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Financial Services
Evolution of Financial services in India
The stage of Infancy existed btw 1960-1980
-merchant bankers providing a wide range of services, starting from project appraisal to arranging
funds
-investment co’s such as the UTI,LIC,GIC made their mark in the first stage of financial services
-leasing made its mark in the closing years of the 1970’s
Modern financial services -during later part of the 1980’s
-OTC ( over the counter trading), share transfer, pledging of shares, mutual funds, factoring,
discounting, VC,credit rating etc.
The third Flush in financial services includes setting up of new institution & paving the way for
innovating new instruments & also their flotation
-Setting up of depositories will promote the concept of paperless trading & will result in to
dematerialization of shares
-on line trading
-the creation of SEBI can be hailed a a path breaking development in terms of regulation, growth
of development of FS
-permission to foreign financial institutions to operate in capital mkt
-public enterprises disinvestment create pressure on the FS firm to gain expertise in
valuation,financial,finanacial & legal restructuring ,& taking the public sector firms in
commercial & capital mkt
Importance of financial services
-promoting investment
-promoting savings
-minimizing the risk
-maximizing the returns
-ensures greater yield
-economic growth
-economic development
-benefit to govt
-expands activities of financial institutions
-capital market
-promotion of domestic & foreign trade
-balanced regional development
Scope of FS- FS offered are mainly 2 types
-Fee based- merchant banking, broking services, credit rating, MF, portfolio mgt
services, underwriting
-fund based factoring,leasing,hire purchases, housing finance, bill discounting, VC ,
etc
• Objectives of financial services---
• Fund raising, Funds deployment, specialized
services, regulation and economic growth.
Characteristics of financial services:-
Intangibility, customer orientation, inseparability
and perish ability and dynamism
• Capital Market:---
• Importance of capital market:-i) the capital
market serves as an important source for the
productive use of the economy’s savings
ii) Incentives to saving and facilitate capital
formation by offering suitable rates of interest
as the price of capital
iii)Provide an avenue for investors
iv)Facilitates increase production and
productivity in the economy
• Money market:-MM is a market for dealing with
financial assets and securities which have a
maturity period of up to one year
i)Call money market
ii)Commercial bills market
iii)Treasury bills market
iv)Short term loan market
Call money market- market for extremely short
period loans say one day to 14 days. Highly liquid. In
India call money markets are associated with the
presence of stock exchanges.
• Interest rate varies from day to day and even from
hour to hour and Centre to Centre
• Commercial bills market:- It is a market for bills of
exchange arising out of genuine trade transactions
• Treasury bills:- which have a short term maturity.
Issued by the Govt. highly liquid, repayment is
guaranteed by the govt.
Two types—ordinary or regular and adhoc treasury bills.
Ordinary treasury bills are issued to the public banks and
other financial institutions with a view to raising
resources for the central govt to meet its short term
financial needs
• Adhoc treasury bills are issued in favour of the RBI
only. They can be purchased by the RBI only.
Adhocs are not marketable in India but holders of
these bills can sell them back to RBI
• TB have a maturity period of 91/182/364 days only
• Short term loan market: short term loans are given
to corporate customers for meeting their working
capital requirements
• Foreign exchange market:- The term foreign
exchange refers to the process of converting home
currencies into foreign currencies and vice versa.
Managed by foreign exchange maintenance Act.
• Functions:-
• i) to make necessary arrangements to transfer
purchasing power from one country to
another
• Ii)to provide adequate credit facilities for the
promotion of foreign trade
• Iii) to cover foreign exchange risks by
providing hedging facilities
• In India foreign exchange business has a three
tired structure consisting of --
• i) trading between banks and their commercial
customers
• Ii) Trading between banks through authorized brokers
• Iii) trading with banks abroad
Financial rates of return
Most house holds in India still prefer to invest on physical
asset like land ,buildings, gold ,silver etc. But studies have
shown that investment in financial assets like equities in
capital market fetches more return than investments on
gold etc. but one should have basic knowledge about the
rate of return on financial assets also
• The return on Govt. securities and Bonds
comparatively less than on corporate securities
due to lower risk
• Interest rate policy of the Govt is designed to
achieve the following :-
i) To enable the Govt to borrow comparatively
cheaper rate
ii) To ensure stability in the macroeconomic system
iii) To support certain sectors through preferential
lending rates
iv) To mobilize substantial savings in the economy
• Recent trends—
i. The interest rates on company deposits are freed
ii. The interest rates on 364 days treasury bills are
determined by auctions and they are expected to
reflect the free market rates
iii. The coupon rates on govt loans have been revised
upwards so as to be market oriented
iv. The interest rates on debentures are allowed to be
fixed by companies depending upon the market
rates
v. The maximum rates of interest payable on bank
deposits (fixed) are freed for all deposits
• Financial instruments ( financial securities):--
which represent financial claims and assets. …
claim to the repayment of a certain sum of
money at the end of a specified period together
with interest or dividend .Eg. Bill of exchanges,
promissory notes, treasury bills, govt bonds,
deposit receipt, shares, debentures, etc.
• Types---i) Primary or direct securities ii)
secondary or indirect securities
• Primary securities are directly issued by the
ultimate investors , eg- shares, debentures
• Secondary securities issued by financial
intermediaries---short, medium and long term
securities
• Features of financial instruments---
Transferrable, ready market, liquidity, possess
security values, tax status, risk, facilitate future
trading, less handling costs, return is directly in
proportion to the risk, may be short term or long
term
• Development of financial systems in India :--
Private financial institutions
Nationalization of financial institutions-RBI(1935) is
the leader of FIs. It was nationalized in the year
1948.Imperial Bank nationalized in the year 1956
renaming SBI, later 245 insurance companies
nationalized and merged, called LIC and GIC, 14
private banks nationalized in the year 1969. In 1980 6
banks nationalized.
Starting of UTI (1964) public sector. Later, UTI
investor service ltd.UTI exchange Ltd, UTI bank (1994)
( now fully privatized Axis bank)
• Establishment of development banks—
Industrial Finance corporation, Industrial credit and
investment corporation of India, Refinance
corporation of India, Industrial Development bank
of India, State Industrial development corporation
of India, Industrial reconstruction corporation of
India, small industries development bank of India.
Institution for Financing agriculture—in 1963, RBI
established Agricultural refinance and
development corporation, in 1982 National Bank
for Agriculture and rural development ( NABARD)
• Institution for Foreign trade—Export and
import bank of India (EXIM) in 1982.
• Institution for Housing finance –the National
housing Bank ( NHB)
• Stock holding corporation of India(SHCIL)
(1987)
• Mutual funds industry
• Venture capital institutions
• Credit rating agencies
• Financial system and economic development:-
---Mobilizing savings
---Promoting investment
---Encouraging investment in financial assets
---Allocating savings on the basis of national
priorities
---Creating credit
---Providing a spectrum of financial assets
--financing trade, industry and agriculture
• ---encouraging entrepreneurial talents
• ---Providing financial services
• --development backward areas
Weaknesses of Indian Financial system :---
----Lack of coordination between different
financial institutions
---Monopolistic market structures
---Dominance of Development Banks in
Industrial Financing
• --Inactive and erratic capital market:( use of
more debt capital during financial problems,
because of developmental banks)
• --Lack of expertise
• --inadequate accommodation
• -inadequate quality service
• --Restricted scope of operations
• --limited innovation
• --lack of sound institutional mechanism