PGDF 103 SLM

FINANCIAL MARKETS
PGDF-103
BLOCK 1:
INTRODUCTION TO
FINANCIAL MARKETS,
MONEY MARKET AND
CAPITAL MARKET
Dr. Babasaheb Ambedkar Open University

Ahmedabad
FINANCIAL MARKETS
Knowledge Management and

Research Organization
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PREFACE
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as possible, but we have not sacrificed quality. Experts were involved in
preparing the materials. However, concepts are explained in easy language
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All the best for your studies from our team!
FINANCIAL MARKETS
Contents
BLOCK 1: INTRODUCTION TO FINANCIAL MARKETS, MONEY MARKET

AND CAPITAL MARKET
UNIT 1 FINANCIAL MARKETS: AN INTRODUCTION
Meaning, Nature and Role of Financial System, Financial Markets as
Components of Financial System, Financial System and Economic
Growth, Financial System, Designs, Bank-Based and Market Based.
UNIT 2 MONEY MARKET
Meaning, Characteristics and Functions of Money Market, Role of the
Reserve Bank in the Money Market, Intermediates in the money
market, Development of money market in India, Money Market
Instruments, Treasury Bills, Commercial Papers, Certificate of Deposit,
Commercial Bills, Collateralized Browsing and Lending Obligation, Call
Money Market and Term Money Market.
UNIT 3 CAPITAL MARKET
Meaning, Functions and Types of Capital Market, Reforms in the
capital Market, Intermediaries, Issue Mechanisms, Types of Primary
Issues, Public Rights and Private Placement, Resource Mobilization
from International Capital Markets, ADRs, GDRs, and ECBs, Primary
Market, Scenario in India, Debt Market: Private Corporate, Role of SEBI
in the Capital Market
UNIT 4 SECONDARY CAPITAL MARKET
Functions of Secondary Market, Post Reforms Stock Market Scenario,
Organization, Management and Membership of Stock Exchange,
Listing of Securities, Trading Arrangements, Stock Market Index, Stock
Exchanges in India
BLOCK 2: FINANCIAL SERVICE, CONSUMER BEHAVIOUR AND BANKING
PRODUCTS
UNIT 1 FINANCIAL SERVICES: AN INTRODUCTION

Introduction, Meaning and Concept, Characteristics of Financial
Services, Evolution of Financial Services in India, Significance of
Financial Services, Types of Financial Services, Impact of Technology,
Challenges before the Financial Services Sector
UNIT 2 MARKETING OF FINANCIAL SERVICES: A CONCEPTUAL
FRAMEWORK
Introduction, Marketing and the Financial Services, Marketing as a
Functional Area of Management, Financial Services and the Different
Marketing Orientations, Difference between Services and Products
Physical Goods, Characteristics of Service, Marketing Mix for Financial
Services, Marketing Strategy and Financial Services
UNIT 3 CONSUMER BEHAVIOUR FOR FINANCIAL SERVICES
Introduction, The Complexity of Consumer Buying Decisions,
Individual Influences on Consumer Behaviour, Needs and Motives,
Individual Perception, Learning and Habit Development, Family
Influences on Buying Behaviour, Behavioural Models for Analyzing
Buyers, Consumer Behaviour Some Learning Points for Financial
Service
UNIT 4 BANKING PRODUCTS AND SERVICES
Introduction, Nature of Product, Products and Services in Banking,
Elements of Product Mix, Product Life Cycle and Product Strategies,
Using Product Life Cycle lo Manage Marketing of Banking Products,
New Product Development, Branding in Bank Marketing, Process and
Product Development Cycle for Banking Services, Product
Development
BLOCK 3: DISTRIBUTION, PRICING, RETAINING CUSTOMERS AND
CONSULTANCY SERVICES
UNIT 1 DISTRIBUTION, PRICING AND PROMOTIONS STRATEGY FOR

BANKING SERVICES
Introduction, Banking Services and Issues in Delivery, Channels of
Distribution for Banks, Types of Branches, Electronic Methods of
Distributing Financial Services, Pricing of Banking Products/Services,
Pricing Objectives, Pricing Methods, Pricing Reviews and Committees,
Price Setting in Practice, Promotion of Banking Products/Services,
Guidelines on Advertising by Public Sector Banks, Sales Promotion,
Internal Communication, Marketing Information Systems (MIS)
UNIT 2 ATTRACTING AND RETAINING CUSTOMERS IN BANKING
SERVICES
Introduction, Defining Customer Value and Satisfaction, Factors
Influencing Consumer Behaviour in Banking, Relationship Marketing
and Attracting Customers, Customer Relationships Management,
Retaining Customers Through Quality, Service and Values , Delivering
Customer Value and Satisfaction, Image as a Managed Perception,
Fulfilling Promises : Internal and Interactive Marketing, Customer
Service and Customer Care, Bank Marketing : Future Challenges
UNIT 3 ADVISORY AND CONSULTANCY SERVICES
Introduction, Portfolio Management, Credit Rating, Takeovers and
Mergers, Trustee Services, Depository Services, The Marketing
Approach for Merchant Banking Services
BLOCK 4: MARKETING OF PENSION FUNDS AND GLOBALIZATION
UNIT 1 MARKETING OF PENSION FUNDS

Introduction, Emerging Dimensions Relating to Investment Services,
Pension Funds: A General Overview, Why Pension Plan?, Types of
Pension Plan, Pension Fund Risk, Funds Management, Pension Fund
Investment: General Guidelines, Pension Funds and Capital Markets,
Pension Funds: Some Related Statistics
UNIT 2 GLOBALISATION AND ITS IMPACT ON FINANCIAL SERVICES
MARKETS
Introduction, Globalisation of Financial Markets and its Impact on
Local Markets, Globalisation of Markets: The Main Drivers,
Globalisation of Markets: The Road Ahead, Some Asian Trends,
Globalisation and Consumer Orientation, The Emerging Imperatives
for Financial Services
Dr. Babasaheb PGDF-103
Ambedkar
Open University
FINANCIAL MARKETS
BLOCK 1: INTRODUCTION TO FINANCIAL MARKETS,

MONEY MARKET AND CAPITAL MARKET
UNIT 1
FINANCIAL MARKETS: AN INTRODUCTION 03
UNIT 2
MONEY MARKET 15
UNIT 3
CAPITAL MARKET 34
UNIT 4
SECONDARY CAPITAL MARKET 62
BLOCK 1: INTRODUCTION TO
FINANCIAL MARKETS,
MONEY MARKET AND
CAPITAL MARKET
Block Introduction
The study of financial market plays a significant role in the study of any
management program. Considering the need and importance of this subject for the
management students this subject has been introduced into this curriculum.
In this block the readers would be briefed about the financial markets,
money market and capital market. The functions and responsibilities of each of
this market would be explained in very detail. Not only has this role do they play
in the proper running of an economy been discussed here in very detail.
After going through this block the readers would get sufficient idea about
the Financial Market, Money Market and Capital Market.
Block Objective
After learning this block, you will be able to understand:
 The concept and functions of financial markets
 The nature and importance of money market
 The nature and types of capital market
 Distinguish between capital market and money market
 The nature and functions of a stock exchange
 The advantages of stock exchanges from the points of view of companies,

investors and society as a whole
 The limitations of stock exchanges
 The concept of speculation and distinguish it from investment
 Outline the stock exchanges in India
 The nature of regulation of stock exchanges in India and the role of SEBI
1
Introduction to Block Structure
Financial Markets,
Money Market and Unit 1: Financial Markets: An Introduction
Capital Market
Unit 2: Money Market
Unit 3: Capital Market

Unit 4: Secondary Capital Market
2
UNIT 1: FINANCIAL MARKETS: AN
INTRODUCTION
Unit Structure
1.0 Learning Objectives
1.1 Introduction
1.2 Meaning
1.3 Nature and Role of Financial System
1.4 Financial Markets as Components of Financial System

1.5 Financial System and Economic Growth
1.6 Financial System Designs

1.6.1 Bank-Based and Market Based
1.7 Let Us Sum Up

1.8 Answers for Check Your Progress
1.9 Glossary
1.10 Assignment
1.11 Activities
1.12 Case Study
1.13 Further Readings

After learning this unit, you will be able to understand:
 The concept and functions of financial markets
 The nature and importance of money market
1.1 Introduction
You are fully aware that business units have to raise short-term as well as
long-term funds to meet their working and fixed capital requirements from time to
time. This necessitates not only the ready availability of such funds but also a
3
Introduction to transmission mechanism with the help of which the providers of funds (investors/
Financial Markets, lenders) can interact with the borrowers/users (business units) and transfer the
Money Market and
Capital Market
funds to them as and when required. This aspect is taken care of by the financial
markets which provide a place where or a system through which, the transfer of
funds by investors/lenders to the business units is adequately facilitated
1.2 Meaning
We know that, money always flows from surplus sector to deficit sector.
That means persons having excess of money lend it to those who need money to
fulfil their requirement.
Similarly, in business sectors the surplus money flows from the investors or
lenders to the businessmen for the purpose of production or sale of goods and
services. So, we find two different groups, one who invest money or lend money
and the others, who borrow or use the money.
Now you think, how these two groups meet and transact with each other.
The financial markets act as a link between these two different groups. It
facilitates this function by acting as an intermediary between the borrowers and
lenders of money. So, financial market may be defined as „a transmission
mechanism between investors (or lenders) and the borrowers (or users) through
which transfer of funds is facilitated‟. It consists of individual investors, financial
institutions and other intermediaries who are linked by a formal trading rules and
communication network for trading the various financial assets and credit
instruments.
Let us now see the main functions of financial market-
(a) It provides facilities for interaction between the investors and the borrowers.
(b) It provides pricing information resulting from the interaction between
buyers and sellers in the market when they trade the financial assets.
(c) It provides security to dealings in financial assets.
(d) It ensures liquidity by providing a mechanism for an investor to sell the

financial assets.
(e) It ensures low cost of transactions and information.
4
Financial
Check your progress 1
Markets: An
1. __________market provides facilities for interaction between the investors Introduction
and the borrowers.
a. Financial
b. Capital
2. __________may be defined as „a transmission mechanism between investors

(or lenders) and the borrowers (or users) through which transfer of funds is
facilitated‟.
a. Capital market
b. financial market
1.3 Nature and Role of Financial System

The financial system plays the key role in the economy by stimulating
economic growth, influencing economic performance of the actors, affecting
economic welfare. This is achieved by financial infrastructure, in which entities
with funds allocate those funds to those who have potentially more productive
ways to invest those funds. A financial system makes it possible a more efficient
transfer of funds. As one party of the transaction may possess superior
information than the other party, it can lead to the information a symmetry
problem and inefficient allocation of financial resources. By overcoming the
information a symmetry problem the financial system facilitates balance between
those with funds to invest and those needing funds.
According to the structural approach, the financial system of an economy

consists of three main components:
1) Financial markets;
2) Financial intermediaries (institutions);
3) Financial regulators.
Each of the components plays a specific role in the economy.
According to the functional approach, financial markets facilitate the flow

of funds in order to finance investments by corporations, governments and
individuals. Financial institutions are the key players in the financial markets as
they perform the function of intermediation and thus determine the flow of funds.
5
Introduction to The financial regulators perform the role of monitoring and regulating the
Financial Markets, participants in the financial system.
Money Market and
Capital Market
Fig 1.1 The structure of financial system
Financial markets studies, based on capital market theory, focus on the

financial system, the structure of interest rates, and the pricing of financial assets.
An asset is any resource that is expected to provide future benefits, and thus
possesses economic value. Assets are divided into two categories: tangible assets
with physical properties and intangible assets. An intangible asset represents a
legal claim to some future economic benefits. The value of an intangible asset
bears no relation to the form, physical or otherwise, in which the claims are
recorded. Financial assets, often called financial instruments, are intangible assets,
which are expected to provide future benefits in the form of a claim to future cash.
Some financial instruments are called securities and generally include stocks and
bonds.
Any transaction related to financial instrument includes at least two parties:

1) The party that has agreed to make future cash payments and is called the
issuer;
2) The party that owns the financial instrument, and therefore the right to
receive the payments made by the issuer, is called the investor.
Financial assets provide the following key economic functions.
 They allow the transfer of funds from those entities, who have surplus funds
to invest to those who need funds to invest in tangible assets;
 They redistribute the unavoidable risk related to cash generation among

deficit and surplus economic units.
The claims held by the final wealth holders generally differ from the
liabilities issued by those entities who demand those funds. They role is
performed by the specific entities operating in financial systems, called financial
intermediaries. The latter ones transform the final liabilities into different financial
assets preferred by the public.
6
Financial
Markets: An
1. The___________system plays the key role in the economy by stimulating Introduction
economic growth.
a. Financial
b. Market
2. A financial system makes it possible a more efficient transfer of_________.

a. Capital
b. funds
1.4 Financial Markets as Components of Financial

System
A financial market is a market where financial instruments are exchanged or
traded. Financial markets provide the following three major economic functions:
1) Price discovery
2) Liquidity
3) Reduction of transaction costs
1) Price discovery function means that transactions between buyers and sellers
of financial instruments in a financial market determine the price of the
traded asset. At the same time the required return from the investment of
funds is determined by the participants in a financial market. The motivation
for those seeking funds (deficit units) depends on the required return that
investors demand. It is these functions of financial markets that signal how
the funds available from those who want to lend or invest funds will be
allocated among those needing funds and raise those funds by issuing
financial instruments.
2) Liquidity function provides an opportunity for investors to sell a financial
instrument, since it is referred to as a measure of the ability to sell an asset
at its fair market value at any time. Without liquidity, an investor would be
forced to hold a financial instrument until conditions arise to sell it or the
issuer is contractually obligated to pay it off. Debt instrument is liquidated
when it matures, and equity instrument is until the company is either
voluntarily or involuntarily liquidated. All financial markets provide some
7
Introduction to form of liquidity. However, different financial markets are characterized by
Financial Markets, the degree of liquidity.
Money Market and
Capital Market 3) The function of reduction of transaction costs is performed, when financial
market participants are charged and/or bear the costs of trading a financial
instrument. In market economies the economic rationale for the existence of
institutions and instruments is related to transaction costs, thus the surviving
institutions and instruments are those that have the lowest transaction costs.
The key attributes determining transaction costs are
 Asset specificity,
 Uncertainty,
 Frequency of occurrence.
Asset specificity is related to the way transaction is organized and executed.

It is lower when an asset can be easily put to alternative use, can be deployed for
different tasks without significant costs.
Transactions are also related to uncertainty, which has (1) external sources
(when events change beyond control of the contracting parties), and (2) depends
on opportunistic behaviour of the contracting parties. If changes in external events
are readily verifiable, then it is possible to make adaptations to original contracts,
taking into account problems caused by external uncertainty. In this case there is a
possibility to control transaction costs. However, when circumstances are not
easily observable, opportunism creates incentives for contracting parties to review
the initial contract and creates moral hazard problems. The higher the uncertainty,
the more opportunistic behaviour may be observed, and the higher transaction
costs may be born. Frequency of occurrence plays an important role in
determining if a transaction should take place within the market or within the
firm. A one-time transaction may reduce costs when it is executed in the market.
Conversely, frequent transactions require detailed contracting and should take
place within a firm in order to reduce the costs. When assets are specific,
transactions are frequent, and there are significant uncertainties intra-firm
transactions may be the least costly. And, vice versa, if assets are non-specific,
transactions are infrequent, and there are no significant uncertainties least costly
may be market transactions.
The mentioned attributes of transactions and the underlying incentive
problems are related to behavioural assumptions about the transacting parties. The
economists Coase (1932,1960, 1988), Williamson (1975, 1985), Akerlof (1971)
and others) have contributed to transactions costs economics by analyzing
8
behaviour of the human beings, assumed generally self-serving and rational in Financial
their conduct, and also behaving opportunistically. Markets: An
Introduction
Opportunistic behaviour was understood as involving actions with
incomplete and distorted information that may intentionally mislead the other
party. This type of behaviour requires efforts of ex ante screening of transaction
parties, and ex post safeguards as well as mutual restraint among the parties,
which leads to specific transaction costs.

1. _________function means that transactions between buyers and sellers of
financial instruments in a financial market determine the price of the traded
asset.
a. Price discovery
b. Cost discovery
2. ___________function provides an opportunity for investors to sell a
financial instrument.
a. Market
b. Liquidity
1.5 Financial System and Economic Growth

The term financial system is a set of inter-related activities/services working
together to achieve some predetermined purpose or goal. It includes different
markets, the institutions, instruments, services and mechanisms which influence
the generation of savings, investment capital formation and growth.
Van Horne defined the financial system as the purpose of financial markets
to allocate savings efficiently in an economy to ultimate users either for
investment in real assets or for consumption. Christy has opined that the objective
of the financial system is to "supply funds to various sectors and activities of the
economy in ways that promote the fullest possible utilization of resources without
the destabilizing consequence of price level changes or unnecessary interference
with individual desires."
9
Introduction to According to Robinson, the primary function of the system is "to provide a
Financial Markets, link between savings and investment for the creation of new wealth and to permit
Money Market and
Capital Market
portfolio adjustment in the composition of the existing wealth."
From the above definitions, it may be said that the primary function of the
financial system is the mobilisation of savings, their distribution for industrial
investment and stimulating capital formation to accelerate the process of
economic growth.
Fig 1.2 The Concept of the Financial System
The process of savings, finance and investment involves financial

institutions, markets, instruments and services. Above all, supervision control and
regulation are equally significant. Thus, financial management is an integral part
of the financial system. On the basis of the empirical evidence, Goldsmith said
that "... a case for the hypothesis that the separation of the functions of savings
and investment which is made possible by the introduction of financial
instruments as well as enlargement of the range of financial assets which follows
from the creation of financial institutions increase the efficiency of investments
and raise the ratio of capital formation to national production and financial
activities and through these two channels increase the rate of growth."
The inter-relationship between varied segments of the economy is

illustrated below:-
10
Financial
Markets: An
Introduction
Fig 1.3 Inter-relationship in the Financial System

1. __________defined the financial system as the purpose of financial markets
to allocate savings efficiently in an economy to ultimate users either for
investment in real assets or for consumption.
a. Van Horne
b. Robinson
2. According to __________ the primary function of the system is "to provide

a link between savings and investment for the creation of new wealth and to
permit portfolio adjustment in the composition of the existing wealth."
a. Van Horne
b. Robinson
1.6 Financial System Designs

A financial system provides services that are essential in a modern
economy. The use of a stable, widely accepted medium of exchange reduces the
costs of transactions. It facilitates trade and, therefore, specialization in
production. Financial assets with attractive yield, liquidity and risk characteristics
encourage saving in financial form. By evaluating alternative investments and
monitoring the activities of borrowers, financial intermediaries increase the
efficiency of resource use. Access to a variety of financial instruments enables an
economic agent to pool, price and exchange risks in the markets. Trade, the
efficient use of resources, saving and risk taking are the cornerstones of a growing
economy. In fact, the country could make this feasible with the active support of
the financial system. The financial system has been identified as the most
11
Introduction to catalyzing agent for growth of the economy, making it one of the key inputs of
Financial Markets, development.
Money Market and
Capital Market
1.6.1 Bank-Based and Market Based

In countries such as Japan, France and Germany, where banks provide
around 20% of the corporate financing, it is known that banks are making
significant effort to develop a relationship banking culture, with long-term loans
and preferential interest rates for clients with a „good history‟. These economies
can be called Bank-Based Economies.
There are also countries where the borrowing-lending activities take place
through organized markets, such as London Stock Exchange, in the UK, or New
York Stock Exchange in USA. These are known as Market-Based Economies.
Although banks are present in these countries, they are highly competitive, the
relationship with lenders and borrowers is purely limited to the transactions of
granting loans or taking deposits and loans are usually granted on short-term.

1. The use of a stable, widely accepted medium of exchange reduces the costs
of __________.
a. Transactions.
b. Money
2. The financial system has been identified as the most catalyzing agent for
growth of the __________.
a. Money
b. economy
1.7 Let Us Sum Up

This unit was of great help in making us understand the basic concepts of
financial markets.
In this unit we have learnt in very detail about the meaning, nature and role
of financial system. In this unit we have learnt in very detail about financial
market as components of financial system. The financial system and economic
12
growth were even discussed here in very detail. Apart from this in this unit we Financial
even covered the financial system designs. Overall the whole of the unit covered Markets: An
Introduction
the financial market in very detail and after going through this unit the readers
would have got a sufficient idea about the financial system and the various aspects
connected with it.
Answers: (1-a), (2-b)
1.9 Glossary
1. Financial Market - It is a market in which people trade financial securities,
commodities, and other fungible items of value at low transaction costs and
at prices that reflect supply and demand.
1.10 Assignment
What are the functions of a financial system?
13
Introduction to 1.11 Activities
Financial Markets,
Money Market and What is the difference between „saving‟ and a „financial surplus‟?
Capital Market
1.12 Case Study

Discuss financial system and economic growth

1. European Commission (2007). European Financial Integration Report 2007,
EC, Brussels.
2. Fabozzi F. J., Modigliani F., (2007). Capital Markets: Institutions and
Instruments, Prentice Hall International.
3. Financial Stability Forum (2008). Report on Enhancing Market and
Institutional Resilience, FSF, Basel.
4. Howells P., Bain K. (2008), Financial Markets and Institutions, Financial
Times, Prentice Hall.
5. Madura J. (2008), Financial Markets and Institutions. Prentice Hall

International.
6. Mishkin F. S., Eakins S. G. (2006), Financial Markets and Institutions,

Addison Wesley.
7. Seifert, W.G., Schleitner, A.K., Mattern, F., Streit, C.C., Voth, H.J. (2000).
European Capital Markets, Macmillan.
8. Valdez, S. (2006). Introduction to Global Financial Markets, Palgrave

Macmillan.
14
UNIT 2: MONEY MARKET
Unit Structure
2.1 Introduction
2.2 Meaning
2.3 Characteristics and Functions of Money Market
2.4 Role of the Reserve Bank in the Money Market

2.5 Intermediates in the Money Market
2.6 Development of Money Market in India

2.7 Money Market Instruments
2.7.1 Treasury Bills
2.7.2 Commercial Papers
2.7.3 Certificate of Deposit

2.7.4 Commercial Bills
2.8 Collateralized Browsing and Lending Obligation

2.9 Call Money Market and Term Money Market
2.10 Let Us Sum Up

2.12 Glossary
2.13 Assignment
2.14 Activities
2.15 Case Study

 The Characteristics and Functions of Money Market .
 Role of the Reserve Bank in the Money Market.
15
Introduction to  Intermediates in the money market.
Financial Markets,
Money Market and  Development of money market in India.
Capital Market
 Money Market Instruments.
2.1 Introduction
The money market is a market for short-term funds, which deals in financial
assets whose period of maturity is up to one year. It should be noted that money
market does not deal in cash or money as such but simply provides a market for
credit instruments such as bills of exchange, promissory notes, commercial paper,
treasury bills, etc. These financial instruments are close substitute of money.
These instruments help the business units, other organisations and the
Government to borrow the funds to meet their short-term requirement.
Money market does not imply to any specific market place. Rather it refers
to the whole networks of financial institutions dealing in short-term funds, which
provides an outlet to lenders and a source of supply for such funds to borrowers.
Most of the money market transactions are taken place on telephone, fax or
Internet. The Indian money market consists of Reserve Bank of India,
Commercial banks, Co-operative banks, and other specialised financial
institutions. The Reserve Bank of India is the leader of the money market in India.
Some Non-Banking Financial Companies (NBFCs) and financial

institutions like LIC, GIC, UTI, etc. also operate in the Indian money market.
2.2 Meaning
The purpose of money markets is facilitate the transfer of short-term funds
from agents with excess funds (corporations, financial institutions, individuals,
government) to those market participants who lack funds for short-term needs.
They play central role in the country‟s financial system, by influencing it
through the country‟s monetary authority.
For financial institutions and to some extent to other non-financial
company‟s money markets allow for executing such functions as:
 Fund raising
 Cash management
16
 Risk management Money
Market
 Speculation or position financing
 Signaling
 Providing access to information on prices.
Money markets are wholesale markets with very large amounts of

transactions, e.g. with transactions from 500 million Euro to 1 billion Euro or
even larger ones. This is the most active financial market in terms of volumes of
trading.
From the start of emergence the traditional money markets performed the
role of monetary policy. In order to influence the supply side, governments have
employed methods of direct regulation and control of the savings and investment
behaviour of individuals and companies. However due to fast technological
advances, internationalization and liberalization of financial markets, possibilities
to carry out policy objectives through such measures have diminished. Current
policy through market oriented measures is aimed primarily at demand side. Thus
money markets serve the interface between execution of monetary policy and the
national economies.
Another role of domestic money markets is to serve public policy
objectives, i.e. financing public sector deficits and managing the accumulated
government deficits. Government public debt policy is an important determinant
of the money markets operations, since government debt typically forms a key
part of the country‟s money markets (as well as debt markets). The scope and
measures of monetary policy are also linked to the government‟s budget and fiscal
policies. Thus the country‟s money market shifts are dependent upon the goals of
national public policy and tools used to reach these goals.
Changes in the role and structure of money markets were also influenced by
financial deregulation, which evolved as a result of recognition that excessive
controls are not compatible with efficient resource allocation, with solid and
balanced growth of economies. Money markets went through passive adaptation
as well as through active influence from the side of governments and monetary
authorities.
Finally, money markets were influenced by such international dimensions as

increasing capital mobility, changing exchange rate arrangements, diminishing
monetary policy autonomy. The shifts in European domestic money markets were
made by the European integration process, emergence and development of
European monetary union.
17
Introduction to
Financial Markets,
Money Market and
1. Changes in the role and structure of money markets were also influenced by
Capital Market
financial ___________.
a. regulation
b. deregulation.
2. Role of __________money markets is to serve public policy objectives.

a. International
b. domestic
2.3 Characteristics and Functions of Money Market

The money market is a market for financial assets that are close substitutes
for money. It is a market for overnight short-term funds and instruments having a
maturity period of one or less than one year. It is not a place (like the Stock
market), but an activity conducted by telephone. The money market constitutes a
very important segment of the Indian financial system.
Characteristics of Money Market

1. It is not a single market but a collection of markets for several instruments.
2. It is wholesale market of short term debt instruments.
3. Its principal feature is honour where the creditworthiness of the participants

is important.
4. The main players are: Reserve bank of India (RBI), Discount and Finance
House of India (DFHI), mutual funds, banks, corporate investor, non-
banking finance companies (NBFCs), state governments, provident funds
and primary dealers. Securities Trading Corporation of India (STCI), public
sector undertaking (PSUs), non-resident Indians and overseas corporate
bodies.
5. It is a need based market wherein the demand and supply of money shape
the market.
18
Functions of Money Market Money
Market
A well-developed money market is essential for a modern economy.
Though, historically, money market has developed as a result of industrial and
commercial progress, it also has important role to play in the process of
industrialization and economic development of a country. Importance of a
developed money market and its various functions are discussed below:
1. Financing Trade:
Money Market plays crucial role in financing both internal as well as
international trade. Commercial finance is made available to the traders through
bills of exchange, which are discounted by the bill market. The acceptance houses
and discount markets help in financing foreign trade.
2. Financing Industry:
Money market contributes to the growth of industries in two ways:
(a) Money market helps the industries in securing short-term loans to meet their
working capital requirements through the system of finance bills,
commercial papers, etc.
(b) Industries generally need long-term loans, which are provided in the capital
market. However, capital market depends upon the nature of and the
conditions in the money market. The short-term interest rates of the money
market influence the long-term interest rates of the capital market. Thus,
money market indirectly helps the industries through its link with and
influence on long-term capital market.
3. Profitable Investment:
Money market enables the commercial banks to use their excess reserves in
profitable investment. The main objective of the commercial banks is to earn
income from its reserves as well as maintain liquidity to meet the uncertain cash
demand of the depositors. In the money market, the excess reserves of the
commercial banks are invested in near-money assets (e.g. short-term bills of
exchange) which are highly liquid and can be easily converted into cash. Thus, the
commercial banks earn profits without losing liquidity.
4. Self-Sufficiency of Commercial Bank:

Developed money market helps the commercial banks to become self-
sufficient. In the situation of emergency, when the commercial banks have
scarcity of funds, they need not approach the central bank and borrow at a higher
19
Introduction to interest rate. On the other hand, they can meet their requirements by recalling their
Financial Markets, old short-run loans from the money market.
Money Market and
Capital Market 5. Help to Central Bank:
Though the central bank can function and influence the banking system in
the absence of a money market, the existence of a developed money market
smoothens the functioning and increases the efficiency of the central bank.
Money market helps the central bank in two ways:
(a) The short-run interest rates of the money market serves as an indicator of
the monetary and banking conditions in the country and, in this way, guide
the central bank to adopt an appropriate banking policy,
(b) The sensitive and integrated money market helps the central bank to secure
quick and widespread influence on the sub-markets, and thus achieve
effective implementation of its policy.

1. Industries generally need ____________term loans, which are provided in
the capital market.
a. long-
b. Short-
2. __________market enables the commercial banks to use their excess

reserves in profitable investment.
a. Capital
b. Money
2.4 Role of the Reserve Bank in the Money Market

The Reserve Bank of India (RBI) has always been playing the major role in
regulating and controlling the India money market. The intervention of RBI is
varied - curbing crisis situations by reducing the cash reserve ratio (CRR) or
infusing more money in the economy.
Having talked about financial sector and the on-going reform process in the
sector, let us now turn our attention to what exact role RBI is playing for the
20
financial sector in general and the financial reform process in particular. As all of Money
Market
you know, RBI is the central bank of the country. Central banks are very old
institutions. The Bank of England was set up way back in 1694, the Bank of
France is more than 200 years old and the Federal Reserve Bank was set up in
1913. As aptly stated by our Governor, Dr. Bimal Jalan, although RBI, set up in
1935, may appear a „toddler or at most a young adult‟, it is one of the oldest
central banks among the developing world. Traditionally, central banks have
performed roles of currency authority, banker to the Government and banks,
lender of last resort, supervisor of banks and exchange control (now it would be
more appropriate to call it exchange management) authority. Generally, central
banks in developed economies have price or financial stability as their prime
objective. The RBI has the twin objectives of maintaining price stability and
promoting growth. The objectives are the following:
 Provision of adequate liquidity to meet credit growth and support

investment demand in the economy while continuing a vigil on movements
in the price level. In line with the above to continue the present stance on
interest rates including preference for soft interest rates.
 To impart greater flexibility to the interest rate structure in the medium-
term. In developing economies, however, the growth objective assumes
greater importance. Recent experience has shown that during recessionary
or deflationary conditions achievement of higher growth becomes the
dominant objective of central banks, both in developing and developed
economies.
Let us now look at the evolution of RBI and its changing role and strategy
over time. RBI was set up to regulate the issue of currency and keep reserves with
a view to securing monetary stability in India and generally to operate the
currency and credit system of the country to its advantage (RBI Act, 1934).
Within these overall objectives, RBI performs a wide range of promotional
functions, which are designed to support the country‟s efforts to accelerate the
pace of economic development with social justice. In keeping with the overall
logic of reforms that market based allocation rather than directed allocation of
resources led to greater efficiency, the functions of the RBI have undergone a
strategic shift under the current reforms. The strategy shifted from controlling
institutions and markets to facilitation of efficient functioning of markets and
strengthening of the supporting institutional infrastructure. The pre-emptions in
the form of CRR and SLR have been progressively reduced. The scope of priority
sector has been expanded. The interest rate has been deregulated both on deposits
and advances. Allowing DFIs and banks to lend in the short as well as the long
21
Introduction to end of the market has reduced segmentation of credit market. From conservation
Financial Markets, of foreign exchange through control of transactions, the focus has shifted to
Money Market and
Capital Market
facilitation of foreign exchange transactions. Intervention in the foreign exchange
market has shifted from fixing of exchange rate to merely curbing speculative
volatility.
Stability issues came to the fore especially after the crises in South East
Asian countries in late 1990s. The RBI progressively strengthened prudential
regulation relating to capital adequacy, income recognition, asset classification,
provisioning, disclosures and transparency. Sequencing of reforms among various
segments of the financial sector (banks, DFIs, co-operative banks, NBFCs, money
market, debt market and forex market) was determined by the importance of each
segment, extent of regulatory powers enjoyed by the RBI and the evolving
situation. Furthermore, institutional strengthening was undertaken to ensure the
progressive development and integration of the securities, money and forex
markets. The RBI has made significant improvements in the quality of
performance of regulatory and supervisory functions. Our standards are
comparable to the best in the world. Attention is being paid to several
contemporary issues such as, relative roles of onsite and off-site supervision,
functional versus institutional regulation, relative stress on internal management,
market discipline and regulatory prescriptions, consolidated approach to
supervision, etc. Several legislative initiatives have also been taken up with
Government, covering procedural law, debt recovery systems, Credit Information
Bureau, Deposit Insurance, etc. Progress in these is critical for effectiveness of
RBI in the regulatory sphere. A recent important legislative development, which
will improve the momentum of recovery of dues, is the enactment of
Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest (SRFAESI) Act. Under this Act RBI has been entrusted with the
role of stipulating suitable norms for registration of securitisation or
reconstruction companies, prescribing prudential norms, recommending proper
and transparent accounting and disclosure standards and framing appropriate
guidelines for the conduct of asset reconstruction and securitisation.

1. The___________has always been playing the major role in regulating and
controlling the India money market.
a. Reserve Bank of India

b. State bank of India
22
2. ____________performs a wide range of promotional functions, Money
Market
a. SBI
b. RBI
2.5 Intermediates in the Money Market

Money market participants include mainly credit institutions and other
financial intermediaries, governments, as well as individuals (households).
Ultimate lenders in the money markets are households and companies with a
financial surplus which they want to lend, while ultimate borrowers are companies
and government with a financial deficit which need to borrow. Ultimate lenders
and borrowers usually do not participate directly in the markets. As a rule they
deal through an intermediary, who performs functions of broker, dealer or
investment banker.
Important role is played by government, which issue money market
securities and use the proceeds to finance state budget deficits. The government
debt is often refinanced by issuing new securities to pay off old debt, which
matures. Thus it manages to finance long term needs through money market
securities with short-term maturities.
Central bank employs money markets to execute monetary policy. Through

monetary intervention means and by fixing the terms at which banks are provided
with money, central banks ensure economy‟s supply with liquidity.
Credit institutions (i.e. banks) account for the largest share of the money
market. They issue money market securities to finance loans to households and
corporations, thus supporting household purchases and investments of
corporations. Besides, these institutions rely on the money market for the
management of their short-term liquidity positions and for the fulfilment of their
minimum reserve requirements.
Other important market participants are other financial intermediaries, such
as money market funds, investment funds other than money-market funds,
insurance companies and pension funds. Large non-financial corporations issue
money market securities and use the proceeds to support their current operations
or to expand their activities through investments.
In general issuance of money market securities allow market participants to

increase their expenditures and finance economic growth.
23
Introduction to Money market securities are purchased mainly by corporations, financial
Financial Markets, intermediaries and government that have funds available for a short-term period.
Money Market and
Capital Market
Individuals (or households) play a limited role in the market by investing
indirectly through money market funds. Apart from transactions with the central
bank, money-market participants trade with each other to take positions dependent
upon their short-term interest rate expectations, to finance their securities trading
portfolios (bonds, shares, etc.), to hedge their longer-term positions with short-
term contracts, and to reduce individual liquidity imbalances.

1. Important role is played by government, which issue money market
securities and use the proceeds to finance state budget _________.
a. Deficits
b. surplus
2. Central bank employs _________markets to execute monetary policy.
a. Capital
b. money
3. Credit institutions account for the largest share of the_________market.

a. Money
b. capital
2.6 Development of Money Market in India

While the need for long term financing is met by the capital or financial
markets, money market is a mechanism which deals with lending and borrowing
of short term funds. Post reforms age in India has witnessed marvellous increase
of the Indian money markets. Banks and other financial institutions have been
able to meet the high opportunity of short term financial support of important
sectors like the industry, services and agriculture. It performs under the regulation
and control of the Reserve Bank of India (RBI). The Indian money markets have
also exhibit the required maturity and flexibility over the past two decades.
Decision of the government to permit the private sector banks to operate has
provided much needed healthy competition in the money markets resulting in fair
amount of improvement in their performance.
24
Till 1935, when the RBI was set up the Indian money market remained Money
highly disintegrated, unorganized, narrow, shallow and therefore, very backward. Market
The planned economic development that commenced in the year 1951 market is
an important beginning in the annals of the Indian money market. The
nationalization of banks in 1969, setting up of various committees such as the
Sukhmoy Chakraborty Committee (1982), the Vaghul working group (1986), the
setting up of discount and finance house of India ltd. (1988), the securities trading
corporation of India (1994) and the commencement of liberalization and
globalization process in 1991 gave a further fillip for the integrated and efficient
development of India money market.

1. Till 1935, when the_________was set up the Indian money market remained
highly disintegrated, unorganized, narrow, shallow and therefore, very
backward.
a. RBI
b. banks
2. Banks and other financial institutions have been able to meet the high
opportunity of _________term financial support of important sectors like the
industry, services and agriculture.
a. Long
b. short
2.7 Money Market Instruments

Money Market is the part of financial market where instruments with high
liquidity and very short-term maturities are traded. It's the place where large
financial institutions, dealers and government participate and meet out their short-
term cash needs. They usually borrow and lend money with the help of
instruments or securities to generate liquidity. Due to highly liquid nature of
securities and their short-term maturities, money market is treated as safe place.
25
Introduction to 2.7.1 Treasury Bills
Financial Markets,
Money Market and A treasury bill is a promissory note issued by the RBI to meet the short-term
Capital Market requirement of funds. Treasury bills are highly liquid instruments that mean, at
any time the holder of treasury bills can transfer of or get it discounted from RBI.
These bills are normally issued at a price less than their face value; and redeemed
at face value. So the difference between the issue price and the face value of the
Treasury bill represents the interest on the investment. These bills are secured
instruments and are issued for a period of not exceeding 364 days. Banks,
Financial institutions and corporations normally play major role in the Treasury
bill market.
2.7.2 Commercial Papers

Commercial paper (CP) is a popular instrument for financing working
capital requirements of companies. The CP is an unsecured instrument issued in
the form of promissory note. This instrument was introduced in 1990 to enable the
corporate borrowers to raise short-term funds. It can be issued for period ranging
from 15 days to one year. Commercial papers are transferable by endorsement and
delivery. The highly reputed companies (Blue Chip companies) are the major
player of commercial paper market.
The aim of its issuance is to provide liquidity or finance company‟s
investments, e.g. in inventory and accounts receivable.
The major issuers of commercial papers are financial institutions, such as
finance companies, bank holding companies and insurance companies. Financial
companies tend to use CPs as a regular source of finance. Non-financial
companies tend to issue CPs on an irregular basis to meet special financing needs.
Thus commercial paper is a form of short-term borrowing. Its initial maturity is
usually between seven and forty-five days. In US, the advantage of issuing CPs
with maturities less than nine months is that they do not have to register with the
Securities Exchange Commission (SEC) as a public offering. This reduces the
costs of registration with SEC and avoids delays related to the registration
process. CPs can be sold directly by the issuer, or may be sold to dealers who
charge a placement fee (e.g. 1/8 percent). Since issues of CPs are heterogeneous
in terms of issuers, amounts, maturity dates, there is no active secondary market
for commercial papers. However, dealers may repurchase CPs for a fee.
26
2.7.3 Certificate of Deposit Money
Market
Certificates of Deposit (CDs) are short-term instruments issued by
Commercial Banks and Special Financial Institutions (SFIs), which are freely
transferable from one party to another. The maturity period of CDs ranges from
91 days to one year. These can be issued to individuals, co-operatives and
companies.
Certificate of deposit (CD) states that a deposit has been made with a bank
for a fixed period of time, at the end of which it will be repaid with interest.
Thus it is, in effect, a receipt for a time deposit and explains why CDs
appear in definitions of the money supply such as M4. It is not the certificate as
such that is included, but the underlying deposit, which is a time deposit like other
time deposits. An institution is said to „issue‟ a CD when it accepts a deposit and
to „hold‟ a CD when it itself makes a deposit or buys a certificate in the secondary
market. From an institution‟s point of view, therefore, issued CDs are liabilities;
held CDs are assets.
The advantage to the depositor is that the certificate can be tradable. Thus
though the deposit is made for a fixed period, he depositor can use funds earlier
by selling the certificate to a third party at a price which will reflect the period to
maturity and the current level of interest rates.
The advantage to the bank is that it has the use of a deposit for a fixed
period but, because of the flexibility given to the lender, at a slightly lower price
than it would have to pay for a normal time deposit.
The minimum denomination can be 100 000USD, although the issue can be
as large as 1million USD. The maturities of CDs usually range from two weeks to
one year. Non-financial corporations usually purchase negotiable CDs. Though
negotiable CD denominations are typically too large for individual investors, they
are sometimes purchased by money market funds that have pooled individual
investors‟ funds. Thus money market funds allow individuals to be indirect
investors in negotiable CDs. This way the negotiable CD market can be more
active. There is also a secondary market for these securities, however its liquidity
is very low.
2.7.4 Commercial Bills

Normally the traders buy goods from the wholesalers or manufactures on
credit. The sellers get payment after the end of the credit period. But if any seller
27
Introduction to does not want to wait or in immediate need of money, he/she can draw a bill of
Financial Markets, exchange in favour of the buyer. When buyer accepts the bill it becomes a
Money Market and
Capital Market
negotiable instrument and is termed as bill of exchange or trade bill. This trade
bill can now be discounted with a bank before its maturity. On maturity the bank
gets the payment from the drawer i.e., the buyer of goods. When trade bills are
accepted by Commercial Banks it is known as Commercial Bills. So trade bill is
an instrument, which enables the drawer of the bill to get funds for short period to
meet the working capital needs.

1. ____________ Market is the part of financial market where instruments with
high liquidity and very short-term maturities are traded.
a. Money
b. capital
2. A __________is a promissory note issued by the RBI to meet the short-term
requirement of funds.
a. commercial paper
b. treasury bill
3. ___________is a popular instrument for financing working capital
requirements of companies.
a. Commercial paper
b. treasury bill
2.8 Collateralized Browsing and Lending Obligation

“Collateralized Borrowing and Lending Obligation (CBLO)", as the name
implies is a fully collateralized and secured instrument for borrowing / lending
money. CBLO as a product is conceived and developed by CCIL for the
facilitating deployment in a collateralized environment. As a product, CBLO aims
to benefit those entities who have been phased out of Call/ Notice money market
and / or those entities on restrictions have been placed on the borrowing / lending
in call / notice money market. CBLO Dealing system is hosted and maintained by
Clear corp Dealing Systems (India) Ltd, a fully owned subsidiary of CCIL. CCIL
becomes Central Counterparty to all CBLO trades and guarantees settlement of
28
CBLO trades. CBLO is an RBI approved money market instrument which can be Money
issued for a maximum tenor of one year. CBLO is a discounted instrument traded Market
on Yield Time priority. CBLO instrument that are generally made available for
trading are those with maturity of next seven business days and three month end
dates. The balances are maintained in electronic book entry. The access to CBLO
Dealing system for NDS Members is made available through INFINET and for
non NDS Members through Internet. The Funds settlement of members in CBLO
segment is achieved in the books of RBI for members who maintain an RBI
Current Account and are allowed to operate that current account for settlement of
their secondary market transactions. In respect of other members, CBLO Funds
settlement is achieved in the books of Settlement Bank.

1. _________as a product is conceived and developed by CCIL for the
facilitating deployment in a collateralized environment.
a. CBLO
b. ILO
2. CBLO is a ________approved money market instrument which can be

issued for a maximum tenor of one year.
a. Government
b. RBI
2.9 Call Money Market and Term Money Market

The call money market deals in short term finance repayable on demand,
with a maturity period varying from one day to 14 days. S.K. Muranjan
commented that call loans in India are provided to the bill market, rendered
between banks, and given for the purpose of dealing in the billion market and
stock exchanges. Commercial banks, both Indian and foreign, co-operative banks,
Discount and Finance House of India Ltd.(DFHI), Securities trading corporation
of India (STCI) participate as both lenders and borrowers and Life Insurance
Corporation of India (LIC), Unit Trust of India(UTI), National Bank for
Agriculture and Rural Development (NABARD)can participate only as lenders.
The interest rate paid on call money loans, known as the call rate, is highly
volatile. It is the most sensitive section of the money market and the changes in
29
Introduction to the demand for and supply of call loans are promptly reflected in call rates. There
Financial Markets, are now two call rates in India: the Inter-bank call rate' and the lending rate of
Money Market and
Capital Market
DFHI. The ceilings on the call rate and inter-bank term money rate were dropped,
with effect from May 1, 1989. The Indian call money market has been
transformed into a pure inter-bank market during 2006–07. The major call money
markets are in Mumbai, Kolkata, Delhi, Chennai and Ahmedabad.
The money market is a market for short-term financial assets that are close
substitutes of money. The most important feature of a money market instrument is
that it is liquid and can be turned over quickly at low cost and provides an
opportunity for balancing the short-term surplus funds of lenders and the
requirements of borrowers. By convention, the term "Money Market" refers to the
market for short-term requirement and deployment of funds. Money market
instruments are those instruments, which have a maturity period of less than one
year. The most active part of the money market is the market for overnight call
and term money between banks and institutions and repo transactions.
Call Money / Repo are very short-term Money Market products. There is a
wide range of participants (banks, primary dealers, financial institutions, mutual
funds, trusts, provident funds, etc.) dealing in money market instruments. Money
Market Instruments and the participants of money market are regulated by RBI
and SEBI.As a primary dealer SBI DFHI is an active player in this market and
widely deals in Short Term Money Market Instruments.
The below mentioned instruments are normally termed as money market
instruments:
 Call/ Notice/ Term Money
 Repo/ Reverse Repo
 Inter Corporate Deposits
 Commercial Paper
 Certificate of Deposit
 T-bills
 Inter Bank Participation Certificate
30
Money
Check your progress 8 Market
1. The__________money market deals in short term finance repayable on

demand, with a maturity period varying from one day to 14 days.
a. Call
b. black
2. The ___________market is a market for short-term financial assets that are

close substitutes of money.
a. Capital
b. money
2.10 Let Us Sum Up

The whole of this unit focussed on the Money market of India. Here the
readers have been briefed about what exactly is a money market. They have been
explained in very detail the various functions and characteristics of money market.
These whole units aim to provide sufficient information on money market and
thus also cover the role of RBI in the money market of India. This unit focussed
on development of money market in India. Various money market instruments
have even been discussed here in very detail. The whole of this unit has been
explained here in very detail and interesting manner to make it interesting for the
students.
After going through this unit the readers would get enough idea about the
money market.
31
Introduction to
Financial Markets,
Money Market and
Capital Market Answers: (1-a), (2-b)
Answers: (1-a), (2-b), (3-a)
Answers: (1-a), (2-b), (3-a)
2.12 Glossary
1. CP - It is a popular instrument for financing working capital requirements of
companies.
2.13 Assignment
Give four examples of credit instruments of the money market.
2.14 Activities
1. Discuss the function of money market.
2. Discuss money market and its characteristics.
32
2.15 Case Study Money
Market
1. Discuss the role played by RBI in money market.
2. Discuss the role of intermediaries in money market

EC, Brussels.
Instruments. Prentice-Hall International.
Institutional, Resilience, FSF, Basel.
4. Howells P., Bain K. (2008). Financial Markets and Institutions. Financial
5. Madura J. (2008). Financial Markets and Institutions. Prentice-Hall
International.
6. Mishkin F. S., Eakins S. G. (2006). Financial Markets and Institutions.
Addison-Wesley.
Macmillan.
33
Introduction to
Financial Markets,
UNIT 3: CAPITAL MARKET
Money Market and
Capital Market Unit Structure
3.1 Introduction
3.2 Meaning
3.3 Functions and Types of Capital Market

3.4 Reforms in the Capital Market
3.5 Intermediaries
3.6 Issue Mechanisms
3.7 Types of Primary Issues

3.8 Public Rights and Private Placement
3.9 Resource Mobilization from International Capital Markets

3.9.1 ADRs
3.9.2 GDRs
3.9.3 ECBs
3.10 Primary Market

3.10.1 Scenario in India
3.11 Debt Market: Private Corporate

3.12 Role of SEBI in the Capital Market
3.13 Let Us Sum Up

3.15 Glossary
3.16 Assignment
3.17 Activities
3.18 Case Study
34
3.0 Learning Objectives Capital
Market
 Functions and Types of Capital Market
 Reforms in the capital Market
 Intermediaries
 Issue Mechanisms
 Types of Primary Issues
 Public Rights and Private Placement
 ADRs, GDRs, and ECBs.
3.1 Introduction
Capital Market may be defined as a market dealing in medium and long-
term funds. It is an institutional arrangement for borrowing medium and long-term
funds and which provides facilities for marketing and trading of securities. So it
constitutes all long-term borrowings from banks and financial institutions,
borrowings from foreign markets and raising of capital by issue various securities
such as shares debentures, bonds, etc. In the present chapter let us discuss about
the market for trading of securities. The market where securities are traded known
as Securities market. It consists of two different segments namely primary and
secondary market. The primary market deals with new or fresh issue of securities
and is, therefore, also known as new issue market; whereas the secondary market
provides a place for purchase and sale of existing securities and is often termed as
stock market or stock exchange.
3.2 Meaning
The capital market is the sector of the financial market where long-term
financial instruments issued by corporations and governments trade. Here “long-
term” refers to a financial instrument with an original maturity greater than one
year and perpetual securities (those with no maturity). There are two types of
capital market securities: those that represent shares of ownership interest, also
called equity, issued by corporations, and those that represent indebtedness, or
debt issued by corporations and by the state and local governments.
35
Introduction to The Capital market is a market for financial investments that are direct or
Financial Markets, indirect claims to capital. It is wider than the Securities Market and embraces all
Money Market and
Capital Market
forms of lending and borrowing, whether or not evidenced by the creation of a
negotiable financial instrument. The Capital Market comprises the complex of
institutions and mechanisms through which intermediate term funds and long-term
funds are pooled and made available to business, government and individuals. The
Capital Market also encompasses the process by which securities already
outstanding are transferred.

1. The _________market is the sector of the financial market where long-term
financial instruments issued by corporations and governments trade.
a. capital
b. money
2. The Capital market is a market for _________investments that are direct or
indirect claims to capital.
a. long term
b. financial
3.3 Functions and Types of Capital Market

Functions of Capital market
Like the money market capital market is also very important. It plays a
significant role in the national economy. A developed, dynamic and vibrant
capital market can immensely contribute for speedy economic growth and
development.
Let us get acquainted with the important functions and role of the capital
market.
1. Mobilization of Savings: Capital market is an important source for
mobilizing idle savings from the economy. It mobilizes funds from people
for further investments in the productive channels of an economy. In that
sense it activates the ideal monetary resources and puts them in proper
investments.
36
2. Capital Formation: Capital market helps in capital formation. Capital Capital
formation is net addition to the existing stock of capital in the economy. Market
Through mobilization of ideal resources it generates savings; the mobilized

savings are made available to various segments such as agriculture, industry,
etc. This helps in increasing capital formation.
3. Provision of Investment Avenue: Thus it provides an investment avenue

for people who wish to invest resources for a long period of time. It
provides suitable interest rate returns also to investors. Instruments such as
bonds, equities, units of mutual funds, insurance policies, etc. definitely
provides diverse investment avenue for the public.
4. Speed up Economic Growth and Development: Capital market enhances
production and productivity in the national economy. As it makes funds
available for long period of time, the financial requirements of business
houses are met by the capital market. It helps in research and development.
This helps in, increasing production and productivity in economy by
generation of employment and development of infrastructure.
5. Proper Regulation of Funds: Capital markets not only helps in fund

mobilization, but it also helps in proper allocation of these resources. It can
have regulation over the resources so that it can direct funds in a qualitative
manner.
6. Service Provision: As an important financial set up capital market provides

various types of services. It includes long term and medium term loans to
industry, underwriting services, consultancy services, export finance, etc.
These services help the manufacturing sector in a large spectrum.
7. Continuous Availability of Funds: Capital market is place where the

investment avenue is continuously available for long term investment. This
is a liquid market as it makes fund available on continues basis. Both buyers
and seller can easily buy and sell securities as they are continuously
available. Basically capital market transactions are related to the stock
exchanges. Thus marketability in the capital market becomes easy.
37
Introduction to Types of Capital Market
Financial Markets,
Money Market and There are two types of capital market
Capital Market
1. Primary market
The primary market is that part of the capital markets that deals with the
issuance of new securities. Companies, governments or public sector institutions
can obtain funding through the sale of a new stock or bond issue. This is typically
done through a syndicate of securities dealers. The process of selling new issues
to investors is called underwriting. In the case of a new stock issue, this sale is an
initial public offering (IPO). Dealers earn a commission that is built into the price
of the security offering, though it can be found in the prospectus.
Features of primary markets are:

This is the market for new long term equity capital. The primary market is
the market where the securities are sold for the first time. Therefore it is also
called the new issue market (NIM).
In a primary issue, the securities are issued by the company directly to
investors. The company receives the money and issues new security certificates to
the investors. Primary issues are used by companies for the purpose of setting up
new business or for expanding or modernizing the existing business. The primary
market performs the crucial function of facilitating capital formation in the
economy. The new issue market does not include certain other sources of new
long term external finance, such as loans from financial institutions. Borrowers in
the new issue market may be raising capital for converting private capital into
public capital; this is known as “going public.”
2. Secondary market
The secondary market, also known as the aftermarket, is the financial
market where previously issued securities and financial instruments such as stock,
bonds, options, and futures are bought and sold. The term “secondary market” is
also used to refer to the market for any used goods or assets, or an alternative use
for an existing product or asset where the customer base is the second market (for
example, corn has been traditionally used primarily for food production and
feedstock, but a second- or third- market has developed for use in ethanol
production). Another commonly referred to usage of secondary market term is to
refer to loans which are sold by a mortgage bank to investors such as Fannie Mae
and Freddie Mac.
38
With primary issuances of securities or financial instruments, or the primary Capital
market, investors purchase these securities directly from issuers such as Market
corporations issuing shares in an IPO or private placement, or directly from the

federal government in the case of treasuries. After the initial issuance, investors
can purchase from other investors in the secondary market.
The secondary market for a variety of assets can vary from loans to stocks,
from fragmented to centralized, and from illiquid to very liquid. The major stock
exchanges are the most visible example of liquid secondary markets – in this case,
for stocks of publicly traded companies. Exchanges such as the New York Stock
Exchange, Nasdaq and the American Stock Exchange provide a centralized, liquid
secondary market for the investors who own stocks that trade on those exchanges.
Most bonds and structured products trade “over the counter,” or by phoning the
bond desk of one‟s broker-dealer. Loans sometimes trade online using a Loan
Exchange

1. _________market is an important source for mobilizing idle savings from
the economy.
a. Capital
b. money
2. Capital market raises resources for __________ periods of time.
a. Shorter
b. longer
3. The __________market is that part of the capital markets that deals with the
issuance of new securities.
a. Primary
b. secondary
4. In a ________issue, the securities are issued by the company directly to
investors.
a. Secondary
b. primary
39
Introduction to 3.4 Reforms in the Capital Market
Financial Markets,
Money Market and
The major reforms undertaken in capital market of India includes:-
Capital Market
1. Establishment of SEBI: The Securities and Exchange Board of India
(SEBI) was established in 1988. It got a legal status in 1992. SEBI was
primarily set up to regulate the activities of the merchant banks, to control
the operations of mutual funds, to work as a promoter of the stock exchange
activities and to act as a regulatory authority of new issue activities of
companies. The SEBI was set up with the fundamental objective, "to protect
the interest of investors in securities market and for matters connected
therewith or incidental thereto."
The main functions of SEBI are:-

a) To regulate the business of the stock market and other securities
market.
b) To promote and regulate the self-regulatory organizations.
c) To prohibit fraudulent and unfair trade practices in securities market.

d) To promote awareness among investors and training of intermediaries
about safety of market.
e) To prohibit insider trading in securities market.
f) To regulate huge acquisition of shares and takeover of companies.

2. Establishment of Creditors Rating Agencies: Three creditors rating
agencies viz. The Credit Rating Information Services of India Limited
(CRISIL - 1988), the Investment Information and Credit Rating Agency of
India Limited (ICRA - 1991) and Credit Analysis and Research Limited
(CARE) were set up in order to assess the financial health of different
financial institutions and agencies related to the stock market activities. It is
a guide for the investors also in evaluating the risk of their investments.
3. Increasing of Merchant Banking Activities: Many Indian and foreign

commercial banks have set up their merchant banking divisions in the last
few years. These divisions provide financial services such as underwriting
facilities, issue organising, consultancy services, etc. It has proved as a
helping hand to factors related to the capital market.
4. Candid Performance of Indian Economy: In the last few years, Indian
economy is growing at a good speed. It has attracted a huge inflow of
Foreign Institutional Investments (FII). The massive entry of FIIs in the
40
Indian capital market has given good appreciation for the Indian investors in Capital
Market
recent times. Similarly many new companies are emerging on the horizon of
the Indian capital market to raise capital for their expansions.
5. Rising Electronic Transactions: Due to technological development in the

last few years. The physical transaction with more paper work is reduced.
Now paperless transactions are increasing at a rapid rate. It saves money,
time and energy of investors. Thus it has made investing safer and hassle
free encouraging more people to join the capital market.
6. Growing Mutual Fund Industry: The growing of mutual funds in India
has certainly helped the capital market to grow. Public sector banks, foreign
banks, financial institutions and joint mutual funds between the Indian and
foreign firms have launched many new funds. A big diversification in terms
of schemes, maturity, etc. has taken place in mutual funds in India. It has
given a wide choice for the common investors to enter the capital market.
7. Growing Stock Exchanges: The numbers of various Stock Exchanges in
India are increasing. Initially the BSE was the main exchange, but now after
the setting up of the NSE and the OTCEI, stock exchanges have spread
across the country. Recently a new Inter-connected Stock Exchange of India
has joined the existing stock exchanges.
8. Investor's Protection: Under the purview of the SEBI the Central
Government of India has set up the Investors Education and Protection Fund
(IEPF) in 2001. It works in educating and guiding investors. It tries to
protect the interest of the small investors from frauds and malpractices in the
capital market.
9. Growth of Derivative Transactions: Since June 2000, the NSE has

introduced the derivatives trading in the equities. In November 2001 it also
introduced the future and options transactions. These innovative products
have given variety for the investment leading to the expansion of the capital
market.
10. Insurance Sector Reforms: Indian insurance sector has also witnessed
massive reforms in last few years. The Insurance Regulatory and
Development Authority (IRDA) were set up in 2000. It paved the entry of
the private insurance firms in India. As many insurance companies invest
their money in the capital market, it has expanded.
11. Commodity Trading: Along with the trading of ordinary securities, the
trading in commodities is also recently encouraged. The Multi Commodity
41
Introduction to Exchange (MCX) is set up. The volume of such transactions is growing at a
Financial Markets, splendid rate.
Money Market and
Capital Market Apart from these reforms the setting up of Clearing Corporation of India
Limited (CCIL), Venture Funds, etc. have resulted into the tremendous growth of
Indian capital market.

1. The Securities and Exchange Board of India (SEBI) was established in
__________.
a. 1988
b. 1978
2. To regulate the business of the stock market and other securities market is
the function of ________.
a. RBI
b. SEBI
3. Under the purview of the SEBI the _______has set up the Investors
Education and Protection Fund (IEPF) in 2001.
a. Central Government of India
b. RBI
3.5 Intermediaries
Capital markets intermediaries are licensed and regulated under the
Securities and Futures Act. They may provide the whole range of capital markets
services as specified in the 2nd schedule of the Securities and Futures Act with the
appropriate Capital Markets Services licence. Currently, these services or
regulated activities include dealing in securities; trading in futures contracts;
leveraged foreign exchange trading; advising on corporate finance; fund
management; real estate investment trust management; securities financing;
providing custodial services for securities; and providing credit rating services.
Individuals who are employed by the capital markets intermediaries to carry
out such regulated activities are required to be representatives under the Securities
and Futures Act
42
Firm or person (such as a broker or consultant) who acts as a mediator on a
Capital
link between parties to a business deal, investment decision, negotiation, etc. In Market
money markets, for example, banks act as intermediaries between depositors
seeking interest income and borrowers seeking debt capital. Intermediaries usually
specialize in specific areas, and serve as a conduit for market and other types of
information is also called a middleman or intermediation.
1. Intermediaries are service providers in the market, including stock brokers,
sub-brokers, financiers, merchant bankers, underwriters, depository
participants, registrar and transfer agents, FIIs/ sub accounts, mutual Funds,
venture capital funds, portfolio managers, custodians, etc.
2. A stockbroker is a regulated professional individual, usually associated with
a brokerage form firm or broker-dealer, who buys and sells stocks and other
securities for both retail and institutional clients, through a stock exchange
or over the counter, in return for a fee or commission. Stockbrokers are
known by numerous professional designations, depending on the license
they hold, the type of securities they sell, or the services they provide.
3. is a person OR a business entity who makes their money from investments,

typically involving large sums of money and usually involving private
equity and venture capital, leveraged buyouts, corporate finance, investment
banking and/or large scale asset management. A financier makes money
through this process when his or her investment is paid back with interest,
from part of the company's equity awarded to them as specified by the
business deal, or a financier can generate income through commission,
performance, and management fees
4. A merchant bank is a financial institution that provides capital to companies

in the form of share ownership instead of loans. A merchant bank also
provides advisory on corporate matters to the firms they lend to. Both
commercial banks and investment banks may engage in merchant banking
activities. Historically, merchant banks' original purpose was to facilitate
and/or finance production and trade of commodities, hence the name
"merchant". Few banks today restrict their activities to such a narrow scope.
5. A company or other entity that administers the public issuance and
distribution of securities from a corporation or other issuing body. An
underwriter works closely with the issuing body to determine the offering
price of the securities, buys them from the issuer and sells them to investors
via the underwriter's distribution network EX- MB and syndicate members.
43
Introduction to 6. Depository system introduced in India in the year 1996. In India, a
Financial Markets, Depository Participant (DP) is described as an agent of the depository. They
Money Market and
Capital Market
are the intermediaries between the depository and the investors. The
relationship between the DPs and the depository is governed by an
agreement made between the two under the Depositories Act. Service
provided Dematerialization, Re-materialization, Transfers of securities,
settlement of trades. In India- NSDL & CDSL are the two entities.
7. Registrar is the trusts or institutions that register and maintain detailed

records of the transactions of investors for the convenience of mutual fund
houses. Registrar or transfer agents are the trusts or institutions that register
and maintain detailed records of the transactions of investors for the
convenience of mutual fund houses.
8. A mutual fund is a type of professionally managed collective investment
scheme that pools money from many investors to purchase securities. While
there is no legal definition of the term "mutual fund", it is most commonly
applied only to those collective investment vehicles that are regulated and
sold to the general public. They are sometimes referred to as "investment
companies" or "registered investment companies. Most mutual funds are
"open-ended," meaning investors can buy or sell shares of the fund at any
time
9. Venture capital (VC) is financial capital provided to early-stage, high-

potential, high risk, growth start-up companies. The venture capital fund
makes money by owning equity in the companies it invests in. The typical
venture capital investment occurs after the seed funding round as the first
round of institutional capital to fund growth (also referred to as Series A
round) in the interest of generating a return through an eventual realization
event, such as an IPO or trade sale of the company. Venture capital is a
subset of private equity. Therefore, all venture capital is private equity, but
not all private equity is venture
10. A portfolio manager is either a person who makes investment decisions
using money other people have placed under his or her control or a person
who manages a financial institution's asset and liability (loan and deposit)
portfolios. On the investments side, they work with a team of analysts and
researchers, and are ultimately responsible for establishing an investment
strategy, Portfolio managers are presented with investment ideas from
internal buy-side analysts and sell-side analysts from investment banks. It is
their job to sift through the relevant information and use their judgment to
44
buy and sell securities. Throughout each day, they read reports, talk to Capital
company managers and monitor industry and economic trends looking for Market
the right company and time to invest the portfolio's capital.
11. A financial professional who has expertise in evaluating the

creditworthiness of individuals and businesses. Credit analysts determine
the likelihood that a borrower will be able to meet financial obligations and
pay back a loan, often by reviewing the borrower's financial history and
determining whether market conditions will be conducive to repayment.

1. ___________markets intermediaries are licensed and regulated under the
Securities and Futures Act.
a. Capital
b. money
2. ___________is/are service providers in the market.
a. RBI
b. Intermediaries
3. A ___________is a regulated professional individual, usually associated

with a brokerage form firm.
a. Stockbroker
b. banks
3.6 Issue Mechanisms

As we all know that capital market (securities markets) is the market for
securities, where companies and the government can raise long-term funds. The
capital market includes the stock market and the bond market. Financial
regulators, oversee the capital markets in their respective countries to ensure that
investors are protected against fraud. The capital markets consist of the primary
market, where new issues are distributed to investors, and the secondary market,
where existing securities are traded.
45
Introduction to Primary markets
Financial Markets,
Money Market and The primary market is that part of the capital markets that deals with the
Capital Market issuance of new securities. Companies, governments or public sector institutions
can obtain funding through the sale of a new stock or bond issue. This is typically
done through a syndicate of securities dealers. The process of selling new issues
to investors is called underwriting. In the case of a new stock issue, this sale is an
initial public offering (IPO). Dealers earn a commission that is built into the price
of the security offering, though it can be found in the prospectus.
Secondary markets
The secondary market is the financial market for trading of securities that
have already been issued in an initial private or public offering. Alternatively,
secondary market can refer to the market for any kind of used goods. The market
that exists in a new security just after the new issue is often referred to as the
aftermarket. Once a newly issued stock is listed on a stock exchange, investors
and speculators can easily trade on the exchange, as market makers provide bids
and offers in the new stock.
In the secondary market, securities are sold by and transferred from one
investor or speculator to another. It is therefore important that the secondary
market be highly liquid and transparent. Before electronic means of
communications, the only way to create this liquidity was for investors and
speculators to meet at a fixed place regularly. This is how stock exchanges
originated.

1. The _________markets consist of the primary market, where new issues are
distributed to investors.
a. capital
b. secondary
2. The ________market is a place where existing securities are traded.

a. primary
b. secondary
46
3. The _______market is that part of the capital markets that deals with the Capital
issuance of new securities. Market
a. primary
b. secondary
3.7 Types of Primary Issues

Primarily, issues can be classified as a Public, Rights or Preferential issues
(also known as private placements). While public and rights issues involve a
detailed procedure, private placements or preferential issues are relatively simpler.
The classification of issues is illustrated below:
Initial Public Offering (IPO) is when an unlisted company makes either a
fresh issue of securities or an offer for sale of its existing securities or both for the
first time to the public. This paves way for listing and trading of the issuer's
securities.
A follow on public offering (Further Issue) is when an already listed
company makes either a fresh issue of securities to the public or an offer for sale
to the public, through an offer document.
Rights Issue is when a listed company which proposes to issue fresh

securities to its existing shareholders as on a record date. The rights are normally
offered in a particular ratio to the number of securities held prior to the issue. This
route is best suited for companies who would like to raise capital without diluting
stake of its existing shareholders.
A Preferential issue is an issue of shares or of convertible securities by listed
companies to a select group of persons under Section 81 of the Companies Act,
1956 which is neither a rights issue nor a public issue. This is a faster way for a
company to raise equity capital. The issuer company has to comply with the
Companies Act and the requirements contained in the Chapter pertaining to
preferential allotment in SEBI guidelines which inter-alia include pricing,
disclosures in notice, etc.
47
Introduction to
Financial Markets,
Money Market and
1. __________is when an unlisted company makes either a fresh issue of
Capital Market
securities or an offer.
a. IPO
b. BPO
2. ___________is when a listed company which proposes to issue fresh

securities to its existing shareholders as on a record date.
a. IPO
b. Rights Issue
3. A ________issue is an issue of shares or of convertible securities by listed

companies to a select group of persons under Section 81 of the Companies
Act, 1956 which is neither a rights issue nor a public issue.
a. Preferential
b. Equity
3.8 Public Rights and Private Placement

A rights issue involves selling securities in the primary by issuing rights to
the existing shareholders, When a company issues additional equity capital, it has
to be offered in the first instance to the existing shareholders on a pro rata basis.
This is required under Section 81 of the Companies act, 1956. The shareholders
however may be a special resolution forfeit this right, partially or fully to enable a
company to issue additional capital the public.
Procedure for rights issue: A company making rights issue sends a letter of offer
along with a composite application form consisting of four forms (A, B, C and D)
to the shareholders. Form A is meant for the acceptance of the rights and
application of additional shares. This form also shows the number of rights shares
the shareholders is entitled to. It also has a column through which a request for
additional shares may be made. Form B is to be used if the shareholder wants to
renounce the rights in-favour of someone else. Form C is meant for application by
the renounces in whose favour the rights have been renounced by the original
allotted, through Form B. Form D is to be used to make a request for split forms.
The composite application form must be mailed to the company within a specific
period which is usually 30 days.
48
Private Placement or Preferential allotment: In private placement, funds are
Capital
raised in the primary market by issuing securities privately to some investors Market
without resorting to underwriting. The investors in this case may be financial
institutions, commercial banks, other company‟s shareholders of promoting
companies, and friends and associates of the promoters.
The merits of private placement are: (1) the process of raising funds is fairly
simple. The elaborate procedure required in the case of a public issue is more or
less by passed. (2) The issues cost is minimal. (3) In the case of a debenture issue,
negotiated directly between the issuing company and the few investors, there may
be greater flexibility with respect to terms and conditions. The disadvantageous of
private placement are: (1) The Quantum of funds that can be raised may be rather
limited, (2) The cost of capital of funds raised by way of private placements may
be somewhat higher.
Private Placement of Debentures: Private placement of debentures has

become very popular in recent years. The principal buyers of such debentures
have been mutual funds, insurance companies, financial institutions, Army Group
Insurance, Navy Group Insurance, Air Group and so on.

1. A ________involves selling securities in the primary by issuing rights to the
existing shareholders.
a. rights issue
b. bonus issue
2. In__________, funds are raised in the primary market by issuing securities
privately to some investors without resorting to underwriting.
a. Public issue
b. private placement
49
Introduction to 3.9 Resource Mobilization from International
Financial Markets,
Money Market and Capital Markets
Capital Market
Funds can be raised in the primary market from the domestic market as well
as from international markets. After the reforms were initiated in 1991, one of the
major policy changes was allowing Indian companies to raise resources by way of
equity issues in the international markets. Earlier, only debt was allowed to be
raised from international markets. In the early 1990s foreign exchange reserves
had depleted and the country‟s rating had been downgraded. This resulted in a
foreign exchange crunch and the government was unable to meet the import
requirement of Indian companies. Hence allowing companies to tap the equity and
bond market In Europe seemed a more sensible option. This permission
encourages Indian companies to become global.
India companies have raised resources from international capital markets

through Global depository receipts (GDRs) / American Depository Receipts
(ADRs), Foreign Currency Convertible Bonds (PCCBs) and External Commercial
Borrowings (ECBs). The last are used as a residual source after exhausting
external equity as a main source of finance for large value projects.
3.9.1 ADRs
ADRs are negotiable instruments denominated in dollars, and issued by the
US Depository Bank. A non-US company that seeks to list in the US, deposits its
shares with a bank and receives receipts which enable the company to issue
American Depository Shares (ADSs). These ADS‟s serve as stock certificates and
are used interchangeably with ADRs which represent ownership of deposited
shares. There is no legal or technical difference between an ADR and a GDR. As
they are listed on the New York Stock Exchange (NYSE) and NASDAQ
(National Association of Securities Dealers Automated Association), ADR issued
offer access to the US institutional and retail markets while GDR issues offer
access only to the US institutional market. GDR listing requires comprehensive
disclosures and greater transparency as compared to GDR listing.
3.9.2 GDRs
GDRs essentially equity instruments issued abroad by authorized overseas
corporate bodies against the shares/bonds of Indian companies held with
nominated domestic custodian banks. The issue of GDR creates equity shares of
50
the issuing company which are kept with a designated bank. GDRs are freely Capital
transferable outside India and divided in respect of the share represented by the Market
GDR is paid in Indian rupees only. They are listed and traded on a foreign stock
exchange. Trading takes place between professional market makers on an OTC
(over the counter) basis. A GDR may represent one or more shares of the issuing
company. The shares correspond to other GDR in a fixed ratio. A holder of a
GDR can, at any time, convert it into the number of shares that it represents. Till
conversion, the GDRs do not carry any voting rights and once conversion takes
place the underlying shares are listed and traded on the domestic exchange. Most
of the Indian companies have their GDR issues listed on the Luxembourg Stock
Exchange and the London Stock Exchange. Indian GDRs are primarily sold to
institutional investors and the major demand is in the UK, US, Hong Kong,
Singapore, France and Switzerland. Rule 144 A of the Securities and Exchange
Commissions (SEC) of the US permits companies from outside the US to offer
their GDRs to qualified institutional buyers.
GDRs can be converted into ADRs by surrendering the existing GDRs and
depositing the underlying equity shares with the ADR depository in exchange for
ADRs. The company has to comply with the Securities and Exchange
Commission requirements to materialize this exchange offer process. However,
the company does not get any funds by this conversion. The trend is towards the
conversion of GDRs into ADRs as ADRs are more liquid and cover a wider
market. Besides these, many European investors have been disappointed by poor
performance of Indian GDRs in traditional industries and are unwilling to provide
more capital.
3.9.3 ECBs
An external commercial borrowing (ECB) is an instrument used in India to
facilitate the access to foreign money by Indian corporations and PSUs (public
sector undertakings). ECBs include commercial bank loans, buyers' credit and
suppliers‟ credit, securitised instruments such as floating rate notes and fixed rate
bonds, etc. credit from official export credit agencies and commercial borrowings
from the private sector window of multilateral financial Institutions such as
International Finance Corporation (Washington), ADB, AFIC, CDC, etc. ECBs
cannot be used for investment in stock market or speculation in real estate. The
DEA (Department of Economic Affairs), Ministry of Finance, Government of
India along with Reserve Bank of India, monitors and regulates ECB guidelines
and policies. For infrastructure and green-field projects, funding up to 50%
51
Introduction to (through ECB) is allowed. In telecom sector too, up to 50% funding through
Financial Markets, ECBs is allowed. Recently Government of India allowed borrowings in Chinese
Money Market and
Capital Market
currency Yuan. Corporate sectors can mobilize USD 750 million via automatic
route, whereas service sectors and NGO's for microfinance can mobilize USD 200
million and 10 million respectively.
Borrowers can use 25 per cent of the ECB to repay rupee debt and the
remaining 75 per cent should be used for new projects. A borrower cannot
refinance its entire existing rupee loan through ECB. The money raised through
ECB is cheaper given near-zero interest rates in the US and Europe, Indian
companies can repay part of their existing expensive loans from that.

1. Funds can be raised in the ___________market from the domestic market as
well as from international markets.
a. Primary
b. secondary
2. _____________are negotiable instruments denominated in dollars, and
issued by the US Depository Bank.
a. GDR
b. ADRs
3. ______________essentially equity instruments issued abroad by authorized
overseas corporate bodies against the shares/bonds of Indian companies held
with nominated domestic custodian banks
a. GDRs
b. ADRs
4. A ____________is an instrument used in India to facilitate the access to
foreign money by Indian corporations and PSUs.
a. GDRs
b. ECB
52
3.10 Primary Market Capital
Market
The Primary Market consists of arrangements, which facilitate the
procurement of long-term funds by companies by making fresh issue of shares
and debentures. You know that companies make fresh issue of shares and/or
debentures at their formation stage and, if necessary, subsequently for the
expansion of business. It is usually done through private placement to friends,
relatives and financial institutions or by making public issue. In any Business
case, the companies have to follow a well-established legal procedure and involve
a number of intermediaries such as underwriters, brokers, etc. who form an
integral part of the primary market. You must have learnt about many initial
public offers (IPOs) made recently by a number of public sector undertakings
such as ONGC, GAIL, NTPC and the private sector companies like Tata
Consultancy Services (TCS), Biocon, Jet-Airways and so on.
3.10.1 Scenario in India

In the Financial Year 2008, India saw the greatest year in Indian capital
Market raised when the Total Capital raised went Northwards of US$ 9 Billion.
 India has seen a tremendous growth of its Capital Markets with close to 500
Initial Public Offerings (IPO) second only US. While India Ranked IV with
respect to the amount of Capital raised contributing to 3.7% of global IPO
share.
 At the end of F.Y 12,the P/E ratio of BSE Sensex and S & P CNX NIFTY
were 17.8 and 18.7 respectively as compared to 21.2 and 22.1 respectively
as at the end of F.Y11 1st Development in Primary Market
 The Overall growth of GDP at factor Cost at contrast Prices, as per

Advanced Estimates, is estimated at 6.9 percent in F.Y12 as compared to the
revised growth of 8.4% during F.Y11
 Industrial Growth measured by Index of Industrial Production reached 2.9%

during F.Y12 as compare to 8.2% in F.Y11 2nd Development in Primary
Market •Among the 17 listed companies that were approved for ordinary
share issue, 16 have completed their Initial Public Offering(IPO) and among
them 12 have already been listed in the Secondary Market too.
 In order to create efficient Capital Market QFI‟s been allowed to directly

invest in the Indian Equity Market in Jan 2012.
53
Introduction to  It is mandatory for Companies to issue IPO of 100 and above in electronic
Financial Markets, form through Nation Wide Broker Network of Stock Exchanges. 3rd
Money Market and
Capital Market Development in Primary Market Resources mobilized in primary market 0
50 100 150 200 250 300 350 400 450 FY08 FY09 FY10 FY11 FY12 IPOs
FPOs Bond/NCD Right Issues Source: SEBI Source: BSE

1. The___________Market consists of arrangements, which facilitate the
procurement of long-term funds by companies by making fresh issue of
shares and debentures.
a. Primary
b. Secondary
2. India has seen a tremendous growth of its __________Markets with close to
500 Initial Public Offerings(IPO)Second only US
a. Primary
b. Capital
3.11 Debt Market: Private Corporate

Debt market refers to the financial market where investors buy and sell debt
securities, mostly in the form of bonds. Entire debt segment is generally consists
of 2/3 of primary market and 4/5 of secondary market. The Indian debt market is
today one of the largest in Asia and includes securities issued by the Government
(Central & State Governments), public sector undertakings, other government
bodies, financial institutions, banks and corporates.
Debt Market Can Be Broadly Classified in To:-
1) Govt. securities market)
2) Corporate debt market. The government debt market is the market for bonds
and securities issued by the central govt., state govt. and the semi govt.
authorities which includes local govt. authorities like city corporations,
metropolitan authorities public sector corporations and other govt. agencies
such as IDBI, IFCI, SFCs. In broader terms Corporate bonds are fixed
income securities issued by corporates i.e. entities other than Government.
54
Corporate debt market can be classified into:- Capital
Market
• Primary market
• Secondary market
Primary market for corporate debt:-The corporate sector can raise debt funds
either through prospectus or private placement. It is a market wherein debt
securities of corporate i.e., debentures, bonds, commercial papers, certificate of
deposits, etc. of private & public sectors are issued for the first time.
Secondary market for corporate debt:-It is a market where the corporate debt
securities of both private sector & public sector undertakings are traded. These
securities are traded on Wholesale Debt Segment (WDM) segment of NSE,
OTCEI &BSE.
Corporate bonds can be issued in two ways:-Public issue in public issue,

corporations issue bonds to the market as a whole. Institutions as well as retail
investors can participate in this issue. The cost of borrowing is little high in case
of public issue. Private placement in private placement corporate, generally park
the bond issuance with few institutions. In India, more than 90% of the corporate
bonds are issued through private placement. It is an easiest and cheapest way of
borrowing corporate bonds.
Structure of corporate debt market in India The primary market for

corporate debt is mainly dominated by private placements (93 per cent of total
issuance in 2011-12) as corporates prefer this route to public issues because of
operational ease, i.e., minimum disclosures, low cost, tailor made structures and
speed of raising funds. Banks/FIs (42.3 per cent of total issuances) followed by
finance companies (26.4 per cent) were the major issuer‟s in2011-12. India lacks a
long-term debt market for pure project finance. Corporate bonds issued in India
usually carry a rating of AAA indicating lack of interest in bonds of lower rated
borrowers in the debt market. Institutional participants, such as, banks, primary
dealers, mutual funds, insurance companies, pension funds, corporates, etc. are the
major players in this market.
According to SEBI, the total trading volume in the secondary corporate
bond market has increased from Rs.961 bn in FY2008 to Rs.2,207 bn in
FY2010CAGR of over 50% over the last two years.• SeFY2008 16,547
967FY2009 21,651 1,487Fy2010 20,933 2,20711/28/2012
55
Introduction to
Financial Markets,
Money Market and
1. __________market refers to the financial market where investors buy and
Capital Market
sell debt securities, mostly in the form of bonds.
a. Debt
b. share
2. The ___________sector can raise debt funds either through prospectus or

private placement.
a. Government
b. corporate
3.12 Role of SEBI in the Capital Market

Repealing of CCI Act: SEBI guidelines were issued after the repeal of the
CCI Act where by the CCI guidelines became out of date. New guidelines by
SEBI were issued starting from the month of June 1992. Some CCI guidelines
were still retained, as in the case of those for premium fixation.
Guidelines for new issues made by new companies: They have to be issued
at par. Free pricing is permitted only if the new company is promoted by the
existing company with not less than 50% of equity.
Guidelines for new issues made by private limited companies: New issues
made by Private Limited Companies and Closely held companies could be made
by free pricing, for listing purposes if such companies have had three years of
track record of consistent profitability out of last 5 years. Not less than 20% of
equity is to be offered to the public, in such cases.
Guidelines for new issues made by existing listed companies: Public issues
by existing listed companies can be made through free pricing, if they are further
issues and if they are disclosed in the prospectus. The NAV and the market price
have to be considered for the last 3 years. The companies with foreign holding
wishing to enhance the limit up to 51% will have to get the prices approved in the
general body meeting by a special resolution under Sec. 81 (A) of the Companies
Act, and subject to RBI approval.
Listing of shares on the OTC: If the new issues are made through OTC,
normal guidelines will apply if the sponsor is not taking any share. If the shares
are taken by the sponsor, subsequent offer to the public may be made at such a
56
price as the sponsor may deem fit. The promoters should retain 25% quota with a Capital
lock in period of 5 years, the sponsor should act as market maker for a period of at Market
least 3 years and also find another market maker for compulsory market making.
This condition was relaxed recently to encourage OTC Listing.
Underwriting issues: Underwriting is optional if the issue is made to the
public and should not include reserved or preferential quota or employees' quota.
If the subscription is not up to 90% of the total issue from the public including
contribution of underwriters, the public should be refunded of their subscription
within 120 days from the date of opening the issue. The compulsory underwriting
provision was also waived for smaller issues.
Composite issues: Issues to the public by existing company can be priced
differently as compared to the rights issued to shareholders.
FCD & PCD: The issues of Fully Convertible Debentures (FCDs) with a
conversion period of more than 36 months will not be permissible unless
conversion is optional. In case FCDs are convertible after 18 months, credit rating
is compulsory; credit rating is now made compulsory for all issues made to public,
other than equity. In case, the non-convertible portion of the Partially Convertible
Debentures is to be rolled over, non-maturing debenture holders should have
option to withdraw from the scheme.
New Financial Instruments: The terms and conditions of the new instrument
such as Deep Discount Bonds, debentures with warrants and secured premium
notes etc. Should be disclosed clearly so that the investor can assess the risk and
return scenario of the instrument.
Reservation in issues: The unreserved portion offered to public should not
be less than the minimum required for listing purposes. Preferential allotment can
be made to promoters, companies and shareholders of those companies, NRIs,
employees and associate companies of the same group. The allotment shall be
subject to a lock in period of three years, if it is made on firm basis, outside public
issue.
Deployment of issue proceeds: Where the total proceeds exceed Rs.250
crores, the company will voluntarily disclose the arrangements made to utilize
proceeds. When the total issue proceeds exceed Rs.500 crores, there is need for
making compulsory disclosure and for the financial institutions to monitor the
deployment of funds, to the stock exchanges.
57
Introduction to Minimum interval between two issues: 12 months should elapse between
Financial Markets, the public or rights issue and bonus issue. The promoters should bring in their
Money Market and
Capital Market
share of the capital before the public issue.
Employee's stock option scheme: The reservation for employees should not
be more than 10% at present and this quota is non-transferable for 3 years and
subject to a maximum allotment of 200 shares per employee, and the lock in was
removed later.
The Lock in period for Promoters' quota is 5 years and the lock in period for
preferential allotment for associates and friends is 3 years.
Bonus shares: Bonus issues are to be made out of free reserves, the share
premium collected in cash, Development Rebate Reserves and Investment
Allowance Reserve. Contingent liabilities disclosed in the audited accounts should
be deducted from net profit for calculation of residual reserves. Residual reserves
after the bonus issues should be at least 40% of the increased paid-up capital. 30%
of the average profits before tax for the previous 3 years should yield a rate of
dividend of 10% on the expanded capital base. Reserves out of revaluation should
not be used for bonus payment. Bonus issue cannot be made in lieu of dividends,
and if there are partly paid up shares; no bonus issue is permitted. Expanded paid-
up capital after bonus issue should not exceed authorized share capital. When a
company has PCD or FCD, pending conversion, no bonus issue can be made
unless this right is kept open to the holders of FCD and PCD falling due for
conversion within 12 months.
Debenture issues: All debentures, which have a life of more than 18 months,
should have a DRR created by company out of profits. DRR should be created
only for non-convertible portion of the debentures. Contribution to DRR should
commence from the date of commercial production and when there are profits
after tax, interest and depreciation. The DRR will be considered as a part of the
general reserves for payment of the bonus issues. DRR should be created and
maintained at 50% of the amount of the debentures before repayment starts. The
company should have already redeemed some liability. DRR and the creation of
Debentures Trust are necessary only if the debentures have a maturity period
exceeding 18 months. The Lead Institution for each issue should monitor the use
of debenture funds either from the working capital or from the project finance.
The SEBI now insists on prior licensing of debenture Trustees; Trust deed
should be ready within 6 months from the date of allotment. Recent amendment:
By a recent amendment to Listing Agreement, the Companies have been asked to
provide unabridged Balance Sheet to Shareholders. The companies have to give
58
the disposition of the funds raised in public issues and compare the actual with Capital
targets every six months, when they present balance sheet to investors. Market

1. __________guidelines were issued after the repeal of the CCI Act.
a. SEBI
b. RBI
2. Underwriting is ___________if the issue is made to the public and should

not include reserved or preferential quota or employees' quota
a. Compulsory
b. optional
3.13 Let Us Sum Up

Here in this unit the main area of focus was capital market. Every effort has
been made in order to make this topic interesting for the readers.
In this unit apart from discussing the meaning and functions of capital
market the functions and types of capital market have been discussed. The various
reforms that took place in capital market have even been discussed here. The issue
mechanism has been discussed here in very detail. The capital market and
scenario in India has also been discussed here in very detail.
After going through this unit the readers would sufficiently gain about the
capital market.
Answers: (1-a), (2-b), (3-a), (4-b)
59
Introduction to
Financial Markets,
Money Market and
Capital Market Answers: (1-a), (2-b), (3-a)
Answers: (1-a), (2-b), (3-a)
Answers: (1-a), (2-b), (3-a)
Answers: (1-a), (2-b), (3-a)
Answers: (1-a), (2-b), (3-a), (4-b)
3.15 Glossary
CCI guidelines: Guidelines issued by competition commission of India.
3.16 Assignment
What is capital market? How does it differ from money market?
60
Capital
3.17 Activities Market
Discuss the various reforms in capital market.
3.18 Case Study

Discuss the various intermediaries in capital market

EC, Brussels.

International.

Addison-Wesley.

Macmillan.
61
Introduction to
Financial Markets,
UNIT 4: SECONDARY CAPITAL MARKET
Money Market and
Capital Market Unit Structure
4.1 Introduction
4.2 Functions of Secondary Market
4.3 Post Reforms Stock Market Scenario

4.4 Organization Management and Membership of Stock Exchange
4.5 Listing of Securities

4.6 Trading Arrangements
4.7 Stock Market Index

4.8 Stock Exchanges in India
4.9 Let Us Sum Up

4.11 Glossary
4.12 Assignment
4.13 Activities
4.14 Case Study

 Functions of Secondary Market.
 Post Reforms Stock Market Scenario.
 Organization Management and Membership of Stock Exchange.
 Listing of Securities.
 Trading Arrangements.
 Stock Market Index.
 Stock Exchanges in India.
62
4.1 Introduction Secondary
Capital Market
The secondary market known as stock market or stock exchange plays an
equally important role in mobilising long-term funds by providing the necessary
liquidity to holdings in shares and debentures. It provides a place where these
securities can be encashed without any difficulty and delay. It is an organised
market where shares and debentures are traded regularly with high degree of
transparency and security. In fact, an active secondary market facilitates the
growth of primary market as the investors in the primary market are assured of a
continuous market for liquidity of their holdings. The major players in the primary
market are merchant bankers, mutual funds, financial institutions, and the
individual investors; and in the secondary market you have all these and the
stockbrokers who are members of the stock exchange who facilitate the trading.
4.2 Functions of Secondary Market

Some of the Important Functions of Stock Exchange/Secondary Market are
listed below:
1. Economic Barometer:
A stock exchange is a reliable barometer to measure the economic condition
of a country. Every major change in country and economy is reflected in the
prices of shares. The rise or fall in the share prices indicates the boom or recession
cycle of the economy. Stock exchange is also known as a pulse of economy or
economic mirror which reflects the economic conditions of a country.
2. Pricing of Securities:
The stock market helps to value the securities on the basis of demand and
supply factors. The securities of profitable and growth oriented companies are
valued higher as there is more demand for such securities. The valuation of
securities is useful for investors, government and creditors. The investors can
know the value of their investment, the creditors can value the creditworthiness
and government can impose taxes on value of securities.
3. Safety of Transactions:
In stock market only the listed securities are traded and stock exchange
authorities include the companies names in the trade list only after verifying the
soundness of company. The companies which are listed they also have to operate
63
Introduction to within the strict rules and regulations. This ensures safety of dealing through stock
Financial Markets, exchange.
Money Market and
Capital Market 4. Contributes to Economic Growth:
In stock exchange securities of various companies are bought and sold. This
process of disinvestment and reinvestment helps to invest in most productive
investment proposal and this leads to capital formation and economic growth.
5. Spreading of Equity Cult:

Stock exchange encourages people to invest in ownership securities by
regulating new issues, better trading practices and by educating public about
investment.
6. Providing Scope for Speculation:

To ensure liquidity and demand of supply of securities the stock exchange
permits healthy speculation of securities.
7. Liquidity:
The main function of stock market is to provide ready market for sale and
purchase of securities. The presence of stock exchange market gives assurance to
investors that their investment can be converted into cash whenever they want.
The investors can invest in long term investment projects without any hesitation,
as because of stock exchange they can convert long term investment into short
term and medium term.
8. Better Allocation of Capital:

The shares of profit making companies are quoted at higher prices and are
actively traded so such companies can easily raise fresh capital from stock market.
The general public hesitates to invest in securities of loss making companies. So
stock exchange facilitates allocation of investor‟s fund to profitable channels.
9. Promotes the Habits of Savings and Investment:

The stock market offers attractive opportunities of investment in various
securities. These attractive opportunities encourage people to save more and
invest in securities of corporate sector rather than investing in unproductive assets
such as gold, silver, etc.
64
Secondary
Check your progress 1 Capital Market
1. A _________exchange is a reliable barometer to measure the economic
condition of a country.
a. Stock
b. money
2. The __________helps to value the securities on the basis of demand and

supply factors.
a. banks
b. stock market
3. The main function of __________is to provide ready market for sale and
purchase of securities.
a. stock market
b. banks
4.3 Post Reforms Stock Market Scenario

After the initiation in 1991 the Indian secondary market now has a three tier
form.
1) Regional stock exchanges

2) National Stock Exchange (NSE)
3) Over the Counter Exchange of India (OTCEI)

The NSE was set up in 1994. It was the first modern stock exchange to bring
in new technology, new trading practices, new institutions, and new products. The
OTCEI was set up in 1992 as a stock exchange providing small and medium sized
companies the means to generate capital.
In all, there are, at present 23 stock exchanges in India – 19 regional stock

exchanges, BSE, NSE, OTCEI and the Inter connected Stock Exchange of India
(ISE). The ISE is a stock exchange of stock exchanges. The 19 regional stock
exchanges are located at Ahmedabad, Bangalore, Bhubaneswar, Kolkata. Cochin,
Coimbatore, Delhi, Guwahati, Hyderabad, Indore, Jaipur, Kanpur, Ludhiana,
Chennai, Mangalore, Pune, Patna, Rajkot and Vadodara. They operate under the
rules, by laws and regulations approved by the government and SEBI.
65
Introduction to
Financial Markets,
Money Market and
1. The NSE was set up in __________.
Capital Market
a. 1984
b. 1994
2. In all, there are, at present__________stock exchanges in India.
a. 17
b. 23
4.4 Organization, Management and Membership of

Stock Exchange
National Stock Exchange of India (NSEI) commenced operations in Whole-
sale Debt Market (WDM) in June 1994 and trading in equities has been started in
the Capital Market Segment (CM) in November 1994. A large number of
members are successfully trading from their respective offices through NSEI‟s
Very Small Aperture Terminal (VSAT) based satellite network. The exchange has
opened membership to 13 cities including Mumbai and operations from other
cities are expected to commence shortly.
As a national exchange it has set fairly stringent criteria for membership in
terms of net worth, education and experience, to ensure that trading members are
well capitalised and can provide other professional services to investors.
The main participant in WDM regiment (Government Securities, Treasury

Bills, PSU Bonds, CDs, CPs and Corporate debentures) are banks, financial
institutions and large corporate, RBI has recently directed banks to use only the
NSEI for all transactions in debt securities done earlier through brokers to ensure
transparency and facilitate regulations. This has raised the volumes of NSEI‟s
debt trade substantially.

1. National Stock Exchange of India (NSEI) commenced operations in Whole-
sale Debt Market (WDM) in June ____________.
a. 1994
b. 1984
66
4.5 Listing of Securities Secondary
Capital Market
Listing means admission of securities to dealings on a recognized stock
exchange. The securities may be of any public limited company, Central or State
Government, quasi-governmental and other financial institutions/corporations,
municipalities, etc.
The objectives of listing are mainly to:
 provide liquidity to securities
 mobilize savings for economic development
 protect interest of investors by ensuring full disclosures
A company, desirous of listing its securities on the Exchange, shall be

required to file an application, in the prescribed form, with the Exchange before
issue of Prospectus by the company, where the securities are issued by way of a
prospectus or before issue of 'Offer for Sale', where the securities are issued by
way of an offer for sale.
Delisting of securities means permanent removal of securities of a listed
company from the stock exchange where it was registered. As a result of this, the
company would no longer be traded at that stock exchange.+
Companies Act, 1956.

As per S. 73 of the companies Act, 1956, a company seeking listing of its
securities on a stock exchange is required to submit a Letter of application to all
the stock exchanges where it proposes to have its securities listed before filing the
prospectus with the registrar of companies.
SEBI Guidelines.
a. A company is required to complete the allotment of securities offered to the
public within 30 days of the date of closure of the subscription list and
approach the designated stock exchange for approval of the basis of
allotment.
b. Issuer company to complete the formalities for trading at all the stock
exchanges where the securities are to be listed within 7 working days of
finalization of the basis of allotment.
c. Companies making public/rights issues are required to deposit 1 % of the
issue amount with the designated stock exchange before the issue price.
67
Introduction to Stock Exchange guidelines.
Financial Markets,
Money Market and In addition to all these rules, regulation and compliance every stock
Capital Market exchange have a set of guidelines of its own for the companies to be listed on
them. For example they may provide for the minimum issue size and market
capitalization of the company
A company has to enter into a listing agreement before being given

permission to be listed on the exchange. Under this agreement the company
undertakes amongst other things, to provide facilities for prompt transfer,
registration, sub-division and consolidation of securities: to give proper notice of
closure of transfer books and record dates, to forward 6 copies of unabridged
Annual reports, balance sheets and profit & loss accounts, to file shareholding
patters and financial results on quarterly basis and to intimate promptly to the
exchange the happenings which are likely to materially affect the financial
performance of the company and its stock price and to comply with the conditions
of Corporate governance.
The companies are also required to pay to the exchange some listing fee as
prescribed by the exchange every financial year.
A company not complying with these requirements are may face some
disciplinary action, including suspension/ delisting of their securities.
In case the exchange does not give permission to the company for listing of
securities, the company cannot proceed with the allotment of shares. However the
company may file an appeal before SEBI under S. 22 of SCRA, 1956.
A company delisted by a stock exchange and seeking relisting at the same

exchange is required to make a fresh public offer and comply with the extant
guidelines of the exchange.
Delisting
As stated above delisting of securities means removal of the securities of a
listed company from the stock exchange. It may happen either when the company
does not comply with the guidelines of the stock exchange, or that the company
has not witnessed trading for years, or that it voluntary wants to get delisted or in
case of merger or acquisition of a company with/by some other company. So,
broadly it can be classified under two head:
1. Compulsory delisting.
2. Voluntary delisting.
68
Compulsory delisting refers to permanent removal of securities of a listed Secondary
Capital Market
company from a stock exchange as a penalizing measure at the behest of the stock
exchange for not making submissions/comply with various requirements set out in
the Listing agreement within the time frames prescribed. In voluntary delisting, a
listed company decides on its own to permanently remove its securities from a
stock exchange. This happens mainly due to merger or amalgamation of one
company with the other or due to the non-performance of the shares on the
particular exchange in the market.

1. _______means admission of securities to dealings on a recognized stock
exchange.
a. Listing
b. Delisting
2. ________of securities mean permanent removal of securities of a listed
company from the stock exchange where it was registered.
a. Listing
b. Delisting
3. Compulsory delisting refers to ________removal of securities of a listed
company from a stock exchange as a penalizing measure at the behest of the
stock exchange
a. Permanent
b. temporarily
4.6 Trading Arrangements

During the second half of the 1990's, trade liberalization and the pursuit of
global free trade underwent a metamorphosis. The political momentum shifted
away from what was seen by some nations as the painstakingly slow process of
multilateral tariff negotiations to smaller regional and bilateral arrangements - the
Regional Trade Agreement.
RTAs are not a new means of trade liberalization; historically, whenever

multilateral trade negotiations broke down, bilateral and multilateral free trade
69
Introduction to agreements filled the void. Such strategic trade arrangements have enabled many Secondary
Financial Markets, Capital Market
states to move towards freer trade at their own pace, and for their own benefits.
Money Market and
Capital Market

1. ______ are not a new means of trade liberalization.
a. RTA
b. TRA
4.7 Stock Market Index

A stock index or stock market index is a measurement of the value of a
section of the stock market. It is computed from the prices of selected stocks
(typically a weighted average). It is a tool used by investors and financial
managers to describe the market, and to compare the return on specific
investments. An index is a mathematical construct, so it may not be invested in
directly. But many mutual funds and exchange-traded funds attempt to "track" an
index, and those funds that do not may be judged against those that do.
Some indices, such as the S&P 500, have multiple versions. These versions
can differ based on how the index components are weighted and on how dividends
are accounted for. For example, there are three versions of the S&P 500 index:
price return, which only considers the price of the components, total return, which
accounts for dividend reinvestment, and net total return, which accounts for
dividend reinvestment after the deduction of a withholding tax. As another
example, the Wilshire 4500 and Wilshire 5000 indices have five versions each:
full capitalization total return, full capitalization price, float-adjusted total return,
float-adjusted price, and equal weight. The difference between the full
capitalization, float-adjusted, and equal weight versions is in how index
components are weighted.

1. A _______ is a measurement of the value of a section of the stock market.
a. stock index
b. Stock
70
2. An___________is a mathematical construct, so it may not be invested in Secondary
Capital Market
directly.
a. share
b. index
4.8 Stock Exchanges in India

The first organised stock exchange in India was started in Mumbai known as
Bombay Stock Exchange (BSE). It was followed by Ahmedabad Stock Exchange
in 1894 and Kolkata Stock Exchange in 1908. The number of stock exchanges in
India went up to 7by 1939 and it increased to 21 by 1945 on account of heavy
speculation activity during Second World War. A number of unorganised stock
exchanges also functioned in the country without any formal set-up and were
known as kerb market. The Security Contracts (Regulation) Act was passed in
1956 for recognition and regulation of Stock Exchanges in India. At present we
have 23 stock exchanges in the country. Of these, the most prominent stock
exchange that came up is National Stock Exchange (NSE). It is also based in
Mumbai and was promoted by the leading financial institutions in India. It was
incorporated in 1992 and commenced operations in 1994. This stock exchange has
a corporate structure, fully automated screen-based trading and nation-wide
coverage.
Another stock exchange that needs special mention is Over The Counter
Exchange of India (OTCEI). It was also promoted by the financial institutions like
UTI, ICICI, IDBI, IFCI, LIC etc. in September 1992 specially to cater to small
and medium sized companies with equity capital of more than Rs.30 lakh and less
than Rs.25 crore. It helps entrepreneurs in raising finances for their new projects
in a cost effective manner. It provides for nationwide online ring less trading with
20 plus representative offices in all major cities of the country. On this stock
exchange, securities of those companies can be traded which are exclusively listed
on OTCEI only. In addition, certain shares and debentures listed with other stock
exchanges in India and the units of UTI and other mutual funds are also allowed
to be traded on OTCEI as permitted securities. It has been noticed that, of late, the
turnover at this stock exchange has considerably reduced and steps have been
afoot to revitalise it. In fact, as of now, BSE and NSE are the two Stock
Exchanges, which enjoy nation-wide coverage and handle most of the business in
securities in the country.
71
Introduction to
Financial Markets,
Money Market and
1. The first organized stock exchange in India was started in Mumbai known as
Capital Market
___________.
a. BSE
b. NSE
2. The Security Contracts (Regulation) Act was passed in__________for

recognition and regulation of Stock Exchanges in India.
a. 1985
b. 1956
4.9 Let Us Sum Up

This unit intends to explain the secondary capital market to its readers in
very detail.
In this unit the functions of secondary market has been discussed in very
detail. The post reform stock market scenario has been discussed here in very
detail. Membership and management of stock exchange was also discussed here in
very detail. Listing of securities and trading arrangements have been discussed
here in very detail. Apart from this stock market index was also explained here in
detail. A detailed note of account has been made on stock exchanges of India.
This unit is going to be of great help for the readers in understanding the
secondary capital market in very detail.
Answers: (1-a), (2-b), (3-a)
heck your progress 2
72
Secondary
Capital Market
Answers: (1-a)
Answers: (1-a), (2-b), (3-a)
Answers: (1-a)
4.11 Glossary
1. Secondary market - is the financial market in which previously issued
financial instruments such as stock, bonds, options, and futures are bought
and sold.
4.12 Assignment
Explain secondary market and its functions.
4.13 Activities
Write a note on post reform stock market scenario.
4.14 Case Study

What do you understand by stock market index.
73
Introduction to 4.15 Further Readings
Financial Markets,
Money Market and 1. European Commission (2007). European Financial Integration Report 2007,
Capital Market
EC, Brussels.
International.
Addison-Wesley.
Macmillan.
74
Block Summary
This block intends to explain financial market, capital market and money
market.
In this block we have learnt that Financial market is the market that
facilitates transfer of funds between investors/lenders and borrowers/ users. It
deals in financial instruments like bills of exchange, shares, debentures, bonds,
etc. It provides security to dealings in financial assets, liquidity to financial assets
for investors and ensures low cost of transitions and information.
Financial Markets can be classified as (1) Money market and (2) Capital
market. Money market refer to the network of financial institutions dealing in
short term funds through instruments like bills of exchanges, promissory notes,
commercial paper, treasury bills, etc. Here we learnt that Capital Market is an
institutional arrangement for borrowing medium and long-term funds and which
provides facilities for marketing and trading of securities. So it constitutes all
long-term borrowings from banks and financial institutions, borrowings from
foreign markets and raising of capital by issue various securities such as shares
debentures, bonds, etc. The securities market has two different segments namely
primary and secondary market. The primary market consists of arrangements for
procurement of long-term funds by companies by fresh issue of shares and
debentures. The secondary market or stock exchange provides a ready market for
existing long term securities. Stock exchange is the secondary market, which
provides a place for regular sale and purchase of different types of securities like
shares, debentures, bonds & government securities. It is an organised market
where all transactions are regulated by the rules and laws of the concerned stock
exchanges.
The functions of stock exchanges are to provide ready and continuous
market for securities, information about prices and sales, safety to dealings and
investment, helps mobilisation of savings and capital formation. It acts as a
barometer of economic and business conditions and helps in better allocation of
funds. Stock exchanges provide many benefits to companies, investors and the
society as a whole. But they also suffer from limitations like exclusive speculation
and fluctuation in prices due to rumours and unpredictable events.
This block is certainly going to be of great help in making the readers in

understanding the basic concept of financial market in India.
75
Introduction to Block Assignment
Financial Markets,
Money Market and
Capital Market
Short Answer Questions
Write a short note on:-
1. Listing of securities.
2. ADR, GDR.
3. Financial market.
4. Capital market.
5. Primary market and secondary market.
Long Answer Questions

1. Discuss the development of money market in India.
2. Discuss the various money market instruments.

3. Explain the various types of issues in capital market.
4. Discuss the various types of capital market.

5. Define stock exchange and explain its functions.
6. Explain the importance of stock exchanges from the points of view of

companies and investors.
7. Explain the role played by SEBI in protecting investors‟ interests and

controlling the business at stock exchange.
8. Write a note on stock exchanges in India.
76
Enrolment No.
1. How many hours did you need for studying the units?
Unit No 1 2 3 4
Nos of Hrs
2. Please give your reactions to the following items based on your reading of the
block:
3. Any Other Comments

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77
Education is something
which ought to be
brought within
the reach of every one.
- Dr. B. R. Ambedkar

‘Jyotirmay Parisar’, Opp. Shri Balaji Temple, Sarkhej-Gandhinagar Highway, Chharodi,
Ahmedabad-382 481.
FINANCIAL MARKETS
PGDF-103
BLOCK 2:
FINANCIAL SERVICE,
CONSUMER BEHAVIOUR
AND BANKING PRODUCTS

Ahmedabad
FINANCIAL MARKETS

Pune
Editorial Panel
Author
Dr. Gaurav Singh
Language Editor
Ms. Kersi Bhesaniya

Ms. K. Jamdal
Ms. Lata Dawange
Ms. Pinaz Driver
Mr. Kiran Shinde
Mr. Prashant Tikone
Mr. Akshay Mirajkar

permission from us.
Acknowledgment
book.

PREFACE
understanding.
FINANCIAL MARKETS
Contents

AND CAPITAL MARKET
UNIT 2 MONEY MARKET
Exchanges in India
PRODUCTS

FRAMEWORK
Service
Development

BANKING SERVICES
SERVICES

MARKETS
Ambedkar
Open University
FINANCIAL MARKETS
BLOCK 2: FINANCIAL SERVICE, CONSUMER BEHAVIOUR

UNIT 1
FINANCIAL SERVICES: AN INTRODUCTION 03
UNIT 2
MARKETING OF FINANCIAL SERVICES: A CONCEPTUAL
FRAMEWORK 33
UNIT 3
CONSUMER BEHAVIOUR FOR FINANCIAL SERVICES 62
UNIT 4
BANKING PRODUCTS AND SERVICES 89
BLOCK 2: FINANCIAL SERVICE,
CONSUMER BEHAVIOUR
Block Introduction
As we are progressing the area of production has been increasing, gone are
the days when only products which are tangible in nature used to be produced.
Now a day the production of services is immensely rising and because of this the
importance of this subject can never be underestimated.
In this block we will be discussing about the financial services and the
conceptual framework of marketing of financial services. In this unit we will be
discussing in very detail about the meaning and importance of financial services.
We will be discussing the various types of financial services.The challenges
before the financial services sector, the concept of service product mix. The
marketing of financial services shall also be discussed here in detail. In this block
we will be discussing in very detail about the consumer behaviour for financial
services. The study of this topic is very important for the analysts of finance
sector. In the fourth unit we will be discussing in very detail about the products of
banking industry. Here we shall be discussing the various products of banking
industry in very detail.
After going through this unit the students will be confident enough about the
basics of financial services the marketing of this sector.
Block Objective
 The importance of financial services
 The types of financial services
 The concept of service product mix in financial service sector
1
Financial Service, Block Structure
Consumer
Behaviour and Unit 1: Financial Services: An Introduction
Banking Products
Unit 2: Marketing of Financial Service’s: A Conceptual Framework
Unit 3: Consumer Behaviour for Financial Services

Unit 4: Banking Products and Services
2
UNIT 1: FINANCIAL SERVICES: AN
INTRODUCTION
Unit Structure
1.1 Introduction
1.2 Meaning and Concept

1.3 Characteristics of Financial Services
1.4 Evolution of Financial Services in India

1.5 Significance of Financial Services
1.6 Types of Financial Services

1.7 Impact of Technology
1.8 Challenges before the Financial Services Sector

1.9 Let Us Sum Up

1.11 Glossary
1.12 Assignment
1.13 Activities
1.14 Case Study


 Explain the concept and meaning of financial services.
 Discuss the significance of financial services.
 Describe the various types of financial services.
 Explain the impact of technology on the financial services sector.
 Enumerate the challenges before the financial services sector.
3
Financial Service,
Consumer
1.1 Introduction
Behaviour and
Banking Products The financial system is a very complex system dealing with a vast variety of
financial activities. The financial system consists of Financial Institutions,
Financial Markets and Financial Instruments and the Financial Services, The first
component of the Financial System, i.e. the Financial Markets, has been discussed
in the first unit.
Financial Markets and Financial Institutions facilitate the functioning of the

Financial System through Financial Instruments. The financial markets play a
very significant role as far as the transfer of funds (financial assets) from surplus
units to deficit units is concerned. This transfer of funds from lenders to borrowers
is facilitated by banks and non-banking institutions, as well as various other
agencies participating in the market.
In unit 2, we have already studied about the major participants in the Money
Market and the Capital Market. Financial Services, the fourth component of the
financial system around which this particular course revolves, is a very popular
area for study these days. It is rather, highly diverse functional area requiring a
great degree of competence and knowledge in a wide range of relevant disciplines.
However, in this unit we will be briefly discussing about the various aspects of the
financial services and also the challenges this sector is posed with.
1.2 Meaning and Concept

The Financial Services Sector per se has become known in the past 25-30
years, although the concept of financial services has been in existence since times
immemorial. However, there is no straight forward definition for the term
Financial Services, but if we look at the meaning of the term „financial services‟
as it is applied in UK, it could be understood to be including banking, insurance,
stock broking and investment services as well as a wide range of other business
and professional services. In other words, what we can say is that financial
services are services that ensure the smooth flow of financial activities in the
economy.
Financial services are an important component of the financial system. They
cater to the needs of financial institutions, financial markets and financial
instruments which are geared to serve individual and institutional investors.
Financial institutions and financial markets facilitate functioning of the financial
system through financial instruments. In order to fulfill the tasks assigned, they
4
require a number of services of financial nature and hence financial services are Financial
Services: An
regarded as the fourth element of the financial system. Thus, functioning of the
Introduction
financial system depends to a great deal on the range of financial services
extended by the providers, and their efficiency and effectiveness.
Financial services include the services offered by both Asset Management
Companies and the Liability Management Companies. The asset management
companies are viz. leasing companies, mutual funds, merchant bankers and issue/
portfolio managers. Bill discounting houses and acceptance houses come under
the liability management companies. Technological innovation and globalization
has brought about a key change in the financial services sector, i.e. the
convergence occurring within the sector. Similar services are now being offered
by different players.
Financial services not only help to raise the required funds but also ensure
their efficient deployment. They assist in deciding the financing mix and extend
their services up to the stage of servicing of lenders. In order to ensure an efficient
management of funds, services such as bill discounting, factoring of debtors,
parking of short-term funds in the money market, e-commerce and securitisation
of debts are provided by financial services firms. This sector provides services
such as banking, insurance, credit rating, lease financing, factoring, venture
capital, mutual funds, merchant banking, stock lending, depository services,
housing finance, etc. These services are provided by various institutions like stock
exchanges, specialised and general financial institutions, and non-banking finance
companies, subsidiaries of financial institutions, banks and insurance companies.
Financial services sector is regulated by the Securities and Exchange Board
of India (SEBI), Reserve Bank of Indiaand the Department of Banking and
Insurance, Government of India, through a plethora of legislations

1. Financial services not only help to raise the required funds but also ensure
their efficient _____________.
a. Deployment
b. Growth
2. Financial services sector is regulated by the ____________.
a. RBI
b. SEBI
5
Financial Service, 3. Financial institutions and financial markets facilitate functioning of the
Consumer
Behaviour and
financial system through financial___________.
Banking Products a. Instruments
b. Institutions
1.3 Characteristics of Financial Services

Financial services are quite distinct in nature from the other services. The
services provided by the financial institutions have some typical characteristics
that make these products quite distinct from the products turned out by the
industrial enterprises. Some of the basic characteristics of financial services are as
discussed:
1. Customer-Specific: Financial services are usually customer focussed. The

firms providing these services, study the needs of their customers in detail
before deciding their financial strategy, giving due regard to costs, liquidity
and maturity considerations. Financial services firms continuously remain in
touch with their customers, so that they can design products which can cater
to the specific needs of their customers. The providers of financial services
constantly carry out market surveys, so they can offer new products much
ahead of need and impending legislation. Newer technologies are being used
to introduce innovative, customer friendly products and services which
clearly indicate that the concentration of the providers of financial services
is on generating firm/customer specific services.
2. Intangibility: In a highly competitive global environment brand image is
very crucial. Unless the financial institutions providing financial products
and services have good image, enjoying the confidence of their clients, they
may not be successful. Thus institutions have to focus on the quality and
innovativeness of their services to build up their credibility.
3. Concomitant: Production of financial services and supply of these services
have to be concomitant. Both these functions i.e. production of new and
innovative financial services and supplying of these services are to be
performed simultaneously.
4. Tendency to Perish: Unlike any other service, financial services do tend to
perish and hence cannot be stored. They have to be supplied as required by
the customers. Hence financial institutions have to ensure a proper
synchronization of demand and supply.
6
5. People based services: Marketing of financial services has to be people Financial
Services: An
intensive and hence it‟s subjected to variability of performance or quality of
Introduction
service. The personnel in financial services organisation need to be selected
on the basis of their suitability and trained properly, so that they can perform
their activities efficiently and effectively.
6. Market Dynamics: The market dynamics depends to a great extent, on

socioeconomic changes such as disposable income, standard of living and
educational changes related to the various classes of customers. Therefore
financial services have to be constantly redefined and refined taking into
consideration the market dynamics. The institutions providing financial
services, while evolving new services could be proactive in visualising in
advance what the market wants, or being reactive to the needs and wants of
their customers

1. Financial services are usually ____________focused.
a. Customer
b. Service provider
2. Production of financial services and supply of these services have to be
____________.
a. unrelated
b. Concomitant
1.4 Evolution of Financial Services in India

The financial services industry in India is in the process of attaining full
bloom. To reach the present position, it has passed through a number of stages as
mentioned below:
The Stage of Infancy:

This existed between 1960 and 1980 and covered in its gamut merchant
banking insurance and leasing services.
Merchant Banking Services were unknown until the early 1960s. The policy
makers and researchers had lack of clarity about the term “merchant bankers”.
7
Financial Service, Someone defined them as institutions which were acting; neither as merchants nor
Consumer
as bankers. However the term was used as an umbrella function, providing a wide
Behaviour and
Banking Products range of services, starting from project appraisal to arranging funds from bankers.
The merchant bankers are expected to identify projects, prepare feasibility reports,
develop detailed project reports, and in doing so conduct marketing, managerial,
financial, and technical analyses. Having done this, they are approached to garner
project finance, and in order to do this resolve the problem‟s of capital structuring.
They are asked to act as abridge between the capital market and the fund-seeking
institutions. They underwrite the issues and become subject to developments in
case such issues are not fully subscribed. They assist the enterprises in getting
listed on the stock exchanges. They offer legal advice on registration of
companies and removing legal tangles. They provide advice and help in mergers
and acquisitions. They give technical advice on leveraged - buyouts and
takeovers. Recently they have added the syndication activity in their portfolio,
wherein they form a syndicate or become a part of it to raise project finance. They
arrange working capital loans and manage the risk element present in the form of
general risk which is covered by the insurance policies of the General Insurance
Company.
Investment companies such as the Unit Trust of India, the life insurance
business initiated by the Life Insurance Corporation of India, and the general
insurance business, also made their mark in the first stage of financial services.
During this period, the Life Insurance Corporation of India has grown as a public
monopoly. Prior to its setting up, the private sector was operating the life
insurance business.The general insurance business was nationalised in the early
1970s. A holding company was set up with four subsidiaries to handle the general
insurance business in the public sector. Suggestions were given very frequently to
privatise the insurance business, as in no way could the insurance business be
considered as a national monopoly.
Leasing made its mark in the closing years of the 1970s. Initially such
companies were engaged in equipment lease financing. Later, they undertook
leasing operations of different kinds, including financial, operating and wet
leasing. During this period the number of leasing firms has shot up to a high of
400. The reorganisation of such firms due to their non-viability later led to a
contraction in their numbers.
Modern Financial Services:

Financial services have entered the second rung during the later part of the
1980s. Over the counter services, share transfers, pledging of shares, mutual
8
funds, factoring, discounting, venture capital, and credit rating, constitute some of Financial
Services: An
the modern financial services. In the West, these services emerged on the scene
Introduction
about 100 years back. The mutual fund business is the major provider of funds to
industry anywhere in the developed countries. The mutual funds there have been
innovative in terms of schemes.They have been giving stable rate of return. Their
asset and liability management is transparent. The small investor is secure in their
hands. Their business policies are such that they create value for their
investors.Investorsare not victimised by shifts in valuation policies, and efforts are
made to harmonise the net asset valuation. The mutual funds have their own code
of conduct.
Credit rating is another important financial service which made its mark in
India in the mid-1980s. Credit rating boosts investor‟ confidence in capital market
operations and prevents fly -by-night companies from making forays in the capital
market. There was one credit rating company initially and we have ended up with
eight finally. In terms of spread of the credit rating function, initially only debt
instruments issues were covered. However later, instruments such as commercial
papers and fixed deposits were brought under the purview of credit rating.
Incidentally, there is a sovereign credit rating assigned by credit rating firms for
the country. The Discount and Finance House of India Limited and a number of
factoring institutions, such as State Bank of India Factors and Canbank Factors
Ltd. Venture capital funds made their appearance in the late 1980s, Most of these
firms have been operating in the public sector.
The Third Flush

The third flush in financial services includes the setting up of new
institutions, and paving the way innovating new instruments and also their
flotation.
The setting up of depositories has brought the India financial services

industry in line with the global financial services industry. It has promoted the
concept of paperless trading and resulted into dematerialisation of shares and
bonds. The stock-lending scheme approved by the Central Government in 1997-
98 budget and the setting up of a separate corporation to deal with the trading of
the “Gilts” are innovative measures. The steps initiated to popularise book
building in order to help both the investorsand fund users. The online trading
interface by the Bombay Stock Exchange, the Delhi Stock Exchange, and
computerisation of the National Stock Exchange, is acting as the fulcrum for the
development of financial services arid is another major advancement in the field
of financial services. This has given a fillip to paperless trading, save the investors
9
Financial Service, from the onslaught of jobbers and brokers, and reduces tax evasion. The
Consumer
guidelines from the Securities and Exchange Board of India in relation to the
Behaviour and
Banking Products capital adequacy ratio for the merchant bankers and their categorisation into
different groups are a major advancement.
This will ensure investor protection and create a differentiation in the
market place. The creation of the Securities and Exchange Board of India itself
can be hailed as a path-breaking development in terms of regulation, growth, and
development of financial services. The ongoing efforts to revamp the Companies
Act, Income-Tax Act, etc. would also lead to the deliverance of effective financial
services. The guidelines about permitting foreign financial institutions to operate
in the Indian capital market will do a two-way good to the country In terms of
enabling the foreign investors to plug into the Indian capital market, and the
Indian investors and financial institutions to study the modus operandi of such
firms.
Public enterprise disinvestments are sure to prop up the state-of-art in the
realm of financial services. It would provide a fillip to the presence of foreign
financial firms in India, as well as result into creating pressure on the Indian
financial firms to master the disinvestment business. The financial services firms
would have to gain expertise in valuation, financial and legal restructuring, and
taking the public sector firms to the commercial and capital markets.
During this period financial services firms scouted for funds abroad to
finance the Indian corporate sector. They have approached the European capital
markets, the most prominent of which belong to the UK and Luxembourg. These
portfolio investments have flowed to India through the GDR route. It requires an
understanding of raising funds abroad and also working together with world level
financial services institutions, such as Lehman Brothers, Arthur Anderson, and
Goldman Sachs, to mention a few.
With the passage of the Insurance Regulatory and Development Authority
(IRDA) Act, 1999, the Insurance Regulatory and Development Authority was set
up with statutory powers to function as the regulator for the insurance sector in
India. This act has opened the doors for private players including foreign equity
participation up to a prescribed limit of paid up capital. It has come out with
regulations on various aspects of insurance business such as licensing of agents,
solvency margin for insurers, accounting norms, investment norms and
registration of Indian Insurance Companies. RBI allowed banks to enter into the
insurance business by issuing a notification specifying insurance as a permissible
10
form of business under section 6(1) (o) of the Banking Regulation Act, 1949. Financial
Services: An
Thus providing banks another avenue for generating fee based income.
Introduction
New Financial Instruments:
The new financial instruments are both being talked about and are also
being used. The critical factors governing the chemistry of the issuance of the new
financial instruments relate to maturity, risk, and interest rate. Based on these, in
Germany some 400 financial instruments have been innovated. In India, both the
market players, such as mutual funds, banks, brokers, stock markets, and the
regulators, including the Finance Ministry, the Reserve Bank of Indiaand the
regulators, and the Securities and Exchange Board of India, have to make more
efforts to create new funds and new instruments. One may like to mention in this
case the very non cordial welcome given to securitisation.
The housing finance companies, automobile manufacturers, and
development and commercial banks can use this method greatly to their
advantage. However, only a few companies have devoted their mind to the
application of this method. Both the market players and the regulators have for
very long been engaged in the idea of setting up the derivatives market in India.
When the Indian economy is trying to become global in nature, the fluctuations in
the rate of foreign exchange would be a routine matter, and hence there would be
a need for currency, interest, and commodity-based derivatives. Derivatives have
now become increasingly important in the field of finance.Futures and options are
now traded on many exchanges. Derivative instruments such as Forward
Contracts, Swaps and many others are regularly traded both in the exchanges and
in the over the counter market.

1. Merchant Banking Services were unknown until the early __________.
a. 1960s
b. 1950s
2. Financial services have entered the second rung during the later part of
the___________.
a. 1960s
b. 1980s
11
Financial Service,
Consumer
Behaviour and 3. Credit rating is another important financial service which made its mark in
Banking Products India in the mid-___________.
a. 1980s
b. 1970s
1.5 Significance of Financial Services

The financial services sector plays a very crucial and significant role in a
country‟s economy.
Growth and Development:

The financial sector now represents a significant proportion of the total
economic activity in most economies. In most developed economies, the financial
services sector has grown rapidly over the post-war period. In India, this sector
has come up gradually after independence. However, after the liberalisation
process initiated by the government, this sector saw a considerable growth.
When one examines the structure of most economies over the last few
decades, the most striking feature is the growth of the services sector as compared
to the manufacturing sector. This is well reflected in the employment statistics for
the respective countries. Employment is just one of the measures of significance
of each group of activities within the economy as a whole.
In UK, at the beginning of 1970‟s the employment in services sector was
53% against 36% in the manufacturing sector, but towards the beginning of
1990‟s it has risen to 73% whereas the employment in the manufacturing sector
has gone down to 20%. Banking/Insurance/Finance, in the UK at the beginning of
1970‟s represented around 11% of total employment within the services sector
which has raised to over 17% by the 1990‟s.
In Indiaat the beginning of the 1970‟s the employment in services sector
was 6% against 9.4% in the manufacturing sector, but towards the beginning of
the 1990‟s the employment in the services sector has risen to 7.3% whereas in the
manufacturing sector it was only 10%. Banking/ Insurance in Indiaat the
beginning of 1970‟s represented 0.3% of the employment within services sector
which has raised to 0.6% by the 1990‟s.
It may be true that technology had a stronger effect on the manufacturing
sector than on the services sector during the earlier days. But it‟s equally true that
12
the market for manufactured goods has tended towards saturation in the post- Financial
Services: An
industrial economies whereas services have experienced acceleration in demand
Introduction
for their products as income and wealth grew. Another reason for this change, in
developed economies like UK could be due to shifting of the manufacturing of
more standard goods from high wage economies towards developing economies
with lower labour cost. In developing economies like India, however there is an
increase in both the sectors, but it‟s quite evident that the rate of growth is more in
the services sector. Thus, the rate of growth of the size of the financial services
sector as a proportion of the overall economy is significant.
Role of Financial Intermediation

The financial services sector is made up of financial institutions such as
banks, insurance companies, trusts, loan companies, credit unions, securities
dealers and exchanges, etc. which act as financial intermediaries. Financial
institutions carry out the process of financial intermediations by acting as a
channel through which the financial surpluses of some groups in society (e.g.
households) are collected and then distributed to other groups in society (e.g.
firms) which has a deficit.
It is well known that banks perform the role of taking in deposits from
customersand lending it to other customers. Similarly, the insurance companies,
particularly those involved in long-term life assurance business, collect premiums
from policy holders and invest these surpluses in industrial/commercial activity
viathe stock market.
The growing size of the financial activity relative to the overall economic
activity in a closely integrated world has implied that disruptions in the financial
markets in any economy can engender contagion which can spread rapidly and
have adverse economic ramifications. So the financial intermediations role played
by the financial services sector is crucially important in mobilizing savings for
investment purposes.
Unique Features:
Financial services are unique in themselvesbut they do share many of the
features of the products of other services. Financial services are intangible and
perishable in nature. The institution providing these services may succeed only if
they have a good image and confidence of the clients, and at the same time
ensuring that demand and supply go hand-in-hand. The focus of these institutions
has to be continuously on the quality and innovativeness of their services in order
to gain the trust of their client‟s thereby building their credibility.
13
Financial Service, The products of the financial services sector are usually long-term in nature
Consumer
and hence there is a great deal of uncertainty in the mind of the customer as to
Behaviour and
Banking Products whether, he had made a right choice. Owing to the nature of these products, the
consumer needs to seek external advice. However, much of this advice comes
from the institution itself, mostly through their agents. They usually provide
advice on product suitability, quality and price either directly or viaan
agent/broker that is paid commission by the sellers of the services.
The functions of producing and supplying financial services have to be

performed simultaneously for which there has to be a perfect understanding
between the financial services firmsand their clients. Even the marketing of these
services, needs to have, not only people-orientation, but also process-orientation.
Financial services are usually customer-oriented. Financial services institutions
study the needs of the customers in detail to suggest financial strategies which
give due regard to costs, liquidity and maturity considerations. The providers of
financial services remain in constant touch with the market offering new products
much ahead of need impending legislation. Financial services have to be
constantly redefined and refined on the basis of socio-economic changes such as
disposable income, standard of living and educational changes related to the
various classes of customers. Financial services institutions while evolving new
services could be proactive in visualising in advance what the markets want, or
reactive to the needs and wants of customers.
Creation of Credit:
The financial services sector particularly the banking sector is very
important to the operation of the economy and to the conduct of the government
economic policy. The major liability of banks is the customer‟s deposit, which is a
significant element of the country‟s money supply. It is through their lending
activities, that banks are able to create new bank deposits and hence the country‟s
money supply.
Let us understand what this means with the help of a simple example. The
assumption that we are making here is that cash advances are always repaid in the
banking system as fresh deposits. Suppose Mr. X, who is a customer of abank,
deposits Rs. 1000 with the bank. The bank in turn lends Rs. 500 by way of cash
advance to customer Y. The customer Y spends this cash, i.e. Rs. 500, with
customer Z, who in turn deposits it with the banking system. Further, suppose that
the bank lends you Rs. 1000 by making a loan, and crediting your current account.
You, in turn, write a cheque on your account in favour of IGNOU, who deposits
the cheque in its account. However, the net effect of lending is that there is no
14
change on the overall banking system balance sheet, but the banking system now Financial
Services: An
owes IGNOU Rs. 1000 rather than you. From this example, it could be seen that
Introduction
the banking system has thus increased its deposits and hence the money supply to
25% of its initial deposit.
This process of deposit creation continues indefinitely, but in practice, the
bank needs to retain a reasonable percentage of its deposits in cash or liquid
assets. We may not go into these details here, but the point that needs to be
emphasized upon is that the banks through their lending activities are able to
create new bank deposits and hence increase the country‟s money supply

1. Banks perform the role of taking in deposits from customersand lending it to
other___________.
a. customers
b. banks
2. Financial services are ___________and perishable in nature.

a. Tangible
b.Intangible
3. Financial services are usually ___________.
a. customer-oriented
b. government oriented
4. The ____________sector is very important to the operation of the economy

and to the conduct of the government economic policy.
a. Insurance
b. banking
1.6 Types of Financial Services

Although there is no such scheme of classification of financial services
which may satisfy everyone or which is able to cover all the subtleties of this
industry. However, in order to understand the functioning of the financial services
industry in abetter perspective we have tried to organize our discussion of the
15
Financial Service, financial services industry by classifying the financial services under three broad
Consumer
categories, i.e. Fee Based Services, Fund Based Services and Insurance Services.
Behaviour and
Banking Products Fee Based Services:
Fee based financial services are those services wherein financial institutions
operate in specialised fields to earn a substantial income by way of fees, dividend,
commission, discount and brokerage on operations. The major fee based financial
services are as follow:
a) Issue Management
b) Corporate Advisory Services
c) Credit Rating
d) Mutual Funds
e) Asset Securitisation
a) Issue Management
Issue management refers to management of securities offerings of the
corporate sector to public and existing shareholders on right basis. In simple
words Issue Management refers to managing issues of corporate securities like
equity shares, preference shares and debentures or bonds. Issue Managers in
capital market parlance are know as Merchant Bankers or Lead Managers,
although the term Merchant Banking covers a wide range of services such as
project counselling, portfolio management, investment counselling, mergers and
acquisitions, etc. Issue Management constitutes perhaps the most important and
sizeable function within it, so Much so, that very often the terms Merchant
Banking and Issue Management are almost used synonymously.
Issue management involves marketing of capital issues, of existing
companies including rights issues and dilution of shares by letter of offer, and
merchant bankers give advice on decisions concerning size and timing of the
public issue in the light of the market conditions. They also provide assistance to
the corporate units on the designing of a sound structure acceptable to the
financial institutions and determining the quantum and terms of the public issues
of different forms of securities. Merchant Bankers also advise the issuing
company whether to go for a fresh issue, additional issue, bonus issue, right issue
or a combination of these. The various aspects of issue management are dealt.
16
b) Corporate Advisory Services Financial
Services: An
Corporate Advisory Services are needed to ensure that a corporate enterprise Introduction
runs efficiently at its maximum potential through effective management of
financial and other resources. The services which come in the ambit of corporate
advisory services, for abusiness enterprise, include services such as providing
guidance in areas of diversification based on the Government‟s economic and
licensing policies, appraising product lines and analyzing their growth and
profitability, consultancy for rehabilitation of sick industrial units, advice on
capital structuring and restructuring, etc. These services are usually provided by
merchant bankers.
Corporate advisory services constitute an important component of the
portfolio of the activities of merchant bankers. It covers any matter worth the
benefit for a corporate unit involving financial aspects, governmental regulations,
policy changes and business environmental reshuffles, etc. Thus, the scope of the
corporate advisory services is very vast ranging from managerial economics,
investment and financial management to corporate laws and the related legal
aspects. We have discussed at length most of the corporate advisory services.
c) Credit Rating
The origin of this service lies in the financial crisis of the US in 1837. The
first mercantile credit rating agency was set up in New York in 1841 to rate the
ability of the merchants to pay financial obligations. In India, credit rating came in
much later. The first credit rating agency viz. the Credit Rating and Information
Services of India Ltd. (CRISIL) was set up in 1987, followed by ICRA in 1994.
The term „Credit Rating‟ comprises of two words „credit‟ and „rating‟.
Credit is trust in a person‟s ability and intention to pay or reputation of solvency
and honesty. Rating means estimating worth or value of, or to assign value to
classifying a person‟s position with reference to a particular subject matter. Rating
is usually expressed in alphabetical symbols. Thus, Credit Rating can be defined
as an expression of an opinion through symbols about credit quality of the issue of
securities or company with reference to a particular instrument.
In India, the scope of credit rating is limited to debt instruments, i.e.

debentures, bonds, fixed deposits, commercial paper, etc. However, in developed
countries equity shares are also rated. Credit rating is thus an important device in
the hands of investors to analyse the instruments floated by issuers. To know more
about the typology of credit rating, the credit rating process.
17
Financial Service, d) Mutual Funds
Consumer
Behaviour and Mutual fund is a trust that pools the savings of a number of investors who
Banking Products share a common goal. Thus, it offers a common man an opportunity to invest in
adiversified, professionally managed basket of securities at a relatively low cost.
In other words, mutual funds invest the money collected from the investors, with
the help of professional managers, in capital market instruments, such as shares,
debenture and other securities.
Mutual fund is usually a long-term investment with a certain level of risk.

Of course, the open-ended feature of mutual funds ensures that you get money
whenever you want at a short notice, i.e. the scheme on behalf of the unit holders
invests in securities, collects the interest payments and dividends from these
securities and sells them when you need money. At the time of initial public issue
investors can invest in close-ended funds, but afterwards they can either buy or
sell the units of the scheme on the stock exchanges where they are listed. In some
schemes there is an option of selling back the units to the mutual fund through
periodic repurchase at NAV related prices.
As per SEBI Regulations at least one of the two exit routes is to be provided
to the investor. The tax-saving Equity Linked Saving Schemes (ELSS) and
pension schemes give added benefit of tax rebate.
e) Asset Securitisation
Asset Securitisation is a process whereby loans and other receivables are
packaged, underwritten and sold in the form of asset-backed securities. The assets
which can be securitised include receivables from the government, trade related
receivables, credit card receivables, automobile loans, real estate loans, housing
loans etc. Securitisation can be defined as the process which takes place when a
lending institution‟s assets are removed in one way or the other from the balance
sheet of that lending institution and are funded instead by investors who purchase
a negotiable instrument evidencing this indebtedness without recourse or with
limited recourse to the original lender.
Under Asset Securitisation a financial institution pools and packages
individual loans and receivables, creates securities against them, gets them rated
and sells them to the investors at large through public offerings or private
placements (Trustee). The asset cash flow is remitted to the trustee who in turn
pays scheduled interest and principal payment to the investors. Thus,
“Securitisation is a synthetic technique of converting assets into securities,
securities into liquidity, liquidity into assets and assets into securities on an
18
ongoing basis” thereby providing flexibility of yield, pricing pattern, size risks Financial
Services: An
and marketability of instruments used to the advantage of both borrowers and Introduction
lenders/investors.
Fund Based Services:

In fund-based services the firm raises funds through equity, debt, and
deposits and invests these funds in securities or lends to those who are in need of
capital. We will be discussing here some of these fund-based services such as:
a) Leasing and Hire Purchase

b) Housing Finance
c) Credit Cards
d) Venture Capital
e) Factoring
f) Forfaiting
g) Bill Discounting
a) Leasing and Hire Purchase

The growth of leasing industry cans be traced to the formation of First
Leasing Company of India in 1973 by Mr. Farouk Irani and remained the only
company in the country till 1980. By 1981, a few more companies, i.e. 20th
Century Finance Corporation, Shetty Investment and Finance, Jaybharat Credit
and Investment, Sundaram Finance, etc. joined the leasing game. During the late
1982, numerous financial institutions and commercial banks started joining in.
Since then the industry leapt into prominence and today we find it as a flourishing
business.
Leasing refers to a contract under which the owner of an asset allows
another person or party to use the assets in return for some rent. The owner of the
asset is referred to as the „lessor‟ and the person using the asset in return for a
payment is referred to as the „lessee‟. However, the lessee is responsible for the
maintenance of the asset. In leasing the cost of capital is usually recovered from
multiple serial rentals and the final sale of the asset. All financial leases virtually
fall under one of the four types of lease financing viz. capital lease, operating
lease, sale and lease back and leveraged lease.
According to the International Finance Corporation (IFC) hire purchase is a
hybrid instrument that provides an alternative to bank financing for purchasing an
asset. A hire purchase involves, in essence, the purchase of an asset on the
19
Financial Service, understanding that the purchaser (called the hirer) will pay in equal periodic
Consumer
instalments spread over a length of time. This service is usually used for financing
Behaviour and
Banking Products consumer durables. Now-a-days it is more popular with automobile financing
business. Leasing and hire purchase have emerged as a supplementary source of
intermediate to long-term finance. These services are provided mainly by non-
banking financial companies, financial institutions and other organisations.
b) Housing Finance
Housing is one of the basic needs of the society. It is closely linked with the
process of overall socio-economic development of a country. This sector remained
neglected for quite some time. It was only in the Seventh and Eighth Five-Year
Plans that it was paid heed to. However, today it is a growing industry with the
banking sector evincing keen interest, which in turn could have been fuelled by
the lack of preferable alternative avenues for investment.
Presently, funds required per dwelling shelter are so high that the
individual‟s saving is not adequate to meet the expenditure of house building. As
a result, there is a great demand for external housing finance. To take advantage
of this situation, the lending institutions are competing with each other for a
market share by offering very attractive terms to the customers in the form of
lower rate of interest, liberal collateral requirements, longer payment period etc.
These institutions have also introduced the floating rate products besides the fixed
rate ones, with the option made available to the borrower for conversion against a
nominal payment. The other tactics of market acquisition are speedier processing
and disbursement; efficient advisory services, waiver or reductions in associated
up front fees etc. We have also discussed therein the housing finance schemes
offered by various housing finance institutions.
c) Credit Cards
Credit cards generally known as plastic money, is widely used by consumers
all around the world. The convenience and safety factors add value to these cards.
The changes in the consumer behaviour led to the growth of credit cards. It is a
document that can be used for purchase of all kinds of goods and services in the
world. Credit card identifies its owner as one who is entitled to purchase things
without cash, purchase services without money and be eligible to get credit from a
number of establishments.
The card issuer issues credit cards depending on the credibility of the
customers. The card issuer also enters into a tie-up with merchant establishments
which are engaged in various fields of business activities. The issuer for its
20
convenience and for proper scrutiny sets up a credit limit for its card holders and a Financial
Services: An
floor limit for its merchant establishments The credit card offers the individual an
Introduction
opportunity to buy rail/air tickets, makes purchases from shops and stay at hotels
when they need.
Credit card is a card which enables an individual to purchase certain
products/ services without paying immediately. He needs to only present the
credit card at the cash counter and has to sign some forms. In short he can make
purchase against credit card without making immediate cash payment. Therefore
credit cards can be considered as a good substitute for cash and cheques. In order
to know the details of this financial service, you may go through the unit on credit
cards.
d) Venture Capital
The concept of Venture Capital was introduced in Indiaby the all India
Financial Institutions with the inauguration of Risk Capital Foundation (RCF)
sponsored by the Industrial Finance Corporation of India (IFCI) to supplement
promoters‟ equity, with a view to encouraging technologistsand professionals to
promote new industries. Venture capital implies long-term investment generally in
high risk industrial projects with high reward possibilities. This investment may
be at any stage of implementation of the project between start-up and
commencement of commercial production. Thus, Venture Capital is defined as the
organised financing of relatively new enterprises to achieve substantial capital
gains. A high level of risk is implied by the term „venture capital‟ and is implicit
in this type of investment.
e) Factoring
Factoring service caters to the requirements of the Indian Industries in the
changed business environment.Its origin can be traced back to the fifteenth
century. England and France used the services of specialised agents for exporting
goods to their colonies. These agents later came to be known as factoring
organisations.
Factoring is an arrangement between the financial institution or banks
(factor) and the business concern (the supplier) which provides goods or services
to its customers on credit, wherein the factor buys out clients (suppliers) book
debts.
There is always a difficulty of foreign languages, customs and laws, fear of
distance, ocean barriers etc. which inhibit entrepreneurs from venturing into
export business, consequently affecting the country‟s export. Factoring is a
21
Financial Service, service that relieves the exporters from the fear of credit losses enabling them to
Consumer
offer open account terms to overseas customers. The factor takes over the
Behaviour and
Banking Products administration of client‟s sales ledger, follow-up with debtors and evaluation of
credit risks. The fee charged for these services by the factor are usually a
percentage of the value of the receivables factored.
In 1990, RBI issued guidelines for factoring services providing it a statutory

framework. Banks are permitted to invest in factoring companies to a certain limit
but they cannot act as promoters of such companies. Investment of abank in the
shares of factoring companies including its factoring subsidiary cannot exceed in
the aggregate 10% of the paid-up capital and reserve of the bank.
f) Forfeiting
Forfeiting is a financial tool for exporters, enabling them to convert their
„credit sales‟ to „cash sales‟ by discounting their receivables with an agency called
forfaitor. Forfeiting denotes the purchase of trade bills or promissory notes by
abank or financial institution without recourse to seller. For exporters it is a „Risk
Management‟ tool as well because by selling the export receivables to the forfeiter
the exporter is relieved of the inherent political and commercial risks involved in
international trade. Thus, all risks and collection problems are fully the
purchaser‟s (forfeiter‟s) responsibility that pays cash to seller after discounting the
notes or bills. It is backed by bank guarantee. In India, the Export Import Bank of
India (EXIM Bank) facilitates this service with an overseas forfeiter agency for
which they charge a commission.
g) Bill Discounting
Bill Discounting, just as factoring and forfeiting, is short-term trade finance,
also known as acceptance credit where one party accepts the liability of trade
towards third party. Bill discounting is used as a medium of financing the current
trade and is not used for financing capital purposes. Trade bills are negotiable
money market instruments and these are bought by the intermediaries at a
discount before their maturity. Discount houses act as intermediary‟s between the
central bank and the banking system, providing liquidity and ensuring efficient
operations of money market. Discount houses play an important role throughout
the universe in the whole system of banking.
Insurance Services:
Insurance, as we all know, is the most preferable method of handling risks
and hence is also called as „risk cover‟. Risk is nothing but an uncertainty of
22
occurrence of a loss viz. loss of lives, accidents causing permanent disability, loss Financial
Services: An
of houses due to floods etc.
Introduction
Insurance is a contract between two parties – the insurer (the insurance
company) and the insured (the person or entity seeking the cover) – wherein the
insurer agrees to pay the insured for financial losses out of any unforeseen events
in return for a regular payment of “premium”. In insurance the actual loss is
substituted by average loss by spreading the losses of unfortunate few over the
entire group. This is a financial service wherein the insured is re-established to his
or her approximate financial position prior to the occurrence of loss. Thus,
insurance provides a unique sense of security that no other form of investment
provides.
Insurance is an attractive investment option as well. These products yield

more compared to regular investment options, and this is besides the added
incentives offered by insurers. It serves as an excellent tax saving mechanism too.
An individual is entitled to a rebate of 20% on the annual premium payable on
his/her life and life of his/her children or adult children as per section 88 of the
Income Tax Act 1961. In order to nationalise the life assurance business in India,
the government had set up the Life Insurance Corporation of India in 1956. Since
then it remained the monopoly of the public sector, until 2001 when private
players were allowed to operate in this sector. However, before opening up this
sector for the private players, an autonomous insurance regulator was set up in
2000. The „Insurance Regulatory and Development Authority‟ has extensive
powers to oversee the insurance business and regulate it in a manner so as to
safeguard the interest of the insured. Block V of this course is completely devoted
to this sector wherein life insurance, non-life insurance and the broking services
are given in detail

1. ___________refers to management of securities offerings of the corporate
sector to public and existing shareholders on right basis.
a. Issue management
b. Foreign management
2. ___________in capital market parlance is known as Merchant Bankers.
a. Bank managers
b. Issue Managers
23
Financial Service, 3. Issue management involves marketing of ____________issues.
Consumer
Behaviour and a. Capital
Banking Products
b. Investment
4. The origin of this service lies in the financial crisis of the US in __________.
a. 1857
b. 1837
1.7 Impact of Technology

The financial services industry both nationally and internationally is one of
the most dynamic and rapidly growing sectors of the economy. It is critically
significant to health of the global economy as well as that of individual businesses
and consumers. The overall percentage of employment in the financial services
has increased. These developments are cited as a part of the „information
revolution‟. Some of the effects of the information technology on the financial
services sector are given below.
From the Service Providers Point of View-

Cost Saving: Information technology has contributed to the containment of
the cost associated with the management of information and the execution of
transactions. A single transaction costs around Rs.50 if conducted through
abranch, but if done through ATM this cost comes to about Rs.15. The same
transaction if conducted electronically through the internet, costs only Rs.4 Thus
we can see that the cost incurred by the financial services firms can be reduced to
a great extent by the efficient use of technology, thereby enhancing its
profitability. These cost savings can be passed on to the customers to gain a
competitive advantage.
One of the major costs of the financial services firms is the labour-cost. The
computerisation of bank-branches has increased the efficiency of the functioning
of the banks. The networking technology has helped the banks to introduce the
single window system. It means that a single person is able to handle the work
which was earlier being done by a number of persons. In other words technology
has reduced the labour requirements of financial services firms, drastically
reducing the cost incurred by these firms on labour.
24
Product Development: In the financial services sector technological Financial
developments have been of great aid in enhancing the existing services, creating Services: An
Introduction
new services and also bringing about product differentiation. The traditional
service of cash payment has been enhanced by providing an alternative i.e. the
debit cards enabling the current account bank customer to make his payments for
goods and services without using cheque thereby removing the limitation on
transaction size. In UK the development of on-line and touch-screen share-dealing
services have simplified the procedures for buying and selling shares.
If observed closely we find that most of the services provided by the
financial services sector are not new services but rather they are the new ways of
offering traditional services. For example, Internet banking can just be thought of
as an alternative way of providing traditional account-based services to retail bank
customers. Similarly, the Automated Teller Machines (ATMs) which most of you
must be familiar with is simply an alternative way of obtaining cash or making
payment. However, the use of computer, telecommunication and information
technology and the drifting from conventional bank branch network is what makes
these products new.
ATMs are now being used by banks for dispensing railway tickets, movie
tickets etc. More value added services could be provided through ATMs thus
reducing the fixed and operating costs. Information technology has thus
contributed to product differentiation to a great extent, in the financial services
sector.
Marketing Tool: Marketing of financial services is to be people-intensive

and therefore subject to variability of performance or quality of service. The
database technology enables the financial institution, especially banks to access
the data collected in connection with one of its services to identify the potential
customers for its other services.
Most of the commercial banks, private banks, foreign banks, financial
institutions etc who are members of the Indian Financial Network (INFINET) a
wide area satellite based network using VSAT technology, have a wider
geographical coverage, enabling these banks in tapping new markets and also for
providing value added services to the existing customers. Web gives the service
providers an ability to serve tens of thousands of customers each day.
Delivery channel: Computers were devised with a focus mainly on
advantage of time and place, to the customers. With continuing advantages of
wirelers technology flexibility in delivery channel device, is being offered by
banks. The successful adoption of the wireless technology has helped banks to
25
Financial Service, provide anytime, anywhere andany device banking. For Ex the international
Consumer
network, SWIFT is being utilized for the speedy transfer of funds across
Behaviour and
Banking Products international destinations.
Decision-making Aid: Technology is an aid in the hands of decision

makers and not a replacement for managers. Artificial intelligence systems such
as the Expert systems are being used for making decisions of a repetitive nature.
Since this system uses a common set of decision rules, the decision-making is
more consistent across the organisation, unlike human decision makers. The
experience and expertise of the managers cannot be replaced by the artificial
intelligence systems but definitely it can be used as a supplement to enhance the
quality of their decisions.
Globalisation: The information technology revolution has brought about a

fundamental transformation, and, no other sector has been affected by advances in
technology as much as banking and finance. It has become the most important
factor for dealing with the intensifying competition and the rapid proliferation of
financial innovations.The surge in globalisation of finance has also gained
momentum with the technological advancements which have effectively
overcome the national borders.
Widespread use of internet banking has widened frontiers of global banking,

and it is now possible to market financial products and services on a global basis.
From Customers Point of View

Accessibility: The computer as well as developments in the information and
communication technology has provided an easy access to information. The web
helps the customers to access much better and completes information about
various products and services being provided by different financial institutions.
The customers find it easy to compare the services and rates of similar kind
of services offered by different institutions and then take a decision accordingly.
For Ex. the information about the different cards and the services as well as
charges that go along with it, offered by various banks can now be easily
accessed.
Convenience: The customersare no longer required to go to the banks for

withdrawal of cash or to procure any information related to his/her account. The
Automated Teller Machines (ATMs) can be used by the customer to withdraw
cash anytime, anywhere across the country. It is also possible for them to get
funds at home by using internet. It has now become convenient for customers to
carry on trading online through their depository participants. Call Centres opened
26
by financial institutions have enhanced the convenience of customers, wherein Financial
Services: An
they can get assistance, as well as information, quickly and accurately.
Introduction
Speedier Settlement of Transactions: The communication and information
technology has no doubt increased the speed with which the transactions can now
be made. It‟s now possible to settle bill payments electronically. The depositories
do facilitate quick settlement of securities electronically. An internet enabled
inward remittance facility for NRIs is also available. NRIs can send money
anytime up to a specific limit to the recipient‟s account, where it‟s deposited in
rupees at the prevailing rate of exchange through the RTGS (Real Time Gross
Settlement). This service not only saves time but is also cheaper.

1. The ____________services industry both nationally and internationally is
one of the most dynamic and rapidly growing sectors of the economy.
a. Financial
b. Insurance
2. The overall percentage of ____________in the financial services have
increased.
a. growth
b. Employment
3. _____________has contributed to the containment of the cost associated
with the management of information and the execution of transactions.
a. Information technology
b. Technology
4. One of the major costs of the financial services firms is the __________.
a. money-cost
b. labour-cost
27
Financial Service,
Consumer
1.8 Challenges before the Financial Services Sector
Behaviour and
Banking Products The financial sector now operates in a more competitive environment than
before and intermediates relatively large volume of international financial flows.
Technology has thrown new challenges in the financial services sector and
new issues have started cropping up which are going to pose certain problems in
the near future.
 In an increasingly competitive environment between banks/insurance

companies and the banks, insurance companies and other players of the
financial system, it is necessary for these institutions to equip themselves
with the right organisational structure. These firms need to properly revamp
their organisational structure so that they are able to bear the stress and
strains of growth, as well as face the challenge arising from the rapidly
changing scenario. The structure should be a judicious blending of the needs
for greater delegation of power, decentralisation of control and constant
monitoring of performance. Designing of an appropriate organisational
structure is abig challenge.
 The employees of the financial services sector (particularly those employed

in the public sector banks and insurance companies) need to be trained in
operating computers. It‟s also necessary that they should be made to
appreciate the efficient use of computer in accounting transactions andalso
for delivering better services to their customers. Its not only computers,
training and development of the staff on the changing systems (internet,
electronic commerce) and procedures as well as developing the appropriate
mindsets have become absolute imperatives for the financial sector. With
the liberalisation of the economy and emergence of new private participants,
the acquisition and development of new and improved skills has become a
pre requisite for their survival and growth. Thus, the need to train and
retrain staff on a continuous basis given the fast paced changes in the IT
sector is a major challenge confronting the financial services sector.
 As most of you must be aware that India is one of the signatories of

Financial Services Agreement (FSA) of 1997 which gives the Indian
financial sector including banks an opportunity to expand their business on a
quid pro quo basis. Globalisation of finance has already gained momentum
with the technological advancements breaking national borders in the
financial services sector. In future globalisation would spread further on
account of the likely opening up of the financial services sector under WTO.
28
As expected, a greater number of international players would be entering the Financial
Services: An
Indian financial system the challenge before the financial institutions is to
Introduction
go global by searching new markets, customers and profits.
 Financial institutions will have to face competition not only at the

international level but also at the domestic level and will have to compete
with foreign participants operating in India. Most of the Indian firms lack in
size, even India‟s largest bank, SBI is not even a 10th in size of the 9th
largest bank Sumitomo Mitsui which has assets of $950 billion against
SBI‟s assets of $91 billion. Size is increasingly becoming important for
global participants as it is crucial to improved efficiency. Effective and
efficient Intra-firm/Inter-firm consolidation (restructuring) is a major
challenge before most of these institutions.
 India‟s largest financial institution ICICI has already moved a step ahead
towards universal banking with its reverse merger with ICICI bank.
 With blurred distinction between the banking and non-banking financial

intermediaries, the firm providing financial services need to come up with
new products with better services in order to retain its old customers and
attract new ones. However with the help of communication and networking
technologies the utilization of the existing facilities could be improved to
provide enhanced customer convenience and satisfaction. The major
challenge before the financial institutions in India thus relates to the need to
introduce innovative, customer friendly products and services for which
newer technologies have to be brought in multiple areas to reduce the
overall transaction costs.
 It‟s a challenge, especially before the banks, to adopt efficient and effective
communication networks to build up integrated delivery channels both
vertical and horizontal by installing an enabling and compatible multi
channel platform which could support and seamlessly integrate both existing
and future delivery channels.
 Providing the customers a single `sign on‟, a unique ATM PIN, for carrying
out transactions across delivery channels is also a challenge in itself.
 Globalisation and technological developments have placed new stresses on

the infrastructure of financial services organisations. It has also increased
their exposure to operational risks such as system failure, electronic frauds
and damaged reputation. They may have to develop a decision support
system on the current MIS for the better analysis of the dataand risk
29
Financial Service, management on real time basis, in addition to other functions such as credit
Consumer
decisions, foreign exchange management, treasury operations etc.
Behaviour and
Banking Products
 Security is another major concern of on-line customersand it is the biggest
risk to the financial service providers in terms of brand image. The need to
comply with international standards including those of certification such as
BS7799 or ISO 17799 to meet its information security requirements and
ITIL (IT infrastructure Library) in the areas of service management is a
emerging challenge before the financial services sector.
The implementation of IT has been confined only to the metros or big urban
customers its now time that the benefits of IT should be made available to the
rural population as well. Here there will be a need to provide for multi-lingual
facilities, which is a migration away from the existing English-only paradigm.
Adequate Infrastructural facilities are must, if these benefits have to accrue. Thus,
in the fast track Internet world the financial services providers will need to invest
heavily in customer relationship management system and brand identify. They
may also have to adopt frameworks of best practices for implementing IT
Governance using internationally accepted standards

1. The ____________services industry both nationally and internationally is
one of the most dynamic and rapidly growing sectors of the economy.
a. Financial
b. Banking
2. The overall percentage of employment in the __________services has

increased.
a. Banking
b. Financial
3. ___________has contributed to the containment of the cost associated with

the management of information and the execution of transactions.
a. Information technology
b. Banking technology
30
4. The ___________do facilitate quick settlement of securities electronically. Financial
Services: An
a. Financial Institutions Introduction
b. Depositories
1.9 Let Us Sum Up

In this unit we have studied about the meaning and concept of financial
services in detail.
In this unit we have covered the meaning of financial services in very detail.
We discussed the characterstics of financial services. The importance of financial
services has even been discussed here in very detail. Later we even discussed the
various types of financial services. The impact of technology in on financial
services were discussed in detail where we studied how the new improved
technology is helping us in providing better services.Not only this in the later
portions we even discussed the various challanges before financial services sector.
This unit was sufficient enough for the readers to understand the basic
concepts behind the financial services.
Answers: (1-a), (2-b), (3-a)
Answers: (1-a), (2-b), (3-a)
Answers: (1-a), (2-b), (3-a), (4-b)
31
Financial Service,
Consumer Check your progress 5
Behaviour and
Banking Products Answers: (1-a), (2-b), (3-a), (4-b)
Answers: (1-a), (2-b), (3-a), (4-b)
Answers: (1-a), (2-b), (3-a), (4-b)
1.11 Glossary
1. SEBI - Stock Exchange board of India.
2. MIS - Management information system.
1.12 Assignment
Discuss the meaning and concept of financial services.
1.13 Activities
Discuss the various types of Financial Services
1.14 Case Study

What are the Challenges before the Financial Services Sector of India?

1. Brean Andeston, 1995 “Financial Services”, Macmillan Press Ltd., London.
2. Kimball Dietrich, 1996 “Financial Services and Financial Institutions
Prentice - Hall, Inc. New Jersey.
32
UNIT 2: MARKETING OF FINANCIAL
SERVICE’S: A CONCEPTUAL
FRAMEWORK
Unit Structure
2.1 Introduction
2.2 Marketing and the Financial Services
2.3 Marketing as a Functional Area of Management

2.4 Financial Services and the Different Marketing Orientations
2.5 Difference between Services and Products Physical Goods

2.6 Characteristics of Service
2.7 Marketing Mix for Financial Services

2.8 Marketing Strategy and Financial Services
2.9 Let Us Sum Up

2.10 Answer for Check Your Progress
2.11 Glossary
2.12 Assignment
2.13 Activities
2.14 Case Study

 Discuss the Concept of marketing as applicable to financial services

marketing.
 Describe the concept of service product mix.
 Discuss various orientations as applied to marketing of financial services.
33
Financial Service,  Differentiate between products and services on the basis of service
Consumer
Behaviour and characteristics.
Banking Products
 Explain the implication of service characteristics for marketing of financial
services.
2.1 Introduction
The first barter exchange can be looked upon as a reflection of the
realisation that exchange added value for both the parties to the transaction. This
indeed marked the dawn of marketing. The recognition of value addition
ultimately led to the development of task specialisation, by far the first real step
forward in economic development. The last century has seen 'marketing' develop
from a mere practice, into a major academic discipline.
Marketing is both a concept and practice; an approach to exchange
relationships, which provides the driving force for formulation of strategies every
type of organisation.
Marketing in the true sense of the word, is relatively new to the financial
sector. Until recently, marketing in most financial sector organisations was largely
synonymous with advertising and public relations and it was not until the 1970s
that marketing department was formed on any scale. (Newman 1984). Even then,
the role of marketing tended to be more tactical. Strategic marketing as seen as a
relatively low status activity with senior management being dominated by
executives with abackground in finance (Hooley and Mann, 1988). In the last
decade marketing has developed as a more integrated function within financial
service organisations largely as a result of rapid changes in the operating
environment. Nevertheless, Morgan and Piercy (1990) suggest that marketing
remains relatively young management function in\ the financial service sector.
2.2 Marketing and the Financial Services

Marketing is the process of determining consumer demand for a product or
service, motivating its sale and distribution it into ultimate consumption at a profit
(Brech 1953).
Marketing is not only much broader than selling; it is not a specialised
activity at all. It encompasses the entire business.it is the whole business seen
from the view point of its final result, that is from the customer's point of view.
34
Concern and responsibility for marketing must therefore permeate of areas of the Marketing of
Financial
enterprise (Ducker). Service‟s: A
Marketing is the set of human activities directed at facilitating and Conceptual
Framework
consummating exchanges (Kotler 1972).
Marketing is concerned with the creation and maintenance of mutually
satisfying exchange relationships (Baker 1976).
The purpose of abusiness is to create and keep a customer (Levitt 1983).
Marketing is the business function that identifies current unfilled needs and
wants, defines and measures their magnitude, determines which target markets the
organisation can best serve and decides on appropriate products, services and
programmes to serve these markets. Thus, marketing serves as a link between ik
society's heeds and its pattern of industrial response (Kotler 1988).
To focus on one financial service, i.e. banking, let us look at the definitions
as applied in the sector. The definition of bank marketing, as referred to by the
NIBM, Pune is as follows:
Bank marketing is the aggregate of functions, directed at providing services
to satisfy customers' financial (and other related) needs and wants, more
effectively and efficiently than the competitor, keeping in view the organisational
objectives of the bank.
This definition highlights the fallowing points:
1. Banks provide services with all the service characteristics discussed later in
this, unit being associated with them.
2. The aim is to satisfy customers' needs and wants.

3. The needs and wants are mostly financial in, nature and some incidental to
or related to the main functions.
4. The competitive element, efficiency and, effectiveness are major factors in
the process, of designing and delivering these services.
5. Organisational objectives are still the driving force.
This could be seen as an extension of the Marketing concept', so modified as

to suit the nature of the banking activity.
The aggregate of functions mentioned in the definition, is the sum total of an

integrated effort to discover, create, arouse and satisfy customer needs. Each
individual opting in the bank is a marketing person who contributes to the total
satisfaction of customers.
35
Financial Service, Bank marketing deals with providing. Services to satisfy customers'
Consumer
financial needs and wants. Banks have to discover/ascertain/anticipate the
Behaviour and
Banking Products financial needs of the customers and offer the services which can satisfy those
needs. Banks may be required to satisfy the customers' other related needs and
want of he customers. Marketing helps in achieving the organisational objectives
of the bank, this means that marketing is equally applicable to achieve commercial
and social objectives of the banks. Indian banks have dual organisational
objectives:
i) Commercial objective to make profit and
ii) Social objective which is a developmental role particularly in the rural areas.
Service areaapproach adopted by the Indian Bank is a marketing approach
whereby a specific target market is assigned to each bank branch for need based
banking activity in tune with the social objectives.
The marketing concept points to the following essentials which contribute

towards bank's success:
a) The bank cannot exist without the customers.
b) The purpose of the bank is to create, win and keep a customer. The customer
is and should be the central focus of everything the bank does.
c) It is also a way of organising the bank. The starting point for organisational
design should be the customer and the bank should ensure that the services
are performed and delivered in the most effective way. Service facilitates
also should be designed for customers convenience.
d) Ultimate aim of abank is to deliver total satisfaction to the customer.

e) Customer satisfaction is affected by the performance of all the personnel of
the bank.
Marketing is an organisational philosophy. The philosophy demands the
satisfaction of customers' (consumer's) needs as the prerequisite for the existence
and survival of the bank. Marketing for service industry like banks is philosophy
to be understood by the whole organisation from the chief executive to the person
working concept at the counter. The first and most important step in applying the
marketing concept is to have a wholehearted commitment to customer orientation
by all the employees. Marketing is an attitude of mind. The central focus of all the
activities of abank is customer.
A traditional marketing department (and officers with marketing
designations) usually cannot be responsible for the total marketing function of a
36
service organisation like banks. Else, it is argued that personnel working in other Marketing of
Financial
departments like operations and back of the counters may tend to ignore their Service‟s: A
customer-related responsibilities and totally concentrate on just handling Conceptual
Framework
operation and other duties mechanically.
Marketing is much more than just advertising and promotion;' it is abasic
part of total business operation. What is required for the bank is the market
orientation and customer consciousness among all the personnel of the bank

1. ___________ is the process of determining consumer demand for a product
or service.
a. Marketing
b. Market
2. Marketing is the set of___________activities directed at facilitating and

consummating exchanges.
a. financial
b. Human
3. _______________marketing deals with providing .services to satisfy

customers' financial needs and wants.
a. Bank
b. Insurance
4. Marketing is an ____________philosophy.
a. Organizational
b. Psychological
5. A ___________marketing department usually cannot be responsible for the

total marketing function of a service organisation like banks.
a. Traditional
b. modern
37
Financial Service,
Consumer
2.3 Marketing as a Functional Area of Management
Behaviour and
Banking Products Marketing is complex phenomenon that combines both the philosophy of
business and its practice. That is, marketing consists of two inter-related
phenomena:
1) A basic concept andat focuses on customers

2) A set of management techniques
Many organisations have a marketing department made up of both

marketing generalists e.g. the marketing manager and specialists e.g. the sales
manager or marketing research manager. Such marketing department will be
based in a physical location within the organisation in the same way as, say
personnel or purchasing. The people involved with the day-to-day running of the
marketing department will have at their disposal a range (management techniques
often referred to as the marketing spectrum or mix. These techniques cover such
areas as sales and sales management, advertising and promotion, pricing,
packaging, product development, marketing research, planning, distribution, and
after-sales-service. Many of the specialisations with the marketing, offer, separate
career opportunities and are often undertaken by specialists with the marketing,
manager responsible for co-ordinating all the separate but inter-related activities
Looked at from this point of view, marketing is indeed a functional area of

management which is usually within the firm and which uses a number of highly
developed technique in order to achieve specific objectives. As a function, an
important part of marketing's role is to identify correctly, both the current and
future needs and wants of specifically defined target markets. This information is
then acted upon by the whole organisation it bringing into existence, the products
and or services necessary to satisfy customer requirements. It is the marketing
function that forms the interface with the firm's existing and potential customers.
Marketing provides entrepreneurship by identifying customer requirements, and
through marketing, the rest of the firm is able to mobilise resources to capitalise
on them.
In fact, the process of marketing management is not different from any other
functional area of management in that is essentially comprises of four key tasks:
Analysis, Planning, Implementation and Control.
Analysis
The starting point of marketing management decisions is analysis.
Customers, competition, trends and changes in the environment and internal
38
strengths and weaknesses must each be fully understood by the marketer before Marketing of
Financial
effective marketing plans can be established. Analysis, in turn, requires Service‟s: A
information using systematic marketing research and marketing information Conceptual
Framework
systems.
Planning
The second task of the manager is the planning process. The marketing
manager must plan both long-term marketing directions for the organisation
(strategic planning), including e.g. the selection of targets and the marketing
programmes and tactics that will be used to support these strategic plans.
Implementation
Fourth strategic and tactical plans must, of course, be acted upon, if they are
to have any effect. The implementation tasks of marketing management involve
such staffing, allocating tasks and responsibilities, budgeting and securing any
other resources needed to translate plans into action.
Control
The fourth and sometimes neglected task of the manager is measuring and
valuating progress against objectives and target established in plans. Control of
marketing plans car be problematical with difficulties associated with both
measuring marketing performance and pinpointing cause and effect. For example,
market share; a frequently used measure of marketing performance and hence
abasis for marketing control, need very careful analysis and interpretation if it is
to provide a useful basis for controlling the effectiveness of marketing the
strategies 'and plans. Both qualitative and quantity the techniques of control
should be used by the marketing manager and including budgetary control, control
of marketing mix effectiveness in turn, forms part of analysis function discussed
earlier, thereby completing the essentially circular nature of these four inter
related tasks.
Although it can be seen that marketing has a very important functional role
within the Organisation, the practice of marketing should not be restricted to the
marketing, department. A marketing-oriented business has implications for the
way people throughout the organisation respond to the initiatives that are
forthcoming from marketing.
39
Financial Service,
Behaviour and
Banking Products 1. ______________is complex phenomenon that combines both the philosophy
of business and its practice.
a. Marketing
b. Organisation
2. The starting point of marketing management decisions is ___________.

a. Thinking
b. Analysis
3. The second task of the manager is the ____________process.
a. Planning
b. decision
4. The fourth and sometimes neglected task of the manager is
____________against objectives and target established in plans.
a. measuring and valuating progress

b. Analysis process
2.4 Financial Services and the Different Marketing

Orientations
There are five competing orientations under which organisations conduct
their marketing activity.
The product concept is one of the oldest concepts guiding sellers.

The production concept holds that consumers will favour those products that
are widely available and low in cost. Managers of production-oriented
organisations concentrate on achieving high production efficiency and wide
distribution coverage.
The assumption holds in at lease two types of situations:
1) The first is where the demand of a product exceeds supply, as in may third
world countries. Here consumersare more interested in obtaining the product
than in its fine points.
40
Marketing of
2) The second situation is where the products' cost is high and has to be Financial
brought down through increased productivity to expand the market. Service‟s: A
Conceptual
In the 19th century and early of the 20th century the fundamental role of Framework
business was seen as production. Manufacturers were in suppliers' market and
were faced with a virtually insatiable demand for goods and services. Firms
concentrated on production and productive efficiency in order to bring down
costs. Firms tended to manufacture and offer products that they were good at
producing with customers' requirements and satisfactions of secondary
importance. This production mentality was a workable philosophy as long as a
sellers' market existed.
The Product Concept/Orientation

Often sellersare guided by the product concept.
 The product concept holds that consumers will favour those products that
offer the most quality, performance or innovative features. Managers in
these product oriented organisations focus their energy on making superior
products and improving them over time.
These managers assume that buyers admire well-made products and can
appraise product quality and performance. Marketing management may become a
victim of 'better mouse trap' fallacy, believing that abetter mousetrap will lead
people to beat a path to its door. At a place where there are no mice, the product
would hardly sell!
Many firms have, in their own opinions, produced excellent products, but
not necessarily of the type customers want to buy. Manufacturers who focus their
attention on existing products and pay little or not attention to the changing needs
and wants of the marketplace suffer from what as often termed 'marketing
myopia'. This is very short sighted viewpoint where firms are so busy
concentrating on their products that they fail to take customers' requirements into
account.
Even today, firms can be found who pay little regards to the needs and
wants of their customers and still have the product concept as the guiding
philosophy of their businesses. Such firms take the attitude that they produce
excellent products and that people will want to buy them.
The Selling Concept/Orientation

The selling concept (or sales concept) is another common approach many
firms take to the market.
41
Financial Service,  The selling concept holds that consumers, if left alone, will ordinarily not
Consumer
Behaviour and bay enough of the organisation's products. The organisation must therefore
Banking Products undertake an aggressive selling and promotion effort.
Philip Kotler defines this selling concept as:-

A management orientation which assumes that consumers will either not
buy or not buy enough of the organisation's products unless the organisation
makes a substantial effort to stimulate their interest in its products.
From the above definition, the implicitly premises of the selling concept are
as follows:
1) Consumers can always be induced to buy more through various 'sales

techniques'.
2) Consumers tend to resist purchasing and it is the salesperson's job to

overcome this. The firm's key talk then is 40 organise an effective sales
force.
Peter Drucker, one of the leading management theorists, puts it this way:
There will always, one can assume, be need for some selling. But the aim of
marketing is to make selling superfluous. The aim of marketing is to know and
understand the customer so well that the product or service fits him and sells
itself; ideally, marketing should result in a customer who is ready to buy. All that
should be needed than is to make the product or service available.
Marketing based on hard selling carries high risks. It assumes that customers
who are coaxed into buying the product will like it and if they don't, they won't
bad-mouth it to friends or complain to consumer organisations. And they will
possible forgot their disappointments and buy it again. One study showed that
dissatisfied customers may bad-mouth the product to ten or more acquaintances;
bad news travels fast. In case of banking it applies thus,
During the times of famous scams in stock market, a foreign bank was in
serious trouble as the: probable losses would have threatened its viability to be in
the business. Many small scheduled banks had put their funds by way of deposits
in that bank. The news items revealed names of such banks and in some cases
they were just rumours. It however, had serious implications on those small banks
due to such rumours which spread very fast in their command areaand frightened
depositors queued up their branches to withdraw their deposits which gave a
severe jolt below the belt to such banks as a result of the rumours. They had to do
a lot of PR and clarifying work to bring back their deposits.
42
The Marketing Concept/Orientation Marketing of
Financial
The marketing concept is abusiness philosophy that challenges the previous Service‟s: A
Conceptual
concepts. Its central tenets crystallised in the mid 1950s.
Framework
The marketing concept holds that the key to achieving organisational goals
consists in determining the needs and wants of target markets and delivering the
desired satisfaction more effectively and efficiently than competitors.
The marketing concept rests on four main pillars, namely.
1) Target market
2) Customer needs
3) Integrated marketing
4) Profitability
These are shown in the figure below, where they are contrasted with a
selling orientation.The selling concept takes an inside-out perspective. It starts
with the factory, focuses on the company's existing products, and calls for heavy
selling and promoting to produce profitable sales. The marketing concept takes an
outside-in perspective. It starts with a Well-defined market, focuses on customer
need, and integrates all the activities that will affect Customers and produces
profits by creating customer satisfaction.
Fig 2.1 Sellingand Marketing Concepts-Contrasted
Peter R Dickson in his book 'Marketing Management' asserts that in the

context of crowding of marketplace by competing companies catering to the same
target markets, a company to survive, will need to adopt the 'strategic marketing
concept' which he define thus:
43
Financial Service, The strategic marketing concept is defined as:
Consumer
Behaviour and The corporate mission is to seek a sustainable competitive advantage over
Banking Products competitorsby meeting consumer needs.
The Societal Marketing Concept

In recent years, some have questioned whether the marketing concept is an
appropriate philosophy in an age of environmental deterioration, resource
shortages, explosive population growth, world hunger and poverty and neglected
social services are companies that do an excellent job of satisfying individual
consumer wants necessarily acting in the best long run interests of consumers and
society?
The marketing concept side-steps the potential conflicts between consumer
wants, consumer interestsand long-run social welfare.
For example, the detergent industry caters to the passion for whiter clothes
by offering a product that pollutes rivers and streams, kills fish and injures
recreational opportunities.
These situations call for a new concept that enlarges the marketing concept.
This new concept may be termed the societal marketing concept.
 The societal marketing concept holds that the organisation's task is to

determine the needs, wants and interests of target markets and to deliver the
desired satisfactions more effectively and efficiently than competitors in a
way that preserves or enhances the consumer's and the society's well-being
as depicted in figure below:
Fig 2.2 Social Marketing Concept
The societal marketing concept calls upon marketers to balance three

considerations in setting their marketing policies, namely 1) company 2)
consumer want satisfaction, and 3) the public interest.
44
Originally, company‟s based their marketing decisions on maximising short- Marketing of
Financial
term company profit. Then they began to recognise the long-run importance of Service‟s: A
satisfying consumer wants and this introduced the marketing concept. Now they Conceptual
Framework
are beginning to factor in society's interests in their decision making.

1. There are ___________competing orientations under which organisations
conduct their marketing activity.
a. Five
b. Six
2. The _____________concept holds that consumers will favour those
products that are widely available and low in cost.
a. product
b. Production
3. Often sellers are guided by the ____________concept.
a. Product
b. Customer
4. Consumers can always be induced to buy __________through various 'sales

techniques.
a. goods
b. More
5. Marketing based on hard selling carries ____________risks.
a. High
b. low
2.5 Difference between Services and Product Physical

Goods
Services now account for more than 70% of employ men and GNP of most
industrialised countries. Many industrial corporations also owe their revenue and
profitability to the peripheral services they add on to their products. The
45
Financial Service, marketing literature, however, has unit1 recently concentrated almost entirely on
Consumer
physical products. Obviously this is because that is where marketing as a separate
Behaviour and
Banking Products function developed earliest, and where it has been most intensively applied,
particularly in the field of fast-moving consumer goods. As both academics and
practitioners have turned their attention to all increasingly important services
markets, the question has been debated, through different actually are services.
When we examine them, we can see that there is not such a clear-cut line
between services and products as might be thought. Many products in fact include
large elements of service in their delivery. Looked at from the buyer's point of
view, services may also form a vital part of the total bundle of benefits which is
sought, particularly in industrial markets. Likewise, many services include a large
contribution from hardware: hotels, airlines, fast food outlets are all classed as
services but the physical elements in the offering are a very large part of what
customer‟s buy. What is different is that as buyers we do not receive ownership of
the physical elements of a service, but merely rent them for a period.
Levitt has suggested that "there are not such things as service industries.
There are only industries whose service components are greater or less than those
of other industries. Everybody is in service". Levitt was emphasising that with
almost every tangible core product, an intangible service component is associated.
Goods-Service Continuum In 1977, Ms. G. Lynn Shostack, the Vice
President of Citibank, suggested that marketing 'entities' are combinations of
intangible and tangible elements which are distinct and discrete. If these absolute
tangible and intangible elements are taken to the two ends of a continuum, as
show 11 below, we can observe that all goods and services occupy different
positions in the continuum. There is a range which varies from an absolute
tangible well like salt to an absolute intangible service like education.
Fig 2.3 Search Goods and Experience Goods
46
Another approach of distinction as proposed by Theqdore Levitt, classifies Marketing of
Financial
goods into and two categories viz. Search goods and experienced goods. Search Service‟s: A
goods are generally those goods which are packaged goods that the customer can Conceptual
Framework
see, evaluate and try prior to the purchase, like a pen or toothpaste like holiday,
travel etc. Some call search goods as tangible goods and the other as intangibles.
There is a range between the 2 absolute extremes and there could be products
falling in this range.
Fig 2.4 Kotlers classification of goods
Philip Kotler's classification is a further improvement in that he suggests

five category under which a company' offer to the market place can be
distinguished.
1) A pure tangible good: No services accompany the product e.g. toothpaste,

soap and salt etc.
2) A Tangible good with accompanying services: A tangible good

accompanied by one or more services to enhance its consumer appeal. Levitt
observes that the more, technologically sophisticated the generic product,
(e.g. cars, computers) the moredependent are its sales on the quality and
availability of its accompanying customer services. (E.g. display rooms,
delivery repairs and maintenance, operator training, warranty fulfilment).
3) A Hybrid: Equal parts of goods and services: e.g. restaurants

4) Amajor service with accompanying minor goods and services - Airline:
transportation service, accompanied by food, drinks, ticket stub, airline
magazine the service requires a capital intensive good an aeroplane for its
realisation, but the primary item is a service.
47
Financial Service, 5) A pure service: Baby sitting, banking hair-dressing, gardener,
Consumer
telecommunication, health club, psychotherapy, etc.
Behaviour and
Banking Products

1. ___________now account for more than 70% of employ men and GNP of
most industrialised countries.
a. Services
b. products
2. Another approach of distinction as proposed by___________, classifies
goods into and two categories viz. Search goods and experienced goods.
a. Philip Kotler
b. Theqdore Levitt
3. There is a range between the 2 absolute extremes and there could be
___________falling in this range.
a. Products
b. services
2.6 Characteristics of Services

Having looked at the differences between products and services, you may
now be ready to describe the essential characteristics of services and understand
how these differences affect the financial services.
There is general agreement in the literature that the main characteristics of
services are intangibility; inseparability, heterogeneity, perish ability.
Intangibility
Intangibility is relevant only to the pure service element; the hotel bed and
the hamburger are very tangible, the problem of intangibility is that it is difficult
to communicate and display exactly what the product is. It is often not possible to
taste, feel, see hear or small services z before they are purchased. Opinions and
attitudes may be sought before hand, a repeat purchase may rely upon previous
experience, the customer may be given something tangible to represent the
service, but ultimately the purchase of a service is the purchase of something
intangible.
48
Inseparability Marketing of
Financial
This refers to the fact the production and consumption of the service are Service‟s: A
Conceptual
inextricably intertwined, the implications of this are that the consumer is involved
Framework
in production. Further, in many cases other consumersare also involved at the
same time, as in most retailing situations. This may be a positive aspect of the
benefits delivered (in a theatre or club), or it may be potential negative aspect
(waiting in queues at the post office). Whether the buyer is physically present or
not, the product comes into existence' only when it is bought; it cannot be mass
produced in advance (although the physical components may be, to some extent.).
Goods are usually purchased, sold and consumed whereas services are usually
sold and then produced and consumed. .
Heterogeneity
Heterogeneity or variability is a result of the fact that services are usually
delivered by human beings, whose performance is necessarily variable; quality
control is extremely difficult. It is often difficult to achieve standardisation of
output of certain services. The standard of a service in terms of its conformity to
what may be prescribed by the seller may depend on who provides the service or
where it is provided. Even though standard systems may be used to handle a flight
reservation, book in a car for service, each 'unit' of service may different from
other 'units'. Franchise operation attempt to ensure standards of conformity but
ultimately, with services it is difficult to ensure the same level of quality of output
as it may be with goods. From the customer's point of view too, it is often difficult
to judge quality in advance of purchase.
Perishability
This means that the service cannot be stockpiled. If a sent is unfilled when
the plane leaves or the play starts, it cannot be kept and sold next day or next
week; that revenue is lost for ever. In some cases, such as insurance or banking, it
could be argued that potential stocks remain, in the sense that the service is there
to be sold every day as long as the underwriting or loan capacity exists. Most
services however, are clearly time dependent, in a way that physical product is
not. Important marketing decisions in service organisations relate to what service
levels will be provided and how to respond in times of low and excessive usage,
for example through differential pricing or special promotions.
These characteristics certainly do not apply in equal measure to all services.
Some services are highly intangible (e.g. education); others are highly tangible
(e.g. fast food restaurant); some may be highly variable (e.g. dental treatment);
49
Financial Service, some highly standardised (e.g. automatic car wash). The notion of continuum of
Consumer
tangibility, inseparability, heterogeneity and Perishability is helpful in
Behaviour and
Banking Products understanding and applying these characteristics.
The origin idea of a single continuum of tangibility for understanding the

differences between goods and services has been extended recently to suggest that
all four characteristics of services can be described and related in this way.
(Payne, 1993)
Fig 2.5 A Continuum of the Characteristics of services
Thus, while 1egal service is less tangible, varied and can be performed away
from the customer, a fast food service is highly tangible, generally standardised
and usually performed near the customer. Different service organisations offering
similar services can + place differing emphasis on each of these characteristics to
obtain competitive leverage and advantage in the market place. Thus, one
management consultant could offer a highly bespoke service and undertake all
assignment personally; another could subcontract work to associates, thus
potentially increasing the scale of business but possible losing the benefit of a
highly individual approach.
These different characteristics have positive and negative implications. The

challenge for marketers is to develop strategies and tactics that emphasise the
positive effects of these characteristics of finds ways of overcoming them where
the consequences are unhelpful. Christian Gronroos (1990) presents the difference
between physical goods and services as follows:
50
Marketing of
Sr. no. Physical Goods Services Financial
Service‟s: A
1 Tangible Intangible Conceptual
Framework
2 Homogeneous Heterogeneous
3 Production and distribution Production, distribution and
separated from consumption consumption are simultaneous

process
4 A thing An activity or process
5 Core value produced in factory Core value produced in buyer

seller interactions
6 customers do not participate in Customers participate in the

the production process production
7 Can be kept in stock Cannot be kept in stock
8 Transfer of ownership No transfer of ownership
Definition of Service
Discussions on the nature of services lead us to a normally accepted
definition of services as follows:
 A service is any act of performance that one party can offer to another that
is essentially intangible and does not result in the ownership of anything. Its
production may or may not be tied to a physical product.
Gronroos proposed a working definition in 1990. According to him:
A service is an activity or series of activities of more or less intangible

nature that normally, not necessarily, take place in interactions between the
customer and service employees and/or physical resources or goods and/or
systems of the service provider which are provided as solution to customer
problems.
This highlights the following important features:
1) Services are by and large 'activities' or they are a series of' activities rather
than things.
51
Financial Service, 2) As a result the services 'we intangible.
Consumer
Behaviour and 3) They take place in the interaction between the customer and the service
Banking Products provider which means that the service; are produced and consumed
simultaneously.
Customer has a role to play in the production process as the services are
provided in response to the problems of customers as solution.
In banking context, the bank has to be continuously aware about the
changing demands and expectations of the customers. At times they have to tailor
such products/schemes thinking about the customer's probable expectations with
changing market scenario e.g. telebanking or e-banking have been thought of
much in advance than customer himself asking for such products as the banks
have networked ATMs and computerised services like Demat which a customer
giving for computers would easily opt to have this benefit. Thus, banks not only
have to keep the present needs and wants of customers but also have to innovate
to create wants for the customers to extend services/technology to meet his
requirements.
Some of the characteristics discussed above have interesting implications

for marketing of financial services.
In general, services must be produced and consumed simultaneously. As a

consequence, services are perishable and must be produced on demand and
'cannot be inventoried.
The presence of inseparability tends to imply the consumers themselves play
a significant role in the production of services. In fact, some experts view
customersas quasi or partial employees (Bowen and Schneider, 1988). For a
service to be provided typically requires either the physical presence of the
consumer or some contact with the consumer to provide the information required
for the service to be performed. The consumer making a loan application does not
have to be in the physical presence of a loan assessor,but must supply that
assessor with information to evaluate the application.
The quality of the service product is typically highly dependent on personal
interactions and as a consequence, the potential for variability (heterogeneity) is
high. To a large extent, the qualities of inseparability and heterogeneity arise
because of the intangible nature of services.The characteristics of services as an
act rather than as an object lead to an emphasis on the individuals providing the
service and their interactions with the organisation's customers.
52
In addition to these service characteristics, financial services display an Marketing of
Financial
additional feature which affects the marketing process. This is the issue of Service‟s: A
fiduciary responsibility which refers to the implicate responsibility which Conceptual
financial service organisations have in relation to the establishes that although any Framework
business has a responsibility to its customers in terms of quality, reliability and

safety of the products it supplies, this responsibility is perhaps much greater in
case of financial service organisation. This may perhaps be due to the fact the
consumers of such services often find the precise details of the service difficult to
comprehend and therefore place their trust in the organisation they deal with.
Equally important is the fact that the 'raw materials' used to produce many
financial products are consumers' deposits; thus in producing and selling a loan
product, the bank has a responsibility to the individuals whose deposits have made
that land possible. Christain Ennew etal, in their book 'Cases in marketing
financial services' advocates that "any organisation involved in the provision of
financial services should retain an awareness of the magnitude of the impact
which their marketing and selling activities can have on the lifestyle of an
individual or the property of a company".
The implications of intangibility, inseparability and heterogeneity are
manifested at both strategic and tactical levels in services marketing. Thomas
(1977) stresses the importance of a clear understanding of the nature of the
business and the establishment of a distinctive basis on which to compete. The
latter is particularly significant given the difficulties of competing on the basis of
offering a service with distinctive attributes or features. Ellnew et a1 state 'the
ease of copying and the lack of patent protection mean that competition is more
commonly based on service levels rather than service attributes and this in turn
will tend to increase the emphasis on efficiency and cost effectiveness in service
provisions'.
As marketing moves towards tactical issues, it also moves closer to and
must be more tailored to, the distinguishing features of specific products and
markets. In the context of marketing mix, this suggests that in the case of services,
the composition of that mix, and the management of its elements can be quite
distinctive.
The essence of marketing strategy is to provide the organisation with a

sustainable competitive advantage in the markets in which it operates. This
requires that the organisation both understands consumer needs and identifies how
those consumers can be grouped into different market segments. By identifying
53
Financial Service, these 'segments and selecting target markets, the organisation can determine
Consumer
where and against whom it intends to compete
Behaviour and
Banking Products Having determined where to compete and whom to compete, the firm will
have effectively determined its product/market scope. However, it must also
establish an appropriate position for its products in the target markets. The whole
purpose of positioning products in markets is to establish a competitive edge for
the products. For example, American Express Cards may be seen as positioned as
a high prestige charge card, with level of service and price reflecting the prestige
of the card holder.
In selecting l a position, the marketing strategy is essentially defining the

image which the organisation wishes to create for its product.
Once a position has been selected, that position will guide the formulation
of the marketing mix Product attributes, pricing decisions, methods of distribution
and communication should all seek to reflect the chosen position
In effect, the marketing mix represents the tactics employed to implement a
chosen strategy. The decisions made in respect of marketing mix need to be
operationalised and the outcomes monitored to check that the actual outcomes
match what was intended. Should the outcome deviate from expectation,
corrective action in the form of modification of marketing mix,-or even the overall
strategy may be warranted.
The process of deregulation and environmental change is continuing with

further liberalisation of financial markets. This presents the financial services
sector with a number of new opportunities and threats. As the environment facing
suppliers of financial services has become increasingly competitive and uncertain,
the importance of marketing in guiding the business development has increased.
Deregulation has removed the traditional restrictions on the types of product
which particular institutions could supply and has created the opportunity for
expansion into new markets. It has also presented the threat of an increase in the
number and variety of competitors in a specific market. In this scenario, tactical
marketing alone is no longer appropriate; no financial services organisation can
afford simply to continue supplying the same products to the same markets
without some consideration of their possible reactions to the changing
opportunities and threats now confronting them. The essence of the strategic
stance not required, is that the firms should adopt an operative approach to their
markets and focus attention on developing a match between organisational
strengths and environmental opportunities. This will enable the organisation to
54
identify and satisfy existing customer requirements and anticipates and be Marketing of
Financial
prepared for future developments. Service‟s: A
Conceptual
The operation of n differentiation strategy depends on effective market Framework
segmentation and targeting. The success of any differentiation strategy is
dependent on the development of an integrated and coherent marketing mix. This
requires the development of an appropriate product which is then priced,
promoted and distributed in such a way as to produce an offered service which
needs the needs of the target customers more effectively than competing products.
Marketing mix is not just a series of tactical responses to changing market
condition; it is a core component of any marketing strategy.

1. The main characteristics of _________are intangibility; inseparability,
heterogeneity, perishability.
a. services
b. goods
2. _________is relevant only to the pure service element.
a. tangibility
b. Intangibility
3. Legal service is _________tangible, varied and can be performed away from

the customer.
a. Less
b. More
4. A ___________is any act of performance that one party can offer to another
that is essentially intangible and does not result in the ownership of
anything.
a. service
b. Product
55
Financial Service,
Consumer
2.7 Marketing Mix for Financial Services
Behaviour and
Banking Products Marketing mix is one of the key concepts in the modern marketing theory.
In practice the, marketing mix is considered to be the core of marketing. Neil
Borden, while quoting from an article of Jame Culiton, wrote that a marketer is
viewed as a 'decider', or an „artist‟ or a 'mixer of ingredients' who plans various
means of competition. "He may follow a recipe prepared by others, or prepare his
own as he, goes along, or adopt a recipe to the ingredients immediately available,
or experiment with or invent ingredients no one else has tried". If a marketer was
a 'mixer of ingredients', what he designed was a marketing mix.
Borden further wrote that 'it was logical to proceed from a realisation of the
existence of a variety of marketing mixes to the development of a concept that
would comprehend not only this variety, but also the market forces that cause
managements to produce a variety of mixes' (to fight competition). Subsequently,
Borden's concept of marketing mix was given due recognition in the marketing
theory.
 Marketing mix is the set of marketing tools that the firm uses to pursue its
marketing objectives in the target market.
There are literally dozens of marketing mix tools. Mc Carthy popularised a
four factor classification of these tools called the four Ps: Product, Price, Place
(i.e. Distribution) and Promotion.
The particular marketing variables under each P are shown in the figure
below:
Fig 2.6 marketing mix
56
A marketing mix is selected from a great number of possibilities. Marketing Marketing of
Financial
mix decisions must be made for both the distribution channels and the final
Service‟s: A
consumers. The following diagrammatic representation of a company's marketing Conceptual
mix strategy, by Kotler, points to the interplay of various factors and players in Framework
the market, which can affect the results of the marketing efforts.
Fig 2.7 Promotion mix
A company may not be able to adjust all the marketing mix variables in the
short run. Normally, the firm can change its price, sales force, size and advertising
expenditures in the short run. Development of new products and modifications in
its distribution channels, are more feasible in the long .run. Thus, the firm
typically makes fewer period to period marketing mix changes in the short run
than the number of marketing mix variables suggest.
The most basic marketing mix tool is product, which stands for the firm's
tangible offer to the market, including the product quality, design, features,
branching, and packaging. The company cold also provide various services such
as delivery, repair, and training as well as running an equipment leasing business.
Place another key marketing mix tool, stands for the various activities the
company undertakes to make the product accessible and available to target
customers. The company must identify recruit and link various middlemen and
marketing facilitators so that its products and services are efficiently supplied to
the target market. It must understand the various types of retailers, wholesalers,
and physical distribution firms and how they make their decisions.
Promotions, the fourth marketing mix tool, stands for the various activities
the company undertakes to communicate and promote its products to the target
market. Thus, the company has to hire, train, and motivate salespeople.It has to set
57
Financial Service, up communication and promotion programmes consisting of advertising, direct
Consumer
marketing, sales promotion and public relations.
Behaviour and
Banking Products It may be noted that 4Ps represent the sellers' view of the marketing tools
available for influencing buyers. From abuyer's point of view, each marketing tool
is designed to deliver a customer benefit. Rober Lautherboln's suggesting was that
the 4Ps correspond to the customers' 4Cs:
4Ps 4Cs
Product Customer needs and wants.
Price Cost to the customer
Place Convenience.
Promotion Communication
Winning companies will be those who can meet customer needs

economically and conveniently and with effective communication.
Fig 2.8 P’s of Target Market
Let us, therefore, see how each "P" is important in the context of marketing
of banking services:
Product: Bank marketing is unique in the sense both product (services) and
its delivery is very important. The product has to suit to customers' needs and
wants. Customers are andrested in the variety (range) of products that suit to their
needs. The quality of product/service is the factor which decides customer
preference to select a product from the given range of products that suit to their
needs by the same bank or different banks. The returns in terms of interest payable
by the bank, the packaging (suitably scheme) its branding etc. like 'Suvidha
scheme' or 'kamdhanu' or 'Grihavitta scheme' also count in customers choosing
bank products.
58
Price: In the competitive banking scenario the price of a product is also Marketing of
very important as it reflects/matches with the cost to the customer. Although they Financial
Service‟s: A
know that the interest rate payable has a ceiling by IBAIRBI, the permutation Conceptual
combination of interest rate differentials mean a lot to customer in term of pricing. Framework
The interest rates charged on loans (short, medium and long term) and offered on
deposits schemes by the banks is the impact of pricing most visible to customer to
decide and choose abanks' product. Similarly, service fees, other charges do count
to differentiate different products of banks.
Place: The studies by IBA (mentioned in subsequent units) indicate that
safe and convenient place of abank (branch location) is perhaps the foremost
preference area for a customer to opt for abank's products/services.
Promotion: How the bank tailors, markets and advertises its products is the
key to success or otherwise in bank marketing'! Communication by abank with its
customers and public at large through advertisements, brochures, and hoardings
and through PR exercise in and out of its premises using its well-trained sales
force enables it to create better image amongst to get more business. Let see in
brief the importance and relevance of balance 3 Ps as well with respect to
marketing of banking services:
People: This is the most important of the 7 Ps in bank marketing which

includes the entire workforce of the bank i.e. executives, officers, employees and
the subordinate staff. The banks policies and systems get converted into service
only through people and that is why well-trained and motivated work force which
is committed to better customer service as a mission is the back bone of abank's
marketing efforts. The appearance of the counter staff, the interpersonal skills of
the sales force, the positive behaviour and approach of those coming in contact
with customersand reflecting right interest and care towards customers result into
positive customer interaction which enables the bank to grow its business
successively over the years.
Physical Evidence: With the growing competition, in the banking industry

the right ambience which includes proper premises, furnishings, convenient
layout, attractive atmosphere, courteous staff and required peripherals to ensure
all sorts of help to the customer puts abank in a winning position vis-à-vis other
competitors.
Process: Starting with the pro-active polices for better customer service
anand simplified procedures/systems to facilitate fast work flow by the employees
who are well empowered and who deliver the goods with quality consciousness
59
Financial Service, for pleasing the customer, the process has to have a proper mix of quality,
Consumer
delegation, direction and discretion for effective customer service.
Behaviour and
Banking Products
1. A company may not be able to adjust all the marketing mix variables in the
____________ run.
a. Short
b. long
2. The most basic marketing mix tool is ___________.

a. price
b. Product
3. ______________, the fourth marketing mix tool, stands for the various
activities the company undertakes to communicate and promote its products
to the target market.
a. Promotions
b. Place
2.8 Marketing Strategy and Financial Services

The key elements in determination of the marketing strategies tar financial
services are the marketing objectives of the organisation, its target segment and its
marketing mix. The process would involve the best possible selection of the
elements of the marketing mix to enable the greatest degree of fit between the
needs and wants of the selected target group and the organisation services offer
such that. The exchange process results in value creation for the consumersand the
organisation.
Once the organisation, looking at the needs of the target market determines
what is sold to whom (decision on the service product), the pricing promotion and
distribution will be easier to determine in practice, these determination of these
elements involve a thorough understanding of buyer preferences and company
capabilities. You will go through some of these inputs in subsequent blocks. In
developing a marketing strategy for financial services, marketers would thus need
to go through a two steps process: First to select or identify its target market or
markets and then to design marketing mix to meet the needs of the target market
better than its competitor.
60
Marketing of
Check your progress 7 Financial
Service‟s: A
1. The ___________ process results in value creation for the consumersand the Conceptual
organization. Framework
a. exchange
b. Sale
2. In developing a___________strategy for financial services, marketers would

thus need to go through a two steps process.
a. sales
b. Marketing
2.9 Let Us Sum Up

In this second unit we covered the topic marketing of financial services in
very detail. Here in this unit we discussed about marketing and financial services
in very detail, a detailed discussion was even made on the marketing as a
functional area of management. Financial services and different marketing
orientations were even discussed.We discussed here in very detail about the
differences between services and products. The service was even discussed here in
detail. The marketing mix of financial services was even discussed here in detail.
In this block we discussed the evolution of service in very detail and how the
production of services is given very much importance in today‟s world. After
reading this block the readers would have got sufficient ideaabout the topics
discussed in the unit above.
Answers: (1-a), (2-b), (3-a), (4-b), (5-a)
Answers: (1-a), (2-b), (3-a), (4-b)
Answers: (1-a), (2-b), (3-a), (4-b), (5-a)

61
Financial Service,
Behaviour and
Banking Products Answers: (1-a), (2-b), (3-a)
Answers: (1-a), (2-b), (3-a), (4-b)
Answers: (1-a), (2-b), (3-a)
2.11 Glossary
1. Perishable - things, especially foodstuffs, likely to decay or go bad quickly.
2.12 Assignment
Discuss the Marketing as functional area of management.
2.13 Activities
Bring out the differences between the services and products.
2.14 Case Study

Discuss the various characterstics of services

1. Brean Andeston, 1995 “Financial Services”, Macmillan Press Ltd., London.
2. Kimball Dietrich, 1996 “Financial Services and Financial Institutions

Prentice - Hall, Inc. New Jersey.
62
UNIT 3: CONSUMER BEHAVIOUR FOR
FINANCIAL SERVICES
Unit Structure
3.1 Introduction
3.2 The Complexity of Consumer Buying Decisions

3.3 Individual Influences on Consumer Behaviour
3.4 Needs and Motives

3.5 Individual Perception
3.6 Learning and Habit Development

3.7 Family Influences on Buying Behaviour
3.8 Behavioural Models for Analyzing Buyers

3.9 Consumer Behaviour Some Learning Points for Financial Service
3.10 Let Us Sum Up

3.12 Glossary
3.13 Assignment
3.14 Activities
3.15 Case Study

 Explain the importance of consumer behaviour analysis for marketing

decision making.
 Describe the variables that affect consumer decision making for financial
services.
 Discuss the impact of needs and motivation, perception and learning on

buying of financial services.
63
Financial Service,  Elaborate on the impact of group and social variables like family, reference
Consumer
Behaviour and groups, culture and subculture on consumer decision making for financial
Banking Products services.
 Apply the various models of consumer behaviour for effective marketing of

financial services.
3.1 Introduction
Some people regard marketing as an art. Others consider it a science.
Actually it is a combination of the two. Marketing involves the effective blending
of the behavioural science-anthropology, sociology, psychology with the
communication, art writing, graphics, photography, drama, to motivate, modify or
reinforce consumer perceptions, beliefs, attitudes and behaviour. To accomplish
this, marketing professional must be constantly aware of the consumer's attitudes,
beliefs, likes and dislikes habits, wants and desires. And since these are always
changing, steps must be taken to monitor them.
As societies change their attitudes towards dress, recreation, morals,

religion, education or even other people, marketing techniques also change.
Because the behavioural characteristics of large groups of people give the
directional force to any marketing 'efforts aimed' it those groups. Marketing tries
to use the trends in mass consumer behaviour to effect changes in specific
consumer behaviour.
3.2 The Complexity of Consumer Buying Decisions

While making even the simplest purchase, consumers go through a
complicated mental process.
For us to appreciate the complexity of the consumer's buying decision, we
need to understand the variety of individual influences on consumer behaviour;
the impact of environmental factors such as family, social, and cultural influences
on the consumer; and how these components are integrated in the consumer's
mind.
A firm's marketing efforts interacts with non-commercial sources of

information to stimulate the purchase decision process. This process is tempered
by the individual in influences of consumer behaviour, including motivation,
personality, learning and perception. The process stops when the consumer loses
64
interest or evaluates the product and decides not to make a purchase. If the Consumer
Behaviour for
purchase is made, the consumer has an opportunity to see whether the product Financial
satisfies his or her needs. If not, the consumer will discontinue the use of the Services
product.

1. While making even the simplest purchase, consumers go through a
complicated ___________process.
a. mental
b. money
2. A firm's ___________efforts interacts with non-commercial sources of
information to stimulate the purchase decision process.
a. selling
b. marketing
3.3 Individual Influences on Consumer Behaviour

The effort of all marketing is to influence people's buying behaviour, but it
is difficult to foresee the success of planned marketing programs because human
beings are all individuals. Each behaves differently, thereby making mass
consumer behaviour patterns us see everyday:
 People vary in their persuability. Some are easily persuaded to do

something; others are sceptical and difficult to convince.
 Some people have very 'cool heads' and control their emotions. Others are
'hot heads' and anger easily.
 Some people are loners, whereas others need the security of a crowd.
 Many people are oriented towards the acquisition of material things. Some
people are motivated mainly by spiritual matters.
 Some people spend their money cautiously. Others spend their money
extravagantly.
65
Financial Service, Many other contrasts in the behaviour of people could be noted such as
Consumer
interests in sports and hobbies, goal orientation, colour preference. All affect
Behaviour and
Banking Products consumers' buying decisions.
To further complicate the marketer's goal of influencing consumer

behaviour, consider these observations. First, people's attitudes, beliefs and
preferences change. What we have liked as children we may not like as adult.
That includes products, activities and living conditions.
Second, individual behaviour is inconsistent and difficult to predict from

one day to the next. An individual may like to go out and have dinner today, but
he may prefer to stay home tomorrow.
Third, people are often unable to explain their own behaviour. A man may
say h e bought a shirt because he needed it and it was at a discount of 30%. The
real reason may be different.
People often do not understand why they behave as they do. And if they do
understand their true motivations, they may fear expressing them.For example,
abusinessman who purchases a new Mercedes probably would be reluctant to
admit it if the real reason for the purchase was his insecurity amongst his peer
group.

1. The effort of all ___________is to influence people's buying behaviour,
a. marketing
b. selling
2. People vary in their ___________.
a. structure
b. Persuability
3. Individual behaviour is inconsistent and __________to predict.

a. Difficult
b. easy
66
Consumer
3.4 Needs and Motives Behaviour for
Financial
In the study of consumer behaviour, motivation is understood to mean the Services
underlying drives that contribute to the individual consumer's buying action.
These drives originate from some conscious or unconscious needs of the
consumer.Unfortunately, motivations cannot be directly observed. When we see a
person eat, we assume he is hungry, but that may not be correct. We eat for a
variety of reasons besides hunger - to be sociable, because it is mealtime, because
we are bored, or because we are nervous.
Often a combination of motives underlines our behaviour in making a

decision. The reasons (motives) a person switches an account from the city bank
to the people's bank may be (I) the people's bank is closer to work (II) it does 11ot
charge for overdrafts and/or (III) the staff at the peoples bank are more friendly.
Psychologists have tried to categorise needs to understand them better.

Abraham Maslow developed the widely used hierarchy of needs on the theory that
the lower biological or survival needs are dominant in human behaviour and must
be satisfied before higher, socially acquired needs become meaningful.
1) Physiological needs - food, drink, oxygen and sleep

2) Safety needs – avoidance/protection from threatening situations and
economic security.
3) Social needs - friendship, affection and a sense of belonging.
4) Esteem needs - self respect, recognition, status and success.

5) Self-actualisation - self fulfillment.
Although Maslow's hierarchy is a convenient way to classify human needs,

it would be a mistake to assume that needs occurs one step at a time. Usually
people are motivated by a combination of needs.
The problem of analysing motivation for marketing purposes is aggravated
by the fact that people are admittedly moved by both conscious and unconscious
needs. To explore the depths of the unconscious, psychologists like Einest Dichter
have developed a discipline called motivation research which although limited to
very small samples of consumers and hampered by analytical subjectivity, has
offered some insight into the underlying reasons for unexpected consumer
behaviour.
67
Financial Service,
Behaviour and
Banking Products 1. _____________is understood to mean the underlying drives that contribute
to the individual consumer's buying action.
a. motivation
b. leadership
2. Often a combination of __________underlines our behaviour in making a

decision.
a. money
b. motives
3. ________have tried to categorise needs to understand them better.

a. Psychologists
b. Marketers
4. Maslow's hierarchy is a convenient way to classify __________needs.
a. money
b. human
3.5 Individual Perception

While an individual is motivated by his personal needs for self-esteem, love
or social recognition, his behaviour is affected by his particular perception of
himself and world around him.
Perception is the sensing of stimuli to which an individual is exposed-the act

or process of comprehending the world in which the individual exists. E.g. when
an individual looks at an automobile that he needs for transportation, he perceives
more than a random collection of steel, glass, tyres and paint. He perceives an
integrated entity designed to provide a variety of benefits-transportation, comfort,
convenience, economy and even status for the driver
A person's perception of this integrated entity may be affected by the
individual's self concept, needs and motivations, knowledge, past experience,
feelings, attitudes and personality.
Self-concept and roles: We all carry images in our minds of whom we are
and who we want to be. If a man wants to appear successful and wealthy, he may
68
favour a 'Gold' credit card from Citibank of American express rather than from an Consumer
Behaviour for
Indian bank. Financial
Services
Marketers are very concerned with the perceptions that consumers have of
their products or services, because to the consumer, the perception is the reality.
As marketing consultant Howard Moskowitz says, if the consumer wants a
'natural taste' and if the consumer thinks lemonade with additives tastes natural,
that's what we'll give her.
'Lemon flavour' is lemon flavour, whether you get it from .a tree or from
chemical ingredients. The constituentsare different but what is perceived as lemon
flavour is, lemon flavour. That‟s reality, similarly a customer of an old
nationalised bank say SBI or BOI will continue will be a valuable customer of that
bank as long as his ego is not hurt and motives of security and convenience are
satisfied. He would believe 'A bank is abank - why shift to another when he is
happy with the present bank'.
Selective perception: One of the major problems that marketers face is the
fact that each individual exercises selective perception.
As humans we have the ability to select from the many sensations

bombaring our brains those that relate to our previous experience, need and
desires.
The average adults are exposed to nearly 10,000 messages a day - twice as
many as we, received 10 years ago. Yet most people are hardly aware of most of
these, we are limited not only by the physical capacity of our senses but also by
our interests. We focus attention on some things and avoid others. A single
newspaper may contain hundreds of advertisements but the average reader recalls
only few of these and is 50 influenced by even less
Recent research has shown that new automobile buyers are more likely to
read advertisement about the brands of cars they have already purchased than
about competitive makes.This electivity makes it important marketers to obtain
satisfied customers and build brand royalty, and the product to fit the image
created by advertising. Satisfied customers will be less likely to obtain
information about competing products and probably will not even notice it when it
is forced on them. Bank customers often prefer to see/read the ADSL messages of
their own banks that re-enforce their perceptions/feelings about security and
returns through their banking products. Unless a new bank or its products has
something very special and attractive or very unconventional and yet convenient
and convincing; such customer may not be diverted easily.
69
Financial Service, Theory of cognitive dissonance: Selective perception services us in many
Consumer
ways. Besides saving us time by filtering out irrelevant uninteresting data, it
Behaviour and
Banking Products protects us from having to face unpleasant realities. Leon Feslinger developed a
theory of cognitive dissonance, which states basically that people strive to justify
their behaviour by reducing the degree to which their impressions or beliefs are
inconsistent with reality (dissonance).
For example, people who use a 'diners club' credit card because they believe
it is the most prestigious and widely accepted card, may receive a mailer from
'ANZ Grindlays that proves that their gold card is even more exclusive with many
more advantages. This exposure may create dissonance because of the gap
between current thinking and 'new evidence'. Marketers such and ANZ Grindlays
hope that the recipient experiences dissonance because the 'Diners club' card
holder upon seeing the 'proof ' of greater effectiveness or value might than relieve
the uncomfortable tension resulting from the dissonance by applying for an ANZ
Grindlays card

1. ___________is affected by his particular perception of himself and world
around him.
a. behavior
b. motivation
2. __________is the sensing of stimuli to which an individual is exposed-the

act or process of comprehending the world in which the individual exists.
a. Motivaton
b. Perception
3. ___________are very concerned with the perceptions that consumers have

of their products or services.
a. Marketers
b. sellers
4. ___________are more likely to read advertisement about the brands of cars

they have already purchased than about competitive makes.
a. sellers
b. buyers
70
Consumer
3.6 Learning and Habit Development Behaviour for
Financial
Another individual influence on consumer behaviour is the way in which Services
consumers learn new information and developed purchasing habits. The major
objective of marketing is to teach people about products and where to buy them.
So marketers are interested in how people learn. Many psychologists consider
learning to be the most fundamental process in human behaviour. The advance,
'higher level' needs, for example, are learned. Learning produces our habits and
skills. It also contributes to the development of attitudes, beliefs, preferences,
prejudices, emotions and standards of conduct.
Learning is a relatively permanent change in behaviour that occurs as a
result of reinforces practices. Theories of learning are numerous but Most Can be
classified into two broad categories: cognitive and stimulus-response theory.
Cognitive theory views learning as a mental process of memory, thinking

and the rational application of knowledge to practical problem solving. This
theory may be an accurate description of the way we learn in school.
Stimulus response theory, on the other hand, treats learning as a trial and
error process whereby needs, motives or drives are triggered by some cue or
stimulus to cause the individual to respond in an effort to satisfy that need.
Satisfaction, then rewards or reinforces the response by reducing the drive and
producing repeat behaviour the next time the drive is aroused.
Let us examine how the stimulus-response theory works in marketing.

Advertising is a stimulus or cue, while a purchase is a response. The motivation is
to satisfy various needs. If the product that the consumer purchases gives
satisfaction then there is some reinforcement Additional reinforcement may be
given through superior product performance, good service, and the reminder
advertising. The advertisements by banks like Citibank or Global trust bank on
T.V., in news papers and at public places like airport, railway station or bus stops
re-enforces the response to the stimulus created about its products and services
with respect to safety, security, utility and status appeal - which is re-enforced by
repetition. The publicity campaign and hoarding by banks like UTI or HDFC bank
regarding one counter service or service with guidance to meet the needs easily
have similar re-enforcing effect on bank customers-both existing and probable.
Through repetition of the cues (advertisements) the learning process,

including memory, may be reinforced and repeat behaviour encouraged. Learning
may be further enhanced by engaging the consumer's participation in the process
through the use of free samples or in-home trials of the product. Finally if learning
71
Financial Service, is reinforced enough and repeat behaviour produced,a purchasing habit may
Consumer
result.
Behaviour and
Banking Products Habit is the natural extension of learning. It is the acquired or developed
behaviour pattern that has become nearly or completely involuntary. The old
cliché 'people are creatures of habit' is true.
Why most consumer behaviour is habitual: There are three reasons that
consumer behaviour is habitual. First we resort to habit when we select products
because it is easy. When we consider an alternative to an existing brand choice,
we are forced to think, evaluate, compare aid then decide. This is difficult for
most of us, not to mention risky. We may be dissatisfied with the new choice.
Second, we rely on habit because of necessity. Consider the person who
purchases 25 items at a provision, store. To evaluate all the features and
ingredients of competitive, brands would require hours, which no one has the
time-or the inclination to do.
Third, we resort to habit because it is the rational thing to do, as we learn
through trial and error which brands, serve us well and which do not, we also
learn which stores and service outlets satisfy us and which do not. When we find a
product or service of abank to our liking we continue to buy the product, patronize
the bank branch, because it is the intelligent choice to make.
Marketers have three Habit-related Goals
1) Habit breaking - a device to get consumers to break an existing purchase

habit that is to stop buying their habitual brand and try a new brand. Many
promotional devices are used to attract consumers to a new product or visit a
new store once. Giving away free samples, introductory trial offer, limited
time price offers, store opening special prices etc. are some of the methods
used to generate customer, traffic and new clientele.
2) Habit acquisition - to get consumers to acquire a habit of buying from their

establishment. To build a product preference habit, marketers may use
'reassurance' advertising to remind customers of an earlier purchase
response. Examples of advertising themes designed to build purchasing
habits are:
'The Citi never sleeps' for Citibank‟s round the clock services; 'don‟t
leave home without it' for American express cards.
3) Habit reinforcement - once consumersare won over, to get them to remain
habitual users. Each time a consumer uses a product and is satisfied with it,
72
the habit is reinforced. Continued satisfaction may reinforce the habit to Consumer
Behaviour for
such a degree that the purchase decision .is virtually automatic. Examples of Financial
second and third generation customers of banks around in each city. Services

1. Learning is a relatively __________change in behaviour that occurs as a
result of reinforces practices.
a. permanent
b. temporary
2. ___________theory views learning as a mental process of memory, thinking

and the rational application of knowledge to practical problem solving.
a. Stimulus response
b. Cognitive
3. ____________theory, on the other hand, treats learning as a trial and error

process whereby needs, motives or drives are triggered by some cue or
stimulus to cause the individual to respond in an effort to satisfy that need.
a. Stimulus response
b. Cognitive
4. _____________is the natural extension of learning.
a. Buyer
b. Habit
3.7 Family Influences on Buying Behaviour

We are all aware as to how our needs and expectation change over different
stages in our lifecycle.Your priorities as a teenager or a young adult or a family
man are very different. These differences are important and marketer as they
enable the marketer to fine tune his marketing effort by using family life cycle as
a segmentation variables
The family life cycle was developed in 1960, and was based on variables
like martial status, number and ages of children, work status and age. It has since
then, been widely 'used as a segmentation tool.
73
Financial Service, Because our age, income and family requirements, except for the basic
Consumer
necessities change over time, the family life cycle and identification of family
Behaviour and
Banking Products needs over various stages of the FLE are useful inputs to the marketer. The family
life cycle consists of 5 stages, the young bachelor stage, the full nest I, the full rest
I1 the empty nest and the solitary survivor stage. Expenditure priorities and need
for money at different stages have interesting implication for the demand for
various financial services. Figure gives you an idea of varying requirements of
consumers for banking services.
Family Life Cycle and Banking Needs
Stage Financial Situation Banking Needs
Young Bachelor Stage Few financial burdens Credit Cards, auto loan
Per capita income high low cost banking

services
Income low as compared
To future prospects
Fullest Married Home buying a priority Mortgage, Credit Card
With young children liquidity low may have overdraft savings

account
Working couples housing and durables

situation loans
Fullest Older Income stabilised. Good Home improvement

loans
Married with older Financial position, mid Of deposits money

equity investments market
certificate dependent deposit accounts fixed
children career, or
comfortable. Position,
flexi deposits other
money involving Matters
Investments services
74
Consumer
Empty nest-Older Significantly reduced Social security services, Behaviour for
Couple, with children income few loan services, med Financial
Services
Now not living at home claim services
May be retired

1. Our needs and expectation __________over different stages in our lifecycle.
a. change
b. dont
2. The family life cycle was developed in___________.
a. 1980
b. 1960
3. ______________life cycle was based on variables like martial status,

number and ages of children, work status and age.
a. Family
b. product
3.8 Behavioural Models for Analysing Buyers

Four different models of the buyer's 'black box' are detailed along with their
respective marketing applications:
 The Marshallian model, stressing economic motivations
 The Pavlovian model, learning
 The Freuidian model, psycho-analytical motivations
 The Veblenian model, psyclto-social factors
The Marshallian Economic Model

Economists were the first professional group to construct a specific theory
of buyer behaviour. The theory holds that the purchasing decisions are the result
of largely 'rational' and conscious economic calculations. The individual buyer
75
Financial Service, seeks to spend his income on those goods that will deliver the most utility or
Consumer
value' (satisfaction) according to his tastes and relative prices.
Behaviour and
Banking Products Adam Smith set the tone by developing a doctrine of economic growth
based on the principle that man is motivated by self-interest in all his actions.
Jeremy Benthan refined this view and saw man as finely calculating and weighing
the expected pleasures and pains of every contemplated action.
Alfred Marshall was the great consolidator of the classical and neoclassical
tradition in economics. His theoretical work, but his method was to start with
simplifying and to examine the effect of a change in a single variable (say price)
when all other variables are kept constant. Over the years his methods and
assumptions have been refined into what is now known as the modem utility
theory: economic man is bent on maximising his utility and does this by carefully
calculating the consequences of any purchase
Marketing Applications of Marshallian Model

From one point of view the Marshallian model is tautological and therefore
neither true nor false. The model holds that the buyer acts in the light of his best
'interest'. But this is not very informative.
A second view is that this is a normative rather than a descriptive model of
behaviour. The model provides logical norms for buyers who want to be 'rational'.
Although the consumer is not likely to employ economic analysis to decide
between abox of 'ship' and 'Shakti‟ matched, he may apply economic analysis in
deciding whether to buy a new car.
A third view is that economic factors operate to a greater or lesser extent in

all markets and therefore must be included in any comprehensive description of
buyer behaviour. Furthermore, the model suggests useful behavioural hypotheses
such as:
 The lower the price of the product, the higher the sales. In banking context,
it applies to increase in advance with lowering of 'interest rates.
 Tile lower the price of substitute products, the lower the sales of this product
and the lower the price of complementary products, the higher the sales of
this product in case of over drafts and loans.
 The higher the real income, the higher the sales of this product, provided it
is not an 'inferior' product holds good regarding medium and long term
deposits if perceived as safe and interest rate is reasonable.
76
 The higher the promotional expenditures, the higher the sale applies to Consumer
Behaviour for
credit cards, consumer loans and ATM cards. Financial
Services
The validity of these 'hypotheses does not rest on whether all individuals act
as economic calculating machines in making their purchasing decisions. For
example, some individual may buy less of a product when its price is reduced.
They may think that the quality has deteriorated or that the ownership has less
status value.
If majority of buyers view price reduction negatively, then sales may

decrease, contrary to the first hypotheses.
But for most goods a price reduction increases the relative value of the
goods in many buyers‟ minds and leads to increase sales. This and the other
hypotheses and intended to describe average effects. This is observed in respect of
reduction of interest rates in case of loans by banks.
The impact of economic factors in actual buying situations is studied

through experimental design or statistical analyses of past data. Demand equations
have been fitted to wide variety of products. More recently, the impact of
economic variables on the fortunes of different brands has been pursued with
significant results.
But economic factors alone cannot explain all the variations in sales. The
Marshallian model ignores the fundamental question of how product and brand
preferences are formed. It represents a useful frame of reference for analysing
only one small corner of the buyer's mind the 'black box'.
The Pavlovian Learning Model

This has its origins in the experiments that Russian psychologist named
Pavlov conducted on dogs. Pavlov rang abell each time before feeding a dog.Soon
he was able to induce the dot to salivate by ringing the bell whether or not food
was supplied. Pavlov concluded that learning was largely an associative process
and a large component of behaviour was conditioned this way. The model has
been refined over the years, and is today based on four central concepts - those of
drive, cue, response and reinforcement.
Drive: Also called needs or motives, drive refers to the strong stimuli
internal to the individual which impels action. Psychologists draw a distinction
between primary physiological drives such as hunger, pain, cold, thirst etc. and
learned drives which re derived socially such as cooperation, fear acquisitiveness.
A customer of abank once recognised and responded positively will show drive to
come again and again.
77
Financial Service, Cue: A drive is very general and impels a particular response only in
Consumer
relation to a particular configuration of cues. Cues are weaker stimuli in the
Behaviour and
Banking Products environment and or in the individual which determine when, where and how the
subject responds. Thus, a cold drink advertisement can serve as a cue which
stimulates the thirst drive in a child. His response will depend upon this cue and
other cues, such as the time of day, the availability of other thirst quenches and the
cues intensity.
Response: The process is the organism's reaction the configuration of cues.

Yet the same configuration of cues will not necessarily produce the same response
in the individual. This depends on the degree to which the experience was
rewarding, that is, drive reducing. A bank customer would demonstrate his
behaviour satisfied or otherwise depending on his past experience.
Re-enforcement: If the experience is rewarding, a particular response is re-
enforced; that is it is strengthened and there is a tendency for it to be repeated
when the same configuration of cues appears again. An individual for example,
will tend to frequent the same bank outlet so long as it is rewarding convenient,
fast friendly, flexible) and the cue configuration does not change. But if a learned
response or habit is not re-enforced, the strength of the habit diminishes and may
be extinguished eventually. Thus, an individual may acquire a new credit card, if
the existing card has some limitations or drawbacks. Or he may change his bank
due lo location, timing service standards, facilities etc.
Forgetting, in contrast to extinction, is the tendency for learned associations
to weaken, not because of the lack of reinforcement but because of non-use.
Cue configurations are constantly changing. The individual may see a new
bank branch near his house, or a special advertising offer for abank credit card.
Experimental psychologists have found that the same learned response will be
elicited a similar pattern of cues; that is, learned responses are generalised. A
housewife wills buy a similar brand of tea when her favourite brand is out of
stock.
A counter tendency to generalization discrimination: When an individual
uses two banks and finds one more rewarding - in terms of location, timings,
speed, courtesy, facilities, etc. his ability to discriminate between similar cue
configurations improves.
Discrimination increases the specificity of the cue response connection,
while generalisation decreases the specificity
Marketing application of the Pavlovian Model
78
The modern version of the Pavlovian model makes no claim to provide a Consumer
Behaviour for
complete theory of behaviour such important phenomenaas perception, the Financial
subconscious, and interpersonal influences are inadequately treated. Yet the model Services
offers insights about some aspects of behaviour of considerable interest to
marketers
Light introductory advertising is a week cue compared with distributing free

samples. Strong cues, although costing more, may be necessary in markets
characterised by strong brand loyalties.
For example new credit cards issuers frequently resort to waiving
membership fees for a limited time promotional offer to attract new members.
To build abrand habit, it helps to provide for a period of introductory offer.
Sufficient quality of product or service must be built into the brand so that 'brand
experience' is reinforcing. Since buyers are more likely to switch to similar brands
than dissimilar ones (generalisation), the company should investigate what cues in
the leading brands have been most effective. Outright imitation may not provide
the most transference, the question of providing enough similarity should be
considered. (Notice the levels of exclusivity conveyed by the colouring/ naming
of credit cards as 'silver', 'gold', and 'Platinum')
The Pavlovian model also provides guidelines in marketing and advertising

strategy. The Pavlovian model emphasizes the desirability of repetition in
advertising. A single exposure is likely to be a weak cue, hardly able to penetrate
the individual's consciousness sufficiently to excite his drives above the threshold
level.
Repetition in advertising/marketing messages has two desirable effects.In
fights forgetting, the tendency of learned responses to weaken in the absence of
practice. It provides reinforcement because after the purchase the customer
becomes selectively exposed to advertisements of the products.
Tile model also provides guidelines for 'message' strategy. To be effective
as a cue, an advertisement must arouse strong drives in the person. The strongest
product related drives must be identified. For chocolates, it may hunger' for cars,
it may be status, for safety belts, fear. The marketing and advertising practitioners
must search his cue box - words, colour pictures and select that configuration of
cues that provides the strongest stimulus to these drives.
The Freudian Psychoanalytic Model

According to Freud, the child enters the world driven by instinctual needs
which he cannot gratify by himself. Very quickly and painfully he realises his
79
Financial Service, separateness from tile rest of the world and yet his dependence on it. He tries to
Consumer
get others to gratify his needs through a variety of blatant means, including
Behaviour and
Banking Products intimidation and supplication. Continual frustration leads him to perfect more
subtle mechanisms for gratifying his instincts.
As he grows, his psyche becomes increasingly complex. A part of his
psyche-the id remains the reservoir of his strong drives and urges. Another part
the ego becomes his conscious planning centres for finding outlets for his drives.
An a third part his super ego channels his instinctive drives into socially approved
outlets to avoid the shame of pain or guilt
The individual's behaviour, is therefore, never very simple. His motivational

wellsprings tire not obvious to the casual observed not deeply understood by the
individual himself If asked why he purchased an expensive sports car, he may
reply that the liked its speed and shape, Ata deeper level he may have purchased
the car to impress others, or to feel young again. At a still deeper level, he may be
purchasing the sports car to achieve substitute gratification for unsatisfied sexual
strivings.
Many refinements and changes in emphasis have occurred in this model.

The instinct concept has been replaced by more careful delineation of basic
drives; the three parts of the psyche are regarded now as theoretical concepts
rather than actual entities; and the behavioural perspective has been extended to
include cultural as well as biological mechanism
Marketing Applications of the Freudian Model

Perhaps the most important marketing implication of this model is that
buyers are motivated by symbolic as well as economic functional product
concerns. The change of abar of map form a square to a round shape may be more
impel-taut in its sexual than its 'functional connotations. A cake mix that is
advertised as involving practically no labour may alienate housewives because the
easy life may evoke a sense of guilt.
Motivation research has proved some interesting and bizarre hypothesis

about what may be in the buyer's mind regarding certain purchases
Motivational researchers have to employ time consuming projective

techniques in the hope of throwing individual 'egos' off guard. When carefully
administered and interpreted, techniques such as word association, sentence
completion, picture interpretation and role playing can provide some insights into
the minds of the small group of examined individuals; but a 'leap of faith' is
sometimes necessary to generalize these findings to the population.
80
Nevertheless, motivation research can lead to useful insights and provide Consumer
Behaviour for
inspiration to creative men in advertising and marketing. Appeals aimed at the Financial
buyer's private world hopes, dreams, and fears fan often be as effective in Services
stimulating purchase as more rationally-directed appeals
The Veblenian Social - Sociological Model

While most economists have been content to interpret buyer behaviour in
Marshallian terms, Thorstein Veblen struck out in different directions.
Veblen was trained as an orthodox economist but evolved into a great social
thinker. He was man primarily as a social animal conforming to the general forms
and norms of his larger culture .and to the more specific standards of the
subcultures and face to face grouping to which his life is bound. His wants are
greatly moulded by his present group memberships and his aspired group
memberships.
Veblin's best known example of this is in his description of the leisure class.
His hypothesis to that much of economic consumption is motivated not by
intrinsic needs or satisfaction so much as by prestige seeking. He emphasized the
strong emulative factors operating in the choice of conspicuous goods like clothes,
cars and houses. Some of his points, however, seem overstated by today's
perspective. The leisure class does not serve as everyone's reference group many
persons aspire to the social patterns the class immediately above it. And important
segments of the affluent class practice conspicuous under consumption. There are
many people in all classes who are more anxious to 'fit in' than to 'stand out'. As
an example, William H. Whyte found that many families avoided buying air-
conditioners before their neighbours did.
Marketing Applications of the Veblenian Model

The various streams of thought crystallized into the modern social sciences
of sociology, culture anthropology and social psychology. Basic to them is the
view that man's attitude and behaviour are influenced by several levels of society
culture, subcultures, social classes, reference groups, and face to face groups. The
challenge to the marketer is to determine which of these social levels are the most
important in influencing the demand for his product.
Culture
The most enduring influences are from culture. Man tends to assimilate his
culture's mores and folkways, and to believe in their absolute rightness until he
confronts member, of another culture.
81
Financial Service, Subculture
Consumer
Behaviour and A culture tends to lose its homogeneity as its population increases. When
Banking Products people no longer are able to maintain face to face relationships with more than
asmall proportion of other members of a culture, smaller units or subcultures
develop which help to satisfy the individual's needs for more specific identity.
The subcultures are often regional entities, because the people of a region,
as a result of more frequent interaction, tend to think and act alike. But
subcultures also take the form of religion, nationalities, fraternal orders and other
institutional complexes which provide abroad identification for people who are
strangers. The subcultures of a person play a large role in his attitude formation
and become another important predictor of certain values he is likely to hold.
Social Class
People become differentiated not only horizontally but also vertically
through a division of labour.The society becomes stratified socially on the basis of
wealth, skill, and power. Sometimes castes develop which the members are reared
for certain roles or social classes develop in which the members feel empathy with
others sharing similar values and economic circumstances.
Because social class involves in different attitudinal configuration, it
becomes a useful independent variable for segmenting markets and predicting
reactions. Significant differences have been found among different social classes
with respect to magazine readership, leisure activities, food imagery, fashion
interests, and acceptance of innovation. A sampling of attitudinal differences in
class is the following with respect to their banking habits:
Members of the upper middle class place an emphasis on professional
competence; indulge in expensive status symbols; and more often that not show a
taste, real or otherwise, for theatre and the arts. They want their children to show
high achievement and precocity and develop into physicists, vice-presidents and
judges. The classes like to deal in ideas and symbols. They, besides recurring and
fixed deposits also take pride in credit cards and ATM.
Member of the lower middle class cherish respectability, bank savings,
college education and good house-keeping. They want their children to who self-
control and prepare for careers as accountants, doctors, lawyers and engineers.
They prefer to keep amounts in fixed deposits to meet future needs.
Members of the lower class try to keep up with the times, if not with the
Mehtas. They stay in older neighbourhoods but buy new kitchen appliances. They
spend proportionately less than the middle class on major clothing articles, buying
82
a new suit mainly for an important ceremonial occasion. They tend to raise large Consumer
Behaviour for
families and their children generally enter manual occupations. This class also Financial
supplies many local storekeepers, garage owners, politicians, sports stars and Services
labour-union leaders. Such segment keeps their funds in savings banks mainly for
getting liquid funds to be available in case of day to day needs.
Reference Groups
There are groups in which the individual has no membership but with which
he identifies and may aspire to reference groups. Many young boys identify with
test cricket players or astronauts, and many young girls identify with Hollywood
stars. The activities of these popular heroes are carefully watched and frequently
imitated. These reference figures become important transmitters of influence,
although more along lines of taste and hobby than basic attitudes.
Face to Face Groups

Groups that have the most immediate influence on the person's tastes and
opinions are face to face groups. This includes all the small 'societies' with which
he comes into frequent contact: his family, close friends, neighbours, fellow
workers, fraternal associates and so forth. His informal group memberships are
greatly influenced by his occupation, residence and stage in the life cycle.
'The powerful influence of small groups on individual attitudes has been

demonstrated in a number of social psychological experiments. There is also
evidence that this influence might be growing. David Riesman and his co-authors
have pointed to signs which indicate a growing amount of other direction, that is,
a tendency for individuals to be increasingly influenced by their peers in the
definition of their values rather than by their parents and elders
For the marketer, this means that brand choice may increasingly be
influenced by one's peers. For such products as cigarettes and automobiles, the
influence of peers is unmistakable.
The role of face to face groups has been recognised in recent industry
campaigns attempting to change basic product attitudes. For years the milk
industry has been trying to overcome the image of mild as a 'satisfied' drink by
portraying its use in social and active situation. The men‟s wear industry is trying
to increase male interest in clothes by advertisements indicating that business
associates judge a man by how well he dresses.
Of all face to face groups, the person's family undoubtedly plays the largest
and most enduring role in basic attitude formation. From them, he acquires a
mental set not only towards religion and politics, but also toward thrift, chastity,
83
Financial Service, human relations land so forth. Although he often rebels against parental values in
Consumer
his teens, he often accepts these values eventually. Their formative influence on
Behaviour and
Banking Products his eventual attitudes is undeniably great. Family members differ in the types of
product messages that they carry to other family members. Most of what parents
know about cereals, candy and toys comes from their children. The wife
stimulates family consideration of family appliances, furniture and vacations. The
husband tends to stimulate the fewest purchase ideas, with the exception of the
automobile and perhaps the home.
The marketer must be alert to what attitudinal configuration dominates in
different types of families and also to how these change over time. For example
the parent's ideas about the child's rights and privileges have undergonea radical
change in the last 30 years. The child has become the centre of attention and
orientation in a great number of house holds, leading some writers to label the
modern family a 'filliarchy'. This has important implications not only for how to
market for today's family but also on how to market to tomorrow's family when
the indulged child to today becomes the parent

1. ___________were the first professional group to construct a specific theory of
buyer behaviour.
a. Economists
b. Sellers
2. ___________set the tone by developing a doctrine of economic growth based
on the principle that man is motivated by self-interest in all his actions.
a. Alfred Marshall
b. Adam Smith
3. ___________was the great consolidator of the classical and neoclassical
tradition in economics.
a. Alfred Marshall
b. Adam Smith
4. If majority of __________view price reduction negatively, then sales may

decrease, contrary to the first hypotheses.
a. sellers
b. buyers
84
Consumer
3.9 Consumer Behaviour: Some, Learning Points for Behaviour for
Financial
Financial Services Services
It is said, satisfaction suffices, but delight dazzles. Average services set up
will compete for the customer by conforming to his/her expectations consistently.
Winner will surpass by constantly exceeding expectations, delivering at doorstep
additional benefits which the investor would never have imagined possible.
A personal loan to a cash strapped investor, surprises and leading to

satisfaction will retain the customer-investor. Telling the investor new
opportunities and helping him or her invest, If no cash with the customer, get a
loan for him/her under a guarantee you offer to the lender and help your customer
invest and help him/her reap benefits. Yes, it is that is where how you can hold
your customer with you and the customer is in need of such entrepreneurs who
will look after him/her at all times. If you call fill the bill then you are most
needed
Reward always your loyal customer before your customer thinks he/she
deserves specials from you.
Similarly hold back your potential defector, attract the fence sitters. Serve
up unparalleled value to your customer, is the watch word in the new millennium
customer psyche. After all why he or she should be with you and for what if you
cannot take care, of him or her.
Pradeep Kar, Managing Director of Microland, says:

'Customer delight docs not end at the front-office of a company it (just)
begins there.'
Abraham Koshy, a Professor of JIM-A, says:
'Customer delight should add value to both the customer and the company.
Don't provide abee lunch'.
What is a delight -- It is a fulfilment of latent needs that the customer is not
yet aware of - a quality of service that he/she does not consider possible from
marketers compete personalization of a standardized product or service an
unexpected benefit that does not result in profits for the company solutions to
problems offered, by a company's personnel at personal initiatives.
What justifies a delight only continuously rising satisfaction levels can hold
back potential defectors ever-rising value strengthens the loyalist's resolve not to
switch to the competition the promise of constant surprise turns experimenters
85
Financial Service, into life long customers entry barriers are raised for new competitors who have to
Consumer
set new standards and the compulsion to innovate constantly leads to pay-offs in
Behaviour and
Banking Products cost reductions and quality.
How to generate delight? Strive constantly to provide additional customer

value in every transaction, use a flexible service envelope around the core product
to generate surprise benefits, constantly surpass expectations that the customer has
built around your product or service treat every customer as though he/she is the
only customer whom the company wants, look for expectation performance gaps
in order to identify opportunities to delight.
R. Sridar of Ogilvy and Mather says -

If you want to drive competition crazy, ignore your competitors and
concentrate on your customer one-on-one. You won't find a more potent
competitive weapon than that. Hence, it is relevant to know that the only safe way
to bet on market is to assess whether a company is capable of creating greater
value for the customer than its rivals. The challenge there is to attain a value
insight. In fact while the value system is market specific, it is influenced by the
level of consumer evolution and the nature of alternatives available as well as the
cultural conditioning of customers.
C.K. Prahalad and Garry Hamel's concept is that in emerging markets there
is a great need, for foresight because of rapid pace of change which needs an
understanding of future drivers of value of three planes, Macro consumer changes
plane, competitive offerings plane and the categories codes plane. Value foresight
being crucial in the emerging markets, needs an understanding of the likely
changes in the value system driven by historical events, fresh competition and the
new cultural categories.

1. ____________suffices, but delight dazzles.
a. satisfaction
b. money
2. ___________always your loyal customer before your customer thinks he/she
deserves specials from you.
a. benefit
b. Reward
86
Consumer
3.10 Let Us Sum Up Behaviour for
Financial
In this unit we have focussed on consumer behaviour for financial services. Services
In this unit we discussed the complexity of consumer buying behaviour.
In this unit the various behavioural models for analysing buyers were even
discussed in detail.The family influences on buyer behaviour were even discussed
here in detail.In this unit efforts have been made to explain every aspect of
consumer behaviour in relation with financial services. Some of the very
important learning points were even discussed here in this unit.
After this detailed discussion the readers would have got the sufficient
knowledge about this topic.
Answers: (1-a), (2-b), (3-a)
Answers: (1-a), (2-b), (3-a), (4-b)
Answers: (1-a), (2-b), (3-a), (4-b)
Answers: (1-a), (2-b), (3-a), (4-b)
Answers: (1-a), (2-b), (3-a)
Answers: (1-a), (2-b), (3-a), (4-b)
87
Financial Service,
Behaviour and
Banking Products Answers: (1-a), (2-b)
3.12 Glossary
1. PLC - Product life cycle
3.13 Assignment
Write abrief note on needs and motives.
3.14 Activities
Write abrief note on individual perception.
3.15 Case Study

Discuss the family influences on buying behavior.

1. Mary Ann Pezzullo 'Marketing Financial Services, MacMillan India.
Limited (1999), IBA
2. A.H. Maslow, "Motivation and Personality (New York: Hamper and
Brothers 1954).
3. Richard P Coleman. "The Continuing significance of social class to
Marketing” Journal of Consumer Research, December 1983.
4. National Automated Clearinghouse Association Website
(http/www.racha.corn March 1997).
5. Henry Assael "Consumer Behaviour and Marketing Action "PWS' Kent
Publishing Co. Boston, 1992.
6. Mita Sujan and James Bateman, "The Effect of Brand Position S t r a t e g i
e s on Consumer Brand and Category Perception "Journal of Marketing
Research Nov. 1989 pages 454-467.
88
UNIT 4: BANKING PRODUCTS AND
SERVICES
Unit Structure
4.1 Introduction
4.2 Nature of Product

4.3 Products and Services in Banking
4.4 Elements of Product Mix

4.5 Product Life Cycle and Product Strategies
4.6 Using Product Life Cycle to Manage Marketing of Banking Products

4.7 New Product Development
4.8 Branding in Bank Marketing

4.9 Process and Product Development Cycle for Banking Services
4.10 Product Development

4.11 Let Us Sum Up
4.12 Answer for Check Your Progress

4.13 Glossary
4.14 Assignment
4.15 Activities
4.16 Case Study

 Describe the concept and significance of banking product types and product
cycles.
 Explain the concept of product and service.
 Understand the product strategies as applicable to banking.
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Financial Service,  Discuss the process of product analysis and product development.
Consumer
Behaviour and  Evaluate the role of brand in marketing of banking services.
Banking Products
4.1 Introduction
The product/service offering is among the most crucial element in marketing
of banking services.
The service is integral part of product in banking and is at timesan
indivisible part of any banking product. Similarly whether we talk of brand or
selling a product, the institution (bank) is always the deciding factor in product
design and delivery as the customers do not look at any product in isolation but
look at it as the particular bank's product.
In this unit we will discuss the important concepts of the types of banking
products, product life cycle, product strategies, product analysis, product
development and innovation and role of brand in marketing of bank's services.
4.2 Nature of Product

A product is defined as: "Anything that has the capacity to provide the
satisfaction, use or perhaps the profit desired by the customer." Product and
service are the words used interchangeably in banking parlance.
It must be remembered that whatever be the form in which a product or
service is provided; the focus willbe on the want and need satisfying aspects of
that product or service. Without such a focus on the customer‟s wants need
satisfaction no product service can exist for long.
For a product or service, when it is marketed the following two aspects are
very significant:
i) Offer - what is offered say a product at a price, and
ii) Manner of offering - how it is offered i.e. the manner of product delivery.
The product includes quality, features, accessories, packaging, brand,
warrant, etc. As the services are marketed like the products, products also include
services.
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An organisation may offer different product lines, each product line Banking
comprising of different product varieties all of which collectively represent a Products and
product mix. Services
Product planning, as it is called, comprises of the process of developing and

maintaining a portfolio of products which satisfy the wants and needs of customer
from different segments. Such product planning has to ensure maximum
utilisation of skills and resources of an organisation.
This product planning function consists of decisions on:

1) Product Line
2) Product Mix
3) Branding
4) Packaging
5) New Product Development
In the following paragraphs we shall discuss all the above aspects

elaborately.

1. A ___________is defined as: "Anything that has the capacity to provide the
satisfaction, use or perhaps the profit desired by the customer."
a. product
b. service
2. The ___________includes quality, features, accessories, packaging, brand,
warrant, etc.
a. service
b. product
3. An organisation may offer different product lines, each product line
comprising of different product varieties all of which collectively represent
____________.
a. Product mix.
b. Product range
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Financial Service,
Consumer
4.3 Products and Services in Banking
Behaviour and
Banking Products As we have seen, a product is abundle of all kinds of satisfaction of
customer's wants and needs.
Products can be goods, a service or goods + service or even just an idea. A
product is, in short, all the things offered to a market. It can involve physical
objects, design, brand, package, price, services, literature, attractive ideas,
personalities or even the image of abank or its branch.
It is thus essential to define a product or service in terms of product
functions i.e. what the customer expects from a product or service offered by
abank.
The normal connotation to differentiate between the product and the service
is that the product is something tangible and service means something intangible.
In general marketing terms, word- product is mostly used. Philip Kotler defines a
product as:
"A product is anything that can be offered to a market for attention,

acquisition, use or consumption; it includes physical objects, services,
personalities, places, organisations and, ideas."
The bank's products are its deposit or borrowing scheme or other products
like credit card or foreign exchange transaction which are tangible and measurable
whereas service can be such products including the way /manner in which they are
offered which cannot be shown but expressed.
But if two banks have same or similar products and pricing; it is the service
(though abstract) which differentiates between these two banks and the better
service (delivery or offering) which wins customer's confidence and satisfies him.
It can, therefore, be said that the better service is even more important than
just a good product when we talk about marketing of banking services.
We will discuss more elaborately about various services offered by abank

various types of deposits and services offered by abank.
Different Banking Products

The discussion and process of understanding the bank marketing will not be
complete unless we know the various products/schemes tailored by different
banks to cater effectively to the customers needs. Important among the banking
products are the following:
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Deposit Accounts Banking
Products and
Knowing the human behaviour with respect to wants and needs or rather Services
making wants to be felt as need is the first challenge in marketing of bank's
schemes. The second challenge is the resistance to change and/ or new ideas
which becomes a touch barrier in the process of marketing products/services of
abank.
Banks, therefore, tailor various deposits schemes and market them to either
their/ existing customer or the new segments of customers. Before selling the
deposit schemes, it becomes necessary to identify the needs and aspirations of the
customers to make them most ideal and acceptable to satisfy their needs.
From the marketing angle the different deposit schemes of the bank can be
grouped on the basis of:
 The mode of deposit
 The mode of repayment
 Additional benefits
 The end use of accumulated funds
 The calculation and payment of interest
 Need for liquidity, safety, growth, etc.
Let us illustrate a few schemes on these criteria:
Need Deposit
1. Personal Saving, Liquidity, easy Saving

withdrawal
2. Turnover, many transactions Current

business
3. Interest income required and lump Fixed deposit monthly int.

sum saving Dep. scheme, quarterly int.
Dep. scheme, cumulative

Deposit scheme
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Financial Service,
Consumer 4. Gift to some one Gift cheque, Festival Deposit
Behaviour and
Certificates
Banking Products
5. Safe Travel Travellers Cheque
6. Deposit in small instalments Recurring deposit scheme,

Daily deposit
Let us first discuss the type of 'main deposits' from the broad classification
point.
 Savings Deposit:
Means a form of deposit which is a deposit account titled as savings
account, savings bank account or savings deposit account which is subject to
restrictions about the number of withdrawals there from (RBI Directive
dt.27.12.85)
Current Deposit Account

Means a form for deposit from which withdrawals are allowed freely, any
number of times depending upon the balance in the account or up to a particular
agreed amount and Shall be deemed to include other deposit accounts which are
neither savings deposit nor term deposit (RBI Directive dt.27.12.85)
Demand Deposit
Means a deposit received by abank which is withdraw able on demand. S.B.,
CIA and overdue deposits are the examples of demand deposits. Customers
having these accounts can withdraw their deposits from their accounts at any time
they desire.
Time Deposit
Are deposits which are not repayable on demand. Such deposits are
repayable on a fixed date in future which is termed as a due date. Rate of interest
for the said period is contracted at the time of opening the account. Deposits held
under these following ' schemes are called time deposits.
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Banking
Products and
Services
Fig 4.1 time deposits
These deposits are:

1. With due dates
2. Long Tern
3. Higher Interest Rates
4. Each transaction: a separate contract

5. Non negotiable
Let us briefly examine the characteristics of each of the above 'Time

Deposits'
1) Short (Term) Deposit: Deposits for a period of 15 days and less than 12
months are called short term deposit. Rate of interest is as prevailing from
time to time as directed by RBI.
i. Fixed Deposit: Deposits for a period of 12 months and above up to
120 months are termed as fixed deposits. Minimum amount accepted
is Rs.100/-. Interest is paid in 112 yearly basis at agreed rate and as
directed by RBI from time to time.
ii. Monthly Income Plan: Interest is payable every month. Minimum
amount accepted is Rs.500/- and interest is paid at the discounted rate
or if depositor agrees to take holiday of 3 months, the bank pays
interest at the stipulated rate from 4th month
iii. Regular Income Plan: Interest is paid every quarter to the depositor.
Minimum amount stipulated is Rs.500/-. Interest is paid on quarterly
basis.
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Financial Service, 2) Deposit at Notice: while keeping the deposit with the bank a depositor
Consumer
stipulates the notice period ranging from 15 days to 90 days. Depositor has
Behaviour and
Banking Products to give stipulated notice to bank he intends to withdraw the deposit, Due
date will count from the notice date. Minimum amount for 15 days to 45
days is Rs.1, 000/- and for 45 days to 90 days it is Rs, 2,500/-.
3) Recurring Deposit: This is recurring in nature. A depositor while opening

the account has to stipulate the period of deposit and amount of the agreed
monthly instalment - which is normally in multiples of 51- or 101- an for
the periods multiples of 12 months up to 120 months.
Instalment is required to be deposited regularly between any days

from first to last date of month. Interest is compounded quarterly and
principal + interest (accumulated) becomes payable on due date or one
month after payment of the last instalment which ever is later.
4) Festival Deposit: Account is opened in the name of festival. Minimum

amount stipulated is Rs.251-. This account can be opened for a minimum
period of 4 months and maximum of 12 months.
5) Cash Certificates: This scheme is meant for persons having seasonal

incomes like farmers, artisans, etc. The face value is in multiples of Rs.50
up to Rs.10,000/- and maturity period from 24 months to 120 months.
Some schemes combine recurring deposit and fixed deposit schemes
benefits.
The prepayment of deposits at the desecration of bank attracts penalty i.e.
1% less interest than due for that period. When loan is allowed e.g. such deposits
(where allowable) interest on that loan is charged 2% above the rate of interest
payable on these deposits which is a price to cover the cost involved in that
transaction.
It is interesting to observe that there is not a very large difference/variation

in the lowest and highest deposit rates of deposits offered by a small co-operative
bank, a nationalised bank, a private bank or a foreign bank. What differ are the
presentation, pricing strategy, labelling and marketing style which projects quality
and professional friendly approach which makes all the difference in customer
making a decision to bank with such banks using professionally marketing.
It is equally interesting to know that although benefits are same or similar as

to interest rate or maturity value, the titles vary very much in their 'catchy' value.
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One more shifts is, earlier most brochures highlighted only interest rate or Banking
benefits but now service charges are also advertised in a subtle and friendly Products and
Services
manner,
Non-Resident Account
We have seen the types of deposits maintained by bank of Resident Indian
in Rupees.
Banks authorised to deal in foreign exchange also maintain various non-
resident accounts which bring the non-resident Indian segment in their portfolio
and ensure both business and exchange profit in the conversion process.
Due to the special consideration in cash reserve calculations and the

exchange communication/profit involved, many banks have been competing with
each other to attract and retain such non-resident accounts.
Who is a Non-Resident Indian?

As per FERA, 1973, an Indian Citizen staying outside India (except in
Nepal or Bhutan) for employment or carrying out business or vocation outside
India or for any other purpose in circumstances indicating his intention to stay
abroad or for an uncertain period I s called 'non-resident'.
a) Indian citizens who proceedabroad for higher studies, business visits and
medical treatment continue to be treated as persons resident in India even
during their temporary absence from India.
b) Indian citizens staying abroad on foreign government/government

assignment, world bodies or officials of Central, State Government, and
Public Sector undertaking and deputed/posted abroad to their offices
including Indian Diplomatic missions are treated as non-resident during
their stay abroad.
Non-Resident Account can be opened by the names of non-resident persons
and persons of Indian origin residing abroad., Persons of Indian origin means a
person who himself or either of his parents or any of his grand-parent was an
Indian citizen or a permanent resident in undivided Indiaat anytime.
OR
A wife of an Indian Citizen or a person of Indian origin shall also be

deemed to be of Indian Origin even though she may be of non-Indian origin.
However, non-resident (E) accounts can also be opened in the names or

overseas companies, partnership firms, societies and corporate bodies which are
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Financial Service, owned by non residents of Indian nationality/origin or trusts, wherein these
Consumer
persons have irrevocable beneficial interest to the extent of 60%.
Behaviour and
Banking Products These non-resident accounts have to be properly introduced.
The following types of non-residential accounts can be opened in Rupees.

a) Current Account
b) Saving Account
c) Term Deposit
d) Special Term Deposit

e) Recurring Deposit
f) Cash Certificates
g) Annuity Deposits
Such N.R.I. accounts can be even jointly opened if:

1. All the account holders are N.R.1.s
2. All are of Indian Nationality or origin

3. All are resident in the same country if belonging to bilateral group (now
modified. in the same or different countries in Ext. group)
Funds in N.R. (E) accounts can be accepted in any currency if they are
transferred to India in an approved manner from the country of residence of the
account holder or from any other foreign country if the country of residence of the
account holder and the country from which remittance is received are both in
same group (now modified).
The following local credits are accepted‟ in N.R. (E) account:
1. Interest/Dividend/sales proceeds of units of UTI, National Plan, Savings

Certificates, and Share provided these are purchased out of external funds
2. Interest on Term Deposit of account holder

3. Transfer from accounts to account holder ad the same/another branch of
bank.
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The following is difference in N.R. (0) and N.R. (E) Account: Banking
Products and
Services
N.R. (0) N.R. (E)
1. Conversion of resident accounts as Conversion not allowed from

account holder becoming non- resident account to N.R. (E)
resident Or new account in the
name of N.R.
2. Source of credit resident as well as Source foreign credit only

foreign
3. Repatriation not allowed Repatriation allowed
4. Joint account with Resident Indian Joint account with N.R. only
- close relative allowed
5. No Tax exemption Eligible for tax exemption
N.R. (E) accounts are eligible for:

1) Tax Exemption
 Income tax
 Wealth tax
 Gift tax
2) Repatriation of balances held in N.R. (E) account including interest is

allowed without prior reference to RBI.
3) Interest rates payable are higher for N.R. (E)
4) Reconversion facility is available Funds from NR (E) can be transferred to
N.R. (Ext) Term Deposit Account Loans 1O.D. Against N, R. (E) Term
Deposit is allowand up to specified limit for approved purpose and
repayment has to be made either by adjusting the deposit or by fresh
remittances in Forex from abroad,
5) Premature payment is allowed like conditions for domestic deposit

6) When the account holder changes his status from N, R to resident the
account should be changed to resident on getting intimation from account
holder.
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Financial Service, Types of Loans/Advances
Consumer
Behaviour and Like the deposit accounts are life bleed or raw material for the bank, the
Banking Products advances are essential to deploy those funds are to earn revenue for the banks.
In order to balance liquidity and profitability properly, banks have to use

their available (lonable) funds judiciously, keeping in mind all the statutory
requirements imposed‟ by RBI.
The employment of funds is made generally as:
1) Cash-certain portion has to be held to meet day-to-day demand of customers

and to hold certain portion in QRR with RBI.
2) Money to call or short notice-Refers to inter-bank borrowings. In day-to-day

requirement banks borrow from each other, the interest whereon varies day
to day.
3) Investments-The investment by bank depend upon statutory requirement as
per Sec. 24 of Banking Regulation Act, 1949 and Sec. 42 of RBI Act, 1934.
4) Advances-As banks have to pay interest on various types of deposits
received from customers, in addition to salary cost, rates, taxes, insurance,
stationery cost and other administration costs, they have to earn adequate
profit to meet all these expenses by deploying funds profitably.
This is done depending on RBI guidelines and bank's own policies.

The advances are granted to eligible borrowers as per bank's policy,
available lonable funds, bank's corporate plan, its performance budget and
borrowers' character, capacity, capital and credit needs.
The following principles are kept in mind:

1) Safety - the advance should be safe.
2) Liquidity - as the time deposits are slowly reducing, advances should be

liquid and not blocked for long period.
3) Profitability - Interest and charges be remunerative.

4) Speed - decided on security, risk, type of industry, etc. which is the pricing
decision linked to bank rate prevailing.
5) Purpose - The advances are generally granted for productive purpose after
verifying utilisation and repayment capacity.
6) Security - This is the safeguard to fall back upon in case of emergency and
recovery by sale of assets. The stock or Fixed Assets or collateral securities
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are insisted upon. Banking
Products and
7) Margin - Depending on the security a cushion is required in case of Services
recovery by sale of asset and this is normally dependent on the type of
security - which is marketable, ascertainable, saleable and transferable.
8) Repayment - the period of repayment and quantum is linked to type of
security, life of security and fund generation capacity (cash flow).
Main Types of Advances Granted by banks:
As the bank's function is to accept deposits from customers and lend money
to borrower, the advances are granted on short-term, medium. Term or long term
basis depending on the fix deposit, lonable funds, exposure to industries and
bank's business policy and profitability requirement.
The types can be classified as
a. Funded
Short Term Long Term
1. Overdraft Short term loans
2. Cash credit Medium Term Loans
3. Bills purchased/discounted Long Term Loans
b. Non-Fund:
Bank Guarantee and Letter of Credit
Let us briefly touch each of these types as a product by the bank:
a) Fund Facilities
1. Over draft-under this type of facility, bank permits aborrower to
overdraw his current account up to a decided limit. The
borrower is allowed to draw in excess of the amount of deposits
up to a specified sum. Normally, it is short term and for
specified purpose to finance current assets,
2. Loans-The loan is normally for acquiring fixed assets and

repayable within 12 months, 1-3 years, 5-7 years or 10 years.
In loan there is usually only one debit and several credits

(repayment) in a phased - predefined manner.
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Financial Service, 3. Cash Credit - It is a, form of advance to meet the demand of
Consumer
trade, industry etc. Operations are conducted similar to the
Behaviour and
Banking Products overdraft. The difference is that while in O.D., CIA is necessary
and it is usually temporary or short term, in cash credit limit is
assessed based on projected sales level and required inventory.
(C/A) level. A limit for 1 year is allowed and balance fluctuates
with in the range. This is given for working capital requirement
of a corporate borrower.
Technically, it has to be brought in credit once a year.
4. Bills purchased and bills discounted - A bill of exchange coines

into being when business transactions take place on credit basis.
A bill of exchange is an unconditional order in writing,

addressed by a person (drawer) to another (drawee) signed by the
maker, requiring the person to whom it is addressed to pay on demand
or at a fixed or determinable future time a certain sum of money to or
to the order of a specified person or the bearer. Banks grant advance
against such bills by purchasing or discounting these bills
b) Non-fund limits
1) Bank Guarantee
A guarantee is a contract to perform the promise or discharge
the liability of a third party in case of his default. In such contract
when the bank undertakes the function of guaranteeing it is known as
a Bank Guarantee, where abank issues a guarantee on behalf of its
corporate customer to a third party. There are generally 3 parties:
 The principal debtor

 The creditor
 The surety
In abank guarantee the liability of surety is secondary and
depends on the principal debtor. In bank guarantee the surety
undertakes the obligation at the request of the principal debtor.
This like L/C is called as non-fund facility as immediately

parting with funds is not required and it earns good commission to the
banks.
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Banking
Products and
2) Letter of Credit Services
A letter of credit is the undertaking given by bank at the instance of its

corporate customer addressed to a seller saying that it (bank) would honour the
drafts drawn there under subject to the terms and conditions stipulated therein.
An Inland LIC is when both buyer and seller are in Indiaand Foreign L/C is
issued on behalf of Indian buyer (importer) to the Foreign Seller (exporter).
The L/C is opened on the basis of the contract between buyer and seller and
the bank undertakes to honour the commitment on behalf of the buyer to pay the,
amount In case of satisfying stipulated condition.
The buyer gets credit and seller gets an assurance from the bank and the
corporate client either buyer or seller gets the benefit of this arrangement.
Banks earn commission for issuing L/Cs.
Products in Demand
We have seen in the earlier paragraphs, different types of deposits advances
and non fund facilities. In the context of products of Banks in recent day Bank
marketing it is essential to take a look at the following two products which attract
the middle 'class customers and also are profitable to the banks
a) Consumer Loans
b) Credit Cards
Due to the restrictions of loanable funds and the less demand for loanable
funds by industry the profits of banks were affected during the period when stock
market and industrial scenario was slack. Merely mobilising deposits do not mean
sound marketing policy. It becomes necessary to market the loans as well as to
improve profitability. Similarly, taking into account the customers need to buy
things in the open market either products of high value of moderate value
consumer loans and credit cards serve the purpose of satisfying such need
adequately thereby matching consumer's demand and supply of bank's loanable
funds.
a) Consumer Loans
Like financing the needs of working capital (for current assets) and loan (for
fixed assets) of an industrial customer or a trader, banks also finance 'consumer
loans' under different captions to its individual customers. The middle class being
the largest segment of bank depositors (savers) and their purchasing power being
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Financial Service, tapped by various companies in consumer durable industry, the job of identifying
Consumer
credit needs of such already tapped segment makes it easier for the banks to
Behaviour and
Banking Products market the consumer loans. As such customers have ready needs to buy consumer
durables like fridge, TV, stereo, two-wheeler, etc, for which they have
comfortable cash flow but not the capital (ready cash balance) to purchase such
items of their own.
Let us examine the modalities of such 'consumer loan' scheme
For whom-
 For existing consumers of the bank
 For customers with proven ability and willingness to repay and who are
interested in starting relationship with the bank.
Salient Feature
 It can be availed by individual who are 18 years of age.
 It is offered for worthwhile purchase or approved purpose to purchase an

article, TV/Video, AC etc
 The amount can be minimum of Rs 5 ,00 to Rs 5 Lacs
 The security taken while advancing such loan is hypothecation of asset so

purchased or lien over another asset of adequate value to cover the loan
amount
 The repayment is in equated monthly instalments (EMI) which is to be

repaid over a period of (minimum) 12 months to (maximum) 60 months.
This is arrived at after verifying the customer's income, saving/repaying
potential and the life of asset so purchased
 The repayments can be through a standing order or by collecting post-dated

cheques from the customer.
 Interest rate charged for such loans is as per bank's policy and RBI
guidelines from time to time
Although such loans have very good potential demand from middle class
customers, it becomes obligatory for the banker to do a thorough scrutiny of the
customer and his credit worthiness and repaying capacity as well. For this purpose
a probing scrutiny is made to cover the following important aspects
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1. Age-Proof like ration card or school leaving certificate. Banking
Products and
2. Address-Should be in bank's command area, can be checked from ration Services
card, electricity bill, proof of salary/income.
3. Income proof - Salary slip or salary certificate regarding employees in

service and income proof/certificate copy of I.T. Return in case of person on
their own (self employed, professionals).
4. Creditworthiness - Satisfactory confidential reports from the employer.
5. Security-The customer‟s personal worth is calculated by taking into

account :
 Average balance in account.
 Shares/Debentures (M.V.).
 Life Insurance Policies (S.V.).
 Real Estate Property.
 Gold/Jewelry.
The minimum value of such assets blocked should nor be less than
Rs.50,000 for salaried customers and not less than Rs. 1.00 Lacs for
professional customers.
6. Repayment-In EM1 within 12-60 months.
7. Costing-Let us take an example of a consumer loan say for Rs.1 Lack.

Loan amount - Rs. 1,00,000
Repayment period - 36 months

Interest rate - 15% (say)
Therefore, EMI - Principal component + Interest componenets

Principal component of EMI = 1,00,000/36 = Rs. 2778 p.m.
Interest component of EMI = 1,00,000 * 15 * 3136 = Rs. 1250 p.m.

Therefore EMI = Rs. 2778.00
+ Rs. 1250.00
Rs. 4028.00
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Financial Service, Besides interest:
Consumer
Behaviour and i. Processing fees of 1% of loan amount subject to a minimum of 5001- and
Banking Products maximum of Rs. 1, 5001- is charged.
ii. For post dated cheques Rs.101- per cheque is charged.

Banks have had very good experience about these consumer loans in terms
01 customers demand and as nationalised banks were not encouraging such loans
(except loans, FD), Co-operative banks, private sector banks and foreign bank
have tapped this segment very well and have deployed the funds and broadened
customer base on one hand and have earned good income as well..
Credit Cards
„Plastic Money' or credit cards have become very popular as bank's product
and have wide acceptance in Indian Market.
The credit card allows a holder to make purchases (upto his sanctioned
credit limit) without making purchases in lending shops/markets to make payment
of bills-electricity or telephone--or to withdraw funds (cash upto a pre decided
limit) as and when required.
The credit cards widely accepted are
Visa cards
Who can have it?
The profile for the prospective visa card holders can be wide i.e., persons of
18 years to 60 years of age. Higher middle income, professionals and financially
mature segment is the largest segment for credit cards
Salient Features
 It is open even for non-customers (non-account holders) .
 No entrance fee is charged
 Annual subscription fee of Rs.250/- is charged
 Family add-on cards are issued @ Rs.200/-- each
 These are affiliated to visa international
 It is valid for transactions in a chain of over 8 - 10000 merchants
 Minimum amount payable can be as low as 1120th (5) of the principal

outstanding.
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 Cash advance of upto a certain limit is allowed on which 2% (porn.) service
Banking
charges are charged. Products and
Services
 For purchases, no service charge is applied if a payment comes within 15
days.
Benefits
 It is safe and convenient
 It facilitates easy purchases
 It provides confidence while traveling
 The owner of the card is sanctioned a resolving credit facility which satisfies
his 'Ego Needs' and also 'purchases -anywhere, anytime-need as well.
 Cardholder's limit is enhanced every year.
This enables bank to have higher profits and more holders who can be non
customers, in its wings)

1. A___________can be goods, a service or goods + service or even just an
idea.
a. Product
b. satisfaction
2. A _________is anything that can be offered to a market for attention,

acquisition, use or consumption.
a. satisfaction
b. product
3. If two ________have same or similar products and pricing; it is the service

(though abstract).
a. banks
b. consumers
4. ___________Deposit Are deposits which are not repayable on demand.

a. current
b. Time
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Financial Service,
Consumer
4.4 Elements of Product Mix
Behaviour and
Banking Products By product mix is meant the total range of products offered by a bank.
In marketing terminology the product mix has three main characteristics:

1) Width
2) Depth
3) Consistency
These can be shown as a diagram in the following way -
Fig 4.2 product mix charecteristics
Width of a product-mix depends upon the number of product groups or

product lines whereas the depth depends upon the number of products in each
line. The consistency means whether the products have production affinity as well
as market affinity.
For the purpose of diversification, frequent changes are made in the product
mix. Broader product mix enables better business turnover 10 minimizes the risk
of failure.
The following factors affect any product-mix:

1) Cost of production/delivery
2) Demand from customers

3) Advertising/distribution cost
4) Policy of the bank

Acceptability of any product or product mix depends upon:
1) Consumer acceptance
2) Satisfactory Performance
3) Adequate distribution
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4) Effective Packaging/Branding Banking
Products and
5) Good service/delivery Services
It can thus be seen from the foregoing details that in marketing of banking
services, product mix consists of product lines which mean similar products or
services like I deposits, loans, investment counseling services. In each product
line there can be different products like example under category of deposits there
can be saving or checking accounts, The width depends upon such number of
product lines whereas the depth means how many product types are offered in a
particular product line. To cite an example abank giving 12 different types of
loans like education loan, housing loan, industrial finance, consumer durable loan
etc. has abroader product mix. Depending upon the market demand i.e. customer's
needs this mix has to be widened or deepened as a prudent marketing strategy.

1. By ____________is meant the total range of products offered by abank.
a. product mix
b. product range
2. __________of a product-mix depends upon the number of product groups.

a. length
b. Width
3. For the purpose of diversification, frequent changes are made in the
__________.
a. product mix
b. product range
4.5 Product Life Cycle and Product Strategies

As the products volume (sales) and sales revenue follow a typical pattern,
the concept of product life cycle has been one of the important concepts in
marketing which must be properly understood.
As each product passes through certain typical but definite stages in its life-
span, we will look up into the important stages:
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Financial Service, i) Introduction
Consumer
Behaviour and ii) Growth
Banking Products
iii) Maturity
iv) Decline
It must be borne clearly in mind that the growth or decline of products
depends not on product alone but the market in which it is launched.
Fig 4.3 Product life cycle
A key concept on which marketers rely is the concept of PLC i.e. Product
Life Cycle. It in essence means the stages in product life from its conception to
obsolescence as mentioned earlier. From strategic view point it provides important
guidelines about product management
The figure given above depicts a typical PLC where the Y-axis shows
volume of sales (business), X-axis shows the time scale.
Introductory Stage/phase
This is the stage when a new service or product has just been introduced in
the market. This stage in the product's life cycle is characterized by low sales and
most pf the times negative profits which may be due to lack of awareness about
the product or limited distribution or unfamiliarity with the product.
In banking industry, however, it is different from consumer goods industry
as the products have been regulated for long and prices were also controlled by
statutory agencies. Promotion being the only variable which could be
manipulated, advertising and personal service were the options for enabling rapid
product growth
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Growth Stage Banking
Products and
After a product survives the introductory stage, it passes into the growth Services
stage. At this point, competitive strategies by other banks can affect the growth.
The promotional strategies tend to change during this stage to keep up the sales.
The product/services are fine tuned during this stage. Sales tend to grow and
profits increase during this phase. Market acceptance of the product is the key
factor at this stage
Maturity Stage
Having continued, at the growth stage, the product reaches a plateau in it
growth curve and thus into the maturity stage. The most notable indicator of this
phase can be the initial stability and then slowdown in volume of sales/profit
Products in maturity stage can give indications about changes required in

product strategies. The competition at times may tend to thin up, the margin to
stabilize the p w t h at maturity phase. It may force to lower the price of the
product or additional cost in promotion and distribution of the product.
Decline Stage
After maturity, with increased competition on change in consumer
preferences a downward shift/drift in sales or reduction in profit May start. Except
in case of new diversified products in banking industry, such sudden decline cases
are not many. We will see the application in the foregoing paragraphs with respect
to decline, death or obsolescence of bank products.
In real life, in banking - being a financial service industry, all products need
not follow such a cycle but still the concept of product life cycle has important
place in product marketing strategy. The bank, knowing what happens to different
products and services at different stages in a given economic scenario in a market
can decide and improve its planning. In fact the trial balances, monthly MIS
dataand quarterly business figures compiled by tlie planning divisions can indicate
the demand and supply position of various products as inter-se composition (vis-a-
vis budgeted pattern) and as a percent share of the total market vis-a-vis the
potential for each product. A suitable flexible plan with a matching pricing
strategy can ensure sustained growth of all the products ensuring growing
business and matching profits – of course with growing customer satisfaction.
Understanding product life cycle may provide inputs for strategic planning
at various stages
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Financial Service,
Behaviour and
Banking Products 1. A key concept on which marketers rely is the concept of ___________.
a. PLC
b. DLC
2. ___________stage is the stage when a new service or product has just been
introduced in the market.
a. maturity
b. Introductory
3. After a product survives the __________stage, it passes into the growth
stage.
a. introductory
b. maturity
4. After___________, with increased competition on change in consumer
preferences a downward shift/drift in sales or reduction in profit may start.
a. maturity
b. introductory
4.6 Using Product Life Cycle to Manage Marketing of

Banking, Products
The introductory stage of the product's life cycle is characterized by low or
negligible sales and .negligible or no profit. When allnew account or product
which is designed to suit to a particular segment of customer is launched after
research by R and D or marketing department, if the same is not properly
advertised or promoted by the staff, initial launching costs will be higher and due
to unawareness resulting in low or no response. Initially it may show very low or
negligible sales.Credit card or ATMs when introduced initially in India shared
similar response.
The products like consumer loans or housing loans or automobile finance
shared a very high growth when the market was booming due to high growth rate
in consumer durable, car and housing (Real Estate) market.
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It ensured both growing demand, very good sales and also very good profit Banking
due to lucrative lending rates charged to such customers who had smooth cash Products and
Services
flow but not lump sum money to buy the much needed car or home or TV/VCR
which were strongly marketed by the seller of these products. In this growth
phase, aggressive marketing by product launchers in these industries enabled bank
to fulfill the needs created by them through their (banks') own products and
services. Here, so to say the growth phase of real estate, consumer durable and
automobile industry coincided (matched) with growth phase of products/services
marketed by banks which was a very good timing to launch and continue
provision of such products as loans and credit limits or loans/advance against
deposits, shares etc.
When all the banks started giving liberal loans for products marketed by
these 3 sectors, the competition went up although the demand was growing, which
resulted in maturity or saturation of banks' products/services and compelled some
banks to adjust the pricing (lending rates) downwards to continue their
products/services to be attractive to buyers so as to ensure the business growth.
The saving accounts or pass book accounts have also reached the maturity
phase as the growing awareness amongst the customers for higher yield make
such low yield products less attractive. Due to the change in interest rate structure
which is linked to the demand and period of (short term) deposits, customers don't
like to block more funds in such type of accounts except for basic safety and
liquidity criteria to meet urgent/unforeseen expenses. To overcome the decline in
such accounts some banks have started flexi accounts giving a combination of
saving and short term investment to provide mobility at the same time ensure
retaining of low cost funds for the bank.
There has been a clear-cut decline in current account of traders who don't
block any funds in such '0' yield accounts and arrange funds to get the cheques
passed as and when the clearing cheques are received.
Due to tax-saving option in the market the short term deposits are getting
diverted to such schemes which provide safety, short term liquidity, comfortable
yield and tax concessions.
A close watch of economy, government policies, industrial scenario and the
middle class habits provide an insight to the banks to study and watch the shift in
saving/borrowing habits of its customers. The change in macro-economy affect
the customer's behaviour at the micro-level due to which proper research and
analysis of the trends of demand and supply as well as the shifts in pattern of
various deposits gives an idea and opportunity for the bank to change its products
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Financial Service, with respect to the design, pricing and need to launch new or innovative
Consumer
products/services to ensure customer's interest and loyalty to their bank accounts.
Behaviour and
Banking Products Through observing and monitoring the product life cycle it becomes easier
to decide and implement the product development strategy.
Generally, these are four strategies recommended for growth in business and
profits which are-
1) Market Penetration
2) Market Development
3) Product Development
4) Product Diversification
It can be shown through the following Figure
Fig 4.4 growth strategies
Market Penetration
Market Penetration strategies involve increasing the sales for an existing
Product in an existing market. This, generally, involves an increase in marketing
effort. These can be possible through three strategies -
i) Increasing current rate of use of a product
ii) Attracting competitor's customers.
iii) Attracting non-users of a product
Increasing rate of usage is strategy normally used by many marketers in

consumers durable industry. Banks can use this strategy to promote increased
usage of certain services. Of course, not all services are conducive to this type of
strategy
Attracting competitor's customers is the second option in market penetration
strategy making a SWOT analysis of abank and its competitors with respect to
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consumers' needs and place, promotion, price of bank's own products enables Banking
abank to attract customers to its products. Products and
Services
The third strategy is to attract the non-users. Cross-selling of a product of
abank is an example of such market penetration strategy. Providing trust/advisory
services can be another example of such strategy
Market Development
Market Development strategies involve the increase in marketing effort for
existing products in new markets. The one option can be to attract new customers
for existing products and the second expanding areas (branch expansion policy).
Managing bank's product/service mix in increasingly competitive market

determines the success or survival of banks in the volatile market situations

1. The __________ stage of the product's life cycle is characterized by low or
negligible sales and negligible or no profit.
a. introductory
b. maturity
2. Market___________strategies involve increasing the sales for an existing

Product in an existing market.
a. demand
b. Penetration
3. ____________rate of usage is strategy normally used by many marketers in
consumers durable industry.
a. Increasing
b. Decreasing
4.7 New Product Development

The new products can be developed for a new market or existing
market.New product can also be launched in improved market or in the new
market, Innovating a product essentially means developing a product resulting in
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Financial Service, an increase in the product line.This enables diversifying business risks, continuing
Consumer
life cycle of a product and also ensuring profits.
Behaviour and
Banking Products Such Ideas are subjected to discussions and examination by expert bankers,
economists, experienced field staff and marketing experts within abank to validate
the applicability of such ideas to lead to new and salable product
Normally such ideas for new products pass through following stages:
Fig 4.5 New product stages
The very modern manifestation of new product development has been the
consumer convenient-credit card. The major impetus of bank charge account plans
began about 3 decades ago when the Franklin National Bank near New York city
sponsored a plan which received massive publicity within the banking
community. By mid 60‟s, seventy five commercial banks had set up such credit
plans. However, risks of recovery and lack of quick profits let to gradual
withdrawal of new entrants from the plan. It took almost a decade to establish
credibility amongst merchants regarding acceptability of credit cards and
streamline recoveries. As time passed revolving credit and shift of charges to
consumers was acceptable and then credit cards became abuzz word. This
innovation has thereafter proved to be of convenience to customers, enabled
merchants in sales promotion and proved to be profitable for the banks as well
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Role of Product in customer satisfaction Banking
Products and
Any product or service developed by abank has to satisfy the needs of the Services
customer. In fact, the product development, positioning, launching etc, is decided
based on customer needs only. It is, therefore, necessary that the strategies keep
the customer needs and satisfaction as the focal point.
General Need of customersare:
 Financial Security
 Quick Service
 Convenience
 Attractive yield
 Low cost loans
 Personalized service
 Advice/Counseling
 Easy Access
 Simple Procedure
 Attractive Package
 Friendly Approach
 Variety of Products
This list is only illustrative.
The product conceptualization and development has to bear these needs in

mind.E.g. Using the PLC approach seen earlier abanker may group these needs
into following segments
Young Customer A Family with teenage children A retired couple
Would prefer a Would have need for proper Would prefer for
bank which saving with safety of funds, high safety, higher
provides security, reasonable yield and availability yield counselling
convenience and of low cost loans for children‟s advice and
quick, friendly education, convenient location personalised service
service at and convenient hours. at convenient
convenient hours. location.
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Financial Service, Thus some needs like safety, liquidity, better yield, personalized service and
Consumer
convenient location and timing are the common factors which have to be satisfied
Behaviour and
Banking Products by any bank‟s product.
As we have seen in the earlier inputs, proper matching of market segments

and needs is the key factor in deciding product strategies for existing as well as
new products. An ongoing market research about positioning strategies by other
banks vis-a-vis changing needs of customers would positively supplement such
exercise to design and launch new products which lead to customer satisfaction
and also more business for the bank.
The following are some of the real life examples of new products developed
by banks to meet the needs/expectations of its customers:
1) Flexible deposits
2) Debit cards
3) Credit cards with ATM card

4) Cumulative deposits
5) Facility of over drawing and saving bank account.
Such new products are developed keeping in mind the growing/new

demands arising out of customers‟ needs/expectations within the
guidelines/directives of IBAIRBI with permutation combination of interest
payable on deposit accounts

1. ___________a product essentially means developing a product resulting in
an increase in the product line.
a. Innovating
b. promoting
2. The very modern manifestation of new product development has been the
consumer convenient-____________.
a. aadhar card
b. credit card
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4.8 Branding In Bank Marketing Banking
Products and
You have already studied this concept in your earlier unit on branding in Services
MS-6 in detail. However, to focus the concept with specific reference to bank
marketing let us re-look at the same.
A brand is the name or design which identifies the products or services of a

manufacturer and distinguishes them from those of competitors.
Brand names may be given to each product or to a complete product line.

Branding is the process of deciding what brands the company should offer.
Branding also differentiates a product which invites the attention of

customers. It gives details as to benefits and quality and ensures the loyalty of
customers. It enables abank to do the market segmentation as each product from
out of a product line can attract a distinct segment of customers.
Branding decisions are taken based on market research and assessment of

customer needs and preferences.
Generally before deciding brands, the following questions have to be

answered satisfactorily:
1) Is the brand name essential?

2) What brand name would suit?
3) Should products be branded separately or as a product line?

4) It is necessary to segment the market for each brand?
5) Is the brand needed for strengthening existing market segment form a new
market?
While selecting abrand name abank should,

i) Chose a short and simple one.
ii) Prefer one which is easy to pronounce and remember.

iii) Avoid confusing or negative connotations.
iv) Ensure that it suits the characteristics of a market.

v) If the bank's name is highly established and accepted the brand name should
include that (bank's) name also like 'citicard' or 'Indbank' fund or 'Bobcard',
etc.
Advantages of branding to buyers (customers)

a) Brands are dependable guides to contents, processes, qualities, etc.
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Financial Service, b) They make shopping of various products feasible and convenient.
Consumer
Behaviour and c) They assure satisfaction.
Banking Products
d) They satisfy the status needs or the emotional needs of the customers.
Advantages of branding to sellers (Bank)

a) It ensures repeat sales through identification.
b) It ensures product stability through customer loyalty.

c) It helps segmenting a market.
d) Customer may even pay a higher price for branded product than an
unbranded one.
e) It shields the product from price competition.

f) Successful brands add to the corporate image of the bank.
The brand establishes after undergoing following chain-

Non recognition----- Recognition--------Preference--------Loyalty--------
Repeat buying
Role of Brand in Bank Marketing

As the brand enables seller bank to build up a certain image which in turn
ensures receptivity of advertising as well as repeat business and consumer loyalty,
brand plays an important role in marketing of banking services.
In banking industry as the competition is 'cut throat' and products are quite
similar as to the basic nature and benefits/returns to the customers, the service
delivery and branding are excellent tools which enable abank to create and
maintain an image among the customers.
Like the brand names 'TATA" or "Godrej" or even "Lijjat Papad" or "Zandu
Balm" customer loyalty goes to products which are linked to' the brand names of
their established and well known producers.
Brand name has to give a positive message and create pleasant associations.
In USA there are more than 5 Lacs brands registered. In Indiaalso thousands
of brands are registered. It become important even here in India where products of
widely different nature are entering the selling channels. Branding is significant
and essential in banking until faith and confidence of the customers are firmly
established.
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In fact at the macro level or corporate level the positioning provides abank Banking
framework to' view itself in the industry concerning the totality of its orientation Products and
Services
towards the marketplace strategy and as micro application with respect to a
specific product or service brands call help to establish its products in the
competition market. Some of the examples of brands are:
BANK PRODUCT BRAND
Citibank Credit card Citi bank card

State Bank of India Mutual Fund SBI Mutual Fund
Canara Bank Growth Fund Schemes Can Growth
Can Share
Indian Bank Housing Loan Ind Shelter
Citibank Car loans Citimobile
It can be, therefore, said that brands are very important as product
(marketing) strategy in marketing of bank's services as branding indicates how the
organisation chooses to use branding as an integral part of its overall marketing
strategy. To the customer such brand name means a way to identify the product
and differentiate the product from other similar products in the market
In the context of bank marketing it is important to note that as the customer

loyalty and patronage is built around bank's name and image, the bank's position
and consumer's perception of abrand in customer's mind makes it easier to market
the product brands.
Logically, it is very few products which sell as brands irrespective of bank's

name if they have distinct advantage and benefits and have been so advertised
constantly. In majority of cases, the bank's overall image is what counts in the
selling process and the customer comes to know about the specific brands more
beneficial to him. It is, therefore, clear that with all its product range and brand of
distinctive products/services, the bank has to develop an image among the
customers and then encashing this 'whole' brand-image, has to market the products
branded for specific customer segments to win over other bank's products.
In a customer's language, two questions have to answer satisfactorily in this
branding effort:
i) What is it in this bank which is different from other banks in terms of its
position, sign off and product range?
ii) What are the product brands which are more beneficial to me which this
bank offers distinct from other bank's products. In summary, both bank's
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Financial Service, brand and product brand are important in the marketing strategy for more
Consumer
clientele, more customer satisfaction and more business in the long run.
Behaviour and
Banking Products

1. A __________is the name or design which identifies the products or
services of a manufacturer and distinguishes them from those of
competitors.
a. brand
b. product
2. __________names may be given to each product or to a complete product

line.
a. product
b. Brand
4.9 Process and Product' Development Cycle for

Banking Services
In the 7 'P's of marketing of banking services, the product related decisions
are very important. To know about the concept of product/service delivery, it is
necessary to know the process cycle concept. In order to have effective marketing
or selling, proper understanding of the concept of product/service delivery is
essential.
The products have to be launched through a well thought product
development strategy. Launching a product or delivering a product to customers
depends on whether it is a totally new and innovative product or just modification
of an existing product. Equally important is the timing and market situation when
a product is launched. It, then, becomes necessary to have suitable pricing and/or
promotion strategy
Process Cycle in Product Development

The product development in banking depends on many factors which
together with the steps in the process decide the success or otherwise of a product
launched.
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The process cycle is the stages of product while it is given in the hands of a Banking
Products and
customer. It is like a flow-chart of steps involved in this process. Let us take a
Services
simple example of a savings bank deposit account. The following aspects are
involved before opening the account.
 New customer approaches with a request to open the account.
 He has to establish identity/bring introduction.
 Account opening documents/forms have to be completed duly signed.
 Pay-in-slip has to be filled in to pay deposit/required amount in cash.
 Specimen signature card/forms have to be signed.
 If cheque book is required, the requisite application form/slip has to be

completed and signed.
 The pass book issued has to be collected.

Thus the Savings Deposit as a product develops from the cash brought in by
the customer and deposited in his account opened after passing through the
aforesaid process.
The acceptability of the product is facilitated by simplification of the

process so that the customer, find it easier and convenient to go for that product.
In service organisation like banks, the system by through which service

delivery takes place is called the 'Process'. This process of delivering a product or
service is akin to the operation management in a manufacturing industry where
the raw material gets converted into a finished product i.e. an input passing
through a mechanism or process becomes an output.
The three processes applicable in delivery of service products can be
indicates as:
 Line Operations- e.g. self service hotels.
 Job Shop Operations-combination of operations using different sequence

e.g. Hospitals or Educational institution.
 Intermittent Operations- i.e. service is rarely repeated e.g. consultancy for

projects.
In application of these concepts of process in banking situations abanker
will have to ask some pertinent questions.
 What are the steps involved in delivery process of a product/service?
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Financial Service,  What can be the logical sequence of event?
Consumer
Behaviour and  What modifications are necessary to smoothen the process?
Banking Products
 At what point and how much consumer contact is involved/desirable?
 Can the technology be useful to speed up the process?
The marketing can be successful if the product development, packaging and

delivery are properly synchronized from the view point of the bank as well as the
customer.
It becomes quite necessary in reviewing the process cycle to consider:
 Customer's benefit
 Concept of service as seen by customer
 Method of offering the service
 Service delivery system

These can be shown as in the following manner:
Consumer Benefit Concept
Concerned with consumer's view point
Translated to service concept
Concurred with the benefits offered by service
Translated in to a service offer
Concerned with greater details
Translated into a service delivery system
Concerned with people and process
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In such delivery of service, the process cycle and a specific market segment' Banking
Products and
has to be considered specifically.
Services
Packaging and Delivery
Packaging in the context of marketing of banking services means the art,
science and techniques of selling the products and services to the customers
ensuring their satisfaction, keeping in mind two salient aspects:
a) Actual delivery and sale of product.
b) Packaging as a function should consider.

(i) Selecting proper material.
(ii) behavioural aspects.
Functions of Packaging
Packaging in normal marketing parlance should do the following functions:
1) Protection
2) Appeal
3) Perform
4) Convenience
5) Cost-effectiveness
The packaging must be attractive and attracting the customer, should build
confidence and indicates real intrinsic value of the product. Consumer research
indicates that the colour and design of packaging is very important as it affects the
consumer purchase decisions. Packaging also should be convenient, useful and
cost effective.
Delivery: Packaging, it must be borne in mind, is much more than just

packing. It is ' a marketing necessity. As the customer doesn't just want a product,
he wants an integrated, combined, pleasant and eye catching package "get it on
the top to gain action" at the close of a sale. Packaging so to say completes the
sale (process) cycle triggered off by advertising.
A simple example can be of the Piggy Bank or Pigmy Deposits popularized
by Syndicate Bank giving small Saving Bank Boxes in the shape of Pigs or 'minty'
similar scheme by Bank of Maharashtra in the shape of a squirrel which promoted
the product fast among children due to the novelty and toy value of the packaging.
Colorful and Crisp plastic envelops of FDRs by many banks facilitate the
close of sale on a very positive note and attract other customersas well. It serves
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Financial Service, as a means of publicity and has retention value and multiplier effect to popularize
Consumer
not just the product but the image of the bank as well.
Behaviour and
Banking Products Service Delivery: When you go to abank with an intention to withdraw
your money from S.B. Account, either with the cheque book or a withdrawal slip,
it is given to a clerk - who verifies the instruments and balance in your account
and then given the monthly corresponding to the withdrawal amount, Here the
check, withdrawal slip, become the delivery system. In product/service delivery
the physical evidence and the people are very important elements.

1. In the _________of marketing of banking services, the product related
decisions are very important.
a. 7 'P's
b. 4P‟s
2. The__________have to be launched through a well thought product

development strategy.
a. brand
b. products
4.10 Product Development

Product Development and Delivery: Some Examples
To understand better about the concept of product development and stages
of delivery of a product in banking situation let us take three illustrations-
i) The Flexi Limit Deposits

To know product development
ii) The Easy Access Deposit

iii) The classical example of fixed deposit - to know the stages of delivery of
abank product.
Let us first take the example of a Flex Units Deposit Account of a Private
Sector Bank.
It is the facility that provides a customer freedom of transferring the excess
funds in saving bank account to a Term Deposit Account of his choice. It also
126
ensures the flexibility in transferring a portion of the term deposit back to savings Banking
Products and
bank account in case of a need with this type of facility (product), the bank can
Services
offer higher interest to customers without affecting their liquidity position which
gives the attractive option to customers to have both liquidity as well as higher
yield.
Let us first understand how this scheme works as a product and then try to
see the intricacies involved in such product development:
i. Balance in excess of the minimum required sum in Savings bank account is

automatically transferred to a term deposit of customer's choice.
ii. In case of need, to meet the cheques drawn by the customer, his term (Flexi)
deposit gets transferred to his S.B. account.
iii. On maturity as per customer's instructions the (Term) Flexi Deposit is either
renewed automatically or the entire amount (principal + interest) is
transferred to S.B. account.
iv. The transfer of funds from SB Account to term deposit account is made at a
minimum of 5 units of Rs.10,001- each and a further in multiples of
Rs.10,001- each.
v. A statement giving details of outstanding balances under SB (Term) Flexi
deposit is furnished as and when required.
Now as a product when such a scheme is developed it requires a close co-
ordination between the following departments:
a) Corporate office - to approve such a product as a concept as a policy-
taking into accounts RBI/IBA guidelines.
b) Marketing Dep’t - to study the demand and products developed by other
banks.
c) Operation Dep’t - to decide suitable transactions and required accounting
for the same.
d) Accounts Department - to streamline the inter department transactions
smoothly and effect the funds properly under respective heads to decide the
interest accrued and payable from the date of opening of account of passing
(converting) a transactions.
Thus the product development in case Flexi Deposit Account requires close
co-ordination between the following departments:-
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Financial Service, Corporate Office------ Marketing Dep‟t ------- Operation Dep‟t---------
Consumer
Accounts Dep‟t ----------- Delivery
Behaviour and
Banking Products If we take another example of easy access deposit of a foreign bank,
following aspects are important:
 Minimum deposit accepted is Rs. 10,000
 Deposit is accepted under any scheme of term deposit (except R.D.)
 Rate of interest and period of deposit is as per RBI guidelines.
 An overdraft of upto 75% is available through current account at a

chargeable interest.
 If such overdraft is taken, interest is paid on full deposit amount and interest
is charged only on amount of O.D. for the actual period of use.
 The period of deposit is 46 days to years.
 A cheque book is given with current account.
 Depositor can avail cash advance upto Rs.3,000/- from any branch of the
bank.
 "Interest on O.D. can be recovered from the customer's current or savings

account.
 Transaction charge of Rs.11- per transaction is charged on all transactions

CIA.
 OD is made available @ 2% higher interest than the simple base rate

payable on deposit.
Benefits
 The customer pays no service charges.
 Withdrawals take place through CIA cheques.
 Freedom to avail 75% of deposit as withdrawal.
 Despite withdrawals, deposit continues to earn interest.
 The customer's money is safe.

Now if we look at this scheme a product development it is a deposit as well
as advance scheme and close co-ordination between following departments is
essential from conceptual state to actual delivery of product.
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Corporate Office------ Marketing Dep‟t ------- Operation Dep‟t--------- Banking
Advance dep‟t ------ Accounts Dep‟t ----------- Delivery Products and
Services
Fixed Deposit Account
Product Attraction: It is a deposit for a fixed amount of money, for a

specified period and at a fixed rate of interest. The rate of interest opted may be
simple or compound. It being higher than interest payable on S.B. account it
becomes an attractive feature.
The term deposits are accepted as short term, simple fixed deposit or
reinvest deposits.
Features
 Deposits can be 46 days or 5 years
 The term of deposit is fixed initially
 Rate of interest is decided as per term
 Premature withdrawals though allowed attract a penal rate of interest
Benefits
 the customer earns higher interest
 funds are secure
 Funds can be saved for specific purpose
 Funds can be withdrawn in emergency
 Free remittance of interest is allowed
 Irrespective of fluctuations, guaranteed earnings are assured
 Term Deposit (fixed deposit) is transferable to any branch of the bank in

India
Process of Delivery
1 Customer Approaches with cash/cheque/instruction for fixed deposit

2 Application made on fixed deposit voucher/record
3 Account opening form and signature/authority card is completed
4 Pre-numbered certificates of deposits are issued
5 Customer‟s instructions regarding renewal/repayment are obtained
6 Fixed deposit receipt prepared/signed/entered
7 F.D. actually – delivered to the customers
129
Financial Service, Thus the above stages involved in delivery of a simple case of bank fixed
Consumer
deposit enables to visualize how the product delivery process has many stages
Behaviour and
Banking Products from the time a customer approaches for a particular product (being
attracted/convinced by its use in fulfilling his specific need) till it is actually
delivered

1. _____________Account is the facility that provides a customer freedom of
transferring the excess funds in saving bank account to a Term Deposit
Account of his choice.
a. Flex Units Deposit
b. Current deposits
2. The _____________deposits are accepted as short term, simple fixed deposit
or reinvest deposits.
a. saving
b. term
4.11 Let Us Sum Up

In this unit we have focussed on the banking products and services. Here the
main area of discussion was banking services. In this unit we discussed the nature
of products that are offered by the banking sector and we studied in very detail
about the various services offered by the banking sector.
In this unit the marketing mix for banking sector. We even studied the
product life cycle of banking product. Basically the banking is a service industry
so all the marketing principles are very similar. Branding and bank marketing
were also discussed here in very detail. The various stages of product
development were even explained in a very detailed way.
After this detailed discussion the readers would have got the sufficient
knowledge about this topic.
130
4.12 Answers for Check Your Progress Banking
Products and
Services
Answers: (1-a), (2-b), (3-a)
Answers: (1-a), (2-b), (3-a), (4-b)
Answers: (1-a), (2-b), (3-a)
Answers: (1-a), (2-b), (3-a), (4-b)
Answers: (1-a), (2-b), (3-a)
Answers: (1-a), (2-b), (3-a)
4.13 Glossary
1. FDRs - Fixed deposit receipts are where amount is deposited with the
bankers for a definite period of time. Rate of interest is more as compared to
saving bank interest.
131
Financial Service,
Consumer
4.14 Assignment
Behaviour and
Banking Products Write abrief note on products and services in banking.
4.15 Activities
Discuss the elements of product mix in banking industry.
4.16 Case Study

Discuss the product development cycle for banking services.

1. Dynamics of Bank Marketing, R.K. Madhukar, UBS Publisher-1990.
2. A Handbook o j Management Techniques, M. Armstrong, Excel Books-
1995.
3. Principles of Bank Management, Vasant Desai, Himalaya Publication-1993.
4. Elements of Marketing Management, Pradeep Kumar, Kedainath and Co.

Meerut, 1995.
132
Block Summary
In this block we have discussed on services in very detail. This block
focused on services and marketing of services in very detail.
In this block we have studied about financial services and marketing of
financial services in very detail. In the first unit we discussed about the financial
services in very detail. We discussed here in this unit about the service. What are
the roles of this sector in our economy? Here we discussed the evoloution of this
sector in detail. We even discussed the characterstics of this sector in very detail.
Later in the second unit we discussed the marketing portion of this sector in very
detail. In this block we discussed in very detail about the marketing aspect of
financial services. Here in detail we discussed the marketing mix of services.
The difference between the product and services was even discussed here in
very detail.In this block we had a detailed discussion on consumer behavior for
financial services, where we studied the behavior of consumer in regards to the
financial services and how does he have here in this sector. In this block under
unit 4 we had a detailed discussion on the banking productsand services; here we
even discussed the product mix for banking industry and even the product life
cycle of the product of banking industry. After going through this block the
readers will certainly feel confident in the topics of the block and would have
understood the basic concepts and objectives of this block.
133
Financial Service,
Consumer
Block Assignment
Behaviour and
Banking Products Short Answer Questions
1. Marketing Mix
2. 4 Ps of Marketing
3. Product mix for financial services

1. Discuss the characterstics of Financial Services.
2. Discuss the Impact of Technology on financial services.
3. Discuss the marketing mix for financial services.
134
Enrolment No.
Unit No 1 2 3 4
Nos of Hrs
2. Please give your reactions to the following items based on your reading of
the block:

………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
……………………………………………………………………………………………..
135
which ought to be
brought within

Ahmedabad-382 481.
FINANCIAL MARKETS
PGDF-103
BLOCK 3:
DISTRIBUTION, PRICING,
RETAINING CUSTOMERS
AND CONSULTANCY
SERVICES

Ahmedabad
FINANCIAL MARKETS

Pune
Editorial Panel
Author
Dr. Gaurav Singh
Language Editor
Ms. Kersi Bhesaniya

Ms. K. Jamdal
Ms. Lata Dawange
Ms. Pinaz Driver
Mr. Kiran Shinde
Mr. Prashant Tikone
Mr. Akshay Mirajkar

permission from us.
Acknowledgment
book.

PREFACE
understanding.
FINANCIAL MARKETS
Contents

AND CAPITAL MARKET
UNIT 2 MONEY MARKET
Exchanges in India
PRODUCTS

FRAMEWORK
Service
Development

BANKING SERVICES
SERVICES

MARKETS
Ambedkar
Open University
FINANCIAL MARKETS
BLOCK 3: DISTRIBUTION, PRICING, RETAINING

CUSTOMERS AND CONSULTANCY SERVICES
UNIT 1
DISTRIBUTION, PRICING AND PROMOTIONS
STRATEGY FOR BANKING SERVICES 03
UNIT 2
ATTRACTING AND RETAINING CUSTOMERS IN
BANKING SERVICES 51
UNIT 3
ADVISORY AND CONSULTANCY SERVICES 88
BLOCK 3: DISTRIBUTION, PRICING,
RETAINING CUSTOMERS
AND CONSULTANCY
SERVICES
Block Introduction
As we are progressing the area of production has been increasing, gone are
the days when only products which are tangible in nature used to be produced.
Now a day the production of services is immensely rising and because of this the
importance of this subject can never be underestimated.
In this block we will be discussing about the distribution, pricing, retaining

customers and consultancy services. In this unit we will be discussing in very
detail about the meaning and importance of distribution, pricing, retaining
customers and consultancy services. In this block we will be studying the banking
Services and Issues in Delivery; we will be focussing on the banking services in
very detail and the various types of banking branches shall be discussed in this
block in detail. Here we will be discussing the various pricing objectives,
methods. We will be discussing the about sales promotion and management
information system in very detail. In this block we will also be discussing in very
detail the topic how to attract and retain customer in banking industry. Thereafter
in the third unit we will be discussing the advisory and consultancy services sector
in which we have discussed in very detail about portfolio management and credit
rating.
After going through this unit the students will be confident enough about the
basics of financial services the marketing of this sector.
1
Distribution, Block Objective
Pricing, Retaining
Customers and After learning this block, you will be able to understand:
Consultancy
 The basic concepts of distribution, pricing and promotion for banking
Services
services.
 Relationship marketing in the banking sector.
 Customer‟s relationships management.
 The process of creating service differentiation through service quality.
 The marketing approach for merchant banking services.
 The depository services.
 The takeovers and mergers.
Block Structure
Unit 1: Distribution, Pricing and Promotions Strategy for Banking
Services
Unit 2: Attracting and Retaining Customers in Banking Services

Unit 3: Advisory and Consultancy Services
2
UNIT 1: DISTRIBUTION, PRICING AND
PROMOTIONS STRATEGY FOR
BANKING SERVICES
Unit Structure
1.1 Introduction
1.2 Banking Services and Issues in Delivery

1.3 Channels of Distribution for Banks
1.4 Types of Branches

1.5 Electronic Methods of Distributing Financial Services
1.6 Pricing of Banking Products/Services

1.7 Pricing Objectives
1.8 Pricing Methods

1.9 Pricing Reviews and Committees
1.10 Price Setting in Practice

1.11 Promotion of Banking Products/Services
1.12 Guidelines on Advertising by Public Sector Banks

1.13 Sales Promotion
1.14 Internal Communication

1.15 Marketing Information Systems (MIS)
1.16 Let Us Sum Up

1.18 Glossary
1.19 Assignment
1.20 Activities
1.21 Case Study
3
Distribution, 1.0 Learning Objectives
Pricing, Retaining
Customers and After learning this unit, you will be able to understand:
Consultancy
Services  Explain the concepts of distribution, pricing and promotion for banking
services.
 Apply these concepts in bank marketing.
 Discuss issues in delivery of banking services.
 Describe the effect of pricing policies in marketing of banking services.
 Appreciate the role of promotion strategies in the banking services.
1.1 Introduction
In an organization engaged in marketing, channels of distribution for
financial services should be thought of as a means to increase the availability
and/or convenience of services that help satisfy the needs of existing users or
increase their use among existing or new customers. The marketers of financial
services have to ensure facilitating right product for the right people at the right
place and at the right price. Pricing can be strategically used as the tool to reduce
the competition. Pricing is equivalent to the total product offering which includes
the brand name, package, product benefits, service delivery, credit extended. It
can be described a sum of expectations and satisfactions. Promotion is a generic
term used for the communication efforts of the firm that are directed towards
achieving the objectives of a marketing strategy. You will see in this unit how the
promotion means conscious efforts towards integrating its marketing strategies
with business plans.
1.2 Banking Services and Issues in Delivery

Let us now attempt to see what effect the special nature of services has, on
the formulation of banking delivery systems:
1. Tangibility: It is not often possible to illustrate, demonstrate or display the

services on offer, and therefore storage, transportation and inventory control
are not relevant for the bank marketer. This partly explains the relative
absence of intermediaries‟ ox middlemen in the delivery of banking
services. As a result it severely limits the alternatives available to the
4
Distribution,
financial services marketer and often necessitates the use of direct channel
Pricing and
for distribution Promotions
Strategy for
2. Inseparability: Because of the simultaneous production and distribution of
Banking Services
financial services, the main concern of the marketer is usually the creation
of time and place utility that is that the services are available at the right
place and at the right time. This implies that direct sale is almost the only
feasible channel of distribution. But as we shall discuss later one way of
overcoming the inseparability factor is the use of credit cards, whereby the
service is transferable.
3. Highly individualized marketing system: When selecting channels of

distribution the goods marketer will usually have a marketing system that
contains several established middle persons. This is not always the case with
financial services with a few traditional distribution channels. 1n many bank
transactions a client relationship exists between buyer and seller, as distinct
from a customer relationship: This is especially true in the case of in any
corporate and trust accounts, although it not extends more and more to other
retail customers as well. Where such a close personal and professional client
relationship must exist direct channels may be only feasible choice.
4. Lack of special identity: To the public often one financial service is very
much like the other. The reason why a particular financial institution or
branch is used is often related to convenience. As the competing products
are similar, the emphasis is on the 'package' reputation, advertising and from
time to time new services. As major competitors offer similar services, the
emphasis will be on the promotional aspects rather than on the inherent
uniqueness of a particular financial institution's service.
5. Geographical dispersion: There has to be a branch network in any
financial. Institution of size and scope, in order to provide benefits of
convenience and to meet international, national and local needs. Therefore,
all services or promotion must have both appeal and wide application.
Barriers to Provision of Delivery System

Barriers to the provision of delivery systems in financial service can be
considered to fall under two broad categories:
 Business barriers, and
 Technological barriers.
5
Distribution,
Pricing, Retaining
Customers and
Consultancy
Services
Fig 1.1 Barriers to Provision of Delivery System

1. The main concern of the ____________is usually the creation of time and
place utility.
a. marketer
b. seller
2. When selecting channels of distribution the goods marketer will usually have
a marketing system that contains several established __________persons.
a. end
b. middle
3. To the ______often one financial service is very much like the other.
a. public
b. seller
1.3 Channels of Distribution for Banks

The channels of distribution in financial services perform a number of key
functions, as follows:
 Sale and offer of services and products, as well as advising customers.
 Contact and liaison with advertising and public relations agencies to assist
in designing more effective advertising/promotional campaigns.
6
 Gathering of information necessary for planning marketing activities, Distribution,
strategy decisions and product development. Pricing and
Promotions
In distributing financial services, firms employ a number of channels. The Strategy for
advantages of direct distribution channels - for example branches, used to be Banking Services
lower operational costs and more efficiency. In comparison, the selling through
indirect channels offers convenience to the customers and more 'impartial' advice,
as in the case of agencies.
Fig 1.2 Distribution Channels
The Branch Network

Bank's major distribution outlets are their branches. The design and
development of the branch network will be affected by:
 Characteristics of the products - importance of service quality,

inseparability of the product, intangibility of the product.
 Customer needs - convenience, opening hours, availability of ATM,

telephone banking, home banking and so on.
 Environmental factors - legislation, development of information

technology.
 Competitors - if a branch network is efficient, it will be a competitive

advantage, keeping up to date with changes made by competitors.
Advantages of the branch network include:
 Its accessibility for customers.
7
Distribution,  It keeps a bank's name in the public eye
Pricing, Retaining
Customers and  The prime sites
Consultancy
 Banks become accepted as important members of the community
Services
Disadvantages of the branch network include:
 It is costly to maintain premises
 The staff costs
 The major investment involved - the amount of capital tied up in it
 It is old fashioned, difficult to modernize
 Small branches can be difficult to enlarge when expansion is necessary
Branch Location and Distribution

As the roles and functions of financial services continue to grow in most
countries, pressures are building up for more efficient distribution systems.
Historically, for financial services branches have essentially been retail outlets.
Although in the last few decades or so the roles of the branches have changed,
financial services customers still regard convenience of delivery as being decisive
when choosing a financial organization. Moreover, location decisions involve
long-term commitment of resources and as such have implications on the long
term profitability of the banks.
In distribution of banking service the marketer is faced with a huge market
that should be duly served. For e.g. in recent years many banks, have already
grown and diversified through acquisition, they have had to face the necessity of
developing profitable services for mass business. This market falls into two broad
categories:
1. The mass (retail) market: Standard products, relatively inflexible in

performance and cost, can be offered to this market. It spells out the
requirements of geographical decentralization, standardized services, heavy
advertising and promotion, attractive services and above all cost effective
processes.
2. The individual (corporate) market: This market constitutes single orders
of sufficient size of importance to be profitably singled out for individual
treatment. It requires individualized services and counselling, such as
comprehensive financial advice, the availability of research services and
contact brokerage to the customer, negotiated terms and so on.
8
Banks are now changing the image of their branches. Bank branches used to Distribution,
be serious, dull places that often intimidated customers. All the staff used to work Pricing and
Promotions
behind security screens and this created an unfriendly atmosphere. Now, some
Strategy for
security screens have gone, banking halls are brighter and a friendly atmosphere Banking Services
has been created that is less daunting for customers. Branches are more like a
financial services shop Newly designed branches are open, planned and many
staff have moved into the banking hall to tables, to advise a customers in a
friendly way about financial matters, opening of accounts, solve problems or
answering queries.
It is expected that by the end for this millennium, the most important aspects
of branch workload will be ATMs, telebanking and the retail counter in that order.
Currently, the developed countries' bank branch workload is in reverse order, the
retail counter demanding the most time and effort from the branch staff and
management. In Indian conditions, the lion's shares of service are through retail
counter only. The other components in the delivery system have just begun to
catch up.
As mentioned, branches still continue to be the most important channel of

distribution for banks although demand for electronic systems has been registering
high growth rate.
The traditional reasons for establishing branches were to collect deposits,
arrange loans and provide convenience in conducting transactions. Technological
development has meant that there is less need for customers to go to branches for
their business transactions. This reduces the possibility of any 'impulse' cross
service sales.

1. Bank's major distribution outlets are their__________.
a. branches
b. customers
2. For financial services _______________have essentially been retail outlets
a. customers
b. branches
9
Distribution, 1.4 Types of Branches
Pricing, Retaining
Customers and Branches of different financial institutions deliver different types of service
Consultancy
for different types of customer as explained in following section:
Services
1. Full service branch: The full service branch has been the conventional
delivery system, providing a full range of the products and services offered
by the institution to both corporate and retail customers, however, in the
developed countries, the services provided by banks have increased
immensely as deregulation has led them to extend their range of
conventional financial service variants. In India, too with the liberalization
and deregulation in the financial sector, similar position is set to be evident
soon.
2. Specialty branch: Specialty branches now serve as alternatives to full
service operation. Specialty branches focus on either retail or corporate
business but not both; for example real estate specialist branches focus on
mortgage finance. Thus the time devoted to withdrawal and deposit
transactions is reduced. On the domestic scene, we have many SSI branches,
industrial finance/corporate banking branches, NIU branches, Hi-tech
agricultural branches, service branches, commercial and personal branches,
recovery branches, leasing branches, housing and finance branches.
3. High net worth' branches: These branches are located' in appropriate
socio-demographic areas and they distribute a range of financial services for
up market customers. These services are often based on minimum account
balance criteria, and they emphasize personal financial counsellor services
rather than conventional bank teller services.
4. Corporate branches: These aim at middle-market corporate accounts and

do not usually handle retail financial services. The services provided are on-
line foreign exchange, letters of credit, asset-based financial specialization
and corporate cash - management services and so on.
5. Hub and spoke banking: The status of each branch is determined by the
area and customers it serves. There is little point for a branch in a small rural
village to have a business advisor. It is more beneficial for the bank to
ignore this service when the market is very small and to cater for it at a
larger branch in the nearest larger town. This system of providing a limited
service in the smaller branches, backed up by a nearby, larger core branch,
that is' able to carry out all the services 'the bank offers, is called 'hub and
spoke' branch banking. The smaller satellite branches provide a limited and
10
mostly highly automated service, dealing mainly with the personal banking. Distribution,
These are linked to a key branch that offers a full range of services and often Pricing and
co-ordinates the activities of its satellites. Normally there can be between Promotions
four and 15 satellites to one key branch. The hub is responsible for corporate Strategy for
Banking Services
business and has overall jurisdiction for the network as a whole. In India
such an organizational arrangement is not common.
The hub and spoke structure has many benefits. One very important benefit
is that it is part of a rationalization strategy. The new structure reduces the large
amount of replication that was occurring at every site (including expensive
equipment and personnel) and which was not being used in an efficient way
anyhow. This reduction and regrouping at the key site has vastly reduced the
excessive duplication in a move towards getting the bank to provide the correct
range of services in an area
The advantages of hub and spoke branching are: -
 Costs are reduced by concentrating specialized (and expensive) staff in key

branches;
 Duplication of management skills is avoided
 The processing function in centralized in a limited number of branches; and
 Banking are able to pursue simultaneously both product and relationship

strategies, for example identifying good customers in satellite branches, who
are then served by product managers (bankers) located in key branches.
Overall the tendency is towards fewer bank branches. The reason for this is
that, the high operational and staffing costs of running a branch, the increase in
scale and benefits of automation and technology, the advent of direct banking (via
telephone, home link and in-touch services offered to larger financial customers),
and the mergers and /or acquisitions by banks, have given rise to rationalization
reduction) of the number of branches.
It often happens that a financial product that might be unprofitable when
delivered through one type of branch-say a satellite branch-might be successful
when it is distributed through a central, regular branch. The selection or emphasis
on one type of distribution outlet rather than another depends on the personal
service required, service content (for example information, advice, personal
attention and so on) financial product complexity and its customization
requirements, purchase frequency and level of customer sophistication.
11
Distribution, There are three perspectives that determine distribution profitability in
Pricing, Retaining financial services:
Customers and
Consultancy 1. Channel profitability
Services
2. Branch profitability
3. Customer profitability
Branch profitability is particularly important, as the costs of managing and

operating branches tend to increase. Obviously, the profitability of a branch is
affected by its, administration. Research has shown that the profitability of a
branch depends largely on the volume of deposits, that is high volume/economies
of scale approach is usually profitable. To handle this problem banks have
developed a number of different types of branch, as mentioned above and depicted
in figure below:
Fig 1.3 Types of bank branches
Branch Location and Shopping/ Commercial Centers

Branch locations often tend to be concentrated in larger shopping centers
because if financial institutions seek to attract personal savings and past
experience indicates that these are the most advantageous locations, especially for
banks. The advantages of locating branches in shopping centers include easy
market entry since many shoppers and potential customers frequent the Height
Street and shopping centers. Generally, availability of parking and transport
facilities as well as proximity makes the location ideal for customer contact.
A few of the distinct limitations for such branches are:

1. They might not be able to expand because of limited adjacent space General
branches
2. They might lose their special identity because of the many competing
12
branches around Distribution,
Pricing and
3. In certain areas, shopping centers have restricted opening hours which might Promotions
affect the branch's activity. Strategy for
Banking Services
The Indian experiments of opening rural branches, service area approach
and directed lending uniquely combined both the marketing and social
responsibility roles for bankers. The liberalization and deregulation may focus
more on the viability of operations more than in the past and hence, the aspects
that go to make a branch profitable will need to be addressed more effectively.

1. The __________branch has been the conventional delivery system, providing
a full range of the products and services.
a. full service
b. speciality
2. ___________branches now serve as alternatives to full service operation.
a. full service
b. speciality
3. __________are located' in appropriate socio-demographic areas and they

distribute a range of financial services for up market customers.
a. branches
b. head office
4. _________locations often tend to be concentrated in larger shopping centers.
a. ATMs
b. Branch
5. Branch __________is particularly important, as the costs of managing and

operating branches tend to increase
a. profitability
b. business
13
Distribution, 1.5 Electronic Methods of Distributing Financial
Pricing, Retaining
Customers and Services
Consultancy
Services The need to make branches and distribution more efficient has led to the
introduction of electronic methods in financial services. The first ATMs
(automated teller machines) were introduced in the UK in the form of cash
dispensers by Barclays Bank in 1968. The main objectives of this distribution
facility were to save costs and staff time, and to provide greater customer
convenience (that is service outside normal banking hours). Since the system was
introduced, there have been four main features associated with ATMs: reliability,
security from fraud, volume generation at any particular location, and the
relatively high costs per machine network.
The decision whether or not to install an ATM depends on a number of
factors, as follows:
 Its impact on branch staffing levels, branch business and costs. (Recent
research suggests that paying out money via cash dispensers is about 65%
cheaper than counter withdrawal).
 The cost of investing in a large network of ATMs including service support

and reciprocal arrangements with other financial institutions.
 The impact of ATM installation on a financial institution's image and its

ability to differentiate its services/products.
The distribution of financial services has been further affected by
development of the electronic funds transfer systems (EFTS), whereby money can
be exchanged between the consumer, retailer and financial institution in the form
of electronic data rather than being transferred physically which involves the
processing of paper. ATMs form part of EFTS and have been used to provide the
customer with a quick, convenient and safe service 24 hours a day, seven days a
week
Financial services today are making determined efforts to make use of the
latest technology is changing the market rapidly and this will have a major impact
on financial services branches. ATMs and EFTPOS (electronic fund transfer at
point of sale) are much more efficient in cost savings, time and labour.
Calculations, show that on an average an ATM equals (or leads to) a total
net labour savings of 1.33 full time staff. There are a number of important reasons
for installing ATMs.
14
 To increase customer convenience, Distribution,
Pricing and
 To increase customer traffic, Promotions
Strategy for
 To reduce cheque volume and consequently cheque processing costs, Banking Services
 To reduce labour cost,
 To reduce cash security problems, and
 To provide the bank with clear strategic advantages (for example entry
barriers, greater economies of scale, and product differentiation).
There is now a trend to establish ATMs in satellite or away from branch

locations in shopping centers and in commercial complexes. ATMs can be used to
absorb extra customer demand during peak hours or outside branch business
hours. They also save staff time. ATMs now perform as many as 150 functions
ranging from cash dispensing to accepting split deposits to trading in stocks, to
buying mutual funds.
Future electronic payment systems in financial services will consist of a

flexible telecommunications network that will join terminals situated on the
premises of retailers in customer's homes, and on the counters of branch offices,
and ATMs. The network will then link these terminals via microcomputers to
financial service computers. All these new electronic methods will eventually
make cash and cheque less necessary but it will take some years for their full
potential to be achieved. In the meantime, it is essential for financial services to
have branches with full payment facilities so as to maintain their strong
competitive edge. Some of the electronic banking methods in use are:
Telemarketing: Consider the case of the largest 'branch' of the manufacturer‟s
bank in the USA. No customer visits it. Its customers reside throughout the USA
and their business is solicited by long distance telemarketing or direct mail. There
has been substantial growth in both loans and deposits via telemarketing and
direct response to newspaper advertising. These systems 'can be much cheaper
than full branch operation and are especially useful to institution that do not have
a large network of bricks and mortar outlets.
ATM’s: Many banks now have ATMs outside their branches. Those outside
ATM‟s offer 24 hours banking to customers. Some banks also have an ATM in
the lobby and customers use their security card to enter the lobby and then use the
machine in the normal way. These machines can be used to withdraw cash, pay
money and cheque into an account or to order statements balances or information
packs. ATMs are also now located at many of the larger retail stores and at
15
Distribution, factories. The machines are maintained by the local branch. The development of
Pricing, Retaining the ATM network may mean that at some point of time in the future, cashiers will
Customers and
be replaced by the ATM machines.
Consultancy
Services EFTPOS: EFTPOS offers a cashless method of payment to the customers at the
point of sale and is important in all areas of retail transactions. In many countries,
the EFTPOS schemes proposed by bank have run into difficulty as the banks have
endeavoured to charge more than retailers have been prepared to pay. While
trends show that EFTPOS will become an important payment mechanism, it is not
expected wholly to replace cheque, although successful EFTPOS systems are
likely to reduce cash payments and in particular stimulate the use of debit rather
than credit cards. As with ATMs, EFTPOS also reduce the need for customers to
visit their branches.
Intelligent Terminals: In the corporate market, developments in electronic
banking have led to the introduction of intelligent terminals. With these, and
backed up with their own central processing units, corporate treasures can interact
with the bank's own mainframe computers to undertake cash management,
transactions, letters of credit and the like, receiving timely transaction data and
other economic and financial information services.
Telephone Banking: Some banks are now offering home or telephone banking.
This may reduce the need for branches in the future. An example of this is
Midland's first direct service which is a new concept in banking. It does not
operate through a branch network but entirely by the use of the telephone and the
postal system, it also provides all the usual banking services - current accounts,
loans, A'TM facilities. Customers can, contact first direct service 24 hours a day.
Midland have spent a lot of money advertising this new venture. The market they
have tried to attract is the younger market particularly the age group 20-35, who
are more financially aware and are used to dealing with matters by phone.
Home banking or in-touch Financial Services: Another innovative means of
distributing bank service has been pioneered in the USA through the application
of computers. Computerized facilities have been used in supermarkets to record
each transaction with the respective customer's account with the bank. The
Seattle- first National bank has promoted an in-touch home service that provides
customers with access to a talking computer from touch-tone phones at home. By
calling up the bank computer, the customer can instruct it to perform financial
services such as:
 Paying bills by transferring funds from his bank account to that of a creditor.
16
Distribution,
 Aiding family book-keeping by reporting expenses with a biweekly budget Pricing and
analysis broken down into several categories (food, housing, clothing, etc.) Promotions
Strategy for
 Computing income tax data Banking Services
Normally, home banking is likely to be just one of a range of services
provided as part of a home information system which also offers shopping, news,
entertainment and information data. The home banking service itself will usually
permit account interrogation; inter account transactions, bill payments, loan
generation and electronic mail. In addition some systems are adding brokerage,
insurance and mortgage banking facilities. Home banking is expected to become a
significant alternative delivery system to conventional branch systems in due
course.
Internet Banking: Security First Network Bank, an Atlanta (US) based savings
bank, is one of the first international banks to go operational on the internet.
Within 10 months of its launch in October, 1995 it garnered 5550 accounts and
US$ 15 million deposits I across the world. The services being envisaged by
Indian Banks include:
Customers with PC and net connectivity can-
 View transactions in their accounts, exchange messages with the officers

concerned in the bank through a mailbox, request cheque book and get
printed account statements, structure loans by asking a series of what if
questions and getting answers.
 Request for funds transfer between accounts, issue stop payment requests
and standing instructions and do deposit modelling.
 Have on-line connectivity providing the customer with the ability to directly
debit and credit the account without the bank's intervention, etc.
A recent study estimates that in a full service branch, the cost per transaction
is US$ 1.07 as against US$ 0.54 for telephone banking, US$ 0.27 for ATM full
service, US$ 0.015 for PC banking and US$ 0.ol for internet based banking.

1. The need to make branches and distribution more efficient has led to the
introduction of __________methods in financial services.
a. electronic
b. manual
17
Distribution,
2. ATMs and EFTPOS are ________efficient in cost savings, time and labour.
Pricing, Retaining
Customers and a. not much
Consultancy
Services b. much
1.6 Pricing of Banking Products/ Servings

No discussion on marketing mix for banking services can be complete
without understanding the concept of pricing and its importance in detail. Pricing
can be strategically used as a tool to meet/ reduce the competition
Pricing affects the product cost and also plays a key role in decision making
of the buyers (customers). Pricing is affected by competitions, seasonality and
general trend of demand and supply. In short, it can be said that the price is
determined by cost, demand and competition in the market.
Price in the eyes of the consumer is the evaluation of the total product
offering which includes the brand name, package, product benefits, service,
delivery, credit extended, etc. Price can be defined as the money value of a
product or service agreed upon in a market transaction and can be shown as –
PRICE = sum of expectations + satisfactions.

Pricing for Profitability:
In a competitive market, price is determined by free play of demand and
supply. Price will increase or decrease depending on increase or decrease in the
demand for product.
Pricing decisions link the marketing actions with the financial objectives of
organizations.
Pricing affects:
1. Sales Volume
2. Profit Margin
3. Rate of return on investment

4. Product position
5. Image of the organization

Pricing is the key decision through which the other marketing strategies
have to consider in order resulting into profit or revenue like:
18
Distribution,
Other Marketing  Price Strategy  Revenue Pricing and
Strategies Promotions
Strategy for
See the relationship of pricing with profitability in a manufacturing concern. Banking Services
We can see the following break-up:
Fig 1.4 Relationship of pricing with profitability in a manufacturing concern
Price simply read can be described as 'cost plus profit'. Therefore, proper
analysis of cost and proper decision regarding profit level has direct impact on
pricing decisional strategy
Normally direct expenses which vary with volume of production/sales are
variable cost and indirect expenses are fixed cost.

1.____________ affects the product cost and also plays a key role in decision
making of the buyers (customers)
a. Pricing
b. selling
2. In a competitive market, ___________ is determined by free play of demand

and supply.
a. cost
b. price
19
Distribution, 1.7 Pricing Objectives
Pricing, Retaining
Customers and Before we review the pricing theories in detail, it is essential to know the
Consultancy
typical pricing objectives. Important among which are:
Services
1. Growth in Sales - A low price can achieve higher growth in sales volume
but may affect the profit level adversely.
2. Market Share - The customer acceptance is reflected by market share of a
product and. is an indicator of acceptability of price.
3. Competition - To face the competition, prices can be lowered to maintain
sales or in the absence of it, prices can be revised but stable prices help in
maintaining image or brand name and quality.
4. Pre-determined Profit - If a profit level is pre-decided as a policy, the price

has to be maintained at a particular level despite other factors as to ensure
attaining that objective.
5. Corporate objectives - to have pay-back in a specific period also can affect
the pricing and price level

1. A _________price can achieve higher growth in sales volume but may affect
the profit level adversely.
a. low
b. high
2. If a _________level is pre-decided as a policy, the price has to be maintained

at a particular level despite other factors as to ensure attaining that objective.
a. danger
b. profit
20
1.8 Pricing Methods Distribution,
Pricing and
Market Based Pricing System: Promotions
Strategy for
In order to understand consumers based inputs on pricing system, we should Banking Services
also take into account the market related pricing systems, which adopt one or
more of the following approaches:
 Perceived value pricing
 Psychological pricing
 Promotional Pricing
 Skimming
Perceived value pricing: These are based on the belief the consumers have about
the value of products and pricing is based on these assumptions. This is
supplemented by market research and if price is more than buyer – recognized
value, it may affect sales whereas if price is less than buyer - recognised value, the
revenue will suffer.
Psychological Pricing: In many pricing systems, pricing is based on prestige -

and can be kept higher to promote the idea of status and quality. Many other times
the price will be just below a round figure say Rs.59.20 (to show it is less than
Rs.100) or Rs.499.00 (i.e. not Rs.5001- or above).
Sometimes instead of giving a 20% discount, the price per unit per-se will be
constant (uncharged) but it will advertised that on purchase of 4 units one unit will
be free.
Promotional Pricing: This is used for promoting high level of sales or to clean
excess stock which although is with a reduced profit margin improves sales and
reduces holding cost.
Skimming: This strategy is to, 'skim the cream' i.e. adopting a high price
approach. When the product is new and innovative and in a monopolistic or less
competitive market, the price will be higher, (like in mobile phones) which can be
progressively reduced with entry of more producers and skimming the cream
sufficiently.
Cost based Pricing:

There are four main cost based pricing methods which are:
1. Standard cost pricing

2. Cost-plus pricing
21
Distribution, 3. Break-even analysis
Pricing, Retaining
Customers and
4. Managerial Pricing
Consultancy Competition Related Pricing Strategies
Services
The competitive pricing means pricing to compete with the leader in the
market with respect to the price
It can be either to set higher price initially and then to offer discounts known
as 'discount pricing' or to significantly increase sales volume by competing with
others already leading in the market by undercutting the prices significantly with
the sole idea of penetrating the market.
Pricing Decisions as applied in Banks

Decisions in pricing are generally taken in view of the market opportunities.
Pricing decisions are differently handled by different organization as a policy or
as a strategy.
The factors such as economic, social, political affect pricing decisions. In

small organisations pricing decisions are taken by the top management whereas in
big organisations the divisional or product line heads have the authority to
decide/fix the price. In some other organisations, committees are set up to fix the
price.
As we focus our attention to marketing of banking services and further on

the pricing aspects, these are two major costs which have to be considered and
they are:
 Interest cost
 Servicing cost
The interest rates for banks in India have been administered for decades by
the Reserve Bank of India and the service charges have been advised and
administered by the I.B.A. with which although in funds management market
forces and demand and supply do play a role, in respect of interest or service
charges, the market forces did not affect to any considerable extent
Pricing policy and strategies, however, is equally relevant in banking due to
the fact that it affects the demand as well as profitability and after a considerable
stress on social banking in Indian context, due to the guidelines regarding capital
adequacy by Narasimham Committee, once again profitability has become an
important consideration of bank viability.
22
Now, even the public sector banks have freedom to stipulate rate schedules Distribution,
for such activities which are not covered under uniform schedules. The interest Pricing and
Promotions
rates on domestic deposits can also be fixed by banks, within the stipulated range,
Strategy for
for deposits with different maturities. Banking Services
With the winds of globalisation and liberalisation flowing freely in India
and the competition faced due to aggressive marketing strategies and innovative
products by private and foreign banks, the banks have to re-think their marketing
policies - more so the pricing strategies.

1. Decisions in __________are generally taken in view of the market
opportunities.
a. pricing
b. profit
2. In __________organisations pricing decisions are taken by the top
management.
a. big
b. small
3. In some organisations, committees are set up to fix the_____________.
a. price
b. quality
4. The interest rates for banks in India have been administered for decades by
the ____________
a. State Bank of India
b. Reserve Bank of India

5. _________and strategies, however, is equally relevant in banking due to the
fact that it affects the demand as well as profitability.
a. Pricing policy
b. profit policy
23
Distribution, 1.9 Pricing Reviews and Committees
Pricing, Retaining
Customers and It is well known that the banks in U.K. and USA have already diverted their
Consultancy
attention to service and non-fund activities for improving revenue.
Services
With regulated interest rates and uniformity in service charges for a long
time, customers too are now aware and many accept the service fees/transaction
fees charged by banks in giving better and prompt service.
 There have been many studies to analyse the ways and means to improve
profitability of banks.
 The very 1st report on cost aspects of Indian Banks was published in 1972.
 Traditionally, interest or finds activities were the only source of profit for
the banks.
 The remittance business and bills business did not prove to be of much help
in increasing profit/ revenue.
 Besides profit from forex business and exchange profit, there were not
enough amounts under other income which now is increasing steadily.
 Before standardization efforts by IBA, banks were using different methods

for service charges like
o Flat Service Charge
o Measured Service Analysis

o Complete Analysis Method
 On bill business the fees charges were not very adequate compared to the
service rendered.
 In 1985 IBA efforts for rationalization and standardization of service

charges met with success to bring about uniformity in several banking
services, while public sector banks are governed by IBA guidelines, the
foreign banks and the private, banks had the freedom to decide their own
charges
The committee, of public sector banks for service charges was set up to
provide guidance, check costing and decide the implementation schedule.
 Sinha Committee was constituted by IBA with Mr.T.K.Sinha as Chairman

to give report on costing of services.. The report was submitted to IBA on
24
April 1987. This was a very useful study providing a firm basis to all the Distribution,
banks to decide pricing strategies. Pricing and
Promotions
The steering committee set up by RBI advised commercial banks to Strategy for
undertake costing studies in two phases. Banking Services
The banks were advised to collect data on deposits, advances, foreign

exchange business, bill business; govt. business, etc.
In the second phase exercise was given by RBI to each bank to work out
cost in following fields:
1) Transfer pricing
2) Pricing of different services

3) Analysis cost trends
4) Cost benefits analysis for concession, etc.

5) Break-even analysis of branches to categories and monitor profit making
and loss making branches and to decide strategy.
With the advent of new departments and products, like merchant banking,
investment, counselling, project consultancy, etc. pricing of new products,
services was required to be based on cost assessment and commercial (viability)
criterion.
Even at the branch level awareness was created to be in tune with macro
level.
(Corporate) planning and decide selective recommending/selling of bank's

products at branch for better pricing mix and better overall revenue.

1. It is well known that the banks in ___________have already diverted their
attention to service and non-fund activities for improving revenue.
a. U.K. and USA
b. India
2. The steering committee set up by_________advised commercial banks to
undertake costing studies in two phases.
a. SBI
b. RBI
25
Distribution, 1.10 Price Setting In Practice
Pricing, Retaining
Customers and We have seen from the discussion on earlier pages that in Indian Banking it
Consultancy
has been a regulated pricing system, till recently regarding 'interest as well as the
Services
service costs.
If we take a look at the following table (taken from the consumer federation
of American report) it will be clear as to how bank fees/services vary and
customers accept such a variety of service fees.
Saving Low High
Minimum balance for

interest
Monthly fee if below

0.00 200,00
minimum
Regular chequing
0.00 3.00
bounced cheque 7.00 20.00
returned deposit
Now A/c 0.00 12.00
Minimum to avoid charge

50.00 2500.00
monthly service charges
Pre-cheque charge if
2.00 3,00
below minimum
Other checking 0.20 0.50
Holds on non-payroll
cheques from out of 2 Days 20 Days
state
Banks have to develop better strategies and understanding with customers to

convince regarding the cost by way of service fees as essential for good quality
service.
26
Traditional Bank Pricing Approach: Distribution,
Primarily two types of approaches are being adopted by banks abroad to set Pricing and
Promotions
prices:
Strategy for
 Bundling Banking Services
 Auction
Bundling involves the aggregation of bank product 01- services offered i.e.
combination of deposit and loan account or credit and non-credit accounts and
bundling these with respect to the compensating balances and a prime rate.
In auction mechanism, banks desirous of making loans to both retail and
corporate sectors auction, their loans in a (restricted) competitive market.
These are further based on considerations like relationship with credit
worthiness of the client and average balance maintained, etc.
Price Determination:
It is not just the interest rates alone that determine pricing, it is also the fee-
based pricing (for services rendered) that is fast gaining momentum. As each
deposit/product or service has potential to achieve certain marketing goal to
satisfy a particular customer segment, the pricing must be set with respect to the
said objectives and customer needs ability and level of satisfaction
Target Pricing:
This is decided by keeping in view a pre-decided target level of business
(volume) or profit (revenue). This depends on the level of investment and degree
of risk involved.
If we look at the factors determining the 'base' price level for any
organisation, its relevance to banking can be judged.
Some Limitations in Pricing for Banking Services
In banking the concepts determining prices have been
Bank Rate
MNR - Minimum Lending Rate
MLR - Maximum Lending Rate
PLR - Prime Lending Rate as a reference rate

Loan Able Funds - Banks have to work within the framework of RBI guidelines
due to which a bank can lend only a certain portion of mobilized deposits after
27
Distribution, providing for cash reserve ratio and statutory liquidity ratio i.e. out of Rs.100
Pricing, Retaining funds only about 58% can be lend as loans/credit. It becomes obvious, therefore,
Customers and
that the revenue by interest on lending should be enough to cover the cost of
Consultancy
Services interest paid on deposits and administration cost.
Spread - Due to the limitations of CDE (Credit Deposit Ratio) and lack of
sufficient demand for borrowings in the money market all banks are consciously
considering the service fee concept to improve their profitability on the SPREAD
is not quite enough to improve the profit planning in view of higher administrative
costs and non-interest bearing advances (non-performing assets).
Transfer Pricing Concept and Mechanism

Simply speaking if we take profit as excess of income over expenditure, the
same has to be re-thought in branch level system where some branches will be
predominantly deposit centers and some branches will be predominantly advance
centers where deposit centers will have mostly interest payable and show losses.
The advances branches will have large demand and all profits by way of interest
on advances but these will not be deposits available as loan able funds.
This means in one branch there will be high supply (deposits) and high
interest payable and no demand or interest receivable whereas as in other branch
there will be high demand and high (profitability) interest receivable but no
supply.
A view is, therefore, taken to compensate this demand and supply of funds
and interest payable/receivable by transferring pricing concept where high deposit
branches are taken as fund supplies and certain interest is payable to them and
high advances branches' have to pay certain interest to such supplying branches.

1. ___________have to develop better strategies and understanding with
customers to convince regarding the cost by way of service fees as essential for
good quality service.
a. Banks
b. Government
28
1.11 Promotion of Banking Products/ Services Distribution,
Pricing and
Promotion is a generic term used for the communication efforts of the firm Promotions
that are directed towards achieving the objectives of a marketing strategy. Strategy for
Banking Services
The promotion efforts include the marketing communication through-
 Advertising
 Publicity
 Sales Promotion
 Person-to-person' communication
 Banks internal communication process, etc.

These elements of promotion serve as the links between the Bank and the
target segment of its market (customers).
In this section we will discuss the communication theories and their
application in banking organisations through the promotional mix-aspects. You
may note that. Promotion does not mean only advertisements but a Bank's
conscious communication efforts towards integrating its marketing strategies with
business plans.
Promotion thus means the Bank's well organized, planned and goal oriented
communication efforts which must be in congruence with its overall business
goals and objectives in the desired market area keeping specific needs of customer
in mind.
Table Composition of Promotion Mix
Mass Communication Person - to - communication
Advertising Person sale
Publicity Internal Communication
Sale Promotion
Public Relation
In the service industry like Banking, promotion assumes all the more
important position as what we really sell is 'abstract' thing i.e., service with the
interest rates, range of product, etc. being more or less same, the service given
29
Distribution, through proper promotional channel makes all the difference between two Banks
Pricing, Retaining in marketing context.
Customers and
Consultancy Promotion can thus mean 'communicating with the buyer (customer), in
Services order to strengthen his attitudes that are favourable to the (Bank's) sellers' offering
and to change his attitudes which are unfavourable to the sellers. This presupposes
ensuring that such buyers become satisfied customers of the Bank, now or later.
The objectives of "Promotion" are:
 Informing/telling/educating potential customer about the banking service

and its value to them.
 Informing existing customers about new products/services.
 Following up with existing/potential customers for schemes introduced.
 Approaching a new segment of customers to attract them to buy new

scheme.
It can thus be briefly said that the objectives of "PROMOTION" are
product/service information, persuasion and re-enforcement so as to create and/or
keep up Bank's image among its existing and potential customers. In the
traditional wheel of marketing as after the '3 Ps' viz. Product, Place and Price;
Promotion is the 4th important "P" in marketing.
Advertising (Budget) Expenditure:

Advertising Expenditure in relation to total market costs (cost of promotion
and distribution) has to be decided as the first step. This budget is decided after an
extensive market research. The Advertising cost may vary from 112 % to as high
as 40% depending on the anticipated business, profit margin and the positioning
of product in a given market
Joel Dean in his paper published in 1966 had raised a very significant
question-"Does advertising belong in the Capital Budget? 'Dean's thesis is as
follows, "Most advertising is, in economic essence, an investment. Mow much to
spend on advertisement is, therefore, a problem of investment economics. A new
approach is required economic and financial analysis of future. This approach
focuses on future after-tax, cash flows and centres around the profit productivity
of capital."
30
Distribution,
Pricing and
1.______________ is a generic term used for the communication efforts of the Promotions
firm that are directed towards achieving the objectives of a marketing Strategy for
Banking Services
strategy.
a. Promotion
b. selection
2. _________thus means the Bank's well organized, planned and goal oriented
communication efforts.
a. Selection
b. promotion
3. In the ___________industry like Banking, promotion assumes all the more
important position as what we really sell is 'abstract' thing.
a. service
b. production
4. __________Expenditure in relation to total market costs has to be decided as
the first step.
a. selling
b. Advertising
1.12 Guidelines on Advertising by Public Sector

Banks
In view of the social commitments of Nationalized Banks and comparatively
limited budgets of advertising, the policy related to advertisement expenditure by
Public Sector banks has been examined by Reserve Bank of India periodically.
This has been done with a view to improve effectiveness on one hand and reduce
the cost on the other.
November 1970 - Banks were instructed to show the expenditure on

Advertising as a note to P & L A/c.
July 1982 - It was advised that the total advertising expenditure should not
exceed 0.1 (1110) % of Bank's Gross Earnings.
31
Distribution, April 1984 - There was a sort of ban on incurring expenditure on publicity
Pricing, Retaining and advertising up till September 1984. However, the foreign banks were allowed
Customers and
to incur Advertising Expenditure to the extent of 50% of their expenditure under
Consultancy
Services this head during the previous year.
October 1985 - These norms were relaxed.
1987 - Public Sector Banks were permitted to incur expenditure upto 0.05
(1/20)% of their gross earnings from Domestic Operations on Domestic Publicity.
For publicity abroad, banks were allowed to incur additional upto 1 (1/10)% of
their Gross Earnings on Advertising and Publicity.
The Joint Publicity Committee (JPC) of Public Sector Banks constituted in

1971 with Government approval played active role since February '1976. In 1980
all the 28 Public Sector Banks were brought under its preview and joint action
was proposed as follows:
 Ensure considerable savings in expenditure on advertising by joint publicity.
 Ensuring non-controversial advertisements
 Improving overall image of public sector banks
 Taking up the matter regarding distorted advertisements with concerned

bank.
JPC recommended use of following media:
 Press
 Hoardings/posters
 Radio/TV sponsored programs.
 Cinema (slides)
 Films
 Direct Mail
JPC emphasized on areas of common interest for advertising and publicity.
i) Deposit mobilization
ii) Customer education
iii) Priority sector advances

iv) Performance highlights of public sector banks
v) Borrower's responsibilities to repay obligations.
32
Advertisements by Foreign Banks Distribution,
Pricing and
Unlike the Public Sector Banks, leading Foreign Banks had liberal approach
Promotions
and higher budgets to regularly advertise in leading newspapers, newsletters, Strategy for
catchy brochures and attractive hoardings in prime locations of metropolitan Banking Services
cities. This enabled them to continuously build a positive and brighter image in
the eyes of customers - which also reflected in their multi fold business
achievements and high profitability vis-à-vis public banks.
Effectiveness of Advertising:
Although advertising is a very effective and most frequently used
promotional tool in marketing of banking services, it is desirable to measure the
effectiveness (impact) of an advertisement campaign. For this there cannot be any
one criterion to assess the effectiveness. These are multiple objectives to asses
such an aspect.
Normally below mentioned methods are used to measure results of

Advertising:
1) Usage Measurement: This is done through measuring business growth,
interviewing consumers.
2) Measuring Recalls: This can be either unaided recall or aided recall – which
assesses the extent to which advertisements are retained by customers' mind.
3) Psychological measurements: Through interviews or inventories this can be
measured.
4) Attitude Measurement: This is done through structured interviews or
attitude scales.
5) Measuring Awareness: This is done through simple YES/NO type
questionnaires.
The success of advertising affects successful launching of product/schemes,
customer's positive response or increase in business share. This can reflect in the
business figures like Deposits, Advances, Profitability, etc. and the comparison of
pre and post advertisement figures can reveal the visible effect of advertising
campaigns.
It can thus be summed up that effective advertising is the technique of

creative communication. It ensures co-ordination and application of various
batches of the art and profession to achieve a, pre-determined end i.e. to
communicate a message to the public in general or to the desired segment of
public/market in particular. Advertising is significant both as a social and
33
Distribution, economic force. Advertising serves as „mouthpiece‟ for the organization‟s
Pricing, Retaining objectives to be made public.
Customers and
Consultancy In simpler words, advertisement makes use of communication process with
Services in-built psychological and sociological contents which influence the buyer's
behaviour in Advertiser's favour through a process cycle of - stimuli, response,
motivation and reward.

1. In ___________banks were instructed to show the expenditure on
Advertising as a note to P & L A/c.
a. November 1970
b. November 1980
2. In ________________it was advised that the total advertising expenditure
should not exceed 0.1 % of Bank's Gross Earnings.
a. November 1970
b. July 1982
3. The _________of advertising affects successful launching of
product/schemes, customer's positive response or increase in business share.
a. success
b. failure
1.13 Sales Promotion

Advertising and Sales Promotion as parts of the marketing mix are
integrated with the marketing objectives and they are often coordinated with other
selling efforts.
As the name suggests, sales promotion is a collective name given to all
measures used to promote the sales. Any sale by an intending seller of a product
presupposes a corresponding buyer and, therefore, to sell anything the buyer has
to be made aware about the product and its advantages to the buyer. The visible
benefits of the product have to be demonstrated to facilitate buyer's decision to
buy that product.
34
Distribution,
In a controlled economy and market if the competition is low or less, sales
Pricing and
promotion may not be necessary if there is only one seller and many buyers but in Promotions
a competitive market place, the importance of sales promotion cannot be Strategy for
undermined. Banking Services
In the banking context due to severe competition between different types of

banks, sales promotion assumes lot of importance.
For much sales promotion, three essentials have to be borne in minds:
a) Product knowledge
b) Market information
c) Reaching the desired customer segment

In the context of a company/firm, the sales promotion serves as a 'link'
between the advertising and its sales force's impact as the trade and public in the
retails stores. There is generally a triumvirate of selling forces-advertising, sales
promotion and personal selling. The sales promotion, measures gives the salesman
a cutting edge in his selling activities.
The main difference between advertising and sales promotion can be
described as - while the advertising moves the consumer to the product; sales
promotion moves the product to the consumer.
The following activities are usually the part and parcel of sales promotion activity:
1) Designing and preparing advertising and sales promotion material.
2) Purchasing/arranging different types of material for display/distribution.

3) Organizing direct mail to customers.
4) Organizing exhibitions/trade shows.

5) Arranging demonstrations in sores, factories and homes.
6) Arranging lectures for public, academia, trade and industry.

7) Sales meetings and conventions.
8) Sales training to sales people and dealers/retailers.

9) Sales contests/dealer contests.
10) Sales bulletins.

11) Preparing bulletins/magazines.
12) Giving sales manuals.
35
Distribution, 13) Preparing sales-films.
Pricing, Retaining
Customers and
14) Organizing seminars/training for customers.
Consultancy 15) Display in trade outlets.
Services
These multi/various activities under sales promotion induce a temptation
among buyers to buy the product on the spot.
From the above discussion it can be understood that the sales promotion is
an activity which enthuses the sales force and distributors to sell more products
and also makes the potential buyers eager to buy, use or consume a product more
frequently.
Steps Required In Sales Promotion

Sales promotion pre-supposes a planned and sustained activity involving
systematic steps which includes:
1) Product promotion and image building.
2) Selling the idea.

3) Selling the idea of comprehensive promotion involving all forms of
publicity.
4) Selling the idea that the salesman is enthusiastic colleague and helps the
people in promoting campaigns.
5) Ensuring right product for right buyers at right times.

Some of the foreign banks do the sales promotion jobs through information
booklets and brochures sent with credit cards, etc. in an excellent manner.
Sales Promotion Strategy:

In Indian context in general and in marketing of banking services i11
particular during the launching of product, distribution channel sales promotion is
an important task.
Before deciding promotion strategy it is important to keep in mind three
essentials, as already mentioned earlier.
 Product Knowledge: This is the first essential. The employees and

specialized staff promoting a scheme/product must have the thorough
knowledge of both the advantages and disadvantages of the product. Only
after ensuring the market demand and specific needs of customers, the
product/scheme has to be launched with full details made available to staff
beforehand to promote this product in a better way.
36
Distribution,
 Market information: This means knowing who will buy the product, when
Pricing and
he wilt buy and why he will buy? This gives an idea about the probable Promotions
market share and enables to decide promotion (selling) strategy to specific Strategy for
segment of the market. This also enables the seller to decide on the Banking Services
advertising through proper media keeping in view the specific needs of the
potential buyers.
 Reaching the customer: After ascertaining the market and ensuring proper
product knowledge to all concerned when it's time to reach the customer, the
campaign has to take into account:
a) TIMING-to launches the product;

b) APPEAL-to target audience; and
c) GEOGRAPHICAL TIMING-to ensure that when the customers

respond, in adequate quantity, product will be available at all probable
locations of demand.
 Personal Selling: Sales promotion also can be done through personal

selling. In banking context, it is the clerk at the counter who is the primary
contact point with both existing and potential buyers (customers). Well
informed and well-trained staff at the counter eager to explain the schemes
to the customers using smile, courtesy and proper communication process
can ensure successful sales promotion through personal selling, within the
branch, across the counter.
The pro-active approach of the staff and projecting a harmonious image of

the bank taking keen interest in customers' interest can do wonders to boost the
image and increase business of the bank.
 Seminars
 Exhibitions
 Deposit mobilization-month/fortnight
 Branch anniversary, etc. is some of the other special sales pro1.notion

measures taken by banks.
37
Distribution, The effectiveness of sales promotion depends upon the following four variables:
Pricing, Retaining
Customers and
Consultancy
Services
Fig 1.5 Sales promotion measures
The sales promotion is very important instrument which smoothens the

process of selling a product to the customer successfully. A well thought strategy
of sales promotion, like planned advertising, should be looked at as an investment
and not just expenditure. Sales promotion is a bridge between advertising and
actual selling in the field. Like the sum 2 + 2 = 5, when proper advertising is
added with sales promotion, publicity and personalized service it can bring rich
dividends in promotional efforts.
Strengths of Sales Promotion
Strengths Weaknesses
1 Developing favourable customer 1 The impact of a
attitude promotion campaign can
2 Flexibility for use at any stage of beistemporary
2 It supplementary to
product life advertisement and
3 Inducing instant 3 personalised selling
Un-trained staff can create
purchase behaviour of obstacles in promotional
the buyer efforts
4 It ensures continued brand 4 Over doing may result in
loyalty by customer adverse effects.
Having looked into the details of advertising and sales promotion we can
make comparison as under:
Advertising Sales Promotion Personal

Selling
Strategy Pull strategy useful for Pull as well as push Push useful for
consumer durables individual
products
38
Promotion is important in Promotion is important in More in Distribution,
Activity
Pricing and
consumer durables both consumer and individual
Promotions
individual goods goods Strategy for
Efficiency High. High Low Banking Services
Effectiveness Low Low High
In marketing of banking service combination of all three ensures success,

We have just discussed the role of advertising and sales promotion at some
length. „Publicity' is a generic term used for a wide range of activities ranging
from antics of stars in films or media to genuine methods of getting a product,
service or even an organisation (or even an individual) 'talked about' and more
widely known to the public.
The Oxford English Dictionary gives definition of the word 'Publicity' as:
"The quality of being public, the condition or fact being open to public
observation or knowledge. The business of making goods or persons publicly
known is called as 'Publicity'.
The publicity differs from Advertising not in its aim but in its techniques.
Whereas the latter has a more specific job to do i.e. inform and motivate, publicity
seeks to interest and draw attention, without essentially motivating or informing
the public.
Publicity can be good or bad. With high customer expectations and presence
of various consumer councils these days it is just possible that a branch of a bank
can get wide bad publicity for some mistakes/flaws or inadequacies in giving
service.
The publicity hand-outs or press releases are the commonest form of
publicity. Such a press release must
i) Give specific facts
ii) Not give any sales promotion suggestion

iii) Be accompanied by photographs
iv) Be prepared/sent well in advance of the function/event Publicity normally is

not paid for by the organisations. It comes through good liaison with press
reporters, journalists and column writers. Good public relation strategy (P.R.
strategy)
39
Distribution, Publicity does the job of reducing ill effects of bad news and also positive
Pricing, Retaining effects of good news if properly backed by proper public relation.
Customers and
Consultancy
Services
1. Advertising and Sales Promotion as parts of the marketing mix are Integrated
with the marketing objectives and they are often coordinated with other
______________efforts
a. selling
b. marketing
2. In a __________economy and market if the competition is low or less, sales

promotion may not be necessary.
a. uncontrolled
b. controlled
3. __________serves as a 'link' between the advertising and its sales force's

impact as the trade and public in the retails stores.
a. sales promotion
b. advertising
4. The __________moves the consumer to the product.

a. sales promotion
b. advertising
5. __________moves the product to the consumer.
a. Sales promotion
b. advertising
1.14 Internal Communication

Thus far we have seen the various promotional measures that are required in
the communication process to achieve the corporate goals and objectives of the
banks.
In order to supplement such external communication measures, most of the

banks also have internal communication strategies in the form of an Annual
40
Budget or business and corporate plan which spells out its goals, objectives and Distribution,
targets during the financial year. Pricing and
Promotions
For such a budget or business plan, Head offices of the banks assess the Strategy for
business targets of various branches, divisions, zones and regions in the past with Banking Services
reference to the achievement rate (of deposits and advances targets) and the
market shares vis-à-vis branches of other banks in that command area. Field
Managers, Planning Officers and P.R. or marketing specialists assist in this
function to assess the projected levels of business at micro (branch) and macro
(corporate) levels.
Internal communication used for this purpose uses 'Top to Bottom' and
'Bottoms up' approach as shown below-
Fig 1.6 Organisational Communication Matrix
In this manner the expectations of the CMD are conveyed with respect to
corporate goals using data in the past and changes in economy and business
environment appealing to the managers/staff to realistically assess the business
potential in the common area of their branches and to arrive at revised business
targets as expected by corporate goals based on analysis of market and potential of
branches. Motivational Techniques and Recognition measures are used in such an
exercise of budget or business plan.
The success of such an exercise largely depends on the realistic assessment

of past data and realistic targets set. The utilization of positive strokes and
empathy in the top-bottom communications ensures positive feedback/response
from bottom to top.
41
Distribution, The response and involvement by each level in deciding/accepting and
Pricing, Retaining implementing business plan decides the success of such an important internal
Customers and
marketing communication.
Consultancy
Services Besides business plan exercise, internal communication also involves:
1) House Journals
2) Circular
3) Corporate objective1Business plan booklet
4) D.O. letter for encouragement/appreciation

5) Posters, etc.
Integrated Marketing Communication

The integrated marketing communication is used through corporate strategy
as can be represented through the following diagram:
Fig 1.7 Corporate Strategy
In order to know about steps in integrated marketing communication, we

will now look into the finer aspects of approaching the market (customer) through
media keeping in mind the various promotional plans as the extension of an
Integrated Marketing Process.
42
Distribution,
Advertising Sales Promotion Publicity Personalised Service
Pricing and
Promotions
It should cover The sales promotion A publicity This should cover Strategy for
the following : plait should cover : plan should Banking Services
1 Objectives Objectives Objectives Business Goal/
cover.
2 Targets Business (Sales) Targets Objectives
Targets
Targets
3 Action Plan Action Plan Deciding Proper
productsl implementation
services to be strategy
4 Theme/Contents Scheduling/Sequencing Budget Privitising

events. important for the seaments1
5 Selecting Media Budget Evaluation Budget
publicity scheme
6 Budget Evaluation Review of *mica given
7 Feedback/ Evaluation
Evaluation of
Effect/
As aResult
shrewd marketing communication strategy, the promotion plan under
aforesaid four major categories must be:
1) Relevant
2) Implementable
3) Specific
4) Thorough
The integrated marketing communication should aim at:

1) Improving market share.
2) Increase sales/Business turnover.

3) Create Awareness.
4) Create Brand loyalty.

5) Create conducive climate for future sales.
6) Establish a positive image.

7) Reach untapped segments.
8) Win over competitors.

9) Highlight special aspects of products.
10) Educate the customers.
43
Distribution, Such an integrated marketing communication should be hand-in-hand with
Pricing, Retaining the broad corporate objectives and policies so as to ensure that it becomes
Customers and
effective by meeting the necessary purpose.
Consultancy
Services Proper co-ordination and integration of selling, advertising and sales
promotion coupled with due publicity and personalized service results in a better
image of the bank and ensures achieving business targets efficiently and
effectively.

1. The _________of such an exercise largely depends on the realistic
assessment of past data and realistic targets set.
a. success
b. profit
2. Proper co-ordination and integration of selling, advertising and sales

promotion coupled with due publicity and personalized service results in a
better image of the ________.
a. RBI
b. bank
1.15 Marketing Information System (MIS)

Since having accurate data and information regarding Buyers' (Customers')
needs and wants is a very crucial requirement and also the feedback and
evaluation after implementing the integrated marketing communication; the MIS
i.e. Marketing Information System becomes another vital re-requisite of an
integrated communication system.
This system (MIS) simply speaking, is an arrangement for on-going and

regular collection of relevant market linked information. This is nut shell can be
shown as the computer system i.e.
Fig 1.8 MIS
44
This generally includes: Distribution,
Pricing and
a) Internal Report System: In company information Promotions
b) Market Intelligence System: Information from outside Strategy for
Banking Services
This serves TWIN objectives i.e. analysis 'of data for marketing
opportunities and locating grievances/problems and offering solutions to them.
MIS can consist of storing data in a compartmentalized fashion i.e.

1) Customers' details
2) Product range
3) Place (location)
4) Pricing details
5) Promotional needs and avenues
6) Competitors' details
7) Changes in external market conditions
8) Required changes in internal policies/operations

9) Newly identified product needs
10) Budgetary allocation and utilization with respect to each aspect of
promotional mix, etc.
MIS is essential in the integrated marketing communication because the
opportunities existing in the market and the nature of problems cannot be properly
known without having such data and its proper analysis.
MIS serves the purpose of marketing support decision system and provides
means for selection, adoption and speedy operation with reference to emerging
market opportunities.
How to design a MIS?

Designing adequate and proper marketing information system involves three
important steps.
1) Defining the required information needs

2) Collecting, collating and storing required information
3) Utilizing the information through retrieval whenever required.

Thus, MIS has to be designed taking into account the business needs.
45
Distribution, It should be put to operation and data should be processed by appropriate
Pricing, Retaining persons. The systems should be monitored on an on-going basis and periodic
Customers and
review should be taken for improving it whenever necessary.
Consultancy
Services With reference to the Integrated Marketing Communication it can be said
that the highly competitive nature of banking business in the recent years is in a
way compelling banks to give their competitive edge in the marketing. In such an
effort is not a single arm of promotional strategy or integrated communication
which should be effectively used but rather all of them duly blended.
In addition to using all the above types of promotional measures' and MIS,
the bank has to be prompt to launch a product or service at proper time to suit to
the customers' requirement.
To sum up, the Integrated Marketing Communication involves well-planned

strategy of using all types of promotional ways viz. advertising, publicity, sales
promotion, personal selling etc. in tune with its business goal to launch the
products/service to meet the customers' demands. Proper blend of different
strategies and use of a specific media ensures achieving the business goals
efficiently and effectively.
Some important pointers to be kept in mind while communicating with the
consumer are summarized in the Table below:
Dos Don'ts
Maintain your cool Be angry
Listen Shift responsibilities
Be positive lntempt
Be humble Neglect a customer
Call customer by name Criticise
Ensure details
Follow up till customer is

satisfied
46
Distribution,
Check your progress 14 Pricing and
Promotions
1. _________becomes another vital re-requisite of an integrated communication
Strategy for
system. Banking Services
a. Marketing Information System
b. internet
2. ________is an arrangement for on-going and regular collection of relevant

market linked information.
a. database
b. MIS
3. MIS serves the purpose of marketing support _________and provides means

for selection.
a. decision system
b. information
1.16 Let Us Sum Up

In this unit we have studied that the success of marketing of banking
services apart from the service product itself, depends upon distribution, pricing
and promotion strategies.
Here in this unit we have studied that in the changing scenario of Indian
Banking the concept of pricing is also undergoing fast changes. There has been a
shift from fixed rates link to PLR and MLR to flexible rates to induce more
healthy competition and better customer service. The fee-based service or service
based fee concept is gaining ground and banks have to make this concept more
consumer friendly backed by improved quality of customer service. Various
objectives, strategies and techniques of deciding proper pricing is the bed rock of
marketing of banking services. A proper understanding and application of these
will certainly sharpen your skills as professional bankers. Pricing should be used
as an effective tool to strike a balance between additional satisfaction to customer
and additional revenue for the bank.
After going through this unit the readers would certainly be benefitted in
understanding the basics of this unit.
47
Distribution, 1.17 Answers for Check Your Progress
Pricing, Retaining
Customers and
Consultancy Check your progress 1
Services
Answers: (1-a), (2-b), (3-a), (4-b), (5-a)
Answers: (1-a), (2-b), (3-a), (4-b), (5-a)
Answers: (1-a)
Answers: (1-a), (2-b), (3-a), (4-b)
Answers: (1-a), (2-b), (3-a)
48
Distribution,
Check your progress 12 Pricing and
Promotions
Answers: (1-a), (2-b), (3-a), (4-b), (5-a) Strategy for
Banking Services
Answers: (1-a), (2-b), (3-a)
1.18 Glossary
1. MIS - System that provides information to management.
1.19 Assignment
1. Explain the role of distribution in the marketing mix. Elucidate the influence
of the characteristics of services, in restricting the delivery system of
banking service essentially to bank branches.
2. Technological advancement has enabled the introduction of various models

of delivery for banking services'. Please discuss.
3. Explain the development of different types of bank branches and other

models of delivery of banking service.
4. Explain the process of communication in marketing. Give illustration with

reference to bank marketing.
1.20 Activities
1. Explain briefly various methods of pricing financial products.
2. Illustrate the concept of breakeven analysis and its relevance in pricing.

3. Pricing is the backbone of profitability in banks, Comment.
4. Define Promotion. What should be the "Ideal Promotion Blend" for

marketing banking services?
49
Distribution, 1.21 Case Study
Pricing, Retaining
Customers and 1. Based on your experience of the bank branches that you are familiar with
Consultancy
respect to a specific branch, enumerate the components of distribution
Services
functions carried on by the branch.
2. In addition to task mentioned above in our study material does the branch
carry out any other activities in relation to the distribution function.
Describe.
3. You may have noticed changes in the layout and placement of various
services within the bank. Briefly list these changes in respect of your own
bank.
4. Talk to at least 10 long standing bank customers and take their feedback on
these changes. Report on the feedback received by you. What do you think
is the impact of these changes on service delivery?
5. Through a visit or on the basis of your experience, compare the banking
services offered at personal service branches, service branches and
automated branches. Briefly enumerate the differences in type of services
offered.

1. Marketing Concepts and Strategies, Dr. S.J. Bedekar, Oxford University
Press-I991.
2. Marketing Management, S.A. Sherlekar, Himalaya Publication House-1986.
3. The Formula for Successful Marketing, Ralph Mroz, Galotia Publication-

1991.
50
UNIT 2: ATTRACTING AND RETAINING
CUSTOMERS IN BANKING
SERVICES
Unit Structure
2.1 Introduction
2.2 Defining Customer Value and Satisfaction
2.3 Factors Influencing Consumer Behaviour in Banking

2.4 Relationship Marketing and Attracting Customers
2.5 Customer Relationships Management

2.6 Retaining Customers Through Quality, Service and Values
2.7 Delivering Customer Value and Satisfaction

2.8 Image as a Managed Perception
2.9 Fulfilling Promises: Internal and Interactive Marketing

2.10 Customer Service and Customer Care
2.11 Bank Marketing: Future Challenges

2.12 Let Us Sum Up

2.14 Glossary
2.15 Assignment
2.16 Activities
2.17 Case Study
51
Distribution, 2.0 Learning Objectives
Pricing, Retaining
Customers and After learning this unit, you will be able to understand:
Consultancy
Services  To explain the importance of customer‟s satisfaction and customer service
in the context of the banking services.
 Discuss the need for relationship marketing in the banking sector.
 Identify the basic levels of customer‟s relationships management.
 Describe the process of creating service differentiation through service

quality.
2.1 Introduction
In the earlier units of this block you looked at the various elements of the
marketing mix for banking services. This unit deals with the strategies for
generating consumer satisfaction and retaining bank consumers.
In times past, management could arrive at a fair understanding of its buyer

groups through the regular experience of selling to them. But the growth in the
size of companies and markets has removed many decision makers from direct
contact with consumers. Decision makers increasingly turn to statistical data and
to behavioural theory and spend large amounts of time and money to study and
understand their consumers.
Mr James E. Turner during the 11th International Retail Banking

Conference, at London, November 1992, opined:
For many financial institutions, profits are down;

Growth has slowed or stopped, Competitors are targeting the most profitable
segments of your customer base.
He continued: It is just the right time to think about Service Quality.
He argued that operating with a high level of service quality made sense
because it saved money instead of costing it. This rationale was based on the fact
that it was less costly to do a job right at the first time.
It is also less expensive to keep a current customer than to attract a new one,
as various studies have shown. Premium quality always brought premium price
from the most profitable but demanding and heavy financial service user
customers, who generally did not switch banks at the slightest lure.
52
That a satisfied customer is not only more likely to stay with the bank, but Attracting and
may also recommend it to others, was good and sufficient reason for Mr. Turner Retaining
Customers In
to advocate service quality even in times of recession, even when profit margins
Banking Services
were at strain. The more affluent the customer is, the more. Influential he is in
referring other customers who are high users of financial services.
Institutions that make service quality a high priority tend to have high
employee morale and low employee turnover.
The situation prevailing in Indian financial markets is no different now,

particularly in the deregulated and liberalized environment. A lot of interest has
been generated by the terms service quality and customer service in different
contexts; in a market economy, the very survival of the organisations depend on
their ability to attract and retain their profitable clientele and in a regulated
economy, the power-groups of the consumers glamour for qualitative performance
when the protected firms fail to meet the group's expectations. India is in a
transitional stage now, and for certain, the financial institutions will need to
address the issue for their own benefit rather than as an imposition from the
regulatory authorities or power-groups
2.2 Defining Customer Value and Satisfaction

Today's in their choice of banking services customer face a vast array of
product and brand choices, prices and suppliers. While making a choice,
customers form an expectation of value and act on it. Then they learn or
experience whether the offer lived up to their value expectation. Customers'
satisfaction and their repurchases or continuance with the product are directly
dependent on this experience.
Customer delivered value as defined by Kotler, is the difference between
total customer value and the total customer cost.
Total customer value is the bundle of benefits customers expect from a
given product or service. The customer adds values li.0111 sources like - product,
services, personnel and image and may perceive an offer to be of more total
customer value, if additional value is perceived through some of these sources.
Total customer cost consists of more than the monetary cost. As Adam
Smith observed two centuries ago, 'the real price of anything is the roil and
trouble of acquiring it'. It includes the buyer's anticipated time, energy and psychic
53
Distribution, costs. The buyer evaluates these costs along with the monetary cost to form a
Pricing, Retaining picture of total customer cost.
Customers and
Consultancy A rational buyer's addition would be to buy from whoever offered the
Services highest delivered value.
In bank marketing context, we may say that the following values are the
most sought after:
1. Safety: Since keeping money at home is very risky and creates a sense of
insecurity, every customer treats safety of funds as the primary value and
looks up to banks as safe place to keep their hard earned savings.
2. Convenience: The customer looks to branch location, timing and

procedures from convenience point of view and prefers that bank which
keeps this value as prime thing to suit to customers' expectations.
3. Growth: With growing needs of people and growing inflationary trends of
the market, customer assign priority to growth of their funds as important
value and banks have to ensure that this value also is sufficiently taken care
of to meet customers' expectations.
4. Speed: Customers rate time as high as money and due to automation and
rapid progress of technology and IT, speed is becoming yet another value.
5. Relationship: In marketing of banking services, service concept itself rests

on relationship between banker and customer and it grows with positive
approach and pro-active schemes marketed with care and personal touch
Awhile selling the products to the customers.

1. Customer delivered value as defined by__________, is the difference
between total customer value and the total customer cost.
a. Kotler
b. Robbins
2. Total ___________consists of more than the monetary cost.

a. producer cost
b. customer cost
54
2.3 Factors Influencing Consumer Behaviour in Attracting and
Retaining
Banking Customers In
Banking Services
In a survey of customers' expectations done by Indian Banks' Association
for rural and urban market revealed the following:
Customer Expectation
Criteria % Preference/Response
URBAN RURAL .
Suitable location 46 65
Quality of service 24 09
Variety of service 11 02
Interest rate 02 02
Canvassing 03 03
Security 03 06
Credit 07 03
Emergency need 0=1 07
100 100
Each segment of customers has a different perception of a good bank and

quality of service.
Research and a study conducted by IBA/NIBM of factors that influence

behaviour of customers in banking indicates the following
a) Location: Where a bank branch is located often influences the choice of the
bank. Subconsciously the consumer is looking for convenience and what
matters is whether the location of the branch is close to his home or office,
Very often the 'bank next door' often win on that basis alone.
b) Safety: Depositors are very often placing their hard earned money in bank
and worrying factor for them is “is Bank Safe?” To quell the fear the
background of the bank, its promoters, international associations and the
years it has been operating in the country, all influences the choice.
c) Returns: A consumer having satisfied himself that his money is safe wants
to be sure that the returns being earned are attractive.
d) Customer Service: The experience of the customer when he has been
within the branch will influence a strengthening or a weakening of the
55
Distribution, relationship. Speed, politeness and friendliness in the service are factors
Pricing, Retaining which do matter.
Customers and
Consultancy e) Range of Services: With greater sophistication in the environment a
Services consumer gets more demanding and would like his bank to offer a variety of
services and products which increase convenience for him, Example, phone
billing + ATMs or offer him greater choice - a range of term deposit
products which offer him high returns and liquidity.
f) Easy Documentation and well-defined Eligibility Criteria: When a

consumer wants to borrow from a bank, what bothers him is 'Will I qualify
for the loan? So a bank will do. well to clearly establish the eligibility
criteria and simplify and make loan documentation easy

1. ______________are very often placing their hard earned money in bank and
worrying factor for them.
a. Depositors
b. bankers
2. A ____________having satisfied himself that his money is safe wants to be

sure that the returns being earned are attractive.
a. banker
b. consumer
2.4 Relationship Marketing and Attracting

Customers
The term 'Relationship Marketing' was introduced in the 1980s and is a
relatively new and evolving concept. One definition is:
'Relationship marketing is the attraction, maintaining relationship with

customers in a multi service organisation aimed at enhancing customer
relationships'.
There are three primary objectives for the study of relationship marketing-
56
1. Companies have changed their perspectives as regards their relationship Attracting and
with customers. Emphasis has changed from a transaction focus to a Retaining
Customers In
relationship focus aimed at long-term customer retention.
Banking Services
2. In addition to customer markets, the organisation is concerned with the
development and enhancement of enduring relationships with other external
markets including suppliers, potential employees, opinion leaders and
influences and people providing referrals, as well as internal publics.
3. The integration of marketing activities, customer service and quality

standards is essential to achieve a strong and stable relationship marketing
orientation.
Customers have become more individualistic, quality conscious and
impulsive in their buying behaviour, any service organisation which wants more
than one-off sales has to nurture the relationship with existing customers, various
intentional studies have proven that retaining existing customer, and building
loyal repeat buyers, costs only one-fifth as much as acquiring new ones
So companies need to monitor customer service at every lave1 including
internally, because personnel who treat one another well serve customers better.
Successful companies listen to everyone in the distribution chain-dealers,
distributors, retailers, etc. They know that the relationship does not end with the
sale, so they try to stay as close as possible to their customers. That is how they
get to the next sale.
With the costs of generating and maintaining databases dramatically
decreasing over the last decade, the age of relationship marketing is rapidly
reaching both maturity and sophistication. As databases collect and store the right
information about your customers and prospects, through the sales force, branch
network, letters and telephone calls, the database becomes the focal point for all
marketing activities from customer loyalty programmes to internal
communications.
To build productive and profitable relationships with target consumers, the

marketer needs to tailor general mass marketing messages into several different
messages, targeted directly at individuals. The marketer then can reward regular
customers and cement their loyalty. Also reactivate lapsed customers, tempt away
competitor's customers and cross sell new products and services to the existing
customers. You can also reach critical audiences such as your sales force and your
shareholders to motivate and inform them about issues that affect them personally
57
Distribution, There are simultaneous and major long-term benefits both to the marketer
Pricing, Retaining and the consumer. Firstly, accurate targeting produces fewer communications with
Customers and
less wastage and better results. Incorporating a relationship marketing strategy
Consultancy
Services allows for the fine tuning of the marketing communications plan and schedule.
Secondly, a data based marketing strategy can create a stronger company
and/or stronger brand image. This is because; the mass communication and direct
promotion efforts work together and result in both sales and awareness increases.
As Theodore Levitt says, "The sale merely consummates the courtship.

Then the marriage begins. How good the marriage is depends on how well the
relationship is managed by the seller".
Customer Markets
Customer must, of course remain the prime focus area for marketing
activity. But the focus needs to be less on 'transactional marketing' and example
on the one-off sale or hooking a new customer and more on building of long-term
client relationships.
As companies are starting to recognize that existing customer are easier to
sell to and are more profitable - the lifetime value of the customer - the retention
of existing customers become even more critical. As mentioned earlier, it costs
five times more to hook a new customer as it does to retain an existing one.
This is not to say that new customers are not important - indeed they are
vital to the future of most financial service businesses. A delicate balance needs to
be maintained between the efforts directed at existing and new customers
Transaction Marketing and Relationship Marketing

The critical differences between transaction and relationship marketing can
be contrasted as below:
Transaction Relationship
Single sale focus Customer Retention focus
Product feature orientation Product benefit orientation
Short time frame Long time scale

Low emphasis on customer service High customer service
Moderate customer contact High customer contact

Moderate quality concern High quality concern
58
Some service organisations have adopted the relationship focus, but it is Attracting and
noticeably absent in many others. Unfortunately, many companies still take the Retaining
Customers In
transactional route which has both limited utility and profitability. The investment
Banking Services
made in winning a new customer, once successful, is immediately transferred to
the next potential customer. Little effort goes into keeping that customer and the
economic benefits of customer retention are often ignored.
Many marketers put their main efforts on the initial activities of identifying
prospective customers and attempting to convert them into customers, rather than
on both deepening and widening the scope of the relationship. It is ultimately
more rewarding to ascertain the needs of customers and cross sell additional
products and services which will subsequently result in strong supporters and
active advocates for the company and its services. For example an ANZ Grindlays
Bank current account holder could well be receptive to applying for a credit card
as car loan, loans against assets, etc.
Moving customers up the consumption and loyalty ladder is not easy.
Marketers need to explicitly know, in great detail, what each customer is buying
and how every customer is different and how the marketer can continue to offer
additional product benefits and service advantages that will distinctively
differentiate its offerings. Essentially, one of the ways to change a casual
customer into a committed customer is to replace customer satisfaction with
customer delight that is by providing service quality that exceeds customer
expectations.
Referral Markets:
The best marketing is that which is carried out by the company's own
customers; that is why the customer loyalty ladder and the creation of advocates is
so important. But existing markets are not the only sources of referral. Referral
markets to under many names intermediaries, connectors, multipliers, agencies
and so on.
An example from a bank will serve as an example here. Referral sources

from the bank included insurance companies, real estate brokers, accountancy and
law films as well as existing customers and internal referrals. An internal study
was conducted for a bank which reflected the amount of businesses that originated
from referral sources. It showed how important these sources were, although the
bank had done little in the traditional sense to promote itself in this area.
A strategy retreat was subsequently organized which included sessions. On

referral sources including presentations from several important intermediaries.
59
Distribution, The bank received a lot of criticism during these presentations. Made aware
Pricing, Retaining through it research of the importance of this business, the bank established a task
Customers and
force to develop better relations with referral sources and establish a marketing
Consultancy
Services plan to deal with referral markets. The result was noticeable and continued
improvements in business generated by referral sources.
Most organisations will need to take similar action. The current and
potential importance of referral sources should be established and a plan
developed for allocating marketing resources to them. Efforts should be made to
monitor results and cost benefits. However, it is worth emphasizing that
developing these relationships take time and that the benefits of increased
marketing activity this area may to come to fruition immediately.
Supplier Markets
The relationship between an organisation and it suppliers is undergoing
fundamental changes mainly under the influence of the Japanese. The old
adversarial relationship where a company tried to squeeze its suppliers to its own
advantage is going way to a relationship that is based more on partnership and
collaboration. One can sense good commercial value in this. Manufacturers in the
Asia-Pacific region typically spend over 60% of total revenue on goods and
service from outside suppliers.
This new relationship has been termed differently at different places. For
example, at AT&T, it is 'vendor ship partnership'; at electronics group Phillips in
Europe it is called 'co-makership'. In the US, it is referred as reverse marketing.
Whatever the term, however the aim is close co-operation between customer and
supplier from a very early stage, mutual concentration on quality, commitment to
flexibility, lowest costs and long term relationships.
Recruitment Markets
The key scarce resources for business is no longer capital or raw materials -
they are skilled people, a vital perhaps the most vital element in customer service
delivery. A situation is not getting easier, even if unemployment climbs to historic
levels. The reason is demographic trends. The new skilled workers entering the
labour market originate from the following key groups: 16-24 and 25-34. If
demand outstrips the supply, which is quite possible then effectively marketing an
organization to its potential employees will become vital success factor. A brief
case study shows the kind of effort that may have to be made:
Several years ago a large and well known accountancy practice was having
problems attracting new recruits. The reasons were hard to discover. Its
60
recruitment was old fashioned and lacked visual impact. A marketing plan to try Attracting and
and improve the situation involved redesigning recruitment literature (with the Retaining
Customers In
help of recent graduates), sending the brightest partners on university visits with
Banking Services
managers with interesting experiences to recount, and sponsoring awards and
prizes at target universities. As a result of this marketing plan, the firm's offers to
acceptances ration increased by nearly 200% within two years.

1. The term 'Relationship Marketing' was introduced in the_________.
a. 1980s
b.1990s
2. ______________have changed their perspectives as regards their relationship

with customers.
a. banking
b. Companies
3. The integration of marketing activities, customer service and quality

standards is essential to achieve a strong and stable ___________orientation.
a. relationship marketing
b. customer marketing
2.5 Customer Relationships Management

All markets require equal levels of attention and in that respect the customer
market cannot be excluded. This is where the role of customer relationship
management comes into play.
The seven activities that constitute customer relationship marketing/after

marketing' are the following:
1) Establishing and maintaining a customer information database

2) 'Blue Printing' or planning customer contact points
3) Analyzing informal customer feedback

4) Conducting customer satisfaction surveys
61
Distribution, 5) Managing communication programmes
Pricing, Retaining
Customers and
6) Hosting special events or programmes for customers
Consultancy 7) Auditing and reclaiming 'Lost Customers
Services
Successful 'After marketing' has direct impact on the customers. It shows
the customers that the marketer:
 Appreciates their business
 Is interested in maximizing their satisfaction
 Cares about their problems
 Is interested in their suggestions and inputs
 Wants their repeat business
So we find that acceptance and relevance are the key twin concepts of
successful 'after marketing'.
Customer Information database

The customer information database should include data-on the following:
 Current customers
 Prospective customers
 Lapsed on lost customer
'Conversion' ratios and 'loss' ratios should be calculated and targets

established.
Customer Satisfaction Measurement

Organisations that develop and implement customer satisfaction
programmes derive
Several benefits by delivering value addition
 A deeper understanding of the buyer-seller relationship can be developed,

for both party's benefit.
 The organisation/bank focuses on delivering measurably high standards of

customer satisfaction not in just being competitive.
 A customer satisfaction audit can also monitor how 'front line' employees
affect customer satisfaction.
62
Managing Customer Communication Programmes Attracting and
Retaining
Every organisation has a set of priority communication goals. They are
Customers In
 To position the bank in a distinctive manner Banking Services
 To keep customers informed on what is new
 To educate customers about the banks products and services and usage
conditions.
 To reaffirm the customer's purchase decision, and lower post purchase

dissonance
 To stimulate cross-selling; promote the bank's range of products and

services to potentially eligible customers
Banks with a large retail branch network use a variety of communication

vehicles to promote their products and services to both existing and potential
customers, some of these are
 Individualized letters on new product introductions.
 Special offers for affinity products, e.g. gold, credit cards to high net worth
customer‟s auto loans for corporate, etc.
Special Events and Programmes for Customer

Banks that have carefully segmented their customer universe can use a host
of methods to address key customer groups, as below-
 Bank newsletters
 Corporate videos
 Special interest magazines
 Invitations to cultural and other events
 Affinity product introductions
All these devices seek to create a deeper relationship with customers and
also communication a sense of belonging to an exclusive club. For example, a Citi
gold credit card holder may receive complimentary copies of a specially
conceived-and produced quarterly magazine; invitations to exclusive music and
theatre performance; discounts at five star hotels, etc.
Lost Customer' Programme

Banks should also implement on-going studies to track the status of lost
customers so that appropriate actions can be taken to stem the attribution rate.
63
Distribution, The key issues monitored through these studies are the following:
Pricing, Retaining
Customers and  Know who your lost customers are, Find out 'why they are left out
Consultancy  Establish if the problem can be fixed
Services
 Apologize if it's the bank's fault
 If the problem can be fixed, fix it
 If the problem cannot be fixed, monitor the situation to see if:
o The banks' ability change

o The customer's preferences or personnel change
Lost customer programmes are becoming more critical in a highly

competitive environment because customers that have deserted the organization
play often have a residual loyalty and some inclination to be won back. The bank
already has customer information files on this sub-group, and knows them, so
these customers can be reconverted cost effectively and can be more profitable
than new customers

1. All ____________require equal levels of attention and in that respect the
customer market cannot be excluded.
a. markets
b. buyers
2. __________should also implements on-going studies to track the status of lost

customers so that appropriate actions can be taken to stem the attribution rate.
a. Financial institutions
b. Banks
3. Lost customer programmes are becoming ____________critical in a highly

competitive environment.
a. more
b. less
64
2.6 Retaining Consumers through Quality, Service Attracting and
Retaining
and Values Customers In
Banking Services
„Satisfaction is the level of a person's felt state resulting from comparing a
product's perceived performance (or outcome) in relation to the person's
expectations".
Therefore, the satisfaction level is a function of the difference between
perceived performance and expectations. If the performance falls short of
expectations, the customer is dis-satisfied. If the performance matches
expectation, the customer is satisfied. If the performance exceeds expectations,
customer may be highly pleased or delighted.
What factors decide or influence 'expectations'?

Expectations get formed, on the basis of the buyer's past buying experience,
statements made by friends and associates and marketer and competitor
information and promises. If the marketer raises expectations too high, and the
company cannot match its delivery with the expectation level, the buyer is likely
to be disappointed. On the other hand, if the company sets expectations too low, it
won't attract enough buyers although it will satisfy those who buy.
Most successful companies raise expectations and deliver matching
performances. These companies are aiming at 'Total Customer Satisfaction'
(TCS). Another observed characteristic of the market place is that those who are
just satisfied find it easy to switch suppliers when a better offer comes along.
Those who are highly satisfied are much less ready to switch.
Defining Service Quality

One of the difficult aspects of managing service quality is establishing a
common understanding of what we all mean when we talk about it. A one
sentence description of what constitutes acceptable service quality will be
significantly different from one person to the next. The definitions given even by
the staff within a bank may vary, depending on the level of the staff in the
organisation. Here are just a few ways in which individuals define quality:
 Courtesy
 Problem-solving ability
 Environment
 Speed
65
Distribution,  Accuracy
Pricing, Retaining
Customers and  Range of Service
Consultancy Differentiation through Quality
Services
Competing on the basis of service quality is very appealing from the
marketing perspective, because prime consumer segments seek it and because
competitors cannot. Match it as easily as they can match pricing or product
change. There are several reasons why service quality is so difficult to match or
even so difficult to achieve:
Service quality is culture, not equipment, adding a new ATM system is
relatively easy when compared with the task of taking the diverse range of your
employee's attitudes and moulding them into a cohesive and consistent service
culture. Unlike equipment, their performance can vary significantly between good
days and bad days. Furthermore, they cannot simply be reprogrammed to change
old habits into the new customer - oriented actions: altering behaviour takes time,
In short, people are human;
In the past, we have focused more 'on the operations and security activities
of delivering financial services than on the human side of the equation. We may,
for example, try to teach tellers to be friendly and thank customers but at the end
of the day, the only things we monitor are their technical errors and drawer count.
In turn, tellers are rewarded, or not rewarded, based only on how they perform the
operational aspects. It is therefore not surprising that customer service is difficult
to improve; and there is a difficulty in communicating what we mean by high
quality service from the top ranks of the institution, down through middle
management to the people who deliver service on the front-line the tellers,
receptionist personal bankers and lending staff for example. All bank chief
executive, presidents or directors say that high quality service is a main priority in
their institutions. At the same time, this is often not translated into the service that
customers actually receive when they do business with the bank
The research by A. Parasuraman has focused on developing a procedure for
quantifying customer's service quality. The research suggested that service quality
can be measured on the following five dimensions:
Reliability: The ability to perform the promised service dependably and

accurately.
Tangibles: The appearance of physical facilities, equipment, personnel and

communication materials.
66
Responsiveness: The willingness to help customers and provide prompt service. Attracting and
Retaining
Assurance: The knowledge and courtesy of employees and their ability to convey Customers In
trust and confidence. Banking Services
Empathy: The caring individualized attention provided to the customer.
Fig 2.1 Service quality
In order to develop greater understanding of the nature of service quality

and how it is achieved in an organization, a service quality model was developed
by Parsuraman and et a1 in 1985. Their model clearly indicated that consumer's
quality perceptions are influenced by a series of five distinct gaps occurring in
organizations. These gaps which can impede delivery of services that consumers
perceive to be of high quality are-
Gap1 Difference between consumer expectations and management
perceptions of consumer expectations.
Gap2 Difference between management perceptions of consumer
expectations and service quality specifications.
Gap3 Difference between service quality specifications and the service
actually delivered.
This gap depends on the size and direction of the first gaps associated with
the delivery of service quality.
Another work of the same team of researchers identified an exhaustive set of
constructs that could affect the magnitude and direction of Gap 4. Most of these
construct involved communication and control processes used to manage
employees, as well as consequences of these processes.
67
Distribution, They summarized by stating that the service quality is a subjective
Pricing, Retaining assessment that customers arrive at by comparing the service level they believe an
Customers and
organization ought to deliver to the service level they perceive is. Being delivered.
Consultancy
Services Extensive qualitative research conducted in the recent past by Parsuraman and et
al suggests that service-quality deficiencies perceived by' customers, i.e. the gap
between their expectations and perceptions, are caused by a series of
organizational gaps.
 Marketing information Gap: inadequate or inaccurate management

understanding of customer's service expectations.
 Standards Gap: Management's failure to develop performance specifications

reflecting customer's expectations.
 Service Performance Gap: Discrepancy between service communication to

customers describing the service actually delivered
Developing Better Service

To use quality effectively as a marketing strategy, Bank managements
should play a pivotal role in the service design and implementation. Their function
is to guide the Programme to fulfill consumer expectations, which also change
from time to time. This is done through such activities as evaluating your
competitors to see how you compare, and researching consumers to identify your
strengths and weaknesses.
In managing the human side of quality service, it is typically most efficient
to plan from the top down, and implement from the bottom up. This means the
quality imperative is defined by the highest level of management, but
implemented in waves, starting at the front line of the bank - their tellers. The
reasons to start there is that they create more customer contact than any other of
the bank, When Jan Carlozn embarked on the service quality Programme for
Scandinavian Airlines in the mid-1980s, he defined these types of contacts as
"moments of truth', during which the success or failure of his airline would
ultimately be determined, These "moments of truth" will be positive, neutral or
negative for the customer depending on how he perceives to have been attended to
by the person with whom he had to have, interaction.
A quality programmer can be effectively started at counters where more of

the transactions are relatively straightforward and routine, and where basic
standards distinguishing high quality form low quality service can be easily
identified. Furthermore, the initial training required can be completed in a matter
of days or weeks, and measurement can be achieved directly and accurately.
68
From there, the Programme should be rapidly extended to reception and Attracting and
telephone service, new accounts or personal bankers, extending upward through Retaining
Customers In
the organization to commercial lending, trust and private banking,
Banking Services
Counter personnel should be rapidly extended to reception and telephone
service, new accounts or personal bankers, extending upward through the
organization to commercial lending, trust and private banking.
Counter personnel with little service can pose a special challenge because;
their perception of what constitutes a superior level of service can be radically
difference from what your customer has in mind. Thus, when senior managers talk
among themselves about high quality service, they may all have a common
concept in mind, but their ideas of quality will probably be different from those of
lower staff levels in the bank. Tellers may not, for example, be totally confident
when dealing with the public, so they may speak softly, keep eyes averted from
the customer, forgets to smile and almost never thank the customer by name.
These are all actions which could lead the customer to feel unwelcome.

1. The__________is a function of the difference between perceived
performance and expectations.
a. satisfaction level
b. satisfaction
2. Most__________companies raise expectations and deliver matching
performances.
a. failed
b. successful
3. Competing on the basis of___________is very appealing from the marketing
perspective.
a. service quality
b. quality
4. Service quality is________, not equipment.
a. output
b. culture
69
Distribution, 2.7 Delivering Customer Value and Satisfaction
Pricing, Retaining
Customers and 'Moments of Truth'
Consultancy
Services The metaphor of the "moment of truth' is a very powerful idea for helping
people in services business shift their point of view and think about the customer's
experience. Donald Porter as Director of customer service quality assurance for
British Airways, points out:
If you are a service person, and you get it wrong at your point in the
customers' chain of experience, you are very likely erasing from the customer's
mind all the memories of the good treatment he or she may have had up until you.
But if you get at right, you have a chance to undo all the wrongs that may have
happened before the customer got to you. You are really the moment of truth.
Every time a service organization performs for a particular customer, the
customer makes an assessment of the quality of the service, even if unconsciously.
The sum total of the repeated assessments by this customer and the collective
assessments by the customers establish in their minds the organization‟s image in
terms of service quality
Three features outstanding service organizations have in common-

1. A well-conceived strategy for service: This service concept the attention of
the people in the organization toward the real priorities of the customer.
2. Customer-oriented front-line people: The effective front-line person is able
to maintain an "otherworldly" focus of attention by tuning o the customer's
current situation, frame of mind, and need. This leads to level of
responsiveness, attentiveness, and willingness of help that marks the service
as superior in the customer's mind and makes him or her want to tell others
about it and come back for more.
3. Customer-friendly systems: The delivery system that backs up the service
people is, truly designed for the convenience of the customer rather than the
convenience d f the organization. The physical facilities, policies,
procedures, methods, and communication processes all say to the customer,
"This apparatus is here to meet your needs".
The Triangle of Service

Karl Albrecht (1984) suggested that the relationship between the company
and its customer be represented by the service triangle model as shown below
70
Attracting and
Retaining
Customers In
Banking Services
Fig 2.2 The Service Strategy
This triangle model is radically different from the standard organization

charts in that it represents a process rather than a structure, and it forces us to
include the customer in our conception of the business.
A customer-driven organization has to start with the customer as the basis
for defining the business. That the company exists to serve the customer is
perhaps never disputed. But the company has to consciously and deliberately,
organize and manage for service.
They suggest that first and foremost, a clear conception of the motivational
structure of the customer needs to be in place. Some kind of workable model for
service can be attempted only thereafter. The aim would be to agree upon a basic
business strategy that will service to differentiate company from its competitors,
in the mind and in the experience of the customers. In many cases, it is a very
challenging task to formulate a nontrivial philosophy of service that can really
make a difference. The service strategy must mean something concrete and
valuable to the customer, something he or she is willing to pay for.
Armed with an understanding of the customer's buying motivations and
concept for service that will position the bank advantageously in the market-place,
the marketer must explore the interplay between the strategy, the people of our
organization, and the systems that are available to them to get the job done.
It is instructive to take each of the parts of the service triangle arid to
explore some of the obvious interactions. Each of the lines in the diagram can
represent an important dimension of impact.
1. The Customer-Service Strategy connection.

a) It can be taken to represent the critical important of building the
service strategy around the core needs and motives of the customer.
This is no place for guesswork. We need to find out, if we don't really
know, what goes on in our customer's mind when he or she thinks
about out kind of service.
71
Distribution, b) Conversely, the line that flows from the service strategy to the
Pricing, Retaining customer represents the process of communicating the strategy to our
Customers and
market. It is not nearly enough that we give good service, or that our
Consultancy
Services service is uniquely better in some way; the customer has to know that
fact for it to do us any good.
2. The Customer-People in Organisation connection

This line connecting the customer and the people of the organization
explains itself. It is the crucial point of contact, the continuation interplay that
accounts from more of the moments of truth. It is this interplay that presents the
greatest opportunity for gain or loss, and for creative effort.
3. The Customer-Systems connections

Another very interesting line on the service triangle figure connects the
customer to the systems that presumably help to deliver the service. These
systems can include abstract procedural systems as well as physical hardware.
Many negative moments of truth in the business world arise because of system
peculiarities and malfunctions. When the customer's interest is treated as an
afterthought in the design of service delivery systems, the situation is virtually
programmed for mediocrity and dissatisfaction. Forms that don't make sense and
are impossible to fill out, illogical or confusing building layouts, and
administrative process that burden the customer with tasks that could be handled
by service employees all make it more' difficult for the people to provide service
effectively
4. Systems-People; Strategy-Systems; Strategy-People connections

a) The three outer lines of the service triangle tell their own individual
stories as well. For example, think about the interplay between the
people and the systems. How often have you seen highly motivated
people prevented from giving the quality of service they really wanted
to give because of nonessential administration procedures, illogical
tasks assignments, regressive work rules, or poor physical facilities?
In situations like these, the service concept is nothing more than
normal procedure. Front-line people are usually much better prepared
than their manager to find ways to improve the systems they use every
day. The big question is do, their managers realize that facts, and are
they willing to invite the people to contribute what they know?
b) The line connection the service strategy with the system suggests that
the design and development of the physical and administrative
72
systems should follow logically from the definition of the service
Attracting and
strategy. This seems obvious, but given the inertial resistance to Retaining
change found in most large organisations, it sometimes seems like an Customers In
Uptopian precept. Banking Services
And finally, what about the line which flows between the service strategy
and people? That line suggests that the people who deliver the service need to
have the benefit of a clearly defined philosophy from management. Without some
sense of focus, clarity and priority, it is difficult for them to keep their attention on
service quality. The moments of truth tend to deteriorate and regress to mediocrity

1. ________ is a very powerful idea for helping people in services business shift
their point of view and think about the customer's experience.
a. moment of truth'
b. Truth
2. A________driven organization has to start with the customer as the basis for
defining the business.
a. producer
b. customer
2.8 Images as a Managed Perception

What are some of the factors that come to your mind when you hear the
word image? These might include terms like goodwill, credibility, honesty, ethics,
reputation and trust, a sense of permanence, consistency, quality, and integrity.
These are some of the images a bank can have. But what is an image?
A practical definition of the term image from the standpoint of business
strategy is "a managed perception on the part of the customer of the way the
company does business." How do we want our customers to perceive us? What
kind of an image do we want to earn by the way we conduct out affairs?
Banks reflect their mission or values to project such image in their literature
like brochures and in advertisements like:
 A bank that helps
73
Distribution,  A bank that cares
Pricing, Retaining
Customers and  A bank with the personal touch
Consultancy
 Why go to 10 counters for one work, get 10 works done at 1 counter.
Services
 A bank to bank upon
 A bank for all needs, etc.

Understanding how a bank's image is created is critical to the process of
building one. The moments of truth concepts remind us that our image improves
or deteriorates, moment to moment and day by day as a result of the sum total of
our customer's experience in dealing with us. We manage the customer's
perception - our image by managing the moments of truth.
Let's return now the concept of the service triangle (See Figure). When we
can find the elements of (1) a meaningful service strategy (2) customer-oriented
front-line people and (3) customer-friendly systems working in self-reinforcing
interplay, we are doing what is n6cessary to earn a positive image. We are
creating such an image indirectly by managing the customer's experience. We are
reinforcing his or her perception of our organization by making things come out
right at the moments of truth

1. An ________managed perception on the part of the customer of the way the
company does business.
a. image
b. picture
2. Understanding how a_________ image is created is critical to the process of
building one.
a. producer's
b. bank's
3. The moments of______concepts remind us that our image improves or
deteriorates.
a. truth
b. false
74
Attracting and
2.9 Fulfilling Promises: Internal and Interactive Retaining
Marketing Customers In
Banking Services
Employee‟s abilities and motivation to meet the expectations of customers
as created by external marketing efforts are backed up by internal marketing
efforts. By creating and maintaining a service culture through marketing
campaigns and activities directed towards the employees the organization may
prepare its employees for the moments of truth.
Personnel management policies based on detailed understanding of
employees' personal needs of jobs, life and career path, role ambiguity, role
conflicts and job conflicts, employee motivation, etc. would have a definite
impact on employees' performance in the moments of truth of buyer-seller
interactions.
Marketing effort is towards establishing developing and commercializing

long term customer relationships, so that the objectives of the parties involved are
met. This is done by mutual exchange and keeping of promises. According to one
definition the most important issue in marketing is to establish, strengthen and
develop customer relations where they can meet business objectives. And the
marketing functions envelops the total organization, even outside the marketing
department, (called part time marketers) and also covers activities (beyond Ps)
which exercise an impact on the current and future customers. Another point in a
service organizational is that the effective or ineffective operations management
influences the perceptions of the organization and therefore both HRD 'and
operations management need to be integrate with marketing.
It is perceived that there is a need to achieve integration between marketing,
operations, human resource, R & D, etc. It is in this context Regin McKenna
remarked that in service organization "marketing is everything and everything is
marketing". The underlying idea is that everyone in the organization who is in
customer contact (personnel) should be oriented towards customer relations. It
implies that the firm has to manage the business from the customer's point of
view. The business processes are to be such as would meet customer needs and
technologies of service delivery are to be harnessed to improve customer
satisfaction.
Quality in service industries would imply, executing customers'
expectations, timeliness, accuracy, responsiveness, performance, etc. A higher
quality would obviously generate brand loyalty, word of mouth publicity and
willingness to pay higher.
75
Distribution, The relationship has to be kept vibrant to remain attuned to customer's
Pricing, Retaining changing expectations. Scheduling of service augmentations to meet the specific
Customers and
need of the customer, at the precise moment when these needs get developed,
Consultancy
Services would definitely enhance the customer's delight.
Managing service recovery is also important in building customer
satisfaction. Exceeding customer expectations when things go wrong, may leave a
stronger positive impressions on customers.
If these suggestions are followed by each functional department and

personnel, then an organization can create and keep loyal customer for a profit

1. __________‟s abilities and motivation to meet the expectations of customers
as created by external marketing efforts are backed up by internal marketing
efforts.
a. Employee
b. Employer
2. ____________is towards establishing developing and commercializing long
term customer relationships, so that the objectives of the parties involved are
met.
b. Marketing effort
a. Selling
3. Managing service recovery is also important in building customer_______.
a. satisfaction
b. trust
2.10 Customer Service and Customer Care

Financial services involve the continuous delivery of service and a strong
membership relationship. Hence relationship management is extremely important.
It in turn depends on the quality of the service offered. If the perceived quality of
the financial service exceeds Collsa1ller expectations, there is a basis for building
a relationship. IF the reverse prevails the relationship tends to deteriorate. Service
quality is of strategic importance in the marketing of financial services, and is
76
considered by some as one of the most important elements in the mix, relationship
Attracting and
management is dealt with in greater detail in later module. Retaining
Customers In
If is not generally accepted that financial services consumer's expectations
Banking Services
of quality are increasing, and that people are becoming increasingly critical of the
service they experience. In addition, financial service organizations are becoming
more aware of the importance of 'looking after' their client base, especially in the
light of the increasingly competitive environment.
It is not just the competitive environment that is changing consumer

attitudes to service, technology also pays a role. Kreitzman sees technology as an
opportunity to increase service; however it is also accepted that technological
developments such as electronic banking and direct line insurance make banks
and insurance companies more impersonal, and less customer contact could make
customers less loyal. Marshall (1985) found that leadership in technology was not
such an important quality that customers want it in a financial service company.
Indeed customers are more concerned with quality of services than with
innovative features such as home banking.
Service Quality
The most recent trend in many service industries has been their emphasis on
quality as a vehicle for sustaining competitive edge. Berry et a1 (1989) believe
that service excellence is key strategic weapon, highlighting that service quality is
the marketing strategy for the financial service industry
Service quality must have the full commitment of every echelon in the
organization, but essentially it is the commitment of top management that yields
the initial quality orientation. 'Effective quality strategies should involve all levels
of staff and should be supported, planned and directed by managers at the top to
the organisation'.
Many definitions are applied to the concept of service quality, and phrases
such as 'meeting customer expectations', or 'providing customers with what they
want, when they want and at an acceptable cost' are well-known explanations of
the meaning of quality. Essentially, quality is a judgmental issue relating to an
individual's perceived expectations of service and actual service performance.
It service organizations care about their employees as well as their
customers, the result should be increased motivation and satisfaction, and a higher
level of service quality compared with the quality expected by customers, and
therefore increased customer satisfaction and loyalty.
77
Distribution, Customer Care
Pricing, Retaining
Customers and
Customer care is an extension of customer service, but is wider in context.
Consultancy Customer services implies and immediacy of actions, the focal point being a
Services tactical response to customer requirements. Customer care, on the other hand is
more strategic: it is the planned provision of services in anticipation of customer
requirements. As already mentioned, customer care is essential if financial
organizations are to maintain their customer base.
Heinz Pekarek, Creditanstalt Bankverrein, says thus:

A major criterion, in making a product or rendering a service, is creating
more value while using resources economically. For the banks, quality is a means
of differentiating an otherwise homogeneous range of service in order to obtain a
"unique selling position" in the competitive environment.
A service or product is of high quality if it meets the demands and
expectations of the customer‟s i. e. if the service or product can be matched with
customer's actual needs and expectations e.g. housing loan, car loan or consumer
durable loans by banks which help a customer to meet his growing social needs
and improve his status.
The satisfaction of customer needs depend on how far the bank optimizes its
internal procedures. Decisive factors or internal quality are technology and
organizational aspects. The following requirements must be met:
 Speed (Same day processing of transfers)
 Security (ensuring that transactions are handled correctly)
 Accuracy and Punctuality.

1. Customer care is an extension of customer service, but is _______in context.
a. wider
b. narrower
2. A service or product is of high quality if it meets the demands and
expectations of the ____________.
a. producer
b. customer
78
2.11 Bank Marketing: Future Challenges Attracting and
Retaining
Under the fast pace of liberalisation, Indian economy is gradually opening Customers In
Banking Services
up. The globalisation of financial services is creating a 'pressure' effect on the
financial firms and companies making them more effective and productive.
Coupled with socio-economic changes, the I.T. related changes is bound to

change the complexion of Indian financial market and banking and marketing of
banking services is no exception to that. They are now required to design new
customer friendly products to cover the emerging needs of changing preferences
and the risk factor. As it is the slack in demand for credit has in itself made all
banks to come out in the arena of marketing their services 'with easier terms and
attractive packages. More and more banks are labelling their products more
effectively as only getting deposits is not going to generate any field. The
prudential norms are creating positive pressure on banks to be more transparent,
effective in recovery and to strengthen their capital base. From just social angle,
banks are now compelled to focus on optimum profits not only for growth but
even for healthy survival amidst the competition all around.
If we review the changes in financial markets on the backdrop of 'future

challenges', it is realised that the financial services, in general, have undergone a
sea-change.
In the first phase of development, the emphasis was on setting up and
functioning of investment institutions, insurance business, leasing and merchant
banking firms.
In the second phase, the focus shifted on hire purchase, factoring, venture
capital funds and reforms in stock market and capital market.
In the third phase, the emphasis was on computerization, paperless trading

and depository‟s innovative use of new financial instruments and integration of
financial services with the rest of the world.
Since there is strong emphasis on development of infrastructure sector as a
priority area of Govt. policy it would need massive outlay and how the financial
institutions cater to its need will be a great challenge. The foreign exchange
market amidst the currency fluctuations and the trend of rupee weakening will be
another challenge to be faced. The increasing expenditure vis-à-vis thinning
margin and its compelling effect on controlling human resources – in terms of not
many fresh recommitment and schemes like VRS are the challenges to HRD and
their socio-economic effect has to be closely monitored.
79
Distribution, Effect on Banking and Latest Trends in Banking Marketing
Pricing, Retaining
Customers and
Let us now review the latest glimpse of the latest trends in bank marketing
Consultancy which will give a glimpse of the changing fabric of banking services and its effect
Services on marketing of banking services.
Latest Trends in Banking Marketing

The banking business is becoming more and more complex with the
changes emanating from the liberalisation and globalisation, with UTI, NSC,
Company Debentures and NBFCT competing in deposits and new private banks
and foreign banks competing in advances, with aggressive marketing strategies,
bankers are becoming growingly aware about the need for marketing.
With the restricted (though now free to decide) rates of interest on deposits
and advances the main emphasis is being given on:
i) Efficient and courteous customer service
ii) Attractive and innovative schemes

iii) Developing subsidiary services
iv) Aggressive personalized selling strategy
Marketing has not remained just a strategy but many banks - like Citibank,
Hong Kong Bank in Foreign Bank Sector and State Bank of India, Canara Bank
among the nationalised bank sector adopted a pro-consumer philosophy.
The 'customer is a king' - thought is getting more and more deep-rooted. If
we take a look at the tables which give reasons as to why a customer leaves a bank
(a) in India and (b) in. USA, it will be clear as to why banks are giving top priority
to quality of people (through continued training) and quality of service (through
continuous improvement) as the bedrock of a good promotional strategy:
Why a Customer leaves a Bank?
In India % In USA
Death 01 Poor Service 20
Move away 03 Moved away 45
Forms other relationship 05 Loan related problems 05
For competitive reasons 09 Services charges 10
Dissatisfied with products 14 Changed jobs 10
Indifferent attitude 68 Changed travel pattern 10
80
Since nationalization, the Indian Banking scenario has been successively Attracting and
Retaining
changing each decade and the banking system today through more transparency,
Customers In
is showing signs of maturity, Banking Services
The changing environment directly affects bank's marketing strategy with
respect to the following categories
1) Political/legal dimensions
2) Technological dimensions
3) Socio-cultural dimensions
4) Economic dimensions
5) Competitive dimensions
With computerization on a large scale, the traditional concept of
communications are undergoing sea change. The letters are now replaced by E-
Mails. In place of cashiers and even tellers, ATMs are responding quickly and for
24 hours. 'Plastic Money' is gaining more acceptance and popularity. Home
Banking, tele-banking, room service are the new catchy concepts which attract the
customer to appeal to his valuable time factor and convenience.
The following Table will indicate the effect of changes in economy on

saving pattern which too is a very important dimension leading bankers to reorient
their marketing strategy
Table Progress Card of the Banking sector
Bank Group wise financial Performance of scheduled commercial bank :

Some
Important Financial Indicators: 1997-98,1998-99 and 1999- 2000

Interest
Opening Income MIRE Other Expenditure Operating & Wage
Net add Provisions Spread
Profit Income income Expended Expenses Contingatiet (Na)
Bill
Stn664
daimon,' 18,423.36 7,30636 1,15,386,00 99,936.85 15,879,15 1,01,01964 69,317.04 27,645.60 18,467.38 11,117.00 30,189.82
Bann
1999-2300 [1.66] [0.66] [10.391 18.96] [1.43] [9.73 [6.24] [2.491 [1.661 [1.001 [2.721
Fut& Sector
13,064.03 5,113.87 90,900.44 79,459.71 11,440.73 85.786.57 5537328 22,461.13 16,361.57 7,950.16 24,034.43
Banks (27)
1999-2030 L2.471 [031 [10.20] (8.92I 0 .28] [9.63] [6.22] [2.521 [124] [0.891 12.701
1tploualler.4.1
7,22428 2,43720 56,883/16 30,273.04 6.61182 54,448.86 35,478.22 14,182.76 10,435 IS 4,787,81 14,794.22
Banks (19)
1959-2000 [130] [0441 (16.26] p26) [I.193 (9.823 [6A0] 12.561 [1.88] [0.861 [2.67]
Mince Bud.
5,839.15 2,676.87 34,014.51 29,186.67 4;827.91 31,337.71 19,297.06 8;27837 3,024.39 3,167.23 9,229.62
Group (3)
81
Distribution, 1999-2000 [1.74] [0401 [10.11] [8.61311 [1.44] [9.321 [5.92] 12.461 [1,761 [0.941 [2.76]
Pricing, Retaining Indhn Neale

Customers and Sector Banks
(24)
1,428.86 655.09 13349.88 7,441511. 1,307.97 8;094.79 5,628.95 1,692.07 1,080.24 773.77 1,812.96
Consultancy
1999-2000 (1.841 (0i4) [11.26) I9381 (1.68] 110.421 (7.24] p.18] ie.391 on0' [2.33J
Services
blip Rime
Sector Banks 1.242.24 569.41 3,407.47 4,4292/ 978.26 40628.06 3,326.61 837.02 163,18 674.43 1,102.60
(8)
1999-2000 [2.11] [0.971 [931 [7431 [1.66] [322] [3.45] [1.41] [0.28] [1.151 [1.27]
Boragn Bath
2,686.63 967.99 1032821 8,176.02 2,152.19 9,360.22 4,916.20 2,645.12 862.37 1,718.64 3,189.85
(42)
1999-2000 [3.24) (1.171 [12.47] (921 [2.69 [1130] [6.02] [3.21] [1.041 12071 pi59
Bank Group. Wise Financial Performance of Scheduled Commercial Bank:

Some Important Financial Indicators: 1997-98, 1998-99 and 1999-2000
The latest statistics in Economic Times indicate that the saving rate has been
26% of, GDP. Household being 76% of overall saving and 10.6% of that is into
financial assets. Percentage of household contribution sector as GDP (1996-97) is
19.1%. The private corporate sector is 4.1% and public sector is 1.9% of GDP.
The money supply (M-3) has been affecting growth of banks' deposits
which is, in fact, the raw material for banking services. These is almost perfect co-
relation between money supply and deposit growth. Due to changing rates of
interest on deposits, there is also shift in the patters of short term, medium tern1
and 1o11g term deposits with Banks. Due to large supply of bank credit to
government and the corporate sector preferring to raise money through the share
market, it has also been affecting the growth of advances. This exerts pressure on
profitability which compels bank to go for low cost deposits and higher rates on
advances. This leads to more emphasis on selling to corporate clients.
The growth of market and vide spread of debenture and share culture
provides the corporate sector a direct access to saver causing dis-intermediation.
This too forces the banks to provide new types of services in the investment area.
The money market instruments also have shown innovative additions like (CP)
Commercial Paper (CD) Certificate of Deposit, Stock invest, Mutual Money
Market Fund, etc.
In the corporate sector, despite easy access of credit which enabled the small
and medium industries to widen their entrepreneurial base, the adoption of,
Tandon and Chore Committee norms for credit decision and credit monitoring
(which had the objective of orienting the corporate borrower to gain more and
82
more for self-reliance in equity), has been a compelling factor for corporate sector Attracting and
to turn to capital market to raise additional funds equity. Retaining
Customers In
Now with more liberalisation of bank credit to corporate sector against the Banking Services
present slack state of affairs in the capital market, banks can 'aggressively utilise
their marketing strategies to market their products/schemes to corporate sector
borrowers whereby the resources can be gainfully employed. This can ensure
comfortable profit margin for the banks and more importantly higher economic
growth through better industrial output.
Changing banking scenario in India is causing changes in the marketing
strategies of commercial banks.
The need for being more competitive and also transparent, to be socially
committed without sacrificing profits has compelled the banks to be more
conscious about quality customer service and to be sensitive to their changing
needs and expectations. The changing patterns of household and corporate sector
have affected the saving-borrowing patterns,' this makes banks to think of more
assertive promotional strategies to attract new customers and maintain the existing
ones as satisfaction
Due to the freedom to decide interest rates on deposits and advances vis-à-
vis the shifts in demand and supply of deposits of loan able funds, banks are
turning more towards relationship (bank) marketing and selling to corporate
clients. Instead of concentrating on high cost deposits and more number of
customers with low deposit, banks prefer the corporate clients. Banks are also
devising new and innovative schemes to attract corporate borrowers. Such an
exercise has to be carried out to ensure that the cost of finds is kept low and return
are better so that profitability is maintained and banks can strengthen their capital
base as required by the Narasimham Committee.
With relationship and transaction banking banks are also becoming more
quality oriented and offer quick and courteous customer service. To facilitate this
swiftly and selling to corporate clients better banks also have to have a pro-active
work culture and a flexible structure. The concept of venture teams can be useful
for the banks for selling suitably to the corporate customers as it has the
combination of line and functional type of organisation. The banks organizational
structure for selling to corporate customers must be flexible with motivated
personnel who are properly empowered so that they can mobilize the customers
for long term banking relations. A corporate marketing department can also be set
up to cater to the corporate clients. All this requires proper promotional strategies.
83
Distribution, The bank marketing has, therefore, become a very complex and yet
Pricing, Retaining interesting subject as it requires the knowledge of economics, sociology,
Customers and
psychology, banking and also marketing concepts. The buyer behaviour and
Consultancy
Services socio-economic situation being constantly changing, an on-going monitoring and
reorienting the promotional strategy is the essence of effective marketing of
banking services.

1. The globalisation of financial services is creating an _______ effect on the
financial firms and companies making them more effective and productive.
a. 'pressure'
b. demand
2. The _________market amidst the currency fluctuations and the trend of
rupee weakening will be another challenge to be faced.
a. money
b. foreign exchange
2.12 Let Us Sum Up

In this block we have studied about the competition has been eating into the
profit margins of banking industry.
In this unit we have studied that Improvement of service quality is what will
keep a customer and the cost in doing a thing right at the first time is cheaper than
the process of recovery. IT is proved be far more expensive to win a new
customer than to retain an existing one and hence it is big business sense to keep
the service standard at high enough levels as per the perceptions of the client so
that he does not get tempted to look the other way. Therefore the clear need of a
banker is to understand the meaning of customer satisfaction and the way in which
this can be achieved through the management of three crucial parameters viz.
quality, service and value. Satisfaction level is a function of the difference
between' perceived performance and expectations. If the performance falls short
of expectations, the customer is dissatisfied. If the performance exceeds
expectations; he may be highly pleased or delighted. Expectations get formed on
the basis of buyer's past experience, marketer and competitor information, etc.
84
Successful companies raise expectations and deliver matching performance, Attracting and
always aiming for Total Customer Satisfaction (TCS).Customer's experiences of Retaining
Customers In
moments of truth are based on certain expectations created by the service
Banking Services
provider. The traditional marketing efforts give promises. Employee‟s motivation
and abilities to meet customer expectations are backed up by internal marketing.
So by creating and maintaining a service culture through marketing campaigns
and activities directed towards the employees, the organization may prepare its
employees for the moments of truth.
So after going through this unit the readers would be feeling confident in the
topic discussed.
Answers: (1-a), (2-b), (3-a)
Answers: (1-a), (2-b), (3-a)
Answers: (1-a), (2-b), (3-a), (4-b)
Answers: (1-a), (2-b), (3-a)
85
Distribution,
Pricing, Retaining
Customers and
Answers: (1-a), (2-b), (3-a)
Consultancy
Services
2.14 Glossary
1. Globalization - It is the process of international integration arising from the
interchange of world views, products, ideas and other aspects of culture.
2.15 Assignment
1. Explain the terms relationship marketing in the context of banking services.
How is relationship marketing different from loyally programmes?
2. What are the 'essential factors affecting customer choice for bank
customers? How do banks try to meet some of these expectations?
2.16 Activities
With respect to banking services, explain the concepts of service quality,
customer value and customer satisfaction. Briefly identify the sources of the five
gaps with respect to the discussion on gap analysis in the unit.
86
Attracting and
Retaining
2.17 Case Study Customers In
Banking Services
The criteria listed above have been researched with respect to individual
customers. Talk to at least 3 organisation, elicit from than the criteria they would
consider most important to their definition of a "good bank". List these criteria
and comment upon how different, if at all, are these from the criteria considered
important by individual consumers.

1. Management Techniques, R. Mittal, G.K. Publications- 1996.
2. Essentials of Management, J.L. Massie, Prentice Key, 1994.
87
Distribution,
Pricing, Retaining
UNIT 3: ADVISORY AND CONSULTANCY
Customers and SERVICES
Consultancy
Services Unit Structure
3.1 Introduction
3.2 Portfolio Management

3.3 Credit Rating
3.4 Takeovers and Mergers

3.5 Trustee Services
3.6 Depository Services

3.7 The Marketing Approach for Merchant Banking Services
3.8 Let Us Sum Up

3.10 Glossary
3.11 Assignment
3.12 Activities
3.13 Case Study

After learning the unit, you will be able to understand:
 Describe the various advisory and consultancy services provided by

merchant bankers.
 Explain the various legal and regulatory provision in respect of providing

qualitative and professional services.
 Know the marketing approach for merchant banking services.
88
3.1 Introduction Advisory and
Consultancy
In addition to the services discussed in the earlier units, merchant bankers Services
today provide an impressive range of advisory and consultancy services, which
have assumed critical importance in present day competitive business
environment, by providing facilitation to business organisations. This unit
describes the various services and allows you to have a general overview of the
range of services
3.2 Portfolio Management

Portfolio Management refers to management of investment portfolio by an
expert or professionally qualified person for the maximum benefit of the investor.
All the transactions are done by the portfolio manager in the name of the
investor under the Power of attorney.
SEBI (Portfolio Managers) Rules 1993 defines- Portfolio means the total
holdings of securities belonging to any person.
Portfolio Manager means any person who pursuant to a contract, agreement
or arrangement with a client advises or directs or undertakes on behalf of the
client the management or administration of portfolio of securities or the funs of
the client as the case may be.
Discretionary Portfolio Manager means a manager who exercises or may
under a contract relating to portfolio management exercise any degree of
discretional as to the investments or management of the portfolio of securities or
the funds of the clients as the case may be.
While selecting the Portfolio Manager an Investor should take in to account
the authorization of the Portfolio Manager with SEBI, his qualifications and
experience, the 50 research base and time period for which he is to be appointed
as Portfolio Manager.
The Objective of the Portfolio management should be specific, because each

objective has a different element of risk involved. A Maximum return objective
has maximum risk, Optimum return hears optimum risk, capital appreciation,
safety objectives may bear comparatively less risks. From the return angle the
securities may be classified as under:
89
Distribution, Fixed Income Securities
Pricing, Retaining
Customers and
1. Debentures, PCD, NCD‟s or Debentures with tradable warrants
Consultancy 2. Preference shares, Government securities, bonds, fixed deposits
Services
3. Bank deposits, Mutual funds, Tax savings schemes, etc.
Variable Income securities

1. Equity shares,
2. Money market securities such as bills, commercial papers, etc.
Functions of Portfolio Manager

1. Advise on new investments, review existing investments,
2. Research: Markel research about the new issues, their comparative

profitability to the investor and the analysis of the performance of the
companies which are listed the new trends in the stock and securities
market, the dealings in derivative instruments, Government Directives,
Study of the Industry for the industry profile for investment.
3. Study of the Market for understanding the bearish or bullish trends, and the
demand and supply of securities,
4. Decide the objective for the investor,

5. Decide the size and split up of portfolio of the investor as per size of
investment,
6. Decide strategies to have optimum return, by diversification of the portfolio.

1. _______refers to management of investment portfolio by an expert or
professionally qualified person for the maximum benefit of the investor.
a. Portfolio Management
b. investment
2. ________Manager means a manager who exercises or may under a contract
relating to portfolio management exercise any degree of discretional as to the
investments.
a. portfolio
b. Discretionary Portfolio
90
3.3 Credit Rating Advisory and
Consultancy
It may he defined as the science of estimating the creditworthiness of a Services
person or a business, or the value of security, on various parameters about
business, such as turnover, repayment capacity, profitability, asset quality, risks,
etc. The credit rating represents, the opinion of the rating agency on the relative
ability and willingness of the issuer of financial instruments to meet service
obligation as and when the same arises.
In India the credit rating agencies rate bonds, debentures, preference shares,
structured obligations, commercial papers, certificate of deposits, equity stocks,
LPG suppliers, real I estate developers. Credit rating of individuals, or entities,' is
also done by the banks to decide the rate of interest to be charged on borrowings.
In India, it is mandatory to get the debt instruments rated such as:
a) Issue of commercial paper (must have a rating not below A-2 of ICRA
grade)
b) Company fixed deposits

Credit Rating provides information to the investor to measure the risk
investing into a particular security. It also provides comparative information about
various securities, and their associated risks. Represented by words such as
AAA+, AA+, A+, BBB+, BB+, B+, CCC+, CC+, C+ in order of increasing risk of
the securities, credit rating allows the investor to apprehend the risk involved. The
return on the investment and take a decision. These ratings represent opinion of
the company, which is formed after a very careful study of the company and the
market conditions. It provides a good tool to the investor. It is security credit
rating specific and time specific
Quality of Rating: The quality of rating depends upon the expertise with the
rating agency, 'and the factors taken into account for rating.
The Credit Rating Analysis: While studying the credit rating of a particular
security being issued by a company, the Rating agency considers all the business
details about the company, and the promoters, and board of directors, as depicted
through their balance sheet, and general market position. The Market condition,
competitors, Government Policies, the position of the Market Leader, and such
other conditions are also taken into consideration while making credit analysis.
The analysis of the instrument to be issued, the time period of its redemption, the
method of redemption or conversion into a share, and similar relevant factors are
also taken into consideration while doing this exercise.
91
Distribution, The analysis is focused on these fundamental risks: Industry Risk, Financial
Pricing, Retaining Risk, Rate of Interest Risk, Management Analysis, and Fundamental Analysis.
Customers and
Consultancy Credit Rating Agencies: The Credit rating agencies floated by three
Services premiers financial institutions ICICI, IFCI, and IDBI presently working in India
me:
1. CRISIL Credit Rating Information services of India Ltd

1988
2. CRA Investment Information and Credit Rating Agency

1990
3. CARE Credit Analysis and Research Ltd

1993
4. Duff and Phelps India Pvt Ltd 1997

CRISIL Debenture rating Symbols
a) High Investment Grade: Highest Safety MA, High Safety AA,

b) Investment Grade: Adequate Safety A, Moderate safety BBB,
c) Speculative Grade: Inadequate Safety BB, High Risk B, Substantial risk C,
In default D
+ Or - symbol may be attached to AA to D to reflect comparative standing within
the Category.
CRISIL Rating for Fixed Deposits
The symbols, FAM, FAA, FA, FB, FC, FD stand for: Higher safety, High
safety, Adequate safety, Inadequate safety, High risk and In-default, ratings
respectively
CRISIL Rating for Short Term Instruments
The Symbols PI, P2, P3, P4, P5 represent decreasing degree of safety of
timely payments of the short term instruments.
Similarly other rating agencies also make ratings by using standard symbols
for easy understanding.
Which Schemes/ Instrument are rated?

Debentures, Bonds, Fixed Deposits schemes, Equity shares, Commercial
papers, Municipal Bonds, Debt Funds, Mutual Fund schemes, Plantation schemes,
Infrastructure related debt, Cellular and basic telecom services, ADR/ GDR
issues, are the instruments schemes rated for benefit of investors.
92
Check your progress 2 Advisory and
Consultancy
1. ____________may he defined as the science of estimating the Services
creditworthiness of a person.
a. Credit Rating
b. Risk taking
2. ________provides information to the investor to measure the risk investing

into a particular security.
a. Risk bearing
b. Credit Rating
3.4 Takeovers and Mergers

Merchant Bankers are best suited to negotiate on behalf of the companies in
cases of amalgamation and mergers. A merchant banker can be an effective
catalyst in deciding the price, time and quality of mergers, and for complying with
all the legal provisions. Maintenance of secrecy, which is highly essential in such
cases, can be done by the merchant bankers, who are professional bankers.
Merchant banker is well equipped 'to do the Pre take over investigations, analysis
of the values of the tangible and intangible assets, arranging the financial
syndication, etc.
The shareholding pattern, the capital structure, the borrowing pattern and the
term liability structure, position of the company in the market, are decided by the
size of its assets and liabilities. A company needs to orient itself in the direction of
either of the methods of takeovers, or merger, for the mutual benefit of the Stock
holders, owners and the society. Merchant banker can help the companies in
taking decision in respect of the under mentioned types of mergers.
Amalgamation: Joining of two or more companies to form a new business. The
existing entities no more exist, a new entity emerges.
Merger: means takeover of companies by a bigger company. The companies
which are taken over lose their identity while the one which takes them becomes a
larger company.
Consolidation: Means fusion of two or more co-existing companies into a new

company to form a new company.
93
Distribution, Reconstruction: A company transfers its undertakings and assets to a new
Pricing, Retaining company in consideration of the issue of the new company's shares to the first
Customers and
company's members and if the first company's debentures are not paid off in
Consultancy
Services further consideration of the new company issuing shares or debentures to the first
company's debenture holders in satisfaction of their claims.
Acquisitions in India are prevented under various statutory provisions as under:

Section: 108 of the Companies Act 1956, on transfer formalities,
Section 391 and 394 on mergers and rearrangement

Section 370 and 372 on limits on borrowing and investments,
Rules 40A and 40B of the listing agreement,

Monopolies and Restrictive Trade Practices Act 1969.
However the Amalgamations may be permitted under the following

circumstances:
Directions or order from the concerned High Court, Approval of High Court
under section 391-394 of Indian Companies Act,
Approval by creditors and financial institutions and banks who have
approved the scheme, RBI approval for shares to NRI‟s.

1. __________Bankers are best suited to negotiate on behalf of the companies
in cases of amalgamation and mergers.
a. Merchant
b. foreign
2. Merger means takeover of companies by a _________company.
a. foreign
b. bigger
3. ________means joining of two or more companies to form a new business.

a. Amalgamation
b. merger
94
4. ____________means fusion of two or more co-existing companies into a new
Advisory and
company to form a new company. Consultancy
a. amalgamation Services
b. merger
3.5 Trustee Services

A Debenture trustee is defined in SEBI Debenture trustee Rules 1993 as: "a
trustee of a trust deed for securing any issue of debentures of any 'body
corporate".
This definition does not at all give the full responsibility of the Debenture
trustee. A debenture trustee is a link between the Company which raises a loan
from the Public in the form of Debentures, and also acts as a trustee for the
investors. It is given various regulatory powers by SEBI, and can exercise a good
control over the actions of the Company, in the interest of the investors in
debentures raised by various companies.
Who can act as a Debenture Trustee in India?

As per SEBI regulations (article 7); A scheduled commercial bank, a public
financial institution, an insurance company or a body corporate only can do the
business of Debenture trustee, in India.
The Obligations and Responsibilities of Debenture Trustee

The Debenture trustee must hold a certificate from SEBI (which is valid for
a period of 3 years), pay the necessary fees for registration, and must abide by the
directives of SEBI,
The duties of the Debenture trustee specified in articles 13,14,15 or SEE1

regulations are as under:
a) The debenture trustee must enter into a written agreement with the company
which intends to issue the debentures, the agreement should be specific
about the amount to be floated, the period within which amount to be raised,
b) If the debentures certificates are to be issued only after registration of

charge, the Debenture trustee must ensure the necessary charge has been so
registered before dispatch of the certificates,
c) Ensure that the interest warrants on these debentures have been dispatched
on or before the due dates,
95
Distribution, d) The redemption of the debentures is made to the debenture holders on
Pricing, Retaining maturity,
Customers and
Consultancy e) Exercise due diligence to protect the interests of the investors, and not allow
Services deterioration in the value of the assets against which the debentures are
raised,
f) Ensure that the company, complies with all the guidelines issued by various
Govt authorities,
g) Inform the SEE1 about any act of breach of trust by the Company, e.g.
Appoint a nominee director on the Board of the Company, in case of 2
consecutive defaults in either of these
i) Payment of interest to the debenture holders,
ii) Default in creation of security for the debentures, or

iii) Default in redemption of debentures
h) Make periodical verification of accounts, records, and registers of the

company, take possession of trust property, and enforce security in the
interest of the debenture holders
Debenture trustee can Call or cause to be called by the company, the

meeting of all the debenture holders, if requested by debenture holders of least 10
% in value.

1. A ______trustee is a link between the Companies which raises a loan from
the Public in the form of Debentures.
a. debenture
b. share
2. _________can Call or cause to be called by the company, the meeting of all
the debenture holders.
a. share trustee
b. Debenture trustee
96
3.6 Depository Services Advisory and
Consultancy
Depository is an agency to whom securities are deposited by the investors, Services
for: a) timely collection of all the benefit such as dividend, rights issues, bonus,
redemption, etc. b) settlement of sale purchase transaction through computerized
accounting system instead of physical movements) safekeeping of the securities,
d) and handling/dealing on behalf of the owner or the depositor, e) collecting
funds from the companies, and settlement of sale purchase transactions of
securities
The Working of the Depository

Investor (owner) of security transfers the same in the name of the
Depository. The depository sends this security to the issuing Company for
transferring it in the name of ' itself, It issues a Receipt to the Investor (beneficial
owner) for holding the security. This enables the Depository to perform its
functions smoothly. The investor can then advise the depository to sell some
portion of his security at a specified rate, or to a specified person. The depositories
will then sell it, realize the proceeds, transfer the interest in the name of the new
purchaser and continue to hold the securities, of course on behalf of the new
beneficial owner and all this without the actual movement of papers.
The Depository gets fees for each of the transactions, the investor gets 10
protect his interests, and is free Prom caring about the legal issues and other
formalities.
The SEBI has issued Rules, regulations and code of conduct for the
depositories.

1. ________ of security transfers the same in the name of the Depository.
a. Investor
b. creditor
97
Distribution, 3.7 The Marketing Approach for Merchant Banking
Pricing, Retaining
Customers and Services
Consultancy
Services Despite the recession, which is affecting various industries in different
countries with varying intensity, the merchant banking and allied activities
continue to grow in terms of turnover and profits and thus have a paramount
impact on other spheres of the economy.
The main characteristics of merchant banking services-

1. Intangibility: They meet a general rather than a specific need. Particular
benefits from one rather than another institution are not readily apparent and
therefore are dependent on effectively getting their message across 'to the
public and ensuring that their image and services are attractive.
2. Inseparability: The main concern of the market is usually the creation of
time and place utility; this implies that direct sale is almost the only feasible
channel of distribution.
3. Highly individualized marketing system: Since a close personal and

professional client relationship must exist, direct channels are the only
feasible choice.
4. Lack of special identity: Each organisation must find a way of establishing
its identity and implanting this in the mind of the public. As the competing
products are similar, the emphasis is on the "package" rather than the
product, the package consists of branch location, staff, services, reputation
and advertising and from time to rime new services. As major competitors
offer similar services the emphasis will be on the promotional aspects rather
than on the inherent uniqueness of a particular institution's service.
5. Heterogeneity or a wide range of products/services: A wide range of

products and services are offered to meet a variety of financial and related
needs from different customers in different areas. On the one hand they
provide a special one-off management service for corporate customers and
on the other, retail services for individuals. The implication is very seldom
can a service be standardized.
6. Geographical Dispersion: Branch network is necessary so that all services
or promotions must have both appeal and wide application.
7. Growth must be balanced with risk: There has to be a well-controlled
balance between expansion and prudence.
98
8. Fiduciary responsibility: The organisation must guard the interests of its Advisory and
customers. Consultancy
Services
9. Labour intensiveness: Personalized service versus automation is an
important issue. Because of relatively high personnel costs as well as to
enhance customers' convenience use of technology is increasing
The main objectives of merchant banking services-

1. Flexible goals: Increasing or decreasing certain type of products, services
and customers.
2. Fixed objective: Increasing profitability, high return on investment,
achieving certain market share/growth rate, achieving a spread of customer
types in order to minimize risks and business fluctuations.
The marketing function of merchant banking services is one of five subsets

of management controllable variables. The management system comprises of four
major sets of variables:
1. Organisational objectives
2. External environnements (non-contrôlable variables)
3. Controllable (or management) variable sets

4. Organisational and control variables
The four facets of variables are interrelated and operate together as a system.
Fig 3.1 The controllable set of management variables
Marketing function focuses its attention on the following activities:
 Customer behaviour, attitudes and segmentation
99
Distribution,  Marketing research that attempts to collect, investigate, analyse and
Pricing, Retaining interpret customers' attitudes and market developments in order to
Customers and
contribute to the maximum attainment of objectives in the light of existing
Consultancy
Services non-controllable factors, and in consonance with the other four major
functions mentioned earlier
 Products/service development
 Branch management; location and distribution of services
 Advertising, communication, promotions and publicity
 Pricing of services
Defining marketing strategies, administering and controlling the marketing
program
Figure below illustrates the dual marketing task for financial institution.
Fig 3.2 Dual Marketing Tasks
The marketing approach refers basically to four steps:

1. Determine customers' requirements;
2. Design new services or update old ones according to the findings;

3. Market services (at a profit) to the customers for whom they were
researched and designed (this includes pricing, promotion and distribution);
4. In doing so, satisfy the customers' needs.
The marketing approach for financial services can be diagrammatically illustrated
100
Advisory and
Consultancy
Services
Fig 3.3 Marketing approach to financial services
In the coming years the developing trend will be more in line with an
increase in computerization and information technology, In the twenty-first
century the trend onwards further liberalisation and deregulation will lead to
tremendous growth in the volume of business, This is likely to lead to a
restructuring of the services industry. The strategies will have to change in order
to enable institutions to benefit from the expected growth, or example by
strengthening the marketing function (including development of problem solving
skills at branch level), improving information systems, increasing strategic
alliances and simplifying the decision making mechanism.

1. ____________ function focuses its attention on customer behaviour, attitudes
and segmentation.
a. Marketing
b. selling
2. In the twenty-first century the trend onwards further _______and deregulation
will lead to tremendous growth in the volume of business
a. liberalisation
b. globalisation
101
Distribution, 3.8 Let Us Sum Up
Pricing, Retaining
Customers and In this unit we have studied about the consultancy and advisory service
Consultancy
sector in very detail.
Services
Here in this unit we have studied about a large number of services can be
rendered by the Merchant Banker. The services are required to be marketed
because of many reasons such as increasing need of investor clients, largeness of
amount of turnover in Investment transactions, monitoring the activities of the
corporate clients, providing liquidity to the various instruments for the profit to
the client, increasing own fee based income. The merchant banker however has to
observe the legal framework and work within the business ethics. Increasing
number of Non-resident investor, foreign investors, foreign institutional investors,
and globalisation of the trade transactions, necessitates proper institutional focus
to the advisory and consultancy services provided by the merchant Banker.
Portfolio Manager: Manages the investment portfolio of his customer client.
This means, that he will sell, retain or purchase securities which may yield long
term or short term or both types of yield for the full satisfaction of the customer,
The portfolio Manager takes the decision about the time of sale/purchase, price of
sale/purchase, and company in which investment is to be made. He is guided by
the SEBI guidelines on the his role and responsibilities. While raising funds, from
the general public, it is essential that the investor knows the risks involved in his
investment decision. Credit Rating of various instruments educates the investor on
the risk and return aspects of his decision. This service is therefore beneficial to
the investor. It also a good source fee based income to the Merchant banker.
Corporate clients need to expand their business. This can be done through various
methods of raising capital or funds, or through takeover, merger, amalgamation
with existing bodies engaged in the same or parallel activity. Since this involves a
substantial amount of legal and technical skill, which the merchant banker
possesses, these services are provided by him.
After going through this unit you must have got the sufficient idea about
contents of this unit and would be confident enough in this topic
102
Check your progress 2 Advisory and
Consultancy
Answers: (1-a), (2-b) Services
Answers: (1-a), (2-b), (3-a), (4-b)
Answers: (1-a)
3.10 Glossary
1. Debenture - Instrument used to raise long term debt from creditors.
3.11 Assignment
1. How can the depository services be marketed by you? Give your answer
with reference to The Place, Price, Promotion and Product angles of
marketing.
2. Write down the advantages of-

a) Depository Services to the Investor,
b) The Company issuing the securities,

c) The Merchant Banker who handles the Depository Services
d) The Stock Exchange, and

e) To the Money Market/ Capital Market.
103
Distribution, 3.12 Activities
Pricing, Retaining
Customers and Write down the strategies adopted by your bank/institution for promoting
Consultancy
merchant banking service?
Services
3.13 Case Study

How do you distinguish between the Services offered by the Portfolio
Manager and Depository Service?

1. Sandra Vandermerwe and Micheal Chadwick, "The Internationalization of
Service”, The Service Industry Journal, January 1989.
2. Micheal E. Porter, "Changing Patterns of International Competition",
Ccdgornin Management Review. Vol. 26, Winter 1986.
3. George S. Yip, "Total Global Strategy: Managing for Worldwide
Competitive Advantage", Englewood Cliffs, N.J. Prentice Wall 1992.
4. Pei-Yuan Chia, "Citibanking the World", Bank Management, July-August

1995.
104
Block Summary
This block focused on Distribution, Pricing, Retaining Customers and
Consultancy Services.
This block was divided into three units, where unit one discusses on
distribution, Pricing and Promotions Strategy for Banking Services. Here in this
unit we made a detailed discussion on banking services, we discussed on various
types of branches, pricing of banking services. On the other hand unit second
discusses on the topic Attracting & Retaining Customers in Banking Services i.e.
how would a bank attract and retain its customers. Here a detailed discussion was
made on Factors Influencing Consumer Behaviour in Banking, and on Customer
Relationships Management. Unit three discusses Advisory and Consultancy
Services. Here a detailed discussion was made on portfolio Management, Credit
Rating, Takeovers and Mergers, Trustee Services, Depository Services.
After going through this block the readers will certainly feel confident in the
topics of the block and would have understood the basic concepts and objectives
of this block.
105
Distribution, Block Assignment
Pricing, Retaining
Customers and Short Answer Questions
Consultancy
Services 1. Sales promotion
2. Promotion
3. Advertising
4. Marketing communication
5. MIS
6. Customer Value and Satisfaction
7. Relationship Marketing
8. Customer Relationships Management
9. Customer Care
10. Bank Marketing
11. Portfolio Management

12. Credit rating
13. Takeovers and Mergers

14. Trustee Services
15. Depository Services

1. What is sales promotion? Explain its role in marketing.
2. Write a note on publicity measures taken in banks.

3. What is integrated marketing communication?
4. What is advertising? Illustrate its role in marketing of banking services.

Quote advertisements by a few banks and what appealed you most in it as a
banker and as a customer?
5. What do you understand by the term "Moments of 'Truth”?", How can a
bank manage to convert most of its moments of' truth into winning
transactions. Explain with reference to your own bank.
106
Enrolment No:
Unit No 1 2 3 4
Nos of Hrs
block:

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107
which ought to be
brought within

Ahmedabad-382 481.
FINANCIAL MARKETS
PGDF-103
BLOCK 4:
MARKETING OF PENSION
FUNDS AND
GLOBALIZATION

Ahmedabad
FINANCIAL MARKETS

Pune
Editorial Panel
Author
Dr. Gaurav Singh
Language Editor
Ms. Kersi Bhesaniya

Ms. K. Jamdal
Ms. Lata Dawange
Ms. Pinaz Driver
Mr. Kiran Shinde
Mr. Prashant Tikone
Mr. Akshay Mirajkar

permission from us.
Acknowledgment
book.

PREFACE
understanding.
FINANCIAL MARKETS
Contents

AND CAPITAL MARKET
UNIT 2 MONEY MARKET
Exchanges in India
PRODUCTS

FRAMEWORK
Service
Development

BANKING SERVICES
SERVICES

MARKETS
Ambedkar
Open University
FINANCIAL MARKETS
BLOCK 4: MARKETING OF PENSION FUNDS AND

GLOBALIZATION
UNIT 1
MARKETING OF PENSION FUNDS 03
UNIT 2
GLOBALISATION AND ITS IMPACT ON FINANCIAL
SERVICES MARKETS 29
BLOCK 4: MARKETING OF PENSION
FUNDS AND
GLOBALIZATION
Block Introduction
As we have already discussed the importance of studying the subject
financial market. In the world of globalisation when there are no boundaries left in
the countries it becomes even more important to study this subject because now
the financial market has not been restricted to the national level but moved at
international level.
In this block we shall be discussing in very detail about the pension funds
and globalisation. As we all are aware of pension, here we will be discussing in
very detail the need or requirement of pension, what are the various types of
pension plans available, how globalisation has affected the pension schemes and
what is the future of this system. This whole block has been divided into units; the
first one focuses on marketing of pension funds, whereas the second one focuses
on globalisation and its impact on financial market
After going through this block the readers would get a sufficient idea about
the pension, its role and need in the society, what are the various kinds of plans
available? In short the utility and future of pension would be known through this
block.
Block Objective
 Requirement of Pension plans.
 The type of Pension plans.
 The risk associated with Pension funds.
 Globalisation of financial markets on local providers.
 The future trends for financial services in respect of globalisation.
 Changing consumer orientation in the forthcoming scenario.
1
Marketing Of Block Structure
Pension Funds
Unit 1: Marketing of Pension Funds
and
Globalization Unit 2: Globalisation and Its Impact on Financial Services Markets
2
UNIT 1: MARKETING OF PENSION FUNDS
Unit Structure
1.1 Introduction
1.2 Emerging Dimensions Relating to Investment Services
1.3 Pension Funds: A General Overview

1.4 Why Pension Plan?
1.5 Types of Pension Plan

1.6 Pension Fund Risk
1.7 Funds Management

1.8 Pension Fund Investment: General Guidelines
1.9 Pension Funds and Capital Markets

1.10 Pension Funds: Some Related Statistics
1.11 Let Us Sum Up

1.13 Glossary
1.14 Assignment
1.15 Activities
1.16 Case Study

 Describe the need and requirement of Pension plans.
 Distinguish between the types of Pension plans.
 Identify the type of risk associated with Pension funds.
 Explain the fund management process for Pension funds.
 Comment upon the Financial Market Implication of Pension funds.
3
Marketing Of 1.1 Introduction
Pension Funds
and Since the volume of International business and capital flows are increasing,
Globalization the commercial banks are likely to be exposed to different types of risk and there
is a need to hedge these exposures. The emerging derivatives in foreign countries
are increasingly used by banks to bring variations in the sensitivity of their funds
and also the underlying portfolio; it is the right time that forex dealers, specially
the commercial banks, in India, familiarize with the complexity of these
instruments and acquires skills to manage these emerging challenges.
Establishment of foreign banks and non-banking companies have played a

very key role in introducing the technology cult in the financial sector in India. In
the light of the diversified product range the banks and financial institutions are
offering to public various types of financial services in a global perspective.
Hence, in the aspiration towards becoming major player in the modern financial
service sector, commercial banks and various investment institutions will have to
evolve appropriate strategies for technology integration for providing faster and
efficient financial services.
The pension funds are playing a very important role in U.S.A. and other
European countries in ensuring challenging of savings into fruitful diversified
investment portfolio.
Different types of financial services are being provided by these pension
funds. The aim of finallcia1 sector reforms in India has been to encourage the
foreign institutional investors to invest in India and, it is hoped that in the
changing global business scenario, ignore and more pension funds will, enter in
India to provide wide variety of financial services. Presently some of the
investment schemes in the same of pension funds investment have been started by
IDBI, ICICI and by some other financial institutions.
1.2 Emerging Dimensions Relating To Investment

Services
Over the years, with the changing scenario in Indian economy, new
challenges are emerging, which the banks have to face with suitable strategies.
The major challenges in the nineties relating to investments and other financial
services are likely to be in the following areas.
4
a) Growing importance of the corporate sector and its diversifying needs,
Marketing of
b) Development of capital markets, the disintermediation phenomenon and Pension Funds
their impact on commercial banks,
c) Development of factoring and commercial paper,

d) Need for export promotion and disintermediation in international business,
and
e) Universal banking.

1. One of the major challenge in the nineties relating to investments and other
financial services will be of ________banking
a. Universal
b. National
1.3 Pension Funds: A General Overview

A Pension is an agreement to provide regular income during a person's post-
retirement life. During the past decade, people have wanted to be provided after
their retirement due to rising life expectancy and the earlier retirement. The
profound social changes have also an impact on the growing population to seek
some sort of regular income after retirement instead of depending upon their
children in their old age.
In the U.S. the first pension plan was established by the end of 19th Century
by Railroad. (The earliest one set up in 1875 by American Express Company was
later on closely associated with Rail road). At that time the pension plan was quite
informal and that too at the discretion of [he employer and used as a disciplinary
devise. During depression in 1930's, the many pension plans failed to make
payment to the beneficiary. These wide spread collapse of pension plans led to
more regulations and it was also a major factor for the establishment of
government sponsored pension plan and social security.
The World War II brought a major expansion or pension plans. This was
necessitated due to scarce labour, government imposed wage control and social
security benefit. In 1949, the U.S. Supreme Court upheld decision of National
5
Labour Relation Board that pensions were a legitimate part of collective
Marketing Of
Pension Funds bargaining. Since then, the pension funds have grown rapidly.
and
Changing Demographic Structure
Globalization
 Although the proportion of people who are old is highest in OECD countries
and transitional socialist countries, most of the growth is in the world's old
population - from half a billion people in 1990 to almost 1.5 billion people
in 2050.
 About one old person in four is "very old" (over age 75) and of these almost
two thirds are women. The economic position of the very old is very
different from that of the younger old, and the position of old women is very
different from that old men.
 The proportion of the population that is old rises with per capita income. In
low income countries, less than 7 per cent of the population is over 60. This
proportion rises to 12 to 16 per cent in middle-income countries and to 17
per cent or more in most high income countries. The ratio of old people to
working age people (old age dependency ratio) also rises with per capita
income a relationship that sterns directly from the lower fertility rate in
richer countries and the ability to lengthen life span through medical
intervention.
 Most old people live in poor countries (which is also the most populous), a
pattern that will intensify towards 2030. By then, more than three-quarters
of the worlds’ old people will be in areas not now industrial more than half
in Asia and more than a quarter in China alone.
Indian old age population would increase from 6.5 per cent in 1990 to the
extent of 7.58 per cent in 2000, 13 per cent in 1030, 28 per cent in 2100 and 30
per cent in 2150.
Table in 15.9 gives details on percentage of old people over the years as
projected by tile World Bank, while Table summarizes the percentage of
population in India by age groups.
Need for Reforms in Social Security
 Political pressures lead to tax financed benefit formulas that are not
sustainable.
 High payroll taxes that are not closely tied to benefits discourage
employment.
6
 Early retirement provisions reduce the supply of experienced workers. Marketing of
Pension Funds
 Financial methods misallocate capital and may reduce national saving.
 Workers often evade contributions but manage to qualify for benefits.
 The failure to index benefits means that pensioners in many countries have
not been
 Protected from inflation.
 The growing deficits of old age programs are passed on to general treasury,
requiring higher taxes and higher public borrowing less public spending for
other important purposes.
 Publicly managed pension reserves are invested unproductively, earning

low, even negative, rates of return.
 Large income transfers go to upper-income old people, while many of the

lower income old are not helped.
 Occupational pension plans have not been adequately regulated.
 Today's children and young workers may pay the price of higher taxes,
lower pensions, and therefore lower living standards, as old age dependency
rates raise and growth declines.

1. A __________is an agreement to provide regular income during a person's
post-retirement life.
a. Pension
b. gratuity
2. In the _______the first pension plan was established by the end of 19th
Century by Railroad.
a. B U.S.
b. India
7
Marketing Of 1.4 Why Pension Plan?
Pension Funds
and Pension plans receive special tax treatment and are subject to eligibility,
Globalization coverage and the benefit standards. For individuals, it would be indifferent-
pension benefits and personal savings if it provides some retirement benefit at the
same cost of forgone current consumption. Tax advantages create favourable
savings through pension plan. For firms, it provides of substitute for wages and
pension can provide firms with a source of financing at a cheaper cost Pension
cost of a firm is tax deductible.
The investment income of pension plan is tax exempt. Pension benefits are
taxed when the benefit paid to the beneficiary not when earned by them. There are
three options available to the employee for their retirement benefit
 Employer does not make any contribution but he pays full amount lo the
employee. Employee himself saves that amount for his retirement benefit.
 Employer does not make any contribution but he pays full amount to the
employee. Employee himself takes a life insurance policy for his retirement
benefit.
 Employer makes a contribution to the pension fund for the retirement

benefit of the employee.
Before considering the comparative advantage of above three options, let us
make assumption that:
 Employee is in tax bracket.
 His marginal rate of tax throughout his life is assumed to be 30 per cent.
 Return earned on his saving assumed to be 14 per cent.
In case of option No.1, employee receives only after tax income of 0.7 (1.00
- 0.3). This after tax income is deposited in a bank which earns rate of interest of
14 per cent. His effective rate of return would be 9.8. In this case, employee
receives Rs. 7001- after paying 30 per cent tax on gross income of Rs. 10001- and
depositing in a bank for 35 years. The interest earned on savings again reinvested
after paying the tax' for that income for each year. Therefore, his return after 35
years will be Rs.18,457.8 after 35 years. This amounts to a rise of 26.37 times
over his initial investments.
In case of option No. 2, employee receives after tax income and takes an
insurance policy of Jeevan Dhara at a single payment of Rs. 31.50. It will accrue
8
and would receive an amount of Rs. 1,0001- after 35 years. It amounts to 31.75
Marketing of
times over his initial investment. Pension Funds
In case of option No. 3, employer contribute Rs. 1,0001- to the pension plan
instead of paying him after tax income of Rs. 7001-. The pension plan accrues an
assumed rate of 12 per cent, the amount returned to the beneficiary would be Rs.
52,8001-. It comes to 52.8 times over his initial investments.
Considering the above three options, it is obvious for an individual to opt
for a pension fund which accrues 52.8 times over his initial investment even at a
lower rate of return of 12 per cent.

1. _________ plans receive special tax treatment and are subject to eligibility,
coverage and the benefit standards.
a. Pension
b. Investment
2. _______advantages create favorable savings through pension plan.

b. Tax
a. Money
3. _______benefits are taxed when the benefit paid to the beneficiary not when
earned by them.
a. Pension
b. Investment
1.5 Types of Pension Plan

There are two basic types of pension plans:
a) Defined Benefit Plan
b) Defined Contribution Plan

Defined Benefit Plan: This plan assures the contributors a predefined pension
payment system depending on the final contribution structure. The plan usually
has a formula which will be worked out and paid accordingly to the employee
upon his retirement. In essence tile pension payment will depend upon the length
9
of the service of the employee and the earnings of the employee. The pension
Marketing Of
Pension Funds obligations are effectively the debt obligations of the sponsor of the fund, which
and assumes the risk of having insufficient funds in the plan to meet the contractual
Globalization payments to the retired employees. Thus all the investment risk is borne by the
plan sponsor.
Defined Contribution Plan: This plan specifies the contribution and pension
income depends upon the amount of contribution, numbers of years in which
contributions made and the performance of the fund. Thus risk of investment is
transferrer1 to the investors in the pension fund. Defined contribution pension
plans come in several legal forms: Money Purchase Pension Plans, 401(k) plans,
Employee Stock Ownership Plans (ESOPs)
With a defined contribution plan, employer merely passes pension fund
management to the insurance company arid stops making contribution to the plan
upon the termination of the plan by employee. With the defined benefit plan, it
become more complicated and controversy. The pension fund assets do not
necessarily equal the present value of promised benefit. If assets are greater than
the benefit the excess assets are transferred to the employer. If the assets are lower
than the benefits then it falls short of obligation.
Hybrid Pension Plans: These combine features of both defined benefit and
defined contribution plans. It appeals to both employee as well as employers,
since bearing of investment risk by the employee in case of defined contribution
plan, while it is expensive and complex to implement defined benefit plans for
employers. Thus there will be risk sharing between sponsor and members of the
plans. Floor-Offset Plan is one of the hybrid plans. Employee contributes a certain
amount each year to a fund as in defined contribution plan. The employer
guarantees a certain minimum level of benefits, depending on the employee's
number of years of service as in a defined benefit plan. The employer manages the
fund and informs the employee periodically of the value of his investment. If the
managed fund does not generate sufficient growth to achieve the present levels of
benefit, the employee is obliged to contribute an additional amount to bridge the
gap.
Factors Affecting Contributions

An organisation must evaluate on actuarial funding projection designed to
accumulate assets to provide benefits to the retiree. An actuarial funding
programme combines the data on plan specification, employee characteristics and
pension fund size with assumption about future interest rate, salary turnover and
death and disability ratio. Given these assumptions and data, an actuary estimates
10
both future pension obligation and the annual payment schedule to satisfy those
Marketing of
obligations. Different interest rate and salary assumptions have an impact on Pension Funds
annual contribution. A rule of thumb is that rising annual interest rate by 1 per
cent point will lower pension liabilities by 15 per cent holding all the factors held
constant. Similarly, different actuarial funding method can substantially alter
required and allowable contribution in any given with even a same plan
characteristics and actuarial assumption features the state pension in selected
OECD countries which follow different number of years for full pension,
indexation and pension benefits.

1. Defined Benefit Plan assures the contributors a predefined pension payment
system depending on the final_______.
a. contribution structure
b. payment
2. ________Plan specifies the contribution and pension income depends upon

the amount of contribution, numbers of years in which contributions made
and the performance of the fund.
a. Defined Contribution
b. Fixed investment
3. _______Pension Plans combine features of both defined benefit and defined
contribution plans.
a. Hybrid
b. variable
4. A _________must evaluate on actuarial funding projection designed to

accumulate assets to provide benefits to the retiree.
a. Organization
b. employee
11
Marketing Of 1.6 Pension Fund Risk
Pension Funds
and The pension funds generally face the following risks:
Globalization
 Coverage Risk
 Replacement Risk
 Investment Risk
 Longevity Risk
 Coverage Risk: Employee failing to participate in the pension schemes

which in turn leads to impossibility of economies of scale of operation in the
funds management. It call be avoided by mandatory contribution by
employee as well as plan participant.
 Replacement Risk: Employee who retires will not be able to maintain the
standard of living after retiring comparable with same standard of living
during pre-retirement periods. Tax benefit should be given for employee to
contribute more to funds as well as to contribute longer time so that
replacement risk can be reduced.
 Investment Risk: The investment made by pension funds may perform
poorly due to market risk and other risk inherent to assets in which the
investments are made. Better diversification across assets and across
countries would help reduces the investment risk which partly depends upon
the fund management.
 Longevity Risk: Risk that the retiree will live longer than expected and thus
exhaust the amount saved for retirement before he dies. This risk can
perfectly be hedged against insurance, since longevity risk is 'beneficial to
insurance companies and mortality risk is beneficial to pension funds. The
life insurance companies would be more beneficial by floating pension
funds and pension fund institutions would be more benefited by floating life
insurance companies.
 Inflation Risk: The risk of price increases, which erode the purchasing
power of the lifetime savings. These risks were entirely depending on
government policy, fiscal deficit and central bank's monetary policy. The
government must bring a regulation similar to ERISA in USA and form the
Pension Benefit Guarantee Corporation (PBGC). The corporation would
guarantee at least inflation risk by charging insurance premium for eligible
pension fund. The corporation liabilities should be guaranteed by central
government and central bank which are accountable for inflation
12
Risk Sharing
Marketing of
 Certain risks that are uncorrelated across individuals, such as longevity risk, Pension Funds
are minimized by pooling across the largest number of people including
everyone in a single insurance pool or reinsuring across several smaller
pools since the average outcome for the group is much more certain than the
experience of any particular individual.
 Other risks, such as disability risk, are subject to moral hazard problems,
which should be constrained to keep costs down.
 Some degree and type of indexation, shifting part of the inflation risk to
younger workers, is needed to prevent the very old from living in poverty
duping inflationary periods
 Investment, insolvency, and political risks are real and potentially large, but
they cannot be reduced through risk pooling because they are correlated
across individuals and subject to moral hazard problems. Diversification is
the solution here. Diversification across several managerial and financing
mechanisms protects pensioners against exposure to extreme failure of any
one arrangement, reducing overall risk for the old.

1. The risk of price increases, which erode the purchasing power of the
lifetime savings, is called _______risk.
a. Inflation
b. investment
1.7 Funds Management

Long-term vs. Short-term
Pension fund benefits from regular inflow of funds on contractual basis and
for long-term liabilities which together imply little liquidity risk. Pension funds
are contractual annuities meaning that the lump sum withdrawals are precluded
each during the period their claims are payable after retirement. The members of
the pension funds are willing to accept low liquidity, giving potential for higher
returns at a greater risk and liberal portfolio regulations are also responsible for
better management and growth of pension funds. Time also needs to be taken as
13
an important variable in the investment decision process. Long-term investment
Marketing Of
Pension Funds could reduce risk significantly and increase return. Madhusoodanan (1997) found
and that taking longer tern view of the market definitely pays rich rewards. That is,
Globalization buy and hold strategy is likely to be better than any trading strategy on long-term
basis this is in conformity with several stock markets. Thus it is very important to
look beyond asset allocation strategies based on the risk-returns trade-off of
different asset classes
Asset Classes and Diversification

How much fund the pension plan should raise and what kind of assets to
invest in are the questions which hove different implications depending upon the
types of plan. For defined contribution plan, employer has to make a promised
contribution .each year and has no other funding decisions to make. The only
question with defined contribution plan is how to invest the assets. The standard
portfolio theory that it would be best with some well diversified combination or
stocks, bonds and treasury bills. More risk employee wants to take higher the
proportion will be in the stocks. In practice, most pension plans in U.S. are fully
funded meaning that assets equal the present value of benefits already earned by
employee. Pension plan is equally split between stocks and bonds. This fifty-fifty
ratio gives possible explanation for the pension fund. There are number of factors
which determine the appropriate asset mix policy. The factors are long-term
prospects of the capital markets, short-term fluctuations in economic values, plan
assets and liabilities, the impact of returns on employers' contributions and
riskiness of the portfolios. Most pension funds choose the mutual funds to rely on
the investment expertise from mutual funds. In table it is elaborates compositions
of pension funds in select developed countries; Table gives real total returns for
those countries for different assets, while Table summarizes the returns for
selected assets in India
Further, real returns on pension funds show that privately managed funds do
better than publicly managed funds. Table 8 shows gross average annual
investment returns after inflation for privately as well as publicly managed
pension funds in the selected countries.
Domestic vs. International Diversification

International diversification reduces risk faster than domestic diversification
because domestic securities exhibit stronger correlation as a result of their joint
exposure to country-specific stocks. International diversification’ should cover
both stock and bonds; efficient portfolios made up only stocks display a
substantially higher risk for the same' level of returns than efficient portfolios
14
made up of both stocks and bonds. (Solnik and Noetzlin, 1982) (See also
Marketing of
Sliashikant, Uma 1998).
Pension Funds
Funding Liabilities
How much funds the pension plans have has different implications
depending upon the types of plan. The firms owing pension fund shall chose the
funding and the portfolio strategy with higher net present value. This leads to two
opposite solutions. Under funding needs to buy risky assets, over funding
facilitates to buy high grade bonds. Ambachtsheer points out that pension funds
can be classified on the basis of liability goals. It can run on the basis of
termination liability goal or going concern goal. A termination liability definition
assumes that goal of the fund is to meet current accrued liabilities. The going
concern liability reflects an assumption that the pension benefits accruing will
actually be paid out over time and that the nominal pay-out value will reflect
actual inflation experience. The investment implications vary according to the
selection of goal of the pension fund. If the pension obligations are termination
obligation, then passive fund management is enough. If the duration of the
liabilities is known, investments are to be made in the portfolio of assets that
matches the duration of the liabilities. An immunization strategy is constructed
through a portfolio of zero coupon long dated paper or coupon paying fixed
income securities. The immunization strategy is subject to an element of interest
rate risk. If the pension liabilities are going concern Basis, investments in stocks
could be worth considering. Then the element of market risk will be with the fund.
If the termination liability view is static view of the world then the going concern
is a dynamic view of the world.
Passive vs. Active Management

The Management of pension fund depends on the efficiency of the asset
market in a particular country. Table summarizes the active investment
management and passive management in different assets in different markets.
Arumugarn (1997) found day of the week anomaly (high stock returns on Friday)
and Arumugarn (1998) found high stock returns before holidays in Indian equity
market. The institutionalized investing could exploit the inefficiencies and
anomalies present in the market. However, Monday-buy and Friday-sell trading
strategy can be used to exploit the day anomaly in the Indian equity market, since
any reversal of timing of investment (Friday-buy and Monday-sell) would incur
loss of 20% p.a. as against the profit of 6% pa. in the Monday-buy and Friday-sell
strategy. Table 10 shows returns on day anomaly trading strategy in Indian equity
15
market. Exhibit 1 elaborates how to choose management style in a given
Marketing Of
Pension Funds environment.
and
Exhibit 1: Choosing Management Style
Globalization
Fig 1.1 Choosing Management Style
Personal Finance
It makes sense as a way of reducing taxes for shareholders. Shareholders
can reduce his taxes by shifting his portfolio by stocks into pension funds. The
firms allow the workers to own pension funds because it is safe for' them to make
long-term commitments to the firm. Further, shareholders can increase their
wealth by buying bonds from companies (interest on bonds are tax deductible) are
investing those interest in pension plans. Table in 15.9 summarizes the attributes
of investment environment in 1980s and 1990s which will have an impact on the
management of pension fund.
16
Check your progress 6 Marketing of
Pension Funds
1. Pension funds are contractual ________meaning that the lump sum
withdrawals are precluded each during the period their claims are payable
after retirement.
a. Annuities
b. Perpetuities
2. _________diversification reduces risk faster than domestic diversification.
a. International
b. national
3. ________returns on pension funds show that privately managed funds do

better than publicly managed funds.
a. Real
b. actual
1.8 Pension Funds Investment: General Guidelines

Prudent man Rule
The pension funds should invest the money in the way how prudent man
invests in the asset of the portfolios. The onus of being prudent is put on the
fiduciary investment committee - the committee that oversees the pension funds.
They would have to basically ensure that they review all the investments properly,
having all the documents properly and all due diligence that a normal prudent man
would, in order to take a decision. This is the process which would have major
impact on the pension fund industry.
Sole Benefit of the Plan Participant

All investments have to be made on the basis of providing benefit to the
plan participants. In a framework of the decision making in pension funds which
has help up to the test of the time, and the pension fund industry generally
speaking has been free of scandal
Management Structure of the Pension Fund

Fiduciary Committee at the top (like the board of governors, or board of
trustees) takes action on specific investments, on investment policies, the asset
17
allocation, and administration of the fund. These investment activities,
Marketing Of
Pension Funds administrative actives, oversee any external investments or managers are being
and done by Chief Investment Officer on behalf of the trust. The officer reports to the
Globalization fiduciary committee. The Chief investment officer and mutual funds or
investments managers are fiduciaries and are liable for any malpractice. This is
the kind of structure in US pension industry and have been really good success.
Asset Classes
While most of the pension funds follow prudent man rule, Table exhibits
stipulated investment limit for the pension and provident funds in India.
Investments are not fairly diversified as it holds only of bond portfolios, nor any
foreign investments
Foreign Investments
Though international diversification' ensures reduction of risk and maximize
the expected returns, in any pension funds are biased towards domestic
investments either by prudent man rule or restrictions by the government.
Performance Measurement
Let us now see how the performance of a given pension fund can be
measured. To take an example, cost Effectiveness Inc. (CEM) have created a
seven-point GAAP for measuring pension fund management operation (Source:
Ambachtsheer, 1994)
 Total fund returns must be decomposed into policy and implementation-

related components before any peer-relative comparative analyses me
performed. Funds may have different investment polices because of
differences in such factors as inability structure and risk tolerance, so
policy-related return components across different funds contain no
information about management skill.
 To understand the sources of implementation-related fund return, it is useful

to decompose it into within-asset-class and across-asset-class (mix)
segment. Ideally, return (and risk) decomposition continues down to the
level of individual portfolio management mandates within the fund.
 When peer comparisons of fund returns are made, only implementation-

related fund returns (and risk) components calculated with identical
decomposition procedures ace comparable.
 Total fund operating costs must be decomposed into minimum-required and

incremental components before any comparative analyses are performed.
18
Because funds have different asset values and different investment policies,
Marketing of
minimum-required operating. Costs across different funds will differ and Pension Funds
will contain no information about management skill.
 To understand the sources of incremental operating costs, it is useful to

further decompose them into those directly related to investment
management and those related to governance and administration. Ideally,
the costs directly related to investment management should be further
decomposed down to the level of individual portfolio management mandates
within the fund.
 When peer comparisons of fund operating costs are made, only incremental
operating cost components calculated with identical decomposition
procedures are comparable.
 When peer comparisons of fund return-operating cost combinations are

made, only implementation-related fund return and incremental operating
cost combinations calculated with identical decomposition procedures are
comparable.

1. The pension funds should invest the money in the way how
_________invest in the asset of the portfolios.
a. prudent man
b. Bank
2. All investments have to be made on the basis of providing__________to the
plan participants.
a. benefit
b. opportunities
3. Most of the pension funds follow__________rule.

a. prudent man
b. Keyman
4. International diversification' ensures reduction of risk and_________the

expected returns.
a. Maximize
b. Minimise
19
Marketing Of 1.9 Pension Funds and Capital Markets
Pension Funds
and Investment policies of pension funds have a profound effect on the capital
Globalization markets, affecting the rate and direction of financial innovation, the behaviour of
security prices and the policies of the corporations whose securities they hold.
Fiduciary role in pension’s management and a large increase in the volatility

of interest rates modest it important for pension funds to hedge their liabilities.
In response to the hedging demands of pension funds, the financial markets

have produced a variety of innovative products.
Pension funds have also pioneered in the development of index trading.

Pension funds having a substantial option of the stock in corporations and their
voting powers can profoundly affect corporate policy. Growth of funds has
influenced international capital flows. International diversification is a means to
reduce systematic risk in domestic markets and beneficial effects on the efficiency
of global capital markets
Opportunities for Growth of Pension Funds
 More than 60 per cent of the household savings are in the form of currency
and deposits, which can be canalized through pension fund reforms
 Provident and pension fund assets in India constitutes only below 20 per
cent of GDP as against average of 30 per cent for developed countries
though percentage of household savings are almost similar.
 The government must bring a regulation similar to ERISA in USA and form
the Pension Benefit Guarantee Corporation (PBGC).
 The corporation would guarantee at least inflation risk by charging

insurance premium for eligible pension fund.
 The corporation liabilities should be guaranteed by central government and

central bank, which are accountable for inflation.
 The regulations should encourage wide diversification across assets and

countries although to a smaller extent in the initial periods.
 Vesting rules should be simplified so that participant can change the funds
depending upon the performance of the funds to encourage competition
among pension Funds.
20
Check your progress 8 Marketing of
Pension Funds
1. Investment policies of pension funds have a profound effect on the
________markets.
a. capital
b. money
2. In response to the ________demands of pension funds, the financial markets

have produced a variety of innovative products.
a. Hedging
b. Investing
3. Pension funds have also pioneered in the development of _________.

a. index trading
b. market
1.10 Pension Funds: Some Related Statistics

In order to understand the scope and dimensions of Pension Funds and the
manner in which they are operated. Let us look at some relevant statistics
Table Percentage of Population over Sixty Years Old 1990-2150
Countries 1990 2000 2010 2050 2100 2150
OBCD 18.2 19.9 23.1 31.2 30.4 31.0
Latin America and

69 7.7 9.3 23.5 29,3 30.6
Caribbean
Eastern Europe and

15.3 17.0 18.2 26.5 192 30.8
Fanner Soviet Union
Middle Bast and North

7.0 7.3 81 18.1 23.6 30.5
Africa
21
Marketing Of
Sub-Saharan Africa 4.6 4.4 4.5 9.9 27.7 29.4
Pension Funds
and
Globalization Asia 74 8.3 9.3 22.1 28.3 30.3
India 6.9 73 53 20.4 27.9 30.2
Table Main Features of State Pension in OECD Countries

'DOW 4: Main Features or State PCIISiOn in OECD Countries
Payroll
tax for
No of year Indexation
Countries Retirement Age pensions, Benefit
required for
women / men Type
full pension workers/
Employers
combined
Australia 60/65 0 Prices MT
Austria 60/65 15 22.9 Wages CR
Britain 60/65 40 18.8 Prices CR
Canada 65/65 1 4.6 Prices OF-MT-CR
France 60/60 37.5 19.8 Wages CR
Germany 65/65 5 17.8 Net Wages CR
Ireland 65/65 3 17.7 NA CR-MT.
Prices and
Italy 55/60 15 26.2 CR
Wages
Japan 65/65 25 16.9 Prices CR
Holland 65/65 49 15.2 Wages CR
Prices and
Spain 65/65 15 16.7 CR
Wages
Sweden 65/65 3 21.0 Prices CR-UF
22
United
65/65 10 124 Prices CR Marketing of
States
Pension Funds
CR - Contribution Related
T - Means Tested
UF - Universal Flat
Table Characteristics of Pension Funds’ Portfolios

Asset Year USA UK Germany Japan Canada
1970 93 85 23 21 77
(a) Marketable
1980 86 79 34 64 73
Securities
1988 90 85 44 87 92
1970 45 61 17 37 23
(b) Real Assets 1980 41 70 18 16 20
1988 48 77 24 30 35
1970 93 93 36 51 76
(C) Capital
1980 82 94 42 70 79
Assets
1988 86 92 48 85 86
(c1) Lang-term 1970 51 32 80 14 65
Fixed-interest 1980 43 24 76 54 66
bearing assets 1988 38 15 73 54 58
Table Characteristics of Real Total Returns 1967-90
Assets US UK Germany Japan Canada
Loans 3.5 1.4 6.5 0.9 4.0
Mortgages 2.0 2.0 4.7 3.0 2.4
Equities 4.7 8.1 9.5 10.9 4.5.
Bonds -0.6 0.8 2.7 0.2 -
Short term assets 2.0 13 3.1 -0.5 25
23
Marketing Of Property 3.4 6.7 4.5 7.2 4.6
Pension Funds
and Foreign Bonds 1.5 -0.3 3.2 1.5 -1.1
Globalization
Foreign Equities 9.1 6.5 10.4 7.8 6.6
Inflation 6.0 8.9 2.1 55 6.4
Table Asset Returns in India between 1964-65 and 1996-67
1964/97 1964-81 1981-97
Nomin
Asset Excess Real Nominal Excess Real Nominal Excess Real
al
Gold 5.3 5.8 13.4 ' 13.6 13.3 19.4 -3.0 -1.6 7.5
Silver 2.0 2.4 10.3 8.4 7.9 14.4 -4.4 -3.0 6.3
Equity 15 1.4 9.7 -2.4 -3.7 .4.2 5.1 6.6 152
Call
0.5 0.5 8.7 0.5 -0.7 6.9 0.4 1.7 10.6
Rate
Book 0 -0.04 8.3 0 -1.3 6.4 0 1.2 10.1
Table Gross Average Annual Investment Rclurns for Selected Pension Funds
Countries Real Rate of Returns Years
Privately Managed Funds
Chile 9.2 1981-90
U.K 8.8 1980-90
U.S 8 1980-90
Netherlands 6.7 1980-90
Publicolly Managed Funds
US (OASI) 4.8 1980-90
Malaysia 4.6 1980-90
Singapore 3 1980-90
24
India 0.3 1980-90
Marketing of
Kenya -3.8 1980-90 Pension Funds
Ecuador -10 1980-86
Egypt -11.7 1981-89
Venezuela -15.3 1980-89
Zambia -23.4 J980-S8
Turkey -23.8 198488
Peru -37 4 1981-88
Table Asset Market Characteristics and Investment Management
Asset Market is Efficient Market is Inefficient
Investment Passive Active
Futures/Cash Portfolio Passive Active
Physical Commodity Active Active
Table Return on Daily and Day Anomaly Trading Strategies

No Trading Cost With Trading Cost
Returns Day Day Day Day Day Day
Unadj. Adj. AdJ.(p.a.) Unadj. Adj. Adi(pm.)
Daily 0.088 0.056 20.3, -0.162 -0.142 -51.19
Mon Fri 0339 0.072 2199 0.089 0.016 5.93
Fri-Mon 0276 0.005 1.93 0.027 -0.056 -20,27
25
Marketing Of Check your progress 9
Pension Funds
and 1. No government limits to foreign investment.
Globalization
a. Austria
b. Australia
2. 4% limit on foreign assets holdings.

a. Germany
b. Japan
3. Foreign investment is prohibited
a. Portugal
b. Norway
1.11 Let Us Sum Up

In this unit we had a detailed discussion on pension funds. Here we
discussed the importance of pension in our society, how is a pension fund needed
in our society, what are the various kinds of funds available.
Here we discussed that countries like India have clearly specified, for the
Government Provident Fund avenues in which the pension funds can be invested
in addition to the providential norms which have been prescribed. This unit
explain the need and significance of pension funds and the type of pension funds
across countries that are in vogue today. The type of risks associated with pension
funds and the general guidelines for investment of service funds have been
discussed.
Important statistics in relation to pension funds have been provided to

enable to you to have an overall view of this market across countries. Growth of
funds has influenced international capital flows. International diversification is a
means to reduce systematic risk in domestic markets and beneficial effects on the
efficiency of global capital markets. Here all these points have been covered in
very detail and you would learn a lot after going through this unit.
26
1.12 Answers for Check Your Progress Marketing of
Pension Funds
Answers: (1-a)
Answers: (1-a), (2-b), (3-a)
Answers: (1-a), (2-b), (3-a)
Answers: (1-a), (2-b), (3-a), (4-b)
Answers: (1-a)
Answers: (1-a), (2-b), (3-a)
Answers: (1-a), (2-b), (3-a), (4-b)
Answers: (1-a), (2-b), (3-a)
Answers: (1-a), (2-b), (3-a)
1.13 Glossary
1. Financial Services - Are services rendered by financial institutions,
facilitating the smooth flow of financial activities in the economy of the
financial system.
27
Marketing Of 1.14 Assignment
Pension Funds
and How does the changing demographic profile influence the scope of pension
Globalization funds?
1.15 Activities
Describe the different types of pension plans.
1.16 Case Study

Discuss the utility of pension for the society.

1. Ambachtsheer, Keith P. (1994), the Economics of Pension Fund
Management, Financial Analysts Journal, November/December 1994.
2. Arthur Mark l., Fogler H Russell, Healey, Thomas J, Kass Dennis M and
Martin Allan C. (1994), Redefining Pension Fund Customer-Supplier
Relationship In Quality Management and Institutional Investing,
Association for Investment Management and Research.
3. Arumugam (l997) Day of the Week Effect in Stock Returns: An Empirical

Evidence front Indian Equity Market, Prajnan, Journal of Social and
Management Science, Vol.XXVI1, No 2, July-September, 1998.
4. Arumugam (l998a), High Stock Returns before Holidays: New Evidence

from India. The ZCFAZ Journal of Applied Finance, Vol 4, No. 2, July
1998.
28
UNIT 2: GLOBALISATION AND ITS
IMPACT ON FINANCIAL
SERVICES MARKETS
Unit Structure
2.1 Introduction
2.2 Globalisation of Financial Markets and its Impact on Local Markets
2.3 Globalization of Markets: The Main Drivers

2.4 Globalization of Markets: The Road Ahead
2.5 Some Asian Trends

2.6 Globalization and Consumer Orientation
2.7 The Emerging Imperatives for Financial Services

2.8 Let Us Sum Up

2.10 Glossary
2.11 Assignment
2.12 Activities
2.13 Case Study


 Discuss the impact of globalisation of financial markets on local providers.
 Explain what the main drivers of globalisation are?
 Describe the future trends for financial services in respect of globalisation.
 Elaborate upon the requirement for changing consumer orientation in the

forthcoming, Scenario.
 Apply some of the imperatives indicated for financial services.
29
Marketing Of 2.1 Introduction
Pension Funds
and Globalisation is making boundaries to yield to create boundary-less state in
Globalization the interest of Internationalizing Markets for free trade situation without any sort
of restrictions whatsoever.
In the past when you look at the foreign trade front, you will find every
country was vying with one another to get the foreign exchange to help the
country to have better balance of payment, but this has been a very difficult task
for every country since every country wanted to save its foreign exchange resaves
or surpluses and no country liked the idea of foreign exchange deficits but that
became very much inevitable. As a result, it in every country's own interest
OPENING UP MARKETS became a necessity. Thus Globalisation became a
reality. In this unit we will look at the impact of Globalisation on ' financial
services in general.
2.2 Globalisation of Financial Market and its Impact

on Local Markets
By Globalisation, we mean opening up market opportunities anywhere in
the world and there are no borders that means we are living in borderless world.
Kenichi Ohmae, a former Managing director of Mckinsey and Company wrote on
the power and strategy of Markets in early nineties and he found semi-conductor
industry was becoming a high fixed cost process industry and that had generated a
lot of criticism that he was behaving somewhat like an agent for MITI (Ministry
of International Trade and industry of Japan) though what he wrote was a great
fact which the industry did not want to accept at that time and interestingly
enough, many of his own colleagues in Mckinsey did not share his views but what
he said was realised as an important fact later in the economic environment
surrounding the world. A nuclear engineer could outpace many professional
economists, as a management consultant. His logics were and are simply better
than a normal economist's logic.
A deregulation of financial markets complicated several situations and that

could' not be stopped as deregulation of financial markets was really very
important even for the very survival of industries and that is how Globalisation
started, on comparative advantages 'and that could be possible only in global open
markets systems, The principle laid down in this is that resources should not be
scarce and that should be available at comfortable costs while nobody loses
30
meaninglessly. You will see today, the new costumer does not believe in scarcity Globalisation
and the very concept of economics taught in the past has undergone a and Its Impact
on Financial
metamorphic change. As Ohamac said in 1990, after deregulation corporations
Services
could use alternatives to create wealth in key regions of the world in addition to Markets
key manufacturing and selling. He further said, "To help then gain a market share
it was necessary to learn about macroeconomics as well as currency and financial
markets".
Protectionism has to die a natural death in favour of the consumer. After all
why should the consumer pay for the inefficiencies and ineffective manufacturing
of products? This has become the consumer driven market, popularly known as
Buyer's market globally. This is further well contributed by the innovative
software development to cause prompt instantaneous connectivity world over, due
to advancement in computer hardware technology and the telecommunication
technology to the consternation of protagonists of ' protectionism today. No doubt
fixed costs are increasing under various heads in the software industry, Sooner or
later, this industry will also face same problems like that of semi-conductor
process industry. After all, cost ineffective industries will have just short runs of
euphemistic growth. But that is not the concern today, somehow because if the
industry matures sooner or later, it will have to work strategies only for short runs
and swiftly move over to new thought provoking innovation and creative dreams
conducive to the consumer. Care should be taken not to put all your eggs
(investments) in one basket.
So it means a lot of product development in financial services and moving

out of export oriented stage of organisation. Also one should move out of single
head-quarters stage to several head-quarters stages. This will help cut down a lot
of governmental levies to the best benefit of the consumer. In this process, several
multi-nationals like Micro-soft have opened establishments in different parts of
the world with local headquarters mechanism. This also reduces fixed costs
phenomenally.

1. By_________, we mean opening up market opportunities anywhere in the
world.
a. Globalisation
b. Nationalisation
31
Marketing Of
2. A ________of financial markets complicated several situations.
Pension Funds a. deregulation
and
Globalization b. regulation
3. Protectionism has to die a natural death in favour of the _________.

a. Consumer
b. Producer
2.3 Globalisation of Markets: The Main Drivers

Some financial services have been global in scope and practice long before
the term came in vogue, Services like banking and insurance have facilitated and
supported early trade routes for' centuries with telecommunication and
information technology a fresh boost has been given to the pace of
internationalization of financial service. Some of these services have simply
followed their customers in new and increasingly global markets; others have used
new opportunities 'through technology or channels becomi8g available to enhance
their access to worldwide customer bases. In order to understand the reasons for
Globalisation, let us look at some of the important 'drivers' for Globalisation in the
context of financial services. The term was first used by Yip in his research on
Globalisation in the context of manufacturing firms but the work can be
generalized for financial services too. In terms of the leading imperatives for
Globalisation, these 'drivers' can be categorized into five classes. Let us discuss
each of these briefly.
Market drivers: This class of imperatives include common customer’s needs,

spread of consumers globally emergence of global channels and transferable
marketing. The emergence of global customers who demand consistent service
from suppliers of financial services whenever they conduct their own business,
has in turn caused financial services like credit cards, banking, foreign exchange
services, auditing, insurance, securitization, etc. to globalize in order to serve their
customer well.
Competition drivers: 'As business customers globalize their operations,
competing suppliers of financial services tend to compete on the basis of
worldwide access and spread. This has important implication for local suppliers of
financial services as an incoming business may also herald in the entry of an
32
overseas competitor in the form of financial services supplier of that incoming
Globalisation
business entity. and Its Impact
on Financial
Technology drivers: Financial services rely heavily on maintenance and
Services
movement of data for enhancing their capabilities for Tran’s border operations. Markets
The availability of broad band telecommunication channels and information
superhighways, now capable of moving vast amount of data at great speed, had
helped providers of financial service to rapidly internationalize. Emergence of the
worldwide web as a major communication tool and its usage in large number of
countries has facilitated internet banking and globally usable credit cards
Cost drivers: The impact of the cost driver for different services would vary
according to the level of fixed costs required to establish operations in a country
and the resultant possibility of cost efficiencies. The lowered costs of tele-
communication and international travel, possibilities of organizing regional hubs
for business operations for financial services, the round the clock availability of
services like foreign exchange and transfers in real time and at lower operational
costs have also encouraged Globalisation of financial services.
Government drivers: Among the most important facilitation of Globalisation has

been provided by lowering of regulatory barriers by the governments of most
nations. Fuelled by the developments in world trade and the impending world
trade regime, wide spread liberalisation and lowering of trade barriers including
opening up of financial service markets for important sectors like insurance, have
created encouraging impetus for the growth of financial services
Worldwide banking, based as it is on information processing has been

particularly affected by all these drivers. The practice of banking has been
revolutionized by advances in information technology through far reaching
developments like electronic funds transfer, automated teller machines, telephone
and internet banking and global network of all major credit card services. These
developments today allow consumers to enjoy banking services at great distances
from the location where such services are provided.
Fast changing technology and its consequent high cost equipment also
become components of the cost drivers in the globalisation-of financial. Services
International trade has been the major market driver for global banking. The
government driver has always been very important for banking because economic
and political reasons have necessitated tight regulation of domestic banking.
Bankers in many countries including India were nationalised to enable
governments to have lighter control over banking activities. The policy is under
33
revision in most countries today as winds of liberalisation buffet government
Marketing Of
Pension Funds policy in these countries
and
The growth and worldwide spread of the multinational corporation have
Globalization
been till important market driver of globalisation in banking, as corporate
customers, such MNC’s seek global coordination and delivery of worldwide
corporate banking services.
The growing needs of business travellers on the other hand are being met by
globally branded traveller’s cheque and credit cards, issued by both head offices
and local franchises, as well as globally networked ATMs that issue money in
local currency. Most MNC’s today use a combination of both local and
international banks, but the larger the geographical spread of a bank, the better its
competitive ability to serve clients with translational business.

1. Emergence of the ________ has facilitated internet banking and globally
usable credit cards.
a. www
b. http
2. The lowered costs of ________and international travel, possibilities of

organizing regional hubs for business operations for financial services.
a. Tele-communication
b. communication
3. Fast changing ________and its consequent high cost equipment also become
components of the cost drivers in the globalisation.
a. technology
b. organisation
4. The growth and worldwide spread of the multinational corporation have been
till important market driver of ________in Banking.
a. globalization
b. nationalization
34
2.4 Globalisation of Markets: The World Ahead Globalisation
and Its Impact
By strategy one should create sustaining value for the consumer. on Financial
Commercialize inventions and discoveries. Globalisation, it is the turn to invent, Services
innovate and create. Accept the nature law. Old should yield to the new. Never Markets
become me - too. If you do, you will be no where the message of the globalisation
is. No longer me - too band - wagon can sell. More informed and highly
demanding customers are increasing day by day, today. So they have the power in
their hands. Multinational really turned out to be the organisations accepting what
the customer wants, in the borderless world. So you are seeing today, a lot of
products are just sold out at much lesser than manufacturing costs just to avoid
finished goods warehousing and interest costs. These companies have to pay, if
they do not understand the Mind of the consumer, as he turned out to be super
strategist cash rich. He will not part with his cash unless the thing he buys gives
him several times satisfaction over his investment on anything. This means that
the customer can never be taken for granted. Barriers and artificial controls will
have no meaning with the new consumer. So even Governments are just failing
today, inter linked economies are much superior to old macro economists view -
that exchange rate should change to adjust for the difference in purchasing power
of tradable goods, and in rates of inflation and interest between two countries.
Inter linked economy has about 1 billion people and above in its net, with the
average capacity to a per capita of $.10,000.- GNP, This is growing and most of
the wealth is created, consumed and re-distributed. Inter dependence of economy
is helping build better security and that is going to be the governing principle in
the years to come. So globalisation has taken a great grip on the industry and
governments as also on all hues of politicians and their political economic
thinking
In this context one has to study what shall be the global asset and liabilities
management. That will vividly give chances of working. Also one should take
into account sustainable energy availability and exploitation to help reduce energy
costs on every manufactured goods. It becomes perforce a necessity to run for
alternate sources of energy, consumer is not willing to pay for your energy costs
and he will need heavy discounts everywhere possible except in most sought after
product or service, for which the consumer might pay any price, as long as it is
not a kind of ransom price.
Today, consumer is the king because what you care about most is the
product's quality, price, design, value and appeal as a consumer, Young people
today are least concerned about a Nation or Country and hence call be called as
35
Nationality less. Today's products have to rely upon so many different critical
Marketing Of
Pension Funds technologies. Interestingly enough today you sell your products to your own
and competitors for comparative advantages so that you can ' supply to your
Globalization consumers your products at most affordable prices and that is the trend setting in
the Beyond Tomorrow, as you know fully well, consumer will not just accept your
products at high price one hand but also that what you give should be useful to
him, You should be always in the lookout for newer technologies so that your
products are in tune with the new technology development. Otherwise you will
soon become obsolete in the markets.
You should have continuous research and development in your area of
product development and also ensure that you’re R and D takes cognizance of
technological advancement so that your product development is consumer friendly
and price competitive in the eye of the consumer. He will not accept anything
inferior at all. Managers have to amortize fixed costs over a much larger market
base and this really drives them. New concept of low labour does not mean you
will pay low wages to your people but ' you will get best work from your work
force and it meals your work force will produce, best products and quality product
and from his it should be clear consumer will not accept second best product but
really be best and that you cannot produce from cheap labour! So the concept of
low cost of labour has to undergo a tremendous change! Winner will be always
focusing on the best or on becoming the best. It is also important to note that
concern for shareholders value is vital. Equally important is to sustain leadership,
put unmatched value in be market place and back it up with superior operating
capability. Best companies are re-inventing competition in their markets.
In the Beyond Tomorrow, if the company is willing to cannibalize its hottest

product with a risky and untested one you are the company for tomorrow. Offer a
service at a cost hoping to establish a long term relationship. Link up with an
adversary to drive its cost even lower, as you have some insight of tomorrow.
Your chances of survival are then much superior to the traditionally driven
companies.
In the tomorrow situation, you will strategize, Cross border operations are
the' in-thing again. Interestingly, you will work on international partnering
mechanism just to cut do costs. Dis-investments will be the order of the day. Only
future is for the strategist. International trade will grow several folds. Foreign
exchange transfers will be on the balance of credit arrangement. Trade boom is
certain. Only intelligent players with sound comm. sense will survive. There will
be very few common currencies - Euros, Dollars, and some currency will emerge
36
in Asia, South-East Asia, may be some Afro-Asian currency. This will keep Globalisation
currency fluctuations under control or minimum volatility, a thing which is very and Its Impact
on Financial
new today. This will cause to make foreign exchange transactions not a gamble.
Services
Change, challenge and crisis have all become clichés. Many nations and Markets
banks, companies did not give adequate concern for these and hence they all
failed miserably. So the today nations and companies should know the trend by all
means prevailing or suddenly appearing. New customer or consumer is just a
challenge-in-total in the world. Even the mightiest have to fall flat before him and
that is the message of this democratic world. Citizen really assumes power, in the
form of consumer or customer. This spread will strengthen the citizen. Once he
has tasted this power, he will take umbrage under this. He deserves this is
provided to him, in the Beyond Tomorrow.

1. By __________one should create sustaining value for the consumer.
a. strategy
b. policy
2. _____________, it is the turn to invent, innovate and create.

b. Globalisation
a. Technology
3. Today, _________is the king because what you care about most is the
product's quality, price, design, value and appeal as a consumer.
a. consumer
b. producer
2.5 Some Asian Trends

Stanley Fisher, deputy managing director of IMF in an interview to Asia
Week's senior correspondent Alejandro Reyes, in the September 1,2000 issue of
Asia Week, said, to a question "Is Asia's recovery solid. The recovery is
impressive. We are expecting growth rates to 6% to 7% range from Asia as a
whole for 2000-2001." HZ further added, “You have pretty solid growth in the
range of 6% to 8% entrenched in two developing giants - China and India. That is
37
very big source of stability". He further added, Korean ' recovery looks set to
Marketing Of
Pension Funds continue. Malaysia looks to be doing pretty well. Thailand is a bit slower, while
and Indonesia, because of political uncertainty (will grow at) around 5%. 'In the
Globalization Philippines, it is a pity that there has been fiscal slippage, because it managed
monetary and exchange rate policy well during the crisis. It is slightly
disappointing that in recent years, it has had difficulty keeping its budget on track.
Obviously, what it takes to get consistent economic policies is political backing
for then and that has been difficult of late."
IMF assesses Japan will grow a little more rapidly next year than this year.
There is a fear lingering around of significant slow-down, as there is tremendous
uncertainty. There is a declining trend of slowdown in U.S. also.
Reforms in Asia varies a great deal, Korea did real progress in dealing with
corporate debt problem and the banks (India should take cue from that
experience). Malaysia had 48 done well in the banking sector (India should learn
From Malaysia) Thailand moved clearly, progress seemed to have flagged,
especially on corporate side. Yes, Indonesia is a bit uncertain, is the view of the
deputy managing director of IME
In the Beyond Tomorrow, investors will not take kindly on governments not
following proper procedures and would not like innocents being punished due to
political interference. That is politician and political governments and governance
would have to meet the citizen standards. Otherwise, politicians will lose their
grip for ever: and independent citizens representatives will emerge from among
the elite's are the message of tomorrow, since the old adage - "politics is the last
refuge of a scoundrel" will die a natural death, sooner or later, as there can never
be continuous "Peaks" in anything.
Banks and corporate re-structuring are very important for mechanisms and'
appropriate re-engineering has to be done in this area and that will light a candle
in darkness
Malaysia is dismantling controls pretty steadily and other nations should

closely see and assess issues in what way they too can do that, just for sheer
survival. Malaysia has got 30% exit levy on repatriating of portfolio funds and
they will have to' get rid of them soon. It is a matter of conjecture how long fixed
exchange rates will continue in Malaysia. Fluctuation is normal phenomenon and
that should be allowed for any economic growth, in monetary policy.
Japanese economy is far from near-capacity points of constraints. Inflation
is no risk at all. In terms of risks confronting Japanese economy any raise in
38
interest rates cannot be useful, as per monetary economic theory and in close Globalisation
cohesion with monetary economic practitioners like IME only restructuring can and Its Impact
on Financial
save economies. Japan has started that but now; consumer confidence has to be
Services
built up at all costs. Risks of slowdown in Japanese economy are looming large. Markets
There was a slowing down in the last three months (of year 2000) in growth
rate in U.S. But growth is returning to sustainable levels and there exists very few
signs of inflation. Growth will continue in the range of 3.25% to 3,75% much
better than one could have anticipated, in the last five years, is the view of the
IME
IMF is now working on debt-relief, an under-lying work of reforming

systems, particularly on the very difficult issue of private sector involvement in
the resolution of financial crisis. IMF vision statement deliberated upon a more
focused fund in IMF meet held at Prague in October, 2000. Fund with
more/focused conditionality – structural conditions will work in areas of essential
interest to the fund elements central to Macroeconomic stabilization, including
governance
On August 11, 2000, Bank of Japan raised interest rates from its zero
interest-rate policy to 0.25% interest rate, while Federal Reserve Bank of U.S. as
on 22 August, 2000 kept U.S. interest rates unchanged, for its own strategic
reasons
In an interview given recently to Laxmi Nakarmi of Asia Week, at Seoul,

global chief economist of giant Zurich Financial Services David Hale said Federal
Reserve's concern is on productivity in U.S. specially when economy is slowing
down, but in the second quarter productivity might stay high, the numbers were
spectacular and it might contain inflationary pressures for a few months. Yet there
is uncertainty in future monetary policy
Implications of Asia according to David Hale, if U.S. interest rates increase

will have negative impact on emerging markets - Asia is an emerging market, in
the first half of this year. Asia is a two-tier region, Korea, and China type and
laggards like Indonesia and South-East Asia with its continued political problems,
languid sense of recovery in Taiwan, lack of confidence in leadership in
Philippines.
China's recovery is real. Its membership in WTO (World Trade

Organisation) will help encourage further reforms. China is expected to be in the
centre stage is about five years’ time, with a dramatic foreign direct investments
from international companies in Europe, North America and Australia besides
39
non-resident Chinese. Global CEOs frequent turn out to China is impressive, as all
Marketing Of
Pension Funds of them hope great hopes in China. South Korea has a strong and robust stock
and market, good export growth, and resurgence in confidence cyclical recovery is just
Globalization begun thought president Kim Dae Jung's term is winding down. North Korea re-
unification with South Korea will not only he dramatic if it really takes place and
chances are indeed greater Re-building North Korea alone will cost at least $1 to
$2 trillion. Gradual opening of the market will be in 2 to 3 times, by normalization
of relations with U.S.A, and Japan by the North Korea part. Money will just pour
in if there are right gestures from North America, feels the chief economist David
Hale.
David Hale is straight to state, "we don't have the kind of leveraging and
capital flow excesses that we had in mid-1990s and the problem is the sense of
paralysis, of stagnation and lack of momentum at a time, when the world economy
offers a lot of opportunities. In Asia, the issues will remain the same for some
time. Attracting foreign investment in the banking system to both revitalize and
restructure, Further improvement in corporate governance will force organisations
to allocate resources more efficiently. Political systems supportive of these
reforms should be in place. Then there is ray of hope. This is what Beyond
Tomorrow needs.

1. ________economy is far from near-capacity points of constraints.
a. Japanese
b. chinese
2. Banks and corporate__________are very important for mechanisms and'

appropriate re-engineering has to be done in this area.
a. re-structuring
b. re-engineering
40
Globalisation
2.6 Globalisation and Consumer Orientation and Its Impact
Docile and stoic customer of the past is changing his face as New customer, on Financial
Services
today and tomorrow, that is Beyond Tomorrow is unforgiving at the market place, Markets
as highly empowered customer will decide the corporate' fate. He will demand
competition, global, quality and look for new economic realities, as a highly
focused customer. So companies have to continuously and constantly monitor and
should be willing to meet the changing customer. Needs and his demands, is the
clear message for tomorrow. Corporate should have unmatched competitive edge
just to be in place, in tomorrow's market place, though he i s trying to satisfy even
today the customer's demands but that is just a drop in the ocean of
uncompromising demands of the New customer
Harish Manwani, director of personal products of FLL said, “the marketer
must constantly upgrade the consumer and the product by finding new
dimensions." In the same way, David Thomas of Proctor and Gamble opined,
“what we have been learning and relearning is that consumers look for quality and
value for money." Suresh Rajpal of Hewlet-Packard-India, said, "There are many
companies that have not yet woken up to the reality that to be competitive, you
have to be customer 'focused".
Deepak Parekh of HDFC said, "All the employees of our organisations have
to be the trustees of our customers". KK Noria of Crompton Greaves said,
"Customer intimacy has to be built not by a few, but by employees across the
organisation". PK Mittal of Ispat Group said, "You have to get all parts of a
corporation talking to the customer. For Indian ' companies, that has to be the
Mantra", Mrutunjay Athreya a management consult4mt of repute said, "All the
rewards accruing to a company come from only one source: the rupee of the
customer."
Ashok Chandarlok of Siemens said, "When you create working cells people
can see more of each other and work better with each other."
So to deliver value to the customer the financial service provider will have to
1. Realign organizational roles and resources around processes that deliver.
2. Introduce customer value by integrating suppliers and customers.

3. Promote multiple competencies in individuals by encouraging creativity.
4. Transform management roles, from command and control to process

leadership.
5. Recast assessment systems to evaluate customer-driven performance.
41
6. Restructure the organisation; Found teams within and across processes.
Marketing Of
Pension Funds 7. Integrate the support functions into high-performance core processes.
and
Globalization For attaining the above goal, customaries -
 Redefine every employee as a customer for everyone else in the

organisation.
 Treat the owners of every stage in the work flow as the customers to the
previous stage.
 Create several chains of internal customers, leading up to the external

customer.
 Use internal customer satisfaction\ion as a gauge for measuring

effectiveness.
 Appraise and reward every employee in his success in servicing the internal
customer.
The above becomes as suitable training, ground or company employee to fit
themselves in real life situations with real customers. This is very much important
to tune up one's mind to be with the customer.
This customization helps as follows:

1. Ensures that every employee realize the importance of new ideas and
concepts.
2. Builds enough flexibility into individual goals to inject innovation in
problem solving.
3. Empowers employees to solve customer problem on their own initiative.
4. Uses customer feedback and participates, to keep the innovation customer

focused.
5. Measures the success of all ideas in terms of the value they add to the
customers.
In the third stage, the implementation should be to:
1. Ensure that every employee interacts directly with the customers and the
end user.
2. Allow the customer access to every person and function within the
organisation.
3. Turn every encounter with the customer into a platform of interactive
42
communication.
Globalisation
4. Involve the customer in designing and fine tuning key products and and Its Impact
on Financial
processes.
Services
5. Set up systems to facilitate interactions between suppliers and customers. Markets

1. _________customer of the past is changing his face as new customer, today
and tomorrow.
a. Docile and stoic
b. Faithful
2. Use __________customer satisfaction as a gauge for measuring
effectiveness.
a. Internal
b. external
2.7 The Emerging Imperatives for Financial Services

Financial institutions and, banking institutions will have to deal in the
following areas in a most innovative way, if the Indian financial or banking
institution have to compete with the foreign counter parts since opening up is
gradually accelerating:-
 The evolution of risk management - to cover volatility of foreign exchange,

volatility in interest rates, volatility in commodity prices, impact of
increased financial risk on firms, Exchange rate risk, interest rate risk,
commodity price risk,
 In futures, Swaps, Options and Hybrid Securities, and related contracting
 Risk management markets - derivatives in' every area a
 Futures
 Financial price risks,
 Taxonomy of options-pricing models and so on and so forth.
43
Similarly attention will have to be given on measuring on and managing
Marketing Of
Pension Funds default risks, managing of price risks in a portfolio of derivatives, and so on.
and
If one wants to get some perceptions of creative and innovative corporate
Globalization
management of today, one has to look at the various advertisements floated by the
corporate for recruiting people to man their new functions and also to handle
marketing functions for domestic and international marketing.
This clearly shows how each company and its board is trying to visualize
the new millennium trends, and this will indicate the aggregates of these kinds of
perceptions world over. Such a focus on skills and, qualities required will lead to a
new exceptional paradigm, after all, man conceive things and then he tries to put
strategic positions which we call managing today.
Let us see some advertisements recently published by the companies.
HSBC - The Hong Kong and Shanghai Banking Corporation Ltd - advertised on
the appointments page of Economic Times recently, reading as under:
“HR Opportunities with HSBC"

In this advertisement HSBC talks about itself.
"The HSBC group is one of the world's largest banking and financial
services organisation with about 6000 offices and around 170,000 employees in
81 countries and territories. Headquarters 'in UK, it has major PERSONAL,
COMMERCIAL and INVESTMENT BANKING operations in Europe, the Asia-
Pacific region, the Americas, The Middle East, and Africa.
This Hong Kong and Shanghai Balking corporation Ltd., is a principal
member of the HSBC group and is a leading multinational bank in India with a
significant presence in personal banking, credit cards, corporate banking,
custodian services, trade finance treasury, and capital markets, and financial
institutions
It further says, "Our human resources function has always played a pivotal
role in SUPPORTING BUSINESS OBJECTIVES and is globally recognised as
having, institutionalized some of the best HR practices across industries. We are
the acknowledged leaders in resourcing through assessment centers, and for career
and succession planning through development centers. We also provide a
structured executive career development Programme for management trainees and
are reputed for our structured job evaluation process.
HSBC is looking for HR, people to contribute for operations and systems
driven roles in compensation, employee relations, and career development
44
activities of the bank. Further, these personnel are expected to have ability to work Globalisation
under pressures, manage change as t' well as conflicting priorities, which assumes and Its Impact
on Financial
essential priorities, at a senior level. While at the junior level, the junior HR men
Services
should be effective communications, below 30 years of age, should rapidly Markets
establish credibility and build working relationships. It also claims, hat this junior
position will provide challenging career and a rewarding career. It presumes
knowledge of labour laws is essential. An analytical and systems driven
background may be an advantage
A trading house, MRF Limited, says it has 50 years of corporate leadership
in diversified fields and it is one of the most successful Trading Houses in India
with trade links established all over the world. It is said that this value reputation
earned global markets that had provided the logical impetus to the growth of its
exports. Today, more than 70 countries across the globe ke witness to the quality
excellence of MRF products. MRF expects its exports executives should be
graduates below 30 years of age preferably with a degree (additional) diploma in
Foreign Trade and with minimum 6 years of experience in exports marketing of
consumer durable be positions demand hard-core selling, prospecting new
markets and involves extensive overseas travel to widen export markets."
In this advertisement one can clearly see, people pin hope on youngsters and
on also those who are from specialised institutions of learning, giving the clear
impression, only these youngster have some grip on the export markets, especially
because the corporate find it difficult to allocate budgets for internal training
programmers, for their own relevant needs, and thee is exclusive dependability for
specialised education, by outsourcing and this also lead us to believe that the
general education pattern developed by the universities, say in India over 160,
excluding deemed ones give terrestrial education leaving specialisation in the
hands of the users. If the present recruiting trend countries, naturally, we will have
to wind up present universal. education pattern, yielding to specialization, since it
is not meaningful to go on increasing' The number of years in one institution or
the other at the cost of the National exchequer on the one side and unnecessarily
reducing the potential working time of d e youth on the other.
We should also consider, in this mercurial global situation, there cannot be
consistency of systems and procedures even in the short-term perspective. So
corporate cannot get away from their own internal training mechanism since each
business needs a particular way of focusing depending upon the business
environment. So it will be clear that there is no short cut to success in the future
but definitely it calls for intelligent kind of reading the situations, from time to
45
time that no school or college and institution can give, unless the corporate adopt
Marketing Of
Pension Funds these college and institutions by developing endowments and grants while
and simultaneously interacting with those institutions by providing feedback on the
Globalization core experience, This is called using the case basis.
That apart, all people today are at cross roads, and are not clear which
direction to move, as every direction is a free for all kinds of direction. That is the
reason why now consulting companies like Arthur Anderson (India) country head
- global corporate finance Mr. Munesh Khanna says in an interview to Economic
Times to Pallab Dutta “major revenues will come from advising on e-commerce
architecture for existing as well as new clients. Not to forget the big and
diversified brick and - mortars that are web enabling their processes and scale of
business operations." He also says "media is disseminating research and in - depth
information about the New economy. Mere increase in bandwidth and net
penetration alone won't speed up the progression to the information age.
Logistics and distribution channels also need 'to be in place, and this means
more road highways, airports, ports, etc." Public finance experts are no longer
there today and their areas are taken over by the corporate finance specialists /
analysts and they are of some assistance to the government and in this process in
India. Fiscal management is wobbling and playing tunes with the corporate
finance wizards. There is less accountability to the tax payers and super
friendliness with the corporate world which never bothers about the agriculture
and farmer. This trend will continue for some more time.

1. __________is looking for HR, people to contribute for operations and
systems driven roles in compensation, employee relations, and career
development activities of the bank.
a. HSBC
b. ICICI
2. __________Limited says it has 50 years of corporate leadership in

diversified fields and it is one of the most successful Trading Houses in
India.
a. MRF
b. JK
46
3. ________channels also need 'to be in place and this means more road Globalisation
and Its Impact
highways, airports, ports, etc.
on Financial
a. Logistics and distribution Services
Markets
b. Connecting
2.8 Let Us Sum Up

In this unit we had a detailed discussion on globalisation and its impact on
financial services.
In this unit we studied that a very large number of financial services
providers are now conducting business across national borders. Some financial
services, by their very nature have been global for a time now. Some of the
stimulus for globalisation has come from markets, technology, competition, costs
and governments themselves. This unit discusses the impact of globalisation on
financial services and outlines the charges that financial service provided would
need to bring about in order to compete effectively in the new world order.
Emerging Asian trends and their impact on financial services have also been
discussed enable you to have a clear idea about the pervasiveness if; the impact of
globalisation.
After this detailed discussion the readers would have certainly got a good
idea about globalisation and how it has affected the financial services sector.
Answers: (1-a), (2-b), (3-a)
Answers: (1-a), (2-b), (3-a), (4-b)
Answers: (1-a), (2-b), (3-a)
47
Marketing Of Check your progress 4
Pension Funds
and Answers: (1-a), (2-b)
Globalization
Answers: (1-a), (2-b), (3-a)
2.10 Glossary
1. Fund Based Services - Financial services firms that cater the short-term
term needs of funds of corporate sector and others are in the funds-based
services.
2. Terrestrial - Wordily.
2.11 Assignment
What are the key drivers for globalisation of financial services? Discuss
with respect i to the Indian scenario.
2.12 Activities
1. How has rapid globalisation affected the local providers of financial
services?
2. What are some of the trends discernible in the Asian Markets in the wake of
globalisation? Briefly discuss.
2.13 Case Study

Enumerate the opportunities that globalisation provide for financia1 service
provide.
48
2.14 Further Readings Globalisation
and Its Impact
1. Sandra Vandermerwe and Micheal Chadwick, "The Internationalization of on Financial
Services
Service”, the Service Industry Journal, January 1989.
Markets
2. Micheal E. Porter, "Changing Patterns of International Competition",
Ccdgornin Management Review. Vol. 26, Winter 1986.
3. George S. Yip, "Total Global Strategy: Managing for Worldwide
Competitive Advantage", Englewood Cliffs, N.J. Prentice Wall 1992.
49
Marketing Of Block Summary
Pension Funds
and This whole block revolves around the pension funds and there role in the
Globalization society. After going through this block we understood what pension fund is and
how it plays a very important role in the society.
In this detailed study we understood the need and importance of pension in

our society, not only the need and importance but we also studied the various
kinds of pension funds policies that are playing a significant role into our society.
In unit 1 we went through the general fund investment guidelines. In the same
way under unit 2 we had a detailed discussion on the effect of globalization on the
financial service markets. What has been the effect of globalization on the local
market; some of the recent trends have even been discussed here in very detail.
The readers would certainly get benefitted after going through this block
and they will learn a lot about the topics.
50
Block Assignment
Short Answer Questions
1. Pension Funds
2. Need for Reforms in Social Security
3. Pension plan
4. Asset classes and diversification
5. Pension Funds And Capital Markets

6. Globalisation
7. Globalisation of financial market

8. Types of globalisation drives
9. Financial services
10. Globalisation and consumer orientation

1. What are the risks associated with pension plans? Can these risks be
managed? How?
2. How is the consumer orientation of financial service provider likely to
change in times to come?
3. In terms of evolving effective marketing practices, what are the main
imperatives the financial service providers should follow?
51
Marketing Of Enrolment No.
Pension Funds
and
Globalization
Unit No 1 2 3 4
Nos of Hrs
block:

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52
which ought to be
brought within

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FINANCIAL MARKETS

Dr. Babasaheb Ambedkar Open University

Knowledge Management and

Graphic and Creative Panel

Copyright © 2015 Knowledge Management and Research Organization.

The need to plan effective instruction is imperative for a successful

BLOCK 1: INTRODUCTION TO FINANCIAL MARKETS, MONEY MARKET

UNIT 1 FINANCIAL SERVICES: AN INTRODUCTION

UNIT 1 DISTRIBUTION, PRICING AND PROMOTIONS STRATEGY FOR

UNIT 1 MARKETING OF PENSION FUNDS

BLOCK 1: INTRODUCTION TO FINANCIAL MARKETS,

 The concept and functions of financial markets

 The nature and importance of money market

 The nature and types of capital market

 Distinguish between capital market and money market

 The nature and functions of a stock exchange

 The advantages of stock exchanges from the points of view of companies,

 The limitations of stock exchanges

 The concept of speculation and distinguish it from investment

 Outline the stock exchanges in India

Unit 3: Capital Market

1.4 Financial Markets as Components of Financial System

1.6 Financial System Designs

1.7 Let Us Sum Up

1.13 Further Readings

1.0 Learning Objectives

 The concept and functions of financial markets

 The nature and importance of money market

(d) It ensures liquidity by providing a mechanism for an investor to sell the

(e) It ensures low cost of transactions and information.

and the borrowers.

2. __________may be defined as „a transmission mechanism between investors

1.3 Nature and Role of Financial System

According to the structural approach, the financial system of an economy

According to the functional approach, financial markets facilitate the flow

Fig 1.1 The structure of financial system

Financial markets studies, based on capital market theory, focus on the

Any transaction related to financial instrument includes at least two parties:

 They redistribute the unavoidable risk related to cash generation among

2. A financial system makes it possible a more efficient transfer of_________.

1.4 Financial Markets as Components of Financial

The key attributes determining transaction costs are

Asset specificity is related to the way transaction is organized and executed.

Check your progress 3

1.5 Financial System and Economic Growth

Fig 1.2 The Concept of the Financial System

The process of savings, finance and investment involves financial

The inter-relationship between varied segments of the economy is

Fig 1.3 Inter-relationship in the Financial System

Check your progress 4

2. According to __________ the primary function of the system is "to provide

1.6 Financial System Designs

1.6.1 Bank-Based and Market Based

Check your progress 5

1.7 Let Us Sum Up

1.8 Answers for Check Your Progress

Check your progress 1