BUSINESS STUDIES

CHAPTER 4: BUSINESS SERVICES

GOOD AND SERVICE

 Services – Those separately identifiable, essentially intangible activities that provides

satisfaction of wants and are not necessarily linked to the sale of a product or another service.
 Good - Physical product capable of being delivered to a purchaser and involves transfer of
ownership from seller to consumer.

NATURE OF SERVICES

 Intangibility – Services cannot be touched, they are experimental in nature.

Quality of the offer cannot be often determined before consumption or purchase.
Hence it is important for the service providers to consciously work on creating a desired
service so that customer undergoes favourable experience.
Ex- Treatment by a doctor.

 Inconsistency – Services have to be performed exclusively each time since there is no

standard tangible product.
Different consumers have different demands and expectations – service providers need to
alter their offer to closely meet requirements of the consumers.
Ex- Mobile services.

 Inseparability – Simultaneous activity of production and consumption being performed

makes them seem inseparable.
Service providers may design a substitute for the person by using appropriate technology, but
interaction with the customer remains a key feature of services.
Ex- ATMs may replace banking clerk for the front office activities like cash withdrawal and
cheque deposit, but at the same time the presence of the customer is required, and his/her
interaction with the process has to be managed.

 Less Inventory – Services have little to no tangible components (perishable), hence cannot
be stored for future use.
Providers at the best can store some associated goods but not the service itself.
Demand and supply needs to be managed, as the service has to be performed as and when the
customer asks for it.
Cannot be performed earlier to be consumed at a later date.
Ex- Railway ticket can be stored but railway journey can only be experienced when railways
provides it.

 Involvement – Participation of the customer in the service delivery process.

Customer has the opportunity to get the services modified according to specific requirements.
DIFFERENCE BETWEEN GOODS AND SERVICES

BASIS SERVICES GOODS

Nature An activity or process – watching A physical object – video cassette
a movie in a cinema hall. of movie

Type Heterogenous Homogenous

Intangibility Intangible – doctor treatment Tangible – medicine
Inconsistency Different customers having Different customers getting
different demands – mobile standardised demands fulfilled –
services mobile phones
Inseperability Simultaneous production and Separation of production and
consumption – eating icecream in consumption – Purchasing ice
a restaurant cream from a store
Inventory Cannot be kept in stock – Can be kept in stock – train
experience of train journey journey ticket
Involvement Participation of customers at the Involvement at the time of
time of service delivery – self delivery not possible –
service in a fast food joint manufacturing a vehicle

TYPES OF SERVICES

 Business Services – Services used by enterprises for the conduct of their activities.
Ex- Banking, Insurance, Transportation, Warehousing.

 Social Services – Provided voluntarily in pursuit of certain social goals, for some
consideration to cover their costs.
May be to improve the standard of living for weaker sections of the society, to provide
educational services to the children, or to provide health care and hygienic conditions in slum
areas.
Ex- Health care and education services provided by NGOs (Non Govt. Organizations) and
govt. agencies.

 Personal Services – Experienced differently by different customers.

Cannot be consistent in nature – depends upon service provider, customer’s preferences and
demands.
Ex- Tourism, recreational services, restaurants.

BANKING SERVICES

 Bank Draft – A Bank Draft is a type of cheque. It is drawn by a bank either on its own
branch or on another bank. It is a very convenient, cheap and safe method of remitting money
from one place to another.
This is a cheque drawn by one bank against funds deposited into its account at another bank,
authorizing the second bank to make payment to the individual whose name is written on the
draft.
 It is a financial instrument through which money can be remitted from one person to another.
A bank draft can be obtained from a bank after depositing the required amount in the bank.
The bank charges some commission for issuing bank draft. There is no risk of dishonour of a
bank draft.

 Banker’s cheque or Pay order – The bank draft which is payable within the city or town.
This is a document which instructs a bank to pay a certain sum to a third party.
Such orders are normally acknowledged by bank which provides a guarantee that the payment
will be made.
A banker’s cheque or pay order is almost like a bank draft – issuing bank charges
commission.
 Real Time Gross Settlement - RTGS is a fund transfer system under which transfer of funds
takes place from one bank to another on a ‘Real Time’ and ‘Gross’ basis.
Settlement on ‘Real Time’ means there is no waiting period in transaction. Transaction is
settled as soon as it is processed. It is almost instant.
‘Gross settlement’ means transaction is made on one- to-one basis without bunching or
netting with any other transaction. Once processed, the transaction is not reversible or
revocable.
This is the fastest possible system for transfer of money through the banking system.
Transactions are settled through RBI which controls the transfers. Fee for this service are also
to be within the fee-band fixed by the RBI.

Main features –
The minimum transaction in RTGS is 2 lakhs - no upper ceiling for a RTGS.
The fees charged for RTGS transaction vary from bank from bank.
RTGS is not available at all bank branches in India.

 National Electronic Funds Transfer – Under NEFT system funds are directly transferred
from one account to another account in different banks.
The receiver and giver of funds are saved from the inconvenience of drawing cheques and
depositing the same with the bank for transfers.
NEFT is a country wide system by which an individual, firm or company can electronically
transfer funds from any bank branch to another individual, firm or company having an
account with any other bank branch in the country.
NEFT settles transactions in batches. The settlement takes place at a particular point of time.
All transactions are held till that time.

Main features –
A bank branch must be NEFT enabled to become a part of the NEFT funds transfer
network.
In order to receive funds through the NEFT system, an individual, firm or company
must have an account with a NEFT enables bank branch.
There is no minimum or maximum amount that can be transferred through NEFT
when one has a bank account.

 Bank Overdraft - Those who operate a current account can avail facility of overdraft.
Current Account holders can overdraw money over and above their credit balance for a
certain period and up to an agreed limit.
 This is a temporary facility given to the customer. Interest is charged on the amount
overdrawn by the current account holder.
Overdraft facility is very useful for business firms for meeting their short term needs for
funds. The excess amount withdrawn from the current account has to be deposited within the
prescribed period.

 Cash Credit - It is a type of loan given by bank to its customers.

A cash credit is a revolving credit arrangement wherein the bank allows the borrower to
borrow money up to a specified limit.
The bank places the specified amount to the credit of the borrower’s bank account. The
borrower withdraws money as and when required.
Interest is charged on the amount actually withdrawn by the borrower. The borrower can
deposit back money whenever he has surplus funds.
Cash Credit is provided to account holders after a certain amount of security is provided by
the account holder. This facility is given for a fixed period of time.

BANKING – TYPES OF BANK ACCOUNTS

 Savings Deposit Account: This type of bank account encourages the small savings of
households.
The deposits in this account are made by the persons who wish to save a little out of their
incomes.
Interest is paid at nominal rate, say 4 percent per annum. The rate of interest is less than that
of fixed deposit account.

 Current Deposit Account: These deposit accounts are most suitable for business
organization.
In this account, a depositor can deposit money any number of time and can withdraw it as and
when he/she requires it.
No interest is paid on these accounts, Rather, the bank may charge some service charges.
Money can be withdrawn from this account by cheque.

 Recurring Deposit (RD) Account: In this type of account a depositor deposits a fixed
amount of money on an annuity basis (say on monthly basis) for a fixed period.
This money cannot be withdrawn before the expiry of that fixed term except in special
circumstances.
Rate of interest on RD account is generally higher than that of Savings Account deposits.

 Fixed Deposit (FD) Account: Money is deposited in fixed deposit account for a fixed period,
say 1 year, 2 years, 3 years or 5 years.
The rate of interest is higher than that of savings deposits account.
The longer is the period of deposit, the higher will be the rate of interest. This is so because
banks can use the money for a longer period.
The amount of deposits is repayable by the bank after the expiry of the fixed term.
If the depositor needs this money before the specified fixed period, then banks can refund the
money deposited after charging some discount.
 Multiple Option Deposit Account: Multiple Option Deposit account is a combination of
savings account and fixed deposit account which provide specific options to the depositors.
 It is a type of Saving Deposits Account in which amount of deposit in excess of a particular
limit gets automatically transferred to Fixed Deposit Account.
And, in case sufficient funds are not available in Saving Deposit Account to honour a cheque
issued, the required amount gets automatically transferred from Fixed Deposit
Account(MOD) to the Saving Deposits Account.
The account holder has two benefits from this account – he/she can earn more interest and it
lowers the risk of dishonouring a cheque.
It is also called Multiple Option Deposit Scheme (MODS).

E-BANKING
Benefits of e-banking for customer -
 E-banking facilitates digital payments and promotes transparency in financial statements.
 Provides 24 hours, 265 days a year services to the customers of the bank.
 Customers can make some of the permitted transactions from office or house, or while
travelling via mobile telephone.
 Inculcates a sense of financial discipline – records each and every transaction.
 Greater customer satisfaction by offering unlimited access to the bank and not limited by
walls of the branch
 Less risk and greater security to the customer as they can avoid travelling with cash.

Benefits of e-banking for the bank –

 Provides competitive advantage
 Unlimited network - not limited to no. of branches since any PC connected to a modem and a
telephone having an internet connection can provide cash withdrawal needs of the customer.
 Load on branches can be reduced – establishing centralised database and taking over some of
the accounting functions.

INSURANCE – FUNDAMENTAL PRINCIPLE

 Basic principle of insurance is that an individual or a business concern chooses to spend a

definitely known sum in place of a possible huge amount involved in an indefinite future loss.
 Thus insurance can be defined as the substitution of a small periodic payment known as
premium, for a risk of large possible loss.
 Insurance is a form of risk management primarily used to safeguard against the risk of
potential financial loss.

FUNCTIONS OF INSURANCE

 Providing certainty – Provides certainty of payment for the risk of loss as there are
uncertainties of happenings of time and amount of loss.
Insurer charges premium for providing certainty.

 Protection – From probable chances of loss, since insurance cannot stop happening of a risk
or an unforeseen event but can compensate for losses arising out of it.

 Risk sharing – On the happening of a risk event, loss is shared by all persons exposed to it.
Share is obtained from every insured member by way of premiums.
  Assist in capital formation – Accumulated funds of the insurer received by way of premium
payments made by the insured, are invested in various income-generating schemes.

PRINCIPLES OF INSURANCE

 Utmost good faith – Both insurer and insured should display good faith towards each other in
regard to the insurance contract.
It is the duty of the insured to voluntarily make full and accurate disclosure of all facts,
material to the risk being proposed
It is the duty of the insurer to make clear all the terms and conditions in the contracts.
Failure to make disclosure of material facts by insured – enables contract of insurance
voidable at discretion of the insurer.

 Insurable interest – ‘It is not the house, ship, machinery, potential liability of life that is
insured, but it is the pecuniary interest of the insure in them which is insured.’
This is so that he/she will suffer financially on the happening of the event against which
he/she is insured.
In case of insurance of property – insurable interest of the insured in the subject matter of
insurance must exist at the time of happening of the event.
Not necessary to be the owner of property in order to name insurable interest.
Ex- Trustee holding property on behalf of others, has insurable interest in the property.

 Indemnity – In the event of loss, insurer undertakes to put the insured in the same position
that he occupied, immediately before the happening of the event insured against.
Insurer undertakes to compensate the insured for the loss caused to him/her due to damage or
destruction of the property insured.
Principle of indemnity is not applicable to life insurance.

 Proximate cause – An insurance policy is designed to provide compensation only for such
losses as are caused by the perils which are stated in the policy.
When loss is the result of two or more causes, proximate cause is the direct, most dominant
and most effective cause of which the loss is the natural consequence.

 Subrogation – Right of the insurer to stand in place of the insured after settlement of a claim,
as far as the right of insured is involved in respect of recovery from an alternative source.
After insured is compensated for the loss of property insured by him/her, ownership of such
property passes on to insurer – insured should not be allowed to make any profit by selling the
damaged property or in case of lost property being recovered.

 Contribution – It is the right of an insurer who has paid claim under an insurance ,to call
upon other liable insurers to contribute for loss of payment.
In case of double insurance - insurers are to share the losses in proportion to the amount
assured by each of them.
In case of loss – more than one policy on the same property will leave no right for the insured
to recover more than the full amt. of his actual loss.
In case of full amt. recovered from one insurer – right to obtain further payment from other
insurer will come to an end.
  Mitigation – It is the duty of the insured to take reasonable steps to minimise the loss or
damage to the insured property.
Insured must behave with great prudence, and not be careless just because there is an
insurance cover.
If reasonable care not taken – claim from insurance company may be lost.

TYPES OF INSURANCE

LIFE INSURANCE

 Life insurance policy was introduced as a protection against the uncertainty of life.
 Life insurance may be defined as a contract in which the insurer agrees to pay the insured, a
consideration of a certain premium either in a lump sum or by other periodical payments, or
to the person whose benefit the policy is taken, the assured sum of money, on the happening of
a specified event contingent on the human life or at the expiry of certain period.
 Life insurance also encourages savings, as the amount of premium has to be paid regularly. It
thus provides a sense of security to the insured and his dependents.

Main elements of a life insurance contract:

 Life insurance contract must have all the essentials of a valid contract – Certain
elements like offer and acceptance, free consent, capacity to enter into a contract, lawful
consideration and lawful object must be present for the contract to be valid.

 Contract of life insurance is a contract of utmost good faith – The assured should be
honest and truthful in giving information to the insurance company. He must disclose all
material facts about his health accurately to the insurer, even if he doesn’t ask him.

 Insured must have insurable interest in the life assured – In case of life insurance,
insurable interest must be present at the time when the insurance is affected. Not
necessary that the assured should have insurable interest at the time of maturity.
Ex- A person is presumed to have an interest in his own life and every part of it, a creditor
has an insurable interest in the life of his debtor, and a proprietor of a drama company has
insurable interest in the lives of the actors.

 Life insurance is not a contract of indemnity – Life of a human being cannot be

compensated, only a specific amt. of money is paid. This is why the amt. payable in the
life insurance on the happening of the event is fixed in advance. Sum of money payable is
fixed, at the time of entering into the contract.

FIRE INSURANCE

 Fire insurance is a contract whereby the insurer, in consideration of the premium paid,
undertakes to make up for any loss or damage caused by fire during a specified period
upto the amt. specified in the policy.
 Fire insurance policy is for a period of one year, after which it is to be renewed from time
to time.
 The premium may be paid either in lump sum or instalments.
 A claim for loss by fire must satisfy the two following conditions – There must be actual
loss, fire must be accidental and non-intentional.
Main elements of fire insurance contract:

 The insured must have insurable interest in the subject matter of insurance –
Insurable interest must be present both at the time of insurance and at the time of loss.
Ex- A person has insurable interest in the property he owns, an agent has insurable interest
in the property of his principal, a partner has insurable interest in the property of a
partnership firm.

 Contract of fire insurance is a contract of utmost good faith – Insured must be truthful
and honest in giving information to the insurance company regarding the subject matter of
insurance.
He is duty-bound to disclose all the facts regarding to the nature of property and risks
attached, accurately. Insurance company to also disclose the facts of the policy to the
insured.

 Contract of fire insurance is a contract of strict indemnity – Insurance can recover the
actual amount of loss from the insurer, in the event of loss. This is subject to the maximum
amount for which the subject matter is insured.
Ex- If a person has insured his house for ₹ 4,00,000 and the insurer is not necessarily
liable to pay that amount, even though the house may be totally destroyed by fire ; he will
pay the actual loss after deducting depreciation within the max limit of ₹ 4,00,000.
Purpose being, that a person should not be allowed to gain by insurance.

 The insurer is liable to compensate only when fire is the proximate cause of damage or
loss.

MARINE INSURANCE

 A marine insurance contract is an agreement wherein the insurer undertakes to indemnify

the insured in the manner and to the extent thereby agreed against marine losses.
 Provides protection against loss by marine perils – collision of ship with the rock, or ship
attacked by the enemies, fire and captured by pirates and actions of the captains and crew
of the ship.
 Insurer in this case is known as the underwriter, and certain sum of money is paid by the
insured in consideration for the guarantee/protection he gets.

Types of marine insurance:

 Ship or hull insurance – As ship is exposed to many dangers at the sea, the insurance
policy is for indemnifying the insured for losses caused by damage to the ship.

 Cargo insurance – While cargo is being transported by the ship, it is being subjected to
many risks like risk of theft, lost goods or on voyage etc. So an insurance policy can be
issued to cover against such risks to cargo.

 Freight insurance – If cargo does not reach the destination due to damage or loss int
ransit, the shipping company is not paid freight charges. Freight insurance is for
reimbursing the loss of freight to the shipping company, i.e. the insured.
 Main elements of marine insurance contract:
 Contract of marine insurance is contract of indemnity – Insured can recover the actual
amt. of loss from the insurer, in the event of loss. The insured is not allowed to make profit
out of marine insurance, in any circumstances. But cargo policies provide commercial
rather than strict indemnity.
The insurers promise to indemnify the insured in the manner and to the extent agreed. In
case of Hull Policy, the amt. insured is fixed at a level above the current market value.

 Contract of marine insurance is of utmost good faith – Both the insured and insurer
must disclose everything, which is in their knowledge and can affect the insurance
contract. The insured is duty-bound to accurately disclose all facts which include the
nature of shipment and the risk of damage it is exposed to.

 Insurable interest must exist at the time of loss but not necessary at the time when the
policy was taken.

 Principle of causa proxima will apply to it – Insurance company will be liable to pay
only if that particular or nearest cause is covered by the policy.
Ex- If a loss is caused by several reasons, then the nearest cause of loss will be considered.
DIFFERENCES BETWEEN LIFE, FIRE AND MARINE INSURANCE

Basis of Difference Life Insurance Fire Insurance Marine Insurance

Subject Matter Human life Physical property or assets. Ship, cargo or freight.

Element Has elements of protection Only the element of Only element of protection.
and investment or both. protection.

Insurable Interest At the time of effect of Both at time of effecting At the time when claim falls
policy – not necessary at policy and when claim falls due or at the time of loss.
the time when claim falls due.
due.
Duration Taken for longer periods Does not exceed a year. For one or period of voyage
ranging from 5 to 30 years or mixed.
or whole life.

Indemnity Sum assured is paid either Insured can claim only the Insured can claim the market
on the happening of certain actual amt. of loss from the value of hsip and cost of
event, or on maturity of insurer. Loss due to fire goods destroyed at sea – loss
policy – not indemnified. indemnified to max limit of is indemnified.
policy amt. – Indemnified.

Loss Measurement Not measurable Measurable Measurable

Surrender or paid Has surrender value or paid Does not have Does not have
up value up value
Policy amount Any amount can be insured Cannot be more than the Can be market value of ship
value of subject matter. or cargo.
Contingency of Element of certainty – Element of uncertainty – Element of uncertainty –
risk death of maturity or policy destruction by fire may not Loss at sea may not occur
is bound to happen, so happen, so claim may not be and there may be no claim.
claim is present. present.