Business ServicesClass 11 Business Studies Notes

Introduction

In our daily lives, we constantly interact with businesses. Sometimes we buy a physical item, and other times we experience an action or a process. This is the fundamental difference between goods and services.

A good is a physical product that can be delivered to a buyer, and its ownership is transferred from the seller to the customer. In contrast, a service is an intangible economic activity that provides satisfaction and involves an interaction between the service provider and the customer. The purchase of a service does not result in owning anything physical.

Nature of Services

Services have five unique characteristics, often called the "five Is," which distinguish them from goods.

Intangibility

Services cannot be touched or seen; they are experiential. You can't taste a doctor's treatment or hold a movie experience in your hands. This makes it difficult to judge the quality of a service before you purchase and consume it. Service providers must focus on creating a positive experience for the customer.

Inconsistency

Because services are performed for each customer individually, they are not standardized. Different customers have different demands and expectations, so a service must be adapted each time.

Inseparability

Services are produced and consumed at the same time. You cannot separate the act of production from the act of consumption. While a car (a good) can be manufactured today and sold a month later, a service must be consumed as it is created. The customer's presence and interaction are key.

Inventory (Less)

Services are perishable and cannot be stored for future use. While you can store some associated goods, you cannot store the service itself. This means that demand and supply must be managed carefully, as the service must be performed when the customer requests it.

Involvement

A key feature of services is the participation of the customer in the delivery process. The customer has the opportunity to have the service modified to meet their specific needs.

Difference between Services and Goods

Types of Services

Services can be broadly classified into three categories:

• Business Services: These are services used by business enterprises to conduct their activities. Examples include banking, insurance, transportation, warehousing, and communication services.
• Social Services: These services are generally provided voluntarily to achieve social goals, such as improving the standard of living for weaker sections of society, providing education, or offering health care. They are often provided by NGOs and government agencies.
• Personal Services: These are services experienced differently by each customer based on their preferences and demands. Examples include tourism, recreational services, and restaurants.

This chapter will focus on Business Services, which are essential for the smooth functioning of modern businesses.

Banking

Banking is the business of accepting deposits of money from the public for the purpose of lending or investment. Banks play a crucial role in the economy by mobilizing the savings of people and making those funds available to businesses for their financial needs.

Type of Banks

There are four main types of banks, each serving different needs:

1. Commercial Banks: These are institutions that deal in money and are governed by the Indian Banking Regulation Act 1949. They accept deposits and provide loans.
   • Public Sector Banks: The government has a major stake in these banks (e.g., SBI, PNB). They often prioritize social objectives.
   • Private Sector Banks: These are owned and controlled by private promoters and operate based on market forces (e.g., HDFC Bank, ICICI Bank).
2. Cooperative Banks: Governed by State Cooperative Societies Acts, these banks provide cheap credit to their members and are a vital source of rural and agricultural financing.
3. Specialised Banks: These banks cater to specific needs, such as foreign exchange, industrial development, and export-import activities. They provide financial aid for large projects and foreign trade.
4. Central Bank: The central bank of a country supervises, controls, and regulates all commercial banks. It acts as the government's banker and manages the country's currency and credit policies. The Reserve Bank of India (RBI) is the central bank of our country.

Functions of Commercial Banks

Commercial banks perform several important functions:

• Acceptance of deposits: Banks accept money from the public through different types of accounts:
  • Current Account: Deposits can be withdrawn at any time without notice.
  • Savings Account: Encourages savings, with some restrictions on withdrawals.
  • Fixed Account: Deposits are made for a fixed period to earn a higher rate of interest.
• Lending of funds: Banks provide loans and advances from the money they collect as deposits. This can be in the form of overdrafts, cash credits, term loans, etc., which support trade, industry, and other business activities.
• Cheque facility: Banks collect cheques for their customers, providing a convenient and inexpensive medium of exchange. Cheques can be bearer cheques (encashable immediately) or crossed cheques (deposited only into the payee's account).
• Remittance of funds: Banks facilitate the transfer of funds from one place to another through instruments like bank drafts and pay orders.
• Allied services: Banks also offer other services like bill payments, locker facilities, underwriting, and buying/selling shares on behalf of customers.

e-Banking

e-Banking, or electronic banking, allows customers to conduct banking transactions over the internet using a computer or mobile device. It is a part of virtual banking that provides 24/7 access to banking services without a human operator.

Services offered under e-banking include:

• Automated Teller Machines (ATM)
• Point of Sales (PoS)
• Electronic Data Interchange (EDI)
• Credit Cards
• Electronic Fund Transfer (EFT), such as NEFT and RTGS

Benefits of e-Banking:

• For Customers:
  • Provides 24/7, 365-day service.
  • Allows transactions from anywhere.
  • Promotes financial discipline by recording every transaction.
  • Offers greater security by reducing the need to carry cash.
• For Banks:
  • Provides a competitive advantage.
  • Offers an unlimited network, not limited by branch locations.
  • Reduces the workload on branches.

Insurance

Life is full of uncertainties and risks. Insurance is a device that helps minimize the impact of these uncertainties. It is a contract where one party (the insurer) agrees to pay an agreed amount of money to another party (the insured) to compensate for a loss, damage, or injury to something of value. In return, the insured pays a regular fee called the premium. The written contract is known as the policy.

Functions of Insurance

• Providing certainty: Insurance removes the uncertainty of loss by guaranteeing payment.
• Protection: It provides protection by compensating for losses that arise from a risk, though it cannot stop the risk from happening.
• Risk sharing: The loss is shared by all the insured members through their premium contributions.
• Assist in capital formation: The premiums collected by the insurer are invested in income-generating schemes, contributing to the economy's capital formation.

Principles of Insurance

A valid insurance contract is based on several key principles:

1. Utmost Good Faith: Both the insured and the insurer must disclose all material facts accurately and completely. The insured must provide full information about the risk, and the insurer must explain all terms and conditions of the policy.
2. Insurable Interest: The insured must have a financial (pecuniary) interest in the subject matter of the insurance. This means the insured would suffer a financial loss if the insured event occurs.
3. Indemnity: This principle applies to fire and marine insurance. The insurer agrees to restore the insured to the same financial position they were in just before the loss occurred. The goal is to compensate for the loss, not to allow the insured to make a profit. This principle does not apply to life insurance.
4. Proximate Cause: An insurance policy only covers losses caused by the perils stated in the policy. When a loss is the result of multiple causes, the most direct and dominant cause (proximate cause) is considered to determine liability.
5. Subrogation: After the insurer has compensated the insured for a loss, the insurer gains the right to stand in the place of the insured to recover the loss from any third party who may be responsible. This prevents the insured from being compensated twice (once by the insurer and again by the third party).
6. Contribution: If the same property is insured with multiple insurers, all insurers will share the loss in proportion to the amount they each insured. This prevents the insured from claiming the full loss from each insurer and making a profit.
7. Mitigation: The insured has a duty to take reasonable steps to minimize the loss or damage to the insured property once an event has occurred. One cannot be careless just because the property is insured.

Types of Insurance

Life Insurance

Life insurance is a contract where the insurer agrees to pay a specified sum of money on the death of the person or on the expiry of a certain period, in exchange for a premium. It provides financial protection to the family in case of premature death and can also serve as an investment, providing funds at an older age.

Key Elements of a Life Insurance Contract:

• It must have all the essentials of a valid contract.
• It is a contract of utmost good faith.
• The insured must have an insurable interest in the life assured at the time the policy is taken.
• It is not a contract of indemnity, as the value of a human life cannot be measured in money. The amount paid is fixed in advance.

Types of Life Insurance Policies:

• Whole Life Policy: The sum is paid only to the beneficiaries after the death of the assured.
• Endowment Life Assurance Policy: The sum is paid to the assured upon reaching a certain age or to their nominee upon their death, whichever is earlier.
• Joint Life Policy: Taken by two or more people (e.g., husband and wife, business partners), the sum is paid to the survivor(s) upon the death of any one of the assured.
• Annuity Policy: The policy amount is paid in regular installments (monthly, quarterly, etc.) after the assured reaches a certain age.
• Children's Endowment Policy: Taken by a parent for their children to cover future expenses like education or marriage.

Fire Insurance

Fire insurance is a contract where the insurer agrees to compensate for any loss or damage caused by fire during a specified period (usually one year).

Key Elements of a Fire Insurance Contract:

• The insured must have an insurable interest in the property both at the time of taking the policy and at the time of the loss.
• It is a contract of utmost good faith.
• It is a contract of strict indemnity; the insured can only recover the actual amount of loss, up to the policy limit.
• The insurer is only liable if fire is the proximate cause of the loss.

Marine Insurance

Marine insurance is a contract that provides protection against losses caused by marine perils, such as a ship colliding with a rock, pirate attacks, or fire. It covers the ship (hull), the cargo (goods), and the freight charges.

Key Elements of a Marine Insurance Contract:

• It is a contract of indemnity.
• It is a contract of utmost good faith.
• Insurable interest must exist at the time of the loss.
• The principle of proximate cause applies.

Difference between Life, Fire, and Marine Insurance

Communication Services

Communication services are vital for businesses to connect with suppliers, customers, and competitors. They can be classified into postal and telecom services.

Postal Services

The Indian postal department provides a range of facilities across the country, categorized as:

• Financial facilities: Post office savings schemes like Public Provident Fund (PPF), Kisan Vikas Patra, recurring deposits, and money order services.
• Mail facilities: Parcel services, registration for security, and insurance for articles in transit.
• Allied facilities: Services like Speed Post for fast delivery, Media Post for advertising, and International Money Transfer.

Telecom Services

A robust telecommunications infrastructure is the backbone of modern business. Various types of telecom services include:

• Cellular mobile services: Voice and non-voice messaging and data services.
• Fixed line services: Voice and data services connected through fiber optic cables.
• Cable services: Primarily for one-way entertainment media services.
• VSAT services: A satellite-based communication service offering reliable solutions in both urban and rural areas.
• DTH services: Direct-to-Home satellite-based media services for receiving television channels.

Transportation

Transportation includes all modes—rail, road, air, and sea—for the movement of goods and passengers. It is crucial for business as it removes the hindrance of place, making goods available to consumers from where they are produced. Efficient transportation infrastructure is essential for economic growth.

Warehousing

Warehousing refers to the storage of goods in a scientific and systematic manner to maintain their quality and value. Modern warehouses are not just for storage; they are logistical service providers that ensure the right quantity of goods is available at the right place, at the right time, and at the right cost.

Types of Warehouses

• Private warehouses: Owned or leased by a company for storing its own goods (e.g., a retail chain's warehouse).
• Public warehouses: Can be used by any member of the public (traders, manufacturers) for a storage fee.
• Bonded warehouses: Licensed by the government to store imported goods before the payment of customs duty. This allows importers to pay duty in installments and facilitates entrepot trade (re-exporting goods).
• Government warehouses: Fully owned and managed by the government through public sector organizations like the Food Corporation of India.
• Cooperative warehouses: Set up by cooperative societies for the use of their members.

Functions of Warehousing

• Consolidation: The warehouse receives goods from different production plants and consolidates them into a single shipment for a customer.
• Break the bulk: The warehouse divides large quantities of goods received from plants into smaller quantities for delivery to different clients.
• Stock piling: This involves the seasonal storage of goods. Goods not needed immediately are stored and made available based on demand.
• Value added services: Warehouses may provide services like packaging, labeling, and grading of goods.
• Price stabilisation: By managing the supply of goods based on demand, warehousing helps to stabilize prices.
• Financing: Warehouse owners may advance money to the owners of the goods against the security of the stored goods.