FINANCIAL SERVICES

Financial services
Means
Mobilizing and allocating savings
Also called financial intermediation
Mobilization of savings into investments
Definition
activities, benefits and satisfaction connected
with the sale of money that offer to users and
customers financial related value.
EVOLUTION OF FINANCIAL SERVICES
IN INDIA:

1. Initial phase (1960-80)
2. Second phase (1980-90)
3. Third phase (1990 onwards )


Financial
system
Financial
institution
s
1.Merchant
banking
1. Investment
companies
Era
2.Modern
services era
3.Depository
era
3.Legislative
era
3.FIIs era
Financial
Markets
Stages Phase 1
Merchant banking era
Between 1960 & 1980
Merchant banking
Involved in
- Identifying projects
- Conducting feasibility analysis
- Advice
- Issue management
- Leasing activities was started in the year
1970


Stages phase 1
Investment companies era
Growth of Insurance and investment
companies
LIC, GIC and UTI initiated to enter into this
segment during this period
Stages phase 2
modern services era
counter share transfers
pledging of shares
mutual funds
Factoring
Discounting
venture capital
credit rating- Most important to bring financial
discipline

Stages phase 3
depository era
The depositories
the stock lending schemes
online trading
paperless trading
Dematerialization
book buildings are the services in this
phase
The lender shall enter into an agreement with
the approved intermediary for depositing the
securities for the purpose of lending through
approved intermediary as per the scheme and
the borrower shall enter into an agreement
with the approved intermediary for the purpose
of borrowing of securities and as such there
shall be no direct agreement between the
lender and the borrower for the lending or
borrowing of securities.
Stock lending scheme
Stages phase 3
Legislative era
Indian economy got liberalized during
1991, FERA was replaced by FEMA-
Stages phase 3
FII era
financial services industry in India was
dominated by commercial banks
The economic liberalization has brought in
a complete transformation in the Indian
financial services industry .
Divestment guidelines by SEBI .
More FIIs
Financial system is a system which supplies the necessary
financial Inputs for the production of goods & services which in
then promote the well being & standard of living of the people
of a country
1- provision of liquidity

2-mobilisation of savings
FINANCIAL SYSTEM

Functions of financial system
FINANCIAL MARKETS
Wherever a financial transaction takes place, it
is deemed to have taken place in the financial
market.
Financial markets are pervasive throughout
the economic system.
Financial markets can be referred to as those
centre and arrangements which facilitate
buying and selling of financial assets, claims
and services.
Organised market
Unorganised market

Unorganized markets

In these markets, there are a number of money
lenders, indigenous bankers, and traders etc. who
lend money to the public.
Indigenous bankers also collect deposits from the
public.
Private finance companies, chit funds etc. whose
activities are not controlled by the RBI.
Recently the RBI has taken steps to bring private
finance companies and chit funds under its strict
control by issuing non-banking financial
companies (Reserve Bank) Directions, 1998.
Financial instruments have not been standardized

Organized Markets

standardized rules and regulations governing their
financial dealings.
High degree of institutionalization and
instrumentalisation.
These markets are subject to strict supervision
and control by the RBI or other regulatory bodies.
Classified as
Capital Market

Money Market

CAPITAL MARKET

Capital market is a market for financial assets
which have a long or indefinite maturity.
It deals with long-term securities which have a
maturity period of above one year.
Capital market may be further divided in to three;

Industrial Securities Market
Government Securities Market
Long-term Loans Market


i. Industrial Securities Market
It is a market for industrial securities namely;
i) equity shares or ordinary shares,
ii) preference shares
iii) debentures or bonds.
Market where industrial concerns raise capital
or debt by issuing appropriate instrument
subdivided in to:
Primary Market or New issue market
Secondary Market or Stock exchange






Primary market deals with those securities which
are issued to the public for the first time.
3 ways to raise capital
Public issue
Rights issue
Private placement
Secondary market is a market for secondary
sale of securities.
Stock exchanges regulated under Securities
Contract Regulation Act, 1956

ii. Government Securities Market
It is otherwise called Gilt-edged securities market.
It is a market where government securities are
traded.
Government securities:-short-term and long-term.
Long-term securities are traded in this market
while short-term securities are traded in the
money market.
E.g securities issued by central Govt, state Govt,
semi govt authorities ( city corporations, port trust,
state electricity boards, PSE)




iii. Long-term Loans Market
Development banks and commercial banks
play a significant role in this market by
supplying long-term loans to corporate
customers.
Long-term loans market can be classified in to:
Term loans Market
Mortgages market
Financial Guarantees Market

Term loans market
- Long term & medium term loans to corporate
customers
- Development banks operate
- E.g IDBI, IFCI, ICICI
- Helps in identifying investment opportunities,
encourage entrepreneurs
Mortgages Market
- Supply mortgage loan to individual customers
- Loan against an immovable property
- Equitable mortgage
- Legal mortgage
- E.g HUDCO
Financial Guarantees Market
- Finance provided against the guarantee of a
reputed person in financial circle
- On non repayment , liability falls on the
guarantor
- Provided by development banks, commercial
banks
- ECGC( Export credit guarantee corporation)
MONEY MARKET

Money market is a market for dealing with
financial assets and securities which have a
maturity period of up to one year.

It is a market for purely short-term funds.
Money Market Instruments
Treasury Bills
A treasury bill is a promissory note or a
finance bill issued by the government.
Maturity period is 3-12 months.
14 days T- bill, 91 days, 182 days, 364
days
Government uses T bill to raise short term
funds
Ad hoc and ordinary T bill

Money Market Instruments
Commercial paper
It is an unsecured promissory transferable
after a particular maturity period ( 3
months or less).
Issued by creditworthy and highly rated
corporate for meeting working capital
requirements
E.g of corporate : BPCL ,HPCL,IOC ,
L&T,Dabur etc.


Commercial Bills
It is a bills of exchange arising out of genuine
trade transactions.
They are negotiable instruments drawn by the
seller on the buyer, which are accepted and
discounted by commercial banks
Maturity period 30 days, 60days or 90 days
E.g demand bills, export bills, import bills


Call money
Call money market is a market for extremely
short period loans - one day to fourteen days.
Associated with stock exchanges
Interest rate varies ( day & hourly)
Money borrowed for 1 day call money
Money borrowed for more than 1 day to 14
days notice money





Certificate Of deposit
Unsecured short term instruments issued by
commercial banks and developmental
institutions
Similar to fixed deposits, but transferable and
tradeable




Repo Instruments
stands for repurchase
The borrower parts with the securities to the
lender with an agreement to repurchase them at
the end of a fixed period at a specific price
The difference between the repurchase price and
the original price is the cost for the borrower.
Cost of borrowing repo rate
India repos are conducted for a period of 3 days
Eligible securities are decided by RBI






Short-term loan Market
Short term loans are given to corporate
customers
For meeting their working capital requirements.



DFHI
Discount & finance house of India
Set up to provide liquidity to money market
instruments
Constituted under Indian Companies Act, 1956
Commenced operations in April 1988
Joint stock company jointly owned by RBI,
Public sector banks and financial institutions.
Function discount, rediscount, buy/ sell/
underwrite marketable securities

Financial instruments
Financial instruments refer to the documents
which represent financial claims on assets.
Financial assets refer to the claims to
repayment of certain sum of money the end of
a specified period together with interest of
individual.
Eg: Bill of exchange, promissory notes,
Treasury bill, government bond, deposit
receipt, share, debenture etc
Financial instruments can also be called
financial securities.

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