Chapter – 4

SERVICE SECTOR AND

BUSINESS

Nature of Services – There is five basic features of service called five “I”s, they are as follows:

1. Intangibility – Services are intangible. We cannot touch or taste or feel them. E.g. one
cannot taste a doctor’s treatment, only can experience it.
2. Inconsistency – Services are provided depending upon the demands and expectations
of different customers as and when it is needed. Service providers should adjust their
offer to closely meet the requirements of the consumers. E.g. Service given by the
mobile service providers.
3. Inseparability – Services are produced and consumed at a time. But in case of goods
it is not so.
4. Inventory – (No Inventory) since there are not tangible components in services, they
cannot be stored for future use.
5. Involvement – It implies the participation of the customer in the service delivery
process.
Differences between Services and Goods

Servic Goods
es
1. An activity or process A physical object
2. Intangible Tangible
3. Inconsistency – different Consistency – All customers get
customers different standardized products.
demands
4. Inseparability – production Separable – production and consumption are
and separated in different times.
consumption at a time.
5. No inventory Inventory – can be kept in stock

Types of Services

1. Business Services – Business includes trade and aids to trade. Banking, Insurance,
Transportation, Warehousing etc. are aids to trade or service sectors of business. They
provide services to business enterprises for the conduct of their activities.
2. Social Services – Services rendered voluntarily to achieve certain social goals are
called social services. They are meant for improving the standard of living of weaker
section of society or providing education, healthcare etc.
3. Personal Services – these types of services differ depending upon the tastes and
preferences of customers. E.g. tourism, recreation, resorts etc.

Business Services

I. BANKING

According to the Banking Regulations Act 1949, banking means “accepting for the purpose
of lending or investment of deposits of money from the public, repayable on demand or
otherwise and may be withdrawn by cheque, draft or otherwise”.
Types of Banks
1. Commercial Banks 3. Specialized Banks
2. Co-operative Banks 4. Central Bank
1. Commercial Banks – These are the institutions dealing in money and credit. They are
governed by Indian Banking Regulation Act 1949.

Types of Commercial Banks:- Commercial banks are classified on the basis of their
ownership.

a. Public Sector Banks: They are the banks which are owned and managed by the
government with a view to channelize bank credit in line with national priorities. Government of
India nationalized fourteen commercial banks in 1969 and another six commercial banks in
1980.

b. Private Sector Banks: They are owned and managed by private parties. Even though they
are governed by the RBI, they are free to evolve their own policy decisions regarding the
banking operations. About to be 34 private sector banks are their in India like IDBI, ICICI,
Federal Bank, Catholic Syriyan Bank, Dhanalkshmi Bank etc. and ICICI Bank is the largest
private sector bank in India.

2. Cooperative Banks – Banks organized based on cooperative principles. They are

governed by the provision of State Cooperative Societies Act. It is an important source for
rural credit.
3. Specialized Banks – Organized to render specific services to the public. Eg., Foreign
Exchange Banks, Industrial Banks, Export-Import (EXIM) Banks etc.
4. Central bank – This is also known as bankers’ bank, which controls and regulates the
operations of all commercial banks in the country. It acts as banker to the government and
controls the currency and credit policy of the country. The Reserve Bank of India is the
central bank of our country established in 1935.

Functions of Commercial Banks:

PRIMARY FUNCTIONS –

a. Accepting Deposits: It accepts deposits from the public in the form Fixed Deposits,
Savings Bank Deposits, Current Deposits, Recurring Deposits etc.

b. Lending of Funds: Lending of money is the main business of commercial banks and the
interest charged on such advances is the main source of income. It may be in the form of
cash credit, overdraft, discounting of bills, term loans etc.

SECONDARY FUNCTIONS – It include agency services and general utility services. Agency
services are offered to the customers and general utility services to the public.

a. Cheque facility - Collection of cheques is an important service provided by the bank to its
customers. It may be crossed cheques (encashed through account only) and bearer
cheques (encashable at the bank counters).
b. Remittance of funds – Transfer of funds from one account to another is made possible
by issuing demand drafs (DD).
c. Allied services (Personal Services) – It include Payment of insurance premium,
telephone charges etc. and the collection of dividend, interest etc.
E – Banking – Electronic banking or internet banking means that, any user can get connected
to the bank’s website to perform banking operations and services with help of a computer or
mobile phone.

E-Banking Services
a. Automated Teller Machine (ATM)
b. Electronic Funds Transfer (EFT)
c. Point of Sale (Pos)
d. Electronic Data Interchange (EDI) – Business documents like invoices, shipping bills
etc. can be sent to the parties in electronic format.
e. Credit Cards

Benefits of E-Banking

a. Any time service – Providing round the clock service.

b. Any where banking is possible (either at home, or office)
c. Creates financial discipline.
d. Less risk and greater security (risk of handling cash may be eliminated)
e. Work load on branches reduced.

II. INSURANCE

Insurance can be defined as a contract in writing whereby one party, called the insurer agrees
in consideration of either a single or a periodical payment called the premium to indemnify
another party called the insured against loss or damage resulting on the happening of a
specified event or events.

The document containing the terms of contract of insurance is known as the Policy. Insurance
is a method of averaging risks. Everyone contributes a small amount in order to pay out the
affected who loses heavily.

Functions of Insurance

1. Providing certainty – Insurance provides certainty of payment when loss occurs.

2. Protection – Insurance creates a sense of security to the insured.
3. Risk sharing – The risk of loss can be shared among all the policy holders.
4. Assist in capital formation – The fund collected by way of premium can be invested in
various income generating schemes. This results in capital formation.

Principles of Insurance

1. Utmost Good Faith – While entering into a contract of insurance, all the material facts
are to be disclosed, otherwise it will become void.

2. Insurable Interest – The insured must have an interest on the subject matter of
insurance, otherwise the contract of insurance become void. E.g. a person who has
advanced money on the security of a house, has an insurable interest on that house.

3. Indemnity – All insurance except life insurance and personal accident insurance are
based on the principle of indemnity. Here the insured is entitled to get only the actual
amount of loss suffered by him and it will not be a source of profit.
 4. Causa Proxima (Proximate Cause) – It means the nearest cause. It says that an
insured can recover the loss only when it is caused by any of the risk insured against.

5. Subrogation – This principle states that, after the payment of loss to the insured on the
property, the whole right of such property is entitled with the insurer. This right is
exercised by the insurer to earn any compensation for the damages on the property
either from the party who were responsible for such damages or by the sale of such
property to some others. This is because the insured should not make profit by selling
the damaged property.

6. Contribution – This principle applies only when the same subject matter is insured with
different insurers, here the actual amount of loss is divided among various insurers. In
this case the contribution of each insurer can be calculated by the following equation:

Liability of one insurer = Sum insured with that insurer / Total sum insured X Loss

e.g. A house is insured against fire for Rs.50000 with A Co. and for Rs.25000 with B
company. There is an actual loss of Rs.15000. Here the insured can recover the loss
from both the companies as follows:

Liability of A Co. = 50000 / 75000 X 15000 = 10000

Liability of B Co. = 25000 / 75000 X 15000 = 5000
Total 25000
=====
7. Mitigation of Loss – It is the duty of the insured to preventive measures to
take
minimize the loss of the property. If any expenses are incurred by him for such
activities, he is entitled to get that much of amount along with the compensation from the
insurance company.
(Acronym: CIMICUS)

Types of Insurance

1. Life Insurance – In this case a person can take a life policy on his own life or on the life
of another person eg. Husband on the life of his wife.
The person who insures his life is called the assured. Here a specified amount of
money is payable on the death of insured or on the expiry of the specified period.
LIC enjoyed monopoly of life insurance business till the end of 2000. Now we have a lot
of private insurance companies.
 Elements of Life Insurance

a. Valid contract – Life insurance contract must fulfill all the essential conditions of a
valid contract.
b. Utmost good faith – The insurer and the insured must disclose all material facts to
each other.
c. Insurable interest – The insured must have insurable interest in the life of assured
at the time of taking policy, it is not needed at the time of maturity.
d. Not a contract of Indemnity – The life of a human being cannot be compensated in
terms of money. That is why the amount payable to the insured on the happening of
the event is fixed in advance.

Types of Life Insurance Policies

a. Whole life Policy - This policy taken for one’s whole life and the payment will be made
to the legal heirs. If premium is payable for a fixed period, say 20 years, the policy will
continue till the death of the assured.
b. Endowment Policy – This policy taken for a specified period e.g. 20 yrs. 15yrs. Etc.
Insurance company undertakes to pay a fixed sum when the assured attains a particular
age or on his death whichever is earlier.
c. Joint Life Policy – Policy taken out jointly by two or more persons. Premium can be
paid jointly or by any of them in installment or lump sum. This policy matures either on
the death of any of the assured or at the expiry of the period.
d. Annuity Policy – In this policy, the assured gets a regular payment after he attains a
particular age (pension plan). The premium is paid either in installment for a definite
period or as a single premium.
e. Children’s Endowment Policy – This policy is taken by a person to provide funds for
the education or marriage of his / her children. If the parent dies before the maturity,
the policy will continue to exist even without the payment of further premium.

2. Fire Insurance – Fire insurance policy is a contract in which the insurer agrees to pay
the loss or damage caused by fire to the insured and this contract exists only for one
year. The claim for compensation should satisfy the following:
a. There must be an actual loss, and
b. The fire is accidental and non-intentional.

Elements of Fire Insurance

a. Insurable interest – The insured must have insurable interest on the subject matter of
insurance. It must be present both at the time taking policy and at the time of loss. Eg.
A house property mortgaged to a bank.
b. Utmost good faith - The insurer and the insured must disclose all material facts to each
other.
c. Indemnity – Indemnity is the protection against loss. In the event of loss the insured
can recover only the actual loss and not the policy amount.
d. Proximate cause – The insurer is liable to compensate only when the loss is due to fire.

3. Marine Insurance – It is a contract whereby the insurer agrees to indemnify the owner
of a ship or cargo against risks which are incidental to marine adventure in consideration
of premium. It covers a variety of risks like sinking or burning of the ship, spoilage of the
cargo, freight loss etc. The subject matter of the insurance may be the ship, the cargo
and the freight.
 Types of Marine Insurance

a. Ship or Hull Insurance – The subject matter of insurance in this case is the hull or
ship.
b. Cargo Insurance – Here the cargo (goods in the ship) is insured.
c. Freight Insurance – It covers the risk of loss of freight by shipping companies in the
event of loss or destruction of goods.

Elements of Marine Insurance

a. Contract of indemnity – The insured can recover the actual loss if occurred.
b. Utmost good faith - The insurer and the insured must disclose all material facts to each
other.
c. Insurable interest – Insurable interest need not be present at the time of taking policy,
but must exist at the time of loss.
d. Proximate cause – The insurer should compensate the insured by considering the
nearest cause for damage, which must be covered by the policy.

Differences between Life Insurance, Fire Insurance and Marine Insurance

N Bas Life Insurance Fire Insurance Marine Insurance
o. is
Maturity or death is
1 Risk Risk is uncertain Risk is uncertain
certain
2 Period Long term Short term (1 year) Short term (1
contract year)
Must be present at
the time of taking Must be present on Insurable
Insurab
3 the policy but not taking policy and at interest is
le
necessary at the the time of loss. needed only in
Interest
time the event of
of death. loss.
Premium paid is
returned with or Will not
4 Premium Will not be returned
without bonus to be
the returned
insured
Monthly,
Payment At the time of At the time
5 quarterly, half-
of taking policy of taking
yearly or yearly
Premium policy
instalments
Loss can be
Not applicable, as Loss can be
measured and
6 Indemnity loss on the death measured and the
the insured is
cannot be insured is
 indemnified.
measurable. indemnified.
Investment and Protection against loss Protection against
7 Objective
protection only loss only
 Life insurance has
8 Surrender No surrender value No surrender
value surrender value value
Double Can enjoy the benefit
9 No chance No chance
insurance of double insurance
One can insure any Only up to the value of Only up to the
1 Policy amount
0 amount property value of property

4. Other Insurance / Miscellaneous Insurance:

i. Health Insurance – for reimbursement of expenses due to hospitalization because

of illness.
ii. Motor Vehicle Insurance – for protection against loss to vehicle, passenger or third
parties due to motor accident.
iii. Burglary Insurance – provide protection against loss by theft or house breaking. It
covers the risk of loss to stock, cash in safe and properties in the business premises.
iv. Cattle Insurance – To cover the loss due to death of animals like bulls, buffaloes,
cows etc.
v. Crop Insurance – To support the farmers due to crop failures due to draught or
flood.
vi. Sports Insurance – To give protection for amateur sportsmen by covering their
sports equipments, legal liability and personal accident.
vii. Third Party Insurance – This policy covers the risk of liability that may arise
because of damage to the property of a third party and the risk of personal injury to
such persons.
viii. Employer’s Liability Insurance – It is intended to protect an employer against any
liability due to death or injury to his employees during the course of employment.
ix. Fidelity Insurance – to cover the risk of loss due to fraud or malpractices by the
employees.
x. Personal Accident Insurance – to compensate the loss due to accident (death or
injury).

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