CHAPTER

o f F i n a n c i a l
F i n a n c i a l

of
Overview
An Services

e
SERVICES service supplier.
financial
MEANING OF
FINANCIAL

nature)
offered by a in the
transformation

(financial in activities
Financial
service is a service
savings and all f+nancial
services

allocating New
mean mobilizing and intermediation.
financial most important
serviCes

inanc1al
lt is otherwise called as
financial
services are
into
nvestment.

and
ngs
insurance related
services, banking resources.

Surance and i n t e r m a t i o n a l trade and flow of financial in rendering

services

India
e s to
Tacilitate
made fascinating
growth in venture
institutions have
operators, off shore and
mutual fund
service
Financial houses
issue and lead managers, and bills discounting
merchant banking, financiers
lease financiers, housing
s
stock exchanges,
p e r a t o r s . portfolio
managers,
financial services are SEBI,
institutions of
The regulatory and
specialized Stock Holding Corporation of India
financial houses of India,
services, discount and
companies.
India and Venture capital
rating
: nerthe Counter Exchange of
OF FINANCIAL SERVICES
1. IMPORTANCE a significant
market and instruments. They provide
Financial institutions consist financialof resources from savers
or transfer of financial
mobilize savings and reallocation of resources
maximum financial advantages to the public
0

eultimate borrowers. Their functions are providing

to and
of the economy. (2). Distribute the savings efficiently
Promoting the overall savings
social-economic needs and (3). To
facilitate trade transactions and credit facilities.
the
institutions entering several new activities in
india has a wide range of sophisticated financial
ir aeas of merchant banking, leasing, housing financing, venture capital and other financial services.
tE tanige of services provided by the financial institutions stretches from rural to international

taal reach and have contributed significantly to the growth.

Financial intermediaries help clients manage risk, channel funds from savers manager risk.
asel funds from savers and investors to capital and facilitate the clearing
businesses secking
setlement of payments. Many types of financial intermediaries exist in the areas of asset and
Management. Banks focus on assets, lending, and providing payment services. insures
TWTe, debt and equity, advise on merger and requisitions, and also engage in securities
brokerage
pension funds and mutual funds offer a means of saving by investing in diversified
portfolios
MRTFINANCIAL SERVICES

CHAPTER
Financial
F i n a n c i a l

O v e r v i e w
of
An Services

1. ie
service
supplier.
SERVICES financial
offered by
a
t r a n s f o r m a t i o n

FINANCIAL
OF nature) activities in
the
MEANING service (financial in and all servIces
service is a
financial
Financial allocating
savings New
mobilizing and
intermediation.
important
services mean financial most
financial otherwise called
as services are
erm It is financial
banking and
investment.
into
ofsavings insurance
related services, resources.
and financial services

and flow of rendering

in India in
insurance
ke international trade
facilitate growth and
venture
besides to made fascinating off shore
institutions have operators,
Financial
service mutual fund houses
issue and lead
managers,
financiers and
bills discounting
merchant banking, housing stock exchanges,
such as lease financiers, services a r e SEBI,
managers,
portfolio financial India
find operators, institutions of Corporation of
and specialized Stock Holding
etc. The regulatory financial houses
of India,
discount and
Credit rating services, Venture capital companies.
Counter Exchange of India and
Lad. Over the
SERVICES
FINANCIAL significant
IMPORTANCE OF instruments. They provide
a
1.1. market and
consist of financial r e s o u r c e s from
savers
Financial institutions transfer of financial
or
of r e s o u r c e s the public
and reallocation maximum financial advantages
to
Tole to mobilize savings providing
Their functions are to and
to the ultimate
borrowers. Distribute the savings efficiently
of the economy. (2).
overall savings transactions and credit
facilities.
by (1). Promoting the To facilitate trade
social-economic needs and (3).
cater to the several new activities in
financial institutions entering
India has a wide range of sophisticated and other financial services.
leasing, housing financing, venture capital
Te areas ofmerchant banking, stretches from rural to international
Ihe range of services provided by
the financial institutions
iancial reach and have contributed
significantly to the growth.
risk, channel funds from savers manager risk.
Financial intermediaries help clients manage
to businesses seeking capital and facilitate the clearing
harnel funds from savers and investors
of financial intermediaries exist in the areas of asset and
ad settlement of payments. Many types
SK management. Banks focus on assets, lending, and providing payment services. insures,
and requisitions, and also engage in securities brokerage
CTWTite, debt and equity, advise on merger means of saving by investing in diversified portfolios
ICes pension funds and mutual funds offer a
asets.
1
 CHAP

INTRODUCTION TO)
FINANCIAL SERVICES

ing Objectives

should be able to understand:

hingthis chapter, you
t characteristics and importance of financial services.
based services.
soffinancial services-asset based and fee
ial sercices and economic environment.
in the financial services sector.

ing, non-banking and investment institutions.

cial services industry in India.

NING AND CONCEPT

7S, there has been an upsurge in the financial services
provided by various banks and
stit
ons. Efficiency emerging
of financial system largely depends upon the quality and
nClal services
provided by the banking and non-banking financial companies.
mFinancial
2e ancial
Servic
of money Services' can be defined as, "activities, benefits and satisfactions, connected
Oey, that offer to users and
s of
customers, financial related value".
financial services incllude the
ks and following types of institutions:
Financial Institutions
ouse Building Societies
 10.2
(1i) lnsurance Compancs
Companns
Crrdit Card Issuer
(I Mutual Funds
( l n v e ' s t m e n t
Trustsand

(vi) S t k Echanges

)leasing Conpanies

i) U'nit Trusts

Conpanies,
and so on.
industrial
rprises
enterpr and ultimate
(
Finannv
render
services to
sector/prisd onsurme
Finanial service
be
organisations

turther
sub-divided to
include

markets.
government/public

Within the financial

service
services sector, th
indust
1.3rkcts. These can international
financial companies.
and
Vmmenial
sertor, industry and
non-banking
institutions

are banks,
financial
Kegulation Act, 1949. Section 5 of the
1ain sertors

a r e governed
by the Banking
o r investment nent, of deposits Ao
(a) Banking
Companies.
"the accepting by cheque,
for the purpose cheque,
of lending
draft,
and
nOne
order
withdrawable
dranon
as, otherwise
detines banking ofgoods
demand or manufacture .

the public repayable on itself in the arries on

trom
company
which engages
for financing businessactivis
its business activities will
any
o t h e r w i s e . T h e r e f o r e ,

from the public

of money
trade and accepts deposits
àn business of banking.
be treated as doing
commercial bank are:

The main
functions of a individuals and ensure safety of funds. Tho
e L
bark
from firms and
) Accepting of deposits
interest on deposits.
provides
i) The lending offunds. indirectly related ta
related services
that are tothe
of a variety of financial and
(ii) The provision
functions.
above two main banking
institutions/financial companies engaged in
Financial Institutions.
Fls refer to non-banking
b)
activities
any of the following its own.
advances and so on any activity except
i) Financing by way of loans,
shares/stocks/bonds/debentures/securities.
(i) Acquisition of
credit.
ii) Hire-purchase and
consumer

(iv) Any class of insurance,

stock broking etc.
(v) Chit funds, and
and their disbursement.
(vi) Collection of money by way of subscription/sale of units
includes
(c) Non-banking Financial Company (NBFC).It means and
(a) Financial institution which is a company. usiness the
(b) A non-banking institution which is a company and which has as its principal D
receiving of deposits or lending.
() Such other non-banking institutions/class of institutions as the RBI may specuy"
 Services

. - b a n k i n g f i n a n c i a l

companies (NBFCs) constitute a 10.3

financia
system. They broden the range of signilicant element of
t thhe
Indian
financial services. the

ACTERISTICS OF FINANCIAL SERVICES

enies
have the tollowing characteristics.
ial
iniangible. F i n a n al services cannot appeal to a buyer's sense of touch,
taste,
Rg
Thus an
n organisation engaged in providing financial services is largelysmell, sight
t t dependent
back from the public as to effectiveness, quality and attractiveness of the services

Direct sale is the only possible channel of

distribution.
There are no middlemen
swen. In order to ensure that services are available at the right time and at the right
v w e e n .

Simultaneous production and distribution of financial services is undertaken by the

TAt organisations.

Heterogenei
eneity. In order to cater a variety of inancial and related needs of different
mers in different areas, financial service organisations ave to offer a wide range of
iats and services. They provide a special one-off management service for industrial
smers and retail service covering insurance, money receipt or storage etc.
Eactuation in demand. The demand for certain categories of financial services eg., life
surance, do fluctuate significantly, according to the level of general economic activity.
s factor puts extra pressures on the roles and functions of marketing in insurance
rganisations.
Frotect customer's interest. The responsibility of any financial services organisation to
e t customer's interest is important not just in banking and insurance, but also in other
etors of the financial services.
~our intensive. Personalised service versus automation, in fact, is an important issue in
rancial services. The financial services sector is highly labour intensive. It leads to increase
e costs of production and consequently affects the price of financial products. Because
righ personnel costs involved and to enhance customer's convenience increased use of
Enology is being made.
Dgraphical dispersion. Financial services must have both appeal and wider application.
Esure this, the service providing organisations must have massive branch network so
at
Denefits of convenience
enjoyed by international, national and local customers.
are

special identity. Customers usually approach a nearby branch of a bank or

nstitution, because it is convenient to them. As the competing products offered by
ervice organisations are similar, the emphasis is more on the 'package' than the
moduct. The pack
ackage consists of branch location, staff, services, reputation, advertising and
aerVices offered from time to time. Thus, major Competitors offering similar services
more emphasis on the omotional aspects rather than on the inherent uniqueness of
particular
ts financial institution's service. Each of establishing
identity and implant this in the mind of organisation
must find a way
public.
 is a r
based.
Financial
service n
i n f o r m a t i o n .
I n t o r m a t i o n

ial componehyoves
of information
(9)
Information
and use
quite
evant in t
proCessing
d i s s e m i n a t i o n ,
Costs of
Creation, services.
financial
production
of services.
the financial
of hih
profitable
production
of
serviCes require
nuge
amounts
igh uality
qualit y labour
The types of
labour.
Financial
with the
market.
types labour anga
(10) Require
quality
and
c o m m u n i c a t i o n

complex analvsis a range fra

deal with
i n t o r m a t i o n

pertorming simple
tasks to
those
undertaKing

The importance
of labour cot
osts
sal.the
negot
the riati
workers
of training
and experience.
production
can be realised from the s role
paid in t
require vears
financial
service
efforts to attract, mot
in make extra e and
inputs have to
human
Financial
service firnms
fo survive, grow
and prosper in fsk..
ure. reta
industry. in order
the human
resources they require

FINANCIAL
SERVICES
IMPORTANCE OF sectors Such as banking, insurance
financial
services
in
Ner the vears, the importance of and need for more
nd the need mo

c o n s u m e r credit,
has grown in
the economy effectie
societies, hire purchase services sector continues to
financial services
financial services
is felt. The
in terms of turnover andofprofits and thus has a great impact on the various sectors of theiques and
marketing management the
are adopting
new marketing techniqe
financial service organisations
For these reasons, the
services.
tools while rendering
while providing the financial services hu e
are kept in mind
The following considerations
rganisations:
the right time, at the right place
at
and at right price by undertakins
1. Services are provided
of financial services.
simultaneously production and distribution
schemes, plans, products and
Various
2. The interest of customer's is always protected.
and needs of the customers.
policies are designed keeping in view the varied interests
3. Service providing organisations only provide services locally but also extend them to
not
national and international customers. They have massive branch
network so that beneits of
convenience are enjoyed by all.
4 Efforts are made by the service organisation to make their image and services public
Information is an essential component in the production of financial services. Mat

emphasis is laid on promotional aspects of the various products/services offered by them.

5. Financial organisations continuously study customer behaviour, their needs and atttuales
carry out market research, develop and design new products/services, open new brancie
to widen their network, and adopt varied advertising techniques to promote and publias
their products/services.
Thus financial service step
organisations take every step to provide service at its best at
ne um ot
the customer. Today's customer is bestowed with
different innovative products at min
ice. Banks and financial institutions meet short, medium and long-term credit needs o tail a

dustrial consumers. Insurance companies provide protection a d v e r s

currences or events to individuals or firms. Mutual funds helpagainst

a variety
vings
in mobilising the
>**
 t oFmanciul

10.5
d them in equity shares, bonds or debentures
invest
Gns an of the fund
funds manage these savings in such a
of joint stock
companies.
stnentmanage way that the risk is minimised
anag ured. Credit rating agencies help the investors in
gers
dyrerurn i s

ompanies
companies save customers from
making investment
issuer
d i tc a r di s s a

allow him
handling cash and protect him from the
d a n g e ro tp i c k
ocketing and to draw
money free of interest and pay his
er telcharges, groceries
hills.
h o t e / ,
etc. through credit cards.

sOFFINANCIAL SERVICES
S OF
FINA

rOvided
orovi
by various financial institutions, commercial banks and merchant
s classified into two categories.
nheb r o a d l yc l a s s i .

based services.
hased/fund
it
Re 'advisory services
e b a s e d / a d

based services include:

T hi
eoortantfund
em p o r t a n t

BuipmentLeasing/Finance

and C o n s u m e r
Credit
Hire-Purchase
l l Discounting

Tenture Capital

HousingFinance
insurance Services

Factoring etc.
efee based/services include

sueManagement
Portfolio Management
Corporate Counselling
Loan Syndication
Merger and Acquisition
Capital Restructuring
Credit Rating
StockBroking and so on

ASETFUND BASED SERVICES institutions are

financial
et/fund base ervices provided by banking and non-banking
below briefly.
ad

PMENT LEASINGLEASE FINANCING financingor

ng has emer and long-term
development and
intermediate
erged as another important
i s o u r c e of
is a recent
erprises during i uer leasing
r e c e n t few decades.
In India,
 10.6 Introduct n to
Finang
equimment leasing was intraduced by First Leasing Company of India Limited
then, a number of medium to large-scale companies have entered the field of la
in 1973 onl Services
arrangement that provides a firm with the use and control over assets without easing. Leasing Sivs
the same. It is a torm of renting assets. ying and .
ncea tirnm has evaluated the economic viability of an asSet as an investment
sclted the proposal, it has to consider alternate methods of financing the investment and accepled
t.
nmaking an investment, the firm need not own the asset. It is basically interested in :
ot the asset. Thus, the firm may consider leasing of the asset rather than
nan
OWever,
acqu ring the us
it. In buying
leasing with buying, the cost of leasing the asset should be compared with the
e t through normal sources of financing, ie, debt and equity. Since
the cost
cost of fi
payment of lease
compar in
nancing the
Siilar to payment of interest and lease is
rentals
on borrowings financing
to t
equivalent dehe cals
tinancial analysts argue that the only appropriate comparison is to compare the
that of cost of borrowing. Hence, lease decisions relating to
he cost of
leas iningandiwing,th
finarncing or
or
primarily involve comparison between the cost of debt-financing and lease financine.
leasing buvkin
buying optior
There is no exclusive law/legislation to govern equipment lease
financing. The d
provisions of a number of allied legislations constitute the legislative framework of
The lease agreements
lease tra evant
provide fora number of obligations on the part of the lessee which do
part of his implied obligations under the legislative framework. The not form
lease agreements provide the legislative framework and the
regulatory framework of lease financing in India.
Leasing industry in ndia is a growing business activity in the country.
2. HIRE-PURCHASE AND CONSUMER CREDIT
Hire-purchase is an alternative to leasing as a source for
Hire
equipment financing.
purchase means a transaction where goods are
) payment will be made in purchased and sold on the terms that
instalments, (i) the possession of the
immediately, (ii) the property (ownership) in the goods is given to the buyer
instalment is paid, (io) the seller
can
goods remains with the vendor till the last
repossess the goods in case of
instalment, and (v) each instalment is treated default in payment of any
as hire
The main characteristics of charges till the last instalment is
paid.
a hire

1. The
purchase agreement are as below:
payment is to be made by the hirer
instalments over a (buyer) to the hiree, usually
specified period of time. the vendo
2. The
possession of the goods is transferred to
the buyer
3. The
property in the
goods remains with the
immediately.
The
ownership passes to the buyer vendor (hiree) till the last
instalmet
is puid
4. The Hiree (hirer) when he pays all
or the vendor can instalments.
received by way of repossess the goods in case of the amou
Ount

instalments as hire default and

ana treat
ueas
5. The
instalments in hire charged for that period.
6.
Usually, the hiree
purchase include interest as
charges interest on flat rate. well as repaymen cipal.
 redit includes all asset based financing
pytsit2err e d i t
In a consumer
plans offered to 107
uu
ablec o n s mer
goods. credit transaction individ
iduals
rdurab nase
purch pricethe time of the
at the to elp them
individua consum
o ft h ec a s h ,
d of time. The delivery of the T buyer
consumer credit has asset and pays the
or a Sp Tndia. The main providersS of consumer emerged as an balance
inanNczalS e r v i c e i n
n
credit are important awet
Ls and finance companies and cover items such foreign/musltin
vnmercial. as
cars, sc nationanal
scooters,
Wasthing machines, appliances, personal computers, cooking VCRS. TV
home
wast is, however, no specific legislation to regulate consumer ranges, f
There credit in India.

g L lD I S C O U N T I N G

bills of exchange is an attractive fund based financial service provided by the

Nuntingof
ac Bill discounting has emerged as a profitable business for finance companies and
npanies. Bill
fication in their activities. After the 1992 Scam, RBI imposed certain restrictions on
i t ' àd i v e r s i f i c

services provided by the banks.

unting
Negotiable Instruments Act, 1881, "The Bill of Exchange (B/E) is an
ar to the Indian
rdin;
an unconditional order, signed by the maker, directing a certain
t writing containing
in
or to the bearer of
or to the order of, a certain person,
certain sum of money only to,
n2 a in goods which means that it is
The B/E is used for financing a transaction
ment". the most important form in which a
instrument. Discounting of bills is
t a trade-related credit. The seller
Present day c o m m e r c e is built upon
nis without any
collateral security. clean bill or a
credit. Such a bill may be either a
of goods o n
bill of exchange on the buyer such as a railway receipt. The
documents of title to goods
ntary bill which is
accompanied by account with the amount
of
demand and credits the customer's
rchases the bills payable on the bill to its acceptor for payment.
In

5 discount. At the maturity

of the bills, bank presents amount of the bill
the bank r e c o v e r s the full
E Dll discounted is dishonoured
for non-payment,

CUSstomer along with expenses in

that connection.
ull-
the existence of a
service depends upon
as a financial
Evelopment of bill discounting a market for commercia
constant efforts to develop im
making
market. The RBI has been in 1952, but, in reality, the bill market grew
wit
hough a bill mark
market scheme w a s launched themselves and
bll bill amongst
permitted banks to rediscount brokers betweer
as bill
7/0.The RBI has now
finance companies
act
companies. The
inancial
u t i o n s and
finance
ks and
business houses.
WENTURE CAPITAL highly risky
project
with

recen
the

in a
old, the
term 'venture financial investment
capital is
very
r e capital' represents m o v e m e n

venture
of capital
While the concept
sationnearning ahigh
venture
Indiar
rate of r e t u r n . to the in the
a filip
6 appears to have
given
entrants

ta.hIn e
t
policy of the government most
of the
recent
country
because o

m
the real sense, venture capital financing is one
l u l
companies in our
Those yenture capita
 Introduction to Financial e
cial Service
to providing apital,
these VC
addition

10.8 i n s t i t u t i o n s .
In
assisted
firms.
tinancial
tihe
by the in guiding
Contribution as rajui interest
the guidelin
tirms) takean
active
of risk.
M o r e o v e r

nes issued by th
apital
high degrec restrictive an
Tealistie an
too
c t t e

are
ivolves a
companies

entun iapital
tinncing
venture
capital capital companies, the
co

vernmen
venture
of to the
tor the setting up addition inancial agencion
s
O v e r n m e n t
In of new to
in the v.av
their
of
gowth.
a
number
Serve the
n.ae mne
instrumental
in setting up venture capital.
has bvn a r e a of
ot ldia
cntrepreneurs
in the
nexds of the
ISnW

These include:

()Tenture Capital
Scheme ot DBI.
ICICI.
Scheme of
(11) enture Capital Ltd. (RCTC)
Corporation
Technology
Risk Capital and Ltd. (IL and FS).
(im Services
ntrastructure Leasing and Financial to provide help in the transferof shares
Ltd. (SHCIL)
(

Stock Holding
Corporation of India
() to undertake tho
and debentures.

Information
Services of India
Ltd. (CRISIL)
assessment of compani
rating f
credit
(1) The Credit Rating debentures/bonds,
and provide
scheme,
fived deposit

5 . HOUSINGFINANCE finance
with the
for house building rested
to provide the country with the co:
the responsibility financial service in setng
Till late 1970's fund based
Government of India.
But it emerged
as a
1988. NHB 1s a n apex/principal housing finane
ance
RBI in
Bank (NHB) by the a number of specialise
of National Housing
subsidiary of the RBI. Till now,
up owned
and is fully have entered in the fieldo
institution in the country and joint sectors
in the public, private
financial institutions/companies LICHousing Finance,
Ind Bank Housing, Cit
Canfin Home,
such as HDFCs, SBIHIF, have designed suitable schemes
housing finance and so on. These companies
ICICI Housing and commercial cooperative
Home, Gujrat Ambuja, The HUDCO, and
builders and promoters.
individuals, corporates, income groups.
for lower and middle
for

banks have designed

schemes specifically

6 . INSURANCE SERVICES n
agrees/undertakes,
Insurance is a contract
where by (i.e. insurance company
the insurer
the insured (policy
of (premium), to make good the loss suffered by
consideration of a sum money on
e
beneficiaries (insured)
risk such as fire or compensate the ot
a specified
holder) against document containing the term
event such as accident or death. The vhich
happening of a specified insured is called policy. The property
black and white, between the insurerand the
contract, in
2ater

insured has in the subject

is insured is the subject-matter of insurance. The interest which the ervices

Depending the subject matter, insurance

known as insurable interest. upon
ofinsurance is
are divided into (i) life (ii) general. nsurane

To cater to the varying needs of the insured, a variety of policies are offered D)y 1e
life etc.
organisations. The principle life insurance policies are endowment, whole life, joint
ife, jolt sive

comprehe
important fire insurance policies, offered by insurance companies are specific policy,
 t oFinancial Service

12arty insurance policy. Marine 10.9

e policy,
Insurance
s s e sa r e
ge, time, mixed, value open and unvalued, and policies
v o v a
which
insure against
anly two floating.
(ntil1 0 there
were only
public
two sector
organisations, namely L.ife Insurance
lnsurance Corporation (GIC)
General Insur.
and its four Corporatiorn of
risk of life and GIC subsidiaries, rendering insurance
nrotection against
a n d

I C

o f fire and marine losses, theft etc. But with

p o v i o

providing protection against the

the
Development Auiuthority (IRDA) in 1999, their monopolysetting up of the Insurance
has been dismantled and
abered the field eg, HDFC Life Insurance, Prudential ICICI Life
h a v e e n t e r e d

nleveysh a
iteInsurance,SBI Life Insurance, Birla Sunlife Insurance, Max
Insurance etc.

, 2FACTORING

fund based financial service, provides resources to finance receivables as well

llection of receivables. It is another method of raising short-term finance through
able credit offered by commercial banks and factors. A commercial bank may provide
discounting the bill ills or invoices of its customers. Thus, a firm gets immediate payment for
a financial institution which offers services
o n . credit. A factor is
on
relating to management
os
made
f debts arising out of credit sales. Factoring is becoming popular all over the world on
mancangof
services offered by the institutions engaged in it. Factors render
services varying
arious
ofvarious
l facilities offered
discounting facilities. commercial banks to a total take over of administration of
by
isounting
including ledger, collection of accounts receivables, credit control
maintenance of sales
ales
saes

of finance and rendering of advisory services to their

etion from bad debts, provision
be on a recourse basis, where the
risk of bad debts is borne by the client, or on
Factoring, may
factor.
where the risk of credit is borne by the
eDUrse basis,
institutions on a recourse basis.
Dresent, factoring
by only a few financial
in India is rendered
t constituted by
Group on Money Market (Vaghul Committee)
E , the Report
of the Working to set up factoring
recommended that banks should be encouraged
has
iserve Bank of India
finance to the corporate entities.
sins to provide speedy The most critical
it suffers from certain limitations.
ispite of many services
offered by factoring, other sources of short-term
cost of factoring as compared to
nts of factoring include (i) the high
weakness about the firm availing
factoring services, and (i)
of financial the borrower
7 ) the preception
a defaulting buyer, upon
of stance taken by factor, against
umpact tough
g into reduced future sales. SBl
operating in the country namely,
organisations
Eent, there are only two factoring Ltd.
CANBank Factors
Commercial Services (SBI FACS) Ltd. and

FEE BASED ADVISORY SERVICES

WERCHANT BANKING
Bankers.
Merchant

rendered by m e r c h a n t

Te be services' includes all those financial

services

ces
services sector. 1o
sector.
H o w e v e r ,

the
first
one
to

sant nkers SOry

play role in the
financial
Grindlays
k
Bank
was

mportant late.
as an advisory n emerged
rather

financial services,
 Introduction to Financial
10.10
in India
with an objective
of undertakino .
Services
in 1969 other foreign bankhag
ernent t
Fol(ICIowiny,
Division
et
up Merchant Banking followed by

tinaneial consultaney.,
It was
of India also st w
public issue and
ndations of the Banking
rXomnend
Comission
State Bank
(1972),
lnvestment Corporation of India
arted mercharu
and
Credit was the
banking service in 1973. The Industrial such service
in 1974.
After mid-seventio.
S,

inclturedemendoN
to initiate
has taken place. These
titst develo
Sowth
finance institution
in the number of merchant
organisations
banking
(NBFCS),
Bbrokers and so
bak
tinaneial lnstitution
financial companies
non-banking
loan syndication
porttolio managemene Finansa
es provided by these organisations
include
mergers/ amalgamations and corporate
ounselling project counselling
debenture trusteeship,
have been discussed in detail n
hav keovers|
dcquisitions ete. Some of these fee
based financial services
services like
credit rating, stock-broking
are separat
discussed in bri
Other fee based financial
hapters.
below.

Il. CREDIT RATING

the relative ability and willingne. of the
of the rating agency on
Credit rating is the opinion as and when they arise. As a f

1SSuer of a debt instrument to

meet the debt service obligations based
investors, Ccorporates (borrowers), banle
is useful to and
financial advisory service, credit rating the underlying credit qualih..
is indicator expressing
investors, it an
financial institutions. For the as
any effect of chan.
informed about the company
The investor is fully
(debt) issue programme.
is evaluated and published regularly
by the
business/economic conditions on the company ng

agency. rate With a good rating. Lesser-knaw

raise funds at a cheaper
The business enterprises can fund ratings are usefil
basis of their rating. The
can also approach
the market orn the
companies decide on lending and investment strateeiss
institutions when they
the banks and other financial clients to select an investment proposal of
efforts in persuading their
Stock brokers have to make less with highly rated instruments has to
investmentin rated instruments. A company
highly
making tacilitates best pricing and timing ofissues
make least efforts in raising funds through public. Rating
In ndia, there are three major credit rating agencies namely:

RISIL (Credit Rating Information

Services of India Ltd.)
of India Ltd),
ICRA (Investment Information and Credit Rating Agency
CARE (Credit Analysis and Research in Equities)

1 . STOCK-BROKING
of
stock exchanges were being supervised by the Ministry Finane
Prior to the setting up of SEBI, less ser
Securities Contracts Regulation Act (SCRA) and were operating more or
under the
The need to retorm stock exchanges was felt, when malpractices crept
regulatory organisations.
investor's interests. SEBI was set up to ensure that stock excnang
trading and in order to protect fessional

role properly. Since then, stock broking has emerged as prores

a
perform their self-regulatory
advisory service. n
sells or dea
Stock broker is a member of a recognised stock exchange who buys, h EBI in
shares/securities. It is mandatory for each stock broker to get him/herself registered w
 FinancialS e r
F i n a m c i a l S e r v i c e s

to
I is empowered to impose conditions while granting the certificate of
ker. * stock exchange, he will have to abide by its rules, regulations and by-
i o n

A S m b e r

e e a n d take adequate steps

"ribed fand
for redressal of investor's
grievances with in o n e
f the conplaint
co and keepP SEBI informed about the number, nature and other
omplaints. SEB)
iptlaints. SEBI has taken rigorous steps to regulate the working of brokers/sub-
compulso registration with SEBI, code of conduct, duty to investors, brokers,
ot
responsibilities, procedure
n s a n dr e s p o n s i b i l i t for inspection, action in default, capital adequacy
ith clients etc.
atis h i p
 discounting,
factoring of de
funds
include
bills
services are c t o
2 of specialised
financial
instrucd
of optimal
m a n a g e m e n t

market
etc.
certificates
of various nents b
The
services

term
fiunds in the money
safe keeping
of
short CRISIl,
parking of like
credit rating by
Itd.
of India
institutions

the corporation
Commercial
stock holding SERvICES
and
others.

One ofthe sienis.

FINANCIAL institutions
OF
1.2.
TYPES
consists of organized and stock
exchanges.
in the na
The
tinancial system
sponsored
institutions
of the
institutions are
publi
s e c t o r s of the econo
Government cent
95 per
societies,
is nearly credit to
various omy
financial system mutual benae
ooperative

the Indian canalizing leasing o r

features of 4.5 lakhs
units of
institutions
loan equipment
t
There a r e investment, the organized sector.
sector finance, etc. In
tinance, housing companies The Life Insurane
The
non-bank ing
or stock
broking small savings.
Stock exchange mobilizes
financial companies. Corporation depoSits
for aiding econom
National small Savings mobilizing
State Bank o
is engaged in up by UTI,
Trust of India
govermment are set
were
and the Unit funds
and CRISIL are involvin
were
Corporation mutual funds
The equity-oriented DHFT, OTCET and
development. institution such as SEBI, SHCI, to provide
protection
The other and arrangement
Indiaand LIC. market, access to capital market,
to improve capital Import Bank
the investors. Bank of India, Export
services to Reconstruction
Industrial Bank of India
institutions like Industries Development
The specialized of India,
Small
Finance Corporation of export, agriculture and rural
Tourism needs
of India. for their financial merchant banks, leasing
Bank catering to institutions such as
National Housing financial
fields. New
other specialized been functioning.
development and companies have
funds, and venture capital
companies, mutual

Chart-1
Services
Broad Outlook of Financial

Banking and other

Banking and other financial services
financial services

(2) (3) (4)

(1) Speciality Re-insurance Insurance
Under writing of
financial risk in insurance brokerage
insurance products productss

1) (2)
Securities related
Fee based conr ercial
financial services
Danking busin ss

Securities lending services

(a) Advisory Services (a)
(b) Mutual fund services
(D) Financal managernent (c) Securities clearance
and transactions services (d) Settlement services
(C) Custody services Securities trading services
(d) Credit card services (e)
() Private placement
e) Letters of credt fo (g) Underwriging services
trade financiers
 Overview
of Financial Services 3
An

Indian financial sector with the emergence of services such as, equipment leasing, hire purchase
non fund based financial services like stock
catmer durables financing, real estate financing and
coetactivities, bils discounting. factoring, merchant banking and allied activities, a pace setter
the intenational inancial market. The regulatory agencies such as Securities and Exchange
Stock ing Corporation of India
Holding credit rating and information services ltd and
Boand
ofIndia,
nt and finance House of India and over the counter exchange of India have been emerged.
discou

The financ1al services have been classified broadly into four categories which are graphically
e s e n t e d

Graph 1.1 Financial Services

1, Fund based financial services 2. Fee based financial services

1Equipmentleasing I. Issue management

Hire Purchase 2. Portfolio management
s.Bill discounting 3. Corporate counseling
4. Loans investments 4. Loan base syndication
5 Venture capital 5. Aranging foreign collaboration
6. Housing Finance 6. Merger and Acquisition
7. Factoring 7. Capital restructuring

3. Commercial 4. Securities related

Banks financial services financial services

a) Financial management and (a) Securities lending services

ransaction services
(b) Mutual fund services
()Advisory services (c) Securities Clearance
c) Custody services
(d) Credit card services (d) Settlement services
(e) Letters ofcredit for trade finance (e) securities trading services
(1) Private placement
(g) Underwriting services.

of the most sophisticated financial services regulatory bodies in the

world.
The UK boasts one
service companies in the U.K.
mancial services agency is the single regulator for ace financial
and
The UK's financial services sector supports the aspirations of fast growth, entrepreneurial
unternational ventures in the knowledge economy working closely with London stock exchange.
trade since the beginning of
London stock exchange has been a world leader in international
ineteenth century. The three key markets, viz., London, New York
and Tokyo are dominated in the

wOrld. Among these, New York and Tokyo have been focusing on domestic markets. London is a
financial and investment
ading center for Islamic financial services; with 23 banks supplying
rOducts based on Islamic principles. Scotland is the second largest financial centre in the U.K. and
the ten centers for banking, life and pensions and investment management
largest European
E Of
Services.
has becotne of the fastest growing
ndian economy is vibrant and ripe with opportunities. It
one

has changed. Liberalization

Omies in the world. Since the early 90's, India's economic landscape in areas of commerce,
reforms
e and investments, integration with global economy and
Cand tax have redefined India's economy and placed it on global stage.
 Chart-2
Financial Services

Fund based financial

Fee based financial
services
services
1. Equipment Leasing 1. Issue management
2. Hire purchase 2. Portfolio management
3. Bill discounting 3. Corporate counseling
4. Loansinvestments 4. Loan base
5. Venture capital counselling
5. Arranging foreign
6. Housing inance 6. Merger Acquisition collaboration
7. Factorin9 7. Capital restructing

1,3 PLAYERS OF FINANCIAL SERvICES

The major players in financial services are listed as follows.
oBanks
Financial institutions
a Insurance institutions

Investment institutions
o Government owned public sector organizations
o Private sector institutions registered under Companies Act, 1956.
a High net worth individual investors
D Investors
D Borrowers

oBankintemediaries
a Securities markets
D Asset management companies
(Mutual funds, Pension funds and insurance companies)
Let us see the important classifications as follows.)
(1) Govenment
The central Government has most important role in the financial services sector because of
its regulatory powers. It has wide powers under the companies Act, 1956, capital issues (control)
Act, 1947, The RBI Act, 1935 and the securities contracts (Regulation) Act, 1956.

(2) Regulatory Agencies

(1) Securities and Exchange Board of India.
(2) Controller of Capital Issues
(3) Reserve Bank of India
3) Financial Institutions
(1) IFCI
(2) DBI
3) ICICI
4Banks (public sector banks, nationalised banks, Private banks and Foreign banks)
 A n O v e r v i e

(5) Mutual funds

(6) Stock exchanges

(7) Merchant bankers

(8) Portfolio managers

9) Stock brokers
tinancial institutions
(10) Non banking
(11) Financial consultants

(12) Specialised institutions

Credit Rating Information Services (CRISIL)
(a) Association (IICRAA)
(b) Intormation and Investment Credit Rating
Discount and Financial House of India
Ltd. (DFHI)
(c)
() Stock Corporation of India Ltd. (SHCIL)
Holding
(e) Over the Counter Exchange of India (OTCEI)
role in mobilising funds through the
The financial services institutions have to play a great
financial services,
exchange markets. In the first stage of the
GDRs and other routes
from the foreign
investment institutions, insurance business,
we concentrate on the setting up and functioning of venture capital
merchant firms. In the second stage, hire purchase, factoring,
banking
leasing and trading, setting up of
in the stock and capital markets. The third stage paperless
funds, and reforms of financial services by
innovation of new financial instruments, and integration
a depositories

permitting foreign financial institutions in India.

(4) Private Financial Services
contributed to the Indian financial
Private financial services companies have significantly
financial companies. Recently, many financial
system. Those companies are termed as non-banking
services including
services companies have established to explore new ventures. They engage in
market operation, foreign exchange
corporate finance, retail finance, merchant banking, capital
portfolio management and money market operations. Some NBFCs have set up asset management
companies tied up with foreign financial institutions.
1.4. FINANCIAL SERVICES AND ECONOMIC ENVIRONMENT
 t
ecretary Gener
1 s exppelL
G e n e r a ,

rose
18
Po
per

billion.
billion, ye
y ea
arr.
.

56.04
previous
previous

the
the
47.6billion i
USS
in
inn
a
b t ilion

billion
bil onthe
B a n k i n gS e r v i c e s

US$ 94
145. 94
cent to RBI in
by 22.7 per released by
rose
according
to data cent
credit 15.8 per
Indian bank
19,
2010
were up by
data [Dec 3].
Novemberr
November Deposits
Inda on statistical
s as
w e e k l

ar
on
s t a t i s t i c a l
supplement.
according
to the
yedr billion year
o n year,

SS
to
146.59 146.59

SERVICES
FINANCIAL

FRAMEWORK
OF
REGULATORY

I N INDIA
services in India.
financial
for various examined
regulators be
multiple services in India can
There are tinancial thhe
f r a m e w o r k of matters by
The regulatory Acts and other legislative
in terms
of respective Bills,
Judicial precedents.
Parliament and

Finance Companies (NBFCs)

and Non-Banking
Regulation of Banking
for the regulation
of Banking
mechanism
There is comprehensive
a
fundamental Acts:
and NBFCs started with two
Reserve Bankk
1934: governs the
Reserve Bank of India Act,
functions sector
1949: governs the financial
Banking Regulation Act,
 FiNANCIAL SER
in the followi
18 as
discussed
such
such
other
acts
acts
are
There
tunctions
speciic
ecurities Act
roposed)
1944/Government
governing
Acts
1Debt Act, debt
market
Public
1956: Regulat
overns

government
Contract
(Regulation) Act, ulates govern1ment
Scurities
securities a r k e t
1906:Governs currency and coins
Coinage Act,
COns
Indian
Foreign
Exchange
Regulation Act, 1973/Foreign
Governs trade

Ex
and foreign exchange ana
Exchange Mana-
Act. 1999:
gement
and Settlement Act, 2007: P
Systems
arket market
Payment for
or
and supervision of payment systems in India
egulation
Operations
4cts governing Banking
banks as
companies
Companies Act, 1956:Governs
Banking Companies (Acquisition and Transfer of Undertal:
Act, 1970/1980: Relates to nationalisation of banks rtakings)
Bankers' Books Evidence Act
Banking Secrecy Act
Negotiable Instruments Act, 1881
Acts
governing Individual Institutions
State Bank of India
The Act, 1954
Industrial Development Bank
Repeal) Act, 2003 (Transfer of
Undertaking and
The Industrial Finance
and
Repeal) Corporation (Transfer of Undertaking
National Act, 1993
National Bank for Agriculture and
Housing Rural
Deposit Insurance Bank Act
and
Developmen'nt Act
Credit Guaranteee orporation Act
RBI AS A Corporation .
FINANCIAL
uerve
serd forBank of India REGULATOR
vemter Financial performs this
1934 as
a Supervi
commitsion (BFSfunction under
T
n
the mii
 Mutual unds diverstlicd
portn
them in a
and fvest
participans.
n s
tor their
c r e d i t which is determi
r e d i t cand
a revolving
line of
ove by the user
he us
It entities
the holder to
allows the
c a r d h o l d e r to pay for purchases made ver a erlod.
nvne A cradit card
Merchant banking credit svndicnti.
managemnent,
services like 1ssue on, capita
Offering of specialized institutions is known as merchant bankine
estnicturing. etc. by financial
Constituents of Financial Service Sector
The financial service sector consists of four major constituents: market narH:.
providers. services and regulatory bodies. ipants
Market participants
Market participants are of different
entities.
categories. They range from individuals to cornora
banks, financial institutions, mutual funds and merchant bankers. ate
 e
An Overvieu'
Q
Financial service providers
linancial institutions, banks, nori-banking financial
Financial service providers are
and factoring companies, and mutual funds. Banks,
institutions. insurance, leasing
either carry out a particular service or
financial institutions, companies and agencies
First Leasing Company of India Ltd., The Twentieth
several services. Leasing companies (The
Century Finance Corporation Ltd.). factorlng agencies
(Can Factoring Agency), credit rating
Services of India-CRISIL), Investment And Credit
agencies (Credit Rating and Information
funds (Credit Capital Venture India
Rating Agency of India Ltd. ICRAI), venture capital
of the institutions rendering
Ltd.) and merchant banking division of several banks are some
specitic financial services.
Regulatory bodies
Reserve Bank of India, Securities and Exchange Board of India, Department of Finance,
and several self-
and Department of Banking and Insurance of the Central Government
financial system are
regulatory bodies regulate financial services. All parts of the in
interconnected with one another and the jurisdictions of the RBI and the SEBI overlap
many areas.
FINANCIAL MARKETS
B r The: nand R11dene defined the financial market as a place where people and organizations