Consumer finance

1Consumer Finance

SUBJECT-

Universal Banking

TOPIC-

Consumer finance

SYBBI

SEMESTER IV

Index

SR NO PARTICULARS PAGE NO.

1. Introduction 6

2. SME Sector 8

3. Retail Lender 12

4. Micro Finance 16

5. Bancassurance 19

6. Retail Banking 21

7. Conclusion 28

9. References 30

2Consumer Finance

INTRODUCTION

Universal Banking

A banking system in which banks provide a wide variety of financial services, including both commercial and investment services. Universal banking is common in some European countries, including Switzerland. In the United States, however, banks are required to separate their commercial and investment banking services. Proponents of universal banking argue that it helps banks better diversify risk. Detractors think dividing up banks' operations is a less risky strategy.

Universal banks may offer credit, loans, deposits, asset management, investment advisory, payment processing, securities transactions, underwriting and financial analysis. While a universal banking system allows banks to offer a multitude of services, it does not require them to do so. Banks in a universal system may still choose to specialize in a subset of banking services.

The concept is most relevant in the United Kingdom and the United States, where historically there was a distinction drawn between pure investment banks and commercial banks. In the US, this was a result of the Glass–Steagall Act of 1933. In both countries, however, the regulatory barrier to the combination of investment banks and commercial banks has largely been removed, and a number of universal banks have emerged in both jurisdictions. However, at least until the global financial crisis of 2008, there remained a number of large, pure investment banks.

In other countries, the concept is less relevant as there is not regulatory distinction between investment banks and commercial banks. Thus, banks of a very large size tend to operate as universal banks, while smaller firms specialised as commercial banks or as investment banks. This is especially true of countries with a European Continental banking tradition. Notable examples of such universal banks include BNP Paribas and Société Générale of France; HSBC, Standard Chartered Bank and RBS of the United Kingdom; Deutsche Bank of Germany; ING Bank of the Netherlands; Bank of America, Citigroup, JPMorgan Chase and Wells Fargo of the United States; and UBS and Credit Suisse of Switzerland.

Universal banking and private banking often co-exist, but can exist independently. The provision of many services by universal banks can lead to long-term relationships between universal banks and firms.

Consumer Finance

It is the division of retail banking that deals with lending money to consumers. This includes a wide variety of loans, including credit cards, mortgage loans, and auto loans, and can also be used to refer to loans taken out at either the prime rate or the subprime rate. Consumer finance in the most basic sense of the word refers to any kind of lending to consumers. One of the best ways to get the unsecured loans is through the consumer finance.

3Consumer Finance

Durables which are financed are Television, Washing Machine, Air Conditioner, DVD/VCD players, Refrigerator, Computers/laptops, And other consumer durables

Consumer finance has largely returned to the marine industry; however, it is very different than it was during its pre-recession prosperity.

There was a time when just about anyone could get financing for a new boat, and consequently, models were flying off the showroom floor. It was a flawed system, however, that led to the recession and recoil from previously generous lenders.

Today, financing has made a comeback, as availability is near pre-recession levels, but it is being conducted in a manner that adheres more strictly to lending guidelines and newly enacted regulations.

Although banks are nowhere near – and possible never will be – pre-recession volumes, banks have re-entered or increased their aggressiveness in the issuing of boat loans.

During the downturn, banks exited recreational financing as loan defaults in all industries increased exponentially. Today, many are coming back in as they are again in a positive position and want to make money on lending.

4Consumer Finance

SME SECTOR

Small and medium enterprises (SMEs) or small and medium-sized businesses (SMBs) are companies whose personnel numbers fall below certain limits. The abbreviation "SME" is used in the European Union and by international organizations such as the World Bank, the United Nations and the World Trade Organization (WTO). Small enterprises outnumber large companies by a wide margin and also employ many more people. SMEs are also said to be responsible for driving innovation and competition in many economic sectors. Small & Medium Enterprise signifies: the owner of the enterprise works alongside his/her workers; the enterprise is classified in the "formal" sector

SME sector of India is considered as the backbone of economy contributing to 45% of the industrial output, 40% of India’s exports, employing 60 million people, create 1.3 million jobs every year and produce more than 8000 quality products for the Indian and international markets. With approximately 30 million SMEs in India, 12 million people expected to join the workforce in next 3 years and the sector growing at a rate of 8% per year, Government of India is taking different measures so as to increase their competitiveness in the international market.

There are several factors that have contributed towards the growth of Indian SMEs. Few of these include; funding of SMEs by local and foreign investors, the new technology that is used in the market is assisting SMEs add considerable value to their business, various trade directories and trade portals help facilitate trade between buyer and supplier and thus reducing the barrier to trade

With this huge potential, backed up by strong government support; Indian SMEs continue to post their growth stories. Despite of this strong growth, there is huge potential amongst Indian SMEs that still remains untapped. Once this untapped potential becomes the source for growth of these units, there would be no stopping to India posting a GDP higher than that of US and China and becoming the world’s economic powerhouse.

Small and medium enterprises (SMEs) are critical for the economic and social development of emerging markets.

They play a major role in creating jobs and generating income for low income people;

They foster economic growth, social stability, and contribute to the development of a dynamic private sector.

As such, access to financial services is vital in developing a vibrant SME sector in any economy.

In many emerging markets, however, access to financial services for SMEs remains severely constrained.

Over the past decade, IFC has played a critical role in helping small and medium enterprises worldwide gain greater access to financing.

5Consumer Finance

IFC works to increase access of SMEs to financial services in developing countries by providing funding for equity, loans, and mezzanine finance to financial intermediaries focusing on SME financing, and by building capacity of financial intermediaries and raising awareness on best SME Banking practices.

IFC uses both investments and technical assistance to support financial intermediaries outreach to the SME sector more effectively and efficiently. Investments made by IFC in financial intermediaries focusing on SME lending have included equity investments, loans, revolving credit lines, and risk mitigation facilities.

On the advisory side, IFC supports enhance banks SME operations in areas such as strategy, market segmentation, product development, risk management and IT/ MIS Facilities.

In 2011, IFC’s Global SME Banking Advisory Services Program comprised 59 projects spanning 38 countries and totalling $41.5 million.

About 81 percent of these projects were in International Development Association (IDA) countries, with 16 percent in conflict-affected or fragile states.

Sixteen percent of these projects included a component supporting targeted lending to women-owned SMEs.

Activities undertaken by the program under the G-20 initiative helped cement IFC’s position as a global thought leader in the SME finance area.

As the technical lead for the G-20 SME Finance Sub-Group under the Global Partnership for Financial Inclusion (GPFI), IFC’s program led the production of a stocktaking report which included a literature review on SME finance challenges, the collection of more than 160 SME finance models, and policy recommendations to scale up SME access to finance.

IFC’s Access to Finance Advisory Services supported a series of initiatives aimed at helping individuals and households access formal financial services, including the SME Finance Challenge, a competition launched by the G-20 to identify models that enable access to finance for SMEs.

IFC established a fund for winners of the challenge and has contributed to the fund.

At 2011 Cannes summit, the G-20 leadership lauded IFC’s role in setting up the fund, which mobilizes grant and risk capital for winning proposals from the Challenge and for scaling up successful SME financing models.

What is the SME?

From a quantitative perspective – Small & Medium Enterprise comprise of

• Less than 25 employees

• Less than 4000 sq. ft. of manufacturing area

6Consumer Finance

• Less than US$50000 investment in equipment; (note: Investments exclude real estate)

• Less than US$125,000 annual sales

• The value of the machinery, equipment and working capital must not exceed $1.5M

Need for SME’s

• The market for international payments services is rapidly expanding as SME’s search for a reliable platform that can serve their international payments needs. Yet, even the largest global banks lack the local footprint to deliver truly global payment solutions.

• Many payment solutions, designed by the banking community, are aimed at the large, multi-national companies but are not well suited for the SME market.

• Bank model continues to push customer service through self-service channels despite SME customer need for tailored, high touch service.

• Innovative payment solutions such as beneficiary management are not currently supported by any global or regional banks

Scope of SME’s

• It aims at delivering quality, innovative and efficient products and services to the SME customers through its professional teams.

• The bank develops flexible lending policies that meet the market needs. It also continues to streamline the approval procedures to improve SME lending efficiency.

• It aims to become a first-class domestic bank with leading performance in retail banking, credit card and SME, etc. as well as advanced international standard management\

• The Bank provides its SME customers with an extensive service platform in helping them solving financial problems and improving efficiency of their capital utilization through integration of service platforms of outlets, Internet banking and phone banking, etc.

7Consumer Finance

Objectives

a) Primary objectives

• To Study on recent economic slowdown on small and medium enterprises customers and measures taken by banks.

b) Secondary Objectives-

• To identify the level of impact of global recession on economy.

• To identify the share of the organization and frame measures to overcome the recession.

8Consumer Finance

RETAIL LENDER

He is a lender who lends money to individuals rather than institutions. Banks, credit unions, savings and loans institutions, and mortgage bankers are all examples of retail lenders. Retail lenders are used generally for lending money for mortgages, auto loans and consumer-finance loans

One of the most common examples of retail lending is the home mortgage. With this arrangement, qualified individuals are able to obtain the financing necessary to purchase a residence. While qualifications will vary from one lender to another, even in the same nation, most will require that the loan applicant have a steady income of a minimum amount, have a reasonable debt to income ratio, and possess a credit rating that is over a certain amount. Home mortgages are normally secured loans, in that the home being purchased with the mortgage is held as collateral until the note is retired in full.

Other types of retail lending include the issuance of loans for a wide range of financial needs. Loans for vehicle purchases are also very common, with the acquired vehicle serving as collateral for the loan. Individual consumers may also obtain loans to aid with settling medical debts, making home repairs, or even as the means to finance a vacation. Depending on the nature of the loan and the credit rating of the individual, some of these loans may not require any collateral, and are granted as unsecured loans.

In recent years, a newer form of retail lending has emerged. Known as a payday loan, this type of unsecured loan helps to provide a quick influx of cash in the event of an emergency. Typically, the loan is scheduled for repayment in full within a week or two, and carries a higher rate of interest than some other types of laws. In some jurisdictions, lawmakers have enacted legislation that places a cap on the amount of interest payday lenders can apply to the loans, although those interest rates are still much higher than loans obtained from more traditional lenders. For the most part, retail lending of this type should be viewed as for emergency purposes only, and when the funds needed to retire the debt can reasonably be expected to be in hand before the loan is due.

Retail loans are those loans which are given by the banks to individuals so as to meet there personal needs, retail loans are smaller in size as compared to corporate loans. Given below are various types of retail loans which are given by the banks -

1. Housing Loans – Most individuals take housing loans and when it comes to retail loans, housing loans is right there at the top. Banks give housing loans to individuals so that can buy apartment or construct new house if they already have the land.

2. Educational Loans – This type of loans is given by the banks to students so that they can pay for the tuition fees, hostel expenses, foreign education and other such expenses.

3. Vehicle or Auto Loans – This type of loans are given to individuals who are looking for buying cars whether new or second hand, auto loans are also given for two wheelers to individuals.

4. Personal Loans – Personal loan are the loans which are given to individuals for purposes such as marriage, traveling to abroad, loans for covering hospital expenses and other such loans which individual may need depending on his or her needs and situations.

5. Consumer lending

Consumer lending, also called retail lending, refers loans that allow consumers to purchase consumables, thus negating business loans, commercial loans, and also mortgage loans.

9Consumer Finance

Consumer lending is a service that is provided by banks and other financial institutions. The consumer loans offered to consumers can come in the form of secured and unsecured loans, usually depending on the amount to be borrowed and type of product to be bought.

For example, it is very common to get a secure loan for car loans. On the other hand, the use of credit cards, which is one of the most common types of consumer loans nowadays, is an unsecured loan.

Consumer lending is a very competitive business, which can be a great advantage to a person with good credit scores. People with good credit scores will have at their disposal a good array of loan products; shopping around for the best interest rates and loan terms is possible. Note though that people with low credit scores will definitely not enjoy the same number of choices. Furthermore, even with a good credit score, any late payment or breach of loan agreements holds the threat of lowered credit scores reduced access to consumer lending products.

As mentioned earlier, credit cards are one of the most accessible types of consumer lending products. However, with this convenience comes the price of high interest rates and penalties, which often leads to consumer debt.

Pattern of growth

Retail lending by banks in India gathered momentum following financial sector reforms in 1990s. Till then, most of the banking credit was focused on agriculture, industry, and commerce. The major role of bank lending till then was to support supply. To ensure that bank lending does not go to finance consumption, the regulator had put various restrictions on retail credit such as limits on total amount of housing loan and loans to individuals. Banks could lend only a specified small percentage of their total lending to individuals for non-productive purposes. The regulator also imposed strict norms for rate of interest, margin stipulation and maximum repayment period. These restrictions were gradually relaxed during 1990s which paved the way for increased retail lending by Indian banks. During the period from 1992-93 to 2005-06, retail loans grew at an average annual growth rate of 28.4 percent against 19.5 percent growth of overall bank credit during this period. The annual growth rate of retail loans was greater than the overall credit growth throughout this period, except in FY 1998-99. It would be recalled that the year 1997 witnessed the South East Asian Currency Crisis. However, the annual growth rate of retail loans dipped below the overall credit growth in the last two financial years, viz 2006-07 and 2007-08. Even in the current financial year retail loans growth rate is expected to lag behind the overall credit growth rate. Consequently, the share of retail loans in total bank credit increased from 8.3percent at end-March 1993 to 22.3 percent at end-March 2007. Chart 1 depicts the annual growth rates of retail loans and total bank credit during this period on the left axis as line graphs, and the percentage share of retail loans in the total bank

credit on the right axis as bar graphs. It is also interesting to look at the share of retail loans in total bank credit in various bank groups-foreign, private, nationalised and State Bank of India (SBI) group. Chart 2 presents the comparison at three points of time-1996, 2000, and 2007.

The share of housing loans in total bank credit was a dismal 3.2 percent in 1998-99. But in 2006-07 housing loans constituted 11.8 percent of total bank credit. The share of housing loans in retail credit first declined from 37.3 percent at end-March 1993 to 27.7 percent by end-March 1998, and then rose sharply to 52.8 percent at Retail Lending: Balancing Concerns in Difficult Times

10Consumer Finance

Importance of retail lending

1 History of Banking in India External shocks have undermined undercapitalized Indian owned banks Go. I direction imposed on banking Liberalization of the economy and the industry leads to the rapid growth of banking, especially retail banking as we know it. Demise of the 4-6-4 method!

2. What is Retail Banking and what makes it different? In a world of parity products, how do you gain leverage? Definition - Banking in which banking institutions execute transactions directly with customers typical products: savings and transaction accounts; mortgages; personal loans; debit and credit cards, etc. Working principle: Law of Large Numbers; probabilistic modelling Critical success factors: Distribution – Branch, channels Branding Unit costs – cost per account, cost per transaction Pricing Risk management

3. Retail Banking: What’s been good for Indian banks hasn’t been good enough for the country scorching pace of growth since liberalization: CAGR of around 30% to touch a figure of INR 9700 Billion. Bankable households are growing at a CAGR of 28% (2007-11) What’s powering this growth? Economic prosperity and growth rate Young population (70%<35 years) Technology channels: ATM, POS, Web, Mobile Retail loans constitute 7% of our economy versus 35% in other Asian countries Retail assets are at only 25% of total banking assets 41% of India’s adult population is un-banked Number of loan accounts: 14% of adult population 73% of farm households have no access to institutional credit Share of money lenders in rural debt has moved from 17% in 1991 to 30% in 2002

4. This imbalance is caused by banks chasing the low hanging fruit that constitutes the urban savvy consumer Purely from a profitability perspective, a large portion of the Indian population is perceived to be “unbankable” The costs of servicing the remote rural sector using traditional business models (KYC; branch centric model; incremental cost of infrastructure) makes profitable banking unviable Therefore, all banks tend to target the upwardly mobile urban salaried class Banks are even creating “financial exclusion” barriers by increasing minimum balance requirements and average deposit sizes Technology has lowered the cost of servicing this target segment

5. Fortunately, the scenario is changing Financial Inclusion (FI) is an RBI mandate, government mandate and a social mandate There IS a fortune at the base of the pyramid Social security payments and NREGA payments are being routed through banks MFI’s have shown that it’s possible to run extremely profitable businesses. Most major banks are working on a business-driven FI strategy Simplified KYC norms and UID is expected to drive down the cost of customer acquisition Innovation in mobile / hand held devices using an uniquely Indian model offers the best potential breakout strategy

6. Source: Verizone the banks that will succeed will be those that can deploy business services through the entire eco systems through seamless supply chains

7. “ Today, if you look at financial systems around the globe, more than half the population of the world - out of six billion people, more than three billion - do not qualify to take out a loan from a bank. This is a shame…. The poor themselves can create a poverty-free world. All we have to do is to free them from the chains that we have put around them”

11Consumer Finance

Opportunities and Challenges of Retail Banking in India

Retail banking has immense opportunities in a growing economy like India. As the growth story gets unfolded in India, retail banking is going to emerge a major driver. How does the world view us? I have already referred to the BRIC Report talking India as an economic superpower. A. T. Kearney, a global management consulting firm, recently identified India as the "second most attractive retail destination" of 30 emergent markets. The rise of the Indian middle class is an important contributory factor in this regard. The percentage of middle to high income Indian households is expected to continue rising. The younger population not only wields increasing purchasing power, but as far as acquiring personal debt is concerned, they are perhaps more comfortable than previous generations. Improving consumer purchasing power, coupled with more liberal attitudes toward personal debt, is contributing to India's retail banking segment.

The combination of the above factors promises substantial growth in the retail sector, which at present is in the nascent stage. Due to bundling of services and delivery channels, the areas of potential conflicts of interest tend to increase in universal banks and financial conglomerates. Some of the key policy issues relevant to the retail banking sector are: financial inclusion, responsible lending, access to finance, long-term savings, financial capability, consumer protection, regulation and financial crime prevention. What are the challenges for the industry and its stakeholders? First, retention of customers is going to be a major challenge. According to a research by Reich held and Sesser in the Harvard Business Review, 5 per cent increase in customer retention can increase profitability by 35 per cent in banking business, 50 per cent in insurance and brokerage, and 125 per cent in the consumer credit card market. Thus, banks need to emphasise retaining customers and increasing market share. Second, rising indebtedness could turn out to be a cause for concern in the future. India's position, of course, is not comparable to that of the developed world where household debt as a proportion of disposable income is much higher. Such a scenario creates high uncertainty. Expressing concerns about the high growth witnessed in the consumer credit segments the Reserve Bank has, as a temporary measure, put in place risk containment measures and increased the risk weight from100 per cent to 125 per cent in the case of consumer credit including personal loans and credit cards (Mid-term Review of Annual Policy, 2004-05).Third, information technology poses both opportunities and challenges. Even with ATM machines and Internet Banking, many consumers still prefer the personal touch of their neighbourhood branch bank. Technology has made it possible to deliver services throughout the branch bank network, providing instant updates to checking accounts and rapid movement of money for stock transfers. However, this dependency on the network has brought IT departments additional responsibilities and challenges in managing, maintaining and optimizing the performance of retail banking networks. Illustratively, ensuring that all bank products and services are available, at all times, and across the entire organization is essential for today’s retails banks to generate revenues and remain competitive. Besides, there are network management challenges, whereby keeping these complex, distributed networks and applications operating properly in support of business objectives becomes essential. Specific challenges include ensuring that account transaction applications run efficiently between the branch offices and data centres. Fourth, KYC Issues and money laundering risks in retail banking is yet another important issue. Retail lending is often regarded as a low risk area for money laundering because of the perception of the sums involved. However, competition for clients may also lead to KYC procedures being waived in the bid for new business. Banks must also consider seriously the type of identification documents they will accept and other processes to be completed. The Reserve Bank has issued details guidelines on application of KYC norms in November 2004.

12Consumer Finance

MICROFINANCE

It is a source of financial services for entrepreneurs and small businesses lacking access to banking and related services. The two main mechanisms for the delivery of financial services to such clients are: (1) relationship-based banking for individual entrepreneurs and small businesses; and (2) group-based models, where several entrepreneurs come together to apply for loans and other services as a group.

In some regions, for example Southern Africa, microfinance is used to describe the supply of financial services to low-income employees, which is closer to the retail finance model prevalent in mainstream banking.

For some, microfinance is a movement whose object is "a world in which as many poor and near-poor households as possible have permanent access to an appropriate range of high quality financial services, including not just credit but also savings, insurance, and fund transfers." Many of those who promote microfinance generally believe that such access will help poor people out of poverty, including participants in the Microcredit Summit Campaign. For others, microfinance is a way to promote economic development, employment and growth through the support of micro-entrepreneurs and small businesses.

Microfinance is a broad category of services, which includes microcredit. Microcredit is provision of credit services to poor clients. Microcredit is one of the aspects of microfinance and the two are often confused. Critics may attack microcredit while referring to it indiscriminately as either 'microcredit' or 'microfinance'. Due to the broad range of microfinance services, it is difficult to assess impact, and very few studies have tried to assess its full impact. Proponents often claim that microfinance lifts people out of poverty, but the evidence is mixed. What it does do, however, is to enhance financial inclusion.

Microfinance and poverty

In developing economies and particularly in rural areas, many activities that would be classified in the developed world as financial are not monetized: that is, money is not used to carry them out. This is often the case when people need the services money can provide but do not have dispensable funds required for those services, forcing them to revert to other means of acquiring them. In his recent book The Poor and Their Money, Stuart Rutherford cites several types of needs:

Lifecycle Needs: such as weddings, funerals, childbirth, education, homebuilding, widowhood and old age.

Personal Emergencies: such as sickness, injury, unemployment, theft, harassment or death. Disasters: such as fires, floods, cyclones and man-made events like war or bulldozing of

dwellings. Investment Opportunities: expanding a business, buying land or equipment, improving

housing, securing a job (which often requires paying a large bribe), etc.

Poor people find creative and often collaborative ways to meet these needs, primarily through creating and exchanging different forms of non-cash value. Common substitutes for cash vary from country to country but typically include livestock, grains, jewellery and precious metals. As Marguerite Robinson describes in The Microfinance Revolution, the 1980s demonstrated that "microfinance could provide large-scale outreach profitably," and in the 1990s, "microfinance began to develop as

13Consumer Finance

an industry" (2001, p. 54). In the 2000s, the microfinance industry's objective is to satisfy the unmet demand on a much larger scale, and to play a role in reducing poverty. While much progress has been made in developing a viable, commercial microfinance sector in the last few decades, several issues remain that need to be addressed before the industry will be able to satisfy massive worldwide demand. The obstacles or challenges to building a sound commercial microfinance industry include:

Inappropriate donor subsidies Poor regulation and supervision of deposit-taking MFIs Few MFIs that meet the needs for savings, remittances or insurance Limited management capacity in MFIs Institutional inefficiencies Need for more dissemination and adoption of rural, agricultural microfinance

methodologies

Benefits and Limitations

The benefits of microfinance are that it helps to manage the assets of the poor and generates income. Through microfinance institutions such as credit unions, financial non-governmental organizations and even commercial banks poor people can obtain small loans and safeguard their savings. The limitations of microfinance are that through this savings plan participants are losing money by having to pay a fee. The user can also pay back their loans whenever they chose therefore encouraging a borrower to have various outstanding loans. The lender is also vulnerable in that there is no guarantee of the loan being repaid in the given arranged timeframe, and the consequences to defaulting are not defined.

When looking at a micro-finance initiative, there are three main benefits and limitations for the model. These are based on a basic micro-finance initiative though they can be applied to many variations. When looking at the three benefits and limitations, they revolve around three key ideas, poverty, mistrust, and promoting change.

A micro-finance initiative wishes to address these issues in a positive way. For example, micro-finance can be an alternative program to address poverty reduction where the tools needed to raise an individual or a family out of poverty are given to them directly. In a micro-finance project these tools include money primarily, and may also be accompanied with a savings program, and financial help. Along with poverty reduction, a micro-finance initiative can aim to avoid a general sense of mistrust between the citizens and their national banks. The money in this case, is not coming from a bank, but rather within the community which allows those participating to foster social capital and community cohesion. Lastly, a microfinance initiative can promote larger poverty reduction movements by increasing the financial knowledge of the average citizen.

However, these initiatives are not without limitations. These limitations focus on the same issues as stated before, but the negative consequences that may occur. For example, while there may be mistrust in the national banking system, there can be microfinance initiatives where the outside creator takes advantage of those participating. The money may not end up in the right places, resulting in distrust to all who have interest in monetary programs, and could potentially ruin the chance of any further microfinance projects becoming successful. Secondly, when creating a microfinance project, time may be an issue. What happens when the program is finished and the people who were participating are still in poverty? In this case, it may be more beneficial for there to be an on-going program. To see what would be an appropriate choice in regards of time, the community must be

14Consumer Finance

assessed before the project is put in place. Lastly, in regards to limitations, someone is always going to be left out. Not everyone can be a part of the program, and therefore one must decide who is going to participate. Often, for a community development project to be sustainable, all must be affected positively.

There are two ways in which the needs of the poor are not being met by micro finance. Firstly, the poor need to store savings for the long run; such as for their retirement, widowhood or their heirs but the examples such as saving up, down and through do not directly meet these needs. Secondly, the poor’s ability to save fluctuates with time and so they may not be able to save the fixed rate of saving. These two shortcomings are difficult for the poor and they often get excluded or exclude themselves (Rutherford, 2009). Poor people have to take a risk to turn their savings in to large lump sum of money because there is no perfect system that would protect their deposits. For example, there is a lack of trust among the members and the organizer; most community micro finance projects only include family and close friends and do not reach beyond that. Also, there is no or very little growth in the amount of money that they save if saving up but if saving down, there is an interest rate that the members have to pay.

Also, there are complications associated with implementing micro-finance projects in Canada. For an example, inflation rates make it difficult to analyse interest rates across countries, so ASCA’s in high inflation would have to charge more interest on their loans which may result in their funds to decline in value themselves (Rutherford, 2009). In many countries, ASCA’s have become permanent institutions referred to as Credit Unions, Savings and Credit Co-operatives. Rutherford argues that credit unions are not owned by the poor because they require specialized skills and higher educated personals to regulate the operation of these institutions themselves (Rutherford, 2009). Although these institutions aim to benefit the poor, they are very different from neighbourhood ASCA’s and issues arise when they purse collateral or securities for loans given. Similarly, there are language barriers between formal federal banks and credit unions that causes complications (McMillian, 2010).

The major benefit of microfinance projects is that it allows low income families to save their money; most of the poor live day to day with the little money that they earn and cannot afford to save. Poor people need such alternatives in order to turn their savings in to large lump sums or receive large sums and pay monthly with low interest rates. Banks and other money lending institutions have high interest rates and simply won’t extend loans to poor people with little or no assets or employment. Microfinance helps the poor people get access or save funds over a period of time with low interest rates. Also, the poor could solve their own issues by working together as a community and this creates trust and social capital in their communities. It also leads to stability and growth in their households, as well as their communities.

15Consumer Finance

BANCASSURANCE

As term itself tells us what does it means. It's a combination of the term 'Bank' and 'Insurance'. It means that insurance have started selling their product through banks. It's a new concept to Indian market but it is very widely used in western and developed countries. It is profitable both to Banks and Insurance companies and has a very bright future to be the most develop and efficient means of distribution of Insurance product in very near future. Insurance company can sell both life and non-life policies through banks. The share of premium collected by banks is increasing in a decent manner from the time it was introduce to the Indian market. In India Bancassurance in guide by Insurance Regulatory and Development Authority Act (IRDA), 1999 and Reserve Bank of India. All banks and insurance company have to meet particular requirement to get into Bancassurance business.

It is predicted by experts that in future 90% of share of premium will come from Bancassurance business only. Currently there are more and more banking and Insurance Company and venturing into Bancassurance business for better business prospect in future.

The banking business is also generating more profit by more premium collected by them and they also receive commission like normal insurance agent which increase their profits and better reputation for the banks as there service base also increase and are able to provide more service to customers and even more customer are attracted toward bank.

It is even profitable for Insurance Company as they receive more and more sales and higher customer base for the company. And they have to directly deal with an organization which reduce there pressure to deal with each customer face to face. In all Bancassurance has proved to be boom in whole Banking and Insurance arena

What is bank assurance?

Bancassurance is the distribution of insurance products through a bank's distribution channels. It is a service that can fulfil both banking and insurance needs at the same time. Bancassurance as a concept first began in India when the insurance industry opened up to private participation in December 1999. There are basically four models of bancassurance:

• Distribution alliance between the insurance company and the bank.

• Joint venture between the two companies.

• Mergers between a bank and insurer.

• Bank builds or buys own insurance products.

Most of the bancassurance operations fall in the first model.

The concept of bancassurance was evolved in Europe. Europe leads the world in Bancassurance market penetration of banks assurance in new life business in Europe which ranges between 30% in United Kingdom to nearly 70% in France. However, hardly 20% of all United States banks were selling insurance against 70% to 90% in many Western European countries. In Spain, Belgium, Germany and France more than 50% of all new life premiums is generated by banks assurance. In Asia, Singapore, Taiwan and Hong Kong have surged ahead in Bancassurance then that with India and China taking tentative step forward towards it. In Middle East, only Saudi Arabia has made some feeble attempts that even failed to really take off or make any change in the system.

16Consumer Finance

Why should banks enter insurance?

There are several reasons why banks should seriously consider Bancassurance, the most important of which is increased return on assets (ROA). One of the best ways to increase ROA, assuming a constant asset base, is through fee income. Banks that build fee income can cover more of their operating expenses, and one way to build fee income is through the sale of insurance products. Banks that effectively cross-sell financial product can leverage their distribution and processing capabilities for profitable operating expense ratios.

By leveraging their strengths and finding ways to overcome their weaknesses, banks could change the face of insurance distribution. Sale of personal life insurance products through banks meets an important set of consumer needs. Most large retail banks engender a great deal of trust in broad segments of consumers, which they can leverage in selling them personal life insurance products. In addition, a bank's branch network allows the face to face contact that is so important in the sale of personal insurance.

Another advantage banks have over traditional insurance distributors is the lower cost per sales lead made possible by their sizable, loyal customer base. Banks also enjoy significant brand awareness within their geographic regions, again providing for a lower per-lead cost when advertising through print, radio and/or television. Banks that make the most of these advantages are able to penetrate their customer base and markets for above-average market share.

Other bank strengths are their marketing and processing capabilities. Banks have extensive experience in marketing to both existing customers (for retention and cross selling) and non-customers (for acquisition and awareness). They also have access to multiple communications channels, such as statement inserts, direct mail, ATMs, telemarketing, etc. Banks' proficiency in using technology has resulted in improvements in transaction processing and customer service.

By successfully mining their customer databases, leveraging their reputation and 'distribution systems' (branch, phone, and mail) to make appointments, and utilizing 'sales techniques' and products tailored to the middle market, European banks have more than doubled the conversion rates of insurance leads into sales and have increased sales productivity to a ratio which is more than enough to make Bancassurance a highly profitable proposition.

Bancassurance primarily banks on the relationship the customer has developed over a period of time with the bank. And pushing risk products through banks is a cost-effective affair for an insurance company compared to the agent route, while, for banks, considering the falling interest rates, fee based income coming in at a minimum cost is more than welcome.

17Consumer Finance

RETAIL BANKING

Retail banking is when a bank executes transactions directly with consumers, rather than corporations or other banks. Services offered include savings and transactional accounts, mortgages, personal loans, debit cards, and credit cards. The term is generally used to distinguish these banking services from investment banking, commercial banking or wholesale banking. It may also be used to refer to a division of a bank dealing with retail customers and can also be termed as Personal Banking services.

In the US the term Commercial bank is used for a normal bank to distinguish it from an investment bank. After the great depression, through the Glass–Steagall Act, the U.S. Congress required that banks only engage in banking activities, whereas investment banks were limited to capital markets activities. This separation was repealed in the 1990s. Commercial bank can also refer to a bank or a division of a bank that mostly deals with deposits and loans from corporations or large businesses, as opposed to individual members of the public (retail banking).

Challenges and opportunities for retail and corporate banks in a fast changing and globalizing world

The deep crisis in the banking sector and the fast-changing environment are forcing retail and corporate banks around the globe to change their business models, and to look for new profit opportunities.

Banks in mature markets are focusing on deleveraging their balance sheets, complying with solvency and liquidity requirements, and increasing their operational efficiency. Return on Equity expectations have been gone back to pre-2002 levels. At the same time, there are plenty of growth opportunities in the new economies.

Management Centre Europe sees a big opportunity for banks serving the growing middle class and the still ‘un banked’ population in the new world. Small and Medium Enterprises (SME) are a major driver of economic growth. Some of the emerging markets are leapfrogging ahead on infrastructure and taking the lead in the convergences between banking, mobile communication and retailing.

A. Growth opportunities in emerging markets

1. Fast growth of the middle class

Strong growth in the young urban educated population results in an important increase of Consumer Lending, both for housing and personal loans. We observe a fast-growing portfolio with relatively high yields and good risk indicators in countries like India, Russia, Turkey and selective African countries.

At the same time, the Wealth Management segment is booming in almost all emerging markets, and especially in new oil- or natural resource-rich economies. The growing demand for Asset Management products creates a strong need to improve the quality of service and to develop advisory services for the wealthy and middle class population.

The major challenge for banks is to become customer-centric while increasing the bank’s profitability.

2. SME banking is the driver for economic growth

18Consumer Finance

In emerging economies, Small and Medium Enterprises have even a higher impact on economic growth compared to the Western world. Moreover, they develop faster than large corporations. Now they are already responsible for up to 50% of GDP and over 70% of the workforce. SMEs are critical for the economic and social development in creating jobs and generating income.

Offering services to SMEs is a key opportunity for economic growth. Often these companies are too large for micro-financing and too small to obtain loans from international institutions (funding gap). Creative solutions might include the development of innovative financial packages with smart subsidies from local government to sustain SME financing, local-international partnerships to mitigate currency and transactional cost risks (local banks with offshore partners), or the structure of lending to SMEs with the option to convert credit in to equity at lower interest rates.

To increase customer loyalty, a customer-centric model and a relationship approach are needed. The creation of a simple value proposition to cover customer needs (current account with overdraft, simple cash management, user-friendly electronic banking system, payment cards, number of allowed transactions within basic price) combined with risk-adjusted relationship pricing and dedicated relationship management will make the difference. It is clear that the SME segment (different from Corporate) requires a standardized and centralized process for up to 90% of its transactions and a special track for long-term investment loans.

3. Access to financial services for the 'un banked'

In places like Africa and India, a high percentage of the population lives in rural areas not meeting the qualifying criteria to open a bank account. In these countries, the government, together with central banks, are setting up programmes for regulatory reform, liberalization, and modernization of the banking industry. The focus is on payment systems, settlement and clearing to support economic growth. A key success factor of the business model is to lower the cost of retail banking to service low-income customers with high efficiency and profitability.

The combination of a high percentage of ‘un-banked ‘(over 70% of population), the boost in sales of mobile phones (over 400 million), the partnerships between mobile operators and banks and the governmental support (regularity reform) allows Africa to lead the way in mobile banking. Today already 37% of cell phone owners in Africa use mobile banking services (compared to 8,5% in leading European markets). By 2015, 238 million Africans (or 55% of cell phone owners) are expected to be using mobile financial services. It is the opportunity to reach a new customer segment and to boost fee revenues while limiting the costs.

One of the success stories is M-PESA in Kenya, in partnership with Safricom. M-PESA made the mobile phone ‘the’ ATM, point of sale and internet banking in one, creating access to financial services for the large un-banked (poor) population. It has a large network of 17.500 agents compared to only 840 bank branches to reduce the costs, generating high volumes of daily transactions with interesting margins at lower costs for the clients. The financial services include payments (mobile wallet), account management and mobile micro finance.

India required a different solution to provide safe, fast and easy payments for the un-banked population. Only 1% of the cell phone owners in India uses it for banking transactions. Branch penetration is low, while cost of banking intermediation is high. The Federal Bank of India introduced an innovative payment strategy to improve access to banking channels and to boost electronic

19Consumer Finance

transactions. A unique 12- digit number linked to basic demographic and biometric information (photograph and finger print scan) prevents fraud and makes it possible to offer personal payment service from person to person, domestic and international, in a few seconds. The same number can be used for payments with both cards and mobiles.

B. Challenges for banks

Given these trends, Management Centre Europe sees fives major challenges for retail and corporate banks around the globe:

1. Setting up for increased competition and expansion

Prepare for new global players entering local markets. Expand in new geographies with relevant customer value propositions.

2. Keeping customers loyal in a multi-banking environment

Become and remain the customer’s bank of choice in times of decreasing customer loyalty.

3. Investing in the right technology

Invest in technological innovation to achieve or maintain leadership in a fast changing market place.

4. Ensuring profitability

Adapt the operating model to ensure efficiency and profitability.

5. Managing risk through the economic cycle

Focus on sustainable growth while managing risk and complying with Basel III requirements and new regulations.

2. SME banking is the driver for economic growth

In emerging economies, Small and Medium Enterprises have even a higher impact on economic growth compared to the Western world. Moreover, they develop faster than large corporations. Now they are already responsible for up to 50% of GDP and over 70% of the workforce. SMEs are critical for the economic and social development in creating jobs and generating income.

Offering services to SMEs is a key opportunity for economic growth. Often these companies are too large for micro-financing and too small to obtain loans from international institutions (funding gap). Creative solutions might include the development of innovative financial packages with smart subsidies from local government to sustain SME financing, local-international partnerships to mitigate currency and transactional cost risks (local banks with offshore partners), or the structure of lending to SMEs with the option to convert credit in to equity at lower interest rates.

To increase customer loyalty, a customer-centric model and a relationship approach are needed. The creation of a simple value proposition to cover customer needs (current account with overdraft, simple cash management, user-friendly electronic banking system, payment cards, number of allowed transactions within basic price) combined with risk-adjusted relationship pricing and dedicated relationship management will make the difference. It is clear that the SME segment (different from Corporate) requires a standardized and centralized process for up to 90% of its transactions and a special track for long-term investment loans.

20Consumer Finance

3. Access to financial services for the 'un banked'

In places like Africa and India, a high percentage of the population lives in rural areas not meeting the qualifying criteria to open a bank account. In these countries, the government, together with central banks, are setting up programmes for regulatory reform, liberalization, and modernization of the banking industry. The focus is on payment systems, settlement and clearing to support economic growth. A key success factor of the business model is to lower the cost of retail banking to service low-income customers with high efficiency and profitability.

The combination of a high percentage of ‘un-banked ‘(over 70% of population), the boost in sales of mobile phones (over 400 million), the partnerships between mobile operators and banks and the governmental support (regularity reform) allows Africa to lead the way in mobile banking. Today already 37% of cell phone owners in Africa use mobile banking services (compared to 8,5% in leading European markets). By 2015, 238 million Africans (or 55% of cell phone owners) are expected to be using mobile financial services. It is the opportunity to reach a new customer segment and to boost fee revenues while limiting the costs.

One of the success stories is M-PESA in Kenya, in partnership with Safricom. M-PESA made the mobile phone ‘the’ ATM, point of sale and internet banking in one, creating access to financial services for the large un-banked (poor) population. It has a large network of 17.500 agents compared to only 840 bank branches to reduce the costs, generating high volumes of daily transactions with interesting margins at lower costs for the clients. The financial services include payments (mobile wallet), account management and mobile micro finance.

India required a different solution to provide safe, fast and easy payments for the un-banked population. Only 1% of the cell phone owners in India uses it for banking transactions. Branch penetration is low, while cost of banking intermediation is high. The Federal Bank of India introduced an innovative payment strategy to improve access to banking channels and to boost electronic transactions. A unique 12- digit number linked to basic demographic and biometric information (photograph and finger print scan) prevents fraud and makes it possible to offer personal payment service from person to person, domestic and international, in a few seconds. The same number can be used for payments with both cards and mobiles.

B. Challenges for banks

Given these trends, Management Centre Europe sees fives major challenges for retail and corporate banks around the globe:

1. Setting up for increased competition and expansion

Prepare for new global players entering local markets. Expand in new geographies with relevant customer value propositions.

2. Keeping customers loyal in a multi-banking environment

Become and remain the customer’s bank of choice in times of decreasing customer loyalty.

3. Investing in the right technology

Invest in technological innovation to achieve or maintain leadership in a fast changing market place.

4. Ensuring profitability

21Consumer Finance

Adapt the operating model to ensure efficiency and profitability.

5. Managing risk through the economic cycle

Focus on sustainable growth while managing risk and complying with Basel III requirements and new regulations.www.mce-ama.com Page 3 September 2012

C. Strategic directions to future growth in emerging markets

1. Customer centricity to improve customer trust and loyalty

When competition increases in an industry, the best companies stand out from the rest. Typically they do this by structuring a customer-needs-based approach (value proposition and segmentation) combined with a proper right pricing strategy (relationship pricing and risk based pricing) for each customer segment. The same principle applies to the banking industry. Because of the higher customer profitability a strong focus on the Wealth Management segment (advisory, different product mix, relationship banking) is needed.

Not too many banks give great customer service. Therefore, it is exactly in service excellence that a competitive bank can differentiate itself from rivals. This is the key to retaining existing customers and gaining new ones. Having the right profile of front end staff and giving them the necessary training and coaching is critical for success.

There are clearly cross-selling opportunities between the corporate, SME and retail segments if the ‘one’ customer approach for both the private and company needs gets implemented. A full integration of SME services in the Retail Branch network makes sense, as well as cross-selling to corporate businesses (promoting salary domiciliation, unsecured overdraft and loans, debit and credit cards).

Russian mid-sized private banks, for example, have a tremendous opportunity to gain market share if they develop a customer centric business model with focus on service excellence and innovation.

2. Technological enhancement to support Customer Centricity

To be customer-centric and to be able to do the right segmentation, it is important to invest in data capture and analytic capabilities. A 360-degree customer view and CRM tool is needed to understand and develop the needs of the different customer segments and to create sales and cross-sales opportunities.

A high-performance core banking platform (automated, real time) is a competitive advantage. Payments can be a money maker, but high-tech development is needed to make it safe, fast and easy. Multi concepts, language, currency,... facilitate the transfer to global markets.

Plenty of examples in Africa (mobile banking), India (unique customer identification) and Brazil (ATM) demonstrate the implementation of high tech solutions to capture new customer segments and to limit the cost of the branch network. In Brazil the Central Bank of Brazil plays a leading role in technological development creating efficiency and reliability for the whole Brazilian banking system seen as one of the best in the world.

3. Efficient operating model to export to global markets

22Consumer Finance

A centralized service with multi-product and multi-segment capabilities together with lean processes (standardized, automatic, digitized, paperless and real time) ensure safe, fast and easy service. It’s important to focus on the core activity and to consider outsourcing of non-core activities.

An industrialized approach for the mass market and SME segments offering standard packages and relationship pricing ensure cost effective processes. And with the right pricing strategy, you can drive the customers to the most efficient channel.

There are attractive opportunities for partnerships with mobile operators and retailers to capture the high volume business amongst the low income population, through a low-cost distribution model. There are plenty of examples in Africa with existing partnerships between banks, mobile operators and retailers.

4. Smart branch network expansion or direct mobile banking?

With strong GDP growth in emerging markets, competitive focus is on expansion and not on cost optimization. The question becomes how to expand in a profitable and cost-effective way while adjusting to the local business environment.

The right multi-channel mix between branches, ATM, Mobile Banking, Internet and Call Centre provides the customer a 24/7 accessibility, while directing him or her to the most efficient channel. In this mix, we see a clear trend to move more towards mobile banking, complementing or even replacing the branch network. For mass affluent and unbanked customers, it is the right time to introduce Direct Mobile Banking 2.0 with the full range of Retail Banking services.

In particular markets, there are still opportunities to expand the branch network. This is thanks to the high economic growth, fast-growing middle class and still relatively low branch penetration. The new branch model will be advisory and service and sales oriented with a customer friendly pro-active approach towards the most profitable segments (middle class, Wealth Management and SME) and this way improve cross-sales and customer profitability.www.mce-ama.com Page 4 September 2012

Another possible solution to limit costs of distribution is the use of mobile branches as Equity Bank in Kenya does. It has a good mix of prestige branches for affluent customers, regular branches servicing all, with separate service for each segment, and mobile branches (vans) to serve rural communities up to twice a week. In Brazil, ATMs are high-performing and enable the customer to execute all standard retail banking transactions. Banks in Brazil favour expansion of the ATM network rather than expanding their branch network.

5. Managing risk through the cycle

Western banks worry about the negative impact of the new Basel III requirements on their profitability and economic growth (higher cost of capital passed to borrowers). Emerging market bank can be more optimistic thanks to a higher investment appetite (historically good return of banking stocks), growth potential of their economies, and having escaped much of the crisis faced by the West.

A major concern for banks is to maintain healthy credit portfolios and to grow in a controlled way, monitoring all key credit ratios carefully to avoid too high write offs. In particular markets, fast economic growth and a boost in consumer lending during the last decade led to huge losses for banks. However in Brazil, the second private bank, Banco Bradesco, grew its market share to 15% and has become one of the leaders in assets with a very healthy credit portfolio.

23Consumer Finance

How can MCE help you to effectively address key challenges in the banking industry

MCE’s Senior Associates all have hands-on international senior management experience in the banking industry. We help you to implement strategy and make change happen in an effective way.

How MCE adds value to your bank

• Helping to make the transformation happen through workshops and advisory services on strategy execution.

• Building specific solutions for internal management and organizational development.

• Conducting workshops for individual managers to exchange ideas with international peers (open enrolment workshops).

• Coaching and mentoring individuals and teams to make them gain competence in new roles or environments.

24Consumer Finance

CONCLUSION

Consumer finance is the segment of the financial services industry that lends money to individual consumers. Although banks and credit unions are among the lenders in the consumer finance industry, alternative lenders include finance companies, pay day loan services and establishments specializing in lending to borrowers with poor credit. As a whole, the broad range of services in consumer finance provides the financing to purchase vehicles, remodel a home or obtain secured and unsecured lines of credit from banks.

Interest rates

Interest rates are an important aspect of consumer finance. Consumers may do themselves a great service by understanding the effect of the interest rate charged on the amount of their loan. Generally, the interest rate on any financing arrangement is the cost of borrowing by the consumer. Intuitively, consumers may find that higher interest rates result in paying much more than the sale price of a particular purchase. In contrast, lower interest rates means that financed purchases do not cost much more than the selling price. With these two interest rate scenarios in mind, a consumer may gauge whether a certain financing arrangement is actually worthwhile and in his best interest. After all, entering a financial arrangement is a commitment to pay back the borrowed amount and additional interest payments.

Being unaware of the effect of interest rates on borrowing or the inability to escape expensive borrowing may be expensive. In some instances, some consumer finance products may not be in the best interest of the consumer. Favourable interest rate terms may make repayment easy to manage while higher rates make repayment a significant financial burden.

Credit Rating

Credit ratings impact a consumer's ability to obtain favorable consumer financing. Generally, a consumer's individual credit rating may serve as a way to gauge the risk of a consumer defaulting on the loan. Credit ratings are expressed as a numerical value of a borrower's credit worthiness. According to Experian, a credit rating higher than 700 is generally accepted to be favorable by creditors. As a result, lenders use credit ratings to approve or reject a consumer's request for a line of credit. In addition, credit ratings may also determine whether the terms of the credit or loan are favorable to the consumer. Although an unfavourable credit rating does not automatically disqualify a consumer from financing, there are significant financial differences in financing terms between consumers with poor credit ratings and those with strong ratings. For instance, poor credit scores may often result in unfavorable financing terms such as paying higher interest rates. In contrast, consumers with strong credit scores may be able to shop around for the best terms and lower interest rates.

Agencies

Three primary agencies--Experian, Equifax and TransUnion--provide lenders with credit information about individual consumers. Generally, lenders will consult with more than one of these three agencies to determine consumer history of credit management. To ensure that lenders get the most accurate information about your credit management, check your credit report with all three agencies for incorrect and outdated information.

25Consumer Finance

Fraud

Consumer finance products may not all be in the best interest of the consumer. Consumers with poor credit or limited financing options may be especially susceptible to potentially bad financing services. The Federal Trade Commission reports that recent "law enforcement efforts demonstrate that fraud promoters who promise financial services or assistance for a several-hundred-dollar fee generally do not deliver. Instead, they take millions of dollars from consumers without providing any services at all." The FTC warns that fraudulent activities include advance fee financing and credit repair services that charge fees upfront to secure credit on behalf of the consumer or improve credit ratings or clear

26Consumer Finance

REFERENCES

Wikipedia

http://en.wikipedia.org/wiki/Universal_bank

http://www.investopedia.com/terms/u/universalbanking.asp

http://www.investorwords.com/6767/consumer_finance.html

http://en.wikipedia.org/wiki/Bancassurance

http://en.wikipedia.org/wiki/Retail_banking

http://www.wisegeek.com/what-is-retail-lending.htm

THE END

Thank You

***********

27Consumer Finance