RETAIL BANKING

RETAIL BANKING

Acknowledgement

On the Event of completion of my project "Retail Banking". I take the opportunity to express my deep sense of gratitude towards all those people without whose guidance, inspiration and timely help, this project would have never seen the light of day.

Any accomplishment requires the effort of many people and this project is not different. I find great pleasure in expressing my deepest sense of gratitude towards my Project guide Prof. Allan D'souza whose guidance and inspiration right from the conceptualization to the finishing stages proved to be very essential and valuable in the completion of the project.

INTRODUCTION

"We don't want satisfied customers...we want delighted customers." It is the new marketing mantra today. The same applies to banking as well. Retail banking and Rural banking were once considered as taboos by the leading foreign and domestic banks. But cut-throat competition, innovation and advanced technology have altogether changed the faced of banking sector. Now all banks have recognized the importance of retail banking.

Retail banking is that part of a bank that offers products and services primarily to individual customers, professional, self-employed individuals or small businesses. The focus is on creating products and services that meet the needs of the target customers and are profitable for the bank as well.

The approach to retail banking products is more is more on a mass production basis wherein all risk and operations are based on and geared to cater to a large number of customers. This is therefore, significantly different from corporate banking or wholesale banking where focus is on large sized customer accounts rather than large numbers of customers.

Understanding retail banking will help in servicing your customer better as it would give you a perspective and insight into how such products are structured and specific requirements for each set of products. This would help you advice your customer in a more informed manner besides making you a more informed consumer.

With the advent of ATMs, 'Anytime banking' has come into picture. Satellites and telecom networks across the world have made 'Anywhere banking' possible. Now it is the turn of 'Anyhow banking', and the leading bank of the next century will be the one which has all these three A's.

WHAT IS RETAIL BANKING?

Retail banking is however; quite broad in nature it refers to the dealing of commercial banks with individual customers, both on liabilities and assets sides of the balance sheet. Fixed current/savings accounts on the liabilities side; and mortgages, loans (e.g. personal, housing, auto and educational) on the assets side are the more important of the products offered by banks. Related ancillary services include credit cards, or depository services.

Today's retail banking sector is characterized by three basic characteristics.

  • Multiple products (deposits, credit card, insurance, investments and securities).
  • Multiple channels of distribution (call center, branch, internet and kiosk); and
  • Multiple customer groups (consumer, small business, and corporate)

DEFINITION:

Retail Banking Services:-

Banking services provided to individual members of the public as opposed to those provided to businesses and institutions.

ANALYSIS OF RETAIL BANKING

STRENGTH:-

1)Emerging as a new growth driver:

or several years banks viewed consumer loan with skepticism. Commercial loans denominated the loan portfolio as they generated high net yield with low credit risk. Consumer loans on the other hand involved smaller amount, large staff to handle account and high default rates. Even regulators across the glob have not encouraged retail banking until now till very recently. However , over past few years, fierce competition among the lowered the spread and profitability an commercial loan with deregulation and increase in consumer loan rate, the risk adjusted return in retail sector have exceed the return on consumer loan.

2)Provides diversified asset portfolio:

Retail banking includes comprehensive range of financial product and services i.e. deposit product, auto loan, car loan, home loan, loan against equity shares, mortgage loan, payment of bills, debit card, credit card, etc. These product provide an opportunity for banks to diversify the asset portfolio with higher profit and relatively lower NPA.

3)Improves standard of living:

Due to major economic reforms in Indian economy there has been an increase in per capita income which has led to change in life style and growing urbanization have made the Indian population rise from oblivion and resurge in modern era on this front role of retail banking arises. Retail banking provide all such product and services(home loan, car loan, personal loan, etc) to its customer which are required by them to maintain change in there life style in short it helps in fulfilling aspiration of people through affordable credit.

4)CRM tool:

The individual customer is deity of bank in retail banking segment. All product and services are designed to satisfy need and wants of its customer. As customer in retail banking belong to different economic, cultural, educational, and social background there demand is also varied. It is acceptance of the banking product and satisfaction of customer that yield profit in this segment. Hence customer Service and Quality implementation through use of CRM tools will help banks Success in this competitive world of retail banking.

5)Innovative product development :

The scope for development in financial services is unlimited. In retail banking ball is in the court of bankers where they approach the customer finds out there financial need and problem, designs the product and services, market them and finally sells them to satisfy its customer.

6)Economies of scale:

Retail banking enables banks to utilize existing capacities and reaching wider population of customer. Banks can get the benefits of information and transaction. In process of extending variety of services, banks are acquiring enormous amount of customer information .if this information is systematically recorded , banks can efficiently utilize this information in order to explore new segment and to cross sell new services.

WEAKNESS:-

1)Avoids corporate sector:

Retail banking avoids corporate sector totally which is the backbone of Indian economy. Main reason put forth or this is decline in corporate borrowing. However bank can take certain step to manage there corporate clients such as lower arte credit, higher amount of loan etc. Managing corporate client is more easier as they have well defined financial policy and project and they concentrate on product and services offered rather than on CRM of bank unlike individual clients.

2) Marketing (Internal and External):

Retail banking requires strong marketing strategies to be adopted by bank both internal and external. under retail banking segment top level management need employees to introduce product properly to its employees because if the employees are not aware regarding the product they are offering that product will fail however effective the product is also bank require to spend lot on its marketing of product to general public because if public is not aware regarding the product and service how will they opt for it. All this increases the cost and time required to introduce the product in the market which can reduce or make the product out dated immediately on its arrival.

3) Changes in technology:

uture of retail banking lies in the hand of IT. Various It solution used by banks such as E-banking, phone banking, ATM leverage the retail banking product and service offered by banks. But this has weekend the segment some how. If banks are not able to adopt the latest technology it may pull back the growth of bank also this technology requires lot of capital investment and if at all the technology fails then it may shake the customer's confidence on bank and bank may land up in loosing its customer.

4) Reduces the profitability:

It is claimed that retail banking increases overall profitability of the bank but in reality this is not the case because managing wide range of product and service requires high quality technology , large number of staff and all this requires high capital investment which reduces banks profitability.

5) Co-ordination among various department:

Success of retail banking is not the result of one department but is result of various departments together. If there is lack of co-ordination among various department of the bank then however strong and effective the may be the product it will fail. Suppose if the front office is successful in attracting the customer but back office is not able to execute the delivery of product or service on time then bank may land up loosing the customer although its CRM was effective.

OPPORTUNITIES:-

1)Scope for innovation:

Under retail banking as banks try to provide all those product and services which are desired by its customer this segment has more scope for innovation banks can keep on modifying its products as per the market demand which helps them from not being out dated .

2)Rise in per capita income:

The rise of the Indian middle class is an important contributory factor in this segment. The percentage of middle to high-income Indian households is expected to continue rising. The younger population not only wields increasing purchasing power, but as far as acquiring personal debt is concerned, they are perhaps more comfortable than previous generations. Improving consumer purchasing power, coupled with more liberal attitudes toward personal debt, is contributing to India's retail banking segment.

3) Economic growth:

Retail banking has immense opportunities in a growing economy like India. In the BRIC Report India is stated as an economic superpower. According to A. T. Kearney, a global management-consulting firm, recently identified India as the 'second most attractive retail destination' of 30 emergent markets. Hence retail banking has high opportunities in India.

THREATS:

1)Large disbursement of loans:

The boom in the field of retail banking and the intense composition among the to increases the customer base has resulted in the large disbursement of customer loans, loans on credit cards, auto loans, educational loans etc. on easy terms without much scrutiny this has brought with in an increase in the number of cases of default in loan repayment thus increasing the bank's NPAs.

2)Issue of customers dignity:

Banks have been adopting carrot and stick policy by renegotiating loan terms where the default is genuine and handing over recovery to third parties where default is willful. Most of the time, the third parties or external agents are not trained to handle the loan repayment process. Hence, they restore to strong arms tactics with defaulting customers. Many cases of harassment and invasion of privacy have been reported by the affected parties. Such instances may hamper the image and corporate vision of the bank in near future.

3) Issue of customer privacy:

Customer privacy is also affected in another way wherein customer service representatives of the banks ring up customers at any times at their places of work, informing them about new products and services. This may cause inconvenience to busy customers. It is also obligation on part of the banks not to share the private information from the records of the customers with outside agencies like market research groups and other advertisers.

4) IT:

The growth of IT has brought with it a number of frauds perpetrated with the help of technology and which come under the domain of cyber crimes. Banks are the victims of unscrupulous elements who have in many instance hacked banks website and stolen credit card number, pass word and other confidential information relating to customer.

NEED FOR RETAIL BANKING

(The Ultimate Service Provider)

Until now banks were relying on financing, production based activities. Retail finance was not favored by Indian banks, But they have to tune to it now with the demand for loans from industrial sector is coming downing the past because of the economic slowdown. As a result banks have become selective in there lending activities. Further changing demographics, a rapidly growing ,middle-class, rise in disposable income changing life style and increasing ability of people to take credit risk are providing banks with an opportunity to shift there lending operation to retail finance. Hence bankers have been increasingly shifting to retail to increase profitability and reduce delinquency rates. Customer shifting, cost pressure and increasing competition are some of the other reasons

Retailing is now favored because of the better returns lesser asset quality problem and low NPA. Further it provides many opportunities for credit expansion. It helps banks in risk diversification and is important for low-cost resources mobilization by banks.

or Banks, retail segment is the principal growth driver as they are slowly gaining market share in the retail space. Foreign banks are securitizing vehicle loans to raise off-balance sheet resources and to reduce overall cost of funding. For example, Bank of Muscat is taking over auto loans and personal loans from other banks signaling a softer interest rate regime for consumer finance and giving indication to the intensifying competition in business.

The objective of the Retail Bank is to provide its target market customers a full range of financial products and banking services, giving the customer a one-stop window for all his/her banking requirements. The products are backed by world-class service and delivered to the customers through the growing branch network, as well as through alternative delivery channels like ATMs, Phone Banking, Net Banking and Mobile Banking.

RETAIL BANKING IN INDIA

The Indian players are bullish on the Retail business and this is not totally unfounded. There are two main reasons behind this. Firstly, it is now undeniable that the face of the Indian consumer is changing. This is reflected in a change in the urban household income pattern. The direct fallout of such a change will be the consumption patterns and hence the banking habits of Indians, which will now be skewed towards Retail products. At the same time, India compares pretty poorly with the other economies of the world that are now becoming comparable in terms of spending patterns with the opening up of our economy. For instance, while the total outstanding Retail loans in Taiwan is around 41% of GDP, the figure in India stands at less than 5%. The comparison with the West is even more staggering. Another comparison that is natural when comparing Retail sectors is the use of credit cards. Here also, the potential lies in the fact that of all the consumer expenditure in India in 2001, less than 1% was through plastic, the corresponding US figure standing at 18%.

Retail banking in India is not a new phenomenon. It has always been prevalent in India in various forms. For the last few years it has become synonymous with mainstream banking for many banks.

The typical products offered in the Indian retail banking segment are housing loans, consumption loans for purchase of durables, auto loans, credit cards and educational loans. The loans are marketed under attractive brand names to differentiate the products offered by different banks. As the has shown that the loan values of these retail lending typically range between Rs.20, 000 to Rs.100 lakh. The loans are generally for duration of five to seven years with housing loans granted for a longer duration of 15 years. Credit card is another rapidly growing sub-segment of this product group.

In recent past retail lending has turned out to be a key profit driver for banks with retail portfolio constituting 21.5 per cent of total outstanding advances as on March 2004. The overall impairment of the retail loan portfolio worked out much less then the Gross NPA ratio for the entire loan portfolio. Within the retail segment, the housing loans had the least gross asset impairment. In fact, retailing make ample business sense in the banking sector.

While new generation private sector banks have been able to create a niche in this regard, the public sector banks have not lagged behind. Leveraging their vast branch network and outreach, public sector banks have aggressively forayed to garner a larger slice of the retail pie. By international standards, however, there is still much scope for retail banking in India. After all, retail loans constitute less than seven per cent of GDP in India vis--vis about 35 per cent for other Asian economies South Korea (55 per cent), Taiwan (52 per cent), Malaysia (33 per cent) and Thailand (18 per cent). As retail banking in India is still growing from modest base, there is a likelihood that the growth numbers seem to get somewhat exaggerated. One, thus, has to exercise caution is interpreting the growth of retail banking in India.

The HDFC Bank Preferred program for high net worth individuals, the HDFC Bank Plus and the Investment Advisory Services programs have been designed keeping in mind needs of customers who seek distinct financial solutions, information and advice on various investment avenues. The Bank also has a wide array of retail loan products including Auto Loans, Loans against marketable securities, Personal Loans and Loans for Two-wheelers. It is also a leading provider of Depository Participant (DP) services for retail customers, providing customers the facility to hold their investments in electronic form.

HDFC Bank was the first bank in India to launch an International Debit Card in association with VISA (VISA Electron) and issues the Master debit card as well. The Bank launched its credit card business in late 2001. By March 2005, the bank had a total card base (debit and credit cards) of 4.2 million cards. The Bank is also one of the leading players in the "merchant acquiring" business with over 42,000 Point-of-sale (POS) terminals for debit / credit cards acceptance at merchant establishments. The Bank is well positioned as a leader in various net based B2C opportunities including a wide range of internet banking services for Fixed Deposits, Loans, Bill Payments, etc.

ADVANTAGES OF RETAIL BANKING

Retail Banking has inherent advantages outweighing certain disadvantages.

RESOURCES SIDE:

  • Retail deposit are stable and constitute core deposit
  • They are interest insensitive and less bargaining for additional interest
  • They constitute the low cost for banks
  • Effective CRM with the retail customer builds a strong customer base.
  • Retail banking increases the subsidiary business of a bank.

ASSETS SIDE:

  • Retail banking results in better yield and improve bottom line of a bank.
  • Retail segment is a good avenue for funds deployment.
  • The consumer loan are presumed to be of lower risk and NPA perception.
  • Help economic revival of the nation through increased production activities.
  • Improves lifestyle and fulfills aspiration of people through affordable credit.
  • Innovative product development.
  • Retail segment involves minimum marketing efforts in a demand driven economy.

PRESENT SENARIO

There has been a considerable growth in the retail-banking sector in India, which makes up for about 1/5th of the overall bank credit. Typically, the retail banking industry encompasses the services such as credit cards, Housing loans, Education loans, Auto loan, etc

Retail banking has brought in a drastic makeover in the overall banking scenario in India. The exceptional improvement in the banking system in India is a result of strong initiatives taken up by both the government and private companies
A recent market research report named, "Indian Retail Banking Sector Analysis (2006)" published by RNCOS provides an exclusive tour to the entire retail-banking industry of India. As per the report, "Mainstream banking and retail banking have become one and the same thing for the past several years now. Approximately, 22% of the total outstanding advances were derived from the retail portfolios of the banks in India till March 2004".

"The contribution of retail banking to the overall banking sector has been outstanding. Growing at a rate of 122%, the retail-banking sector of India managed to reach a worth of $67 billion in the year 2005", as per experts at RNCOS. "The retail banking sector in India should reach a worth of $310 billion by the year 2010", anticipate the experts. Profiles of key players along with the strategies and plans adopted by them for the growth of the industry are also talked about in it. Besides discussing the present scenario of the financial system in India the report offers a reliable prediction of the market in the years to come.

The ratio of retail credit to net credit at the global level is around 5%. In India, it is interesting to note that this ratio is over 10% as on March31, 2002 (Source : RBI, Annual Report ). With the economy reforms set in motion , the country is already rated as a major hub for economic development. Increase in per capita income , change in life style and growing urbanization have made the Indian population rise from oblivion and resurge in modern era. The policy of and spent is gradually giving way to spend and save concept.

WHAT ARE VARIOUS RETAIL BANKING SERVICES?

Retail banking includes comprehensive range of financial product and services i.e. deposit product, auto loan, car loan, home loan, loan against equity shares, mortgage loan, payment of bills, debit card, credit card, etc. These product provide an opportunity for banks to diversify the asset portfolio with higher profit and relatively lower NPA. Today the most proactive banks have entered the retail banking segment and have identified it as a principal growth driver.

VARIOUS PRODUCT OF RETAIL BANKING

1) Home Loans:

Types of Home Loans

There are a variety of home loans available:

Home Purchase loans: This is basic home loan for the purchase of a new home.

Existing home improvement loans: These loans are given for implementing repair works & innovations in home that has already been purchased by the borrower.

Home construction loan: This is a loan given for the construction of a new home.

Home extension loan: his is given for expanding or extending an existing home such as adding a room or floor etc.

Home conversion loan: This is loan given to those who have financed the present home with loan & wish to purchase another home for which extra funds are necessary. The home conversion loan allows the borrower to transfer the existing loan to the new home loan, which includes the extra amount required, thus doing away with the need to pre-pay the previous loan.

Land Purchase Loans: This is loan which is provided to purchase land either for construction of a home or for investment in land.

Bridge Loan: These are loans given to persons who are looking to sell their existing home & purchase another. The bridge loan helps finance the purchase of the new home until the old one is sold.

Balance transfer loan: This is loan which allows the borrower to repay an existing loan & avail of another loan at lower rates of interest.

Refinance loans: This is a loan that is given in order to repay debts incurred from un-organized sourced such as relatives, friends etc. which may have been taken to purchase the home.

Stamp Duty Loan: This is a loan sanctioned to pay the stamp duty amount necessary to be paid on the purchase of a home.

Loan to NRIs: These are similar to loans given to domestic borrowers but are specifically ear-marked loans to NRIs as the repayment is usually from foreign currency sources.

Eligibility terms for home loans

The primary concern of a housing finance company is to determine the loan amount that the borrower is comfortably able to repay. The repayment capacity is determined by taking into consideration factors such as income, age, qualification, number of dependents, spouse's income, assets, liabilities, stability & continuity of occupation & savings history.

Documentations requirements - pre-approval

  • At the time of application for a home loan, the housing finance company would ask for the following common documents:
  • In case the borrower is a salaried employee, proof of income i.e. salary certificate/slips & TDS certificate (From 16) of the borrower & co-applicant, if any.
  • In case the borrower is self-employed; details of business track record & a copy of the audited financial statement of the last two years of the borrower & co-applicant, if any.
  • Copy of bank account statement for the last 6 months.
  • Copy of the latest credit card statement.
  • Passport size photograph.
  • Signature verification from the borrower's banker.
  • Proof of residence.

Upon receipt of all the documents along with the duly completed application form, the housing finance company receives the details & communicate its decision regarding approval of he loan application.

Documentation requirements - post-approval/ disbursal stage:

After a loan application has been approved & at the time that the borrower requires the funds for payment, the following documents are required to be furnished:

  1. Allotment letter
  2. Photocopies of title deeds
  3. Agreement to sell
  4. Non-encumbrance certificate
  5. Approved plans & clearance certificates along with estimates if the property is self-constructed.

Repayment Period

Repayment options range generally from 5 to 15 years. A few housing finance companies also offer a 20-year repayment period, usually at a higher rate of interest. NRIs can avail of a housing loan for a maximum period of 7 years. Repayment is usually taken in Equated Monthly Installments (EMI) by way of post-dated cheques. This fixed money that is repaid to the housing finance company every month comprises of both interest & principal repayment.

Collateral Securities

Housing finance companies usually take securities as collateral in addition to the mortgage of the property being purchased. These collateral securities could be guarantees from one or two persons (guarantors), assignment of life insurance policies, shares, units of Unit Trust of India, bank deposits & other securities. These securities are taken so as to ensure that the loan is repaid in the event that the borrower's normal source of income is no longer available.

Security for the loan is a first mortgage of the property to be financed, normally by way of deposit of title deeds. Liquidation of the mortgaged property is usually the last resort of the housing finance company for repayment of the loan.

Interest Rate Calculation

In India, the interest on home loans is usually calculated on Monthly Reducing or yearly reducing balance.

A. Monthly Reducing Balance: The principal on which the interest is paid reduces every month as the EMI is paid.

B. Annual Reducing Balance: The principal is reduced at the end of the year. This method of calculating interest is more expensive as the borrower continues to pay interest on a certain of the principal, which has already been paid back to the housing finance company by way of the EMI.

The effective interest rate is approximately 0.7% higher than the monthly reducing balance method.

Tax Benefits

Tax benefits are available under:

1. Exemption under section 88 of IT act (Rebate) for repayment of principle up to Rs. 10,000.

2. Deduction under section 24 of IT act for interest payment on housing loans up to Rs. 150,000 (in respect of self-occupied house property acquired or constructed with capital borrowed on or after 1.4.99, & acquisition or construction is completed within 3 years from the end of the financial year in which the capital borrowed). Tax benefit will defer in case of the property has been leased out.

2) Auto Loans:

Types of Auto Loans

Auto loans or car loans could be of the following nature:

New car loan: This is most opted for as it provides a simple loan for purchasing a new car.

Used car loan: This is loan facility offered on second hand car purchases. This involves valuation of the car being purchased by way or certified values of used cars.

Auto Refinance: This is a loan facility given on an existing car owned by the borrower provided that the car is not hypothecated to any financier.Eligibility terms For Auto Loans

Typically most financiers have similar eligibility criteria for auto loans. The age of the borrower should be between 2-58 years. Annual income should be above Rs. 60,000. Additional information is taken with the loan application form.

The size of the loan amount sanctioned depends on the cost of the vehicle, the type of car (standard or Premium) & the percentage financing. Used cars get lower is offered. A new car can get up to 90% financing. Used cars get lower financing. Depending on the model & its resale, the amount in used cars like the Maruti 800 could go up.

Documentations Requirements - Pre-Approval

  • In case the borrower is a salaried employee, proof income i.e. salary certificate/slips & TDS certificate (From 16) of the borrower & co-applicant, if any.
  • In case of borrower is self-employed, details of business track record & a copy of the audited financial statements of the last 2 years of the borrower & co-applicant. If any.
  • Copy of bank statements for the last 6 months.
  • Copy of the latest credit card statement.
  • Passport size photograph.
  • Signature verification from the borrower's bank.
  • Proof of residence.

Upon receipt of all the documents along with the duly completed application form, the car finance company/bank reviews the details & communicates its decision regarding approval of the loan application.

Documentation requirements - Post approval/disbursal

Apart from the loan documentation the borrower is required to submit photocopies of the following:

1. Registration Certificate (RC book).

2. Insurance policy.

3. Road transport tax papers.

The RC book is usually endorsed as hypothecated to the financier until full repayment of the loan amount, when the hypothecation is cancelled. After the last payment is made the bank issues a NOC & form 35 to cancel the hypothecation on the car. This is submitted to the RTO for updating the RC book. The insurance company also requires an NOC o make the necessary changes on the insurance policy.

Repayment Period

Usually Car financing is available from 1-5 years. Some financiers offer longer tenure loans up to 7 years. The tenure is usually dependent on the brand of car being purchased. A super premium car such as the Mercedes would be restricted to tenure of 3 years only. As tenure increases the EMI reduces but the total interest outflow is higher.

Some financiers allow a facility for back loading of the EMI where in the EMI payments are lower initially & increases as the borrower's income increases.

Collateral Securities

Typically there is no requirement for any additional collateral to be provided. The RC book is endorsed for hypothecation to the financier which by itself is adequate security for the financier.

Interest Rate Calculation

The interest is usually charged on a rate or on a reducing balance basis which could be daily, monthly, quarterly on annually.

Fees & Charges

There are fees & charges in addition to interest rate. Processing fees, advanced EMIs if applicable, stamp charges, registration charges & insurance have to be paid prior to the transaction being completed.

Most financiers do not cover insurance & registration. The price of the car is taken to be the ex-showroom price, which does not include insurance & registration charges.

Tax Benefits

Salaried employees cannot avail of tax benefits on the loan taken for purchasing a car. However self employed persons can avail of tax benefits on depreciation as well as on the interest paid on the amount borrowed for the purchase of the vehicle.

3)Two wheeler & consumer durable loan:

Two wheeler loans are given for purchase of mopeds, scooters & motor-cycles.

Consumer durable loans cover purchase of durables such as refrigerators, washing machines, Music systems, camcorders & DVD Players.

Eligibilty Terms for Two Wheelers & consumer Durable Loans

Broadly, the eligibility criteria are:

1. Between 21 years & 60 years

2. Minimum gross monthly income of Rs.4, 500 for salaried employees.

3. Minimum annual income of about Rs. 45,000 for self-employed individuals.

The loan amount sanctioned range from Rs. 7.500 to Rs. 90'000 for two wheeler loans. Consumer durable loans are usually of a smaller amount & vary as per the nature of the durable being purchased.

Most of the financiers require a down payment to be made by the borrower towards the purchase of the two-wheeler or consumer durable.

Documentation Requirements

  • In case the borrower is a salaried employee, proof on income that is salary certificate/slips & TDS certificate (From 16) of the borrower & co-applicant, if any. However, the stringency of his requirement is waived in most cases.
  • In case the borrower is self-employed, details of business track record & a copy of the audited financial statements of the last 2 years of the borrower & co-applicant, if any. These documents are not mandatory in most cases.
  • Signature verification from the borrower's banker/Proof of identity.
  • Proof of residence.

Repayment Period

Repayment of two wheeler loans are usually over 6 to 36 months, whilst those of consumer durable loans are between 12 to 36 months.

Collateral Securities

Usually no collateral security is required in two wheeler & consumer durable loans.

Interest Rate Calculation

Interest is charged at a flat rate & range between 7.5% & 15.25% for two wheeler loans. The rates on consumer durable loans are varied depending on the seasonality of the product being sold.

Fees & Charges

Most two-wheeler financiers charge a flat processing fee of 2% or Rs. 500 whichever is higher.

The additional charges on consumer durable financing are similar to that of the two-wheeler charges, the difference being that there are slabs of loan amounts of approximately of up to Rs. 10,000 between Rs. 10,000 & Rs. 20,000 & above Rs. 20,000 & fees are based on these amounts.

Tax Benefits

Salaried employees cannot avail of tax benefits on the loan taken for purchasing a two wheeler. However, self employed persons avail of tax benefits on depreciation as well as on the interest paid on the amount borrowed for the purchase of the vehicle of durable if it is for professional purposes.

4) Personal/Unsecured Loans:

Personal loan is an all-purpose loan for which the end use can be to meet any personal requirements of the borrower.

Eligibility Terms For Personal/Unsecured Loans

Typically, the take home salary has to be over Rs. 8,000. The borrower should be over 21 years of age & less than 58 years old.

Loan eligibility is determined primarily by the borrower's capacity to repay i.e. his current earnings are the primary determinant. The bank usually tries to improve that the EMI does not exceed 30-40% of the net take home salary. The borrower's place of residence & work place & employment track record are given higher priority than in secured loans.

The maximum amount of loan sanctioned is usually in the range of about normal household expenses & outflows such as any EMI on other loan etc. & regular outflows. Most banks lend anywhere between Rs.15, 000 to Rs.10 lakhs towards personal loans.

Documentations Requirements - Pre-Approval

  • In case the borrower is a salaried employee; proof of income i.e. salary certificate/slips & TDS certificate (Form 16) of the borrower & co-applicant, if any.
  • In case the borrower is self-employed: details of business track record & copy of the audited financial statements of the last 2 years of the borrower & co-applicant, if any.
  • Copy of bank account statements for the last 6 months.
  • Copy of the latest credit card statement.
  • Passport size photograph.
  • Signature verification from the borrower's banker.
  • Proof of residence.

Upon receipt of all the documents along with the duly completed application form, the bank reviews the details & communicates its decision regarding approval of the loan application.

Documentation Requirements - Post approval/Disbursal

Post approval, the bank collects post-dated cheques for the full tenure of the loan prior to disbursal along with the collateral securities, if any.

Repayment Period

Personal loans are usually short tenure loans up to maximum of three years. In rare cases some banks offer a 5-year repayment option. There is usually a 6 months lock in period in either case.

Collateral Securities

Unsecured loans are by definition unsecured. They are designed for people who don't want to undergo the hassles of providing security or hypothecation or are willing to pay the higher price of such loans. No collateral or guarantee is usually taken by the bank. However, in case of software professionals, some banks are ask for a guarantor or a co-applicant.

Interest Rate Calculation

Interest rates currently vary between 15 to 30%. Longer tenure loans are usually priced higher. As also loans to persons with a higher risk profile.

Tax Benefits

Tax benefit on personal loans is not available to salaried employees. However, self employed persons may avail of tax benefits on the interest amount paid if the loan is for professional purposes.

5) Educational loan:

Educational loan usually cover a variety of courses. It pays for the cost of tuition fees, hostel fess, mess fees & examination fees. The cost of books, equipment & other instruments required by the student are also covered. Some financiers cover the cost of airfare if the studies are being undertaken overseas.

Eligibility Terms for Educational Loans

The terms for eligibility for an Educational Loan vary from bank to bank. The primary requirement is that the student should have got admission to the course that he is seeking the loan for. Most banks also specify an age criteria such as 16-26 years etc. The past academic track record of the student would also be considered.

The maximum loan amount varies by individual banks as well as the institution that the student would pursue his/her academics. It could be for studies abroad. The repayment capacity of the student & in several cases, the parents &/or guardians is of utmost concern to the bank. Usually no margin money is required for loans uptoRs.4 Lakhs. For loans in India & 15% for studies in abroad, to be borne by the applicant. The parent's income would also be considered by most banks.

Documentation Requirements - Pre-Approval

  • The documentation requirements would depend on the specific requirements as per the policy of the bank giving the loan. However, a confirmation of admission by the educational institution is necessary. Other documents would include.
  • Copy of bank account statements for the last 6 months.
  • Passport size photograph.
  • Signature verification from the borrower's banker.
  • Proof of residence.
  • Incase either of the borrower's parents is a salaried employee; proof of income i.e. salary certificate/slips & TDS certificate (Form16) of he borrower & co-applicant, if any.
  • Incase either of the borrower's parents is self-employed; details of business rack record & a copy of the audited financial statements of the last 2 years of the borrower & co-applicant.
  • Documents with respect of past academic track record of the student.
  • Airline booking details, in case of foreign university education.

Documentations Requirements - Post-Approval/Disbursal

Disbursement of the educational loan is made directly to the institution to which the student is admitted. Hostel & mess fees are also paid likewise. Airfare is directly paid to the airlines. The student is given certain amounts to make book or instrument/equipment purchases on a monthly or quarterly basis. Receipts for each payment are forwarded to the bank.

When the loan amount exceeds Rs. 1 lakh, banks usually requires a Life Insurance Policy equal to or more than the loan amount. This is the security that the bank takes to recover the outstanding amount in case the student is unable to repay the loan amount.

Repayment Period

A holiday period is usually given for educational loan requirement before he/she starts paying back the loan in EMIs. The holiday period ranges from 6 months to a year. However, if the students start working immediately on completing the course, he does not enjoy a holiday period. Repayment stars 6 months after completion of the course or on commencement of a job, whichever is earlier.

Collateral Securities

Some banks do not require collateral security to be furnished if the amount being borrowed is less than Rs. 25,000. For amounts greater than that NSCs, bonds, property mortgage etc. are taken as collateral.

Interest Rate Calculation

Interest on educational loan is charged on a simple basis during study period or up to commencement of repayment (interest rates are as per RBI guidelines at ha time).

Fees & Charges

Fees & charges include:

1. Processing fees

2. Documentation cost

3. Pre-payment penalty4. Penal interest for overdue amount & overdue period.

Tax Benefits

Under section 80E of the IT Act, a deduction will be allowed in respect of repayment of loan educational purposes, subject to the following conditions.

In computing total income of an assessee being an individual, these shall be deducted, in accordance with, & subject to, the provision of this section: any amount from the previous year, out of his income chargeable to tax, or any approved charitable institution for the purpose of pursuing his/her higher education such loan, provided that the amount that may be so deducted shall not exceed Rs. 25,000.

6) Plastic money:

A barometer of maturity of an economy with a few exceptions is the stage of development reached by its payment systems. Cash in the form of notes and coins make up just one form of payment system. The development in banking brought about a second phase in payment system, through paper instruments namely cheques and credit transfers. The requirement for greater flexibility and convenience and development of technology has given rise to electronic payments and this is where plastic cards have been provided.

The credit card can be defined as "a small plastic card that allows its holder to buy goods and services on credit and to pay at fixed intervals through the card issuing agencies".

Regulatory for cards

In view of this ever-increasing role of credit cards, a working group was set up for regulatory mechanism for cards. The terms of reference of the working group were fairly broad and the group was to look into the type of regulatory measures that are to be introduced for plastic cards (credit, debit and smart cards) for encouraging their growth in a safe, secure and efficient manner, as also to take care of the best customer practices and grievances redressal mechanism for the card users. The Reserve bank has been receiving a number of complaints regarding various undesirable practices by credit card issuing institutions and their agents. Some of them are:

  • Unsolicited call to members of the public by card issuing banks/direct selling agents pressurizing them to apply for credit card.
  • Communicating misleading/wrong information regarding credit cards regarding conditions for issue, amount of service charges/waiver of fees, gifts/prizes.
  • Sending credit cards to persons who have not applied for them/activating unsolicited cards without the approval of the recipient.
  • Charging very high interest rates/service charges.
  • Lack of transparency in disclosing fees/charges/penalties. Non -disclosure of detailed billing procedure.

The working group deliberated a number of major issues relating to customer grievances and rights:

  • Transparency and disclosure.
  • Customers rights protection and
  • Code of conduct.

The group recommended that the most important terms and conditions should be highlighted and advertised and sent separately to the prospective customer. These terms and conditions include various issues relating to.

  • Fees and charges.
  • Drawl limits.
  • Billing.
  • Default.
  • Termination/revocation of card membership.
  • Loss/theft/misuse of card and
  • Disclosure.

While building a regulatory oversight in this regard we need to ensure that neither does it reduce the efficiency of the system nor does it hamper the credit card usage.

Type of cards issued by a Bank are:

Cash card:

Also known as an ATM card. This has been discussed in detail earlier. A special plastic card is used for getting currency notes from a machine. Known as automated teller machine.

Debit Cards:

Debit cards allow for direct withdrawal of funds from a customer's bank account. The spending limit is determined by the user's bank upon available balance in the account of user. It is a special plastic card connected with electromagnetic identification hat one can use to pay for things purchased directly from his bank account. Under the system, card holders account are immediately debited against purchase or services through the computer network. Hence, under debit card the cardholder must have adequate balance in his account. This system is intended to replace cheque system of payment. Debit card & smart card issuance by banks in India should be approved by the respective bank's board as well as by RBI. These can be issued only for customer maintaining satisfactory accounts & for a minimum period of six months.

Cheque cards:

It is a card given to customer by the bank that he must show when he writes a cheque, which promises that the bank will pay out the money written on the cheque. Under check card system, the card holder is given a card & a chequebook. He has to use the cheques, while purchase is made & the traders gets guaranteed payment. The customer does not get free credit, he has to keep sufficient balance in his account or the bank will provide overdraft up to a specific limit, of course on interest payment basis.

Charge Card:

A small usually plastic card provided by an organization with which one may buy goods from various shops, etc. The full amount owed must then be paid on demand. In credit cards, the card holders get credit or loan for payment of periodical bills when sufficient balance is available in their accounts. In a charge card such credit facility is not available. The periodical bill amount is paid off by charging it to customers account. A fee is also payable by the card holder to the card issuing institution.

Smart Cards:

With the use of credit cards, we may avail of credit facility on our purchase of goods/services from approved sales outlets. A smart card however, enables the cardholder to perform various other banking functions apart from credit purchases. For examples, with smart cards, we can draw cash from ATMs, we can verify entries in our accounts, seek information pertaining to our accounts, etc. This is possible because the card has an integrated circuit with microprocessor chip embedded in the card for identification purposes. The card can also perform calculations & maintain records.

Convenience Users:

Credit card customers are typically extended an unsecured credit at least up to 30 days. Beyond the period, the bank charges interest on outstanding bills. However, some cardholders may prefer to pay off their full dues before the free credit period. Such cardholders are called convenience users.

Everyone dreams of living a comfortable life and does all one can to make this dream come true. Today this has become much easier, as with higher levels of income and multiple earning members in the family, it is easy to avail loans to fulfill aspirations Buying a home, car or any small household item such as TV or a refrigerator using money borrowed from a bank or a finance company has become the way of life today. This has created a big business opportunity for finance companies.

They are offering loans to all types of customers for all types of assets. Retail lending has thus become one of the key business verticals for finance companies. This necessitates banks to follow processes for conducting business profitably. There are two main areas in lending. Loan Origination and Loan Servicing. The process of validating customers, convincing them that the finance company is the right source for their loan requirement and finally offering the loan with terms and conditions that make business sense to the finance company is Loan Origination and once the loan is disbursed, the process of managing the repayments from customers and responding to the customer requests for pre payments, early settlement, rescheduling, etc. is Loan Servicing.

Lending has become very competitive as customers are in the mode of shopping for loans. Finance companies have to continuously offer new financial products to customers and thus two of the important aspects of the business are time-to-market and flexibility. But as number of customers increase, the risk of increase in the number of defaulters prevails. Thus finance companies have to do the balancing act. On one hand they have to acquire more business by lending to more customers and on the other hand they have to lend to select customers so that the rate of delinquency is under control.

ROLE OF IT IN RETAIL BANKING

The growth in retail banking has been facilities by the growth in banking technology and automation in banking process that enables in extension of reach and rationalization of cost. ATM has emerged as an alternative channel which has facilitate low cost transaction . It also has the advantage of reducing the branch traffic and enable bank with small network to offset traditional disadvantage by increasing there reach and spread.

Indian retail banks have been extensively using Information and Communication technologies for their operations like central accounting, customer information management, transaction-processing and importantly, for numerous customer-facing solutions. Besides there are supporting or ancillary solutions such as security and compliance in addition to the "middleware" that banks use to link their customer-facing applications to their core systems. The major business focus of the IT savvy retail banks is in providing products and services to the customers through a diversified base of channels - bank branches, ATMs, e-banking, e-branch, mobile-banking, SMS-banking, etc. In India, the business growth is driving technology spending in the retail banking segment. Indian retail banks are looking to move beyond their branch-centric distribution models. Extending ATMs networks, advancing online and phone banking, and rationalizing branch infrastructure are all on the cards.

Technology provides Retail Banks with various delivery channels:-

1)Automated Teller Machines(ATM):

The trend in banking has evolved from a cash economy to cheque economy and thereon to the plastic card economy. One of the channels of banking services delivery is vide the ATM or the Automated Teller Machines, whose traditional and primary use is to dispense cash upon insertion of a plastic card and its unique PIN or Personal Identification Number.

Current and savings account holders of a bank who hold a certain minimum balance in their accounts (determined by each bank as per their policy) are issued an ATM card. The card is a plastic card with a magnetic strip with the account number of the individual. When the card is inserted into the ATM, the machines sensing equipment identifies the account holder and asks for his/her identification code number. This is referred to, usually, as the PIN and is issued by the banks computers. This number is unknown to the banks staff and is secret and unique to that individual. When the person uses the ATM and it asks for the PIN, the cardholder identifies himself/herself by pressing the relevant number buttons on the machine. The machine then verifies the account number on the ATM card along with the secret code number stored in the ATM. When the matches found, the ATM pops a menu screen, which allows the user to transact almost all types of bank transactions.

1)Tele banking: -

Tele banking or phone banking service offered by banks to enable customers to access their accounts for information or transactions. Similar to the ATM PIN, a telephone PIN (T-PIN) is provided to each account holder.The customer can call the exclusive tele-banking numbers and provide the details to identify himself/herself to the automated voice. Typically, the bank account number and the T-PIN are asked for.Upon the respective numbers matching the computerized systems the customer is given access to his account to query or transact on his account.Though cash withdrawal and deposit are not enabled through this service many banks offer cash delivery or collection service to certain classes of customers.

2) Internet Banking:

One of the channels of service delivery to a banking customer is through the Internet. The access to account information as well as transaction is offered through the worldwide network of computers on the Internet. Every bank has special firewalls & its own security measures to protect the accounts from non-authentic use from unauthorized users. Data are encoded using algorithms with a 128-bit key or, in some cases, with a 1,024-bit encryption.

Each account holder is provided a PIN similar to that of the ATM or Phone banking PIN. The access to the account is allowed upon a match of the account details & PIN entered on the computer system. A higher level of security may be reached by an electronic finger-print. The finger print is taken before & after the transaction. Then both versions are compared. In case of any difference, the transaction is aborted.

Account querying as well as transaction is possible on the Internet banking platform. The accounting is instantaneous & funds transfers can be effected immediately.

Though cash transaction are not possible at present, the next phase of evolution in Internet banking will allow those as well.

MARKETING STRATEGIES

(Innovative Retail Banking)

The competition is intense in retail banking as almost all the public, private and foreign banks are eyeing a share a on retail market pie . To meet the competition retail banking product and services have to become more competitive, and they are being perceived as commodities. To leverage the competitive environment , they are reducing the interest rate to increase the customer base

According to Hemant Kaul, Senior vice- President, Retail Banking ,UTI Bank, banks are formulating there marketing strategies around the customer life cycle because they have different credit requirement at different stage of there lives Initially customers look for personal loan after some time they look to buy a scooter or a car. Around the age of 30-35 years , they look for home loans . so banks are not only developing strong product but also investing in developing infrastructure and delivery points.

or expanding the market, banks ate developing both market and product they are venturing into new locations and adding depth to the existing geography. They are increasing there penetration in existing location as well. They are also increasing there presence in Tier-2 and Tier-3 because these have immense potential.

Banks are tying up with small and organized retailers (malls) to co-brand with credit card companies to fuel retail growth. As disposable income is increasing it gives retail opportunities to sell more. Banks are providing retail loans to Small and Medium Entrepreneurs (SME) Sector. They are also extending collateralized loans and working capital finance to suppliers and vendors to large corporate customers as a part of the supply chain financing initiative. These banks are tying up with manufacturers, builders, and vehicle suppliers to facilitate quicker supply of loan In such a scenario IT has become an important tool facilitating net banking, tele banking, mobile banking and ATM, In retail financing they have been concentrating on mortgages as this lending is less risky even though it involves significantly larger than average loan.

To be on safe side banks are targeting the upwardly urban salaried class despite knowing that it is "Big city Indian youth" who are most profitable segment. However banks are also spreading there operations to include the self employed and semi-urban rich

Retail Banking covers both asset-side and liabilities-side products. The liabilities side includes ATM, E-banking, and Tele-banking where the bank has to make significant investment in infrastructure and technology. The asset side of bank has various type of loans provided by banks

Bank can devise suitable strategies of segmentation, delivery channels and pricing by understanding the frame work of retail banking. Banking service can be understood in three categories from the point of view of retail banking. Core services, facilitating services are needed and supporting services are needed.

CRM IN RETAIL BANKING

Banks are commercial institutions whose chief activity is to borrow money from those entities that has surplus cash and lend money to those entities which are deficient in cash, at different rate of establishment for carrying out business with money. Under retail banking activity, banks have to deal with a large number of individual accounts whose account size is very small when compare to the account size of corporate entities.

The individual customer is the presiding deity of banks in the field of retail banking. All the products and services are designed and formed to satisfy the financial needs of the customers. The customers belong to different economic, cultural and social background. Hence the products and services offered are also varied. Through out the world it has been felt that main focus of the banks in the retail sector should be customer service. It is the acceptance by the customers of the banking products and his satisfaction with the services that brings out profit for the banks in this sector. Unlike corporate banking where corporate customers have a well defined financial policy and projects, in retail banking the onus lies on the banks to approach the customers, find out there financial needs and problems, design the products and services, market them and finally sell them to the satisfaction of the customer.

CONCLUSION

There is a need of constant innovation in retail banking. In bracing for tomorrow, a paradigm shift in bank financing through innovative products and mechanisms involving constant up gradation and revalidation of the banks' internal systems and processes is called for. Banks now need to use retail as a growth trigger. This requires product development and differentiation, innovation and business process reengineering, micro-planning, marketing, prudent pricing, customization, technological up gradation, home / electronic / mobile banking, cost reduction and cross selling.

While retail banking offers phenomenal opportunities for growth, the challenges are equally daunting. How far the retail banking is able to lead growth of the banking industry in future would depend upon the capacity building of the banks to meet the challenges and make use of the opportunities profitably. However, the kind of technology used and the efficiency of operations would provide the much-needed competitive edge for success in retail banking business. Furthermore, in all these customers' interest is of paramount importance. The banking sector in India is demonstrating this and I do hope they would continue to chart in this traded path.

BIBLIOGRAPHY

BOOKS:

  • Commercial Banking (sep- 2003), ICFAI (Page no. 34-37 and 39)
  • Banking and financial services- Renu sobti.

MAGZINES:

  • Professional banker (FEB-2006), ICFAI (Page no. 53-55)
  • Indian Banking special(2004), ICFAI (Page no. 72, 74)

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