Unit-2: Banking and Insurance Services

Banking-Introduction:

Banking is categorized under the finance industry of service sector. Banking renders a wide spectrum of
financial services to the society as a whole. Bank is a financial intermediary through which funds are
provided to the needy persons. It plays a vital role in developing an economy.

Meaning: Banking is a business of accepting deposits and lending money. It is carried out by financial
intermediaries, which performs the functions of safeguarding deposits and providing loans to the public.

In other words, Banking means accepting for the purpose of lending or investment of deposits of money
from public repayable on demand and can be withdrawn by cheque, draft or and so on.

The banking system is a principal mechanism through which the money supply of the country is created
and controlled.

Traditional Services of the Banking system: The traditional services or functions rendered by the banks
are as follows:

1. Accepting Deposits: The most significant and traditional function of bank is accepting deposits
from the public. The deposits may be of three types: Saving deposits, Current deposits and fixed
deposits. These deposits are also called as demand deposits.

2. Providing Loans: The second important function of bank is to provide loans against suitable
mortgages to the public to fulfill their needs of money. Loans can be granted in the form of cash
credit, demand loans, short- term loan, overdraft, discounting of bills etc. Under cash credit
system, borrower is sanctioned a credit limit up to which he can borrow from the bank. The
interest payable by the borrower is calculated on the amount of credit limit actually drawn.
Demand loans granted by a bank are those loans which can be recalled on demand by the bank
any time.

3. Credit Creation: This is a unique function performed by the banks. A bank has sometimes been
called a factory for the manufacture of credit. In the process of acceptance of deposits and
granting of loans, commercial banks are able to create credit. When the banks provide loans &
advances to the needy people or an organization, the credit is created in the economy.

4. Transfer of Funds: Banks are able to transfer funds of a customer to other customer’s account
through the cheques, draft, mail transfers, telegraphic transfers etc. These are the traditional
systems of services provided by the banking system. Some of these methods of transfer of funds
are still exists in the banks.

5. Agency Functions: Banks act as an agent to their customers. They charge fee or commissions for
rendering agency services. The agency services include:

a. Collection of cheques, bills and drafts:

b. Collection of interest, dividend etc.
c. Payment of interest, installments of loans, insurance premium etc,
d. Purchase and sale of securities: The banker, on behalf of the customer can purchase
shares, debentures, bonds and other financial securities and sell the securities as and
 when the customers instructs so. Through the service of stock broking, the banker
would purchase and sell the investment on behalf of his customers. The customers
need to open Demat Account for availing such stock broking services. For rendering
stock broking services, the bank will put some charges called brokerage commission.

e. Transfer of funds through demand drafts, mail transfer etc.

Modern Banking Services
In modern days, banking is dramatically changing its system of rendering services. With the
introduction of latest technology in the banking, the various modern services are emerging. The
services are provided in seconds of time. The internet technology has made the banking system
narrow. The following are the various modern banking services:

1. Advancing of Loans: Banks are profit oriented business organizations. So they have to
advance loan to the public and generate interest from them as profit. After keeping
certain cash reserves, banks provide short-term, medium-term and long-term loans to
needy borrowers.

2. Overdraft: Sometimes, the bank provides overdraft facilities to its customers through
which they are allowed to withdraw more than their deposits. Interest is charged from the
customers on the overdrawn amount. Usually, current account holders avail this type of
service.

3. Discounting of Bills Of Exchange: This is another popular type of lending by the modern
banks. Through this method, a holder of a bill of exchange can get it discounted by the bank,
in a bill of exchange, the debtor accepts the bill drawn upon him by the creditor (i.e., holder
of the bill) and agrees to pay the amount mentioned on maturity.

After making some marginal deductions (in the form of commission), the bank pays value of
the bill to the holder. When the bill of exchange matures, the bank gets its payment from the
party, which had accepted the bill.

4. Cheque Payment: Banks provide cheque pads to the account holders. Account holders can
draw cheque upon the bank to pay money. Banks pay for cheques of customers after formal
verification and official procedures.

5. Collection and payment of credit instruments: In modern business, different types of

credit instruments such as the bill of exchange, promissory notes, cheques etc. are used.
Banks deal with such instruments. Modern banks collect and pay different types of credit
instruments as the representative of the customers.

6. Foreign currency exchange: Banks deal with foreign currencies. As the requirement of
customers, banks exchange foreign currencies with local currencies, which is essential to
settle down the dues in the international trade.
7. Consultancy: Modern commercial banks are large organizations. They can expand their
function to consultancy business. In this function, banks hire financial, legal and market
experts who provide advice to customers in regarding investment, industry, trade, income, tax
etc.

8. Bank Guarantee: Customers are provided the facility of bank guarantee by modern
commercial banks. When customers have to deposit certain fund in governmental offices or
courts for a specific purpose, a bank can present itself as the guarantee for the customer,
instead of depositing fund by customers. The customer needs to deposits the guarantee
amount in fixed form with the bank.

9. Remittance of Funds: Banks helps their customers in transfer funds from one place to
another through NEFT, RTGS, SWIFT, IMPS, Internet Banking, ECS, etc.

10. Credit Cards: A credit card is cards that allow their holders to make purchases of goods and
services in exchange for the credit card’s provider immediately paying for the goods or
service, and the card holder promising to pay back the amount of the purchase to the card
provider over a period of time, and with interest.

11. ATMs Services: ATMs replace human bank tellers in performing basic banking functions
such as deposits, withdrawals, account inquiries. Key advantages of ATMs include:

= 24-hour availability

= Elimination of labor cost

= Convenience of location
12. Debit Cards: Debit cards are used to electronically withdraw funds directly from the
cardholders’ accounts. Most debit cards require a Personal Identification Number (PIN) to be
used to verify the transaction.

13. Home Banking: Home banking is the process of completing the financial transaction from
one’s own home as opposed to utilizing a branch of a bank. It includes actions such as
making account inquiries, transferring money, paying bills, applying for loans, directing
deposits.

14. Online Banking: Online banking is a service offered by banks that allows account holders to
access their account data via the internet. Online banking is also known as “Internet banking”
or “Web banking.”

Online banking through traditional banks enable customers to perform all routine
transactions, such as account transfers, balance inquiries, bill payments, and stop-payment
requests, and some even offer online loan and credit card applications. Account information
can be accessed anytime, day or night, and can be done from anywhere.
 15. Mobile Banking: Mobile banking (also known as M-Banking) is a term used for performing
balance checks, account transactions, payments, credit applications and other banking
transactions through a mobile device such as a mobile phone or Personal Digital Assistant
(PDA).

16. Priority banking: Priority banking can include a number of various services, but some of the
popular ones include free checking, online bill pay, financial consultation, and information.

17. Private Banking: Personalized financial and banking services that are traditionally offered
to a bank’s rich, high net worth individuals (HNWIs). For wealth management purposes,
HNWIs have accrued far more wealth than the average person, and therefore have the means
to access a larger variety of conventional and alternative investments. Private Banks aim to
match such individuals with the most appropriate options.

Recent Trends in Banking Services:

India’s banking sectors has made rapid strides in reforming and make even itself to the new
competitive business environment. Indian Banking Industry is in the midst of the Information
Technology Revolution and its changes have put forth the competition among the Banks
worldwide. Indian economic environment is witnessing path breaking reform measures. The
financial sector, of which the banking industry is the largest player, has also been undergoing a
metamorphic change. Today, we are having a fairly well developed banking system with
different classes of banks – public sector banks, foreign banks, private sector banks – both old
and new generation, regional rural banks and cooperative banks with the Reserve Bank of India
as the fountain Head of the system. During the last 41 years since 1969, tremendous changes
have taken place in the banking industry. The banks have shed their traditional functions and
have been innovating, improving and coming out with new types of the services to cater to the
emerging needs of their customers.

The Indian banking industry is not lagging behind, it has started providing services
electronically over the internet. These services rendered over electronic media include:

1 Electronic Payment Services -E Cheques:

2 Real Time Gross Settlement (RTGS)
3 Electronic Funds Transfer (EFT)
4 Electronic Clearing Service (ECS)
5 Automatic Teller Machine (ATM)
6 Electronic Data Interchange (EDI)
7 Shared Payment Network System
8 SPNS Tele Banking
9 Phone banking
10 Credit Cards
11 Point of Sale – POS
12 D-Mat Accounts
1. Electronic Payment Services – E Cheques: Now-a-days we are hearing about e-
governance, email, e-commerce, e-tail etc. In the same manner, a new technology is
being developed in US for introduction of e-cheque, which will eventually replace the
conventional paper cheque. India, as harbinger to the introduction of e-cheque, the
Negotiable Instruments Act has already been amended to include; Truncated cheque and
Echeque instruments.

2. Real Time Gross Settlement (RTGS): Real Time Gross Settlement system, introduced
in India since March 2004, is a system through which electronics instructions can be
given by banks to transfer funds from their account to the account of another bank. The
RTGS system is maintained and operated account within two hours.

3. Electronic Funds Transfer (EFT): Electronic funds transfer is a system of processing

and communication of payment through electronic methods. EFT assumes greater
significance in the banking system as the RBI also encourages the commercial banks to
adopt this technique. Inter and intra bank transfers of funds are now made through this
EFT mechanism. Transactions of high value i.e., at least more than one lakh is now made
through this cost effective and quick system of settlement. Normally, payments are made
through cash, cheques, drafts and credit cards. The latest in this process are the debit card
system, charge, digital cash, and electronic purse and so on.

4. . Electronic Clearing Service (ECS): Electronic Clearing Service is a retail payment

system that can be used to make bulk payments/receipts of a similar nature especially
where each individual payment is of a repetitive nature and of relatively smaller amount.
This facility is meant for companies and government departments to make/receive large
volumes of payments rather than for funds transfers by individuals.

5. Automated Teller Machine (ATM): Automatic Teller Machine is the most popular
devise in India, which enables the customers to withdraw their money 24 hours a day 7
days a week. It is a device that allows customer who has an ATM card to perform routine
banking transactions without interacting with a human teller. In addition to cash
withdrawal, ATMs can be used for payment of utility bills, funds transfer between
accounts, deposit of cheques and cash into accounts, balance enquiry etc.

6. Electronic Data Interchange (EDI): Electronic Data Interchange is the electronic

exchange of business documents like purchase order, invoices, shipping notices,
receiving advices etc. in a standard, computer processed, universally accepted format
between trading partners. EDI can also be used to transmit financial information and
payments in electronic form.
7. Shared Payment Network System (SPNS): SPNS installed by the IBA in the city of
Mumbai, enables electronic banking service like cash transactions, extended hours of
banking, utility payments, cheques, point of sale facilities by the SPNS can go to any
ATM linked.

8. Tele Banking: Tele Banking facilitates the customer to do entire non-cash related
banking on telephone. Under this devise Automatic Voice Recorder is used for simpler
queries and transactions. For complicated queries and transactions, manned phone
terminals are used. Tele banking has gone a long way in providing maximum customer
satisfaction within the limited infrastructure

9. Phone Banking: Bank on phone provides easy access for customers to have large
businesses through telephones. Data are exchanged over the phone regarding any queries,
to issue instructions on balance transfer, statement of account, cheque- book, stop
payments, new schemes, interest rates etc. at any convenient time and place.

10. . Credit Cards: These plastic cards enable customers to spend whenever he/she wants
within the prescribed limits and pay later. Debit card is a prepaid card with stored value,
whereas credit card is postpaid with fixed limits. It is seen that spending is higher through
debit cards than with credit cards currently CITY Bank and time bank have started with
Debit cards and now other banks are also following these to launch their own cards.

11. Point of sale [POS] terminal: Payment card at a retail location for electronic transfer of
fund is called POS. The client enters his personal identification number [PIN] and
confirms the amount due. Customer’s account is automatically debited with the amount
of purchases and it credits the retailers account POS installed at petrol stations and large
retail houses are linked to banks network participant sometimes make illegal money at
the cost of investors. SEBI should find ways to overcome this to give a good scope for
Demat in India.

12. . Demat Accounts: Transacting shares business through electronic media is called D-
Mat. Investor opens an account called Demat Accounts with DPS. They get shares in
electronic form. Then they send the actual shares to the investor. Investor pays for the
opening, maintenance and collection of shares. This has reduced the paper work, bad
deliveries; loss of shares and less transaction cost. However delays in demating, higher
cost charged by the investors has not given a good start for the growth and scope of
Demat in India. Depository.
Insurance:
Introduction: Insurance is risk-transfer mechanism that ensures full or partial financial
compensation for the loss or damage caused by event(s) beyond the control of the insured party.
Under an insurance contract, a party (the insurer) indemnifies the other party (the insured)
against a specified amount of loss, occurring from specified eventualities within a specified
period, provided a fee called premium is paid. In general insurance, compensation is normally
proportionate to the loss incurred, whereas in life insurance usually a fixed sum is paid.
Some types of insurance (such as product liability insurance) are an essential component of risk
management, and are mandatory in several countries.
Insurance, however, provides protection only against tangible losses. It cannot ensure continuity
of business, market share, or customer confidence, and cannot provide knowledge, skills, or
resources to resume the operations after a disaster.

Meaning: Insurance is a contract, represented by a policy, in which an individual or

entity receives financial protection or reimbursement against losses from an insurance
company. The company pools clients' risks to make payments more affordable for the
insured.

Insurance policies are used to hedge against the risk of financial losses, both big and small, that
may result from damage to the insured or her property, or from liability for damage or injury
caused to a third party.

There are a multitude of different types of insurance policies available, and virtually any
individual or business can find an insurance company willing to insure them, for a price. The
most common types of personal insurance policies are auto, health, homeowners, and life.
Most individuals in the United States have at least one of these types of insurance, and car
insurance is required by law.

Businesses require special types of insurance policies that insure against specific types of risks
faced by the particular business. For example, a fast food restaurant needs a policy that covers
damage or injury that occurs as a result of cooking with a deep fryer. An auto dealer is not
subject to this type of risk but does require coverage for damage or injury that could occur during
test drives. There are also insurance policies available for very specific needs, such as kidnap and
ransom (K&R), medical malpractice, and professional liability insurance, also known as errors
and omissions insurance.

Insurance Policy Components

When choosing a policy, it is important to understand how insurance works. Three important
components of insurance policies are the premium, policy limit, and deductible. A firm
understanding of these concepts goes a long way in helping you choose the policy that best suits
your needs.
A policy's premium is simply its price, typically expressed as a monthly cost. The premium is
determined by the insurer based on your or your business' risk profile, which may include
creditworthiness. For example, if you own several expensive automobiles and have a history of
reckless driving, you will likely pay more for an auto policy than someone with a single mid-
range sedan and a perfect driving record. However, different insurers may charge different
premiums for similar policies; so, finding the price that is right for you requires some legwork.

The policy limit is the maximum amount an insurer will pay under a policy for a covered loss.
Maximums may be set per period (e.g. annual or policy term), per loss or injury, or over the life
of the policy, also known as the lifetime maximum. Typically, higher limits carry higher
premiums. For a general life insurance policy, the maximum amount the insurer will pay is
referred to as the face value, which is the amount paid to a beneficiary upon the death of the
insured.

The deductible is a specific amount the policy-holder must pay out-of-pocket before the insurer
pays a claim. Deductibles serve as deterrents to large volumes of small and insignificant claims.
Deductibles can apply per-policy or per-claim depending on the insurer and the type of policy.

Policies with very high deductibles are typically less expensive because the high out-of-pocket
expense generally results in fewer small claims. In regards to health insurance, people who have
chronic health issues or need regular medical attention should look for policies with lower
deductibles. Though the annual premium is higher than a comparable policy with a higher
deductible, less expensive access to medical care throughout the year may be worth the trade-off.

Definition of insurance:

According to Dictionary of Business and Finance: “Insurance is a form of contract or

agreement under which one party agrees in return for a consideration to pay an agreed amount of
money to another party to make good for a loss, damage, or injury to something of value in
which the insured has a pecuniary interest as a result of some uncertain events.”

Mowbray and Blan Chard” insurance is a social device for eliminating or reducing the cost to
society of certain types of risk”.

Life Insurance:
Meaning: Life insurance is a protection against financial loss that would result from the
premature death of an insured. The named beneficiary receives the proceeds and is thereby
safeguarded from the financial impact of the death of the insured. The death benefit is paid by a
life insurer in consideration for premium payments made by the insured.

In other words, life insurance can be termed as an agreement between the policy owner and the
insurer, where the insurer for a consideration agrees to pay a sum of money upon the occurrence
of the insured individual’s or individual’s death or other event, such as terminal illness, critical
illness or maturity of the policy.
Why to have a life insurance?

 Protection
 Liquidity
 Tax Relief
 Money when you need it

The life insurance sector is one of the fastest growing finance related segments in India. There
are many different products, each with a variety of offerings. Right from fueling investment
needs to meeting different financial goals, they come with many objectives for the investor. Here
are a few common types of covers, including whole life and term insurance policy.

Types of Life Insurance:

1. Term Life Insurance: Term insurance policy offers coverage only for a set period of time.
On the occurrence of death or permanent disability during the tenure of the plan, the
beneficiaries will be paid benefits to cover income loss or unpaid debt. Disability can be both
partial and total, depending on the type of plan. However, if the insured survives the term of the
plan, no such benefits are paid. Term insurance is for a short period of years ranging from 3
months to 7 years. Sum assured payable only in the event of death of the life assured
occurring during the period; but the assurance comes to an end, should the life assured survive.
The selected term premiums are usually payable throughout the term of the policy or till the prior
death of the life assured. Term insurance policies are the cheapest policies.

Term life insurance is a type of life insurance that provides a death benefit to the beneficiary
only if the insured dies during a specified period. If the insured survives until the end of the
period, or term, the coverage ceases without value and a payout or death claim cannot be made.
Term life insurance is income replacement that remains active for a specified number of years.
Term life insurance is the most affordable type of life insurance.

Features of term insurance policies are as follows:

 Sum assured is payable only in the event of death during the term.
 In case of survival, the contract comes to an end at the end of term.
 Term of insurance can be for period as long as 40 years and as short as 1 year.
 No refund of premium
 No-participating policies (no payment of dividend to the policy holders)
 Low premium as only death risk is covered

Types of Term Life Insurance:

a. Increasing Term Insurance: Life insurance cover under this plan goes on increasing
periodically over the term in a predetermined rate. Where the coverage and premium
increase.
b. Decreasing Term Insurance: The sum assured decreases with the term of the policy.
Normally decreasing term assurance plan is taken out for mortgaged protection, under
which outstanding loan amount decreases as time passes as also the sum assured. Where
the death benefit under the plan decreases with time and the renewal premium is constant.
For example: Mortgage redemption policies, credit life insurance.

c. Convertible term assurance policy: Under this plan a policyholder is entitled to

exchange the term policy for endowment insurance or a whole life policy. Conversion
can be done at any time during the term except last 2 years. Under this policy, option to
convert it into whole life or endowment policy is available. In corporation, the life
assured this plan has an option to convert the policy, provided it is in full force, into
either a limited payment life policy or an endowment assurance policy, without having to
undergo fresh medical examination, at any time during the specified term except the last
two years. If the option of conversion is exercised, a new policy under the limited
payment life-plan or endowment assurance plan will be issued as the case may be subject
to the rates of premium and terms and conditions prevailing on the date of conversion. In
other words, the premium rates will be increased according to the age attained.

d. Level Term Life Insurance: The sum assured throughout the term of the policy does not
change. In this policy the death benefit remains the same throughout the policy term and
the renewal premium is constant.

e. Renewable Term Life Insurance: With renewable term insurance, the insurance
company automatically allows you to renew your coverage after the term of the policy is
over (generally 5 to 20 years). These policies are renewable at the expiry of term for an
additional period without medical examination; but the premium rate will be altered
according to the age attained at the time of renewal. This policy is beneficial to those
whose health are deteriorating and will be uninsurable at an advanced age. With the help
of this policy, they continue to enjoy the insurance benefit without going under fresh
medical examination. However, the premium rate will be increasing according to the
attained age. The policyholder can renew it many times provided the attained age has not
crossed 55 years.

f. Straight-term (temporary) insurance: The corporation (insurer) issues term-insurance

for two years, which is also called as two-year temporary assurance policy. The sum
assured will be payable only in the event of the life assureds’ death occurring within two
years from the commencement of the policy. A single premium is required to be paid at
the outset. The policies are issued only under, the without profits plan. The proposes is
required to pay the medical examination fee. The policy is not entitled to any surrender
value and no loan can be granted on the security thereof because, it is not of accumulative
nature and payment is not always certain. This plan cannot be converted into other plans.
This policy is beneficial to the dependents who are required to pay estate duty and to
those persons who are given charity or donation of fixed property.
2. Endowment Insurance Policy: There is a savings quotient linked to such policies. They
come with a specified maturity period, as decided by the insurer. On the occurrence of any
unforeseen event of the death or permanent disability, during the tenure of the policy; the sum
assured will be received by the said beneficiaries to the policy. If the insured survives the term of
the policy, the agreed maturity benefits become payable. An endowment policy is a life
insurance to pay back a lump sum amount after a specified term (on its’ maturity) or on death of
the policy holder. It provides living benefit to the policyholder as periodic pay-outs along with
insurance coverage. Endowment policy is a type of life insurance coverage in which, the insurer
offers payment of sum assured to the policy holder or to his nominee or assignee or legal heirs
either at the end of the specified period or on death of the assured before the specified period. An
endowment policy is defined as a type of life insurance that is payable to the insured if he/she is
still living on the policy's maturity date, or to a beneficiary otherwise. An endowment policy
provides you with a dual combination of protection and savings. In an endowment policy, if the
insured dies during the term of the policy, the nominee receives the sum assured plus the bonus
or participating profit or guaranteed additions, if any. The bonus or profit is paid for the number
of years that the insured survives in the policy term

The features of the endowment insurance policy are as follows:

Endowment insurance plan is an investment oriented plan which not only pays in the event of
death but also in the event of survival at the end of the term.

 It is a contract underwritten by a life insurance company to pay a fixed term plus

accumulated profits that are declared annually.
 Two premiums include – mortality (death) element & investment element.
 Minimum age at entry :12 years
 Maximum age entry : 65 years
 Maximum age at maturity: 75 years.

Benefits of Term Life Insurance Plans

 Provides life coverage and financial security to the family of the insured at an affordable
premium rate.
 Term insurance plans can be bought online in a simple and hassle freeway.
 As compared to other life insurance policies term insurance plans offer higher coverage
at a minimum premium rate.
 Term insurance plans offer flexible payout options to the policyholder.
 The premiums paid towards the term insurance plans are eligible for tax exemption under
section 80C of Income Tax Act 1961.
 Term insurance plans also offer the option of additional rider benefit in order to enhance
the coverage of the policy.
Types of Endowment Insurance:

a. Joint Life Endowment Plan: Under this plan, two lives can be insured under one
contract. The sum assured is payable at the end of the endowment term or death of either
of the two.
b. Money Back Endowment Plan: In this plan, there is an additional advantage of
receiving a certain amount of money at periodic intervals during the policy term.
c. Marriage Endowment Plan: This plan has the specific condition that the sum assured is
payable only after the expiry of the term even if death of the life assured takes place
earlier.
d. Educational Endowment Plan: These plans are specially designed to meet educational
expenses of children at a future date. If the insured parent dies before the date of maturity
the installment is paid in lump sum with immediate effect which helps to meet the
educational expenses.

4. Whole (Permanent) Life Insurance: Unlike a term insurance policy, whole life plans strive
to give you lifelong protection. Such cover comes with death benefits, meaning your family can
continue to be financially stable after your death. It also comes with maturity benefits, after the
expiry of the term. Most people use this type of policy to create an inheritance or estate for their
children. Whole life insurance is a type of life insurance that provides you coverage throughout
your lifetime provided the policy is in force. Whole life insurance policies also contain a cash
value component that increases over time. You can withdraw your cash value or take out a loan
against it as per your convenience. In addition, in case of your unfortunate demise before you
pay back the loan, the death benefit paid to your beneficiaries will be reduced.

The features of this policy are as follows:

 Whole life plans are another type of endowment plan, which cover death for an
indefinite period.
 When the policy holder dies, the face value of the policy, know as a death
benefit, is paid to the person or person named in the insurance policy (the
beneficiary or beneficiaries).
 It can be with or without profits.
 If you cancel the policy after a certain amount of time has passed, the insurance
company will surrender the cash value to you.

Types of Whole Life Insurance:

a. Ordinary Whole Life Plan: This is a continuous premium payment plan. The
insured pays premium throughout his life. It provides dual facility of protection plus
savings.
b. Limited Payment Whole Life Plan: It provides the same benefit as above but
premiums are paid for a limited period. Premiums are sufficiently higher to cover the
risk
c. Single premium policies: Single premium policy: The single premium payment is
not very common whereas the limited premium payment is the most popular form
of whole- life insurance policies because, it is convenient to the policyholder to
arrange the payment of premium during his income-earning period.

d. Continuous premium policy: In continuous premium payment, this benefit is not

available because premium is payable up to the life of the policyholder. This is losing
its importance because only the dependents of life assured are getting the benefit.
Also, in extreme cases, he pays, more by way of premium than the benefits relievable
under the policy and that too when earning capacity of the assured is reduced. This
plan is cheaper and suits to an young man with limited resources and whose
requirements for protection is maximum. It is also beneficial to pay estate duty.

e. Limited payment whole life policies: The payment of premium is limited to certain
period, although the amount secured under this plan is payable on the death of the
policyholder. Premium under this plan is higher than the premium payable under a
whole life plan. The amount of premium depends upon the number of annual
premiums stipulated since premiums are payable for a selected period of years or
until death if it occurs within this period, the life assured is satisfied to know the
amount of maximum premium payable. If the life assured survives, the premium
paying period, the policy continues in full force, provided all premiums have been
paid, but no further premiums are required to be paid. With profits limited payment
policies do not cease to participate in profits after completion of the premium-paying
period but continue to share in the periodical bonus distribution.

f. Convertible whole life policies: This is a whole-life policy which gives its holder an
option to get it converted at the end of five years, into an endowment policy. If this
option is exercised, the policy no longer remains a whole-life policy, if it is not
exercised the policy continues to be, a whole-life policy. The policy is designed to
meet the needs of the young man who is on the threshold of his career and has
prospect for increase in income after a short-period. The object is to provide
maximum insurance protection at a minimum cost and at the same time to offer a
flexible contract which can be allowed to an endowment policy, at the end of five
years of the policy. If the option is not exercised, the policy continues as a whole life
assurance with premiums ceasing at age 70. If the policy is converted into
endowment, the premium is suitably increased. However, no difference in premiums
 for the previous five years, and interest thereon, will charged and he is not required to
go under fresh medical examination. The vested bonus additions would be altered to
an amount which the policy would have earned had it been effected from the
commencement as an endowment policy and further, the policy would thereafter be
entitled to bonus at the rate applicable to endowment assurance. The minimum sum
assured for which a policy will be issued under this plan is Rs. 5,000 and the
maximum age at entry shall be 45 years.

5. Children Life Insurance: These plans can be taken in the name of the child or the parent.
However, it is only for the benefit of the child. This helps parents mobilize finances when the
child reaches a particular age or stage of life. A child insurance policy is a saving cum
investment plan that is designed to meet your child‘s future financial needs. A child insurance
policy allows your kids to live their dreams. Child insurance policy gives you the advantage to
start investing in the children‘s plan right from the time the child is born and provisions to
withdraw the savings once the child reaches adulthood. Some child insurance policies do allow
intermediate withdrawals at certain intervals.

Life insurance is not just to fulfill the daily expenses of the family in the absence of breadwinner.
It should be capable enough to bail out the family during large financial exigencies. So, one
should always choose one or two best types of life insurance which can support his/her family in
different stages of life.

The features of the policy are as follows:

 Since last few years insurance companies have started offering risk cover plans like
limited payment whole life, and endowment assurance plans from the age of 12 years and
money back plan from age of 13 years (completed).
 New plans have been specifically designed for children where the risk of the child starts
much earlier say 7 years.
 Policies on the lives of children are taken out by other elders. After some time when the
child becomes major and is competent to contract, the child may assume the ownership of
the policy. The policy is then said to ‘vest’ in child.
 The date on which this happens is called the ‘testing date’.
 The risk begins when the child attains 18 years of age. This is called the ‘deferred date’
and the period between the deferred date and the date of commencement of policy is
called the ‘deferred period’.

6. Unit Linked Plans: It has emerged as one of the fastest growing insurance products. It is a
combination of an investment fund (such as mutual fund) and an insurance policy. The premium
amount is invested in the stock market and returns better income on the maturity period. Unit
linked plans are better for long-term investment option. These are generally provide higher
returns as large portion of the funds are invested in equities

There is also flexibility and the assured can choose levels and extent of cover needed. And it has
option of switching over from one fund to another if it does not seem to be profitable. Unit
linked insurance plans are a type of life insurance plan that provide you with a dual advantage of
protection and flexibility in investment. A unit-linked insurance plan (ULIP) is a type of life
insurance where the cash value of a policy varies according to the current net asset value of the
underlying investment assets. The premium paid is used to purchase units in investment assets
chosen by the policyholder.

ULIPs can be classified as:

a) Unit linked – equities, bonds, real estate & money market instrument.
b) Equity linked-only in equities
c) Index linked- equity, bonds or money market instruments.

7. Money or cash plans: In these types of plans, a portion of the agreed and payable sum
assured is returned to the insured person by the insurance company. This payment is made on a
periodical basis, in the form of a survival benefit. When the term expires, the outstanding sum
assured is paid as a maturity benefit. However, life risk is covered for the entire amount of the
agreed sum assured, even if a portion of the benefits has already been paid. Money back policy
gives you money during the policy tenure. A money back policy gives you a percentage of the
sum assured at regular intervals during your policy term. If you live beyond the term of the
policy then you will receive the remaining portion of the corpus and the accrued bonus also at
the end of the policy term.

But in case of an unfortunate event before the full term of the policy is over; the beneficiaries are
entitled to receive the entire sum assured regardless of the number of instalments paid out.
Money back policies are the most expensive insurance options offered by insurance companies
as they offer returns to the insured during the policy tenure.

Money Back policy gives way for a person to plan the course of his life with a sum that is
expected in regular intervals. Plans such as children’s education, children’s marriage can be
executed in a better way with the help of this policy.

Benefits of Money Back Policy

 Money back policies are low-risk savings options which also offer the benefit of life
coverage.
 Money back policy offers regular income to the policyholder in particular intervals of
time in form of survival benefit.
 Tax benefit can be availed under section 80C and 10(10D) of Income Tax Act 1961.
  Money back policy helps the insured to fulfill the short-term financial goals of life.
 Additional rider benefits are offered under the policy in order to increase the coverage of
the policy.
 Money back plans also come with an additional bonus facility.
 Money back plans offer risk free returns to the policyholder.

8. Annuity plans: Just like a term insurance policy, this type of insurance aims at covering
income loss. After retirement, an individual is cut-off from a regular source of income, and any
benefits, like gratuity or provident funds, run the risk of getting exhausted quickly. Pension is a
model provision for safe-guarding retirement, as the benefit is like a regular income. So, it is best
to get pension plans in order to ensure financial independence after retirement.

9. Retirement polices: A savings and investment plan that provides you with income during
retirement is called Retirement Plan. Retirement plans are offered by life insurance companies in
India and help you to build a retirement corpus. On maturity, this corpus is invested for
generating a regular income stream which is referred to as pension or annuity. Retirement plans
are further classified into.
 'With cover' and 'without cover' plans: 'With cover' pension plans offer an assured life
cover in case of an eventuality and in 'Without cover' pension plan, the corpus built till is
given out to the nominees in case of an eventuality. There is no life cover in without
cover plans.
 Immediate Annuity Plans: In case of immediate annuity plans, the pension commences
within one year of having paid the premium.
 Deferred Annuity Plans: In case of deferred annuity, the pension does not commence
immediately; it is ‘deferred ‘up to a time, which is decided upon by the policyholder.

10. Savings and Investment Plans: Savings & Investment Plans provide you the assurance of lump
sum funds for you and your family's future expenses. While providing an excellent savings tool for your
short term and long term financial goals, these plans also assure your family a certain sum by way of an
insurance cover. This is a broad categorization which covers both the traditional and unit linked plans.
 General Insurance:
Meaning: General insurance or non-life insurance policies, including automobile and
homeowners policies, provide payments depending on the loss from a particular financial
event. General insurance is typically defined as any insurance that is not determined to be life
insurance.

Definition: Insurance contracts that do not come under the ambit of life insurance are called
general insurance. The different forms of general insurance are fire, marine, motor, accident
and other miscellaneous non-life insurance.

TYPES OF GENERAL INSURANCE:

1. Fire Insurance: Fire insurance is a form of property insurance which protects people
from the costs incurred by fires. When a structure is covered by fire insurance, the
insurance policy will pay out in the event that the structure is damaged or destroyed by
fire. The following are the types of Fire Insurance:

a. Specific policy: In this type of policy, the insurance company is liable to pay a sum,
which may be less than the property’s real value. The insured is called to bear a part
of the loss, as the actual value of the property is not considered in deciding the
amount of indemnity.

b. Comprehensive policy: Known as “all-in-one” policy, the insurance company

indemnifies the policyholder for loss arising out of fire, burglary, theft and third party
risk. In this type of policy, the policyholder also gets paid for loss of profits incurred,
due to fire, till the time the business remains shut.

c. Valued policy: In this type of policy, the value of the commodity is already set and
actual loss is not taken into consideration. The policy follows a standard contract of
indemnity, wherein the policyholder gets paid a specific amount of indemnity,
without considering the actual loss.

d. Floating policy: This type of policy is subject to average clause and the extent of
coverage expands to different properties, belonging to the policyholder, under the
same contract and one premium. The floating policy also provides protection of
goods kept at two different stores.

e. Replacement of Re-instatement policy: As per replacement or re-instatement

policy, the insurance company instead of paying the policyholder the amount of
indemnity in cash, replaces the damaged property/commodity with a new one.
Need for Fire Insurance:
Fire insurance is important because a disaster can occur at any time. There could be many factors
behind a fire, for example arson (inflammable), natural elements, faulty wiring, etc. Some facts
that stress the importance of fire insurance include:

 Fire contributes to the maximum number of deaths occurring in America due to natural
disasters.
 Eight out of ten fire deaths take place at home.
 A residential fire takes place after every 77 seconds.
 The major reason for a residential fire is unattended cooking.

2. Health Insurance: Health insurance, like other forms of insurance, is a form of

collectivism by means of which people collectively pool their risk, in this case the risk of
incurring medical expenses. Ill health can result in a major halt in your life and work.
Moreover, the escalating price of health care costs means that you would be shelling out a
massive amount of money to bear the brunt of these costs. This is the reason why you
would need health insurance to cover your medical expenses following hospitalization
from sudden illnesses or expenses caused by accidents. This also includes cashless
facility in empanelled hospitals, pre and post hospitalization expenses, and ambulance
charges.

Importance of Health Insurance:

 Rising medical costs

 Sharing of health related risk
 Uncertain hospital bills
 Expensive/quality health care services
 Money value-Sick Versus Healthy
 Family health insurance
 Tax benefits
 Productivity of workforce
 Removes some of the burden from the state
 Keeping pace with the customer needs while achieving profitability
Types of Health Insurance Plans:

a. Individual Health Plans: Largely, an individual health insurance plan, or ‘mediclaim’ ,

would cover expenses if you are hospitalized for at least 24 hours. These plans are
indemnity policies, that is, they reimburse the actual expenses incurred up to the amount
of the cover that you buy. Some of the expenses that are covered are room rent, doctor’s
fees, anesthetist’s fees, cost of blood and oxygen, and operation theatre charges.

b. Family Floater Plans: This is a fairly new entrant in the health insurance firmament. It
takes advantage of the fact that the possibility of all members of a family falling ill at the
same time or within the same year is low. Under a family floater health plan, the entire
sum insured can be availed by any or all members and is not restricted to one individual
only as is the case in an individual health plan. Let’s look at an example. Say, a family of
four has individual covers of Rs. 1 lac each. If the cost of treating one person crosses Rs.
1 lac, then the rest has to be borne by the family out of its own money. If, however, the
entire family is insured for Rs. 4 lac through a floater policy, then any of the members
will be covered for that amount in any year.

c. Surgery Cover – A Surgical Protection Plan provides a fixed benefit amount for
specified surgeries and helps you to take care of the expensive medical treatment in a
hospital. This benefit plan that is used for the surgical treatment of serious illnesses such
as cancer, kidney failure, and heart attack can be availed as a standalone plan or a rider.

d. Comprehensive Health Insurance – A high value comprehensive health insurance

policy, such as Health Care Supreme with a wide range of sum insured, add-on covers,
special benefit covers such as maternity benefits and dental treatments, fulfills all the
healthcare needs and ensures complete peace of mind, regardless of the situation of life
you are in.
Other health insurance covers: Personal Accident, Hospital Daily cash Allowance,
Critical Illness.
3. Travel Insurance
Despite all your planning, a trip abroad can go wrong due to medical eventualities, and non-
medical contingencies such as loss of baggage, trip delay and other incidental expenses. Travel
insurance covers the insured against these misfortunes while traveling. Catering to people from
all walks of life, Bajaj Allianz offers three different plans – Travel Companion, Travel Elite and
Student Travel. Choose a basic plan or go for extended covers as per your requirements.
The different travel insurance policies include:

 Individual travel policy

 Family travel policy
 Senior citizens travel policy
  international Travel Insurance
 Student Travel Insurance
 Group Travel Insurance
 Domestic Travel Insurance
 Corporate Travel Insurance

In addition, there are insurance companies that offer special plans such as a corporate travel
policy or a comprehensive policy for travel to a special place such as Asia.
4. Home Insurance
Your home is a priceless possession and possibly one of the largest financial investments that
you have made. It needs to be safeguarded from unforeseen events. Along with your home,
property insurance also protects the valuables and other assets that are the interest of the insured.
A comprehensive cover, such as My Home, for your house as well as the contents ensures that
your home is well protected. A home offers the peace, serenity and warmth that you may be
looking for after a tiring day at work. Therefore, buying a home insurance is utmost important. It
offers protection to the entire structure of your house and ensures utmost security for all the
belongings that you may collected over the years. There are certain home insurance policies that
offer coverage till 5 years. You would have to pay a premium based on the value of the
belongings in your home.
Home Insurance Covers the Structure and Content of your home from below

Fire and Peril Cover: Due to Fire, Explosion, Aircraft Damage, Lightning, Earthquake, Missile Testing
Operations

Natural Calamities: Flood, Hurricane (storm or tornado), Storm, Landslide and Rockslide, Cyclone,
etc.

Man Made Calamities: Riot (disturbance or mutiny), Strike, Theft or Burglary

Home insurance, however, doesn't include loss or damage due to nuclear perils, any consequential loss,
damage due to war, damage or any loss due to pollution, contamination, etc. Also, valuables like bullion,
gold and silver are not covered, however, if you wish to, then you can certainly opt for a special cover.

5. Marine Insurance: Marine Insurance covers the loss or damage or ships, cargo,
terminals, and any transport or cargo by which property is transferred, acquired, or held
between the points of origin and final destination. The Marine Insurance can be classified
into
A. Ocean marine insurance
 Hull Insurance
 Cargo Insurance
 Freight Insurance
 Protection and indemnity insurance
 B. Inland Marine Insurance:

 Extension of Ocean marine insurance

 Domestic goods in transit insurance
 Property held by Bailees
 Mobile equipment and property
 Block Polices- “all-risks” basis
 Means of transport and communication

Hull insurance: Hull insurance is an insurance policy especially designed for covering ship
damage expenses. Where the ‘Hull’ refers to the main body of the ship. Hull insurance can be
understood like a car insurance, with a difference of being for a water faring vehicle instead of
land. Hull insurance also includes any fixtures attached to the hull of the ship as a functional
part, into the definition of hull. Since the policy mostly applies to water going vessels, it is more
popularly called Marine Hull Insurance, and is a part of marine insurance.

It covers all types of vessels operating into the oceans, lakes, or rivers like bulk carriers, fishing
boats, ships, tankers, cruises, yachts, jetties, and wharfs.

Cargo insurance: Marine cargo insurance, also known as freight insurance, marine insurance or
shipping insurance, covers the risks of loss or damage to goods and merchandise while in transit
by any method of transport – sea, rail, road or air - and while in storage anywhere in the world
between the points of origin and final destination.

Freight insurance: Insurance coverage for goods during shipment. Freight insurance can be
purchased directly from a shipper or from a third-party insurer. also called cargo insurance.
risk.

Freight insurance provides additional protection beyond the default carrier policy. Standard
carrier policies tend to only cover blanket amounts and do not adjust according to your freight’s
value. The blanket amounts may be a flat amount or a sliding scale based on a dollar to pound
ratio.An independent policy can offer protection for the full value of your shipment and help you
avoid the burden of proving liability should any damage occur. Basically, if your shipment is
valuable, insurance adds the peace of mind of knowing you're covered. Claims are handled
directly between the insurance company and the consignee.

6. Auto insurance: The auto insurance generally includes: Loss or damage by accident, fire,
lighting, self ignition, external explosion, burglary, housebreaking or theft, malicious act.
Liability for third party injury/death, third party property and liability to paid driver. On payment
of appropriate additional premium, loss/damage to electrical/electronic accessories.

7. Rural Insurance
Rural insurance helps to fulfil the requirements of rural and agricultural businesses which is the
base of rural insurance. The motive of this type of general insurance is to ensure that working
capital as well as assistance is offered to the rural families. This can be done in the form of
income generating assets.

Rural Insurance includes: Livestock such as goat, sheep, cattle, etc., Agricultural pump sets,
Plantation like grapes, rubber trees, Sub-Animals including silkworm, honeybee, etc.

8. Motor insurance

Insurance for the damage or theft of your motor vehicle, two-wheeler, three-wheeler or four-
wheeler, is covered under this type of insurance. The damage caused to the vehicle can be caused
natural or man-made circumstances, the extent of which would change from policy to policy.

Under the Motors Vehicle Act, motor insurance is mandatory in India. New motor vehicles come
with third-party insurance right from the showroom itself.
 UNIT-3 FINANCE AND MARKETING SERVICES
Financial service is part of financial system that provides different types of finance through
various credit instruments, financial products and services. In financial instruments, we come
across cheques, bills, promissory notes, debt instruments, letter of credit, etc.

In financial products, we come across different types of mutual funds. Extending various types of
investment opportunities. In addition, there are also products such as credit cards, debit cards,
etc. In services we have leasing, factoring, hire purchase finance etc., through which various
types of assets can be acquired either for ownership or on lease. There are different types of
leases as well as factoring too.

Thus, financial services enable the user to obtain any asset on credit, according to his
convenience and at a reasonable interest rate.

Meaning:

Financial services are the economic services provided by the finance industry, which
encompasses a broad range of businesses that manage money, including credit
unions, banks, credit-card companies, insurance companies, accountancy companies, consumer-
finance companies, stock brokerages, investment funds, individual managers and
some government-sponsored enterprises.

IMPORTANCE OF FINANCIAL SERVICES:

It is the presence of financial services that enables a country to improve its economic condition
whereby there is more production in all the sectors leading to economic growth.

The benefit of economic growth is reflected on the people in the form of economic prosperity
wherein the individual enjoys higher standard of living. It is here the financial services enable an
individual to acquire or obtain various consumer products through hire purchase. In the process,
there are a number of financial institutions which also earn profits. The presences of these
financial institutions promote investment, production, saving etc.

1. Expands activities of financial markets.

2. Benefits of Government.
3. Economic Development.
4. Economic Growth.
5. Ensures Greater Yield.
6. Maximizes Returns.
7. Minimizes Risks.
8. Promotes Savings.
9. Promotes Investments.
10. Balanced Regional Development.
11. Promotion of Domestic & Foreign Trade.
12. Vibrant capital market.

1. Promoting investment
The presence of financial services creates more demand for products and the producer, in order
to meet the demand from the consumer goes for more investment. At this stage, the financial
services comes to the rescue of the investor such as merchant banker through the new issue
market, enabling the producer to raise capital.
The stock market helps in mobilizing more funds by the investor. Investments from abroad is
attracted. Factoring and leasing companies, both domestic and foreign enable the producer not
only to sell the products but also to acquire modern machinery/technology for further production.

2. Promoting savings
Financial services such as mutual funds provide ample opportunity for different types of saving.
In fact, different types of investment options are made available for the convenience of
pensioners as well as aged people so that they can be assured of a reasonable return on
investment without much risks.
For people interested in the growth of their savings, various reinvestment opportunities are
provided. The laws enacted by the government regulate the working of various financial services
in such a way that the interests of the public who save through these financial institutions are
highly protected.

Financial Services offered by various financial institutions

 Factoring.
 Leasing.
 Forfeiting.
 Hire Purchase Finance.
 Credit card.
 Merchant Banking.
 Book Building.
 Asset Liability Management.
 Housing Finance.
 Portfolio Finance.
 Underwriting.
 Credit Rating.
 Interest & Credit Swap.
 Mutual Fund.
3. Minimizing the risks
The risks of both financial services as well as producers are minimized by the presence of
insurance companies. Various types of risks are covered which not only offer protection from the
fluctuating business conditions but also from risks caused by natural calamities.

Insurance is not only a source of finance but also a source of savings, besides minimizing the
risks. Taking this aspect into account, the government has not only privatized the life insurance
but also set up a regulatory authority for the insurance companies known as IRDA, 1999
(Insurance Regulatory and Development Authority) .

4. Maximizing the Returns

The presence of financial services enables businessmen to maximize their returns. This is
possible due to the availability of credit at a reasonable rate. Producers can avail various types of
credit facilities for acquiring assets. In certain cases, they can even go for leasing of certain
assets of very high value.

Factoring companies enable the seller as well as producer to increase their turnover which also
increases the profit. Even under stiff competition, the producers will be in a position to sell their
products at a low margin. With a higher turnover of stocks, they are able to maximize their
return.

5. Ensures greater Yield

As seen already, there is a subtle difference between return and yield. It is the yield which
attracts more producers to enter the market and increase their production to meet the demands of
the consumer. The financial services enable the producer to not only earn more profits but also
maximize their wealth.

Financial services enhance their goodwill and induce them to go in for diversification. The stock
market and the different types of derivative market provide ample opportunities to get a higher
yield for the investor.

6. Economic growth
The development of all the sectors is essential for the development of the economy. The financial
services ensure equal distribution of funds to all the three sectors namely, primary, secondary
and tertiary so that activities are spread over in a balanced manner in all the three sectors. This
brings in a balanced growth of the economy as a result of which employment opportunities are
improved.

The tertiary or service sector not only grows and this growth is an important sign of development
of any economy. In a well developed country, service sector plays a major role and it contributes
more to the economy than the other two sectors.

7. Economic development
Financial services enable the consumers to obtain different types of products and services by
which they can improve their standard of living. Purchase of car, house and other essential as
well as luxurious items is made possible through hire purchase, leasing and housing finance
companies. Thus, the consumer is compelled to save while he enjoys the benefits of the assets
which he has acquired with the help of financial services.
8. Benefit to Government
The presence of financial services enables the government to raise both short-term and long-term
funds to meet both revenue and capital expenditure. Through the money market, government
raises short term funds by the issue of Treasury Bills. These are purchased by commercial
banks from out of their depositors’ money.

In addition to this, the government is able to raise long-term funds by the sale of government
securities in the securities market which forms apart of financial market. Even foreign exchange
requirements of the government can be met in the foreign exchange market.

The most important benefit for any government is the raising of finance without offering any
security. In this way, the financial services are a big boon to the government.

9. Expands activities of Financial Institutions

The presence of financial services enables financial institutions to not only raise finance but also
get an opportunity to disburse their funds in the most profitable manner. Mutual funds, factoring,
credit cards, hire purchase finance are some of the services which get financed by financial
institutions.

The financial institutions are in a position to expand their activities and thus diversify the use of
their funds for various activities. This ensures economic dynamism.

10. Capital Market

One of the barometers of any economy is the presence of a vibrant capital market. If there is
hectic activity in the capital market, then it is an indication of the presence of a positive
economic condition. The financial services ensure that all the companies are able to acquire
adequate funds to boost production and to reap more profits eventually.

In the absence of financial services, there will be paucity of funds which will adversely affect the
working of companies and will only result in a negative growth of the capital market. When the
capital market is more active, funds from foreign countries also flow in. Hence, the changes in
capital market are mainly due to the availability of financial services.

11. Promotion of Domestic and Foreign Trade

Financial services ensure promotion of domestic as well as foreign trade. The presence
of factoring and forfeiting companies ensures increasing sale of goods in the domestic market
and export of goods in the foreign market. Banking and insurance services further contribute to
step up such promotional activities.

12. Balanced Regional development

The government monitors the growth of economy and regions that remain backward
economically are given fiscal and monetary benefits through tax and cheaper credit by which
more investment is promoted. This generates more production, employment, income, demand
and ultimately increase in prices.

The producers will earn more profits and can expand their activities further. So, the presence of
financial services helps backward regions to develop and catch up with the rest of the country
that has developed already.

Features of financial services:

Financial services may be simply defined as services offered by financial and banking
institutions like loan, insurance, etc. Financial services are concerned with the design and
delivery of financial instruments and advisory services to individuals and businesses within the
area of banking and related institutions, personal financial planning, investment, real assets,
insurance etc. It involves provision of a wide variety of fund/asset based and no-fund
based/advisory services and includes all kinds of institutions which provide intermediate
financial assistance and facilitate financial transactions of both individuals and corporate
customers. The following are the features of financial services:

1. Intangible: The basic characteristics of financial services are that they are intangible in
nature. For financial services to be successfully created and marketed, the institutions providing
them must have a good image and the confidence of its clients. Quality and innovativeness of
services are the focal points for building credibility and, gaining the trust of the clients.

2. Customer oriented: The institutions providing services study the needs of the customers in
detail. Based on the results of the study, they come out with innovative financial strategies that
give due regard to costs, liquidity, and maturity considerations for various financial products.
This way, financial services are customer-oriented.

3. Inseparability: The functions of producing and supplying financial services have to be

carried out simultaneously. The financial services cannot be separated from its provider.

4. Perishable and cannot be stored: Financial services have to be created and delivered to the
target clients. They cannot be stored. They have to be supplied according to the requirements of
customers. Hence, it is imperative (crucial) that the providers of financial services ensure a
match between demand and supply.

5. Dynamic in nature: as a financial service varies with the changing requirements of the
customer and the socio-economic environment.- must be dynamic socio economic changes,
disposable income. The financial services must be dynamic. They have to be constantly re-
defined and refined. On the basis of socio-economic changes occurring-in the economy, such as
disposable income, standard of living, level of education, etc., financial services institutions must
be proactive in nature and evolve new services by visualizing the expectations of the market.
6. Heterogeneity: Financial services are characterized as heterogeneous. There is a difference
among service providers in rendering the services and its quality, price, time taken etc. The wider
the human involvement in the service and the process of financial services, the higher the
potential for heterogeneity.

7. Link between the investor and borrower: The financial services help financial institutions
to fill the gap between savings and capital. The business houses and individuals can avail loans
and advances through the financial services. And there are some individuals and enterprises who
is having excess money to invest. The financial services act as bridge between these two people.
They are considered as intermediaries.

8. People based services: Financial services are people based services. The rendering and
receiving of financial services involves human factor.

8. Distribution of risks: Financial services helps in distributing the risk among the investors.

Contribution of Financial Services in promoting industry:

Financial services play crucial role in promoting the industries by providing wide spectrum of
financial products. Finance is the life blood of the every business, without finance no economic
activity is take place. Financial services helps business firms in running day to day business
(working capital), fresh capital to start a business, to acquire fixed assets, purchasing of raw-
materials, payment of salaries and wages, assist in export and import business etc. The following
are the contribution made by the financial services in promoting industries:

1. Supply of required capital: The wide variety of financial services provided by the
various banks and financial institutions will supply the necessary capital require to run a
business or to start a new venture. Finance is the life blood of the any business
organization. By supplying the necessary capital to the business organizations, the
financial services will promote the industries.

2. Financial assistance for export and import: The financial services will ensure of the
assistance for export and import business. The financial institutions by providing Letter
of Credit, Bank Guarantee supports for the promotion of industry in the economy. It
provides export finance and thereby increasing the Balance of Payment.

3. Recovery of Debts: Banks and other financial institutions provide factoring services to the
business houses by taking the Bills Receivables (debt due to the business by customers) as
security. The sundry debtors are pledged with the bank and loan can be taken by the business
houses. Banks provide certain percentage of money out the total debtors and the final amount
can be settled after the receiving final due from the customers.
4. Reducing regional imbalances: Industries can be developed through sufficient financing the
business houses. By establishing the new industries in undeveloped areas.

5. Promotion of Domestic and Foreign Trade: Financial institutions and banks provide
various services to both domestic and foreign trade which will the lead to the development of
the economy.

6. Acquisition of assets: Financial services like hire purchase will help in acquiring the fixed
assets as well as the current assets. Fixed assets are plant and machinery, land and building
etc.

7. Payment of salaries and wages: Financial services help in payment of direct labor such as
payment of salaries and wages. Working capital is necessary for the business to run its daily
activities.

8. Expansion of the business: There are services available for expansion of the existing
business. By financing for expansion of the business financial services will promote the
industries.

9. Acquiring of new technologies: Financial services will help in acquiring or purchasing the
new technologies in the context of business.

10. Encouraging foreign exchange: By providing wide spectrum of financial services for
export business foreign exchange can earn. More and more if we export and we will earn
more foreign exchange.

TYPES OF FINANCIAL INSTRUMENTS:

International Accounting Standards defines financial instruments as any contract that gives rise
to a financial asset of one entity and a financial liability or equity instrument of another entity.
Financial instruments act as channels to invest the money. There are various financial
instruments available on the market currently. It acts as a tool to raise funds. For investment
purpose, there are many ways to save money. An investor has to choose the best investment
option to fetch the best return on the invested money.

Financial instruments are assets that can be traded. They can also be seen as packages of capital
that may be traded. Most types of financial instruments provide an efficient flow and transfer of
capital all throughout the world's investors. These assets can be cash, a contractual right to
deliver or receive cash or another type of financial instrument, or evidence of one's ownership of
an entity. The following are the financial instruments mentioned below:

1. Cash and cash equivalent instruments: Cash instruments are those whose value is
determined directly by the markets. They can be securities, which are readily transferable
and loans and deposits, where both borrower and lender have to agree on a transfer.
 These are relatively safe and highly liquid investment options. Treasury bills and money
market funds are cash equivalents.

2. Derivative instruments: Derivative instruments are those which derive their value from
the value and characteristics of one or more underlying entities such as an asset, index, or
interest rate. They can be exchange-traded derivatives and over-the-counter (OTC)
derivatives.

3. Bonds: The bond is a debt security, under which the issuer owes the holders a debt and
(depending on the terms of the bond) is obliged to pay them interest (the coupon) or to repay
the principal at a later date, termed the maturity date. Bonds are fixed income instruments
which are issued for the purpose of raising capital. Both private entities, such as companies,
financial institutions, and the central or state government and other government institutions
use this instrument as a means of garnering funds. Bonds issued by the Government carry the
lowest level of risk but could deliver fair returns.

4. Loans: In finance, a loan is the lending of money by one or more individuals, organizations,
and/or other entities to other individuals, organizations etc. The recipient incurs a debt, and is
usually liable to pay interest on that debt until it is repaid, and also to repay the principal amount
borrowed.

5. Bond Futures: A futures contract (more colloquially, futures) is a standardized forward

contract, a legal agreement to buy or sell something at a predetermined price at a specified time
in the future. The asset transacted is usually a commodity or financial instrument. In a bond
futures, the asset is a bond.

6. Options on bond futures: An option is a contract which gives the buyer (the owner or holder
of the option) the right, but not the obligation, to buy or sell an underlying asset or instrument at
a specified strike price on a specified date, depending on the form of the option. Here the asset is
a bond futures.

7. Interest rate swaps: An interest rate swap (IRS) is an interest rate derivative (IRD). It
involves exchange of interest rates between two parties. In particular it is a linear IRD and one of
the most liquid, benchmark products.

8. Interest rate caps and floors: An interest rate cap is a type of interest rate derivative in which
the buyer receives payments at the end of each period in which the interest rate exceeds the
agreed strike price. An example of a cap would be an agreement to receive a payment for each
month the LIBOR rate exceeds 2.5%.
Similarly an interest rate floor is a derivative contract in which the buyer receives payments at
the end of each period in which the interest rate is below the agreed strike price. Caps and floors
can be used to hedge against interest rate fluctuations.

9. Interest rate options: An Interest rate option is a specific financial derivative contract whose
value is based on interest rates. Its value is tied to an underlying interest rate, such as the yield on
10-year treasury notes.

10. Exotic derivatives: An exotic derivative, in finance, is a derivative which is more complex
than commonly traded “vanilla” products.

11. Equities: Equities are a type of security that represents the ownership in a company. Equities
are traded (bought and sold) in stock markets. Alternatively, they can be purchased via the Initial
Public Offering (IPO) route, i.e. directly from the company. Investing in equities is a good long-
term investment option as the returns on equities over a long time horizon are generally higher
than most other investment avenues. However, along with the possibility of greater returns
comes greater risk.
In India, share trading actively happens in stock exchanges; prominent ones are BSE (Bombay
Stock Exchange) and NSE (National Stock Exchange). It is one of the best options to invest in
equities over an extended period as it will fetch good returns. It is also subject to market-related
risk, and one needs to do thorough research before investing in equities. Equity shares constitute
permanent capital for the firm and it cannot be redeemed during the lifetime of the company and
as per the Companies Act of 1956, a company cannot purchase its own shares during its
existence. At the time of liquidation, the equity shareholders can demand the refund of their
capital amount and the same will be paid after meeting the other entire prior claim including
preference shareholders.

12. Deposits: Investing in bank or post-office deposits is a very common way of securing surplus
funds. These instruments are at the low end of the risk-return spectrum. A deposit account is a
savings account, current account or any other type of bank account that allows money to be
deposited and withdrawn by the account holder. These transactions are recorded on the bank’s
books, and the resulting balance is recorded as a liability for the bank and represents the amount
owed by the bank to the customer. Some banks may charge a fee for this service, while others
may pay the customer interest on the funds deposited.

13. Mutual funds: A mutual fund allows a group of people to pool their money together and
have it professionally managed, in keeping with a predetermined investment objective. This
investment avenue is popular because of its cost-efficiency, risk-diversification, professional
management and sound regulation. You can invest as little as Rs. 500 per month in a mutual
fund. There are various general and thematic mutual funds to choose from and the risk and return
possibilities vary accordingly.
 Types of mutual funds:
It’s important to understand that each mutual fund has different risk and reward profiles. In
general, the higher the potential return, the higher the risk of potential loss. Although some funds
are less risky than others, all funds have some level of risk – it's never possible to diversify away
all risk – even with so-called money market funds. This is a fact for all investments. Each mutual
fund has a predetermined investment objective that tailors the fund's assets, regions of
investments and investment strategies.

At the most basic level, there are three flavors of mutual funds: those that invest in stocks (equity
funds), those that invest in bonds (fixed-income funds), those that invest in both stocks and
bonds (balanced funds), and those that seek the risk-free rate (money market funds). Most mutual
funds are variations on the theme of these three asset classes.

1. Money Market Funds

The money market consists of safe (risk-free) short-term debt instruments, mostly
government Treasury bills. This is a safe place to park your money. You won't get substantial
returns, but you won't have to worry about losing your principal. A typical return is a little more
than the amount you would earn in a regular checking or savings account and a little less than the
average certificate of deposit (CD). While money market funds invest in ultra-safe assets, during
the 2008 financial crisis, some money market funds did experience losses after the share price of
these funds, typically pegged at $1, fell below that level and broke the buck.

2. Income Funds

Income funds are named for their purpose: to provide current income on a steady basis. These
funds invest primarily in government and high-quality corporate debt, holding these bonds until
maturity in order to provide interest streams. While fund holdings may appreciate in value, the
primary objective of these funds is to provide a steady cash flow to investors. As such, the
audience for these funds consists of conservative investors and retirees. Because they produce
regular income, tax conscious investors may want to avoid these funds.

3. Bond Funds

Bond funds invest and actively trade in various types of bonds. Bond funds are often actively
managed and seek to buy relatively undervalued bonds in order to sell them at a profit. These
mutual funds are likely to pay higher returns than certificates of deposit and money market
investments, but bond funds aren't without risk. Because there are many different types of bonds,
bond funds can vary dramatically depending on where they invest. For example, a fund
specializing in high-yield junk bonds is much more risky than a fund that invests in government
securities. Furthermore, nearly all bond funds are subject to interest rate risk, which means that if
rates go up the value of the fund goes down.

4. Balanced Funds

The objective of these funds is to provide a balanced mixture of safety, income and capital
appreciation. The strategy of balanced funds is to invest in a portfolio of both fixed income and
equities. A typical balanced fund will have a weighting of 60% equity and 40% fixed income.
The weighting might also be restricted to a specified maximum or minimum for each asset class,
so that if stock values increase much more than bonds, the portfolio manager will automatically
rebalance the portfolio back to 60/40.

A similar type of fund is known as an asset allocation fund. Objectives are similar to those of a
balanced fund, but these kinds of funds typically do not have to hold a specified percentage of
any asset class. The portfolio manager is therefore given freedom to switch the ratio of asset
classes as the economy moves through the business cycle.

5. Equity Funds

Funds that invest primarily in stocks represent the largest category of mutual funds. Generally,
the investment objective of this class of funds is long-term capital growth. There are, however,
many different types of equity funds because there are many different types of equities. A great
way to understand the universe of equity funds is to use a style box, an example of which is
below.

The idea here is to classify funds based on both the size of the companies invested in
(their market caps) and the growth prospects of the invested stocks. The term value fund refers to
a style of investing that looks for high quality, low growth companies that are out of favor with
the market. These companies are characterized by low price-to-earning (P/E), low price-to-book
(P/B) ratios, and high dividend yields. On the other side of the style spectrum are growth funds,
which look to companies that have had (and are expected to have) strong growth in earnings,
sales, and cash flows. These companies typically have high P/E ratios and do not pay dividends.
A compromise between strict value and growth investment is a “blend,” which simply refers to
companies that are neither value nor growth stocks and are classified as being somewhere in the
middle.

The other dimension of the style box has to do with the size of the companies that a mutual fund
invests in. Large-cap companies have high market capitalizations, with values over $5
billion. Market cap is derived by multiplying the share price by the number of shares
outstanding. Large-cap stocks are typically blue chip firms that are often recognizable by
name. Small-cap stocks refer to those stocks with a market cap ranging from $200 million to $2
billion. These smaller companies tend to be newer, riskier investments. Mid-cap stocks fill in the
gap between small- and large-cap.

A mutual fund may blend its strategy between investment style and company size. For example,
a large-cap value fund would look to large-cap companies that are in strong financial shape but
have recently seen their share prices fall, and would be placed in the upper left quadrant of the
style box (large and value). The opposite of this would be a fund that invests in startup
technology companies with excellent growth prospects: small-cap growth. Such a mutual fund
would reside in the bottom right quadrant (small and growth).

6. Global/International Funds

An international fund (or foreign fund) invests only in assets located outside your home
country. Global funds, meanwhile, can invest anywhere around the world, including within your
home country. It's tough to classify these funds as either riskier or safer than domestic
investments, but they have tended to be more volatile and have unique country and political
risks. On the flip side, they can, as part of a well-balanced portfolio, actually reduce risk by
increasing diversification since the returns in foreign countries may be uncorrelated with returns
at home. Although the world's economies are becoming more interrelated, it is still likely that
another economy somewhere is outperforming the economy of your home country.

7. Specialty Funds

This classification of mutual funds is more of an all-encompassing category that consists of

funds that have proved to be popular but don't necessarily belong to the more rigid categories
we've described so far. These types of mutual funds forgo broad diversification to concentrate on
a certain segment of the economy or a targeted strategy. Sector funds are targeted strategy funds
aimed at specific sectors of the economy such as financial, technology, health, and so on. Sector
funds can therefore be extremely volatile since the stocks in a given sector tend to be
highly correlated with each other. There is a greater possibility for large gains, but also a sector
may collapse (for example the financial sector in 2008 and 2009).

Regional funds make it easier to focus on a specific geographic area of the world. This can mean
focusing on a broader region (say Latin America) or an individual country (for example, only
Brazil). An advantage of these funds is that they make it easier to buy stock in foreign countries,
which can otherwise be difficult and expensive. Just like for sector funds, you have to accept the
high risk of loss, which occurs if the region goes into a bad recession.

Socially-responsible funds (or ethical funds) invest only in companies that meet the criteria of
certain guidelines or beliefs. For example, some socially responsible funds do not invest in “sin”
industries such as tobacco, alcoholic beverages, weapons or nuclear power. The idea is to get
competitive performance while still maintaining a healthy conscience. Other such funds invest
primarily in green technology such as solar and wind power or recycling.

8. Index Funds

Index funds are passively managed funds that seek to replicate the performance of a broad
market index such as the S&P 500 or Dow Jones Industrial Average (DJIA). An investor might
consider an index fund if they subscribe to the logic that most active portfolio managers cannot
beat the market on a regular basis. Since an index fund merely replicates the market return it also
benefits investors in the form of low fees. Index funds have been increasing in popularity since
Vanguard pioneered the way for passive indexing in mutual fund form.

9. Exchange Traded Funds (ETFs)

A twist on the mutual fund is the exchange traded fund, or ETF. These ever more popular
investment vehicles pool investments and employ strategies consistent with mutual funds, but
they are structured as investment trusts that are traded on stock exchanges, and have the added
benefits of the features of stocks. For example, ETFs can be bought and sold at any point
throughout the trading day. ETFs can also be sold short or purchased on margin. ETFs also
typically carry lower fees than the equivalent mutual fund. Many ETFs also benefit from
active options markets where investors can hedge or leverage their positions. ETFs also enjoy tax
advantages from mutual funds. The popularity of ETFs speaks to their versatility and
convenience.

FACTORING:
What is a 'Factor'?

A factor is a financial intermediary that purchases receivables from a company. A factor is

essentially a funding source that agrees to pay the company the value of the invoice less a
discount for commission and fees. The factor advances most of the invoiced amount to the
company immediately and the balance upon receipt of funds from the invoiced party.

Factoring Operations

The terms and conditions set forth by a factor may vary depending on their own internal
practices. Most commonly, factoring is performed through third party financial institutions,
referred to as factors. Factors often release funds associated with newly purchased accounts
receivable within 24 hours. Repayment terms can vary in length depending on the amount
involved. Additionally, the percentage of funds provided for the particular account receivables
referred to as the advance rate, can also vary.

Factoring is not considered a loan, as neither party issues or acquires a debt as part of the
transaction. The funds provided to the company in exchange for the accounts receivable is also
not subject to any restrictions regarding use.

Factoring process: The factoring process can be summarized in the activities of all the parties
(client, buyer, factor) in a factoring agreement. Various tasks performed by the parties in a
factoring process are:

Buyer:

1. Enters into an agreement, negotiates and decides terms and conditions of sale agreement.
2. Takes delivery with invoice bill and instructions to make payment to the factor on due
date.
3. Makes a payment or asks for extension. In case of default the buyer may face legal
actions.

Seller:

1. Enters into a contract of sale of goods on credit as per purchase order

2. Sells goods as per contract.
 3. Send copies of invoice, delivery challan along with goods to the buyer with instructions
for making payment to factor.
4. Provides warranty that the customer has received the merchandise without any counter
claim or disputes.
5. Sells the receivable received from the buyer to a factor and receives 80% or more in
advance.
6. Receives the balance after paying the service charges.

Factor:

1. Enters into an agreement with the seller for rendering factor services i.e. collection of
receivables.
2. Advises client on credit worthiness of potential clients.
3. Pays up to 80% advance on receiving sales documents
4. Renders statement of accounts at periodic intervals to client and buyer.
5. Receives payments from the buyer and pays balance after deducting commission

LEASING:

Leasing is a written or implied contract by which an owner (the lessor) of a specific asset (such
as a parcel of land, building, equipment, or machinery) grants a second party (the lessee) the
right to its exclusive possession and use for a specific period and under specified conditions, in
return for specified periodic rental or lease payments.

A long-term written lease (also called a deed) creates a leasehold interest which in itself can be
traded or mortgaged, and is shown as a capital asset in a firm's books. Advantages of leasing
include (1) lack of restrictive covenants (common in bank loans and bond indentures), (2)
conservation of capital (because the lessor provides 100 percent financing), (3) tax savings (in
most cases), (4) avoidance of the risk of obsolescence, and (5) relative ease of obtaining a lease
as opposed to a comparable bank loan.
In most cases a lease, in effect, is a hire-purchase agreement without the requirement of an initial
deposit and the added advantage of tax benefits. See also capital lease, operating lease, and, sale
and leaseback.
Process of leasing;

Step 1. Defining Your Requirements

The first step in the leasing process is to determine your list of requirements. What is your
budget? Where do you want to live, near bustling downtown, in a community like Tarrytown or
on the shores of the Lake Austin? What type of property appeals to you most, a house, duplex,
condo or apartment? How many bedrooms and bathrooms will you need? Do you have any other
requirements, pets or pools, garage or gym, closet-space or clothes washer and dryer? Once
you've prioritized your most important criteria (print out and complete our Leasing Wish List),
you're ready to start the search for your ideal property.
If you think you've already found your dream property on Craigslist, we'll help you check it out,
compare it to similar properties, and make sure what may sound too good to be true really is the
deal of a lifetime. Proceed to Step #3 below. Already eying one of those spiffy downtown
apartments? Great, we'll help you get the best deal and be your advocate through every step of
the process. The guy at the leasing office might have HIS best interests in mind, not yours. Skip
to Step #4 and call us right away to get the process started.

Step 2. Searching for Properties

If you want to begin your property search online, CarvajalGroup.com is a great place to start.
We've worked hard to ensure that our search engine is fast, intuitive, and most importantly, up to
date. Click on search, select the "Leases" box on the left-hand side and the property types you
want to consider on the right-hand side, along with your ideal price, size and location. You'll see
all of the properties that meet your requirements with detailed information, pictures, virtual tours
and more. Then save your favorites to your shopping cart.

Step 3. Finding Your Ideal Property

Once you've narrowed down your list to a handful of good matches (after throwing out that
house that looks like it was last updated in 1920 and all the other properties you just didn't like
the look of for one reason or another), it's time schedule showings with your agent. Pictures are
one thing, but you'll want to see your prioritized properties in person, take notes and compare.
Which property best suits your needs? It's up to you to answer, but we'll be with you every step
of the way to help with questions and details. Remember, this is likely where you'll live for the
next year or more. Don't settle, take the time to find the property that's right for you.
Step 4. Submit Your Lease Offer or Apartment Application
Once you've found your ideal property, you'll need to submit a lease offer for houses/duplexes/
condos or rental application for apartments. Don't worry, it's not a daunting process. Credit and
background checks will likely be completed during this part of the process, so let your agent
know up front if there are any issues that may arise. We'll work through these in advance so that
when you find the right place, everything proceeds like clockwork. If you're leasing an
apartment, you'll typically need the following for your application: picture identification, your
social security number, your three most recent monthly paystubs, information about yourself and
your rental history. You may also be required to pay a non-refundable rental application fee
(typically less than $50) at this time.

Step 5. Sign Your Lease

Leases are binding contracts, so we'll want to make sure to go over the fine print. What day of
the month is your rent due and is there a grace period? Who should you contact for repairs? Will
your lease automatically renew without written notice? You'll need to pay any necessary deposits
and often the first month's rent. When everything is signed and the deal is done, file a copy of
your lease somewhere safe to refer to later. Bring checks, you'll typically need to put down your
deposit and first month's rent when you sign your lease.

Step 6. Walk-Through and Move-In

Want that deposit back? Before you move in, you walk through the property and note any issues.
We'll make sure you submit the appropriate form so your landlord will make any immediate
repairs necessary and so that you will not be heeld responsible for any major flaws upon move
out. See our Move-In Checklist to ensure that NOTHING goes overlooked. Finally, it's time to
unpack your boxes and enjoy your new home

Venture capital: Startup or growth equity capital or loan capital provided by private
investors (the venture capitalists) or specialized financial institutions (development finance
houses or venture capital firms). Also called risk capital.

Venture capital is a type of funding for a new or growing business. It usually comes from venture
capital firms that specialize in building high risk financial portfolios. With venture capital, the
venture capital firm gives funding to the startup company in exchange for equity in the startup.
This is most commonly found in high growth technology industries like biotech and software.
Feature of a venture capital:

Venture capital has the following features:

1. Venture capital investments are made in innovative projects

2. Benefits from such investments may be realized in the long run.

3. Suppliers of venture capital invest money in the form of equity capital.

4. As investment is made through equity capital, the suppliers of venture capital participate in the
management of the company.

The advantages of venture capital are as follows:

i. New innovative projects are financed through venture capital which generally offers high
profitability in long run.

ii. In addition to capital, venture capital provides valuable information, resources, technical
assistance, etc., to make a business successful.

Disadvantages of Venture Capital:

The disadvantages of venture capital are:

i. It is an uncertain form of financing.

ii. Benefit from such financing can be realized in long run only.

Classification of financial instruments:

1. SDRs

2. Monetary gold Currency

3. Deposits
 4. Securities other than shares

5. Borrowings

6. Loans

7. Shares and other equity

8. Other accounts receivable/payable

9. Financial derivatives

10. Letters of guarantee

11. Letters of credit

12. Financial commitments

13. Pledged financial assets

SERVICE MARKETING:

Service marketing is marketing based on relationship and value. It may be used to market a
service or a product. With the increasing prominence of services in the global economy, service
marketing has become a subject that needs to be studied separately. Marketing services is
different from marketing goods because of the unique characteristics of services namely,
intangibility, heterogeneity, perishability and inseparability.

In most countries, services add more economic value than agriculture, raw materials and manu-
facturing combined. In developed economies, employment is dominated by service jobs and
most new job growth comes from services.

Jobs range from high-paid professionals and technicians to minimum-wage positions. Service

organizations can be of any size from huge global corporations to local small businesses. Most
activities by the government agencies and non-profit organizations involves services.

The American Marketing Association, defines services as activities, benefits, or satisfactions that
are offered for sale or provided with sale of goods to the customer, that is, pre-sale and after-
sales services. Berry states, ‘while a product is an object, devise or physical thing, a service is a
deed, performance, or an effort’.

Features of marketing services:

1. Intangibility:

A physical product is visible and concrete. Services are intangible. The service cannot be

touched or viewed, so it is difficult for clients to tell in advance what they will be getting. For

example, banks promote the sale of credit cards by emphasizing the conveniences and
advantages derived from possessing a credit card.

2. Inseparability:

Personal services cannot be separated from the individual. Services are created and consumed

simultaneously. The service is being produced at the same time that the client is receiving it; for

example, during an online search or a legal consultation. Dentist, musicians, dancers, etc. create
and offer services at the same time.

3. Heterogeneity (or variability):

Services involve people, and people are all different. There is a strong possibility that the same

enquiry would be answered slightly differently by different

people (or even by the same person at different times). It is important to minimize the differences

in performance (through training, standard setting and quality assurance). The quality of services
offered by firms can never be standardized.

4. Perishability:

Services have a high degree of perishability. Unused capacity cannot be stored for future use. If

services are not used today, it is lost forever. For example, spare seats in an aeroplane cannot be

transferred to the next flight. Similarly, empty rooms in five-star hotels and credits not utilized

are examples of services leading to economic losses. As services are activities performed for
simultaneous consumption, they perish unless consumed.
5. Changing demand:

The demand for services has wide fluctuations and may be seasonal. Demand for tourism is

seasonal, other services such as demand for public transport, cricket field and golf courses have
fluctuations in demand.

6. Pricing of services:

Quality of services cannot be standardized. The pricing of services are usually determined on the

basis of demand and competition. For example, room rents in tourist spots fluctuate as per
demand and season and many of the service providers give off-season discounts.

7. Direct channel:

Usually, services are directly provided to the customer. The customer goes directly to the service

provider to get services such as bank, hotel, doctor, and so on. A wider market is reached
through franchising such as McDonald’s and Monginis.

Problems in Marketing Services:

1. A service cannot be demonstrated.

2. Sale, production and consumption of services takes place simultaneously.

3. A service cannot be stored. It cannot be produced in anticipation of demand.

4. Services cannot be protected through patents.

5. Services cannot be separated from the service provider.

6. Services are not standardized and are inconsistent.

7. Service providers appointing franchisees may face problems of quality of services.

8. The customer perception of service quality is more directly linked to the morale, motivation
and skill of the frontline staff of any service organization.
 IMPORTANCE OF MARKETING SERVICES:

The U.S. economy has evolved into a service economy with services like health care,
education and consulting making up a larger part of the overall economy. Marketing such
services is an important skill--and a tough one--for businesses to have. Without a tangible
product to show and tell customers about, service marketers must be adept at pulling together
all the pieces of the marketing mix to create value for their intended consumers.

1. Relationships Are Key

In service marketing, because there is no tangible product, relationships are key. Service
marketers must listen to and understand the needs of customers and prospective customers to
build loyalty and trust. Ultimately, effective relationships in service marketing will lead to repeat
sales and positive word of mouth.
2. Multiple Touchpoints

Service marketing involves many touchpoints for the consumer. Interactions with multiple
people and experiences that are less tangible than when buying an actual product all impact the
consumer's perspective of the purchase process. These touchpoints work together to establish a
perception in the consumer's mind.
3. Services Proliferate

Consumers have many service options to choose from, and because the product is intangible, the
challenge for the service marketer is to somehow make her services stand out from the crowd.
Because service marketing is so prolific, marketers must think of ways to communicate the
benefits of the service they offer in language that reflects consumer need and value.
4. Feedback Improves Service

Unlike the marketing process for a tangible product, service marketing actually involves the
consumer in the marketing process. He is engaged in the process and contributes to a positive
outcome. For this reason, it is important to seek consumer feedback and to use that feedback to
improve service marketing effectiveness.
5. Technology Impacts

Technology is having a major impact on the service economy. You can use technology to
streamline service activities and provide do-it-yourself options for consumers. Internet-based
services, for instance, allow consumers to participate actively in the service marketing process,
often never involving contact with another human being. Having a website is important, because
people like to get information about service providers before deciding which one to use.

6. Customer Retention:

Given today’s highly competitive scenario where multiple providers are vying for a limited pool
of customers, retaining customers is even more important than attracting new ones. Since
services are usually generated and consumed at the same time, they actually involve the
customer in service delivery process by taking into consideration his requirements and feedback.
Thus they offer greater scope for customization according to customer requirements thus offering
increased satisfaction leading to higher customer retention.