Financial Services: How They Work to Your Advantage

The term "Financial Services" in a broad sense means "mobilizing and allocating savings". Thus, it includes all activities involved in the transformation of saving into investment. The process of globalization of liberalization has changed the financial services industry drastically. It has paved way for the entry of innovative and sophisticated financial services into our country. In this changed context, the financial service industry in India has to play a positive and dynamic role in the years to come by offering many innovative products to suit to the varied requirements of the millions of prospective investors spread throughout the country.

In this lesson, we will cover the origin, meaning and scope of financial service. Also the importance and the types of financial services. Their classification and the current scenario.

by Siddharth Jogani
1 year, 7 months ago

In general, all types of activities which are of a financial nature could be brought under the umbrella term ' financial services'. The term "Financial Services" in a broad sense means "mobilizing and allocating savings". Thus, it includes all activities involved in the transformation of savings into investment.

The financial service can also be called ' financial inter-mediation ', as it is the process by which funds are mobilized from a large number of savers and made available to all those who are in need of it, especially the corporate customers. Thus, financial services sector is a key area and it is very vital for industrial developments. A well developed financial services industry is absolutely necessary to mobilize the savings and allocate the same to various invest-able channels in order to promote industrial development in a country.

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The term "financial services" became more prevalent in the United States partly as a result of the Gramm-Leach-Bliley Act of the late 1990s, which enabled different types of companies operating in the U.S. financial services industry at that time to merge.  

Companies usually have two distinct approaches to this new type of business. One approach would be a bank which simply buys an insurance company or an investment bank, keeps the original brands of the acquired firm, and adds the acquisition to its
holding company simply to diversify its earnings. Outside the U.S. (e.g., in Japan), non-financial services companies are permitted within the holding company. In this scenario, each company still looks independent, and has its own customers, etc. In the other style, a bank would simply create its own brokerage division or insurance division and attempt to sell those products to its own existing customers, with incentives for combining all things with one company.

In India, the financial services industry has undergone a metamorphosis since 1990. During the late seventies and eighties, the Indian financial services industry was dominated by commercial banks and other financial institutions which catered to the requirements of the Indian industry. The 1992 Budget session was of utmost importance to the Indian economy due to the reforms which were announced by Dr. Manmohan Singh (the then finance minister of India).

The new economic reforms of 1992, popularly known as Liberalization, Privatization and Globalization (LPG model) aimed at turning around the Indian economy leading to it becoming the fastest growing economy and globally competitive. The series of reforms undertaken with respect to the industrial sector aimed at making the economy more efficient.

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  1. Customer-Oriented : Like any other service industry financial services industry is also a customer-oriented one. Customer is the king and his requirements must be satisfied in full should be the basic of any financial service industry. Timely delivery of services and customization is of utmost importance.
  2. Intangibility: Financial services are intangible and they cannot be standardized or reproduced in the same form. These services cannot be heard,felt or touched but they are experienced.
  3. Inseparability: These services are produced and consumed at the same point. It can't be stored and consumed later on. As a result there needs to be perfect understanding between the firms and their clients.
  4. Dynamism: Financial services change as per social needs.
  5. Perishability: Financial services cannot be stored, they need to be supplied as per the requirements of their customer.
Let us look at the types of financial services to understand them better. But first , it is important to know the policy changes that have paved way for the new financial services in India, the document below, provides you with the various phases.
Financial sector players of the future will emerge larger in size, technologically better equipped and ...
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Financial services cover a wide range of activities. They can be broadly classified into
namely :

1. Traditional activities  2. Modern activities

1. Traditional activities

These are activities which comprise of both capital and money market. They come under two categories:

  • Fund based
  • Non-fund based or Fee based

Fund Based activities: The traditional services which come under fund based are the following:

  1. Underwriting of or investment in shares, debentures, bonds etc. of new issues (Primary market activities)
  2. Dealing in secondary market activities.
  3. Participating in money market instruments like commercial papers,certificate of deposits, Treasury bills, discounting of bills etc.
  4. Involving in equipment leasing,hire purchase, venture capital, seed capital etc.
  5. Dealing in foreign exchange market activities.


Non-fund based activities: Today, customers whether individual or corporate are not satisfied with mere provision of finance. They expect more from financial service companies. Hence, a wide variety of services, are being provided under this head. They include the following:

  1. Managing the capital issues ( management of pre-issue and post issue activities in accordance with the SEBI guidelines)
  2. Making arrangements for the placement of capital and debt instruments with investment institutions.
  3. Arrangement of funds from financial institutions for the clients project cost or his working capital requirements.
  4. Assisting in the process of getting all government and other clearances.

2. Modern activities

Besides the above traditional services, the financial intermediaries render innumerable
services in recent times. Most of them are of the non-fund based activity. They are also referred to as new financial products and services. 

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1. Merchant Banking

A merchant banker is a financial intermediary who helps to transfer capital from those who possess it to those who need it. It includes a wide range of activities such as

  • Management of customers securities,
  • Portfolio management,
  • Project counselling and appraisal,
  • Underwriting of shares and debentures,
  • Loan syndication,
  • Acting as banker for the refund orders
  • Off shore investment
Merchant Bankers need to be authorized by SEBI to carry out business. There are 4 categories of merchant banking in India  The 1st one requires a minimum net worth of Rs.1 crore and can perform all the activities mentioned above. The 2nd category requires minimum net worth of Rs.50 lakhs , 3rd requires Rs.20 lakhs and 4th requires nil. SEBI has a code of conduct which needs to be followed by all the categories in order to ensure transparency. Merchant Banking services were started by foreign banks, namely the National Grindlays Bank in 1967 and the City Bank in 1970.  In India, SBI was the 1st bank to set-up Merchant Banking division in 1972, followed by ICICI, BOI, PNB , etc2. Loan syndication

This is more or less similar to ' consortium financing'. But, this work is taken up by the merchant banker as a lead-manager. It refers to a loan arranged by a bank called lead manager for a borrower who is usually a large corporate customer or Government Department. The other banks who are willing to lend can participate in the loan by contributing an amount suitable to their own lending policies. Since a single bank cannot provide such a huge sum as loan, a number of banks join together and form a syndicate. It also enables the members of the syndicate to share the credit risk associated with a particular loan among themselves.

3. Leasing

A lease is an arrangement under which a company or a firm, acquires a right to make use of capital asset like machinery, on payment of a prescribed fee called ' Rental charges'. The lessee cannot acquire any ownership to the asset, but he can use it and have full control over it. He is expected to pay for all maintenance charges and repairing and operating costs. In countries like USA, UK and Japan equipment leasing is very popular and nearly 25 % of Plant and equipment is being financed by leasing companies. In India many financial companies have started equipment leasing business. In India, ICICI, HSBC, HDFC, LIC, etc provide lease financing services.

Types of Leasing

A. Financial Lease ( Capital, Long term Lease): It is irrevocable and non-cancelable

B.Operating Lease (Service, Short-term lease)

C. Leveraged Lease (Lessor acquires maximum 50 percent and rest by financiers/lenders secured by mortgage)

D. Sale and lease back

E. Cross Border Lease ( International Lease)

4. Mutual Funds 

A Mutual fund refers to a fund raised by a financial service company by pooling the savings of the public. It is invested in a diversified portfolio with a view to spreading and minimizing risk. The fund provides avenue for small investors who cannot participate in the equities of big companies. It ensures low risks, steady returns  high liquidity and better capital appreciation in the long run.

5. Factoring 

It refers to the process of managing the sales ledger of a client by a financial service company. In other words, it is an arrangement under which a financial intermediary assumes the credit risk in the collection of book debts for its clients. The entire responsibility of collecting of book debts passes on to the factor. His services can be compared to a del credre (Italian for belief or trust) agent who undertakes to collect debts. But, a factor provides credit information, collect debts, monitors the sales ledger and provides finance against debts. Thus, he provides a number of services apart from financing.

6. Forfaiting

It is a technique by which a forfaitor (financing agency) discounts an export bill and pay ready cash to the exporter who can concentrate on the export front without bothering about collection of export bills. The forfaitor does so without any recourse to the exporter and the exporter is protected against the risk of non-payment of debts by the importers. It is applicable to only export bills unlike factoring which is applicable to any invoices.

7. Venture capital

It is another method of financing in the form of equity participation. A venture capitalist finances a project based on the potentialities of a new innovative project. It is in contrast to the conventional " security based financing ". Much thrust is given to new ideas or technological innovations. Finance is being provided not only for 'start-up capital' but also for 'development capital' by the financial intermediary.

8. Custodial services

It is yet another line of activity which has gained importance, of late. Under this, a financial intermediary mainly provides services to clients, particularly to foreign investors, for a prescribed fee. Custodial services provide agency services like safe keeping of shares and debentures, collection of interest and dividend and reporting of matters on corporate developments and corporate securities to foreign investors.

9. Corporate Advisory Services

Financial Intermediaries particularly banks have set up corporate advisory service branches to render services exclusively to their corporate customers. For instance, some banks have extended computer terminals to their corporate customers so that they can transact some of their important banking transactions by sitting in their own office. As new avenues of finance like Euro loans, GDRs, etc. are available to corporate customers, this service is of immense help to the customers.

10. Securitisation

It is a technique whereby a financial company converts its ill-liquid, non negotiable and high value financial assets into securities of small value which are made tradable and transferable. A financial institution might have a lot of its assets blocked up in assets like real estate, machinery etc which are long term in nature and are non-negotiable to an extent. In such cases, securitisation helps the financial institution to raise cash against such assets by means of issuing securities of small values to public. They can be traded in the market like any other security. It is best suited for housing finance companies to issue such securities as they have a lot of money locked up in real estate.

11. Hire-purchase 

It is a method of selling goods. In a hire-purchase transaction the goods are let out on hire by a finance company(creditor) to the hire purchase customer(hirer). The buyer is required to pay an agreed amount in periodical installments during a given period. The ownership of the property remains with creditor and passes on to hirer on the payment of last installment. In India , it started only after first world war, however it was only after second world war that Hire-purchase became more popular.

12. Credit Cards and Debit Cards

These are plastic cards with a magnetic strip invented with the intention to simplify the complicated banking process for an individual in case he/she is short of cash, be it something casual like shopping or something severe like an emergency situation. Credit card is a pay later product , whereas a debit card is a pay now product. In case of credit card, the holder can avail of credit for 30-45 days whereas in a debit card the customer's account is debited immediately. 

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  1. Economic Growth - The finanicial services industry mobilises the savings of the people and channels them into productive investment by providing various services to people, this leads to economic growth.
  2. Promotion of Savings - By providing transformation services, the firms inculcate the habit of savings amongst potential savers as their are more and more avenues to invest.
  3. Promotes Capital Formation
  4. Provision of Liquidity - The financial service industry promotes liquidity in the system by allocating and reallocating savings and investment into various avenues of economic activity. It facilitates easy conversion of financial assets into liquid cash at the discretion of the holder of such assets.
  5. Contribution to GNP
  6. Creation of Employment Opportunities
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At present , the financial system in India is in process of rapid transformation, particularly after the introduction of reforms in the financial sector. We're also witnessing the emergence of many private sector financial services. The capital markets which were sluggish, have become a popular source of raising finance. There is introduction of Credit Rating agencies which grade instruments. These ratings help investor in his portfolio management and thus, these ratings play a significant role in investment decision-making. 

The process of globalization of liberalization has changed the financial services industry drastically. It has paved way for the entry of innovative and sophisticated financial services into our country. In this changed context, the financial service industry in India has to play a positive and dynamic role in the years to come by offering many innovative products to suit to the varied requirements of the millions of prospective investors spread throughout the country.

Todd Maclin, CEO of Commercial banking at JPMorgan Chase & Co, discusses the changing landscape of ...
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1. Meaning Of Financial Services
2. History
3. Features Of Financial Services
4. Scope of Financial Services
5. Classification of New Financial Products And Services
6. Importance Of Financial Services
7. Conclusion
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