Financial services-concepts, objectives, functions, characteristics-financial

services market, concepts, constituents-Growth of financial services in India-

financial services sector problems- financial services environment-forces-

players in financial markets-Interest rate determinations-Macroeconomic

aggregates in India.

1. INTRODUCTION
Financial Service as a part of financial system provides different types of finance
through various credit instruments, financial products and services.
In financial instruments, we come across cheques, bills, promissory notes,
debt instruments, letter of credit, etc.
In financial products, we come across different types of mutual funds,
extending various types of investment opportunities. In addition, there are also
products such as credit cards, debit cards, etc.
In services we have leasing, factoring, hire purchase finance etc., through
which various types of assets can be acquired either for ownership (or) on lease.
There are different types of leases as well as factoring too.
Thus, financial services enable the user to obtain any asset on credit,
according to his convenience and at a reasonable interest rate.

Objectives (or) Functions of Financial Services

Following are the objectives of Financial Services that are generally offered
by banking financial companies :-
1. Fund Raising :
Financial Services help to raise the required funds from a host of investors,
individuals, institutions and corporate. For this purpose, various instruments of
finance are used. The funds are demanded by corporate houses, individuals, etc.
2. Funds Deployment :
An array of financial services are available in the financial markets which help the
players to ensure an profitable deployment of the funds raised. Financial Services
assist in the decision making regarding the financing mix. Services such as bill
discounting, factoring of debtors, parking of short-term funds in the money market,
 credit rating, e-commerce, and securitization of debts are provided by banking
financial services firms in order to ensure efficient management of funds.

3. Specialized Services :
The financial services sector provides specialized services such as credit
rating, venture capital financing, lease financing, factoring, mutual funds,
merchant banking, stock lending, depository, credit cards, housing finance, book
building, etc. besides banking and insurance institutions and agencies such as stock
exchanges, specialized and general financial institutions, non banking finance
companies, subsidiaries of financial institutions, banks and insurance companies
also provide these services.
4. Regulation :
There are agencies that are involved in the regulation of the financial
services activities. In India, agencies such as the Securities and Exchange Board
of India (SEBI), Reserve Bank of India (RBI) and the Department of Banking and
Insurance, Government of India, through a plethora of legislative measures,
regulate the functioning of the financial service institutions. The objective is to
ensure an orderly functioning of the financial markets.
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 of a cross section of people, for the purpose of channeling them into
productive investments.

Characteristics of Financial Services :

1. Intangibility :
The basic characteristics of financial services are that they are intangible
in nature. For financial services to be successfully created and marketed, the
institutions providing them must have a good image and enjoy the confidence of
their clients.

2. Customer Orientation :
The institutions providing financial services study the needs of the
 customers in detail. Based on the results of the study, they come out with
innovative financial strategies that give due regard to costs, liquidity, and maturity
considerations for various financial products and services. This way, financial
services are customer oriented.
3. Inseparability :
The functions of production and supply of financial services have to be
carried out simultaneously. This cause for a project understanding between the
financial services firms and their clients.
4. Perishability :
Financial Services have to be created and delivered to the target clients
instantaneously. They cannot be started. They have to be supplied according to the
requirements of customers. Hence it is imperative that the providers of financial
services ensure a match between demand and supply.

Importance of Financial Services :

It is the presence of financial services that enables a country to improve its
economic condition where by there is more production in all the sectors leading to
economic growth. The benefit of economic growth is reflected on the people in the
form of economic prosperity where in the individual enjoys higher standard of
living.
1. Promoting Investment :
The presence of financial services creates more demand for products and
the producer, in order to meet the demand from the consumer goes for more
investment. At this stage, the Financial Services come to the rescue of the investor
such as merchant banker through the new issue market, enabling the producer to
raise capital. The stock market helps in mobilising more funds by the investor.
Investments from abroad is attracted. Factoring and leasing companies, both
domestic and foreign enable the producer not only to sell the products but also to
acquire modern machinery / technology for further production.
2. Promoting Savings :
Financial Services such as mutual funds provide ample opportunity for
different types of saving. In fact, different types of investment options are made
available for the convenience of pensioners as well as aged people so that they can
be assured of a reasonable return without much risks for people interested in the
growth of their savings, various reinvestment opportunities are provided.
3. Minimising the risks :
The risk of both financial services as well as producers are minimized by
the presence of insurance companies. Various types of risks are covered which not
only offer protection from the fluctuating business conditions but also from risks
caused by natural calamities. Insurance is not only a source of finance but also a
source of a savings, besides minimizing the risks.
4. Maximising the returns :
The presence of financial services enables businessmen to maximize their
returns. This is possible due to the availability of credit at a reasonable rate.
Producers can avail various types of credit facilities for acquiring assets. In certain
cases, they can even go for leasing of certain assets of very high value. Factoring
companies enable the sources as well as producer to increase their turn over which
also increases the profit.
5. Ensures greater yield :
As seen already, there is a subtle difference between return and yield. It is
the yield which attracts more producers to enter the market and increase their
production to meet the demands of the consumer. The financial services enable the
producer to not only earn more profits but also maximize their wealth. Financial
Services enhance their goodwill and induce them to go in for diversification. The
stock market and the different types of derivative market provide ample
opportunities to get a higher yield for the investor.

6. Economic growth :
The development of all the sectors is essential for the development of the
economy. The financial services ensure equal distribution of funds to all the three
sectors namely, primary, secondary and tertiary so that activities are spread over
in a balanced manner in all the three sectors.
7. Economic development :
Financial Services enable the consumers to obtain different types of
products and services by which they can improve their standard of living. Purchase
of car, house and other essential as well as luxurious items are made possible
through hire purchase, leasing and housing finance companies.
8. Benefit to Government :
The presence of financial services enables the government to raise both
short-term and long-term funds to meet both revenue and capital expenditure
through the money market, government raises short-term funds by the issue of
Treasury Bills. There are purchased by commercial banks from out of their
depositor’s money. In addition to this, the government is able to raise long-term
funds by the sale of government securities in the securities market which forms a
part of financial market. Even foreign exchange requirements of the government
can be met in the foreign exchange market.
9. Expands activities of financial institutions :
The presence of financial services enables financial institutions to not only
raise finance but also get an opportunity to disburse their funds in the most
profitable manner. Mutual funds, factoring, credit cards, hire purchase finance are
some of the services which get financed by financial institutions.
10. Capital Market :
One of the barometers of any economy is the presence of a vibrant capital
market. If there is hectic activity in the capital market, then it is an indication of
the presence of a positive economic condition. The financial services ensure that
all the companies are able to acquire adequate funds to boost production and to
reap more profits eventually.
11. Promotion of Domestic and Foreign Trade :
Financial Services ensure promotion of domestic as well as foreign trade.
The presence of factoring and forfeiting companies ensures increasing sale of
goods in the domestic market and export of goods in the foreign market. Banking
and insurance services further contribute to step up such promotional activities.
 12. Balanced Regional Development :
The government monitors the growth of economy and regions that remain
backward economically are given fiscal and monetary benefits through tax and
cheaper credit by which more investment is promoted. This generates more
production, employment, income, demand and ultimately increase in prices.
Types of Financial Services :
i. Factoring
ii. Leasing
iii. Forfeiting
iv. Hire Purchase Finance
v. Credit Card
vi. Merchant Banking
vii. Book Building
viii. Asset Liability Management (ALM)
ix. Housing Finance
x. Portfolio Finance
xi. Underwriting
xii. Credit Rating
xiii. Interest and Credit Swap
xiv. Mutual Funds

1. Factoring :
Factoring may be defined as an arrangement between the financial
institution and the business concern which is selling goods on credit. There are
three parties in a factor agreement. The supplies (or) the saver, the buyer and the
factor. After saving the goods to the buyer, the saver prepares a bill either for a
period of 3 (or) 6 months as per the agreement. This bill is given to the factor who
will provide upto 80% of the bill value to the saver. The factor undertakes to collect
the money from the buyer on the due date, there upon the balance amount is handed
over to the saver. For this function the factor is provided a commission by the
saver.
 2. Leasing :
To enable companies (or) small firms to acquire asset of a higher value,
leasing companies were setup. The leasing company will purchase the asset and
give it the manufacturer on a lease for a period of 10 (or) 12 years the company
leasing the machine is called lessor and manufacturer who is taking the asset for
use is called leasing. The lease will be paying rent to the lessor for the use of the
asset. Basically there are 2 types of lease agreement.
(i) Financial Lease
(ii) Operating Lease
Financial Lease :
A financial lease is a contract involved payment over a fixed period of a specific
amount the capital outlay of a specific project.
Operating Lease :
An equipment is purchased and production on lease to the Lessee for
use. The Lessee has the option to cancel the contract and at the same time, the
Lessee has the option to sell the asset to any other person to cost of the equipment
is not fully recovered by the lease amount and the lease period is normally shorter
that the economic life of the asset.
3. Forfeiting :
This is an arrangements under which the exporter is provided finance
against his bills by forfeiting bank. In domestic trade, it is discounting of foreign
bill is favour of the exporter. It is an understanding between the exporter bank :
forfeiting bank and the importer bank. Due to this, the exporters are able to get
finance immediately after export and the risk of bad debts is eliminated.
4. Hire Purchase Finance :
The hire purchase finance companies provide finance to the buyers of
assets from a period of 2 to 5 (or) even 10 years. When a buyer is unable to
purchase an asset for example a car the hire purchase finance companies provide
finance to the buyer, which is repayable on a monthly instalment over a period of
24 (or) 60 months. The amount of repayment will be an equal amount from which
a part of it will be taken towards the principal and the remaining towards interest
the hire purchase finance companies will be charging interest at a flat rate of 10
(or) 15% for the period of the loan.
5. Credit Card :
This is a facility given to the customers of fixed income (or) middle and
higher income group. A credit card is a plastic card given by the banker to the
customer in which the name of the customer is embossed in block letters. The
name of the bank and the date of issue and expiry are also mentioned on the face
of the card the reverse side of the card will bear the specimen signature of the
customer. A list of vendors (or) saver will be given by the banker to the customers.
6. Merchant Banking :
A merchant banker is one who underwrites corporate securities and advise
clients on issues like corporate mergers. The merchant banker may be in the form
of a bank, a company firm (or) even a proprietary concern. It is basically service
banking which provides non-financial services such as arranging for funds rather
than providing them. The merchant banker understands the requirements of the
business concern and arranges finances with the help of financial institutions,
banks, stock exchanges and market.

7. Book Building :
When a company instead of offering shares directly to the public, invites
bids from the merchant bankers for the sale of shares it is called book building.
The merchant bankers will take the full responsibility for the issue of the shares.
The entire procedure of allotment of listing of shares will be undertaken by the
merchant bankers. The share price depends on the demand for the shares in the
market.
8. Asset Liability Management (ALM) :
It is a method used by banks for adjusting their liability from assets which
should qualify the three conditions of safety, liquidity and profitability. In other
words, a bank which receives money from the depositors will go for investment
(or) grating of loans of different types.
The bank will prefer such kind of assets (while investing (or) lending)
which will have safety, liquidity and profitability. There are companies which
helps banks is managing assets and liabilities in a creditable manner.
9. Housing Finance :
Housing Finance has not only become popular. But the procedure for
obtaining loan has been simplified and housing loans for dwelling houses are made
easily available. This due to the change is the housing policy of both the central
and state governments. Commercial banks have entered housing finance. In fact
State Bank of India has setup a separate subsidiary for housing finance. World
bank is providing soft loan repay in 25 to 40 years for the purpose.
10. Portfolio Finance :
Portfolio finance deals with the Management of Portfolio Investment. A
company involved in portfolio management undertakes to manage the investment
of an individual (or) company is such a manner that a better return on investment
is ensured, keeping in that the safety of investment. Thus in portfolio finance the
finance in various shares (or) securities is managed by persons with special
knowledge of the market and different securities. The mutual fund companies and
investment trust companies are very good example of portfolio finance. They help
individuals, commercial banks and other finance companies is distributing their
investment in different portfolios. Portfolio management consists of investment in
shares debentures, government securities, commercial paper, bonds, global deposit
receipt and other investment securities such as unit trust of India, Infra structure
bonds etc.
11. Under Writing :
Under Writing is an act of guarantee by an organisation for the sale of
certain minimum amount of shares and debentures issued by a public limited
company. According to the companies act, when a person agrees to take up shares
specified in the underwriting agreement, when the public (or) others failed to
subscribe for them, it is called underwriting agreement. For this purpose the
underwriter who guarantees for the sale of shares is given a commission.
12. Credit Rating :
It is a method of judging the credit worthiness of a borrower (or) of a
company in which investments are made the credit rating of a borrowing company
is done on the basis of its performance of the company is previous years, liquidity
position, market share of the company repayment of deposits, profits earned,
interest offered on deposits & assets portfolio etc.
13. Interest and Credit Swap :
There are two types of interest rate fixed interest rate and floating interest
rate. The fixed interest rate is applicable for the entire loan while is floating interest
rate the interest will be changing. Interest swap is a method where by a person who
has taken a loan with a higher rate of interest, would like to take advantage of the
lower rate of interest by shifting his previous loan to the new floating rate which
has a lower rate of interest.
When an old loan is replaced by a new loan at a lower rate of interest it is
called interest swap and also credit swap because of a new creditors replacing the
old creditor
14. Mutual Funds :
A mutual fund is a company that brings together from many people and
invests it is stocks bonds (or) assets. The combined holdings of stocks bonds (or)
other assets the fund owns are known as its portfolio. Each investor in the fund
owns shares, which represent a part of these holdings.
The mutual fund offers open-ended and close-ended funds. The open ended
funds are kept open and the investors have the option to enter at any time and
option out as they like. But in closed-ended fund there is a limit of time and amount
and this ensures that mutual fund to get a better return. Apart from this there is also
growth. Oriented fund which reinvest the return by the customers so that on a
future date they can get a higher return. In the case of tax benefit funds there is a
tax relief for the return they get on the investment.

FINANCIAL SERVICES MARKET

The market for the exchange of financial services products and
instruments through a wide variety of players, each one offerings a unique type of
service, may be designated as the ‘financial services market’.
Constituent
The Financial Services Market comprises of four major constituents as
stated below :
 1. Market Players :
Financial Services are offered by a host of institutions and agencies that
understand and meet the requirements of a wide spectrum of customers. The
players include banks, financial institutions, mutual funds, merchant bankers,
stock brokers, consultants, underwriters, market makers, corporate bodies, FIIS,
custodians, vendute capital funds etc.
2. Instruments :
Financial Instruments constitute an important part of the financial services
market. The instruments include equity instruments, debt instruments, hybrid and
exotic instruments. It is characteristic of a financial services market that a number
of innovative instruments, such as zero-coupons bonds, etc. are floated on a
continuous basis. The purpose is to keep the financial markets vibrant.
3. Specialized Institutions :
A financial services market is characterized by the dynamic presence of
specialized institutions. These include acceptance house, discount houses, factors,
depositories, credit rating agencies, venture capital institutions, etc
4. Regulatory Bodies :
The financial service market is regulated by a host of institutions and
agencies. The regulatory bodies include the department of banking and insurance
of the Central Government, Reserve Bank of India, Securities and the exchange
board of India, board of industrial and financial reconstruction, etc.

Growth of Financial Sources in India :

The growth of financial services in India has taken place under the various
stages. It is outlined below :
1. Merchant Banking Era :
The period between 1960 and 1980 may be called the ‘Merchant Banking
Era’. During this period, financial queries such as merchant banking, insurance
and leasing services began to grow. During this period, merchant bankers carried
out the following functions.
(i) Identifying projects, preparing feasibility reports, and developing detailed project
reports.
(ii) Conducting marketing, managerial, financial and technical analysis on behalf of
their clients.
(iii) Assist in designing an appropriate capital structure.
(iv) Acting as a bridge between the capital market and fund-seeking institutions.
(v) Carrying out underwriting functions.
(vi) Assisting enterprises in getting their issues listed on the stock exchange.
(vii) Offering legal advice relating to mergers and acquisitions.
(viii) Providing technical advice on leverged buyouts and takeovers.
(ix) Extending syndication facility as part of arranging project finance.
(x) Arranging working capital loans.

2. Investment Companies Era :

This era marked the setting up of a variety of investment institutions and
banks. The investment companies include the Unit Trust of India, which is the
largest public sector mutual fund in the world, the life insurance corporation of
India that initiated the life insurance business and the general insurance
corporations.
3. Modern Services Era :
This stage marked the launch of a variety financial products and services
during the eighties. These financial services included over-the-counter services.
Share transfers, pledging of shares, mutual funds, factoring, discounting, venture
capital & credit rating.
4. Depository Era :
In order to integrate the Indian financial sector with the global financial
services industry, depositories were setup. The depository system was introduced
with a view to promoting the concept of paperless trading through the
dematerialization of shares and bonds. The introduction and popularization of
book-building was also another step forward in the direction of building a strong
financial services sector in India. Similarly the ‘On-line Trading’ interface
introduced by the Bombay Stock Exchange, the Delhi Stock Exchange and the
computerization of the National Stock Exchange, are all acting as the fulcrum for
the development of a strong financial services market in India.
 5. Legislative Era :
Several legislations were introduced in order to allow for broad based
development in the financial services sector. The FERA has been replaced by
FEMA. Far-reaching amendments were made in the Indian Companies Act,
Income Tax Act, etc. to facilitate safe and orderly trading, and settlement of
transactions.

Foreign Institutional Investors (FIIS)

This era marks the latest stage in the growth of the Indian financial markets.
The economic reform measures initiated by the Government necessitated greater
free play for various participants. As part of it, divestment guidelines have been
issued by the SEBI in recent times, where by FIIs are permitted to operate in the
Indian capital market.
Financial Services Sector – Problems in Indian Financial Services:
(i) Lack of expertise
(ii) Inadequate accommodation
(iii) Inadequate technology
(iv) Inadequate quality service
(v) Captive organization
(vi) Restricted scope of operations
(vii) Limited innovation
(viii) Lack of sound institutional mechanism
(ix) Lack of core-competence

Macroeconomic Aggregates in India :

Real Sector Policies :
Real Sector Policies are guided by the objective of boosting domestic
investment demand by expanding the participation of private enterprise and by
promoting foreign investment.
Fiscal Policies :
Fiscal Policies renew commitment to consolidation and rectitude alongside
a six-pronged strategy to reinvigorate the economy and return to a growth path
consistent with its potential. Monetary policy aims at ensuring adequate liquidity
 to meet credit demand and pursues the objective of softening of interest rates
consistant with a vigil on price stability. The refined channels of credit delivery
and the operational effectiveness of monetary policy are sought to be improved as
an integral part of building the institutional infrastructure and augmented for an
efficient and vibrant financial system.
Agriculture Policy :
Agriculture policy aims at initiating measures for the development of the
agriculture sector. A number of steps have been undertaken in this regard for
instance measures have been taken to reduce food grain stocks that are posing
problems of storage and disposal.
Policy on Manufacturing Infrastructure and Services :
Policy initiatives are continued to be taken under the gamut of ‘economic
liberalization’ to support and promote manufacturing, infrastructure and services
sector. The plan outlay on power, roads and national highways and railways in
enhanced substantially to step up public investment in infrastructure.
Trade Policies :
The Medium-Term Export Strategy (MTES) sets out a road map for the
export sector, which is coterminus with the tenth five-year plan period. The MTES
aims at increasing India’s share in world trade.
Export and Import (EXIM) Policy :
The five year Exim policy for the period 2002-2007 includes, inter alia,
removal of all QRs on exports (except a new sensitive items reserved for exports
through state trading enterprises), a farm-to-port approach for exports of
agricultural products, special focus on cottage sector and handicrafts and
Assistance to States for Infrastructural Development for Exports (ASIDE).

Policies for external capital flows :

a. Foreign direct investment.
b. Portfolio investment
c. Non resident deposits
d. Indian direct and portfolio investment overseas
e. External commercial borrowings and EEFC accounts.
 Interest Rate Determination :
The rate of exchange between present and future resources is called ‘market
interest rate’. An interest rate refers to the price of a loan. Interest rate represents
terms at which short-term funds are loaned and borrowed.
Features of Rate Determination :
a) Shifting Resources :
Interest rate helps those who wish to shift present resource to future by lending.
b) Future Expectation :
The exchange of resources takes place through the mechanism of market
rate of interest. It tells participants as to how much money is to be expected in
future for the money lent now.
c) Rate Determination :
d) The relative demand for and supply of funds determine the market rate of interest.
The market rate of interest is always positive because lenders have the alternative
of keeping the funds idle and therefore there is no question of getting anything less
in future than what they give up now.
e) Different Rates :
There are many market rates depending on the length of time and the extent
of risk of funds. The rate as applicable to a risky company will be higher than that
paid by the government because lenders are risk-average and require greater
compensation in future resources from risky borrowers.
Determining the rate of interest :
The rate of interest for funds is determined by the demand for and the supply
of funds
a) Demand for funds :
Demand for funds is indicated by the “demand curve”. The function of a
demand curve is to show different rates of interest a which borrowers would be
willing to borrow. Demand curve always slopes downwards. This is because, high
interest rate would result is less borrowing and vice versa. Further, higher rate of
interest funds the necessity for a promise of higher amount in future for a given
amount at present. This makes borrowings less attractive moreover, demand curve
represents the behavior of borrowers.
b) Supply of funds :
Supply of funds is indicated by the ‘Supply Curve’. The function of a
supply curve is to show the different rates of interest at which lender would be
willing to lend. Supply curve always slopes upwards. This is because; high interest
rate would result in more lending by lenders and vice versa. Supply curve
represents the behavior of lenders.
As shown in Exhibit 3, the rate of interest of 10 percent is determined by
the interplay of the forces of demand for any supply of funds of Rs. 1000/-. If
demand for funds increases from Rs.1000/- to Rs.1200/- the rate of interest
increases from 10 percent to 12 percent. This is of course based on the assumption
that the supply of funds remains constant at Rs.1000/-.

Financial Services and Economic Environment :

The growth of financial services in a country needs proper economic
environment. This consists of various economic factors such as (a) favorable
economic system, (b) economic laws, (c) economic policies, (d) economic
planning, (e) economic condition.
A) Favorable Economic System :
Financial Services provide financial assistance according to the
requirements of different business activities. A business may function under
different forms of organizations, such as sole trader, partnership firm, joint stock
companies (or) by multinational corporation etc. It may also be undertaken by the
government by way of public sector enterprises.
B) Economic Laws :
(1) Industries and Regulation Act for promoting proper investment.
(2) Companies Act for regulating proper management of companies
(3) Securities (contract and regulation) Act for streamlining transactions in stock
exchange.
(4) Consumer Protection Act to safeguard the interests of consumers.
(5) Foreign Exchange Regulation Act for regulating foreign investment, which is now
called Foreign Exchange Management Act (FEMA).
C) Economic Policies :
In economy policy, we deal with aspects connected with improving the
economic conditions of the country. The government will adopt such policies
which promote investment, production, employment, foreign trade, economic
growth, etc. For their purpose, the policy will be aimed at encouraging investment,
both from domestic and foreign country. Increase of production in agriculture,
industry and service sectors has to be taken up through proper pricing policy,
procurement policy, allowance and subsidies, tax concessions, etc.

D) Economic Planning :
In economic planning, accounting decides a particular course (or) path for
its development. Planning fixes the rate of growth of the economy and accordingly
links all the physical, fiscal and monetary resources to achieve the desired growth.
The purpose of economic planning is to achieve rapid economic growth in all the
sectors of the economy so that the people in the country experience a higher
standard of living.
E) Economic Condition :
Financial Services can be active only under favourable economic
conditions. If there is depression with falling prices and closing down of
production, financial services cannot experience more scope. So, a controlled
inflation with more scope for investment and production will be ideal for the
expansion of financial services.
Macro Economic Aggregates and Policies :
Here, we deal with various macro economic factors which not only influence
the economic condition of the country but also the working of financial services in
the country.
 Economic factors at the national level, influencing the economic condition of the
country can be stated as macro economic aggregates. There are
1. Savings of the economy.
2. Investment
3. Economic growth
4. Capital Formation
5. Capital output ratio
6. Population growth
7. Growth of foreign trade
8. Balance of payments
9. Foreign debt
10. Exchange rate stability
11. Employment level
12. Capital inflow
13. Per capita income as an indicator of economic development
1. Savings of the economy :
In most of the developed countries, savings of the people form a major part
of investment in the country. Savings can be there only when the income level of
the people is higher and the people are living above the poverty level. In our
country, savings are on an average only 9% of the total gross domestic product.
As against this, in developed countries, they are nearly 28 to 30% of GDP. (For
example, the purchase of jewels in the rural economy). Hence the financial
services in our country are unable to play a major role due to poor savings.
2. Investment :
The growth of the economy depends on the extent of investment made in
the country. Investments must generate more production and they should promote
a balanced growth of all the sectors in the economy. Thus, the more production in
agriculture will create conditions for growth in industrial sector and services
sector. Investment can be done both by public and private sectors. Investment as a
percentage of GDP should be sufficient so that the desired growth is achieved in
all the sectors of the economy.
3. Economic growth :
The increase in physical production in all the three sectors of the economy
namely agriculture, industry and service is referred as economic growth. An
increase in economic growth need not bring an increase in economic development.
Because, the increased production may be consumed by the increased population.
4. Capital formation :
When a company earns profits, it may plough back a part of its profits in
the business which expands its capital. In this way, capital formation takes place
for capital formation, a reduction in consumption is very essential. Financial
services can play a major role by attracting the savings (or) the profit earned by
the companies for a beneficial investment.
5. Capital-output ratio :
The amount of capital required for an output is dealt in the capital-output
ratio. The significance of this ratio is the quantum of capital needed for generating
the required output with more technology. Lesser capital is utilized and more
output is obtained with a higher amount of investment, the capital-output ratio is
bound to bring in more benefits to the economy. The difference between an under
developed and a developed country in this – a developed country consumers less
capital but brings out more output, while an under developed country consumers
more capital and turns out lesser output due to poor technology. We can very well
experience this in our agriculture.
6. Population Growth :
Increase in population may retard the economic growth of a country. If the
increased population is not put to use for productive purposes. But unfortunately,
the productive force is of a higher percentage. Of late, the export of services is
gaining ground and in this context, India has earned more than 15% of its expert
earnings in the IT industry by exporting software financial services require more
human touch and it is here that a trained person in financial service contributors
more to the economy.
7. Growth of Foreign Trade :
Export forms a major part of any developed economy most of the countries
which have developed rapidly have given due importance to foreign trade. The
promotion of foreign trade requires the active support of financial services. Bank
provide export finance. Factoring and forfeiting companies finance the exporter.
In this way, every aspect of financial service promotes foreign trade which in turn
plays a crucial role in the development of the economy.
8. Balance of Payments :
The receipts and payments of a country from abroad are represented by the
balance of payments statement. If the receipts are more and the payment is less,
the country experiences a favourable balance of payments position. But
sometimes, it may face a reverse situation, with more payments and less receipts,
leading to unfavourable balance of payments. Thus the financial services can act
as a bridge between the foreign investor on the one hand and the domestic producer
on the other.
9. Foreign Debt :
Financial Services helps the economy in mobilizing foreign debt. Such
debts can be obtained in the global financial market at a competitive rate of
interest. Normally, the credit rating of the country is taken into consideration
before extending any foreign loan. Hence, raising foreign debts at a competitive
rate of interest and putting them for proper use is another important factor and the
financial services ensure that the returns commensurate with the interest rate on
the foreign debts.
10. Exchange Rate Stability :
When a country continuously borrows in the foreign market followed by
heavy imports, then it will experience a decline in its currency value in relation to
foreign currency. For (e.g) If India has an exchange rate of 1 US Dollar = Rs.48/-
, after the imports and foreign debts, its exchange rate may slide to 1 US Dollar =
Rs. 60/-. This slide will affect India, as we have to pay more for our debts which
are now 25% more than what they were at the time of our borrowing.
11. Employment Level :
Another Marco economic aggregate influenced by financial services is the
level of employment. With more financial services such as leasing, hire purchase
finance, housing finance, insurance etc., the level of employment opportunity in
the country is bound to increase. This will create more demand and other industries
will also expand. Thus, the country can reach the level of full employment.
12. Capital Inflow :
The capital market in the country can attract more capital from aborad,
leading to capital inflow. This will take place only when the return on capital much
higher or the interest rate offered is higher that what is prenailing in the domestic
country.
13. Per Capita Income as an indicator of Economic Development :
When the national income of the country increase due to increased production and
services, the benefits goes to the population in the form as per capita income which
is an indicator of the economic development of the country. Financial services can
increase the per capita income by providing various types of loans and encouraging
self employment schemes.

Players in the Financial Services Sector :

14. Financial Service Sector comes under the tertiary sector is which banks play a
major role. For the growth of financial services, banks are led by the central bank
of the country followed by commercial banks, co-operation banks, development
banks, foreign banks etc.
15. Hire purchase financier is also a player in the financial service sector as he enables
the consumer to buy the product on credit basis.
16. Leasing companies through financial and operating lease ensure the acquiring of
assets by producers on a long-term basis at a reasonable charge.
17. Factoring enables the saver to obtain 80% value of sales from the financial
companies undertaking factoring services.
18. Under writers and merchant bankers are additional players who promote not only
companies but also ensure dynamic activity in the capital market.
19. Book-builders help companies in allotting shares to different categories of
investors.
20. Mutual funds ensure investment by the public and also ensure tax relief to the
investor.
21. Credit cards, another important player in the financial services, ensure the
circulation of plastic money and enable purchase on credit by the consumer.
22. Credit rating companies play an important role by giving different credit ratings to
companies to mobilize public deposits.
23. Housing finance companies and insurance companies also promote investment in
the economy as they also form a part of the players in the financial services.
24. Asset liability management company enables mutual funds to undertake proper
investment in different types of economy.
25. Finance companies in general and also as a part of non-banking finance companies
provide additional funds to the above players so that there is more activity in the
economy.

Question bank
UNIT 1

PART A

1. What are financial services? Name them

2. What is a financial services market?
3. List out the financial services environment?
4. Define interest rate?
5. Meaning of Forfeiting?
6. Mention any four players in financial services?
7. Mention any four problems in financial services sector?
8. What is mean by financial market?
9. Name any three components of financial services
10. list any four characteristics of financial services?
 Part B
1. Bring out the important role played by financial services in developing the economic
growth of a country
2. What kind of economic environment should prevail for the effective functioning offinancial
services in a country
3. State the features of rate determination
4. State the financial Services Sector – Problems in Indian Financial Services:
5. Describe the types of players in the financial services sector
6. Explain the Functions of Financial Services
7. Explain the types of financial services
8. Mention and explain the Characteristics of Financial Services
9. Explain the growth of financial services in India?
10. Explain the role played by the financial services in favorable economic system

Reference:
Gurusamy.S Essential of Financial Service Vijay Nicole Imprints P Ltd.-Chennai.
Santhanam.B Financial Services Margam Publications, Chennai.