Retail Banking

By
Prof Santosh Kumar
 Features
• Cater to individual household sector to meet
financial needs
• Banks get better ALM
• Customers get better savings opportunity
• Also called convenience banking
• Mass banking
• Products are simplified
• Low cost banking across customer’s life cycle
 It seems
• Multiple customer groups
• Multiple products
• Multiple channel of distribution ( branch,
internet, ATM, KIOSK, Call Centre, Mobile
banking, Credit cards)
• Well defined inputs, process and outputs
 It helps in
• Improve product mix
• Expanding revenues
• Enhancing profitability
• Ensuring better liquidity
• Better risk management
 Drivers of retail banking
• Economic prosperity
• Changing consumer demographics
• Technological factors ( Branch banking, phone
banking, internet banking)
• Decline in interest rates
 Types of retail banking products
• Retail deposit accounts
• Retail lending
• Retail payments
• Third party products
 Retail deposit accounts
• Transaction and non-transaction deposit
accounts
• Savings deposit, current deposit, term deposit
and hybrid deposit accounts
• Residential and non residential deposit
accounts
• Rupee and foreign currency deposit accounts
 Transaction and non-transaction deposit
accounts
• Transaction deposit accounts can deposit or
withdraw any number of times subjected to
funds
• Non-transaction deposit accounts refers to
mostly savings and term deposits. It is for
savings and investments.
 Savings Deposit Accounts
• First touch with individual households
• Low cost funds with cross selling opportunity
• Subjected to reserve requirements
• KYC as per RBI provisions
• Joint account possible
• Nomination permitted
• Minimum average deposit
• Above 1 Lakh, interest across banks may differ
• Deposit insurance limit is Rs 1 Lakh
• Restriction on number of withdrawal and payments
• Annual maintenance charge
• Other fee based services
 Current Deposit Account
• It is for business customers
• It is transaction accounts
• Balance in current account is under the ambit of reserve
requirements
• Nomination is available
• Minimum average deposit
• No interest
• Deposit insurance is available for proprietorship concern
• No restrictions on number of payments/withdrawals
• Overdraft is also possible based on credit history
• Annual maintenance charges
 Time deposit
• Non transaction deposit
• Also called as term deposit or fixed deposit
• Maturity varies from few days to many years
• Safest form of investment for low risk
conservative investors
• Pre-mature withdrawal is possible
• Loan or overdraft is also permitted
• Automatic renewal is permitted
 Hybrid deposit schemes
• Variable interest rate term deposits ( linked to
inflation)
• Term deposits with cheque writing facility ( fully
liquid)
• CASA linked to money market mutual funds
offering higher rate of return
• Unfixed time deposit ( deposit with convenience
of overdraft facility)
• Annuity deposit scheme: Accept lump sum
deposit and pay in equal instalments
 Non resident deposit accounts
• NRO ( Non resident Ordinary Rupee Account)
• NRE ( Non Resident External Rupee Account
• FCNR ( Foreign Currency Non Resident Rupee
Account
 NRO
• Any person resident outside India ( excluding
Nepal and Bhutan) ( Entities of Pakistan and
Bangladesh require prior approval from RBI)
• Can be jointly held with residents
• Nomination allowed
• Currency denomination is Indian Rupees only.
• Can have savings, current and fixed deposit
• Interest rates < domestic rupee accounts
 NRO Cont.
• Not repatriable except for (1) current income and
(2) up to $US 1 million per financial year for any
bonafide purpose out of the balances in the
account e.g. sale proceeds of assets in India
acquired by way of purchase /inheritance/legacy
• Power of attorney is restricted to withdrawals for
permissible local payments in rupees, remittance
of current income to the account holder outside
India
 NRO cont.
• Loans .....India....account holder and third
parties permitted subjected to extant rules
• Loans ....Abroad....account holder and third
parties not permitted
• Foreign currency loans in India......
India....account holder and third parties not
permitted
 NRE Account
• For NRIs ( individuals of Pakistan and Bangladesh
require prior approval)
• Joint account may be with two or more non
resident individuals of persons of Indian origin
• Nomination permitted
• Denomination in rupee account only
• Repatriable
• CASA , recurring and fixed can be attached
• Interest rates < domestic rates
 NRE cont.
• Power of attorney is restricted to withdrawals for
permissible local payments or remittance to the account
holder himself through normal banking channels.
• Loan to account holder in India...< 1 crore
• Loan to third parties in India....< 1 crore
• Loan to account holder abroad permitted provided no
funds are remitted back to India
• Loan to third parties abroad provided no funds are
remitted back to India
• Foreign currency loan in India not permitted
• Loan granted for personal/business/direct investment in
India/acquisition of house for residential use
FCNR ( Foreign Currency Non Resident)
Account
• NRIs ( Pak and Bangladesh require prior
approval)
• Joint account same to NRE
• Nomination permitted
• Any freely convertible currency
• Repatriable
• Term deposit only ( 1-5 years)
• Loan also available up to 1 crore
 Two types of foreign currency
accounts
Particulars Resident Foreign Currency Exchange earners foreign currency
Account (RFC Account) account (EEFC Account)
Eligibility Returning NRI/PIO after being All categories of foreign exchange
resident outside India for at earners such as individuals, companies
least one year etc. who are resident in India
Permitted USD, GBP, EUR, AUD, CAD JPY USD, GBP, EUR
currency
Permissible Balances of NRE/FCNR and 100% of the foreign exchange earnings
credits proceeds of assets held subjects to permissible debits and
outside India at the time of credits
return
Account CASA and term deposit Current account only

Fund Freely used in India and Not freely

utilization abroad for investments and
expenses
 Cont.
Particulars Resident Foreign Currency Exchange earners foreign currency
Account (RFC Account) account (EEFC Account)

Nomination yes Yes

Conversion Freely permissible. If Feely permissible. But again can’t be

into rupees returning abroad, RFC can be converted into foreign currency
converted to FCNR

Person resident outside India but citizen of India ............................NRI

PIO is a citizen of any country other than Bangladesh or Pakistan , if (a) he 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 Citizenship Act 1955; or (c) the
person is a spouse of an Indian citizen
 Pricing of Deposits and Deposit Mix
• Pricing of deposits = f ( min balance
requirements, transaction costs, lending and
investment avenues to bank)
• Deposit mix is a concept where a bank can
change proportions of deposits under current
savings and term deposits.
• Banks focus on low cost deposits CASA
 Retail loans
• Secured versus unsecured retail loans
• Straight versus revolving retail loans
Secured versus unsecured retail loans
• Secured loans backed by tangible securities
like home loan, car loan. Banks can anytime
re-possess and dispose of the asset if the
borrower fails to pay the loan as agreed.
• Unsecured loans = f ( credit rating of
borrower, his income and expenses
behaviour). Personal loan, credit card,
educational loan. It is more expensive, less
flexible and of short duration.
 Straight versus revolving retail loans

• Straight loans ..........EMI fixed but principal

and interest within the EMI varies. E.g Home
loan
• Revolving loans.........Evergreen
loans...Arrangement which allows for the loan
amount to be withdrawn, repaid and redrawn
again up to a certain limit in any manner and
any number of times, until the arrangement
exists. Credit card loans are revolving loans
Retail loans are evaluated as below
• Character ( trustworthy and reliable)..f ( past
tract record of income and expenses)
• Capacity (ability to repay the loan)
• Capital ( margin money or commitment by
borrower)
• Collateral (ability of borrower for secondary
payment)
• Conditions ( Credit viability due to changing
economic conditions)
 Hybrid credit scoring model
Accommodate extensive historical facts along
with flexibility to incorporate new risk factors
Important features:
• Statistical approach to judge the risk
• Calculate the probability of default based on
customers’ information
• Past experience of bank
 Behavioural scoring model
• Focus on lending relationship that a customer
has with retail banking division and how the
customer uses their bank account.
Retail loan organizational structure
• Central risk management division....policy
formulation, evaluation of proposals, post
approval review, performance analysis of loan
portfolio
• Retail loan evaluation division....approval of
individual loan applications
• Risk intelligence and control divisions......Control
on fraudulent activities, CIBIL score
• Recovery divisions
 Retail loan products
• Housing/home loan ( direct housing finance and
indirect housing finance)
• Home equity loans ( loans on property, secured loan
given against the collateral of existing home)....lower
interest rate....usually for repairing, medical expenses,
higher education
• Vehicle loans
• Consumer loans
• Education loans
• Personal loans
• Loan against shares