B.B.A. LL.B. (Five Years) Sem 4 Financial Services (Hons) 2019 Jun Question Paper with Solutions

For full marks, cover: the meaning of a financial service; who provides it; its main features; why an economy needs financial services; the scope, set out as fund-based services, fee-based or advisory services, capital market services and newer services; the regulators who watch over each; and a conclusion.

Meaning

A financial service is a service that helps people and businesses to save, borrow, invest, pay, insure or raise money. It is an economic service tied to finance and provided by financial institutions. Banks, non-banking finance companies, insurance companies, mutual funds, merchant bankers, stock brokers, credit rating agencies and depositories all provide financial services.

In simple words, a financial service does not make goods. It moves money from those who have it to those who need it, and it helps both sides do so safely and cheaply.

Who provides it:

1. Banks: deposits, loans, payments and cards.

1. They mobilise savings from households and put them to productive use.
2. They channel funds to industry, trade and government.
3. They spread and reduce risk through insurance, diversification and rating.
4. They help the capital market grow by bringing issuers and investors together.
5. They support trade at home and abroad through bill discounting, factoring and forfaiting.
6. They raise the standard of living through housing loans, consumer credit and pension savings.

Scope of financial services

The scope is very wide. It is easiest to study in four groups.

1. Fund-based services. Here the provider puts in its own money.

• Leasing: the lessor buys an asset and lets the lessee use it for rent.
• Hire purchase: the buyer pays in instalments and becomes owner after the last one.
• Bill discounting: a bank pays the seller now against a bill payable later.

• Depository services: holding securities in electronic form and transferring them by book entry. NSDL (1996) and CDSL (1999) are India's two depositories.
• Stock broking: buying and selling securities on the exchange for clients.
• Mutual funds: pooling small savings and investing them by experts.
• Custodial services: keeping clients' securities safe.

4. Newer services.

• Online and mobile banking, payment systems and cards.
• Electronic discounting of invoices for small firms on the Trade Receivables Discounting System.
• Alternative investment funds, including venture capital funds.
• Credit cards, wealth management and pension planning.

Fund-based and fee-based compared

Example

A small cashew exporter in Mangaluru uses many financial services in one year. A bank keeps its deposits and gives it a working capital loan. A leasing company leases it a packing machine. A factor buys its domestic invoices and pays 80 per cent at once. When it plans to list, a merchant banker manages the issue. A credit rating agency rates its bonds, and a depository holds its shares in demat form.

Conclusion. Financial services are the services that move money from savers to users and manage the risks on the way. Their scope covers fund-based services such as leasing, factoring and venture capital, and fee-based services such as merchant banking and credit rating. It also covers capital market services such as depositories and mutual funds, and many newer digital services. Each is regulated, mainly by the Reserve Bank and SEBI, because each handles other people's money. A strong financial services sector is a condition of economic growth.