Retail banking environment in India and way ahead

Retail banking

1. RETAIL BANKING AND OTHER RELATED ISSUES 1

2. BACKGROUND The Global Financial Crisis has proved to be landmark event in the history of finance. The scale of the crisis is unprecedented in the sense that it has affected all economies of the world in some form or other. The regulatory reforms unleashed in the wake of the crisis globally have aimed at making the financial sector a more stable arena . The first and foremost of these measures have sought to curb the high-risk activities undertaken by the investment/wholesale banking divisions of the banks through structural measures for controlling SYSTEMIC RISKS . The crisis also highlighted a heightened need for INCLUSIVE GROWTH as a means to ensure FINANCIAL STABILITY. 2

3. EVOLUTION OF BANKING 1. Initial Phase: Provision of saving facilities , credit for productive purposes and also facilitate payment services including remittances. 2. Intermediate phase: During this phase, the banks additionally moved into lending for CONSUMPTION PURPOSES . The banks also started offering certain PARA BANKING SERVICES like insurance etc. The demand for such services arises primarily on account of a transition of the economy from an investment (PRODUCTION) led growth phase to a CONSUMPTION led growth phase. At this stage of development of the economy and the society, RETAIL BANKING becomes relevant. 3

4. 3. Advanced Phase : Banks have started providing additionally High-end savings and investment products Wealth Management Products Structured products to Individuals and Corporates. Private banking , an advanced version of Retail Banking for CLASSES becomes relevant at this stage . Even SPECULATIVE ACTIVITES over and above Production and Consumption activities are funded by banks. 4 EVOLUTION OF BANKING

5. What Exactly is Retail Banking ? Retail banking refers to Provision of banking products and services offered to INDIVIDUAL CUSTOMERS, typically NON-ENTERPRENEURIAL PURPOSES . Retail banking involves offering of products both sides of the Balance Sheet . Additionally Retail banking also involves offering of credit cards , depository services and other para banking products and services viz Insurance products, capital market products, etc to individuals. Thus, retail banking services broadly corresponds to the banking services provided in the INTERMEDIATE PHASE OF Evolution of Banking. 5

6. Retail Banking products Liabilities Wealth Management Assets Fee Based Income Home Loan Educational Loan Vehicle Loans Personal Loan Savings Accounts Current Account Time Deposit

7. Bank level Challenges 1 1.Presence of an EFFICIENT DELIVERY MECHANISM : The banks should be able to deliver the products and services to the customers in SAFE, SECURE, PROMPT AND COST EFFECTIVE MANNER by leveraging technology . The banks can bring down their cost of service delivery, if and only if they are able to improve OPERATIONAL EFFICIENCY. 7

8. 2. Appropriateness of the product and services for the customers. Rather than focussing on Net worth of the customers , the banks would have to inculcate a habit of listening to their customers and building analytics based on this interaction supported by income levels. . 8 Bank Level Challenges 2

9. 3.PRICING Has to be reasonable, transparent, uniform across a class. There should not be any discrimination among the borrowers when the loan product and its features are common. 9 Bank Level Challenges 3

10. Housing Loans: Lowest Risk Asset Class Mortgaged based lending Income based credit approach The most basic necessity of a Man Everyone wants a Roof to secure his family, so he will not default. Sentimental value Less litigations Easy to Repossess and realise 10

11. 1. Enhanced Clientele. 2. Improved Net Interest Margin 3. Subdued volatility 4. Evening out Credit Risk 5. Customer Retention and cross selling 11 Housing Loans: Why do Banks like this ?

12. 1.Shifting social and demographic patterns in the country 2.The cultural and economic diversity 3.The growing population 4.Urbanisation 12 What Drives Housing ?

13. 5.Nuclearisation of families 6.Education 7.Consistent increase in income levels 8.Second income in the Family 13 What Drives Housing ?

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15.         1. Detailed Pre-sanction inspection including visit without giving prior information to the applicant. 2.Pre-sanction inspection report should be prepared in the format prescribed and kept on record.      3. During Pre-sanction inspection, the branch official must cross verify the information submitted by the applicant with respect to his identity, residence, employment / business and property to be purchased .   Due Diligence 15

16. PRESANCTION ACTIVITIES 1/2 1. KYC guidelines should be very meticulously and should be made on relative documents and kept on record. 2. Independent enquiries from the employer in respect of salaried person about employment status and salary should be made. 3. No middleman should be entertained for any retail credit proposal 16

17. 4. In case of applicants other than salaried persons, the original taxpayer’s copy of challans of tax deposited should be verified to ascertain genuineness of Income Tax Returns and also the assessment orders for earlier years. Housing proposals of the persons, who have filled their income tax returns of last three years in one lot , should not be entertained. 5. In cases, where the status of the employment as well as the employer is doubtful , the branches should discourage considering loans to such persons . 17 PRESANCTION ACTIVITIES 2/2

18. EXECUTION OF DOCUMENTS - POWER OF ATTORNEY The POA to be executed abroad shall be attested by the office of embassy of the concerned country. ❖   On receipt of duly executed POA in India the same is required to be adequately stamped within 90 days from the date of receipt in India and same should be got   registered with the Registrar of Assurances to make it enforceable till its revocation. 18

19. ❖ Matter should be referred to the Legal advisors along with copy of POA for examination and authority to get the documents executed by the POA. ❖ Letter of confirmation from the Donor of POA to be obtained that power given by him / her is valid and has not been revoked as on date. ❖ Branch to confirm the Donor of POA about the execution of documents by the POA holder. ❖ Signature of the principal to be obtained on all documents on first available opportunity. ❖ The attorney / agent should also be a major and of sound mind EXECUTION OF DOCUMENTS - POWER OF ATTORNEY 19

20. Take over of Loans Ø      The disbursement of the loan should be made directly to the institution and their receipt kept along with the loan documents. Ø      The amount of loan may include the outstanding balance, foreclosure fee payable to existing Bank, if any and stamp duty for creation of equitable mortgage in your Bank's favour subject to margin, income and repaying capacity criteria. Ø      All other collaterals charged to the previous institution from whom the loan is being taken over should also be made available as security to our Bank. 20

21. What is the limit for housing loans under priority sector? Loans to individuals up to ₹ 35 lakh in metropolitan centres (with population of ten lakh and above) and loans up to ₹ 25 lakh in other centres for purchase/construction of a dwelling unit per family, are eligible to be considered as priority sector provided the overall cost of the dwelling unit in the metropolitan centre and at other centres does not exceed ₹ 45 lakh and ₹ 30 lakh, respectively. Housing loans to banks’ own employees are not eligible for classification under priority sector 21 Priority Sector Classification: as per RBI as on 19 th June 2018

22. Priority Sector Classification :      Loans for repairs to damaged houses : Up to Rs.2/- lac in rural semi urban, urban and up to Rs 5/- lacs in metropolitan areas. Loans to any government agency for construction of houses subject to ceiling of Rs . 10 Lakh per house / dwelling unit for weaker sections or slum clearing. Education Loan upto Rs 10 lacs, irrespective of the sanctioned limits  will be covered under Priority Sector .    22

23. High Volume Low Value A Large number of accounts in a particular branch consumes lot of time of the entire team in monitoring the portfolio. Follow up in SMA accounts becomes almost Fulltime job of the branch manager and his team. This affects concentration of the team on further business growth of the branch . Many times the high volume becomes disincentive for the branches. Branch Level Challenges 23

24. Staff:: Both number and Experience Retail borrowers, especially HNIs are sensitive. Branch should have adequate staff to attend them . Experienced staff members are able to score better. Quality of discussion and speed are the real challenge at branch level. 24 Branch Level Challenges

25. Large data base to be scrutinised / monitored. Increased administration costs with narrow margin Constraint on Staff Recruitment: Cost versus Profitability Sensitivity to reputation – may result in Run on business 25 Constraints

26. GOING AHEAD 1. ONE OF THE FOCUS AREAs OF ALL BANKS 2. FOR CONTINUING RELATIONSIP TO NEXTGEN 3. FOR AUGMENTING FEE BASED INCOME 4. FOR BUSINESS GROWTH UNDER LOW INTENSITY HIGH FREQUENCY MATRIX 5. FOR CONSERVING RISK WEIGHTED CAPITAL 6. SCOPE FOR IT FACILITATED APP, PROCESSING AND MONITORING . 26

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29. RECAP 1. Evolution of Banking: Three Phases 2. What exactly is Retail Banking 3. Bank Level Challenges 4. Due Deligence / Presanction Activities 5. Documentation/Builder/POA 6. Take over of loans 7. Priority Sector Norms 8. Branch Level Challenges 9. Merits, Demerits and Constraints 10. Going Ahead 29

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