Post on 08-Apr-2018
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MANAGEMENT OF FINANCIAL
SERVICESunit -1
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INTRODUCTION
FINANCIAL SYSTEM: it is the system of country which deals
with the financial aspects.
COMPONENTS OF FINANCIAL SYSTEM:
I. FINANCIAL MARKETSII. FINANCIAL INSTITUTIONS
III. FINANICAL INSTRUMENTS
IV. FINANCIAL SERVICES.
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I. FINANCIAL MARKETS
Primary markets: deals with new issues
Secondary markets: trading in existing securities
II. FINANCIAL INSTITUTIONS: these are the institutions which deal with the
financial instruments. They create the various instruments of credit.
III. FINANCIAL INSTRUMENTS: these are the claims against an institution or a
person for payment at a future date of sum of money in the form of
dividend/ interest.
IV. FINANCIAL SERVICES: financial services are those which help in borrowing
and funding, buying and selling securities, lending and investing, making
and enabling payments and settlements and managing risk exposures in
financial markets
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MEANING OF FINANCIAL SERVICES
All types of activities which are of f inancial nature may be
regarded as financial services.
In simple words, the term financial services means mobilizing
and allocating savings. Thus, it includes all activities in the
transformation ofsavings into investments.,
The financial services is also called financial intermediation.
Financial intermediation is the process by which funds are
mobilized from savers and make them available to the
corporate customers for investments.
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Financial
intermediaries
Money market
intermediaries( supply
short-term funds)
Commercial and
cooperative banks
Capital marketintermediaries
( term lending
institutions and
investment
institutions)
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Financial services comprise of various functions and servicesthat are provided by financial institutions in financial system.
financial services help not only in raising the required funds
but also in ensuring their efficient utilization
Financial services are provided by stock exchanges, specializedand general financial institutions, banks and insurance
companies.
Financial services are regulated by SEBI, RBI and the
department of banking and insurance, government of India
through legislations.
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ACTIVITIES COVERED BY FINANCIAL
SERVICES
I. TRADITIONAL ACTIVITIES:A. FUND BASED ACTIVITIES:
- Dealing in shares, debentures of new issues
- Dealing in secondary market activities
- Dealing in money market instruments- Involving in hire purchase, leasing etc.
- Dealing in foreign exchange market activities.
B. NON FUND BASED ACTIVITIES(FEE BASED):
These are not connected with provision of finance.
- Managing capital issues
- Arranging placement of capital and debt instruments with
investment institutions.
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- Arrangement of project finance and working capital funds
from financial institutions
- Assisting in the process getting all clearances from the
government departments.
II. MODERN ACTIVITIES: new financial products and services:
- Merchant banking
- Venture capital
- Factoring
- Forfeiting
- Credit rating- Mutual funds
- Under writing
- Stock investment
- securitization
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MODERN ACTIVITIES OF FINANCIAL
SERVICES In the recent times, the financial intermediaries render non-
fund based modern services. They are:
- Rendering project advisory services right from the project
report preparation till the raise of funds for starting the
project with necessary government approved.- Planning for mergers and acquisitions and assisting for their
smooth carryout
- Guiding corporate customers in capital restructuring
- Acting as trustees to the debenture holders- Recommending suitable changes in the management
structure and management style with a view to achieving be
the results.
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- Structuring the financial collaboration/joint ventures by
identifying suitable partner and preparing joint ventureagreement.
- Rehabilitating and restructuring sick companies through
appropriate scheme of reconstruction and facilitating the
implementation of the scheme.
- managing the portfolio of large public sector corporations.
- Undertaking risk management services like insurance services,
buy-back options.
- Promoting credit rating agencies for the purpose of rating
companies which want to go public by the issues of debt
instruments.
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Advising the clients on the question selecting the best source
of funds taking into consideration the quantum of funds
required, their cost, lending period etc.
Guiding the clients in minimizing the cost of debt and the
determination of the optimum debt-equity mix.
Under taking services relating to the capital market such as:
-clearing services
-Safe custody of services
-Collection of income on securities
-registrations and transfers.
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SOURCES OF INCOME
Fund based income comes from interest spread, lease rentals,
income from investments in capital markets and real
estate.(major income $ high risk).
Fee based income comes from merchant banking, advisoryservices, custodial services etc. fee based income doesnt
involve much risk. But it requires a lot of expertise on the part
of financial company to offer such fee- based services. On the
other hand , fund based activities involve a large share of
expenditure in the form of interest and brokerage. Ex: accepting deposits by offering a very high rate of interest.
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FINANCIAL MARKETS Financial markets are those markets which facilitate buying
and selling of financial claims, assets, services and securities.
In financial markets, funds or savings are transferred from
surplus units to deficit units.
A financial market comprises of players such as banking andnon- banking financial institutions, dealers, borrowers and
lenders, investors, depositors and agents
The above participants take an active part in driving demand
and supply in the financial market Financial market is said to exist wherever financial
transactions take place
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financial markets
Organized
market
Unorganized
market
Capital
market
Primary
market
Secondary
market
Money
market
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Organized market: in which, there are set of rules and
regulations governing financial dealings. There is high degree
of institutionalization and instrumentalisation in such market.
Un organized market: it has no adequate regulations relating
to financial regulations, financial instruments are limited in
supply, besides being non- standardized in character. The
settlement is not effective and institutionalization is alsolimited.
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MONEY MARKET: money market deals with short-term claimsor financial assets for a period of one year or less.
CAPITAL MARKET: capital market deals with those financial
assets which have maturity period of more than one year.
PRIMARY MARKET: markets that deal in new issue of
securities
SECONDARY MARKETS: markets that deal in securities, which
are already issued and available for trading in the market.
Money markets and capital markets are the important
segments of the financial market
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OBJECTIVES OF FINANCIAL SERVICES
MARKET CONFIDENCE: maintaining confidence in the financialsystem.
PUBLIC AWARENESS: promoting public understanding of the
financial system.
CONSUMER PROTECTION: securing the appropriate degree ofprotection for consumers.
REDUCTION OF FINANCIAL CRIME: reducing the extent to
which it is possible for a business carried on by a regulated
person to be used for a purpose connected with financialcrime.
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MODERN ACTIVITIES CONTROL
Advising the clients on the question selecting the best source
of funds taking into consideration the quantum of funds
required, their cost, lending period etc.
Guiding the clients in minimizing the cost of debt and the
determination of the optimum debt-equity mix.
Under taking services relating to the capital market such as:
- Clearing services
- Safe custody of services
- Collection of income on securities
- Registrations and transfers
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FINANCIAL INSTRUMENTS
Financial claims such as financial assets and securities dealt infinancial market are referred to as financial instruments.
Financial assets refer to claims of periodical payments of
certain sum of money by way of payment of principal, interest
or dividend. The payments may vary depending on the nature
of financial instrument.
E.g.: govt bonds/ govt. securities, bank deposits or debentures
issued by companies( regular receipt of interest and receipt of
principal at a specified period)
Perpetual bonds: interest at a regular intervals but theprincipal at the time of bond up of the company.
Equity shares: steady payments of dividends subject to nps.
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CHARACTERISTICS OF FINANCIAL
INSTRUMENTS
Liquidity: allows for the easy and quick conversion into cash
Marketability: facilitates easy trading of the security in the
market
Transferability: allows for easy and quick transfer ofinstruments without rigid formalities
Collateral value: allows for pledging of instruments for
obtaining loans
Maturity period: short-term/long-term/medium-term Transactions cost: implies the expenses involved in buying and
selling of instruments
ROI: allows for earning of nominal or real returns
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MAJOR CATEGORIES OF FINANCIAL
SECURITIES
Ownership securities like shares, creditor ship,securities(debentures, deposit securities/certificates,short term securities, medium and long- term securitiesetc)
Popular financial securities: public sector tax free bonds&taxable bonds, certificates of deposits(cds), commercialpapers(cps) corporate bonds, floating rate bonds, stategovt loans treasury bills etc;
Short term securities:
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Financial engineering
Financial engineering is the design, the development and theimplementation of innovative financial instruments andprocesses and formulation of creative solutions to problemsin finance.
The growing need for innovation has assumed immense
importance in the recent times This process being referred to as financial engineering
FINANCIAL INNOVATION- CAUSES:
Financial intermediaries perform the task of financialinnovation to meet the dynamically changing needs of theeconomy and to help the investors cope with an increasinglyvolatile and uncertain market place. There is a dire necessaryfor the financial intermediaries to go for innovation due to thefollowing reasons:
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Reasons: Low profitability(with traditional products)
Keen competition(due to entry of many parties)
Economic liberalization(foreign competitors)
(deregulation in the form of elimination of exchange controls
& ceiling on interest rates)
Improved communication technology( world market is linked
with the investors)
Customer service( to satisfy the new customers, new products
to be invented)
Global impact(changes in global financial market have impacton domestic market)
Investor awareness(shifting the investors interest from gold,
silver, land to financial assets like shares, debentures, mutual
funds.
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New financial products and services
Leasing: it a method of acquiring right to use any equipment
or asset for consideration.
Merchant banking: a merchant banker is a financial
intermediary who helps to transfer capital from those who
posses it to those who need it. These are service bankers andconcerned with providing non- fund based services of
arranging funds rather than providing them.
Mutual funds: a mutual fund refers to a fund raised by a
financial service company by pooling the savings from thepublic, these funds are invested in a diversified portfolio with
a view to spreading and minimizing risk.
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Factoring: it is an arrangement between a financial
institution(factor) and a business concern(client) which sells goods
and services to trade customers. As a result of this arrangement,
the factor( usually banker) undertakes collection of the clients
debts and finance the client on the basis of his accounts
receivables.
Forfeiting: it is a technique by which a forfeiter(financing agency)
discounts an export bill and pay ready cash to the exporter who
can concentrate on the export front without bothering about
collection of bills, with this the exporter is protected against the
risk of non- payment ofdebts by the importer.
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Stock invest: it is the facility available to an investor for paymentof share application money against the shares applied by him.
Securitization: it is a technique where by a financial company
converts its ill- liquid non- negotiable and high value financial
assets into securities of small value which are made tradableand transferable. It is a method of trading in securities, backed
by pools of mortgage loans. Payment of principal and interest
from the income generated by the mortgages.
Book- building: it is the process by which corporate determine
the demand and price of the securities through public bidding.
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INNOVATIVE FINANCIAL INSTRUMENTS:
COMMERICAL PAPER: short- term negotiable money marketinstrument it is like unsecured promissory note with a fixedmaturity of 3-6 months.
TREASURY BILL: money market instrument issued by the centralgovernment. It is issued at discount and redeemed at par(182 to
364 days) INTER- BANK PARTICIPATIONS(1BPS): scheduled banks issue 1bps
carrying 14-17% interest p.a(91-180 days- with or without riskparticipations)
ZERO INTEREST CONVERTIBLE DEBENTURES/BOND: these areconverted into equity shares after some period and no interest ispaid.
DEEP DISCOUNT BONDS: no interest payments and they are soldat very high discount. Eg: discounted price rs. 5,300, face value isrs. 2,00,000. maturity period is 25 years.
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Index linked guilt bonds: fixed maturity period and the value
is linked to the index prevailing on the date of maturity.
Secured premium notes: no interest for 3 years.
Medium term debentures: secured, negotiable and highly
liquid(3-5 years). Popular in German.
Variable rate debentures: compound rate of interest but
vary from time to time.
Non convertible debentures with equity warrants:
redeemed at premium in installments( 5, 6th 7,8th year
onwards)
Cumulative convertible preference shares: within 3 to 5 yrs,
these are compulsory converted into equity shares withcapital and accumulated dividend.
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Debentures with call or put features: call features:
company has the option to redeem before maturity
Put features: holder is given right to seek redemption
Easy exit bonds: Ancash bond after 18 months of its issue
Retirement bond: the investor gets an assured monthly
income for a fixed period after the expiry of the wait
period Regular income bond: attractive rate of interest payable
half- yearly. Redeemable at the end of every year
Loyalty coupons: these are entitlements to the holder of
debt for two to three years to exchange into equity at adiscount prices.
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Infrastructure bonds: giving tax benefits to the investor.
Global depository receipt( gdr): a dollar denominated instrument
traded on a stock exchange in Europe/USA or both. It represents a
certain number of underlying equity shares, which are
denominated in rupees. The shares are issued by the company to
an intermediary called depository on whose name the shares are
registered. It is depository which subsequently issues the GDRs
Convertible bonds: can be converted into equity shares at a pre
determined data either partially or fully.
Options bonds: cumulative/ non- cumulative(periodical payment
ofinterest)
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Classification of equity shares
1. Blue chip shares: established company shares
2. Defensive shares: safe return for the investors moneymore stable than others.
3. Growth shares: the shares of fast growing companies(with high eps and p/e ratios)
4. Cyclical vs. non cyclical shares: which rise and fall inprice with the state of the economy of the industries towhich they belong to called cyclical shares, otherwise
non-cyclical.5. Turn around shares: rise/fall all of sudden due to turn
round situations prevailing in companies
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6. Active shares: which have frequent and day to daydealings, they must be bought and sold at least 3 timesa week.
7. Alpha shares: most frequently traded in the market.
8. Sweat shares: which are issued to employees or workerswho contribute for the development of the company.
CHALLENGES TO THE FINANCIAL SECTOR:
1. Dearth of qualified personnel( intermediaries)
2. Lack of investor awareness
3. Lack of transparency
4. Lack of recent data
5. Lack of specialization
6. Lack of efficient risk management system
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Present scenario:
Conservation to dynamism
Concept of credit rating
Process of liberalization and globalization
Emergency of primary equity market( to channelizethe giving's)
The financial sector should meet the above
challenges by adopting new instruments and
innovative means of financing, so that it could play adynamic role in the economy.
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Thank u