The CVMU’s

SEMCOM
TYBCOM, TYBBA, TYITM SEMESTER-IV
INDIAN FINANCIAL SYSTEM

Unit-V Financial Services

Points to be covered:
 Meaning& Definition
 Features
 Importance
 Types of Financial Services – Factoring, Leasing, Venture Capital, Consumer Finance,
Housing & Vehicle Finance

Meaning& Definition of Financial Services:

 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 liberalisation 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 financial system.
 Financial services are the foundation of a modern economy.
 The financial service sector is indispensable for the prosperity of a nation.
 In general, all types of activities which are of financial nature may be regarded as
financial services.
 In a broad sense, the term financial services means mobilisation 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 organisations that deal with the
management of money.
 These organisations include banks, credit card companies, insurance companies,
consumer finance companies, stock brokers, investment funds and some government
sponsored enterprises.
Definition:
 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.
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  Financial intermediation is a process by which funds are mobilised from a large number
of savers and make them available to all those who are in need of it and particularly to
corporate customers.
 There are various institutions which 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 variety of services to corporate enterprises.
 Such services are called financial services.
 Thus, services rendered by financial service organisations 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.

Features of Financial Services:

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 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 perfect understanding between the financial service institutions
and its 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 a variety of financial and related needs of different customers in
different areas, financial service organisations 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.

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 5) Dominance of human element:
 Financial services are labour intensive.
 Thus, financial services are labour intensive.
 It requires competent and skilled personnel to market the quality financial products.

6) Information based:
 Financial service industry is an information based industry.
 It involves 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 organisations.
 The importance of financial services may be understood from the following points:
1) Economic Growth:
 The financial service industry mobilises 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 mobilises the savings of the people by providing
transformation services.
 It provides liability, asset and size transformation service by providing huge loan from
small deposits collected from a large number of people.
 In this way financial service industry promotes savings.

3) Capital Formation:
 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 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.

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  It facilitates easy conversion of financial assets into liquid cash.

 Types of Financial Services:

1) Factoring:
 Factoring is an arrangement under which the factor purchases the account receivables
(arising out of credit sale of goods/services) and makes immediate cash payment to the
supplier or creditor.
 Thus, it is an arrangement in which the account receivables of a firm (client) are
purchased by a financial institution or banker.
 Thus, the factor provides finance to the client (supplier) in respect of account receivables.
 The factor undertakes the responsibility of collecting the account receivables.
 The financial institution (factor) undertakes the risk.
 For this type of service as well as for the interest, the factor charges a fee for the
intervening period.
 This fee or charge is called factorage.

2) Leasing:
 A lease is an agreement under which a firm acquires a right to make use of a capital asset
like machinery etc. on payment of an agreed fee called lease rentals.
 The person (or the company) which acquires the right is known as lessee.
 He does not get the ownership of the asset.
 He acquires only the right to use the asset.
 The person (or the company) who gives the right is known as lessor.

3) Venture Capital:
 Venture capital simply refers to capital which is available for financing the new business
ventures.
 It involves lending finance to the growing companies.
 It is the investment in a highly risky project with the objective of earning a high rate of
return.
 In short, venture capital means long term risk capital in the form of equity finance.

4) Consumer Finance:
 Consumer financing is a financial arrangement that allows customers to purchase goods
and services at the point of sale through different types of loan options.
 It offers an alternative to credit cards and cash.
 This method enables shoppers to manage their cash flow and make purchases that might
otherwise be out of reach.
 Consumer finance encompasses a diverse set of financial products and services, including
installment plans, Buy Now, Pay Later (BNPL), revolving credit, lease-to-own, and B2B
financing to meet the unique needs of shoppers.

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 5) Housing & Vehicle Finance:
 Housing finance simply refers to providing finance for house building.
 It emerged as a fund based financial service in India with the establishment of National
Housing Bank (NHB) by the RBI in 1988.
 It is an apex housing finance institution in the country.
 Till now, a number of specialised financial institutions/companies have entered in the
filed of housing finance.
 Some of the institutions are HDFC, LIC Housing Finance, Citi Home, Ind Bank Housing
etc

DISCLAIMER:

This study material is prepared by Dr Khyati Jagatkumar Patel. The basic objective
of this material is to supplement teaching and discussion in the classroom in the
subject. Students are required to go for extra reading in the subject through library
work.

Compiled by Dr Khyati Jagatkumar Patel, Assistant Professor, SEMCOM Page 5