Meaning of Financial Services (2)

7/29/2019 Meaning of Financial Services (2)

1/32

In general, all types of activities which are of a financial nature could be brought under

the term financial services.The term financial services in a broad sense means, mobilising and allocating savings.

Thus, it includes all activities involved in the transformation of saving into investments.


2/32

Meaning of financial service The financial service can also be called as financial

intermediation.

Financial intermediation is a process by which fundsare mobilised from a large number of savers and makethem available to all those who are in need of it andparticularly to corporate customers.


3/32

Meaning of Financial Services Thus, financial services sector is a key area and it is

very vital for industrial development.

A well developed financial services industry isabsolutely necessary to mobilise the savings and toallocate them to various investable channels andthereby to promote industrial development in a

country.


4/32

The financial intermediaries in India can be traditionallybe classified into two:

Capital Market intermediaries Money Market intermediaries

CLASSIFICATION OF FINANCIAL SERVICES INDUSTRY:


5/32

Capital market The capital market intermediaries consist of term lending

institutions are investing institutions which mainly providelong term funds.

Hence, the term financial service industry includes all kindsof organisations which intermediate and facilitate financial

transactions of both individuals and corporate customers.


6/32

Money Market On the other hand, money market consists of

commercial banks, co-operative banks and otheragencies which supply only short term funds.


7/32

Financial Service Industry Hence, the term financial service industry includes

all kinds of organisations which intermediate andfacilitate financial transactions of both individual sand corporate customers


8/32

Scope of Financial Services Financial services cover a wide range of activities. They

can be broadly classified into two namely:

Traditional Activities Modern Activities


9/32

Fund based activities:

The traditional services which come under fund basedactivities are the following:

Underwriting of or investment in shares, debentures,

bonds etc. Of new issues (primary market activities) Dealing in secondary market activities


10/32

Fund based activities Participating in money market instrument like

commercial papers, certificate of deposits, treasurybills, discounting of bills etc.

Involving in equipment leasing, hire purchase, venturecapital, seed capital etc.

Dealing in foreign exchange market activities.


11/32

Financial intermediaries provide services on the basisof non-fund activities also. This can also be called feebased activity.

Today, customers whether individuals or corporate arenot satisfied with mere provision of finance.

They expect more from financial service companies.Hence, a wide variety of services, are being provided

under this head. They include the following:

Non-Fund based activities


12/32

Non- fund based activities Managing the capital issue, i.e., management of pre-

issue and post-issue activities relating to the capitalissue in accordance with the SEBI guidelines and thus

enabling the promoters to market their issues. Making arrangement for the placement of capital and

debt instruments with investment institutions.

Arrangement of funds from financial institutions for

the clients project cost or his working capitalrequirement.

Assisting in the process of getting all Government andother clearances.


13/32

Modern Activities

Besides the above traditional services, the financial intermediariesrender innumerable services in recent times. Most of them are in thenature of non-fund based activity:

Rendering project advisory services right from the preparation of theproject report till the raising of funds for starting the project withnecessary Government approval.

Planning for merger and acquisitions and assisting for their smoothcarry out.

Guiding corporate customers in capital restructuring. Acting as trustee s to the debenture-holders. Recommending suitable changes in the management structure and

management style with a view to achieving better results.

Structuring the financial collaboration/joint ventures by identifyingsuitable joint venture partner and preparing joint venture agreement. Rehabilitating and reconstructing sick companies through appropriate

scheme of reconstruction and facilitating the implementation of thescheme.


14/32

Modern Activities Hedging of risks due to exchange rate risk, interest rate

risk, economic risk and political risk by using swaps andother derivatives products.

Managing the portfolio of large Public Sector Corporations Undertaking risk management services like insurance

services, buy-back options etc.

Advising the clients on the question of selecting the bestsources of funds taking into consideration the quantum offunds required, their cost, lending period etc.

Guiding the clients in the minimisation of the cost of debtand in the determination of optimum debt-equity mix.


15/32

Undertaking services relating to the

capital market such as :

Clearing services Registration and transfer

Safe custody of security.

Collection of income on securities

Promoting credit rating agencies for the purpose ofrating companies which want to go public by issue ofdebt instruments.


16/32

Services relating to capital market

Undertaking services relating to the capital marketsuch as :

Clearing services Registration and transfer

Safe custody of security.

Collection of income on securities

Promoting credit rating agencies for the purpose ofrating companies which want to go public by issue ofdebt instruments.


17/32

CAUSES OF FINANCIAL INNOVATION:

Financial intermediaries have to perform the task of

financial innovation to meet the dynamically changingneeds of the economy

To help the investors cope with the increasinglyvolatile and uncertain market place.

There is a dire necessity for the financialintermediaries to go for innovation due to thefollowing reasons:


18/32

Low Profitability: The profitability of the major financial intermediary,

namely the banks has been very much affected inrecent times.

There is a decline in the profitability of traditionalbanking products.

So they have been compelled to seek out new

products which may fetch high returns


19/32

Keen Competition: The entry of many financial intermediaries in the

financial sector market has led to severe competitionamong themselves.

This keen competition has paved the way for the entryof varied nature of innovative products so as to meetthe varied requirements of the investors.


20/32

Economic Liberalisation: Reform of the financial sector constitutes the most

important component of Indias programme towardseconomic liberalisation.

The recent economic liberalisation measures haveopened the door to foreign competitors to enter intoour domestic market.

Deregulations in the form of elimination of exchange

control and interest rate ceilings have made themarket more competitive.

Innovation has become a must for survival.


21/32

Improves Communication

Technology: The communication technology has become so

advanced that even the worlds issuers can be linkedwith the investors in the global financial marketwithout any difficulty by means of offering so manyand opportunities.

Hence, innovative products are brought into thedomestic market in no time.


22/32

Customer Service: Nowadays, the customers expectations are very great.

They want newer products at lower cost or at lowercredit risk to replace the existing ones.

To meet this increased customer sophistication, thefinancial intermediaries are constantly undertakingresearch in order to invent a new product which may

suit to the requirement of the investing public. Innovations thus help them in soliciting new

business.


23/32

Global Impact: many of the providers and users of capital have

changed their roles all over the world.

Financial intermediaries have come out theirtraditional approach and they are ready to assumemore credit risks.

As a consequence, many innovations have taken place

in the global financial sector which has its own impacton the domestic sector also.


24/32

Investors Awareness: With the growing awareness amongst the investing

public, there has been a distinct shift from investingthe saving in physical assets like gold, silver, land etc.

To financial assets, they go from risk free bankdeposits to risky investments in shares.

To meet the growing awareness of the public,

innovation has become the need of the hour.


25/32

CHALLENGES FACING THE

FINANCIAL SERVICES SECTOR

However, the financial service sector has to face manychallenges in its attempt to fulfil the ever growingfinancial demands of the economy. Some of theimportant challenges are briefly reported hereunder:


26/32

Lack of Qualified Personnel The financial services sector is fully geared to task of

financial creativity.

However, this sector has to face many challenges.

In fact, the dearth of qualified and trained personnel isan important impediment in its growth.

Hence, it is very vital that a proper and a

comprehensive training must be given to the variousfinancial intermediaries.


27/32

Lack of investors awareness The introduction of new financial products and

instruments will be of no use unless the investor isaware of the advantages and uses of the innovative

instruments through literature, seminar, workshopsand advertisements and even through audio-visualaids.


28/32

Lack of Transparency: The whole financial system is undergoing a

phenomenal change in accordance with therequirements of the national and global environment.

It is high time that this sector gave up their orthodoxattitude of keeping accounts in a highly secret manner.

Hence, this sector should opt for better levels of

transparency. In other words, the disclosurerequirements and the accounting practices have to bein line with the international standards.


29/32

Lack of Specialisation: In the Indian scene, each financial intermediary seems to

deal in different financial service lines without specialisingin one or two areas.

In other words, each intermediary is acting as a financialsuper market delivering so many financial products anddealing in different varieties of instruments.

In other countries, financial intermediaries like Newtons,

Solomon Brothers etc. Specialise in one or two areas only. This helps them to achieve high level of efficiency and

excellence. Hence, in India also, financial intermediariescan go for specialisation.


30/32

Lack of recent data: Most of intermediaries do not spend more on research.

It is very vital that one should build up a proper database on the basis of which one could embark uponfinancial creativity.

Moreover, a proper data base would keep oneselfabreast of the recent developments in other parts of

the whole world and above all, It would enable the fund manager to take sound

financial decisions.


31/32

Lack of efficient risk management

system: With the opening of the economy to multinationals and the

exposure of Indian companies to international competition,much importance is given to foreign portfolio flows.

It involves the utilisation of multi currency transactions whichexposes the client to exchange rate risk, interest rate risk andeconomic and political risk. Unless a proper risk managementsystem is developed by the financial intermediaries as in the

West, they would not be in a position to fulfil the growingrequirements of their customers.

Hence, it is absolutely essential that they should introduceFutures, Options, Swaps and other derivative products which arenecessary for an efficient risk management system.


32/32

Need to face the challenges The above challenges are likely to increase in number

with the growing requirements of the customers. Thefinancial services sector should rise up to the occasion

to meet these challenges by adopting new instrumentsand innovative means of financing so that it could playa very dynamic role in the economy.

Documents

Meaning of Financial Services (2)