15 Main Scope of Financial Services


Scope of Financial Services

The scope of financial services is very wide. This is because it covers a wide range of services. Financial services can be broadly classified into two:

  1. Equipment Leasing or Lease Financing
  2. Hire Purchase and Consumer Credit
  3. Bill Discounting
  4. Venture Capital
  5. Housing Finance
  6. Insurance services
  7. Factoring
  8. Forfaiting
  9. Mutual Fund
  10. Merchant Banking
  11. Credit Rating
  12. Stock Broking
  13. Custodial Services
  14. Loan Syndication
  15. Securitization
Scope of Financial Services
Scope of Financial Services

Fund Based Services

Equipment Leasing or Lease Financing

A lease is an agreement under which a firm acquires a right to make use of a capital asset like machinery etc. on payment of an agreed fee called lease rentals. The person (or the company) which acquires the right is known as lessee.

He does not get the ownership of the asset. He acquires only the right to use the asset. The person (or the company) who gives the right is known as lessor.

Hire Purchase and Consumer Credit

Hire purchase is an alternative to leasing. Hire purchase is a transaction where goods are purchased and sold on the condition that payment is made in installments.

The buyer gets only possession of goods. He does not get ownership. He gets ownership only after the payment of the last installment. If the buyer fails to pay any installment, the seller can repossess the goods. Each installment includes interest also.

Bill Discounting

Discounting of bill is an attractive fund based financial service provided by the finance companies. In the case of time bill (payable after a specified period), the holder need not wait till maturity or due date. If he is in need of money, he can discount the bill with his banker.

After deducting a certain amount (discount), the banker credits the net amount in the customer’s account. Thus, the bank purchases the bill and credits the customer’s account with the amount of the bill less discount.

On the due date, the drawee makes payment to the banker. If he fails to make payment, the banker will recover the amount from the customer who has discounted the bill. In short, discounting of bills mean giving loans on the basis of bills of exchange.

Venture Capital

Venture capital simply refers to capital which is available for financing the new business ventures. It involves lending finance to the growing companies. It is the investment in a highly risky project with the objective of earning a high rate of return. In short, venture capital means long term risk capital in the form of equity finance.

Housing Finance

Housing finance simply refers to providing finance for house building. It emerged as a fund based financial service in India with the establishment of National Housing Bank (NHB) by the RBI in 1988. It is an apex housing finance institution in the country.

Till now, a number of specialised financial institutions/companies have entered in the field of housing finance. Some of the institutions are HDFC, LIC Housing Finance, Citi Home, Ind Bank Housing etc.

Insurance services

Insurance is a contract between the insurer (insurance company) and the insured (individual or entity seeking coverage). The insurer promises to compensate the insured for any loss from specific risks in exchange for regular payments, called premiums.

The terms and conditions of the agreement are detailed in the insurance policy, and the compensation amount, or “sum assured,” is defined. This system transforms uncertainties into certainties and enables the collective sharing of risk. Premiums can be paid on a monthly, quarterly, semi-annual, or annual basis.

Factoring

Factoring is an arrangement under which the factor purchases the account receivables (arising out of credit sale of goods/services) and makes immediate cash payment to the supplier or creditor. Thus, it is an arrangement in which the account receivables of a firm (client) are purchased by a financial institution or banker.

Thus, the factor provides finance to the client (supplier) in respect of account receivables. The factor undertakes the responsibility of collecting the account receivables. The financial institution (factor) undertakes the risk. For this type of service as well as for the interest, the factor charges a fee for the intervening period. This fee or charge is called factorage.

Forfaiting

Forfaiting is a form of financing of receivables relating to international trade. It is a non-recourse purchase by a banker or any other financial institution of receivables arising from export of goods and services. The exporter surrenders his right to the forfaiter to receive future payment from the buyer to whom goods have been supplied.

Forfaiting is a technique that helps the exporter sells his goods on credit and yet receives the cash well before the due date. In short, forfaiting is a technique by which a forfaitor (financing agency) discounts an export bill and pay ready cash to the exporter. The exporter need not bother about collection of export bill. He can just concentrate on export trade.

Mutual Fund

Mutual funds are financial intermediaries which mobilise savings from the people and invest them in a mix of corporate and government securities. The mutual fund operators actively manage this portfolio of securities and earn income through dividend, interest and capital gains. The incomes are eventually passed on to mutual fund shareholders.

Non-Fund Based or Fee Based Services

Merchant Banking

Merchant banking is basically a service banking, concerned with providing non-fund based services of arranging funds rather than providing them. The merchant banker merely acts as an intermediary. Its main job is to transfer capital from those who own it to those who need it.

Today, merchant banker acts as an institution which understands the requirements of the promoters on the one hand and financial institutions, banks, stock exchange and money markets on the other.

SEBI (Merchant Bankers) Rule, 1992 has defined a merchant banker as, “any person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to securities or acting as manager, consultant, advisor, or rendering corporate advisory services in relation to such issue management”.

Finance and Accounting Outsourcing (FAO) has become a pivotal strategy for businesses aiming to streamline their financial operations and optimize resource allocation. The concept of Finance and Accounting Outsourcing involves delegating financial tasks such as bookkeeping, payroll management, and tax preparation to specialized external service providers. By leveraging the expertise of professionals in the field, companies can achieve cost efficiencies and focus on core business functions.

Credit Rating

Credit rating means giving an expert opinion by a rating agency on the relative willingness and ability of the issuer of a debt instrument to meet the financial obligations in time and in full. It measures the relative risk of an issuer’s ability and willingness to repay both interest and principal over the period of the rated instrument.

It is a judgement about a firm’s financial and business prospects. In short, credit rating means assessing the creditworthiness of a company by an independent organisation.

Stock Broking

Now stock broking has emerged as a professional advisory service. Stock broker is a member of a recognized stock exchange.

He buys, sells, or deals in shares / securities. It is compulsory for each stock broker to get himself / herself registered with SEBI in order to act as a broker. As a member of a stock exchange, he will have to abide by its rules, regulations and bylaws.

Custodial Services

In simple words, the services provided by a custodian are known as custodial services (custodian services). Custodian is an institution or a person who is handed over securities by the security owners for safe custody. Custodian is a caretaker of a public property or securities.

Custodians are intermediaries between companies and clients (i.e. security holders) and institutions (financial institutions and mutual funds). There is an arrangement and agreement between custodian and real owners of securities or properties to act as custodians of those who hand over it.

The duty of a custodian is to keep the securities or documents under safe custody. The work of custodian is very risky and costly in nature. For rendering these services, he gets a remuneration called custodial charges. Thus custodial service is the service of keeping the securities safe for and on behalf of somebody else for a remuneration called custodial charges.

Loan Syndication

Loan syndication is an arrangement where a group of banks participate to provide funds for a single loan. In loan syndication, a group of banks comprising 10 to 30 banks participate to provide funds wherein one of the banks is the lead manager.

This lead bank is decided by the corporate enterprises, depending on confidence in the lead manager. A single bank cannot give a huge loan. Hence a number of banks join together and form a syndicate. This is known as loan syndication. Thus, loan syndication is very similar to consortium financing.

Securitisation

Securitisation is a financial process that turns a bank’s illiquid loan assets into tradable securities. The bank’s loans, such as credit card balances, hire purchase debtors, and lease receivables, are transformed into marketable assets by turning them into securities that can be sold to investors.

This makes these originally non-transferable loans liquid and marketable. Unlike factoring, which simply transfers debts, securitisation transforms illiquid assets into securities that can be traded in the open market.


FAQs About the Scope of Financial Services

What is the scope of financial services?

The scope of financial services is vast and encompasses a wide range of activities that facilitate the management of money and assets. Here are some key aspects:
1. Equipment Leasing or Lease Financing
2. Hire Purchase and Consumer Credit
3. Bill Discounting
4. Venture Capital
5. Housing Finance
6. Insurance services
7. Factoring
8. Forfaiting
9. Mutual Fund
10. Merchant Banking.

What is lease?

A lease is a contract outlining the terms under which one party agrees to rent property owned by another party. It guarantees the lessee, also known as the tenant, use of an asset and guarantees the lessor, the property owner, or landlord, regular payments from the lessee for a specified number of months or years.

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