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A CHANGING SCENARIO

OF
FINNCIAL SERVICES IN INDIA

By
Prof. PUTTU GURU PRASAD
FACULTY MEMBER
ICFAI National College,
Guntur.

Introduction:
All types of activities which are of a financial nature could be brought under financial
service. It means mobilizing and allocating investments, includes all activities involved in the
transformation savings into investments. It is also called as a financial intermediation; it is the
process by which funds are mobilized from a large number of savers and make them available
to all those who are who are in need of it and particularly to corporate customers. Thus,
financial services sector is a key area for the Indian economy in developing industrial
development.
As India is a fastest growing economy most of the financial services organizations are
striving to achieve increasingly ambitious profit and growth targets against a background of
heightened risk, regulation and market pressures. Customer needs and expectations are
evolving in the face of increasing personal wealth, more private funding of pensions and
healthcare and the desire for ever more accessible and personalized financial products and
services. In turn, intense competition has squeezed industry margins and forced organizations
to cut costs while still seeking to enhance the quality of client choice and service. The battle
for talent is also heating up as companies seek to enhance innovation, customer loyalty and
investment returns.
The corollary of this market evolution is increasing risk as products become more
complex, organizations more diffuse and the business environment ever more uncertain.
Regulation is also tightening in the wake of public and government pressure for improved
governance, transparency and accountability. In this environment, the winners will be
companies that can turn the challenges into opportunities to build stronger and more enduring
customer relationships; sharpen process efficiency; unlock talent and creativity; use improved
risk management processes to deliver more sustainable returns; and use new regulatory
demands as a catalyst for strengthening the business and enhancing market confidence.
Some of the major financial services offered by the most of the financial services companies
in India are:
1. Capital markets (primary and Secondary)
2. Securities and Exchange Board of India(SEBI)
3. Merchant Banking
4. Hire Purchase
5. Leasing
6. Factoring
7. Venture Capital
8. Mutual Funds
9. Credit Rating
10. Insurance Services
Some of the innovative financial services offered by the most of the financial services
companies in India are:
1. Carrot and Stick Bonds
2. Flip-Flop Notes
3. Loyalty Coupons
4. Dual Currency Bonds
5. Inter-bank Participants(IBPs)
6. Cyclical and Non-Cyclical Shares
7. Alpha Shares
8. Index-Linked Guilt Bonds
9. Secured Premium Notes
10. Easy Exit Bonds
11. ADR and GDR’s
Analysis:
India is one of the fastest growing economies in the world with a rapidly expanding
financial services sector. After adjustments for purchasing power parity, India's economy is
the fourth largest in the world in terms of Gross Domestic Product (GDP). An efficient
securities market provides the necessary channel for flow of resources from the providers of
capital to the users of capital for economic development. The overall growth of the economy
and economic activity are also important factors, which determine availability of resources. In
India because of the Liberalization, Privatization and Globalization introduced by Mr.
P.V.Narasimharao, the scenario has been changing in the financial services industry.

Before LPG in 1991:

During the late time before the Indian economy LPG, the Indian financial services
industry was dominated by the commercial banks and other financial institutions which cater
to the requirements of the Indian industry. Infact the capital market played a secondary role
only. The economic liberalization has brought in a complete transformation in the Indian
financial services industry.
Prior to the economic liberalization, the Indian financial service sector was
characterized by so many factors which retarded the growth of the financial services sector.
Some of the significant factors were:
1. Excessive controls in the form of regulations of interest rates, money rates etc.
2. Too many controls over the prices of securities under the controller of the
capital issues.
3. Non-availability of financial instruments on a large scale as well as on
different varieties.
4. Absence of independent credit rating and credit research agencies.
5. Lack of information about international developments in the financial sector.
6. Absence of a developed government securities market and the existence of
stagnant capital market without any reformation.
7. Strict regulation of foreign exchange market with too many restrictions on
foreign investment and foreign equity holding in Indian companies.
8. Non-availability of debt and other instruments on a large scale.

After LPG in 1991:

After the economic liberalization, the entire financial services sector has undergone a
rapid change and now we are witnessing the emergence of new financial products and
services almost everyday. The Indian financial services industry has experienced significant
growth in the last few years. There has been a considerable broadening and deepening of the
Indian financial markets due to various financial market reforms undertaken by the Indian
regulators, the introduction of innovative financial instruments in recent years and the entry of
sophisticated domestic and international financial services participants. Sectors such as
banking, asset management and brokerage have been liberalized to allow private sector
involvement, which has contributed to the development and modernization of the financial
services sector. This is particularly evident in the non-banking financial services sector, such
as brokerage, residential mortgage and insurance services, where new products and expanding
delivery channels have helped these sectors to achieve high growth rates recently. Financial
services accounted for approximately 14% of total GDP in Fiscal 2007.

Regulatory Developments:
The following are certain regulatory developments in the Indian financial sector since
India's economic reforms. As part of the reforms process, the
1. Capital Issues (Control) Act, 1947 was repealed in 1992 and replaced by the
SEBI Act, 1992, paving the way for market-determined allocation of resources.
The Investor Education and Protection Fund was established for the promotion
of aware.
2. Reserve bank of India to regulate the banking and other services in India.
3. Insurance regulatory and development authority for regulating and monitoring
of insurance companies.
4. Depository act for the settlement system on Indian stock exchanges gave rise
to settlement risk due to the lapse of time before trades were settled by NSDL
and CDSL.
5. Different exchanges were started to trade different financial instruments.

The financial intermediaries render innumerable services in recent times. Most of them are
nature of non-fund based activity. Some of the modern services are:
1. Rendering project advisory services right from the preparation of the project
till the raising of funds for starting the project with necessary government
approval.
2. Planning for mergers and acquisitions and assisting for their smooth carry out.
3. Guiding corporate customers in capital restructuring.
4. Managing the portfolio of large public sector corporations and undertaking risk
management services like insurance, buy-back options etc.
5. Hedging of risk due to exchange rate risk, interest rate risk, economic risk, and
political risk by using derivative products.
6. Structuring the financial collaboration/joint ventures by identifying suitable
joint venture partner and preparing joint venture agreement.
7. Promoting credit rating agencies for the purpose of rating companies which
want to go public by the issue of debt instruments.
8. Undertaking services related to capital markets such as:
• Clearing services
• Registrations and transfers
• Safe-custody of securities
• Collection of income on securities.

Causes for Financial Innovation:


Financial intermediaries have to perform the task of financial innovation to meet the
dynamically changing needs of the economy and to help the investors cope with an
increasingly volatile and uncertain market place. There is a necessity for the financial
intermediaries to go for innovation due to the following reasons:
1. Low profitability
2. keen competition
3. Economic liberalization
4. Improved communication technology
5. Customer service
6. Global impact
7. Investor awareness
Players in Financial
Services Sector

Unorganized
Organized sector
sector

Capital market Money market Indigenous Traders and


intermediaries Intermediaries
Money lenders Bankers
Pawn brokers landlords

Development RBI
banks
Insurance Commercial Banks
companies

Agriculture Financial Co-operative


institutions banks

Government
EXIM Bank
(Treasury bills)

Government
(P.F, NSC)

NBFC

Hire purchase
companies

Leasing companies

Investment
companies

Finance companies
The recent trends in the financial services sector in India:
1. The cap on foreign investments in Indian banks has been increased from 49%
to 74%. Technological innovations in banking like electronic fund transfer,
internet banking, cash back cards, home banking, virtual branches and video
banking (where ATMs, phones can call be seen through not the staff),any
where, any time banking services etc.
2. In portfolio management services special services to institutional investors, to
NRIs, suggesting the investors about the aversion of risk and providing the
best solutions, sending updates about latest happenings to the investors through
mobile sms and through mail alerts, reducing regulations in the services etc.
3. In mutual funds the investor is given the option to assess the risk and returns
involved, and then take the investment decisions, increasing transparency, new
schemes that are cater the needs of pensioners, young parents, salaried
employees, investments in foreign equity markets, systematic investment
plans, systematic withdrawal plans, auto debit schemes, sectoral schemes, mail
alerts etc.
4. In insurance services the recent trends are marriage insurance, bancassurance,
work site marketing, multi national companies in life and general insurances
with wide range of services in terms of the flexible policies and premiums
which are convenient to all age group people, businesses etc.
Conclusion:
India is one of the fastest growing economies in the world with a rapidly expanding
and changing the financial services sector after the LPG in the year 1991. After adjustments
for purchasing power parity, India's economy is the fourth largest in the world in terms of
Gross Domestic Product ("GDP"). An efficient securities market provides the necessary
channel for flow of resources from the providers of capital to the users of capital for economic
development. The overall growth of the economy and economic activity are also important
factors, which determine availability of resources.
There are some challenges which need some concentration to make more effectively to
provide a financial service in the economy.
The major challenges in Indian Financial Services Sector:
1. Creating a sustainable business
2. Improving business. performance
3. Managing crises
4. Managing risk
5. Operating globally
6. Reducing costs
7. Strengthening governance and regulatory compliance
8. Governance & risk management
9. Human capital
10. Market reporting

The strategy to overcome the challenges:

The major target is to reach each and every individual investor by setting up a
benchmark against best global practices. Apprising the latest techniques, market

Strategy
developments and best practices that financial service companies, banks, and other financial
intermediaries use to meet broad challenges in the sector. Interacting and listening to the
regulators, leading professionals in the business from across the globe and benefit from their
experience in today's fast-paced markets. The following diagram shows a strategy to
overcome the challenges and to make more strengthen the sector.

Funding Regulatory compliance Emerging business


The growth opportunity

Risk Gear up to the future


Management challenges

Revenue Efficiency enhancement Relationship management


Growth

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