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What are examples of financial services?

Financial services are a vast area covering almost any activity pertaining to the making and preserving of money. These services can very broadly, be divided into two types – fund / asset based services and fee / advisory services. Further sub-categories are retail and corporate. There is necessarily some degree of overlap between these categories, due either to the volumes handled or because of the intricacies involved.

The growing complexity of financial services and the depth of knowledge required to manage this complexity has been the prime driver for specialization Consequently, the range of financial services available today appears to be a virtual maze as illustrated below :

These individual segments are in themselves, very broad categories and each category comprises of a large number of distinct services. Like a Banyan tree, various branches have grown in complexity and have virtually become trees on their own.

A) PAYMENT SERVICES – RETAIL

At the retail level, these services stretch from the universal ATM to payment of telephone, electricity, and medical bills, to even payment of Income Tax. The varieties of payments that can be made through this medium are endless. In many countries, even taxi fare is paid through Credit / Debit Cards. Some of the widely used services are :

  1. Automatic Teller Machines
  2. CREDIT CARDS
  3. DEBIT / CHARGE CARDS
  4. BILL PAYMENT SERVICES
  5. PREPAID CASH CARDS

The difference between credit cards and debit or charge cards is that in the former the Card Issuing Company extends credit to the user from the point of purchase to the point of payment. The user need not have requisite money at the time of purchase and is given time to arrange for adequate funds. In the latter case, the user’s account will be debited on use of the card and should have sufficient balance at the time of use to cover the amount spent. This curbs the tendency to over-spend.

Prepaid Cash Card are similar to pre-paid cards used for mobiles phones i.e. they can be purchased for a predetermined amount and used either for making payments or for drawing cash from ATMs. Prepaid cards have proved quite useful to students as safety is ensured by limiting the amount that can be accessed through the card.

B) REMITTANCE FACILITIES

  1. PRE-PAID DRAFTS
  2. TRAVELER’s CHEQUES
    Financial Companies / Banks offer pre-paid drafts / TCs in addition to their regular channels for remitting funds. With the coming of age of Credit / Debit cards, TCs have lost much of their relevance as a safe mode of carrying money. However, they are still used extensively by international travelers, due to their widespread acceptability.

C) INVESTMENT ACTIVITIES – RETAIL

  1. MUTUAL FUNDS
  2. CHIT FUNDS
  3. STOCK BROKERING
  4. PORTFOLIO MANAGEMENT (PRIVATE BANKING)
    The large number of mutual funds which have cropped up in the last two decades is evidence of the growing maturity of the retail investor, who is no longer satisfied with the plain vanilla products offered by Banks earlier, i.e. fixed deposits and savings accounts. Mutual funds offer a wide range of investments in debt and equity markets promising substantially higher returns by way of revenue in addition to gains from capital increase in value of investment.

Portfolio management is of two types. In the first category, i.e. advisory, the portfolio manager merely proffers advice regarding the investment options available to his client and it is upto the client to take or refuse the advice. In the second category the client hands over a part of or even his entire portfolio of securities / funds to the fund manager who then makes the investment, monitors the value, takes a decision to disinvest or continue and delivers the net gains periodically to the client.

Private banking, which is an offshoot of portfolio management, pertains to provision of custom-tailored services to high net-worth individuals based on a thorough understanding of the client’s financial goals. The services can include planning for wealth management (tax optimisation, estate and local or cross border retirement planning) investment management, art banking etc. etc. All these activities are normally fee based. However in some cases, fees are fixed on the basis of a percentage of the profits made on the portfolio.

D) INSURANCE
Although, the list appears to be small, this is one of those branches, which has become a full tree in itself. The sub-branches are many and quite specialised covering almost all aspects, e.g. insurance for loss of life, health, medical expenditure, accident, property, vehicle, household goods, jewelry, travel, etc. and almost all imaginable risks like fire, theft, floods, riots, earthquake, etc.

Products too have become increasingly complex and life insurance today, has moved away from covering risk to life and limb alone to becoming complex investment instruments providing a variety of saving / tax benefits.

E) CONSUMER CREDIT

  1. HIRE-PURCHASE
  2. HOUSING FINANCE
  3. LEASE-FINANCE
  4. KISSAN CREDIT CARD
    Consumer credit has spread rapidly from metros to even remote rural areas. Today, housing and consumer finance is driving the growth of credit in the economy – a natural outcome as the country’s economic development gathers momentum.

The variety of consumer credit available is quite mind boggling, ranging from housing finance to loans for travel, wedding, education, medical expenditure, purchase of all manner of goods and services. The low level of overall default and simplicity of assessment has made consumer credit the most active arena of intense competition between various banks and other financial agencies.

F) OTHERS

  1. CUSTODIAL SERVICES
  2. TAX ACCOUNTING
  3. TRUSTEES
  4. VALUATION OF PROPERTIES
    Custodial services range from providing lockers to maintenance of securities. Financial firms also provide individual accounting solutions / services on a regular retainership basis. Occasionally Banks, and frequently financial / legal firms are appointed as trustees to look after the financial interest of particular person(s) for a specified period.

G) RECEIVABLE MANAGEMENT

  1. FACTORING
  2. FORFAITING
  3. REDISCOUNTING OF BILLS / REFINANCING
  4. ESCROW SERVICES
    At the Corporate level, receivable management is the neural network, which controls the overall activity of the unit. Banks normally advance against various types of receivables. Additionally, factoring firms discount bills of corporates either with or without recourse for a pre-determined fee.

Forfaiting is similar to factoring except that it is restricted to export receivables and is without recourse to the seller i.e. exporter, and generally used for medium and long term export bills.

Apart from providing direct advances against receivables, several financial institutions e.g. SIDBI, IDBI etc. re-discount bills of corporates already discounted by a primary lender.

Escrow services are provided for collection of cash funds from a large number of sources e.g. toll collections. Most receivable services are fee based although the practice of up-front discount is also fairly common.

H & I) INVESTMENT ACTIVITIES & FUNDING OPTIONS – CORPORATE

  1. CERTIFICATE OF DEPOSITS (CDs)
  2. MONEY MARKET OPERATIONS
  3. PORTFOLIO MANAGEMENT
  4. BONDS / DEBENTURES
  5. COMMERCIAL PAPERS (CPs)
  6. LEASE FINANCE
  7. LOAN SYNDICATION
  8. VENTURE CAPITAL
  9. GLOBAL DEBOSITORY RECEIPTS
    The crux of financial services pertains to deployment of short and long term surplus funds and to raising suitable funds to meet requirements for different tenors. Every investment opportunity pre-supposes a funding option and they come together as part of financial services. An effective financial system requires a well-diversified structure with appropriate market instruments catering to the requirements of various categories of investors and borrowers.

Financial firms / Banks advise their clients how to invest their surplus funds or raise resources appropriate to the tenor of their requirements. They also actively participate in the process of raising funds and investing them – either on behalf of their clients or on their own accord. Over a period of time, specialized services have developed in order to cater to increasingly complex requirements. Amongst all financial services, this area is witnessing the greatest amount of innovation & customization.

The aim of Venture Capital funds is to invest in new / unproven technologies which carry a high risk, in the hope that they will become commercially successful eventually. These funds have further developed specialization in different segments e.g. software, hardware, travel & hospitality industry, etc. Quite often, in addition to money, VC funds also provide expertise, marketing design / strategy and occasionally even manage these operations at the nascent stage.

Some lease finance firms have also evolved into specialty firms focusing on core areas e.g. medical equipment, earth moving / project equipment with long-term leases, etc. etc. whereas others cover the whole gamut of fixed assets.

J) CASH MANAGEMENT & ELECTRONIC TRANSFER OF FUNDS
Cash management services too have developed considerable variety and range from simple collection accounts to daily / weekly sweep accounts, lock box accounts and controlled disbursement accounts. Increasingly sophisticated technology is enabling customization of such services, helping companies to reduce the amount of their float funds and improve overall efficiency of fund utilization.

Another benefit of technological development in the field of finance has been the electronic transfer of funds. This has greatly facilitated the direct payment of dividend warrants / interest payments from a single source to a large number of recipients.

K) MERCHANT BANKING

  1. CAPITAL ISSUES – MANAGEMENT & SERVICING
  2. MERGER / AMALGAMATION – ADVISORY
  3. CORPORATE ADVISORY SERVICES
  4. LOAN SYNDICATION
  5. PROJECT CONSULTANCY
  6. UNDERWRITING
  7. BUSINESS VALUATION
    Merchant Banking covers an enormous variety of activities – each requiring a degree of in-depth knowledge and specialisation distinct from regular banking / financial activities. Originally, most Merchant Bankers started out with a mandate to arrange and manage public issue of equity for corporates. Now, there is little they do not do – apart from direct financing / investments. Corporate advisory services are all encompassing, and can cover any aspect – from financial advice to business restructuring.

L) RISK MITIGATING ACTIVITIES

  1. INSURANCE
  2. HEDGES
  3. SWAPS
  4. OPTIONS
  5. DERIVATIVES – CREDIT / INTEREST
  6. UNDERWRITING
    The second most important are of financial services pertains to the managing and mitigation of financial risk inherent in all financial activity. Hedges, Swaps, Options, Derivatives – all are designed to cover different types of future risk due to the uncertainty of the economic environment.

These activities range from the basic forward contract hedge, employed for covering the risk of adverse foreign exchange rate movement to complex derivatives used for mitigating possible changes of either the principal value of the financial instrument or its’ income value, or both. Derivatives & Swaps are also used for mitigating the risk of concentration of exposure to a particular industry or segment.

Underwriting is normally done to cover the risk of inadequate response to a public issue, but may be extended to cover other risks related with the issue also.

M) OTHERS

  1. AUDITING
  2. TAX ACCOUNTING
  3. CREDIT RATING SERVICES
  4. INDUSTRY PROFILES
  5. INDUSTRY RATINGS
  6. VALUATION OF PROPERTIES
  7. TRUSTEES
    There is a host of financial firms providing niche or highly specialized services, including ratings of corporates on financial & industry parameters, preparation of detailed industry profiles, etc. Most such services are fee based, but many are also public services available in the form of subscription or distributed as regular publications. Many of these services are also available on customized basis.

Sources & References:

https://businessjargons.com/portfolio-management.html

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Non Banking Financial Institutions

Non – banking financial institutions or companies perform banking operations. These institutions do not have banking licenses. That is why these institutions cannot receive deposits as they do not have banking licenses. They can offer other financial services.

Non-banking financial companies perform shadow banking. These institutions must register themselves under companies Act 1956 in India. Working conditions and rules and regulations of these companies runs under rules and regulations formulated by Reserve Bank of India (RBI).

Only limited and restricted information they access which is for know your customer (KYC). Other than this these companies cannot access more informations of individuals.

Types of Non banking Financial Companies (NBFC):

  1. Asset Financial Company (AFC): This supports lending and the managing of finances related to physical assets such as automobiles, tractors, cranes, generators and so on.
  2. Investment Companies (IC): This deals with assets for management of securities.
  3. Loan Company (LC): This provides loans and advances to companies other than own.
  4. Infrastructure Financing Company: Provides credit infrastructure companies.
  5. Infrastructure Debt Fund (IDF): Provides long-term debt to infrastructure companies. It can provide currency bond of the five-year maturity to these companies.
  6. Gold Loan NBFC: In India the amount of NBFC related to gold loan is on increase. Due to rise of gold price people are going to these institutions for loans. Aggressive and faster approval and increase of loan to value provides increase of such institutions.
  7. Residuary Non banking companies (RNBC): Residuary non banking companies comes under such non banking companies that receives funds not through investment but it has its own source of money.

Functions of non banking financial companies (NBFC):

  1. It provides financial and banking services to people without banking licenses.
  2. Demand deposits are no for NBFCs.
  3. Banks perform payment in terms of loan and then go for settlement, but NBFC has no right in this.
  4. It cannot issue checks.
  5. It cannot enagae in agricultural, mineral and primary non movable sectors.
  6. 100% foreign investment allowed.

In some states of India, micro-finances comes under heavy criticism. Allegation is that they cheat poor and downtrodden with high interest and then use coercive force to collect money from them. Some small and micro finances evaporated after an allegation of irregular activities. A stronger and stringent measure and action is the need for the hour.

There are allegation that many small finances illegal take money from people in the name of refunding them on higher intrest rates and when the payment time comes they and their offices disappear all of a sudden. It needs a stronger law and stronger and vigilant law enforcing authorities to disperse these illegal activities.

People on the other hand needs to acknowledge and invest their hard earned money in good sources. Especially in nationalised banks which RBI and Governement of India recognises. It is important for people to seek entire details of these instituions before investment.

Article Updated on 3 April 2019
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Basel II Risk Management

Basel Accords are suggestions and rules and regulations with which banking industries should perform. Banking rules and regulations begin with Basel I, Basel II and now Basel III. During the year 2015 when this article wrote by me during that time Basel II was used by many banks and now slowly they are moving to the Basel III.

The Basel committee comprised of G-20 countries and other prominent countries of reserve banks heads or central banks’ head. The suggestions of this committee are for recommendation only but most of the member nations find it easy and good at administration to implement these policies.

These policies update itself through more and more Basel accords that are going to the stage of understanding present-day banking rules and regulations. Many organisations and nation tend to implement these suggestions or at times mould it with their national concern to make a better place for most the people who use banking standards.

It tires to advice banking industries to have minimum capital levels so that it can fight against any such emergencies of liquidity of funds. it removes competitive spirits among bank of different nations and thus create one of most standardise banking management.

In the Basel I accord the existing capitals such as shares, bank reserves comes into mind when calculating banking reserves. In Basel II hybrid capitals of banks such as time duration of loans, and other banking liquidity measurements come into force. In this Basel accord risk of capitals comes into consideration while calculating liquidity ration of banks.

It looks for credit rating and the higher it is safer for banks and the lower is vice versa. Banks are physical institution and in order to observe and manage absolute risks one need to understand the physical risks such as whether the building of bank is of its own or is at rented and then what are cash flow in terms of liquidity risks and what is the current liquidity value, and legal risks in terms of bad loans and how much time it is taking to solve this.

All of these comes under financial statements, calculate risk exposures and assessment of risks and management of it provide adequacy of judgement for calculation of capital adequacy that is maintained inside the banking system.

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Chit Fund Cheating Cases

Chit Funds are such financial organisation which collects money from people and lured them to provide them with higher terms and returns. In this way mostly illiterate people deposit money in order to have higher amount of return. What it utimately did is that these companies are not registered with Government of India but the poor and illiterate does not know this and in this way after accumulating all of these money these companies moved away from that location within darkness and downtrodden and thei dreams in complete tatters.

Chit Funds theme are there in every house hold when people of some experience and honsety of that locality used to fund these money from the people and then lend these money to others and the money accured from these intrests equally divided among depositors during some holy occasion such as during Kumar Purnima or any related occasion.

All of these are going on for ages but most of these poeple are from the same locality and stays there for ages and those have honest propostion. Those persons who stays inside that location, knows that fund raiser so there is in noway one can escape from that location.

On the other hand when we do see and find information about chit fund cases those companies came from nowhere and people have hardly any idea about those companies and still, eple depend on them and believe them and that becomes extremely surprise denomination as funding money to an unknown institution itself one need to know about that in complete detail.

Poeple must check where that compnay and what are the origins of that compnay as this is a must for these people as their hard earned money is going to be invested here and for this one need to be extremely cautious about it and one should deeply check up the rigin and authenticity of that chit fund company in which they deposit their hard earned money for.

it is not the same as that of depositing the money with the person in your locality as you know that person but in the case with chit fund company one need to exactly and completely understand from where these companies have reached and what are the motives of these companies for.

If some one have no access to all of these then he or she could approach to the person whom they believe and investigate about that particular chit fund company and then move forward and find out whether these are the well established company or mere cheat companies aiming to cheat people through the gate of chit fund.

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