Chapter 1

Financial Services Summary

Financial Services, as the name suggest it is a service industry.

But it came into its actual swing since liberalization in economic policy after 1990. Before that, it was dominated by commercial banks & other financial institutions & having dominance on Indian financial service sector. It was characterized by number of factors which impediments the growth of this sector, viz.

Excessive control in the form of regulation of interest & money rate, prices of securities.

Unavailability of financial instruments on large scale. Absence of independent credit rating agencies. Lack of information about international developments.

One might think, ‘why to study this?’ But considering present

scenario, we are witnessing the emergence of new financial products & services almost everyday. This chapter throws light on all-important points regarding money, scope, activities, financial instruments & challenges.

The meaning of financial services in broad sense is nothing but mobilizing & allocating savings. It includes all activities involved in the transformation of saving into investments.

The classification of this industry can be made into two, Capital market & Money market. The former consist of institutions, which provide long-term funds & later consist of commercial banks & other agencies, which supply short-term funds. Though the scope of the services is wide, but we can classify them into two again, those are Traditional & Modern.

The traditional activities combined both capital & money market, which are grouped as fund based & non-fund based.

As we mentioned above that, this is service industry, the income source of this industry is fund based & fee based. Fund based means interest spread & fees based income has it’s source in merchant banking, advisory service etc. The less risk involved in fees based than that of fund based.

There are number of reasons for financial innovations as we stated earlier that, since liberalization of economy - this sector has gone through a metamorphosis. Some of the important causes are low profitability, keen competition, customer service, global impact, and

investor’s awareness. All this leads to financial innovation to meet the dynamically changing needs of economy & help to investors.

Financial service comprises of traditional & modern activities. In now a days investor expect financial service provider to play dynamic role as not only to provide finance but also as a departmental store of finance. The activities comes under modern activities are merchant banking, loan syndication, leasing, mutual fund, venture capital, custody services, corporate advisory services, derivative security. With globalization the Forex Market is one of the key area for financial services providers. The services rendered in connection with forex markets are forward contracts, options Swaps, futures etc. The LOC is also an important product. It means the line of credit, which help in import of goods. It acts as conduct of financing which is for ascertain period & on certain terms for the required goods to be imported. The financial service is mainly depends on instruments i.e. a financial instrument due to keep in tune with changing time; the world innovation has became key word in modern era. To cope up with changing time & customers many innovative financial instruments came into market viz. Commercial Paper, Treasury Bill, Certificate of deposit, Inter- Bank Participation, various Bonds & Debentures, Shares, ECU Bonds (European Currency Unit Bonds). In short to provide more & reliable service to customer the innovation is must. The financial instruments consist of debentures & shares. There are different names of shares depend upon the nature of industry to which they belong. For e.g.

Blue Chip Shares- are shares of those companies, which are well established & showing consistent growth.

Defensive Shares- as the name suggests they provide a safe return for the investor’s money.

Growth Shares- represents fast growing companies. Cyclical Shares- are those, which rise & falls in price. Non-Cyclical Shares- those who’s price is not affected by

any such changes. The other types are Turn around shares, Active Shares, Alpha Shares. The Sweet share is an interesting type of share which normally given to employees or workers for their value addition to the company for the development of company. All this leads to, from being a conservative industry to a dynamic one. To enable the financial service industry to play dynamic role, the government of India recently taken some steps viz. Privatization of public sector undertaking, fully convertibility of Rupee on current A/c, permitting Private sector to participate in banking & mutual funds. Allow corporate sector to raise debt/equity in international markets.

Although all above facilities provided by government, there are lots of challenges ahead in this sectors. Some of these important challenges are:

• Lack of qualified personal investor awareness • Lack of transparency • Specialization recent data

These challenges are likely to grow in number with growing requirement of customers. The financial service sector has to come up with new instruments & innovativeness to meet these challenges. The current scenario of financial service sector is in transformation stage from conservatism to dynamism. We are now witnessing the many private sector financial services. The number of stock exchange gone up by 3 times in just 14 years. The number of companies listed on stock exchange in 1980 was just 2265 have gone over 7000 in 1993. So the primary equity market is getting stronger. The credit rating plays important role in financial service sector. Now CRISIL, CARE, ICRA are the leading institutions who are mainly related to rate the provider & give the rating on the basis of that the company’s standing in the market is decided. And now it is become compulsory for every non-banking financial institution or companies to get the credit rating for their debit instrument. The process of Globalization & liberalization gave rise to all this. By the globalization, the world become very small & it becomes a market place & at the same time by liberalization, the interest rate has been deregulated which is a backbone of this industry.