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FINANCIAL SERVICES MEANING, TYPES AND IMPORTANCE INTRODUCTION •Financial services refers to the services provided by finance industry. •Since 1990s, there has been an upsurge in financial instruments. •Finance industry includes all broad range of organisations that deals with management of money:  Banks Credit card Companies Insurance Companies Stock Brokerages Investment funds Some government sponsered enterprises MEANING •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 broad sense means mobilizing and allocating savings. Thus it includes all activities involved in the transformation of savings into investments. •Financial Services can also be called “Financial Intermediation”. Financial Intermediation is a process by which funds are mobilising from large number of savers and make them available to all those who are in need of it . … •Thus , Financial services sector is a key area and it is very vital for industrial development. A well developed financial service industry is absolutely necessary to mobilize the savings to various invest able channels and thereby to promote industrial development in a country. CLASSIFICATION OF FINANCIAL •Financial intermediaries in India can be traditionally SERVICES classified into two: •Capital market INDUSTRY intermediaries •Money market intermediaries •Capital market intermediaries consist of term lending institutions and investment institutionswhich mainly provide long term funds. •On the other hand, money market consist of commercial banks, cooperative banks and other agencies which supply only short term funds. •Hence, the term financial services industry includes all kinds of organizations which intermediate and facilitate transactions of both individuals and corp[orate customers. TYPES OF FINANCIAL SERVICES Financial services cover the wide range of activities. They can be broadly classified into two, namely: •Traditional activities •Modern Activities •Traditionally, the financial intermedieries have been rendering a wide range of services encompassing both capital and money market activities. They can be grouped under two heads, viz: 1. Fund based activities 2. Non-fund based activies Fund based financial services Foreign Secondary Money Equipment Bill Discounting Market Exchange Market Leasing Services activities 1.UNDERWRITING • The process by which investment bankers raise investment capital from investors on behalf of corporations and governments that are issuing securities (both equity and debt). •It ensures the success of new issue of capital and if shares and debenture are not subscribed by the public wholly, the underwriter will have to take them up and pay for them. •In short, the firm which undertakes the guarantee are called underwriters. •Example: Insurance company, Banks, stock exchange. 2.SECONDARY MARKET •A newly issued IPO will be considered a primary market trade when the shares are first purchased by investors directly from the underwriting investment bank; after that any shares traded will be on the secondary market, between investors themselves. In the primary market prices are often set beforehand, whereas in the secondary market only basic forces like supply and demand determine the price of the security. •Meaning: Stock market represent the secondary market where existing securities are traded, stock exchange provide an original mechanism for purchase and sale of existing securities. 3.MONEY MARKET SERVICES •A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded. The money market is used by participants as a means for borrowing and lending in the short term, from several days to just under a year. Money market securities consist of negotiable certificates of deposit (CDs), bankers acceptances, Treasury bills, commercial paper,. •There are various centers of money market like Mumbai , Kolkata and Chennai, etc. 4.EQUIPMENT LEASING •Leasing is an agreement that provides a firm with the use and control over asset without buying and owning the same. •It is a form of renting asset. •Lease is a contract between owner of the asset (Lessor) and the user of the asset called the Lessee, where lessor gives the right to use the asset to the lessee over an agreed period of time for a consideration called lease rental. 5.HIRE PURCHASE •A system by which one pays for a thing in regular instalments while having the use of it. •A method of buying goods through making installment payments over time. Under a hire purchase contract, the buyer is leasing the goods and does not obtain ownership until the full amount of the contract is paid. If he fails to do so then the ownership of the good will remains with the seller. •Each installment will be treated as hire charges till the last installment is paid. 6.VENTURE CAPITAL •Money provided by investors to startup firms and small businesses with perceived long-term growth potential. This is a very important source of funding for startups that do not have access to capital markets. It typically entails high risk for the investor, but it has the potential for above-average returns. • There is a perception that venture capital is a means of financing high technology projects. However, venture capital is investment of long term finance made in: 1. Venture promoted by technically or professinally qualified but unproven enterprenuers, or 2. High risk ventures 7.FOREIGN EXCHANGE ACTIVITIES • Only difference between foreign exchange and stock exchange is that the foreign exchange deals outside the boundries of the country. •The exchange of one currency for another, or the conversion of one currency into another currency.  •Foreign exchange also refers to the global market where currencies are traded virtually around-the-clock. •The term foreign exchange is usually abbreviated as "forex" and occasionally as "FX." 8.BILL DISCOUNTING •A non-interest-bearing written order used primarily in international trade that binds one party to pay a fixed sum of money to another party at a predetermined future date. •Bills of exchange are similar to checks and promissory notes. •They can be drawn by individuals or banks and are generally transferable by endorsements.  •The difference between a promissory note and a bill of exchange is that this product is transferable and can bind one party to pay a third party that was not involved in its creation.  •If these bills are issued by a bank, they can be referred to as bank drafts. If they are issued by individuals, they can be referred to as trade drafts. 9.FACTORING •A financial intermediary that purchases receivables from a company. A factor is essentially a funding source that agrees to pay the company the value of the invoice less a discount for commission and fees. The factor advances most of the invoiced amount to the company immediately and the balance upon receipt of funds from the invoiced party. •Although factoring is a relatively expensive form of financing, factors provide a valuable service to (a) companies that operate in industries where it takes a long time to convert receivables to cash, and (b) companies that are growing rapidly and need cash to take advantage of new business opportunities. NON-FUND BASED ACTIVITIES 3. Investment Institutions … •It is also called “Fee based ” activities. •They include the following: 1. Managing the capital issues,i.e. management of pre-issue and post-issue of activities according to the SEBI guidelines. 2. Making arrangement for placement of capital and debt instruments with investment institutions. 3. Arrangements of funds from financial institutions for the clients. MODERN ACTIVITIES 1. Project Advisory Services 2. Mergers and Acquisitions 3. Capital Restructuring 4. Joint Ventures 5. Rehabilitiation of Sick Companies 6. Credit Rating 7. Hedging 8. Portfolio Management 9. Capital Market Services 10. Housing Finance 11. Insurance Services 1. Project Advisory Services •The financing of long-term infrastructure, industrial projects and public services based upon a non-recourse or limited recourse financial structure where project debt and equity used to finance the project are paid back from the cash flow generated by the project. •Project finance is especially attractive to the private sector because they can fund major projects . •Merchant bankers, as a part of financial services they render to their clients, undertake project counseling and preparation of pre investment studies and project report. 2. Mergers and Acquisitions •One plus one makes three: this equation is the special alchemy of a mergers or an acquisitions. •Main difference between mergers and acquisition is: 1. (X+Y=X) When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition.  2. (X+Y=Z)A merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. Types of mergers: •. Horizontal mergers - Two companies that are in direct competition and share the same product lines and markets.  •. Vertical merger - A customer and company or a supplier and company. Think of a cone supplier merging with an ice cream maker.  •. Conglomeration - Two companies that have no common business areas.  3. Capital Restructuring •When a company is having trouble making payments on its debt, it will often consolidate and adjust the terms of the debt in a debt restructuring. After a debt restructuring, the payments on debt are more manageable for the company and the likelihood of payment to bondholders increases. A company restructures its operations or structure by cutting costs. 4. Joint Ventures •A business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. •This task can be a new project or any other business activity. •In a joint venture, each of the participants is responsible for profits, losses and costs associated with it. • However, the venture is its own entity, separate and apart from the participants' other business interests. 5. Rehabilitiation of sick companies •Sick companies are the one that had existed for at least five years and had incurred accumulated losses equal to or exceeding its entire net worth at the end of any financial year. •The financial organization helps the government in rehabilitation of public sector sick units. •The unit that cannot be revived is supposed to be shut down. 6. Credit Rating •An assessment of the credit worthiness of a borrower in general terms or with respect to a particular debt or financial obligation. • A credit rating can be assigned to any entity that seeks to borrow money – an individual, corporation, state or provincial authority, or sovereign government. • Credit assessment and evaluation for companies and governments is generally done by a credit rating agency such as CRISIL OR CIBIL. •These rating agencies are paid by the entity that is seeking a credit rating for itself or for one of its debt issues. •For individuals, credit ratings are derived from the credit history maintained by credit-reporting agencies. 7. Hedging •Making an investment to reduce the risk of adverse price movements in an asset.  •An example of a hedge would be if you owned a stock, then sold a futures contract stating that you will sell your stock at a set price, therefore avoiding market fluctuations.  8. Portfolio Management •The art and science of making decisions about investment mix and policy, matching investments to objectives, asset allocation for individuals and institutions, and balancing risk against performance. •Portfolio management is all about strengths, weaknesses, opportunities and threats in the choice of debt vs. equity, domestic vs. international, growth vs. safety, and many other tradeoffs encountered in the attempt to maximize return at a given appetite for risk. 9. Capital Market Services •Markets for buying and selling equity and debt instruments. Capital markets channel savings and investment between suppliers of capital such as retail investors and institutional investors, and users of capital like businesses, government and individuals. •Capital markets typically involve issuing instruments such as stocks and bonds for the medium-term and long-term.  In this respect, capital markets are distinct from money markets, which refer to markets for financial instruments with maturities not exceeding one year. 10. Housing Finance •A type of seller financing in which a firm extends customers a loan, allowing them to purchase its goods or services.  •The automobile sales industry is a prominent user of in-house financing. Many vehicle sales rely on the buyer taking a loan, in-house financing allows the firm to complete more deals by accepting more customers. • Financial institutions in the field of housing finance are HDFC, LIC housing finance, ICICI housing, and so on. 11. Insurance Services •A contract (policy) in which an individual or entity receives financial protection or reimbursement against losses from an insurance company. The company pools clients' risks to make payments more affordable for the insured. •Types: 1. Life insurance 2. General Insurance THANK YOU