EMERGING TRENDS IN BANKINGEMERGING TRENDS IN BANKING

Module 5

Traditional Banking Concept

“Banking is defined as the acceptance of deposits of money from the public for the purpose of lending or investment and repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise.”

Section 5(b), Banking Regulation Act, 1949

EMERGING TRENDS IN BANKING

TECHNOLOGY BUSINESS PROCESS RE-ENGINEERING FINANCIAL INCLUSION CONSUMER CREDIT SME CREDIT MICRO FINANCE AND RURAL CREDIT CROSS SELLING FACTORING FORFAITING HIRE PURCHASE & LEASING VENTURE CAPITAL

Emerging trends--SecuritisationHedge fundsReverse mortgage

TECHNOLOGYTECHNOLOGY

CORE BANKING

SOLUTIONS

Multi City Cheques

Mobile PhoneBanking

Fund Transfer

ATM/Debit Card/Credit Card

InternetBanking

BUSINESS PROCESS RE-ENGINEERING

“Critical analysis and radical redesign of business process to achieve break through improvements in performance”.Drop boxGrahak MitraCurrency Administration CellRelationship ManagerCentral Processing Centers

Objectives of BPRProvide Quality Products and Services at competitive prices to customersReduces transaction costOptimizes Capacity utilizationEnsure meticulous internal control

CORE BANKING SOLUTIONS

Networking of Bank Branches

Centralized Data System.

Data Warehousing & data mining.

Anywhere Anytime Banking.

Instantaneous Transfer of Funds.

Multicity cheques.

Essential Requirements of CBS

Creation of Primary Data Centre : it houses the central server for online transaction. It is manned round the clock to offer 24x7 service.Disaster Recovery Site: (DRS) it is done to avoid disruption in the business activities of CBS branches due to central system or network failure.

Software : it is to comprise branch functional modules, delivery channel needs like ATMs, tele-banking, internet banking, interface to integrate with NEFT & RTGS.Networking: leased lines of WAN to be used as primary communication channel .

Advantages of CBS for customers

Transaction of business from any branchATM offers him anywhere, anytime banking facilityLower incidence of errorsBetter fund management due to immediate availability of funds.

Advantages of CBS to Banks

Standardization of process within the bank.Better customer service leading to retention of customer.Availability of accurate data.Better use of available infrastructure.Better MIS and reporting to external agencies such as Govt. RBI etc.Increased business volume with better Asset-Liability Management and risk mgmt.

ATM No Human intervention. ATM-cum-Debit Card is used. Personal Identification Number (PIN). Machines are kept onsite or offsite or

mobile. Cash payment and Transaction Related Services – Cash/ Cheque deposit. Transfer of funds , Railway ticket booking,

College / University fee remittance etc. 24 X 7 Banking. Anywhere banking. Shared Payment Network System.

INTERNET BANKING Use of IT to make transactions even

without coming to bank. Anywhere banking – Office, home, or

abroad through internet. Any Time Banking – 24 X 7. Permitted transactions – eg: Transfer of

funds from one account to another, payment of a bill, tax, request for cheque book, demand drafts etc.

Safe. Cost of banking will become low.

Mobile Phone Banking

Statement of accounts. SMS message about debit/credit transaction. Request for cheque book / draft, transfer of funds etc.

FINANCIAL INCLUSIONDelivery of financial services, at an affordable cost, to the vast sections of disadvantaged /low- income groups who tend to be excluded from the formal financial system.A sizable proportion of the households, especially in rural areas remains outside the coverage of banking system.An important step to bring the financially excluded people within the fold of the formal financial sector was the promotion of micro finance.

RBI’s broad approach to financial inclusion is to ‘connect’ people with the banking system and not just dispense credit.The measures initiated by RBI to bring the hitherto financially excluded population into the fold of the formal financial system include:

- ‘No frill-account’ - Promotion of financial literacy and

responsible borrowing

FINANCIAL INCLUSIONNo frill accounts eg. Janapriya Special SB Account.Zero BalanceFree ATM CardNo cheque booksInternet/Mobile banking not allowedImmediate credit of outstation cheques not allowed

INNOVATIVE DEPOSIT PRODUCTS

Special SB A/C for children eg.CanChampDeposits for Senior Citizens – Ashraya depositMulti option deposit (flexi)schemeFloating Rate Deposit Scheme (ROI linked to 91 days treasury bill rate)Tax Saver Deposit Scheme (included under Sec.80 C of I-T Act)Automatic reinvestment planUnit Deposit Scheme

CONSUMER CREDIT

Housing Loan Education Loan Computer Loan Vehicle Loan Personal Loan Mortgage Loan

SME CREDIT Project finance and Working Capital

finance for Small Scale / Medium / Tiny Industries.

Small Scale Service and Business Enterprises (SSSBEs).

Flexi SSI Loan. Laghu Udyami Credit Card. Retail Traders. Road Transport Operators. Professional & Self employed persons. Tourism – House Boat /Mini Restaurants

/Hotels. Swarozgar Credit Card (SCC) Scheme. IT (industry related) activities. Gold Card Scheme for Exporters

MICRO FINANCE AND RURAL CREDIT

The “unbanked” population in rural areas is 440 million (96.5 million house hold).

Rural Credit through SHGs. Micro finance through NGOs. Agri. Term Loans. Kisan Credit Card.

CROSS SELLING

Life Insurance Products. Non-Life Insurance Products. Mutual Funds. Credit Cards.

Move towards Universal Banking: ‘Financial

supermarkets’Diversification of the activities by providing a length of financial services, thereby converting themselves into ‘financial services supermarkets’.

- Merchant banking services- Factoring services- Asset management services- Insurance services etc.-

Specialized BranchesNRI Branches – to cater to the needs of NRI clientsOverseas branch – to specifically concentrate on export -import business.Industrial Finance Branches- to cater to the needs of industrial clients exclusively.SME Branches

Professional Branches – to cater to the needs of professionals such as engineers, doctors, chartered accountants, lawyers, contractors etc.Agricultural Finance Branches- to cater to the needs of high-tech agriculture, agro- exports and corporate clients dealing with agri-business.Corporate Finance branches.Recovery branches – to exclusively concentrate on recovery of NPAs

FACTORING Collection of receivables Management of receivables by a

financial intermediary called “factor”. Fee – based service. Client gets immediate funds.

FORFAITING Used in Export finance. Exporter surrenders rights to

claim payment of goods delivered to an importer, in return for immediate cash payment from a forfaiter.

Helps the exporter to concentrate on export front without bothering about collection of export bills.

HIRE PURCHASE & LEASING

HP is a contract between “owner” of a good and “customer” who uses it.

Hire for a fixed term and fixed price payable in instalments.

Ownership continues to vest with the owner till agreed price is paid in full.

In leasing the user (lessee) uses the equipment for a rental during the lease period.

Legal ownership vested with the leasing company (lessor).

VENTURE CAPITAL FINANCE

Risk Finance. New and Untried/ Advance technologies. Expectation of Spectacular return in

future.

SECURITISATION

Securitisation involves transfer of loan assets from the bank (the ‘originator’) through pooling and repackaging by a SPV into securities that can be sold to investors.Securitisation benefits banks by :•providing liquidity to loan portfolios•mitigating credit risk by removing assets of bank’s books.

DERIVATIVESA derivative is a security, financial investment or a contract designed in such a way that its price is derived from the price of an underlying asset.Help in understanding quantifying and managing financial risks.In practice, they are promises to pay cash according to the performance of an index.Eg. Forward contract, futures,options etc.

Hedge FundsA hedge fund is a fund that offers investor balance or a “hedge”, against the risks of operating in a highly volatile market. Typically, a hedge fund is an investment fund that takes considerable risks, including heavy investment in unconventional instruments, in the hopes of generating positive returns under all market conditions.A hedge fund is opened to only a limited range of investors such as institutions and HNW individuals.

Reverse MortgageReverse mortgage is a loan scheme to senior citizens against the mortgage of their house property.The borrower gets a monthly installment of a particular amount and can continue to stay in the house for life time.No repayment. The loan becomes due when the borrower dies, moves or sells.The loan amount is calculated in such a manner not to exceed selling price.

Financial clinicsTo push bank’s retail products and also mutual funds and insurance policies of other companies, and various other investment instruments.Target elite customers who can spare at least Rs.1 lac .Advice is given how to get the maximum value for their money and better returns.

Credit Counseling CentresTo focus on small scale units and SMEs.The objective is to help them:

- Their products properly- Do better financial planning and- Achieve break even- To prevent them from slipping to

Non-Performing Assets

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