Financial Services

The scope of financial services is very wide. This is because it covers a wide
range of services. The financial services can be broadly classified into two:
(a) fund-based services
(b) non-fund services (or fee-based services)
Fund based Services The fund based or asset-based services include the
following:
1. Underwriting
2. Dealing in secondary market activities
3. Participating in money market instruments like CPs, CDs etc.
4. Equipment leasing or lease financing
5. Hire purchase
6. Venture capital
7. Bill discounting
8. Insurance services
9. Factoring
10. Forfeiting
11. Housing finance
12. Mutual fund
Asset/Fund Based Services

1. Equipment leasing/Lease financing: A lease is an agreement under which

a firm acquires a right to make use of a capital asset like machinery etc.
on payment of an agreed fee called lease rentals. The person (or the
company) which acquires the right is known as lessee. He does not get
the ownership of the asset. He acquires only the right to use the asset.
The person (or the company) who gives the right is known as lessor.
2.Hire purchase and consumer credit: Hire purchase is an alternative to
leasing. Hire purchase is a transaction where goods are purchased and sold on
the condition that payment is made in instalments. The buyer gets only
possession of goods. He does not get ownership.

3. Bill discounting: Discounting of bill is an attractive fund based financial

service provided by the finance companies. In the case of time bill (payable
after a specified period), the holder need not wait till maturity or due date. If
he is in need of money, he can discount the bill with his banker. After deducting a
certain amount (discount), the banker credits the net amount in the customer’s
account. Thus, the bank purchases the bill and credits the customer’s account
with the amount of the bill less discount.

4. Venture capital: Venture capital simply refers to capital which is available

for financing the new business ventures. It involves lending finance to the
growing companies. It is the investment in a highly risky project with the
objective of earning a high rate of return. In short, venture capital means long
term risk capital in the form of equity finance.

5. Housing finance: Housing finance simply refers to providing finance for

house building. It emerged as a fund based financial service in India with the
establishment of National Housing Bank (NHB) by the RBI in 1988. It is an apex
housing finance institution in the country. Till now, a number of specialised
financial institutions/companies have entered in the filed of housing finance.
Some of the institutions are HDFC, LIC Housing Finance, Citi Home, Ind Bank
Housing etc.

6. Insurance services: Insurance is a contract between two parties. One party

is the insured and the other party is the insurer. Insured is the person whose
life or property is insured with the insurer. That is, the person whose risk is
insured is called insured. Insurer is the insurance company to whom risk is
transferred by the insured. That is, the person who insures the risk of insured
is called insurer. Thus, insurance is a contract between insurer and insured. It is a
contract in which the insurance company undertakes to indemnify the
insured on the
happening of certain event for a payment of consideration. It is a contract
between the insurer and insured under which the insurer undertakes to
compensate the insured for the loss arising from the risk insured against.

7. Factoring: Factoring is an arrangement under which the factor purchases the

account receivables (arising out of credit sale of goods/services) and makes
immediate cash payment to the supplier or creditor. Thus, it is an arrangement
in which the account receivables of a firm (client) are purchased by a financial
institution or banker. Thus, the factor provides finance to the client (supplier)
in respect of account receivables. The factor undertakes the responsibility of
collecting the account receivables. The financial institution (factor) undertakes
the risk. For this type of service as well as for the interest, the factor charges a
fee for the intervening period. This fee or charge is called factorage.

8. Mutual fund: Mutual funds are financial intermediaries which mobilise savings
from the people and invest them in a mix of corporate and government
securities. The mutual fund operators actively manage this portfolio of
securities and earn income through dividend, interest and capital gains. The
incomes are eventually passed on to mutual fund shareholders.

Non-fund based financial services

With increasing challenges in the money market, customers, especially
businesses, are not satisfied with the mere provision of funding. They expect a
lot more from the financial service-providing organizations. These types of
services are termed as non-fund based financial services, which are offered to
clients for fees. Some common examples of this type of service are bonds, letters
of guarantee, letters of credit, etc. The following is an expanded list of non-funds
based or fee-based financial services:

1. Financing (housing, automobiles, personal loans)

2. Mutual funds
3. Banking, fixed deposits
4. Equipment leasing or lease financing
5. Hire purchase
6. Venture capital
7. Bill discounting.
8. Insurance services
9. Factoring
10.Forfeiting
11.Underwriting
12. Dealing in secondary market activities
13.Participating in money market instruments like CPs, CDs etc

Financing (housing, automobiles, personal loans):

 Housing Finance: Loans provided by banks, housing finance companies,

or other financial institutions for the purpose of purchasing,
constructing, or renovating residential properties.
 Automobile Finance: Loans specifically designed for the purchase of
vehicles, such as cars, trucks, or two-wheelers, usually offered by banks,
auto finance companies, or the vehicle manufacturer's financing arm.
 Personal Loans: Unsecured loans provided to individuals for various
purposes, such as education, medical expenses, weddings, or debt
consolidation, based on their creditworthiness and repayment capacity.

Mutual Funds:

 Mutual funds are investment vehicles that pool money from numerous
investors and invest in a diversified portfolio of securities, such as stocks,
bonds, and money market instruments.
 They offer diversification, professional management, and economies of
scale, allowing investors to access a wide range of investment
opportunities with relatively low capital requirements.

Banking, Fixed Deposits:

 Banking services include various deposit accounts (savings, current, and

fixed deposits), lending services (personal loans, mortgages, business
loans), and other financial products and services.
 Fixed Deposits (FDs) are a type of investment offered by banks and other
financial institutions, where investors deposit a lump sum for a fixed
tenure and earn interest at a predetermined rate.

Equipment Leasing or Lease Financing:

 Equipment leasing, also known as lease financing, is a form of asset-

based financing where a business acquires the use of equipment or
machinery
 from a lessor (leasing company or financial institution) for a specified
period and agreed-upon lease payments.
 This allows businesses to access the necessary equipment without
making a substantial upfront purchase.

Hire Purchase:

 Hire purchase is a form of financing where a business or individual

acquires an asset (such as a vehicle or equipment) by making periodic
payments to the owner (finance company or dealer) over a specified
period.
 Ownership of the asset is transferred to the hirer after all instalments
are paid, including interest and other charges.

Venture Capital:

 Venture capital is a form of financing provided by firms or individuals

(venture capitalists) to start-ups, early-stage, or high-growth companies
with significant potential for success.
 Venture capitalists invest in these companies in exchange for equity
ownership, with the expectation of generating high returns when the
company goes public or is acquired.

Bill Discounting:

 Bill discounting is a form of short-term financing where a financial

institution (bank or non-banking financial company) purchases a
company's accounts receivable or promissory notes at a discounted value.
 This provides the company with immediate access to cash, and the
financial institution collects the full amount from the company's
customers or debtors on the due date.

Insurance Services:

 Insurance services involve the provision of various types of insurance

products, such as life insurance, health insurance, property insurance, and
general insurance, by insurance companies.
 These services offer financial protection against potential risks and
losses in exchange for premium payments.
 Factoring:

 Factoring is a financial service where a business (the client) sells its

accounts receivable or invoices to a third party (the factor) at a discounted
price.
 The factor then assumes the responsibility of collecting payments from
the client's customers, providing the business with immediate cash flow
and relieving it of credit control and collection tasks.

Forfeiting:

 Forfeiting is a form of trade finance where a forfeiter (usually a bank or

financial institution) purchases the exporter's promissory notes or bills of
exchange at a discounted value, providing the exporter with immediate
cash flow.
 The forfeiter then assumes the risk of collecting payment from the
importer on the due date.

Briefly explain the role of SEBI in capital formation

SEBI, the Securities and Exchange Board of India, plays a crucial role in capital
formation by regulating the securities market in India. It ensures investor
protection, promotes fair and transparent dealings in the market, and
facilitates the mobilization of savings into productive investments. SEBI
regulates various entities like stock exchanges, brokers, merchant bankers, and
other intermediaries to maintain market integrity and boost investor
confidence, ultimately contributing to capital formation in the country.

Regulation and Oversight: SEBI regulates various entities in the securities market
to ensure compliance with rules and regulations. By overseeing the market
activities, SEBI maintains transparency and integrity,

Investor Protection: SEBI works to protect the interests of investors by

ensuring fair practices, disclosure norms, and grievance redressal mechanisms.
This in stills confidence among investors, encouraging them to participate in
the capital market and contribute to capital formation.

Market Development: SEBI plays a key role in developing the securities market
by introducing new products, enhancing market infrastructure, and promoting
innovations. A well-developed market attracts more investors and facilitates
capital formation.

Promoting Transparency: SEBI mandates disclosure requirements for listed

companies, ensuring that investors have access to relevant information for
making informed decisions.

Write a short note on NSDL CDSL

NSDL (National Securities Depository Limited) and CDSL (Central

Depository Services Limited) are the two main depositories in India that
facilitate the holding, trading, and transfer of securities in electronic form.
Here is a brief overview of both depositories:

NSDL (National Securities Depository Limited):

NSDL was established in 1996 and is the first and largest depository in India.
It provides electronic holding of securities such as shares, debentures, bonds,
and mutual funds.
NSDL offers services like dematerialization (converting physical securities into
electronic form), rematerialization (converting electronic securities into
physical form), and transfer of securities.
It operates through a network of Depository Participants (DPs) who act as
intermediaries between the depository and investors.
NSDL plays a crucial role in promoting a paperless and efficient securities
market in India.

CDSL (Central Depository Services Limited):

CDSL was established in 1999 as a competitor to NSDL.
It also offers services for holding securities in electronic form and facilitates
electronic transfer of securities.
CDSL has a strong network of DPs and provides services for dematerialization,
rematerialization, and settlement of trades in a secure and efficient manner.
CDSL has gained significant market share over the years and competes with
NSDL in providing depository services to investors and market participants.
Both NSDL and CDSL are regulated by SEBI and play a vital role in modernizing
the Indian securities market by eliminating the risks and inefficiencies associated
with physical securities.