MANAGEMENT OF FINANCIAL SERVICES unit 1

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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

MANAGEMENT OF FINANCIAL SERVICES unit 1

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