CLASS XI- BUSINESS STUDIES

CHAPTER – 4 NOTES

BUSINESS SERVICES
SERVICES
Services are those separately identifiable, essentially intangible activities that provide
satisfaction of wants, and are not necessarily linked to the sale of a product or another service.
Their purchase does not result in the ownership of anything physical.

GOODS
A good is a physical product capable of being delivered to a purchaser and involves the transfer
of ownership from seller to customer. Goods are also generally used to refer to commodities or
items of all types, except services, involved in trade or commerce.

NATURE OF SERVICES

There are five basic features of services:

Intangibility: Services are intangible, i.e., they cannot be touched. They are experiential in nature. One
cannot taste a doctor’s treatment, or touch entertainment. One can only experience it. An important
implication of this is that quality of the offer can often not be determined before consumption and, therefore,
purchase.

Inconsistency: Since there is no standard tangible product, services have to be performed exclusively each
time. Different customers have different demands and expectations. Service providers need to have an
opportunity to alter their offer to closely meet the requirements of the customers. This is happening, for
example, in the case of mobile services.

Inseparability: Another important characteristic of services is the simultaneous activity of production and
consumption being performed. This makes the production and consumption of services seem to be
inseparable.

Inventory (Less): Services have little or no tangible components and, therefore, cannot be stored for a future
use. That is, services are perishable and providers can store some associated goods but not the service itself.
For example, a railway ticket can be stored but the railway journey will be experienced only when the
railways provides it.

Involvement: One of the most important characteristics of services is the participation of the customer in the
service delivery process. A customer has the opportunity to get the services modified according to specific
requirements.

BANKING
MEANING: Banking means accepting deposits from public for the purpose of lending and
investment, which are repayable on demand or otherwise and withdrawable by cheques, draft, order
or otherwise.

Bank: A bank is an institution which is involved in banking activities i.e. the institution which
accepts deposits from public for the purpose of lending and investment, which are repayable on
demand.
 TYPES OF BANKS
Commercial Cooperative Specialized
Central Bank
Banks Banks Banks

1. Commercial Banks: Commercial banks are those banks which accept demand deposits
from the public for purpose of lending or investment. These are governed by Indian Banking
Regulation Act 1949.

There are two types of commercial banks, public sector and private sector banks.

Public sectors banks are those in which the Private sector banks are owned, managed and
government has a major stake and they usually controlled by private promoters and they are
need to emphasise on social objectives than on free to operate as per market forces. The private
profitability. There are a number of public sector banks are HDFC Bank, ICICI Bank,
sector banks like SBI, PNB, IOB etc. Kotak Mahindra Bank and Jammu and Kashmir
Bank etc.

2. Cooperative Banks: Cooperative banks are governed by the provisions of State Cooperative
Societies Act and meant especially for providing cheap credit to their members. It is an
important source of rural credit, i.e., agricultural financing in India.

3. Specialized Banks: Specialized banks provide financial aid to industries, heavy turnkey
projects & foreign trade.
Specialised banks are foreign exchange banks, industrial banks, development banks,
export-import banks catering to specific needs of these unique activities.

4. Central Bank: Central bank of any country supervises controls & regulates the activities of
all the commercial banks of that country. It also acts as a government banker. It controls
and coordinates currency and credit policies of any country. The Reserve Bank of India is
the central bank of our country.

FUNCTIONS OF COMMERCIAL BANKS

1. Accepting deposits: Commercial banks accept deposits from general public who want to
save their excess money and also at the same time earn interest. These deposits are
generally taken through current bank account, saving bank account and fixed deposits etc.

2. Lending of funds: Second major activity of commercial banks is to provide loans and
advances out of the money received through deposits. These advances can be made in the
form of overdrafts, cash credits, discounting trade bills, term loans, consumer credits and other
miscellaneous advances.

TYPES OF ADVANCES
 Bank overdraft Cash credit Short/Medium/Lon
g term loans Discounting of bills
•Under this, a customer •Under this, bank gives
having a current account loan on securities like Businessmen generally do
•A loan is a lump sum not wait till maturity of
is allowed to withdraw shares, debentures, etc. advance given to the
money beyond the The loan amount is the bill. They get the bill
customer, repayable by discounted from a bank.
amount in his account. always less than the the customer on the
•The overdrawn amount actual value of the The bank gives cash
expiry of the specified against the bill after
is up to a specific limit securities. period or in instalments
and the bank charges •The limit of cash credit is deducting the amount of
along with interest. It discount. On the due date;
interest on the amount fixed on the basis of may be secured or
overdrawn. This goodwill of customers. the bank gets the full
unsecured. amount from the drawer
overdrawn amount is The customer can
also to be paid later on. withdraw within the of the bill.
specified limit and the
interest is charged only
on the withdrawn
amount.

EXTRA SERVICES

1. RTGS (Real Time Gross Settlement): RTGS is a fund transfer mechanism where transfer of
money takes place from one bank to another on a (real time gross settlement). The RBI
maintains this payment network.
Real Time means the transactions are settled as soon as they are processed without any
waiting period. Gross Settlement means the transaction is settled on one to one basis
without bunching with any other transactions. Thus, under RTGS transactions are
processed continuously throughout the RTGS business hours.

2. National Electronic Funds Transfer (NEFT): It is a nationwide system that facilitates

individual, firms and corporate to electronically transfer funds (Maximum limit- Rs. 2,00,000)
from any bank branch to any individual, firm or corporate having an account with any other bank
branch in the country.
The transfer of funds does not take place immediately as NEFT operates on Deferred Net
Settlement Basis, which settles transactions in batches at a particular point of time.

3. ATMs (Automated Teller Machines): ATMs are installed by banks in different parts of the
cities to enable customers to withdraw and deposit funds 24 hours a day. The customers are
provided with an ATM card with unique PIN number to access the facility. The ATM card is
inserted in the machine and the Pin number is entered to withdraw money from ATM. The
customer also receives a receipt after the transaction which shows the balance amount in
the customer‘s account.

4. Debit Card: It is plastic card which provides an alternative payment method to pay cash
while making purchases. It can be used at an ATM to withdraw money from bank account. It
combines the functions of an ATM card and cheque.

5. Credit Card: The credit card allows its holder to purchase product or services without cash
& to pay at a later date. It provides overdraft facility to the customers. For the credit card, a
customer might open an account with the bank which sponsors the card. The customer has
to pay interest on the amount used if not paid within the specified period. VISA was the first
credit card recognized worldwide.

E–BANKING
Under e-banking, the transactions are carried out through interest, mobile phone, ATMs etc.
Internet banking means any user with a PC and a browser can get connected to the banks
website to perform any of the virtual banking functions and avail of any of the bank‘s services.
All the services that the bank has permitted on the internet are displayed on a menu. There is no
face- to- face interaction of customers and bank in e-banking.

Range of services offered by e-banking are:

1. Automated Teller Machines (ATM) and Point of Sales (PoS),
2. Electronic Data Interchange (EDI) and Credit Cards,
3. Electronic or Digital Cash and
4. Electronic Bank Transfer (EFT). The two ways in which EFT can be done are: NEFT (National
Electronic Fund Transfer) and RTGS (Real Time Gross Settlement).

Benefits of e-Banking to customers Benefits of e-Banking to Banks

1. e-banking facilitates digital payments and 1. e-banking provides competitive advantage to
promotes transparency in financial statements. the bank.
2. e-banking provides 24 hours, 365 days a year 2. e-banking provides unlimited network to the
services to the customers of the bank. bank and is not limited to the number of
3. It helps in accessing banking facilities from branches, any PC connected to a modem and a
anywhere, be it home or office or even while telephone having an internet connection can
travelling via mobile phones also. provide cash withdrawal needs of the customer.
4. It inculcates a sense of financial discipline by 3. Load on branches can be considerably
recording each and every transaction. reduced by establishing centralised data base
5. Greater customer satisfaction by offering and by taking over some of the accounting
unlimited access to the bank, not limited by the functions.
walls of the branch and less risk and greater
security to the customer as they can avoid
travelling with cash.
6. It helps in increasing customer satisfaction
by adding value to banking relationships.
7. It speeds up the transactions and reduces the
chances of committing errors as everything is
done through computers.
 INSURANCE
DEFINITION: Insurance is a contract or agreement under which one party (Insurer) agrees, in
return for a consideration (Premium), to pay an agreed amount of money to another party (Insured)
to compensate his loss, damage or injury of subject matter, in which the insured has a pecuniary
interest, as a result of some uncertain event.
• The agreement/contract is put in writing and is known as ‘policy’. The person whose risk is
insured is called ‘insured’ and the firm which insures the risk of loss is known as insurer/
assurance underwriter.

Functions of Insurance
1. Providing certainty: Insurance provides certainty of payment for the risk of loss. Insurance
removes uncertainties and the assured receives payment of loss. The insurer charges
premium for providing the certainty.
2. Protection: The second main function of insurance is to provide protection from probable
chances of loss. Insurance cannot stop the happening of a risk or event but can compensate
for losses arising out of it.
3. Risk sharing: On the happening of a risk event, the loss is shared by all the persons
exposed to it. The share is obtained from every insured member by way of premiums.
4. Assist in capital formation: The accumulated funds of the insurer received by way of
premium payments made by the insured are invested in various income generating schemes.

PRINCIPLES OF INSURANCE
1. Principle of utmost good faith: A contract of insurance is a contract of uberrimae fidei i.e.,
a contract found on utmost good faith. According to this principle, both the insurer and the
insured must display utmost good faith towards each other by disclosing all the relevant
facts. In case the necessary disclosures are not made, the contract becomes voidable.
For example - John took a health insurance policy. At the time of taking policy, he was a smoker
and he didn't disclose this fact. He got cancer. Insurance company won't pay anything as John didn't
reveal the important facts.

Examples of facts to be disclosed:

• Fire insurance: Construction of building, fire detection and fire fighting equipment; nature
of its use.
• Motor insurance: Type of vehicle; driver details.
• Personal Accident insurance: Age, height, weight, occupation, previous medical history.
• Life insurance: Age, previous medical history, smoking/drinking habits.

2. Principle of insurable interest: According to this principle, the insured must have
insurable interest in the subject matter of insurance. The insured must have an interest in
the preservation of the thing or life insured, so that he/she will suffer financially on the
happening of the event against which he/she is insured. It means that the insured must
stand to gain by its existence and loose by its destruction.
E.g. a husband has insurable interest in the life of his wife, the employer has insurable
interest in the life of the employee, and parents have insurable interest in the life of their
children and vice-versa.
• In case of life insurance, insurable interest must be present at the time of taking the
policy.
• In case of fire insurance, insurable interest must be present at the time of taking the
policy as well as at the time of the loss of subject matter.
• In case of marine insurance, insurable interest should be present at the time of loss of
subject matter.

3. Principle of indemnity: According to this principle, the insured will be paid by the insurer
(insurance company), the actual amount of loss or the amount of policy, whichever is less, in
case of risk or loss suffered by the insured. The main purpose of this principle is to place the
insured in the same position where he would have been if he had not suffered loss due to the
risk. The insured is not allowed to make any profit out of the loss of subject matter.
All insurance contracts of fire or marine insurance are contracts of indemnity. The principle
of indemnity is not applicable to life insurance because the value of life of a person cannot be
estimated.
For instance, a person gets his stock insured worth 50,000 for 70,000. A fire occurs and whole stock
gets damaged. Insurance company will pay him only 50,000 i.e., the actual value of his stock and
not 70,000. On the other hand, if any person gets his stock insured worth 50,000 for 30,000 and the
whole stock gets damaged, he will get only 30,000, the actual value for which insurance has been
taken. As per this principle, out of the actual loss and sum assured, the insurance company will
make the payment for whichever is lower.

4. Principle of cause Proxima: According to this principle, an insurance policy is designed to

provide compensation only for such losses as are caused by the perils which are stated in
the policy. In case of loss arising out of any mishap, the most proximate cause of the mishap
should be taken into consideration.
For example: if a ship gets damaged due to constant frictions with icebergs and this causes damage
to the stock as well. Now this damage is to the stock which is insured. Hence the insurance
company will pay the compensation.
5. Principle of mitigation of loss: According to this principle, insured must take reasonable
steps to minimize the loss or damage to the insured property. If reasonable care is not taken
like any prudent person then the claim from the insurance company may be lost.

For example - Ram took insurance policy fo his house. In an cylinder blast, his house burnt. He
should have called nearest fire station so that the loss could be minimised.

6. Principle of subrogation: As per this principle, after the insured is compensated for the loss
or damage to the property insured, the right of ownership of such property passes on to the
insurer. This is because the insured should not be allowed to make any profit, by selling the
damaged property or in the case of lost property being recovered.
For example :- Ram took a insurance policy for his Car. In an accident his car totally damaged.
Insurer paid the full policy value to insured. Now Ram can't sell the scrap remained after the scrap.

7. Principle of contribution: According to this principle, if a person has taken more than one
insurance policy for the same subject matter, then all the insurers will contribute the
amount of loss and compensate the insured for the actual amount of loss. The insured
cannot separately claim the total loss from each insurer. The insurers contribute to the total
loss in proportion to the amount insured by each.
• This principle is corollary of the principle of indemnity.
• It implies that in case of double insurance, the insurers are to share the losses in proportion
to the amount assured by each of them.

For example - Raj has a property worth Rs.5,00,000. He took insurance from Company A worth
Rs.3,00,000 and from Company B - Rs.1,00,000. In case of accident, he incurred a loss of
Rs.3,00,000 to the property. Raj can claim Rs. Rs.3,00,000 from A but after that he can't make
profit by making a claim from Company B. Now Company A can make a claim from Company B to
for proportional loss claim value.