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FINANCIAL

SERVICES
MEANING, TYPES AND
IMPORTANCE

INTRODUCTION
Financial services refers to

the services provided by


finance industry.
Since 1990s, there has been
an upsurge in financial
instruments.
Finance industry includes all
broad range of organisations
that deals with management
of money:
Banks
Credit card Companies
Insurance Companies
Stock Brokerages
Investment funds
Some government
sponsered enterprises

MEANING
In general , all types of

activities, which are of a


financial nature could be
brought under the term
Financial Services. The term
Financial Services in broad
sense means mobilizing and
allocating savings. Thus it
includes all activities involved
in the transformation of
savings into investments.
Financial Services can also
be called Financial
Intermediation. Financial
Intermediation is a process
by which funds are mobilising
from large number of savers
and make them available to
all those who are in need of it
.

Thus , Financial services

sector is a key area and it is


very vital for industrial
development. A well
developed financial service
industry is absolutely
necessary to mobilize the
savings to various invest able
channels and thereby to
promote industrial
development in a country.

CLASSIFICATION
OF
FINANCIAL
Financial
intermediaries in
India can be traditionally
SERVICES
classified into two:
Capital market
INDUSTRY
intermediaries
Money market intermediaries
Capital market

intermediaries consist of term


lending institutions and
investment institutionswhich
mainly provide long term
funds.
On the other hand, money
market consist of commercial
banks, cooperative banks and
other agencies which supply
only short term funds.
Hence, the term financial
services industry includes all
kinds of organizations which
intermediate and facilitate
transactions of both
individuals and corp[orate
customers.

TYPES OF
FINANCIAL
SERVICES
Financial services cover the wide range of activities. They can be broadly classified into two, namely:
Traditional activities
Modern Activities
Traditionally, the financial intermedieries have been rendering a wide range of services encompassing
both capital and money market activities. They can be grouped under two heads, viz:
1.
Fund based activities
2.
Non-fund based activies

Fund based
financial services
Foreign
Secondary
Money
Equipment
Bill
Discounting
Market
Exchange
Market
Leasing
Services
activities

1.UNDERWRITING
The process by which investment bankers raise investment capital

from investors on behalf of corporations and governments that are


issuing securities (both equity and debt).
It ensures the success of new issue of capital and if shares and
debenture are not subscribed by the public wholly, the underwriter will
have to take them up and pay for them.
In short, the firm which undertakes the guarantee are called
underwriters.
Example: Insurance company, Banks, stock exchange.

2.SECONDARY
MARKET
A newly issued IPO will be considered a primary market trade

when the shares are first purchased by investors directly from the
underwriting investment bank; after that any shares traded will be
on the secondary market, between investors themselves. In the
primary market prices are often set beforehand, whereas in the
secondary market only basic forces like supply and demand
determine the price of the security.
Meaning: Stock market represent the secondary market where
existing securities are traded, stock exchange provide an original
mechanism for purchase and sale of existing securities.

3.MONEY MARKET
SERVICES
A segment of the financial market in which financial instruments

with high liquidity and very short maturities are traded. The
money market is used by participants as a means for borrowing
and lending in the short term, from several days to just under a
year. Money market securities consist of negotiable certificates
of deposit (CDs), bankers acceptances, Treasury bills,
commercial paper,.
There are various centers of money market like Mumbai ,
Kolkata and Chennai, etc.

4.EQUIPMENT
LEASING
Leasing is an agreement that provides a firm with the

use and control over asset without buying and owning


the same.
It is a form of renting asset.
Lease is a contract between owner of the asset
(Lessor) and the user of the asset called the Lessee,
where lessor gives the right to use the asset to the
lessee over an agreed period of time for a
consideration called lease rental.

5.HIRE PURCHASE
A system by which one pays for a thing in regular

instalments while having the use of it.


A method of buying goods through making installment
payments over time. Under a hire purchase contract, the
buyer is leasing the goods and does not obtain ownership
until the full amount of the contract is paid. If he fails to do
so then the ownership of the good will remains with the
seller.
Each installment will be treated as hire charges till the last
installment is paid.

6.VENTURE
CAPITAL
Money provided by investors to startup firms and small businesses

with perceived long-term growth potential. This is a very important


source of funding for startups that do not have access to capital
markets. It typically entails high risk for the investor, but it has the
potential for above-average returns.
There is a perception that venture capital is a means of financing
high technology projects. However, venture capital is investment
of long term finance made in:
1. Venture promoted by technically or professinally qualified but
unproven enterprenuers, or
2. High risk ventures

7.FOREIGN
EXCHANGE
ACTIVITIES
Only difference between foreign exchange and stock

exchange is that the foreign exchange deals outside the


boundries of the country.
The exchange of one currency for another, or the
conversion of one currency into another currency.
Foreign exchange also refers to the global market where
currencies are traded virtually around-the-clock.
The term foreign exchange is usually abbreviated as
"forex" and occasionally as "FX."

8.BILL
DISCOUNTING
A non-interest-bearing written order used primarily in international trade that binds

one party to pay a fixed sum of money to another party at a predetermined future
date.
Bills of exchange are similar to checks and promissory notes.
They can be drawn by individuals or banks and are generally transferable by
endorsements.
The difference between a promissory note and a bill of exchange is that this
product is transferable and can bind one party to pay a third party that was not
involved in its creation.
If these bills are issued by a bank, they can be referred to as bank drafts. If they are
issued by individuals, they can be referred to as trade drafts.

9.FACTORING
A financial intermediary that purchases receivables from a company. A

factor is essentially a funding source that agrees to pay the company the
value of the invoice less a discount for commission and fees. The factor
advances most of the invoiced amount to the company immediately and
the balance upon receipt of funds from the invoiced party.
Although factoring is a relatively expensive form of financing, factors
provide a valuable service to (a) companies that operate in industries
where it takes a long time to convert receivables to cash, and (b)
companies that are growing rapidly and need cash to take advantage of
new business opportunities.

NON-FUND BASED
ACTIVITIES
3. Investment Institutions


It is also called Fee based activities.
They include the following:
1. Managing the capital issues,i.e. management of

pre-issue and post-issue of activities according to


the SEBI guidelines.
2. Making arrangement for placement of capital and
debt instruments with investment institutions.
3. Arrangements of funds from financial institutions
for the clients.

MODERN
ACTIVITIES
1. Project
Advisory
Services

2. Mergers and
Acquisitions

3. Capital
Restructuring

4. Joint
Ventures

5. Rehabilitiation
of Sick
Companies

6. Credit Rating

7. Hedging

8. Portfolio
Management

9. Capital
Market Services

10. Housing
Finance

11. Insurance
Services

1. Project Advisory
Services
The financing of long-term infrastructure, industrial projects

and public services based upon a non-recourse or limited


recourse financial structure where project debt and equity
used to finance the project are paid back from the cash flow
generated by the project.
Project finance is especially attractive to the private sector
because they can fund major projects .
Merchant bankers, as a part of financial services they render
to their clients, undertake project counseling and preparation
of pre investment studies and project report.

2. Mergers and
Acquisitions
One plus one makes three: this equation is the special alchemy of amergers or an

acquisitions.
Main difference between mergers and acquisition is:
1. (X+Y=X) When one company takes over another and clearly established itself as the new
owner, the purchase is called an acquisition.
2. (X+Y=Z)A merger happens when two firms, often of about the same size, agree to go
forward as a single new company rather than remain separately owned and operated.
Types of mergers:
. Horizontal mergers- Two companies that are in direct competition and share the same
product lines and markets.
. Vertical merger- A customer and company or a supplier and company. Think of a cone
supplier merging with an ice cream maker.
. Conglomeration- Two companies that have no common business areas.

3. Capital
Restructuring
When a company is having trouble making payments

on its debt, it will often consolidate and adjust the


terms of the debt in a debt restructuring. After a debt
restructuring, the payments on debt are more
manageable for the company and the likelihood of
payment to bondholders increases. A company
restructures its operations or structure by cutting
costs.

4. Joint Ventures
A business arrangement in which two or more parties

agree to pool their resources for the purpose of


accomplishing a specific task.
This task can be a new project or any other business
activity.
In a joint venture, each of the participants is responsible
for profits, losses and costs associated with it.
However, the venture is its own entity, separate and
apart from the participants' other business interests.

5. Rehabilitiation
of sick companies
Sick companies are the one that had existed for at

least five years and had incurred accumulated losses


equal to or exceeding its entire net worth at the end of
any financial year.
The financial organization helps the government in
rehabilitation of public sector sick units.
The unit that cannot be revived is supposed to be
shut down.

6. Credit Rating
An assessment of the credit worthiness of a borrower in general

terms or with respect to a particular debt or financial obligation.


A credit rating can be assigned to any entity that seeks to borrow
money an individual, corporation, state or provincial authority, or
sovereign government.
Credit assessment and evaluation for companies and governments
is generally done by a credit rating agency such as CRISIL OR CIBIL.
These rating agencies are paid by the entity that is seeking a credit
rating for itself or for one of its debt issues.
For individuals, credit ratings are derived from the credit history
maintained by credit-reporting agencies.

7. Hedging
Making an investment to reduce the risk of adverse

price movements in an asset.


An example of a hedge would be if you owned a
stock, then sold a futures contract stating that you will
sell your stock at a set price, therefore avoiding
market fluctuations.

8. Portfolio
Management
The art and science of making decisions about investment

mix and policy, matching investments to objectives, asset


allocation for individuals and institutions, and balancing risk
against performance.
Portfolio management is all about strengths, weaknesses,
opportunities and threats in the choice of debt vs. equity,
domestic vs. international, growth vs. safety, and many
other tradeoffs encountered in the attempt to maximize
return at a given appetite for risk.

9. Capital Market
Services
Markets for buying and selling equity and debt instruments. Capital

markets channel savings and investment between suppliers of capital


such as retail investors and institutional investors, and users of capital
like businesses, government and individuals.
Capital markets typically involve issuing instruments such as stocks
and bonds for the medium-term and long-term. In this respect, capital
markets are distinct from money markets, which refer to markets for
financial instruments with maturities not exceeding one year.

10. Housing
Finance
A type of seller financing in which a firm extends customers a

loan, allowing them to purchase its goods or services.


The automobile sales industry is a prominent user of in-house
financing. Many vehicle sales rely on the buyer taking a loan,
in-house financing allows the firm to complete more deals by
accepting more customers.
Financial institutions in the field of housing finance are HDFC,
LIC housing finance, ICICI housing, and so on.

11. Insurance
Services
A contract (policy) in which an individual or entity receives

financial protection or reimbursement against losses from


an insurance company. The company pools clients' risks to
make payments more affordable for the insured.
Types:
1. Life insurance
2. General Insurance

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