Financial Services – Features, Types, Utility & Significance

Financial Services may be simply defined as services offered by financial and banking institutions like loan, insurance, etc.

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 involves provision of a wide variety of fund/asset based and non-fund based/advisory services and includes all kinds of institutions which provide intermediate financial assistance and facilitate financial transactions of both individuals and corporate customers.

Features of Financial Services 

  1. Financial services are Intangible

  2. Financial services are customer oriented

  3. The production and delivery of a service are simultaneous functions therefor are inseparable

  4. They are perishable in nature and cannot be stored

  5. 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

  6. They are proactive in nature and help to visualize the expectations of the market

  7. They acts as link between the investor and borrower

  8. They aid in distribution of risks

Types of Financial Services 

  1. Capital market Services – It consists of consist of term lending institutions which mainly provide long term funds.

  2. Money market Services – It consists of commercial banks, financial institutions, co-operative banks which providing short term funds agencies

  3. Retail Service – Services provided to individuals for direct consumption.

  4. Wholesale Service – Services provided to corporate institutions which may be directly or indirectly converted into retail services.

Fund Based Services – It refers to services that are used to acquire assets or funds for a customer. It consists of –

– Primary market activities 

– Secondary market activities 

– Foreign exchange activities

– Specialized financial Services

Important fund based services include –

  1. Leasing

  2. Hire purchase

  3. Factoring

  4. Forfeiting

  5. Mutual funds

  6. Bill discounting

  7. Credit Financing

  8. Housing Finance

  9. Venture capital

Fee based services – When financial institutions operate in specialised fields to earn income in form of fees, commission, brokerage or dividends it is called a Fee based Service.  They include –

  1. Issue Management

  2. Portfolio management

  3. Corporate counseling

  4. Merchant banking

  5. Credit rating

  6. Stock broking

  7. Capital restructuring

  8. Bank Guarantee

  9. Letter of Credit

  10. Debt Restructuring

Types of Financial Activities 

Fund based Activities –

  1. Underwriting 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 eg. Discounting bills, treasury bills, certificate of deposit etc.

  4. Involving in equipment leasing, hire purchase, venture capitals

  5. Dealing in foreign exchange activities

Fee based Activities –

  1. Managing the capital issue in accordance with SEBI guidelines enabling promoters to market their issue

  2. Making arrangements for placement of capital and debt instruments with investment institutions

  3. Arrangement of funds from financial institutions for clients project cost or working capital

  4. Assisting in getting all Government and other clearances

Modern Activities –

  1. Rendering project advisory services right from the preparation of the project report till raising of funds

  2. Planning for Memorandum and Articles of Association and assisting for their smooth carry out

  3. Guiding Corporate Customers in capital restructuring

  4. Acting as trustees to the debenture holders

  5. Recommending changes in managing structure and style

  6. Structuring financial collaboration/Joint Venture by identifying partners and preparing Joint Venture agreements

  7. Rehabilitating and Restructuring sick companies

  8. Hedging of risks by using swaps and other derivative products

  9. Managing the portfolio of large public sector corporations

  10. Undertaking risk management services eg. Insurance, buy back options

  11. Advising clients

  12. Promoting credit rating agencies

  13. Minimizing cost of debt and determining optimum debt equity ratio

  14. Undertaking capital market services –

  15. clearing services

  16. registration and transfers

  17. safe custody of securities

  18. collection of income or securities

Utility and significance of financial services in current scenario –

The significance of financial services lies in –

  1. Channelizing the funds for economic growth and development of a country and

  2. Implementing monetary and debt management policies of the government

Its utility lies in the following:

  1. Financial Services form a major part of the Gross Domestic Product

  2. It ensures there is no shortage of funds for productive ventures

  3. It reduces cost of transaction and borrowing by providing an adequate financial structure and system

  4. It helps in making good financial decisions

  5. It aids in allocation of risk and helps to minimize risk

  6. It aids in financial deepening and broadening

  7. It generates employment

  8. It links entrepreneurs to investors and business organizations to lending institutions

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