K

(D
(D
 Syllabus
No. of
No. Modules/ Units Lectures

1 Introduction to Financial Services: 12

Financial Services:
Meaning Classification Scope Fund Based Activities Non-Fund
Based Activities -Modern Activities Sources of Revenue Need for
Financial Innovation New Financial Products,and Services
Innovative Financial Instruments Challenges Facing the Financial
Sector
Merchant Banking:
Definition-Origin- Merchant Bankingin India - Merchant Banks and
Commercial Banks - Services of Merchant Banks- Qualities of
Merchant Bankers in Market Making Process - Progress of Merchant
Banking in India- Problems-Scope of Merchant Bankingin India.
2 Mutual Funds and Factoring and Forfeiting: 12

Mutual Fund:
Introduction to Mutual Fund Structure of Mutual Fund in India-
Classification of Mutual Fund AMFI Objectives Advantages of
Mutual Fund Disadvantages of Mutual Fund NAV Calculation and
Pricing of Mutual Fund Mutual Funds Abroad Mutual Funds in
India Reasons for Slow Growth Future of Mutual Funds Industry.
Factoring and Forfaiting
Factoring- Meaning - Modus Operandi -Terms and Conditions
Functions-Types of Factoring. Factoring v/s Discounting Cost of
Factoring benefits Factoring in India International Factoring -
Definition-Types of Export Factoring- Factoring in other countries
EDI Factoring-Forfeiting - Definition - Factoring v/s Forfaiting

Working of Forfaiting Cost of Forfaiting - Benefits of Forfaiting

Drawbacks of Forfaiting.
3 Securitisation of Debts and Derivatives:
12
Securitization of Debt:
Meaning and Definition of Securitization Securitization v/s Factoring
Modus Operandi- Role of Merchant Bankers - Role of other Parties
-
Securitization Structure-Securitisable
Conditions for
Assets, Benefits of
Securitization successful Securitization
Securitization Abroad Securitization in India Reasons for Non-
popularity of Securitization - Future Prospects of Securitization.

iv)
 Derivatives:
Meaning- Types of Financial Derivatives - Options Futures
Forwards -

Swaps Futures and

-

Options Trading System Clearing

-

Entities and their Role.

Housing Finance and Consumer Finance: 12
Housing Finance:
Introduction Housing Finance Industry Housing Finance Policy
Aspect Sources of Funds Market of Housing Finance in India
Major Issues of Housing Finance in India - Growth Factors - Housing
Finance Institutions in India National Housing Bank (NHB)
Guidelines for ALM System in Housing Finance Companies Fair Trade
-

Practice Code for HFC's Housing Finance Agencies.

Consumer Finance
Introduction Sources - Types of Products - Consumer Finance
Practice in India - Mechanics of Consumer Finance T e r m s - Pricing-

Marketing and Insurance of Consumer Finance Consumer Credit

Scoring.
5 Depositories and Pledge: 12

Depositories:
Overview of Depository Key Features of Depository System in India -|
Depository- Bank Analogy- Legal Framework-Eligibility Criteria for a
Depository- Agreement between Issuers-Rights and
Depository and
Obligation of Depositories Records to maintained by Depository-
Services of Depository and Functions of Depository-Organisation and
Functions of NSDL.
Pledge and Hypothecation:
Pledge and Hypothecation Procedure for Plédge/ Hypothecation
Procedure of Confirmation of Creation of Pledge/Hypothecations by
Pledgee Closure of a Pledge/ Hypothecation by Pledgor- Invocation
of Pledge by Pledgee.
Total 60
 Introduction to Financial Services

UNIT I

Chapter

Introduction to
Financial Services
Introduction - Definitions Features Functions-Objectives - Importance
Classification of Financiol Service Industry Scope of Financial Service - Sources of

Revenue Financial Innovations - Financial Services in India New Financial Products

and Services - Innovative Financial Instruments - Factors Affecting Access to Financial
Services Challenges facing the Financial Service Sector Agencies providing
Financial Services - Questions.

INTRODUCTION:
Financial Services are the largest industry in the world in terms
of earning. A financial service is a term used to refer services
provided by the financial industries. n a narrow sense, a financial1
service otherwise called financial intermediation includes all types
of financial activities, which are carried on by financial institution.
In a broader sense, financial service means the 'mobilisation and
i.e. transformation of savings into
allocation of savings
investment.
Financial services are provided by financial intermediaries who
are called financial institutions. Financial service provider
enhances growthof the economy by pooling funds of the small
and scattered savers and allocating them for investment in an
efficient manner. Since 1990, Indian financial service industry was
dominated by commercial banks and non-banking financial

institutions. These institutions have been offering wide range of

2 Vipul'Financial Services Management(B61) (L1)
services to their customers, which facilitate them to build portfolio
of financial institutions.
Financial service include a multiplicity of monetary activities
namely factoring, merchant banking, lease and hire purchàse
financing, venture capital, underwriting and new issue marketing,
bills discount, investment advisory services, insurance services,
mergers, acquisitions and amalgamations, project preparation,
options, swaps, derivatives, security, etc.
The institutions providing financial services include
Commercial banks, merchant banks, investment banks,
development banks, insurance companies, mutual funds, leasing
and hire purchase companies. Credit card companies,
underwriters etc. Of these, important financial services
intermediaries are insurance, banking andnon-banking
institutions.

MEANING AND DEFINITION:

The services which are offered by the finance companies are

are known as
known as "financial services." Financial companies
asset management companies
and liability management
consist of leasing
companies. The asset management companies etc. Liability
mutual fund, merchant bankers,
companies,
companies include bill discounting companies and
management
house companies. The financial services may also be
acceptance is a
'financial intermediation'. Financial intermediation
known as
s a v e r s and
borrowers. The financial
where it co-ordinate
process enroute the r e s o u r c e s towards
mobilizes the savings and
service for industrial
and serves as a key area

required sector The financial service

market
development of
the country.
constituents:
of four important
comprises financial institutions,
Commercial banks,
1 Market Players stock brokers, etc.
discount
institutions Credit Rating agencies, factoring,
2 Specialised
house, etc.
and Insurance
3 Regulatory bodies SEBI, RBI, IRDA, Banking
Government
Department of Central
 Introduction to Financial Services 3

4 Financial instruments Equity instruments, debt, instrument and

zero coupon bonds
Financial service can be defined as "activities benefits and
satisfaction, connected with the sale of money that offers to users
and customers, financial related values".

FEATURES OF FINANCIAL SERVICES:

(1) Customer Oriented: Financial service industry is a customer-
oriented service industry. The customer is the king and his

requirements must be satisfied in full should be the basic

target of any financial service industry.
involved in
(2) Intangibility: A peculiar feature of the companies
financial service is that they provide only intangible products
to their customers. The financial product cannot
be seen or
touched.
Simultaneous Performance: In financial service industry,
(3)
have to be
both production and supply of financial service
both suppliers of
performed simultaneously. Therefore, clear-cut
services and c o n s u m e r s should have a good rapport,
communication.
perception and effective
of any inancial service
(4) Technology: The quality of service
the technology. The analysis of any
company depends upon
between input and
firm involves the technology relationship
output.
service market
(5) Financial service market: The Financial
institutions, regulatory
comprises market players, specialized
instruments.
bodies and financial
6) Economic growth: Financial service
rendered by the financial
the between lack of knowledge on
intermediaries bridge gap
of
of inventors and the increasing sophistication
the part
These financial services
financial instruments and markets. and
are vital for creation
of firms, industrial expansion
economic growth.
 Services Management (BB) (L1
4 Vipul's Financiol
consumed
are immediately
rerishability: Financial services
There is a great need
hence inventories cannot be created.
and
for balancing demand and supply.

FUNCTIONS OF FINANCIAL SERVICES:

are
services that
Following are the functions of financial
generally offered by financial companies:
Fund Raising
2 Deployment of Funds

Different Services
Regulations
Economic Growth and Development
(1) Fund raising: Finançial services help to raise the required
funds from a group of investors, individuals, institutions and

corporate's.For the various instruments of finance

purpose,
are used. The funds are demanded by corporate's,
individuals, etc.
(2) Deployment of funds: An array of financial services are
available in the financial markets which help the players to
ensure an effective deployment of the funds raised. Financial
services assist in the decision making regardirng the financing
mix.
(3) Different Services: The financial services sector provides
specialized services such as credit rating, venture capital,
financing, lease financing, depository, etc. besides banking
and insurance. Institutions and agencies such as stock
exchanges, specialized and general financial institutions, non-
banking finance companies, banks and insurance companies
also provide these services.
(4) Regulations: There are agencies that are involved in the
regulation of the financial services activities. In India,
agencies such as the SEBI, RBI and Department of Banking
and Insurance of the Government of India through a plethora
of legislations, regulate the functioning of the financial service
institutions.
Introduction to Financial Services 5

(5) Economic Growth: Financial services contribute, in good

measure, to speeding up the process of economic growth and
development. This takes place through the mobilization of the
savings across section of people, for the purpose of
channelizing them into productive investments.

OBJECTIVES OF FINANCIAL SERVICES:

The financial intermediation process creates wealth of the
nations. The wealth of a nation will be built-up by a strong
foundation of financial architecture. The good design of financial
architecture will create asset formation. Following are the

objectives of financial services:

(1) Mobilisation of resources: The market is a combination of
savers and borrowers. The saver includes individual

investors, institutional investors, corporate sector and

financial institutions. The funids are required by the corporate
The
sector, government sector, individual and institutions.
finance companies will channelize the saving amount into

productive way.
show
(2) Assist in Decision Making: The finance companies will
to the investors, to park their resources in a better and safety
decision making
place in financial market. They assist in
regarding the services such as factoring, bill discounting,
securitization of debt etc.
(3) Skilful services: The financial services require a specialized
the key
knowledge and greater efficiency. The knowledge is
and
factor and will have to take decisions immediately
and implementations
instantly. The speed of decision making
will indicate the profitability of the firms.
the
(4) Economic stability: A stability of economy depends upon
services
infrastructure of the financial system. The financial
dominant role in the growth of economic
ocçupies'a
development.
in India
(5) Regulation: The Financial Regulatory Authority
Reserve
includesSecurities and Exchange Board of India,
 6 VY"V" Vipul's Financial Services Management (BB/) (LL)

Bank of India, Insurance Regulatory Development Authority

and Banking Department of the Central Government.

IMPORTANCE OF FINANCIAL SERVICES:

(1) Economic Growth: The main function of financial service
system is the collection of savings and their distribution for
industrial investment, thereby
formation and, to that extent,
stimulating the capital
economic growth.
accelerating the process of
(2) Promotion of savings: The financial services
industry
promotes savings in the country by providing transformation
services. It provides liability, asset and transformation service
by providing large loans on the basis of numerous small
deposits.
(3) Capital formation: The financial service industry facilitates
capital formation by rendering various capital market
intermediary services. Through financial service activity,
resources are actually committed to
production. The volume
of capital formation
depends upon the intensity and
efficiency with which these activities are carried on.
(4) Provisions of liquidity: The financial services facilitate
easy
conversion of financial assets into liquid cash. It
promotes
liquidity in the system by allocating and reallocating savings
and investment into various avenues of economic
activity.
(5) Financial intermediation: The financial service
industry
facilitates the function of intermediation between savers and
investors by providing a means and a medium of
and by undertaking innumerable services.
exchange
(6) Contribution to GNP:: The contribution of financial services
to GNP has been going on
increasing year after year in all1
countries.
(7). Creation of Employment Opportunities: The financial
service
industry. creates and provides employment
opportunities to millions of people all over the world.
 Introduction to Financial Services 1

CLASSIFICATION OF FINANCIAL SERVICE INDUSTRY:

A financial system is a complex, well-integrated set of sub-
systems of financial institutions, markets, instrumernts, and service
which facilitates the transfer and allocation of funds, efficiently
and
and effectively. The active participation of financial service
institutions will make speedy development of economy. The
financial services can be classified into two categories:
(1) Money market intermediaries
(2) Capital market intermediaries
(1) Money market intermediaries: The money market is the
market for short-term sources of finance. It consists of
commercial banks, co-operative banks and other agencies
which supply only short term funds. In India, the RBI
regulates the money market.
(2) Capital market intermediaries: It consists of long term
lending institutions and investing institutions which mainly
provide long-term funds. In India, the SEBI regulates the
capital markets.

SCOPETYPES/KINDS OF FINANCIAL SERVICES:

Financial services cover a wide range of activities. They can be
broadly classified into two namely:
(1) Traditional Approach
(2) Modern Approach
(1) Traditional Approach: The traditional financial service
activities
industry provides a wide range of activities. The
include both money and capital market aspects. They are
the
deeply involved in financial markets. According to into two
traditional approach; they can be categorized
methods:
(a) Fund based activities (Asset based service)
(b) Fee based activities (Non-fund/advisory service)
fund based
(a) Fund based activities/asset based service: In involved in
financial service, money in the form of cash is
8 Financial Services Management
(B8I) (LL)
Vipul's
require an
the transaction. The fund based activities
service institutions. Iney
vestment by the financial sector.
nvolve in providing of finance to the corporate
different kinds
fin ancial market is the combination of
1he following
savers and borrowers. The tollowing
O1nvestors,
activities are treated as fund based services:
Scope of Financial Services

Modern Approach
Traditional Approach

Fund Based Activities Fee Based Activities

(Asset Based) (Non-fund)
- Leasing Finance
Credit Rating
- Hire Purchase
Merchant Banking
- Factoring
Managing of public issue
Venture Capital -Portfolio Management

Forteiting Project Counselling

Underwriting of public issue Advisory Service
- Loan Syndication
Mutual funds
Bills discounting Investment Service for NRI's
Foreign Exchange Service Intermediation

Housing Finance Depository Services

Insurance Services Other Services

Project advisory service

Clearance of Government approval
Mergers and acquisition
Capital structuring senvice
Management advisory service
Insurance

Collection of income on service

Other Services

(i) Lease financing: Leasing finance is a financial

intermediary service provided by a leasing
company for the procurement of asset through
lease. Lease is an option for corporate enterprises to
conserve capital because, in effect, they obtain 100
for obtaining assets.
percent finance
Introduction to Financial Services 9

(ii) Hire purchase: Hire purchase, refers to term loans

provided for the purchase of fixed assets and
consumer durables. Under this service provided by
specialized hire purchase companies, financial
institutions and commercial banks. Under this
system the buyer gets the facility of paying the
amount in instalment to buy the asset and the seller
is able to sell more goods.
(iii) Factoring: Factor is a financial institution which
provides financial servicee called factoring.
Factoring means purchase of book-debts or
conversion of credit sales into cash. Factoring is an
arrangement in which receivable on account of sale
of goods or services are sold to the factor at a
certain discount. Factors collect receivables and
also advance cash against receivable to solve the
client firm's liquidity problems.
(iv) Forfeiting: It is a type of finance of receivables
pertaining to international trade. Forfeiting is a
source of trade finance, which enables exporters to
get funds from the forfeiter on transferring the
right to recover the debts from the importer.
(v) Venture capital: Venture capital is a type of private
equity capital typically provided by professional,
outside investors to new, highly potential and
growth companies in the interest of taking the
company to an IPO or trade sale of the business.
Venture capital finance may be provided by
by
wealthy individual investors, mutual fund
investment banking firms, insurance
companies,
Companies, etc.

(vi) Underwriting of Public Issue: Underwriting is an

with a
agreement, entered into by a company
financial agency, in order to ensure that the public
will subscribe for the entire issue of shares or
debentures made by the company. Underwriter
 Services Manogement
(B8/) (L
10 Vipul' Financial

company issues,
tobuy that part of the
agrees
which are not subscribed by the publicC.
vehicle
investment
(Vii) Mutual fund: Mutual fund is an
n a t is made of a pool of
funds collected from
up
investors for the purpose of investing in
many a
mutual fund is managed by
securities. Every
fund manager.
(viii) Bill discounting: One of the methods of providing
of
credit to customers by bank is by discounting
commercial bills at a prescribed discount rate.
The
of
discounting of bills is a widely used source
short-term finançe in the Indian corporate sector.

(ix) Foreign exchange service: This service is mainly

provided by commercial banks. It includes
purchase and sale of foreign currencies and
transfer of foreign funds by electronic media.
(x) Housing Finance: Housing finance service is
provided by housing finance institutions. Housing
finance involves extending finance for the setting
up of housing units.
(xi) Insurance services: Insurance is a financial service
which involves the transfer of loss exposure of
several entities into a common pool and the
redistribution of the cost of actual losses among the
members of the pool.
(b) Fee based/Advisory service/Non-fund service: In fee
based financial service, no money is directly involved in
the transaction. In fee based services the financial
institutions provide various financial services and levied
fees as a charge of rending financial services. Following
are the bee based services provided by banking and non-
banking financial institutions:

Credit rating: Credit rating gives an idea about the

financial strength of the company issuing securities
rhich is useful to the investors, corporate, banks
and other financial institutions.
troduction to Financial Services

(ii) Merchant Banking: Merchant bankers transform

capital from those who own it to those who use it.
They provide various services like underwriting,
portfolio management, loan syndication,
consultancy, advisory, issue, etc.
(ii) Portfolio investment management services:
Portfolio management means maintaining proper
combination of securities (equity and debt) in aa
manner that they give maximum return to the
client.
(iv) Project counselling: This service is provided by the
merchant bankers to their client. It refers to the
development of the idea of project, preparation and
technical appraisal of projects, etc.
(v) Advisory services relating to Mergers and
Takeover Merchant bankers provide expert advice
to their clients regarding takeovers, acquisitions
and mergers.
(vi) Loan syndication: Merchant bankers help their
client in preparation and submission of application
for raising long term loans from Indian and foreign
countries.
(vi) Offshore Finance: Merchant bankers help their
clients in managing and obtaining long term
foreign currency loan like Euro, Dollar, American
Depository Receipts etc.
(viii) Investment services for NRI: Merchant bankers
provide various kinds of services to NRI like
offering expert advice, help in choosing the shares
etc.
(ix)
(ix) Intermediation and Advisory service by brokers:
Stock broker is a member of a recognized stock
exchange who assists their clients in buying, selling
or dealing in securities.
(x) Depository services: Depository is the place where
the securities are deposited. Depository participant
12 (BBI) (UY
Vipul's Financial Senvices Manogement
and is authorized to
1s an agent of the depository
offer depository services to investors.
(xi) Other services: Besides the above mentioned
Services, financial service provides some other
service also like business valuation, private
placement of securities, buyback assignments,
share valuation, clearing services etc.
(2) Modern Approach/Activities: Financial services are
dynamic
activities. The economic development will be only possible
with the help of financial service. At present, it provides the
following activities:
(a) Capital structuring service to corporate sector
(b) Management advisory services
(c) Insurance service
(d) Buy back option
(e) Determining optimal debt mix
(f) Safe custody of securities
g)Collection of income on securities
(h) Share transfer and registration
(i) Clearance of government approval
(j) Acting as trustees for debenture holder
(k) Acting as an agent for paying interest, dividend etc.
(D Rendering project advisory services right from the
preparation of the project report till the raising of funds
for starting the project with
necessary governmental
approval.
(m) Planning for mergers and
acquisitions and assisting for
their smooth carry out.
(n) Recommending suitable changes in the management
structure and management style with a view
better results. to achieve
 Introduction to Financial Services 13

(o) Hedging of risks due to exchange rate risk, interest rate

risk, economic risk and political risk by using swaps and
other derivative products.
(p) Managing the portfolio of large public sector
corporations.
q Undertaking risk management services like insurance
services, buy-back options, etc.
Guiding the clients in the minimization of the cost of
debt and in the determination of the optimum
debt
equity mix.
(s) Promoting credit rating agencies for the purpose of
rating companies which wants to go public by the issue
of debt instruments etc.

SOURCES OF REVENUE:
There are two categories of sources of income/revenue for a
financial service company. They are:
(1) Fund based, and
(2) Fee based.
(1) Fund based income: The fund based requires an investment
by the financial service institutions. They involve in
providing of finarnce to the corporate sector. Their income
mostly comes from interest spread i.e. difference between the
interests paid and earned, lease rentals, income from
investments in capital market etc. Financial service
institutions earn major part of income through fund based
activities. Moreover, fund based financial service institution
has to spend more on interest and brokerage.
(2) Fee-based income: The financial service institutions who
provides different kind of fee based activities, requires a
greater knowledge to perform these activities. Fee based
income has its source in merchantbanking, advisory services,
custodial services, management advisory service, portfolio
management etc. Moreover, fee based. income does not
 14 Financial Services Manogement (BBI) (LL)
Vipul'sT
to
vOIve much risk but they require a greater knowledge
perform these activities.

Based
Ditterence between Fund Based and Non-Fund (ree)
Services:
Fund Based Non-Fund/Fee Based
(1) Meaning:
The fund based Fees based funds, requires
requires an
Investmentby the financial service greater knowledge or skill to
institutions. They provide funds to perform different kind of services.
corporate sector.
(2) Income:
Income mostly comes from Income comes from the services
internet, lease rentals, income like merchant banking services,
from investments,etc. advisory services, custodial services,
portfolio management etc.
(3) Risk:
It involves more risk It does not involve much
risk
because it needs greater knowledge
to provide services.

(4) Requirement:
Financial institution needs Financial institution needs
funds to provide services. specialized knowledge, experience,
skill to provide services.
(5) Services:
It comprise all commercial Its services does not
banking activities &
include
other commercial banking activities.
activities like underwriting, hire
purchase, seed capital etc.
(6) Money:
In fund based financial service, In fee based financial
service, no
money in the form of cash is money is
directly involved in the
involved in the transaction transaction.
Introduction to Financial Services 15

(7) Example:
Some of the fund based Some of the fee based services
services are hire purchase, are credit rating, merchant banking,
factoring bills discounting, | loan syndication, project
venture capital, banking services counselling, depository services etc.
etc.

FINANCIAL INNOVATION:
Financial innovation means advances over time in the financial
instruments, services and. payment system used in the lending
borrowing of funds or service activity rendered by financial
intermediaries. These changes which include innovations in
technology, risk transfer and credit and equity generation, have
increased available ttedit for borrower and other services and
given banks new and less costly ways to raise equity capital.
As a result of innovations, new instruments and new products
are emerging in the capital market. The capital market and the
money market are getting widened and deepened. Moreover,
there has been a structural change in the international capital
market with the emergence of new products and innovative
techniques of operation in the capital market. Many financial
intermediaries including banks have already started expanding
their activities in the financial services sector by offering a variety
of new products.
Cause For Financial Innovation:
Following are the reasons for cause of innovation in financial
service industry.
(1) Dramatic increase in competition: Many institutions are
providing financial services including banking institution,
non-banking institution and foreign institution. It has led to
severe competition among themselves. They have to innovate
various financial products to satisfy their requiremernts of
customers.
(2) To meet the demand: The customers of today have become
Smarter and more knowledgeable. As a result, their demand
and standards have also risen. In order to meet these
demands, financial institutions have come up with their
 Manogement (BB) u(LL)
FinancialServices
16 Vipul's
hgh degree
achieve a
to
employ
innovations that thev
Or
of customer satisfaction.
(1)
(6)
Global Impact Competition

Reasons for (2)

Demand
(5) Financial Innovations
To increase
Profit

(4) (3)
Economic Technology
Liberalisation

Improvement in computer and

(3) Advancement in technology: innovations in
technology brings many
telecommunication
ATM was a greater
financial service industry. For example, reduce
innovation. Such innovations are helpful to
financial
the transaction costs.
facilitates
Economic liberalisation: The financial system
(4) intermediation
economic activity growth, lower financial
and
economic reform
cost, makes innovation least costly, etc. The
in
liberalisation and globalization was introduced
process of
of all sectors and making
the 1990s to improve performance
competitive. Thus, it leads to introduce
new
India globally
product to survive in the
sector.

(5) To increase profit: entry of various financial

After the
institutions in the field, there is a decline in the profitability,
of the financial institution, they have to0
to improve the profit
introduce new products.

(6) Global impact: The ultimate reason behind financial

innovations is the ever-changing face of global patterns
which have direct effect on the policies of all business
including financial institutions.
Thus, the growing need tor innovation has assumed more
recent times. Ihis process is being referred to as
importance in
financial engineering
 Introduction to Financial Services VY"Y" 17
Financial Engineering:
Financial engineering is the life blood of any financial ability.
According to John Finnerty, "Financial engineering involves the
design, the development and the implementation of innovative financial
instruments and processes and the formulation of creative solutions to
problems in finance." One of the essential characteristics of financial
engineering product is "Financial Innovation"'. But not all
engineered products are innovative. They are to be different and
add value to users. A financial innovative product may be
innovative today but it may eventually become a common
product in near future.

FINANCIAL SERVICES IN INDIA:

The financial services scenario in India in the past has
undergone drastic changes. Post reform period has witnessed
remarkable improvement in the financial services both
quantitatively as well as qualitatively. The financial system of
India has significantly impacted the pace and pattern of growth
with financial services organisations responsible for the economic
growth. During post reform period, every segment of financial
market of the country significantly improved. Consequent upon
the various initiatives of the RBI since the early 1990s, the Indian
money market has undergone transformation in terms of
instruments, participants and technology infrastructure leading to
emergence of deep, liquid and vibrant money market. The present
scenario can be explained through following terms:
(1) Conservatism of dynamism: The main objective of the
financial sector reforms is to promote an efficient, competitive
and diversified financial system in the country. This is
essential to raise the allocative efficiency of available savings,
increasing the return on investment and thus to promote
Indian economy. As a result, there are lot of changes in its
money market, securities market, capital market, debt market
and the foreign exchange market. The emergence of various
financial institutions and regulatory bodies have transformed
the financial service sector from being a conservative industry
to a dynamic one.
 (BB) (L1)
18
Vipul's Financial Services Management

(2 Process of Globalisation: The process of globalisation nas

paved the way for the entry of innovative and sophisticatea
financial products into our country. Since the goverrment 1s
the way or
very removing all obstacles that stand in f o
keen in
rthe
inflow of foreign capital, the potentialities
introduction of innovative international financial product ut
or
India are very
great. Hence, there is every possibility
introduction of more and more innovative financial services
in India.
(3) Process of Liberalisation:.The Finance Act, 1992 has brought
into effect large-scale amendments in the tax structure of
long-term capital gains. The Finance Act, 1994 has givena
further boost by lowering the lock-in period from 3 years to 1
year, in order to get the entitlement as a long term capital
asset. The Securities Exchange Board of India (SEB1) has
liberalized many stringent conditions so as to boost the
capital and money markets.
(4) Emergency of Primary Equity Market: The
primary equity
market has emerged as an important vehicde to channelize the
savings of the individuals and corporate for productive
purpose and thus to promote the industrial and economic
growth of our nation. The number of stock exchanges in the
country has gone up from 9 in 1980 to 19 in 2011. The
aggregate funds raised by the industries in the primary
markets have gone from 7,864 crore in 1993-94
to 35,559
crore in 2010-11 by IPOs.
(5) Concept of credit rating:
There is every
possibility of
introducing equity grading. The investment decisions of the
investors have been based on tactors like name
the company, recognition of
operations of the group, market sentiments,
reputation of the promoters, etc. Now,
grading from the
independent agency would help the investors in his/her
Dortfolio management. Moreover, the concept of credit
rating
would play significant role in identifying the risk level
a

the co-operative entity in which the investors wants

of
to take
Dart. Now, it is mandatory tor the
non-banking financial
 Introduction to Financial Services
19
companies to get credit rating for their debt instrumernts. In
India, four major credit rating agencies are available:
(a) Credit Rating Information Services of India Ltd (CRISIL)
(b) Credit Analysis and Research Ltd (CARE)
(c) Investment Information and Credit Rating Agency
(ICRA), and
(d) Duff Phelps Credit Rating Pvt. Ltd (DCR India)

NEW FINANCIAL PRODUCTS AND SERVICES (AFTER LPG):

Today, the importance of financial services is gaining
Today,
prominence all over the world. As a result of innovations, new
instruments and new products are emerging in the capital market.
Many financial intermediaries including banks have already
started expanding their activities in the financial service sector by
offering a variety of new products. Some of the products and
services are as follows:
(1) Merchant Banking: (Already discussed earlier)
(2) Leasing Finance: (Already discussed earlier)
(3) Mutual Funds: (Already discussed earlier)
(4 Loan Syndication: (Already discussed earlier)
5) Factoring: (Already discussed earlier)
(6) Forfeiting: (Already discussed earlier)
(7) Venture Capital: (Already discussed earlier)
(8) Custodial services: Custodial services provide agency
services like safe keeping of shares and debentures, collection
of interest and dividend and reporting of matters on
corporate developments and corporate securities of foreign
investors.
(9) Corporate advisory services: Financial intermediaries
particularly banks have set up corporate advisory service
branches to render services exclusively to their corporate
customers. Recently, they are providing new kinds of finance
like Euro loans, GDRs etc. to the corporate customers.
20 Vipul' Financial Services Management (BBI) (L1)
(10) New reverse mortgage plan: Banks have started introducing
a new
mortgage plan along with life insurance
reverse
companies. This new product is called 'Reverse Mortgage
Enabled Annuity' Scheme. It requires an insurance company
to undertake the risk of uncertainty of life of the person
availing this scheme.
11) Derivative security: A derivative security is a security whose
value depends upon the value of other basic variables
backing the security. In India some forms of derivatives are in
operation like forwards in forex market.
(12) New Product in Forex Market: Some of these products are
yet to make full entry in Indian markets. Following are the
few products of forex markets. They are:
(a) Forward contract.
(b) Options.
(c) Futures.
(d) Swaps.
(13) Letter of Credit (LOC): It is an innovative
funding
mechanism for the import of goods and services on differed
payments terms. LOC is arrangement of a financing
an

institution/bank of one country with another institutions/

bank to support the export of goods and services so
as to
enable the importers to import on deferred
The LOC helps the exporters to get
payment terms.
payment immediately as
soon as the goods are shipped.

INNOVATIVE FINANCIAL INSTRUMENTS:

In recent times, many innovative financial
instruments have
come into the financial market. Innovation
has helped financial
intermediaries to keep in track. With the
changing time andd
changing needs of the customers.Some of the
recent financial
instruments are as given below:

(1) Treasury bill

(2) Commercial paper
 21
Introduction to Financial Services

debenture/Bonds
(3) Zero interest convertible
(4) Deep discount bonds
(5) Option bonds

(6) Index-Linked Guilt bond

(7) Inter-bank participations (IBPs)

(8) Secured premium notes

(9) Variable rate debentures

warrants
(10) Non-convertible debentures with equity
(11) Equity with 100% safety net
share
(12) Cumulative convertible preference
(13) Convertible bonds

(14) Easy exist bond

(15) Retirement bonds

(16) Regular income bonds

(17) Carrot and stick bonds
(18) Convertible bonds with a premium put
(19) Infrastructure bond

(20) Debenture with 'Cåll' and Put' feature

(21) Dual currency bonds
(22) European currency unit bonds (ECU)
(23) Loyalty coupons
(24) Global depository receipts, etc.
Some of them are briefly explained below:
(1) Treasury Bill: A treasury bill is an instrument which is issued
discount and
by the Central Government. It is also issued at a also issued
redeemed at par. The Central Government has
short term treasury bills of 182 days and 364 days bills.
(2) Commercial paper: Banking and non-banking companies can
issue commercial paper for raising their short term debt. It is
a short term negotiable instrument. It is like a promissory
note witha fixed maturity of 3-6 months.
22 (BBI) ()
Vipul's Financial Services Management
(5) Option bonds: They bonds may be cumulative To Or
Cumulative per the option of the holder of the
as
case of cumulative bonds, interest is
bonds. n
accumulated ana 15

payable only on maturity.

(4Secured Premium notes: In this instrument, interest will be
paid only after 3 years and hence companies with high capital
intensive investments can resort to this of
(5)
financing type
Equity with 100% safety net: Some companies make "100 %
safety net" offer to the public. It means that they give a
guarantee to the issue price.
(6) Retirement bond: This type of bonds enables an investor to
get an assured monthly income for a fixed
period after the
expiry of the 'wait period' chosen by him. The longer the wait
period, the higher will be the monthly income.
(7) Regular income bond: This bond offers
an attractive rate of
interest payable half
yearly
with the
facility of early
redemption. The investor is assured of
regular and fixed
income.
(8) Convertible bonds with a
premium put: These are bonds
issued at face value with a
put, which
bondholder can redeem the bonds for moremeans that the
value.
than their face
(9) Debenture with call and
put feature: Debenture with
feature means, the issuing 'call'
the debentures at a certain
company has the
option redeem
to
price before the maturity date.
Debenture with Put' feature means, the
holder the right to seek company gives the
determined prices.
redemption
at specified times at pre-
(10) European currency unit bonds: These
denominated in a basket of currencies of the 10 bonds are
are
constitute European community. They pay countries that
the
interest in ECUs or in or the
any principal and
10
currencies at the option
the holder. of

(11) Lovalty coupons: Ihere are entiuements to the

for two to three years to holder of deht
exchange into equity
discount prices. share at
Introduction to Financial Services 23

(12) Global depository receipt (GDR): A global depository

receipt is a dollar denominated instrument traded on a Stock
Exchange in Burope or the USA or both. It represents a
certain number of underlying equity shares.

FACTORS AFFECTING ACCESS TO FINANCIAL SERVICES:

A number of factors affecting access to financial services and
factors that determining financial services to be in-house or
outsourced have been identified. They are:
(1) Gender and age.
(2) Legal identity.
(3) Limited literacy.
(4) Place of living.
(5) Psychological barriers.
6) Cultural barriers.
(7) Social barriers.
(8) Social security payments.
(9) Level of income.
(10) Bank changes.
(11) Terms and conditions.
(12) Types of business.
(13) Attractiveness of the product.
(14) Cumbersome procedure.
(15) Bias of financial institutions.
(16) Wrongful assessment.
(17) Willingness to spread services.
(18) Lack of opportunities.
(19 Owning assets, etc.
 24 Financial Services Management
(BB!) (LL)
Vipul's
CALLENGES FACING THE FINANCIAL SERVICE SECTOR:
Financlal
rollowing are the important challenges faced by
Service Sector:
(1) Fast changes in technology and political/regulatory trend:
The ever and improving technology that
inreasing changes
quite rapidly has proved to be a boon as well as bane ror
many in the service industry. The political trends in the
country, has not been very stable resulting in lack of strong
regulatory trend.
(2) Lack of qualified personnel: Due to the ever improVing
technology, there has been a shortage of experienced and
qualified personnel's resulting in issues in the financial
services sector.
(3) Lack of specialization: In India, each
as a financial
intermediary is acting
super market delivering so many financial
products and dealing in different varieties of instruments. In
other countries, financial intermediaries
specialize in one or
two areas only. Hence, Indian financial
intermediaries can
also go for specialization.
(4) Lack of recent data: It is very vital that one should
build up a
proper data base on the basis of which one could embark
upon financial creativity. Moreover, a proper data base
would keep the financial intermediaries
up to date and help
to take sound financial decisions.
(5) Lack of investors' awareness: The investors
understand the various products and services availableshould
in
market unless there is no use of
the
innovative products and
instruments. The financial intermediaries should
nrospective investors about the product educate the
workshops, literature, advertisenment, etc.
through seminars,
(6) Lack of transparency: The financial service sector
for better level of transparency, Its disclosure
should ont
and the accounting practices nas to be in line requirements
international standards.
with the

(7) Lack of efficient risk management system: Unless a Hue

oper
is
risk management system developed by #the financial
 Introduction to Financial Services "Y"Y 25
intermediaries, they would not be in a position to fulfil the
growing requirement of their customers. Hence; it is
absolutely essential that they should introduce Future,
Options, Swaps and other derivative products which are
necessary for an efficient risk management system.
The financial service sector should rise up to the occasion to
meet their challenges by adopting new instruments and
innovative means of financing so that it could play a very
dynamic role in the economy.

AGENCIES PROVIDING FINANCIAL SERVICES:

Many agencies provide financial services like commercial1
banks, financial institutions, merchant bankers, leasing and hire
purchasing companies, stock brokers, etc.
(1) Commercial banks: Commercial banks are mainly involved
in fund based activity. They provide various loans and
overdraft facilities. In addition with that, they provide some
fee based services also, such as, project approval services,
loan syndication, etc.
(2) Merchant bankers: Merchant banking services are mainly
non-fund based activities. In attracting public savings,
merchant bankers play a vital role as specialized agencies.
The trends in the primary market in India suggest that
merchant bankers have been playing a very significant role in
the corporate sector's drive for mobilizing funds from the
public.
(3) Lease Financing: A lease is a contractual arrangement
whereby lessor grants to lessee' the right to use an asset in
return for periodical lease rental payments. In this
arrangement, the lessor' buys capital equipment for the use
of the lessee' in accordance with the latter's requirements
and specification. It is quite an advantage to lessee as he
acquires the use of asset with no initial cash outlay.
4) Hire purchase companies: Hire purchase is also a method of

inancing equipment purchases. The hirer

machinery
purchases an asset and agrees to pay in equal periodic
26 Vipul' Financial Services Management (BBI) (LL)
NBFC (Non-
instalments in specific time-length. Mostly
involved in these activities.
banking Financial Companies) are
to fund
(5) Venture capital: Venture capital is equity support
new concepts that involve a higher
risk and at the same time,
than
have and profit potential. There are more
high growth sector in
20 venture capital companies in public and private
India.
is a specific evaluation
(6) Rating agencies: The credit rating securities. It is done for
about the credit quality of the issue of
a particular financial
instruments. In India, CRISIL, ICRA,
CARE and ONICRA are fully involved in the Credit Rating

activities.
These include consumer
(7) Non-banking financial companies:
etc.
finance companies, portfolio management companies,
financial institution which
(8) Mutual funds: A mutual fund is a
and invest the
mobilizes the savings from the general public
different ways. The profits earned by
money so collected in
fund.
the funds are distributed to the shareholders of the
Stock Exchange
(9) The stock exchange: As a market, the
facilities for exchange of shares into money and vice
provides
versa. It is an association which performs through member
brokers who assist, facilitate and regulate trading in
services of stock
securities. Following are the functions
exchange:
is to
(a) Liquidity: The prime function of stock exchange
offer liquidity' to the existing securities. Stock exchanges
that
impart liquidity to the capital market instruments so
investors can disinvest while new savers can invest and
enter the market.

(b) Capital formation and economic growth: Stock

exchanges help in mobilization of surplus funds of
individuals and business firms for investment in
securities.
and acquisition: Take over,
(c) Facilitate take
over
of expansion of
acquisition or mergers are means
 Introduction to Financial Services VY"V 27
businesses for companies, which are made easier through
the stock exchanges.
(d) Evaluation of securities: Stock
exchange provides
information about the demand and market price of
various securities traded in the
exchange. This helps
investors to ascertain the current market prices of their
holdings.
(e) Other functions: Stock exchange performs multiple
functions, other than mentioned above some of the
functions are: ensure continuous and ready market for
securities, act as barometer of the economy, assist in
primary issue, etc.

Objective Questions with Answers

(1) Fill in the blanks:
(a) The prime function of stock exchanges is to offer to the
existing securities.
(6) Financial companies are known as &
management companies,
(c) Term lending institutions are market intermediaries.
(d) Underwriting of shares by a financial intermediary is a kind of
activity.
(e) Loan syndication by a financial intermediary is a kind of.
activity.
()Money market is the market for - sOurces of finance.
(g) regulates the capital market in India.
(h) Commercial banks mainly involved in activities.
Ans.: (a) Liquidity, (b) Asset & Liability, (c) Capital, (d) Fund Based,
(e) Fee based, (f) Short term, (g) SEBI, (h) Fund based
(2) Choose the best answer from the following:
(a) Non-banking companies should compulsorily get credit rating for their
(i) capital market instruments (i) Debt Market instruments (ii) Money
market instruments (iv) All of these instruments
(b)
(6) The process of managing the sales ledger of a client by a financial
service company is called
() Forfeiting (i) Factoring (ii) Leasing (iv) Securitisation of debt
c) Find the odd one out:
) commercial paper (i) certificate of deposit (ii) Share certificate
(V) Treasury bill
 Financial Services Management,
(BBI) (LL)
28 Vipul's
financial
kind of fee-based activity of a
(d) The following one is a
intermediary. purchase financingg
financing
(ii) Underwriting of shares (ii) Hire
(9Leasing
(iv) Capital issue management financial
of a
(e) The following one is a kind of fund based activity
intermediary Credit rating
counselling (ii)
(i) Loan syndication (i) Project
(iv) Venture capital
Ans.: (a-i), (b - ) , (c - i), (d - iv), (e - iv).

(3) State whether the following statements are True or False:

are specialized
(a) Credit rating agencies, factoring, discount house, etc.
institutions
(b) Merchant banking do the business of banking also.
Investment bankers provide expert advice to their clients regarding
)
takeover, acquisitions and mergers.
Financial service companies earn a major part of their income through
(d)
fee based activities.
(e) Custodial service is provided to foreign investors. (Oct. 18)
Ans.: (a) True (b) False (c) False (d) False (e) True.
(4) Abbreviations:
(a) ECU-European Currency Unit.
(b) GDR-Global Depository Receipt.
(c) IBP- Inter-Bank Participations.
(d) IPO- Initial Public Offer.
(e) LOC-Letter of Credit.