Big picture
No business can run on its own. It needs a bank to hold and lend money, insurance to cover risks, transport to move goods, warehouses to store them, and communication to stay in touch. These business services support trade and industry.
Services are different from goods: you can't touch them or store them, and they are produced and consumed at the same time. This chapter explains the nature of services and the main business services, with the principles of insurance being a frequent exam topic.
Learning goals
Explain the nature of services and distinguish services from goods.
Classify services as business, social and personal.
Explain the types and functions of banks, and e-banking.
Explain the principles of insurance and the types of insurance.
Explain communication and transportation services.
Explain the types and functions of warehouses.
Core ideas
1. Nature of services
Feature | Meaning | Example |
|---|---|---|
Intangibility | Services can't be touched; they are experienced | A doctor's treatment |
Inconsistency | Each delivery may differ, because demands and providers vary | Two haircuts by the same barber may not be identical |
Inseparability | Production and consumption happen at the same time | A teacher's lecture is delivered and received together |
Inventory (less) | Services can't be stored for future use | Unsold cinema seats for a show are lost |
Involvement | The customer takes part in delivering the service | A customer specifies the design of a dress to a tailor |
Goods and services compared
Basis | Goods | Services |
|---|---|---|
Nature | Tangible | Intangible |
Type | Homogeneous (standardised) | Heterogeneous (vary) |
Inseparability | Production and consumption can be separated | Produced and consumed simultaneously |
Storage | Can be stored | Can't be stored |
Customer involvement | Not possible during production | Possible |
Types of services: business services (used by businesses: banking, insurance, transport, warehousing, communication); social services (provided voluntarily for social goals: education and health care by NGOs); personal services (experienced differently by each customer: tourism, restaurants, recreation).
2. Banking
A bank accepts deposits from the public, repayable on demand or otherwise, and lends or invests them.
Types of banks
Type | Role |
|---|---|
Commercial banks | Public sector, private sector and foreign banks that accept deposits and lend to the public |
Cooperative banks | Formed under cooperative laws; provide cheap credit, mostly to members |
Specialised banks | Banks for specific purposes, such as foreign exchange banks, industrial banks and export-import banks |
Central bank | The apex bank (the RBI) that supervises and controls the banking system |
Functions of commercial banks
Accepting deposits: current accounts (for businesses; unlimited transactions, usually no interest), savings accounts (for individuals; limited withdrawals, interest paid) and fixed deposits (for a fixed period; higher interest).
Lending funds: overdraft (withdrawing more than the balance up to a limit), cash credit (borrowing against security up to a limit), loans and advances, and discounting of bills of exchange (paying the bill's value before maturity, less a discount).
Cheque facility: a safe way to pay without carrying cash.
Remittance of funds: transfer of money between places by draft, NEFT, RTGS and so on.
Allied services: lockers, collecting dividends, paying bills and premiums, and buying and selling securities on behalf of customers.
E-banking (electronic banking) allows banking through the internet and mobile phones.
Service | Use |
|---|---|
NEFT (National Electronic Funds Transfer) | Transferring funds between banks in batches |
RTGS (Real Time Gross Settlement) | Instant transfer of large amounts |
IMPS (Immediate Payment Service) | Instant transfer round the clock through mobile and internet |
UPI (Unified Payments Interface) | Instant mobile payments using a virtual payment address or QR code |
ATMs, debit and credit cards | Cash withdrawal and payments |
Benefits of e-banking: 24 × 7 service; transactions from anywhere; lower transaction costs for banks and customers; greater customer satisfaction; and less cash handling. Concerns: security risks such as fraud and phishing, and the need for digital literacy.
3. Insurance
Insurance is a contract in which the insurer agrees, in return for a payment called the premium, to compensate the insured for a loss caused by a specified risk. The document is the policy. Insurance works on the principle of pooling risk: many people pay small premiums, and the few who suffer losses are compensated.
Principles of insurance
Principle | Meaning | Example |
|---|---|---|
Utmost good faith (uberrimae fidei) | Both parties must disclose all material facts truthfully | Hiding a known heart condition when taking life insurance can make the policy void |
Insurable interest | The insured must have a financial interest in the subject matter, so that they would suffer a loss | A person can insure their own house but not a neighbour's |
Indemnity | The insured is compensated only for the actual loss, not to make a profit (doesn't apply to life insurance) | A house insured for ₹50 lakh suffers fire damage of ₹10 lakh; the insurer pays ₹10 lakh |
Proximate cause | The loss must be caused by the nearest, most direct cause covered by the policy | Goods insured against fire are damaged by water used to put out the fire; fire is the proximate cause, so the claim is paid |
Subrogation | After compensating, the insurer takes over the insured's rights against third parties and to the damaged property | After paying for a damaged car, the insurer can sell the salvage or sue the driver at fault |
Contribution | If the same property is insured with several insurers, they share the loss in proportion to their policies | Two insurers covering the same warehouse share the claim |
Mitigation | The insured must take reasonable steps to minimise the loss | The owner of a burning shop must try to save goods and call the fire brigade |
Types of insurance
Type | Covers | Variants or examples |
|---|---|---|
Life insurance | Payment on death of the insured, or on maturity | Whole life policy (paid on death), endowment policy (paid on maturity or earlier death), joint life policy (two or more lives, paid on the first death), annuity policy (regular payments after a certain age), children's endowment policy (for children's education or marriage) |
Health insurance | Medical and hospital expenses | Individual and family floater policies |
Fire insurance | Loss or damage by fire | The fire must be accidental, and there must be actual fire |
Marine insurance | Risks of sea voyages | Hull insurance (the ship), cargo insurance (the goods), freight insurance (the shipping company's freight earnings) |
Life insurance is a contract of assurance, not indemnity, because a human life can't be valued in money; all other types are contracts of indemnity.
4. Communication services
Communication links businesses with customers, suppliers and others. Postal services (India Post) provide mail (letters, registered post, parcels), speed post, financial services (money orders, savings schemes and the India Post Payments Bank), and courier services from private firms. Telecom services include mobile and fixed-line telephony, broadband internet, video conferencing and data services, which enable e-commerce and online business.
5. Transportation
Transport removes the hindrance of place by moving goods and people. Modes are road, rail, water (inland and ocean), air and pipelines. The choice depends on cost, speed, distance, the nature of goods (perishable or bulky) and reliability.
6. Warehousing
A warehouse is a place for storing goods in a systematic way until they are needed. It removes the hindrance of time.
Types of warehouses
Type | Feature |
|---|---|
Private warehouse | Owned by a manufacturer or trader for their own goods |
Public warehouse | Used by anyone for a fee; licensed by the government |
Bonded warehouse | Licensed to store imported goods before customs duty is paid; the importer can pay duty in instalments as goods are taken out |
Government warehouse | Owned and managed by government, such as the Central Warehousing Corporation and the Food Corporation of India |
Cooperative warehouse | Owned by cooperative societies for their members at low cost |
Functions of warehousing
Function | Meaning |
|---|---|
Consolidation | Goods from different producers are combined into one full load for a customer |
Break the bulk | Large quantities are divided into smaller lots for customers |
Stockpiling | Seasonal goods are stored and supplied through the year |
Value-added services | Packaging, grading, labelling and branding at the warehouse |
Price stabilisation | Supply is matched to demand, preventing sharp price swings |
Financing | Warehouse receipts can be used as security for bank loans |
A reliable approach to case-based questions
For a feature of services, look for the clue: can't be touched (intangibility), varies each time (inconsistency), produced and used together (inseparability), can't be stored (inventory), customer participates (involvement).
For insurance, identify the principle from what happens: hiding facts (utmost good faith), no stake in the property (insurable interest), claim limited to the actual loss (indemnity), insurer takes over rights (subrogation), several insurers share (contribution), nearest cause (proximate cause), duty to reduce loss (mitigation).
For warehouses, imported goods awaiting duty: bonded; open to anyone for a fee: public.
Connections that matter
Evolution and fundamentals of business introduced auxiliaries to trade; this chapter explains them.
Emerging modes of business builds on e-banking and digital payments.
International trade relies on marine insurance, bonded warehouses and foreign exchange banks.
Common mistakes
Saying the principle of indemnity applies to life insurance. Life insurance is a contract of assurance.
Confusing subrogation and contribution. Subrogation transfers rights to the insurer; contribution shares a loss among insurers.
Calling a bonded warehouse a private warehouse. It stores imported goods before duty is paid.
Saying services can be stored.
Revision checklist
I can explain the five features of services and compare goods and services.
I can explain the types and functions of banks and e-banking services.
I can explain all seven principles of insurance with examples.
I can explain life, health, fire and marine insurance and their variants.
I can explain the types and functions of warehouses.