The Financial Bulletin
FROM THE EDITORS
Money Matters Club IBS, Hyderabad Est..—2005
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Dear Readers, It gives us pleasure to come up with the January 2021 issue of the Financial Bulletin successfully. In this issue, we aim to give you a brief description of the growing Banking and Financial services, provided by various entities in the nation. These services are an integral part of the financial system of India and help in smooth conduct of numerous business activities daily. The bulletin also describes the modalities of the working of these services. May this issue be fruitful to each one.
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Money Matters Club, The official Finance Club of IBS Hyderabad.
Kritika Gupta Jagriti Gupta Juhi Parasrampuria Saisadwik Chodavarapu
Newsletter Coordinators
MENTOR SPEAKS lasted from 1969 to 1991 Phase III: The Liberalisation or the Banking Sector Reforms Phase which began in 1991 and continues to flourish to date
Dr. M.V.Narasimha Chary
(Faculty Coordinator)
The History of Banking in India dates back to before India got independence in 1947. The Indian banking sector is broadly classified into scheduled and non-scheduled banks. The scheduled banks are those included under the 2nd Schedule of the Reserve Bank of India Act, 1934. The scheduled banks are further classified into nationalized banks; State Bank of India and its associates; Regional Rural Banks (RRBs); foreign banks; and other Indian private sector banks. The SBI has merged its Associate banks into itself to create the largest Bank in India on 01 April 2017. With this merger, SBI has a global ranking of 236 on the Fortune 500 index. The term commercial banks refer to both scheduled and nonscheduled commercial banks regulated under the Banking Regulation Act, 1949. Banking in India forms the base for the economic development of the country. Major changes in the banking system and management have been seen over the years with the advancement in technology, considering the needs of people. The banking sector development can be divided into three phases: Phase I: The Early Phase which lasted from 1770 to 1969 Phase II: The Nationalisation Phase which
During the 20th century, developments in telecommunications and computing caused major changes to banks' operations and let banks dramatically increase in size and geographic spread. The financial crisis of 2007-2008 caused many bank failures, including some of the world's largest banks, and provoked much debate about bank regulation and supervision. This led to a focus on supervisory control, capital regulations, market-entry regulations, activity restrictions, private monitoring, and liquidity. However, a few studies have shown that the effect of bank regulation and supervision also depends on the ownership structure and the size of a bank. Banks that were pushed by their boards to maximize shareholder wealth before the crisis took risks that were understood to create shareholder wealth, but were costly ex-post because of outcomes that were not expected when the risks were taken. Mongiardino and Plath (2010) show that the risk governance in large banks seems to have improved only to a limited extent despite increased regulatory pressure induced by the credit crisis. They outline best practices in banking risk governance and highlight the need to have at least (1) a dedicated board-level risk committee, of which (2) a majority should be independent, and (3) that the CRO should be part of the bank’s executive board. A study indicates that the banks have to be better prepared to face the next financial crisis, have to significantly improve the quality and profile of their risk management function, but also embed the appropriate risk governance having CEO and CRO at the same
level, ideally both reporting to the board of directors. Following the global financial crisis, several developing countries have endorsed the objective of financial inclusion for economic prosperity and growth. Many multilateral organizations have made commitments to advance financial inclusion globally. For example, the G20 created the “Global Partnership for Financial Inclusion” in 2010 at the Seoul Summit intending to promote inclusive financial development in developing countries. Greater financial inclusion brings unbanked firms and consumers into the formal banking system. It helps financial institutions to diversify their depositor base and loan portfolio. Mehrotra and Yetman (2015) found that the increased diversification potentially enhances the resilience of financial institutions to withstand a financial crisis. Information and communications technology (ICT) diffusion and its effects on the banking industry have received remarkable attention after the global financial crisis. Staff downsizing and staff retraining are the challenges that banks are facing as a consequence of the modernization of the IT structure. Technology experts have particular importance and utility in helping banks understand the benefits that these technological advances can bring in terms of costs and innovation for the banking business (e.g., through access to new customer segments, new tools, and systems to implement, etc.).
With advances in technology and the digitalization of business processes in the financial services industry, physical and virtual environments are rapidly converging. The digital transformation of the financial sector has led to more digitized business models and processes but has also created new products and services. For example,
the past decade has seen the rise of digital advisory and trading systems, artificial intelligence and machine learning, peer-topeer (P2P) lending, crowdfunding, mobile payment systems, and even new monetary capabilities, with various forms of digital money (Bitcoin and other cryptocurrencies). Today, digital channels are no longer just another or cheaper way to interact with customers. Rather, they represent a significant and continuously increasing share of retail client business worldwide. We use the term “Fintech” to refer to the services of various high-tech start-ups that feature innovative business and digital platform models. Fintech is part of the process of evolving financial innovation which made inroads into the banking and financial services sector. The use of fintech along with other technological advancements is intended to lower search costs of matching transacting parties, achieve economies of scale in gathering and using large data, achieve cheaper and more secure information transmission and reduce verification costs. The major areas that fintech covers are: (i) credit, deposits, and capital-raising services; (ii) payments, clearing, and settlement services, including digital currencies; (iii) investment management services (including trading); and (iv) insurance. Part of the technological backbone of fintech is Blockchain technology. There is little doubt that digital currencies will eventually replace cash, but the open questions are when and in what form will central banks embrace such currencies as part of the payment system? One of the driving factors behind the shift of market share toward Fintech is because of better customer satisfaction through better service offerings. Perceived trust and reliability, transparency, and financial literacy appear to be the most important attributes of adopting Fintech products and services.
INTRODUCTION Financial Services The services which are provided by the finance industry are called Financial services. There is a large number of businesses that manage money, banking, and insurance companies, consumer-finance companies, credit-card companies, etc. The financial services help in setting both the small and large scale business which enables people to earn and save. Examples for Financial services: Savings accounts, checking accounts, credit, and home loans, etc. A financial system has various elements like financial markets, financial institutions, and intermediaries. Importance Promoting the investment: Financial services give more demand for the products and the producer will go to more investment. The financial services at this stage help the investor to raise capital. The investments are attracted from abroad. The producer can acquire modern machinery for a new production by factoring and leasing companies. Promoting Savings: Mutual fund is one type of financial service that gives the investor the opportunity for different types of saving. For pensioners and aged people, different types of options are given for a reasonable return with less risk. Maximizing the Returns: The availability of the credit at a reasonable rate gives businessmen the maximum returns. The producers can use the leasing method for some assets or else they can opt for credit facilities for acquiring the assets.
Banking services The basic banking services comprise a payment account having basic features and an instrument for using the account. Eg: Debit card, Online banking ID. The account should provide cash withdrawing facilities, execution of payment transactions, and electronic means of identification. Basic banking services don’t include credit card facilities and accounts with overdraft facilities.
Evolution of banking One of the oldest businesses in the Banking business. The changing technological era made the bank system change its operations according to the needs of customers. All the Banking benefits are provided Online through online banking. The long queues at the ATMs disappeared as the online services came into the picture. The rise in the internet created new employment for IT people to check the online baking facilities. The old traditional approach of meeting the bank representative in the working days is no longer followed by most of the customers. The rapid changes in technology made banking so easy that people are more comfortable using smartphones and computers to check their account balance and making all their transactions. Mobile apps are providing the best services to the customers. The Government continuously tracks the activities of the banks and regulations are made accordingly to improve the banking sector. The top banks hold significant power and the banking assets should be carefully monitored by the Governments. Financial institutions involved JP Morgan, chase & co, Bank of America, Citi Group, and Wells Fargo
By – Siddartha Molleti
SWAP A Swap is an acquired contract in which two parties exchange cash flows or liabilities from two different financial instruments. Most exchanges include cash flows based on the principal amount of the loan or bond, but the principal amount of the bond does not change hands although the instrument can be almost anything. Each cash flow consists of one leg of the exchange. One cash flow is usually adjusted, while the other varies and is based on the interest rate, floating exchange rate, or index price. The most common type of exchange is an interest rate exchange. The exchange does not trade, and trading investors do not participate in the exchange. Instead, swaps are over-the-counter (OTC) contracts especially between businesses or financial institutions designed for the needs of both parties. Types of Swap Interest Swap: In interest rates, entities exchange and cash flow based on the principal interest rate (this amount is not exchanged) to protect interest rate risk or speculation. For example, consider ABC Co. recently released $ 1 million in five-year contracts with a fixed annual interest rate defined as the London Interbank Offered Rate (LIBOR) and 1.3% (or 130 key points). Also, consider that LIBOR is 2.5% and ABC management is concerned about rising interest rates. The management team finds a distinct company, XYZ Inc., that is willing to pay ABC an annual LIBOR average and 1.3% to a well-known principle of $ 1 million for five years. In other words, XYZ will fund ABC interest rates on its latest bond issue. In exchange, ABC pays XYZ an annual fixed rate of 5% for $ 1 million over five years. ABC benefits in exchange if prices rise sharply over the next five years. XYZ benefits when prices fall, settle or rise slightly. Commodity Swap: A commodity swap involves the exchange of floating commodity prices, such as Brent Crude's oil price, at a fixed price. As this example illustrates, commodity swap often involves crude oil. Currency swap: In exchange for money, groups exchange interest on the principal payments for loans received in various currencies. Unlike the interest rate swap, the principal is not a recognized lender, but an interest rate swap. Currency swaps are possible between countries. China, for example, has used swaps with Argentina, helping the latter to strengthen its foreign reserves. Credit Swap: Credit swap involves the exchange of equity debt - in the case
of a publicly-traded company, this could mean stock bonds. It is a way for companies to restructure their debt or restructure their financial structure. Total Return Swap: In a Total Return Swap, the total asset is exchanged for a fixed interest rate. This allows the group to pay for the disclosure of a fixed asset level - stock or index. For example, an investor may pay a fixed rate in one group to cover the amount of money and shares in stocks. Credit Default Swaps (CDS): Credit Default Swap (CDS) is a one-company agreement to repay a lost principal with interest rates on a CDS consumer if the borrower is not in good credit. Overheating and risk management in the CDS markets was the cause of the 2008 financial crisis. Pros: Swaps are usually cheaper. There is no pre-premium and reduces transaction costs. Swaps can be used to prevent risk, and long-term fencing is possible. Provides flexibility and retains information benefits. Cons: Early termination of swap before maturity may lead to a breakage cost. Lack of liquidity. It is subject to default risk.
By – Smaran Neelisetty
ASSET FINANCING Asset financing is a sort of borrowing short term finances associated with the assets of a corporation. In asset financing, the corporate uses its existing inventory, assets, or short-term investments to secure short-term financing. Reasons for Asset Financing  Securing the use of assets : The capital expenditures for purchasing assets outright can put a strain on a company’s working capital and cash flow. Using asset financing provides a corporation with the assets they have to work and grow while maintaining financial flexibility to allocate funds elsewhere. Purchasing assets outright is often expensive, risky, and holds a corporation back from expansion. Asset financing provides a viable choice to acquire the assets that the business needs without excessive expenditures. With asset financing, both the lenders (banks and financial institutions) and therefore the borrowers (businesses) enjoy the as it is safer for lenders than lending a standard loan. A traditional loan requires the lending of an outsized sum of funds that a bank hopes they're going to revisit. When the bank lends assets out, they know they're going to recover a minimum worth of the asset. Besides, if borrowers fail to make payments, the assets can be seized by the lender. 
Securing a loan through assets : Asset financing involves a business looking to secure a loan by using its assets in the balance sheet pledged as collateral. Companies will use asset financing in the situation of traditional financing because the lending is decided by the worth of the assets instead of the creditworthiness of a corporation. If the corporation were to default their loans, their assets would be seized. Assets pledged against such loans can include Plant, Property, and Machine (PP&E), inventory, accounts receivable, and short-term investments. Early-stage and smaller companies often run into an issue with lenders because they lack the credit rating or track record to secure a traditional loan. Through asset financing, they will receive a loan supporting the assets they have to secure, financing for his or her day-to-day operations and growth.
Functions It is commonly used for short-term funding and working capital. The funds are going to be put towards various things, like employee wages, payments to suppliers, and other short-term needs.
The loans are typically easier and faster to get, which makes them attractive to all or any companies. With fewer covenants and restraints, they are more flexible to use. The loans are usually amid a hard and fast rate of interest, which helps the corporate with managing its budgets and income. Pros Easier to obtain than traditional bank loans. Fixed payments make budgeting and income simple to manage. Most agreements have fixed interest rates. Failure to pay only leads to the loss of assets, nothing more. Cons There is the danger of losing important assets required for running a business. The value of the assets against which a loan is secured can vary, with the likelihood of low valuations. Not as effective for securing long term funding.
By— Mahesh Sohanda
RISK MANAGEMENT Risk management is the process of recognizing, analyzing, and controlling threats to an association's capital and earnings. These risks or threats could come from a wide assortment of sources, including financial uncertainty, legitimate liabilities, strategic management errors, accidents, and natural disasters. IT security threats and data-related threats, and risk management strategies to alleviate them, have become the main concern for digitized organizations. Therefore, a risk management plan progressively incorporates companies' processes for identifying and controlling threats to their digital assets, including proprietary corporate data, a customer's personally identifiable information (PII), and intellectual property. Each business and association faces the risk of startling, harmful occasions that can cost the organization cash or cause it to for all time close. Risk management allows the associations to endeavor to get ready for the surprises by limiting risks and additional expenses before they occur. Process Identify the Risk—It is very important to acknowledge the risks that the business is exposed to in its day to day business operations. Some of the common risks which are observed by every organization are – legal risks, environmental risks, market risks, regulatory risks, and much more. Analyze the Risk—An analysis is a key element in managing any risk. The scope of the risk must be assessed. It is also important to understand the link between the risk and different factors prevailing in the organization. Evaluate or Rank the Risk—Most risk management solutions have different categories of risks, depending on the magnitude of the risk. A risk that has few uncertainties is rated lowly, risks that can result in catastrophic loss are rated the highest. Treat the Risk — This is done by taking help from domain professionals. In a risk management solution, all the relevant stakeholders can be sent notifications from within the system and the discussion regarding the risk can take place within the system. Monitor and Review the Risk — Market risks and environmental risks are examples of risks that need to be monitored continuously. Under a digital environment, the risk management system monitors the entire risk structure of the organization. If any material changes happen it is immediately
visible to the team. Continuous monitoring risks ensures the business to operate smoothly.
Functions Risk management function includes the following: Identifying risks, analyzing them, forecasting future frequency and severity of losses, mitigating risks, finding risk mitigation solutions, creating plans, conducting a cost-benefit analysis, and implementing programs for loss control and insurance Benefits of Risk Identification Minimization of risks Saving cost and time New opportunities Disadvantages of the Risk Management Process Complex calculations Unmanaged losses Ambiguity Depends on external entities
By— Riya Gupta
TAX/AUDIT CONSULTATION By the Finance Act, 1984, Section 44AB was incorporated in the Income-tax Act, 1961. This section provides for the audit of accounts of assesses with net revenue, turnover, or gross receipts exceeding the limits stated in that section, generally referred to as 'Tax Audit'. The said audit is carried out to ensure that the assesses have kept proper accounts books and complied with the provisions of the Act. It is important to comply with the various provisions of the Act, inter alia, with sections 28 to 44DB, while keeping the books of accounts for the return of income. The clauses in these sections deal with taxable income from business or profession, how much income is measured, feasibility, different allowances or disallowances and the depreciation rate on different properties held and used by the assessor, deduction for making investments, deductions for making an investment, care and tax enforcement on borrowed capital, treatment and tax incidence on bad debts, statutory funds, accounting methods, etc.
Process The following individuals are required, as per section 44AB, to have their accounts audited: The person carrying on a business where INR 1 crore exceeds his total revenue, turnover or gross receipts; The individual engaged in a career where his gross receipts are greater than INR 50 lakhs; The business individual who opted for a presumptive scheme under section 44AE, 44BB, and 44BBB and who claimed income below the profits considered; Under section 44ADA, the individual carrying on the career and opting for a presumptive scheme and reporting income lower than considered profits but income exceeds the minimum threshold. Functions Advising clients on the management of account books according to the rules of the Act;
Advising under the rules of the Act on the admissibility of expenditure; Estimate of the disallowances to be recorded in the tax audit report as well as in the revenue return report; Conducting a tax audit following the provisions of the Income Tax Act and preparing a report on Form 3CD by the various provisions of the Act and the related guidance notes; Furnishing the report to the income tax department on Form 3CD.
By— Varun Damwani
INSURANCE Insurance is a legal agreement between an insurance company (insurer) and an individual (insured). The insurance company promises to salvage the losses of the insured on happening of the insured contingency. The contingency is the event that causes the loss. It could be a result of the death of the policyholder or damage/destruction of the property. The party insured pays a premium in return for the promise made by the insurer. I How Does It Work? The insurer and the insured get a legally binding contract for the insurance, which is called the insurance policy. The insurance policy consists of details about the terms and conditions and circumstances under which the insurance company will pay the insurance amount to either the insured person or the nominees. Any individual or company can apply for insurance from an insurance company, however, the final decision to provide insurance is at the discretion of the insurance company. The insurance company evaluates the claim application to make a decision.
Types Of Insurance Life insurance- life insurance is insurance on one’s life. Life insurance makes sure your dependents are financially secured in the event of one’s untimely demise. Health insurance- Health insurance covers medical costs for expensive treatments. Health insurance policies cover an array of diseases and ailments. The premium paid for a health insurance policy includes treatment costs, hospital bills, and medication costs. Car insurance - car insurance protects you against any untoward incident like accidents. Some policies may also compensate for damages to your car during natural calamities. Education Insurance - Education insurance provides a lump sum amount of money when your child reaches the age for higher education and gains entry into college. The fund can then be used to pay for the child’s higher education expenses. Under this insurance, the child is the recipient of the funds, while the legal guardian is the owner of the policy. Home insurance - Home insurance can help with covering loss or damage caused to one’s home due to accidents like fire and other natural calamities or peri.
By - Vanshika Saraff
FORWARD RATE AGREEMENT Forward Rate Agreements are agreements between a bank and a borrower where the bank agrees to lend to the borrower the amount of interest agreed upon by the principal which might charge in the future. The FRA is an agreement between two parties that agrees on a fixed interest rate to be paid/received on a later date. Interest exchanges are based on the maximum calculated amount for a period not exceeding six months. FRAs are used to help companies manage their interest rate disclosure. At the same time, the borrower agrees to pay the Bank Bill Reference Rate to the same principal. As a borrower, this allows you to lock down your borrowing level rather than favor the market. No capital exchange takes place, only the difference between the current market interest rates and the agreed interest rate of the FRA is exchanged. The reverse can also be adjusted. How does FRA Work? FRA is an agreement between you and the Bank to exchange net differences between fixed interest rates and floating interest rates. This exchange is based on the visual value you need in the selected term. The net difference between the two interest rates is used compared to the basic loan. For example, XYZ Corporation, which has borrowed a fixed interest rate, has developed the view that interest rates may increase. XYZ has opted for fixed payments on all or part of the remaining loan term using FRA (or a series of FRAs, (see Interest Rate Swaps), while their basic lending is always flexible, but fenced.
How Much Does an FRA Cost? FRA may be scheduled for one to six months and start-up to 18 months from the date of the transaction. There are no fees or other direct costs associated with FRAs. The FRA price is simply a fixed interest rate at which the FRA agreed between you and the Bank. The FRA rate will depend on the FRA period, how far the agreement is set, and the current market interest rates.
Who Can Use The FRA? FRAs can be used by borrowers who are interested in or need to adjust their interest rate or cash flow profile to suit their specific needs. FRAs are used by borrowers who want to protect themselves or take advantage of future interest rates. Flexible borrowers will use FRAs to convert their interest rates by converting them into a variable interest ratepayer into a fixed interest payer in a market where volatile interest rates are expected. Limited rate lenders can use FRA to convert from a fixed ratepayer to a variable ratepayer in the market where volatile prices are expected. Pros: It empowers the parties to the Agreement to reduce the risk of future borrowing and borrowing from any non-performing entity by entering into these agreements. For example, a market participant who is scheduled to receive payment in foreign currency at the end of one year can avoid the risk of currency fluctuations by entering into a Progress Agreement. Similarly, a bank that lends money at a fixed rate and expects future interest rates to benefit from the restrictions by entering into the Advancing Standard Agreement as a Floating Taxpayer. It is usually used for trading depending on the interest rate expected for Market participants. Cons: FRA is customized and sold over the counter and, as such, carries a higher amount of Comparison Risk compared to a guaranteed futures contract, paid by Qualified Centralized Counterparty (QCCP) Unlike exchanges where a clearing house guarantees both seller and buyer gets paid, the parties in FRA are exposed to non settlement risk as they are not standardized. By - Smaran Neelisetty
CAPITAL RESTRUCTURING The modification of a firm's capital structure either in response to changing business conditions or as a way to acquire funding for the organization's growth initiatives. Reasons for Capital Restructuring The capital restructuring may be a corporate operation aimed toward changing the ratio of equity and debt during a firm's capital structure. It is usually wiped out a response to a crisis such as: Changing market conditions. Hostile takeover bid. Bankruptcy. Before embarking on capital restructuring, a business's owners or managers might want to form changes to enhance the company's general prospects. In some cases, the restructuring might also be done in economic changes such as rescission and bankruptcy. In economic-driven cases, capital restructuring will specialize in protecting and keeping the core of the business intact during the economic downturn. It does this by using a number of its capital assets to offset operating expenses during this era. On the opposite hand, capital restructuring may come as a result of positive economic changes that make a variety of growth opportunities, prompting the rearrangement of assets to maximize new possibilities to extend the rock bottom line and reputation of the business. Pros Capital restructuring is an operational approach primarily wont to affect changes that impact a business's financial stability. However, it also can rearrange capital assets to position the corporation to require advantage of growth opportunities. In essence, capital restructuring is completed to vary a company's holdings and finances. The goal is for the business to realize its objectives while operating more efficiently. Strong communication skills are a requirement since restructuring would require delicate negotiations with equity and debt holders during a bid to balance out their interests.
Cons It causes employees to panic about how the changes in capital structure might affect their job security. Changes in capital structure can affect the position of investors’ trust in the company. Loss of assets Decreased public image
By— Mahesh Sohanda
PORTFOLIO MANAGEMENT Portfolio management is the process of managing individuals’ investments so that they maximize their earnings within a given time horizon. Such practice ensures that an individual's invested capital is not exposed to too much market risk. Primarily, portfolio management serves as a SWOT analysis of different investment avenues with investors’ goals against their risk appetite. In turn, it helps to generate substantial earnings and protect such earnings against risks. The entire process is based on the ability to make the right decision. Such a decision relates to – attaining a profitable investment mix, assigning assets as per risk and financial goals, and diversifying resources to combat capital erosion. Process The Four Key Steps for Successful Portfolio Management: Executive Framing -Framing is the difference between building an effective decision tool and an academic exercise. It provides the focus necessary for streamlining data collection. Data Collection - Analysing the data and engaging in strategic conversation can account for less than 5% of time spent in the planning process. Modelling and Analysis- Generating a series of analyses to understand the model dynamics and validating these by comparing them to an existing plan, by reviewing them with appropriate business and financial experts within the company. Synthesis and Communication - It is vital to synthesizing the information to make it easy to share with executives. This step kicks off a new round of analysis to formulate profound questions.
Functions of Portfolio Management Portfolio management aims to create a portfolio that has a maximal return at whatever level of risk the investor is willing to take.
Risk Diversification-It is spreading risk akin to the investment of assets. Diversification could take place across different securities and different industries. Asset Allocation- It deals with achieving the operational proportions of investments from asset classification. Portfolio managers focus on a stockbond mix. For this purpose, equally-weighted classes of assets are used. Best Estimation- It is to estimate the best coefficient. It calculates and
ranks the systematic risk of various assets. The best coefficient is an index of systematic risk. Pros PMS promises to outperform the benchmark i.e Higher returns than the benchmark in the long run. No limit to the extent to which one can invest in a certain stock. No herd behaviour is followed by an expert, they keep the individual’s requirements in their mind and accordingly invest in the segment preferred. Cons PMS providers share profits but not losses. Long documentation procedure, one needs to open a new Demat Account, trading, as well as a bank account for PMS. High set up cost – one has to pay 1 or 2 % of your AUM i.e. the amount you want to invest, at the time of investment. Along with this yearly management, the cost has to be paid.
By - Riya Gupta
WEALTH MANAGEMENT Wealth management is an investment consulting service that puts other financial resources together to serve the needs of affluent clients. It is an advisory process whereby the advisor gathers information about the client's needs and uses relevant financial products and services to create a tailor-made plan specifically suiting the needs of the individual. A wealth management consultant or wealth manager is a type of financial advisor that uses the range of financial disciplines available for one fixed fee to manage a wealthy client's wealth, such as financial and investment advice, legal or estate planning, accounting and tax services, and retirement planning. Wealth management is more than just investment advice. It has to consider different aspects of an individual's financial life. The idea is that high net worth individuals benefit from a holistic approach in which all the tools needed to handle their assets are managed by a single person, rather than trying to combine guidance and various items from a range of experts to manage their money and prepare for their own or their family's present and future needs.
In certain cases, a wealth management consultant may have to coordinate feedback from outside financial experts as well as representatives of the client (lawyers, accountants, etc.) to formulate the best plan for the client's benefit. Some wealth managers also provide philanthropic activities with banking services or advice. A wealth management advisor requires affluent people, but a wealth management advisor is not needed for all affluent people. This service is typically ideal for affluent people with a wide variety of varied needs. Pros
Executing and monitoring investments - The implementation and control of each investment plan is the responsibility of wealth managers. To deliver the highest returns, they should know exactly where and when investment products should be purchased or sold and handle all transactions on behalf of their clients. When required, investment portfolios should be controlled and rebalanced.
Exclusive access - Some wealth managers have exclusive access, via other outlets, to investment vehicles that are not available to others. This may include individual company shares, stocks that have not yet been made available via an initial public offering (IPO), or information or consultation that is difficult to obtain. The movement towards global financial market openness has raised concerns about exclusive access models.
Cons
Costs - The cost of wealth management services poses the greatest downside. There could be some wealth management fees, and these will eat into your earnings. Until signing up for an asset management program, prospective asset management customers are encouraged to submit detailed quotes that clearly describe all relevant costs.
Actively-managed investment - Several studies have shown that actively managed investment strategies never perform better than traditional market indices, in which an investor or fund manager takes an active part in buying and selling individual investment vehicles. For this reason, a growing number of asset managers have started to include passive investment strategies in investment portfolios, such as exchange-traded funds.
By - Varun Damwani
FACTORING & FORFEITING Factoring is also known as accounts receivable financing. It is the process in which businesses receive advances against their accounts receivables. There are three parties involved when it comes to factoring:
the debtor (its buyer of goods), the client (seller of the goods), and the factor (the financier). Forfeiting is a financing option which exporters use to receive immediate cash. Claims are sold by exporters on medium and long-term trade receivables to a forfeit-er at a discounted rate to receive immediate cash. Exporters minimize the risk of factoring by selling without recourse, which means the exporter is not liable when the importer fails to pay or honour the bill. Key Differences Between Factoring and Forfeiting The main difference between the two is that factoring can be used in domestic and international trade, whereas forfeiting only applies to international trade financing because forfeiting involves exporter and importer majorly.
By - Mehul Patwari
GUARANTEE A guarantee means giving something as security. A bank guarantees assurance that the bank offers surety and guarantees for different business obligations on behalf of their customers within certain regulations. This is a promise done by the bank to any third person undertaking the payment risk on behalf of bank customers. It is serving as a risk management tool for the beneficiary. A Bank guarantee is given between the bank and its customers on a contractual obligation. Process A person with good financial records is eligible for a guarantee. It can be applied by a business in his bank or any other bank offering such services. Bank will analyse the previous banking history, creditworthiness, liquidity before approval. The BG period, value, beneficiary details, and currency are examined by the bank as they are required for approval. The banking officials will provide necessary approvals for BG when all the criteria are met. How it Works The risk assumed by the bank in each transaction decides the BG charges. One example is the performance BG is having less risk than the financial BG. The fees are charged quarterly on the BG value according to the type of BG. The application processing fee, handling fee, and documentation fee may also be charged by the bank. There are certain cases where the bank requires security from its customers which includes 100% of the Bank guarantee value. In some cases, the collateral security or cash margin can be accepted by the issuing banks Pros  The financial risk in the business transaction is reduced by the Bank guarantee  The sellers want to expand their business on a credit basis due to the low risk.  The small-scale business gets the benefit because the bank charges low fees for guarantees.
When banks analyse and certify the financial stability of the business, its credibility increases, and this, in turn, increases business opportunities. The documents required for the guarantee are less and processing is done quickly by the banks on submission of all documents.
Cons : Sometimes, the bank's process for assessing the financial position of the business is so rigid which makes the overall process time-consuming and complicated. The loss-making entities have difficulty to find a bank guarantee with the strict rules and assessments of banks To process a guarantee for high-risk transactions collateral security is required by the bank
By - Isha Agarwal
LETTER OF CREDIT The Document is Issued by The Bank and Provides: Seller protection: If a buyer fails payment, the bank that issues a letter of credit pays the seller only if the seller meets all of the requirements in the letter. The document provides security when the buyer and seller are in different countries. Buyer protection: when the product or service fails to deliver which was bought by a person, the buyer can be paid using standby LOC. This is similar to a refund. The money you received can be used to pay someone else for the product or service which is needed. When Does Payment Happen? For international trade, the seller may have to deliver merchandise to a shipyard to satisfy the requirements of the letter of credit. The seller receives the document only after the delivery is confirmed and sent the documents to the bank. To allow payment according to the letter of credit, the banks verify the required documents. The bank is not concerned with the quality of goods or other items that may be important to the buyer and seller. That doesn't necessarily mean that sellers can ship junk: Buyers can insist on an inspection certificate as part of the deal, which allows somebody to review the shipment and ensure that everything is acceptable. For a “performance” transaction, a beneficiary might have to prove that somebody failed to do something. 4
Pros The trade partners can transact with unknown partners or in newly established trade. It helps in expanding their business. It is safer for the seller or exporter in case the buyer or importer goes bankrupt to have a letter of credit because the creditworthiness of the importer is transferred to the issuing bank, the bank will be liable to pay the amount as agreed in the letter of credit. In case of a dispute between the partners, a letter of credit accounting allows the exporter to withdraw the fund as agreed upon in the letter of credit and resolve the disputes later in the beneficiary’s The phrase ‘pay now, litigate later’ is used by the courts to describe the right to full payment.
Cons
A letter of credit adds to the cost of doing Banks charge a fee for providing this service, and it can increase steeply if the parties want to put some additional features A letter of credit poses a material fraud risk to the bank that will pay the exporter upon looking at the shipping documents and not the actual quality of goods. A letter of the credit life cycle has an expiration date, and therefore the exposer has a time limit within which he will have to deliver the goods by all means.
By - Isha Agarwal
SYNDICATE LOAN A syndicated bank facility is a type of financing that is being offered by a group of lenders who are known as a syndicate and they work together to provide funds for a single borrower. A corporation, a large project, or a sovereign government can play the role of a borrower. The loan shall include a fixed amount of funds, a credit, or a mixture of two. Process The need for syndicated loans arises when a project is in the need of a large loan for a single lender or when a specialized lender is needed with expertise in a specific asset class or when large funding is required for mergers, acquisitions, buyouts, and other capital expenditure projects. The syndicated loan allows anyone lender to fulfil the need for a large loan while maintaining prudent and manageable credit exposure because the risks associated are divided among other lenders. The liability of each lender is restricted to their respective share of the loan interest. People Who Can Avail for This? This type of banking service generally requires a huge amount of capital and it typically exceeds a single lender’s resource or the underwriting capacity. These types of loans enable lenders to spread risk and take part in the financial opportunities that shall be too large for the individual capital base. The interest rates on these types of loans may be fixed or floating which is based on a benchmark rate such as London Interbank Offered Rate (LIBOR).LIBOR can be defined as the average interest rates that major banks borrow from each other.
Functions It can meet the demand for the large term and a large number of funds. It is needed by new project loans, financing in transportation, petrochemical, telecommunication, and other industries. It ensures less time and effort for financing. It's the arranger’s responsibility for doing the preparation work initiating the syndicate after the borrower and the arranger have agreed on loan terms by negotiation. It provides diversified approaches as the same loan syndications may have many forms such as fixed-term loans, revolving loans, standby L/C line on requirements of the borrower and the borrower can also select RMB, USD,
EUR, GBP, and another currency portfolio if required. It also enables borrowers to establish a good image in the market. The successful initiation of a syndicate comes from the participant’s full recognition of the borrower’s financial performance. Syndicated loans are made on the best effort basis and that means even if enough investors can’t be found the amount received by the borrower is lower than originally anticipated.
Types of Syndication Underwriting for syndication An underwritten deal Best effort syndication Club deal Participants in Syndicated Loans Arranging bank- The lead manager is another term for the arranging bank and is authorized by the borrower to construct the funding based on specific terms of the loan. The term sheet contains the financial terms between the arranging bank and the borrower. Agent- In syndicated loan service the agent acts as the link between the borrowers and the lenders and has a contractual obligation to both borrower and lender. The agent is not required to fulfil any fiduciary duty as his duty is primarily administrative. Trustee- The trustee is liable for holding the security of the assets of the borrower in place of the lenders. In case of default, the trustee is liable for ensuring security according to the instructions by the lenders. Disadvantages Negotiation with one bank may take many days, which is a time-consuming process. Management of multiple bank relationships is a tough task and requires investment both regarding money and time.
By - Astha Sristi
TREASURY SERVICES Treasury services refer to the term in investment banking that illustrates services that are provided by huge banks that extend cash management, liquidity management, FX payment, escrow, and trade solutions are provided to corporations. The banks offer treasury services by their internal operations, fixed income, and money market desk for interest-bearing securities may be included by these banks. For example, the solutions may include helping in managing cash balances, transactions, and information through client channels.
Process These services structurally enhance the bottom line of its clients by reducing their costs and enhancing their efficiency in finance. They create synergy and reduce costs for the clients by the implementation of innovative solutions and the services include services, software, training, and financial engineering tools. With the help of these building blocks, the services can create complete solutions for the client. Functions of Treasury Management Treasury management aims to ensure that sufficient cash is available with the organization at the time of outflow of funds also it contributes to the optimum utilization of funds and ensures that there are no utilized funds kept in the frim for a long duration. Treasury management also maximizes the return on the funds available with the company by making investments that have a higher return and low risk.
People Who Can Avail of These Services? Treasury services ensure management of all the financial affairs of the business for example raising funds from different sources, currency management, cash flow, and different strategies and procedures of corporate finance. Advantages Liquidity Measuring, monitoring, and managing cash flow To establish good financial contract terms Ensuring that no excess working capital is tied up in the business. Arrangement for financing the supply chain Cross border liquidity management Funding Creating an optimum mix of equity and debt to meet capita expenditure Determination of optimum capital structure. Reduction of cost of capital Financial Risk Management Identifying potential risk Expansion of credit facilities to end-user Integrating currency and commodity price risk management.
By - Astha Sristi
CORPORATE BANKING Corporate banking is also mentioned as business banking, which serves various clients, ranging from MSME to big MNCs across the country. The term was originally utilized in the US to differentiate it from investment banking after the GlassSteagall Act of 1933 separated the 2 activities. While that law was repealed within the 1990s, corporate banking and investment banking services were offered for several years under an equivalent umbrella by most banks within the United States and elsewhere. Corporate banking may be a key profit centre for many banks. But because the biggest originator of customer loans, it's also the source of normal write-downs for loans that have soured. Corporate Banking Services Credit Loans and different credit products are offered to corporate clients. The share of profits for commercial banks comes from credit facilities provided by them. The rate of interest imposed on the loans is significantly high because the amount of risk in lending to corporate customers is relatively high.
Treasury services Treasury services are employed by companies to manage their capital requirements. These are extremely important for multinational companies as they ease currency conversion. Fixed asset requirement financing Fixed asset requirement financing services are important for corporates involved in labour-intensive industries like transportation, heavy machinery manufacturing, and information technology. Banks give customized loans and lease agreements for the purchase of kits, machinery, etc. Employer services Commercial banks also provide services like the choice of healthcare plans and retirement plans, also as payroll facilities, for labourers. Commercial services Banks also provide services such as leverage analysis, portfolio analysis, analyses of real assets, debt and equity restructuring, etc. Other important services that are provided to corporate clients include underwriters for initial public offering (IPOs) and asset management services, etc.
Characteristics of Corporate Banking Clientele A bank’s business banking unit usually serves MSME businesses and enormous conglomerates. Authority A company’s corporate banking accounts can only be opened after obtaining approval from the board of directors of the corporate. It means they need to be authorized by a company resolution or a politician vote. The company’s treasurer conventionally opens corporate accounts. Liability Since companies are accepted as separate legal entities under the law, all contents of corporate accounts are the property of the corporate and not of the individual members. It means there's a particular degree of independence to corporate accounts. It also indicates that the private creditors of the board of directors aren't entitled to the contents of the company account of a corporation. Credit rating The functioning of the corporate account forms a part of the credit history of the company. It affects the share prices and valuation of the corporate, the interest rates applicable to loans given to the corporate, etc.
By - Karan Jalan
FOREIGN CURRENCY EXCHANGE Foreign exchange (FOREX) means trading of one nation’s currency for another and such transactions occur in a foreign exchange market. The forex market is a network of banks, brokers, and other financial institutions. All the forex is handled and under the auspice of the Bank for International Settlements (BIS). The forex market is the one with the highest liquidity in the world. Future and forward markets are also another way of operating in the forex market. Major forex trading markets are located in the biggest financial hubs of the world, namely New York, London, Frankfurt, Tokyo, Sydney, and Hong Kong. How Do FOREX Markets Work? In an economy, a country’s currency value is determined according to the laws of demand and supply. The value, also known as the exchange rate is determined by the market. Forex trading involves currency pairs, where one is priced in terms of another, for example, USD/INR, EUR/USD, or USD/JPY. There will be a price associated with each pair, such as 1.4568. Considering this price was tagged to the USD/CAD pair, it implies that it costs 1.4568 CAD to buy one USD. The mosttraded currencies globally are the United States dollar, Euro, Japanese Yen, British Pound, and USD accounts for 87% of the total daily value traded. On average, the daily volume of forex transactions touches $5.1 trillion. In a forex market, currencies are traded in ‘lots’, categorized into micro, mini, and standard. The worth of each lot is as follows: a micro lot is 1000, the mini is 10000, and the standard lot is 100000. Factors Affecting Foreign Exchange The basic influencing factor for determining an exchange rate is the demand and supply of the currencies being traded. Other factors include various economic, political, and psychological conditions, government’s economic policies, trade, investment, tourism, geopolitical risk, trade balances, inflation, and economic growth outlook. Also, the exchange of foreign currency is not just a simple conversion of one currency to another. It also includes the application of multiple financial instruments like forwards, swaps, options, etc.
Major Types of The FOREX Market Spot Market— A spot market is a financial market where financial instruments and commodifies are traded for instantaneous delivery. Delivery refers to the physical exchange of a financial instrument or commodity with a cash consideration. The spot market is also known as the cash market or physical market because cash payments are processed immediately, and there is a physical exchange of assets. Forward Market— A forward market is an over-the-counter marketplace that sets the price of a financial instrument or asset for future delivery. Forward markets are used for trading a range of instruments, but the term is primarily used with reference to the foreign exchange market.
Pros Fewer rules as compared to other markets which imply that investors are not bound to strict rules and regulations. Since trading doesn’t take place at a typical exchange, there is no commission/fees as such. No cut off time for trading since forex trading takes place 24 hours a day, 5 days a week. Since the liquidity of the market is very high, an investor gets in/out as many times and trades any amount of currency at a time. Cons There is a lack of transparency and less outcome of the investment where a brokerage is involved. There is a risk factor involved in the Forex trading market. There is high leverage which results in the higher risk involved. In the Foreign Exchange Market, there are a lot of scammers who are waiting to loot the money from the investor. Forex trading operations are difficult to manage because this market never sleeps.
By - Karan Jalan
TRADE FINANCE Trade Finance consists of various financial instruments and products that are used by companies to smoothen international trade and commerce. Trade Finance makes it possible and trouble-free for importers and exporters to transact business through trade. It also helps in reducing the risk associated with global trade by reconciling the diverse needs of an exporter and importer. Functions: The principal function of trade finance is to establish third-party transactions to eliminate the risk of payment and supply. Trade finance foretells the exporter with receivables or payments according to the agreement while the importer might be extended credit to fulfil the trade order.
Types of Trade Finance: Cash Advances: It is a payment of funds to the exporting business before the shipment of goods. It is a high-risk financing arrangement for the purchaser as there may be a delay in sending the product or non-delivery of the product. Purchase Order (PO): It is received from an end customer, based on PO the financier may pay the supplier directly and receive repayment from the buyer. The aim of PO is for a lender to finance from a supplier, through to repayment of the trade. Term Loans: Overdraft facilities or long-term debt can be more sustainable sources of funding as they are backed by guarantees or security. Pros: Trade Finance is relatively an easy way to arrange short-term finance This finance is typically secured against the goods and is backed by an insurance policy. It helps the business to focus on its growth activities.
Cons: Trade finance can become expensive if payments are not made on a timely basis. It is based on having a good track record in terms of its payments and operations, which is less accessible for new companies. By - Sai Snetha Nunna
ESCROW ACCOUNT An escrow account is a third party account where funds are stored before they are transferred to the ultimate party. Escrow accounts can hold money, funds, securities, and other assets. They provide security against frauds and scams especially with an asset having high value. How Does Escrow Work? The buyer and seller agree on the terms of the transaction and set the price. The buyer completes the transaction, and the buyer can choose Escrow as their preferred payment method for future transactions. After the payment is verified, the seller delivers the merchandise to the buyer. The buyer then inspects the product and accepts the service if the quality is at par. If both parties are satisfied, the funds are released. Pros: Lower mortgage costs: A person having an escrow account is eligible for a discount on his/her interest rate or closing costs. No big bills to pay around the holidays: For the ones who make hefty property tax payments around holidays, escrow accounts are the right one for them. The lender is responsible for making the payments: People holding escrow accounts need not worry about homeowner’s insurance and property tax payments on time as the lender is responsible for it.
Cons: Escrow accounts tie up funds: If a person has enough savings, he/she may decide to keep control of property tax funds, until it’s ready to pay the bills and in the meantime, he/she can earn interest on those funds. Upfront payment to set up an escrow account: Before opening the escrow account a person is required to deposit several months of property taxes depending on the time of the year.
By - Sai Snetha Nunna
WORKING CAPITAL FINANCE Working Capital Finance is a type of finance designed for businesses to uplift the working capital available to the business. These finances are used to take specific growth projects like taking a bigger contract or investing in new markets.
The basic idea of having these finances is to have free cash which can be used towards growing the business which can be short term to medium term. These types of finances are not used for long term funding. Businesses use various types of working capital finance which are explicitly designed to help working capital requirements of a business. Types of Working Capital Finance Working Capital Loans- These loans are short term to medium term to boost cash inflow in the business which further helps companies to go after new opportunities. These loans depend on the type and size of the business. But these loans depend on the assets available with the business which are kept as security while taking loans. Credit rating also plays an important role while taking loans. Asset Refinancing- The other way to get working capital financing is using your business assets to raise finance. Valuable assets of the company are used towards raising loans and personal assets are kept out of the picture. Merchant Cash Advances- If transactions in the business are done using card terminals, a merchant cash advance is a useful way to increase working capital. In this type, companies take advances from their merchants which is a percentage of the firm's average monthly revenue. These are painless sources of funds. Pros Helps the business to have cash in hand for any unforeseen circumstances. In most cases, businesses are safe from putting any collateral. Borrowing and repayments become easier. Cons In certain cases, there may be chances of the high level of interest payments. Sometimes businesses have to compromise on their credit rating. By - Muskan Mittal
BILL FINANCING Bill Finance is a type of finance that involves short to medium term financing benefits to small scale businesses. This helps businesses like manufacturers of indigenous machinery, capital equipment, components, etc., to seek finance under various eligibility criteria, norms. Types of Bill Financing Receivable Financing Scheme- The main purpose of this scheme is to enable small scale industries or small medium enterprises to medium and largescale units to realize their sale proceeds quickly. But these limits are to be sanctioned by SIDBI and either seller or purchaser needs to qualify itself as an SSI/SME/Service sector unit. This scheme has a validity of 90 days.
Direct Discounting Scheme- The main purpose of this scheme is to enable Small Scale Industries/service sector to offer deferred payment terms for credit sales and realize sale proceeds by promissory notes / discounting bills of exchange arising out of such sales.Usage of the bill is normally between 35 years and all the limits are sanctioned by SIDBI with a minimum transaction value of Rs. 1 Lakh.
Bills Rediscounting Scheme- Equipment (BRS-E)- The purpose of this scheme is the sale or acquisition of machinery on deferred payment terms for setting up new SSI units. These schemes are operated through scheduled commercial banks and normally ranges from a period of 2-5 years.
By - Muskan Mittal
MERCHANT SERVICES Merchant Services which are also called credit card processing is the handling of electronic payment transactions for merchants. Merchant processing involves activities such as receiving the authorization for the transaction, obtaining sales information from the merchant, sending payment to the merchant based on collecting funds from the bank. Process Step 1: The customer purchases goods or services from a merchant with a credit card; the clerk present there swipes the credit card through a point-of-sale (POS) terminal to obtain the information stored on the consumer’s card and then inputs the amount of the transaction.
Step 2: The above information is transmitted to the merchant bank. The information is conveyed in one of the following ways:
Standard terminal – authorization request is submitted through a standard phone line connection. IP terminal – With a specially designed terminal, the authorization request is submitted by an Internet connection to the bank. Processing software – authorization request is submitted through an Internet connection to the bank using computer software and a small magnetic stripe reader. No traditional terminal is required. Payment processing gateway - The request for the sales authorization is submitted by an automated website, which further communicates with the bank.
Step 3: The transaction was obtained by the merchant bank and this information is sent to the customer’s card-issuing bank by a network. Step 4: The association system then deviates the transaction to the issuing bank and requests for approval. The transaction is approved or declined depending upon the status of the consumer’s account.
Step 5: The issuing bank responds. If the transaction is verified, the issuing bank
transmits the authorization code back to the card association. Step 6: The authorization code is then sent from the card institution to the acquiring bank. Step 7: The acquiring bank deviates the approval code to the merchant’s terminal. Depending upon the merchant and transaction type, the merchant’s terminal may print a receipt for the customer to sign, which obligates the customer to pay the amount approved. Step 8: The customer was billed by the issuing bank. Step 9: The bills are paid by the customer to the issuing bank.
Who is Considered a Merchant? A merchant account is a bank account established for business purposes where companies can make and accept payments. Merchant services include allowing businesses to accept credit and debit card transactions or other electronic payment from customers, with the aid of a payment gateway. These services often come with added fees but also add an array of services. Most often the merchant has to recover the transaction fees through payment processors, the credit card association, and the issuing bank for the merchant account. However, a low processing fee doesn’t guarantee reliable service and support in the long run.
By - Vanshika Saraff
FUTURE PROSPECTS The framework of Banking and Financial services is structured against six functions of financial services and eleven clusters of innovation. Functions of Financial Services is experiencing an environment of rapid change. To design, deliver and provide financial services, the core needs to develop the required structure. We have identified 3 core functions that comprise financial services: Payments Deposits & Lending Investment Management Prospective Changes in Payment Mechanism Functionalities of new buyers are being based on existing instalment frameworks and will bring about significant changes in client conduct. Key Disruptive Trends: Mobile Payments Streamlined Payments Integrated Billing Next-Generation Security Cryptographic Protocols P2P Transfers Mobile Money The implication for Institutions and Service Providers: Institutions will need to develop more robust mechanisms to facilitate these structures. This can give multiple benefits like data collection, pattern analysis and user behaviour. With reduced visibility of the customers, customer segmentation will shrink. Institutions need to deploy more resources towards technology infrastructure to gain a presence in the market. With crypto payments kicking in, highly strong and strategic risk management systems must be adopted with appropriate Government policies. Prospective Changes in Deposits and Lending New lending platforms are transforming credit evaluation and loan origination processes. Also, customers are shifting towards other borrowing options.
Key Disruptive Trends: Automated and paperless process Alternative sources of borrowing Banking as an API platform Digital short-term lending A growing inclination towards mobile banking
The Implication for Institutions and Service Providers: Intensified competition has narrowed down the spreads between deposits and lending, thereby decreasing profitability for the business houses. Increase of alternative lending systems has completely changed the traditional process. Emergence of automated tellers. Financial products now need to be flexible in terms of their offerings. Incentive linked products will be a new exchange business. Prospective Changes in Investment Management Robo-advisors are improving accessibility to worldly financial management and creating margin pressure resulting in forcing traditional advisors to evolve. Key Disruptive Trends: Automated Advice. Algo trading Advanced Analytics Personalised products The Implication for Institutions and Service Providers: With more and more structured products, the competition will be very high. Behaviour of the consumer makes product modification easy. Big investment for big data management. CONCLUSION Banking and financial services will see a structural change in the coming years because of rapid urbanization and digitization. The structural reforms will also need some dynamic workforce with technology as their main armour. From lending to investment, everything will be done with just a click of a button. With all these developments risk management and big data analysis will play an important role. By - Sachin Gupta
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