Fs Unit 1
Fs Unit 1
Fs Unit 1
Chapter1
-Introductionto Financial Services
Binancial Services - Concept: The term financial services refer to
mobilisation of,savings and its allocation for investment. It inchs a'
activities involved in the channelisation of savings into investment.
The term financial services includes services provided by financial
institutions and financial intermediaries. They enable financial transactions
of individuals and corporates.
Services rendered by financial service organisations to industrial enterprises
and to ultimate consumer markets are financial services. These are the
services and facilities required for the smooth operation of the financial
markets.
new ventures.
cash.
exchange. The bank purchases bills of from the holder of the bill 6.P
and credits his account with the amount of the bill less discount. On the due proj
date, the drawee makes payment to the banker. 7.Pe
The inv
5.Insurance services: It is a contract between the insurer and insured.
specific
insurer promises to compensate the insured for the-less arising from
8.N
risks. Insurance can be for life and non-life such as property. me
the
6.Factoring: The accounts receivables of a fim are purchased by the factor 9.C
who takes the responsibility of collecting them. The factor provides finance cap
to the firm based on the amount of receivables. 10.
se
7.Forfaiting: It is financing of receivables relating to international trade. re
The forfaitor discounts export bills and provides finance to the exporter.
Fl
8.Housing Finance: It is providing finance for. buying or construction of 1.
house property. It emerged as a fund based financial Service in ndia with ex
the establishment of National Housing Bank (NHB) in 1988. pr
9.Mutual Funds:Mutual funds mobilise savings from the public and invest 2.
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them in financial securities and other assets. The income earned is passed
tothe unit holders after deducting its fees.
I. Fee Based Or Non-fund Based Services: Financial service companies
providethe following non fund| based or fee based services:
1.Securitisation: Loans given to customers are assets for the bank.
Securitisation is the process of conversion of loan assets into marketable
securities. The organisation can raise funds by selling them to investors.
2.Merchant banking: The primary role of merchant banking is undertaking
activities related to new issue of secunties by companies. Its scope is wide
and includes arrangingfunds and negotiating financial deals for their clients,
preparing and executing projects, underwriting, advising on mergers etc..
Merchant banker are intermediaries who transfer capital from those who
it.
own it to those who need
3.Credit rating: It is a opinion by a rating agency on the relative willingness
and ability of the issuer of adebt instrument to repay both interest and
principal. It is an assessment of the debt repaying capacity of the firm
issuing debt.
4.Custodial Services: It involves keeping the securities safe for and on
bebalf of others in return for custodial charges. The person providing this
service is called as a custodian.
5.Loan Syndication: A single bank cannot give a huge loan. known Hence
merchant bankers negotiate with banks to jointly offer loans. This is
as loan syndication.
6.Project Advisory: It involves assessing investment proposals, studying
project feasibility, preparation of project reports, arranging for funding etc.,
7.Portfolio Management: It involves providing investment advice, making
investments on behalf of clients, managing the investment portfolio etc.,
8. Mergers and Acquisitions:It involves providing advice and guidance on
mergers and acquisitions, assessing the networth of companies, finalising
the terms of mergers etc.,
9.Capital Restructuring: It is providing guidance for restructuring the
Capital structure. Advice on steps to be taken to reduce the cost of debt.
10.Stock Broking: It involves buying, selling or dealing in financial
Securities. This service is offered by stock brokers who are members of a
recognised stock exchange.
FUNCTIONS OF FINANCIAL SERVICES
1. Aid in Exchange of Goods and Services: Financial services aid in
increased
exchange of g0ods and services in the economy. They enablecustomers.
production of goods and services and also their distribution to
2. Mobilising savings: Financial services help to mobilise funds from
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6. Market Makers: They provide liquidity and aready market for securities.
They purchase the securities ofered by sellers at any time and hold them ilu
they are demanded by buyers. They buy at alower price and sell at a higher
price and earn profits.
II. Specialised Institutions: They provide various types of financial
services. They include: Acceptance Houses, Discount houses. Facto
Depositories, Credit rating agencies etc. Financial market is dynamic a
of
serves the ieeds
providers,
IN Regulatory Bodie hey rame ndes and wyujatinn
markets und
ryuatu
thee tinanclal
banking systen. It regulates all the hnancial ervices wded yhaika
EHISregulatory
other (he regulater of thesuch
bodies alockas market and its Law
0he Company parti laoatd
ipnts There as sleth
u 1uguas
functioning of corporales,
GROWTH OF FINANCIAL SERVICESIN INDIA
Financial services is an important compoent of the fisancial
country. I promotes savings, investment, capital formatum aru wmme
growth. In India, financial services has been growing nt an attrative tate
Its contributionto GDPand employnent has been growing on a otinuns
growth of financial services in lndia
basis, The factors contributing lo the
are as follows:
Factors Contributing to the Gowth of Financial Serviees in Sndia
I. Well developed financial sector.
2.Strong banking system.
3.Multiple financial institutions providinga variety of financial services.
4.Regulatory institutions who have developed astrong regulatory franework
for different sectors(RBI, SEB1, IRDAI, PFRDA etc.,).
higher
5.Rising literacy, employment and income levels resulting in
demand for financial services.
potential for
6.A high proportion of youth population resulting in higher
savings and investment.
7.Government incentives for savings and investiment encouraging the
demand for financial services.
8.Strong and well regulated capital markets providing liquidity to
investments.
of Indian financial markets are RBI, SEBI, IRDAI, PFRDA, FMC etc.,
The stock markets and mutual funds are regulated by the Securities
Exchange Board of India(SEBI).
The insurance sector is regulated by Insurance Regulatory Development
Authority of India (IRDAI).
The commodiy exchanges are regulated by the Forward Markets
The Pensions sector is regulated by Pension Fund Regulatory Development
Authority (PFRDA).
The following points bring out the importance of financial sector
regulation:
1.Financial regulation is required to provide a framework for the proper
functioning of the financial market.
2.It is on the basis of financial regulation, that
misconduct of any market
participant is investigated and suitable action is taken.
3.Financial regulation is essential for the orderly functioning of financial
markets.
4.Financial regulation is essential for strengthening and improving
individualfinancial institutions and the entire financial system.
5.Mobilisation of savings and their optimal allocation for investments is
required for economic growth and development. Financial sector
enables this. regulation
6.Protection of investors rights is possible only through effective financial
regulation.
7.Financial regulation and its effective implementation is
improving the confidence in the financial system. essential for
8.0ptimal use of resources is possible only if the financial sector
an eficient manner. Aa essential operates in
requirement of this is financial regulation.
9.Competition is an essential requirement for
financial markets. Financial efective functioning of
regulation
practices and promotes fair competition. tries to eliminate unfair
competitive
16. The financiai sector faces many types
iS essential to manage risks in a ofrisks. Financial sector regulation
prudent manner.
11.Financial sector
tinancial sector. regulation improves the healthy development of the
This is an essential condition for
development. ecenomic growth and
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12. A strong and stable financial sector is essential for meeting the financial
needs of households, MSMEs and businesses. This is essential for improving
cconomic growth and development.
13. Strong financial sector regulation can help to prevent and manage
financial crisis in an effective manner.
14. Complete and clear disclosure of financial information is essential
for investors to take prudent investment decisions. Financial regulations
investors.
provide clear guidelines for disclosures to benefit