•Financial services may be defined as

the products and services offered by

financial institutions for the facilitation
of various financial transactions and
other related activities.

•Financial services refer to services

provided by the finance industry.

•All types of activities which are of

financial nature may be regarded as
financial services.

•The term financial services means

mobilization and allocation of
savings.

•Financialservices can also be called

financial intermediation. Financial
intermediation is a process by
which funds are mobilised from a
large number of savers and make
them available to all those who are
in need of it and particularly to
 Financial Services

• Financial service is an essential segment of financial system. Financial

services are the foundation of a modern economy. The financial service
sector is indispensable for the prosperity of a nation.
• Financial Services are concerned with the design and delivery of financial
instruments and advisory services to individuals and businesses within the
area of banking and related institutions, personal financial planning,
investment, real assets, insurance etc.
• It is the services offered by financial and banking institutions like loan,
insurance, etc.
Financial intermediaries play an important role in the financial services industry. Financial
institutions are types of financial intermediaries. Their role is to collect money from savers
and to invest it in financial assets. The two major types of financial institutions are banks
and insurance companies.
Main Categories
of Financial
Services
Types of Financial Services
• Capital Market Services – It consists of consist of term lending
institutions which mainly provide long term funds.
• Money Market Services – It consists of commercial banks, financial
institutions, cooperative banks which providing short term funds
agencies
• Retail Service – Services provided to individuals for direct
consumption.
• Wholesale Service – Services provided to corporate institutions which
may be directly or indirectly converted into retail services
 Features/Characteristics of Financial Services
• Intangible
The institutions supplying the financial services should have a better image and confidence of
the customers. Otherwise, they may not succeed. They must focus on quality and innovation of
their services. Then only they can build credibility and gain the trust of the customers.
• Customer oriented
Financial services firms continuously remain in touch with their customers, so that they can
design products which can cater to the specific needs of their customers.
• Concomitant
Production of financial services and supply of these services must be concomitant. Both these
functions i.e., production of new and innovative financial services and supplying of these
services are to be performed simultaneously.
• Tendency to Perish
Unlike any other service, financial services do tend to perish and hence cannot be stored. They
must be supplied as required by the customers. Hence financial institutions must ensure a
proper synchronization of demand and supply.
 Features of Financial Services
• Variability
In order to cater a variety of financial and related needs of different customers in different
areas, financial service organisations have to offer a wide range of products and services. This
means the financial services must be tailor-made to the requirements of customers.

• Dominance of human element

Financial services are dominated by human element. Thus, financial services are labour
intensive. It requires competent and skilled personnel to market the quality financial
products.

• Market Dynamics
They are dynamic in nature as a financial service varies with the changing requirements of the
customer and the socio-economic environment. –must be dynamic socio-economic changes,
disposable income. They are proactive in nature and help to visualize the expectations of the
market.
 Functions of Financial Services

1.FACILITATING
2.MOBILIZING SAVINGS (FOR 3. ALLOCATING CAPITAL 4.MONITORING MANAGERS
TRANSACTIONS (EXCHANGE
WHICH THE OUTLETS WOULD FUNDS (NOTABLY TO FINANCE (SO THAT THE FUNDS
OF GOODS AND SERVICES IN
OTHERWISE BE MUCH MORE PRODUCTIVE INVESTMENT). ALLOCATED WILL BE SPENT AS
THE ECONOMY).
LIMITED). ENVISAGED).

5.TRANSFORMING RISK
(REDUCING IT THROUGH
AGGREGATION AND
ENABLING IT TO BE CARRIED
BY THOSE MORE WILLING TO
BEAR IT).
Importance of Financial Services

1. Economic 2. Promotion 3. Capital

growth of savings formation

4. Creation of
5.Contribution 6. Provision of
employment
to GNI liquidity
opportunities
 Types of Financial Services Activities
• Financial services a wide range of activities. They can be
broadly classified into two.
1. Traditional activities
2. Modern activities
 Traditional Activities
can be grouped under 2 categories

Non-Fund
Asset/Fund Based/Fee Based
Based Services Financial Services
Fund Based Financial Services
• Important Asset/fund-based services include –
• Leasing
• Hire purchase
• Factoring
• Forfeiting
• Mutual funds
• Bill discounting
• Insurance services
• Venture capital
• Housing Finance
1.Equipment leasing/Lease financing: A lease is an agreement under which a firm acquires aright 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. He gets ownership only after the payment of the last
instalment. If the buyer fails to pay any instalment, the seller can repossess the goods. Each instalment includes
interest also.

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. On the due date, the drawee makes payment to the
banker. If he fails to make payment, the banker will recover the amount from the customer who has discounted the
bill. In short, discounting of bill means giving loans on the basis of the security of a bill of exchange.
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. Insurance is a device by which a loss likely to be caused by uncertain event is spread over
a large number of persons who are exposed to it and who voluntarily join themselves against such an event.
The document which contains all the terms and conditions of insurance (i.e. the written contract) is called the
‘insurance policy’. The amount for which the insurance policy is taken is called ‘sum assured’. The
consideration in return for which the insurer agrees to bare the loss is known as ‘insurance premium’. This
premium is to be paid regularly by the insured. It may be paid monthly, quarterly, half yearly or yearly.
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. Forfaiting: Forfaiting is a form of financing of receivables relating to international trade. It is a non-

recourse purchase by a banker or any other financial institution of receivables arising from export of goods
and services. The exporter surrenders his right to the forfeiter to receive future payment from the buyer to
whom goods have been supplied. Forfaiting is a technique that helps the exporter sells his goods on credit
and yet receives the cash well before the due date. In short, forfaiting is a technique by which a forfeiter
(financing agency) discounts an export bill and pay ready cash to the exporter. The exporter need not
bother about collection of export bill. He can just concentrate on export trade.

9. 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.
Fee Based Financial Services
• When financial institutions operate in specialized fields to earn
income in form of fees, commission, brokerage or dividends it is
called a Fee based Service.
Fee Based Financial Services
• Important fee-based services include –
• Issue Management
• Merchant banking
• Credit rating
• Stock broking
• Bank Guarantee
• Letter of Credit
 Fee Based Financial
Services
1. Merchant banking: Merchant banking is basically a service banking, concerned with providing non-fund
based services of arranging funds rather than providing them. The merchant banker merely acts as an
intermediary. Its main job is to transfer capital from those who own it to those who need it.

2. Credit rating: Credit rating means giving an expert opinion by a rating agency on the relative willingness
and ability of the issuer of a debt instrument to meet the financial obligations in time and in full. It measures
the relative risk of an issuer’s ability and willingness to repay both interest and principal over the period
of the rated instrument. It is a judgement about a firm’s financial and business prospects. In short, credit
rating means assessing the creditworthiness of a company by an independent organisation.

3. Stock broking: Now stock broking has emerged as a professional advisory service. Stock broker is a
member of a recognized stock exchange. He buys, sells, or deals in shares/securities. It is compulsory for each
stock broker to get himself/herself registered with SEBI in order to act as a broker. As a member of a stock
exchange, he will have to abide by its rules, regulations and bylaws.
4. Issue Management: Issue management refers to management of securities offerings of the corporate sector to public
and existing shareholders on right basis. In simple words Issue Management refers to managing issues of corporate
securities like equity shares, preference shares and debentures or bonds.

5.Bank Guarantees: Bank Guarantee is a contract to perform the promise or discharge the liability of a third person
in case of his default. Eg. China trust Commercial Bank sanctions Bank Guarantee limit to facilitate issue of guarantees
on behalf of its clients. Various types of guarantees offered are – financial performance, tenders, etc. Bank guarantees are
accepted by all government agencies including Customs, Excise, Insurance Companies, Shipping Companies, all Capital
Market Agencies such as NSE, BSE, ASE, CSE etc. and all major corporates.

6.Letters Of Credit:A Letter of Credit (LC) is a document that guarantees the buyer’s payment to the sellers. It is
issued by a bank and ensures timely and full payment to the seller. If the buyer is unable to make such a payment, the
bank covers the full or the remaining amount on behalf of the buyer. A letter of credit is issued against a pledge of
securities or cash. Banks typically collect a fee, ie, a percentage of the size/amount of the letter of credit. The LC facility
can be granted to the importers after assessing their requirement/ credit worthiness/ financial strength and other parameters
being to the satisfaction of the Bank.
Modern Financial Activities
• Rendering project advisory services right from the preparation of the
project report till raising of funds.
• Planning for Memorandum and Articles of Association and assisting
for their smooth carry out
• Guiding Corporate Customers in capital restructuring
• Acting as trustees to the debenture holders. safeguarding the interest
of debenture holders and acting as an intermediary between the issuer
company and the debenture holders.
• Recommending changes in managing structure and style
• Structuring financial collaboration/Joint Venture by identifying
partners and preparing Joint Venture agreements
Modern Financial Activities
• Rehabilitating and Restructuring sick companies
• Hedging of risks by using swaps and other derivative products
• Managing the portfolio of large public sector corporations.
• Undertaking risk management services eg. Insurance, buy back options
• Advising clients
• Promoting credit rating agencies
• Minimizing cost of debt and determining optimum debt equity ratio
Modern Financial Activities
• Undertaking capital market services –
• clearing services
• registration and transfers
• safe custody of securities
• collection of income or securities
 • Financial service sector has to face lot
of challenges in its way to fulfil the
ever growing financial demand of the
economy. Some of the important
challenges are listed below:
Challenges
1. Lack of qualified personnel in the
faced by the financial service sector.

financial 2. Lack of investor awareness about the

various financial services.

service 3. Lack of transparency in the disclosure

requirements and accounting practices
sector relating to financial services.
4. Lack of adequate data to take financial
service related decisions.
5. Lack of efficient risk management system
in the financial service sector.
 Activity
1) Try to define financial services in your own words.

2)Elucidate the functions of financial services.

3)Difference between fund based and fee-based activities.