Financial Services
The savings and investment in an economy play a dominant role in the economic development of a country as these determine the flow of capital for production of goods and services in the economy. The surplus savings of the household sector form the core of finance. The savers do not lend directly to borrowers as the default risk and market risk involved in lending, make the savers cautious in parting with their savings. Thus as an intermediary, banks and financial institutions (including non-banking financial companies) mobilise the savings of the public and make these available to the needy by way of lending. This process is called financial intermediation. Accepting funds in the form of deposits and advancing the funds in the form of loans and advances’ is the real function of financial intermediaries.
The process of financial liberalisation in the country since the 1990s has brought in an array of savings instruments for the savers. There is a shift in saver’s preference from ‘deposits’ to other investment assets like equity shares, preference shares, debentures, etc. This resulted in the transformation of intermediation process into disintermediation.
Disintermediation is a process whereby savings which have been hitherto flowing to the ultimate borrowers through the medium of financial intermediaries (banks, NBFCs, etc.) are taken by the ultimate borrower directly from the savers.
Example: V-Guard, entered the capital market and mobilised a huge amount by issue of equity shares. Thus those who are in need of funds are in a position to mop up the savings of the public directly. The growth of the capital market enabled corporates entering the equity market to mobilise the required amount of funds. The equity cult which is spreading very fast in India has reshaped the Indian
financial system.
Indian financial system comprises four components. They are financial institutions, financial markets, financial instruments and financial services.
To satisfy the savers as well as the borrowers, new products and innovative
schemes are developed to service the lender of money (saver) as well as the user of
money (borrower) according to their likes and dislikes.
With the liberalisation process attaining momentum, there is increasing inclination for the small and medium sized savers to invest in shares and/or debentures of joint stock companies, obviously for earning better return. In fact, the growing awareness is reflected in the magnitude of over subscription to each of the public issues. Then many investors lost interest on the money tied up in the application process till they get refund. To lure such investors, bankers introduced the ‘stock invest’ scheme.
With the middle class population becoming more upwardly mobile than in the past and also with the market being flooded with consumer durables, the middle class population was badly in need of credit cards, smart cards, debit cards and ATM cards which came the scene from banks and non banking finance companies. The investment euphoria which gripped millions of people in the country during in the late eighties and early nineties culminated in hundreds of public issues offered by companies across the length and breadth of India. However, many companies
defaulted in their commitments to the investors/depositors. The investors depositors were looking for some guidance for investment from trusted sources. This
culminated in the setting up of credit rating agencies to rate the companies, and
instruments for investment.
During the period of capital rationing, and cutting down capital expenditure decisions for want of money, entrepreneurs were happy with leasing of assets which will provide use of the asset without getting ownership. Thus, leasing of assets became familiar among the business class.
Delay in receiving payments from the importers creates hurdles for the exporters in expanding their export business. In their search for an alternative arrangement, banks and NBFCs started offering forfaiting’ facility.
Young and bold entrepreneurs, with attractive business ideas, not yet tested but with much potential to succeed may not be getting financial accommodation from traditional sources. To satisfy such class, a new method of financing known
as venture capital financing has come up.
In short, Indian financial scene has witnessed a wide range of innovations.
The financial services industry has seen major changes with banks, NBFCs and
other players entering into diversified activities and users of fund seeking different
sources for raising funds. Today institutions providing financial services are assuming a major role in the Indian financial system. Some of the existing financial institutions such as ICICI have decided to get themselves converted into Universal Bank to offer a wide range of banking and financial services under a single roof.
Definition
Financial service is defined as “a process by which funds are mobilised from a large number of savers and made available to all those who are in need of it, particularly
corporate customers.”
Meaning
Financial service, as a part of financial system, provides different types of
finance through various credit instruments, financial products and services. In credit instruments, financial services include bonds/debentures with different features like Zero Coupon Bond, Deep Discount Bond, Floating Rate Notes (FRNs).
Gold Bond Scheme, Letter of Credit, etc. In financial products, financial services include mutual funds with multiple options, credit cards, debit cards, add on cards,
etc.
In services, the most important are leasing, hire purchase, venture capital financing, factoring, forfaiting, securitisation of assets, etc.
Financial services help the user to obtain the asset, to enjoy the services, according to his convenience and at a reasonable rate of interest. It assists the supplier of money to get the best possible returns on investment within the regulatory framework prescribed by the regulators/society.
Site Title 