A CHANGING SCENARIO OF

FINNCIAL SERVICES IN INDIA

ByProf. PUTTU GURU PRASAD

FACULTY MEMBERICFAI 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 Banking4. Hire Purchase5. Leasing6. Factoring7. Venture Capital8. Mutual Funds9. Credit Rating10. Insurance Services

Some of the innovative financial services offered by the most of the financial services companies in India are:

1. Carrot and Stick Bonds2. Flip-Flop Notes3. Loyalty Coupons4. Dual Currency Bonds5. Inter-bank Participants(IBPs)6. Cyclical and Non-Cyclical Shares7. Alpha Shares8. Index-Linked Guilt Bonds9. Secured Premium Notes10. Easy Exit Bonds11. 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 profitability2. keen competition3. Economic liberalization4. Improved communication technology5. Customer service6. Global impact7. Investor awareness

Players in Financial Services Sector

Organized sector Unorganized sector

Money lenders Indigenous Bankers

Pawn brokers Traders and landlords

Capital market intermediaries

Money market Intermediaries

RBI

Commercial Banks

Co-operative banks

Government (Treasury bills)

Development banks

Insurance companies

Agriculture Financial institutions

EXIM Bank

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.

Emerging business opportunity

Gear up to the future challenges

Relationship management

Regulatory compliance

Efficiency enhancement

Funding The growth

Risk Management

Revenue Growth