FINANCIAL SERVICES

Introduction
Financial services refer to services provided by the finance
industry. The finance industry encompasses a broad range of
organizations that deal with the management of money. Among
these organizations are credit unions, banks, credit card
companies,
insurance
companies,
consumer
finance companies, stock brokerages, investment funds and
some government sponsored enterprises.
Financial services refer to services provided by the finance
industry. The finance industry encompasses a broad range of
organizations that deal with the management of money. Among
these organizations are banks, credit card companies, insurance
companies, consumer finance companies, stock brokerages,
investment funds and some government sponsored enterprises.

Introduction
Financial services refer to services provided by
the finance industry.
Services that are financial in nature.
The finance industry encompasses a broad range
of organizations that deal with the management
of money.
Among these organizations are banks, credit card
companies, insurance companies, consumer
finance companies, stock brokerages, investment
funds and some government sponsored
enterprises.

MEANING OF FINANCIAL
SERVICES
Typically, it means mobilizing and
allocating SAVINGS.

It includes all activities involved in the

transformation of SAVINGS into
INVESTMENTS.

Financial Services can also be called

Financial Intermediation.

FEATURES OF FINANCIAL
SERVICES
INTANGIBILITY
INSEPERABILITY
DYNAMISM
ACT AS LINK
CUSTOMER ORIENTED

PERISHABILITY
DERIVATIVES AND CATALYSTS
DISTRIBUTION OF RISKS

IMPORTANCE OF FINANCIAL
SERVICES
Economic
Growth

Capital
formation

Promotion of
Savings

Financial
Intermediation

Contribution to
GNP

Creation of
employment
opportunities

Dominance of
Human element

Provision of
Liquidity

OBJECTIVES OF FINANCIAL SERVICES

FUND RAISING

FUNDS DEVELOPMENT

REGULATION

SPECIALIZED SERVICES

ECONOMIC GROWTH

PLAYERS IN FINANCIAL SERVICES

PLAYERS

INDIVIDUALS

MARKET
INTERMEDIARIES

REGULATORS

GOVERNMENT

RBI

SEBI

IRDA

FIRMS OR
CORPORTAES

Classification of Financial Services Industry

The financial intermediaries in India can be traditionally .
classified into two :
A.
Capital Market intermediaries and
B. Money market intermediaries.
The capital market intermediaries consist of term lending
institutions and investing institutions which mainly provide
lung term funds. On the other hand, money market consists of
commercial banks, co-operative banks and other agencies
which supply only short term funds. Hence, the term 'financial
services industry' includes all kinds of organizations which
intermediate .and facilitate financial transactions of both
individuals and corporate customers.

TYPES of Financial Services

Financial services cover a wide range of
activities. They can be broadly classified into
two, namely :
i. Traditional. Activities
ii. Modern activities.

Traditional Activities
Traditionally, the financial intermediaries have
been rendering a wide range of services
encompassing both capital and money market
activities. They can be grouped under two
heads, viz.
a. Fund based activities and
h. Non-fund based activities.

 Fund based activities : The traditional services

which come
under fund based activities are the following :
i. Underwriting or investment in shares,
debentures, bonds, etc. of new issues
(primary market activities).

 ii. Dealing in secondary market activities.

iii. Participating in money market
instruments like commercial
papers, certificate of deposits, treasury bills,
discounting of bills etc .
Involving in equipment leasing, hire purchase,
venture capital, seed capital,
v. Dealing in foreign exchange market
activities. Non fund based activities

Fund Based Services

The firm raises funds through debt, equity, deposits
and the bank invests the funds in securities or lends to
those who are in need of capital.
The following are some of these fund-based services
such as:

Leasing and Hire Purchase

Housing Finance
Credit Cards
Venture Capital
Factoring
Forfeiting
Bill Discounting
Insurance

Leasing
A lease transaction is a commercial arrangement
whereby an equipment owner or Manufacturer
conveys to the equipment user the right to use
the equipment in return for a rental.
In other words, lease is a contract between the
owner of an asset (the lessor) and its user (the
lessee) for the right to use the asset during a
specified period in return for a mutually agreed
periodic payment (the lease rentals).

Consumer Credit
Consumer credit is basically the amount of credit used
by consumers to purchase non-investment goods or
services
that
are
consumed
and
whose
value depreciates quickly.
This includes automobiles, recreational vehicles (RVs),
education, boat and trailer loans but excludes debts
taken out to purchase real estate or margin on
investment accounts.
For example, a mortgage for purchasing a house is not
consumer credit. However, the 52 inch television you
put on your credit card is consumer credit.

Hire Purchase
A system by which a buyer pays for a thing in
regular installments while enjoying the use of it.
During the repayment period, ownership (title) of
the item does not pass to the buyer. Upon the
full payment of the loan, the title passes to the
buyer.
A method of buying an article by making regular
payments for it over several months or years. The
article only belongs to the person who is buying it
when all the payments have been made

Factoring
Factoring is a financial transaction
whereby a business sells its accounts
receivable (i.e., invoices) to a third
party (called a factor) at a discount.

Advantages of Factoring
Time Savings. Factoring can save you time and effort that would
otherwise be spent on collecting from customers.
Good Use for Growth. The instant cash to generate growth, maybe
hiring another salesperson who will bring in more business. Or
buying an advertisement that will reach new customers. Or buying a
piece of equipment that will accelerate production.
Doesnt Require security. Unlike traditional bank loans, factoring
doesnt require to risk your home or other property as collateral.
Qualify for More Funding. Factoring firms will typically give a cash
advance on up to 80% of receivables. That may be more than be able
to get from a bank.

Forfaiting
It is a form of financing of receivables relating to
international trade.
It is a form of supplier credit in which an exporter
surrenders possession of export receivables,
which are usually guaranteed by a bank on the
importers country.
Forfaiting is a mechanism of financing exports:

by discounting export receivables

evidenced by bills of exchanges or promissory notes
without recourse to the seller (viz; exporter)
carrying medium to long-term maturities
on a fixed rate basis upto 100% of the contract value.

Bills Discounting
While discounting , banks buy the bill before it
is due and credit the value of the bill after a
discount charge to the customer's account.
There are two types of bill discounting
Import Bill Discount is a kind of short-term finance
offered by the bank to the importer according to
his demand upon receiving the bills under the
letter of credit and the import collection items.

Export Bill Discounting is financing of money in

transit supplied by the bank.

Bills Discounting
According to the Indian Negotiable
Instruments Act, 1881
The bill of exchange is an instrument in writing
containing an unconditional order, signed by the
maker, directing a certain person to pay a certain
sum of money only to, or to the order of, a certain
person, or to the bearer of that instrument.

Housing Finance
Housing finance is what allows for the
production and consumption of housing.
It refers to the money we use to build and
maintain the nations housing stock.
But it also refers to the money we need to pay
for it, in the form of rents, mortgage loans and
repayments.

Venture Capital Financing

It is a fund that is available for investment in
an enterprise which offers the probability of
profit along with the possibility of loss.
Venture is a course of proceeding associated
with risk whose outcome is uncertain.
Capital means the financial resources to start
an enterprise.

. Non fund based activities

Financial intermediaries provide services on
the basis of non-fund activities also. This can
be called 'fee based' activity. Today customers,
whether individual or corporate, are not
satisfied with mere provisions of finance. They
expect more from financial services
companies. Hence a wide variety of services,
are being provided under this head. They
include :

MERCHANT BANKING

CREDIT RATING

STOCK BROKING

SECURITIZATION OF DEBTS

LETTER OF CREDIT

BANK GUARANTEE

About Merchant Banking

Bank that deals mostly in international finance, long-term
loans for companies and stock underwriting.
Merchant banking primarily involves financial advice and
services for large corporations and wealthy individuals.
Merchant banks do not provide regular banking services to the
general public.
Merchant banks invest their own capital in client companies &
provide services for mergers and acquisitions.

Stock Broking
The process of investing in the share market,
either individually or through a broker is
known as stock broking.
This is primarily done by opening a Demat
account.
If done through a broker, he opens an
account, helping to operate through online
stock broking facility.

Stock broker
Licensed agent who has to pass certain qualifying
tests to be certified to offer securities investment
advice to investors.
He or she may

counsel what and when to buy

counsel whether to hold or sell securities,
execute buy-sell orders on behalf of the investors, and
charge a percentage of the transaction amountants
brokerage fee for the services rendered.

Credit Rating
It is an opinion on the future ability and legal
obligation of an issuer to make timely
payments of principal and interest on a
specific fixed income security.
As per credit rating agencies regulations 1999
rating means
An opinion regarding securities
Expressed in the form of standard symbols
Assigned by a credit rating agency
Used by an issuer of such securities

CRISIL rates a wide range of entities, including

CRISIL: Credit Rating and Information Services of India Limited.

Industrial companies
Banks
Non-banking financial companies (NBFCs)
Infrastructure entities
Microfinance institutions
Insurance companies
Mutual funds
State governments
Urban local bodies

Modern Activities
Beside the above traditional services, the
financial intermediaries render innumerable
services in recent times. Most of them are in
the nature of non-fund based activity. In view
of the importance, these activities have been
in brief under the head 'New financial
products and services'. However, some of the
modern services provided by them are given
in brief hereunder.

 i. Rendering project advisory services right

from the
preparation of the project report rill the
raising of funds for starting the project with
necessary Government approvals.
ii. Planning for M&A and assisting for their
smooth carry out.
iii. Guiding corporate customers in capital
restructuring

 iv. Acting as trustees to the debenture holders.

v. Recommending suitable changes in the
management structure and management style with a
view to achieving better results.
vi. Structuring the financial collaborations / joint
ventures by identifying suitable joint venture
partners and preparing joint venture agreements,
Rehabilitating and restructuring sick companies
through appropriate scheme of reconstruction and
facilitating the implementation of the scheme.

 viii. Hedging of risks due to exchange rate risk,

interest rate risk, economic risk, and political
risk by using swaps and other derivative
products.
Managing [In- portfolio of large Public Sector
Corporations.
x. Undertaking risk management services
like insurance services, buy-hack options etc.

 . Advising the clients on the questions of selecting the best

source of funds taking into consideration the quantum of
funds required, their cost, lending period etc.
xii, guiding the clients in the minimization of the cost of debt
and in the determination of the optimum debt-equity mix.
Undertaking services relating to the capital market, such as
:-.. Clearing services
b. Registration and transfers,
c. Safe custody of securities
d. Collection of income on securities
xiv. Promoting credit rating agencies for the purpose of rating
companies which want to go public by the issue of debt
instrument;*.

Fund based income

Fund based income comes mainly from interest spread (the
difference between the interest earned and interest paid),
lease rentals, income from investments in capital market and
real estate. On the other hand, fee based income has its
sources in merchant banking, advisory services, custodial
services, loan syndication, etc. In fact, a major part of the
income is earned through fund-based activities. At the same
time, it involves a large share of expenditure also in the form
of interest and brokerage. In recent times, a number of
private financial companies have started accepting deposits
by offering a very high rate of interest. When the cost of
deposit resources goes up, tin" (ending rate should also go up.
It means that such companies have to compromise the quality
of its investments.

Fee based income

Fee based income, on the other hand, does
not involve much risk. But, it requires a lot of
expertise on the part of a financial company to
offer such fee-based services.

CAUSES FOR FINANCIAL

INNOVATION

FINANCIAL SERVICES AND ECONOMIC

ENVIRONMENT
Increase the output of the economy
Emergence of primary equity market
Evaluating assets, increasing liquidity and producing and spreading
information
Stability and resilience
Conservation to dynamism
Process of globalization
Accelerate the volume and rate of savings
Makes innovation
Risk management services
Disciplining and guiding the management companies
Concept of credit rating
Process of liberalization
Accelerates the rate of economic growth