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 its 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

investors 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 investors money.
Growth Sharesrepresents fast growing companies.
Cyclical Shares- are those, which rise & falls in price.
Non-Cyclical Shares- those whos 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 companys 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.