Marketing Mix Long Answer Type Questions

Marketing Mix Long Answer Type Questions

Question 1.
What do you mean by “product life cycle? Explain?
Product life cycle is similar to human life cycle. It is defined as “an attempt to recognize distinct stages in the sales history of the product”. It is also defined as generalized model of sales and profit trends for a product class or category over a period of time.”

Stages of product life cycle:
PLC has 4 stages as showed in the diagram namely introduction, growth, maturity and decline.
Marketing Mix Long Answer Type Questions IMG 1

(a) Introduction:
It is the first step of PLC. In this stage product is introduced in the market, sales volume begins to grow but the rate of growth is slow. Profit is not be there because of low sales volume, large production and distribution company requires heavy advertising and sales promotion.

(b) Growth:
It is the period during which the product is accepted by customers and the traders. During this stage the rate of increase of sales turnover is very rapid profit also increase in proportion to sales. In the growth stage company gives top priority to sales volume and quality maintenance may have secondary preference. In this stage effective distribution and advertising are considered as key factors.

(c) Maturity:
During this stage keen competition brings pressure on prices increasing marketing expenditure and falling price will reduce profit. Additional expenditure . is involved in product modification and improvement of the product line marketers have to adopt new strategy to stimulate demand and face competition, through additional advertising and sales promotion.

(d) Saturation:
The saturation point occurs in the market when all potential buyer are using the product and company is having the work of selling product, consumption achievers a constant rate and the marketer have to concertrate on competitions to get more market share, price may fall rapidly and profit margin becomes small, company must make certain plan for improvement in product characteristics and production cost reduction to gain the market share for product.

(e) Decline stage:
After the reaching of peak point product slowly enter the decline stage and become obsolete, some time product may be gradually displaced by some new innovation. Competition covers the market and sales drops severely company have to reduce expenditure on advertising and sales promotion. Cost control becomes the key factors to generate profit.

Question 2.
Explain the various components of product planning.
Product plan or strategy:
A product strategy is a company plan for marketing its products. We lay down product objectives. We develop a product design to achieve the set objectives. We have a product programme suitable to the products position in the life cycle. Product plan or strategy involves a number of issues to be resolved.

(1) Product line:
Product line is a group of products that are related either because they satisfy similar needs of different market segments, or because they satisfy different but related needs of a given market segment.

(2) Product mix:
Product mix implies all the products offered by a firm for sale. It may consist of a single product line or several lines of products.

(3) Packaging:
Packaging may be defined as the general group of activities in the planning of a,product. These activities concentrate on formulating a design of the package and producing an appropriate and attractive container or wrapper for a product.

(4) Labeling:
Label is a part of a product. It gives verbal information about the product and the seller

(5) Branding:
Brand preference is the activity of the consumers who prefer to buy only particular type of products.

(6) Organising for product planning and development:
Product planning involves decision regarding the products or service which the firm is to produce or sell. It is concerned with the estimation and analysis of potential markets, estimation of sales volume, searching and screening of new products, budgeting of costs, modification of existing productions and scrapping of marginal or unprofitable products.

Product planning involves decision making in the following areas which are termed as components of product planning.
(a) What changes have place or likely to take place in consumer demand, product characteristics must be designed to match the requirements of consumers. Therefore, the first step in product planning is the study of market to determine buyers needs.

(b) Which new products or improvements in existing products are necessary to meet changes in demand.

(c) Which products should the firm make itself and which should it buy from outside.

(d) Should the company expand or simplify its product line.

(e) How should the product by styled and designed and in what size, colour, materials quality should be produced.

(f) What package, brand and label should be used to each product.

(g) What services, warranties and amenties should be supplied along with product.
Thus product planning involves the formulation of product policy and guidelines regarding the nature and extent of goods and services that the firm is to provide to its target market.

(7) Product research and improvements:
In marketing product analysis and research is a study of consumers preference and habit as well as dealer preferences and habits relating to a given product. Such a study can determine the extent to which the product should be altered modified or adopted to meet exactly the existing demands of the customers and resellers. The study can also enable us to devise a new product exactly needed in the market.

Question 3.
What is product-positioning? Give examples of different positioning strategies.
Meaning of Product Positioning:
Product positioning is an aid to product planning. It shows where the proposed and or present brands are located in a market. This is technically defined as a process of identifying the needs of market segments, product strength and weakness and the extent to which competing products are received to meet customer needs.

The position of a product with consumers are fixed by Consumers themselves with or without the assistance of marketers. Marketers should plan position strategies that will give their products the greatest competitive advantage in selected target markets. The positioning strategies are based on product or service attitudes benefits, usage, class of users, against competitors etc.

Different positioning strategies:
The different positioning strategies are –
(i) Attributes positioning:
When a product is positioned on its specific attributes, it is known as attributes positioning. Example – Maruti Omni Van as a family car with its features more suitable to more people ad for more comforts.

(ii) Benefits as Basis:
When a product is positioned on the needs they bill or the benefits they offer it is known as positioning the product on benefits as basis. Example : Colgate toothpaste reduces cavity.

(iii) Classes of Users:
When a product is positioned for certain classes of users it is known as positioning on the basis of classes of users. Example : Johnson and Johnson Baby bath soap.

(iv) Against competitors:
In this positioning strategy, the product is positioned against a competitor. Example – Matador (Bajaj) Van is advertised giving comparative performance of the vehicle along with other makes.

(v) Advertisement changes:
In this strategy, an advertisement claim is different from that made earlier. Example: Bournavita advertisement claims it is a ‘Health, strength and energy drink.

(vi) Usage Occasions:
In this strategy, products are positioned according to usage occasions. Example – Usha Fans for a cool summer.

(vii) Product classes:
In this strategy, products are positioned with respect to product classes. Example – Sun flower cooking oil is positioned against groundnut oil.

(viii) Away from competitors:
In this strategy, products are positioned away from competitors. Example – Thanda bole to Coca Cola.

Question 4.
What steps are involved in new product development?
There are seven steps in the planning and development of a new product.
(a) New product ideas:
In the first stage of hew product development company generates the new idea for introduction of new product in market. It finds out the detailed features of new model product Ideas may be contributed by scientists, professional designers, competitors customers, sates, force, top, management, deafens, etc., company should collect many number of ideas to get one commercially viable product.

(b) Ideas screening:
It is the second stage of new product development. In this stage company in evaluating all ideas and inventions. Poor and bad ideas are dropped out and through the process of elimination only most promising and profitable ideas are picked up for farther detailed investigation and research.

(c) Concept of development and testing:
In this stage of work only best selected ideas are studied in detail. They wit? be developed into mature product concepts. At this stage company can corporate consumer meaning into product ideas concept testing helps the company to choose the best among the alternative product concepts.

(d) Business analysis:
After the selection of best product concept it is the duty of the; company to – evaluate its market potential. Capital investment, rate of. return on capital etc. Business analysis is combination of marketing research, cost benefit analysis and probability analysis. Business analysis will prove the economic prospects of the new product concept. The proposed product must offer a realistic’profit objective.

(e) Product development and programme:
Under this stage the product idea is converted into the tangible physical product. This involves the design and formulation of the product and development of a technically and commercially method of manufacture. Product development involves developing the product features and’ farther development of manufacturing packing and distribution cost estimates.

(f) Test marketing:
After the product is examined it will be ready for mass production and marketing. But the marketers do not take the risk of mass marketing unless they are assured of positive market response. Therefore they resort to test marketing. Test marketing is the actual conduct of a marketing campaign with in a limited market for a limited period of time, it confirms the management about the product marketing at national level or international level.

(g) Commercialisation:
The final stage in product planning is commercialization of the product. Commercialization means the process of finally deciding the product profile in this stage products ope actually introduced into market place commercialization is the last step in product development process and it includes actual sale of product in the market.

Question 5.
What are the importance of branding?
Following are the importance of good brand name –

  • Branded products can be easily recognized by the customer in the retail shop.
  • Branding enable the firm assured control over the market.
  • Branding creates an exclusive market for the product.
  • It differentiate the products from its rivals.
  • Branding reduces price flexibility.
  • Good brand and branding gives greater bargaining power to the manufacture with the dealer.
  • It reduces the advertising costs.
  • Powerful brands have the! capacity to create maintain and externa the demand for the product.
  • It helps to increase sales.
  • Consumers always prefer goods branded goods.
  • It protects the consumers against duplicate goods.
  • Branded products gives standard life style to consumers.
  • Branded goods are always supplied by firm continuously therefore there is no irregularity in supply of branded goods.
  • Branded products covers more market share and more number of customers.
  • It popularizes the product in the market.

Question 6.
What are the factors influencing pricing decision policy?
Company’s pricing decisions are influenced by both the internal and external factors. These factors are –
(A) Internal factors:
(a) Organisational factors:
It means an internal arrangement for decision making and its implementation. These decisions are different from one company to other pricing decision is intended by production and market specialization.

(b) Product differentiation:
Product differentiation is the ability of a manufacturer to make his- product distinctive from others in the market therefore product differentiation makes the company to fix differentiated price rate to his product.

(c) Cost:
Product quality ingrediants and production costs determines the pricing, level of production and productivity influence the decision maker to take decision on pricing policy.

(d) Product life cycle:
The pricing policy is also influenced by the age of product. In the introduction stage of product price is usually fixed at high rate to cover preliminary expenditure and during the deceline stage price is fixed at low rate to- clear stock of product.

(e) Pricing objective:
Profit maximization in common objective of many companies therefore usually companies are fixing high rate to this product. But some companies are in the nature of service rendering and those companies are fixing low rate to this product.

(f) Functional position:
Functional position of manufacturer, wholesaler, retailer has its own impact on the firm’s pricing policy. If the firm has a longer channel of distribution the product price for the consumer is bound to be higher than in case of a smaller channel.

(B) External factors:
(a) Product demand:
Demand for the product is the most important single factor having tremendous impact on price, price policy and strategy followed by the firm.

(b) Competition :
Determination of price is influenced by present and potential competition. The competitions price helps the firms in setting its price. Therefore company should carefully study the competitors prices and the consumers reactions towards product in determining the price.

(c) Distribution channel;
Goods are available to consumers through middlemen each one of them has to be compensated for the service rendered. This compensation should be included in the consumer price. Therefore longer the distribution channel more will be the price for the product.

(d) Government:
Government interference also makes influence on pricing decision. If government increases tax the ultimate consumers will have to pay mote for the product.

(e) Economic conditions:
Economic conditions prevailing in the market and in the country influences price fixation usually prices are raised during inflation, because of increase in costs. During the periods of depression prices are reduced.

(f) Types of Buyers:
Price fixation is largely depends on the types of consumers. Different buyers have different motives and values. Quality, safety, status, symbol beauty hobby are the different factors taken into consideration from the buyers in their purchase.

(g) Other external factors:
Other external factors are sudden change in technology ecological, influence, resellers reactions etc., These are also taken into consideration in price fixation.

Question 7.
What are the different methods of pricing policy?
Following are the different methods of pricing policy –
(a) Cost based method:

  • Cost – plus pricing
  • break – even analysis and target profit pricing.

(b) Buyers based method:

  • Perceived value pricing

(c) Competition based method:

  • Going rate pricing
  • Sealed bid pricing

(a) Cost based pricing:
(i) Cost plus pricing:
In this method of pricing manufacturing cost of a product serves as the base for price fixation. Management uses the policy of adding profit to cost of product to determine the price. Most of the manufactures are using this – method to cover manufacturing cost and to fix price by adding profit.

(ii) Break even analysis and target profit pricing:
it is also cost oriented approach. In this method break even analysis is the base for price fixation. Price is fixed, at a desired percentage return over and above the break even point.

(b) Buyer based method:
(i) Perceived value pricing:
Some companies are using this, method of price fixation, Companies are concentrating on buyer’s perception value not on the sellers cost as the key to pricing. This type of price fixation always depends on number of buyers to the product.

(c) Competition based method:
(i) Going rate pricing:
In this method of pricing price setting is largely related to the prices of competitors. Therefore under this method firm may charge more or less than the competitors price. This pricing method is popular where the costs are difficult to measure and competitive response is uncertain.

(ii) Seated bid pricing:
Under this methods firms bid for jobs. The firm fixes its prices on how the competitors price their product, it means that if the firm is to win a contract or a job it should quote less than the competitors. This method of pricing is selected by the firm only when the strong competitors are better and able to select appropriate prices.

Question 8.
Explain different kinds of pricing strategies and policies?
(a) Geographic pricing;
Manufactures are concentrated in some areas but their consumers are throughout the country and world. Therefore firms adopt different prices at different area. The distance and transportation cost involved in moving the products from the place of production to different regions for marketing plays an important role in price fixation.

(b) Prestige pricing:
In this method price is based on the perceived value of a product. Many customers judge the quality of a product by its price. Consumers may think that higher the price better will be the quality. Therefore it is the duty of the firm to establish the value in the minds of the customers.

(c) Job work:
Government contracts are usually awarded through this method. It is called as tender. The expected is worked out indetail and quotation is placed. The minimum quoted price, is accepted and the work contract is entered into with the party.

(d) Skim-the cream pricing (High pricing):
This method is used for newly introduced product. In the initial stage of product introduction firm fixes high prices to cover preliminary expenditure. This is called as market skimming, generally extra ordinary or new fashionable products are introduced under this pricing strategy.

(e) Penetration pricing (Low pricing):
It is the opposite of high pricing system, in the product introduction stage firm fixes low price to cover more market and to attract large number customers towards the market for a product.

(f) One price policy:
Under single-price.policy single price is charged to all buyers without discriminating between regions and customers, terms of sale are same for similar qualities of product.

(g) Variable price policy:
Under this system seller will sell similar quantities to similar buyers at different prices. Certain favoured customers are offered lower prices. The terms of sale e.g. discount, offer etc. are.granted on unequal terms to buyers.

(h) Psychological pricing:
It is the practice of fixing odd price rates to products example Rs. 17.97 Rs. 999 etc. This policy is usually followed in consumer goods industry example Bata. Shoes company. This pricing strategy is based on the belief that a buyer is mentally prepared to pay a little less than the rounded figure.

(i) Customary pricing:
These prices are fixed by custom. This pricing system is adopted by chain stores e.g. soft drinks of all companies are priced under this method.

(j) Price lining:
Under this system pricing decisions are made only initially and such fixed prices remain constant over a long periods of time. Any charge in the market conditions are met by adjustments in the quality of merchandise.

(k) Administered pricing:
This is a practice of pricing the products for the market not on the basis of cost, competitive pressures etc., but only on the basis of the price policy decisions of the sellers. It remains unchanged for a longer period of time.

(l) Monopoly pricing:
In case of new product introduction stage if there is absence of competition, seller has a free hand in fixing the price such price will maximize the profit.

(m) Accepted pricing:
In this method price is fixed by the seller according to customer expectations. The response of the consumers to the price is analysed and later a price is fixed.

(n) Negotiated pricing:
This method is usually adopted by industrial suppliers manufacturers who require goods of highly specialized often negotiate and only then fix the price.

(o) By product pricing:
By products are produced in addition to main product. These by products.price is fixed by the seller taking selling and distribution cost into an account. Because production cost is not a main point in by product production. Therefore the aim of seller is to recover selling and distribution cost.

(p) Time pricing:
Price is charged according to time is called as time pricing.

(q) Two part pricing :
This method is followed in Service sectors according to this method price is divided into two parts viz. fixed price and variable price. For example Minimum auto fare upto 2 kms. is fixed irrespective of any fraction of 2 kms. Travelled there after for every kilometer price is charged.

(r) Product bundle pricing:
A group of product sold as a package is called as product bundle. example Tools kit, shaving set etc., The price of the such bundle is normally less than each individual products price.

(s) Market segment pricing policy:
Under this method customers will be divided into group based on some common features and a single price is charged to customers belonging to a segment. example Senior citizens and children are charged less fare in buses and other passengers are charged general high fare for bus service.

(t) Location pricing:
The prices charged will depend upon the location of supply of product or service. E.g. In hospital charges are different for general ward, special ward, etc.

Question 9.
What is pricing strategy? Explain the different polices and strategies followed by business firms.
Pricing strategies are more specific than the objectives’and deal with situations in the foreceable future, that generally recur. It provides the framework and consistency needed by the firm to make reasonable, practicable and effective pricing decisions.

The different pricing strategies followed by the firm as follows:

  • Cost-oriented or cost-based pricing strategy.
  • Demand-oriented or Demand-based pricing strategy.
  • Cost-demand – oriented pricing strategy.
  • Competition-oriented or pricing strategy.

(a) Cost oriented or cost based pricing strategy:
It is also referred to as cost plus pricing. This policy assures that no product is sold at a loss but a fixed percentage of profit is added to the unit cost. Under this method, the pricing determination of a product is made on the basis of cost of production plus an assitional profit margin. The advantage of this strategy is that it is a simple and socially fair system, recovery of cost is guaranteed and can be applied in changing situations, The disadvantage is that it ignores demand and future cost.

(b) Demand-oriental or Demand-based pricing strategy:
Under this method demand of the product is considered while fixing the price i.e. price is fixed on the basis of demand for the product. The advantage of this method is that consumers preferences are considered and inefficiency on the manufacturer is penalized. The disadvantage is that it is socially unfair and does not ensure competitive harmony.

(c) Cost-demand – oriented pricing strategy:
Under this method, the prices of the competitors are taken into account while determining the price. This means that this method neither takes into account the cost of the product nor the demand of the product.

(d) Competition-oriented or pricing strategy:
This pricing strategy is based on the concept of break-even-point (i.e. where the sales revenue are equal to total cost). At break-even-point there will be neither profit nor toss. It helps in estimating the effects of different prices on profits.

Question 10.
Write a note on types of marketing channels.
The most common routes used for bringing the precuts in the market from producer to consumer are as below.
(a) Manufacturer – consumer – channel (Direct sale):
This is shortest and simplest channel of distribution. It is a zero or direct channel of distribution in which goods are directly transferred from the producer to the consumer. There is no intermediaries involved in this channel there are three alternatives in direct sale to consumer.

  • Sale through advertising and direct methods, (mail/order selling)
  • Sale through travelling sales force (house to house selling).
  • Sale through retail shops of manufacturer, (manufacturers own large scale retail organization)

(b) Manufacturer retailer – consumer channel:
Between producer and consumer there is only one middleman called retailer. This is common channel for ready made garments shoes, textiles etc. departmental stores, chain stores, super market, co-operative stores are the examples for this type of channel of distribution under this method of distribution either the manufacturer or the retailer performs the function of wholesale.

(c) Manufacturer-Wholesaler-retailer-consumer:
Under pis channel of distribution manufacturer sells goods in large quantity of wholesale arid wholesaler sells it to retailer in small quantity and retailer sells goods to final consumer as and when demanded by the consumers. It is popular channel of distribution used for groceries, drugs etc.

(d) Manufacturer – agent – wholesaler – retailer – consumer:
In this channel of distribution producer uses the service of agent to distributor goods to wholesaler and than wholesaler to retailer and retailer to consumers. The channel of distribution is common for agricultural marketing.

(e) Manufacturer wholesaler-consumer:
In this channel of distribution wholesales acts, as a middleman between manufacturer and user of the product. This channel is mainly used for industrial goods. Example business buyers, government, consumer co-operative, hospitals educational institution etc. Buyers under this method of channel are not individual buyers they are institutional buyers. Therefore the scope of this channel is limited to the number of institutional buyers.

Question 11.
Explain the factors governing the choice of channels of distribution.
Following are the factors influencing inflection of channel of distribution.
I. Product factors:
(a) Product nature:
Incase of industrial product buyers are limited in number therefore direct channel of distribution is preferable. But incase of consumer goods buyers or users are large in number and spread all over the world therefore indirect channel of distribution is suitable.

(b) Perishable nature:
Perishable goods like milk, bread, meat etc. have very short life therefore these goods requires direct channel to move them fast to the consumer.

(c) Cost of product:
High cost, and good quality product requires direct channel of distribution to customers. Because customers for these products are riot large in number but for how cost product general product indirect channel Of distribution is more suitable.

(d) Technical nature:
When a product is technically designed and more complex like computer, machineries etc., direct channel is relatively more useful. Because these type of goods requires skilled technicians help in its selling.

(e) Seasonal product:
Some products are demanded by the consumers during certain seasons only e.g. woolens are demanded during winter season. Therefore these goods are distributed to consumer through sales agents, retailers etc.

(f) Fashionable goods:
Businessman must distribute goods of new fashion to consumers quickly during the particular season only. Because there is a risk of style obsolescence in Case of fashion goods. Therefore wastage of time in distribution is a danger. Hence direct selling is best method of approaching customers.

(g) New product:
New product introduction requires aggressive selling system, therefore quick and fast movement of goods from seller to buyers is required exclusive franchise indirect channel is suitable for such products.

II. Market factors:
Channel of distribution selection depends on certain market factors also they are –
(a) Consumers:
Incase of large number of consumers to a product long channel of distribution is required. Because consumers are spread all over the world distributing the product through indirect channel of distribution is more suitable method. If consumers are concentrated in a small geographic location it is always advantageous to opt for a direct channel.

(b) Intermediaries:
Strength and weakness of intermediaries also influence in selection channel. If terms and condition of wholesaler or retailer are unfavorable a manufacturer would like to prefer direct channel by performing the work of wholesaler or retailer.

(c) Competitors:
The distribution channel used by the competitors influence in selection of channel. When the competitors are using a channel and have been successful in the distribution work, it is essential to adopt such type of channel to get success in the work.

III. Company factors:
(a) Financial ability of channel members:
Sometime manufacturers opt. for direct channel as they do not need the financial support and other facilities offered by the market intermediaries. On the other hand a financially weak company has to select an indirect channel out of financial compulsion.

(b) Experience:
Old and well established company wants to supply goods directly to consumers. But if the same company has good relationship with intermediaries than it opt for indirect channel of distribution.

(c) The extent of market control desired:
The channel selection is governed by the degree of market control desired by the company. That is the desire of the company to make Intermediaries behave and act in the manner desired by its management, the control may be in respect of retail price, product quotes etc.

(d) The company reputation:
Company reputation helps in appointment of intermediaries reputed company products are very easy to sell in the market. This is a plus point for the company to make channel as for as possible direct.

(e) The company marketing policies:
The company’s market policies influences greately on the selection of channel of distribution marketing policies includes policies on advertising delivery of goods, after sale services, and pricing all these influence the channel choice.

IV. Environmental factors:
(a) Economic factors:
During prospecting growth, and boom period intermediaries are willing to co-operate and ready to work because of assured and quick possible turn over and during the period of deflation intermediaries are not ready to participate because they find it very difficult to move the goods.

(b) Legal factors:
The legislative restrictions imposed by the government give final shape to the channel choice. The provisions of the MRTP Act 1969 prevents channel arrangements that tend to lesson competition create monopoly and those are objectionable to the very public interests.

(c) Fiscal structure:
In India sales tax rates vary from state to state. This sales fax paid by the company is a part of final price borne by final consumers and this plays an important role in designing channel arrangements.

Question 12.
What is channel management? Explain the steps involved in the management of channels intermediaries.
Channel management refers to selecting and motivating middlemen arid evaluating their performance. More than selection of an appropriate channel and good intermediaries, it is essential that, for effective implementation of channel decisions and polices they are to be effectively managed.

The management of channel intermediaries involves the following step –

  • Selection of good intermediaries
  • Compensating intermediaries for their services.
  • Motivating intermediaries for better results
  • Co-ordinating the efforts of intermediaries
  • Control measures on intermediaries.

(i) Selection of good intermediaries:
Producers should distinguish the intermediaries on the basis of their experience, growth, profit record, co-operativeness, etc., while selecting an appropriate’ intermediary. For the purpose of identifying efficient intermediary, the producer may also take the help of the outsiders, if required.

(ii) Compensating intermediaries for their services:
Intermediaries perform various functions such as assembling, strong, transporting of goods, financing, risk bearing, grading etc., which helps the producers. Therefore, the producers should also see that the intermediaries are properly remunerated either monetarily or non-monetariiy.

(iii) Motivating intermediaries for better results:
If the producers want to perform better and better in the market than they should motivate the Intermediaries to work hard, honestly and efficiently. Producers can motivate the intermediaries by offering them higher margins, special deals, advertising allowances, sales can test etc.

(iv) Co-ordinating the efforts of intermediaries:
The producers must properly co – ordinate the activities of the intermediaries properly. When sales is high producer should supply sufficient quantity and when sales it tow producer should not pileup too much of stocks similarly the other activities should also be co-ordinated.

(iv) Control measures on intermediaries:
The producer must periodically evaluate the middlemen’s performance against standards which are pre-determined. Producers should not treat their dealers lightly and risk of losing their support such evaluation of intermediaries are essential for effective control on them.

Question 13.
Discuss the functions and services of a whole saler.
Functions of wholesaler are as follows –
Wholesaler is one who sells to other middlemen institution, and individuals usually in fairly large granitites. Following are the function of wholesaler.

  • He collects goods available at different, location of manufactures and assembles them at a particular location.
  • He provides warehousing facility to the goods collected from different manufacturer.
  • He undertakes the risk of transporting goods from the warehouse of manufacturer to the warehouse of retailer.
  • He supplies goods on credit to retailer.
  • He bears the risk of loss due to change in price, damage during transportation, deterioration of quality theft etc.
  • He undertakes the risk of grading of goods purchased and packing and packaging them properly.
  • They provide market information both to the manufacturer and retailer.

Wholesalers render some value services both to the manufacturer and retailers.

Services to manufacturer:

  • Wholesaler purchase goods in large quantity from the manufacturer. As such the manufacturer enjoys the benefits of bulk selling.
  • Wholesaler relieves the manufacturers from the risk of distribution.
  • Wholesaler helps the manufacturer to keep the production cycle unaltered and regular.
  • Wholesaler purchases goods on cash basis as such there is no problem of lockup of capital.
  • Wholesale makes adjustment of demand and supply. As such them is stability’ in price.

Services to retailer :

  • Wholesaler relieves the retailer from holding large quantity of goods.
  • Retailer can save the time by making direct purchase from wholesaler.
  • Retailer gets the goods at his door as such economy in transport and packing can be enjoyed by him.
  • Retailer can make use of his capital effectively.
  • Retailer can get all information’s about the market through wholesaler.

Question 14.
Explain merits and demerits of advertising?
Strength of advertising as a promotional tool.

  • It gives planned and controlled message to public.
  • It can contact and influence numerous people quickly.
  • It has the ability to deliver message to audience with particular demographic and socio economic features.
  • It can deliver the same message in a variety of context.
  • It can reach prospects that cannot be reached by salesmen.
  • It induces buyers to buy goods.
  • It offers a wide choice of channels for transmission of messages.
  • It is very useful to create maximum intrest and offer adequate knowledge of the hew product.
  • It increases and stabilizes sales turnover of seller.
  • It helps to maintain the existing market and explores the hew market.
  • It controls the product prices.
  • It reduces the burden of salesmen job.
  • It helps the consumer in taking buying decision.
  • It ensures better quality goods at reasonable creates.
  • It helps to uplift the standard of living of the people.
  • It helps to provide gainful employment opportunities to society people by increasing market for product.
  • It tries to increases the knowledge of customer towards the product.

Weakness of advertising (demerits of advertising):

  • It is less effective then personal selling and sates promotion in convincing and securing action.
  • It is less flexible than personal communication.
  • It cannot give answer for objections raised by public.
  • If is one-way means of communication.
  • Advertising media carry many messages competing to secure attention of audience simultaneously. Thus it cereates noise in communication.
  • Many adverting messages are unbelievable.
  • Rigidity in advertisement sometimes irritates the Customers.

Question 15.
Explain the types of advertising?
Following are the various types of advertising –
(A) Based on the objectives:

  • informative advertising: This method of advertising is used by manufacturer when the product is newly introduced in the market. This kind of advertising gives information about product features.
  • Persuasive advertising: This method of advertising is used to boost the image, features and benefits in the use of product. Because it would create strong desires in the consumers, to buy the product and persuade him to act positive.
  • Reminder advertising: This advertising is used to remind the consumer during saturation or decline stage of product. This kind of advertising helps in repeat and countries sale of the product.

(B) Based on the geographical area covered:

  • National advertising: It is an advertisement of a product all through out nation. It is useful for the products which have national-level market.
  • Regional advertising: This advertising is ristricted to regional level because product is produced and sold at regional market only.
  • Local advertising: It is smallest advertising style in which locally produced goods information are communicated to local people.

(C) Based on sponsorship:

  • Manufacturer advertising: When manufacturer takes the risk of advertising the product than it is called as manufacturer advertising.
  • Dealers advertising: Dealers are taking the responsibility of advertising the product.

(D) Product advertising:

  • Direct action advertising: This advertising directly induce the consumer to rush towards the shop to buy goods example Discount sale, extra offers etc.
  • Indirect action advertising: This brings gradual growth in sale by creating a positive image of the company and its products in the minds of the consumers.
  • Primary demand advertising: This is the method of advertising used for newly produced product. It is always informative in nature.
  • Comparative advertising: It is a strategy used in advertising by the advertises about the best quality of his product against competition substitute goods.

(E) Based on target consumers:

  • Consumer advertising: This is the advertisement method used to attract final users or consumers of the product.
  • Industrial advertising: It is the method of advertising used to give information about industrial product to industrial buyers.
  • Trade advertising: It is meant to target whole saler, retailers dealers and other middlemen.

(F) Based on others:

  • Institutional advertising: It is the advertisement method used to project the image of the company. E.g. Life insurance corporation, banks are doing institutional advertising.
  • Co-operative advertising: Manufactures and middlemen are jointly share the expenditure of advertising and combinely advertise the product.
  • Non commercial advertising: Non trading Oranizations are advertising their programme for seeing financial support from the public or the collection of donations.

Question 15.
Is advertising is waste do you agree? Give reasons.
Before commencing the above subject, let us consider the arguments is favour and against the advertising.
Arguments in favour of advertisement:
(1) Advertising stimulates production, employment and income leading to rising purchasing power and better living standards.

(2) Commercialization of inventions, accelerated public acceptance of innovations, new products etc. can be realized only due to effective mass communication advertising.

(3) Informative advertising enables consumers to secure released and adequate information about all rival products and their relative merits. So the consumers can make the right choice.

(4) Advertising facilities mass production and mass distribution we have lesser unit cost of production as well, as lesser unit cost of distribution scientific marketing reduces cost of production. So customers are able to get the product at a competitive prices.

(5) Advertising builds up brand preference and brand loyalty. In the long run these are not possible under keep competition unless the brand quality is maintained and steadily improved by the manufacturer.

(6) Advertising has educative value also. It teaches us to adopt new ways of life and higher standard of living. It can educated the community to demand quality of life.

Arguments against advertising:

  • Expenditure on advertising becomes a part of the price of the product there by consumers have to pay high price than what the product is actually costs.
  • The money invested on advertising go waste if the advertisement is not noticed or ignored by the customers.
  • As advertising is quite expensive, now- a days it is used by big companies to monopolies the market.
  • The advertising can easily mislead the people by making unreliable claims.
  • It stimulate the people of purchase beyond their capacity and in turn discourage savings, affecting capital formation of the company.
  • Advertising is necessary only if there is product differentiation otherwise it is a waste.
  • With a view to make use of advertising, producers create trial differences in their products, valuable resources that can be used to create new industries are wasted in the production.

In Spite of various limitations, advertising is an essential marketing function in present day world -now- a – days advertising has become an integral part of not only our marketing process but also for our entire economic and social life. It is double edged instrument or tool in the marketing mix. If it is properly used it can be a boon or a blessing in distribution. But if it is misused, it can also act as a curse in distribution.

By itself it is no doubt a very fine device of demand creation and demand stimulation and can contribute a lot to investment, economic growth, rising income, rising standard of living and economic prosperity in any country. But some people are of the opinion that advertisement undermined social values, ultimately as stored earlier advertisement is not social justifiable because advertisement is a double edged tool, if it is used in a proper way, it has got off lot of advantages.

Question 16.
Explain the various media of advertising.
An advertising medium is the means to deliver the advertising message. The advertiser will select the right message carrier by keeping in mind the cost, efficiency & specialties of the media.
(1) Newspapers: Of all the media, the newspaper is considered as the backbone of advertising programme, & it remains the most powerful message carrier even today.

(2) Magazines & Trade journals : The is one of the oldest media of advertising, Magzines can be special & general. If it is a special magazines, it will appeal to specific class of Consumers.

(3) Radio Advertisements: This media can even appeal to the illiterate people. The advertisement can be repeated in different programmes. Communicates with different types of people.

(4) Television Advertisement: In India., television was first commissioned in 1959, & Commercial telecasting started only in 1976, & Colour transmission in 1982. This is specialized Media, as is provides scientific synchronization of sound, light, Motion, Colour & immediately that no other medium does, except film.

(5) Film advertising: Business unit prepare short films or slides, which are shown before the start of the regular shows of during the intermission. Along with the film there will be running commentary on the features, uses & Superiority of the product.

(6) Outdoor or Mutual advertising: This is also known as position or Indirect advertising. This is the Media to reach the people when they are out of the doors, or traveling, than when they are in out doors, or traveling, than when they are in the home or offices. Her the advertising message is not deliver the audience.

Likinprint and broad cost media, but are plaid in strategic locations, where they are exposed to the audience who are on the move. This media catches attention of the people within a split of a second’s times. Its effectiveness can be seen from the fact that 97% of total adult population moved out of door every day.

(7) Transit advertising This is also known as traveling displays. It stands for all types of advertising signs or displays used in trains, buses, cars, autos, trucks and other such transportation vehicles & terminals or the stations from which they operate.

(8) Direct mail: This is the advertising media where in the advance sends messages directly to target customers by mail. The messages may be mailed in a variety of forms. Says letters, circulars, catalogues, folders, brochures etc., which may be informatics, persuasive & reminders.

Question 17.
What are the merits and demerits of personal selling?
Advantages of personal selling:

  • It is useful method of promotional tool in launching the product.
  • It helps to adjust the products features according to customers needs and desires by colleting feedback from them.
  • It helps to increase in sales by persuading the customer to buy goods.
  • It helps to achieve target sales.
  • It is a two way communication process therefore it clarify the doubts of public.
  • It is useful for convincing new customers.
  • It tries to improves company image and goodwill.
  • There is less wastage of promotional expenditure under this process.
  • It is useful method for educating the buyer about product and service.
  • Salesman adjust the sales presentation on the spot to meet objections and reactions of the his buyers in order to gain action.

Disadvantages of personal selling:

  • The cost of developing and maintain efficient sales force is quite high.
  • Good and competent sales man are inscarce.
  • It is difficult to use this method for general and low quality goods.

Question 18.
What is pricing strategy? Explain the different polices and strategies followed by business firms.
Pricing strategies are more specific than the objectives and deal with situations in the foreseable future that generally recur. It provides the framework and consistency needed by the firm to make reasonable, practicable and effective pricing decisions.

The different pricing strategies followed by the firm as follows :

  • Cost-oriented or cost-based pricing strategy.
  • Demand-oriented or Demand-based pricing strategy.
  • Cost-demand – oriented pricing strategy.
  • Competition-oriented or pricing strategy.

(a) Cost oriented or cost based pricing strategy:
It is also referred to as cost plus pricing. This policy assures that no product is sold at a loss but a fixed percentage of profit is added to the unit cost. Under this method, the pricing determination of a product is made on the basis of cost of production plus and essential profit margin.

The advantage of this strategy is that it is a simple and socially fair system, recovery of cost is guaranteed and can be applied in changing situations. The disadvantage is that it ignores demand and future cost.

(b) Demand-oriented or Demand-based pricing strategy:
Under this method, demand of the product is considered while fixing the price i.e., price is fixed on the basis of demand for the product. The advantage of this method is that consumers preferences are considered and inefficiency of the manufacturer is penalized. The disadvantage is that it is socially unfair and doesnot ensure competitive harmony.

(c) Cost-demand – oriented pricing strategy:
Under this method, the prices of the competitors are taken into account while determining the price. This means that this method neither takes into account the cost of the product nor the demand of the product.

(d) Competition-oriented or pricing strategy:
This pricing strategy is based on the concept of break-even-point (i.e. where the sales revenue are equal to total cost). At break-even-point there will be neither profit nor loss. It helps in estimating the effects of different prices on profits.

Question 19.
Describe briefly the functions of retailer.
The functions of retailer are as follows:
(i) Linking: A retailer links the wholesalers with the consumers. In other words, the goods purchased by’wholesaler are distributed to the consumers through the retailers.

(ii) Assembling: The retailer purchases goods from numerous wholesalers spread out in different places and assembles them at one place.

(iii) Storing: The retailer stores the goods purchased by him from the numerous wholesalers in his warehouse and dispatches them to the consumers on demand.

(iv) Grading: The retailer sorts out the goods in his warehouse into different grades on the basis of their quality, size, shape, etc.,

(v) Transporting: The retailer arranges for the transportation of goods from the wholesaler to the customer.

(vi) Risk bearing: By owning and holding goods under his custody, the retailer assumes the risks arising out of fall in price, change in demand, damage, theft etc.,

(viii) Financing: The retailer often, grants credit facilities to the regular customers.

(ix) Informing: The retailer collects information about the tastes and needs of the consumers and passes it on to the wholesaler. He also brings to the notice of the consumers about the new types of goods.

Marketing Mix Very Short Answer Type Questions

Marketing Mix Very Short Answer Type Questions

Question 1.
Define product.
“Product is a bundle of utilities consisting of various product features and accompanying services” – By Alderson.

Question 2.
What is product?
Product is anything that one receives in an exchange transaction.

Question 3.
What is consumer products?
These are the products purchased by the consumer for their final consumption.

Question 4.
What is industrial product?
These are products used by industries to convert it into some other product through production process.

Question 5.
What is durable product?
These are tangible products used by the customer repeatedly for longer time.

Question 6.
What is non-durable product?
These are the products which get exhausted with a single or a few uses example – Food items, soaps, etc.

Question 7.
What is product modification?
Product modification means any deliberate alteration in the physical attributes of a product or its packaging. It is a new innovation on design of the product.

Question 8.
What is product line?
It is a group of products that are related either because they satisfy similar needs of group of customers, or because they function in a similar manner.

Question 9.
Define product line?
Product line is defined as “a broad group of products intended for essentially similar uses and possessing reasonably similar physical characteristics constitute a product line” by Wiliam J. Stanton.

Question 10.
What is trading up?
It is the act of adding a high priced prestigious product to the existing product line with a view to increase the sales of currently available low priced product.

Question 11.
What is trading down?
In this approach manufactures of high quality products encourage his customer to go in for low quality product.

Question 12.
What is product mix?
Product mix the set of all product lines and product that a particular seller offers for sale to buyer.

Question 13.
Explain characteristics of product mix?
Product mix of a company has three main characteristics.

  • Product mix width: Width of the product mix depends upon the number of product groups or product lines found within the company.
  • Product mix depth: Depth of the product mix depends upon the number of items within each product line.
  • Product mix consistency: It refers how closely related the various product lines are in end use, production requirements, distribution channels etc.

Question 14.
What are the stages in product life cycle?

  • Introduction stage
  • Growth stage
  • Maturity stage
  • Saturation stage
  • Decline stage.

Question 15.
What are the attributes of a product?
The essential attributes of a product are tangibility, money value, customer/satisfaction etc.

Question 16.
Mention any two bases of classification of products.
The two bases of classification of products are –

  • on the basis of purposes
  • on the basis of attitudes.

Question 17.
What is product development?
Product development includes the technical activities of product research, engineering and design. Product development includes scientific techniques of the product to improve or to make a better product than before.

Question 18.
What is product planning?
A product planning is the function of marketing in which the process of manufacturing is determining in advance. It includes the answers for what to produce how to produce, when to produce what is the cost of production which product to produce etc.

Question 19.
What is product line?
Product line is a group of related products. These products satisfy similar needs of customers of different market segment.

Question 20.
What is product addition?
It means adding a new product in the existing product line. This product addition work have been made for the further expansion of the business. This result in increase in sales volume, profit demand reputation of the firm.

Question 21.
What is product deletion?
Product deletion refers to the reducing the product from the existing product line. It means simplifying the product. The product deletion have been made when the product fail.

Question 22.
What do you mean by commercialisation?
After test marketing firms distribute the product through channel of distribution to final consumers. This process is called commercialisation. Mass production and distribution work will be started by the company and it is the introduction stage of the product.

Question 23.
What is product differentiation?
Product differentiation refers to a situation when the buyer of the product differentiate with other products. The product differentiation may be real or imaginary. Real differences are like design, material, etc., and imaginary differences are advertisement, trade mark etc, These product differentiation indication that the goods are close substitution but are not homogeneous.

Question 24.
What is a new product?
New product is a product that is new to the company. Company is introducing a new product even though may have been made in some form by others.

Question 25.
What is product innovation?
Product innovation is the adoption of new idea for production. Product or process which is prospectively useful.

Question 26.
What is test marketing?
Test marketing is the actual conduct of marketing compaign with in limited market for a limited period. It minimizes the risk of national or regional launch. It confirms the management’s expectations about the product by testing those variables in the marketing planning.

Question 27.
What is brand?
A brand is a symbol, a mark, a name, that acts as a means communication which brings about an identity of a given product.

Question 28.
What is branding?
Branding is the process of finding and fixing a brand name to a product for identification of the product.

Question 29.
What is family brand name?
It means all the manufactured products of a company are sold under a single brand name. This is called as family brand name. Example – Godrej, Bajaja etc.

Question 30.
What is brand mark?
A brand mark is that part of the brand which appears in the form of symbol design etc.

Question 31.
What is packaging?
Packaging means “the general group of activities concentrating on formulating a design of the package and producing an appropriate and attractive container or wrapper for a product.

Question 32.
Give the meaning of package?
Package is a wrapper or a container in which a product is enclosed or sealed.

Question 33.
What is packing?
It means the activities of wrapping the product for performing the marketing functions more economically and easily. Packing helps for shipment, storage, sale or final use.

Question 34.
Mention any two essentials of a good package.
They are –

  • It should be attractive.
  • It should communicate product message and motivate the consumers to buy product.

Question 35.
What is label?
Label is an informative tag, wrapper, or seal attached to product to inform the user about product, producer, and such useful information to be beneficial to the user.

Question 36.
What is price?
Price is amount for which a product, a service or an idea is exchanged from the seller to the buyer.

Question 37.
What is pricing?
Pricing is the function of determining the product value in monetary terms by the company before it is offered for sale to the target customers.

Question 38.
What is cost plus pricing?
This pricing method is based on cost of production and distribution. It involves the cost of product and the certain percentage of profit on the cost. It helps the businessman to each benefit.

Question 39.
What is psychological pricing?
It is the practice of fixing odd price, to products. Example Rs. 699, Rs. 76.50 etc. This type of prices simply feels that a buyer is mentally preparing to pay little less than the rounded figure.

Question 40.
What is break even pricing?
Cost demand oriented pricing policy is known as break even pricing. In break even point the sales revenue will be equal to total cost means there will be neither profit nor loss. It gives the relationship between the cost and sales volume. Break even price helps in analyisng, estimating the effects of different prices as profit.

Question 41.
What is prestige pricing?
Prestige pricing is one that is fixed at a higher price than the price of substitute product. Prestige pricing is adopted because consumer may feel that high price means high quality.

Question 42.
What is meant by Exchange value?
Exchange value refers to the capacity of the product to be being exchanged with some Other product or with money.

Question 43.
What is basic price?
This is a kind of geographic pricing under which base point pricing is fixed at factory gate which includes cost of production and cost of sale and transport cost is collected from base point to the buyers location.

Question 44.
Mention any two pricing objectives.
They are –

  • To achieve target rate of return on investment
  • To stabilize prices
  • To maintain or improve market share
  • To meet or prevent competition

Question 45.
Mention any two factors affecting pricing decisions.
Factors influencing the pricing decisions are classified into two categories:

  • Cost of the product
  • Demand of the product

Question 46.
Give the meaning channel of distribution?
Channels of distribution means routes or pathways through which goods and services flow or more from producers to consumers.

Question 47.
Define the term “Channel of distribution”.
According to Philip Kotler “distribution channel is the set of firms and individuals that take title or assist in transferring title to the particular good or service as it moves from the producer to the consumer.”

Question 48.
What do you mean by direct channel of distribution?
Direct channel of distribution means goods and services are supplied from the manufacturer to consumer directly without having and intermediaries. There are three alternatives in direct sale to customer. It is also called as zero channel of distribution.

  • Sale through advertising and direct network.
  • Sales through travelling sales force.
  • Sale through retail shops of manufacturer.

Question 49.
What is target marketing?
It is a process of identifying market segments, targeting one or more of these segments and developing products and marketing programmes to suit each selected segments.

Question 50.
What are the four major channels of distribution?
Channels of distribution are paths through which products more from the points of production to the points of consumption.
These trade channels are –

  • Manufacturer – consumer (direct channel)
  • Manufacturer – retailer – consumer
  • Manufacturer – wholesaler – retailer – consumer
  • Manufacturer – agent – wholesaler – retailer – consumer.

Question 51.
What is promotion?
Promotion is the process of marketing communication involving information, persuasion and influence promotion communicates marketing information to consumers users and resellers.

Question 52.
Define the term “Promotion”.
According to Williams J.Stanton “Promotion includes advertising personal selling, sales promotion and other selling tools”.

Question 53.
What are the tools of promotion mix?

  • Advertising
  • Sales promotion
  • Publicity
  • Personal selling
  • Public relation.

Question 54.
What is colloquial copy?
Colloquial copy refers to that type of advertisement copy which uses an informal language and talks in personal terms with the use of ‘I’and ‘You’.

Question 55.
What is promotion mix?
Promotion mix involves advertising, personal selling, sales promotion and publicity to make the potential customers to know about a firm’s product or services.

Question 56.
Name any two advantages of personal selling.
They are –

  • It maintains the demand for the existing products.
  • It builds goodwill or reputation for the seller.

Question 57.
What is publicity?
Publicity means non-personal stimulation of demand tor a product, service or business unit by planting commercially significant news about it in a published medium or obtaining favourable presentation of it upon radio, television, or stage that is not paid for by the sponsor.

Question 58.
Define “advertising”?
It is “any paid form of non-personal presentation of ideas goods or services by an identified sponsor” by the American marketing association.

Question 59.
What is advertising?
Advertising is a promotional tool. It is a paid communication because the advertiser had to pay for the space or time in which his advertisement appears.

Question 60.
What Is advertisement copy?
Advertisement copy is just like a prospectus which contains the information of advertisement and convince the people to buy the product advertisement copy should be scientifically drafted and it always contains merits of the product.

Question 61.
State any two criticism leveled against advertising?

  • Advertising increases the price of goods.
  • Comparative or competitive advertising is a waste because it enables only reshuffling of customers. One company stealing customers from other company.
  • Some adverting is fraudulent.

Question 62.
Give the meaning of personal selling?
Personal selling is an art of convincing the prospective buyer to buy the given products and service.

Question 63.
Define personal selling.
“Sales man ship consists of winning the buyers confidence for the seller’s house and goods thereby winning the regular and permanent customer” by Mr. Garfield Blake.
“Personal selling consists in individual and personal. Communication in contrast to mass relatively impersonal communication of advertising, sales promotion and other promotional tool” By Prof. William Stanton.

Question 64.
Mention any two limitations of personal selling.
The two limitations of personal selling are –

  • It does not appeal to masses.
  • It is costly.

Question 65.
What is AIDAS formula?

  • A – Attention : Attention of the customer must be attracted to the product.
  • I – Intrest : Salesman must curate an intrest in the mind.
  • D – Desire : The salesman must ignite the desire of customer.
  • A – Action : It must gaining an order.
  • S – Satisfaction : Satisfaction leads to repeat orders.

Marketing Environment Long Answer Type Questions

Marketing Environment Long Answer Type Questions

Question 1.
Name the factors influencing consumer behaviour.
Following are the factors influencing buying behaviour.
(a) Culture:
It consists of social values, attitudes, towards work, language, belief, art, moral, law, customs, traditions, etc., acquired by a man as a member of society. It determines a perons’s wants and behaviour, food preference clothing choice, career ambitions differ from person to person as per the social values.

(b) Social classes:
On the basis of income category the population is generally divided into upper class, middlecam, and lower class. But on the basis of caste and religion population is possible to divide in large number of groups, people within similar group tend to exhibit similar buying behaviour.

(c) The family:
Family members decides purchase needs and also puts financial strain within which the buying i§ to be done. Family influence is considered as strong influence..

(d) Reference groups:
It means a group to which a person belongs and interacts has’direct influence. A persons a member of family, friends, neighbours, etc. He is a member of religious organization, professional association and trade unions. All these groups influence in the behaviour of a ponsumer while purchasing the goods.

(e) Status symbol:
Status refers to position of a person in the society. It plays important role in buying behaviour. A person plays different role like father, son, manager, friend sportsman, etc., each of the role will influence some of his buying behaviour.

(f) Age and life cycle stage:
It is a personal factor influence on buying behaviour, people charge goods and services they buy over life times. People’s taste for food, clothes, furniture etc. are age related factors. Marketers duty is to collect correct data on demographic segmentation for production.

(g) Occupation;
It is very important factor in determining buyer behaviour demand for mixer, washing machine, fast food etc. are increased in market due to increase in number of working women in society. Marketer’s have to identify the occupation groups because it influence on goods and services bought.

(h) Income:
Income level Of people defines the needs and desire for the product. Purchase of property borrowing power saving etc., are depends income of people in the society.

(i) Life style:
Living style of people also decides his or her activities, interest and option. It helps the marketer to take decision on changing customer values.

(j) Personality:
It means distinguishing psychological characteristics that lead to relatively consistent and enduring responses to his/her own environment distinct personality will also influence his or her buying behaviour.

(k) Motivation:
Motive is a stimulated need that an individual seeks to satisfy. It is important for marketer to understand the motives that lead consumers to make purchases.

(l) Perception:
People perceive the situation differently. The way individual perceives things will depend upon many personal factors such as needs, moods, memories, values etc., The marketer must therefore make sure that a given message is correctly perceived by the consumer.

(m) Learning:
It is the process of acquiring knowledge and it is the basic factor which describes charges in an individuals behaviour arising from experience.

(n) Beliefs and attitudes:
It includes individuals feelings, beliefs, values from the emotional part of the mind etc. it develops gradually as the result of experience people have attitudes on many things religion, polities, clothes, music, food etc. There are may factors determines consumer behaviour. And these factors are useful in identifying the buyer who is interested in buying the particular product.

Question 2.
What is marketing environment? Explain different kinds of marketing environment.
Marketing environment refer to sum total of all. The factors of forces which would influence the marketing objectives decisions and policies of the firm. It determines the success and survival of a product in the market. It includes, micro environment and macro environment, micro environment consists of controllable and partially controllable factors and macro environment consists of only uncontrollable factors.

Marketing environment also includes four layers they are –

  • Organizational environment which includes company, its department, organizational structure etc.
  • Marketing environment includes total number of potential and actual customers of the product.
  • Macro environment: Which consists of forces that affect transactions between the firm and the markets.
  • Extra environment which consists of some negligible Or irrelement factors to the organization.

Different kinds of environment:
(A) Controllable factors:
Controllable factors are possible to control by the business organization with the help of good business decision. Company can fix the quality of product, price channel of distribution and mode of transportation, according to its convenience. Therefore good understanding of marketing environment gives better chance for protable growth of the business.
Marketing Environment Short Answer Type Questions IMG 2

(B) Partially controllable factors:
These factors are external factors. But management can understand and manage the situation according to company objectives.

(C) The uncontrollable forces:
These are external environmental factors. On which company cannot do anything to prevent it. It includes customers needs and desires, competition, economic conditions etc. There are six major environmental forces mainly considered as constraints on the growth of the organization at all level. They are –
(a) Demographic environment:
Demography means scientific study Of population and its distribution. It consists of the details about population structure, age groups, income, occupation, sex ratio, education, geographic concentration, urban and rural population etc. without knowing these information, the businessman cannot market his product successfully. Because different people need different products at particular ages, hence production has to be geared to meet the specific demand.

(b) Economic environment:
It is the second uncontrollable factor of marketing environment. Economic conditions influence the marketing organization and marketing activities directly and indirectly,, production of goods fully based on purchasing power of customers. At the same time purchasing power and willingness to spent depends on economic conditions. Marketing plans and programmes are also influenced by some other economic factors as the interest rates, money supply, price level, consumer credit etc. economic environment influence product planning, price fixing, and promotion policies.

(c) Natural environment or ecological environment:
It consists of availability of raw material, pollution, resource management etc., Disposal of chemical and nuclear waste, plastics, and other non biogradable materials cause greater public apathy. Therefore government agencies play an active role in environmental protection.

(d) Technological environment:
Technology has brought a change in the life styles and consumption patterns in the society. Therefore product development, packaging, promotion prices, and distribution systems are all influenced directly by technology.

(e) Political and legal environment:
It consists of laws and regulations, policy decision government planning, etc. marketing decisions are strongly affected by this environment. There are many rules and regulations and frequent changes in government polices directly affect business decisions.

(f) Socio and cultural environment:
It consists of people and their values, and social patterns, life style, social values, beliefs desires, etc. There forces usually influence the welfare of a business in long run. The society is always dynamic with changing social norms and values as a result of which increase in demands are created/education and technology also plays an important role in consumers expectations in the market.

Question 3.
Explain the nature and scope of marketing.
Nature of Marketing:
(a) It is operational:
That is, Mangers must think & act a achive results. Benefits of Marketing will not emerge from a passive attitude to the exchange process Emphasizing the statement “no gains without pains.”

(b) It is Customer oriented:
That is Marketing firm is to be the keen observer, outside, focusing its attention on needs of customers. It effectiveness lies is finding solutions to the challenges posed by these demands.

(c) It is Mutuality of Benefits:
Exchange of goods & Services works & persist because it is mutual interest of both parties to continue. Both the marketers & customer benefit through supply of quality goods & services in return for profit.

(d) It is value Driven:
The culture of the Marketing firm are based on a desire to build in business through meeting the needs & responding to the market where the values aroused by firms leaders are communicated to all those involved in the firm.

(e) It is proactive to the Environment:
Marketing firm is a sub system of super system the environment. The environment is something which is external to the firm. The environmental is something which is external to the firm. The environmental form are ecology, technology legal frame work, which are to the accepted by the marketing unit where it is to be proactive & not reactive.

Marketing is recognised as the most significant activity in our society. Marketing is all arround us. Our delivery existence, our entire economic life, our life styles are continuosly affected by a wide range of marketing activities. The food we eat, the cloths we wear, the housing that shelters us, the comforts & amneties we enjoy in our home & at work places, the health & welfare activities which give us peace of mind, all these are profoundly affected each day by the Marketing System. Marketing alone can put goods & services we want & need at our door steps & satisfy our varied & innumerable needs & wants. Our entire economic life shall be simply paralysed, if marketing system fails to shoulder its main responsibility, viz. discovering & serving the market demand.

Marketing has achived social importance because it is entrasted with the task of creating & delivery of standard of living to society. Marketing studies continuously consumer demand which is varied & dynamic. On the basis of upto – date knowledge of nature. Character & Magnitude of market demand, the firm produces wanted goods & services which are offered to consumers at fair prices through distribution channels.

Marketing is the vital connecting link between producers & consumers. It is primarily responsible to keep the wheels production & consumption constantly moving or running at their optimum speed. Optimun production & optimun consumption can secure optimun standard of living in an economy. Marketing is directly responsible to maintain the equalibrium between mass production & mass consumption. Then only we wilt have economic stability.

Idustrial revolution offered mass production in the 19th century. Marketing revolution is called upon to provide mass distribution machinery in the 20th century for effective distribution in ever-expanding markets. We have yet to evolve a smoothly operating system of physical distribution. Consumer-oriented markets can & must play an important role in mass distribution. Better marketing can raise living standards of all people in any country.

Marketing system plays a unique role is transforming the benefits of mass production in terms of rising living standards of life styles of all people through the best system of physical distribution. The No.1 problem in our economic life today is distribution. Marketers must meet this challenge to justify their existence in our Socio – economic environment. Marketing has assumed tremendous importance to solve this burning problem of mass distribution. The problem of marketing today is greater than the problem of production.

Marketers must devise a comprehensive marketing system which would deliver alt the goods we could produce or manufactured goods would rise substantially.

We live in a dynamic economy & marketing system is called upon to maintain equilbrium between supply & demand in such an economy. If the two flows viz. goods flow & the money flow balance each other. We have economic stability & naturally price stability, of course, at higher & higher level of national output, emploment & income.

This is an ideal & desirable state of national economy. Marketers are now confronted with a challenge to ensure an expanding market that will easily absorb the mounting amount of goods & services our producers & manufacturers are able to offer us under computerised & automated systems of production, if marketers assure equitable mass distribution, the nation can have steady economic growth & dynamic expansion with stability.

Economic development in developing coutries entirely depends upon effective system of production & distribution the two wheels of national economy. Levels of marketing govern the levels or production. Production & distribution are two sides of the same blade. Nothing happens in our economy until somebody markets something. Thus, marketing plays a critical role in our economic growth. In underdeveloped country marketing is the most undeveloped part of the economy. Mareting development can change the entire economic life of such as underdeveloped country without any change in its methods of production, distribution of population or of income.

Introduction to Marketing Long Answer Type Questions

Introduction to Marketing Long Answer Type Questions

Question 1.
What is marketing? What is its importance?
Marketing means a set of all those activities which help to transfer the goods from the producer to the consumer.

Importance of marketing:

  • Marketing activities help to increase in national income of the nation.
  • A reduction in the cost of marketing is a direct benefit to the society.
  • Marketing process will brings new variety of goods to the society.
  • Scientific marketing has a stabilizing effect on the price level.
  • It helps for the improvement of productive efficiency.
  • It gives goods service to customers.
  • It provides employment opportunities to large number of people in the society.
  • It helps to increase the standard of living of the people.
  • It helps for better utilization of available resources of the nation.
  • It contributes to the development of entrepreneur and management class of people.
  • It achieves economic stability.
  • It helps to supply goods to all class at consumers.
  • It makes goods available to all geographical location.
  • It improves transport and communications.
  • It establishes and improves better relationship between the buyer and seller:
  • It achieves a balance between mass production and mass consumption through mass distribution.
  • It increases revenue of government.
  • It enables to increase profit.
  • It helps the manufacturer decide what to produce when to produce and how to sell a product.
  • It helps the top management to manage product innovation.
  • It helps in creation of utilization.

Question 2.
Discuss different classes of retail stores?
(a) Departmental stores:
It is a large scale retail organization carries a wide range of product lines each product line is operated in a separate department and this is managed by specialist.

(b) Supermarket:
It is a large scale retail organization for wide variety of food, textile and daily needs. In this retail stores consumer buy the goods usually at low rates.

(c) Specialty stores:
It is a large scale retail organization carries very few product line with a deep assortment. Eg. Furniture house, sports shop, bookstores etc.,

(d) Convenience stores:
It is a small shop located near to residential area. It usually carries a limited line of high turnover convenience goods.

(e) Super bazaar:
It is a large retail store for food item and non food item. It sells goods which are needed to customers in their day to day life. Routinely used goods are offered to customer in supper bazaar, therefore there is a possibility of good customer relationship management.

(f) Factory outlet:
Manufacture opens this type of retail stores to sell his product customers.

(g) Chain stores:
It is a retail business in which two or more branches are opened at different places to sell goods to customer through the head office or main branch.

Question 3.
Discuss recent developments in the field of marketing?
(1) E- Business:
E-Business means using the internet or related technologes for any of your normal business operation.

(2) M- Business:
M-Business is mobile business. Mobile business is commonly reffered to as m-business which means being able to pay for merchandise service or information through mobile phone. Wireless application protocol (WAP) is enabling the technologies to bring the internet content & service to mobile phones & other wireless terminals. These days mobile a-e available with every one, at all time so M-Business can be done used for any kind of transaction.

(3) Tele Marketing:
The telephone is a powerful sales instruments. Most of the activities traditionally performed by a travelling representative can now be done by phone or their remote means. Video-tapes, models, samples can effectively replace face to face demonstrations of a new product.

(4) Virtual Marketing:
It is something which is responsible for the design of series of ground-breaking web-Projects in the low contry & countries to guide the area in innovative & affordable web sites. It is known for creating the local website segment with introduction of its widely successful product. This “Virtual Marketing” concept is to create low cost service for broadening the base of quality design & graphics a web-site online provides.

The different types of Retailing business are:
(1) Department store Retailing:
Departmental stores are large retailing institutions that carry wide variety of merchandise lines under single roof. They provide (A-Z) product requirements under one shelter. These are also called as variety stores.

(2) Speciality store Retailing:
Speciality store retailers specialize in the merchandise or service they offer a consumer. Thus, single line speciality stores offer only one or a very closely related products, such as Jewellery, Shoes etc.

(3) Chain stores retailing:
In retailing, the term chain is used in a variety of ways. As commonly used, a chain stores is any retail organisation that operates multiple outlets, Technically, any retail organisation that operates more than one unit can be called as chain stores.

(4) Discount store Retailing:
A discount store is a retailing institution that sells a wide variety of merchandise at less than traditional retail prices.

(5) Off-price Retailing:
Off price retailers are those speciality retailers who sell both soft & hard goods at price levels below 20 to 60% of regular retail price.

(6) Super market Retailing:
There is no university accepted definition of the term ‘Super Market’ But word is generally used to describe a self-service, departmentalised food store with a minimum sale of one million US dollers.

(7) Convenience store Retailing:
As name suggests, the convenience store offers customers a convenient place in shop. The modern version is comer “Mona & Pop” grocery store. It offers time convenience by being open longer & during the inconvenient early morning & late night hours & place convenience by being a small, compact fast service operation that is close to consumer especially.

(8) Franchised Retailers;
Of late partly, large share of retail marketing is conducted through franchise system which is a form of retailing in which a parent organisation (Franchise) obtains distribution of its products, services or methods through a network of contractually affillicated dealers (franchisees).

(9) Warehouse Retailing:
A warehousing retailing involves some combination of warehouses & showroom facilities. In some cases, these facilities are located in a seperate but adjucent areas, in others, the warehouse & showroom are combined into are large physical structure. Generally, a warehouse retailer uses warehouse principles to reduce operating expenses & thereby offer discount prices as a prime customer appeal.

(10) Hyper market:
Hyper market is a general merchandise warehouse retail unit that stocks & sells food products & a wide variety of both hard & soft-goods, operating out of a warehouse, the hyper market displays offerings in wire basekets, metal racks, wooden bins & simple stocks of merchandise that normally reach a height of 12 to 15 feet.

(11) Mail order Retailing:
Mail order business is an established form of non- store retailing where those retailing units contact the prospective customers by mail, receives orders by. mail & deliveries are made by mail back to customers.

(12) Electronic Retailing:
Electronic Retailing can be rightly called as the innovative stage of the retail life cycle. Infact, the elecronic retailers have good many options at present & yet many will come to light because of new technologies covering up in a big way. At present, electronic retailers have focussed their attention on most commonly accepted options namely videotex, video disc, video logs & interactive cable television.

Question 4.
What is meant by an approach to the study of marketing? Explain ail the marketing approaches.
An approach to the study of marketing means the view-point that can be used to describe the marketing system. The different approaches that are commonly used to describe the marketing system are commodity approach, functional approach, institutional approach, decision making approach, system approach, etc.

Seven basic approaches are commonly used to describe the marketing systems.

  • Commodity opproach
  • Functional opproach
  • Institutional opproach
  • Managerial (or) Decision making approach
  • System approach
  • Economic approach.
  • Legal approach.

(1) Commodity approach:
Under the commodity approach, we study the flow of a certain commodity & its journey from the original producer right upto the final customers. In such a study, we can locate the centre of production. People engaged in buying & setting of the product, mode of transportation, problems of selling & advertising the product, problems of financing it, problem arising out of its storages & so on. Through such an approach, we can find out the different types of commodities. Thus, we can have complete picture of the field marketing. Marketing of agricultural products such as cotton, wheat, jute represent the commodity approach.

(2) Functional approach:
Under the functional approach, we concentrate, our attention on the specilised services or functions or activities performed by marketers, the study of marketing functions like buying, selling storing, risk bearing, transport financing & providing information represents the functional approach to the marketing system.

(3) Institutional approach:
Under this institutional approach, our main interst centres around the marketing institutions or agencies such as wholesalers, retailers, transport undertakings, r banks, insurance companies etc.,who participate in discharging this marketing responsibilities during the movement of distribution of goods. We try to find out
how these various business institutions. & agencies work together to form a total marketing system.

(4) Managerial or Decision making approach:
This approach which is of recent origin combines certain features of the commodity institution & functional approaches. In this approach, the focus of marketing study is on the decision making process. The study encompasses discussion of the different underlying concepts decision influencing factors, alternative strategies & techniques & methods of problem solving.

(5) The systems approach:
A system is a set of interacting or interdepadant groups co-ordinated to form a unified & organised to accomplish a set of objectives. In the model of system approach we have objectives, inputs, processor, output & feedback, the objective direct the process. Controls monitors the process.

Information feed back gives information from internal & external sources & it is the basis for future change in the system. An open system has its own environment giving the inputs & accepting the output inputs are processed, producing outputs to meet the meet the objections, the twin objectives of marketing systems are customer satisfaction and profitability.

(6) The economic Approach:
Under this approach, the problems of demand, supply, prices are studied. It is the true that demand, supply & value are important factors in marketing. But such a narrow approach alone cannot give the whole picture of marketing. This approach is more relevant at the level.

(7) The legal Approach:
The focus of this approach is on the regulatory aspects of marketing such as the effect on transfer of title in a legal way. That is a narrow approach. However, in India this approach has some relevance because laws influence marketing. The sale of goods Act. the essential commodities Act, the weight & measure Act. The contract Act, the consumer protection Act are some of these laws.

Question 5.
What is Net-working Marketing? State the merits and demerits of it.
Meaning of Net-work Marketing:
Network marketing or multi-level marketing is the most powerful and effective marketing or distribution system. It is about sales and distribution. Network marketing is a marketing system or method which helps in building a huge business not only for the company, but also for every distributor in the network marketing by getting customers through word-of-mouth recommendation.

In network marketing a distributor will buy use and recommend a product or service of another person and that person will buy that product or service and recommend it to some other person and so on, and as a result, there will arise an organization of distributors for the company product or service. The rewards here come from not just one’s own sales but include a percentage of the sales of the entire downline.

Merits of Network Marketing:
The merits of network marketing are –
(i) It offers flexibility of working hours as most of the network marketing business are designed such that they, can be full-time or part time.

(ii) Net work marketing can be done by people of all ages as they can easily operate from home. It can be done by students, old peoples, housewives etc.

(iii) Network marketing does not require much investment. Usually, the cost to purchase a sample kit and some business supplies to start the business.

(iv) Network marketing companies provides good incentives to their recruits for achieving a certain level of sales.

(v) Network marketing is a smart way to build a business.

(vi) As the word-of-mouth advertising in involved in network marketing the multi-level companies can cut their advertising costs by utilizing the important distributors.

(vii) It follows an easy and low-risk entrepreneurial opportunity.

(viii) Network marketing does not require specific educational qualifications to be-come a network marketer.

(ix) Network marketing gives an individual right to control his destiny.

Demerits of Network Marketing:
The demerits of network marketing are –

  • Network marketing may be affected by other companies offering equivalent products at the same price.
  • Network marketing products face competition, from equivalent products in traditional retail markets.
  • Network marketing tends to ignore advertising as it don’t have the means to advertise.
  • There are also fears of people moving out of the network causing breakage and losses.
  • Word-of-mouth recommendation is the key driver of this business and it takes a long time to build its goodwill and recognition in the market.

Question 6.
State the differences between traditional and modern concept of marketing.
Traditional concept of Marketing:
According to traditional concept of marketing, it consists of all those activities or operations which help the flow of goods from the producers or manufacturers to the ultimate consumers. Thus, the various activities that help in the creation of place, time and possession utilities and help the flow of goods from centres of production to the centres of consumption or use constitute the subject matter of traditional marketing.

In short, marketing is a mere physical process or set activities connected with the exchange of goods. According to Tousley, Clark and Clark, “Marketing consists of those efforts which effect transfer in ownership of goods and care for their physical distribution.”

Modern Concept of Marketing:
According to modern concept of marketing, it includes all those activities connected with identifying the needs of the consumers, and then, organizing the business accordingly to meet the needs of the consumers. It analyses the needs of the consumers before products are produced and offered to them.

In the words of W. J. Stanton, “Marketing is a total system of interacting business activities designed to plan, price, promote and distribute want satisfying products and services to the present and potential customers.

According to Philp Kotter, “Marketing is specifically concerned with how transactions are created, stimulated, facilitated and valued. Some of the important differences between traditional and modern concept of marketing are as follows –

Traditional concept:

  • Sellers focus is on product only.
  • It is short term oriented
  • It aims at aggressive selling.
  • It is profit oriented.
  • Here, there is no scope for professionalism.
  • It is a narrow concept.
  • It is a disintegrated marketing phenomenon.
  • It does not includes or includes very less promotional activities.

Modem concept:

  • Sellers focus is on customer’s needs and wants
  • It is long term oriented.
  • It aims at establishing customer relationship.
  • It aim at customer satisfaction and is delight oriented.
  • Here, there is ample scope for professionalism.
  • It is a broader and comprehensive concept.
  • It is an integrated marketing approach.
  • It is includes lot of promotional activities.

Introduction to Marketing Short Answer Type Questions

Introduction to Marketing Short Answer Type Questions

Question 1.
What is marketing? What are the features of marketing?
Marketing includes all those activities have, to do with effecting Changes in ownership and possession of goods and services. It is the part of economic activities which deals with time place and possession utilities and that phase of economic activity through which human wants are satisfied by the exchange of goods and services for some valuable consideration. It is the management function which promotes trade employment and satisfy consumer needs.

Features of marketing:

  • Marketing includes set of activities.
  • Marketing ensures optimum use of recourses.
  • Marketing gives customer satisfaction by supplying goods and services.
  • Marketing aims at developing economy of nation.
  • Marketing includes both national and international marketing.
  • Marketing gives scope of development of new product.
  • Marketing gives employment opportunity.
  • Marketing helps for use of resources available for production.
  • It is an act of creating customer needs and demand for the product.
  • If focuses on the customer needs.
  • It satisfy the needs of customer and there by satisfy the needs of marketer.

Question 2.
Explain approaches to the study of marketing?
The following are the most important approaches to the study of marketing.
(a) Commodity approach:
This approach focus on the study of specific commodity. In this approach the subject matter of discussion centers around the specific commodity selected for the study and also includes the sources and condition of supply nature and extent of demand the distribution channel used etc., performed by various agencies.

(b) Institutional approach:
This approach focus on the study of various middle men and agencies such as wholesalers retailers etc., this approach also explains the position of middlemen in the channels of distributions.

(c) Functional approach:
This approach focus on the different kinds of functions like selling storage and warehousing transportation financing etc-, this approach gives importance to various functions of marketing in relation to given commodities.

(d) Managerial approach;
This approach focus on the social contribution and cost created by various marketing activities and institution. This study is the interaction between the various environmental factors and their impact on the well being of society.

(e) Societal approach:
This approach focus on the social contribution and cost created by various marketing activities and institution. This study is the interaction between the various environmental factors and their impact on the well being of society.

(f) System approach:
This approach focus on the study of inter connection among the components of a marketing system in which products, services, money equipment, and information flow from marketers to consumers.

Question 3.
Write a note on function of marketing?
The main aim of marketing is to maximize the profit by selling goods and services to the customers. Following are the main functions of marketing.

Functions of exchange:
(a) Buying and assembling:
Buying is the main function of marketing. Raw materials are purchased for production by industrial enterprises and semi finished and finished goods are purchased for resale by the commercial enterprises; Purchasing goods for different purposes requires scientific and managerial skill in modern marketing. Purchasing is very different from assembling. Assembling means collection of goods already purchased from different sources at a common point. This function helps for further work of an enterprises.

(b) Selling:
Selling is an important aspect of marketing. According to this functions ownership of goods are transferred from the seller to the buyer at a profitable prices. It also includes personal and impersonal efforts made in persuading the prospective customers to buy a commodity and service.

Functions of physical supply:
(i) Transportation:
Transportation is the physical means to move the goods’and people from a place to another. The goods are moved from a place where they are not required to the place where they are demanded. This function creates the place utility. Goods are sent to the market place of in number of ways like railways, roadways, airways, and water ways. The speed and the cost determines the selection of a particular type of transportation.

(ii) Storage:
This function of marketing creates time utility. The products are to be preserved from the time of production to the time of consumption as they cannot be sold immediately. This function of marketing helps the business men to earn more profit by selling the goods only according the consumer demand. Storage also helps the consumers to postpone their needs for the product.

Facilitating functions:
(i) Financing:
Finance is the base the for all marketing functions. Every business requires short term or long term finance to run their business smoothly. Business collects long term capital by issue of debentures arid shares. Organization gets credit from banks and other trading concerns to tide over seasonal difficulties.

(ii) Risk bearing:
Risk is a danger of loss arising out of unforeseen circumstances in the future. There are two types of risks. They are transferable risk and non-transferable risk. Transferable risks are possible to shift but non-transferable risks are not possible to shift which is barred by the businessman himself.

(iii) Market information:
Market information includes all facts estimates opinions views regarding the market weather. This function is having three aspects viz. collection interpretation and dissemination. But this Collected information must be adequate timely and accurate. Therefore business must have up-to-date information about customers dealers and internal operations to achieve ultimate goal.

(iv) Standardisation:
It is related with division of commodities into distinct groups, each having . common characteristics. This function involves fours steps viz. fixing the standard, grading, inspecting and labeling. Standardization function helps the customers and businessmen for easy purchase and sale of product.

Question 4.
‘What are marketing processes? Explain each in brief.
Marketing processes are Concentration Equalization and Dispersion:
(a) The process of concentration:
It is the first process of marketing. It means bringing the goods at a single point to make possible convenient and economical distribution. Therefore collection of goods for the purpose of distribution is called as concentration. It is essential to collect all the goods from small scale agriculturist before they are transported to the wholesale markets from where they can be sent to different consuming centre.

(b) The process of equalization:
It is the activity occurs between the processes of concentration and dispersions. It means adjustment of supply to demand on the basis of time, through this process goods supply is adjusted with the customer demands. Storage and transportation plays an important role in this process.

(c) The process of dispersion:
Goods are concentrated at market place for dispersion of it through various channels of trade to final customers. Raw materials are dispersed to manufacturers for further process and final products are dispersed to middlemen to supply it to final consumers.

Question 5.
What is B2B model? What are its merits and demerits?
B2B means the transaction between two businessman. It includes limited number of transaction traded between two businessman for business use. The transaction made between two parties is generally large in volume.


  • It reduces the manual work and replace a number of people like accountants, ware house managers with auto material intelligent system.
  • It helps to perform the functions of marketing efficiently, quickly and securely.
  • It save the time and allows the manager to concentrate on some other important work of business.
  • It reduces operating cost and respond to market demand and trends quickly.
  • It increases customer loyally.
  • It is a charge in business culture and implementation of this network up-grade the knowledge of work.
  • It also facilitates for improvement in productivity.


  • It is costly method.
  • Running and maintenance cost is also high.
  • It required-expert staff to operate this system.
  • It requires separate software system to work with other business.

Question 6.
What is retailing? Explain its features.
Retailing means set of all those business activities that are involved in’the sale of goods or services to the final user directly. A retailer is a person performs the functions of retailing. Therefore retailing is concerned with selling goods and services to final consumers.

Characteristics of retailing:
(a) Small lot and frequent sales: Seller sells goods to final consumer is small quantity on a frequent basis. Therefore retailer should keep ready stock to meet the needs of final consumer.

(b) Retail prices are higher: Usually retailer is selling goods at high price. Because he is keeping large variety of goods in stock at his shop. There is a risk of storage and marketing in retail business. To cover these risk retailer fixes high rate.

(c) Retailer always depends on consumer: Retailing business is always depend on consumers. It is the duty of retailer to maintain good relationship with them.

(d) Running and maintenance cost is high: There is direct relationship between retailers and customer retailers should display all the products to his customer to attract their attention. Displaying the goods is routine work of retailer. He requires heavy, establishment expenditure to run the business in large scale manner.

(e) Retailer follows one price policy: Manufacturers and wholesales are selling goods on the basis of discount. But retailer must adopt single price policy under similar circumstances because customers observe these keenly.

Question 7.
Briefly explain the modem concept of marketing?
According to modern concept of marketing it includes all those activities connected with Identifying the needs of the consumers, and then, organizing the business accordingly to meet the needs of the consumers. It analyses the needs of the consumers before products are produced and offered to them.

In the words of W.J. Stanton, “Marketing is a total system of interacting business activities designed to plan, price, promote and distribute want satisfying products and services to the present and potential customers.” According to Philip Kotler, “Marketing is specifically concerned with how transactions are created, stimulated, facilitated and valued.”

Some of the important points which can be highlighted are –

  • It is long term oriented.
  • It aims at establishing customer relationship.
  • It aims at customer satisfaction and is delight oriented.
  • Here, sellers focus is on customers needs and wants.
  • Here, there is an ample scope for professionalism.
  • It is a broader and comprehensive concept.
  • It is an integrated marketing approach.
  • It includes lot of promotional activities.

Question 8.
Mention any five differences between selling and marketing.
The term selling & marketing are not synonymous. They differ from each other in many respects.
The main differences between them are :
(i) Selling is the mere exchange of goods for money between the sellers & buyers It is only a part of the marketing process. On the other hand, marketing is a more comprehensive term. It includes not only selling, but also other activities which help the movement of goods from the centres of production to the centres of consumption.

(ii) Selling comes at the end of the manufacturing cycle. But marketing comes at the beginning of the manufacturing cycle.

(iii) Selling is concerned with the creation of mere possession or ownership utility. But marketing is concerned with creation of place, time & possession utilities.

(iv) Selling is concerned with transfer of the goods which the seller has. But real marketing is concerned with marketing available to the consumers the goods which they want.

(v) Selling focusses on the product where as marketing focusses on the customers.

(vi) Selling emphasises the needs of the sellers whereas marketing emphasises the needs of buyers/consumers.

(vii) Selling is product oriented. Where as marketing is consumer oriented.

Question 9.
Distinguish between‘market’,‘marketing’.
In literal sense the term ‘market’ refers to a certain place where buyers and sellers personally meet each other and make their purchases and sales. In other words, it is a place where goods are brought and sold. In economic sense the term ‘market’ does not refer to any particular place where buyers and sellers meet face to face and make their purchases and sales, but covers the whole of any region where the buyers and seller are in such free intercourse with one another that a single price prevails for a certain commodity at a certain point of time throughout the region. It means getting together of buyers and sellers in person or by mail, telephone, telegraph, cable or through any other means of communication. According to Prof. Seligman, “A market means a coming together of offers and parties.”

Marketing –
Marketing includes all these activities connected with identifying the needs of the consumers, and then, organizing the business accordingly to meet the needs of the consumes. It analyses the needs of the consumers before the products are produced and offered to them.

According to Philip Kotter, “Marketing is specifically concerned with how transactions are created, stimulated, facilitated and valued.” In the words of W.J. Stanton, “Marketing is a total system of interacting business activities designed to plan, price, promote and distribute want satisfying products and services to the present and potential customers.”

Question 10.
What is green marketing? explain green marketing.
Green marketing includes all the activities intended to generate as well as facilitate any exchange in order to satisfy human needs such that satisfying those needs happen with the most minimal input in the environment.
(a) Product:
The ecological objectives in planning products are to resource consumption and pollution and to increase conservation of scare resource

(b) Price:
Consumers are ready to pay extra value to their product only when the product has extra product value this value may be improved performance function designer visual appear or taste, green marketing gives importance to these values.

(c) Promotion:
In green marketing promotional activities are in combination of a product and biophysical environment. It also gives information about environmental responsibility.

(d) Place:
The choice of where and when to make a product available will have significant impact on customers. Very few customers will go out of their way to buy green product.

Question 11.
What are the salient features of green product.
Following are the important features of green product:

  • They promote clean air quality
  • Green products are durable and have a low maintence requirements
  • They are recyclable and reusable
  • They are made using natural renewable or environment friendly resources
  • They do not contain any ozone -depleting substances like green house gases
  • Green products do not contain highly toxic compounds
  • Green products are biodegradable

Introduction to Marketing Very Short Answer Type Questions

Introduction to Marketing Very Short Answer Type Questions

Question 1.
State the functions of marketing?
The functions of marketing are –
(i) Functions of exchange:

  • Buying and assembling
  • Selling

(ii) Functions of physical supply:

  • Transportation
  • Storage and warehousing

(iii) Facilitating functions:

  • Financing
  • Risk bearing
  • Standardization and grading
  • Market information.

Question 2.
What is selling?
Selling is the process of informing the people to buy goods or services. It not only gives the information about the products but also inspire them to buy the goods or services. It is an important function of marketing.

Question 3.
State the approaches to the study of marketing?

  • Commodity approach
  • Functional approach
  • Institutional approach
  • System approach

The study these approaches describe the marketing system.

Question 4.
Mention two objectives of marketing?
Goals of marketing: As an economic activity, marketing has three objectives.

  • Creation of Utility.
  • Cost reduction.
  • Price stability.
  • Other Objects

Question 5.
State the basic difference between marketing and selling?
The basic difference between the marketing and selling are:

  • Selling means transfer of product from seller to the buyer marketing means concentrated on consumer needs.
  • Selling has a narrow scope where as marketing has a wider scope.

Question 6.
Define marketing?
Marketing means a set of all those activities which helps to transfer the goods from the producer to the consumer. According to Duddy “Marketing is the economic process by means of which goods and services are exchanged and their values determined in terms of money prices.”

Question 7.
Mention the goals of marketing system?

  • To meet the consumer needs and demand of target market.
  • To maintain the current position.
  • To support new products
  • To improve market share.
  • To grow the existing business.

Question 8.
What is marketing process?
Marketing process is the set of activities in attaining a particular goals of an organization. There are three process in marketing. They are Concentration, Equalization and Dispersion.

Question 9.
What is assembling?
It means collection of goods purchased from different sources at a common point. This function helps for further work of an enterprises. It is the main function states immediately offer the function of buying.

Question 10.
Examine the need for customer oriented approach marketing?
Customer oriented approach of marketing conciliates on the customers satisfaction and profits. Consumer is the main point to all the businessman. Therefore businessman tries to satisfy the customer needs and there by he wants to increase profit.

Question 11.
What are 4 p’s of marketing mix?
Marketing mix is combination of 4 factors. They are –

  • Product
  • Price
  • Place
  • Promotion

Question 12.
What do you mean by social marketing?
Social and cultural forces usually influences the welfare of human resources in the longrun. The new demands are created and old one’s are lost in due course. Change in our life style and social value depend on marketing is known as social marketing.

Question 13.
What is grading?
Grading is sub function of standardization. It is the process of classing the products into groups having similar physical and chemical properties.

Question 14.
What is E-business?
E-business is a way of conducting business electronically leveraging technology. Such as e-commerce, web based supply etc. This type of business is conducting on the internet.

Question 15.
What are the categories of internet?
(a) B2B = Business to Business.
(b) B2C = Business to Consumers.
(c) C2B = Consumer tb Business.
(d) C2C = Consumer to Customer.

Question 16.
What is M-Business?
M-Business is mobile business. M- Business means mobile phone is used for merchandise service or information.

Question 17.
What is Tele marketing?
Telemarketing means a form of direct marketing in which seller uses the telephone to contact the buyers and to sell products or services. It is a practice of selling goods and services to customers by means of telephone.

Question 18.
Expand the term SMS and MMS.

  • SMS = Short Message Service.
  • MMS = Multi Media Messaging Service.

Question 19.
What is Relationship marketing?
Relationship marketing means marketing oriented towards strong, lasting relationships with individual accounts. It is an act of building a permanent relationship

Question 20.
What is CRM?
CRM means customer relationship management. It is a comprehensive strategies and process of acquiring retaining and patterning with selective customers to create superior value for the company and customer.

Question 21.
What is business system?
It is one of the dynamic process involving a set of interacting & Interrelated activities to reach customer. It receives input from the Environment in the form of valuable information & satisfy customer heeds & there by earn profit.

Question 22.
Define Marketing Management.
Acc to Philip Kotler “Marketing Management is the process of planning & executing the conception, pricing, promotion & distribution of goods, services & ideas to bring about desired exchanges with target group that satisfy customer & organisational objectives”.

Question 23.
What is traditional concept of marketing?
It implies that management firmly belives that if we have good product, customer response is bound to be favourable & we will need very little promotion efforts. This was the marketing philosophy till 1930. Under Production – oriented marketing concept, There is no need of marketing effort provided a product & its price is reasonable.

Question 24.
What is market penetration?
It involves expansion of sales of existing products in existing markets by selling more to present customers or gaining new customers in existing markets. The firm can market its present products to existing markets. This is done through a more aggressive marketing mix. Customers from rivals or potential buyers can also be attracted. Existing buyers may be induced to increase their rate of use. We may have temporary price cut to raise the volume of sales and penetrate the market.

Question 25.
What is meant by concept marketing?
Philosophy of an organsiation in relation to marketing is referred to as marketing concept or concept marketing.

Question 26.
What is buyers market?
A buyers market is a market in which there is an abundance of a particular goods or service for sale.

Question 27.
Define green marketing?
According to the American marketing association green marketing is the marketing of products that are presumed to be environmentally safe.

Question 28.
What is the reason for adoption of green marketing?
Marketer should go for the adoption of green marketing for following reasons –

  • Opportunities
  • Corporate social responsibility
  • Government pressure
  • Competitive pressure
  • Cost or profit issues

B.Com 1st Sem Indian Financial System Question Paper Dec 2017

B.Com 1st Sem Indian Financial System Question Paper Dec 2017

Time: 3 Hours
Max. Marks: 70


I. Answer any five sub-questions. Each sub-question carries two marks. (5 x 2 = 10)

Question (a)
What is Financial Institution?
Financial institutions, otherwise known as banking institutions, are corporations which provide services as intermediaries of financial markets. Broadly speaking, there are three major types of financial institutions.

  • Depository institutions – deposit-taking institutions that accept and manage deposits and make loans, including banks, building societies, credit unions, trust companies, and mortgage loan companies
  • Contractual institutions- insurance companies and pension funds
  • Investment institutions-investment banks, underwriters, brokerage firms

Question (b)
What is Primary Market?

Question (c)
What is Overdraft?
An overdraft is an extension of credit from a lending institution when an account reaches zero. An overdraft allows the individual to continue withdrawing money even if the ac-count has no funds in it or hot enough to cover the withdrawal. Basically, overdraft means that the bank allows customers to borrow a set amount of money.

Question (d)
What is Credit Control?
Credit control is an important tool used by Reserve Bank of India, a major weapon of the monetary policy used to control the demand and supply of money (liquidity) in the economy. Credit control are of two.types namely quantitative and qualitative.

Question (e)
What is Letter of Credit?
A letter of credit (LC), also known as a documentary credit, bankers commercial credit, is a payment mechanism used in international trade to perform the same economic function as a guarantee, by allocating risk undertaken by contracting parties.

Question (f)
What is lender of last resort?
A lender of last resort is an institution, usually a country’s central bank, that offers loans to banks or other eligible institutions that are experiencing financial difficulty or are considered highly risky or near collapse.

Question (g)
Give the meaning of Open market.
Open market operations (OMO) refer to the buying and selling of government securities in the open market in order to expand or contract the amount of money in the banking system. Securities’purchases inject money into the banking system and stimulate growth, while sales of securities do the opposite and contract the economy.


II. Answer any three questions. Each question carries six marks. (3 x 6 = 18)

Question 2.
State the role of financial markets.
Financial market gives strength to economy by making finance available at the right place.
(1) Mobilisation of Savings and their Channelization into more Productive Uses:
Financial market gives impetus to the savings of the people. This market takes the uselessly lying finance in the form of cash to places where it is really needed. Many financial instruments are made available for transferring finance from one side to the other side. The investors can invest in any of these instruments according to their wish.

(2) Facilitates Price Discovery:
The price of any goods or services is determined by the forces of demand and supply. Like goods and services, the investors also try to discover the price of their securities. The financial market is helpful to the investors in giving them proper price.

(3) Provides Liquidity to Financial Assets:
This is a market where the buyers and the sellers of all the securities are available all the times. This is the reason that it provides liquidity to securities. It means that the investors can invest their money, whenever they desire, in-securities through the medium of financial market. They can also convert their investment into money whenever they so desire.

(4) Reduces the Cost of Transactions:
Various types of information are needed while buying and selling securities. Much time and money is spent in obtaining the same. The financial market makes available every type of information without spending any money. In this way, the financial market reduces the cost of transactions.

Question 3.
Distinguish between Primary Market and Secondary Market.
Purchasing Method or Primary and Secondary Market:
The primary market for financial instruments is a direct market where companies offer their shares to the members of the public for consideration. The buyers and sellers interact with one another offering the chance to negotiate for the shares on offer, especially in the auction markets where the highest bidder is assumed to have won the purchasing battle.

The secondary marker is an indirect financial platform where prospective buyers purchase shares from others investors. In the secondary market, the original owner of the shares (company) is not involved in the transfer of the units of ownership.

Financing/Beneficiary for Primary and Secondary Market:
The main purpose of the primary market is to provide finances to organizations so that they can expand their operations or boost their current activities. Companies offer their shares for a subscription to prospective buyers and investors in return for money, which is essential in funding the events of the company.

On the other hand, secondary market does not offer finances to the company. This is because the shares are traded between prospective investors who have speculative motives. The secondary market involves the exchange of shares from one investor to the other.

Parties Involved in Primary and Secondary Market:
The primary market involves direct contact between the company and the investor. The company offers shares to the investor who considers them for purchase concerning the associated profits and the cost of the shares. The secondary market involves different investors exchanging the financial instruments. The company is not involved because this is an indirect market, which involves investors only.

Price of Financial Instruments for Primary and Secondary Market:
In the primary market, the price of the financial instruments is usually fixed. Companies sell their shares in an open market where other members of the public are aware of the prevailing prices. Besides, the price of the shares in an initial public offer is communicated through the print and other media platforms.

However, the participants do not know the price of shares and other products. The price of the financial instruments keeps OR fluctuating and is mostly depends on demand and supply aspects. Therefore, the more the products, the lower the prices and the vice versa.

The primary trade of financial instruments is usually not rooted in any specific place or geographical position. This means that buyers can buy their shares at any place, especially the organizational premises. The secondary market has physical existence, which means that this form of trade is rooted in a specific place. This explains why there is the existence of the stock exchange offices and halls where investors sell their units of ownership to other investors.

Agents/Intermediaries for Primary and Secondary Market: In the primary markets, underwriters are the intermediaries between the company and the investors who are willing to purchase units of ownership in the company. Some of the common underwriting agencies include banks and insurance companies among others. Brokers form the intermediaries in the secondary market. Brokers are responsible for assessing the risks and profits associated with a specific financial instrument after which they purchase the promising shares on behalf of the buyer.

Number of Transactions involved in Primary and Secondary Market:
In the primary market, a financial instrument is sold once. The enterprise is tasked with the obligation of selling the share to the investor for profit at a fixed rate upon which the investor possesses the full rights to the unit.

The investor is entitled to all the benefits associated with the ownership of the instrument including dividends and resale rights. On the other hand, a unit of ownership can be sold several times with each transaction involving the exchange of rights and benefits. This is because the secondary market consists of the sale of shares and other financial instruments between investors at a profit.

Question 4.
What are the objectives of Exim Banks?
The Export-Import Bank of India was set up by the Government of India on January 1, 1982. Its main objects are:

  • To ensure integrated and co-ordinated approach in solving the allied problems encountered by exporters in India
  • To pay specific attention to the exports of capital goods
  • Export projection
  • To facilitate and encourage joint ventures and export of technical services and international and merchant banking
  • To extend buyers’ credit and lines of credit
  • To tap domestic and foreign markets for resources for undertaking development and financial activities in the export sector.

Question 5.
What are the indicators of liquidity of a commercial bank?
Liquidity of the Indian commercial banks is measured through different ratios: Liquid assets to demand deposits, liquid assets to total assets, demand deposits to total deposits and advances to deposits. Liquid assets to demand deposits ratio is calculated by ratio of the assets matured within the time period of one year and the liabilities to be paid within the same period This proposed to capture the liquidity mismatch of assets and liabilities and provided an indication of the level to which bank could meet short term withdrawal of funds without facing liquidity problem.

Demand deposits to total deposits ratio specify the prerequisite of the bank to retain cash ready to pay the deposits payable on demand. Higher ratio enhances the ability of the bank to pay its liabilities as and when they are demanded.

Question 6.
What are the promotional functions of RBI?
(a) Promotion of Banking Habit:
The Reserve Bank of India helps in mobilizing the savings of the people for investment. It expanded banking system throughout the nation by setting up of various institutions like UTI, IDBI, IRCI, N ABARD etc. Thereby it promoted banking habit among the people.

(b) Providing Refinance for Exports:
The Reserve Bank of India is providing refinance for export promotion. The Export Credit and Guarantee Corporation (ECGC) and Export Import Bank were established initially by the Reserve Bank of India to finance the foreign trade of India. They finance foreign trade in the form of insurance cover, long-term finance and foreign currency credit. However, they are now functioning separately.

(c) Providing Credit to Agriculture:
The Reserve Bank of India makes institutional arrangements for rural or agricultural finance. For example, the bank has set up special agricultural credit cells. It has promoted regional rural banks with the help of commercial banks. It has also promoted NABARD.

(d) Providing Credit to Small Scale Industrial Unit:
Commercial banks lend loans to small-scale industrial units as per the directives issued by the Reserve Bank of India time to time. The Reserve Bank of India encourages commercial banks to render guarantee services also to small-scale industrial sector. The Reserve Bank of India considers advances given to small-scale sector as priority sector advances. It also directed commercial banks to open specialized branches to provide adequate financial and technical assistance to small-scale industrial branches.

(e) Providing Indirect finance to Cooperative Sector:
The RBI has directed NABARD to give loans to State Cooperative Banks, which in turn lend loans to cooperative sector. Hence, the Reserve Bank of India provides indirect finance to cooperative sector in India.

(f) Exercising Control over Monetary and Banking system of the Country:
The Reserve Bank of India is vested with enormous and extensive powers regarding supervision and control over commercial banks, cooperative banks and also non-banking institutions receiving deposits. The Banking Regulation Act prescribes extensive requirements as minimum regarding the paid-up capital, reserves, cash reserves and liquid assets. The operation of the bank, the management, amalgamation, reconstruction and liquidation etc. are thoroughly supervised by the officials of the Reserve Bank of India. Every sched-uled bank is required to furnish to the Reserve Bank a weekly statement showing the principal items of its liabilities and assets in India.

(g) Making Industrial arrangement for Industrial Finance:
The Reserve Bank of India makes institutional arrangement for industrial finance. For instance, it has brought into existence several development banks such as the Industrial Finance Corporation of India, the Industrial Development Bank of India, which provide long-term finance to industries.


III. Answer any three questions. Each question carries fourteen marks. (3 x 14 = 42)

Question 7.
Differentiate between Money Market and Capital Market.
Money market is distinguished from capital market on the basis of the maturity period, credit instruments and the institutions:
(a) Maturity Period:
The money market deals in the lending and borrowing of short-term finance (i.e., for one year or less), while the capital market deals in the lending and borrowing of long-term finance (i.e., for more than one year).

(b) Credit Instruments:
The main credit instruments of the money market are call money, collateral loans, acceptances, bills of exchange. On the other hand, the main instruments used in the capital market are . stocks, shares, debentures, bonds, securities of the government.

(c) Nature of Credit:
Instruments: The credit instruments dealt with in the capital market are more heterogeneous than those in money market. Some homogeneity of credit instruments is needed for the operation of financial markets. Too much diversity creates problems for the investors.

(d) Institutions important institutions operating in the money market are central banks, commercial banks, acceptance houses, nonbank financial institutions, bill brokers, etc. Important institutions of the capital market are stock exchanges, commercial banks and nonbank institutions, such as insurance companies, mortgage banks, building societies, etc.

(e) Purpose of Loan: The money market meets the short-term credit needs of business; it provides working capital to the industrialists. The capital market, on the other hand, caters the long-term credit needs of the industrialists and provides fixed capital to buy land, machinery, etc.

(f) Risk:The degree of risk is small in the money market. The risk is much greater in capital market. The maturity of one year or less gives little time for a default to occur, so the risk is minimised. Risk varies both in degree and nature throughout the capital market.

(g) Basic Role:The basic role of money market is that of liquidity adjustment. The basic role of capital market is that of putting capital to work, preferably to long-term, secure and productive employment.

(h) Relation with Central Bank: The money market is closely and directly linked with central bank of the country. The capital market feels central bank’s influence, but mainly indirectly and through the money market.

(i) Market: Regulation: In the money market, commercial banks are closely regulated. In the capital market, the institutions are not much regulated.

Question 8.
Define Commercial Bank. Also discuss the functions of a Commercial Bank.
Meaning of a Commercial Bank:
A commercial bank can be defined as the financial institution that offers banking services to the general public and to companies with the main aim of making profit. A commercial bank is a type of bank that provides services such as accepting deposits, making business loans, and offering basic investment products. Commercial banks accept deposits from customers with the aim of using such money to do business or serves as loan to other people with the aim of making profit. Commercial banks are limited liability companies.

Primary Functions of a Commercial Bank:

  • Accepting Deposits
  • Advancing Loan

(A) Accepting Deposits: This is perhaps the most important function of commercial banks. Commercial banks accept deposits from customers
The main kinds of deposits are:
(i) Current Account Deposits or Demand Deposits: These deposits refer to those deposits which are repayable by the banks on demand:

  • Such deposits are generally maintained by businessmen with the intention of making transactions with such deposits.
  • They can be drawn upon by a cheque without any re-striction.
  • Banks do not pay any interest on these accounts. Rather, banks impose service charges for running these accounts.

(ii) Fixed Deposits or Time Deposits: Fixed deposits refer to those deposits, in which the amount is deposited with the bank for a fixed period of time.

  • Such deposits do not enjoy cheque-able facility.
  • These deposits carry a high rate of interest.

(iii) Saving Deposits: These deposits combine features of both current account deposits and fixed deposits:

  • The depositors are given cheque facility to withdraw money from their account. But, some restrictions are imposed on number and amount of withdrawals, in order to discourage frequent use Of saving deposits.
  • They carry a rate of interest which is less than interest rate on fixed deposits. It must be noted that Current Account deposits and saving deposits are chequable deposits, whereas, fixed deposit is a non-chequable deposit.

(B) Advancing of Loans: The deposits received by banks are not allowed to remain idle. So, after keeping certain cash reserves, the balance is given to needy borrowers and interest is charged from them, which is the main source of income for these banks.

Different types of loans and advances made by a Commercial Bank:
(i) Cash Credit:
Cash credit refers to a loan given to the borrower against his current assets like shares, stocks, bonds, etc. A credit limit is sanctioned and the amount is credited in his account. The borrower may withdraw any amount within his credit limit and interest is charged on the amount actually withdrawn.

(ii) Demand Loans:
Demand loans refer to those loans which can be recalled on demand by the bank at any time. The entire sum of demand loan is credited to the account and interest is payable on the entire sum.

(iii) Short-term Loans:
They are given as personal loans against some collateral security. The money is credited to the account of borrower and the borrower can withdraw money from his account and interest is payable on the entire sum of loan granted.

Secondary Functions of a Commercial Bank:
(a) Overdraft Facility:
It refers to a facility in which a customer is allowed to overdraw his current account upto an agreed limit. This facility is generally given to respectable and reliable customers for a short period. Customers have to pay interest to the bank on the amount overdrawn by them.

(b) Discounting Bills of Exchange:
It refers to a facility in which holder of a bill of exchange can get the bill discounted with bank before the maturity. After deducting the commission, bank pays the balance to the holder. On maturity, bank gets its payment from the party which had accepted the bill.

(c) Agency Functions of a Commercial Bank:
Commercial banks also perform certain agency functions for their customers. For these services, banks charge some commission from their clients.

Some of the agency functions are:
(i) Transfer of Funds: Banks provide the facility of economical and easy remittance of funds from place-to-place with the help of instruments like.demand drafts, mail transfers, etc.

(ii) Collection and Payment of Various Items: Commercial banks collect cheques, bills, interest, dividends, subscriptions, rents and other periodical receipts on behalf of their customers and also make payments of taxes, insurance premium, etc. on standing instructions of their clients.

(iii) Purchase and Sale of Foreign Exchange: Some commercial banks are authorized by the central bank to deal in foreign exchange. They buy and sell foreign exchange on behalf of their customers and help in promoting international trade.

(iv) Purchase and Sale of Securities: Commercial banks buy and sell stocks and shares of private companies as well as government securities on behalf of their customers.

(v) Income Tax Consultancy: They also give advice to their customers on matters relating to income tax and even prepare their income tax returns.

(vi) Trustee and Executor: Commercial banks preserve the wills of their customers as trustees and execute them after their death as executors.

(vii) Letters of Reference: They give information about the economic position of their customers to traders and provide the similar information about other traders to their customers.

General Utility Functions of a Commercial Bank – Commercial banks render some general utility services like:
(i) Locker Facility: Commercial banks provide facility of safety vaults or lockers to keep valuable articles of customers in safe custody.

(ii) Traveller’s Cheques: Commercial banks issue traveler’s cheques to their customers to avoid risk of taking cash during their journey.

(iii) Letter of Credit; They also issue letters of credit to their customers to certify their creditworthiness.

(iv) Underwriting Securities: Commercial banks also undertake the task of underwriting securities. As public has full faith in the creditworthiness of banks, public do not hesitate in buying the securities underwritten by banks.

(v) Collection of Statistics: Banks collect and publish statistics relating to trade, commerce and industry. Hence, they advise customers on financial matters. Commercial banks receive deposits from the public and use these deposits to give loans. However, loans offered are many times more than the deposits received by banks. This function of banks is known as Money Creation’.

Question 9.
Explain the functions of Reserve Bank of India.
Functions of Reserve Bank:
(1) Issue of Notes:
The Reserve Bank has the monopoly for printing the currency notes in the country. It has the sole right to issue currency notes of various denominations except one rupee note (which is issued by the Ministry of Finance). The Reserve Bank has adopted the Minimum Reserve System for issuing/printing the currency notes. Since 1957, it maintains, gold and foreign exchange reserves of Rs. 200 Cr. of which at least Rs.115 cr. should be in gold and remaining in the foreign currencies.

(2) Banker to the Government:
The second important function of the Reserve Bank is to act as the Banker, Agent and Adviser to the Government of India and states. It performs all the banking functions of the State and Central Government and it also tenders useful advice to the government on matters related to economic and monetary policy. It also manages the public debt of the government.

(3) Banker’s Bank:
The Reserve Bank performs the same functions for the other commercial banks as the other banks ordinarily perform for their customers. RBI lends money to all the commercial banks of the country.

(4) Controller of the Credit:
The RBI- undertakes the responsibility of controlling credit created by the commercial banks. RBI uses two methods to control the extra flow of money in the economy. These methods are quantitative and qualitative techniques to control and regulate the credit flow in the country. When RBI observes that the economy has sufficient money supply and it may cause inflationary situation in the country then it squeezes the money supply through its tight monetary policy and vice versa.

(5) Custodian of Foreign Reserves:
For the purpose of keeping the foreign exchange rates stable, the Reserve Bank buys and sells the foreign currencies and also protects the country’s foreign exchange funds. RBI sells the foreign currency in the foreign exchange market when its supply decreases in the economy and vice-versa. Currently India has Foreign Exchange Reserve of around US$ 360bn.

(6) Other Functions:
The Reserve Bank performs a number of other developmental works. These works include the function of clearing house arranging credit for agriculture (which has been transferred to NABARD) collecting and publishing the economic data, buying and selling of Government securities (gilt edge, treasury bills etc)and trade bills, giving loans to the Government buying and selling of valuable commodities etc. It also acts as the representative of the Government in the International Monetary Fund (I.M.F.) and represents the membership of India.

Question 10.
Explain the Quantitative and Qualitative Credit Control of RBI.

Question 11.
Explain in detail the different types of financial services.

Financial Services Long Answer Type Questions

Financial Services Long Answer Type Questions

Question 1.
Give a detailed explanation of lease finance.
State the features of leasing:

  • The lessee (customer or borrower) will select an asset (equipment, vehicle, software)
  • The lessor (finance company) will purchase that asset
  • The lessee will have use of that asset during the lease
  • The lessee will pay a series of rentals or instalments for the use of that asset
  • The lessor will recover a large part or all of the cost of the asset plus earn interest from the rentals paid by the lessee
  • The lessee has the option to acquire ownership of the asset (e.g. paying the last rental, or bargain option purchase price)
  • The finance company is the legal owner of the asset during duration of the lease.

Question 2.
State the features of financial leasing.

  • Asset finance (leasing and hire purchase) is a very flexible way of raising funds. The advantages include:
  • Assets and capital equipment can be paid for from the revenue they earn.
  • Rates can be as competitive, or even better, than bank funding rates because of the security provided by the asset.
  • Longer-term and more flexible options than many bank loans, typically 3 to 5 years.
  • It is generally non-cancellable by the lessor, providing certainty to businesses.
  • Asset finance offers real value to businesses with limited capital, or those that need to manage their cash flow.
  • It is highly accessible, as it is secured – largely or entirely – on the asset being financed.
  • In a recession, leasing is particularly well positioned to help businesses when most have low taxable profits.
  • Depending on the situation, companies may benefit from tax advantages.

Question 3.
What is venture capital? Explain the features of venture capital.
Venture capital is long-term risk capital to finance high technology projects which involve risk but at the same time has strong potential for growth. Venture capitalist pools their resources including managerial abilities to assist new entrepreneur in the early years of the project. Once the project reaches the stage of profitability, they sell their equity holdings at high premium.

Features of venture capital:

  • The venture capitalist participates in the entrepreneur’s business through direct purchase of shares, options or convertible shares.
  • The objectives of the venture capitalist are to make capital gains by selling off the investment once the enterprise becomes profitable.
  • The venture capital firm (VCF) is inclined to assume a high degree of risk to make capital gains.
    Venture financing is a long-term illiquid investment where investment can be liquidated in the assisted firm only after a long-period, say 4-8 years.
  • The financial burden of the assisted firm tends to be negligible during the first few years.
  • The VCF, in addition to providing funds, takes an active interest in guiding the firm in various ways and supports the entrepreneur through all the stages of the company’s development – monetarily and non-monetarily.

Question 4.
Explain the different types of factoring.
The different types of Factoring are as follows:
For International Trade:

  • Full Factoring
  • Recourse Factoring
  • Maturity Factoring
  • Advance Factoring
  • Undisclosed Factoring
  • Invoice Discounting
  • Bulk Factoring
  • Agency Factoring

A. Domestic Factoring:
→ Factoring can be both domestic and for exports. In domestic Factoring, the client sells goods and services to the customer and delivers the invoices, order, etc., to the Factor and informs the customer of the same.

→ In return, the Factor makes a cash advance and forwards a statement to the client. The Factor then sends a copy of all the statements of accounts, remittances, receipts, etc., to the customer. On receiving them the customer sends the payment to the Factor.

Different types of Domestic Factoring are as follows:
(a) Full Factoring: This is also known as “Without Recourse Factoring” . It is the most comprehensive type of facility offering all types of services namely finance sales ledger administration, collection, debt protection and customer information.

(b) Recourse Factoring: The Factoring provides all types of facilities except debt protection. This type of service is offered in India. As discussed earlier, under Recourse Factoring, the client’s liability to Factor is hot discharged until the customer pays in full.

(c) Maturity Factoring: It is also known as “Collection Factoring”. Under this arrangement, except pro-viding finance, all other basic characteristics of Factoring are present. The payment is effected to the client at the end of collection period or the day of collecting accounts which-ever is earlier.

(d) Advance Factoring:
This could be with or without recourse. Under this arrangement, the Factor pro-vides advance at an agreed rate of interest to the client on uncollected and non-due receivables. This is only a pre-payment and not an advance. Under this method, the customer is not notified about the arrangement between the client and.the Factor. Hence the buyer is unaware of factoring arrangement. Debt collection is organized by the client who makes payment of each invoice to the Factor, if ad-vance payment had been received earlier.

(e) Invoice Discounting:
In this arrangement, the only facility provided by the Factor is finance. In this method the client is a reputed company who would like to deal with its customers directly, including collection, and keep this Factoring arrangement confidential. The client collects pay-ments from customer and hands it over to Factor. The risk involved in invoice discounting is much higher than in any other methods. The Factor has liberty to convert the facility by notifying all the clients to protect his interest. This service is becoming quite popular in Europe and nearly one third of Factoring business comprises this facility.

(f) Bulk Factoring:
It is a modified version of Involve discounting wherein notification of assignment of debts is given to the customers. However, the client is subject to full recourse and he carries out his own administration and collection.

(g) Agency Factoring:
Under this arrangement, the facilities of finance and protection against bad debts are provided by the Factor whereas the sales ledger administration and collection of debts are carried out by the client.

Question 5.
Explain briefly the various types of venture capital.
There are several types of venture capital that are extremely crucial in the context of the modern day business world. The types of venture capital are classified as per the purpose and time of their application. The 3 principal types of venture capital are early stage financing, expansion financing and acquisition/buyout financing.
(a) Early Stage Financing:
Early stage financing has three sub divisions – seed financing, start up financing and first stage financing. Seed financing is basically a small amount that an entrepreneur receives for the purpose of being eligible for a start up loan. Start up financing is given to companies for the purpose of finishing the development of products and services. However, this type of venture capital may also be used for initial marketing as well. Companies that have spent all their starting capital and need finance for beginning business activities at the full-scale are the major beneficiaries of the First Stage Financing.

(b) Expansion Financing:
Expansion financing may be categorized into second-stage financing, bridge financing and third stage financing or mezzanine financing. Second-stage financing is provided to companies for the purpose of beginning their expansion. Second-stage financing is also known as mezzanine financing. It is provided basically for the purpose of assisting a particular company to expand in a major way. Bridge financing is useful in many ways. It may be provided as a short term interest only finance option as well as a form of monetary assistance to companies that employ the Initial Public Offers as a major business strategy.

(c) Acquisition or Buyout Financing:
Acquisition or buyout financing is categorized into acquisition finance and management or leveraged buyout financing. Acquisition financing assists a company to acquire certain parts or an entire company. Management or leveraged buyout financing helps a particular management group to obtain a particular product of another company.

Question 6.
State the objectives of financial services.
Financial Intermediation: The financial service industry facilitates the function of intermediation between savers and investors by providing a means and a medium of exchange and by undertaking innumerable services.

State the objectives of financial services:
(a) Fund raising: Financial services help to raise the required funds from a host of investors, individuals, institution and corporate. For this purpose, various instruments of finance are used.

(b) Funds deployment: An array of financial services is available in the financial markets which help the players to ensure an effective deployment of funds raised. Services such as bill discounting, parking of short-term funds in the money market, credit rating &securitization of debts are provided by financial services firms in order to ensure efficient management of funds.

(c) Specialized services: The financial service sector provides specialized services such as credit rating, venture capital financing lease financing, mutual funds, credit cards, housing finance, etc besides banking and insurance. Institutions and agencies such as stock exchanges, non-banking finance companies, subsidiaries of financial institutions, banks & insurance companies also provide these services.

(d) Regulation: There are agencies that are involved in the regulation of the financial services activities. In India, agencies such as the Securities and Exchange Board of India (SEBI), Reserve Bank of India (RBI) and the Department of Banking and Insurance of the Government of India, regulate the functioning of the financial service institutions.

(e) Economic growth: Financial services contribute, in good measure, to speeding up the process of economic growth & development.

Question 7.
Explain the various types of fund based financial services offered by banks.
(a) Working Capital Finance:
Bank offer working capital facilities – both fund-based and fee-based. Fund- based working capital products include cash credit, overdraft, bill discounting, short-term loans, export financing (pre-shipment as well as post-shipment). Fee based facilities include letters of credit and bank guarantees. Working Capital facilities are provided to finance the day-to-day business requirements. Funding requirements are structured to finance procurement of raw materials/stores and payment towards manufacturing costs and other overheads. Sales are financed against sundry debtors/ receivables. The Bank offers a combination of operative cash credit and working capital demand loan to meet the domestic working capital requirements of our clients.

(b) Short Term Finance:
The Bank offers short-term loans for a period ranging from 3 months to 12 months to sound corporate for meeting their specific short-term working capital requirements. The funds are provided with interest rates either linked to our BPLR or at a fixed rate with varying repayment patterns.

(c) Bill Discounting:
This product enables corporate to fund their operating cycle right from the stage of procurement to sale. Bill Financing is extended by Induslnd Bank to its clients at competitive rates. Letter of credit backed bill discounting and clean bill discounting are the convenient mode of financing for domestic trade transactions. BOE could be broadly classified into Demand and Usance bills and are further classified into clean and documentary bills.

(d) Export Finance:
As an important incentive to the exporters community for boosting exports, financial assistance in Rupees is extended to exporters on priority basis on relatively liberal terms. Such finance is provided both at pre-shipment stage (as working capital finance) and at post-shipment stage (to bridge the time lag between the shipment of goods and the realization of proceeds). Interest charged on export credit is exempted from the purview of interest tax.

(e) Term Lending:
We offer term loans to both Industrial as well as Infrastructure sectors promoted by strong business houses. These loans are for a period of 3-5 years with a moratorium period. Interest rates could be fixed or floating linked to the bank’s BPLR.

(f) Buyer’s Credit / Supplier’s Credit:
This facility provides total flexibility to corporate to utilise the line (sanctioned limit) of credit. The terms of the line of credit are either predetermined or negotiated at the time of availment. This facility is used as and when the client has a requirement.

Question 8.
Explain the important financial services.
The important financial services are:

  • Underwriting of shares.
  • Secondary market activities.
  • Equipment leasing.
  • Arranging capital issues.
  • Project advisory services.
  • Assisting mergers and acquisitions.
  • Guidance in capital restricting.
  • Debenture trustee services.
  • Financial collaboration service.
  • Recommending changes in management structure.
  • Rehabilitating and restricting sick companies.
  • Portfolio management.
  • Capital market services such as registration and transfers, clearing services, collection of income on securities, safe custody of securities, etc.
  • Advice to client on best source of funds and cost of capital.

Question 9.
Explain the any five important financial services.
The five important financial services are explained below:
(i) Underwriting services:
Underwriting is an agreement whereby underwriter promises to subscribe to a specified number of shares or debentures or a specified amount of stock in the event of public not subscribing to the issue. If the issue is fully subscribed then there is no liability for the underwriter. If a part of shares remain unsold, the underwriter will buy the shares. Thus, underwriting is a guarantee for the marketability of shares.

(ii) Factoring services:
Factoring refers to the process of managing the sales ledger of a client by a financial service company. It is an arrangement under which a financial intermediary assumes the credit risk in the collection of book debts for its client.

(iii) Custodial services:
Under custodial services, a financial intermediary mainly provides services to clients, particularly to foreign investors, for a prescribed fee. It involves providing agency services like safe keeping of shares and debentures, collection of interest and dividend etc.

(iv) Mutual Fund;
A mutual fund is a financial service organization that receives money from shareholders, invest it, earns returns on it, attempts to make it grow and agrees to pay the share holders cash on demand for the current value of his investment. The fund provides investment avenues for small investors who cannot participate in the equities of big companies.

(v) Leasing services:
A lease is an agreement under which a company or a firm requires a right to make use of a capital assets like machinery, on payment of a prescribed fee called ‘rental charges’ Under this system, the lessee cannot acquire any ownership to the asset, but he can use it and have full control over it. the lease is also expected to pay for all maintenance charges and repairing the operating costs.

Question 10.
Explain the advantages and disadvantages of factoring.
Advantages of factoring:

  • Factoring is a way to finance requirement of working capital of the company in respect of receivables.
  • It provides a large and quick increase in cash flow of the business.
  • Due to existence of many factoring companies prices are usually competitive.
  • It is a cost effective way, of outsourcing your sales ledger at the same time managing your business.
  • Factoring firms are specialized in their field thus the company might get useful information about the creditworthiness of its customers.
  • Protection from bad debts if non-recourse factoring is chosen.
  • Factors check the credibility of company’s customers which help business trade with better quality customers.

Disadvantages of factoring:
(a) Cost : Factoring is a costly mean of financing as the cash price of the invoices is discounted by the factor company, the upfront cash price being usually 70-90% of the face value, depending on the credit history of the customers and the nature of selling company’s business which reduces the profit margin of the selling company.

(b) Selling company gets locked in to the relationship with the factor as they rely completely on the services of a factor because of the cash flow implications of any arrangements.

(c) Possible harm to the customer: Selling company fully gives the charge of collecting invoice to the factoring company and pays more attention on money collection methods which impairs company’s relationship with their customers.

(d) Company image distortion: In the past, factoring was considered a sign on the financial difficulties of the company. However in recent times this perception has changed and it has considered a normal way of doing business.

(e) Impose constrains the way of doing business: In the case of non-recourse factoring the factoring company pre-approve the selling company’s customers, which cause delay in placing new orders. Also the factoring company applies its credit limits to individual customers and will apply credit limits to individual customers.

(f) The selling company may have to pay extra to remove its liability for bad debtors.

(g) Some customers might want to deal directly with the selling company instead of dealing with factor.

Financial Services Short Answer Type Questions

Financial Services Short Answer Type Questions

Question 1.
Explain the features of financial services.
Like any other service, financial services are characterized by the following:
(a) Intangibility:
The basic characteristics of financial services are that they are intangible in nature. For financial services to be successfully created and marketed, the institutions providing them must have a good image and the confidence of its clients. Quality and innovativeness of services are the focal points for building credibility and gaining the trust of the clients.

(b) Customer Orientation:
The institutions providing financial services study the needs of the customers in detail. Based On the results of the study, they come out with innovative financial strategies that give due regard to costs, liquidity, and maturity considerations for various financial products. This way, financial services are customer – oriented.

(c) inseparability:
The functions of producing and supplying financial services have to be carried out simultaneously. This case for a perfect understanding between the financial services firms and their clients.

(d) Perishability:
Financial services have to be created and delivered to the target clients. They cannot be stored. They have to be supplied according to the requirements of customers. Hence, it is imperative that the providers of financial services ensure a match between demand and supply.

(e) Dynamism:
The financial services must be dynamic. They have to be constantly redefined and refined. On the basis of socio-economic changes occurring in the economy, such as disposable income, standard of living, level of education, etc. Financial services institutions must be proactive in nature and evolve new. services by visualizing the expectations of the market

Question 2.
What are the importances of financial services?
(a) Economic Growth:
The financial service industry mobilizes the savings of the people and channels them into productive investment by providing various services to the people. In fact, the economic development of a nation depends upon these savings and investment.

(b) Promotion of Savings:
The financial service industry promotes savings in the country by providing transformation services. It provides liability, asset and size transformation service by providing large loans on the basis of numerous small deposits. It also provides maturity transformation services by offering short-term claim to savers on their liquid deposit and providing long-term loans to borrowers.

(c) Capital Formation:
The financial service industry facilitates capital formation by rendering various capital market intermediary services ± capital formation in the very basis for economic growth. It is the principal mobilize, of surplus funds to finance productive activities and thus it promotes capital accumulation.

(d) Provision of Liquidity:
The financial service industry promotes liquidity in the system by allocating and reallocating savings and investment into various avenues of economic activity. It facilitates easy conversion of financial asset into liquid cash at the discretion of the holder of such assets.

(e) Financial Intermediation:
The financial service industry facilitates the function of intermediation between savers and investors by providing a means and a medium of exchange and by undertaking innumerable services.

(f) Contribution to GNP:
The contribution of financial services to GNP has been going on increasing year after year in almost all countries in recent times.

(g) Creation of Employment Opportunities:
The financial service industry creates and provides employment opportunities to millions of people all over the world.

Question 3.
Explain the features of venture capital.
The terms and conditions on which venture capital is provided are not standardized, the following are the main features of venture capital:

  • The venture capitalist participates in the entrepreneur’s business through direct purchase of shares, options or convertible shares.
  • The objectives of the venture capitalist are to make capital gains by selling off the investment once the enterprise becomes profitable.
  • The venture capital firm (VCF) is inclined to assume a high degree of risk to make capital gains.
  • Venture financing is a long-term illiquid investment where investment can be liquidated in the assisted firm only after a long-period, say 4-8 years.
  • The financial burden of the assisted firm tends to be negligible during the first few years.
  • The VCF, in addition to providing funds, takes an active interest in guiding the firm in various ways and
  • supports the entrepreneur through all the stages of the company’s development – monetarily and non-monetarily.

Question 4.
What is the eligibility for venture capital financing?
According to Government of India guidelines, the following enterprises are eligible for venture capital financing:
(a) Size:
Total investment should not exceed Rs, 100 million.

(b) Technology:
New or relatively untried or very closely held or being taken from pilot to commercial stage or incorporating some significant improvement over the existing ones in India.

(c) Entrepreneur:
Relatively new, professionally or technically qualified persons with inadequate resources or backing to finance the project. Venture capital excludes financing of enterprises engaged in trading, broking, and investment of financing services, and agency or liaison work. A venture capital Firm in India is required to invest at least 75 percent of its funds in venture: capital activity, and must be managed by professionals.

Question 5.
What are the advantages and disadvantages of housing finance?
Housing finance service is financial service provided by commercial works and housing finance companies to people who wish to acquire or construct houses for their residence housing finance also covers finance for the acquisition or development of plots or lands for construction of houses.

Advantages of housing finance:

  • Housing finance helps the middle and low incomes groups to have their own houses easily.
  • The cost of housing finance is not very high.
  • There is also the advantage of convenient repayment of housing loans provided by the housing finance companies.

Disadvantages of housing finance:

  • The cost of housing finance is unreasonable in many cases.
  • The procedure for obtaining housing finance is though
  • The methods of recovering of housing finance adopted by many housing finance providers are not fair.

Question 6.
What are the advantages and disadvantages of vehicle finance services?
Many commercial banks and finance companies provide vehicle loans to persons who wish to buy vehicles like carstmotor bikes, scooters etc.

Advantages of vehicle finance:

  • Vehicle loans help middle income groups and salaried people to own vehicle without having funds in their hands for the same.
  • The cost of vehicles loans are not very high
  • There is also the advantages of convenient repayment of vehicle loans

Disadvantages of vehicle finance:

  • The cost of vehicle loans is very high in many cases
  • The procedures for obtaining is too laborious

Question 7.
Explain the various types of leases.
There are two main types of lease: Finance Leases and Operating Leases.
(a) Financial leases:
Under a finance lease, the finance company owns the asset throughout and the agreement covers a set period – considered to be the full economic life of the asset. Often, there is an option to continue leasing at a reduced, or ‘peppercorn’ rate, at the end of the contracted period. As we are not the owner of the asset, you cannot sell the asset during the rental period. The. finance company can claim the writing-down allowances and pass this benefit to you in reduced rentals.

(b) Operating leases:
An operating lease runs for less than the full economic life of the asset, and the lessee is not liable for the financing of its full value. The lessor carries the risk associated with the residual value of the asset at the end of the lease. This type of lease is often used when the asset is likely to have a resale value, for example, aircraft and vehicles.

The customer gets the use of the asset, sometimes along with other services. Operating leases are particularly attractive to companies that frequently update or replace equipment and want to use equipment without ownership. The most common form of operating lease in motor finance is contract hire, particularly in the provision of vehicle fleets.

Question 8.
Define factoring. State the characteristics of factoring.
Definition of factoring is very simple and can be defined as the conversion of credit sales into cash. Here, a financial institution which is usually a bank buys the accounts receivable of a company usually a client and then pays up to 80% of the amount immediately on agreement. The remaining amount is paid to the client when the customer pays the debt. Examples includes factoring against goods purchased, factoring against medical insurance, factoring for construction services etc.

Characteristics of Factoring:

  • The normal period of factoring is 90-150 days and rarely exceeds more than 150 days.
  • It is costly.
  • Factoring is not possible in case of bad debts.
  • Credit rating is not mandatory.
  • It is a method of off balance sheet financing.
  • Cost of factoring is always equal to finance cost plus operating cost.

Question 9.
Explain the various types of international factoring.
Types of International Factoring:
The following are the important types of International Factoring. The client can choose any type of international factoring depending upon exporter – client needs and his price bearing capacity.

Two Factor Systems:
his is the most common system of international factoring and involves four parties i.e., Exporter, Importer, Export Factor in exporter’s country and Import Factor in Importer’s country.
The functions of the export Factor are:

  • Assessment of the financial strength of the exporter
  • Prepayment to the exporter
  • Follow-up with the Import Factor
  • Sharing of commission with the import Factor

The functions of the Import Factor are:

  • Maintaining the books of the exporter in respect of sales to the debtors in his country
  • Collection of debts from the importer and remitting the proceeds to the exporter’s Factor
  • Providing credit protection in case of financial inability on the part of any of the debtors

Single / Direct Factoring System:
In this system, a special agreement is signed between two Factoring companies for single Factoring. Whereas in Two Factor System, credit is provided by import Factor and pre-payment, book keeping and collection responsibilities remain with export Factor. For this system to be effective there should be strong co-ordination and co-operation between two Factoring companies. Pricing is lower when compared to Two Factor System.
(a) Direct Export Factoring:
Here only one Factoring company is involved, i.e., export Factor, which provides all services including finance to the exporter.

(b) Direct Import Factoring:
Under this system, the seller chooses to work directly with Factor of the importing country. The Factoring agreement is executed between the exporter and the import Factor. The import Factor is responsible for sales ledger administration, collection of debts and providing bad debt protection up to the agreed level of risk cover.

(c) Back to Back Factoring:
It is a very specialized form of International Factoring, used when suppliers are selling large volumes to a few debtors for which it is difficult to cover the credit risk in International Factoring. In this case, International Factor can sign a domestic Factoring agreement with the debtor whereby it will be getting the receivables as security for the credit risk taken in favour of Export Facto

Question 10.
Distinguish between factoring and bill discounting.
Though both factoring and bill discounting provides short term finance, however in bill discounting the drawer undertakes the responsibility of collecting the bills and pay the proceeds while in factoring it is the factor that usually undertakes the responsibility of collecting the bills. Given below are some more differences between the two –
(a) Bill discounting is always of recourse type while factoring can be either with or without recourse. In case of recourse the factor does not assume the credit risk and it is the company which assumes the credit risk.

(b) Factoring is an off balance sheet entry in the sense that both amount of receivables and bank credit are not shown in the balance sheet which is not the case with the bill discounting which is shown in the balance sheet.

(c) In bill discounting there is only provision of finance while in factoring factor provides in addition to finance facility other facilities like- sales ledger maintenance, collection etc..

(d) Discounted bills may be re-discounted several times before they mature for payment which is not the case with factoring.

Question 11.
What is financial services? State the components of financial services.
Financial services refers to services provided by the financial institutions in a financial system. The finance industry encompasses a broad range of organizations that deal with the management of money. Among these organizations are Asset Management Companies like leasing companies, merchant bankers and Liability Management Companies like discounting houses and acceptance houses, and further general financial institutions like banks, credit card companies, insurance companies, consumer finance companies, stock exchanges, and some government sponsored enterprises. The term ‘Financial Services’ in a broad sense means “mobilising and allocating savings.” Thus, it includes all activities involved in the transformation of savings into investment.

Following are some of the examples of financial services:

  • Leasing, credit card services, factoring, portfolio management and financial consultancy services.
  • Underwriting, discounting and rediscounting of bills.
  • Acceptances, brokerage and stock holding.
  • Depository services, housing finance and book building
  • Hire purchases and installment credit.
  • Mutual Fund management.
  • Deposit insurance.
  • Financial and performance guarantees.
  • E-commerce and securat3.isation of debts.
  • Loan syndicating and credit rating.

Question 12.
Explain the objectives of portfolio management.
Objectives of Portfolio Management:
The major objectives of portfolio management are summarized as below:

  • Keep the security, safety of Principal sum intact both in terms of money as well as its purchasing power.
  • Stability of the flow of income so as to facilitate planning more accurately and systematically the re-investment or consumption of income.
  • To attain capital growth by re-investing in growth securities or through purchase of growth securities.
  • Marketability of the security which is essential for providing flexibility to investment portfolio.
  • Liquidity i.e. nearness to money which is desirable for the investor so as to take advantage of attractive opportunities upcoming in the market.
  • Diversification: The basic objective of building a portfolio is to educe the risk of loss of capital and income by investing in various types of securities and over a wide range of industries.
  • Favourable tax status: The effective yield an investor gets from his investment depends on tax to which it is subject. By minimizing the tax burden, yield can be effectively improved.

Question 13.
State the characteristics of hire purchase system.
Characteristics of Hire-Purchase System: The characteristics of hire-purchase system are as under –

  • Hire-purchase is a credit purchase.
  • The price under hire-purchase system is paid in instalments.
  • The goods are delivered in the possession of the purchaser at the time of commencement of the agreement.
  • Hire vendor continues to be the owner of the goods till the payment of last instalment.
  • The hire-purchaser has a right to use the goods as a bailer.
  • The hire-purchaser has a right to terminate the agreement at any time in the capacity of a hirer.
  • The hire-purchaser becomes the owner of the goods after the payment of all instalments as per the agreement.
  • If there is a default in the payment of any instalment, the hire vendor will take away the goods from the possession of the purchaser without refunding him any amount.

Question 14.
State the modern financial service activities.

  • Rendering project advisory services.
  • Planning for mergers and acquisitions.
  • Guiding corporate customers in capital restructuring.
  • Acting as Trustees to Debenture holders.
  • Recommending suitable changes in financial structure.
  • Structuring the financial collaboration through joint ventures
  • Rehabilitating and reconstructing sick companies through reconstruction.
  • Hedging of risks through derivative trading.
  • Managing portfolio of public sector corporations.
  • Asset liability management.
  • Undertaking risk management services through insurance.
  • Advising clients for selecting the best source of funds.
  • Guiding clients for determining the optimum debt-equity mix.
  • Undertaking specialized services like credit rating, underwriting, registration and transfers, clearing services, custodian services etc.

Question 15.
Explain the advantages of leasing.
(a) Saving of Capital:
Leasing covers the full cost of the equipment used in the business by providing 100% finance. The lessee is not to provide or pay any margin money as there is no down payment. In this way the saving in capital or financial resources can be used for other productive purposes e.g. purchase of inventories.

(b) Flexibility and Convenience:
The lease agreement can be tailor- made in respect of lease period and lease rentals according to the convenience and requirements of all lessees.

(c) Planning Cash Flows:
Leasing enables the lessee to plan its cash flows properly. The rentals can be paid out of the cash coming into the business from the use of the same assets.

(d) Improvement in Liquidity:
Leasing enables the lessee to improve their liquidity position by adopting the sale and lease back technique.

Question 16.
Explain the advantages and disadvantages of venture capital.
Advantages of venture capital:
(a) Mentoring – Venture capitalists provide companies with ongoing strategic, operational and financial advice. They will typically have nominee directors appointed to the company’s board and often become intimately involved with the strategic direction of the company.

(b) Alliances – Venture capitalists can introduce the company to an extensive network of strategic partners both domestically and internationally and may also identify potential acquisition targets for the business and facilitate the acquisition.

(c) Facilitate exit – Venture capitalists are experienced in the process of preparing a company for an initial public offering (IPO) of its shares onto the Australian Stock Exchange (ASX) or overseas stock exchange such as NASDAQ. They can also facilitate a trade sate.

(a) Most venture capitalists seek to realise their investment in a company in three to five year If an entrepreneur’s business plan contemplates a longer timetable before providing liquidity, venture capital may not be appropriate. Entrepreneurs should also consider:

(b) Pricing – Venture capitalists are typically more sophisticated and may drive a harder bargain. Intrusion – Venture capitalists are more likely to want to influence the strategic direction of the company.

(c) Control – Venture capitalists are more likely to be interested in taking control of the company if the management is unable to drive the business.

Question 17.
List the various financial intermediaries.

  • Commercial banks and other banks
  • Insurance companies
  • Credit card and issue companies
  • Stock exchanges
  • Leasing companies
  • Mutual fund corporations
  • Investment agencies
  • Finance companies and other financial institutions

Question 18.
Explain the disadvantages of leasing.
Disadvantages of Leasing:
→ The leasing is efficient only if the equipment can be operated over the whole period of the contract; not using this equipment over the whole period of the contract, mainly due to the lack of orders, leads to losses for the beneficiary.

→ In case the lessee could obtain a bank credit under advantageous conditions, the cost of leasing would be higher.

→ The good that makes the object of the leasing contract doesn’t belong to the lessee, and therefore he cannot sell it during the period of the contract, and the sublease can be accomplished only with the owner’s agreement.

→ Through leasing only the usage right is given away, the ownership right being kept, but therefore the supplier’s goods can be damaged by improper usage, after the first lease being possible that the good will not find other users.

Question 19.
Discuss the various schemes of housing loans.
The various schemes of housing loans are as follows:
(a) Home loans for construction of new house / flat,purchase of old house/ flat, etc: Initially, lenders approved a home loan for family/own residence only. After gaining experience and more importantly to be competitive, lenders now approve loans even when the applicant has more than one house or flat/apartment. Today there is no general restriction on the number of houses owned by an individual. The only stipulation is that the home loan funds should not be used for commercial purposes.

(b) Home extension loan: These loans are given for expanding or extending an existing home. These are some of the instances for which you could take an Extension Loan. To construct an additional room or floor by getting additional FSI granted. Using grills or sliding windows to enclose the balcony. Construction of a garden or garage in the building vicinity.

(c) Home improvement loan: Home improvement loans for repairs /renovation including water proof, plumbing, compound wall, digging of well/tube-well, flooring/tiling, additions like built-in cupboards/shelves, internal repairs including replacing doors windows, etc. A loan for purchase of household furniture including space-saving furniture (kitchen racks, cupboards, etc) may also be sanctioned as a home improvement loan.

(d) Home loan for purchase of housing site: Here again, initially many banks did not approve such loans. However, market forces have now made this a universal feature of the home loan market. However, care has been taken in structuring the schemes for avoiding financing for purchase of land for speculative purposes.

(e) Home equity loans:
A home equity loan (sometimes abbreviated HEL) is a type of loan in which the borrower uses the equity in their home as collateral. These loans are sometimes useful to help finance major home repairs, medical bills or college education. A home equity loan creates a lien against the borrower’s house, and reduces actual home equity.

Question 20.
Explain the scope of financial services.
Scope of Financial Services:
The objectives of financial services mainly includes Fund Raising, Funds Deployment which helps in decision making regarding financing mix, rendering Specialised Services like credit rating, underwriting, merchant banking, depository, mutual fund, book building etc., which provides for the speeding up of the process of economic growth and development.

Financial services cover wide range of activities which can be broadly classified as:

  • Traditional Activities
  • Modern Activities

(a) Traditional Activities:
It includes services rendered for both money and capital market, which can be grouped under two heads:

  • Fund Based Activities
  • Non Fund Based or Fee Based Activities

(I) Fund Based Activities:
Fund based activities are the activities which come under the following:

  • Primary Market Activities
  • Secondary Market Activities
  • Foreign Exchange Market Activities
  • Specialised Financial Services Activities
  • Financial Engineering Activities.

The important fund based services include:

  • Equipment Leasing / Finance
  • Hire Purchase and Consumer Credit
  • Bill Discounting
  • Venture Capital
  • Housing Finance
  • Insurance Services
  • Factoring etc.

(II) Non Fund Based or Fee Based Activities:
Today, customers whether individual or corporates are not satisfied with the mere provision of finance. They expect more sophisticated financial services and wide range in it which usually includes the following fee based activities:

  • Managing Capital Issues according to SEBI guidelines.
  • Making arrangements of funds from financial institutions to meet the project cost and working capital.
  • Making arrangements for the placement of capital and debt instruments with investment institutions.
  • Assisting in the process of getting all government and legislative clearances.
  • Managing the portfolio

The fee based / advisory services include:

  • Issue Management
  • Portfolio
  • Management
  • Corporate Counselling
  • Loan Syndication
  • Merger and Acquisition
  • Capital Restructuring
  • Credit Rating
  • Stock Broking etc.

Financial Services Very Short Answer Type Questions

Financial Services Very Short Answer Type Questions

Question 1.
State any two custodial services.

  • Financial leasing services including equipment leasing and hire-purchase by a body corporate
  • Credit card services
  • Merchant banking services
  • Securities and foreign exchange (Forex) broking.

Question 2.
What is housing finance?
Housing finance service is financial service provided by commercial works and housing finance companies to people who wish to acquire or construct houses for their residence housing finance also covers finance for the acquisition or development of plots or lands for construction of houses.

Question 3.
What is venture capital?
Venture capital is long-term risk capital to finance high technology projects which involve risk but at the same time has strong potential for growth. Venture capitalist pools their resources including managerial abilities to assist new entrepreneur in the early years of the project. Once the project reaches the stage of profitability, they sell their equity holdings at high premium.

Question 4.
State any four fund based services.

  • Venture capital
  • Housing finance
  • Factoring
  • Insurance

Question 5.
State any four fee based advisory services.

  • Portfolio management
  • Corporate counseling
  • Loan syndication
  • Merger and acquisition e. credit rating

Question 6.
What is vehicle loan?
Vehicle loan refers to getting a loan to pay for the vehicle and repaying the loan with the monthly payments. Vehicle loan can be obtained by a customer’s bank or a credit union or depending upon where we buy. In the present scenario loan for financing vehicle is available through dealership.

Question 7.
What is factoring?
Selling of accounts receivable on a contract basis to an agency known as a factor in order to obtain cash payment before the accounts come due is termed as factoring. The factor shoulders the responsibility of credit analysis of new accounts, payments collection, and credit losses.

Question 8.
What do you mean by financial services?
Financial Services is an expression employed to refer to the services offered by the finance industry. It can also be used to elaborate or explain organizations that deal with the management of money. Mumbai and The National Stock Exchange are examples of financial services in India.

Question 9.
What is merchant banking?
A merchant banker is a financial intermediary who helps to transfer capital from those who possess it to those who need it. Merchant banking includes a wide range of activities such as management of customer securities, portfolio management, project counseling and appraisal, underwriting of shares and debentures, loan syndication, acting as banker for the refund orders, handling interest and dividend warrants etc.

Question 10.
Give the meaning of lease.
A lease is an agreement under which a company or a firm acquires’a right to make use of a capital asset like machinery, on payment of a prescribed fee is called. It is very popular and nearly 25% of plant and equipment is being financed by leasing companies. In India many financial companies have started equipment leasing business.

Question 11.
What is mutual fund?
A mutual fund refers to a fund raised by a financial service company by pooling the savings of the public. It is invested in a diversified portfolio with a view to spreading and minimizing the risk

Question 12.
What is Portfolio Management?
The art of selecting the right investment policy for the individuals in terms of minimum risk and maximum return is called as portfolio management. Portfolio management refers to managing an individual’s investments in the form of bonds, shares, cash, mutual funds etc so that he earns the maximum profits within the stipulated time frame.

Question 13.
What is loan syndication?
Syndicated loan is a loan provided by a group of lenders, usually commercial or investment banks. Syndicated loan deals are typically structured and administered by a lead arranger that initially underwrites the transaction and guarantees the total commitment, and later subscribes a given amount of the commitment to other banks in the syndicate.

Question 14.
What is corporate counseling?
Corporate counseling refers to a set of activities performed to ensure the efficient running of a corporate enterprise and to improve the performance.

Question 15.
What is foreign collaboration?
Foreign collaboration can be financial collaboration or technical collaboration in case of financial collaboration is inflow of foreign investment takes place, but in
case of technical collaboration refers to inflow of technology .franchises, patents, for which foreign partner get lump sum fee or royalty for specified period or specified rate.

Question 16.
What is fees based financial services?
Fees based-financial services are those which are paid for a flat fee rather than s commission. Those services are known as fees based services.

Question 17.
What is capital restructuring?
Capital restructuring is the process of reorganizing structure or combination of various debt and equity. It can be of two types namely debt and equity restructuring,

Question 18.
State any two differences between merger and acquisition.
Merger results in combination of two or more company’s to form a new company whereas in case of acquisition formation of a new company does not takes place. Merging companies shares are surrendered and new shares are issued where as in case of acquisition acquiring company purchases the shares of old company.

Question 19.
What is forfeiting?
Forfeiting is a facility offered by importer’s bank where the bank purchases the – receivables from the exporter and grants finance and later collect from the importer along with the interest.

Question 20.
What is fund based financial services?
Fund based or asset based financial services are those services which are rendered for commission basis or for a certain amount of interest.

Question 21.
State any two institutions providing housing loan in India.

  • Industrial development bank of India
  • State bank of India and its subsdiaries
  • Tata Home finance

Question 22.
What is consumer finance.
Banks provides loans to meet essentials of its consumers. It is called as consumer financing types of consumer finiance are Home loan, MOrtagage loan education loan, car loan etc.

Regulatory Institutions Long Answer Type Questions

Regulatory Institutions Long Answer Type Questions

Question 1.
Write a note on National Bank for Agriculture and Rural Development (NABARD).
NABARD is set up by the Government of India as a development bank with the mandate of facilitating credit flow for the promotion and development of agriculture and integrated rural development. The mandate also covers supporting all other allied economic activities in rural areas, promoting sustainable rural development, and ushering in prosperity in the rural areas.

With a capital base of Rs 2,000 crore provided by the Government of India and Reserve Bank of India, it operates through its head office at Mumbai, 28 regional offices situated in state capitals and 391 district offices at districts.

Its functions are:
→ Initiates measures toward institution-building for improving absorptive capacity of the credit delivery system, including monitoring, formulation of rehabilitation schemes, restructuring of credit institutions, training of personnel, etc.

→ Coordinates the rural financing activities of all the institutions engaged in developmental work at the field level and maintains liaison with the government of India , State governments, the Reserve Bank of India and other national level institutions concerned with policy formulation

→ Prepares, on annual basis, rural credit plans for all the districts in the country. These plans form the base for annual credit plans of all rural financial institutions

→ Undertakes monitoring and evaluation of projects refinanced by it.

→ Promotes research in the fields of rural banking, agriculture and rural development

→ Functions as a regulatory authority, supervising, monitoring and guiding cooperative banks and regional rural banks

Question 2.
What do you understand by selective credit control? Describe the various methods selective or qualitative credit control.
Qualitative Method controls the manner of channelizing of cash and credit in the economy. It is a ‘Selective method’ of control as it restricts credit for certain section where as expands for the other known as the ‘priority sector’ depending on the situation.

Various methods are used as below:
Marginal Requirement:
Marginal Requirement of loan = current value of security offered for loan-value of loans granted. The marginal requirement is increased for those business activities, the flow of whose credit is to be restricted in the economy.

Example – A person mortgages his property worth Rs. 1,00,000 against loan. The bank will give loan of Rs. 80,000 only. The marginal requirement here is 20%. In case the flow of credit has to be increased, the marginal requirement will be lowered. RBI has been using this method since 1956.

Rationing of credit
Under this method there is a maximum limit to loans and advances that can be made, which the commercial banks cannot exceed. RBI fixes ceiling for specific categories. Such rationing is used for situations when credit flow is to be checked, particularly for speculative activities. Minimum of “Capital: Total Assets” (ratio between capital and total asset) can also be prescribed by Reserve Bank of India.

RBI uses media for the publicity of its views on the current market condition and its directions that will be required to be implemented by the commercial banks to control the unrest. Though this method is not very successful in developing nations due to high illiteracy existing making it difficult for people to understand such policies and its implications.

Direct Action:
Under the banking regulation Act, the central bank has the authority to take strict action against any of the commercial banks that refuses to obey the directions given by Reserve Bank of India. There can be a restriction on advancing of loans imposed by Reserve Bank of India on such banks, e.g. – RBI had put up certain restrictions on the working of the Metropolitan Co-operative Banks. Also the ‘Bank of Karad’ had to come to an end in 1992.

Moral Suasion:
This method is also known as “Moral Persuasion” as the method that the Reserve Bank of India, being the apex bank uses here, is that of persuading the commercial banks to follow its directions/orders on the flow of credit. RBI puts a pressure on the commercial banks to put a ceiling on credit flow during inflation and be liberal in lending during deflation.

Question 3.
What are the procedure to be followed for listing of securities?
An Issuer has to take various steps prior to making an application for listing its securities on the Stock Exchange. These steps are essential to ensure the compliance of certain requirements by the Issuer before listing its securities on a recognized stock exchange.
The various steps to be taken include:

  • Approval of Memorandum and Articles of Association
  • Approval of draft prospectus
  • Submission of Application
  • Listing conditions and requirements

(a) Approval of Memorandum and Articles of Association:
Rule 19(2) (a) of the Securities Contracts (Regulation) Rules, 1957 requires that the Articles of Association of the Issuer wanting to list its securities must contain provisions as given here under.

The Articles of Association of an Issuer shall contain the following provisions namely:

  • That there shall be no forfeiture of unclaimed dividends before the claim becomes barred by law
  • That a common form of transfer shall be used
  • That fully paid shares shall be free from all lien and that in the case of partly paid shares the Issuer’s lien shall be restricted to moneys called or payable at a fixed time in respect of such shares
  • That registration of transfer shall not be refused on the ground of the transferor being either alone or jointly with any other person or persons indebted to the Issuer on any account whatsoever
  • That any amount paid up in advance of calls on any share may carry interest but shall not in respect thereof confer a right to dividend or to participate in profits
  • That option or right to call of shares shall not be given to any person except with the sanction of the Issuer in general meetings.
  • Permission for Sub-Division/Consolidation of Share Certificate.

(b) Approval of draft prospectus:
The Issuer shall file the draft prospectus and application forms with the Stock Exchange. The draft prospectus should have been prepared in accordance with the statutes, notifications, circulars, guidelines, etc. governing preparation and issue of prospectus prevailing at the relevant time.

The Issuers may particularly bear in mind the provisions of Companies Act, Securities Contracts (Regulation) Act, the SEBI Act and the relevant subordinate legislations thereto. Draft prospectus should be in accordance with the listing requirements. The Issuer should also submit the SEBI acknowledgment card or letter indicating observations on draft prospectus or letter of offer by SEBI.

(c) Submission of Letter of Application:
As per Section 73 of the Companies Act, 1956, a company seeking listing of its scrips on an exchange is required to submit a letter of application to all the stock exchanges where it proposes to have its shares listed before filing the prospectus with the Registrar of Companies.

(d) Payment of Listing Fee and Deposit of Security money:
The companies making public issues are generally required to deposit 1 per cent of the issue amount with the regional stock exchange before the issue opens. This amount is liable to be forfeited in the event of the company not resolving the complaints of investors regarding delay in sending refund orders/ share certificates, non-payment of commission to underwriters, brokers and so on. The listing fee is payable on an annual basis to the stock exchanges.

(e) Supporting documents:
Issuers desiring to list existing/new securities on the stock exchanges shall make application for admission of their securities to dealings on the exchange in the forms prescribed in this regard by the exchange or in such other form or forms as the Relevant Authority may from time to time prescribe in addition thereto or in modification or substitution thereof along with the following documents:

  • Clauses of Articles of Association.
  • Application Letter for Listing.
  • Listing Application providing pre-issue details of securities.
  • Listing Application providing post-issue details of securities.
  • Checklist for supporting documents ( as applicable to the issuer)
  • Schedule of Distribution
  • Listing Agreement

(f) Compliance of Listing Agreement and Laws:
The Issuer shall comply with all prevailing requirements of law including all requirements of and under any notifications, directives and guidelines issued by the Central Government, SEBI or any statutory body or local authority or any body or authority acting under the authority or direction of the Central Government and all prevailing listing requirements and conditions of the exchange and of each recognized Stock Exchange where the Issuer has applied for permission for admission to dealings of the securities, within the prescribed or stipulated period.

Question 4.
What do you mean by SEBI ? What are its functions? Explain.
Securities and exchange board of India was set up on April 12, 1998 as a non statutory body. Govt, of India passed a separate legislation called securities and exchange board of India Act 1992 conferring statutory powers to SEBI. This act gave SEBI with comprehensive powers over practically all aspects of capital market operations.

Section 11 of the SEBI Act specifies the functions as follows:
(i) Regulatory functions:

  • Regulation of stock exchange and self regulatory organizations.
  • Registration and regulation of stock brokers, sub brokers, registrar to all issue, merchant bankers, underwriters, portfolio managers and such other intermediaries who are associated with securities market.
  • Registration and regulation of the working of collective investment schemes including mutual funds.
  • Prohibition of fraudulent and unfain trade practices relating to securities market.
  • Prohibit insider trading in securities.
  • Regulating substantial acquisition of shares and take over of companies.

(ii) Developmental functions:

  • Promote investor’s education
  • Training of intermediaries
  • Conducting research and published information useful to all market participants.
  • Promotion of fair practices code of conduct for self regulatory organisation.
  • Promoting self regulatory organizations.

Question 5.
What are the powers of SEBI? Explain organisational structure of SEBI.
SEBI has been vested with the following powers:

  • Power to call periodical returns from recognised stock exchange.
  • Power to call any information or explanation from recognized stock exchanges or their members.
  • Power to direct enquireies to be made in relation to affairs of stock exchanges or their members.
  • Power to grant approval to bye laws of recognized stock exchanges.
  • Power to make or amend bye-laws of recognized stock exchanges.
  • Power to compel listing of securities by public companies.
  • Power to control and regulate stock exchange,
  • Power to grant registration to market intermediaries.
  • Power to levy fees or other charges for carrying out the purpose of regulation.
  • Power to declare applicability of section 17 of the securities contract (regulation) Act in any state or area to grant licences to dealers in securities.

Chapter II of the SEBI Act deals with establishment, incorporation, administration and management of the Board of directors etc. SEBI Act provides for the establishment of a statutory board consisting of six members. The chairman and two members are to be appointed by the central government, one member to be appointed by the reserve bank and two members having experience of securities market to be appointed by the central govt.

SEBI has divided its activities into four operational departments namely:
→ Primary market department: It deals with all policy matters and regulatory issues relating to primary market, market intermediaries and redressel of investor grievances.

→ Issue management and intermediaries department: It is concerned with vetting of offer documents and other things like registration, regulation and monitoring of issue related to intermediaries.

→ Secondary market department: It looks after all the policy and regulatory issues for the secondary market, administration of the major stock exchange and other matters related to it.

→ Institutional investment department: This department is concerned with framing policy for foreign institutional investors, mutual funds and other matters like, publications, membership in international organizations, etc

Apart from these there are 2 other departments viz., legal department and investigation department also headed by officials of the rank of executive directors. SEBI has two advisory committees, one each for primary and secondary markets. The committees are constituted from among the market players, recognized investor associations and eminent persons associated with the capital market. They provide advisory inputs in framing policies and regulations. These committees are non-statutory in nature and SEBI is not bound by the committees.

Question 6.
Explain the functions of RBI.
The Reserve Bank of India is authorized to undertake the following central banking functions.
(i) To Issue Bank Notes : The RBI has the sole right to issue bank notes in India. In addition, it issues currency notes of the Govt, of India supplied to it by the govt. The issue of bank notes is undertaken by the bank in its issue department.

This department issue such notes to the banking department or to other person in exchange for other bank notes, or for coins, bullion or securities as permitted in the Act, which form part of the reserves. Balance sheet of this department is prepared separately from that of the banking dept.
The liabilities of the issue department are equal to the amount of the –

  • Currency notes of the govt, of India and
  • Bank notes in circulation.

Assets of the issue department consists of:

  • Gold Coins and Gold bullion : The aggregate value of which shall be not less than Rs. 115 crore, valued as a price not exceeding the current international market price.
  • Foreign securities : The aggregate value of such securities together with Gold coin and bullion shall be not less than Rs. 200 crore valued as current market rates.
  • Rupee coins, at their face value.
  • Govt, of India rupee securities of any maturity
  • Promissory notes drawn by NABARD for any loans taken by it.
  • Bills of exchange and promissory notes payable in India, which are eligible for purchase by RBI.

RBI follows the minimum reserve system of note issue:
(ii) To transact Govt. Business in India: The RBI acts as banker to the Central Govt, and undertakes all Govt, business, i.e. it accept Money for the Govt., makes payment out of the same and carries out its exchange, remittance and other banking operations. The cash balances of the Central Govt, are kept deposited with it free of interest. The Reserve bank also undertakes the aforesaid business on behalf of the state Govt, after entering into an agreement with them.

(iii) To manage public debt: The RBI has also been entrusted with the task of managing the public debt of the central govt, and the state govt. Issues new loans on behalf of the govt, is also undertaken by the RBI. It undertakes auction for the treasury bills and govt, dated securities on behalf of the govt.

(iv) To undertake transactions in Foreign Exchange and to act as controller of foreign exchange: Sec. 40 of the RBI Act authorises the RBI to undertake transactions in foreign exchange. The bank sells to or buys from any authorized person. Who makes a demand in this behalf. The authorized person means a person who is entitled to buy or sell foreign exchange under the foreign exchange management Act, RBI also acts as the controller of foreign exchange and undertakes various functions.

(v) To keep cash reserves of scheduled banks: Under section 42(1) of the RBI Act, 1934 every scheduled bank is required to maintain with the RBI an average daily balance, the amount of which shall not be less than 3% of the total demand and time liabilities of such bank in India. The bank is empowered to increase this rate to such higher rate not exceeding 20% of the net demand and time liabilities. Since 16th Nov. 2002 such reserve is required to be maintained @ 4.75%.

(vi) To grant loans and advances to scheduled commercial banks and co-operate banks; Under See. 17(4) of the RBI Act, the Bank grants loans and advances to the scheduled commercial banks, local authorities, state co-operative banks and state financial corporations repayable on demand or on the expiry of fixed periods not exceeding 90 days against the security of stocks, trustee securities, gold or silver and eligible bills of exchange and promissory notes, etc., Under Sec 17(2) and 17(3) RBI may purchase, sale and rediscount bills of exchange and promissory notes of various kinds prescribed therein.

(vii) To grant loans and advances to other financial institutions: Under various sub-section of section 17 BBI may grant loan and advances to various financial institution for the period specified there in. RBI is also authorised to make annual contribution to the national rural credit (long term operations) fund established under NABARD Act. Loans and advance may also be made out of National industrial credit (long-term operations) fund, etc. Bank may also invest in the shares of NABARD, IDBI, SBI any other bank and financial institution. It is also permitted to promote, establish, support or aid financial institutions.

(viii) To grant advances to governments:
RBI is also authorized to make advances to the central Govt, and state govt. These advances are made in the form of overdrafts for very short period or as ways and means advances.  It may also purchase and sell securities of the central and state or local authorities. It also acts as agent for the Central Govt, any state Govt., IFCI or local authority for undertaking specified business.

(ix) To act as controller of credit:
RBI acts as the controller of credit by exercising various statutory powers vested in it .viz, by changing the bank rate (U/S 49) cash reserves requirement (U/S 42), refinancing and rediscounting policy (U/S 17) open market operations policy and statutory liquidity ratio (U/S 24) of the Banking regulations Act) and through directive issued under Sec 21 and 35A of the Banking Regulation act 1949.

(x) To act as regulatory and supervisory authority:
RBI has been vested with wide powers under the banking regulation act, 1949 and RBI act 1934, to regulate, inspect and supervise the banking companies, non-banking financial companies and various financial institutions. In exercice of these powers RBI undertakes inspection of these institutions and issues them directives and regulatory guidelines etc., RBI has issued prudential norms and capital adequancy norms for all these institutions.

(xi) Publications:
RBI publishes its annual report and the report on trends and progress of Banking in India. Which are submitted to the Govt, of India under RBI Act, 1934 and banking regulations Act, 1949 respectively. In addition, it publishes RBI Bulletin (Monthly) and Report on currency and finance (annual) which contain valuable information on the Indian economy and the working of the financial system.