UNIT-I: Financial Services

Q.1 Define financial services and explain their importance in

the Indian economy. Discuss the evolution of financial
services in India with relevant examples.

What is Financial Services ?

Financial services are the services which are offered by the financial companies. The financial
companies comprise of both Asset Management Companies and Liability Management Companies. In
Asset Management Companies, there leasing are companies, mutual funds, merchant bankers and
issue/portfolio managers while Liability Management Companies has the bill discounting and
acceptance houses.

In other words, the financial service is referred to as the products and services which are offered by the
banks as they provide various kinds of facilities of financial transactions and other financial activities
loans, insurance, credit cards, investment opportunities and money management and also give
information on the stock market and other issues like market ups and downs. The basic aim of this
sector is to act as intermediary between individual and institutional investors which will help in financial
transactions.

Definition of Financial Services

The financial service industry is defined as, "The collection of organizations which intermediate and
facilitate financial transactions of individual and institutional investors from their resource allocation
activities through time".
Thus, the financial services comprise of various works related to change of savings into investment.
objectives of Financial Services

The various objectives of financial services are as follows :

1) Fund Raising :
The required funds can be raised by the help of financial services from the host of investors, individuals,
institutions and corporate. There are various instruments of finance being used for raising funds. These
kinds of funds are required by the corporate houses, individuals, etc.

2) Funds Deployment :
There are various kinds of financial services present in the financial markets which help the company in
proper deployment of funds. It also helps in decision-making of financial mix. The financial service
provide various types of services like bill discounting, factoring of debtors, shifting of short-term funds in
the money market, credit rating, e-commerce and securitization of debts for effective funds
management.

3) Specialized Services :
The various specialized services are being provided by financial service except banking and insurance
like credit rating, venture capital financing, lease financing, factoring, mutual funds, merchant banking,
stock lending, depository, credit cards, housing finance, book-building, etc. These services are provided
by various kinds of institutions and agencies like stock exchanges, specialized and general financial
institutions and non-banking finance companies, subsidiaries of financial institutions, banks and
insurance companies. etc.

4) Regulation :
There are various kinds of regulatory bodies present in India like Securities and Exchange Board of
India (SEBI), Reserve Bank of India (RBI) and the Department of Banking and Insurance of the
Government of India which have different types of legislation's and also help in providing various kinds
of functions of financial services institutions.

5) Economic Growth :
The financial services help in increasing the economic growth and development of country. It is done by
the help of mobilizing the saving of the public by investing in productive investments. Due to this reason,
the various developed and developing countries which are engaged in the effective financial market has
increased the savings and investments.

Scope of Financial Services

The scope / functions of financial service is as follows :

1) Gross Domestic Product (GDP) :

The gross domestic product refers to the financial value of all the finished goods and services
manufactured inside the country in a specific time period. The financial service contributes to the GDP
of the country.

2) Employment :
The financial service requires various kinds of financial institutions which need different kinds of skilled
manpower which indirectly lead to increase in the employment of the country.

3) Foreign Direct Investment (FDI) :

The financial service helps in increasing the foreign direct investment in the country which helps in
increasing the growth of the country.

4) Mobilizing of Funds :
The financial service helps in increasing the investment opportunity among the public leading to
mobilizing the funds of the public.

5) Long-Term Loan :
The long-term loan is basically required by the industries. The financial service helps in providing cheap
and long-term loan to industries.

6) Insurance :
There are various types of financial services. Among them the most important is insurance. The
insurance financial protection to the consumers.

Nature of Financial Services

The nature of financial services are given below :

1) Intangibility :
The financial services are intangible in nature. The companies need to build goodwill and confidence in
the clients for producing better and efficient financial services. The quality and innovations plays an
important role for building reliability among the customers.

2) Customer Orientation :
The financial institution selling financial services needs to study the demand of the customers. By the
help of various studies, the financial institutions makes different strategies relating to the costs, liquidity
and maturity consideration of the financial products. Hence, financial services are customer-oriented.

3) Inseparability :
The financial institutions and its customers cannot be separated from each other while producing and
supplying of financial services as both the functions of financial service is done at the same time.

4) Perishability :
Financial services cannot be stored as they need to be created and delivered to the target customers as
per their requirements. So, it is important for financial institutions to assure that there is match of
demand and supply of financial services.

5) Dynamism :
The financial service should be dynamic so that they can be changed according to the socio-economics
changes in the economy like disposable income, standard of living, level of education, etc. The financial
services should be efficient so that the new services can be made by studying the future wants of the
marker.

6) Derivatives and Catalysts :

The financial services are derivatives of financial market. So, they also act as a catalyst in the market
operation. It starts the market operations and help in increasing the investment by increasing the saving
for a high rate of capital formation. They help in various financial products which are derived from
various financial transactions.

7) Act as Link :
The financial services bridge the gap between investors and borrowers. They give profit bearing
investment to the investors by which they can also minimize the risk. The investors have the options of
high risk and high profits, low risk and low profit or get a regular income on acceptable risk. The
borrowers are also given many financial services for fulfilling the financial needs by lowering the cost of
funds and also making the repayments according to the income pattern.

8) Distribution of Risks :
The financial services distribute the funds in the profitable manner so that the investors can diversify
their risk in different financial services for getting maximum rate of return. The various experts in the
market help the investors for proper selection of the portfolio for getting maximum return.

Types of Financial Services

The financial services are divided into wholesale financial service and retail financial services according
to the profile of users.
The wholesale financial services are the services which are used for converting into final retail products.
It is used by industry and business people. The retail financial services are given to the individual for
direct consumption. The Classification of Financial Services are as follows :

Traditional activities are classified into fund based activities and non-fund based activities.
These are also known as assets based financial services and fee based financial services respectively.
Fund/Asset Based Financial Services

In this, the financial services are used for making assets or are backed by assets in which the funds are
changed to assets which are known as asset based financial services. It consists of the following :

1) Lease Financing :
A lease is known as the agreement between two parties known as lessor and lessee. The lessor is the
owner of the asset and lessee is the user of the asset. In this agreement, there is transfer of asset from
lessor to lesser for certain time period, in return the lessor receives the regular rent. As the lease period
gets over, the asset is returned back to lessor until there is renewal of the contract.

2) Hire Purchase :
The hire purchase refers to the hiring of an asset for certain time period and when the time period gets
over, there is purchase of same asset. At the time of sharing of asset, the person hiring the asset gets
the ownership and is allowed in use it. It is being used for financing of capital goods like industrial
finance, financing of consumer goods and for selling consumer good on hire purchase as it is a legal
advice.

3) Factoring :
Factoring is done when the company requires immediate money. It is done by selling the account
receivable like invoices to a third party known as factor at certain discount for immediate cash. This
cash is required for continuous working of the business.

4) Forfeiting :
Forfeiting is the way of financing of receivable related to international trade. It represents to the
purchase done by bank and financial institutions of trade bills/promissory notes instead of recourse to
the seller. The purchase is done by discounting the documents including the overall risk of non-payment
in collection. The various problems related to collection are accountability of the purchaser who pays
cash to seller after discounting the bills and notes.
5) Mutual Fund :
Mutual fund is the type of investment in which the pool of funds is sourced from various investors for
investing in various securities like stocks, bonds, money market instruments and similar assets. It is
managed by the money managers who invest the fund capital and tries to get capital gains and income
for the investors of the fund. The portfolio of mutual fund is organized and is according to the investment
objective given in the prospectus.

6) Exchange Traded Funds (ETFs) :

It is traded same like stocks in the stock exchange. It has the following assets like stocks, commodities
or bonds. They trade near to the net asset value according to the working of the trading day. The ETFs
also has a role to monitor various index like stock index or bond index. Exchange traded funds is useful
for investments as there are low costs, tax efficiency and stock-like features. They are very famous
among exchange-traded product.

7) Consumer Credit/Consumer Finance :

The term consumer credit means the activities related to giving credit to the consumers for empowering
them to acquire their own goods required for daily use. It is also known as credit merchandising,
deferred payments, installment buying, hire purchase, pay-out-of income scheme, pay-as-you earn
scheme, easy payment, credit buying, installment credit plan, etc.

8) Bill Discounting :
The bill discounting or a bill of exchange is known as the short-term, negotiable and can easily
liquidates money market instrument. It is used for financing a transaction in goods which is trade related
instrument.

9) Housing Finance :
The housing finance refers to the collection of all the financial arrangements which are offered by the
Housing Finance Companies (HFCs) for fulfilling the need of housing.

10) Venture Capital :

Venture capital includes two words i.e. venture and capital Venture refers to the way of doing something
whose result is not known as it is present with various kinds of loss while capital refers to human and
non-human resources required for starting the business.

Fee/Non-Fund Based Financial Services

The fee based financial does not provide instant fund but instead it allows for the creation of funds by
the fee charged service. It consists of the following :

1) Merchant Banking :
The merchant banker can be individual or institutions like an underwriter or agent for the companies and
municipalities allocating securities. They are also involved in broker or dealer functions, maintain the
market for previously issued securities and also gives suggestion to the investors on the advisory
services. It plays important part in mergers and acquisitions, private equity placements and corporate
restructuring.

2) Credit Rating :
The credit rating is the process in which the symbol is assigned to the instrument for some special work
which is referred to as benchmark of present knowledge on related capacity on the issuer to service its
debt obligation on particular time. The symbols used in credit rating are basically alphabetical or
alphanumeric. The comparison of different instruments is easy by the help of credit rating. The basic
objective of credit rating is to inform the investors about the relative ranking of the default-loss
probability for required fixed income investment in comparison to other rated instruments.

3) Stock Broking :
The stock broking refers to the method of bringing together the buyers and sellers of stock at the stock
exchange. It is the function of financial service intermediary. It is done by brokers, both main brokers
and sub brokers who are allowed by the SEBI. The stock broker can be individual broker, a firm of
brokers or a corporatized broker.

4) Securitization :
The change of present or future cash inflow of an individual into trade-able security which can be sold in
the market is known as securitization. These cash inflows can be from financial assets like mortgage
loans, automobile loans, trade receivables, credit card receivables, fare collections will be security
 according to which borrowing can be raised. Though an individual can take the assistance of
securitization instruments for efficient economic growth.

5) Letters of Credit (LC) :

A letter of credit is issued by the bank of the buyer to the seller which has a written undertaking for
repaying the cost of goods and services given by the seller to the buyer in place of producing
documents required within the precise time, place and to prescribed bank as stated in the documents
which is submitted according to the terms and conditions of the LC.

6) Bank Guarantees :
The guarantee is the contract between the issuing bank and the client in which the bank attempt to take
the claims presented by the client on the customer on behalf of which the bank had guarantee. The
payment of default can be taken from the bank by the client in case the customers do not fill the
obligation. The bank is only liable for the amount declared in the contract if the amount of default is
more than the bank will have to give the whole amount.

Modern Activities

The financial intermediaries also have other services besides the traditional services. These are of non
fund based activity. These are classified under New Financial products and services. The different
services are as follows :
1. It provides various project advisory services starting from the preparation of the project report
until raising of funds along with the various government approvals.
2. The planning and implementing the process involved in for merger and acquisition.
3. It assists the corporate customers in capital restructuring.
4. It acts s the trustees to the debenture holders.
5. It helps in achieving the better outcome by giving required changes in the management
structure and management style.
6. It help helps in finding the better joint venture partners and also making the joint venture
agreements which directly help in structuring the financial collaborations and joint ventures.
7. It also helps the sick companies by rehabilitating and restructuring the proper plans in the
execution of the scheme.
8. It helps in reducing risk by the help of exchange rate risk, interest rate risk, economic risk and
political risk by using swaps and other derivative products.
9. It It helps in controlling the portfolio of large public sector company.
10. It is involved in risk management service like insurance services, buy-back options etc.
11. It also gives suggestions to clients on the way of choosing the better source of funds by taking
up the various funds, cost, lending time, etc.
12. It also helps the client in lowering the debt cost and also for selecting the better optimum debt
equity ratio.
13. It also helps the companies which are related in credit rating and want to go public by the issue
of debt instruments.
14. It takes the various services associated to the capital market like :
 Clearing services
 Registration and transfers
 Sate custody of securities
 Collection of income on securities

Importance of Financial Services in Indian economy:

The advantages of financial services are as follows :

1) Economic Growth and Development :

The financial service is very important for economic growth and development. The banking, saving and
investment, insurance and debt and equity provides help both to the private citizens and business. The
private citizens get help in saving money, getting protection against some causalities while helps the
business in their formation, increasing the efficiency and also for expanding the business both nationally
and internationally. It also helps the poor section of societies as these services helps in lowering the
vulnerability and helping people to control the availability of assets for making the income and options
which leads to poverty in the society.

2) Contribution in GDP :
The financial service sector has the largest earning which consists of various type of business like
merchant banks, credit card companies, stock brokerages and insurance companies. It is largest in the
world. The financial services contribute a larger part of GDP.

3) Promotion of Liquidity :
The basic feature of the financial service is to use the money and monetary assets for producing the
goods and services so for this process there the requirement of regular flow of money. The money and
monetary assets are referred to as the liquidity in finance. While liquidity can also be known as the
money and other assets which can be changed into cash and reduce the risk of loss.

4) Generate Employment :
The financial service also helps in generating employment in the country as it is in the growth stage. It is
helpful for the developing country like India. It also helps in expanding the financial market. It helps in
increasing the FDI flow in the country which is required for the growth of the country.

5) Link between Savers and Investors :

The financial service helps in bridging the gap between the depositors and investors which helps in
increasing the savings and investments. It helps in doing proper allocation of resources which help in
mobilizing the saving of the public. It also contributes in the continuous up-gradation of the technology.
These all factors have increased the growth of the country on the sustainable basis.

6) Reduce Cost of Transaction and Borrowing :

The financial services has helped in making such financial structure which has the lower cost of
transactions. It has increased the profit on the return to the savers and it also lowers the cost of
borrowing which increases the rate of saving among the people. The financial services also help in
providing the cheap and long-term loans to different industries.

7) Minimizes Situations of Asymmetric Information :

The various financial services like insurance, pension and portfolio adjustment helps in providing the
financial protection and reducing the conditions in which the information is not regular and may also
affects the performance of the operators or when one party has the details while the other does not
have.

8) Financial Deepening and Broadening :

The financial services helps in developing the process of financial deepening and broadening. Financial
deepening means increasing the financial assets according to the percentage of Gross Domestic
Product (GDP). Financial broadening means in increasing the number of financial assets and also the
variety of participants and instruments.

9) Helps in Projects Selection :

The financial services also help in improving the performance of the investment. It also helps in
providing the way for exchanging the goods and services and also transferring the economic resources
by time and also geographic region and industries.

10) Allocation of Risk :

The financial service works in doing optimum allocation of risk bearing. It reduces, merges and trade
various kind of risks which is used in mobilizing the saving and assigning the credit. The financial
services work to make the risk within the limits and also reduces the gathering cost and examining the
information to help the operators in decision making.

Limitations of Financial Services

The growth rate of financial service is very fast but they also face some issues and problems. These
financial services face various challenges for accomplishing the financial demand of the economy. The
various disadvantages of financial services are as follows :

1) Lack of Qualified Personnel :

The financial services sector requires the financial creativity. There is lack of qualified and trained
employees to do so. It also reduces the growth of the economy.
2) Lack of Investor Awareness :
The investors do not have knowledge about the new financial products and instruments which makes it
of no use and the investors also does not get the advantages of innovative products and instruments.

3) Lack of Transparency :
As the financial system is expanding in various forms both national and international wise but do you the
lack of transparency in keeping the accounts the growth of financial system is very slow.

4) Lack of Specialization :
There is lack of specialization in India as each financial intermediary trade in different financial service
without having knowledge in one or two area While in other countries the financial intermediaries work
only in those area in which they are specialized.

5) Lack of Recent Data :

The financial intermediaries are not involved in research work so they do not get any updated
information which is important for doing any new innovation in the financial service.

6) Lack of Efficient Risk Management System :

Due to globalization of the economy the various multinational companies are entering the Indian market
and importance is given to the foreign portfolio flows. There is flow of various kinds of currencies which
increase the various kind of risk like exchange rate risk, interest rate risk, economic and political risk.

evolution of financial services in India

The Early Roots

Financial services in India have ancient roots, dating back to Vedic times. Money lending, barter, and
informal savings systems were prevalent. However, it was during British colonial rule that modern
financial institutions began to take shape.

The Birth of Banking

The foundation of modern banking in India was laid with the establishment of the Bank of Bengal in
1806. This marked the beginning of formal banking services in the country. The subsequent
establishment of the Bank of Bombay and the Bank of Madras formed the trio known as the Presidency
Banks.

The Imperial Bank and RBI

In 1921, the three Presidency Banks merged to form the Imperial Bank of India, which later became
the State Bank of India. The Reserve Bank of India (RBI) was established in 1935 as the central
banking authority, with the responsibility of regulating and controlling the banking sector.

The Green Revolution

The 1960s and 1970s saw the advent of the Green Revolution, which transformed Indian agriculture.
Financial institutions like the Agricultural Refinance Corporation (later NABARD) played a crucial role in
providing credit to farmers and boosting agricultural productivity.
Nationalization of Banks
In 1969, the Indian government undertook a significant step by nationalizing 14 major banks, followed
by six more in 1980. This move aimed to spread banking services to rural and underserved areas,
making banking more inclusive.

The Liberalization Era

The early 1990s brought about a seismic shift in India’s financial landscape with economic liberalization
and globalization. Key reforms included:

Deregulation: The government eased regulations on interest rates, allowing banks to set their own
rates.

Foreign Direct Investment (FDI): India opened its doors to foreign investment, attracting capital from
around the world.

Private Sector Banks: New private sector banks like ICICI Bank and HDFC Bank emerged, adding
competition to the sector.

Stock Market Reforms: The stock market underwent reforms to make it more transparent and efficient.
The Rise of Fintech
The 21st century witnessed the rise of financial technology (fintech) companies, offering innovative
digital solutions. Online banking, mobile wallets, peer-to-peer lending platforms, and robo-advisors have
become integral to the financial services landscape.
The Role of Regulatory Bodies
Regulatory bodies like the Securities and Exchange Board of India (SEBI), the Insurance Regulatory
and Development Authority (IRDAI), and the Pension Fund Regulatory and Development Authority
(PFRDA) have been established to oversee and regulate various segments of the financial services
sector.
Financial Inclusion Efforts
In recent years, India has made significant strides in financial inclusion. Initiatives like the Pradhan
Mantri Jan Dhan Yojana (PMJDY) have aimed to bring unbanked and underbanked populations into the
formal financial system.
The Digital Revolution
The digital revolution has transformed the delivery of financial services in India. The introduction of the
Unified Payments Interface (UPI) and mobile banking apps has made transactions quicker and more
accessible to a broader audience.

Conclusion
The financial services sector in India has undergone significant transformation over time, evolving from
traditional banking practices to modern, technology-driven financial solutions. The industry plays a
critical role in economic growth by facilitating capital mobilization, supporting investment opportunities,
and bridging the gap between investors and borrowers.

With the expansion of financial markets, regulatory bodies like SEBI, RBI, and IRDAI ensure proper
oversight, fostering transparency and efficiency. Financial services contribute to GDP growth,
employment generation, foreign direct investment (FDI), and financial inclusion through schemes like
the Pradhan Mantri Jan Dhan Yojana (PMJDY).

The rise of fintech has further revolutionized the sector, with digital payments, online banking, and
innovative investment platforms reshaping financial transactions. However, challenges such as lack of
financial literacy, limited access to banking in rural areas, and inefficient risk management still persist.

Overall, India's financial services sector continues to expand, modernize, and adapt to global trends,
ensuring economic stability and inclusive financial growth for all sections of society.
Regulatory Framework of Financial Services

Usually, the regulatory framework has the objective of establishing the efficient and effective financial
institutions and also assists in maintaining the stability of the transmission method and also
safeguarding the consumers of the financial services. The regulatory framework of financial services in
India is shown below :

1) Framework for Banking and Financing Services :

The banks handle two functions which also determine their growth. These functions are savings and
investments. The working of the banking and financial institutions is controlled by Central Government
and RBI. The central government and RBI help in maintaining the growth of economy according to the
requirement. The RBI by the help of RBI Act and Banking Regulation Act controls all the financial
institutions which are related to saving and capital formation. There are various other laws for institution
which are involved in raising and lending the capital. The various regulations for banking institutions
are as follows :

i) New Branch :
It gives permissions for establishing new bank or new branch.

ii) Capital :
It suggests the minimum capital, reserves and need of profit and reserves, dispersion of dividends, the
amount requirement for minimum cash reserve and other liquid assets.

iii) Inspection :
The proper monitoring and maintenance on the functioning of the banks.

iv) Appointment :
The various appointments of Chairman and Chief Executive Officer of private banks and nominating
members to the Board of Directors done.

v) Monetary Policy :
The planning and implementation of monetary and credit policy for effective regulation of credit flows.
Maintenance of certain amount by t deciding Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio
(SLR). The various treasury operations are done by the regular issue of bonds and repos.

vi) Credit Control :

The various qualitative and quantitative credit control method are used for managing credit flow to
different industries.

vii) Other Services :

The various other services like regulating, factoring, bill discounting and credit card services are offered
by the banks.

2) Framework for Insurance Services :

The Insurance Act, 1938 was made for managing the insurers prior to the nationalization of life and
general insurance. The LIC formed in 1956 and GIC was formed in 1973 are the big institutions in
insurance service. The nationalization of the insurance companies has changed the working of the Act.
The regulatory functions came along with LIC and GIC.
 The RBI appointed the Malhotra Committee in 1993 for providing ways to enhance the functioning of
various insurance services present in India so the Insurance Regulatory Authority (IRA) was framed in
1996. The IRA performs the following works for both public and private insurance company :

i) Orderly Growth :
The regulation and promotion of the insurance business leads to the orderly growth.

ii) Exercise of Powers :

The various powers and functions of the controller of Insurance under the Insurance Act, 1938, LIC Act,
1956 and the General Insurance Business (Nationalization) Act, 1972 or any other law relating to
insurance in force at the time it is exercised and performed.

iii) Protecting Policy-Holders :

The various interest of policy-holders like assigning of policy nomination by policy-holders, insurable
interest, settlement of insurance claims, surrender value of policy and other terms and conditions of
contract insurance, besides controlling and regulating the rates. advantageous terms and conditions that
are offered should be protected by the insurer.

iv) Professionalization :
The professional organization related to the insurance business should be controlled and promoted.

v) Information :
The various information of the inspection, inquiries and investigation including audit of the insurers,
insurance intermediaries and other organizations related to the insurance business can be called by the
governing body.

vi) Books Maintenance :

The way of maintaining the books of accounts with all the statements of accounts is prescribed to the
insurers and other insurance intermediaries.

3) Framework for Investment Services :

The various fund-based activities like mutual funds and venture capital is related to the investment
services. In the same way, the stock exchange and stock broking institution is also related with the
investment activities. The regulations followed by them can be discussed with other investment
activities. The Securities Contracts (Regulations) Act (SCRA), 1956. SEBI Regulations and Reserve
Bank of India comprises of the regulatory is defined.

4) Framework for Merchant Banking and Other Services :

The working of different types of intermediaries related to the management of public and right issue of
capital, like merchant bankers, underwriters, brokers, market-makers, registrars, advisors, collection
bankers, advertisement consultant, debenture trustees, credit rating agencies etc., are controlled by
various guidelines of SEBI which are explained as follows :
 SEBI (Merchant Banker) Regulation, 1992
 SEBI Rules for Underwriters
 SEBI (Brokers and Sub-brokers) Regulation, 1992
 SEBI Rules for Registrars to an Issue and Share Transfer Agents, 1993
 SEBI (Bankers to an Issue) Regulations, 1994
The regulations for merchant bankers and other intermediaries are as follows :
 The business should be registered with SEBI prior to the commencement of business according the
related rules and to regulations.
 The various rules and certification relating to the net-worth, capital adequacy and code of conduct
should be followed.
 The proper monitoring of the books and records should be done and also various investigations should
be done on the working of intermediaries. The accurate measure should be suggested wherever
required.
 All the guidelines of SEBI should he followed and the "due-diligence certificate" should also be issued.
 The SEBI guidelines for Disclosure and Investor Protection, 1992 related to the issue of capital and
SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1994 related to the method to be
followed by the acquirer and the merchant banker for such acquisition of shares should be followed.

Reasons for Regulation of Financial Services

The reasons for the regulation of financial services are as follows :

1. The market efficiency can be improved.
 2. It helps in removing the illegal trade practices.
3. It helps in maintaining the transparency in the operation and avoiding the case of manipulation.
4. It helps in increasing equality and correctness.
5. It also helps in safeguarding the small investors, depositors, insurance policy holders and
securities investors.
6. It helps in avoiding the misconduct in the market.
7. It helps in maintaining the stability of the financial system.
8. It helps in taking decisions regarding the plans and policy of financial system.
9. It helps in representing the international platform which helps in increasing the coordination
with the international financial administration policy.
10. It checks that the working is done according to the rules concerned with the financial markets.
11. It manages the financial regulation by issuing orders of cancellation or termination of licenses
forcing disciplinary sanctions, instructing corrective methods, etc.
12. Establishing the capability of financial service providers.
13. It helps in providing confidence in the financial system.
14. It reduces the breaching of laws.

Impact of Regulations on Banking, Insurance, and

Investment Services in India

Regulatory frameworks in India play a crucial role in ensuring financial stability, protecting consumer
interests, and fostering economic growth. Various regulatory bodies, such as the Reserve Bank of
India (RBI), Securities and Exchange Board of India (SEBI), and Insurance Regulatory and
Development Authority of India (IRDAI), oversee different segments of the financial system. Below is
a detailed analysis of how regulations impact banking, insurance, and investment services in India:

1. Impact of Regulations on Banking

Sector
Regulatory Body: Reserve Bank of India (RBI)

Financial Stability & Risk Management:

 The Basel III norms regulate capital adequacy, stress testing, and market liquidity risks for
Indian banks, ensuring financial stability.
 RBI monitors Non-Performing Assets (NPAs) and enforces stringent provisioning
requirements to prevent banking crises.

🔹 Consumer Protection & Fraud Prevention:

 Know Your Customer (KYC) & Anti-Money Laundering (AML) guidelines ensure banks verify
customer identities and prevent financial fraud.
 Ombudsman Schemes help consumers resolve grievances efficiently.

🔹 Monetary & Credit Regulations:

 RBI controls repo rates, CRR (Cash Reserve Ratio), and SLR (Statutory Liquidity Ratio) to
manage inflation, liquidity, and economic growth.
  Priority Sector Lending (PSL) mandates ensure banks provide credit to sectors like
agriculture, MSMEs, and housing.

🔹 Digital Banking & Fintech Integration:

 Regulations under Payment and Settlement Systems Act, 2007 enable digital payments, UPI,
and fintech innovations in banking.
 RBI's Data Localization Policy mandates banks to store payment data within India for
security.

Key Challenges in Banking Regulation:

✅ Compliance with evolving cybersecurity and fintech regulations

✅ Balancing financial inclusion with risk mitigation
✅ Strengthening public sector banks (PSBs) amid high NPAs

2. Impact of Regulations on Insurance

Sector
Regulatory Body: Insurance Regulatory and Development Authority of India
(IRDAI)

🔹 Consumer Protection & Policyholder Interests:

 Standardization of insurance products (e.g., health, motor, and life insurance) ensures
transparency.
 Grievance Redressal Mechanisms like the Insurance Ombudsman resolve consumer
disputes.

🔹 Capital & Solvency Regulations:

 Minimum solvency margin (1.5x liabilities) ensures insurance companies remain financially
sound.
 Foreign Direct Investment (FDI) limits:

o Raised to 74% in private insurance firms (from 49%) to attract global investment.

🔹 Expansion of Insurance Coverage & Financial Inclusion:

 Government-driven schemes like Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY) and
Ayushman Bharat improve insurance penetration.
 Microinsurance regulations encourage coverage for low-income groups.

🔹 Digital & Insurtech Innovation:

 IRDAI promotes paperless insurance and e-KYC for faster claim processing.
 The rise of Usage-Based Insurance (UBI) and AI-driven underwriting is reshaping the sector.

Key Challenges in Insurance Regulation:

✅ Reducing claim settlement delays and fraudulent claims
✅ Expanding coverage to rural and underserved areas
✅ Balancing customer affordability with insurer profitability

3. Impact of Regulations on Investment

Services
Regulatory Body: Securities and Exchange Board of India (SEBI)

🔹 Investor Protection & Market Integrity:

 Strict corporate governance norms (e.g., SEBI’s LODR regulations) ensure transparency in
listed companies.
 SEBI’s role in IPOs & Mutual Funds:

o Mandates disclosures for Initial Public Offerings (IPOs) to prevent misleading

investments.
o Enforces fair-pricing rules in mutual funds and Alternative Investment Funds (AIFs).

🔹 Stock Market Regulations & Trading Norms:

 Regulation of Brokers & Investment Advisors:

o Ensures fair practices in stock trading and financial advisory services.

 High-Frequency Trading (HFT) & Algorithmic Trading Rules:

o SEBI limits HFT abuses to prevent market manipulation.

🔹 Foreign Investment & Capital Market Growth:

 SEBI regulates Foreign Portfolio Investments (FPIs) to balance inflow control and ease of
investment.
 Ease of trading & transparency:

o SEBI introduced T+1 settlement cycle for quicker stock transactions.

🔹 Digital & Crypto Regulations:

 SEBI supports fintech-driven Robo-Advisory Services for retail investors.

 India's stance on Cryptocurrency regulations remains unclear, with a potential Digital Rupee
(CBDC) under RBI’s oversight.

Key Challenges in Investment Regulations:

✅ Preventing market frauds, insider trading & stock manipulation

✅ Regulating new asset classes like cryptocurrencies and NFTs
✅ Ensuring fair trade execution with the rise of AI-driven trading
Conclusion

Regulations in banking, insurance, and investment services in India play a pivotal role
in ensuring financial stability, investor confidence, and economic growth. While RBI
safeguards the banking sector, IRDAI protects policyholders, and SEBI regulates
capital markets, all three contribute to financial security and inclusion. However,
continuous reforms are necessary to balance growth with risk management,
especially in the fintech-driven digital age.

Q.3 Compare and contrast the functions of merchant

banking and other intermediaries in the financial services
sector. Highlight their advantages and disadvantages.

Comparison of Merchant Banking and Other Financial

Intermediaries
Financial intermediaries play a crucial role in the financial services sector by
facilitating transactions between investors and borrowers. Among them, merchant
banks and other intermediaries such as commercial banks, investment banks,
stockbrokers, mutual funds, and non-banking financial companies (NBFCs)
serve distinct functions. Below is a comparison of merchant banking and other
financial intermediaries in terms of their roles, functions, and key differences.

1. Functions of Merchant Banking

Merchant banks specialize in providing advisory, fundraising, and financial

structuring services, mainly for corporate clients.

Key Functions of Merchant Banking:

🔹 Capital Raising & IPO Management – Assist companies in issuing stocks and
bonds via Initial Public Offerings (IPOs), rights issues, and private placements.
🔹 Mergers & Acquisitions (M&A) Advisory – Offer expert guidance on mergers,
acquisitions, takeovers, and corporate restructuring.
🔹 Underwriting Services – Guarantee the purchase of shares or securities issued by
companies, reducing the risk for issuers.
🔹 Project Financing & Syndication – Arrange funding for large projects through
debt and equity financing.
🔹 Corporate Advisory Services – Provide financial restructuring advice, risk
management, and capital structuring strategies.
🔹 Venture Capital & Private Equity Advisory – Help businesses secure funding
from venture capitalists and private equity firms.

Example: ICICI Securities, SBI Capital Markets, and Kotak Mahindra Capital are
leading merchant banks in India.

2. Functions of Other Financial Intermediaries

Apart from merchant banks, several other financial intermediaries play vital roles in
financial markets.

(i) Commercial Banks

🔹 Accept deposits and provide loans and credit facilities to individuals and
businesses.
🔹 Offer payment and settlement services like issuing checks, online banking, and
fund transfers.
🔹 Provide trade finance services, such as letters of credit and bank guarantees.
🔹 Example: State Bank of India (SBI), HDFC Bank, Punjab National Bank (PNB).

(ii) Investment Banks

🔹 Facilitate institutional trading of stocks, bonds, and other securities.
🔹 Manage large-scale investments and corporate restructuring.
🔹 Example: Goldman Sachs, Morgan Stanley, JM Financial.

(iii) Stockbrokers & Brokerage Firms

🔹 Act as intermediaries in buying and selling stocks, bonds, and derivatives.

🔹 Provide investment research and advisory services.
🔹 Example: Zerodha, Angel Broking, Motilal Oswal.

(iv) Mutual Funds

🔹 Pool funds from investors to invest in diversified equity, debt, and hybrid
instruments.
🔹 Offer professional fund management services to retail and institutional investors.
🔹 Example: HDFC Mutual Fund, SBI Mutual Fund, ICICI Prudential Mutual Fund.

(v) Non-Banking Financial Companies (NBFCs)

🔹 Provide loans and credit services, similar to banks but without a banking license.
🔹 Offer vehicle loans, housing finance, microfinance, and leasing services.
🔹 Example: Bajaj Finance, Mahindra & Mahindra Financial Services.

3. Comparison of Merchant Banking & Other

Financial Intermediaries

Other Financial
Feature Merchant Banking
Intermediaries
Corporate financial Lending, deposit-taking,
Primary
advisory, IPOs, M&A stock trading, investment
Function
deals, venture capital management
Large corporations,
Target Individuals, businesses,
startups, institutional
Clients retail investors
investors
Deposit & Does not accept deposits
Banks & NBFCs accept
Lending or provide direct lending
deposits and provide loans
RBI (Banks & NBFCs), SEBI
Regulatory SEBI (Securities and
(Stockbrokers & Mutual
Authority Exchange Board of India)
Funds), IRDAI (Insurance)
Lower risk (banks, mutual
Risk & High risk due to capital
funds) but varies by
Return market exposure
intermediary
Key Advisory fees, Interest income, trading
Revenue underwriting commissions, fund
Source commissions management fees
4. Conclusion

Merchant banks primarily cater to corporate clients by providing investment and

advisory services, while other financial intermediaries, such as commercial banks,
NBFCs, stockbrokers, and mutual funds, serve a broader audience, including
individuals and businesses. While commercial banks focus on lending and
deposits, stockbrokers facilitate securities trading, and mutual funds provide
investment diversification.

Thus, merchant banking complements other financial intermediaries by

specializing in corporate finance and capital market services, making it essential in
financial markets but distinct from retail-oriented intermediaries.

Advantages and Disadvantages of Merchant Banking

and Other Financial Intermediaries

Financial
Advantages Disadvantages
Intermediary
✅ Capital Raising
❌ High-Risk Exposure –
Support – Helps
Involves significant risk
Merchant companies raise funds
due to market fluctuations
Banking through IPOs, rights
and investment
issues, and private
uncertainties.
placements.
✅ Expert Advisory
❌ Not for Retail
Services – Provides
Customers – Primarily
financial restructuring,
caters to corporate clients,
mergers & acquisitions
limiting services for
(M&A), and venture
individuals.
capital advisory.
✅ Underwriting ❌ High Fees – Charges
Services – Reduces risk high advisory and
for businesses by underwriting fees, making
guaranteeing stock sales it expensive for small
in IPOs. businesses.
✅ Customized Financial
❌ Regulatory
Solutions – Offers
Compliance – Highly
tailored strategies for
regulated by SEBI,
corporate growth, debt
requiring strict adherence
structuring, and
to financial laws.
investment planning.
✅ Deposit Safety & ❌ Limited Investment
Loans – Accepts public Services – Does not offer
Commercial
deposits and provides extensive corporate
Banks
loans for individuals and advisory or investment
businesses. banking functions.
✅ Liquidity & Payment ❌ Strict Lending Policies
Services – Provides easy – Loans require high
 Financial
Advantages Disadvantages
Intermediary
creditworthiness and
access to funds through
collateral, making
ATMs, online banking,
borrowing difficult for
and credit facilities.
some.
❌ Lower Interest on
✅ Government-Backed
Deposits – Fixed deposits
Stability – Regulated by
and savings accounts offer
RBI, ensuring financial
lower returns compared to
system stability.
investment options.
✅ Institutional
❌ High Entry Barriers –
Investment Support –
Not accessible to retail
Investment Helps large businesses
investors due to high
Banks with acquisitions,
minimum investment
restructuring, and
requirements.
institutional trading.
✅ Capital Market ❌ Complex Transactions
Expertise – Specializes – Deals involve high
in large-scale financial complexity and require
transactions and risk extensive legal and
management. regulatory approvals.
✅ Stock Market Access ❌ Market Volatility Risk
Stockbrokers
– Facilitates trading of – Investors may face
& Brokerage
stocks, bonds, and losses due to stock market
Firms
derivatives for investors. fluctuations.
✅ Investment Advisory – ❌ Brokerage Fees &
Offers research insights Commissions – Traders
and guidance on must pay brokerage fees,
securities selection. which reduce net returns.
✅ Diversified ❌ Expense Ratios &
Investment – Reduces Management Fees –
Mutual
risk by pooling funds and Investors must pay annual
Funds
investing in multiple fees, which can lower
securities. returns.
✅ Professional Fund
❌ No Guaranteed
Management –
Returns – Market-based
Managed by experts who
investment, subject to
analyze and select the
fluctuations.
best assets.
✅ Variety of Options – ❌ Lock-In Periods –
Investors can choose Some mutual funds (e.g.,
between equity, debt, ELSS) require a minimum
and hybrid funds. holding period.
Non-Banking ✅ Flexible Loan ❌ Higher Interest Rates
Financial Products – Offers vehicle – Compared to banks,
Companies loans, housing finance, NBFCs often charge
(NBFCs) and microloans with higher interest on loans.
 Financial
Advantages Disadvantages
Intermediary
simpler processes.
✅ Less Stringent ❌ Lack of Deposit
Regulations – More Insurance – Deposits are
flexible lending norms not insured by RBI like
than commercial banks. bank deposits.
✅ Caters to ❌ Liquidity Issues –
Underserved Segments Some NBFCs face liquidity
– Serves customers who crises due to over-lending
may not qualify for bank and poor financial
loans. management.

Constituents of Financial Services and Their

Interdependence

The financial services sector is a broad industry that facilitates financial transactions,
investments, and economic growth. It consists of various financial institutions and
services that work together to support individuals, businesses, and governments.

1. Constituents of Financial Services

The financial services sector comprises the following key constituents:

(i) Banking Services

🔹 Commercial Banks – Provide deposit and lending services, fund transfers, and
payment processing.
🔹 Investment Banks – Specialize in capital raising, mergers & acquisitions, and
institutional trading.
🔹 Non-Banking Financial Companies (NBFCs) – Offer loans, asset financing, and
microfinance but do not hold banking licenses.

(ii) Insurance Services

🔹 Life Insurance Companies – Provide protection against life risks and offer
savings plans.
🔹 General Insurance Companies – Cover risks related to health, property, vehicles,
and businesses.

(iii) Investment & Capital Market Services

🔹 Stock Market & Stockbrokers – Facilitate buying and selling of securities in

stock exchanges.
🔹 Mutual Funds & Asset Management Companies (AMCs) – Pool funds from
investors to invest in diversified portfolios.
🔹 Pension Funds – Provide retirement savings and investment options.

(iv) Financial Advisory & Wealth Management

🔹 Merchant Banking – Provides corporate finance advisory, IPO management, and

venture capital assistance.
🔹 Portfolio Management Services (PMS) – Help high-net-worth individuals (HNIs)
in managing their investments.

(v) Payment & Settlement Systems

🔹 Fintech & Digital Payments – Enable online transactions via UPI, mobile wallets,
and e-commerce platforms.
🔹 Credit & Debit Card Services – Provide financial flexibility to individuals and
businesses.

(vi) Regulatory Bodies

🔹 Reserve Bank of India (RBI) – Regulates banking and monetary policies.

🔹 Securities and Exchange Board of India (SEBI) – Governs capital markets,
mutual funds, and stock trading.
🔹 Insurance Regulatory and Development Authority of India (IRDAI) –
Regulates the insurance industry.

2. Interdependence of Financial Services

Each financial service is interconnected and depends on others for seamless
functioning.

Constituent Interdependence with Other Financial Services

🏦 Provide loans to businesses, which invest in
capital markets and insurance.🏦 Support
Banking
mutual funds and investment firms through
Services
financial transactions.🏦 Enable digital payments
and fintech innovations.
 Constituent Interdependence with Other Financial Services
📑 Require banking and investment services for
managing premiums and claims.📑 Depend on
Insurance
capital markets for investing policyholders'
Services
funds.📑 Work with NBFCs and microfinance
institutions to provide insurance products.
📈 Depend on banks and NBFCs for financial
Investment &
liquidity.📈 Require stockbrokers and merchant
Capital
banks for facilitating trading.📈 Mutual funds invest
Markets
in stocks, bonds, and corporate securities.
💰 Rely on investment banks, mutual funds, and
Financial
capital markets to optimize returns.💰 Work closely
Advisory &
with insurance firms for risk management
Wealth
strategies.💰 Provide guidance on corporate
Management
financing and mergers.
📲 Depend on banks, NBFCs, and credit card
Fintech & services for processing transactions.📲 Enhance the
Digital efficiency of stock market trading and mutual
Payments fund investments.📲 Strengthen financial inclusion
by supporting microfinance and digital banking.
🏛 Oversee and govern the entire financial
services sector.🏛 Ensure stability in banks,
Regulatory
insurance companies, and capital markets.🏛
Bodies
Implement regulations for fintech innovations
and digital banking.

Conclusion

The financial services ecosystem functions as an integrated system where each

constituent plays a vital role. Banks provide funding, investment firms manage
wealth, insurance companies mitigate risk, and fintech enables digital
transactions. Regulatory bodies like RBI, SEBI, and IRDAI ensure stability and
transparency. The interdependence of these services ensures smooth financial
operations, economic growth, and consumer confidence in the financial system.

Role of Financial Services in Economic Development –

Illustrated with Examples

Financial services are crucial for economic growth, employment generation, capital
formation, and financial inclusion. Below are examples illustrating how different
financial services contribute to economic development.
1. Banking Services – Enabling
Economic Growth
Example: Pradhan Mantri Jan Dhan Yojana (PMJDY) –
Financial Inclusion
 The Indian government launched PMJDY in 2014 to provide bank accounts for unbanked
individuals, especially in rural areas.
 Over 50 crore bank accounts were opened, giving millions access to credit, savings, and
insurance.
 This has boosted savings rates and access to credit, promoting entrepreneurship and
economic stability.

Example: SBI’s Role in Infrastructure Development

 State Bank of India (SBI) provides long-term loans for infrastructure projects like highways,
railways, and power plants.
 The Mumbai Metro expansion was funded partly by SBI loans, improving urban mobility and
boosting the local economy.

2. Insurance Services – Risk Mitigation

& Social Security
Example: Ayushman Bharat – National Health
Protection Scheme
 Ayushman Bharat provides health insurance coverage up to ₹5 lakh per family for low-
income groups.
 This reduces out-of-pocket healthcare expenses, preventing families from falling into
poverty due to medical bills.
 It also supports the healthcare industry, leading to investment in hospitals and medical
infrastructure.

Example: Crop Insurance for Farmers (PMFBY)

 Pradhan Mantri Fasal Bima Yojana (PMFBY) insures farmers against crop failures due to
weather conditions.
 Millions of farmers receive compensation during droughts and floods, ensuring financial
stability and reinvestment in farming.

3. Investment & Capital Market Services

– Boosting Industrial Growth
Example: Reliance Industries’ Stock Market Growth
  Reliance Industries Ltd (RIL) raised capital from stock markets to invest in telecom and retail
sectors.
 This led to the creation of Jio, which disrupted the telecom industry and made internet
access affordable for millions.
 Increased stock market participation has helped businesses expand, creating millions of
jobs.

Example: Mutual Funds Driving Retail Investments

 The rise of Systematic Investment Plans (SIPs) in mutual funds has encouraged small
investors to participate in the stock market.
 HDFC Mutual Fund has attracted thousands of retail investors, mobilizing savings for
corporate and industrial growth.

4. Financial Advisory & Wealth

Management – Corporate Expansion
Example: Mergers & Acquisitions (M&A) by Merchant
Banks
 ICICI Securities facilitated the merger between HDFC Bank and HDFC Ltd, creating India’s
largest private-sector bank.
 This merger enhanced credit availability, boosted financial inclusion, and strengthened the
Indian banking sector.

Example: Venture Capital Supporting Startups

(Zomato & Paytm)
 Startups like Zomato and Paytm received venture capital investments from Sequoia Capital
and SoftBank.
 These investments enabled these companies to expand operations, create employment, and
drive India’s digital economy.

5. Fintech & Digital Payments –

Accelerating Financial Transactions
Example: Unified Payments Interface (UPI)
Revolutionizing Digital Transactions
 UPI transactions crossed ₹17 lakh crore (₹17 trillion) in a single month, indicating
widespread adoption.
 It has enabled cashless payments for small businesses, increased financial transparency, and
boosted e-commerce growth.
Example: Microfinance Institutions Empowering
Women Entrepreneurs
 Bandhan Bank and SKS Microfinance provide small loans to women entrepreneurs in rural
India.
 These funds help women start small businesses like tailoring, dairy farming, and
handicrafts, leading to self-employment and rural economic growth.

6. Regulatory Bodies – Ensuring Stability

& Growth
Example: SEBI’s Role in Protecting Investors
 SEBI introduced T+1 settlement cycle, reducing the risk in stock trading and increasing
investor confidence.
 It ensures transparent trading practices, attracting more retail and institutional investors.

Example: RBI’s Monetary Policy Controlling Inflation

 During high inflation periods, RBI increases repo rates to control excess liquidity and
stabilize the economy.
 This policy was crucial during COVID-19, where RBI implemented measures to support
businesses and prevent economic downturns.

Conclusion

The financial services sector is interconnected and plays a pivotal role in economic
development. Banks provide credit, insurance mitigates risks, capital markets
fund industrial expansion, and fintech drives financial inclusion. Together, these
services fuel GDP growth, create employment, and foster economic resilience and
prosperity. 🚀