Financial services

Meaning :-
In general , all types of activities which are of financial nature may be regarded as financial services . In a broad sense,
the term financial services means mobilisation and allocation of savings. Thus, it includes in the transformation of savings
into investment.

Characteristics :

These are the following characteristics of financial services are given :-

1) Intangibility
Financial services are intangible in nature, unlike physical commodities. The institutions providing these services should
build a good brand image in the public sphere and create confidence amongst their clients.

2) Customer-Centricity
Financial services are customer-centric. They have to remain in constant contact with their customers to understand their
requirements and design products that cater to their specific demands.

3) Inseparability

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 The production and supply of financial services must be performed, simultaneously. For example, an individual who wants
to have a haircut has to depend on the availability of the barber to avail of the service.

4) Heterogeneity
Firms engaged in providing financial services must be proactive in anticipating what the market wants and reacting to the
specific needs and wants of their customers.

5) Marketability
The marketing of financial services has become intensive at present. Persons engaged in marketing have to be ethical as
customers base their financial decisions , on trusting the marketers.

6) Simultaneous Functions
The creation of financial services and their delivery have to be simultaneous. They have to be created and delivered to the
target clients immediately.

7) Perishability
Unlike other services, financial services perish, if not used. They cannot be stored and provided, based on the
requirements of customers.

8) People-Based Services
As a service-oriented industry, the personnel in the financial service sector need to be selected on the basis of their
temperament and suitability. The personnel have to be trained Properly.

9) Dynamic Nature
Economic and social factors affect consumer habits, which have undergone a radical change. For example, customers
were in the habit of going to banks, physically, in the past. Now, most normal transactions are delivered at ATMs.It is no
longer necessary to go to a bank to conduct routine transactions.

10) Market Dynamics

Market dynamics depend on the disposable incomes of the social segment that is the target; their investment habits,
educational standards in society. Financial services have to be constantly innovative, redefined, and refined, taking into
account the changing market dynamics.

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 Importance :-

The importance of financial services can be highlighted aa below:-

1) Economic Growth
The economic growth of any country depends upon the proper channelization of its savings and investments. The role of
the financial services industry is to ensure the proper mobilization of savings of people into productive investments.

2) Promotion of Savings
One of the prime importance of financial services is to promote savings among people. Financial services organizations
continuously innovate products to promote savings among the general public.

3) Capital Formation
The financial service industry facilitates capital formation by providing different types of capital market intermediary
services.

4) Creation of Employment
The financial services sector employs millions of people across the globe.

5) Provision of Liquidity
The financial service industry promotes liquidity in the financial system. It facilitates the easy conversion of financial
assets into liquid cash.

FUNCTIONS :-

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 There are following functions of financial services are given below :-

1) Minimising the risks

Risk factors of both the financial services as well as producers are minimized by the presence of insurance companies.
Different types of risks are covered here.

2) Maximising the Returns

Financial services enable businessmen to maximise their returns. This is possible because of the availability of credit at a
reasonable rate.

3) Economic growth

The financial services ensure equal distribution of the funds to all the three sectors named primary, secondary, and
tertiary. Because of this, the activities are spread over in a balanced manner in all the three sectors. This brings in a
balanced growth of the economy.

4) Economic development

Financial services enable consumers to obtain various kinds of products and services by which they can improve their
living standards.

5) The benefit to the Government

Financial services enable the government to raise short-term and long-term funds to meet both revenue and capital
expenditures. The government raises short term funds through the money market and by issuing the Treasury Bills.

Types:—

Traditional Activities
The traditional activities are classified into fund based activities and non-fund based activities.

A. Fund/Asset Based Financial Services

It consists of the following:-

1) lease financing :
A lease is known as the agreement between two parties known as lessor and lessee.

A lease is known as the agreement between two parties known as lessor and lessee.

The lessor is the owner of the asset and lessee is the user of the asset. In this agreement, there is transfer of asset
from lessor to lesser for certain time period, in return the lessor receives the regular rent.

As the lease period gets over, the asset is returned back to lessor until there is renewal of the contract.

2) Hire purchase :
Hire purchase is an arrangement made while buying expensive goods. The consumer makes a downpayment during the
purchase, and the outstanding balance will be paid in instalments with an interest charge.

3) Factoring :
Factoring is done when the company requires immediate money. It is done by selling the account receivable like invoices
to a third party known as factor at certain discount for immediate cash. This cash is required for continuous working of the
business.

4) Bill Discounting :

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 The bill discounting or a bill of exchange is known as the short-term, negotiable and can easily liquidates money market
instrument. It is used for financing a transaction in goods which is trade related instrument.

5) Housing Finance :
The housing finance refers to the collection of all the financial arrangements which are offered by the Housing Finance
Companies (HFCs) for fulfilling the need of housing.

6) Venture Capital :
Venture capital includes two words i.e. venture and capital Venture refers to the way of doing something whose result is
not known as it is present with various kinds of loss while capital refers to human and non-human resources required for
starting the business.

7) Insurance services :
An insurance is a legal agreement between an insurer (insurance company) and an insured (individual), in which an
insured receives financial protection from an insurer for the losses he may suffer under specific circumstances.

8) Consumer Credit/ Consumer finance:

The term consumer credit means the activities related to giving credit to the consumers for empowering them to acquire
their own goods required for daily use. It is also known as credit merchandising , credit buying, etc.

B. Fee / Non - fund based financial services

It consists of the following:-

1) Merchant banking :
The merchant banker can be individual or institutions like an underwriter or agent for the companies and municipalities
allocating securities. They are also involved in broker or dealer functions, maintain the market for previously issued
securities and also gives suggestion to the investors on the advisory services.

2) Stock - Broking
The stock broking refers to the method of bringing together the buyers and sellers of stock at the stock exchange. It is the
function of financial service intermediary. It is done by brokers, both main brokers and sub brokers who are allowed by the
SEBI. The stock broker can be individual broker, a firm of brokers

3) Credit Rating :
Credit ratings assess how likely an issuer (the borrower) is to pay back investors (the lenders) and the interest rate it
may have to pay in return.

Credit ratings are conferred as letter grades, ranging from A at the top to C or D at the bottom.

In india , there are three major credit rating agencies namely:-

CRISIL ( Credit rating information services of india Ltd )

ICRA ( investment information and credit rating agency of india Ltd .)

CARE (Credit Analysis and research in equities )

4) Custodial Services :
Custodial services are provided by custodians .

A custodian an intermediary who keeps account of its clients and also ensures safe custody of the share certificates of
the clients.

Its acts as a trustee and provides ancillary services such as physical transfer of share certificates, collecting dividends
and interest warrants

A custodian keeps a track of book closure , record date, bonus and right shares in order to claim benefits on behalf of
its clients.

5) Corporate restructuring :
As per oxford dictionary, restructuring means to give a new structure to, rebuild or rearrange.

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 Corporate restructuring, as per collins English dictionary, means a change in the business strategy of an organisation
resulting in diversification, closing parts of the business, etc to increase its long - term profitability .

We can say that “corporate restructuring is the process of significantly changing a company’s financial structure to
address challenges and increase shareholder value.

Modern Activists
The different services are as follows:-

It assists the corporate customers in capital restructuring.

It acts s the trustees to the Debenture holders.

It helps in controlling the portfolio of large public sector company.

It is involved in risk management service like insurance services, buy-back options etc.

It also helps the client in lowering the debt cost and also for selecting the better optimum debt equity ratio.

SCOPE
There are following scopes of financial services are given below :-

1) Gross domestic product (GDP) :

The gross domestic product refers to the financial value of all the finished goods and services manufactured inside the
country in a specific time period. The financial service contributes to the GDP of the country.

2) Employment :

The financial service requires various kinds of financial institutions which need different kinds of skilled manpower which
indirectly lead to increase in the employment of the country.

3) Foreign Direct Investment (FDI) :

The financial service helps in increasing the foreign direct investment in the country which helps in increasing the growth
of the country.

4) mobilisation of funds:
The financial service helps in increasing the investment opportunity among the public leading to mobilizing the funds of
the public.

5) Long - term loan:

The long-term loan is basically required by the industries. The financial service helps in providing cheap and long-term
loan to industries.

6) Insurance:
There are various types of financial services. Among them the most important is insurance. The insurance financial
protection to the consumers.

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