MODULE I
INTRODUCTION TO FINANCIAL SERVICES
2 MARKS QUESTIONS
1. Define Financial services
Financial service can be defined as activities, benefits and satisfactions connected with
the sale of money that offer to users and customers financial related value.
2. Who is a category II merchant banker?
They are permitted to undertake the functions of co-managers, underwriters,
consultants and advisors to capital issues. They can also act as portfolio managers.
They should have a minimum net worth Rs. 50 lakhs.
3. Explain Loan Syndication
It means arranging and mobilizing credit from financial institutions, banks and other
lending institutions for financing the project cost or meeting working capital
requirement.
4. What are Non-banking financial companies.
It is a financial institution registered under the companies act 1956 and is engaged in
the business of loans and advances, leasing, hire purchase, insurance business etc.
5. Who are Merchant bankers?
Merchant bankers are persons engaged in the business of issue management either
by making arrangements regarding selling, buying or subscribing to securities as
manager, consultant, advisor or rendering corporate advisory services in relation to
such issue management.
5 MARKSQUESTIONS
6. Define financial services. Explain the features of financial services.
Financial service can be defines as all those services available in the financial market
which either do or assist the mobilization of savings and their conversion in investment.
Features of financial services
a. Intangible – Effectiveness, quality of the financial service can be evaluated only
from the feedback from the customers.
b. Direct sale – There is no intermediary between buyer and seller the distribution of
financial services.
c. Tailor made – Financial services are provided based on the requirements of the
customer.
d. Customer orientation – Financial services are offering their products and services
based on the customers needs and wants.
e. Wide range of products – It will provide wide range of products.
f. Geographical dispersion – Financial services are widely dispersed so the
customers can access these services from their own location.
g. Skilled employees – In order to provide various financial services skilled
employees are required because innovative products are offered in the financial
service.
7. Who is a Merchant banker? What are the classifications of a Merchant banker?
SEBI regulation act defines Merchant banker as “ any person engaged in the business
of issue management either by making arrangements regarding selling, buying or
subscribing to securities as manager, consultant, advisor or rendering corporate
advisory services in relation to such issue management.”
Category I Merchant banker
They are permitted to perform issue management as well as lead manager, co-
managers, portfolio managers, underwriters, consultants and advisors to capital
issues. Such banks must have minimum net worth of 5 crores.
Category II Merchant banker
They are permitted to undertake the functions of co-managers, underwriters,
consultants and advisors to capital issues. They can also act as portfolio managers.
They should have a minimum net worth of Rs.50 lakhs.
Category III Merchant banker
They undertake the functions of underwriters, consultants and advisors to capital
issues. Such companies should have minimum net worth of Rs.20 lakhs.
Category IV Merchant banker
They can act only as advisor or consultant to issue.
8. Difference between Commercial and Merchant banking
Commercial banking Merchant banking
Concentrate on deposit and Concentrate on securities
lending activities. underwriting and other security
related activities.
Extends credit facilities to Assist the financing of
individuals and corporates. corporates to issue management
Serves the financial Serves mostly the financial
requirements of the general needs of the large corporation.
public like individuals
businessman etc.
Offers retail banking like Meets the financial requirements
personal loan ,vehicle loan, of corporates.
housing loans to the general
public.
Grants short term loans and Provides mainly medium and
advances. long term finance.
15 MARKSQUESTIONS
9. Explain types of financial services.
Financial service can be defines as all those services available in the financial market
which either do or assist the mobilization of savings and their conversion in investment.
Features of financial services
Intangible – Effectiveness, quality of the financial service can be evaluated
only from the feedback from the customers.
Direct sale – There is no intermediary between buyer and seller the
distribution of financial services.
Tailor made – Financial services are provided based on the requirements
of the customer.
Customer orientation – Financial services are offering their products and
services based on the customers needs and wants.
Wide range of products – It will provide wide range of products.
Geographical dispersion – Financial services are widely dispersed so the
customers can access these services from their own location.
Skilled employees – In order to provide various financial services skilled
employees are required because innovative products are offered in the
financial service.
Financial services can be classified into two;
a. Fund based services
b. Fee based services.
a. Fund based services
The important types of financial services under fund based category are ;
1. Leasing – Leasing is an agreement between lessor and lessee for using
an asset for a specified period of time by receiving a rent known as lease
rent. The person who owns the asset is called lessor and the person who
use the asset is called lessee. In leasing only possession of the goods is to
be transferred. After the use lessee will return the asset to the lessor .
2. Hire Purchase – Under hire purchase goods are to be purchased in
installments. The ownership of the goods is to be transferred only on the
last installment is to be paid. The owner of the asset is called vendor and
person who buys the asset is called hire purchaser.
3. Bill discounting – If the holder of the bill needs cash before the maturity
date of the bill then he can present this bill to the bank before the maturity
date. Then bank encashes the bill after deducting some charges known as
discount. This process is known as bill discounting.
4. Venture capital financing – Venture capital means risk capital. Venture
capital financing is a type of financing high risk projects with long term
growth potential. It is a multi stage financing where funds are provided in
various phases of the working of a project.
5. Factoring – It is a mechanism in which credit receivables of a firm are to
be managed. For this business firm appoints an agency known as factoring
firm. They will collects debts of the firm. For this they will charge
commission known as factorage. It will reduce bad debts of the firm.
b. Fee based services
1. Merchant banking – Merchant banking deals with management of issues
for raising funds through various types of instruments by the companies.
The specialized services of merchant banking also include corporate
counselling, project counselling, portfolio management and underwriting.
2. Stock brokering – It offers expert services to people to invest in stock
markets. The stock brokering firm buys and sells stock on behalf of its
clients.
3. Credit rating – Credit rating is the service of analyzing credit worthiness of
a company it makes balanced and objective view of the financial situation
of a borrower and his capacity to repay the debt a high rating shows a low
profitability of defaulting on the debt and the low credit rating suggest high
profitability of default.
4. Loan syndication – In this service a group lending institution is formed or
arranged to provide funds for a client. The syndicate of lenders is
constituted when the project of the client is unusually large or complex.
2. what are the functions of merchant banks ?
Ans : merchant banks are neither merchants nor banker . they are
non fund based , non banking service organization . they are
specialized financial intermediary who help to mobilize and transfer
capital from those who possess it to those who need it
Functions of merchant bank
• Corporate counselling : it covers the entire range of financial
service provided by a merchant bankers
• Project counselling : it include the preparation of a project
report , deciding the financial pattern .
• Credit syndication : it means arranging and getting loans from
financial institution , banks and other lending and investment
organization
• Issue management : management to capital issue is a
professionalized service rendered by skilled and experienced
merchant bankers
• Underwriting of public issues : underwriting is a guarantee given
by the underwriter that in the event of under subscription the
amount underwritten would be subscribed in proportion by the
underwriter .
• Portfolio management : they take up the management of
portfolio of securities . portfolio means investment in different
types of securiities
• Advisory services relating to merger and take overs
• Relief to sick companies
• Acceptance of bill discounting
3. explain the pre issue and post issue financial service
provided by merchant banker ?
Ans : pre issue management acitivites
• Lead manager : merchant banker is the lead manager and
has to get the moa & aoa approved by the stock exchange
• Appointment of agencies : merchant banker had to appoint
various agencies
• Underwriting of share
• Appointment of brokers
• Appointment of bankers
• Appointment of registrars
• Prospectus formalities
• Completing stock exchange formalities
Post issue management activities
• Analysis of collection : subscription list is open for a minimum
period of 3 and maximum of 10 working days
• Processing of data : subscribers name , occupation , address
etc
• Allotment of shares or debentures
• Issue of refund orders and allotment letter
• Listing of security
