OTHER FINANCIAL SERVICES PROVIDED BY BANKS | RBWM IMPORTANT NOTES | MODULE D

OTHER FINANCIAL SERVICES PROVIDED BY BANKS | RBWM IMPORTANT NOTES

Banks have other services to offer apart from the standard ones, in these RBWM free notes we are going to discuss those other financial services provided by the banks.

Banks are allowed to undertake certain financial services or para-banking activities, such as bancassurance, depository service, insurance, MFs, and credit and debit cards. These activities have increased the reach of the banks and brought a wide segment of the population into the fold of basic financial services.

Para banking activities

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Retail banking: distribution of third-party products

Let’s explore the extensive array of other services offered by banks, such as loans, investment opportunities, credit cards, and more.

Retail banking is a business model built on a large customer base and targets products and services to this customer base. However, customers’ needs extend beyond banking services and encompass insurance and other investment needs. 

Banks are prohibited from offering such services independently due to regulatory restrictions but can offer them through the relevant service providers through agency arrangements with them. 

The distribution of third-party products has emerged as a key driver of revenue for foreign banks and new-generation private sector banks. 

The Reserve Bank of India has established rules for banks to follow when engaging in various parabanking activities and has made it illegal for banks to engage in parabanking outside of the guidelines’ purview. “Para Banking” is the name for this idea of selling goods other than banking products.”.

Mutual fund business

A wide range of financial goods and solutions, including the mutual fund business, is among the Other services offered by banks.

Mutual funds are investments in stocks, bonds, short-term money-market instruments, other securities or assets, or some combination of these investments. 

The money collected by an Asset Management Company (AMC) is a part of the Mutual Fund and is invested in capital market instruments such as shares, debentures and other securities. 

Unit Holders share profit or losing proportion to their investments and are required to be registered with the Securities and Exchange Board of India (SEBI).

Advantages of Mutual Funds include professional management, diversification, economies of scale, liquidity, simplicity, choice of schemes, and tax benefits. Investors should carefully examine each of the above features before investing in mutual funds.

Types of mutual funds

At the most basic level, there are three different types of mutual funds, each with a different predetermined investment objective that customises their assets, investing locations, and investment strategies.

1. Equity funds (stocks)
2. Fixed-income funds (bonds)
3. Money market funds

Mutual funds are variants of three asset classes: growth, speciality and open-ended. Growth funds invest in fast-growing companies, while speciality funds invest in companies of the same sector or region. Open-ended funds can be closed-ended depending on the maturity date.

Open-ended funds

An open-ended fund has no maturity date, but investors can purchase and sell units from and to the Asset Management Company (AMC), at investor service centres (ISCs), mutual fund offices, and the stock market. The Net Asset Value (NAV) is the basis for the prices at which purchase and redemption transactions in a mutual fund occur.

Close-ended funds

Closed-end funds run for a specified period and are redeemed at the specified maturity date. They are listed on a stock exchange to provide liquidity and investors buy and sell units at the market price.

Interval fund

A Mutual Fund called an Interval Fund allows investors to buy units only during a specific, predetermined period. Although these funds have been found to invest mostly in debt instruments, they may also invest in equity securities. Investors are prohibited from buying and selling interval fund units frequently, much like with closed-end funds. Fund companies may provide redemption at the current Net Asset Value (NAV) during certain times. In that investors’ money stays invested for a set period and the investment cannot be repaid before maturity, Interval Funds and Fixed Maturity Plans (FMPs) share many similarities. This makes it easier to develop a solid investment strategy that generates higher returns.

Categorisation of mutual fund schemes

Open-ended MF schemes should be divided into groups, with each category having its classifications and traits, SEBI advised. This would standardise the procedure for Mutual Funds and promote uniformity.

1. Equity Schemes
2. Debt Schemes
3. Hybrid Schemes
4. Solution Oriented Schemes
5. Other Scheme

The majority of mutual funds fall into the category of equity investments, with long-term capital growth and modest income as their primary investment goals. Equity funds can be divided into three categories: Large Cap, Mid Cap, and Small Cap. 

1. Large Cap: The first through one-hundredth corporation in terms of market capitalisation 
2. Mid Cap: Companies between 101st and 250th in terms of total market capitalisation. 
3. Small Cap: Starting with the 251st company in terms of total market capitalization.

Purchase debt securities with a range of maturities. This guarantees steady income.

Hybrid Schemes

Depending on the goals of the schemes, invest in equity and debt securities.

Solution Oriented Schemes

Solution-oriented schemes require a specified period of lock-in, such as for funds in the scheme.

Open-ended retirement solutions, retirement fund plans have a 5-year lock-in period or until retirement age. 

Children’s Fund is an open-ended investment fund with a minimum 5-year lock-in period or until the child reaches the age of majority. 

ETFs and index fund schemes are some other programmes.

Mutual fund business by banks

• Mutual Fund (MF) distribution by banks has become a key element in the fee-based distribution model. 
• A new concept, mutual banking, has emerged offering new product and service innovations for customers who avail of MF products through banks. 
• Banks have the potential to build and improve the retail side of the investors’ universe of MFs, and the database can be used for “Experience Marketing” and “Product Co-Creation”. 
• Customers can now access non-banking financial products with multiple return matrices from their banking service providers.

Product: Based on customer preferences and timing preferences, banks with several tie-ups should choose various MF products. Although there are new fund offers available, for customer-focused selling, it is crucial to carefully choose from among the current programmes.

Risk: Banks should have in-house research to identify schemes based on the risk profile of their customers, and select products with performance above their benchmark indices to minimise risk. MFs do not guarantee returns and are subject to market vagaries.

Opportunities: Customers have the chance to build wealth through investments in MFs, and a healthy capital market improves chances for capital growth and returns. The prospects are improved and the rewards are higher with professional fund managers. When constructing the matrix, products with longer-term, higher returns should be taken into account.

People: Both internal and external customers are driven by people, with internal customers being line employees who promote the programmes and external customers being target customers.

Appetite: Consumers’ tolerance for risk varies between segments, with rural wealthy consumers’ tolerance for the risk being lower than that of their urban counterparts. Every segment’s risk tolerance should be reflected in the product offering.

Geography: For greater distribution effectiveness, banks and MFs should base their distribution design decisions on the MF’s brand equity within or across regional borders. The goal of a single tie-up model is to sell globally, whereas a multi-tie-up strategy requires that borders be clearly defined.

Attributes: Product structurings and investment goals, such as those for Growth Schemes, Income Schemes, Balanced Schemes, Index Schemes, Monthly Income Plans (MIP), and Systematic Investment Plans (SIP), define product features.

Training: The Association of Mutual Funds in India’s (AMFI) Training and Certification Programme is necessary for the distribution plan to be implemented successfully. Target investors will receive better counselling and be more satisfied as a result of the trained staff’s communication skills and subject matter expertise. Banks should strive to accomplish the distribution and training goals.

Education: The most crucial information in this work is that successful distribution depends on educating the external client about mutual funds and the subtleties of mutual fund investments. Customers should be educated and guided into investing depending on their risk tolerance, expected return, and wealth cycle staff. Additionally, strong PROPAGATE model development and use will improve bank mobilisations. However, the MF business has been impacted by two significant recent events, which have reduced mobilisation.

RBI guidelines on mutual fund business

In accordance with RBI requirements, banks must adhere to rules governing know-your-customer (KYC) and anti-money laundering (AML) standards, among other services offered by banks.

When announcing new schemes, banks must include a disclaimer clause, refrain from engaging in mutual fund business involving risk participation, and engage in mutual fund company agency activity subject to extra restrictions. 

Applications from investors must be sent to mutual funds, registrars, and transfer agents; purchases must be made at the risk of the client; credit facilities must follow Master Directions on Credit Management; and investments must be separate from those of the bank.

Insurance business 

Scope of marketing insurance products

The insured transfers a risk of potential financial loss to the insurance business in exchange for monetary compensation. Insurance is a technique for managing financial risk. Different sorts of policies exist based on the risk they reduce.

1. Health Insurance
2. Life Insurance
3. Asset Insurance

The insurance-based market in India has been deregulated, creating a free market that has facilitated the growth of insurance-based commerce.

Health insurance 

A health insurance policy is a legal agreement between an insured person and an insurance company to pay for medical expenses. The insurance industry has grown as a result of market liberalisation, rising middle-class demand, and the popularity of group insurance as well as individual and floater plans.

Present players in Health Insurance Industry

We can divide them into THREE categories

1. Standalone health insurance companies
2. Health Insurance from General insurance companies
3. Health Insurance from Life Insurance Companies

Life insurance products

Life insurance products cater to different investment needs and objectives, with broad categories of life insurance products. Endowment policies are life insurance contracts created to pay a lump amount after a predetermined time or upon death, often ten, fifteen, or twenty years up to a set age limit. 

Term insurance policies are created to meet nominees’ or beneficiaries’ immediate needs in the case of the policyholder’s untimely or unexpected death. Money-back policies are an extension of endowment plans where the policyholder receives a fixed amount at specific intervals throughout the duration of the policy. Pension plans are for senior citizens and those planning a secure future should consider these policies to ensure they never give up on the best things in life.

General insurance products 

General insurance is any insurance that is not life-related. It includes property insurance, personal insurance, and liability insurance. It acts as an economic backup for a nation’s economy and acts as an aegis to financial causalities.

Asset Insurance 

The Insurance Regulatory and Development Authority is an agency of the Government of India that regulates the insurance sector in India. It covers many movable and immovable assets, such as vehicles, machinery, and livestock, and is responsible for the supervision and development of the insurance sector.

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Insurance business by banks 

The finance minister announced that banks would be allowed to act as insurance brokers in the budget speech 2013-14. To allow banks to engage in insurance broking on a departmental level, the IRDA developed and published the IRDA (Licencing of Banks as Insurance Brokers) Regulations, 2013. However, banks must do so through a subsidiary or J established for anticipation departmentally and must do so through a subsidiary/J set up for the purpose.

1. Insurance company with joint venture or subsidiary for risk sharing: Bank can undertake insurance business with risk participation if it has a net worth of 1000 crore and minimum net worth of Rs. 500 crores, minimum capital, net non-performing assets of 3%, net profit in preceding three financial years, and satisfactory track record.
2. Banks that engage in insurance brokerage or corporate agency through a subsidiary or joint venture: A bank can set up a subsidiary/joint venture company for insurance broking and corporate agency if it meets the eligibility criteria: net worth not less than Rs. 500 crores, minimum capital, net non-performing assets not more than 3%, net profit in preceding three financial years, and satisfactory track record.
3. Departmental services for insurance brokerage: Banks can act as insurance brokers subject to certain conditions, such as a Board approved policy, a license from the IRDA, and a non-refundable deposit of Rs. 50 Lakh, and a standardised system of assessing the need/suitability of products. The most important details are that the bank must treat customers fairly, ensure performance assessment and incentive structure is not violative, and put in place a robust internal grievance redressal mechanism and a Board approved customer compensation policy.

Functions of a direct broker 

Obtaining in-depth knowledge of the client’s business and risk management philosophy, becoming familiar with the client’s operations and underwriting data, providing advice on the right insurance coverage and terms, remaining knowledgeable about the market available insurance markets, submitting quotations, providing underwriting information, acting promptly, paying a premium, negotiating claims, and maintaining records of claims.

Corporate agencies of insurance companies

Banks can act as corporate agents of insurance companies without prior approval from the RBI. They offer insurance policies to their customers based on their knowledge of their situation and needs. Corporate Agents can represent three life insurers, three non-life insurers and three standalone health insurers, as well as two specialized insurance companies, Export Credit Guarantee Corporation and Agriculture Insurance Corporation of India.

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Group insurance products

Life insurers offer group insurance solutions for designated groups to provide life insurance at a reasonable cost. As an added benefit to their product offerings, banks provide various group insurance plans to their customers. 

The group insurance plans available come in two flavours: a straightforward fixed cover in the event of a natural death or an accident, and a dynamic protection issued to borrower accounts on a declining basis by loan repayment. The income potential in group cover is attractive as banks are reimbursed with marketing expenses of about 10% to 15% of the premium mobilized.

Distribution of non-life insurance products

Banks offer a range of non-life insurance products, both standalone regular products and group products. The non-life cover is about covering different types of assets, and banks’ lending extends to all these areas. 

Banks can generate insurance premiums from these accounts through proper solicitation of business forms. Group health policies are offered by some banks as a value addition to their account holders, and the premium rates are much less (about 50%) than standalone policies. The income from this segment is attractive with a 15% commission income on premium mobilized.

Some social security insurance schemes

Pradhan Mantri Jeevan Jyoti Bima Yojana

1. PMJJBY and PMSBY were introduced by the central government as part of a programme for financial inclusion. Banks engage in these schemes’ agency business:
2. PMJJBY is an Insurance Scheme offering life insurance coverage for death due to any reason. 
3. It is a one-year cover, renewable from year to year, and is offered through LIC and other Life Insurance companies. 
4. Benefits: Rs. 2 lacks are payable on member’s death, premium: Rs. 436/- per annum per member, termination of assurance: On attaining age 55 years, closure of account with the bank, or insufficiency of balance to keep the insurance in force. 
5. Appropriation of premium: Insurance premium to LIC/insurance company: 289/- per annum per member, reimbursement of expenses to BC/Micro/Corporate/Agent: 30/- per annum per member, and reimbursement of administrative expenses to participating Bank: Rs. 11/- per annum per member.

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Pradhan Mantri Suraksha Bima Yojana (PMSBY)

1. An accident insurance programme called PMSBY provides coverage for accidental death and disability for people who pass away or become disabled due to an accident. 
2. It covers all individual bank account holders in the age group of 18-70 years, with Aadhar being the primary KYC. Enrolment is by auto-debit from the designated bank account or full annual premium. 
3. Benefits include death, total and irrecoverable loss of both eyes, total and irrecoverable loss of sight of one eye, and total and irrecoverable loss of use of one hand or foot. 
4. The annual premium for each member is Rs. 20 and is automatically debited from the account holder’s bank account.
5. Termination of cover is on attaining age 70, closure of an account, or insufficiency of balance. 
6. Appropriation of premium is Rs. 20 per member per year, reimbursement of costs to BC/Micro/Corporate/Agent, and repayment of costs for administration to participating Bank.

Pradhan Mantri Suraksha Bima Yojana (PMSBY)

For bank account holders between the ages of 18 and 70, the PMSBY Accident Insurance Scheme provides coverage for accidental death and disability. Benefits include death, total and irrecoverable loss of both eyes, total and irrecoverable loss of sight of one eye, and loss of use of one hand or foot. The 1 lakh premium, which costs Rs. 20 annually per member, is automatically debited from the account holder’s bank account. Termination of cover is on attaining age 70, the closing of the account, or insufficiency of balance.

Cross-selling 

Cross-selling is the process of selling additional products to an existing customer base to generate more business and profit. Strategies for effective cross-selling include a robust customer database, broad mapping of customer profiles, and internal customer training. The target customer group is essential for success, as selling the right product to the right customer improves the relationship.

Depository services by banks 

1. Depository services are provided by banks through Depository Participants (DP). 
2. DPs provide services such as opening a demat account, dematerialization, rematerialization, maintaining a record of holdings, receiving electronic credit, and freezing the demat account for debits, credits, or both. 
3. Opening a demat account involves choosing a DP, filling up an account opening form, signing an agreement, complying with KYC requirements, and receiving a unique account number. 
4. Demat accounts are a safe and convenient way to hold securities. 
5. They can be opened in the name of a minor and can be operated by a guardian until the minor becomes a major. 
6. Benefits of availing depository services include the immediate transfer of securities, no stamp duty, elimination of risks associated with physical certificates, reduced paperwork, reduced transaction cost, and nomination facility.

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Portfolio management services given by banks

1. PMS is an investment consultancy/management service for a fee, entirely at the customer’s risk without guaranteeing a pre-determined return. 
2. The fee charged is independent of the return to the client, and funds accepted for portfolio management must not be entrusted to another bank for management. 
3. The bank providing PMS must maintain a client-wise account/record of funds accepted and investments made there against, and all credits and debits must be reflected in the account.

Wealth Management – Indian Scenario

1. India has seen tremendous growth in the number of High-Net-Worth Individuals (HNWIs) and their wealth after the global financial crisis. 
2. Tax planning and advisory asset management are the most demanded services among HNWIs, with ICICI Bank, Axis Bank, HDFC Bank, Kotak Mahindra Bank, State Bank of India and BOB being the top three players. 
3. Advantages for customers include tax planning, selection of investment strategy, estate management, and planning. 
4. ICICI, HDFC, and Kotak are the top three players in the wealth management industry, with ICICI providing tax planning, HDFC providing investment strategy selection, ICICI providing estate management, and Kotak providing planning.

Factoring

1. Factoring is a financial option for the management of receivables, where a financial institution (factor) buys the accounts receivable of a company (Client) and pays off the amount after retaining a small portion. 
2. The scope of factoring services in India is limited due to the lack of avenues for MSMEs to convert their receivables before maturity. RBI guidelines on factoring service.
3. Factoring business through a subsidiary is needed to ensure an efficient and cost-effective factoring process.
4. The aggregate equity investment in factoring subsidiaries and factoring companies must not exceed 10% of the bank’s paid-up capital and reserves.
5. Factoring services must be provided with recourse or without recourse or on a limited recourse basis, and all underwriting commitments about the credit risk on the debtor must be by Board approved limits. 
6. Factoring services must be extended for invoices representing genuine trade transactions, and factoring must be treated on par with loans and advances. 
7. Credit information regarding the non-payment of dues must be furnished to the Credit Information Companies authorized by RBI. Exposure for facilities extended by way of factoring services must be reckoned on the assignor, debtor, or import factor.

TRedDS

1. The Reserve Bank of India (RBI) launched TReDS as a means of facilitating corporate payments for MSME receivables.  
2. It doubled its business volumes to over Rs. 3400 Crore in 2023-24. 
3. The SGBs were established by the government in 2015 to lessen India’s reliance on imported gold and alter Indians’ savings practices from actual gold to paper with government backing. 
4. The smallest investment amount is one gramme of gold, while the maximum subscription amounts are four kilogrammes for individuals, four kilogrammes for HUF, and twenty kilogrammes for trusts. 
5. For investors that subscribe online and pay with a digital method, the SGBs’ issue price will be reduced by $50 per gramme.

Sales channel

Commercial banks, SHCIL, CCIL, designated post offices, and recognised stock exchanges will sell SGBs. Bonds may be used as collateral for loans, and investors will receive annual returns of 2.50%.

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