Introduction
The Indian financial services industry has undergone a metamorphosis since1990. Before its emergence, the commercial banks and other financial institutions dominated the field and they met the financial needs of the Indian industry. It was only after the economic liberalization that the financial service sector gained some prominence. Now, this sector has developed into an industry. In fact, one of the world’s largest industries today is the financial services industry.
Financial service is an essential segment of the financial system. Financial services are the foundation of a modern economy. The financial service sector is indispensable for the prosperity of a nation.
Meaning of Financial Services
In general, all types of activities that are of financial nature may be regarded as financial services. In a broad sense, the term financial services mean mobilization and allocation of savings. Thus, it includes all activities involved in the transformation of savings into investment.
Financial services refer to services provided by the finance industry. The finance industry consists of a broad range of organizations that deal with the management of money. These organizations include banks, credit card companies, insurance companies, consumer finance companies, stockbrokers, investment funds, and some government-sponsored enterprises.
Financial services may be defined as the products and services offered by financial institutions for the facilitation of various financial transactions and other related activities.
Financial services can also be called financial intermediation. Financial intermediation is a process by which funds are mobilized from a large number of savers and make available to all those who are in need of it and particularly to corporate customers. There are various institutions that render financial services. Some of the institutions are banks, investment companies, accounting firms, financial institutions, merchant banks, leasing companies, venture capital companies, factoring companies, mutual funds, etc. These institutions provide a variety of services to corporate enterprises. Such services are called financial services. Thus, services rendered by financial service organizations to industrial enterprises and to ultimate consumer markets are called financial services. These are the services and facilities required for the smooth operation of the financial markets. In short, services provided by financial intermediaries are called financial services.
Key Understanding
Commercial banks are the heart of our financial system. They hold the deposits of millions of persons, governments, and business units. They make funds available through their lending and investing activities to borrowers - individuals, business firms, and governments. In doing so, they facilitate both the flow of goods and services from producers to consumers and the financial activities of governments. They provide a large portion of our medium of exchange and they are the media through which monetary policy is effected. These facts obviou51y add up to the conclusion that the commercial banking system of the nation is important to the functioning of its economy.
Commercial banks play a very important role in our economy; in fact, it is difficult to imagine how our economic system could function efficiently without many of their services. They are the heart of our financial structure, since they have the ability, in cooperation with the Reserve Bank of India, to add to the money supply of the nation and create additional purchasing power. Banks' lending, investments, and related activities facilitate the economic processes of production, distribution, and consumption.
The major task of banks and other financial institutions is to act as intermediaries, channeling savings into investment and consumption: through them, the investment requirements of savers are reconciled with the credit needs of investors and consumers.
If this process of transference is to be carried out efficiently, it is absolutely essential that the banks are involved. Indeed, in performing their tasks, they realize important economies of scale: the savings placed at their disposal are employed in numerous and large transactions adapted to the specific needs of borrowers. In this way, they are able to make substantial cost savings for both savers and borrowers, who would otherwise have to make individual transactions with each other. However, there is more to these economies of scale than just the cost aspect.
Commercial banks have been referred to as 'department stores of finance' as they provide a wide variety of financial services. In addition to the acceptance of deposits, lending, and investing, they provide a multitude of services, including transfer of funds, collection, foreign exchange, safe custody, safe deposit locker, traveller'5 cheque, merchant banking services, credit cards, gift cheques, etc. Commercial Banks provide various securities-related services. Commercial banks in India have set up subsidiaries to provide capital market-related services, recruitment banking merchant banking, etc. Merchant banking services are activities i.e. counseling corporate clients who are in need of capital on capital structure, the form of capital to be raised, the terms and conditions of issue underwriting of the issue, the timing of the issue & preparation of the prospectus, and publicity for grooming the issue for the market. While providing these services they act as sponsors of issues, render expert advice on matters pertaining to investment decisions, render the services as corporate counseling, and advice on mergers acquisition, and reorganization.
Functions of financial services
1. Facilitating transactions (exchange of goods and services) in the economy.
2. Mobilizing savings (for which the outlets would otherwise be much more limited).
3. Allocating capital funds (notably to finance productive investment).
4. Monitoring managers (so that the funds allocated will be spent as envisaged).
5. Transforming risk (reducing it through aggregation and enabling it to be carried by those more willing to bear it).
Characteristics or Nature of Financial Services
From the following characteristics of financial services, we can understand their nature:
1. Intangibility:
Financial services are intangible. Therefore, they cannot be standardized or reproduced in the same form. The institutions supplying the financial services should have a better image and confidence of the customers. Otherwise, they may not succeed. They have to focus on the quality and innovation of their services. Then only they can build credibility and gain the trust of the customers.
2. Inseparability:
Both production and supply of financial services have to be performed simultaneously. Hence, there should be a perfect understanding between the financial service institutions and their customers.
3. Perishability:
Like other services, financial services also require a match between demand and supply. Services cannot be stored. They have to be supplied when customers need them.
4. Variability:
In order to cater to a variety of financial and related needs of different customers in different areas, financial service organizations have to offer a wide range of products and services. This means the financial services have to be tailor-made to the requirements of customers. The service institutions differentiate their services to develop their individual identity.
5. Dominance of the human element:
financial services are labor-intensive. quality financial products. Financial services are dominated by the human element. Thus, It requires competent and skilled personnel to market the
6. Information based:
The financial service industry is an information-based industry. It involves the creation, dissemination, and use of information. Information is an essential component in the production of financial services.
Importance of Financial Services
The successful functioning of any financial system depends upon the range of financial services offered by financial service organizations. The importance of financial services may be understood from the following points:
1. Economic growth:
The financial service industry mobilizes the savings of the people, and channels them into productive investments by providing various services to people in general and corporate enterprises in particular. In short, the economic growth of any country depends upon these savings and investments.
2. Promotion of savings:
The financial service industry mobilizes the savings of the people by providing transformation services. It provides liability, asset, and size transformation services by providing huge loans from small deposits collected from a large number of people. In this way financial service industry promotes savings.
3. Capital formation:
The financial service industry facilitates capital formation by rendering various capital market intermediary services. Capital formation is the very basis for economic growth.
4. Creation of employment opportunities:
The financial service industry creates and provides employment opportunities to millions of people all over the world.
5. Contribution to GNP:
Recently the contribution of financial services to GNP has been increasing year after year in almost all countries.
6. Provision of liquidity:
The financial service industry promotes liquidity in the financial system by allocating and reallocating savings and investment into various avenues of economic activity. It facilitates easy conversion of financial assets into liquid cash.
Types of Financial Services
Financial service institutions render a wide variety of services to meet the requirements of individual users. These services may be summarized as below:
1. Provision of funds:
- (a) Venture capital
- (b) Banking services
- (c) Asset financing
- (d) Trade financing
- (e) Credit cards
- (f) Factoring and forfaiting
2. Managing investible funds:
- (a) Portfolio management
- (b) Merchant banking
- (c) Mutual and pension funds
3. Risk financing:
- (a) Project preparatory services
- (b) Insurance
- (c) Export credit guarantee
4. Consultancy services:
- (a) Project preparatory services
- (b) Project report preparation
- (c) Project appraisal
- (d) Rehabilitation of projects
- (e) Business advisory services
- (f) Valuation of investments
- (g) Credit rating
- (h) Merger, acquisition, and reengineering
5. Market operations:
- (a) Stock market operations
- (b) Money market operations
- (c) Asset management
- (d) Registrar and share transfer agencies
- (e) Trusteeship
- (f) Retail market operation
- (g) Futures, options, and derivatives
6. Research and development:
- (a) Equity and market research
- (b) Investor education
- (c) Training of personnel
- (d) Financial information services.
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