Financial Services Basics, Types of Financial Services, Financial Services and Industrial Development, Financial Services and economic development.

1. Financial services-Basics
Lt P. Abdul Azees
Farook College
India

2. Concept & Features
• All those services rendered by financial institutions in a
financial system
• Process by which funds are mobilised from a large no of
savers and made available to all those who are in need of it.
• Defined as all activities, benefits and satisfactions connected
with the sale of money, that offer to users and customers,
financial related value.
• Features of financial services include
• intangibility,
• heterogeneity,
• labour intensive,
• inseparability etc

3. Role of FS in economic devt
• Capital formation
• Risk management
• Fund pooling
• Economic growth
• Promotion of savings
• Provision of liquidity
• Fund pooling
• Creation of employment
• Easy Transfer of money etc

4. Factors influencing the growth of
financial service industry
• Economic policy of government
• Type of economy
• Government reforms
• Stage of development
• Macro economic variables
• Political condition
• Incentives for innovation
• Legal and regulatory constraints
• Financial infrastructure
• Technological advancement

5. Types of financial services
• Fund based
• Those services which requires funds for the
performance( venture capital, lease financing,
hire purchase, housing finance)
• Fee based
• Those services provided after collecting fee(
merchant banking, credit rating, advisory
services)

6. Equipment leasing
• Introduced by “First leasing company of India”
in 1973
• Arrangement that provides the use and
control over asset without owning them. Form
of renting asset
• Lease decisions are taken after comparing
debt financing cost
• Parties are lessor and lessee
• No exclusive law to control it in INDIA

7. Hire purchase
• A transaction where goods are purchased and
sold on terms that
• Installment payment, immediate possession,
no ownership , default, hire charges
• Hiree (seller) and hirer(buyer) are the parties
• Hire purchase act 1972
• Usually interest charged is flat rate

8. Consumer credit
• All financing plans offered to individuals to
acquire durable consumer goods.
• No specific legislations
• It may be a bipartite/tripartite arrangement
• Bankers and nbfc’s are providers
• A part if paid by consumer normally and called as
down payment
• Monthly payment is called equated monthly
instalment

9. Bill discounting
• it is a case of converting(discounting) a bill into
cash
• Banker provides a discounted amount to the
seller
• B/E is a trade related instrument
• Banks lends money without collaterals in B/E
• The bill is drawn by the seller
• Dishonoring is a case of non payment at the time
of maturity

10. Venture capital
• Investment in a highly risky project with the
objective of earning a high rate of return
• Widely used by technocrats
• It is a form of equity financing
• It is a case of illiquid investment
• Angel investors are those individuals engaged
in venture capital financing

11. Housing finance& insurance services
• Financing the construction and repair of homes in
the country.
• National housing bank in 1988
• HDFC, CITIHOME, ICICI HOUSING etc are other
payers
• Insurance is regulated by IRDA since 1999
• It is a case of risk sharing
• Until 1999 it is dominated by 2 companies
namely LIC and GIC

12. Factoring
• Provides resources to finance receivables as
well facilitates the collection of receivables.
• It may be on recourse or non recourse
basis(risk is borne by factor)
• Managing and financing debt
• SBI Factors and commercial services ltd
• International version of factoring is called
forfaiting

13. Fee based services
• Merchant banking
– 13 century in EUROPE where merchants started
offering banking business
– ACCEPTING AND ISSUING HOUSES IN UK
– INVESTMENT BANKING IN USA
– Started by National Grind lays bank in 1967 in
India.

14. Credit rating
• It is the opinion of a rating agency
• Measures the worthiness of securities,
companies, country(sovereign credit rating) etc
• It is an indicator of the credit quality
• It is a continuous practice
• CRISIL is the first agency in INDIA followed by
ICRA, CARE etc.
• Fitch, Moody’s, PWC etc are international
agencies

15. Stock broking
• Activity of the stock broker
• Is a member in a recognised stock exchange
who is authorised in buying or selling of sec
• Foreign brokers are also there
• It is a professional advisory service
• Regn, capital adequacy, integrity, track record
etc is needed to act as stock brokers

16. Mutual funds
• ‘Small drops of water make a big ocean’
• It is a collective investment
• Contributors and beneficiaries of the fund are
same class of people
• The instrument issued is called units
• Run by investment professionals called as AMC’s
• The value of the unit in a particular time period is
called net asset value

17. FS and industrial development
• FS companies play a vital role in pooling
surplus resources and deploying them in an
efficient manner for the growth of economy.
1. proper issue mgt through merchant banking
services
2.Working capital finance through factoring
srevices
3.equipment finance through lease financing

18. Cont….
• Long term risk capital through venture capital
financing( Private equity financing).
• Risk management through derivatives
• Better safety through credit rating
• Industrial development through specialized
services like underwriting, refinancing,
depository services, credit card services, stock
broking and so on