Prof. B. B. Bhattacharyya

Welingkar Institute of Management Development & Research

QUESTIONS

1. What are Liability Products important for ?

2. An illiterate customer approaches a Bank Manager for opening a Savings Account jointly with another illiterate person. What would be the Bank’s response ?

3. What is a Demand Loan?4. Name three factors that go into

determination of a retail asset’s tenor.

QUESTIONS

7. Can credit card be called a Retail Asset Product?

8. What are the basic differences between a retail loan and corporate loan?

9. What is a Term Loan?

10.Any maximum period for which a fixed deposit account can be opened?

Drivers of Growth

• Economic prosperity – increase in purchasing power

• Changing consumer demographic

• Technological forces

• Retail’s share of impaired assets lower and hence necessitate lower provision

Demand Deposits

• Deposit received by a bank withdrawable on demand.

Demand Deposits

SB :

Cannot be opened in the name of any business concern except those specifically permitted.

CD :

Individual, partnership firm, companies, associations, Institutions,Trusts, Societies

Time Deposits

• 7 days to 120 months

• Interest rate

• Premature withdrawal

• Loan against deposit

Recurring Deposits

• 6 moths to 120 months.

Liabilities

• Savings Account

• Current Account

• Term Deposit

• Recurring Deposit

• KYC Requirements

• Non-Resident Deposit

• Deposit Insurance

Importance of Liability Products• Form the largest source of funds for banks

• Low cost funding source

• Large base reduces risk of sudden withdrawal

• Grow customer base

• Get ready data available for customers through account balances and account conduct

• The CASA ratio of a Bank is a strong indicator of the cost of funds & stability of deposit base

Types of Customers– Individuals – Illiterate, V.C.P, Mentally

Retarded– Trust Account– HUF– Clubs,Committees,Associations,Co-

operative Societies, Govt. Offices, Proprietary Concerns

– Partnership Firms– Company Accounts

• Minimum balance criteria• Interest – on daily product basis• Withdrawal• Transfer of Account• Joint Account• Minor Account• A customer Mr. X opens a Savings

Account with a Bank with Rs. 5 lacs and Bank allows interest @ 7 % p.a. whereas Mr. Y opens a Savings Account also with Rs.5 lacs and Bank allows @5% p.a.. What would be your response ?

Savings account – Basic Features

• For individuals

• Funds can be transferred to and from the account – includes cheque book facility

• Detailed statement of transactions are issued to savings bank account holders

• Garnishee order

Current account – Basic Features

• Can be opened by – Any individual attaining majority– Two or more individuals in joint names– HUFs– Sole proprietorships – Partnership firms – Private / Public limited companies– Clubs, Societies– Trusts– Other Govt bodies, local authorities

Current account – Basic Features

• Facilitates regular transactions: Funds can be transferred to and from the account – includes cheque book facility

• Does not bear interest

• Detailed statement of transactions are issued to current account holders

Term Deposit Accounts• Can be opened by anyone who can open a SB or

current a/c.• Fixed tenure accounts• Rate of Interest – depends on tenor, for 1 year

and above is usually higher than SB rates• Tenor ranges from 7 days to max. 10 years• TD > 20,000 cannot be made by cash deposit.

Requires either a transfer from Current / Savings account OR by way of Demand Draft

• Premature Withdrawal – Possible by paying the same rate of interest or 1%

lower than the originally contracted rate

Recurring Deposit Accounts

• Fixed amounts deposited on a monthly basis

• Minimum monthly deposit amount – Rs. 100

• Tenor – 6 months to 10 years• Rate of interest – similar to FDs for

similar maturities• Premature withdrawal – possible like for

FDs• Savings scheme for long term

Recurring Deposits

In case of delay by the depositor to make monthly instalment, penalty is levied on the delayed deposit at the rate of Rs. 1.5 / 100 per month for deposits upto 5 years and Rs. 2 / 100 per month for deposits > 5 years

Non Resident Savings / Current A/cs

Can be opened by Non-resident Indians

Can be opened jointly with another NRI

Remittances from abroad in permitted currencies

FCNR Deposits• Can be opened only by NRIs & kept in term

deposits for fixed periods• Can be opened jointly with another NRI• Deposits can be opened in specified foreign

currencies – usually USD, Euro, Pound, Jap Yen, Aus Dollar, Can. Dollar

• Tenor – 1 to 5 years• Premature withdrawal possible but with 1%

penalty• Rupee loans can be taken by the depositor in

India against security of the deposits• Foreign currency loan can be availed abroad

against security of FCNR deposits

CERTIFICATES OF DEPOSIT

Negotiable money market instrument

Min Rs. 1 lakh and in multiples of Rs. 1 lakh,

Period not less than 7 days/ not more than 1 year

Issued at discount Transferable by

endorsement and delivery

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Assets

• Term Loan

• Demand Loan

CHARACTERISTICS OF RETAIL LOAN

Loans / Credit Facilities to individuals and / or small business needs

Small ticket size - Granular Usually in the form of EMI repayment / Some

monthly repayment Higher spreads as compared to corporate

loans

IMPORTANCE OF RETAIL LOANS

• Help service the financing requirements of individuals for consumption / asset purchase

• Strengthening relationship with retail customers who help build balances

• Granular in nature – Bank risk is spread across large number of accounts

• Facilitate sale of other consumer products

REQUIREMENTS FOR RETAIL LOANS

• Regular needs of individuals - Investment– Consumer durables / electronics– Two Wheeler / Car– House– Shops / Land / Other Assets– Education for children

RETAIL LOANS – UNSECURED

Based on monthly income / credit history Credit Cards Personal loans

RETAIL ASSET - PRODUCTS

• Daily needs of individuals - Consumption– Purchase of grocery– Purchase of garments / accessories– Purchase of fuel – petrol / diesel– Payment for tickets for travel – Air / Rail /

Hotel– Payment of electricity, telephone, water, gas,

etc bills

• Retail Asset Product - Credit Card

RETAIL ASSET - PRODUCTS

Consumer durables / electronics

Two Wheeler Car House Education Shares / Financial assets Gold

• Durable loan / Personal loan

• Two Wheeler Loan• Car Loan• Housing Loan• Educational loan• Loan against shares• Gold loan

RETAIL ASSET - PRODUCTS

• Commercial Vehicles – Trucks

• Other property / shops

• Contingency requirements for individuals / small businesses

• Commercial Vehicle loans

• Loan against property• Personal loans /

Business Loans / Business Cards

RETAIL ASSET – HOW IS TENOR DETERMINED ?

• Useful life of the asset

• Size of the loans

• Regular Income – repayment capacity

• Credit history / track record

RETAIL ASSET – TENOR / AMOUNT

• Tenor of loans – Asset Based– Asset life

• Consumer Durables – 1-2 years• Car – 2-5 years• House – 10-20 years

• Tenor of loan – non-asset based– Value of loan – repayment ability assessment– Cost of servicing & income potential for the

bank– Personal Loan – 2-3 years ;

RETAIL ASSET – TENOR / AMOUNT

• Amount of loan – Asset based– Cost of Asset: Cost of consumer durable or

Two wheeler is very low as compared to Cost of House

– Immovable / movable asset– Registration / identification / location of

movable asset

• Amount of loan – non-asset based– Determination of need– Credit assessment of individual

FACTORS AFFECTING PRICINGPortfolio Size 1,00,00,00,000 1,00,00,00,000

Average Loan size 10,00,000 40,000

# of loans for Rs. 100 crs. 1,000 25,000

Hours of processing / case 24 4No. of mandays @ 8 / day 3 0.5Cost / manday 2000 2000Cost / loan 6000 1000Total cost for Rs. 100 crs. 60,00,000 2,50,00,000 Avg loan tenor (yrs) 10 2Amortised approval / disbursement costs 6,00,000 1,25,00,000

Annual Interest income @ 5% NII 5,00,00,000 5,00,00,000 Earnings to Bank 4,94,00,000 3,75,00,000 Profit Margin 4.9% 3.8%Maintenance / collection costs 0.1% 2.5%Expected Delinquency 1% 4%Profit Margin - post losses 3.8% -2.7%

FACTORS AFFECTING PRICINGAll figures in Rs except where specified Home Loan Two Wheeler loan TW loan - revisedPortfolio Size 1,000,000,000 1,000,000,000 1,000,000,000

Average Loan size 1,000,000 25,000 50,000

# of loans for Rs. 100 crs. 1,000 40,000 20,000

Hours of processing / case 24 4 4No. of mandays @ 8 / day 3 0.5 0.5Cost / manday 2000 2000 2000Cost / loan 6000 1000 1000Total cost for Rs. 100 crs. 6,000,000 40,000,000 20,000,000 Avg loan tenor (yrs) 10 2 4Amortised approval / disbursement costs 600,000 20,000,000 5,000,000

Annual Interest income @ 5% NII 50,000,000 50,000,000 50,000,000 Earnings to Bank 49,400,000 30,000,000 45,000,000 Profit Margin 4.9% 3.0% 4.5%Maintenance / collection costs 0.1% 2.5% 2.0%Expected Delinquency 1% 2% 2%Profit Margin - post NPAs 3.8% -1.5% 0.5%

Factors Influencing pricing of retail products

• Size of the portfolio – economies of scale

• Average ticket size of loan

• Time / cost for processing a loan

• Average loan tenor

• Maintenance cost of loan

• Loan delinquency levels

Comparison of retail asset products

Average Tenor (yrs.) 10 4 2 3

Maintenance cost L L M L

Delinquency (%) 0.5-1 1-2 2-3 3-4

Loan processing time/ Cost (H / M/ L)

H M M H

Avg. Ticket Size (Rs. Lacs) 10.0 3.0 0.3 2.0

Retail Asset Prodt Home Loan

Autoloan

TWloan PL

Cont.

H

5 +

L

0.5

Cr. Cards

Key Success Factors for Retail Asset Business• Strong Process Orientation for loan processing

• Large distribution for selling products across geography – direct or arrangements

• Identification of the right segments to target – e.g. salaried segment in PL have lower delinquency

• Relevant underwriting skills e.g. for a Home loan business, the underwriters must have sound knowledge of property related title documents & valuation of property

Key Success Factors for Retail Asset Business

• Credit Rating models for quick, efficient and consistent credit dispensation

• Standardization of documentation

• Strong monitoring on delinquencies & feedback mechanism from monitoring into credit appraisal parameters

• Strong collections support for managing delinquencies

Drug smuggling/ trafficking

Money laundering Terrorism If you are to build a

relationship you should know all about the customer.Therefore no account should be opened unless the customer has been introduced properly.

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A CUSTOMER IS: A person or entity that

maintains an account and/ or has a business relationship with the bank.

One on whose behalf an account is maintained.

Any person/ entity connected with a financial transaction which can pose significant reputational or other risks

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What is KYC?

KYC exercise is aimed at preventing Banks from being used for purposes of money laundering by criminal elements. Banks undertake this exercise carefully to verify identity of customers.

Are all customers subject to KYC?

• Yes. Every individual willing to have any business relationship with the bank i.e. any type of account, locker, benefits on account of financial transactions, remittance, loan facility etc. needs to comply with KYC.

What is the Legal Banking for KYC?

• Section 35A of the B.R. Act, 1949 and Rule 7 of the P.M.L.R., 2005. Any violation could attract penalty.

What if somebody cannot submit address proof?

• Such person need to submit an identity proof along with an utility bill of the relative with whom the willing customer is staying along with a declaration from the relative confirming the fact.

Under what circumstances can KYC norms be relaxed?

• Customer belonging to low income group, under financial inclusion, can open an account with an introduction from another account holder who has complied with KYC procedure. But the total balance in the account must not exceed Rs.50,000/- and all credits in the account must not exceed Rs.1 lakh a year. Introducer’s account must be 6 months old.

THE RBI States:

• KYC must be the key principle for identification of an individual/ corporate for opening an account. This would entail verification:– Thro’ an introductory reference from an

existing account holder – Thro’ a person known to the bank.– On the basis of documents provided by

the customer.

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INTRODUCTION

• Account to be introduced by someone known to Bank.

• Person must know the client – Wolfgang Mueller Case

• No protection if negligent (section 131 of NI act)

• If introducer does not come send thank you letter

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Key Elements of KYC

Customer Acceptance Policy.

Customer identification Procedures

Monitoring of tranactions

Risk Management

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CUSTOMER ACCEPTANCE POLICY

• RBI states banks must have this and it should include:– No account opened in anonymous/ fictitious names– Parameters of risk perception– Documentation to be collected– That account not opened/ closed where bank unable to

apply appropriate customer due diligence.– Spelling out where a customer may act for another.– Checks to ensure identity of customer does not match with

that of known criminal.

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• HOWEVER:– Information sought should not be

intrusive. – Information provided is confidential and

divulging details for cross selling or any other purpose would be in breach of customer confidentiality obligations.

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CUSTOMER IDENTIFICATION PROCEDURE

• Banks must obtain sufficient information to satisfy themselves on the person’s identity. This means banks must be able to satisfy competent authorities that due diligence was observed.

• For natural person there must be sufficient identification data to verify identity, address, location and photo.

• KYC must be done for existing customers too.

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TRANSACTION MONITORING

• Ongoing monitoring is an essential.• Must check transactions that fall outside the

regular pattern of activity.• Look at complex/ unusually large

transactions.• Maintain record of all transactions of

suspicious transactions + cash transactions (deposits and withdrawals) of Rs. 10 lakhs and above.

• Freeze suspicious accounts.

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KYC and RBI

• PAN numbers for Demand Drafts

• DDs, TCs etc of Rs. 50,000 or more not to be given on cash.

• Photographs of customers must be procured

• Transactions of suspicious nature to be reported

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KYC Guidelines

• Identity

• Address Proof

• Occupation

• Source of Income

• PAN

KYC Norms for opening A/cs• Documents for customer identity – Passport,

Voter ID, Driving license, PAN Card, any other identity card to bank’s satisfaction

• Documents for address proof – Bank a/c statement from another bank, telephone bill, electricity bill, ration card, letter from existing employer, letter from recognized public authority, ST / Service Tax / Professional Tax certification / registration documents for proprietor

WHAT IS MONEY LAUNDERING?

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A broad definition

• Transfer of earnings from illegal businesses like drug peddling and extortion into a seemingly legitimate front company.

• Using legitimate money to fund terrorism or other such activities (reverse money laundering)

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What is the extent?

• Globally estimated to be:

• Between $590 billion and $1.5 trillion annually.

• This is 2% to 5% of global GDP

• In India estimated at 40% of GDP but this includes black money also.

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MONEY LAUNDERING

• Activity not consistent with customer’s business

• Unusual activities• Attempts to avoid reporting or record

keeping requirements• Customer who provides insufficient or

suspicious information.• Certain bank employees• Changes in Bank transactions

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Money Laundering Process• STRUCTURING

It is a placement of funds in fictitious accounts.

• LAYERING

It is a process of transferring the same through series of complex transactions so as to confuse the audit trail.

• INTEGRATION

It is a mingling of the illegal property with legitimate property.

Provisions of “The Prevention of Money Laundering Act 2002”

• Sec.2 (p) of the Act defines Money Laundering as “Whoever has anything to do with the proceeds of crime and projects such proceeds as untainted property commits the offence of money laundering”.

• Sec.12 – very important for the banks. It provides that the Banks and Fis and all intermediaries in capital markets associated with SEBI Act must maintain records of Cash and Suspicious transactions as may be prescribed by rules formed under this Act.

Contd..

• It also provides that the banks must maintain the documents of identity proof of all clients.

• Sec.24 – provides that when the bank or the person is accused of money laundering the onus of providing otherwise shall lie on the person so accused.