Definition of Financial Services

As per section 65(10) of the Finance Act, 1994, “banking and financial services” means the following services provided by a banking company or a financial institution including a non banking financial company, namely;

(i)	financial leasing services including equipment leasing and hire-purchase by a body corporate;
(ii)	credit card services;
(iii)	merchant banking services;
(iv)	securities and foreign exchange (forex) broking;
(v)	asset management including portfolio management, all forms of fund management, pension fund management,   custodial depository and trust services, but does not include cash management;
(vi)	advisory and other auxiliary financial services including investment and portfolio research and advice, advice on mergers and acquisition and advice on corporate restructuring and strategy; and
vii)	provision and transfer of information and data processing.

Financial services can be defined as the products and services offered by institutions like banks of various kinds for the facilitation of various financial transactions and other related activities in the world of finance like loans, insurance, credit cards, investment opportunities and money management as well as providing information on the stock market and other issues like market trends

Financial services refer to services provided by the finance industry. The finance industry encompasses a broad range of organizations that deal with the management of money. Among these organizations are banks, credit card companies, insurance companies, consumer finance companies, stock brokerages, investment funds and some government sponsored enterprises.

Functions of Financial Services

• Facilitating transactions (exchange of goods and services) in the economy.
• Mobilizing savings (for which the outlets would otherwise be much more limited).
• Allocating capital funds (notably to finance productive investment).
• Monitoring managers (so that the funds allocated will be spent as envisaged).
• Transforming risk (reducing it through aggregation and enabling it to be carried by those more willing to bear it).

Characteristics  and Features of Financial Services

1. Customer-Specific: Financial services are usually customer focused. The firms providing these services, study the needs of their customers in detail before deciding their financial strategy, giving due regard to costs, liquidity and maturity considerations. Financial services firms continuously remain in touch with their customers, so that they can design products which can cater to the specific needs of their customers. The providers of financial services constantly carry out market surveys, so they can offer new products much ahead of need and impending legislation. Newer technologies are being used to introduce innovative, customer friendly products and services which clearly indicate that the concentration of the providers of financial services is on generating firm/customer specific services.
2. Intangibility: In a highly competitive global environment brand image is very crucial. Unless the financial institutions providing financial products and services have good image, enjoying the confidence of their clients, they may not be successful. Thus institutions have to focus on the quality and innovativeness of their services to build up their credibility.
3. Concomitant: Production of financial services and supply of these services have to be concomitant. Both these functions i.e. production of new and innovative financial services and supplying of these services are to be performed simultaneously.
4. Tendency to Perish: Unlike any other service, financial services do tend to perish and hence cannot be stored. They have to be supplied as required by the customers. Hence financial institutions have to ensure a proper synchronization of demand and supply.
5. People Based Services: Marketing of financial services has to be people intensive and hence it’s subjected to variability of performance or quality of service. The personnel in financial services organisation need to be selected on the basis of their suitability and trained properly, so that they can perform their activities efficiently and effectively.
6. Market Dynamics: The market dynamics depends to a great extent, on socioeconomic changes such as disposable income, standard of living and educational changes related to the various classes of customers. Therefore financial services have to be constantly redefined and refined taking into consideration the market dynamics. The institutions providing financial services, while evolving new services could be proactive in visualizing in advance what the market wants, or being reactive to the needs and wants of their customers.

Scope of Financial Services

Financial services cover a wide range of activities. They can be broadly classified into two, namely:

1. Traditional Activities

Traditionally, the financial intermediaries have been rendering a wide range of services encompassing both capital and money market activities. They can be grouped under two heads, viz.

1. Fund based activities and
2. Non-fund based activities.

Fund based activities: The traditional services which come under fund based activities are the following:

• Underwriting or investment in shares, debentures, bonds, etc. of new issues (primary market activities).
• Dealing in secondary market activities.
• Participating in money market instruments like commercial papers, certificate of deposits, treasury bills, discounting of bills etc.
• Involving in equipment leasing, hire purchase, venture capital, seed capital etc.
• Dealing in foreign exchange market activities. Non fund based activities

Non fund based activities:  Financial intermediaries provide services on the basis of non-fund activities also. This can be called ‘fee based’ activity. Today customers, whether individual or corporate, are not satisfied with mere provisions of finance. They expect more from financial services companies. Hence a wide variety of services, are being provided under this head. They include:

• Managing the capital issue i.e. management of pre-issue and post-issue activities relating to the capital issue in accordance with the SEBI guidelines and thus enabling the promoters to market their issue.
• Making arrangements for the placement of capital and debt instruments with investment institutions.
• Arrangement of funds from financial institutions for the clients project cost or his working capital requirements.
• Assisting in the process of getting all Government and other clearances.

2.  Modern Activities

Beside the above traditional services, the financial intermediaries render innumerable services in recent times. Most of them are in the nature of non-fund based activity. In view of the importance, these activities have been in brief under the head ‘New financial products and services’. However, some of the modern services provided by them are given in brief here under.

• Rendering project advisory services right from the preparation of the project report till the raising of funds for starting the project with necessary Government approvals.
• Planning for M&A and assisting for their smooth carry out.
• 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 better results.
• Structuring the financial collaborations/joint ventures by identifying suitable joint venture partners and preparing joint venture agreements.
• Rehabilitating and restructuring sick companies through appropriate scheme of reconstruction and facilitating the implementation of the scheme.
• Hedging of risks due to exchange rate risk, interest rate risk, economic risk, and political risk by using swaps and other derivative products.
• Managing in-portfolio of large Public Sector Corporations.
• Undertaking risk management services like insurance services, buy-back options etc.
• Advising the clients on the questions of selecting the best source of   funds taking into consideration the quantum of funds required, their cost, lending period etc.
• Guiding the clients in the minimization of the cost of debt and in the determination of the optimum debt-equity mix.
• Promoting credit rating agencies for the purpose of rating companies which want to go public by the issue of debt instrument.
• Undertaking services relating to the capital market, such as 1)Clearing services, 2)Registration and transfers, 3)Safe custody of securities, 4)Collection of income on securities.