The document provides an overview of key concepts in financial services including capital formation, savings, and the functions of the financial system. It discusses some important characteristics of financial services like intangibility and perishability. The document also outlines the traditional and modern scope of financial services, innovations and new instruments that have emerged, challenges facing the sector, and how the sector has shifted from conservatism to dynamism since liberalization.

1. Review Notes
An Overview of Financial Services
Dr. Lalit K Khurana
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Some Basic Concepts
• Capital formation?
• Transfer of savings from the savers to the users of capital
• Net addition to the capital stock required for producing goods and services
• Savings
Savings is an activity by which claims to resources that might be put to current consumption are
set aside and so become available for other purposes
• Types of Savings
• Public savings are
• Savings of the government through normal budgetary channels and
• Savings of public sector enterprises
• Private savings refers to all other savings (savings by households and business
enterprises)
• Corporate savings are the retained earnings (earnings after tax − payment of dividend
and interest)
• Financial System?
A financial system consists broadly of financial institutions, financial markets and financial
instruments or securities.
• Financial Dualism
• Formal + Informal Financial System
• Formal is Organized, Institutional, Regulated, leads to Lower intermediation cost
• Informal is Un-organized, Non Institutional, Non Regulated
• There is Coexistence and Co-operation between Formal and Informal Financial System
• Financial deepening: is measured by the size of financial assets in relation to the size of the
economy, or the GDP. The higher this ratio, the deeper is the financial system.
• Financial widening: It refers to the number and variety of participants and financial instruments
in a financial system. Financial widening indicates how diverse the financial system is
• Functions of Financial System
• Mobilization and Allocation
• Lower cost of Transaction
• Deepening and Broadening
• Payment Settlement System
• Risk Reduction

2. • Key elements of a well functioning financial system
• Stable Money
• Legal and Regulatory environment
• Sound Management of public finance and public debt
• Information System
• Well-functioning securities market
• Sound Banking System
Design of Financial System

3. • Financial inclusion is the delivery of financial services at affordable costs to sections of
disadvantaged and low-income segments of society.
• Financial exclusion is the inability of individuals, households or groups to access Financial
services in an appropriate form
• Financial Services ?
Financial services are services provided by the financial system. These encompass all the
services provided by financial institutions and financial markets
The financial services include all activities connected with the transformation of savings into
investment.
Globalization of financial services means the integration of providers of financial services all over
the globe
• Characteristics of Financial Services
• Intangibility
• Inseparatibility
• Heterogeneity
• Perishability
• Distribution of Risks
• Catalyst in Market Operations
• Link between investor and borrower
• Assistance to Investor
• Distinctiveness of Financial Services
• Monetary Character
• Direct linkage with economy
• Involves intellectual exercises
• Different consumption pattern
• Distinct channels of Distribution
• Intermediary Institutions
• Regulated
• Tailor Made products
• Specialized Staff needed
• Public Image is important
• Non-guranteed – No sample
• Complexity
• Classification of Financial Services
• Wholesale and Retail
• Asset based and fee based
• Scope of financial services
• Traditional activities
• b – Modern activities
• Traditional activities encompass both capital and money market activities. They
can be grouped under two heads viz;

4. • a –Fund-based or asset based financial services
• b – Non fund-based or fee-based services
• Modern activities
• Project advisory services
• Planning for mergers and acquisitions
• Guiding in capital restructuring
• Acting as trustees to the debenture holders
• Recommending suitable changes in the management structure to achieve better results
• Restructuring the financial collaboration or joint ventures by identifying suitable joint
venture partner and preparing joint-venture agreement
• Rehabilitating the sick companies through appropriate scheme
• Hedging of risk
• Managing the portfolio of large public sector organisation
• Undertaking risk management services like insurance services
• Advising the clients on selecting the best source of funds
• Guiding the clients in the minimization of the cost of debt and determining the optimum
debt equity mix
• Services related to the capital market such as registration, transfers, collection of
income securities
• Promoting credit rating agencies
• Constituents of the financial services sector
• Government – central government is the most important constituent of financial
services sector. It has wide powers under various acts to regulate the sector.
• Regulatory agencies – in India the reserve bank of India and SEBI act as regulating
agencies in this sector
• Financial institutions - various financial institutions play important role
• Other constituents – these include public issue of shares, funds, stockbrokers, financial
consultants, credit rating agencies etc.
• Financial Intermediation and Disintermediation
Importance of financial services sector
 Raising finance - relate to the efficient management of funds
 Financial services act, 1986 identifies the investment business has a central pivot around which
the financial services sector is built.

5.  Financial services – A Laboratory
Essentials of an ideal financial services industry
• Easy access to financial services.
• Customers should be able to transact at a short notice without adverse price reactions.
• The market should be well-informed.
• Wide range of securities.
• Access for sound financial counseling
• Corporate borrowers should have timely access to capital markets. (place utility)
• Credit rating - Reports and findings
• The government should be able to implement the monetary and fiscal policy efficiently.
• The participants in the financial services industry would be able to enter and exit markets with
the minimal cost.
• Participants should be fully aware of the riskiness of financial services.
Financial Services Industry Prior to the economic liberalization
1. Excessive controls of interest rates
2. Too many controls over the prices of securities under the controller of capital issues
3. Lack of financial instruments on large-scale as well as non-availability of varieties.
4. Absence of independent credit rating agencies
5. Strict regulation of the foreign exchange market
6. Lack of information about international the documents in the financial sector
absence of government securities market
7. Non availability of debt instruments on a large-scale
Need for Financial innovation
– Low profitability
– Keen competition
– Economic liberalization
– Improved communication technology
– Customer service
– Global impact
– Investor awareness
– Financial engineering
Some New Financial Services
• Merchant banking
• Loan syndication
• Mutual funds
• Factoring
• Venture capital
• Custodial services
• Corporate advisory services

6. • Securitization
• New products in forex market – forward contracts, options, futures, swaps
Some New Financial Instruments
• Commercial paper
• Interbank participations
• Zero interest convertible debentures
• Deep discount bonds
• Index bonds
• Secure a premium notes
• Convertible bonds
• Debenture with call and put feature
• Retirement bond
• Infrastructure bond
• Yankee bonds, samurai bonds
• Floating-rate notes
• Global depository receipts
Challenges facing the financial services sector
• Lack of qualified personnel
• Lack of investor awareness
• Lack of transparency
• Lack of specialization
• Lack of recent data
• Lack of efficient risk management system
• Poor quality of Information
• Speculative pressures
Present scenario of financial services sector
• Conservatism to dynamism
• Emergence of primary equity markets
• Concept of credit rating
• Process of globalization
Process of liberalization
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