Financial Services Industry in India & Abroad
Overview, market size, growth trends, news resources
P. T. Barnum, the nineteenth-century showman and politician, once said that money is a great master but an excellent servant. He was only repeating what man had realised centuries before him. Indeed, the well-to-do had already started trying out ways to make wealth work for them. Today’s financial services industry, with its many products and services, is the result of this age-old endeavour.
The financial services industry manages money for individuals and corporations. It comprises such organisations as commercial and investment banks, insurance companies, hedge funds, credit-card companies, consumer finance firms, accounting agencies, and brokerage firms. The industry’s services are mainly related to banking and insurance services, asset management, investments, foreign exchange, and accounting.
Financial services form the lifeblood of economic growth and development. They facilitate the setting up of big and small businesses and the expansion of businesses. Employment and entrepreneurship created with the help of the services enable people to earn and save.
Financial services show the poor ways out of poverty and of leading better lives. To the wealthy, financial services offers opportunities to make money grow.
The financial services industry is the largest-earning sector in the world. Through interventions in industry and agriculture and other formal sectors, they provide lines of credit and investment.
However, financial services have largely eluded the poor and small and micro units, and there is great potential to extend the services to the informal sector, too. Perhaps, the future of the financial sector lies here.
Brief notes on sector history, current scenario, trends and outlook, region-wise, follow:
Financial services industry in USA
Until the 1970s, the financial services industry in the United States consisted of a few broad segments such as banks and savings/loan agencies that catered to individuals and companies and brokerage firms that assisted in making investments in stocks and bonds.
However, during that decade, federal regulations curbing the activities of banks in mutual funds, insurance, and stocks made banks less profitable. The oil embargo and the steep increase in oil prices ordered by the Organisation of Petroleum Exporting Countries (OPEC) — the “oil shock” — caused a staggering rise in inflation that made the interest rate on bank deposits unattractive.
Soon, companies that offered higher returns from mutual funds that they invested in safe government securities began sprouting, severely affecting banks.
However, banks rose from the ashes, making full use of gaps in Glass-Steagal Banking Act of 1933, which had originally restricted their functions. They began to offer more services; they sold mutual fund products, established loan subsidiaries, and set up automatic teller machines. These steps brought them unprecedented profits by 1993.
The convergence of organisations offering financial products and services continued. Perhaps, a most important event was the setting up of Citigroup with the merger of Citicorp and Travelers Insurance.
Other mega mergers followed, breaking the compartmentalisation of the financial services sector. Today, many banks offer products much beyond their traditional portfolios and many financial enterprises offer conventional banking services.
Despite its almost permanent sheen, the financial services industry has had to face many crises.
Among the more recent ones are Black Monday (October 19, 1987), when the New York Stock Exchange experienced its biggest single-day loss in history, losing nearly 26 percent of its value; the dot-com bubble of 2000; and the subprime mortgage (housing bubble) crisis of 2007-2009.
The Gramm-Leach-Bliley Act passed in the US in 1999 allowed financial services companies to engage in multi-segment transactions, but brought in stringent regulations for protecting the customer and ensuring solvency.
But the industry came under strict government scrutiny following the collapse of the Enron Corporation in 2004 and accusations of fraud against top executives of JP Morgan Chase and Merrill Lynch and the bankruptcy of the financial services firm Lehman Brothers.
While fraud and greed on the part of financial sector head-honchos and poor policy implementation by national governments now threaten to derail the financial services industry, new technology has brought it a global, 24/7 reach.
This has made the industry more customer-oriented and led to greater competition; but regulatory measures will have to become fool proof for it to thrive once again.
Financial services in Europe
The financial services industry in Europe, in the face of economic crises, continues to provide the means to finance infrastructure development and business expansion and make available saving and investment options to individuals.
According to a research report by the City of London, Europe’s financial services industry accounts for nearly 6 percent of the continent’s GVA (gross value added), or €731 billion, gives employment to 6.4 million people, and contributes €209 billion in taxes.
Nineteen of the European Union’s 28 countries share the euro and make up the Eurozone. Apart from a common currency, these nations have free-trade pacts, besides labour and capital agreements that allow the free movement of these resources.
The European Central Bank decides the monetary policy of the Eurozone, whose main job is to check inflation. Political decisions related to the Eurozone and the euro are under the purview of the Eurogroup.
The global economic crises since 2000 have deeply affected the financial services sector in Europe, too. Following the international financial crisis of 2008, public funds were used generously to bail out banks and other financial institutions.
This has led to the decline in public finances and calls for a more robust financial system and more transparent financial markets. The latest turbulence to hit the European finances services industry is the debt crisis, caused by mismanagement of public finances and overspending by governments.
In order to stabilise the financial market and the financial services industry, the European Commission has put forward more than 40 regulatory reform measures. Efforts to fully develop a European banking union that would preserve the single market for financial services are on the cards.
Financial services in India | History and trends
The financial services sector in India, which accounts for 6 percent of the nation’s GDP, is growing rapidly. Although the sector consists of commercial banks, development finance institutions, nonbanking financial companies, insurance companies, cooperatives, mutual funds, and the new “payment banks,” it is dominated by banks, which holds over 60 percent share.
The Reserve Bank of India (RBI) is the apex bank of the country, controlling all activities in the financial sector. Commercial banks include public sector and private sector banks and are under the regulatory supervision of the RBI. Development finance institutions include industrial and agriculture banks.
Non-banking finance companies (NBFC) provide loans, purchase stocks and debentures, and offer leasing, hire purchase, and insurance services.
Insurance companies function in both public and private sectors and are controlled by the Insurance Regulatory and Development Authority (IRDA).
India also has a vibrant capital market with stocks exchanges controlled by the Securities and Exchange Board of India (SEBI).
According to “India in Business,” a website of the Union Government, India’s banking sector assets were worth $1.8 trillion in the 2014-15 financial year.
According to a report by KPMG-CII, India’s banking sector is on the way to becoming the fifth largest in the world by 2020. The country’s life insurance sector is the biggest in the world, and the market size is expected to touch about $400 billion by 2020.
The assets of the mutual fund industry are worth $190 billion. The pension corpus fund is projected to record $1 trillion by 2025. Reforms to put the financial services industry and the economy on the fast track include measures to make finance available to medium, small, and micro industries.
India once had a heavily government-dominated financial services industry, and most services were provided by nationalised banks. Financial sector reforms were initiated in 1991 with the aim of accelerating economic growth.
In the following years, industry and service sectors were opened up for foreign direct investment. The reforms ended the dominance of the public sector and reduced direct government control on industrial investments.
Financial sector reforms in India have improved resource mobilisations and allocation. The liberalisation of interest rates and the easing of cash reserve norms have helped make funds available to various sectors.
However, prudential norms have been tightened and transparency and regulation increased to avoid a systemic collapse that other countries have suffered.
Financial services in the rest of Asia
Asia, particularly the eastern region, faced a severe setback with the 1997-98 financial crisis that started with the collapse of the Thai baht and Thailand’s near bankruptcy.
However, the Asian financial sector, particularly banks, has lived to see better days. The middle-income nations in the region have been able to strengthen their stock markets and their nonbanking financial sector.
However, the financial services sector in the region is lagging way behind that in the US and Europe. But the potential to develop is huge and the sector is developing rapidly.
Along with opportunities for development, the sector also faces threats to stability. Reforms and regulatory measures have to be quickly initiated.
Types of financial services | List and overview
Brief profiles of some of the services offered by the financial services sector are given below.
Accounting is the process of measuring the financial parameters of a company and presenting them to investors and managers of the company for making investment decisions and evolving management strategies.
A firm that functions as an agent for the purchase of stocks or other financial securities is known as a brokerage. Full-service brokerage firms study the market and advise their clients on which securities to buy. Portfolio and pension fund managers are among their clients.
Read more about careers in financial trading.
The grant of loans or other credit lines to consumers is called consumer finance, and includes auto loans and credit cards. It also includes student loans for higher education.
Credit cards are instruments that help the cardholder to make payments for goods or services without using cash. The bank issuing a credit card offers the cardholder a line of credit on which an interest is charged.
Foreign exchange is the conversion of one currency into another by individuals or corporations for completing transnational deals. It is the biggest segment of the financial market, and its daily turnover runs into trillions of dollars.
Hedge funds are private limited investment partnerships that use a large initial investment. They have low liquidity, and funds usually have a lock-up period of at least one year. Hedge funds are flexible and help investors spread their risk through their diverse investment opportunities.
Insurance is a risk management tool that an individual or company uses to transfer risk of financial loss to an insurance company in return for a one-time or periodic premium.
Read more about careers in insurance industry.
An investment bank enables corporations to raise capital and assists them in issuing stocks. Investment banks underwrite new debts and equity securities for companies. They provide their clients guidance in mergers and acquisitions.
Read more about careers in investment banking.
Private banking is the set of speciality financial services offered by banks to high-net-worth individuals who make very large investments.
Private equity is a method by which an investor takes control of a significant portion of a company’s stock in the hope of maximising his or her returns. A typical method of operation of a private equity fund is to take control of a company and use its returns to repay themselves.
Retail banking services are offered to individuals rather than to organisations. Retail banking helps people open savings accounts, take personal and housing loans, make deposits, and use credit/debit and ATM cards.
Read more about careers in retail banking.
Venture capital is the initial seed money provided by an investor to the holder of a new, potentially financially rewarding business idea for a share in the returns of the start-up business. Venture capital companies make investments from a long-term perspective. Venture capital funds are a big boon for start-ups that do not have access to financial markets.
Wealth management (or asset management) is a strategy to help the affluent maximise returns from their investments by alerting them to investment opportunities and helping them choose appropriate financial products.
Read more about careers in wealth / asset management.
News & reports on Financial Services | Online resources
2. Wall Street Journal
3. Company Financials on Financial Times
4. International Business Times (India edition)
5. Economic Times (India)
6. Business Standard
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