The financial services sector provides financial services to people and corporations.

This
segment of the economy is made up of a variety of financial firms including banks, investment
houses, lenders, finance companies, real estate brokers, and insurance companies.
The financial services sector is the primary driver of a nation's economy. It provides the free
flow of capital and liquidity in the marketplace. When the sector is strong, the economy grows,
and companies in this industry are better able to manage risk.
Financial services make up one of the economy's most important and influential sectors.
Financial services are a broad range of more specific activities such as banking, investing, and
insurance. Financial services are limited to the activity of financial services firms and their
professionals, while financial products are the actual goods, accounts, or investments they
provide.

Role and Importance of financial services

1. Banking segments 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. At this stage, the financial
services come to the rescue of the investor such as merchant banker through the new issue
market, enabling the producer to raise capital. The stock market helps in mobilizing more funds
by the investor. Investments from abroad is attracted. Factoring and leasing companies, both
domestic and foreign enable the producer not only to sell the products but also to acquire modern
machinery/technology for further production.
2. Promoting savings
Financial services such as mutual funds provide ample opportunity for different types of saving.
In fact, different types of investment options are made available for the convenience of
pensioners as well as aged people so that they can be assured of a reasonable return on
investment without much risks. For people interested in the growth of their savings, various
reinvestment opportunities are provided.
3. Minimizing the risks
The risks of both financial services as well as producers are minimized by the presence of
insurance companies. Various types of risks are covered which not only offer protection from the
fluctuating business conditions but also from risks caused by natural calamities. Insurance is not
only a source of finance but also a source of savings, besides minimizing the risks. Taking this
aspect into account, the government has not only privatized the life insurance but also set up a
regulatory authority for the insurance companies known as IRDA, 1999 (Insurance Regulatory
and Development Authority).
4. 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. Producers can avail various types of
credit facilities for acquiring assets. In certain cases, they can even go for leasing of certain
assets of very high value.
5. Ensures greater Yield
The financial services enable the producer to not only earn more profits but also maximize their
wealth. Financial services enhance their goodwill and induce them to go in for diversification.
The stock market and the different types of derivative market provide ample opportunities to get
a higher yield for the investor.
6. 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 namely, primary, secondary
and tertiary so that activities are spread over in a balanced manner in all the three sectors. This
brings in a balanced growth of the economy as a result of which employment opportunities are
improved. The tertiary or service sector not only grows and this growth is an important sign of
development of any economy.
7. Economic development
Financial services enable the consumers to obtain different types of products and services by
which they can improve their standard of living. Purchase of car, house and other essential as
well as luxurious items is made possible through hire purchase, leasing and housing finance
companies. Thus, the consumer is compelled to save while he enjoys the benefits of the assets
which he has acquired with the help of financial services.
8. Benefit to Government
The presence of financial services enables the government to raise both short-term and long-term
funds to meet both revenue and capital expenditure. Through the money market, government
raises short term funds by the issue of Treasury Bills. These are purchased by commercial banks
from out of their depositors’ money. In addition to this, the government is able to raise long-term
funds by the sale of government securities in the securities market which forms apart of financial
market.
9. Expands activities of Financial Institutions
The presence of financial services enables financial institutions to not only raise finance but also
get an opportunity to disburse their funds in the most profitable manner. Mutual funds, factoring,
credit cards, hire purchase finance are some of the services which get financed by financial
institutions. The financial institutions are in a position to expand their activities and thus
diversify the use of their funds for various activities. This ensures economic dynamism.
10. Capital Market
One of the barometers of any economy is the presence of a vibrant capital market. If there is
hectic activity in the capital market, then it is an indication of the presence of a positive
economic condition. The financial services ensure that all the companies are able to acquire
adequate funds to boost production and to reap more profits eventually. In the absence of
financial services, there will be paucity of funds which will adversely affect the working of
companies and will only result in a negative growth of the capital market. When the capital
market is more active, funds from foreign countries also flow in.
11. Promotion of Domestic and Foreign Trade
Financial services ensure promotion of domestic as well as foreign trade. The presence of
factoring and forfaiting companies ensures increasing sale of goods in the domestic market and
export of goods in the foreign market. Banking and insurance services further contribute to step
up such promotional activities.
12. Balanced Regional development
The government monitors the growth of economy and regions that remain backward
economically are given fiscal and monetary benefits through tax and cheaper credit by which
more investment is promoted. This generates more production, employment, income, demand
and ultimately increase in prices. The producers will earn more profits and can expand their
activities further. So, the presence of financial services helps backward regions to develop and
catch up with the rest of the country that has developed already.

Banking Financial Services

The banking industry is the foundation of the financial services group. It is most concerned with
direct saving and lending, while the financial services sector incorporates investments, insurance,
the redistribution of risk, and other financial activities.
Banking is made up of several segments—retail banking, commercial banking, and investment
banking. Also known as consumer or personal banking, retail banking serves consumers rather
than corporations. These banks offer financial services tailored to individuals, including
checking and savings accounts, mortgages, loans, and credit cards, as well as certain investment
services. Corporate, commercial, or business banking, on the other hand, deals with small
businesses and large corporations. Like retail banking, it provides account services and credit
products that are tailored to the specific needs of businesses.
An investment bank typically only works with deal makers and high-net-worth individuals
(HNWIs)—not the general public. These banks underwrite deals, secure access to capital
markets, offer wealth management and tax advice, advise companies on mergers and acquisitions
(M&A), and facilitate the buying and selling of stocks and bonds. Financial advisors and
discount brokerages also occupy this niche.

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.
A non-bank financial intermediary does not accept deposits from the general public. The
intermediary may provide factoring, leasing, insurance plans or other financial services. Many
intermediaries take part in securities exchanges and utilize long-term plans for managing and
growing their funds. The overall economic stability of a country may be shown through the
activities of financial intermediaries and the growth of the financial services industry. Financial
intermediaries move funds from parties with excess capital to parties needing funds. The process
creates efficient markets and lowers the cost of conducting business.
For example, a financial advisor connects with clients through purchasing insurance, stocks,
bonds, real estate, and other assets. Banks connect borrowers and lenders by providing capital
from other financial institutions and from the Federal Reserve. Insurance companies collect
premiums for policies and provide policy benefits. A pension fund collects funds on behalf of
members and distributes payments to pensioners.

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.
Financial institutions can vary by size, scope, and geography.
Types of Financial Institutions
1. Investment Banks
2. Commercial Banks
3. Internet Banks
4. Retail Banking
 5. Insurance companies
6. Mortgage companies.
7. Brokerage companies

1. Investment Banks
Investment banks specialize in providing services designed to facilitate business operations, such
as capital expenditure financing and equity offerings, including initial public offerings (IPOs).
They also commonly offer brokerage services for investors, act as market makers for trading
exchanges, and manage mergers, acquisitions, and other corporate restructurings.
2. Commercial Banks
A commercial bank is a type of financial institution that accepts deposits, offers checking
account services, makes business, personal, and mortgage loans, and offers basic financial
products like certificates of deposit (CDs) and savings accounts to individuals and small
businesses. A commercial bank is where most people do their banking, as opposed to an
investment bank.
3. Internet Banks
Some banks operate exclusively online, with no physical branch. These banks handle customer
service by phone, email, or online chat. Online banking is frequently performed on mobile
devices now that Wi-Fi and 4G networks are widely available. It can also be done on a desktop
computer.
These banks may not provide direct automatic teller machine (ATM) access but will make
provisions for consumers to use ATMs at other banks and retail stores. They may reimburse
consumers for some of the ATM fees charged by other financial institutions. Reduced overhead
costs associated with not having physical branches typically allow online banks to offer
consumers significant savings on banking fees. They also offer higher interest rates on accounts.
4. Retail Banks
Retail banking provides financial services to individual consumers rather than large institutions.
Services offered include savings and checking accounts, mortgages, personal loans, debit or
credit cards, and certificates of deposit (CDs). Retail banks can be local community banks or the
divisions of large commercial banks. In the digital age, many fintech companies can provide all
of the same services as retail banks through Internet platforms and smartphone apps. While retail
banking services are provided to individuals in the general public, corporate banking services are
only provided to small or large companies and corporate bodies.
 5. Insurance Companies
Among the most familiar non-bank financial institutions are insurance companies. Providing
insurance, whether for individuals or corporations, is one of the oldest financial services.
Protection of assets and protection against financial risk, secured through insurance products, is
an essential service that facilitates individual and corporate investments that fuel economic
growth.
6. Mortgage Banks
A mortgage bank is a bank with a specialization in lending the money against the mortgage of
any specific securities. They structure various loan products at a cheap rate or with better funding
arrangements and involves various activities like loan origination, mortgage sale, and Loan
servicing/mortgage servicing. The fees on such transactions remain very small hence the
profitability in such business remains high.
7. Brokerage Firms
Investment companies and brokerages, such as mutual fund and exchange-traded fund (ETF)
provider Fidelity Investments, specialize in providing investment services that include wealth
management and financial advisory services. They also provide access to investment products
that may range from stocks and bonds all the way to lesser-known alternative investments, such
as hedge funds and private equity investments.

Role of Financial Institutions

The financial institution provides varied kinds of financial services to the customers. Financial
institution provides an attractive rate of return to the customers. Promotes the direct investment
by the customers and making them understand the risk associated with that as well. It helps in
forming the liquidity of the stock in case of an emergency in the financial markets.
Features
 It provides a high rate of return to the customers who have invested in the financial
institution.
 It reduces the cost of financial services provided.
 It is considered very important for the development of financial services in the country.
 It also advises the customers on how to deal with the equity and the other securities
bought and sold in the market.
 It helps to improvise decision making because it follows a systematic approach to
calculate all the risks and rewards.
Functions
 The financial institutions provide loans and advances to the customers.
 The rate of return is very high in case of investment made in this type of institution.
 It also gives a high rated consultancy to the customers for their beneficial investments.
 It also serves as a depository for their customers.
 It can also make an effort to minimize the monitoring cost of the company.
 All the finance related work is done by the financial institution or on behalf of the
customers.

Financial Markets
Financial markets refer broadly to any marketplace where the trading of securities occurs. There
are many kinds of financial markets, including (but not limited to) forex, money, stock, and bond
markets. These markets may include assets or securities that are either listed on regulated
exchanges or else trade over-the-counter (OTC). Financial markets trade in all types of securities
and are critical to the smooth operation of a capitalist society.

Types of Financial Markets

1. Stock Markets
Perhaps the most ubiquitous of financial markets are stock markets. These are venues where
companies list their shares and they are bought and sold by traders and investors. Stock markets,
or equities markets, are used by companies to raise capital via an initial public offering (IPO),
with shares subsequently traded among various buyers and sellers in what is known as a
secondary market.
Typical participants in a stock market include (both retail and institutional) investors and traders,
as well as market makers (MMs) and specialists who maintain liquidity and provide two-sided
markets. Brokers are third parties that facilitate trades between buyers and sellers but who do not
take an actual position in a stock.
2. Over-the-Counter Markets
An over-the-counter (OTC) market is a decentralized market—meaning it does not have physical
locations, and trading is conducted electronically—in which market participants trade securities
directly between two parties without a broker. While OTC markets may handle trading in certain
stocks (e.g., smaller or riskier companies that do not meet the listing criteria of exchanges), most
stock trading is done via exchanges. Certain derivatives markets, however, are exclusively OTC,
and so make up an important segment of the financial markets. Broadly speaking, OTC markets
and the transactions that occur on them are far less regulated, less liquid, and opaquer.
 3. Bond Markets
A bond is a security in which an investor loans money for a defined period at a pre-established
interest rate. A bond is an agreement between the lender and borrower that contains the details of
the loan and its payments. Bonds are issued by corporations as well as by municipalities, states,
and sovereign governments to finance projects and operations. The bond market sells securities
such as notes and bills issued by the United States Treasury, for example. The bond market also
is called the debt, credit, or fixed-income market.
4. Money Markets
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
Treasury bills, among other examples.
5. Derivatives Markets
A derivative is a contract between two or more parties whose value is based on an agreed-upon
underlying financial asset (like a security) or set of assets (like an index). Derivatives are
secondary securities whose value is solely derived from the value of the primary security that
they are linked to. In and of itself a derivative is worthless. Rather than trading stocks directly, a
derivatives market trades in futures and options contracts, and other advanced financial products,
that derive their value from underlying instruments like bonds, commodities, currencies, interest
rates, market indexes, and stocks.
Futures markets are where futures contracts are listed and traded. Unlike forwards, which trade
OTC, futures markets utilize standardized contract specifications, are well-regulated, and utilize
clearinghouses to settle and confirm trades. Options markets, such as the Chicago Board Options
Exchange (CBOE), similarly list and regulate options contracts. Both futures and options
exchanges may list contracts on various asset classes, such as equities, fixed-income securities,
commodities, and so on.
6. Forex Market
The forex (foreign exchange) market is the market in which participants can buy, sell, hedge, and
speculate on the exchange rates between currency pairs. The forex market is the most liquid
market in the world, as cash is the most liquid of assets. The currency market handles more than
$5 trillion in daily transactions, which is more than the futures and equity markets combined. As
with the OTC markets, the forex market is also decentralized and consists of a global network of
computers and brokers from around the world. The forex market is made up of banks,
commercial companies, central banks, investment management firms, hedge and trade globally
across a patchwork of independent online crypto exchanges.
7. Commodities Markets
Commodities markets are venues where producers and consumers meet to exchange physical
commodities such as agricultural products (e.g., corn, livestock, soybeans), energy products (oil,
gas, carbon credits), precious metals (gold, silver, platinum), or "soft" commodities (such as
cotton, coffee, and sugar). These are known as spot commodity markets, where physical goods
are exchanged for money. The bulk of trading in these commodities, however, takes place on
derivatives markets that utilize spot commodities as the underlying assets. Forwards, futures, and
options on commodities are exchanged both OTC and on listed exchanges around the world such
as the Chicago Mercantile Exchange (CME) and the Intercontinental Exchange (ICE).
8. Cryptocurrency Markets
The past several years has seen the introduction and rise of cryptocurrencies such as Bitcoin and
Ethereum, decentralized digital assets that are based on blockchain technology. Today, hundreds
of cryptocurrency tokens are available.

Role of Financial Markets

 To facilitate saving by businesses and households: Offering a secure place to store money
and earn interest
 To lend to businesses and individuals: Financial markets provide an intermediary between
savers and borrowers
 To allocate funds to productive uses: Financial markets allocate capital to where the risk-
adjusted rate of return is highest
 To facilitate the final exchange of goods and services such as contactless payments systems,
foreign exchange etc.
 To provide forward markets in currencies and commodities: Forward markets allow agents
to insure against price volatility
 To provide a market for equities: Allowing businesses to raise fresh equity to fund their
capital investment and expansion.

Indian Financial Markets

Financial markets form a bridge between investors and borrowers. It brings together individuals
and entities that have surplus funds and those who are in a deficit of funds so that funds can be
transferred between them. This transfer of funds is done through different types of financial
instruments that operate in the financial markets. The financial markets are mainly divided into
two: money market and capital market.

1. Money market
The money market is a marketplace for short-term borrowing and lending. Securities that have a
maturity period of less than a year are traded on money markets. The assets traded in money
markets are usually risk-free and are very liquid. Since the maturity period is low, the risk of
volatility is low, and the returns are also low..
Features

 It can be called as a collection of the market. Its main feature is liquidity. All the submarkets,
such as call money, notice money, etc. have close interrelation with each other. This helps in
the movement of funds from one sub-market to another.
 The volume of traded assets is generally very high.
 It enables the short-term financial needs of the borrowers. Also, it deals with investments that
have a maturity period of 1 year or less.
 It is still evolving. There is always a possibility of adding new instrument

a) Call Money
It is a segment of the market where scheduled commercial banks lend or borrow on short
notice (say a period of 14 days). In order to manage day-to-day cash flows. The interest
rates in the market are market-driven and hence highly sensitive to demand and supply.
Also, the interest rates have been known to fluctuate by a large % at certain times.
b) 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.
c) 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.
Corporates, primary dealers (PDs) and All-India Financial Institutions (FIs) can issue
CPs. CPs have a fixed maturity period ranging from 7 days to 270 days. However,
investors can trade this instrument in the secondary market. They offer relatively higher
returns compared to that from treasury bills.
d) 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). Because of
the restriction on minimum investment amount, CDs are more popular amongst
organizations than individuals who are looking to park their surplus for short term, and
earn interest on the same. The maturity period of Certificates of Deposits ranges from 7
days to 1 year, if issued by banks. Other financial institutions can issue a CD with
maturity ranging from 1 year to 3 years.
e) Repurchase Agreements
Also known as repos or buybacks, Repurchase Agreements are a formal agreement
between two parties, where one party sells a security to another, with the promise of
buying it back at a later date from the buyer. It is also called a Sell-Buy transaction. The
seller buys the security at a predetermined time and amount which also includes the
interest rate at which the buyer agreed to buy the security. The interest rate charged by
the buyer for agreeing to buy the security is called Repo rate. Repos come-in handy when
the seller needs funds for short-term, he can just sell the securities and get the funds to
dispose. The buyer gets an opportunity to earn decent returns on the invested money.
f) Banker’s Acceptance
A financial instrument produced by an individual or a corporation, in the name of the
bank is known as Banker’s Acceptance. It requires the issuer to pay the instrument holder
a specified amount on a predetermined date, which ranges from 30 to 180 days, starting
from the date of issue of the instrument. It is a secure financial instrument as the payment
is guaranteed by a commercial bank. Banker’s Acceptance is issued at a discounted price,
and the actual price is paid to the holder at maturity. The difference between the two is
the profit made by the investor.