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FINANCIAL SERVICES BY BANKS
Financial system facilitates the transformation of savings of individuals, government as well as business into investment and consumption. It consists of financial intermediaries, financial markets and financial assets. A vibrant and competitive financial system is necessary to sustain reforms in the structural aspects of any economy. Financial system in India has made commendable progress in extending its geographical spread and functional reach. Banks, insurance companies,investment companies, accounting firms, financial institutions offer numerous financial services to business concerns. A few financial innovations / services which are emerging as potent instruments at the disposal of commercial banks and investment financing institutions in India are : Merchant Banking , Leasing, Mutual Funds, Factoring, Credit Cards,Credit Rating, Commercial Paper, Housing Finance, Venture Capital Merchant bankers are financial intermediaries. They act as intermediaries in the
process of transfer of capital from those who own it to those who use it. They are providing the whole range of inputs of innovative financial services, technical and managerial knowledge and competence and expert advice on legal and industrial matters needed by the user of funds for establishing a new industrial unit or for diversifying / modernizing a running industrial unit or for merger / acquiring another industrial unit or for entering into a foreign collaboration / launching of a joint venture abroad.Apart from the private leasing companies, the banks and financial institutions are also participating in the leasing business. Several commercial banks have decided to enter the field of leasing by promoting leasing subsidiaries or by making portfolio investment in existing or newly set up private leasing companies. The banks are in an advantageous position to
recover lease rentals in time, which is not so in case of other leasing companies.Mutual Funds is an ideal alternative for a small saver who is handicapped with inadequate resources for diversified portfolio, lack of time, expertise and market knowledge. The enormous growth of mutual funds compelled the government to issue guidelines under the set up of SEBI to regulate the same for their healthy growth on prudential norms.With a view to provide an additional short-term avenue to investors and to bring money market instruments within the reach of individuals and small bodies, the RBI has proposed a 2 scheme for a new type of Mutual Funds by scheduled commercial banks and their subsidiaries. The new money market mutual funds are a special type of funds investing only in high quality money market instruments of a short-term nature. Factoring is a business activity. Factor (a bank) purchases the receivables of the sellers of Goods (clients) and reimbursement is obtained later on from the buyer of goods. This
service is intended to provide much critical inputs of credit to both buyers and sellers of
small scale and medium industries. With the introduction of factoring services it is
expected that the commercial banks factoring services will be able to meet the
requirement of the small scale sector and exports units in the country.Under Credit Card
system credit is accommodated to the card-holders for a specific period of time without
obtaining any security. The credit card service has been introduced as an integral part of
better customer service and the bank is also able to make increased earnings by way of
commission from dealers and interest on credit offered. A Credit Card organization enters
into an agreement with several establishments of the different parts of the country and
even of other countries to provide goods and services to the Credit Card holders. This
service also provides emergency cash facilities through banks or Automatic Teller
machine (ATM). In India four rating agencies have been set up so far. These are : 1. The
Credit Rating Information Services of India Limited (CRISIL) 2. The Investment
Information and Credit rating Agency of India Limited (ICRA) 3. The Credit Analysis
and Research Ltd (CARE) and 4. Duff & Phelps Credit* Rating (P) Ltd. (DPCR). They
rate debentures, fixed deposit programmes, short term instruments like commercial paper,
structural obligations and preference shares. The primary objective is to provide
guidance to the investors / creditors in determining the credit risk associated with a debt
instrument / credit obligation. The ratings are not recommendations to buy or sell
securities.
The position of banks is quite significant in the market for commercial papers because in
addition to being an important buyer, they also act as agents in issuing, holding of
commercial papers and provide credit to firms which issue commercial papers.
Commercial banks have also entered into Housing Finance to facilitate middle and low
income groups purchase or construct houses or flats. Setting up of NHB in 1988, an apex
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body for housing finance has given a boost to banks. Banks like SBI, Canara Bank, PNB,
have already set up separate subsidiaries for housing finance.
Venture capital is the response of invisible funds to capitalize on an opportunity to earn
very high returns as compared to conventional security backed lending, by enabling high
risk but high promise projects to realize their full potential. The growth of venture capital
is typically the response to the demand created for more risk-bering funds to finance
commercialization of new technologies and innovative market solutions. Venture capital
industry in India is of recent origin.
Challenges
As the volume of international business and capital flows are increasing, the commercial
banks are likely to be exposed to different types of risks and there is a need to hedge
these exposures. The commercial banks, in India,have to familiarize with the complex
instruments and acquires skills to manage these risks. Further more, commercial banks
and various investment institutions will have to evolve appropriate strategies for
technology integration for providing faster and efficient financial services.Over the years,
with the changing scenario in India economy, new challenges are emerging, which the
banks have to face with suitable strategies.
The number of financial institutions in public sector that provide financial services is
rather large. Overlap and duplicity reduces cost effectiveness and output efficiency.
There is a need for allocative planning regarding ‘who should do what’. The selection
should be based on some past performance linked efficiency criteria. These then should
compete with private sector freely under minimal government control to check only
illegal / unethical practices. Several Banks and Financial Institutions have diversified into
services like merchant banking, leasing venture capital, factoring, mutual funds,
consumer credit cards and housing finance, either directly or through subsidiaries.
Merchant banking activity encompasses managing of public issues, loan syndication,
financial and management consultancy services, project counseling and appraisal,
arrangement of technical consultancy, mergers and acquisitions, etc. Mutual funds
through their investment schemes provide benefits of diversified portfolio and expert
investment advice to a large number of investors. The setting up of the National Housing
Bank as an apex institutions has provided further impetus for banks and financial
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institutions to meet the funding requirements of the housing sector. Travel related
services are emerging as an important avenue for the banking sector. As capital market
expands, both internally and externally, the scope for advisory services will be immense
for commercial banks and term lending institutions in future.
The weaknesses of Banks and non-banking financial institutions in terms of low
competitive efficiency, productivity and low profitability of their assets have forced them
to enter into new areas of non-bank financial services since the early eighties. Along with
the increasing integration of financial markets, there has been a remarkable growth in the
types of new financial services. The task before the financial institutions in
accommodating these changes assumes added significance in the wake of deregulation in
the domestic financial markets and lesser controls over cross-border flow up of capital.
With these perceived changes, banks and financial institutions besides retaining their
traditional activities, will have to provide wider range of financial services entailing more
competition and declining margin. Hence, there is a greater need for integration of
various financial markets so that proper intermediation between household savings and
investment of funds on the one hand and international financial markets on the other hand
is facilitated.
Answer the following questions:-
1. Briefly describe the financial services offered by banks
2. Explain the new challenges faced by the banks in Financial Services industry
3. What are the emerging dimensions in the financial services offered by banks ?