Financial Services

UNIT-1
By: Dr. Feeroj Pathan
 THE FINANCIAL SYSTEM IN INDIA
• The economic development of any country
depends upon the existence of a well
organised financial system.
• It is the financial system which supplies the
necessary financial inputs for the production
of goods and services which in turn promote
the well being and standard of living of the
people of a country.
• Financial system is broader term which brings
under its fold the Financial Markets and
Financial Institutions which support the
system.
• An efficient functioning of the financial system
facilitates the free flow of funds to more
productive activities and thus promotes
investment.
• Financial system provides the intermediation
between savers and investors and also
promotes faster economic development.
 Indian Financial System

Un-Organized
Organized
Money lenders
Regulators Local bankers
Financial Institutions Traders
Financial Markets Landlords
Financial services Pawn brokers
Financial Instruments
 Organized Indian Financial System

Regulators Financial Financial Financial

Instruments Markets Intermediaries
1.MoF
2.SEBI
3.RBI Forex Capital Money Credit/debt
Market Market Market Market
4.IRDA

Primary Market

Secondary Market

Money Market Capital Market

Instrument Instrument
FUNCTIONS OF THE FINANCIAL SYSTEM
• Provision of Liquidity- The major function of the
financial system is the provision of money and
monetary assets for the production of goods and
services. There should not be any shortage of money
for productive ventures.
• Mobilisation of Savings- Another important activity of
the financial system is to mobilise savings and
channelize them into productive activities. System
should offer appropriate incentives to attract savings
and make them available to more productive ventures.
It should transfer savings into investment and
consumption.
• Size Transformation Function- Savings of millions of
small investors are in the nature of a small unit of
capital which cannot find any fruitful avenue for
investment unless it is transformed into a sensible size
of credit unit. Banks and other financial intermediaries
perform this size transformation.
• Maturity Transformation Function- Financial
intermediaries accept deposits from public in different
maturities according to their liquidity preference and
lend them to the borrowers in different maturities.
• Risk Transformation Function- most small investors
don’t want to take risk so they hesitate to invest
directly in stock market. Therefore financial
intermediaries collect the savings from individual and
distribute them in different investment units with their
high knowledge and expertise.
 FINANCIAL CONCEPTS
An understanding of the financial system requires
an understanding of the following concepts
1. Financial Assets
2. Financial Intermediaries
3. Financial Markets
4. Financial rates of return
5. Financial Instruments
6. Market players
 1. Financial Assets
• In any financial transaction there should be
creation or transfer of financial asset. “A financial
asset is one which is used for production or
consumption or for further creation of assets”.
• Classification of Financial Assets:
i. Marketable assets- Easy to Transfer,
e.g. shares, Government securities, Bonds,
Mutual fund Units, UTI Units, Bearer Debentures
i. Non Marketable assets- e.g. Bank deposits, P.F.,
LIC Schemes, P.O. Certificate.
 2. Financial Intermediaries
• The term financial intermediary includes all kinds
of organizations which intermediate and facilitate
financial transactions of both individuals and
corporate customers. Thus it refers to all kinds of
financial institutions and investing institutions in
financial markets they may classified into
i. Capital market intermediaries e.g. Financial
corporations, LIC
ii. Money market intermediaries- e.g. Commercial
banks, co-operative banks etc.
3. Financial Markets
 4. Financial Rates of Return
• Most households in India still prefer to invest
on physical assets like land, buildings, gold,
silver etc. But studies shown that investment
in financial assets like equities has more
return than investments on gold.
 5. Financial Instruments
• Financial instruments refer to those documents
which represent financial claims on assets.
• Financial asset refers to a claim to the repayment
of a certain sum of money at the end of a
specified period together with interest or
dividend.
• It includes equity, debt and hybrid. These
instruments are written evidences of ownership
and they give the holders the right to demand
and receive property not in their possession.
 6. Market players
• The players in the market include:
I. Commercial banks: The commercial banking in the
developed countries provide term loans to corporate sector
by participating in the capital and equipment finance.
II. Financing companies: The participation of finance
organizations can stimulate the economic growth. They
inject new blood to the corporate sector. the Non- Banking
Finance Corporations sector has recorded marked growth in
the recent past.
III. Stock brokers: Stock Brokers play an important role in the
stock market. They involve in buying and selling of
securities in a recognized stock exchange. If any one wants
to work as a broker, a certificate of registration from the
SEBI is mandatory after satisfying all the terms and
conditions.
IV. Consultants: Consultants are the professionals in the area of
Finance can be providing best solutions to the problems
faced by the corporate sector. Their services are intangible
and show greater impact on the functioning of the company.
They provide tailor made solution to all the problems
irrespective of any area.
V. Underwriters: Underwriters are the intermediaries in the
primary market. They render valuable services to the newly
started companies, which require believable advice.
Underwriters assure the company full subscriptions for a
commission.
VI. Market makers: Market makers are associated with the
stock exchanges. The market making system is very much
popular in London, New York and Chicago stock exchanges.
Their basic function is to provide the needed liquidity to a
particular scrip. They help in eliminating the temporary
disparity between the supply and demand of scrip. They
help in maintaining a fair and orderly market.
MEANING OF FINANCIAL SERVICES

• The term Financial services in its broader

sense refers to ― mobilizing and allocation of
savings‘‘. It is identified as all those activities
involved in the process of converting savings
into investment.
 GROWTH AND EVOLUTION OF
FINANCIAL SERVICES IN INDIA
Financial services sector is blooming in India
and it has passed through various phases as
mentioned below:
• Initial phase (1960-80)
• Second phase (1980-90)
• Third phase (1990-2002)
 Initial phase:
• Financial services at the initial phase
introduced many innovative services such as
merchant banking, Insurance and leasing
finance.
• The term merchant banking was not known till
1960.
• LIC, GIC and UTI initiated to enter into this
segment during this period. Leasing activities
was started in the year 1970.
 Second phase:
• Financial services entered the second stage
and it covered the period of 10 years
approximately. In this phase it introduced
many innovative value added services such as
over the counter share transfers, pledging of
shares, mutual funds, factoring, discounting,
venture capital and credit rating.
 Third phase:
• This phase in financial services include the setting
up of new institutions and instruments. This
period started after post liberalization. The
depositories, the stock lending schemes, online
trading, paperless trading, dematerialization,
book buildings are the contemporary issues of
this phase.
• In this phase government has taken initiatives to
allow foreign institutional investors into the
capital market. The government of India is
revamping companies‘ act, income tax act, MRTP
act etc, for delivering effective financial services.
 PRESENT SCENARIO:
1. Conservatism to dynamism:
At present it is adopting the changing needs. the
financial system in India is in a process of rapid
transformation to promote an efficient, competitive
and diversified financial system in the country.
2. Emergence of Primary Equity Market:
• Primary market in India is now very active. India is now
witnessing the emergence of many private sector
financial services.
• The aggregate funds raised in the Indian capital market
have doubled over a decade.
3. Concept of Credit Rating: The facility of credit rating
helps the investors in finding a profitable and safe debt
capital.
4. Process of Globalization: Globalization has given way for
the entry of innovative and sophisticated financial
products into our country. Government of India is very
keen in removing all the obstacles in the financial sector.
5. Process of liberalization: Government of India has
initiated many steps to reform the financial services
industry. The interest rates have been deregulated. The
private sector has been permitted to participate in
banking and mutual fund sectors. The Finance Act of
Government of India is bringing various amendments
every year to keep the financial sector very flexible.
 FUNCTIONS OF FINANCIAL SERVICE
INSTITUTIONS:
• They assist in deciding the financing mix
• They provide services like bill discounting,
factoring of debtors, parking of short-term funds
in the money market, e-commerce, securitization
of debts, and so on to ensure an efficient
management of funds.
• These firms provide some specialized services like
credit rating, venture capital, lease financing,
factoring, mutual funds, merchant banking.
• Financial system/services works as an effective medium for
optimum allocation of financial resources in an economy.
• It helps in establishing a link between the savers and the investors.
• Financial system/services allows ‘asset-liability transformation’.
Banks create claims (liabilities) against themselves when they
accept deposits from customers but also create assets when they
provide loans to clients.
• Economic resources (i.e., funds) are transferred from one party to
another through financial system.
• The financial system/services ensures the efficient functioning of
the payment mechanism in an economy. All transactions between
the buyers and sellers of goods and services are effected smoothly
because of financial system/services .
• Financial system enhances liquidity.
• Financial system helps price discovery of financial assets resulting
from the interaction of buyers and sellers. For example, the prices
of securities are determined by demand and supply forces in the
capital market.
• Financial system helps reducing the cost of transactions.