Financial Service Management TYBBI-sem V

UNIT-01

Q.1) What are financial services? Explain with features / Nature/ Characteristics of
financial Services?
Ans:
Financial Services are the largest industry in the world in terms of earning. A
financial service is a term used to refer services provided by the financial industries. In
a narrow sense, a financial service otherwise called financial intermediation includes all
types of financial activities, which are carried on by financial institution. In a broader
sense
transformation of savings into investment.
Financial Service are provided by financial intermediaries who are called
financial institutions. Financial service provider enhances growth of the economy by
pooling funds of the small and scattered savers and allocating them for investment in
an efficient manner. Since 1990, Indian financial service industry was dominated by
commercial banks and non-banking financial institutions. These institutions have been
offering wide range of services to their customers, which facilitate them to build
portfolio of financial institutions.
Financial service includes a multiplicity of monetary activities namely factoring,
merchant banking, lease and hire purchase financing, venture capital, underwriting and
new issue marketing, bills discount, investment advisory services, insurance services,
mergers, acquisitions and amalgamations, project preparation, options, swaps,
derivatives, security, etc.
The institutions providing financial service include commercial banks, merchant
banks, investment banks, development banks, insurance companies, mutual funds,
leasing and hire purchase companies. Credit card companies, underwriters etc. of these,
important financial services intermediaries are insurance, banking and non-banking
institutions.

known as asset management companies and liability

management companies. The asset management companies consist of leasing
companies, mutual fund, merchant bankers, etc. Liability management companies
include bill discounting companies and acceptance house companies. The financial
intermediation is a
process where it co-ordinate savers and borrowers. The financial service mobilizes the
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savings and end route the resources towards required sector and serves as a key area
for industrial development of the country. The financial service market comprises of
four important constituents:
Commercial banks, financial institutions,
1 Market Players
stock brokers, etc.
Credit Rating agencies, factoring, discount
2 Specialised institutions
house, etc.
SEBI, RBI, IRDA, Banking and Insurance
3 Regulatory bodies
Department of Central Government
Equity instrument, debt, instrument and zero
4 Financial Instruments
coupon bonds

Financial service can be d

(1) Financial service industry is a customer-oriented

service industry. The customer is the king and his requirements must be satisfied,
in full should be the basic target of any financial service industry.
(2) Intangibility: A peculiar feature of the companies involved in financial
service is that they provide only intangible products to their customers. The
financial product cannot be seen or touched.
(3) In financial service industry, both
production and supply of financial service have to be performed simultaneously.
Therefore, both suppliers of services and consumers should have a good rapport,
clear-cut perception and effective communications.
(4) Technology: The quality of service of any financial service company
depends upon the technology. The analysis of any firm involves the technology
relationship between input and output.
(5) The Financial service market comprises market
players, specialized institutions, regulatory bodies and financial instruments.
(6) h: Financial Service rendered by the financial
intermediaries bridge the gap between lack of knowledge on the part of inventors
and he increasing sophistication of financial instruments and markets. These
financial services are vital for creation of firms, industrial expansion and
economic growth.
(7) Perishability: Financial services are immediately consumed and hence
inventories cannot be created. There is a great need for balancing demand and
supply.

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Q.2) Explain the functions of financial Services?

Ans: Following are the functions of financial services that are generally offered by
financial companies:
(1) Financial services from a group of

instrumen
individuals, etc.
(2) An array of financial services is available in the financial markets which
help the players to ensure an
Financial services assist in the decision making regarding the financing mix.
(3) The financial services sector such as credit
rating, venture capital, financing, lease financing, depository, etc. besides banking
and insurance. Institutions and agencies such as stock exchange, specialized and
general financial institutions, non-banking finance companies, banks and
insurance companies also provide these services.
(4) There are agencies that are involved in the
. In India, agencies such as the SEBI, RBI and Department of
Banking and Insurance of the Government of India through a plethora of
legislations, regulate the functioning of the financial service institutions.
(5) Financial services contribute, in good measure, to speeding up the process
of This takes place through the
mobilization of the savings across section of people, for the purpose of
channelizing them into productive investments.

Q.3) What are the objectives of financial Services?

Ans: The financial intermediation process creates wealth of the nations. The wealth of a
nation will be built-up by a strong foundation of financial architecture. The good design
of financial architecture will create asset formation. Following are the objectives of
financial services:
(1) The market is a combination of savers and
borrowers. The saver includes individual investors, institutional investors,
corporate sector and financial institutions. The funds are required by the
corporate sector, government sector, individual and institutions. The finance
companies will channelize the saving amount into productive way.

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(2) The finance companies will show to the
investors, to park their resources in a better and safety place in financial market.
They assist in decision making regarding the services such as factoring, bill
discounting, securitization of debt etc. They provide best service in order to
ensure efficient utilization of funds.
(3) ces: The financial services require a specialized knowledge
and greater efficiency. The efficiency is the barometer in the financial transaction.
The efficiency will have to be procured from high knowledge. The knowledge is
the key factor and will have to take decisions immediately and instantly. The
speed of decision making and implementation will indicate the profitability of the
firm.
(4) A stability of economy depends upon the
infrastructure of the financial services occupies a dominant role in the growth of
economic development. The wealth creation is possible only with efficiency of
financial services. Financial services will render a continuous effort for its rapid
growth of development.
(5) Regulation: The financial regulatory authority in India includes Securities
and Exchange Board of India, Reserve Bank of India, Insurance Regulatory
Development Authority and Banking Department of the Central Government. A
strong regulatory authority is necessary for the developing nations.

Q.4) What are the Importance of Financial Services?

Ans: IMPORTANCE OF FINANCIAL SERVICES
(1) The main function of financial service system is the
collection of saving and their distribution for industrial investment, thereby
stimulating the capital formation and to that extent, accelerating the process of
economic growth.
(2) The financial services industry promotes savings in
the country by providing transformation services. It provides liability, asset and
transformation service by providing large loans on the basis of numerous small
deposits.
(3) The financial service industry facilitates capital
formation by rendering various capital market intermediary services. Through
financial service activity, resources are actually committed to production. The
volume of capital formation depends upon the intensity and efficiency with which
these activities are carried on.
(4) The financial services facilitate easy conversion of
financial assets into liquid cash. It promotes liquidity in the system by allotting
and reallocating savings and investment into various avenues of economic
activity.

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(5) The financial service industry facilitates the
function of intermediation between savers and investors by providing a means
and a medium of exchange and by undertaking innumerable services.
(6) GNP: The contribution of financial services to GNP has
been going on increasing year in all countries.
(7) The financial service industry
creates and provides employment opportunities to millions of people all over the
world.

Q.5) Classification of financial Services?

Ans: A financial system is a complex, well-integrated set of sub-systems of financial
institutions, markets, instruments, and service which facilitates the transfer and
allocation of funds, efficiently and effectively. The active participation of financial
service institutions will make speedy development of economy. The financial services
can be classified into two categories:
(1) Money market intermediaries
(2) Capital market intermediaries
The money market is the market for short-term
sources of finance. It consists of commercial banks, Co-operative banks and other
agencies which supply only short term funds. In India, the RBI regulates the money
market.

It consists of long term lending institutions and

investing institutions, which mainly provide long-term funds. In India, the SEBI
regulates the capital markets.
services?
Ans: Financial services cover a wide range of activities. They can be broadly classified
into two namely:
1) Traditional Approach
2) Modern Approach

1) The traditional financial service industry provides a wide

range of activities. The activities include both money and capital market aspects.
They are deeply involved in financial markets. According to the traditional approach,
they can be categorized into two methods:
a) Fund based activities (Asset based service)
b) Fee based activities (Non-fund/ advisory service)

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a) In fund based financial services,
money in the form of cash is involved in the transaction. The fund based activities
require an investment by the financial service institutions. They involve in providing of
finance to the corporate sector. The financial market is the combination of different
kinds of investors, savers and borrowers. The following activities are treated as fund
based services:
i) Leasing finance is a financial intermediary service provided by a
leasing company for the procurement of asset through lease. Lease is an option for
corporate enterprises to conserve capital because, in effect, they obtain 100 percent
finance for obtaining assets.

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Scope of Financial Services

Traditional Approach Modern Approach

Fund Based Activities Fee Based Activities

(Assets Based) (Non-fund)
Leasing Finance
Credit Rating
Hire Purchase Merchant Banking
Factoring Managing of public issue
Venture Capital Portfolio Management
Forfeiting Project Counselling
Underwriting of public issue Advisory Service

Mutual funds Loan Syndication

Bills discounting

Foreign Exchange Service Intermediation

Housing Finance Depository Services

Insurance Services Other Services

Project advisory service

Clearance of Government Approval

Mergers and acquisition

Capital Structuring service

Management advisory Service

Insurance

Collection of Income on service

Other Services

ii) Hire purchase refers to term loans provided for the purchase of
fixed assets and consumer durables. Under this service provided by specialised hire
purchase companies, financial institutions and commercial banks. Under this system

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the buyer gets the facility of paying the amount in instalment to buy the asset and the
seller is able to sell more goods.

iii) Factoring: Factoring is a financial institution which provides financial service called
Factoring. Factoring means purchase of book-debts or conversion of credit sales into
cash. Factoring is an arrangement in which receivable on account of sale of goods or
services are sold to the factor at a certain discount. Factors collect receivables and also
advance cash against receivable to solve the client firm's liquidity problems.

iv)Forfeiting: It is a type of finance of receivables pertaining to international trade.

Forfeiting is a source of trade finance, which enables exporters to get funds from the
forfeiter on transferring the right to recover the debts from the importer.

v) Venture capital is a type of private equity capital typically provided

by professional, outside investors to new, highly potential and growth companies in the
interest of taking the company to an IPO or trade sale of the business. Venture capital
finance may be provided by wealthy individual investors, mutual fund companies,
investment banking firms, insurance companies, etc.

vi) Underwriting is an agreement, entered into by a

company with a financial agency, in order to ensure that the public will subscribe for
the entire issue of shares or debentures made by the company. Underwriter agrees to
buy that part of the company issues, which are not subscribed by the public.

vii) : Mutual fund is an investment vehicle that is made up of a pool of

funds collected from many investors for the purpose of investing in securities. Every
mutual fund is managed by a fund manager.

viii) One of the methods of providing credit to customers by bank is

by discounting of commercial bills at prescribed discount rate. The discounting of bills
is a widely used source of short-term finance in the Indian Corporate sector.

ix) This service is mainly provided by commercial banks. It

includes purchase and sale of foreign funds by electronic media.

x) Housing Finance service is provided by housing Finance

institutions. Housing Finance involves extending finance for the setting up of housing
units.

xi) Insurance is a financial service which involves the transfer of

loss exposure of several entities into a common pool and the redistribution of the cost
of actual losses among the members of the pool.

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b) - In fee based financial service, no
money is directly involved in the transaction. In fee based services the financial
institutions provide various financial services and levied fees as a charge of rending
financial services. Following are the been based services provided by banking and non-
banking financial institutions:

i) Credit rating gives an idea about the financial strength of the

company issuing securities which is useful to the investors, corporate, banks
and other financial institutions.
ii) Merchant bankers transform capital from those who own
it to those who use it. They provide various services like underwriting,
portfolio management, loan syndication, consultancy, advisory, issue, etc.
iii) Portf Portfolio management means
maintaining proper combination of securities (equity and debt) in a manner
that they give maximum return to the client.
iv) This service is provided by the merchant bankers to
their client. It refers to the development of the idea of project, preparation and
technical appraisal of projects, etc.
v) Merchant bankers
provide expert advise to their clients regarding takeovers, acquisition and
mergers.
vi) Merchant bankers help their client in preparation and
submission of application for raising long term loans from Indian and foreign
countries.
vii) Merchant bankers help their clients in managing and
obtaining long term foreign currency loan like Euro, Dollar, American
Depository Receipt etc.
viii) Merchant bankers provide various kinds of
services to NRI like offering expert advice, help in choosing the shares etc.
ix) Stock broker is a
member of a recognised stock exchange who assists their clients in buying,
selling or dealing in securities.
x) Depository is the place where the securities are
deposited. Depository participant is an agent of the Depository and is
authorised to offer depository services to investors.
xi) Besides the above mentioned services, financial service
provides some other service also like business valuation, private share
valuation, clearing services etc.

2) Financial services are dynamic activities. The

economic development will be only possible with the help of financial services. At
present, it provides the following activities:
a) Capital structuring service to corporate sector

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b) Management advisory services
c) Insurance service
d) Buy back option
e) Determining optimal debt mix
f) Safe custody of securities
g) Collection of income on securities
h) Share transfer and registration
i) Clearance of government approval
j) Acting as trustees for debenture holder
k) Acting as an agent for paying interest, dividend etc.
l) Rendering project advisory services right from the preparation of the project
report till the raising of funds for starting the project with necessary
governmental approval.
m) Planning for mergers and acquisitions and assisting for their smooth carry out.
n) Recommending suitable changes in the management structure and management
style with a view to achieve better results.
o) Hedging of risks due to exchange rate risk, interest rate risk, economic risk and
political risk by using swaps and other derivative products.
p) Managing the portfolio of large public sector corporations.
q) Undertaking risk management services like insurance services, buy-back options,
etc.
r) Guiding the client in the minimization of the cost of debt and in the determination
of the optimum debt-equity mix.
s) Promoting credit rating agencies for the purpose of rating companies which
wants to go public by the issue of debt instruments etc.

There are two categories of sources of income/ revenue for a financial service
company. They are:
1) Fund based, and
2) Fee based

1) The fund based requires an investment by the financial

service institutions. They involve in providing of finance to the corporate sector.
Their income mostly comes from interest spread i.e. difference between the
interests paid and earned, lease rentals, income from investments in capital
market etc. Financial service institutions earn major part of income through fund
based activities. Moreover, fund based financial service institution has to spend
more on interest and brokerage.
2) Fee- The financial service institutions who provides different
kind of fee based activities, requires a greater knowledge to perform these
activities. Fee based income has its source in merchant Banking, advisory

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services, custodial services, management advisory service, portfolio management
etc. Moreover, fee based income does not involve much risk but they require a
greater knowledge to perform these activities.

Q.7) Difference between fund based & Non-fund based (fee based) service?
Ans:
Non-
1) Meaning:
The fund based requires an Fees based funds, requires greater
Investment by the financial service knowledge or skill to perform different
institutions. They provide funds to kind of services.
corporate sector.

2) Income:
Income mostly comes from Internet, Income comes from the services
lease rentals, income from investments, like merchant Banking services, advisory
etc. services, custodial services, portfolio
management etc.

3)
It involves more risk. It does not involve much risk because it
needs greater knowledge to provide
services.

4) Requirement:
Financial institutions needs funds to Financial institution needs specialized
provide services. knowledge, experience, skills to provide
services.

5) Services:
It comprise all commercial banking It's services does not include
activities & other activities like commercial banking activities.
underwriting, hire purchase, seed capital
etc.

6) Money:
In fund based financial service, money In fee based financial service, no
in the form of cash is involved in the money is directly involved in the
transaction. transaction.
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7) Example:
Some of the fund based services are Some of the fee based services are
hire purchase, factoring, bills discounting, credit rating, merchant Banking, loan
venture capital, banking services etc. syndication, project counselling,
depository services etc.

Q.8) Short Note: Financial Innovation:

Ans:
Financial Innovation means advances over time in the financial instruments,
services and payment system used in the lending, borrowing of funds or service activity
rendered by financial intermediaries. These changes which include innovations in
technology, risk transfer and credit and equity generation, have increased available
credit for borrower and other services and given banks new and less costly ways to
raise equity capital.
As a result of innovations, new instruments and new products are emerging in
the capital market. The capital market and the money market are getting widened and
deepened. Moreover, there has been a structural changes in the international capital
market with the emergence of new products and innovative techniques of operation in
the capital market. Many financial intermediaries including Banks have already started
expanding their activities in the financial service sector by offering a variety of new
products.

Following are the reasons for cause of innovation in financial service industry:

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(6) (1)
Global Impact Competition

Reasons for
(5) financial (2)
To Innovation Demand
increase

(4) (3)
Economic Technolog
Liberalisatio

1) Many institutions providing financial

services including banking institution, non-banking institution and foreign
institution. It has lead to severe competition among themselves. They have to
innovate various financial products to satisfy their requirements of customers.

2) The customers of today have become smarter and more

knowledgeable. As a result, their demand and standards have also risen. In order
to meet these demands, financial institutions have come up with their own set of
innovations that they employ to achieve a high degree of customer satisfaction.

3) Improvement in computer and

telecommunication technology brings many innovations in financial service
industry. For example, ATM was a greater financial Innovation. Such innovations
are helpful to reduce the transaction costs.

4) The financial system facilitates economic activity and

growth, lower financial intermediation cost, makes innovation least costly, etc.
The economic reform process of liberalisation and globalization was introduced
in the 1990s to improve performance of all sectors and making India globally
competitive. Thus, it leads to introduce new product to survive in the sector.

5) After the entry of various financial institutions institutions

in the field, there is a decline in the profitability, to improve the profit of the
financial institution, they have to introduce new products.
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6) The ultimate reason behind financial innovations is the ever-

changing face of Global patterns, which have direct effect on the policies of all
business including financial institutions.

Thus, the growing need for innovation has assumed more importance in recent
times. This process is being referred to as financial engineering.

Engineering:
Financial engineering is the life blood of any financial ability. According to
Finnerty, "Financial engineering involves the design, the development and the
implementation of innovative financial instruments and processes and the formulation
of creative solutions to problems in finance." One of the essential characteristics of
financial engineering product is "Financial Innovation ". But not all engineered
products are innovative. They are to be different and add value to users. A financial
innovative product may be innovative today but it may eventually become a common
product in near future.

Q.9) Short Note: Financial engineering

Ans:
In general, Financial Engineering is the process through which some value is
added to the raw materials or semi-finished product so as to make it useful to the user's
or consumers. Applying this meaning of engineering, financial engineering is defined as
a process through which finance managers or intermediary institutions in financial
markets add value to existing plain vanilla products that satisfy the user needs.

According to "Financial engineering involves the design, the

development, and the implementation of innovative financial instruments and
processes, and the formulation of creative solutions to problems in finance". One of the
essential characteristics of financial engineering products is 'Financial Innovation'. But
not all engineered products are innovative. They are to be different and add value to
users. A financially innovative product may be innovative today but it may eventually
become a common product in the near future.
Factors that propagate need for (causes of) Financial engineering i.e. innovation
are:
1) Stiff competition in business necessitates smarter financial
arrangements. Economy achieved in fund sourcing, investment and deployment
gives hedge over the competitors and can be translated into competitive product
pricing.
2) Liberalisation: Globalization of economies has increased competition and has
brought many new concepts in finance and other aspects of management. To
survive in liberalized era, financial Innovation is needed.
3) Technology: Modern technology has changed processes of transactions. Security
and legal documentation have new dimensions. Payment and approvals through
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emails and sms are catching up. Innovation in services in this respect is also
necessary.
4) With spread of higher education has made investors and
entrepreneurs smarter and demanding. They insist on fulfilment of their goals
and demand specific solutions. Stereotype products in finance are no longer
acceptable.
5) As legal processes and legislation improve, many
'security' oriented products require redesign. New aspects are to be incorporated
and product be recast.

Q.10) Explain the present scenario of financial services in India?

Ans: The financial services scenario in India in the past has undergone drastic changes.
Post reform period has witnessed remarkable improvement in the financial services
both quantitatively as well as qualitatively. The financial system of India has
significantly impacted the pace and pattern of growth with financial services
organisations responsible for the economic growth. During post reform period, every
segment of financial market of the country significantly improved. Consequent upon
the various initiatives of the RBI since the early 1990s, the Indian money market has
undergone transformation in terms of instruments, participants and technology
infrastructure leading to emergence of deep, liquid and vibrant money market. The
present scenario can be explained through following terms:
1) The main objective of the financial sector reforms
is to promote an efficient, competitive and diversified financial system in the
country. This is essential to raise the allocative efficiency of available savings,
increasing the return on investment and thus to promote Indian economy. As a
result, there are lot of changes in its money market, securities market, capital
market, debt market and the foreign exchange market. The emergence of various
financial institutions and regulatory bodies have transformed the financial
service sector from being a conservative industry to a dynamic one.
2) The process of globalisation has paved the way for
the entry of innovative and sophisticated financial products into our country.
Since the government is very keen in removing all obstacles that stand in the way
of inflow of foreign capital, the potentialities for the introduction of innovative
international financial product in India are very great. Hence, there is every
possibility of introduction of more innovative financial services in India.
3) The Finance Actually, 1992 has brought into effect
large-scale amendments in the tax structure of long-term capital gains. The
Finance Act, 1994 has given a further boost by lowering the lock-in period from 3
years to 1 year, in order to get the entitlement as a long term capital asset. The
Securities Exchange Board of India (SEBI) has liberalized many stringent
conditions so as to boost the capital and money markets.
4) The primary equity market has emerged
as an important vehicle to channelize the savings of the individuals and corporate

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for productive purpose and thus to promote the industrial and economic growth
of our nation. The number of stock exchanges in the country has gone up from 9
in 1980 to 23 in 2015. The aggregate funds raised by the industries in the
primary markets have gone from Rs.7864 crore in 1993-94 to Rs. 35559 crore in
2010-11 by IPOs.
5) There is every possibility of introducing equity
grading. The investment decisions of the investors have been based on factors
like name recognition of the company, operations of the group, market
sentiments, reputation of promoters, etc. Now, grading from the portfolio
management. Moreover, the concept of credit rating would play a significant role
in identifying the risk level of the Co-operative entity in which the investors
wants to take part. Now, it is mandatory for the non-banking financial companies
to get credit rating for their debt instruments. In India, four major credit rating
agencies are available :
a) Credit rating Information Services of India Ltd (CRISIL)
b) Credit Analysis and Research Ltd (CARE)
c) Investment Information and Credit Rating Agency (ICRA), and
d) Duffy Phelps Credit Rating Pvt. Ltd (DCR India).

Q. 11) New financial products & services after LPG?

Ans: Today, the importance of financial services is gaining prominence all over the
world. As a result of innovations, new instruments and new products are emerging in
the capital market. Many financial intermediaries including Banks have already started
expanding their activities in the financial service sector by offering a variety of new
products. Some of the products and services are as follows :
1) Merchant bankers transform capital from those who own it
to those who use it. They provide various services like underwriting, portfolio
management, loan syndication, consultancy, advisory, issue, etc.

2) Leasing finance is a financial intermediary service provided by

a leasing company for the procurement of asset through lease. Lease is an option
for corporate enterprises to conserve capital because, in effect, they obtain 100%
finance for obtaining assets.

3) Mutual fund is an investment vehicle that is made up of a pool of

funds collected from many investors for the purpose of investing in securities.
Every mutual fund is managed by a fund manager.

4) Merchant bankers help their client in preparation and

submission of application for raising long term loans from Indian and foreign
countries.

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Financial Service Management TYBBI-sem V
5) Factoring: Factoring is a financial institution which provides financial service
called Factoring. Factoring means purchase of book-debts or conversion of credit
sales into cash. Factoring is an arrangement in which receivable on account of
sale of goods or services are sold to the factor at a certain discount. Factors
collect receivables and also advance cash against receivable to solve the client
firm's liquidity problems.

6) Forfeiting: It is a type of finance of receivables pertaining to international trade.

Forfeiting is a source of trade finance, which enables exporters to get funds from
the forfeiter on transferring the right to recover the debts from the importer.

7) Venture capital is a type of private equity capital typically

provided by professional, outside investors to new, highly potential and growth
companies in the interest of taking the company to an IPO or trade sale of the
business. Venture capital finance may be provided by wealthy individual
investors, mutual fund companies, investment banking firms, insurance
companies, etc.

8) Custodial services provide agency services like safe keeping

of shares and debentures, collection of interest and dividend and reporting of
matters on corporate developments and corporate securities of foreign investors.

9) Financial intermediaries particularly banks have

set up corporate advisory service branches to render services exclusively to their
corporate customers. Recently, they are providing new kinds of finance like Euro
loans, GDRs etc to the corporate customers.

10) Ne Banks have started introducing a new

reverse mortgage plan along with the insurance companies. This new products is
called 'Reverse Mortgage Enabled Annuity' Scheme. It requires an insurance
company to undertake the risk of uncertainty of life of the person availing this
scheme.

11) According derivative security is a security whose

value depends upon the value of other basic variables backing the security. In
India some forms of derivatives are in operation like forwards in forex market.

12) Market: Some of these products are yet to make

full entry in Indian markets. Following are the few products of forex markets.
They are:
a) Forward contract.
b) Options.
c) Futures.

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d) Swaps.

13) (LOC): It is innovative funding mechanism for the

importer of goods and services on differed payments terms. LOC is an
arrangement of a financing institution/ bank of one country with another
institutions/ bank to support the export of goods and services so as to enable the
importers to import on deferred payment terms. The LOC helps the exporters to
get payment immediately as soon as the goods are shipped.

Q.12) CHALLENGE FACING THE FINANCIAL SERVICE SECTOR:

Following are the important challenges faced by financial service sector.

1) The ever increasing

and improving technology that changes quite rapidly has proved to be a boon as well as
bane for many in the service industry. The political trends in the country has not been
very stable resulting in lack of strong regulatory trend.

2) Due to the ever improving technology, there has been

a shortage of experienced and qualified personnel's resulting in issues in the financial
services sector.

3) In India, each intermediary is acting as a financial super

market delivering so many financial products and dealing in different varieties of
instruments. In other countries, financial intermediaries specialize in one or two areas
only. Hence, Indian financial intermediaries can also go for specialization.

4) It is very vital that one should build up a proper data base on

the basis of which one could embark upon financial creativity. Moreover, a proper data
base would keep the financial intermediaries up to date and help to take sound
financial decisions.

5) The investors should understand the various

products and services available in the market unless there is no use of innovative
products and instruments. The financial intermediaries should educate the prospective
investors about the product through seminars, workshops, literature, advertisement,
etc.

6) The financial service sector should opt for better level of

transparency. Its disclosure requirements and the accounting practices has to be in line
with the international standards.

7) Unless a proper risk management

system is developed by the financial intermediaries, they would not be in a position to

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Financial Service Management TYBBI-sem V
fulfil the growing requirement of their customers. Hence, it is absolutely essential that
they should introduce future, Options Swaps and other derivative products which are
necessary for an efficient risk management system.

The financial services sector should rise up to the occasion to meet their challenges by
adopting new instruments and innovative means of financing so that it could play a
very dynamic role in the economy.

Q.13) Agencies Providing Financial Services?

Ans: Many agencies provide financial services like commercial banks, financial
institutions, merchant bankers, leasing and hire-purchasing companies, stock brokers,
etc.

1. Commercial banks are mainly involved in fund based activity.

They provide various loans and overdraft facilities. In addition, with that, they provide
some fee based services also, such as, project approval services, loan syndication, etc.

2. Merchant Banking services are mainly Non-fund based

activities. In attracting public savings, merchant bankers play a vital role as specialized
agencies. The trends in the primary market in India suggest that merchant bankers
have been playing a very significant role in the corporate corporate sector's drive for
mobilizing funds from the public.

3. According lease is a contractual arrangement whereby 'lessor'

grants to 'lessee' the right to use an asset in return for periodical lease rental payments.
In this arrangement, the 'lessor' buys capital equipment for the use of the 'lessee' in
accordance with the latter's requirements and specification. It is quite an advantage to
lessee as he acquires the use of asset with no initial cash outlay.

4. Hire purchase is also a method of financing equipment/

machinery purchases. The hirer purchases and and safety and assents

agrees to pay in equal periodic instalments in specific time-length. Mostly NBFV (Non-
banking Financial Companies) are involved in these activities.

5. Venture capital is equity support to fund new concepts that involve

a higher risk and at ghe same time, have high growth and profit potential. There are
more than 20 venture capital companies in publicl and private sector in India.

6. The credit rating is a specific evaluation about the credit quality of

the issue of securities. It is done for a particular financial instruments. In India, CRISIL,
ICRA, CARE and ONICRA are fully involved in the Credit Rating activities.

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Financial Service Management TYBBI-sem V
7. Non- These include consumer finance companies,
portfolio management companies, etc.

8. A mutual fund is a financial institution which mobilizes the savings

from the general public and invest the money so collected in different ways. The profits
earned by the funds are distributed to the shareholders of the fund.

9. The As a market, the Stock Exchange provides facilities for

exchange of shares into money and vies versa. It is an association which performs
through member brokers who assists, facilitate and regulate trading in securities.
Following are the functions/ services of stock exchange:

a) Liquidity: The prime function of stock exchange is to offer 'liquidity' to the

existing securities. Stock exchanges impart liquidity to the capital market
instruments so that investors can disinvest while new savers can invest and enter
the market.

b) Stock exchanges help in mobilization

of surplus funds of individuals and business firms for investment in securities.

c) Take over, acquisition or mergers are

means of expansion of businesses for companies, which are made easier through
the stock exchanges.

d) Stock exchange provides information about the

demand and market price of various securities traded in the exchange. This helps
investors to ascertain the current market prices of their holdings.

e) Stock exchange performs multiple functions, other than

mentioned above some of the functions are: ensure continuous and ready market
for securities, act as barometer of the economy, assist in primary issue, etc.

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2

Q.1) What is Merchant Banking? Explain the Objective and Features of Merchant
Banking?
Ans. INTRODUCTION
Merchant Banking services strengthen the economic development of a country as
they act as source of funds and information for corporate entities. For a rapid growth of
the economy, the role of Merchant Banking services is indispensable. These financial
institutions also act as advisory bodies to help corporations rightly get involved in
various financial activities. They manage and underwrite new issues, undertake
syndication of credit, advice corporate clients on fund raising.
Merchant bankers provide assistance to the corporate houses for setting up
industries. While bank assist industrial development by providing term loans and
guarantees for setting up units and working capital, Merchant bankers play a different
role by assisting industrial houses in the very formation of the unit and their horizontal
and vertical expansion.
These services do not come under the control of RBI, but are regulated by
Securities and Exchange Board of India (SEBI).However, banks are forming subsidiaries
to undertake Merchant Banking activity and RBI may be interested in verifying the
books of bank's subsidiaries. State Bank of India started the Merchant Banking division
in 1972. SBI was the first Indian Bank to set up a Merchant Banking subsidiary,
followed by Canara bank. Today, a number of banks have set up subsidiaries or
separate departments for this business.

MEANING
Merchant Banking is a combination of banking and consultancy services. It
provides consultancy to its clients for financial, marketing, managerial and legal
matters. Consultancy means to provide advice, guidance and service for a fee. It helps a
businessman to start a business. It helps to raise (collect) finance. It helps to expand
and modernise the business. It helps in restructuring of a business. It helps to review
sick business units. It also helps companies to register, buy and sell shares at the stock
exchange.

DEFINITIONS:
1) defines Merchant bank as "

2) The Notification of the Ministry of Finance defines a Merchant Bankers as,

management."

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Financial Service Management TYBBI-sem V

1. To assist in the capital formation in the economy.

2. To create secondary market for bills and facilitate discounting or re-discounting of
bills.
3. To assist in foreign exchange dealings within the ambit of relevant laws and
regulations.
4. To promote the venture capital technology funds and provide services to them.
5. To assist in project formulation and development.
6. To assist in modernization and diversification of business unit.
7. To assist in mobilising resources by the business enterprises.

1. Merchant banker as a manager, consultant, advisor in the process of selling, buying,

subscribing to securities and rendering corporate advisory services in relation to such
issue management.
2. Merchant Banking is the financial intermediation that matches the entities that need
capital and those that have capital for investment.
3. Merchant bankers engage in the business of issue management.
4. Merchant bankers services include the arrangement regarding selling, buying or
subscribing to securities.
5. Merchant banker mainly engaging in money market activities and lending,
underwriting and financial advice and investment services.
6. Merchant Banking is skill based activities and involves serving every financial need
of every client.
7. The Merchant banks have emphasis on fee and commission income.
8. They provide special and sophisticated services on a national and international level.
9. The organisation structure of Merchant bankers in India have the special nature of
formation, that is they are established on any one of following form:
i) Institution base
ii) Bankers base
iii) Private base, and
iv) Broker base

Q.2) Short Note: Merchant Banking in India.

Ans. In India prior to the enactment of Indian Companies Act, 1956, managing agents
acted as issue houses for securities, evaluated project reports, planned capital structure
and to some extent provided venture capital for new firms. India realized the need for
specialized merchant Banking services after the rapid growth of capital market. The
first merchant bank services were started by foreign banks, namely the National
Grindlays Bank in 1967 and to City Bank in 1970. In 1972, the Bank Commission in its
report recommended to start Merchant Banking institutions by commercial banks and
financial institutions.

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Financial Service Management TYBBI-sem V
After that, many banks were offered Merchant Banking services along with other
traditional banking services. The state Bank of India was the first Indian Bank to set up
Merchant Banking division in 1972. After that, many banks have started Merchant
Banking Divisions. The Merchant Banking gained prominence during 1983-84 due to
new issue boom.
In mid 1970s, there was a boom in the capital market with the introduction of
"Foreign Exchange Regulation Act (FERA), 1973." This created an awareness in the
investing public about the capital market. This also encourages a few commercial banks
and financial institutions to set up merchant Banking divisions. In addition, private
financial brokers also started private merchant banking organisation. Today, the
Merchant Banking set up in the country is broadly divided into the following groups.

Merchant Banking Divisions

Foreign Banks Indian Banks Financial Private

Institutions Merchant

Subsidiary A Division
Institutions within the

In the early stages, the role of merchant banking in India was largely confined to the
management of public issues of equity capital. Today, the scope of merchant Banking
has gone much beyond just issue management. Bank's merchant Banking divisions are
now engaged in providing a wide spectrum of financial and related services to their
customers. The names of some of them are :
1.
SBI Capital Market Ltd
Bank of Maharashtra
Punjab National Bank
2. bankers:
ICICI Securities Ltd
Bajaj Capital Ltd
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Financial Service Management TYBBI-sem V
Tata Capital Ltd
Reliance Securities Ltd
Kotak Mahindra Capital Co. Ltd.
3.
Goldman Sachin (India) Securities Pvt. Ltd.
Bank of America
Deutsch Equities India Pvt. Ltd.

Q.3) Difference between Merchant bank and commercial banks?

Ans. Difference between Merchant Banks and Commercial banks are as follows:
Commercial Banks Merchant Banks
1 Commercial banks are catering to The merchant banks cater to the
the needs of the common man. needs of corporate firms.
2 Any person can open a bank It cannot be done in the merchant
account in the commercial bank. bank.
3 Commercial banks provide Merchant banks provide assistance in
financial assistance in the form of raising capital in the form of equity,
term loan and working capital. preference share and syndicated loan
working capital instruments.
4 Commercial banks as their primary Merchant banks do not accept
nature of business accepts deposits deposits.
both demand and time deposits.
5 Commercial bank deals with debt It deals with equities.
related finance which includes the
activities like credit proposals,
loan sanctions, etc.
6 Commercial banks are more Merchant bank is related to the
related to secondary markets. primary market.
7 Commercial banks are asset The merchant banks are management
oriented. oriented.
8 The commercial banks generally The merchant banks are willing to
avoid risks. take the risks.
9 The commercial bank can A merchant bank can not undertake
undertake merchant banking business.
business.

Q.4) Explain the various services rendered by Merchant bankers?

Ans: The services of merchant bankers are discussed as follows :

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Financial Service Management TYBBI-sem V

12) 1)
Miscellaneous Corporate
Services Counseling
2)
11) Project
Merger and Counseling
Acquisition

3) Management of
10) debt and equity
Venture
MERCHANT
Capital
BANKING
4) Loan
SERVICES
Syndication
9)
Bought
Out Deals
5) Issue
Management
8)
7)
Portfolio
Management 6) Underwriting
Management
Of fixed Of capital Issue
deposit

1) Merchant banking institutions provide guidance to the

client on organizational goals, choice of product and market survey, forecasting a
product, cost analysis, investment decisions, pricing methods, capital management and
expenditure control, marketing strategy etc .The scope of corporate counselling is
limited to giving suggestions and options to the client and help taking actions to solve
their problems

2) Project counselling comprises preparation of project reports,

deciding upon the pattern of financing to meet out the cost of the project and
appraising the project reports with the financial institutions and banks and the validity
of the projects. Its also included filling up of application forms with significant
information for obtaining funds from financial institutions and obtaining government
approval and various procedures for implementation of the projects etc.

3) This is the major function of the

merchant banker. Merchant banker assists the companies in raising funds from the
market. The main areas of work in this regard are Instrument Designing, pricing the

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Financial Service Management TYBBI-sem V
issue, Registration of the Offer Document, Underwriting Support, Marketing of the
Issue, Allotment and Refund and Listing on Stock Exchange.

3) Loan syndication is an assistant provident by merchant

bankers to get mainly term loans for projects. It helps corporate clients to raise
syndicated loans from banks and other financial institutions. It helps the clients
to get loan for the project. For this, they provide various services towards
syndication of loans. The services may be either loan sought for long term fixed
capital or of working capital funds.

5) Issue management means management of issues involves

marketing of securities such as equity share, preference shares and debenture by
offering them to public. Merchant banks act as an intermediary to transfer capital from
those who own it to those who need it. After taking action as per SEBI guideline ,the
merchant banker organises a meeting with company representatives and advertising
agents to finalise arrangements relating to date of opening and closing of issue,
registration of prospectus, launching publicity campaign and fixing date of board
meeting to approve and sign prospectus and pass the necessary resolutions. The
merchant bankers provides issue management services for the following issues:
a) Public issue
b) Right issue
c) Debenture issue
d) Advisors to Non-Resident Issue
e) Private Placement

6) Underwriting is a guarantee given by the

underwriter that in the event of under subscription the amount underwritten, would be
subscribed by him. The companies for raising capital in the stock markets can engage a
merchant banker to implement and underwrite the process. The merchant banker
performs all the work required regarding the compliance with concerned authorities
and are aslo responsible for marketing the new stock. They ensure the minimum
subscription. In the event of shortage of public subscription ,they undertake such
shortage and relieve the firm.

7) The service of merchant

bankers regarding the management of the fixed deposit include, computation of the
amount that a company can raise by way of deposits from the public, advising the
company on terms and conditions for acceptance of fixed deposits, arranging for issue
of advertisement in newspaper, maintaining of records/registers etc.

8) Portfolio refers to investment in different kinds of

securities such as shares, debentures issued by different companies. Portfolio
management refers to maintaining proper combination of securities in manner that

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Financial Service Management TYBBI-sem V
they give maximum return to the investors. Merchant bankers helps their investors in
deciding such combination of the securities. They conduct regular market and
economic surveys.

9) A bought out deal is a deal in which the company sells its share to
agent or a merchant banker. This merchant banker then off loads or sells the shares at
an appropriate time. Bought out deals is beneficial to firms and promoters.The main
benefit are (i)easy and quick sale of securities (ii)
Bought-out deals offer flexibility for promoters to set a realistic price.

10 Funding an emerging high risk, hi-tech projects based purely on

research and development efforts is terms as venture capital financing. It is a source of
financing for hi-tech industries which use new technology to produce new products.
The services of merchant bankers includes the provision of long term start up funds for
high risk ventures promoted by unknown entrepreneurs which suffer from capital
deficiencies but have a high profit potential.

11) The merchant banker provides service on negotiating

acquisitions and mergers by offering expert valuation regarding the quantum and the
nature of consideration and other related matters.

12) Merchant banks also provides following services.

They are:
(i) Leasing
(ii) counselling to sick industrial unit
(iii) stock broking for both institutional and retail investors
(iv) Distribution of financial product
(v) asset management
(vi) investment research
(vii) commodities broking
(viii) advisory services for Joint ventures
(ix) off shore finance
(x) non-resident investment etc.

The securities and Exchange Board of India (SEBI) is the statutory body that
supervises India's Capital Market. It is mandatory for a merchant banker to register
with the SEBI. Without holding a certificate of registration granted by the securities
banker in India. As per the SEBI notification during the year 2009, number of registered
merchant bankers were 134. It includes public sector, private sector and foreign
merchant bankers.

Q.5) What are the guidelines issued by SEBI towards merchant Banking?

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Financial Service Management TYBBI-sem V
Ans: Merchant Banking in India is governed by SEBI (Merchant bankers) Regulations,
1992. These were amended from time to time. It is mandatory for a Merchant Bankers
to register with the SEBI.
1. The Merchant bankers should register according to the
categories. They are:
To carry on the activity of issue management and to act as adviser,
consultant, manager, underwriter, portfolio manager.
To act as adviser consultant, co-manager, underwriter, portfolio manager.
To act as underwriter, adviser, or consultant to an issue.
To act as adviser or consultant to an issue.

2. The SEBI has prescribed the following capital

Adequacy requirements for different categories of merchant bankers:
- Rs. 5 crore
- Rs. 50 Lakh
- Rs. 20 Lakh
: NIL

3.
An application should be moved to the SEBI in form A of the SEBI ( Merchant Bankers)
Regulations, 1992. The SEBI shall consider the application and on being satisfied issue a
certificate of Registration in form B of the Act. Within 15 days of the receipt of the
intimation from the Board, the Merchant banker shall pay a sum of Rs. 5 lakh as
registration fees. Further, to keep registration in force, he shall pay renewal fee of Rs.
2.5 lakh every three years from the fourth year from the date of initial registration.

4. Only a body corporate other than a non-banking financial company shall be eligible
to get registration as merchant banker.

5. The applicant should not carry on any business other than those connected with the
securities market.

6. All applicants for Merchant bankers should have qualification in Finance, Law or
Business management and applicant should have infrastructure like space, equipment,
manpower, etc.

7. The applicants for merchant bankers should fulfil capital adequacy (net worth)
criteria as specified by SEBI from time to time.

8. Merchant bankers should act only on authentic official information and not enter into
any transactions on the basis of rumours or on unpublished information available to
them in the course of their professional management.

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Financial Service Management TYBBI-sem V

9. SEBI has prescribed a code of conduct to the merchant bankers. The banker must
perform his duties with highest standards of integrity and fairness in all his dealings.

10. Inspection will be conducted by SEBI towards ensure that provisions of the
regulations are properly complied with and to investigate the compliance from
customers. It is obligatory on the part of merchant bankers to furnish all the details
required by investigating team.

11. An initial authorization fee, and annual fee and renewal fee may be collected by
SEBI.

12. The merchant bankers should maintain proper books of accounts and have to
submit half yearly /annual financial statement to SEBI within the time specified.

13. The merchant bankers can associate only with others who are registered under
SEBI.

14. All issues must be manages at least by one authorised banker, functioning as the
sole manager or the lead manager.

15. Every merchant banker should appointment a compliance officer.

16. SEBI can suspend/ cancel registration of defaulter merchant bankers.

Q.6) Qualities required for Merchant banker?

Ans: Merchant bankers are individual experts who organise and manage the merchant
bankers. The operations of merchant banks are, therefore influenced by the personality
trait of these individuals. For the success of merchant bank's operations, the qualities
which merchant bankers should have are discussed below:
1. Ability to analyse various aspects such as technical, financial and
economic aspects concerning the formation of an industrial project.

2. Knowledge: Through understanding of technical issue related to business,

understanding of legal and statutory requirements, knowledge of trends in stock
exchange, psychology of investing public, technological environment, financial
expertise are key things a Merchant bank must know.

3. Merchant bankers should be familiarity with primary

market, secondary market, stock market, their movement and procedure. He should
track important happening in the market on an ongoing basis.

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Financial Service Management TYBBI-sem V
4. Innovative approach in developing capital market
instruments to satisfy the Ever changing needs of investing public.

5. Integrity: Merchant bankers has valuable and confidential information of its

customers. Merchant bank has to maintain high professional standards in the present
scenario.

6 The most important personality traint of a

Merchant Bankers is his attitude towards problem solving. Positive approach to
understand the view points of others, their difficulties and their adverse circumstances
is possible only when a person is skilled in human relations particularly the inter-
personal and intra -personal behaviour. Effective communication and proper feedback
are the pre-requisite for creating a positive attitude towards problem solving.

Q.7) Short Note: Progress of Merchant bank in India.

Ans.
Till 18th Century, moneylenders, money changes, village merchants and saucers
performed the functions of banks and merchant banks. Jagat Sheth (Bengal), Habib &
Sons which is now Habib Bank, founded in 1941 now in Pakistan, we're the organised
merchant bankers in the history of India.
In 1969, merchant activity in India was originated professionally with the
merchant Banking division set up by the Grindlays Bank, the largest foreign bank in the
country. Following Grindlays Bank, Citibank set up its Merchant Banking division in
1970. Consequent to the recommendations of Banking Commission in 1972, that Indian
banks should offer merchant bank services as part of the multiple services they could
provide their clients. The state Bank of India (SBI) started the Merchant Banking
division in 1972.
The commercial banks that followed SBI were Central Bank of India, Syndicate
Bank in 1977, Bank of Barkham, Standard Chartered Bank and Mercantile Bank in 1978
and United Bank of India. United Commercial Bank, Punjab National Bank, Canara Bank
and Indian overseas Bank in late 1970s and early 1980s. ICICI started merchant
Banking activities in 1973 followed IFCI (1986) and IDBI (1991). Thus, by the end of
the 1980s there were 33 merchant bankers belonging to three major segments viz.,
commercial banks, Indian financial institutions and private firms. Merchant Banking
functions of these institutions was related only to management of new capital issues.
The number of merchant banks by the end of 1992-93 were 115 and it was
increased to 501 by the end of 1994-1995. All merchant bankers registered with SEBI
under four different categories include 50 commercial banks, 6 all India financial
institutions - ICICI, IFCI, IDBI, IRBI, Tourism Finance Corporation of India,
Infrastructure leasing and financial services Ltd and private merchant bankers. In
addition to Indian merchant bankers, a large number of international merchant
bankers like Goldman Sachs, Morgan Stanley etc are providing merchant Banking

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Financial Service Management TYBBI-sem V
services in India. In 1997, 1163 merchant banks were registered. But, in the year 2011,
only 199 merchant bankers we're there in India.

1. In India, SEBI guidelines have authorised merchant bankers to undertake issue

related activities only with an exception of portfolio management. These guidelines
have made the merchant bankers to restrict their activities.
2. RBI does not permit merchant Banking firms to do the service of underwriting, hire
purchase, leasing, money lending and portfolio management, so the same promoters
have to set up different companies for different purpose. This will increase
management cost and expertise pooling.
3. SEBI guidelines stipulate a minimum net worth of Rs. 1 crore for authorisation of
merchant bankers. Small but professional and specialized merchant bankers who do
not have a network worth of Rs. 1 crore may have to close down their business.
4. Non-co-operation of the issuing companies in timely allotment of securities and
refund of application money is another problem of merchant bankers.
5. Professional qualification focused on merchant banking is not available.
Still there us a scope for further improvements of the activities of merchant bankers.

Q.8) Explain the scope of Merchant Banking in India?

Ans: There is vast scope for Merchant bankers to increase their operations in domestic
as well as international markets.
1. Indian market is growing. Lots of new and green fried
projects are happening. Merchant bankers have lots of opportunities, space to
contribute. Indian as well as foreign markets are expected to continue in future.
2. In 1992, foreign institutional investors were allowed to
invest in capital market (both primary and secondary) and also permitting Indian
companies to directly tap foreign capital through euro issues. They news the service of
merchant bankers to advise them for their investment in India.
3. RBI prefers that commercial banks do not provide merchant Banking
services, for that purpose, the Bank has to set up separate subsidiary unit. This limits
scope of commercial banks Nd gives space to merchant bankers.
4. Financial institutions have changed their lending policies from
security orientation to project orientation. Corporate enterprise would require the
expert services of merchant bankers for project approval, financial management, etc.
5. Deb The development of debt market will offer tremendous opportunities
to merchant bankers. In India, the concept of debt market has to set to work through
National Stock Exchange(NSE) and the Over The Counter (OTC).
6. ments: The Indian capital market have introduced
many innovative products like non-convertible debentures, zero coupon bonds, triple
option bonds, floating rate bonds, secured premium notes etc. This has further
extended the role of merchant bankers as market makers for these instruments.

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Financial Service Management TYBBI-sem V
7. Corporate can do project appraisal, strategic restructuring in-
house as well. If the corporate prefer third party for such assessment, then the work
will be handed over to merchant bankers only.
8. Increased activity in business like mergers, takeover, fund
raising for government institution etc gives more opportunities to merchant bankers.

Q.9) Explain the following term: AMBI.

Ans.
Association of Merchant Bankers in India is a professional non-profit company
set up to represent the merchant banking industry. Currently the association has over
500 members. This would be a step towards establishing the association as a self-
regulatory organisation where it can implement the code of conduct on all members in
the Industry.

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