Financial Services Meaning Classification of Fin. Service Industry Scope of Financial Services Sources of Revenue Causes for Financial Innovation New Financial Products & Services Innovative Financial Instruments Classification of Equity Shares Government Steps Challenges for Financial Service Sector Present Scenario
Meaning In a broad sense the term Financial Services means Mobilising and allocating savings. It can also be called Financial Intermediation It is a process by which funds are mobilised from large number of savers to all those who are in need of it. So it is very vital for Industrial development.
Classification of Fin. Service Industry Financial Intermediaries in India can be classified in to two Capital Market Intermediaries : Are those who provides long term funds. e.g. Term Lending & Investing Institutions Money Market Intermediaries : Are those who provides short term funds. e.g. Banks & other agencies
Scope of Financial Services Broadly Classified in to Two Traditional and Modern Traditional Fund Based Underwriting of Shares & Debentures Secondery Market Activities Dealing in Foreign Exchange Participating in Money market instruments
Scope of Financial Services Traditional Non-Fund Based Managing Capital Issue Shares & Debentures Arrangement for the Placement of Capital & debt instruments Arrangement of Fund for Project Finance & Working Capital needs
Scope of Financial Services Modern Activities a) Rendering Project advisory services b) Planning for mergers c) Guiding corporate customers in capital restructuring d) Undertaking Services relating to Capital Market such as: i. Clearing Services ii. Registration & Transfers iii. Safe-Custody of Securities iv. Collection of income on Securities e) Reconstructing of sick companies
Sources of Revenue The sources by which Financial Service Company collect revenue are of Two types : Fund Based : It comes mainly from interest spread, lease rent, income from investment in capital market and real estate. Fee - Based : This source of income is less risky. Though it requires expertise personals. e.g. Merchant Banking Custodial Service and Loan Syndication etc.
Causes of Financial Innovations To meet the dynamically changing needs and to help investors to cope with continuously volatile and uncertain market place. The main causes are as below : Low Profitability : In current scenario the profitability is very low, so every institution requires to maximize the profit by adopting new methods and technology. Global Impact : Many of the providers have changed their roles all over the world and ready to take more risks.
Causes of Financial Innovations Keen Competition : More and more financial companies entering in the market every day. So the competition is really cut-throat. To stay in the market and prosper a Financial Service Co. must find out new measures. Economic : Due to economic liberalisation the Liberalisation deregularisation in the form of exchange control and interest rate ceiling.
Causes of Financial Innovations Improved Communication : With the new and fast Technology communication methods, even world issue can be linked with the investor in Global Financial market. Customer Service : Expectation from customers is high, they want a Fin. Ser. Co s is to be like department stores of finance. Hence the financial companies has to be innovative enough to satisfy customers
Causes of Financial Innovations Investor s Awareness : Now a days investor is shifting from investing in physical assets like gold, land to shares, debentures etc. again from shares they go to risk free investments like bank deposits. This all made Financial Company work more harder and compel them to find out new ideas to keep investor intact.
New Financial Products & Services Due to economic liberalisation policy, the free market concept comes in to reality. Increase in uncertainty and volatility become part of day to day life of individual as well as corporate clients. To satisfy them financial sector offer them some sophisticated and innovative products and services. Some of them are.. Merchant Banking : A new improved way to satisfy clients needs under one roof. After SEBI s regulation in 1992, the Merchant Banking improving in India.
New Financial Products & Services Loan Syndication : It refers to a loan arrange by a bank for a borrower who is usually a large corporate customer or a Government Department. Leasing : It is an agreement under which company acquires a right to make use of assets by paying fee called rental charges. Mutual Fund : This is a fund raised by a financial company by pooling the saving of the public.
New Financial Products & Services Factoring : This is a service offer by financial service company by taking risk in the collection of book debts for it clients. Forfeiting : In this financial service company discounts export bill and pay cash to exporter. Venture Capital : This is a project based finance and not a traditional security based finance, provided not only for start-up-capital but also for development capital.
New Financial Products & Services Corporate Advisory Ser.: This service is particularly set up by Bank to its corporate customers. Offering them computer terminals to transact their important banking transactions by sitting in their office. Securitisation : It is a technique where financial company convert non-negotiable assets in to small value which are tradable and transferable.
Innovative Financial Instruments To help financial service companies for providing better service to clients, many innovative financial instrument come in to the Market. Some of them are as below : Commercial Paper : It is a short term negotiable money market instrument. Treasury Bill : It is also money market instrument but issued by Central Government.
Innovative Financial Instruments Certificate of Deposit : Nothing but deposit receipt given by scheduled Bank. I. B. P.s : Inter Bank Participations, As the name suggest this is confined to scheduled bank only. Zero Interest : In this bonds no interest is paid till its Convertible Bonds conversion Deep Discount : These type of bonds are sold at huge Bondsdiscount.
Innovative Financial Instruments Option Bonds : This is type of bond where customer had a choice to select cumulative or noncumulative. Secured : Carry no interest for three years. Premium Notes Medium Term : This type of instrument is highly Debt popular in Germany. Convertible : Are those which can be converted in to Bonds equity shares either fully or partially.
Innovative Financial Instruments Easy Exit Bonds : This bonds enables the small investor to encash it at any time after 18 months of its issue. Infrastructure : This bonds issued with a view to give Bonds tax shelter to investor. HUDCO has issued first time such Bonds. Loyalty Coupons: Issued for holding debt for two to three years. Global Depository : It is a Dollar dominated instrument traded on Receipt stock exchange.
Classification of Equity Shares On the basis of nature of shares, industries and trading the equity shares can be called by various names. The popular names are Blue Chip Shares : The companies who are well known and well established showing consistent growth, the shares of those companies called as Blue Chip shares Defensive Shares : The shares which gives stable return than other shares and protect investor money are called as the name suggest Defensive shares.
Classification of Equity Shares Growth Shares : These shares are related to growth of a company to which they are relate. Normally a fast growing company s shares called Growth shares. Cyclical Vs : Cyclical shares are those whose price is Non-Cyclical rise or fall with the state of national economy. And the next one s price remains stable. Turn a Round : These type of shares offer investor Shares opportunity to buy it when the price is low. The fluctuation in this shares is high.
Classification of Equity Shares Active Shares : The shares whose dealing in the market is twice or thrice in the week are called Active shares. Alpha Shares : Are those which are regularly or frequently traded in the market. Sweat Shares : As the name suggest, these shares are like reward given by the employer to employee or worker for their contribution in development of company.
Government Steps To support financial service industry s dynamic role and to face global competition, Government taken following steps. 1) Privatisation of public sector. 2) Free pricing 3) Fully convertible of Indian Rupee on current account 4) Authorising private sector to participate in the Banking 5) De-regulation of interest rates 6) Allowing corporate sector to raise debt/equity in international market 7) Signing of GATT
Challenges for Financial Service Sector Although we have seen the Govt. steps to back this sector, there are many more challenges in front of this sector, some of them discussed below. Lack of Qualified : This sector is fully geared with task Personals of financial creativity. So with out trained persons this sector suffers from innovations. Lack of Investors : This sector s personals has to Awareness educate investors by way of seminars, workshop. By doing this lost their valuable time.
Challenges for Financial Service Sector Lack of Transparency : Being global, this sector have to come up with international standards and throw out old conservative approach. Lack of Specialisation: In India one financial intermediary acts as super market of financial services. This leads to lack of specialisation. Lack of Recent Data : Most of intermediaries having no recent or proper information about current market.
Present Scenario Although we discussed the challenges in front of financial service sector, the current scenario shows some good and hopeful picture. Conservatism to : Currently the Indian financial system is in the Dynamism process of transformation. The emergence of various financial institutions & regulatory bodies helps this. Primary Equity : The no. of stock exchange in 1980 was just 9, Market but in 1994 it was 22. The no. of companies listed on stock exchange in 1980 was 2265 &in 1993 it was over 7000.
Present Scenario Concept of Credit : This concept play significant role in identifying Rating the risk level of the corporate entity in which the investor wants to take part. Process of : Realising all factors, Govt. of India taken many Globalisation steps to reform this industry. Free pricing, Finance Act 1992 brought large scale amendments in the tax structure. All this leads to better and fast growth of this sector, which ultimately boost our economy and position in international market.