1.

FINANCIAL SERVICES - CHARACTERISITCS

Financial Services are characterized by the following :
1. Intangibility - The basic characteristics of financial services are tangible in
nature .for financial services to be successfully created and marketed the
institutions providing them must gain good and confidence of its clients.
Quality and innovativeness of services are the focal points for building
credibility and gaining the trusts of the clients.
2. Customer Orientation - The institutions proving the financial services
study the needs of the customers in detail based on the results of the study they
come out with innovative financial strategies that give due regard to costs,
liquidity and maturity considerations for various financial products this way
financial services are customer orientated.
3. Inseparability - The functions of producing and supplying financial
services have to be carried out simultaneously their calls for a perfect
understanding between the financial services firms and their clients.
4. Perishability - Financial services have to be created and delivered to target
clients they cannot be stored. They have to be supplied according to the
requirements of customers.
Hence it is imperative that the providers of financial services ensure a match
between demand and supply.
5.Dynamism - The financial services must be dynamic they have to be
constantly redefined and refined on the basis of socio-economic changes
occurring in the economic such as disposable income, standard living level of
education are
Financial services institutions must be proactive in nature, and evolve new
services by visualizing the expectations of the market.
Various Financial Services
The financial services may be classified in to two groups
Fund or Asset - based financial services
Fee- based financial services
1. Fund or Asset based financial services
Lease Financing
Hire Purchase Finance and consumer credit
Factoring and forfaiting
Bills discounting
housing finance
Insurance services
Venture capital financing
2. Fee based Advisory Services
The emerging financial services sector in India also provide fee-based
advisor services to corporate enterprises.
These services include the mgt. either by making arrangement regarding
selling, buying or subscribing to securities and they render corporate
advisory services in relation to such issue mgt.
The institutions or persons engaged in such activities are merchant bankers,
stock brokers, credit rating agencies etc.
2.Various Options available for Investment or Various Investment
Alternatives:
All the modes of investment differ from each other in one or more of these
features.These features can also be used to evaluate whether a particular
investment product is suitable for you or fulfills your financial needs.
A critical evolution of various investment alternatives based on these features is
given below.
1. Bank Deposits
These are high on liquidity and convenience. The risk involve is negligible, the
return is also moderate only a few tax concessions are available.
2. Equity shares
The potential for high returns is more because of capital appreciation. Equity
shares rank high on risk, liquidity and convenience. Returns however are
uncertain and subject to market forces.
3. Mutual Funds
High on liquidity and convenience. Good tax concessions available which
differ from scheme to scheme. Returns and risk may vary according to the
scheme.
4. Life Insurance Policies
Tax benefits are high, life insurance policies rank high on convenience, but the
returns are modest. Liquidity and risk are low.
5. Company Deposits
These provide higher returns but are also high on risk. No tax concessions are
available Liquidity and convenience are also low.
6. Bonds and corporate Debentures
Returns and risk are both high with no tax concessions available these are low
on liquidity and convention.
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7. Post office Deposit Schemes:
Returns are moderate but risk is low. Various tax concessions are available but
liquidity is low.
8. Gold, Silver, Other Precious Metals:
Potential exists for high returns with good quality. With only a few tax
concessions available, the risk is moderate to high convenience is medico.
9. Real Estate:
High on returns with high risk, but liquidity is low. Tax concessions are
available for self occupies houses convenience is low.
3.Reason for preferring Securitized Financial Instrument
1.Helping small investor Financial claims often involves sizeable sum of
money, clearly outside the reach of the small investor. The initial response to
this was the development of financial intermediation, where by an intermediary
such as bank would pool together the resources of the small investors and use
the same for a larger investment need of the user.
2.Facilitating Liquidity Small investors are typically not in the business of
investments and hence liquidity of investments is most critical for them.
Marketable instruments provides the liquidity of investments.
3.Utility of Instruments- Generally instruments are easily understood than
financial transaction. An instrument is a homogenous, usually made in a
standard form and generally containing standard issuer obligations. Besides an
important part of investor information is the quality and price of the instrument
and both are easier in case of the instruments than in case of financial

4.Features of CreditRating
Following are the characteristics features of credit rating
Specificity
The rating is specific to a debt instrument.It is intended as a grade and an
analysis of the credit risk associated with that particular instrument. Rating is
neither a general purpose evaluation of the issuer,nor an overall assessment of
the credit risk likely to be involved in all the debts contracted by such an entity.
Relativity
The rating is based on the relative capability and willingness of the issuer of the
instrument toservice debt obligations(both principal and interest) in accordance
with the terms of the contract.
Guidance
The rating primarily aims at furnishing guidance to investors/creditors in
determining a credit risk associated with a debt instrument /credit obligation.
Not a Recommendation
The rating does not provide any sort of recommendation to buy,hold or sell an
instrument since it does not take into consideration, factors such market prices,
personal risk preferences and other considerations which may influence an
investment decision.
Broad Parameters
The rating process is based on certain broad parameters of information supplied
by the issuer and also collected from various other sources including personal
interactions with various entities.
No Guarantee
The rating furnished by the agency does not provide any guarantee for the
completeness or accuracy of the information on which the rating is based.
Quantitative and Qualitative
While determining the rating grade both quantitative as wellas qualitative
factors are employed. The judgement is qualitative in nature and the role of
quantitative analysis is limited toassist in the making of the best possible overall
judgement.

5.Different Types of Underwriting

1. Firm underwriting
Firm underwriting takes place when the underwriter agrees to take up a certain
specified number of securities,irrespective of the securities being offered to the
public.
2.Sub-underwriting
Sub-underwriting takes place when the underwriting of securities is contracted
out by the main underwriter to other underwriting intermediaries.
3.Joint underwriting
It refers to a situation of issue of securities being underwritten by two or more
underwriting intermediaries jointly.
4.Syndicate underwriting
Syndicate of underwriters by means of an agreement, underwrites the issue of
securities collectively, it is called syndicate underwriting.
7.Types of consumer Finance
There are several types of credit facility available to consumers.They are briefly
discussed below
Revolving Credit
An ongoing credit arrangement similar to a bank overdraft where by the
financier of a revolving basis, grants credit is called Revolving Credit. The
consumer is entitled to avail credit to the extent sanctioned as the credit limit.
An ideal example of revolving credit is credit cards.
Fixed credit
It is like a term loan whereby the financier provides loan for a fixed period of
time.The credit has to be squared off within a stipulated period. Examples of
fixed credit include monthly instalment loan, hire purchase,etc.
Cash Loan
Under this type of credit banks and financial institutions provide money with
which the consumers buy articles for personal consumption. Here the lender and
the seller are different. The lender does not have the responsibilities of a seller.
Secured Finance
When the credit granted by a financial institutions is secured by a collateral, it
takes the form of secured finance. The collateral is taken by the creditor in order
to satisfy the debt in the event of default by the borrower. The collateral may be
in the form of personal property, real property or liquid assets.
Unsecured Finance
When there is no security offered by the consumer against which money is
granted by financial institution it takes the form of unsecured finance.
Sources of Consumer Finance
The various sources of consumer finance available to people are discussed
below :
Traders
The predominant agencies that are involved in the provision of consumer
finance are traders. They include sales finance companies, hire-purchase and
other such financial( non-bank ) institutions.
Commercial Banks
Commercial banks take keen interest in providing, directly or indirectly ,the
finance for consumer durables. Banks lend large sums of money at wholesale
rates to commercial or sales finance companies. Hire purchase concerns and
other such financial intermediaries. Recently banks have also started directly
financing consumers through personal loans, which are meant for purchasing
consumer durable goods. Personal loans are granted without a security.
Credit Card Institutions
Credit card institutions arrange for credit purchase of consumer articles through
the respective banks which issue the credit cards.The credit card system enables
a person to buy goods and services on credit.
NBFCs
Non banking finance companied constitute another important source of
consumer finance. Consumer finance companies also known as small loan
companies, personal finance companies or licensed lenders, are non-savings
institutions whose prime assets constitute sale finance receivables, personal
cash loans to consumers, short and intermediate term business receivables etc.
These finance companies charge substantially higher rate of interest than the
market rates.
Credit Unions
A credit union is an association of people who agree to save their money
together and in turn provide loans to each other relatively lower rates of interest.
These are called cooperative credit societies in India. The first credit union was
started in Germany in the year 1848.These are non-profit, deposit-taking and
low-cost credit institutions.
Middlemen
Middlemen such as dealers of consumer articles also grant credit to consumers
as part of their promotion campaign. In many cases dealers work in union with
banks and finance companies and direct the consumers to the friendly finance
companies. This type of arrangement helps dealers maintain a close and loyal
relationship with customers.

8.Smart Cards
A smart card is a credit card sized plastic card with an embedded computers
chip. The chip allows the card to carry a much greater amount of information
than a magnetic card.The telecom industry was perhaps the pioneer in smart
cards, the most prominent being subscriber Identity Module (SIM) cards in the
GSM digital calculator network using special terminals designed to interact
with the embedded chip the card can perform special functions this is
essentially in prepaid card.
Two Types of Smart Cards
1.Memory Card
2.Micro Processor Card
1.Memory Cards- Memory cards are static they store information and value
and are not programmable it is not reloadable phone cards and other prepaid
cards are example.
2. Micro Processor Cards- Micro Processor Cards have internal memory,
have high storage capabilities and the data stored in the chip is dynamic and
reloadable.
Smart cards hold a promising future because they offer multiple advantages to
merchants consumers and banks.
Chip Card- A chip card is a plastic card with an embedded integrated circuit
or a micro chip as opposed to magnetic strips on conventional card. The chip
can be used on existing debit and credit cards as well as on emerging products
like store valued cards, inserting the card is what is called a pin pad effects the
transaction and the value on it reduces accordingly. These cards are reloadable
and disposable. The idea is to do away with the trouble of carrying cash.
Co-branded card- The times card a cobranded card is the first of its kind form
a publishing house in the Asian subcontinent. There is a co-branded credit
card of Times of India Group and Citibank Master Card. The co-branding
concept has caught in the credit card industry the world over during the last
five year.

9.REGULARTORY FRAME WORKS

Regulation of Financial services
The Indian financial services sector is regulated by
1. Government
2. The Reserve Bank of India
3. The Securities and Exchange Board of India (SEBI).
1. Government -The Central Government has extensive power to regulate the
financial services sector.It Exercises control by various acts, rules, directives,
guidelines, notifications etc.The issue of capital is regulated by :
The companies Act 1956
The capital Issues (Control) Act 1947
The capital Issues (Exemption) order 1969.
The capital Issue (Application for consent) Rules 1966.
The stock exchanges are regulated by the securities contracts
(Regulation) Act 1956.
The Securities contracts (Regulation) Rules 1957
The notification of stock exchange.
2. Reserve Bank of India
The Reserve Bank of India (RBI) is the apex institution in the Indian Financial
system. It has wide powers to control the money and capital markets. It
ensures the efficient functioning of the financial system by keeping a watch on
the development and disturbances in. It influences the operations of the
financial system through regulation on the banking system.
3. Securities and Exchange Board of India (SEBI)
The Securities and Exchange Board of India (SEBI) was set up in 1988 as a
non-statutory body. In January 1992, it was made a statutory body. The
objectives of SEBI are to
1. Protect the interests of the investors in securities.
2. Promote the development of the Securities market.
3. Regulate the securities market.
SEBI is authorized to regulate all merchant banks on issues activities and to
regulate mutual funds by issuing guidelines and supervising.SEBI in
consultation with the Government has taken a number of steps to introduce
improved practices and greater transparency in the capital markets in the
interests of the investing public and the healthy development of the capital
market.
10.Functions of Merchant Bankers
Merchant banking being a service oriented industry renders the same services in
India as merchant banks in UK and other European countries. In the U.S,
investment bankers cater to the needs of business enterprises carrying out
merchant banking functions Merchant banks in India carry out the following
functions and services.
1.Corporate Counselling
2.Project Counselling
3.Pre-investment studies
4.Capital Restructuring
5.Credit Syndication and project Finance
6.Issue Management and Underwriting
7.Portfolio Management
8.Working Capital Finance
9.Acceptance credit and Bill Discounting
10.Mergers,Amalgamations and Takeovers
11.Venture Capital
12.Lease Financing
11.Characteristics of Book Building
1. Tendering process
Book Building involves inviting subscriptions to a public offer of
securities, essentially through a tendering process. Eligible investors are
required to place their bids for their number of shares to be issued and the
price at which they are willing to invest, with the lead manager running
the book. At the end of the cut-off period, the lead manager determines
the response to the issue in terms of the quantum of shares and the highest
price at which the demand is sufficient to match the size of the issue.
2. Floor Price
Floor price is the minimum price set by the lead manager in consultation
with the issuer. This is the price at which the issue is open for
subscription. Investors are free to place a bid at any price higher than the
floor price.
3. Price Band
The range of price (The Highest and the lowest price) at which offer for
the subscription of securities is made is known as price band. Investors
are free to bid any price within the Price band.
4. Bid
The Investor can place a bid with the authorized lead manager- merchant
banker. In case of equity shares usually several brokers in the stock
exchange are also authorized by the lead manager. The investor fills up a
bid-cum-application form, which gives a choice to bid upto three optional
prices. The price and demand options submitted by the bidder are treated
as optional demands and are not cumulated.
5. Allotment
The lead manager in consultation with the issuer, decides the price at
which the issue will be subscribed and proceeds to allot shares to the
investors who have bid at or above the fixed price. All investors are
allotted shares at the same fixed price. For any allottee, therefore, the
price will be equal to or less than the price bid.
6. Participants
Generally, all investors including, eligible to invest in a particular issue of
securities can participate in the book building process. However, if the
issue is restricted to qualified institutional investors, as in the case of
government securities, then only those eligible can participate.
12.DISTINCTION BETWEEN FACTORING AND FORFAITING
S.NO
CHARACTERISTICS FACTORING FORFAITING
1 Suitability For transactions with
short term maturity
period.
For transactions with
medium term maturity
period
2 Recourse Can be either with or
without recourse
Can be either without
recourse only
3 Risk Risk can be
transferred to seller
All risks are assumed by
the forfeiter
4 Cost Cost of factoring is
usually borne by the
seller
Cost of forfeiting is
borne by the overseas
buyer (importer)
5 Coverage Covers a whole set
of jobs at a predetermined
price.
Structuring and costing
is done on a case to case
basis
6 Extent of financing Only a certain
percent of
receivables factored
is advanced
Hundred percent
financed is available
7 Basis of financing Financing depends
on the credit
standing of the
exporter
Financing depends on
the financial standing of
the availing bank
8 Services Besides financing, a
factor also provides
other services such
as ledger
It is a pure financing
Arrangement
administration etc.,
9 Exchange fluctuations No security against
exchange rate
fluctuations
A forfeiter guards
against exchange rate
fluctuations for a
premium charge
10 Contract Between seller and
factor
Between exporter and
Forfeiter
13.Functions of stock Exchange
The Stock exchanges perform a number of functions useful t both the investors
and the corporations. They carry out the following functions.
1. Central Trading Place- They provide a central place, where the brokers
and dealers regularly meet and transact business.
2. Settlement of Transaction- They provide convenient arrangements for the
settlement of transactions.
3. Continuous market- These are the market for the existing securities.
These are places for the holders of securities to buy and sell their securities
and for those who want to invest their savings. The stock exchange thus
provides liquidity to their investment.
4. Supply of Long Term Funds- Since the securities can be negotiated and
transfer through stock exchanges, it becomes possible for the companies to
raise long term funds from investors.In the stock exchange, one investor is
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substituted by another when a security is transacted. Therefore the
company is assured of long-term availability of funds.
5. Setting up of Rules and Regulations - Stock exchanges set up rules and
regulations governing the conduct and finance of their members. It ensures
that a reasonable measure of safety is provided to investors and the
transactions take place under competitive conditions.
6. Evaluation of Securities- Stock exchanges help to evaluate the securities
as they publish the prices of securities regularly in newspapers. They also
enable the holders of securities to know the worth of their holdings at any
time.
7. Control over Company Management- A Company which wants to get its
shares listed in a stock exchange has to follow the rules framed by the stock
exchange. Through these rules and requirements, the stock exchanges
exercise some control on the mgt. of the company.
8. Helps capital Formation - Stock Exchange helps capital formation. The
publicity given by the stock exchanges about the different types of
securities and their prices encourage even the disinterested persons to save
and invest in securities.
9. Facilities Speculation- Stock Exchange provides facilities for speculation
and enables shrewd business man to speculate in the market and make
substantial profits.
10. Directs the flow of savings - A stock exchange directs the flow of savings
of the community between different types of competitive investments. It
also helps to meet the investment needs of entrepreneur.