Short Theory on Financial Services (must read recommended)
FINANCIAL SERVICES
INTRODUCTION
The Indian financial services industry has undergone a
metamorphosis since1990. Before its emergence, commercial banks and other
financial institutions dominated the field and they met the financial needs of
the Indian industry. It was only after the economic liberalization that the
financial service sector gained some prominence. Now, this sector has developed
into an industry. In fact, one of the world’s largest industries today is the
financial services industry. Financial service is an essential segment of the financial
system. Financial services are the foundation of a modern economy. The
financial service sector is indispensable for the prosperity of a nation.
MEANING OF FINANCIAL SERVICES
In general, all types of activities that are of
financial nature may be regarded as financial services. In a broad sense, the
term financial services mean mobilization and allocation of savings. Thus, it
includes all activities involved in the transformation of savings into
investment. Financial services refer to services provided by the finance
industry. The finance industry consists of a broad range of organizations that
deal with the management of money.
These organizations include banks, credit card
companies, insurance companies, consumer finance companies, stockbrokers,
investment funds and some government-sponsored enterprises. 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.
FUNCTIONS OF FINANCIAL SERVICES
1. Facilitating transactions (exchange of goods and
services) in the economy.
2. Mobilizing savings (for which the outlets would
otherwise be much more limited).
3. Allocating capital funds (notably to finance
productive investment).
4. Monitoring managers (so that the funds allocated
will be spent as 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
The successful functioning of any financial system
depends upon the range of financial services offered by financial service
organisations. The importance of financial services may be understood from the following
points:
1. Economic growth: The financial service industry
mobilises the savings of the people, and channels them into productive
investments by providing various services to people in general and corporate enterprises
in particular. In short, the economic growth of any country depends upon these
savings and investments.
2. Promotion of savings: The financial service
industry mobilises the savings of the people by providing transformation
services. It provides liability, asset and size transformation service by
providing huge loan from small deposits collected from a large number of
people. In this way financial service industry promotes savings.
3. Capital formation: Financial service industry
facilitates capital formation by rendering various capital market intermediary
services. Capital formation is the very basis for economic growth.
4. Creation of employment opportunities: The financial
service industry creates and provides employment opportunities to millions of
people all over the world.
5. Contribution to GNP: Recently the contribution of
financial services to GNP has been increasing year after year in almost
countries.
6. Provision of liquidity: The financial service
industry promotes liquidity in the financial system by allocating and
reallocating savings and investment into various avenues of economic activity.
It facilitates easy conversion of financial assets into liquid cash.
TYPES OF FINANCIAL SERVICES
Financial service institutions render a wide variety
of services to meet the requirements of individual users.
These services may be summarized as below:
1. Provision of funds:
(a) Venture capital
(b) Banking services
(c) Asset financing
(d) Trade financing
(e) Credit cards
(f) Factoring and forfaiting
2. Managing investible funds:
(a) Portfolio
management
(b) Merchant banking
(c) Mutual and pension funds
3. Risk financing:
(a) Project preparatory services
(b) Insurance
(c) Export credit guarantee
4. Consultancy services:
(a) Project preparatory services
(b) Project report preparation
(c) Project appraisal
(d) Rehabilitation of projects
(e) Business advisory services
(f) Valuation of investments
(g) Credit rating
(h) Merger, acquisition and reengineering
5. Market operations:
(a) Stock market operations
(b) Money market operations
(c) Asset management
(d) Registrar and share transfer agencies
(e) Trusteeship
(f) Retail market operation
(g) Futures, options, and derivatives
6. Research and development:
(a) Equity and market research
(b) Investor education
(c) Training of personnel
(d) Financial information services
SCOPE OF 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 and
(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. Forfaiting
11. Housing finance
12. Mutual fund
Non-fund based Services
Today, customers are not satisfied with mere provision
of finance. They expect more from financial service companies. Hence, the
financial service companies or financial intermediaries provide services on the
basis of non-fund activities also. Such services are also known as fee based
services. These include the following:
1. Securitisation
2. Merchant banking
3. Credit rating
4. Loan syndication
5. Business opportunity related services
6. Project advisory services
7. Services to foreign companies and NRIs.
8. Portfolio management
9. Merger and acquisition
10. Capital restructuring
11. Debenture trusteeship
12. Custodian services
13. Stockbroking
Link-1 pdf file
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