UNIT 6 :

FINANCIAL SERVICES

Meaning of financial services :As applied in UK:-• It could be understood be including banking,

insurance, stock broking & investment services as well as wide range of business & other services.

• Services that insure smooth flow of financial activities in the economy.

• Important component of financial system.• Financial institutions & financial markets

facilitate functioning of the financial system through financial instruments.

• Fourth element of the financial system.• Efficient & effective financial services extended

by the provider are helpful for the smooth functioning of the financial system.

• Financial services include the services offered by asset management companies like leasing companies, mutual funds, merchant bankers & issue/portfolio manager.

• Include the services offered by liability management companies like bill discounting houses & acceptance houses.

• Key change in financial services sector due to technological innovation & globalization.

• Raising of required funds & ensuring their efficient deployment.

• Ensuring an efficient management of funds.• Services provided by various institutions.• Service sector is regulated by

SEBI,RBI,DEPARTMENT OF BANKING & INSURANCE,GOVERNMENT OF INDIA.

• Need & Importance of Financial Services :-• The financial services play a very crucial

& significant role in country’s economy.• I) Growth & Development :• Represent a significant proportion of the total

economic activity in most economies.• Growth of service sector is much more as

compared to the manufacturing sector.• Increase in employment statistic due to service

sector.• Changes due to technology.• Market for manufactured goods has tended

towards saturation in the past. Whereas service sector has experienced acceleration in demand for their products as income & wealth grow.

• II) Role of Financial Intermidiation :• Financial service sector is made up of different

financial institutions.• These institutions acts as financial

intermediaries.• Financial institutions carry out the process of

financial intermediations by acting as channel through which the financial surpluses of some groups in society

• (e.g. household) are collected & then distributed to other groups in society

• (e.g. firms) which have deficit.• E.g. Role of banking services & insurance

services. They help to mobilising saving for investment purposes.

• III) Unique Features :• Financial services are unique in themselves but

they do share many of the features of the products of other services.

• Intangible in nature.• Perishable in nature.• Focus of the institutions on the quality &

innovativeness of their services.• Products of financial services are long term in

nature.• The functions of producing & supplying financial

services have to be performed• Simultaneously for which their has to be perfect

understanding between the financial services firms & their clients.

• Marketing of financial services not only need people orientation but also process orientation.

• Financial services are customer oriented.• Need of the customer are studied by institutions

providing financial services to suggest financial strategies.

• Financial services remain in constant touch with the market offering new products.

• Financial services have to be constantly redefined & refined on the basis of socio-economic changes relative to various income class.

• Financial services institutions while evolving new services could be proactive in visualising in advance what the markets want or reactive to the needs & wants of customers.

• Marketing of financial services not only need people orientation but also process orientation.

• Financial services are customer oriented.• Need of the customer are studied by institutions

providing financial services to suggest financial strategies.

• Financial services remain in constant touch with the market offering new products.

• Financial services have to be constantly redefined & refined on the basis of socio-economic changes relative to various income class.

• Financial services institutions while evolving new services could be proactive in visualising in advance what the markets want or reactive to the needs & wants of customers.

• IV) Creation of Credit :• Financial service sector particularly the banking

sector is very important to the operation of the economy & to the conduct of the government economic policy.

• The major liability of the banks is the customer deposit, which is significant element of the country’s money supply.

• It is through their lending activities, that banks are able to create new bank deposit & hence country’s money supply.

• Cash advances are always repaid in the banking system as fresh deposits.

Characteristics of Financial Services :-• Financial Services are quite distinct in nature from the

other services.• These services provided by the financial institutions

have some typical characteristics that makes these products quite distinct from the products produced by the industrial enterprises.

1) Customer Specific :• Firms providing these services study the need of

customers in detail before deciding the financial strategies.

• Firms give due regard to costs, liquidity & maturity considerations.

• Financial services firms continuously remain in touch with their customers & carry out the market surveys to design the product which can cater to the specific needs of the customers.

• Newer technologies are being used to introduce innovative, customer friendly products & services.

2) Intangibility :• Basically related to brand image.• In highly competitive global environment, financial

institutions providing financial products & services must have good image ,enjoying the confidence of their clients to became successful.

• Institutions have to focus on the quality & innovativeness of their services to build up their credibility.

3)Concomitant :• Production of financial services & supply of these services

have to be concomitant.i.e. Production of new & innovative financial services & supplying of these services are to be performed simultaneously.

4) Tendency to perish :• Financial services have tendency to perish, hence can not

be stored.• Financial services have to be supplied as required by the

customer.• Financial Institutions have to maintain proper balance

between demand & supply of financial services.

5) People based service:• Proper selection of personnel for marketing of

financial services as per their suitability.• Proper training must be given to them to perform

their activity efficiently & effectively.6) Market Dynamics:• Market Dynamics depends mostly on

socioeconomic changes such as disposable income, standard of living & educational changes related to various classes of customer.

• Financial services have to be constantly redefined & refined on the basis of socio-economic changes relative to various income class.

• Financial services institutions while evolving new services could be proactive in visualising in advance what the markets want or reactive to the needs & wants of customers.

• Evolution Of Financial Services :-• The Financial Services Industry in India is in the process

of attaining full bloom.To reach the present position, it has to passed through the following stages.The stages are :-

A) The stage of Infancy ( between 1960 to 1980):-• Covered in merchant banking, insurance & leasing services.

Merchant bankers provide different services as follows.• Service starting from project appraisal to arranging funds

from bankers. • Act as bridge between capital market & fund seeking

institutions Underwriting of issues & helps in development of issues which are not fully subscribed.

• Assessing enterprises in getting listed on the stock market.• Offering legal advice on registration of companies &

removing legal barriers.• Proving advice & helping in mergers & acquisitionProviding

technical advice on takeovers &Performing syndication activity in their portfolio to raise project finance.

• Arranging working capital loans & manage risk element i.e. general risk through insurance policy by the general insurance company.

• Development of investment companies & starting such as U.T.I.

• Life Insurance business initiated by the L.I.C.• Nationalization of general insurance business in

early 1970s.• Setting of holding company with four subsidiaries

to handle the general insurance business inn the public sector.

• Giving up of suggestions to privatize the insurance business, as in no way could the insurance business be considered as national monopoly.

• Leasing made its mark in the closing years of the 1970,s.

a) Initially companies were engaged in equipment lease financing .Later on operations of different kinds like financial, operating & net leasing.

b) In starting there were 400 companies then no contracted due to their non viability.

• B) The stage of Modern Financial Services:-• Financial services have entered the second

rung during later part of the 1980s.• These services include counter services, share

transfer, pledging of shares, mutual funds, factoring, discounting,venture capital & credit rating.

• Starting of mutual fund business in India.• Credit rating is another important financial

service which made its mark in the mid 1980,s.• Appearance of Discount & Finance House of

India Limited• Appearance of no of factoring institutions in

public sector in the late 1980’s.• e.g.State Bank of India Factors & Can Bank

Factors Ltd.

Types of Financial Services:-1) Fee Based Services :- Services where financial institutions

operate in specialized fields to earn substantial income by way of fees, dividend, commission, discount & brokerage.

a) Issue Management:Issue Management referes to management of securities offerings of the corporate sector to public & existing shareholders on right basis.

• Issue Management refers to managing issues of corporate securities like equity shares, preference shares & debentures.

• Issue Managers in capital market are known as Merchant Banker or Lead Managers.Issue Management involves marketing of capital issues of existing companies including right issues & dilution of shares by letter of offer.

• Merchant Banker give advice on decisions concerning size & timing of the public issues in the light of market condition.

• Merchant Banker provide assistance to corporate units on the designing of sound structure acceptable to financial institutions.

• Merchant Bankers also advice the issuing company whether to go for fresh issue,additional issue,bonus issue,right issue or combination of these.

b) Corporate Advisory Services:• Corporate Advisory Services are needed to ensure that

corporate enterprise runs efficiently at its maximum potential through effective management of financial & other resources.

• These services include for business enterprise,include services such as providing guidance in areas of diversification based on the Government economic & licensing policies,appraising product lines & analyzing their growth & profitability.consultancy for rehabilitation of sick industrial units,advice on capital structuring & restructuring.

• Corporate Advisory Services constitutes an important component of the portfolio of the activities of the merchant bankers.

• Corporate Advisory Services covers matter benifited for corporate unit involving financial aspects,government regulations,policy changes & business environmental reshuffles.

• Thus Scope of Corporate Advisory Services is very vast ranging from managerial economies,investment & financial management to corporate laws & related to legal aspects.

c) Credit Rating:Origin of Credit Rating service lies in the financial crisis of the US in 1837.The first mercantile credit rating agency was set up in New York in 1841 to rate the ability of the merchants to pay financial obligations.

• In India,Credit Rating came much later as compared to US.The first credit rating agency i.e.Credit Rating & Information Services of India Ltd.( CRISIL)was set up in 1987,followed by ICRA IN 1994.

• The term ‘Credit Ratting’ comprises of two words’credit’ & ‘rating’.Where Credit is trust in a person’s ability & intention to pay or reputation of solvency & honesty.Rating means estimating worth or value of,or to assign value to classifying a persons position with reference to particular subject matter.Rating is usually expressed in alphabetical symbols.

• Thus Credit Rating can be defined as an expression of an opinion through symbols about credit quality of the issue of securities or company with reference to particular instrument.

• In India,the scope of credit rating is limited to debt instruments,i.e.debentures, bonds,fixed deposits,commercial paper,etc.However,in developed countries equity shares are also rated.Credit Rating is thus an important device in the hands of investors to analyse the instruments floated by issuers.

d) Mutual Funds:• Mutual Fund is a trust that pools the saving of a number of

investors who share common goal of getting good returns on investment fund.

• Mutual Fund offers a common man an opportunity to invest in diversified ,professionally managed basket of securities at a relatively low cost.

• Thus Mutual Funds invest the money collected from the investors,with the help of professional managers,in capital market instruments,such as shares,debentures & other securities.

• Mutual Fund is usually a long-term investment with certain level of risk.

• Schemes like Open-ended Mutual Funds ensures that investors will get money whenever they want at a short notice.

• Long term investment can be made through close ended scheme.

• E.g.Tax-saving Equity Linked Saving Scheme(ELSS) & Pension Fund. Tax benefit can be get through these scheme.

• Security & Exchange Board Of India(SEBI) is the Regulatory Authority for Mutual Funds in India.

e) Asset Securitization :-• Asset Securitisation is a process whereby loans & other

receivables are packaged,underwritten & sold in the form of asset-backed securities.

• The asset which can be securitised include receivables from the Government, trade related receivables,credit card receivables,automobile loans,real estate loans,housing loans etc.

• Under Asset Securitisation Financial institution pools & packages individual loans & receivables,create securities against them,gets them rated & sells them to the investor at large through public offerings or private placements.

• Asset Securitisation is a synthetic technique of converting assets into securities,securities into liquidity,liquidity into assets & assets into securitiesan on an onging basis.

• Thus Asset Securitisation provide flexibility of yield,pricing pattern,size risks & marketability of instruments used to the advantage of both borrowers & lender/investors.

Thank You!