.

SHORT NOTES
ON
RETAIL BANKING
&
WEALTH MANAGEMENT
FOR DB&F /JAIIB

RETAIL BANKING & WEALTH MANAGEMENT

 MODULE A – RETAIL BANKING
Unit - 1. Retail Banking: Introduction

 Banking services offered to a large group of individual customers is referred

to as ‘Retail Banking’.
 The delivery model of retail banking is both physical and remote through
branches and also through remote channels like ATMs, Internet Banking and
Mobile Banking.
 Unlike wholesale banking, retail banking focuses strictly on consumer markets.
 Although retail banking is, for the most part, mass-market driven, many retail
banking products may also extend to small and medium sized businesses.
 Pure retail banking is generally conceived to be the provision of mass market
banking services to private individuals.
 Attractive interest spreads since spreads are wide, since customers are too
fragmented to bargain effectively; Credit risk tends to be well diversified, as
loan amounts are relatively small.
 There is less volatility in demand and credit cycle than from large corporates.
 Higher delinquencies especially in unsecured retail loans and credit card receivables.
 In some banks retail banking was christened as consumer banking as the focus
was towards individual consumers.
 Capgemini, ING and the European Financial Management & Marketing
Association (EFMA) have studied the global Retail Banking market with the aim
of providing insights to financial services community through the World Retail
Banking Report(WRBR).

Retail Banking has many advantages as a business segment for banks:

 Risk is less as client base is large.
 Income is relatively more as spreads are more.
 Customer loyalty will be strong.
 Stable model with less volatility in business as the client base is very large.
 Higher potential for cross selling.

But it has its own disadvantages also:

 Huge clientele requires more efforts for monitoring and tracking.
 Cost of servicing will be relatively high.
 Delinquencies relatively higher in unsecured retail loans like Personal Loans
and Credit Card Receivables.

Globally the retail banking space had a great growth trajectory and the emergence of
the new remote channels have changed the distribution paradigm of banks. Alternate
channels have gained prominence to meet the growing customer demands.
 The performance of banks in retail banking across the globe had a stable
growth. The potential for retail banking based on customer segments and
household incomes looks highly promising. The growth potential in Asia and
South Pacific is very attractive and the numbers are expected to grow in the
 near future.

Retail Banking as a concept in India has been initiated by foreign banks/new

generation banks and nurtured by the PSBs and other private sector banks. It grew by
a compounded annual growth rate between 2021 and 2022 and expected to grow
further in the coming years. The penetration level of retail banking in India is still very
low as compared to the other Asian countries like China, Malaysia, Thailand, etc.

It’s been more than one and half year since the coronavirus first made its presence.
Lot has changed in these past seventeen months. And, one thing that is quite evident
is life has never been the same since then.

Based on research and findings, here are a few pandemic-sparked retail banking trends
worth keeping an eye on for 2021 and beyond. They are,
 Blooming of Digital Banking
 Rapid Adaptation of Blockchain by Retail Bankers
 Artificial Intelligence, Machine Learning, Virtual Reality and Data Science in
Banking
 Cyber Security to be a top priority
 Payment Innovations
 Rise of Big Tech in Banking Industry

Unit - 2. Retail Banking: Role within the Bank Operations

 Business models are adopted by banks keeping in mind their overall

business strategy, projections for future, business mix and corporate
objectives.
 The business models for retail banking adopted by banks vary among the
public sector, private sector and foreign banks.
 The main approaches are as follows:
 Strategic Business Unit (SBU) Approach,
 Departmental Approach,
 Integrated Approach (part of the overall business plan)
 Banks generally structure their retail banking models mainly on a positioning
platform and to be the best/top three among the peer group players or across
players.
 Strategies are based on the positioning objectives and vary from bank to bank
depending on the importance attached to the business model.
 It is used as a barometer for all decisions that impact the marketing strategy of the
bank.
 Foreign Banks normally do not go by positioning objectives.
 Rather strategy plays a big role in foreign banks.
 Foreign banks had in the past have existed when their business objectives have
not been met.
 A classic example is BNP Paribas existing in the late 1990s.
  Citibank is the recent example of exiting retail business in India.

Unit - 3. Applicability of Retail Banking Concepts and Distinction between Retail

and Corporate/Wholesale Banking

 The most common strategies are end to end outsourcing, predominant

outsourcing, partial outsourcing and in house sourcing.
 Regulatory prescriptions are one of the major determinants of outsourcing or
lack of it in these banks.
 In some foreign banks, both front and back end operations are outsourced and
in some banks, the back end operations are outsourced while the front end
operations like sourcing of HNI clients are done through captive resources.

The implementation models in retail banking are mainly built under the following
broad classifications:
 Horizontally Organised Model
 Vertically Organised Model
 Predominantly Vertically Organised Model
 Predominantly Horizontally Organised Model

 The horizontal or vertical model depends on the level of customer information

available in a single platform in the data base side for offering multiple
products/services across assets, liabilities and other services.
 Horizontally organized model is a modular structure using different process
models for different products, offering end-to-end solutions product wise.
 Vertically organized model provides functionality across products with
customer data base orientation and centralized customer data base is used
across products.
 Predominantly horizontally organized model is mostly product oriented with
common customer information for some products.
 In predominantly vertically organized model, common information is available
for most of the products.
 In most of the PSBs, horizontally organised model is the standard norm. New
private sector banks generally follow a vertically organised model.

 Sustainable Retail Banking Business models of the future: In light of the current
challenges, retail banks need to focus on their strengths.
 There are two core strengths that define a bank’s retail business model:
 First, a clear customer centricity and second, a strong value chain focus.
 Retail Banking Solutions are offered by banks by extending different retail asset
products, retail liability products and plethora of other services covering the
entire financial services and investment services and requirements of
customers.
 Banks implement these services mainly through their technology initiatives.

 All banks have implemented their core banking solutions to offer their
customers borderless banking and end-to-end solutions for total banking
 experience with virtual presence of the customer.
 As a part of overall segmentation game plan of the bank, branches are classified
as Resource Centres, Profit Centres, Priority Centres and General Centres to
have a clear business focus.
 This concept is an effective business model for PSBs with large network and
useful for focused strategies and already getting implemented in public sector
banks.
 Liability products are offered to retail banking customers basically under three
spaces - Savings Accounts, Current Accounts and Term Deposit Accounts.
Product differentiation among these accounts is best achieved by adding
different value propositions. (from a plain vanilla account to a value enriched
account.)
 Retail asset financing is a major component of retail banking model of banks.
 Mostly all PSBs are in the credit card business since it is a big volume game and
needs process efficiencies.
 In the development process, geography is not given importance but type of
branch and centre and business potential are given due importance.
 The common form of process models are Centralised Retail Assets Processing
Centres where all the retail loans sourced at the branches and marketing team
are processed at a single point and assets are financed through that centre or
processing alone done at the centre and financing done at the branches.
 Opening of account, issue of Pass Book, Cheque Book, ATM Card/Debit Card,
PIN Mailers for the Cards are the stages in the tangibilisation process.
(Centralized Processing)
 Process time is a major differentiator in the efficacy of retail banking
operations. Process Time is business sensitive and customer sensitive.
 Standalone pricing for different products and services is the basic structure.
 Regarding Price Structuring quantum and volumes are two important determinants.
 This structuring is a cross selling strategy to entice the customer to avail more
products so that profitability per customer is enhanced.
 The technology models basically adopted by banks are In House Models,
Outsourced Models, Partially In House and Partially Outsourced Models.
 As discussed elsewhere, retail banking is different from corporate banking.
 In retail banking the impact of NPA will be less whereas in corporate
banking, the NPA impact will be higher.
 Likewise, the cost of deposits will be relatively less than corporate banking as
the customer base is large in retail banking and hence pressure for finer rates
will be less.

Unit - 4. Branch Profitability

Banking System is a hub of a strong economy and needs to be both stable and profitable.
 Commercial Banks act as a bridge between the depositors and the
borrowers to meet requirement of employing and deploying funds.
 An entity that transacts with the funds of the depositors, is exposed to various risks.
 Responding to the need to meet the competitive global environment,
 India, in the nineties opened its economy, largely by ending the Licence Raj and
the permit system.
 As of today, Indian Banking System consists of 12 Public Sector Banks, 21 Private
Sector Banks, 45 Foreign Banks, 53 Scheduled Urban Cooperative banks, 1470
non-scheduled Urban Cooperative Banks, 43 Regional Rural Banks and around
96,000 Rural Cooperative banks in addition to Cooperative Credit Institutions.
 According to the Reserve Bank of India (RBI), the banking sector in India is
sound, adequately capitalized and well-regulated with High Quality Liquidity
Assets (HQLA) and SLR investments as it is much better when compared to
other economies of the world.
 On the other hand, the quality of assets remains a matter of concern.
 Profitability is a measure of an organization’s profit relative to its expenses.
 It compares how much profit a company makes compared with its overall
revenue and costs.
 Profit and profitability are not the same, although the two terms are used
interchangeably.
 While profit is an absolute amount, profitability is a relative one. Profitability is
a measurement of efficiency.
 Profits can be measured as a Return on Assets and as a Return on Equity.
 Because of leverage, banks earn a much larger return on equity than they do on
assets.
 Banks increase profits by using leverage.
 When a bank increases its liabilities to pay for assets, it is using leverage,
otherwise a bank’s profit would be limited by the fees that it can charge and its
interest rate spread.
 Branch level profitability differs from bank to bank, branch to branch,
time to time depending on banks’ goals and objective.
 Accordingly, there is no step(s) as such which may suit and effective to all the
branches.
 However, broadly, the strategies like the following can help the
branches focus on generating income and maximizing overall branch
profitability.
 Focus on balancing profit
 Growth and risk
 Assessing the strategic fit and unique role for each branch in the network
 Analysis of the current customer base for each branch
 Identification of best new prospect (potential customers) opportunities
 Proper analysis of the competition

 Setting specific goals by branch for business and consumer markets

 Execution of effective marketing campaigns to drive customer origination
 Retention and expansion
 Redefining the bank model of the future
 Relentless focus on NPA reduction
 More quality loans
 Focus on non-interest income
 Low cost deposit
  Holding minimum cash balance
 Cost management
 Good customer relationship
 Courteous behaviour by Branch Head
 Finally instilling a culture that values efficiency

 Improving profitability is not one time task rather it is a continuous process

throughout the day and throughout the year.
 Improved branch profitability can help to reduce costs, increase turnover and
productivity, and help the officials to plan for change and growth.

Unit - 5. Customer Requirements

The basic segmentation of customers based on their income levels is presented below.

Income Levels (Rs. Lakhs p.a.) Customer Segment

2-10 Mass Market
10-50 Mass Affluent
50-400 Super Affluent
400-4,000 HNW
4000-120,000 Super HNW
Above 120,000 Ultra HNW

The fundamental assumptions about customers for building retail banking

products and services
 Customers are different and so are their expectations.
 Needs of the customers are different.
 Each customer will have different sets of need for financial services.
 The requirements of customers for financial services will be unique.
 Customers can be broadly grouped together based on their need pyramids.
 Customers can be grouped together based on their income, age, geography,
profession, employment, vocation gender and family size.
 Product and services can be developed for a single or a combination of
the above elements to satisfy most of the needs.
 Products and services can be structured on a niche basis within one or any
of the above elements.

Maslow's Theory and Customer Requirements

Maslow has defined five needs of individuals in their various stages of life
Need Level Matching Banking Investment and Insurance Products
Physiological Needs Core Savings Accounts
Personal Accident Cover Housing
Loans
 Security/Safety Needs Recurring, Fixed Deposit Products.
Life Insurance Products: Endowment Products with low
premium, long tenor and high maturity amounts.
Tax Planning Banking, Insurance and Mutual Fund Products

Social Needs Consumer Loans

Personal Loans
Home Loans
Car Loans
Loans for Professional Development for Doctors, Engineers,
Lawyers, Chartered Accountants, Management Consultants,
Architects etc.,
Insurance Cover tagged to above loans.
Retail Gold Coins.
Health Policies for self and family.
Investment Products like Mutual Fund Schemes.
Systematic Investment Plans of Mutual Funds.
Unit Linked Insurance Products.
Esteem Needs Special Term Deposit Products.
Term Insurance Products.
Second Housing Loans/ Home Improvement/ Home Decor
Loans.
Self Actualization Needs Pensioners Loans
Retirement Solutions in Banking & Pension Plans in Insurance
Senior Citizens Term Deposit Products

Expectations from the customers about the service quality of the bank basically depend on
the following factors:

Tangibility in services Physical side of the service

Reliability Sticking to agreed terms and promises.
Responsiveness Willingness to help and extend prompt service.
Assurance Competence, Courtesy, Credibility and Security.
Empathy Understanding the service expectations from the
customers' point of view.
Value Customer, his business and time Welcome and greet the customer, Respect his/her
time
Provide solutions not excuses Take actions, Provide solution, Suggest alternative(s)
Understand Customer queries and Listen, See the issue/problem from his/her point of
concern view, Acknowledge his/her feelings

Service quality and delivery parameters for savings accounts

1. Touch point Experience: Overall Measures – At an overall level, the PSBs are
comparable to the Private Sector Banks average across touch points.
2. Branch-Layout and Cash transactions: Performance across parameters above
Private Sector Banks average.
3. Savings Account: No serious concerns on savings account; Parameters at or above
par visà-vis private banks.
4. Branch Non-Cash Transactions: Scores on most parameters at par with
Private Bank’saverage.
5. Communication: Communication channels available along with information flow to
customer meets average expectations.
6. Problem Incidence/Recurrence: Very low problem incidence just like the industry.
7. Key Performance Indicator – Savings Account Activation Time - Account activation
within 3- day window similar to industry average.
8. Key Performance Indicator – Welcome Kit Receipt Time: Close to 90 percent
receives welcome kit within 14 days.
9. Customer Mind space (Image Map) – The PSU Bank differentiated on problem
resolution & delivering on promise, amongst its customers.

Measures needed to enhance service quality

1. Banks need to focus on strengthening its performance across all parameters.
2. Banks need to have range of product features to make them more customer friendly.
3. Proactive customer communication from the bank needs to have a systemic approach.
4. Customer-friendly modules on branch network, new products and services.
5. Banks need to reorient its employees towards this key aspect of customer
experience through proper training and feedback process.

Customers’ requirement from Banks

i. Right product mix to satisfy different customer segments.
ii. Right channel mix (both direct channels and e channels).
iii. Structured process time across products and adherence to the time prescriptions.
iv. Delivery of the promises with regard to products/services and channels.
v. Satisfactory service experience from the delivery channels and the service personnel.
vi. Effective communication about the different products and services.
vii. Transparent dealings and service charges.
viii. Good ambience.
ix. Effective and time bound grievance redressal mechanism

Unit - 6. Product Development Process

 Product is the fulcrum on which the entire retail banking revolves.

 Product is "Anything that has the capacity to provide the satisfaction, use and
return desired by the customer".

 The first stage is the 'introduction' stage when the product is introduced. The
sales volume will be low and revenue from the products will not be sufficient to
cover the cost of producing, marketing and servicing it.

 In the 'growth' stage, which is the second stage in the product life cycle, the
sales volume of the product picks up and the product is likely to break even and
 start generating profits for the organisation.

 In the third stage which is the 'maturity' stage, there is more growth and sales
volume peaks. Here there is a wide customer base which will result in
maximisation of sales with inflow of business and profits.

 In the fourth stage, which is the 'staleness' stage or 'saturation' stage, because
of competition and better products available from the competitors, staleness
will creep in, which will result in saturation of sales.

 The final stage of the product life cycle called as 'decline stage'. In this stage,
the product becomes less attractive for the consumers due to various reasons
and results in drop in sales volume and profits.

 Augmented products are products which are developed from formal products
by combining two core products and adding value to the product in terms of
benefits and comforts to the customer.

The marketer should develop a product policy which involves the following concepts:
 Appraisal of the product line and individual products
 Decisions on product differentiation
 Product positioning
 Brand decisions
 Decisions on packaging
 New Product Development

Products can be broadly classified into following:

 Deposit Products or Liability Products
 Asset Products or Retail Credit Products
 Other Products and Services.

 The Generic Product - the core product.

 The Expected Product - adding additional features.
 The Augmented Product- adding value in addition to features.
 The Potential Product - futuristic features in anticipation.

 In the liability side, Banks offer different retail products like Demand
Deposits, Time Deposits with different variations with regard to product
features and duration.

 In the asset side banks offer mainly Home Loans, Auto Loans, Personal
Loans and credit lines against credit card receivables.
Unit - 7. Credit Scoring

The types of risks and the triggers in risk analysis are mentioned below:
 Credit Risk – Customer fails to pay
 Business Risk – Losing money due to wrong strategy
 Market Risk – Change in market prices
 Operating Risk – Processing failures and frauds

 A credit score is the statistical analysis of a person’s past credit dealings and
represents his or her Credit discipline
 Cibil-TransUnion model gives scores ranging from 300 to 900.
 Some bank may perceive 700 as a good score and another may not.
 Thus, in India, different banks will rank different scores as good.
 Still, any score over 700 may be considered good by banks

Credit Information Companies (CICs) typically build scores using three historical data files
 Defaults on previous credit transactions.
 Payment behaviour/Payment history
 Previous searches/inquiries

Credit Scoring Models are based on the following details of applicants:

 Family Size
 Income Levels
 Occupation/Business
 Repayment History on earlier loans

Factors leading to favourable credit score

 On time loan EMI payments.
 Regular payment of credit card bills.
 Paying credit card bills in full rather than paying minimum due amount every time.
 Avoiding over-leveraging.
 Maintaining strong financial records.
 Too many forms of credit (such as unsecured personal loans) among family
members.
 Proper utilization of approved credit limit.
 Ensuring banks and other financial institutions, you’re dealing with, record
and submit positive information to CICs.
 Requesting and maintaining a copy personally rather than through financial
institutions.

Factors leading to negative credit score

 Too many credit report enquiries by banks and other institutions.
 Cheque bounces/dishonours.
 Irregular loan repayments.
 Defaulting on credit card bills/making late payments or consistent part payments.
  Too much unsecured credit such as multiple personal loans.
 Multiple applications for unsecured loan getting rejected.
 Defaulting as a guarantor.
 High utilization of approved credit limit or overshooting the limit.
 Non-payment of utility bills may also have negative bearing on credit
score. Utility companies report delinquent account to CICs very fast.
 Errors in record by banks and other finance institutions.

Advantages of maintaining high credit scores

 Easy availability of credit such as loans. According to the official CIBIL
website, about 90% of loan applicants with CIBIL score greater than 700 are
approved for loans.
 Quick processing of loan and credit card applications.
 Ability to negotiate interest rates, owing to your strong financial standing.
 Though not guaranteed, the possibility of negotiating or waiving processing
fees as well as choosing prepayment options.

The most common mistakes in credit score will be due to the following;
 Confusion of names
 Human Input Error
 Identity Theft

Unit - 8. Important Retail Liability Products

 In simple language, the banking that takes place between our personal
bank and us is nothing but retail banking.
 Retail banking helps us to meet our day to day needs by services like debit
cards, credit cards, online withdrawals, deposits, loans and many other
benefits.
 Intermediation is the primary function of banks and mobilisation of deposit is
the first step to intermediation.
 They accept deposit from public and lend it to the enterprise class engaged in
productive activities.
 Therefore, the deposited money is the banks liability as interest is paid on that
sum to the depositor.
 On the other hand, the loaned out money becomes the asset for the bank
and earns interest.

 Banks accept various types of deposits viz. Demand Deposit (Current and
Savings), Term Deposit (Fixed deposit and Recurring Deposit).
 Banks are the only financial intermediaries that are permitted to accept
Demand Deposits which can be withdrawn by the customer at any time on
demand.
 Such deposits are repayable on demand; therefore, they are called Demand Deposits.
 Current Deposit account
 Current Deposit account is opened by businessmen who have a higher
number of regular transactions with the bank.
 It includes deposits, withdrawals, and contra transactions.
 Current deposits are vital deposit component of banks as it is almost no cost
deposit for the bank.
 The minimum balance required to be maintained in Current Account is
comparatively higher than that of Savings Account because of higher
transaction cost involved in Current Accounts due to unlimited transactions
being allowed in Current Accounts.
 In current accounts where there are no operations continuously for two
years, should be treated as inoperative accounts.

Main Features of Current Deposit Account

 Current deposit accounts are meant to run a business.
 It is a non-interest bearing bank account.
 It needs a higher minimum balance to be maintained as compared to
the savings account.
 Penalty is charged if minimum balance is not maintained in the current account.
 It charges interest on the short-term funds/overdraft borrowed from the bank.

 It is of a continuing nature as there is no fixed period to hold a current account.

 It does not promote saving habits with its account holders.
 Banker requires KYC (Know your Customers) norms to be completed before
opening a current account.
 The main objective of current bank account is to enable the businessmen
to conduct their business transactions smoothly.
 There is no restriction on the number and amount of deposits.
 There is also no restriction on the number and amount of withdrawals
made, as long as the current account holder has funds in his bank account.
 Generally, bank does not pay any interest on current account.

Operational Instructions in Current Account

(i) Accounts of Individuals: The column meant for “Operational Instructions” in
Account Opening form should be crossed as a precaution to prevent its subsequent
misuse while opening current Account in the name of individual(s).

(ii) Joint Accounts: “Account will be generally operated upon by and the balance /
securities, if any, will be payable/deliverable to:
 Either or Survivor
 Any one, or survivor
 Former and survivor
 Any two, three etc. jointly or survivors jointly or the last survivor
 The operational instructions must be authenticated by all the joint account
holders.

(iii) Sole proprietorship firm: The operational instructions should be,

 “The account will be operated upon by Shri.................as the Sole Proprietor in the name
of the
firm/on behalf of the firm.”

Cheque(s) to be signed in the name

and style as For and On Behalf of
(Firm’s name)

(Signature)
Sole Proprietor

(iv)Partnership Firm: “The account will be operated upon by any one of the partners
singly or any two or more partners jointly in the name of the firm/on behalf of the
said firm.”

Cheque(s) to be signed with stamp in the name and style as

For and On Behalf of

(Firm’s name)

(Signature)
Partner (s)

(v) Limited Company: The operational instructions should be as per board resolution
given at the time of account opening.

Cheque(s) to be signed with stamp in the name and

style as For and On Behalf of
(Company’s name)

(Signature)
Directors (s)/ Authorised Signatory

SB accounts
 Individuals can open SB Account singly or Jointly.
 RBI prohibits banks from opening of SB accounts of business entities
 RBI has allowed certain Government Departments and non-profit-organisations
to open SB Accounts
 Savings BMaximum balance to the credit of such account should not exceed at
any time 1,00,000/-.ank account in the sole name of ‘minor’ to be operated by
the minor can be opened provided the minor is 10 years of age or above
 Maximum balance to the credit of such account should not exceed at any time
1,00,000/-.
 However, for accounts of minors of 14 years and above, there is no limit
of maximum balance.
 No overdraft should be granted in Savings Bank accounts of minors held
either singly or jointly with guardian/s.
  Savings bank accounts of illiterate individuals who are otherwise capable of
entering into a contract can be opened
 For withdrawals, the illiterate person should come to the branch personally and
affix his/her thumb impression in the presence of an officer
 No cheque book facility should be extended in account of an illiterate person.
 Joint account of an illiterate can be opened with a literate close relative i.e.
father, son, husband, wife, mother and daughter but not two cousins
 There is no any legal bar in opening savings bank accounts of blind persons by
the banks as usual

Advantages and Importance of Savings Bank Deposits to Customers

 Saving account encourages savings habit among salary earners and
others who have fixed income.
 It enables the depositor to earn income by way of saving bank interest.
 Saving account helps the depositor to make payment by way of issuing cheques.
 It shows income of a salaried and other person earned during the year.
 Saving account passbook acts as an identity and residential proof of the account
holder.
 It provides a facility such as Electronic fund transfer (EFT) to other people’s
accounts.
 It helps to do online shopping via facility like internet banking.
 It aids to keep records of all online transactions carried on by the account holder.
 It provides immediate funds as and when required through ATM.
 Enables digital transaction 24*7*365 in ‘AAA’mode of bankin

 “Know Your Customer” (KYC) guidelines should be followed in respect of

opening of accounts and monitoring of newly opened accounts.
 CASA deposits of all banks and these, i.e. Current Accounts Savings Accounts
(CASA) Deposits are very importantperformance indicators for the Banks.
 The rates of interest paid to the customers by the bank on CASA Deposits are
very low i.e. NIL interest on Current Accounts and less rate of interest on
Savings Accounts.
 This brings down the overall cost of funds of the bank and gives them a lot of
flexibility to give credit/loans at lower rates and still earn a good Net Interest
Margin (NIM) and profitability.
 In deposit accounts where there are no operations continuously for two years,
should be treated as inoperative accounts.
 Previously interest rate on Savings Bank Deposit was being regulated by RBI.
 However, w.e.f. 25th October, 2011, RBI deregulated interest rate to be paid by
the banks on domestic SB Deposit vide circular No. DBOD.Dir.BC.42/13.03.00/
2011-12 dated October 25,2011.
 Banks generally impose a limit on the number of withdrawals that can be made
from the SB Account which varies from bank to bank.
 Most of the banks insist on monthly average balance (MAV) to be maintained in
the account failing which penalty is charged.
 Banks pay interest on Savings Account balance on daily product basis normally
at quarterly intervals.
  Mostly banks insist on monthly average balance (MAV) to be maintained in the
account failing which penalty is charged.

Time Deposit
 A time deposit receipt is not a negotiable instrument and, therefore,
cannot be transferred by endorsement by a depositor in favour of another.
 Interest on FDs is paid at quarterly intervals.
 The customer can choose to have the interest reinvested in the FD account.
 In this case, the deposit is called the Cumulative FD or compound interest deposit.
 For such deposits, the interest is paid with the invested amount on
maturity of the deposit at the end of the term.
 If the customer instructs that the interest to be paid every quarter/month, it
is credited to their Savings Account or sent to them by cheque.
 This is called Simple FD.
 Fixed deposit can be accepted by banks minimum for 7 days and maximum
for 120 months (10 years).
 Recently banks have come up with value added SB/current accounts and FD
linked accounts.
 They represent combination of two schemes, mostly a running account like
SB Account or Current Account which offer flexibility of using the balance in
FD accounts at the time of need.
 Recurring deposit (RD) accounts help customers with regular income to save
a fixed amount every month and at the same time earn interest at the rate
applicable to FDs.

 Balances in savings/current accounts which are not operated for 10 years, or

term deposits not claimed within 10 years from date of maturity are classified
as “Unclaimed Deposits”

Unit - 9. Important Retail Asset Products

 In the retail asset side, the important products offered by banks are Home
Loans, Educational Loans, Personal Loans and other retail loans developed for
specific customer segments.
 Each loan is designed for a specific purpose and need and structured in such a
way that the needs and requirements of different customers are taken care of.

Home Loans
 To purchase/construct house/flat.
 To renovate/extend/repair existing house/flat.
 To purchase a plot of land for construction of house.
 To acquire household articles along with the house/flat – for furnishing the
house/flat.
 Mortgage/Equitable Mortgage on land/flat/house
 Repayment (can be customized) : Highly flexible – maximum 30
years including moratorium period is considered by banks.
 Maximum moratorium period of 18 months in case of construction and 3
 months in case of purchase is allowed generally by banks

Auto/Vehicle Loans
 Purchase of two/four wheeler vehicles
 Banks generally adopt a model involving the manufacturer, dealer and
the financier (bank)
 Hypothecation of vehicle to be purchased out of Bank finance. Charge to be
registered with RTO.
 Repayment For Individuals – for new vehicles : 4 wheelers – Max. 7 years, 2
wheelers – max. 5 to 6 years, generally.
 For Corporate/Firms, etc. – Max. 5 years, generally.
 For Second Hand vehicles – Max. 3 years

Personal Loans
 Personal Loans are basically unsecured in nature and are backed by
personal enterprise/guarantees only
 Marriage expenses of self, children or a dependent.
 Medical Expenses incurred/to be incurred for self, spouse, children, other
dependents.
 For education of self/spouse/children.
 For repairs/renovation/extension of existing flat/ house building.
 For meeting social and financial commitments,
 Purchase of consumer durables, etc.
 Any other personal expenses of bonafide nature as approved by the Bank.

Educational Loans
 Education is the important tool for empowering youth
 To realize this, a simple and hassle free model educational loan scheme was
framed by IBA to make available educational loans to all the eligible students.
 To provide need based finance to meet the expenses for pursuing higher
studies to eligible students
 Maximum upto 10 Lakh – Studies in India
 Maximum upto 20 Lakh – Studies abroad
 Margin : Upto 4 Lakh Nil, Above 4 Lakh – Studies in India 5%, Studies abroad 15%
 Loan upto 7.5 lakhs is eligible for the Credit Guarantee coverage
 Security :
 Upto 4 Lakh No security; Parents to be joint borrower(s)
 Above 4 Lakh upto 7.5 Lakh – besides the parent(s) as co-borrower,
collateral security in the form of suitable third party guarantee will be taken.
 Above 7.5 Lakh – Parent(s) to be joint borrower(s) & Tangible
collateral security acceptable to the bank
 Repayment Holiday/Moratorium: Course period + 1 year
 Insurance : Mandatory to arrange for life insurance policy on the
students availing Educational Loan- discretion of individual banks

Eligible expenses for loan

 Fee payable to college/school/hostel - Fees as approved.
 Reasonable for lodging/boarding
 Examination/Library/Lab. fee - Actual
 Travel expenses/passage money for studies abroad - One way (outward)
 Insurance premium for student borrower - Actual
 Caution deposit, Building fund/refundable deposit - Not to exceed 10%
of the total tuition fees.
 Purchase of books/equipment/instruments/ uniforms (a)
 Purchase of computer at reasonable cost (b)
 Any other expense – viz., study tours, project work, thesis, etc. (c)
 (a)+(b)+(c) - A realistic assessment may be made by the banks and then fix a
maximum of 20% of the total tuition fees

 Banks process and sanction retail loans in two different ways.

 They sanction retail loans on a standalone basis (through the branches) or
through a centralised model (through retail loan processing hubs/centres).
 Each model has its own advantages as well as disadvantages.
 In the branch model, personal touch is more, in the centralised model, more
professional approach is followed.

 Standalone model for retail loan processing refers to processing of retail loans
independently at the branch level, based on the discretionary powers
 Centralised Model for retail loans processing refers to processing of loans at a
centralised place depending upon the geography of branches. Banks adopt
different centralised models for processing of retail loans. Some of the names,
Banks give to these retail loans processing centres are :
 Retail Loan Factory
 Retail Loan Hub
 Retail Loan Processing Centres
 Retail Asset Processing Centres
 Retail Loan Branches

 The introduction of RLPCs has definitely helped banks to improve the quality of
appraisal and also has reduced the gaps and deficiencies in the documentation
side.

Unit - 10. Credit and Debit Cards

Credit Cards

 Credit Card is plastic money with pre-set limits based on the credit score of the
customer
and can be used across merchant establishments for payment of purchases and in ATMs for
withdrawal of cash.
 The operational process of a credit card starts from the card issue, matures into
card usage and closes with the payment of credit card dues.

In the case of a credit card, parties to the ‘complete cycle of transaction’ are five in
number.
 The Customer (cardholder)
 The Retailer
 The Acquiring bank
 The Clearing Network
 The Issuing bank

 Banks issue different types of cards with targeted volumes and business
objectives after proper screening of applicants, arriving at the credit score and
issuing the relevant card matching the credit score with fixing of appropriate
limit.
 The card issue will be justified if only the card is used frequently upto the limit
made available.
 Payments made by the customers for credit card usage are the deciders for
revenue generation.
 The payment may be made one time or in installments subject to the minimum
payment due every month.
 More the credit limit is used; more will be the revenue but is subject to
payment without defaults and delinquencies.

 Banks issue different types of cards like Classic, Silver, Gold, Platinum, Titanium,
etc., in collaboration with card issuers like Visa, Master Card and RuPay and
they mainly do it in two ways; proprietary cards and co-branded cards.
 While proprietary cards are issued by banks generally, co-branded cards are
issued with specific tie ups with other institutions like petroleum companies,
travel companies, retail stores with the objective of focused marketing and
extra benefits to the card user for using the facilities of the tied up institutions.

 NPCI offers ‘RuPay Credit card’, ‘RuPay Debit card’, ‘RuPay Prepaid card’ &
‘‘RuPay Global card’
 The variants of RuPay Credit card are:
 ‘RuPay Select’

 RuPay Platinum’
 ‘RuPay Classic’
 RuPay is the first of its kind global payment network of India with wide
acceptance at ATMs, POS devices and e-commerce websites across India.

 Banks advise the credit card users about the terms and conditions of the credit
card usage and the standard terms used in the payment mechanisms.
 These terms like Annual Fee, Minimum Payment Due, Credit Limit, EMI
Payments, Interest and method of interest calculation, Penalties, etc., have
 their own implications in the credit card payments.

Eligibility for credit card

 At least 18 years of age
 Compliance of KYC norms
 A regular source of income to repay one’s credit card bills (whether
salaried or self- employed)
 A good credit history

Charges
i. Finance Charges
Illustration
 Balance outstanding as on the statement date – 20,000
 Balance is not paid on the due date.
 Interest – 3.5% per month
 Daily Interest Charge for the above balance is
 = 20,000 × (3.5% × 12 months)/365 = 23.01
 Total interest payable by the next statement cycle (after 30 days)
 = 23.01 × 30 = 690.41 + Tax

ii. Minimum Amount Due

 5% of the statement outstanding, or
 Sum total of all installments billed, interest, fees, other charges, amount
that is over limit and 1% of the principal, or
 250/- in case of default or if the statement balance is less than 250/-,
the entire outstanding amount has to be paid.

iii. Maximum Interest Free Period

The period depends on the type of card and may vary from 20 days to 50 days
depending on the card issuer

iv. Annualised Percentage Rate (APR)

Illustration
 Monthly retail interest of 3.1% p.m. is annualised to arrive at an APR of 37.20%
 Cash Transactions will attract an interest rate of 3.49% and APR of 41.88%.
 The interest rate for retail transactions is variable and will vary between
2.49% p.m. (APR of 29.88%) and 3.49% p.m. (APR of 41.88%).
 In case of EMI Cards, monthly interest rate of 2% is annualised (APR of
24%) on transactions greater than ₹2,000/-.

v. Other Charges & Penalties

 Cash Advance Transaction Fee - 2.5% (Min. 300) of the cash amount
 Card Replacement (lost/stolen/re-issue/any other) - 100/250 depending on the
card
 Overdue Penalty/Late Payment Fee - 15% of Total Amount Due (Min. 350, Max.
750)
 Over Limit Penalty - 600/-
  Cheque Return/Dishonour Fee - 500/-

BharatQR
 Bharat QR is integrated with BHIM QR/UPI (Unified Payment Interface)
credentials from September 2017.
 It is used for P2P or P2M transactions using Virtual Payment Address (VPA).
 Parties of QR code Payment System
 Acquirer- merchant on-boarding, merchant management, and mobile app
solutions
 Issuer- consumer on-boarding and consumer mobile app solutions
 Transaction processing Engine (NPCI) - end transaction routing engine.

Features of Bharat QR code transactions

 Low-cost infrastructure
 Remote management of merchant and customers
 Interoperable QR code
 Push based transaction
 No need to store any charge slip copy by merchant
 Instant payment notification to merchant and consumer
 Transaction history is available in the app
 Non disclosure of card details by consumer to merchant

Debit Cards
 The characteristics of Debit Cards differ vastly from Credit Cards.
 Credit Cards define the concept of “Buy Now, Pay Later” but Debit Cards
explain the concept of “Buy Now and Pay Now”.

 The important aspect of Debit Card is that at the point of purchase itself,
the payment is made directly from their account balances.
 The details of the account are embedded in the debit card and can be used
at both merchant locations through a PoS Machine for purchases made and
also in ATMs for withdrawal of cash.
 Debit Cards are issued when account is opened with the bank and had
become an essential value addition for Savings Bank Account and a part of
the core product.

Other Cards
 A charge card allows customers to defer the costs of purchases made on the
card until the end of the payment cycle
 Prepaid Cards offer a service to the unbanked audience and act as an
extension of the card market
 Other pre-paid debit cards are issued both in rupees for various domestic
purposes and forex cards with pre denominated forex loaded in the cards
for travellers going abroad.
 Prepaid cards are issued by the banks/non-banks against the value paid in
advance by the cardholder and stored in such cards which can be issued as
smart cards or chip cards, magnetic stripe cards, internet accounts, internet
 wallets, mobile accounts, mobile wallets, paper vouchers, etc.
 As per extant instructions, the maximum value that can be stored in any
prepaid Payment card (issued by banks and authorized non-bank entities) at
any point of time is
₹1,00,000/-.
 Prepaid Payment Instrument (PPI) facilitate purchase of goods and services,
including financial services, remittance facilities, etc., against the value
stored on such instruments
 PPIs are classified under three types viz.
 Closed System PPIs
 Semiclosed System PPIs
 Open System PPIs

Unit - 11. Remittance Products

 Remittance products have evolved over a period from physical movement of

remittance instruments to instant electronic transfer of remittances across the
country and globe.
 Cheques, Demand Drafts, Bank Orders, Telegraphic Transfers are some of
the earliest remittance products that constituted the core remittance
mechanism across banks.
 But the invasion of technology in banking has permeated into the remittances space
also.
 Technology brought about a paradigm change in the whole remittance space
with newer, speedier and innovative remittance product in banking without
physical presence of the remitter, abolishing the time zones and geographic
boundaries.
 Most of the new generation remittance products are relevant in retail banking.

National Electronic Funds Transfer (NEFT)

 NEFT is a nation-wide payment system facilitating one-to-one funds transfer.
 NEFT operates on a Deferred Net Settlement (DNS) basis which settles
transactions in batches.
 For Non-Bank account holders, cash remittances will be restricted to a
maximum of less than 50,000/- per transaction.
 The NEFT system also facilitates one-way cross-border transfer of funds
from India to Nepal. This is known as the Indo-Nepal Remittance Facility
Scheme
 Maximum amount per transaction is limited to below 50,000/- for
remittances to Nepal under the Indo-Nepal Remittance Facility Scheme.
 Online NEFT transactions can be performed 24*7, 365 days
 There are 48 half-hourly batches every day.
 The settlement of the first batch will commence at 12.30 a.m (after
midnight) and the last batch will end at 12.00 a.m. (midnight) hours
 The transactions are settled in B+2 timings and hence the beneficiary can
expect to get credit for the NEFT transactions within two business hours
Charges for NEFT (No charges for NEFT transactions initiated online via internet/
mobile banking portals by Savings Account holders)

 Inward transactions at destination bank branches (for credit to beneficiary

accounts)
• Free, no charges to be levied on beneficiaries
 Outward transactions at originating bank branches – charges applicable to the
remitter
• For transactions up to 10,000 : not exceeding 2.50 (+ Applicable GST)
• For transactions above 10,000 up to 1 lakh: not exceeding 5 (+ Applicable GST)
• For transactions above 1 lakh and up to 2 lakh: not exceeding 15 (+ Applicable
GST)
• For transactions above 2 lakh: not exceeding 25 (+ Applicable GST)

Real Time Gross Settlement System (RTGS)

 Retail electronic and card based payments registered a quantum jump
mainly due to introduction of RTGS (Real Time Gross Settlement) and NEFT
(National Electronic Funds Transfer).
 The concept of electronic remittance mechanism is picking up fast over the
past two years and this trend offers potential to package a remittance
product as a add on in their retail banking package to the customers.
 Real Time Gross Settlement System (RTGS) has drastically changed the
complexion of the remittances scenario in financial services.
 This global practice was introduced in India for changing the model of
remittances and to bring in efficiency in settlement of transactions on a real
time basis.
 The impact and growth of RTGS in the past two years are demonstrated the
effectiveness of the product.
 The impact and growth of RTGS in the past two years is an indication of the
acceptance and growth of the product as an effective and speedy
remittance tool, though it is skewed more on the corporate and interbank
side than on the retail side.
 RTGS as a funds transfer mechanism has revolutionised the concept of
remittances though it is more relevant for big ticket transactions and
applicable in a limited way for retail banking.
 The minimum amount to be remitted through RTGS is 2 lakh. There is no
upper ceiling for RTGS transactions.
 W.e.f. 14th Dec.2020, RBI has made available RTGS services 24*7* 365 days.
 W.e.f.01.07.2019, RBI has waived the processing charges levied by it for
RTGS transactions. Banks may pass on the benefit to customers.

Service charges levied by the banks

 Inward transaction: Free, no charge to be levied
 Outward transaction:
 2/- lac to 5/- lac :- not exceeding 24.50/- (exclusive of taxes, if any)
 Above 5/- lac: not exceeding 49.50 (exclusive of taxes, if any)
Electronic Clearing Services (ECS)
 Electronic Clearing Services (ECS) is another payment mechanism in which
the payments are authorized for a specific period and amount through a
mandate to the beneficiary.
 ECS is a convenient and flexible payment option for both the parties
concerned, i.e., the issuer and the beneficiary.
 National Automated Clearing House (NACH) has taken place of ECS on May 1,
2016.
 NACH, which was initially available on bank working days, is now made
available on all days of the week beginning August 1, 2021, in order to
improve client convenience and leverage the 24x7 availability of RTGS.

 National Payments Corporation of India (NPCI) has implemented “National

Automated Clearing House (NACH)” for Banks, Financial Institutions,
Corporate and Government, a web based solution to facilitate interbank,
high volume, electronic transactions which are repetitive and periodic in
nature.
 Mobile banking has revolutionized the payment system by the introduction
of mobile application based payment services such as UPI service and BHIM.

There are three broad categories of ECS Schemes

 Local ECS is operating at 81 centres/locations across the country
 Regional ECS (RECS) is operating at 9 centres/locations at various parts of the
country
 National ECS (NECS) is the centralized version of ECS

Aadhar Enabled Payment System (AePS)

 Aadhar Enabled Payment System (AePS) allows online interoperable
financial transaction at PoS (Point of Sale/ Micro ATM) through the Business
Correspondent (BC)/Bank Mitra of any bank using the Aadhaar
authentication.
 Services Offered by AePS
• Cash Withdrawal
• Cash Deposit
• Balance Enquiry
• Aadhaar to Aadhaar Fund Transfer
• Mini Statement

Unit - 12. Digitisation of Retail Banking Products

 Technology is the foundation on which the retail banking edifice is built across the
globe.
 Technology is the enabler for building and translating a customer data base
into retail banking business.
 Banks adopt different technology platforms in line with the global trends.
 New generation private sector banks were started with technology advantage
 of a single server environment.
 PSB banks also have re-engineered their technology initiatives and started
implementing core banking solutions networking the customers and accounts in
a single platform.
 Most of the PSBs have completed the core banking solutions process while in a
few banks the level of implementation is in various advanced stages.
 There are basically four approaches followed by retail banks in integrating
technology with retail banking processes. They are:
 Horizontally Organised Model where individual process platform supports
one product only. The sub data in the model are not shared with other
products and product platform.
 Vertically Organised Model where functionality is provided across all
products. In this model, customer information is centralised. Centralised
customer information builds common origination and servicing processes
across all its retail banking products.
 Predominantly Horizontally Organised Model with some modularization
within a product oriented feedback. Customer data integration is available
to a certain extent for other products.
 Predominantly Vertically Organised Model is a hybrid model that offers
common information for most of the related services. The basic information
is available across products for common services to the various products.

 Technology initiatives were adopted by banks in different ways.

 Some banks had implemented through in house resources for
development and implementation while some other banks had done it
through outsourced vendors.
 Some banks followed a blend of proprietary as well as outsourced model.
 Scalability and Sustainability are the main issues in all these models.

 The models outsourced as well as in-house developed offer various customer

analytics solutions for the banks to help them in customer identification, need
mapping and offering the right products and services.

 Banking industry is in the path of growth leveraging Information Technology in a

big way in all its strategic, functional and operational processes and
applications.

IDRBT conceptualized, designed and developed IT products viz.

 Indian Financial Network (INFINET)
 Structured Financial Messaging System (SFMS)
 National Financial Switch (NFS)
 Indian Banking Community Cloud (IBCC)
These are extensively used in banking particularly in retail segment.

Indian Financial Network (INFINET)

 Funds transfer under NEFT and RTGS is being done through INFINET.
 The advantages of INFINET being:
  Banking and Financial services independent of their location.
 Extended banking business reach and hours as well as increased business
volume and better fund utilisation, thereby facilitating reduced operational
cost.
 Increased security.
 Reduction/elimination of payment risks.
 Efficient Housekeeping.
 Improvement in decision making process.
 Innovative customer-oriented delivery mechanisms.

Structured Financial Messaging System (SFMS)

 Structured Financial Messaging System (SFMS) is a secure messaging
standard developed to serve as a platform for intra-bank and inter-bank
applications.
 It is an Indian standard similar to Society for World- wide Interbank Financial
Telecommunications (SWIFT)
 The inter-bank messaging part is used for applications like Electronic Funds
Transfer (EFT), Real Time Gross Settlements System (RTGS), Delivery Versus
Payments (DVP), Centralised Funds Management System (CFMS), etc.

National Financial Switch (NFS)

 NFS ATM network, was launched by IDRBT on August 27, 2004.
 This was taken over by National Payments Corporation of India on December 14,
2009
 As on 30th April, 2022, there were 1212 members that include 112
Direct member banks, 1053 Sub member banks, 43 RRBs and 4 WLAOs
using NFS network connected to
2.58 lac ATMs
 Each member joining the NFS network would have to pay a one-time
subscription fee of 3,00,000(three lakh) plus applicable taxes
 In the NFS sponsorship model, the sponsor bank will have to pay a one-
time fee of 6,00,000 (six lakh) plus applicable taxes

Services offered by NFS

 Cash Withdrawal
 Balance Enquiry
 PIN Change and Mini Statement
 Interoperable Cash Deposit (ICD)
 Mobile Banking Registration (MBR)
 Card-to-Card Fund Transfer (C2C)
 Cheque Book Request (CBR)
 Statement Request (SR)
 Aadhar Number Seeding (ANS)

Indian Banking Community Cloud (IBCC)

 IDRBT has setup a pilot approach to building Community Cloud for the
Indian Banks to provide Infrastructure as a Service.
  Cloud computing technology provides three fundamental services
 Software as a service (SaaS): SaaS is an “on-demand software” service
where the required software is provided to the end users as an application
to run on their systems through Internet.
 Platform as a Service (PaaS): In PaaS, a computing environment is provided
as a service to the customers to build their own applications that run on the
provider’s infrastructure.
 Infrastructure as a Service (IaaS): A pool of equipment including servers,
storage systems, network, data centres, etc., provided as a service to the
customers where providers can handle customers’ application workloads is
referred as IaaS.

Unit - 13. Role of Al and Technology in Retail Banking

 The term “Banking Technology” refers to the use of sophisticated information

and communication technologies together with computer science to enable
banks to offer better services to its customers in a secure, reliable, and
affordable manner, and sustain competitive advantage over other banks.
 Banking Technology is not a single, stand-alone discipline, but a confluence of
several disparate fields such as finance (subsuming risk management),
information technology, communication technology, computer science and
marketing science.
 Technology is used to interchange information and communication technology
together with computer science.
 Information technology has not only helped banks to deliver robust and reliable
services to their customers at a lower cost, but also helped banks make better
decisions.
 There have been a lot of advancements in the banking sector in the last over 50 years
or so.
 The first most notable technological advancement in the financial industry was
the advent of the credit card in 1950.
 In 1950, Dinner’s Club introduced the first universal credit card, a portable
payment solution that could be used at numerous member establishments.
 During 1960s, the world was introduced to the first ATM.
 In the 1980s, with digital technology well underway, the “term ‘online’ which
referred to the use of a terminal, keyboard and TV to access the banking
system using a phone line” gained popularity.
 As online banking gained momentum, the first commercially available computer
tablet, manufactured by Samsung in 1989, brought a new wave of convenience
in retail banking.
 The early 2000s, with the advent of wireless technology and the wide adoption
of smartphones, brought the next major shift in the financial industry—mobile
banking.
 About seven years later in 2011, Google introduced Google Wallet, a mobile
payment technology meant to rival credit cards.
 Heading the charge in 2015, “Bank of America introduced fingerprint
authentication and Touch ID,” making it easier and safer for people to log into
 their mobile banking apps.
 It’s now easier than ever before for financial institutions to access and act on
their wealth of data to help customers make well-informed financial decisions.
 Once Indian IT services companies started booming, it was just a matter of time
before Indian banks whole heartedly embraced technology.
 As banks adopt more technology, two things stand out-using less paper and
doing transactions wirelessly.
 However, there appears to be a lot of challenges towards adoption of
technology in banking in India.
 Commercial Banks in India are now becoming a one-stop Supermarket.

 Technology is the enabler for building and translating a customer data base into
retail banking business.
 The implementation of core banking has directly increased the chances of
availability of customer data base across products and has increased the scope
for cross selling and up selling.
 Artificial Intelligence or AI refers to software technologies that make a robot or
computer to act and think like a human.
 Artificial intelligence (AI), from time to time also called machine intelligence is
simulation of human intelligence in machines.
 Artificial intelligence consists of generally two fundamental ideas.
 First it involves studying human brains like how their thought process works and
secondly it helps representing those processes through machine learning.
 AI is the simulation of human intelligence which helps to build smarter
machines capable of doing human work in a smart way.
 Banking sector is becoming one of the fast adopters of AI and just like
other segments, banks are exploring and implementing the technology in
various ways.

Why AI in Banking Industry?

 Enormous challenges in the banking sector.
 Thrust for a process-driven operation.
 Initiate self-service in the branches.
 Customer desire to deliver different personalized solutions.
 Build functional efficiencies.
 Escalating the productivity of employees.
 To support focus on productivity and efficiency.
 Visualization to extend human function with the use of robotics tools.
 To minimize the chances of fraud and scam.
 Manage an immense volume of data at record speed and gain valuable insights.
 To carry out effective decision-making.

Benefits of Artificial Intelligence Technology in Banking And Finance

 Personalized Financial Services
 Smart Wallets
 Underwriting
 Voice Assisted Banking
  Data-driven AI applications for lending decisions
 Customer support
 Digitalization instead of branch lines
 Blockchain hastening payments

Unit - 14. Recovery of Retail Loans

Repayment in Retail Loans

Holiday period/Moratorium period

A moratorium period/holiday period is a time allowed for the borrowers, during the
loan term, when they are not required to make any principal repayment.

Types of monthly installments

 Bullet payment: In this case, the loan amount with interest is paid in a single
payment at the end of the loan period.
 Fixed instalment loan: This payment is in equal monthly instalments.
 Equated Monthly Installments (EMI): Recoveries are effected in retail loans
by Equated Monthly Installments or simply EMIs.

 Recovery is one of the most important elements of retail banking which decides
its success as a segment.
 Since, retail asset base is well spread out with a large number of customers,
monitoring and follow up of all the retail assets for proper servicing is a must
for retail bankers to keep the asset book healthy.

 Credit monitoring process is a scientific as well as an essential tool for

maintaining the quality of retail assets.
 As discussed above it has to do designed in such a way that it addresses both
genuine defaulters as well as wilful defaulters.

Genuine Defaults
 In genuine defaults, the customers fail to repay the EMIs due to personal
setbacks, job losses, unforeseen medical expenses, etc., in case of
borrowers having a steady salary income.

Wilful Defaults
 Default in payment/repayment obligations to the lender even when
the unit has capacity to honour the obligations.
 Default in meeting payment/repayment obligations to the lender and has
diverted the funds for other purposes not in terms of sanction.
 Default in meeting its payment/repayment obligations to the lender and has
siphoned off the funds and the funds are not available with the unit in the
form of other assets.

 Defaulted in meeting its payment/repayment obligations to the lender and

has also disposed off or removed the movable fixed assets or immovable
 property given for the purpose of securing a term loan without the
knowledge of the bank/lender.

Diversion of funds
 Utilization of short-term working capital funds for long-term purposes not in
conformity with the terms of sanction.
 Deploying borrowed funds for purposes/activities or creation of assets other
than those for which the loan was sanctioned.
 Transferring borrowed funds to the subsidiaries/Group companies or other
corporates by whatever modalities.
 Routing of funds through any bank other than the lender bank or
members of consortium without prior permission of the lender.
 Investment in other companies by way of acquiring equities/debt
instruments without approval of lenders.
 Shortfall in deployment of funds vis-à-vis the amounts
disbursed/drawn and the difference not being accounted for.

Siphoning of Funds
 The term ‘siphoning of funds’ should be construed to occur if any funds
borrowed from banks are utilised for purposes unrelated to the operations
of the borrower, to the detriment of the financial health of the entity or of
the lender.

A retail asset becomes non-performing when it ceases to generate income for the
bank. A nonperforming asset (NPA) is a loan or an advance where:
 Interest and/or instalment of principal remain overdue for a period of
more than 90 days in respect of a term loan
 The account remains ‘out of order’, in respect of an Overdraft/Cash Credit
(OD/CC) for a period of more than 90 day
 The bill remains overdue for a period of more than 90 days in the case of
bills purchased and discounted.

Asset Classification
 Substandard Assets
 Doubtful Assets
 Loss Assets

 Substandard asset: A sub-standard asset is one, which has remained NPA for a
period less than or equal to 12 months.

 Doubtful Assets: An asset is required to be classified as doubtful, if it has

remained NPA for more than 12 months.
 Doubtful-I: An asset which has remained in Doubtful category up to 12 months
 Doubtful- II: An asset which has remained in doubtful category for more
than 12 months and up to three years.
 Doubtful- III: An asset in Doubtful category for more than three years.
  Loss Assets: An asset is considered uncollectible and of such little value that its
continuance as a bankable asset is not warranted although there may be some
salvage or recovery value.

Provisioning Norms
Sub-Standard (Secured) - 15%
Sub-Standard (Unsecured) - 25% (other than
infrastructure loans) Sub-Standard (Unsecured) - 20%
(infrastructure loans)

Doubtful-I (Secured) -
25% Doubtful-I
(Unsecured) - 100%
Doubtful-II (Secured)
- 40% Doubtful-II
(Unsecured) - 100%
Doubtful-III (Secured)
- 100% Doubtful-III
(Unsecured) - 100%

Loss - 100%

 The recovery processes are well defined in banks with step by step approach for
following up the accounts in different stages of recovery.
 Recovery Policies are implemented by banks in a professional way for effective
recovery of dues and overdues and non-performing assets that may erupt due
to genuine defaults as well as wilful defaults.
 Recovery process is a scientific as well as an essential tool for maintaining the
quality of retail assets.
 Giving Notice to Borrowers
 Repossession of Security
 Valuation And Sale of Proerty
 Opportunity for the Borrower to Take Back the Security

The major features of recovery policy by banks are summarized below:

 The debt collection policy of the bank is built around dignity and respect to
customers.
 The repayment schedule for any loan sanctioned by the bank will be fixed
taking into account paying capacity and cash flow pattern of the borrower.

 The bank will explain to the customer upfront the method of calculation of
interest and how the Equated Monthly Installments (EMI) or payments
through any other mode of repayment will be appropriated against interest
and principal due from the customers.

The bank would expect the customers to adhere to the repayment schedule agreed to.
 The Bank Security Repossession Policy aims at recovery of dues in the event
 of default and is not aimed at whimsical deprivation of the property.
 Debt Recovery Tribunals (DRTs) are constituted across the country for
settlement of dues of financial institutions. DRTs can appoint Receivers,
Commissioners, pass ex-parte orders, ad- interim orders, interim orders
apart from powers to Review its own decision and hear appeals against
orders passed by the Recovery Officers of the Tribunal.
 By initiating SARFAESI action security assets can be enforced without
intervention of court.
 Recovery of NPAs through the award of Lok Adalat is the easiest, cheapest
and fastest mode.
 One-time Settlement (OTS) can be put through Lok Adalat, so that in case of
default in payment as per OTS, the award could be executed by the Court,
as in the case of execution of a decree.

SARFAESI ACT
 Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest (SARFAESI) Act was put in place to allow banks and FIs to
take possession of securities and sell them.
 The act envisaged the formation of asset reconstruction companies
(ARCs)/Securitisation Companies (SCs).
 The Act provides alternative methods for recovery of NPAs, namely:
 Securitisation
 Asset Reconstruction

Debt Recovery Tribunals (DRTs)

 DRTs are governed by provisions of the Recovery of Debt Due to Banks
and Financial Institutions Act, 1993, also popularly called as the RDB Act.
 Each Debt Recovery Tribunal is presided over by a Presiding Officer.
 The Presiding Officer is generally a judge of the rank of Dist. & Sessions Judge.
 The Presiding Officer of a Debt Recovery Tribunal is the sole judicial
authority to hear and pass any judicial order.
 Each Debt Recovery Tribunal has two Recovery Officers.
 DRTs can appoint Receivers, Commissioners, pass ex-parte orders, ad-
interim orders, interim orders apart from powers to Review its own decision
and hear appeals against orders passed by the Recovery Officers of the
Tribunal.

Recovery Agents
 PSBs administer recovery management through their own staff in case of
retail loans, private and foreign banks outsource their recovery process and
entrust the same to Recovery Agents for end to end recovery management
when the accounts become delinquent.
 Reserve Bank has requested the Indian Banks' Association to formulate, in
consultation with Indian Institute of Banking and Finance (IIBF), a certificate
course for Direct Recovery Agents with minimum 100 hours of training.
 Once the above course is introduced by IIBF, banks should ensure that over
a period of one year all their Recovery Agents undergo the above training
 and obtain the certificate from the above institute.

Taking Possession of Property Mortgaged/Hypothecated to Banks

The terms and conditions of the contract should be strictly in terms of the Recovery
Policy and should contain provisions regarding :
 notice period before taking possession
 circumstances under which the notice period can be waived
 the procedure for taking possession of the security
 a provision regarding final chance to be given to the borrower for
repayment of loan before the sale/ auction of the property
 the procedure for giving repossession to the borrower
 the procedure for sale/auction of the property.

Banks are encouraged to use the forum of Lok Adalats for recovery of personal
loans, credit card loans or housing loans upto Rs. 20 lakhs.

Unit - 15. Management Information Systems

Management Information System (MIS) consists of three words,

 Management
 Information
 System

Main Elements of MIS

 An integrated system to give service to many users.
 The computer system linking some of information software via a database.
 User-machine interface responding to the temporary and immediate searches.
 Presenting the information to all management level.
 Supporting the operation and decision making.

 Broadly speaking, two main roles are played by MIS in decision making by the
managers.
 First it helps the managers to take decision based on the information being prepared.
 Second when the decision making and decisions are fixed and only the input
data change, it acts as a suitable repeat to support different types of managerial
decisions.
 It is inherent to state that decision making is an integral part of any business.
 MIS provides a fitting platform for good decision making.
 Essentially, without the established systems of getting information in MIS, it
would be extremely difficult for organizations to make their decisions.

The major drawbacks and the reasons of failure and using MIS in public
organizations Humanistic factors
 The lack of understanding of the needs of the users by designers (the
lack of correct definition of the needs and their analysis).
 The lack of information of the managers and users as they don’t know
 exactly what they want and what their information needs are.
 The lack of participation of the managers and users in system design.
 The lack of understanding of the managers of software and information systems.
 The lack of accuracy in the data collected.

Environmental factors
 The lack of procedures and methodology and stages of creating the system.
 The lack of suitable consultants for designing the system and software.
 The lack of evaluation of environmental aspects in management information
systems.
 The lack of serious consideration and adequate investment in this regard.

Organizational factors
 The lack of good conditions for participation and collaboration of the
managers, users and system directors.
 The lack of existing systems and methods analysis before the system design.
 The lack of evaluation of the existing power.
 Bad condition of educating the specialized forces.
 Unsuitable implementation of the system.
 Inadequate education of the users.
 Inadequate and incomplete documentation.

 The unique service in banking mostly means solving the customers’ problems in
the financial matters, and the single most widely used measure of quick service
is the elapsed time of transaction execution.
 Points to be taken care of while designing an MIS will differ from bank to bank
depending upon goals and objectives, quality of staff, technological
development, customer segmentation and so many factors.
 The factors affecting existing issues related to MIS may be broadly divided into
humanistic, environmental and organizational factors.
 The basic nature, constitution, culture, goals and objectives differ from
organization to organization.
 Accordingly, the MIS related issues are different for each organization and it is
too difficult to frame and provide common solutions which may be found
suitable for every organization.

Unit - 16. Securitization

 Securitization is the process of converting and breaking definable asset classes

into tradable units and selling to others through a mechanism called as Special
Purpose Vehicle (SPV).
 Through the securitization process, the assets are removed from the balance
sheet and the funds generated through securitization can be ploughed back for
further asset expansion.
 Performing assets and Non-performing assets are securitised.
 But only eligible assets can be securitised - eligibility criteria prescribed by RBI.
 In case of securitization of performing assets Minimum holding period and
 minimum retention requirements are also prescribed.

 As per the guidelines of RBI, banks shall, with the approval of their Board,
identify and list internally the specific financial assets identified for sale to other
institutions, including ARCs, at least once in a year, preferably at the beginning
of the year.
 The assets identified for exit shall be listed for the purpose of sale. Banks may
offer the assets for sale to ARCs and other banks/NBFCs/FIs, etc.
 Participation of more buyers will result in better price discovery.
 With effect from April 1, 2017, where the investment by a bank in SRs backed
by stressed assets sold by it, under an asset securitization, is more than 50
percent of SRs backed by its sold assets and issued under that securitization,
need to keep provision on the assets.
 With effect from April 1, 2018, the above threshold of 50 percent will stand
reduced to 10 percent.

 Indian Banks Association (IBA), have re-floated an old idea of creating a ‘bad
bank’. The Economic Survey 2017, suggested Public Sector Asset Rehabilitation
Agency or PARA, to buy out the NPAs of high value from Indian banks.
 A bad bank is technically an asset reconstruction company that buys bad
loans(NPAs) from the commercial banks at a discount and tries to recover the
money from the defaulter by providing a systematic solution over a period of
time.
 The idea of a bad bank seeks to reduce the NPAs in the banking sector and then
revive lending and credit growth. NARCL is new bad bank.
 IDRCL will professionally manage the assets acquired by NARCL for resolution.

Advantages of Securitization
 With its support, banks can keep loans off their balance sheet, thus reducing
need for additional capital
 It is an alternative form to banks and financial institutions of funding risk
transfer and capital market development
 It helps reduce lending concentration and improve liquidity

 Supports attainment of funds at lower costs since these are isolated

from potential bankruptcy risk of originator
 Provides better matching of assets and liabilities and development of
long-term debt market
 Provides diversified pool of uniform assets to banks and financial institutions
 Supports converting non-liquid loans or assets into liquid assets or
marketable securities.
 Facilitates transfer of funds from less efficient debt market to more
efficient capital market through securitization.

Assets Eligible for Securitization

Subject to this condition, all on-balance sheet standard assets, except the following,
will be eligible for securitization by the originators
  Revolving credit facilities (e.g. 2 Cash Credit accounts, Credit Card receivables, etc.)
 Assets purchased from other entities
 Securitization exposures (e.g., Mortgage-backed/asset-backed securities)
 Loans with bullet repayment of both principal and interest*

Securitization and concept of Bad Bank in India

IBA have re-floated an old idea of creating a ‘bad bank’. A bad bank is technically an
asset reconstruction company that buys bad loans(NPAs) from the commercial banks
at a discount and tries to recover the money from the defaulter by providing a
systematic solution over a period of time.
Rationale of Bad Bank
 Easing Provisioning Requirement
 Re-assuring Trust
 Concerns About IBC Code

National Asset Reconstruction Company Limited (NARCL)

NARCL (Bad Bank) has incorporated in July 2021 with authorized capital of 2750 Crore
and paid up capital of 1409.05 Crore.
RBI has given license to NARCL on 4th October, 2021 under section 3 of SARFAESI Act
2002. Public Sector Banks will have 51% shareholding in the company and balance by
other financial institutions and investors.

India Debt Resolution Company Limited (IDRCL)

IDRCL has been incorporated on 3rd September, 2021 with authorized capital of 50Cr
and paid- up capital 20 Cr.
State owned Banks will have 49% stake and balance with private sector lenders.