LECTURE NOTE

Courses: B.Com-IV

Subject: Indian Financial System (BCH-405)

Faculty of Commerce and Management

Rama University

Faculty : Dr. Palash Bairagi

(Unit-1)

1. What Is a Financial System?

A financial system is a set of institutions, such as banks, insurance companies, and stock
exchanges that permit the exchange of funds. Financial systems exist on firm, regional,
and global levels. Borrowers, lenders, and investors exchange current funds to finance
projects, either for consumption or productive investments, and to pursue a return on their
financial assets. The financial system also includes sets of rules and practices that
borrowers and lenders use to decide which projects get financed, who finances projects,
and terms of financial deals.

 A financial system is the set of global, regional, or firm-specific institutions and practices
used to facilitate the exchange of funds.
 Financial systems can be organized using market principles, central planning, or a hybrid
of both.
 Institutions within a financial system include everything from banks to stock exchanges
and government treasuries.
The financial system is composed of the products and services provided by financial
institutions, which includes banks, insurance companies, pension funds, organized exchanges,
and the many other companies that serve to facilitate economic transactions. Virtually all
economic transactions are effected by one or more of these financial institutions. They create
financial instruments, such as stocks and bonds, pay interest on deposits, lend money to
creditworthy borrowers, and create and maintain the payment systems of modern economies.

These financial products and services are based on the following fundamental objectives of any
modern financial system:

 To provide a payment system,

 To give money time value,
 To offer products and services to reduce financial risk or to compensate risk-taking for
desirable objectives,
 To collect and disperse information that allows the most efficient allocation of economic
resources,
 To create and maintain financial markets that provide prices, which indicates how well
investments are performing, which also determines the subsequent allocation of
resources, and to maintain economic stability.

The financial system is the main part of running the economy smoothly. Financial
system provides the flow of finance in the economy. Which leads to the
development of the country financial system show the strength of the country.

2. Structure of Indian Financial System

The following are the four major components that comprise the Indian Financial
System:

Financial Institutions

Financial Markets

Financial Instruments/Assets/Securities

Financial Services.
1. Financial Institutions

Financial institutions are the intermediaries who facilitate the smooth functioning
of the financial system by making investors and borrowers meet. They mobilize
savings of the surplus units and allocate them in productive activities promising a
better rate of return. Structure of Indian Financial System also provides services to
entities (individual, business, government) seeking advice on various issues
ranging from restructuring to diversification plans. They provide whole range Of
services to the entities who want to raise funds from the markets or elsewhere. The
financial Institutions is very important for the function of a financial system

Types of Financial Institutions

Financial institutions can be classified into two categories

Banking Institutions

Non-Banking Financial Institutions

2. Financial Markets

Financial markets may be broadly classified as negotiated loan markets and open
The negotiated loan market is a market in which the lender and the borrower
personally negotiate the terms of the loan agreement, e.g. a businessman borrowing
from a bank or from a small loan company. On the other hand, the open market is
an impersonal market in which standardized securities are treated in large volumes.
The stock market is an example of an open market. The financial markets, in a
nutshell, the credit markets catering to the various credit needs Of the individuals,
links and institutions. Credit is supplied both on a short as well as a long
On the basis of the credit requirement for short-term and long term purposes,
financial markets are divided in to two categories:

Types of the financial market

Money Market

Capital Market

Financial Instruments/ Assets/ Securities

This is an important component of the financial system. Financial instruments are

monetary contracts between parties. The products which are traded in a financial
market are financial assets, securities or other types of financial instruments. There
is a wide range of securities in the markets since the needs of investors and credit
seekers are different. Financial instruments can be real or virtual documents
representing a legal agreement involving any kind of monetary value. Equity-based
financial instruments represent ownership of an asset. Debt-based financial
instruments represent a loan made by an investor to the owner of the asset.

Types of Financial Instruments

Cash Instruments

Derivative Instrument

Financial Services

It consists of services provided by Asset Management and Liability

Management Companies. They help to get the required funds and also make sure
that they are efficiently invested. They assist to determine the financing
combination and extend their professional services up to the stage of servicing of
lenders.

Types of Financial Services

Banking

Wealth Management

Mutual Funds

Insurance

The Structure of Indian Financial System is about A financial system is a system

that system which allows the exchange of funds between investors, lenders, and
borrowers. Indian Financial systems operate at national and global levels. They
consist of complex, closely related services, markets, and institutions intended to
provide an efficient and regular linkage between investors and depositors.
2. RBI – Role and functions: (Refer the Link:
https://testbook.com/blog/functions-of-reserve-bank-of-india-gk-notes-pdf/

https://exampariksha.com/role-functions-rbi-economics-study-material-notes/ )
The RBI was first established on the 1st of April 1935 and nationalized in 1949. The governing of the
RBI is done in accord to the RBI Act by the government. Its day to day affairs are take care of the
Board of Directors who are chosen by the government.

Reserve Bank of India (RBI)

Reserve Bank of India (RBI) is the central bank of India entrusted with a multidimensional role
which includes implementation of monetary policy and maintaining monetary stability in the
country. RBI was established on 1st April 1935 under the Reserve Bank of India Act, 1934. RBI
was set up after the recommendations of Hilton young Commission which had submitted its
report in the year 1926. Later on, in 1931 the Indian Central banking enquiry committee had also
recommended for the establishment of the central bank in India.

Initially, Reserve Bank of India was established as a private shareholders bank, but it was
nationalised after independence in the year 1949 through the Reserve Bank (Transfer of public
ownership) act, 1948.

As per the Preamble of Reserve Bank of India, the role and functions of RBI are described as

to regulate the issue of Bank notes and keeping of reserves with a view to securing monetary
stability in India and generally to operate the currency and credit system of the country to its
advantage; to have a modern monetary policy framework to meet the challenge of an
increasingly complex economy, to maintain price stability while keeping in mind the objective of
growth.

Organisational and Management structure of Reserve Bank of India

The supervision and general affairs of RBI are governed by the central board of directors. The
Government of India appoints the central board of directors for a tenure of 4 years.
  The Central Board of directors consists of full-time officials which include the Governor
and not more than four Deputy Governors.

 The government nominates ten directors from different fields and two government
officials. Other four directors one each from the local boards are also appointed.

 The current Reserve Bank of India governor is Dr. Urjit R. Patel. The current 4 Deputy
Governors are Shri M. K. Jain, Shri B.P Kanungo, Dr. Viral V. Acharya, and Shri N.S.
Vishwanathan.

 The Deputy Governor and director attend the meetings of the Central Board, however,
they are not entitled to vote.

Functions of the RBI

 The issuer of Currency: The RBI is the only authorized body that can issue currency in the
country. So they print, distribute and regulate the flow of currency in the economy.

 Banker to the Government: Even the Central and State government need
basic banking functions. The RBI provides them with these facilities like depositing monies,
remittances etc. It can also make advances and provide loans to the government whenever
necessary.

 Banker to other Banks: The Reserve Bank of India also supervises all other commercial
banks in the country. It provides financial assistance to these banks like short-term loans and
advances. The RBI also will dictate interest rates and the CRR limits to the commercial
banks.
 Regulator of Foreign Exchange: It is the function of the RBI to maintain the value of the
rupee in the global economy. It does so by acting as the custodian of foreign exchange
reserves in the country. It maintains enough reserves to battle against fluctuations.

 Controls Credit in the Economy: This can be said to be the primary function of the Reserve
Bank of India, the control of credit and money in the market. It uses qualitative and
quantitative methods to either expand or contract the available credit in the economy
according to circumstances.

Role of RBI

Role and functions of RBI

Traditional functions.

Traditional role and functions of RBI refer to those functions which every Central Bank of a
country has to perform all over the world. Traditional functions are mainly the basic and
fundamental functions of RBI.

1. Issue currency notes: RBI has the sole authority to issue currency notes in India. Earlier
all currency notes except one rupee note and coins of smaller denomination were issued
by RBI. However, Reserve Bank of India in New Mahatma Gandhi series has issued
notes in the denominations of Rs 10 and above. Reserve Bank of India has been given
these exclusive powers under the provisions of section 22 of Reserve Bank of India Act,
1934. This system of issuing currency notes is known as minimum reserve system. The
currency notes issued by RBI is a legal tender throughout the territory of India without
any limitations. It issues these currency notes against the security of gold bullion, gold
coins, promissory notes, exchange bills and government of India bonds etc.

2. Banker to other banks: Reserve Bank of India is the apex monetary body in the
country and it controls the volume of bank reserves. It helps and regulates other banks to
create credit in the right proportion. It has obligatory powers to regulate, guide, help and
direct other banks of the country, and hence it acts as the guardian of commercial banks
in India. Every commercial bank has to maintain a certain part of the Reserves with RBI.
Reserve Bank of India acts as the lender of last resort and banks can approach RBI when
they need funds. Under the Banking Regulation Act, 1949 RBI has extensive powers to
supervise and control the banking system of the country.

3. Banker, agent and financial advisor of the government: under section 20 of Reserve
Bank of India act, it acts as the banker and agent to the government. Section 21 and 21A
gives powers to RBI to conduct transactions of Central and state governments. It has the
duty to make payments, taxes, and deposits on behalf of the government. It represents
Government of India at International levels. It gives financial advice to the government
and maintains government accounts. It has a responsibility to manage public debt and
maintain the foreign exchange reserves. It provides overdraft facilities to Central and
state governments.
 4. Exchange rate management and the custodian of Foreign Exchange
Reserves: Reserve Bank of India has the responsibility to stabilize the external value of
Indian currency. It keeps gold bullions and foreign currency reserves etc. against
currency note issue and has the responsibility to meet the adverse balance of payment
with other nations. RBI has the responsibility to maintain exchange rate stability and for
this, it has to bring demand and supply of foreign currency (usually US Dollar) to similar
levels. It maintains this stability through buying and selling of foreign currency etc.

5. RBI as the bank of Central clearance, settlement, and transfer: RBI provides the
facility of clearing house for settling banking transactions. This allows other banks to
settle their interbank claims smoothly and economically. At places where RBI does not
have its own office, this function is carried out in the premises of State Bank of India.
This facility is provided by Reserve Bank of India through a cell called as the National
Clearing Cell.

6. Credit control function: RBI tries to maintain price stability in the country which is
essential for economic development. It regulates money supply in the economy according
to the changing circumstances of the economy. It uses various measures such as
qualitative and quantitative techniques to regulate credit in the economy. It uses
quantitative controls such as bank rate policy, cash reserve ratio, open market operations
etc. Qualitative controls include selective credit control, rationing of credit etc.

Promotional and developmental Role and Functions of RBI

Every Central Bank has to perform numerous promotional and development functions which
vary from country to country. This is truer in a developing country like India were RBI has been
performing the functions of the promoter of financial system along with several special functions
and non-monetary functions.

 Promotion of Banking habits and expansion of banking system: It performs several

functions to promote banking habits among different sections of the society and promotes
the territorial and functional expansion of banking system. For this purpose, RBI has set
several Institutions such as Deposit and Insurance Corporation 1962, the agricultural
refinance Corporation in 1963, the IDBI in 1964, the UTI in 1964, the Investment
 Corporation of India in 1972, the NABARD in 1982, and national housing Bank in 1988
etc.

 Export promotion through refinance facility: RBI promotes export through the Export
Credit and Guarantee Corporation (ECGC) and EXIM Bank. It provides refinance facility
for export credit given by the scheduled commercial banks. The interest rate charged for
this purpose is comparatively lower. ECGC provides insurance on export receivables
whereas EXIM banks provide long-term finance to project exporters etc.

 Development of financial system: RBI promotes and encourages the development of

Financial Institutions, financial markets and the financial instruments which is necessary
for the faster economic development of the country. It encourages all the banking and
non-banking financial institutions to maintain a sound and healthy financial system.

 Support for Industrial finance: RBI supports industrial development and has taken
several initiatives for its promotion. It has played an important role in the establishment
of industrial finance institutions such as ICICI Limited, IDBI, SIDBI etc. It supports
small scale industries by ensuring increased credit supply. Reserve Bank of India directed
the commercial banks to provide adequate financial and technical assistance through
specialised Small Scale Industries (SSI) branches.

 Support to the Cooperative sector: RBI supports the Cooperative sector by extending
indirect finance to the state cooperative banks. It routes this finance mostly via the
NABARD.

 Support for the agricultural sector: RBI provides financial facilities to the agricultural
sector through NABARD and regional rural banks. NABARD provides short term and
long term credit facilities to the agricultural sector. RBI provides indirect financial
assistance to NABARD by providing large amount of money through General Line of
Credit at lower rates.

 Training provision to banking staff: RBI provides training to the staff of banking
industry by setting up banker s training college at many places. Institutes like National
Institute of Bank management (NIBM), Bank Staff College (BSC) etc. provide training to
the Banking staff.
  Data collection and publication of reports: RBI collects data about interest rates,
inflation, deflation, savings, investment etc. which is very helpful for researchers and
policymakers. It publishes data on different sectors of the economy through its
Publication division. It publishes weekly reports, annual reports, reports on trend and
progress of commercial bank etc.

Supervisory Role and Functions of RBI

RBI performs certain non-monetary functions for the supervision of banks and promotion of
sound banking system in India. Supervisory functions ensure improvement in the methods of
operation of Banking in India. It controls and administers the entire financial and banking system
of India through these functions.

 Giving licence to banks: RBI has the authority to grant licence to the banks for carrying
out business. It provides licence for the opening of new branches, opening extension
counters, and also for closing down existing branches. Reserve Bank of India through this
power avoids unnecessary competition among different banks at any particular location.
It helps RBI to remove undesirable people from entering into the banking business.

 Bank inspection and enquiry: RBI has the power to inspect and enquire banks in
various matters under the Banking Regulation Act, and the Reserve Bank of India act. It
can inspect loans and advances, deposits, investment functions etc. which helps to ensure
that financial Institutions and banks carry out their operations in a proper manner. It
carries out periodical inspection once or twice a year and banks have to take remedial
measures pointed out during an inspection. It also asks for periodical information
regarding certain Assets and liabilities of banks.

 Implementation of deposit Insurance Scheme: RBI has the responsibility to implement

the deposit Insurance Scheme to ensure the protection of deposits of small depositors.
Under this scheme, deposits below Rs 1 lakh are insured with the Deposit Insurance
Guarantee Corporation set up by Reserve Bank of India. It implements the deposit
Insurance Scheme in case of failure of any Bank. Deposits made in the accounts of
commercial banks, cooperative banks and RRBs are covered under this scheme. The
 fixed deposits with Institutions such as ICICI, IDBI etc are not covered under this
scheme.

 Control over Non-Banking Financial Institutions: The monetary policy of RBI does
not influence the Non-Banking Financial Institutions. However, it gives directions to the
Non-Banking Financial Institutions and also conducts enquiry and inspection to exercise
control over these institutions. For example, it requires permission from the Reserve
Bank of India for deposit-taking operations by Non-Banking Financial Institutions.

 Periodic review of the working of commercial banks: the supervisory functions of RBI
also includes periodic review of the working of commercial banks. It takes necessary
steps to increase the efficiency of the commercial banks, and for the implementation of
policy changes and schemes for the improvement of the banking system.

Prohibitory Role and Functions of RBI

1. RBI cannot purchase the shares of any industrial undertaking or even its own share.

2. It cannot provide direct monetary or financial assistance to any commercial undertaking

or trade etc.

3. RBI does not have the power to buy any immovable property.

4. RBI does not have the authority to give loans on the security of property or shares.

Instruments of monetary policy of Reserve Bank of India (RBI)

The monetary policy committee of RBI has the responsibility to fix the benchmark policy
interest, also known as a repo rate for the controlling inflation rate. One of the major objectives
of monetary policy is to contain inflation rate at 4%, with maximum standard deviation of 2%.

Quantitative measures:

It refers to those measures of RBI in which affects the overall money supply in the economy.
Various instruments of quantitative measures are:
  Bank rate: it is the interest rate at which RBI provides long term loan to commercial
banks. The present bank rate is 6.5%. It controls the money supply in long term lending
through this instrument. When RBI increases bank rate the interest rate charged by
commercial banks also increases. This, in turn, reduces demand for credit in the
economy. The reverse happens when RBI reduces the bank rate.

 Liquidity adjustment facility: it allows banks to adjust their daily liquidity mismatches.
It includes a Repo and reverse repo operations.

 Repo rate: Repo repurchase agreement rate is the interest rate at which the Reserve Bank
provides short term loans to commercial banks against securities. At present, the repo rate
is 6.25%.

 Reverse repo rate: It is the opposite of Repo, in which banks lend money to RBI by
purchasing government securities and earn interest on that amount. Presently the reverse
repo rate is 6%.

 Marginal Standing Facility (MSF): It was introduced in 2011-12 through which the
commercial banks can borrow money from RBI by pledging government securities which
are within the limits of the statutory liquidity ratio (SLR). Presently the Marginal
Standing Facility rate is 6.5%.

Varying reserve ratios

Reserve Bank of India uses the tools of varying the reserve requirements that banks have to
maintain with RBI.

 Cash reserve ratio (CRR): It is the minimum amount of cash that commercial banks
have to maintain with the Reserve Bank of India in the form of deposits. An increase in
CRR decreases money supply in the economy whereas a decrease in CRR increases the
money supply. The current CRR rate is 4%.

 Statutory liquidity ratio (SLR): It is the minimum percentage of non-cash assets to be

kept with RBI. It includes government securities, bonds, gold etc. An increase in SLR
reduces the capacity of banks to give loans to its customers. The reverse happens when
SLR is reduced. The current SLR rate is 19.5%.
Open market operations (OMOs): open market operations include the sale and purchase of
government securities for either injecting or absorbing liquidity from the economy.

Market stabilisation scheme (MSS): this instrument is used to absorb the surplus liquidity from
the economy through the sale of short-dated government securities. The cash collected through
this instrument is held in a separate account with the Reserve Bank. It was introduced in 2004.
RBI had raised the ceiling of the market stabilisation scheme after demonetization in 2016.

Monetary Policy vs. Fiscal Policy

Monetary Policy
Central banks typically have used monetary policy to either stimulate an economy or to check its
growth. By incentivizing individuals and businesses to borrow and spend, the monetary policy
aims to spur economic activity. Conversely, by restricting spending and incentivizing savings,
monetary policy can act as a brake on inflation and other issues associated with an overheated
economy.

The Federal Reserve, also known as the "Fed," frequently has used three different policy tools to
influence the economy: open market operations, changing reserve requirements for banks and
setting the discount rate. Open market operations are carried out on a daily basis when the Fed
buys and sells U.S. government bonds to either inject money into the economy or pull money out
of circulation.3 By setting the reserve ratio, or the percentage of deposits that banks are required
to keep in reserve, the Fed directly influences the amount of money created when banks make
loans. The Fed also can target changes in the discount rate (the interest rate it charges on loans it
makes to financial institutions), which is intended to impact short-term interest rates across the
entire economy.
Monetary policy is more of a blunt tool in terms of expanding and contracting the money supply
to influence inflation and growth and it has less impact on the real economy. For example, the
Fed was aggressive during the Great Depression. Its actions prevented deflation and economic
collapse but did not generate significant economic growth to reverse the lost output and jobs.

Expansionary monetary policy can have limited effects on growth by increasing asset prices and
lowering the costs of borrowing, making companies more profitable.

Monetary policy seeks to spark economic activity, while fiscal policy seeks to address either
total spending, the total composition of spending, or both.

Fiscal Policy
Generally speaking, the aim of most government fiscal policies is to target the total level of
spending, the total composition of spending, or both in an economy.2 The two most widely used
means of affecting fiscal policy are changes in government spending policies or in government
tax policies.

If a government believes there is not enough business activity in an economy, it can increase the
amount of money it spends, often referred to as stimulus spending. If there are not enough tax
receipts to pay for the spending increases, governments borrow money by issuing debt securities
such as government bonds and, in the process, accumulate debt. This is referred to as deficit
spending.

What is the difference between monetary and fiscal policy?

 Monetary policy involves changing the interest rate and influencing the money supply.
 Fiscal policy involves the government changing tax rates and levels of government
spending to influence aggregate demand in the economy.
They are both used to pursue policies of higher economic growth or controlling inflation.
Monetary policy

Monetary policy is usually carried out by the Central Bank/Monetary authorities and involves:

 Setting base interest rates (e.g. Bank of England in UK and Federal Reserve in the US)
 Influencing the supply of money. E.g. Policy of quantitative easing to increase the supply
of money.

How monetary policy works

 The Central Bank may have an inflation target of 2%. If they feel inflation is going to go
above the inflation target, due to economic growth being too quick, then they will
increase interest rates.
 Higher interest rates increase borrowing costs and reduce consumer spending and
investment, leading to lower aggregate demand and lower inflation.
 If the economy went into recession, the Central Bank would cut interest rates.
  See also: Cutting interest rates

Fiscal policy

Fiscal policy is carried out by the government and involves changing:

 Level of government spending

 Levels of taxation
1. To increase demand and economic growth, the government will cut tax and increase
spending (leading to a higher budget deficit)
2. To reduce demand and reduce inflation, the government can increase tax rates and cut
spending (leading to a smaller budget deficit)

Example of expansionary fiscal policy

In a recession, the government may decide to increase borrowing and spend more on
infrastructure spending. The idea is that this increase in government spending creates an injection
of money into the economy and helps to create jobs. There may also be a multiplier effect, where
the initial injection into the economy causes a further round of higher spending. This increase in
aggregate demand can help the economy to get out of recession.
This shows that in 2009/10 the UK ran a budget deficit of 10% of GDP. This was caused by the
recession and also the government’s attempt to provide a fiscal stimulus (VAT tax cut) to try and
get the economy out of recession.

See more at: Expansionary fiscal policy

If the government felt inflation was a problem, they could pursue deflationary fiscal policy
(higher tax and lower spending) to reduce the rate of economic growth.

Which is more effective monetary or fiscal policy?

In recent decades, monetary policy has become more popular because:

  Monetary policy is set by the Central Bank, and therefore reduces political influence (e.g.
politicians may cut interest rates in the desire to have a booming economy before a
general election)
 Fiscal policy can have more supply side effects on the wider economy. E.g. to reduce
inflation – higher tax and lower spending would not be popular, and the government may
be reluctant to pursue this. Also, lower spending could lead to reduced public services,
and the higher income tax could create disincentives to work.
 Monetarists argue expansionary fiscal policy (larger budget deficit) is likely to
cause crowding out – higher government spending reduces private sector expenditure,
and higher government borrowing pushes up interest rates. (However, this analysis is
disputed)
 Expansionary fiscal policy (e.g. more government spending) may lead to special interest
groups pushing for spending which isn’t really helpful and then proves difficult to reduce
when the recession is over.
 Monetary policy is quicker to implement. Interest rates can be set every month. A
decision to increase government spending may take time to decide where to spend the
money.
However, the recent recession shows that monetary policy too can have many limitations.

 Targeting inflation is too narrow. During the period 2000-2007, inflation was low but
central banks ignored an unsustainable boom in the housing market and bank lending.
 Liquidity trap. In a recession, cutting interest rates may prove insufficient to boost
demand because banks don’t want to lend and consumers are too nervous to spend.
Interest rates were cut from 5% to 0.5% in March 2009, but this didn’t solve recession in
the UK.
 Even quantitative easing – creating money may be ineffective if banks just want to keep
the extra money on their balance sheets.
 Government spending directly creates demand in the economy and can provide a kick-
start to get the economy out of recession. Thus in a deep recession, relying on monetary
policy alone, may be insufficient to restore equilibrium in the economy.
  In a liquidity trap, expansionary fiscal policy will not cause crowding out because the
government is making use of surplus saving to inject demand into the economy.
 In a deep recession, expansionary fiscal policy may be important for confidence – if
monetary policy has proved to be a failure.

Financial Services:

(Meaning, Features, and Scope)

Meaning of Financial Services

Financial Services is the economic services provided by the finance industry, which
encompasses a broad range of businesses that manage money, including credit unions, banks,
credit card companies, insurance companies, accountancy companies, consumer-finance
companies, stock brokerages, investment funds, individual managers and some government-
sponsored enterprises.

Definition of Financial Services:

the Services and products provided to consumers; and businesses by financial institutions
such as banks, insurance companies, brokerage firms, consumer finance companies, and
investment companies all of which comprise the financial services industry.

Facilities such as savings accounts, checking accounts, confirming, leasing, and money transfer,
provided generally by banks, credit unions, and finance companies. Financial Services may
simply define as services offered by financial and banking institutions like the loan, insurance,
etc.
The financial services concerns with the design and delivery of financial instruments and
advisory services to individuals and businesses within the area of banking and related
institutions, personal financial planning, investment, real assets, and insurance, etc.

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.

Functions of Financial Services:

The following functions of financial services below are;

 Facilitating transactions (exchange of goods and services) in the economy.

 Mobilizing savings (for which the outlets would otherwise be much more limited).
 Allocating capital funds (notably to finance productive investment).
 Monitoring managers (so that the funds allocated will spend as envisaged).
 Transforming risk (reducing it through aggregation and enabling it to carry by those more
willing to bear it).

Characteristics and Features of Financial Services:

The following Characteristics and Features of Financial Services below are;

Customer-Specific: They are usually customer focused. The firms providing these services, study
the needs of their customers in detail before deciding their financial strategy, giving due regard
to costs, liquidity and maturity considerations. Financial services firms continuously remain in
touch with their customers, so that they can design products that can cater to the specific needs of
their customers.

The providers of financial services constantly carry out market surveys so they can offer new
products much ahead of need and impending legislation. Newer technologies are being used to
introduce innovative, customer-friendly products and services which indicate that the
concentration of the providers of financial services is on generating firm/customer-specific
services.

Intangibility: In a highly competitive global environment, brand image is very crucial. Unless
the financial institutions providing financial products; and services have a good image, enjoying
the confidence of their clients, they may not be successful. Thus institutions have to focus on the
quality and innovativeness of their services to build up their credibility.

Concomitant: Production of financial services and the supply of these services have to be
concomitant. Both these functions i.e. production of new and innovative services and supplying
of these services are to perform simultaneously.

The tendency to Perish: Unlike any other service, they do tend to perish and hence cannot be
stored. They have to supply as required by the customers. Hence financial institutions have to
ensure proper synchronization of demand and supply.

People-Based Services: Marketing of financial services has to be people-intensive and hence

it’s subjected to the variability of performance or quality of service. The personnel in
their organizations need to select based on their suitability and trained properly so that they can
perform their activities efficiently and effectively.
Market Dynamics: The market dynamics depends to a great extent, on socioeconomic
changes such as disposable income, the standard of living and educational changes related to the
various classes of customers. Therefore, they have to constantly redefine and refine taking into
consideration the market dynamics. The institutions providing their services, while evolving new
services could be proactive in visualizing in advance what the market wants, or being reactive to
the needs and wants of their customers.

The Scope of Financial Services:

The following scope of Financial services, and cover a wide range of activities. They can
broadly classify into two, namely:
Traditional Activities:
Traditionally, the financial intermediaries have been rendering a wide range of services
encompassing both capital and money market activities. They can group under two heads, viz.
 Fund based activities and
 Non-fund based activities.
A. Fund based activities:
The traditional services which come under fund based activities are the following:
 Underwriting or investment in shares, debentures, bonds, etc. of new issues (primary
market activities).
 Dealing with secondary market activities.
 Participating in money market instruments like commercial papers, certificates of
deposits, treasury bills, discounting of bills, etc.
 Involving in equipment leasing, hire purchase, venture capital, seed capital, etc.
 Dealing in foreign exchange market activities. Non-fund based activities
B. Non-fund based activities:
Financial intermediaries provide services-based on non-fund activities also. This can calls “fee-
based” activity. Today customers, whether individual or corporate, not satisfy mere provisions of
finance. They expect more from their companies. Hence a wide variety of services, are being
provided under this head.
They include:
 Managing the capital issue i.e. management of pre-issue and post-issue activities relating
to the capital issued by the SEBI guidelines and thus enabling the promoters to market
their issue.
 Making arrangements for the placement of capital and debt instruments with investment
institutions.
 The arrangement of funds from financial institutions for the client’s project cost or his
working capital requirements.
 Assisting in the process of getting all Government and other clearances.

Modern Activities:
Besides the above traditional services, the financial intermediaries render innumerable services
in recent times. Most of them are like the non-fund based activities. Because 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.
1. Rendering project advisory services right from the preparation of the project report until
the raising of funds for starting the project with necessary Government approvals.
2. Planning for M&A and assisting with their smooth carry out.
3. Guiding corporate customers in capital restructuring.
4. Acting as trustees to the debenture holders.
5. Recommending suitable changes in the management structure and management style to
achieve better results.
6. Structuring the financial collaborations/joint ventures by identifying suitable joint venture
partners and preparing joint venture agreements.
7. Rehabilitating and restructuring sick companies through an appropriate scheme of
reconstruction and facilitating the implementation of the scheme.

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