Retail Banking

RETAIL BANKING
COURSE DESIGN COMMITTEE
Content Reviewer
Prof. Ritu Tripathi (PGDBA, M.Com)
Assistant Professor- Finance
NMIMS Global Access - School for Continuing Education
RETAIL BANKING
Author: Shobhna Jha
Reviewed By: Prof. Ritu Tripathi
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C O N T E N T S
CHAPTER NO. CHAPTER NAME PAGE NO.
1 An Overview of Retail Banking 1
2 Working of Retail Banks and its Role in the Economy 23
3 Retail Banking Regulation—Risk and its Management 53
Competition in Retail Banking, Marketing and Distribution

4 83
Management in Retail Banks
5 Retail Banking Products 93
6 Retail Banking Channels 109
7 Payments and Payment Systems 123
8 Credit Appraisal 135
9 Banking Securities 149
10 Banks of Future 161
11 Case Studies 1 to 10 177
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RETAIL BANKING
C U R R I C U L U M
RETAIL BANKING
An Overview of Retail Banking: Introduction, Functions of Retail Banking, Types of Banking, Activities
Undertaken by a Universal Bank, Intermediation as a Function of Bank and Features, Credit Creation Process,
Factors Affecting Bank Strategies
Working of Retail Banks and its Role in the Economy: Introduction, Bank’s Balance Sheet, Assets and
Liabilities-Concept, Profitability and Interest Rate, Role of Retail Bank Management, Money and its Functioning,
Significance of Monetary Policy, Monetary Policy Instruments, Impact of Monetary Policy, NRI Banking, Types
of Accounts NRIs can Open
Retail Banking Regulation—Risk and its Management: Introduction, Regulatory Bodies in Financial Services,
Types of Regulation Apparent in Retail Banking, Capital Adequacy Ratio (CAR), Various Types of Risk, Risk
Measurement, Risk Management, Non-performing Assets, NPA Management, Tools of Debt Recovery
Competition in Retail Banking, Marketing and Distribution Management in Retail Banks: Introduction,
Corporate and Market Levels Strategies for Retail Banks, Effect of Competition on Bank’s Stakeholders,
An Overview of Distribution Management
Retail Banking Products: Introduction, Various Types of Accounts and Facilities that Banks Offer, Features of
Different Deposit Accounts, Various Types of Loans and Credit Products, Relationship Between Customer and
Banker, Fee-based Products and Services Offered by Banks, Importance of Interest and Non-interest Revenues
to Retail Banks
Retail Banking Channels: Features of Retail Banking Channels, Bank Delivery Systems, Working of Bank
Delivery Systems, Practical Issues Relating to Common Banking Channels, Changing Trends in The Recent
Delivery System
Payments and Payment Systems: Different Types of Payment Systems, Working of Different Payment Systems,
Legal Issues Relating to Common Payment Types, Changing Trends in Payment Systems, Differences Between
Different Domestic Payment Systems
Credit Appraisal: The Lending Life Cycle, Essentials of Good Credit, Application of Lending Principles Applied
to Different Cases, The Role of Credit Scoring — CIBIL in Personal Lending, Basic Lending Principles, Appraisal
of Term Loan
Banking Securities: Introduction to Banking Security, Importance of Securities, Major Factors Involved in
Taking Security, Major Forms of Banking Security, Steps Needed to Take Security, Introduction to Mortgage
Banks of Future: Multifactor Authentication, E-signature and Its Importance, Power of Social Media, Mobile,
Artificial Intelligence, Cloud Banking and Robotics, Customer Experience, Characteristics of the Bank of the
Future, How Digital Transformation is Changing the Finance Sector
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C H A
1 P T E R
AN OVERVIEW OF RETAIL BANKING
CONTENTS
1.1 Introduction
1.1.1 Evolution of Retail Banking
1.1.2 Meaning of Retail Banking
1.1.3 Characteristics of Indian Banking System
Self-Assessment Questions
Activity 1
1.2 Functions of Retail Banking
1.2.1 Primary Functions
1.2.2 Secondary Functions
1.2.3 Agency Functions and General Utility Functions
1.3 Types of Banking
1.3.1 Commercial Banking
1.3.2 Investment Banking
1.3.3 Various Types of Banking
Activity 2
1.4 Activities Undertaken by a Universal Bank
1.5 Intermediation as a Function of Bank and Features
1.5.1 Benefits of Intermediation
1.6 Credit Creation Process
1.6.1 Factors Affecting Credit Creation
1.6.2 Advantages and Limitations of Credit Creation
1.7 Factors Affecting Bank Strategies
1.8 Summary
Key Words
1.9 Discussion Questions
1.10 Answer Key
1.11 Suggested Readings and E-References
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2 RETAIL BANKING
INTRODUCTORY CASELET
ABC Bank and XYZ Bank were the two banks in the market area of
Meerut. ABC bank offered the customers all the functions and facilities
with updated technologies whereas the XYZ bank also offered the same
services but the technological products were not available in this bank.
The business of the ABC bank was growing at a rapid pace but the busi-
ness of the XYZ bank was constantly declining. Its existing customers
were also migrating to the ABC bank. Mohan, the branch head of XYZ
bank enquired about the reasons why the customers were shifting to the
private sector bank inspite of the various types of fees and charges. He
found that ABC bank marketed its products and services in a very easy
and attractive manner. They provided updated mobile banking and all
online services, thus, making it convenient for the customers to do their
banking works online. Apart from the primary functions, ABC bank also
provided innovative services like children saving accounts. They also
distributed bank assurance products. Mohan now understood that in
order to compete in this fierce competition among retail banks, all the
services provided must be updated and innovative ones.
QUESTIONS
1. What innovative and updated services was ABC Bank offering?

(Hint: Mobile banking and online services)
2. Which additional services are to be provided by the XYZ Bank
to retain its customers? (Hint: Updated technologies and
innovative services)

An Overview of Retail Banking 3
LEARNING OBJECTIVES
After reading this chapter, you will be able to

> Understand what retail banking is
> Know the different functions that a bank performs
> Describe the difference between commercial banking and invest-
ment banking
> Understand the meaning of universal bank and how it works
> Describe intermediation and the benefits of intermediation
> Explain the meaning and process of credit creation
> Discuss the factors affecting bank strategies
1.1 INTRODUCTION
This unit will help us to understand the meaning and functions of bank. The
various sections of this chapter will give us an insight into the characteristics
of Indian Banking System and several functions of commercial banks. In this
unit we will study about the banks, and how banks play a key role in growth
of a nation and its economy. Banks provide a number of services which can
be categorized on the bases of different criteria. A bank takes in money from
one group of people (depositors) and lends it to another (borrowers). This
means that there must be a gross profit margin made from loans advanced
which can be set against borrower defaults. The business of lending is the
same as any other business, in that increased profit comes at the expense of
increased risk. Thus, a bank may lend either at very high rates to very risky
borrowers (hope that the default rate is sufficiently low to leave it in profit) or
at very low rates to the eligible borrowers. Hence, earning profit to meet any
kind of expense or loss which might occur.
1.1.1 EVOLUTION OF RETAIL BANKING

The bank plays a vital role in the growth of an economy. The bank mainly is an
institution that deals in money along with its substitutes and provides other
money related services. Modern banking originated in India from the begin-
ning of the 19th century. The earliest commercial bank was started in India
by the employees of the East India Company, known as Agency Banks, which
mainly did the banking business along with other trading activities. The first
bank that started its business in India was Bank of Hindustan in 1770. There
were three Presidencies Banks—Bank of Calcutta, Bank of Bombay, and
Bank of Madras which were established in 1806, 1840 and 1843, respectively.
Bank of Calcutta was later on known as Bank of Bengal in 1809. These three
Presidency Banks was amalgamated and formed Imperial Bank of India on
27th January 1921. This Imperial Bank of India after independence again
were renamed and became State Bank of India in 1955. The banking indus-
try faced major changes in 1969 with nationalization of 14 banks and later on,
6 more banks were also nationalised.

4 RETAIL BANKING
1.1.2 MEANING OF RETAIL BANKING

A bank plays an important role in the economy. Retail banking is, however,
quite broad in nature. It refers to the dealing of commercial banks with indi-
vidual customers, both on liabilities and assets sides of the balance sheet.
Retail banking consists of two words – ‘retail’ means selling of goods to the
public in shops etc. and word ‘banking’ means business done by banks. So, in
simple terms, retail banking is banking with the public which includes sell-
ing of banking products and offering various services directly to the public.
In this chapter, we will see how the term retail banking evolved and need for
the retail banking?
“Retail banking means transactions with customers of smaller means, i.e.
small checking account, consumer credit, holding of saving deposits, or sale
of certificate of deposit in small holding of individuals.”
– L.M. Bhole
1.1.3 CHARACTERISTICS OF INDIAN BANKING SYSTEM

The Indian banking system can be understood by the following features:
1. Dealing in Money: Banking business deals with other people’s
money, i.e. getting money from depositors and lending the same to
borrowers.
2. Banking Business: A bank is a financial institution which does banking
activities of selling financial services such as home loans, business
loans, lockers, fixed deposits. In order to enable people to confirm that
it is a bank and is dealing in money, for easy identification, a financial
institution should add the word “bank” as its last name.
3. Acceptance of Deposit: A bank accepts money from the people in the
form of deposits where there is an obligation to refund deposits on
demand or after the expiry of a fixed tenure as they feel that it is the
safest place to deposit money.
4. Lending Money: A bank provides advance money in the form of loans
to needy persons for promotion and development of business, purchase
of home, car, etc.
5. Easy Payment and Withdrawal Facility: Payment and withdrawal
of money can be made through issuance of cheques and drafts, ATM,
Online Fund Transfer without the need for carrying money in hand. A
bank provides easy payment and withdrawal facility to its customers in
the form of cheques, drafts, ATMs and ETF.
6. Motive of Profit with Service Orientation: A bank has a motive of
employing funds received as deposits from the public in a profitable
manner with service-oriented approach.
7. Linking Bridge: Banks collect money from those who have surplus
money and give the same to those who are in the need of money. It acts
as a trust/custodian of funds of its customers.
8. Name Identity: A bank should always add the word “bank” to its
name to enable people to know that it is a bank and that it is dealing in
money.

SELF-ASSESSMENT
1. A bank is a financial institution which does not help people in providing
QUESTIONS
a. Home loans and business loans
b. Lockers
c. Fixed deposit etc.
d. Kisan Vikas Patra
2. To avoid carrying money in hand, payment and withdrawal of money
can be made in a bank
a. Through issuance of cheques and drafts
b. ATM
c. Online Fund Transfer
d. All of the above
1. Visit a bank nearby you and collect information about the documents ACTIVITY 1
needed for opening a saving account and also find the interest rates
of different schemes.
1.2 FUNCTIONS OF RETAIL BANKING
1.2.1 PRIMARY FUNCTIONS

Retail banking has three primary functions
(a) Accepting deposits from the general public in the form of saving
accounts, current accounts, term deposits and recurring deposits.
The banks offer interest on the deposits held by the public in theses
accounts except current account.
(b) The money deposited by the public in their accounts is not left idle,
instead it is used for advancing credit to the eligible customers for
meeting their needs and requirements like purchasing of land, house,
car, etc. or meeting their personal expenses. The credit is offered at
specific interest rate to be paid along with the amount taken as credit
in specific period of time.
(c) In addition, retail banks also charge fee for some ancillary services.
A few examples are credit cards, and overdraft costs. These are the ! IMPORTANT CONCEPT
strategies of the retail banks to stay profitable. Retail banking includes three
major functions which are
1.2.2 SECONDARY FUNCTIONS accepting deposits, lending
and money management.
Besides the primary functions of accepting deposits and lending money,
banks perform a number of other functions which are called secondary func-
tions. These are as follows:
(a) Issuing letters of credit, travellers’ cheques, circular notes, etc.
(b) Undertaking safe custody of valuables, important documents, and
securities by providing safe deposit vaults or lockers

6 RETAIL BANKING
(c) Providing customers with facilities of foreign exchange

(d) Transferring money from one place to another; and from one branch to
another branch of the bank
(e) Standing guarantee on behalf of its customers, for making payments
for purchase of goods, machineries, vehicles etc
(f) Collecting and supplying business information
(g) Issuing demand drafts and pay orders
(h) Providing reports on the credit worthiness of customers
1.2.3 AGENCY FUNCTIONS AND GENERAL UTILITY

FUNCTIONS
The primary activities of commercial banks include acceptance of deposits
from the public and lending money to businessmen and other members of
society. Besides these two main activities, commercial banks also render a
number of ancillary services.
These services supplement the main activities of the banks. They are essen-
tially non-banking in nature and broadly fall under two categories: (1) Agency
services, and (2) General utility services.
1. Agency Services: Agency services are those services which are rendered
by commercial banks as agents of their customers. They include:
(a) Collection and payment of cheques and bills on behalf of the
customers
(b) Collection of dividends, interest and rent, etc. on behalf of customers,
if so instructed by them
(c) Purchase and sale of shares and securities on behalf of customers
(d) Payment of rent, interest, insurance premium, subscriptions etc. on
behalf of customers, if so instructed
(e) Acting as a trustee or executor
(f) Acting as agents or correspondents on behalf of customers for other
banks and financial institutions at home and abroad
2. General Utility Services: General utility services are those services
which are rendered by commercial banks not only to the customers but
also to the general public. These are available to the public on payment
of a fee or charge. They include:
(a) Issuing letters of credit and travellers’ cheques
(b) Underwriting of shares, debentures, etc.
(c) Safe-keeping of valuables in safe deposit locker
(d) Underwriting loans floated by government and public bodies
(e) Supplying trade information and statistical customers
(f) Acting as a referee regarding the financial status
(g) Undertaking foreign exchange business

SELF-ASSESSMENT
3. Services which are rendered by commercial banks not only to the
QUESTIONS
customers but also to the general public are called ________________
services.
a. Agency services
b. General Utility services
c. Ancillary services
d. None of the above
4. Agency services include
a. Collection and payment of cheques and bills on behalf of the cus-
tomers
b. Purchase and sale of shares and securities on behalf of custom-
ers
c. Payment of rent, interest, insurance premium, subscriptions etc.
on behalf of customers, if so instructed
d. All of the above
1.3 TYPES OF BANKING

Due to regulatory restrictions, liberalization, and competition during the
past century, banks all over the world have increased in size through merg-
ers and joint ventures in addition to traditional expansion. Regulation’s capi-
tal requirements can frequently be traced back to expansion, which opens up
access to greater capital and deposit resources. Consolidation is also fuelled
by technological advancement and scale and scope economies. This situa-
tion is shown and briefly described in Exhibit 1.1 by the banking industry
(pic- Hitvada)
Exhibit 1.1

8 RETAIL BANKING
of India. Not only have consolidation and mergers occurred horizontally

and geographically (i.e., when banks merged with other banks of a similar
nature), but also as a result of bank regulation. There were 27 nationalised
banks in India, but following mergers, there are now just 12.
1.3.1 COMMERCIAL BANKING

The most common role of the bank is to deposit money and give loans to
those who require. This process is known as commercial banking. There are
two categories of commercial banking: retail banking and wholesale bank-
ing. Retail banks deal with individuals and businesses and wholesale banks
deal with other banks and the government
Banks keep the money of the depositors as their property and return it imme-
diately when they need it. In the case of term deposits banks charge a penalty
by deducting the interest if the customers withdraw funds before maturity.
If a bank lends out money deposited by customers, it will be unable to repay
their deposits on demand. To maintain liquidity banks themselves have to
deposit and borrow money from other banks. In a balance sheet customers’
deposits are meant to be liabilities and loans are meant to be assets.
Banks can earn profit by giving loans to other banks from their excess bal-
ances which is just kept idle in their customer’s accounts either overnight or
for longer periods.
The liquidity gap which is estimated daily by banks could be covered by bor-
rowing from other banks or surplus funds should be used by the other banks
or the government. London inter-bank offered rate (LIBOR) is the interest
rate that helps to understand how government monetary policy is affected
through the banking system. This is known as wholesale banking.
Banks have developed efficient and secure payment and settlement systems
for providing a central intermediary function between retail customers.
1.3.2 INVESTMENT BANKING

Investment banks are American creation, established by the US Glass–
Steagall Act of 1933. The Act was passed in response to numerous bank
failures during the Wall Street crash of 1929 and the subsequent Great
Depression, when many banks had utilized the funds deposited by the cus-
tomers, and invested to buy shares which lost all its value in the crisis.
The Act required the separation of the savings and loan activities of banks
from their investment activities, aiming to protect depositors’ funds, and its
effect was that separate commercial and investment banks emerged with
similar names, such as JP Morgan Chase and Morgan Stanley—a legacy that
remains.
FUNCTIONS OF AN INVESTMENT BANK

Investment banking activity is mainly focused on trading on behalf of
clients, in which capacity of the bank acts as an agent.
Some activities can be for the bank’s ‘own account’, whereas the bank
actively buys and sells securities and bonds, derivatives and futures at a

profit—that is, so-called proprietary trading. In a traditional investment

bank, the three key activities that can be identified are:
underwriting bond and share issues,
trading (that is, buying and selling) issued (that is, second-hand)
securities, and
processing futures, swaps, etc. on behalf of clients.
Functions which are carried out on behalf of clients, must add similar
activities whereas the bank trades for its own account—engaging in pro-
prietary trading and risking the bank’s capital in doing so. Underwriting
often follows the provision of advice to corporate customers wishing to
raise finance by issuing shares to the public or issuing bonds (loan notes)
to the public. The reasons that some companies prefer to raise finance in
this way are numerous and have to do with the fact that it is cheaper than
borrowing from a commercial bank.
The process of underwriting ensures that the company will receive the
money it needs by enlisting the investment bank to buy or fund the share or
bond issue. To avoid being left with a sizable block of shares or bonds that no
one wants, the investment bank will have arranged with other institutions to
purchase some or all of that issuance. The securities’ value will drop in the
absence of demand, costing the bank money. It is obvious that good under-
writing requires a thorough knowledge of the markets.
Among other things, futures and swaps are tools for risk reduction. Such
tool deployment, on behalf of clients, has become an increasingly important
aspect of the investment bank’s operations. However, several of these instru-
ments have received negative criticism since the financial crisis of 2007–2008:
it is claimed that traders should have had a better understanding of the
underlying value of such “exotic” assets and the assumptions regarding risk
distribution (also known as “casino banking”). Similar to, how money is the
currency of investment banking, information is the currency of proprietary
trading, and banks must take great care not to profit from the confidences of
their own clients.
SELF-ASSESSMENT
5. Investment banking means
QUESTIONS
a. Banks actively buy and sell securities and bonds derivatives and
futures at a profit.
b. Trading (that is, buying and selling) issued (that is, second-hand)
securities
c. Processing futures, swaps, etc. on behalf of clients.
d. All of the above
6. The customer deposits are kept on the ___________ side in bank
balance sheets and loans as ___________.
a. profit; loss
b. gains; losses
c. liabilities; assets

10 RETAIL BANKING
1.3.3 VARIOUS TYPES OF BANKING

RETAIL BANKING
WHOLESALE BANKING
TYPES OF BANKING
UNIVERSAL BANKING
RURAL BANKING
RETAIL BANKING
It refers to banking in which banking institutions execute transactions
directly with consumers. Services offered in retail banking includes savings
and transactional accounts, mortgages, personal loan, debit cards, credit
cards etc. In retail banking, all the needs of individual customers are met in
an integrated manner. Retail banking refers to provision of banking services
to individuals.
WHOLESALE BANKING
Banking services provided to large clients such as financial institutions,
large corporations, banks, government agencies, pension funds, real estate
developers, etc are known as wholesale banking. In retail banking, services
are provided only to individual clients and small businesses. In wholesale
banking, services are provided at lower prices than in retail banking because
of the large amount of money involved.
UNIVERSAL BANKING
Universal banking is a system in which banks provide a wide variety of com-
prehensive financial services, including those tailored to retail, commercial,
and investment services. Universal banking is common in some European
countries, including Switzerland. Universal banking is a term for banks
that offer a variety of comprehensive financial services, including both
commercial banking and investment banking services. Commercial banks
typically offer consumer and business services, such as checking and sav-
ings accounts, business and personal loans (including mortgages and auto
loans), and certificates of deposits (CDs). Investment banks provide merger
and acquisition services for corporations, underwriting services, and bro-
kerage services for institutional and private clients. Banks, in a universal
system, may still choose to specialize in a subset of commercial or invest-
ment banking services, even though, they technically can offer much more
to their client base.

RURAL BANKING
Regional Rural Banks (RRBs) are government owned scheduled commercial
! IMPORTANT CONCEPT
banks of India that operate at regional level in different states of India. These The father of rural banking is
banks are under the ownership of Ministry of Finance, Government of India. Dr. Mohammad Yunus. He was
awarded Nobel Peace Prize
They were created to serve rural areas with basic banking and financial ser-
for founding Grameen Bank
vices. RRBs were established in the year 1975 in the rural areas to ensure
and introducing concept of
sufficient flow of institutional credit for agriculture and other rural sectors.
microfinance.
SELF-ASSESSMENT
7. Commercial banks provide:
QUESTIONS
a. Checking and savings accounts
b. Business and personal loans (including mortgages and auto
loans)
c. Certificates of deposits (CDs)
d. All of the above
8. Rural banks operate at:
a. National level
b. State level
c. International level
d. Regional level
9. Wholesale banking provides services to:
a. Banks and other financial institutions
b. Government agencies
c. Large corporations and real estate developers
d. All of the above
1. Visit a village and ask few villagers about the banking facilities ACTIVITY 2
available in their area and how they take benefit of it.
1.4 ACTIVITIES UNDERTAKEN BY A

UNIVERSAL BANK
Universal banking is a system in which banks provide a wide variety of com-
prehensive financial services, including those tailored to retail, commercial,
and investment services
Commercial banks typically offer consumer and business services, such
as checking and savings accounts, business and personal loans (includ-
ing mortgages and auto loans), and certificates of deposits (CDs).
Investment banks provide merger and acquisition services for corpora-
tions, underwriting services, and brokerage services for institutional and
private clients.

12 RETAIL BANKING
Banks in a universal system may still choose to specialize in a subset

of commercial or investment banking services, even though they techni-
cally can offer much more to their client base.
Universal banks may offer
Credit and loans – A universal bank provides loans and advances to the
creditworthy and eligible borrowers to be repayable on demand or in a fixed
period of time at a particular rate of interest.
Deposits – A major function of universal bank is to accept deposits in the
form of savings, current accounts and other deposits like fixed deposits,
recurring deposits and flexible deposits.
Asset management – The asset management function of investment banks
involves managing the funds of corporate institutional investors by investing
in stocks, fixed-income securities/bonds, derivatives investments, and other
types of investments.
Payment processing – Payment processing is how businesses complete
credit card and debit card transactions. Payment processing services expe-
dite card transactions, and payment gateways securely transmit data so that
money from a customer’s issuing bank can be transferred to a merchant’s
account.
Securities transactions – Another function of universal banks is to trade
in bonds and securities. Customers can purchase or sell the units from the
financial institution itself, which offers more convenience than alternate
approaches.
Underwriting – Underwriting is the function where an individual or an insti-
tution undertakes the risk associated with a venture, an investment, or a loan
in lieu of a premium. Underwriting function is performed by the universal
bank.
Financial analysis – This function is performed by banks in order to provide
loans to the business houses. The eligibility amount of the firm or business is
determined by the bank.
While a universal banking system allows banks to offer a multitude of ser-
vices, it does not require them to do so. Banks in a universal system may still
choose to specialize in a subset of banking services.
Universal banking combines the services of a commercial bank and an
investment bank, providing all services from within one entity. The services
can include deposit accounts, a variety of investment services, and may even
provide insurance services. Deposit accounts within a universal bank may
include savings and checking.
1.5 INTERMEDIATION AS A FUNCTION OF

BANK AND FEATURES
The creation of credit and intermediation, or the role of banks as “middle-
men” between those with money to lend and those looking to borrow, are
the two fundamental banking ideas that are explored in this section. Similar

to the payments system, the creation of credit by banks is a by-product of

intermediation.
The legal and practical tenet that a bank can utilise customer’s funds at its
discretion after they have been deposited, subject to the obligation to return
them to the depositor upon demand, underpins both intermediary services,
and the generation of credit. The ability of a retail banker is to strike a bal-
ance between the needs of lenders and borrowers and also turning a profit
for its owners. It is also important to take into account the more recent idea
of disintermediation, in which businesses and people handle lending and
borrowing without the help of conventional banks.
The idea of banking intermediation acknowledges that there are two cate-
gories of participants in the financial system: surplus units and deficit units,
which include people, government, businesses, and banks. Let us refer to
the units as “lenders” and “borrowers.” There is no duty on the part of those
with excess funds to lend. Despite the hazards of both physical (theft or
destruction) and economic loss, people have been hiding their money under
their beds or burying it in their gardens for decades (i.e., of the real purchas-
ing power of the money dropping as a result of inflation). But a lender can
decide to look for a borrower to make the most of their extra cash (or bor-
rowers). The interest rates offered will affect where the lender deposits its
funds because the lender will be looking for a return on its investment when
it grants a loan.
There are four main ways in which lenders and borrowers interact:
Direct communication with one another (financial disintermediation).
Dealing through an intermediary (such as a bank or building society),
dealing through the markets (such as the bond market, currency market,
or money market), and dealing through intermediaries in terms of the
securitization of loans.
Only transacting through an intermediary (a bank or building soci-
ety) is practical for the great majority of people, although direct deal-
ing is increasingly common among large corporations. Direct Markets
Borrowers Intermediaries Lenders Investment banks will provide the
necessary services for businesses desiring to transact on the markets (see
“Investment banking”).
1.5.1 BENEFITS OF INTERMEDIATION

The customers get many advantages by employing banks as their financial
intermediaries, including four that can be combined to form the acronym
MARG:
Maturity transformation
Asset aggregation
Risk transformation
Geographic location transformation
The capacity to access money quickly and readily, whether through the with-
drawal of deposits or in the form of a loan that will be returned over time, is

14 RETAIL BANKING
referred to as the maturity transformation. In this sense, the needs of the two
types of bank customers vary.
Typically, depositors want their money to be withdrawn whenever they need
it, or available on demand. While many savings accounts are term deposits,
banks frequently permit withdrawal on demand - for a fee - while current
accounts are “on demand.” Borrowers, however, seek to return loans as soon
as feasible. Following an investment, companies repay loans from profits,
which can take years to materialise.
Over the course of 25 to 30 years, monthly revenue is used to pay down mort-
gage loans. Banks establish a balance between these two demands by pool-
ing funds (much like insurance firms and pension funds do because they
are also middlemen), so they store just enough cash to cover the immediate
withdrawals of their depositors while keeping enough to lend to borrowers.
The concept behind the generation of credit by banks is based on this inter-
mediation feature.
Banks are able to anticipate the amount of liquidity that their clients need on
a daily basis using their extensive experience and knowledge, for instance by
realising that as the holiday season draws near, funds are likely to be with-
drawn to cover rising expenses. The upkeep of an efficient payments or clear-
ing system so that the clients can withdraw their money swiftly and easily. It
is a by-product of financial intermediation. Few clients would deposit their
savings in a bank without a way to withdraw them.
Asset transformation, or aggregation, is the term used to describe the pool-
ing of funds on the scale attained by banks. Depositors’ funds can be invested
more broadly and diversified when they are pooled together than a single
depositor could. This aids in lowering the depositor’s risk, while the extremely
low interest rates offered on current accounts, or “demand” deposits, also
serves to lower possible rewards.
The final feature is risk transformation. This depends on the bank’s knowl-
edge of lending as well as its capacity to collect deposit money and reap the
rewards of pooling. Through improvements to organizational and payment
systems, banks may experience economies of scale and decrease unit costs.
They also benefit from economies of scale when it comes to the data they
learn about specific clients.
By utilising a bank as an intermediary, the depositor lowers the danger of
losing their money since they may take advantage of the bank’s extensive
experience in determining creditworthiness, monitoring loan repayment,
and pursuing “bad” debts when borrowers default on their obligations. The
argument holds that depositors should not have to worry about their money
being lost because banks retain enough capital (their own money) to offset
potential losses.
The location of the intermediary is its last advantage. Numerous banks made
significant investments in branch networks, mergers and consolidations in
the 19th and 20th centuries, and the internet in the 20th century. It is import-
ant to have adequate geographic and virtual coverage so that depositors
can deposit and withdraw money with ease. However, bank branches were
created in an era when actual presentation of either instrument was required
and cash and checks were the main forms of payment.

10. MARG means SELF-ASSESSMENT

QUESTIONS
a. Maturity transformation
b. Asset aggregation
c. Risk transformation
d. Geographic location transformation.
e. All of the above
11. Which statement is incorrect for Universal bank
a. Universal bank does not provide loan and advance to the credit-
worthy and eligible borrowers to be repayable on demand or in
a fixed period of time at a particular rate of interest.
b. A major function of universal bank is to accept deposit in the
form of saving, current account and other deposits like fixed
deposit, recurring deposit and flexible deposit.
c. The asset management function of investment banks involves
managing the funds of corporate institutional investors by
investing in stocks, fixed-income securities/bonds, derivatives
investments, and other types of investments.
d. Another function of universal banks is to trade in bonds and
securities
1.6 CREDIT CREATION PROCESS

A central bank is the primary source of money supply in an economy of a nation
through the circulation of currency. It ensures the availability of the currency
for meeting the transaction needs of an economy. It also facilitates various eco-
nomic activities such as production, distribution as well as consumption. For
this purpose, the central bank needs to depend upon the reserves of the com-
mercial banks which are the secondary source of money supply in an economy.
The most crucial purpose of a commercial bank is the creation of credit. This
is the reason why the money supplied by commercial banks is called credit
money. All commercial banks create credit by advancing loans and purchas-
ing securities. They lend money to the individuals as well as to the businesses
out of deposits accepted from the public.
Commercial banks are not allowed to use the entire amount of public deposits
for lending purposes. They are accepted to keep a certain amount as a reserve
with the central bank. This is for serving the cash needs of the depositors. The
commercial banks can lend the remaining portion of the public deposits after
keeping the expected amount of reserves.
1.6.1 FACTORS AFFECTING CREDIT CREATION

Factors that have an effect on the creation of credit are as follows:
1. The capacity of the banks to create credits on depends the availability
of cash deposits with banks. Also, the capacity to create credit depends
on the factors that determine their cash deposit ratio.
2. The desire of the banks to create credits.
3. The demand for credit in the market.

16 RETAIL BANKING
1.6.2 ADVANTAGES AND LIMITATION OF CREDIT CREATION

On the advantageous side, the depositors can access a wider range of prod-
ucts that the intermediaries offer that can easily be converted into cash.
Investment of the company shares (mutual funds) can also be liquidated in a
very easy manner.
On the disadvantageous side, there are several limitations, which are as
follows:
1. Lack of securities.
2. The business environment
3. Lack of cash
4. The habits of the people
5. Leakages
SELF-ASSESSMENT
12. Factors that have an effect on the creation of credit are
QUESTIONS
a. The capacity of the banks to create credits
b. The desire of the banks to create credits
c. The demand for credit in the market
d. All of the above
13. Limitation of credit creation by commercial banks are
a. Lack of securities and lack of cash
b. The business environment
c. The habits of the people
d. All of the above
14. Which statement is not correct for commercial banks?
a. The most crucial purpose of a commercial bank is the creation of
credit.
b. The money supplied by commercial banks is called debit money.
c. All commercial banks create credit by advancing loans and pur-
chasing securities.
d. They lend money to the individuals as well as to the businesses
out of deposits accepted from the public.
1.7 FACTORS AFFECTING BANK STRATEGIES

Retail banks face more challenges than most. Here are seven ways to use
automation to respond to some of today’s biggest retail banking challenges:
1. Meeting customer expectations
As the retail banking directly deals with the consumer, there are many possibil-
ities of personalised service. These services are affected by the advertisements
of brands, fintech and also by the other banks which are in the market. The
need for the retail banks in these times includes providing qualitative, consis-
tent and memorable experiences through their multiple channels.

2. Outpacing the competition

The retail banking industry in the present scenario is the most competitive
one. As banking no longer restricted by geography, the competition in this
industry can come from anywhere. In case of online banks don’t have to
cover the expenditure of having branches, their budget is freed up and they
try and tempt the customers into switching.
3. Meeting regulations
The retail banks are regulated by the RBI and finance ministry policies. A
core challenge for retail banks is keeping up with regulations and maintain-
ing compliance. It is because of the endless updates to existing regulations,
as well as the introduction of new ones the bank face challenges to retain the
existing customers and make profit.
4. Managing risk
Managing compliance and security risks effectively is essential for retail
banking organizations to avoid financial and reputational damage.
5. Employee recruitment and retention
The banking industry is volatile, there has been change in the working knowl-
edge and culture due to constant updation in the software and technology.
Therefore, finding the right person having the knowledge, is a tough task. It is
also very hard to retain the employees in matter of career growth, incentives etc.
6. Combatting outdated technology
Legacy systems could be holding the retail bank industry back from growth
and being able to serve your customers better. They’re costly to maintain and
complicated to integrate.
7. Optimizing costs
This is the most challenging for the retail banks to increase its revenue and
minimizing its cost incurred by way of salary to employees, maintenance of
branches and technologies updation.
The challenges in the retail banking can be curtailed by adopting some of the
measures which are as follows:
1. Product Innovation
The bank’s database has customers’ demographic and financial informa-
tion. This data helps banks in creating innovative personalized products for
various segments and categories of customers belonging to different regions.
Constant product innovation to meet the requirements of customers is ben-
eficial. Some areas where the banks are launching new and personalized
products are mutual funds, insurance, car loans, securities, etc.
2. Quality of Service
Mostly, all the retail banks offer similar services. If a customer discovers that
identical services offered by another bank has better quality and lower costs,
they switch over easily. Hence, client’s experience and services offered by
the bank matters the most. So, it is very important that banks come up with
personalized products at low costs to satisfy and retain customers, and help
banks earn a profit.

18 RETAIL BANKING
3. Detailed Market Research

A detailed market research can help the banks to untap the new markets.
They can innovate products and services that others have not implemented
yet. This gives them leverage and provides a competitive edge.
4. Multiple Delivery and Contact Channels
Customers prefer multiple means of communication to contact their banks.
Therefore, banks should provide high-quality service channels such as
mobile banking, internet banking, web chat services, telephone banking.
5. Understanding Customer Sentiment through Cross-channel Analysis
Banks can find out their customers’ views about their brand and offerings
through sentiment analysis. It provides them with insights to prepare for
the upcoming changes required to keep up with changing trends. The social
media platforms such as Twitter, Facebook, and Instagram, Reddit display
real-time customer conversations. By analyzing, the banks can draw an accu-
rate picture of their experiences and can enhance customer service.
1.8 SUMMARY
A bank is a financial institution which does banking activities of sell-
ing financial services such as home loans, business loans, lockers, fixed
deposits.
A bank takes in money from one group of people (depositors) and lends it to
another (borrowers). This means that there must be a gross profit margin
made from loans advanced which can be set against borrower defaults.
The bank’s database has customers’ demographic and financial informa-
tion. This data helps banks in creating innovative personalized products
for various segments and categories of customers belonging to different
regions.
The Indian banking industry has impact on the growth of GDP, and rise
in national income and per capita income.
Retail banking refers to the dealing of commercial banks with individual
customer, both on liabilities and assets sides of the balance sheet.
The key difference between retail banking and whole sale banking is that
retail banks lend to and borrow from individuals and businesses, whereas
wholesale banks work with other banks and governments (national and
overseas).
Retail banking means transactions with customers of smaller means, i.e.
small checking account, consumer credit, holding of saving deposits, or
sale of certificate of deposit in small holding of individuals.
Retail banking includes three major functions which are accepting depos-
its, lending, and money management.
The Indian banking industry has impact on the growth of GDP, rise in
national income, and per capita income.
Payment processing is how businesses complete credit card and
debit card transactions. Payment processing services expedite card

transactions, and payment gateways securely transmit data so that

money from a customer’s issuing bank can be transferred to a mer-
chant’s account.
Lenders and borrowers interact, by direct communication with one
another (financial disintermediation) or dealing through an intermedi-
ary (such as a bank or building society) or dealing through the markets
(such as the bond market, currency market, or money market) and deal-
ing through intermediaries in terms of the securitization of loans.
1. The bank is an institution that deals in money along with its KEY WORDS
substitutes and also provides other money related services.
2. Retail banking refers to banking which executes transactions
directly with consumers.
3. Wholesale services are reserved only for government agencies,
pension funds, corporations with strong financials, and other
institutional customers of a similar nature.
4. Universal banking is a system in which banks provide a wide
variety of comprehensive financial services, including those tailored
to retail, commercial, and investment services.
5. Agency services are those services which are rendered by commercial
banks as agents of their customers.
6. General utility services are those services which are rendered by
commercial banks not only to the customers but also to the general
public. These are available to the public on payment of a fee or charge.
7. “Commercial banking” refers to a bank’s conventional role in
accepting deposits and disbursing loans.
8. Regional Rural Banks (RRBs) are government owned scheduled
commercial banks of India that operate at regional level in different
states of India. These banks are under the ownership of Ministry of
Finance, Government of India.
9. Payment processing is how businesses complete credit card and
debit card transactions. Payment processing services expedite card
transactions and payment gateways, and securely transmit data so
that money from a customer’s issuing bank can be transferred to a
merchant’s account.
10. Asset transformation, or aggregation, is the term used to describe
the pooling of funds on the scale attained by banks. Depositors’ funds
can be invested more broadly and diversified when they are pooled
together than a single depositor could.
11. A central bank is the primary source of money supply in an
economy of a nation through the circulation of currency. It ensures
the availability of the currency for meeting the transaction needs
of an economy. It also facilitates various economic activities such as
production, distribution as well as consumption.

20 RETAIL BANKING
1.9 DISCUSSION QUESTIONS

1. What is the meaning of retail banking?
2. What are the major functions of retail banks and explain them?
3. What are the advantages of retail banking?
4. What challenges do you think retail banking industry face?
5. Explain the ways in which the challenges can be overcome by the retail
banking industry.
6. What are the key functions of bank?
7. What is the difference between commercial and investment bank?
8. What do you mean by universal bank? Explain.
9. What is intermediation and explain its function?
10. Explain what is credit creation and the process of credit creation in
banks.
1.10 ANSWER KEY
SELF-ASSESSMENT QUESTIONS
Topics Q. No. Answers

Introduction 1. d. Kisan Vikas Patra
2. d. All of the above
Functions of Retail 3. b. General utility services
Banking
4. e. All of the above
Types of Banking 5. d. All of the above
6. c. liabilities, assets
8. d. Regional level
Benefits of 10. e. All of the above
Intermediation
11. a. Universal banks do not provide loans
and advance to the credit worthy
Credit Creation 12. d. All of the above
Process
14. b. The money supplied by commercial
banks is called Debit money.

1.11 SUGGESTED READINGS AND

E-REFERENCES
www.investopedia.com
Reserve bank of India docs
Retail Banking by IIBF
Retail Banking Keith Pond

C H A
2 P T E R
WORKING OF RETAIL BANKS AND ITS ROLE

IN THE ECONOMY
CONTENTS
2.1 Introduction
2.2 Bank’s Balance Sheet
2.3 Assets and Liabilities-Concept
2.3.1 Liability
2.3.2 Assets
Activity 1
2.4 Profitability and Interest Rate
Activity 2
2.5 Role of Retail Bank Management
2.5.1 Capital Formation
2.5.2 Monetization
2.5.3 Innovations
2.5.4 Finance for Priority Sectors
2.5.5 Provision for Medium and Long-Term Finance
2.5.6 Cheap Money Policy
2.5.7 Need for a Sound Banking System
2.6 Money and its Functioning
2.6.1 Role of Reserve Bank of India
2.6.2 Functions of RBI
2.7 Significance of Monetary Policy
2.7.1 Monetary Policy
2.8 Monetary Policy Instruments

24 RETAIL BANKING
2.8.1 Open Market Operations

2.9 Impact of Monetary Policy
2.10 NRI Banking
Activity 3
2.11 Types of Accounts NRIs can Open
2.12 Summary
Key Words
2.14 Answer Keys

WORKING OF RETAIL BANKS AND ITS ROLE IN THE ECONOMY 25
ABC Bank had suffered a loss of Rs 200 crores as per their result in
March 2020. The balance sheet of the bank showed a heavy amount
of provision. A large part of the advances turned into bad advances
amounting to Rs 80 crores. Now as per the RBI norms banks have to
make provisioning of the NPA accounts. Provisioning is done from the
profit of the bank, which leads to reduction in profit. ABC Bank put all
its efforts in the NPA management, and in the Financial Year 2022 the
profits were Rs 100 crore as it recovered its bad loans through various
recovery tools available with the banks. The reduction in the NPA ratio
increased its profit as less amount was reserved for provisioning.
QUESTIONS
1. Why was ABC Bank in loss? (Hint: Bad Advances)

2. What made ABC Bank to earn profit in 2022? (Hint: Recovery of
bad loans)

26 RETAIL BANKING
LEARNING OBJECTIVES

> Understand bank’s balance sheet
> Give comparison between different types of assets and liabilities
> Explain retail bank’s profitability and interest rates
> Know the role of retail bank management to general economic and
regulatory issues
> Explain money and its functioning
> Discuss significance of monetary policy for banks
> Describe monetary policy of RBI
> Explain impact of monetary policy on different areas of banks
> Understand NRI banking
> Know the different types of accounts with examples—NRO, NRE,
and FCNR
2.1 INTRODUCTION
This chapter examines the accounting side of the banking industry, discuss-
ing liquidity, profit margins, and how assets and liabilities are handled. To
interpret a bank’s balance sheets as a depiction of banking activity, it is nec-
essary to address the term nature of deposits and loans. This chapter goes
into greater depth about liquidity and interest rate risk and emphasising
the significance of the interbank market. By attempting to put into perspec-
tive the many activities of the bank as an intermediary, the primary cause
affecting profit and loss, and some of the fundamental external issues and
concepts that govern a bank’s decisions, the chapter serves as a basis for the
following two chapters attempts to put into perspective the various activ-
ities of the bank as an intermediary, the main factors affecting profit and
loss, and some of the key external issues and concepts that guide a bank’s
decisions.
2.2 BANK’S BALANCE SHEET

A balance sheet in simple terms is the statement of assets and liabilities of
any business as of a particular date. We now look at the components that
would typically be found on a balance sheet, or a snapshot of the assets and
liabilities of a universal bank, as of 31 March (the typical year-end). A simple
balance sheet looks like this
Liabilities Amount Asset Amount

Capital Cash and balances at banks
Reserves and Balances with banks, money
Surplus at call and short notice


Deposits Investments
Borrowings from Loans and advances to cus-
others tomers and other banks
Other liabilities Fixed assets
1. Which of the following is not a part of liabilities? SELF-ASSESSMENT

QUESTION
a. Capital
b. Reserves and surplus
c. Deposits
d. Investments
2.3 ASSETS AND LIABILITIES-CONCEPT
2.3.1 LIABILITY
Liabilities are the ones for which we have to pay. In the case of banks, the lia-
bilities components consist mainly of capital, reserves, and surplus, deposits,
borrowings from other banks or RBI, and other liabilities and provisions. Let
us discuss these in detail.
1. Capital
Capital is the amount of money that a bank has obtained from its sharehold-
ers and other investors and the profit that is made by the bank and not paid
out. Capital (called-up) is the equity shares in the issue. These are held by
private investors and staff (as a profit sharing schemes) in the case nation-
alised bank capital is the government funds infused in banks.
Equity contribution of owners. The basic approach of the capital adequacy
framework is that a bank should have sufficient capital to provide a stable
resource to absorb any losses arising from the risks in its business. Capital is
divided into different tiers according to the characteristics / qualities of each
qualifying instrument. For supervisory purposes capital is split into two cat-
egories: Tier I and Tier II.
2. Reserves and surplus
a. Statutory reserves – In terms of section 17 (1) and 11 (1)(b) (ii) of the
Banking Regulation Act, 1949 banks are required to transfer, out of
the balance of profit as disclosed in the profit and loss account, a sum
equivalent to not less than 20 per cent of such profit to Reserve Fund.
This provision is a minimum requirement.
b. Capital Reserves – The expression ‘capital reserves’ means surplus on
revaluation or sale of fixed assets. Capital reserves are capital profits
that are set aside for anticipated expenses or long-term projects. They
are funds that have a purpose when they are taken from the capital
profits.

28 RETAIL BANKING
3. Deposits
I. Demand Deposits—(i) from banks includes all bank deposits repayable on
demand. (ii) from others including all demand deposits of the non-bank sec-
tors. Credit balances in overdrafts, cash credit accounts deposits payable at
call, overdue deposits, inoperative current accounts, matured time deposits
and cash certificates, etc. are to be included under this category.
II. Savings bank Includes all savings bank deposits (including inoperative
Deposits savings bank accounts).
III. Term Deposits- Deposits repayable after a specified term. Includes all from
banks types of deposits of the non-bank sector repayable after a specified term
Fixed deposits, cumulative and Bulk deposits, recurring deposits, cash cer-
tificates, annuity deposits, branches in deposits mobilised under various
schemes, ordinary staff India, foreign currency non-resident deposits, depos-
its of accounts, etc. are to be included under this category.
4. Borrowing
I. Borrowings in India Includes borrowings/refinance and rediscount
obtained from
(i) Reserve Bank of India- Includes borrowings/refinance India and rediscount
obtained from commercial banks (including co-operative banks)
(ii) Other banks include borrowings/refinance and rediscount from the
Industrial Development Bank of India, Export-Import Bank of India,
National Bank for Agricultural and Rural Development and other
institutions, and agencies (including liability against participation
certificates, if any)
II. Borrowings outside include borrowings and rediscounts of bills of Indian
branches in India abroad as well as borrowings of foreign branches. Secured
borrowings can be shown separately. It includes secured included above bor-
rowings/refinance in India and outside India.
5. Other liabilities and provisions
I. Bills Payable includes drafts, telegraphic transfers, mail transfers payable,
pay slips, bankers’ cheques, and other miscellaneous.
II. Inter-Office items, etc. The inter-office adjustments balance if in credit,
should be shown under this head. Only the net position of interoffice accounts,
inland as well as foreign should be shown here.
III. Interest accrued be shown under this head and deferred tax includes
interest due and payable and interest accrued provision for income tax
and other taxes like interest tax (less advance payment, tax deducted at
source, etc.), surplus provisions in bad debts provision account, surplus
provisions for depreciation in securities, contingency funds which are not
disclosed as reserves but are actually like reserves, proposed dividend/
transfer to Government Includes interest due and payable and interest
accrued.
Others - Other liabilities which are not disclosed under any of the major
heads such as unclaimed dividends, provisions and funds kept for specific

purposes, unexpired discounts, outstanding charges like rent, conveyance,

etc. certain types of deposits like staff security deposits, margin deposits,
etc. where the repayment is not free, should also be included under this
head.
SELF-ASSESSMENT
2. The following is a type of term deposits. QUESTION
a. Fixed deposits
b. cumulative and bulk deposits
c. recurring deposits
d. All of these
2.3.2 ASSETS
A bank’s assets are the source of its income and profits. Most banks will
choose to invest in those assets that offer the highest quality and highest
return possible, but there is also a need to maintain stability, adopt a portfolio
approach, to spread risk, and to conform to capital adequacy and reserve-as-
set ratio (RAR) requirements.
1. Cash and balances at banks

Cash and balances at banks include notes and coins in Branch and auto-
matic teller machines (ATMs). Holding cash is expensive and earns nothing
for a bank, so banks want to keep their cash holdings to a minimum. It also
includes cash deposits at the central bank (Reserve Bank of India) which
earn no interest but must be maintained to fulfil clearing transactions and
any mandated deposits.
2. Balances with other banks

In India it includes the balances with the Reserve Bank of India and other
banks. It includes deposits of the bank in RBI other than the current account.
Includes all balances with banks in India (including and India (other than
cooperative banks). Balances in current accounts and money in current
deposit accounts should be shown separately.
Money at call and short notice includes deposits repayable within 15 days or
less than 15 days’ notice lent in the inter-bank call money short other banks
market.
3. Investments It includes Central and State Government securities and
Government treasury bills. Securities other than securities Government
securities, which according to the Statutes are treated as approved securi-
ties, should be included in other approved securities.
Investments in shares of companies and corporations not included in item
(ii) should be included here. Bonds investments in debentures and bonds
of companies and not included in item should be included subsidiaries/
here.

30 RETAIL BANKING
Investments in subsidiaries/associate companies should be included here. A

company will be considered as associate company for the purpose of this clas-
sification if more than 25% of the share capital of that company is held by the
bank. Includes residual investments, if any, like gold. All foreign Government
securities including securities (including issued by local authorities may
be classified under this. All other investments outside India may be shown
under this head.
Loans and advances to banks

Banks give the loans and advances to other banks in the financial system and
to over short-term mainly in the form of short-term loans. Loans to discount
houses are also given at the interest rates with very low margin above the
market rates.
Loans and advances to customers

Banks give loans and advances to corporate and personal customers in the
form of long-term and short-term loans. Mortgages, personal loans, and over-
drafts are taken into account. These loans are either secured or unsecured.
At more than 50 percent of all assets, these are the most profitable with the
maximum risk.
Debt securities
Longer-term loans can be made to the government and to commercial
borrowers.
These can be secured debentures. Income from these instruments is gener-
ally fixed and regular, providing guaranteed income, especially from those
issuers with the highest credit rating. Debt securities will be characterized by
a range of risks depending on the standing of the borrower
Interests received
Shareholdings in credit cards or other payments organizations are shown
under the heading interests in joint ventures and associated undertakings.
On numerous occasions, banks enter into joint ventures, such as when estab-
lishing ATM networks, processing cheques or offering plastic card schemes,
and they record these investments in their accounts. These shareholdings
are often too small in terms of percentage ownership to allow full incorpora-
tion into group accounts.
4. Fixed assets
Branches, head office premises, computer hardware and furniture are all
represented by tangible fixed assets. Generally, these do not provide an
income stream to the bank, but are essential in its activities.
5. Other assets
Other assets include prepayments and expenses that a bank has made in
advance, and interest and charges accrued that customers have not yet
paid.
An example of statement of various assets and liabilities is represented in
Exhibit 2.1.

Exhibit 2.1: Statement of Assets and Liabilities

(` in Lakh)
STATEMENT OF ASSETS AND LIABILITIES
As on 31.03.2022 As on 31.03.2021 As on 31.03.2021
Particulars (Audited) (Reviewed) (Audited)
Capital and Liabillities
Capital 11955.96 11955.96 9918.34
Share 2600.00
Application
Maoney
Reserves and 11637.54 11314.31 10088.07
Surplus
Deposits 224072.90 218802.52 205919.39
Borrowing 13508.14 14165.92 15382.63
Other Liabilities 6609.48 6791.94 9427.67
and Provisions
Total 267784.02 263030.65 253336.11
Assets
Cash and 10287.55 9927.54 9445.41
Balance with
RBI
Balance with 15860.44 14995.31 14154.83
Banks and
Money at call
and short Notice
Investments 96873.80 96514.26 93782.95
Advances 122784.41 118727.53 111354.54
Fixed Assets 3334.92 3332.29 3218.23
Other Assets 18642.90 19533.72 21380.14
Total 2677847.02 263030.65 253336.11
SELF-ASSESSMENT
3. Which of the following is not a part of assets?
QUESTION
a. Cash and balances at banks
b. Investments
c. Loans and advances to banks
d. Borrowing
1. Compare the rate of interest of banks in different schemes e.g. fixed ACTIVITY 1
deposits, recurring deposits, cash certificates, annuity deposits etc.

32 RETAIL BANKING
2.4 PROFITABILITY AND INTEREST RATE

Profitability is a measure of an organization’s profit relative to its expenses.
Organizations that are more efficient will realize more profit as a percentage
of its expenses than a less-efficient organization, which must spend more to
generate the same profit.
Earning a profit is important to a business because profitability impacts

whether a company can secure financing from a bank, attract investors to
fund its operations and grow its business. Companies cannot remain in busi-
ness without turning a profit.
Profit is the money a business pulls in after accounting for all expenses.
Whether it’s a lemonade stand or a publicly-traded multinational company,
the primary goal of any business is to earn money, therefore a business per-
formance is based on profitability, in its various forms.
Some analysts are interested in top-line profitability, whereas others are

interested in profitability before taxes and other expenses. Still others are
only concerned with profitability after all expenses have been paid.
The three major types of profit are gross profit, operating profit, and net
profit–all of which can be found on the income statement. Each profit type
gives analysts more information about a company’s performance, especially
when it’s compared to other competitors and time periods.
The bottom line tells a company how profitable it was during a period and how
much it has available for dividends and retained earnings. What’s retained
can be used to pay off debts, fund projects, or reinvest in the company.
The nature of intermediation and the motivation of each party to the pro-
cess are key to understanding the series of dilemmas facing a bank when
deciding on the appropriate balance of asset and liability types. Banks must
generate profits, achieve good returns for customers and earn a sufficiently
good credit rating to enable it to borrow funds from other banks at the lowest
possible rates. Associated with this is the need to reduce physical costs (in
terms of maintaining a branch network and staffing).
While it will be relatively easy for a bank to set interest rates for its borrow-
ers that are higher than its cost of funds plus overhead costs, these rates
must also be competitive if they are to attract lenders (liabilities) and bor-
rowers (assets). To ensure a positive margin, a bank may offer only fixed
rates to depositors and borrowers, but then it will miss the opportunity to
make higher profits if short term rates change. To ensure that it benefits
from short-term interest-rate movements, a bank may offer only variable
rates – for example a percentage above the London inter-bank offered rate
(Libor) or its own base rate – but it may then miss the opportunity to achieve
higher profits on larger, longer-term loans and may itself be uncompetitive in
the market for larger longer-term deposits.
Profitability, measured by return on equity (ROE), will also be affected by

bank regulation – not only in terms of the physical costs of compliance, but
also the capital requirements based on the type of business that the bank
transacts.

Profitability is affected by following factors

capital requirements,
interest spread,
fees and commissions,
cost–income ratio,
expected loan losses,
taxation rate.
Scenario A is the base case in which the bank is experiencing benign eco-
nomic conditions and little competition. Scenario B introduces competition
through the narrowing of the interest spread achieved and reduction of loan
fees. Scenario C introduces economic problems and increased loan losses,
and Scenario D reflects increased costs of delivery. The model could go on
to assume different capital and tax requirements, but the key point is made:
that bank profits can be fragile, and are affected by a wide range of issues
that banks must balance and manage on a daily basis.
Interest spread and fees will be driven as much by competition in specific
markets as by the lending policy that a particular bank adopts. Although
banks maintain and fix their own preferred margins, transparency of inter-
est rates is essential, especially for consumer products, and this can lead to a
lack of differentiation between providers.
Fees and commissions arise from loans, and also from non-interest products
such as insurance and handling fees for foreign exchange. To protect fixed
interest offers, bank may charge a ‘booking’ fee, as well as an early-repay-
ment penalty. Commissions and fees (less compensation for mis-selling) are
responsible for about half of retail bank profits annually.
Cost–income ratios rely largely on staffing and premises. Physical costs of
operations and staff are also vital to bank profitability. Some of the deliv-
ery system choices that banks may make as they seek to reduce costs and
increase efficiencies. Traditional branch networks are far more expensive
than internet-only banks, for example, and can miss opportunities for econo-
mies of scope – that is, for building on the basic creditor–debtor relationship
and cross-selling other products, based on the brand strength and market
presence.
Finally, however careful and prudent the initial lending decision, it is certain
that some loans will never be repaid. Even with home mortgages, the value of
the security can fall, so that the whole of the loan is not covered by the resale
value of the property – a phenomenon known as ‘negative equity’.
This section documents the analytical framework in which the profitability of
banking institutions is determined.
The net interest income, other income, operating expenses and provisioning
are the factors which get into the direct calculation of net profits.
NP = (NII + OI) – (OE +Pr)

34 RETAIL BANKING
Where NP – Net profits, NII – Net Interest Income, OI – Other Income, OE –

Operating Expenses, Pr – Provisioning.
The net interest income is the difference between interest income and
interest expenses. The interest income is dependent on the return on funds
and the interest expenses depend upon the cost of funds. While the cost of
funds indicates the efficiency of resource mobilisation by a bank, the return
on funds indicate how profitably the bank has deployed its funds. Thus, the
capability to raise low cost resources and the ability to design profitable
asset creating strategy are the keys to increase the net interest income of
a bank.
Apart from interest income, banks also have income from other sources
such as commission, exchange and brokerage, profit on sale of investments,
and profit on exchange transactions. Those banks which make conscious
efforts to increase income from other sources would register higher net
profits than others. On the expenditure side, apart from interest expenses,
i.e., interest paid on deposits and borrowings, another major expenditure
category is the operating expenses. The operating expenses mainly con-
sists of payments to and provisions for employees, rent, taxes, printing
and stationery, advertisement and publicity, law charges and insurance,
among others. Savings in these expenses through austerity measures would
increase net profits of banks.
Provisioning including those for non-performing assets, standard assets,

depreciation on investment and floating provisions, is another major item
which has a bearing on net profits of banks. Banks are required to keep aside
a portion of their operating profit as provisions. Thus, as NPA increases or
the value of investment decreases due to adverse market movements, banks
have to increase the amount kept aside as provisions, which will reduce
their net profits. Thus, quality of loans and investment strategies will have a
strong bearing on profitability of banks. Further, it is observed that some of
the sectors in the economy are more prone to NPAs. Accordingly, if a bank
has more exposures to such sectors, it is likely to impact the profitability of
those banks adversely.
While factors discussed above such as net interest income, other income,
operating expenses and provisioning, would get into the direct calculation
of net profits, there could be other factors in the second line which would
influence these first line factors and through them, net profits. For exam-
ple, if macroeconomic growth momentum is conducive in a particular econ-
omy, it would have a positive impact on the banking sector as well through
reduction in NPAs and good growth in banking business. Further, the credit
risk undertaken by a bank as reflected in the NPA generation would impact
the profitability negatively. Further, banks’ profitability would also move
in tandem with business cycles in the economy owing to the pro-cyclical
behavior of banks. Thus, the profitability of banks would increase during
an economic upturn and decrease during an economic downturn. The
inflationary pressures in the economy would tighten the interest rate envi-
ronment in the economy, thus, making banking services less attractive to
customers. This also will have a negative impact on the profitability of the
banking sector.

SELF-ASSESSMENT
4. Profitability is affected by ________ factor(s).
QUESTION
a. interest spread
b. fees and commissions
c. cost–income ratio
d. All of the above
1. Compare the interest rates of private sector banks and public sector ACTIVITY 2
banks in different schemes. Also compare the services provided by
both the banks.
2.5 ROLE OF RETAIL BANK MANAGEMENT

The importance of a sound system of commercial banking for a developing
country may be depicted as follows:
2.5.1 CAPITAL FORMATION

The rate of saving is generally low in an underdeveloped economy due to
the existence of deep-rooted poverty among the people. Even the potential
savings of the country cannot be realized due to lack of adequate banking
facilities in the country.
To mobilize dormant savings and to make them available to the entrepre-
neurs for productive purposes, the development of a sound system of com-
mercial banking is essential for a developing economy.
2.5.2 MONETIZATION
An underdeveloped economy is characterized by the existence of a large
number of monetized sectors, particularly, in the backward and inaccessible
areas of the country. The existence of a non-monetized sector is a hindrance
in the economic development of the country. The banks, by opening branches
in rural and backward areas, can promote the process of monetization in the
economy.
2.5.3 INNOVATIONS
Innovations are an essential prerequisite for economic progress. These inno-
vations are mostly financed by bank credit in the developed countries. But the
entrepreneurs in underdeveloped countries cannot bring about these inno-
vations for lack of bank credit in an adequate measure. The banks should,
therefore, pay special attention to the financing of business innovations by
providing adequate and cheap credit to entrepreneurs.
2.5.4 FINANCE FOR PRIORITY SECTORS

The commercial banks in underdeveloped countries generally hesitate
in extending financial accommodation to such sectors as agriculture and

36 RETAIL BANKING
small scale industries, on account of the risks involved there in. They mostly
extend credit to trade and commerce where the risk involved is far less. But
for the development of these countries it is essential that the banks take risk
in extending credit facilities to the priority sectors, such as agriculture and
small-scale industries.
2.5.5 PROVISION FOR MEDIUM AND LONG-TERM FINANCE

The commercial banks in underdeveloped countries invariably give loans
and advances for a short period of time. They generally hesitate to extend
medium and long term loans to businessmen. As is well known, the new busi-
ness needs medium- and long-term loans for their proper establishment.
The commercial banks should change their policies in favour of granting
medium- and long-term accommodation to business and industry.
2.5.6 CHEAP MONEY POLICY

The commercial banks in an underdeveloped economy should follow cheap
money policy to stimulate economic activity or to meet the threat of business
recession. In fact, cheap money policy is the only policy which can help pro-
mote the economic growth of an underdeveloped country. It is heartening to
note that recently the commercial banks have reduced their lending interest
rates considerably.
2.5.7 NEED FOR A SOUND BANKING SYSTEM

A sound system of commercial banking is an essential prerequisite for the
economic development of a backward country.
SELF-ASSESSMENT
5. __________is not why commercial banking is important for a
QUESTION
developing country.
a. Cheap money policy
b. Finance for Priority Sectors
c. Innovations
d. Non-monetized sector
2.6 MONEY AND ITS FUNCTIONING

Money is anything which fulfils four main functions which are as follows-
1. It is a medium of exchange that is acceptable to all, divisible, convenient
and secure,
2. It is a liquid store of value,
3. It is a unit of account, and
4. It is a standard of deferred payments
A medium of exchange
Unlike barter system where goods were exchanged for goods, money serves
as a medium of exchange goods for money and then the money for other

goods. Money acts as an intermediary – as a medium of exchange – just as

banks act as intermediaries between borrowers and lenders. The bank is an
acceptable counterparty to both, while the borrower individually may not be
acceptable to the individual lender.
Normally, a nation’s own currency is the most acceptable, and there is
good business to be done by banks in allowing customers and tourists to
exchange their own native currency for that of their destination (and back
again).
A liquid store of value – Money is a liquid store of value which can be saved
easily. Money has liquidity that is it can easily be converted to cash without
any cost and with no loss of capital value or forfeit of interest.
A unit of account
Money is also a unit of account. We use money to add together all sorts of
completely different items, for reasons of clarity and brevity, to help us to cal-
culate, among other things: the total values of all of the assorted articles, fig-
ures for the profit or loss we may have made on transactions during the year,
budget totals for expenditure beyond which we may not go in the coming
year, and forecasts of sales or profits that we expect to achieve during the
coming year.
A standard of deferred payment

We defer payment by offering to pay money, usually over a much longer
period. A home mortgage loan is a good example of this. We are using money
for banking and legal purposes, incorporating monetary values in the con-
tract and agreeing to pay in full at some date in the future. Interest reflects
the value to the lender of its deferment of liquidity and the risk that borrower
may not complete repayment.
2.6.1 ROLE OF RESERVE BANK OF INDIA

The Reserve Bank of India (RBI) was established on 1st April 1935 under
the Reserve Bank of India Act, 1934. After its establishment, it took over the
function of issuing paper currency from the Government of India and of con-
trolling credit from the Imperial Bank of India. It originally started as a share
holders bank with a paid-up capital of `5 crores. It was nationalized on 1st
January 1956 and since then it has been functioning as a State owned and
State-controlled Central Bank.
2.6.2 FUNCTIONS OF RBI

The top financial institution in the money market is the Central Bank. It
operates as both the government bank and the bankers’ bank, serving as
the nation’s monetary authority. It handles the majority of the government’s
financial operations. To ensure that financial institutions support the govern-
ment’s economic agenda, it has an impact on their behaviour.
The central bank’s primary responsibility is to control the monetary system,
which consists of the banking, currency, and credit systems. The bank is given
extensive powers for this reason. Conducting the government’s banking and
financial operations is another crucial duty of the central bank. Additionally,

38 RETAIL BANKING
it does a few other tasks. These tasks are carried out for the benefit of others
rather than for financial gain.
Nature and functions of Central Bank
1. Traditional Central Banking Functions (Monetary Functions)
a. Bank of Issue – The Minimum Reserve System
b. Banker to Government
c. Banker’s Bank and Lender of the Last Resort
d. Controller of Credit
e. Custodian of Foreign Reserves
2. Supervisory Functions
3. Promotional Functions
4. Miscellaneous Functions
a. Interest Rate Intervention
b. Monetary Policy Instruments
SELF-ASSESSMENT
6. The Reserve Bank of India (RBI) was established on
QUESTION
a. 1st May 1940
b. 1st January 1956
c. 1st April 1935
d. 1st April 1945
2.7 SIGNIFICANCE OF MONETARY POLICY
2.7.1 MONETARY POLICY

Under the Reserve Bank of India, Act, 1934 (RBI Act,1934) (as amended in
2016), RBI is entrusted with the responsibility of conducting monetary policy
in India with the primary objective of maintaining price stability while keep-
ing in mind the objective of growth.
The monetary policy plays an important role in the economic growth as well
as price and exchange rate stability, there are other aspects that it can help
with as well.
1. Promotion of saving and investing: Since the monetary policy regulates
the country’s interest rate and inflation, it may have an impact on
peoples’ savings and investments. A higher rate of interest increases the
likelihood of saving and investing, which helps to keep the economy’s
cash flow healthy.
2. Controlling imports and exports: Monetary policy assists export-
oriented units to replace imports and enhance exports by assisting
industries in obtaining a loan at a lower rate of interest. In turn, this
enhances the state of the balance of payments.

3. Managing business cycles: Boom and depression are the two primary
phases of an economic cycle. The best weapon for regulating the boom
and bust phases of business cycles is monetary policy, which manages
credit to regulate the money supply. By limiting the supply of money,
inflation in the market can be managed. On the other hand, when the
money supply expands, the economy’s demand will grow as well.
4. Regulation of aggregate demand: The monetary policy controls the
demand in an economy, so it helps to maintain a balance between the
demand and supply of goods and services. When credit is expanded
the interest rate are reduced, which enables many people to get loan
for purchase of goods and services, which increases demand in the
economy. On the other hand, when the authorities wish to reduce
demand, they can reduce credit and raise the interest rates.
5. Generation of employment: As the monetary policy can reduce the
interest rate, small and medium enterprises (SMEs) can easily secure
a loan for business expansion. This can lead to greater employment
opportunities.
6. Helping with the development of infrastructure: Concessional finance
is permitted under the monetary policy for infrastructure development
within the nation.
7. Allocating more credit for the priority segments: For the development
of the priority sectors, such as small-scale industries, agriculture,
undeveloped societal segments, etc., additional funds are allotted under
the monetary policy at reduced rates of interest.
8. Managing and developing the banking sector: The entire banking
industry is managed by the Reserve Bank of India (RBI). While RBI
aims to make banking facilities available far and wide across the nation,
it also instructs other banks using the monetary policy to establish rural
branches wherever necessary for agricultural development. Additionally,
the government has also set up regional rural banks and cooperative
banks to help farmers receive the financial aid they require in no time.
2.8 MONETARY POLICY INSTRUMENTS

The main monetary policy instruments available to central banks are
1. open market operation,
2. Bank reserve requirement,
3. Interest-rate policy,
4. Re-lending and rediscount (including using the term repurchase
market), and
5. Credit policy (often coordinated with trade policy).
2.8.1 OPEN MARKET OPERATIONS

A central bank influences the money supply in an economy directly. Each
time it buys securities, exchanging money for the security, it raises the money
supply. Opposite to this, selling of securities lowers the money supply. Buying

40 RETAIL BANKING
of securities thus amounts to printing new money while lowering supply of

the specific security.
The main open market operations are:
_ Temporary lending of money for collateral securities (Reverse Operations
or repurchase operations, otherwise known as the ‘repo’ market). These
operations are carried out on a regular basis, where fixed maturity loans (of
1 week and 1 month for the ECB) are auctioned off.
_ Buying or selling securities (Direct Operations) as per need.
_ Foreign exchange operations such as forex swaps.
All of these interventions can also influence the foreign exchange market
and thus the exchange rate.
Techniques of Credit Control
Several tools and techniques of credit control used by the Reserve Bank of
India can be broadly categorized as quantitative or general methods and
qualitative or selective methods.
Quantitative or General Methods
The tools used by the central bank to influence the volume of credit in total-
ity in the banking system, without any regard for the use to which it is put,
are called quantitative or general methods of credit control. These methods
govern the lending power of the financial sector of the whole economy and
do not discriminate among the several spheres of the economy. The crucial
quantitative methods of credit control are:
Bank Rate Policy: The standard rate at which the central bank is ready to
buy or rediscount bills of exchange or other commercial papers eligible for
purchase under the provisions of the Act of RBI. Thus, the Reserve Bank of
India rediscounts the first-class bills in the hands of commercial banks to
furnish them with liquidity in case of need.
The bank rate indicates the central bank’s long-term outlook on interest rates.
If the bank rate moves up, long-term interest rates also tend to move up, and
vice versa. Banks make a profit by borrowing at a lower rate and lending the
same money at a higher rate of interest. If the RBI hikes the bank rate (this
is currently 6 per cent), the interest that a bank pays for borrowing money
(banks borrow money either from each other or from the RBI) increases. It,
in turn, raises its own lending rates to ensure it continues to make a profit.
Open Market Operations: It means of enforcing monetary policy by which
RBI controls the short-term rate of interest and the supply of base money
in an economy, and thus indirectly the total supply of money. In times of
inflation, RBI sells securities to finish off the excess money in the market.
Similarly, to increase the money supply, RBI purchases securities.
Adjusting with CRR and SLR: By adjusting the CRR (Cash Reserve Ratio)
and SLR (Statutory Liquidity Ratio) which are short term tools to be used to
shortly govern the cash and fund flows in the hands of the banks, people and
government, the central bank of India regularly makes necessary alterations
in these rates. These variations in the rates will easily have a larger control
over the cash flow of the country.

(i) CRR (Cash Reserve Ratio): All commercial banks are required to retain
a certain amount of its deposits in cash with RBI. This percentage is
called the cash reserve ratio. The present CRR requirement is 4 per
cent. This serves two purposes. Firstly, it ensures that a part of bank
deposits is totally risk-free and secondly it enables RBI to control
liquidity in the system, and thereby, inflation by tying their hands in
lending money
(ii) SLR (Statutory Liquidity Ratio): Indian banks are required to maintain
25 per cent of their time and demand liabilities in government securities
and certain approved securities. What SLR does is again restrict the
bank’s leverage in lifting more money into the economy by investing
a part of their deposits in government securities as a part of their
statutory liquidity ratio requirements.
Lending Rate: Lending rates can be defined as the ratios fixed by RBI to lend
the money to Notes the customers on the basis of those rates. The higher the
rate of lending signifies the costlier credit to the customers. The lower the
rate of lending signifies the credit to the customers is less which will encour-
age the customers to borrow funds from the banks more that will facilitate
the flow of more money in the hands of public.
Repo Rate: Repo rate is the rate at which banks borrow funds from the
central bank to fill the gap between the demand they are facing for pro-
viding loans to their customers and how much funds they have on hand to
lend.
If the RBI wants to make it more costly for the banks to borrow money, it
hikes the repo rate; similarly, if it wants to make it cheaper for banks to
borrow money, it cuts the repo rate.
Reverse Repo Rate: The rate at which Reserve Bank of India borrows money
from the banks (or banks lend money to the RBI) is termed as the reverse
repo rate. The RBI uses this instrument when it feels there is too much funds
floating in the banking industry.
If the reverse repo rate is rising up, it means the RBI will borrow money from
the bank and offer them a lucrative rate of interest. As a result, banks would
prefer to keep their money with the RBI (which is absolutely risk free) in lieu
of lending it out (this option comes with a certain amount of risk) to other
customers.
Qualitative or Selective Methods
The tools used by RBI to govern the flows of credit into specific directions
of the economy are called qualitative or selective methods of credit control.
Unlike the quantitative methods, which affect the total volume of credit, the
qualitative methods affect the types of credit extended by the commercial
banks; they affect the composition of credit rather than the size of credit
in the economy. The important qualitative or selective methods of credit
control are:
Marginal Requirements: Every commercial bank has to keep a margin
whenever it provides loans against the security. It means that the amount of
loan is lower than the real value of security.

42 RETAIL BANKING
Example: Actual value of security is 100 and the amount of loan is 85, there-
fore margin requirement is 15%.
Central bank can increase or decrease the supply of money by altering the
requirements of margin. Example: If central bank wants to decrease the
money supply it can do so by increasing the margin requirements. In this
way amount of loans decreases.
Regulation of Consumer Credit: Consumer credit facility refers to the act of
selling a consumer good on a credit basis to the customers. This tool is used
by government or Reserve Bank of India to enforce certain regulations on
the goods that are sold on credit.
If the central bank wants to increase the money supply it can do so by
adopting a lenient policy about the credit for purchase of consumer goods.
Similarly central bank can cut the money supply by putting limitations on
consumer credit.
Credit Rationing: Central bank uses credit rationing to fix the credit ceil-
ing allowed for each and every commercial bank. The central bank fixes
the credit limit for each commercial bank and does not give credit to them
beyond that limit.
Whenever the RBI desires to cut the supply of money, it decreases the limit
up to which it can give loans to the member banks. Likewise, central bank
can increase the money supply by increasing the credit limit.
Moral Suasion: In some cases central bank morally persuades or requests
the commercial banks not to get involved themselves in such economic activ-
ities which are unfavourable to the interest of the country. It regularly guides
and proposes the member banks to follow a specific policy for loans and
abstain themselves from giving loan for speculative purposes.
Direct Action: Direct action is the last option through which central bank
takes a direct action against the bank which does not act in conformity with
the policy of Reserve Bank of India. In case of direct action the central bank
can impose fine and penalty and can deny giving out loans to the commercial
bank. Such type of force keeps commercial banks away from unsought credit
activities.
Publicity: Central bank also publishes details concerning its policies and
important information about assets and liabilities, credit and business situ-
ation etc. of commercial banks. This facilitates commercial banks as well as
general public to realize the monetary needs of country. Central bank dis-
closes some of the important information about the commercial banks so
that the people know about the several activities of commercial Notes banks
and can protect themselves from any potential loss in the future.
Current monetary policy of RBI
The present rate as on 23rd December 2022–
Indicators Current Rates

CASH RESERVE RATIO 4.50%
STATUTORY RESERVE RATIO 18.00
REPO RATE 5.90%

Indicators Current Rates

REVERSE REPO RATE 3.35%
MARGINAL STANDING RATE 6.15%
BANK RATE 6.15%
SELF-ASSESSMENT
7. ________ is the main monetary policy instrument available to central
QUESTIONS
banks.
a. Open market operation
b. Bank reserve requirement
c. Interest-rate policy
d. All of the above
8. The rate at which Reserve Bank of India borrows money from the
banks (or banks lend money to the RBI) is termed as the
a. lending rate
b. marginal standing rate
c. repo rate
d. reverse repo rate
2.9 IMPACT OF MONETARY POLICY

The monetary policies of the Central Bank, i.e. the Reserve Bank of India
(RBI) plays a huge role in effecting the ability of commercial banks to create
credit. The RBI uses a number of methods to regulate the credit creation in
the economy, some of them are:
a. Bank Rate: It is the rate at which RBI gives loans to or rediscounts
the bill of exchange of the commercial banks. This is also known as
the repo-rate. The bank rate and the rate of interest charged by the
commercial banks to its customer are inter-related. For example, in
case of inflation when the RBI wants to contract the credit flow in the
economy it increases the repo-rate. This would lead to an increase in
the rate of interest charged by the commercial banks to the customers
and thus higher interest outgo world reduce the amount borrowed by
the customer from the banks, thus reducing the cash available in the
economy. And during recession the RBI would reduce the repo rate to
increase the credit flow in the economy. This is evident from the recent
RBI decision to reduce the repo-rate from 5.15% to 4.40%. This was
required as the economy is entering into a recessionary phase due to
COVID-19 impact world-wide.
b. Open Market operations: It refers to the sale and purchase of securities
by the RBI in the money and capital markets. During inflation the
RBI sells its securities. Buyer of the securities pays the amount by
withdrawing their deposits from the banks. This reduces the cash
holdings of the commercial banks and a reduction of cash reserve
would reduce the loans and advances given by them and hence reduce
the credit flow in the economy.

44 RETAIL BANKING
c. Cash Reserve Ratio: Commercial banks are required to keep a portion

of the total deposits with the RBI as cash reserve. During inflation
RBI increases the CRR and during recession RBI reduces it. It is for
this reason that RBI has recently cut the CRR from 4% to 3% of net
time and demand liabilities (NTDL), to counter the COVID related
recession.
It is due to this process that in case one bank collapses, the entire banking
chain is affected and this leads to cyclical effect of NPA’s. Hence it is import-
ant to maintain the financial health of banks to ensure there is no serious
repercussion on the economy if banking system collapses.
SELF-ASSESSMENT
9. This is the rate at which RBI gives loans to or rediscounts the bill of
QUESTION
exchange of the commercial banks.
a. reverse repo rate
b. marginal standing rate
c. repo rate
d. bank rate
2.10 NRI BANKING

Meaning of NRI (Non Resident Indian)
An Indian citizen who resides in India for less than one hundred and
eighty-two days during the course of the preceding financial year, or
who has gone out of India or who stays outside India for the purpose of
employment, or
who has gone out of India or who stays outside India for carrying on busi-
ness or vocation outside India, or
who has gone out of India or who stays outside India for any other
purpose indicating his intention to stay outside India for an uncertain
period.
Note: NRI day is celebrated every year on 9th January in India to mark
the contribution of the NRIs in the development of India.
For example- Shivani pursued her MBA from London School of Business
in the year 2018 and has been working there post completion of her
degree. She has visited India only thrice during this period. Shivani is
thus an NRI as she is staying outside India for more the 182 days in the
previous financial years.
Definition of NRI as per RBI

NRI for this purpose is defined as a person resident outside India who
is citizen of India. In terms of Regulation2 FEMA Notification number
13 dated May 3, 2000, Non-Resident Indian (NRI) means a person who is
resident outside India who is a citizen of India. Person of Indian Origin

(PIO) means a citizen of any country other than Bangladesh or Pakistan

who had
(a) at any time held Indian passport or
(b) he or either of his parents or any of his grandparents was a citizen of
India by virtue of the Constitution of India or the Citizenship Act, 1955 or
(c) the person is a spouse of an Indian citizen or a person referred to in (a)
or (b).
Meaning of Person of Indian origin

Following can be termed as person of Indian origin
A person who holds an Indian passport at any point of time
A person whose parents was/were citizens of India
A person whose grandparents was/were citizens of India
A spouse (who is not a Pakistan or Bangladesh citizen) of an Indian
citizen or of a person of Indian origin
However, there are certain conditions that are laid down by RBI, when
opening accounts for PIOs
Opening of accounts by foreign nationals of Pakistan or Bangladesh will
require prior approval of RBI
When opening banking accounts for PIOs, the bank accounts must be opened
jointly with the NRI spouse only.
Difference between NRI and PIO
NRIs are people who are citizens of PIOs are people who either have Indian
India who live abroad parents, grandparents or an Indian
spouse
An Indian who spends less than PIO cardholders can visit India at any
182days in India in a year point of time and stay in India for 180
days
NRIs hold voting rights in India PIOs do not have the right to vote.
NRIs are eligible to hold public PIOs cannot hold post in public offices
post in public offices
SELF-ASSESSMENT
10. NRI is an Indian who spends less than ________ days in India in a
QUESTION
year.
a. 180 b. 185
c. 182 d. 175
1. Prepare a list of documents needed by the NRI to open an account ACTIVITY 3

and what are the terms and conditions.

46 RETAIL BANKING
2.11 TYPES OF ACCOUNTS NRIs CAN OPEN

Banks in India offer several deposit schemes for NRIs in India as long as they
retain their NRI status
Non-resident ordinary (NRO)
Non-Resident External Rupee Account (NRE)
Foreign Currency Non-Resident Account (FCNR)

DEPOSIT
Resident Foreign Currency deposit Schemes
Special non resident rupee
1. NRO accounts – It stands for Non Resident Ordinary Accounts. An Existing

bank account of an Indian citizen who relocates from India to another country,
will get converted to NRO. However Individuals/ Entities moving to Pakistan
and Bangladesh shall require prior approval of RBI. NRO account can be
opened in any branch of India. The account may be held jointly in the names
of two or more NRIs/PIOs. Interest earned in accounts is freely repatriable
after tax deduction at source (TDS). In other words, the interest earned.
can be legally brought back into the home country. The account holder of an
NRO account is exposed to the fluctuations in the value of Indian rupee to
the extent of repatriable portion of the account
Notes: Repatriation means bringing back home something bought and
earned in foreign country.
Current, saving, term deposits and RDs are the types of accounts.
Source of funds and NRO accounts- There are mainly following types of
transactions that can be done in an NRO account. It can be categorised into
following types-Permissible Credits- Permissible credit means the funds that
can be brought into the NRO accounts. Following are the types of permissi-
ble credits.
Inward remittance from outside India.
Transfer From other NRO accounts.
Rupee gift/loan made by a resident to a NRO/PIO relative within the limits
prescribed under the Liberalised Remittance Scheme may be credited to
the latter’s NRO account
Permissible Debits- It means payment which can be done through the NRO
accounts. The debits which can be done in these accounts are-
Local payments,
transfer to other NRO account,
remittance of current income abroad
Apart from above, balances in the NRO account cannot be repatri-
ated abroad except by NRIs and PIOs up to 1 million USD, subject
to FEMR(Remittance)2016 (FEMR- Foreign exchange management
Remittance)

Funds can be transferred to NRE account within this USD1million facility

Other features of NRO scheme- There are various other features of NRO
which are as under
1. Nomination facility is available in the NRO accounts.
2. Income earned in form of interest etc is taxable
3. Rate of interest is in the bank’s discretion i.e., every bank has its own
rate of interest.
4. Loan against the deposits held by an individuals can be granted in
India to the account holder or third party but the loan amount given
cannot be used for the purpose of relending, carrying on agricultural /
plantation activities or investment in real estate. Loan outside India is
not permitted.
5. The balance available in an NRO account of NRIs/PIOs are remittable
upto USD 1(one) million per financial year along with other eligible
assets.
6. In NRO account the facility of operation by Power of Attorney is
permitted for withdrawals for permissible local payments in rupees,
remittance of current income to the account holder himself through
normal banking channels. The limits and conditions of repatriability
will be applicable.
Any kind of change in residential status and returning to India, the NRO
Account will be designated as resident accounts on the return of the account
holder to India.
An NRO (current/saving) account can also be opened by a foreign national of
non-Indian origin visiting India, having funds which are remitted from out-
side India through banking channel or by sale of foreign exchange brought
by him to India.
The balances which are available in the NRO account can be paid to the
account holder at the time of his departure from India only if the account has
been maintained for a period not exceeding six months and the credit in the
account are only the interest accrued and no local funds.
2. NRE ACCOUNT – It stands for Non resident External Rupee the features
of this account are as follows-
1. NRIs can open this NRE account.
2. Joint account can be opened in the name of two or more NRIs. It can
also be opened with former survivor option where former is an NRI and
the survivor is the resident of India.
3. Principal along with interest is freely repatriable in this account.
4. Account holder is the NRE account are subjected to the fluctuations in
the value of Indian rupees.
5. An NRE account can be current, saving or term deposit.
6. The term deposit made can be of minimum tenure for term deposit is 1
year and maximum 10 years of duration.

48 RETAIL BANKING
7. Loan against term deposit can also be availed but the fund given
should not be utilized for the purpose of relending or for carrying
on agricultural/plantation activities or for investment in real estate
business.
8. It is TDS free and tax free in India.
Sources of funds- The possible credits and debits which can done in these
accounts are-
Permissible credits can be current income like rent, dividend, pension, inter-
est etc. Interest on investment to be credited if such investments are made
from this account or through inward remittance.
Permissible debits are local disbursements, remittance outside India, trans-
fer to other NRE/FCNR(B) accounts and investments.
3. FCNR Account – FCNR stands for foreign currency non-resident account.
The features of this account are as follows-
This account can be opened by NRIs.
Joint account can be opened in the name of two or more NRIs. It can also
be opened with former survivor option where former is an NRI and the
survivor is the resident of India.
The currency in which the account can be denominated in Pound ster-
ling, US Dollar, Japan Yen, EURO, Canadian Dollar or in any other con-
vertible currency as may be decided by bank.
Principal along with interest is freely repatriable in this account.
Account holder is protected against changes in rupee value (deprecia-
tion) vis-a-vis the currency in which the account is denominated.
One of its distinguishing feature is that FCNR account can be opened in
form of term deposits only excluding RDs.
The minimum tenure of Term deposit is 1 year and maximum is 5 year.
Loan against term deposit can be given provided that the fund is not
utilized for the purpose of relending or for carrying on agricultural/plan-
tation activities or for investment in real estate business.
It is TDS free and tax free in India.
Sources of funds- Foreign inward remittance (FIR) OR transfer from NRE/
FCNR(B).
4. RFC Account – RFC stands for Resident Foreign Currency deposit
Schemes. It is for the NRIs who become resident of India after returning, the
bank offers the RFC(Resident Foreign Currency) account scheme.
5. Special Non Resident Rupee Account (SNRR) account – It is account
opened by any person resident outside India, who has business interest
in India may open Special non-resident rupee account with an authorised
dealer for the purpose of putting through bonafide transactions in rupees
which do not involve violation of the Act, rules and regulations made there-
under. The names of such account should be in the name of business carried
on by the NRI. It shall not bear any kind of interest. The tenure of SNRR

account should be the tenure of the contract, period of operation or the busi-
ness of the account holder and not more than seven years.
SELF-ASSESSMENT
11. The following is not the type of account that an NRI can open: QUESTION
a. NRO accounts
b. NRE accounts
c. Fixed deposit
d. RFC account
2.12 SUMMARY
A balance sheet is the statement of assets and liabilities of any business
as on a particular date.
Liabilities component consists mainly of capital, reserves and surplus,
deposits, borrowings from other banks or RBI, and other liabilities and
provisions.
Basic approach of capital adequacy framework is that a bank should have
sufficient capital to provide a stable resource to absorb any losses arising
from the risks in its business.
Money at call and short notice includes deposits repayable within 15 days
or less than 15 days’ notice lent in the inter-bank call money short other
banks market.
Loans and advances to banks are largely short-term loans to other banks
in the financial system and to overseas banks.
Profitability is a measure of an organization’s profit relative to its expenses.
The three major types of profit are gross profit, operating profit, and net
profit—all of which can be found on the income statement.
Profitability of banks would increase during an economic upturn and
decrease during an economic downturn.
The commercial banks in underdeveloped countries invariably give loans
and advances for a short period of time.
Repo rate is the rate at which banks borrow funds from the central bank
to fill the gap between the demand they are facing for providing loans to
their customers and how much funds they have on hand to lend.
The monetary policies of the Central Bank i.e. the Reserve Bank of India
(RBI) plays a huge role in effecting the ability of commercial banks to
create credit.
1. Capital is the amount of money that a bank has obtained from its KEY WORDS
shareholders and other investors and the profit that is made by bank
and not paid out.
2. Capital reserves means surplus on revaluation or sale of fixed assets.

50 RETAIL BANKING
3. The net interest income is the difference between interest income

and interest expenses.
4. Innovations are an essential prerequisite for economic progress.
These innovations are mostly financed by bank credit in the
developed countries.
5. Repo rate is the rate at which banks borrow funds from the central
bank to fill the gap between the demand they are facing for providing
loans to their customers and how much funds they have on hand to
lend.
6. Money has liquidity that is it can easily be converted to cash without
any cost and with no loss of capital value or forfeit of interest.
7. The rate at which Reserve Bank of India borrows money from the
banks (or banks lend money to the RBI) is termed as the reverse
repo rate.
8. Direct action is the last option through which central bank takes a
direct action against the bank which does not act in conformity with
the policy of Reserve Bank of India.
9. Bank Rate is the rate at which RBI gives loans to or rediscounts the
bill of exchange of the commercial banks.
10. NRI for this purpose is defined as a person resident outside India
who is citizen of India.
11. RFC stands for Resident Foreign Currency deposit Schemes. It is
for the NRIs who become resident of India after returning.

1. Give five major differences between liabilities and assets.
2. What do you understand by term deposits?
3. Discuss the factors on which profitability is dependent.
4. Briefly describe the type of accounts that NRI can open.
5. What are the differences between NRE and FCNR accounts?
6. What is the role of RBI? Also describe the functions of RBI?
7. Which are the main monetary policy instruments available to central
banks?
8. Discuss the impact of monetary policy on different areas of banks.
2.14 ANSWER KEYS
Bank’s Balance Sheet 1. d. Investments
Assets and Liabilities-Concept 2. d. All of these


3. d. Borrowing
Profitability and Interest Rate 4. d. All of the above
Role of Retail Bank 5. d. Non-monetized sector
Management
6. c. 1st April 1935
Monetary Policy Instruments 7. d. All of the above
8. d. reverse repo rate
Impact of Monetary Policy 9. d. bank rate
NRI Banking 10. c. 182 days
Types of accounts NRI can open 11. c. Fixed deposit
2.15 SUGGESTED READINGS AND

E-REFERENCES

C H A
3 P T E R
RETAIL BANKING REGULATION—RISK

AND ITS MANAGEMENT
CONTENTS
3.1 Introduction
3.2 Regulatory Bodies in Financial Services
3.2.1 Reserve Bank of India (RBI)
Self-Assessment Question
3.2.2 SEBI
3.2.3 IRDA
3.2.4 PFRDA
3.2.5 Ministry of Corporate Affairs (MCA)
3.2.6 Need for Financial Regulation
3.3 Types of Regulation Apparent in Retail Banking
3.3.1 Exposure Limits
3.3.2 Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR)
3.3.3 Provisioning
3.3.4 Priority Sector Lending
3.3.5 New Bank License Norms
3.3.6 Willful Defaulters
3.3.7 BCSBI Code for Banking Services
3.4 Capital Adequacy Ratio (CAR)
3.4.1 Objectives of Capital Adequacy Ratio (CAR)
3.4.2 BASEL
3.4.3 Basel II
3.4.4 Regulatory Supervision and Market Discipline

54 RETAIL BANKING
3.4.5 Basel III

3.4.6 Capital Buffers for Tough Times
3.5 Various Types of Risk
3.5.1 Types of Financial Risks
3.6 Risk Measurement
3.7 Risk Management
3.7.1 General Risk Management Policy
3.8 Non-performing Assets
3.8.1 Classification of NPAs
3.8.2 Provisions for NPAs
3.9 NPA Management
3.9.1 Causes for Creation of Non-Performing Assets
3.10 Tools of Debt Recovery
3.10.1 One Time Settlement/Compromise Scheme
3.10.2 Lok Adalats
3.10.3 Debt Recovery Tribunals (DRTs)
3.10.4 Credit Information Bureau (India) Ltd. (CIBIL)
3.10.5 Securitization and Reconstruction of Financial Assets and Enforcement of
Security in Interest (SARFAESI) Act, 2002
3.10.6 Implication of NPA and Debt Recovery on the Performance of Banks
3.11 Summary
Key Words
3.13 Answer Keys

RETAIL BANKING REGULATION—RISK and ITS MANAGEMENT 55
Anupam has a home loan of Rs 40 lakhs with the XYZ Bank. The inter-
est rate offered at the sanction time was 6.95% which was floating rate
and repo linked. Anupam was very delighted to receive the loan at a
cheaper rate. After one year, he got a call from the bank that his account
was having an overdue amount of Rs 5000/-. He was surprised to hear
as he was regular in EMI payment. He visited the bank and discussed
the issue with the advance in charge. He saw the details of his account
and informed him that the rate of interest in his account is floating. So,
it has been direct impacted by the interest parameter from the regula-
tory body of banks i.e RBI. As the RBI increased the repo rate due to
increase in inflation, the bank also increased the rate of interest which
is now 7.50%. Because of this, the interest has increased in Anupam’s
loan account and his existing EMI was less to suffice with the increased
interest rate. This led to overdue payment in his account. Now, he has to
increase his EMI to serve the increased interest.
QUESTIONS
1. What led to an increase in Anupam’s home loan interest rate?

(HINT: RBI increased the repo rate.)
2. At what rate of interest was home loan sanctioned to Anupam?
(HINT: 6.95%)

56 RETAIL BANKING
LEARNING OBJECTIVES

> Know the regulatory bodies in financial services
> Describe regulations imposed on retail banks
> Understand the capital adequacy and its norms
> Learn risk management—meaning and its measurement
> Give meaning of NPA and its management in banks
> Explain the various tools used by banks to recover their debts.
3.1 INTRODUCTION
In the previous chapter, we discussed about the bank’s balance sheet, its
components and the monetary policy, its instruments, and how its measures
affect banks. In this chapter, we will know the regulations imposed on banks
and financial services for proper and efficient working. Apart from the regu-
lations, the bank has to maintain the capital adequacy as per standards. Risk
is the integral part of any business. In context of retail banks also, there are
numerous types of risk which banks face. Risk management departments of
every bank works on the analysis and mitigation of such risks. The chapter
will provide the types of different types of risks, how they can be calculated
and managed.
Non-performing loans are the loans or assets which cease to generate
income for the banks. These are the bad loans, for which every bank has
to make provisions out of its profit. This chapter throws light on the rea-
sons why loans become non-performing, how the recovery of such loans
are done by banks. There are many tools that can be used for recovery of
such bad loans.
3.2 REGULATORY BODIES IN FINANCIAL

SERVICES
The financial regulatory authorities are the bodies which governs the work-
ing of the different financial organizations working in the economy. The main
task of these financial regulators is to maintain stability and integrity of the
financial organizations in the country. The major financial regulating bodies
are as follows:
1. Reserve Bank of India (RBI)
2. Securities and Exchange Board of India (SEBI)
3. Insurance Regulatory and Development Authority (IRDA)
4. Pension Funds Regulatory and Development Authority (PFRDA)
5. Ministry of Corporate Affairs (MCA)

SEBI
RBI IRDA
Financial Regulatory
bodies of India
MCA PFRDA
3.2.1 RESERVE BANK OF INDIA (RBI)

The regulatory authority of banks in India is the Reserve Bank of India. It
was formed in 1934 and controls the functioning of the financial organiza-
tions including banks. The central bank’s primary responsibility is to control
the monetary system, which consists of the banking, currency, and credit
systems. The bank is given extensive powers for this reason. Conducting the
government’s banking and financial operations is another crucial duty of the
central bank. Additionally, it does a few other tasks. These tasks are carried
out for the benefit of others rather than for financial gain.
FUNCTIONS OF RBI
1. RBI prints and circulates currency throughout the country.
2. RBI under the monetary policy sets the reserve ratios for banks like
CRR and SLR.
3. It Inspects bank financial statements to keep an eye on any stresses in
the financial sector.
4. RBI regulates payments and settlements as well as their infrastructure.
5. It manages the country’s foreign exchange (FX) reserve.
6. It regulates and controls interest rates, which affect money market
liquidity.
SELF-ASSESSMENT
1. When was the Reserve Bank of India formed?
QUESTION
a. 1934 b. 1943
c. 1940 d. 1954
3.2.2 SEBI
SEBI was established in the year 1992 for regulating the functions of the
capital market. The functions of SEBI are regulatory and protective. It pro-
vides the code of conduct and the guidelines for the market players such as

58 RETAIL BANKING
investment banks, brokers, etc. It also provides various measures to protect

the investors from inside trading, price rigging, and other malpractices.
FUNCTIONS
SEBI has the power to supervise the stock exchanges’ functioning.
It regulates the business of exchanges.
It has complete access to the exchanges’ financial records and the com-
panies listed on the exchange.
It oversees the listing and delisting process of companies from any
exchange in the country.
It can take disciplinary action, including fines and penalties against
alpractices.
m
It also promotes investor education.
It undertakes inspection, conducts audits and inquiries when it spots any
wrong doing.
SELF-ASSESSMENT
2. SEBI was established in the year ______
QUESTIONS
a. 1993 b. 1992
c. 1994 d. 1995
3. Which of these is/are functions of SEBI?
a. It has the power to supervise the stock exchanges’ functioning.
b. It regulates the business of exchanges.
c. It promotes investor education.
d. All of these
3.2.3 IRDA
It was established in the year 1999 for regulation and protecting the insur-
ance policyholders. With the advent of many insurance companies, IRDA has
made certain rules and regulations which need to be followed by the insur-
ance companies.
The IRDA outlines the education requirements and training programmes for
insurance agents and other intermediaries, which the insurer must adhere
to. According to the IRDA Act, it is able to impose fees and change them as
well. The premium rates, terms, and conditions that insurers may offer are
regulated and controlled. The IRDA must approve any benefit offered by an
insurer.
SELF-ASSESSMENT
4. When was IRDA established?
QUESTION
a. 1999
b. 1992
c. 1997
d. 1995

3.2.4 PFRDA
The Indian pension industry is only regulated by the PFRDA, which was
established in 2013. All citizens, including non-resident Indians (NRIs), are
eligible for its services. Its major goal is to give income security to senior
citizens. This is accomplished by regulating pension funds and safeguarding
participants in pension plans. The NPS and Atal Pension Yojana pension
plans are governed by PFRDA. These schemes are covered by the PFRDA
Act. The PFRDA scope includes:
Setting up guidelines for investing in pension funds
Settling disputes between intermediaries and pension fund subscribers
Increasing awareness about retirement and pension schemes
Identifying intermediaries and other participants in malpractices
SELF-ASSESSMENT
5. What is the full form of PFRDA?
QUESTION
a. Provident Funds Regulatory and Development Authority
b. Pension Form Regulatory and Development Authority (PFRDA)
c. Pension Funds Role and Development Authority (PFRDA)
d. Pension Funds Regulatory and Development Authority
3.2.5 MINISTRY OF CORPORATE AFFAIRS (MCA)

The Companies Act and all of its variations are administered by the MCA.
For the business sector to operate legally, it establishes the rules and regu-
lations. The Limited Liability Partnership Act of 2008 was also managed by
MCA in addition to the Companies Act. It is responsible for enforcing all laws
and regulations that control the working of India’s corporate sector. Its goal
is to support business expansion. The Registrar of Companies for the MCA
approves company registrations and their legal operations.
3.2.6 NEED FOR FINANCIAL REGULATION

1. Financial Stability:
There is need for regulation for the protection and enhancement of
financial stability in the country. Without the regulatory bodies, the
financial institutions would follow malpractices and mis-sell their
products in order to earn more profits. This would lead to financial
instability in the economy. For example- the Repo rate and various rate
fixed by the RBI leads to financial stability in the economy.
2. Consumer Protection:
Protecting the appropriate degree of consumers. The main lifeline of
any business is the consumer, for whom, the products and services are
designed. There is need for financial regulation for protecting con-
sumer interest. It makes sure that the consumers are not cheated by
the defective services. For example, SEBI insures and protects con-
sumers from insider trading and has provisions to avoid it.
3. Market Confidence:
Maintaining the confidence in the financial system. Presence of finan-
cial regulators maintains the confidence of the investors and account

60 RETAIL BANKING
olders. These regulators frame the various norms, which the various
h
financial institutions have to abide by and thus, avoid any malpractices.
4. Reduction in financial fraud/crimes:
Reducing the possibilities of businesses to face finance-related crimes
or frauds. The stringent regulations led by the regulators protects con-
sumers from any likable frauds and crimes. It also makes the consum-
ers aware of the various measures. For example advertisement by RBI
about the various norms regarding online banking makes customer
about the things to be avoided in online banking with tag line “RBI
Kehta hai Jagruk bane, Satark rahe.”
SELF-ASSESSMENT
6. Which of the financial regulatory bodies of India is responsible for
QUESTION
enforcing all laws and regulations that control how India’s corporate
sector is run?
a. PFRDA b. MCA
c. SEBI d. IRDA
3.3 TYPES OF REGULATION APPARENT

IN RETAIL BANKING
The banking system of India is regulated by the Reserve Bank of India (RBI),
through the provisions of the Banking Regulation Act, 1949. Some import-
ant aspects of the regulations that govern banking as well as RBI circulars
related to banking in India, will be explored in the following section:
3.3.1 EXPOSURE LIMITS

Exposure limits for lending are set by the RBI. A single borrower can be
given a loan up to 15% of banks’s capital funds (Tier 1 and Tier 2), 20% for
infrastructure projects and in case of group exposure, 30% of the bankss’
capital fund can be lent as loan and 40% in case of infrastructure projects.
3.3.2 CASH RESERVE RATIO (CRR) AND STATUTORY

LIQUIDITY RATIO (SLR)
Banks in India are required to keep a minimum of 4% of their net demand
and time liabilities (NDTL) in the form of cash with the RBI. These currently
earn no interest. The CRR needs to be maintained on a fortnightly basis.
In addition to the CRR, a minimum of 22% and a maximum of 40% of the
NDTL, or SLR, must be kept in the form of gold, cash, or specific specified
securities. The extra SLR holdings may be utilize overnight to borrow money
from the RBI through the marginal standing facility (MSF). The maximum
amount that can be borrowed under MSF, is 2% of NDTL, and the interest
rate is 100 basis points higher than the repo rate.
3.3.3 PROVISIONING
Substandard, doubtful, and loss are the three categories used to classify
non-performing assets (NPAs). In the case of a term loan, an asset is con-
sidered non-performing if there have not been any interest or principal

TABLE 3.1
NPA Categories Secured Unsecured
Substandard 15 25
Doubtful
Up to one year (D1) 25 100
One to 3 years (D2) 40 100
More than 3 years (D3) 100 100
Loss 100 100
ayments for over 90 days. Substandard assets are those that have had an
p
NPA classification for less than 12 months before becoming questionable
assets. A lost asset is the one that is often written off the books because the
bank or auditor expects no return or recovery (Table 3.1).
Provisioning is also required on standard assets. Provisioning for agri-
culture, small, and medium enterprises is 0.25% and for commercial real
estates, it is 1% (0.75% for housing), while it is 0.4% for the remaining sec-
tors. Provisioning for standard assets cannot be deducted from gross NPAs
to arrive at net NPAs.
3.3.4 PRIORITY SECTOR LENDING

Agriculture, education, housing, and financing to low-income or less privi-
leged populations, small and medium-sized businesses are all considered to
be in the priority sector. For domestic commercial banks and foreign banks
with more than 20 branches, the lending target has been set at 40% of adjusted
net bank credit (ANBC), which is defined as outstanding bank credit less cer-
tain bills and non-SLR bonds, or the credit equivalent amount of off-balance
sheet exposure (CEOBE), whichever is higher. For foreign banks with fewer
than 20 branches, the target has been set at 32% (Table 3.2).
3.3.5 NEW BANK LICENSE NORMS

According to the new regulations, organizations requesting a license must
have a successful track record spanning at least 10 years, and the bank
must be run by a non-operative financial holding company (NOFHC) that is
entirely controlled by the promoters. Five billion rupees must be set aside as
the required minimum paid-up voting equity capital, of which the NOFHC
must hold at least 40% before gradually reducing its ownership to 15% over
a 12-year period. Within three years of the bank’s operations beginning, the
shares must be listed.
The foreign shareholding is limited to 49% for the first five years of its oper-
ation, after which RBI approval would be needed to increase the stake to
a maximum of 74%. The board of the bank should have a majority of inde-
pendent directors and it would have to comply with the priority sector lend-
ing targets discussed earlier. The bank is not permitted to own any financial
assets owned by the NOFHC, and neither is the NOFHC permitted to own
any securities issued by the promoter group. 25% of the branches must be
opened in rural communities that have never had access to banking services,
according to the new regulations.

62 RETAIL BANKING
TABLE 3.2
Domestic commercial
banks (excl. RRBs and
SFBs) and foreign
banks with 20 branch- Foreign banks with
Categories es and above less than 20 branches Regional Rural Banks Small Finance Banks
Total Prior- 40 per cent of ANBC as 40 per cent of ANBC as 75 per cent of ANBC 75 per cent of ANBC
ity Sector computed in para 6 be- computed in para 6 be- as computed in para as computed in para
low or CEOBE which- low or CEOBE which- 6 below or CEOBE 6 below or CEOBE
ever is higher ever is higher; out of whichever is higher; whichever is higher.
which up to 32% can be However, lending to
in the form of lending Medium Enterprises,
to Exports and not less Social Infrastructure
than 8% can be to any and Renewable Energy
other priority sector shall be reckoned for
priority sector achieve-
ment only up to 15 per
cent of ANBC.
Agriculture 18 per cent of ANBC or Not applicable 18 per cent ANBC or 18 per cent of ANBC or
CEOBE, whichever is CEOBE, whichever is CEOBE, whichever is
higher; out of which a higher; out of which a higher; out of which a
target of 10 percent# is target of 10 percent# is target of 10 percent# is
prescribed for Small prescribed for SMFs prescribed for SMFs
and Marginal Farmers
(SMFs)
Micro 7.5 per cent of ANBC or Not applicable 7.5 per cent of ANBC or 7.5 per cent of ANBC or
Enterprises CEOBE, whichever is CEOBE, whichever is CEOBE, whichever is
higher higher higher
Advances 12 percent# of ANBC or Not applicable 15 per cent of ANBC or 12 percent# of ANBC or
to Weaker CEOBE, whichever is CEOBE, whichever is CEOBE, whichever is
Sections higher higher higher
Source: RBI.
3.3.6 WILLFUL DEFAULTERS

A default is termed as a willful default when the customer does not repay
the loan even though he has all the resources to repay it or the loan amount
is used for other purposes than for which it is given, or if a customer has a
loan for buying a property and sells it without informing the bank. If a group
company defaults then the other group companies, standing as guarantors
but do not honor their guarantees, will also be termed as wilful defaulters.
Criminal cases will be booked against the willful defaulters (including the
directors) with no access to funding. As per the recent changes in the reg-
ulations by the RBI, the non-group companies, standing as guarantors for
another company outside the group but not honoring their guarantees, will
be termed as wilful defaulters.
3.3.7 BCSBI CODE FOR BANKING SERVICES

Banking Rules and Regulations Board of India: The Banking Codes and
Standards Board of India (BCSBI) has established a number of compliance

standards for the promises made by banks on the provision of services to

customers of retail banking, and these promises have been codified into a
document. The majority of these obligations are relevant to private clients
using retail banking services.
1. This is a voluntary Code.
2. It sets minimum standards of banking practices for banks to follow
when they are dealing with individual customers.
3. It provides protection to customers and explains how banks are
expected to deal with customers for day-to-day operations.
4. The code does not replace or supersede regulatory or supervisory
instructions of the Reserve Bank of India.
5. Provisions of the code may set higher standards than what is indicated
in the regulatory instructions and such higher standards will prevail, as
the Code represents the best practices voluntarily agreed to by banks.
6. In the code, ‘you’ denotes the customer and ‘we’, the bank the customer
deals with.
Objectives of the Code:
1. Promote good and fair banking practices by setting minimum standards
in dealing with customers.
2. Increase transparency so that customer can have a better understanding
of what they can reasonably expect of the services
3. Encourage market forces, through competition, to achieve higher
operating standards
4. Promote a fair and cordial relationship between you and your bank
5. Foster confidence in the banking system.
Application of the Code:
This Code applies to all the products and services listed below, whether they
are provided by branches or subsidiaries, agents acting on our behalf, across
the counter, over the phone, by post, through interactive electronic devices,
on the Internet or by any other method.
1. Current accounts, savings accounts, term deposits, recurring deposits,
PPF accounts and all other deposit accounts
2. Payment services such as pension, payment orders, remittances-by
way of Demand drafts, wire transfers and all electronic transactions
e.g. RIGS, EFT, NEFT.
3. Banking services related to Government transactions.
4. DEMAT accounts, equity, Government bonds
5. Indian currency notes exchange facility
6. Collection of cheques, safe custody services, safe deposit locker facility
7. Loans, overdrafts and guarantees
8. Foreign exchange services including money changing

64 RETAIL BANKING
9. Third party insurance and investment products sold through our

branches
10. Card products including credit cards, debits cards, ATM cards, smart
cards and services (including credit cards offered by our subsidiaries/
companies promoted by us).
SELF-ASSESSMENT
7. Banks in India are required to keep a minimum of _______of their
QUESTION
net demand and time liabilities (NDTL) in the form of cash with
the RBI.
a. 4% b. 5%
c. 6% d. 3%
3.4 CAPITAL ADEQUACY RATIO (CAR)

The capital adequacy ratio (CAR) is a percentage of a bank’s risk-weighted
credit exposure that indicates how much capital is readily available to it. The
goal is to show that banks have enough capital on hand to absorb a specific
level of losses before running the risk of going bankrupt.
The Committee on Banking Regulations and Supervisory Practices (Basel
Committee) had released the guidelines on capital measures and capital
standards in July 1988, which were been accepted by Central Banks in vari-
ous countries including RBI. In India, it has been implemented by RBI w.e.f.
1.4.92. It is ratio of capital fund to risk weighted assets expressed in percent-
age terms. The formula for CAR is
(Tier 1 Capital + Tier 2 Capital) / Risk-Weighted Assets
For example, suppose bank ABC has Rs 100 crores in Tier I capital and Rs 50
crores in Tier II capital. It has loans that have been weighed and calculated
as Rs 5 crores. The capital adequacy ratio of bank ABC is 30% (Rs 100 crores
+ Rs 50 crores) /Rs 5 crores). Therefore, this bank has a high capital ade-
quacy ratio and is considered to be safer. As a result, bank ABC is less likely
to become insolvent if unexpected losses occur.
3.4.1 OBJECTIVES OF CAPITAL ADEQUACY RATIO (CAR)

The fundamental objective behind the norms is to strengthen the soundness
and stability of the banking system. Tier I capital should at no point of time
be less than 50% of the total capital. This implies that Tier II cannot be more
than 50% of the total capital.
CAPITAL FUND
Capital fund has two tiers – I and II
Tier I capital includes
paid-up capital
statutory reserves
other disclosed free reserves, and
capital reserves representing surplus arising out of sale proceeds of assets.

Minus
equity investments in subsidiaries,
intangible assets, and
losses in the current period and those brought forward from previous
periods, to workout the Tier I capital.
Tier II capital consists of
Undisclosed reserves and cumulative perpetual preference shares.
Revaluation reserves (at a discount of 55 percent while determining their
value for inclusion in Tier II capital).
General provisions and loss reserves up to a maximum of 1.25% of
weighted risk assets.
Investment fluctuation reserve not subject to 1.25% restriction.
Hybrid debt capital instruments (say bonds).
Subordinated debt (long-term unsecured loans).
Risk weighted assets (Fund based): Risk weighted assets mean fund-based
assets, such as cash, loans, investments and other assets. Degrees of credit
risk expressed as percentage weights have been assigned by the RBI to each
such assets.
SELF-ASSESSMENT
8. The Basel Committee had released the guidelines on capital
QUESTIONS
measures and capital standards in _________
a. June 1980 b. July 1988
c. July 1987 d. June 1988
9. Tier II capital consists of__________.
a. Hybrid debt capital instruments
b. Subordinated debt
c. Paid-up capital
d. None of these
3.4.2 BASEL
BASEL I, the committee’s first accord, was issued in 1988 and focused mainly
on credit risk by creating a classification system for bank assets. Basel I orig-
inally called for a minimum ratio of capital to risk-weighted assets of 8%,
which was to be implemented by the end of 1992.
Basel I is the first of three sets of international banking regulations estab-
lished by the Basel Committee on Banking Supervision, based in Basel,
Switzerland.
PURPOSE OF BASEL I
The purpose of Basel I was to establish an international standard for how
many capital banks must keep in reserves in order to meet their obliga-

66 RETAIL BANKING
tions. Its regulations were intended to enhance the safety and stability of the
banking system worldwide.
Basel I introduced guidelines for how much capital banks must keep in
reserve based on the risk level of their assets. Basel II refined those guide-
lines and added new requirements. Basel III further refined the rules based
in part on the lessons learned from the worldwide financial crisis of 2007
to 2009.
Basel I, the first of three Basel Accords, created a set of rules for banks to
follow to mitigate risk.
Basel I is now considered too limited in scope, but it laid the framework
for the subsequent Basel Accords.
With the advent of Basel I, bank assets were classified according to their
level of risk, and banks are required to maintain emergency capital based
on that classification.
Under Basel I, banks were required to keep capital of at least 8% of their
determined risk profile on hand.
3.4.3 BASEL II
Basel II is a set of international banking regulations established by the
Basel Committee on Banking Supervision, based in Basel, Switzerland.
Basel II was released in 2004, with the goal of being phased in over a series
of years.
Basel II is a set of international banking regulations first released in 2004
by the Basel Committee on Banking Supervision. It expanded the rules
for minimum capital requirements established under Basel I, the first
international regulatory accord, provided a framework for regulatory
supervision and set new disclosure requirements for assessing the capital
adequacy of banks.
FEATURES OF BASEL II
Basel II, the second of three Basel Accords, has three main tenets:
minimum capital requirements, regulatory supervision, and market
discipline.
Building on Basel I, Basel II provided guidelines for the calculation of
minimum regulatory capital ratios and confirmed the requirement that
banks maintain a capital reserve equal to at least 8% of their risk-weighed
assets.
The second pillar of Basel II, regulatory supervision, provides a frame-
work for national regulatory bodies to deal with systemic risk, liquidity
risk, and legal risks, among others.
One weakness of Basel II emerged during the subprime mortgage melt-
down and Great Recession of 2008 when it became clear that Basel II
underestimated the risks involved in current banking practices and that
the financial system was overleveraged and undercapitalized.

SELF-ASSESSMENT
10. Basel II was released in _______
QUESTIONS
a. 2003 b. 2005
c. 2004 d. 2006
11. Basel II has the following main tenets:
a. minimum capital requirements
b. regulatory supervision
c. market discipline
d. All of the above
3.4.4 REGULATORY SUPERVISION AND MARKET DISCIPLINE

Regulatory supervision is the second pillar of Basel II and provides a frame-
work for national regulatory bodies to deal with various types of risks, includ-
ing systemic risk, liquidity risk, and legal risks.
The market discipline pillar introduces various disclosure requirements for
banks’ risk exposures, risk assessment processes, and capital adequacy. It is
intended to foster greater transparency into the soundness of a bank’s busi-
ness practices and allow investors and others to compare banks on equal
footing.
3.4.5 BASEL III

BASEL III is an international regulatory accord that introduced a set of
reforms designed to mitigate risk within the international banking sector by
requiring banks to maintain certain leverage and keep certain levels of reserve
capital on hand. Began in 2009, it is still being implemented as of 2022.
FEATURES OF BASEL III

Basel III is an international regulatory accord that introduced a set of
reforms designed to improve the regulation, supervision, and risk man-
agement of the banking sector.
Basel III is an iterative step in the ongoing effort to enhance the banking
regulatory framework.
A consortium of central banks from 28 countries devised Basel III in
2009, largely in response to the financial crisis of 2007–2008 and ensuing
economic recession. As of 2022, it is still in the process of implementation.
3.4.6 CAPITAL BUFFERS FOR TOUGH TIMES

Basel III’s new regulations mandate that institutions hold additional reserves
known as countercyclical capital buffers. Banks may be subject to these buf-
fers, which may be imposed during periods of economic expansion and vary
from 0 to 2.5% of a bank’s RWAs. As a result, they ought to be prepared with
more cash during periods of economic contraction, such a recession, when
they are more likely to suffer losses. Therefore, a bank may be obliged to keep
reserves of up to 10.5% when taking into account both the minimum capital
and buffer requirements. Leverage and liquidity measures were introduced
in the BASEL III.

68 RETAIL BANKING
New leverage and liquidity rules were also implemented by Basel III in an
effort to protect against excessive and hazardous lending while ensuring that
banks have enough liquidity during times of financial stress.
SELF-ASSESSMENT
12. New leverage and liquidity rules were implemented by _____ in an
QUESTION
effort to protect against excessive and hazardous lending.
a. Basel I b. Basel II
c. Basel III d. None of these
3.5 VARIOUS TYPES OF RISK

In finance, risk refers to the degree of uncertainty and/or potential financial
loss inherent in an investment decision. In general, as investment risks rise,
investors seek higher returns to compensate themselves for taking such risks.
Every saving and investment product has different risks and returns.
Differences include: how readily investors can get their money when they
need it, how fast their money will grow, and how safe their money will be
Major risks for banks include credit, operational, market, and liquidity risk.
Since banks are exposed to a variety of risks, they have well-constructed risk
management infrastructures and are required to follow government regulations.
3.5.1 TYPES OF FINANCIAL RISKS

The different types of risks are categorized in several different ways. Risks
are classified into some categories, including market risk, credit risk, opera-
tional risk, strategic risk, liquidity risk, and event risk.
Financial risk is one of the high-priority risk types for every business. Financial
risk is caused due to market movements and market movements can include a
host of factors. Based on this, financial risk can be classified into various types
such as market risk, credit risk, liquidity risk, operational risk, and legal risk.
Market Risk
This type of risk arises due to the movement in prices of financial instru-
ments. Market risk can be classified as directional risk and non-directional
risk. Directional risk is caused due to movement in stock price, interest rates
and more. Non-directional risk, on the other hand, can be volatility risks.
Market risk are mainly caused due to change in interest rate, price, or reces-
sion in the market. It can be further classified into following types-
a. Interest rate risk- this type of market risk occurs due to change in
interest risk because of change in the fundamental factors for example
change in monetary policy by RBI.
b. Equity risk- This type of risk arises due to changes in the stock prices.
c. Commodity risk- It is caused due to changes in the price of commodities
like crude oil, corn etc.
d. Currency risk- Risk caused by the fluctuation in the price of one
currency in relation to other currencies is known as Currency risk. It is
also known as exchange rate risk.

Credit Risk
This type of risk arises when one fails to fulfill their obligations towards their
counterparties. Credit risk can be classified into Sovereign risk and settle-
ment risk. Sovereign risk usually arises due to difficult foreign exchange pol-
icies. Settlement risk, on the other hand, arises when one party makes the
payment while the other party fails to fulfill the obligations. The credit risk
can be assessed through five C’S- credit history, capacity to repay, capital,
loan’s conditions and collateral.
Liquidity Risk
This type of risk arises out of an inability to execute transactions. When a
company, organization, or financial institution is unable to pay its short-term
debt obligations, liquidity risk arises. There may not be enough bidders or
an inefficient market, which would prevent the investor or company from
selling the asset for cash without forfeiting money and income. Liquidity
measurement ratios are used by creditors, managers, and investors to gauge
an organization’s level of risk. They frequently make comparisons between a
company’s short-term liabilities and its liquid assets. If a company’s liquidity
risk is too high, it will need to sell off assets, generate more income, or find
some other means to close the gap between its cash on hand and its debt
commitments. Different types of liquidity risks are
i. Term Liquidity Risk – It is risk which arises due to an unexpected
delays in repayments of the capital in lending transactions.
ii. Withdrawal/Call Risk- A primary liquidity risk, which arises on account
of excess withdrawal of deposits than expected thus creating constraints
for bank to meet its payment obligations-deposit run-offs in a bank-
specific event.
iii. Structural Liquidity Risk – This type of Liquidity risk arises when the
necessary funding transactions cannot be carried out.
Operational Risk
This type of risk arises out of operational failures such as mismanagement
or technical failures. The risks and uncertainties a firm encounters when
attempting to conduct its regular business operations in a particular field
or industry are summed up as operational risk. These risks are frequently
connected to active choices made about the priorities and operations of the
company. Although failure, decreased productivity, or greater total costs are
not certain outcomes of the risks, they are viewed as higher or lower depend-
ing on a variety of internal management decisions. Operational risk has been
defined by the Basel Committee on Banking Supervision as the risk of loss
resulting from inadequate or failed internal processes, people and systems or
from external events. This definition includes legal risk, but excludes strate-
gic and reputational risk. Different types of operation risks are –
a. Human error-The error is the most frequent and important risk to
the company. It might possibly be connected to a processor skill issue.
Errors of this kind develop when inaccurate input is caused by human
mistake. Incomplete information, a lack of understanding, inadequate
knowledge, uneven processing, a real input error, and more could all be
causes of improper input.

70 RETAIL BANKING
b. Technical Error-Despite the fact that everything is fine, there are

occasionally system problems like slowdowns, connectivity problems,
system crashes, inaccurate application calculations, or missing bridges.
Sometimes the output might not match the anticipated outcome, but it
might be hard to notice because of unidentified technical flaws.
c. Documentation risk-risk arising out of improper or insufficient
documentation which gives rise to ambiguity regarding the
characteristics of the financial contract.
d. Uncontrollable risk-These include external environmental variables
that affect the performance and quality of processors and jeopardize
the output, such as political scenarios, weather changes, syndromes
that affect living things, out-of-date technology, etc.
e. Legal Risk-This type of financial risk arises out of legal constraints
such as lawsuits. Whenever a company needs to face financial losses
out of legal proceedings, it is a legal risk.
Only after considerable losses, the impact caused by operational risk be dis-
covered and evaluated. Each company has a cap on immaterial losses that
happens only after a material loss is looked at.
Once a mistake is discovered, it could or might not be possible to undo and
fix it. There is a danger of losses already incurred, even if it can be reversed.
It is therefore best to establish appropriate control checks at each stage of
the operation.
Earning risk
Due to increased competition in the banking industry, there may a variation
in the earning of the banks. There have been many new competitors in form
of new bank due to which there have been a reduction in the cost of services
thereby decreasing the spread between return on bank assets and cost of
funding. This creates the risk of earning for the banks.
3.6 RISK MEASUREMENT

The measurement of risk is different for different types of risk. There are
some methods used to evaluate the risk of a bank such as GAP analysis, value
at risk, credit metrics, interest rate risk measuring, revaluation, maturity
model and duration model.
GAP analysis is an interest rate risk management tool based on the balance
sheet which focuses on the potential variability of net-interest income over
specific time intervals. For example, Bank ABC has Rs 150 crores in inter-
est rate sensitive assets (such as loans) and Rs 100 million in interest rate
sensitive liabilities (such as savings accounts and certificate of deposit).
The gap ratio is 1.5 or Rs 150 crores divided by Rs 100 crores. The gap is
more than one which means that when rates rise, a bank’s profits or reve-
nues will likely rise.
The value at risk (VaR) indicates how much a firm can lose or make with a
certain probability in a given time horizon.

3.7 RISK MANAGEMENT

The risk management process can be summarized with the following three steps:
1. Identifying and assessing the potential risk in the banking b
usiness.
2. Developing and executing an action plan to deal with and manage these
activities that incur potential losses.
3. Continuously reviewing and reporting the risk management practices
after they have been put into action/operation.
The overall purpose of the risk management process is to evaluate the poten-
tial losses for the banks in the future and to take precautions to deal with
these potential problems when they occur.
3.7.1 GENERAL RISK MANAGEMENT POLICY

The basics of the bank’s risk management policy are:
1. To carry out daily activities within the scope of functional separation of
duties (deciding to perform a transaction that causes risk, accounting of
the transaction and assigning the functions of control of the transaction
to the responsibility of different personnel).
2. To adopt portfolio approach in risk management; systematically analyze
and compare observed information and events within correlation and
probabilities,
3. To establish a strong control and risk management culture within the
bank, execution of trading transactions units responsible for recording
the resulting transaction units. The third dimension is the control
function. It is the effective monitoring and management of all risks that
the bank may be exposed to by evaluating the risks.
“Being aware” of the risks undertake during the activities, taking “measures”
to prevent the realization of risks, allocating “provisions” if necessary, “hedg-
ing” the risk within the framework of the Bank’s policies if market conditions
are appropriate, and “making a profit” during all these activities.
Avoiding concentration through portfolio diversification.
It will not affect the service quality negatively but maximize process reliability
to support daily activities with checkpoints to keep them at a controlled level.
3.8 NON-PERFORMING ASSETS

Non-performing assets, also known as non-productive assets (NPAs), consti-
tute an integral part of banks’ operations. A bank gives money in the form of
loans and advance and earns income on the promise of a borrower to repay.
When loans are not repaid, the bank loses both its income, as well as its cap-
ital. The level of non-performing loans is recognized as a critical indicator
for assessing banks’ credit risk, asset quality and efficiency in allocation of
resources to productive sectors.
NPA is the most common problem face by almost all the commercial
banks which affects their viability and solvency and thus posing challenge
to their ultimate survival. NPAs adversely affect lending activity of banks

72 RETAIL BANKING
as non-recovery of loan installments as also interest on the loan portfolio

negates the effectiveness of credit-dispensation process.
Non-recovery of loans also hurt the profitability of banks. Besides, banks
with a high level of NPAs have to carry more owned funds by way of capital
and create reserves and provisions and to provide cushion for the loan losses.
“An asset (advance) is considered as non-performing in case if interest or
installments of principal or both remain unpaid for more than two quarters
and if it has come past due, i.e., 30 days after the due date.”
An advance is to be classified as ‘substandard’ if it remains NPAs up to a period
of two years and will be classified as ‘Doubtful’ if it remains NPA for more than
two years (which was reduced to 18 months from the year ending 31st March
2001). An account will be classified as ‘loss’ without any waiting period where
the dues are considered uncollectible or only marginally collectible.
In order to move towards international best practices and impart greater
transparency, it was decided by the RBI to introduce classification of loans as
non-performing when interest and/or installments of principal remain over-
due for a period of more than 90 days from the year ending March 31, 2004.
SELF-ASSESSMENT
13. An asset is considered as non-performing in case if interest or
QUESTIONS
installments of principal or both remain unpaid for more than _____.
a. one quarter b. two quarters
c. three quarters d. one year
14. What is the period for an advance to be classified as ‘substandard’?
a. period of two years b. more than two years
c. period of three years d. less than 3 years
3.8.1 CLASSIFICATION OF NPAS

Banks should classify their assets into the following broad groups, namely
STANDARD ASSETS
Standard Asset is one which does not reveal any problems and which does
not carry more than normal risk attached to the business. Such an asset
should not be an NPA.
SUB-STANDARD ASSETS
1. W.e.f. March 31, 2005 an asset would be classified as substandard if it
stayed NPA for a period less than or equal to 12 months. In these cases,
the current net worth of the borrowers of the current market value of
the security charged is not enough to check recovery of the dues to the
banks in full. Putting it differently, such assets will have well defined
credit weaknesses that threaten the extermination of the debt and are
characterized by the distinct possibility that the banks will suffer some
loss, if deficiencies are not corrected.
2. An asset where the terms of the loan agreement concerning interest
and principal have been rescheduled after commencement of

production should be classified as substandard and should remain in

such category for at least 12 months of satisfactory performance under
the rescheduled terms. In other words, the categorization of an asset
should not be upgraded just as a result of rescheduling, unless there is
an acceptable compliance of this condition.
DOUBTFUL ASSETS
With effect from March 31, 2005, an asset is required to be classified as doubt-
ful, if it has remained NPA for more than 12 months. For Tier I banks, the
12-month period of categorization of an inferior asset in doubtful category is
effective from April 1, 2009. As in the case of sub-standard assets, rescheduling
does not entitle the bank to promote the quality of an advance automatically.
A loan classified as doubtful has all the disadvantages underlying as that
classified as substandard, with the added feature that the disadvantages
make collection or liquidation in full, on the basis of currently known facts,
conditions and values, highly doubtful and improbable.
LOSS ASSETS
A loss asset is one where loss has been recognized by the bank or internal or
external auditors or by the Cooperation Department or by the Reserve Bank
of India review but the amount has not been written off, entirely or partly. In
other terms, such an asset is considered uncollectible and of such little value
that its continuation as a profitable asset is not guaranteed although there
may be some relief or recovery value
Example: We suppose a party is disbursed a loan on January 1, 2020. Its due
date is June 1, 2020. But the party does not make a payment. So, it will be a
standard asset from January 1 2020 till June 1 2020. Substandard from August
30, 2020 till August 29, 2021. Doubtful from August 30, 2021 till August 29, 2022.
SELF-ASSESSMENT
15. With effect from March 31, 2005, an asset is required to be classified
QUESTION
as ‘doubtful’, if it has remained NPA for more than ______.
a. 18 months b. 12 months
c. 6 months d. 24 months
3.8.2 PROVISIONS FOR NPAS

Following are the provisions given by Reserve Bank of India:
In accordance with the prudential norms, provisions should be made on the
non-performing assets on the basis of categorization of assets. Taking into
account the time lag between an account becoming doubtful of retrieval, its rec-
ognition as such, the realization of the security and the erosion over time in the
value of security charged to the bank, the banks should make provision against
standard assets, sub-standard assets, doubtful assets and loss assets as below:
STANDARD ASSETS
a. From the year ended March 31, 2000, the banks should make a general
provision of a minimum of 0.25 per cent on standard assets.

74 RETAIL BANKING
b. However, Tier II banks (as defined in Circular dated May 6, 2009) will
be subjected to higher provisioning norms on standard assets as under:
The general provisioning necessity for all types of ‘standard advances’
shall be 0.40 per cent. However, direct advances to agricultural and
SME sectors which are standard assets would attract a uniform pro-
visioning requirement of 0.25 per cent of the funded notes outstanding
on a portfolio basis, as hitherto. Further, with effect from Dec 8, 2009,
all UCBs (Both Tier I and Tier II) are required to make a provision of
1.00 percent in respect of advances to Commercial Real Estate Sector
classified as ‘standard assets’.
SUB-STANDARD ASSETS
A general provision of 10 per cent on total outstanding should be made with-
out making any allowance for DICGC/ECGC guarantee cover and securities
available.
DOUBTFUL ASSETS
Following are the provisions for doubtful assets:
a. Provision should be for 100 per cent of the extent to which the advance
is not covered by the realizable value of the security to which the
bank has a valid recourse should be made and the realizable value is
estimated on a realistic basis.
b. In regard to the secured portion, provision may be made on the
following basis, at the rates ranging from 20 per cent to 100 percent of
the secured portion depending upon the period for which the asset has
remained doubtful:
c. The provisions towards “standard assets” need not be netted from
gross advances but shown separately as “Contingent Provision against
Standard Assets” under “Other Funds and Reserves” (item 2) (viii) of
Capital and Liabilities} in the Balance Sheet.
d. If due to changes in the regulatory requirements on provisions to
be maintained by banks, the provisions held by banks exceed what
is required to be held by banks, such excess provisions should not be
reversed. In future, if by applying the revised provisioning norms, any
provisions are required over and above the level of provisions currently
held for the standard category assets; these should be duly provided for.
e. In case banks are already maintaining excess provision than what is
required/prescribed by Statutory Auditor/RBI Inspection for impaired
credits under Bad and Doubtful Debt Reserve, additional provision
required for Standard Assets may be segregated from Bad and Doubtful
Debt Reserve and the same may be parked under the head “Contingent
Provisions against Standard Assets” with the approval of their Board
of Directors. Shortfall if any, on this account may be made good in the
normal course.
f. The above contingent provision will be eligible for inclusion in Tier II
capital.

LOSS ASSETS
a. The entire assets should be written off after obtaining necessary
approval from the competent authority and as per the provisions of the
Cooperative Societies Act/Rules. If the assets are permitted to remain
in the books for any reason, 100 percent of the outstanding should be
provided for.
b. In respect of an asset identified as a loss asset, full provision at 100 percent
should be made if the expected salvage value of the security is negligible.
SELF-ASSESSMENT
16. The general provisioning necessity for Tier II banks for all types of
QUESTION
‘Standard advances’ shall be _________________.
a. 0.50% b. 0.40%
c. 0.60% d. 0.45%
3.9 NPA MANAGEMENT

Non-performing assets came into Indian financial systems consequent to
introduction of Prudential Accounting Norms. An era of taking profits (even
unrealized) was changed to providing for expected loss. Days of ‘counting
the chickens before the eggs hatch’ came to an end. However, non-perform-
ing loans did exist even before the introduction of present prudential norms.
According to the RBI study, the proportion of problem loans (sticky loans)
of PSUs to their gross advances stood at 17.91 percent as on March 31, 1989.
This soared to 23.5 percent as on March 31, 1994. Reasons for the high level
NPAs are discussed in further sections.
3.9.1 CAUSES FOR CREATION OF NON-PERFORMING ASSETS

INTERNAL FACTORS
Internal defaulters, Faulty projects, most of the project reports are ground
realities, proper linkages, product pricing etc. Some approach for the “heck”
of starting a venture, with poor knowledge of product risks, over depended on
poorly paid skilled workers and technicians, building up pressure for sanc-
tions, Inept handling by banker’s lack of professionalism and appraisal stan-
dards, non-observance of system, procedures and non-insistence of collaterals
etc., Lack of post sanction monitoring, unchecked diversions. Diversion of
funds mostly for expansion/diversification/modernization, and taking up new
projects and for helping/promoting associated concerns have been reported to
be the single most prominent reason for the high levels of NPAs.
SELF-ASSESSMENT
17. Which are the most prominent reasons for the high level of NPAs?
QUESTION
a. Faulty projects
b. Poor knowledge of product risks
c. Over dependence on poorly paid skilled workers and techni-
cians
d. Poor loan appraisal and credit monitoring

76 RETAIL BANKING
EXTERNAL FACTORS
Natural calamities and climatic conditions, recession, changes in Government
policies changes in economic conditions, industry-related problems, impact
of liberalization on industries, technical problems are the external causes.
An important reason for the bulging of NPAs was the ‘euphoria’ generated
following liberalization, a dream of globalization leading to huge investments,
which unfortunately could not be utilized due to hesitant liberalization pol-
icies. Dominance of traditional industries in credit portfolios, industrial
sickness, labor problems, the overall economic slowdown—global as well as
domestic—particularly in the industrial sector have until recently adversely
affected the bottom line of borrower units and their capacity to service the
debt leading to slippage of standard assets into NPA.
Among other external factors, the RBI study noted that non-availability
of raw materials, power shortage, transport bottlenecks, financial bot-
tlenecks, changes in government policy, natural calamities, industrial
sickness, increase in import costs, increase in overhead costs, market sat-
uration, product obsolescence, fall in demand and others were responsible
for weak performance in 48 percent of units assisted by the banks resulting
into advances given to them turning bad.
An ineffective legal system is the most important factor contributing to enor-
mously high level of NPAs in Indian commercial banks. Antiquated defaulter
friendly legal system, extremely slow judicial system, and dismal record of
enforcement machineries have also contributed significantly to high level of
NPAs in India.
SELF-ASSESSMENT
18. __________is not the external factor contributing to enormously high
QUESTION
level of NPAs in Indian commercial banks.
a. Natural calamities and climatic conditions
b. Recession
c. Industry-related problems
d. Diversion of funds
3.10 TOOLS OF DEBT RECOVERY
3.10.1 ONE TIME SETTLEMENT/COMPROMISE SCHEME

In May 1999, the RBI issued guidelines for the constitution of Settlement
Advisory Committees (SACs) for compromise settlements of chronic NPAs
of the small sector. Modified guidelines were issued in July, 2000 to provide a
simplified, non-discretionary and non-discriminatory mechanism for recov-
ery of the stock of NPAs.
Under one-time settlement/compromise scheme of the RBI extended in
May 2003, the time limit for processing of applications received under the
revised guidelines for compromise and settlement of chronic NPAs of PSBs
up to Rs 10 crore up to December 31, 2003, which was further extended July
31, 2004. Amount of Rs 1497 crore was received through 21,311 compromise
proposals up to March 2005.

SELF-ASSESSMENT
19. When did RBI issue guidelines for the constitution of Settlement
QUESTION
Advisory Committees for compromise settlements of chronic NPAs
of the small sector?
a. May 1999 b. March 1998
c. March 1999 d. None of these
3.10.2 LOK ADALATS

Lok Adalats have proved an effective institution for settlement of dues in
respect of smaller loans. These Adalats have been conferred a judicial status.
The RBI issued guidelines to banks in 2001 indicating that:
1. Ceiling of amount for coverage under Lok Adalats would be Rs 5 lakhs;
2. The scheme may include both sent-filed and non-sent filed accounts in
the doubtful and loss category; and
3. The settlement formula must be flexible.
Furthermore, DRTs have been empowered to organize Lok Adalats to decide
in cases of NPAs of Rs 10 lakhs and above. The monetary ceiling of cases to
be referred to Lok Adalats organized by civil courts was enhanced to Rs 20
lakh. Furthermore, banks were advised to participate in the Lok Adalats con-
vened by various DRTs/DRATs for resolving cases involving Rs 10 lakh and
above to reduce the stock of NPAs.
3.10.3 DEBT RECOVERY TRIBUNALS (DRTS)

The Recovery of Debts Due to Banks and Financial Institutions Act was
enacted in 1993 to provide for the establishment of tribunals for expeditious
adjudication and recovery of debts due to banks and financial institutions
and for matters connected therewith and incidental thereto. The amend-
ments made in 2000 to this Act and the Rules framed there under further
strengthened the functioning of DRTs.
Up to March 31, 2009, 81,173 cases involving ` 1,30,917 crore had been filed
with DRTs by the banks. 45,088 cases involving ` 62,849 were adjudicated
with the amount recovered at ` 24,884 crore.
On the recommendation of the Reserve Bank, the Government of India set
up a working group in July, 2004 to improve the functioning of DRTs. The
working group was expected to examine issues and recommend appropriate
measures regarding: (a) the need to extend the provisions of the Recovery of
Debts Due to Banks and Financial Institutions Act to cases for less than Rs 10
lakhs. (b) redistribution of the jurisdiction of the various DRTs; (c) modifica-
tion in the existing strength of the DRTs/Debt Recovery Appellate Tribunals
(DRATs); and (d) legal and institutional provisions.
3.10.4 CREDIT INFORMATION BUREAU (INDIA) LTD. (CIBIL)

Taking cognizance of the utility of an effective institutional mechanism for
sharing of information on borrowers/potential borrowers by banks, CIBIL
was set up in 2001. Banks were advised to go for parallel reporting of data

78 RETAIL BANKING
on suit filed accounts to both the RBI and CIBIL up to March 31, 2003 and
switch over such reporting to the CIBIL effective from April 1, 2003.
Banks have been urged to make persistent efforts in obtaining consent from
all their borrowers in order to establish an efficient credit information system,
which would help in enhancing the quality of credit decisions and improv-
ing the asset quality of banks, apart from facilitating faster credit delivery.
Further, with a view to strengthening the legal mechanism and facilitating
credit information on borrowers of bank/FIs, a draft credit information
companies Regulation Bill, 2004 covering registration, responsibilities of the
bureaus, rights and obligations of the credit institutions and safeguarding of
privacy rights are under active consideration of the government.
3.10.5 SECURITIZATION AND RECONSTRUCTION

OF FINANCIAL ASSETS AND ENFORCEMENT
OF SECURITY IN INTEREST (SARFAESI) ACT, 2002
Until the enactment of Securitization Act, Banks/financial institutions had
to enforce their security through court which was a very slow and time-con-
suming process. There was also no provision in any of the present law in
respect of hypothecation, though hypothecation is one of the major security
interests taken by the Bank/financial institution. The Securitization Act was
first enacted with effect from 21-06-2002 to overcome the hardships faced by
the Banking industry.
3.10.6 IMPLICATION OF NPA AND DEBT RECOVERY ON THE

PERFORMANCE OF BANKS
The large percentages of NPAs have a deleterious impact on a banks profit
in a number of ways:
They result in reduced interest income and recovery of debt loan will
increase the interest income.
They erode (eat into) current profits through provisioning requirements.
With debt recovery through various tools less provisioning is required.
NPA leads into erosion of capital base and reduction in their competitive-
ness and recovery of bad loans improves the capital base.
NPA creates reserves and provisions that come from profits, to act as
cushions for loan losses. When bank makes recovery of loans the less
provisions have to be made.
Decline in profit has its bearing on variables like Capital to Risk Weighted
Assets Ratio (CRAR and cost).
To quote the committee on banking sector reforms (Narasimham Committee
II, 1998) “NPAs constitute a real economic cost to the nation is that they
reflect the application of scarce capital and credit funds to unproductive
uses. The money locked up in NPAs is not available for productive uses to
the extent that banks seek to make provisions for NPAs or write them off. It
is a charge on their profits, NPAs, in short, is not just a problem for banks;
they are bad for the economy.

3.11 SUMMARY
A bank gives money in the form of loans and advance and earns income
on the promise of a borrower to repay. When loans are not repaid, the
bank loses both its income, as well as its capital. The level of non-per-
forming loans is recognized as a critical indicator for assessing banks’
credit risk, asset quality and efficiency in allocation of resources to pro-
ductive sectors.
The regulatory authority of banks in India is the Reserve Bank of India.
It controls the functioning of the financial organizations including banks.
Its primary responsibility is to control the monetary system, which con-
sists of the banking, currency, and credit systems.
In finance, risk refers to the degree of uncertainty and/or potential finan-
cial loss inherent in an investment decision. In general, as investment
risks rise, investors seek higher returns to compensate themselves for
taking such risks.
The Indian pension industry is only regulated by the PFRDA, which was
established in 2013. All citizens, including non-resident Indians, are eligi-
ble for its services (NRIs). Its major goal is to give senior citizens income
security.
The Banking Codes and Standards Board of India has established a
number of compliance standards for the promises made by banks on the
provision of services to customers of retail banking, and these promises
have been codified into a document.
Lok Adalats have proved an effective institution for settlement of dues in
respect of smaller loans. These Adalats have been conferred a judicial status.
The Recovery of Debts Due to Banks and Financial Institutions Act was
enacted in 1993 to provide for the establishment of tribunals for expedi-
tious adjudication and recovery of debts due to banks and financial insti-
tutions and for matters connected therewith and incidental thereto.
Taking cognizance of the utility of an effective institutional mechanism
for sharing of information on borrowers/potential borrowers by banks,
Securitization and Reconstruction of Financial Assets and Enforcement
of Security in Interest (SARFAESI) Act, 2002
The financial regulatory authorities are the bodies which governs the
working of the different financial organizations working in the economy.
The main task of these financial regulators is to maintain stability and
integrity of the financial organizations in the country.
An advance is to be classified as “substandard’ if it remains NPAs up to a
period of two years and will be classified as ‘Doubtful’ if it remains NPA
for more than two years (which was reduced to 18 months from the year
ending 31st March 2001). An account will be classified as ‘loss’ without
any waiting period where the dues are considered uncollectible or only
marginally collectible.
Standard Asset is one which does not reveal any problems and which
does not carry more than normal risk attached to the business. Such an
asset should not be an NPA.

80 RETAIL BANKING
KEY WORDS 1. Risk can be referred to like the chances of having an unexpected or
negative outcome. Any action or activity that leads to loss of any type
can be termed as risk. There are different types of risks that a firm
might face and needs to overcome.
2. SEBI provides the code of conduct and the guidelines for the market
players like investment banks, brokers etc. It also provides various
measures to protect the investors from inside trading, price rigging
and other malpractices.
3. Non-performing assets, also known as Non-productive Assets
(NPAs), constitute an integral part of banks’ operations. “An asset
(advance) is considered as non-performing in case if interest or
installments of principal or both remain unpaid for more than two
quarters and if it has come past due, i.e., 30 days after the due date.”
4. Sub-standard asset means where the terms of the loan agreement
concerning interest and principal have been rescheduled after
commencement of production and should remain in such category
for at least 12 months of satisfactory performance under the
rescheduled terms
5. A loss asset is one where loss has been recognized by the bank or
internal or external auditors or by the Cooperation Department or
by the Reserve Bank of India review but the amount has not been
written off, entirely or partly
6. Risk Adjusted Rate of Return on Capital (RAROC) analysis shows
how much economic capital different products and businesses need
and determines the total return on capital of a firm.
7. A willful default takes place when a loan isn’t repaid even though
resources are available, or if the money lent is used for purposes
other than the designated purpose, or if a property secured for a loan
is sold off without the bank’s knowledge or approval.
8. The capital adequacy ratio (CAR) is a percentage of a bank’s risk-
weighed credit exposures that indicates how much capital is readily
available to it. The goal is to show that banks have enough capital
on hand to absorb a specific level of losses before running the risk of
going bankrupt.
9. GAP Analysis is an interest rate risk management tool based on
the balance sheet which focuses on the potential variability of net
interest income over specific time intervals
10. Standard Asset is one which does not reveal any problems and which
does not carry more than normal risk attached to the business. Such
an asset should not be an NPA.
11. Duration is value and time weighted measure of maturity of all
cash flows and represents the average time needed to recover the
invested funds.


1. What do you understand by non-performing loans? Why these loans
are known as bad loans?
2. What are the major financial regulating bodies in India? Write the
functions of RBI.
3. What is PFRDA? What is the scope of PFRDA?
4. What are the types of regulation apparent in retail banking? Briefly
describe about priority sector lending.
5. What are the objectives and applications of the Banking Codes and
Standards Board of India (BCSBI)?
6. What is the capital adequacy ratio (CAR)? What are its objectives?
7. What are the types of financial risks? Describe any two of them in
detail.
8. What are the features of BASEL II and BASEL III?
9. What are the types of financial risks? Discuss any two of them in detail.
10. What do you understand by VaR and what are the methods to calculate
it?
11. What are the provisions for doubtful assets?
12. What are the guidelines issued by RBI to banks in 2001?
13. What are the causes for creation of non-performing assets?
14. What are the implications of NPA and debt recovery on the performance
of banks?
15. What is the purpose of risk management policy?
3.13 ANSWER KEYS
Regulatory Bodies in Finan- 1. a. 1934
cial Services
2. b. 1992
3. d. All of these
4. a. 1999
5. a. Pension Funds Regulatory and
Development Authority
6. b. MCA
Types of Regulation Apparent 7. a. 4%
in Retail Banking
Capital Adequacy Ratio (CAR) 8. b. July 1988
9. c. Paid-up capital
10. c. 2004

82 RETAIL BANKING

12. c. BASEL III
Non-performing Assets 13. b. Two-quarters
14. a. Period of 2 years
15. b. 12 months
16. b. 0.40%
NPA Management 17. d. Poor loan appraisal and credit
monitoring
18. d. Diversion of Funds
Tools of Debt Recovery 19. a. May 1999
3.14 SUGGESTED READINGS

AND E-REFERENCES
https://www.uasinternational.in/recent-trends-in-marketing-strategy-
inbanking-sector
www.rbidocs.com
invetopedia.com

C H A
4 P T E R
COMPETITION IN RETAIL BANKING, MARKETING AND

DISTRIBUTION MANAGEMENT IN RETAIL BANKS
CONTENTS
4.1 Introduction
Activity
4.2 Corporate and Market Levels Strategies for Retail Banks
4.2.1 Corporate-Level Strategies Include
4.2.2 Recent Marketing Strategies of Banks Include
Activity
4.3 Effect of Competition on Bank’s Stakeholders
Activity
4.4 An Overview of Distribution Management
4.4.1 Need of Distribution Management
Activity
4.5 Summary
Key Words
4.6 Descriptive Questions
4.7 Answer Keys

84 RETAIL BANKING
Mr. Sameer Sharma, an account holder of XYZ Bank, has Rs 15 lakh in

his saving account. Saving deposit is giving ROI of 2.60%, so, he wanted
to make fixed deposit for 3 years. He mentioned this to the staff at the
front desk. The staff gave him the form and provided the information
regarding the rate of interest which was 6%. Before coming to XYZ
Bank, Sameer had inquired about the rate of interest in other banks
also. He mentioned to the staff that the ABC is giving him higher rate of
interest of about 7%, and asked the staff why should he do fixed deposit
in their bank. The customer made his fixed deposit at ABC bank and not
in the XYZ bank.
After few days, the XYZ bank increased its rates on fixed deposits due
to the competition prevailing in the market. There are many players in
the market giving neck to neck competition to each other. The customer,
thus, has many options available. The bank follows various schemes and
strategies to attract the customers.
QUESTIONS
1. What is the rate of interest given by the bank on saving deposit?

(Hint: 2.60%)
2. What is fixed deposit and how does it differ from saving account?
(Hint: Money is kept for a fixed period.)

COMPETITION IN RETAIL BANKING, MARKETING AND DISTRIBUTION MANAGEMENT 85
LEARNING OBJECTIVES
After reading this chapter, you will be able to:

> Outline the frameworks for understanding competition among
retail banks
> Explain the key areas of competition among retail banks
> Describe the key strategies used by retail banks at corporate and
market levels
> Discuss the implications of competition for a bank’s stakeholders
4.1 INTRODUCTION
The dictionary meaning of the word competition is a situation, where two
or more people or organizations are trying to achieve, obtain, etc. the same
thing or to be better than somebody else. In banking business, gone are the
days, when bank employees sat on their desks and customers came to them
and did their work as per their time and need. With the advent of new tech-
nology and more market players, banks provide personalized services to the
customers. The banks now employ attractive marketing strategies to popu-
larize their products and services among the customers.
There has been a drastic change in the working of the retail banks in the
present era. This chapter explains the reasons for the increased competition,
various marketing strategies adopted by banks. The effect of the competition
on the stake holders, consumers have been explained in this chapter.
Competition is the life line of a modern economy. The competition in the
market helps to update methods and technology. It provides the most pro-
ductive way to earn profit in business.
Healthy competition helps to do the things and services in a new and effi-
cient manner.
Market size – Indian banking industry is never like before. The increased
competition due to entry of new comers has increased the market share.
Profitability – The main motive of any business is to earn profit. There are
many new entries in the market leading to competition.
Rapid technological change – It enables quicker and more efficient service
besides providing advantage to new entrants over existing players.
Product innovations – Features such as home banking and ATMs make the
industry more competitive and alert.
Markets such as domestic and foreign currency, banking, and non-banking,
are getting integrated into our country. Correspondingly, there are institu-
tional innovations and inter linkages, both in ownership and operations – be
it in depositories or mutual funds.
Consumers of banking services are becoming more demanding, enlightened
and cost and quality conscious. Due to this there has been competition in
price, product, technology etc.
The banking industry has to face increased competition due to above reasons.

86 RETAIL BANKING
SELF-ASSESSMENT 1. Reasons that have made the environment competitive for banks are
QUESTIONS
a. Higher rate of interest
b. Personalized services
c. Advanced working environment
d. All of the above
2. New technologies that have been introduced in the banks in recent
years are
a. ATM b. Mobile banking
c. Wealth management d. All of the above
ACTIVITY 1 Prepare a report on risks involved in online banking.
4.2 CORPORATE AND MARKET LEVELS

STRATEGIES FOR RETAIL BANKS
A marketing strategy is a business’s overall plan to attract prospective con-
sumers and turn them into customers of their products or services. A market-
ing strategy highlights the company’s value proposition, key brand messaging,
data on target, customer demographics, and other high-level elements.
Bank marketing develops a unique brand image, which is treated as the capi-
tal reputation of the financial academy. It is very important that a bank should
develop good relationships with their valued customers along with their inno-
vative ideas, to be used as measures to meet their requirements.
Customers always expect good quality services and high returns. There is a
chance that the quality factor may be the prime determinant of successful bank-
ing corporations. Therefore, Indian banks should acknowledge the imperative
of proactive Bank Marketing and Customer Relationship Management and
also take systematic steps in this direction.
The reasons for the importance of marketing scope in banking and the interest
of banks in marketing subjects can be attributed to the following factors:
1. There has been a change in demographic dynamics.
2. Marketing strategies are required due to fierce competition in the
service industry like banks.
3. The urge to increase profit in this competitive environment makes
marketing mandatory.
4. Marketing is required due to deregulation of interest rates.
5. Marketing of products is required due to entry of new comers in the
industry.
6. Increase in customers’ awareness and demand, there has been a need
for marketing strategy
7. With the advent of technology, the marketing of products is required.

4.2.1 CORPORATE-LEVEL STRATEGIES INCLUDE

1. Branding – Branding is the positive perception of people about a
company’s image, products, and services. It is one of the corporate
strategies to retain customers. The more brand image, the bank will
retain its customers more. For example- State bank of India has become
a brand in banks and because of this, it has increased its customer base.
2. Funding – Funding is providing resources to start a project or program.
It is the financial investment of the bank in its products and services. It
also involves asset and liability management.
3. Operational efficiencies include the ability of an organisation to reduce
waste in time, effort and material to provide a high quality product
or service. These are strategies which can include the outsourcing of
functions, the use of overseas or remote call centres, and the automation
of payments.
4. Product and market portfolios include collections of the products
and services offered by the company. This strategy includes decisions
regarding on which products or services and markets to focus, and
sometimes which to exit, since banks can capitalize on key skills and
expertise only in markets in which these add value
5. Growth – A growth strategy of a company is to overcome present and
future challenges to accomplish its plan for expansion. These challenges
may at either or both the domestic and international level
4.2.2 RECENT MARKETING STRATEGIES OF BANKS INCLUDE

1. Among the other promotional tools, advertising is the most important
promotional tool for banks.
2. Expectations of consumers from banks are increasing. With the
increase in the education of consumers, they are expecting more and
more value-added services even if they have to pay a premium for it.
3. Mobile banking has become a blessing for consumers in case they have
no time to visit the bank branch.
4. Social media has become an important tool for marketing banking
services. In 2017, seventy percent of banks made use of social media for
marketing purposes. Now, banks prefer to promote their products and
services on social media such as Facebook and Twitter.
5. Due to the increase in the use of technological bases, the operational
efficiency of Indian banks has increased. Marketers said that
e-newsletters were the most effective form of Internet marketing,
followed by search engine marketing and sponsorships.
6. In order to attract more and more customers, expenditure on marketing
has been increased due to the adoption of new and innovative strategies.
With the increased competition and awareness about the banking sectors,
customers are now becoming more demanding of the services being offered
by them. New trends are being witnessed. Banks have understood that social
channels are to be used differently in financial services than in retail or other
industry verticals.

88 RETAIL BANKING
SELF-ASSESSMENT 3. Banks attract their customers by offering

QUESTIONS
a. High rate of interest
b. Loans at less rates
c. Value added services
d. All of the above
4. Social media helps banks
a. to reach to the maximum number of customers all over the world
b. to spread knowledge about their new schemes to their customers
c. to share their experiences of old customers with new ones
d. All of the above
ACTIVITY 2 Visit a bank and ask about their educational loan and its term and conditions.
4.3 EFFECT OF COMPETITION ON BANK’S

STAKEHOLDERS
It is important to remember that retail banks have a number of stakeholders
– that is, people and organizations for whom the bank’s successful operation
is essential, including:
1. Shareholders, who are interested in returns on their investments-
Increased competition enables a bank to adopt updated technologies
and schemes, which will increase the profitability of the banks, hence,
provide increased returns to the stakeholders.
2. Consumers, who are interested in good service, and in choice and
convenience, but at low cost, are most benefitted with the availing
competition in the market.
Due to increased competition, there is cut throat competition in the rates
of interest in deposits and advances which is beneficial for customers.
3. Managers and employees, who are interested in career progression
and pay, as well as job satisfaction, and professional standards, and
4. The government, which is interested in a well-functioning banking
system as an engine, for economic growth and for stability.
The aim of each and every stakeholder of bank is to earn profit. Profits are a
signal of success and stability in the market; they allow a bank to give better
returns to shareholders, to offer better rewards to staff and, potentially, to
invest in better services to consumers.
SELF-ASSESSMENT 5. Which statement is not correct with respect to consumers?

QUESTIONS
a. They need good service.
b. They need low interest rates on their deposits.
c. They want convenience during their transactions.
d. They need faster work.

6. Stakeholders include
a. Shareholders
b. Consumers
c. Managers and employees who are interested in career progres-
sion and pay raise
d. All of the above
Prepare a report about the different schemes of different banks for eco- ACTIVITY 3
nomically weak sections and also which you think is the better one.
4.4 AN OVERVIEW OF DISTRIBUTION

MANAGEMENT
The distribution or delivery of products and services by banks to customers is
known as distribution management in retail banking. Banks constantly need
to innovate ideas to deliver different and effective products and services to
their customers.
Ideal distribution system or channel can be determined by exploring the need
and requirements of the customers in terms of service output from the distri-
bution channels. Also, it depends on the willingness of the consumers to pay
for a given service level, the way by which these services can be provided to
them, and the costs of alternative distribution channels.
Six main channels are used for the delivery of banking services. The chan-
nels are:
1. Branch Banking
2. Mobile Banking
3. ATM Channel of Banking
4. Mobile Banking or Phone Banking, Tele-Banking
5. Self Service Banking
6. Internet Banking, Online Banking, E-Banking.
4.4.1 NEED OF DISTRIBUTION MANAGEMENT

There has been a need for distribution management in retail banks because
of the following reasons-
1. The physical channel involves direct intervention of people in providing
services to the customer. It is challenge to provide the banking services
manually to all the customers who are near and far. The three important
human interventions in physical channels are
(i) Internal Customer - Staff of the Branch
(ii) Specialised Marketing Personnel
(iii) Direct Selling Associates (DSAs).
Due to this, there is a need for distribution management to provide
banking services to customers who are far.

90 RETAIL BANKING
2. In many of the public sector banks, retail banking is carried on only as

a separate departmental activity and not as a Strategic Business Unit
(SBU), whereas in foreign banks and new generation private banks,
retail banking is carried as a Strategic Business Unit. Due to this, there
has been a need for various distribution channels to provide access of
banking services.
3. Internal customer, is more focused in- service delivery in new private sector
banks. They are, thus, used to the traditional banking practices. But, due
to the alternate delivery channels, customers are now demanding online
services. These can be provided easily through distribution channels.
4. In public sector banks, even without a strategic focus to retail banking,
the service delivery is generally more personalised and caring because
of the loyalty factor of public sector bank customers and better personal
understanding of the customers’ profile by the staff in PSBs. This is
more pronounced in semi urban and rural branches where retail
customers are more loyal and value their relationships with the banks.
SELF-ASSESSMENT 7. Which statement is not correct for private sector banks?

QUESTIONS
a. Do not understand customer’ profile
b. Are not personalised and caring
c. Provide doorstep services
d. Are technologically advanced
8. The three important human interventions in physical channels are
a. Internal Customer - Staff of the Branch
b. Specialised Marketing Personnel
c. Direct Selling Associates (DSAs)
d. All of the above
ACTIVITY 4 Visit a private sector bank and prepare a report on its functioning and the
difference you observed in it from public sector banks.
4.5 SUMMARY
The chapter explains the reasons for the increased competition, various
marketing strategies adopted by banks.
The competition in the market helps to update methods and technology.
It provides the most productive way to earn profit in business.
Features such as home banking, ATMs are all making the industry con-
tinuously alert, and fiercely competitive.
Markets are increasingly getting integrated in our country also. Domestic
and foreign currency, banking and non-banking are getting closer.
The banks now employ attractive marketing strategies to popularize
their products and services among the customers.

Customers expect quality services and returns. There are good chances
that the quality factor will be the sole determinant of successful banking
corporations.
Mobile banking is the need of the hour. It is a blessing for consumers who
have no time to visit the bank.
Social media has become an important tool for marketing banking ser-
vices; banks prefer to promote their products and services on social
media such as Facebook and Twitter.
Banks have understood that social channels are to be used differently in
financial services than in retail or other industry verticals.
Ideal distribution system or channel can be determined by exploring the
need and requirements of the customers in terms of service output from
the distribution channels. Also, it depends on the willingness of the con-
sumers to pay for a given service level, the way by which these services
can be provided to them, and the costs of alternative distribution channels.
Product and market portfolios which include decisions on the products
or services and markets to focus on and sometimes to exit, since banks
can capitalize on key skills and expertise only in markets in which these
add value.
1. Competition is a situation where two or more people or organizations KEY WORDS

are trying to achieve, obtain, etc. the same thing or to be better than
somebody else.
2. Depositories is a facility or institution where something is deposited
for storage or safeguarding.
3. A marketing strategy refers to a business’s overall plan for achieving
prospective consumers and to make them into customers of their
products or services.
4. Mutual fund is a pool of money managed by a professional fund
manager
5. Stakeholders are people and organizations for whom the bank’s
successful operation is essential, including shareholders, consumers
etc.
6. Profits are a signal of success and stability in the market. They allow
a bank to give better returns to shareholders, to offer better rewards
to staff and, potentially, to invest in better services to consumers.
7. Distribution management in retail banking means delivery of
products and services by banks.
8. Advertising is the most important promotional tool for banks among
the other promotional tools.

92 RETAIL BANKING
4.6 DESCRIPTIVE QUESTIONS

1. How does healthy competition help in doing things in an efficient
manner?
2. Why has marketing become important in banking also?
3. Explain the marketing strategies followed by the banks.
4. What is the need for distribution management?
5. Why is mobile banking the need of today?
4.7 ANSWER KEYS
Competition and areas be- 1. d. All of the above
tween retail banks
Corporate and market level 3. d. All of the above
strategies
Effect of competition on banks’ 5. b. They need low interest rates on
stakeholders their deposits.
An overview of distribution 7. b. Are not personalized and caring
management

AND E-REFERENCES
https://www.uasinternational.in/recent-trends-in-marketing-strategy-in-
banking-sector
www.rbidocs.com
invetopedia.com

C H A
5 P T E R
RETAIL BANKING PRODUCTS
CONTENTS
5.1 Introduction
5.2 Various Types of Accounts and Facilities that Banks Offer
Activity
5.3 Features of Different Deposit Accounts
Activity
5.4 Various Types of Loans and Credit Products
Activity
5.5 Relationship Between Customer and Banker
Activity
5.6 Fee-Based Products and Services Offered by Banks
Activity
5.7 Importance of Interest and Non-interest Revenues to Retail Banks
Activity
5.8 Summary
Key Words
5.10 Answer Keys

94 RETAIL BANKING
Garima entered a bank in her locality to deposit cash in her father’s

account. Her father is a businessman and has his business account in
ABC bank. It is the first time she visited a bank. She entered and asked
bank official about the process to deposit the cash. The bank official
asked her about the kind of account her father is having and what is the
account number. She was unaware of the different types of accounts a
person can have in banks and also various other products. So, the bank-
ing official guided her about the different retail products.
The retail products of banks can be broadly divided into two categories
– asset and liabilities products of bank. Asset products are mainly the
products which earn income through interest and commission for the
banks and liabilities products are the products in which the banks have
to pay interest and commission.
Liabilities products of the banks are the various deposit accounts on
which bank pays interest to the depositors for parking their surplus
funds. After going into the case you can now answer these questions-
QUESTIONS
1. Name different types of accounts a person can have in a bank.

(HINT: saving account, current account, etc.)
2. Under which category do deposit accounts on which a bank
pays interest come? (HINT: Liabilities)

Retail Banking Products 95
LEARNING OBJECTIVES
After reading this chapter you will be able to

> Know the different types of relationships between customer and
banker
> Describe how can we do categorization of retail products
> Explain the various deposit products offered by banks
> Understand the various loan products offered by retail banks
> Discuss various types of services provided by banks
5.1 INTRODUCTION
Banks earn profit by offering two types of products- interest-based and
non-interest-based. Interest-based includes saving deposits, current
deposits term deposits etc. The net profit is the difference between the
interest paid to the depositors and the interest charged to the borrowers.
In this chapter, we will study the different types of bank accounts. Banks
not only provide us with services that fulfil our basic needs but also help
with internet shopping, different payment systems, etc. In this chapter, we
will also learn about noninterest-based products and the risks involved in
them. We will also know about the legal relationship between the bank and
the customer.
5.2 VARIOUS TYPES OF ACCOUNTS

AND FACILITIES THAT BANKS OFFER
Various types of deposit accounts offered by banks are-
Demand Deposit – Deposits which are withdrawal on demand (e.g., savings,
current).
Savings Deposit account – Saving deposit accounts is an interest bear-
ing deposit account for doing a certain amount of saving for meeting short
term requirement. It is a demand deposit which is subject to restrictions
on number of withdrawals or amount of withdrawals. Savings accounts are
mainly intended to plan and save for future requirements. Saving accounts
are intended for doing small savings and it is not intended for earning any
kind of profit.
A savings bank account is for an individual or in the name of two or more
individuals. A minor can also open a saving account which can be operated
by his/her legal guardian till he/she attains majority. The saving account is
not meant for business entities, or business concerns such as proprietary/
partnership or company/ association.
Similarly, Government Departments such as, State Electricity Boards,
Housing Boards, cannot open a savings account. The Reserve Bank of India
permitted banks to open savings bank accounts in the name of Zilla Parishad/
Gram Panchayats for the placement of funds released for the implementa-
tion of various rural development/welfare programs.

96 RETAIL BANKING
Current deposit account – These accounts are mainly for carrying out busi-
ness and trade transactions. There are no restrictions on the number of
withdrawal and deposit of trade/business related transactions and service
charges are charged for this depending on the volume of transactions. No
interest will be paid for the deposit amounts. This is a ‘no cost deposit’ for
the banks.
Do you know?
The current account and saving account together are called CASA
deposits in banks. It plays a vital role in banks as no interest is paid by
banks in the current account and the interest paid on saving accounts
is minimal. So, the funds in these accounts can be used for the purpose
of lending.
Term deposit – Term deposits are the deposit accounts where amount in the
account are held for a definite period. The bank provides interest on these
deposits for the period of time the funds are held on. The interest rate are
fixed and rate depends upon the period of deposit and these are offered with
facility for getting monthly, quarterly interest as well as deposits with cumu-
lative interest at the end of the deposit period.
Flexi fixed deposits – Apart from the saving and fixed deposit accounts,
banks also open flexi fixed deposit (FFD) for customers who want to do
saving and fixed deposit. A certain amount is held in account and rest of
the amount above the certain amount can be fixed for certain period of
time. Thus, the customer can earn interest at a higher rate than saving
account.
SELF-ASSESSMENT
1. In which type of account do banks not pay interest?
QUESTIONS
a. Saving account
b. Current deposit
c. Fixed deposit
d. Flexi fixed deposit
2. Which accounts are together called CASA deposits in banks?
a. Saving account and current account
b. Current account and term deposit
c. Term deposit and flexi fixed deposit
d. All of the above
ACTIVITY 1 Suresh Babu, a government employee, wants to open a salary account in

a bank. His salary is Rs. 20,000/ per month and expenditures are varied
from Rs. 15,000 to Rs. 18,000 per month. Please suggest an account that is
suitable for him.

5.3 FEATURES OF DIFFERENT DEPOSIT

ACCOUNTS
Savings Bank Scheme is generally available at all the branches of banks.
Minimum balance varies from bank to bank, centre to centre and with or
without chequebook facility. Normally, the structure of minimum balance in
public sector banks is as follows:
Minimum balances with chequebook facility
Category Metro Urban Semi-urban Rural

Individual Rs 1000 Rs 1000 Rs 500 Rs 250
Others Rs 1500 Rs 1500 Rs 1000 Rs 250
Pensioners Rs 250 Rs 100 Rs 100 Rs100
(ucobank.com)
Minimum balances without chequebook facility
Category Metro Urban Semi-urban Rural

All classes of depositors Rs 500 Rs 500 Rs 250 Rs 100
Pensioners Rs 50 Rs 50 Rs 50 Rs 50
Features of saving account

1. Saving accounts provide the facility of debit cards and cheque books to
their customers and augmented saving account holders get additional
services such as internet banking, mobile banking, tagged insurance
cover, personal accident cover, sweep in-sweep out facility, and other
concessions like free remittances.
2. SB deposits is a simple product that inculcates the habit of saving in a
customer.
3. Banks charge no fees in the deposit or withdrawal of money in saving
account.
4. Customers can operate their account multiple times and the fees kept
by the bank is kept at a low level.
5. Interest rate with effect from 10.04.2022
Balance Rate of Interest(p.a.)

Upto 10 lakhs 2.60%
Over 10 lakhs 2.75%
6. Nowadays, the facility of debit cards, mobile banking, and internet

banking are provided along with the saving account.
7. For adding value to the product and for the benefit of the customers,
some banks are offering group life cover and/or group health cover at a
very attractive price as compared to a standalone cover.

98 RETAIL BANKING
Features of Current Account
A current account is an account that can be operated any number of times

on a working day without any restriction on the number and amount of with-
drawals in this account. The bank has to repay these deposits on demand.
Current accounts are good and feasible for joint stock companies, public
authorities, corporations, etc. which daily do lots of transactions.
Benefits of a current account:
1. Third-party cheques and cheques with endorsements may be deposited
in the current account for collection and credit.
2. Overdraft facilities are given in the case of current accounts only.
3. Banks give loans to their customers via current accounts not in the form
of cash. Thus, current accounts earn interest on all types of advances
allowed by the banker.
Difference between current account and saving account-
Difference Saving Account Current Account

Deposit Restriction on amount of No restriction on the
deposit amount of deposit
Withdrawal Restriction on the number No restriction on the
and amount of withdrawals number and amount of
withdrawal
Interest Interest is paid on these No interest is paid on
accounts these accounts
Overdraft No overdraft facility is Overdraft facility is avail-
available able
Chequebook facility Chequebook facility is Chequebook facility is
upto 2 chequebook per chargeable
half year is free
Features of Term deposit – Term deposit are deposits which are fixed for a
fixed period of time. They can be categorised into fixed deposit and recurring
deposit. Features of these accounts are-
Features of Recurring deposit – In recurring deposits, the money is gener-
ally deposited on a monthly, weekly, or daily basis for a fixed period and is
repaid to the depositor along with interest on maturity. It inculcates the habit
of saving. The period of the recurring deposit varies from bank to bank, gen-
erally ranging from one to ten years.

Who can open account Anyone who wants to save money on weekly or
monthly basis. Minor can also open RD account
under guardianship.
Rate of interest Rate of interest is paid quarterly basis.
Nomination Nomination facility is available in this account.
Pre mature withdrawal Pre mature withdrawal can be done on deduction of
1% interest rate applicable.
Loan facility Loan against recurring deposits can be taken.
Features of Fixed Deposits

Fixed deposits are the deposits repayable after the expiry of a certain period,
which generally varies from 3 months to 5 years. The amount of fixed deposit
done by the public can be used by banks for lending and other investments
without having to keep a reserve and hence is very popular with the banks.
Who can open Anyone who wants to save money on weekly or monthly
account basis. Minor can also open fixed deposit account under
guardianship.
Rate of interest Rate of interest is paid on monthly or quarterly basis.
Nomination Nomination facility is available in this account.
Pre mature Pre mature withdrawal can be done on deduction of 1%
withdrawal interest rate applicable in form of penalty.
Loan facility Loan against fixed deposits can be taken.
Senior citizen Senior citizens are paid upto 0.50% more than general
interest.
Tax TDS is deducted on the interest of FDR.
Duration It can be done for any number of days to upto 10 years
maximum.
SELF-ASSESSMENT
3. Which statement is not correct for a saving account?
QUESTIONS
a. Saving account in a bank is a simple product for inculcating
the habit of savings and routing the savings transactions in that
account.
b. There is no free deposit and withdrawal of money by cash and by
cheques.
c. It gives absolute flexibility to the customer to operate his account
and price is kept at a low level.
d. Debit cards, mobile banking and internet banking facilities are
provided along with the saving account.

100 RETAIL BANKING
4. Which statement is true for recurring deposits?

a. A minor can also open RD account under guardianship.
b. Nomination facility is available in this account.
c. Pre mature withdrawal can be done on deduction of 1% interest
rate applicable
d. Loan against recurring deposits can be taken.
e. All of the above
ACTIVITY 2 Prepare a list of documents needed for opening a saving account in a bank.
5.4 VARIOUS TYPES OF LOANS AND CREDIT

PRODUCTS
Credit accounts: The credit accounts are more straightforward to classify
than the savings. The motivations for personal borrowers are essentially
twofold: to buy an asset; or to anticipate income to meet the liquidness of the
funds. While the purchase of assets cannot always be financed from current
revenues or cash flows, repayment of a loan may well be the responsibility of
an individual or a business.
For an enterprise, there may be a need to fund assets before any income can
be generated. A simple loan is not only one of the ways to achieve this but is
requested by most of the business organisation.
For any person, home, mortgage and personal loans are popular. Banks pro-
vide retail loans for various purposes. The type of loan and its terms and
conditions vary from bank to bank. Major Retail Lending products are given
below:
Home Loans: For purchase or construction of new or old house or flat or
extension of already built house, for repair, renovation, up gradation, paint-
ing and other repairs.
Home Decor Loans: For furnishing of the house or flat or interior decoration
or air conditioner, etc.
Auto Loans: This loan is given for the purchase of new car, old car, two
wheeler etc. In general, private and foreign banks are aggressive in financ-
ing car loans by having a link to the manufacturer, factoring dealer of the
manufacturer to increase volume of sales etc. resulting in finer pricing.
However, banks do not focus much on two wheeler finance.
Personal Loans: Personal loans are sanctioned by banks based on salary
in the case of employees, annual income in the case of business, and also
the number of years of service or being in business. However, in the case of
Central or state government employees, salary tie up is not required. Public
sector banks are cautious in these loans due to the high rate of defaults.

Educational Loans: Educational loans are given to students for pursuing

education. The students willing to pursue the course of study as defined by
IBA can avail the loan. Salient features of the scheme are given below:
a. The scheme could be adopted by all scheduled commercial banks.
b. Eligible courses would include school education Plus-2 stage; grad-
uation and post graduation courses, professional courses, computer
certificate courses etc.
c. Student Eligibility: He/She should be an Indian national and should
have got admission in professional/technical courses through the
entrance test/selection process or secured admission to foreign
universities/institutions.
d. Expenses for Loan: Fee payable to college/school/hostel; Examination/
library/laboratory fee; Purchase of books/equipment/instruments/uni-
forms; caution deposit/building fund etc.
Credit card/revolving credit: It is one of the most popular methods of credit
which is less cumbersome and hassle free. It sets a credit limit which has to
be repaid in a minimum monthly payment. It can be redrawn after repay-
ment of credit.
Overdraft: It is the facility in which one can withdraw more amount than the
amount available in the current account. It is provided to meet any kind of
exigencies in case of shortage of funds. It is charged with the interest which
is calculated on the daily basis. Businesses also use overdraft facilities, since
they need to finance the purchase of stock, the payment of wages and so on
before income is generated.
SELF-ASSESSMENT
5. In which type of account do banks have to pay minimum interest?
QUESTIONS
a. Saving account b. Recurring deposit
c. Fixed deposit d. Flexi Fixed deposit
6. Overdraft facility is available in
a. Saving account b. Current account
c. Fixed deposit d. Flexi Fixed deposit
Rekha, a domestic help, wants to an account for her son aged three years ACTIVITY 3
in a bank. She can deposit small amount of cash on monthly basis. Please
suggest which type of account is suitable for her to get maximum benefits.
5.5 RELATIONSHIP BETWEEN CUSTOMER

AND BANKER
The Banking Regulation Act, 1949 defines ‘Banking’ as accepting for the pur-
pose of lending or investment of deposits of money from the public, repayable
on demand or otherwise and withdrawal by cheque, draft order or otherwise
(Sec. 5b) and says that any company which transacts the business of banking
is a ‘Banking Company ‘(Sec. 5c).

102 RETAIL BANKING
A customer is one who has a saving, current or fixed deposit (Saving/Current/

Fixed) deposit account. An agreement to open an account makes one a cus-
tomer. But one, who has any other transactions/business only, but no account
with the bank, cannot be called its customer.
Depending on the various functions of the bank, the relationship between
customer and banker can be divided into following types:
Debtor–Creditor: Debtor and creditor relationship arises when a bank
accepts deposits from the customer, bank becomes debtor and customer a
creditor irrespective of the fact the bank pays interest or not. But the rela-
tionship is of a special nature, as established by several judgments.
Trustee–Beneficiary: Banks may also act as trustee. The position of a bank
will be that of a trustee when:
a. Person without bank account deposits money with instruction to hold
it until further notice.
b. There is an instruction from the customer to debit his account for a
particular purpose or for remittance to other bank or branch account.
c. When bank manages properties of its customer.
Agent–Principal: As per Sec 151 of the Indian Contract Act, the bank is
duty-bound when the banker accepts, bills, etc. for collection on behalf of his
customer. The banker should act with reasonable diligence and skill as per
instruction of the principal (in absence of instruction as per customs) failing
which, to make good the loss, if any, as per Sections 211 and 212 of the Indian
Contract Act.
Bailee–Bailor: When an article is kept for safe custody with the bank, the
bank should take as much care of the goods as a man of ordinary wisdom
takes of his own similar goods.
Example: When a car is given to the mechanic for repair. In this case, the
owner is the bailor while the mechanic has the car in physical custody and
he is the bailee.
Lessor–Lessee: When the bank hires out the locker to a customer, the bank
becomes a lessor and the hirer a lessee and the relationship is that of land-
lord and tenant. The lessor, that is the bank, is not responsible for any loss
or damage. A suitable clause to the effect is also incorporated in the Lease
Deed. The hirer, that is the customer, is advised to insure their valuables
deposited in the locker.
SELF-ASSESSMENT
7. A customer in a bank is the one who has a
QUESTIONS
a. Saving deposit b. Current deposit
c. Fixed deposit d. Any of the above.
8. When a bank hires out the locker to a customer
a. Bank becomes lessor
b. The hirer becomes lessee
c. The lessor, that is the bank, is not responsible for any loss or damage
d. All of the above

A man goes to a bank and asks for a locker to keep his valuables. Bank offi- ACTIVITY 4
cial hands over an agreement to him to read the instructions and sign it.
Please procure such an agreement, go through it and figure out its salient
features.
5.6 FEE-BASED PRODUCTS AND SERVICES

OFFERED BY BANKS
The profitability of retail banks depends not only on financing and lending,
operating costs and bad debts, but also on the possibility of taking advantage
of “scope savings” by selling financial products on the basis of fees or com-
missions. Fees and commissions are charged for loans too, for example pro-
cessing fees, documentation fees etc, but the other opportunities fall into the
following categories:
Insurance and investment products.
Payment services: These also emanate from the basic account relation-
ship, but take on different structures depending on territory, technology
and sector.
International services: These specialist services are aimed at the financial
and physical risks involved in international trade. Even the smallest busi-
ness can have import and export issues. It also includes foreign remittance.
For example, Shashi has to send fees for her daughter studying in
Canada, so she approaches her bank, asks how she can remit the funds.
She was told that she can send the money under foreign remittance to
her daughter with an exchange rate prevailing at that time and also bank
will charge commission for doing the remittance.
Risk management services: These cover financial risks generally, such as
interest-rate or exchange-rate fluctuations.
Bill Finance facility is self-liquidating with the fulfilment of bills pur-
chased/discounted for the borrower, Demand Loan, and Term Loans
have definite repayment periods.
Issue of Drafts, Bank Order/Bankers Cheques, National Electronic
Funds Transfers (NEFT), Real Time Gross Settlements (RTGS) are
the major services offered to the customer by the bank. The cost of
using these services will depend on the number of transactions and
the customer’s business relationship with the bank.
Collection of cheques, safe deposit lockers, and standing instructions
of the customer on a periodic basis are the important services pro-
vided by the bank.
Letter of Guarantee and Letter of Credit are other services offered by
the bank and are also called a non-fund business of the bank.
In the letter of credit and in the letter of guarantee, though at the lime
of offering these services, there is no fund outlay but at any future
time, a liability may arise for the banker to part with the bank’s funds.

104 RETAIL BANKING
Letter of guarantee is a guarantee given by the bank on behalf of

their customer to a beneficiary, guaranteeing the beneficiary to pay if
the customer is not paying or performing.
Letter of credit is an undertaking from the banker to pay the bene-
ficiary the prescribed amount, subject to production of certain doc-
uments that are listed in the LC itself. In the case of Letter of Credit
also, though at the time of offering the service, there would be no
funds outlay, at a future date a liability may crystallise on the bank.
Letter of credit and bank guarantee offer tremendous scope for income and
profit because banks collect commission for offering these services without
outlay of funds. But the risk is involved, if there is failure of the obligation by
the party, then banks’ outlay of funds is involved.
Other fee-based services

Third Party Distribution
1. Third party distribution of products of other financial organizations
like insurance company or mutual fund is a source of fee based income.
2. Activities like insurance or mutual fund business are called as para
banking activities and RBI has prescribed rules and regulations for
carrying out these activities by banks.
Insurance Products
Retail banks often exist in the context of a universal bank and offer invest-
ment, insurance and retirement products on behalf of a bank held (i.e.,
linked). They act as broker and provide advice and arrange policy with the
help of insurance companies. In this world which is full of risks, individuals
and business require insurance to make them in the same position after suf-
fering losses. Insurance must be done in considering following:
1. Measurability. The actual loss that might have occurred must be
capable of being measured in financial terms.
2. Chance: Insurance companies will estimate the likely risks for different
age groups (car or life risks) or different locations (flood or theft risks)
and base the premiums that they charge on that probability.
3. Commonality. There must be a sufficiently large pool of people or
companies sharing the same type of risk. However, actual loss should
be independent (that is, subject to chance).
4. Insurable interest. Only those who will suffer loss from a particular risk
are able to insure against it. It would be unthinkable if unconnected
parties were able to insure others’ lives: imagine if, as an ‘investment’,
you were to insure the lives of people boarding a particular ferry in the
Mediterranean?
5. Public policy. When the risk event is considered to be a crime, it is
against public policy for insurance to be valid. For example, the family
taking out a home mortgage would want life assurance to cover the
adults providing the repayments. In the case of their death, the loan
would be repaid and the family would not risk losing their home as
well – and the bank would avoid having to evict any surviving partner

and children following the tragic death of a breadwinner, which would

inevitably impact negatively on the bank’s reputation.
Investment Products
The investment markets available will depend upon the amount and level of
funds available, and the risk appetite of the individual or business manage-
ment team. Advice for investments can be taken by a professional interme-
diary, such as a banker, but alternatively could be an accountant, solicitor or
broker. A range of products such as bonds (corporate or government-backed)
derivatives or equities should be assessed. In many countries, the providers
of investments and investment advice must be duly qualified and regulated.
Bank tie up with the fund houses to provide an advice of investments to the cus-
tomer through the accounts opened by the customer in their branches. Banks
earn commission on the investment done through their various branches. Banks
provide following services through digital mode to its customers:
ASBA (Application supported by blocked amount)
Demat services
Equity fund schemes.
Mutual fund schemes.
SELF-ASSESSMENT
9. The profitability of retail banks depends on
QUESTIONS
a. Financing and lending
b. Operating costs and bad debts
c. Selling financial products on the basis of fees or commissions
d. All of the above
10. In the remittance services, banks offer the following major services
to the customer
a. Issue of Drafts, Bank Order/Bankers Cheques
b. National Electronic Funds Transfers (NEFT)
c. Real Time Gross Settlements (RTGS)
d. All of the above
Hari, aged 25 years, wants to make some investments for the short term i.e. ACTIVITY 5
for a period of 3 years and for the long term i.e. for a period of more than
10 years. He visits a bank for their advice before taking any decision. Please
suggest the various options that can be offered to him in this regard.
5.7 IMPORTANCE OF INTEREST AND NON-

INTEREST REVENUES TO RETAIL BANKS
Income forms an important role in the profit making of any business. In bank-
ing business, income comes from interest rate based products like deposits in
which interest has to be paid and loans on which the bank receives interest
from the borrowers.

106 RETAIL BANKING
Apart from interest income, banks also earn from non-interest-generating

products and services like insurance schemes, remittance facilities, bills col-
lection, etc.
Bank earns by giving loans at a particular rate of interest to eligible custom-
ers for their businesses, education, vehicles, home, etc.
For financial institutions, such as banks, interest represents operating
income, which is income from normal business operations. The core purpose
of a bank’s business model is to loan money, so its primary source of income
is interest. Banks rely heavily on non-interest income when interest income
is low. When interest rates are high, sources of non-interest income can be
lowered to entice customers to choose one bank over another.
When interest rates are low, banks profit from the spread between the cost
of funds and the average lending rate. Low-interest rates make it difficult for
banks to make a profit, so they often rely on non-interest income to maintain
profit margins.
SELF-ASSESSMENT
11. Banks also earn from non interest generating products and services
QUESTIONS
like
a. Insurance schemes
b. Remittance facilities
c. Bills collection
d. All of the above
12. Banks rely heavily on non-interest income when
a. Interest rate is low
b. Interest rate is high
c. Interest income is high
d. None of the above.
ACTIVITY 6 Three banks have opened their branches in an area and offered differ-
ent types of facilities for their customers. Please visit all the banks and
make a list of the facilities/products being offered by them and compare
their fees being charged for providing the facilities. Also, visit the same
branches when the interest rates are changed and see whether there is
any difference in their fees now. Compare the fees being charged for both
the occasions.
5.8 SUMMARY
The retail products of banks can be broadly divided into two categories
–Asset and liabilities products of bank.
Saving deposit account is an interest bearing deposit account for doing a
certain amount of saving for meeting short term requirements.
Current deposit accounts are mainly for carrying out business and trade
transactions.

Term deposits are the deposit accounts where amount in the account are
held for a definite period.
Flexi fixed deposits are the deposits for customers who want to do saving
and fixed deposit.
Recurring accounts are the accounts in which the money is generally
deposited in monthly instalments for a fixed period and is repaid to the
depositor along with interest on maturity.
Banks provide retail loans for various purposes; the major retail lend-
ing products are Home loans, Home Decor Loans, Auto Loans, Personal
Loans, Educational Loans etc.
Depending on the various functions of the bank, the types of relationship
between customer and banker are Debtor-Creditor, Trustee-Beneficiary,
Agent-Principal, Bailee-Bailor and Lessor-Lessee.
Apart from interest income, bank also earn from non interest generating
products and services like insurance schemes, remittance facilities, bills
collection etc.
1. Asset products are mainly the products which earn income through KEY WORDS
interest and commission for the banks.
2. Liabilities products are the products in which the banks have to
pay interest and commission.
3. Demand deposits are deposits which are withdrawal on demand
(e.g., Savings, Current).
4. Saving deposit account is an interest bearing deposit account for
doing a certain amount of saving for meeting short term requirement.
5. Current deposit accounts are mainly for carrying out business and
trade transactions.
6. The term deposits are the deposit accounts where amount in the
account are held for a definite period.
7. Flexi fixed deposits are the deposits for customers who want to do
saving and fixed deposit.
8. Recurring Accounts are the accounts in which the money is
generally deposited in monthly instalments for a fixed period and is
repaid to the depositor along with interest on maturity.
9. Overdraft is a facility in which one can withdraw more amount than
the amount available in the current account. It is provided to meet
any kind of exigencies in case of shortage of funds.
10. Letter of Guarantee is a guarantee given by the bank on behalf of
their customer to a beneficiary, guaranteeing the beneficiary to pay
if the customer is not paying or performing.
11. Letter of credit is an undertaking from the banker to pay the
beneficiary the prescribed amount, subject to production of certain
documents that are listed in the LC itself.

108 RETAIL BANKING

1. What are the different types of relationship between banker and
customer?
2. Explain the relation of bailor and bailee.
3. What are the different retail products of bank?
4 What are the types of deposit account and elaborate there features.
5. What are difference between saving and current account?
6. Explain the different types of loan products of bank.
7. What are the other services offered by bank?
5.10 ANSWER KEYS
Various types of accounts and 1. b. Current deposit
facilities that banks offer
2. a. Saving account and current
account
Features of different deposit 3. b. There is no free deposits and
accounts withdrawal of money by cash
and by cheques.
Various types of loans and 5. a. Saving account
credit products
6. b. Current account
Relationship between customer 7. d. All of the above
and banker
Fee based products and services 9. d. All of the above
offered by banks
Importance of interest and non 11. d. All of the above
interest revenues to retail banks
12. a. Interest rate is low

AND E-REFERENCES
www.rbidocs.com
Keith Bond: Retail Banking

C H A
6 P T E R
RETAIL BANKING CHANNELS
CONTENTS
6.1 Features of Retail Banking Channels

6.2 Bank Delivery Systems
6.2.1 Physical/Direct Channels
6.2.2 Electronic and Remote Channels
Activity
6.3 Working of Bank Delivery Systems
6.4 Practical Issues Relating to Common Banking Channels
6.5 Changing Trends in The Recent Delivery System
6.6 Summary
Key Words
6.7 Answer Keys

110 RETAIL BANKING
INTRODUCTRY CASELET
Ankita is 35 years old and a busy professional. She does all her banking
works via Internet and mobile banking apps as she does not have suffi-
cient time to visit branch. She is accustomed to the updated technolo-
gies and find it much easier than going to the bank. However, when she
wants detailed information about the new schemes and other schemes,
she visits bank.
Sunita is an old lady of 65 years. She does her banking work by visiting
branch for all her work. She has faith in the branch banking rather than
the online banking. She visits branch even for her passbook entry. Bank
officials many times tried to update her about the online applications to
make her at ease with them but she is much used to branch visiting and
face to face dealing. Thus, banks have to form such delivery channels as
per the customers preferences.
QUESTIONS
1. What are online facilities provided by banks? (Hint: transfer of

money, knowing your balance, etc)
2. Which mode of banking do you prefer and why?

RETAIL BANKING CHANNELS 111
LEARNING OBJECTIVES

> Understand the features of retail banking channels
> Know the bank delivery systems
> Describe the working of bank delivery systems
> Discuss the issues faced by banking channels
> Learn the different changing trends in delivery systems
6.1 FEATURES OF RETAIL BANKING

CHANNELS
Distribution forms an important part in the banking system. Ideal distribution
system or channel can be determined by exploring the needs of customers in
terms of service output from the distribution channels, their willingness to pay
for a given service level, the mechanism through which these services can be
provided to them, and to assess the costs of alternative distribution channels.
Features of the various channels in retail banking are as follows:
The various channels of retail banking provide access of banking services
to all the needy customers who are not able to use the banking facilities
directly.
The various channels of retail banking have increased the serviceable
area of banks. The channels like mobile banking, internet banking can be
used at any place and any time.
The cost of the services has reduced due to direct dealing with the con-
sumer. The mobile banking services or net banking can be directly used
by customer and avoids any cost to be paid to the middleman involved.
One of the features of channels of retail banking is to provide person-
alised services to all its customers through various channels like mobile
banking and net banking.
Distribution channels in banking are time saving and less cumbersome.
SELF-ASSESSMENT
1. This channel of retail banking cannot be used at any place and any
QUESTION
time.
a. Mobile banking b. Internet banking
c. Passbook entry d. None of these
6.2 BANK DELIVERY SYSTEMS

There are a number of distribution channels which provide various banking
facilities at ease. We will discuss these channels in the further sections.

112 RETAIL BANKING
6.2.1 PHYSICAL/DIRECT CHANNELS
Branch: It is a place of bank where all the banking facilities are avail-
able under one roof. All you have to do is to visit the branch. It is face
to face and there is direct interaction between the bank employees and
customers.
Extension Counter: Extension counters provide basic banking services
such as deposit/withdrawal transactions, issuing and encashment of
drafts and mail transfers, issue and encashment of travellers’ cheques,
sale of gift cheques and collection of bills.
6.2.2 ELECTRONIC AND REMOTE CHANNELS

Automated Teller Machines (ATMs)
An automated teller machine, also known as an automated banking machine

(ABM), is an electronic telecommunication device that enables the customers
of a financial institution to perform financial transactions, particularly cash
withdrawal, without a human cashier, clerk or bank teller.
The services normally offered at an ATM are:
Cash withdrawal
Cash deposit
Account information
Regular bills payment
Balance enquiry
Mini statements
Money transfer
Purchase of re-load vouchers for mobiles

Go to nearest ATM and withdraw cash and take mini statement. Also, note ACTIVITY 1
the other services that an ATM offers. Would you like to use them or go to
the bank for them?
Point-of-sale (POS) terminal
Now a days, there is no need to take excess cash while doing shopping, book-
ing flights, etc. These can be done through PoS which uses the debit or credit
card linked to your account. A customer has to enter a card PIN to complete
the transaction using the PoS terminal. The end-customer does not need to
pay any charges for swiping his or her debit/credit cards at the PoS termi-
nals. Rent is paid by the merchant who usually pay 1% to 3% fee for the pro-
cessing of payments for every transaction. Rates can differ as it depends on
factors such as level of business, types of cards used by the consumer, and the
value of the average transaction.
Mobile Banking
Mobile banking is a facility, through which customers are able to initiate and/
or perform banking tasks on their mobile phones. This is provided by most of
the banks in India and abroad. Customers can use mobile banking to view the
balance of their accounts, to make instant fund transfers, and to pay bills, etc.
There are various types of mobile banking, viz. via SMS, USSD, and mobile
apps. Some of the banks such as SBI, UCO bank etc. have incorporated ser-
vices like loan approval and linking of insurance policy in their mobile bank-
ing apps. There are various features and benefits of mobile banking.
Banks provide mobile banking services to their customers in the various
ways, which are as follows:
Mobile banking over mobile applications (for smartphones; e.g. SBI Yono
and iMobile by ICICI Bank, UCO M BANKING Plus by UCO Bank etc.)

114 RETAIL BANKING
Mobile banking over SMS (also known as SMS banking)

Mobile banking over unstructured supplementary service data (USSD).
ACTIVITY 2 Make mobile payments (bill payments) either through app or website.
Immediate Payment Service (IMPS)

IMPS stands for immediate payment service. It enables 24 × 7 electronic fund
transfer services in which the transaction is carried out between two bank
accounts in real-time and on an immediate basis. IMPS fund transfer can be
done through online banking as well as mobile banking. It is one of the most
commonly used facility in mobile banking and other payment apps. It was
introduced in 2010.
Unified Payments Interface (UPI)
Unified payments interface (UPI) is a system that powers multiple bank
accounts into a single mobile application (of any participating bank), merg-
ing several banking features, seamless fund routing, and merchant payments
into one hand. It also serves to the “peer to peer” collect request, which can
be scheduled and paid as per requirement and convenience.
Participants in UPI
Payer PSP
Payee PSP
Remitter bank
Beneficiary bank
NPCI
Bank account holders
Merchant
UPI—Benefits to the Ecosystem Participants
Benefits for banks
Single click two factor authentication
Universal application for transaction
Leveraging existing infrastructure
Safer, secured and innovative
Payment basis single/unique identifier
Enable seamless merchant transactions
Benefits for end customers
Round the clock availability
Single application for accessing different bank accounts
Use of Virtual ID is more secure, no credential sharing

Single click authentication

Raise complaint from mobile app directly
Benefits for merchants
Seamless fund collection from customers—single identifiers
No risk of storing customer’s virtual address like in cards
Tap customers not having credit/debit cards
Suitable for e-com and m-com transactions
Resolves the COD collection problem
Single click 2FA facility to the customer—seamless pull
In-App payments (IAP)
Internet Banking
Internet banking is also known as online banking, or e-banking, or net b anking,
and is a facility offered by banks and financial institutions that enables customers
to use banking services over the internet. Customers are not required to visit
their bank’s branch office to avail each and every small service.
Features of Online Banking
Check the account statement online
Open a fixed deposit account
Pay utility bills such as water bill and electricity bill
Make merchant payments
Transfer funds
Order for a cheque book
Buy general insurance
Recharge prepaid mobile/DTH
Advantages of Internet Banking
The advantages of internet banking are as follows:
Availability: Customers can avail the banking services round the clock
throughout the year. Most of the services offered are not time-restricted;
customers can check their account balance at any time and transfer funds
without having to wait for the bank to open.
Easy to operate – The internet banking is easy to operate and any person
can use this facility. It guides the user step by step i.e. in internet banking,
there are various tabs like personal account information, Fund transfer,
Bill payments etc. Services are provided in a manner which the user can
easily use.
Convenience – The internet banking facility is easy and convenient to
use. There is no much requirement for using this facility. The account
holder can avail this facility by self registration facility. All the infor-
mation, which is required, is his account information and ATM card
details.

116 RETAIL BANKING
Time efficient – The internet banking is time saving as the account holder
does not have to stand in queue in the bank and wait for his work. He can
do this work on his own by login in the e-banking tab in the bank’s web-
site. The internet banking facility is available 24 × 7 also.
Activity tracking – Activity tracking is also provided by internet banking.
The customer can track the status of his transaction through transaction
history.
The success of the retail banking depends on the efficiency with which the prod-
ucts and services are delivered to the customer. Delivery effectiveness in physi-
cal channels is determined by the persons who are delivering the services.
SELF-ASSESSMENT
2. _____ provide basic banking services such as deposit/withdrawal
QUESTIONS
transactions, issuing and encashment of drafts, mail transfers,
etc.
a. ATM
b. Extension counters
c. Mobile banking
d. None of these
3. Full form of ATM is
a. Automated teller machine
b. Any time money
c. Actual transaction money
d. Automatic transaction machine
4. The services offered at an ATM are:
a. Cash withdrawal
b. Balance enquiry
c. Account information
d. All of these
5. Rate for the processing of payments for every transaction using
credit/debit card depends on:
a. level of business
b. types of cards used by the consumer
c. value of the average transaction
d. All of these
6. ________ enables 24 × 7 electronic fund transfer services in which the
transaction is carried out between two bank accounts in real-time
and on an immediate basis.
a. Unified payments interface
b. Immediate payment service
c. Point-of-sale (POS) terminal
d. In-App payments (IAP)
7. Immediate payment service was introduced in the year
a. 2011 b. 2009
c. 2010 d. 2012

6.3 WORKING OF BANK DELIVERY SYSTEMS

The working of delivery channels depends on the type of delivery channels.
In case of manual channels, such as branch and extension corners, the work
procedure includes
Internal customer—staff of the branch
Specialised marketing personnel
Direct selling associates (DSAs)
Professional Marketing Managers
Marketing managers were appointed in addition to existing internal
human resources.
Marketing manager recruited are specialist officers having specialised
degree (MBA).
These managers will provide expertise in the following:
Market intelligence
Potential sourcing
Right selling to the targeted customer group
Sales conversions
Closing the leads with sales
Compliance of promises made and conforming to the services delivery
standards
Following up with the operations department for effective processing
and delivery of products sold.
Direct Selling Agents (DSAs) This is a new concept introduced by banks to
increase its market share. These are mainly persons or agencies appointed
by banks for selling their products mainly credit cards and loans. The banks
provide fee for their services.
In case of automated services such as mobile banking, e-banking or other
online services, ATM, POS, the customer is required to follow the require-
ments for these delivery systems. For example, for using ATM card, the cus-
tomer needs to be acquainted with ATM card and use of ATM.
The essentials for online banking services are mainly computer, or smart phone
with internet connection. In order to access the service, clients need to register
for their bank’s online banking service. In order to register, they have to create
a password. Once that’s done, they can use the service to do all their banking.
SELF-ASSESSMENT
8. These are persons or agencies appointed by banks for selling their
QUESTION
products, mainly credit cards and loans.
a. Professional Marketing Managers
b. Direct selling agents (DSAs)
c. Specialised marketing personnel
d. None of these

118 RETAIL BANKING
6.4 PRACTICAL ISSUES RELATING TO

COMMON BANKING CHANNELS
The delivery channels of the banks face mainly challenges in the present
scenario. Some of these are as follows:
1. The major challenge is the cost of investment required in these channels
such as ATM network and wide area network which banks have to bear.
2. The customers of the banks are less aware and also hesitate in using
these updated delivery channels like ATM, mobile banking services
and online banking services.
3. Increased use of digital services have also opened doors for many kinds
of cyber frauds which also pose challenges for the successful working
of delivery channels.
4. Updation of technology also pose threat to the delivery channels
working. Banking technologies are constantly updated, hence, the
delivery channels involved are also to be updated.
5. Increase in competition in the industry also poses a challenge to the
proper functioning of delivery channels.
6. There are different categories of banks’ customers. A bank needs to
have an appropriate delivery channel which is useful and adaptable for
all categories of customers.
Due to the above reasons, the delivery channels could not work in an appro-
priate manner in the present banking industry.
SELF-ASSESSMENT
9. Find the incorrect option regarding the challenges faced by the
QUESTION
delivery channels of the bank.
a. Cyber frauds
b. Customers of the banks hesitate in using updated delivery chan-
nels like ATM, mobile banking services.
c. Cost of investment have to be borne by the customers.
d. None of these
6.5 CHANGING TRENDS IN THE RECENT

DELIVERY SYSTEM
The banks, in the recent times, would have more of virtual existence than
physical branches. Banking functions would largely go on to the online mode
rather than the face to face meeting and services between customer and
branch staff.
The staff involved in bank would, thus, be confined to the updation and
innovation of new and existing technologies providing these services. Banks
create, hold, analyse, and use information about their customers. The modern
retail bank, which recognizes the customer information are at the centre of
operational design.

In the 21st century, the bank branch is simply one of different channels
through which customers can access services. Head office functions add an
analytical dimension to customer information, and allow for targeted mar-
keting and the proactive design of existing and new systems. The bank’s
retention of data on interactions at both market and individual levels, thus,
aids its product and operational design, facilitates business planning, and
provides it with flexibility, and a chance to update legacy systems in a way
that does not damage business relationships.
One final source of benefit to the 21st-century bank is that it does not itself
need to provide in-house all of the services and functions on which its busi-
ness depends; some non-core functions can be outsourced or sourced via
shared-service centres.
Many of the functions of a retail bank, as described in this chapter, could be
outsourced to create what Llewellyn (1996: 167) calls a ‘virtual bank’. As far
as the customer is concerned, the bank is the same as it has always been, but,
behind the scenes, key processes and functions are carried out by outside
bodies. A number of the outsourced functions may be routine and frequent
operations, such as payment transactions and credit scoring.
There has been a paradigm shift in the way of interaction between customers
and the financial services providers in recent times. Financial services are
now available 24 × 7 × 365 on omni-channel basis. The spectrum of products
and services has been expanded to internet and mobile banking, electronic
funds transfer, UPI, Aadhaar e-KYC, Bharat Bill Payment System (BBPS),
QR Scan and Pay, digital pre-paid instruments, etc.
SELF-ASSESSMENT
10. Financial services are now available _______ on omni-channel basis.
QUESTION
a. 24 × 7 × 365
b. 24 hours Monday to Friday
c. Bank working hours only
d. Bank working days only
6.6 SUMMARY
Ideal distribution system or channel can be determined by exploring
needs of customers in terms of service output from the distribution chan-
nels, their willingness to pay for a given service level, how the mechanism
through which these services can be provided to them, and to assess the
costs of alternative distribution channels.
Distribution channels in banking are time saving and less cumbersome.
An automated teller machine also known as an automated banking
machine (ABM), is an electronic telecommunication device that enables
the customers to perform financial transactions, particularly cash with-
drawal, without a human cashier, clerk or bank teller.
Mobile banking is a facility which makes it possible for the customers to
initiate and/or perform banking tasks on their mobile phones.

120 RETAIL BANKING
IMPS enables 24 × 7 electronic fund transfer services in which the trans-

action is carried out between two bank accounts in real-time and on an
immediate basis.
Internet banking also known as online banking or e-banking or net bank-
ing, is a facility offered by banks and financial institutions that allow cus-
tomers to use banking services over the internet.
Direct selling agents (DSAs) are mainly persons or agencies appointed by
banks for selling their products mainly credit cards and loans.
Increased use of digital services has opened doors for many kinds of
cyber frauds which also poses challenges for the successful working of
delivery channels.
Financial services are now available 24 × 7 × 365 on omni-channel basis.
KEY WORDS 1. Extension counters provide basic banking services such as deposit/
withdrawal transactions, issuing and encashment of drafts and mail
transfers, issue and encashment of travellers’ cheques, sale of gift
cheques and collection of bills.
2. Mobile banking is a facility which makes it possible for the customers
to initiate and/or perform banking tasks on their mobile phones.
3. Immediate payment service enables 24 × 7 electronic fund transfer
services in which the transaction is carried out between two bank
accounts in real-time and on an immediate basis.
4. Unified payments interface (UPI) is a system that powers multiple
bank accounts into a single mobile application, merging several
banking features, seamless fund routing and merchant payments
into one hand.
5. Internet banking is a facility offered by banks and financial institutions
that enables customers to use banking services over the internet.
6. Direct Selling Agents (DSAs) are mainly persons or agencies
appointed by banks for selling their products mainly credit cards
and loans.
6.7 ANSWER KEYS
Features of Retail Banking Chan- 1. c. Passbook entry
nels
Bank Delivery Systems 2. c. Mobile Banking
3. a. automated teller machine
4. d. All of these
5. d. All of these


6. b. Immediate payment service
7. c. 2010
Working of Bank Delivery Systems 8. b. Direct selling agents (DSAs)
Practical Issues Relating to Com- 9. c. Cost of investment have to
mon Banking Channels bear by the customers
Changing Trends in the Recent 10. a. 24 × 7 × 365
Delivery System

AND E-REFERENCES
RBI docs and indexes
Retail Banking by Keith Pond
www.investopedia.com.

C H A
7 P T E R
PAYMENTS AND PAYMENT SYSTEMS
CONTENTS
7.1 Different Types of Payment Systems

Activity
7.2 Working of Different Payment Systems
Activity
7.3 Legal Issues Relating to Common Payment Types
7.4 Changing Trends in Payment Systems
Activity
7.5 Differences Between Different Domestic Payment Systems
Activity
7.6 Summary
Key Words
7.8 Answer Keys

124 RETAIL BANKING
Seema bought a dress from a garment shop for Rs 6000. When she saw
her purse, she did not have sufficient cash. She intimated the shop-
keeper about her problem. The shopkeeper then suggested her for the
online payment options available at his shop. He said she can use the
POS, or scan and pay through QR code, or use the UPI also.
She had her debit card which she gave to the shopkeeper who swiped it
through the POS machine. Then the shopkeeper asked her to key-in her
PIN number on the POS. On providing the PIN number, the payment
transaction started, verification for bank account balance was done and
her account was debited with Rs 6000 and shopkeeper’s account was
credited. Payment was made and Seema bought her dress.
QUESTIONS
1. What are the digital payment methods available with the

shopkeeper? (Hint: UPI, POS, etc.)
2. Which method of payment did Seema use? (Hint: Debit card)

PAYMENTS AND PAYMENT SYSTEMS 125
LEARNING OBJECTIVES

> Know the different types of payment systems
> Understand how the different payment systems work
> Describe legal issues in payment systems
> Explain what are the changing trends or the latest trends in pay-
ment systems
> Know how the different domestic payment systems differ
7. 1 DIFFERENT TYPES OF PAYMENT SYSTEMS

The Reserve Bank of India has authorised various types of payment system
operators, namely financial market infrastructure (enabling securities, tri-
party repos, forex trades, Rupee/forex derivatives settlements, etc.), retail
payments organization (operating ATM switch, fast payment systems,
cheque clearing, automated clearing, Aadhaar-based payments, toll collec-
tions, etc.), card payment networks, cross-border inbound money transfer
entities, Automated Teller Machine (ATM) networks, white label ATM oper-
ators, Prepaid Payment Instrument (PPI) issuers, instant money transfer
service provider, Trade Receivables Discounting System (TReDS) operators,
Bharat Bill Payment Central Unit (BBPCU), Bharat Bill Payment Operating
Units (BBPOUs), etc.
Different payment services available can be categorised as follows:
1. Digital payment
Payment services 2. Paper based or cash payments

available
3. Other payment services
DIGITAL PAYMENT
These payment systems are based on technology and use it for making
payments. It includes NEFT, RTGS, NACH, POS, PPI, etc.
NEFT System – In November 2005, a more secure system was introduced
for facilitating one-to-one funds transfer requirements of individuals /
corporates. It stands for National Electronic Fund Transfer. It facilitates
payment from one bank account to other bank account on settlement
basis. The customer has to visit branch with the required details such as
account number, IFSC code of the beneficiary. From December 2019, it is
available 24x7 throughout the year with half-hourly settlements.
Prepaid Payment Instruments (PPIs) – PPIs are payment instruments
that facilitate purchase of goods and services including financial services,
remittance facilities etc., against the value stored on such instruments.
PPIs may be loaded/reloaded by cash, debit to a bank account, credit and
debit cards, and other PPIs. The PPIs may be issued as cards, wallets,

126 RETAIL BANKING
and any such electronic or digital form/instrument which can be used to

access the PPI and to use the amount therein.
National Automated Clearing House (NACH) – NACH is a centralised
Electronic Clearing System (ECS) operated by NPCI. It operates both
NACH Credit and NACH Debit payment systems. NACH credit, like ECS
credit, is used for making one-to-many credit transfers towards pay-
ment of dividends, interest, salary, pension, distribution of subsidies, etc.
NACH Debit operates to collect payments from many accounts to one
destination account, e.g. collection of various utility payments pertaining
to telephone, electricity, water and gas charges, etc. It is also used in col-
lecting periodic instalments towards loans, investments in mutual funds,
insurance premium, etc.
Point of Sale (POS) Terminals/Online Transactions using credit/debit/
prepaid cards issued by Card Payment Networks – Five Card Payment
Networks including India’s own Rupay run by NPCI, have been autho-
rised by Reserve Bank of India. There are over fifty lakh POS terminals
in the country, which enable customers to make payments for purchases
of goods and services by means of credit/debit cards. To facilitate con-
venience to customers, the banks have also permitted cash withdrawals
using debit cards issued by the banks at POS terminals. This facility is
used for enabling online payments for goods and services. The online pay-
ments are enabled through payment aggregators or payment gateways.
For more details, please see section Other Payment Services.
Real Time Gross Settlement (RTGS) System – RTGS is a funds
transfer system where transfer of money takes place from one bank
to another on a “real time” and on “gross” basis. Settlement in “real
time” means payment transaction is not subjected to any waiting
period. “Gross settlement” means the transaction is settled on one
to one basis without bunching or netting with any other transaction.
Once processed, payments are final and unchangeable. This was first
introduced in 2004 and settles all inter-bank payments and customer
transactions above `2 lakh. From December 2020, it is available 24 × 7,
making India one of the few countries in the world to operate its RTGS
system round the clock.
PAPER BASED/CASH PAYMENT
Paper-based or cash-based payment is the oldest payment system. The CTS-
2010 Standards, specifying the security features towards standardization of
cheques, were issued vide circular dated February 22, 2010 and subsequently
in December 2011. All banks were advised to issue only ‘CTS 2010’ standard
cheques across the country by September 30, 2012. Mandatory Features
include Paper and Watermark (at manufacturing stage), VOID pantograph
and bank’s logo with UV ink (at printing stage), field placements of a cheque,
mandating colours and clutter-free background, prohibiting alterations/cor-
rections on cheques and pre-printed account number.
Cheque Truncation System – Cheque truncation (CTS) system was intro-
duced (to restrict physical movement of cheques and enable use of images
for payment processing). All sixty-six MICR centres were subsumed in CTS
grid systems and MICR clearing was discontinued w.e.f July 2014. CTS was

expanded to ensure pan-India coverage to include all bank branches in the

country. Positive Pay system for Cheque Truncation has been implemented
from January 1, 2021 for increased security of high value cheques.
Cash Payments – Automated Teller Machines – As on April 2022, there are
over 2,17,000 banks-owned ATMs and around 32,000 white label ATMs in
India. Customers are eligible for 5 free transactions in a month from their
own bank ATM. They are also eligible for free transactions in other banks
ATMs viz., 3 transactions in metros and 5 in non-metros.
OTHER PAYMENT SERVICES
Clearing Corporation of India Limited (CCIL) – CCIL was set up in April
2001 by banks, financial institutions and primary dealers, to function as
an industry service organization for clearing and settlement of trades in
money market, government securities and foreign exchange markets.
Mobile Banking Services – Mobile phones are nowhere limited for making
call and messages but can now provide you all the banking facilities with-
out visiting branch. All you need to download the mobile banking app of
your bank and you can check your account balance, transfer fund, make
bill payment, open fixed deposits, recurring deposits at your finger tips.
Bharat Bill Payment System – Bharat Bill Payment System (BBPS) is
an integrated bill payment system that offers suitable and accessible bill
payment services with a single brand image. It provides convenience
of ‘anytime anywhere’ bill payment to customers. BBPS facilitates col-
lection of repetitive (monthly, bi-monthly, quarterly, etc.) payments for
everyday utility services provided by utility service providers in cate-
gories such as electricity, telecom, DTH, gas, water bills, and also other
repetitive payments such as insurance premium, mutual funds, school
fees, institution fees, credit cards, fastag recharges, local taxes, housing
society payments, at one single window.
Payment Aggregators/Gateways – Payment Aggregators (PAs) are
entities that facilitate e-commerce sites and merchants to accept var-
ious payment instruments from the customers. Merchants has no
need to create a separate payment integration system of their own for
the completion of their payment obligation. PAs facilitate merchants
to connect with acquirers. In the process, they receive payments from
customers, pool and transfer them on to the merchants after a time
period. Non-bank entities which want to offer services as Payment
Aggregators need to apply for authorization from the RBI under the
PSS Act.
Others – Apart from the above, there are also other payment systems
like Cross border Money Transfer - in-bound only, Instant Money
Transfer, which are operated by various authorised payment system
operators (PSOs). Reserve Bank has authorised National Payments
Corporation of India (NPCI) to function as a Retail Payments
Organisation and it operates payment systems such as, National
Financial Switch (NFS), Immediate Payment System (IMPS),
Aadhaar Enabled Payments System (AEPS), Unified Payments
Interface (UPI) and National Electronic Toll Collection (NETC).

128 RETAIL BANKING
SELF-ASSESSMENT
1. Which government body has authorised various types of payment
QUESTIONS
system operators in India?
a. Reserve Bank of India
b. Government of India
c. Finance Ministry
2. Digital payments include
a. NEFT b. RTGS
c. NACH d. All of the above
ACTIVITY 1 Amit Kumar, a qualified Computer Science Engineer, goes to a bank for
opening an account. As he is a busy person and cannot visit the bank fre-
quently, as he asks the bank official for the various options that will be
available to him for carrying out the transactions without visiting the bank
during its working hours. List out the various options that will be avail-
able to him in this regard.
7.2 WORKING OF DIFFERENT PAYMENT

SYSTEMS
The process of transferring of funds through a central agency, from payer
to payee, through participation of their respective banks or custodians of
funds is called settlement. The two key elements for payment processing are
payment order or message requesting the transfer of funds to the payee and
the actual transfer of funds between the payer’s bank and the payee’s bank.
Settlement systems can be classified based on (i) time – designated-time (or
deferred) settlement systems and real-time (or continuous) settlement sys-
tems and (ii) amount – gross settlement and net settlement. India has mul-
tiple payments and settlement systems, for both gross and net settlement
systems.
There are various channels involved in processing digital payments. For
example, on swapping your ATM card at any POS, immediately when your
ATM card is swapped, your account-related information such as name, bank,
and available balance reaches the intermediary involved in the processing,
on entering PIN Number the balance is checked and required amount is
debited from purchaser account and credited to the merchant’s account.
SELF-ASSESSMENT
3. Settlement is the process of transferring of funds
QUESTIONS
a. Through a central agency
b. From payer to payee
c. Through participation of their respective banks or custodians of
funds
d. All of the above

4. When an ATM card is swapped, the account related information that

reaches the intermediary is
a. Name b. Bank
c. Available balance d. All of the above
Babu Lal, aged 70 years, used to visit the bank to withdraw cash. But as ACTIVITY 2
there are a huge number of customers, he has no other option but to use
his ATM card for the first time. As he is hesitant to withdraw the money
from ATM, how he can be convinced to use the ATM and the various pre-
cautions that should be taken during the use of the debit card.
7.3 LEGAL ISSUES RELATING TO COMMON

PAYMENT TYPES
The payment systems are regulated and governed by the Payment and
Settlements Systems Act, 2007. Salient features of this are as follows:
The act appoints RBI as the governing and regulating body for the pay-
ment systems.
The Act has made it compulsory to obtain RBI authorisation for any pay-
ment system to operate.
It authorises RBI to regulate and supervise payment system and have
access to payment information, reports and documents.
RBI, as per this act, can inspect and perform the audit of various pay-
ment systems.
RBI has the power to issue various directives for netting and settlement
of payment transactions.
SELF-ASSESSMENT
5. Payment and Settlements Systems Act, 2007
QUESTIONS
a. Appoints RBI as the governing and regulating body for the pay-
ment systems
b. Authorises RBI to regulate and supervise payment system
c. Powers RBI to issue various directives for netting and settle-
ment of payment transactions
d. All of the above
6. RBI is authorised to have access to
a. Payment information b. Reports
c. Documents d. All of the above
7.4 CHANGING TRENDS IN PAYMENT SYSTEMS

Digitization of services has become the need of the hour. It is estimated that
digital payments will increase by 300% by 2025. The growth of digital payment
has covered almost every corner of the country even the unbanked areas.

130 RETAIL BANKING
RBI Inter Regulatory Working Group on FinTech and Digital Banking had
categorised FinTech innovations broadly into the following areas, viz., (i)
Payments, Clearing and Settlement, (ii) Deposits, Lending, Capital raising,
(iii) Market provisioning, (iv) Investment Management and (v) Data Analytics
and Risk Management. In India, FinTech companies are not competing
with banks but are collaborating with them by putting in place Business to
Business (B2B) models and thus acting as ecosystem enablers.
The digital payment system has made payment easy and convenient. Due
to this feature, every single person in this time accepts digital payments.
During COVID pandemic, digital payment had gained momentum and was
preferred over cash. Innovation of new and updated apps also making pay-
ment services easy.
Unified payment system (UPI) is one of the best example of FinTech. It is an
application-based electronic payment system enabled through a smart phone
that uses a registered virtual address to make or receive payments. It has
revolutionised the mobile payments arena. UPI platform allows non-bank
FinTech players to on-board bank customers and offer payment services.
There are currently over 40 non-bank third party applications of various
merchants live on the UPI platform. UPI was launched in August 2016, and
with over 207 banks live, it has witnessed over 200 crore transactions per
month since October 2020.
The innovative products/services which are the future of payment systems
are
Mobile payments including feature phone-based payment services.
General innovation in mobile payment services has focused on or sup-
ported app-based access, limited to smartphones and similar devices.
Along with online payment systems, there has been a need for offline pay-
ment system which will increase digital mode of payments more popular.
Contactless payments have also emerged as a new trend in payments by
which payments can be made by just scanning card. It can be done with-
out physical card.
SELF-ASSESSMENT
7. The digital payment system has made payment
QUESTIONS
a. Easy
b. Convenient
c. Less time taking
d. All of the above
8. Contactless payments can be made by
a. Just scanning card b. Without physical card
c. Both a and b d. None of the above
ACTIVITY 3 Manoj needs to send money to his parents in Bihar frequently. He wants a
payment system through which he can send money in an easy and conve-
nient way without any charges. Please suggest a digital payment system
that is best suited to his needs.

7.5 DIFFERENCES BETWEEN DIFFERENT

DOMESTIC PAYMENT SYSTEMS
There has been an upsurge of payment systems in India. We can find many
new payment systems entering into the market. All the payment systems
serve the same purpose, but consumers want the payment system which is
easy to use and is commonly used by the most of the common public. For
example, UPI by Google Pay and Phone Pe has become more popular in
comparison to BHIM UPI because it is less cumbersome. It just requires the
phone number linked with the bank account and money can be transferred
from one account to another.
Customers prefer a payment method that suits their needs. Enabling differ-
ent payment methods for a customer make a better experience and if one of
the options fails, customers would not feel stuck. It gives the customer the
freedom to explore other options and get the best deal.
Differences between the traditional payment system and electronic payment
systems are
Electronic Payment Systems Digital Payment Systems

In this payment system there is In this payment system, transaction
direct transaction through internet is done through human intervention.
like mobile banking, UPI Example RTGS and NEFT at bank’s
branch
These payment methods uses It requires human to enable communi-
technology for communication cation and process.
like chatbots.
These payment systems have ad- These are risky and have possibility of
vanced security features in place. theft. Like Cheques and cash.
There is facility of instant deposit As it is a manual process it takes time
and withdrawal at any time. and there is limit of cash deposit and
withdrawal.
These payment systems have low These have huge cost like ATM
operation cost. machine, clearing device for CTS
cheques.
SELF-ASSESSMENT
9. Which payment system has become more popular than BHIM UPI?
QUESTIONS
a. Google Pay
b. Phone Pe
c. Both a and b
10. Customers prefer a payment method that
a. Suits their needs
b. Is easy to use
c. Commonly used by the most of the public
d. All of the above

132 RETAIL BANKING
ACTIVITY 4 Vinod wants to make payments through a payment system. What are the
various payment systems that are available to him and which one you will
suggest that is easy, less cumbersome and used by the most of customers?
7.6 SUMMARY
Different payment services available can be categorised as digital pay-
ment, paper based or cash payments and other payment services.
Digital payment systems are based on technology and use it for making
payments. It includes NEFT, RTGS, NACH, POS, PPI etc.
Paper based/cash payment is the oldest payment system continuing since
the inception of banking.
Mobile phones can now provide you all the banking facilities without vis-
iting branch.
The process of transferring of funds through a central agency, from payer
to payee, through participation of their respective banks or custodians of
funds is known as settlement.
Settlement systems can be classified based on (i) time-designated-time
(or deferred) settlement systems and real-time (or continuous) settle-
ment systems and (ii) amount-gross settlement and net settlement.
On swapping your ATM card at any POS your account related informa-
tion such as name, bank, and available balance reaches the intermediary
involved in the processing.
On entering PIN Number the balance is checked and required amount
is debited from purchaser account and credited to the merchant’s
account.
Payment systems are regulated and governed by the Payment and
Settlements Systems Act, 2007.
Digitization of services has become the need of the hour. It is estimated
that digital payments will increase by 300% by 2025.
The digital payment system has made payment easy and convenient.
During COVID pandemic, digital payment had gained momentum and
was preferred over cash.
UPI i.e., Unified payment system is one of the best examples of
FinTech.
Contactless payments have also emerged as a new trend in payments by
which payments can be made by just scanning card. It can be done with-
out physical card.
UPI by Google Pay and Phone Pe has become more popular in compar-
ison to BHIM UPI because it is less cumbersome. It just requires the
phone number linked with the bank account and money can be trans-
ferred from one account to another.

1. NEFT stands for National Electronic Fund Transfer. It facilitates KEY WORDS
payment from one bank account to other bank account on settlement
basis.
2. Prepaid Payment Instruments (PPIs) are payment instruments
that facilitate purchase of goods and services including financial
services, remittance facilities etc., against the value stored on such
instruments.
3. National Automated Clearing House (NACH) is a centralised
Electronic Clearing System (ECS) system operated by NPCI.
4. Real Time Gross Settlement (RTGS) System is a funds transfer
system where transfer of money takes place from one bank to
another on a “real time” and on “gross” basis.
5. Cheque truncation (CTS) system was introduced to restrict
physical movement of cheques and enable use of images for payment
processing.
6. Clearing Corporation of India Limited (CCIL) was set up in April
2001 by banks, financial institutions and primary dealers, to function
as an industry service organisation for clearing and settlement of
trades in money market, government securities and foreign exchange
markets.
7. Bharat Bill Payment System (BBPS) is an integrated bill payment
system that offers interoperable and accessible bill payment services
with a single brand image, providing convenience of ‘anytime
anywhere’ bill payment to customers.
8. Payment Aggregators (PAs) are entities that facilitate e-commerce
sites and merchants to accept various payment instruments from the
customers for completion of their payment obligations without the
need for merchants to create a separate payment integration system
of their own.
9. Unified payment system is one of the best example of FinTech. It is
an application based electronic payment system enabled through a
smart phone that uses a registered virtual address to make or receive
payments.

1. What do you mean by digital payment? Explain any two types of digital
payments in detail.
2. Into how many areas did RBI Inter Regulatory Working Group on
FinTech and Digital Banking categorised FinTech innovations?
3. What is UPI? Explain in detail.
4. List the salient features of Payments and Settlements Systems Act
2007.
5. Explain mobile banking services.

134 RETAIL BANKING
7.8 ANSWER KEYS
Different types of payment systems 1. a. Reserve Bank of India
Working of different payment systems 3. d. All of the above
Legal issues relating to common 5. d. All of the above
payment types
Changing trends in payment systems 7. d. All of the above
8. c. Both a and b
Differences between different 9. c. Both a and b
domestic payment systems

AND E-REFERENCES
Reserve Bank of India docs
Retail Marketing by Keith Pond
ht t p s : / / re ds e e r. c o m / n e w s l e t t e rs / i n di a n -m o b i l e -p a yme nts -5 x-
growth-by-2025/
https://streamlynacademy.com/blog/a-comprehensive-google-pay-case-
study)

C H A
8 P T E R
CREDIT APPRAISAL
CONTENTS
8.1 The Lending Life Cycle

Activity
8.2 Essentials of Good Credit
Activity
8.3 Application of Lending Principles Applied to Different Cases
Activity
8.4 The Role of Credit Scoring — CIBIL in Personal Lending
Activity
8.5 Basic Lending Principles
Activity
8.6 Appraisal of Term Loan
8.7 Summary
Key Words
8.9 Answer Keys

136 RETAIL BANKING
Tanvi, a sales executive working in an MNC wants to have her dream

house in Mumbai. The cost of the flat is Rs 60 lakhs. She has just saved
Rs 10 lakhs. Her friend Divya suggested to her to take home loan from
UCO bank. The rates at the UCO bank are the lowest among rest of the
banks. It also provides concession in case of CIBIL score.
Divya, also gives her information about concession she can get in case
her CIBIL score is more than 750. Tanvi, then visits UCO bank branch.
She meets the advance incharge, who provides her all the information
about the loan. She then submits her application loan with her KYC and
income proof. This leads to the lending process and credit appraisal.
QUESTIONS
1. Which type of loan does Tanvi want? (Hint: Home Loan)

2. What is the CIBIL score in which bank will provide concession?
(Hint: 650 or more)

CREDIT APPRAISAL 137
LEARNING OBJECTIVES

> Understand what the lending life cycle is
> Know what the different essentials of a good credit are
> Describe how the principles of lending can be applied in different cases
> Explain what CIBIL is and what is its importance in loan approval
> Discuss what the basic principles of lending are
8.1 THE LENDING LIFE CYCLE
Loan Origin
Process
Loan Evaluation
CPF approval
Collection
Lending
Life
Cycle
Servicing
CPF Reporting
Figure 8.1 Lending Life Cycle.

With cut-throat competition and constant transformations that the banking
sector is undergoing, traditional institutions such as banks and upcoming
sectors such as the Fintech space has to constantly redefine ways in which
revenue channels are growing. In this, lending forms one of the major chan-
nels of revenue. Having an effective lending life cycle goes a long way in
ensuring that the above mentioned objective is met.
Hence, the loan origination process can be divided into many stages.
Loan origination process – The first stage of the lending life-cycle is known
as the loan origination process and as the name suggests loan origination is
where the entire process begins. It can be called as the prequalification pro-
cess where the financial institution will ask for a few key documents from the
prospective customer. These documents would normally consist of KYC doc-
uments which could be in the form of Aadhaar card, pan card, voter ID card
etc. In addition to this, the bank may also ask for employment details in the
form of ID cards which may have been issued by the company or salary slips.
A brief check on the credit history of the customer is also done and these
days credit bureaus such as CIBIL help them go a long way in helping to find
out the customer’s credit history and finally the prospective customer’s bank
statement may also be asked so that the institution gets an idea in terms of
the funding that the customer already has.
Loan evaluation and approval – The information provided by the applicant
is filled in the application form. On the basis of this application, the evalua-
tion takes place on the basis of income, credit history, security offered, credit
worthiness. The evaluation process decides whether the applicant is eligible
for loan or not. If the applicant satisfies all conditions as per loan policy, the

138 RETAIL BANKING
loan can be approved.

Servicing and reporting – After the approval of the loan, loan is sanctioned
and disbursed to the borrower which can be used by him for meeting his
business requirements, purchase of property, etc. The various information
regarding his loan such as balance, EMI due date etc. are conveyed through
mails and SMS.
Collection – The fourth stage is collection of the amount given as loan. The
loan repayment starts after the disbursement of the loan. The borrower
has to serve the EMI in case of term loan and interest in case of cash credit
accounts.
SELF-ASSESSMENT
1. In the loan originating process, the financial institution may ask for
QUESTIONS
a. Aadhaar card b. Pan card
c. Voter ID card d. All of the above
2. The evaluation takes place on the basis of
a. Income
b. Credit history
c. Security offered and credit worthiness
d. All of the above
ACTIVITY 1 Ashok wants to start a new business for the manufacturing of garments in
his locality in two months. He has an amount of Rs. 25 lakhs and requires
another Rs. 25 lakhs for the purpose. Describe the key documents and
other formalities that are required to be fulfilled so that he can get the loan
from a bank in time.
8.2 ESSENTIALS OF GOOD CREDIT

There are several steps and measures that a banking institution may put
in place to ensure that they have a good customer portfolio that in turn
serves as a good source of interest income for the bank. Here are just a few
of them.
HAVING A ROBUST CREDIT POLICY DOCUMENT
The basis of credit decision of every lending institution is formal credit policy
document which is formulated typically by the operations department. The
credit policy document talks essentially about the limits to the credit amount
that is assigned to various levels of credit officers. The guidelines that govern
the credit worthiness of a potential customer or an institution, LTV other-
wise known as a loan to value ratio, tenure that can be proposed to the loan
seeking customer and many such other details.
In addition to this, the credit policy document also provides risk mitigation
measures that can be taken for excessive exposure to a prospective customer.

Presence of such a credit policy document adds much needed structure to the
credit decisions that are taken by operation managers at everyday level with
the onset of loan management systems, much of the credit decision capabil-
ities are automated. These, however, are also based on the credit policy doc-
ument that would have been prepared as a beginning step. When you have a
credit policy document in place, the credit approving process becomes more
structured, and in case of any wrong credit decisioning, the countermeasures
are also something that can be found in a credit policy document.
EVALUATION OF CUSTOMERS
Evaluating a customer’s worth is by far one of the most critical steps for a
lending institution. The bank at every step has to evaluate whether a prospec-
tive customer would be able to pay the entire outstanding principal as well as
the interest amount in a future course of time. This prediction can effectively
happen. There are various kinds of information that a bank can ask for these
include, but are not restricted to, the customers residential status, whether
the customer is a salaried individual or has his or her own business.
The bank also needs to assess the financial status of the prospective custom-
ers. This can be done by assessing the customers’ bank statements income
documents. In case the customer is the owner of a company. The companies’
financial statements must also be retrieved and analyzed by a credit offi-
cer. Another important aspect of assessing a customer showing loan paying
capacity is looking into the customers’ credit history.
There are various credit rating agencies such as CIBIL which captures the
customers’ credit background. Most such reports come with a score which
reflects the customers’ loan paying capacity. Typically, a higher score is
indicative of a safer customer and vice versa. The collection of all these
documents can give a fair estimate and also help build a customer profile,
on the basis of which decision can be taken by the credit managers.
PORTFOLIO MONITORING
Once the loan has been disbursed, it is extremely important that the bank
has a tight grip on the portfolio that it has built for itself over the years.
Continuous monitoring of this portfolio is important since it helps the bank
to plan for provisioning and also take proactive steps to ensure that all its
customers are paying their EMI on time.
In case a customer misses the first, second or subsequent EMI, it is an
appropriate level that message is sent to the customer. This could be auto-
mated recorded messages, emails and SMS reminders followed by voice
calls and then, if required, customer visits by collection and debt servicing
managers.
Many lending institutions assess their loan portfolios in the form of delin-
quency levels. Delinquency levels are essential measures that tell a bank
what percentage of their customers are paying their EMI on time and what
percentage of their customers are in various delay buckets.
Another reason as to why portfolio monitoring is important as it helps the
operation department to revise its credit policy document and example
would be if a certain geographical area has a good portfolio. Then the lending
institution can create a unique lending policy for that particular area.

140 RETAIL BANKING
SELF-ASSESSMENT
3. Credit policy document has the guidelines that govern
QUESTIONS
a. Credit worthiness of a potential customer
b. Risk mitigation measures
c. The countermeasures for any wrong credit decisioning
d. All of the above
4. In case a customer misses the first, second or subsequent EMI, the
customer is informed through
a. Automated recorded messages, emails
b. SMS reminders followed by voice calls
c. Customer visits by collection and debt servicing managers
d. All of the above
ACTIVITY 2 Ram Chand applies for a loan of Rs. 50 lakh for the purchase of a shop for
starting a business of toys. As a branch manager of a bank, what are the
guidelines that you will follow before disbursing the loan to him?
After the disbursal of the loan, what actions will you take if he fails to
deposit the EMI on time?
8.3 APPLICATION OF LENDING PRINCIPLES

APPLIED TO DIFFERENT CASES
While processing any loan proposal, banks follow the basic principles of
lending as formulated by banks in their loan policy documents. The basic
principles of lending are:
Safety of funds
Liquidity of funds
Diversification of risk
Profitability
Purpose
A prudent banker follows these principles while sanctioning of all loan pro-
posals to avoid and minimize the various risks associated with loan proposals.
In case of home loan proposal, the banker must ensure that the there is no
diversion of funds. The funds must be used for the purpose of construction of
house or repair, renovation or purchase of ready built house. The home loan
must be given for the purchase of property which are easily approachable and
approved by the authorised bodies which involves the safety of fund principle.
The asset purchased can be sold out easily in case of default of loan.
Banks follow the principles of lending in all loan proposals like
Home loans
Car loans
Education loans

Personal loans
Issuing credit card
Working capital credit
Loan against property
SELF-ASSESSMENT
5. The basic principles of lending are
QUESTIONS
a. Safety and liquidity of funds
b. Diversification of risk
c. Profitability and purpose
d. All of the above.
6. A home loan must be given for the purchase of property which is
a. Easily approachable
b. Approved by the authorised bodies
c. Can be sold out easily in case of default of loan.
d. All of the above
Veena is planning to buy a house in the next three years. What you would ACTIVITY 3
like to advise for the things to be taken care of in the financial transactions
in the next three years and opt for such a locality so that her loan can be
approved by the bank without any hassles?
8.4 THE ROLE OF CREDIT SCORING — CIBIL IN

PERSONAL LENDING
Credit score is a unique score which is assigned to either an individual or a
business which is reflective of the credit worthiness of that specific entity,
typically higher the credit score higher is the credit worthiness.
The customer’s credit score is generated by various agencies with the help of sta-
tistical algorithms that take into account various factors such as the c ustomer’s
recent repayment habits, the total amount of money which is owed by the
customer at that point of time and other such factors. There are various credit
agencies that offer this service in India.
We have CRIS Hi mark, Experian, Equifax and CIBIL TransUnion which
form part of the four credit rating agencies. Every organisation has different
ways of assessing and presenting a credit score and hence it is possible that
same individual will have different credit scores generated by different com-
panies. Hence, it is important for a risk manager or an operations manager
to have a basic idea in terms of how the score is generated by each. One of
these credit agencies having said that a higher score is generally reflective of
good credit behavior.
Whenever a customer applies for a loan, the lending institution checks, the
credit score as the initial screening method. Credit reports and credit scores

142 RETAIL BANKING
help financial institution to check for the customers repayment capability

based on credit behavior in the past. Hence, credit scores and credit reports
are a key element in assessing the risk which a bank is taking if it is willing
to give out a loan.
Credit scores also helps banks in pricing their risky products. For example, a
bank may choose to disburse a particular loan amount to a customer with a
low credit score. However, in such a case, the bank would be sure to charge
a much higher rate of interest for the same amount of loan. Many loan man-
agement softwares use a credit score as an initial level of screen is to filter
out prospective bad customers at the very beginning of the loan processing
stage.
COMPONENTS OF CREDIT SCORE

As mentioned earlier, credit scores are generally calculated with the help of
a statistical algorithm which takes into account various components of cus-
tomers. Credit history, while these components may differ from one rating
agency to the next. Generally, the following are taken into account.
Credit history of the individual
Current debts of the individual
Duration of credit mix
Credit mix
Frequency of application of new credits
IMPORTANCE OF CIBIL SCORE

1. Minimum credit score – On the basis of credit history of an individual,
CIBIL provides score ranging from 300–900. The financial institutions
set minimum CIBIL score required for various loans. Failing the
minimum CIBIL score criteria, bank will reject the loan application.
Higher the score, higher are the chances of loan approval.
2. Credit worthiness – CIBIL score also reflects credit worthiness of a
person i.e., whether the person can repay his loan EMI on due time.
3. Application Approval – CIBIL score is the first step in the loan approval
case. Higher CIBIL score has most of the chances of processing of loan
quickly.
a. Interest Rate – Interest rate on loan products to individuals depends
on CIBIL score. Concession in interest rate is provided in home
loan and car loans on the basis of high CIBIL score above 750.
SELF-ASSESSMENT
7. Number of credit rating agencies in India is
QUESTIONS
a. Four
b. Three
c. Two
d. One

8. A bank may choose to disburse a particular loan amount to a

customer with a low credit score
a. At the same rate of interest
b. At lower rate of interest
c. At higher rate of interest
d. Will not disburse loan
Raman has a loan of Rs. 25 lakhs from a bank since the last 3 years. He ACTIVITY 4
has a plan to apply for a loan of Rs. 50 lakhs next year. Make a list of the
measures he should take to maintain a high CIBIL score for the easy and
timely approval of loan by a bank.
8.5 BASIC LENDING PRINCIPLES

Lending is the most profitable business of any bank. It generates revenue
through interest which is charged in loan accounts. Banks follow basic prin-
ciples of lending before sanctioning any loan. Lending also involves many
risks; therefore a banker must follow the principles of good lending before
sanctioning any loan. The principles of lending are:
SAFETY
It is the most important principle of lending. It means the loan amount given
is to be repaid by the borrower in form of principal along with the interest as
and when it becomes due. The banker should always analyze the risk associ-
ated the loan and ensure that the credit given involves minimum risk.
LIQUIDITY
It means the ease with which an asset can be converted into cash. The banks
must ensure that the loans given are liquid, i.e. in case of default, it can be
easily sold out and converted to cash. It should be ensured that loans are
given for short duration and for very long duration.
DIVERSIFICATION OF RISKS
The principle ensures that the loan granted involves minimum risk. In order
to diversify risk, the bank should lend in different segments rather than con-
centrating in one single segment. The maturity duration of the loans should
also be different. It results in continuous repayment throughout the year and
maintains liquidity of funds.
PROFITABILITY
It is an important principle of lending. Banks earn profit from the difference
between lending rate and deposit rates. The lending rates are affected by the
various factors like bank rate, interbank competition and interbank agree-
ments. Sufficient margin should be maintained between the deposit rates
and lending rates.

144 RETAIL BANKING
PURPOSE
A banker should inspect and inquire whether the fund given as loan by the
bank is used for the purpose provided in loan. It should not be used for any
other purpose. It should be ensured that there is no diversion of funds. The
funds from the loan should not use for trading or speculative purposes.
SELF-ASSESSMENT
9. Lending provides the business of any bank
QUESTIONS
a. Most profit b. Less profit
c. Loss d. None of the above
10. In order to diversify risk, the bank should lend
a. In different segments
b. In one single segment
c. The maturity duration of the loans should be the same
ACTIVITY 5 A person wants to apply for a loan of Rs. 50 lakhs in a bank for the con-
struction of his house. Would you like to advise him to visit other banks to
ascertain their rates of interest. How can you help him to choose the bank
for this purpose?
8.6 APPRAISAL OF TERM LOAN

The appraisal of a loan includes both an evaluation of the borrower and an
evaluation of the project. Term loans have long-term commitments. Banks
and other financial organizations often offer term loans with repayment
terms of 10 to 15 years, with longer terms available in rare circumstances,
like mortgage loans. The payback would be funded by money made from
business operations. The borrower’s honesty, integrity, reputation, busi-
ness capability, managerial skills, and financial resources in proportion to
the scope of the project are all evaluated. The personal interview, credit
investigation, trade circle inquiries, market report, existing bank’s report,
CIBIL report, and assets and liabilities statements provided the sources of
information.
Four measures to be taken care while appraising term loan proposal are
1. Technical feasibility of the project – It means whether any project
meets the technical requirements such as availability of raw material,
infrastructural facilities. While processing term loan in case of a new or
existing project, the bank takes into consideration whether the project
to be financed is technical viable or not. The raw material required,
infrastructural facilities and other requirements are fulfilled easily
without any hindrances for the loan to be sanctioned.
2. Economic visibility – It is one of main consideration while appraising any
term loan project. The activity or project to be financed is economically

viable or not. A project is called as economically feasible if the economic

benefits of the project is more than its economic costs. The economic
costs of the project are not the same as its financial costs—external
factors and environmental impacts are also considered. Banks assess
the term loans given for the business or project and should meet the
cost which it has incurred or not.
3. Financial viability of the project – Any project that the bank is supposed
to sanction credit should be financially viable which means it should be
able to generate profit. An organization’s ability to generate enough
revenue to cover operational expenses, debt obligations, and, where
necessary, to permit development while maintaining service levels is
referred to as financial viability.
4. Managerial Competence – The abilities, routines, goals, information,
and attitudes needed to successfully manage people are referred to as
management competencies. Management competences can improve
leadership and aid in corporate performance when they are cultivated.
The banks also analyse the managerial competence of a project before
sanctioning any proposal. The manager should be competent enough
to manage its people.
8.7 SUMMARY
Loan origination process can be divided into many stages such as loan
origination process, loan evaluation and approval, Servicing and report-
ing and collection of the loan amount given as loan.
The evaluation of loan takes place on the basis of income, credit history,
security offered, credit worthiness.
The credit policy document provides the guidelines that govern the
credit worthiness of a potential customer or an institution, LTV other-
wise known as a loan to value ratio, tenure that can be proposed to the
loan seeking customer and many such other details.
Evaluating a customer’s worth is by far one of the most critical steps for
a lending institution.
Continuous monitoring of the portfolio helps the bank to plan for provi-
sioning and also take proactive steps to ensure that all its customers are
paying their EMI on time.
To understand the role of credit scoring in the lending business, it is nec-
essary to understand credit score.
Credit scores and credit reports are a key element in assessing the risk
which a bank is taking if it is willing to give out a loan.
Chris hi Mark, Experian, Equifax and CIBIL TransUnion are four credit
rating agencies in India.
The basic principles of lending are safety of funds, liquidity of funds,
diversification of risk, profitability, and purpose.

146 RETAIL BANKING
KEY WORDS 1. CIBIL i.e., credit Information Bureau (India) limited is the most
popular of the four credit information companies licensed by Reserve
Bank of India.
2. Loan origination process is the first stage of the lending life-cycle
where the entire process begins.
3. Evaluation of loan is the process of taking a decision on the basis of
income, credit history, security offered, credit worthiness whether
the applicant is eligible for loan or not.
4. Servicing and reporting include the disbursal of to the borrower
and conveying the information regarding his loan such as balance,
EMI due date etc. through mails and SMS.
5. LTV is known as a loan to value ratio.
6. The credit policy document provides the guidelines that govern the
credit worthiness of a potential customer or an institution.
7. Evaluating a customer’s worth means whether a prospective
customer would be able to pay the entire outstanding principal as
well as the interest amount in a future course of time.
8. Delinquency levels tell a bank what percentage of their customers
is paying their EMI on time and what percentage of their customers
are in various delay buckets.
9. Credit score is a unique score which is assigned to either an
individual or a business which is reflective of the credit worthiness
of that specific entity.

1. Explain in detail the loan origination process.
2. What are principles of lending?
3. What is credit score? What are its components?
4. What do you mean by portfolio monitoring?
5. What is the importance of CIBIL score?
8.9 ANSWER KEYS
The lending life cycle 1. d. All of the above
Essentials of good credit 3. d. All of the above


Application of lending principles 5. d. All of the above
applied to different cases
The role of credit scoring – CIBIL in 7. a. Four
personal lending
8. c. At higher rate of interest
Basic lending principles 9. a. Most profit
10. a. In different segments

AND E-REFERENCES

C H A
9 P T E R
BANKING SECURITIES
CONTENTS
9.1 Introduction to Banking Security

Activity
9.2 Importance of Securities
Activity
9.3 Major Factors Involved in Taking Security
Activity
9.4 Major Forms of Banking Security
9.5 Steps Needed to Take Security
Activity
9.6 Introduction to Mortgage
Activity
9.7 Summary
Key Words
9.8 Descriptive Questions
9.9 Answer Keys

150 RETAIL BANKING
Anaya is planning to go for higher studies outside India. Tuition fee and
hostel expenses are amounting to a huge sum, which she is not able to
manage through her savings. She decides to go for an education loan.
She met the manager at ABC bank, and he shared the entire process of
getting the loan. One of the things, he mentioned was that she will have
to deposit a security in form of property which would be mortgaged by
bank. Anaya then talk to her parents about keeping the papers of her
house where they live, as security with the bank. The property to be
offered as loan, is in the name of her mother. Her parents are concerned
what will happen if she will not able to pay back the amount. How will
Anaya get her parents’ approval and manage to get the loan?
QUESTIONS
1. Why is security demanded by bank in case of education loan?

(Hint: If the student is unable to pay the loan bank will become
the owner of that property.)
2. What will be process for granting education loan? (Hint: Step
by step process: eligibility, selection process, security kept with
the bank, etc.)

BANKING SECURITIES 151
LEARNING OBJECTIVES

> Understand why it is necessary to take securities
> Know what factors are taken into considerations while taking
security
> Describe what are the major forms of banking security
> Explain what steps are to be followed in taking a security
> Know what is mortgage and what are its types?
9.1 INTRODUCTION TO BANKING SECURITY

Consider two friends A and B. A needs INR 1 lac and requests B to lend. She
plans to return the amount in 4 months. B agrees on a condition that if A can
deposit an insurance paper/shares/jewellery item of equivalent amount. A
deposits one of her jewellery piece and deal is done.
Now, replace B with Bank. Jewellery piece as a financial instrument or asset
that is kept as security with bank. In case, the customer faulters then bank
will have every right to trade the financial instrument in the market and
recover their money.
So, in financial terms, security means an asset which is pledged by the bor-
rower as a protection, in case, he or she defaults a loan. The bank can sell off
the security pledged and adjust its dues from the sale proceeds. The security
can be in form of property, FDR, or third-party guarantee.
SELF-ASSESSMENT
1. What is the full form of FDR?
QUESTIONS
a. Fixed deposit return
b. Financial deposit return
c. Fixed deposit receipt
d. Financial deposit receipt
2. The security with the bank can be in the form of
a. Property b. FDR
c. Jewellery d. All of the above
Visit a bank and ask about the terms and conditions for gold loan. ACTIVITY 1
9.2 IMPORTANCE OF SECURITIES

Consider the example as discussed in previous section. A borrowed money from
B but was not able to payback after four months even after multiple reminders
from B. At the end of the credit period and after waiting for some time, B decides
to sell the jewellery piece kept as deposit and recover her money. Now, think
about the outcome if B had not kept the jewellery piece as security.

152 RETAIL BANKING
Securities are important to bank as they help to safeguard business interests.

Creditor can trade the financial asset kept as security and recover their amount
in case the debtor faulters. The importance of securities are as follows:
It safeguards a loan
There are more chances of approval of loan if a collateral security is
provided
The interest rate is also lower in case of secured loan. For example, inter-
est rate on home loan are less than the personal loans
For the bank, there are less chances of loan defaults and in case of default,
bank can recover its debt by selling of the security.
SELF-ASSESSMENT
3. The importance of securities to a bank is that
QUESTION
a. They safeguard a loan.
b. There are more chances of approval of loan if a collateral security
is provided.
c. There are less chances of loan defaults and in case of default,
bank can recover its debt by selling off the security.
d. All of these
ACTIVITY 2 Taruna has jewellery worth Rs 10 lakh. Calculate, how much loan she will
get in keeping her jewellery in the bank as a security.
9.3 MAJOR FACTORS INVOLVED IN TAKING

SECURITY
Securities are done on standard forms governed by laws of land. Security
that carries a good title, no liability, and has stable value, are considered as
good. Other qualities of good security are:
Marketability: When the need arises, it should be easy to market the
security. In case of home, it should be in such area, which is approachable
and has passage to the main road.
Stability of value: Prices tend to fluctuate a lot due to macroeconomic
scenario. Security should be devoid of major price changes.
Other factors: Security, that is easy to store/transfer and transport, is
considered good one.
Approved by the authorities: The security, which is to be offered with
loan, should be approved by the competent authorities. Unapproved
securities should not be taken as security.
Clear Title: The security should have a clear title, that who is the owner
of the property, should be clear. There should not be any ambiguity in the
ownership of the property.
No government dues outstanding: In case of security, no dues in form
of property tax, electricity bill, etc. should be outstanding at the time of
loan approval.

SELF-ASSESSMENT
4. _______ is not the factor involved in taking security.
QUESTION
a. Marketability
b. Stability of value
c. Approved by the authorities
d. Ambiguity in the ownership of the property
Describe few points which are necessary to consider before purchasing a ACTIVITY 3
house.
9.4 MAJOR FORMS OF BANKING SECURITY

To mitigate the risks, that are lending institution would typically take, while
giving out a loan, it is prudent to take some kind of security against it. Banks
normally take securities in various forms such as lien, pledge, hypothecation,
and mortgages (Figure 9.1).
Figure 9.1 Major Forms of Charge on Security.
Lien
Lien is a legal right to claim assets, which are usually used as a collateral
against a loan. The creditors have the right to seize the asset that is the
subject of the lien. One important feature about the lien is that, unless the
contract between the lender and the borrower explicitly says so, under the
arrangement of a lien, the lender does not have the right to sell the underly-
ing asset, if there is a default on the loan. Examples of lien may include rent
receivables, shares, gold deposits, etc.
For example – Abhay takes Loan against his fixed deposit in ABC Bank. The
bank keeps his fixed deposit receipt under lien and gives him loan. The bank
has the right over the fixed deposit and can adjust the loan, in case, Abhay
fails to repay.
Pledge
Commonly used for goods and securities such as gold, stocks, certificates,
etc. Pledge is another type of security, which is taken by banks to mitigate

154 RETAIL BANKING
the risks of lending. One important feature of pledge is that the lender actu-
ally holds possession of the secured assets until the borrowed money has
been returned. If the borrower defaults on the loan that has been taken, the
banking institution can sell the goods to recover its principal and interest
amounts from the banker’s perspective. This kind of a security is a much
safer one since the collateral is in actual possession of the lender for as long
as the loan is outstanding.
For example – In case of gold loan, the bank has the right to sell the gold, in
case, the borrower fails to repay the loan.
Hypothecation
This kind of securities are usually charged on movable assets. Classic exam-
ple includes that of auto loans hypothecation is different from plays. Since in
this case, the vehicle, which has been used as the security, is not in posses-
sion of the bank but it is actually in the possession of the borrower. Hence, at
the time of default, the bank must first take into possession the vehicle and
then, take the subsequent steps to sell off and consequently, recover its out-
standing principal and interest amounts.
For example – in case of car loan, the car is hypothecated to the bank
i.e the car is the asset of bank and the borrower is supposed to take care of
the banks’s assets till the loan is fully repaid. The bank has full right to take
the possession of car in case of default of loan.
Mortgage
A mortgage is created by the transfer of ownership in an asset by way of secu-
rity. Condition, in which the mortgagee has transfer the title back to the mort-
gagor, when the obligation, for which the security was created, is discharged.
In case of home loan, security offered by the borrower is mortgaged by the
banks, hence, ownership is transferred to bank.
For example – in case of home loan, the home the charge created by the bank
is equitable mortgage. The bank keeps the registry of the property with it till
the loan is repaid. The bank becomes the owner of the property till the loan
continues but the physical possession is with the borrower. However, in case
of default, the bank can take possession under SARFAESI ACT.
TABLE 9.1 DIFFERENCE BETWEEN DIFFERENT CHARGE CREATED

BY BANK ON SECURITIES
Lien Pledge Hypothecation Mortgage
Type of security Movable Movable Movable Immovable
Possession of Remains Remains Remains with Remains with
security with bank with bank borrower borrower
Rights It does not Bank has Bank has own- Bank has
constitute ownership ership right in ownership
ownership right in case case default right in case
rights to default default
bank
Example Loan Gold loan Car loan, Home loan,
against working capital Loan against
deposit loan, term loan property

SELF-ASSESSMENT
5. ________is a legal right to claim assets, which are usually used as a
QUESTIONS
collateral against a loan.
a. Mortgage b. Pledge
c. Lien d. Hypothecation
6. Which kind of securities are usually charged on movable assets?
a. Hypothecation b. Lien
c. Pledge d. Mortgage
7. This type of security is usually taken by banks to mitigate the risks
of lending.
a. Mortgage b. Pledge
c. Lien d. Hypothecation
9.5 STEPS NEEDED TO TAKE SECURITY

It is in the interest of the bank to take some kind of security for the loan.
The process and the framework under which these kinds of securities can be
taken is governed by laws and regulations of that particular country. In India,
the Securitization and Reconstruction of Financial Assets and Enforcement
of Security Interest Act, 2002, which is also known as the SARFAESI Act, is
the governing legal framework under which lending institutions can repos-
sess the securities and then, finally, sell them off to recover losses taken by
the banks. The first asset reconstruction company of India, which is known
as ARCIL, was also set up under the purview of this act. Amongst the many
sections under the SARFAESI Act, it is section number 13 which is of utmost
importance because under this section, banks and other creditors institu-
tions have the right to repossess the security asset after the concerning loan
has been declared as a non-performing asset.
This law does not apply to unsecured loans, loans below a sum of one lakh
rupees and where the remaining debt is below 20% of the original principal
amount that was lent out.
In addition to the legal framework, it is imperative that banks should also
inform their customers right at the time of executing the loan contract that
what are the various conditions under which the bank may take repossession
of the asset which has been put as a security. These pieces of information
should not be restricted to and should contain,
a. the notice period that would be given to the customer before the asset
is actually taken into possession
b. circumstances under which this notice period can be waived off
c. the actual procedure for taking possession of the secured asset
d. what kind of provisions may be offered to the customer as a final chance
for the customer to repay her loan,
e. the procedure for giving repossession to the borrower and
f. the procedure for the sale or auction of the repossessed asset

156 RETAIL BANKING
SELF-ASSESSMENT
8. Under which sections do banks and other creditors institutions have
QUESTIONS
the right to repossess the security asset after the concerning loan
has been declared as a non-performing asset?
a. Section number 15 b. Section number 13
c. Section number 14 d. None of these
9. SARFAESI Act does not apply to loans below a sum of _________
rupees and where the remaining debt is below _________% of the
original principal amount that was lent out.
a. 1 lakh, 10% b. 1.5 lakh, 20%
c. 1 lakh, 20% d. 1.5 lakhs, 10%
ACTIVITY 4 Visit a bank and ask about its different loan schemes.
9.6 INTRODUCTION TO MORTGAGE

Dictionary meaning of mortgage is a legal agreement to borrow money from a
bank or other financial organization, especially to buy a house or other prop-
erty, or the amount of money borrowed. Mortgage loans are used to finance
properties. It applies to both residential and commercial properties. Mortgage
loans are secured amount given to borrower at an interest rate set by the
bank. In event of non-payment from the borrower, bank will have every right
to own the property. They will be able to take possession of the property and
recover their money.
People opt for mortgage loan as the property rates are too high to put their
entire income and savings in buying the land, flat, or commercial spaces.
With mortgage loan, they can return the amount in small sections on monthly
basis. The loan period could be anything between 15-30 years. While, mort-
gage loans could be very helpful to people with monthly salaries, sometimes,
people with no shortage of funds also opt for mortgage loan. It is done simply
to utilize their funds in other investment opportunities.
Anybody, with a decent CIBIL score, can qualify for mortgage loan. In order
to maintain good CIBIL score, the borrower should not have faltered with
payments of credit cards/pervious loans, etc.
MORTGAGE TYPES
1. Fixed rate mortgage loan This type of loan will have fixed rate of interest.
Customers will know, how much amount, they need to pay back to bank
before the close of loan period.
2. Floating rate mortgage loan This type of loan will have variable rate of
interest. Interest rates fluctuate depending on base rate set by banks
which are impacted by the repo rate as fixed by RBI.
3. Adjustable-rate mortgage loan In this case, the rate of interest, if fixed,
for certain period and then it can go high or low depending on the base
rate.

4. Simple mortgage loan In this case, lender has right to sell the property
and recover money if the borrower fails to pay within stipulated time.
However, property doesn’t get transferred to the lender.
5. Usufructuary Mortgage Loan In this case, the borrower has the right to
sell the property to the lender of the loan. Through this, the borrower
can receive an income which can be adjusted against the principal and
interest amount of the loan.
6. Subprime or Sub Mortgage Loan This is offered to borrowers with a poor
CIBIL score and therefore, interest charged is greater. This takes care
of lender’s interests, in case, the customer fails to pay back.
7. English Mortgage In this case, the property is transferred to the lender,
who will have right to sell the property, if customer fails to pay. However, if
the customer pays off within the given time frame, then the property gets
transferred back to the customer, once the full payment has been made.
SELF-ASSESSMENT
10. Which type of loan will have variable rate of interest?
QUESTIONS
a. Floating rate mortgage loan
b. Adjustable-rate mortgage loan
c. Sub-mortgage loan
d. Usufructuary mortgage loan
11. In which type of loan does the borrower have the right to sell the
property to the lender of the loan?
a. Floating rate mortgage loan
b. Adjustable-rate mortgage loan
c. Usufructuary mortgage loan
d. Sub-mortgage loan
12. In _____________loan, the property is transferred to the lender, who
will have right to sell the property if customer fails to pay.
a. Usufructuary mortgage loan
b. English mortgage loan
c. Simple mortgage loan
d. Fixed rate mortgage loan
Rahul took Rs 25 lakh loan from a bank for three years at interest rate of ACTIVITY 5
12%. Calculate the total money he returned to the bank after three years.
9.7 SUMMARY
Securities safeguards the loan and the rate of interest is also lower in
case of secured loans.
The bank can sell off the security pledged and adjust its dues from the
sale proceeds. The security can be in form of property, FDR, or third-
party guarantee.

158 RETAIL BANKING
The process and the framework under which these kinds of securities can
be taken is governed by laws and regulations of that particular country.
It is imperative that banks should also inform their customers right at the
time of executing the loan contract
In India, the Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 which is also known as the
SARFAESI Act, is the governing legal framework.
Anybody, with a decent CIBIL score can qualify for mortgage loan. In
order to maintain good CIBIL score, the borrower should not have fal-
tered with payments of credit cards/pervious loans, etc
Prices tend to fluctuate a lot due to macroeconomic scenario. Security
should be devoid of major price changes.
The security, which is to be offered with loan, should be approved by the com-
petent authorities. Unapproved securities should not be taken as security.
Mortgage loans are used to finance properties. It applies to both resi-
dential and commercial properties. Mortgage loans are secured amount
given to borrower at an interest rate set by the bank.
KEY WORDS 1. Security means an asset, which is pledged by the borrower as a

protection, in case, he or she defaults a loan.
2. Lien is a legal right to claim assets, which are usually used as a
collateral against a loan.
3. Mortgage means a legal agreement to borrow money from a bank
or other financial organization, especially to buy a house or other
property, or the amount of money borrowed.
4. Marketability means the ability of a commodity to be sold or
marketed.
5. Hypothecation is the practice where we pledge an asset to a bank
when applying for a loan.
6. Subprime or Sub Mortgage Loan This is offered to borrowers with
a poor CIBIL score and therefore, interest charged is greater. This
takes care of lender’s interests, in case, the customer fails to pay back.
7. English Mortgage In this case, the property is transferred to the
lender, who will have right to sell the property if customer fails to pay.
8. Usufructuary Mortgage Loan In this case, the borrower has the
right to sell the property to the lender of the loan. Through this, the
borrower can receive an income, which can be adjusted against the
principal and interest amount of the loan.
9. Pledge is a type of security, which is taken by banks to mitigate the
risks of lending.

9.8 DESCRIPTIVE QUESTIONS

1. Describe the importance of securities.
2. What are the qualities of good security?
3. Explain the different types of mortgage loans
4. Explain the various conditions under which the bank may take
repossession of the asset, which has been put as a security.
5. Explain Lien in detail.
9.9 ANSWER KEYS
Introduction to banking security 1. c. Fixed deposit receipt
Importance of securities 3. d. All of the above
Major factors involved in taking 4. d. Ambiguity in the ownership
securities of the property
Major forms of banking securities 5. c. lien
6. a. Hypothecation
7. b. Pledge
Steps needed to take security 8. b. Section no 13
9. c. 1 lakh 20%
Introduction to mortgage 10. a. Floating rate mortgage loan
11. c. Usufructuary mortgage loan
12. b. English mortgage loan

AND E-REFERENCES
Reserve Bank of India Docs
Magic bricks blogs
Business Standard blog on securitisation

C H
10 A P T E R
BANKS OF FUTURE
CONTENTS
10.1 Multifactor Authentication

Activity
10.2 E-signature and Its Importance
Activity
10.3 Power of Social Media, Mobile, Artificial Intelligence, Cloud Banking
and Robotics
Activity
10.4 Customer Experience
Activity
10.5 Characteristics of the Bank of the Future
Activity
10.6 How Digital Transformation is Changing the Finance Sector
Activity
10.7 Summary
Key Words
10.9 Answer Keys

162 RETAIL BANKING
Nikita, a young girl uses the updated technology for all her work. She
does not visit the bank often as she does not find the time. She is mobile
banking user of UCO bank. She does all her banking through mobile
banking only. She avoids going to the bank but one day she wanted to
consult about some financial investments she wanted to make. This
required advice as she was not much acquainted with the options of
investments provided by the banks. Then she saw the Chatbot show-
ing the name UMA, appearing just like human. The Chatbot then asked
about her problems, and she received solutions from the Chatbot. She
was satisfied and happy with the latest technology.
QUESTION
1. What type of digital banking is used by Nikita? (Hint: Mobile

Banking)

BANKS OF FUTURE 163
LEARNING OBJECTIVES

> Know multifactor authentication
> Understand E-signatures and their importance
> Explain about important social media, mobile banking, artificial
intelligence, cloud and robotics
> Discuss why customer experience is important
> Describe how the bank will look like in future
> Know how digital world affects financial sector
10.1 MULTIFACTOR AUTHENTICATION

Multifactor authentication is a security technology that helps in creating
multiple layers of barriers which a legitimate user has to cross to be able
to access the system or to carry out any financial transaction. This is a key
security enhancement since the traditional methods of using login IDs and
passwords are very much vulnerable. Hackers of today use several advanced
software that can very easily find out passwords using various combinations
and hence making secure systems fall prey to cyber crimes and attacks. To
counter this, multifactor authentication is an effective tool that makes it
almost impossible for hackers to get into systems.
Multifactor authentication can combine several independent information
which may include what the user knows (e.g. a password) what the user pos-
sesses (such as a smartphone) and who the user is (biometric verification
methods). The predecessor to multifactor authentication was the two factor
authentication which would often use a combination of login ID/password
and perhaps an OTP generated and sent to the users’ smartphone. Due to
the vulnerable nature of this kind of authentication method, multifactor
authentication was introduced. The primary difficulty that a hacker would
face is that even if one layer of information is compromised, it is very much
difficult for a hacker to gain multiple layers of information.
There are essentially three layers of information that a multifactor authen-
tication system uses to create a security wall. These layers are called the
knowledge factors, the possession factors, and the inherence factors.
KNOWLEDGE FACTOR
This level of security typically asks the user to key in the answer to a personal
security question. This could be in the form of a password, a personal identi-
fication number or a one-time password. Typical example includes that of a
pin number that you enter every time you swipe a debit card or credit card at
the checkout counter. Another example could be providing the maiden name
of your mother.
POSSESSION FACTOR
In this layer of security, the user must have in possession a certain physical
device that can provide this second layer of information required to access a
particular system. This physical device could be in the form of a smartphone

164 RETAIL BANKING
which when used in conjunction with an OTP app, can give a secured com-
bination of letters and numbers. There are certain hardware devices as well
that come with a simple LED display which generates random alphanumeric
characters at regular time intervals. These could also form part of the posi-
tion factor.
INHERENCE FACTOR
In this layer of security, typically a biological trait of the user is used as the
final bit of information to gain access to secured portal. These biological traits
may include a retina or iris scan, a fingerprint scan, a voice authentication
method or even facial recognition.
In addition to the above, the user location can also be used as one of the
layers of security. In this, the location of the user is detected typically by the
GPS tracking system which are enabled in almost all smartphones of today.
SELF-ASSESSMENT
1. Security technology helps in creating multiple layers of barriers that
QUESTIONS
makes it almost impossible for hackers to get into system. These are:
a. Login IDs
b. Passwords
c. Multifactor authentication
2. The layers of information that a multifactor authentication system
uses to create a security wall are:
a. Knowledge factor
b. Possession factors
c. Inherence factors
d. All of the above
ACTIVITY 1 Name the authentication system present in your smartphone which you
use to keep your data safe and describe its functioning in brief.
10.2 E-SIGNATURE AND ITS IMPORTANCE

With the up gradation in technology, there has been a drastic change in the
banking industry. It has moved from face to face interaction to digital plat-
forms, ATMs, Kiosks, smartphones, tablets and online. It has become more
customers friendly and reasonable also.
Although several banking transactions have been digital, some of the pro-
cesses such as loan approvals, loan account, opening and investments are
still manual due to the requirements of signatures of customers. The use of
electronic signatures will be helpful in reduction of time of processes and
their completion and will lead to customer satisfaction.
According to a study the market of e-signature software and its services is
expected to grow at 60% from 2015 to 2020 and cross 90 million transactions
in that period.

BANKS OF FUTURE 165
Indian government has also recognised the significance of e-signature. It has

legalised the e-signature under Information and Technology Act 2000 (IT
Act). There has been a massive increase in the use of e-signatures. Aadhaar
card issued by India government provides the facility of e-sign, i.e. digitally
sign a document.
E-signature has various benefits
1. It saves time and documents. As less time is to be spent on preparing
documents and reviewing documents.
2. Switching to digital signature reduces cost of paper, ink, printers and
scanners.
3. Faster sales cycles, CRM integration and tracking features leads to
increase in revenue.
4. Faster contract turnaround, improved document security, and reduced
team time spent on contracts from hours to minutes each day.
5. Ecofriendly as less use of paper due to digitalization.
6. Safe and secure as it routes directly to the signers and has security
features like password.
In case of banks, it reduces operational costs. For example, HDFC
Bank, Citibank etc. are using the technology for signing statement of
accounts for savings, current and credit cards.
SELF-ASSESSMENT
3. Digital or E-signatures are required for
QUESTIONS
a. Withdrawal of cash from ATM
b. Online transfer of funds
c. Digitally sign a document
d. All of the above
4. Digital or E-signatures are used to
a. To save time
b. To save documents
c. To reduce cost of paper, ink, printers and scanners
d. All of the above
Prepare a list of functions wherein you have observed E-signatures in use. ACTIVITY 2
10.3 POWER OF SOCIAL MEDIA, MOBILE,

ARTIFICIAL INTELLIGENCE, CLOUD
BANKING AND ROBOTICS
Social media has become an integral part of everyone’s lives. India as a coun-
try is not behind in this respect either. As per some reports, by 2020, 50% of
India’s population was accessing on multiple kinds of social media platforms
and this is expected to grow at a rate of 67% of population by the year 2025.
This in part has been facilitated by the boom in the infrastructure around

166 RETAIL BANKING
telecommunication and data availability. In such a respect, the power of

social media has to be leveraged by banking institutions and other players
operating in the same space.
INCREASING CUSTOMER TOUCHPOINTS
With ever increasing number of hours that an average person spends on
scrolling through various social media platforms, banking institutions can
use social media platforms to promote their products in a very effective way.
Also, to break down the target audience, an institution can even add at pin
code level, can sort audiences as per their interests, social media behavior as
well as other demographics such as age gender and geography. With these in
place, various financial products can be pitched to the right segment of the
customers, hence making way for more returns on investments that a com-
pany would usually spend on advertising. This was not the case before social
media happened. Since banks would primarily have to wait for a customer to
walk into a branch and then promotion of all kinds could be initiated.
CUSTOMER DATA
Social media platforms also give the facility of analyzing data around all the
customers that has seen or engaged with marketing posts promoted by the
banking institution. This kind of data analysis further helps a banking institu-
tion to come up with the right product, pitch it at the right place and use the
right kind of communication to make it appealing to its customer segment.
DEVIATION FROM BRICK AND MORTAR MODEL
With increasing rates in real estate prices, there is a massive cost involved in
setting up physical bank branches. Especially when we are talking about a
country like India which has a massive size. With the advent of social media
and internet as a whole, there are various facilities that a bank can offer to its
customers without having the need of a physical presence. In fact, there are
various companies, especially belonging in the fin tech space, which might
not have a traditional brick and mortar model having several bank branches
across the length and breadth of the country.
POWER OF MOBILE PHONE
The usage of mobile phone and its integration with payment systems in India
is a phenomenal example of how technology can be used at a grassroot level.
As per some estimates the number of mobile banking payments across India
in the fiscal year of 2019 was approximately USD 6.2 billion and this quan-
tum of Indian digital payments market is estimated to reach a value of US$1
trillion by the end of year 2023.
Some of the top evolving technologies revolving around mobile banking as
follows:
Biometrics
Most customers of today are already in possession of smart phones and these
smartphones are typically equipped with facial recognition as well as finger-
print recognition technologies in them. Banking institutions at leveraging
on these technologies to provide a more secure framework under which a
customer can operate as per some estimates globally the BFSE industry is
poised to invest close to US$8.9 billion by the year 2026.

BANKS OF FUTURE 167
Chatbots
Establishing a line of communication with customers, especially the new
ones, who are approaching a bank for the first time, is of critical importance.
Traditionally, these communications are done by human beings sitting on
the other end of a call centre. Whilst these had their own inherent advan-
tages, automation and AI have proven to be even more effective in attracting
and retaining customers. Chatbots in this respect have played a significant
role. Chatbots, as a technology, can provide the right kind of information
based on the customer inputs. They can be there in the form of a text or a
voice message. Chat box can resolve customer queries promptly and they
can also act as a data collection Centre which, in turn, can help in gaining
further customers related initiatives.
Touch Free ATM Transaction
Several banks in India and globally are offering a technology wherein touch
free ATM transactions can be carried out. In this method, the screen of the
ATM generates a QR code which can be easily scanned by the customers’
smartphone. Thereafter, the subsequent transactions would happen in the
customer’s smartphone and not on the ATM device. This kind of technology
would not only help in more effective way of withdrawing money, it will also
help in avoiding fraud schemes such as card cloning.
Banking and AI
Artificial intelligence and its applications are already being used in several
banking and financial institutions and with time, this association would
have to be even more deeply integrated into the operational and marketing
aspects of any company operating under the BFSI space. There are several
ways in which AI is being leveraged. Below are just a few examples of them.
Automated Advice
Although somewhat controversial, especially in the financial space, there are
automated advices giving algorithms which collect generic as well as specific
information about a customer’s financial and purchasing behavior based on
which highly personalised financial advice is given out. These advices may
include the appropriate financial instruments for investments, the right kind
of loan products to go for and various such financial products.
Predictive Analysis
There are several AI programs which take help of semantics and natu-
ral language applications to predict customer behavior and accordingly
these programs can promote the right financial products and the right
time to a customer. For example, credit scoring — Utilizing predictive
analytics to assess the creditworthiness of customers and make informed
lending decisions.
Automation of Lending Process
There are several loan management software which integrate AI appli-
cations and together they help in assessing loan applications not only on
the basis of the bank’s credit policy but taking into account other factors
as well such as analyzing customers’ credit history, analyzing a custom-
er’s bank statement and deciphering purchase habits and also assessing
whether all payment obligations in the past are made out on time.

168 RETAIL BANKING
Cloud Banking
Cloud-based banking essentially refers to the shifting of the banking infra-
structure onto a cloud-based ecosystem. There are several cloud service pro-
viders such as Microsoft, Google, Azure and Huawei and these account for
almost 80% of the market share. Some of the standard models that these
cloud service providers offers are:
Business process as a service (BPaaS): These services include every day
operations, such as human resources and general administration.
Infrastructure as a Service (IaaS): This service includes a more fully inte-
grated core banking infrastructure that handles activities such as loan man-
agement and software integrations.
Software as a service (SaaS): This include services wherein software which
is used for various purposes such as customer relationship management,
invoicing and accounting are provided in a cloud based infrastructure
Platform as a Service (PaaS): In this cloud-based platform is provided which
is used for database development or application development.
There are several advantages in cloud banking.
Economical
When a bank adopts cloud-based banking, it ends up saving operational cost
which is required to maintain your physical servers as well as handling main-
tenance costs. The users end up paying only a subscription fee or a pay per
use fee and this itself takes care of all the associated costs.
Compatibility
Since cloud-based infrastructure is platform agnostic. Hence, every time a
financial institution upgrades compatibility is not an issue at all. This might
not be the case when a financial institution runs on legacy software.
Environment Friendly
Large financial institutions inherently have to manage large amounts of
data which require a lot of computing power and presence of dedicated
server rooms. Such a physical infrastructure adversely affects the environ-
ment and hence cloud computing can help banks achieve an eco-friendly
infrastructure.
Robotics in Banking
Robotics in banking has found an application through what is known as
Robotic Process Automation. Otherwise known as RPA, it involves using arti-
ficial intelligence and robotics to automate manual and repetitive processes
which are normally carried out by the human force in a financial institution.
There are several banks globally, which have started to use RPA through
which they have been able to automate processes related to payments depos-
its, withdrawals and other banking transactions without having the need of
any manual intervention.

BANKS OF FUTURE 169
SELF-ASSESSMENT
5. Touch Free ATM Transaction would happen on
QUESTIONS
a. Customer’s smartphone b. ATM device
c. Both a and b d. None of the above
6. The advantages in cloud banking are that it is
a. Cheaper b. Compatible
c. Environment Friendly d. All of the above
Name few chatbots which you use in your daily life. ACTIVITY 3
10.4 CUSTOMER EXPERIENCE

Customer experience means what customer thinks of the services provided
by the banks e.g. online banking systems, emails, call centers, online adver-
tising, face to face interactions.
LATEST TRENDS IN BANKING
Smart, savvy fintech competitors have entered the market, disrupting
traditional customer relationships.
Global digitization has changed customer expectations provides 24/7
self-service, faster response, and personalized experience across service
channels and payment platforms.
Digitalization has also increased the chances of cyber frauds; thus, cus-
tomer expects safety in such transactions.
Stringent and complex regulatory compliance must be maintained to
ensure a good reputation and avoid security breaches, fines, and litigation.
Reduction in expenditure on IT development can hinder the software
and thus may be vulnerable and affects customer service.
Increased customer experience has affected many banks business as it
depends on the digital services provided by the banks.
RECENT TRENDS IN CUSTOMER EXPERIENCE

1. Enhancing Products and Services with Mobile App Data – After the
disruption of covid pandemic when it was difficult to visit branches, use
of mobile banking application of banks increased, and now of the most
attractive applications to be offered by any bank.
The software used can help customer extract their account information
on downloading the app and providing the necessary data. The easier
the applications more customer would be accustomed to the application
and increase the overall customer experience.
2. The Branch of the Future – In the upcoming future there may not be
existence of physical branches. Due to increased use of internet banking
and mobile banking the customer need not visit the physical branches.
The customer may require the digital banking units which will provide
all the self services and advanced technology.

170 RETAIL BANKING
For example, Digital banking units which has all automated services and
deposit machines and atm machines. It works without any manual staff.
3. Advising Services – Customers in the recent scenario wants advisory
functions about investments and loans from banks. The banks also
provide these functions in form of advisory functions through automatic
help which is always available online.
Example in mobile banking app function of wealth management also
provides guidance in which funds amount can be invested to get higher
returns.
4. Artificial Intelligence – Banks and their customers both are benefited
by the AI innovation as it saves valuable time by solving the problems of
customers and providing them information about the various services
provided by the banks. Customers no longer have to wait to talk to a
representative. Some financial institutions have developed AI-enabled
virtual assistants to provide money management tips and tricks.
For example: chatbot act as human representative for providing help online.
5. Support for Digitalization and Remote Service – The Covid-19
pandemic has made the digital world more useful and easily accessible.
The more comfortable and confident a customer feels interacting with
digital channels and remote services, the better their overall financial
services customer experience will be.
For example, mobile banking apps and online account opening through
video kyc.
6. “Humanizing” Digital – The financial institutions along with digital
services also provide chatbots and other AI services to feel more human
by giving the names to them.
For example, UCO Bank has named its chatbots in mobile banking UMA
to which one can chat and ask for help in mobile-related services. The
more human touch increases customer experience.
7. Proactive Engagement – One advantage of AI innovation to banks is
that they can now monitor customers’ financial health and proactively
offer assistance with financial management or suggest opportunities to
grow their wealth.
This type of proactive engagement can take place across any number
of channels—in-person, over the phone, through their banking app, via
email, and so on, depending on each customer’s personal preference.
SELF-ASSESSMENT
7. Which statement is not true for mobile banking?
QUESTIONS
a. It provides all the self-service and advanced technologies with-
out visiting branch.
b. It does not provide 24/7 service.
c. It can monitor customer’ financial health and offer assistance
accordingly.
d. It has provided banking services to remote areas.

BANKS OF FUTURE 171
8. Global digitization has changed customer expectations as it provides

a. 24/7 self-service b. Faster response
c. Payment platforms d. All of the above
Download any bank app and find out the services provided by the bank ACTIVITY 4
on that app.
10.5 CHARACTERISTICS OF THE BANK

OF THE FUTURE
Digitization has changed the working of the banks and financial institutions.
Now the routine banking needs can be met by the online services and the
E-corners offered by the banks. The customers have started to lessen visit to
the physical branches. The visit is only done in matters where online services
are not available. Banks of the future will have online existence and very
few branches would be required.
Retail banking, refers to the specific services banks offer to their consumers—
such as savings and checking accounts, credit and debit cards, and loans.
New banking technologies are redefining the entire retail banking market
and also consumers are happy to access the banking services digitally.
FUTURE OF RETAIL BANKING
The future of retail banking depends on the technology, as banks are launch-
ing various AI and digital products making it safe and easy for the customers.
Retail banks are also launching platforms in the Banking-as-a-Service (BaaS)
space to remain competitive. For example, UK neo bank Starling used to
exclusively offer business-to-consumer (B2C) retail banking services; but,
after launching a BaaS platform, Starling diversified its product and revenue
streams, helping it remain relevant in the neo bank space
MOBILE BANKING
Mobile banking will the key services offered by the banks in the futures.
Customers can have banks in their mobile apps. It provides banking as well
as advisory functions from the bank side. The customers find it very easy and
accessible to use such services.
ONLINE BANKING
The popularity of mobile banking has excelled that of online banking.
According to insider intelligence, mobile banking is growing at five times
the rate of online banking, and half of all online customers are also mobile
banking users.
INCREASE IN SE OF MOBILE BANKING

Some banks still have not advanced mobile technology like bill pay and reward
redemption, users to go to online banking. Online banking provides various bill
payments and also provides reward redemption and forms an important part in
the bank of the future.

172 RETAIL BANKING
BANKING TECHNOLOGY TRENDS

Consumers, particularly members of the younger generation who view
technology as an improvement to their life, will determine the direction of
financial technology in the future. Using an application programming inter-
face (API) to make confidential data accessible to anybody with the consum-
er’s consent to access it is a frequent trend in banking technology.
In addition to simulating actual personnel through chatbots and voice assistants,
banks are utilising AI to streamline client identification and authentication. APIs
could be used to enable a bank’s mobile app to pull down customer account
information. FinTech have also used API technology to enable their businesses
to work, and their success is encouraging competitors to develop their own APIs.
Additionally, a 2020 Insider Intelligence survey of banking executives found that
66% believe new technologies such as blockchain, artificial intelligence (AI), and
the Internet of Things (IoT) will have the greatest impact on banking by 2025.
According to Insider Intelligence, banks are exploring blockchain technology in
hopes of streamlining processes and cutting costs.
Consumers can already see AI being used by most banks through chatbots
in the front office. Banks are using AI to smooth customer identification and
authentication, while also mimicking live employees through chatbots and
voice assistants.
SELF-ASSESSMENT
9. Intelligence survey of banking executives found that technologies
QUESTIONS
that have the greatest impact on banking are
a. Blockchain b. Artificial Intelligence
c. Internet of things d. All of the above
10. Retail banking services that banks offer to consumers are
a. Savings and Current accounts
b. Credit and debit cards
c. Loans
d. All of the above
ACTIVITY 5 Explain the steps involved in transferring Rs 50,000 through online bank-
ing from one account to another.
10.6 HOW DIGITAL TRANSFORMATION IS

CHANGING THE FINANCE SECTOR
1. Use of FinTech
Financial technology, or FinTech, consists of all the modern technologies
that banks and financial businesses use to improve financial services. It
includes all services from the use of ATMs and electronic cards to digi-
tal banks. FinTech has transformed the finance sector by using automa-
tion and machine learning techniques. Future FinTech money-makers
include the use of automated chatbots that are available 24/7, online bud-

BANKS OF FUTURE 173
geting tools to regulate money spending, and spending tracker to moni-

tor funds.
FinTech will have an important place in the future of the financial
industry. In the period 2019–2025, reliable projections state that FinTech
will grow by about 25 to 30 percent.
2. Providing Cyber Security using Artificial Intelligence
Artificial intelligence (AI) helps in detecting and forecasting the possi-
bilities of fraud. Several credit card companies and financial lending
institutions use these services to perform background checks and be
risk-averse. This valuable technology also helps banks fulfill compliance
regulations effectively. AI helps in reducing cybercrime by protecting
mobile banking, login credentials, and much more. AI also improves cus-
tomer experience by providing valuable insights into customer behaviour
as a guide for all businesses. Following data also supports the importance
of cyber security.
a. Forbes states that 70 percent of all financial service businesses that
take part in their research use machine learning in their production.
Also, 60 percent of them use Natural Language Processing (NLP).
b. The same study also stated that leading financial service firms
attribute 19 percent of monetary growth to their AI initiatives as
opposed to 12 percent of other firms that followed.
c. The Financial Brand.com states that by 2030, financial institutions
will be able to save 22 percent of their operational costs due to AI.
3. Competition from small business using disruptive technologies
There would be immense impact of the disruptive technologies used by
small business houses. The best examples are the PayPal, Amazon pay
or Google Pay. Customer’s shift from tedious traditional banking proce-
dures to convenient digital banking services is quite evident.
Here’s how PayPal is transforming businesses
a. It currently has 286 million users active on its site.
b. The research estimated a $17.70 billion revenue surge in 2019.
c. 87.5 percent of online purchasers use PayPal.
d. It was the most famous digital wallet in 2016.
Furthermore, Statista.com states that the market share will be an $11.1
trillion market by 2025. Disruptive technology truly marks the coming
years with bright and positive colours.
4. Transform Financial Institutions through Blockchain
Blockchain is a decentralised, unchangeable ledger that makes it easier
to keep track of assets and record transactions in a network of busi-
nesses. An asset may be physical (such as a home, car, money, or land)
or intangible (intellectual property, patents, copyrights, branding). On
a blockchain network, practically anything of value may be recorded
and traded, lowering risk and increasing efficiency for all parties.
Blockchain technology, which is frequently associated with crypto
currencies, present many opportunities in a variety of other fields.
Smart contracts are made possible by the functionality of its ledger
system, which applies stringent controls to audit data. By increasing

174 RETAIL BANKING
transparency and lowering risk and human error, it also helps to

increase consumer trust. It is for this reason that stock exchanges, AI
companies, and other financial institutions are exploring this technol-
ogy aggressively.
A few Blockchain-centric businesses raised over a huge $240 million
venture capital in the first half of 2017. Furthermore, this investment
keeps growing every year from 2017. Blockchain and its allied tech-
nologies have the power to grow and impact several financial services
going forward.
SELF-ASSESSMENT
11. Artificial intelligence (AI)
QUESTIONS
a. Detects financial frauds
b. Prevents cybercrime
c. Both a and b
12. Blockchain technology is frequently associated with
a. Crypto currencies
b. Equities
c. Bond market
d. All of the above
ACTIVITY 6 Find out how the payment systems like Google pay, Amazon pay work.
10.7 SUMMARY
Multifactor authentication can combine independent information which
may include what the user knows (e.g. a password) what the user pos-
sesses (like a smartphone) and who the user is (biometric verification
methods).
There are essentially layers of information that a multifactor authentica-
tion system uses to create a security wall.
The use of electronic signatures will be helpful in reduction of time of
processes and their completion and will lead to customer satisfaction.
Social media platforms also give the facility of analyzing data around all
the customers that has seen or engaged with marketing posts promoted
by the banking institution.
Chatbots, as a technology, can provide the right kind of information in
the form of a text or a voice message based on the customer inputs.
There are several ways in which AI is being leveraged such as Automated
Advice, Predictive Analysis, Automation of Lending Process, Cloud
Banking and Robotics in Banking.
Automated advice give algorithms which collect generic as well as spe-
cific information about a customer’s financial and purchasing behavior
based on which highly personalised financial advice is given out.

BANKS OF FUTURE 175
Automation of Lending Process is loan management software which

integrates AI applications and together they help in assessing loan
applications.
The advantages of cloud banking are that it is cheaper, compatible and
environment friendly.
Financial technology, or FinTech, consists of all the modern technology
that banks and financial businesses employ to improve the delivery of
financial services.
Artificial intelligence (AI) plays an important role in detecting and fore-
casting the possibilities of fraud and preventing cybercrime and providing
valuable insights into customer behaviour as a guide for all businesses.
1. Multifactor authentication is a security technology that helps in KEY WORDS

creating multiple layers of barriers which a legitimate user has to cross
to be able to access the system or to carry out any financial transaction.
2. Knowledge factor is first level of security that typically asks the user
to key in the answer to a personal security question.
3. Possession factor is the layer of security in which the user must have
in possession a certain physical device that can provide this second
layer of information required to access a particular system.
4. Inherence factor is a biological trait of the user which is used as the
final bit of information to gain access to secured portal.
5. Digital or E-Signatures is an efficient and legal way to get electronic
documents signed quickly.
6. Chatbots, as a technology, can provide the right kind of information
in the form of a text or a voice message based on the customer inputs.
7. Blockchain is a decentralised, unchangeable ledger that makes it
easier to keep track of assets and record transactions in a network of
businesses.
8. Retail banking, also known as consumer banking, refers to the
specific services banks can offer to consumers – such as savings and
current accounts, credit and debit cards, and loans.
9. Predictive analysis are several AI programs which take help of
semantics and natural language applications to predict customer
behaviour.
10. Robotic process automation uses artificial intelligence and robotics
to automate manual and repetitive processes.

1. Explain multifactor authentication.
2. Explain the benefits of E-signatures.
3. How has the popularity of mobile banking surpassed that of online
banking?

176 RETAIL BANKING
4. What do you mean by blockchain technology?

5. Explain cloud banking.
10.9 ANSWER KEYS
Multifactor Authentication 1. c. Multifactor authentication
E-signature and its Importance 3. c. Digitally sign a document
Power of Social Media, Mobile, 5. a. Customer’s smartphone
Artificial Intelligence, Cloud and
Robotics
Customer Experience 7. b. It does not provide 24/7
service
Characteristics of the Bank of the 9. d. All of the above
Future
How Digital Transformation is 11. c. both a and b
Changing the Finance Sector
12. a. Crypto currencies

AND E-REFERENCE
https://www.insiderintelligence.com/insights/future - of-banking-
technology/
Reserve Bank of India docs.
Financial brand
Read more at:
https://economictimes.indiatimes.com/small-biz/startups/news -
buzz/sign-in-the-growing-relevance-of-e-signatures-for-banking/
articleshow/62957556.cms?utm_source=contentofinterest&utm_
medium=text&utm_campaign=cppst

C H
11 A P T E R
CASE STUDIES
1 TO 10
CONTENTS
Case Study 1 An Overview of Retail Banking

Case Study 2 Working of Retail Banks and their Role in the Economy
Case Study 3 Retail Banking Regulation—Risk and its Management
Case Study 4 Competition in Retail Banking, Marketing and Distribution Management in
Retail Banks
Case Study 5 Retail Banking Products
Case Study 6 Retail Banking Channels
Case Study 7 Payments and Payment Systems
Case Study 8 Credit Appraisal
Case Study 9 Banking Securities
Case Study 10 Banks of Future
Retail Banking_Case Studies.indd 177 2/3/2023 6:09:13 PM

178 RETAIL BANKING
CASE STUDY 1
AN OVERVIEW OF RETAIL BANKING
Avni, a saving account holder having deposit in ABC bank, deposited Rs

50000, cash in her account. This increased the cash deposit of ABC Bank
by Rs 50000. The balance sheet of ABC will look like the following:
Balance sheet of ABC Bank

Deposit 50000 CASH received 50000
50000 50000
Cash Reserve 10000

Excess Reserved 40000
Now the above balance sheet of the bank shows that it has 50000 as its
asset, now suppose as per RBI guideline 20% of cash has to be retained
as cash reserve, so the ABC bank has to reserve 10000 as reserve and
rest 40000 it can used it for lending process. Now lets assume the bank
ABC gives Samir a loan of Rs 40000 for paying his dues, so the balance
sheet will show loan of Rs 40000/- on the asset side and loan will be dis-
bursed in the saving account so, it will increase the liability by 40000/-
Balance sheet of ABC Bank

Deposit 50000 CASH Received 50000
Demand deposit 40000 Loan to Samir 40000
90000 90000
The fund given by Samir was used for paying his dues to Ajay, who
bought goods worth Rs 40000/- and paid cash to the shopkeeper Mahesh.
The shopkeeper than deposits this money in the current account of
XYZ. Now the balance sheet will have Rs 40000/- as cash received and
Rs 40000/- on liability side as the deposit increased by 40000/-
Balance sheet of XYZ Bank

40000 40000
Cash reserve 8000

Excess 32000
Now the XYZ bank will also do the same thing as done by the ABC bank,
that is it will reserve 20% as cash reserve i.e. Rs 8000/- and Rs 32000/-
available for advancing loans. The XYZ bank gives loan for purchasing

case study 1: An Overview of Retail Banking 179
CASE STUDY 1
some asset to Sachin. Now the asset of the XYZ will show loan to Sachin
and on liability side deposit will increase.
Balance sheet of XYZ Bank

Current deposit 32000 Loan to Sachin 32000
72000 72000
Sachin uses the funds to meet his requirements and gives to Rakesh
who deposited it in his account in the SBS bank., the balance sheet of
the SBS bank will also be like
Balance sheet of SBS Bank

32000 32000
So, we can summarise the whole process of credit creation in the manner
that the fund made available through credit increases the purchasing
power which increases the deposit and thus provides more funds to lend.
QUESTIONS
1. On the basis of above case what will be the cash reserve if as per
RBI 10% has to be retained and reserve? (Hint: Cash reserve
ratio is the percentage of deposit to be maintained in form of
liquid assets like cash to meet the operating risk.)
2. How much fund can SBS bank lend? (Hint: Amount that
remains after maintaining cash reserve ratio can be used for
lending.)
3. What do you mean by balance sheet and what does it show?
(Hint: A written statement of company which shows what it owes
to others and what it has to receive from others in monetary
terms.)
4. What comes under liability and what comes under asset? (Hint:
Anything which is to paid back is a liability and anything which
is to be received is an asset.)

180 RETAIL BANKING
CASE STUDY 2
WORKING OF RETAIL BANKS AND THEIR ROLE IN THE

ECONOMY
RBI Monetary Policy Highlights: Repo rate hiked 50 bps to 5.9%;

2022- growth forecast cut to 7%
RBI Monetary Policy Meeting Highlights: RBI Governor Shaktikanta
Das announced that the monetary policy committee (MPC) hiked the
repo rate by 50 bps to 5.90 per cent and added that inflation is expected
to remain elevated at around 6 per cent in second half of 2022–23. The
central bank also cut growth forecast for the current financial year to
7 per cent. Here’s what the Indian central bank chief announced.
Prior to this, the RBI had raised the repo rate – by 40 bps in an off-cycle
meeting in May and 50 bps each in June and August. It was expected that
the repo rate will be increased by 50 basis points (bps) in the meeting to
tame the raging inflation and to control the fall of the rupee which hit
an all-time low earlier this week due to the strengthening of the dollar.
The retail inflation or Consumer Price Index (CPI) that the RBI factors
in, while considering its benchmark lending rate, stood at 7.00 percent
in August. Retail inflation has continued to remain above the central
bank’s comfort level of 6 percent since the start of this year.
The RBI governor announced that the standing deposit facility (SDF)
rate stands adjusted to 5.65 percent and the marginal standing facil-
ity (MSF) rate and the bank rate to 6.15 percent. He said that the MPC
decided by a majority of 5 out of 6 members to remain focused on the
withdrawal of accommodation to ensure that the inflation remains
within target going forward.
In his speech, the RBI governor also said that the world is in the midst
of a third major shock from aggressive monetary tightening by central
banks. He explained that there is nervousness in the financial market
and the global economy is eye of a new storm. He noted that the Indian
economy continues to be resilient in midst of global turmoil.
While commenting on the inflation, Das said that the inflation trajectory
remains clouded with uncertainties arising from continuing geograph-
ical tensions and nervous global financial market sentiments. “Today,
inflation is hovering around 7 percent and we expect it to remain ele-
vated at around 6 percent in the second half of 2022–23,” he said.
About the GDP, Das viewed that while real GDP growth in Q1 turned out
to be lower than our expectations, the late recovery in Kharif sowing,
the comfortable reservoir levels, improvement in capacity utilization,
buoyant bank credit expansion, and the government’s thrust on capital
expenditure are expected to support aggregate demand and output in
the second half of 2022–23.
The central bank cut the 2022–23 growth projection to 7 per cent from
its previous estimate of 7.2 per cent. Das said that the real GDP growth
for 2022–23 is projected at 7.0 per cent with Q2 at 6.3 per cent, Q3 at
4.6 per cent and Q4 at 4.6 per cent, with risks broadly balanced. While
the growth for Q1 of 2023–24 is projected at 7.2 per cent.

CASE Study 2: Working of Retail Banks and their Role in the Economy 181
CASE STUDY 2
Impact of monetary policy

1. As the repo rate has increased by 190 bps to 5.90 per cent, it will
have a huge impact on borrowers – both new and existing. Existing
borrowers will see their EMIs or loan tenors increase with the
latest rate hike.
2. The 50-basis point hike in repo rate to 5.9% was expected as
the RBI intensifies its efforts to tame inflation. While banks will
eventually be forced to pass on this increased cost to borrowers,
the possibility of this happening during the ongoing festive season
is low. There would be increase in interest rate due to which less
people will tend to take loan.
3. This would lead to decrease in money supply as the interest rates
on loan have increased making less money available to the public.
QUESTIONS
1. By how many basis points has the repo rate been hiked by the
RBI? (Hint: 50 bps)
2. What is the current repo rate? (Hint: 5.90 per cent)
3. Presently what is the rate of inflation? (Hint: 6 per cent)

182 RETAIL BANKING
CASE STUDY 3
RETAIL BANKING REGULATION—RISK AND ITS MANAGEMENT
With the development and growth of the economy, the importance of

banking systems has also increased. This has led to the role of banks
becoming indispensable. But one of the biggest challenges for the Indian
banks is the amount of non-performing assets, especially after national-
izing banks in 1969. After nationalization, the amount of non-performing
assets around 15%, was considered to be one of the biggest limitations
for commercial banks.
Therefore, RBI issued guidelines based on the recommendations of the
Narasimhan Committee. As per the guidelines, every bank has to be
punctual in granting loans and, more importantly, to collect the amount
of the loan i.e., recovery of the loan. Considering the recommendations
of the RBI, the proportion of NPAs has come down to 3.6% in 2013. Even
then, the problem has not been solved altogether. Here, the study of
UCO banks is presented in reference to NPAs for a particular period.
UCO Bank, a government undertaking
Particulars 2019 2020 2021 2022

Gross NPA 29888.33 19281.95 11351.97 10237.43
Total 29888.33 19281.95 11351.97 10237.43
(Source: http://www.moneycontrol.com/stocks/company_info/print_main.php)
Above table shows that Gross NPA from the year 2019 to 2022. The
above table represents that gross NPAs for the bank has been decreas-
ing from 2019 to 2022. It was 29888.33 crores in 2019 and has decreased
to Rs 10237.43 crores in 2022. Figure 1 shows the Gross NPA from 2019
to 2022.
Figure 1 Gross NPA from 2019 to 2022

CASE Study 3: Retail Banking Regulation—Risk and Its Management 183
CASE STUDY 3
Analysis of Net NPA

Net NPA as we know is Gross NPA minus doubtful and unpaid debts.
UCO Bank Net NPA also decreased from 2019 to 2022. It also shows a
decreasing trend.
Particulars 2019 2020 2021 2022

Net NPA 9649.92 5510.65 4389.50 3315.78
Total 9649.92 5510.65 4389.50 3315.78
Figure 2 shows NET NPA of UCO Bank from 2019 to 2022
Particulars 2019 2020 2021 2022

Net profit -4321.09 -2436.83 167.04 929.76
Figure 2 NET NPA of UCO Bank from 2019 to 2022
The net profit of UCO Bank increased from 2019 to 2022. The reason for
the increased profit is decreasing gross NPA and net NPA.
Figure 3 Profit of UCO Bank from 2019 to 2022

184 RETAIL BANKING
CASE STUDY 3
Conclusion
The case of UCO Bank clearly shows the effect on profitability of the
bank. In 2019 the gross NPA amount was Rs 29888.33 crores, the bank
was in loss in 2019 amounting to Rs 4321 crores but in the coming years
due to good recovery of debt the bank increased its profit in 2022 amount-
ing to Rs 929.76 crores. The profit increased due to less provisioning on
NPA account.
QUESTIONS
1. Explain with the help of case study of UCO bank why

nonperforming assets can be considered as one of the biggest
limitations for any commercial bank. (Hint: Figures 2 and 3.
Summerise these along with the last paragraph.)

CASE STUDY 4
COMPETITION IN RETAIL BANKING, MARKETING AND DISTRIBUTION

MANAGEMENT IN RETAIL BANKS
Ajay Kumar and his friend Ankit use credit cards. But Ajay Kumar has
Mastercard credit card issued by ABC Bank while Ankit has VISA credit
card. Both made the same expenses during the month. While paying the
bill, Ajay observed that his bill was showing more amount than Ankit’s.
He asked Ankit about the issue, to which he answered that he is has
a VISA card issued by XYZ bank. Abhay visited his bank from where
he had received the credit card. They informed him that Mastercard
charges are 0.10% more than the VISA card and that is why he had to pay
more than his friend having VISA credit card. The banks charge ‘inter-
change fee’ along with interest on these cards which are different for
different banks. The interchange charge is one way banks make money
from issuing cards and ‘acquiring’ retailers or merchants that will take
these cards. To cover the risks and expenses involved in processing the
payment request, the merchant’s bank pays a fee to the cardholder’s
bank. By charging the merchant a fee based on the kind and amount of
the transaction completed, the merchant’s bank recovers the cost.
Due to increased competition, the rates of interest vary heavily.
Customers have to pay the fee inbuit with these types of cards.
QUESTIONS
1. What are the two credit cards talked about in the case? (Hint:
Give the name of the two cards discussed.)
2. How did banks earn profit in the above case? (Hint: Explain
interchange fee and the process with which banks charge it.)

186 RETAIL BANKING
CASE STUDY 5
RETAIL BANKING PRODUCTS
Yogesh, a new customer of ABC bank applied for personal loan there.
The rate of interest on the personal loan was 11.50%. He inquired about
the personal loan interest rate at XYZ bank in his locality also. The rate
of interest provided by XYZ Bank is 11%. He found that there is 0.50%
difference in the rate of interest charged. But when he visited XYZ bank
he saw that the ambience of the branch is not as good as compared to
the ABC bank. The branch was overcrowded. There were customers
waiting at every counter. He enquired one of the customers about the
services and the products of the XYZ bank. The customer informed him
that the branch provides every service at the branch only.
Digital services of the bank were available but did not work well and
required updation. The rate of interest was a bit lower than the that of
ABC Bank, but products and services were not up to the mark in com-
parison to ABC bank.
ABC bank on the other hand provided all the digital services along with
the facility of door-step banking, mobile banking etc. The customers of
ABC bank visited its branches less frequently as all the products were
available online and were easily accessible to the customers. Taking all
this into consideration Yogesh applied for his loan at ABC bank only as
they provided other services also.
QUESTIONS
1. Which loan had Yogesh applied for at ABC bank? (Hint: The
type of loan; its name)
2. What are the other services which were offered by ABC bank?
(Hint: Explain digtal, mobile, doorstep banking and their
advantages.)
3. Which bank provided lower rate of interest on personal loan?
(Hint: The one where services were not up to the mark.)

CASE Study 6: Retail Banking Channels 187
CASE STUDY 6
RETAIL BANKING CHANNELS
Digital banking has become one of the main products of any bank. After
the COVID pandemic the need for online banking without physical
branches had gained momentum. Each and every bank has therefore
involved itself in providing these online services. Looking into this the
Government of India has also introduced a Digital Banking Unit (DBU),
which is a specialized fixed-point business unit/hub housing certain
minimum digital infrastructure for delivering as well as servicing exist-
ing financial products and services digitally, in both self-service and
assisted mode.
There are 75 Digital Banking Units opened by Government of India in
different parts of the country. The main focus of these digital banks is
to promote the use of advanced technology and innovation in banking.
This will act as an enabler in the digital ecosystem and will improve cus-
tomer experience by facilitating seamless banking transactions.
These digital banking units, unlike banks, will provide all the services
provided by the banks, without human intervention. Services like open-
ing an account, cash deposit, withdrawals, transfer of amount etc. can
be done through machines in these units. On the credit delivery front, to
start with, the DBUs will provide end-to-end digital processing of small
ticket retail and MSME loans, starting from online applications to dis-
bursals. The DBUs will also provide services related to certain identi-
fied government sponsored schemes. The products and services in these
units will be provided in two modes, namely, self-service and assisted
modes, with self-service mode being available on 24x7x365 basis. Banks
are also free to engage the services of digital business facilitators and
business correspondents to expand the footprint of the DBUs. With
the advent of use of technology and digital products there will be more
DBUs in the near future.
QUESTIONS
1. What do mean by DBUs? (Hint: Provide full form and explian in

brief what they do.)
2. How many DBUs have been launched by Government of India?
(Hint: 75)

188 RETAIL BANKING
CASE STUDY 7
PAYMENTS AND PAYMENT SYSTEMS
ABC bank in the year 2013 came up with new product, Smart Digi wallet
which is available in the mobile banking app. This is a new and innova-
tive product of the bank which has various benefits. At the initial state
the company incurred losses due to this product. Due to lack of digital
banking customers were less accustomed to the digital products and
used more of traditional banking services.
After the COVID pandemic the bank recorded a boom in the use of
Smart Digi Wallet scheme. Consumers do not have to keep cash with
them everywhere. Along with this, other digital services were also avail-
able in this mode. They can use the smart Digi Wallet for making pay-
ment of products and services and also to transfer funds from one wallet
to another.
The business of the ABC company touched new heights with this new
product. Looking into this the ABC bank started to work on bringing
more of such products in the upcoming year by making it more simple
and easy for rural customers and senior citizens.
QUESTIONS
1. Which product did ABC bank introduce? (Hint: A digital wallet)

2. What are the facilities available in their wallet? (Hint: The
facilities required by customers during times of the COVID
pandemic lockdown and social distancing)

CASE Study 8: Credit Appraisal 189
CASE STUDY 8
CREDIT APPRAISAL
Shikha Sharma has recently joined a mid-size hospital as their opera-

tions officer. She has been tasked with the assignment of getting a loan
approved for the company to add more beds in this hospital and build a
new one in sub-urban location, 60 km away from the current one.
Shikha in consultation with the management is looking at getting CC
(cash credit) of INR 1 cr.
Mohit Jain from the bank is assisting her in closing the loan request. He
shared with Shikha the following as the process to get credit appraisal
of working capital loan by the bank:
Points to Remember
1. Obtain Know Your Customer/ credit login check list
2. Preparation of credit report
3. Obtaining Financial statements—Balance sheet, Profit and loss
account, Income tax returns, GST returns, Sales tax returns
4. Obtain secondary data and conduct other due diligence
5. Personal discussion/ customer visit
6. Preparation of CRAN (credit risk assessment note)
7. Scrutiny of CRAN report
8. Sanctioning or rejecting of the proposal
9. Terms and condition
10. Loan agreement
11. Disbursement of loan
12. Monitoring
Step 1  Know your customer / credit login check list: As per bank
policies all documents and information is collected from the customer.
The customer is required to login the request in their portal for loan and
its further processing.
Step 2  Preparation of CPA (credit processing assistant) report: As
per RBI, its mandatory to analyze balance sheets and income statement
of the company or the firm. The pattern illustrated here can be different
from the one given by company law board (CLB). The Company Law
Board is an independent quasi-judicial body in India which has powers
to overlook the behavior of companies within the Company Law.
Step 3  Obtain secondary data and conduct due diligence: In this
step banks conduct due diligence of secondary data such as:
Industry outlook
CIBIL (Credit Information Bureau India Ltd) check

190 RETAIL BANKING
CASE STUDY 8
CRILIC (Central Repository of Information on Large Credits) check

RBI default check list
Information on account status received by other banks
Company detail verification from MCA (Ministry of Corporate
Affairs) website
Step 4  Personal discussion / customer visit: PD is conducted by the
relationship officer and credit manager to verify the reason for loan taken
by the customer and if it is justified or not. Officers try to get detailed
knowledge about the company that has requested for loan and take down
notes about various business, technical and financial conditions.
Step 5  Preparation of credit risk assessment note i.e., CRAN:
Through CRAN, organizations assess whether the borrower will be able
to pay back the loan or not. Borrower’s company stability, income range,
credit history, capital and loan’s conditions are evaluated thoroughly. In
cases where borrower’s credit risk is high, the interest rate on the loan
will be increased.
Step 6  Scrutiny of CRAN report is done based on financial and
Profitability analysis:
Liquidity Analysis  Net working capital (NWC) (also known as work-
ing capital) is the difference between current assets and current
liabilities. It is a calculation that measures a business’s short-term
liquidity and operational efficiency. It also helps to predict cash flow and
debt requirements.
Current Ratio: Benchmark for current ratio as per KMBL guidelines
is 1.33.
Quick Ratio: Quick ratio indicates short term liquidity of a company and
measures a company’s ability to meet its short term obligations.
NCFO i.e., Net cash flow from the operating cycle:
Profitability analysis
PBDIT / Net sales (%) – The increasing trend in this value indicates
good health of the company as the profit before depreciation interest
and tax makes good contribution to percentage of net sales.
Retained Profits / Net profits (%) – For both the years 100% of the net
profit is retained by the company and this indicates good financial health
for the firm.
Solvency Analysis-TOL / TNW – This is a critical ratio in ensuring the
extent of the external debt funds a company relies on. The higher the
value, the lower would be the capacity of company to withstand shocks
and downturns.
Debt to equity ratio (DER): This value indicates how much debt a com-
pany uses to finance its assets relative to the amount of value repre-
sented in shareholders’ equity. Among similar companies, a higher D/E

CASE Study 8: Payments and Payment Systems 191
CASE STUDY 8
ratio suggests more risk, while a particularly low one may indicate that a
business is not taking advantage of debt financing to expand.
Debt service coverage ratio i.e. DSCR: This value indicates how much
cash flow is available to pay current debt obligations to the company.
Assessment of the current proposal:
The assessment of working capital is done by two methods. The lower of
the two eligible working capital loan amounts is considered for provid-
ing loan subject to other policies and norms of the bank.
Turnover method: In this method, the working capital limit is calculated
based on turnover of the business. A fixed margin like 20% of the turn-
over reflecting in balance sheet is given as working capital.
MPBF (Maximum Permissible Bank Finance) method: A bank
can finance 75% of the working capital gap. It can be calculated as
75/100*working capital gap.
Verification Process:
Prior to sanctioning the loan residential FI is done.
Personal discussion is done to verify minute details.
ITR Verification is done before sanctioning of loan.
Internal Dedupe Checks (NCIF and BCIF): Done as mentioned above.
External Dedupe Checks (Consumer and Commercial CIBILs, PAN*
and CA verifications): Done as mentioned above.
Security Details: Property details are recorded for security purpose as
it can be used as collateral. It consist of following:
Address of the mentioned property: *Can’t be disclosed
Name of the owner: *Can’t be disclosed
Type of property: *Can’t be disclosed
Market value of the property: *Can’t be disclosed
Rating Report
There are other several agencies and institutions like CIBIL, CRISIL
etc. which performs credit rating.
LOAN DOCUMENTATION
Based on all steps done so far a loan documentation or legal relationship
is established between the bank and the borrower and for bank’s legal
resort in the court of law. It includes the nature and level of security which
is required in order to provide evidence of the transactions, for deciding the
terms and conditions and for enforcing the rights under the documents.
DOCUMENTATION PROCESS
Tollowing are the steps involved in process of documentation:
1. Pre-sanctioning safety measures are to be taken before the
documentation process starts.

192 RETAIL BANKING
CASE STUDY 8
2. Execution of documents – The following are the steps involved in

execution of documents:
All documents should be as per terms and condition declared
for sanction and it should be executed by proper sanctioning
authority. Also relevant details should be filled up before sign-
ing of the documents by the concerned parties.
Proper stamping: Documents must be properly stamped as per
the stamp law for them to be legally enforceable, failing which
those documents would not be considered as valid evidence in
court of law.
Proper execution: Execution of documents should be done in
the presence of authorized officials or some representatives
from the bank. In case, it must be executed outside the bank
premises then it has to be approved by the bank itself.
POST SANCTIONING INSPECTION OF THE BORROWER TO MAKE
SURE LOAN IS PROPERLY UTILIZED
1. Make sure the interest payment made by the borrower is always
on time.
2. Always visit the borrower on quarterly basis.
3. Make assessment of the borrower on quarterly basis.
Shikha has been listening patiently all this while. At the end, she is able
to guess that this whole process would require deeper financial analy-
sis than she had available in her papers. Also, she is able to see after a
quick look that some documents are missing which are mandatory as
part of KYC. She has to do some hard work before she can get the loan
approved.
QUESTIONS
1. What are the documents needed by the applicant at the time of

application? (Hint: Documents which disclose identity, income,
details of the asset to be invested.)
2. What is loan appraisal? (Hint: Analysisng loan application on
various parameters)
3. With reference to the case study what are the financial
documents to be taken by bank? (Hint: Documents related to
income and sources of income)
4. If you were the branch head of this branch how would you
calculate whether the loan can be sanctioned or not? (Hint:
Analysing loan application starting from identity verification to
repayment capacity)

CASE Study 9: Banking Securities 193
CASE STUDY 9
BANKING SECURITIES
Manya Singh recently joined the XYZ Rural Development bank as

branch manager. Last one month she spent lot of time going through
the data and understanding the financial health of the branch. Overall,
the branch is doing fine but she is able to infer that the non-performing
assets especially the housing loans need deeper analysis.
After some further work, in a week’s time, she is able to come up with a
list of 15 loans where the customers have faltered with their payments
for over six months.
She sits with the zonal officer to decide on next course of actions. They
refer to recent cases pertaining to SARFAESI Act. They refer to some
recent news items as well.
News 1: The Supreme Court has given 45 days’ time limit for filing an
application under Section 17 of SARFAESI Act. This verdict is passed
due to quick enforcement of the security.
News 2: Punjab and Haryana High Court has announced that banks
can repossess the property if they are facing large scale loan defaults.
The repossession can be done as per various sections of the SARFAESI
Act 2002.
“This court has not granted any stay on the proceedings to be under-
taken by the banks/financial institutions, under Sections 13 and 14 of the
SARFAESI Act. It is further clarified that this court has also not granted
any kind of interim stay in respect of the steps to be taken by the banks/
financial institutions for recovering the amount on account of car loans
and gold loans. Also HC has passed an interim order, on April 28, 2021,
that said that ‘any bank or financial institution shall not take action for
auction in respect of any property of any citizen or person or party or
anybody corporate till June 30, 2021’. It has now, however, clarified that
‘the object and purpose of passing the interim order was only to stay the
auction proceedings in respect of residential accommodations’.”
In accordance with the SARFAESI Act 2002, they decide to take posses-
sion of such properties and recover their money.
QUESTIONS
1. What is the full form of SARFAESI Act? (Hint: Search on the

Internet; newpapers and news-magazines can also be used)
2. When was this Act introduced? (Hint: A part of the full name of
the Act)
3. What type of right does bank have under this Act? (Hint: Refer
to the two news items quoted.)
4. When can banks go for SARFAESI? (Hint: Go through the two
news items and unserstand the conditions that enable banks to
act under SARFAESI.)

194 RETAIL BANKING
CASE STUDY 10
BANKS OF FUTURE
Use of technology in banking and finance sector is boosting the sales,

performance and competitiveness. There are several successful exam-
ples of banks using artificial intelligence for different business processes.
As per standard definition, artificial intelligence is the ability of a digi-
tal computer or computer-controlled robot to perform tasks commonly
associated with intelligent beings.
Taking a cue from their counterparts, ABC bank, which is a listed bank
and well known among middle class customer base for better returns
on savings and fixed deposits, has decided to offer added services by
enhancing use of technology. Currently, they offer net banking services.
They have a big staff count to support different services across 350
branches largely spread in North and West India.
Some of the initiatives the management has talked about are:
They plan to introduce AI based chatbot. Chatbots have the power
to understand customer queries, look for solutions in the database
and resolve queries in less than minutes. They can manage customer
engagement, expectation, and satisfaction through smooth pro-
cessing. EVA (Electronic Virtual Assistant) from HDFC is one such
example. iPal is the chatbot from ICICI Bank.
They plan to introduce AI based robots. There are many tasks in
banks which are repetitive in nature. Robots can very well manage
those tasks upto customer’s satisfaction. IRA (Intelligent Robotic
Assistant) from HDFC is one such example. These robots are capa-
ble of vocal interactions.
AI in mobile banking apps can help provide seamless user experi-
ence. Apps help the customers even on the days when banks are
not working. Such mobile apps using ML can provide accurate user
behavior data for banks to plan personalized products and services.
AI based data collection and analysis. Such data can help in better
asset, portfolio and risk management.
Leading banks in India like HDFC, ICICI, SBI are already leading the
way in such initiatives.
QUESTIONS
1. What are the different ways in which artificial intelligence can

be used in banking? (Hint: Make a list out of the four bulletted
points mentioned in the case.)
2. Give some examples of chatbots in Indian banks. (Hint: HDFC,
ICICI chatboxes; find out if other banks too have AI-based
chatboxes.)
3. Give example of use of robots in Indian banks. (Hint: Go through
the second bulletted point in the case.)

CASE Study 10: Banks Of Future 195
CASE STUDY 10
4. What are the benefits of AI in mobile banking apps? (Hint: Refer

to the third bulleted point.)
5. Do you think ABC Bank is planning well to enhance present
business and being prepared for future? (Hint: Refer to the
initiatives the management has talked about.)


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RETAIL BANKING

COURSE DESIGN COMMITTEE

Printed at: Repro India Pvt. Ltd.

NMIMS Global Access - School for Continuing Education

CHAPTER NO. CHAPTER NAME PAGE NO.

1 An Overview of Retail Banking 1

2 Working of Retail Banks and its Role in the Economy 23

3 Retail Banking Regulation—Risk and its Management 53

Competition in Retail Banking, Marketing and Distribution

5 Retail Banking Products 93

6 Retail Banking Channels 109

7 Payments and Payment Systems 123

8 Credit Appraisal 135

9 Banking Securities 149

10 Banks of Future 161

11 Case Studies 1 to 10 177

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TOC.indd 2 2/3/2023 5:25:18 PM

AN OVERVIEW OF RETAIL BANKING

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1. What innovative and updated services was ABC Bank offering?

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After reading this chapter, you will be able to

1.1.1 EVOLUTION OF RETAIL BANKING

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1.1.2 MEANING OF RETAIL BANKING

1.1.3 CHARACTERISTICS OF INDIAN BANKING SYSTEM

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1.2 FUNCTIONS OF RETAIL BANKING

1.2.1 PRIMARY FUNCTIONS

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(c) Providing customers with facilities of foreign exchange

1.2.3 AGENCY FUNCTIONS AND GENERAL UTILITY

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1.3 TYPES OF BANKING

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of India. Not only have consolidation and mergers occurred horizontally

1.3.1 COMMERCIAL BANKING

1.3.2 INVESTMENT BANKING

FUNCTIONS OF AN INVESTMENT BANK

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profit—that is, so-called proprietary trading. In a traditional investment

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1.3.3 VARIOUS TYPES OF BANKING

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1.4 ACTIVITIES UNDERTAKEN BY A

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 Banks in a universal system may still choose to specialize in a subset

1.5 INTERMEDIATION AS A FUNCTION OF

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to the payments system, the creation of credit by banks is a by-product of

1.5.1 BENEFITS OF INTERMEDIATION

1.2.3 AGENCY FUNCTIONS AND GENERAL UTILITY

1.4 ACTIVITIES UNDERTAKEN BY A

Banks in a universal system may still choose to specialize in a subset

1.5 INTERMEDIATION AS A FUNCTION OF

1.11 SUGGESTED READINGS AND