Page 128 - DCOM208_BANKING_THEORY_AND_PRACTICE

Unit 8: Banking Systems

Fee-based services can be further classified into corporate and retail fee-based services. Notes
Organizations avail of such services for meeting both their short-term and long-
term financial requirements. The common fee-based services offered to corporate
clients are: cash management services, letter of credit, bank guarantees, bill
discounting, factoring/ forfeiting, forex services, merchant banking, registrar
services, underwriting services, custodial services, lease and hire purchase, and
credit rating.

Retail fee-based services are availed of at large by the retail customers for payments,
money transfers, personal wealth management, online trading, etc.
Banks need to deal with the changing requirements of their customers through new product
development. However, financial products can be easily replicated.
The pricing of banking products directly affects customer acquisition and customer retention, in
addition to profitability and long-run viability.

!
Caution Price is a mechanism to cover the costs of operations which comprises of production
costs, distribution costs, promotion costs, and other operational expenses.
The pricing decision is influenced by many factors such as cost, competition, customers, and
other constraints. With the advent of deregulation and the simultaneous rise in competition,
many of the banks have acquired a competitive pricing strategy. RBI has deregulated the pricing
mechanism for both asset and liability products. Every bank has to set its own Benchmark Prime
Lending Rate (BPLR) to price its asset products. A bank may price its asset products (for a given
customer either above or below the BPLR, depending on situational factors such as
credit-worthiness of the customer, stage of relationship, etc.

Notes New product development and innovation are considered essential for a bank’s
long term sustainability.

Corporate banking products are distributed mainly through a direct sales force or bank branches,
supplemented by phone banking and online banking. Relationship officers are based at several
branches of banks; they make frequent client visits to nurture relationships and to develop fresh
business opportunities. Banks attempt to develop an optimal distribution mix using personal/
non-personal ways of delivery, in order to achieve various objectives such as superior customer
service, operational efficiency, and profitability. Integrated banking software applications –
usually referred to as Core Banking Solutions (CBS) — are essential to the real-time
synchronization of the transactions that happen through the different modes of distribution.

The small and medium business enterprises (SME) sector is regarded as the growth engine of the
Indian economy; it generates employment for nearly 30 million people and contributes around
30 percent to the nation’s GDP. However, corporate bankers ignored this segment for a long run
due to the high incidence of Non-performing Assets (NPA) and the lack of proper tools to assess
the credit rating of the SMEs. This trend is changing and the SME segment is now one of the focus
areas of growth for several banks. This shift has been affected by the policy initiatives introduced
by the Reserve Bank of India and the government in favour of SMEs. With big enterprises
getting access to cheaper funds from other channels, their bargaining power has been increased
with respect to the banks. This situation has also induced corporate bankers to look at SMEs as
an avenue for profitable growth.

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