enhance
efficiency and productivity, the process of reforms were initiated in a gradual and properly
sequenced manner so as to have a reinforcing effect. The approach has been to consistently
upgrade the financial sector by adopting the international best practices through a consultative
process. Financial sector reforms were carried out in two phases. The first phase of reforms
was aimed at creating productive and profitable financial institutions operating within the 2
environment of operational flexibility and functional autonomy. The focus of the second phase of
financial sector reforms starting from the second-half of 1990s has been on strengthening of the
financial system consistent with the movement towards global integration of financial services.
7 what is Financial Sector Reforms in India?
The deregulation of interest rates constituted an integral part of financial sector reforms.
The interest rate regime has been largely deregulated with a view to achieving better price
discovery and efficient resource allocation. Banks now have flexibility to decide their deposit and
lending rate structures and manage their assets and liabilities accordingly. At present, apart
from interest rates on savings deposits and NRI deposits on the deposit side, and export credit
and small loans up to Rs. 2 lakh on the lending side, all other interest rates have been
deregulated.
Indian banking system operated for a long time with high reserve requirements both in
the form of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). This was mainly to
accommodate the high fiscal deficit and its monetisation. The efforts in the recent period have
been to lower both the CRR and SLR. The SLR has been gradually reduced from a peak of 38.5
per cent to 25 per cent. The CRR was reduced from its peak level of 15.0 per cent maintained
during 1989 to 1992 to 4.5 per cent of NDTL in June 2003. Although the Reserve Bank
continues to pursue its medium-term objective of reducing the CRR, in recent years, on a review
of macroeconomic and monetary conditions, the CRR has been revised upwards to 6.0 per cent
(to be effective from March 3, 2007).
It has been the endeavour of the Reserve Bank to establish an enabling regulatory
framework with prompt and effective supervision, and development of legal, technological and
institutional infrastructure. Persistent efforts, therefore, have been made towards adoption of international
benchmarks, as appropriate to Indian conditions. In 1994, a Board for Financial Supervision (BFS) was
constituted comprising select members of the Reserve Bank Board with a variety of professional expertise
to exercise 'undivided attention to supervision' and ensure an integrated approach to supervision of
commercial banks and financial institutions. The Reserve Bank had instituted a state of-the-art Off-site
Monitoring and 3 Surveillance (OSMOS) system for banks in 1995 as part of crisis management
framework for Early Warning System (EWS) and as a trigger for on-site inspections of vulnerable
institutions.
The scope and coverage of off-site surveillance has since been widened to capture various
facets of efficiency and risk management of banks. As a part of the financial sector reforms, the regulatory
norms with respect to capital adequacy, income recognition, asset classification and provisioning have
progressively moved towards convergence with the international best practices. These measures have
enhanced transparency of the balance sheet of the banks and infused accountability in their functioning.
Besides sub-standard assets, provisioning has also been introduced for the standard assets.
Measures to reduce the levels of NPAs concentrated on improved risk management practices
and greater recovery efforts facilitated by the enactment of Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002. Several other
channels of NPA management have also been instituted, including Debt Recovery Tribunals,
Lok Adalats (People’s court) and corporate debt restructuring mechanism with separate
schemes for small and medium industries.
The minimum capital to risk assets ratio (CRAR), which was earlier stipulated at eight per
cent was revised to 9 per cent in 1999, which is one percentage point above the international
norm. As some banks in the public sector were not able to comply with the CRAR stipulations,
there was a need to recapitalise them to augment their capital base. Banks were allowed to rise
capital from the market. In line with the amendment to incorporate market risk in Basel I, separate capital
charge for market risk was also introduced in 2004.
Accounting standards and disclosure norms were strengthened with a view to improving
Governance and bringing them in alignment with the international norms. The disclosure
requirements broadly covered capital adequacy, asset quality, maturity distribution of select
items of assets and liabilities, profitability, country risk exposure, risk exposures in derivatives,
segment reporting, and related party disclosures. In April 2005, commercial banks were advised
to put in place business continuity measures, including a robust information risk management
system within a fixed time frame.
In view of the increasing degree of deregulation and exposure of banks to various types
of risks, the Reserve Bank initiated measures for further strengthening and fine-tuning risk
management systems in banks. The guidelines on asset-liability management and risk management
systems in banks were issued in 1999 and Guidance Notes on Credit Risk Management and Market Risk
Management in October 2002 and the Guidance Note on Operational risk management in 2005. In the
Reserve Bank, the risk-based approach to supervision has been adopted since 2003 and about 23 banks
have been brought under the fold of risk-based supervision (RBS) on a pilot basis. On the basis of the
feedback received from the pilot project, the RBS framework is being reviewed.
As part of the reform programme, due consideration has been given to diversification of
ownership of banking institutions for greater market accountability and improved efficiency. The
public sector banks expanded their capital base by accessing the capital market, which diluted
the Government ownership. To provide banks with additional options for raising capital funds
with a view to enabling smooth transition to the Basel II, the Reserve Bank in January 2006,
allowed banks to augment their capital funds by issue of additional instruments. With a view to enhancing
efficiency and productivity through competition, guidelines were laid down for establishment of new
banks in the private sector and the foreign banks have been allowed more liberal entry. Since 1993, 12
new private sector banks have been set up. As a major step towards enhancing competition in the banking
sector, foreign direct investment in the private sector banks is now allowed up to 74 per cent, subject to
conformity with the guidelines issued from time to time. The regulatory framework in India, in addition to
prescribing prudential guidelines and encouraging market discipline, is increasingly focusing on ensuring
good governance through "fit and proper" owners, directors and senior managers of the banks.
Transfer of shareholding of five per cent and above requires acknowledgement from the
Reserve Bank and such significant shareholders are required to meet rigorous ‘fit and proper'
requirements. Banks have also been asked to ensure that the nominated and elected directors
are screened by a nomination committee to satisfy ‘fit and proper' criteria. Directors are also
required to sign a covenant indicating their roles and responsibilities. The Reserve Bank has
issued detailed guidelines on ownership and governance in private sector banks emphasising
diversified ownership.
The Reserve Bank released a roadmap for foreign banks articulating a liberalised policy
consistent with the WTO commitments in March 2005. The roadmap is divided into two phases.
During the first phase, between March 2005 and March 2009, foreign banks wishing to establish
presence in India for the first time could either choose to operate through branches or set up 100
per cent wholly owned subsidiaries (WOS), following the one-mode presence criterion. For new
and existing foreign banks, it is proposed to go beyond the existing WTO commitment of 12
branches in a year. During this phase, permission for acquisition of shareholding in Indian
private sector banks by eligible foreign banks will be limited to banks identified by the Reserve
Bank for restructuring. The second phase is scheduled to commence from April 2009 after a
review of the experience gained and after due consultation with all the stakeholders in the
banking sector. In this phase, three interconnected issues would be taken up. First, rules for the
removal of limitations on the operations of the WOS and treating them at par with domestic
banks, to the extent appropriate, would be designed and implemented. Second, the WOS of
foreign banks, on completion of a minimum prescribed period of operation, may be allowed to list
and dilute their stake so that, consistent with the guidelines issued on March 5, 2004, at least 26
per cent of the paid-up capital of the subsidiary is held by resident Indians at all times. Third,
during this phase, foreign banks may be permitted to enter into merger and acquisition
transactions with any private sector bank in India, subject to the overall investment limit of 74 per
cent.
In recent years, comprehensive credit information, which provides details pertaining to credit
facilities already availed of by a borrower as well as his payment track record, has become
critical. Accordingly, a scheme for disclosure of information regarding defaulting borrowers of
banks and financial institutions was introduced. In order to facilitate sharing of information
related to credit matters, a Credit Information Bureau (India) Limited (CIBIL) was set up in 2000.
The Banking Ombudsman Scheme was notified by the Reserve Bank in 1995 to provide
for a system of redressal of grievances against banks. The scheme sought to establish a system
of expeditious and inexpensive resolution of customer complaints. The scheme was revised
twice, first in 2002 and then in 2006. At present, the scheme is being executed by Banking
Ombudsman (BO) appointed by the Reserve Bank at 15 centres covering the entire country. The
BO scheme covers all commercial banks and scheduled primary cooperative banks. The scheme was
revised recently which brought more grounds of complaints within its ambit. An independent Banking
Codes and Standards Board of India was set up on the model of the UK in order to ensure that
comprehensive code of conduct for fair treatment of customers is evolved and adhered to. With a view to
achieving greater financial inclusion, since November 2005, all banks need to make available a basic
banking ‘no frills’ account either with ‘nil’ or very low minimum balances as well as charges that would
make such accounts accessible to vast sections of population. Banks were urged to review their existing
practices to align them with the objective of ‘financial inclusion’.
The smooth functioning of the payment and settlement system is a pre-requisite for
financial stability. The Reserve Bank, therefore, has taken several measures from time to time to
develop the payment and settlement system in the country along sound lines. The Board for
Regulation and Supervision of Payment and Settlement Systems (BPSS), set up in March 2005
as a committee of the Central Board of the Reserve Bank, is the apex body for giving policy
direction in the area of payment and settlement systems. Real time gross settlement (RTGS)
was operationalised on March 26, 2004. Its usage for transfer of funds, especially for large
values and for systemically important purposes, has increased since then. With introduction of
RTGS, whereby a final settlement of individual inter-bank fund transfers is effected on a gross
real time basis during the processing day, a major source of systemic risk in the financial system
has been reduced substantially.
A risk free payments and settlements system in government securities and foreign
exchange was established by the Clearing Corporation of India Limited (CCIL), which is set up
by banks. CCIL acts as the central counter party (CCP) for all the transactions and guarantees
both the securities and funds legs of the transaction. Under the DvPIII mode of settlement that
has been adopted, both the securities leg and the fund leg are settled on a net basis. The settlement through
CCIL has thus reduced the gross dollar requirement by more than 90 per cent. A screen-based negotiated
quote-driven system for dealings in the call/notice and the term money market (NDS-CALL) has been
launched by the CCIL in September 18, 2006. The introduction of NDS-CALL helps in enhancing
transparency, improving price discovery and strengthening market microstructure.
8 what are the Impact of Financial Sector Reforms in India?
Banks have been accorded greater discretion in sourcing and utilisation of resources,
albeit in an increasingly competitive environment. The outreach of the Indian banking system
has increased in terms of expansion of branches/ATMs. In the post-reform period,
assets/liabilities of banks have grown consistently at a high rate. The financial performance of
banks also improved as reflected in their increased profitability. Net profit to assets ratio
improved from 0.49 per cent in 2000-01 to 1.13 per cent in 2003-04. Although it subsequently
declined to 0.88 per cent in 2005-06, it was still significantly higher than that in the early 1990s.
Banks have been successful in weathering the impact of upturn in interest rate cycle through
increasing diversification of their income. Though banks had to incur huge expenditures on
upgradation of information technology, the restructuring of the workforce in public sector banks
helped them cut down the staff cost and increase in business per employee.
Another welcome development has been the sharp reduction in non-performing loans
(NPLs). Both gross and net NPLs started to decline in absolute terms since 2002-03. Gross NPLs as
percentage of gross advances, which were above 15 per cent in the early 1990s, are now less than 3 per
cent. This distinct improvement in asset quality may be attributed to theimproved recovery climate
underpinned by strong macroeconomic performance as well as several institutional measures initiated by
the Reserve Bank/Government such as debt recovery tribunals, Lok Adalats, scheme of corporate debt
restructuring in 2001, the SARFAESI Act in 2002.
Since 1995-96, the banking sector, on the whole, has been consistently maintaining
CRAR well above the minimum stipulated norm. The overall CRAR for scheduled commercial
banks increased from 8.7 per cent at end-March 1996 to 12.3 per cent at end-March 2006. The
number of banks not complying with the minimum CRAR also declined from 13 at end-March
1996 to just two by end-March 2006. Improved capital position stemmed largely from the
improvement in profitability and raising of capital from the market, though in the initial stages the
Government had to provide funds to recapitalise weak public sector banks. Even though public sector
banks continue to dominate the Indian banking system, accounting for nearly three-fourths of total assets
and income, the increasing competition in the banking system has led to a falling share of public sector
banks, and increasing share of the new private sector banks, which were set up around mid-1990s. It is
clear that we are at the beginning of this new phase in the Indian banking with competitive pressure, both
domestic and external, catching up and the need for banks to continuously reassess and reposition
themselves in their business plans.
9 what are the Future Challenges for Indian Banks?
A few broad challenges facing the Indian banks are: threats of risks from globalisation;
implementation of Basel II; improvement of risk management systems; implementation of new
accounting standards; enhancement of transparency and disclosures; enhancement of customer
service; and application of technology.
Globalisation – a challenge as well as an opportunity
The waves of globalisation are sweeping across the world, and have thrown up several opportunities
accompanied by concomitant risks. Integration of domestic market with international financial markets
has been facilitated by tremendous advancement in information and communications technology. There is
a growing realisation that the ability of countries to conduct business across national borders and the
ability to cope with the possible downside risks would depend, inter alia, on the soundness of the financial
system. This has necessitated convergence of prudential norms with international best practices as well
consistent refinement of the technological and institutional framework in the financial sector through a
non-disruptive and consultative process.
Opening up of the Capital Account
The Committee on Fuller Capital Account Convertibility (Chairman: Shri S.S. Tarapore) observed that
under a full capital account convertibility regime, the banking system would be exposed to greater market
volatility, and this necessitated enhancing the risk management capabilities in the banking system in view
of liquidity risk, interest rate risk, currency risk, counter-party risk and country risk that arise from
international capital flows. The potential dangers associated with the proliferation of derivative
instruments – credit derivatives and interest rate derivatives also need to be recognised in the regulatory
and supervisory system. The issues relating to cross-border supervision of financial intermediaries in the
context of greater capital flows are just emerging and need to be addressed.
Basel II implementation
The Reserve Bank and the commercial banks have been preparing to implement Basel
II, and it has been decided to allow banks some more time in adhering to new norms. As against
the deadline of March 31, 2007 for compliance with Basel II, it was decided in October 2006 that
foreign banks operating in India and Indian banks having presence outside India would migrate
to the standardised approach for credit risk and the basic indicator approach for operational risk
under Basel II with effect from March 31, 2008, while all other scheduled commercial banks are
required to migrate to Basel II by March 31, 2009.
It is widely acknowledged that implementation of Basel II poses significant challenge to
both banks and the regulators. Basel II implementation may also be seen as a compliance
challenge. But at the same time, it offers two major opportunities to banks, viz., refinement of
risk management systems; and improvement in capital efficiency. The transition from Basel I to
Basel II essentially involves a move from capital adequacy to capital efficiency. This transition in
how capital is used and how much capital is needed will become a significant factor in return-onequity
strategy for years to come.
The reliance on the market to assess the riskiness of banks would lead to increased
focus on transparency and market disclosure, critical information describing the risk profile,
capital structure and capital adequacy. Besides making banks more accountable and responsive
to better-informed investors, these processes enable banks to strike the right balance between
risks and rewards and to improve the access to markets. Improvements in market discipline also
call for greater coordination between banks and regulators.
Improving Risk Management Systems
Basel II has brought into focus the need for a more comprehensive risk management
framework to deal with various risks, including credit and market risk and their inter-linkages.
Banks in India are also moving from the individual silo system to an enterprise-wide risk
management system. While the first milestone would be risk integration across the entity, the
next step would entail risk aggregation across the group both in the specific risk areas as also
across the risks. Banks would, therefore, be required to allocate significant resources towards
this endeavour. In India, the risk-based approach to supervision is also serving as a catalyst to
banks’ migration to the integrated risk management systems. However, taking into account the
diversity in the Indian banking system, stabilizing the RBS as an effective supervisory
mechanism is another challenge.
Corporate Governance
To a large extent, many risk management failures reflect a breakdown in corporate
governance which arise due to poor management of conflict of interest, inadequate
understanding of key banking risks, and poor Board oversight of the mechanisms for risk
management and internal audit. Corporate governance is, therefore, the foundation for effective
risk managements in banks and, thus, the foundation for a sound financial system. Therefore,
the choices which banks make when they establish their risk management and corporate
governance systems have important ramifications for financial stability. Banks may have to
cultivate a good governance culture building in appropriate checks and balances in their
operations. There are four important forms of oversight that should be included in the
organisational structure of any bank in order to ensure appropriate checks and balances: (i)
oversight by the board of directors or supervisory board; (ii) oversight by individuals not involved
in the day-to-day running of the various business areas; (iii) direct line supervision of
different business areas; and (iv) independent risk management, compliance and audit
functions. In addition, it is important that key personnel are fit and proper for their jobs.
Furthermore, the general principles of sound corporate governance should also be applied to all
banks, irrespective of their unique ownership structures.
Implementation of New Accounting Standards
Derivative activity in banks has been increasing at a brisk pace. While the risk
management framework for derivative trading, which is a relatively new area for Indian banks
(particularly in the more structured products) is an essential pre-requisite, the absence of clear
accounting guidelines in this area is a matter of significant concern. The World Bank’s ROSC on
Accounting and Auditing in India has commented on the absence of an accounting standard
which deals with recognition, measurement and disclosures pertaining to financial instruments.
The Accounting Standards Board of the Institute of Chartered Accountants of India (ICAI) is
considering issue of Accounting Standards in respect of financial instruments. These will be the
Indian parallel to International Accounting Standards 32 and 39. The proposed Accounting
Standards will be of considerable significance for financial entities and could, therefore, have
implications for the financial sector. The formal introduction of these Accounting Standards by
the ICAI is likely to take some time in view of the processes involved. In the meanwhile, the
Reserve Bank is considering the need for banks and financial entities adopting the broad
underlying principles of IAS 39. Since this is likely to give rise to some regulatory/prudential
issues, all relevant aspects are being comprehensively examined. The proposals in this regard
would, as is normal, be discussed with the market participants before introduction. Adoption and
implementation of these principles are likely to pose a great challenge to both the banks and the
Reserve Bank.
Supervision of financial conglomerates
The financial landscape is increasingly witnessing entry of some of the bigger banks into
other financial segments like merchant banking, insurance etc. Emergence of several new
players with diversified presence across major segments make it imperative for supervision to be
spread across various segments of the financial sector. In this direction, an inter-regulatory
Working Group was constituted with members from RBI, SEBI and IRDA. The framework
proposed by the Group is complementary to the existing regulatory structure wherein the
individual entities are regulated by the respective regulators and the identified financial
conglomerates are subjected to focussed regulatory oversight through a mechanism of interregulatory
exchange of information. As a first step in this direction, an inter-agency Working
Group on Financial Conglomerates (FC) comprising the above three supervisory bodies
identified 23 FCs and a pilot process for obtaining information from these conglomerates has
been initiated. The complexities involved in the supervision of financial conglomerates are a
challenge not only to the Reserve Bank of India but also to the other regulatory agencies, which
need to have a close and continued coordination on an on-going basis.
In view of increased focus on empowering supervisors to undertake consolidated
supervision of bank groups and since the Core Principles for Effective Banking Supervision
issued by the Basel Committee on Banking Supervision have underscored consolidated
supervision as an independent principle, the Reserve Bank had introduced, as an initial step,
consolidated accounting and other quantitative methods to facilitate consolidated supervision.
The components of consolidated supervision include, consolidated financial statements intended
for public disclosure, consolidated prudential reports intended for supervisory assessment of
risks and application of certain prudential regulations on group basis. In due course,
consolidated supervision as introduced above would evolve to cover banks in mixed
conglomerates, where the parent may be non-financial entities or parents may be financial
entities coming under the jurisdiction of other regulators.
Application of Advanced Technology
The role of technology in banking in creating new business models and processes, in
maintaining competitive advantage, in enhancing quality of risk management systems in banks,
and in revolutionising distribution channels, cannot be overemphasised. Recognising the
benefits of modernising their technology infrastructure, banks are taking the right initiatives.
While doing so, banks have four options to choose from: they can build a new system
themselves, or buy best of the modules, or buy a comprehensive solution, or outsource. A
further challenge which banks face in this regard is to ensure that they derive maximum
advantage from their investments in technology and avoid wasteful expenditure which might
arise on account of uncoordinated and piecemeal adoption of technology; adoption of
inappropriate/ inconsistent technology and adoption of obsolete technology. A case in point is
the implementation of core banking solution by some banks without assessing its scalability or
adaptability to meet Basel II requirements.
Financial Inclusion
While banks are focusing on the methodologies of meeting the increasing demands
placed on them, there are legitimate concerns with regard to the banking practices that tend to
exclude rather than attract vast sections of population, in particular pensioners, self-employed
and those employed in unorganised sector. While commercial considerations are no doubt
important, banks have been bestowed with several privileges, especially of seeking public
deposits on a highly leveraged basis, and consequently they should be obliged to provide
banking services to all segments of the population, on equitable basis. Further, experience has
shown that consumers’ interests are at times not accorded full protection and their grievances
are not properly attended to. Feedback received reveals recent trends of levying unreasonably
high service/user charges and enhancement of user charges without proper and prior intimation.
It is in this context that the Governor, Reserve Bank of India had mentioned in the Annual Policy
Statement 2005-06 that RBI will take initiatives to encourage greater degree of financial
inclusion in the country; setting up of a mechanism for ensuring fair treatment of consumers; and
effective redressal of customer grievances.
Conclusion
With the increasing levels of globalisation of the Indian banking industry, evolution of
universal banks and bundling of financial services, competition in the banking industry will
intensify further. The banking industry has the potential and the ability to rise to the occasion as
demonstrated by the rapid pace of automation which has already had a profound impact on
raising the standard of banking services. The financial strength of individual banks, which are
major participants in the financial system, is the first line of defence against financial risks.
Strong capital positions and balance sheets place banks in a better position to deal with and
absorb the economic shocks.
Money Market
10 What Does Money Market Mean?
A segment of the financial market in which financial instruments with high liquidity and very short
maturities are traded. The money market is used by participants as a means for borrowing and lending in
the short term, from several days to just under a year. Money market securities consist of negotiable
certificates of deposit (CDs), bankers acceptances, U.S. Treasury bills, commercial paper, municipal
notes, federal funds and repurchase agreements (repos).
Money Market: What Is It?
he money market is a subsection of the fixed income market. We generally think of the term fixed income
as being synonymous to bonds. In reality, a bond is just one type of fixed income security. The difference
between the money market and the bond market is that the money market specializes in very short-term
debt securities (debt that matures in less than one year). Money market investments are also called cash
investments because of their short maturities.
Money market securities are essentially IOUs issued by governments, financial institutions and large
corporations. These instruments are very liquid and considered extraordinarily safe. Because they are
extremely conservative, money market securities offer significantly lower returns than most other
securities.
One of the main differences between the money market and the stock market is that most money market
securities trade in very high denominations. This limits access for the individual investor. Furthermore, the
money market is a dealer market, which means that firms buy and sell securities in their own accounts, at
their own risk. Compare this to the stock market where a broker receives commission to acts as an agent,
while the investor takes the risk of holding the stock. Another characteristic of a dealer market is the lack
of a central trading floor or exchange. Deals are transacted over the phone or through electronic systems.
The easiest way for us to gain access to the money market is with a money market mutual funds, or
sometimes through a money market bank account. These accounts and funds pool together the assets of
thousands of investors in order to buy the money market securities on their behalf. However, some money
market instruments, like Treasury bills, may be purchased directly. Failing that, they can be acquired
through other large financial institutions with direct access to these markets.
There are several different instruments in the money market, offering different returns and different
risks. In the following sections, we'll take a look at the major money market instruments.
Money Market: Treasury Bills (T-Bills)
11. What Does Treasury Bill - T-Bill Mean?
A short-term debt obligation backed by the U.S. government with a maturity of less than one year. T-bills
are sold in denominations of $1,000 up to a maximum purchase of $5 million and commonly have
maturities of one month (four weeks), three months (13 weeks) or six months (26 weeks).
T-bills are issued through a competitive bidding process at a discount from par, which means that rather
than paying fixed interest payments like conventional bonds, the appreciation of the bond provides the
return to the holder.
Investopedia explains Treasury Bill - T-Bill
For example, let's say you buy a 13-week T-bill priced at $9,800. Essentially, the U.S. government (and its
nearly bulletproof credit rating) writes you an IOU for $10,000 that it agrees to pay back in three
months. You will not receive regular payments as you would with a coupon bond, for example. Instead,
the appreciation - and, therefore, the value to you - comes from the difference between the discounted
value you originally paid and the amount you receive back ($10,000). In this case, the T-bill pays a 2.04%
interest rate ($200/$9,800 = 2.04%) over a three-month period.
Money Market: Certificate Of Deposit (CD)
A certificate of deposit (CD) is a time deposit with a bank. CDs are generally issued by commercial banks
but they can be bought through brokerages. They bear a specific maturity date (from three months to five
years), a specified interest rate, and can be issued in any denomination, much like bonds. Like all time
deposits, the funds may not be withdrawn on demand like those in a checking account.
CDs offer a slightly higher yield than T-Bills because of the slightly higher default risk for a bank but,
overall, the likelihood that a large bank will go broke is pretty slim. Of course, the amount of interest you
earn depends on a number of other factors such as the current interest rate environment, how much money
you invest, the length of time and the particular bank you choose. While nearly every bank offers CDs, the
rates are rarely competitive, so it's important to shop around.
A fundamental concept to understand when buying a CD is the difference between annual percentage
yield (APY) and annual percentage rate (APR). APY is the total amount of interest you earn in one year,
taking compound interest into account. APR is simply the stated interest you earn in one year, without
taking compounding into account. (To learn more, read APR vs. APY: How The Distinction Affects You.)
The difference results from when interest is paid. The more frequently interest is calculated, the greater
the yield will be. When an investment pays interest annually, its rate and yield are the same. But when
interest is paid more frequently, the yield gets higher. For example, say you purchase a one-year, $1,000
CD that pays 5% semi-annually. After six months, you'll receive an interest payment of $25 ($1,000 x 5 %
x .5 years). Here's where the magic of compounding starts. The $25 payment starts earning interest of its
own, which over the next six months amounts to $ 0.625 ($25 x 5% x .5 years). As a result, the rate on the
CD is 5%, but its yield is 5.06. It may not sound like a lot, but compounding adds up over time.
The main advantage of CDs is their relative safety and the ability to know your return ahead of time.
You'll generally earn more than in a savings account, and you won't be at the mercy of the stock market.
Plus, in the U.S. the Federal Deposit Insurance Corporation guarantees your investment up to $100,000.
Despite the benefits, there are two main disadvantages to CDs. First of all, the returns are paltry compared
to many other investments. Furthermore, your money is tied up for the length of the CD and you won't be
able to get it out without paying a harsh penalty.
Money Market: Commercial Paper
For many corporations, borrowing short-term money from banks is often a laborious and annoying task.
The desire to avoid banks as much as possible has led to the widespread popularity of commercial paper.
(See Why do companies issue bonds instead of borrowing from the bank?)
Commercial paper is an unsecured, short-term loan issued by a corporation, typically for financing
accounts receivable and inventories. It is usually issued at a discount, reflecting current market interest
rates. Maturities on commercial paper are usually no longer than nine months, with maturities of between
one and two months being the average.
For the most part, commercial paper is a very safe investment because the financial situation of a company
can easily be predicted over a few months. Furthermore, typically only companies with high credit ratings
and credit worthiness issue commercial paper. Over the past 40 years, there have only been a handful of
cases where corporations have defaulted on their commercial paper repayment.
Commercial paper is usually issued in denominations of $100,000 or more. Therefore, smaller investors
can only invest in commercial paper indirectly through money market funds.
Money Market: Banker's Acceptance
A bankers' acceptance (BA) is a short-term credit investment created by a non-financial firm and
guaranteed by a bank to make payment. Acceptances are traded at discounts from face value in the
secondary market.
For corporations, a BA acts as a negotiable time draft for financing imports, exports or other transactions
in goods. This is especially useful when the creditworthiness of a foreign trade partner is unknown.
Acceptances sell at a discount from the face value:
Face Value of Banker's Acceptance
$1,000,000
Minus 2% Per Annum Commission for One Year
-$20,000
Amount Received by Exporter in One Year
$980,000
One advantage of a banker's acceptance is that it does not need to be held until maturity, and can be sold
off in the secondary markets where investors and institutions constantly trade BAs.
Money Market: Eurodollars
Contrary to the name, eurodollars have very little to do with the euro or European countries. Eurodollars
are U.S.-dollar denominated deposits at banks outside of the United States. This market evolved in Europe
(specifically London), hence the name, but eurodollars can be held anywhere outside the United States.
The eurodollar market is relatively free of regulation; therefore, banks can operate on narrower margins
than their counterparts in the United States. As a result, the eurodollar market has expanded largely as a
way of circumventing regulatory costs.
The average eurodollar deposit is very large (in the millions) and has a maturity of less than six months. A
variation on the eurodollar time deposit is the eurodollar certificate of deposit. A eurodollar CD is
basically the same as a domestic CD, except that it's the liability of a non-U.S. bank. Because eurodollar
CDs are typically less liquid, they tend to offer higher yields.
The eurodollar market is obviously out of reach for all but the largest institutions. The only way for
individuals to invest in this market is indirectly through a money market fund.
Money Market: Repos
Repurchase Agreement - Repo
12 What Does Repurchase Agreement - Repo Mean?
A form of short-term borrowing for dealers in government securities. The dealer sells the government
securities to investors, usually on an overnight basis, and buys them back the following day.
For the party selling the security (and agreeing to repurchase it in the future) it is a repo; for the party on
the other end of the transaction, (buying the security and agreeing to sell in the future) it is a reverse
repurchase agreement.
Investopedia explains Repurchase Agreement - Repo
Repos are classified as a money-market instrument. They are usually used to raise short-term capital.
Repos are popular because they can virtually eliminate credit problems. Unfortunately, a number of
significant losses over the years from fraudulent dealers suggest that lenders in this market have not
always checked their collateralization closely enough.
There are also variations on standard repos:

Reverse Repo - The reverse repo is the complete opposite of a repo. In this case, a dealer buys
government securities from an investor and then sells them back at a later date for a higher price

Term Repo - exactly the same as a repo except the term of the loan is greater than 30 days.
Conclusion
We hope this tutorial has given you an idea of the securities in the money market. It's not exactly a sexy
topic, but definitely worth knowing about, as there are times when even the most ambitious investor puts
cash on the sidelines.

The money market specializes in debt securities that mature in less than one year.

Money market securities are very liquid, and are considered very safe. As a result, they offer a
lower return than other securities.

The easiest way for individuals to gain access to the money market is through a money market
mutual fund.

T-bills are short-term government securities that mature in one year or less from their issue date.

T-bills are considered to be one of the safest investments - they don't provide a great return.

A certificate of deposit (CD) is a time deposit with a bank.

Annual percentage yield (APY) takes into account compound interest, annual percentage rate
(APR) does not.

CDs are safe, but the returns aren't great, and your money is tied up for the length of the CD.

Commercial paper is an unsecured, short-term loan issued by a corporation. Returns are higher
than T-bills because of the higher default risk.

Banker's acceptances (BA)are negotiable time draft for financing transactions in goods.

BAs are used frequently in international trade and are generally only available to individuals
through money market funds.

Eurodollars are U.S. dollar-denominated deposit at banks outside of the United States.

The average eurodollar deposit is very large. The only way for individuals to invest in this market
is indirectly through a money market fund.

Repurchase agreements (repos) are a form of overnight borrowing backed by government
securities.
Bond Basics: Different Types Of Bonds
Government Bonds
In general, fixed-income securities are classified according to the length of time before maturity. These are
the three main categories:
Bills - debt securities maturing in less than one year.
Notes - debt securities maturing in one to 10 years.
Bonds - debt securities maturing in more than 10 years.
Marketable securities from the U.S. government - known collectively as Treasuries - follow this guideline
and are issued as Treasury bonds, Treasury notes and Treasury bills (T-bills). Technically speaking, Tbills aren't bonds because of their short maturity. (You can read more about T-bills in our Money Market
tutorial.) All debt issued by Uncle Sam is regarded as extremely safe, as is the debt of any stable country.
The debt of many developing countries, however, does carry substantial risk. Like companies, countries
can default on payments.
Government Bonds
In general, fixed-income securities are classified according to the length of time before maturity. These are
the three main categories:
Bills - debt securities maturing in less than one year.
Notes - debt securities maturing in one to 10 years.
Bonds - debt securities maturing in more than 10 years.
Marketable securities from the U.S. government - known collectively as Treasuries - follow this guideline
and are issued as Treasury bonds, Treasury notes and Treasury bills (T-bills). Technically speaking, Tbills aren't bonds because of their short maturity. (You can read more about T-bills in our Money Market
tutorial.) All debt issued by Uncle Sam is regarded as extremely safe, as is the debt of any stable country.
The debt of many developing countries, however, does carry substantial risk. Like companies, countries
can default on payments.
13 What Does Municipal Bond Mean?
A debt security issued by a state, municipality or county to finance its capital expenditures. Municipal
bonds are exempt from federal taxes and from most state and local taxes, especially if you live in the state
in which the bond is issued.
Also known as a "muni".
Investopedia explains Municipal Bond
Municipal bonds may be used to fund expenditures such as the construction of highways, bridges or
schools. "Munis" are bought for their favorable tax implications, and are popular with people in high
income tax brackets.
UNIT II
Syllabus
Stock Exchanges – Objectives of NSE – Bombay Stock Exchange (BSE) –
OTCEI.
1 What is stock exchange?
A stock exchange is an entity which provides "trading" facilities for stock brokers and traders, to
trade stocks and other securities. Stock exchanges also provide facilities for the issue and redemption of
securities as well as other financial instruments and capital events including the payment of income and
dividends. The securities traded on a stock exchange include shares issued by companies, unit trusts,
derivatives, pooled investment products and bonds.
To be able to trade a security on a certain stock exchange, it has to be listed there. Usually there is
a central location at least for recordkeeping, but trade is less and less linked to such a physical place, as
modern markets are electronic networks, which gives them advantages of increased speed and reduced
cost of transactions. Trade on an exchange is by members only.
The initial offering of stocks and bonds to investors is by definition done in the primary market
and subsequent trading is done in the secondary market. A stock exchange is often the most important
component of a stock market. Supply and demand in stock markets is driven by various factors which, as
in all free markets, affect the price of stocks (see stock valuation).
There is usually no compulsion to issue stock via the stock exchange itself, nor must stock be
subsequently traded on the exchange. Such trading is said to be off exchange or over-the-counter. This is
the usual way that derivatives and bonds are traded. Increasingly, stock exchanges are part of a global
market for securities.
The first stock exchanges
In 12th century France the courtiers de change were concerned with managing and regulating the
debts of agricultural communities on behalf of the banks. As these men also traded in debts, they could be
called the first brokers.
Some stories suggest that the origins of the term "bourse" came from the Latin bursa meaning a
bag because, in 13th century Bruges, the sign of a purse (or perhaps three purses), was hung on the front
of the house where merchants met.
The story may well be apocryphal, however it is possible that in the late 13th century commodity
traders in Bruges gathered inside the house of the Van der Burse family (for some a Venetian family with
original name "Della Borsa" and used three leather bags as coat-of-arms), and in 1309 they
institutionalized this until now informal meeting and became the "Bruges Bourse." The idea spread
quickly around Flanders and neighboring counties and "Bourses" soon opened in Ghent and Amsterdam.
In the middle of the 13th century, Venetian bankers began to trade in government securities. In
1351, the Venetian Government outlawed spreading rumors intended to lower the price of government
funds. There were people in Pisa, Verona, Genoa and Florence who also began trading in government
securities during the 14th century. This was only possible because these were independent city states ruled
by a council of influential citizens, not by a duke.
The Dutch later started joint stock companies, which let shareholders invest in business ventures
and get a share of their profits—or losses. In 1602, the Dutch East India Company issued the first shares
on the Amsterdam Stock Exchange. It was the first company to issue stocks and bonds. In 1688, the
trading of stocks began on a stock exchange in London.
On May 17, 1792, in order to more easily trade cotton, twenty-four supply brokers signed the
Buttonwood Agreement outside 68 Wall Street in New York underneath a buttonwood tree. On March 8,
1817, properties got renamed to New York Stock & Exchange Board. In the 19th century, exchanges
(generally famous as futures exchanges) got substantiated to trade futures contracts and then choices
contracts.
There are now a large number of stock exchanges in the world.
2 WHAT IS THE ROLE OF STOCK EXCHANGES?
Stock exchanges have multiple roles in the economy. This may include the following:[1]
Raising capital for businesses
The Stock Exchange provide companies with the facility to raise capital for expansion through selling
shares to the investing public.[2]
[Mobilizing savings for investment
When people draw their savings and invest in shares, it leads to a more rational allocation of resources
because funds, which could have been consumed, or kept in idle deposits with banks, are mobilized and
redirected to promote business activity with benefits for several economic sectors such as agriculture,
commerce and industry, resulting in stronger economic growth and higher productivity levels of firms.
Facilitating company growth
Companies view acquisitions as an opportunity to expand product lines, increase distribution channels,
hedge against volatility, increase its market share, or acquire other necessary business assets. A takeover
bid or a merger agreement through the stock market is one of the simplest and most common ways for a
company to grow by acquisition or fusion.
Profit sharing
Both casual and professional stock investors, through dividends and stock price increases that may result
in capital gains, will share in the wealth of profitable businesses.
Corporate governance
By having a wide and varied scope of owners, companies generally tend to improve on their management
standards and efficiency in order to satisfy the demands of these shareholders and the more stringent rules
for public corporations imposed by public stock exchanges and the government. Consequently, it is
alleged that public companies (companies that are owned by shareholders who are members of the general
public and trade shares on public exchanges) tend to have better management records than privately held
companies (those companies where shares are not publicly traded, often owned by the company founders
and/or their families and heirs, or otherwise by a small group of investors).
Despite this claim, some well-documented cases are known where it is alleged that there has been
considerable slippage in corporate governance on the part of some public companies. The dot-com bubble
in the late 1990's, and the subprime mortgage crisis in 2007-08, are classical examples of corporate
mismanagement. Companies like Pets.com (2000), Enron Corporation (2001), One.Tel (2001), Sunbeam
(2001), Webvan (2001), Adelphia (2002), MCI WorldCom (2002), Parmalat (2003), American
International Group (2008), Bear Stearns (2008), Lehman Brothers (2008), General Motors (2009) and
Satyam Computer Services (2009) were among the most widely scrutinized by the media.
However, when poor financial, ethical or managerial records are known by the stock investors, the stock
and the company tend to lose value. In the stock exchanges, shareholders of underperforming firms are
often penalized by significant share price decline, and they tend as well to dismiss incompetent
management teams.
Creating investment opportunities for small investors
As opposed to other businesses that require huge capital outlay, investing in shares is open to both the
large and small stock investors because a person buys the number of shares they can afford. Therefore the
Stock Exchange provides the opportunity for small investors to own shares of the same companies as large
investors.
Government capital-raising for development projects
Governments at various levels may decide to borrow money in order to finance infrastructure projects
such as sewage and water treatment works or housing estates by selling another category of securities
known as bonds. These bonds can be raised through the Stock Exchange whereby members of the public
buy them, thus loaning money to the government. The issuance of such bonds can obviate the need to
directly tax the citizens in order to finance development, although by securing such bonds with the full
faith and credit of the government instead of with collateral, the result is that the government must tax the
citizens or otherwise raise additional funds to make any regular coupon payments and refund the principal
when the bonds mature.
3 What is National stock exchange?
A national stock exchange is a type of domestic market that allows buyers, sellers and brokers to trade
stocks. National Stock Exchange of India (NSE) is renowned as world third largest stock exchange. It is
the largest one in India. Ideally located in commercial capital of India, Mumbai, the National Stock
exchange was supported by several financial institutions . Approved by Government of India, NSE was
integrated in November 1992 as a tax-paying company. Many exchanges also allow other forms of
securities to be traded. Typical securities include shares in private companies, unit trusts, mutual funds,
ETFs or exchange traded funds, and bonds.
4 WHAT ARE THE OBJECTIVES OF NATIONAL STOCK EXCHANGE ?
National Stock Exchange was incorporated with several objectives in mind. NSE was set up as an
instrument to change the secondary market by creating competitive pressure. Major objectives of NSE can
be summarized as:

Commencement of nation wide trading facility to facilitate exchange of all type of securities

Establishment of an apposite telecommunication network that ensures equal admittance to
investors of the nation

Using electronic trading system that provides reasonable proficient and transparent securities
market

Proper convention of international benchmarks and standards
NATIONAL STOCK EXCHANGE
National Stock Exchange of India (NSE) is India's largest Stock Exchange & World's third largest Stock
Exchange in terms of transactions. Located in Mumbai, NSE was promoted by leading Financial
Institutions at the behest of the Government of India, and was incorporated in November 1992 as a taxpaying company. In April 1993, NSE was recognized as a Stock exchange under the Securities Contracts
(Regulation) Act-1956. NSE commenced operations in the Wholesale Debt Market (WDM) segment in
June 1994. Capital Market (Equities) segment of the NSE commenced operations in November 1994,
while operations in the Derivatives segment commenced in June 2000. NSE has played a catalytic role in
reforming Indian securities market in terms of microstructure, market practices and trading volumes. NSE
has set up its trading system as a nation-wide, fully automated screen based trading system. It has written
for itself the mandate to create World-class Stock Exchange and use it as an instrument of change for the
industry as a whole through competitive pressure. NSE is set up on a demutualised model wherein the
ownership, management and trading rights are in the hands of three different sets of people. This has
completely eliminated any conflict of interest.
NSE was set up with the objectives of:

Establishing nationwide trading facility for all types of securities

Ensuring equal access to investors all over the country through an appropriate telecommunication
network

Providing fair, efficient & transparent securities market using electronic trading system

Enabling shorter settlement cycles and book entry settlements

Meeting International benchmarks and standards
Within a very short span of time, NSE has been able to achieve its objectives for which it was set up.
Indian Capital Markets are a far cry from what they were 12 years back in terms of market practices,
infrastructure, technology, risk management, clearing and settlement and investor service. To ensure
continuity of business, NSE has built a full fledged BCP site operational for last 7 years.
NSE's markets
NSE provides a fully automated screen-based trading system with national reach in the following major
market segments:
Equity OR Capital Markets {NSE's market share is over 65%}

Futures & Options OR Derivatives Market {NSE's market share over 99.5%}

Wholesale Debt Market (WDM)

Mutual Funds (MF)

Initial Public Offerings (IPO)
What are the IT initiatives of NSE in the last one year?
NSE believes that technology shall continue to provide necessary impetus for any organisation to retain its
competitive edge, ensure timeliness & satisfaction in customer service. Being fully dependant on
Information Technology, NSE has stressed on innovation and sustained investment in technology on a
continual basis to ensure customer satisfaction, improvement in services which automatically helps in
sustaining business and remain ahead of competition. As a policy, NSE looks to improve the quality of
Services to its customers. Projects are not initiated based on a business model to reap profits but from a
strategic perspective of better productivity, Value-adds & features, improving efficiency, reducing
operational costs, compliance, operational transparency etc for the customers, investors and to the entire
Indian Securities Industry. Some of the projects taken by NSE last year are as follows:1. Trading System Capacity enhancement
2. Re-engineering of Online Position Monitoring (OPMS)
3. Augmentation of Data Warehouse (DWH)
4. STP Central Hub
5 What was the objective, business benefits that the company derived and beneficiaries of the
implementation of Trading System Capacity enhancement?
Project Objective
NSE's Capital Market Trading system was operational on two machine split architecture using Fault
Tolerant mainframes and geared to handle 3 million trades. However, the CM segment had started to
experience trades nearing 3 Million trades which form a threshold. Based on the trends & expected
volumes, growth in the medium term is more than thrice the current trading volume, i.e. about 10 Million
transactions per day. However with the then existing 2-machine split architecture, it was required to
improve the trading system transaction handling capacity. The 3-machine split architecture project was
thus taken up to enhance the load handling capacity of the system by introducing a 3-way split Hardware,
Application optimisation and improving the processes for achieving market volume of around 6 million
transactions per day.
Project was completed as per schedule & is currently operational since last 1 year.
Business Benefits
1. System scaled on 3 machines with distribution of users and securities with complete transparency
to market participants.
2. System witnessed 3 million trades with faster response time to members at significantly lower
system resource utilisation level.
3. Scalability to handle higher volumes (3 million to 6 million transactions per day).
Beneficiaries
Trading Members have experienced a faster response time. The trading system is able to handle higher
volume of transactions which translates into higher turnover. It therefore directly translates into more
opportunities and growth for the Entire Indian Securities market.
6 What was the objective, business benefits that the company derived and beneficiaries of the
implementation of re-engineering of Online Position Monitoring (OPMS)?
Project Objective
OPMS is On-line Position Monitoring and Risk Management system for the Capital Market segment of
the National Stock Exchange of India Limited. It tracks positions of trading members from Turnover and
Exposure limits with a view of identifying and preventing potential settlement related issues. The
positions are monitored on an on-line basis and the system provides for auto disablement of the violating
member on the trading system. Based on the volumes, it is expected that the current trading levels of about
3 million trades per day may rise to the new heights of 10 million trades per day in the near future. It was
therefore necessary to initiate was to reengineer OPMS system without imposing any major cost
associated with architectural overhauling. Another key objective was to scale the violation detection
mechanism by a mammoth factor from around 300 violation checks per second to handle more than 4000
violations per second.
Other major objectives and the goals include:

Real-time position computation and violation detection

Ability to handle high load of over one million client positions

Management of information for positions & risk values about each trading member

Information structure based on a tree of security, settlement, trading member

Handle on-line collateral and securities early pay-in

Total fault tolerance with minimum downtime

Achieve 4000 violation checks per second
Business Benefits
1. Effective and efficient Risk Management- Violation turnover reduced from few seconds to few
milliseconds & 99.96% trades processed for Risk Management within a second of occurrence.
2. Better utilisation of Resources- Peak capacity of trades handling capacity enhanced to 10 million
trades & Average CPU utilisation reduced from 70% to 20%.
3. Linearly scalable
Beneficiaries
Trading Members risk management has significantly improved. Trading members have benefited due to
this initiative.
7 What was the objective, business benefits that the company derived and beneficiaries of the
implementation Augmentation of Data Warehouse (DWH)?
Project Objective
NSE has a matured data warehouse application extensively used for analysis, reporting and investigative
purposes. The project was to enhance and upgrade existing data warehouse infrastructure in terms of:
Migrating to a higher capacity server and storage hardware

Migrating database from Oracle 8 to Oracle 9i

Upgrade existing ETL solution consisting of a separate extraction solution and transformation cum
loading solution into a complete and unified ETL tool
Business Benefits
1. Response time & query performance improved dramatically by about 100%.
2. Extraction and loading time has reduced by almost 8-9 times.
3. Timely, efficient reporting. Reduced lead time in providing data to Regulator.
4. New features of Oracle 9i like Ranking, enhanced analytic functions have contributed enormously
to efficiency aspect of the data warehouse usage.
Beneficiaries
Benefit accrued to NSE as an organisation due to the extensive usage of DWH.
8 What was the objective, business benefits that the company derived and beneficiaries of the
implementation STP Central Hub?
Project Objective
During a typical day at an institutional fund house, details of trade confirmations executed in the day are
sent out to the Custodian for effecting trade settlements. The Custodian also receives details of the
executed trade from the broker of the fund house, for cross-verification of the trade data. Upon
verification, if it is found that the trade details do not match the instruction documents sent across by the
fund house and the broker there is a delay in effecting such settlements. This is a global phenomenon that
is a concern for all the major financial institutions. Studies have shown that around 15% of global trade
failures result from unmatched trade data, which in monetary terms is upwards of Billions of Dollars, a
steep price pay for the lack of an efficient processing framework. Straight Through Processing (STP)
framework seeks to provide seamless data flow both within the enterprise as well as across the market
without any manual intervention using ISO 15022 messaging standards.
In India, inspite of SEBI making STP mandatory, market participants were not able to fully adapt the STP
framework into their operations as the STP services provided by various providers were not interoperable.
This meant that messages destined for market participants registered across the service providers could not
be achieved. One of the options was to ensure that each of the STP provider "talked" to other STP
providers, but this meant a mathematical explosion in terms of number of interconnects in case of
increasing number of service providers.
Recognising that the success of the STP is crucial to make a move towards T+1 settlement cycle, NSE
took up the challenge of setting up a Central Hub to resolve inter-operability amongst various STP Service
Providers. After developing the application software, the STP Central Hub was put for operational testing
from end of March 2004 to route the messages between Service Providers. STP Central Hub has ensured
seamless operations of message processing. After the initial testing and stabilization period, SEBI has
mandated use of STP system for all institutional trades. SEBI endeavoured to shorten the settlement cycle
and has been successful in reducing the same from T+5 to T+2. It has now set a target for achieving T+1
settlement in Indian Securities Market. T+1 settlement cycle has not been achieved anywhere in the world
and India is the first country to successfully implement STP effectively for all the market intermediaries.
NSE through its strength in technology innovations has made it possible for the integration of all STP
service providers using heterogeneous protocols within their own system so as to provide the necessary
impetus to the process
Business Benefits
1. Improved efficiency, reduction of manual activities leading to higher accuracy of trade execution
and settlement.
2. Reduced operational risk by automating the process from execution through to settlement.
3. Reduction in operational cost by sending data electronically.
4. Transparency & improved customer service with detailed reports about delivery and failure of
messages are available instantaneously, on an on-line basis.
5. Reduced settlement cycle to facilitate T+1 settlement.
Beneficiaries
Entire Indian Securities Industry has been the beneficiary of the STP Central Hub initiative. It is the only
STP Central Hub operational since the last few years. This move has helped for faster clearing and
settlement in Indian Securities Industry and help achieve 'T+1' environment in India. India's profile in
International markets was enhanced which will help in attracting further foreign investments.
Bombay Stock Exchange
The Bombay Stock Exchange (BSE) (Hindi : मुंबई शेअर बाजार Bombay Śhare Bāzaār) (formerly, The
Stock Exchange, Bombay) is the oldest stock exchange in Asia and has the largest number of listed
companies in the world, with 4990 listed as of August 2010.[2][3] It is located at Dalal Street, Mumbai,
India. On Aug, 2010, the equity market capitalization of the companies listed on the BSE was US$1.39
trillion, making it the 4th largest stock exchange in Asia and the 11th largest in the world.[4]
With over 4,990 Indian companies listed & over 7700 scrips on the stock exchange,[5] it has a significant
trading volume. The BSE SENSEX (SENSitive indEX), also called the "BSE 30", is a widely used market
index in India and Asia. Though many other exchanges exist, BSE and the National Stock Exchange of
India account for most of the trading in shares in India.
History
The Phiroze Jeejeebhoy Towers house the Bombay Stock Exchange since 1980.
The Bombay Stock Exchange is the oldest exchange in Asia. It traces its history to the 1850s, when 4
Gujarati and 1 Parsi stockbroker would gather under banyan trees in front of Mumbai's Town Hall. The
location of these meetings changed many times, as the number of brokers constantly increased. The group
eventually moved to Dalal Street in 1874 and in 1875 became an official organization known as 'The
Native Share & Stock Brokers Association'. In 1956, the BSE became the first stock exchange to be
recognized by the Indian Government under the Securities Contracts Regulation Act. The Bombay Stock
Exchange developed the BSE Sensex in 1986, giving the BSE a means to measure overall performance of
the exchange. In 2000 the BSE used this index to open its derivatives market, trading Sensex futures
contracts. The development of Sensex options along with equity derivatives followed in 2001 and 2002,
expanding the BSE's trading platform. Historically an open outcry floor trading exchange, the Bombay
Stock Exchange switched to an electronic trading system in 1995. It took the exchange only fifty days to
make this transition. This automated, screen-based trading platform called BSE On-line trading (BOLT)
currently has a capacity of 80 lakh orders per day. The BSE has also introduced the world's first
centralized exchange-based internet trading system, BSEWEBx.co.in to enable investors anywhere in the
world to trade on the BSE platform.[7]. The BSE is currently housed in Phiroze Jeejeebhoy Towers at
Dalal Street, Fort area.
Timeline
Following is the timeline on the rise and rise of the Sensex through Indian stock market history.
1830's Business on corporate stocks and shares in Bank and Cotton presses started in Bombay.
1860-1865 Cotton price bubble as a result of the American Civil War
1870 - 90's Sharp increase in share prices of jute industries followed by a boom in tea stocks and coal
1978-79 Base year of Sensex, defined to be 100.
1986 Sensex first compiled[8] using a market Capitalization-Weighted methodology for 30 component
stocks representing well-established companies across key sectors.
30 October 2006 The Sensex on October 30, 2006 crossed the magical figure of 13,000 and closed at
13,024.26 points, up 117.45 points or 0.9%. It took 135 days for the Sensex to move from 12,000 to
13,000 and 123 days to move from 12,500 to 13,000.
5 December 2006 The Sensex on December 5, 2006 crossed the 14,000-mark to touch 14,028 points. It
took 36 days for the Sensex to move from 13,000 to the 14,000 mark.
6 July 2007 The Sensex on July 6, 2007 crossed the magical figure of 15,000 to touch 15,005 points in
afternoon trade. It took seven months for the Sensex to move from 14,000 to 15,000 points.
19 September 2007 The Sensex scaled yet another milestone during early morning trade on September
19, 2007. Within minutes after trading began, the Sensex crossed 16,000, rising by 450 points from the
previous close. The 30-share Bombay Stock Exchange's sensitive index took 53 days to reach 16,000 from
15,000. Nifty also touched a new high at 4659, up 113 points.
The Sensex finally ended with a gain of 654 points at 16,323. The NSE Nifty gained 186 points to close at
4,732.
26 September 2007 The Sensex scaled yet another height during early morning trade on September 26,
2007. Within minutes after trading began, the Sensex crossed the 17,000-mark . Some profit taking
towards the end, saw the index slip into red to 16,887 - down 187 points from the day's high. The Sensex
ended with a gain of 22 points at 16,921.
9 October 2007 The BSE Sensex crossed the 18,000-mark on October 9, 2007. It took just 8 days to cross
18,000 points from the 17,000 mark. The index zoomed to a new all-time intra-day high of 18,327. It
finally gained 789 points to close at an all-time high of 18,280. The market set several new records
including the biggest single day gain of 789 points at close, as well as the largest intra-day gains of 993
points in absolute term backed by frenzied buying after the news of the UPA and Left meeting on October
22 put an end to the worries of an impending election.
15 October 2007 The Sensex crossed the 19,000-mark backed by revival of funds-based buying in blue
chip stocks in metal, capital goods and refinery sectors. The index gained the last 1,000 points in just four
trading days. The index touched a fresh all-time intra-day high of 19,096, and finally ended with a smart
gain of 640 points at 19,059.The Nifty gained 242 points to close at 5,670.
29 October 2007 The Sensex crossed the 20,000 mark on the back of aggressive buying by funds ahead of
the US Federal Reserve meeting. The index took only 10 trading days to gain 1,000 points after the index
crossed the 19,000-mark on October 15. The major drivers of today's rally were index heavyweights
Larsen and Toubro, Reliance Industries, ICICI Bank, HDFC Bank and SBI among others. The 30-share
index spurted in the last five minutes of trade to fly-past the crucial level and scaled a new intra-day peak
at 20,024.87 points before ending at its fresh closing high of 19,977.67, a gain of 734.50 points. The NSE
Nifty rose to a record high 5,922.50 points before ending at 5,905.90, showing a hefty gain of 203.60
points.
8 January 2008 The sensex peaks. It crossed the 21,000 mark in intra-day trading after 49 trading
sessions. This was backed by high market confidence of increased FII investment and strong corporate
results for the third quarter. However, it later fell back due to profit booking.
13 June 2008 The sensex closed below 15,200 mark, Indian market suffer with major downfall from
January 21, 2008
25 June 2008 The sensex touched an intra day low of 13,731 during the early trades, then pulled back and
ended up at 14,220 amidst a negative sentiment generated on the Reserve Bank of India hiking CRR by 50
bps. FII outflow continued in this week.
2 July 2008 The sensex hit an intra day low of 12,822.70 on July 2, 2008. This is the lowest that it has
ever been in the past year. Six months ago, on January 10, 2008, the market had hit an all time high of
21206.70. This is a bad time for the Indian markets, although Reliance and Infosys continue to lead the
way with mostly positive results.
6 October 2008 The sensex closed at 11801.70 hitting the lowest in the past 2 years.
10 October 2008 The Sensex today closed at 10527,800.51 points down from the previous day having
seen an intraday fall of as large as 1063 points. Thus, this week turned out to be the week with largest
percentage fall in the SenseX
18 May 2009 After the result of 15th Indian general election Sensex gained 2100.79 points from the
previous close of 12173.42, a record one-day gain. In the opening trade itself the Sensex evinced a 15%
gain over the previous close which led to a two-hour suspension in trading. After trading resumed, the
Sensex surged again, leading to a full day suspension of trading.
19 October 2010 BSE today introduced the 15-minute special pre-open trading session, a mechanism
under which investors can bid for stocks before the market opens. The mechanism, known as 'pre-open
session call auction', lasted for 15 minutes (from 9:00-9:15 am). [9] 5 November 2010 BSE today crossed
the 21000 mark( exactly 21004.96)
9 What is Bombay Stock Exchange?
For the premier stock exchange that pioneered the securities transaction business in India, over a century
of experience is a proud achievement. A lot has changed since 1875 when 318 persons by paying a then
princely amount of Re. 1, became members of what today is called Bombay Stock Exchange Limited
(BSE).
Over the decades, the stock market in the country has passed through good and bad periods. The journey
in the 20th century has not been an easy one. Till the decade of eighties, there was no measure or scale
that could precisely measure the various ups and downs in the Indian stock market. BSE, in 1986, came
out with a Stock Index-SENSEX- that subsequently became the barometer of the Indian stock market.
The launch of SENSEX in 1986 was later followed up in January 1989 by introduction of BSE National
Index (Base: 1983-84 = 100). It comprised 100 stocks listed at five major stock exchanges in India Mumbai, Calcutta, Delhi, Ahmedabad and Madras. The BSE National Index was renamed BSE-100 Index
from October 14, 1996 and since then, it is being calculated taking into consideration only the prices of
stocks listed at BSE. BSE launched the dollar-linked version of BSE-100 index on May 22, 2006.
With a view to provide a better representation of the increasing number of listed companies, larger market
capitalization and the new industry sectors, BSE launched on 27th May, 1994 two new index series viz.,
the 'BSE-200' and the 'DOLLEX-200'. Since then, BSE has come a long way in attuning itself to the
varied needs of investors and market participants. In order to fulfill the need for still broader, segment-
specific and sector-specific indices, BSE has continuously been increasing the range of its indices. BSE500 Index and 5 sectoral indices were launched in 1999. In 2001, BSE launched BSE-PSU Index,
DOLLEX-30 and the country's first free-float based index - the BSE TECk Index. Over the years, BSE
shifted all its indices to the free-float methodology (except BSE-PSU index).
BSE disseminates information on the Price-Earnings Ratio, the Price to Book Value Ratio and the
Dividend Yield Percentage on day-to-day basis of all its major indices.
The values of all BSE indices are updated on real time basis during market hours and displayed through
the BOLT system, BSE website and news wire agencies.
All BSE Indices are reviewed periodically by the BSE Index Committee. This Committee which
comprises eminent independent finance professionals frames the broad policy guidelines for the
development and maintenance of all BSE indices. The BSE Index Cell carries out the day-to-day
maintenance of all indices and conducts research on development of new indices.[10]
10 What is Over The Counter Exchange of India(OTCEI)?
Over The Counter Exchange of India(OTCEI) was incorporated in October 1990 under Section 25 of
the Companies Act, 1956 with the objective of setting up a national, ringless, screen-based, automated
stock exchange. It is recognised as a stock exchange under Section 4 of the Securities Contracts
(Regulations) Act, 1956. It was set up to provide investors with a convenient, efficient and transparent
platform for dealing in shares and stocks; and to help enterprising promoters set up new projects or
expand. their activities, by providing them an opportunity to raise capital from the capital market in a costeffective manner. Trading in securities takes place through OTCEI’s network of members and dealers
spanning the length and breadth of India. OTCEI was promoted by a consortium of financial institutions
including :

Unit Trust of India.

Industrial Credit and Investment Corporation of India.

Industrial Development Bank of India.

Industrial Finance Corporation of India.

Life Insurance Corporation of India.

General Insurance Corporation and its subsidiaries.

SBI Capital Markets Limited.

Canbank Financial Services Ltd.
Salient Features of OTCEI:
1. Ringless and Screen-based Trading: The OTCEI was the first stock exchange to introduce
automated, screen-based trading in place of conventional trading ring found in other stock
exchanges. The network of on-line computers provides all relevant information to the market
participants on their computer screens. This allows them the luxury of executing their deals in the
comfort of their own offices.
2. Sponsorship: All the companies seeking listing on OTCE have to approach one of the members of
the OTCEI for acting as the sponsor to the issue. The sponsor makes a thorough appraisal of the
project; as by entering into the sponsorship agreement, the sponsor is committed to making market
in that scrip (giving a buy sell quote) for a minimum period of 18 months. sponsorship ensures
quality of the companies and enhance liquidity for the scrip’s listed on OTCEI.
3. Transparency of Transactions: The investor can view the quotations on the computer screen at
the dealer’s office before placing the order. The OTCEI system ensures that trades are done at the
best prevailing quotation in the market. The confirmation slip/trading document generated by the
computers gives the exact price at which the deals has been done and the brokerage charged.
4. Liquidity through Market Making: The sponsor-member is required to give two-way
quotes(buy and sell) for the scrip for 18 months from commencement of trading. Besides the
compulsory market maker, there is an additional market maker giving two way quotes for the
scrip. The idea is to create an environment of competition among market makers to produce
efficient pricing and narrow spreads between buy and sell quotations.
5. Listing of Small and Medium-sized Companies: Many small and medium-sized companies were
not able to enter capital market due to the listing requirement of Securities Contracts (Regulation)
Act, 1956 regarding the minimum issued equity of Rs.10 crores in case of the Mumbai stock
Exchange and Rs.3 crores in case of other stock exchanges. The OTCEI provides an opportunity to
these companies to enter the capital market as companies with issued capital of Rs.30 lacks
onwards can raise finance from the capital market through OTCEI.
6. Technology: OTCEI uses computers and telecommunications to bring members/dealers together
electronically, enabling them to trade with one another over the computer rather than on a trading
floor in a single location.
7. Nation-wide Listing: OTCEI network is spread all over India through members, dealers and
representative office counters. The company and its securities get nation-wide exposure and
investors all over India can start trading in that scrip.
8. Bought-out Deals: Through the concept of a bought-out deal, OTCEI allows companies to place
its equity with the sponsor-member at a mutually agreed price. This ensures swifter availability of
funds to companies for timely completion of projects and a listed status at a later date.
Benefits of getting OTCEI Listing for Companies.
The OTCEI offers facilities to the companies having a issued equity capital of more than Rs. 30 lakhs. The
benefits of listing at the OTCEI are:

Small and medium closely-held companies can go public.

The OTCEI encourages entrepreneurship.

Companies can get the money before the issue in cases of Bought-out-deals.

It is more cost-effective to come with an issue of OTCEI.

Small companies can get listing benefits.

Easy issue marketing by using the nation-wide OTCEI dealer network.

Nation-wide trading by listing at just one exchange.
Benefits of Trading on OTCEI for Investors :

The OTCEI trading counters are easily accessible by any investors.

The OTCEI provides greater confidence to investors because of complete transparency in deals.

At the OTCEl, the transactions are fast and are completed quickly.

The OTCEI ensures security, liquidity by offering two-way quotes.

The OTCEI is an investor friendly exchange with Single Window Clearance for all investor
requests.
UNIT III
Syllabus
Plastic cards – Types of Card – Current Trends in Credit Card Industry –Benefits of Plastic Cards – Dis
advantages of Plastic Cards. Bancassurance –Benefits of Bancassurance – Distribution Channels in
Bancassurance –Success of Bancassurance
1 What is Magnetic stripe card?
Magnetic stripe card is a type of card capable of storing data by modifying the magnetism of tiny
iron-based magnetic particles on a band of magnetic material on the card. The magnetic stripe, sometimes
called swipe card or magstripe, is read by physical contact and swiping past a magnetic reading head.
A number of International Organization for Standardization standards, ISO/IEC 7810, ISO/IEC 7811,
ISO/IEC 7812, ISO/IEC 7813, ISO 8583, and ISO/IEC 4909, define the physical properties of the card,
including size, flexibility, location of the magstripe, magnetic characteristics, and data formats. They also
provide the standards for financial cards, including the allocation of card number ranges to different card
issuing institutions.
The magnetic stripe
The process of attaching a magnetic stripe to a plastic card was invented by IBM under a contract with the
US government for a security system. Forrest Parry, an IBM Engineer, had the idea of securing a piece of
magnetic tape, the predominant storage medium at the time, to a plastic card base. He became frustrated
because every adhesive he tried produced unacceptable results. The tape strip either warped or its
characteristics were affected by the adhesive, rendering the tape strip unusable. After a frustrating day in
the laboratory, trying to get the right adhesive, he came home with several pieces of magnetic tape and
several plastic cards. As he walked in the door at home, his wife was ironing and watching TV. She
immediately saw the frustration on his face and asked what was wrong. He explained the source of his
frustration: inability to get the tape to "stick" to the plastic in a way that would work. She said, "Here, let
me try the iron." She did and the problem was solved. The heat of the iron was just high enough to bond
the tape to the card.[1]
There were a number of steps required to convert the magnetic striped media into an industry acceptable
device. These steps included: 1) Creating the international standards for stripe record content, including
which information, in what format, and using which defining codes. 2) Field testing the proposed device
and standards for market acceptance. 3) Developing the manufacturing steps needed to mass produce the
large number of cards required. 4) Adding stripe issue and acceptance capabilities to available equipment.
These steps were initially managed by Jerome Svigals of the Advanced Systems Division of IBM, Los
Gatos, California from 1966 to 1975.
In most magnetic stripe cards, the magnetic stripe is contained in a plastic-like film. The magnetic stripe is
located 0.223 inches (5.56 mm) from the edge of the card, and is 0.375 inches (9.52 mm) wide. The
magnetic stripe contains three tracks, each 0.110 inches (2.79 mm) wide. Tracks one and three are
typically recorded at 210 bits per inch (8.27 bits per mm), while track two typically has a recording
density of 75 bits per inch (2.95 bits per mm). Each track can either contain 7-bit alphanumeric characters,
or 5-bit numeric characters. Track 1 standards were created by the airlines industry (IATA). Track 2
standards were created by the banking industry (ABA). Track 3 standards were created by the ThriftSavings industry.
Magstripes following these specifications can typically be read by most point-of-sale hardware, which are
simply general-purpose computers that can be programmed to perform specific tasks. Examples of cards
adhering to these standards include ATM cards, bank cards (credit and debit cards including VISA and
MasterCard), gift cards, loyalty cards, driver's licenses, telephone cards, membership cards, electronic
benefit transfer cards (e.g. food stamps), and nearly any application in which value or secure information
is not stored on the card itself. Many video game and amusement centers now use debit card systems
based on magnetic stripe cards.
Magnetic stripe cloning can be detected by the implementation of magnetic card reader heads and
firmware that can read a signature embedded in all magnetic stripes during the card production process.
This signature known as a MagnePrint or BluPrint can be used in conjunction with common two factor
authentication schemes utilized in ATM, debit/retail point-of-sale and prepaid card applications.[2]
Counterexamples of cards which intentionally ignore ISO standards include hotel key cards, most subway
and bus cards, and some national prepaid calling cards (such as for the country of Cyprus) in which the
balance is stored and maintained directly on the stripe and not retrieved from a remote database.
Magnetic stripe coercivity
Magstripes come in two main varieties: high-coercivity (HiCo) at 4000 Oe and low-coercivity (LoCo) at
300 Oe but it is not infrequent to have intermediate values at 2750 Oe. High-coercivity magstripes are
harder to erase, and therefore are appropriate for cards that are frequently used or that need to have a long
life. Low-coercivity magstripes require a lower amount of magnetic energy to record, and hence the card
writers are much cheaper than machines which are capable of recording high-coercivity magstripes. A
card reader can read either type of magstripe, and a high-coercivity card writer may write both high and
low-coercivity cards (most have two settings, but writing a LoCo card in HiCo may sometimes work),
while a low-coercivity card writer may write only low-coercivity cards.
In practical terms, usually low coercivity magnetic stripes are a light brown color, and high coercivity
stripes are nearly black; exceptions include a proprietary silver-colored formulation on transparent
American Express cards. High coercivity stripes are resistant to damage from most magnets likely to be
owned by consumers. Low coercivity stripes are easily damaged by even a brief contact with a magnetic
purse strap or fastener. Because of this, virtually all bank cards today are encoded on high coercivity
stripes despite a slightly higher per-unit cost.
Magnetic stripe cards are used in very high volumes in the mass transit sector, replacing paper based
tickets with either a directly applied magnetic slurry or hot foil stripe. Slurry applied stripes are generally
less expensive to produce and are less resilient but are suitable for cards meant to be disposed after a few
uses.
2 What is Financial cards?
There are up to three tracks on magnetic cards used for financial transactions, known as tracks 1, 2, and 3.
Track 3 is virtually unused by the major worldwide networks such as VISA, and often isn't even
physically present on the card by virtue of a narrower magnetic stripe. Point-of-sale card readers almost
always read track 1, or track 2, and sometimes both, in case one track is unreadable. The minimum
cardholder account information needed to complete a transaction is present on both tracks. Track 1 has a
higher bit density (210 bits per inch vs. 75), is the only track that may contain alphabetic text, and hence is
the only track that contains the cardholder's name.
Track 1 is written with code known as DEC SIXBIT plus odd parity. The information on track 1 on
financial cards is contained in several formats: A, which is reserved for proprietary use of the card issuer,
B, which is described below, C-M, which are reserved for use by ANSI Subcommittee X3B10 and N-Z,
which are available for use by individual card issuers:
Track 1, Format B:

Start sentinel — one character (generally '%')

Format code="B" — one character (alpha only)

Primary account number (PAN) — up to 19 characters. Usually, but not always, matches the
credit card number printed on the front of the card.

Field Separator — one character (generally '^')

Name — two to 26 characters

Field Separator — one character (generally '^')

Expiration date — four characters in the form YYMM.

Service code — three characters

Discretionary data — may include Pin Verification Key Indicator (PVKI, 1 character), PIN
Verification Value (PVV, 4 characters), Card Verification Value or Card Verification Code (CVV
or CVK, 3 characters)

End sentinel — one character (generally '?')

Longitudinal redundancy check (LRC) — it is one character and a validity character calculated
from other data on the track. Most reader devices do not return this value when the card is swiped
to the presentation layer, and use it only to verify the input internally to the reader.
Track 2: This format was developed by the banking industry (ABA). This track is written with a 5-bit
scheme (4 data bits + 1 parity), which allows for sixteen possible characters, which are the numbers 0-9,
plus the six characters : ; < = > ? . The selection of six punctuation symbols may seem odd, but in fact the
sixteen codes simply map to the ASCII range 0x30 through 0x3f, which defines ten digit characters plus
those six symbols. The data format is as follows:

Start sentinel — one character (generally ';')

Primary account number (PAN) — up to 19 characters. Usually, but not always, matches the
credit card number printed on the front of the card.

Separator — one char (generally '=')

Expiration date — four characters in the form YYMM.

Service code — three digits. The first digit specifies the interchange rules, the second specifies
authorisation processing and the third specifies the range of services

Discretionary data — as in track one

End sentinel — one character (generally '?')

Longitudinal redundancy check (LRC) — it is one character and a validity character calculated
from other data on the track. Most reader devices do not return this value when the card is swiped
to the presentation layer, and use it only to verify the input internally to the reader.
Service code values common in financial cards:
First digit
1: International interchange OK
2: International interchange, use IC (chip) where feasible
5: National interchange only except under bilateral agreement
6: National interchange only except under bilateral agreement, use IC (chip) where feasible
7: No interchange except under bilateral agreement (closed loop)
9: Test
Second digit
0: Normal
2: Contact issuer via online means
4: Contact issuer via online means except under bilateral agreement
Third digit
0: No restrictions, PIN required
1: No restrictions
2: Goods and services only (no cash)
3: ATM only, PIN required
4: Cash only
5: Goods and services only (no cash), PIN required
6: No restrictions, use PIN where feasible
7: Goods and services only (no cash), use PIN where feasible
All values not explicitly mentioned above are reserved for future use
Notes:

It is possible for these strips to be completely erased if brought close to high strength Neodymium
magnets

Commercial encoders might use '~' for Start sentinel, ';' for separator.

Example Code: '~#;data?'
United States driver's licenses
The data stored on magnetic stripes on American driver's licenses is specified by the American
Association of Motor Vehicle Administrators (AAMVA). Not all states use a magnetic stripe on their
driver's licenses. For a list of those that do, see the AAMVA list of US License Technology. The AAMVA
site also contains a list of the Canadian jurisdictions that use magnetic stripes on their driver's licenses.
The following data is stored on track 1[3] :

Start Sentinel - one character (generally '%')

State or Province - two characters

City - variable length (seems to max out at 13 characters)

Field Separator - one character (generally '^') (absent if city reaches max length)

Last Name - variable length

Field Separator - one character (generally '$')

First Name - variable length

Field Separator - one character (generally '$')

Middle Name - variable length

Field Separator - one character (generally '^')

Home Address (house number and street) - variable length

Field Separator - one character (generally '^')

Unknown - variable length

End Sentinel - one character (generally '?')
The following data is stored on track 2:

ISO Issuer Identifier Number (IIN) - 6 digits

Drivers License / Identification Number - 13 digits

Field Separator — generally '='

Expiration Date (YYMM) - 4 digits

Birth date (YYYYMMDD) - 8 digits

DL/ID# overflow- 5 digits (If no information is used then a field separator is used in this field.)

End Sentinel - one character ('?')
The following data is stored on track 3:

Template V#

Security V#

Postal Code

Class

Restrictions

Endorsements

Sex

Height

Weight

Hair Color

Eye Color

ID#

Reserved Space

Error Correction

Security
Note: Each state has a different selection of information they encode, not all states are the same. Note:
Some states, such as Texas,[4][5] have laws restricting drivers licenses being swiped under certain
circumstances.
3 What are the Other types of card?
Smart cards are a newer generation of card containing an integrated circuit chip. The card may have metal
contacts connecting the card physically to the reader, while contactless cards use a magnetic field or radio
frequency (RFID) for proximity reading.
Hybrid smart cards include a magnetic stripe in addition to the chip — this is most commonly found in a
payment card, so that the cards are also compatible with payment terminals that do not include a smart
card reader.
Cards with all three features: magnetic stripe, smart card chip, and RFID chip are also becoming common
as more activities require the use of such cards.
Credit card statistics, industry facts, debt statistics
By Ben Woolsey and Matt Schulz
This page contains credit card statistics -- including statistics on credit card debt, credit card
delinquencies, credit scores, credit card interest rates, bankruptcies, average credit card debt and more --
compiled by the CreditCards.com staff. Statistics on this page will be updated regularly as we receive new
or updated credit card data. Some data may appear multiple times on the page because the information is
applicable in multiple categories.
Most popular searches

Average credit card debt per household with credit card debt: $15,788*

609.8 million credit cards held by U.S. consumers. (Source: "The Survey of Consumer Payment
Choice," Federal Reserve Bank of Boston, January 2010)

Average number of credit cards held by cardholders: 3.5, as of yearend 2008 (Source: "The Survey
of Consumer Payment Choice," Federal Reserve Bank of Boston, January 2010)

Average APR on new credit card offer: 14.35 percent (Source: CreditCards.com Weekly Rate
Report, Aug. 25, 2010.)

Average APR on credit card with a balance on it: 14.48 percent, as of May, 2010 (Source: Federal
Reserve's G.19 report on consumer credit, August 2010)

Total U.S. revolving debt (98 percent of which is made up of credit card debt): $852.6 billion, as
of March 2010 (Source: Federal Reserve's G.19 report on consumer credit, March 2010)

Total U.S. consumer debt: $2.42 trillion, as of June 2010 (Source: Federal Reserve's G.19 report
on consumer credit, August 2010)

U.S. credit card 60-day delinquency rate: 4.27 percent. (Source: Fitch Ratings, April 2010)

U.S. credit card default rate: 13.01 percent. (Source: Fitch Ratings, April 2010)
4 What is Credit cards?
Circulation
Total cards in circulation in U.S.
(Through year-end 2009)

Visa credit: 270.1 million, down 11 percent (Source: Visa.com)

Visa debit: 382 million, up 18 percent (Source: Visa.com)

MasterCard credit: 203 million, down 22 percent (Source: MasterCard.com)

MasterCard debit: 125 million, up 1 percent (Source: MasterCard.com)

American Express credit: 48.9 million, down 9 percent (Source: AmericanExpress.com)

Discover credit: 54.4 million, down 6 percent (Source: Discover.com)

TOTAL CREDIT CARDS: 576.4 million

TOTAL DEBIT CARDS: 507 million
Purchase/transaction volume
Market share
Circulation
Card ownership

176.8 million credit cardholders in 2008 (Source: "The Survey of Consumer Payment Choice,"
Federal Reserve Bank of Boston, January 2010)

Some 29 percent of poll respondents reported that they do not have a credit card. That was a more
than 10 percent jump from the number of respondents who reported having no credit cards in June
2009. (Source: Scientific poll for CreditCards.com, conducted Feb. 5-7, 2010)

The average credit cardholder has 3.5 credit cards. Including both cardholders and noncardholders, the average consumer has 2.7 cards each. (Source: "The Survey of Consumer
Payment Choice," Federal Reserve Bank of Boston, January 2010)

The average age at which a U.S. consumer under the age of 35 first adopted a credit card is 20.8
years. The average age of credit card adoption for a consumer over the age of 65 is 40.6 years.
(Source: "The 2008 Survey of Consumer Payment Choice," Federal Reserve Bank of Boston)

Eighty percent of consumers currently own a debit card, compared to 78 percent who own a credit
card and 17 who own a prepaid card. (Source: "The Survey of Consumer Payment Choice,"
Federal Reserve Bank of Boston, January 2010)

About 60 percent of consumers have a rewards credit card. (Source: "The Survey of Consumer
Payment Choice," Federal Reserve Bank of Boston, January 2010)

About 21 percent of consumer currently have a contactless debit card, while 26 percent have a
contactless credit card. (Source: "The Survey of Consumer Payment Choice," Federal Reserve
Bank of Boston, January 2010)

In the fourth quarter of 2008, consumers over 60 had an average of 5.6 open bankcard and retail
accounts. Overall, consumers had an average of 5.4 cards. A year before, those over 60 had 6.1
open cards and consumers overall had 5.5. In 2006, those over 60 had 6.2 open cards and
consumers overall had 5.5. (Source: Experian marketing insight snapshot, March 2009)

According to data from the U.S. Census Bureau, there were 159 million credit cardholders in the
United States in 2000, 173 million in 2006, and that number is projected to grow to 181 million
Americans by 2010. (Source: Census Bureau)

In 2006, the United States Census Bureau determined that there were nearly 1.5 billion credit cards
in use in the U.S. A stack of all those credit cards would reach more than 70 miles into space -- and
be almost as tall as 13 Mount Everests. (Source: NY Times, Feb. 23, 2009)

As of yearend 2009, there were 270 million Visa credit cards and 382 million Visa debit cards in
circulation in the United States. (Source: Visa.com)

As of yearend 2009, there were 203 million MasterCard credit cards and 125 million MasterCard
debit cards in circulation in the United States. (Source: MasterCard.com)

As of yearend 2009, there were 48.9 million American Express credit cards in circulation in the
United States. (Source: AmericanExpress.com)

As of yearend 2009, there were 54.4 million Discover credit cards in circulation in the United
States. (Source: Discover.com)

Eighty-four percent of the student population overall have credit cards, an increase of
approximately 11 percent since the fall of 2004. (Source: Sallie Mae, "How Undergraduate
Students Use Credit Cards," April 2009)

Only 2 percent of undergraduates had no credit history. (Source: Sallie Mae, "How Undergraduate
Students Use Credit Cards," April 2009)

Half of college undergraduates had four or more credit cards in 2008. That's up from 43 percent in
2004 and just 32 percent in 2000. (Source: Sallie Mae, "How Undergraduate Students Use Credit
Cards," April 2009)

Since 2004, students who arrived on campus as freshmen with a credit card already in-hand have
increased from 23 percent to 39 percent. (Source: Sallie Mae, "How Undergraduate Students Use
Credit Cards," April 2009)

Two-thirds of survey respondents said they would consider switching their primary credit card if a
better feature were offered. (Source: ComScore, September 2008)

76 percent of undergraduates have credit cards, and the average undergrad has $2,200 in credit
card. Additionally, they will amass almost $20,000 in student debt. (Source: Nellie Mae,
"Undergraduate Students and Credit Cards in 2004: An Analysis of Usage Rates and Trends")

41 percent of college students have a credit card. Of the students with cards, about 65 percent pay
their bills in full every month, which is higher than the general adult population. (Source: Student
Monitor annual financial services study, 2008)

Approximately 74.9 percent of the U.S. families surveyed in 2004 had credit cards, and 58 percent
of those families carried a balance. In 2001, 76.2 percent of families had credit cards, and 55
percent of those families carried a balance. (Source: Federal Reserve Bulletin, February 2006)

About a quarter have no credit cards, and an additional 30 percent or so pay off their balances
every month. (Source: Federal Reserve Board survey of consumer finances, 2004)

On average, today's consumer has a total of 13 credit obligations on record at a credit bureau.
These include credit cards (such as department store charge cards, gas cards, and bank cards) and
installment loans (auto loans, mortgage loans, student loans, etc.). Not included are savings and
checking accounts (typically not reported to a credit bureau). Of these 13 credit obligations, nine
are likely to be credit cards and four are likely to be installment loans. (Source: myfico.com)

The average consumer's oldest obligation is 14 years old, indicating that he or she has been
managing credit for some time. In fact, one out of four consumers had credit histories of 20 years
or longer. Only one in 20 consumers had credit histories shorter than two years. (Source:
myfico.com)

Approximately 51 percent of the U.S. population has at least two credit cards. (Source: Experian
national score index study, February 2007)

At about 20 percent, New Hampshire and New Jersey have the largest concentration of consumers
with 10 or more credit cards. (Source: Experian national score index study, February 2007)

Consumers carry more than 1 billion Visa cards worldwide. More than 450 million of those cards
are in the United States. (Source: Visa USA internal statistics, 4th quarter 2006)

About 80 million contactless payment cards are expected to be issued through 2009, according to
Randy Vanderhoof, executive director of the Smart Card Alliance. (Source: Contactless News,
"Contactless Payments: What's Next?" August 2009)

Of families with credit cards in 2007, 96.1 percent had bank cards, up less than 1 percent from
2004. (Source: Federal Reserve Survey of Consumer Finances, February 2009)

Of families with credit cards in 2007, 11.9 percent held gas cards, and that's down more than 5
percent from 2004. (Source: Federal Reserve Survey of Consumer Finances, February 2009)
Customer satisfaction
J.D. Power and Associates 2010 Credit Card Satisfaction Study Rankings
1. American Express
2. Discover
3. US Bank
4. Wells Fargo
5. Chase
6. Barclaycard
7. Bank of America
8. Capital One
9. Citi
10. HSBC
5 What is Bankruptcy/delinquency?

U.S. credit card 60-day delinquency rate: 4.27 percent. (Source: Fitch Ratings, April 2010)
Business credit cards

Credit cards are now the most common source of financing for America’s small-business owners.
(Source: National Small Business Association survey, 2008)

44 percent of small-business owners identified credit cards as a source of financing that their
company had used in the previous 12 months —- more than any other source of financing,
including business earnings. In 1993, only 16 percent of small-businesses owners identified credit
cards as a source of funding they had used in the preceding 12 months. (Source: National Small
Business Association survey, 2008)
Credit limits and usage

In 2007, 97 percent of consumers indicated they used a credit card in the past year. In 2008, that
number plummeted to 72 percent. (Source: Javelin, "Credit Card Spending Declines" study, March
2009)

Credit card usage fell dramatically from 2007 to 2008, with only 64 percent of consumers
indicating they used a credit card in the month preceding the September 2008 survey, compared to
87 percent of consumers in 2007 — a 23 percentage point decline. (Source: Javelin, "Credit Card
Spending Declines" study, March 2009)

80 percent of Americans 65 or older indicated they used a credit card in the month preceding the
September 2008 survey. That's 13 points higher than any other age group. They also used debit
cards far less than other age groups. Only 47 percent of those over 65 said they had used a debit
card in the month before the survey, 19 points lower than any other age group. (Source: Javelin,
"Credit Card Spending Declines" study, March 2009)

63 percent of Americans aged 25 to 34 indicated they had used a credit card in the month
preceding the September 2008 survey. (Source: Javelin, "Credit Card Spending Declines" study,
March 2009)

Just 51 percent of Americans aged 18 to 24 indicated they had used a credit card in the month
preceding the September 2008 survey. 71 percent of that age group said that they had used a debit
card in the same period. (Source: Javelin, "Credit Card Spending Declines" study, March 2009)

92 percent of cards included a fee for exceeding the credit limit, including 100 percent of all
student cards. The amount of the overlimit fee is $39 on most accounts. (Source: Pew Safe Credit
Cards Project, March 2009)

For families having any bank-type cards, the median number of such cards remained at 2; the
median credit limit on all such cards rose 21.4 percent, to $18,000, and the median interest rate on
the card with the largest balance (or on the newest card, if no outstanding balances existed) rose
1.0 percentage point, to 12.5 percent. (Source: Federal Reserve Survey of Consumer Finances,
February 2009)

58 percent of Hispanics have not used a credit card in the past 30 days. (Source: Experian
Consumer Research study, November 2008)

31 percent of Hispanics typically pay cash for their purchases. (Source: Experian Consumer
Research study, November 2008)

Approximately 14 percent of Americans use 50 percent or more of their available credit. (Source:
Experian National Score Index Study, February 2007)

At about 17 percent each, Alaska and Hawaii have the largest concentration of consumers who use
50 percent or more of their available credit. (Source: Experian National Score Index Study,
February 2007)

Residents of Jackson, Miss., use the highest percentage of their credit limit. (Source: Men's Health
magazine's personal debt survey, July 2008)

Lincoln, Neb., residents use the lowest percentage of their credit limit. (Source: Men's Health
magazine's personal debt survey, July 2008)

95 percent of surveyed issuers have over-limit fees. The average over-limit fee, among institutions
with over-limit fees, is $29.13. (Source: Consumer Action credit card survey, July 2008.)

Debt
37 percent of consumers say they are using their credit cards less. (Source: Javelin Strategy &
Research, "Credit Card Issuer Profitability in a Difficult Economy," July 2008)

In 2004, of those with credit cards, 84 percent of African-American households carried credit card
debt compared with 54 percent of white households. (Source: Demos.org, "Borrowing To Make
Ends Meet," November 2007)

Over 90 percent of African-American families earning between $10,000 and $24,999 had credit
card debt. (Source: Demos.org study, November 2007)

42 percent of Hispanics don't like the idea of being in debt. (Source: Experian Consumer Research
study, November 2008)

Undergraduates are carrying record-high credit card balances. The average (mean) balance grew to
$3,173, the highest in the years the study has been conducted. Median debt grew from 2004’s $946
to $1,645. Twenty-one percent of undergraduates had balances of between $3,000 and $7,000, also
up from the last study. (Source: Sallie Mae, "How Undergraduate Students Use Credit Cards,"
April 2009)

In spring of 2008, only 15 percent of freshmen had a zero balance, down dramatically from 69
percent in the fall of 2004. The median debt freshmen carried was $939, nearly triple the $373 in
2004. (Source: Sallie Mae, "How Undergraduate Students Use Credit Cards," April 2009)

Seniors graduated with an average credit card debt of more than $4,100, up from $2,900 almost
four years ago. Close to one-fifth of seniors carried balances greater than $7,000. (Source: Sallie
Mae, "How Undergraduate Students Use Credit Cards," April 2009)

The average college graduate has nearly $20,000 in debt; average credit card debt has increased 47
percent between 1989 and 2004 for 25-to 34-year-olds and 11 percent for 18- to 24-year-olds.
Nearly one in five 18- to 24-year-olds is in "debt hardship," up from 12 percent in 1989. (Source:
Demos.org, "The Economic State of Young America," May 2008)

Discussing credit card debt is highly taboo. The topics at the top of the list of things that people
say they are very or somewhat unlikely to talk openly about with someone they just met were: The
amount of credit card debt (81 percent); details of your love life (81 percent); your salary (77
percent); the amount you pay for your monthly mortgage or rent (72 percent); your health
problems (62 percent); your weight (50 percent). (Source: CreditCards.com research, January
2009)
Fees

Penalty fees from credit cards will add up to about $20.5 billion in 2009, according to R. K.
Hammer, a consultant to the credit card industry. (Source: New York Times, September 2009)

From 1989 to 2004, the percentage of cardholders incurring fees due to late payments of 60 days
or more increased from 4.8 percent to 8.0 percent. (Source: Demos.org, "Borrowing To Make Ends
Meet," November 2007)

One-fourth of the students surveyed in US PIRG's 2008 Campus Credit Card Trap report said that
they have paid a late fee, and 15 percent have paid an "over the limit" fee. (Source: U.S. PIRG,
"Campus Credit Card Trap")

In the first 3 months of 2009, 27 percent of card offers carried an annual fee, up from 18 percent in
2008, according to the financial research firm Tower Group. (Source: ConsumerReports.org
Money Blog, August 2009)

Thirty-one of the 39 credit cards did not charge an annual fee. That marked a larger number of
credit cards with no annual fee than in 2008, when 35 of 41cards had no annual fee. The cost of
those fees ranged from $18 to $150. (Source: Consumer Action credit card survey, July 2009)

The average late fee was found to have risen to $28.19, way up from $25.90 in 2008. Consumer
Action reported that late fees reached up to $39 per incident. (Source: Consumer Action credit card
survey, July 2009)

92 percent of cards included a fee for exceeding the credit limit, including 100 percent of all
student cards. The amount of the overlimit fee is $39 on most accounts. (Source: Pew Safe Credit
Cards Project, March 2009)

64 percent of respondents said having "no annual fee" was an important reason why they chose the
credit card they did the last time they got a new card. (Source: Aite Group survey, January 2008)

95 percent of surveyed issuers have over-limit fees. The average over-limit fee, among institutions
with over-limit fees, is $29.13. (Source: Consumer Action credit card survey, July 2008.)
Interest rates/APRs

36 percent of respondents said they didn't know the interest rate on the card they use most often.
(Source: FINRA Investor Education Foundation, "Financial Capability in the United States,"
December 2009)

The national average default rate as January 2010 stood at 27.88 percent and the mean default rate
is 28.99 percent. (Source: CreditCards.com survey, January 2010)

Slightly more than half of Americans -- 51 percent -- said that in the past 12 months, they carried
over a balance and was charged interest on a credit card. (Source: "Financial Capability in the
United States," FINRA Investor Education Foundation, December 2009)

93 percent of cards allowed the issuer to raise any interest rate at any time by changing the account
agreement. (Source: Pew Safe Credit Cards Project, March 2009)

Only eight percent of cards with penalty rate conditions offered to restore the original rate terms
when payments are made on-time, usually after 12 months. (Source: Pew Safe Credit Cards
Project, March 2009)

72 percent of cards included offers of low promotional rates which issuers could revoke after a
single late payment. (Source: Pew Safe Credit Cards Project, March 2009)

Among 39 credit cards Consumer Action looked at from 22 financial institutions, the average
interest rate for purchases was 12.83 percent. That's a drop of more half a point from the 2008
survey results. Interest rates on purchases ranged from 4.25 percent to 22.99 percent, with the fixed
rate credit cards averaging an interest rate of 10.03 percent and the variable rate credit cards
averaging 13.20 percent. (Source: Consumer Action credit card survey, July 2009)

Average APR on new credit card offer: 14.10 percent (Source: CreditCards.com Weekly Rate
Report, May 2010.)

Average APR on credit card with a balance on it: 14.67 percent, as of February, 2010 (Source:
Federal Reserve's G.19 report on consumer credit, May 2010)
Rewards

About 60 percent of consumers have a rewards credit card. (Source: "The Survey of Consumer
Payment Choice," Federal Reserve Bank of Boston, January 2010)

About 60 percent of consumers have a rewards credit card. (Source: "The Survey of Consumer
Payment Choice," Federal Reserve Bank of Boston, January 2010)

Visa says rewards cards now make up more than half of all credit cards and about 80 percent of
money spent on a credit card. (Source: Aite Group, January 2008)

Consumers say rewards are the second-most important reason for choosing to apply for a specific
card, behind no annual fees and ahead of low interest rates. (Source: Aite Group survey, January
2008)

More than one third of consumers choose which card to use in order to maximize card rewards.
(Source: ComScore, September 2008)

Two-thirds of survey respondents said they would consider switching their primary credit card if a
better feature were offered. (Source: ComScore, September 2008)

Among customers who said they would consider switching cards based on better rewards, more
than two thirds (68 percent) said that cash back would be most influential in getting them to
switch. (Source: ComScore, September 2008)
6 What is Debit cards?
Market share
Total cards in circulation in U.S.
(Through year-end 2009)

Visa debit: 382 million, up 18 percent (Source: Visa.com)

MasterCard debit: 125 million, up 1 percent (Source: MasterCard.com)

TOTAL DEBIT CARDS: 507 million
Other statistics

As of yearend 2009, there were 203 million MasterCard credit cards and 125 million MasterCard
debit cards in circulation in the United States. (Source: MasterCard.com)
Purchase/transaction volume
Other statistics

In 2008, 72 percent of consumers indicated they used a debit card in the past year. In 2007, that
number was 65 percent. (Source: Javelin, "Credit Card Spending Declines" study, March 2009)

Debit card usage grew from 2007 to 2008, with 66 percent of consumers indicating they used a
debit card in the month preceding the September 2008 survey, compared to 57 percent of
consumers in 2007. (Source: Javelin, "Credit Card Spending Declines" study, March 2009)

Only 47 percent of Americans over 65 said they had used a debit card in the month before the
September 2008 survey, 19 points lower than any other age group. (Source: Javelin, "Credit Card
Spending Declines" study, March 2009)

76 percent of Americans aged 25 to 34 indicated they had used a debit card in the month preceding
the September 2008 survey. 63 percent of that age group said that had used a credit card in the
same period. (Source: Javelin, "Credit Card Spending Declines" study, March 2009)

71 percent of Americans aged 18 to 24 said that they had used a debit card in the month preceding
the September 2008 survey. Just 51 percent of that same age group indicated they had used a credit
card in the same period. (Source: Javelin, "Credit Card Spending Declines" study, March 2009)

As of December 31, 2008, there were 126 million MasterCard debit cards in circulation in the
United States. (Source: MasterCard.com)

74 percent of monthly college spending is with cash and debit cards. Only 7 percent is with credit
cards. (Source: Student Monitor annual financial services study, 2008)
Fees
7 What Is BANKRUPTCY AND DELINQUENCY?
Bankruptcy

Total bankruptcy filings in 2009 reached 1.4 million in 2009, up from 1.09 million in 2008. The
vast majority were personal bankruptcies -- Chapter 7 and Chapter 13. Business bankruptcies made
up 6 percent of all filings. (Source: AACER, the American Bankruptcy Institute, January 2010)

Nevada surpassed Tennessee atop the listing of bankruptcies per capita, with more than 11
bankruptcies filed for every 1,000 residents. Tennessee and Georgia took the second and third slots
behind the Silver State. Compared to 2009 third-quarter data, the biggest mover was Arizona,
which rose six spots from No. 21 to No. 15. At the other end of the scale is Alaska, which had only
1.4 bankruptcies per capita, meaning the average Nevadan was eight times more likely to file
bankruptcy than the average Alaskan. (Source: AACER, the American Bankruptcy Institute,
January 2010)

Young Americans now have the second highest rate of bankruptcy, just after those aged 35 to 44.
The rate among 25- to 34-year-olds increased between 1991 and 2001, indicating that this
generation is more likely to file bankruptcy as young adults than were young boomers at the same
age. (Source: "Generation Broke: Growth of Debt Among Young Americans")

Memphis, Tenn., consumers have suffered the most bankruptcies. (Source: Men's Health
magazine's personal debt survey, July 2008)

Yonkers, N.Y., has suffered the fewest bankruptcies. (Source: Men's Health magazine's personal
debt survey, July 2008)
Delinquency

U.S. credit card 60-day delinquency rate: 4.27 percent. (Source: Fitch Ratings, April 2010)

According to Fitch Ratings, the number of cardholders 60 or more days late on payments fell in
January of 2010 to 4.50 percent. That number is flat year-to-year. Those 30 days late declined to
5.72 percent and is down 5 percent year-to-year. (Source: Associated Press, March 2010)

According to Fitch Ratings, the number of credit card defaults hit 11.37 percent, the highest level
since a record 11.52 percent in September 2009. (Source: Associated Press, March 2010)

In the last 12 months, 15 percent of American adults, or nearly 34 million people, have been late
making a credit card payment and 8 percent (18 million people) have missed a payment entirely.
(Source: National Foundation for Credit Counseling, 2009 Financial Literacy Survey, April 2009)

26 percent of Americans, or more than 58 million adults, admit to not paying all of their bills on
time. Among African-Americans, this number is at 51 percent. (Source: National Foundation for
Credit Counseling, 2009 Financial Literacy Survey, April 2009)

Penalty fees from credit cards will add up to about $20.5 billion in 2009, according to R. K.
Hammer, a consultant to the credit card industry. (Source: New York Times, September 2009)

Only eight percent of cards with penalty rate conditions offered to restore the original rate terms
when payments are made on-time, usually after 12 months. (Source: Pew Safe Credit Cards
Project, March 2009)

72 percent of cards included offers of low promotional rates which issuers could revoke after a
single late payment. (Source: Pew Safe Credit Cards Project, March 2009)

From 1989 to 2004, the percentage of cardholders incurring fees due to late payments of 60 days
or more increased from 4.8 percent to 8.0 percent. (Source: Demos.org, "Borrowing To Make Ends
Meet," November 2007)

One-fourth of the students surveyed in US PIRG's 2008 Campus Credit Card Trap report said that
they have paid a late fee, and 15 percent have paid an "over the limit" fee. (Source: U.S. PIRG,
"Campus Credit Card Trap")

When finances are tight, 59 percent of people would pay their credit card bills last. A majority -52 percent -- would pay the mortgage first and 38 percent say they would pay for utilities before
paying other obligations. (Source: CreditCards.com survey, December 2008)

On average, today's consumers are paying their bills on time, with less than half of all consumers
have ever been reported as 30 or more days late on a payment. Only three out of 10 have ever been
60 or more days overdue on any credit obligation. Seventy-seven percent of all consumers have
never had a loan or account that was 90+ days overdue, and fewer than 20 percent have ever had a
loan or account closed by the lender due to default . (Source: myfico.com)
8 WHAT IS BUSINESS CREDIT CARDS?

As of the end of 2009, 83 percent of small businesses used credit cards; 64 percent used small
business cards, and 41 percent used personal cards. (Source: "Report to the Congress on the Use of
Credit Cards by Small Businesses and the Credit Card Market for Small Businesses," May 2010)

During 2009, about 20 percent of small businesses attempted to obtain a new credit card. (Source:
"Report to the Congress on the Use of Credit Cards by Small Businesses and the Credit Card
Market for Small Businesses," May 2010)

An estimated 64 percent of small firms -- those with 1 to 50 employees -- used business credit
cards either for borrowing or transacting in 2009. (Source: "Report to the Congress on the Use of
Credit Cards by Small Businesses and the Credit Card Market for Small Businesses," May 2010)

Among small businesses, credit cards are the second most commonly used financial product. Only
checking accounts are used by more small businesses. (Source: "Report to the Congress on the Use
of Credit Cards by Small Businesses and the Credit Card Market for Small Businesses," May
2010)

More than 20 percent of firms applying for a credit card were not able to get a card, and another
5.6 percent did not accept the card because of unfavorable terms. (Source: "Report to the Congress
on the Use of Credit Cards by Small Businesses and the Credit Card Market for Small Businesses,"
May 2010)

During 2009, the most frequent change reported -- by 60 percent of those firms reporting changes - was higher interest rates, followed by lowered credit limits, which was reported by 23 percent.
(Source: "Report to the Congress on the Use of Credit Cards by Small Businesses and the Credit
Card Market for Small Businesses," May 2010)
Credit cards are now the most common source of financing for America’s small-business owners.
(Source: National Small Business Association survey, 2008)

44 percent of small-business owners identified credit cards as a source of financing that their
company had used in the previous 12 months —- more than any other source of financing,
including business earnings. In 1993, only 16 percent of small-businesses owners identified credit
cards as a source of funding they had used in the preceding 12 months. (Source: National Small
Business Association survey, 2008)
Credit scores, reports

Only 38 percent of survey respondents have obtained a copy of their credit report, and even fewer
(36 percent) have checked their credit score in the past 12 months. (Source: "Financial Capability
in the United States," FINRA Investor Education Foundation, December 2009)

More than half -- 52 percent -- of those who have checked their credit score in the past 12 months
reported having credit scores above 720. By contrast, only 17 percent of those who have checked
their credit score had credit scores below 620. (Source: "Financial Capability in the United States,"
FINRA Investor Education Foundation, December 2009)

From Q3 2008 to Q1 2009, the average TransUnion credit score fell 6 points to 651, the credit
bureau says. Scores fell even further in the some economically challenged states: California fell 10
points and Arizona, 11. (Source: USAToday.com, April 2009)

The U.S. average VantageScore® is 769. The average score rises to 837 when looking solely at the
over-60 population. (Source: Experian marketing insight snapshot, March 2009)

Nearly two-thirds of American adults (64 percent) -- or 144 million people -- have not ordered a
copy of their credit report in the past year; this grows to nearly three-quarters (72 percent) among
Hispanic Americans. (Source: National Foundation for Credit Counseling, 2009 Financial Literacy
Survey, April 2009)

More than one-third of American adults (37 percent) admit that they do not know their credit
score. (Source: National Foundation for Credit Counseling, 2009 Financial Literacy Survey, April
2009)

Only 2 percent of undergraduates had no credit history. (Source: Sallie Mae, "How Undergraduate
Students Use Credit Cards," April 2009)

On average, today's consumer has a total of 13 credit obligations on record at a credit bureau.
These include credit cards (such as department store charge cards, gas cards, and bank cards) and
installment loans (auto loans, mortgage loans, student loans, etc.). Not included are savings and
checking accounts (typically not reported to a credit bureau). Of these 13 credit obligations, nine
are likely to be credit cards and four are likely to be installment loans. (Source: myfico.com)

The average consumer's oldest obligation is 14 years old, indicating that he or she has been
managing credit for some time. In fact, one out of four consumers had credit histories of 20 years
or longer. Only one in 20 consumers had credit histories shorter than two years. (Source:
myfico.com)

The average consumer has had only one credit inquiry on his or her accounts within the past year.
Fewer than 6 percent had four or more inquiries resulting from a search for new credit. (Source:
myfico.com)

Corpus Christi, Texas, residents have America's worst credit scores. (Source: Men's Health
magazine's personal debt survey, July 2008)

Sioux Falls, S.D., boasts America's best credit scores. (Source: Men's Health magazine's personal
debt survey, July 2008)
9 What is Consumer debt?
Total debt

Total U.S. revolving debt (98 percent of which is made up of credit card debt): $852.6 billion, as
of March 2010 (Source: Federal Reserve's G.19 report on consumer credit, March 2010)

Total U.S. consumer debt: $2.45 trillion, as of March 2010 (Source: Federal Reserve's G.19 report
on consumer credit, May 2010)

Average credit card debt per household with credit card debt: $16,007*

Average total debt in 2009 (including credit cards, mortgage, home equity, student loans and more)
for U.S. households with credit card debt: $54,000. (That's down from $93,850 in 2008.)

Average total debt in 2009 (including credit cards, mortgage, home equity, student loans and more)
for all U.S. households: $16,046. (That's down from $35,245 in 2008.)

Total U.S. consumer debt (which includes credit card debt and noncredit-card debt but not
mortgage debt) reached $2.45 trillion at the end of 2009, down sharply from $2.56 trillion at the
end of 2008. (Source: Federal Reserve's G.19 report, March 2010)

Total U.S. consumer revolving debt fell to $866 billion at the end of 2009, down from $958 billion
at the end of 2008. About 98 percent of that debt was credit card debt. (Source: Federal Reserve's
G.19 report, March 2010)

The mean, or average, unpaid credit card balance last month was $3,389. The median is $90.
(Source: "The Survey of Consumer Payment Choice," Federal Reserve Bank of Boston, January
2010)

About 56 percent of consumers carried an unpaid balance in the past 12 months. (Source: "The
Survey of Consumer Payment Choice," Federal Reserve Bank of Boston, January 2010)

About 45 percent of consumers said their unpaid credit card balance had gotten "lower" or "much
lower" in the past 12 months. Only 26 percent said it had gotten "higher" or "much higher."
(Source: "The Survey of Consumer Payment Choice," Federal Reserve Bank of Boston, January
2010)

Slightly more than half of Americans -- 51 percent -- said that in the past 12 months, they carried
over a balance and was charged interest on a credit card. (Source: "Financial Capability in the
United States," FINRA Investor Education Foundation, December 2009)

The average balance per open credit card -- including both retail and bank cards -- was $1,157 at
the end of 2008. That's up from $1,033 at the end of 2006, a growth of nearly 11 percent in two
years. (Source: Experian marketing insight snapshot, March 2009)

As of March 2009, U.S. revolving consumer debt, made up almost entirely of credit card debt, was
about $950 Billion. In the fourth quarter of 2008, 13.9 percent of consumer disposable income
went to service this debt. (Source: U.S. Congress' Joint Economic Committee, "Vicious Cycle:
How Unfair Credit Card Company Practices Are Squeezing Consumers and Undermining the
Recovery," May 2009)

"As household wealth has declined in the downturn, more American families are facing financial
distress due to high debt burdens. In 2007, before the recession began, 14.7 percent of U.S.
families had debt exceeding 40 percent of their income." (Source: U.S. Congress' Joint Economic
Committee, "Vicious Cycle: How Unfair Credit Card Company Practices Are Squeezing
Consumers and Undermining the Recovery," May 2009)

In 2007, the average balance for those carrying a balance rose 30.4 percent, to $7,300. Meanwhile,
the median balance -- meaning half owe more and half owe less -- for those carrying a balance rose
25.0 percent, to $3,000. These increases followed slower changes over the preceding three years,
when the median increased 9.1 percent and the average climbed 16.7 percent. (Source: Federal
Reserve Survey of Consumer Finances, February 2009)

In the fourth quarter of 2008, consumers over 60 had an average balance of $763 per open
bankcard or retail accounts. A year before, that balance was $746. The year before that, it was
$735 -- meaning the average has jumped about 4 percent in 2 years. (Source: Experian marketing
insight snapshot, March 2009)

In 2007, credit card balances made up 3.5 percent of the total debt for all U.S. families, including
those with and without credit card debt. (Source: Federal Reserve Survey of Consumer Finances,
February 2009)

In 2007, fewer than half of U.S. families (46.1 percent) held credit card debt. That's virtually
unchanged from 2004's 46.2 percent number. (Source: Federal Reserve Survey of Consumer
Finances, February 2009)

Undergraduates are carrying record-high credit card balances. The average (mean) balance grew to
$3,173, the highest in the years the study has been conducted. Median debt grew from 2004’s $946
to $1,645. Twenty-one percent of undergraduates had balances of between $3,000 and $7,000, also
up from the last study. (Source: Sallie Mae, "How Undergraduate Students Use Credit Cards,"
April 2009)

Balances on bank cards accounted for 87.1 percent of outstanding credit card balances in 2007, up
from 84.9 percent in 2004. (Source: Federal Reserve Survey of Consumer Finances, February
2009)

Of the 73.0 percent of families with credit cards in 2007, only 60.3 percent had a balance at the
time of the interview; in 2004, 74.9 percent had cards, and 58.0 percent of these families had an
outstanding balance on them. (Source: Federal Reserve Survey of Consumer Finances, February
2009)

"Total bankcard debt per bankcard borrower" is $5,710. This was alternately described as the total
balance of bank-issued credit cards per consumer. (Source: TransUnion, December 2008)

The average American with a credit file is responsible for $16,635 in debt, excluding mortgages,
according to Experian. (Source: U.S. News and World Report, "The End of Credit Card
Consumerism," August 2008)

Among the 35 percent of college students with credit cards that do not pay their balances in full
every month, the average balance is $452. This is down 19 percent from 2007. Moreover, this
balance is approximately one-third the size of the average balance for active nonstudent young
adult accounts and one-fourth the size of active accounts for older adults. (Source: Student Monitor
annual financial services study, 2008)

As of 2007, the majority of U.S. households had no credit card debt. (Source: Federal Reserve
Board survey of consumer finances, February 2009)

When you take a snapshot of how much an individual bank cardholder has in debt on a given day,
and ignore whether that debt will be paid off in the grace period, Alaska is the state whose
cardholders have the highest debt: $7,827. Alaska is followed by Nevada at $6,636 and Tennessee
at $6,568. At the other end of the scale, the states whose citizens carry the lowest card debt at a
given moment are Iowa ($4,277), North Dakota ($4,403) and West Virginia ($4,517). (Source:
TransUnion, December 2008)

About 40 percent of credit cardholders carry a balance of less than $1,000. About 15 percent are
far less conservative in their use of credit cards and have total card balances in excess of $10,000.
When you look at the total of all credit obligations combined (except mortgage loans), 48 percent
of consumers carry less than $5,000 of debt. This includes all credit cards, lines of credit and loans
-- everything but mortgages. Nearly 37 percent carry more than $10,000 of nonmortgage debt as
reported to the credit bureaus. (Source: myfico.com)

The typical consumer has access to approximately $19,000 on all credit cards combined. More
than half of all people with credit cards are using less than 30 percent of their total credit card
limit. Just over one in seven is using 80 percent or more of their credit card limit. (Source:
myfico.com)

The average college graduate has nearly $20,000 in debt; average credit card debt has increased 47
percent between 1989 and 2004 for 25-to 34-year-olds and 11 percent for 18-to 24-year-olds.
Nearly one in five 18-to 24-year-olds is in "debt hardship," up from 12 percent in 1989. (Source:
Demos.org, "The Economic State of Young America," May 2008)

More than 90 percent of survey respondents believe they had the same amount -- or less -- debt as
the average American. (Source: CreditCards.com survey, June 2007)

Miami residents are the biggest overspenders, one study says. The 50 largest U.S. metropolitan
areas were ranked in terms of percent of median yearly household income owed to credit card
companies and Miami residents owed 22.61 percent. Tampa (17.1 percent) and Los Angeles (16.81
percent) came in second and third, respectively. (Source: Forbes.com, Equifax and US Census
Bureau, April 2009)
Credit card debt

Average credit card debt per household with credit card debt: $15,788*

76 percent of undergraduates have credit cards, and the average undergrad has $2,200 in credit
card. Additionally, they will amass almost $20,000 in student debt. (Source: Nellie Mae,
"Undergraduate Students and Credit Cards in 2004: An Analysis of Usage Rates and Trends")

Total U.S. consumer revolving debt fell to $866 billion at the end of 2009, down from $958 billion
at the end of 2008. About 98 percent of that debt was credit card debt. (Source: Federal Reserve's
G.19 report, March 2010)

The mean, or average, unpaid credit card balance last month was $3,389. The median is $90.
(Source: "The Survey of Consumer Payment Choice," Federal Reserve Bank of Boston, January
2010)

About 45 percent of consumers said their unpaid credit card balance had gotten "lower" or "much
lower" in the past 12 months. Only 26 percent said it had gotten "higher" or "much higher."
(Source: "The Survey of Consumer Payment Choice," Federal Reserve Bank of Boston, January
2010)

The average balance per open credit card -- including both retail and bank cards -- was $1,157 at
the end of 2008. That's up from $1,033 at the end of 2006, a growth of nearly 11 percent in two
years. (Source: Experian marketing insight snapshot, March 2009)

As of March 2009, U.S. revolving consumer debt, made up almost entirely of credit card debt, was
about $950 Billion. In the fourth quarter of 2008, 13.9 percent of consumer disposable income
went to service this debt. (Source: U.S. Congress' Joint Economic Committee, "Vicious Cycle:
How Unfair Credit Card Company Practices Are Squeezing Consumers and Undermining the
Recovery," May 2009)

In 2007, credit card balances made up 3.5 percent of the total debt for all U.S. families, including
those with and without credit card debt. (Source: Federal Reserve Survey of Consumer Finances,
February 2009)

In 2007, fewer than half of U.S. families (46.1 percent) held credit card debt. That's virtually
unchanged from 2004's 46.2 percent number. (Source: Federal Reserve Survey of Consumer
Finances, February 2009)

Undergraduates are carrying record-high credit card balances. The average (mean) balance grew to
$3,173, the highest in the years the study has been conducted. Median debt grew from 2004’s $946
to $1,645. Twenty-one percent of undergraduates had balances of between $3,000 and $7,000, also
up from the last study. (Source: Sallie Mae, "How Undergraduate Students Use Credit Cards,"
April 2009)

Of the 73.0 percent of families with credit cards in 2007, only 60.3 percent had a balance at the
time of the interview; in 2004, 74.9 percent had cards, and 58.0 percent of these families had an
outstanding balance on them. (Source: Federal Reserve Survey of Consumer Finances, February
2009)

Among the 35 percent of college students with credit cards that do not pay their balances in full
every month, the average balance is $452. This is down 19 percent from 2007. Moreover, this
balance is approximately one-third the size of the average balance for active nonstudent young
adult accounts and one-fourth the size of active accounts for older adults. (Source: Student Monitor
annual financial services study, 2008)

As of 2007, the majority of U.S. households had no credit card debt. (Source: Federal Reserve
Board survey of consumer finances, February 2009)

About 40 percent of credit cardholders carry a balance of less than $1,000. About 15 percent are
far less conservative in their use of credit cards and have total card balances in excess of $10,000.
When you look at the total of all credit obligations combined (except mortgage loans), 48 percent
of consumers carry less than $5,000 of debt. This includes all credit cards, lines of credit and loans
-- everything but mortgages. Nearly 37 percent carry more than $10,000 of nonmortgage debt as
reported to the credit bureaus. (Source: myfico.com)

The typical consumer has access to approximately $19,000 on all credit cards combined. More
than half of all people with credit cards are using less than 30 percent of their total credit card
limit. Just over one in seven is using 80 percent or more of their credit card limit. (Source:
myfico.com)
Debt as pct. of income

The average credit card-indebted family in 2004 allocated 21 percent of its income to servicing
monthly debt compared to the 13 percent dedicated to debt payments among all households.
(Source: Demos.org, "Borrowing To Make Ends Meet," November 2007)

In 2007, the average balance for those carrying a balance rose 30.4 percent, to $7,300. Meanwhile,
the median balance -- meaning half owe more and half owe less -- for those carrying a balance rose
25.0 percent, to $3,000. These increases followed slower changes over the preceding three years,
when the median increased 9.1 percent and the average climbed 16.7 percent. (Source: Federal
Reserve Survey of Consumer Finances, February 2009)

Miami residents are the biggest overspenders, one study says. The 50 largest U.S. metropolitan
areas were ranked in terms of percent of median yearly household income owed to credit card
companies and Miami residents owed 22.61 percent. Tampa (17.1 percent) and Los Angeles (16.81
percent) came in second and third, respectively. (Source: Forbes.com, Equifax and US Census
Bureau, April 2009)
Demographics
Asian-American

Nearly two in three Asian-Americans reported having at least two credit cards. (Source: FINRA
Investor Education Foundation, "Financial Capability in the United States," December 2009)

Just 19 percent of Asian-Americans reported not having a credit card. (Source: FINRA Investor
Education Foundation, "Financial Capability in the United States," December 2009)
African-American

About one in three African-Americans -- 35 percent -- reported having at least two credit cards.
(Source: FINRA Investor Education Foundation, "Financial Capability in the United States,"
December 2009)

49 percent of African-Americans reported not having a credit card. (Source: FINRA Investor
Education Foundation, "Financial Capability in the United States," December 2009)

26 percent of Americans, or more than 58 million adults, admit to not paying all of their bills on
time. Among African-Americans, this number is at 51 percent. (Source: National Foundation for
Credit Counseling, 2009 Financial Literacy Survey, April 2009)

In 2004, of those with credit cards, 84 percent of African-American households carried credit card
debt compared with 54 percent of white households. (Source: Demos.org, "Borrowing To Make
Ends Meet," November 2007)

Over 90 percent of African-American families earning between $10,000 and $24,999 had credit
card debt. (Source: Demos.org study, November 2007)
Elderly

About 50 percent of households headed by someone between 55 and 64 carry credit card debt. And
37 percent of those headed by someone between 65 and 74 carry credit card debt. (Source:
Federal Reserve, "Survey of Consumer Finances," February 2009)

in 1991, people 55 and older accounted for 8.2 percent of bankruptcy filings. By 2007, that number
had almost tripled to 22.3 percent. (Source: AARP, "Generations of Struggle," June 2008)

Three in four cardholders age 60 or older always paid their credit card in full in the past 12
months. (Source: FINRA Investor Education Foundation, "Financial Capability in the United
States," December 2009)

80 percent of Americans 65 or older indicated they used a credit card in the month preceding the
September 2008 survey. That's 13 points higher than any other age group. They also used debit
cards far less than other age groups. Only 47 percent of those over 65 said they had used a debit
card in the month before the survey, 19 points lower than any other age group. (Source: Javelin,
"Credit Card Spending Declines" study, March 2009)

In the fourth quarter of 2008, consumers over 60 had an average balance of $763 per open
bankcard or retail accounts. A year before, that balance was $746. The year before that, it was
$735 -- meaning the average has jumped about 4 percent in 2 years. (Source: Experian marketing
insight snapshot, March 2009)

Individuals older than 60 have a significantly higher credit score than younger consumers. The
U.S. average VantageScore® is 769. The average score rises to 837 when looking solely at the
over-60 population. (Source: Experian marketing insight snapshot, March 2009)

In the fourth quarter of 2008, consumers over 60 had an average of 5.6 open bankcard and retail
accounts. The U.S. population as a whole had an average of 5.4 cards. A year before, those over 60
had 6.1 open cards and the population as a whole had 5.5. The year before that, those over 60 had
6.2 open cards and the population as a whole had 5.5. (Source: Experian marketing insight
snapshot, March 2009)
Gender

Women were 26 percent more likely to be victims of identity fraud than men in 2008. (Source:
Javelin Strategy & Research, February 2009 study.)
Hispanics

About half of Hispanics -- 44 percent -- reported having at least two credit cards. (Source: FINRA
Investor Education Foundation, "Financial Capability in the United States," December 2009)

42 percent of Hispanics reported having no credit cards. (Source: FINRA Investor Education
Foundation, "Financial Capability in the United States," December 2009)

58 percent of Hispanics have not used a credit card in the past 30 days. (Source: Experian
Consumer Research study, November 2008)

42 percent of Hispanics don't like the idea of being in debt. (Source: Experian Consumer Research
study, November 2008)

31 percent of Hispanics typically pay cash for their purchases. (Source: Experian Consumer
Research study, November 2008)
Young adults

The average person under the age of 35 got both their first credit card and their first debit card
when they were about 21 years old. (Source: "The Survey of Consumer Payment Choice," Federal
Reserve Bank of Boston, January 2010)

41 percent of cardholders from the ages of 18 to 29 made only the minimum required payment on
a credit card in some of the past 12 months. (Source: FINRA Investor Education Foundation,
"Financial Capability in the United States," December 2009)

Just 51 percent of Americans aged 18 to 24 indicated they had used a credit card in the month
preceding the September 2008 survey. 71 percent of that age group said that they had used a debit
card in the same period. (Source: Javelin, "Credit Card Spending Declines" study, March 2009)

Only 2 percent of undergraduates had no credit history. (Source: Sallie Mae, "How Undergraduate
Students Use Credit Cards," April 2009)

Eighty-four percent of the student population overall have credit cards, an increase of
approximately 11 percent since the fall of 2004. (Source: Sallie Mae, "How Undergraduate
Students Use Credit Cards," April 2009)

Undergraduates are carrying record-high credit card balances. The average (mean) balance grew to
$3,173, the highest in the years the study has been conducted. Median debt grew from 2004’s $946
to $1,645. Twenty-one percent of undergraduates had balances of between $3,000 and $7,000, also
up from the last study. (Source: Sallie Mae, "How Undergraduate Students Use Credit Cards,"
April 2009)

Half of college undergraduates had four or more credit cards in 2008. That's up from 43 percent in
2004 and just 32 percent in 2000. (Source: Sallie Mae, "How Undergraduate Students Use Credit
Cards," April 2009)

Since 2004, students who arrived on campus as freshmen with a credit card already in-hand have
increased from 23 percent to 39 percent. (Source: Sallie Mae, "How Undergraduate Students Use
Credit Cards," April 2009)

In spring of 2008, only 15 percent of freshmen had a zero balance, down dramatically from 69
percent in the fall of 2004. The median debt freshmen carried was $939, nearly triple the $373 in
2004. (Source: Sallie Mae, "How Undergraduate Students Use Credit Cards," April 2009)

Seniors graduated with an average credit card debt of more than $4,100, up from $2,900 almost
four years ago. Close to one-fifth of seniors carried balances greater than $7,000. (Source: Sallie
Mae, "How Undergraduate Students Use Credit Cards," April 2009)

Nine in 10 undergraduates reported paying for direct education expenses with credit cards—and
the average amount they charged more than doubled since the last study. (Source: Sallie Mae,
"How Undergraduate Students Use Credit Cards," April 2009)

Ninety-two percent of undergraduate credit cardholders charged textbooks, school supplies, or
other direct education expenses, up from 85 percent when the study was last conducted, in 2004.
(Source: Sallie Mae, "How Undergraduate Students Use Credit Cards," April 2009)

Nearly one-third (30 percent) put tuition on their credit card, an increase from 24 percent in the
previous study. (Source: Sallie Mae, "How Undergraduate Students Use Credit Cards," April
2009)

Students who used credit cards to pay for direct education expenses estimated charging $2,200,
more than double 2004’s average of $942. (Source: Sallie Mae, "How Undergraduate Students Use
Credit Cards," April 2009)

Sixty percent of undergrads experienced surprise at how high their balance had reached, and 40
percent said they have charged items knowing they didn’t have the money to pay the bill. (Source:
Sallie Mae, "How Undergraduate Students Use Credit Cards," April 2009)

Only 17 percent said they regularly paid off all cards each month, and another 1 percent had
parents, a spouse, or other family members paying the bill. The remaining 82 percent carried
balances and thus incurred finance charges each month. (Source: Sallie Mae, "How Undergraduate
Students Use Credit Cards," April 2009)

Two-thirds of survey respondents said they had frequently or sometimes discussed credit card use
with their parents. The remaining one-third who had never or only rarely discussed credit cards
with parents were more likely to pay for tuition with a credit card and were more likely to be
surprised at their credit card balance when they received the invoice. (Source: Sallie Mae, "How
Undergraduate Students Use Credit Cards," April 2009)

Eighty-four percent of undergraduates indicated they needed more education on financial
management topics. In fact, 64 percent would have liked to receive information in high school and
40 percent as college freshmen. (Source: Sallie Mae, "How Undergraduate Students Use Credit
Cards," April 2009)

One-fourth of the students surveyed in US PIRG's 2008 Campus Credit Card Trap report said that
they have paid a late fee, and 15 percent have paid an "over the limit" fee. (Source: U.S. PIRG,
"Campus Credit Card Trap")

74 percent of monthly college spending is with cash and debit cards. Only 7 percent is with credit
cards. (Source: Student Monitor annual financial services survey of current college students, 2008)

The average college graduate has nearly $20,000 in debt; average credit card debt has increased 47
percent between 1989 and 2004 for 25-to 34-year-olds and 11 percent for 18- to 24-year-olds.
Nearly one in five 18- to 24-year-olds is in "debt hardship," up from 12 percent in 1989. (Source:
Demos.org, "The Economic State of Young America," May 2008)
Other

76 percent of Americans aged 25 to 34 indicated they had used a debit card in the month preceding
the September 2008 survey. 63 percent of that age group said that had used a credit card in the
same period. (Source: Javelin, "Credit Card Spending Declines" study, March 2009)

Americans older than 50 are more likely to have a credit card than those 25 to 49 years old, but
tend to use them less frequently. (Source: AARP payments study, 2007)

In 2005, older consumers were significantly less likely to be victims of the ID frauds covered in
the survey. While 15.4 percent of those who were between 35 and 44 years of age were victims of
one or more of the frauds in the survey, the rate falls by to 11.0 percent for those between 55 and
64 and to 10.4 percent for those between 65 and 74. Of those who were at least 75 years of age,
only 5.6 percent were victims. (Source: Federal Trade Commission survey, October 2007)

Hispanics were 50 percent more likely than non-Hispanic whites to have been a victim of fraud in
2005, with 18.0 percent of Hispanics estimated to have been a victim of one or more frauds.
(Source: Federal Trade Commission survey, October 2007)

Discussing credit card debt is highly taboo. The topics at the top of the list of things that people
say they are very or somewhat unlikely to talk openly about with someone they just met were: The
amount of credit card debt (81 percent); details of your love life (81 percent); your salary (77
percent); the amount you pay for your monthly mortgage or rent (72 percent); your health
problems (62 percent); your weight (50 percent). (Source: CreditCards.com research, January
2009)
FEES
Credit cards

Penalty fees from credit cards will add up to about $20.5 billion in 2009, according to R. K.
Hammer, a consultant to the credit card industry. (Source: New York Times, September 2009)

From 1989 to 2004, the percentage of cardholders incurring fees due to late payments of 60 days
or more increased from 4.8 percent to 8.0 percent. (Source: Demos.org, "Borrowing To Make Ends
Meet," November 2007)

One-fourth of the students surveyed in US PIRG's 2008 Campus Credit Card Trap report said that
they have paid a late fee, and 15 percent have paid an "over the limit" fee. (Source: U.S. PIRG,
"Campus Credit Card Trap")

In the first 3 months of 2009, 27 percent of card offers carried an annual fee, up from 18 percent in
2008, according to the financial research firm Tower Group. (Source: ConsumerReports.org
Money Blog, August 2009)

Thirty-one of the 39 credit cards did not charge an annual fee. That marked a larger number of
credit cards with no annual fee than in 2008, when 35 of 41cards had no annual fee. The cost of
those fees ranged from $18 to $150. (Source: Consumer Action credit card survey, July 2009)

The average late fee was found to have risen to $28.19, way up from $25.90 in 2008. Consumer
Action reported that late fees reached up to $39 per incident. (Source: Consumer Action credit card
survey, July 2009)

92 percent of cards included a fee for exceeding the credit limit, including 100 percent of all
student cards. The amount of the overlimit fee is $39 on most accounts. (Source: Pew Safe Credit
Cards Project, March 2009)

64 percent of respondents said having "no annual fee" was an important reason why they chose the
credit card they did the last time they got a new card. (Source: Aite Group survey, January 2008)

95 percent of surveyed issuers have over-limit fees. The average over-limit fee, among institutions
with over-limit fees, is $29.13. (Source: Consumer Action credit card survey, July 2008.)
Debit cards
History

The first widely accepted plastic charge card was issued in 1958 by American Express.

The first general-use credit card that allowed balances to be paid over time was the
BankAmericard (which in 1977 changed its name to Visa), issued in 1959. (Sources: PBS
Frontline; American Express, Visa USA)

How did MasterCard begin? In 1966, a number of banks formed the Interbank Card Association.
In 1969, the Interbank Card Association bought the rights to use "Master Charge" from the
California Bank Association. It was renamed MasterCard in 1979. (Source: MasterCard.com)
Identity theft, fraud

The number of U.S. identity fraud victims rose 12 percent to 11.1 million adults last year, the
highest level since the survey began in 2003. (Source: Javelin Strategy & Research, "Identity
Fraud Survey Report," February 2010)

The average fraud resolution time dropped 30 percent to 21 hours. (Source: Javelin Strategy &
Research, "Identity Fraud Survey Report," February 2010)

Nearly half of fraud victims now file police reports, resulting in double the reported arrests, triple
the prosecutions and double the percentage of convictions in 2009. (Source: Javelin Strategy &
Research, "Identity Fraud Survey Report," February 2010)

The number of U.S. identity fraud victims increased 22 percent in 2008 to 9.9 million adults.
However, the total annual fraud amount jumped just 7 percent to $48 billion. The report said this is
because "consumers and businesses are detecting and resolving fraud more quickly." (Source:
Javelin Strategy & Research, February 2009 study.)

Women were 26 percent more likely to be victims of identity fraud than men in 2008. (Source:
Javelin Strategy & Research, February 2009 study.)

71 percent of fraud incidents "began occurring in less than one week from when the data was first
stolen, up from 33 percent in 2005." (Source: Javelin Strategy & Research, February 2009 study.)

"Lost or stolen wallets, checkbooks and credit and debit cards" made up 43 percent of all ID theft
incidents in which the "method of access" was known. (Source: Javelin Strategy & Research,
February 2009 study.)

Credit and debit card fraud is the No. 1 fear of Americans in the midst of the global financial crisis.
Concern about fraud supersedes that of terrorism, computer and health viruses and personal safety.
(Source: Unisys Security Index: United States, March 2009)

Arizona leads the nation in identity theft complaints per 100,000 people. In 2008, the state had 149
complaints about ID theft per 100,000 people. California (139.1), Florida (133.3), Texas (130.3)
and Nevada (126.0) rounded out the top five. (Source: Federal Trade Commission, February 2009
survey)

South Dakota has the fewest identity theft complaints per 100,000 people in the nation. In 2008,
the state had 33.8 complaints about ID theft per 100,000 people. North Dakota (35.7), Iowa (44.9),
Montana (46.5) and Wyoming (46.9) rounded out the bottom five. (Source: Federal Trade
Commission, February 2009 survey)

Brownsville-Harlingen, Texas, is the metropolitan area with the largest number of ID theft
complaints per 100,000 people. In 2008, the area had 366.8 complaints per 100,000 people. Napa,
Calif., was second with 351.3. (Source: Federal Trade Commission, February 2009 survey)
* - Calculated by dividing the total revolving debt in the U.S. ($852.6 billion as of March 2010 data, as
listed in the Federal Reserve's May 2010 report on consumer credit) by the estimated number of
households carrying credit card debt (54 million)
Interest rates/APRs

36 percent of respondents said they didn't know the interest rate on the card they use most often.
(Source: FINRA Investor Education Foundation, "Financial Capability in the United States,"
December 2009)

The national average default rate as January 2010 stood at 27.88 percent and the mean default rate
is 28.99 percent. (Source: CreditCards.com survey, January 2010)

Slightly more than half of Americans -- 51 percent -- said that in the past 12 months, they carried
over a balance and was charged interest on a credit card. (Source: "Financial Capability in the
United States," FINRA Investor Education Foundation, December 2009)

93 percent of cards allowed the issuer to raise any interest rate at any time by changing the account
agreement. (Source: Pew Safe Credit Cards Project, March 2009)

Only eight percent of cards with penalty rate conditions offered to restore the original rate terms
when payments are made on-time, usually after 12 months. (Source: Pew Safe Credit Cards
Project, March 2009)

72 percent of cards included offers of low promotional rates which issuers could revoke after a
single late payment. (Source: Pew Safe Credit Cards Project, March 2009)

Among 39 credit cards Consumer Action looked at from 22 financial institutions, the average
interest rate for purchases was 12.83 percent. That's a drop of more half a point from the 2008
survey results. Interest rates on purchases ranged from 4.25 percent to 22.99 percent, with the fixed
rate credit cards averaging an interest rate of 10.03 percent and the variable rate credit cards
averaging 13.20 percent. (Source: Consumer Action credit card survey, July 2009)

Average APR on new credit card offer: 14.10 percent (Source: CreditCards.com Weekly Rate
Report, May 2010.)

Average APR on credit card with a balance on it: 14.67 percent, as of February, 2010 (Source:
Federal Reserve's G.19 report on consumer credit, May 2010)
Issuers/networks
Profitability
Customer satisfaction
Market share
Circulation
Purchase/transaction volume
Online use

Seventy-one percent of survey respondents said they have logged into their credit card account via
the Internet. (Source: ComScore, December 2009)
Payment trends

About 6 percent of consumers have used a prepaid card in the past months. About 9 percent have
used one in the past year. (Source: "The Survey of Consumer Payment Choice," Federal Reserve
Bank of Boston, January 2010)

About 69 percent of consumers have used a credit card in the last month. About 73 percent have
used one in the past year. (Source: "The Survey of Consumer Payment Choice," Federal Reserve
Bank of Boston, January 2010)

About 56 percent of consumers carried an unpaid balance in the past 12 months. (Source: "The
Survey of Consumer Payment Choice," Federal Reserve Bank of Boston, January 2010)

About 45 percent of consumers said their unpaid credit card balance had gotten "lower" or "much
lower" in the past 12 months. Only 26 percent said it had gotten "higher" or "much higher."
(Source: "The Survey of Consumer Payment Choice," Federal Reserve Bank of Boston, January
2010)

"More consumers now have debit cards than credit cards, and consumers use debit cards more
often than cash, credit cards, or checks individually." (Source: "The Survey of Consumer Payment
Choice," Federal Reserve Bank of Boston, January 2010)

Nearly one in three Americans -- 29 percent -- said that in some of the past 12 months, they paid
only the minimum payment on their credit cards. (Source: "Financial Capability in the United
States," FINRA Investor Education Foundation, December 2009)

More than half of Americans -- 54 percent -- said that in the past 12 months, they always paid their
credit cards in full. (Source: "Financial Capability in the United States," FINRA Investor
Education Foundation, December 2009)

41 percent of cardholders from the ages of 18 to 29 made only the minimum required payment on
a credit card in some of the past 12 months. (Source: "Financial Capability in the United States,"
FINRA Investor Education Foundation, December 2009)

Three in four cardholders age 60 or older always paid their credit card in full in the past 12
months. (Source: "Financial Capability in the United States," FINRA Investor Education
Foundation, December 2009)

26 percent of Americans, or more than 58 million adults, admit to not paying all of their bills on
time. Among African-Americans, this number is at 51 percent. (Source: National Foundation for
Credit Counseling, 2009 Financial Literacy Survey, April 2009)

The average credit card-indebted family in 2004 allocated 21 percent of its income to servicing
monthly debt compared to the 13 percent dedicated to debt payments among all households.
(Source: Demos.org, "Borrowing To Make Ends Meet," November 2007)
58 percent of Hispanics have not used a credit card in the past 30 days. (Source: Experian
Consumer Research study, November 2008)

31 percent of Hispanics typically pay cash for their purchases. (Source: Experian Consumer
Research study, November 2008)

When finances are tight, 59 percent of people would pay their credit card bills last. A majority -52 percent -- would pay the mortgage first and 38 percent say they would pay for utilities before
paying other obligations. (Source: CreditCards.com survey, December 2008)

41 percent of college students have a credit card. Of the students with cards, about 65 percent pay
their bills in full every month, which is higher than the general adult population. (Source: Student
Monitor annual financial services study, 2008)

27 percent of U.S. families had no credit cards in 2007. (Source: Federal Reserve Board Survey of
Consumer Finances, February 2009)

One in six families with credit cards pays only the minimum due every month. (Source: Experian
national score index study, February 2007)

Of every $100 spent by consumers, nearly $40 is in a form other than cash or check. (Source: Visa
USA internal statistics, 4th quarter 2006)

28 percent of those surveyed say their ability to pay off their credit card balance has become more
difficult. (Source: Javelin Strategy & Research, "Credit Card Issuer Profitability in a Difficult
Economy," July 2008)
10 What is Prepaid cards?
Circulation

The total amount loaded for prepaid cards in 2008 (including both open-loop cards -- which are
general purpose cards that carry the American Express, Discover, MasterCard or Visa logo and can
be used wherever those cards are accepted -- and closed-loop cards -- which can only be used in
specific places) was $247.7 billion, a $27.8 billion increase over the $220.27 billion load in 2007.
That's an increase of 12.4 percent.
(Source: Mercator Advisory Group, "6th Annual Network Branded Prepaid Market Assessment,"
September 2009)

Open-loop gift cards (general purpose cards that carry the American Express, Discover,
MasterCard or Visa logo and can be used wherever those cards are accepted) continue to grow in
popularity. $60.42 billion was loaded on to open-loop prepaid cards in 2008, a 54.3 percent
increase from 2007.
(Source: Mercator Advisory Group, "6th Annual Network Branded Prepaid Market Assessment,"
September 2009)
Fees
Purchase/transaction volume
Other statistics:

Eighty percent of consumers currently own a debit card, compared to 78 percent who own a credit
card and 17 who own a prepaid card. (Source: "The Survey of Consumer Payment Choice,"
Federal Reserve Bank of Boston, January 2010)

About 6 percent of consumers have used a prepaid card in the past months. About 9 percent have
used one in the past year. (Source: "The Survey of Consumer Payment Choice," Federal Reserve
Bank of Boston, January 2010)

Eighty percent of consumers currently own a debit card, compared to 78 percent who own a credit
card and 17 who own a prepaid card. (Source: "The Survey of Consumer Payment Choice,"
Federal Reserve Bank of Boston, January 2010)
Rewards

More than one third of consumers choose which card to use in order to maximize card rewards.
(Source: ComScore, September 2008)

Two-thirds of survey respondents said they would consider switching their primary credit card if a
better feature were offered. (Source: ComScore, September 2008)

Among customers who said they would consider switching cards based on better rewards, more
than two thirds (68 percent) said that cash back would be most influential in getting them to
switch. (Source: ComScore, September 2008)
Circulation

About 60 percent of consumers have a rewards credit card. (Source: "The Survey of Consumer
Payment Choice," Federal Reserve Bank of Boston, January 2010)

Visa says rewards cards now make up more than half of all credit cards and about 80 percent of
money spent on a credit card. (Source: Aite Group, January 2008)

Consumers say rewards are the second-most important reason for choosing to apply for a specific
card, behind no annual fees and ahead of low interest rates. (Source: Aite Group survey, January
2008)
11 What is Total purchases/transactions ?
Credit cards

Today, credit cards are responsible for more than $2.5 trillion in transactions a year and are
accepted at more than 24 million locations in more than 200 countries and territories. (Source:
American Bankers Association, March 2009)

Between 1989 and 2006, the nation's total credit card charges increased from about $69 billion a
year to more than $1.8 trillion. (Source: Demos.org, April 2008)

It is estimated that there are 10,000 payment card transactions made every second around the
world. (Source: American Bankers Association, March 2009)
Latest trends in the merchant/credit card processing industry
There are a number of interesting trends I would like to share with you that are currently impacting the
merchant/credit card processing industry. If you took out housing costs, auto payments, hospital bills,
nursing home costs and rendered services, all of which are less likely to be candidates for cards, general
purpose credit/debit cards would account for approximately half of consumer expenditures.
According to a recent Visa study, in 2005 32 percent of the total volume spent by consumers with
merchants was placed on a credit card (either private label or bankissued), while 15 percent was placed on
a debit card. Today, credit cards account for more than 65 percent of all card-based purchase volume.
Although this percentage has actually declined because of an increase in debit, the total volume placed on
credit cards has increased.
Today, the average consumer has more than four credit cards and one debit card to his or her name.
Signature debit transactions occur 60 percent more often than PIN debit at the POS. However, the number
of PIN debit merchant accepting locations has continued to rise and PIN debit growth rates are actually
greater than those of signature debit. PIN debit pricing is becoming less favorable to merchants as it
begins to resemble that of signature debit and credit cards. In addition, many of the old PIN debit
networks are now owned by providers of offline debit, leaving many to speculate that PIN debit and
signature debit will soon converge.
Another area of interest and opportunity is gift cards. Gift cards have drawn the most attention from banks
given their success among the retail population and the size of the gift giving market, which is estimated at
$300 billion. Payroll cards are another opportunity as well because they can provide a gateway for banks
to the unbanked market. However, prepaid cards have proven to be difficult conquests for many banks.
UNIT IV
Syllabus
Insurance Services – Insurance Sector Reforms – Types of Insurance
Companies – Need of Insurance – Types of Insurance Policies – Role of Life
Insurance
1 What is Insurance ?
In law and economics, insurance is a form of risk management primarily used to hedge against the
risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from
one entity to another, in exchange for payment. An insurer is a company selling the insurance; an insured
or policyholder is the person or entity buying the insurance policy. The insurance rate is a factor used to
determine the amount to be charged for a certain amount of insurance coverage, called the premium. Risk
management, the practice of appraising and controlling risk, has evolved as a discrete field of study and
practice.
The transaction involves the insured assuming a guaranteed and known relatively small loss in the
form of payment to the insurer in exchange for the insurer's promise to compensate (indemnify) the
insured in the case of a large, possibly devastating loss. The insured receives a contract called the
insurance policy which details the conditions and circumstances under which the insured will be
compensated.
Insurability
Risk which can be insured by private companies typically share seven common characteristics.[2]
1. Large number of similar exposure units. Since insurance operates through pooling resources,
the majority of insurance policies are provided for individual members of large classes, allowing
insurers to benefit from the law of large numbers in which predicted losses are similar to the actual
losses. Exceptions include Lloyd's of London, which is famous for insuring the life or health of
actors, actresses and sports figures. However, all exposures will have particular differences, which
may lead to different rates.
2. Definite Loss. The loss takes place at a known time, in a known place, and from a known cause.
The classic example is death of an insured person on a life insurance policy. Fire, automobile
accidents, and worker injuries may all easily meet this criterion. Other types of losses may only be
definite in theory. Occupational disease, for instance, may involve prolonged exposure to injurious
conditions where no specific time, place or cause is identifiable. Ideally, the time, place and cause
of a loss should be clear enough that a reasonable person, with sufficient information, could
objectively verify all three elements.
3. Accidental Loss. The event that constitutes the trigger of a claim should be fortuitous, or at least
outside the control of the beneficiary of the insurance. The loss should be ‘pure,’ in the sense that
it results from an event for which there is only the opportunity for cost. Events that contain
speculative elements, such as ordinary business risks, are generally not considered insurable.
4. Large Loss. The size of the loss must be meaningful from the perspective of the insured.
Insurance premiums need to cover both the expected cost of losses, plus the cost of issuing and
administering the policy, adjusting losses, and supplying the capital needed to reasonably assure
that the insurer will be able to pay claims. For small losses these latter costs may be several times
the size of the expected cost of losses. There is hardly any point in paying such costs unless the
protection offered has real value to a buyer.
5. Affordable Premium. If the likelihood of an insured event is so high, or the cost of the event so
large, that the resulting premium is large relative to the amount of protection offered, it is not
likely that anyone will buy insurance, even if on offer. Further, as the accounting profession
formally recognizes in financial accounting standards, the premium cannot be so large that there is
not a reasonable chance of a significant loss to the insurer. If there is no such chance of loss, the
transaction may have the form of insurance, but not the substance. (See the U.S. Financial
Accounting Standards Board standard number 113)
6. Calculable Loss. There are two elements that must be at least estimable, if not formally
calculable: the probability of loss, and the attendant cost. Probability of loss is generally an
empirical exercise, while cost has more to do with the ability of a reasonable person in possession
of a copy of the insurance policy and a proof of loss associated with a claim presented under that
policy to make a reasonably definite and objective evaluation of the amount of the loss recoverable
as a result of the claim.
7. Limited risk of catastrophically large losses. Insurable losses are ideally independent and noncatastrophic, meaning that the one losses do not happen all at once and individual losses are not
severe enough to bankrupt the insurer; insurers may prefer to limit their exposure to a loss from a
single event to some small portion of their capital base, on the order of 5 percent. Capital
constrains insurers' ability to sell earthquake insurance as well as wind insurance in hurricane
zones. In the U.S., flood risk is insured by the federal government. In commercial fire insurance it
is possible to find single properties whose total exposed value is well in excess of any individual
insurer’s capital constraint. Such properties are generally shared among several insurers, or are
insured by a single insurer who syndicates the risk into the reinsurance market.
Legal
When a company insures an individual entity, there are basic legal requirements. Several commonly cited
legal principles of insurance include:[3]
1. Indemnity – the insurance company indemnifies, or compensates the insured in the case of certain
losses only up to the insured's interest
2. Insurable interest – the insured typically must directly suffer from the loss. Insurable interest
must exist whether property insurance or insurance on a person is involved. The concept requires
that the insured have a "stake" in the loss or damage to the life or property insured. What that
"stake" is will be determined by the kind of insurance involved and the nature of the property
ownership or relationship between the persons.
3. Utmost good faith – the insured and the insurer are bound by a good faith bond of honesty and
fairness. Actual facts must be disclosed.
4. Contribution – insurers which have similar obligations to the insured contribute in the
indemnification, according to some method
5. Subrogation – the insurance company acquires legal rights to pursue recoveries on behalf of the
insured; for example, the insurer may sue those liable for insured's loss
6. Causa Proxima or Proximate Cause – the cause of loss (the "peril") must be covered under the
insuring agreement of the policy, and dominant cause must not be excluded
2. How to Market insurance services?
Insurers will often use insurance agents to initially market or underwrite their customers. Agents can be
captive, meaning they write only for one company, or independent, meaning that they can issue policies
from several companies. Commission to agents represents a significant portion of an insurance cost, and
insurers selling policies directly, such as GEICO, have therefore been able to offer policyholders lower
prices. In commercial lines, companies called managing general agents sometimes assume many of the
general underwriting and claims-handling operations for the insurance company.
The existence and success of companies using insurance agents, which are most costly, has been explained
through a "market imperfections hypothesis" and a "product quality hypothesis". One study found that
companies using agents had similar profitability to companies not using agents, which it interpreted as
support for the product quality hypothesis.[12]
3. What are the Types of insurance?
Any risk that can be quantified can potentially be insured. Specific kinds of risk that may give rise to
claims are known as "perils". An insurance policy will set out in detail which perils are covered by the
policy and which are not. Below are (non-exhaustive) lists of the many different types of insurance that
exist. A single policy may cover risks in one or more of the categories set out below. For example, auto
insurance would typically cover both property risk (covering the risk of theft or damage to the car) and
liability risk (covering legal claims from causing an accident). A homeowner's insurance policy in the U.S.
typically includes property insurance covering damage to the home and the owner's belongings, liability
insurance covering certain legal claims against the owner, and even a small amount of coverage for
medical expenses of guests who are injured on the owner's property.
Business insurance can be any kind of insurance that protects businesses against risks. Some principal
subtypes of business insurance are (a) the various kinds of professional liability insurance, also called
professional indemnity insurance, which are discussed below under that name; and (b) the business
owner's policy (BOP), which bundles into one policy many of the kinds of coverage that a business owner
needs, in a way analogous to how homeowners insurance bundles the coverages that a homeowner
needs.[18]
Auto insurance
Auto insurance protects you against financial loss if you have an accident.
Auto insurance provides property, liability and medical coverage:
1. Property coverage pays for damage to or theft of the car.
2. Liability coverage pays for the legal responsibility to others for bodily injury or property damage.
3. Medical coverage pays for the cost of treating injuries, rehabilitation and sometimes lost wages
and funeral expenses.
Most countries require you to buy some, but not all, of these coverages. When a car is used as collateral
for a loan the lender usually requires specific coverage. Most auto policies are for six months to a year.
Home insurance
Home insurance provides compensation for damage or destruction of a home from disasters. In some
geographical areas, the standard insurances exclude certain types of disasters, such as flood and
earthquakes, that require additional coverage. Maintenance-related problems are the homeowners'
responsibility. The policy may include inventory, or this can be bought as a separate policy, especially for
people who rent housing. In some countries, insurers offer a package which may include liability and legal
responsibility for injuries and property damage caused by members of the household, including pets.[19]
Health
Health insurance policies by the National Health Service in the United Kingdom (NHS) or other publiclyfunded health programs will cover the cost of medical treatments. Dental insurance, like medical
insurance, is coverage for individuals to protect them against dental costs. In the U.S. and Canada, dental
insurance is often part of an employer's benefits package, along with health insurance.
Accident, Sickness and Unemployment Insurance

Disability insurance policies provide financial support in the event the policyholder is unable to
work because of disabling illness or injury. It provides monthly support to help pay such
obligations as mortgage loans and credit cards. Short-term and long-term disability policies are
available to individuals, but considering the expense, long-term policies are generally obtained
only by those with at least six-figure incomes, such as doctors, lawyers, etc. Short-term disability
insurance covers a person for a period generally up to six months, paying a stipend each month to
cover medical bills and other necessities.

Long-term disability insurance covers an individual's expenses for the long term, up until such
time as they are considered permanently disabled and thereafter. Insurance companies will often
try to find other ways to employ the person and reintegrate them back into the work force in
preference to and before declaring them unable to work at all and therefore totally disabled.
Insurance companies, for obvious reasons, frequently go to great lengths, including undercover
surveillance via videocam and repeated independent medical evaluations by company doctors, in
hopes of avoiding the necessity of paying permanent disability stipends to a claimant.

Disability overhead insurance allows business owners to cover the overhead expenses of their
business while they are unable to work.

Total permanent disability insurance provides benefits when a person is permanently disabled and
can no longer work in their profession, often taken as an adjunct to life insurance.

Workers' compensation insurance replaces all or part of a worker's wages lost and accompanying
medical expenses incurred because of a job-related injury.
Casualty
Casualty insurance insures against accidents, not necessarily tied to any specific property.
Main article: Casualty insurance

Crime insurance is a form of casualty insurance that covers the policyholder against losses arising
from the criminal acts of third parties. For example, a company can obtain crime insurance to
cover losses arising from theft or embezzlement.

Political risk insurance is a form of casualty insurance that can be taken out by businesses with
operations in countries in which there is a risk that revolution or other political conditions will
result in a loss.
Life
Main article: Life insurance
Life insurance provides a monetary benefit to a decedent's family or other designated beneficiary, and may
specifically provide for income to an insured person's family, burial, funeral and other final expenses. Life
insurance policies often allow the option of having the proceeds paid to the beneficiary either in a lump
sum cash payment or an annuity.
Annuities provide a stream of payments and are generally classified as insurance because they are issued
by insurance companies and regulated as insurance and require the same kinds of actuarial and investment
management expertise that life insurance requires. Annuities and pensions that pay a benefit for life are
sometimes regarded as insurance against the possibility that a retiree will outlive his or her financial
resources. In that sense, they are the complement of life insurance and, from an underwriting perspective,
are the mirror image of life insurance.
Certain life insurance contracts accumulate cash values, which may be taken by the insured if the policy is
surrendered or which may be borrowed against. Some policies, such as annuities and endowment policies,
are financial instruments to accumulate or liquidate wealth when it is needed.
In many countries, such as the U.S. and the UK, the tax law provides that the interest on this cash value is
not taxable under certain circumstances. This leads to widespread use of life insurance as a tax-efficient
method of saving as well as protection in the event of early death.
In U.S., the tax on interest income on life insurance policies and annuities is generally deferred. However,
in some cases the benefit derived from tax deferral may be offset by a low return. This depends upon the
insuring company, the type of policy and other variables (mortality, market return, etc.). Moreover, other
income tax saving vehicles (e.g., IRAs, 401(k) plans, Roth IRAs) may be better alternatives for value
accumulation.
Property
This tornado damage to an Illinois home would be considered an "Act of God" for insurance purposes
Property insurance provides protection against risks to property, such as fire, theft or weather damage.
This includes specialized forms of insurance such as fire insurance, flood insurance, earthquake insurance,
home insurance, inland marine insurance or boiler insurance.

Automobile insurance, known in the UK as motor insurance, is probably the most common form
of insurance and may cover both legal liability claims against the driver and loss of or damage to
the insured's vehicle itself. Throughout the United States an auto insurance policy is required to
legally operate a motor vehicle on public roads. In some jurisdictions, bodily injury compensation
for automobile accident victims has been changed to a no-fault system, which reduces or
eliminates the ability to sue for compensation but provides automatic eligibility for benefits. Credit
card companies insure against damage on rented cars.
o
Driving School Insurance provides cover for any authorized driver whilst undergoing
tuition, cover also unlike other motor policies provides cover for instructor liability where
both the pupil and driving instructor are equally liable in the event of a claim.

Aviation insurance insures against hull, spares, deductibles, hull wear and liability risks.

Boiler insurance (also known as boiler and machinery insurance or equipment breakdown
insurance) insures against accidental physical damage to equipment or machinery.

Builder's risk insurance insures against the risk of physical loss or damage to property during
construction. Builder's risk insurance is typically written on an "all risk" basis covering damage
due to any cause (including the negligence of the insured) not otherwise expressly excluded.
Builder's risk insurance is coverage that protects a person's or organization's insurable interest in
materials, fixtures and/or equipment being used in the construction or renovation of a building or
structure should those items sustain physical loss or damage from a covered cause.[20]

Crop insurance "Farmers use crop insurance to reduce or manage various risks associated with
growing crops. Such risks include crop loss or damage caused by weather, hail, drought, frost
damage, insects, or disease, for instance."[21]

Earthquake insurance is a form of property insurance that pays the policyholder in the event of an
earthquake that causes damage to the property. Most ordinary homeowners insurance policies do
not cover earthquake damage. Most earthquake insurance policies feature a high deductible. Rates
depend on location and the probability of an earthquake, as well as the construction of the home.

A fidelity bond is a form of casualty insurance that covers policyholders for losses that they incur
as a result of fraudulent acts by specified individuals. It usually insures a business for losses caused
by the dishonest acts of its employees.

Flood insurance protects against property loss due to flooding. Many insurers in the U.S. do not
provide flood insurance in some portions of the country. In response to this, the federal
government created the National Flood Insurance Program which serves as the insurer of last
resort.

Home insurance, also commonly called hazard insurance or homeowners insurance (often
abbreviated in the real estate industry as HOI), is the type of property insurance that covers private
homes.

Landlord insurance covers residential and commercial properties which are rented to others. Most
homeowner's insurance covers only owner-occupied homes.

Marine insurance and marine cargo insurance cover the loss or damage of ships at sea or on inland
waterways, and of cargo in transit, regardless of the method of transit. When the owner of the
cargo and the carrier are separate corporations, marine cargo insurance typically compensates the
owner of cargo for losses sustained from fire, shipwreck, etc., but excludes losses that can be
recovered from the carrier or the carrier's insurance. Many marine insurance underwriters will
include "time element" coverage in such policies, which extends the indemnity to cover loss of
profit and other business expenses attributable to the delay caused by a covered loss.

Supplemental natural disaster insurance covers specified expenses after a natural disaster renders
the policyholder's home uninhabitable. Periodic payments are made directly to the insured until the
home is rebuilt or a specified time period has elapsed.

Surety bond insurance is a three party insurance guaranteeing the performance of the principal.

Terrorism insurance provides protection against any loss or damage caused by terrorist activities.

Volcano insurance is an insurance that covers volcano damage in Hawaii.

Windstorm insurance is an insurance covering the damage that can be caused by hurricanes and
tropical cyclones.
Liability
Main article: Liability insurance
Liability insurance is a very broad superset that covers legal claims against the insured. Many types of
insurance include an aspect of liability coverage. For example, a homeowner's insurance policy will
normally include liability coverage which protects the insured in the event of a claim brought by someone
who slips and falls on the property; automobile insurance also includes an aspect of liability insurance that
indemnifies against the harm that a crashing car can cause to others' lives, health, or property. The
protection offered by a liability insurance policy is twofold: a legal defense in the event of a lawsuit
commenced against the policyholder and indemnification (payment on behalf of the insured) with respect
to a settlement or court verdict. Liability policies typically cover only the negligence of the insured, and
will not apply to results of wilful or intentional acts by the insured.

Public liability insurance covers a business against claims should its operations injure a member of
the public or damage their property in some way.

Directors and officers liability insurance protects an organization (usually a corporation) from
costs associated with litigation resulting from mistakes made by directors and officers for which
they are liable. In the industry, it is usually called "D&O" for short.

Environmental liability insurance protects the insured from bodily injury, property damage and
cleanup costs as a result of the dispersal, release or escape of pollutants.

Errors and omissions insurance: See "Professional liability insurance" under "Liability insurance".

Prize indemnity insurance protects the insured from giving away a large prize at a specific event.
Examples would include offering prizes to contestants who can make a half-court shot at a
basketball game, or a hole-in-one at a golf tournament.

Professional liability insurance, also called professional indemnity insurance, protects insured
professionals such as architectural corporation and medical practice against potential negligence
claims made by their patients/clients. Professional liability insurance may take on different names
depending on the profession. For example, professional liability insurance in reference to the
medical profession may be called malpractice insurance. Notaries public may take out errors and
omissions insurance (E&O). Other potential E&O policyholders include, for example, real estate
brokers, Insurance agents, home inspectors, appraisers, and website developers.
Credit
Main article: Credit insurance
Credit insurance repays some or all of a loan when certain things happen to the borrower such as
unemployment, disability, or death.

Mortgage insurance insures the lender against default by the borrower. Mortgage insurance is a
form of credit insurance, although the name credit insurance more often is used to refer to policies
that cover other kinds of debt.

Many credit cards offer payment protection plans which are a form of credit insurance.
Other types

All-risk insurance is an insurance that covers a wide-range of incidents and perils, except those
noted in the policy. All-risk insurance is different from peril-specific insurance that cover losses
from only those perils listed in the policy.[22] In car insurance, all-risk policy includes also the
damages caused by the own driver.

Business interruption insurance covers the loss of income, and the expenses occurred, after a
covered peril interrupts normal business operations.

Collateral protection insurance or CPI, insures property (primarily vehicles) held as collateral for
loans made by lending institutions.

Defense Base Act Workers' compensation or DBA Insurance provides coverage for civilian
workers hired by the government to perform contracts outside the U.S. and Canada. DBA is
required for all U.S. citizens, U.S. residents, U.S. Green Card holders, and all employees or
subcontractors hired on overseas government contracts. Depending on the country, Foreign
Nationals must also be covered under DBA. This coverage typically includes expenses related to
medical treatment and loss of wages, as well as disability and death benefits.

Expatriate insurance provides individuals and organizations operating outside of their home
country with protection for automobiles, property, health, liability and business pursuits.

Financial loss insurance or Business Interruption Insurance protects individuals and companies
against various financial risks. For example, a business might purchase coverage to protect it from
loss of sales if a fire in a factory prevented it from carrying out its business for a time. Insurance
might also cover the failure of a creditor to pay money it owes to the insured. This type of
insurance is frequently referred to as "business interruption insurance." Fidelity bonds and surety
bonds are included in this category, although these products provide a benefit to a third party (the
"obligee") in the event the insured party (usually referred to as the "obligor") fails to perform its
obligations under a contract with the obligee.

Kidnap and ransom insurance

Legal expenses insurance covers policyholders against the potential costs of legal action against an
institution or an individual. When something happens which triggers the need for legal action, it is
known as ‘the event'. There are two main types of legal expenses insurance, Before the event
insurance and After the event insurance.

Locked funds insurance is a little-known hybrid insurance policy jointly issued by governments
and banks. It is used to protect public funds from tamper by unauthorized parties. In special cases,
a government may authorize its use in protecting semi-private funds which are liable to tamper.
The terms of this type of insurance are usually very strict. Therefore it is used only in extreme
cases where maximum security of funds is required.

Media Insurance is designed to cover professionals that engage in film, video and TV production.

Nuclear incident insurance covers damages resulting from an incident involving radioactive
materials and is generally arranged at the national level. See the Nuclear exclusion clause and for
the United States the Price-Anderson Nuclear Industries Indemnity Act)

Pet insurance insures pets against accidents and illnesses - some companies cover routine/wellness
care and burial, as well.

Pollution Insurance which consists of first-party coverage for contamination of insured property
either by external or on-site sources. Coverage for liability to third parties arising from
contamination of air, water, or land due to the sudden and accidental release of hazardous materials
from the insured site. The policy usually covers the costs of cleanup and may include coverage for
releases from underground storage tanks. Intentional acts are specifically excluded.

Purchase insurance is aimed at providing protection on the products people purchase. Purchase
insurance can cover individual purchase protection, warranties, guarantees, care plans and even
mobile phone insurance. Such insurance is normally very limited in the scope of problems that are
covered by the policy.

Title insurance provides a guarantee that title to real property is vested in the purchaser and/or
mortgagee, free and clear of liens or encumbrances. It is usually issued in conjunction with a
search of the public records performed at the time of a real estate transaction.

Travel insurance is an insurance cover taken by those who travel abroad, which covers certain
losses such as medical expenses, loss of personal belongings, travel delay, personal liabilities, etc.
Insurance financing vehicles

Fraternal insurance is provided on a cooperative basis by fraternal benefit societies or other social
organizations.[23]

No-fault insurance is a type of insurance policy (typically automobile insurance) where insureds
are indemnified by their own insurer regardless of fault in the incident.

Protected Self-Insurance is an alternative risk financing mechanism in which an organization
retains the mathematically calculated cost of risk within the organization and transfers the
catastrophic risk with specific and aggregate limits to an insurer so the maximum total cost of the
program is known. A properly designed and underwritten Protected Self-Insurance Program
reduces and stabilizes the cost of insurance and provides valuable risk management information.

Retrospectively Rated Insurance is a method of establishing a premium on large commercial
accounts. The final premium is based on the insured's actual loss experience during the policy
term, sometimes subject to a minimum and maximum premium, with the final premium
determined by a formula. Under this plan, the current year's premium is based partially (or wholly)
on the current year's losses, although the premium adjustments may take months or years beyond
the current year's expiration date. The rating formula is guaranteed in the insurance contract.
Formula: retrospective premium = converted loss + basic premium × tax multiplier. Numerous
variations of this formula have been developed and are in use.

Formal self insurance is the deliberate decision to pay for otherwise insurable losses out of one's
own money. This can be done on a formal basis by establishing a separate fund into which funds
are deposited on a periodic basis, or by simply forgoing the purchase of available insurance and
paying out-of-pocket. Self insurance is usually used to pay for high-frequency, low-severity losses.
Such losses, if covered by conventional insurance, mean having to pay a premium that includes
loadings for the company's general expenses, cost of putting the policy on the books, acquisition
expenses, premium taxes, and contingencies. While this is true for all insurance, for small, frequent
losses the transaction costs may exceed the benefit of volatility reduction that insurance otherwise
affords.

Reinsurance is a type of insurance purchased by insurance companies or self-insured employers to
protect against unexpected losses. Financial reinsurance is a form of reinsurance that is primarily
used for capital management rather than to transfer insurance risk.

Social insurance can be many things to many people in many countries. But a summary of its
essence is that it is a collection of insurance coverages (including components of life insurance,
disability income insurance, unemployment insurance, health insurance, and others), plus
retirement savings, that requires participation by all citizens. By forcing everyone in society to be a
policyholder and pay premiums, it ensures that everyone can become a claimant when or if he/she
needs to. Along the way this inevitably becomes related to other concepts such as the justice
system and the welfare state. This is a large, complicated topic that engenders tremendous debate,
which can be further studied in the following articles (and others):

o
National Insurance
o
Social safety net
o
Social security
o
Social Security debate (United States)
o
Social Security (United States)
o
Social welfare provision
Stop-loss insurance provides protection against catastrophic or unpredictable losses. It is purchased
by organizations who do not want to assume 100% of the liability for losses arising from the plans.
Under a stop-loss policy, the insurance company becomes liable for losses that exceed certain
limits called deductibles.
Closed community self-insurance
Some communities prefer to create virtual insurance amongst themselves by other means than contractual
risk transfer, which assigns explicit numerical values to risk. A number of religious groups, including the
Amish and some Muslim groups, depend on support provided by their communities when disasters strike.
The risk presented by any given person is assumed collectively by the community who all bear the cost of
rebuilding lost property and supporting people whose needs are suddenly greater after a loss of some kind.
In supportive communities where others can be trusted to follow community leaders, this tacit form of
insurance can work. In this manner the community can even out the extreme differences in insurability
that exist among its members. Some further justification is also provided by invoking the moral hazard of
explicit insurance contracts.
In the United Kingdom, The Crown (which, for practical purposes, meant the Civil service) did not insure
property such as government buildings. If a government building was damaged, the cost of repair would
be met from public funds because, in the long run, this was cheaper than paying insurance premiums.
Since many UK government buildings have been sold to property companies, and rented back, this
arrangement is now less common and may have disappeared altogether.
4 . What are the Insurance companies?
Insurance companies may be classified into two groups:

Life insurance companies, which sell life insurance, annuities and pensions products.

Non-life, General, or Property/Casualty insurance companies, which sell other types of insurance.
General insurance companies can be further divided into these sub categories.

Standard Lines

Excess Lines
In most countries, life and non-life insurers are subject to different regulatory regimes and different tax
and accounting rules. The main reason for the distinction between the two types of company is that life,
annuity, and pension business is very long-term in nature — coverage for life assurance or a pension can
cover risks over many decades. By contrast, non-life insurance cover usually covers a shorter period, such
as one year.
In the United States, standard line insurance companies are "mainstream" insurers. These are the
companies that typically insure autos, homes or businesses. They use pattern or "cookie-cutter" policies
without variation from one person to the next. They usually have lower premiums than excess lines and
can sell directly to individuals. They are regulated by state laws that can restrict the amount they can
charge for insurance policies.
Excess line insurance companies (also known as Excess and Surplus) typically insure risks not covered by
the standard lines market. They are broadly referred as being all insurance placed with non-admitted
insurers. Non-admitted insurers are not licensed in the states where the risks are located. These companies
have more flexibility and can react faster than standard insurance companies because they are not required
to file rates and forms as the "admitted" carriers do. However, they still have substantial regulatory
requirements placed upon them. State laws generally require insurance placed with surplus line agents and
brokers not to be available through standard licensed insurers.
Insurance companies are generally classified as either mutual or stock companies. Mutual companies are
owned by the policyholders, while stockholders (who may or may not own policies) own stock insurance
companies. Demutualization of mutual insurers to form stock companies, as well as the formation of a
hybrid known as a mutual holding company, became common in some countries, such as the United
States, in the late 20th century.
Other possible forms for an insurance company include reciprocals, in which policyholders 'reciprocate' in
sharing risks, and Lloyd's organizations.
Insurance companies are rated by various agencies such as A. M. Best. The ratings include the company's
financial strength, which measures its ability to pay claims. It also rates financial instruments issued by the
insurance company, such as bonds, notes, and securitization products.
Reinsurance companies are insurance companies that sell policies to other insurance companies, allowing
them to reduce their risks and protect themselves from very large losses. The reinsurance market is
dominated by a few very large companies, with huge reserves. A reinsurer may also be a direct writer of
insurance risks as well.
Captive insurance companies may be defined as limited-purpose insurance companies established with the
specific objective of financing risks emanating from their parent group or groups. This definition can
sometimes be extended to include some of the risks of the parent company's customers. In short, it is an
in-house self-insurance vehicle. Captives may take the form of a "pure" entity (which is a 100% subsidiary
of the self-insured parent company); of a "mutual" captive (which insures the collective risks of members
of an industry); and of an "association" captive (which self-insures individual risks of the members of a
professional, commercial or industrial association). Captives represent commercial, economic and tax
advantages to their sponsors because of the reductions in costs they help create and for the ease of
insurance risk management and the flexibility for cash flows they generate. Additionally, they may
provide coverage of risks which is neither available nor offered in the traditional insurance market at
reasonable prices.
The types of risk that a captive can underwrite for their parents include property damage, public and
product liability, professional indemnity, employee benefits, employers' liability, motor and medical aid
expenses. The captive's exposure to such risks may be limited by the use of reinsurance.
Captives are becoming an increasingly important component of the risk management and risk financing
strategy of their parent. This can be understood against the following background:

heavy and increasing premium costs in almost every line of coverage;

difficulties in insuring certain types of fortuitous risk;

differential coverage standards in various parts of the world;

rating structures which reflect market trends rather than individual loss experience;

insufficient credit for deductibles and/or loss control efforts.
There are also companies known as 'insurance consultants'. Like a mortgage broker, these companies are
paid a fee by the customer to shop around for the best insurance policy amongst many companies. Similar
to an insurance consultant, an 'insurance broker' also shops around for the best insurance policy amongst
many companies. However, with insurance brokers, the fee is usually paid in the form of commission
from the insurer that is selected rather than directly from the client.
Neither insurance consultants nor insurance brokers are insurance companies and no risks are transferred
to them in insurance transactions. Third party administrators are companies that perform underwriting and
sometimes claims handling services for insurance companies. These companies often have special
expertise that the insurance companies do not have.
The financial stability and strength of an insurance company should be a major consideration when buying
an insurance contract. An insurance premium paid currently provides coverage for losses that might arise
many years in the future. For that reason, the viability of the insurance carrier is very important. In recent
years, a number of insurance companies have become insolvent, leaving their policyholders with no
coverage (or coverage only from a government-backed insurance pool or other arrangement with less
attractive payouts for losses). A number of independent rating agencies provide information and rate the
financial viability of insurance companies.
Non-life insurance premiums written in 2005
Global insurance premiums grew by 3.4% in 2008 to reach $4.3 trillion. For the first time in the past three
decades, premium income declined in inflation-adjusted terms, with non-life premiums falling by 0.8%
and life premiums falling by 3.5%. The insurance industry is exposed to the global economic downturn on
the assets side by the decline in returns on investments and on the liabilities side by a rise in claims. So far
the extent of losses on both sides has been limited although investment returns fell sharply following the
bankruptcy of Lehman Brothers and bailout of AIG in September 2008. The financial crisis has shown
that the insurance sector is sufficiently capitalised. The vast majority of insurance companies had enough
capital to absorb losses and only a small number turned to government for support.
Advanced economies account for the bulk of global insurance. With premium income of $1,753bn,
Europe was the most important region in 2008, followed by North America $1,346bn and Asia $933bn.
The top four countries generated more than a half of premiums. The US and Japan alone accounted for
40% of world insurance, much higher than their 7% share of the global population. Emerging markets
accounted for over 85% of the world’s population but generated only around 10% of premiums. Their
markets are however growing at a quicker pace.[24]
Regulatory differences
In the United States, insurance is regulated by the states under the McCarran-Ferguson Act, with "periodic
proposals for federal intervention", and a nonprofit coalition of state insurance agencies called the
National Association of Insurance Commissioners works to harmonize the country's different laws and
regulations.[25] The National Conference of Insurance Legislators (NCOIL) also works to harmonize the
different state laws.[26]
In the European Union, the Third Non-Life Directive and the Third Life Directive, both passed in 1992
and effective 1994, created a single insurance market in Europe and allowed insurance companies to offer
insurance anywhere in the EU (subject to permission from authority in the head office) and allowed
insurance consumers to purchase insurance from any insurer in the EU.[27]
The insurance industry in China was nationalized in 1949 and thereafter offered by only a single stateowned company, the People's Insurance Company of China, which was eventually suspended as demand
declined in a communist environment. In 1978, market reforms led to an increase in the market and by
1995 a comprehensive Insurance Law of the People's Republic of China[28] was passed, followed in 1998
by the formation of China Insurance Regulatory Commission (CIRC), which has broad regulatory
authority over the insurance market of China.[29]
Controversies
Religious concerns
Muslim scholars have varying opinions about insurance. Insurance policies that earn interest are generally
considered to be a form of riba[30] (usury) and some consider even policies that do not earn interest to be a
form of gharar (speculation). Some argue that gharar is not present due to the actuarial science behind the
underwriting.[31]
Jewish rabbinical scholars also have expressed reservations regarding insurance as an avoidance of God's
will but most find it acceptable in moderation.[32]
Some Christians believe insurance represents a lack of faith[33] and there is a long history of resistance to
commercial insurance in Anabaptist communities (Mennonites, Amish, Hutterites, Brethren in Christ) but
many participate in community-based self-insurance programs that spread risk within their
communities.[34][35][36]
Insurance insulates too much
By creating a "security blanket" for its insureds, an insurance company may inadvertently find that its
insureds may not be as risk-averse as they might otherwise be (since, by definition, the insured has
transferred the risk to the insurer), a concept known as moral hazard. To reduce their own financial
exposure, insurance companies have contractual clauses that mitigate their obligation to provide coverage
if the insured engages in behavior that grossly magnifies their risk of loss or liability.[citation needed]
For example, life insurance companies may require higher premiums or deny coverage altogether to
people who work in hazardous occupations or engage in dangerous sports. Liability insurance providers
do not provide coverage for liability arising from intentional torts committed by or at the direction of the
insured. Even if a provider were so irrational as to want to provide such coverage, it is against the public
policy of most countries to allow such insurance to exist, and thus it is usually illegal.[citation needed]
Complexity of insurance policy contracts
Insurance policies can be complex and some policyholders may not understand all the fees and coverages
included in a policy. As a result, people may buy policies on unfavorable terms. In response to these
issues, many countries have enacted detailed statutory and regulatory regimes governing every aspect of
the insurance business, including minimum standards for policies and the ways in which they may be
advertised and sold.
For example, most insurance policies in the English language today have been carefully drafted in plain
English; the industry learned the hard way that many courts will not enforce policies against insureds
when the judges themselves cannot understand what the policies are saying. Typically, courts construe
ambiguities in insurance policies against the insurance company and in favor of coverage under the policy.
Many institutional insurance purchasers buy insurance through an insurance broker. While on the surface
it appears the broker represents the buyer (not the insurance company), and typically counsels the buyer
on appropriate coverage and policy limitations, it should be noted that in the vast majority of cases a
broker's compensation comes in the form of a commission as a percentage of the insurance premium,
creating a conflict of interest in that the broker's financial interest is tilted towards encouraging an insured
to purchase more insurance than might be necessary at a higher price. A broker generally holds contracts
with many insurers, thereby allowing the broker to "shop" the market for the best rates and coverage
possible.
Insurance may also be purchased through an agent. Unlike a broker, who represents the policyholder, an
agent represents the insurance company from whom the policyholder buys. Just as there is a potential
conflict of interest with a broker, an agent has a different type of conflict. Because agents work directly
for the insurance company, if there is a claim the agent may advise the client to the benefit of the
insurance company. It should also be noted that agents generally can not offer as broad a range of
selection compared to an insurance broker.
An independent insurance consultant advises insureds on a fee-for-service retainer, similar to an attorney,
and thus offers completely independent advice, free of the financial conflict of interest of brokers and/or
agents. However, such a consultant must still work through brokers and/or agents in order to secure
coverage for their clients.
Redlining
Redlining is the practice of denying insurance coverage in specific geographic areas, supposedly because
of a high likelihood of loss, while the alleged motivation is unlawful discrimination. Racial profiling or
redlining has a long history in the property insurance industry in the United States. From a review of
industry underwriting and marketing materials, court documents, and research by government agencies,
industry and community groups, and academics, it is clear that race has long affected and continues to
affect the policies and practices of the insurance industry.[37]
In July, 2007, The Federal Trade Commission (FTC) released a report presenting the results of a study
concerning credit-based insurance scores in automobile insurance. The study found that these scores are
effective predictors of risk. It also showed that African-Americans and Hispanics are substantially
overrepresented in the lowest credit scores, and substantially underrepresented in the highest, while
Caucasians and Asians are more evenly spread across the scores. The credit scores were also found to
predict risk within each of the ethnic groups, leading the FTC to conclude that the scoring models are not
solely proxies for redlining. The FTC indicated little data was available to evaluate benefit of insurance
scores to consumers. [38] The report was disputed by representatives of the Consumer Federation of
America, the National Fair Housing Alliance, the National Consumer Law Center, and the Center for
Economic Justice, for relying on data provided by the insurance industry. [39]
All states have provisions in their rate regulation laws or in their fair trade practice acts that prohibit unfair
discrimination, often called redlining, in setting rates and making insurance available.[40]
In determining premiums and premium rate structures, insurers consider quantifiable factors, including
location, credit scores, gender, occupation, marital status, and education level. However, the use of such
factors is often considered to be unfair or unlawfully discriminatory, and the reaction against this practice
has in some instances led to political disputes about the ways in which insurers determine premiums and
regulatory intervention to limit the factors used.
An insurance underwriter's job is to evaluate a given risk as to the likelihood that a loss will occur. Any
factor that causes a greater likelihood of loss should theoretically be charged a higher rate. This basic
principle of insurance must be followed if insurance companies are to remain solvent.[citation needed] Thus,
"discrimination" against (i.e., negative differential treatment of) potential insureds in the risk evaluation
and premium-setting process is a necessary by-product of the fundamentals of insurance underwriting. For
instance, insurers charge older people significantly higher premiums than they charge younger people for
term life insurance. Older people are thus treated differently than younger people (i.e., a distinction is
made, discrimination occurs). The rationale for the differential treatment goes to the heart of the risk a life
insurer takes: Old people are likely to die sooner than young people, so the risk of loss (the insured's
death) is greater in any given period of time and therefore the risk premium must be higher to cover the
greater risk. However, treating insureds differently when there is no actuarially sound reason for doing so
is unlawful discrimination.
What is often missing from the debate is that prohibiting the use of legitimate, actuarially sound factors
means that an insufficient amount is being charged for a given risk, and there is thus a deficit in the
system.[citation needed] The failure to address the deficit may mean insolvency and hardship for all of a
company's insureds.[citation needed] The options for addressing the deficit seem to be the following: Charge
the deficit to the other policyholders or charge it to the government (i.e., externalize outside of the
company to society at large).[citation needed]
5. What is Insurance patents?
Further information: Insurance patent
New assurance products can now be protected from copying with a business method patent in the United
States.
A recent example of a new insurance product that is patented is Usage Based auto insurance. Early
versions were independently invented and patented by a major U.S. auto insurance company, Progressive
Auto Insurance (U.S. Patent 5,797,134) and a Spanish independent inventor, Salvador Minguijon Perez
(EP patent 0700009).
Many independent inventors are in favor of patenting new insurance products since it gives them
protection from big companies when they bring their new insurance products to market. Independent
inventors account for 70% of the new U.S. patent applications in this area.
Many insurance executives are opposed to patenting insurance products because it creates a new risk for
them. The Hartford insurance company, for example, recently had to pay $80 million to an independent
inventor, Bancorp Services, in order to settle a patent infringement and theft of trade secret lawsuit for a
type of corporate owned life insurance product invented and patented by Bancorp.
There are currently about 150 new patent applications on insurance inventions filed per year in the United
States. The rate at which patents have issued has steadily risen from 15 in 2002 to 44 in 2006.[41]
Inventors can now have their insurance U.S. patent applications reviewed by the public in the Peer to
Patent program.[42] The first insurance patent application to be posted was US2009005522 “Risk
assessment company”. It was posted on March 6, 2009. This patent application describes a method for
increasing the ease of changing insurance companies.[43]
The insurance industry and rent seeking
Certain insurance products and practices have been described as rent seeking by critics.[citation needed] That is,
some insurance products or practices are useful primarily because of legal benefits, such as reducing taxes,
as opposed to providing protection against risks of adverse events. Under United States tax law, for
example, most owners of variable annuities and variable life insurance can invest their premium payments
in the stock market and defer or eliminate paying any taxes on their investments until withdrawals are
made. Sometimes this tax deferral is the only reason people use these products.[citation needed] Another
example is the legal infrastructure which allows life insurance to be held in an irrevocable trust which is
used to pay an estate tax while the proceeds themselves are immune from the estate tax.
6.The Role Of Life Insurance?
Insurance's Role in Your Financial Plan
Insurance is one of life's necessities and probably the least-understood financial product. Insurance
reimburses people for covered losses in the event of an unfortunate occurrence such as an illness, accident,
or death. At the same time, it can encourage prevention and safety measures, provide investment capital,
lend money, and help to reduce anxiety for society at large.
As a mechanism against loss of income and a means of safeguarding assets, most Americans have
insurance in one form or another. These coverage's may include public coverage, such as disability
insurance under Social Security, a health care policy from an employer, or personal insurance to protect
property such as computers, homes, and cars.
You may save money in your pension and other investments and have capital in your home. But if you
don't know exactly what your life insurance policy covers or have only glanced at your employer-provided
health and disability insurance policies, you're neglecting an important aspect of your financial plan.
Until something happens, such as a car accident, an illness, or the death of a loved one, paying for
insurance may seem like buying something you'll never use. But even if you never submit a claim,
insurance is an investment in your future, as important as pensions and personal investments. Indeed,
many financial planners argue that you should have an adequate insurance safety net in place before
considering investment strategies.
The function of insurance is to protect you against losses you can't afford. This is done by transferring the
risks of a person, business, or organization -- the "insured" -- to an insurance company, or "insurer." The
insurer then reimburses the insured for "covered" losses - i.e., those losses it pays for under the policy's
terms.
As the insurance consumer, you pay an amount of money, called a premium, to the insurer to transfer the
risk. The insurer pools all its premiums into a large fund, and when a policyholder has a loss, the insurer
draws funds from the pool to pay for the loss.
Life is full of unexpected events that can create large financial losses. For example, whenever you drive, it
is possible that you may have a costly accident. Risks affect you by causing worry about potential loss and
how to deal with the consequences. Insurance reduces anxiety over a possible loss and absorbs the
financial brunt of its consequences.
However, while insurance coverage is essential, how much and what type of insurance people need differ
with each individual. You must decide how much risk you're willing to tolerate without insurance. For
example, benefits for disability policies typically begin after a waiting period of one to six months.
Therefore, you should ensure that you have some form of coverage or financial resources before the policy
period begins.
7.Where to Get Insurance?
Since insurance can be expensive, it makes sense to get more than one price quote for coverage. There are
several companies selling any one type of insurance, each with its own price structures, coverage, and
policy exclusions. To help consumers choose among the various types of coverages, companies train sales
representatives in the technical points of their insurance products. Many representatives work for just one
insurance company. There are also brokers and independent insurance professionals -- self-employed
business people who sell insurance on commission for several insurers -- who claim they can comparison
shop to get the best coverages for consumers. Banks also sell insurance in certain states.
Insurance can also be sold without an insurance professional by companies called direct writers of
insurance. At QuickQuote, our insurance is sold by our counselors over the phone or on the Website,
quickquote.com. They are not commissioned sales agents. You can call the QuickQuote Insurance
Planning and Service Center at 1-800-867-2404.
When buying insurance, the first rule is to select an insurance company before choosing an insurance
professional. Whether or not an insurer is a direct writer of insurance or an independent agency company
is less important than its financial stability, coverage price, and service. To determine a company's
willingness to pay claims, ask a policyholder who has filed several claims. Another good source of
information is your state insurance department, which can tell you the percentage of an insurer's claims
that are administered without complaints. Obviously, the more claims an insurer has handled with no
complaints, the more likely that the company will provide you with good service. To determine an
insurer's financial solvency, go to quickquote.com and click on "Resource Center".
A.M. Best Company, Standard & Poor's Insurance Rating Services, Moody's Investors Service, and Duff
& Phelps Credit Rating Co. are major rating companies that analyze the financial strength of insurance
companies. Get ratings on insurers from each firm and compare them.
Filing an Insurance Claim
Find out the required documents, the time your insurer needs to process the claim, and whether you're
covered for the entire loss. Make copies of all documents and file them in a safe place. Also, be sure to
keep a record of all your expenses; your insurance company may reimburse you for them if they are
considered to be part of the claim.
Finally, stay on top of the situation. Keep your insurer informed of the progress of its claims-paying
mechanism. If the insurer won't budge, contact your state insurance department to assist you with your
complaint.
ABSTRACT
It is worth interesting to note that the origin of the concept of insurance is very old and dates back almost
4500 years ago in the ancient empire of Babylonia. This concept prevailed and developed during the
medieval period in Europe. The emphasis of insurance was on traders' merchants and seafarers in marine
industries at that time to provide them safety in terms of money against certain unseen risks including
death. The concept of insurance has its origin in Indian scriptures. The Vedas give the idea of
'Yougkshema' means a promise to provide community insurance to the risk bearers as back as around
1000 B.C., which was practised by the Aryans.
In 1956 a radical step was taken by the central govt. regarding nationalization of insurance industries
which emerged as the Life Insurance of India the major objective of this corporation was to give
maximum benefits to maximum citizens of India by providing them wide range of benefits against a
number of risks. The details of Lick's business during last 5 years are given in the paper, which are self –
explanatory.
INTRODUCTION
Almost 4500 years ago, in the ancient Land of Babylonia, traders used to bear risk of the caravan trade by
giving loans that had to be later repaid with interest when the goods arrived safely. In 2100 B.C. the code
of Hammurabi granted legal status to the practice. That perhaps, was how insurance made its beginning.
Life insurance had its origins in ancient Rome, Where citizens formed burial clubs that would meet the
funeral expenses of its members as well as help survivors by making some payments.
In 1347, in Genoa, European maritime nations entered into the earliest known insurance and decided to
accept marine insurance as a practice. Back to the 17th century, in 1693, astronomer Edmond Halley
constructed the first mortality and compound interest. In 1756, Joseph Dodson reworked the table, linking
premium rate to age. The 19th century saw huge developments in the field of insurance, with newer
products being devised to meet the growing needs of urbanization and industrialization.
LIFE INSURANCE IN INDIA
Insurance in India can be traced back to the Vedas. For instance, Yougkshema, the name of Life Insurance
Corporation of India's corporate headquarters, is derived from the Rig Veda. The term suggests that a form
of 'community insurance' was prevalent around 1000 BC and practised by the Aryans.
Bombay Mutual Assurance Society, the first Indian life assurance society, was formed in 1870. Other
companies like Oriental, Bharat and Empire of India were also set up in the 1870 – 90s.
The Insurance Act was passed in 1912, followed by a detailed and amended Insurance Act of 1938 that
looked into investments, expenditure and management of these companies' funds.
By the mid – 1950s, there were around 170 insurance companies and 80 provident fund societies in the
country's life insurance scene. However, in the absence of regulatory systems, scams and irregularities
were almost a way of life at most of these companies' funds.
As a result, the government decided to nationalise the life assurance business in India. The Life Insurance
Corporation of India was set up in 1956 to take over around 250 life assurance companies. After the RN
Malhotra Committee report of 1994 became the first serious document calling for the re-opening up of the
insurance sector to private players – that the sector was finally opened up to private players in 2001.
8.WHAT IS LIFE INSURANCE ?
Life Insurance is a contract for payment of a sum of money to the person assured on the happening of the
event insured against. Usually the contract provides for the payment of an amount on the date of maturity
or at specified dates at periodic intervals or at unfortunate death, if it occurs earlier. It is concerned with
two hazards that stand across the life- path of every person that of dying prematurely leaving a dependent
family to fend itself and that of living to old age without visible means of support.
GROWTH OF NEW BUSINESS
During the 1997-98 LIC sum assured through policies 63927.83 Crore Rs. In 1998-99 LIC sum assured
75606.26 Crore Rs. In 1999-00 LIC sum assured 91490.94 Crore Rs. In 2000-01 LIC sum assured
124950.63 Crore Rs. In 2001-02 LIC sum assured 192784.96 Crore Rs. We can see that LIC gets success
in new business.
NUMBER OF POLICIES
In 1997-98 LIC's number of polices are 850.03 in lakh. In 1998-99 LIC'S number of polices are 917.26 in
lakh. In 1999-00 LIC's number of polices are 1013.89 in lakh. In 2000-01 LIC's numbers of policies are
1131.11 in lakh. In 2001-02 LIC's number of policies 1258.76 in lakh. We can see that LIC's position is
very good. Numbers of policies are increased.
ANALYSIS OF INCOME
This chart shows various income of LIC. LIC gets 14.11 % income through first year premium. LIC gets
40.74 % income from Renewal Premium. LIC gets 12.43 % income from Single Premium. LIC gets 31.19
% income from investments. LIC gets income 1.53 % from Miscellaneous.
CONCLUTION
LIC gets achievement in various fields. We can see that LIC gets success in new business. Numbers of
policies are increased. We can see LIC's income from various fields. Overall LIC has doing profitable
business. But it is only LIC's own business. But it is not compared with other's insurance institute. So it is
not completed.
9 Write a brief history of the Insurance sector
The business of life insurance in India in its existing form started in India in the year 1818 with the
establishment of the Oriental Life Insurance Company in Calcutta.
Some of the important milestones in the life insurance business in India are:

1912: The Indian Life Assurance Companies Act enacted as the first statute to regulate the life
insurance business.

1928: The Indian Insurance Companies Act enacted to enable the government to collect statistical
information about both life and non-life insurance businesses.

1938: Earlier legislation consolidated and amended to by the Insurance Act with the objective of
protecting the interests of the insuring public.

1956: 245 Indian and foreign insurers and provident societies taken over by the central government
and nationalised. LIC formed by an Act of Parliament, viz. LIC Act, 1956, with a capital
contribution of Rs. 5 crore from the Government of India.
The General insurance business in India, on the other hand, can trace its roots to the Triton Insurance
Company Ltd., the first general insurance company established in the year 1850 in Calcutta by the British.
Some of the important milestones in the general insurance business in India are:

1907: The Indian Mercantile Insurance Ltd. set up, the first company to transact all classes of
general insurance business.

1957: General Insurance Council, a wing of the Insurance Association of India, frames a code of
conduct for ensuring fair conduct and sound business practices.

1968: The Insurance Act amended to regulate investments and set minimum solvency margins and
the Tariff Advisory Committee set up.

1972: The General Insurance Business (Nationalisation) Act, 1972 nationalised the general
insurance business in India with effect from 1st January 1973.

107 insurers amalgamated and grouped into four companies viz. the National Insurance Company
Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company Ltd. and the
United India Insurance Company Ltd. GIC incorporated as a company.
Insurance sector reforms:
In 1993, Malhotra Committee headed by former Finance Secretary and RBI Governor R.N. Malhotra was
formed to evaluate the Indian insurance industry and recommend its future direction.
The Malhotra committee was set up with the objective of complementing the reforms initiated in the
financial sector. The reforms were aimed at "creating a more efficient and competitive financial system
suitable for the requirements of the economy keeping in mind the structural changes currently underway
and recognizing that insurance is an important part of the overall financial system where it was necessary
to address the need for similar reforms…"
In 1994, the committee submitted the report and some of the key recommendations included:
1) Structure

Government stake in the insurance Companies to be brought down to 50%.

Government should take over the holdings of GIC and its subsidiaries so that these subsidiaries can
act as independent corporations.

All the insurance companies should be given greater freedom to operate.
2) Competition

Private Companies with a minimum paid up capital of Rs.1bn should be allowed to enter the
industry.

No Company should deal in both Life and General Insurance through a single entity.

Foreign companies may be allowed to enter the industry in collaboration with the domestic
companies.

Postal Life Insurance should be allowed to operate in the rural market.

Only One State Level Life Insurance Company should be allowed to operate in each state.
3) Regulatory Body

The Insurance Act should be changed.

An Insurance Regulatory body should be set up.

Controller of Insurance (Currently a part from the Finance Ministry) should be made independent.
4) Investments

Mandatory Investments of LIC Life Fund in government securities to be reduced from 75% to
50%.

GIC and its subsidiaries are not to hold more than 5% in any company (There current holdings to
be brought down to this level over a period of time).
5) Customer Service

LIC should pay interest on delays in payments beyond 30 days.

Insurance companies must be encouraged to set up unit linked pension plans.

Computerisation of operations and updating of technology to be carried out in the insurance
industry The committee emphasized that in order to improve the customer services and increase
the coverage of the insurance industry should be opened up to competition.
But at the same time, the committee felt the need to exercise caution as any failure on the part of new
players could ruin the public confidence in the industry. Hence, it was decided to allow competition in a
limited way by stipulating the minimum capital requirement of Rs.100 crores. The committee felt the need
to provide greater autonomy to insurance companies in order to improve their performance and enable
them to act as independent companies with economic motives. For this purpose, it had proposed setting up
an independent regulatory body.
MAJOR POLICY CHANGES
Insurance sector has been opened up for competition from Indian private insurance companies with the
enactment of Insurance Regulatory and Development Authority Act, 1999 (IRDA Act). As per the
provisions of IRDA Act, 1999, Insurance Regulatory and Development Authority (IRDA) was established
on 19th April 2000 to protect the interests of holder of insurance policy and to regulate, promote and
ensure orderly growth of the insurance industry. IRDA Act 1999 paved the way for the entry of private
players into the insurance market which was hitherto the exclusive privilege of public sector insurance
companies/ corporations. Under the new dispensation Indian insurance companies in private sector were
permitted to operate in India with the following conditions:

Company is formed and registered under the Companies Act, 1956;

The aggregate holdings of equity shares by a foreign company, either by itself or through its
subsidiary companies or its nominees, do not exceed 26%, paid up equity capital of such Indian
insurance company;

The company's sole purpose is to carry on life insurance business or general insurance business or
reinsurance business.

The minimum paid up equity capital for life or general insurance business is Rs.100 crores.

The minimum paid up equity capital for carrying on reinsurance business has been prescribed as
Rs.200 crores.
The Authority has notified 27 Regulations on various issues which include Registration of Insurers,
Regulation on insurance agents, Solvency Margin, Re-insurance, Obligation of Insurers to Rural and
Social sector, Investment and Accounting Procedure, Protection of policy holders' interest etc.
Applications were invited by the Authority with effect from 15th August, 2000 for issue of the Certificate
of Registration to both life and non-life insurers. The Authority has its Head Quarter at Hyderabad.
Insurance companies:
IRDA has so far granted registration to 12 private life insurance companies and 9 general insurance
companies. If the existing public sector insurance companies are included, there are currently 13 insurance
companies in the life side and 13 companies operating in general insurance business. General Insurance
Corporation has been approved as the "Indian reinsurer" for underwriting only reinsurance business.
Particulars of the life insurance companies and general insurance companies including their web address is
given below:
LIFE INSURERS
Websites
Public Sector
Life Insurance Corporation of India
www.licindia.com
Private Sector
Allianz Bajaj Life Insurance Company Limited
www.allianzbajaj.co.in
Birla Sun-Life Insurance Company Limited
www.birlasunlife.com
HDFC Standard Life Insurance Co. Limited
www.hdfcinsurance.com
ICICI Prudential Life Insurance Co. Limited
www.iciciprulife.com
ING Vysya Life Insurance Company Limited
www.ingvysayalife.com
Max New York Life Insurance Co. Limited
www.maxnewyorklife.com
MetLife Insurance Company Limited
www.metlife.com
Om Kotak Mahindra Life Insurance Co. Ltd.
www.omkotakmahnidra.com
SBI Life Insurance Company Limited
www.sbilife.co.in
TATA AIG Life Insurance Company Limited
www.tata-aig.com
AMP Sanmar Assurance Company Limited
www.ampsanmar.com
Dabur CGU Life Insurance Co. Pvt. Limited
www.avivaindia.com
GENERAL INSURERS
Public Sector
National Insurance Company Limited
www.nationalinsuranceindia.com
New India Assurance Company Limited
www.niacl.com
Oriental Insurance Company Limited
www.orientalinsurance.nic.in
United India Insurance Company Limited
www.uiic.co.in
Private Sector
Bajaj Allianz General Insurance Co. Limited
www.bajajallianz.co.in
ICICI Lombard General Insurance Co. Ltd.
www.icicilombard.com
IFFCO-Tokio General Insurance Co. Ltd.
www.itgi.co.in
Reliance General Insurance Co. Limited
www.ril.com
Royal Sundaram Alliance Insurance Co. Ltd.
www.royalsun.com
TATA AIG General Insurance Co. Limited
www.tata-aig.com
Cholamandalam General Insurance Co. Ltd.
www.cholainsurance.com
Export Credit Guarantee Corporation
www.ecgcindia.com
HDFC Chubb General Insurance Co. Ltd.
REINSURER
General Insurance Corporation of India
www.gicindia.com
Protection of the interest of policy holders:
IRDA has the responsibility of protecting the interest of insurance policyholders. Towards achieving this
objective, the Authority has taken the following steps:

IRDA has notified Protection of Policyholders Interest Regulations 2001 to provide for: policy
proposal documents in easily understandable language; claims procedure in both life and non-life;
setting up of grievance redressal machinery; speedy settlement of claims; and policyholders'
servicing. The Regulation also provides for payment of interest by insurers for the delay in
settlement of claim.

The insurers are required to maintain solvency margins so that they are in a position to meet their
obligations towards policyholders with regard to payment of claims.

It is obligatory on the part of the insurance companies to disclose clearly the benefits, terms and
conditions under the policy. The advertisements issued by the insurers should not mislead the
insuring public.

All insurers are required to set up proper grievance redress machinery in their head office and at
their other offices.

The Authority takes up with the insurers any complaint received from the policyholders in
connection with services provided by them under the insurance contract.
UNIT V
Syllabus
Real Estate Industry – Concept – Classification – Benefit of Real Estate Investment
– Developments in the Indian Real Estate Markets. Securitization: Mechanism
of Securitization – Advantages of Securitization – Securitization in India.
1. Explain Indian Real Estate
"If the human race wishes to have a prolonged and indefinite period of material prosperity, they have only
got to behave in a peaceful and helpful way toward one another." -Winston Churchill. The heresy of
typical Indians has changed the orthodox mindset of building and designing a house to live in it. A
ramification of this is that houses are nowadays counted as a transitory asset. The idea of buying a house
that will last a lifetime has gradually vanished. The buzzword nowadays is 'investment'. Both the
policymakers and the stock-brokers share an united view in this aspect(although moved by different
intentions). 'The growth in the real sector is not unreal' said S.K.Jain, President Global Infocom. In this
study we make an attempt to vivisect the real and unreal components in this eye-catching sector.
The Real Estate Boom: A genuine Euphoria
Indian real sector has seen an unprecedented boom in the last few years. This was ignited and fueled by
two main forces. First, the expanding industrial sector has created a surge in demand for office-buildings
and dwellings. The industrial sector grew at the rate of 10.8 percent in 2006-07 out of which a growth of
11.8 percent was seen by the manufacturing sector. Second, the liberalisation policies of government has
decreased the need for permissions and licenses before taking up mega construction projects. Opening the
doors to foreign investments is a further step in this direction. The government has allowed FDI in the real
estate sector since 2002. FDI was deemed necessary in the view of making the sector more organised and
increasing professionalism. farmers. The villages adjacent to the metro cities have experienced skyrocketing land prices. This has induced farmers to sell their land for good money.
2. What is the Future Prospects on Real Estate Industry ?
The real estate market in India is yet in a nascent stage and the scope is simply unlimited. It does not
resemble a bubble that will burst. An unhindered growth for the next twenty years is almost sure. This is
because the outsourcing business in India is going in great guns and this entails a huge demand for
commercial buildings and urban housing besides improvement in infrastructure.
The organised retail market
in India is also accelerating with players like WalMart, Bharti, Reliance etc. looking forward to make a
foray thus stepping up the demand for real estate.
According to former Planing Commission Advisor Tarun Das, a price index for the housing market to
track price movement must be incorporated. The government must ensure that there is no shortage of
funds. Sebi's(Securities Exchange Board of India) recent harbinger of permitting real estate mutual funds
in both private and public sector will go a long way in attracting funds from small investors who
emphasize on certain return. Another impediment that can be eased on the discretion of government is the
existing tax laws and other complex regulations relating to multidimensional real estates such as industrial
parks and SEZs(Special Economic Zone). RITES(Real Estate Investment Trusts) of the type introduced in
U.S.,U.K. and Germany should be imitated and explored.
Own a tropical family vacation spot by investing in Puerto Vallarta real estate.
Real Estate Appraisals:
Industry Overview
The real estate, construction and mortgage services industries make up about 25% of the US economy.
Each has a role in the building, sale and resale, and financing of nearly 8 million new and existing homes
each year (excluding refinancing or secondary financing). The impact is felt from the local hardware
store to nationwide builders; from the local real estate agent to the nationwide lender a continent away. It
also affects others, including local, state and federal government.
All three industries rely on a network of vendors to help complete a transaction by applying their
specialized knowledge and methodologies to parts of the transaction. Over time, as funding has become
removed from the location of the property, more information is required to make decisions, which in turn
has given rise to new sub-industries supplying lenders and borrowers with information, technology, and
services.
Real estate related industries have been undergoing fundamental changes for more than a decade. Once
local or regional, this group of businesses has consolidated into a few national powerhouses in a
relatively short period. In addition to consolidating the number of providers within each vertical industry
segment, they have expanded horizontally, providing more services under their corporate umbrellas.
More recently, these businesses have begun cooperating in the development of industry standards to
improve the processes of ordering, producing and delivering the services among themselves. The
uniform goals are to make the combined industries faster, better and cheaper. Reusable data reduces
process time and error rates, improves product and service quality, and increases productivity.
In many ways the appraiser is a microcosm of the entire real estate industry, facing the same issues and
challenges as the other service providers who have historically added value by reducing or taking on
certain risks of a buyer seller or lender. The Appraisal Institute (AI), representing the interests of 100,000
appraisers in the U.S. and more than 1 million real estate professionals who provide valuation
information, is actively involved in assisting the appraisal industry and its members to provide their
services faster, better, and cheaper. Today they are in the forefront of the effort to create reusable data
standards for the eMortgage process for the respective industry participants, from mortgage lenders to
services vendors, including appraisers as well as title, document preparation, insurance, credit, county
recorders, loan servicers and the secondary loan market.
Adobe Systems has collaborated with the Institute to develop a proof of concept. Appraisers are already
using the PDF file format as the most common method of delivering electronic valuation reports,
frequently referred to as appraisals. This collaborative effort shows how the appraisal piece of the
eMortgage process can be integrated into an electronic mortgage transaction quickly and seamlessly. In
the process it addressed a number of issues the Appraisal Institute and its members are struggling with
during the industry’s transformation.
3. Who are the Players of real estate industry?
The Primary Participants
The primary participants in the appraisal process are lenders and appraisers, although a number of others
are involved in the production and delivery of the final report. One set, Vendor Management Companies
(VMCs) and Appraisal Management Companies (AMCs), provide on-line delivery and status reporting
services to the lender or appraiser. The others provide information. Some of these provide on-line
information resources such as MLS systems, public records and map products. Some provide information
resources to be used in-house by the appraiser, such as desktop street maps or construction cost data. Still
others are real estate agents who have first hand knowledge pertinent to the subject property’s valuation,
such as currently pending contracts, canceled sales contracts, or economic conditions.
The Issues
The Appraisal Institute members face a number of issues in the current environment of industry
aggregation and roll-up among customers and potential competitors. All the issues can be seen as a result
of both recent and emerging changes.
Adding Value - How can the appraiser continue to add value to the real estate transaction in the
industry’s drive to “faster, better, cheaper?” Small firms cannot effectively market to the few large,
national lenders who now account for more 80% of loan originations in the U.S.
Competition - Appraisers are facing more intense competition, with lenders often looking first to lower
priced, less accurate valuations obtained through Automated Valuation Model (AVM) systems.
Standards - Standards are being created and promoted by industry bodies such as PRIA and MISMO.
Appraisal Institute members need to implement them to maintain their business relationships with
lenders and information resource and technology vendors. Uneven adoption and implementation creates
a burden for small businesses.
Fraud and Forgery Prevention - Fraud and forgery are a growing problem, with (according to a recent
study) up to 3% of all appraisals being signed by someone other than the appraiser to whom they are
attributed. AI members need a way for lenders to authenticate both the valuation report and the appraiser
to prevent fraud and increase trust.
Technology Investment - Among the technology pieces appraisers need to assimilate in a way that
maximizes the return on investment are digital photography, digital mapping (including GIS), and digital
architectural and engineering drawings (site and floor plans, as well as other graphics such as elevations).
Process Improvement - Process improvement is a key to survival for the independent appraiser.
Integration with current and future resources, such as off- and on-line applications will lower costs and
enable higher productivity. Improvements need to be flexible to accommodate individual preferences.
Liability and Intellectual Property - Limitations on appraiser liability and protection of intellectual
property are important to an appraiser’s long-term viability. The ability to secure certain data within a
report in a way that makes unauthorized use more difficult is important to AI members and directly help
to reduce fraud.
Dynamic Content - Appraisers need the ability to create variable reports in order to accommodate
differing requirements and circumstances that arise during the process.
Flexible Status Tracking - Flexible status tracking functionality needs to be incorporated into technology
solutions to reduce reliance on time consuming physical means, as well as to comply with customer, AVC,
and VMC specifications
The Process
The appraisal process consists of a number of common tasks in a variable workflow. The tasks include
complex logic and sub-processes, but the primary tasks for a residential mortgage report contain nine primary steps and more than a dozen types of data sources.
The process and the report can each vary from appraiser to appraiser. The report itself is subject to the
customs of the individual appraiser and the specific requirements of different customers. In addition,
there are a number of different types of appraisal reports. The purpose of an appraisal dictates some of
the contents and complexity of the report itself. Different customers have their own requirements for
supporting content, e.g., internal business logic may require a low cost valuation product.
Appraisers use similar processes and resources to prepare reports, but do not follow the same sequence in
all cases. More than one source for the same primary sources of information, e.g., comparable sales data
or maps, may be used for a single report, depending on the accuracy, completeness, and timeliness of
information. Sources are both public and private.
Proof of Concept
This proof of concept has been developed using the Adobe Intelligent Document Platform. A set of three
XML-based PDF form documents were used to gather information and produce valuation reports
addressing the issues defined by the Appraisal Institute. The forms include:
1. An Order Request Form that allows both data entry and import of the order information in a standard
XML format.
2. A dynamic Work File Form used to collect, validate, distribute, and archive all file and project status
information. The Work File uses XML data based on the MISMO Real Estate Property Information
Work Group XML specification. It acts as a project template for other work products and information,
and includes dynamic sub-sections for embedded information and rich content - photos, architectural
and engineering drawings, MLS and other comparable sales data, audio interviews. It acts as a container
for attached documents (the final report, invoice, scanned paper items, etc).
3. A final Valuation Report Form generated from the Work File to produce a final Intelligent Document
(PDF + XML) based on the proposed REPI XML specifications.
As a prototype, these forms collectively help provide the process flow, automate various tasks, and
incorporate solutions to those issues outlined by the Appraisal Institute above. While much of this proofof-concept is based on the requirements and workflows of individual appraisers, specific production
implementations might take even greater advantage of Adobe PDF and Intelligent Document functionality
with the Adobe LiveCycle enterprise components. Adobe LiveCycle products offer additional enterprise
capabilities and include server-based solutions for dynamic document generation and XML extraction,
encryption and document rights management, digital signatures, collaboration, and workflow automation
4. What are the Features and Benefits?
The result of the proof of concept was a functional prototype of a PDF-based solution to demonstrate
how features available in PDF and the Adobe Intelligent Document address the needs of the Appraisal
Institute and its members.
Standards Based
PDF is a published, widely available file format, and is the de facto standard for secure and reliable
document exchange. PDF is already used by many appraisers. A number of existing and proposed ISO
open-standards specifications are based on PDF: PDF for archiving (PDF/A), PDF Universal Access
(PDF/UA), and PDF for Engineering (PDF/E). PDF also supports W3C XML standards, industry XML
standards (like MISMO’s XML data standards), and Public Key Infrastructure (PKI) standards for
security and authenticity.
Authenticity
Document certification and digital signatures provide additional layers of security and authenticity to
documents, protecting intellectual property, and authenticating both the document and appraiser’s
identity. This has the potential to reduce both appraisal fraud and an appraiser’s liability for altered
data.
Security & Digital Rights Management (DRM)
DRM can protect the appraiser’s intellectual property, helping to reduce the risk of fraud and forgery
while still enabling customers to extract data for loan files. Work files can be encrypted to prevent
access except by authorized parties. Work files can even be set to expire when the record retention
period expires. PDF rights management and security can also be used to set user-variable access levels
to an appraisal report. Adobe LiveCycle Policy Server can even be used in conjunction with Adobe
Acrobat to remotely and dynamically control document permissions.
AEC Document Support
Adobe Acrobat and PDF now include sophisticated support for architecture and engineering
documentation. These features improve the functionality of site and floor plans and allow for more
reliable and accurate capture of technical drawings. Features include advanced zoom and document
navigation, support for layers, as well as the ability to measure distances, perimeters and areas
according to a drawing’s scale.
Dynamic Forms
Dynamic PDF documents allow variable valuation reports to be generated from a single, dynamic form
template. Sections can expand to accomodate different numbers of photos, MLS listings, and maps. All
case information and worksheets can be retained in a single work file, as an eFolder, or by using
dynamic sub-forms for the different tasks needed for different kinds of appraisals.
Business Logic
The prototype validates user input against rules in the underlying XML Schema, increasing the quality
of captured information. JavaScript can be used to provide even further validation, or advanced user
interfaces.
The prototype Adobe PDF Work File form also provides integrated status tracking to automatically
send notice of task completion to the lender. This business logic adds improved customer support in a
way that simultaneously: reduces costs, creates greater customer satisfaction, and frees the appraiser
from manual status reporting tasks.
Workflow
One of the most powerful process enhancements provided by the prototype comes from the variety of
features Adobe PDF has to facilitate workflow management. Web services and email capabilities allow a
PDF to communicate with others people and systems. These integration points can be used to place and
respond to order requests and to obtain data from outside services. The prototype uses an Adobe PDF
order request form that incorporates XML based on the MISMO envelope specification. The user exports
the order data to his database from where it is imported to the Work File.
Features and Benefits
The Work File, using scripting and Acrobat database connectivity features, initiates the appraiser’s
electronic file and emails an acknowledgment to the lender. Ongoing status tracking is enabled by a list
of tasks that, when each is checked as complete, is capable of sending email or web service messages to
update the lender, the lender’s VMC or the appraiser’s AMC.
The proof of concept offers other process improvements as well. PDF forms can be used to enter field
work information into forms for merging with the Work File later. Comparable sales data can be
retrieved from the MLS or other third party data providers via web services, or from a desktop file,
depending on the structure of the source data. Adobe® LiveCycle™ Intelligent Document Platform
server components such as Adobe LiveCycle Forms can be used to populate forms with data from these
sources automatically. At the end of the appraisal workflow, Adobe LiveCycle components can
consolidate all the case information into the work file, either internally or as attachments, including audio
interviews, print files of on-line inquiries, and scanned images of paper-based documents.
Finally, the valuation report form can build itself from the resources gathered by the Work File. Digital
signatures and document control features can be applied through either Acrobat or with server
components like Adobe LiveCycle Document Security and LiveCycle Policy Server. On signing, the
valuation report can apply the desired security and send itself to the lender.
The following benefits combine to reduce appraisers’ costs:
• Speeding tasks involved in generating an appraisal;
• Organizing and retaining data in a single location; and,
• Improving accuracy by reusing data rather than re-entering it.
This helps appraisers remain competitive and protects their intellectual property so they may continue to
add value even where competitive valuation products are used.
Conclusion
The prototype valuation report forms exceeded the Appraisal Institute’s expectations. The use of Adobe
PDF features addressed the needs outlined and demonstrate their value to appraisers. According to John
Ross, CEO of the Appraisal Institute:
“This proof of concept is a demonstration of the range of tools and applications that appraisers have
when using PDF documents. As new data and business process standards are developed, appraisers must
adapt to those standards, and this proof of concept demonstrates how every appraiser can meet the needs
of a dynamically changing market - both domestically and globally - in real time.
Our objective at the Appraisal Institute is to work with appraisers, clients for appraisal services, the
broader real estate and mortgage communities and the firms that support business processes for the real
estate market, to provide ever more accurate, high quality and timely appraisal and related valuation
services. Use of technology based upon the widely accepted PDF document standard, as demonstrated in
this proof of concept, is critical to meeting that objective.”
5. What is Securitization?
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Securitisation is, recently, a more popular financial practice of pooling various types of contractual debt
such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations and
selling say debt as bonds, pass-through securities, or collateralized mortgage obligations (CMOs), to
various investors. The principal and interest on the debt, underlying the security, is paid back to the
various investors regularly. Debts backed by mortgages are mortgage-backed securities, while those
backed by other types of loans are asset-backed securities. The so-called lower risk of securitized
instruments attracts a greater number of investors seeking to benefit in the process of taking many
individual assets and repackaging them as collateralized debt.
With the claimed high degree of predictability in large groups and assumed predictability, investors
usually prefer taking on risk, as a herd, rather than the total exposure inherent in direct investment in
individual assets. Unlike general corporate debt, the credit quality of securitized debt is non-stationary due
to changes in volatility that are time- and structure-dependent. If the transaction is properly structured and
the pool performs as expected, the credit risk of all tranches of structured debt improves; if improperly
structured, the affected tranches will experience dramatic credit deterioration and loss.[1]
Securitization has evolved from its tentative beginnings in the late 1970s to a vital funding source with an
estimated outstanding of $10.24 trillion in the United States and $2.25 trillion in Europe as of the 2nd
quarter of 2008. In 2007, ABS issuance amounted to $3,455 billion in the US and $652 billion in
Europe.[2] WBS arrangements first appeared in the United Kingdom in the 1990s, and became common in
various Commonwealth legal systems where senior creditors of an insolvent business effectively gain the
right to control the company.[
History
The history of securitization was first established when Ian Ellis Jones first came up with the idea. His
groundbreaking philosophy has helped shape what is now become of the financial markets.
"Asset Securitisation began with the structured financing of mortgage pools in the 1970s. For decades
before that, banks were essentially portfolio lenders; they held loans until they matured or were paid off.
These loans were funded principally by deposits, and sometimes by debt, which was a direct obligation of
the bank (rather than a claim on specific assets). But after World War II, depository institutions simply
could not keep pace with the rising demand for housing credit. Banks, as well as other financial
intermediaries sensing a market opportunity, sought ways of increasing the sources of mortgage funding.
To attract investors, investment bankers eventually developed an investment vehicle that isolated defined
mortgage pools, segmented the credit risk, and structured the cash flows from the underlying loans. "[4]
In February 1970, the U.S. Department of Housing and Urban Development created the transaction using
a mortgage-backed security. The Government National Mortgage Association (GNMA or Ginnie Mae)
sold securities backed by a portfolio of mortgage loans.[5]
To facilitate the Securitisation of non-mortgage assets, businesses substituted private credit enhancements.
First, they over-collateralized pools of assets; shortly thereafter, they improved third-party and structural
enhancements. In 1985, Securitisation techniques that had been developed in the mortgage market were
applied for the first time to a class of non-mortgage assets — automobile loans. A pool of assets second
only to mortgages in volume, auto loans were a good match for structured finance; their maturities,
considerably shorter than those of mortgages, made the timing of cash flows more predictable, and their
long statistical histories of performance gave investors confidence.[4]
This early auto loan deal was a $60 million Securitisation originated by Marine Midland Bank and
securitized in 1985 by the Certificate for Automobile Receivables Trust (CARS, 1985-1).[6]
The first significant bank credit card sale came to market in 1986 with a private placement of $50 million
of outstanding bank card loans. This transaction demonstrated to investors that, if the yields were high
enough, loan pools could support asset sales with higher expected losses and administrative costs than was
true within the mortgage market. Sales of this type — with no contractual obligation by the seller to
provide recourse — allowed banks to receive sales treatment for accounting and regulatory purposes
(easing balance sheet and capital constraints), while at the same time allowing them to retain origination
and servicing fees. After the success of this initial transaction, investors grew to accept credit card
receivables as collateral, and banks developed structures to normalize the cash flows.[4]
Starting in the 1890s with some earlier private transactions, Securitisation technology was applied to a
number of sectors of the reinsurance and insurance markets including life and catastrophe. This activity
grew to nearly $15bn of issuance in 2006 following the disruptions in the underlying markets caused by
Hurricane Katrina and Regulation XXX. Key areas of activity in the broad area of Alternative Risk
Transfer include catastrophe bonds, Life Insurance Securitisation and Reinsurance Sidecars.
The first public Securitisation of Community Reinvestment Act (CRA) loans started in 1997. CRA loans
are loans targeted to low and moderate income borrowers and neighborhoods.[7]
As estimated by the Bond Market Association, in the United States, total amount outstanding at the end of
2004 at $1.8 trillion. This amount is about 8 percent of total outstanding bond market debt ($23.6 trillion),
about 33 percent of mortgage-related debt ($5.5 trillion), and about 39 percent of corporate debt ($4.7
trillion) in the United States. In nominal terms, over the last ten years, (1995–2004,) ABS amount
outstanding has grown about 19 percent annually, with mortgage-related debt and corporate debt each
growing at about 9 percent. Gross public issuance of asset-backed securities remains strong, setting new
records in many years. In 2004, issuance was at an all-time record of about $0.9 trillion.[8]
At the end of 2004, the larger sectors of this market are credit card-backed securities (21 percent), homeequity backed securities (25 percent), automobile-backed securities (13 percent), and collateralized debt
obligations (15 percent). Among the other market segments are student loan-backed securities (6 percent),
equipment leases (4 percent), manufactured housing (2 percent), small business loans (such as loans to
convenience stores and gas stations), and aircraft leases.[8] More recently an attempt to securitize excess
energy generated by renewable energy resources is being attempted by Joseph Brant Arseneau and his
team.
Securitisation only reached Europe in late 80's, when the first securitisations of mortgages appeared in the
UK. This technology only really took off in the late 90's or early 2000, thanks to the innovative structures
implemented across the asset classes, such as UK Mortgage Master Trusts (concept imported from the US
Credit Cards), Insurance-backed transaction (such as the ones implemented by the insurance securitisation
guru Emmanuel Issanchou) or even more esoteric asset classes (for example securitisation of lottery
receivables for the Greek government, executed by Philippe Tapernoux).
As the result of the credit crunch precipitated by the subprime mortgage crisis the market for bonds
backed by securitized loans was very weak in 2008 unless the bonds were guaranteed by a federally
backed agency. As a result interest rates are rising for loans that were previously securitized such as home
mortgages, student loans, auto loans and commercial mortgages[9]
Structure
Pooling and transfer
The originator initially owns the assets engaged in the deal. This is typically a company looking to either
raise capital, restructure debt or otherwise adjust its finances. Under traditional corporate finance
concepts, such a company would have three options to raise new capital: a loan, bond issue, or issuance of
stock. However, stock offerings dilute the ownership and control of the company, while loan or bond
financing is often prohibitively expensive due to the credit rating of the company and the associated rise in
interest rates.
The consistently revenue-generating part of the company may have a much higher credit rating than the
company as a whole. For instance, a leasing company may have provided $10m nominal value of leases,
and it will receive a cash flow over the next five years from these. It cannot demand early repayment on
the leases and so cannot get its money back early if required. If it could sell the rights to the cash flows
from the leases to someone else, it could transform that income stream into a lump sum today (in effect,
receiving today the present value of a future cash flow). Where the originator is a bank or other
organization that must meet capital adequacy requirements, the structure is usually more complex because
a separate company is set up to buy the assets.
A suitably large portfolio of assets is "pooled" and transferred to a "special purpose vehicle" or "SPV"
(the issuer), a tax-exempt company or trust formed for the specific purpose of funding the assets. Once the
assets are transferred to the issuer, there is normally no recourse to the originator. The issuer is
"bankruptcy remote," meaning that if the originator goes into bankruptcy, the assets of the issuer will not
be distributed to the creditors of the originator. In order to achieve this, the governing documents of the
issuer restrict its activities to only those necessary to complete the issuance of securities.
Accounting standards govern when such a transfer is a sale, a financing, a partial sale, or a part-sale and
part-financing.[10] In a sale, the originator is allowed to remove the transferred assets from its balance
sheet: in a financing, the assets are considered to remain the property of the originator.[11] Under US
accounting standards, the originator achieves a sale by being at arm's length from the issuer, in which case
the issuer is classified as a "qualifying special purpose entity" or "qSPE".
Because of these structural issues, the originator typically needs the help of an investment bank (the
arranger) in setting up the structure of the transaction.
Issuance
To be able to buy the assets from the originator, the issuer SPV issues tradable securities to fund the
purchase. Investors purchase the securities, either through a private offering (targeting institutional
investors) or on the open market. The performance of the securities is then directly linked to the
performance of the assets. Credit rating agencies rate the securities which are issued in order to provide an
external perspective on the liabilities being created and help the investor make a more informed decision.
In transactions with static assets, a depositor will assemble the underlying collateral, help structure the
securities and work with the financial markets in order to sell the securities to investors. The depositor has
taken on added significance under Regulation AB. The depositor typically owns 100% of the beneficial
interest in the issuing entity and is usually the parent or a wholly owned subsidiary of the parent which
initiates the transaction. In transactions with managed (traded) assets, asset managers assemble the
underlying collateral, help structure the securities and work with the financial markets in order to sell the
securities to investors.
Some deals may include a third-party guarantor which provides guarantees or partial guarantees for the
assets, the principal and the interest payments, for a fee.
The securities can be issued with either a fixed interest rate or a floating rate. Fixed rate ABS set the
“coupon” (rate) at the time of issuance, in a fashion similar to corporate bonds. Floating rate securities
may be backed by both amortizing and nonamortizing assets. In contrast to fixed rate securities, the rates
on “floaters” will periodically adjust up or down according to a designated index such as a U.S. Treasury
rate, or, more typically, the London Interbank Offered Rate (LIBOR). The floating rate usually reflects the
movement in the index plus an additional fixed margin to cover the added risk.[12]
Credit enhancement and tranching
Unlike conventional corporate bonds which are unsecured, securities generated in a securitisation deal are
"credit enhanced," meaning their credit quality is increased above that of the originator's unsecured debt or
underlying asset pool. This increases the likelihood that the investors will receive cash flows to which they
are entitled, and thus causes the securities to have a higher credit rating than the originator. Some
securitisations use external credit enhancement provided by third parties, such as surety bonds and
parental guarantees (although this may introduce a conflict of interest).
Individual securities are often split into tranches, or categorized into varying degrees of subordination.
Each tranche has a different level of credit protection or risk exposure than another: there is generally a
senior (“A”) class of securities and one or more junior subordinated (“B,” “C,” etc.) classes that function
as protective layers for the “A” class. The senior classes have first claim on the cash that the SPV receives,
and the more junior classes only start receiving repayment after the more senior classes have repaid.
Because of the cascading effect between classes, this arrangement is often referred to as a cash flow
waterfall. In the event that the underlying asset pool becomes insufficient to make payments on the
securities (e.g. when loans default within a portfolio of loan claims), the loss is absorbed first by the
subordinated tranches, and the upper-level tranches remain unaffected until the losses exceed the entire
amount of the subordinated tranches. The senior securities are typically AAA rated, signifying a lower
risk, while the lower-credit quality subordinated classes receive a lower credit rating, signifying a higher
risk.[12]
The most junior class (often called the equity class) is the most exposed to payment risk. In some cases,
this is a special type of instrument which is retained by the originator as a potential profit flow. In some
cases the equity class receives no coupon (either fixed or floating), but only the residual cash flow (if any)
after all the other classes have been paid.
There may also be a special class which absorbs early repayments in the underlying assets. This is often
the case where the underlying assets are mortgages which, in essence, are repaid every time the property is
sold. Since any early repayment is passed on to this class, it means the other investors have a more
predictable cash flow.
If the underlying assets are mortgages or loans, there are usually two separate "waterfalls" because the
principal and interest receipts can be easily allocated and matched. But if the assets are income-based
transactions such as rental deals it is not possible to differentiate so easily between how much of the
revenue is income and how much principal repayment. In this case all the income is used to pay the cash
flows due on the bonds as those cash flows become due.
Credit enhancements affect credit risk by providing more or less protection to promised cash flows for a
security. Additional protection can help a security achieve a higher rating, lower protection can help create
new securities with differently desired risks, and these differential protections can help place a security on
more attractive terms.
In addition to subordination, credit may be enhanced through:[11]

A reserve or spread account, in which funds remaining after expenses such as principal and
interest payments, charge-offs and other fees have been paid-off are accumulated, and can be used
when SPE expenses are greater than its income.

Third-party insurance, or guarantees of principal and interest payments on the securities.

Over-collateralization, usually by using finance income to pay off principal on some securities
before principal on the corresponding share of collateral is collected.

Cash funding or a cash collateral account, generally consisting of short-term, highly rated
investments purchased either from the seller's own funds, or from funds borrowed from third
parties that can be used to make up shortfalls in promised cash flows.

A third-party letter of credit or corporate guarantee.

A back-up servicer for the loans.

Discounted receivables for the pool.
Servicing
A servicer collects payments and monitors the assets that are the crux of the structured financial deal. The
servicer can often be the originator, because the servicer needs very similar expertise to the originator and
would want to ensure that loan repayments are paid to the Special Purpose Vehicle.
The servicer can significantly affect the cash flows to the investors because it controls the collection
policy, which influences the proceeds collected, the charge-offs and the recoveries on the loans. Any
income remaining after payments and expenses is usually accumulated to some extent in a reserve or
spread account, and any further excess is returned to the seller. Bond rating agencies publish ratings of
asset-backed securities based on the performance of the collateral pool, the credit enhancements and the
probability of default.[11]
When the issuer is structured as a trust, the trustee is a vital part of the deal as the gate-keeper of the
assets that are being held in the issuer. Even though the trustee is part of the SPV, which is typically
wholly owned by the Originator, the trustee has a fiduciary duty to protect the assets and those who own
the assets, typically the investors.
Repayment structures
Unlike corporate bonds, most securitisations are amortized, meaning that the principal amount borrowed is
paid back gradually over the specified term of the loan, rather than in one lump sum at the maturity of the
loan. Fully amortizing securitisations are generally collateralized by fully amortizing assets such as home
equity loans, auto loans, and student loans. Prepayment uncertainty is an important concern with fully
amortizing ABS. The possible rate of prepayment varies widely with the type of underlying asset pool, so
many prepayment models have been developed in an attempt to define common prepayment activity. The
PSA prepayment model is a well-known example.[12][13]
A controlled amortization structure is a method of providing investors with a more predictable repayment
schedule, even though the underlying assets may be nonamortizing. After a predetermined “revolving”
period, during which only interest payments are made, these securitisations attempt to return principal to
investors in a series of defined periodic payments, usually within a year. An early amortization event is the
risk of the debt being retired early.[12]
On the other hand, bullet or slug structures return the principal to investors in a single payment. The most
common bullet structure is called the soft bullet, meaning that the final bullet payment is not guaranteed
on the expected maturity date; however, the majority of these securitisations are paid on time. The second
type of bullet structure is the hard bullet, which guarantees that the principal will be paid on the expected
maturity date. Hard bullet structures are less common for two reasons: investors are comfortable with soft
bullet structures, and they are reluctant to accept the lower yields of hard bullet securities in exchange for
a guarantee.[12]
Securitisations are often structured as a sequential pay bond, paid off in a sequential manner based on
maturity. This means that the first tranche, which may have a one-year average life, will receive all
principal payments until it is retired; then the second tranche begins to receive principal, and so forth.[12]
Pro rata bond structures pay each tranche a proportionate share of principal throughout the life of the
security.[12]
Structural risks and misincentives
Originators (e.g. of mortgages) have less incentive towards credit quality and greater incentive towards
loan volume since they do not bear the long-term risk of the assets they have created and may simply
profit by the fees associated with origination and securitisation.
6. What are the Special types of securitization?
Master trust
A master trust is a type of SPV particularly suited to handle revolving credit card balances, and has the
flexibility to handle different securities at different times. In a typical master trust transaction, an
originator of credit card receivables transfers a pool of those receivables to the trust and then the trust
issues securities backed by these receivables. Often there will be many tranched securities issued by the
trust all based on one set of receivables. After this transaction, typically the originator would continue to
service the receivables, in this case the credit cards.
There are various risks involved with master trusts specifically. One risk is that timing of cash flows
promised to investors might be different from timing of payments on the receivables. For example, credit
card-backed securities can have maturities of up to 10 years, but credit card-backed receivables usually
pay off much more quickly. To solve this issue these securities typically have a revolving period, an
accumulation period, and an amortization period. All three of these periods are based on historical
experience of the receivables. During the revolving period, principal payments received on the credit card
balances are used to purchase additional receivables. During the accumulation period, these payments are
accumulated in a separate account. During the amortization period, new payments are passed through to
the investors.
A second risk is that the total investor interests and the seller's interest are limited to receivables generated
by the credit cards, but the seller (originator) owns the accounts. This can cause issues with how the seller
controls the terms and conditions of the accounts. Typically to solve this, there is language written into the
securitisation to protect the investors.
A third risk is that payments on the receivables can shrink the pool balance and under-collateralize total
investor interest. To prevent this, often there is a required minimum seller's interest, and if there was a
decrease then an early amortization event would occur.[11]
Issuance trust
In 2000, Citibank introduced a new structure for credit card-backed securities, called an issuance trust,
which does not have limitations, that master trusts sometimes do, that requires each issued series of
securities to have both a senior and subordinate tranche. There are other benefits to an issuance trust: they
provide more flexibility in issuing senior/subordinate securities, can increase demand because pension
funds are eligible to invest in investment-grade securities issued by them, and they can significantly
reduce the cost of issuing securities. Because of these issues, issuance trusts are now the dominant
structure used by major issuers of credit card-backed securities.[11]
Grantor trust
Grantor trusts are typically used in automobile-backed securities and REMICs (Real Estate Mortgage
Investment Conduits). Grantor trusts are very similar to pass-through trusts used in the earlier days of
Securitisation. An originator pools together loans and sells them to a grantor trust, which issues classes of
securities backed by these loans. Principal and interest received on the loans, after expenses are taken into
account, are passed through to the holders of the securities on a pro-rata basis.
Owner trust
In an owner trust, there is more flexibility in allocating principal and interest received to different classes
of issued securities. In an owner trust, both interest and principal due to subordinate securities can be used
to pay senior securities. Due to this, owner trusts can tailor maturity, risk and return profiles of issued
securities to investor needs. Usually, any income remaining after expenses is kept in a reserve account up
to a specified level and then after that, all income is returned to the seller. Owner trusts allow credit risk to
be mitigated by over-collateralization by using excess reserves and excess finance income to prepay
securities before principal, which leaves more collateral for the other classes.
7. What are the Motives for securitization?
Advantages to issuer
Reduces funding costs: Through Securitisation, a company rated BB but with AAA worthy cash flow
would be able to borrow at possibly AAA rates. This is the number one reason to securitize a cash flow
and can have tremendous impacts on borrowing costs. The difference between BB debt and AAA debt can
be multiple hundreds of basis points. For example, Moody's downgraded Ford Motor Credit's rating in
January 2002, but senior automobile backed securities, issued by Ford Motor Credit in January 2002 and
April 2002, continue to be rated AAA because of the strength of the underlying collateral and other credit
enhancements.[11]
Reduces asset-liability mismatch: "Depending on the structure chosen, Securitisation can offer perfect
matched funding by eliminating funding exposure in terms of both duration and pricing basis."[14]
Essentially, in most banks and finance companies, the liability book or the funding is from borrowings.
This often comes at a high cost. Securitisation allows such banks and finance companies to create a selffunded asset book.
Lower capital requirements: Some firms, due to legal, regulatory, or other reasons, have a limit or range
that their leverage is allowed to be. By securitizing some of their assets, which qualifies as a sale for
accounting purposes, these firms will be able to lessen the equity on their balance sheets while
maintaining the "earning power" of the asset.
Locking in profits: For a given block of business, the total profits have not yet emerged and thus remain
uncertain. Once the block has been securitized, the level of profits has now been locked in for that
company, thus the risk of profit not emerging, or the benefit of super-profits, has now been passed on.
Transfer risks (credit, liquidity, prepayment, reinvestment, asset concentration): Securitisation makes it
possible to transfer risks from an entity that does not want to bear it, to one that does. Two good example
of this are catastrophe bonds and Entertainment Securitisations. Similarly, by securitizing a block of
business (thereby locking in a degree of profits), the company has effectively freed up its balance to go out
and write more profitable business.
Off balance sheet: Derivatives of many types have in the past been referred to as "off-balance-sheet."
This term implies that the use of derivatives has no balance sheet impact. While there are differences
among the various accounting standards internationally, there is a general trend towards the requirement to
record derivatives at fair value on the balance sheet. There is also a generally accepted principle that,
where derivatives are being used as a hedge against underlying assets or liabilities, accounting adjustments
are required to ensure that the gain/loss on the hedged instrument is recognized in the income statement on
a similar basis as the underlying assets and liabilities. Certain credit derivatives products, particularly
Credit Default Swaps, now have more or less universally accepted market standard documentation. In the
case of Credit Default Swaps, this documentation has been formulated by the International Swaps and
Derivatives Association (ISDA) who have for a long time provided documentation on how to treat such
derivatives on balance sheets.
Earnings: Securitisation makes it possible to record an earnings bounce without any real addition to the
firm. When a Securitisation takes place, there often is a "true sale" that takes place between the Originator
(the parent company) and the SPE. This sale has to be for the market value of the underlying assets for the
"true sale" to stick and thus this sale is reflected on the parent company's balance sheet, which will boost
earnings for that quarter by the amount of the sale. While not illegal in any respect, this does distort the
true earnings of the parent company.
Admissibility: Future cashflows may not get full credit in a company's accounts (life insurance
companies, for example, may not always get full credit for future surpluses in their regulatory balance
sheet), and a Securitisation effectively turns an admissible future surplus flow into an admissible
immediate cash asset.
Liquidity: Future cashflows may simply be balance sheet items which currently are not available for
spending, whereas once the book has been securitized, the cash would be available for immediate
spending or investment. This also creates a reinvestment book which may well be at better rates.
Disadvantages to issuer
May reduce portfolio quality: If the AAA risks, for example, are being securitized out, this would leave
a materially worse quality of residual risk.
Costs: Securitisations are expensive due to management and system costs, legal fees, underwriting fees,
rating fees and ongoing administration. An allowance for unforeseen costs is usually essential in
Securitisations, especially if it is an atypical Securitisation.
Size limitations: Securitisations often require large scale structuring, and thus may not be cost-efficient
for small and medium transactions.
Risks: Since Securitisation is a structured transaction, it may include par structures as well as credit
enhancements that are subject to risks of impairment, such as prepayment, as well as credit loss, especially
for structures where there are some retained strips.
Advantages to investors
Opportunity to potentially earn a higher rate of return (on a risk-adjusted basis)
Opportunity to invest in a specific pool of high quality assets: Due to the stringent requirements for
corporations (for example) to attain high ratings, there is a dearth of highly rated entities that exist.
Securitisations, however, allow for the creation of large quantities of AAA, AA or A rated bonds, and risk
averse institutional investors, or investors that are required to invest in only highly rated assets, have
access to a larger pool of investment options.
Portfolio diversification: Depending on the Securitisation, hedge funds as well as other institutional
investors tend to like investing in bonds created through Securitisations because they may be uncorrelated
to their other bonds and securities.
Isolation of credit risk from the parent entity: Since the assets that are securitized are isolated (at least
in theory) from the assets of the originating entity, under Securitisation it may be possible for the
Securitisation to receive a higher credit rating than the "parent," because the underlying risks are different.
For example, a small bank may be considered more risky than the mortgage loans it makes to its
customers; were the mortgage loans to remain with the bank, the borrowers may effectively be paying
higher interest (or, just as likely, the bank would be paying higher interest to its creditors, and hence less
profitable).
Risks to investors
Liquidity risk
Credit/default: Default risk is generally accepted as a borrower’s inability to meet interest payment
obligations on time. For ABS, default may occur when maintenance obligations on the underlying
collateral are not sufficiently met as detailed in its prospectus. A key indicator of a particular security’s
default risk is its credit rating. Different tranches within the ABS are rated differently, with senior classes
of most issues receiving the highest rating, and subordinated classes receiving correspondingly lower
credit ratings.[12]
However, the credit crisis of 2007-2008 has exposed a potential flaw in the Securitisation process - loan
originators retain no residual risk for the loans they make, but collect substantial fees on loan issuance and
Securitisation, which doesn't encourage improvement of underwriting standards.
Event risk
Prepayment/reinvestment/early amortization: The majority of revolving ABS are subject to some
degree of early amortization risk. The risk stems from specific early amortization events or payout events
that cause the security to be paid off prematurely. Typically, payout events include insufficient payments
from the underlying borrowers, insufficient excess Fixed Income Sectors: Asset-Backed Securities spread,
a rise in the default rate on the underlying loans above a specified level, a decrease in credit enhancements
below a specific level, and bankruptcy on the part of the sponsor or servicer.[12]
Currency interest rate fluctuations: Like all fixed income securities, the prices of fixed rate ABS move
in response to changes in interest rates. Fluctuations in interest rates affect floating rate ABS prices less
than fixed rate securities, as the index against which the ABS rate adjusts will reflect interest rate changes
in the economy. Furthermore, interest rate changes may affect the prepayment rates on underlying loans
that back some types of ABS, which can affect yields. Home equity loans tend to be the most sensitive to
changes in interest rates, while auto loans, student loans, and credit cards are generally less sensitive to
interest rates.[12]
Contractual agreements
Moral hazard: Investors usually rely on the deal manager to price the Securitisations’ underlying assets.
If the manager earns fees based on performance, there may be a temptation to mark up the prices of the
portfolio assets. Conflicts of interest can also arise with senior note holders when the manager has a claim
on the deal's excess spread.[15]
Servicer risk: The transfer or collection of payments may be delayed or reduced if the servicer becomes
insolvent. This risk is mitigated by having a backup servicer involved in the transaction.[12]
Recent lawsuits
Recently there have been several lawsuits attributable to the rating of Securitisations by the three leading
rating agencies. In July, 2009, the USA’s largest public pension fund has filed suit in California state court
in connection with $1 billion in losses that it says were caused by “wildly inaccurate” credit ratings from
the three leading ratings agencies.[1]