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RBI SUGGESTED TO LAUNCH INDEX-INFLATION BONDS TO FINANCE 

MINISTER.

The move may also help balance trade imbalances as gold import has been jacking up trade 

deficit which in turn increases current account deficit.

The Reserve Bank of India (RBI) is in talks with the Finance Ministry for launchinginflation-indexed bonds, which can help reduce physical demand for gold, its DeputyGovernor HR Khan said, reports PTI. The move can also help balance trade imbalances asgold import has been jacking up trade deficit which in turn increases current account deficit.

"We are talking to the Finance Ministry to launch inflation-linked bonds, which can helpreduce the demand for physical gold," Khan told the FICCI-organised Asian FinancialCooperation Conference. The move can also help arrest imported inflation in the light of thesteep fall in the rupee. Typically, according to experts, a 10% fall in the rupee leads to a 100

basis points or 1 percentage point spike in inflation. The rupee has lost nearly 7% this fiscalafter losing nearly 18 percent in the last calendar year. It can be noted that last year thecountry imported 969 tonne gold, which contributed to record current account deficit of 4.2%.

This year, however, there is some taming in gold import demand and according to theWorld Gold Council, this is likely to slide to 800 tonnes, thus losing the years of gold-demand dominance to China by a whisker this year. Both the RBI and the government havebeen taking steps to reduce gold demand through a series of measures. As gold importstouched a record high last year, pushing up the current account deficit to a historic high of 4.2% in the year, the Reserve Bank has unveiled a slew of curbs on gold purchase andfinancing. This spike in gold demand was in spite of the record price rally that metalwitnessed last fiscal.In April, the RBI brought down the loan to value or LTV that gold loancompanies could offer to just 60% of the market value, from a high of 85-90%. In the 30thOctober credit policy, the RBI banned banks from offering loans to gold loan companies andnbfcs for buying gold.

  The government on its part had increased the import duty on gold in the Budget.

  RBI had also advised banks to not extend loans for purchase of gold to gold 

companies.

Addressing the annual banking conference in Pune last Saturday, another deputy governorSubir Gokarn had said there was an urgent need to "dematerialise" gold like any otherfinancial product, which could help reduce physical imports of the precious metal that is inturn leading to the current macroeconomic stress.

"High gold import is creating some macroeconomic stresses and so the challenge is to findways to replicate the financial characteristics of gold without necessarily causing physicallyimporting," Gokarn had said. Gokarn had also said an RBI working group head by KUB Rao

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would shortly submit a report on the ways to deal with the problem arising from high goldimports on the macroeconomic front in the form of balance of payments.

Gokarn had said while global gold output has stayed stable at around 4,000 tonne per year,domestic consumption has doubled to 1,000 tonne annually since 1999, despite a massive

rally in the prices. Last fiscal there was a 39% rise in gold imports and in gross terms,constituting 80% of the CAD of 4.2% of GDP. Net gold import constituted 1.8-2.4% of GDP.

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NEED OF LAUNCHING THE NEW FINANCIAL PRODUCT.

He Reserve Bank of India announced it is contemplating measures to ensure the countryconsumes less physical gold as the consumer craze for the yellow metal is putting the nation'sexternal trade at risk. A sharply depreciating rupee and the highest ever current account deficit,

excess of imports over imports, at 4.5% of the gross domestic product has made policy-makersthink of ways to curb the demand that's draining productive purposes.

"We are considering instruments which can mimic the returns on gold," Reserve Bank of Indiadeputy governor  Anand Sinha said without elaborating on the kind of instruments under consideration. "Gold import has been a substantial part of current account deficit and, therefore,it is being looked at what best can be done."

The Indian rupee has been the most volatile among major emerging economies' currencies in the past year as foreign fund flow slows and domestic consumers buy more gold to protect againstfuture inflation as returns from fixed income securities were negative in real terms, meaning

adjusted for inflation investors lost money. In contrast, gold has provided positive returns for nearly a decade now. India imported $45 billion worth of gold in 2011-12, an increase of 3%year-on-year although physical imports fell 17% to 854 tonnes from 1,034 tonnes due to highinternational prices which was amplified by the weak Indian rupee. India is the world's largestimporter and consumer of the precious metal. The government imposed a nominal tax too ongold to slow consumption. The government duty is having an impact as some forecast a near 30% drop in gold consumption this year. Rough estimates suggest Indian household possessessome 18,000 tonnes of gold. About 23% of all gold imported was for investment in India while75% of jewellery is treated as investment, according to World Gold Council data.

RBI's Financial Stability Report said that banks' import of gold coins for retail sale to households

has risen from just 1% of total imports by banks in 2009-10 to 3.8% in 2011-12. It expressedconcerns over the issue as households investing in the metal could reduce the availability of funds for the financial sector and thus shrink economic growth. Sinha said that any economiccrisis followed by financial crisis takes a long time heal and he emphasised on the importance of micro and small entrepreneurs who contribute 40% of the country's exports and 46% of manufacturing output. He said revival of sick SME units is under the consideration of RBI andthe government. On the issue of new bank licences, the deputy governor said the final guidelineswill be released only after the amendment of the Banking Regulation Act.

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I NTRODUCTION TO FINANCIAL SERVICES.

Financial services are services related to handling and managing money, usually providedon a commercial basis. Examples include banking, insurance, currency exchange, mortgageprovision and facilities for borrowing money such as credit cards, car loans, and online

payday loans. 

In the modern world, banking has become a financial service which it can be very difficult to do without. In the past, many people, particularly those at the lower end of the economicspectrum, were able to live entirely on a cash basis. They would have received payment from their employers in cash and would then have spent or saved that money directly,without contact with any financial institution. More recently, many employers haverequired that their employees have bank accounts in order to receive payment. As a result,some governments have taken steps to encourage banks to provide banking services topoorer people, something they have often been reluctant to do because of its non-profitability.

Many banks market a wide range of financial services to their clients, using the informationwhich they naturally glean from their awareness of the customer’s financial situation to

make suitable offers to them and to assess the customer as a risk prospect. Although insome countries banking services are provided for free and therefore at a loss from thebank’s perspective, the banks usually expect to earn money through the marketing of otherservices to the customer.

DEFINITION:-

Financial services are the economic services provided by the finance industry, whichencompasses a broad range of organizations that manage money, including credit unions, banks,  credit card companies, insurance companies, consumer finance companies, stock brokerages,  investment funds and some government sponsored enterprises. As of 2004,the financial services industry represented 20% of the market capitalization of the s&p 500in the united states. 

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FINANCIAL SERVICES AFTER Lpg.

Service sector is fast emerging as the largest contributing forces to the growth of 

economies around the world. With opening up of the economy at global level, there hasbeen a shift from manufacturing to service sector which has experienced intense attractionand interest the world over. India is no exception to this."TRIMS" – Trade relatedinvestment measures have played further a key role in spurring the growth of servicesector. Since 1990s, the Indian Financial Services has comparatively undergone tocomplete and a new face of change as compared to other early days when the financialservices landscape was exactly controlled by commercial banks and other financialinstitutions which are the main source of funds for the priority sectors. Consequently, that era is known as ‘Financial Repression” because it was engulfed with retarded growth dueto: too much regulations of the interest rates, price of securities, lack of enough financialinstruments in the required large scale, poor credit rating, too much regulation of foreign

exchange market, mitigated or lack of reliable information about international financialsectors development, under developed government securities market and finally poor debt instruments. Now, due to the comprehensive step taken by the Indian government in 1991owing to economic liberation privatization and globalization (LPG), we have witnessed that the entire financial sector has undergone a wide and vast change. Financial services can bedivided into two parts: [a] Fund based services & [b] Fee based services.The fund based services is related to the bank deposits, investment in various securities

and instruments. On the other side, fee-based services relate to advisory services, custodialservices and many more. Despite the development of new financial services, technology hasbeen a major vehicle for spurting out growth in financial services. Let us discuss thesesfinancial services one by one.

Merchant Banking

The merchant banker are those financial intermediary involved with the activity of transferring capital funds to those borrowers who are interested in borrowing.The activities of the merchant banking in India is very vast in nature of which includes thefollowinga) The management of the customers securitiesb) The management of the portfolio,c) The management of projects and counseling as well as appraisald) The management of underwriting of shares and debenturese) The circumvention of the syndication of loans

f) Management of the interest and dividend etc

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Factors responsible for the Changes

Globalization of Indian Economy has made the whole economy open, which has moremultinational player in the era of the financial services. This has resulted in to theemergence of 

the global investment in financial sector. Government has now open up the doors of investments especially in the area of banks and insurance, which leads to competitiveenvironment for the present players. Now, they have to bring something new which isefficient and best services to live in the competitive environment.Competition arising out of Private Company Participation is due to the liberalization of the economy. Now along with the public/government players, private players are alsooffering financial services and instruments, which are more innovative and different thanthe earlier offering. All around, there is a fresh thinking on the financial products, structureof banking and insurance instruments with value creation. Financial markets are beingredefined, reinvented and reconfigured on a persistent basis.

Changing Customer Demographics If we look at the all-growing economies like China,Germany and Brazil, India has 35% of the population in the age group of 15 years to 34years. The demographic change leads to the change in the need of the customer.

Changing Customer Needs customers have larger segment in corporate decision-makingthey are the final judges of the every single activity offered by the marketer. Banks in Indiahave traditionally offered mass banking products. Financial market has turned into abuyer's market. Market focus is shifting from mass banking products to class banking withintroduction of valueadded products. Today, financial institutions are co-designing the products/services withtheir customers and striving to provide them with global solutions.

Technology Improvements Technology is also helping market players redefine the waythey have been operating in the market. In today's time, it becomes very easy for acustomer to transfer a fund from one location to another location with click of mouse.Availability of the concepts like phone banking, anytime banking etc. has become possiblebecause of the technological developments only.

Government Reforms Government is major decision player in the financial market. It decides the proportion of the investment limits as well as the regulation and control. In last ten years, government is designing its policy with more liberal and competitive content which are welcome trends for the emerging financial services.

Given the heightened focus on customer relations, the bank of the future has to beessentially a marketing organization that also sells banking products. New distributionchannels are beingused; more & more banks are outsourcing services like disbursement and servicing of consumer loans, Credit card business. Direct Selling Agents (DSAs) of various Banks go out and sell their products. They make house calls to get the application form filled in properlyand also take your passport-sized photo.

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Value Added Services in Banking

There are new and innovative value added services in banking which makes the banking aunique and very comfortable experience. Some of them are:• 2 in 1 Accounts• Overdrafts (OD)

• ATMs• Net Banking• Credit Card2 in 1 Accounts

2 in 1 accounts are available at many of the foreign and private banks. It amalgamates thefeatures of a savings or a current account and a fixed deposit account. As soon as one opens2 in 1 accounts with the bank, deposit starts earning a rate of interest higher than that of aplain savings account. The rate of interest can be equivalent to prevailing rates for FixedDeposit. Customers can choose the sweep option – Term Deposit or Mutual Fund, based ontheir requirements.

Overdraft [OD] Overdraft is the agreed amount by which a bank account can be overdrawn. When theamount of money withdrawn from the bank account is greater than the amount actuallyavailable in the account the excess is known as the overdraft and the account is said to beoverdrawn. If agreed by the bank in advance this is essentially a form of loan facility andthere is a particular interest rate attached with the overdrawn amount.

 ATMs

Automated Teller Machines has revolutionized entire banking sector. Currently, there aremore than 16000 ATMs in India fulfilling the daily requirement of money to a commonman. The story of the humble cash-dispensing machine started around three decades back.

Since then, they have become common site in metros and semi-metro cities. ATM allows acustomer to do number of banking functions like withdrawing cash, making balanceinquiries, transferringmoney from one account to another account, request for a Cheque book and statements,Utility Bill Payment  – like electricity bills, Credit Card payments etc by using a plastic,magnetic strip card and personal identification number issued by financial institution.

Net Banking

Internet technology has invaded the portal of our banking institutions. No doubt,innovation like ATM have considerably put customer at ease in the recent past, but with net banking the customer is able to transact with the help of the mouse. The services offered

enable one to check credit card transactions, paying bills, transferring fund betweenaccounts in two different banks, and scheduling future payments and transfers. A gradualincrease in net banking is logical as the need to minimize costs catches attention. A NorthAmerican Internet Banking survey done by management consultancy Booz Allen &Hamilton in 2000 revealed that the cheapest way of banking is internet banking.

Credit Cards

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It is estimated in the year 2004; the total credit card market in the country was at 17million cards. The credit card industry is growing at 30 – 35 % per annum at present. Thesize of Indian credit card market is estimated to be around $4bn by end of 2010.Four banks have now crossed the 2 million card base, with ICICI bank leading the pack at 4million cards followed by Citibank at 2.8 million, HDFC bank at 2.2 million and SBI card just 

over 2 million. Industry average for spends on credit a card two years ago was just aroundRs 16,000 per card that has now increased to around 20,000 per card. Rapid advancement in technology, easier access to knowledge and globalization have changed entire bankingsector. Because of these factors, today customer is sophisticated and well aware about thefinancial needs.

Leasing Services

Lease is that agreement under which the company or Indian firm acquires the exact right and make use of certain capital asset on the consideration of payment of rental charges.The Indian company cannot acquire any kind of ownership to such an asset apart from

making use of it. The user comparatively pays all the expected operating costs and also themaintenance expenses.Leasing services are popular in developed countries like America,United Kingdom. In India, since the era of liberalization, many of the Indian companies haveequally been involved in the leasing transactions. On the other side, many financialinstitutions and even the commercial banks in the Indian financial sector havecomparatively been accepted over the same transactions.

Mutual Funds Services

The mutual funds comprises of funds gained by pooling all the public savings. The mutualfunds are comparatively invested in those portfolios, which are commonly diversified innature with the main objectives of sharing the risk. The modern concept of the mutual

funds was developed in 1968 in London by the foreign and colonial government trust of London. Its invention in India was in early 1980, even if it was exactly started in 1964 bythe unit trust of India. The mutual funds can be grouped into [a] Close ended funds & [b]Open ended funds. The Indian corporate companies can only benefits from the mutualfunds on gaining savings for investment, better yield low cost on investment, tax benefits,flexible on investment, promoting industrial development reducing the cost of new issueand many more other advantages. On the other side, the kind of risks involved with themutual funds are market risks, schemerisks, business risk, investment risks and even the political nature of risks. While theinvestors selecting the funds must take into account the objectives of the fund, consistencyof performance of the funds, historical background of the funds, cost of operation, capacity

for innovation, the investors servicing, market trends, and even the transparence of thefund management.

Hire Purchase Services

In the hire purchase, goods are left out on hiring by the company on which the hirer isrequired to do the payment on an agreed sum of amount in the system of periodicalinstallments. In the hire purchase, the ownership of such kind of the property exactlyremain under the control of the creditor who normally passes the right to hirer on thecondition of payment of the last agreed sum of money in installment.

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Payment is usually made in installment over the agreed specified period, possession of thesame right is delivered to the purchaser during the time of agreement, the property passesto the exact purchaser on the agreed last installment, and the hirer has a right to return theproperty without further installment. In addition to the above, the agreement must contain the nature of the

goods as described in manner so that to identify them easily, the nature of the hirepurchase price, the date of commencement and finally the extend or number of installments.

Venture Capital Services

The venture capital is that investment in the new Indian enterprises which arecomparatively specializing, in new technological ideas in the commercial sectors.The venture capital is equity participation, it's of high risk in nature, it's also available onlyfor commercialization of new technologies and it's the exact promoter of the projects, andit's continuous in nature and input of the firm. The venture capital involves thedevelopment of project idea, implementation, fledging or additional financing, and

establishment stage. The main importance of venture capital to Indian, corporatecompanies are the reduction of risk, easy to analyze the business prospects and to assumethe investors on affairs of the business. The Indian methods of venture financing are equityparticipation, income notes, the conventional loans and even the conditional loans. In orderto promote the venture capital growth in India, there must be tax concessions for capitalgains, high level development of capital market, giving of fiscal incentives to Indiancorporate companies, high level participation of the private sectors the improving andreviewing of the existing laws and limited partnership and many more.

Discounting, factoring and forfeiting services

The supplier of the exact goods draws bill which is based on the purchase for the invoice

price of goods sold on credit. It is drawn for the short period of time. The buyer pays theamount on the exact date by which the supplier of goods has to await until the expiry of theexact bill. However, the banks provides the cash discounting based on the exact trade billsby which they deduct certain charges as discount based on the amount of the bill and credit balance to the customer’s account.

Factoring

In factoring, assignment of debt has to be in favor of the factor. The factor will equally haverecourse in case of non-payment, details on payment for the services, interest and limit of any overdraft facility charged. The Indian corporate companies must be well informed

about the types of factoring as full service, recourse factoring, maturity, bulk, invoice,agency and also international factoring. At the same time, the exact cost of factoring like thepricing, fee, discount, accounting system must be taken into consideration.

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Forfeiting

Forfeiting is the French term means "to give something" or "give one's right". Generally theterm forfeit is non-recourse purchase by the commercial bank or any other financialintermediaries or institutions receivables that equally arises from the export of the goods.

Securitization of Debt ServicesThe securitization is that process by which the exact long term, non-negotiable instrumentsare equally converted into securities of such kind of small value in nature which can beeasily transacted in the commercial capital market. In India, apart from the above, there islow and unpopularity of securitization due to introduction of it as it's a new idea or concept to India, heavy stamp duty and comparative registration fees imposed by the Indiangovernment, complicated and also, legal transfer procedure the difficulty in the assignment of debts. Also there is poor standard of loan documentation, problem of In adequate credit rating system, poor accounting procedure and lack of comprehensive guidance.

Derivatives

The derivatives are those instruments, which are commonly used to derive therein-exact value of underlying asset of the financial institutional corporate companies. The derivativescomparatively may involve the payment or receipt of the value or income created by theunderlying assets. The main factors that are responsible for the slow growth of derivativesin India and high level of misconception of the derivatives, the derivatives lends themselvesto leveraging, the nature of the off balance sheet items, poor accounting system, speculativemechanism and finally poor infrastructure system.

Credit Rating Services

According to Moody's Rating are designed exclusively for the purpose of grading bondsaccording to their investments qualities". Also according to the Australian Ratings "A

corporate credit rating provides lenders with a simple system of gradation by which therelative capacity of companies to make timely repayment of interest and principal on aparticular type of debt can benoted". The main credit ratings in India are credit rating information service ltd (CRISIL),investment information and credit rating agency of India (ICRA), Credit Analysis andResearch (CARE), and Duff Phelps Credit Rating Pvt. Ltd (DCR India).

Banncassurance

Insurance provided by a bank. For example, a bank could offer life insurance in addition toits savings,  loan, and investment  services. Proponents argue that bancassurance canstreamline internal and government regulations. For example, a bank offering a mortgage

may require borrowers to buy homeowners insurance; if bancassurance is available, theborrower could purchase a policy directly from the bank without needing to shop around.However, bancassurance is somewhat controversial; critics contend that allowing banks tosell insurance gives them too much control over the financial services sector. The sale of insurance and other similar products through a bank. This can help the consumer in somesituations; for example, when a bank requires life insurance for those receiving a mortgageloan, the consumer could purchase the insurance directly from the bank. Some critics feelthat bancassurance gives the bank too much control.

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 CLASSIFICATION OF FINANCIAL SERVICES:-

  Issue Management.

  Corporate.

  AdvisoryServices.

  Credit Rating.

  Mutual Funds.

  Asset Securitization.

  Stock Broking Services

  LEASING AND HIRE 

PURCHASE.

  HOUSING FINANCE.  CREDIT CARDS.

  VENTURE CAPITAL.

  FACTORING.

  FORFEITING.

  BILLDISCOUNTING.

  INSURANCE.

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Fund based activities :

In fund-based services the firm raises funds through debt, equity, deposits and the bank 

invests the funds in securities or lends to those who are in need of capital.

The traditional services which comeunder fund based activities are the following :

  Underwriting or investment in shares, debentures, bonds, etc. of new issues

  (primary market activities).

  Dealing in secondary market activities.Participating in money market instruments

like commercialpapers, 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.

Fee-based activities :

Fee based financial services are those services wherein financial institutions operate in

specialized fields to earn a substantial income in the form of fees or dividends or brokerageon operations. 

Financial intermediaries provide services on the basis of non-fund activities also. This can

be called ‘fee based’ activity. Today customers, whether individual or corporate, are not 

satisfied with mere provisions of finance. They expect more from financial services

companies. Hence a wide variety of services, are being provided under this head.

They include :

  Managing the capital issue – i.e. management of pre-issue and post-issue activities

relating to the capital issue inaccordance with the SEBI guidelines and thus enabling

the promoters to market their issue.

  Making arrangements for the placement of capital and debt instruments with

investment institutions.

  Arrangement of funds from financial institutions for the clients’ project cost or his

working capital requirements.

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