CHAPTER : 1

INDUSTRY PROFILE
( Indian Financial Industry )
1.1 Financial Institutions :-
 A financial institution (FI) is a company engaged in the business of dealing with
financial and monetary transactions such as deposits, loans, investments and
currency exchange. Financial institutions include a broad range of business
operations within the financial services sector, including banks, insurance
companies, brokerage firms, and investment dealers.

 Financial institutions are vital to a fPunctioning capitalist economy in matching

people seeking funds with those who can lend or invest it.
 Financial institutions encompass a broad range of business operations within the
financial services sector including banks, insurance companies, brokerage firms, and
investment dealers.

1.1.1 Banking Institutions :-

 The term "banking institution" as used in this part shall be construed to mean any
bank, trust company, bank and trust company, stock savings bank, or mutual savings
bank, which is now or may hereafter be organized under the laws of this state.

There are two types of banking financial institutions: depository and non-
depository.
 Depository institutions include banks, savings and loans associations, credit unions,
and mutual savings banks.
 Non-depository institutions include finance companies, insurance companies, and
pension funds.

Commercial banks:

 A commercial bank is a kind of financial institution that carries all the operations
related to deposit and withdrawal of money for the general public, providing loans
for investment, and other such activities. These banks are profit-making institutions
and do business only to make a profit.

1. Public Sector :- Public Sector Undertakings (Banks) are a major type of government-
owned banks in India, where a majority stake (i.e., more than 50%) is held by the
Ministry of Finance (India) of the Government of India or State Ministry of Finance
of various State Governments of India. Example:- State Bank of India (SBI) , Bank of
Baroda (BOB) , Canara Bank , Punjab National Bank (PNB).

2. Private Sector :- Private sector banks are banks where the majority of the bank's
equity is owned by a private company or a group of individuals. They comply with
the central bank's guidelines yet have a unique financial system. Example :- HDFC
Bank , Kotak Mahindra Bank , ICICI Bank , Axis Bank.
3. Regional Rural Banks (RRB’s) :- Regional Rural Banks (RRB) are Indian
Scheduled Commercial Banks ( Government Banks) operating at regional level in
different states of India. They have been created with a view of serving primarily the
rural areas of India with basic banking and financial services. Example :- Andhra
Pragathi Grameena Bank , Andhra Pradesh Grameena Vikas Bank , Uttar Bihar
Gramin Bank.

4. Foreign Banks :- Foreign banks are those banking companies which open a branch in
a different nation than the headquarters. They have their registered office in one
country. These foreign banks open a branch in other countries. It is to provide better
services and convenience to multinational customers. Example :- City Bank , DBS
Bank , Bank of America , HSBC Bank.

Cooperative Banks :-

 Cooperative banking refers to a small financial institution started by a group of

individuals to address the capital needs of their specific community. Such financial
institutions are owned and controlled by their members, and the board members are
democratically selected to oversee the operations. Examples :- Saraswat Cooperative
Bank , Shamrao Vithal Cooperative Bank (SVC Bank) , Abhyudaya Cooperative
Bank.
1.1.2 Non-Banking Institutions :-
 A Non-Banking Financial Company (NBFC) is a company registered under the
Companies Act, 1956 engaged in the business of loans and advances, acquisition of
shares/stocks/bonds/debentures/securities issued by Government or local authority or
other marketable securities of a like nature, leasing, hire-purchase, insurance
business, chit business but does not include any institution whose principal business
is that of agriculture activity, industrial activity, purchase or sale of any goods (other
than securities) or providing any services and sale/purchase/construction of
immovable property. A non-banking institution which is a company and has principal
business of receiving deposits under any scheme or arrangement in one lump sum or
in installments by way of contributions or in any other manner, is also a non-banking
financial company (Residuary non-banking company).
Organised Financial Institutions :-
 The organised sector is made up of businesses that are registered with the
government and follow its guidelines and regulations. These businesses usually have
more resources, such as money and employees, than those in the unorganised sector.
They also tend to be more efficient and productive. The main reason these businesses
can be so successful is that they have access to a larger market and can sell their
products or services for a higher price.
Unorganised Financial Institutions :-
 The unorganised sector is made up of businesses that are not registered with the
government and do not follow its guidelines and regulations. These businesses
usually have fewer resources, such as money and employees, than those in the
organised sector. They also tend to be less efficient and productive. The main reason
these businesses are not as successful is that they have a smaller market and can only
sell their products or services for a lower price.
1.2 Financial Markets :-
 Financial Markets include any place or system that provides buyers and sellers the
means to trade financial instruments, including bonds, equities, the various
international currencies, and derivatives. Financial markets facilitate the interaction
between those who need capital with those who have capital to invest. In addition to
making it possible to raise capital, financial markets allow participants to transfer risk
(generally through derivatives) and promote commerce.

1.2.1 Money Market :-

 Money market basically refers to a section of the financial market where financial
instruments with high liquidity and short-term maturities are traded. Money market
has become a component of the financial market for buying and selling of securities
of short-term maturities, of one year or less, such as treasury bills and commercial
papers.
 Over-the-counter trading is done in the money market and it is a wholesale process. It
is used by the participants as a way of borrowing and lending for the short term.

Call Money Market :-

 Call money, also known as money at all , is a short-term financial loan that is
payable immediately, and in full, when the lender demands it. Unlike a term loan
, which has a set maturity and payment schedule, call money does not have to
follow a fixed schedule, nor does the lender have to provide any advance notice
of repayment.
Treasury Bills :-
 Treasury Bill is a money market instrument is issued by the Government of India.
The bill is issued as a promissory note of repayment in the future. The purpose of
 a treasury note is to secure funds to meet the short-term fund requirements of the
government.
Commercial Bills :-
 Commercial bill is an instrument that helps companies to get advance payment for
the invoices they raise after making sales to their customers. Commercial bills are
issued for financing needs of the medium term. It comes into effect only after a
sale has taken place.

1.2.2 Capital Market :-

 Capital markets are financial markets that bring buyers and sellers together to
trade stocks, bonds, currencies, and other financial assets. Capital markets include
the stock market and the bond market. They help people with ideas become
entrepreneurs and help small businesses grow into big companies.

Primary Market :-
 A primary market is a source of new securities. Often on an exchange, it's where
companies, governments, and other groups go to obtain financing through debt-based
or equity-based securities. Primary markets are facilitated by underwriting groups
consisting of investment banks that set a beginning price range for a given security
and oversee its sale to investors.
Secondary Market :-
 The secondary market is where investors buy and sell securities. Trades take place on
the secondary market between other investors and traders rather than from the
companies that issue the securities. People typically associate the secondary market
with the stock market. National exchanges, such as the New York Stock Exchange
 (NYSE) and the NASDAQ, are secondary markets. The secondary market is where
securities are traded after they are put up for sale on the primary market.
Derivative Market :-
 The term derivative refers to a type of financial contract whose value is dependent on
an underlying asset, group of assets, or benchmark. A derivative is set between two
or more parties that can trade on an exchange or over-the-counter (OTC).

 These contracts can be used to trade any number of assets and carry their own
risks. Prices for derivatives derive from fluctuations in the underlying asset. These
financial securities are commonly used to access certain markets and may be traded
to hedge against risk. Derivatives can be used to either mitigate risk (hedging) or
assume risk with the expectation of commensurate reward (speculation). Derivatives
can move risk (and the accompanying rewards) from the risk-averse to the risk
seekers.

1.3 Financial Instruments:-

 Common examples of financial instruments include stocks, exchange-traded funds
(ETFs), mutual funds, real estate investment trusts (REITs), bonds, derivatives
contracts (such as options, futures, and swaps), checks, certificates of deposit (CDs),
bank deposits, and loans.

1.3.1 Three Terms of Financial Instruments :-

1. Short Term :- Short-term debt-based financial instruments last for one year or less.
Securities of this kind come in the form of Treasury bills (T-bills) and commercial
paper. Bank deposits and certificates of deposit (CDs) are also technically debt-based
instruments that credit depositors with interest payments.
 2. Medium Term :- The medium term is a financial period that denotes the time horizon
or holding period for an asset or investment. How long the term is, generally depends
on the investor and the nature of the asset. Here, the asset can be a stock, a bond, or a
real estate property.

3. Long Term :- Long-term finance can be defined as any financial instrument with
maturity exceeding one year (such as bank loans, bonds, leasing and other forms of
debt finance), and public and private equity instruments.

1.3.2 Types Of Financial Instruments :-

1. Primary Securities :- Primary security is the asset created out of the credit facility
extended to the borrower and / or which are directly associated with the business /
 project of the borrower for which the credit facility has been extended. Collateral
security is any other security offered for the said credit facility.
2. Secondary Securities :- Securities are initially issued in a primary market. After
issuance, such securities are listed in stock exchanges for subsequent trading. Trading
of already issued securities takes place in a secondary market. Investors purchase
shares directly from the issuer in the primary market.
3. Innovative Securities :- Innovative financial instruments are a range of activities
such as. participation in equity (risk capital) funds. guarantees to local banks lending
to a large number of final beneficiaries, for instance small and medium-sized
enterprises (SMEs).

1.4 Financial Services :-

 In general, all types of activities which are of financial nature may be regarded as
financial services. In a broad sense, the term financial services means mobilisation
and allocation of savings. Thus, it includes all activities involved in the
transformation of savings into investment.
 Financial services refer to services provided by the finance industry. The finance
industry consists of a broad range of organisations that deal with the management of
money. These organisations include banks, credit card companies, insurance
companies, consumer finance companies, stock brokers, investment funds and some
government sponsored enterprises.
 Financial services may be defined as the products and services offered by financial
institutions for the facilitation of various financial transactions and other related
activities.
 Financial services can also be called financial intermediation. Financial
intermediation is a process by which funds are mobilised from a large number of
savers and make them available to all those who are in need of it and particularly to
corporate customers. There are various institutions which render financial services.
Some of the institutions are banks, investment companies, accounting firms, financial
institutions, merchant banks, leasing companies, venture capital companies, factoring
companies, mutual funds etc. These institutions provide variety of services to
corporate enterprises. Such services are called financial services. Thus, services
rendered by financial service organisations to industrial enterprises and to ultimate
consumer markets are called financial services. These are the services and facilities
 required for the smooth operation of the financial markets. In short, services provided
by financial intermediaries are called financial services.

Functions of financial services:

1. Facilitating transactions (exchange of goods and services) in the economy.
2. Mobilizing savings (for which the outlets would otherwise be much more limited).
3. Allocating capital funds (notably to finance productive investment).
4. Monitoring managers (so that the funds allocated will be spent as envisaged).
5. Transforming risk (reducing it through aggregation and enabling it to be carried by those
more willing to bear it).
Characteristics or Nature of Financial Services:
1. Intangibility: Financial services are intangible. Therefore, they cannot be standardized or
reproduced in the same form. The institutions supplying the financial services should have a
better image and confidence of the customers. Otherwise, they may not succeed. They have
to focus on quality and innovation of their services. Then only they can build credibility and
gain the trust of the customers.
2. Inseparability: Both production and supply of financial services have to be performed
simultaneously. Hence, there should be perfect understanding between the financial service
institutions and its customers.
3. Perishability: Like other services, financial services also require a match between
demand and supply. Services cannot be stored. They have to be supplied when customers
need them.
4. Variability: In order to cater a variety of financial and related needs of different
customers in different areas, financial service organisations have to offer a wide range of
products and services. This means the financial services have to be tailor-made to the
requirements of customers. The service institutions differentiate their services to develop
their individual identity.
5. Dominance of human element: financial services are labour intensive. quality financial
products. Financial services are dominated by human element. Thus, It requires competent
and skilled personnel to market the
6. Information based: Financial service industry is an information based industry. It
involves creation, dissemination and use of information. Information is an essential
component in the production of financial services.
Importance of Financial Services

 The successful functioning of any financial system depends upon the range of
financial services offered by financial service organisations. The importance of
financial services may be understood from the following points:
1. Economic growth: The financial service industry mobilises the savings of the people, and
channels them into productive investments by providing various services to people in general
and corporate enterprises in particular. In short, the economic growth of any country depends
upon these savings and investments.
2. Promotion of savings: The financial service industry mobilises the savings of the people
by providing transformation services. It provides liability, asset and size transformation
service by providing huge loan from small deposits collected from a large number of people.
In this way financial service industry promotes savings.
3. Capital formation: Financial service industry facilitates capital formation by rendering
various capital market intermediary services. Capital formation is the very basis for economic
growth.
4. Creation of employment opportunities: The financial service industry creates and
provides employment opportunities to millions of people all over the world.
5. Contribution to GNP: Recently the contribution of financial services to GNP has been
increasing year after year in almost countries.
6. Provision of liquidity: The financial service industry promotes liquidity in the financial
system by allocating and reallocating savings and investment into various avenues of
economic activity. It facilitates easy conversion of financial assets into liquid cash.

Fund Based Financial Services :-

 Fund based financial services are centered around the provision and management of
funds. Financial institutions engage in lending activities, where they provide funds to
individuals or entities and earn interest on the lent amount over a specified tenure.
Here are several types of fund-based financial services.

 Leasing:
o Leasing is a contractual arrangement where assets are provided to clients for
use over a specified period in return for periodic lease payments.

o Example: Companies leasing vehicles or equipment from financial

institutions, making periodic payments as per the lease agreement.
 Hire Purchase:

o In a hire purchase agreement, customers can purchase assets by making an

initial down payment followed by subsequent periodic payments.

o Example: Acquiring machinery or vehicles on hire purchase, paying a part of

the cost upfront and the rest in installments.
 Insurance:

o Insurance services provide coverage against specified risks, offering financial

protection to individuals and entities.

o Example: Insurance companies offering life insurance, health insurance, or

property insurance.
 Bill Discounting:

o Bill discounting is a short-term financing facility where a bank purchases a bill

of exchange from a client at a discount and makes the payment on the maturity
date.

o Example: A bank purchasing a bill of exchange from a client at a discount and

making the payment on the maturity date.
 Consumer Credit:

o Consumer credit involves providing funds to individuals for purchasing

consumer goods like vehicles, appliances, or other products.

o Example: Banks providing loans to individuals for purchasing vehicles or

other consumer goods.
  Venture Capital:

o Venture capital is a specialized fund-based service providing financing to

startups and small enterprises showing potential for high growth.

o Example: Venture capital firms providing funding to promising tech startups

to help them scale their operations.

Fee Based Financial Services :-

 Fee-based financial services do not involve the provision of funds but rather are about
offering financial services or advice for a fee. Here are several types of fee-based
financial services:

 Stock Broking:

o Stockbroking services involve facilitating the buying and selling of securities

like stocks, bonds, and other financial instruments.

o Example: Stockbrokers buying and selling shares on behalf of clients in return

for a commission.
 Debt Restructuring:

o Debt restructuring services involve modifying the terms of existing debt

agreements to make them more favorable for the borrower.

o Example: Financial institutions helping borrowers restructure their debt by

modifying the interest rate or repayment schedule.
 Credit Rating:

o Credit rating services involve assessing the creditworthiness of individuals or

entities and assigning a credit rating based on the assessment.

o Example: Credit rating agencies assessing the creditworthiness of companies

and assigning a credit rating based on the assessment.
 Merchant Banking:

o Merchant banking encompasses corporate advisory services to businesses,

including assistance in mergers, acquisitions, and capital market operations.
 o Example: Merchant banks advising companies on mergers and acquisitions or
public offerings.
 Issue Management:

o Issue management services involve assisting companies in raising capital

through public offerings of securities like stocks or bonds.

o Example: Financial institutions helping companies raise capital through public

offerings of securities like stocks or bonds.
 Underwriting Services:

o Underwriting services involve guaranteeing the sale of securities by acting as

an intermediary between the issuing company and the public, assessing the
risk and pricing of securities.

o Example: Financial institutions providing underwriting services for public

stock or bond offerings, ensuring the successful sale of securities.

In conclusion, fund-based and fee-based financial services cater to the diverse financial needs
of individuals and businesses. While fund-based services focus on the provision of funds and
financing, fee-based services offer expertise, advisory, and other financial services for a fee.
Financial institutions often provide a blend of both fund-based and fee-based services,
enabling them to offer a comprehensive range of financial solutions to their clients.