Tag: Customer Relationship Management

Management Notes

Augmented Reality in Banking

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AR is an experience where parts of users’ physical world are enhanced with computer-generated input. It can provide an interactive experience of a virtual environment in the real world.

Augmented reality solutions have the potential to substantially benefit the financial services industry. The future of mobile banking may involve apps that allow users to superimpose images and data over their real-world surroundings.

Banks that partner with fintech developers who can leverage augmented reality in banking use cases to offer greater convenience to their customers will be more likely to maintain and boost customer loyalty.

Need

Augmented realities allow users to cover digital information on top of the real-world environment. AR technology is partially immersive experience boosted by heads up display or existing smartphones. Banks and financial institutions can engage customers and create new immersive experiences through millions of existing compatible smartphones. AR can help financial service institutions to engage existing and new potential banking customers.

The need for AR in the banking sector can be deduced by the fact that it will provide consumers to view the information in a concise, engaging as well as in an immersive manner. The banks have found this challenging, and AR can help them in tackling this challenge.

Banks have also faced challenges with respect to enabling greater consumer choice and in providing greater visibility in terms of spending patterns and behaviors. It is another area where banks have encountered issues, but it is also an area where AR can have a profound impact as it will allow consumers to make informed decisions in terms of spending. It will provide customers with a new way of interpreting banking data and information.

Applications:

Virtual Trading

Some companies are making trading a virtual experience by creating virtual reality workstations for trading. Citi uses Microsoft HoloLens to give traders Holographic Workstations. This type of workstation offers 2D and 3D elements that add to the bank’s existing processes. Comarch uses virtual reality in their wealth management software to give users better access to algorithms and trading tools.

Data Visualization

Being able to visualize data is an important tool traders use to help them make important decisions about wealth management, especially as the financial industry becomes more complex and there is more data to analyze. AR and VR add to this experience and make it easier and faster to visualize and organize large amounts of data. Salesforce uses Oculus Rift to create an immersive 3D environment for analyzing data. Fidelity Labs, a part of Fidelity Investments, has also taken advantage of the technology behind Oculus Rift. They created a virtual world called “StockCity” where stock portfolios are turned into a virtual 3D city, where investors can immerse themselves in the data. Also read: Futures be augmented of virtual with AR/VR.

Virtual Branches

Digital-only banks and mobile banks are already here. But someday soon we may be able to go to a virtual bank. If customers are not able to visit a physical branch location for whatever reason, there will soon be given the possibility to go to a virtual branch. The hope is that these branches will be able to provide the same services but exclusively in a VR environment.

Virtual Reality Payments

Some companies are even making payments a virtual experience. MasterCard has partnered with Wearality to create a world where consumers can make purchases without leaving the virtual world. They have a virtual reality golf experience called ‘Priceless’ and players are able to buy clothing in the virtual world, without having to do anything offline.

Financial Education

For both employees and customers of financial institutions, education is important for understanding changes in financial systems. AR and VR have huge potential for teaching people new information in the VR Finance.

Security

In order to create a more secure customer experience, biometric security could be introduced in an AR system that could then connect with a VR world. These could be used to access VR bank services, make ATM transactions, or make payments.

Customer Service

Many financial institutions are also using AR and VR to help improve the experience of their customers. Many banks have AR apps that help customers find the nearest banks and ATMs. When in a city, they can scan the area with their phones and see real-time information about location, distance, and services at nearby banks.

Recruitment and Training

In order to provide high-quality services to customers, financial institutions need to make sure they are recruiting top talent and training all employees to give them skills that will help them do their jobs to the best of their abilities. Some banks are using a VR experience to show tech recruits how innovative and tech-savvy the bank is. Potential employees, as well as current employees, use this platform to form teams and create apps that will help the bank’s customers.

Management Notes

Quantum Computing in banking

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Quantum computing is a technology based on the principles of quantum theory. Quantum computing harnesses the laws of quantum mechanics to carry out complex data operations. Quantum mechanics pertains to the realm of sub-atomic particles where the laws of classical physics breakdown. It shows how particles and waves have a dual nature. Particles like electrons tend to behave like waves, whereas light waves also display particle nature.

A quantum processor has millions of qubits that explore all possible combinations to find the best answer. A qubit (or quantum bit) is the basic unit of quantum information (quantum version of the classical binary bit). Quantum entanglement (perfect correlation between quantum particles) allows qubits to communicate with each other even if they are miles (or even millions of miles) apart.

Optimal arbitrage, credit scoring, derivative pricing; all these financial procedures involve many mathematical calculations and become even more complicated and resource-intensive as the number of variables increases. At some point, people have to settle for less-than-optimal solutions, because the complexity of the problem surpasses the capabilities of current technology and methods.

Over time, financial institutions will grow their quantum technology capacity and ability and will grow the number of specific business applications. As a result, the hybrid quantum-HPC computer will lie at the basis of their core business. Those that don’t join in could be running serious commercial risk and financial organizations know this.

Quantum has a bright future, with the potential to make the sector more profitable and less risky. One day it might even make the global economy more stable, as fiscal risks can be better predicted with quantum computers. But quantum computing is not the only quantum technology. What would Finance look like once we have a quantum internet that allows for instantaneous, faster-than-light, correlations? Will we again change the statistics of algorithmic trading, as the rules of the game change? Nobody knows, but it is interesting to consider.

Management Notes

Robotic Process Automation in banking

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RPA is a technology used to automate manual business procedures to allow banks to stay competitive in a growing market. An RPA banking will provide customers with the ability to automatically process payments, deposits, withdrawals, and other banking transactions without the need for manual intervention. Banks are very quickly able to see an ROI from RPA.

RPA takes full form in banking as technology continues to grow. More and more people are using digital banking, cryptocurrency, and mobile payments. These are only some examples of RPA in banking. These Digital transformation projects remain at the top of the list for many banks and will continue to drive the overall technological growth of the banking process.

Intelligent Automation works in banking:

  • IA enables banks to automate complex end-to-end processes.
  • These processes typically involve the use of structured and unstructured data.
  • Thanks to AI and Machine Learning (ML), IA systems are able to communicate using human languages, classifying, and recognizing ‘sentiment’.
  • This understanding of sentiment or language enables IA to operate in a completely automated fashion, even automating workflow steps that would have previously required human intervention.

Role:

Customer Service

Banks deal with multiple queries every day ranging from account information to application status to balance information. It becomes difficult for banks to respond to queries with a low turnaround time.

RPA can automate such rule-based processes to respond to queries in real-time and reduce turnaround time to seconds, freeing up human resources for more critical tasks

With the help of artificial intelligence, RPA can also resolve queries that need decision-making. By using NLP, Chatbot Automation enables bots to understand the natural language of chatting with customers and respond like humans.

Credit Card Processing

Traditional credit card application processing used to take weeks to validate the customer information and approve credit cards. The long waiting period was dissatisfaction to customers and cost to banks. However, with the help of RPA, banks now can process the application within hours. RPA can talk to multiple systems simultaneously to validate the information like required documents, background checks, credit checks and take the decision based on rules to approve or disapprove the application.

Accounts Payable

Accounts payable is a simple but monotonous process in the banking system. It requires extracting vendor information, validating it, and then processing the payment. This does not require any intelligence making it the perfect case for RPA.

Robotic Process Automation with the help of optical character recognition (OCR) solutions can solve this problem. OCR can read the vendor information from the digital copy physical form and provide information to the RPA system. RPA will validate the information with the information in the system and process the payment. If any error occurs, RPA can notify the executive for resolution.

General Ledger

The banks must keep the general ledger updated with information like financial statements, revenue, assets, liabilities, expenses, and revenue which is used to prepare financial statements. Financial statements are the public documents that are then accessed by the public, stakeholders, and media. Considering the amount of detailed information in the statement, errors in the report can very badly affect the bank’s image.

To create the statement, the bank needs to update information from the multiple legacy systems as these systems cannot integrate, verify it and make sure that the general ledger is prepared with no errors. With this amount of data from multiple systems, it is bound to have errors. Here comes RPA to the rescue. RPA is independent of the technology and can integrate data from multiple legacy systems to present in the required format even if the data in the systems are not in the same format. This reduces the huge amount of data handling and time.

Report Automation

Like all other public companies, banks need to prepare reports and present them to their stakeholders to show their performance. Considering the importance of the report, there is no chance for the bank to make an error.

While RPA systems provide data in multiple formats, they can create reports by auto-filling the available report format to create reports without errors and minimum time

Account Closure Process

With such a huge number of customers, it is supposed to get some account closure requests monthly. There can be various reasons for the account closures and one of them is when a client has failed to provide the mandatory documents.

With Robotic Process Automation, it is easy to track such accounts, send automated notifications, and schedule calls for the required document submissions. RPA can also help banks to close accounts in exceptional scenarios like customers failing to provide KYC documents.

Fraud Detection

With the introduction of digital systems, one of the major concerns of banks is fraud. It is really difficult for banks to track all the transactions to flag the possible fraud transaction. Whereas RPA can track the transactions and raise the flag for possible fraud transaction patterns in real-time reducing the delay in response. In certain cases, RPA can prevent fraud by blocking accounts and stopping transactions.

KYC Process

Know Your Customer (KYC) is a mandatory process for banks for every customer. This process includes 500 to 1000+ FTEs to perform necessary checks on the customers. According to Thomson Reuters, banks spend more than $384 million per year on KYC process compliance.

Considering the cost of the manual process, banks have started using RPA to validate customer data. With increased accuracy, banks no longer have to worry about the FTEs and the process can be completed with minimal errors and staff.

Management Notes

Non Resident Indians Accounts, Pigmy Deposit Accounts, Other Special Accounts

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Non Resident Indians Accounts

The NRE account is an Indian rupee-denominated account, offering complete security. These accounts can be in the form of savings, current, recurring, or fixed deposits. The foreign currency you deposit into the account is converted to INR. You can transfer your funds (Principal & Interest amount) to a foreign account from an NRE account without any complications and restrictions. You need to note that the amount you deposit into these accounts must be earned outside India. The international debit card enables you to transact and withdraw money 24*7. Also, mutual fund investments to become effortless and instant if you link your NRE account number to the investment account. NRE account is primarily used for carrying out business, personal banking and making investments in India.

An NRO account is a savings or current account held by NRIs in India to manage their income earned in India. Account-holders can deposit and manage their accumulated rupee funds without any hassle. The account allows you to receive funds in Indian or Foreign currency. You can apply for an NRO account jointly with a resident Indian or even an NRI. It is even feasible to transfer money from your current NRE account. However, the interest you earn in this account is subject to TDS (Tax Deducted at Source). Tax Deducted at Source (TDS).

FCNR (B) Account

FCNR or Foreign Currency Non-Residential Account facilitates deposits made by Non-Residential Indians (NRIs) or Persons of Indian Origin (POI). NRIs or POI can make these deposits in the currency of their country of residence and shall be held in that account in any one of the foreign currencies prescribed by RBI.

The currencies in which deposits can be held in an FCNR (B) Account are – US Dollars (USD), Canadian Dollar (CAD), Australian Dollar (AUD), Euro (EUR), Great Britain Pound Sterling (GBP), Singapore Dollar (SGD), Hong Kong Dollar (HKD), Japanese Yen (JPY) and Swiss Franc (CHF).

Hence, for instance, if an individual has earnings in any of these currencies, their deposits in an FCNR (B) Account shall not be subject to conversion. On the other hand, if an individual earns in any other currency, deposits made in it shall be converted to any one of the prescribed currencies mentioned above.

Pigmy Deposit Accounts

Pigmy Deposit Scheme is a monetary deposit scheme introduced by Syndicate Bank, India.

Money in amounts as small as five rupees can be deposited into an account on a daily basis, by a bank agent collecting the money from the account holder’s doorstep. The scheme was introduced to help daily wage earners, small traders and farmers begin saving, as a means to fund their bigger capital requirements such as weddings or purchases of homes or vehicles.

The account is for daily wage earners or tiny businessmen, who would like to put aside a little of their days earnings and accumulate it for a year or two. Even if Rs. 10/- is saved a day for 365 days, the saved amount together with interest could reach a figure like Rs. 4000/-

In about 5 years,

First Year Contribution Rs 3650 Interest 350 Say Rs 4000/-

Second year Contribution Rs 3650 Interest 350 Say Rs 4000/- + Rs. 400/-

Third year Contribution Rs 3650 Interest 350 Say Rs 4000/- + Rs. 1200/-

Fourth year Contribution Rs 3650 Interest 350 Say Rs 4000/- + Rs. 2000/-

Fifth year Contribution Rs 3650 Interest 350 Say Rs 4000/- + Rs. 3000/

Nearly Rs 25–26000 would be saved by the person.

This account is most useful to very small earners. They cannot command credit even from banks as their earning capacity is lowest.

Other Special Accounts

Management Notes

Retail Banking Services: Home loans, Auto Loans, Personal loans

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Home Loan

A Home Loan is a form of financial assistance extended by banks and financial institutions. Such banks or financial institutions can help increase your budget to purchase a house with the loan amount offered. You can avail of the loan by meeting certain Home Loan eligibility criteria for a specific tenure. You must return the loan amount borrowed over the course of the tenure along with interest according to predetermined interest rates. You repay the Home Loan in monthly instalments, just like you would repay any other loan. Today, most banks offer Home Loans that not only help you purchase ready-made homes, but also facilitate the construction of a house from scratch. In addition, you can also seek Home Loans for renovation or repair purposes.

This is the most common type of home loan availed to purchase a house. There are many housing finance companies, public banks, and private banks that offer housing loans where you borrow money to purchase the house of your choice and repay the loan in monthly instalments.

You can get up to 80%-90% of the house’s market price in the form of financing. The lender will hold the house until you completely repay the loan.

Home Construction Loan

This is the right home loan type if you already have a plot of land and you need financing to construct a house in that land.

Home Extension Loan

Say you already own a house and you would like to extend the house with another room or another floor to accommodate the growing family. Home extension loan provides financing for this purpose.

Home Improvement Loan

A home improvement loan provides financing for renovating or repairing the house if there’s any fault in the existing system, such as painting the house’s interior or exterior, plumbing, upgrading the electrical system, waterproofing the ceiling, and more.

Home Loan Balance Transfer

The current home loan interest rate may be overwhelming, or you may not be happy with your current lender’s service; you can transfer the home loan’s outstanding balance to a different lender who offers a lower interest rate and better service. Upon transfer, you can even check out the possibilities of a top-up loan on your existing one.

Composite Home Loan

This type of home loan provides financing for purchasing the plot of land where you would like to construct a house and for the construction, both within a single loan.

Benefits of Taking a Home Loan

Tax benefits

The foremost benefit of a home loan is the income tax deduction you can claim on the interest and principal repayments. You can claim up to Rs.1.5 lakh on principal repayments u/s 80C, up to Rs.2 lakh on interest repayments u/s 24B, up to Rs.2 lakh on interest repayment in special circumstances u/s 80EE and 80EEA, and up to Rs.1.5 lakh on stamp duty expenses u/s 80C.

Due diligence of property

When you go through a bank to purchase a house, the bank will conduct thorough checks on the property from the legal perspective and check if all the documents produced are valid.

This due diligence check from the bank’s end will reduce the risk of you being scammed. If the bank approves the property, that means you and your house are safe.

Lower interest rate

The home loan interest rate is much lower as compared to any other loan types available. If you come across a cash crunch, you may get a top-up on the existing home loan at a lower interest rate than a personal loan to solve the issue.

Balance transfer facility

You can transfer the home loan from one lender to another for several reasons, such as the interest rate, service charges, customer service experience, and others.

Auto Loans

An auto loan is a loan that allows you to buy a desired four wheeler, and pay the vehicle off in equated monthly installments for a set tenure instead of having to pay the full price upfront. The terms of an auto loan depend on various factors, including your income and credit history.

Though everybody may not have enough cash to purchase the auto with a lump-sum payment, numerous lenders can help you realise your dream of buying the auto through a auto loan.

Applying for a auto loan is now hassle-free, easy, and paperless. Just make a few clicks, and you can submit the auto loan application form online. Almost every bank today offers auto loans at attractive interest rates. Based on one’s affordability, it is now quite easy to take a auto loan and then pay EMIs without really biting into a person’s finances.

Features and Benefits of Auto Loan

  • Get financing for purchasing new and used autos.
  • The financing can go up to 85%-90% of the on-road price of the auto. Some banks offer up to 100% financing on the vehicle’s on-road price to certain conditions.
  • The loan tenure can range from one year up to seven years.
  • The loan amount can be up to three times the annual income of the applicant.
  • Some lenders offer instant financing facilities for autos.
  • You may get additional discounts and offers if you choose to purchase a auto from the dealer or manufacturer the bank has a tie-up with.
  • The auto purchased through financing will be held as collateral until the loan is repaid.
  • The repayment structure most commonly followed for a auto loan is equated monthly instalments (EMI).

Personal loans

Personal Loan is an unsecured credit provided by financial institutions based on criteria like employment history, repayment capacity, income level, profession and credit history. Personal Loan, which is also known as a consumer loan is a multi-purpose loan, which you can use to meet any of your immediate needs.

Benefits

  • With various financial institutions offering Personal Loan online services, the loan amount is disbursement within a few hours provided the lender is convinced of your repayment capacity.
  • Unlike other types of loans like Home Loan or Gold Loan, where you must provide several documents, Personal Loans require minimum documents and the approval process is quick.
  • Another significant feature of Personal Loan is that the lenders offer you the flexibility to choose your loan tenure. Usually, Personal Loan tenure ranges from one to five years. So, you can select the loan term based on your repayment capacity. You should opt for a shorter loan, so that you can save on the interest payment and repay the amount faster.
Management Notes

Retail Banking Services: Safe Lockers, Jewel Loans, Consumer Durable Loans, Education Loans

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Safe Lockers

A safe deposit locker is a rented locker that a bank offers you to store your valuables. This could be jewellery, gemstones, financial or legal papers, insurance policies, identity proof, such as a passport, and other similar items of high value. You can rent a locker for as long as you want for a certain fee. The key to the locker remains with you, and you can access your items whenever you need them after informing the bank.

Features:

  • Lockers Branches are equipped with high security features and specially built strong rooms.
  • Safe Deposit Locker facility is one of the ancillary services provided by the Bank to its customers.
  • Locker facility is available in over 2500 branches across the country. Wide availability of lockers in various sizes and at various locations.
  • Hassle-free payment options through your HDFC Bank Account.
  • Extended banking hours for accessing lockers.
  • Nomination facility available.
  • Nomination on safe-deposit lockers enables HDFC Bank to release the contents to the nominee of the person hiring in the event of their death. If a locker is held jointly, and one of the people hiring dies, the contents can only be removed jointly by the nominee(s) and the survivors.
  • The nomination facility is available to anyone hiring a locker.
  • For those hiring on an individual basis; nomination can be made in favour of one individual.
  • For those hiring jointly by more than one hirer: more than one nominee can be made. In such scenario no. of nominees are restricted to the no. of joint hirers.
  • Unpaid locker rentals are recovered from the nominee.
  • If the hirer is major and the nominee is minor, the nomination will be made by someone lawfully entitled to act on behalf of the minor.

Jewel Loans

Avail a gold loan from a bank in India with interest rates ranging between 7% p.a. and 29% p.a. You can avail a loan amount of up to Rs.1.5 crore and repayment tenure starting at 3 months and going up to 4 years depending on the loan scheme availed by you. You can pledge your gold ornaments and jewellery for funds in the event of a financial emergency.

Features:

Purpose: You can avail a gold loan in order to finance various needs, such as for educational purposes, medical emergencies, going on a holiday, and so on.

Security: The gold that has been pledged with the bank or the financial institution acts as the security or collateral against which the loan amount is provided.

Tenure options: The tenure options can range from a minimum of 3 months to a maximum of 48 months.

Fees: The other fees and charges that might be applicable on a gold loan are – processing fee, late payment charges/ penalty for non-payment of interest, valuation fees, etc.

Repayment Options: There are three main options offered by lenders to borrowers for the repayment of a gold loan. These are:

  • Repayment in Equated Monthly Installments (EMI)
  • Payment of interest upfront and repayment of the principal loan amount at the end of the loan tenure.
  • Payment of interest on a monthly basis and repayment of the principal loan amount at the end of the loan tenure.

Rebates: Several lenders offer the option of discount on the prevailing interest rate on the loan against gold if the borrower repays the interest regularly. This rebate can be 1% – 2% off on the original rate of interest.

Consumer Durable Loans

Consumer durable loan is a special category of personal loan that is generally used to purchase electronic gadgets and household appliances that include smartphones, televisions, PlayStations, home theatres, laptops, cameras, washing machines, modular kitchens and much more. Typically this loan type can be availed for amounts ranging from Rs. 10,000 to Rs. 15 lakh. Consumer loans are mostly available at a 0% interest rate or No Cost EMI and can be repaid within a range of a few days to 36 months.

Benefits:

Minimum Formalities

Some basic documents are required to apply for such loans, making the process relatively simple.

0% Interest Rate

Consumer durable loans are typically available at a lower interest rate than personal loans. Tata Capital offers such loans with no interest and minimum payment. Tata Capital does not even ask for any security deposits, making the loan application process effortless.

Tenure

The loan tenure for a Tata Capital Consumer Durable loan is between 6-24 months. This may differ from one lending institution to another. Usually, a longer tenure attracts a lower EMI and vice versa. As the repayment period affects EMI payments, it is important to calculate the EMI on an online EMI calculator before applying for loans.

Education Loans

An education loan is a loan that students apply to meet the financial requirements to complete their course. Many banks and NBFCs in India offer education loans at competitive rates to help educate the upcoming innovators and leaders.

Types of Education Loans

Based on Location

Domestic Education Loan

Students who would like to pursue education in India can apply for this loan type. The loan will get approved only if the applicant is admitted to an Indian educational institution and meets all other lender criteria.

Overseas Education Loan

Such loans help students realise their dream of pursuing the course of their desire in a foreign institution. The loan covers the airfare, accommodation, and tuition fee for students who wish to study abroad only if they satisfy the eligibility criteria.

Based on Course

Undergraduate Loans

This type of education loan is provided for students to give financial aid to students so they can complete their undergraduate degrees. An undergraduate degree will usually be a 3 to the 4-year long course under various specialisations. Having an undergraduate degree helps individuals to land a decent job and start earning.

Postgraduate Loans

Many undergraduates would like to continue their education with a postgraduate course, usually a 2-year long course in India. An advanced degree is desired to get more profound knowledge in the area of interest.

Career Development Loans

Many professionals who work for a few years in corporate jobs prefer to pause their career and take up professional courses and training to improve their employment prospects. Such individuals would strive hard to get into reputed business and technical schools to polish their skills and reach greater heights in their career.

Based on Collateral

Loan Against Property, Deposits, and Securities

You can pledge immovable assets, such as agricultural land, residential land, flat, house, and others, fixed deposit certificates, recurring deposits, gold deposits, bonds, debentures, and equity shares to get the necessary financing to pursue education.

Third-Party Guarantee

A guarantee letter from an employee of the bank or a home bank can help the student get an education loan.

Features and Benefits

  • 100% financing available for certain conditions.
  • The loan amount can go up to Rs.1 crore for international students and up to Rs.50 lakh for domestic students.
  • The financing covers other expenses, such as student exchange travel expenses and laptop.
  • Preferential forex rates may be available for international disbursements.
  • Loan repayment tenure can go up to 12 years after six months from completing the course.
  • Parents should be joint borrowers for the education loan.
Management Notes

Origin of Bank, Meaning and Definition, Features of Banks

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Bank is a financial institution that accepts deposits from the public, provides loans, and offers various financial services such as wealth management, investment, and currency exchange. Banks act as intermediaries between savers and borrowers, ensuring the efficient allocation of funds in the economy. They play a crucial role in economic stability and growth by facilitating transactions, offering credit, and managing risks. In India, banks are regulated by the Reserve Bank of India (RBI) to ensure financial stability and protect the interests of depositors. Types of banks include commercial banks, cooperative banks, and specialized institutions like development banks.

Definitions:

  • According to R.S. Sayers, “Banks are institutions whose debts are commonly accepted in final settlement of other peoples debts.”
  • Oxford Dictionary defines a bank as “an establishment for custody of money, which it pays out on customer’s order.”
  • According to Peter Rose, “Bank is financial intermediary accepting deposits and granting loans.”
  • According to F.E. Perry, “Bank is an establishment which deals in money, receiving it on deposit.”
  • According to R.P. Kent, “Bank is an institution which collects idle money temporarily from the public and lends to other people as per need.”
  • According to P.A. Samuelson, “Bank provides service to its clients and in turn receives perquisites in different forms.”
  • According to Cairn Cross, “Bank is an intermediary financial institution which deals in loans and advances.”
  • According to W. Hock, “Bank is such an institution which creates money by money only.”

Origin of Bank:

The origin of banking in India traces its roots to ancient times when financial activities were carried out through moneylenders and merchant guilds. During the Vedic period (1500-500 BCE), practices of lending and borrowing were prevalent, and the concept of “srenis” (merchant guilds) emerged. These guilds facilitated trade, and their members acted as bankers by providing loans and credit.

The modern banking system in India, however, evolved during the British colonial period. The first bank established in India was the Bank of Hindustan, founded in 1770 in Calcutta (now Kolkata). Though it failed in 1830, it marked the beginning of formal banking activities. In 1806, the General Bank of India was established, followed by the Bank of Bengal in 1809, which eventually merged into the Imperial Bank of India in 1921 (later known as the State Bank of India).

The pivotal moment in India’s banking history came in 1935 with the founding of the Reserve Bank of India (RBI). The RBI was established as the central banking institution to regulate the monetary and credit system, ensuring economic stability and growth. In post-independence India, the banking sector underwent significant reforms, most notably the nationalization of banks in 1969. This was aimed at making credit more accessible to the rural and underserved populations.

Since then, the Indian banking system has grown and diversified, with the introduction of private sector banks (like HDFC and ICICI), foreign banks, and regional rural banks, all regulated by the RBI, fostering a modern and robust banking ecosystem.

Features of Banks:

1. Accepting Deposits

One of the primary functions of banks is accepting deposits from individuals, businesses, and institutions. Banks offer various types of deposit accounts, such as savings accounts, current accounts, and fixed deposits. These deposits provide a safe place for customers to store their money while earning interest on certain types of accounts, such as savings and fixed deposits. This feature makes banks a trusted institution for safeguarding funds.

2. Providing Loans and Credit

Banks lend money to individuals, businesses, and governments, facilitating investment and consumption. The loan types include personal loans, home loans, education loans, business loans, and agricultural loans. Banks charge interest on these loans, which is a major source of income for them. By lending money, banks stimulate economic growth, enabling the expansion of businesses, homeownership, and personal development.

3. Financial Intermediation

Banks act as intermediaries between savers and borrowers. They pool the savings from individuals who deposit money and then lend it to those who need funds. This process helps in the efficient allocation of resources, fostering economic growth. Banks, by offering a return on deposits and earning interest from loans, create a symbiotic relationship between those who save and those who borrow.

4. Risk Management

Banks help in managing and mitigating various types of financial risks. Through services such as insurance, derivatives, and hedging, banks provide protection to both individuals and businesses from unforeseen risks, such as economic downturns, natural disasters, or market fluctuations. By spreading and diversifying risks, banks contribute to financial stability in the economy.

5. Facilitating Payments

Banks provide a variety of payment services, making it easier for individuals and businesses to transfer funds. This includes cheque services, Electronic Funds Transfers (EFT), Real-Time Gross Settlement (RTGS), Immediate Payment Service (IMPS), and online banking. These payment methods are integral to trade, commerce, and personal financial management, reducing the need for physical cash transactions and promoting a digital economy.

6. Currency Issuance

In India, the Reserve Bank of India (RBI) issues currency notes, but commercial banks play a key role in ensuring the circulation and distribution of currency. Banks provide customers with the required denomination of currency for daily transactions. They also manage the withdrawal and deposit of cash, ensuring an efficient cash flow within the economy.

7. Wealth Management and Investment Services

Banks offer a wide range of wealth management services, including investment advice, portfolio management, and the sale of investment products such as mutual funds, bonds, and fixed deposits. They also provide retirement planning and tax-saving products. These services help customers grow their wealth and plan for the future, offering guidance and access to diverse investment opportunities.

8. Regulation and Security

Banks are regulated by central authorities such as the Reserve Bank of India (RBI) in India, ensuring they maintain financial stability, sound lending practices, and consumer protection. Banks are also required to adhere to strict guidelines related to capital adequacy, liquidity, and risk management. The regulatory framework ensures the security of deposits and minimizes the risk of bank failures.

Management Notes

Foreign Banks, Role, Functions, Advantages, Disadvantages

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Foreign banks play a crucial role in India’s financial ecosystem, offering specialized services, advanced technologies, and global expertise. These banks operate under the regulations of the Reserve Bank of India (RBI) and contribute to the growth of international trade, foreign investment, and the adoption of modern banking practices in the country.

Roles of Foreign Banks

  • Promoting International Trade

Foreign banks facilitate international trade by providing essential financial services like letters of credit, trade finance, and forex services. They act as a bridge between Indian businesses and global markets, ensuring smooth transactions across borders.

  • Encouraging Foreign Investments

By catering to multinational corporations and foreign investors, foreign banks attract and manage foreign direct investment (FDI) and portfolio investments. Their expertise in global financial markets makes them a preferred partner for foreign investors.

  • Introducing Advanced Banking Practices

Foreign banks bring innovative products, advanced technology, and international best practices to India. Their services, such as digital banking, mobile payments, and AI-driven analytics, set high standards for the banking industry.

  • Providing Specialized Financial Services

Foreign banks offer niche financial services, such as wealth management, investment banking, and treasury management, catering to high-net-worth individuals (HNWIs), corporations, and institutional investors.

  • Enhancing Competition in the Banking Sector

The presence of foreign banks increases competition in the Indian banking system. This drives domestic banks to improve service quality, adopt new technologies, and enhance operational efficiency.

  • Strengthening India’s Integration with the Global Economy

Foreign banks help Indian businesses and individuals access global financial systems. They provide exposure to international markets and help integrate India into the global financial framework.

  • Channeling Global Expertise for Local Growth

With their international exposure, foreign banks contribute to the development of India’s financial infrastructure. They provide insights into global market trends, risk management strategies, and economic policies that benefit the local economy.

Functions of Foreign Banks

  • Acceptance of Deposits

Foreign banks mobilize deposits from customers, including individuals, corporations, and institutions. They offer various deposit products, such as savings accounts, current accounts, and term deposits, often tailored for international clients.

  • Providing Credit Facilities

Foreign banks extend credit to businesses, individuals, and multinational corporations. Their loans are typically geared toward trade finance, project financing, and working capital needs, with a focus on international operations and cross-border activities.

  • Facilitating Foreign Exchange Transactions

One of the primary functions of foreign banks is offering foreign exchange services. They assist businesses and individuals in currency conversion, hedging foreign exchange risks, and managing international remittances.

  • Offering Investment Banking Services

Foreign banks play a significant role in providing investment banking solutions, including mergers and acquisitions (M&A), equity issuance, debt restructuring, and corporate advisory services. These functions support corporate growth and capital market activities.

  • Treasury and Risk Management

Foreign banks manage their clients’ financial risks, such as currency, interest rate, and commodity price risks, through their treasury operations. They provide sophisticated financial instruments like derivatives and swaps to help clients mitigate risks.

  • Wealth and Asset Management

Foreign banks cater to HNWIs and institutional investors by offering wealth management and asset allocation services. They help clients build diversified portfolios, manage investments, and achieve long-term financial goals.

  • Supporting Corporate and Institutional Banking

Foreign banks specialize in corporate banking services, including cash management, trade finance, and customized credit solutions. They also cater to the needs of multinational corporations, offering expertise in international financial systems.

Advantages

  • Foreign banks enter host countries with new technology that contributes to the country’s technological development.
  • The entry of foreign banks has a positive impact on the regulatory and supervisory regimes of the host country because they will be able to learn about the regulatory and supervisory regimes of foreign banks’ home countries.
  • Foreign banks have a greater ability to invest in more sectors than domestic banks in the host country because they have a larger economic scale and risk diversification techniques.
  • The presence of a foreign bank in a developing country also contributes to the transmission of best practices in the banking industry.
  • The entry of a foreign bank increases competition, which has an automatic positive impact on the development of the country’s banking sector.
  • Over the years, foreign banks have made significant contributions to the banking sector by bringing capital and global best practices, as well as grooming talent.

Challenges Faced by Foreign Banks

  • Regulatory Constraints:

Operating under stringent RBI regulations, foreign banks must adapt their global practices to local requirements.

  • Limited Branch Networks:

Foreign banks typically have fewer branches, restricting their reach in rural and semi-urban areas.

  • High Competition:

They face stiff competition from established domestic banks and financial technology (fintech) companies.

Some foreign banks in India:

  1. Citibank
  2. Standard Chartered Bank
  3. HSBC (Hongkong and Shanghai Banking Corporation)
  4. Deutsche Bank
  5. Barclays Bank
  6. Bank of America
  7. Royal Bank of Scotland (RBS)
  8. JP Morgan Chase Bank
  9. BNP Paribas
  10. DBS Bank
  11. UBS Bank
  12. Credit Suisse
  13. Wells Fargo Bank
  14. Societe Generale
  15. Industrial and Commercial Bank of China (ICBC)
  16. Mizuho Bank
  17. Sumitomo Mitsui Banking Corporation (SMBC)
  18. CIMB Bank
  19. Mashreq Bank
  20. ANZ Bank (Australia and New Zealand Banking Group)
Management Notes

Special types of banks: Women Bank, Payments Bank, Savings Bank, Microfinance Banks

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Women Bank

A women-only bank is a financial institution catering exclusively to women. In 2001, Dubai Islamic Bank opened a women-only bank branch.

Iran opened such a bank in Mashhad on June 7, 2010. The bank’s director stated, “the aim is not sex segregation but respect for women.” The government-owned bank is Bank Melli.

In Saudi Arabia, most banks have some sort of women-only branch within the main branch. Not necessarily all branches and banks have this. Albeit the main branch can usually be accessed by both men and women.

in 2013, India launched its first public sector bank for women only, in Mumbai, aimed at economically empowering millions of women in India.

Payments Bank

Payments banks are new model of banks, conceptualised by the Reserve Bank of India (RBI), which cannot issue credit. These banks can accept a restricted deposit, which is currently limited to 200,000 per customer and may be increased further. These banks cannot issue loans and credit cards. Both current account and savings accounts can be operated by such banks. Payments banks can issue ATM cards or debit cards and provide online or mobile banking. Bharti Airtel set up India’s first payments bank, Airtel Payments Bank.

Features of Payment Banks

  • They are differentiated and not universal banks.
  • These operate on a smaller scale.
  • It needs to have a minimum paid-up capital of Rs. 100,00,00,000.
  • Minimum initial contribution of the promoter to the Payment Bank to the paid-up equity capital shall at least be 40% for the first five years from the commencement of its business.

Activities that Can Be Performed By Payment Banks

  • The money received as deposits can be invested in secure government securities only in the form of Statutory Liquidity Ratio (SLR). This must amount to 75% of the demand deposit balance. The remaining 25% is to be placed as time deposits with other scheduled commercial banks.
  • Payment banks can take deposits up to Rs. 2,00,000. It can accept demand deposits in the form of savings and current accounts.
  • Payments banks will be permitted to make personal payments and receive cross border remittances on the current accounts.
  • It can issue debit cards.

Savings Bank

A savings bank is a financial institution whose primary purpose is accepting savings deposits and paying interest on those deposits.

They originated in Europe during the 18th century with the aim of providing access to savings products to all levels in the population. Often associated with social good, these early banks were often designed to encourage low-income people to save money and have access to banking services. They were set up by governments or by socially committed groups or organisations such as with credit unions. The structure and legislation took many different forms in different countries over the 20th century.

Savings banks and savings-and-loans are often confused. The original function of savings banks to service consumers was limited to savings. Savings banks invested in government and corporate debt. Savings and loan associations had a dual purpose which gave more importance to home loans. Towards the end of the 20th century their functions blurred as savings banks issued mortgages.

The advent of Internet banking at the end of the 20th century saw a new phase in savings banks with the online savings bank that paid higher levels of interest in return for clients only having access over the web.

Microfinance Banks

Microfinance is a category of financial services targeting individuals and small businesses that lack access to conventional banking and related services. Microfinance includes microcredit, the provision of small loans to poor clients; savings and checking accounts; microinsurance; and payment systems, among other services. Microfinance services are designed to reach excluded customers, usually poorer population segments, possibly socially marginalized, or geographically more isolated, and to help them become self-sufficient.

Microfinance initially had a limited definition: the provision of microloans to poor entrepreneurs and small businesses lacking access to credit. The two main mechanisms for the delivery of financial services to such clients were:

(1) Relationship-based banking for individual entrepreneurs and small businesses.

(2) Group-based models, where several entrepreneurs come together to apply for loans and other services as a group.

Over time, microfinance has emerged as a larger movement whose object is: “a world in which as everyone, especially the poor and socially marginalized people and households have access to a wide range of affordable, high quality financial products and services, including not just credit but also savings, insurance, payment services, and fund transfers.”

Proponents of microfinance often claim that such access will help poor people out of poverty, including participants in the Microcredit Summit Campaign. For many, microfinance is a way to promote economic development, employment and growth through the support of micro-entrepreneurs and small businesses; for others it is a way for the poor to manage their finances more effectively and take advantage of economic opportunities while managing the risks. Critics often point to some of the ills of micro-credit that can create indebtedness. Many studies have tried to assess its impacts.

New research in the area of microfinance call for better understanding of the microfinance ecosystem so that the microfinance institutions and other facilitators can formulate sustainable strategies that will help create social benefits through better service delivery to the low-income population.

Management Notes

Debtor and Creditor

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Creditor

A creditor could be a bank, supplier or person that has provided money, goods, or services to a company and expects to be paid at a later date. In other words, the company owes money to its creditors and the amounts should be reported on the company’s balance sheet as either a current liability or a non-current (or long-term) liability.

Some creditors, such as banks and other lenders, have lent money to the company and will require the company to sign a written promissory note for the amount owed. When a promissory note is required, the company borrowing the money will record and report the amount owed as Notes Payable.

If the creditor is a vendor or supplier that did not require the company to sign a promissory note, the amount owed is likely to be reported as Accounts Payable or Accrued Liabilities.

Other creditors include the company’s employees (who are owed wages and bonuses), governments (who are owed taxes), and customers (who made deposits or other prepayments).

Some creditors are referred to as secured creditors because they have a registered lien on some of the company’s assets. A creditor without a lien (or other legal claim) on the company’s assets is an unsecured creditor.

Debtors

A debtor is a person, company, or other entity that owes money. In other words, the debtor has a debt or legal obligation to pay the amount owed.

A debtor is an individual or entity that owes money to a creditor. The concept can apply to individual transactions, so that someone could be a debtor in regard to a specific supplier invoice, while being a creditor in relation to its own billings to customers. Even a very wealthy person or company is a debtor in some respects, since there are always unpaid invoices payable to suppliers. The only entity that is not a debtor is one that pays up-front in cash for all transactions. Thus, an entity could be a debtor in relation to specific payables, while being flush with cash in all other respects.

A debtor is considered to be in default if it does not pay a debt within the payment terms of the debt agreement. Thus, a short payment or late payment could trigger a default.

The liability owed by a debtor can be discharged in bankruptcy, or with the agreement of the counterparty. In either case, if the liability is no longer valid, the entity involved is no longer a debtor in relation to that liability.

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