Unit 1 – Introduction to

Financial Services
Ms. Suman J. Dhanani
 1. Financial Services
2. Features of Financial Services
3. Financial Service Markets/Types of Financial Services
4. Constituents of Financial Service Market
https://www.goseeko.com/blog/constituents-of-financial-service-
market/
5. Functions of Financial Services
6. Financial Services in India

INDEX https://www.ibef.org/industry/financial-services-india.aspx
7. Problems in Financial Service Sector
https://riskandinsurance.com/7-crucial-issues-facing-the-finance-
sector/
8. Banking and Non-Banking Companies
https://www.rbi.org.in/Scripts/FAQView.aspx?Id=92
9. Regulatory Framework
https://www.careerlauncher.com/rbi-grade-b/regulations-of-banks-
and-financial-
institutions/#:~:text=The%20financial%20system%20in%20India,at
%20least%20to%20some%20extent
 10. Factoring
11. Types of Factoring
12. Merits & Demerits of Factoring
https://www.nibusinessinfo.co.uk/content/advantages-
and-disadvantages-factoring
13. Forfaiting
14. Merits & Demerits of Forfaiting
https://beingintelligent.com/forfaiting.html#:~:text=O
nly%20major%20selected%20currencies%20are,result
INDEX s%20in%20higher%20export%20cost.
15. Case Study
16. Factoring v/s Forfaiting
17. Bill Discounting & Bill Market Scheme
https://www.economicsdiscussion.net/india/bill-
market/bill-market-in-india-types-advantages-and-
defects-of-bill-market-scheme/31349
18. Factoring v/s Bill Discounting
 ▪ Financial services are the economic services provided
by the finance industry, which encompasses a broad
range of business that manage money, including credit
unions, banks, credit-card companies, insurance
companies, accountancy companies, consumer finance
companies, stock brokerage, investment funds and
Financial some government sponsored enterprise.

Services ▪ Financial services refer to the service provided by the

finance industry. Services that are financial in nature.

▪ Financial services make up one of the economy's most

important and influential sectors.
https://www.youtube.com/watch?v=xXStP80NwuM&t=1s
 Financial service market comprises of participants such as
commercial banks that provide various financial services like
ATM. Credit cards. Credit rating, stock broking etc. is known
as financial service market. Individuals and firms use
financial services markets, to purchase services that enhance
the workings of debt and equity markets.

Types of ▪ Banking – Commercial Banking Services & Investment

Banking Services
Financial ▪ Insurance

Services ▪ Stock Market

▪ Debt Instruments such as Government Bonds
▪ Wealth Management
▪ Mutual Funds
▪ Tax Consultants & Audit Firms
 ▪ Intangibility
▪ Inseparability

Features of ▪ Heterogeneity

Financial ▪ Perishability
▪ Changing demand
Services ▪ Pricing of Services
▪ Direct Channel
 ▪ Encourage Savings – Household Sector, Domestic
Private Corporate Sector & Public Sector
▪ Mobilization of Savings

FUNCTIONS of ▪ Allocation of Funds

Financial https://timesofindia.indiatimes.com/blogs/developing-
contemporary-india/three-ways-to-promote-savings-
Services among-low-income-families/
https://www.youtube.com/watch?v=Oi9cq7tXkmg
 Financial
Market
Capital Market
Money Market (Monitored by Ministry of
(Governed by RBI– Finance, SEBI & RBI – long

CONSTITUENTS short tem) term)

OF FINANCIAL Commercial
Shares

mARKET Treasury Bills

Papers

Debentures
Certificate of
Deposits

Bonds
 FINANCIAL
SERVICES IN
INDIA
 Basis of Comparison NBFCs Banks

Meaning They provide banking It is government authorized

services to people without financial intermediary
holding Bank License which aim at providing
banking services to the
public.

Regulated under Companies Act 2013 Banking Regulation Act

Banking and
1949
Demand Deposit Cannot be Accepted Can be Accepted

Non-Banking Foreign Investment Allowed up to 100% Allowed up to 74% for

Private Sector Bank
Companies Payment and Settlement Not a part of the System An Integral part of the
system System
Maintenance of Reserve Not Required Mandatory
Ratios
Deposit Insurance Facility Not Available Available

Credit Creation NBFC does not create Bank create Credit

Credit
Transaction Services Cannot be provided by Provided by Bank
NBFC
 The main objective for which NBFC’s are established is to grant
credit to the poor section of the society whereas the banks are
the financial intermediaries authorized by the government to
receive deposits and grant credit to the public. Licensing of
banks and NBFCs also differ in terms that licensing
NBFCs & requirements of a bank are more stringent in comparison to

banks
NBFC. Banks cannot operate any business other than the
banking business whereas an NBFC can operate such
businesses.
An NBFC is incorporated under the Companies Act whereas a
bank is registered under the Banking Regulation Act, 1949.

https://enterslice.com/learning/difference-banks-nbfcs/
https://www.rbi.org.in/Scripts/FAQView.aspx?Id=92
FACTORING

https://www.youtube.com/watch?v=IE6OVk7C4dM
 ▪ Factoring is a financial transaction and a type of debtor finance
in which a business sells its accounts receivable (i.e., invoices)
to a third party (called a factor) at a discount. A business will
sometimes factor its receivable assets to meet its present and
immediate cash needs.

factoring ▪ Factoring provides:

▪ Credit cover
▪ Case advances
▪ Sales ledgering – computerization & storage
▪ Provide valuable advice
FACTORING
 Recourse factoring is the most common and means that your
company must buy back any invoices that the factoring
company is unable to collect payment on. You are ultimately
responsible for any non-payment.

TYPES OF Non-recourse factoring means the factoring company assumes

most of the risk of non-payment by your customers.
FACTORING
 ▪ Recourse factoring − In this, client had to buy back unpaid bills receivables from factor. There
is credit risk involved for the seller.

▪ Non – recourse factoring − In this, client in which there is no absorb for unpaid invoices. It is
known as old-line factoring.

▪ Domestic factoring − When the customer, the client and the factor are in same country.
▪ Export factoring − It involves four parties, the exporter, the export factor, the import factor and
the importer. It is also called as cross border factoring.

▪ Disclosed factoring − If factor name is represented on the invoice of the goods or services and

Types of asks customer to pay the factor.

▪ Undisclosed factoring − Factor is not mentioned on the invoice of the goods or services by

factoring manufacturer.

▪ Advance factoring − In this, advance is paid to the client by factor against uncollected
receivables.

▪ Maturity factoring − In this, bank collects money from the customer and pays to firm on due
date or before. It is also known as Collection Factoring.

▪ Invoice discounting − Clients collects payments from customer directly and pays to the factor.
▪ Bulk factoring − In this, full recourse can be done by client and administration and collection is
done by his own ways.

▪ Agency factoring − In this, finance and protection against bad debts is done by factor,
administration and collection is done by client.
FORFAITING
FORFAITING
 ▪ Forfaiting is a kind of international trade finance wherein export bills
receivables are discounted, with which the exporters can get instant cash by
selling their receivables. ‘Forfait’ is a French word, which refers to
‘relinquish a right’.
▪ Therefore, in financing ‘forfaiting’ implies giving up of the right to
receivables, which are due at a future date, by the exporter, to get quick cash,
at a discount. Further, all the risks and responsibilities as to the collection or
non-payment of the bills, or notes are passed on to the purchaser, i.e.
forfaiter, who is the third party to the transaction.
▪ In forfating credit is advanced to the importer of capital goods for a certain

FORFAITING period.
▪ The amount of payment is receivable in any convertible currency.
▪ The letter of credit or bank guarantee is given by the importer’s bank.
▪ Finance is provided on a fixed or floating interest rate.
▪ The forfaiter can be an individual or an entity, like a bank or a financial
institution. The risks associated with the forfaiting are credit risk, transfer
risk, foreign exchange rate risk or interest rate changes.
▪ Moreover, it involves buying of international trade receivables such as the
bill of exchange or promissory notes at a discount, on a 100% non-recourse
basis.
CASE STUDY
CASE STUDY
FACTORING
V/S
FORFAITING
 ▪ Bill Discounting is a trade-related activity in which a company's
unpaid invoices which are due to be paid at a future date are sold to
a financier (a bank or another financial institution).
▪ A letter of credit, also known as a documentary credit or bankers
commercial credit, or letter of undertaking, is a payment
mechanism used in international trade to provide an economic
guarantee from a creditworthy bank to an exporter of goods.

BILL ▪ LC discounting is a short- term credit facility provided by the bank

to the seller. In this case, LC issuing bank confirms all the original
DISCOUNTING documents and provide acceptance to the confirming bank. After
the due diligence from the bank, the seller will get the credit
amount after deducting the discount.
▪ The bill discounting is categorized into two types namely sales and
purchase. If the discounting is done by the seller, it is the sales side
and the buyer will be called purchase side bill discounting. The
rates of discounting vary depending upon the amount, period and
creditworthiness of the client.
 ▪ The main difference between Bill Discounting and Factoring is that
while bill discounting is the amount which the client pays before the due
date with a discount less than the actual rate on the other hand
factoring means the client gives his book debts to the financial
institution or bank with a discount.
▪ Bill discounting means the fee required by the bank from the seller if he is

BILL
willing to sell the credit bills before the deadline of credit period arrives.
▪ Bill discounting methods are used frequently where the letter of credit takes
DISCOUNTING place (also commonly written as L/C among the people involved in this
arena). L/C has become mandatory for importing and exporting these days.
v/s ▪ Factoring is not a loan. In factoring, a company sells its outstanding invoice
factoring to a factor. The factor pays them a particular amount which could be 70%-
80% of the amount raised in the invoice. The rest of the amount is
transferred to the company once the invoice is paid by the customers.
▪ However, factors charge a fee of around 6-8%. Factoring is a method to get
early access to money for the company’s present financial needs when the
loan is not granted to it. It costs more than a loan but it is better than not
having any money at all.
 ▪ In the case of Bill discounting Debt, an assignment is not available. But, in the
case of Factoring Debt assignment can be exercised.
▪ In the event of bill factoring the Financier’s source of income is only subject to
Charges of discounting or in other terms the interest associated with it. But
when it comes to factoring, the financier is entitled to receive remuneration for
the financial services and receives a commission for other associated services
related to the event.
▪ In bill discounting, the assignment of debt option is not available. But in the
BILL event of factoring the firm holds the option of debt assignment in hand for its

DISCOUNTING
purpose.
▪ No certain rules are provided by the law for the factoring method. But in case
v/s of bill factoring Negotiable instrument act 1881 is mandated as a guideline for
ending the process.

factoring ▪ Two major components for both the process is recourse and non-recourse. The
first component recourse is entitled to bill factoring which means if the
customer somehow fails to deliver the price of the goods in official term
defaults to pay. And then the borrower of the money must pay the amount of
money which the particular customer is not able to pay. In factoring both
recourse and nonrecourse components come into existence. The term non-
recourse means the borrower is not entitled to pay any money if one or more of
his customers are in a position of not being able to pay. And the buyer of the
accounts receivables takes full responsibility regarding the purchase and cannot
make the borrower liable for anything short of his financial expectation.
 Parameter of Comparison Bill Discounting Factoring

Factoring is when a firm

Bill discounting is when
sells its book debt to the
one delivers the bill before
Definition financial transaction of the
the deadline at a cost which
factoring company at
is less than the actual price.
a discount rate,

Trade debts carrying the

The entire portion of the
Portion portion of the account’s
BILL receivables.
trade debts of the company.

DISCOUNTING Affect
▪ .
Advance payment by the The full purchase of the
customer for the issued bill. trade debts.

v/s
factoring In the case of Bill
discounting method, only
Both recourse and non-
recourse options are
Type available if the firm decides
the option of recourse is
to go for factoring its entire
available in this case
portion of the trade debts.

There is no Law and

Bill discounting process
Law and legislation under legislation act under which
falls under the Negotiable
which the category falls the method of factoring is
Instrument Act, 1881.
susceptible to.