Basics of Banking – SLU 3.

Session Objectives:

Post this session, you will be able to:

Familiarize yourselves on
1. Certain important Government Sponsored Investment Schemes
2. Need for and importance of sale of TPP
3. Bancassurance & Mutual Funds

Introduction:
This session highlights the importance of sale of other products by the bank. We all know that the basic function of a bank is accepting
deposits from customers and in turn lend the same to the needy borrowers and in the bargain earn interest income.
With the business models in the bank changing drastically by 2000, banks who were saddled with NPAs and tighter monitoring norms
also specified Capital Adequacy Ratio to be maintained by banks, they started exploring other modes of income generation which is risk
free and no impact on Capital. Hence the TPP or Third Party Products selling came in a big way into banking sector.

In this session, we will learn about various such products which are not owned by the bank (not a banking product) but are sold to
banks customers and earn fee income from sale. The Government Sponsored Investment Schemes that are to be promoted and
popularized particularly amongst the customers matching their needs. The Bank gets a commission for actively promoting these
schemes which will add to the non-interest income and profitability. The Bancassurance business in which the bank plays a role of an
agent to the insurance companies (both life and nonlife) & the Mutual Fund business, which is gaining huge popularity in the retail
segment.

By just having a clear understanding about these schemes and pitching them rightly, you would be helping the Bank in earning
substantial income alongside being a social catalyst.

We will have an overview of the various schemes and products in this session. A more elaborate discussion on the same will be done in
the Retail Banking products sessions

1
Knowledge:

Atal Pension Yojana

Objective

To provide old age income security of the working poor in unorganized sector and to encourage them to voluntarily save for their
retirement.
Swavalamban Scheme started in 2011-2012 is renamed as Atal pension Scheme in 2015-2016, a National Pension System (NPS)
administered by the Pension Fund Regulatory and Development Authority (PFRDA).
This is a Social Security Scheme initiated by Government of India in 2015.

Features

Under the APY, the subscribers would receive the fixed minimum pension of Rs. 1000 per month, Rs. 2000 per month, Rs. 3000 per
month, Rs. 4000 per month, Rs. 5000 per month, at the age of 60 years, depending on their contributions.
The scheme allows a subscriber to decrease or increase pension amount during the course of accumulation phase, once in a year.

Senior Citizens Savings Scheme

Some of the Features of the scheme are :

 Scheme for persons who have completed 60 years or above

 Applicable for 55 years of age if retired under superannuation/ VRS
 A retired Personnel of Defence Services (Excluding Civilian Defence Employees), above 50 years of age and below 60 years of

2
 age
 Can be opened individually or jointly with spouse.
 NRIs are not eligible to open the account.
 If the person becomes NRI during currency of the scheme, scheme will continue till maturity. Further extension not allowed.
 HUF is not eligible to open the account.
 Present Interest rate is 7.40% p.a for the current April-June2021 quarter.
 Minimum Amount of investment Rs 1000/- or multiples of Rs 1000/- maximum amount of Deposit Rs 15 lakhs.

Sukanya Samruddhi Yojana - Initiative under Beti Padao, Beti Bachao

Features:
o To promote the welfare of the girl child
Scheme for natural/legal guardian on behalf of a girl child.

Eligibility
o The account may be opened by the guardian in the name of a girl child from the birth of the girl child till she completes the
age of 10 years
o Guardian of a girl child shall be allowed to open two accounts for maximum two girl children only or three accounts if twin
girls are born in the second birth or triplets are born in the first birth
Duration
o Deposit for a period of 21 years from date of opening of account. The account can be closed on maturity after 21 years from
the date of account opening or at the time of marriage of girl child after attaining age of 18 years. (1 month before or 3
months after date of marriage),
o Minimum tenure of contribution is 15 years from the date of opening of account.
o Withdrawal allowed up to 50% for the girl’s higher education and marriage after she attains 18 years of age

3
Monetary Limits
o Initial Minimum Deposit Rs.250/-in a F.Y. Maximum Rs1.50 lakhs in a F.Y

PUBLIC PROVIDENT SCHEME

A PPF or Public Provident Fund is a savings scheme offered by the Government of India. The interest on the account is paid by the
government of India and set every quarter. It is also tax-free. The applicable PPF interest rate for 1st July 2021 to 30th September 2021
(Q2 FY 2021-22) has been fixed at 7.1%.

Importance of Opening a PPF Account

 The principal and interest in the PPF account are guaranteed by the Government.
 Contributions to the account up to Rs 1.5 lakh per annum are tax-free. Interest on the PPF account is also tax-free.
 Interest Rate for the PPF account is declared by the Government every quarter. PPF returns are higher than FD rates of many
banks in that period.
 The PPF account is immune from attachment from any order or decree of any court under the Government Savings Banks Act,
1873.

Minimum and Maximum Contribution

The minimum annual contribution is Rs 500 and the maximum is capped at Rs. 1.5 lakh per year. The maximum limit applies to
contributions made by a person for himself and for a minor child. There can be a maximum of 12 contributions in a year.

PPF Interest

PPF is a fixed income investment. The interest rate on PPF account is notified by the central government every quarter.

National Pension System

4
A New Pension Scheme (Contribution based Pension Scheme) now called National Pension System (NPS), was introduced for Central
Government employees vide Ministry of Finance (Department of Economic Affairs) Notification No. 5/7/2003- ECB & PR dated 22nd
December 2003. NPS was made mandatory for all new recruits to the Central Government service (except the armed forces) from 1st
January 2004.

NPS is applicable for bank employees joining Bank's services on or after 01st April 2010. Employees shall contribute 10% of Pay and
Dearness Allowance towards the Defined Contributory Pension Scheme and the Bank shall make a matching contribution in respect of
these employees. There shall be no separate Provident fund for employees joining services of Banks on or after 01st April 2010.

The National Pension System (NPS) is being administered and regulated by Pension Fund Regulatory and Development Authority
(PFRDA) set up under PFRDA Act, 2013. (23rd August 2013). PFRDA has appointed the National Securities Depository Ltd (NSDL) as a
Central Recordkeeping Agency (CRA), Bank of India as a Trustee Bank and other intermediaries (Point of Presence) involved in the NPS.
NSDL, the CRA shall issue a Permanent Retirement Account Number (12-digit PRAN) to each subscriber and maintain data base of each
Permanent Retirement account along with related recording transactions. Stock Holding Corporation of India (SCHIL) is the Custodian
under NPS and is responsible for the custody of underlying assets.

Equity Linked Savings Scheme (ELSS)

 Equity Linked Savings Scheme or ELSS Funds are tax-saving equity mutual funds.
 ELSS funds are also called tax saving schemes since they offer tax exemption of up to Rs. 150,000 from your annual taxable
income under Section 80C of the Income Tax Act.
 These schemes have a mandatory lock-in period of 3 years. Therefore, on redeeming the units, you receive long-term capital
gains or LTCG. These gains are not taxable up to Rs. 1 lakh in one financial year. Any LTCG above this limit is taxed at 10% of the
gains exceeding Rs. 1 lakh without indexation.
 Investors can continue their invested amount after the stipulated lock-in period of 3 years for as long as they want.
 Most ELSS schemes allow investors to start investing with as low as Rs.500. This will enable the ease of investment. It allows the

5
 investors to invest in small amounts and avail tax benefits along with an opportunity to create wealth.(SIP)

Bancassurance:

In India, the process of Bancassurance began in 2000. IRDA came up with regulation on registration of Indian companies. Government
of India also issued a Notification specifying 'Insurance' as a permissible form of business that could be undertaken by banks under
Section 6(1)(o) of the Banking Regulation Act, 1949. Until then, it was mainly the agents channel with was sourcing the business either
through open market sourcing or through the references from existing customers.

Bancassurance is an arrangement between a bank and an insurance company allowing the insurance company to sell its products to the
bank's client base. This partnership arrangement can be profitable for both companies. While the Insurance companies got access to
the large network of bank branches and the large client base and utilised the relationship of these customers with the bank which
became the front end of the sales process, the banks earned substantial income by way of commission earned out of selling insurance
products.
The bancassurance model works on LG and LC concepts. LG- The Lead Generator is the bank employee who is in touch with the
customer and explores the business opportunities post servicing. The lead is then passed on to the Insurance company employees who
meet the prospective customer along with the bank employee (LG) and convert them to business. Such employees are known as LC-
Lead Converters. In many occasions the LG and LC can be the same employee of the bank. However, IRDA has made it mandatory for
bank employees to be SP certified (Specified person) through the IRDA to be eligible to sell Insurance products.

Mutual Funds:

Capital Markets are always enticing the investors to put their hard earned money in the stocks. However owing to various reasons, the
investors would be skeptical to invest in the markets. It could be

1. Lack of adequate knowledge

6
 2. Lack of time to monitor their investments
3. Lack of large sum of money which will create a portfolio.

For all such retail investors, Mutual Funds are the right choice.

Concept of Mutual Fund:

 Traditional investments are giving limited returns and the investors are looking for better opportunities. Capital markets give
these opportunities to the investors. But investment in capital markets are sophisticated and complex. Hence to invest in capital
market investor requires guidance and expertise which is provided by Mutual Funds.
 Mutual Funds serve as a link between investors and capital markets
 Mutual Funds are a common pool of money contributed by multiple investors
 This pool of money is invested in securities accordance with a stated objective
 The ownership of the fund is thus joint or mutual, the fund belongs to all investors
 A mutual fund uses the money collected from investors to buy those assets which are specifically permitted by its stated
objective.

Who can Invest:

Residents: Individuals and Non-Individuals
Non-Residents: NRI, FII’S registered with SEBI, Person of Indian Origin
Who cannot Invest:
Foreign Nationals, Overseas Corporate Bodies

Know your Customer (KYC) Details have to be obtained before taking the investment

Investment Mode:
1. Can invest in lump sum
2. Can invest in monthly instalments known as Systematic Investment Plan

Investment Options:

7
 1. Growth option
2. Dividend Option
 Payout
 Reinvest

1. Your Action:

During your interaction with your customers, identify those who are perfect fits for these schemes and educate them on these. For this,
you must always be updated on the recent developments by reading the circulars issued by the Bank, RBI Master Directives so that you
are abreast. These schemes have been introduced with an avowed objective of helping the subscribers in financial upliftment, ensuring
higher returns and offering retirement benefits. Your advice would ensure that the benefits of these schemes reach the last man in the
queue.

Sri Bheemappa is a carpenter. He is aged 32 years. He has two daughters aged 7 years and 9 years. He has regular dealings with you
under the SB account. He is perturbed about the future of his children given his limited resources and income. He has expressed this to
you. Can you advise him on any good scheme of the Government?

Ms Sakshi, aged 29 years, is a SB customer of your Bank drawing her salary through her account with your branch. She approaches you
one day seeking you advice on some investment options. She would like to invest around Rs.10,000 monthly. She has read somewhere
that she can get a tax exemption too on such investments. What would be the scheme that you would suggest? Can you explain the
salient features?

Mr Ramesh is an young executive working in an MNC. While he has surplus money to invest, he is apprehensive about the Capital
Markets and investments in stocks. What can we suggest him and why?

Sri Ramanna Murthy is your SB customer. He is aged 59 years and works in a Public Sector. His son – Sri Vallabh has recently secured a
job as a Lecturer in a Private College. When you congratulate Ramanna Murthy on this, he regrets that his son’s generation are not

8
assured of any fixed income post retirement. Can you see an opportunity here to offer some advise for his son?

Knowledge Check
Question No.1: What is the duration of deposit under Sukanya Samruddhi Scheme?
(a) 21 years from the date of account opening
(b) 10 years from the date of account opening
(c) Till the girl child attains the age of 18 years
(d) Till the girl child is married.

Correct Answer: (a) 21 years from the date of account opening as per the features of the scheme.
Question No.2: Identify the wrong statement on partial withdrawals from National Pension System.
(a) Upto 25% of own contribution in Tier-1 at any time
(b) Permitted only after 10 years of contribution
(c) Permitted only on the death of the subscriber
(d) Permitted Maximum three times with a gap of minimum 5 years

Correct Answer: (c) – Partial withdrawals are permitted as per (a), (b) and (d)