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Financial services
UNIT-I
Financial services:Concept and meaning. Classification Traditional and Modern activities;
Fund-based and nonfund based activities. Financial Engineering Need for financial
innovation; Model for new product development; new financial products and services. Current
scenario and challenges to the financial services sector in India.
FINANCIAL SYSTEM
1
The economic development of any country depends on the existence of a well organized
Financial System (F.S). It is the F.S which supplies the necessary financial inputs for the
production of goods and services, which in turn promote the well being and standard of living
of the people of the country. Thus, the F.S is a broader term which brings under its fold the
financial markets and the financial institutions which supports the system
The F.S comprises a variety of intermediary, markets and instruments that are shown in above
diagram. It provides the main means by which savings are transformed into investments. Given
its role in the allocation of resources, the efficient functioning of F.S is critical to a modern
economy.
The economic development of a nation is reflected with the progress of various economic units,
broadly classified into corporate sector, Govt. and Household sector.
While the corporate has the surplus arising from the retained earnings, they need funds for
investment in new projects, for expansion/Diversification/modernization, etc. On the other
hand, a Govt. which always faces a deficit budget needs funds for public expenditure to finance
its developmental projects and other Public Sector Undertakings (PSUs), etc. along with these
two economic units, the household sector requires funds for varied purposes. Example, for
acquiring assets. How ever the surplus funds of the household is normally more than the other
units.
While an understanding of the financial system is useful to all informed citizen, it is particularly
relevant to the financial manager. He negotiates loans from financial intermediaries, raises
resources from the financial markets and invests surplus funds in financial instruments. In a
very significant way he manages the interface between the firm and its financial environment.
An overview of Financial Service (F.Sr)
2
Financial services constitute an important component of the F.S. F.Sr through the network of
elements such as financial institutions, financial markets and financial instruments serve the
need of individuals, institutions and corporates.
It is through these elements that the functioning of the F.Sr is facilitated. In fact, an orderly
functioning of the F.S depends to a great deal on the range and the quality of the F.Sr extended
by the host of providers.
Concept of Financial Services
In general, services that are offered by the financial service companies are said to F.Services.
The term “Financial services” in a broad sense means “mobilizing and allocating savings”.
Thus, it includes all activities involved in the transformation of saving into investment.
Financial Service companies include both Asset Management Companies (AMC) and Liability
Management Companies (LMC). AMC include leasing companies, Mutual Funds, Merchant
Bankers and Issue/Portfolio managers. LMC comprise of the Bill Discounting and Acceptance
Houses.
Objectives of Financial Services

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1. Fund Raising Financial Services help to raise required fund from a host of investors,
individuals, institutes and corporate.
2. Funds Deployment An array (variety/types/collection/group) of financial services are
available in the market which helps the players to ensure an effective deployment of the
funds raised. Services such as Bills Discounting, Factoring of debtors, parking of short term
funds in the money market, credit rating, etc. are provided by financial services firms in
order top ensure efficient management of funds.
3. Specialized services The financial services sector provides specialized services such
as credit rating, venture capital financial, lease financing, factoring, mutual funds, merchant
banking, credit cards, housing finance, etc. besides banking and insurance.
4. Regulation In India, Agencies such as Securities and Exchange Board of India (SEBI),
RBI and the Dept. of Banking and Insurance of the Govt. of India, through a number of
legislations regulate the functioning of the financial services institutions.
5. Economic Growth Financial services help in speeding up the process of economics
growth and development. This takes place through the mobilization of the savings of a cross
section of peoples, for the purpose of channeling then in the productive investments.
FINANCIAL ENGINEERING
3
Financial Engineering (F.E) is the development and application of financial technology to solve
financial problems and the creation of value by the identification and exploitation of financial
opportunities. The term F.E means different things to different people.
F.E involves the design, the development and the implementation of innovative financial
instruments and processes, and the formulation of the creative solutions to the problems in
finance.
In corporate finance, the financial engineers are often called upon to develop new instruments
to secure the funds necessary for the operation of large scale businesses.
Financial Innovation
Miller describes financial innovations as unanticipated improvements in the array of financial
products and instruments that are stimulated by unexpected tax or regulatory impulses.
Silber considers financial innovation as devices used by companies to reduce the financial
constraints faced by them
A financial innovation makes the market more efficient if it reduces transaction costs,
diminishes losses, etc, Van Horne
Financial Innovation in India
1
Till the mid 1980s, the Indian financial system did not see much innovation. In the last 18
years, financial innovation in India has picked up and it is expected to grow in the years to
come, as a more liberalized environment affords greater scope for financial innovation.
The important financial innovation that have taken place in India are listed below along with
the principal factor which motivated it or fuelled its growth.
New financial products and services are as follows
Innovation
Principle motivation factor
1. Debt oriented schemes of MF
Tax Benefits
2. Partially convertible debentures and fully
convertible debentures
Pricing and interest rate regulation obtaining
under the capital issues control act
3. Deep discount/zero coupon bonds
Tax benefits
4. Puttable and callable bonds
Perceived volatility of interest rates
5. Stock index futures
Volatility of equity prices
6. Badla Transaction
Restriction on forward trading
7. Ready forwards
Restrictions under the portfolio management
scheme

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Financial services UNIT-I Financial services:Concept and meaning. Classification – Traditional and Modern activities; Fund-based and nonfund based activities. Financial Engineering – Need for financial innovation; Model for new product development; new financial products and services. Current scenario and challenges to the financial services sector in India. FINANCIAL SYSTEM1 The economic development of any country depends on the existence of a well organized Financial System (F.S). It is the F.S which supplies the necessary financial inputs for the production of goods and services, which in turn promote the well being and standard of living of the people of the country. Thus, the F.S is a broader term which brings under its fold the financial markets and the financial institutions which supports the system The F.S comprises a variety of intermediary, markets and instruments that are shown in above diagram. It provides the main means by which savings are transformed into investments. Given its role in the allocation of resources, the efficient functioning of F.S is critical to a modern economy. The economic development of a nation is reflected with the progress of various economic units, broadly classified into corporate sector, Govt. and Household sector. While the corporate has the surplus arising from the retained earnings, they need funds for investment in new projects, for expansion/Diversification/modernization, etc. On the other hand, a Govt. which always fac ...
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