Bank RetailBanking

7/30/2019 Bank RetailBanking

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Banks, Banking & Retailbanking services

Prepared by::

Mithun Shankar


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Table of Contents

Content Slide number

What is a Bank? 3

What is Banking? 4

Classification of Banking services 5

Banks and Profits 9

Section A


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What is Banking?

Banking is defined as the process of accepting deposits frompeople/units who have surplus (lenders) in economic

system and lend it to people who need it (borrowers).


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5

Classification of Banking services

Banking

Retail Banking Wholesale Banking Universal Banking


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Retail Banking

Retail banking refers to mobilization of deposits fromindividuals and provide loans to small businesses &individuals.

Retail banks satisfy the needs of the retailers i.e.,individuals. Services offered by retail banks:

Secured and unsecured loans

Savings and checking accounts

Electronic fund transfers, withdrawals, deposits.

Banking investment products such as certificate of deposits Purchase and sale of mutual funds and securities.

Example :: Dena Bank, Uco Bank


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Commercial/Wholesale Banking

Commercial banks mainly service business

establishments i.e., it is also known as business tobusiness banking. It is usually between banks and largeestablishments/enterprises, even offer services toindividuals.

Services offered by commercial banks Loans to brokerage firms for the brokers to finance their

purchase of securities.

Secured or unsecured loans to business firms/enterprises.

Underwriting services whenever any issuers issue securities

the underwriters ensure any unsubscribed portion issubscribed by the underwriter.

Clearing of securities.

Custodian services.

Example :: IDBI


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Universal Banking

Universal banking is a combination of both retail andcommercial (wholesale) banking.

Services offered by universal banks Secured and unsecured loans

Savings and checking accounts

Electronic fund transfers, withdrawals, deposits

Loans to brokerage firms for the brokers to finance theirpurchase of securities.

Secured or unsecured loans to business firms/enterprises.

Clearing of securities. Many more.

Example :: ICICI, SBI.


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Banks and Profits

Section B


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Table of contents


How does bank earn profits? 11

What will have an impact on banks profits? 12

Investor expectations 13

Borrower expectations 14

Section B


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How does a Bank earn profits?

Bank profit = Total income Total costs

Where,

Total income = Interest income + Non-Interest income.

Total costs = Operating costs + provision for credit loss

+ Interest costs+ depreciation.

Interest income might include interest earned on loans.

Non-Interest income might include pre-payment penalty on loans, pre-withdrawal fee on deposits, processing fee on demand drafts, O/S cheques.

Operating costs might include salary, rents payable, utility payments.

Provision for credit loss might be defaulters on all kind of loans.

Interest costs might include interest payable on term and non-term deposits

Depreciation is decline in the value of some assets such as cars, furniture.


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What will have an impact on banks profits?

Assets Liabilities

Fixed assets

Current assets

Interest earned on loansReturn on assets, equity.

Good faith (brand name)

Non Performing Assets

Interest payable on deposits

Operating costs (Salary, Rentspayable).


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Investor Expectation

Return of capital

Return on capital

Good service

Liquidity

Correct use of the invested capital Legitimacy of dealings


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Borrower Expectation

Availability of capital

Return of the collateral

Good service

Cost of the capital (interest)

Legitimacy of dealings


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Services offered by Retail Banks

Section C


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Table of contents


Chart flow- Deposits 18

Demand deposits 19Time deposits 21

Cheque 23

Chart flow :: Transaction services 26

Account services 27

Collection and payment services 30

Remittances and fund transfers 31

Section C


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Table of contents

Section C


Lending/Loans and process involved 34

Loans :: Types of loans 35

Chart flow :: Cards 40

Credit cards 41

How does credit card shopping work? 42

Debit cards 48

Smart cards 49

Chart flow :: Third party services 50


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Services offered by Retail Banks

Bank

Transaction

services

Deposits Lending

/Loan

Cards 3rd party

products

Demand

deposits

Time

deposits

Account

services

Collection

& payment

Fund

transfers

Real estate

Auto Loan

Student

loans

Personal

loan

Credit

cards

Debit cards

Smart

cards

Insurance

Mutual funds


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Deposits

Demand Deposits Time Deposits

Savings account

Current account

Money markets

Certificate of deposits

Chart flow :: Deposits


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Demand Deposits :: Savings Deposit

FeaturesThis kind of account helps people to keep money in a safeplace and earn interest on the same.

Flexibility :: withdraw your money anytime.

Debit cards for 24*7 banking

With or without Cheque book facilityInternet banking

Statement of transactions

Drawback

Limitation on number of withdrawals by cheque

Cheque :: It is a written set of instruction to the bank.

(Will be Explained in detail in further slides.)


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Demand Deposits :: Current Deposits

FeaturesOffer safety and convenience

No restriction on number of withdrawals

Overdraft facility

Debit cards for 24*7 bankingInternet banking

Statement of transactions

DrawbackNo interest paid on the amount deposited


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Time deposits :: Money market

Offers higher interest rate when compared to savingsdeposit

Limitation on number of cheque withdrawal's

The user should maintain minimum balance asprescribed by the bank, usually on higher than savingsdeposit.


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Time deposits :: Certificate of Deposits

Certificate of Deposits commonly known as Fixed

depositsThe depositor will have to invest/put in specific amountof money for specific period of time.

Features

The interest rate changes based on the time period of thedeposits

CODs have a maturity date

No cheques or debit cards issued on CODs.

If a depositor wishes to cash-out the before maturity, the bank

may charge a penalty (early withdrawal fee).


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Cheque* :: What is a cheque?

Cheque is a written set of instruction to your bank.

What does a cheque contain?

The name of bank

The name of the branch with address The cheque number

Magnetic strip MICR @ the bottom with encodedinformation

Your account number

* Cheque is spelled as Check in US


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Cheque :: What you need to fill up in a cheque?

Date of issuing the cheque

Delegated to

Amount in words

Amount in numerical Of course your signature which matches with the

documentation present @ the bank.

It may or may not be an account payee cheque


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Cheque :: How is a cheque processed?

Company A gives a cheque of Rs10,000 to Mr. X

Mr. X deposits the cheque to her bank The bank endorses the cheque and sends it to the

Countrys central bank

The Countrys Central bank sends the cheque to the

company As bank and the amount gets deduced fromcompany As account.

The amount Rs10000 is then credited to Mr. X account.

In for some reason the company did not have enough

money in its account then the cheque would bounce,the reason being Not sufficient funds.


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Transaction services

Account

services

Collection and

paymentservices

Remittances

and fundtransfers

Chart flow :: Transaction services


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Transaction services :: Account services

Key features of account services.

Standing instructions

Balance information Account statements


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Transaction services :: Account services

Standing instructions

Standing instructions are the services provided by thebank for the payment of utility bills, insurancepremiums, subscriptions

Balance informationBanks provide the customers account balance viadifferent channels such as e-mail, phone, internet,mailers.

Account statements

The account statements are of two types

Bank account statements

Brokerage account statements


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Transaction services :: Collection and payment services

Collection and payment services include the following..

Electronic payment services

Bank money orders

Demand drafts/pay orders Employee payroll

Cheque collection


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Transaction services :: Remittances and fund transfers

Remittances and fund transfers include the following

services.

Foreign exchange receipts

Purchase of currency

Travellers cheques

Bank remittances are.

Fast

Safe

Inexpensive Simple


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Real estate Auto loan Student loan Personal loan

Lending / Loans

Chart flow :: Lending / Loans


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Loans :: Types of loans

Real estate loans

Purpose :: Loan funded to buy property

Security :: Loans are secured by a lien on theproperty

Interest :: Can either have a fixed rate of interest orfloating rate of interest.

Tenure :: can be 5-20+ years


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Loans:: Types of loans

Auto loans

Purpose :: To fund the purchase of automobilesSecurity :: Lien on the automobile/vehicle

Tenure :: (cars)

3-7years for new automobile

3-5years for used automobiles Amount :: 75 100% of the value of the automobile

(usually excluding the taxes).

Interest :: Costlier than real estate loans.


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Loans :: Types of loans

Student loans

Purpose :: to meet the educational needs of students

Security :: Guaranteed by the parents

Interest rate :: lower than or equivalent to real estateloans

Tenure :: payment of the loan is usually after thecompletion of duration of the course i.e., Typicallyhave moratorium periods and repayments start at alater date

Advantage :: Tax breaks once employment begins


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Front End Sales Credit Operations


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Product marketing

Customer

Front End Sales Credit Operations

Credit Bureau

Operations

Department

Lending process

Repayment process Recovery process

Customer Collections DeptOperations Dept

Processesinvolved in

lending


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Debit CardsCredit Cards Smart Cards

Cards

Chart flow :: Cards

Credit cards


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Credit cards

A credit card is small card containing Name of the issuing Bank

A magnetic strip Card number Card holders name Photo (may or may not)

Features of the credit card It is an alternate payment mechanism Can be used to purchase merchandise Can be used to withdraw money at network ATMs Can be used for utility payments A credit-card holder can pay at a later date for the

goods & services availed on a date. For this benefit, hehas to pay a periodic fee to the bank which has issuedthe card.

How does credit card shopping work?


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H d dit d h i k?


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Person X: I want to buy a Samsung LCD/Plasma costing Rs.20,000,but I dont have any cash right now.

Person Y: Why dont you use your credit card?

Person X: I am quite skeptic about using these cards. I pay using the

card, get a bill after 30 days and pay after another 20 days. This is amaximum of 50 days interest free loan. Why does any bank do it?

If I borrow Rs.20,000 on personal loan at 11%.Interest to be paid for 50 days = Rs. 20,000 * 11% * (50/365) =Rs.301.40.

Something is wrong somewhere!Here the bank is giving me a loan without interest when I use

the credit card?



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At the end of day or at the end of some period Samsungdealer chooses: Samsung dealer submits the receipt you signed to Citibank

who pays Samsung dealer the money. Samsung dealer paysCitibank a fee called Merchant Discount . Let us say this is6% of the sale value = 6% * 20,000 = Rs 1200

Citibank sends the receipt electronically to a Visa data

center which in turn sends it to Samsung dealer. X Bank transfers the money to a Settlement bank which in

turn transfers the funds to Citibank. Citibank pays X Bank an Interchange Fee of 4% of the sale

value = 4% * 20,000 = Rs 800

20 to 50 days later X Bank gets the money from you andyou dont pay the interest!!




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Person X: Interesting! So Samsung dealer pays more than the interestthat I should have paid for the loan that I take. I, as a cardholder

have the following benefits1. Convenience of not having to carry cash.2. Credit availability? free of interest!!!

However what benefits does Samsung dealer get for paying so muchmoney? Isnt it more profitable for them to take cash? They can saveas much as Rs.1200.

Person X:Certainly. Some retail outlets offer you discounts if youpay by cash, dont they?

However when you dont count the money that you are spending,you tend to buy more! Cards encourage this, called impulse

purchase .

If you did not have access to credit, you would not have bought theLCD this month ? or may be not any time soon either. By acceptingcards, the merchant is actually extending you credit at the risk of thecard issuer. He pays money to the banks to carry that risk.




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Person X: So X Bank uses this money to pay back to us when theyannounce 5% cash back. They insist that the Sales draft that I sign at

the retailer should also be from X Bank. This means they are savingon the Interchange Fee and also pay me a part of the MerchantDiscount that they get.

Person Y: Exactly! If you have noticed, X Bank gives you the cashback in the next credit card statement. They keep the Cash backmoney for a maximum of 60 days before passing on a part to you.

This accrues them interest too.

Say if X Bank earns an interest of 6% per annum for the cash theycarry they get Rs.1000 * 6% * (60/365) = Rs.10

That is not huge, but money nevertheless. And when you considerthat almost everyone in this city shops with a credit card these days,it is a big sum.

Person Y: Good! You seem to have figured out how it all works!


D bit d


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Debit cards

A debit card is also a small card containing

Name of the issuing Bank A magnetic strip Card number Card holders name

Photo (may or may not)

Features of the debit card It is an alternate payment mechanism Can be used to purchase merchandise Can be used to withdraw money at network ATMs Can be used for utility payments Payment is made in full and the money is debited to the card

holders account immediately

S t d


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Smart cards

A small card much like the credit or debit card, with amagnetic strip/microchip embedded in it that can be usedto store value (such as reward points) or offerintelligent services (utilization / limit alerts).

Example .

Prepaid cash cards which can be usedinstead of cash to recharge phones, renew

DTH subscriptions, use it as a debit card

Ch t fl Thi d t i


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Insurance

Third party services

Mutual funds

Brokerage Services

Chart flow :: Third party services

Third Party Services


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Banks sell many products which is not a part of core

banking, these products might be from their subsidiaryor from external partners.

What does the bank get by offering third party services?

Generates Additional income

Better utilization of resources and infrastructure

Retain customers by delighting the customer

Improve returns on investments



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y

Insurance

Insurance is a promise of reimbursement in case ofloss.

For example: Person X takes a loan with insurancecover on the loan and fails to pay the loan due to some

valid reason (such as death), In case of such an eventthe insurance company is liable to pay the loanamount.

d ff d b b k


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Life Insurance Property Insurance

Health Insurance

Loan life Insurance Travel Insurance

Auto InsuranceMortgage Insurance

Insurance

Insurance products offered by banks

Mutual Fund


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Mutual fund is the collect of stocks and/or bonds.

What does the investor get investing in mutual fund? The investor owns shares, Which represents a portion

of the total funds that the mutual und company/bankinvest in stocks, securities or bonds.

Advantage It is managed professional management experts

Investor need not invest his time and money when hewants to invest in mutual funds.

Risk level is comparatively lower when compared toinvesting directly in stocks.

Brokerage


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Brokerage

Banks offer brokerage services.

How does a bank handle brokerage service?

The banks handle customer orders to buy or sellsecurities like shares. They act as middlemen betweensecurities that trade on market and investors that

buy/sell them. Some banks even handle property brokerage services.


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Thank you.

This is a very brief introduction to Banks, Banking and services offered by retail banks.It is up to the user to get more information on the topics discussed here.

Bank RetailBanking

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