FINANCIAL SERVICES (QUESTION BANK)

UNIT -1 PART -A

1 Define finance

Finance is defined as the management of money and includes activities such as investing , lending
,budgeting ,saving and forecasting .There are three types of finance personal ,corporate
,public/govt

2 What is meant by financial services

Financial services as a part of financial system provide different types of finance through various
credit instruments, financial products and services,

In financial instruments we come across cheques, bills, promissory notes and letter of credit. In
financial products there are different types of mutual funds ,extending various types of
investment opportunities etc.

3 Give short notes on new issue market

A primary market is one in which new securities are offered to the investing public for the first
time. Hence it is also called as new issue market . Each and every organisation is in need of funds
and it invites the investing sources like individuals, institutions, development banks, commercial
banks and mutual funds etc to subscribe to its new issues

4 Write about finance system

The financial system consists of a variety of institutions, markets, instruments and services. It
provides the principal means by which savings are transformed into investments. Given its role in
the allocation of resources, the efficient functioning of the financial system is of critical
importance to a modern economy.

5 what are called financial tools

Financial tools are one of the most efficient ways that can be used for ensuring good profit from
your investments. These financial tools are highly helpful in evaluating the market and investing in
a way so as to maximize the profit from the investments made.

6 How to measure the financial risk

When the financial risk is associated with a company’s debt, the simplest option to measure the
financial risk of the company is to look for the debt to asset ratio. If a company owns assets valued
more than the it owes, then the financial risk is lesser and it is an attractive opportunity for
investors.

7 How many kinds of players in financial service sector

There are different types of players in financial service sector namely,

# Hire purchase financier # Mutual funds

# Leasing companies

# Underwriters

# Merchant bankers
8 What are mutual funds

Mutual funds are trusts of public members who wish to make investments in the financial
instruments or assets of the business sector/corporate sector for the mutual benefits of its
members . It is a concept of mutual help of subscribers for portfolio investments and management
of these investments by experts in the field.

9 How to arise finance

+ Get business loans from microfinance providers or NBFCs

+ Get funding from business incubators & accelerators

+ Get venture capital from your business

+ Raise money through bank loans

10 What is fund seeker

Fund seeker means a society members seeking fundraising on the platform and who has entered
into a fund seeker agreement.

11 What is credit rating

The term credit rating means the exercise of assessing the credit records, integrity and capability
of a prospective borrower so as to meet debt obligations. Credit rating is done for companies,
individuals and even in different countries.

12 Define economic environment

The definition of economics environment is the environment in which businesses operate that is
dependent on the sum total of economic factors

Economic factors include income, employment, inflation, interests rates, consumer behaviour and
distribution of wealth. All of the economic factors have effects on the economic environment,
which in turn affects the business market.

13 State the institutions that are engaged in the provision of financial service

#Banking

#Professional Advisory

#Wealth Management

#Mutual funds

#Insurance

#Stock Market

#Treasury/Debt Instruments

#Tax/Consulting

14 Name some of the regulatory agencies that govern the function of financial services
>Reserve Bank of India (RBI) – central bank and primary regulator of banks, payments system, and
financial entities.

>Deposit Insurance and Credit Guarantee Corporation (DICGC)

>Banking Codes and Standards Board of India (BCSBI)

>Securities and Exchange Board of India (SEBI)

>Forward Markets Commission (FMC)

15 What is the impact of MICR technology in financial services

MICR technology helps detect and prevent fraud, banks and other financial institutions use it to
minimize losses. The routing number, account number, and check number combine to create a
unique identifier for each check.

PART -B

1 What are financial services

#Financial services as a part of financial system provide different types of finance through various
credit instruments, financial products and services,

#In financial instruments we come across cheques, bills, promissory notes and letter of credit. In
financial products there are different types of mutual funds ,extending various types of
investment opportunities etc. In addition, there are also products such as credit cards, debit cards
etc.

#In services we have leasing, factoring, hire purchase finance etc.,through which various types of
assets can be acquired either for ownership or on lease. There are different types of leases as well
as factoring too.

#It is the presence of financial services that enables a country to improve its economic condition
where by there is more production in all the sectors leading to economic growth.

#The benefit of economic growth is reflected on the people in the form of economic prosperity
wherein the individual enjoys higher standard of living.

#It is financial services that enables an individual to acquire or obtain various consumer products
through hire purchase.In this process various number of financial institutions which also earn
profits.

#The presence of these financial institutions promote investment, production, savings etc…

#Thus financial services enable the user to obtain any asset on credit according to his convenience
and at a reasonable interest rate.

2 Describe the importance of financial services

#PROMOTING SAVINGS : The presence of financial service helps to provide ample opportunities
for different types of saving. Mutual funds plays the major role in it. It made available for the
convenience of prisoners as well as aged people.
#PROMOTING DOMESTIC AND FOREIGN : The presence of financial service ensure promotion of
domestic as well as foreign trade. Forfaiting companies helps in increasing of sale of goods in the
both domestic and foreign market. Factoring, banking, and insurance service it helps in
promotional actions.

#ECONOMIC GROWTH : Development of all sectors is essential for the development of the
economy. The financial services ensure equal distribution of funds to all. Three sectors namely
primary, secondary and tertiary. . Balance growth of the economy results in employment
opportunity.Tertiary sector plays a important role in economic growth.

#ECONOMIC DEVELOPMENT : Financial service in economic development helps to improve

standard of living. Hire purchase, leasing and housing finance companies helps in purchasing of
assets easily.

#MINIMISING THE RISK : The risks of both financial service as well as producers are minimised by
the presence of insurance companies. Insurance is not only a source of finance but also a source of
saving besides minimising the risks.

3 Explain about the functions of financial services

>The financial system transfer resources across time, sectors, and regions.

>The financial system manages risks for the economy – (Fire Insurance)

>The financial system pools and subdivides funds depending upon the need of the individual saver
or investor.

>Performs an important clearing house finance function, which facilitates transactions between
payers and payees.

>Perform the essential function of channeling funds from economic players that have surplus
funds to those that have a shortage of funds.

>Direct finance is the borrowers borrow funds directly from lenders in financial markets by selling
them securities.

>Promotes economic efficiency by producing an efficient allocation of capital, which increases

production.

>Directly improve the well being of consumers by allowing them to time purchases better.

4 What are the categories of players in financial service sector

Players in the financial services sector can be categorised into 2 types based on the number of
parties involved namely,

1.Three players i.e,

a.Fund Seeker,

b.Financial Institutions and,

c.Fund Saver

2.Two players i.e,

a.Fund Seeker and,

 b.Financial Institutions .

1. THREE PLAYERS MODEL : There are three players in each and every activity . Financial
institutions act simply as an intermediary and connect the financial seeker and financial
saver.Mutual funds ,house financing , discounting of bills etc, are under this category. Banks,
Insurance companies , non -banking financial institutions etc… collect money from investors and
provide finance to the needy persons.

FUND SAVER -------> FINANCIAL INSTITUTIONS -----------> FUND SEEKER

-------->Represents flow of funds

2. TWO PLAYERS MODEL : In this model only two parties are involved in the financial activities.
This model consists of only two parties viz.,financial institutions and fund seeker because financial
institutions themselves finance the funds out of its own source to the fund seekers. It eliminates
fund saver from the line and the financial institutions have connection directly with the fund
seeker.

FINANCIAL INSTITUTIONS ------------->FUND SEEKER

-------->Represents flow of funds

5 Discuss about the hire purchase system

>The essence of the agreement between the seller and the buyer is that the ownership of goods
does not pass he to the buyer until he pays the last instalment.

>There are two parties to the hire purchase agreement.

>One is the hirer vendor, who is the seller and the other is the hire purchaser, the buyer

>The hire purchaser exercises the option of purchasing.He may even return the goods , if he is not
satisfied with their quality or performance.

>But this is different from instalment sale , in which the ownership of the goods passes to the
buyer immediately on payment of the first instalment and the buyer has no option to return the
goods.

6 Write notes on leasing

>leasing refers to a financial service under which a concern acquires the right to use an asset
without holding title of it

>It is based on the theory that an enterprise makes a profit merely by using an asset instead of
owning it.A lease is thus, use of an asset , which belongs to somebody else.

>In legal terms , the Indian Contract Act 1872 defines as the possession and the use of the asset
with the user is called the “LESSEE” whereas the ownership remains with the provider called
“LESSOR”.

>”A lease of the movable property is a transfer of a right to enjoy such property, made for a
certain time, express or implied , or in perpetuity in consideration of a price paid or promised or
for money, a share of services or any other thing of value, to be rendered periodically or on
specific occasions to the transferor by the transferee , who accepts the transfer on such terms”

>Thus leasing is the mechanism by which a person acquires the possession and use of a capital
asset owned by another party by paying a pre – determined amount of money called “RENTAL”
periodically over a stated period of time and the lessor remains the legal owner.

>The lessee is not required to make an initial deposit and so he has no stake in the asset he uses.

>Under leasing method, many kinds of assets including plant , machinery , equipment and
vehicles without the need for capital outlay.

7 How many kinds finance oriented services

The various financial services can be brought under the following types:

+Facilitating type

+Investment -oriented

+Promotion – oriented

+Return or Income oriented

+Linking type

+Trade oriented

+Credit oriented

+ Performance oriented

#FACILITATING TYPE : Hire purchase finance companies facilitate consumers in the purchase of
consumers goods while lease companies facilitate traders in the purchase of capital goods. Hence,
they come under facilitating type.

#INVESTMENT ORIENTED : Merchant bankers promote investments by helping investors in

fulfilling various formalities such as issue of shares and debentures. They also advice the
promoters on the quantum of capital to be raised through issue of different types of securities.

#PROMOTION ORIENTED : Promoting new ventures is taken up by the venture capital companies.
Underwriters also helps in the sale of securities which promotes companies.The bankers also help
entrepreneurs through project finance. Hence , they all come under promotion type.

#RETURN OR INCOME ORIENTED :For those investors who do want to take risks yet but want to
ensure a reasonable return for their investment. Mutual funds companies are the best source
which come under this type of financial services.

#LINKING TYPE : Promoters, investors , public, foreign investor and govt are linked by certain
companies such as merchant bankers. They not only link these people but also ensure that each
one is satisfied with his /her return on investment. The merchant bankers acts as the brain in
coordinating the various entities.

8 Discuss briefly the different financial development measures

>BALANCED REGIONAL DEVELOPMENT : The govt monitors the growth of economy and regions
that remains 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.

>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.

>PROMOTING SAVINGS : The presence of financial service helps to provide ample opportunities
for different types of saving. Mutual funds plays the major role in it. It made available for the
convenience of prisoners as well as aged people.

>PROMOTING DOMESTIC AND FOREIGN : The presence of financial service ensure promotion of
domestic as well as foreign trade. Forfaiting companies helps in increasing of sale of goods in the
both domestic and foreign market. Factoring, banking, and insurance service it helps in
promotional actions.

9 What are the characteristics of financial services

MEANING : Financial services refers to services provided by the finance industry. The finance
industry consist of a broad range of organisation that deal with the management of money.

CHARACTERISTICS :

#INTANGIBLE IN NATURE : They cannot be standardized naked and they only focus on quality.

#INSEPARABILITY : Both supply &demand must be simultaneous.

#VARIABILITY : There are many varieties and different types of financial services.

#DOMINANTS OF HUMAN ELEMENTS : Knowledge and skilled person should be there to do the
work.

#INFORMATION BASED : Passing of information and sharing of knowledge does the best.

10 What are the objectives of financial services

>RAISES FUND : Financial services serve as an efficient tool for raising funds in an economy. It
provides various financial instruments to individuals, investors, corporation, and institutions
where they can invest their money thereby raising funds from them.

>PROMOTES SAVINGS : These services provide different types of convenient investment options
that can grow people’s savings. A mutual fund is one such good option where people can invest
and earn reasonable returns without much risk.

>DEPLOYMENT OF FUNDS : Financial services enable the proper deployment of financial resources
into productive means. There are numerous investment avenues and instruments available in the
financial market where people can invest their funds for earning income.

>MINIMIZES RISK : Risk minimization is an important role played by financial services. These
services help in diversifying the risk and protect people against damages by providing insurance
policies.
>ECONOMIC GROWTH : Financial services help the government in attaining the overall growth of
the economy. The government can easily raise both short – term and long term funds for its
various needs. It helps in improving overall infrastructural facilities and employment opportunities
in a country.

PART -C

1 Enumerate the various financial services available in India

The following are the various types of financial services, which are commonly rendered in our
country.

1.Merchant Banking

2.Mutual Funds

3.Credit Rating

4.Portfolio Services

5.Leasing

6.Hire Purhase Financing

7.House Finance

8.Venture Purchase Financing

9.Factoring

10.Discounting of Bills

11.Interconnected Stock Exchange of India (ISE)

The various financial services can be brought under the following types:

+Facilitating type

+Investment -oriented

+Promotion – oriented

+Return or Income oriented

+Linking type

+Trade oriented

+Credit oriented

+ Performance oriented

#FACILITATING TYPE : Hire purchase finance companies facilitate consumers in the purchase of
consumers goods while lease companies facilitate traders in the purchase of capital goods. Hence,
they come under facilitating type.
#INVESTMENT ORIENTED : Merchant bankers promote investments by helping investors in
fulfilling various formalities such as issue of shares and debentures. They also advice the
promoters on the quantum of capital to be raised through issue of different types of securities.

#PROMOTION ORIENTED : Promoting new ventures is taken up by the venture capital companies.
Underwriters also helps in the sale of securities which promotes companies.The bankers also help
entrepreneurs through project finance. Hence , they all come under promotion type.

#RETURN OR INCOME ORIENTED : For those investors who do want to take risks yet but want to
ensure a reasonable return for their investment. Mutual funds companies are the best source
which come under this type of financial services.

#LINKING TYPE : Promoters, investors , public, foreign investor and govt are linked by certain
companies such as merchant bankers. They not only link these people but also ensure that each
one is satisfied with his /her return on investment. The merchant bankers acts as the brain in
coordinating the various entities.

#TRADE ORIENTED : For the purpose of increasing the sales, both domestically and abroad, factors
play a major role in financing the traders by financing a major part of the value of the traded
goods. Forfaiting companies do the same while selling goods across the borders.

#CREDIT ORIENTED : Financial services which provides credit to consumers will come under this
category. Credit card companies and even hire -purchase companies come under this category.

#PERFORMANCE APPRAISAL : In order to enable the public to know the financial strength of
companies before investment, we have credit rating companies which provide ratings on the basis
of the performance of the companies from various aspects. Thus, the strength of companies is
known beforehand which will not only help the companies to get more finance but also improve
their performance in course of time.

2 Briefly describe the economic environment of our country

The growth of financial services in a country needs proper economic environment. This consist of
various economic factors as follows.

+Economic System

+Economic Laws

+Economic Policies

+Economic Planning

+Economic Conditions

ECONOMIC SYSTEM :

< Financial service provide financial help according to the requirement of business activities a
business may function under different forms example sole trader, partnership, joint stock
companies, MNC’s

< The need for financial services will be felt only when there is more private sector participation
with healthy competition. The is possible only under capitalism as a part of economic growth.
< When there is communist system the government will make arrangement for funds for
production.

< In India since we have mixed economy system financial services is felt as an encouraging one.
This encouragement will activate a systematic approach.

ECONOMIC LAWS :

< Another atmosphere for financial services the presence of economic laws, which not only
regulates the private sector but enables the financial institutions to mobilize more funds and
provide the same to the needy business men.

< Proper economic laws will not only check unscrupulous financial institutions but also plans
restrictions on the functioning of unethical business units.

< The miss use of funds, wastage of funds will be checked by proper economic laws.By proper
economic laws the government will find out unwanted accumulated of wealth in private banks tax
evation, smuggling of goods, emergence of unaccounted money, black marketing will be
prevented by proper economic laws.

ECONOMIC POLICIES :

< In economic policy which deal with many aspects connected with improving the economic
conditions of the country. The government will adopt certain policies which promote investment,
production, employment, foreign trade and economic growth.

< Increase of production in agriculture, industry and services sectors has to be taken up through
pricing policy procurement policy, allowance and subsidiaries, tax concession.

< Fiscal and monetary policies adopted by the government and the central bank respectively
should fall in line with the economic policies of the government. There may be more levying of
taxes with hire rate of interest on loans.

< The government can go for foreign borrowing provided it has a firm commitment.

ECONOMIC PLANNING :

< In economic planning a country decides a particular course or path for its development planning
fixes the rate of growth of the economy and accordingly links all the physical monetary resources
to achieve the growth.

< The purpose of economic planning is to achieve rapid economic growth. In all the sectors of the
economy.

< Five year plans clearly indicate a percentage of population that has to be lifted above the
poverty line.

< Here financial services will play a crucial role as they provide financial support to various
institutions.
ECONOMIC CONDITION :

< Financial services can be active only under favourable economic conditions. If there is depression
with falling prizes and closing down of production financial services cannot experienced more
scope. So, a controlled inflation with more scope of investment and production will be ideal for
the expansion of financial services.

< In case of ression in the economy it is for the government to play an important role for the
revaival of the economy.

3 Write notes on a)House finance b)Hire purchase system.

HOUSE FINANCE :

< Recently many private house financing companies are established. Government of India has
established a finance company called National Housing on July 9,1988.

< It is acting as the apex of the entire housing finance companies functioning in the country. So far
the bank has given recognition to about 10 companies to get rediscounting finance from it.

< It also provides refinance facilitates to housing finance institutions and scheduled banks. It also
provides guarantee and underwriting facilities to housing finance institutions.

< It co-ordinates the working of all agencies connected with housing.

< House Finance and Urban Development Corporation (HUDCO), Hosing Development and Finance
Corporation (HDFC), LIC are the subsidiaries of commercial banks are some of the organisations
that are actively involved in rendering finance in this field.

HIRE PURCHASE SYSTEM :

< Hire purchase is a kind of debt. In this method, an asset is purchased on payment of regular
instalments comprising the principal and interest spread over a specified period.

< The asset gets transformed only on payment of the last instalment. However, the hirer can avail
of depreciation and deduction of interest cost for computing taxable income.

< Hire purchase act was enacted in the year 1972. It consists of legal provisions regulating the right
and obligations of the parties to the hire purchase namely, hire vendor one who sells the assets
and hire purchaser one who purchases the assets.

< Hire purchase sales are to be made in accordance with the provisions of the Hire Purchase Act,
1972. In this method goods are delivered to the purchaser immediately on competition of the
contract. However the right will not be transferred; only the possession is transferred.

< If the hire purchaser fails to pay the instalments regularly, the hire vendor has every right to
repossess the property. The instalments so far paid will be treated as the rent for the usage of the
property.
4 Explain – financial services and economic environment

The growth of financial services in a country needs proper economic environment. This consist of
various economic factors as follows.

+Economic System

+Economic Laws

+Economic Policies

+Economic Planning

+Economic Conditions

ECONOMIC SYSTEM :

< Financial service provide financial help according to the requirement of business activities a
business may function under different forms example sole trader, partnership, joint stock
companies, MNC’s

< The need for financial services will be felt only when there is more private sector participation
with healthy competition. The is possible only under capitalism as a part of economic growth.

< When there is communist system the government will make arrangement for funds for
production.

< In India since we have mixed economy system financial services is felt as an encouraging one.
This encouragement will activate a systematic approach.

ECONOMIC LAWS :

< Another atmosphere for financial services the presence of economic laws, which not only
regulates the private sector but enables the financial institutions to mobilize more funds and
provide the same to the needy business men.

< Proper economic laws will not only check unscrupulous financial institutions but also plans
restrictions on the functioning of unethical business units.

< The miss use of funds, wastage of funds will be checked by proper economic laws.By proper
economic laws the government will find out unwanted accumulated of wealth in private banks tax
evation, smuggling of goods, emergence of unaccounted money, black marketing will be
prevented by proper economic laws.

ECONOMIC POLICIES :

< In economic policy which deal with many aspects connected with improving the economic
conditions of the country. The government will adopt certain policies which promote investment,
production, employment, foreign trade and economic growth.
< Increase of production in agriculture, industry and services sectors has to be taken up through
pricing policy procurement policy, allowance and subsidiaries, tax concession.

< Fiscal and monetary policies adopted by the government and the central bank respectively
should fall in line with the economic policies of the government. There may be more levying of
taxes with hire rate of interest on loans.

< The government can go for foreign borrowing provided it has a firm commitment

ECONOMIC PLANNING :

< In economic planning a country decides a particular course or path for its development planning
fixes the rate of growth of the economy and accordingly links all the physical monetary resources
to achieve the growth.

< The purpose of economic planning is to achieve rapid economic growth. In all the sectors of the
economy.

< Five year plans clearly indicate a percentage of population that has to be lifted above the
poverty line.

< Here financial services will play a crucial role as they provide financial support to various
institutions.

ECONOMIC CONDITION :

< Financial services can be active only under favourable economic conditions. If there is depression
with falling prizes and closing down of production financial services cannot experienced more
scope. So, a controlled inflation with more scope of investment and production will be ideal for
the expansion of financial services.

< In case of ression in the economy it is for the government to play an important role for the
revaival of the economy.

5 Describe the pages that influence the dynamics of a financial services sector of a country