A to Z of Banking BANKING: Banking is accepting for the purpose of lending or investment, of deposits or money from the public, repayable

on demand or otherwise, withdraw able by cheque, draft, order or otherwise (Section 5(b), Banking regulations Acts, 1949) Primary Functions: i) Acceptance of deposits ii) Lending of money on investment of funds. Secondary i) Collection of cheques and bill of exchange. ii) Remittance facility issue of Demand Draft Telegraphic Transfer, Real Time Govt. settlement (RTGS) electronic fund Transfer(EFT) iii) Safe custody of articles securities and other documents. iv) Safe demerit locker to keeper valuables in a safe place. v) Non-fund facilities letter of credit, Banker Guarantee vi) Crafts selling of third party products e.g. Insurance mutual fund products, Govt. securities Retail Banking: Retail Banking is banking catering to requirements of individuals relating to deposits, advances and functions. It is almost banking of the ---by the banking of the people and for the doge. Advantages: i) High yield ii) Diversified risk iii) Low level of NPA iv) Helping large under of customers to increase their standard of living. v) Opportunity for cross-selling. Disadvantages: i) Larger tenure of loan for 5 to 20 years. ii) High cost of securing money customers in different locations. Opportunity: i) Tremendous opportunity for anytime, anywhere banking. Threat: i) Concurrent borrowing of retail customers from different bankers and financial institutions. ii) Reduced proportion of no cost funds (current account), inscrolling the cost of funds for banks. Wholesale banking:

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Wholesale banking is banking of corporate customers and institutional finance. SWOT analysis: Strength: i) High quality of service to limited number of customer ii) Low cost of maintenance (of services) iii) Monitoring and follow up of wholesale advances is cashes. Weakness: i) High risk ii) Low yield of loan as the customers are highly demanding. iii) Cost of fund is high as the corporate customers donot keep idle no cost fund. iv) From the viewpoint of economy, increases inequality of income and wealth. Threat: A few corporate and institutions and large number of banks files competing for their business. Opportunity: Growth of corporate and institution with the advent of liberalization and globalistion. Strategy for success:- Retail. 1. Customer Relationship management. 2. Universal banking/financial supplement. 3. Advanced technology like:- ATM, core banking, EFT, RTGS making anytime, anywhere banking possible 4. More delivery channels 5. Service quality with a human touch. 6. Market research for innovative products and services

Wholesale
1. Advanced technology 2. Strategic cast managerial 3. Risk management strategy. New retail products 1. Certificate of deposit (C.O) Minimum deposit Rs. 1 lakh Period 15 days to 1 year Higher rate of interest.

2. Smart money (HSBC) fixed deposit linked to current/savings account. 3. Business varitage- HSB current account with e-banking, phone banking, diversity banking service, special ATM withdrawal submit of Rs.10 lakhs peer day and no bounce cheque protection.

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4. Business select: Business select customers with ATM withdrawal of Rs. 2 lakh per day, Hon living of cheques with Rs 2 lakhs irrespective of balance business centre facilities at all and managerial forces exchange rates order. 5. Classical credit card: Classical credit card offers o/o-balance transfer from other credit cards, internets banking, and comprehensive insurance exclusive travel benefits from interactive travel house, global calling card etc. 6. Gold card: Gold card holder gets all these privileges plus rebate on international/domestic leisure packages, discount at hotel, high amount personal accident insurance. 7. Flexi-finance: This facility draws money against assets such as balance sheets salary steps shares fixed deposits etc. 8. Gen next account-Exclusive account to secure a childrens future through systematic investment plan. 9. Orange saving Account- ING Vysyas account with added convenience to the customer. 10. Prashanti: ING Vysyas senior citizens. 11. Mediplus Scheme-SBIS scheme to cover medical expenses. 12. Cyber plus, Courier plus, Doctor plus, Paryatan plus Social Plus Plans Scheme of SBI to help the targeted sector with selectively low interest rate and additional facilities for targeted customer groups. 13. Now corgs Jeevan Griha RakshaCorporation banks low cost single premises group insurance scheme envisaging foreclosure of the on expanding loan amount by the proceeds of claim amount received from LIC on the death of the borrower. 14. Corp e-cheque: Corporation Banks Scheme of remittance of funds to preapproved beneficiaries with 48 hours. ASSET-LIABILITY RISKS This includes interest rate risk for the banking book, foreign exchange and liquidity risks. These risks are named asset-liability risks because they arise from the dissimilar characteristics of assets and liabilities. Interest Rate Risk Interest rate risk is the volatility in the earnings or the value of a financial institution owing to unexpected changes in interest rates. It is due to the mismatched re-pricing of a financial intermediarys assets and liabilities.

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Liquidity Risk Liquidity risk is the risk of economic losses resulting from the fact that the sum of all inflows and the cash reserves of a financial intermediary on a day are not sufficient to meet its outflows on that day. Foreign Exchange Risk Foreign exchange risk is defined as the volatility in earnings or value of a financial intermediary caused by unexpected changes in exchange rates. Operational Risk Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. The changes in the markets, products, and technologies of financial intermediaries caused operational risk. Solvency Risk The risk of insolvency, is a situation wherein losses are large enough to wipe out the capital of a financial intermediary, is called solvency risk. It is impossible to reduce the possibility of insolvency to zero. MARKET RISK VALUE-AT-RISK: Value-at-risk (VAR) is the potential loss in value of a position over a certain period of time with a specific probability. The time horizon used most often for VaR is a day. A VaR of Rs. 1 million at a 90% confidence level means that the loss in value of the portfolio over a day is likely to exceed Rs.1 million 10% only of the time. Historical Simulation Historical simulation uses the distribution of historical prices to calculate VaR. The daily prices for the last t days are used to revalue the anchored portfolio with a composition as on the anchor date. The historical daily returns are applied to the prices of the portfolio of the form, V1, V2,.V1. This series of values is then used to generate a series o daily changes in values, V1V2, etc. The series of value changes is then used to calculate the VaR. Monte Carlo Simulation Monte Carlo simulation is like the historical simulation approach except that the prices are simulated randomly from a pre-specified stochastic process. These

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prices are then used to revalue the portfolio and calculate VaR in the same manner as in historical simulation. STRESS TESTING Stress testing tells banks about the large losses that might occur owing to changes in market prices that are placed in the extreme tails of the market return distributions, beyond the VaR. While these events may not have a high probability of occurrence, their severity merits them an analysis. There are three types of stress. The first involves analyzing the largest loss incurred during the reporting period and comparing that to the VaR. The second involves subjecting bank portfolios to a series of simulated stress scenarios which are historical. The third stress test involves the bank using its own internally generated (as against historical) Stress scenarios to stress the risk calculations reported by its VaR measurement model. INTEREST RATE RISK Sources of Interest Rate Risk i) ii) iii) iv) Mismatched Re-pricing: The timing difference in maturity of fixed rate assets and liabilities and in re-pricing of floating rate assets and liabilities. Basis Risk: Interest rates on each asset/liability type might be linked to different indices causing them to change in an unsynchronized fashion. Embedded Options: A number of bank assets and liabilities provide embedded options for customers e.g. each withdrawal option on deposits and prepayment option on advances. Yield Curve Composition: Non-parallel shifts in the yield curve contribute to interest rate risk. For example, if a bank has long-term assets financed with short-term liabilities, its spread will widen when the yield curves slope increases.

Exposure Measurement: i) Earnings Perspective: The GAP analysis measures volatility in net interest income attributable to unexpected interest rate changes, over a period of one year. The steps in carrying out GAP analysis are: a) Selection of a time frame for analysis b) Construction of time buckets or bands within the time frame.

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c) d) e)

Apportioning assets and liabilities to the time band corresponding to their maturity or re-pricing date Grouping the assets and liabilities in each band into homogeneous groups. Calculating the periodic and cumulative GAPs for each time band

Economic Value Perspective: Duration GAP calculation: The duration of an instrument measures the sensitivity of the market value of the instrument of interest rate changes. Duration is additive across securities, enabling the calculation of the sensitivity of the entire portfolio. Thus aggregate risk to the net worth of a bank can be calculated using the duration of its assets and liabilities.

Operational Risk
Caused (2001) an increase in the importance of operational risk to five Drivers of Changing Operations. Changing markets; changing products and services; changing technologies, changing techniques; and unexpected events are responsible for operational loss. Operational

Loss event categories

Event type Category Internal fraud Definition Losses due to acts of a type intended to defraud, misappropriate property or circumvent regulations, the law or company policy which involves at least one internal party. Excludes diversity/ discrimination events Losses due to acts of a type intended to defraud, misappropriate property or circumvent the law, by a third party Sub-categories Unauthorized activity Theft and fraud Theft and fraud Systems security

External fraud

Employee Practices Losses arising from acts inconsistent with employment, Employee relations safe and Workplace Safety health or safety laws or agreements, from payment of environment Diversity and personal injury claims, or from diversity/ Discrimination discrimination events Clients, Products and Business Practices Losses arising from an unintentional or negligent failure to meet a professional obligation to specific clients (including fiduciary and suitability requirements), Or from the nature and design of products. Suitability, disclosure and fiduciary Improper business or market practices Product flaws Selection, sponsorship and exposure Advisory activities

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Damage to physical assets Business disruption and systems failure Execution, delivery process management

Losses arising from loss or damage to physical assets from natural disaster or other events. Losses arising from disruption of business or system failures. Losses from failed transaction processing or process Transaction capture, management, from relations with trade counterparties execution and and vendors maintenance Monitoring and reporting Customer intake and documentation. Customer account management Trade counterparties. Vendors and suppliers

Key Risk indicators Employee sick days Staff turnover Aggregate grading of employee reviews Failed background checks on employees. Above market returns
Transaction volumes Amount of overtime worked Investments in technology System downtime Age of hardware Capacity to usage ratio Margin on a product Level of training required by internal staff.

MEASURING Top-Down Approaches. The first and the least sophisticated method is the basic indicator approach. The standardized approach is the next and the advanced measurement approach is the most sophisticated. The basic indicator approach allows a bank to calculate the operational risk capital charge as 15% of its average annual gross income* over the previous three years. The choice of 15% has been made on the basis of an observed industry wide relationship between the required capital and annual gross income.

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The standardized approach due to banks activities into eight business lines, namely corporate finance, trading and sales, retail banking, commercial banking, payment and settlement, agency services, asset management, and retail brokerage. The operational risk capital charge for each business line is calculated by multiplying the gross income of that business line by a factor ranging from 12 to 18%. Bottom-Up Approache It allows banks to use an internal operational risk measurement system provided some qualitative and quantitative criteria are met. The difficulties are: lack of position equivalence; incompleteness of portfolio; context dependence and irrelevance of past data; and validation difficulties. Unlike credit and market risks, operational risk does not have a measurable exposure amount or position equivalence.

Managing Bank Capital The term bank capital can have different meanings. Capital can be either book value of capital, market value of capital. The focus in this chapter is on economic capital. Difference between the assets and liabilities of bank. Book capital paid-up share capital of the financial intermediary of the premium received at the time of capital issuance to retained earnings and free reserves. The market value of equity the number of shares outstanding times the current market price of the financial intermediarys stock. Market value of capital reflects not only the current and past performance expectations of investors. Regulator capital is the minimum capital a bank is required to maintain as per regulatory standards. This calculated as a specified percentage of a banks assets weighted according to their level of risk.

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Economic Capital Economic capital is the aggregate amount of equity capital required as a cushion for a companys unexpected losses due to all its credit, market and operational risks.

Measuring Economic Capital 1. The confidence 2. The time horizon 3. Measures of banking risks. The Confidence Level The choice of confidence interval is a managerial decision made at the highest level. This decision is made using the historical default probabilities of peer banks and their associated ratings. The first step for the bank is to identify a target rating for itself.

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cy

The Time Horizon The time horizon typically selected is a one-year horizon. The choice of horizon involves a trade off between the horizons for credit risk which tend to be longer than a year and the horizons for market risk that are shorter than a year. Measuring Risks: The risk of loss owing to borrower defaults, i.e. credit risk is measured at the level of individual loans in the case of commercial credits and portfolios in the case of retail credits. Market risk, the risk of losses owing to changes in market prices, can be measured by using VaR. While evaluating market risk for the purpose of economic capital it is important to ensure that the confidence level selected is the same as that for measuring capitalat-risk and also the horizon. If the horizon used to measure VaR is different, it can be up-sealed or down-sealed in line with the horizon for the capital-at-risk. Operational risk can be quantified using either top-down or bottom-up approaches. Again the confidence level and time horizon should be selected to match that chosen for capital risk. The critical estimates required for operational risk measurement are results of selfassessments, key risk indicator and loss frequency and loss severity data. Aggregating Risks. After quantifying risks that a financial institution faces, these can be aggregated to yield economic capital either through simple addition (assuming perfect correlation), or assuming independence between the risks, or after taking diversification benefits between the risks into account.

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Risk Adjusted Return on Capital The calculation of economic capital is used in performance evaluation of the firm as a whole and of individual business units. This is achieved through the calculation of a risk adjusted performance measure. Return on risk adjusted capital is defined as,

Expected annual net income RORAC =--------------------------------------Economic capital Where, Expected annual net income = Expected annual net interest incomeexpected annual operating costsexpected annual losses (or loan loss provisions)- expected annual taxes. RORAC Hurdle Rate The hurdle rate is nothing but the cost of equity for the bank as a whole. The cost of equity or the required rate of return from an equity investment in the bank by shareholders is calculated by using the capital asset pricing model, which expresses the required rate of return on a security as the risk free rate plus a premium based on the extent to which the securitys returns move with the market returns. Following is the equation for calculating cost of equity. Ri = Rf + (Rm-Rf)
Where, Ri are the returns on the banks equity, Rm are the returns on the market portfolio Rf is the risk free rate of return and

is the covariance (Ri, Rm) / m2 m2 is the volatility of market returns.

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Shareholder Value Added (SVA) Economic profit defined as earnings net of interest payments (funding cost), taxes, and provisions for specific loan losses, less a charge for cost of equity capital. The cost of equity capital or capital charge is calculated by multiplying the economic capital by the firm wide hurdle rate. The shareholder value added (SVA) is defined as follows: SVA = Expected net interest income-Expected operating costs-Expected losses (or loan loss provisions)-Expected taxes-Capital charges. Where, Capital charges = Economic capital utilized by an activity times banks hurdle rate.

Liquidity Risk
Liquidity risk as the risk to a banks earnings and capital arising from its inability to timely meet obligations when they come due without incurring unacceptable losses.
SORUCES Intrinsic mismatches: identifying a large mismatch in the contractual cash flows arising from existing business.

Uncertain account activity The nature of demand liabilities and advances in the form of cash credit and overdraft accounts is the second source of risk. Portfolio dynamism The growth dynamics of the banks portfolio both in terms of existing and new deals is the third major source of liquidity risk. This involves alteration of existing deals that have otherwise contractually bound cash flows and garnering of new deals. Credit and interest rate risk. The default of a counter party lends further uncertainty to cash flows and is another source of liquidity risk. A problem loan will demonstrate irregular payments of principal and interest causing inference in cash flows.

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Inadequate funding capability A bank might also experience liquidity risk owing unavailability of liquid assets, Systemic failures A system failure refers to a liquidity crisis that engulfs a large part of the banking system. This can happen because of the interconnected transitions of banks and the large size of the inter-bank market. Portfolio characteristics Some bank specific characteristics that can amplify liquidity risk are the presence of a few large contract holders (depositors or borrowers), and portfolios concentrated in a few sectors or clients.

Central Banks
Definition: H.A Shaw (1918) defines a Central Bank as the bank whose main function is control of credit. In the words of Hawtrey, A Central Bank is that which the lender of the last resort is. According to P.A. Samuelson (1966-86), A Central Bank is a bank of bankers. Its duty is to control the monetary base and through control of high-powered money to control the communitys supply of money. 1. The Central Bank is the apex institution of the monetary and banking system of the country. A commercial bank is only a constituent unit of the banking system and a subordinate to the Central Bank. 2. While the Central Bank possesses the monopoly of note issue, commercial banks do not have this right. 3. The Central Bank is not a profit-making institution. Its aim is to promote the general economic policy of the government. But, the primary objective of the commercial banks is to earn profit for their shareholders. 4. The Central Bank maintains the foreign exchange reserves of the country. The commercial banks only deal in foreign exchange under the directions of the Central Bank. 5. The Central Bank is an organ of the government and acts as its banker and the financial advisor, whereas the commercial banks act as advisors and bankers to the general public only.

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FUNCTIONS: Implementation of Monetary Policy. Note Issue The Reserve Bank of India is required to keep Rs. 115 crore in gold and Rs.85 crore in foreign securities, but there is no limit to the issue of notes. 1. 2. 3. Banker to the Government. Bankers Bank Custodian of Foreign Exchange Reserves Lender of the Last Resort Clearing Function Credit Control Quantitative Methods Bank rate policy Open market operations Variations in reserve ratios of commercial banks.

Bank rate (or) discount rate policy:- The rate of interest of every Central Bank is known as bank rate. It is also known as discount rate. At this rate, the Central Bank rediscounts bill of exchange and government securities held by he commercial banks. Open market operations: Direct buying and selling of securities, bill, and bonds of government and private financial institutions by the Central Bank on its own initiative is called Open market operations. Variable reserve ratio: Every commercial bank is required by law to maintain a minimum percentage of its time and demand deposits with the Central Bank. Qualitative or Selective Credit Control. Margin requirements: Regulation of Consumer Credit: Rationing of Credit: Direct Action: Moral Suasion. Publicity.

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INDIAN MONEY MARKET AND FINANCIAL SERVICES INDIAN MONEY MARKET: The Money market performs three broad functions: 1. Providing an equilibrating mechanism for demand and supply of shortterm funds. 2. Enabling borrowers and lenders of short-term funds to fulfill their borrowing and investment requirements at an efficient market-clearing price. 3. Providing an avenue for the Central Bank intervention in influencing both quantum and cost liquidity in the financial system thereby transmitting monetary policy impulses to the real economy. INSTRUMENTS OF MONEY MARKET: CALL/NOTICE MONEY MARKET: Borrowed or lent for a day, it is known as call (overnight) money. When money is borrowed or lend for more than a day and up to 14 days, it is called notice money. Inter-bank Term Money: Inter-bank market for deposits of maturity beyond 14 days is referred to as the term money market. The Discount and Finance House of India (DEHI) is a major player in the market. Treasury Bills: At present, there are the 91 days and 364 days treasury bills. The benefits of investment in treasury bills include: 1. No tax deducted at source 2. Zero default risk being sovereign paper 3. Highly liquid money market instrument 4. Better returns especially in the short term 5. Transparency 6. simplified settlement 7. High degree of tradability and active secondary market facilitate meeting unplanned fund requirements. Features: Minimum amount of bids: Rs.25,000/-only and in multiples thereof. Yield calculation: (100-P*) 365* 100 Y = ----------------------P*D

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Y = discounted yield P = Price D = days to maturity There are two types of auction for treasury bills: 1. Multiple price based or French auction: Under this type, all bids equal to or above the cut-off price are accepted. However, the bidder has to obtain the treasury bills at the price quoted by him. 2. Uniform price based on Dutch auction: Under this system, all the bids equal to or above the cut-off price are accepted at the cut-off level. Participation Certificates (PCs) and Commercial Bills PCs were utilized mostly by financial institutions to park their funds for longer maturities and could not be developed for meeting liquidity mismatches between financial institutions and/or banks. 1. PCs with risk sharing. The instrument provides flexibility in the credit portfolio of banks. These PCs are issued for 91-180 days in respect of certain types of loan advances. Interest is to be determined between the issuing and the participating bank freely. 2. PCs without risk sharing. This instrument is a money market instrument with tenure not exceeding 90 days. The two contracting banks determine the interests on such PCs. Certificates of Deposit (CD): Certificates of Deposit (CDs0 is a negotiable money market instrument, issued in dematerialized from or as a Since Promissory Note for funds deposited at a bank or other eligible financial institution for a specified time period. Guidelines for issue of CDs are presently governed by various directives issued by the Reserve Bank of India, as amended from time to time. 1. CDs can be issued to individuals, corporations, companies, trusts, funds, associates, etc. 2. NRIs can subscribe to CDs on non-repatriable basis. 3. CDs attract stamp duty as applicable to negotiable instruments. 4. Banks have to maintain SLR and CRR on the issue price of CDs. No ceiling on the amount to be issued. 5. The minimum issue size of CDs is RS. 5 lakh and multiples thereof. 6. CDs are transferable by endorsement and delivery. 7. The minimum lock-in-period for CDs is 15 days.

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Commercial Papers: Commercial papers (CP) refer to short-term unsecured promissory notes normally issued by corporate companies with a high credit rating. It is a note in evidence of the debt obligation of the issuer. 1. CPs are issued by companies in the form of usance promissory note, redeemable at par to the holder on maturity. 2. The tangible net worth of the issuing company should be not less than Rs.4 crore. 3. Working capital (fund-based) limit of the company should not less than Rs. 4 crore. 4. Credit rating should be at least equivalent of P2/A2/PP2/Ind.D.2 or higher from any approved rating agencies and should be more than two months old on the date of issue of CP. 5. Corporate are allowed to issue CP is up to 100 per cent of their fundbased working capital limits. 6. Issued at a discount to face value 7. Attract stamp duty. 8. Can be issued for maturities between 15 days and less than one year from the date of issue. 9. May be issued in the multiples of Rs. 5 lakh. 10. No prior approval of RBI is needed to issue CP, and underwriting the issue is not mandatory. 11. All expenses (such as dealers fees, rating agency fee and charges for provision of stand by facilities) for the issue of a CP are to be borne by the issuing company. Derivative Usance Promissory Notes (DUPN): RBI has restricted rediscounting for a minimum period of 15days. The maturity date of the bill should not be more than 90 days from the date of rediscounting. RBI has widened the entry regulation for Bill Market by selectively allowing cooperative banks, mutual funds and financial institutions, besides banks and Primary dealers (PDs). Ready Forward Contracts (REPOS) Ready forward or repo or Buyback deal is a transaction in which two parties agree to sell and repurchase the same security. Under such an arrangement, the seller sells specified securities with an agreement to repurchase the same at a mutually decided future date and a price. Similarly, the buyer purchases the securities with an agreement to resell the same to the seller on an agreed date in future at a pre-fixed price. Under ready forward deal, the seller of the security is the borrower and the buyer is the lender of funds. Such a transaction offers benefits both to the seller and the buyer. The seller gets the funds at a specified interest rate and, thus, hedges himself against volatile rates without parting with his security permanently, and the buyer gets the security to meet his SLR requirements.

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Scheme of Liquidity Adjustment Facility Pursuant to the recommendations of the Narsimham Committee Report on Banking Reforms ( Narasimham Committee II), it has been decided in principle to introduce a Liquidity Adjustment Facility (LAF) operated through repo and reverse repo since June 5, 2000. Under this scheme, (i) repo auctions (for absorption of liquidity), and (ii) reverse repo auctions (for injection of liquidity) will be conducted on a daily basis (except Saturdays). Dated Government Securities: Since the date of maturity is specified in the securities, these are known as dated government securities. Its market in India has two segments: 1. Primary market 2. Secondary market. The primary market consists of the issuers of the securities, viz. Central and State Governments. The secondary market includes commercial banks, financial institutions, insurance companies, provident funds, trusts, individuals, primary dealers and the Reserve Bank of India. Gilt-edged Market: Government securities do not suffer from the risk of default, and are highly liquid. Regulatory Framework The Securities and Exchange Board of India (SEBI) is the regulatory authority established under the SEBI Act, 1992 in order to protect the interests of the investors in securities as well as promote the development of the capital market. It involves regulating the business in stock exchanges and supervising the working of stock brokers, share transfer agents, merchant bankers, underwriters, etc. as well as prohibiting unfair trade practices in the securities market. Capital Market Instruments. Debentures: A debenture is usually a loan repayable at a fixed date. Bonds: A bond is a debt investment with which the investor loans money to an entity (company or government) that borrows the funds for a defined period of time at a specified interest rate.

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Preference Shares: Preferential shareholders enjoy a preferential right over equity shareholders with regards to: (i) receipt of dividend and (ii) receipt of residual funds after liquidation. Equity Shares: Equity shares represent proportionate ownership in a company. Investors who own equity shares in a company are entitled to ownership rights. Functions of Capital Market 1. It provides for the investors a safe and productive channel for investment of savings and secures the recurring benefit of return thereon as long as the savings are retained. 2. It provides liquidity to the savings of the investors by developing a secondary capital market and, thus, makes even short-term savings consistently available for long-term users. 3. It mobilizes savings of a large number of individuals, families and associations and makes the same available for meeting the large capital needs of organized industry, trade and business and for progress and development of the country as a whole and its economy. Over the Counter Exchange of India (OTCEI) The traditional trading mechanism prevailed in the Indian stock markets gave way to many functional inefficiencies, such as absence of liquidity, lack of transparency, unduly long settlement periods and benami transactions, which affected the small investors to a great extent. To provide improved services to investors, the countrys first ring less, scrip-less electronic stock exchange, called OTCEL, was created in 1992 by the countrys premier financial institutions-Unit Trust of India, Industrial Credit and Investment Corporation of India, Industrial Development Bank of India, SBI Capital markets, Industrial finance Corporation of India, General Insurance Corporation and its subsidiaries and CanBank Financial services. National Stock Exchange (NSE) Non-Banking Financial Companies (NBFCs) An NBFC is a company registered under the Companies Act, 1956 and is engaged in the business of loans and advances, acquisition of shares/stock/ bonds/ debentures/securities issued by the government or local authority or other securities of marketable nature, leasing, hire purchase, insurance business, chit business, but does not include any institution whose principal business is that of agricultural activity, industrial activity, or sale/purchase/construction of immovable property.

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Registration: Minimum net owned fund (NOF) should be Rs.2 Crore for new NBFCs seeking grant of Certificate of Registration. Supervision: 1. On-site inspection 2. Off-site monitoring supported by state-of-the art technology 3. Market intelligence 4. Exception reports of statutory auditors of NBFCs. The system of on-site examination put in the place during 1997 is structured on the basis of assessment and evaluation of CAMELS (Capital, Assets, Management, Earnings, Liquidity, and Systems and Procedures) approach. Ceiling of interest rates: For RNBCs, the minimum interest rate is 4 per cent daily deposits and 6 per cent on other than daily deposits. Period of deposits: All NBFCs cannot accept demand deposits. For other deposits, the deposits periods are (i) NBFC: 12-60 months, (ii) RNBCs: 12-84 months, and (iii) MNBCs (chit funds): 6-36 months. Payment of brokerage. The permissible brokerage, commission, incentives or any other benefit on deposits with all NBFCs is 2 per cent of the deposit. The expenses by way of reimbursement on the basis of related vouchers/bills produced up to 0.5 per cent of the deposits are also permitted. New Financial Products and Services: 1. Merchant banking: A merchant banker is a financial intermediary who helps transfer capital from those who possess it to those who need it. Merchant banking includes a wide range of activities such as management of customer securities, portfolio management, project counseling and appraisal, underwriting of shares and debentures, loan syndication, acting as banker for the refund orders, and handling interest and dividend warrants. 2. Loan syndication. This is more or less similar to consortium financing. But this work is taken up by the merchant banker as a lead manager. 3. Leasing: A lease is an agreement under which a company or a firm acquires a right to make use of a capital asset like machinery, on payment of a prescribed fee called rental charges. 4. Mutual funds: A mutual fund refers to a fund raised by a financial services company by pooling the savings of the public. 5. Factoring:

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6. Forfeiting: It is a technique by which a forfeiter (financing agency) discounts an export bill and pays ready cash to the exporter who can concentrate on the export front without bothering about collection of export bills. 7. Custodial services: Under this, a financial intermediary mainly provides services for a prescribed fee to clients such as safe keeping of financial securities and collection of interest and dividends. 8. Corporate advisory services: Financial intermediaries, particularly banks, have set up specialized branches for this. As new avenues of finance such as Euro loans, and GDRs are available to corporate customers, this service is of immense help to the customers. 9. Securitisation: It is a technique whereby a financial company converts its ill-liquid, on-negotiable and high value financial assets into securities of small value which are made tradable and transferable. 10. New products in forex markets: Forward contract. A forward transaction is one where the delivery of foreign currency takes place at a specified future date for a specified price. It may have a fixed or flexible maturity date. Options. As the very name implies, it is a contract wherein the buyer of options has a right to buy or sell a fixed amount of currency against another currency at a fixed rate on a future date according to his options. Futures: It is a contract wherein there is an agreement to buy or sell a stated quantity of foreign currency at a future date at a price agreed between the parties on the stated exchange. Swaps: A swap refers to a transaction wherein a financial intermediary buys and sells a specified foreign currency simultaneously for different maturity dates. Lines of credit (LoC): It is an innovative funding mechanism for the import of goods and services on deferred payments terms. LoC is an arrangement of a financing institution of one country with another to support the export of goods and services so as to enable the importer to import on deferred payment terms.

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MODERN TRENDS IN INDIAN BANKING Revised Guidelines on Priority Sector Lending 1. In order to overcome the crowding-out effect against small loans particularly to agriculture, big-ticket loans/ advances have been kept out of the direct agriculture segment (loans/advances in excess of Rs.1 crore granted to corporate, will get only one-third weight -age for being counted under direct agriculture) 2. With a view to encouraging direct and retail lending by banks, intermediation has been generally discouraged by keeping loans for onlending barring a few categories out of the priority sector fold and by phasing out investment in bonds of financial institutions from the priority sector. 3. Some of the banks had a nil or negligible net bank credit (NBC) and were engaging mostly in non-funded business (derivatives). This distortion has been sought to be corrected by linking their targets to the credit equivalent of their off balance-sheet business. 4. The overall priority sector lending targets at 40 per cent and 32 per cent for the domestic and foreign banks, respectively, as also other subtargets, have been retained unchanged. However, these are now calculated as a percentage of adjusted net bank credit (ANBC) or credit equivalent amount of off-balance-sheet exposures (OBC), whichever is higher, instead of NBC. ANBC includes NBC plus investments made by banks in non-SLR bonds held in HTM category. In order to address the problem faced by banks in pursuing a moving target, the reference ANBC or credit equivalent of OBE for the purpose of the targets has been stipulated as ANBC or credit equivalent of OBE as on March 31 of the preceding year. 5. Certain concessions granted earlier for the purpose of priority sector (i.e. exclusion of FCNR (B)/NRNR deposits from NBC) have lost their relevance in an environment of substantially large foreign exchange reserves. Such concessions have, therefore, been withdrawn. The outstanding FCNR (B)/ and NRNR deposit balances would no longer be deducted for computation of ANBC for priority sector lending purposes. 6. The revised guidelines also take into account the revised definition of small and micro enterprises as included in the Micro. Small and Medium Enterprises Development (MSMED) Act, 2006.

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Technical group for review of legislations on money lending: The All-India Debt and Investment Survey (NSS fifty-ninth round) had revealed that the share of moneylenders in total dues of rural households had increased from 17.5 per cent in 1991 to 29.6 per cent in 2002. Considering that high indebtedness to moneylenders could be an important reason for distress of farmers, a Technical Group for Review of Legislations of money-lending (Chairman: Shri S.C. Gupta) as announced in the Annual Policy Statement for the year 2006-07, was set up to review the efficacy of the existing legislative framework governing money lending and its enforcement machinery in different States. 1. Money-lenders should be registered compulsorily with the State Governments. Unregistered moneylenders will be penalized. The procedure for registration and renewal should be made simple and hassle free. 2. In order to focus the legislation on the regulation of money-lending transactions, banks, statutory corporations, corporative, financial institutions, NBFCs and RBI need to be kept out of the purview of the legislation. 3. To provide with the flexibility of adjusting the rates of interest in accordance with the market realities, the maximum rates of interest to be charged by moneylenders should be notified by the State Governments from time to time. 4. Alternate dispute resolution mechanisms such as Lok Adalat and Nyaya Panchayat for speedy and economical dispensation of justice have been recommended. Alternatively. Financial Inclusion Financial inclusion refers to delivery of banking services at an affordable cost to the vast sections of disadvantaged and low-income groups who tend to be excluded from the formal banking channel. RBIs broad approach to financial inclusion aims at connecting people with the banking system and not just credit dispensation; giving people access to the payments system; and portraying financial inclusion as a viable business model and opportunity. Services to depositors and small borrowers in rural and semi-urban areas: NCAER initiated the study in January 2006 and submitted the report in October 2007. The study covered 930 bank branches across the country from 30 States/ Union Territories, and included 9300 depositors and 13,950 borrowers. Prompt services delivery at the counter and professional attitude of the bank staff in reaching out to the customers emerged as the key determinants for customer satisfaction in rural and semi-urban areas.

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Credit counseling: setting up of centers on a pilot basis: The Working Group under the Chairmanship of: Prof. S. S. Johl had recommended that financial and livelihood counseling is important for increasing the viability of credit. Further, the Working Group under the chairmanship of Shri C.P. Swarnkar also had recommended that banks should actively consider opening counseling with a view to giving special thrust to credit delivery in the relatively underdeveloped regions. Micro-Credit Disbursement Indicators 1. An intermediate model that works on banking principles with focus on both savings and credit activities and where banking services are provided to the clients either directly or through SHGs. 2. There is a wholesale banking model where the clients comprise NGOs, MFIs and SHG federations. This model involves a unique package of providing both loans and capacity building support to its partners. 3. Further, there is an individual banking-based model that has its clients as individuals or joint liability groups. While programme management and client appraisal in this model may be a challenge, it is best suited to lending to enterprises. Micro-Finance Recognizing the potential of micro-finance to positively influence the upliftment of the poor, RBI has been making efforts to create an environment for its orderly development. It conducted a joint fact-finding study in May 2006 with a few major banks. The study revealed that some of the micro-finance institutions (MFIs) financed by banks or acting as their intermediaries/partners appeared to be focusing on relatively better banked area. They were also operating in the same area trying to reach out to the same set of poor resulting in multiple lending. Further, many MFIs, supported by banks were not engaging themselves in capacity building and empowerment of the groups to the desired extent. Also, some banks, as principal financiers of MFIs, did not appear to be engaging them for improving their systems, practices and lending policies. An advisory was, therefore, issued to banks in November 2006 communicating these findings and advising them to take corrective action at their end. Board for Financial Supervision (BFS) An independent Board for financial Supervision (BFS) under the aegis of the RBI has been established as the apex supervisory authority for commercial banks, financial institutions, urban banks and NBFCs. Consistent with international practice, the Boards focus is on offsite and onsite inspections and on banks internal control systems. Offsite surveillance has been strengthened through control returns.

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A scheme of Prompt Corrective Action (PCA) is in place for attending to banks showing steady deterioration in financial health. Three financial indicators, viz. (i) capital-to-risk-weighted-assets ratio (CRAR), (ii) net non-performing assets(net NPA), AND (iii) Return on Assets (RoA) have been identified with specific threshold limits. When the indicators fall below the threshold level (CRAR, RoA) or go above it (net NPAs), the PCA scheme envisages certain structured/discretionary actions to be taken by the regulator.

Deposit Insurance Reforms The issue of the limit of deposit insurance cover in India, now Rs. 1 lakh, is to be seen. In India, there have been demands to raise the insurance cover limit. The Shere Committee (1997) and the Vasudev the non-banks on the grounds of moral hazard, among others. In fact, the Committee on Banking Sector Reforms (1998) also endorsed this view. The increase in premium is required to enable the Deposit Insurance and Credit Guarantee Corporation (DICGC) to build up a deposit insurance fund of 2% of insured deposits over the next four years. For the deposit insurance fund to account for 2% of insured bank deposits, the total size of the fund would need to be Rs 94 billion. At the same time, to ensure that there is no moral hazard arising out of the security of deposit insurance, RBI has proposed to introduce a risk-based pricing of the premium. The report on Reforms in Deposit Insurance in India has stated that DIC will have the right to reject insuring a banks deposit if the banks rating is below investment grade for three consecutive years. As per the Central Banks recommendation, the liquidity in the event or a bank failure will have to be provided by the corporation. Thus, there is a need for DIC to have a larger deposit insurance fund to inspire depositors confidence in the system. SECURITISATION Securitisation is the process of conversion of existing assets or future cash flows into marketable securities. In other words, it deals with the conversion of assets, which are not marketable, into marketable ones. For the purpose of distinction, the conversion of existing assets into marketable securities is known as assetbacked securitization and the conversion of future cash flows into marketable securities is known as future-flows securitization. Some of the assets that can be securitized are loans such as car loans, housing loans, and future cash flows viz. ticket sales, credit card payments, car rentals or any other form of future receivables.

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CAPITAL ADEQUACY NORMS The framework suggested a minimum of 8 per cent capital to risk-weighted assets ratio which includes both on-and off-balance sheet items. REVERSE MORTGAGE In the Union Budget 2007-08, the Finance Minister announced the introduction of a novel product for senior citizens-the reverse mortgage. This product enables a senior citizen, who is the owner of a house, to avail of a monthly stream of income against the mortgage of his/her house while remaining the owner and occupying the house throughout his/her lifetime without repayment or servicing of the loan. Conceptually, reverse mortgage seeks to monetize the house as an asset and specifically the owners and equity in the house. It is just opposite of a forward mortgage which requires the payment of the principal loan amount along with interest on a monthly basis. This helps a borrower in retaining his home equity and hence increasing the home value. But with reverse mortgages, there are no such monthly repayments and so the debts go on increasing. The home equity, therefore, reduces to an extremely low value unless the property value keeps increasing. Reverse mortgages are therefore often known as rising debt and falling equity. Principal benefits of the scheme are that it enables senior / elderly citizens owning a house but having inadequate income to meet unexpected lump-sum expenditure needs such as renovation/repairs to house, hospitalization etc. Even after the demise of the borrower, the spouse can continue to stay in the house. If the spouse is co-borrower, he/she will continue to receive payment (up to 15 years from grant of the loan). Payment received from a reverse mortgage is considered as loan and not income from tax angle. Such a scheme can be a partial substitute for a social security scheme for home owning senior citizens and it will be particularly useful to those with no/unwilling family to support them. However, the scheme involves revaluation of the property mortgaged to the lender at intervals that may be fixed by the lender depending upon the location of the property and its physical state.

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AGRICULTURAL (ADWRS),2008

DEBT

WAIVER

AND

DEBT

RELIEF

SCHEME

In the waiver scheme, a farmer, who had obtained investment credit for allied activities where the principal loan amount did not exceed Rs. 50,000, was classified as small and marginal farmer and where the principal amount exceeded Rs. 50,000, was to be classified as other farmer, irrespective in both cases of the size of the size of the land holding, if any. In the case of a short-term production loan, the amount of such loan (together with applicable interest) and, in the case of an investment loan, the installments of such loan that are overdue (together with applicable interest on such installments), were eligible for debt waiver or debt relief, as the case may be, if the loan was (a) disbursed up to March 31, 2007 and overdue as on December 31, 2007 and remained unpaid until February 29, 2008; (b) restructured and rescheduled by banks in 2004 and 2006 through the special packages announced by the Central Government, whether overdue or not. Applicable Reserve Banks guidelines on account of natural calamities, whether overdue or not. The Committee on Agricultural Indebtedness (under the chairmanship of Dr. R. Radhakrishna) constituted by the Government of India submitted its report, which inter alia, addressed issues relating to creation of credit absorption capacities, need for risk-mitigation practices, introduction of cyclical credit system, dispute resolution mechanisms and setting up of a debt-redemption fund. Consequent upon the announcement made in the Mid-Term Review of the Annual Policy Statement for the year-2007-08, an internal working group was constituted (under the chairmanship of Shri V.S.Das) to examine the recommendations of the Radhakrishna Committee that were relevant to the banking system in general and the Reserve Bank in particular. The internal group submitted its report in April 2008. Based on their recommendations, it was bank, including RRBs, would be asked to select one district for introduction, on a pilot basis, of a simplified cyclical credit product for farmers to enable them to continuously utilize a core component of 20% of the credit limit. This arrangement should ensure minimum year-round liquidity as long as the interest is serviced. It was also announced to introduce a simplified procedure for crop loans to landless laborers, share croppers, tenant farmers and oral lessees whereby banks could accept an affidavit giving details of land tilled/crops grown by such persons for loans up to Rs.50,000 without any need for independent certification. Banks could also encourage the Joint Liability Group (JLG) SHG mode of lending for such persons. The modalities for implementation of the announcement are being finalized.

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BANKING ON INNOVATION Flow Chart Area like revenue growth market share increased customer satisfaction, are concern for innovation. The sources of innovation are customers, employees, consultants, business partner, and competitors. Examples 1) Securitization and venture capital funds. Securitization helps them to avoid credit risk and additional regulatory capital, but in the process retains the customer loyalty and connectivity. Venture capitalists perform the role of the catalysts in transforming innovative ideas into useful products or services, by their propensity to take higher risk and ability to identity a new idea. 2) A nationalized bank has proposed to utilize the services of dabbawallabs of Mumbai as delivery channels for its products and services. 3) The RBI, engaged in the task of financial inclusion, has designed two delivery models, namely, business correspondents model and business facilitators model to enhance the outreach of the banks in extending banking services to the poor. It also proposes to engage the services of the wide network of post offices. 4) The development of payment and settlement systems by the RBI, consisting of Real Time Gross Settlement System (RTGSS), National Electronic Funds Transfer, Centralized Funds Management System, besides Cheque Truncation System, have to Recommended Models e viewed as the process innovations of great value for the banking system. Rural Credit and Microfinance What the RBI Internal Group Report Says. Model A Model B H.R. Khan Group (2005) recommended on following: Business Facilitator Business Correspondent Persons are unbankable in the evaluation / perception of bankers. he loan amount is too small to invite attention of the bankers. NNoThe person is bankable on a credit appraisal approach but distances are too long for servicing and supporting the accounts and expanding Non-financial branch Servicesnetwork is not feasible and viable. High transaction costs particularly in dealing with a large number of small Financial accounts. Scope of Activities services as Borrower identification Lack of collateral security. Pass-through Collection, Inability to evaluate and monitor cash flow cycles and repayment processing and Scope of Activities agents submission of applications. Disbursal of small value loan. capacities due to information asymmetry, lack of data base and absence Preliminary appraisal. Recovery of of credit history of people with small means. Marketing of the financial principal/collection of interest. products. Human resources-related constraints both in terms of inadequacy of Sale of insurance, mutual Post-sanction monitoring. manpower and lack of proper orientation /expertise. etc. fund, Promotion and nurturing SHGs/ Collection of small deposits in Adverse security situation prevailing in some parts of rural India. LGs.
Follow-up of recovery. due course of time.

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Lack of banking habits and credit culture. Information-shadow geographical area. Extension services which are crucial to improve the production efficiency of the farmers are inadequate. The report records the following reasons from the demand side: High transaction costs at the client level due to expenses such as travel costs, wage losses, incidental expenses, etc. Documentation. Lack of awareness. Lack of social capital EligibleNon-availability of ideal products. Entities Eligible Entities Very small volumes/size of transactions which are not encouraged by formal banking NGOs, Farmers Clubs, Functionalinstitutions. Registered NBFCs, Section 25 Hassles related to documentation and procedures in the set up under Cooperatives, IT-enable rural outlets of companies, NGOs-MFIs formal system. corporates, Postal Agents, Insurance Societies /Trust Act, Societies under Agents, Well-functioning Panchayats, MACS, PACs, government/corporates Rural Multipurpose Kiosks/village supported IT-enabled outlets, Knowledge Centers, Agri Clinics/Agri Organizations/trusts set up by banks Business Centers, KVIC/KVIB units, (e.g., RUDSET), etc. KVKs Local youth, Retired bank employees, etc.

Banc assurance In terms of insurance penetration ratio (defined as ratio of insurance premium to GDP), a key indicator of the spread of insurance coverage and insurance culture, India compares poorly by international standards. Insurance Penetration-International Comparison-2006 (Select European and Asian Countries) Countries Insurance Penetration # (Per cent) Life Non-life Total 1 2 3 4 European Countries UK 13.1 3.4 16.5 Switzerland 6.2 4.9 11.1 France 7.9 3.1 11.0 Ireland 7.9 2.5 10.4 The Netherlands 5.1 4.3 9.4 Belgium 6.5 2.7 9.2 Portugal 6.1 2.9 9.0

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Germany 3.1 3.6 6.7 Asian Countries Taiwan 11.6 2.9 14.5 South Korea 7.9 3.2 11.1 Japan 8.3 2.2 10.5 Hong Kong 9.2 1.2 10.4 Singapore 5.4 1.1 6.5 Malaysia 3.2 1.7 4.9 PR China 1.7 1.0 2.7 India 4.1 0.7 4.8 World 4.5 3.0 7.5 USA 4.0 4.8 8.8 Canada 3.1 3.9 7.0 #: insurance penetration is measured by the ratio of insurance premium to GDP (in per cent) Source: Swiss Re.

Banc assurance as Distribution Channel for life Insurance Products in Select European Countries. Countries # 1 France Portugal Spain Belgium Ireland Sweden The Netherlands UK In per cent Proportion of insurance products distributed by banks 2 70 69 63 42 30 22 18 12

Year 1 2005-06

Select Indicators of Insurance Business in India Insurance Density * (Rs.) Insurance Penetration** (%) Life Non-life Total Life Non-life Total 2 3 4 5 6 7 956.42 183.91 1140.00 4.10 $ 0.70$ 4.80$

Bancassurance Models Banks intending not to take risk could adopt referral model wherein they merely part with their client data base for business lead for commission. The actual transaction with

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the prospective client in referral model is done by the staff of the insurance company either at the premise of the bank or elsewhere. Corporate Agency The other form of non-risk participatory distribution channel is that of corporate agency, wherein the bank staff is trained to appraise and sell the products to the customers. Here the bank as an institution acts as corporate agent for the insurance products for a fee /commission. A developed country like US., banks stated to have preferred to focus on the distribution channel akin to corporate agency rather than underwriting business. Several major US banks including Wells Fargo, Wachovia and BB &T build a large distribution network by acquiring insurance brokerage business. This model of bancassurance worked well in the US, because consumers generally prefer to purchase policies through broker banks that offer a wide range of products from competing insurers.

Insurance as Fully Integrated Financial Service /Joint Ventures

State Bank of India in the public sector, have already taken a lead in resorting to this type of banc assurance model and have acquired sizeable share in the insurance market, also made a big stride within a short span of time. Some Issues: The difference in working style and culture of the banks and insurance sector needs greater appreciation. Insurance is a business of solicitation unlike a typical banking service, it requires great drive to sell/ market the insurance products. Conflict deposits and other products which are mainly aimed at long term savings/investments can be very similar to that of the insurance products. In case the Bancassurance is fully integrated with that of the banking institution, it is suitable only for larger banks. All efforts that a bank staff spends in explaining to a customer would clinch the deal due to the very nature of the insurance products. Bankers in India are extremely nave in insurance products as there were no occasions in the past for the bankers to deal in insurance products; therefore they require strong motivation of both monetary and non monetary incentives. The problem of conflict of interest would also arise in a different form; as banks are privy to a lot of information about the customer, especially in the context of Know Your Customer (KYC) system being in place, these information could be used by the insurers for their unfair advantage. With more integration between and among various constituents of financial sector, there is greater possibility for contagion effect The regulation and supervision needs to address the institution as a financial conglomerate rather than each institution individually.

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Differences in the risk characteristics in banking and insurance will persist, relating, in particular, to the time pattern and degree of uncertainty in the cash flows and that has to be recognized and appropriately handled. Conflicts of interest between different regulators also could not be ruled out. Ensuring transparency and disclosure on activity-wise may be difficult task for the regulators, albeit it is essential. Possibility of abuse of consumers by bankers from being coerced to buy insurance products against their will need to be guarded, which RBI has been already emphasizing in its circular. Possibility of banks using the long term insurance funds to meet their short term liquidity and the problem of asset-liability management also could not be ruled out.

CUSTOMER MANAGEMENT IN RETAIL BANKING: AN OVERVIEW

RETAIL BANKING: Modern retail banking sector has been distinguished three basic characteristics: a. Multiple products: Different financial products like the savings and current deposits, credit/debit cards, personal loans, investments and securities are offered by these banks. b. Multiple channels of distribution: Retail Banks approach their customers through multi-channels like call centre, branch, Internet and kiosk. c. Multiple customer groups: Retail banks segment their consumers into groups like consumers, small business and corporate. They have different strategies for each customer segment. Rules: 1) 2) 3) 4) Customers redefine the rules of the game: Universal banks and ultra-focused niche players thrive: Changing workforce composition dictates new approaches: Regulatory burdens intensify: With increasing security concerns and privacy, banks will have to make proactive approach for managing compliance issues. 5) Technology improves inexorably to enable breakaway value: Strategy: 1) Strategies are developed differently for different segments. Retail banks implement segment specific channel strategies to develop highperformance by migrating clients to cost-effective direct channels.

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2) Development of contact centers services and processes for high and lowend customers. 3) Retail Banks are increasing their cross-selling and up-scaling activities for increasing their customer base and improve their customer relation. 4) Product innovation is another strategy applied by retail banks. The different client segments are offered other services like insurance or leasing services. 5) The latest strategy is in the use of debit/ATM cards in a all processing platforms irrespective of the retail banks. In other words a single credit/debit/ATM card can be used in any of the ATM machine without any processing or transaction fee. 6) For the high net-worth and techno-savvy individuals retail banks offer ebanking facilities which will enable them to do the banking transaction form anywhere in the world without physically going down to the branch. 7) Increasing their product penetration to the existing clients in the traditional market while for the urban or metro markets, increasing the distribution and selling of specialized business products to commercial customers is focused more.

Factors Affecting Customers Choice

1) Safety of Deposits, 2) Size and Strength, 3) Accuracy, 4) General Service Quality 5) Speed of Delivery, 6) Proximity 7) Security of Environment, 8) Cordiality of staff, 9) Price and Service Charges, 10) Product Packaging 11) General Public impression, 12) Peer Group impression, 13) Face Lift (structural), 14) Friendship with Staff, and 15) Advertisement and Publicity. According to the findings based on the empirical study, the first six factors exert the greatest influence, next four have moderate importance, and the remaining five have relatively lower influence. Customer Relationship Management KEY DRIVERS OF CRM Internal Factors

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1. 2. 3. 4. 5. 6. 7. 8.

Improving customer satisfaction and cross-selling: Increasing share of customer spend: Operational performance: Competitive pressure: Understanding customer lifetime value: Integration of all delivery channels: Introduction of multi-channel management: Automated Business Processes:

External Factors 1. 2. 3. 4. 5. 6. 7. Reduced competitive barriers: Reduced scope for differentiation: Customer demand: Relationship banking: Advances in technology: Affordable data storage for the retention : Calculate customer profitability:

HIGH NET WORTH CUSTOMERS CUSTOMER RELATIONSHIP MANAGEMENT Rs. 1 UNIT

CUSTOMER OUTSOURCING MANAGEMENT

COST TO REVENUES FROM

BIGGEST

CUSTOMER

SMALLEST

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Unlocking Client Advocacy Unlocking Client Advocacy: The IBM Customer Focused Insight Quotient (CFiq) TM Customer Focused Insight Quotient (CFiq), this measure captitures and integrates these attributes by asking clients to state their level of agreement with three simple statements: I would recommend my bank to friends and family. I would go to my bank first for future financial services needs. I would stick with my bank if offered a competitively priced product. The CFiq results are eye-opening-according to this measure; only 27 percent of retail banking clients are advocates of their bank Whats more telling is that the smaller players, such as credit unions and nontraditional banks, have a higher proportion of advocates than the national banks when segmented by CFiq scores. How Can Banks Capture the Opportunity? 1. Adopt a transformative mindset. 2. Apply an outside in perspective. 3. Break traditional design approaches and constraints. Shift Mindset A mindset shift is required, beginning with executive management; it must become a way of life for the organization and central of the culture. This implies it is a top-down led strategy. Donald Bell of Wesjlet Airlines. Bell has set the tempo for his customer focused enterprise. He is known as the spiritual leader and culture guru of his organization. Bell leads his customer focused mission by experiencing his business and customer base first-hands: he pilots a plane once a week to discuss experiences with front-line employees and customers. Apply an Outside-in Perspective

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The understand and effectively manage client attitude, banks need to identify specific moments of truth by advocacy segment and design competitively superior target experiences, while prioritizing resources and investments.

Human Performance: Customer Experience Management (CEM) has emerged to focus on the fundamentals of understand customers-not simply from an analytical perspective but from a relationship point of view, and not as an alternative to having a competitive product or reasonable price, but as a differentiator. Leadership roles are assigned with in each channel to create a framework for customer-facing employees to collaborate and design targeted client experiences. Solution experience: CUSTOMER opposed to more Some banks focused on interactions with the client, as OUTSOURCING typical MANAGEMENT generalized communications and product promotions. Customer focused organization and operating model innovation: Banks need to asses what customer relationship attributes make them different or especially valuable from the clients perspective. Then they must deliver consistently on these attributes at the point of interaction. Customer Advocacy: At a high level, the Customer Experience Management: 1. Perform a baseline advocacy measurement analysis, such as the CFiq, by selecting an appropriate client sample set from a banks database that draws from the banks collective lines of business and channels. 2. Apply customer experience principles to customer events, aligning the companys brand promise with the customers expectations. 3. Identify key experiences and events for each customer segment, creating a comprehensive catalog of moments of truth in a Customer Event Map. 4. Understand customer expectations, needs and wants in order to develop an outside-in view and distinguish which actions will change client attitude toward advocacy. To quickly focus on the key experiences among the thousands of customer interactions, we recommend both an internal and external data overlay on the Customer event Map.

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5. Blueprint the customers target experience, or in other words, describe the type of interaction that will build advocacy in the future client-facing operation. 6. Perform a gap analysis to determine the operational shortcomings and requirements needed to fulfill the target interaction. 7. Develop the operational blueprint that will allow the organization to deliver the target client interactions with the desired attributes. The operational blueprint includes business rules, process and organization, data, application and infrastructure decisions. 8. Develop a value case and refine the target to determine the interactions that will deliver the most for the client and company and, ultimately, prioritize the areas the company should focus on first, those they should implement later, and those not worth doing. A value case should be developed to show the economic returns on customer experience investments. 9. Implement the capabilities, deliver and measure these intentional client experiences. Begin rolling out the new interaction capabilities and measure their results on advocacy and client attitude.

BANKERS AUTOMATED CLEARING SYSTEM. 1. 2. 3. 4. Regular automated payments. Reduces time and cost of administering bulk payments. Helps manage cash flow and improve financial control. Reduces risk of loss, late payment and theft for customers.

Electronic Credit Clearing Service: Electronic Credit Clearing is a method of payment whereby the institutions having to make a large number of payments (such as interest and dividend) can directly credit the amount electronically into the bank accounts of the share holders/depositors/investors without having to issue paper instruments. 1. It requires expensive administrative machinery for printing, dispatch and reconciliation.

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2.

Bunching of a large number of instruments in clearing results in operational bottlenecks and pressures on the cheque processing system. 3. Chances of loss of instruments in transit and their fraudulent encashment. 4. The customer has also to keep track of the receipt/non-receipt of the instrument and take efforts in depositing the instrument to the bank on receipt of the same. 5. Banks find processing of such a large volume of instruments not only error prone and monotonous, but also a strain on the cheque clearing system. ECS helps save the administrative cost presently being incurred for printing of paper instruments in MICR format and dispatching them by registered post. By the time the ECS cycle is completed, the user institution gets an electronic data file from its bank with the date of payment and bankers confirmation thereon. At present, the ECS scheme is in operation at 15 RBI centres (where clearing houses are managed by RBI) and other centres managed by various public sector banks managing the clearing houses. ECS is highly beneficial to corporate bodies/institutions who have periodic, large volume payments to a fixed group of investors /beneficiaries. Electronic Debt Clearing The Reserve Bank of India has introduced the Electronic Clearing Service (Debit) scheme to provide faster, periodic and repetitive payments by direct debt to customers accounts (duly authorised), thereby minimising paper transactions and increasing customer satisfaction. Thos scheme envisages. a large number of debits and one credit in the case of collection of electricity bills, telephone bills, loan installments, insurance premia, club fees etc. by the utility service providers. The benefits are: 1. Faster collection of bills by the companies and better cash management by them. 2. Eliminates the need to go to the collection centres / banks by the customers and no need to stand in long queues for payment. 3. Automatic debiting to the accounts once the mandates are given by the customers, to that effect cuts down the procedural delay. SOCEITY FOR WORLDWIDE TELECOMMUNICATION (SWIFT) INTERBANK FINANCIAL

The Society for Worldwide Inter-bank Financial Telecommunication (SWIFT) operates a worldwide financial messaging network. The swift network exchanges message securely and reliably between banks and other financial institutions, much of it for use on the SWIFT Net network and the ISO 9362 bank identifier codes which are popularly known as SWIFT codes.

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SWIFT provides turn-key solutions for members consisting of linkage clients to facilitate connectivity to the SWIFT-Net and computer-based terminals (CBTs) which members use to manage the delivery and receipt of their messages. Some of the more well-known CBTs are: 1. SWIFTNet Link (SNL) 2. SWIFT Net Alliance Access/ Entry ( SAA/SAE) 3. SWIFT Alliance Workstation (SAW) 4. SWIFT Alliance Gateway(SAG) 5. SWIFT Alliance Starter Set (SAS) 6. SWIFT Alliance Webstation (SAB) 7. SWIFT Alliance Messenger(SAM) Currently, 90 per cent of all banks worldwide us the SWIFT network to carry out international bank transfers. Some banks in developing countries are not affiliated with network and they transmit this kind of information by telex, thus resulting in delay. Clearing House Automated Payment System. The Clearing House Automated Payment System (CHAPS) was established in London in 1984. Today, it offers same-day sterling and euro fund transfers. CHAPS is a member of the trader organization APACS. 1. for business-to-business payments; 2. by solicitors/licensed conveyances to transfer the purchase price of a house between the bank accounts of those involved; and 3. by individuals buying or selling a high-value item, such as a car, who need a secure, urgent, same-day guaranteed payment. EFT transactions may be accompanied by methods to authenticate the card and the cardholder. The merchant may manually verify the cardholders signature, or his PIN may be sent online in an encrypted form for validation by the card issuer. Some information included in the transaction may not be visible to the cardholder (for instance, the cardholders address or the CVV2 value printed on the card) ELECTRONIC FUNDS TRANSFER POINT OF SALE: Electronic Funds Transfer Point of Sale (EFTPOS) technology allows a retailer to directly debit a customers bank account by using debit card. The debit card, generally the same as an ATM card, is swiped through a reading device just like a credit card. The customer must enter his/ her PIN number, generally requested once the amount of the sale has been entered into the EFTPOS device. There are many advantages to using an EFTPOS for the retailer and the customer alike. The retailer is paid instantly without having to accept actual cash. Though cash is certainly preferable over credit cards with surcharges, or

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personal cheques that can bounce, there are many security liabilities surrounding the handling of large amounts of cash. Cash must be manually counted by the cashier at the POS, counted again when the register is balanced out, and finally collected by an armed service or personally deposited. With EFTPOS, the money is wired directly into the retailers bank account, bypassing those liabilities while saving manual resources. 1. Never tell anyone, not even your bank, what your EFTPOS security PIN number is. 2. Choose an EFFTPOS security PIN that is difficult to guess (NOT your birthday or the same number as other cards) 3. Do not write down your EFTPOS security PIN, but memorise it. 4. Call your bank immediately if you lose your EFTPOS card. 5. Be aware of anyone nearby when using your EFTPOS security PIN. Cover the EFTPOS keypad with your hand in such cases. 6. Do not leave your EFTPOS card in your car. 7. Never give your EFTPOS card in your car. 8. Carry handbags strapped around your body with openings towards you. 9. Sign your new EFTPOS card as soon as it arrives and destroy the old one. 10. If you must write down any security PIN number, keep the record separate from your EFTPOS card and code it securely (for example, write what looks like a phone number in your address book, but has a PIN written backwards as the last 4 digit) 11. Be sure that you know where your EFTPOS card is at all times. Develop a routine when you change clothes.

DIGITAL PAYMENT SYSTEM: The digital payment system represents just a part of the world payment system, but it is certainly the part which has undergone a major change as a result of evolving technological, social and economic conditions. Like the global payment system universe, the digital payment system also can be represented as an expanding universe as there is a continuous marked growth in the number and value of transactions. However, the growing number of electronic transactions, more and more of which are international, and the rise in their total value are capturing increased attention and interest by operators and newcomers who were previously outside the field. The evolution of such global networks calls for new technologies offering increasing efficiency security, convenience and value creation, consumer empowerment and greater transparency in fees application, and it also alls for standardization and regulation. E-BANKING

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E-banking is about using the infrastructure of the digital age to create opportunities, both local and global. It enables the dramatic lowering of transaction costs, and the creation of new types of banking opportunities that address the barriers of time and distance. Banking opportunities are local, global and immediate in e-banking. 1. Electronic mail (e-mail) improves communication between individuals and the bank, within the bank, with the bank and external parties, and between banks. 2. The availability of online information and services online, which customers can pay for and receive. 3. Banks can provide information and services online, which customers can pay for and vehicle for research. 4. Banking processes are made more efficient and cost-effective by integrating other aspects of banking operations such as treasury management and financial control. 5. If a banking function does not require physical interaction, it may derive the benefits of electronic banking. VIRTUAL PAYMENT SYSTEMS A virtual credit card is a way for people to make purchase online without risking themselves with frauds. The card enables the cardholder to avoid giving details of an active credit card online (credit card number, billing address, shipping address etc). Its main advantages are: the cardholder can buy anywhere online, there is no monthly fee to the credit card company, it can be used to pay online tuition for academic institutes, it is good for purchases worldwide, and the cardholder doesnt have to have a bank account. PAYPAL Paypal is an e-commerce business allowing payments and money transfers to be made through the Internet. It performs payment processing for online vendors, auction sites, and other corporate users, for which it charges a fee. WebMoney WebMoney Transfer Online Payment System is an electronic money and online payment system owned and administered by WM Transfer Ltd. it was founded in 1998 and is a legal corporate entity of Belize. Originally targeted at Russian clients, it is now used worldwide. The company more than 2 million users.

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Clients can use the system through the downloaded software called WM Keeper or through a limited web client called WM Keeper light. Signing up and receiving WebMoney (known as WM units) from other users is free; sending WM units to other accounts incurs a fee of 0.8 per cent. WebMoney transactions are safe because they do not require a credit card or bank account, and are immune against certain scams because they are final and cannot be retracted. This is similar to e-gold and cash, and unlike credit card transactions and PayPal. INTERNET BANKING Internet banking offers the following features: 1. Bank statements, with the possibility to import data in a personal finance programme such as Quicken or Microsoft Money. 2. Electronic bill presentment and payment (EBPP) 3. Funds transfer between a customers own checking and savings accounts, or to another customers account. 4. Investment purchase or sale. 5. Loan applications and transactions, such as repayments. 6. Account aggregation to allow the customers to monitor all their accounts in one place, whether they are with their main bank or with other institutions. Drivers 1. Improve customer access 2. Facilitate more services 3. Increase customer loyalty 4. Attract new customers 5. Provide services offered by competitors 6. Reduce customer attrition. Long-term success, a bank may follow: 1. 2. 3. 4. 5. Adopting a webs mindset. Catching on the first movers advantage. Recognising the core competencies. Ability to deal multiplicity with simplicity. Senior management initiative to transform the organization from inward to outward looking. 6. Aligning roles and value propositions with the customer segments. 7. Redesigning optimal channel portfolio. 8. Acquiring new capabilities through strategic alliances. The above can be implemented in four steps:

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1. First, familiarizing the customer to new environment by demo version of software on the banks website. This should contain tour through the features which are to be included. It will enable users to give suggestions for improvements, which can be incorporated in later versions wherever feasible. 2. The second phase provides services such as account information and balances, statement of account, transaction tracking, mailbox, cheque book issue, stop payment, and financial and customized information. 3. The third phase may include additional services such as fund transfers, DD issue, standing instructions, opening fixed deposits, and intimation of loss of ATM cards. 4. The forth step should include advanced corporate banking services such as third party payments, utility bill payments, establishment of L/Cs, and cash management services. Enhanced plan for the customers in future can include requests for demand drafts and pay orders and many more to bring in the ultimate in banking convenience. MOBILE BANKING: Mobile banking can be said to consist of three interrelated concepts: 1. Mobile accounting. 2. Mobile brokerage 3. Mobile financial information services. CHALLENGES: Interoperability: There is a lack of common technology standards for m-banking. The many protocols being used for it include HTML, WAP, SOAP and XML. It would be a wise idea for the vendor to develop a mobile banking application that can connect multiple banks. SECURITY Security of financial transaction from some remote location and transmission of financial information over the air are the most complicated challenges that need to be addressed jointly by mobile application developers, wireless network service providers and the banks IT department. Scalability and Reliability Another challenge for the CIOs and CTOs of the banks is to scale-up the mbanking infrastructure to handle exponential growth of the customer base. With m-banking, the customer may be sitting in any part of the world (a true anytime, anywhere banking), hence banks need to ensure that the systems are up and

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running in a true 24 x 7 fashion. As customers will find m-banking more and more useful, their expectations from the solution will increase. HOME BANKING Self-service banking for consumers and small business owners enabling users to perform many routine functions at home by telephone or cable modem connection. Home banking, also called online banking or PC banking, give consumers an array of convenient services: they can move money between accounts, pay bills, check balances, and buy and sell mutual funds and securities. They can also look up loan rates and see if they qualify for a credit card or mortgage. Some of the home banking services currently the most popular are: 1. 2. 3. 4. Vision of the credit. Bank transfers Operations over the phone Online payments.

TELEBANKING Tele-banking has the following features: 1. 2. 3. 4. 5. Can be used in two modes: (i) online and (ii) offline. Step towards anywhere banking. Multilingual facility. User-friendly. Provides account and other related information such as balance inquiry, last five transactions, cheque inquiry, stop payment, cheque book request and rates inquiry. 6. Call transfer to branch representative. 7. Statement of accounts can be requested by fax mode. Tele-banking gives the following benefits to the customers: 1. Reduces the queue of customers seeking account-related information in the bank. 2. Reduction of workload on bank/branch staff. 3. Can be used as a channel for selling various banking instruments. 4. Helps receive information anywhere, anytime and any place. OFFSHORE BANKING

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An offshore bank is a bank located outside the country of residence of the depositor, typically in a low tax jurisdiction that provides financial and legal advantages which include: 1. 2. 3. 4. 5. Strong privacy Less restrictive legal regulation Low or no taxation Easy access to deposits Protection against local political or financial instability.

Advantages: Some offshore banks may operate with a lower cost base and can provide higher interest rates. Geographically remote island nations can competitively engage. Interest is generally paid by offshore banks without tax deduction. Disadvantages: Offshore banking had been associated n the past with the underground economy and organized crime through money laundering. Following sept.11, 2001, offshore banks and tax havens, along with clearing houses, have been accused of helping various organized crime gangs, terrorist groups, and other State or non-state actors. GOLD BANKING The demand for gold liquidity has also led banks to market new forms of gold savings products, including gold accumulation accounts-now available in Brazil, India, Malaysia, and Turkey-by which regular monthly savings are used to buy gold certificates of deposit (bought with one-off currency payments). Turkish banks now offer the facility for converting gold coins and jewellery (held for traditional savings reasons) into income-earning gold deposits.

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CUSTOMER RELATIONSHIP MANAGEMENT

Year 1 2005-06

Select Indicators of Insurance Business in India Insurance Density * (Rs.) Insurance Penetration** (%) Life Non-life Total Life Non-life Total 2 3 4 5 6 7 956.42 183.91 1140.00 4.10 $ 0.70$ 4.80$

Bancassurance Models Banks intending not to take risk could adopt referral model wherein they merely part with their client data base for business lead for commission. The actual transaction with the prospective client in referral model is done by the staff of the insurance company either at the premise of the bank or elsewhere. Corporate Agency The other form of non-risk participatory distribution channel is that of corporate agency, wherein the bank staff is trained to appraise and sell the products to the customers. Here the bank as an institution acts as corporate agent for the insurance products for a fee /commission. A developed country like US., banks stated to have preferred to focus on the distribution channel akin to corporate agency rather than underwriting business. Several major US banks including Wells Fargo, Wachovia and BB &T build a large distribution network by acquiring insurance brokerage business. This model of bancassurance worked well in the US, because consumers generally prefer to purchase policies through broker banks that offer a wide range of products from competing insurers.

Insurance as Fully Integrated Financial Service /Joint Ventures

State Bank of India in the public sector, have already taken a lead in resorting to this type of banc assurance model and have acquired sizeable share in the insurance market, also made a big stride within a short span of time.

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Some Issues: The difference in working style and culture of the banks and insurance sector needs greater appreciation. Insurance is a business of solicitation unlike a typical banking service, it requires great drive to sell/ market the insurance products. Conflict deposits and other products which are mainly aimed at long term savings/investments can be very similar to that of the insurance products. In case the Bancassurance is fully integrated with that of the banking institution, it is suitable only for larger banks. All efforts that a bank staff spends in explaining to a customer would clinch the deal due to the very nature of the insurance products. Bankers in India are extremely nave in insurance products as there were no occasions in the past for the bankers to deal in insurance products; therefore they require strong motivation of both monetary and non monetary incentives. The problem of conflict of interest would also arise in a different form; as banks are privy to a lot of information about the customer, especially in the context of Know Your Customer (KYC) system being in place, these information could be used by the insurers for their unfair advantage. With more integration between and among various constituents of financial sector, there is greater possibility for contagion effect The regulation and supervision needs to address the institution as a financial conglomerate rather than each institution individually. Differences in the risk characteristics in banking and insurance will persist, relating, in particular, to the time pattern and degree of uncertainty in the cash flows and that has to be recognized and appropriately handled. Conflicts of interest between different regulators also could not be ruled out. Ensuring transparency and disclosure on activity-wise may be difficult task for the regulators, albeit it is essential. Possibility of abuse of consumers by bankers from being coerced to buy insurance products against their will need to be guarded, which RBI has been already emphasizing in its circular. Possibility of banks using the long term insurance funds to meet their short term liquidity and the problem of asset-liability management also could not be ruled out.

CUSTOMER MANAGEMENT IN RETAIL BANKING: AN OVERVIEW

RETAIL BANKING: Modern retail banking sector has been distinguished three basic characteristics:

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d. Multiple products: Different financial products like the savings and current deposits, credit/debit cards, personal loans, investments and securities are offered by these banks. e. Multiple channels of distribution: Retail Banks approach their customers through multi-channels like call centre, branch, Internet and kiosk. f. Multiple customer groups: Retail banks segment their consumers into groups like consumers, small business and corporate. They have different strategies for each customer segment. Rules: 6) 7) 8) 9) Customers redefine the rules of the game: Universal banks and ultra-focused niche players thrive: Changing workforce composition dictates new approaches: Regulatory burdens intensify: With increasing security concerns and privacy, banks will have to make proactive approach for managing compliance issues. 10)Technology improves inexorably to enable breakaway value: Strategy: 8) Strategies are developed differently for different segments. Retail banks implement segment specific channel strategies to develop highperformance by migrating clients to cost-effective direct channels. 9) Development of contact centers services and processes for high and lowend customers. 10)Retail Banks are increasing their cross-selling and up-scaling activities for increasing their customer base and improve their customer relation. 11)Product innovation is another strategy applied by retail banks. The different client segments are offered other services like insurance or leasing services. 12)The latest strategy is in the use of debit/ATM cards in a all processing platforms irrespective of the retail banks. In other words a single credit/debit/ATM card can be used in any of the ATM machine without any processing or transaction fee. 13)For the high net-worth and techno-savvy individuals retail banks offer ebanking facilities which will enable them to do the banking transaction form anywhere in the world without physically going down to the branch. 14) Increasing their product penetration to the existing clients in the traditional market while for the urban or metro markets, increasing the distribution and selling of specialized business products to commercial customers is focused more.

Factors Affecting Customers Choice

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16)Safety of Deposits, 17)Size and Strength, 18)Accuracy, 19)General Service Quality 20)Speed of Delivery, 21)Proximity 22)Security of Environment, 23)Cordiality of staff, 24)Price and Service Charges, 25) Product Packaging 26) General Public impression, 27) Peer Group impression, 28) Face Lift (structural), 29) Friendship with Staff, and 30) Advertisement and Publicity. According to the findings based on the empirical study, the first six factors exert the greatest influence, next four have moderate importance, and the remaining five have relatively lower influence. Customer Relationship Management KEY DRIVERS OF CRM Internal Factors 9. Improving customer satisfaction and cross-selling: 10. Increasing share of customer spend: 11. Operational performance: 12. Competitive pressure: 13. Understanding customer lifetime value: 14. Integration of all delivery channels: 15. Introduction of multi-channel management: 16. Automated Business Processes: External Factors 8. Reduced competitive barriers: 9. Reduced scope for differentiation: 10. Customer demand: 11. Relationship banking: 12. Advances in technology: 13. Affordable data storage for the retention : 14. Calculate customer profitability:

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HIGH NET WORTH CUSTOMERS CUSTOMER RELATIONSHIP MANAGEMENT Rs. 1 UNIT

CUSTOMER OUTSOURCING MANAGEMENT

COST TO REVENUES FROM

BIGGEST

CUSTOMER

SMALLEST

Unlocking Client Advocacy Unlocking Client Advocacy: The IBM Customer Focused Insight Quotient (CFiq) TM Customer Focused Insight Quotient (CFiq), this measure captitures and integrates these attributes by asking clients to state their level of agreement with three simple statements: I would recommend my bank to friends and family. I would go to my bank first for future financial services needs. I would stick with my bank if offered a competitively priced product. The CFiq results are eye-opening-according to this measure; only 27 percent of retail banking clients are advocates of their bank

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Whats more telling is that the smaller players, such as credit unions and nontraditional banks, have a higher proportion of advocates than the national banks when segmented by CFiq scores. How Can Banks Capture the Opportunity? 4. Adopt a transformative mindset. 5. Apply an outside in perspective. 6. Break traditional design approaches and constraints. Shift Mindset A mindset shift is required, beginning with executive management; it must become a way of life for the organization and central of the culture. This implies it is a top-down led strategy. Donald Bell of Wesjlet Airlines. Bell has set the tempo for his customer focused enterprise. He is known as the spiritual leader and culture guru of his organization. Bell leads his customer focused mission by experiencing his business and customer base first-hands: he pilots a plane once a week to discuss experiences with front-line employees and customers. Apply an Outside-in Perspective The understand and effectively manage client attitude, banks need to identify specific moments of truth by advocacy segment and design competitively superior target experiences, while prioritizing resources and investments.

Human Performance: Customer Experience Management (CEM) has emerged to focus on the fundamentals of understand customers-not simply from an analytical perspective but from a relationship point of view, and not as an alternative to having a competitive product or reasonable price, but as a differentiator. Leadership roles are assigned with in each channel to create a framework for customer-facing employees to collaborate and design targeted client experiences. Solution experience: Some banks focused on interactions with the client, as opposed to more typical generalized communications and product promotions.

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CUSTOMER OUTSOURCING MANAGEMENT Customer focused organization and operating model innovation: Banks need to asses what customer relationship attributes make them different or especially valuable from the clients perspective. Then they must deliver consistently on these attributes at the point of interaction. Customer Advocacy: At a high level, the Customer Experience Management: 1. Perform a baseline advocacy measurement analysis, such as the CFiq, by selecting an appropriate client sample set from a banks database that draws from the banks collective lines of business and channels. 2. Apply customer experience principles to customer events, aligning the companys brand promise with the customers expectations. 3. Identify key experiences and events for each customer segment, creating a comprehensive catalog of moments of truth in a Customer Event Map. 4. Understand customer expectations, needs and wants in order to develop an outside-in view and distinguish which actions will change client attitude toward advocacy. To quickly focus on the key experiences among the thousands of customer interactions, we recommend both an internal and external data overlay on the Customer event Map. 5. Blueprint the customers target experience, or in other words, describe the type of interaction that will build advocacy in the future client-facing operation. 6. Perform a gap analysis to determine the operational shortcomings and requirements needed to fulfill the target interaction. 7. Develop the operational blueprint that will allow the organization to deliver the target client interactions with the desired attributes. The operational blueprint includes business rules, process and organization, data, application and infrastructure decisions. 8. Develop a value case and refine the target to determine the interactions that will deliver the most for the client and company and, ultimately, prioritize the areas the company should focus on first, those they should implement later, and those not worth doing. A value case should be developed to show the economic returns on customer experience investments. 9. Implement the capabilities, deliver and measure these intentional client experiences. Begin rolling out the new interaction capabilities and measure their results on advocacy and client attitude.

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BANKERS AUTOMATED CLEARING SYSTEM. 1. 2. 3. 4. Regular automated payments. Reduces time and cost of administering bulk payments. Helps manage cash flow and improve financial control. Reduces risk of loss, late payment and theft for customers.

Electronic Credit Clearing Service: Electronic Credit Clearing is a method of payment whereby the institutions having to make a large number of payments (such as interest and dividend) can directly credit the amount electronically into the bank accounts of the share holders/depositors/investors without having to issue paper instruments. 6. It requires expensive administrative machinery for printing, dispatch and reconciliation. 7. Bunching of a large number of instruments in clearing results in operational bottlenecks and pressures on the cheque processing system. 8. Chances of loss of instruments in transit and their fraudulent encashment. 9. The customer has also to keep track of the receipt/non-receipt of the instrument and take efforts in depositing the instrument to the bank on receipt of the same. 10. Banks find processing of such a large volume of instruments not only error prone and monotonous, but also a strain on the cheque clearing system. ECS helps save the administrative cost presently being incurred for printing of paper instruments in MICR format and dispatching them by registered post. By the time the ECS cycle is completed, the user institution gets an electronic data file from its bank with the date of payment and bankers confirmation thereon. At present, the ECS scheme is in operation at 15 RBI centres (where clearing houses are managed by RBI) and other centres managed by various public sector banks managing the clearing houses. ECS is highly beneficial to corporate bodies/institutions who have periodic, large volume payments to a fixed group of investors /beneficiaries. Electronic Debt Clearing The Reserve Bank of India has introduced the Electronic Clearing Service (Debit) scheme to provide faster, periodic and repetitive payments by direct debt to

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customers accounts (duly authorised), thereby minimising paper transactions and increasing customer satisfaction. Thos scheme envisages. a large number of debits and one credit in the case of collection of electricity bills, telephone bills, loan installments, insurance premia, club fees etc. by the utility service providers. The benefits are: 4. Faster collection of bills by the companies and better cash management by them. 5. Eliminates the need to go to the collection centres / banks by the customers and no need to stand in long queues for payment. 6. Automatic debiting to the accounts once the mandates are given by the customers, to that effect cuts down the procedural delay. SOCEITY FOR WORLDWIDE TELECOMMUNICATION (SWIFT) INTERBANK FINANCIAL

The Society for Worldwide Inter-bank Financial Telecommunication (SWIFT) operates a worldwide financial messaging network. The swift network exchanges message securely and reliably between banks and other financial institutions, much of it for use on the SWIFT Net network and the ISO 9362 bank identifier codes which are popularly known as SWIFT codes. SWIFT provides turn-key solutions for members consisting of linkage clients to facilitate connectivity to the SWIFT-Net and computer-based terminals (CBTs) which members use to manage the delivery and receipt of their messages. Some of the more well-known CBTs are: 8. SWIFTNet Link (SNL) 9. SWIFT Net Alliance Access/ Entry ( SAA/SAE) 10. SWIFT Alliance Workstation (SAW) 11. SWIFT Alliance Gateway(SAG) 12. SWIFT Alliance Starter Set (SAS) 13. SWIFT Alliance Webstation (SAB) 14. SWIFT Alliance Messenger(SAM) Currently, 90 per cent of all banks worldwide us the SWIFT network to carry out international bank transfers. Some banks in developing countries are not affiliated with network and they transmit this kind of information by telex, thus resulting in delay. Clearing House Automated Payment System. The Clearing House Automated Payment System (CHAPS) was established in London in 1984. Today, it offers same-day sterling and euro fund transfers. CHAPS is a member of the trader organization APACS. 4. for business-to-business payments;

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5. by solicitors/licensed conveyances to transfer the purchase price of a house between the bank accounts of those involved; and 6. by individuals buying or selling a high-value item, such as a car, who need a secure, urgent, same-day guaranteed payment. EFT transactions may be accompanied by methods to authenticate the card and the cardholder. The merchant may manually verify the cardholders signature, or his PIN may be sent online in an encrypted form for validation by the card issuer. Some information included in the transaction may not be visible to the cardholder (for instance, the cardholders address or the CVV2 value printed on the card) ELECTRONIC FUNDS TRANSFER POINT OF SALE: Electronic Funds Transfer Point of Sale (EFTPOS) technology allows a retailer to directly debit a customers bank account by using debit card. The debit card, generally the same as an ATM card, is swiped through a reading device just like a credit card. The customer must enter his/ her PIN number, generally requested once the amount of the sale has been entered into the EFTPOS device. There are many advantages to using an EFTPOS for the retailer and the customer alike. The retailer is paid instantly without having to accept actual cash. Though cash is certainly preferable over credit cards with surcharges, or personal cheques that can bounce, there are many security liabilities surrounding the handling of large amounts of cash. Cash must be manually counted by the cashier at the POS, counted again when the register is balanced out, and finally collected by an armed service or personally deposited. With EFTPOS, the money is wired directly into the retailers bank account, bypassing those liabilities while saving manual resources. 12. Never tell anyone, not even your bank, what your EFTPOS security PIN number is. 13. Choose an EFFTPOS security PIN that is difficult to guess (NOT your birthday or the same number as other cards) 14. Do not write down your EFTPOS security PIN, but memorise it. 15. Call your bank immediately if you lose your EFTPOS card. 16. Be aware of anyone nearby when using your EFTPOS security PIN. Cover the EFTPOS keypad with your hand in such cases. 17. Do not leave your EFTPOS card in your car. 18. Never give your EFTPOS card in your car. 19. Carry handbags strapped around your body with openings towards you. 20. Sign your new EFTPOS card as soon as it arrives and destroy the old one. 21. If you must write down any security PIN number, keep the record separate from your EFTPOS card and code it securely (for example, write what looks like a phone number in your address book, but has a PIN written backwards as the last 4 digit)

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22. Be sure that you know where your EFTPOS card is at all times. Develop a routine when you change clothes.

DIGITAL PAYMENT SYSTEM: The digital payment system represents just a part of the world payment system, but it is certainly the part which has undergone a major change as a result of evolving technological, social and economic conditions. Like the global payment system universe, the digital payment system also can be represented as an expanding universe as there is a continuous marked growth in the number and value of transactions. However, the growing number of electronic transactions, more and more of which are international, and the rise in their total value are capturing increased attention and interest by operators and newcomers who were previously outside the field. The evolution of such global networks calls for new technologies offering increasing efficiency security, convenience and value creation, consumer empowerment and greater transparency in fees application, and it also alls for standardization and regulation. E-BANKING E-banking is about using the infrastructure of the digital age to create opportunities, both local and global. It enables the dramatic lowering of transaction costs, and the creation of new types of banking opportunities that address the barriers of time and distance. Banking opportunities are local, global and immediate in e-banking. 6. Electronic mail (e-mail) improves communication between individuals and the bank, within the bank, with the bank and external parties, and between banks. 7. The availability of online information and services online, which customers can pay for and receive. 8. Banks can provide information and services online, which customers can pay for and vehicle for research. 9. Banking processes are made more efficient and cost-effective by integrating other aspects of banking operations such as treasury management and financial control. 10. If a banking function does not require physical interaction, it may derive the benefits of electronic banking. VIRTUAL PAYMENT SYSTEMS

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A virtual credit card is a way for people to make purchase online without risking themselves with frauds. The card enables the cardholder to avoid giving details of an active credit card online (credit card number, billing address, shipping address etc). Its main advantages are: the cardholder can buy anywhere online, there is no monthly fee to the credit card company, it can be used to pay online tuition for academic institutes, it is good for purchases worldwide, and the cardholder doesnt have to have a bank account. PAYPAL Paypal is an e-commerce business allowing payments and money transfers to be made through the Internet. It performs payment processing for online vendors, auction sites, and other corporate users, for which it charges a fee. WebMoney WebMoney Transfer Online Payment System is an electronic money and online payment system owned and administered by WM Transfer Ltd. it was founded in 1998 and is a legal corporate entity of Belize. Originally targeted at Russian clients, it is now used worldwide. The company more than 2 million users. Clients can use the system through the downloaded software called WM Keeper or through a limited web client called WM Keeper light. Signing up and receiving WebMoney (known as WM units) from other users is free; sending WM units to other accounts incurs a fee of 0.8 per cent. WebMoney transactions are safe because they do not require a credit card or bank account, and are immune against certain scams because they are final and cannot be retracted. This is similar to e-gold and cash, and unlike credit card transactions and PayPal. INTERNET BANKING Internet banking offers the following features: 7. Bank statements, with the possibility to import data in a personal finance programme such as Quicken or Microsoft Money. 8. Electronic bill presentment and payment (EBPP) 9. Funds transfer between a customers own checking and savings accounts, or to another customers account. 10. Investment purchase or sale. 11. Loan applications and transactions, such as repayments. 12. Account aggregation to allow the customers to monitor all their accounts in one place, whether they are with their main bank or with other institutions.

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Drivers 7. Improve customer access 8. Facilitate more services 9. Increase customer loyalty 10. Attract new customers 11. Provide services offered by competitors 12. Reduce customer attrition. Long-term success, a bank may follow: 9. Adopting a webs mindset. 10. Catching on the first movers advantage. 11. Recognising the core competencies. 12. Ability to deal multiplicity with simplicity. 13. Senior management initiative to transform the organization from inward to outward looking. 14. Aligning roles and value propositions with the customer segments. 15. Redesigning optimal channel portfolio. 16. Acquiring new capabilities through strategic alliances. The above can be implemented in four steps: 5. First, familiarizing the customer to new environment by demo version of software on the banks website. This should contain tour through the features which are to be included. It will enable users to give suggestions for improvements, which can be incorporated in later versions wherever feasible. 6. The second phase provides services such as account information and balances, statement of account, transaction tracking, mailbox, cheque book issue, stop payment, and financial and customized information. 7. The third phase may include additional services such as fund transfers, DD issue, standing instructions, opening fixed deposits, and intimation of loss of ATM cards. 8. The forth step should include advanced corporate banking services such as third party payments, utility bill payments, establishment of L/Cs, and cash management services. Enhanced plan for the customers in future can include requests for demand drafts and pay orders and many more to bring in the ultimate in banking convenience. MOBILE BANKING: Mobile banking can be said to consist of three interrelated concepts: 4. Mobile accounting. 5. Mobile brokerage 6. Mobile financial information services.

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CHALLENGES: Interoperability: There is a lack of common technology standards for m-banking. The many protocols being used for it include HTML, WAP, SOAP and XML. It would be a wise idea for the vendor to develop a mobile banking application that can connect multiple banks. SECURITY Security of financial transaction from some remote location and transmission of financial information over the air are the most complicated challenges that need to be addressed jointly by mobile application developers, wireless network service providers and the banks IT department. Scalability and Reliability Another challenge for the CIOs and CTOs of the banks is to scale-up the mbanking infrastructure to handle exponential growth of the customer base. With m-banking, the customer may be sitting in any part of the world (a true anytime, anywhere banking), hence banks need to ensure that the systems are up and running in a true 24 x 7 fashion. As customers will find m-banking more and more useful, their expectations from the solution will increase. HOME BANKING Self-service banking for consumers and small business owners enabling users to perform many routine functions at home by telephone or cable modem connection. Home banking, also called online banking or PC banking, give consumers an array of convenient services: they can move money between accounts, pay bills, check balances, and buy and sell mutual funds and securities. They can also look up loan rates and see if they qualify for a credit card or mortgage. Some of the home banking services currently the most popular are: 5. 6. 7. 8. Vision of the credit. Bank transfers Operations over the phone Online payments.

TELEBANKING Tele-banking has the following features:

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8. Can be used in two modes: (i) online and (ii) offline. 9. Step towards anywhere banking. 10. Multilingual facility. 11. User-friendly. 12. Provides account and other related information such as balance inquiry, last five transactions, cheque inquiry, stop payment, cheque book request and rates inquiry. 13. Call transfer to branch representative. 14. Statement of accounts can be requested by fax mode. Tele-banking gives the following benefits to the customers: 5. Reduces the queue of customers seeking account-related information in the bank. 6. Reduction of workload on bank/branch staff. 7. Can be used as a channel for selling various banking instruments. 8. Helps receive information anywhere, anytime and any place. OFFSHORE BANKING An offshore bank is a bank located outside the country of residence of the depositor, typically in a low tax jurisdiction that provides financial and legal advantages which include: 6. Strong privacy 7. Less restrictive legal regulation 8. Low or no taxation 9. Easy access to deposits 10. Protection against local political or financial instability. Advantages: Some offshore banks may operate with a lower cost base and can provide higher interest rates. Geographically remote island nations can competitively engage. Interest is generally paid by offshore banks without tax deduction. Disadvantages: Offshore banking had been associated n the past with the underground economy and organized crime through money laundering. Following sept.11, 2001, offshore banks and tax havens, along with clearing houses, have been accused of helping various organized crime gangs, terrorist groups, and other State or non-state actors. GOLD BANKING

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CUSTOMER RELATIONSHIP MANAGEMENT

The demand for gold liquidity has also led banks to market new forms of gold savings products, including gold accumulation accounts-now available in Brazil, India, Malaysia, and Turkey-by which regular monthly savings are used to buy gold certificates of deposit (bought with one-off currency payments). Turkish banks now offer the facility for converting gold coins and jewellery (held for traditional savings reasons) into income-earning gold deposits.

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