JAIIB Paper 4 (RMWM) Capsule PDF

Ambitiousbaba.com Paid Course Best Study Materials – Videos, Mock Tests, PDF for JAIIB Exams | test.ambitiousbaba.com 1  Ambitiousbaba.com Paid Course JAIIB Paper 4 (RMWM) Capsule No. of Module...

Ambitiousbaba.com Paid Course Best Study Materials – Videos, Mock Tests, PDF for JAIIB Exams | test.ambitiousbaba.com 1  Ambitiousbaba.com Paid Course JAIIB Paper 4 (RMWM) Capsule No. of Module Module Name Page No. Module A Retail Banking 2-19 Module B Retail Products and Recovery 20-103 Support Services- Marketing Module C 104-140 of Banking Services/ Products Module D Wealth Management 141-178 Additional Reading Material Module E 179-207 on Home Loans JAIIB Paper 4 (RMWM) Module A: Retail Banking No. of Unit Unit Name Unit 1 Retail Banking Introduction Unit 2 Role within the Bank Operations Unit 3 Application of Retail Banking Concept and Distinction between Retail and Corporate/Wholesale Banking Unit 4 Branch Profiabiltity JAIIB Retail Banking Module A Unit 1: Retail Banking Introduction Retail Banking Best Study Materials – Videos, Mock Tests, PDF for JAIIB Exams | test.ambitiousbaba.com 2  Ambitiousbaba.com Paid Course "Retail Banking is a banking service that is geared primarily toward individual consumers. Retail banking is usually made available by commercial banks, as well as smaller community banks. Unlike wholesale banking, retail banking focuses strictly on consumer markets. Retail banking entities provide a wide range of personal banking services, including offering savings and checking accounts, bill paying services, as well as debit and credit cards. Through retail banking, consumers may also obtain mortgages and personal loans. Although retail banking is, for the most part, mass-market driven, many retail banking products may also extend to small and medium sized businesses. Today much of retail banking is streamlined electronically via Automated Teller Machines (ATMs), or through virtual retail banking known as online banking." Characteristics of Retail Banking The definitions of retail banking as discussed above bring out the following characteristics: Banking facilities targeted at individual customers. Focused towards mass market segment covering a large population of individuals. Offer different liability, asset and a plethora of service products to the individual customers. The delivery model of retail banking is both physical and virtual i.e. services are extended through branches and also through technology driven electronic off site delivery channels like ATMs, Internet Banking and Mobile Banking. Extended to small and medium size businesses. Advantages of Retail Banking Client base will be large and therefore risk is spread across the customer base. Customer Loyalty will be strong and customers tend not to change from one bank to another very often. Attractive interest spreads since spreads are wide, since customers are too fragmented to bargain effectively; Credit risk tends to be well diversified, as loan amounts are relatively small. There is less volatility in demand and credit cycle than from large corporates. Large numbers of clients can facilitate marketing, mass selling and the ability to categorize/select clients using scoring systems/data mining. Constraints in Retail Banking Though retail banking as a segment has a number of embedded advantages, the segment suffers from constraints also. A few of the constraints are listed below: Problems in managing large numbers of clients, especially if IT systems are not sufficiently robust. Rapid evolution of products can lead to IT complications Best Study Materials – Videos, Mock Tests, PDF for JAIIB Exams | test.ambitiousbaba.com 3  Ambitiousbaba.com Paid Course The costs of maintaining branch networks and handling large numbers of low- value transactions tend to be relatively high. (For this reason banks are encouraging clients to use cheaper distribution channels, such as ATMs, the telephone or internet for these transactions and reserve the branches for higher added value transactions). Higher delinquencies especially in unsecured retail loans and credit card receivables. Prerequisite for Success of Retail Banking There are various factors that can subscribe to the success of retail banking in India: Presence of an efficient delivery mechanism Product appropriateness Pricing Scoring models for assessing the credit worthiness Consumer protection environment Challenges for Retail Banking Consumer Protection & Pricing Inadequacy of MIS Understanding of KYC/AML issues Managing Risk Effects of disruptive new technologies Continuing growth Reason for the Growth of the Retail Banking Segment Rise of the young Indian Professionals Growth as an Economic Superpower Increasing purchasing power of middle class people Financial market reforms Engine of economic growth Mass Market banking Volume driven business Automation of banking process Easy and affordable access Financial liquidity Economic prosperity Changing consumer demographics Technology innovations Increase the Bank Liquid cash Decline in interest rates Declining cost of incremental deposit Changes of terms of loans Best Study Materials – Videos, Mock Tests, PDF for JAIIB Exams | test.ambitiousbaba.com 4  Ambitiousbaba.com Paid Course Scope of Retail Banking in India Increase in economic activity is taking place with some recessionary trends. Increase in purchasing power. The rural India has more purchasing power at their disposal and this is an opportunity to market Retail Banking. India has 300 million households and 400 million middle class population. More than 90% of the savings come from the house hold sector. Falling interest rates have resulted in a shift. “Now People Want to Save Less and Spend More.” Nuclear family concept is gaining much importance which may lead to large savings. The number of banking services to be provided is increasing day-by-day. Tax benefits are available. For example, in case of housing loans/ education loan the borrower can avail tax benefits for the loan repayment and the interest charged for the loan. Future of Retail Banking Growth in Digital Banking Rapid Adaptation of Blockchain by Retail Bankers Artificial Intelligence (AI) and Data Science in Banking Cyber Security to be a Top Priority Payment Innovations Rise of Big Tech in Banking Industry JAIIB Retail Banking Unit 2: Retail Banking: Role within the Bank Operations The business models for retail banking show interesting revelations across types of banks. The models adopted by banks vary among the public sector, private sector and foreign banks. The main approaches are as follows: Strategic Business Unit (SBU) Approach, Departmental Approach, Integrated Approach (part of the overall business plan). Strategic Business Unit (SBU) SBU approach aims at dividing the business on lines of Strategic Business Units (SBUs). SBUs are autonomous divisions, small enough to be flexible and large enough to exercise control over most of the factors affecting its long-term performance. SBUs can be defined as profit centres which focus on product offering and market segment. An SBU can be a business unit of a large corporation or it can be a business in itself. Departmental Approach Best Study Materials – Videos, Mock Tests, PDF for JAIIB Exams | test.ambitiousbaba.com 5  Ambitiousbaba.com Paid Course In Departmental Approach, rather than dividing on strategic or businesslines, an organisation can also be divided on the basis of functions, various teams perform. The departmental approach is a specialised functional approach within an organisation. This approach segregates the functions of the organisation into departments such as accounting, marketing, finance, planning, etc. Generally, every department has its manager and chain of command. Public Sector Banks in India generally have adopted the Departmental Approach as their retail banking business model. It indicates that the approach is more a general one with retail banking as one of the business models and not a focused business model. The Integrated Approach The Integrated Approach is usually adopted by smaller businesses. It combines allsocio economic aspects and adopts a cohesive approach to tackle problems of the business. It is assumed that having a unified business would reduce risk and increase profitability through scale rather than having separate entities for each business line. If we go further deep into the models of retail banking followed by banks with regard to products, processes, delivery channels, technology, etc., Business Model Banks generally structure their retail banking models mainly on a positioning platform and to be the best/top three among the peer group players or across players. Strategies are based on the positioning objectives and vary from bank to bank depending on the importance attached to the business model. Among the public sector banks, some banks aim for a place among the top three retail players across banks including peer group banks while some other public sector aim for a space in the top three among the peer group. But the strategy adopted by these banks was a part of the overall strategy based on the business mix. projections and corporate objectives of the bank. Unit 3: Application of Retail Banking Concept and Distinction between Retail and Corporate/Wholesale Banking The growth of retail banking is attributable to the rapid advances in information technology, the evolving macroeconomic environment, financial market reform, and several micro-level demand and supply side factors. It facilitates the delivery of the right product at the right price at the right place and at the right time. Today’s retail banking sector is characterized by three basic characteristics: Multiple products (deposits, loans, cards, insurance, investments, securities, etc.) Best Study Materials – Videos, Mock Tests, PDF for JAIIB Exams | test.ambitiousbaba.com 6  Ambitiousbaba.com Paid Course Multiple channels of distribution (call centre, branch, internet, mobile banking, kiosk, etc.) Multiple customer groups (consumer, small business, and corporate). This Unit deals with the various business process structure, product models, business approach, retail liability products, retail assets products, etc., in detail. Business Process Structure in Retail Banking Horizontally organized model is a modular structure using different process models for different products offering end to end solutions product wise. Vertically organized model provides functionality across products with customer data base orientation and centralised customer data base is used across products. Predominantly horizontally organized model is mostly product oriented with common customer information for some products. In predominantly vertically organized model, common information is available for most of the products. Business Approach (Domain Specific) in Retail Banking The business strategies with regard to the domains targeted are approached in different ways by different banks. The most common approaches are as follows: Segmented Approach - where branches are classified based on the business potential with regard to retail space and business targeted in these segments of branches only with focused marketing strategies. These branches will be positioned as resource centre branches and will form part of the overall segmentation game plan of the bank. Branches are classified as Resource Centres, Profit Centres, Priority Centres and General Centres to have a clear business focus. This concept is an effective business model for PSBs with large network and useful for focused strategies and already getting implemented in some public sector banks. Geography based approach - where retail models are built based on geographies. Classification based approach - where strategies are designed based on the type of branch viz., Rural. Semi Urban. Urban and Metro. This strategy helps in better product structuring for specific types of branches. Product Models in Retail Banking Liability Products Liability products are offered to retail banking customers basically under three spaces - Savings Accounts, Current Accounts and Term Deposit Accounts. Product differentiation among these accounts is best achieved by adding different value propositions. Retail deposit are stable and constitute core deposits. They are interest insensitive and less bargaining for additional interest. Best Study Materials – Videos, Mock Tests, PDF for JAIIB Exams | test.ambitiousbaba.com 7  Ambitiousbaba.com Paid Course They constitute low cost funds for the banks. Effective customer relationship management with the retail customers build a strong customer base. Retail Asset Products Retail asset financing is a major component of retail banking model of banks. In fact retail loans are the backbone of the revenue streams of banks. In any customer expansion strategy, retail loan is packed as the main attraction uniformly by all banks. Retail banking results in better yield/improved bottom line for a bank. Retail segment is good revenue for funds deployment. Consumer loans are presumed to be of lower risk and NPA perception. Helps economic revival of nation through increased production activity. Improves lifestyles and fulfils aspirations of the people through affordable credit. Retail banking involves minimum marketing efforts in a demand-driven economy. Other Products/Services Other products and services broadly cover the beyond product facilities tagged to the products and services. These enhance the service experiences of the customers by providing process and delivery efficiencies by additional service tools to the basic products. One set of these products are Credit Cards, Debit Cards. ATM Cards, Telephone Banking. Mobile Banking, Internet Banking. Depository Service and Broking Services. Distribution of third party products like life and non life policies, mutual funds, retail sale of gold coins, bill payment services, multi city cheques, payment gateway for rail, air ticket. Process Models for Products and Services Processing of products and services in retail banking is basically approached from three dimensions viz., the entire processing is done through in house resources, some products processed in house and for some products outsourcing is done for process and the third approach is outsourcing of entire process subject to prescribing process standards. In PSBs and old private banks the entire process for products and services are done through in house resources but in some banks, process part of some products are outsourced. But generally no outsourcing is done for the process part. In new generation private sector banks, outsourcing is attempted partially for some process areas. In foreign banks, the entire process is outsourced and normally happens through a dedicated back office covering the entire gamut of retail banking services. Pricing of Products and Services Banks develop models for pricing of products and services based on certain fundamental parameters. Market dynamics, risk perception, return Best Study Materials – Videos, Mock Tests, PDF for JAIIB Exams | test.ambitiousbaba.com 8  Ambitiousbaba.com Paid Course expectations, tenor/duration, resources position, asset liability management positions and customer profile are some of the variables which are factored into the pricing model by banks. The balancing of these various variables dynamically with changing market dynamics is the key function for good pricing model. In addition, regulatory advices (both overt and covert) also influence the pricing models. The fundamental concept of costing in pricing has now gelled with the asset liability management practices of banks. Technology Models in Retail Banking The technology platform for retail banking plays a major role in the retail banking initiatives of banks. In today's scenario, technology is the backbone of the process and delivery efficiencies of banks. The technology models basically adopted by banks are In House Models, Outsourced Models, Partially In House and Partially Outsourced Models. Each model will have advantages and disadvantages and the overall business will be the decider of the effectiveness of the model. Distinction between Retail and Corporate/Wholesale Banking Retail Banking and Corporate or Wholesale Banking differ in their basic approach to banking. The major differences between the two segments are discussed as follows: Retail Banking targets at the individual segment while corporate banking deals mainly with corporate clients. Retail Banking is a mass market banking model whereas wholesale/corporate banking look at a relatively smaller segment of business/corporate client base as compared to retail segment. Retail Banking is a B2C approach (Business to Customer) whereas corporate banking is a B2B approach (Business to Business). The ticket size of loans in retail banking is low whereas the ticket size is high in corporate loans. Risk is widespread in retail banking as customer base is huge whereas in Corporate Banking, the risk is more as the ticket size is big though customer base is relatively small. Returns are more in retail banking as the spreads are more for different asset classes in retail. But in corporate banking, the returns will be low as corporates bargain for lower rates due to higher loan amounts. Monitoring and recovery in retail assets are more laborious because of the larger customer base as compared to corporate banking. In the liability side also, the cost of deposits is relatively less and mostly go along with the card rates as the ticket size in retail deposits is small. In corporate banking, as the ticket sizes of deposits will be large, the cost of deposits will be high due to pressure from the corporates for higher rates and competitive forces to garner the deposits. Best Study Materials – Videos, Mock Tests, PDF for JAIIB Exams | test.ambitiousbaba.com 9  Ambitiousbaba.com Paid Course The impact of NPA will be more pronounced in corporate banking than retail banking as the ticket sizes in corporate loans are higher than retail loans. JAIIB RBWM Module A Unit 4-Branch Profiabiltity Banking System: An Introduction What Is Banking? Banking is classically defined in the Banking Regulations Act, 1949 (BR Act). As per Section 5(1) (b) of the BR Act, banking is ‘the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise.’ Section 5(l)(c), further defines a banking company as any company which transacts the business of banking in India. Section 6 of the BR Act defines, in detail, the types of activities that banks are authorised to carry out, although under modern day banking, banks have embraced many other types of activities, too. The traditional types of businesses that banks Another important aspect on banking in India is that, in terms of Section 7 (1) of the BR Act, ‘No company other than a banking company shall use as part of its name any of the words “bank”, “banker” or “banking” and no company shall carry on the business of banking in India, unless it uses as part of its name at least one of such words.’ Further, Section 7(2) states ‘No firm, individual or group of individuals shall, for the purpose of carrying on any business, use as part of its or his name any of the words “bank”, “banking” or “banking company”.’ History Of Banking In India The banking sector development can be divided into three phases: Phase I: The Early Phase which lasted from 1770 to 1969 Phase II: The Nationalisation Phase which lasted from 1969 to 1991 Phase III: The Liberalisation or the Banking Sector Reforms Phase which began in 1991 and continues to flourish till date Best Study Materials – Videos, Mock Tests, PDF for JAIIB Exams | test.ambitiousbaba.com 10  Ambitiousbaba.com Paid Course Pre Independence Period (1786-1947) The first bank of India was the “Bank of Hindustan”, established in 1770 and located in the then Indian capital, Calcutta. However, this bank failed to work and ceased operations in 1832. During the Pre Independence period over 600 banks had been registered in the country, but only a few managed to survive. Following the path of Bank of Hindustan, various other banks were established in India. They were: The General Bank of India (1786-1791) Oudh Commercial Bank (1881-1958) Bank of Bengal (1809) Bank of Bombay (1840) Bank of Madras (1843) During the British rule in India, The East India Company had established three banks: Bank of Bengal, Bank of Bombay and Bank of Madras and called them the Presidential Banks. These three banks were later merged into one single bank in 1921, which was called the “Imperial Bank of India.” The Imperial Bank of India was later nationalised in 1955 and was named The State Bank of India, which is currently the largest Public sector Bank. Pre-Indepence Banks in India Bank Name Year of Establishment Allahabad Bank 1865 Punjab National Bank 1894 Bank of India 1906 Central Bank of India 1911 Canara Bank 1906 Bank of Baroda 1908 Post Independence Period (1947-1991) At the time when India got independence, all the major banks of the country were led privately which was a cause of concern as the people belonging to rural areas were still dependent on money lenders for financial assistance. With an aim to solve this problem, the then Government decided to nationalise the Banks. These banks were nationalised under the Banking Regulation Act, 1949. Whereas, the Reserve Bank of India was nationalised in 1949. Candidates can check the list of Banking sector reforms and Acts at the linked article. Following it was the formation of State Bank of India in 1955 and the other 14 banks were nationalised between the time duration of 1969 to 1991. These were the banks whose national deposits were more than 50 crores. Given below is the list of these 14 Banks nationalised in 1969: Best Study Materials – Videos, Mock Tests, PDF for JAIIB Exams | test.ambitiousbaba.com 11  Ambitiousbaba.com Paid Course 1.Allahabad Bank 2.Bank of India 3.Bank of Baroda 4.Bank of Maharashtra 5.Central Bank of India 6.Canara Bank 7.Dena Bank 8.Indian Overseas Bank 9.Indian Bank 10.Punjab National Bank 11.Syndicate Bank 12.Union Bank of India 13.United Bank 14.UCO Bank In the year 1980, another 6 banks were nationalised, taking the number to 20 banks. These banks included: Andhra Bank Corporation Bank New Bank of India Oriental Bank of Comm. Punjab & Sind Bank Vijaya Bank Apart from the above mentioned 20 banks, there were seven subsidiaries of SBI which were nationalised in 1959: State Bank of Patiala State Bank of Hyderabad State Bank of Bikaner & Jaipur State Bank of Mysore State Bank of Travancore State Bank of Saurashtra State Bank of Indore Best Study Materials – Videos, Mock Tests, PDF for JAIIB Exams | test.ambitiousbaba.com 12  Ambitiousbaba.com Paid Course All these banks were later merged with the State Bank of India in 2017, except for the State Bank of Saurashtra, which merged in 2008 and State Bank of Indore, which merged in 2010. Note: The Regional Rural Banks in India were established in the year 1975 for the development of rural areas in India. Liberalisation Period (1991-Till Date) Once the banks were established in the country, regular monitoring and regulations need to be followed to continue the profits provided by the banking sector. The last phase or the ongoing phase of the banking sector development plays a hugely significant role. To provide stability and profitability to the Nationalised Public sector Banks, the Government decided to set up a committee under the leadership of Shri. M Narasimham to manage the various reforms in the Indian banking industry. The biggest development was the introduction of Private sector banks in India. RBI gave license to 10 Private sector banks to establish themselves in the country. These banks included: Global Trust Bank ICICI Bank HDFC Bank Axis Bank Bank of Punjab IndusInd Bank Centurion Bank IDBI Bank Times Bank Development Credit Bank What Is Profitability Before moving to Branch Profitability, let us first have a broad view of profit and profitability. Profitability is a measure of an organization’s profit relative to its expenses. Organizations that are more efficient will realize more profit as a percentage of its expenses than a less-efficient organization, which must spend more to generate the same profit. In other words, Profitability is a measurement of efficiency – and ultimately its success or failure. What Is Profit? Profit is the money a business pullsin after accounting for all expenses. Whether it’s a lemonade stand or a publicly-traded multinational company, the primary goal of any business is to earn money, therefore a business performance is based on profitability, in its various forms. Best Study Materials – Videos, Mock Tests, PDF for JAIIB Exams | test.ambitiousbaba.com 13  Ambitiousbaba.com Paid Course Some analysts are interested in top-line profitability (Gross Sales), whereas others are interested in profitability before taxes and other expenses. Still others are only concerned with profitability after all expenses have been paid (bottom- line profitability). Three major types of profit Gross profit Operating profit, and Net profit Gross Profit The first level of profitability is gross profit, which is sales minus the cost of goods sold. Sales are the first line item on the income statement, and the cost of goods sold (COGS) is generally listed just below it. For example, if Company A has ₹1,00,00,000/- in sales and a COGS of ₹60,00,000/- it means the gross profit is ₹40,00,000/-, (i.e. ₹1,00,00,000 minus ₹60,00,000/-). Divide gross profit by sales for the gross profit margin, which is 40% (i.e. ₹40,00,000/- divided by ₹1,00,00,000/- multiplied by 100). Gross Profit = Total Sales − Cost of Goods Sold Operating Profit The second level of profitability is Operating Profit, which is calculated by deducting operating expenses from gross profit. Gross profit looks at profitability after direct expenses, and operating profit looks at profitability after operating expenses. These are things like selling, general, and administrative costs (SG&A). Company A (stated above) has ₹20,00,000/- in operating expenses, and hence, the Operating Profit is ₹40,00,000/- minus ₹20,00,000/-, which is equal to ₹20,00,000/-. Divide operating profit by sales for the operating profit margin, which is 20%. Operating Profit = Gross Profit − Operating Expenses Operating Profit Margin = Operating Profit/ Total Sales Net Profit The third level of profitably is net profit, which is the income left over after all expenses, including taxes and interest, have been paid. If interest is ₹5,00,000/- and taxes are another ₹5,00,000/-, net profit is calculated by deducting both of these from operating profit. In the example of above Company, the answer is ₹20,00,000/- minus ₹10,00,000/-, which equals ₹10,00,000/-. Divide net profit by sales for the net profit margin, which is 10%. Net Profit = Operating Profit − Taxes & Interest Profit And Profitability In The Context Of Banking Best Study Materials – Videos, Mock Tests, PDF for JAIIB Exams | test.ambitiousbaba.com 14  Ambitiousbaba.com Paid Course Like other businesses, banks profit by earning more money than what they pay in expenses. The major portion of a bank’s profit comes from the interest that it earns on its assets mainly and fees it charges for its services. Its major expense is the interest paid on its liabilities. The major assets of a bank are its loans and advances to individuals, businesses, and other organizations and the securities that it holds, while its major liabilities are its deposits and the money that it borrows, either from its customers or other banks or by selling commercial paper in the money market. Banks increase profits by using leverage or gearing, which is the extent to which the banks fund its assets with borrowings rather than equity. Profits can be measured as a return on assets and as a return on equity. Because of leverage, banks earn a much larger return on equity than they do on assets. Traditional Measures Of Profitability The traditional measures of the profitability of a business are primarily its Return on Assets (ROA) and Return on Equity (ROE). Assets are used by businesses to generate income. Loans and securities are bank’s assets and are used to provide most of a bank’s income. However, to make loans and to buy securities, a bank must have money, which comes primarily from the bank’s owners in the form of bank capital, from depositors, and from money that it borrows from other banks or by selling debt securities — a bank buys assets primarily with funds obtained from its liabilities as can be seen from the following classic accounting equation: Assets = Liabilities + Bank Capital (Owners’ Equity) Return on Asset (ROA) Return on Asset is determined by the amount of income that it earns on its Net Interest income and fees on its services. Net interest income depends partly on the Interest Rate Spread, which isthe Average Interest Rate earned on it assets minus the Average Interest Rate paid on its liabilities. Net Interest Margin shows how well the bank is earning income on its assets. High net interest income and margin indicates a well- managed bank and also indicates future profitability. Best Study Materials – Videos, Mock Tests, PDF for JAIIB Exams | test.ambitiousbaba.com 15  Ambitiousbaba.com Paid Course Net Interest Margin = Net Interest Income / Average Total Assets Return on Asset for Banks: (Note: Herein we will refer to Average Total Assets as simply Bank Assets.) Return On Equity (ROE) For Banks The return on equity is what the bank’s owners are primarily interested in because that is the return that they earn on their investment, and depends not only on the return of assets, but also on the total value of the assets that earn income. However, to purchase more assets, a bank needs to pay for it either with more liabilities or with bank capital. Therefore, if the owners want to earn a greater return, they would rather use liabilities rather than their own capital because this greatly increases their return. When a bank increases its liabilities to pay for assets, it is using leverage, otherwise a bank’s profit would be limited by the fees that it can charge and its interest rate spread. But the interest rate spread is limited by what a bank must pay on its liabilities and what it can charge on its assets. Since banks compete with each other for depositors and deposits compete with other investments, banks must pay competitive market rate to attract depositors. Likewise, banks can only charge so much for loans since there is competition from other banks and businesses can get loans by selling debt securities, either commercial paper or bonds, in the financial markets. Hence, interest rate spreads are not wide, so a bank can only earn more net interest income by increasing the number of loans that it makes compared with the amount of its bank capital, which it does by using leverage: Best Study Materials – Videos, Mock Tests, PDF for JAIIB Exams | test.ambitiousbaba.com 16  Ambitiousbaba.com Paid Course The leverage that banks use is similar to a business using debt to increase its earnings. After all, deposits are just money that the bank owes to its depositors. Hence, the leverage ratio is the same as the debt ratio used to determine the leverage of other business types. The return on equity can be increased by increasing leverage, but banks can only increase leverage by so much, because with increased leverage comes increased risk. For instance, let us consider the following hypothetical bank: Bank Assets = ₹ 100 Bank Liabilities = ₹ 95 Bank Capital = ₹ 5 This is a leverage ratio of 20 to 1 (₹100/₹5). If the value of its assets drops just 5%, then the bank’s capital will be wiped out. To protect the safety of the banking system, the regulator (i.e. RBI in India) restricts the amount of leverage that banks can have. In USA to protect the safety of the banking system, the Federal Reserve restricts the amount of leverage that banks that are depository institutions can use. Typically, the leverage ratio is about 10 to 12. In other words, a bank’s assets may have at least 10 times the value of its capital, but not much more. Branch Operating Efficiency With the challenges banks are facing these days, it’s becoming clear that banks must get the best “bang for the buck” from all resource expenditures. Continued inefficiency at a bank might be robbing important efforts of the resources banks need to be fully successful. But a focus on cutting costs alone is not a formula for long-term success. A balanced approach – one that enables a bank not only to improve operating efficiency but also to upgrade its capabilities to respond to market needs and prepare for the future – is imperative to the success of a bank’s operations and profitability. Why Efficiency matters for Bank Operations As with any business, banks must be vigilant about spending wisely. Today, however, the banking industry faces a new combination of circumstances that are giving special impetus to the need for efficiency. Changes in customer preferences and expectations, new competition, and new technologies are transforming the nature of banking. Best Study Materials – Videos, Mock Tests, PDF for JAIIB Exams | test.ambitiousbaba.com 17  Ambitiousbaba.com Paid Course The business of banking is morphing toward a digital- and technology-based model while retaining important aspects of the traditional person-to-person business model. To remain competitive, banks need to invest in technology, marketing, automation, and self-service capabilities, and also must optimize their legacy investments in branches and traditional systems. Setting operating targets for improvement Banks today are focusing how, and by how much, efficiency and costs can be improved. Every institution is unique, of course, so the size of the improvement opportunity will vary greatly from one bank to another and also from one branch to another. Industry experience suggests that a concentrated and carefully executed efficiency initiative should be able to achieve significant savings. The outcomes are not always realized through direct cost reductions. Ideally, improved efficiency means processes that are scalable and that support a faster pace of growth for the bank’s revenue stream and asset base than for its overhead costs. Strategies For Improving Efficiencies Of Banking Operations Business realignment Channel optimization Process costs Staff productivity Technology and automation Vendor Management Product Bundling and Relationship Pricing Cross-lob data sharing and building a 360-degree Customer View Sophisticated customer segmentation Real time cross –selling/up –selling Innovative Reward Design Automating Customer Care Digital Revolution Big Data Multi-Channel Seamless Experience Innovative Bank Branch Design Instilling a culture that values efficiency Factors Affecting Profitability of Banks In India The results indicate that profitability of banks in India is affected by both internal and external factors. Strength of equity capital, operational efficiency, ratio of banking sector deposits to the gross domestic product (GDP, cost of funds, non-performing assets(NPA) are few of the external factors which affect bank profitability whereas inflation, government policies, competition, etc. are few external factors affecting the profitability. Broadly the profitability of banks is affected by three major factors as follows: Best Study Materials – Videos, Mock Tests, PDF for JAIIB Exams | test.ambitiousbaba.com 18  Ambitiousbaba.com Paid Course Macro-economic factors-The profitability of banks respond positively to GDP growth and negatively, to inflation growth rate. Inflation has a strong effect on profitability of banks and banks’ profits are not significantly affected by the real GDP fluctuations. Low interest rates along with stiff competition among banks put pressure on interest margins of banks and hence negatively affect bank profitability. Industry Specific Factors-NPAs have the most adverse impact on the profitability of banks. They reduce the profitability due to increase in operating costs and decline in their interest margins. Other Bank Specific Factors-There exists a positive relationship between deposits and profitability as more deposits a bank collects, higher will be the availability of funds for generating loans and for other profitable uses such as investments. Non-interest income of the bank consisting of commission income, service charges, and fees, guarantee fees, net profit from sale of investment securities, and foreign exchange profit is another factor in determining the bank’s profitability. Steps To Improve Branch Profitability Focus on balancing profit, growth and risk Assess the strategic fit and unique role for each branch in the network Analyse the current customer base for each branch Identify your best new prospect (potential customers) opportunities Analyse the competition Set specific goals by branch for business and consumer markets Execute effective marketing campaigns to drive customer origination, retention and expansion Redefine the bank model of the future Besides the strategic steps stated above, the branches should also ensure to focus on the following steps too to improve profitability. Relentless focus on NPA reduction More quality loans Focus on non-interest income Low cost deposit Holding Minimum Cash Balance Cost Management Good Customer Relationship Courteous behaviour by Branch Head Essential Factors To Make Continuous Improvement In Profitability Locating areas in your business that could be improved or made more efficient, e.g. general business processes or administration Best Study Materials – Videos, Mock Tests, PDF for JAIIB Exams | test.ambitiousbaba.com 19  Ambitiousbaba.com Paid Course Using key performance indicators (KPIs) to analyse your strengths and weaknesses, e.g. rising costs or falling sales Assessing your general business costs, e.g. overheads, how discounted deals with loyal customers affect your profits, how productive your staff are Reviewing your areas of business waste and reduce them, e.g. power supply costs Regularly reviewing the pricing of your products Testing the prices of any products you review before making the changes permanent Improving your profitability through your best customers - use up-selling, cross selling and diversifying techniques to improve your profit margins Identifying areas of expenditure and limit these by bargaining with your suppliers Long-term deals with suppliers to negotiate a better price on products Researching new opportunities in your business sector and identifying where you could expand the market Put monitoring systems and processes in place, e.g. benchmarking. JAIIB RBWM Module B (Retail Products and Recovery) Index No. of Unit Unit Name Unit 1 Customer Requirement Unit 2 Product Development Process Unit 3 Credit Scoring Unit 4 Important Retail Liability Products Unit 5 Important Retail Asset Products Unit 6 Credit and Debit cards Unit 7 Remittance Products Unit 8 Digitisation of Retail banking products Unit 9 Role of AI and Technology in Retail Banking Unit 10 Recovery of Retail Loans Unit 11 Management Information Systems Unit 12 Securitization JAIIB RBWM Module B Unit 1: Customer Requirement Best Study Materials – Videos, Mock Tests, PDF for JAIIB Exams | test.ambitiousbaba.com 20  Ambitiousbaba.com Paid Course Customer Requirement Retail Product Overview Approval Process for Retail Loans Due Diligence (Verification of KYC with relevant documents, Pan Number, House visit etc etc..) Quantum of loan Quantum of loan is either related to the product or to the income of the individual. The quantum is expressed as 12th times the monthly income in the case of loans for personal expenses. 4 times the annual income in the case of vehicles, 48 to 60 times the monthly income for the purpose of housing etc. Margin may vary from 15% to 30% of the value of asset, depending on the type of loan/scheme. Payment Period The repayment period may vary from 3yrs to 30 yrs depending on the purpose. Loans for personal expense are to be repaid within 3 years. Auto loans are given for duration of 5 to 7 years; Housing loans for 5 to 30 years. Customer Requirements Let us first try to understand the customer segment first before discussing about their requirements. Broadly customers are segmented based on their income levels as their need pyramid will vary with the rise in their income levels. Banks develop and market their products based on this segmentation and target the relevant segment for maximum conversion of business. The basic segmentation of customers based on their income levels is presented below. Income Levels Lakhs) Customer Segment (Rs. 2-10 Mass Market 10-50 Mass Affluent 50-400 Super Affluent 400-4,000 HN W 4000-120,000 Super HNW Above 120,000 Ultra HNW The fundamental assumptions about customers for building retail banking products and services are briefly explained as follows: Customers are different. Needs of the customers are different Each customer will have different sets of need for financial services. Best Study Materials – Videos, Mock Tests, PDF for JAIIB Exams | test.ambitiousbaba.com 21  Ambitiousbaba.com Paid Course The need requirements of customers for financial services will be unique. Customers can be broadly grouped together based on their need pyramids. Customers can be grouped together based on their income, age, geography, profession, employment, vocation gender and family size. Product and services can be developed for a single or a combination of the above elements to satisfy most of the needs. Products and services can be structured on a niche basis within one or any of the above elements. Moslow's Theory and Customer Requirements Maslow has defined five needs of individuals in their various stages of life. The needs start from the basic requirements and move up the value chain during the life stage progression. Obviously, the need ladder will also move up with the change in the life stage of the customers. If banks structure products and services to match the different stages in the need spectrum, banks will achieve the twin objectives of customer satisfaction and business conversion. Let us demonstrate the above concept with the following illustration: Investment and Insurance Need Level Matching Banking Products Physiological Needs Core Savings Accounts Personal Accident Cover Housing Loans Best Study Materials – Videos, Mock Tests, PDF for JAIIB Exams | test.ambitiousbaba.com 22  Ambitiousbaba.com Paid Course Security/Safety Needs Recurring, Fixed Deposit Products. Life Insurance Products Endowment Products with low premium, long tenor and high maturity amounts. Tax Planning Banking, Insurance and Mutual Fund Products Social Needs Consumer Loans Personal Loans Home Loans Car Loans Loans for Professional Development for Doctors, Engineers, Lawyers, Chartered Accountants, Management Consultants, Architects etc., Insurance Cover tagged to above loans. Retail Gold Coins. Health Policies for self and family. Investment Products like Mutual Fund Schemes. Systematic Investment Plans of Mutual Funds. Unit Linked Insurance Products. Esteem Needs Special Term Deposit Products. Term Insurance Products. Second Housing Loans/ Home Improvement/ Home Decor Loans. Self Actualization Needs Pensioners Loans Retirement Solutions in Banking & Pension Plans in Insurance Senior Citizens Term Deposit Products Customer Requirements about Service Quality Service quality is what customers expect from Banks and has different dimensions. Following are some of the requirement s/expectations form the customers about the service quality of banks. (a)Tangibles: Appearance of physical facilities. equipment, personnel and communication materials Are bank's facilities attractive? Is my credit card statement easy to understand? (b)Reliability: Ability to perform the promised service dependably and accurately. Where an Officer says that the amount will be sanctioned in 2 days, does he follow up and inform the status? Is my credit card statement accurate? (c)Responsiveness: Willingness to help customers and provide prompt service. Best Study Materials – Videos, Mock Tests, PDF for JAIIB Exams | test.ambitiousbaba.com 23  Ambitiousbaba.com Paid Course When there is a problem with the bank statement, does the bank resolve the bank quickly? Are the charges which are debited wrongly are recredited to my account properly, (d)Assurance Competence - Possession of required skills and knowledge to perform services. Courtesy - Politeness, respect, consideration and friendliness of the contact personnel. Credibility - Trustworthiness about the service provider. Security - Freedom from risk and doubt. (e)Empathy Access - Approachability and ease of contact. Communication - Keeping customers informed in a language that they understand. Understanding the customer - Making an effort to know customers and their needs. Service Quality Savings Bank The following dimensions revealed the service quality and delivery parameters for savings accounts: Touch point Experience: Overall Measures - At an overall level, the PSU bank is comparable to the PS banks average across touch points. Branch-Layout and Cash transactions: Performance across parameters above PS banks average. Savings Account: No serious concerns on savings account; Parameters at or above par vis-a-vis private banks. Branch Non-Cash Transactions: Scores on most parameters at par with PS Banks average. Communication: Communication channels available along with information How to customer meets average expectations. Problem Incidence/Recurrence - Very low problem incidence just like the industry. Key Performance Indicator - Savings Account Activation Time - Account activation within 3-day window similar to industry average. Key Performance Indicator - Welcome Kit Receipt Time - Close to 90% receive welcome kit within 14 days. Customer Mindspace (Image Map) - The PSU Bank differentiated on problem resolution & delivering on promise, amongst its customers. Further Mreasures Needed to Enhance Service Quality The study suggested further measures to improve the service quality to meet the customer expectations with regard to savings accounts. Need to improve transaction time at the branch. Best Study Materials – Videos, Mock Tests, PDF for JAIIB Exams | test.ambitiousbaba.com 24  Ambitiousbaba.com Paid Course Branch offerings need to be relooked at, in terms of range of services offered, in light of people-related drivers being seen as driving overall customer satisfaction. Lack of adequate channels is felt by the customer, in addressing his needs. Need to relook at current channels and their ease of access/usage for the customer. Home Loans The PSU Bank came second in the rankings for service quality with regard to Home Loans. Important service parameters satisfied by the Bank are listed below : The PSU Bank index is above the average for the Cluster it belongs to. Drivers of Satisfaction (Identifying the most important touch points): Product features and communication seen to be driving overall experience the most. Overall Measures: At an overall level, the Bank scored above PS banks average across touch points. Home loan parameters perform above PS banks average. Communication channels & communication received from the bank, all score above PS banks average. Loan Disbursement Time: Disbursement within the 14 day window for the bank far higher than Industry average. Customer Mindspace (Image Map) -The Bank differentiated on responsiveness and customer service, amongst its customers. Measures Needed to Enhance Service Quality The bank has scored across parameters at par or above PSU banks' average. But to enhance the service quality, bank has to take the following initiatives. Bank has to focus on strengthening performance across parameters Bank has to pay special attention to range of product features. Proactive customer communication needs to have a systemic approach. Customer-friendly modules on branch network, new products and services need to be developed. Score comparatively lower on handling special requests. Need to reorient employees, towards this key aspect of customer experience, through training and reviews around service time. Customers' Requirement from Banks Generally, customers require the following from their bank/s for maintaining their accounts/relationship. Right product mix to satisfy different customer segments. Right channel mix (both direct channels and e channels). Structured process time across products and adherence to the time prescriptions. Delivery of the promises with regard to products/services and channels. Satisfactory service experience from the delivery channels and the service personnel. Best Study Materials – Videos, Mock Tests, PDF for JAIIB Exams | test.ambitiousbaba.com 25  Ambitiousbaba.com Paid Course Effective Communication about the different products and services. Transparent service charges. Good ambience. Effective and time bound greivance redressal mechanism. Join Telegram Group For Mock test and Video Course Visit: test.ambitiousbaba.com Join Free Classes: JAIIBCAIIB BABA Download APP For Study Material: Click Here JAIIB RBWM Unit 2: Product Development Process Product Development Process Best Study Materials – Videos, Mock Tests, PDF for JAIIB Exams | test.ambitiousbaba.com 26  Ambitiousbaba.com Paid Course In retail banking, product is the starting point of the marketing process. Product is the fulcrum on which the entire retail banking revolves. Everything is centered on it. The add on and the other value propositions are tagged to the products to offer better value and acceptance to the product. The different definitions for product are discussed below: Theodre Levitt observes that "Products are almost always combinations of the tangible and the intangible. To the potential buyer, a product is a complex cluster of value satisfactions... A customer attaches value to a product in proportion to its perceived ability to help solve his problems or meet his needs. All else is derivate". A bank product can be defined as "Anything that has the capacity to provide the satisfaction, use and return desired by the customer". Product Life Cycle There are various stages in the life of the product. The product after development goes through different stages in its sales journey and in each stage, the impact on sales will be different. Introduction Growth Maturity Decline Product Lines of a Banker To be successful in retail banking, any Bank has to understand different segments and develop appropriate products to meet these segments. Though different products cater to different segments, there are certain products like core products which cater to all segments. Products can be broadly classified into following: Deposit Products or Liability Products Asset Products or Retail Credit Products Other Products and Services. Deposit Products or Liability Products In the Deposit Product category, the products can be classified into Saving Deposit Current Deposit Term Deposit Demand Deposit (CASA Deposit) Current Accounts (CA) Best Study Materials – Videos, Mock Tests, PDF for JAIIB Exams | test.ambitiousbaba.com 27  Ambitiousbaba.com Paid Course Core Current Accounts Basic Current Account with Cheque Book Augmented Current Accounts Basic Current Account with Cheque Book + Value Additions like tagged insurance cover (life and non life) Other concessions like fi remittance etc. Saving Accounts (SA) Basic Savings Account with Cheque Book, Debit Card Value Additions like tagged insurance cover (life and non life) Personal Accident Cover Sweep In/Sweep Out Facility Other concessions like free remittance etc., Saving Accounts (SA) Term Deposit (Fixed Deposits) Recurring Deposits Deposit can be built up on a monthly basis. Term Deposit Interest Rate tor the relevant period. Flexibility with respect of amount payable every month Fixed Deposits Deposits offered lor a fixed period. Option to receive interest at maturity/monthly/quarterly/half yearly. Interest also reinvested ad payable on matumy along with principal Combination Term Deposits Combination of Recurring Deposits and Fixed Deposits. Different combinations are structured. The first part will be in the form of RD and the second part will be on any one type of fixed deposit. Basic Savings Bank Deposit Account (BSBDA) The Basic Savings Bank Deposit (BSBD) Account has been designed as a savings account which will offer certain minimum facilities, free of charge, to the holders of such accounts. Minimum Common Facilities The ‘Basic Savings Bank Deposit Account’ should be considered a normal banking service available to all. This account shall not have the requirement of any minimum balance. Best Study Materials – Videos, Mock Tests, PDF for JAIIB Exams | test.ambitiousbaba.com 28  Ambitiousbaba.com Paid Course The following basic minimum facilities will be offered in the BSBD Account, free of charge, without any requirement of minimum balance. 1. The deposit of cash at bank branch as well as ATMs/CDMs 2. Receipt/ credit of money through any electronic channel or by means of deposit /collection of cheques drawn by Central/State Government agencies and departments 3. No limit on number and value of deposits that can be made in a month 4. Minimum of four withdrawals in a month, including ATM withdrawals 5. ATM Card or ATM-cum-Debit Card No charge will be levied for non-operation/activation of in-operative ‘Basic Savings Bank Deposit Account’. Banks are free to provide additional value-added services, including issue of cheque book, beyond the above minimum facilities, which may/may not be priced (in non-discriminatory manner) subject to disclosure. The availment of such additional services shall be at the option of the customers. However, while offering such additional services, banks shall not require the customer to maintain a minimum balance. Offering such additional services will not make it a non-BSBD Account, so long as the prescribed minimum services are provided free of charge. The BSBD Account shall be subject to RBI instructions on KYC/AML for opening of bank accounts. Holders of ‘Basic Savings Bank Deposit Account’ will not be eligible for opening any other savings bank deposit account in that bank. If a customer has any other existing savings bank deposit account in that bank, he/she will be required to close it within 30 days from the date of opening a ‘Basic Savings Bank Deposit Account’. The minimum free withdrawals available to the BSBD Account holders can be made at all ATMs (own-bank/other bank ATMs). Small Account In terms of Rule 2 clause (fb) of the Notification 'small account' means a savings account in a banking company where- The aggregate of all credits in a financial year does not exceed rupees one lakh; The aggregate of all withdrawals and transfers in a month does not exceed rupees ten thousand; and The balance at any point of time does not exceed rupees fifty thousand. Rule (2A) of the Notification lays down the detailed procedure for opening 'small accounts'. Banks are advised to ensure adherence to the procedure provided in the Rules for opening of small accounts. Know Your Customer Forms (KYC Forms) KYC Forms, as said earlier, are required to be obtained from all the account holders while opening the account itself. It is obtained as an Annexure to the Account Opening Best Study Materials – Videos, Mock Tests, PDF for JAIIB Exams | test.ambitiousbaba.com 29  Ambitiousbaba.com Paid Course Form. It throws light on the different dimensions of the customers and helps the banks to deal with them appropriately. The important details which are to be furnished in the KYC Form are discussed below: Name and Address of the Customer and PAN/TIN Number Details of Spouse/Father and also Son(s)/Daughter(s) Type of Account - Savings/Current/Term Deposit/Loan (iv) Age - Age band - < 20, 21 -40,41 -60 and >60. Occupation - Details of Service, Profession, Others Educational Qualifications - Non Graduate, Graduate, Post Graduate, Others Nationality Accomodation - Own/Residential Conveyance - Two Wheeler/Car etc., Telephone Credit Card - Details of Credit Cards held Details of Deposits/Loans held with other branches/banks Purpose of opening the account. Source of funds - Salary/Business etc., Annual Income If in business, all business details Details of passport, if any. Details of foreign countries visited during the past three years. Any other relevant information. Credit Products Credit products offered by the bank, again, can be classified into two broad categories, traditional credit schemes and market oriented new credit schemes. Traditional credit products are cash credit accounts for business people to fix credit limits and allow them to operate freely within the limits subject to certain stipulations. Overdraft scheme is to allow credit for a short period to be adjusted in a very short time. Retail Credit Products Home Loans Auto Loans Personal Loans Credit Card Receivables Other Retail Loans Other Services In the other services category, all the services offered by the bank other than the Deposit schemes and Credit schemes can be grouped. Again it can be further classified into Remittances and other Fee Based Services. In the remittances services, issue of Drafts, Bank Orders/Bankers Cheques, National Electronic Funds Transfers (NEFT), Real Time Gross Settlements Best Study Materials – Videos, Mock Tests, PDF for JAIIB Exams | test.ambitiousbaba.com 30  Ambitiousbaba.com Paid Course (RTGS) are the types of services offered to the customer. The cost of availing these services will depend on the quantum of transactions and the customer's business relationship with the bank. In other fee based services, Collection of Cheques, Safe Deposit Lockers, Standing Instructions for carrying out the instructions of the customer on a periodic basis. 'Other Services' is the non fund based business of the banks. In these types of services, the bank will be guaranteeing on behalf of the customer for whom they will be offering these products. Two examples of non fund based business for the banks are: Letter of Guarantee Letter of Credit Co-acceptance of bills Stages In New Product Development Generating new product ideas Idea screening Concept Testing Business analysis and Market analysis Actual product development, test marketing and commercialisation : Product Management According to Theodre Levitt, product, over a period, evolved on the following lines : The Generic Product The Expected Product The Augmented Product The Potential Product Best Study Materials – Videos, Mock Tests, PDF for JAIIB Exams | test.ambitiousbaba.com 31  Ambitiousbaba.com Paid Course Product Policy Product policy is one of the main tasks in product management. The marketer should decide what exactly the products to be offered to different segments are. Again if the customer base is fairly very large, the product line should be based on the homogenous needs of the heterogeneous customer base and customer segments. Otherwise it will result in unwieldy product range. But of course the marketer has to consider designing product tailored to specific customer base if the segment is an important segment. For deciding that the marketer should develop a product policy which involves the following concepts: Appraisal of the product line and individual products Decisions on product differentiation Product positioning Brand decisions Decisions on packaging New Product Development JAIIB RBWM Module B Unit 3: Credit Scoring Risk The types of risks and the triggers for the risk are mentioned below: Credit Risk - Customer fails to pay Business Risk - Loosing money due to wrong strategy. Market Risk - Change in market prices. Operations Risk - Processing failures and frauds, Credit Scoring -Concepts Every borrower seeks the lowest interest rate, every lender the highest. The return a lender seeks factors in, apart from his profit, a premium for the risk he feels he bears Best Study Materials – Videos, Mock Tests, PDF for JAIIB Exams | test.ambitiousbaba.com 32  Ambitiousbaba.com Paid Course of not being paid back. This risk perception is different for different borrowers and, ideally, should be determined from their credit history. What is a Credit Score? A credit score takes a 'snapshot' of a consumer's credit report and through advanced analytics turns the information into a 3-digit number representing the amount of risk he brings to a particular transaction. For instance, the Cibil- TransUnion model gives scores ranging from 300 to 900. The higher the score, the lesser is the risk of the consumer going 91-plus days overdue in the next year. While credit scores are new to India, the US has had them since 1989, when the FICO scores were launched. The lines of credit assessed to arrive at this score would mainly be retail products like home loans, auto loans, personal loans, credit cards and overdrafts. What's a Good Credit Score? Whether a score is good or not will depend on the bank's internal policy, its customer profile and its risk appetite. Some bank may perceive 700 as a good score and another may not. Thus, in India, different banks will rank different scores as good. Still, any score over 800 will be considered excellent across the board. But credit score is only an indicative tool for managing risk and its effectiveness depends on the banks' internal control mechanism. An objective thing like the credit score will not only help the banks to reduce defaults but also make loan disbursing faster, improve operational efficiency and bring costs down. Credit Scoring Model CICs typically build scores using three historical data files: Defaults on previous credit transactions Payment behavior/ Payment history Previous searches/inquiries Managing the Credit Score We have studied about the two important determinants of the credit scoring by banks. But to effectively manage the credit score, the following points are very important. Credit Utilization: Effective credit utilisation is a very important step in individual's credit score. If your safe limit is Rs 10000 and you are using only Rs 5000, then you are a very safe customer. If your limit is Rs 10000 and you are not only fully using it, but also seeking further credit, you could be overleveraging yourself and your score could fall. Payment Defaults: How many past accounts are due, by how many days and by how much? The fewer, the better. Trade Attributes: How old are your lines of credit and what type are they? Do you have a good mix or is it, say, all credit cards? A history of consistent repayment of various types of credit will improve your score. Best Study Materials – Videos, Mock Tests, PDF for JAIIB Exams | test.ambitiousbaba.com 33  Ambitiousbaba.com Paid Course Positive Side of Credit Score A good credit score will indicate the character of the borrower in his financial matters. The following are some of the indicators of good score. Evidence of financial discipline. If the borrower has defaulted once or twice due to reasons beyond their control, those would show up as clear aberrations in an overall consistent payment history. The longer the credit history, the better. The lender's assessment presumably improves as he gets bigger spans of repayment. One should be judicious about closing old accounts and opening new ones. Warning Signs In Credit Score The behavioroul pattern of the borrowers will impact the credit score of the borrowers. The following are some of the signals. Craving for credit. Frequent and unnecessary shopping for credit, Several new accounts or recent requests for loans can be taken as signs of an over- hungry borrower. The length of credit history is also important. Older accounts are generally better, so you should be judicious about closing old accounts and opening new ones. Trade attributes - does the customer use a good mix of credit? Credit Information Companies in India Presently, four CICs Credit Information Bureau (India) Limited Equifax Credit Information Services Private Limited Experian Credit Information Company of India Private Limited CRIF High Mark Credit Information Services Private Limited have been granted Certificate of Registration by RBI. In terms of Section 15 of the Credit Information Companies (Regulation) Act, 2005 (CICRA), every Credit Institution shall become member of at least one CIC. Further, Section 17 of CICRA stipulates that a CIC may seek and obtain credit information from its members (Credit Institution / CIC) only. As a result, when a Specified User, as defined in CICRA and Credit Information Companies Regulations, 2006, obtains credit information on a particular borrower/client from a CIC, it gets only such information that has been provided to the CIC by its members. Factors lending to favourable credit score Best Study Materials – Videos, Mock Tests, PDF for JAIIB Exams | test.ambitiousbaba.com 34  Ambitiousbaba.com Paid Course On time loan EMI payments. Regular payment of credit card bills. Paying credit card bills in full rather than paying minimum due amount every time. Avoiding over-leveraging Maintaining strong financial records. Too Many forms of credit (such as unsecured person loans) among family members. Proper utilization of approved credit limit. Factors leading to negative credit score Too many credit report enquiries by banks and other institutions. Cheque bounces/dishonours. Irregular loan repayment. Defaulting on credit card bills/making late payments or consistent part payements. Too much unsecured credit such as multiple personal loans. Multiple applications for unsecured loan getting rejected. Defaulting as a guarantor. High utilization of approved credit limit or overshooting the limit. Errors in record by banks and other finance institutions. Issues in credit scoring Three common credit problems are: Lack of enough credit history. Denied credit application. Fraud and identity theft. Mistakes In Credit Scoring Confusion of Names Human Input Error Identity Theft Troubleshooting Credit Score We have to accept that there are chances of mistake in arriving of credit score or mistaken identities creating confusion in the scoring process. Errors and inaccuracies are possible with Credit Information Report. The steps for seeking clarifications in your credit report are as follows: Contact the bank that declined a credit card or loan application on the basis of your poor credit score. Ask them for a clarification on the poor credit score and request them to provide the control number for your credit report. Best Study Materials – Videos, Mock Tests, PDF for JAIIB Exams | test.ambitiousbaba.com 35  Ambitiousbaba.com Paid Course The bank will provide you with the control number of the credit report and also share the information on the credit report that is responsible for your poor credit score. Provisions are available in the website of the CICs for resolving disputes. The control number is a nine-digit unique number that helps to track an individual’s credit report from CIC’s database. The control number is generated when banks pull out your credit report on a requirement basis. The control number is a unique number, which is generated every time any bank or credit institution pulls out a credit report on you. CIC requires this number because it enables them to view the exact details that the bank has seen when they drew a report on you. Hence, it is important for you to request the bank to provide you the control number. JAIIB RMWM Module B Unit 4: Important Retail Liability Products An Introduction to Retail Liability Intermediation is the primary function of banks and mobilisation of deposit is the first step to intermediation. They accept deposit from public and lend it to the enterprise class engaged in productive activities. On loans and advances banks charge some additional interest rate. Banks don’t have their own money and so they lend from the deposited money. Banks normally pay interest on the money deposited by public which lies with the banks. Therefore, the deposited money is the banks liability as interest is paid on that sum to the depositor. On the other hand, the money given out as loan becomes the asset for the bank and earns interest. Main Retail Liability Products of Banks As stated above, main Retail Liability Products of Banks constitute various types of DEPOSIT accounts. Banks accept various types of deposits. These are, Demand deposits: Are payable on demand Term deposits: Are repayable on expiry of the period and also known as Time deposit/ Fixed deposit Recurring Deposit: Help people with regular income to save a fixed income every month and at the same time earn interest at the rate applicable to Fixed Deposit. Current Deposit Account Current Deposit account is opened by businessmen who have a higher number of regular transactions with the bank. It includes deposits, withdrawals, and contra transactions. In current account, amount can be deposited and withdrawn at any time without giving any notice. Best Study Materials – Videos, Mock Tests, PDF for JAIIB Exams | test.ambitiousbaba.com 36  Ambitiousbaba.com Paid Course It is also suitable for making payments to creditors by using cheques and online banking. Cheques received from customers can be deposited in this account for collection. Main Features Of Current Deposit Account Current deposit accounts are meant to run a business. It is a non-interest bearing bank account. It needs a higher minimum balance to be maintained as compared to the savings account. Penalty is charged if minimum balance is not maintained in the current account. It charges interest on the short-term funds/overdraft borrowed from the bank. It is of a continuing nature as there is no fixed period to hold a current account. It does not promote saving habits with its account holders. Banker requires KYC (Know your Customers) norms to be completed before opening a current account. The main objective of current bank account is to enable the businessmen to conduct their business transactions smoothly. There is no restriction on the number and amount of deposits. There is also no restriction on the number and amount of withdrawals made, as long as the current account holder has funds in his bank account. Generally, bank does not pay any interest on current account. Advantage Of Current Deposit Account To Customer Since the purpose of the deposit is generally for ‘Trading’ and ’Business’ it differs from the object of other deposit accounts which are meant to tap/mobilize the savings of the people. Current account is mainly opened by businessmen such as proprietors, partnership firms, public and private companies, trust, association of persons, etc. that has a large number of daily banking transactions, i.e. receipts and/or payments. It enables businessmen to carry out their business transactions properly and promptly. The businessmen can withdraw from their current accounts without any limit, subject to banking cash transaction tax, if any, as stipulated by the individual bank. Home branch is that location where one opens his bank account. Normally, there are no restrictions on deposits made in the current account opened in a home branch of a bank. However, the current account holder can deposit the cash to any other branch of a bank other than the home branch by paying a nominal charge as applicable/stipulated by the individual bank. It helps businessmen to make a direct payment to their creditors by issuing cheques, demand drafts or pay-orders, online fund transfers etc. It enables a bank to collect money on behalf of its customers and credits the same in their customers’ current accounts. Best Study Materials – Videos, Mock Tests, PDF for JAIIB Exams | test.ambitiousbaba.com 37  Ambitiousbaba.com Paid Course It enables the current account holder to obtain overdraft (short-term borrowing) facility subject to satisfactory conduct of the account. Third party cheques and cheques with endorsements may be deposited in the current account for collection and credit to the account, subject to certain conditions. The creditors of the account holder can get credit-worthiness information of the account holder through inter-bank connection. It facilitates the industrial progress of the country. Without its help, businessmen would face difficulties in running their businesses. It has the facilities of Internet-banking and mobile-banking to carry out important business transactions with ease and quickly. It also provides various other advantages (benefits) such as: Deposit and withdrawal of money (cash) at any location Multi-location funds transfer Electronic funds transfer Periodical (monthly, quarterly or yearly) e-mail or download of bank statements in various formats like ‘.XLS’, ‘.TXT’, ‘.PDF’, etc. Support from customer care executives Documents Required for Opening Various Types Of Current Accounts Individuals (singly/jointly): A certified copy of an OVD, as mentioned in the Master Directions on KYC, containing details of identity and address of the individual shall be obtained. Sole proprietary firm: A certified copy of an OVD, as mentioned in the Master Directions on KYC, containing details of identity and address of the individual (proprietor) shall be obtained. And Certified copy of any two the following: Registration certificate. Certificate/ licence issued by the municipal authorities under Shop and Establishment Act. Sales and income tax returns. CST/VAT certificate. Certificate/registration document issued by Sales Tax/Service Tax/Professional Tax authorities. Licence/certificate of practice issued in the name of the proprietary concern by any professional body incorporated under a statute. Complete Income Tax Return (not just the acknowledgement) in the name of the sole proprietor where the firm’s income is reflected, duly authenticated/ acknowledged by the Income Tax authorities. Best Study Materials – Videos, Mock Tests, PDF for JAIIB Exams | test.ambitiousbaba.com 38  Ambitiousbaba.com Paid Course Utility bills such as electricity, water, and landline telephone bills. Partnership firm: One certified copy of each of the following documents shall be obtained: Registration certificate Partnership deed Officially valid documents in respect of the person holding an attorney to transact on its behalf, PAN card of the entity OVD of all the partners as per master directions on KYC Hindu Undivided Family (HUF) or Joint Hindu Family: Joint Hindu Family letter A certified copy of an OVD, as mentioned in the master directions on KYC, containing details of identity and address of the individual operating the account shall be obtained. PAN Card of the HUF Limited Liability Partnership Firms: Certificate of Incorporation Copy of Resolution PAN Card of the LLP firm OVD of the designated partners as per master directions on KYC Limited Companies: A certified copy of each of the following documents to be obtained: Certificate of incorporation and Certificate of Commencement of Business in the case of public limited companies Memorandum of Association Article of Association Are solution from the Board of Directors and power of attorney granted to its managers, officers or employees to transact on its behalf Officially valid documents in respect of managers, officers or employees holding an attorney to transact on its behalf PAN Card of the entity Co-operative Societies: Certificate of registration associations, clubs, etc. of the society/association/club, if any Certified copy of the bye-laws of the society etc. Resolution of the managing committee, appointing the bank a sits bankers and stipulating the conditions for the conduct of the account List of members of the managing committee, with the copy of the resolution electing them to the committee Best Study Materials – Videos, Mock Tests, PDF for JAIIB Exams | test.ambitiousbaba.com 39  Ambitiousbaba.com Paid Course Charitable or Public Trust: A certified copy of each of the following documents to be obtained: Registration certificate Trust deed Officially valid documents in respect of the person holding a power of attorney to transact on its behalf Transgender Persons: Banks have been advised by RBI to refer to the judgement dated April 15, 2014 of the Supreme Court in the case of National Legal Services Authority v. Union of India and others [AIR 2014 SC 1863: (2014) 5 SCC 438] on treating all transgender persons as ‘third gender’. Banks should therefore, include ‘third gender’ in all forms/applications etc. prescribed by the Reserve Bank or the banks themselves, wherein any gender classification is envisaged. Apart from above business entities, current accounts can also be opened for the followings subject to completion of the necessary/required formalities: All scheduled banks All apex cooperative banks All district cooperative banks All land mortgage banks All Regional Rural Banks sponsored by any bank All urban cooperative banks Government Departments/Bodies/Corporations/ Committees /Boards/Development Authorities/ Panchayat Bodies, etc. Opening Of Current Account The following points are to be kept in mind while opening Current accounts: Cheques may also be accepted along with the cash. When the party gives a cheque drawn on his own account with another bank, it may be accepted as an initial deposit. Abundant care should be exercised while opening an account with an initial deposit by means of a demand draft. Before opening a current account of a company or firm, banks should ensure that they do not enjoy any credit facilities with any other bank/branch. The purpose of this procedure is to discourage the likely misuse of such accounts to avoid the credit discipline. As per RBI notification no. RBI/2021-22/116DOR.CRE.REC.63/21.04.048/2021- 22 dated October 29,2021 it has been clarified that banks may open current accounts for borrowers who have availed credit facilities in the form of cash credit (CC)/ overdraft (OD) from the banking system as per the provisions below: Best Study Materials – Videos, Mock Tests, PDF for JAIIB Exams | test.ambitiousbaba.com 40  Ambitiousbaba.com Paid Course (i) For borrowers, where the exposure of the banking system is less than ₹5 Crore, there is no restriction on opening of current accounts or on provision of CC/OD facility by banks, subject to obtaining an undertaking from such borrowers that they shall inform the bank(s), as and when the credit facilities availed by them from the banking system reaches ₹5 crore or more. (ii) In respect of borrowers where exposure of the banking system is ₹5 crore or more, such borrower can maintain current accounts with any one of the banks with which it has CC/OD facility, provided that the bank has at least 10 per cent of the exposure of the banking system to that borrower. Operational Instructions In Current Account Accounts of Individuals Joint Accounts Sole proprietorship firm Partnership Firm Limited Company Transfer Of Accounts As per recommendations of Damodaran Committee on Customer Service, IBA has given direction for implementing the facility of account number portability, whereby customer is allowed to maintain the same a/c number in the bank even when he/she moves to another city or shifts his a/c to another branch in the same city. Inoperative Accounts In current accounts where there are no operations continuously for two years, should be treated as inoperative accounts. Banks recover incidental charges every half year to the debit of inoperative accounts and credit to P/L Incidental Charges. The account can be made operative after the bank is satisfied with the reasons for non-operation and fresh KYC documents are obtained and duly verified. Closure Of Current Account To close your bank account permanently, you have to visit the bank and enquire about the process of closing a bank account and then write a letter to the branch manager by providing the reasons for closing the account. Also, provide the required documents for proof and verification. Saving Account Individuals have requirements to make a variety of payments regularly, such as electricity bills, telephone bills, water bills, school fees etc. Therefore, they require an account that helps them to make regular payments without having cash to use. They also like to keep some amount in their savings account for meeting their near future Best Study Materials – Videos, Mock Tests, PDF for JAIIB Exams | test.ambitiousbaba.com 41  Ambitiousbaba.com Paid Course expenditure and at the same time earn some interest. The SB Account has been designed to meet these needs of individuals. Individuals can open SB Account singly or Jointly. Advantages And Importance Of Savings Bank Deposits To Customers Saving account encourages savings habit among salary earners and others who have fixed income. It enables the depositor to earn income by way of saving bank interest. Saving account helps the depositor to make payment by way of issuing cheques. It shows income of a salaried and other person earned during the year. Saving account passbook acts as an identity and residential proof of the account holder. It provides a facility such as Electronic fund transfer (EFT) to other people’s accounts. It helps to do online shopping via facility like internet banking. It aids to keep records of all online transactions carried on by the account holder. It provides immediate funds as and when required through ATM. Enables digital transaction 24*7*365 in ‘AAA’ mode of banking. Advantages and Importance of Savings Bank Deposits to Bank Savings deposits are valuable component of CASA deposits for banks, these accounts provide the broad retail deposit base. It help banks to shore up their earnings through low cost deposits which can be profitably deployed into high yielding advances and thereby provide better interest spread and margin. Provides potential customer base for marketing of other product’s. Relatively stable in nature. Who Can Open a Savings Bank Account? Person (s) who is/are legally capable of entering into a valid contract and make application to the bank in proper manner and accept the terms and conditions and are agreeable to follow/ accept the rules and regulations stipulated by the bank can open a Savings Bank Account either singly or jointly. As the relationship between the bank and the depositor is essentially that of “Debtor” and “Creditor”, the parties to the contract should be competent to enter into the contract. Documents Required for opening Savings Bank Account Proof of identity (OVD) Proof of address in case address is different than the identity proof or no address is mention in identity proof. Recent photograph PAN card or declaration in form 60 or 61 as per I.T. Act (vide section 39A) from the person opening the account. Savings Bank Account of Minor: Best Study Materials – Videos, Mock Tests, PDF for JAIIB Exams | test.ambitiousbaba.com 42  Ambitiousbaba.com Paid Course Documents required to open a bank account for a minor: Proof of a minor’s date of birth KYC documents of the parents/guardian. Aadhaar card of a minor. Specimen signature of a guardian. The minor's specimen signature if he/she is 10 years old or above. No overdraft should be granted in Savings Bank accounts of minors held either singly or jointly with A minor is any person below the age of 18 years. Savings Bank Accounts of Illiterates No cheque book facility should be extended in account of an illiterate person. Joint account of an illiterate can be opened with a literate close relative i.e. father, son, husband, wife, mother and daughter but not two cousins. Savings Bank Account of Blind Persons Like other persons, the blind persons are fully competent to enter into a valid contract. Accordingly, there is no any legal bar in opening savings bank accounts of blind persons by the banks as usual. However, due care should be taken while opening of such accounts because blind persons can later on argue that the terms and conditions were not properly told to them. They may also dispute their signatures due to which banks are required to take extra care while opening and allowing operations in the accounts of blind persons. Savings Bank Accounts of Incapacitated (Handicapped/ Old/ Sick) Persons As an alternative, the person may be requested to give a suitable power of attorney to a person of his/her confidence. It would also be in order to open a joint account with his/ her near relative. Where a person is incapacitated due to