Divya

PROJECT REPORT ON “FINANCIAL SERVICE” SUBMITTED TO: UNIVERSITY OF MUMBAI

A project report submitted in the partial fulfillment of the requirements for the award of the degree of Bachelor of commerce – Banking and Insurance. Prepared By: DIVYA P WAGHMARE T.Y.B.B.I (SEM V) Under the guidance of Prof.Sujeet Singh.

1

K.M.AGRAWAL COLLEGE OF ARTS, SCIENCE AND COMMERCE KALYAN (W) - 421301.

UNIVERSITY OF MUMBAI (2014 – 2015) SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF DEGREE T.Y. B.COM – BANKING & INSURANCE

BY DIVYA P WAGHMARE. T.Y.BBI (SEMESTER V)

2

CERTIFICATE This is to certify that, DIVYA P WAGHMARE of T.Y.B.B.I Semester V (2014-15),Seat no:

has successfully completed project work on

“FINANCIAL SERVICE” under the guidance of Prof. SUJEET SINGH. PLACE :- KALYAN DATE :-

(Signature of Project Guide)

(Signature of Principal)

(Signature of Coordinator)

(Signature of External)

3

GUIDE CERTIFICATE

I Prof. Sujeet Singh hereby certify that Miss. DIVYA P

WAGHMARE of TYBBI Seat No. has completed the project on

“FINANCIAL SERVICE”

for the academic year 2014-2015. The information submitted is true & original to the best of my knowledge.

Place :- Kalyan . Date :-

(Signature of Project Guide)

4

DECLARATION

I DIVYA P. WAGHMARE the student of B.com Banking and Insurance semester V (2014-2015).

Hereby declare that I have completed the

FINANACIAL SERVICES project on in the academic year 2014-

2015.

This information submitted is true and original to the best of my knowledge.

Signature of student (DIVYA P WAGHMARE)

Seat No:

ACKNOWLEDEMENT 5

Life is so short that we forget to thank those people who help us in tackling various hurdles in our life. But I take my privilege in conveying heartiest gratitude to all those people, whose help enabled me to complete the project. It gives me pleasure and satisfaction to state that this presentation is not a solo effort; so many people have contributed their bit to it. It is very difficult to individualize their gratefulness here, to all whose contributions have blossomed into this presentation. My foremost gratitude and thanks exist for Prof. SUJEET SINGH who has guided, assisted or provided me with information or otherwise helped me obtain statistics & facts.

I also express my grateful thanks to respondents for giving their valuable time to make this project to success.

Last but not the least; I would like to pay our gratitude to my PARENTS, without their help and blessing I can’t take a single step in right direction.

INDEX SR NO.

CONTENTS

PAGE NO. 6

1.

INTRODUCTION

09

2.

HISTORY

12

3.

STRUCTURE

15

4.

FEATURES

18

5.

BANKING SERVICES

21

6.

INSURANCE

26

7.

OTHER FINANCIAL SERVICES

30

8.

CLASSIFICATION

39

9.

FUNDAMENTALS OF FINANCIAL SERVICES

45

10.

CAUSES OF FINANACIAL SERVICES

47

11.

VARIOUS

SERVICES

OF

FINANACIAL 49

SERVICES IN MARKETING 12.

EMERGING FUNCTION IN MARKETING OF 53 FINANCIAL SERVICES

13.

CASE STUDY

55

14.

CONCLUSION

58

15.

BIBLOGRAPHY

59

FINANCIAL SERVICES

7

CHAPTER 1 INTRODUCTION 8

The financial services sector plays a predominant role in stimulating and sustaining the economic growth of a nation. Till recently, the public sector institutions have been showing dominance in all the areas of financial services like banking, insurance, term lending, housing finance, etc in the Indian financial system. But after the initiative of economic liberalization by the government, the private as well as the foreign players are also putting rapid strides in this sector. Consequently the financial services sector in India started growing rapidly in the economy. The competitive climate in the Indian financial services sector has drastically changed over the last few years.

MEANING OF FINANCIAL SERVICES 9

Financial services mean mobilizing and allocating savings. It includes all activities involved in the transformation of savings into investment. It is also called as “financial intermediation”. Financial intermediation is a process by which funds are mobilized from a large number of savers and make them available to all those who need it and particularly to corporate customers. Thus, financial services sector is a key area and it is very vital for industrial developments. 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. As of 2009, the financial services industry represented 40% of the market capitalization of the S&P 500 in the United States.

SCOPE OF FINANCIAL SERVICE 10

Guiding corporate customers in capital restructuring. Dealing in foreign exchange market activities. Dealing in secondary market activities. Participating in money market instruments like commercial papers, certificate of deposits, treasury bills, discounting of bills. Arrangements of funds from financial institutions for the clients project cost or his working capital requirements. Planning for mergers and acquisitions and assisting for their smooth carryout. Promoting credit rating agencies for the purpose of rating companies which want to go for public issues of debt instruments

CHAPTER 2 HISTORY OF FINANCIAL SERVICES

11

The Indian financial services industry has undergone a drastic change in 1990. During the late seventies and eighties, the Indian financial services industry was dominated by commercial banks and other financial institutions which cater to the requirements of the Indian industry. Infact the capital market has played a secondary role. The economic Liberlization has brought in a complete transformation in the Indian financial services industry. Prior to the economic liberalization, the Indian financial sector was characterized by so many factors which retarded the growth of financial services sector.

INDIAN FINANCIAL SERVICE SECTOR The Indian financial services industry has experienced significant growth in the last few years. There has been a considerable broadening and deepening of 12

the Indian financial markets due to various financial market reforms Undertaken by the regulators, the introduction of innovative financial instruments in the recent years and the entry of sophisticated domestic and international players. Sectors such as banking, asset management and brokerage have been liberalized to allow private sector involvement, which has contributed to the development and modernization of the financial services sector. This is particularly evident in the non-banking financial services sector, such as equities, derivatives and commodities brokerage, residential mortgage and insurance services, where new products and expanding delivery channels have helped these sectors achieve high growth rates

SOME OF THE SIGNIFICANT FACTORS ARE AS FOLLOWS:

13

1. Excessive controls in the form of regulations of interest rates, money rates. 2. Too many controls over the prices of securities under the erstwhile controller of capital issues 3. Non-availability of financial instruments on a large scale as well as on different varieties. 4. Absence of independent credit rating and credit research agencies. 5. Strict regulation of the foreign exchange market with too many restrictions on foreign investment in Indian companies. 6. Lack of information about international developments in the financial sector.

CHAPTER 3 STRUCTURE OF FINANCIAL SYSTEM

14

The financial system implies a set of complex and closely connected institutions, agents, practices and markets. The following is a typical structure of financial system in any economy.

FINANCIAL SYSTEM

FINANCIAL INSTITUTIO NS

FINANCIA L MARKETS

FINANCIAL INSTRUMENT S

FINANCIAL SERVICES

FINANCIAL INSTITUTIONS Financial institutions are business organizations who act as mobilizes and depositories of savings, and suppliers of credit or finance. These institutions provide various financial services to the business organizations and common people. Financial institutions can be divided into banking and non banking institutions. Banking institutions deal is financial assets such as deposits, loans, and securities etc institutions deal in real assets such as machinery, equipments, stock of goods and real estate. Their activities may be general or special institutions none. These financial participate in the economy s payment mechanism by providing transaction services, money supply and credit.

FINANCIAL MARKETS Financial markets are the centers which provide facilities for buying and selling of financial claims and services. the participants in the financial markets are financial institutions, brokers, dealers, borrowers and investors. They are interlinked by the 15

laws, contracts, and communication networks. Financial markets can be divided into two parts. The primary markets which deals in new financial claims or instruments. it is also called as new issue market. The secondary market deals in securities which are already issued but the companies and investors in providing liquidity however, stock exchanges are both primary and secondary markets segments , units and insurance policies deposits. Differ from each the financial instruments other in respect of their investments characteristics. The important characteristics are liquidity, transferability, volatility, maturity, risk, and return.

FINANCIAL SERVICES A financial service is any kind of service of a financial nature offered by a financial service provider. All banking and insurance related services are included in this concept. These services are intangible and invisible. There should Financial markets are also classified as capital markets and money market. The money market deals in the short term claims with maturity period of less than a year and capital markets deals in long term claims or securities. The capital market is co extensive not only with the stock market but it is much wider than the stock market. The financial markets may be classified as organized or unorganized, formals or informal and domestic or foreign markets.

FINANCIAL INSTRUMENTS Financial instruments are claims to the payment of money in future or a periodic interval. For e.g. the important financial instruments are shares, debentures, bonds, fixed deposits etc. regular payment in the form of interest or dividend is paid by the 16

company to the investors. Directly to the ultimate savers such as equity shares, debentures secondary instruments are issued by intermediaries to the ultimate savers as bank e proximity between the service provider and the consumer in order to complete a service transaction. These services cover a wide range of economic activities. Financial services have developed to meet the needs of companies. Banking and insurance are traditional financial services. The modern financial services include over the counter services. Share transfer, pledging of shares, mutual funds, factoring, discounting, venture capital and credit cards. Financial services have started long back in western countries. In India, these services have started long back in western countries. in India, these services have started during 1980s. These services play a significant role in the changed business services.

CHAPTER 4 FEATURE OF FINANCIAL INSTRUMENT: Membership management member : 

Members and customers



Membership registration 17



Membership exit



Membership transfer



Minimum membership period

Financial management : 

Account payable



Fixed assets

Reporting system : Deregulatory reports e.g. central bank user customized reports service managementfosa (front office services activités) on-the-counter transactions (banking services) such as savings deposits, withdrawals, loans repayment, salary payments teller functions – tellers, head tellers, cash drawer and strong room cash management bosa (back office services activities) behind the scene activities such as salary processing, loans processing, journals processing, etc

DIFFERENT TYPES OF FINANCIAL SERVICES The finance industry provides a number of services to the clients. There are different types of financial services company to provide these services to different commercial sectors as well as to the individuals. There are different types of financial services like lending money for different purposes, insurances, depository services, mortgage services, investment services, credit rating services and many more. The different types of financial services 18

company jointly create one of the largest industries of the world. There are a number of financial services companies in the world. Some of these companies are the following: 

Investment services company



Bank



Insurance company



Intermediation or advisory services company



Conglomerates



Credit Rating Agencies

1. INVESTMENT SERVICE COMPANY The investment services companies provide services like asset management, hedge funds, custody services and many more. Asset management - the term usually given to describe companies which run collective investment funds. Hedge fund management - Hedge funds often employ the services of "prime brokerage" divisions at major investment banks to execute their trades. Custody services - Custody services and securities processing is a kind of 'backoffice' administration for financial services. Assets under custody in the India was estimated to $65 trillion at the end of 2008. 2. BANKS It is one of the biggest financial services companies of the world. There are different types of banks in the world. Some of these are commercial banks, 19

private banks and many more. There are some banks that work for the capital markets only. Banks provide a number of financial services to the clients. These services include depository services, lending services, credit card facilities and many more. A "commercial bank" is what is commonly referred to as simply a "bank". The term "commercial" is used to distinguish it from an "investment bank", a type of financial services entity which, instead of lending money directly to a business, helps businesses raise money from other firms in the form of bonds (debt) or stock (equity).

CHAPTER 5 BANKING SERVICES The primary operations of banks include: 

Keeping money safe while also allowing withdrawals when needed



Issuance of checkbooks so that bills can be paid and other kinds of payments can be delivered by post 20



Provide personal loans, commercial loans, and mortgage loans (typically loans to purchase a home, property or business)



Issuance of credit cards and processing of credit card transactions and billing



Issuance of debit cards for use as a substitute for checks



Allow financial transactions at branches or by using Automatic Teller Machines (ATMs)



Provide wire transfers of funds and Electronic fund transfers between banks



Facilitation of standing orders and direct debits, so payments for bills can be made automatically



Provide overdraft agreements for the temporary advancement of the Bank's own money to meet monthly spending commitments of a customer in their current account.



Provide Charge card advances of the Bank's own money for customers wishing to settle credit advances monthly.



Provide a check guaranteed by the Bank itself and prepaid by the customer, such as a cashier's check or certified check.



Notary service for financial and other documents.

OTHER TYPES OF BANK SERVICES Private banking - Private banks provide banking services exclusively to high net worth individuals. Many financial services firms require a person or family to have a certain minimum net worth to qualify for private banking services. Private banks often provide more personal services, such as wealth management and tax planning, than normal retail banks. 21

Capital market bank - bank that underwrite debt and equity, assist company deals (advisory services, underwriting and advisory fees), and restructure debt into structured

finance products.

Bank cards -

include both credit

cards

debit cards. ICICI

and

bank is the

largest

issuer

of

bank cards. Credit

card

and

machine

services

networks

-

Companies which provide credit card machine and payment networks call themselves "merchant card providers".

BANK CARDS Bank cards include both credit cards and debit cards . In India ICICI bank is the largest issuer of bank cards :  American express  Master card  Visa

BANKING SURVEY REPORT RNCOS The Indian banking sector, despite the global crisis, is still fuelling the economy. A report 'Opportunities in Indian Banking Sector', by market research company, RNCOS forecasts that the Indian banking sector will grow at a healthy compound annual growth rate (CAGR) of around 23.3 per cent till 2011. The total asset base of the 77 scheduled commercial banks (SCBs) added up to 91.8 per cent of India’s GDP (at current market prices) through the financial year 2008.

22

According to a study report by Dun and Bradstreet, around 80 per cent of the overall assets of SCBs were accounted for by 22 leading banks with a balance sheet size of above US$ 11.83 billion each. This included 16 Public Sector Banks (PSBs), 3 Private Sector Banks and 3 Foreign Banks. Deposits of private sector banks increased at a CAGR of 26 per cent during fiscal year 2004–2008, compared to the total CAGR growth of 20.5 per cent by all SCBs. Advances of private sector banks increased at a CAGR of 32 per cent against a CAGR of 30.1 per cent by all SCBs for the same period. Public sector banks accounted for above 66 per cent of the collective total income (including interest income and non-interest income) of all SCBs. Retail banking accounted for a 41 per cent share of the overall revenue generated by PSU banks while it was 36 per cent for private sector banks, and for foreign banks the share of retail banking also stood at around 36 per cent. As per figures released by the Reserve Bank of India (RBI), bank credit increased by 24 per cent till January 2, 2009, compared to the 21 per cent growth in the previous year. Credit to industry increased by 30.2 per cent till December 19, 2008, against 24.9 per cent in the same period in the previous year. Further, according to RBI data, lending by banks increased by more than 76 per cent during April-November 2008, as compared to the same period a year ago. With the credit growth, leading Indian banks are likely to increase their earnings by around 40 per cent y-o-y in the December 2008 quarter. Public sector banks are going in for a major image overhaul. With global banks getting pressurized under the economic downturn, several companies and individuals are digressing from private banks to state-owned banks. To make the most of this situation, they are adopting new strategies and technologies to attract more customers. 23

State-owned banks are now offering services like Internet banking and personalized cheque books, and evaluation of loan proposals within a specific period. Many such banks run processing centers and back offices. The State Bank of India has even introduced two-faced ATMs. Whereas, the Indian Bank has introduced wealth management services for its high net worth (HNI) clients providing various types of financial advisory and wealth management services.

HSBC BANK HISTORY HSBC Bank was founded in 1865 to serve the needs of the merchants of the China coast and finance the growing trade between China, Europe and the United States. The origins of HSBC Bank in India can be traced back to October 1853 when the Mercantile Bank of India, London and China was founded in Bombay. In 1959, The Hong Kong and Shanghai Banking Corporation (HSBC) acquired the Mercantile Bank of India and the head office of the HSBC Bank was established in Bombay (Mumbai). In 1987, HSBC Bank gave India its first ATM. Through the 1990s, HSBC Bank blossomed into one of the leading banking and financial services organizations of the world. As on June 30 24

2004, the Bank has over 110 million customers worldwide with assets over US$1,154 billion. HSBC Bank has about 10,000 offices in 76 countries and territories in Europe, the Asia Pacific region, the Americas, the Middle East and Africa.

Foreign exchange services Foreign exchange services are provided by many banks around the world. Foreign exchange services include: Currency Exchange - where clients can purchase and sell foreign currency bank notes Wire transfer - where clients can send funds to international banks abroad from India. Foreign Currency Banking - banking transactions are done in foreign currency

CHAPTER 6 INSURANCE

The insurance companies provide the clients with risk coverage services. These services are designed to 25

cover a number of risks that are related to an individual's life, property and many more. These services are not only designed to provide security but at the same time there are a number of insurance plans that are designed to provide regular income to the clients. The insurance policies can be divided in several types like general insurance, life insurance, commercial insurances and a lot more. Insurance brokerage - Insurance brokers shop for insurance (generally corporate property and casualty insurance) on behalf of customers. Recently a number of websites have been created to give consumers basic price comparisons for services such as insurance, causing controversy within the industry. Insurance underwriting - Personal lines insurance underwriters actually underwrite insurance for individuals, a service still offered primarily through agents, insurance brokers, and stock brokers. Underwriters may also offer similar commercial lines of coverage for businesses. Activities include insurance and annuities, life insurance, retirement insurance, health insurance, and property & casualty insurance. Reinsurance - Reinsurance is insurance sold to insurers themselves, to protect them

Insurance survey report by ASSOCHAM The insurance sector is one of the most promising sectors in India today. In an ASSOCHAM report— 'Insurance Sector Futuristic Growth'— stated that India's insurance sector is likely to reach US$ 46.25 billion by 2010. The report said, "The total insurance business will reach a level of US$ 46.25 billion in the next two years from the current level of US$ 1.15 billion." Private insurance business is likely to see a 140 per cent growth rate due to the aggressive marketing techniques used by them. Conversely, state-owned insurance companies would see a 35–40 per cent growth rate. India is the fifth largest life insurance market in the emerging insurance economies globally and the segment is growing at a healthy 32–34 per cent annually. According 26

to a report by research firm RNCOS—'Booming Insurance Market in India (2008– 2011)'—the total life insurance premium in India is projected to grow to US$ 259.72 billion by 2010–11.

The

general

insurance sector is

likely to grow at a

rate of 18 per cent

in 2008, compared

to 13 per cent in

2007. The 17 major

non-life

insurers

collected a total of

US$ 840.27 million

as premium in April

2008. Life Insurance Corporation (LIC) is bullish on growth and is targetting business in excess of US$ 59.14 billion by 2011–12. The government is planning to ease restrictions on foreign investments in insurance, banking and pensions, and allow foreign direct investment (FDI) of 49 per cent from the present 26 per cent.

INSURANCE UNDERWRITING Personal lines insurance underwriters actually underwrite insurance for individuals, a service still offered primarily through agents, insurance 27

brokers, and stock brokers. Underwriters may also offer similar commercial lines of coverage for businesses. Activities include insurance and annuities, life insurance, retirement insurance, health insurance, and property & casualty insurance. Some Well Known Insurers Includes: A. GOVT. COMPANIES IN GENERAL INSURANCE IN INDIA 

The new India assurance co. Ltd



The oriental Insurnce co. Ltd



The national insurance ltd



United India insurance ltd

B. PRIVATE COMPANIES IN GENERAL INSURANCE LTD 

Bajaj Allianz general insurance ltd



Icici Lombard general insurance ltd



Bharti axa general insurance ltd



Ing vysya general insurance ltd



cholamandalam general insurance ltd

C. GOVT. COMPANIES IN LIFE INSURANCE 

Life insurance corporation of India (LIC)

D. PRIVATE COMPAINES IN LIFE INSURANCE 

Max new York life co. Ltd 28



Icici prudential co. Ltd



Tata aig



Met life insurance co. Ltd



Birla sunlife insurance co. Ltd



Aviva life insurance co. Ltd



Bajaj Allianz life insurance co.ltd



Hsbc canara life insurance co. Ltd

CHAPTER 7 OTHER FINANCIAL SERVICES Intermediation or advisory services - These services involve stock brokers (private client services) and discount brokers. Stock brokers assist investors in buying or selling shares. Primarily internet-based companies are often referred to as discount brokerages, although many now have branch offices to assist clients. These brokerages primarily target individual investors. Full service and private client firms primarily assist execute trades and execute trades for clients with large amounts of capital to invest, such as large companies, wealthy individuals, and investment management funds. Private equity - Private equity funds are typically closed-end funds, which usually take controlling equity stakes in businesses that are either private, or taken private 29

once acquired. Private equity funds often use leveraged buyouts (LBOs) to acquire the firms in which they invest. The most successful private equity funds can generate returns significantly higher than provided by the equity markets Venture capital - Venture capital is a type of private equity capital typically provided by professional, outside investors to new, high-potential-growth companies in the interest of taking the company to an IPO or trade sale of the business. Angel

investment - An angel

investor or

angel

business

angel

investor in

Europe), is an affluent

individual

who provides capital for

a business

start-up,

exchange

for convertible debt or

(known or

as

a

informal

usually

in

ownership equity. A small but increasing number of angel investors organize themselves into angel groups or angel networks to share research and pool their investment capital. Conglomerates - A financial services conglomerate is a financial services firm that is active in more than one sector of the financial services market e.g. life insurance, general insurance, health insurance, asset management, retail banking, wholesale banking, investment banking, etc. A key rationale for the existence of such businesses is the existence of diversification benefits that are present when different types of businesses are aggregated i.e. bad things don't always happen at the same time. As a consequence, economic capital for a conglomerate is usually substantially less than economic capital is for the sum of its parts.

STOCK MARKETS

30

Fund raisinng by India Inc through initial public offers (IPOs) rose by a whopping 62 per cent since the beginning of 2008 to 29 May, 2008 to US$ 4.2 billion, against US$ 2.6 billion during the same period in 2006, according to global deal data provider, Dealogic. Significantly, fund mobilisation during the first quarter of 2008 was the second highest for a quarter in the Indian capital's history. In recent months, the Indian stock market has slowed down due to the global economic turmoil. However, expectations of it rebounding soon are also high. Further, according to global consultancy firm, Deloitte Haskins & Sells, the Indian economy and capital markets are expected to witness a turnaround within six to nine months. According to the initial public offering (IPO) estimates for 2009, by Thomson Reuters study, India Inc is likely to raise four times the proceeds it garnered from the primary market in 2008. As per the study, India Inc is targetting to raise a massive US$ 15.28 billion through public issues.

Furthermore, SEBI will be making it easier for companies to raise money from the stock market, by relaxing eligibility rules to facilitate faster raising of funds from existing shareholders. Presently, only companies having had a market capitalisation of above US$ 1.97 billion in the last one year are entitled to this route. SEBI plans to bring down this figure.

31

PRIVATE EQUITY

In finance, private equity is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange. Investments in private equity most often involve either an investment of capital into an operating company or the acquisition of an operating company. Capital for private equity is raised primarily from institutional investors. There is a wide array of types and styles of private equity and the term private equity has different connotations in different countries. 32

Among the most common investment strategies in private equity include leveraged buyouts, venture capital, growth capital, distressed investments and mezzanine capital. In a typical leveraged buyout transaction, the private equity firm buys majority control of an existing or mature firm. This is distinct from a venture capital or growth capital investment, in which the private equity firm typically invests in young or emerging companies, and rarely obtain majority control. According to a report by global research firm Preqin, private equity investments are likely to perk up in the second-half of 2009 and fuel the global economic recovery. "With approximately US$ 1 trillion of dry powder (term used to denote capital available for deals) available, private equity is poised to play a major role in the coming economic recovery," the report revealed. Private equity (PE) players see are bullish on investing in India as a profitable destination, expecting the inflows to be around US$ 5 billion-US$ 8 billion in the coming year. Industry experts feel that long-term investing in India is a profitable option. According to a survey by Deloitte during the last six months, sectors driven by domestic consumption and infrastructure are expected to witness a lot of activity. Sandeep Gill, managing director of Deloitte corporate finance, said, "We have observed two key points, the competitive environment for investment opportunities for PE houses is expected to ease during 2009, as smaller PE firms and hedge funds exit the market. Second, the volume of PE deals in the market will be dependent on how quickly promoters are willing to accept lower valuations." The total number of PE deals during the first five months of 2008 stood at 170, with an announced value of US$ 6.39 billion as against 159 deals amounting to US$ 4.97 billion during the corresponding period in 2008. India is among the top 10 countries in terms of value of private equity deals across the world, according to the global deal tracking firm, Zephyr. The sector is going to see a flurry of activity and investments in the coming months.

33

Many companies have ambitious plans to enter the private equity (PE) business and raise funds. Indivision India Partners is planning to raise another fund-Indivision II, with a corpus in excess of US$ 425 million raised through Indivision I. Other bigwigs planning fund raisings are the Tata and Aditya Birla groups with plans to raise US$ 350 million and US$ 250 million, respectively. In August 2008, Reliance Capital had announced setting up a US$ 1 billion PE fund. Private equity firm, Actis has raised a US$ 2.9 billion private equity fund ‘Actis Emerging Markets 3 (AEM3)’ for the emerging markets of China, India, Africa, Latin America and South-east Asia. The fund will be pumping in US$ 1 billion as investments in India over the next 3-4 years. US-based Apollo Management, with an asset base of more than US$ 20 billion, will be soon setting up shop in India. The PE firm has plans to spend around US$ 800 million in investments in Indian and the US markets. Tata Capital Ltd is planning to float a US$ 350 million private equity (PE) fund.

EMERGENCE OF PRIMARY EQUITY MARKETS Now, we are also witnessing the emergence of many private sector financial services. The capital market, which was very sluggish, has become a popular source of raising finance. The primary equity market has emerged as an important vehicle to channelise the savings of the individuals and corporates for productive purposes and thus to promote the industrial and economic growth of the country.

MUTUAL FUNDS

34

A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors and invests it in stocks, bonds, short-term money market instruments, and/or other securities. The mutual fund will have a fund manager that trades the pooled money on a regular basis. The net proceeds or losses are then typically distributed to the investors annually. Since 1940, there have been three basic types of investment companies in the United States: open-end funds, also known in the U.S. as mutual funds; unit investment trusts (UITs); and closed-end funds. Similar funds also operate in Canada. However, in the rest of the world, mutual fund is used as a generic term for various types of collective investment vehicles, such as unit trusts, open-ended investment companies (OEICs), unitized insurance funds, and undertakings for collective investments in transferable securities (UCITS). According to a report by research firm RNCOS, the Indian mutual funds retail market is presently growing at a CAGR of around 30 per cent, and is likely to touch US$ 300 billion by 2015. The growth momentum of the mutual fund industry continues in the new fiscal year (2008–09). Fund mobilisation has increased by a whopping 77.4 per cent to US$ 327.93 billion during April–June 2008, compared to US$ 184.81 billion in April–June 2007. Consequently, average Assets Under Management (AUM) of the mutual fund industry has increased to US$ 132.33 billion for June 2008, against US$ 99.86 billion in the corresponding period in 2007. Further, at approx. US$ 96 billion–US$ 98 billion in assets for February 2009, the mutual funds (MF) industry has seen a sharp increase of about 8.7 per cent in AUM since the previous month. This is also the third consecutive monthly rise in assets for the industry as a whole. As per SEBI, the mutual fund industry made an overall investment of US$ 2.14 billion in equities between January-September 2008. According to market sources, the mutual funds industry has mustered an estimated US$ 1.24 billion during the same period. In September 2008, the AUM totalled to US$ 1.10 trillion. 35

To improve government restriction and

the

capital

market,

the

is

likely to remove the

on

profit-making Navratna

mini-Ratna

undertakings

public

sector

(PSUs) from investing in

mutual funds. Life Insurance Corporation of India (LIC) has put in over US$ 2.75 billion into liquid funds of different fund houses. The amount was more than three times its similar investments made in 2008. Looking ahead, the Indian mutual funds market is estimated to grow at a CAGR of 18 per cent in the next five years, with the country's mutual funds assets expected to more than double to US$ 298.73 billion by 2012, according to a report by US-based financial services research and consulting firm, Cerulli Associates.

HSBC Mutual Fund HSBC is one of the world's leading banking giants and boasts of a 140-year history in banking services. HSBC operates in more than 70 countries across the globe and has assets of over $1.2 trillion on the consolidated group balance sheet. The investment banking and fund management businesses of the group is handled by HSBC Investments. HSBC Asset Management India Private Limited acts as the Asset Management Company to the HSBC Mutual Fund.

36

HSBC

Securities and Capital

Markets

India Private Limited,

an affiliate

of the HSBC group,

is

sponsor of the fund

and

the owns

75

percent can

stake.

Preferred

shares

be

considered

part of debt or equity.

Attributing

preferred shares to one

or the other is partially a subjective decision but will also take into account the specific features of the preferred shares. When used to calculate a company's financial leverage, the debt usually includes only the Long Term Debt (LTD). Quoted ratios can even exclude the current portion of the LTD. The composition of equity and debt and its influence on the value of the firm is much debated and also described in the Modigliani-Miller theorem. Financial analysts and stock market quotes will generally not include other types of liabilities, such as accounts payable, although some will make adjustments to include or exclude certain items from the formal financial statements. Adjustments are sometimes also made to, for example, exclude intangible assets, and this will affect the formal equity; debt to equity (dequity) will therefore also be affected. Financial economists and academic papers will usually refer to all liabilities as debt, and the statement that equity plus liabilities equals assets is therefore an accounting identity (it is, by definition, true). Other definitions of debt to equity may not respect this accounting identity, and should be carefully compared. Due to the high volatility in the equity markets, Indian investors are choosing debt market and mutual funds over equities.

37

According to an ASSOCHAM report, around US$ 333.27 million was invested in the debt market against US$ 249.89 million in equities, as on the third week of June 2008. The report revealed that investors favoured corporate bonds, particularly debentures issued by leading companies. The debt market in India included segments like government securities, corporate bond market, PSU (public sector undertaking) bonds, and fixed deposits among others. According to a report by Goldman Sachs, with insurance, mutual funds and pension sector experiencing rapid growth, India's debt market is estimated to grow four-fold, from about US$ 400 billion (45 per cent of GDP) in 2006 to about US$ 1.5 trillion (about 55 per cent of GDP) by 2016. Significantly, the non-government sector is expected to grow from US$ 100 billion in 2006 to US$ 575 billion in 2016, increasing its share in GDP from 10 per cent to 22 per cent.

CHAPTER 8 CLASSIFICATION OF FINANCIAL SERVICES INDUSTRY 38

The financial intermediaries in India can be traditionally classified into two: 

CAPITAL MARKET INTERMEDIARIES



MONEY MARKET INTERMEDIARIES

1. CAPITAL MARKET INTERMEDIARIES The capital market intermediaries consist of term lending institutions and investing institutions which mainly provide long term funds.

2. MONEY MARKET INTERMEDIARIES The money market intermediary consists of commercial banks, co-operative banks and other agencies which supply only short term funds. Hence the term “financial services industry” includes all kinds of organizations which intermediate and facilitate financial transactions of both individuals and corporate customers.

INNOVATIVE FINANCIAL INSTRUMENTS In recent years, innovation has been the key word behind the phenomenal success of many of the financial service companies and it forms an integral 39

part of all planning and policy decisions. This has helped them to keep in tune with the changing times and changing customer needs. Accordingly, many innovative financial instruments have come into the financial market in recent times. SOME OF THEM HAVE BEEN BRIEFLY DISCUSSED BELOW: 

COMMERCIAL PAPER



TREASURY BILL



CERTIFICATE OF DEPOSIT



BILLS OF EXCHANGE



PROMISSORY NOTE

COMMERCIAL PAPER A commercial paper is a short term negotiable money market instrument. It has the character of an unsecured promissory note with a fixed maturity of 3 to 6 months. Banking and non-banking companies can issue this for raising their short term debt. It also carries an attractive rate of interest. Commercial papers are sold at a discount from their face value and redeemed at their face value. Since its denomination is very high. It is suitable only to institutional investors and companies.

40

TREASURY BILL A treasury bill is also a money market instrument issued by the central government. It is also issued at a discount and redeemed at par. Recently, the government has come out with the short term treasury bills of 182 days bills and 364 days bills.

CERTIFICATE OF DEPOSIT

The scheduled commercial banks have been permitted to issue certificate of deposit without any regulations on interest rates. This is also a money market instrument and unlike a fixed deposit receipt. It is a negotiable instrument and hence it offers maximum liquidity. As such, it has a secondary market. Since the denomination is very high, it is suitable to mainly institutional investors and companies. 41

PROMISSORY NOTE A promissory note is a written promise by the maker to pay money to the payee. Bank note is frequently transferred as a promissory note, a promissory note made by a bank and payable to bearer on demand. A maker of a promissory note promises to unconditionally pay the payee (beneficiary) a specific amount on a specified date. A promissory note is an unconditional promise to pay a specific amount to bearer or to the order of a named person, on demand or on a specified date. A negotiable promissory note is unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand, or at fixed or determinable future time, sum certain in money to order or to bearer. (see Sec.194) A promissory note, briefly stated, is a promise to pay a sum of money.Original parties to a promissory note. There are originally two parties in a promissory note. The one who makes the promise and signs the instrument is called the "maker" and the party to whom the promise is made or the instrument is payable is called the "payee"

BILLS OF EXCHANGE

A bill of exchange or "draft" is a written order by the drawer to the drawee to pay money to the payee. A common type of bill of exchange is the cheque (check in American English), defined as a bill of exchange drawn on a banker and payable on demand. Bills of exchange are used primarily in international trade, and are written orders by one person to his bank to pay the bearer a specific sum on a specific date. 42

Prior to the advent of paper currency, bills of exchange were a common means of exchange. They are not used as often today. A bill of exchange is an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at fixed or determinable future time a sum certain in money to order or to bearer. (Sec.126) It is essentially an order made by one person to another to pay money to a third person. A bill of exchange requires in its inception three parties--the drawer, the drawee, and the payee. The person who draws the bill is called the drawer. He gives the order to pay money to third party. The party upon whom the bill is drawn is called the drawee. He is the person to whom the bill is addressed and who is ordered to pay. he becomes an acceptor when he indicates his willingness to pay the bill. (Sec.62) The party in whose favor the bill is drawn or is payable is called the payee. The parties’ need not all be distinct persons. Thus, the drawer may draw on himself payable to his own order. A bill of exchange may be endorsed by the payee in favour of a third party, who may in turn endorse it to a fourth, and so on indefinitely. The "holder in due course" may claim the amount of the bill against the drawee and all previous endorsers, regardless of any counterclaims that may have disabled the previous payee or endorser from doing so. This is what is meant by saying that a bill is negotiable. In some cases a bill is marked "not negotiable". In that case it can still be transferred to a third party, but the third party can have no better right than the transferor.

CONGLOMERATES 43

A financial services

conglomerate

financial

firm that is active in

services

a

more than one sector

of

services market e.g.

life insurance, general

insurance,

insurance,

management,

health retail

the

is

banking,

financial asset wholesale

banking, investment banking, etc. A key rationale for the existence of such businesses is the existence of diversification benefits that are present when different types of businesses are aggregated i.e. bad things don't always happen at the same time. As a consequence, economic capital for a conglomerate is usually substantially less than economic capital is for the sum of its parts.

CHAPTER 9 FUNDAMENTALS OF FINANCIAL SERVICE SECTOR

44

A detailed study on the fundamentals of financial concepts is sure to give some idea on the concepts of finance. The investors need to go through some theories of finance that will help them to understand the behavior of market in a better way. There are a number of factors that influence the functioning of the investment market. The individual investor's choice of investment may vary from one person to another. While some investors go for investing in the risky securities, some investors tend to play safe in the market by investing in the less risky security. Arbitrage is one of the most important fundamentals of financial concepts. It typically defines the process of taking advantage of the price different between two or more markets. A clear concept on the arbitrage practicing may be beneficial for the investors. The cash flow is another fundamental of the financial concept that refers to the process of cash being transferred by a business or an organization. Understanding of the cash flow management may be useful to evaluate a particular business or in determining the problems with liquidity. Money market makes an important part in the concept of finance. Investment in currencies is getting popular with the passage of time. A study on the forex market is crucial for all those who are investing in the money market. The forex market handles the trading of one currency with another country's currency and it is the largest financial market in the world in terms of transaction volume. The various types of risks that come under the domain of financial concepts are - systemic risk, credit risk, consumer credit risk, settlement risk, liquidity risk and market risk.

FINANCIAL SERVICES THEORIES The prime concept of finance theory is to study the various ways by which a business or an individual raises money. Allocating money into projects while considering the risk factors attached to them also fall under the canopy of 45

finance theory fundamentals. The concept of finance may also be integrated with the concepts such as: study of money and other assets, managing and profiling project risks, control and management of assets and also. In simple understanding, 'financing' also means provision and allocation of fund for a particular business module or project. Number of finance theories that offer separate approaches to the finance hypotheses. Some of the major and popular finance theories of the world are: arbitrage pricing theory, rational choice theory, prospect theory, cumulative prospect theory, and Monte Carlo option model, binomial options pricing model, Black model and legal origins theory. T h e Ar b i t r a g e Pricing Theory for example talks about the general theory of asset pricing. The proper asset pricing is necessary for the proper pricing of shares. The Arbitrage Pricing Theory states that the return that is expected from a financial asset can be presented as a linear function of various theoretical market indices and macro-economic factors. Here it is assumed that the factors considered are sensitive to changes and that is represented by a factor-specific beta coefficient. The Prospect theory of finance, on the other hand, discusses the alternatives involving risks. It takes into consideration the alternatives that come with uncertain outcomes. The model is descriptive by nature and it tries to represent the real-life choices but not optimal decisions. This theory proposes how the investors should use diversification in order to optimize their portfolios.

CHAPTER 10 CAUSES FOR FINANCIAL INNOVATION FOLLOWING ARE THE CAUSES OF FINANCIAL INNOVATIONS: 46



Economic Liberalization



Investor Awareness



Low Profitability



Customer Service



Keen Competition



Improved Communication Technology



Global Impact

ECONOMIC LIBERALISATION Reform of the financial sector constitutes the most important component of India’s programmed towards economic liberalization. The recent economic liberalization measures have opened the door to foreign competitors to enter into our domestic market.

INVESTOR AWARENESS With a growing awareness amongst the investing public, there has been a distinct shift from investing the savings in physical assets like gold, silver, land, etc. to financial assets like shares, debentures, mutual funds, etc.

LOW PROFITABILITY The profitability of the major financial intermediary, namely the banks has been very much affected to recent times. There is a decline in the profitability of traditional banking products. 47

CUSTOMER SERVICE Now-a-days the customer’s expectations are very great. They want newer products at lower cost or at lower credit risk to replace the existing one.

KEEN COMPETITION The entry of many financial intermediaries in the financial sector market has led to severe competition among themselves. This keen competition has paved the way for the entry of varied nature of innovative financial products so as to meet the varied requirements of the investors .

IMPROVED COMMUNICATION TECHNOLOGY The communication technology has become so advanced that even the world’s issuers can be linked with the investors in the global financial market without any difficulty by means of offering so many options and opportunities.

GLOBAL IMPACT Many of the providers and users of capital have changed their roles all over the world.

CHAPTER 11 VARIOUS ELEMENTS OF FINANCIAL SERVICES MARKETING:

48

In the formulation of overall marketing strategies in the financial services industry, the following decisions are considered important in the present liberalized environment

 Product Planning  Pricing Policy  Branding  Customer Service  Distribution Policy  Promotion Policy Market Segmentation

PRODUCT PLANNING The financial companies should aim at creating new generic products as per the needs of the customers. Attractive schemes have to be created with efficient delivery in order to optimize customer satisfaction. It is always better to bring modification in the existing products by adding some new features and elimination of outdated products. In the competitive market, the task of selling a product is tougher since the core products are the same. This necessitates product differentiation. There should be different products in the arrays of the company, so that the company can cater to the needs of the different groups of investors or customers. In order to design and develop new products one should take the help of market research to asses the needs of the customers, availability of existing product and future growth in demand.

49

PRICING POLICY The potential customers generally frame their investment strategies in the background of pricing decisions. The prices take different dimension depending upon the type of financial services. The price of financial services is always linked with returns.For an insurance company the price means the premium, for the banks it is the net asset value. However, while deciding pricing, incentives, brokerage and agency commission is also to be decided in advance because the expenses towards these items will affect the ultimate returns to the investors. After all in all cases only the competitive price and the promised return catch the sentiment of the customers.

BRANDING Brand name very often signifies the market segments, inherent benefits and investment objectives and also the customer’s loyalty. This process consists of product name, designing brand policy like individual family or corporate brand.

CUSTOMER SERVICES Marketing of services is significantly influenced by the quality of service and interpersonal relationship between the customers and service organizations. In order to motivate the potential customers, the service should be offered in the best possible manner. In the competitive world of financial services, market orientation of product and customer orientation of service are the two key factors. Prompt and timely service as per the needs of customer would make difference. The personal touch in services has shown a positive result in the recent times. The quality of services offered in turn helps to develop loyalty among the customers. Services can be provided either directly by the company through the service the service department or through intermediaries like registrars or external agencies. Customers are involved in a very real 50

relationship with the company and even one weak link can significantly damage their trust.

MARKET SEGMENTATION The financial service industries are expected to satisfy both rural and urban customers, small and large-scale entrepreneurs, high and low earning customers, retail and institutional customers. The segmentation of market based on the changing needs of customers is considered to be the most appropriate solution. Identification of market segment is crucial to take further action regarding promotion and distribution of the product. Market segment will be identified in the basis of nature of the product, direct and indirect benefits of the product on the one hand and behavior or attitude of the customers, etc.

DISTRIBUTION POLICY The determination of proper channel for selling the product is also a key issue in the marketing of financial products. Before launching a product, there should be a clear-cut idea about the channel of distribution of the product so as to make it accessible to the ultimate customers. The channels which directly link to the cudtomers or through the intermediaries like agents, brokers, franchisees should be determined based on the internal marketing strength of the organization.

PROMOTION POLICY The promotion of sale may be through advertisement, road shows,

personal

finance shows, contest, etc. the various promotional tools used by the major players are personal and impersonal promotions 51

CHAPTER 12 EMERGING FUNCTIONS IN MARKETING OF FINANCIAL SERVICES The following are the emerging functions of financial service industries and having greater significance in this competitive market. 52



Product Development



Channel Management



Appraisal Management



Territory Sales Management



Branch Management



Brand Management

PRODUCT MANAGEMENT To monitor profitability for each product line. To Asses the potential of retail asset business based on market feedback and to enhance existing products and develop new products.

CHANNEL MANAGEMENT To identify third-party agencies such as direct sales agents, verification agencies and to finalize terms and conditions, responsibilities and pricing of each agency. To monitor the performance of these agencies on an ongoing basis and ensure a high-quality channel operation.

APPRAISAL MANAGEMENT To scrutinize and recommend and approval or rejection of retail loan proposals received from branches by way of credit scoring system and sound judgment.

TERRITORY SALES MANAGEMENT 53

To build the retail asset business in liaison with direct selling agents and branch head in order to achieve the business targets for the region. To identify and recommend suitable third-party agencies for marketing, collection and verification of operations as well as to ensure quality of credit portfolio and flow-up default cases.

BRANCH MANAGEMENT To achieve the business target of the branch with a predominantly retail business.

BRAND MANAGEMENT To develop strong brand name for the product and corporate image for the company through various innovative devices. Today’s financial services industry requires new strategies to survive and continue to operate. They have to adopt new marketing strategies and tactics which will enable them to capture the maximum opportunities with lowest risk in order to enable them to survive and to meet the tough competition from global players of the domestic and foreign origin.

CASE STUDIES

54

ICICI BANK I have a account with ICICI bank because it’s our salary account, and we are kind of forced to use ICICI Bank. And since we have a salary account, we get a decent service. But yes, the credit card department, and the call centre sucks big time. That’s my personal experience. They put you on hold for 5 to 10 mins. (just imagine listening to the same junk music/tone/adverts continuously), and then there is no guarantee that you will get to speak to someone or your problem would be solved. Infact, today I was put on hold for around 7 mins, and after that the call as abruptly disconnected! Next time I call the call center, I get to speak to a totally new person, and start from scrap describing the problem. The people at the call center just promise to do things, and nothing actually happens. If it happens, then you are really your luck. Hope K V Kamath reads this My

advice to all - Avoid ICICI as far as possible. Many people predict that

the bank would collapse in a few years from now. Have an account with any nationalized bank.

55

HSBC BANK HSBC bank recovery agents bash up 58-year-old professor Two days back RBI had put on its website guidelines for the bank’s recovery agents and in it has warned the banks about strict actions would be taken against them and even penalize the license of the bank but it seems still the warning is falling on deaf ears. Again an incident of unruliness by recovery agent of the bank has come into limelight. It is HSBC bank in news. This time the victim is a professor of a reputed engineering college, Prof J.S. Kalra. He has charged a multinational bank which allegedly sent a pack of intimidating loan recovery agents to hound him. Kalra had taken a loan of Rs 4.5 lakh to buy a Santro from the Noida branch of HSBC last year. The incident took place in September but the 58-year-old professor. He is hopeful of justice, encouraged by the recent strict guidelines issued by the RBI against banks intimidating customers to recover loan. Even the Finance Minister Pranab Mukherjee too has iterated that “strictest action” will be taken against banks stooping to strong-arm methods.Prof J.S. Kalra of the Delhi College of Engineering has filed his complaint against the bank. In his complaint he told the police that the agents abused and beat him up outside the Indraprashta University campus in north Delhi for delaying monthly installments of a loan. They did not care to stop even after he told them that he was a heart patient and that he had developed chest pain. “They even threatened to kill me,” Kalra said in his complaint. Police have registered a case of criminal intimidation against the loan recovery agents, allegedly hired by HSBC bank. Devesh Chandra Srivasatava, deputy commissioner of police (north) told the 56

press “They got into Kalra’s car and refused to leave till he paid the loan installments immediately. They hurled abuses, and beat him up. When they saw Kalra developing heart problem, they left him”

CONCLUSION OF FINANCIAL SERVICES 57

Financial services comprises of assisting in sourcing of funds, funding, advising and procedural assistance in deployment of funds. Financial services are the integral part in the modern business world. Many of the financial services are provided by the employees of the firm itself

i.e. it becomes an internal or finance manager’s function. Otherwise

the firm would source it from an external agency. Commercial banks, merchant banks, investment banks, mutual funds, venture capital funds, rating agencies, non-banking finance companies (NBFC), leasing and hire purchase companies, are some of the entities that provide financial services.

BIBLIOGRAPHY

58

WWW.HSBC.CO.IN WWW.ICICI.COM

WWW.GOOGLE.COM WWW.WIKIPEDIA.COM

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