MA0027 Financial System and Commercial Banking SATHISH K

MA0027 – Financial System and Commercial Banking -2 Credits

Assignment Set- 1 (30 Marks)

1. Discuss the existing financial system of India with examples.

The process of financial development in independent India hinges effectively on the

development of commercial banking, with the impetus given to industrialization
based on the initiatives provided in the five year plans. Financing of emerging
trade and industrial activities during the ‘fifties, and the ’sixties reflected the
dominance of banking as the critical source. The number of banks and branches
had gone up, notwithstanding the consolidation of small banks, and the support
given to co-operative credit movement. Functionally, banks catered to the needs of
the organized industrial and trading sectors. The primary sector consisting of
‘agriculture, forestry and fishing’ which formed more than 50 per cent of GDP
during this period had to depend largely on own financing and on sources outside
the commercial banks. It is against this backdrop that the process of financial
development was given impetus with the adoption of the policy of social control
over banks in 1967, reinforced in 1969 by the nationalization of 14 major
scheduled commercial banks. Since then, the banking system has formed the core
of the Indian financial system.

Driven largely by the public sector initiative and policy activism, commercial banks
have a dominant share in total financial assets and are the main source of
financing for the private corporate sector. They also channel a sizeable share of
household savings to the public sector. Besides, in recent years, they have been
performing most of the payment system functions. With increased diversification in
recent years, banks in both public and private sectors have been providing a wide
range of financial services.

In the three decades following the first wave of bank nationalization (the second
wave consisted of six commercial banks in 1980), the number of scheduled
commercial banks has quadrupled and the number of bank branches has increased

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eight-fold. Aggregate deposits of scheduled commercial banks have increased at a

compound annual average growth rate of 17.8 per cent during this period (1969 to
1999), while bank credit expanded at a rate of 16.3 per cent per annum. Banks’
investments in government and other approved securities recorded a growth of
18.8 per cent per annum. The increased role of bank intermediation is also
reflected in its payment system activities..

The financial system outside the banks has also exhibited considerable dynamism.
The system today is varied, with a well-diversified structure of financial
institutions, financial companies and mutual funds. Financial institutions comprise
All India Financial Institutions (AIFIs), State Level Institutions (SFCs and SIDCs)
and other institutions (ECGC and DICGC).2 AIFIs include All India Development
Banks (IFCI, ICICI, IDBI, SIDBI and IIBI), specialised institutions (EXIM Bank,
IVCF, ICICI Venture, TFCI and IDFC), Investment Institutions (UTI, LIC and GIC
and its subsidiaries) and Refinance Institutions (NABARD and NHB). The setting up
of some specialised financial institutions and refinance institutions during last three
decades and the onset of reforms from about the early ‘nineties, provided depth to
the financial intermediation outside the banking sector. These developments,
coupled with increased financial market liberalization, have enhanced competition.
A number of the existing financial institutions have diversified into several new
activities, such as, investment banking and infrastructure financing, providing
guarantees for domestic and offshore lending for infrastructure projects. Apart
from the financial institutions, rapid expansion of Non-Banking Financial Companies
(NBFCs) took place in the ‘eighties and provided avenues for depositors to hold
assets and for borrowers to enhance the scale of funding of their activities. Various
types of NBFCs have provided varied services that include equipment leasing, hire
purchase, loans, investments, mutual benefit and chit fund activities. More
recently, NBFC activity has picked up in the area of housing finance. Financial
development is also reflected in the growing importance of mutual funds. In the
‘nineties, they have enabled sizable mobilization of financial surpluses of the
households for investment in capital markets. Capital markets themselves have
become an important source of financing corporate investments, especially after
firms were permitted to charge share premium in a flexible manner.

Sanctions as well as disbursements of all-financial institutions, including the SFCs

and the SIDCs has expanded at a rate of 24.1 per cent per annum and 23.8 per
cent per annum, respectively, during 1970-71 to 1999-2000. In addition, there has
been a spurt in the activities of NBFCs and mutual funds over the last two decades.
Deposits of NBFCs recorded an impressive growth of about 35 per cent per annum
from the mid-’eighties to the middle of the ‘nineties. In the ’sixties and ’seventies,
the Unit Trust of India (UTI) was the only mutual fund. By 1999-2000 as many as
34 mutual funds were operating of which 7 mutual funds were set up by the public
sector banks and financial institutions

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The financial development in the banking and non-bank financial sector has
supported saving and investment in the economy and contributed to growth in real
economic activity. By pooling risks, reaping economies of scale and scope, and by
providing maturity transformation, financial intermediation supports economic
activity of the non-financial sectors. Its influence on growth, however, needs to be
examined from different viewpoints that are of potential relevance in the Indian
context.

Framework and Segments of Financial System

The economic development of any country depends upon the existence of a well-
organized financial system. The major function of the financial system is to provide
money and monetary assets for the production of goods & services.

Financial institutions:

Financial institutions serve as an intermediary between savers of funds and users

of funds. They mobile savings either directly or through financial markets.
Facilitated by various financial instruments. Financial institution comprises of
regulatory bodies, intermediaries, non-intermediaries and other. Regulatory bodies
consist of Reserve Bank of India, Securities & Exchange Board of India (SEBI),
Insurance Regulatory Development

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Authority (IRDA), NHB, NABARD, PFRDA, and Govt. of India. Financial

intermediaries are further classified into banking and non-banking intermediaries
Banking institutions accepts deposits form public & lend the same to traders,
industries and to individual borrowers. Banking institutions are categories into:
commercial banks, co-operative banks, land development bank, foreign banks, and
regional rural banks. Non- banking financial institutions also collect money from
the savers and lend them to the traders, industries etc, but they do not participate
in payment mechanism. The UTI, LIC, and GIC are some of the NBFIs in India.
Govt. of India facilitated creating of IDBI, IFCI and NABARD to provide assistance
for specific purposes, sector and regions.

Financial service:

Financial service is concerned with the design and delivery of advice and financial
products to individuals and business. Financial services comprise of personal
financial planning, investments real assets, insurance. Non-banking financial
companies (NBFCs) provide wide variety of fund / asset based and non-fund based
advisory services.

2. Write short notes on the following:

A. Reserve Bank of India

Reserve Bank of India is the apex monetary Institution of India. As an apex

institution, it has been guiding, monitoring, regulating, controlling and promoting
the financial system of the country. The central bank was established on April1,
1935 in accordance with The Reserve Bank of India Act 1934.

Main Functions of Reserve Bank of India:

· To maintain monetary stability so that the business and economic life can deliver
welfare gains of a properly functioning mixed economy.

· To maintain financial stability and ensure sound financial institutions so that

monetary stability can be safely pursued and economic units can conduct their
business with confidence.

· To maintain stable payments system so that financial transactions can be safely

and efficiently executed.

· To promote the development of financial infrastructure of markets and systems,

and to enable it to operate efficiently.

· To ensure that credit allocation by the financial system broadly reflects the
national economic priorities and societal concerns.

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· To regulate the overall volume of money and credit in the economy with a view to
ensure a reasonable degree of price stability.

Roles of RBI

- Issues and exchanges or destroys currency and coins not fit for circulation.

- Provides the public adequate quantity of supplies of currency notes and coins and
in good quality.

- Performs a wide range of promotional functions to support national objectives.

- Acts as the Banker to the Government: performs merchant banking function for
the Central and the State governments. It provides “ways and means advances” to
both Central and State Government.

- Maintains banking accounts of all scheduled banks.

B. Securities and Exchange Board of India (SEBI)

Securities and Exchange Board of India (SEBI) was first established in the year
1988 as a non-statutory body for regulating the securities market. It became an
autonomous body in 1992 and more powers were given through an ordinance.
Since then, it regulates the market through its independent powers.

Objectives of SEBI

As an important entity in the market, it works with following objectives:

1. It tries to develop the securities market.

2. Promotes investors’ interest.

3. Makes rules and regulations for the securities market.

Functions of SEBI:

1. Regulates Capital Market.

2. Checks trading of securities.

3. Checks the malpractices in securities market.

4. Enhances investors’ knowledge of the market by providing education.

5. Regulates the stock-brokers and sub-brokers.

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6. Promotes Research and investigation.

SEBI in India’s Capital Market

SEBI, from time to time, has adopted many rules and regulations for enhancing
the Indian capital market. The recent initiatives undertaken are as follows:

Sole Control on Brokers

Under this rule, every broker and sub broker has to register with SEBI and any of
the Stock Exchanges in India.

Major Policy Reforms and Developments during 2002-03

· Implementation of T + 3 rolling settlement for all listed securities across the

exchanges from April 2, 2002 and to move to T + 2 system on April 1, 2003.

· Introduction of scientific model for risk management based on VaR.

· Introduction of Electronic Data Information Filing and Retrieval (EDIFAR) system

to facilitate electronic filing of certain documents/statements by the listed
companies and their immediate disclosure to the market participants.

· Introduction of Straight Through Processing (STP) for the securities transaction.

· Establishing of the Central Listing Authority

· Introduction of the trading of government securities on the stock exchange.

· Establishment of inter-depository transfer through on-line connectivity between

CDSL and NSDL

· Implementation of a comprehensive risk management system for mutual funds.

· Introduction of benchmarking of all the mutual funds schemes to facilitate the

understanding of the investors about the performance of the funds.

· Simplification of documentation procedure for FII registration and reduction of

registration fee for FIIs

C. Exchange traded funds

The ETFs are typically organized as unit trusts and are similar to index mutual
funds, but are traded more like a stock. This is a new variety of MF which came

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into existence in 1993. They represent a basket of securities that are traded on an
exchange and can be bought and sold like any other stock. Nifty BeES the first ETF
of India was introduced in the year 2002. It is traded on the capital market
segment of NSE. Each Nifty BeES unit is 1/10th of the S&P Nifty Index value. They
are traded in dematerialized form and are settled like any other share in T+2
rolling settlement.

D. Pension funds.

India does not have a comprehensive old age income security system. There are,
however, some mandatory schemes for employees of State and Central
governments, employees of public sector banks, employees in firms with a staff of
20 or more and some others. In recent years, the insurance and the mutual fund
industry in India has also started offering pension plans. In 2004, a new defined
contribution individual account pension system was constituted for Central
government employees recruited after January 1, 2004. This will soon be open for
all citizens of India on a voluntary basis.

Formal sector pensions

Formal sector pensions in India can be divided into three categories; viz. those
schemes that come under an Act or Statute, Government pensions and voluntary
pensions.

New Pension Scheme:

The new pension scheme is mandatory for all government employees who have
joined service after Jan1,2004. It is opened for others from May 1, 2009. Unlike
the traditional retirement solutions such as PPF and EPF, the NPS is not a defined
benefit, but rather a defined contribution plan. The returns from NPS will be
market determined but PPF and EPF schemes carry fixed interest rate of interest.

The Pension Fund Regulatory and Development Authority (PFRDA) has designated
six asset management companies (AMCs) for the purpose. Though the NPS will be
managed by fund houses, the autonomy lies with the PFRDA. While a mutual fund
investor can enter and exit a scheme at free will, the NPS will bind them till the
retirement age of 58 years. The guidelines do not permit a premature withdrawal
or any loan against investments in NPS.

The investment norms allow subscribers to invest their entire savings in

government securities or corporate, state and municipal bonds, which are not as
risky as equity. As per the revised ‘auto choice’ half of investments of subscribers
up to the age of 35 years will go into equities, one-fifth into central and state
government bonds, and the rest into corporate bonds. At the age of 60, these
investments will gradually be adjusted so that only one-tenth remains in equity,
another one-tenth in corporate bonds and 80 percent in central and state
government bonds.
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The NPS requires to maintenance of all records and this will be done by the NSDL
which will act as the central record keeping agency (CAR). PFRDA has appointed
some banks as points of presence (POP) to facilitate quick and hassle free
transaction.

3. Explain the public sector, private sector and MNC banks with an
example of each. In your opinion, which of the three will be predominantly
serving customers in the near future? Support your answer.

public sector banks

The public sector banks including nationalised banks, State Bank of India and its
associates (subsidiaries) and the regional rural banks fall in the first category.

Among the Public Sector Banks in India, United Bank of India is one of the 14
major banks which were nationalised on July 19, 1969. Its predecessor, in the
Public Sector Banks, the United Bank of India Ltd., was formed in 1950 with the
amalgamation of four banks viz. Comilla Banking Corporation Ltd. (1914), Bengal
Central Bank Ltd. (1918), Comilla Union Bank Ltd. (1922) and Hooghly Bank Ltd.
(1932).

Oriental Bank of Commerce (OBC), a Government of India Undertaking offers

Domestic, NRI and Commercial banking services. OBC is implementing a GRAMEEN
PROJECT in Dehradun District (UP) and Hanumangarh District (Raiasthan)
disbursing small loans. This Public Sector Banks has implemented 14 point action
plan for strengthening of credit delivery to women and has designated 5 branches
as specialized branches for women entrepreneurs.

SBI group:

State Bank of India, with its seven associate banks commands the largest banking
resources in India. SBI and its associate banks are:

State Bank of India , State Bank of Bikaner & Jaipur , State Bank of Hyderabad ,
State Bank of Indore , State Bank of Mysore , State Bank of Patiala , State Bank of
Saurashtra , State Bank of Travancore

After the amalgamation of New Bank of India with Punjab National Bank, currently
there are 19 nationalised banks in India:

Allahabad Bank , Andhra Bank , Bank of Baroda , Bank of India , Bank of

Maharashtra , Canara Bank , Central Bank of India , Corporation Bank , Dena Bank
, Indian Bank , Indian Overseas Bank , Oriental Bank of Commerce , Punjab & Sind
Bank , Punjab National Bank , Syndicate Bank , Union Bank of India , United Bank
of India , UCO Bank , Vijaya Bank

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Private Sector Banks

Private banking in India was practised since the beginning of banking system in
India. The first private bank in India to be set up in Private Sector Banks was
IndusInd Bank. It is one of the fastest growing bank among Private Sector Banks
in India. IDBI is ranked as the tenth largest development bank in the world among
private banks in India and has promoted world class institutions in India.

The first Private Bank in India to receive an in-principle approval to set up a bank
in the private sector in India as part of the RBI’s liberalisation of the Indian
Banking Industry from the Reserve Bank of India was Housing Development
Finance Corporation Limited. It was incorporated in August, 1994 as HDFC Bank
Limited with registered office in Mumbai and commenced operations as Scheduled
Commercial Bank in January, 1995.

ING Vysya, yet another Private Bank of India, was incorporated in the year 1930.
Bangalore has a pride of place for having the first branch inception in the year
1934. With successive years of patronage and constantly setting new standards in
banking, ING Vysya Bank has many credits to its account.

Multinational Banks in India

Multinational banks which are also shortly known as MNBs are those banks which
operate physically in more than one country. Multinational banks facilitate its
global customers by providing banking services in various countries. Citibank, Bank
of America are the leading examples of MNBs. MNBs in India played a vital role in
cross-border mergers and acquisition, takeovers, financing the subsidiaries etc
particularly after the deregulation of financial sector in 1990. Foreign Direct
Investment, Foreign Portfolio Investment are largely channeled through MNBs.

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MB0027 – Financial System and Commercial Banking -2 Credits

Assignment Set- 2 (30 Marks)

1. Explain the concept of virtual banking .Discuss the key advantages and
disadvantages of electronic banking.

Multimedia technology has been quite effective in bringing the banking services to
the door-step of its customers. The Customer Activated Terminal (CAT) or Kiosk is
an interactive multimedia display unit, housed in a small enclosure, typically
consisting of a computer workstation, monitor, video disk player and a card reader.
It allows the customers to browse through information and use the available
banking services at their own speed. Some banks are thinking of establishing
‘virtual’ branches where a customer can walk through the door, explore services by
touching parts of the screen and at any time call up a member of the bank staff by
video conferencing. While the banks do not need to invest heavily in real estate for
setting up such a branch, the customer gets the benefit of ‘one-stop banking’ at a
convenient location.

Advantages of Electronic Banking.

Banking around the clock is no longer a remote possibility. But the banks don't
have to keep their branches open 24 hours a day to provide this service. This is
one of the biggest advantages of Internet banking.

One doesn't have to go to the bank's branch to request a financial statement. You
can download it from your online bank account, which shows you up-to-the-minute
updated figures.

Another advantage of Internet banking is that it is cost-effective. Thousands of

customers can be dealt with at once. There is no need to have too many clerks and
cashiers. The administrative work gets reduced drastically with Internet banking.
Expenditures on paper slips, forms and even bank stationery have gone down,
which helps raise the profit margin of the bank by a surprisingly large number.

As far as customers are concerned, their account information is available round the
clock, regardless of their location. They can reschedule their future payments from
their bank account while sitting thousands of miles away. They can electronically
transfer money from their bank accounts or receive money in their bank accounts
within seconds.

You can apply for a loan without visiting the local bank branch and get one easily.
You can buy or sell stocks and other securities by using your bank accounts. Even
new accounts can be opened; old accounts can be closed without doing tedious
paperwork. Especially with the increasing acceptability of digital signatures around

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the world, Internet banking has made life much easier and banking much faster
and more pleasant, for customers as well as bankers.

Internet Banking provides detailed information on Internet Banking, Advantages Of

Internet Banking, Internet Business Banking, US Internet Banking and more.
Internet Banking is affiliated with Best Internet Banks.

Disadvantages of Electronic Banking.

The reason that not many people have started using Internet banking is because
they do not trust the services of the bank through the net. Some human beings
prefer to trust others like them and may have some difficulty in trusting a
machine, especially in the matters of money. They may always have a doubt about
whether their money is safe, while being processed through Internet banking.

In addition to this, a few cases of forgery have been reported in online banking.
There are some fraud or proxy websites, which can hack information (user name
and password) entered by a person for some transaction, and later misuse it. In
such cases, people lose their money without knowing and by the time, they get the
bill, huge loses may have been incurred.

Another disadvantage of Internet banking is that it may take some time, to get the
Internet account started, as it requires a lot of paper work. Some people avoid
using Internet banking services because they find it difficult to understand how it
works. Also, the fact that a wrong click can cause monetary losses may be a
deterrent. Internet banking can also pose a problem, if the network is down in
one's area. This may cause difficulty, if the person has to do an important
transaction.

One very common disadvantage of online banking is when a person has some
problem or query. In a normal bank, if one faces some problem, one can go to
some employee of the bank to solve it. However, in the case of Internet banking,
one will find oneself making endless calls to the customer service department.
There have been cases, where the person is put on hold or has been passed
around from one person to another.

Although, Internet banking has certain disadvantages, one can avail of its
customer-friendly services, if one is a little careful. One should never give away
one's password to any unknown person and to make the experience of Internet
banking a smooth process, one must use sites that are familiar and reliable.

2. Discuss the importance of Asset Liability Management and its spread in

the banking system

Asset Liability Management (ALM) and Spread

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Asset-Liability Management

Asset-liability risk is a leveraged form of market risk because the capital (surplus)
of a financial firm such as a bank or insurance company is small relative to its
assets or liabilities. A small percentage changes in assets or liabilities can translate
into large percentage changes in capital. Consider the evolution over time of a
hypothetical company’s assets and liabilities. Over the period, the assets and
liabilities may change only slightly, but those slight changes dramatically alter the
company’s capital (which is just the difference between assets and liabilities). In
this example if the capital falls by over 50% for an erosion in assets by 10%, a
development that would threaten almost any institution.

Banks and Insurance Companies address this risk by structuring their assets to
hedge their liabilities. For example, if a liability represents a long-dated fixed
income obligation, a company might hold long bonds as a hedging asset. In this
way, changes in the value of the liability are mirrored by changes in the value of
the assets and capital-the difference between the two-is unaffected.

Asset-liability management can be performed on a per-liability basis, matching a

specific asset to support each liability. Alternatively, it can be performed across the
balance sheet. With this approach, the net exposures of the organization’s
liabilities are determined, and a portfolio of assets is maintained which hedges
those exposures. For example, a life insurance company might determine the net
duration and convexity of all its liabilities and then structure its assets to have the
same duration and convexity.

While most of the banks in other economies began with strategic planning for asset
liability management as early as 1970, the Indian banks remained unconcerned
about the same. Till eighties, the Indian banks continued to operate in a protected
environment. In fact, the deregulation that began in international markets during
the 1970s almost coincided with the nationalization of banks in India during 1969.
Nationalization brought a structural change in the Indian banking sector. Wholesale
banking paved the way for retail banking and there has been an all-round growth
in branch network, deposit mobilization and credit disbursement. The Indian banks
did meet the objectives of nationalization, as there was overall growth in savings,
deposits and advances. But all this was at the cost of profitability of the banks.
Quality was subjugated by quantity, as loan sanctioning became a mechanical
process rather than a serious credit assessment decision. Political interference has
been an additional malady. Paradigm Shift

As the real sector reforms began in 1992, the need was felt to restructure the
Indian banking industry. The reform measures necessitated the deregulation of the
financial sector, particularly the banking sector. The initiation of the financial sector
reforms, brought about a paradigm shift in the banking industry. The Narasimham
Committee Report on the banking sector reforms highlighted the weaknesses in
the Indian banking system and suggested reform measures based on the Basle

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norms. The guidelines that were issued subsequently laid the foundation for the
reformation of Indian banking sector.

The deregulation of interest rates and the scope for diversified product profile gave
the banks greater leeway in their operations. New products and new operating
styles exposed the banks to newer and greater risks. Though the types of risks and
their dimensions grew, there was not much being done by the banks to address
the situation. At this point, the Reserve Bank of India, the chief regulator of the
Indian banking industry, has donned upon itself the responsibility of initiating risk
management practices by banks. Moving in this direction, the RBI announced the
Prudential norms relating to Income Recognition, Asset Classification and
Provisioning and the Capital Adequacy norms, for the banks. These guidelines
ensured that the Indian banks followed international standards in risk
management.

As all transactions of the banks revolve around raising and deploying the funds,
Asset-Liability Management gains more significance for them. Asset-liability
management is concerned with the strategic management of balance sheet
involving the management of risks caused by changes in the interest rates,
exchange rates and the liquidity position of the bank. While managing these three
risks, forms the crux of the ALM, credit risk and contingency risk also form a part
of the ALM. Due to the presence of a host of risks and due to their inter-linkage,
the risk management approaches for ALM should always be multi-dimensional. To
manage the risks collectively, the ALM technique should aim to manage the
volume, mix, maturity, rate sensitivity, quality and liquidity of the assets and
liabilities as a whole so as to attain a predetermined acceptable risk/reward ratio.
The purpose of ALM is thus to enhance the asset quality and quantify the risks
associated.

The various risks that banks are exposed to will affect their short-term profits,
long-term earnings and the long-run sustenance capacity. Hence the ALM model
should primarily aim to stabilize the adverse impact of the risks on the same.
Depending on the primary objective of the model, the appropriate parameter
should be selected. The most common parameters for ALM in banks are:

Net Interest Margin (NIM): The impact of volatility on the short-term profits is
measured by NIM, which is the ratio of the net interest income to total assets.
Hence, if a bank has to stabilize its short-term profits, it will have to minimize the
fluctuations in the NIM.

Market Value of Equity (MVE): The market value of equity represents the long-
term profits of the bank. The bank will have to minimize adverse movement in this
value due to interest rate fluctuations. The target account will thus be MVE. In the
case of unlisted banks, the difference between the market value of assets and
liabilities will be the target account.

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Economic Equity Ratio: The ratio of the shareholders’ funds to the total assets
measures the shifts in the ratio of owned funds to total funds. This in fact assesses
the sustenance capacity of the bank. Stabilizing this account will generally come as
a statutory requirement.

While targeting any one parameter, it is essential to observe the impact on the
other parameters also. It is not possible to simultaneously eliminate completely the
volatility in both income and market value. If the bank lays exclusive focus on the
short-term profits, it may have an adverse impact on the long-term profits of the
bank and vice-versa. Thus, ALM is a critical exercise of balancing the risk profile
with the long/short term profits as well as its long-run sustenance.

Spread

It is the difference between the interest rate a bank charges a borrower and the
interest rate a bank pays a depositor.

There lies a difference between the buying and selling rate (also the margin above
a benchmark rate such as LIBOR). Banks quote a spread on their buying and
selling rates, which means that when you buy your yen for a trip to Japan you find
you get a different number of yen for your $A than you get on the way back when
you change your yen back into dollars, even if the exchange rate has remained
unchanged. Spreads in rates can widen if dealers are uncertain about currency
movements or if a money-changer (bureau de change) is out to make a large
profit. Investors hoping to profit from the narrowing or widening of the spread
between different options use one or more of the various option spread strategies.

3. Analyze the factors that influence the increasing use of electronic

payment cards. Discuss the marketing strategies of any leading private
sector bank to familiarize/market their products.

Marketing Strategies

There are only three marketing strategies needed to ensure the growth of a
business:

1. Increase the number of customers

2. Increase the average transaction amount, and

3. Increase the frequency of repurchase.

Every marketing strategy should be measured by its ability to directly impact and
improve upon each of these three factors. Increasing only one factor will produce
linear business growth. Increasing all three factors will produce geometric business
growth.

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Marketing Strategy 1:

Increase the number of customers:

Increasing the total number of customers is the first step most business owners
and managers take to grow their business. Losses can occur when inexperienced
sales personnel are put in charge of designing and implementing a marketing
program – investing corporate resources to find more customers.

Executed correctly, basic marketing strategies cost efficiently produce new

prospects that are ready, willing and able to buy products or services. The main
purpose of a marketing strategy is to give sales personnel prospects to convert
into paying customers. Rewarding existing customers for referring new ones is one
easy step business owners can take to increase their total number of customers.

Marketing Strategy 2:

Increase the average transaction amount:

Owners and managers spend most of their time operating their business and
searching for new customers. They often overlook the customers they see
regularly. These repeat customers are usually taken for granted and left to conduct
entire transactions without ever being asked if they would like to buy more product
or service.

Complacency, expecting customers to buy a minimum amount of product or

service without ever being asked to buy more, can be the undoing of a business.
This attitude can eventually cause customers to spend less money. Customers who
are not continuously offered compelling reasons to keep buying more of the same
products and services from one business will look for new reasons to buy from
another.

Cross selling and upselling, systematically offering customers more value via
additional products or services at the point of sale, are two simple steps business
owners can take to increase their average transaction amount.

Marketing Strategy 3:

Increase the frequency of repurchase:

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In an established business, an average customer purchasing pattern develops and

(like the average transaction amount) is usually taken for granted and rarely
improved upon. A customer’s repeat business is earned by the business which
gives the customer what they want. Without having basic marketing strategies or
processes for consistently offering customers more of what they want, repeat
business is earned less frequently.

Marketing Strategy in Banking Field

In commercial banking, marketing strategy has to meet the challenges by

strengthening themselves by mergers or diversifications such as going to national
from regional and from national to global level playing. They have to have a
dynamic management team, modified value systems, suitable to the requirements
of customers and a market thrust to meet the challenge of competitors. There is
need for diversification of product range such as introduction of credit card or debit
cards, 24 hour banking, ATM and other computerized services, banking from home
through the website of the internet, electronic transfer of funds and
dematerialization of all physical certificates. Banks may be prepared to service the
customers as they desire, say by arranging portfolio management, tax payment,
consultancy and personal investments. These are all called market responsive
management practices and customer-oriented services.

What is true of commercial banks is also applicable to co-operatives and

investment banks. Diversified loan portfolios, new avenues such as home banking,
personal consumer finance, new deposit mobilization techniques and designing
innovative schemes of lending and entering with global services, say Euro markets
and foreign borrowing and lending. Customers now demanding and they want to
deal with people who are empathetic, knowledgeable, responsive, caring, open and
communicative and professionalized. What is wanted in consumer finance is how a
loan product is explained and delivered rather than simply interest rate or terms
which are generally common to all companies.

All banking services are now treated like "products" thanks to the early days of
Chase & Citibank.

Bank Marketing, Financial Services Marketing

Bank executives and marketers faced with ongoing challenges can make better
business decisions with the help of software, data and analytic services from
Mapping Analytics:

1. Who are my best customers and how can I retain them?

2. Where is the greatest market potential to find new customers?

3. What locations should I choose to expand our branch network?

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4. Is our network of bank branches optimized for maximum performance?

The answer to each of these questions depends in large part on geography and
location. That means working with Mapping Analytics. Many banks, both large and
small, use services to improve marketing and branch network decisions.

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