CHAPTER 4

BUSINESS SERVICES

LEARNING OBJECTIVES

After studying this chapter, you should be able to:

• state the characteristics of services;

• distinguish services from goods;

• classify different types of business services;

• explain the concept of e-banking;

• identify and classify different types of insurance policies; and

• describe different types of warehouses.

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4.1 INTRODUCTION

You must all have, at some time or theother experienced the effect of businessactivities on your lives. Let us examinefew examples of business activity i.e.,purchasing ice cream from a store andeating ice cream in a restaurant,watching a movie in a cinema hall orpurchasing a video cassette/CD,purchasing a school bus and leasing itfrom a transporter. If you analyse allthese activities, you will observe thatthere is a difference between purchasingand eating, purchasing and watchingand purchasing and leasing. What iscommon in all of them is that one ispurchasing an item and the other is

experiencing a service. But there isdefinitely a difference between the itemor good and the service performed.

For a layperson, services areessentially intangibles. Their purchasedoes not result in the ownership ofanything physical. For example, you canonly seek advice from the doctor, youcannot purchase him. Services are allthose economic activities that areintangible and imply an interaction tobe realised between the service providerand the consumer.

Services are those separatelyidentifiable, essentially intangibleactivities that provides satisfaction ofwants, and are not necessarily linked tothe sale of a product or another service.

All of us have seen a petrol pump. Have your ever thought how a petrol pumpowner does his business in a village? How he gets the petrol and diesel to thevillages in the interior? How he gets the money to purchase large quantities ofpetrol and diesel? How he communicates to petrol depots for requirement andalso to customers? How he safeguards himself from various risks associatedwith this business? The answer to all the above questions lies in theunderstanding of business services. The transportation of petrol and dieselfrom oil refineries to petrol pumps is carried out by train and tankers (transportservices). They are then stored at various depots of oil companies situated inall major towns across India (warehousing services). Petrol pump owners usepostal, mail and telephone facilities to be in touch with customers, banks andthe depots for the availability of their requirements on regular basis(communication services). As oil companies always sell the petrol and dieselon advance payment, the owners have to take loans and advances from banksto fund their purchases (banking services). Petrol and diesel being highly riskyproducts, the owners have to safeguard themselves from various risks by gettingthe business, the products, the life of people working there, etc., insure(insurance services). Thus, we see that a single business of providing petroland diesel at a petrol pump is actually a collective outcome of various businessservices. These services are being utilised in the entire process of shipment ofpetrol and diesel from oil refineries to the point of sale at petrol pumps, spreadacross the length and breath of India.

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A good is a physical productcapable of being delivered to apurchaser and involves the transfer ofownership from seller to customer.Goods are also generally used to referto commodities or items of all types,except services, involved in trade orcommerce.

4.2 NATURE OF SERVICES

There are five basic features of services.These features also distinguish themfrom goods and are known as the five Isof services. These are discussed asbelow:(i) Intangibility: Services areintangible, i.e., they cannot be touched.They are experiential in nature. Onecannot taste a doctor’s treatment, ortouch entertainment. One can onlyexperience it. An important implicationof this is that quality of the offer canoften not be determined beforeconsumption and, therefore, purchase.It is, therefore, important for the serviceproviders that they consciously workon creating a desired service so that thecustomer undergoes a favourableexperience. For example, treatment by adoctor should be a favourable experience.(ii) Inconsistency: The secondimportant characteristic of services isinconsistency. Since there is nostandard tangible product, serviceshave to be performed exclusively eachtime. Different customers have differentdemands and expectations. Serviceproviders need to have an opportunityto alter their offer to closely meet therequirements of the customers. This is

happening, for example, in the case ofmobile services.(iii) Inseparability: Anotherimportant characteristic of services isthe simultaneous activity of productionand consumption being performed.This makes the production andconsumption of services seem to beinseparable. While we can manufacturea car today and sell it after, say, amonth; this is often not possible withservices that have to be consumed asand when they are produced. Serviceproviders may design a substitute forthe person by using appropriatetechnology but the interaction with thecustomer remains a key feature ofservices. Automated Teller Machines(ATMs) may replace the banking clerkfor the front office activities like cashwithdrawal and cheque deposit. But,at the same time, the presence of thecustomer, is required and his/herinteraction with the process has to bemanaged.(iv) Inventory (Less): Services havelittle or no tangible components and,therefore, cannot be stored for a futureuse. That is, services are perishableand providers can, at best, store someassociated goods but not the serviceitself. This means that the demand andsupply needs to be managed as theservice has to be performed as andwhen the customer asks for it. Theycannot be performed earlier to beconsumed at a later date. For example,a railway ticket can be stored but therailway journey will be experiencedonly when the railways provides it.

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(v) Involvement: One of the mostimportant characteristics of services isthe participation of the customer in theservice delivery process. A customerhas the opportunity to get the servicesmodified according to specificrequirements.

4.2.1 Difference between Servicesand Goods

From the above, it is clear that the twomain differentiating characteristics ofservices and goods are non-transferability of ownership andpresence of both provider as well asconsumer. While goods are produced,services are performed. A service is anact which cannot be taken home. Whatwe can take home is the effect of theservices. And as the services are sold

at the consumption point, there are noinventories. On the basis of abovefeatures, we can have followingpoints of distinction between goodsand services.

4.3 TYPES OF SERVICES

When speaking of the service sector,services can be classified into threebroad categories, viz., businessservices, social services and personalservices. These have been explained inthe following pages.

(i) Business Services: Businessservices are those services which areused by business enterprises for theconduct of their activities. Forexample, banking, insurance,transportation, warehousing andcommunication services.

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An Introduction to the GATS

The agreement on trade in services reached in the Uruguay Round is perhapsthe most important single development in the multilateral trading system. Thenew General Agreement on Trade in Services (GATS) for the first time framedinternationally agreed rules and commitments, broadly comparable with thoseof the General Agreement on Tarrif and Trade (GATT). The most important elementof GATS is the classification of services used in making commitments. The GATSschedule largely follows a classification, which identifies 11 basic service sectors(plus a twelfth category for miscellaneous services). These sectors are subdividedinto some 160 subsectors or separate service activities. As an example, thetourism category breaks down into subsectors for hotel and restaurants.The twelve sectors are:1. Business services (including professional and computer)2. Communication services3. Construction and related engineering services4. Distribution services5. Educational services6. Environmental services7. Financial services (Insurance and Banking)8. Health related and social services9. Tourism and travel related services10. Recreational, cultural and sporting services11. Transport services and12. Other services not included elsewhere

(ii) Social Services: Social servicesare those services that are generallyprovided voluntarily in pursuit ofcertain social goals. These social goalsmay be to improve the standard ofliving for weaker sections of society, toprovide educational services to theirchildren, or to provide health care andhygienic conditions in slum areas.These services are usually providedvoluntarily but for some considerationto cover their costs. For example,health care and education servicesprovided by certain Non-governmentorganisations (NGOs) and governmentagencies.

(iii) Personal Services: Personalservices are those services which areexperienced differently by differentcustomers. These services cannot beconsistent in nature. They will differdepending upon the service provider.They will also depend uponcustomer’s preferences and demands.For example, tourism, recreationalservices, restaurants.

In the context of betterunderstanding of the businessworld, we will be limiting ourfurther discussions to the firstcategory of the service sector i.e.,business services.

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4.3.1 Business Services

Today’s world is of tough competition,where the survival of the fittest is therule. There is no room for non-performance, and hence companiestend to stick to what they can do best.In order to be competitive, businessenterprises, are becoming more andmore dependant on specialisedbusiness services. Business enterpriseslook towards banks for availability offunds; insurance companies for gettingtheir plant, machinery, goods, etc.,insured; transport companies fortransporting raw material; and finished

goods, and telecom and postal servicesfor being in touch with their vendors,suppliers and customers. Today’sglobalised world has ushered in a rapidchange in the service industry in India.India has been gaining a highlycompetitive edge over other countrieswhen it comes to providing services tothe developed economies of the world.Many foreign companies are looking toIndia for performing a host of businessservices. They are even transferring apart of their business operations to beperformed in India. We will discussthese in detail in the next chapter.

Role of Services in an Economy

• The services sector — including power, telecom and transport account for60-65 per cent of the economy in most OECD (Organisation for EconomicCooperation and Development) countries. While that may be surprising, evendeveloping countries have significant proportion of their GDP coming fromthe services sector.

• Sustained, high and broad-based growth is essential for economic developmentand poverty alleviation. What is needed for such growth is an increase ininvestment in the economy. There are encouraging signs on both the growthand investment fronts in recent years. India is the second largest country inthe world, measured by a population of purchasing power parity. It ranksamong the top 5 economies of the world and expects to become the third largesteconomy in the world by 2025.

• As with any growing economy the sectoral composition of GDP has beenchanging with the services showing an increased share of above 50 per centand that of agriculture declining to 25 per cent. The services sector continuedto be the mainstay of the expansion during 2003-04, contributing 57.6 percent to real GDP growth. Leading the upsurge was ‘trade, hotels, transportand communication’. This was in consonance with the improved performanceof the commodity producing sectors. The strong expansion in cargo handledat major ports as well as the rise in freight and passenger traffic of the railwaysboosted the performance of the transport sector.

• According to the latest estimates, services account for about 63 per cent ofthe world economy. Industry accounts for 32 per cent and agriculture just 5per cent. Nearly 70 per cent of the labour force in developed economies isemployed in the services sector.

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4.4 BANKING

Commercial banks are an importantinstitution of the economy for providinginstitutional credit to its customers. Abanking company in India is the onewhich transacts the business ofbanking which means accepting, for thepurpose of lending and investment ofdeposits of money from the public,repayable on demand or otherwise andwithdrawable by cheques, draft, orderor otherwise. In simple terms, a bankaccepts money on deposits, repayableon demand and also earns a margin ofprofit by lending money. A bankstimulates economic activity in themarket by dealing in money. It mobilisesthe savings of people and makes fundsavailable to business financing theircapital and revenue expenditure. Italso deals in financial instruments andprovides financial services for a pricei.e., interest, discount, commission, etc.

Banks can be classified into thefollowing:

1. Commercial banks2. Cooperative banks3. Specialised banks4. Central bank

(i) Commercial Banks: Commercialbanks are institutions dealing inmoney. These are governed by IndianBanking Regulation Act 1949 andaccording to it banking meansaccepting deposits of money from thepublic for the purpose of lending orinvestment. There are two types ofcommercial banks, public sector andprivate sector banks.

Public sectors banks are those inwhich the government has a majorstake and they usually need toemphasise on social objectives than onprofitability. Private sector banks areowned, managed and controlled byprivate promoters and they are free

4.4.1 Type of Banks

The focus of banking is varied, theneeds diverse and methods different.Thus, we need distinctive kinds ofbanks to cater to the above-mentionedcomplexities.

to operate as per market forces. Thereare 20 nationalised public sector bankslike SBI, PNB, IOB etc., and otherprivate sector banks represented byHDFC Bank, ICICI Bank, KotakMahindra Bank and Jammu andKashmir Bank.

Banking and Social Objectives

In the recent past there has been a concerted effort by the policy makers inreorienting banking towards achieving social objectives. There has been a majorshift in the banking policy of the country:

from to(i) Urban orientation — Rural orientation(ii) Class banking — Mass banking(iii) Traditional — Innovative practices(iv) Short term objectives — Development objectives

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(ii) Cooperative Banks: CooperativeBanks are governed by the provisionsof State Cooperative Societies Act andmeant essentially for providing cheapcredit to their members. It is animportant source of rural credit i.e.,agricultural financing in India.(iii) Specialised Banks: Specialisedbanks are foreign exchange banks,industrial banks, development banks,export-import banks catering tospecific needs of these unique activities.These banks provide financial aid toindustries, heavy turnkey projects andforeign trade.(iv) Central Bank: The Central bankof any country supervises, controls andregulates the activities of all thecommercial banks of that country. Italso acts as a government banker. Itcontrols and coordinates currency andcredit policies of any country. TheReserve Bank of India is the centralbank of our country.

4.4.2 Functions of CommercialBanks

Banks perform a variety of functions.Some of them are the basic or primaryfunctions of a bank while others areagency or general utility services innature. The important functions arebriefly discussed below:(i) Acceptance of deposits: Depositsare the basis of the loan operationssince banks are both borrowers andlenders of money. As borrowers theypay interest and as lenders they grantloans and get interest. These depositsare generally taken through currentaccount, savings account and fixed

deposits. Current account deposits canbe withdrawn to the extent of thebalance at any time without any priornotice.

Savings accounts are forencouraging savings by individuals.Banks pay rate of interest as decidedby RBI on these deposits. Withdrawalfrom these accounts has somerestrictions in relation to the amountas well as number of times in a givenperiod. Fixed accounts are timedeposits with higher rate of interest ascompared to the savings accounts. Apremature withdrawal is permissiblewith a percentage of interest beingforfeited.(ii) Lending of funds: Second majoractivity of commercial banks is toprovide loans and advances out of themoney received through deposits.These advances can be made in the formof overdrafts, cash credits, discountingtrade bills, term loans, consumercredits and other miscellaneousadvances. The funds lent out by bankscontribute a great deal to trade,industry, transport and other businessactivities.(iii) Cheque facility: Banks render avery important service to theircustomers by collecting their chequesdrawn on other banks. The cheque isthe most developed credit instrument,a unique feature and function of banksfor the withdrawal of deposits. It is themost convenient and an inexpensivemedium of exchange. There are twotypes of cheques mainly (a) bearercheques, which are encashableimmediately at bank counters and

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(b) crossed cheques which are to bedeposited only in the payees account.(iv) Remittance of funds: Anothersalient function of commercial banksis of providing the facility of fundtransfer from one place to another, onaccount of the interconnectivity ofbranches. The transfer of funds isadministered by using bank drafts, payorders or mail transfers, on nominalcommission charges. The bank issuesa draft for the amount on its ownbranches at other places or other banksat those places. The payee can presentthe draft on the drawee bank at hisplace and collect the amount.(v) Allied services: In addition toabove functions, banks also provideallied services such as bill payments,locker facilities, underwriting services.They also perform other services like buyingand selling of shares and debentureson instructions and other personalservices like payment of insurancepremium, collection of dividend etc.

4.4.3 e-Banking

The growth of Internet and e-commerceis dramatically changing everydaylife, with the world wide web ande-commerce transforming the worldinto a digital global village. The latestwave in information technology isinternet banking. It is a part of virtualbanking and another delivery channelfor customers.

In simple terms, internet bankingmeans any user with a PC and abrowser can get connected to the bankswebsite to perform any of the virtualbanking functions and avail of any of

the bank’s services. There is no humanoperator to respond to the needs of thecustomer. The bank has a centraliseddata base that is web-enabled. All theservices that the bank has permittedon the internet are displayed on amenu. Any service can be selected andfurther interaction is dictated by thenature of service.

In this new digital market placebanks and financial institutions havestarted providing services over theinternet. These type of services providedby the banks on the internet, callede-banking, lowers the transaction cost,adds value to the banking relationshipand empowers customers. e-bankingis electronic banking or banking usingelectronic media. Thus, e-banking is aservice provided by many banks, thatallows, a customer to conduct bankingtransactions, such as managingsavings, checking accounts, applyingfor loans or paying bills over theinternet using a personal computer,mobile telephone or handheldcomputer (personal digital assistant)The range of services offered bye-banking are: Electronic FundsTransfer (EFT), Automated TellerMachines (ATM) and Point of Sales(PoS), Electronic Data Interchange(EDI) and Credit Cards Electronic orDigital cash.

Benefits

There are various benefits of e-bankingprovided to customers which are:(i) e-banking provides 24 hours,

365 days a year services to thecustomers of the bank;

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(ii) Customers can make some of thepermitted transactions from officeor house or while travelling viamobile telephone;

(iii) It inculcates a sense of financialdiscipline by recording each andevery transaction;

(iv) Greater customer satisfaction byoffering unlimited access to thebank, not limited by the walls of thebranch and less risk and greatersecurity to the customer as theycan avoid travelling with cash.The banks also stand to gain by

e-banking. The benefits are:(i) e-banking provides competitive

advantage to the bank;

(ii) e-banking provides unlimitednetwork to the bank and is notlimited to the number of branches,Any PC connected to a modem anda telephone having an internetconnection can provide cashwithdrawl needs of the customer;

(iii) Load on branches can beconsiderably reduced byestablishing centralised data baseand by taking over some of theaccounting functions.

4.5 INSURANCE

Life is full of uncertainties. The chancesof occurrence of an event causing lossesare quite uncertain. There are risks of

Indian Insurance Sector

It is a well-known fact that the Indian economy has been amongst the fastestgrowing economies of the world. It is triggered by better performances of all thethree sectors i.e., agriculture, industry and services. With an increase inmanufacturing and service sector activities, a directly proportional higherinsurance penetration is the need of the hour.

With the initiation of financial sector reforms, the Indian insurance sector whichwas till now under the government control has to set open for competition tomeet the global challenge. The first step taken by the government was to establishIRDA Act with the objective of streamlining the development process. The Indianinsurance market is a mega market with a huge potential. Since the opening ofthe insurance sector in December 1999 the insurance industry is changingrapidly. Today 13 companies operate in the life and 13 in non-life segment. LICof India has dominated the life segment for over four decades although only25 per cent of the insurable population was insured.

From the year 2000 onwards IRDA started granting licenses to private players.Thus general insurance sector has seen considerable expansion over the pastfew years. The premium income has recorded a growth rate of 20 per cent. Adepartment wise split shows that in the year 2002-03, 21 per cent of business isderived from fire, 9 per cent from marine insurance, 39 per cent from motorinsurance, 8 per cent from health schemes, 5 per cent from re-engineering andremaining 18 per cent from other miscellaneous insurances. Amongst the fastestgrowing companies are the National Insurance, Bajaj Allianz, Tata-AIG and ICICILombard. Currently, over 70 per cent of the business underwritten (fire, marine,motor and engineering) is subject to tariff controls.

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death and disability for human life; fireand burglary risk for property; perils ofthe sea for shipment of goods and, soon. If any of these takes place, theindividuals and/or, organisations maysuffer a great loss, sometimes beyondtheir capacities to bear the same. Itis to minimise the impact of suchuncertainties that there is a need forinsurance. Investment in factorybuildings or heavy equipments or otherassets is not possible unless there isarrangement for covering the risks, withthe help of insurance. Keeping this inmind, people facing common risks cometogether and make small contributionsto a common fund, which helps tospread the loss caused to an individualby a particular risk over a number ofpersons who are exposed to it.

Insurance is thus a device by whichthe loss likely to be caused by anuncertain event is spread over anumber of persons who are exposed toit and who prepare to insure themselvesagainst such an event. It is a contractor agreement under which one partyagrees in return for a consideration topay an agreed amount of money toanother party to make a loss, damageor injury to something of value inwhich the insured has a pecuniaryinterest as a result of some uncertainevent. The agreement/contract is putin writing and is known as ‘policy’. Theperson whose risk is insured is called‘insured’ and the firm which insures therisk of loss is known as insurer/assurance underwriter.

4.5.1 Fundamental principle ofInsurance

The basic principle of insurance is thatan individual or a business concernchooses to spend a definitely knownsum in place of a possible huge amountinvolved in an indefinite future loss.Thus insurance is the substitution ofa small periodic payment (premium) fora risk of large possible loss. The loss ofrisk still remains but the loss is spreadover a large number of policyholdersexposed to the same risk. The premiumpaid by them are pooled out of whichthe loss sustained by any policy holderis compensated. Thus, risks are sharedwith others. From the analysis of pastevents the insurer (an insurancecompany or an underwriter) knows theprobable losses caused by each typeof risk covered by insurance.

Insurance, therefore, is a form of riskmanagement primarily used to safeguard against the risk of potentialfinancial loss. Ideally, insurance isdefined as the equitable transfer of the riskof a potential loss, from one entity toanother, in exchange for a reasonablefee. Insurance company, therefore, isan association, corporation or anorganisation engaged in the businessof paying all legitimate claims that mayarise, in exchange for a fee (known aspremium).

Insurance is a social device in whicha group of individuals (insured)transfers risk to another party (insurer)in order to combine loss experience, whichprovides for payment of losses from

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funds contributed (premium) by allmembers. Insurance is meant to protectthe insured, against uncertain events,which may cause disadvantage to him.

4.5.2 Functions of Insurance

The various functions of insurance areas follows:(i) Providing certainty: Insuranceprovides certainity of payment for therisk of loss. There are uncertainties ofhappenings of time and amount of loss.Insurance removes these uncertaintiesand the assured receives payment ofloss. The insurer charges premium forproviding the certainity.(ii) Protection: The second mainfunction of insurance is to provideprotection from probable chances ofloss. Insurance cannot stop thehappening of a risk or event but cancompensate for losses arising out of it.(iii) Risk sharing: On the happeningof a risk event, the loss is shared by allthe persons exposed to it. The share isobtained from every insured memberby way of premiums.(iv) Assist in capital formation: Theaccumulated funds of the insurerreceived by way of premium paymentsmade by the insured are invested invarious income generating schemes.

4.5.3 Principles of Insurance

The principles of insurance are therules of action or conduct adopted bythe stakeholders involved in theinsurance business. The specificprinciples of utmost significance to avalid insurance contract consists of thefollowing:(i) Utmost good faith: A contract ofinsurance is a contract of uberrimaefidei i.e., a contract found on utmostgood faith. Both the insurer and theinsured should display good faithtowards each other in regard to thecontract. It is the duty of the insuredto voluntarily make full, accuratedisclosure of all facts, material to therisk being proposed and the insurer tomake clear all the terms and conditionsin the insurance contract. Thus, it isbinding on the proposer to disclose allmaterial facts about the subject matterof the proposed insurance. Any fact,which is likely to affect the mind of aprudent insurer in deciding to acceptthe proposal of insurance or in fixingthe rate of premium is material for thispurpose. Failure to make disclosure ofmaterial facts by the insured makes thecontract of insurance voidable at thediscretion of the insurer.

Examples of facts to be disclosed

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

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(ii) Insurable Interest: The insuredmust have an insurable interest in thesubject matter of insurance. Onefundamental fact of this principle isthat ‘it is not the house, ship,machinery, potential liability of life thatis insured, but it is the pecuniaryinterest of the insured in them, whichis insured.’ Insurable interest meanssome pecuniary interest in the subjectmatter of the insurance contract. Theinsured must have an interest in thepreservation of the thing or life insured,so that he/she will suffer financially onthe happening of the event againstwhich he/she is insured. In case ofinsurance of property, insurableinterest of the insured in the subjectmatter of the insurance must exist atthe time of happening of the event. Inorder to name insurable interesthowever, it is not necessary that oneshould be the owner of the property.For example, a trustee holdingproperty on behalf of others has aninsurable interest in the property.(iii) Indemnity: All insurancecontracts of fire or marine insuranceare contracts of indemnity. Accordingto it, the insurer undertakes to put theinsured, in the event of loss, in the sameposition that he occupied immediatelybefore the happening of the eventinsured against. In other words theinsurer undertakes to compensate theinsured for the loss caused to him/herdue to damage or destruction ofproperty insured. The compensationpayable and the loss suffered are to bemeasured in terms of money. Theprinciple of indemnity is not applicableto life insurance.

(iv) Proximate Cause: According tothis principle, an insurance policy isdesigned to provide compensation onlyfor such losses as are caused by theperils which are stated in the policy.When the loss is the result of two ormore causes, the proximate causemeans the direct, the most dominantand most effective cause of which theloss is the natural consequence. In caseof loss arising out of any mishap, themost proximate cause of the mishapshould be taken into consideration.(v) Subrogation: It refers to the rightof the insurer to stand in the place ofthe insured, after settlement of a claim,as far as the right of insured in respectof recovery from an alternative sourceis involved. After the insured iscompensated for the loss or damage tothe property insured by him/her theright of ownership of such propertypasses on to the insurer. This isbecause the insured should not beallowed to make any profit, by sellingthe damaged property or in the case oflost property being recovered.(vi) Contribution: As per this principleit is the right of an insurer who has paidclaim under an insurance, to call uponother liable insurers to contribute forthe loss of payment. It implies, that incase of double insurance, the insurersare to share the losses in proportion tothe amount assured by each of them.In case there is a loss, when there ismore than one policy on the sameproperty, the insured will have no rightto recover more than the full amountof his actual loss. If the full amount isrecovered from one insurer the right toobtain further payment from the otherinsurer will cease.

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(vii) Mitigation: This principle statesthat it is the duty of the insured to takereasonable steps to minimise the lossor damage to the insured property.Suppose goods kept in a store housecatch fire then the owner of the goodsshould try to recover the goods andsave them from fire to minimise theloss or damage. The insured mustbehave with great prudence and notbe careless just because there is aninsurance cover. If reasonable care is

not taken like any prudent personthen the claim from the insurancecompany may be lost.

4.5.4 Types of Insurance

Various types of insurance exist byvirtue of practice of insurancecompanies and the influence of legalenactments controlling the insurancebusiness. Broadly speaking, insurancemay be classified as follows:

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LIFE INSURANCE

Since life itself is uncertain, allindividuals try to assure themselves ofa certain sum of money in the future totake care of unforeseen events orhappenings. Individuals in the courseof their life are always exposed to somekind of risks.

The risk may be of an event whichis certain that is death. In that case,what will happen to the other membersof the family who are dependent on aparticular individuals income. Theother risk may be living too long inwhich an individual may become tooold to earn i.e., retirement. In this casealso, the earnings will decline or end.Under such circumstances, individualsseek protection against these risksand life insurance companies offerprotection against such risks.

A life insurance policy wasintroduced as a protection against theuncertainity of life. But gradually itsscope has widened and there arevarious types of insurance policiesavailable to suit the requirements of anindividual. For example, disabilityinsurance, health/medical insurance,annuity insurance and life insuranceproper.

Life insurance may be defined as acontract in which the insurer inconsideration of a certain premium,either in a lump sum or by otherperiodical payments, agrees to pay tothe assured, or to the person for whosebenefit the policy is taken, the assuredsum of money, on the happening of aspecified event contingent on the

human life or at the expiry of certainperiod. Thus, the insurance companyundertakes to insure the life of a personin exchange for a sum of money calledpremium. This premium may be paidin one lump sum, or periodically i.e.,monthly, quarterly, half yearly oryearly. At the same time, the companypromises to pay a certain sum of moneyeither on the death of the person or onhis attaining a certain age (i.e., theexpiry of certain period). Thus, theperson is sure that a specified amountwill be given to him when he attains acertain age or that his dependents willget that sum in the event of his death.

This agreement or contract whichcontains all the terms and conditionsis put in writing and such document iscalled the policy. The person whose lifeis insured is called the assured. Theinsurance company is the insurer andthe consideration paid by the assuredis the premium. The premium can bepaid periodically in instalments.

This insurance provides protectionto the family at the premature death orgives adequate amount at old age whenearning capacities are reduced. Theinsurance is not only a protection butis a sort of investment because a certainsum is returnable to the insured atthe time of death or at the expiry of acertain period.

Life insurance also encouragessavings as the amount of premium hasto be paid regularly. It thus, providesa sense of security to the insured andhis dependents.

The general principles of insurancediscussed in the previous section apply

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to life insurance also with a fewexceptions. The main elements of a lifeinsurance contract are:(i) The life insurance contract must

have all the essentials of a validcontract. Certain elements like offerand acceptance, free consent,capacity to enter into a contract,lawful consideration and lawfulobject must be present for thecontract to be valid;

(ii) The contract of life insurance is acontract of utmost good faith. Theassured should be honest andtruthful in giving information to theinsurance company. He mustdisclose all material facts about hishealth to the insurer. It is his dutyto disclose accurately all materialfacts known to him even if theinsurer does not ask him;

(iii) In life insurance, the insured musthave insurable interest in the lifeassured. Without insurable interestthe contract of insurance is void. Incase of life insurance, insurableinterest must be present at the timewhen the insurance is affected. It isnot necessary that the assuredshould have insurable interest atthe time of maturity also. Forexample, a person is presumed tohave an interest in his own life andevery part of it, a creditor has aninsurable interest in the life of hisdebtor, and a proprietor of a dramacompany has an insurable interestin the lives of the actors;

(iv) Life insurance contract is not acontract of indemnity. The lifeof a human being cannot be

compensated and only a specifiedsum of money is paid. That is whythe amount payable in lifeinsurance on the happening of theevent is fixed in advance. The sumof money payable is fixed, at thetime of entering into the contract. Acontract of life insurance, therefore,is not a contract of indemnity.

Types of life insurance policies

The document containing the writtencontract between the insurer and theinsured alongwith the terms andconditions of insurance is called thePolicy. After the proposal form is filledby the insured (or the proposer) andthe insurer (insurance company)accepts the form and the premium, apolicy is issued to the insurer.

People have different requirementsand therefore they would like a policyto fulfill all their needs. The needs ofpeople for life insurance can be familyneeds, children’s needs, old age andspecial needs. To meet the needs ofpeople the insurers have developeddifferent types of products such asWhole Life Assurance, Endowment typeplans, combination of Whole Life andEndowment type plans, Children’sAssurance plans and Annuity plans.Some of these are explained below:(i) Whole Life Policy: In this kind ofpolicy, the amount payable to theinsured will not be paid before thedeath of the assured. The sum thenbecomes payable only to thebeneficiaries or heir of the deceased.

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The premium will be payable for afixed period (20 or 30 years) or for thewhole life of the assured. If the premiumis payable for a fixed period, the policy willcontinue till the death of the assured.(ii) Endowment Life AssurancePolicy: The insurer (InsuranceCompany) undertakes to pay a specifiedsum when the insured attains aparticular age or on his death whichever is earlier. The sum is payable to hislegal heir/s or nominee named thereinin case of death of the assured.Otherwise, the sum will be paid to theassured after a fixed period i.e., till he/she attains a particular age. Thus, theendowment policy matures after alimted number of years.(iii) Joint Life Policy: This policy istaken up by two or more persons. Thepremium is paid jointly or by either ofthem in instalments or lump sum. Theassured sum or policy money is payableupon the death of any one person to theother survivor or survivors. Usually thispolicy is taken up by husband and wifejointly or by two partners in apartnership firm where the amount ispayable to the survivor on the death ofeither of the two.(iv) Annuity Policy: Under this policy,the assured sum or policy money ispayable after the assured attains acertain age in monthly, quarterly, halfyearly or annual instalments. Thepremium is paid in instalments over acertain period or single premium maybe paid by the assured. This is usefulto those who prefer a regular incomeafter a certain age.

(v) Children’s Endowment Policy:This policy is taken by a person for his/her children to meet the expenses oftheir education or marriage. Theagreement states that a certain sum willbe paid by the insurer when thechildren attain a particular age. Thepremium is paid by the person enteringinto the contract. However, no premiumwil be paid, if he dies before the maturityof the policy.

FIRE INSURANCE

Fire insurance is a contract wherebythe insurer, in consideration of thepremium paid, undertakes to makegood any loss or damage caused by fireduring a specified period upto theamount specified in the policy.Normally, the fire insurance policy isfor a period of one year after which it isto be renewed from time to time. Thepremium may be paid either in lumpsum or instalments. A claim for lossby fire must satisfy the two followingconditions:

(i) There must be actual loss; and(ii) Fire must be accidental and non-

intentional.The risk covered by a fire insurance

contract is the loss resulting from fireor some other cause, and which is theproximate cause of the loss. Ifoverheating without ignition causesdamage, it will not be regarded as a fireloss within the meaning of fireinsurance and the loss will not berecoverable from the insurer.

A fire insurance contract is basedon certain fundamental principles

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Difference between Life, Fire and Marine Insurance

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which have been discussed in generalprinciples. The main elements of a fireinsurance contract are:(i) In fire insurance, the insured must

have insurable interest in the subjectmatter of the insurance. Withoutinsurable interest the contract ofinsurance is void. In case of fireinsurance, unlike life insuranceinsurable interest must be presentboth at the time of insurance and atthe time of loss. For example, aperson has insurable interest in theproperty he owns, a businessmanhas insurable interest in his stock,plant, machinery and building, anagent has an insurable interest inthe property of his principal, apartner has insurable interest in theproperty of a partnership firm, anda mortgagee has insurable interestin the property, which is mortgaged.

(ii) Similar to the life insurancecontract, the contract of fireinsurance is a contract of utmostgood faith i.e., uberrimae fidei. The

insured should be truthful andhonest in giving information to theinsurance company regarding thesubject matter of the insurance. Heis duty-bound to discloseaccurately all facts regarding thenature of property and risksattached to it. The insurancecompany should also disclose thefacts of the policy to the proposer.

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(iv) The insurer is liable to compensateonly when fire is the proximatecause of damage or loss.

MARINE INSURANCE

A marine insurance contract is anagreement whereby the insurerundertakes to indemnify the insuredin the manner and to the extent therebyagreed against marine losses. Marineinsurance provides protection againstloss by marine perils or perils of the sea.Marine perils are collision of ship withthe rock, or ship attacked by theenemies, fire and captured by piratesand actions of the captains and crew ofthe ship. These perils cause damage,destruction or disappearance of theship and cargo and non-payment offreight. So, marine insurance insuresship hull, cargo and freight. Thus, it isa device wherein the insurer undertakesto compensate the owner of a ship orcargo for complete or partial loss at sea.The insurer gurantees to make good thelosses due to damage to the ship or cargoarising out of the risks incidental to seavoyages. The insurer in this case is knownas the underwriter and a certain sum ofmoney is paid by the insured inconsideration for the guarantee/protection he gets. Marine insurance isslightly different from other types. Thereare three things involved i.e., ship or hull,cargo or goods, and freight.(a) Ship or hull insurance: Since the

ship is exposed to many dangers atsea, the insurance policy is forindemnifying the insured for lossescaused by damage to the ship.

(b) Cargo insurance: The cargo whilebeing transported by ship is subjectto many risks. These may be at porti.e., risk of theft, lost goods or onvoyage etc. Thus, an insurancepolicy can be issued to cover againstsuch risks to cargo.

(c) Freight insurance: If the cargo doesnot reach the destination due todamage or loss in transit, theshipping company is not paid freightcharges. Freight insurance is forreimbursing the loss of freight to theshipping company i.e., the insured.

The fundamental principles ofmarine insurance are the same as thegeneral principles. The main elementsof a marine insurance contract are:(i) Unlike life insurance, the contract

of marine insurance is a contract ofindemnity. The insured can, in theevent of loss recover the actualamount of loss from the insurer.Under no circumstances, theinsured is allowed to make profitout of the marine insurancecontract. But cargo policies providecommercial indemnity rather thanstrict indemnity. The insurerspromise to indemnify the insured“in the manner and to the extentagreed.” In case of ‘Hull Policy’, theamount insured is fixed at a levelabove the current market value;

(ii) Similar to life and fire insurance, thecontract of marine insurance is acontract of utmost good faith. Boththe insured and insurer mustdisclose everything, which is in theirknowledge and can affect theinsurance contract. The insured is

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duty-bound to accurately discloseall facts which include the natureof shipment and the risk of damageit is exposed to;

(iii) Insurable interest must exist at thetime of loss but not necessary at thetime when the policy was taken;

(iv) The principle of causa proxima willapply to it. The insurance companywill be liable to pay only if thatparticular or nearest cause iscovered by the policy. For example,if a loss is caused by severalreasons then nearest cause of losswill be considered.

4.6 COMMUNICATION SERVICES

Communication services are helpful tothe business for establishing links withthe outside world viz., suppliers,customers, competitors etc. Businessdoes not exist in isolation, it has tocommunicate with others fortransmission of ideas and information.Communication services need to bevery efficient, accurate and fast for themto be effective. In this fast moving andcompetitive world it is essential to have

advanced technology for quickexchange of information. The electronicmedia is mainly responsible for thistransformation. The main serviceswhich help business can be classifiedinto postal and telecom.

Postal Services

Indian post and telegraph departmentprovides various postal services acrossIndia. For providing these services thewhole country has been divided into 22postal circles. These circles manage theday-to-day functioning of the varioushead post offices, sub-post offices andbranch post offices. Through theirregional and divisional levelarrangements the various facilitiesprovided by postal department arebroadly categorised into:(i) Financial facilities: These facilitiesare provided through the post office’ssavings schemes like Public ProvidentFund (PPF), Kisan Vikas Patra, andNational Saving Certificates in additionto normal retail banking functions ofmonthly income schemes, recurringdeposits, savings account, timedeposits and money order facility.

Indian Postal Network Realities

• 1,54,149 post offices• 5,64,701 letter boxes• 1,575 crore mails every year• 5,01,716 villages with public telephones (84 per cent of total villages)• 26,000 post offices already connected through network• Post Office Savings Bank is the largest retail bank of 1,50,000 plus branches• Total collections at Rs. 200,000 crores• Dedicated VSAT network via satellite of over 1200 post offices• Speed Post facility for over 1000 destinations in India• Links 97 major countries around the globe

Source: www.indiapost.gov.in

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(ii) Mail facilities: Mail services consistof parcel facilities that is trans-missionof articles from one place to another;registration facility to provide securityof the transmitted articles andinsurance facility to provide insurancecover for all risks in the course oftransmission by post.

Postal department also offers alliedfacilities of the following types:

1. Greeting post — A range ofdelightful greeting cards forevery occasion.

2. Media post — An innovativeand ef fect ive vehicle forIndian corporates to advertisetheir brand through postcards,envelopes, aerograms, tele-grams, and also throughletterboxes.

General Insurance

1. Health InsuranceHealth Insurance is a safeguard against rising medical costs. A health insurancepolicy is a contract between an insurer and an individual or group, in which theinsurer agrees to provide specified health insurance at an agreed-upon price(the premium). Depending upon the policy, premium may be payable either in alump sum or in instalments. Health insurance usually provides either directpayment or reimbursement for expenses associated with illness and injuries.The cost and range of protection provided by health insurance depends on theprovider and the policy purchased. In India, presently the health insuranceexists primarily in the form of Mediclaim policy offered to an individual or to anygroup, association or corporate bodies.

2. Motor Vehicle InsuranceMotor Vehicle Insurance falls under the classification of General Insurance.This insurance is becoming very popular and its importance increasing day-by-day. In motor insurance the owner’s liability to compensate people who werekilled or insured through negligence of the motorists or drivers is passed on tothe insurance company. The rate of premium under motor insurance isstandardised.

3. Burglary InsuranceBurglary insurance falls under the classification of insurance of property. Incase of burglary policy, the loss of damages of household goods and propertiesand personal effects due to theft, larceny, burglary, house-breaking and acts ofsuch nature are covered. The actual loss is compensated.(i) Insurable interest must exist at the time of loss but not necessarily at the

time when the policy was taken.

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(ii) The principle of causa proxima will apply to it. The insurance company willbe liable to pay only that particular or nearest cause that is covered by thepolicy. For example, if a loss is caused by several reasons then the nearestcause of loss will be considered.

4. Cattle InsuranceA contract of cattle insurance is a contract whereby a sum of money is secured tothe assured in the event of death of animals like bulls, buffaloes, cows and heifers.It is a contract against death resulting from accident, disease, or pregnantcondition as the case may be. The insurer usually undertakes to pay the excessin the event of loss.

5. Crop InsuranceA contract of crop insurance is a contract to provide a measure of financialsupport to farmers in the event of a crop failure due to drought or flood. Thisinsurance covers against all risks of loss or damages relating to production ofrice, wheat, millets, oil seeds and pulses etc.

6. Sports InsuranceThis policy assures a comprehensive cover available to amateur sportsmencovering their sporting equipment, personal effects, legal liability and personalaccident risks. If desired the cover can also be made available in respect of thenamed member of insured’s family residing with him. This cover is not availableto professional sportsmen. The cover is available in respect of any one or more ofthe following sports: angling, badminton, cricket, golf, lawn tennis, squash, use ofsporting guns.

7. Amartya Sen Siksha YojanaThis policy offered by the General Insurance Company secures the education ofdependent children. If the insured parent/legal guardian sustains any bodilyinjury resulting solely and directly from an accident, caused by external, violentand visible means and if such injury shall within twelve calendar months of itsoccurrence be the sole and direct cause of his/her death or permanent totaldisablement, the insurer shall indemnify the insured student, in respect of allcovered expenses to be incurred from the date of occurrence of such accident tillthe expiry date of policy or completion of the duration of covered course whicheveroccurs first and such indemnity shall not exceed the sum insured as stated in thepolicy schedule.

8. Rajeswari Mahila Kalyan Bima YojanaThis policy has been designed to provide relief to the family members of insuredwomen in case of their death or disablement arising due to all kinds of accidentsand/or death and/or disablement arising out of problems incidental to women only.

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3. Direct post is for direct advertising.It can be both addressed as wellas unaddressed.

4. International Money Transferthrough collaboration withWestern Union financial services,USA, which enables remittance ofmoney from 185 countries to India.

5. Passport facilities — A uniquepartnership with the ministry ofexternal affairs for facilitatingpassport application.

6. Speed Post: It has over 1000destinations in India and links with97 major countries across the globe.

7. e-bill post is the latest offering ofthe department to collect billpayment across the counter forBSNL and Bharti Airtel.

Telecom Services

World class telecommunicationsinfrastructure is the key to rapideconomic and social development of thecountry. It is in fact the backbone ofevery business activity. In today’s worldthe dream of doing business acrosscontinents will remain a dream in theabsence of telecom infrastructure.There have been far reachingdevelopments in the convergence oftelecom, IT, consumer electronics andmedia industries worldwide.Recognising the potential in enhancingquality of life and to facilitate India’svision of becoming IT super power bythe year 2025, new Telecom PolicyFramework 1999 and BroadbandPolicy 2004 were developed by theGovernment of India. Through thisframework the government intends to

provide both universal services toall uncovered areas and high-levelservices for meeting the needs of thecountry’s economy.

The various types of telecomservices are:(i) Cellular mobile services: These areall types of mobile telecom servicesincluding voice and non-voicemessages, data services and PCOservices utilising any type of networkequipment within their service area.They can also provide direct interconnectivity with any other type oftelecom service provider.(ii) Radio paging services: RadioPaging Service is an affordable meansof transmitting information to personseven when they are mobile. It is a one-way information broadcasting solution,and has spread its reach far and wide.Radio paging services are availableincluding tone only, numeric only andalpha/numeric paging.(iii) Fixed line services: These are alltypes of fixed services including voiceand non-voice messages and dataservices to establish linkages for longdistance traffic. These utilise any typeof network equipment primarilyconnected through fiber optic cableslaid across the length and breadth ofthe country. The also provide interconnectivity with other types of telecomservices.(iv) Cable services: These are linkagesand switched services within a licensedarea of operation to operate mediaservices, which are essentially one wayentertainment related services. The twoway communication including voice,

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data and information services throughcable network would emerge significantlyin the future. Offering services throughthe cable network would be similar toproviding fixed services.(v) VSAT services: VSAT (Very SmallAperture Terminal) is a satellite-basedcommunications service. It offersbusinesses and government agenciesa highly flexible and reliablecommunication solution in bothurban and rural areas. Compared toland-based services, VSAT offersthe assurance of reliable anduninterrupted service that is equal toor better than land-based services. Itcan be used to provide innovativeapplications such as tele-medicine,newspapers-on-line, market rates andtele-education even in the most remoteareas of our country.(vi) DTH services: DTH (Direct toHome) is again a satellite based mediaservices provided by cellularcompanies. One can receive mediaservices directly through a satellite withthe help of a small dish antenna and a

set top box. The service provider of DTHservices provides a bouquet of multiplechannels. It can be viewed on ourtelevision without being dependent onthe services provided by the cablenetwork services provider.

4.7 TRANSPORTATION

Transportation comprises freightservices together with supporting andauxiliary services by all modes oftransportation i.e., rail, road, air andsea for the movement of goods andinternational carriage of passengers.You have already studied thecomparative advantages anddisadvantages of different modes oftransportation in earlier classes. Theirservices are considered to be importantfor business since speed is of essencein any business transaction. Alsotransportation removes the hindranceof place, i.e., it makes goods availableto the consumer from the place ofproduction. We need to develop ourtransportation system to keep pace

Infrastructure in Transportation

In the first, 50 years of independence, India saw the construction of around13, 000 kilometers of national highways. The ambitious NHAI, Government ofIndia’s project consisting of Golden Quadrilateral connecting Delhi-Kolkata-Chennai-Mumbai and the North-South, East-West corridors linking Srinagar toKanyakumari and Silchar to Porbandar will see the construction of 13,151 kmsof National Highways within a span of eight years. This project will not onlychange the face of road transport in India, but it will also have a lasting impacton our economy. The Ministry of Railways have also done massive innovationsin their movement and monitoring of goods trains to facilitate the needs of thebusiness community.

The Government of India is also serious in ensuring better and more facilities atthe seaports and airports to provide an impetus to business activities. Thegovernment plans not only to enhance capacities of existing ports but also todevelop modern and new ports at strategic locations.

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with the requirements of our economy.We need better infrastructure of roadswith sufficient width and high quality.We have few ports and they too arecongested. Both government andindustry needs to be proactive and viewthe effective functioning of this serviceas a necessity for providing a lifeline toa business services. In sectors likeagriculture and food, there are massivelosses of product in the process oftransportation and storage.

Warehousing

Storage has always been an importantaspect of economic development. Thewarehouse was initially viewed as astatic unit for keeping and storinggoods in a scientific and systematicmanner so as to maintain their originalquality, value and usefulness.The typical warehouse receivedmerchandise by rail, truck or bullockcart. The items were moved manuallyto a storage within the warehouse andhand piled in stacks on the floor. Theyare used by manufacturers, importers,exporters, wholesalers, transportbusiness, customs etc., in India.

Today’s warehouses have ceased tobe a mere storage service providers andhave really become logistical serviceproviders in a cost efficient manner.That is making available the rightquantity, at the right place, in the righttime, in the right physical form at theright cost. Modern warehouses areautomated with automatic conveyors,computer operated cranes and forkliftsfor moving goods and also usage of

logistics automation software’s forwarehouse management.

Types of Warehouses

(i) Private warehouses: Privatewarehouses are operated, owned orleased by a company handling theirown goods, such as retail chainstores or multi-brand multi-productcompanies. As a general rule an efficientwarehouse is planned around amaterial handling system in order toencourage maximum efficiency ofproduct movement. The benefit ofprivate warehousing includes control,flexibility, and other benefits likeimproved dealer relations.(ii) Public warehouses: Publicwarehouses can be used for storage ofgoods by traders, manufacturers orany member of the public after thepayment of a storage fee or charges.The government regulates the operationof these warehouses by issuing licencesfor them to private parties.

The owner of the warehouse standsas an agent of the owner of the goodsand is expected to take appropriate careof the goods.

These warehouses provide otherfacilities also like transportation by railand road. They are responsible for thefull safety of the goods. Smallmanufacturers find it very convenientas they cannot afford to construct theirown warehouses.

The other benefits include flexibilityin the number of locations, no fixed costand capability of offering value addedservices like packaging and labelling.

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(iii) Bonded warehouses: Bondedwarehouses are licensed by thegovernment to accept imported goodsprior to payment of tax and customsduty. These are goods which areimported from other countries.Importers are not permitted to removegoods from the docks or the airport tillcustoms duty is paid.

At times, importers are not in aposition to pay the duty in full or doesnot require all the goods immediately.The goods are kept in bondedwarehouses by the customs authoritiestill the customs duty is paid. Thesegoods are said to be in bond.

These warehouses have facilities forbranding, packaging, grading andblending. Importers may bring theirbuyers for inspection of goods andrepackage them according to theirrequirements. Thus, it facilitatesmarketing of goods.

Goods can be removed in part asand when required by the importersand buyers, and import duty can bepaid in instalments.

The importer need not block fundsfor payment of import duties before thegoods are sold or used. Even if he wishesto export the goods kept in the bondedwarehouse he may do so withoutpayment of customs duty. Thus, bondedwarehouses facilitate entrepot trade.(iv) Government warehouses: Thesewarehouses are fully owned andmanaged by the government. Thegovernment manages them throughorganisations set up in the publicsector. For example, Food Corporationof India, State Trading Corporation,and Central Warehousing Corporation.

(v) Cooperative warehouses: Somemarketing cooperative societies oragricultural cooperative socities haveset up their own warehouses formembers of their cooperative society.

Functions of warehousing

The functions of warehousing arediscussed as follows:(a) Consolidation: In this function

the warehouse receives andconsolidates, materials/goods fromdifferent production plants anddispatches the same to a particularcustomer on a single transportationshipment.

(b) Break the bulk: The warehouseperforms the function of dividingthe bulk quantity of goods receivedfrom the production plants intosmaller quantities. These smallerquantities are then transportedaccording to the requirements ofclients to their places of business.

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(c) Stock piling: The next function ofwarehousing is the seasonal storageof goods to select businesses. Goodsor raw materials which are notrequired immediately for sale ormanufacturing are stored inwarehouses. They are made availableto business depending on customersdemand. Agricultural productswhich are harvested at specific timeswith subsequent consumptionthrough out the year also need to bestored and released in lots.

(d) Value added services: Certainvalue added services are alsoprovided by the warehouses, suchas in transit mixing, packaging andlabelling. Goods sometimes need to

Central Warehousing Corporation

At present a central government undertaking CWC i.e., Central WarehousingCorporation provides these services for businessmen across the country. Privatewarehousing companies like TCI, Shanker International, Blue Dart, DHL etc.,are providing cargo facilities of both transportation and warehousing.

be opened and repackaged andlabelled again at the time ofinspection by prospective buyers.Grading according to quantity anddividing goods in smaller lots isanother function.

(e) Price stablisation: By adjustingthe supply of goods with thedemand situation, warehousingperforms the function of stabilisingprices. Thus, prices are controlledwhen supply is increasing anddemand is slack and vice versa.

(f) Financing: Warehouse ownersadvance money to the owners onsecurity of goods and furthersupply goods on credit terms tocustomers.

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Key Terms

Business services Insurance Subrogation Fire insurance

Banking Insurable interest Contribution Marine insurance

e-Banking Indemnity Mitigation Telecom services

Commercial banks Proximate cause Life insurance Warehousing

SUMMARY

Nature of services: Services are those separately identifiable, essentiallyintangible activities that provide satisfaction of wants, and are notnecessarily linked to the sale of a product or another service. There are fivebasic features of services. These features also distinguish them from goodsand are known as the five Is of services i.e., Intangibility, Inconsistency,Inseparability, Inventory (less), Involvement.

Difference between services and goods: While goods are produced,services are performed. A service is an act which cannot be taken home.What we can take home is the effect of the services. And as the services aresold at the consumption point, there are no inventories.

Types of services: Business Services, Social Services, Personal Services.

Business services: In order to be competitive, business enterprises arebecoming more and more dependent on specialised business services.Business enterprises look towards banks for availability of funds; insurancecompanies for getting their plant, machinery, goods, etc., insured; transportcompanies for transporting raw material and finished goods; and telecomand postal services for being in touch with their vendors, suppliers andcustomers.

Banking: A banking company in India is one which transacts the businessof banking which means accepting, for the purpose of lending and investmentof deposits of money from the public, repayable on demand or otherwise andwithdrawable by cheques, draft, order or otherwise.

Type of banks: Banks can be classified into the following i.e., commercialbanks, cooperative banks, specialised banks, central bank.

Functions of commercial bank: Some of them are the basic or primaryfunctions of a bank while others are agency services or general utility servicesin nature. Acceptance of deposits, lending of funds, cheque facility, remittanceof funds, allied services.

e-Banking: The latest wave in information technology is internet banking. Itis a part of virtual banking and another delivery channel for customers.e-banking is electronic banking or banking using the electronic media. Thus,

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e-banking is a service provided by many banks, that allows a customer toconduct banking transactions, such as managing savings, checkingaccounts, applying for loans or paying bills over the internet using a personalcomputer, mobile telephone or handheld computer (personal digital assistant)

Insurance: Insurance is thus a device by which the loss likely to be causedby an uncertain event is spread over a number of persons who are exposedto it and who are prepared to insure themselves against such an event. It isa contract or agreement under which one party agrees in return for aconsideration to pay an agreed amount of money to another party to makegood a loss, damage or injury to something of value in which the insured hasa pecuniary interest as a result of some uncertain event.

Fundamental principle of insurance: The basic principle of insurance isthat an individual or a business concern chooses to spend a definitely knownsum in place of a possible huge amount involved in an indefinite future loss.Insurance, therefore, is a form of risk management primarily used to safeguard against the risk of potential financial loss.

Functions of insurance: Providing certainty, Protection, Risk sharing, Assistin capital formation.

Principles of Insurance

Utmost good faith: A contract of insurance is a contract of uberrimae fideii.e. a contract found on utmost good faith. Both the insurer and the insureddisplay good faith towards each other in regard to the contract.

Insurable interest: The insured must have an insurable interest in thesubject matter of insurance.

Insurable interest means some pecuniary interest in the subject matter ofthe insurance contract.

Indemnity: According to it, the insurer undertakes to put the insured, inthe event of loss, in the same position that he occupied immediately beforethe happening of the event insured against.

Proximate cause: When the loss is the result of two or more causes, theproximate cause means the direct, the most dominant and most effectivecause of which the loss is a natural consequence.

Subrogation: It refers to the right of the insurer to stand in the place of theinsured, after settlement of a claim, as far as the right of the insured inrespect of recovery from an alternative source is involved.

Contribution: As per this principle it is the right of an insurer who has paidclaim under an insurance, to call upon other liable insurers to contributefor the loss payment.

Mitigation: This principles states that it is the duty of the insured to takereasonable steps to minimise the loss or damage to the insured property.

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Types of Insurance

Life insurance: Life insurance may be defined as a contract in which theinsurer, in consideration of a certain premium, either in a lump sum or byother periodical payments, agrees to pay to the assured, or to the personfor whose benefit the policy is taken, the assured sum of money, on thehappening of a specified event contingent on the human life or at the expiryof a certain period.

This insurance provides protection to the family at premature death of anindividual or gives adequate amount at an old age when earning capacitiesare reduced. The insurance is not only a protection but is a sort of investmentbecause a certain sum is returnable to the insured at the time of death or atthe expiry of a certain period.

The main elements of a life insurance contract are:

(i) The life insurance contract must have all the essentials of a validcontract.

(ii) The contract of life insurance is a contract of utmost good faith.

(iii) In life insurance, the insured must have insurable interest in the lifeassured.

(iv) Life insurance contract is not a contract of indemnity.

Types of life insurance policies: People have different requirements andtherefore they would like a policy to fulfill all their needs. The needs of peoplefor life insurance can be family needs, children’s needs, old age and specialneeds. To meet the needs of people the insurer’s have developed differenttypes of products such as Whole Life Assurance, Endowment type plans,combination of Whole Life and Endowment type plans, Children’s Assuranceplans and Annuity plans.

Fire insurance: Fire insurance is a contract whereby the insurer, inconsideration of the premium paid, undertakes to make good any loss ordamage caused by a fire during a specified period upto the amount specifiedin the policy.

The main elements of a fire insurance contract are:

(i) In fire insurance, the insured must have insurable interest in thesubject matter of the insurance.

(ii) Similar to the life insurance contract, the contract of fire insurance is acontract of utmost good faith i.e uberrimae fidei.

(iii) The contract of fire insurance is a contract of strict indemnity.

(iv) The insurer is liable to compensate only when fire is the proximatecause of damage or loss.

Marine insurance: A marine insurance contract is an agreement wherebythe insurer undertakes to indemnify the insured in the manner and to theextent thereby agreed against marine losses. Marine insurance provides

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protection against loss by marine perils or perils of the sea. Marine insuranceis slightly different from other types. There are three things involved i.e. shipor hull, cargo or goods and freight.

The main elements of a marine insurance contract are:

(i) Unlike life insurance, the contract of marine insurance is a contractof indemnity.

(ii) Similar to life and fire insurance, the contract of marine insurance isa contract of utmost good faith.

(iii) Insurable interest must exist at the time of loss.

(iv) The principle of causa proxima will apply to it.

Communication services: Communication services are helpful to businessfor establishing links with the outside world viz., suppliers, customers,competitors etc. The main services which help business can be classifiedinto postal and telecom.

Postal services: Various facilities provided by postal department are broadlycategorised into financial facilities, mail facilities.

Telecom services: The various types of telecom services are of the followingtypes: Cellular Mobile Services, Radio Paging Services, Fixed line services,Cable Services, VSAT Services, DTH services.

Transportation: Transportation comprises freight services together withsupporting and auxiliary services by all modes of transportation i.e. rail,road, air and sea for the movement of goods and international carriage ofpassengers.

Warehousing: The warehouse was initially viewed as a static unit for keepingand storing goods in a scientific and systematic manner so as to maintaintheir original quality, value and usefulness.

Today’s warehouses have ceased to be mere storage service providers andhave really become logistical service providers in a cost efficient manner.

Types of warehouses: private warehouses, public warehouses,bondedwarehouses, government warehouses, cooperative warehouses.

Functions of warehousing: The functions of warehousing are normallydiscussed as follows : consolidation, break the bulk, stock piling, value addedservices, price stablisation, financing.

EXERCISES

Multiple Choice Questions

1. DTH services are provided by________.

a. Transport companies. b. Banksc. Cellular companies d. None of the above

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2. The benefits of public warehousing includes_______.

a. Control b. Flexibilityc. Dealer relationship d. None of the above

3. Which of the following is not a function of insurance?

a. Risk sharing b. Assist in capitalformation

c. Lending of funds d. None of the above

4. Which of the following is not applicable in life insurance contract?

a. Conditional contract b. Unilateral contractc. Indemnity contract d. None of the above

5. CWC stands for_______.

a. Central Water Commission b. Central WarehousingCommission

c. Central Warehousing Corporation d. Central WaterCorporation

Short Answer Questions

1. Define services and goods.

2. What is e-banking. What are the advantages of e-banking?

3. Write a note on various telecom services available for enhancingbusiness.

4. Explain briefly the principles of insurance with suitable examples.

5. Explain warehousing and its functions.

Long Answer Questions

1. What are services? Explain their distinct characteristics?

2. Explain the functions of commercial banks with an example of each.

3. Write a detailed note on various facilities offered by Indian PostalDepartment.

4. Describe various types of insurance and examine the nature of risksprotected by each type of insurance.

5. Explain in detail the warehousing services.

Projects/Assignments

1. Identify a list of various services you use on a regular basis and identifytheir distinct characteristics.

2. Do a project on banking services. Approach a nearby bank and collectinformation about various facilities offered by them and also collectleaflets about salient features of different schemes. Compile and suggestwhat extra services you feel the bank should be providing.