SBAA7001 BANKING AND INSURANCE

MANAGEMENT
II MBA – BATCH (2019-2021)
SEMESTER III – AUGUST 2020
SCHOOL OF MANAGEMENT STUDIES

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 UNIT 2 BANKING PRODUCTS AND SERVICES
Products/Services offered by banks – Deposit products – Credit
Products – Payment and Custodial Services; Credit appraisal
Techniques – Approach to lending; Credit Management – credit
monitoring – NPA management – Priority Sector Lending – Factoring –
Ancillary Services; Remittances, safe Deposit lockers etc; Payment and
Collection of Cheque – duties and responsibilities of paying and
collecting banker.

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 Products/ Services offered by banks - Introduction

• A product is a packaged offer made by a bank. It has a

structure, a target audience and a price tag. It can be
quantified easily.
• It becomes a service, when you utilize it. This is about the
actual delivery - the people and processes that deliver,
customer satisfaction, customer retention etc. It is the
qualitative aspect.

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Broad Classification of Products Offered by Banks

Retail Banking:
• Deposits
• Loans, Cash Credit and Overdraft
• Negotiating for Loans and advances
• Remittances
• Book-Keeping (maintaining all accounting records)
• Receiving all kinds of bonds valuable for safe keeping
Trade Finance:
• Issuing and confirming of letter of credit.
• Drawing, accepting, discounting, buying, selling, collecting of bills of
exchange, promissory notes, drafts, bill of lading and other securities.
Treasury Operations:
• Buying and selling of bullion, Foreign exchange.
• Acquiring, holding, underwriting and dealing in shares, debentures, etc.
• Purchasing and selling of bonds and securities on behalf of constituents.
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Products and Services offered by banks

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Products and Services offered by banks

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Traditional Vs. New Services offered by
banks
S.No Traditional Services offered by Banks New Services offered by banks

1 Offering savings deposits Financial Advisory services

2 Currency exchange transactions Credit, debit cards and gift cards
3 Providing business or personal loans Cash management
4 Providing car and home loans to retail customers Equipment Leasing
5 Safe keeping of Valuables Venture Capital loans and private
equity funds
6 Supporting government activities with credit by Insurance services
purchasing government bonds
7 Offering trust services, other property and financial Retirement plans
management related services for a fee.
8   Equity trading and Investment
services
9   Mutual fund
10   Investment banking services
11   Wealth management
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 Custodial Service - Meaning

• It is one of the financial services in which a brokerage or other

financial institution holds and manages a client's securities or
other assets on their behalf.
• A custodian provides an investor a place to store assets with
little risk. This reduces the risk of the client losing their assets
or having them stolen. They are also available to sell through
the brokerage at the client's demand.
• The custody business provides a range of security services, like
safekeeping and settlement, dividends collection and
distribution, proxy voting, tax reclaim services, fund
administration and providing market news.
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 Who needs Custody Services?
• Private Banking & Wealth Management customers
• Corporations
• Investment firms
• Insurance Companies
• Finance Firms
• Institutional investors
• Domestic & International Brokers
• Sub-Custodians
• Fund & Asset Managers
• Medium to small sized Banks
• Securities Issuers
• Private Investors
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 What a Custodian does not do?

• A Custodian does not Execute trade

• A Custodian does not generally advise on investment selection
• A Custodian does not advise on corporate actions election
• A Custodian does not advise on proxy voting
• A Custodian does not organise trades between clients
• A Custodian acts only as a custodian or an administrator of
securities
• Clients’ assets are separated from those of the Custodian Bank
often through the establishment of a nominee company to
safeguard clients’ assets Custodians are Not Beneficial Owners
of Securities.
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 KMBL - Example
Custodial services provided by KMBL
1. Account Opening: Kotak Mahindra Bank would assist clients for the custody account
opening documentation requirements and facilitate clients during the SEBI registration
process.
2. Securities Safekeeping: Provides safekeeping services for securities held both in
electronic as well as physical forms
3. Corporate Actions: KMBL custody tracks for corporate actions processing on behalf of its
clients. This involves application made to issuers on behalf of clients, income collection and
following-up for corporate action events like dividend, interest, redemption, bonus,
4. Foreign Exchange Services: KMBL has a dedicated foreign exchange desk that takes care
of client needs for currency conversions and risk management products.
5. Proxy Services: KMBL would act on client instructions and participate and vote on their
behalf in shareholders' meetings of companies.
6. Compliance Monitoring and Regulatory Reporting: KMBL would monitor compliance to
existing guidelines by investors and facilitate reporting to regulators and local authorities on
behalf of the client.
7. Transaction Settlement: As a Clearing Member with the clearing houses of leading
8. Standardized and Customized Reporting: Investors need meaningful information that
offers insight to their investment portfolios. It also provides customized reports to clients at
various frequencies to enable clients to efficiently manage their securities portfolio, cash 11
balances and take more informed investment decisions.
Credit Appraisal System- Background
-The High level of NPAs hamper a bank’s operations and
the trust and confidence of customers.
*Are banks following the right approach?
* Are they lending to credit worthy customers?
- Management of Credit worthiness ensures that a bank
is not too much at risk of exposure to bad loans
- Ultimately, the banks must be able to earn at least a
minimum level of returns to repay its depositor's with the
accepted level of interest.

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Credit Appraisal - Meaning

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 The 5C’s to Build Credit Appraisal Process

• Character – indicates a “good citizen” or a “good Corporate”

• Capacity – refers to the cash flow
• Capital – refers to the assets or wealth
• Collateral – Security
• Conditions – Mostly the economic
The banker attempts to quantify these C’s so that a constructive
decision can be taken. The entire process is termed as “Credit
Analysis”.

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 The Four pillars of Credit Assessment
Repayment Remuneration Relationship Reputation
The bank will Customer Bank’s
The loan will earn reasonable Relationship reputation will
be repaid when return on the will be grow and
due and loan given the strengthen, opportunities
instalments will assumed risk generating for lending to
be promptly and efforts revenue other
paid expended. prospects for customers will
bank. arise through
the loan.

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 Aspects of Credit Appraisal
• Non – Financial
- management skills, aptitude and style and if it’s a
personal/housing loan could involve the individuals education ,
reputation and job position as also credit history.
Rather than the absolute figures, a relationship among these
pararmeters would give a more relevant picture to the analysts.
In this regard, ratio analysis is a useful tool.
Key Parameters
- Technical feasibility
- Structural & Infrastructural Feasibility
- Managerial Competency
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Aspects of Credit Appraisal
• Financial
- Key parameters- Profitability, Cash flow capital and
Liquidity
- Company and Industry Analyses
Rather than the absolute figures , a relationship among
these parameters would give a more relevant picture to the
analysts. In this regard, ration analysis is a useful tool.

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 Principles of Credit Appraisal
1. Pay attention to quality of credit, rather than quantity
2. Every loan must have a 3-way exist route to meet all eventualities
3. Focus on the character and antecedents and decedents of the borrower
4. Do not lend to a business you don’t understand
5. Lend only when feel comfortable about doing so
6. Know all the facts
7. Be conscious of the business cycles and their impact
8. Understand the management and its style of operation
9. Collateral is desirable, but it never is a replacement for repayment
10. Size does matter
11. Pay attention to even small details
12. Stay away from borrowers who can’t get loans from local banks
13. Don’t be rushed
14. Concentrate on where is the loan money is going?
15. Bank comes first – never make a loan to some one you personally
won’t give a loan! 19
 Loan Arithmetic
• Little Johnny was being questioned by the teacher during an
arithmetic lesson.
• 'If you had ten dollars,' said the teacher, 'and I asked you for a
loan of eight dollars, how much would you have left?'
• 'Ten,' said Little Johnny firmly.
• 'Ten?' the teacher said 'How do you make it ten?'
• 'Well,' replied Little Johnny 'You may ask for a loan of eight
dollars, but that doesn't mean you'll get it!'

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 Credit Monitoring - Meaning
• Credit Information Bureau India Limited or more commonly
know as CIBIL is the most critical player in the finance
industry. Set up in August 2000, they help many financial
institutions with providing loans to customers and even help
them manage their business. CIBIL is the credit monitors on
the country, they maintain records of an individual's financial
transaction history pertaining to loans, credit cards etc. from
the many banks and lending institutions in the country. With
this information they create reports with will pertain to the
individual's financial transaction history, called Credit
Information Report which also provide the individual with a
score. The score of the individual will allow many banks and
financial institutions to provide a loan of any kinds to an
individual, since CIBIL has checked his/her repaying 21
capability.
 Benefits of Credit Monitoring
• It provides individuals with reports if any changes occur on
their history, with also provides your score and report.
• With credit monitoring, the possibility of credit fraud and
identity theft is curtailed due to monitoring.
• Alerts provided to the individuals on their important activities,
such as credit history, credit inquires, delinquency, records of
public nature, and even any other negative information.

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7 Things you won’t find on your CIBIL
report

• Savings and investment data

• Credit approval status and analysis
• How to improve your credit score
• Your credit utilisation ratio
• Reason for settlements
• Defaulters list
• Monthly payment history beyond 3 years

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 Performing Asset
• An account does not disclose any problems and carry more
than normal risk attached to the business
• All loan facilities which are regular .
Non Performing asset
• Non Performing Asset means a loan or an account of borrower,
which has been classified by a bank or financial institution as
sub-standard, doubtful or loss asset, in accordance with the
directions or guidelines relating to asset classification issued by
RBI.

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 Factors Impacting rise in NPAs
• External factors : • Internal factors :
• Defective Lending process
• Ineffective legal
• Inappropriate / non –use of
framework & weak recovery technology like MIS ,
tribunals Computerization
• Lack of demand / • Improper SWOT analysis
economic recession or • Inadequate credit appraisal system
slowdown • Managerial deficiencies
• Absence of regular industrial
• Change in Govt. policies visits & monitoring • Deficiencies
• Wilful defaults by in re-loaning process
customers • Alleged corruption
• Alleged political • Inadequate networking & linkages
b/w banks 25
interferences
 Why Loan accounts go Bad?
• BORROWER-SIDE
- Lack of Planning
- Diversion of Funds Disputes within No contribution No
modernization Improper monitoring Industrial Relations Natural
Calamities
BANKER – SIDE
Defective Sanction
No post-sanction supervision, etc
Delay in releases
Directed lending
Slow decision making process
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 Non Performing Assets - Types
• Sub-Standard Assets: An asset which has remained NPA for a
period less than or equal to 12 months.
• Doubtful Assets: An asset that has remained in the
substandard category for a period of 12 months.
• Loss Assets: An asset where loss has been identified by the
bank or internal or external auditors or the RBI inspection but
the amount has not been written off wholly.

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 NPA -Management Strategies
a. Preventive Management -  It
is rightly said that prevention is
better than cure.
• Developing ‘Know Your Client’
profile (KYC )
• Monitoring Early Warning
Signals  of potentially viable units
• Installing Proper Credit
Assessment and Risk
Management Mechanism
• Reduced Dependence on
Interest
• Generating Watch-list/Special
Mention Category
• b. Curative Management
• Re-phasement of loans
• Pursuing Corporate Debt
Restructuring (CDR)
• Encouraging rehabilitation
• Encouraging acquisition
of sick units by healthy units
• Entering compromise
schemes with borrowers /
Entering one time settlement
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 Tools for Recovering NPA
• Using Lok Adalats for compromise settlement for smaller loans
in “doubtful” and “loss” category.
• Using Securitization & SARFAESI Act (Securitisation and
Reconstruction of Financial Assets and Enforcement of
Securities Interest Act, 2002)
• Using Asset Reconstruction Company (ARC)
• Approaching Debt Recovery Tribunals (DRTs).
• Recovery Action against Large NPAs
• Circulation of Information of Defaulters
• Strengthening Database of Defaulters

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Priority Sector Lending - Meaning
• Priority sector as the sectors of economy involving Agriculture
Finance, Retail Trade, Small Enterprises, Education Loans,
Micro Credit and housing loans.
• The Reserve Bank of India, describes Priority sector lending
norms to include the following areas:

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 Categories under priority sector

• Agriculture
(ii) Micro, Small and Medium Enterprises
(iii) Export Credit
(iv) Education
(v) Housing
(vi) Social Infrastructure
(vii) Renewable Energy
(viii) Others
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 Priority sector lending norms to include the
following areas:

• Small scale industries, this includes loans for setting up of

industrial estates also.
• Small road and water transport operators with a limit for owning
upto 10 vehicles.
• Small business, where the cost of equipment used for business does
not to exceed 20 lakh rupees.
• Retail trade, with loans upto rupees 10 lakh.
• Professional and self-employed persons, with the borrowing limit
upto 10 lakh rupees, with many terms and conditions.
• State sponsored organizations for upliftment of Scheduled
Castes/Scheduled Tribes
• Education sector, includes educational loans to individuals.
• Housing includes both direct and indirect  loans with different limits 32
set for rural and urban areas
• Consumption loans covered under Consumption Credit scheme
being run for weaker sections.
• Micro-credit to self help groups(SHGs) or Non Governmental
Organizations (NGOs).
• Loans to the software industry upto Rs 1 crore rupees.
• Loans to the specified industries operating in the Food and
Agro-processing sector, which have an investment in plant and
machinery not exceeding Rs 5 crore.
• Loans to sanitation, health care and drinking water facilities
and renewable energy. (newly added)
• Bank Investment in venture capital funds or companies that are
registered with SEBI.

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Minimum Limits for Priority Sector Lending
• The minimum limits are prescribed by RBI according to the
ownership pattern of banks.
• For all local banks in both public and private sectors are required
to lend 40% of their net bank credit (NBC), to the priority sector.
• For foreign banks the minimum limit is 32% of their NBC (Net
Banking Credit) to the priority sector.

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 Factoring
• The selling of a company’s accounts receivable, at a discount
to a factor, who then assumes the credit risk of the account
debtors and receives cash as the debtors settle their accounts
also called accounts receivable financing.
• Characteristics of Factoring
- Money market Instruments
- No Direct Payments
- Two types of Charges
- Margin

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 Factoring

• Parties
- Buyer of the goods (Customer)
- Seller of the goods (Client)
- Factor
Factoring Companies in India
- Canbank Factors Limited
- SBI Factors
- The Hong Kong
- ECGC
- Citibank
- SIDBI 36
- Standard Chartered Bank
How factoring Works

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 Factoring
Types
Functions
• Recourse Factoring
- Instant Cash
• Non- Recourse Factoring
• Invoice Factoring
- Speedy Collection
• Maturity Factoring - Credit Protection
• Undisclosed Factoring - Advisory services
• Domestic Factoring - Sales Ledger
• International Factoring administration
• Guarantee Based
Factoring 38
 Ancillary Services
• Safe Custody of Valuables
• Lockers
• Remittances – RTGS/NEFT/Drafts
• Fee Based Service – Issuing Guarantees and LOC
• Selling Third Party products
• Insurance and Mutual fund units
• Credit Cards, Debit cards
• Brokerage and DEMAT services
• Forex Service
• Custodial Service
• Gold Sale
• E- banking 39
 Payment and Collection of Cheque
• Meaning of collecting banker
The banker who collects the cheques and bills on behalf of
it’s customers
Every crossed cheque is necessarily to be collected through
any bank which is known as collecting banker
While collecting the cheques of a customer the banker may
act in the capacity of either as a holder for value or as an agent
of the customer.
For collection, the collecting banker will charge commission

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 Duties and responsibilities of a
collecting banker
• Due care and diligence in the collection of a cheque: in case
the collecting banker and the paying banker are in the same
bank the cheque should be presented by next day.
• Serving notice of dishonor: when the cheque is dishonored
the collecting banker is bound to give notice to his customer
within a reasonable time
• Agent for collection: when a banker is not a member of the
clearing house he employs another banker who is a member
of the clearing house for collecting the cheque
• Remittance of proceeds to the customer: in case a collecting
banker has realized the cheque he should pay the proceeds
• Collection of bill of exchange: it is not a duty but a facility 41
provided by the banks. A bank should examine the title 
Duties and responsibilities of a Payment
banker
• It is the obligation of the bank to honor the cheques issued by
the customer if the following conditions are fulfilled:
• There is sufficient balance in the account of the customer
• The cheque is properly drawn and presented
• There is no legal restriction on payment
• The banker who is liable to pay the value of a cheque of a
customer as per the contract, when the amount is due from
him to the customer is called “Paying Banker”
• Paying banker is also known as the drawee 

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