Retail Banking

 Retail Banking Scenario  Retail Banking in India  Types of Consumer Loans  Credit Analysis and Consumer Loans  Consumer Credit Regulations  Customer Relationship Management

Retail Banking Scenario
 ING, Cap Gemini Ernst & Young, and the

European Financial Management & Marketing Association have conducted an in-depth study of the variables governing global retail banking.

Retail Banking Scenario-2
 A link exists between the degree of regulation

and pricing in national markets.  As a more integrated global market emerges, retail banks that take a global perspective on pricing can have differential advantage.

Retail Banking Scenario-3
 Local pricing reflects usage and custom. Norwegians and

Swedes use checks only for big-ticket items, such as buying a house, Americans use check for as small amounts as $5.  In Canada, France, and the United States, payments are dominated by checks and credit cards, while in Spain, it is direct debits, and in Belgium, Germany, and Sweden, it is wire transfers.

Retail Banking Scenario-4
 Most banks in a given country apply some combination of four basic

pricing models: account-based, transaction-based, package-based, and indirect revenue-based.  Pricing Models  Account-based pricing mode

Fees is applied annually to the general management of the account. The fee level is often determined by the account balance, and individual transactions are provided free up to a certain limit. Fees based on the number of individual transactions.

Transaction-based mode

Retail Banking Scenario-5
 Pricing Models ..Contd…

Package-based pricing model

Fee for a suite of services, rather than just an account.

Indirect revenue-based pricing model,

Day-to-day banking services are free  Pricing within domestic markets varies far less than pricing across countries  Interest rate spreads and other indirect charges have no apparent impact on pricing.  No direct causal relationship between the major macroeconomic indicators of each country and its pricing level.

Retail Banking Scenario-6
 While prices vary enormously across countries, most

institutions within a country adopt a broadly consistent pricing model, so pricing differences within a given country are smaller.

Retail Banking Scenario-7
 Business Models

In many countries, core banking is a loss-making activity. Banks expect to profit through high interest margins and the cross-selling. New entrants focus on attracting clients by offering high interest rates on deposit accounts, and better service.

Retail Banking Scenario-8
 Macroeconomic Factors

Local Income.

There is no evident link between pricing and country incomes or purchasing power parity. Higher unit labor costs do not necessarily lead to higher prices for core banking services. UK has higher labor cost but low pricing. Italy has lower labor cost but higher pricing. No relationship between pricing and market size

Domestic labor costs

Market Size.

Retail Banking Scenario-9
 Macroeconomic Factors Contd…

Competitive Environment.

In most countries banking is a concentrated industry with a few large, local players .No clear link between competitive environment and pricing.  High prices cannot be attributed to a single macroeconomic variable

Retail Banking Scenario-10
 Less quantifiable sources of potential pricing drivers.  Regulation and Customer behavior.  Regulation
 There is a link between the degree of regulatory pressure and pricing in national markets.  In Germany, interest rates are capped to limit the competition.  Certain banking services in most western countries are essential element in everyday economic life.  In France and Sweden one has to present a bank statement to rent out space. Bank accounts are free by law.

Retail Banking Scenario-11
 Regulation and Customer behavior ..Contd..

In France certain transactions must be made by check. Banks have to offer free checking to all customers. Merchants that accept cheques receive tax breaks and those who issue bad cheques face penalties.

Retail Banking Scenario-12
Regulation and Customer behavior ..Contd..

Customer Behavior  Customer plays a role at the local market level, and it has a significant influence on pricing models.  Customer dissatisfaction with limited banking hours, for instance, has forced banks in many countries to open on Saturdays and provide 24-hour call center services.  Conversely, bank pricing strategies can encourage customers to change their behavior. In the Nordic countries, banks demanded premium prices for branch transactions, and concurrently offered free Internet and call center access. As a result, Sweden and Norway have comparatively few branches and ATMs per capita.

Retail Banking Scenario-13
A Changing Landscape
With

globalization, integration across borders looks inevitable  First Scenario  European Commission issue directives to streamline retail bank pricing policies.  Second scenario  Several big players enter a domestic market putting pressure on interest rates and other variables breaking the domestic pricing pattern.

Retail Banking Scenario-14

Consumer Credit Counselling
    

 

United States has National Foundation for Credit Counseling (NFCC) established in 1954 to promote financial literacy and among consumers to avoid bankruptcy. Credit counselling now is well developed credit counselling industry. Telephone as also face-to-face counselling exists. Over the last several years, a whole host of countries have undertaken significant initiatives towards credit counselling. The Consumer Credit Counseling Service (CCCS) in the UK, established in 1993, helps consumers with budgeting and better money management as also their debt repayment plans. Canada established a non-profit counselling organization in 2000. Termed Credit Counseling Canada (CCC), the organization seeks to enhance the quality and availability of not-for-profit credit counselling for all its citizens. The Bank Negara Malaysia has established a Credit Counseling and Debt Management (CCDM) agency to provide credit counselling and loan restructuring advice to individuals. Counseling of Singapore (CCS), established in 2003, is meant to assist financially distressed consumers.

Retail Banking India
 Present Scenario

Indian retail banking has been showing phenomenal growth  Over the last 5 years CAGR has been over 35%  Comprises of multiple products,channels of distribution and multiple customer groups

Retail Banking India-2
 Economy vs. Retail Banking

Retail assets are just 22% of the total banking assets of India  Contribution of retail loans to GDP:  India 6% , China 15 %,Thailand 24% Taiwan 52%  Indians below 35 yrs of Age 70 %  Reach of Formal Banking Channels 20-25% of Indian population

Retail Banking India-3
 Drivers Of Retail Growth

CHANGING CONSUMER DEMOGRAPHICS  Growing disposable incomes  Youngest population in the world  Increasing literacy levels  Higher adaptability to technology  Growing consumerism  Fiscal incentives for home loans  Changing mindsets-willingness to borrow/lend  Desire to improve lifestyles  Banks vying for higher market share

Retail Banking India-4
 Industry's response to the change

Any where, Any time Banking  Improved processes/Bundled product offerings  Faster service/Reduced TATs  Customer specific products/offerings on a regular basis  Bank customer has replaced Branch customer  Focus on understanding customer needs/ preferences  Segmentation/Differentiation of customers  Customer driven strategies  Building relationships

Retail Banking India-5
 Industry's response to the change

The accelerated retail growth has been on a historically low base  Penetration continues to be significantly low compared to global bench marks  Share of retail credit expected to grow from 22% to 36%  Retail credit expected to grow to Rs.575,000 crs by 2010 at an annual growth rate of 25%

Retail Banking India-6
 Industry's response to the change

The accelerated retail growth has been on a historically low base  Penetration continues to be significantly low compared to global bench marks  Share of retail credit expected to grow from 22% to 36%  Retail credit expected to grow to Rs.575,000 crs by 2010 at an annual growth rate of 25%

Retail Banking India-7
 Future of Retail Banking

Dramatic changes expected in the credit portfolio of Banks in the next 5 years  Housing will continue to be the biggest growth segment, followed by Auto loans  Banks need to expand and diversify by focussing on non urban segment as well as varied income and demographic groups  Rural areas offer tremendous potential too which needs to be exploited

Retail Banking India-8
 Strategic prerequisites

Performance oriented leadership  Sophisticated marketing and sales  Efficient distribution channels  Process efficiency and ease of scalability  Superior credit policy, procedures and skills

Retail Banking India-9
 Challenges

Sustaining Customer loyalty  NPA reduction & Fraud prevention  Avoiding Debt Trap for customers  Bringing Rural masses into mainstream banking

Retail Banking India-10
 Reaching Customers
       

Need to customize Customer segmentation/differentiation Data mining/CRM based campaigns Products per customer/loyalty Promoting low risk retail lending products Offer an array of products and financial advisory. Cost effective expansion Renewed emphasis on superior execution by front-line employees

Types of Customers Loans
 TYPES OF CONSUMER LOANS

Installment loans  Credit card loans, or revolving credit lines  Non-installment loans.

Types of Customers Loans-2
   

Installment Credit Periodic payment of principal and interest Maturity ranges from two to five years. Direct Loan

A direct loan is negotiated between the ultimate user of funds and the bank.

 Indirect loans.  An indirect loan is funded by a bank through a separate retailer. The retailer takes the credit application, negotiates terms with the individual and presents the agreement to the bank. If the bank accepts the proposal it buys the loan from the retailer under prearranged terms.

Types of Customers Loans-4
 Installment Credit  Other types
   

Home loans Auto loans Education Loans Consumption loans

Types of Customers Loans-5
 Installment Credit  HOUSING LOANS  For purchase or construction of a new/old house/ flat; repair, renovate or alter a house/ flat; purchase a plot of land meant for construction of a dwelling unit.  Loan amount is determined on the basis of the requirement, the repayment capacity taking into account income, age, assets and liabilities of the borrower.  EDUCATIONAL LOANS  These loans are given to students with certain academic brilliance, studying at recognized colleges/universities in India and abroad. The finance can be availed to meet the expenses on tuition fee/ maintenance cost/books and other equipment  Auto Loans  For purchase of old/new four/two wheelers  PERSONAL CONSUMPTION LOANS  To meet any kind of personal expenses, e.g., marriage, family functions, medical, educational, travel expenses, etc.

Types of Customers Loans-6
 CREDIT CARDS OR REVOLVING CREDIT LINES

Credit cards and overlines tied to checking accounts are the two most important forms of revolving credit agreements. An overline is a prearranged loan to cover overdrafts of checking accounts. Usually, customers pay only a fraction of their monthly and incur finance charges on the remainder. Card issuers earn income from three sources: charging cardholders fees, charging interest on outstanding loan balances and discounting the charges that merchants accept on purchases.

Types of Customers Loans-7
 Non-installment Loans  A limited number of consumer loans require a single

principal and interest payment for temporary needs.  Credit extended in anticipation of a well-defined future cash inflow.  The quality of the loan depends on the certainty of the timing and the amount of the anticipated net cash flow.

Credit Analysis
 Objective of consumer credit analysis is to assess the risks associated with

lending to individuals

When evaluating loans, bankers cite the Cs of credit:  Character  The most important element, but difficult to assess  Capital  Refers to the individual's wealth position  Capacity  The lender often imposes maximum allowable debt-service to income ratios  Conditions  The impact of economic events on the borrower's capacity to pay  Collateral  The importance of collateral is in providing a secondary source of repayment

Credit Analysis-2
 Two additional Cs  Customer Relationship  A bank’s prior relationship with a customer reveals information about past credit and deposit experience that is useful in assessing willingness and ability to repay.  Competition  Has an impact by affecting the pricing of a loan.  All loans should generate positive risk-adjusted returns  Lenders periodically react to competitive pressures by undercutting competitors’ rates in order to attract new business  Competition should not affect the accept/reject decision

Credit Analysis-3
 Policy Guidelines

Acceptable Loans
   

House Loans Personal-Unsecured Car Loans Education Loans etc

Credit Analysis-4
 Policy Guidelines

Unacceptable Loans  Loans for speculative purposes  Loans secured by a second lien  Loans to a poor credit risk based on the strength of the cosigner  Single payment automobile loans etc

Credit Analysis-5
 Evaluation Procedures:

Judgmental and  Quantitative, Credit Scoring

Credit Analysis: -6
 Judgmental

The loan officer subjectively interprets the information in light of the bank’s lending guidelines and accepts or rejects the loan

Credit Analysis-7
 Quantitative credit scoring / Credit scoring model  The loan officer grades the loan request according to a statistically sound model that assigns points to selected characteristics of the prospective borrower  In both cases, judgmental and quantitative, a lending

officer collects information regarding the borrower’s character, capacity, and collateral

Credit Analysis-8
 You receive an application for a customer to

purchase a 2006 Indica

Do you make the loan?

Credit Analysis-9
Scoring system IBS University Bank
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Consumer Credit Regulations
 "A creditor is worse than a slave-owner; for the master

owns only your person but a creditor owns your dignity and can command it. "

Consumer Credit Regulations-2
 In the US credit data sharing serves needs of credit providers, also protects the      

interests of bona fide credit seekers, defaulters under true hardship and consumers at large. Code of conduct laid down and is enforced by Federal Trade Commission (FTC) Consumer data cannot be disclosed to third parties or used outside the intended scope. Use of factors such as age, gender, race or exact geographic location in the credit scoring models is forbidden. The interest to be charged exactly as advertised .The formulas used in calculation should be explained in the statements sent to customers. Contact with borrowers for debt collection can only be made between 8 a.m. and 9 p.m. Contacting the borrowers at their workplace without prior permission and using inappropriate or strong language is construed as harassment in the court of law with harsh penalties for the credit provider as well as the collection agency involved,.

Consumer Credit Regulations-3
 In India Credit Information Companies (Regulation) Bill has been passed.  The Credit Information Bill makes it lawful for all credit providers in the country to pool   

and share information on borrowers. Each institutional credit provider electronically reports to a central database hosted by a credit information company called a "credit bureau". Personal details of borrowers, their borrowings, repayment history and delinquency status are all reported on a monthly basis. In return for reporting their internal data on customers to the credit bureau, each credit provider receives instantaneous electronic access to the comprehensive borrowing history of all their present and prospective customers. All the information contained in the credit file is fed into a mathematical model as input criteria, and a risk score indicating the customer's creditworthiness is calculated. The risk score is then used as the basis for determining whether the customer is approved for the loan and under which terms and conditions.

Consumer Credit Regulations-4
 BCSBI  In November 2003, RBI constituted the Committee on Procedures and

Performance Audit of Public Services recommended setting up of the Banking Codes and Standards Board of India broadly on the lines of Banking Codes and Standards Board functioning in U.K.  The Banking Codes and Standards Board of India has been registered as a separate society under the Societies Registration Act, 1860. Therefore, it would function as an independent and autonomous body.
 The Banking Codes and Standards Board of India is not a Department of the

RBI. Reserve Bank has agreed to lend it financial support for a limited period.

Consumer Credit Regulations-4
         

  

BCSBI – Code of Conduct-A voluntary Code Advertising and promotional literature is clear and not misleading Providing you regular appropriate updates. Inform about changes in the interest rates, charges or terms and conditions. Do not discriminate on the basis of age, race, gender, marital status, religion or disability. Provide information about the penalties etc. Treat all personal information as private and confidential To give information to credit reference agencies about the personal debts only if overdue. Collection policy to be built on courtesy, fair treatment and persuasion. Contact borrower ordinarily at the place of his choice and in the absence of any specified place at the place of his residence and if unavailable at his residence, at the place of business/occupation. Contact borrower between 0700 hrs and 1900 hrs. Document Time and number of calls and contents of conversation.

Customer Relations Management
 Definition .  "CRM is the business strategy that aims to understand,

anticipate, manage and personalize the needs of an organization's current and potential customers"  CRM is a business strategy, one that puts the customer at the heart of the business.  Central to the CRM concept is the idea that businesses should select, cultivate and manage the most profitable customer relationships with a view to increasing long-term profitability

Customer Relations Management-2
 Nothing new..... Think of the “Kirana Wala” who

knows every customer's name, habits etc i.e. Information storehouse of the colony.  There now exists the technology to enable this customer-centricity on a much larger scale.

Customer Relations Management-3
 CRM was first coined in the mid-1990s.  Evolution from Sales force automation software

(SFA) focusing on customer contact management to integrated knowledge management solutions to ultimately a more strategic approach.

Customer Relationship Management-4
 CRM solutions include:
•

data warehouses for storing customer data,  • analytical tools for better understanding and segmenting customer bases,  • data mining tools for discovering previously unknown customer knowledge, and  • marketing and campaign management tools for automating more focused marketing efforts.

Customer Relationship Management-5
 Information technology, particularly Internet and

call centre technology enable personalisation, user identification, and relationship marketing at the customer level possible.  All customers are not of equal value but that there are opportunities to enhance value.  Target under-value customers through cross selling or up-selling.  May “fire” unprofitable customers.

Customer Relationship Management-6
 Customer value, customer lifetime value and customer

profitability are common measures used to understand customers from a financial perspective.  Calculate revenue from products and services a customer purchased in a fixed period and subtract the costs of supplying them to arrive at net revenue of the customer during a fixed period.  Use modelling techniques to arrive at the net present value of probable future revenues. Such modelling will include frequency of purchases and the channels used by a customer.

Customer Relationship Management-7
 Knowing customer value and being able to pinpoint

profitable customers is just the beginning of  CRM. To build customer relationships firms need business strategies and practices that enable them to nurture the relationship beyond its simple money value.  With increasing numbers of relationships, employees are often assigned several or many relationships to manage, locally, across the nation, or around the globe.

Customer Relationship Management-8
 Customer Data and Information
 Business

operations require product, transactional, and customer data.  CRM focuses on customer data, for customer data is central to creating customer profiles.

Customer Relationship Management-9
 Customer Data and Information  Five important areas of customer data:

Contact information  Household Information  Group Information: population segment based on interest, profession and other factors,  Account Information: including account history, account conduct, account balances, credit limit etc.  Analytical or Customer Profitability Information: Customer credit score ,profitability and lifetime value

Customer Relationship Management10
 Considerations while designing Information

Deployment System
 Not

all information can be, nor should it be, delivered to front end sales staff.  Would providing customer profitability information to front end sales staff encourage them to discriminate higher value customers from lower value customer?  Is the information relevant?

Customer Relationship Management12
 CRM Strategy in Banking  Bank customers are frequently segmented into

groups based on the number of products used and balances held.
 Transactional

exchanges  Value-adding exchanges  Collaborative exchanges

Customer Relationship Management13
 Transactional exchanges –

Customers with a low number of products and low balances may be treated as having a ‘transactional exchange relationship’. The focus is on providing cost-effective transactions through ATMs, Internet etc.

 Value-adding exchanges –

Customers holding many products and high potential balances.  The focus is on keeping customers by developing an understanding of their needs and changing requirements, then tailoring services.

Customer Relationship Management14
 Collaborative exchanges –
 Customers

balances.  Banks maintain close information, social and process linkages and mutual commitments made in expectation of long run benefits with customers.  Specialist managers maintain close relationships with these clients to gather information to anticipate client’s future requirements.

holding many products and high

Customer Relationship Management15
 However, the majority of the banks' customers are

transactional exchange or value-adding relationships.  This large group of customers most often approach the bank through branches or call centres (sometimes referred to as customer contact centres).  To manage these relationships, branch and call centre staff must be armed with both bank product information and customer information.

Customer Relations Management-16
 First Things First  Successful CRM always starts with a business

strategy, which drives change in the organization and work processes, enabled by technology.  Re-engineer your business processes to make them more effective for your customers.

Customer Relations Management-17
 The Future  Customer Relationship Management is about

people first and technology later.  CRM may or may not prove to be the answer to providing excellent customer care, but the philosophy of putting customers at the heart of our business is definitely a step in the right direction.

Customer Relationship Management18
 CRM Resurgence in Asia: Which Banks Lead the

Charge?  Financial Insights report identifies eight banks — the Bank of the Philippine Islands, Chinatrust Commercial Bank, DBS Bank, HDFC Bank, HSBC Hong Kong, ICICI Bank, OCBC Bank, and United Overseas Bank — as representing the region's leading CRM capabilities.

Customer Relationship Management19
 CRM in Indian banks  Indian banks protected by regulations presumed

that their operations were customer-centric, simply because they had customers.  When the banking sector opened up, they survived by adapting quickly.  RBI's efforts to cut rates brought bonanza to the banks in bonds where they made huge profit.

Customer Relationship Management20
 According to a RBI road-map, India will have a

competitive banking market after 2009.  India will see foreign banks come in, what with more freedom to come in, grow and acquire.  Indian banks waking up and re-focusing on their core asset — the customer.

Customer Relationship Management21
 CRM would also make Indian bankers to "create

and keep a customer" and to "view the entire business process as consisting of a tightly integrated effort to discover, create, and satisfy customer needs."

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