2. Types of Banking: Retail Banking and its Products, wholesale Banking
and its products, International Banking, Electronic Banking, CIBIL,
Basel – II, Banking Codes and Standard Boards, Basel III and Risk
Management.
Asset-Liability Management, NPA Management, Opening accounts for
various types of customers, KYC Guidelines, Types of Collaterals and
their characteristics, Priority Sector Lending, Financial Inclusion, Recent
Developments in National and International Scenarios.
2
Unit – 2: Syllabus
4. Though there are different definitions on retail banking, there are some
common characteristics such as:
☺Multiple customer groups (individuals, small business)
☺Multiple products [Deposits (savings, fixed, recurring), Loans (education,
housing, personal), payment cards, Insurance (life, general, health),
Investments]
☺Multiple channel of distribution (Branch, Internet, ATM, Kiosk, call centers,
Mobile Banking, Credit cards, etc.)
5. Retail Banking vs Private Banking
1. Retail Banking involves provision of standard banking products and services
whereas, Private banking offers customized products and services to meet the
customers requirements.
2. Retail banking is offered to large number of individuals and small businesses
through multiple channels whereas, In private banking, customer service is
offered/rendered on a more personal basis usually via dedicated relationships.
3. In Retail banking as the products/services are offered to mass groups, the
personal attention is less whereas Private banking is investment and other
financial services provided by banks to rich people investing in sizable assets.
6. 4. The objective of Retail banking is to provide low-cost banking services to
customers whereas, the objective of private banking is to provide high cost
superior services to rich people facilitating better managing their assets and
financial requirements.
Importance of Retail banking segment for banks
☺Improves Product mix of the banks
☺Expanding revenue streams
☺Enhancing profitability
☺Ensuring better liquidity
☺Risk Management
7. Retail Banking in India
☺The growth of Retail banking in emerging economies like India is attributable to the
rapid advances in information technology, evolving macroeconomic environment,
financial market reforms and several demand and supply side factors.
☺Retail loan is set to become largest segment for Indian banking industry as the
CAGR stood at 14% compared to 4% decline of corporate loans (Source: The Week
dated, Abhinav Singh, 09 Feb 2022).
☺The Retail loan market has transformed from a seller’s market to a buyer’s market.
☺New generation private sector banks have been able to create a niche in the retail
sector.
☺Public sector banks are not much lagging behind as they leverage to vast branch
network and outreach.
☺Retail loans contribution to India’s GDP is low (7%) as against 55% in South Korea,
52% in Taiwan and 33% in Malaysia.
8. The drivers of Retail Banking business in India
• Economic prosperity and increase in purchasing power have given a boom to retail
banking (India’s economy grow at an average of around 6% in the last one decade).
• Changing consumer demographics indicates vast potential for growth in consumption
both qualitatively and quantitatively. India is having highest proportion (nearly 70%)
of population below 35 years of age.
• Technological factors played major role. Convenience banking in the form of debit
cards, internet, phone banking etc., has attracted new customers into the banking field.
• Decline in interest rates have also contributed to the growth of retail credit by
generating the demand for such credit.
10. I. Retail deposit accounts
1. Savings Deposits accounts:
☺most popular deposits for individual accounts.
☺provide cheque facility.
☺gives flexibility for deposits and withdrawals.
☺interest on savings account differs from 3% - 6%.
☺Earlier SB account was regulated by RBI has and it was fixed at 4% on daily
balances basis. However, wef 25th October 2011, RBI has deregulated saving
account interest rates and now the banks are free to decide the same with certain
conditions imposed by RBI.
11. • Under the directions of RBI, now banks are also required to open no frill
accounts (accounts which do not have any minimum balance requirements).
Interest earned up to Rs.10,000 in a financial year on savings bank account is
exempted from tax.
• There is a maximum limit for number of transactions.
• KYC norms are applicable.
• Joint account is allowed.
• Deposit insurance is applicable.
12. 2. Current account
☺meant for businessmen and not for the purpose of savings/investments.
☺No limit for No. of transactions or the amount of transactions in a day.
☺Mostly opened in the name of a firm & cheque book facility is provided.
☺No interest is paid by banks on current account. on the other hand banks charge certain
service charges on such accounts.
☺current deposit accounts along with savings deposit accounts is popularly referred as
CASA. CASA is a source of low cost funds for banks.
☺Banks cost of funds and profitability is directly impacted by the proportion of CASA in
total funds.
13. 3. Time deposits
☺Time deposit is a non-transaction deposit held with banks for a pre-determined fixed
term.
☺It is also referred as term deposits and fixed deposits.
☺These deposits can be issued by banks with maturities ranging from few days to number
of years.
☺From banks perspective, these are stable sources of funds and cost of funds varies
depending on the maturity period.
☺From customer’s perspective, it is the safest form of investment and therefore it is very
appealing to low-risk taking (conservative) investors.
14. ☺Interest is compounded mostly on quarterly basis.
☺Interest may be paid on monthly intervals on discounted value.
☺pre-mature withdrawals are allowed subject to charges.
☺Loan facility is available on deposits.
☺TDS as per Income tax Act.
☺Automatic renewals allowed.
15. 4. Other deposit accounts
☺variable interest rate time deposit: It is a type of fixed deposit where the interest rate is linked to
the inflation or some other benchmark rate.
☺Non-resident deposit accounts: Banks operating from India can open following types of deposit
accounts in the name of NRI/PIO;
Non-resident ordinary rupee account (NRO a/c) – to manage income earned in India. The account
allows you to receive funds in Indian or foreign currency. The interest earned in this account is
subject to TDS. Repatriable up to US$1 million per financial year.
Non-resident external rupee account (NRE a/c) – deposits into these accounts to be earned outside
India. Foreign currency deposited into this account is converted to INR. Customer can transfer
funds to foreign account without any complications and restrictions. It is used to carrying out
business, personal banking and making investments in India. Freely repatriable.
Foreign currency non-resident account - is a fixed deposit account that a Non-Resident Indian,
can open in the currency of their current residence country (e.g.) US$. Since there is no change in
the type of currency, the risks arising out of exchange rate changes are mitigated. Freely repatriable.
17. 5. Foreign currency accounts
Bank accounts can maintain following two types of foreign currency
accounts.
☺Resident Foreign Currency account (RFC a/c) - A Resident Foreign Currency
Account can be opened if a customer is an NRI who has returned for permanent settlement in
India for a continuous period of not less than one year. If a customer want to keep his money in
foreign currency even post turning resident then this is the right account for him. He can open
this account with an authorised dealer by submitting the necessary documents.
☺Exchange Earners Foreign Currency account (EEFC a/c) – An account maintained
in foreign currency with an authorised dealer. It is a facility provided to the foreign exchange
earners, including exporters, to credit 100% of their foreign exchange earnings to the account,
so that the account holders do not have to convert foreign exchange into rupees and vice versa,
thereby minimising the transaction costs. It can be held only in the form of current account. So,
no interest is paid.
18. II. Retail Loans
☺Retail loans are extended to individuals, salaried and self-employed.
☺retail loans are classified as;
secured vs. unsecured retail loans.
straight vs. revolving retail loans.
19. 1. Secured vs unsecured retail loans
☺Secured loans refers to loans backed by assets like house in case of home loans, car
in case of auto loan.
☺Asset acquired with bank money secures as collateral for the loan.
☺From bank’s perspective, secured loans are considered safe bet as bank re-possess
and dispose of the asset if the borrower fails to pay the loan as agreed.
☺Unsecured loan is granted on the basis of credit rating of a borrower and his income
and expense behavior.
☺Personal loans, credit card facility and education loans fall under the category of
unsecured loans.
20. 2. Straight vs revolving loans:
☺Straight loans repay the same amount of money in each repayment period involving
principal and interest. However, the interest portion is reduced and principal portion
is increased with time.
☺Housing loans, vehicle loans, consumer loans, etc., are normally straight loans
wherein loan amount is disbursed once and borrower pay through equated monthly
installments (EMI).
☺Revolving loans also called as evergreen loans is an arrangement which allows for
the loan amount to be withdrawn, repaid and redrawn again up to certain limit in
any manner and any number of times, until the arrangement exists. Credit card loans
are revolving in nature.
21. Retail loan Products
1. Housing loans / Home loans:
☺It is the largest component of retail loan portfolio.
☺Home loan up to certain value is also reckoned as part of priority sector lending (28
lakhs loan – Dwelling cost Rs.35 lakhs )in metro cities, in other cities – (Rs. 20 lakhs
- Dwelling cost Rs.25 Lakhs).
☺Banks provide housing loans in two ways;
a. Direct Housing Finance:
☺It refers to provision of loan to individuals or group of individuals including co-
operative societies for owing / constructing a house, for purchase of a plot, for
carrying out alterations, additions / repairs to pre-owned house, etc.
22. b. Indirect Housing Finance:
☺It is channeled by way of term loans by housing finance institutions.
☺Eligible loan amount is usually based on multiples of take home/gross salary subject to
maximum limit.
☺Down payments usually 15 to 20 percent.
2. Personal loans:
☺Banks give personal loans without any tangible security.
☺Invariably such loans are given to salaried persons based on their regular source of
income i.e., salary.
23. Purpose:
☺The purpose of personal loan is to cover travel, marriage, education, medical expenses,
etc.
Eligibility:
☺Though eligibility for personal loan differs from bank to bank, generally employees of
central, state Governments, employees of reputed companies in public and private with
minimum number of years of service are eligible to avail personal loans.
Loan amount:
☺The loan amount is calculated based on number of times of the gross/net salary.
☺Banks generally verify the proof of employment, salary certificate, bank statement, etc.,
to work out the eligible loan amount.
24. ☺Some bank insists that minimum 40 to 50 percent of the gross salary should be the
minimum take home pay after the proposed EMI for the loan.
Security:
☺No tangible security like fixed assets is required.
☺Mostly banks require a personal guarantee.
Loan documents:
☺cheque leaves.
☺Loan agreement (as per bank’s standard format).
☺Bank’s loan sanction letter.
☺Proof of employment, salary certificate and pass book/bank statement showing
salary credits.
☺Guarantee agreement, if the loan is guaranteed.
25. 3. Consumer loans:
☺Consumer loans are either granted by banks by way of term loans or granted by finance
companies by way of hire purchase.
☺These loans are given to customers to assist them to obtain consumer durables and white
goods like TV, PCs, refrigerators, etc., of their choice and requirement.
☺Goods are purchased through the hire purchase, then the title of goods passes to the
buyer at the end of the term after the last installment is paid.
Eligibility:
☺Generally persons who have regular source of income like salaried persons,
professionals, pensioners, self-employed, etc.
26. Loan Amount:
☺Decided based on the cost of the goods purchased and the margin (which needs to be
provided by the borrower).
☺The minimum take home pay off around 40% after the proposed EMI is also
considered.
Security:
☺The consumer goods to be purchased out of the loan amount are to be hypothecated
to the bank.
Loan documents:
Blank cheques Hypothecation agreement
Loan sanction letter Proof of employment
salary certificate passbook/bank statement
IT returns (professionals)/form 16/16A (Self-employed)
Quotations of the goods/articles from reputed dealer.
27. WHOLESALE BANKING
• Wholesale Banking refers to do banking business with industries and business
entities – Mostly corporates and trading houses including MNCs, Domestic
business houses and Public sector companies.
• This segment of business is also called as Corporate banking / Commercial
Banking.
• Traditionally, banks in India have been doing only this segment of business.
• Competing with multinational banks, in servicing to this segment of customers,
banks are contesting with each other in providing a wide array of commercial,
transactional and electronic banking products.
28. • The product offerings are suitably structured taking into account a client’s risk
profile and specific needs.
• The products offered under Wholesale Banking can be classified into four major
groups;
• Fund-based services
• Non-Fund based services
• Value-Added services
• Internet Banking services
29. 1. Fund-based services
A. Term lending – commercial loan for major investment in the business - Repayment
period:10 years (max: 30 years) – Monthly or quarterly repayment schedule.
B. Short-term finance – often referred as bridging finance – loan period usually up to 12
months – usually secured.
C. Working capital Finance – capital used for day-to-day business operations – Current
Assets minus Current Liabilities.
D. Bill Discounting – Selling a bill of exchange prior to the maturity date at a value less than
the par value of the bill.
E. Structured Finance – involves high complex financial transactions – offered for the
companies with unique financing needs which don’t match conventional financial products
such as loan.
F. Export Credit – Loan facility extended to an exporter by a bank in the exporter’s country.
30. 2. Non-fund based Services
A. Bank Guarantees – bank ensures the liabilities of the debtor to creditor will be
met even if the debtor fails to settle a debt (liability will met by bank in such
case).
B. Letter of Credit – Written document showing commitment to pay by a importer’s
(buyer’s) bank to the exporter’s (Seller’s) bank – Guarantees payment of specified
sum at specified time in specified currency.
C. Collection of Bills and Documents – Collect bills and receivables on behalf of
corporates.
31. 3. Value-added services
A. Cash management services – helps in efficient processing of firm’s receivables
and payables.
B. Channel Financing – innovative product to extent working capital finance to
dealers having business relationships with large companies in India.
C. Vendor Financing - The lending of money by a company to one of its customers
so that the customer can buy products from it. By doing this, the company
increases its sales even though it is basically buying its own products.
D. Real Time Gross settlement (RTGS) – 'Real Time' means the processing of
instructions at the time they are received rather than at some later time; 'Gross
Settlement' means the settlement of funds transfer instructions occurs individually
(on an instruction by instruction basis) Primarily meant for large transactions
(Minimum amount remitted through RTGS is Rs.2 lakhs).
E. Corporate Salary accounts
32. F. Syndication Services – Loan syndication most often occurs in situations where a
borrower requires a large sum of capital that may either be too much for a single lender
to provide, or may be outside the scope of a lender's risk exposure levels. Thus, multiple
lenders will work together to provide the borrower with the capital needed, at an
appropriate rate agreed upon by all the lenders.
G. Forex Desk – helps in buying/selling foreign currencies.
H. Money Market Desk – buy & sell money market securities on behalf of customers.
I. Derivatives Desk – offers assistance in using derivative products to speculate and
hedge.
J. Employees Trusts
K. Tax Collection – provides tax collection services for individuals/corporates and
remit the tax money to government.
L. Bankers to Right / Public Issue: Act as a capital market intermediary by acting as a
banker / registerer to the issue.
33. 4. Internet Banking Services
A. Payment Gateway Services: It is a e-commerce application service provider
that authorizes card payments for e-businesses and online retailers. It is the
equivalent of a physical point of sale terminal located in most retail outlets.
Payment gateways protect debit/credit card details by encrypting sensitive
information, such as card numbers, to ensure that information is passed
securely between the customer and the merchant and also between merchant
and the payment processor.
B. Corporate Internet Banking: It is the powerful user-friendly online banking
service that helps Corporate and Institutional customers to execute complex
banking transactions from their desktops.
34. INTERNATIONAL BANKING
• Every country manufactures certain goods and services beyond its requirements and
they need to sell (export) this surplus production to other countries.
• Similarly, no country is self-reliant with regard to all its requirements and hence it
needs to buy (import) certain goods and services from other countries in order to bridge
the demand and supply of its economy.
• In a liberalized free trade economy, the government and people of one country may
invest capital and labour in another country and in turn may earn income in the form of
profits, dividends, interest, royalty etc.
• The foreign exchange market is the place where each country / people can pay for their
obligations and receive their receipts in their home currency.
35. • Banks are among the active members of the foreign exchange market
and they provide certain types of services to their customers called
International Banking services.
• Banking services catering cross-border transactions is called International
Banking.
• Banks are offering various services to the international business people.
These services can be broadly grouped into the following;
36. 1. REQUIREMENTS OF EXPORTERS
• Export packing Credit: Pre-shipment finance for exporters – Both in rupees
and foreign currencies
• Export Bill Negotiation: Banks negotiate export bills drawn under Letter of
Credit (LC) – payment of bills to exporter is made even before bills are realized
from importers.
• Export Bill Purchase and Discounting: Even when the exports are not covered
under LC, banks sanction credit limits and pay the value of invoice, immediately
on shipment to the exporter at a discount. The export documents are presented
and the proceeds will be credited to the advance account on realization.
37. • Export Bill Collection Services: The export documents are sent for collection by
the exporter through his banker for payment by the overseas buyer. The payments
received against the delivery of documents by the buyer’s bank are remitted to the
collecting (Exporter’s) bank and proceeds credited to his account after deducting
commission and other charges, if any.
• Bank Guarantees: Banks also issues guarantees in foreign currency on behalf of
exporters for approved purposes as defined under FEMA, subject to availability of
credit limits or against 100 cash margin.
• Rupee advances against export bills: If an exporter expects the currency of his
invoicing to appreciate further and does not want to surrender the export value of
Forex, before the due date, banks offer rupee advances against export bills up to the
due date of the receivables, subject to limit availability and RBI rules.
38. • Export LC Advising: With the corresponding banking relationship with the
leading banks across the world, Letter of Credit is advised through banks.
• Export LC confirmation: When the exporter does not have confidence in the
credit standing of the LC opening bank or if the political climate or credit risk
of the buyer’s country is not satisfactory, banks offer LC confirmation
services.
• Suppliers credit: This facility enables Indian exporters to extend term credit
to importers (overseas) of eligible goods at the post-shipment stage.
39. 2. REQUIREMENTS OF IMPORTERS
oImport Collection Bill services: Bill collection requires careful and accurate
attention to Bills of Exchange, Bills of lading and other documents. Banks collect
import collection documents meticulously and help importers to remit the import
value.
o Direct import bills: FEMA allows importers to receive import documents directly
from the overseas supplier subject to certain conditions and banks help importers to
settle payments against the direct importers.
o Advance payment towards Imports: Whenever any advance payment to an
overseas supplier is required to be made, banks provide advisory services and also
assist in faster remittance to the suppliers.
40. • Import letter of Credit: Banks issue Import Letter of Credit on behalf of importers.
• Arranging for Buyer’s Credit: BC is a short-term loan facility extended to an importer by
an overseas lender such as a bank or financial institution to finance the purchase of capital
goods, services etc. Buyer’s credit is a very useful financing method in international trade as
it gives importers access to cheaper funds compared to what may be available locally.
• Bank Guarantees: Bank issue bank guarantees in foreign currency on behalf of Importers
for all approved purposes as defined under FEMA, against 100 per cent cash margin or
under regular limits.
41. 3. REMITTANCE SERVICES
• EFC Account Services: Banks provide facilities to maintain an Exchange earners
Foreign Currency account (EEFC a/c) in all permitted currencies.
• Receipt of Foreign Inward Remittances Services: Banks receive from abroad and
credit them to the Indian beneficiaries accounts.
• Payment Services to Abroad (Outward Remittances): Banks as Authorized
Dealers in Foreign Exchange provide remittance facilities in foreign currency to any
country for any permitted purpose up to the limits permitted by RBI.
*****
42. ELECTRONIC BANKING
• Electronic banking is a form of banking in which funds are transferred through
an exchange of electronic signals rather than through an exchange of cash,
cheques, or other types of paper documents.
• There are various electronic banking systems, and they range in size. An
example of a small system is an ATM network. Electronic banking laid the
groundwork for speed and convenience in individual and commercial (business)
banking. The spread of personal computer use has added another layer of
convenience and speed to the process.
• Electronic banking allows customers of most banks to do their banking at any
hour of the day, regardless of the bank’s operating hours. When funds are
transferred between accounts by electronic means, it is called an
electronic funds transfer (EFT).
43. The provision of banking service through electronic channels and the
customer can access the banking data without time and geographical restrictions.
E-banking refers to the use of technology which allows customers to perform
banking transactions electronically without visiting a bank.
E-Banking is the delivery of Banking services through the use of electronic
communication. E-banking may include ATMs, Wire transfers, Telephone
Banking, Electronic Fund Transfers and Debit/Credit Cards.
E-Banking is often called as Internet Banking, On-Line Banking or PC
Banking.
44. Electronic services allow bank’s customers and other stake holders to interact and
transact with the bank through a variety of channels such as the internet, wireless
devices, ATMs, Online banking, Phone banking, Electronic collection services,
Smart cards and Tele-banking.
Other services offered under E-banking include electronic fund transfer, electronic
clearing service and electronic payment media including the Credit card, Debit card
and Smart card.
On-line banking helps consumers to overcome the limitations of place and time as
they can bank anytime, anytime as these services are available 24 hours, 365 days a
year without physical limitations of space like a specific bank branch, city or
region. They also by-pass the paper based aspect of traditional banking.
45. Development of E-Banking
In 1980s: Rapid development of internet, IP System (Communication system) and
E-Commerce.
May 1995 – Wells Fargo – the first bank in the world to offer customer access to
their accounts over the internet.
ICICI was the first bank to initiate the internet banking revolution in India as early
as 1997 under the brand name ‘Infinity’.
46. Why E-Banking is important?
• Choice and Convenience for customers
• Attracting High value customers
• Enhanced Image
• Increased revenues
• Easier Expansion
• Load Reduction on other channels
• Cost Reduction
• Organizational efficiency
• E-Marketing in Financial services sector
48. Forms of Electronic-Banking
In recent years, with the development of technologies and techniques, options for
communication with banks are expanding for clients. New services are originating such as
phone banking, internet banking and others.
Electronic banking are more convenient, faster, and often cheaper for clients.
1. Automated Teller machine
2. Internet Banking
3. Electronic Clearing Services
4. Electronic Fund Transfer
5. Tele-banking
6. Electronic Cheques
7. Credit Cards
8. Debit Cards
9. Smart card
49. Electronic Fund Transfer System - Types
1. IMPS (Immediate Payment System):
• IMPS is an instant payment inter-bank electronic funds transfer system in India.
• It offers an inter-bank electronic fund transfer service through computer systems and
mobile phones.
• The service is available 24x7 throughout the year including bank holidays.
• It is managed by the National Payments Corporation of India (NPCI) and is built upon
the existing National Financial Switch network.
• IMPS was publicly launched on 22 November 2010.
• Around 200 million IMPS transactions amounting to roughly US$20 billion of
transaction amount happen every month in India.
• The sender requires to know the bank account number and the Indian Financial System
Code (IFSC) of the beneficiary to transfer money.
50. 2. NEFT (National Electronic Fund Transfer):
• It is an electronic funds transfer system maintained by the Reserve Bank of India (RBI).
• It was started in November 2005, the setup was established and maintained by Institute
for Development and Research in Banking Technology (IDRBT).
• NEFT enables bank customers in India to transfer funds between any two NEFT-
enabled bank accounts on a one-to-one basis. It is done via electronic messages.
• Unlike real-time gross settlement, fund transfers through the NEFT system do not occur
in real-time basis.
• There are 48 half-hourly batches occurring between 00.30 am to 00:00 am every day
regardless of a holiday or otherwise.
• NEFT has gained popularity due to the ease and efficiency with which the transactions
can be concluded.
• There is no limit – either minimum or maximum – on the amount of funds that can be
transferred using NEFT.
51. 3. RTGS (Real Time Gross Settlement)
• The acronym 'RTGS' stands for Real Time Gross Settlement, which can be defined
as the continuous (real-time) settlement of funds transfers individually on an order by
order basis (without netting).
• 'Real Time' means the processing of instructions at the time they are received rather
than at some later time; 'Gross Settlement' means the settlement of funds transfer
instructions occurs individually (on an instruction by instruction basis).
• Considering that the funds settlement takes place in the books of the Reserve Bank of
India, the payments are final and irrevocable.
• The RTGS system is primarily meant for large value transactions.
52. Essential information to furnish for RTGS
The remitting customer has to furnish the following information to a bank for initiating a
RTGS remittance:
• Amount to be remitted
• Remitting customer’s account number which is to be debited
• Name of the beneficiary bank and branch
• Name of the beneficiary customer
• Account number of the beneficiary customer
• Sender to receiver information, if any
• The IFSC Number of the receiving branch
53. Differences between NEFT, IMPS, and RTGS
Category NEFT RTGS IMPS
Minimum transfer
value
Rs.1 Rs.2 lakh Rs.1
Maximum transfer
value
Depends on the
customer segment
No upper limit Rs.2 lakh
Type of settlement Batches One-on-one settlement One-on-one settlement
Speed of settlement
1/2 hour (subject to
cut-off timings and
batches)
Immediately Immediately
Service availability 24/7 Depends on the bank 24/7
Online/Offline Both Both Online
54. Credit Information Bureau of India Limited (CIBIL)
Ownership Structure
• CIBIL, India’s first credit information bureau was established by SBI and HDFC, with a
shareholding of 40% each, while Dun & Bradstreet Information Services Private Limited
(D&B) and Transunion international Inc. (TU) hold 10% each.
• D&B and TU have also provided the necessary technical and Software support to CIBIL.
• In 2016, TransUnion acquired 92.1% stake in CIBIL to become Transunion CIBIL.
• CIBIL is a repository of information, which contains the credit history of Commercial
and Consumer borrowers.
• CIBIL provides this information to its members in the form of Credit Information
Reports (CIRs).
55. Functions of CIBIL
• The CIBIL is a composite Credit Bureau, which caters to both commercial and consumer
segments.
• The Consumer credit bureau covers the credit availed by individuals while the
Commercial Credit Bureau covers credit availed by non-individuals such as partnership
firms, proprietary concerns, private and public limited companies etc.
• The aim of CIBIL’s commercial credit Bureau is to minimize instances of concurrent and
serial defaults by providing credit information, pertaining to non-individual borrowers such
as partnership firms, proprietary concerns, private and public limited companies etc.
• CIBIL maintains a central database of information as received from its members. It collates
and disseminates this information on demand to members in the form of commercial Credit
Information Reports (CIR) to assist them in their loan appraisal process.
56. Roles of CIBIL
• CIBIL is India’s first credit information company. It collect and maintain monthly
reports (Credit Information Report – CIR) from banks and Financial institutions
dealing Commercial and Individuals loan and credit card payment history.
• Based on the CIR, a credit score is generated which is then used by the lenders
during the loan evaluation process.
57. Credit Score
• A Credit score (CIBIL Transunion score) is a three digit numeric summary of your
credit history. The value ranges between 300-900. The credit score is derived by
using details found in the Accounts and Enquiries section on your Credit
Information Report (CIR).
• The Score indicates the ‘Probability of default’ of a borrower based on their credit
history.
58. • The closer your score is 900, the more favorably your loan application will
be viewed by a credit institution. The score plays a critical role in the loan
approval process. The higher the credit score, the better the chances of your
loan getting approved.
• In simple, individual’s credit score tells how likely a loan applicant is
going to payback the loan based on the applicants past pattern of credit
usage and loan repayment behavior.
• The higher credit score gives more confidence to the credit institutions to
approve your loan application.
59. Determining loan eligibility
• Loan eligibility is determined using information such as Income, Current EMIs and
Credit Score. Once a credit score meets the lenders internal credit policy criteria,
they analyze the other key documents before approving loan application.
60.
61.
62. How to read your Credit Report
• The credit report is divided into 6 sections.
71. BASEL
Basel norms are set by Bank of International Settlement (BIS) in Basel, Switzerland. BIS was established on
17 May 1930.
he Bank for International Settlements (BIS) is an international financial institution owned by central banks
that "fosters international monetary and financial cooperation and serves as a bank for central banks"
The mission of BIS is:
- to serve the central banks in monetary and financial stability
- to foster international cooperation in monetary and financial stability
- to act as a bank for central banks
Currently 63 countries central bank are members to the BIS. These countries together make up about 95% of
world GDP.
Basel Committee on Banking Supervision (BCBS) is a committee of banking supervisory authorities.
72. BCBS is the global standard-setter for the prudential regulation of banks worldwide with the purpose
of enhancing financial stability.
I. Basel I Accord: (focused on credit risk)
BCBS came out with its first accord in 1988 for banks, taking into account the element of risk in
various types of assets in the balance sheet. (Risk Management)
Under Basel I Accord, only the credit risk was considered initially along with the minimum
requirement of capital funds at 8 percent of the total risk weighted assets – Tier 1 capital (includes
shareholders’ equity and retained earnings) at 4% and Tier II capital at 4%. (includes revaluation
reserves, hybrid capital instruments, subordinated term debt, general loan-loss reserves and
undisclosed reserves).
In 1996, the accord was amended to include market risk. No recognition of operational risk.
In India during Basel I Accord period, however banks are required to maintain a minimum Capital-
To-Risk Weighted Asset Ratio (CRAR) of 9 percent on an ongoing basis.
74. II. Basel II Accord:
Following the South East Asian Currency Crisis, the Basel Committee met in June 1999 and came
up with Basel II Accord. Basel II was officially introduced in the year 2005.
Short term funds played a major role in Asian Currency Crisis. So, the risk weights accordingly
adjusted under Basel II.
Brings discipline and safety to banking institutions.
The Three Pillars of Basel II are;
Minimum Capital Requirements: Capital Structure & Capital adequacy
Supervisory Review Process: Supervisors can impose additional capital
Market Discipline: Disclosure of information (capital structure, capital adequacy & different
types of risks namely, market risk; liquidity risk and operational risk)
75. Basel III Accord:
After Global financial Crisis in 2008-09, the Basel III accord was agreed by committee in
December 2010.
It maintains the three pillars of Basel II as that helps the financial health of whole environment.
It address the shortcomings of Basel II to create more stable banking / financial sector.
The main objectives of Basel III are;
- To improve the banks ability to absorb losses / shocks.
- To improve risk management and governance.
- To strengthen bank’s transparency and disclosure.
76. In India, Bank assets are classified into 5 categories viz., 0%, 10%, 20%, 50% and
100%.
The Reserve Bank issued final guidelines on implementation of Basel III capital
regulations on May 2, 2012. The guidelines became effective from April 1, 2013 in
phases and the full implementation was postponed due to COVID-19 (earlier planned to
implemented in March, 2019 and postponed to March 2020 and it is now further
postponed).
The major features of Basel III are;
- It provides a stricter definition of capital (what qualifies to be called capital and what
not).
- More common equity – Minimum 4.5% in lieu of 2% (Increase in common equity
enhances the ability to absorb losses).
77. - More Tier I (T1) capital to Risk Weighted Assets – 6% of Tier I capital in lieu of 4%. (Tier 1
capital consists of shareholders' equity and retained earnings – helps in enhancing loss
absorption capital)
– For example, bank ABC has Rs. 6,00,000 in equity and retained earnings and has Rs. 100,00,000
in risk-weighted assets. Its tier 1 capital ratio is 6% (6,00,000/100,00,000), which meets the
minimum Basel III requirement.
- Introduced additional buffer called Capital Conservation Buffer of 2.5% of Risk weighted Asset
(RWA) making total capital requirement to go from 8% to 10.5%.
- It recommends better liquidity.
78. - It introduces new term called ‘Counter Cycle Buffer’ to be used during stress / bad
times (0%) and during healthy times (2.5%). This is introduced to curtail excessive credit
growth and risk taking by banks.
- Systematically Important Financial Institution (SIFI) expected to go beyond Basel III
recommendation. (Big financial institutions whose stress affects whole industry).
Basel II vs. Basel III
79. • Global Liquidity Standard
Apart from a strong capital requirements, a need for strong liquidity base is
realized in Basel III accord. To complement these principles, the accord was strengthened with two
minimum requirements for ensuring liquidity.
Liquidity Coverage Ratio (LCR)
= High quality liquid assets / Net Cash Outflows over a 30-day period >= 100%
LCR ensures that bank maintains high quality liquid assets that can be converted into cash.
Net Stable Funding Ratio (NSFR)
= Available Stable Funding / Required Stable Funding >= 100%
Helps to measure the long term capability of a bank.
80. • Some recent news and proposed changes:
With an aim to reduce risk in the banking sector, RBI has proposed to limit exposure of
a bank to a business group to 25 percent of its core capital, down from the existing level
of 55 percent.
Public Sector Banks (PSUs) required additional capital mobilization of more than 2.5
lakh crores to implement Basel III requirements. In 2019-20, Rs.70,000 crores was
infused to boost credit and strong impetus to the economy.
RBI’s asset quality review adds-up the banks’ pressure in maintaining Capital Adequacy
Ratio (CAR) as the provisions for losses are increased drastically.
RBI’s approval for revaluation of assets brings some cheer in banking industry.
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81. BANKING CODES AND STANDARD BOARDS OF INDIA (BCSBI)
Despite a number of committees have gone in to the aspect of customer service
and made certain recommendations, the goal of efficient and faultless service has not
been reached.
One of the way to achieve this is to define and benchmark the delivery
process so that the actual performance can be compared and improved whenever the
shortcomings are noticed.
Similarly, it will be appropriate for the banks to communicate its
commitments to customers in specific terms (Example: The standard time to
withdraw an amount X in a small size will take 10 minutes) so that both staff members
and customers aware of the timeliness and standard of the banking transactions
delivered.
Thus in improving customer service, banking codes and standards play an
important role.
82. Background and Origin
• In November 2003, RBI constituted the committee on Procedures and
Performance Audit of Public Services under the chairmanship of Shri S.S.
Tarapore (former Deputy Governor) to address the issues relating to availability
of adequate banking services to common man.
• The mandate to the committee included identification of factors that hinders the
attainment of best customer services and suggesting steps to improve the
quality of banking services to individual customers.
• The committee felt that in an effort to continuously upgrade the package of
services that banks offered to their customers there was a need of benchmarking
of such services.
83. • The committee found that there was a gap between the measuring the
performance of the banks against benchmark reflecting the best
practices.
• Therefore, the committee recommended setting up of Banking Codes and
Standards Boards of India broadly on the lines of Banking Codes and
Standards Boards functioning in U.K.
• Dr.Y.V.Reddy, Governor, Reserve Bank of India, in his Monetary Policy
statement (April 2005) announced setting up of Banking Codes and
Standards Board of India (BCSBI) in order to ensure comprehensive code
of conduct for fair treatment of customers was evolved and adhered to.
84. Formation of BCSBI
• The BCSBI has been registered as a separate society under the Societies
Registration Act, 1860 on 18th February, 2006.
• The BCSBI functions as an autonomous body, to monitor and assess the
compliance with codes and minimum standards of service to individual customers
to which the banks agreed to.
• BCSBI is not a Department of the RBI. It is an independent banking industry
watch dog to ensure that the consumer of banking services get what they are
promised by the banks.
85. Codes brought out by BCSBI
BCSBI has brought out two codes, viz.,
• Code of Bank’s Commitment to Customers
• Code of Bank’s Commitment to Micro and Small Enterprises (MSEs).
86. Code of Bank’s Commitment to Customers
• The Indian Bankers Association (IBA) had brought out its ‘Bankers Fair
Practice’ code in June 2004 and all member banks adopted it voluntarily. The
code was essentially a commitment to be fair and transparent in dealing with
individual customers.
• The IBA had also separately come out with ‘Fair Practices Code for Credit
card Operations’ and ‘Model Code for Dues and Repossession of Security’
to address specific concerns voiced by customers about banking practices in
these areas.
• RBI had requested IBA to set up a working group to draft a comprehensive
fair practices code, covering all the areas of customer service for uniform
adoption by banks.
87. • Accordingly, IBA had set up a working group to study international practices and review
the existing codes adopted by bankers in UK, Canada, Hong Kong, Singapore and Australia
and prepared a draft Banker’s fair Practice code.
• The working group also incorporated the suggestions from the member banks and
submitted it to the BCSBI.
• BCSBI had made further refinements to the code and it is known as ‘Code of Bank’s
commitment to Customers’.
• The code sets minimum standards of banking practices for banks to follow when they
deal with individual customers.
• The ‘Code of Bank’s commitment to Customers’ was released by Dr. Y.V.Reddy, Governor,
RBI in July 2006. The code has been revised in August 2009 in order to bring greater
transparency, further enhancements in banking practices relating to customer service.
88. • The code represents each member bank’s commitment to minimum standards of
service to individual customers in relation to the products and services offered by the
bank, like;
• Deposit accounts
• Safe deposit lockers
• Settlement of accounts of deceased account holders
• Foreign exchange services
• Remittances within India
• Loans and Advances and Guarantees
• Credit cards
• Internet banking
In addition, the code of Bank’s commitment to MSEs is also applicable to;
• Letter of Credits
• Bills
• Factoring Services and
• Merchant services
89. Code of Bank’s Commitment to Micro and Small Enterprises
• This code was brought out by BCSBI in May 2008 and sets minimum standards of banking
practices for banks to follow when they are dealing with Micro and Small enterprises
(MSEs).
• It provides protection to MSEs and explains how banks are expected to deal with them for
their day to day operations and in times of financial difficulties.
90. Function of BCSBI
The main functions of the board is to ensure adherence of banks to the ‘Code of
Banks Commitment to Customers’ and ‘Code of Bank’s commitment to Micro and Small
Enterprises’.
Both the codes are voluntary and set minimum standards of banking practices for
banks to follow when they are dealing with individual customers and MSEs in their day-to-
day operations.
The codes are not only meant to provide protection to the customers but are also
expected to generate awareness in the common man about his rights as a consumer of
banking services.
91. Difference between banking Ombudsman and BCSBI
The Banking Ombudsman is a redressal mechanism to attend the disputes
between banks and its customer as also to attend to individual complaints relating
to deficiencies in banking services.
Whereas,
BCSBI is an industry watch dog to oversee compliance with the ‘Code of
Bank’s Commitment to Customers’ and ‘Code of bank’s commitment to MSEs’. It
is not a redressal mechanism and will look into an individual complaint only to
the extent it points to any systemic failure in compliance with the codes.
92. Credit Counseling services of the BCSBI
• Coverage: Credit counseling will be provided only to the borrowers of member
banks in retail segment e.g. Personal loan / Vehicle loan / Home loan / Credit Card
and MSE sector whose credit exposure does not exceed Rs. 50 lakh.
• Procedure: Borrowers in distress and seeking credit counseling may directly apply
to BCSBI in the prescribed application form. Member banks may also encourage
borrowers whose loan accounts are in default and who, in their opinion, need credit
counseling to approach BCSBI.
• Charges: Credit counseling services are free of charge.
• Confidentiality: Credit Counselors will maintain confidentiality of the
information.
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