Chapter 3 – Other Issues in Retail Banking

As part of Retail banking, banks can provide only banking and remittance products to their customers. To ensure that bank meets other needs of the customers like insurance, mutual funds, dematerialization etc, banks are entering into agency arrangements with relevant service providers. Offering these services not only covers the entire need spectrum of the customers but also improves the fee based income of the banks as banks receive commission for acting as corporate agent for these service providers. This concept of selling products other than banking products is called “Para Banking”.

MUTUAL FUNDS

Prior approval of the RBI should be obtained by banks before undertaking mutual fund business. Bank-sponsored mutual funds should comply with guidelines issued by SEBI from time to time.
The bank-sponsored mutual funds should not use the name of the sponsoring bank as part of their name. Where a bank’s name has been -associated with a mutual fund, a suitable disclaimer clause should be inserted while publicising new schemes that the bank is not liable or responsible for any loss or shortfall resulting from the operations of the scheme.
Banks may enter into agreements with mutual funds for marketing the mutual fund units subject to the following terms and conditions:
Banks should only act as an agent of the customers, forwarding the investors’ applications for purchase I sale of MF units to the Mutual Funds/ the Registrars / the transfer agents.
- The purchase of units should be at the customers’ risk and without the bank guaranteeing any assured return.
- Banks should not acquire units of Mutual Funds from the secondary market.
- Banks should not buy back units of Mutual Funds from their customers.
- If a bank proposes to extend any credit facility to individuals against the security of units of Mutual Funds, it should be as per guidelines of RBI on advances against shares / debentures and units of mutual funds.
- Banks holding custody of MF units on behalf of their customers, should ensure that their own investments and investments made by / belonging to their customers are kept distinct from each other.
- Banks should put in place adequate and effective control mechanisms in this regard. Besides, with a view to ensuring better control, retailing of units of mutual funds may be confined to certain select branches of a bank.

INSURANCE BUSINESS BY BANKS

Scheduled commercial banks are permitted to undertake insurance business as agent of insurance companies on fee basis, without any risk participation. They can also engage in referral arrangement without any risk participation. The subsidiaries of banks will also be allowed to undertake distribution of insurance product on agency basis.
All banks entering into insurance business will be required to obtain prior approval of the Reserve Bank. Banks which satisfy the eligibility criteria given below will be permitted to set up a joint venture company for undertaking insurance business with risk participation. The maximum equity such a bank can hold in the joint venture company will normally be 50 per cent of the paid-up capital of the insurance company. RBI may perry it a higher equity contribution by a promoter bank initially, pending divestment of equity within the prescribed period. The eligibility criteria for joint venture participant are as under:
1. The net worth of the bank should not be less than Rs.500 crore;
2. The CRAR of the bank should not be less than 10 per cent;
3. The level of non-performing assets should be reasonable;
4. The bank should have net profit for the last three consecutive years;
5. The track record of the performance of the subsidiaries, if any, of the concerned bank should be satisfactory.
In cases where a foreign partner contributes 26 per cent of the equity with the approval of Insurance Regulatory and Development Authority/Foreign Investment Promotion Board, more than one public sector bank or private sector bank may be allowed to participate in the equity of the insurance joint venture. As such participants will also assume insurance risk, only those banks which satisfy the criteria given above would be permitted.
A subsidiary of a bank or of another bank will not normally be allowed to join the insurance company on risk participation basis. Subsidiaries would include bank subsidiaries undertaking merchant banking, securities, mutual fund, leasing finance, housing finance business, etc.
Banks which are not eligible as joint venture participant as above, can make investments up to 10% of their networth or Rs.50 crore, whichever is lower, in the insurance company for providing infrastructure and services support. Such participation shall be treated as an investment and should be without any contingent liability for the bank. The eligibility criteria for these banks will be as under : The CRAR of the bank should not be less than 10%; The level of NPAs should be reasonable; The bank should have net profit for the last three consecutive years.
It should be ensured that risks involved in insurance business do not get transferred to the bank and that the banking business does not get contaminated by any risks which may arise from insurance business. There should be ‘arms length’ relationship between the bank and the insurance outfit.
Holding of equity by a promoter bank in an insurance company or participation in any form in insurance business will be subject to compliance with any rules and regulations laid down by the IRDA/Central Government. This will include compliance with Section 6AA of the Insurance Act as amended by the IRDA Act, 1999, for divestment of equity in excess of 26 per cent of the paid up capital within a prescribed period of time.
Banks which make investments and later qualify for risk participation in insurance business will be eligible to apply to the Reserve Bank for permission to undertake insurance business on risk participation basis

Insurance agency business/referral arrangement

The banks need not obtain prior approval of the RBI for engaging in insurance agency business or referral arrangement without any risk participation, subject to the following conditions:

The bank should comply with the IRDA regulations for acting as ‘composite corporate agent’ or referral arrangement with insurance companies.
The bank should not adopt any restrictive practice of forcing its customers to go in only for a particular insurance company in respect of assets financed by the bank. The customers should be allowed to exercise their own choice.
The bank desirous of entering into referral arrangement, besides complying with 1RDA regulations, should also enter into an agreement with the insurance company concerned for allowing use of its premises and making use _of the existing infrastructure of the bank. The agreement should be for a period not exceeding three years at the first instance and the bank should have the discretion to renegotiate the terms depending on its satisfaction with the service or replace it by another agreement after the initial period. Thereafter, the bank will be free to sign a longer term contract with the approval of its Board in the case of a private sector bank and with the approval of Government of India in respect of a public sector bank.
As the participation by a bank’s customer in insurance products is purely on a voluntary basis, it should be stated in all publicity material distributed by the bank in a prominent way. There should be no ‘linkage’ either direct or indirect between the provision of banking services offered by the bank to its customers and use of the insurance products.
The risks, if any, involved in insurance agency/referral arrangement should not get transferred to the business of the bank.

THIRD PARTYPRODUCTS DISTRIBUTED BY BANKS

Banks mainly focus on the following products and market the same to their captive customers through their network of branches:

Marketing of life insurance products of life insurance companies.
Marketing of non life Insurance products of general insurance companies.
Distribution of mutual fund schemes of various mutual fund houses.
Offering of Demat Services.
Offering of Broking Services.

Banks typically enter into agency tie ups for distribution by entering into distribution agreements covering all the aspects of distribution including market support, training to bank personnel, collection arrangements and commission/marketing expenses paid out for the agency services rendered by the Bank.

Marketing and Distribution of Life Policies

The concept of distribution of insurance policies through the branches of banks is termed as “Bancassurance”.
Bancassurance is useful for both insurance companies and banks. By using the network of bank branches to reach their customers for selling different insurance policies, the insurance companies can reach to large number of customers. Banks will be able to derive more fee-based income without risk participation.
The bancassurance model is gaining strength in India also. Banks have entered into Corporate Agency arrangements with insurance companies for distribution of life products.
Banks generally market the following products through their branch network – single premium products and regular periodical premium payment products, group insurance products based on definite group of customers like deposit holders and different loan customers. In group products, the group should be clearly defined and Bank will be the purchaser of the policy on behalf of the defined group. As per IRDA guidelines, there should not be any deviation in the defined group for which group policy is purchased by the Bank from the insurers.

Corporate Agency model of distribution

Banks can take the Corporate Agency of one life insurer and one non life insurer only.
Banks as a Corporate Agent can distribute the regular premium policies of life insurers across it branches.
The type of policies issued by the insurers are Endowment Policies with profit, Term Plans (Plain Vanilla Life Cover), Equity Linked Savings Scheme, Unit Linked Insurance and other schematic policies which are hybrid combinations of the above policies.
In policies which are equity oriented, the return expectations in addition to life cover are uncertain since they are linked to capital market volatilities.
In pure Term Plan, the policy benefits cover only the death of the policyholder and the premiums are very low.
The premium payment models of policies are basically of two types: single premium and regular premium (monthly, quarterly, half yearly and annual payments).
The commission banks receive for mobilization of single premium policies is very low as for them the service cost is less. (normally 2%).
In case of regular premium policies, the commission income of banks normally varies between 15% to 25% approximately.
Insurance companies especially the big players push single premiums more as it results in more premium mobilization for the insurers and less commission payout for the Corporate Agents.
Banks should focus more on regular premium policies, of course based on the needs of the customers, but should not mis-sell policies for the sake of commission.
The marketing paradigm for distribution of life polices varies across banks. Some banks market only through specific identified branches but most of the banks distribute it through all branches.
The insurers extend hand holding support for marketing by deploying their sales personnel across the banks’ branches with the banks’ personnel for better conversion. The leads for sales are generated by the bank through data base marketing and customer contacts and then pass on the leads to the insurers for following up. The marketing process is done jointly. Special promotional campaigns are conducted to give focused thrust to marketing and better conversion.

Group Insurance Products

Group insurance products are offered by life insurers for specific and identified groups for providing life cover at a competitive premium as compared to regular policies. As per the guidelines of IRDA, when group products are offered by the insurers, the group should be homogenous and clearly defined and each member of the group should conform to the group definition.
Banks offer different group insurance covers to their customers as a value addition to their product offerings.
In case of life insurance, group covers are offered to cover the life of the group members (customers) who have availed specific product’s from the bank.
Banks are offering group insurance cover to their customers who are having different types of accounts viz. Savings, Current Account Holders, Loan_Borrowers, Term Deposit ,Recurring Deposit Holders etc.,
The group covers offered are basically of two types. The first type of cover is the simple fixed cover on the happening of natural death or accidental death and the amount of cover is fixed.(say for example Rs.1 lac for natural death and Rs.2 lacs for accidental death). In these type of covers, the premium will be charged on an annual basis.
The second type of cover is the dynamic cover provided to borrowal accounts on a reducing basis in line with the repayment of the loan. The cover is made available for retail loans and housing loans. The premium payment for the cover is on a single premium mode covering the repayment period of the loan and the cover is available in case of death of the borrower during the repayment period and restricted to the regular outstanding in the loan account i.e. the cover will not take care of overdue amounts in the loan.
Banks are offering the cover as a tagged facility for value enhancement of the product and also to increase the customer satisfaction in addition to being a risk mitigation tool for the customer and protection for the family of the account holder.
The income potential in group cover is attractive as banks are reimbursed with marketing expenses of about 10% to 15% of the premium mobilised.

Distribution of Non Life insurance Products

In the non life side, banks offer both stand alone regular products and group products. Non life cover is basically about covering different types of assets like building, machinery, stocks, fleet etc. and banks’ lending extends to all these areas. Hence there is a captive market for banks to generate insurance premium from these accounts through proper soliciting of business form their borrower customers as insurance is a subject matter of solicitation. Non life cover will generate fee based income by way of commission ranging from 10% to 15% as fixed by IRDA for different types of asset insurance.

In the group insurance side, group health policies are offered by banks as a value addition to their account holders. The policies are offered to the customers on a floater basis covering the account holders and their families (self+ spouse+2 children and also parents on additional payment of premium). The advantage of the group policies over the regular policies is that the premium rates are very less (about 50%) as compared to stand alone policies. The commission on this type of product is about 15% on premium mobilised.

Insurance Business by Banks

Insurance sector was deregulated in 1999 and foreign insurers were allowed to enter with a cap on equity being 26%. The major focus of foreign insurers was on the life insurance side as it was highly under penetrated and there was huge scope for new business. Public Sector Banks also started venturing into insurance business with the objective of tapping the untapped potential as well to use their network and existing infrastructure to gamer business. The market is now dominated by insurance companies which have large banks as partners. PSBs are also acting as Corporate Agents for their joint venture insurance companies.

Mutual Funds Distribution by Banks

MF distribution offers good scope for augmenting fee-based income of banks. Upfront Commission, Trail (loyalty) Commission, Mobilisation Incentives, Special Incentives, Collection Charges are various sources of income for New Fund Offers. The existing customer base serves as a captive prospective investor base. There is no other distribution channel for MFs that can offer such a lucrative retail base as can be offered by a bank. Moreover, frontline staff of the bank is trained for marketing. The database of a bank can be used effectively for “Experience Marketing” of future products and “Product Co Creation” based on segments. Banks selling mutual fund schemes should understand the implications mentioned in the model called as PROPAGATE Model for distribution. PROPAGATE model refers to Product, Risk, Opportunities (Returns), People, Appetite, Geography (Place), Attributes, Training& Education.

Product: Banks with multiple tie-ups should decide on products of different MFs based on their customer segment and time preferences.

Risk: MF schemes carry capital risk and return risk. MFs do not normally guarantee returns for their investments and investments are subject to market vagaries. Banks should have in-house research to identify schemes based on the risk profile of their customers.

Opportunities: Investments in MFs are opportunities for customers to create wealth. In case of growth schemes, buoyant capital market creates better opportunities for capital appreciation and returns, and the expertise of professional fund managers enhance the opportunities and deliver better returns.

People: People relate to both the internal and external customers. Internal customers comprise line staff who actually market the schemes and external customers are target customers to whom the schemes are marketed by the internal customer. Selecting a marketing staff with the right aptitude and attitude will make sure that schemes reach the external customer and trigger the purchase intentions that are translated into sales.

Appetite: Product offering across segments should match the risk appetite of the respective customer segments.

Geography: Banks should first decide on branches through which they are going to distribute MF products. The awareness level about MF in general and schemes, in particular, varies across geographies (rural, semi-urban, urban and metro) and also customer segments.

Attributes: Attributes of products are borne out of product structuring and investment objectives. Growth Schemes, Incorhe Schemes, Balanced Schemes, Index Schemes etc., are some of the product attributes and Monthly Income Plan (MIP) and Systematic Investment Plan (SIP) have return and investment attributes.

Training: Training and Certification Programme by the Association of Mutual Funds in India (AMFI) for distributing mutual fund products is essential for successful implementation of the distribution strategy.

Education: The customer should be educated and guided for investing based on their risk return appetite, life cycle and wealth cycle.

Cross Selling

Cross selling is selling one or more additional products to the existing customer base so as to generate more business and profit per customer. It involves generating new/additional retail asset(s) from a liability. It means that if the bank is able to sell an asset product (housing/car/educational loan) to a savings/current deposit account holder successfully, then it is cross selling.

In the retail banking almost all banks, are following standard strategies with various asset products like housing, auto, education and consumer loans to add volume to their retail asset book.

There is competition among all types of banks because strategies in terms of pricing, technology are more or less similar and there is insignificant product/value differentiation. In this situation “Search thyself is a strategy which needs to be looked into.

Earlier cross selling was happening mostly on the liability side by marketing a high-cost term deposit product to a savings/current account holder resulting in additional cost. In the present day retail banking scenario, systematic cross selling of assets is required.

Cross selling ratio is different in different countries. The ratio is 2 for the US and slightly above 2 for the UK and Germany, above 2.5 for France and a high 3 for Scandinavia. In addition, the traditional banks (all customers) with a cross sell ratio of 2.5 out performed the internet banks with a ratio of only

A research study has indicated that selling three products to a customer who already holds one increases profitability by up to 500 per cent.

Why Cross Selling?

The prime reason for cross selling is the cost factor. According to various studies it costs a bank four to five times less to cross sell an existing client than to acquire a new one.
Cross selling an asset/additional asset product to an existing customer improves the profits, in general, and profits per customer, in particular.
Cross selling fosters brand loyalty. A customer who has availed himself of more than one product from the bank is drawn closer to the bank than a customer who has taken only one product. The percentage of loyalty increases with the number of products the customer takes. The reasons may be for convenience, service, price and value offerings by the bank for the total product solutions to the customer.
Cross selling helps banks to plan, implement and maintain better customer relationship management programmes (CRM) as it gives clarity to developing plans based on the customers’ relationship profile.

Potential for Cross Selling:

Studies have shown that the percentage of Savings, Current and Term Deposit customers who have additionally taken a credit product from the bank is very low indicating the enormous scope for cross selling.

Strategies for Effective Cross Selling

A robust customer database which is the core.on which the entire cross selling strategy is built.
Based on the customer relationship history and the cross selling model, a broad mapping of the customer profile and retail products to be cross sold has to be done.
The mapped data has to be further studies to develop specific asset related cross selling information.
The cross selling information has to be placed before staff (internal customers) to view and communicate to the target customer group.
The internal customers should be trained to effectively cross sell and convert the initiatives into business.
Cross selling is a team effort and success depends on the attitude and involvement of all the staff.
The success of cross selling depends on offering at the right time, the relevant product to the customer.
The strategy has to percolate from the corporate to the branch level based on customer database across geographies.
Dynamic feedback from the line level should be taken cognizance of for fine-tuning/re-tuning the strategies.
Selecting the target customer group is essential for cross selling success.
Cross selling is more relationship- than transaction-based. At any point of time, the cross selling initiative by the line staff should not be an irritant for the customer.

The above concepts are applicable to fee based products also for increasing the fee based income. But the values in the fee based products like insurance, mutual funds should be properly presented to the customers so that he realises the value of the offerings and avail the services.

DEMAT ACCOUNTS

Dematerialisation is the process of converting physical shares (share certificates) into an electronic form. Shares once converted into dematerialised form are held in a Demat account. Demat account provides the customer additional convenience for dealing with his securities in a hassle free manner. Almost all the banks offer Demat Account facility to their customers. Some banks offer the provision of trading facility also under tie up with brokers so that the requirement of trading, demat and account requirements are met in a single platform.

Dematerialisation Process

For dematerialization, the investor has to fill a Demat Request Form (DRF) which is available with every DP and submit the same along with the physical certificates. Every security has an ISIN (International Securities Identification Number). If there is more than one security than the equal number of DRFs has to be filled in.

WEALTH MANAGEMENT SOLUTIONS

Wealth management is an investment advisory service that incorporates financial planning, investment portfolio management and a number of aggregated financial services. Wealth management solutions are mainly required by High net worth individuals, small business owners. It involves coordination of retail banking, estate planning, legeresources, tax professionals and investment management. Wealth management services comprises of following key function areas –

Financial Planning;
Portfolio Strategy Definition/ Asset Allocation/Strategy implementation;
Portfolio Management Administration, Performance Evaluation and Analytics
Strategy Review and Modification.

Services offered by Wealth Management Professionals

Advisory – providing guidance on investment/financial planning and tax advisory, based on client profile. Investment decisions are solely taken by the client, as per his/her own judgment.
Investment processing (transaction oriented): Client may engage wealth manager to execute specific transaction or set of transactions.
Custody, Safekeeping and Asset Servicing: Client is responsible for investment planning, decision and execution. Wealth manager is entrusted with management, administration and oversight of investment process.
End-to-end Investment Lifecycle Management: In some cases, Wealth manager owns the whole gamut of investment planning, decision, execution and management, on behalf of the client. He is mandated to make financial planning, implement investment decisions and manage the investment throughout its life.

Advantages of wealth management for Customers

Helpful in Tax Planning: The wealth management professional provide the service of tax planning and how to minimize the tax and save more money.
Helpful in Selection of Investment Strategy: With professional help, the customer can easily know the investment strategy and analyze risk and return.
Helpful In Estate Management: Estate management is a task to provide objective administration of funds tailored to aim in responsible distribution and protection of overall estate.
Helpful in forward planning: Helps in forward planning in a professional way.

Key Challenges in wealth management

Highly Personalized and Customized Services
Personal relationship driving the business
Evolving Client Profile
Client Involvement Level
Passion Investment (Philanthropy and Social Responsibility)
Limited Leveraging Capabilities of Technology (as an enabler)
Technical Architecture and Technology Investment
Intricate Knowledge of Cross-functional Domain.

PRIVATE BANKING

Private Banking is referred to providing banking, investment and other financial services to private individuals investing sizable assets. The term “private” refers to the customer service being rendered on a more personal basis than in massmarket retail banking, through dedicated personal bank advisers. Private Banking will offer various services such as wealth management, savings, inheritance and tax planning for their clients. A high-level form of private banking (for the especially affluent) is often referred to as wealth management.

Globally, Switzerland and Luxembourg are major locations for private banking. In India a number of foreign banks like Citibank, Deutche Bank, HSBC Bank, Societie Generale, BNP Paribas are active players in the private banking. ICICI Bank, Axis Bank and HDFC Bank are some of the private banks that are active on the private banking business. Private Banking and Wealth Management are complimentary in nature though called by different names and both the models offer almost similar services.