Financial Services

Financial services refers to services provided by the financial institutions in a financial system. The finance industry encompasses a broad range of organizations that deal
with the management of money. Among these organizations are Asset Management Companies like leasing companies, merchant bankers and Liability Management Companies like
discounting houses and acceptance houses, and further general financial institutions like banks, credit card companies, insurance companies, consumer finance companies, stock
exchanges, and some government sponsored enterprises. The term Financial Services in a broad sense means mobilising and allocating savings. Thus, it includes all activities
involved in the transformation of savings into investment.
Following are some of the examples of Financial Services offered by various financial institutions:
1. Leasing, credit card services, factoring, portfolio management and financial consultancy services.
2. Underwriting, discounting and rediscounting of bills.
3. Acceptances, brokerage and stock holding.
4. Depository services, housing finance and book building
5. Hire purchases and installment credit.
6. Mutual Fund management.
7. Deposit insurance.
8. Financial and performance guarantees.
9. E -commerce and securatisation of debts.
10. Loan syndicating and credit rating.
The financial services can also be called financial intermediation. Financial intermediation is the process by which funds are mobilised from a large number of savers and make them
available to all those who are in need of it.
Importance of Financial services
It is the presence of financial services that enables a country to improve its economic condition whereby 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 wherein the individual enjoys higher standard of living. It is here the financial services enable
an individual to acquire or obtain various consumer products through hire purchase. In the process, there are a number of financial institutions which also earn profits. The presence of
these financial institutions promote investment, production, saving etc.
Hence, we can bring out the importance of financial services in the following points:
1. Promotes Investments.
2. Promotes Savings.
3. Minimizes Risks.
4. Maximizes Returns.
5. Economic Growth.
6. Economic Development.
7. Benefits of Government.
8. Expands activities of financial markets.
9. Vibrant Capital Market.
10. Balanced Regional Development.
11. Promotion of Domestic & Foreign Trade.
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 comes 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 mobilizing 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 on investment without much risks. For people interested in the growth of
their savings, various reinvestment opportunities are provided. The laws enacted by the government regulate the working of various financial services in such a way that the interests
of the public who save through these financial institutions are highly protected.
3. Minimizing the risks: The risks 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 savings,
besides minimizing the risks. Taking this aspect into account, the government has not only privatized the life insurance but also set up aregulatory authority for the insurance
companies known as IRDA, 1999 (Insurance Regulatory and Development Authority) .
4. Maximizing 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 seller as well as producer to increase their turnover which also increases the profit. Even under stiff competition, the producers will be in a position to sell their products at a low
margin. With a higher turnover of stocks, they are able to maximize their return.
5. 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. This brings in a balanced growth of the economy as a
result of which employment opportunities are improved. The tertiary or service sector not only grows and this growth is an important sign of development of any economy. In a welldeveloped country, service sector plays a major role and it contributes more to the economy than the other two sectors.
6. 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 is made possible through hire purchase, leasing and housing finance companies. Thus, the consumer is compelled to save while
he enjoys the benefits of the assets which he has acquired with the help of financial services.
7. 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. These are purchased by commercial banks from out of their depositors 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 apart of financial market. Even foreign
exchange requirements of the government can be met in the foreign exchange market. The most important benefit for any government is the raising of finance without offering any
security. In this way, the financial services are a big boon to the government.
8. 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. The financial
institutions are in a position to expand their activities and thus diversify the use of their funds for various activities. This ensures economic dynamism.
9. 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. In the absence of financial services, there will be paucity of funds which will adversely affect the working of companies and will only result in a negative growth of the
capital market. When the capital market is more active, funds from foreign countries also flow in. Hence, the changes in capital market is mainly due to the availability of financial
services.
10. Promotion of Domestic and Foreign Trade: Financial services ensure promotion of domestic as well as foreign trade. The presence of factoring 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.
11. 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. The producers
will earn more profits and can expand their activities further. So, the presence of financial services helps backward regions to develop and catch up with the rest of the country that has
developed already.

Financial institutions: Financial institutions are the firms that provide

financial services and advice to their clients. The financial institutions are
generally regulated by the financial laws of the government authority.
Various types of financial institutions are as follows:
1. Commercial Banks
2. Credit Unions
3. Stock Brokerage Firms
4. Asset Management Firms
5. Insurance Companies
6. Finance Companies
7. Building Societies
8. Retailers
Role of Financial Institutions
The various financial institutions generally act as an intermediary between the capital market and debt market. But the services provided by a particular institution depends on its
type.The financial institutions are also responsible to transfer funds from investors to the companies.
Typically, these are the key entities that control the flow of money in the economy.
Mutual Funds
A mutual fund is a pool of money from numerous investors who wish to save or make money just like you. Investing in a mutual fund can be a lot easier than buying and
selling individual stocks and bonds on your own. Investors can sell their shares when they want.
A mutual fund is a collection of investments, such as stocks, bonds and other funds owned by a group of investors and managed by a professional money manager. The
investment objective of the mutual fund determines what types of securities it buys. A mutual fund can focus on specific types of investments. For example, a fund may invest mainly
in government bonds, stocks from large companies, or stocks from certain countries. Or, it may invest in a variety of investments.
An investment company that continually offers new shares and stands ready to redeem existing shares from the owners. Because the shares are purchased directly from
and are sold directly to the mutual fund, there is no secondary market in these companies' stock.
Types Of Mutual Fund:
There are many different types of mutual funds, each with its own set of goals. They all are given below :
1. Open-Ended - This scheme allows investors to buy or sell units at any point in time. This does not have a fixed maturity date.
a. Debt/ Income - In a debt/income scheme, a major part of the investable fund are channelized towards debentures, government securities, and other debt instruments.
Although capital appreciation is low (compared to the equity mutual funds), this is a relatively low risk-low return investment avenue which is ideal for investors seeing a
steady income.
b. Money Market/ Liquid - This is ideal for investors looking to utilize their surplus funds in short term instruments while awaiting better options. These schemes invest in shortterm debt instruments and seek to provide reasonable returns for the investors.
c. Equity/ Growth - Equities are a popular mutual fund category amongst retail investors. Although it could be a high-risk investment in the short term, investors can expect
capital appreciation in the long run. If you are at your prime earning stage and looking for long-term benefits, growth schemes could be an ideal investment.
I. Index Scheme - Index schemes is a widely popular concept in the west. These follow a passive investment strategy where your investments replicate the movements of
benchmark indices like Nifty, Sensex, etc.
II. Sectoral Scheme - Sectoral funds are invested in a specific sector like infrastructure, IT, pharmaceuticals, etc. or segments of the capital market like large caps, mid caps,
etc. This scheme provides a relatively high risk-high return opportunity within the equity space.
III. Tax Saving - As the name suggests, this scheme offers tax benefits to its investors. The funds are invested in equities thereby offering long-term growth opportunities. Tax
saving mutual funds (called Equity Linked Savings Schemes) has a 3-year lock-in period.
d. Balanced - This scheme allows investors to enjoy growth and income at regular intervals. Funds are invested in both equities and fixed income securities; the proportion is
pre-determined and disclosed in the scheme related offer document. These are ideal for the cautiously aggressive investors.
2. Closed-Ended - In India, this type of scheme has a stipulated maturity period and investors can invest only during the initial launch period known as the NFO (New Fund Offer)
period.
a. Capital Protection - The primary objective of this scheme is to safeguard the principal amount while trying to deliver reasonable returns. These invest in high-quality fixed
income securities with marginal exposure to equities and mature along with the maturity period of the scheme.
b. Fixed Maturity Plans (FMPs) - FMPs, as the name suggests, are mutual fund schemes with a defined maturity period. These schemes normally comprise of debt instruments
which mature in line with the maturity of the scheme, thereby earning through the interest component (also called coupons) of the securities in the portfolio. FMPs are
normally passively managed, i.e. there is no active trading of debt instruments in the portfolio. The expenses which are charged to the scheme, are hence, generally lower
than actively managed schemes.
3. Interval - Operating as a combination of open and closed ended schemes, it allows investors to trade units at pre-defined intervals.
Benefits of Mutual Funds: An investor can invest directly in individual securities or indirectly through a financial intermediary. Globally, mutual funds have established themselves as
the means of investment for the retail investor.
1. Professional management: An average investor lacks the knowledge of capital market operations and does not have large resources to reap the benefits of investment. Hence, he
equires the help of an expert. It, is not only expensive to hire the services of an expert but it is more difficult to identify a real expert. Mutual funds are managed by professional
managers who have the requisite skills and experience to analyse the performance and prospects of companies. They make possible an organised investment strategy, which is hardly
possible for an individual investor.
2. Portfolio diversification: An investor undertakes risk if he invests all his funds in a single scrip. Mutual funds invest in a number of companies across various industries and sectors.
This diversification reduces the riskiness of the investments.
3. Reduction in transaction costs: Compared to direct investing in the capital market, investing through the funds is relatively less expensive as the benefit of economies of scale is
passed on to the investors.
4. Liquidity: Often, investors cannot sell the securities held easily, while in case of mutual funds, they can easily encash heir investment by selling their units to the fund if it is an openended scheme or selling them on a stock exchange if it is a close-ended scheme.
5. Convenience: Investing in mutual fund reduces paperwork, saves time and makes investment easy.
6. Flexibility: Mutual funds offer a family of schemes, and investors have the option of transferring their holdings from one scheme to the other.
Working of Asset Management Company
Asset management companies are financial institutions that manage the investments of both individual clients and companies. Some asset management companies may
provide individual service and account management for each individual client, while others pool the resources of many clients in order to create more diversified trading options. Asset
management clients perform a variety of tasks for their clients, including portfolio analysis, market forecasting, investment advice, implementation of investing strategies, and
performance analysis.
One of the benefits of asset management companies that work by pooling resources is that they may be able to present clients with investing opportunities that would not
be available to them on an individual level. Since pooling resources means greater investment capital, preferential rates and purchasing options may be open to investors that could
not qualify for them alone. Investors receive returns in proportion to their investments in the general fund. While this can provide greater opportunity, it also can limit the options of
each individual investor to investments in which the company feels confidant.

Concept:

Functions of Mutual Fund

Management: When you invest in a mutual fund, you receive professional money managers and their research team. Spectacular returns aren't guaranteed just because the fund
is run by a professional, but you do know your funds are managed by an experienced crew who understand the financial markets. This means you don't have to spend a lot of
time researching stocks yourself, as you would if you were investing in individual stocks. Instead, mutual fund managers track the financial markets and the day-to-day
fluctuation of different industries.
Diversification: When you buy into a mutual fund you have the opportunity to buy multiple stocks, bonds or other assets, depending on the type of fund it is. This diversified
approach minimizes the effect of price fluctuations in a single asset. The more assets you own, the less overall effect each individual asset has on your portfolio. Invest in a single
mutual fund and you are already more diversified than if you purchased a single stock. Buying multiple funds, including bond, stock and money-market funds, provides a
diversification level nearly impossible to achieve by purchasing stocks and bonds one at a time.
Cost-Effective: When you buy a fund, you will have to pay a commission as well as a yearly management fee. The management fee can range from less than 1 percent of your
total investment to several percent. The fee is charged by the fund for managing your money. However, you should keep in mind that mutual funds hold multiple assets.
Purchasing all those assets individually, to attain a similar diversification level, could result in an even more expensive commission bill.
Precision: Mutual funds let you tailor your portfolio to meet investment objectives by purchasing different fund types. Mutual funds range from conservative and low-risk to
exotic and high-risk. Bonds and money-market funds are typically low-risk, providing stable but relatively small returns. Funds investing in domestic and foreign stock are more
risky than bond funds, but over the long haul usually provide a higher return.

Leasing
Lease financing is one of the important sources of medium- and long-term financing where the owner of an asset gives another person, the right to use that asset against
periodical payments. The owner of the asset is known as lessor and the user is called lessee.
The periodical payment made by the lessee to the lessor is known as lease rental. Under lease financing, lessee is given the right to use the asset but the ownership lies with
the lessor and at the end of the lease contract, the asset is returned to the lessor or an option is given to the lessee either to purchase the asset or to renew the lease agreement.
Different Types of Lease: The different types of leases are discussed below:
1. Finance Lease: It is the lease where the lessor transfers substantially all the risks and rewards of ownership of assets to the lessee for lease rentals. In other words, it puts the
lessee in the same con-dition as he/she would have been if he/she had purchased the asset. Finance lease has two phases: The first one is called primary period. This is noncancellable period and in this period, the lessor recovers his total investment through lease rental. The primary period may last for indefinite period of time. The lease rental for the
secondary period is much smaller than that of primary period.
Features of Finance Lease: From the above discussion, following features can be derived for finance lease:
a. A finance lease is a device that gives the lessee a right to use an asset.
b. The lease rental charged by the lessor during the primary period of lease is sufficient to recover his/her investment.
c.
The lease rental for the secondary period is much smaller. This is often known as peppercorn rental.
d. Lessee is responsible for the maintenance of asset.
e.
No asset-based risk and rewards is taken by lessor.
f.
Such type of lease is non-cancellable; the lessors investment is assured.
2. Operating Lease: Lease other than finance lease is called operating lease. Here risks and rewards incidental to the ownership of asset are not transferred by the lessor to the
lessee. The term of such lease is much less than the economic life of the asset and thus the total investment of the lessor is not recovered through lease rental during the primary
period of lease. In case of operating lease, the lessor usually provides advice to the lessee for repair, maintenance and technical knowhow of the leased asset and that is why this
type of lease is also known as service lease.
Features of Operating Lease: Operating lease has following features:
a. The lease term is much lower than the economic life of the asset.
b. The lessee has the right to terminate the lease by giving a short notice and no penalty is charged for that.
c.
The lessor provides the technical knowhow of the leased asset to the lessee.
d. Risks and rewards incidental to the ownership of asset are borne by the lessor.
e.
Lessor has to depend on leasing of an asset to different lessee for recovery of his/her investment.

Merchant Banking
Merchant Banking is a combination of Banking and consultancy services. It provides consultancy to its clients for financial, marketing, managerial and legal matters.
Consultancy means to provide advice, guidance and service for a fee. It helps a businessman to start a business. It helps to raise (collect) finance. It helps to expand and modernize the
business. It helps in restructuring of a business. It helps to revive sick business units. It also helps companies to register, buy and sell shares at the stock exchange.
The functions of merchant banking are listed as follows:
1. Raising Finance for Clients : Merchant Banking helps its clients to raise finance through issue of shares, debentures, bank loans, etc. It helps its clients to raise finance from the
domestic and international market. This finance is used for starting a new business or project or for modernization or expansion of the business.
2. Broker in Stock Exchange : Merchant bankers act as brokers in the stock exchange. They buy and sell shares on behalf of their clients. They conduct research on equity shares. They
also advise their clients about which shares to buy, when to buy, how much to buy and when to sell. Large brokers, Mutual Funds, Venture capital companies and Investment Banks
offer merchant banking services.
3. Project Management : Merchant bankers help their clients in the many ways. For e.g. Advising about location of a project, preparing a project report, conducting feasibility studies,
making a plan for financing the project, finding out sources of finance, advising about concessions and incentives from the government.
4. Advice on Expansion and Modernization : Merchant bankers give advice for expansion and modernization of the business units. They give expert advice on mergers and
amalgamations, acquisition and takeovers, diversification of business, foreign collaborations and joint-ventures, technology up-gradation, etc.
5. Managing Public Issue of Companies : Merchant bank advice and manage the public issue of companies. They provide following services:
Advise on the timing of the public issue.
Advise on the size and price of the issue.
Acting as manager to the issue, and helping in accepting applications and allotment of securities.
Help in appointing underwriters and brokers to the issue.
Listing of shares on the stock exchange, etc.
6. Handling Government Consent for Industrial Projects : A businessman has to get government permission for starting of the project. Similarly, a company requires permission for
expansion or modernization activities. For this, many formalities have to be completed. Merchant banks do all this work for their clients.
7. Special Assistance to Small Companies and Entrepreneurs : Merchant banks advise small companies about business opportunities, government policies, incentives and concessions
available. It also helps them to take advantage of these opportunities, concessions, etc.
8. Services to Public Sector Units : Merchant banks offer many services to public sector units and public utilities. They help in raising long-term capital, marketing of securities, foreign
collaborations and arranging long-term finance from term lending institutions.
9. Revival of Sick Industrial Units : Merchant banks help to revive (cure) sick industrial units. It negotiates with different agencies like banks, term lending institutions, and BIFR (Board
for Industrial and Financial Reconstruction). It also plans and executes the full revival package.
10. Portfolio Management : A merchant bank manages the portfolios (investments) of its clients. This makes investments safe, liquid and profitable for the client. It offers expert
guidance to its clients for taking investment decisions.
11. Corporate Restructuring : It includes mergers or acquisitions of existing business units, sale of existing unit or disinvestment. This requires proper negotiations, preparation of
documents and completion of legal formalities. Merchant bankers offer all these services to their clients.
12. Money Market Operation : Merchant bankers deal with and underwrite short-term money market instruments, such as:
Government Bonds.
Certificate of deposit issued by banks and financial institutions.
Commercial paper issued by large corporate firms.
Treasury bills issued by the Government (Here in India by RBI).
13. Leasing Services : Merchant bankers also help in leasing services. Lease is a contract between the lessor and lessee, whereby the lessor allows the use of his specific asset such as
equipment by the lessee for a certain period. The lessor charges a fee called rentals.
14. Management of Interest and Dividend : Merchant bankers help their clients in the management of interest on debentures / loans, and dividend on shares. They also advise their
client about the timing (interim / yearly) and rate of dividend.
Recent Developments in Merchant Banking
The recent developments in Merchant banking are due to certain contributory factors in India. They are.
1.The Merchant Banking was at its best during 1985-1992 being when there were many new issues. It is expected that 2010 that it is going to be party time for merchant banks, as
many new issue are coming up
2.The foreign investors - both in the form of portfolio investment and through foreign direct investments are venturing in Indian Economy. It is increasing the scope of merchant
bankers in many ways.
3.Disinvestment in the government sector in the country gives a big scope to the merchant banks to function as consultants.
4.New financial instruments are introduced in the market time and again. This basically provides more and more opportunity to the merchant banks.
5.The mergers and corporate restructuring along with MOU and MOA are giving immense opportunity to the merchant bankers for consultancy jobs
However the challenges faced by merchant bankers in India are
1.SEBI guideline has restricted their operations to Issue Management and Portfolio Management to some extent. So, the scope of work is limited.
2.In efficiency of the clients are often blamed on to the merchant banks, so they are into trouble without any fault of their own.
3.The net worth requirement is very high in categories I and II specially, so many professionally experienced person/ organizations cannot come into the picture.
4.Poor New issues market in India is drying up the business of the merchant bankers
The Growth Of Merchant Banking In India: Formal merchant activity in India was originated in 1969 with the merchant banking division setup by Grind Lays Bank, the largest foreign
bank in the country. the main service offered at that time to the corporate enterprises by the merchant banks included the management of public issues and some aspects of financial
consultancy. Following Grind Lays Bank , Citibank setup its merchant banking division in 1970. banking commission in 1972,that Indian banks should offer merchant banking services as
part of the multiple services, state bank of India started the merchant banking division in 1972.bank of India and syndicate bank in 1977.bank of Baroda started charted bank
mercantile bank in 1978 and united bank of India.
Future Of Merchant Banking: Time and again the merchant banking industry UN India witnessed, experienced and underwent significant changes. The very purpose for which these
firms are commencing there services should be taken care of and they should mould there policy decision and activities to move in tune with the main objective of investors protection
and to create healthy environment in capital markets. No doubt , merchant banking firms are subject to a host of control measures, regulations and rules framed and guided SEBI.
Merchant banking In India: In India, Merchant bankers are a body corporate who carries on any activity of the issue management, which consist of preparing prospectus and other
information relating to the issue. Merchant banks in India are not allowed to conduct any business other than that related to securities market. There is no official category in
investment banking.