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Chapter 4 Service Sector and Business <<previous page | index | next page>>
4.1 Introduction Service sector business came into prominence in recent years due to economic liberalization. There is a radical reorganization of the service industry which covers a wide range of activities including, travel, advertising, engineering, finance and accounting. The most prominent service sector in India is banking service. Insurance and telecommunication witnessed tremendous change in recent years.
4.2 Banking Finance and Insurance Business enterprises in India are closely linked with the financial institutions. The flow of funds in the industry trade and services are skillfully channeled by organized financial institution in India. Financial instruments and security facilitate transfer of funds in the business.
4.2.1 Nature and Type of Financial Services Financial services include all types of financial activities .The service of financial institutions are essential to transport small saving into productive investment. Financial services are also known as financial intermediaries. They mobilize savings from private individuals and transfer them to productive sectors.
Types of Financial Services Financial services cover a high range of activities. The traditional activities are banking and insurance. In addition to these traditional activities any non-financial services such as merchant banking, loan syndication, leasing mutual funds, factoring etc have emerged in the recent past. These institutions play an important part in the smooth functioning of business.
i) Merchant Banking Merchant banks are also known as investment banks. Their activities are mainly in the area of management of share issue, underwriting and corporate restructuring. The scope of merchant banking activities has been expanding in India over the years. Merchant banks support cooperate clients in a number of ways.
Merchant banks take care of legal and procedural complications involved in the issue of securities and raising of loans. They also provide professional advice in matter of investments, capital restructuring, mergers and administration. Large number of nationalized banks set up merchant banking system to provide these specialized services.
ii) Leasing Leasing is a kind of rental agreement for properties. Unlike normal rental agreement, leasing agreement is generally made for a longer period. Usually the person who takes the property on lease pays a lump sum to the owner which is returned at the end of lease period. In addition to this lump sum sometimes there is an additional lease rent is also paid.
Leasing can be done by individuals or companies specialized in leasing business. In India independent leasing companies form an important group in leasing business.
Leasing is convenient to the owner because he gets a lump sum at the beginning which is not available in normal rent agreements. Moreover the owner does not lose his ownership of the property. He can regain possession of the property at the end of the lease period. Lease is convenient to the person who hires the property also, because he gets possession of property almost like ownership, but at much lower price.
Leasing companies play an important role as financial intermediaries. They encourage investment by making funds available with minimum formalities. Thus leasing is an important financial service that helps the growth of manufacturing sector.
iii) Mutual Funds Mutual funds are organizations collecting small investments from individuals and invest in share and debentures for earning profit. The main feature of mutual funds is that the major portion of their funds comes from small saving.
Mutual funds are financial intermediaries. They collect money through units. They facilitate capital formation. Individual investors with limited finance cannot invest in diversified portfolios to reduce risk and enhance savings. This shortcoming is solved by mutual funds who collect these small savings and invest them in diversified ventures.
The first mutual fund started in India in 1964 was the Unit Trust of India. Later on State Bank and Canara Bank set up their mutual funds. Now many banks have setup their mutual funds.
iv) Factoring This refers to the practice of raising funds by selling a firm’s accounts receivable. Factoring companies are specialized in credit management. They make advance payment to companies against book debts. They charge interest on advances and factoring commission on the collections made.
v) Venture Capital Venture capital is mainly initial capital provided for a business. This generally considered high risk capital. Venture capital is provided on the basis of the project report and proposals by promoters. Raising capital for such new ventures or new projects is difficult because conventional sources of capital generally avoid high risk areas. Venture capitalists usually take up new projects with high risk and high technology. Equity finance is provided by purchasing shares of the company, which entitles part ownership in the new business. In addition to providing finance these companies provide management support to ensure a smooth launching and running of the new venture.
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