Classification of Financial Services 📊
Financial services are broadly classified into two categories based on whether the service provider invests money or just gives advice.
1. Fund Based Services (Asset Based) 💰
Definition: Services where the financial institution invests its own funds or lends money to the customer.
- The institution takes Credit Risk (Risk of default).
- Income: Interest, Lease Rentals, Capital Gains.
Examples:
- Leasing: Buying an asset and renting it out.
- Hire Purchase: Financing a car/machine.
- Factoring: Buying receivables (bills) of a company.
- Bill Discounting: Lending against bills of exchange.
- Venture Capital: Investing in startups.
- Housing Finance: Home loans.
2. Non-Fund Based Services (Fee Based) 🗣️
Definition: Services where the institution does NOT lend money but provides specialized advice or service.
- No Credit Risk (usually).
- Income: Fees, Commission, Brokerage.
Examples:
- Merchant Banking: Managing IPOs (Issue Management).
- Credit Rating: Rating a company's debt (CRISIL, ICRA).
- Stock Broking: Buying/selling shares for clients (Zerodha).
- Letter of Credit (LC): Guaranteeing payment (Non-fund limit).
- Bank Guarantee: Guaranteeing performance.
- Corporate Advisory: Advice on mergers/acquisitions.
Comparison Table 🆚
| Feature | Fund Based (Asset Based) | Non-Fund Based (Fee Based) |
|---|---|---|
| Nature | Financing / Lending | Advisory / Service |
| Funds Involved | Large funds outflow | No funds outflow (mostly) |
| Primary Income | Interest / Rentals | Fees / Commission |
| Risk | Credit Risk (Default) | Professional Liability Risk |
| Example | Car Loan, Leasing | Merchant Banking, Stock Broking |
Quiz Time! 🎯
Test Your Knowledge
Question 1 of 5
1. Fund Based Services involve:
💡 Final Wisdom: "Fund based = 'Here is money'. Fee based = 'Here is advice'. Both are essential for business!" 💰🗣️
Next up: Fund-Based Activities - Deep dive into Leasing, HP, and Factoring! 🏊♂️