Banking Products and Operations

Ravi for IBA

Session 1:Banking Products and Operations

Retail Banking Introduction:• Evolution and growth • Multiple products (deposits, credit cards, insurance, investments and securities)• Multiple channels of distribution (call centre, branch, Internet, mobile banking,

wallet banking and kiosk)• Multiple customer groups (consumer, small business, and corporate)• Bank Insurance Model (Bankcassurance) and its impact on Retail banking• New Development in Retail banking – Payment Banking and its Scope & its

limitations, Small Finance Banks (Licensing of banks under processing by RBI)• Wallet Banking (Payment system)

Banking - Importance

•Banking is today an integral part of our everyday life: at home, at school, at office, at business, on travel everywhere we counter some aspect of banking.• The significance of banking in our day to day life is

being felt increasingly.•How did the concept emerge?

Concept of Banking Evolution

Money has always played dominant role in life.Forms of money have evolved from coin to paper currency notes to

credit cards. Commercial transactions have increased in content and quantity from

simple banker to speculative international trading.Need arose for a third party who will assist smooth banding of

transaction, mediate between the seller and buyer, hold custody of money and goods, remit funds and also to collect proceeds.

As the number of such mediators grew there is need to control and gave birth to the concept of “banks” and “banking”.

Banking Evolution in India

• Banking in India in the modern sense originated in the last decades of the 18th century.• Among the first banks were the Bank of Hindustan, which was

established in 1770 and liquidated in 1829-32; the General Bank of India, established 1786 but failed in 1791.• The largest bank, and the oldest still in existence, is the State Bank of

India. It originated as the Bank of Calcutta in June 1806. In 1809, it was renamed as the Bank of Bengal.

Banking Evolution in India contd.

• Bank of Bengal was one of the three banks funded by a presidency government, the other two were the Bank of Bombay and the Bank of Madras.• The three banks were merged in 1921 to form the Imperial Bank of

India, which upon India's independence, became the State Bank of India in 1955.• Reserve Bank of India Act, 1934 (amended in 1936) is the legislative

act under which the Reserve Bank of India was formed and meant to provide a framework for the supervision of banking firms in India.

Banking Post Independence – Important Miles Stones

• RBI -Established in 1935 Nationalized in 1949 through the act 1948• Nationalization of banks - 1969: 14 largest commercial banks & 6

more banks in 1980.• Liberalization in the 1990s -licensing a small number of private banks

(New Generation tech-savvy banks -(ICICI, HDFC, UTI (AXIS), Oriental Bank of Commerce, Global Trust Bank)• Licensing of 11 New Payment Banks – 2015 (August)• Licensing of 10 Small Finance Banks – 2015 (September)

Multiple Products

Deposits accounts: - Savings accounts, Salary Accounts, Business Current Accounts, - Fixed Deposit accounts, Recurring deposit accounts

Loan / Lending related Products :- Personal Loan, Home Loan, Loan against Properties, Loan against Securities

(Gold / Shares), Gold Loan, Educational Loan, Vehicle Loans, Commercial Loans, Short term loans (working capital loan).

Cash Less Banking:- Debit Cards, Credit Cards, Pre-Paid Cards, Gift Cards- Cheques, Demand Draft- Online transfer (NEFT / RTGS / IMPS etc)

Multiple Products

Other Services:- Wealth Management and Investment Services- Demat account *opening- NRI Banking services- Foreign Currency Services- Insurance Product Promotion (Cross Selling) – Life & Non-Life Insurance

Banking Sector (Customer groups)

•Personal Banking• Small and Medium Sector Enterprises•Commercial banking•Global or International Banking•Rural & Agricultural Sector banking•Private banking (High Network individuals)

Banking – Channels of Distribution

Channels are the vehicles through which customers can interact with a bank. These channels may be used for either sales or service interactions.• Branches (Major or Primary Channel)• Electronic – ATMs, Internet Banking, Email, Mobile banking/Wallet

banking• Phone Banking (Call Centres)• Branch Less Banking (Banking at door step)• Direct Sales agents / Brokers / Agents / Sales Personnel

Channels of Banking

Cross Selling – Insurance (Bancassurance)

Cross selling of Insurance Products through subsidiaries- Vehicle Insurance (Two Wheeler / Car Insurance / Tractor / Heavy

Vehicle insurance ) along with Vehicle Loans- Property Insurance / Life Insurance / Plant & Machinery Insurance

(while promotion of Home Loan / Term loan/ Working Capital Loans)- Other Insurance Products – Personal Accident / Medical Insurance

products

New Development in Retail Banking

• Licensing of Payment Banks

• Licensing of Small Finance Banks

Payment Banks - New

A bank licensed as a payments bank can only receive deposits and provide remittances.

Cannot carry out lending activities.• Targeted at

Migrant labourers,

Low income households,

Small businesses, and other

Unorganised sector entities.

New Payment Banks - Licensed

• 1.Aditya Birla Nuvo• 2.Airtel M Commerce Services• 3.Cholamandalam Distribution Services• 4.Department of Posts• 5.FINO PayTech• 6.National Securities Depository• 7.Reliance Industries• 8.Dilip Shanghvi, Sun Pharmaceuticals• 9.Vijay Shekhar Sharma, Paytm• 10.Tech Mahindra• 11.Vodafone M-Pesa

Few Regulatory conditions for Payment Bank• The bank should be fully networked from the beginning.• The bank can accept utility bills.• It cannot form subsidiaries to undertake non-banking activities.• Initially, the deposits will be capped at ₹1,00,000 per customer.• The bank cannot undertake lending activities.• 25% of its branches must be in the unbanked rural area.• The bank must use the term "payments bank" in its to differentiate it

from other types of bank.

Few Regulatory conditions for Payment Bank contd.

• The "in-principle" license is valid for 18 months within which the entities must fulfil the requirements.• They are not allowed to engage in banking activities within the

period. • The RBI will consider grant full licenses under Section 22 of the

Banking Regulation Act, 1949, after it is satisfied that the conditions have been fulfilled

What Payment Banks can and can’t do

• They can’t offer loans but can raise deposits of upto Rs. 1 lakh, and pay interest on these balances just like a savings bank account does.

• They can enable transfers and remittances through a mobile phone.

• They can offer services such as automatic payments of bills, and purchases in cashless, chequeless transactions through a phone.

• They can issue debit cards and ATM cards usable on ATM networks of all banks.

What Payment Banks can and can’t do

• They can transfer money directly to bank accounts at nearly no cost being a part of the gateway that connects banks.

• They can provide forex cards to travellers, usable again as a debit or ATM card all over India.

• They can offer forex services at charges lower than banks.

• They can also offer card acceptance mechanisms to third parties such as the ‘Apple Pay.’

Are Payment Banks going to be a game-changer?

• The move is seen as a major step in pushing financial inclusion in the country. • It’s a step to redefine banking in India.• Target India’s migrant labourers, low-income households and small

businesses, offering savings accounts and remittance services with a low transaction cost.• It hopes payments banks will enable poorer citizens who transact only in cash

to take their first step into formal banking.• It could be uneconomical for traditional banks to open branches in every

village • The mobile phones coverage is a promising low-cost platform for quickly

taking basic banking services to every rural citizen.

Are Payment Banks going to be a game-changer? Contd.

• The innovation is also expected to accelerate India’s journey into a cashless economy. • India’s domestic remittance market is estimated to be about Rs. 800-900 billion

and growing.• Payment banks can also play a crucial role in implementing the government’s

direct benefit transfer scheme, where subsidies on healthcare, education and gas are paid directly to beneficiaries’ accounts. • Payment technologies have proved hugely popular in other developing countries Eg: In Kenya, the most cited success story, Vodafone’s M-Pesa is used by two in three of adults to store money, make purchases and transfer funds to friends and relatives.

Small Finance Banks – What are they ?• Banks with a small finance provide basic banking service of acceptance

of deposits and lending• Objective is to provide financial inclusion sections of the economy not

being served by other banks, such as small business units, small and marginal farmers, micro and small industries and unorganised sector entities such as

small business units, small and marginal farmers,micro and small industries and unorganised sector entities.

What Small Banks can do

– Take small deposits and disburse loans

– Distribute mutual funds, insurance products and other simple third-

party financial products

– Lend 75% of their total adjusted net bank credit to priority sector

– Maximum loan size would be 10% of capital funds to single borrower,

15% to a group

– Minimum 50% of loans(total loan portfolio) should be up to 25 lakhs

What Small Banks cannot do

Can not Lend to big corporates and groups

Cannot open branches with prior RBI approval for first five years

Other financial activities of the promoter must not mingle with the bank

It cannot set up subsidiaries to undertake non-banking financial

services activities

Cannot be a business correspondent of any bank

Small Finance Banks Licensed List by RBI

• Au Financiers (India) Ltd., Jaipur• Capital Local Area Bank Ltd., Jalandhar• Disha Microfin Private Ltd., Ahmedabad• Equitas Holdings P Limited, Chennai• ESAF Microfinance and Investments Private Ltd., Chennai• Janalakshmi Financial Services Private Limited, Bengaluru • RGVN (North East) Microfinance Limited, Guwahati• Suryoday Micro Finance Private Ltd., Navi Mumbai• Ujjivan Financial Services Private Ltd., Bengaluru• Utkarsh Micro Finance Private Ltd., Varanasi

Why payments, small banks will revolutionise banking system?

• Of the two sets of new, differentiated banks, payment banks are probably going to do more in the initial stages, since they can dramatically increase the reach of banking by using mobile-based technology. • And the biggest players in this game are all well-funded and credible.

Among the initial licensees are the Aditya Birla Group, Airtel, Vodafone, Reliance, India Post (the country’s postal service), billionaire Dilip Shangvi (owner of Sun Pharma, India’s largest pharma company) and PayTM, the e-wallet company.

Why payments, small banks will revolutionise banking system?

Contd.Consider the numbers: • Airtel has 230 million customers, Vodafone 185 million and Idea 162

million. • That’s over 577 million potential payment bank customers between

just three future payment banks. • India Post, with over 1.5 lakh post offices, many in semi-urban and

rural areas, can serve several hundred million customers from its branches. • PayTM already has 25 million e-wallet customers, who are all

potential targets for its payment bank.

Mobile Banking - Wallet Banking (new)

• Select Banking Products through installation of Mobile apps• Features :• Withdrawal of money at ATM with out debit cards• Transfer of Money to known contacts through mobile using PIN• Request for money from known contacts• Bill payment for registered services• On the go services – booking of rail / air / cinema tickets• Example : ICICI – “Pockets”, SBI – “BUDDY”, AXIX – “LIME”

SBI – Mobile Wallet Banking - New

SBI Mobile Wallet- features

SBI – “BUDDY” – MOBIL WALLET Banking

Mobile Wallet Banking ICICI Bank “pockets”