INDUSTRY PROFILE OF FINANCIAL SERVICE INDUSTRY

The financial services industry manages money for individuals and corporations. It comprises
such organizations as commercial and investment banks, insurance companies, hedge funds,
credit-card companies, consumer finance firms, accounting agencies, and brokerage firms.

Importance and role of Financial service industry:

 Promoting Investment: The presence of financial services creates more demand for
products and the producer, in order to meet the demand from the consumer goes for more
investment.
 Promoting Savings: Financial services such as mutual funds provide ample opportunity
for different types of saving.
 Minimizing the risks: The risks of both financial services as well as producers are
minimized by the presence of insurance companies.
 Maximizing the Returns: The presence of financial services enables businessmen to
maximize their returns. This is possible due to the availability of credit at a reasonable
rate.
 Ensures greater Yield: There is a subtle difference between return and yield. It is the yield
which attracts more producers to enter the market and increase their production to meet
the demands of the consumer.
 Economic growth: The development of all the sectors is essential for the development of
the economy. The financial services ensure equal distribution of funds to all the three
sectors.

Banking Financial Services

BFSI industry is set to grow significantly in the coming years due to India’s economic expansion
and growing awareness among the population of these financial products / services. New and
wider products will provide immense opportunities to develop niche areas. The industry has
adopted IT as an integral part of business strategy, where RSM is well positioned to provide
various services on such IT platforms. High supervision by regulators will require constant
vigilance and need to adopt measures to mitigate risks based on various control measures
including ‘Risk Based Audits’ (RBA) as provided by: The Reserve Bank of India in its RBA
guidelines to banks, The Insurance Regulatory authority of India (IRDA) to the insurance
industry, Securities Exchange Board of India (SEBI) for the mutual fund industry.

Financial Intermediaries

A financial intermediary is an entity that acts as the middleman between two parties in a
financial transaction, such as a commercial bank, investment bank, mutual fund, or pension fund.
Financial intermediaries offer a number of benefits to the average consumer, including safety,
liquidity, and economies of scale involved in banking and asset management. Although in certain
areas, such as investing, advances in technology threaten to eliminate the financial intermediary,
disintermediation is much less of a threat in other areas of finance, including banking and
insurance.

Financial Institutions

A financial institution (FI) is a company engaged in the business of dealing with financial and
monetary transactions such as deposits, loans, investments, and currency exchange. Financial
institutions encompass a broad range of business operations within the financial services sector
including banks, trust companies, insurance companies, brokerage firms, and investment dealers.
Virtually everyone living in a developed economy has an ongoing or at least periodic need for
the services of financial institutions.

Financial Markets

Financial Market refers to a marketplace, where creation and trading of financial assets, such as
shares, debentures, bonds, derivatives, currencies, etc. take place. It plays a crucial role in
allocating limited resources, in the country’s economy. It acts as an intermediary between the
savers and investors by mobilizing funds between them.

 Role of Financial Markets

 It facilitates mobilization of savings and puts it to the most productive uses.

 It helps in determining the price of the securities. The frequent interaction between
investors helps in fixing the price of securities, on the basis of their demand and supply in
the market.
  It provides liquidity to tradable assets, by facilitating the exchange, as the investors can
readily sell their securities and convert assets into cash.
 It saves the time, money and efforts of the parties, as they don’t have to waste resources
to find probable buyers or sellers of securities. Further, it reduces cost by providing
valuable information, regarding the securities traded in the financial market.

Indian Financial Markets

The Indian money market consists of Reserve Bank of India, Commercial banks, Co-operative
banks, and other specialized financial institutions. The Reserve Bank of India is the leader of the
money market in India. Some Non-Banking Financial Companies (NBFCs) and financial
institutions like LIC, GIC, UTI, etc.

Classification of Financial Markets

Money Market

Typically the money markets trade in products with highly liquid short-term maturities (of less
than one year) and are characterized by a high degree of safety and a relatively low return in
interest. At the wholesale level, the money markets involve large-volume trades between
institutions and traders. At the retail level, they include money market mutual funds bought by
individual investors and money market accounts opened by bank customers. Individuals may
also invest in the money markets by buying short-term certificates of deposit (CDs), municipal
notes, or U.S. Treasury bills, among other examples.

Instruments of Money Market

Treasury Bills (T-Bills): Treasury bills or T- Bills are issued by the Reserve Bank of India on
behalf of the Central Government for raising money. They have short term maturities with
highest up to one year. Currently, T- Bills are issued with 3 different maturity periods, which are,
91 days T-Bills, 182 days T- Bills, 1 year T – Bills.T-Bills are issued at a discount to the face
value. At maturity, the investor gets the face value amount. This difference between the initial
value and face value is the return earned by the investor. They are the safest short term fixed
income investments as they are backed by the Government of India.
Commercial Papers: Large companies and businesses issue promissory notes to raise capital to
meet short term business needs, known as Commercial Papers (CPs). These firms have a high
credit rating, owing to which commercial papers are unsecured, with company’s credibility
acting as security for the financial instrument.

Certificates of Deposits (CD): CDs are financial assets that are issued by banks and financial
institutions. They offer fixed interest rate on the invested amount. The primary difference
between a CD and a Fixed Deposit is that of the value of principal amount that can be invested.
The former is issued for large sums of money (1 lakh or in multiples of 1 lakh thereafter).

Capital Market

The capital market is a market which deals in long-term loans. It supplies industry with fixed and
working capital and finances medium-term and long-term borrowings of the central, state and
local governments. The capital market deals in ordinary stock are shares and debentures of
corporations, and bonds and securities of governments.

Importance or Functions of Capital Market:

 The capital market plays an important role immobilizing saving and channel is in them
into productive investments for the development of commerce and industry.
 The capital market acts as an important link between savers and investors. The savers are
lenders of funds while investors are borrowers of funds.
 Funds flow into the capital market from individuals and financial intermediaries which
are absorbed by commerce, industry and government. It thus facilitates the movement of
stream of capital to be used more productively and profitability to increases the national
income.

Primary Market

A primary market is a source of new securities. Often on an exchange, it's where companies,
governments, and other groups go to obtain financing through debt-based or equity-based
securities. Primary markets are facilitated by underwriting groups consisting of investment banks
that set a beginning price range for a given security and oversee its sale to investors.
An initial public offering, or IPO, is an example of a security issued on a primary market. An
IPO occurs when a private company sells shares of stock to the public for the first time, a process
known as "going public." The process, including the original price of the new shares, is set by a
designated investment bank, hired by the company to do the initial underwriting for a particular
stock.

Secondary Market

The secondary market is where investors buy and sell securities they already own. It is what
most people typically think of as the "stock market," though stocks are also sold on the primary
market when they are first issued. The national exchanges, such as the New York Stock
Exchange (NYSE) and the NASDAQ, are secondary markets.

Corporate Actions

A corporate action is an event initiated by a public company that brings or could bring an actual
change to the securities—equity or debt—issued by the company. Corporate actions are typically
agreed upon by a company's board of directors and authorized by the shareholders. Corporate
actions include stock splits, dividends, mergers and acquisitions, rights issues and spin-offs. All
of these are major decisions that typically need to be approved by the company's board of
directors and authorized by its shareholders.

Broking Firms vs. Wealth Management Firms vs. AMCs

Stockbroking is a service which gives retail and institutional investors the opportunity to buy and
sell equities. Stockbrokers will trade shares both on exchange and over-the-counter, dependent
on where they can find the best price and liquidity. Stock exchanges place strict regulations on
who can trade shares directly on their books, which is why most individual investors hoping to
trade shares will do so via a stockbroker. Asset management refers to the management of assets
that could involve investments like equity, fixed income securities, real estate, global
investments, etc. Asset management firms are concerned with maximizing returns of client’s
assets. Wealth management refers to overseeing all the financial aspects of the client and may
include management of assets, taxes, estate, cash flows, and all other possible uses of money.
Wealth management thus encompasses asset management and takes a holistic view of the
client’s finances. Based on their requirements, investors need to decide whether they require the
services of an asset management firm or a wealth management firm or both.

Growth of financial services industry

The growth of financial sector in India was due to the development in sectors

Growth of the banking sector in India

The banking system in India is the most extensive. The total asset value of the entire banking
sector in India is nearly US$ 270 billion. The total deposits is nearly US$ 220 billion. Banking
sector in India has been transformed completely. Presently the latest inclusions such as Internet
banking and Core banking have made banking operations more user friendly and easy.

Growth of the Capital Market in India

 The ratio of the transaction was increased with the share ratio and deposit system
 The removal of the pliable but ill-used forward trading mechanism
 The introduction of InfoTech systems in the National Stock Exchange (NSE) in order to
cater to the various investors in different locations
 Privatization of stock exchanges

Growth in the Insurance sector in India

 With the opening of the market, foreign and private Indian players are keen to convert
untapped market potential into opportunities by providing tailor-made products.
 The insurance market is filled up with new players which has led to the introduction of
several innovative insurance based products, value add-ons, and services. Many foreign
companies have also entered the arena such as Tokio Marine, Aviva, Allianz, Lombard
General, AMP, New York Life, Standard Life, AIG, and Sun Life.
 The competition among the companies has led to aggressive marketing, and distribution
techniques.
 The active part of the Insurance Regulatory and Development Authority (IRDA) as a
regulatory body has provided to the development of the sector.

Growth of the Venture Capital market in India

  The venture capital sector in India is one of the most active in the financial sector in spite
of the hindrances by the external set up.
 Presently in India there are around 34 national and 2 international SEBI registered
venture capital funds.

Medha Singh

Finance Intern

Christ University