Retail Banking

Presented by : Dr. Rajnish Kataria

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Loans available in India
• A loan is essentially money borrowed with a promise of return
within a specific time period/tenor. The lender decides a fixed rate
of interest that you must pay on the money you borrow, along with
the principal amount borrowed.
• Loans can be classified basis collateral requirements and usage
• Secured loans vary based on the asset used as collateral
• Personal loans are the most popular form of unsecured loans
• Banks in India offer instant financing with pre-approved loan offers
• There are various types of loans available in India, and they are
classified based on two factors:
- Whether they require collateral
- The purpose they are used for
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 Secured Loans
• Secured loans are loans that require collateral, i.e., you have to provide an
asset to the lender as security for the money you are borrowing. That way, if
you are unable to repay the loan, the lender still has some means to get back
their money. The rate of interest of secured loans tends to be lower as
compared to those for loans without collateral.
• Home loan
• Home loans are a secured mode of finance, that give you the funds to buy or
build the home of your choice. While buying a new property/home, the lender
requires you make a down payment of at least 10-20% of the property’s value.
The rest is financed. The loan amount disbursed depends on your income, its
stability and current liabilities among others.
• Land purchase loan: Purchase land for your new home
• Home construction loan: Build a new home
• Home loan balance transfer: Transfer the balance of your existing home loan
at a lower interest rate
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• Top up loan: Can be used to renovate an existing home or have the latest
interiors for your new home
Secured Loans
• Loan against property (LAP)
• Loan against property is one of the most common forms of a secured loan
where you can pledge any residential, commercial or industrial property for
availing the funds required. The loan amount disbursed is equivalent to a
certain percentage of the property’s value and varies across lenders.
• While some lenders may offer an amount equivalent to 50-60% of the
property’s value, others may offer an amount close to 80%. A loan against
property helps you unlock the dormant value of your asset and can be used to
satiate personal life goals such as higher education of children or marriage.
• Businesses use a loan against property for business expansion, R&D and
product development among others.
• Loans against insurance policies
• Pleae note that all insurance policies don’t qualify for this. Only policies, such
as endowment and money-back policies, which have a maturity value can be
used to avail loans. Thus, you can’t avail a loan against a term insurance plan as
it doesn’t have any maturity benefits. Also, loans can’t be availed against unit-
linked plans as the returns aren’t fixed and depends on the performance of the
market. It’s essential to note that you can opt for a loan against endowment 4
and money back policies only after they’ve acquired a surrender value. These
policies acquire a surrender value only after paying regular premiums
continuously for 3 years.
Secured Loans
• Gold loans
• For the longest time, gold has been one of the most favoured asset
classes. The organized Indian gold loan industry is expected to touch
Rs.3,101 billion by 2019-20, according to a KPMG report, thanks to
flexible interest rates offered by financial institutions.
• A gold loan requires you to pledge gold jewellery or coins as collateral.
The loan amount sanctioned is a certain percentage of the gold’s
value pledged. Gold loans are generally used for short-term needs
and have a short repayment tenor compared to home loans and loan
against property.
• Loans against mutual funds and shares
• An ideal vehicle for long-term wealth creation, mutual funds can also
be pledged as collateral for a loan. You can pledge equity or hybrid
funds (mix of stocks and bonds) to the financial institution for availing
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a loan.
Secured Loans
• The bank will write to the mutual fund registrar and a lien
on the certain number of units to be pledged is marked.
• Typically, you can get 60-70% of the value of units
pledged as a loan. Similarly, with shares, financial
institutions create a lien against shares against which the
loan is taken and the loan value is equivalent to a
percentage of the value of the shares.
• Loans against fixed deposits
• The humble fixed deposit not only offers assured returns
but can also come handy when you need a loan. The
amount of loan can vary between 70-90% of the FD’s
value and varies across lenders. However, it’s essential to
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note that the loan tenor can’t be more than the FD’s
tenor.
Housing Loans
• Home loan is the most common and popular type of loan availed for
home purchase. You can opt for a housing loan, to purchase your
dream home. A reputed Housing Finance Company/ Banks can help
you to achieve this dream of owning a home by providing housing
loans that are fully transparent and flexible with fair terms.
Land or plot loan:
• You can come to a housing finance company/ bank and avail a land
loan to buy a piece of a plot for constructing your dream home.
Home construction loan:
• This type of home loan is ideal if you want to construct a home
according to your needs. Several Housing finance Companies/ Banks
in India offer home construction loan.
Home extension loan:
• You may want to add a new room or a new floor to expand your
existing home as your family grows or simply to enlarge your home.
For this purpose you can avail of a home extension loan from a 7
housing finance company/ banks of your choice.
Home Improvement loan:
• A home improvement loan (also sometimes known as home
renovation loan) can be used for various purposes such as painting
the exterior or interior of the house, plumbing, upgrading electrical
system, installing new tiles, waterproofing, etc.
Home loan balance transfer:
• Sometimes the current home loan interest rates can be taxing for you.
It is also possible that you may not be happy with the services offered
by the current housing finance company/banks. In such cases, you
have an option to transfer the home loan to another lender who
offers lower home loan interest rates and better services. Some
housing finance companies/ banks in India even offer an option of a
top- up loan besides the home loan amount which helps you get
additional funds to fulfill any other financial need that you may have.
Composite Loan:
• A variant of Housing loan also includes an option of a combined loan
for buying a plot as well as a loan for constructing your dream home.
Besides the above-stated types of loans, people can also avail of other
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variants of home loans like a NRI home loan (only for NRI borrower),
home conversion loans, etc.
Unsecured Loans
• These are loans that do not require collateral. The lender lends you the
money based on past associations, and your credit score and history.
Unsecured loans usually come at a higher rate of interest due to the
lack of collateral.
• Personal loan
• Offering an instant flush of liquidity, a personal loan is one of the most
popular types of unsecured loans. However, since a personal loan is an
unsecured mode of finance, the interest rates are higher compared to
secured loans. A good credit score along with high and stable income
ensures you can avail this loan at a competitive rate of interest.
Personal loans can be used for the following purposes-
- Manage all expenses of a family wedding
- Pay for a vacation or an international trip
- Finance your home renovation project
- Fund the cost of your child’s higher education
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- Consolidate all your debts into a single loan
- Meet unexpected/ unplanned/ urgent expenses
Unsecured Loans
Short-term business loans
• Another type of unsecured loans, a short-term
business loan can be used to meet their
expansion and daily expenses by various entities
and organizations.
- Working capital loans
- Machinery loans and equipment finance
- Small business loans for MSMEs
- Loans for women entrepreneurs
- Loans for traders
- Loans for manufacturers
- Loans for service enterprises 10
 Flexi Loans
• A facility whereby you can avail funds from your approved limit and as when
required and pay interest only on the amount used. You can withdraw on your
loan limit, any number of times and prepay when you have extra cash, at no
extra cost. Such a unique facility gives you the freedom to be in full control of
your finances unlike rigid term loans and offers you savings on your EMIs by up
to 45%. Here, you also have the option to pay only interest as EMIs, with the
principal payable at the end of the tenor.
• Education loans
• Aspiration for higher education from reputed institutions have bolstered the
demand for education loans in the country. This loan covers the basic fees of
the course along with allied expenses such as the accommodation, exam fee,
etc. In this loan, the student is the main borrower while parents, siblings and
spouse are co-applicants.
• An education loan can be taken for a full-time, part-time or vocational course
along with graduation and post-graduation course in the fields of
management, engineering and medicine, among others. The loan must repaid
by the student once the course is complete.
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• A unique feature of an education loan is the moratorium period, wherein the
student has the option of not paying the EMIs until after 12 months of
completing the course or 6 months after he/she starts working, whichever is
 Auto Loans
Secured Auto Loans vs. Unsecured Auto Loans
• Auto loans can either be secured or unsecured. For secured car loans,
the lender will put a lien on an asset owned by the borrower. Most
secured loans will put a lien on the car being purchased. However,
other types of secured auto loans may put a lien on another car or a
house owned by the borrower. Consumers should make sure they
know what assets secure their loans.
• The act of putting a lien on an asset allows the lender to repossess
that asset if payments are not made as agreed. The lien lowers the
risk of default for the lender and allows consumers to obtain a lower
rate than they likely could obtain with an unsecured loan.
• Unsecured loans, on the other hand, do not allow lenders to
repossess any assets if payments are missed. Instead, lenders have to
go after the delinquent borrower through other legal means. This
raises the cost and interest rate of most unsecured loans. 12
Auto Loans
Pre-Computed Interest Loans vs. Simple Interest Loans

• Another major difference between types of auto loans revolves around how
interest is calculated. Pre-computed interest loans require the borrower to
stick to a set payment schedule in which each and every payment has a
calculated interest and principal portion.
• Even if a borrower pays their loan early, they will not save any money on
interest because the payments are applied based on the pre-computed
interest schedule. According to the Consumer Financial Protection Bureau, if a
borrower wanted to pay off their car loan early, pre-computed interest loans
may not make the most financial sense.
• Alternatively, simple interest loans calculate interest on a preset periodic
basis, such as a daily basis. During each period, interest will be calculated
based on the amount of principal outstanding on the loan. If a borrower pays
off additional principal on their loan, they will no longer have to pay interest
on the additional principal that has been paid off. Early payments allow 13
borrowers to pay off simple interest loans faster while paying less in interest
over the life of the loan.
 Auto Loans
Special Types of Auto Loans
• A few circumstances allow car owners to take out specialized loans. One such
instance is a title loan. If someone owns their car outright, then they can hand
over their title to a loan company in exchange for a sum of money. The money
can be used for any purpose and does not have to be used to purchase another
car. Title loans are secured loans, which means the lender can repossess the car
if payments are not made on time.
• Car lease buyout loans are another special circumstance. When a person leases a
car, they must either return the car when the lease expires or pay a buy out
amount to purchase the car outright. Many lenders offer lease buyout loans so
people that lease cars can take advantage of the purchase option at the
expiration of the lease if they wish. The institution offering the lease buyout loan
will pay the lease buyout fee and the borrower will then make monthly payments
to the institution to pay off the loan. Once the lease buyout loan is paid off, the
borrower will fully own the car.
• Caution : Loans of any type can be complicated. Auto loans are no exception.
Consumers should make sure they understand all terms of their loan before they
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sign on the dotted line. By understanding the terms of their loan options,
consumers can compare multiple loan offers and pick the loan that offers the
best terms for any situation that may arise.
Future of Bank Risk Management
• Risk management in banking has been transformed over the past decade,
largely in response to regulations that emerged from the global financial crisis
and the fines levied in its wake. But important trends are afoot that suggest risk
management will experience even more sweeping change in the next decade.
• The change expected in the risk function’s operating model illustrates the
magnitude of what lies ahead. Today, about 50 percent of the function’s staff
are dedicated to risk-related operational processes such as credit
administration, while 15 percent work in analytics. McKinsey research suggests
that by 2025, these numbers will be closer to 25 and 40 percent, respectively.
• No one can draw a blueprint of what a bank’s risk function will look like in
2025—or predict all forthcoming disruptions, be they technological advances,
macroeconomic shocks, or banking scandals.
• Credit risk
• Market risk : Interest rate risk ; Equity risk ; Currency risk ; Commodity prices
• Operational risk : Human risk ; IT/System risk ; Processes risk
• Liquidity risk
• Reputational risk
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• Business risk
• Systemic risk
• Moral hazard
Six trends are shaping the role of
the risk function of the future.
• Trend 1: Regulation will continue to broaden and deepen
• While the magnitude and speed of regulatory change is unlikely to be uniform
across countries, the future undoubtedly holds more regulation—both
financial and nonfinancial—even for banks operating in emerging economies.
• Much of the impetus comes from public sentiment, which is ever less tolerant
of bank failures and the use of public money to salvage them. Most parts of
the prudential regulatory framework devised to prevent a repetition of the
2008 financial crisis are now in place in financial markets in developed
economies. But the future of internal bank models for the calculation of
regulatory capital, as well as the potential use of a standardized approach as a
floor (Basel IV), is still being decided. The proposed changes could have
substantial implications, especially for low-risk portfolios such as mortgages or
high-quality corporate loans.
• Governments are exerting regulatory pressure in other forms, too.
Increasingly, banks are being required to assist in crackdowns on illegal and
unethical financial transactions by detecting signs of money laundering,
sanctions busting, fraud, and the financing of terrorism, and to facilitate the 16
collection of taxes.
• Trend 2: Customer expectations are rising in line with changing technology
• Technological innovation has ushered in a new set of competitors: financial-
technology companies, or fintechs. They do not want to be banks, but they do want
to take over the direct customer relationship and tap into the most lucrative part of
the value chain—origination and sales.
• The seamless and simple apps and online services that fintechs offer are beginning
to break banks’ heavy gravitational pull on customers. Most fintechs start by asking
customers to transfer a single piece of their financial business, but many then
steadily extend their services. If banks want to keep their customers, they will have
to up their game, as customers will expect intuitive, seamless experiences, access
to services at any time on any device, personalized propositions, and instant
decisions.
• Banks’ responses to higher customer expectations will be automated: an instant
response to retail and corporate credit decisions, for example, and a simple, rapid
online account-opening process. For banks to deliver at this level, they will have to
be redesigned from the perspective of customer experience and then digitized at
scale.
• Technology also enables banks and their competitors to offer increasingly
customized services. It may be possible eventually to create the “segment of one,”
tailoring prices and products to each individual. This degree of customization is
expensive for banks to achieve because of the complexity of supporting processes. 17
Regulatory constraints might well be imposed in this area, however, to protect
consumers from inappropriate pricing and approval decisions.
• Trend 3: Technology and advanced analytics are evolving
• Technological innovations continuously emerge, enabling new risk-
management techniques and helping the risk function make better risk
decisions at lower cost. Big data, machine learning, and crowdsourcing
illustrate the potential impact.
• Big data : Faster, cheaper computing power enables risk functions to use
reams of structured and unstructured customer information to help banks
make better credit risk decisions, monitor portfolios for early evidence of
problems, detect financial crime, and predict operational losses. An important
question for banks is whether they can obtain regulatory and customer
approval for models that use social data and online activity.
• Machine learning : This method improves the accuracy of risk models by
identifying complex, nonlinear patterns in large data sets. Every bit of new
information is used to increase the predictive power of the model. Some
banks that have used models enhanced in this way have achieved promising
early results. Since they cannot be traditionally validated, however, self-
learning models may not be approved for regulatory capital purposes.
Nevertheless, their accuracy is compelling, and financial institutions will
probably employ machine learning for other purposes.
• Crowdsourcing : The Internet enables the crowdsourcing of ideas, which 18
many incumbent companies use to improve their effectiveness.
• Trend 4: New risks are emerging
• Inevitably, the risk function will have to detect and manage new and unfamiliar risks
over the next decade. Model risk, cybersecurity risk, and contagion risk are
examples that have emerged.
• Model risk : Banks’ increasing dependence on business modeling requires that risk
managers understand and manage model risk better. Although losses often go
unreported, the consequences of errors in the model can be extreme. For instance, a
large Asia–Pacific bank lost $4 billion when it applied interest-rate models that
contained incorrect assumptions and data-entry errors. Risk mitigation will entail
rigorous guidelines and processes for developing and validating models, as well as
the constant monitoring and improvement of them.
• Cybersecurity risk : Most banks have already made protection against cyber attacks a
top strategic priority, but cyber security will only increase in importance and require
ever greater resources. As banks store an increasing amount of data about their
customers, the exposure to cyber attacks is likely to further grow.
• Contagion risk : Banks are more vulnerable to financial contagion in a global market.
Negative market developments can quickly spread to other parts of a bank, other
markets, and other involved parties. Banks need to measure and track their exposure
to contagion and its potential impact on performance. Measures to reduce a bank’s
total risk can reduce its capital requirements, as contagion risk is one of the main
drivers for classification as a global systemically important bank (G-SIB) and for G-SIB 19
capital surcharges.
• Trend 5: The risk function can help banks remove biases

• Behavioral economics has made great strides in understanding how

people make decisions guided by conscious or unconscious biases. It
has shown, for example, that people are typically overconfident—in
a few well-known experiments, for example, enormous majorities of
respondents rated their driving skills as “above average.” Anchoring
is another bias, by which people tend to rely heavily on the first
piece of information they analyze when forming opinions or making
decisions.
• Business, too, is prone to bias. Business cases are almost always
inflated, and if the first person to speak in a discussion argues in
favor of an idea, the likelihood is high that most present, if not all,
will agree.
• The risk function could take the lead in de-biasing banks. It could
even become a center of excellence that rolls out de-biasing
processes and tools to other parts of the organization.
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• Trend 6: The pressure for cost savings will continue

• The banking system has suffered from slow but constant margin
decline in most geographies and product categories. The downward
pressure on margins will likely continue, not least because of the
emergence of low-cost business models used by digital attackers.
• As a result, the operating costs of banks will probably need to be
substantially lower than they are today. After exhausting traditional
cost-cutting approaches such as zero-based budgeting and
outsourcing, banks will find that the most effective remaining
measures left are simplification, standardization, and digitization.
• The risk function must play its part in reducing costs in these ways,
which will also afford opportunities to reduce risks. A strong
automated control framework, for example, can reduce human
intervention, tying risks to specific process break points. As the
pressure to reduce costs will persist, the risk function will need to 21
find further cost-savings opportunities in digitization and automation
while delivering much more for much less.
 Retail Foreign Exchange
• Foreign exchange regulations have been liberalised over the years to
facilitate the remittance of funds both in and out of India. The changes
have been introduced on a continuous basis in line with the
government policy of economic liberalisation. Still, in few cases, specific
approvals are required from the regulatory authorities for foreign
exchange transactions/remittances.
• The foreign exchange regulations in India are governed by the Foreign
Exchange Management Act, 1999 (“FEMA”). The apex foreign exchange
regulatory authority in India is the Reserve Bank of India (“RBI”) which
regulates the law and is responsible for all key approvals.
• FEMA is not only applicable to all parts of India but is also applicable to
all branches, offices and set-ups outside India which are owned or
controlled by a person resident in India. It also applies to all branches,
offices and set-ups in India which are controlled or owned by person
resident outside India. FEMA regulates all aspects of foreign exchange
and has direct implications on external trade and payments. 22
• FEMA also impacts foreign nationals who are working in India or
outside.
Retail Foreign Exchange
• The foreign exchange market in India consists of 3 segments or tires. The first
consists of transactions between the RBI and the authorized dealers (AD). The
latter are mostly commercial banks. The second segment is the interbank
market in which the AD’s deal with each other. And the third segment consists
of transactions between AD’s and their corporate customers. As in any market
essentially the demand and supply for a particular currency at any specific
point in time determines its price (exchange rate) at that point. Prior to 1990s
fixed Exchange rate of the rupee was officially determined by RBI.
• During the early years of liberalization, the Rangarajan committee
recommended that India’s exchange rate be flexible. India moved from a fixed
exchange rate regime to “market determined” exchange rate system in 1993.
• A country’s currency exchange rate is typically affected by the supply and
demand for the country’s currency in the international foreign exchange
market. Let’s take the example of Rupee Dollar exchange. The rupee/dollar rate
is a two-way rate which means that the price of 1 dollar is quoted in terms of
how much rupees it takes to buy one dollar. The value of one currency against
another is based on the demand of the currency. If the demand for dollar
increases, the value of dollar would appreciate. As the quotation for Rs/$ is a 23
two way quote, an appreciation in the value of dollar would automatically
mean the depreciation in Indian rupee and vice-versa.
Retail Foreign Exchange
• Inward & outward foreign exchange remittances
• Travel : Forex cards, cash, drafts, etc.
• Medical
• Education
• Gifts
• Maintenance of close relatives abroad
• Export Collections
• Import collections
• Guarantees
• Investments overseas
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• Purchase of property
Indian exchange rate
• RBI Intervention: When there is too much volatility in the rupee-
dollar rates, the RBI prevents rates going out of control to protect the
domestic economy. The RBI does this by buying dollars when the
rupee appreciates too much and by selling dollars when the rupee
depreciates way too much.
• Inflation: When inflation increases there will be less demand of
domestic goods and more demand of foreign goods i.e. increases
demand for foreign currency), thus value of foreign currency
increases and home currency depreciates thus negatively affecting
exchange rate of home currency.
• Imports and Exports: Importing foreign goods requires us to make
payment in foreign currency thus strengthening the foreign
currency’s demand. Increase in demand increases the value of
foreign currency and exports do the reverse. 25
Indian exchange rate
• Interest rates: The interest rates on Government bonds in emerging
countries such as India attract foreign capital to India.
• If the rates are high enough to cover foreign market risk, money would start
pouring in India and thus would provide a push to rupee demand thus
appreciating rupee value for exchange.
• Operations: The major sources of supply of foreign exchange in the Indian
foreign exchange market are receipts on account of exports and invisibles in
the current account, drafts, travellers cheque and inflows in the capital
account such as foreign direct investment (FDI), portfolio investment,
external commercial borrowings (ECB) and non-resident deposits. On the
other hand, the demand for foreign exchange rises from imports and
invisible payments in the current account, amortisation of ECB (including
short-term trade credits) and external aid, redemption of NRI deposits and
outflows on account of direct and portfolio investment.
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Types of foreign market
operations
• Spot market (current market): Spot market for foreign exchange is that
market which handles only spot transactions or current transactions. Spot
rate of exchange prevails at the time when transactions are incurred. it is of
daily nature.
• Forward market (derivative market): It is meant for future delivery. It
determines forward exchange rate at which forward transaction are to be
honored. It deals in following instruments: foreign exchange forwards,
currency futures, currency swaps, currency options.
• Exchange settlement and dealings: Nostro and Vostro account facilitate
settlement of foreign exchange transaction.

Nostro account: A foreign currency ac maintained by a bank in India with a

bank in abroad. For example, Bank of India US dollar account with Citi bank.
Vostro account: A rupee account of a foreign bank abroad with a bank in India.
For example, Citi bank rupee ac with bank of India. 27