Understand what a finance charge is and how it affects borrowing costs. Learn about the different types of charges and fees that can be included.
What is a finance charge? Meaning and Definition
A finance charge is the cost of borrowing money, typically expressed as an annual percentage rate (APR). It encompasses both interest and any additional fees or charges related to obtaining credit. These charges can include, but are not limited to, late fees, annual fees, origination fees, and service charges. Essentially, the finance charge represents the total amount you pay to a lender for the privilege of borrowing money.
Finance charges apply to various forms of credit, such as:
Credit Cards: With credit cards, the charge is primarily composed of interest charged on any unpaid balances. It may also include fees for late payments or exceeding the credit limit.
Personal Loans: For personal loans, the charge includes the interest rate agreed upon and any origination fees or other loan-related fees.
Mortgages: In the case of mortgages, the charge consists of interest payments over the life of the loan, along with any points paid upfront and other related fees.
Understanding the finance charge is crucial as it enables consumers to compare different credit offers effectively. By assessing the APR, consumers can gauge the true cost of borrowing from different lenders and make more informed decisions. Additionally, being aware of charges can help in managing debt more efficiently and avoiding unnecessary costs.
What is a Finance Charge on a Loan?
A finance charge on a loan refers to the total cost associated with borrowing money, including interest and any additional fees. This charge is typically expressed as an annual percentage rate (APR) and can vary depending on the type of loan. Below, we explore the finance charges commonly found in different types of loans: student loans and personal loans.
Student Loans
What is a finance charge on a student loan? For student loans, the charge primarily includes the interest accrued on the borrowed amount. Here are some specific components:
Interest Rate: The interest rate is the primary component of the charge. It can be fixed or variable, depending on the loan terms.
Origination Fees: Some student loans may come with origination fees, which are upfront charges for processing the loan application.
Late Fees: If loan payments are not made on time, late fees may be added to the charge.
Personal Loans
What is a finance charge on a personal loan? Personal loans have charges that encompass various fees and interest rates. Here’s a breakdown:
Interest Rate: The agreed-upon interest rate is the main component of the charge for personal loans.
Origination Fees: These are upfront fees for processing the loan and are usually a percentage of the loan amount.
Prepayment Penalties: Some personal loans may include penalties for paying off the loan early.
Late Fees: Failure to make payments on time can result in additional late fees.
Understanding the finance charge is crucial as it enables consumers to compare different loan options effectively. By assessing the APR, consumers can gauge the true cost of borrowing from different lenders and make more informed decisions. Additionally, being aware of finance charges can help in managing debt more efficiently and avoiding unnecessary costs.
Pros and Cons of Finance Charge
Understanding the pros and cons of finance charges can help consumers make better-informed decisions when borrowing money. Here’s a breakdown of the advantages and disadvantages:
Pros
Transparent Cost of Borrowing:
It especially when expressed as an Annual Percentage Rate (APR), provides a clear and transparent view of the total cost of borrowing. This helps in comparing different credit offers.
Informed Decision-Making:
By understanding the finance charge, consumers can make more informed decisions about whether a particular loan or credit option is cost-effective and suitable for their financial situation.
Negotiation Power:
Knowledge of finance charges provides consumers with the ability to negotiate better terms with lenders, potentially reducing the overall cost of borrowing.
Credit Utilization:
They enable consumers to utilize credit for purchasing essential items or making investments without having the full amount upfront.
Debt Management:
Awareness of finance charges helps in better debt management by avoiding unnecessary fees and charges, leading to more efficient handling of financial obligations.
Cons
Higher Cost of Borrowing:
It include not just the interest but also various fees, which can make borrowing more expensive than initially anticipated.
Complexity:
Various components of finance charges, such as interest rates, origination fees, late fees, and penalties, can make the cost structure complex and difficult to understand.
Debt Accumulation:
High charges can lead to significant debt accumulation, especially if the borrower is unable to repay the borrowed amount on time, leading to additional late fees and higher overall costs.
Potential for Over-Borrowing:
The availability of credit with finance charges can sometimes encourage consumers to borrow more than they can afford to repay, leading to long-term financial problems.
Impact on Credit Score:
Accumulation of high finance charges, especially due to late payments or exceeding credit limits, can negatively impact a consumer’s credit score, affecting their ability to obtain credit in the future.
Understanding both the advantages and disadvantages of finance charges is crucial for effective financial planning and management. Assessing these factors enables consumers to navigate borrowing decisions with greater confidence and caution.
Discover the definition of audit and its crucial role in ensuring the accuracy and integrity of financial statements. Learn about the fundamental aspects of auditing, including its key components, principles, and the step-by-step audit process. Understand how auditing ensures the accuracy and integrity of financial statements, enhances transparency, and improves operational efficiency within organizations. Discover the pivotal role of auditors in preventing fraud and maintaining financial health.
Understanding the Definition of Audit: A Comprehensive Guide
Auditing is a systematic and objective process of examining and evaluating evidence regarding the financial and operational activities of an organization. This process is crucial for ensuring the accuracy and integrity of financial statements and other management assertions. Rooted in ancient history, auditing practices have evolved significantly, adapting to the complexities of modern economies and regulatory environments. The earliest known auditing activities date back to ancient civilizations such as Mesopotamia, where record-keeping and verification were essential for trade and governance.
Today, auditing holds a pivotal role in various industries, providing stakeholders with the confidence needed to make informed decisions. It is a fundamental component in maintaining transparency, accountability, and trust in financial reporting. Auditors assess the reliability and fairness of financial statements, ensuring compliance with established accounting standards and regulatory requirements. This, in turn, helps mitigate risks, detect fraud, and enhance operational efficiency within organizations.
There are several types of audits, each serving distinct purposes. Internal audits conducted by an organization’s staff to evaluate internal controls, risk management, and governance processes. On the other hand, external audits performed by independent third-party auditors to provide an unbiased opinion on the financial statements. Financial audits focus on the accuracy and completeness of an entity’s financial records. Operational audits assess the effectiveness and efficiency of business operations, while compliance audits ensure adherence to laws, regulations, and internal policies.
Understanding the various facets of auditing is essential for grasping its full scope and significance. As we delve deeper into the specific types and methodologies of audits in subsequent sections, it becomes evident that auditing is not merely a financial exercise but a comprehensive mechanism to uphold the integrity and credibility of organizational practices.
Key Components and Principles of Auditing
Auditing is a critical process that ensures the accuracy, reliability, and fairness of financial statements and other relevant information. The key components and principles of auditing are essential to understand how this process works effectively. These elements provide a framework for auditors to conduct their work with the highest standards of professionalism and integrity.
One of the fundamental principles of auditing is integrity. Auditors must adhere to honesty and straightforwardness in their professional and business relationships. This principle ensures that the auditor’s work is trustworthy and credible. Alongside integrity, objectivity is crucial; auditors must remain unbiased and not allow personal feelings or relationships to influence their judgment. This impartiality is vital for maintaining the trustworthiness of the audit process.
Another cornerstone is professional competence. Auditors required to maintain their knowledge and skills at a level that ensures competent professional service. They must stay updated with changes in laws, regulations, and auditing standards. Coupled with competence is the principle of confidentiality, which mandates that auditors respect the confidentiality of information acquired during their work and not disclose it without proper authority or a legal obligation.
The principle of professional behavior requires auditors to comply with relevant laws and regulations and avoid any conduct that discredits the profession. This principle upholds the reputation of the auditing profession and ensures that auditors act in a manner consistent with the high standards expected of them.
When it comes to the components of the audit process, the initial step is audit planning. This involves developing an overall audit strategy and an audit plan that outlines the nature, timing, and extent of audit procedures. Following planning, auditors perform risk assessments to identify and evaluate risks of material misstatement in the financial statements. This step is crucial for determining where to focus their efforts.
Internal control evaluation is another important component, where auditors assess the effectiveness of an organization’s internal controls. Effective internal controls help mitigate risks and ensure accurate financial reporting. After evaluating internal controls, auditors gather evidence through various procedures, such as inspections, observations, inquiries, and confirmations, to support their audit opinion.
The final component is audit reporting, where auditors communicate their findings. The audit report provides an opinion on whether the financial statements are free from material misstatement and conform to the applicable financial reporting framework. This report is crucial for stakeholders who rely on the audit’s conclusions to make informed decisions.
By adhering to these principles and following these components, auditors can ensure that the audit process is conducted with accuracy, reliability, and fairness, ultimately contributing to the trust and integrity of financial reporting.
The Audit Process: Step-by-Step
The audit process is a structured sequence of activities designed to provide an objective examination and evaluation of financial statements, internal controls, and compliance with applicable standards and regulations. It begins with preliminary engagement activities, which are crucial for establishing the foundation of the audit. This initial phase involves understanding the client and the context in which they operate. Auditors gather information about the industry, regulatory environment, and specific characteristics of the client’s business. This understanding helps tailor the audit approach to reflect the unique risks and challenges that may be present.
Once the preliminary understanding is established, the audit moves into the planning and risk assessment phase. During this stage, auditors develop a detailed audit plan that outlines the scope, timing, and direction of the audit work. Risk assessment procedures are conducted to identify areas with a higher likelihood of material misstatements. This involves analyzing financial data, performing analytical procedures, and assessing internal controls. Auditors use this information to determine the nature, timing, and extent of audit procedures required to mitigate identified risks.
The next phase is the execution phase, where auditors collect and analyze evidence to support their audit opinion. This involves performing substantive procedures, such as inspecting documents, observing processes, and conducting inquiries with management and staff. Auditors may also perform tests of controls to evaluate the effectiveness of internal controls in preventing and detecting errors or fraud. The evidence gathered during this phase forms the basis for the audit conclusions and findings.
Finally, the audit process concludes with the reporting stage. During this phase, auditors document their findings and communicate them to the client’s management and, if applicable, to the board of directors or audit committee. The audit report provides an opinion on whether the financial statements are presented fairly, in all material respects, by the applicable financial reporting framework. It may also include recommendations for improvements in internal controls and other areas of concern identified during the audit. Clear and effective communication of audit findings is essential for ensuring that stakeholders understand the results and can take appropriate action based on the audit’s conclusions.
The Role and Impact of Auditors
Auditors play a pivotal role in ensuring the financial integrity and operational efficiency of organizations. As independent professionals, auditors are tasked with examining financial records and transactions to provide an objective assessment of an entity’s financial health. Their primary responsibility is to verify the accuracy and completeness of financial statements, ensuring that they comply with the relevant accounting standards and regulations.
One of the most significant impacts auditors have is on enhancing financial transparency. By conducting thorough audits, auditors help build trust among stakeholders, including investors, regulators, and the public. This transparency is critical for maintaining the confidence of these stakeholders, which is essential for the smooth functioning of financial markets. Additionally, auditors play a key role in preventing and detecting fraud. Through their meticulous examination of financial records, they can identify discrepancies and red flags that may indicate fraudulent activities.
Moreover, audits contribute to improving operational efficiency within organizations. By identifying areas of inefficiency and recommending improvements, auditors help organizations streamline their processes and enhance overall performance. This proactive approach not only saves costs but also promotes a culture of continuous improvement.
However, the role of auditors is not without challenges. They must navigate complex regulatory environments and adhere to stringent ethical standards. Auditors are required to maintain professional skepticism, independence, and objectivity throughout the audit process. Ethical considerations, such as confidentiality and integrity, are paramount to uphold the credibility of the auditing profession.
The nature of auditing is continuously evolving, driven by technological advancements and regulatory changes. The emergence of big data, artificial intelligence, and blockchain technology has transformed the way audits are conducted. These technologies enable auditors to analyze large volumes of data more efficiently and accurately. Furthermore, regulatory bodies are constantly updating standards and requirements, necessitating auditors to stay abreast of these changes to ensure compliance.
In conclusion, auditors play an indispensable role in enhancing financial transparency, preventing fraud, and improving operational efficiency. Despite the challenges they face, auditors continue to adapt to the evolving landscape, leveraging new technologies and adhering to high ethical standards to fulfill their crucial responsibilities effectively.
Discover how to buy treasury bills and make safe and reliable investments. Learn the steps involved and make informed financial decisions.
Introduction
Are you looking for a safe and reliable investment option? Treasury bills can be a great choice. In this blog post, we will guide you through the process of buying treasury bills, from understanding what they are to the steps involved in purchasing them. Let’s dive in!
Investing in Treasury Bills: Everything You Need to Know
Treasury bills, commonly known as T-bills, are a staple for savvy investors looking for safety and reliability in their investment portfolios. Issued by the government, these short-term debt instruments backed by the full faith and credit of the issuing government, making them an extremely safe investment choice. This guide covers everything you need to know about investing in treasury bills, from what they are to how you can buy them.
What are Treasury Bills?
Treasury bills are short-term securities issued by the government to meet its short-term financial needs. They do not bear interest in the traditional sense but sold at a discount. Investors buy these bills at a discounted rate and receive the full face value upon maturity, the difference being their earnings.
Why Invest in Treasury Bills?
Safety: T-bills considered one of the safest investments because the government backs them.
Liquidity: Due to their short maturity periods, ranging from a few days to one year, they are highly liquid.
Predictable Returns: The return on T-bills known at the time of purchase, which removes market volatility concerns.
How to Buy Treasury Bills
Step 1: Verify Your Eligibility
To invest in treasury bills, typically, you need to be an individual investor, a corporation, or a financial entity. Most countries require that you meet certain criteria and have valid identity proof.
Step 2: Choose Your Investment Provider
You can purchase treasury bills directly from the government through scheduled auctions or from banks and financial institutions. Choosing the right platform based on fees, service, and accessibility is crucial.
Step 3: Open an Investment Account
If you choose to buy T-bills from a financial institution, you’ll need to open a dedicated investment account. This process involves the submission of personal information and documents for identity verification.
Step 4: Decide on the Investment Amount
There is typically a minimum amount for investing in treasury bills. Ensure you are prepared with sufficient funds to meet this requirement.
Step 5: Place Your Order
Post-funding your account, place an order specifying the amount and the desired maturity of the T-bills. This can usually be conducted online or at a bank branch.
Upon confirmation of payment, you’ll receive details of your T-bill investment. You can thereafter decide to hold them until maturity or trade them in the secondary market.
Conclusion
Investing in treasury bills is a wise decision for those looking for security and stability in their investment choices. By understanding the nature of T-bills and following these steps, you can easily incorporate them into your investment portfolio. Remember, consulting with a financial advisor can provide personalized insights tailored to your financial situation. Happy investing!
10 different tips and tricks on how to better manage your finances. In life, you may earn a lot of money, but if you are not able to manage your finances properly, you will always face difficulties that you could have avoided. Managing your finances well is essential to carrying out your projects, whether they are short or long-term.
Here are the articles to explain, how to better manage your finances for 10 different tips and tricks!
Managing your finances requires some self-control. To better manage them, we must think about savings. What is a credit hero score? It is important to save money or adopt a thrifty lifestyle. Managing your money well allows you to be independent, and avoid going into debt, to meet your needs.
So what to do? Here is a summary of 10 key tips that can help you in this exercise.
Understand your financial situation
To manage your finances appropriately, you must:
Questioning yourself: you must first become aware of the limits of your management and decide to improve it. Otherwise, it will not be possible to achieve convincing results.
Get organized: After realizing and adopting a new resolution, you can now move on to organizing your finances. It is essential to organize, discipline, and control your net income to better manage your finances.
Determine your different sources of income and classify them according to their importance. This way, you will be able to plan your expenses and save. It is only natural to determine exactly how much you are earning before planning what to spend.
Know and control fixed costs
Whether you are an employee or self-employed, it is always essential to have perfect knowledge of your fixed costs per month. For that you need:
Remember to budget all expenses from the largest to the smallest (for example rent, transport, bills, food, etc.).
Always think about saving whatever the circumstances, whatever the amount, it can always help. You don’t always have to wait until you reach a certain income to start saving.
Plan for the unexpected to manage your finances
Managing finances becomes difficult when unusual situations surface. Unforeseen events (for example car breakdown, urgent repair of part of the house, family problems, etc.) generally disrupt all of our financial management. To better manage your finances, it is important to do full-fledged budgeting for contingencies.
Provide a fund for crises
It is recommended to set aside an emergency budget that would be adequate for the equivalent of 3 to 6 months of ordinary monthly expenses in the event of an incident occurring. The purpose of this fund is to help you if you go through an unfavorable situation (for example loss of employment, disability due to an accident, a pandemic, etc.). It seems a budget that can help you to make sure your daily life at least for a while.
Seize savings opportunities
This is about never paying for something you can still get for free. Take advantage of discounts and even those at the grocery store. It is also important to control the price of products and articles to avoid being duped. Always Use coupons and if you are then you can ask for special student pricing for those who are under 25.
It is advisable to live below your means and in proportion to your needs. Paying bills and dues, the worst thing is to run away from debt. This way of life will sully your reputation for years. The best thing to do is to pay your debts and be honest with yourself because “Whoever pays his debts gets richer “.
Establish an annual budget to better manage your finances
To better manage your finances, it will also be important to consider establishing an annual budget. Setting up an annual budget means allocating every penny of any expense to a detailed and precise budget. yeah, it can indeed take time and a lot of precision, but planning a budget is very important and even more to desire wealth.
Forced savings to save money
The trick to this is to view savings as a fixed charge. So you could save money, any time, savings can be made in variable expenses. With this in mind, it is up to you to decide how much money you will allocate to your savings.
Assess your situation
This involves listing all the things that you have never used or that you no longer use (for example books, clothes, DVDs, etc.) and offering them for sale. It’s another way to get rid of clutter and save some money.
Stay aware of his actions, it is a question of avoiding any impulsive purchase or any purchase at heart so as not to find excuses. But this isn’t a question of privation or austerity but clarity. Stay lucid and tell yourself that saving is much more interesting than spending.
Be patient
To better manage your expenses, it is also important to ask yourself certain questions before making certain purchases. Ask yourself for each purchase if it’s really useful or if it’s just for fun. So every time you want to make an expense, make the effort to postpone your purchase for the next day, this will allow you to think twice.
After reading these different tips and tricks to better manage your finances, you will achieve certain financial stability by applying them. Managing your money well requires discipline, sacrifice, and a lot of patience. But it allows you to protect yourself from need, anticipates crises, and affords certain extras in the long term.
10 different tips and tricks on how to better manage your finances.
4 Stages of Microfinance in India with their Development and Evolution; The Grameen Bank model of microfinance based on the “joint liability” of members has received wide international appeal and popularity in numerous emerging economies like India. The developing economies have even tried to replicate these models for developing small-scale businesses and reducing poverty levels.
Here is the article to explain, Development and evolution of Microfinance in India with its 4 Stages!
The evolution of Indian microfinance can broadly divide into four distinct phases:
The Cooperative Movement (1900-1960);
During this phase, there was the dominance of two sources of credit viz. institutional sources and non-institutional sources. The noninstitutional sources catered to 93 percent of credit requirement in the year 1951-52; and, institutional sources accounted for 7 percent of total credit requirements about that year. The preponderance of informal sources of credit was due to the provision of loans for both productive and nonproductive purposes; as well as for short-term and long-term purposes and simple procedures of lending adopted.
But they involved several malpractices like charging high rates of interest, denial of repayment, misappropriation of collaterals, etc. At that time, the government considered cooperatives as an instrument of economic development of disadvantaged masses. The credit cooperatives were vehicles to extend subsidized credit to the poor under government sponsorship.
They existed characterized as non-exploitative, voluntary membership, and decentralized decision-making. The Primary Agricultural societies (PACS) provide mainly short-term and medium-term loans; and Land Development Banks provide long-term loans as a part of the cooperative movement.
Subsidized Social Banking (1960 – 1990);
It stood observed that cooperatives could not do much as existed expected of them. With the failure of cooperatives, the All India Rural Credit Survey Committee in 1969 emphasized the adoption of the “Multiagency Approach to Institutional Credit”; which assigned an important role to the commercial banks in addition to cooperatives. Even Indian planners in the fifth five-year plan (1974-79), emphasized “Garibi Hatao” (Removal of poverty) and the “growth with social justice”.
It was due to this approach that in 1969, 14 leading banks stood nationalized, and later on; five regional rural banks stood set up for the purpose on October 2, 1975, at Moradabad and Gorakhpur in Uttar Pradesh, Bhiwani in Haryana, Jaipur in Rajasthan and Malda in West Bengal. Hence, as a result of the Multiagency approach and other planning initiatives; the Government focused on measures such as the nationalization of Banks, expansion of rural branch networks; the establishment of Regional Rural Banks (RRBs), and the setting up of apex institutions.
Such as the National Bank for Agriculture and Rural Development (NABARD); and the Small Scale Industries Development Bank of India (SIDBI). The Reserve Bank of India (RBI) as the central bank of the country played a crucial role by giving overall direction for providing credit and financial support to the national bank for its operations. Therefore, after the multiagency approach, the commercial banks and regional rural banks assumed a major role in providing both short-term and long-term funds for serving the poorest of the poor.
Part 01;
Despite, the multiagency approach adopted; a very large number of the poorest of the poor continued to remain outside the fold of the formal banking system. While these steps led to reaching a large population, the period stood characterized by large-scale misuse of credit; creating a negative perception about the credibility of micro borrowers among bankers; thus further hindering access to banking services for low-income people.
However, the gap between demand and supply of financial services still prevailed due to shortcomings of the institutional credit system; as it provides funds only for productive purposes, the requirement of collateral, massive paperwork leading to inordinate delays. As a response to the failure of the formal financial system in reaching the destitute masses; microfinance through Self-help groups existed innovated and institutionalized in the India scenario.
“While no definitive date has been determined for the actual conception and propagation of SHGs; the practice of small groups of rural and urban people banding together to form a savings and credit organization well establish in India. In the early stages, NGOs played a pivotal role in innovating the SHG model and in implementing the model to develop the process fully”.
Part 02;
The first step towards Microfinance intervention was the establishment of the Self Employed Women’s Association (SEWA); a nonformal organization owned by women of petty trade groups. It stood established on the cooperative principle in 1974 in Gujarat. This initiative existed undertaken for providing banking services to the poor women employed in the unorganized sector of Ahmadabad. Shree Mahila Sahkari Bank stood set up as an urban cooperative bank. At the national level, the SHG movement involves NGOs helping in the formation of the groups.
During this time, the planners and policymakers were desperately searching for viable ways of poverty alleviation. Around that time, the Government of India launched the Integrated Rural Development Program (IRDP); a large poverty alleviation credit program, to provide credit to the poor and underprivileged; which involved the provision of government-subsidized credit through banks to the poor. But the IRDP was a “supply-led” program and the clients had no choice over the purpose and the amount. At this stage, it existed realized that the poor needed better access to these services and products, rather than cheap subsidized credit. That is when the experts started talking about microfinance, rather than microcredit.
Part 03;
Keeping in view the economic scenario of those days, a strong need existed felt for alternative policies, procedures, savings and loan products, other complementary services, and new delivery mechanisms; which would fulfill the requirements of the poorest, especially of the women members of such households. It was during this time, NABARD conducted a series of research studies independently and in association with MYRADA, a leading NGO from Southern India; which showed that a very large number of poor continued to remain outside the fold of the formal banking system. Later on, PRADAN in its Madurai projects started forming women SHG groups”.
During 1988-89, NABARD in association with Asia Pacific Rural and Agricultural Credit Association (APRACA) undertook a survey of 43 NGOs in 11 states in India, to study the functioning of microfinance SHGs and their collaboration possibilities with the formal banking system. Both these research projects laid the foundation stone for the initiation of a pilot project called the SHG linkage project.
SHG-Bank Linkage Program (1990 – 2000);
The failure of subsidized social banking lead to the delivery of credit with NABARD initiating the Self Help Group (SHG) Bank Linkage Programme in 1992 (SBLP), aiming to link informal women’s groups to formal banks. This was the first official attempt in linking informal groups with formal lending structures. “To initiate this project NABARD held extensive consultations with the RBI. This resulted from the RBI issuing a policy circular in 1991 to all Commercial Banks to participate and extend finance to SHGs” (RBI, 1991). This was the first instance of mature SHGs that were directly financed by a commercial bank. “The informal thrift and credit groups of poor were recognized as bankable clients. Soon after, the RBI advised Commercial Banks to consider lending to SHGs as part of their rural credit operations thus creating SHG Bank Linkage”.
The program has been extremely useful in increasing banking system outreach to unreached people. The program has been extremely advantageous due to the reduction of transaction costs; due to less paperwork and record keeping as group lending rather than individual lending involved. The SHG bank linkage is a strong method of financial inclusion; providing unbanked rural clientele with access to formal financial services from the existing banking infrastructure.
Other things;
The major benefit of linking SHGs with the banks is that it helps in overcoming the problem of high transaction costs of banks; as the responsibility of loan appraisal, follow-up, recovery of loans is left to the poor themselves. On the other side, SHGs gain by enjoying larger and cheaper sources.
Later, the planners in the Ninth Five-year plan (1997-2002) emphasized “Growth with Social Justice and Equality”. The objective of the Ninth plan as approved by the National Development Council explicitly states as follows:
“Promoting and developing participatory institutions like Panchayati Raj Institutions, cooperatives, and Self -Help Groups”.
Hence, it was a ninth five-year plan that expressly laid down the objective of establishment of Self Help Groups to achieve the objective of Growth with Social Justice and Equality” as a part of the microfinance initiative. Meanwhile, in 1999, the Government of India merged various credit programs, refined them; and launched a new program called Swaranjayanti Gram Swarazagar Yojana (SGSY). SGSY aimed to continue to provide subsidized credit to the poor through the banking sector to generate self-employment through a Self-Help Group approach.
Commercialization of Microfinance: The first decade of the new millennium;
This stage involves greater participation of new microfinance institutions that started taking interest in the sector not only as part of their corporate social responsibility but also as a new business line in India. Several institutions have been set up over time; which stood required to meet the credit requirements of the new society and downtrodden.
At present Eleventh Five Year Plan (2007-2012) aims at “Towards More and Inclusive Growth”. The word inclusive growth means including and considering; those who are somehow excluded from the benefits which they (poor) should avail. Microfinance is a step towards inclusive growth via inclusive finance; which moves around serving the financial needs and non-financial needs of the poor to improve the level of living of rural masses.
Microfinance in India 4 Stages Development Evolution; Image by Mohamed Hassan from Pixabay.
4 Life Insurance Types of Coverage, Advantages, Disadvantages, and Explained Finance Essay; This insurance is one of the most popular types of insurance that people purchase. Life insurance is insurance that you purchase and will pay money to your beneficiaries if you die. One of the main reasons why people purchase life insurance is to protect their families financially. Life insurance will help pay for burial costs, debt, mortgages, and any other income losses that will occur if someone dies. Life insurance pays for just like automotive insurance is. It can pay by a monthly, quarterly, or annual premium for as long as the policy goes for. There are several different types of life insurance coverage policies that people can purchase that will best suit their needs.
Here is the article to explain, 4 Types of Life Insurance Coverage, Advantages, Disadvantages, and Explained Finance Essay;
The main types are term life insurance, whole life insurance, variable life insurance, and universal life insurance. In this research paper, I will explain the advantages, disadvantages, time lengths, and how each of the types of life insurance coverage fits different people. It is very important to understand how these insurance companies calculate premiums for different people. Their main goal is to assess the risk of someone dying during the policy. Just like other types of insurance, the more risk you have, the higher your premium will be. Some of the factors that use to determine premiums are gender, age, occupation, height, weight, medical history, lifestyle, and if you smoke.
Recently I had to do a project in class where you had to find different premiums on life insurance. Some other things that I was asked were if I recently had any DUIs if any relatives have died before the age of 60, if I have recently been hospitalized, and if any diseases run in my family. All of these factors do give the insurance companies a better understanding of someone’s risk, but it is nearly impossible to be able to determine the chances of someone passing away. It is also difficult to estimate the cost of each of the 4 different types of life insurance because it is different for every individual.
Term life insurance;
Term life insurance is very affordable, and that is why it is growing in popularity. It is a life insurance policy that covers a person if they die during the length of their insurance. Term life insurance policies can be anywhere from 1 to 30 years. These policies know as “temporary” because once the policies are over, you are no longer covered. For example, if you purchase a 10-year term life insurance policy, and you die the year after your policy expires, your beneficiaries won’t receive any money. This also means that if you stop paying your premiums, you will no longer cover.
There are many different reasons how people decided on how long they want their life insurance policy to cover their family. A lot of people that purchase term life insurance decide to make their contract until they retire. Another popular way people decide on their term is to remain covered until their children have turned 18. This is a very smart way to ensure that your children will be financially protected until they are adults. Another good reason to purchase term life insurance is if you involve in risky or potentially fatal activities. Even though these factors will increase your premium, it is still worth it in case something terrible happens. The cost of term life insurance all depends on a person’s risk and the length of the policy.
Types of Term Insurance;
There are several different types of term life insurance coverage, and it is important to know the differences when selecting the best type. Annual renewable term life insurance means that each year a person may renew their term life insurance. However, each year you renew your term life insurance, the premium will go up in cost because of your age. Renewable term life insurance means that after your specific term is up; you allow signing a new term life insurance contract. Level premium term insurance means that your premium will not change throughout the length of the contract. This type of term insurance is good because as you get older, you don’t have to pay more money for your life insurance.
Convertible term insurance means that you allow converting your term insurance into another type of life insurance, like universal or whole life. There are advantages and disadvantages to term life insurance. Some advantages are that you get to choose how long you want to cover for; most policies can change or renew to other policies, and your beneficiaries pay a specific amount upon your death; which decides when you start your policy. Some disadvantages are that if you pass away after your term life insurance policy, no benefits give to your family; and it doesn’t offer as much protection as other life insurance policies offer.
Whole Life Insurance;
Whole life insurance is exactly what it sounds like, a life insurance policy that lasts for someone’s whole life. Upon death, the beneficiary receives the value of the account. Whole life insurance is also known as permanent life insurance. The main difference between whole life and term life is that whole life insurance grows in value over time. Whole life insurance is similar to a retirement account where you are putting money toward the future, except in this case it is toward your death. An interesting fact about whole life insurance is that you can borrow money out of your account, which you cannot do with term insurance. To be able to borrow money out of your account, there must be a set minimum of money already invested into the account.
Most whole life insurance policies mature when a person turns 100 years old, so if that person is still alive they will receive the face value of their account. The main reason why people choose whole life insurance over term life insurance is that they want to insure for the rest of their life. For this reason, whole life insurance is more expensive than term insurance. There are several different types of whole life insurance coverage. Non-participating whole life insurance means that you do not receive dividends for your policy. On the other hand, participating in whole life insurance means that you do receive dividends. Level premium whole life insurance is just like level term insurance, where you pay the same premium throughout the length of the policy.
Why are you buy a whole life insurance?
Purchasing a life insurance policy with a fixed premium is a great choice because once you retire; you wouldn’t want your premium to increase every year due to the loss in income. Single premium whole life insurance is a policy where you pay a large sum of money at the begging of your policy; which then eliminates having to pay premiums. This type of policy is not very popular the reason that you would need a lot of money upfront. Intermediate whole life insurance means that your premiums change over time depending on your status. In the past couple of years, a significant amount of people lost their homes because of adjustable mortgages, so I think that this type of whole life insurance is not a good choice.
Some advantages of Whole life insurance are that they usually fixed premiums; the beneficiaries will receive money whenever the policyholder dies; there are tax benefits, and most of the money will return if the policy cancels. The money that accumulates in your policy is tax-free; which attracts a lot of people to purchase a whole life insurance policy over a term life insurance policy. Some disadvantages of whole life insurance are that it costly compare to term insurance; and, it is much more complicated than term life insurance. If you are interested in purchasing a whole life insurance policy; it is important to know which type it is so you know you will be able to afford it for the rest of your life.
Universal Life Insurance;
Universal life insurance is very similar to whole life insurance. A universal life insurance policy will cover someone for their whole life; so it also considers a permanent life insurance policy. Universal life insurance policies also grow in cash over time, which tax-defer. The interest rates increase and decrease like the money market; so there is a chance to make a lot of money in this type of life insurance. The main advantage that universal life insurance has over whole life insurance is that there is more flexibility in the policy. The cash value and the death benefits parts of your policy broke up; so a person can decide how much of their money will go in each part. The policyholder can also increase and decrease their premium depending on their situation.
However, the insurance companies do have a target premium, so if you pay less than it, you may penalize. This type of life insurance policy would be best for someone who wanted to cover for the rest of their life and would want to be able to adjust their policy to suit their needs. Advantages of Universal life insurance are it is the most flexible, you can take out loans, you can adjust your premiums due to your situation, and the cash you earn in interest can use toward your payments. Some disadvantages are that your cash value isn’t guaranteed like it is with whole life insurance; and, it is more costly than term and universal life insurance policies.
Variable Life Insurance;
Variable life insurance is also considered a permanent type of life insurance. It is considered a “pure investment policy” because the insured has completed control of how their money is invested. They can decide to invest their cash account into bonds, stocks, or any other money market funds. For this reason, variable life insurance is the riskiest out of all the types of life insurance coverage. If a person makes poor investment choices, they risk losing a substantial amount of their money. On the other hand, if good investments make, the policyholder can receive a significant profit. Due to the risk of this type of life insurance, it is the most expensive one. This type of life insurance policy is only a good choice for people that understand the money market and will remain active in watching their investments.
Benefits Advantages Drawbacks Disadvantages of Life Insurance Types of Coverage;
Life insurance offers several advantages not available from any other financial instrument, yet it also has disadvantages.
Benefits or Advantages of Life Insurance;
Life insurance provides an infusion of cash for dealing with the adverse financial consequences of the insured’s death.
Life insurance enjoys favorable tax treatment, unlike any other financial instrument. Policy loans are income tax-free.
A life insurance policy may exchange for another life insurance policy (or for an annuity) without incurring current taxation.
Many life insurance policies are exceptionally flexible in terms of adjusting to the policyholder’s needs. The death benefit may decrease at any time and the premiums may easily reduce, skip, or increase.
A cash value life insurance policy may be thought of as a tax-favored repository of easily accessible funds if the need arises; yet, the assets backing these funds are generally held in longer-term investments, thereby earning a higher return.
Drawbacks or Disadvantages of Life Insurance;
Policyholders forego some current expenditure to pay policy premiums. Moreover, life insurance typically purchase for the benefit of others and usually only indirectly for the insured person.
Cash surrender values are usually less than the premiums paid in the first several policy years and sometimes a policy owner may not recover the premiums paid if the policy surrender.
The life insurance purchase decision and the positioning of the life insurance can be complex especially; if the insurance is for estate planning, business situations, or complex family situations.
The life insurance acquisition process can be annoying and perplexing (e.g. Is the life insurance agent trustworthy? Is this the right product and carrier? How can medical underwriting streamlined?).
4 Life Insurance Types of Coverage, Advantages, Disadvantages, and Explained Finance Essay; Image by Tumisu from Pixabay.
References; Types of Life Insurance: Advantages and Disadvantages. Retrieved from https://www.ukessays.com/essays/business/life-insurance-will-pay-money-to-your-beneficiaries-if-you-die-business-essay.php?vref=1, and https://www.gatewayfinancial.biz/private-clients/advantages-disadvantages-of-life-insurance/
Interest Rate Risk in Banking, the banks define their meaning, definition, principles, example, types with Management and Business Finance; The management should be an important part of market risk management in banks. In the past, regulatory restrictions have significantly reduced many risks in the banking system. However, deregulation of interest rates has exposed them to the negative effects of interest rate risk.
Here is the article to explain, Interest Rate Risk Management in Banking Principles Business Finance
Interest rate risk management in banking is a potential negative impact on net interest income and is related to the vulnerability of an institution’s financial position to changes in interest rates. Changes in interest rates affect income, assets, liabilities, off-balance sheet items, and cash flows. Therefore, the objectives of interest rate risk management are to maintain profitability; the ability to increase the capacity to bear losses and ensure adequate risk compensation received, and reach a compromise between return and risk.
The significance or meaning of interest rate risk;
What does mean interest rate risk? Interest rate risk is the potential investment loss caused by changes in interest rates. For example, if interest rates rise, the value of bonds or other fixed-income investments falls. The change in bond prices when interest rates change knows as duration. Interest rate risk can be reduced by holding bonds with different maturities; and, investors can also reduce interest rate risk by hedging fixed-income investments with interest rate swaps, options, or other interest rate derivatives.
Interest rate risk management aims to record the risk of non-adherence to maturity and revaluation and is measured in terms of both profit and economic value. The bank’s net interest income (NII) or net interest margin (NIM) depends on the development of interest rates. Any difference in cash flows (fixed assets or liabilities) or revaluation dates (moving assets or liabilities) will make the NII or NIM of the bank fluctuate. Returns on assets and prices of liabilities are now closely related to the volatility of market interest rates.
The profit perspective includes an analysis of the effect of changes in interest rates on fees or reported earnings shortly. This measure by measuring changes in Net Interest Income (NII); which is the difference between total interest income and total interest expense. The economic outlook includes an analysis of the expected cash flows from assets minus the expected cash flows from liabilities plus net cash flows or balance sheet items. The economic outlook determines the risk value of the difference in long-term interest rates.
Determination or Definition of interest rate risk in banking;
Interest rate risk defines as the risk of changes in asset value due to interest rate volatility. It makes the security in question uncompetitive or increases its value. Although risk should arise from an unexpected move, investors are generally concerned about reducing risk. This risk directly affects holders of fixed-income securities. If the interest rate rises, the price of fixed-income security falls and vice versa.
It banking book describes the risk to bank capital, management; and, gains from adverse interest rate developments that affect positions in the banking book. Any changes in interest rates will affect the present value of the bank’s future cash flows. This affects the basic value of the bank’s assets, liabilities, and off-balance sheet. This causes a change in its economic value. When interest rates change, it affects the bank’s bottom line, as net interest income (NII) changes; which depends on interest-sensitive income and expenses.
Interest rate risk is the potential that changes in overall interest rates will reduce the value of bonds or other fixed-income investments:
If interest rates rise, bond prices fall and vice versa. This means that the market price of existing bonds will fall to offset the prices of new, more attractive bonds.
Interest rate risk measure by the duration of fixed-income securities, with long-term bonds being more sensitive to price changes.
Interest rate risk can reduce by diversifying the terms of the bonds or hedging with interest rate derivatives.
Understanding risk opportunities;
The feedback between interest rates and bond prices can explain by the possibility of risk. By buying bonds, investors accept that if interest rates rise; they will relinquish the option to buy bonds with more attractive yields. When interest rates rise, the demand for existing bonds with lower yields decreases as new investment opportunities arise (for example, new bonds with higher yields issue). Although fluctuations in interest rates affect the prices of all bonds, the rate of change varies between bonds.
Different bonds show different price sensitivity to interest rate fluctuations. It is therefore important to assess the duration of a bond when assessing interest rate risk. Bonds with shorter maturities usually involve lower interest rate risk than bonds with longer maturities. With longer-term bonds, interest rates are more likely to change. Therefore, they bear the risk of higher interest rate changes.
The principle of interest rate risk in banking;
The Basel Committee has established the following principles for measuring and managing interest rate risk. Part one below are;
Risks critical to all banks must specifically identified, measured, monitored, and controlled. In addition, banks must monitor and assess CSRBB (Credit Spread Risk in the banking book).
The governance body of each bank is responsible for overseeing the IT governance framework and the bank’s risk appetite for IRRB. Their monitoring and management may delegate by senior management, experts, or an asset-liability management committee. Banks must have an adequate IT governance framework, including periodic independent reviews and assessments of system effectiveness.
Bank’s risk appetite must formulate in terms of risk, both economic value, and profit. Banks should apply policy limits to keep their exposure in line with their risk appetite.
Your measurements should be based on the results of economic values and income-based metrics derived from abroad and a precise set of interest rate shock and pressure scenarios.
When measuring IRRB, the most important behavioral and model assumptions should fully understand, conceptually justified and documented. These assumptions must rigorously examine and consistent with the bank’s business strategy.
The measurement systems and models used should be based on accurate data and subject to appropriate documentation, tests, and controls to ensure the accuracy of calculations. The model used to measure it must be comprehensive and covered by the management process to control the risk model, including a validation function that is independent of the development process.
Part two below are;
The results of your hedging assessments and strategies should report regularly to the management body or its agents at the appropriate aggregation level (by consolidation level and currency).
Information on exposure levels and measurement and control practices should regularly disclose to the public.
Capital adequacy should specifically consider as part of the Authority’s Approved Capital Adequacy Assessment Process (ICAAP) in line with the bank’s risk appetite for IRRB.
Supervisors should regularly obtain sufficient information from banks to monitor trends in bank credit exposure, assess the soundness of bank governance, and identify additional banks that require review and/or additional regulatory capital.
Supervisors should regularly evaluate this and the effectiveness of the approach banks use to identify, measure, monitor, and control IRRB. Regulators should use dedicated resources to support such assessments. The supervisory authorities should cooperate and exchange information with the competent supervisory authorities in other jurisdictions regarding the supervision of banking exposures.
Supervisors should publish their criteria to further identify banks. Banks identified as having extraordinary value should consider as potential illegal IRRB holders. If a bank’s exposure review reveals inadequate management or excessive risk to capital, earnings, or overall risk profile, regulators should require measures to reduce risk and/or capital gain.
How high is the detailed interest rate risk in banking?
In detail Interest rate risk in banks the risk due to changes in market interest rates which can harm the bank’s financial position, management. Changes in interest rates have a direct impact on bank profits through a decrease in net interest income (NII). Ultimately, the potential long-term effects of changes in interest rates will have an impact on the underlying economic value of bank assets, liabilities, and off-balance sheet items. Interest rate risk seen from these two perspectives refers to as “Profit Outlook” or “Economic Value Outlook”.
Simply put, a high percentage of fixed-income assets means that raising interest rates will not increase interest income (because interest rates fix), and lowering interest rates will not reduce interest income either. The low proportion of fixed assets has the opposite effect.
For the classification of securities in the trading book, the bank has set guidelines for volume, minimum period, holding period, duration, stop loss, rating standards, etc. The interest rate sensitivity declaration makes by the bank. Regulatory restrictions have been imposed on gaps in total assets, income, or equity.
Interest rates explain using examples;
For example, a bank accepts 13% long-term deposits and uses a 17% down payment. If the market interest rate falls by 1%; it must decrease the down payment rate by 1%, because advances revalue every three months. However, it will not be able to reduce the fixed time deposit interest. This will reduce the bank’s net interest income by 1%.
Or let’s say the bank has a 90-day deposit of 9% in a 12% annual bond. If the market interest rate rises by 1%, the bank must renew the deposit after 90 days at a higher interest rate. However, it still receives interest from the old bond interest rates. And in this case, net interest income fell by 1%.
Examples of interest rate risk;
Let’s understand interest rate risk using an example.
If the investor has invested a certain amount in a fixed rate of interest, the bond will be at its current price; which offers a 5% coupon; and, if the interest rate then rises to 6%, the bond price will fall. This is because bonds offer a 5% interest rate while the market offers a 6% yield. If the investor wants to sell these bonds in the market, then the buyer will offer a lower amount for the bonds; because these bonds have low yields compared to the market. New investors will try to achieve a return similar to the market because the amount invested is lower.
In other words, the opportunity cost of earning better returns elsewhere increases as interest rates increase. Therefore, this leads to a decrease in the price of the binding. There are several ways to counter interest rate risk. One can buy interest rate swaps, buy calls or place options on securities, or invest in negatively correlated securities to hedge risk.
The effect of changes in interest rates on bonds;
Changes in interest rates have different effects on bonds with different maturities. The correlation between interest rate movements and price movements increases with increasing maturity. Because if interest rates rise, bonds with longer maturities will suffer longer from lower interest rates than bonds with shorter maturities. For this reason, investing in bonds with different maturities use as a hedging technique to combat interest rate risk.
Changes in interest rates affect coupon bonds and no-coupon bonds differently. If we look at two types of bonds with the same maturities; they will see a sharper decline in the price of a no-coupon bond compared to a coupon bond due to rising interest rates. This is because, with zero-coupon bonds, the full amount must receive at the end of the specified term and thus increases the effective duration; whereas with coupon bonds, returns generate periodically and thus the effective payment reduces the duration.
Interest rate risk also affects by interest rates. Bonds with lower interest rates carry a higher interest rate risk than bonds with higher interest rates. This is because small changes in the market rate can easily overwhelm the lower rate and lower the bond’s market price.
Price risk arises when an asset sale before a specified maturity. In financial markets, bond prices and yields are inversely related. Price risk closely ties to the trading book, which should benefit from short-term interest rate movements. Therefore, banks that have active trading portfolios should formulate guidelines for limiting portfolio size, holding period, duration, offset period, stop loss limit, market marking, etc. This is the risk of changes in the price of a security that could result in an unexpected gain or loss on the sale of the security.
Reinvestment or Investment Risk:
Uncertainty about the rate at which future cash flows can reinvest knows as reinvestment risk. Any difference in cash flow will expose the bank to fluctuations in NII because market interest rates move in different directions. This refers to the risk of changes in interest rates that could lead to a lack of ability to reinvest at current interest rates. Also, It divides into 2 parts.
Duration of risk; This refers to the risk that arises from the possibility that you will not want to repay or extend an investment early after a predetermined period of time.
Main or Basis risks; This refers to the risk of not experiencing a reversal of changes in the interest rates of securities with an inverse characteristic.
Interest Rate Risk in Banking Principles Management Finance; Image by Gerd Altmann from Pixabay.
Factors of Finance; Finance can define as an administrative area or organization or group of administrative functions related to cash and debt systems that can ensure the organization’s cooperation in providing the necessary resources to adequately fulfill its objectives. Source of finance factors, Now the question arises as to what factors affect the company’s financial system.
Here is the article to explain the question of What are the factors affecting the choice of source of Finance?
In response, it can say that companies or corporations usually need fixed capital and working capital. There are many sources of finance for a company. Finances need for different purposes, and different purposes require the most suitable source of funding for them. There are several factors to consider when choosing the right funding source. Factors to consider when selecting an appropriate finance (funding) source are:
Type of activity (Nature of Business):
If the nature of the business or company requires heavy machinery and equipment to manufacture products, significant investment capital requires; otherwise, less investment capital requires. On the other hand, if the nature of the business is the production of consumer goods, the financial needs will be large.
Amount of money needed:
This is a number that the organization wants to increase. Not all funding sources provide all funding. Some sources are not able to raise large amounts of money while others are not flexible enough to handle the small amounts of money a business needs. Therefore, it is necessary to determine the amount of money the company needs to choose the right funding source.
For example, taking a business loan is not appropriate for short-term and small cash flow problems, as the loan may have a minimum amount that can borrow; so taking a bank overdraft would make sense if the money could borrow in small amounts. . Amounts and overdrafts can pay off quickly. Therefore, the amount of money is an important factor when choosing a source of finance.
Urgency Money:
This refers to the time a company can spend raising funds. If the company has enough time before its financial needs are met, then the company can spend time looking for alternative sources of cheap funding. On the other hand, if a company wants money quickly, it will have to make sacrifices and accept funding sources that can be even more expensive. The urgency of funding also needs to assess as some funding sources take longer to collect than others.
For example, issuing shares is a very long and complex process where there are legal requirements and then potential shareholders have to inform (advertising), and finally, money collects through application and distribution, which takes longer.
Cost of funding sources:
Different sources of funds have different costs. It is always more profitable for the company to find and obtain cheaper sources of finance. However, sometimes time does not allow organizations to find cheaper sources of funding. Internal funding sources are always cheaper than external funding sources.
Relevant risks:
The risk consists in the certainty that the financing will generate a return for the lender of the investment made. In simpler terms, it is a guarantee of project success. If financiers do not convince that the project in which their money invest is likely to be unprofitable, the lender will not want to provide funds to the company. In this case, money can secure by assets as collateral, stimulating lenders to lend.
Funding period:
This is the period of time where money will need. This can be short-term (within one year), medium-term (one to five years), or long-term (five years or more). By determining the duration of funding needs, organizations can eliminate inappropriate funding sources and choose funding sources that are more suitable for the required time period.
Business transfer rates:
The transfer rate plays an important role in the availability of funding sources because the transfer rate shows the ratio of debt to the total capital of a company. If the business is highly focused, commercial lenders will not want to lend because the company is already using more credit than equity. Very focused companies must pay more than their profits in the form of interest on loans and other loan capital. When this happens, potential lenders fear the company’s ability to handle more interest payments and debt settlements.
Business control:
The existing shareholders of the company will not want to issue shares because it will reduce control of the business. Issuance of shares in stock companies also allows takeovers. The same is true for venture capitalists, where money invests as equity, and venture capitalists, as owners, have the right to influence the way the company is run. Existing shareholders and business owners who do not want a change in control and ownership of the company will forgo sources of equity financing.
Economy (Business Cycle):
When the business cycle is booming, capital requirements remain low, but working capital requirements increase.
Forms, philosophies, and styles of leadership and management:
Financial requirements are influenced by the form, philosophy, and style of management within the company. If the business is run by a professional and has a good reputation in the financial markets, then the business may not require a large number of funds.
On the other hand, if management carries out according to traditional methods and places greater emphasis on confidentiality, the financial requirements are much higher. It lists and describes the financial factors that affect firm value. And also the factors that influence the selection of the company as a source of funding.
Other factors:
In addition to the factors above, many other factors or elements also affect the financial management of a company. Above, maybe you’ll understand the factors affecting the choice of source of finance. These are the availability of transportation, opportunities to increase the circulation of money, government policies, opportunities for war, etc.
The factors affecting the choice of source of Finance; Image by Mudassar Iqbal from Pixabay.
What does Public Finance Management mean? Introduction to Public Finance, Expenditure, Revenue, and Debt (In Hindi); Collection of sufficient resources from the economy in an appropriate manner along with allocating and use of these resources efficiently and effectively constitute good financial management. Resource generation, resource allocation, and expenditure management (resource utilization) are the essential components of a public financial management system – By Wikipedia.
The Concept of Public Finance Management explains with its Expenditure, Revenue, and Debt.
The following subdivisions form the subject matter of public finance.
Step by step explains each one; Public expenditure, Public revenue, Public debt, Financial administration, and Federal finance.
Public finance is the management of a country’s revenue, expenditures, and debt load through various government and quasi-government institutions. This guide provides an overview of how public finances manage; what the various components of it are, and how to easily understand what all the numbers mean. A country’s financial position can evaluate in much the same way as a business’ financial statements.
The study of government’s role in the public finance economy is, it is the branch of economics; which evaluates the government expenditure of government revenue and government authorities, and one or the other adjustment to achieve desirable effects and avoid undesirable people.
The federal government helps prevent market failure by supervising the allocation of resources, distribution of income, and stabilization of the economy. Regular funding for these programs mostly secures through taxation.
Borrowing from banks, insurance companies, and other governments and earning dividends from their companies helps fund federal government, state and local governments also receive grants and assistance from the federal government, in addition to ports, airport services And user fees with other features; Penalty derived from breaking the law; Revenue from licenses and fees, such as for driving; And the sale of government securities and bond issues is also the source of public finance.
Public expenditure refers to government expenditure ie government expenditure. This is done by the central, state, and local governments of any country. Of the two main branches of public finance, i.e. public revenue and public expenditure, we will first study public expenditure.
Public expenditure can define in this way,
“The expenditure incurred by public authorities like central, state and local governments to satisfy the collective social wants of the people is known as public expenditure.”
But now, the cost of the government across the world has increased a lot. Therefore, modern economists have started analyzing the effects of public expenditure on production, distribution, and income levels, and employment in the economy.
Classical economists did not analyze the effects of public expenditure in the nineteenth century, due to very limited governmental activities for public expenditure.
During the 19th century, most governments followed laissez-faire economic policies, and their work was limited to protecting aggression and to maintain law and order. The size of the public expenditure was very small.
To maximize the social and economic welfare of the governments, there is a need to do various tasks in the field of political, social, and economic activities. To do these duties and tasks, the government needs a large number of resources. These resources call public revenues. Public revenue includes revenue from administrative activities such as taxes, fines, fees, gifts, and grants.
According to Dalton, however, the word “Public Revenue / Income” has two senses – broad and narrow. In its broadest sense, it contains all the income or receipts that can secure a public authority at any time of time. In its narrow sense, however, it includes only the sources of public authority’s income, which is commonly known as “revenue resources”. To avoid ambiguity, thus, the former calls “public receipts” and later “public revenue”.
As such, receipts from public lending (or public debt) and public property sales mainly exclude from public revenue. For example, the budget of the Government of India is classified as “Revenue” and “Capital”. In the “heads of revenue”, the heads of income under the capital budget calls “receipts”, thus, the word “receipts” includes. Public income sources that exclude from “revenue”.
Revenue receipts and capital receipts are both. Revenue receipts derive from the taxes of various forms. Capital receipts include primary internal market borrowing and external debt. However, a large portion of the state’s revenue comes from internal sources. The main point of difference between the two is that where there is a gain or earning of people in the form of a source; then there is public property in the form of a source.
Introduction to Public Finance, Expenditure, Revenue, and Debt, #Pixabay.
Public Debt:
In simple terms, government / public debt (also known as public interest, government debt, national debt, and sovereign debt) is the outstanding debt by the government. Borrowing by public authorities is of recent origin. This practice of revenue collection was not prevalent before the eighteenth century.
“Public debt” often uses interchangeably with sovereign debt terms. Public debt usually refers only to National debt. But in some countries, loans outstanding by states, provinces, and municipalities also include.
In the Middle Ages, borrowing was a rare event. Whenever there is urgency, there is usually a war; the emperor relies on their deposits or borrows on their own debts. However, such lending was not recognized by society. It was considered a “dead-weight” loan.
This promises to the government with them that the holders of these bonds will be paid interest at regular intervals, at the end of the term, at the lump sum rates at the regular intervals.
Prof. According to Taylor,
“Government debt arises out of borrowing by the Treasury, from banks, business organizations, and individuals. The debt is in the form of promises by the treasury to pay to the holders of these promises a principal sum and in most instances interest on that principle.”
Prof. Adams points out that public debt is the source of advance revenue which is opposite with direct/derived revenue; and, therefore every question of public debt should be judged in the light of this fact.
What does Public and Private Finance mean?Public and Private Finance: Differences, Similarities, and Dissimilarities;what their meaning?Public finance is the finance sector that deals with the allocation of resources to meet the set budgets for government entities. Private Finance can classify into two categories the public or personal finance and business finance. Personal finance deals with the process of optimizing finances by individuals such as people, families, and single consumers.
The Concept of Public and Private Finance; explain into Differences, Similarities, and Dissimilarities.
Public finance has several branches; public revenue, public expenditure, public debt, budget policy, and fiscal policy. This branch of economics is responsible for the scrutiny of the meaning and effects of financial policies implemented by the government. This sector examines the effects and results of the application of taxation and the expenditures of all economic agents and the overall economy. Richard Musgrave, a renowned Economics professor, terms Public Finance as a complex of problems that are centered around the income and expenditure processes of the government.
Personal Finance deals with the process of optimizing finances by individuals such as people, families, and single consumers. A great example is an individual financing his/her car by the mortgage. Personal finance involves financial planning at the lowest individual level. It includes savings accounts, insurance policies, consumer loans, stock market investments, retirement plans, and credit cards.
Business Finance involves the process of optimizing finances by business organizations. It involves asset acquisition and proper allocation of funds in a way that maximizes the achievement of set goals. Businesses can require finances on either of the three levels; short, medium, or long term.
Differences between Public and Private Finance:
The following differences are explained into two sections; A) Basic, and B) Advanced.
A. Basic differences part one are;
About the differences between private and public finance.
The pattern and volume of expenditure of an individual are influenced by his total resources income and wealth but in the case of government, expenditure determines income. Moreover, government expenditures determine people’s income. If the government spends money on road construction, some employment is automatically generated.
Private individuals or firms are mainly concerned with private consumption or profits. The government aims at promoting the welfare of society rather than that of the individual. The individual (or a firm) is mainly concerned with his (its) present gains and prospects, not with that of the distant future. The government has to serve society generation after generation.
Private firms derive income by selling goods and they pay to factors of production according to the quantity or quality purchased. The services of governments are usually made available to individuals quite irrespective of the cost and often at rates that do not cover full costs.
A public authority can vary the amount of its income and expenditure within limits, of course, but more easily than an individual. An individual cannot easily double his income or halve his expenses even if he would be better off that way. But this is not so difficult in the case of Governments.
A. Basic differences part two are;
About the differences between private and public finance.
A public authority usually does not discount the future at as high a rate as an individual. The reason is obvious. The life of a man is counted in years and his foresight is limned. A-State is supposed to live forever. Hence, future satisfactions do not appear so small against present utilities to a State as they do to an individual. He always prefers a bird in hand to two in the bush even though the two in the bush may be fairly certain tomorrow.
A wise man is he who, after meeting his needs, saves something to lay by. Not so with a State. A State should not ordinarily try to hoard but should repay to the people in services all that it receives in taxes. A heavily surplus budget is for this reason as bad as, and perhaps even worse than, a heavily deficit one. The deficit budget may propose to incur the deficit for the promotion of mass welfare, while the surplus budget is only an extra burden on the tax-payer.
There is no fixed period over which an individual balances his budget. State budgets are -generally made for one year. But the income and expenditure of an individual are continuous and cover the whole period of his life.
Individual finance is kept a secret, whereas State finance is made public. The budget is published and every citizen is welcome to scrutinize it and comment on it. An individual will not let anybody have a peep into his financial position.
B. Advanced differences;
The following differences below are;
Borrowing:
The government can borrow from itself, it can simply go back to the people to ask for loans in whichever financial asset e.g. bonds when shortages arise. However, an individual can’t borrow from itself.
Objective:
The public sector’s main objective is to create social benefits in the economy. The private industry seeks to maximize personal or profit benefits.
Currency ownership:
The government is in charge of all aspects related to currency. This involves the creation, distribution, and monitoring. No one in the private sector allows to create currency, this is illegal and most countries classify it as a capital offense.
Present or future Income:
The public sector is more involved with future planning and making long-term decisions. The government makes decisions that will bear fruits in the long-term even ten years. These investments could include the building of schools, hospitals, and infrastructure. The private industry makes financial decisions on projects with a shorter return waiting time.
Income and Expenditure Adjustment:
The government adjusts the income according to the expenditure budget. The private sector including individuals and private businesses adjust their expenditure according to the income or future estimates. The government first creates an outline for the expenditure then devices means of acquiring the monetary budget needed. Private finance involves cutting your coat according to your cloth.
Coercion to getting Revenue:
The government can use force to get revenue from individuals. This could involve the use of force to get taxes. The private sector, however, doesn’t have this authority.
Surplus Budget Concept:
Excess income or surplus budgets is a great virtue in the private sector, this is however not the case in public finance. The government is expected to only raise what is needed for a fiscal year. Of what use would it be to have surplus budgets? It would be much easier to offer tax reliefs to the tax-payers to offset the surplus.
Ability to Make Huge and Deliberate Changes:
The public finance sector can make huge decisions on income amount without any consequences. For example, it can effectively and deliberately increase or decrease the income amount instantly. Businesses and individuals can’t make these decisions and implement them immediately.
Similarities between Public and Private Finance:
While the individual is concerned with the utilization of labor and capital at his disposal, to satisfy some of his wants, the state is concerned with the utilization of the labor and capital and other resources to satisfy social wants. It will observe that both private and public finance have broadly, the same objective, namely the satisfaction of human wants.
However, while private finance emphasizes individual interests public finance attempts to promote social welfare. From this, it may though that public finance is only an extension of private finance and that the rules and regulations which apply to private finance will also apply to public finance.
The following similarities below are;
Borrowing:
Borrowing is a common element both in private and public finance. Just as an individual borrows from different sources when current incomes are insufficient to meet the current expenditure, the public authority also resorts to borrowing, when its revenue fall short of aggregate expenditure.
Problems of Adjustment of Income and Expenditure:
Both public and private finance always face the problem of the adjustment of income and expenditure. Hence the problem of choice is common in both types of finance. Both kinds of finance have income and expenditure. Both try to balance their income and expenditure.
Rationality:
Private and public finance are based on rational behavior. The resources at the disposal of private individuals and public authority are limited. Therefore in both cases, maximum care is taken to ensure better utilization of scarce resources. A rational individual tries to maximize personal benefits from his expenditure. Likewise, a rational government seeks to maximize social benefits from public expenditure.
The scarcity of Resources:
Both have limited resources at their disposal. Both public and private individuals are required to match their income and expenditures in such a way that both make the optimum use of scarce resources.
Loans are Repayable:
Both private and public loans are required to repay. An individual borrows money from various sources to meet personal requirements. But that too cannot unlimited. He has to repay his loans. Like individuals, the government cannot live beyond its means. It can temporarily postpone repayment of loans, but it is obligatory to repay the loans. Thus, public finance may regard as an extension of private finance. This, however, is not true.
Public and Private Finance: Differences, Similarities, and Dissimilarities, #Pixabay.
Dissimilarities between Public and Private Finance:
One can notice fundamental dissimilarities between public and private finance.
The important differences are:
Public Budget is not Necessarily Balanced:
An individual tries to maintain a balanced budget and maintenance of a surplus budget is a virtue. Instead of a balanced or surplus budget, it is desirable to have a deficit budget of a government to increase the country’s productive power. In other words, a surplus budget may not stimulate economic activities. On the contrary, a deficit budget often makes to finance economic development.
The scope of Study:
Public finance studies the complex problems that center around the revenue – expenditure process of government. Private finance, on the other hand, confines to the study of those aspects of the economy that arise in the course of operation of private households in the sphere of financial transactions and activities. Hence in terms of scope of study private finance has a limited sphere of operation.
Compulsory Character:
There are certain items of expenditure that the state can neither avoid nor postpone. Irrespective of the availability of resources, this type of expenditure should incur.
According to Prof. Findlay Sierras,
“Another characteristic of public expenditure is its compulsory character.”
The expenditure on defense, civil administrations, etc. is compulsory. Likewise, the state can compel people to purchase and consume a particular variety of cloth, wheat, or other commodities at a price fixed by the state.
Nature of Resources:
There is a difference between private and public authorities as regards the nature of resources. While the individual has only limited resources at his disposal, the public authorities can even draw upon the entire wealth of the community, by raising a force, if necessary.
Tax payment is a personal responsibility of the taxpayer. Nobody can refuse to pay taxes if it is imposing on him. Besides tax revenue, the public authorities can borrow funds from the general public and if needed, from outside the country.
The government can even resort to deficit financing, as and when the financial situation worsens. As compared to this, individuals and business houses have only a limited source of resources.
Coercive Authority of the Government:
An individual cannot raise coercive methods to raise his income. But the government can use force to collect the necessary revenue. Since the public authority possesses coercive power, it can raise the rate of taxes, add new taxes to the existing system, and force taxpayers to pay taxes promptly. Moreover, during the financial crisis, the government can introduce, the compulsory deposit of funds, using the coercive authority of the state.
