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Unit 11: Innovations in Banking
1. Deposit Products: Savings Account - Current Account - Demand Deposits -Term Deposits Notes
- Certificate of Deposit
2. Remittance Products: Demand Draft - Travelers Cheques - Mail Transfer - Telegraphic
Transfer - RTGS-SFMS
3. IT Products: MICR Cheques - Channel Banking - Core Banking - Internet Banking Mobile
Banking - ATM's - Debit Card - Credit Card
4. Loan Products: Short Term Loans-Long Term Loans - Consumer Loans - Education Loans
- Housing Loans - Business Loans - Farm Loans - Kisan Credit Cards - Corporate Loans -
Syndication - Microfinance
Services
The growth of financial markets during the last 15 years has been phenomenal. This period has
witnessed tremendous changes in the composition of markets. The share of banks in the total
financial transactions recorded had fallen behind the security market transactions.
Financial markets, in the process, afforded efficient risk sharing mechanism among investors
through an array of innovative financial instruments with very different risk-return relationship.
For example investors, who are extremely risk averse, may invest a large part of their wealth in
risk-free securities such as treasury bills, whereas, more risk-tolerant investors may select risky
stocks, while investors with moderate risk preference may choose a combination of bonds and
stocks.
11.12 Factoring
Features
Buying the receivables of a company for a value.
Enables better management of receivables.
Involves outright sale of receivables of a manufacturing or trading firm to a financial
institution called "factor".
Could be with or without recourse to the client.
A fee, as a percentage of the value of receivables, is collected by the factor.
Factoring is a financial option for the management of receivables. In simple definition it is the
conversion of credit sales into cash. In factoring, a financial institution (factor) buys the accounts
receivable of a company (Client) and pays up to 80% (rarely up to 90%) of the amount immediately
on agreement. Factoring company pays the remaining amount (Balance 20% - finance cost-
operating cost) to the client when the customer pays the debt. Collection of debt from the
customer is done either by the factor or the client depending upon the type of factoring. We will
see different types of factoring in this article. The account receivable in factoring can either be
for a product or service. Examples are factoring against goods purchased, factoring for
construction services (usually for government contracts where the government body is capable
of paying back the debt in the stipulated period of factoring. Contractors submit invoices to get
cash instantly), factoring against medical insurance etc. Let us see how factoring is done against
an invoice of goods purchased.
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