Financial Services | Commerce & Accountancy Optional Notes for UPSC PDF Download

Introduction

Financial services are a critical component of our economic ecosystem, encompassing a wide range of activities such as banking, insurance, investment services, brokerage services, and consumer finance companies. These services are typically provided by financial services firms and their professionals, who offer various financial products and instruments. In essence, any activity with a financial nature falls under the umbrella of financial services.

Financial services in India– An Overview and Recent Developments

• India boasts a diverse financial sector that is undergoing rapid expansion, evident in the growth of existing financial services and the emergence of new market entrants. The sector includes commercial banks, insurance companies, Non-Banking Financial Companies (NBFCs), pension funds, mutual funds, and numerous smaller financial entities. The banking sector has experienced significant growth, with the introduction of payment banks, Small Finance Banks, and digital banking innovations. 
• The Indian government is actively pursuing liberalization reforms to further boost the industry, with the Reserve Bank of India (RBI) facilitating easier fund access for Micro, Small, and Medium Enterprises (MSMEs) through initiatives like MUDRA (Micro Units Development and Refinance Agency). Regulatory agencies like the Securities and Exchange Board of India (SEBI) have also played a role in transforming the financial services landscape in the country. The collective efforts of stakeholders have made the Indian financial services sector one of the most vibrant and robust in the world.
• As of June 2021, the Assets under Management (AUM) of the mutual fund industry alone stood at Rs.33.67 trillion (USD 449.29 billion), with investments in Systematic Investment Plans (SIPs) reaching Rs 96,000 crore (USD 13.12 billion). The insurance industry has also experienced significant growth, with life insurance policies' first premium collections surpassing Rs 2.60 lakh crore (USD 36.74 billion) in 2020. Additionally, 55 Initial Public Offerings (IPOs) raised USD 4.25 billion during the same period. Despite the challenges posed by the pandemic, financial services in India continue to witness explosive growth.

Characteristics of Financial Services

• Customer-Centric: Financial services are heavily focused on the customer, who is at the center of all activities. These services are tailored to meet specific customer needs, whether they are individuals or institutions. Providers stay in constant communication with customers to design new products and services.
• Information-Driven: Financial services are reliant on information. Providers must gather and analyze relevant data to offer customized services.
• Intangible: Financial services, like other services, are intangible. They can't be seen like physical goods, but their impact can be felt. Branding and image are essential for their effectiveness.
• Inseparable: Financial services and providers are inseparable. The creation and delivery of services happen simultaneously.
• Perishable: Financial services, like other services, are perishable. They need to be supplied when demanded and can't be stored.
• Human-Centric: The financial services industry is driven by people who are professionals in their fields. They must thoroughly understand customer needs and design appropriate products and services.
• Customization: Financial services are highly customized and involve varying degrees of advisory services. Each client's needs are unique, making financial services heterogeneous.

Functions of Financial Services

Financial services rely on a harmonious blend of financial markets, intermediaries, and products to create a robust ecosystem that fulfills specific functions. For orderly economic development, financial services must operate at an optimal level. Below are some key functions:

• Mobilization of Funds: Financial services mobilize idle funds, whether from individuals, institutions, or corporations, through instruments like shares, bonds, debentures, and mutual funds.
• Utilization of Mobilized Funds: Financial services ensure optimal utilization of mobilized funds through factoring, securitization, retail investing, and other methods, maximizing benefits.
• Economic Development: Mobilizing and channeling savings into productive investments facilitates economic development.
• Risk Management: Insurance, an essential financial service, transfers risk from the insured to the insurer, managing risk effectively.
• Improving Liquidity: Allocating and reallocating savings and investments improves liquidity, facilitating the smooth conversion of financial assets into cash.
• Employment Opportunities: The financial services sector is a significant employer, providing millions of jobs.

Classification of Financial Services

The term "financial services" encompasses a wide array of institutions that enable individuals and businesses to save for the future, protect against risk, and manage capital for investment and consumption. These services include raising funds, credit rating, underwriting, merchant banking, commercial banking, depository services, mutual funds, factoring, and forfaiting, among others. Here's how we can classify financial services:

• Traditional Financial Services: These services cater to both capital and money markets and can be divided into two categories:
  • Fund-Based Services: These involve raising funds through equity shares, debentures, and loans from banks. Examples include factoring, consumer loans, bill discounting, hire purchase, lease financing, insurance, venture capital, and housing finance.
  • Fee-Based Services: These are services where financial institutions earn income through fees, brokerage, commission, or dividends. Examples include managing IPOs and capital issues, management consultancy, portfolio management, corporate counseling, loan syndication, stockbroking, capital restructuring, and mergers and acquisitions.
• Modern Financial Services: These services have evolved to meet new and evolving client needs. Examples include risk hedging, project advisory, rehabilitation and restructuring of sick companies, registration and transfer, custodian, clearing services, credit rating services, and asset liability management.

Challenges Faced by the Indian Financial Services Sector

The Indian financial services sector is known for its vibrancy and strength, catering to a diverse range of individual and institutional clients. However, with this exponential growth come a series of challenges. Let's examine some of the key challenges faced by the Indian financial services sector:

• Evolving Regulatory Landscape: The sector is subject to a constantly changing regulatory environment. Overregulation can stifle flexibility and innovation while simultaneously hindering institutions' ability to flourish. Striking a balance between investor protection and institutional growth is crucial.
• Talent Shortage: The growth of the financial services sector has created a demand for skilled and qualified professionals. Unfortunately, there is a shortage of such talent. It's imperative to build a pool of financially literate and qualified professionals to meet the industry's needs.
• Shifting Consumer Preferences: Consumer needs and preferences are constantly evolving, necessitating continuous innovation and adaptation by companies. Addressing these changing preferences is a significant challenge that requires proactive measures.
• Unconventional Market Segmentation: The complexity of the Indian market, coupled with unconventional segmentation, poses navigational challenges for financial institutions. The disjointed segmentation complicates market linkages and requires strategic planning to overcome.