MANAGEMENT OF FINANCIAL

SERVICES
unit -1
 INTRODUCTION
• FINANCIAL SYSTEM: it is the system of country which deals
with the financial aspects.
• COMPONENTS OF FINANCIAL SYSTEM:
I. FINANCIAL MARKETS
II. FINANCIAL INSTITUTIONS
III. FINANICAL INSTRUMENTS
IV.FINANCIAL SERVICES.
I. FINANCIAL MARKETS
• Primary markets: deals with new issues
• Secondary markets: trading in existing securities
II. FINANCIAL INSTITUTIONS: these are the institutions which deal with the
financial instruments. They create the various instruments of credit.
III. FINANCIAL INSTRUMENTS: these are the claims against an institution or a
person for payment at a future date of sum of money in the form of
dividend/ interest.
IV. FINANCIAL SERVICES: financial services are those which help in borrowing
and funding, buying and selling securities, lending and investing,
making and enabling payments and settlements and managing risk
exposures in financial markets
 MEANING OF FINANCIAL SERVICES
• All types of activities which are of financial nature may be
regarded as financial services.
• In simple words, the term financial services means mobilizing
and allocating savings. Thus, it includes all activities in the
transformation of savings into investments.,
• The financial services is also called financial intermediation.
• Financial intermediation is the process by which funds are
mobilized from savers and make them available to the
corporate customers for investments.
 Financial
intermediaries

Capital market
Money market intermediaries
intermediaries( supply ( term lending
short-term funds) institutions and
Commercial and investment
cooperative banks institutions)
• Financial services comprise of various functions and services
that are provided by financial institutions in financial system.
• financial services help not only in raising the required funds
but also in ensuring their efficient utilization
• Financial services are provided by stock exchanges,
specialized and general financial institutions, banks and
insurance companies.
• Financial services are regulated by SEBI, RBI and the
department of banking and insurance, government of India
through legislations.
 ACTIVITIES COVERED BY FINANCIAL
SERVICES
I. TRADITIONAL ACTIVITIES:
A. FUND BASED ACTIVITIES:
- Dealing in shares, debentures of new issues
- Dealing in secondary market activities
- Dealing in money market instruments
- Involving in hire purchase, leasing etc.
- Dealing in foreign exchange market activities.
B. NON FUND BASED ACTIVITIES(FEE BASED):
These are not connected with provision of finance.
- Managing capital issues
- Arranging placement of capital and debt instruments with
investment institutions.
- Arrangement of project finance and working capital funds
from financial institutions
- Assisting in the process getting all clearances from the
government departments.
II. MODERN ACTIVITIES: new financial products and services:
- Merchant banking
- Venture capital
- Factoring
- Forfeiting
- Credit rating
- Mutual funds
- Under writing
- Stock investment
- securitization
 MODERN ACTIVITIES OF FINANCIAL
SERVICES
• In the recent times, the financial intermediaries render non-
fund based modern services. They are:
- Rendering project advisory services right from the project
report preparation till the raise of funds for starting the
project with necessary government approved.
- Planning for mergers and acquisitions and assisting for their
smooth carryout
- Guiding corporate customers in capital restructuring
- Acting as trustees to the debenture holders
- Recommending suitable changes in the management
structure and management style with a view to achieving be
the results.
- Structuring the financial collaboration/joint ventures by
identifying suitable partner and preparing joint venture
agreement.
- Rehabilitating and restructuring sick companies through
appropriate scheme of reconstruction and facilitating the
implementation of the scheme.
- managing the portfolio of large public sector corporations.
- Undertaking risk management services like insurance services,
buy-back options.
- Promoting credit rating agencies for the purpose of rating
companies which want to go public by the issues of debt
instruments.
• Advising the clients on the question selecting the best source
of funds taking into consideration the quantum of funds
required, their cost, lending period etc.
• Guiding the clients in minimizing the cost of debt and the
determination of the optimum debt-equity mix.
• Under taking services relating to the capital market such as:
-clearing services
-Safe custody of services
-Collection of income on securities
-registrations and transfers.
 SOURCES OF INCOME
• Fund based income comes from interest spread, lease rentals,
income from investments in capital markets and real estate.
(major income $ high risk).
• Fee based income comes from merchant banking, advisory
services, custodial services etc. fee based income doesn’t
involve much risk. But it requires a lot of expertise on the part
of financial company to offer such fee- based services. On the
other hand , fund based activities involve a large share of
expenditure in the form of interest and brokerage.
• Ex: accepting deposits by offering a very high rate of interest.
 FINANCIAL MARKETS
• Financial markets are those markets which facilitate buying
and selling of financial claims, assets, services and securities.
• In financial markets, funds or savings are transferred from
surplus units to deficit units.
• A financial market comprises of players such as banking and
non- banking financial institutions, dealers, borrowers and
lenders, investors, depositors and agents
• The above participants take an active part in driving demand
and supply in the financial market
• Financial market is said to exist wherever financial
transactions take place
 financial markets

Organized Unorganized Money Capital Primary Secondary

market market market market market market
• Organized market: in which, there are set of rules and
regulations governing financial dealings. There is high degree
of institutionalization and instrumentalisation in such market.

• Un organized market: it has no adequate regulations relating

to financial regulations, financial instruments are limited in
supply, besides being non- standardized in character. The
settlement is not effective and institutionalization is also
limited.
• MONEY MARKET: money market deals with short-term claims
or financial assets for a period of one year or less.
• CAPITAL MARKET: capital market deals with those financial
assets which have maturity period of more than one year.
• PRIMARY MARKET: markets that deal in new issue of
securities
• SECONDARY MARKETS: markets that deal in securities, which
are already issued and available for trading in the market.
• Money markets and capital markets are the important
segments of the financial market
 OBJECTIVES OF FINANCIAL SERVICES
 MARKET CONFIDENCE: maintaining confidence in the financial
system.
 PUBLIC AWARENESS: promoting public understanding of the
financial system.
 CONSUMER PROTECTION: securing the appropriate degree of
protection for consumers.
 REDUCTION OF FINANCIAL CRIME: reducing the extent to
which it is possible for a business carried on by a regulated
person to be used for a purpose connected with financial
crime.
 MODERN ACTIVITIES CONTROL
• Advising the clients on the question selecting the best source
of funds taking into consideration the quantum of funds
required, their cost, lending period etc.
• Guiding the clients in minimizing the cost of debt and the
determination of the optimum debt-equity mix.
• Under taking services relating to the capital market such as:
- Clearing services
- Safe custody of services
- Collection of income on securities
- Registrations and transfers
 FINANCIAL INSTRUMENTS
• Financial claims such as financial assets and securities dealt in
financial market are referred to as financial instruments.
• Financial assets refer to claims of periodical payments of
certain sum of money by way of payment of principal,
interest or dividend. The payments may vary depending on
the nature of financial instrument.
• E.g.: govt bonds/ govt. securities, bank deposits or
debentures issued by companies( regular receipt of interest
and receipt of principal at a specified period)
• Perpetual bonds: interest at a regular intervals but the
principal at the time of bond up of the company.
• Equity shares: steady payments of dividends subject to nps.
 CHARACTERISTICS OF FINANCIAL
INSTRUMENTS
• Liquidity: allows for the easy and quick conversion into cash
• Marketability: facilitates easy trading of the security in the
market
• Transferability: allows for easy and quick transfer of
instruments without rigid formalities
• Collateral value: allows for pledging of instruments for
obtaining loans
• Maturity period: short-term/long-term/medium-term
• Transactions cost: implies the expenses involved in buying and
selling of instruments
• ROI: allows for earning of nominal or real returns
 MAJOR CATEGORIES OF FINANCIAL
SECURITIES
• Ownership securities like shares, creditor ship,
securities(debentures, deposit securities/certificates,
short term securities, medium and long- term securities
etc)
• Popular financial securities: public sector tax free bonds
&taxable bonds, certificates of deposits(cd’s),
commercial papers(cps) corporate bonds, floating rate
bonds, state govt loans treasury bills etc;
• Short term securities:<1 yr} maturity within
• Medium term securities: 1-5 yrs}”
• Long term securities: above 5 years }”
 Financial engineering
• Financial engineering is the design, the development and the
implementation of innovative financial instruments and
processes and formulation of creative solutions to problems
in finance.
• The growing need for innovation has assumed immense
importance in the recent times
• This process being referred to as “financial engineering”
FINANCIAL INNOVATION- CAUSES:
• Financial intermediaries perform the task of financial
innovation to meet the dynamically changing needs of the
economy and to help the investors cope with an increasingly
volatile and uncertain market place. There is a dire necessary
for the financial intermediaries to go for innovation due to
the following reasons:
 Reasons:
• Low profitability(with traditional products)
• Keen competition(due to entry of many parties)
• Economic liberalization(foreign competitors)
• (deregulation in the form of elimination of exchange controls &
ceiling on interest rates)
• Improved communication technology( world market is linked
with the investors)
• Customer service( to satisfy the new customers, new products
to be invented)
• Global impact(changes in global financial market have impact
on domestic market)
• Investor awareness(shifting the investors interest from gold,
silver, land to financial assets like shares, debentures, mutual
funds.
 New financial products and services
• Leasing: it a method of acquiring right to use any equipment
or asset for consideration.
• Merchant banking: a merchant banker is a financial
intermediary who helps to transfer capital from those who
posses it to those who need it. These are service bankers and
concerned with providing non- fund based services of
arranging funds rather than providing them.
• Mutual funds: a mutual fund refers to a fund raised by a
financial service company by pooling the savings from the
public, these funds are invested in a diversified portfolio with
a view to spreading and minimizing risk.
• Factoring: it is an arrangement between a financial
institution(factor) and a business concern(client) which sells goods
and services to trade customers. As a result of this arrangement,
the factor( usually banker) undertakes collection of the clients
debts and finance the client on the basis of his accounts
receivables.
• Forfeiting: it is a technique by which a forfeiter(financing agency)
discounts an export bill and pay ready cash to the exporter who
can concentrate on the export front without bothering about
collection of bills, with this the exporter is protected against the
risk of non- payment of debts by the importer.
venture capital: It is a form of equity financing designed specially
for funding high –risk and high reward projects. It is a method of
financing in the form of equity participation. A venture capitalists
finances a project based on the potentialities of a new innovative
project. much trust is given to new ideas and finance is being
provided not only for start-up capital but also for development
capital by the financial intermediary.
Hire purchase: it is a method of selling assets on installment basis.
Custodial services: under this, financial intermediary provides
services to clients particularly to foreign investors for a prescribed
fees. Eg: collection of interest and dividends safe keeping of shares
and debentures
• Stock invest: it is the facility available to an investor for payment
of share application money against the shares applied by him.
• Securitization: it is a technique where by a financial company
converts its ill- liquid non- negotiable and high value financial
assets into securities of small value which are made tradable
and transferable. It is a method of trading in securities, backed
by pools of mortgage loans. Payment of principal and interest
from the income generated by the mortgages.
• Book- building: it is the process by which corporate determine
the demand and price of the securities through public bidding.
 INNOVATIVE FINANCIAL INSTRUMENTS:
 COMMERICAL PAPER: short- term negotiable money market
instrument it is like unsecured promissory note with a fixed
maturity of 3-6 months.
 TREASURY BILL: money market instrument issued by the central
government. It is issued at discount and redeemed at par(182 to
364 days)
 INTER- BANK PARTICIPATIONS(1BPS): scheduled banks issue 1bps
carrying 14-17% interest p.a(91-180 days- with or without risk
participations)
 ZERO INTEREST CONVERTIBLE DEBENTURES/BOND: these are
converted into equity shares after some period and no interest is
paid.
 DEEP DISCOUNT BONDS: no interest payments and they are sold
at very high discount. Eg: discounted price rs. 5,300, face value is
rs. 2,00,000. maturity period is 25 years.
 Index linked guilt bonds: fixed maturity period and the value
is linked to the index prevailing on the date of maturity.
 Secured premium notes: no interest for 3 years.
 Medium term debentures: secured, negotiable and highly
liquid(3-5 years). Popular in German.
 Variable rate debentures: compound rate of interest but
vary from time to time.
 Non convertible debentures with equity warrants:
redeemed at premium in installments( 5, 6th 7,8th year
onwards)
 Cumulative convertible preference shares: within 3 to 5 yrs,
these are compulsory converted into equity shares with
capital and accumulated dividend.
 Debentures with call or put features: call features:
company has the option to redeem before maturity
 Put features: holder is given right to seek redemption
 Easy exit bonds: Ancash bond after 18 months of its issue
 Retirement bond: the investor gets an assured monthly
income for a fixed period after the expiry of the wait
period
 Regular income bond: attractive rate of interest payable
half- yearly. Redeemable at the end of every year
 Loyalty coupons: these are entitlements to the holder of
debt for two to three years to exchange into equity at a
discount prices.
 Infrastructure bonds: giving tax benefits to the investor.
 Global depository receipt( gdr): a dollar denominated instrument
traded on a stock exchange in Europe/USA or both. It represents a
certain number of underlying equity shares, which are
denominated in rupees. The shares are issued by the company to
an intermediary called depository on whose name the shares are
registered. It is depository which subsequently issues the GDRs
 Convertible bonds: can be converted into equity shares at a pre
determined data either partially or fully.
 Options bonds: cumulative/ non- cumulative(periodical payment
of interest)
 Classification of equity shares
1. Blue chip shares: established company shares
2. Defensive shares: safe return for the investors money
more stable than others.
3. Growth shares: the shares of fast growing companies
(with high eps and p/e ratios)
4. Cyclical vs. non cyclical shares: which rise and fall in
price with the state of the economy of the industries to
which they belong to called cyclical shares, otherwise
non-cyclical.
5. Turn around shares: rise/fall all of sudden due to turn
round situations prevailing in companies
6. Active shares: which have frequent and day to day
dealings, they must be bought and sold at least 3 times
a week.
7. Alpha shares: most frequently traded in the market.
8. Sweat shares: which are issued to employees or
workers who contribute for the development of the
company.
CHALLENGES TO THE FINANCIAL SECTOR:
1. Dearth of qualified personnel( intermediaries)
2. Lack of investor awareness
3. Lack of transparency
4. Lack of recent data
5. Lack of specialization
6. Lack of efficient risk management system
Present scenario:
• Conservation to dynamism
• Concept of credit rating
• Process of liberalization and globalization
• Emergency of primary equity market( to channelize
the giving's)
• The financial sector should meet the above
challenges by adopting new instruments and
innovative means of financing, so that it could play a
dynamic role in the economy.
Thank u