✓ MEANING OF FINANCIAL SERVICES

INTRODUCTION:-

Financial services are 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.
Financial services companies are present in all economically developed geographic locations and
tend to cluster in local, national, regional and international financial centers such as London, New
York City, and Tokyo.

The Indian financial services industry has undergone a metamorphosis since1990. Before its

emergence the commercial banks and other financial institutions dominated the field and they met

the financial needs of the Indian industry. It was only after the economic liberalisation that the

financial service sector gained some prominence. Now this sector has developed into an industry.

In fact, one of the world’s largest industries today is the financial services industry.

Financial service is an essential segment of financial system. Financial services are the

foundation of a modern economy. The financial service sector is indispensable for the prosperity of

a nation.

Meaning of Financial Services

In general, all types of activities which are of financial nature may be regarded as financial

Services. In a broad sense, the term financial services means mobilisation and allocation of savings.

Thus, it includes all activities involved in the transformation of savings into investment.

Financial services refer to services provided by the finance industry. The finance industry

consists of a broad range of organisations that deal with the management of money. These

Organisations include banks, credit card companies, insurance companies, consumer finance

Companies, stock brokers, investment funds and some government sponsored enterprises.

Financial services may be defined as the products and services offered by financial institutions

for the facilitation of various financial transactions and other related activities.

Financial services can also be called financial intermediation. Financial intermediation is a

process by which funds are mobilised from a large number of savers and make them available to all

those who are in need of it and particularly to corporate customers. There are various institutions

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which render financial services. Some of the institutions are banks, investment companies,

accounting firms, financial institutions, merchant banks, leasing companies, venture capital

companies, factoring companies, mutual funds etc. These institutions provide variety of services to

Corporate enterprises. Such services are called financial services. Thus, services rendered by

Financial service organisations to industrial enterprises and to ultimate consumer markets are called

Financial services. These are the services and facilities required for the smooth operation of the

financial markets. In short, services provided by financial intermediaries are called financial

services.

Functions of financial services

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

2. Mobilizing savings (for which the outlets would otherwise be much more limited).

3. Allocating capital funds (notably to finance productive investment).

4. Monitoring managers (so that the funds allocated will be spent as envisaged).

5. Transforming risk (reducing it through aggregation and enabling it to be carried by those more

willing to bear it).

✓ Importance of Financial Services

The successful functioning of any financial system depends upon the range of financial
services offered by financial service organisations. The importance of financial services
may be understood from the following points:
1. Economic growth: The financial service industry mobilises the savings of
the people, and channels them into productive investments by providing
various services to people in general and corporate enterprises in particular.
In short, the economic growth of any country depends upon these savings
and investments.
2. Promotion of savings: The financial service industry mobilises the
savings of the people by providing transformation services. It provides liability,
asset and size transformation service by providing huge loan from small
deposits collected from a large number of people. In this way financial service
industry promotes savings.
3. Capital formation: Financial service industry facilitates capital formation
by rendering various capital market intermediary services. Capital formation is
the very basis for economic growth.
4. Creation of employment opportunities: The financial service industry
creates and provides employment opportunities to millions of people all over
the world.

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 5. Contribution to GNP: Recently the contribution of financial services to
GNP has been increasing year after year in almost countries.
6. Provision of liquidity: The financial service industry promotes liquidity in
the financial system by allocating and reallocating savings and investment
into various avenues of economic activity. It facilitates easy conversion of
financial assets into liquid cash.
7. Risk Minimization: Financial services reduce the effect of risk to
customers through diversification. Insurance policies offered by companies
provide protection to people against various losses.
8. Promoting investment :The presence of financial services creates more
demand for products and the producer, in order to meet the demand from the
consumer goes for more investment. At this stage, the financial services
comes to the rescue of the investor such as merchant banker through the
new issue market, enabling the producer to raise capital.
9. Maximizing the Returns: The presence of financial services enables
businessmen to maximize their returns. This is possible due to the availability
of credit at a reasonable rate. Producers can avail various types of credit
facilities for acquiring assets. In certain cases, they can even go for leasing of
certain assets of very high value.
10. Capital Market :One of the barometers of any economy is the presence
of a vibrant capital market. If there is hectic activity in the capital market, then
it is an indication of the presence of a positive economic condition. The
financial services ensure that all the companies are able to acquire adequate
funds to boost production and to reap more profits eventually.
11. Capital Market
One of the barometers of any economy is the presence of a vibrant capital
market. If there is hectic activity in the capital market, then it is an indication of
the presence of a positive economic condition. The financial services ensure
that all the companies are able to acquire adequate funds to boost production
and to reap more profits eventually.

✓ TYPES OF FINANCIAL SERVICES:-

Main types of financial services for you to consider:

1. Banking

Banking includes handing deposits into checking and savings accounts, as well as lending
money to customers. About 10% of the money deposited into banks must stay on hand, as
dictated by the Federal Deposit Insurance Corporation’s (FDIC) reserve requirement. The
other 90% is available for loans. Some of the interest the bank earns from these loans is
given to the customers who have deposited money into the bank.

2. Advisory

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This branch of financial services helps both people and organizations with a variety of tasks.
Financial advisors can help with due diligence on investments, provide valuation services for
businesses, aid in real estate endeavors, and more. In each case, advisors help to guide
people in the right direction when making financial decisions.

3. Wealth Management

This type of financial service helps people to save money intelligently, and receive a return
on their investment when possible. If you have a 401K program through your employer, that
is one type of wealth management.

4. Mutual Funds

Mutual funds institutions offer a type of investment that multiple parties share in. These
investments are managed by a professional, not the investors themselves. The buy-in for a
mutual fund is not quite as large as some traditional investments in bonds, the stock market,
or the like, so they are a popular option for people who are a little hesitant with their
finances. The investments are also diversified, which helps to mitigate risk.

5. Insurance

This is one of the more common types areas in financial services. Most people have some
understanding of insurance; it is a system that you pay into monthly or annually which acts
as a safety net and covers costs of some large expenditures which are often unforeseen.
There are many kinds of insurance: health, auto, home, renters, and life insurance, just to
name a few.

6. Stock Market: The stock market segment includes investment solutions for customers in
Indian stock markets(National Stock Exchange and Bombay Stock Exchange), across
various equity-linked products. The returns for customers are based on capital appreciation
– growth in the value of the equity solution and/or dividends – and payouts made by
companies to its investors.

7. Treasury/Debt Instruments

Services offered in this segment include investments into government and private
organization bonds (debt). The issuer of the bonds (borrower) offers fixed payments
(interest) and principal repayment to the investor at the end of the investment period. The
types of instruments in this segment include listed bonds, non-convertible debentures,
capital-gain bonds, GoI savings bonds, tax-free bonds, etc.

8. Tax/Audit Consulting

This segment includes a large portfolio of financial services within the tax and auditing
domain.This services domain can be segmented based on individual and business clients.
They include:

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 Tax – Individual (determining tax liability, filing tax-returns, tax-savings advisory, etc.)

Tax – Business (determining tax liability, transfer pricing analysis and structuring, GST
registrations, tax compliance advisory, etc.)

In the auditing segment, service providers offer solutions including statutory audits, internal
audits, service tax audits, tax audits, process/transaction audits, risk audits, stock audits,
etc.These services are essential to ensure the smooth operation of business entities from a
qualitative and quantitative perspective, as well as to mitigate risk. You can read more about
taxation in India.

9. Capital Restructuring :These services are offered primarily to organizations and involve
the restructuring of capital structure (debt and equity) to bolster profitability or respond to
crises such as bankruptcy,volatile markets, liquidity crunch or hostile takeovers. The types of
financial solutions in this segment typically include structured transactions, lender
negotiations, accelerated M&A and Capital raising.

10. Portfolio Management

This segment includes a highly specialized and customized range of solutions that enables
clients to reach their financial goals through portfolio managers who analyze and optimize
investments for clients across a wide range of assets (debt, equity, insurance, real estate,
etc.).These services are broadly targeted at HNIs and are discretionary (investment only at
the discretion of fund manager with no client intervention) and non-discretionary (decisions
made with client intervention).

✓ Players in financial services sector

1. Financial service sector comes under the tertiary sector in

which banks play a major role. For the growth of financial services
industry, banks are led by the central bank of the country followed
by commercial banks, co-operative banks, development banks,
foreign banks, etc.
2. Hire purchase financier is also a player in the financial service
sector as he enables the consumer to buy the product on credit basis.
3. Leasing companies through financial and operating lease ensure
the acquiring of assets by producers on a long-term basis at a
reasonable charge.
4. Factoring enables the seller to obtain 80% value of sales from the
financial companies undertaking factoring services.

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5. Underwriters and merchant bankers are additional players who
promote not only companies but also ensure dynamic activity in
the capital market.
6. Book-builders help companies in allotting shares to different
categories of investors.
7. Mutual funds ensure investment by the public and also ensure tax
relief to the investor.
8. Credit cards, another important player in the financial services,
ensure the circulation of plastic money and enable purchase on credit
by the consumer.

9. Credit rating companies play an important role by giving

different credit ratings to companies to mobilize public deposits.
10. Housing finance companies and insurance companies also
promote investment in the economy as they also form a part of the
players in the financial services.
11. Asset liability management company enables mutual funds to
undertake proper investment in different types of companies.
12. Finance companies in general and also as a part of non-banking
finance companies provide additional funds to the above players so
that there is more activity in the economy.
In addition to the above players, the government acts as the umpire
and the various enactments as rules for playing a fair game in the field
of financial services.

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