Management Of Financial Services

Meaning, Types and Importance of Financial Services

Financial services are the economic services provided by the finance industry, which include a broad range of organizations that manage money including: Credit unions Banks Credit card companies Insurance companies Consumer finance companies Stock brokerages Investment funds and some government sponsored enterprises

Definition of Financial Services

Financial services can be defined as the products and services offered by institutions like banks of various kinds for the facilitation of various financial transactions and other related activities in the world of finance like loans, insurance, credit cards, investment opportunities and money management as well as providing information on the stock market and other issues like market trends. Financial services refer to services provided by the finance industry. The finance industry encompasses a broad range of organizations that deal with the management of money. Among these organizations are banks, credit card companies, insurance companies, consumer finance companies, stock brokerages, investment funds and some government sponsored enterprise

Functions and Importance of Financial Services

Facilitating transactions: (exchange of goods and services) in the economy. Mobilizing savings : (for which the outlets would otherwise be much more limited). Allocating capital funds: (notably to finance productive investment). Monitoring managers : (so that the funds allocated will be spent as envisaged). Transforming risk : (reducing it through aggregation and enabling it to be carried by those more willing to bear it).

Financial System
Financial System of any country consists of financial markets, financial intermediation and financial instruments or financial products
Flow of funds (savings)
Seekers of funds (Mainly business firms and government) Suppliers of funds (Mainly households) Flow of financial services

Incomes , and financial claims

Constituents of a Financial System

Importance of Financial Services

Economic Growth Promotion of Savings Capital Formation Provision of Liquidity Financial Intermediation

Contribution to GNP
Creation of Employment Opportunities

Classification
CAPITAL MARKET: Term Lending Institutions Investing Institutions Long Term Funds MONEY MARKET: Consists of Commercial banks Co-operative banks and other agencies Short term funds

Money Market
The market for dealing with financial assets and sec. which have a maturity period of up to one year.

RBI defines the money market as A market for short term financial assets that are close substitutes for money, facilitates the exchange of money for new financial claims in primary market as also for financial claims, already issued, in the secondary market

Money Market Instruments

Money market instruments are those which have maturity period of less than one year. The most active part of the money market is the market for overnight call and term money between banks and institutions and repo transactions Call money/repo are very short-term money market products

Money Market Instruments

Certificates of Deposit Commercial Paper Inter-bank participation certificates Inter-bank term money Treasury Bills Bill rediscounting Call/notice/term money CBLO (Collateralized Borrowing and Lending Obligation) Market Repo

Features of a money market

Market purely for short term funds or financial assets. Its deals with financial assets having maturity period up to one year. it deals with those assets which can be convert in to cash readily without loss and mini transaction cost Transaction have to be conducted without the help of brokers

Objectives of money market

To provide a parking place to employ short-term surplus. To provide room for overcoming short-term deficits.

To enable the central bank to influence and regulate liquidity in the economy through its intervention in this market.
To provide reasonable access to the users of short-term funds to meet requirements.

Characteristics of a Developed Money Market

Highly organized banking system Presence of a central bank Availability of proper credit instrument Existence of sub-brokers Sufficient resources Existence of secondary markets Demand and supply of funds

Importance of Money Market

Development of money market Development of capital market Smooth functioning of commercial banks Effective central bank control Formulation of suitable monetary policy Non-inflation source of finance to government

Composition of Money Market

The money market consist of following sub market.

Call money market Commercial bills market Acceptance market Treasury bill market

Call money market

The call money market refers to the market for extremely short period loans, say one day to fourteen days. These loans are repayable on demand at the option of either the lender or the borrower.

Advantages of call money market: High liquidity High profitability Maintenance of statutory reserve ration (SRR) Safe and cheap Assistance to central bank operation

Commercial bills market or discount Market

Definition:
An instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to ,or the order of certain person or to the bearer of the instrument.

Types of bills
Demand bills
are also called sight bills. these bills are payable immediately as soon as they are presented to the drawer no time of payment is specified and hence they are payable at sight.

Documentary bill
when bills have to be accompanied by document of title to goods like railway receipt, lorry receipt, bill of lading etc.The bills are called documentary bills.

 Inland and foreign bills Inland bills are those drawn upon a person resident in India and are payable in India. foreign bills are drawn outside India and they may be payable either in India or outside India. Export bills and import bills Export bills are those drawn by Indian exporters on imports outside India and importer bills are drawn on Indian importers in India by exporters outside India. Indigenous bills Indigenous bills are those drawn and accepted according to native custom or usage of trade.

Advantages of Commercial bills market

Liquidity Self-liquidating and negotiable asset Certainty of payment Ideal investment Simple legal remedy High and quick yield Easy central bank control

Drawbacks of Commercial Bills Market

Absence of bill culture Absence of rediscounting among banks Stamps duty Absence of secondary market Difficulty in ascertaining genuine trade bills Limited foreign trade

Absence of acceptance service

Attitude of banks

Treasury Bill Market

A treasury bill nothing but a promissory note issued by the Govt. under discount for a specified period stated therein. The Govt.promises to pay the specified amount mentioned therein to the bearer of the instrument on the due date. T.B are issued only by the RBI on behalf of the govt. TB are issued for meeting temporary govt. deficits.

Types of Treasury bill

There are two types of TB: Ordinary Treasury bills are issued to the public and other financial institution for meeting the short term financial requirements of the central govt. Ad Hocs Treasury are always issued in favor of the RBI only.

Importance of TB
Safety Liquidity Ideal short-term investment Ideal fund management Statutory liquidity Source of sort term funds Non-inflationary monetary tool Hedging facility Defects of TB poor yield absence of competitive bids absence of active trading

Commercial papers (CP)

A CP Is an unsecured promissory note issued with a fixed maturity by a company approved by RBI, negotiable by endorsement and delivery, issued in bearer form and issued at such discount on the face value as may be determined by the issuing co. Short-term borrowings by corporate, financial institutions, primary dealers from the money market Can be issued in the physical form (Usance Promissory Note) or demat form Introduced in 1990 When issued in physical form are negotiable by endorsement and delivery and hence, highly flexible Issued subject to minimum of Rs. 5 lacs and in the multiple of Rs. 5 lacs after that Maturity is 7 days to 1 year Unsecured and backed by credit rating of the issuing company Issued at discount to the face value

 Certificate of deposit CD are short term deposits instruments issued by bank and financial institutions t raise large sums of money. Repo instrument. Repurchase transaction the borrower parts with securities to the lender with an agreement to repurchase them at the end of the fixed period at a specified price.
At the end of the period the borrower will repurchase the securities at the predetermined price.

Capital Markets
What is Capital Market It is an organized market mechanism for effective and efficient transfer of money capital or financial resources from the investing class to the entrepreneur class in the private and public sector of the economy. Capital market for long term funds. The capital market provides long term debt and equity finance for govt. and corporate.

Capital market facilitates the dispersion of business ownership and

reallocation of financial resources among corporate and industries.

Capital market mechanism

Supply of funds

Middlemen

Demand for funds

Individuals Institutions Government Investors Lenders Sellers of money capital

Capital Market
Stock exchange New issue market Finance and investment corp.

Individuals Institutions Government

Entrepreneurs Borrowers Clearing house for long term or permanent finance

Buyers of money capital

Capital Market Structure

Marketable Securities New Issues Market players original Non-Marketable Securities

Govt. securities Corporate securities PSUs Bonds

Bank Deposits Deposits with Companies Loans and advances of banks and FIs. POC and deposits

Stock market intermediaries

UTI Mutual Funds

New Issues Market players for Issues

Capital market instruments

Equity shares Preference shares Non-voting equity shares Cumulative convertible preference shares Company fixed deposits Debentures/ bonds Global depository receipts

Structure of Capital Markets

Primary Markets
When companies need financial resources for its expansion, they borrow money from investors through issue of securities. Securities issued a) Preference Shares b) Equity Shares c) Debentures Equity shares is issued by the under writers and merchant bankers on behalf of the company.

Secondary Markets
The place where such securities are traded by these investors is known as the secondary market. Securities like Preference Shares and Debentures cannot be traded in the secondary market. Equity shares are tradable through a private broker or a brokerage house.

People who apply for these securities are: a) High networth individual b) Retail investors c) Employees d) Financial Institutions e) Mutual Fund Houses f) Banks
One time activity by the company.

Securities that are traded are traded by the retail investors.

Helps in mobilizing the funds for the investors in the short run.

Scope Of Financial Services

Traditional Activities:
FUND BASED ACTIVITIES:
Underwriting Dealing in secondary market activities Participating in money market instruments Leasing, hire-purchase Venture capital etc

 FEE BASED ACTIVITIES:

Managing the capital issues Arrangements for placement of capital and debt instruments Arrangement of funds from financial institutions Assisting in Government and other clearance

MORDERN ACTIVITIES:

Rendering project advisory services Planning for Mergers and Acquisitions

Acting as trustees to the Debenture-holders

Hedging of risks

Managing the portfolio of large public sector companies.

Undertaking risk management services

New Financial Products And Services

Merchant Banking Loan Syndication Leasing Mutual Funds Factoring Venture Capital Custodial Services Corporate Advisory Services Securitization Reverse Mortgage Derivatives:Forward Contract-Options-Futures-Swaps

 Definition:

Security Trading

Trading is the process of buying and selling securities. The procedure of trading consists of two processes, i.e. Delivery (when securities are sold) and Receipt (when securities are purchased). These two processes can be understood as follows:

Online Vs Offline Trading

Basics of Online trading:
Trade from almost anywhere. Transfer funds online from anywhere. Shares are transferred to and from online. (as compulsory one has to open a demat account with the same broker he wants to trade online with) Can trade only to the extent of credit in the trading account. Absolutely Real time stock quotes. Real time confirmation of trades. View trades, accounts, balances, portfolio etc online. Less brokerage/commission costs

Basics of Offline trading: Call or visit the broking firm and trade. Transfer funds online as well as via cheque. Shares can be transferred online if account is with same broker else can deliver manually too. Trading limits can be flexible depending on the relationship with the broker. Cant view real time quotes, would have to depend on the dealer. Tele-confirmation of trades. Contract notes can be viewed online as well as can be received offline via courier. Accounts, balances, portfolio etc can be viewed online as well as on request can be received via courier. Higher brokerage/commission costs.

Advantages & Disadvantages

Advantages Of Online Trading Typically online trading requires the investor to pay lower brokerage. So, while you are selling or buying stocks you gain more by paying lower brokerage in comparison with offline trading.

In online trading you are trading on the real time. No phone calls and no wait time, you can directly sell or buy stocks in about no time and get the stocks at the price that are showing on your screen.
There is no middle man involved in online trading. You need not have a broker to execute your calls, you can do the selling or buying of the stocks yourself. In case of online stock trading there is no paper work involved, all your stocks are stored at your demat account and you can see them online. Disadvantages Of Online Trading The biggest disadvantage of online trading is that you must be online to place your bid and trade in stocks. When you are on move and you get a call for a potentially profitable stock you can not buy that stock at that moment itself. For those who are otherwise busy all the time it is difficult to manage their portfolio by their own. So, online trading is hardly of any help for them. Not all the exchanges are online till date, so the online trading options are still limited.
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Advantages Of Offline Trading

It is the most trusted and the oldest form of stock trading. With an efficient and trusted broker you can effortlessly manage your portfolio without spending any time for that .

Disadvantage Of Offline Trading Often times the brokers takes time to execute your instruction for selling or buying the stocks that might incur losses. Offline trading brokerage is always higher than that of online brokerage

Demat and Remat

Dematerialisation (Demat)
According to the Depositories Act, 1996, an investor has the option to hold securities either in Physical or Electronic form which is otherwise called as Dematerialisation. Dematerialisation is the process of converting physical security certificates (e.g. share certificates) to an equivalent number of securities in electronic form and crediting the same to the investors demat account. Dematted securities do not have any distinctive numbers or certificate numbers and are dealt only in quantity.

 Rematerialisation (Remat)
Rematerialisation is the process of conversion of securities from electronic form to physical form. Your DP will forward your request to NSDL, after verifying that you have the necessary balance. NSDL in turn will intimate the registrar who will print the certificates and dispatch the same to you.

Depositories
A Depository is an organization, which holds the beneficial owners securities in electronic form, through a registered Depository Participant (DP). To avail of the services offered by a depository, the investor has to open a DP account with a registered Depository Participant. In other words, a Depository is like a Bank where securities are held in electronic (demat) form, which enables securities transactions to be processed by book entry as electronic records. In India, there are two Depositories:1. NSDL (National Securities Depositories Limited) 2. CDSL (Central Depository Services Limited).

Depository
Definition: A Depository is an organization, which holds the beneficial owners securities in electronic form, through a registered Depository Participant (DP). To avail of the services offered by a depository, the investor has to open a DP account with a registered Depository Participant. In other words, a Depository is like a Bank where securities are held in electronic (demat) form, which enables securities transactions to be processed by book entry as electronic records. In India, there are two Depositories:1. NSDL (National Securities Depositories Limited) 2. CDSL (Central Depository Services Limited). Beneficial Owner (BO) Beneficial Owner is a person in whose name a demat account is opened with any of the two depositories for the purpose of holding securities in the electronic form and whose name is recorded as such with that depository.

 Depository Participant(DP) Under the Depositories Act, investors can avail of the services of the Depositories through Depository Participants. A Depository Participant (DP) is an agent of the depository who is authorized to offer depository services to investors. Financial Institutions, Banks, Custodians and Stockbrokers complying with the requirements prescribed by SEBI / Depositories can be registered as DP. For selling Dematerialised securities After selling the securities, the Beneficial Owner should instruct his DP whom he maintains his demat account, through the Delivery Instruction Slip (DIS), to debit his account with the number of securities sold by him and credit his brokers (clearing member pool )account. Then the broker gives instruction to its DP for delivery to clearing corporation before the pay-in day. After that, the broker receives payment from the stock exchange (clearing corporation). And finally the seller receives payment from the sale of securities from the broker.

 On-market transactions Any transaction for sale and purchase of securities through a broker on the stock exchange to be settled through clearing corporation is generally called as On-market transaction.
Off-market transactions When securities are transferred from the beneficiary account of one investor to that of another, and if that transaction does not get round through the stock exchange, it is an off-market transaction. Inter Depository transfer Any transfer of securities between two Beneficial Owners not having demat accounts with the same depository is called as Inter Depository transfer.

The Benefits Of Participation In A Depository

The unique centralized database of Depositories ensures immediate transfer of securities. No stamp duty on transfer of securities. It is a safe and convenient way to hold securities compared to holding securities in physical form. Elimination of risks associated with physical certificates such as bad delivery, fake securities. It also eliminates delays, thefts, interceptions and subsequent misuse of certificates. Reduction in paperwork involved in transfer of securities. Reduction in transaction cost. Nomination facility.

Change of name, address, registration of power of attorney etc, recorded with DP gets registered electronically with all companies in which investor holds securities eliminating the need to correspond with each of them separately.
Facility to hold equity, debt instruments and Government securities in a single account. Automatic credit into demat account, of shares, arising out of split/consolidation/merger etc.

Reserve Bank of India (RBI)

Establishment of RBI
The reserve bank of India was established on April 1,1935 in accordance with the provisions of the reserve bank of India Act, 1934.

The central office of the reserve bank was

initially in Calcutta but was permanently moved to Mumbai in 1937. the central office is where the governor sits and where policies are formulated.

Objectives of RBI
To maintain the internal value of the nations currency. To preserve the external value of the currency. To secure reasonable price stability.

To promote economic growth with rising levels of employment, out and real income

Functions of a RBI
Monetary policy functions Currency issue and management Maintaining value of currency Anchor economic growth expectation Monetary regulation and management Regulation of interest rates Financial sector regulation and supervision Exchange management and control Credit control Liquidity management Clearing and settlement Development of financial market Policy oriented research Collection of data and publication of reports Institution building

Role of the Reserve Bank of India

Banker to the government Banker to the banks Banks supervision Monetary regulation and management Foreign exchange and management Promotional functions

Supervisory/regulatory function of RBI

Licensing of banks

Approval of capital, reserves and liquid assets of banks

Branch licensing policy Inspection of banks

Control over management

Audit Credit information service

Deposit insurance
Training and banking education