Financial Services – Meaning & Classification
Introduction
Financial Services encompass the activities and benefits offered by financial institutions to facilitate the functioning of the financial system.
"Services that mobilize and allocate savings."
1. Classification of Financial Services
They are broadly classified into two categories:
A. Fund-Based Services (Asset Based)
The service provider deploys their own funds (money) to the client.
- Leasing: Buying asset and renting it.
- Hire Purchase: Buying asset and selling on EMI.
- Factoring: Buying receivables.
- Venture Capital: Investing equity.
- Housing Finance: Giving loans.
B. Fee-Based Services (Advisory Based)
The service provider does not deploy funds but gives advice/expertise for a Fee.
- Merchant Banking: Managing IPOs.
- Credit Rating: Assessing risk.
- Stock Broking: Executing trades.
- Loan Syndication: Arranging loans from multiple banks.
- Corporate Counseling: Strategic advice.
2. Importance of Financial Services
- Promotes Investment: Makes it easy for people to invest (Mutual Funds).
- Minimizes Risk: Insurance services cover life/business risk.
- Ensures Liquidity: Factoring converts credit sales into cash immediately.
Summary
- Fund Based: Involves lending/investing money (Risk of Default).
- Fee Based: Involves advice/action (Risk of Reputation).
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