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RETAIL BANKING A PROJECT REPORT ON “RETAIL BANKING” BACHELOR OF COMMERCE BANKING & INSURANCE SEMESTER V Submitted In Partial Fulfillment of the requirements For the Award of the Degree of Bachelor of Commerce – Banking & Insurance By HARPREET SINGH JAGGI ROLL NO. 17 1

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Page 1: 19 Retail Banking

RETAIL BANKING

A PROJECT REPORT ON“RETAIL BANKING”

BACHELOR OF COMMERCEBANKING & INSURANCE

SEMESTER V

Submitted

In Partial Fulfillment of the requirementsFor the Award of the Degree of

Bachelor of Commerce – Banking & Insurance

By HARPREET SINGH JAGGI

ROLL NO. 17

G.N.KHALSA COLLEGE OF ARTS, SCIENCE & COMMERCE,

MATUNGA, MUMBAI – 400019

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C E R T I F I C A T E

This is to certify that Mr. HARPREET SINGH JAGGI of B.Com – Banking & Insurance – Semester V (2008-09) has successfully completed the project on “RETAIL BANKING”

Under the guidance of SIR ALLAN D’SOUZA .

Course Coordinator Principal

Project Guide/ Internal Examiner

External Examiner

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DECLARATION

I, HARPREET SINGH JAGGI, the student of B.Com – Banking & Insurance – Semester V (2008-09) hereby

declare that I have completed this project on “RETAIL BANKING” Submitted is true & original to the best of

my knowledge.

Student’s Signature

HARPREET SINGH JAGGI

ROLL.NO 17

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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.

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CONTENTS

SR.NO TOPIC PAGE NO1. INTRODUCTION 7

2 WHAT IS RETAIL BANKING? 8

3 ANALYSIS OF RETAIL BANKING 9

STRENGTH 9

WEAKNESS 11

OPPORTUNITIES 13

THREATS 14

4. RETAIL BANKING IN INDIA 16

5. ADVANTAGES OF RETAIL BANKING 18

6. PRESENT SENARIO 19

7. WHAT ARE VARIOUS RETAIL

BANKING SERVICES?

20

8. VARIOUS PRODUCT OF RETAIL

BANKING

22

Home Loans 22

Auto Loans 27

Two wheeler & consumer durable loan 30

Personal/Unsecured Loans 32

Educational loan 34

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Plastic money 37

9. RETAIL LENDING 42

10. ROLE OF IT IN RETAIL BANKING 43

11. MARKETING STRATEGIES 46

12. CRM IN RETAIL BANKING 48

13. CONCLUSION 49

14. BIBLIOGRAPHY 50

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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.

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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.

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ANALYSIS OF RETAIL BANKING

STRENGTH:-

1) Emerging as a new growth driver:

For 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.

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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.

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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:

Future 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.

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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.

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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.

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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

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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.

For 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

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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.

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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-à-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

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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.

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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

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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.

Categorization of Retail Bank services

Core services Facilitating services Supporting services

Payment services Cash

Foreign currency

requirements

Traveller cheque

DD/bankers cheque

IT

EFT

Making payment at door

step

Internet banking

Telephone banking

Current account

and saving account

ATM card

Standing instruction

from customer for

making payments

Inter branch transfer of

fund

Safety vault

Credit card

Debit card

Service to senior citizen

Telephone banking

Internet banking

Conversion of excess

balance to time deposit

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Loan product:

Consumer loan

Housing loan

Personal loan

Education loan

Current account

Saving account

Time deposit account

Delivery of loan at

promised time

Interest loan option

Flexibility

in paying

loan

Counseling on Real estate

market

Legal services for

documentation

ECS for payment of loan

installment

Insurance product:

Life insurance

Pension scheme

Current account

Saving account

Time deposit

account

Safety vaults

Additional insurance

facility for family

members.

Counseling on post

retirement saving

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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

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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.

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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.

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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.

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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.

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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

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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 penalty 4. 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.

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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.

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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:

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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:

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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:

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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.

RETAIL LENDING

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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

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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

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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:

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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)

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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.

For 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

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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

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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.

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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.

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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)

WEBSITE: www.google.com (Retail banking) (Banking in India) www. Go2.com (Retail Banking in India) www.icfaipress.org ww.indiainfolinne.com www.wikipedia.com www.fotoshop.com

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