Banks, Banking & Retail banking services

Prepared by::
Mithun Shankar

Table of Contents
Section A

Content

Slide number

What is a Bank?

What is Banking? Classification of Banking services

Banks and Profits

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What is a Bank?

Bank is a financial intermediary. Banks are depository institutions i.e., they collect deposit from individual investors and business corporations. These deposits are in turn lent to borrowers or invested in financial securities such as mutual funds, stocks, bonds.

What is Banking?

Banking is defined as the process of accepting deposits from people/units who have surplus (lenders) in economic system and lend it to people who need it (borrowers).

Classification of Banking services

Banking

Retail Banking

Wholesale Banking

Universal Banking

Retail Banking Retail banking refers to mobilization of deposits from individuals 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

Commercial/Wholesale Banking Commercial banks mainly service business establishments i.e., it is also known as business to business banking. It is usually between banks and large establishments/enterprises, even offer services to individuals.
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 is subscribed by the underwriter. Clearing of securities. Custodian services. Example :: IDBI

Universal Banking
Universal banking is a combination of both retail and commercial (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 their purchase of securities. Secured or unsecured loans to business firms/enterprises. Clearing of securities. Many more.

Example :: ICICI, SBI.

Banks and Profits

Section B

Table of contents
Section B
Content Slide number

How does bank earn profits?

What will have an impact on banks profits? Investor expectations Borrower expectations

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12 13 14

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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, prewithdrawal 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 Fixed assets Current assets Interest earned on loans Return on assets, equity. Good faith (brand name)

Liabilities Non Performing Assets Interest payable on deposits Operating costs (Salary, Rents payable).

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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 Section C

Content Chart flow- Deposits Demand deposits Slide number 18 19

Time deposits
Cheque Chart flow :: Transaction services Account services Collection and payment services Remittances and fund transfers

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23 26 27 30 31

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Table of contents Section C

Content Slide number

Lending/Loans and process involved

Loans :: Types of loans Chart flow :: Cards

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35 40

Credit cards
How does credit card shopping work? Debit cards Smart cards Chart flow :: Third party services

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42 48 49 50

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Services offered by Retail Banks

Bank

Deposits

Transaction services

Lending /Loan

Cards

3rd party products

Demand deposits
Time deposits

Account services
Collection & payment Fund transfers

Real estate

Credit cards
Debit cards Smart cards

Insurance

Auto Loan

Mutual funds

Student loans Personal loan18

Chart flow :: Deposits Deposits

Demand Deposits

Time Deposits

Savings account

Money markets

Current account

Certificate of deposits

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Demand Deposits :: Savings Deposit Features

This kind of account helps people to keep money in a safe place and earn interest on the same. Flexibility :: withdraw your money anytime. Debit cards for 24*7 banking With or without Cheque book facility Internet 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

Features
Offer safety and convenience No restriction on number of withdrawals Overdraft facility Debit cards for 24*7 banking Internet banking Statement of transactions

Drawback
No interest paid on the amount deposited

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Time deposits :: Money market

Offers higher interest rate when compared to savings deposit Limitation on number of cheque withdrawal's The user should maintain minimum balance as prescribed by the bank, usually on higher than savings deposit.

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Time deposits :: Certificate of Deposits Certificate of Deposits commonly known as Fixed deposits The depositor will have to invest/put in specific amount of money for specific period of time. Features
The interest rate changes based on the time period of the deposits 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 encoded information 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 from company 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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Chart flow :: Transaction services

Transaction services

Account services

Collection and payment services

Remittances and fund transfers

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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 the bank for the payment of utility bills, insurance premiums, subscriptions Balance information Banks provide the customers account balance via different channels such as e-mail, phone, internet, mailers.

Account statements The account statements are of two types Bank account statements Brokerage account statements 29

Transaction services :: Account services

Bank account statements Bank account statement lists the transactions that took place on an account for a particular time period. They might be credit or debit transactions. Brokerage account statements Brokerage account statement lists stock purchases and sales and other transactions.

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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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Chart flow :: Lending / Loans

Lending / Loans

Real estate

Auto loan

Student loan

Personal loan

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Lending/Loans and process involved Lending is traditional source of income in the banking industry. The borrower pays an interest and principal to the bank. The lending process basically has three steps Lending process Repayment Recovery

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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 the property Interest :: Can either have a fixed rate of interest or floating 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 automobiles Security :: 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 estate loans Tenure :: payment of the loan is usually after the completion of duration of the course i.e., Typically have moratorium periods and repayments start at a later date Advantage :: Tax breaks once employment begins

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Loans:: Types of loans Personal loans Purpose :: to meet the financial needs of individuals Interest :: Rate of Interest is usually higher than real estate loans and auto loans Security :: Typically unsecured, based on your income Tenure :: Shorter tenure 1-5years

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Front End Sales Credit Operations Customer

Credit Bureau
Operations Department Lending process

Product marketing

Processes involved in lending

Repayment process

Recovery process

Customer

Operations Dept

Collections Dept

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Chart flow :: Cards

Cards

Credit Cards

Debit Cards

Smart 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, he has to pay a periodic fee to the bank which has issued the card.

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How does credit card shopping work?

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How does credit card shopping work?

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 a maximum 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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How does credit card shopping work? Person Y: Well? let me tell you how does the process work when you use your card to pay for the LCD/Plasma.

You present your Bank credit card ? a VISA card. Samsung Dealer swipes your card on a machine provided by X Bank. Lets call Citibank ? the acquirer bank and the process of Samsung Dealer swiping the card on that machine ? Requesting authorization . Citibank communicates with the card issuer ? X Bank through VISA Network to check if the card is valid and has the required credit limit. X Bank reviews and approves / declines which is communicated back to Samsung dealer. You sign a receipt called Sales Draft given by Citibank. This is the obligation on your part to pay the money to X Bank. Data on this receipt can be captured electronically and transmitted.

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How does credit card shopping work? At the end of day or at the end of some period Samsung dealer chooses:

Samsung dealer submits the receipt you signed to Citibank who pays Samsung dealer the money. Samsung dealer pays Citibank a fee called Merchant Discount . Let us say this is 6% 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 and you dont pay the interest!!

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How does credit card shopping work?

Person X: Interesting! So Samsung dealer pays more than the interest that I should have paid for the loan that I take. I, as a cardholder have the following benefits
1. 2. Convenience of not having to carry cash. Credit availability? free of interest!!!

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

Person X: Certainly. Some retail outlets offer you discounts if you pay 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 the LCD this month ? or may be not any time soon either. By accepting cards, the merchant is actually extending you credit at the risk of the card issuer. He pays money to the banks to carry that risk.

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How does credit card shopping work?

Person X: So X Bank uses this money to pay back to us when they announce 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 saving on the Interchange Fee and also pay me a part of the Merchant Discount that they get. Person Y: Exactly! If you have noticed, X Bank gives you the cash back in the next credit card statement. They keep the Cash back money 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 they carry they get Rs.1000 * 6% * (60/365) = Rs.10 That is not huge, but money nevertheless. And when you consider that 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!

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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

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Smart cards

A small card much like the credit or debit card, with a magnetic strip/microchip embedded in it that can be used to store value (such as reward points) or offer intelligent services (utilization / limit alerts). Example . Prepaid cash cards which can be used instead of cash to recharge phones, renew DTH subscriptions, use it as a debit card

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Chart flow :: Third party services

Third party services

Insurance

Mutual funds

Brokerage Services

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Third Party Services Banks sell many products which is not a part of core banking, these products might be from their subsidiary or 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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Third Party Services Insurance Insurance is a promise of reimbursement in case of loss. For example: Person X takes a loan with insurance cover on the loan and fails to pay the loan due to some valid reason (such as death), In case of such an event the insurance company is liable to pay the loan amount.

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Insurance products offered by banks

Health Insurance

Life Insurance

Property Insurance

Insurance

Mortgage Insurance

Auto Insurance

Loan life Insurance

Travel Insurance

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Mutual Fund 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/bank invest in stocks, securities or bonds. Advantage It is managed professional management experts Investor need not invest his time and money when he wants to invest in mutual funds. Risk level is comparatively lower when compared to investing directly in stocks.

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Brokerage Banks offer brokerage services. How does a bank handle brokerage service? The banks handle customer orders to buy or sell securities like shares. They act as middlemen between securities 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.

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