Classification of Financial Services
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Questions and Answers

What is the main difference between capital market intermediaries and money market intermediaries?

  • Capital market intermediaries deal only in stocks, while money market intermediaries deal only in bonds.
  • Capital market intermediaries provide long-term funds while money market intermediaries provide short-term funds. (correct)
  • Both types of intermediaries provide the same fund duration.
  • Money market intermediaries are more regulated than capital market intermediaries.

    • Which of the following activities is categorized as a fund-based activity?

  • Undertaking equipment leasing. (correct)
  • Providing financial consulting services.
  • Managing the capital issue for a company.
  • Advising customers on investment strategies.

    • What do non-fund based activities primarily focus on?

  • Investing in shares and debentures.
  • Trading in money market instruments.
  • Gathering long-term capital for projects.
  • Providing services based on fees rather than funds. (correct)

    • Which of the following is NOT a component of the money market intermediaries?

    <p>Term-lending institutions</p> Signup and view all the answers

    What is an example of a traditional fund-based activity?

    <p>Underwriting shares in a new issue.</p> Signup and view all the answers

    Why have financial services companies expanded their offerings beyond just providing finance?

    <p>Customers expect more comprehensive solutions.</p> Signup and view all the answers

    Which of the following instruments is associated with money market activities?

    <p>Treasury bills</p> Signup and view all the answers

    How are fund-based activities different from non-fund based activities?

    <p>Fund-based activities involve direct financial transactions, while non-fund based activities focus on service provision.</p> Signup and view all the answers

    What is one of the primary functions of a bank?

    <p>To lend money to those in need</p> Signup and view all the answers

    How does a bank ensure the safety of depositors' funds?

    <p>By accepting deposits repayable on demand or after a fixed period</p> Signup and view all the answers

    What does a bank mean by ‘custody of money’?

    <p>Protecting and managing customer deposits</p> Signup and view all the answers

    What aspect reflects the profit-oriented nature of a bank?

    <p>Lending money with interest to borrowers</p> Signup and view all the answers

    How do banks act as a connecting link in the financial system?

    <p>By collecting surplus funds from lenders and providing them to borrowers</p> Signup and view all the answers

    Which characteristic indicates the evolutionary nature of banking?

    <p>Ever increasing functions and services offered by banks</p> Signup and view all the answers

    What type of institution can be classified as a bank?

    <p>A person, firm, or company operating under banking regulations</p> Signup and view all the answers

    Which of the following is considered an agency service provided by banks?

    <p>Facilitating various utility services for customers</p> Signup and view all the answers

    What is the primary focus of development banks?

    <p>Offering all types of financial assistance for economic development</p> Signup and view all the answers

    What was the original purpose of co-operative banks in India?

    <p>To lend to farmers at cheaper rates</p> Signup and view all the answers

    What is the role of the National Bank for Agricultural and Rural Development (NABARD)?

    <p>To coordinate rural credit efforts among various financial institutions</p> Signup and view all the answers

    Which of the following banks specifically aids exporters and importers?

    <p>Export Import Bank of India (EXIM Bank)</p> Signup and view all the answers

    What initiative was introduced in 1992 to enhance the access of rural poor to financial services?

    <p>Self-Help Group (SHG) – Bank linkage programme</p> Signup and view all the answers

    What is the primary function of factoring in financial services?

    <p>To manage sales ledgers and assume credit risk in debt collection</p> Signup and view all the answers

    Which of the following best describes forfaiting?

    <p>An arrangement where an exporter receives cash by discounting export bills</p> Signup and view all the answers

    What does securitization achieve in financial markets?

    <p>It transforms illiquid assets into marketable securities</p> Signup and view all the answers

    What is the main benefit of leasing for the lessee?

    <p>Access to property without the burden of full ownership</p> Signup and view all the answers

    How does a hire purchase agreement differ from a lease?

    <p>Ownership is transferred only after all payments in a hire purchase</p> Signup and view all the answers

    What role do credit-rating agencies play in the capital market?

    <p>They provide credit information and rate companies wanting to issue debt instruments</p> Signup and view all the answers

    Which statement accurately reflects the responsibilities of a factor?

    <p>Assumes the credit risk involved in collecting debts and manages sales ledgers</p> Signup and view all the answers

    What is a key advantage for exporters using forfaiting?

    <p>They acquire immediate cash flow without future payment concerns</p> Signup and view all the answers

    What is one role of financial intermediaries when assisting clients with project costs?

    <p>Arranging funds from financial institutions</p> Signup and view all the answers

    Which of the following is considered a non-traditional service provided by financial intermediaries?

    <p>Providing project advisory services</p> Signup and view all the answers

    Financial intermediaries help clients minimize the cost of debt by advising on what?

    <p>Determining the optimum debt-equity mix</p> Signup and view all the answers

    What type of risk management service might a financial intermediary provide?

    <p>Offering insurance services and buy-back options</p> Signup and view all the answers

    What is a key activity involved in capital restructuring guided by financial intermediaries?

    <p>Advising on changes in management structure</p> Signup and view all the answers

    In the context of sick companies, what service do financial intermediaries typically perform?

    <p>Rehabilitating and restructuring companies</p> Signup and view all the answers

    Which task is part of the financial intermediaries' role in structured financial collaborations?

    <p>Identifying joint venture partners and agreements</p> Signup and view all the answers

    What specific financial service is provided to companies looking to go public?

    <p>Promoting credit rating agencies for ratings</p> Signup and view all the answers

    Study Notes

    Transforming Risk

    • Risk transformation involves reducing and redistributing risk among those who can best bear it.

    Classification of Financial Services

    • Financial intermediaries in India are categorized into two groups:
      • Capital market intermediaries: Focus on long-term funding through term lending and investment.
      • Money market intermediaries: Deal with short-term funding, including commercial and cooperative banks.

    Scope of Financial Services

    • Financial services encompass a wide array of activities, classified into traditional and non-traditional services.

    Traditional Activities

    • Financial intermediaries traditionally offer:
      • Fund-based activities:
        • Underwriting and investment in new shares and bonds.
        • Trading in secondary market instruments.
        • Participation in money market instruments (commercial papers, treasury bills).
        • Equipment leasing and venture capital funding.
        • Foreign exchange market dealings.
      • Non-fund based activities:
        • Management of capital issues and compliance with SEBI guidelines.
        • Facilitating placements of capital and debt instruments.
        • Arranging funding from financial institutions.
        • Securing necessary government clearances.

    Non-Traditional Activities

    • Recent services provided by intermediaries include:
      • Project advisory from inception to funding acquisition.
      • Mergers and acquisitions (M&A) support.
      • Guidance on capital restructuring for corporate clients.
      • Acting as trustees for debenture holders.
      • Recommendations on management practices for improved results.
      • Structuring joint ventures and financial collaborations.
      • Restructuring sick companies and implementing recovery schemes.
      • Risk management through hedges against exchange rates and economic fluctuations.
      • Managing portfolios for Public Sector Corporations.
      • Risk management services like insurance and buy-back options.
      • Advising clients on optimal financing sources and debt-equity mix.
      • Promoting credit rating agencies for companies issuing debt.

    Fund-Based Activities

    • Factoring: Financial service assumes credit risk in debt collection for clients.
    • Forfaiting: Financier discounts export bills, providing exporters with immediate cash while reducing collection risks.
    • Leasing: Tenants rent property, ensuring regular payments and guaranteeing asset use.
    • Hire Purchase: Facilitates buying expensive goods via installment payments post an initial down payment.
    • Securitization: Converts illiquid assets into marketable securities for raising funds.

    Banking Overview

    • A bank is a financial institution handling deposits, advances, and related services.
    • It functions to safeguard customer deposits while offering loans.

    Characteristics of Banks

    • Transactions primarily involve management of depositors' funds.
    • Banks may operate as individuals, firms, or companies.
    • They accept deposits repayable on demand or after a fixed term.
    • Provide loans to individuals and businesses.
    • Facilitate easy payment and withdrawal options.
    • Offer various agency and utility services.
    • Aim for service orientation while seeking profits.
    • Functions of banks are expanding continuously.
    • Act as intermediaries between savers and borrowers of money.

    Development and Cooperative Banks

    • Development banks provide all types of medium and long-term financial assistance for business growth.
    • Cooperative banks were established to offer affordable credit primarily to farmers but also operate in urban areas.

    Specialised Banks

    • EXIM Bank supports exporters and importers with long-term financial help.
    • NABARD, established in 1982, facilitates rural credit and coordinates financial institutions in rural development.
    • NABARD’s micro-finance initiatives increase access to formal credit for the rural poor, including the Self-Help Group-Bank linkage program introduced in 1992.

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    Description

    This quiz covers the classification of financial intermediaries in India, focusing on capital market and money market intermediaries. Understand how these institutions operate in providing financial services and managing risk through aggregation. Test your knowledge on key concepts related to financial services classification.

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