Innovative Financial Instruments

RINSE JOHN (11SJCCB012)

Meaning of Financial Services

Financial Services is a term used to refer to the services provided by the

finance market. Financial Services is also the term used to describe organizations that deal with the management of money. Example: Banks, investment banks, insurance companies, credit card companies and stock brokerages.

SCOPE OF FINANCIAL SERVICES:

1) Traditional Services: The financial intermediaries have been rendering

a wide range of services encompassing both capital and money market activities. They can be grouped under two heads, a. Fund Based Services b. Non Fund Based Services 2) Modern or new financial services.

FUND BASED SERVICES TYPES: 1) Underwriting or investment in shares 2) Treasury Bills 3) Discounting of Bills 4) Involvement in equipment leasing, venture capital 5) Term Loans 6) Overdraft facilities

NON-FUND BASED SERVICES: These are also called as fee based services. This service does not involve a huge risk compared to the fund based services. But requires a lot of expertise. Examples of non-fund based services are: 1) Investment banking services 2) Merchant Banking activities 3) Insurance Business 4) Project counseling 5) Mergers & Amalgamations 6) Rehabilitation of sick units.

PURPOSE OF INNOVATION
1) CREDIT CONTROL: Credit Control is an important tool used by Reserve Bank of India, to control the demand and supply of money in the economy. It is basically used to achieve the objective of Inflation or Deflation and also used to boost the economy. 2) LIQUIDITY MANAGEMENT: Activities within a financial institution to ensure that holdings of liquid assets (e.g. cash, bank deposits and other financial assets) are sufficient to if they fall due to unexpected transactions or so on. 3) SATISFYING OTHER OBJECTIVES LIKE RETAINING MANAGEMENT CONTROL: This is nothing but basically used to determine or compare the performance with the pre-determined standards, plans or objectives. So in order to satisfy the objective, the performance should be almost near or as to the same of the determined standards.

4) TREASURY MANAGEMENT: Treasury management (or treasury operations) includes management of an enterprise's holdings with the ultimate goal of maximizing the firm's liquidity.

INNOVATIVE FINANCIAL INSTRUMENTS

WHY INNOVATIONS? Technology is taking banking closer to customers, If public sector banks fail to attract younger customers, it can slow down future growth. INNOVATIVE FINANCIAL INSTRUMENTS: 1) Time Share: Timeshare is a common term that is used in real estate to describe a particular type of real estate ownership. In short, time share is a type of property ownership typically reserved for vacation properties. It occurs when a multitude of owners have a right to use the timeshare property for a specified time each year. 2) FCCB : (Foreign Currency Convertible Bonds) a. FCCB is a type of convertible bond issued in a currency different than the issuers domestic currency. FCCB also gives the bondholder the option to convert the bond into stocks. 3) Zero Coupon Bond: A bond which pays no coupons, is sold at a deep discount to its face value and matures at its face value. A Zero coupon bond has the important advantage of being free of re-investment risk. Drawback is that: There is no opportunity to enjoy the rise in market interest rates. 4) Infrastructure Bonds: These are the bonds issued by the private sector with the purpose of financing infrastructure projects of public interest.

Ex: When bonds are once released in the market, people subscribe to them and the proceeds are utilized to finance infrastructure projects across the nation. 5) Commercial Paper: Commercial papers are promissory notes that are unsecured and issued by companies and financial institutions. Commercial Papers yields higher denominations as compared to the Treasury Bills and the Certificate of Deposit. The maturity period of Commercial Papers is a maximum of 9 months. These securities are actively traded in secondary market. 6) Certificate of Deposit: A certificate or deposit is a short-term borrowing note, like a promissory note, in the form of a certificate. It enables the bearer to receive interest. The returns are higher but even risk is also involved. The funds cannot be withdrawn on demand, but it can be liquidated on payment of a penalty. 7) ADR / GDR : (American Depository Receipt & Global Depository

Receipt)
a. These are the instruments in the nature of depository receipt or certificates. b. These instruments are negotiable and they are publicly traded. c. ADR are listed on American Stock Exchange and GDR are listed on Global Stock Exchange other than American Stock Exchange.

8) Inter-Bank Participation :

a. IBP is inter-bank instrument confined only to scheduled

commercial banks excluding regional rural banks. b. The IBP with risk sharing can be issued for 91-180 days. 9) Flip Flop Notes: Kind of debt instruments which permits investors to switch between two types of securities. Example: Switch from a long term bond to short-term fixed rate note.

NEW FINANCIAL SERVICES OFFERED BY BANKS: 1) Financial Advising: Customers have asked for financial institutions
for advice, particularly when it comes to savings and investing of funds. For this, Banks have come with wide range of financial advisory services to help prepare financial plans for individuals & provide consulting about market opportunities at home & abroad.

2) Managing Cash: Over the years, financial institutions have found that
some of the services they provide for themselves are valuable for their customers. One of the most prominent among them is Cash Management Services, which is a financial intermediary agrees to handle cash collections and disbursements for a business firm and to invest any temporary cash in interest bearing assets until cash is needed to pay bills.

3) Offering Equipment Leasing: Many banks and finance companies

have moved aggressively to offer their business customers the option to purchase equipment through a lease arrangement. Its basically where the lending institution buys the equipment and lends it to the customer. So what happens here is that the lender can depreciate the leased equipment to save on taxes.

4) Making Venture Capital Loans: Banks, Security dealers & other

financial institutions have become active in financing the startup cost of new companies. Because of the added risk involved, this is done through a separate venture capital firm that raises money from investors to support young businesses in the hope of turning it into a profit.

5) Selling and Managing Retirement plans: Banks, Mutual funds &

Insurance companies are active in managing the retirement plans that most businesses make available to their employees. This involves investing in incoming funds and dispensing the payments to qualified recipients who have reached retirement or become disabled.

6) Offering Merchant Banking services: Lets look at U.S financial

services providers. They are following the footsteps of leading financial institutions all over the globe.

For ex: Barclays & Duetsche Bank. They offer merchant banking services to large corporations. These consists of temporary purchase of corporate stock in the aid of starting a new business venture or in supporting the expansion of existing company. Hence, a merchant banker becomes a temporary stock holder and bears the risk that the stock purchased may decline. TRADITIONAL MARKET INSTRUMENTS: 1) Money Market: The major purpose of financial markets is to transfer funds from lenders to borrowers. Money market means market where money or its equivalent can be traded. The most common money market instruments are Treasury Bills, Certificate of Deposits, Commercial Papers, Repurchase Agreements and Banker's Acceptance. 2) DEBT MARKET INSTRUMENTS: Government Securities Market (G-Sec Market): It consists of central and state government securities. It means that, loans are being taken by the central and state government. Bond Market: It consists of Financial Institutions bonds, corporate bonds and debentures. These bonds are issued to meet financial requirements. The return in debt market is fixed and is almost risk free that is assured returns.

They have a maturity ranging from 1 year to 20 years.

Like T-Bills, G-secs (Govt securities) are issued through auctions but RBI can sell/buy securities in its Open Market.

3) CAPITAL MARKET INSTRUMENTS: A Capital market is a market for securities, where business enterprises and government can raise long term funds.