Introduction to Financial

Services
Dr. Priyanka Zala
Components of Indian Financial System
Financial Services
• Financial Services constitute an important component of the financial
system.

• Financial services, through the network elements serve the needs of

individuals, institutions and corporate.

1. Financial Institutions
2. Financial Markets
3. Financial Instruments
Features of Financial Services
Intangible

Short Life

Indivisibility

Importance of Information

Dynamic
Challenges faced by Financial Services Industry

1. Lack of awareness among the investors

2. Lack of qualified personnel for financial service
industry
3. Not focusing on specialized services
4. Lack of research skills and non-availability of data
• https://www.moneylife.in/article/nse-trading-
halted-due-to-technical-issue/63039.html
Types of financial services

Fund Non-
Based Fund
Services Based
Services
Fund Based Services
Fund based services involves funds of financial
institutions
1. Fund- Based Services
1. Lease Financing
2. Hire-purchase
3. Factoring
4. Forfaiting
5. Venture Capital
6. Consumer Credit
7. Insurance Service
8. Housing Finance
9. Mutual Funds
10. Participating in Money Market
11. Underwriting
12. Bills Discounting
Non-Fund Based Services
 In such types of financial services, funds of financial
institutions are not involved

 Some fees/commission is paid on receiving such services

2. Non-Fund Based Services
1.Credit rating
2. Securitization
3. Loan Syndication
4. Merger and Acquisition
5. Merchant Banking and Issue Management
6. Portfolio Management
Fund Based Financial Services
1. Lease Financing:

This is a contract between the lessor and the lessee, where lessor
gives the lessee the right to use the asset for a specific period and
on the payment of some amount, i.e. consideration called rentals
(lease rentals).
Essential elements of a leasing contract

1. Parties to Lease Contract

2. Ownership Disconnected with User
3. Underlying Asset
4. Lease Rentals
5. Term of the Lease Contract
Examples:
Plant and machinery
Land and building
Costly equipment
2. Hire Purchase
It allows the customers to deposit a portion of total
payment on the spot and rest of the money is allowed to
be paid on monthly basis
Conditions in Hire Purchase

1. Goods are immediately passed to the buyer

2. Payments for goods are made in instalments
3. Ownership of the asset rests with the merchant till the last
instalment is paid to them
4. If buyer fails to pay any of the instalments, then merchant has
the right to repossess the goods sold
3. Factoring

In factoring financial institutions buy receivables from the seller

of services/goods and manage seller’s receivable.

Factoring means an arrangement between a factor and his client

which includes the following services:
• Finance
• Maintenance of accounts
• Collection of debts
• Protection against credit
4. Forfaiting

 It is a form of financing of receivables relating to

international trade
 The term forfaiting as a trade finance by which
exporter/seller gets finance for exporting goods to the
importer/buyer who will pay for the import after a
long period on some future date
Forfaiting

Parties involved in a forfaiting agreement and mechanism of

forfaiting:
1. Seller/exporter
2. Buyer/Importer
3. Seller’s bank
4. Buyer’s bank
5. Forfeiter
Forfaiting

Exporter and importer make a deal of business and seller approaches forfeiter

Forfeiter gathers information about importer, credit terms and other important
documentation

After determining the credit risk, forfeiter determines the discount rate

Exporter collects information about discount rate, commission rate and send
sale price of the goods to importer

Importers take guarantee of the import from their banks and based on the
guarantee, export of goods take place place

On due date, the forfeiter has the right to collect payment from the importer on
behalf of the seller
5. Venture Capital

Venture capital is a financial intermediary which provides funds

to new entrepreneurs having some innovative and new
technology based business ideas.
Generally, these entrepreneurs are of small to medium level
enterprises.
 These companies are private companies and investment made
in these companies is generally in the form of equity

 Venture capitalist continuously monitor the business model of

these projects and suggest various measures to improve
profitability and return on investment from the project
6. Consumer Credit

 Consumer credit is extended by banks, retailers, and others to

enable consumers to purchase goods immediately and pay off
the cost over time with interest.
 It is broadly divided into two classifications
(i) Installment Credit
(ii) Revolving Credit
(i) Installment Credit: Installment credit is used for a specific
purpose and is issued at a defined amount for a set period of time.

 Payments are usually made monthly in equal installments.

 Installment credit is used for big-ticket purchases such as
major appliances, cars, and furniture.
 Installment credit usually offers lower interest rates than
revolving credit as an incentive to the consumer.
 The item purchased serves as collateral in case the consumer
defaults.
(ii) Revolving Credit
 Revolving credit, which includes credit cards, may be used for
any purchase.
 The credit is "revolving" in the sense that the line of credit
remains open and can be used up to the maximum limit
repeatedly, as long as the borrower keeps paying a minimum
monthly payment on time.
7. Insurance Services

 Both banks and insurance companies are playing significant

roles in providing various financial services to the customers
 Broadly the insurance policies can be divided into life
insurance and non-life insurance policy
Types of Life Insurance

1. Term life insurance

2. Endowment Insurance
3. Permanent Life Insurance
4. Unit Linked Plans
8. Housing Finance

 It refers to finance that is provided to individuals or group of

individuals to purchase/build house or houses.
Purpose

 Purchase of flat/house or purchase of plot of land

 For renovation/repairs of an existing house/flat
 For extending an existing house
 Short term bridge finance while purchasing another house/flat
Interest rate and security for housing loan

 Fixed- for entire tenure of the loan

 Floating – which is changing through out the duration of loan
 The security in respect of housing finance is the property
purchase with a mortgage is taken on the same
 For additional security guarantee may be taken
9. Mutual Funds
Mutual fund is a fund established in the form of a trust to raise
money through the sale of units to the public or a section of the
public under one or more schemes for investing in securities,
including money market instruments
The following are the basic features of mutual funds

1. It is an investment company which pools together the funds

of investors with common interest
2. Each investor is called a unit holder
3. It is formed under a trust
4. The funds collected by a mutual fund company are invested
in a diversified portfolio
5. This portfolio is managed by professionals who are generally
called fund manager
6. The fund managers charge a given fee for providing their
services
7. These are duly regulated by some regulatory body
10. Underwriting

Underwriting is an agreement entered into before the shares are

bought by the public that in the event of the public not taking up
the whole of them the underwriter will take an allotment of such
part of the shares as the public has not applied for.
 The primary role of the underwriter is to purchase securities
from the issuer and resell them to investors
 Underwriters act as intermediaries between issuers and
investors, providing for an efficient of capital
 The underwriters take the risk that it will be able to resell the
securities at a profit
 By undertaking to take up the whole issue or the remaining
shares not subscribed by the public, it helps a company to
undertake project investments with the assurance of adequate
capital funds
11. Bills Discounting

 A bill of exchange is a negotiable instrument generated with a

trade transaction of goods and used for financing by a bank or
a financial institution
 It is written by the creditor for his debtor
Features of bill of exchange in India

 A bill of exchange is a written document

 It is an order to make payment not a promise
 The order to make payment is unconditional
 The bill must be signed by the person who is making it
 The amount to be paid must be certain
 The date of payment must also be certain
 The bill of exchange must be payable to a certain person
 The amount of bill of exchange can either be payable on
demand or on expiry of certain period
 It must be stamped as legal document
Non-Fund Based Services
Non-Fund Based Services

1. Credit Rating
 The credit rating is a financial service which is
provided by qualified and approved organizations
 The organizations are generally called Credit Rating
Agencies
 These agencies analyse a debtor’s ability to repay the
debt and also rate their credit risk.
 Various financial instruments are rated by these rating
agencies under a set model to determine the risk
exposure of rated instruments
 A credit rating agency does assessment of the financial
strength of companies and other government entities
 Default risk is of utmost importance to the investors while
taking an investment decision, no matter whether they are
investing in a debt instrument which is generally called a
relatively safer financial instrument or equity which is more
risky
 Should be used as one parameter to take investment
decision in addition to other parameters
 A credit rating agency charges fees for providing the
rating services
 There are a total of six credit agencies in India viz,
CRISIL, CARE, ICRA, SMREA, Brickwork Rating,
and India Rating and Research Pvt. Ltd.
• The entities that are rated by credit rating agencies
comprise companies, state governments, non-profit
organisations, countries, securities, special purpose
entities, and local governmental bodies.
• Credit rating agencies take into consideration several factors
like the financial statements, level and type of debt, lending
and borrowing history, ability to repay the debt, and the past
debts of the entity before rating their credit.
• Once a credit rating agency rates the entities, it provides
additional inputs to the investor following which the investor
analyses and takes a sound investment decision.
• Poor credit rating indicates that the entity is at a high risk of
defaulting.
• The credit ratings that are given to the entities serve as a
benchmark for financial market regulations.
• Credit ratings are published by agencies like Moody’s
Investors Service and Standard and Poor’s (S&P) based on
detailed analysis.
Credit rating agencies in India

1. Credit Rating Information Services of India

Limited (CRISIL)
The company’s portfolio includes, mutual funds
ranking, Unit Linked Insurance Plans (ULIP) ranking
2. ICRA Limited

ICRA’s product portfolio includes rating for - corporate

debt, financial rating, structured finance, infrastructure,
insurance, mutual funds, project and public finance,
SME, market linked debentures and so on.
3. Credit Analysis and Research limited (CARE)
CARE offers credit rating services to areas such as
corporate governance, debt ratings, financial sector,
bank loan ratings, issuer ratings, recovery ratings, and
infrastructure ratings
4. Brickwork Ratings (BWR)
It offers ratings for bank loans, SMEs, corporate
governance rating, municipal corporation, capital
market instrument, and financial institutions.
5. India Rating and Research Pvt. Ltd.
It offers credit ratings for insurance companies, banks,
corporate issuers, project finance, financial institutions,
finance and leasing companies, managed funds, and
urban local bodies.
6. Small and Medium Enterprises Rating Agency of
India (SMERA)
SMERA is a joint initiative of SIDBI, Dun & Bradstreet
India and leading banks in India.
2. Loan syndication

 Loan syndication is the process of involving a group of lenders

in funding various portions of a loan for a single borrower.
 Loan syndication most often occurs when a borrower requires
an amount too large for a single lender to provide or when the
loan is outside the scope of a lender's risk-exposure levels.
 Thus, multiple lenders form a syndicate to provide the
borrower with the requested capital
3. Merger and Acquisition

Companies need both advisory services as well as

financial aid to execute corporate restructuring
strategies
These financial service providers following assistance
 Finding a right partner
 Meeting all legal and procedural issues
 Making valuation of concerned companies
 Setting a platform for negotiation
 Arranging funds
 Final settlement of exchange ratio
4. Merchant Banking and Issue Management

The merchant banker assist in raising funds from capital markets

and follow the entire regulations required to complete the
documentation prescribed by various regulatory authorities

1. Pre-issue activities
2. Post- issue activities
3. Issue Marketing
1. Pre-issue activities:
 They prepare copies of prospectus and send it to SEBI and
then file them to registrar of companies
 They conduct meetings with company representatives and
advertising agencies to decide upon the date of opening issue,
closing issue, launching publicity campaign etc.
 They help the companies in fixing up the prices for their issues
 Selection of broker and underwriters
2. Post-Issue activities
• It includes collection of application forms, screening of
applications, deciding allotment procedure, mailing of
allotment letters, share certificates and refund orders
• Compliance of listing requirements of stock exchange etc.
3. Issue Marketing

Besides being a sponsor of issues, merchant banks now provide

the following services to ensure success in marketing of
securities:
• Advertising and arranging publicity agency for post and pre-
issue
5. Portfolio Management

Merchant bankers can be of assistance to corporate

clients in efficient management of the securities and
other components of their investment portfolio which is
an essential part of investment decision of the company
It takes into account following factors:
1. Objectives of the investments
2. Tax bracket applicable to the investor
3. Need for maximizing return
4. Capital appreciation
6. Securitization

Securitization is the process of taking illiquid assets and then

transforming them, through the process of financial
reengineering, into a new security which can be sold in the
financial markets
Advisory/Consultancy Services provided by merchant bankers

• Corporate Counseling
• Capital Restructuring
• Credit syndication and Project Finance
• Foreign Currency Finance
• Issue Management and Underwriting
• Lease Financing
• Mergers, Amalgamations and Takeovers
• Pre-investment Studies
• Project Appraisal
• Project Counseling
• Working Capital Finance
• Venture Capital