definition of financial services

8/2/2019 Definition of Financial Services

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Definition of Financial Services

As per section 65(10) of the Finance Act, 1994, banking and financial services means the

following services provided by a banking company or a financial institution including a nonbanking financial company, namely;

(i) financial leasing services including equipment leasing and hire-purchase by a bodycorporate;

(ii) credit card services;(iii) merchant banking services;(iv) securities and foreign exchange (forex) broking;(v) asset management including portfolio management, all forms of fund management, pension

fund management, custodial depository and trust services, but does not include cashmanagement;

(vi) advisory and other auxiliary financial services including investment and portfolio researchand advice, advice on mergers and acquisition and advice on corporate restructuring and

strategy; andvii) provision and transfer of information and data processing.

Financial services can be defined as the products and services offered by institutions like banksof various kinds for the facilitation of various financial transactions and other related activities inthe world of finance like loans, insurance, credit cards, investment opportunities and moneymanagement as well as providing information on the stock market and other issues like markettrends

Financial services refer to services provided by the finance industry. The finance industryencompasses a broad range of organizations that deal with the management of money. Among

these organizations are banks, credit card companies, insurance companies, consumer financecompanies, stock brokerages, investment funds and some government sponsored enterprises.

Functions of financial services

1. Facilitating transactions (exchange of goods and services) in the economy.

2. Mobilizing savings (for which the outlets would otherwise be much more limited).

3. Allocating capital funds (notably to finance productive investment).

4. Monitoring managers (so that the funds allocated will be spent as envisaged).

5. Transforming risk (reducing it through aggregation and enabling it to be carried by thosemore willing to bear it).


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Characterstics and Features of Financial Services

i) Customer-Specific: Financial services are usually customer focused. The firms providingthese services, study the needs of their customers in detail before deciding their financialstrategy, giving due regard to costs, liquidity and maturity considerations. Financial services

firms continuously remain in touch with their customers, so that they can design products whichcan cater to the specific needs of their customers. The providers of financial services constantlycarry out market surveys, so they can offer new products much ahead of need and impendinglegislation. Newer technologies are being used to introduce innovative, customer friendlyproducts and services which clearly indicate that the concentration of the providers of financialservices is on generating firm/customer specific services.

ii) Intangibility: In a highly competitive global environment brand image is very crucial. Unlessthe financial institutions providing financial products and services have good image, enjoying theconfidence of their clients, they may not be successful. Thus institutions have to focus on thequality and innovativeness of their services to build up their credibility.

iii) Concomitant: Production of financial services and supply of these services have to beconcomitant. Both these functions i.e. production of new and innovative financial services andsupplying of these services are to be performed simultaneously.

iv) Tendency to Perish: Unlike any other service, financial services do tend to perish and hencecannot be stored. They have to be supplied as required by the customers. Hence financialinstitutions have to ensure a proper synchronization of demand and supply.

v) People based services: Marketing of financial services has to be people intensive and henceits subjected to variability of performance or quality of service. The personnel in financial

services organisation need to be selected on the basis of their suitability and trained properly, sothat they can perform their activities efficiently and effectively.

vi) Market Dynamics: The market dynamics depends to a great extent, on socioeconomicchanges such as disposable income, standard of living and educational changes related to thevarious classes of customers. Therefore financial services have to be constantly redefined andrefined taking into consideration the market dynamics. The institutions providing financialservices, while evolving new services could be proactive in visualising in advance what themarket wants, or being reactive to the needs and wants of their customers.

Scope of Financial Services

Financial services cover a wide range of activities. They can be broadly classified into two,namely:

i. Traditional. Activities

ii. Modern activities.


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i. Traditional Activities

Traditionally, the financial intermediaries have been rendering a wide range of servicesencompassing both capital and money market activities. They can be grouped under two heads,viz.

1. Fund based activities and

2. Non-fund based activities.

Fund based activities: The traditional services which come under fund based activities are thefollowing:

Underwriting or investment in shares, debentures, bonds, etc. of new issues (primarymarket activities).

Dealing in secondary market activities.

Participating in money market instruments like commercial Papers, certificate of deposits, treasury bills, discounting of bills etc. Involving in equipment leasing, hire purchase, venture capital, seed capital, Dealing in foreign exchange market activities. Non fund based activities

Non fund based activities

Financial intermediaries provide services on the basis of non-fund activities also. This can becalled fee based activity. Today customers, whether individual or corporate, are not satisfiedwith mere provisions of finance. They expect more from financial services companies. Hence awide variety of services, are being provided under this head. They include:

Managing the capital issue i.e. management of pre-issue and post-issue activitiesrelating to the capital issue in accordance with the SEBI guidelines and thus enabling thepromoters to market their issue.

Making arrangements for the placement of capital and debt instruments with investmentinstitutions.

Arrangement of funds from financial institutions for the clients project cost or hisworking capital requirements.

Assisting in the process of getting all Government and other clearances.ii. Modern Activities

Beside the above traditional services, the financial intermediaries render innumerable services inrecent times. Most of them are in the nature of non-fund based activity. In view of theimportance, these activities have been in brief under the head New financial products andservices. However, some of the modern services provided by them are given in brief hereunder.

Rendering project advisory services right from the preparation of the project report tillthe raising of funds for starting the project with necessary Government approvals.


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Planning for M&A and assisting for their smooth carry out. Guiding corporate customers in capital restructuring. Acting as trustees to the debenture holders. Recommending suitable changes in the management structure and management style with

a view to achieving better results.

Structuring the financial collaborations / joint ventures by identifying suitable jointventure partners and preparing joint venture agreements. Rehabilitating and restructuring sick companies through appropriate scheme of

reconstruction and facilitating the implementation of the scheme. Hedging of risks due to exchange rate risk, interest rate risk, economic risk, and political

risk by using swaps and other derivative products. Managing In- portfolio of large Public Sector Corporations. Undertaking risk management services like insurance services, buy-hack options etc. Advising the clients on the questions of selecting the best source of funds taking into

consideration the quantum of funds required, their cost, lending period etc. Guiding the clients in the minimization of the cost of debt and in the determination of the

optimum debt-equity mix. Promoting credit rating agencies for the purpose of rating companies which want to go

public by the issue of debt instrument. Undertaking services relating to the capital market, such as 1)Clearing services,

2)Registration and transfers, 3)Safe custody of securities, 4)Collection of income onsecurities.

What Is The Definition Of Financial Services?From time immemorial, the phrase "financial services has been commonly used especially concerning

money issues. For better understanding of its meaning, it is important therefore to first understand

what finance is. Finance relates to raising of money through issuance and sale of debt or equity. It is a

branch of economics whose main goals relate to allocation of resources, management of resources, how

the resources are acquired and investments. In general, finance implies interacting with matters that

deal with money and the markets. The concept of finance considers time, money and risk and how they

relate or interrelate.

A service is an equivalent of an economic good that is intangible. The person or firm offering the service

boosts the ability, resources skills and or experience to offer a balanced satisfaction of client need while

at the same time remaining relevant and functional in an economy. Financial services therefore are

those services that are offered by the institutions, which deal with the management of money and other

factors that relate to the flow of money in an economy. To clarify on this, a service and the financial

service provider possess various characteristics that make the service distinct. For instance, the concept

of intangibility also referred to as insubstantiality, perishability as regards to time and reversal of a

service, inseparability, simultaneity and variability which refers to the distinctiveness or uniqueness of a

given financial service.

Following the above discussion, it can be correctly put that a financial service refers to those facilities


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such as savings accounts, leasing, money transfers, checking accounts, confirming among others that are

offered by players or organizations in the finance industry. These players includebanks, credit unions,

stock brokerage firms, insurance firms, and foreign exchange among others. Financial services are many,

wide and varied hence many institutions or organizations are involved in offering them. Other well

known financial services include debt resolution, private equity, intermediation venture capital

conglomerates as well as both private and public equity. The above directly implies that financial

services in general relate to all those issues which affect the circulation of money and how they

interrelate.

Blurtit Answer

Financial services can be defined as the products and services offered by institutions like banks of

various kinds for the facilitation of various financial transactions and other related activities in the world

of finance like loans,insurance, credit cards, investment opportunities and money management as well

as providing information on the stock market and other issues like market trends.

The Gramm-Leach-Bliley Act enacted in the late 1990s brought the term financial services intoprominence when it repealed earlier laws which forbade a bank or any financial institution from

venturing into fields like insurance and investment. The result was the merger of many organizations

offering the above mentioned services under one banner giving rise to a new type of banking popularly

known as Commercial Banking and a number of organizations like Citibank came into existence purely as

service providers.

The Finance servicesindustrythough a highly profitable Industry with respect to earnings does not

count for a large share of the market and also employs a lesser number of people as compared to some

of the other Industries. Some of the major service providers and commercial banks in this field are:

1. Citibank

2. HSBC

3. Standard Chartered

4. Citigroup

5. Merrill Lynch

6. Morgan Stanley

7. ING (Investment)

8. American Express (Credit Card)

9. VISA (Credit Card)

10. Allianz (Insurance) Financial services

Financial services refer toservicesprovided by the finance industry. The finance industryencompasses a broad range of organizations that deal with the management of money. Amongthese organizations arecredit unions,banks,credit cardcompanies,insurancecompanies,consumer financecompanies,stock brokerages,investment fundsand somegovernment
http://www.blurtit.com/q680868.htmlhttp://www.blurtit.com/q680868.htmlhttp://www.blurtit.com/q680868.htmlhttp://www.blurtit.com/q469784.htmlhttp://www.blurtit.com/q469784.htmlhttp://www.blurtit.com/q469784.htmlhttp://www.blurtit.com/q751004.htmlhttp://www.blurtit.com/q751004.htmlhttp://www.blurtit.com/q751004.htmlhttp://duckduckgo.com/?q=Financial%20serviceshttp://delicious.com/search?p=Financial%20serviceshttp://en.wikipedia.org/wiki/Service_%28economics%29http://en.wikipedia.org/wiki/Service_%28economics%29http://en.wikipedia.org/wiki/Service_%28economics%29http://en.wikipedia.org/wiki/Credit_unionhttp://en.wikipedia.org/wiki/Credit_unionhttp://en.wikipedia.org/wiki/Credit_unionhttp://en.wikipedia.org/wiki/Bankhttp://en.wikipedia.org/wiki/Bankhttp://en.wikipedia.org/wiki/Bankhttp://en.wikipedia.org/wiki/Credit_cardhttp://en.wikipedia.org/wiki/Credit_cardhttp://en.wikipedia.org/wiki/Credit_cardhttp://en.wikipedia.org/wiki/Insurancehttp://en.wikipedia.org/wiki/Insurancehttp://en.wikipedia.org/wiki/Insurancehttp://en.wikipedia.org/wiki/Consumer_financehttp://en.wikipedia.org/wiki/Consumer_financehttp://en.wikipedia.org/wiki/Stock_brokerhttp://en.wikipedia.org/wiki/Stock_brokerhttp://en.wikipedia.org/wiki/Stock_brokerhttp://en.wikipedia.org/wiki/Investment_managementhttp://en.wikipedia.org/wiki/Investment_managementhttp://en.wikipedia.org/wiki/Investment_managementhttp://en.wikipedia.org/wiki/Government_sponsored_enterprisehttp://en.wikipedia.org/wiki/Government_sponsored_enterprisehttp://en.wikipedia.org/wiki/Government_sponsored_enterprisehttp://en.wikipedia.org/wiki/Investment_managementhttp://en.wikipedia.org/wiki/Stock_brokerhttp://en.wikipedia.org/wiki/Consumer_financehttp://en.wikipedia.org/wiki/Insurancehttp://en.wikipedia.org/wiki/Credit_cardhttp://en.wikipedia.org/wiki/Bankhttp://en.wikipedia.org/wiki/Credit_unionhttp://en.wikipedia.org/wiki/Service_%28economics%29http://delicious.com/search?p=Financial%20serviceshttp://www.amazon.com/s?ie=UTF8&index=blended&field-keywords=Financial%20services&tag=smtfx1-20http://www.amazon.com/s?ie=UTF8&index=blended&field-keywords=Financial%20services&tag=smtfx1-20http://duckduckgo.com/?q=Financial%20serviceshttp://duckduckgo.com/?q=Financial%20serviceshttp://www.blurtit.com/q751004.htmlhttp://www.blurtit.com/q469784.htmlhttp://www.blurtit.com/q680868.html


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sponsored enterprises. As of 2004, the financial services industry represented 20% of themarketcapitalizationof theS&P 500in theUnited States.[1]

Banks

Main article:Bank

A "commercial bank" is what is commonly referred to as simply a "bank". The term"commercial" is used to distinguish it from an "investment bank," a type of financial servicesentity which, instead of lending money directly to a business, helps businesses raise money fromother firms in the form ofbonds(debt) orstock(equity).

[edit] Banking services

The primary operations of banks include:

Keeping moneysafewhile also allowingwithdrawalswhen needed Issuance ofcheckbooksso that bills can be paid and other kinds of payments can be delivered

by post

Providepersonal loans,commercial loans, andmortgage loans(typically loans to purchase ahome, property or business)

Issuance ofcredit cardsand processing of credit card transactions and billing Issuance ofdebit cardsfor use as a substitute for checks Allow financial transactions at branches or by usingAutomatic Teller Machines(ATMs) Provide wire transfers of funds andElectronic fund transfersbetween banks Facilitation of standing orders and directdebits, so payments for bills can be made automatically Provideoverdraftagreements for the temporary advancement of the Bank's own money to

meet monthly spending commitments of a customer in their current account. Provide internet banking system to facilitate the customers to view and operate their respective

accounts through internet.

Provide Charge card advances of the Bank's own money for customers wishing to settle creditadvances monthly.

Provide a check guaranteed by the Bank itself and prepaid by the customer, such as acashier'scheckorcertified check.

Notaryservice for financial and other documents Credit card machine services and networks - Companies which provide credit card machine and

payment networks call themselves "merchant card providers".

[edit] Insurance

Main article:Insurance

Insurance brokerage -Insurance brokersshop for insurance (generally corporate property andcasualty insurance) on behalf of customers. Recently a number of websites have been created to
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-0http://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/S%26P_500http://en.wikipedia.org/wiki/Market_capitalizationhttp://en.wikipedia.org/wiki/Market_capitalizationhttp://en.wikipedia.org/wiki/Government_sponsored_enterprise


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give consumers basic price comparisons for services such as insurance, causing controversy

within the industry.[6]

Insurance underwriting - Personal lines insuranceunderwritersactually underwrite insurance forindividuals, a service still offered primarily through agents,insurance brokers, andstock brokers.

Underwriters may also offer similar commercial lines of coverage for businesses. Activities

include insurance andannuities,life insurance, retirement insurance,health insurance, and

property & casualty insurance.

Reinsurance- Reinsurance is insurance sold to insurers themselves, to protect them fromcatastrophic losses.

Other financial services

Intermediation or advisory services - These services involve stock brokers (private clientservices) 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 withlarge amounts of capital to invest, such as large companies, wealthy individuals, and investment

management funds.

Private equity -Private equityfunds are typically closed-end funds, which usually takecontrolling 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 capitalis a type of private equity capital typically provided by professional, outsideinvestors to new, high-potential-growth companies in the interest of taking the company to an

IPO or trade sale of the business.

Angel investment - Anangel investoror angel (known as a business angel or informal investor inEurope), 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 research and pool

their investment capital.

Conglomerates- A financial services conglomerate is a financial services firm that is active inmore 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 capitalfor a conglomerate is

usually substantially less thaneconomic capitalis for the sum of its parts.

Debt resolution is a consumer service that assists individuals that have too much debt to pay offas requested, but do not want to file bankruptcy and wish to payoff 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. There are many services/companies that can assist with this.

These can includedebt consolidation,debt settlementandrefinancing.
http://en.wikipedia.org/wiki/Financial_services#cite_note-5http://en.wikipedia.org/wiki/Financial_services#cite_note-5http://en.wikipedia.org/wiki/Financial_services#cite_note-5http://en.wikipedia.org/wiki/Underwriterhttp://en.wikipedia.org/wiki/Underwriterhttp://en.wikipedia.org/wiki/Underwriterhttp://en.wikipedia.org/wiki/Insurance_brokerhttp://en.wikipedia.org/wiki/Insurance_brokerhttp://en.wikipedia.org/wiki/Insurance_brokerhttp://en.wikipedia.org/wiki/Stock_brokerhttp://en.wikipedia.org/wiki/Stock_brokerhttp://en.wikipedia.org/wiki/Stock_brokerhttp://en.wikipedia.org/wiki/Annuity_%28financial_contracts%29http://en.wikipedia.org/wiki/Annuity_%28financial_contracts%29http://en.wikipedia.org/wiki/Annuity_%28financial_contracts%29http://en.wikipedia.org/wiki/Life_insurancehttp://en.wikipedia.org/wiki/Life_insurancehttp://en.wikipedia.org/wiki/Life_insurancehttp://en.wikipedia.org/wiki/Health_insurancehttp://en.wikipedia.org/wiki/Health_insurancehttp://en.wikipedia.org/wiki/Health_insurancehttp://en.wikipedia.org/wiki/Property_%26_casualty_insurancehttp://en.wikipedia.org/wiki/Property_%26_casualty_insurancehttp://en.wikipedia.org/wiki/Reinsurancehttp://en.wikipedia.org/wiki/Reinsurancehttp://en.wikipedia.org/wiki/Private_equityhttp://en.wikipedia.org/wiki/Private_equityhttp://en.wikipedia.org/wiki/Private_equityhttp://en.wikipedia.org/wiki/Venture_capitalhttp://en.wikipedia.org/wiki/Venture_capitalhttp://en.wikipedia.org/wiki/Angel_investorhttp://en.wikipedia.org/wiki/Angel_investorhttp://en.wikipedia.org/wiki/Angel_investorhttp://en.wikipedia.org/wiki/Conglomerate_%28company%29http://en.wikipedia.org/wiki/Conglomerate_%28company%29http://en.wikipedia.org/wiki/Retail_bankinghttp://en.wikipedia.org/wiki/Retail_bankinghttp://en.wikipedia.org/wiki/Retail_bankinghttp://en.wikipedia.org/wiki/Economic_capitalhttp://en.wikipedia.org/wiki/Economic_capitalhttp://en.wikipedia.org/wiki/Economic_capitalhttp://en.wikipedia.org/wiki/Economic_capitalhttp://en.wikipedia.org/wiki/Economic_capitalhttp://en.wikipedia.org/wiki/Economic_capitalhttp://en.wikipedia.org/wiki/Debt_consolidationhttp://en.wikipedia.org/wiki/Debt_consolidationhttp://en.wikipedia.org/wiki/Debt_consolidationhttp://en.wikipedia.org/wiki/Debt_settlementhttp://en.wikipedia.org/wiki/Debt_settlementhttp://en.wikipedia.org/wiki/Debt_settlementhttp://en.wikipedia.org/wiki/Refinancinghttp://en.wikipedia.org/wiki/Refinancinghttp://en.wikipedia.org/wiki/Refinancinghttp://en.wikipedia.org/wiki/Refinancinghttp://en.wikipedia.org/wiki/Debt_settlementhttp://en.wikipedia.org/wiki/Debt_consolidationhttp://en.wikipedia.org/wiki/Economic_capitalhttp://en.wikipedia.org/wiki/Economic_capitalhttp://en.wikipedia.org/wiki/Retail_bankinghttp://en.wikipedia.org/wiki/Conglomerate_%28company%29http://en.wikipedia.org/wiki/Angel_investorhttp://en.wikipedia.org/wiki/Venture_capitalhttp://en.wikipedia.org/wiki/Private_equityhttp://en.wikipedia.org/wiki/Reinsurancehttp://en.wikipedia.org/wiki/Property_%26_casualty_insurancehttp://en.wikipedia.org/wiki/Health_insurancehttp://en.wikipedia.org/wiki/Life_insurancehttp://en.wikipedia.org/wiki/Annuity_%28financial_contracts%29http://en.wikipedia.org/wiki/Stock_brokerhttp://en.wikipedia.org/wiki/Insurance_brokerhttp://en.wikipedia.org/wiki/Underwriterhttp://en.wikipedia.org/wiki/Financial_services#cite_note-5


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Depository

When u buy shares or sell the shares, the transaction goes through a specific medium. The Depository

Services provider settles the trade or transactions u make in stock markets. The depository is linked with

Exchange boards like NSE,BSE and few others. Like banks, even the depository service providers have a

clearing house where at the end of the day all the buying n selling settlements takes place between

buyers n sellers through stock brokers.

Depository is a company which holds the shares you purchase. Right now there are 2 depository

companies. NSDL (National Securities Depository Ltd) & CDSL ( Central Depository Services Ltd.)

And a depository participant is an institution which acts as an agent between an investor and Depository

servie provider. It can be a stock broker, a bank or any NBFC.

There are few other interesting points i would like to discuss regarding depository participants and

depository services providers. If the readers here show good response, i would continue to share more

knowledge on this.

Credit rating

A credit rating evaluates thecredit worthinessof an issuer of specific types of debt, specifically,debt issued by a business enterprise such as acorporationor a government. It is an evaluation

made by a credit rating agency of the debt issuers likelihood ofdefault.

[1]

Credit ratings aredetermined by credit ratings agencies. The credit rating represents the credit rating agency'sevaluation of qualitative and quantitative information for a company or government; includingnon-public information obtained by the credit rating agencies analysts. Credit ratings are notbased on mathematical formulas. Instead, credit rating agencies use their judgment andexperience in determining what public and private information should be considered in giving arating to a particular company or government. The credit rating is used by individuals andentities that purchase the bonds issued by companies and governments to determine thelikelihood that the government will pay its bond obligations.

Credit ratings are often confused withcredit scores. Credit scores are the output of mathematical

algorithms that assign numerical values to information in an individual'scredit report. The creditreport contains information regarding the financial history andcurrent assetsandliabilitiesof anindividual. A bank or credit card company will use the credit score to estimate the probabilitythat the individual will pay backloanor will pay back charges on a credit card. However, inrecent years, credit scores have also been used to adjust insurance premiums, determineemployment eligibility, as a factor considered in obtaining security clearances and establish theamount of a utility or leasing deposit.
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A poor credit rating indicates a credit rating agency's opinion that the company or governmenthas a high risk of defaulting, based on the agency's analysis of the entity's history and analysis oflong term economic prospects. A poor credit score indicates that in the past, other individualswith similar credit reports defaulted on loans at a high rate. The credit score does not take intoaccount future prospects or changed circumstances. For example, if an individual received a

credit score of 400 on Monday because he had a history of defaults, and then won thelotteryonTuesday, his credit score would remain 400 on Tuesday because his credit report does not takeinto account his improved future prospects.

Factoring

Factoring is afinancial transactionwhereby a business job sells itsaccounts receivable(i.e.,invoices) to a third party (called afactor) at adiscountin exchange for immediate money withwhich to finance continued business. Factoring differs from a bank loan in three main ways.First, the emphasis is on the value of the receivables (essentially afinancial asset),[1][2]not thefirmscredit worthiness. Secondly, factoring is not aloanit is the purchase of afinancial asset

(thereceivable). Finally, a bank loan involves two parties whereas factoring involves three.

It is different fromforfaitingonly in the sense that forfaiting is a transaction-based operationinvolving exporters in which the firm sells one of its transactions,[3]while factoring is a FinancialTransaction that involves the Sale of any portion of the firm's Receivables.[2][1]

Factoring is a word often misused synonymously withinvoice discounting[citation needed] - factoringis the sale of receivables, whereas invoice discounting is borrowing where the receivable is usedascollateral.[4]

The three parties directly involved are: the one who sells the receivable, thedebtor, and the

factor. Thereceivableis essentially afinancial assetassociated with the debtor'sliabilityto paymoney owed to the seller (usually for work performed or goods sold). The seller then sells one ormore of its invoices (the receivables) at a discount to the third party, the specialized financialorganization (aka the factor), to obtain cash. The sale of the receivables essentially transfersownership of the receivables to the factor, indicating the factor obtains all of the rights and risksassociated with the receivables.[2][1]Accordingly, the factor obtains the right to receive thepayments made by the debtor for the invoice amount and must bear the loss if the debtor does notpay the invoice amount. Usually, the account debtor is notified of the sale of the receivable, andthe factor bills the debtor and makes all collections. Critical to the factoring transaction, theseller should never collect the payments made by the account debtor, otherwise the seller couldpotentially risk further advances from the factor. There are three principal parts to the factoring

transaction; a.) the advance, a percentage of the invoice face value that is paid to the seller uponsubmission, b.) the reserve, the remainder of the total invoice amount held until the payment bythe account debtor is made and c.) the fee, the cost associated with the transaction which isdeducted from the reserve prior to it being paid back the seller. Sometimes the factor charges theseller a service charge, as well as interest based on how long the factor must wait to receivepayments from the debtor.[5]The factor also estimates the amount that may not be collected dueto non-payment, and makes accommodation for this when determining the amount that will be
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given to the seller. The factor's overall profit is the difference between the price it paid for theinvoice and the money received from the debtor, less the amount lost due to non-payment.[2]

In theUnited States, under theGenerally Accepted Accounting Principlesreceivables areconsidered soldwhen the buyer has "no recourse,"[6]or when the financial transaction is

substantially a transfer of all of the rights associated with the receivables and the seller'smonetary liability under any "recourse" provision is well established at the time of the sale.[7]Otherwise, the financial transaction is treated as aloan, with the receivables used ascollateral.

Foreifting and Factoring.

IntroductionForfeiting and factoring are services in international market given to an exporter or seller. Itsmain objective is to provide smooth cash flow to the sellers. The basic difference between theforfeiting and factoring is that forfeiting is a long term receivables (over 90 days up to 5 years)while factoring is a shorttermed receivables (within 90 days) and is more related to receivablesagainst commodity sales.

Definition of Forfeiting

The terms forfeiting is originated from a old French word forfait, which means to surrender

ones right on something to someone else. In international trade, forfeiting may be defined as thepurchasing of an exporters receivables at a discount price by paying cash. By buying these

receivables, the forfeiter frees the exporter from credit and the risk of not receiving the paymentfrom the importer.

How forfeiting Works in International Trade

The exporter and importer negotiate according to the proposed export sales contract. Then theexporter approaches the forfeiter to ascertain the terms of forfeiting. After collecting the detailsabout the importer, and other necessary documents, forfeiter estimates risk involved in it and

then quotes the discount rate.The exporter then quotes a contract price to the overseas buyer by loading the discount rate andcommitment fee on the sales price of the goods to be exported and sign a contract with theforfeiter. Export takes place against documents guaranteed by the importers bank and discountsthe bill with the forfeiter and presents the same to the importer for payment on due date.

Documentary Requirements
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In case of Indian exporters availing forfeiting facility, the forfeiting transaction is to be reflectedin the following documents associated with an export transaction in the manner suggested below:

Invoice : Forfeiting discount, commitment fees, etc. needs not be shown separately instead,these could be built into the FOB price, stated on the invoice.

Shipping Bill and GR form : Details of the forfeiting costs are to be included along with the otherdetails, such FOB price, commission insurance, normally included in the "Analysis of Export

Value "on the shipping bill. The claim for duty drawback, if any is to be certified only with

reference to the FOB value of the exports stated on the shipping bill.

Forfeiting

The forfeiting typically involves the following cost elements:1. Commitment fee, payable by the exporter to the forfeiter for latters commitment to execute

a specific forfeiting transaction at a firm discount rate with in a specified time.2. Discount fee, interest payable by the exporter for the entire period of credit involved and

deducted by the forfaiter from the amount paid to the exporter against the availised promissorynotes or bills of exchange.

Benefits to Exporter

100 per cent financing : Without recourse and not occupying exporter's credit line That is to sayonce the exporter obtains the financed fund, he will be exempted from the responsibility to

repay the debt.

Improved cash flow : Receivables become current cash in flow and its is beneficial to theexporters to improve financial status and liquidation ability so as to heighten further the funds

raising capability.

Reduced administration cost : By using forfeiting , the exporter will spare from themanagement of the receivables. The relative costs, as a result, are reduced greatly.

Advance tax refund: Through forfeiting the exporter can make the verification of export and gettax refund in advance just after financing.

Risk reduction : forfeiting business enables the exporter to transfer various risk resulted fromdeferred payments, such as interest rate risk, currency risk, credit risk, and political risk to the

forfeiting bank.

Increased trade opportunity : With forfeiting, the export is able to grant credit to his buyersfreely, and thus, be more competitive in the market.

Benefits to Banks

Forfeiting provides the banks following benefits:

Banks can offer a novel product range to clients, which enable the client to gain 100% finance,as against 8085% in case of other discounting products.

Bank gain fee based income. Lower credit administration and credit follow up.
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Definition of Factoring

Definition of factoring is very simple and can be defined as the conversion of credit sales intocash. Here, a financial institution which is usually a bank buys the accounts receivable of acompany usually a client and then pays up to 80% of the amount immediately on agreement. The

remaining amount is paid to the client when the customer pays the debt. Examples includesfactoring against goods purchased, factoring against medical insurance, factoring forconstruction services etc.

Characteristics of Factoring1. The normal period of factoring is 90150 days and rarely exceeds more than 150 days.2. It is costly.3. Factoring is not possible in case of bad debts.4. Credit rating is not mandatory.5. It is a method of offbalance sheet financing.6. Cost of factoring is always equal to finance cost plus operating cost.

Different Types of Factoring1. Disclosed2. Undisclosed

1. Disclosed FactoringIn disclosed factoring, clients customers are aware of the factoring agreement.

Disclosed factoring is of two types:

Recourse factoring: The client collects the money from the customer but in case customer dontpay the amount on maturity then the client is responsible to pay the amount to the factor. It is

offered at a low rate of interest and is in very common use.Nonrecourse factoring: In nonrecourse factoring, factor undertakes to collect the debts from thecustomer. Balance amount is paid to client at the end of the credit period or when the customerpays the factor whichever comes first. The advantage of nonrecourse factoring is that continuousfactoring will eliminate the need for credit and collection departments in the organization.

2. UndisclosedIn undisclosed factoring, client's customers are not notified of the factoring arrangement. In thiscase, Client has to pay the amount to the factor irrespective of whether customer has paid or not.

Merchant bank

A merchant bank is a financial institution which provides capital to companies in the form ofshare ownership instead of loans. A merchant bank also provides advisory on corporate mattersto the firms they lend to.
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Today, according to the USFederal Deposit Insurance Corporation(acronym FDIC), "the termmerchant banking is generally understood to mean negotiated private equity investment byfinancial institutions in the unregistered securities of either privately or publicly heldcompanies."[1]Bothcommercial banksandinvestment banksmay engage in merchant bankingactivities. Historically, merchant banks' original purpose was to facilitate and/or finance

production and trade of commodities, hence the name "merchant". Few banks today restrict theiractivities to such a narrow scope.

Commercial bank

A commercial bank (or business bank) is a type offinancial institutionandintermediary. It is abankthat providestransactional, savings, and money market accounts and that acceptstimedeposits.[1]

After the implementation of theGlassSteagall Act, the U.S. Congress required that banksengage only in banking activities, whereasinvestment bankswere limited tocapital marketactivities. As the two no longer have to be under separate ownership under U.S. law, some usethe term "commercial bank" to refer to a bank or a division of a bank primarily dealing withdeposits and loans from corporations or large businesses. In some other jurisdictions, the strictseparation of investment and commercial banking never applied. Commercial banking may alsobe seen as distinct fromretail banking, which involves the provision of financial services directto consumers. Many banks offer both commercial and retail banking services.

Leasing

Leasing is a process by which a firm can obtain the use of a certain fixed assets for which it mustpay a series of contractual, periodic, tax deductible payments.

Thelesseeis the receiver of the services or the assets under theleasecontract and the lessor isthe owner of the assets. The relationship between the tenant and the landlord is called a tenancy,and can be for a fixed or an indefinite period of time (called thetermof the lease). Theconsiderationfor the lease is calledrent. Agross leaseis when the tenant pays a flat rentalamount and the landlord pays for all property charges regularly incurred by the ownership fromlawnmowers and washing machines to handbags and jewellry.[1]

Under normal circumstances, afreeholdowner of property is at liberty to do what they want withtheir property, including destroy it or hand over possession of the property to a tenant. However,if the owner has surrendered possession to another (the tenant) then any interference with thequiet enjoyment of the property by the tenant in lawful possession is unlawful.

Similar principles apply toreal propertyas well as topersonal property, though the terminologywould be different. Similar principles apply to sub-leasing, that is the leasing by a tenant inpossession to a sub-tenant. The right to sub-lease can be expressly prohibited by the main lease.
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Hire purchase

Hire purchase (abbreviated HP) is the legal term for a contract, in this persons usually agree topay for goods in parts or a percentage at a time. It was developed in theUnited Kingdomand can

now be found inChina,Japan,Malaysia,India,Australia, Jamaica andNew Zealand. It is alsocalledclosed-end leasing. In cases where a buyer cannot afford to pay the asked price for an itemof property as a lump sum but can afford to pay a percentage as a deposit, a hire-purchasecontract allows the buyer to hire the goods for a monthlyrent. When a sum equal to the originalfull price plus interest has been paid in equal installments, the buyer may then exercise an optionto buy the goods at a predetermined price (usually a nominal sum) or return the goods to theowner. InCanadaand theUnited States, a hire purchase is termed an installment plan; otheranalogous practices are described asclosed-end leasingorrent to own.

Hire purchase differs from amortgageand similar forms oflien-secured credit in that the so-called buyer who has the use of the goods is not the legal owner during the term of the hire-

purchase contract. If the buyer defaults in paying the installments, the owner may repossess thegoods, a vendor protection not available with unsecured-consumer-credit systems. HP isfrequently advantageous to consumers because it spreads the cost of expensive items over anextended time period. Business consumers may find the differentbalance sheetandtaxationtreatment of hire-purchased goods beneficial to their taxable income. The need for HP is reducedwhen consumers have collateral or other forms of credit readily available.

Guarantee

Guarantee is an undertaking for the fulfillment of a promise or a condition, a surety. In otherwords, one who pledges oneself as surety for the fulfillment of a condition. So guaranteed meanssecured by an undertaking. And guarantor means a person giving a guarantee or security.

Warrantee means a person to whom a thing is guaranteed by a warrant, or, one to whomauthority is granted. Warrantor means one who warrants or guarantees, one who authorizes. Sowarranty is an assurance given as to the quality of the goods, a authority to the quality.

In view of the above, in sales and service of goods both guarantee/warranty is used and isdemanded by the buyer from the suppliers.

For example: The material supplied by us under our DC No./Invoice No.. dated...... has beenguaranteed/warranted for satisfactory performance for a period of 12 months from the date ofcommissioning or 18 months from the date of supply against any manufacturing defects,whichever is earlier. Any manufacturing defects found during these period and the same shall bereplaced or rectified free of cost by us .

A guarantee agreement is usually made during a loan, or a realestatetransaction. It tends toinvolve a third party who will step in and make necessary payments if the main person obtaining
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a loan or renting a property cannot make payments. The third party is called theguarantor, orsometimes co-signer.

Often, student loans are part of a guarantee agreement. They assert that the governmentguarantees repayment of a loan. If the student defaults for any reason, the bank lending the

money will get its money from the government, and the government will be responsible forattempting to collect the debt from the student.

People with poor credit may be involved in a guarantee agreement for the purposes of purchasinga car or renting a home. Often they use someone withgood credit, perhaps their parents or asibling, as co-signers so a guarantee agreement can be made. This is a bit of a double-edgedblade. If the person cannot meet his financial obligation, the financial obligation is transferred tothe guarantor. So for example, if a person does not make rent payments, the parent or siblingmust make them. It is advisable to consider entering into a guarantee agreement with due cautionif the person one is guaranteeing will be unlikely to meet his or her financial obligations.

Surety

A surety or guarantee, in finance, is a promise by one party (the guarantor) to assumeresponsibility for thedebtobligation of a borrower if that borrower defaults. The person orcompany that provides this promise, is also known as a surety or guarantor.

The situation in which a surety is most typically required is when the ability of the primaryobligor orprincipalto perform its obligations under acontractis in question, or when there issome public or private interest which requires protection from the consequences of the principal'sdefault or delinquency. In mostcommon lawjurisdictions, acontract of suretyshipis subject tothestatute of frauds(or its equivalent local laws) and is only enforceable if recorded in writingand signed by the surety and the principal.

If the surety is required to pay or perform due to the principal's failure to do so, the law willusually give the surety a right ofsubrogation, allowing the surety to "step into the shoes of" theprincipal and use his (the surety's) contractual rights to recover the cost of making payment orperforming on the principal's behalf, even in the absence of an express agreement to that effectbetween the surety and the principal.

Traditionally a guarantee was distinguished from a surety in that the surety's liability was jointand primary with the principal, whereas the guarantee's liability was ancillary and derivative.Many jurisdictions have abolished this distinction.

In the United States, under Article 3 of theUniform Commercial Code, a person who signs anegotiable instrumentas a surety is termed an accommodation party; such a party may be able toassert defenses to the enforcement of an instrument not available to the maker of the instrument.
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In the United Kingdom the idea of a loan with a guarantor has been popularised over the last 3years. Guarantor loans open a unique type of unsecured loan, which is not based on the credithistory of the borrower. In fact it is quite the opposite, this loan is based on the credit standing ofthe person who will guarantee the payment of the loan in case the borrower defaults. Certaincircumstances lead to a reduction of credit rating. Whenever a credit rating reduces and becomes

poor it will not be very easy to obtain even a high rate bad credit loan. Having a guarantor willaddress the lenders concern, and is a great way to regain the lost credibility in terms of obtainingcredit.[1][2]

Portfolio (finance)

Portfolio is a financial term denoting a collection of investments held by an investment

company,hedge fund, financial institution or individual.

[1]

Definition

The term portfolio refers to any collection of financial assets such asstocks,bondsand cash.Portfolios may be held by individual investors and/or managed by financial professionals, hedgefunds, banks and other financial institutions. It is a generally accepted principle that a portfolio isdesigned according to the investor's risk tolerance, time frame and investment objectives. Thedollar amount of eachassetmay influence the risk/reward ratio of the portfolio and is referred toas theasset allocationof the portfolio.[2]

Underwriting

Underwriting refers to the process that a large financial service provider (bank, insurer,investment house) uses to assess the eligibility of a customer to receive their products (equitycapital, insurance,mortgage, or credit). The name derives from theLloyd's of Londoninsurancemarket. Financial bankers, who would accept some of the risk on a given venture (historically asea voyage with associated risks of shipwreck) in exchange for apremium, would literally writetheir names under the risk information that was written on a Lloyd's slip created for this purpose.
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Venture capital

Venture capital (VC) isfinancial capitalprovided to early-stage, high-potential, high risk,growthstartup companies. The venture capitalfundmakes money by owningequityin thecompanies it invests in, which usually have a novel technology orbusiness modelin high

technology industries, such asbiotechnology,IT,software, etc. The typical venture capitalinvestment occurs after theseed fundinground as growth funding round (also referred asSeriesA round) in the interest of generating a return through an eventual realization event, such as anIPOortrade saleof the company. Venture capital is a subset ofprivate equity. Therefore allventure capital is private equity, but not all private equity is venture capital.[1]

In addition toangel investingand otherseed fundingoptions, venture capital is attractive for newcompanies with limited operating history that are too small to raise capital in the public marketsand have not reached the point where they are able to secure abank loanor complete adebtoffering. In exchange for the high risk that venture capitalists assume by investing in smaller andless mature companies, venture capitalists usually get significant control over company

decisions, in addition to a significant portion of the company's ownership (and consequentlyvalue).

Venture capital is also associated with job creation (accounting for 21% of US GDP),[2]theknowledge economy, and used as a proxy measure ofinnovationwithin an economic sector orgeography. Every year there are nearly 2 million businesses created in the USA, and only 600-800 get venture capital funding. According to the National Venture Capital Association 11% ofprivate sector jobs come from venture backed companies and venture backed revenue accountsfor 21% of US GDP.[3]

History

A venture may be defined as a project prospective of converted into a process with an adequateassumed risk and investment. With few exceptions, private equity in the first half of the 20thcentury was the domain of wealthy individuals and families. The Vanderbilts, Whitneys,Rockefellers, and Warburgs were notable investors in private companies in the first half of thecentury. In 1938,Laurance S. Rockefellerhelped finance the creation of bothEastern Air LinesandDouglas Aircraftand the Rockefeller family had vast holdings in a variety of companies.Eric M. WarburgfoundedE.M. Warburg & Co.in 1938, which would ultimately becomeWarburg Pincus, with investments in bothleveraged buyoutsand venture capital.

[edit] Origins of modern private equity

BeforeWorld War II, money orders (originally known as "development capital") were primarilythe domain of wealthy individuals and families. It was not until after World War II that what isconsidered today to be true private equity investments began to emerge marked by the foundingof the first two venture capital firms in 1946:American Research and Development Corporation.(ARDC) andJ.H. Whitney & Company.[4]
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ARDC was founded byGeorges Doriot, the "father of venture capitalism"[5](former dean ofHarvard Business Schooland founder ofINSEAD), withRalph FlandersandKarl Compton(former president ofMIT), to encourage private sector investments in businesses run by soldierswho were returning from World War II. ARDC's significance was primarily that it was the firstinstitutional private equity investment firm that raised capital from sources other than wealthy

families although it had several notable investment successes as well.

[6]

ARDC is credited withthe first trick when its 1957 investment of $70,000 inDigital Equipment Corporation(DEC)would be valued at over $355 million after the company's initial public offering in 1968(representing a return of over 1200 times on its investment and anannualized rate of returnof101%).[7]

Former employees of ARDC went on and established several prominent venture capital firmsincludingGreylock Partners(founded in 1965 by Charlie Waite and Bill Elfers) and Morgan,Holland Ventures, the predecessor of Flagship Ventures (founded in 1982 by James Morgan).[8]ARDC continued investing until 1971 with the retirement of Doriot. In 1972, Doriot mergedARDC withTextronafter having invested in over 150 companies.

J.H. Whitney & Companywas founded byJohn Hay Whitneyand his partnerBe

definition of financial services

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