FINANCIAL INSTITUTIONS AND SERVICES

Presented By:

Sumit Munje

Swapnil Khule

Seema Kumari

Antra Banerjee

Akshay Nalawade

Parakram singh Rao

Finance Terms

• Finance: The proper management of money.

• Money: The current medium of exchange or means of payment.

• Credit or Loan: A sum of money to be returned normally with interest.

Classification of finance

1. Public finance• It studies the sources of funds of public authorities such

as states, local self-governments and the Central Government.

• It is concerned with the income and expenditure of public authorities and with the adjustment of one to another.

• Private finance• An individual

• Profit-seeking business organizations• External finance (outside sources)• Direct financing (through issuing securities)• Indirect financing (through middlemen)

• Internal finance (ploughing back of profits)

• A non-profit organization

Classification of finance

A set of institutions, instruments and markets which promote savings and channel them to their most efficient use.

Financial system

Financial system

Financial Institutions

Financial Markets

Financial instruments

(Claims, assets, securities)

Financial Services

Regulatory Inter-mediaries

Non-Inter-mediaries

Others

Banking Non-banking

Organised Un-organised

Primary Secondary

Capital Markets

Money Markets

Equity Market Debt Market Derivatives Market

Primary Secondary

Short term Medium Term Long Term

Financial Institutions

Banking

• These are participate in the economy’s payments mechanism

• Their deposit liabilities constitute a major part of the national money supply

• They can, as a whole, create deposits or credit, which is money

Non-Banking

• Lend only out of resources put at their disposal by the savers.

• LIC, UTI, IDBI

Financial Institutions

Financial Markets

• These are the centers or arrangements that provide facilities for buying and selling of financial claims and services.

• These are classified into• Primary and secondary markets• Money and capital markets

Primary and Secondary Markets

• Primary Markets • deal in the new financial claims or new securities (new

issue markets)• these are mobilize savings and they supply fresh or

additional capital

• Secondary Markets • deal in securities already issued or existing or

outstanding.• these do not contribute directly to the supply of

additional capital

Money and Capital Markets

• Both are perform the same function of transferring resources to the producers.

• Money markets deals short-term claims

• Capital markets deals long-term claims

Financial Services

•Capital markets services - underwriting debt and equity, assist company deals (advisory services, underwriting, mergers and acquisitions and advisory fees), and restructure debt into structured finance products.

•Private banking - Private banks provide banking services exclusively to high-net-worth individuals. Many financial services firms require a person or family to have a certain minimum net worth to qualify for private banking service. Private banks often provide more personal services, such as wealth management and tax planning, than normal retail banks.

•Brokerage services - facilitating the buying and selling of financial securities between a buyer and a seller. In today's (2014) stock brokers, brokerages services are offered online to self trading investors throughout the world who have the option of trading with 'tied' online trading platforms offered by a banking institution or with online trading platforms sometimes offered in a group by so-called online trading portals.

Financial Services

Foreign exchange Services

Foreign exchange services:Foreign exchange services are provided by many banks and specialist foreign exchange brokers around the world.

Foreign exchange services include:•Currency exchange - where clients can purchase and sell foreign currency banknotes.•Wire transfer - where clients can send funds to international banks abroad.•Remittance - where clients that are migrant workers send money back to their home country.

Invest Services

• Investment management - the term usually given to describe companies which run collective investment funds. Also refers to services provided by others, generally registered with the Securities and Exchange Commission as Registered Investment Advisors. Investment banking financial services focus on creating capital through client investments.

• Hedge fund management - Hedge funds often employ the services of "prime brokerage" divisions at major investment banks to execute their trades.

• Custody services - the safe-keeping and processing of the world's securities trades and servicing the associated portfolios. Assets under custody in the world are approximately US$100 trillion.

Insurance•Insurance brokerage - Insurance brokers shop for insurance on behalf of customers. Recently a number of websites have been created to give consumers basic price comparisons for services such as insurance, causing controversy within the industry.

•Insurance underwriting - Personal lines insurance underwriters actually underwrite insurance for individuals, a service still offered primarily through agents, insurance brokers, and stock brokers. Underwriters may also offer similar commercial lines of coverage for businesses. Activities include insurance and annuities, life insurance, retirement insurance, health insurance, and property insurance and casualty insurance.

•F&I - Finance & Insurance, a service still offered primarily at asset dealerships. The F&I manager encompasses the financing and insuring of the asset which is sold by the dealer. F&I is often called "the second gross" in dealerships who have adopted the model•Reinsurance - Reinsurance is insurance sold to insurers themselves, to protect them from catastrophic losses.

Other Financial services

Bank cards - include both credit cards and debit cards. According to the Nilson Report, JP Morgan Chase is the largest issuer of bank cards.Credit card machine services and networks - Companies which provide credit card machine and payment networks call themselves "merchant card providers".

Intermediation or advisory services - These services involve stock brokers (private client services) and discount brokers. Stock brokers assist investors in buying or selling shares. Primarily internet-based companies are often referred to as discount brokerages, although many now have branch offices to assist clients. These brokerages primarily target individual investors. Full service and private client firms primarily assist and execute trades for clients with large amounts of capital to invest, such as large companies, wealthy individuals, and investment management funds.

Other Financial Services

• Private equity - Private equity funds are typically closed-end funds, which usually take controlling equity stakes in businesses that are either private, or taken private once acquired. Private equity funds often use leveraged buyouts (LBOs) to acquire the firms in which they invest. The most successful private equity funds can generate returns significantly higher than provided by the equity markets

• Venture capital is a type of private equity capital typically provided by professional, outside investors to new, high-growth-potential companies in the interest of taking the company to an IPO or trade sale of the business.

Other Financial Services

• Angel investment - An angel investor or angel (known as a business angel or informal investor in Europe), is an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity. A small but increasing number of angel investors organize themselves into angel groups or angel networks to share resources and pool their investment capital.

• Conglomerates - A financial services company, such as a universal bank, that is active in more than one sector of the financial services market e.g. life insurance, general insurance, health insurance, asset management, retail banking, wholesale banking, investment banking, etc. A key rationale for the existence of such businesses is the existence of diversification benefits that are present when different types of businesses are aggregated i.e. bad things don't always happen at the same time. As a consequence, economic capital for a conglomerate is usually substantially less than economic capital is for the sum of its parts.

Other Financial Services

• Financial market utilities - Organisations that are part of the infrastructure of financial services, such as stock exchanges, clearing houses, derivative and commodityexchanges and payment systems such as real-time gross settlement systems or interbank networks.

• Debt resolution is a consumer service that assists individuals that have too much debt to pay off as requested, but do not want to file bankruptcy and wish to pay off their debts owed. This debt can be accrued in various ways including but not limited to personal loans, credit cards or in some cases merchant accounts.

Technology in Financial System

• Financial Services will be provided by a wide variety of institutions.

• Small financial service firms will be able to obtain access to the technologies they will require to remain viable.

• Large number of small, specialized financial service organizations will prevent the few from dominating the market.

• Networks are permitting electronic fund transfers from the merchant’s counter.

• Systems providing access to funds from virtually any place in the Nation and are likely to be in use in the next few years.

Technology in Financial System

• Advanced communication technologies including satellite relays, video cable, fiber optics and cellular radio will find wide application in the financial service industry.

• Decreasing computer costs will create the opportunity for large numbers of individual consumers and managers of small businesses to take advantage of technology in using financial services.

• Large computers will be used to support the data bases.

• Computers that accept voice inputs and recognize fingerprints may become cost effective for financial service delivery.

Financial System instability

• Increased cross-border integration and the presence of large international financial institutions facilitate the dissemination of financial shocks across countries.

• Financial innovation in products and markets, together with the existence of large financial companies facilitate the transmission of financial shocks in domestic financial markets.

• Strong growth in asset prices and the growing importance of household credit are potential sources of financial instability.

Financial System Stability• Monitoring and analysis of financial system developments

• Designing and building up financial system safety nets

• Regulation of the banking system

• Market Infrastructure

• Safety Buffers

• Adoption of Common International Standards

• Corporate Bonds and Securities Market

• Risk management

• Market discipline (through prudential regulation and supervision)

Development Finance Institution (DFI)

• It refers to a range of alternative financial institutions including microfinance institutions, community development financial institution and revolving loan funds.

• These institutions provide a crucial role in providing credit in the form of higher risk loans, equity positions and risk guarantee instruments to private sector investments in developing countries.

• The purpose of DFIs is to ensure investment in areas where otherwise, the market fails to invest sufficiently.

Development Finance Institution (DFI)

• There are three main forms of subsidies in the operations of DFIs in practice :

• High level of liquidity;• An ability to access technical assistance funds; and• Subsidies passed on directly to beneficiaries.

Universal Banking

• Universal banking is a combination of Commercial banking, Investment banking, Development banking, Insurance and many other financial activities.

• It is a place where all financial products are available under one roof.

• A universal bank is a bank which offers commercial bank functions plus other functions such as Merchant Banking, Mutual Funds, Credit cards, Housing Finance, Auto loans, Retail loans, Insurance, etc.

Advantages of Universal Banking

• Investors' Trust

• Economics of Scale

• Resource Utilisation

• Profitable Diversification

• Easy Marketing

• One-stop Shopping

Disadvantages of Universal Banking

• Different Rules and Regulations

• Effect of failure on Banking System

• Monopoly

• Conflict of Interest

Financial Intermediaries &

Financial Innovation

Financial Institutions

• Provider of financial services such as• transforming financial assets in terms of maturity of liquidity  (these

are financial intermediaries)• trading financial assets for themselves and others• creating financial assets and then selling those assets on the behalf of

customers• giving professional investment advice to others• managing investment portfolios for others

• Depository institutions acquire most of their funds through accepting deposits

• Non depository institutions receive funds from other sources

Role of Financial Intermediaries

• Make direct investments by purchasing bonds, stocks or making loans.  These are their assets

• Raise money for these investments by issuing their own financial assets such as deposits, insurance policies, mutual fund shares.  These are liabilities for the intermediary and are indirect investments for the investors.

Asset/Liability Management

• Not all liabilities of financial intermediaries are created equal!  They differ in terms of the certainty of their amount and timing• Type I liabilities:  timing and amount are certain

• example:  bank fixed rate CD.  Bank knows how much it owes the depositor and when.

• Type II liabilities:  amount is certain but timing is not• example:  term life insurance policy.  Insurance company

knows amount of policy but uncertain when the policy holder will die.

Asset/Liability Management

• Type III liabilities:  amount is not certain but timing is• example:  variable rate Certificate of Deposits (CD).  Bank

knows the maturity date, but the interest owed is not known when the CD is issued.

• Type IV liabilities:  time and amount are uncertain• example:  auto insurance policy.  The timing and payout for an

auto accident is not known when the policy is issued.

• The type of liabilities created by a financial intermediary will determine how they invest their funds (i.e. the type of assets that they hold)

Financial Innovation

• What is it?• creation of new financial assets or new ways to use financial assets

• Why does it happen?• changing circumstances:  increased instability in interest rates, stock

prices and exchange rates led to the development of derivative securities

• advances in technology make new trading strategies feasible• competition among institutions for unique products and strategies• desire to avoid regulations or tax laws

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