FINANCIAL SERVICE

Meaning & Concept

• FS are services rendered by financial
institutions, facilitating the smooth flow of
financial activities in the economy of the
financial system.
 Features of FS
• Customer specific
• Intangible
• Market dynamics
• Link between the investor and borrower
• Distribution of risks
• Inseparability
 Significance of FS
• Economic Growth
• Credit Creation - banks through their lending
activities are able to create new bank deposits
and hence increase the country’s money
supply.
For Example The bank in turn lends Rs. 500 by
way of cash advance to customer Y.
The customer Y spends this cash, i.e. Rs. 500,
with customer Z, who in turn deposits it with
the banking system
 Types of FS
A. Fee Based
B. Fund Based

A. Fee Based
• Fee based financial services are those services;
• wherein financial institutions operate in specialized
fields ;
• to earn a substantial income by way of fees, dividend,
commission, discount and brokerage on operations.
 Fee Based
• Financial services firms that enable the
corporate sector and other to raise capital from
the market;
• Manage or transfer their risk to other
participants of the market;
• are in fee based services.
 Fee Based
• The major fee based financial services are as
follow:
a) Issue Management
b) Corporate Advisory Services
c) Credit Rating
d) Mutual Funds
e) Portfolio Management
 CASE STUDY : INDIA – ICICI
SECURISATION OF SHARE MICRO-
CREDITS
• Barriers:- Lack of availability of micro credits for
households
• Instrument:- Securitizing micro credits via partial
payment risk guarantee
• Amount US$4.3 million
 CASE STUDY : INDIA – ICICI
SECURISATION OF SHARE MICRO-
CREDITS
• PROJECT BACKGROUND AND OBJECTIVES
The market for solar home system in India depends
largely on the availability of micro credits to assist
households with the co-financing of the investment in
the systems. In 2004, ICICI, and Indian bank purchased
a portfolio of 42,500 loans worth US$4.3 million from
SHARE, a leading micro finance institution. Grameen
Foundation supported this transaction by providing
ongoing technical assistance and US$325,000 as cash
collateral deposit.
 CASE STUDY : INDIA – ICICI
SECURISATION OF SHARE MICRO-
CREDITS
 INSTRUMENTS USED
Micro finance loans to households to purchase SHS.
The securitization of these loans will not be asset
backed; ICICI will have as collateral a “first loss”
guarantee of an 8% deposit, which is provided by
Grameen Foundation.
 INSTITUTIONAL ARRANGEMENTS
ICICI provides the loans to households, and
receive payments with SHARE acting as the
collection agency.
 CASE STUDY : INDIA – ICICI
SECURISATION OF SHARE MICRO-
CREDITS
• OUTCOMES
This transaction benefits all parties. Households
can obtain micro finance to purchase SHS,
SHARE secures new source of funds at a cost
3-4% cheaper than normal bank loans, ICICI
can reach borrowers while leaving the
administration to SHARE, and Grameen sees
its cash deposit multiply 12 folds in terms of
loans to poor households.
 Fund Based
• Fund Based Services : Financial services firms that
cater the short-term term needs of funds of corporate
sector and others are in the funds-based services.
• Some of these fund-based services such as:
a) Leasing and Hire Purchase
b) Housing Finance
c) Credit Cards
d) Venture Capital
e) Factoring
f) Bill Discounting
 Questions
I) Explain the terms financial services, and discuss
the characteristics of financial services.
ii) Discuss the significance of the financial services
sector in detail.
iii) Describe the various fee based services being
provided by the financial institutions
iv) Explain the fund based services that are
provided by the financial institutions.
v) Discuss the impact that technology has made on
the financial service sector.
 Suggested Readings
• Brean Andeston, 1995 “Financial Services”,
Macmillan Press Ltd., London.
• Kimball Dietrich, 1996 “Financial Services
and Financial Institutions. Prentice - Hall, Inc.
New Jersey
 Merchant Banking
• Concept
• Functions
• Institutional Structure
• Recent Developments
• Legal Framework
 Concept of Merchant Banker
• SECURITIES AND EXCHANGE BOARD
OF INDIA (MERCHANT BANKERS)
RULES, 1992 defines MB as :
• Merchant Banker" means any person who is
engaged in the business of issue management;
• either by making arrangements regarding
selling , buying or subscribing to securities ;
• as manager, consultant, adviser or rendering
corporate advisory service in relation to such
issue management”
 Issue Management
 Methods of Issue of securities
 Managing issues of corporate securities
shares and debentures .
 It involves marketing of capital issues, of
existing companies including rights issues
and dilution of shares by letter of offer.
 Management of issue also involves other
issues. The decisions concerning size and
timing of the public issue in the light of the
market conditions
 Functions
• Raising finance for client
• Advice on expansion and Modernization
• Managing public issue
• Portfolio Management
• Corporate restructuring
• Merger & Acquisition
• Underwriting
• Project Conselling, Finance & Appraisal
 Categories of Merchant Bankers
•

Issue
Management
Adviser
Adviser Adviser
Consultant
Manager Consultant Adviser
Underwriter
Underwriter Underwriter
Portfolio
Consultant
Management
Portfolio
Manager
 Some leading Merchant Banks
• SBI capital market
• Kotak Mahindra Securities Ltd
• ICICI Securities Ltd
• IFCI
• IDBI
• Bajaj Capital
 ISSUE MANAGEMENT

Role of Merchant Bankers

in Appraisal of a Project
 Financial Appraisal
• Projection of the costs and revenues expected
during the projected life span.
• Operations Cost (Material, Labour & other direct
Expense) and Indirect Expenses (Factory,
Administrative & Selling Overhead)
• All financing costs, like depreciation, interest on
long term loans and short term working capital
loans, writing off of pre-operative and
preliminary expenses, etc. are included in the
calculations.
• Income Tax calculations are also included.
 Financial Appraisal
• Projections of the following :
• The Profit & Loss statement
• The Balance Sheet
• Cash Flow statement for about ten years of
operations.
Socio-Environment Impact Assessment
• Cost Benefit Analysis can be used
 Outline of a Project Appraisal
• 1. Project Background & History
• 2. Analysis of Market Demand & Supply
• Demand Forecasting, Production forecasting ,
plant capacity , production technology etc.
• 3. Analysis of Raw material
• 4. Location & Site
• 5. Engineering & Technology
• 6. Organization
• 7. Manpower
• 8. Time-schedule for project execution
 9. Financial & Economic evaluation
• Estimates of total costs of investment and their cash-flow pattern,
• Proposed capital structure, modes of financing, and annual
financial costs.
• Estimates of total fixed and variable costs of production
• Financial evaluation of the project, in terms of -

• Pay-back period
• Break-even point
• Return on investment

• Economic evaluation of the project using cost - benefit analysis

• Based on project's Net Present Value.