Unit - 1

Introduction to Retail
Bank Management
 Retail Banking
Retail banking, also known as consumer banking or personal
banking, is banking that provides financial services to
individual consumers rather than businesses. Retail banking
is a way for individual consumers to manage their money,
have access to credit, and deposit their funds in a secure
manner.
 Types of Retail Banks
Online Banks
As the name suggests, online banks work electronically with
no tangible offices. Moreover, they operate through an official
website accessible from even the remotest parts of the world.
Now that a majority of people prefer to avail banking services
from the comfort of their homes, it is a lucrative option for
people with hectic schedules.
Examples:
Kotak 811
Pockets by ICICI
Jupiter
Paytm payments Bank
Retail Vs Commercial Banking

Categories Retail Banks Commercial Banks

Main Consumers Individual people, families, Businesses, corporations, institutions,

and small businesses and government organizations

Types of Products Checking and savings Checking and savings accounts

and Services accounts Lines of credit
Debit and credit cards Business loans
Mortgages Foreign exchange services
Personal loans Wealth management services
Retail Vs Investment Banking
Retail Vs Investment Banking
Retail Vs Investment Banking
Products & Services of Retail Banks
• Savings account
• Debit cards
• Credit cards
• Home loan
• Personal loan
• Money orders
Products & Services of Retail Banks
• Checkings account
• Mortgages
• Certificate of deposits
• Foreign currency exchange
• Safe deposit box
• Wire transfers
 Financial Advisor
A financial advisor provides financial services and advice to
investors to help them achieve their goals. You may come across
many different types of financial advisors, each with different
acronyms or titles that you may not be familiar with. For example, a
financial advisor may have a CFP (certified financial planner)
designation or may be an RIA (registered investment advisor).

Each of these financial professionals can help with basic investment

strategies. However, some are better suited than others for unique
situations based on their education, experience, licensing and
certifications. Additionally, the organization they work for may
provide additional resources and training that help them stand out
against their competition.
 Bank - Financial Advisor
Most investors think of their bank for deposit accounts, loans and
other banking services. Some banks also offer investments and
insurance products to their clients. This one-stop approach enables
customers to handle all of their money needs under one roof. And it
helps the bank to protect their clients from leaving for another
financial institution.

Not all banks have financial advisors, while other banks may offer
you free financial advice under certain circumstances. While most
large banks offer full-service products for banking, lending,
investing and insurance, other banks may not. In some cases, the
banks partner with other financial services companies to refer
clients away from the competition.
 Bank - Financial Advisor:
Pros & Cons
There are many benefits of working with a bank financial advisor.
However, there are downsides to consider as well. Understand the pros
and cons of bank financial advisors before selecting your advisor.

Pros
• Conveniently located inside a branch
• Relationship pricing on deposit and loan products
• All your assets are “under one roof” which makes them easier to
track
Cons
• Advisors may be limited on the products they sell
• Could steer you to company products that are inferior or higher
cost
• May not work outside “banker’s hours”
 Bancassurance

Bancassurance is a term used for selling insurance policies through

banking institutions. It is a relationship between a bank and an
Insurance company, aimed at offering insurance products and its
benefits to the customers of the bank.

The word “Bancassurance” is derived from the merger of Banks (Ban)

and Assurance or Insurance (Assurance). The concept of
Bancassurance first originated in France. It was only in 2000 when the
process was also adopted in India.
 Bancassurance
• Generally, insurance products were marketed and sold through
individual agents and they would solely account for the business in
the retail segment.
• However, through bancassurance, the point of sale and point of
contact for the customers is none other than the bank staff and
tellers.
• Bank staff is trained and supported by the insurance company by
way of product information, marketing campaigns, sales training,
etc. in order to reach out to the bank’s customers for the sale of
insurance.
• Although the insurance policies are processed and administered
by the insurance company, the bank and the insurance company
both share the commission.
 Bancassurance - Types
Life insurance
● Term insurance plans (with accidental and death claims)
● Endowment plans
● Unit Linked Insurance Plans (ULIPs)

Non-Life insurance
● Health insurance
● Marine insurance (for cargo shipments)
● Property insurance (against natural calamities)
● Key Man insurance (top executives of companies, partnership
firms, etc.)
 Bancassurance - Advantages

In the past years, Bancassurance has emerged as a very important

route for the distribution of insurance products and services both for
the banks as well as the insurance companies. If implemented in a
well-planned and structured manner, this partnership can be
beneficial for all the parties involved – that is, the banks, insurers, and
the customers as well.

Following are the advantages of bancassurance to banks, insurers, and

customers:
 Bancassurance - Advantages
To Banks
• Bancassurance is the best way to offer another source of income
for the banks with little or no capital outlay. A minor capital outlay
in turn results in a high return on equity.
• An addition to the product portfolio
• An easy source of additional fee-based profits
• Increased manpower efficiency – as existing bank staff can be
trained easily
• Possibility of a high degree of product sales alignment in a
customized way and support services
• Selling financial services of wide range to clients and increment in
customer retention
• Optimization of manpower utilization to increase productivity
efficiency.
 Bancassurance - Advantages
To Insurance companies:

• Increase in turnover
• Increased penetration in both rural as well as urban markets using
existing customer database of the bank
• Very cost-effective as the route and network are already set up by
the banks
• Insurance companies may utilize the currently existing branches
and outlets of the banks in the rural and/ or urban areas to market
their products.
 Bancassurance - Advantages
To Customers:
• A purpose to provide one-stop service to all the customers.
• Builds high degree of trust
• It is very simple to make claims
• Easy payment of premium, as it can be linked directly to the bank
account
• Easy access to a range of products within a bank
• Assured services and advice by the bank as customers get
professional experts and trained staff to guide them through
finances.
 Bancassurance - Disadvantages
● Banks and insurance companies must work together to make such an
agreement a success. In reality, it isn’t easy to bring two different
companies together.
● Insurance companies have no direct control over the sale of their
product. This may make it more difficult to manage marketing
strategies.
● It increases the workload for banks, as their employees need to fully
understand insurance products.
● If a bank has more than one such arrangement, it will sell the products
that give it more income.
● Furthermore, these arrangements make it difficult to determine legal
liability if a customer registers any disputes.
 Mutual Funds
A mutual fund is an investment vehicle where many investors pool their
money to earn returns on their capital over a period. This corpus of funds
is managed by an investment professional known as a fund manager or
portfolio manager. It is his/her job to invest the corpus in different
securities such as bonds, stocks, gold and other assets and seek to provide
potential returns. The gains (or losses) on the investment are shared
collectively by the investors in proportion to their contribution to the
fund.

Mutual funds give small or individual investors access to diversified,

professionally managed portfolios. They charge annual fees, expense
ratios or commission.
 Mutual Funds - Types
Types of funds based on asset class:

1. Equity funds:
In contrast to debt funds, equity funds invest your money in stocks. Capital
appreciation is an important objective for these funds. But since the
returns on equity funds are linked to market movements of stocks, these
funds have a higher degree of risk. They are a good choice if you want to
invest for long term goals such as retirement planning or buying a house
as the level of risk comes down over time.
 Mutual Funds - Types

2. Debt funds:
Debt funds (also known as fixed income funds) invest in assets like debt
securities and corporate bonds. These funds aim to offer reasonable
returns to the investor and are considered relatively less risky. These
funds are ideal if you aim for a steady income and are averse to risk.

3. Hybrid funds:

Hybrid funds invest in a mix of both equity and fixed income securities.
Based on the allocation between equity and debt (asset allocation), hybrid
funds are further classified into various sub-categories.
 Mutual Funds - Types
Types of funds based on structure:
1. Open-ended mutual funds:
Open-ended funds are mutual funds where an investor can invest on any
business day. These funds are bought and sold at their Net Asset Value
(NAV). Open-ended funds are highly liquid because you can redeem your
units from the fund on any business day at your convenience.
2.Close-ended mutual funds:
Close-ended funds come with a pre-defined maturity period. Investors can
invest in the fund only when it is launched and can withdraw their money
from the fund only at the time of maturity. These funds are listed just like
shares in the stock market. However, they are not very liquid because
trading volumes are very less.
 Mutual Funds - Types
Types of funds based on investment objective:
1.Growth funds:
The main objective of growth funds is capital appreciation. These funds
put a significant portion of the money in stocks. These funds can be
relatively more risky due to high exposure to equity and hence it is good to
invest in them for the long-term.
2.Income funds:
As the name suggests, income funds try to provide investors with a stable
income. These are debt funds that invest mostly in bonds, government
securities and certificate of deposits, etc. They are suitable for different
-term goals and for investors with a lower-risk appetite.
 Mutual Funds - Types
3.Liquid funds:

Liquid funds put money in short-term money market instruments like

treasury bills, Certificate of Deposits (CDs), term deposits, commercial
papers and so on. Liquid funds help to park your surplus money for a few
days to a few months or create an emergency fund.

4.Tax saving funds:

Tax saving funds offer you tax benefits under Section 80C of the Income
Tax Act. When you invest in these funds, you can claim deductions up to Rs
1.5 lakh each year. Equity Linked Saving Scheme (ELSS) are an example of
tax saving funds.
 Mutual Funds - Advantages
1.Advanced Portfolio Management:

When you buy a mutual fund, you pay a management fee as part of your
expense ratio, which is used to hire a professional portfolio manager who
buys and sells stocks, bonds, etc. This is a relatively small price to pay for
getting professional help in the management of an investment portfolio.

2.Dividend Reinvestment:

As dividends and other interest income sources are declared for the fund,
they can be used to purchase additional shares in the mutual fund,
therefore helping your investment grow.
 Mutual Funds - Advantages
3.Risk Reduction (Safety):

Reduced portfolio risk is achieved through the use of diversification, as

most mutual funds will invest in anywhere from 50 to 200 different
securities—depending on the focus. Numerous stock index mutual funds
own 1,000 or more individual stock positions.

4.Convenience and Fair Pricing:

Mutual funds are easy to buy and easy to understand. They typically have
low minimum investments and they are traded only once per day at the
closing net asset value (NAV). This eliminates price fluctuation throughout
the day and various arbitrage opportunities that day traders practice.
 Mutual Funds - Disadvantages
3.Tax Inefficiency:

Like it or not, investors do not have a choice when it comes to capital gains
payouts in mutual funds. Due to the turnover, redemptions, gains, and
losses in security holdings throughout the year, investors typically receive
distributions from the fund that are an uncontrollable tax event.

4.Poor Trade Execution:

If you place your mutual fund trade anytime before the cut-off time for
same-day NAV, you'll receive the same closing price NAV for your buy or
sell on the mutual fund. For investors looking for faster execution times,
maybe because of short investment horizons, day trading, or timing the
market, mutual funds provide a weak execution strategy.
 Mutual Funds - Disadvantages
1.High Expense Ratios and Sales Charges:

If you're not paying attention to mutual fund expense ratios and sales
charges, they can get out of hand. Be very cautious when investing in
funds with expense ratios higher than 1.50%, as they are considered to be
on the higher cost end. There are several good fund companies out there
that have no sales charges. Fees reduce overall investment returns.
 Portfolio Management Service

• Portfolio Management Service (PMS) is a facility offered by a portfolio

manager with the intent to achieve the required rate of return within
the desired level of risk.
• An investment portfolio can be a mix of stocks, fixed income,
commodities, real estate and cash. A portfolio manager is a licensed
investment professional who specializes in analyzing the investment
objectives of the investor and has a vast knowledge of the various
instruments in the market.
• The portfolio manager is better positioned to make informed
decisions for investments in securities as opposed to a layman.
 Portfolio Management Service

• PMS is a customized service offered to High Net-worth Individuals

(HNI) clients. The service is tailored as per the investor’s return
requirements and the ability and willingness to assume the risk.
• An Investment Policy Statement (IPS) is drafted by a PMS to
understand the financial position and needs of the client. The
portfolio manager ensures that the return requirements coincide with
the risk profile. Before executing the optimum portfolio, PMS also
studies the various constraints such as time horizon, tax applicability,
liquidity, and other unique considerations of the client.
 PMS - Types

1.Active Portfolio Management: The portfolio manager's primary goal is

to maximise returns. In the Active Portfolio Management method, the
portfolio manager attempts to reduce the risk of your investments by
diversifying them across asset classes, industries, and businesses. When
compared to the passive style, this results in a higher turnover.

2.Passive Portfolio Management: This method focuses on fixed profiles

that are in line with the current market trend. In this case, portfolio
managers prefer to invest in index funds which grow passively over time
with minimal intervention.
 PMS - Types
3.Discretionary Portfolio Management: The portfolio manager is
entrusted with managing a specific portfolio in this method. Based on
your objectives, risk tolerance, and investment duration, the manager
selects an appropriate strategy that they believe is best suited to your
portfolio. The portfolio manager is given complete control of the portfolio
and is free to adopt any strategy which is suitable to the IPS.

4.Non-Discretionary Portfolio Management: In this method, the

portfolio managers advise you on investing, but the final decision is yours.
Once you give the go-ahead, the portfolio managers take the appropriate
action on your behalf.
 PMS - Benefits
1.Expert opinion on your investment:
One of the primary benefits of using a Portfolio Management Service is
that your investment is in the hands of professionals. The portfolio
managers assigned to you are experts in their field and understand how to
deal with market volatility. They will manage your portfolio efficiently and
aim to increase your profit margin over time.

2.Customised investment plans:

The portfolio managers customise investment strategies based on your
financial objectives. They then modify the strategy based on your income,
budget, risk tolerance, and age.
 PMS - Benefits
3.Efficient risk management:
A portfolio manager's primary goal is to reduce the risk of your
investment while increasing the returns. They focus on diversifying the
risk involved so that you do not suffer a loss when market trends change.

4.Regular monitoring:
A portfolio manager will keep a close eye on the performance of each asset
and the returns generated regularly. Based on this analysis, your
investment is altered to meet your financial objectives.
 PMS - Drawbacks
1.Risk Of Over Diversification:

Sometimes portfolio managers invest funds among large categories of

assets whose control becomes impossible. In his efforts to diversify the
risk it goes beyond the limit to manage efficiently. Loss arising in such
situations is quite high and can bring serious repercussions.

2.No Downside Protection:

Portfolio management only reduces the risk through diversification but

does not provide full protection. At times of market crash, the concept of
portfolio management becomes obsolete.
 PMS - Drawbacks
3.Faulty Forecasting:

Portfolio management uses historical data for evaluating the returns of

securities for investment purposes. Sometimes the historical data
collected is incorrect or unreliable which leads to wrong forecasts.

4.Documentation:
Since PMS requires the opening of a separate Demat account and
registering the power of attorney in favour of the portfolio manager, the
documentation tends to be burdensome.
 Retail Banking - Advantages

• The deposits from retail customers are stable and form core
deposits. Such deposits are interest insensitive with less bargaining
for additional interest. Also, they constitute low-cost funds for the
banks.
• An effective customer relationship management helps in developing a
vast and strong customer base.
• Retail banking also assists in increasing subsidiary businesses of the
banks like insurance, etc.
• It amounts to better yield and profitability.
• Helps in improving the lifestyle of consumers by providing loans at
affordable rate of interest.
• Involves minimum marketing efforts.
 Retail Banking - Disadvantages

• Monitoring and follow-up of a large number of loan accounts induce

banks to spend heavily on manpower.
• Banks invest heavily in technology for better services however, they
are not utilized to that extent.
• Nowadays, most customers are interested in other financial products
such as mutual funds.
• Long-term loans may turn into Non-Performing Asset (NPA) if they
are not monitored and followed up properly.
 Group Activity
Pick any two banks, analyse what are the
retail banking services and other ancillary
services provided by them along with their
benefits and drawbacks.