CORRESPONDENT BANKING AND NRI ACCOUNTS

Correspondent Banking and NRI Accounts

Introduction :

Given the increase in international trade and finance, there has been an ever—growing
need for a relationship between banks across borders to facilitate cross border
handling of trade documents, receipts and payments.
In addition, a large number of Indians living abroad has fuelled
the growth of NRI banking and the interaction of Indian banks
with foreign counterparts.
In this unit, you will learn about:
- The concept, need and applications of
correspondent banking 

- Electronic modes of transmission of financial
messages

- Concept of NRI banking and accounts

Correspondent Banking :

Correspondent banking involves two banks having mutual
accounts with each other across geographical limits to facilitate the
transfer of money.
In a larger sense, correspondent banking facilitates a relationship
between banks and financial intermediaries to service the banking
needs of their clients without having account relationship.
Correspondent banking has the following advantages:
- Reduction in costs for banks, as the need for a global
network is eliminated
- Mitigation of road blocks created by regulatory restrictions
for the operations of foreign banks
- Availability of opportunities in other countries with low

operational costs

Correspondent Banking - An Example

First Street Bank has branches only within India. Pioneer
Imports, an Indian customer, wants to make a payment of
USD 100,000 to Transworld Exports in America.
Transworld Exports has an account with Smithson Brothers
Bank in America.

First Street Bank has a correspondent banking
arrangement with Grenfeld Bank in America. Therefore,
First Street Bank maintains a current account
denominated in USD with Grenfeld Bank. Hence, to make
payments in dollars, First Street Bank instructs Grenfeld
Bank to debit its current account and make a payment to
Smithson Brothers Bank through a SWIFT message.

On receiving the receipt of the SWIFT message, Grenfeld
Bank debits the current account of First Street Bank by
USD 100,000 and then by using the local payment system,
pays the amount to Smithson Brothers Bank. On the
receipt of USD 100,000, Smithson Brothers Bank credits

the amount to the account of Transworld Exports.

Correspondent Banking - An Example

Types of Bank Accounts :

Bank accounts are a major function in the realm of
correspondent banking and generate good revenue for
the international banks. The account facilitates handling of
receipts and payments, collections and reimbursements in
the country and currency of the correspondent bank.

The foreign currency accounts maintained by a bank with
another bank are classified as NOSTRO, VOSTRO and
LORO accounts. Banks also maintain mirror accounts of

the NOSTRO accounts.

LORO Account :

A LORO account refers to 'his account with them'. For example,
Citibank referring to American Express' account with SBI Mumbai,
is a LORO Account for Citibank, NY.

NOSTRO Account:

A NOSTRO account means 'our account With YOU'- For example,
SBI maintaining a USD account with Citibank, New York is a
NOSTRO account in the books of SBI, Mumbai and a VOSTRO

account for Citibank, NY

VOSTRO Account:

A VOSTRO account is 'your account With US'. For example,
American Express, NY maintaining a rupee account With SBl is a
VOSTRO account in the books of SBI, Mumbai and a NOSTRO
account for American Express, NY.

Mirror Account :

While a bank maintains NOSTRO accounts with a foreign bank, it
has to keep an account of the same in its books. This is more or
less a reflection or shadow of the NOSTRO account.

The entries in the mirror account are maintained in two currencies,
one of which is the foreign currency and the other one is the home
currency.

Electronic Modes of Transmission :

Payment gateways exist to give support to the vast international trade and finance network.

Different needs based on the client requirement, regulatory requirement, and availability of technology have given rise to various gateways.

SWIFT : Society for Worldwide Interbank Financial Telecommunications (SWIFT) is a co-operative entity owned by banks. It
provides fast, secure and reliable messaging services to banks and companies.
Messages are exchanged between banks by using Bank Identifier Codes (BIC) also popularly known as SWIFT BIC
codes. A SWIFT BIC is an 11-character code indicating the name of the bank, country, city and branch location.
For instance, BIC of Oriental Bank of Commerce, Mumbai is ORBCINBBPMS, where:

- ORBC demotes Oriental Bank of Commerce

- IN denotes India

- BB denotes Mumbai

- PMS denotes the branch
SWIFT is used by more than 11,000 financial institutions in 200+ countries, exchanging an average of 27.5 million messages per day.
Banks mainly use the SWIFT Net Messaging Service to exchange messages among themselves.

CHIPS : 

The Clearing House Interbank Payments System (CHIPS) is a funds-transfer system that transmits and settles payment orders in US. dollars for some of the largest and most active banks in the world.

CHIPS in the USA. is a hybrid payment system; meaning it computes net obligations of the participant and at
periodical intervals, transfers the funds from/to the participants accounts maintained with the Federal Reserve Bank
of New York.

Funds can be transferred using CHIPS Universal Identifier (UID). Currently, CHIPS has 50 participant banks
(including SBI) through whom the funds are transferred.

CHIPS is operative only in New York and is mainly used for Foreign Exchange inter-bank settlements.

FEDWIRE : Fedwire is the real-time gross settlement system (RTGS) operated by the Federal Reserve System of United States
for transfer of funds within United States. Fedwire is restricted to the USA. and handles majority of the domestic
payments.

Banks that maintain a Fedwire account are allotted a unique ID called ‘ABA numbers' to identify the senders and
receivers of payments.

CHAPS : The Clearing House Automated Payments System (CHAPS) is one of the largest real-time gross settlement (RTGS)
systems in the world.

CHAPS is based in London and operates on similar principals as that of CHIPS. Currently, it has 18 members, and
approximately 400 financial institutions across the world use this system for a same day transfer of funds in sterling
pounds (Great British Pound - GBP).

TARGET : 

Trans-European Automated Real-Time Gross Settlement Express Transfer System (TARGET) is an RTGS system
operating in Eurozone for exchanging payments denominated in Euro (EUR). TARGET caters to around 30,000
participating institutions across Europe.

TARGET 2 is an updated version of TARGET. RTGS-Plus and EBA are the other Euro clearing systems.

RTGS System in India :

The Reserve Bank of India has implemented the RTGS system for Indian banks- A detailed explanation is as follows.


The RTGS system provides real-time transfer of funds across India in Indian rupees. The name 'reaI-time gross
settlement' indicates that the payment instructions are executed as soon as they are received (in real time) and are paid
off on a gross basis that is without any netting. The money is credited to the account of the beneficiary instantly.
If the money cannot be credited for any reason, the receiving bank would have to return the money to the remitting bank
within 2 hours. Once the money is received back by the remitting bank, the original debit entry in the customer's account
is reversed. In India, the minimum amount, which can be transferred using RTGS, is Rs. 2 Iakhs.
IDBRT Hyderabad manages RTGS and the RBI maintains the central server. RTGS facilities are available to all types of

customers like individuals, partnership firms, companies and so on.

Non-Resident Indians :

As perthe Foreign Exchange Management Act (FEMA), 1999, a non-resident Indian (NRI) means a person residing outside 
India who is a citizen oflndia. This includes Indian citizens residing abroad for employment or having their own business. It
also includes Indian citizens working abroad forforeign governments and Indian government officials deputed abroad.

A person oflndian origin who is a citizen ofany other country (otherthan Pakistan and Bangladesh) has to meet certain criteria.
Helshe should ideally have held an Indian Passport at some point in time. Helshe should have parents or grandparents as
citizens oflndia or he/she should be the spouse of an Indian citizen.


The following images describe some individuals and their citizenships.

Non-resident Indian :

Mahesh, an Indian citizen has gone out of lndia
for a permanent employment in New York. He is a

non-resident Indian.

Rohit, an Indian citizen resides in Spain. He is visiting
his relatives in New Delhi for2 months. He is a non-

resident Indian.

Resident of India :

Meeta, an Indian citizen, has gone to Sydney to visit
her brother. She will return within 10 days. She is a

resident of India.

Mallika. a person of lndian origin (PIO) has arrived in
Mumbai to work in a company as a front line manager.

She is a resident of lndia.

Global Exports :

Global Exports has 60% of its ownership with Rahul,
an NRI residing in the United States. The company is
treated as an Overseas Corporate Body (OCB). OCB's
have facilities as those ofindividual NRls.

Facilities to NRI's : 

NRIs have been allowed to invest in India in various
securities, schemes and avenues so thatthe precious
foreign exchange earned by them is used forthe
development ofthe country.

Investments by the NRls have been broadly categorised
into two segments.

Repartriation Basis :

On repatriable basis, NRIs can make investments in
securities shares and bonds. These investments can
be done with the funds brought from abroad or in
freely convertible currencies or by debiting their NRE
or FCNR accounts.

An NRI is also permittedto purchase shares and
debentures issued by Indian companies. This can be
done eitherthrough the stock exchanges under
portfolio investment scheme or by taking foreign direc
investment (FDI) route. This is subjectto compliance with specified terms and conditions underthe Foreign Exchange Management Act.

Non-Repartriation Basis :

An NRI can also invest without any limit in government
securities, treasury bills, units of domestic mutual
funds, units of money market mutual funds,
non-convertible debentures issued by an Indian
company and national plan/saving certificates on the
non-repatriation basis.

As per RBI guidelines, NRIIPIO can also deal in
exchange traded derivative contracts approved by the
Securities and Exchange Board oflndia (SEBI).
Howeverthis has to be out oleRfunds held in India on non-repatriable basis, subjectto the limits
prescribed by the SEBI.

Purchasing of Real Estate by NRI's : 

Ramesh is a married software engineer and is considering a ajob offered by one ofthe top software brands based in Doha.
Before accepting the offer and shifting to Doha, he has certain queries about his future investments, as one cannot purchase real

estate in Doha. Ramesh meets a consultant to find a solution to his problem.

Ramesh: Hello Mr. Kumar, I have certain queries about my investments
in India afterl shift to Doha.

l'.'Ir. Kumar: Please go ahead.

Ramesh: I am a bit worried about the future. Will I be able to purchase
property in India even afterl become an NRI?

l'.'Ir. Kumar: Yes Ramesh. An NRI or a PIO can purchase immovable
property in India except for agricultural land/plantation property or a
farmhouse out of repatriable or non-repatriable funds. The payment of
the purchase should be made from the funds received in India through
normal banking channels.

Ramesh: How can this be done?

Mr. Kumar: It can be done by way ofinward remittance from any place
outside India orfunds held in any non-resident account maintained in
accordance with the FEIvIA and RBI regulations.

Ramesh: What happens ifthe NRI sells the property?


Mr. Kumar: If an NRI or a PIO sells the property, the sales proceeds can be repatriated abroad, subjectto certain conditions.

Ramesh: Hmmm... I understand it now. What about the availability of
loans?

I'.'lr. Kumar: NRIs and POIs have several options to take loans in India.
They are allowed to take foreign currency loans against the security of
their FCNR (B) account or mortgage loans can be taken against
residential property.

Ramesh: Can third parties also take loans?

I'.'Ir. Kumar: Yes. Third parties can also take loans against the security
ofthe money held in deposit accounts of an NRI.

Ramesh: Thank you Mr. Kumar. I am certainly relieved now. By the way,
would I retain all the facilities available, ifl plan to return?

I'llr. Kumar: NRIs returning to India can use the facility ofthe Resident
Foreign Currency (RFC) Account with an authorised dealerto transfer
investments/savings abroad and money available in their NRE/FCNR
(B) accounts.

Ramesh: What about RFC accounts?

l‘.'lr. Kumar: The RFC Account is free from foreign currency utilisation
restrictions. These accounts can be in the form of current orterm
deposits.

Ramesh: I am glad thatl consulted you Mr. Kumar. Nowl am ready to
shift abroad without fearing about my future investments and savings.
Thank you.


Mr. Kumar: My pleasure.

Summary :

In this unit, you have learnt the following:

- The non-residentsegment has grown in Indian
banking overthe years.

- Varieties of products have been introduced to caterto
this segment.

. As correspondent banking essentially involves
institutions across borders, several agreements
needto be put in place, and these activities are

regulated by the RBI for controlling risk.

RETAIL BANKING - TOPIC I -INTRODUCTION

RETAIL BANKING 

INTRODUCTION:-

Retail banking involves offering banking services directly to individual consumers than to institutions or companies. Some such banking services include savings accounts, current accounts, fixed deposit accounts, bill payment, personal loans, credit cards, debit cards and mortgage loans, etc. Today, most of retail banking services can be streamlined electronically through a network of Automated Teller Machines (ATMs), mobiles or the Internet. Most of the new private sector banks as well as foreign banks in India are in the fore front of the movement to use technology to deliver efficient retail banking services to their  customers in India.

Learning Objectives

In this unit, you will learn:

- To identify the characteristics of retail banking

- To describe the advantaga and disadvantages of retail banking

- To describe the evolution of retail banking

- To identify the global trends in retail banking

Characteristics of Retail Banking : 

Retail banking has some distinct characteristics. Here are a few such characteristics:

. It provides banking facilities and services to individual customers.

. It also extends banking facilities and services to small and medium size businesses.

. It is focused towards the mass market segment which covers a very large group of individuals.

. It offers a host of services and products to individual customers. The services include savings deposits, cash withdrawal and mortgage loans.

. It delivers services not only through the physical medium but also through virtual media using technology driven facilities like ATM's, online banking and mobile banking.

Advantages and Disadvantages of Retail Banking : 

Every business unit functions in a unique environment. The business environment brings with it some  advantages and disadvantages. Let's go through the advantages and disadvantages of retail banking.

Advantages :-

The advantages of retail banking are: 

. Large Customer Base:

 Retail banking has a very large customer base. A large customer base can facilitate mass selling and marketing activities at a lower cost.

- Increases Net Interest Margin:

The deposit rates in retail banking are much lower than other sources of funds. Thus retail banking helps increase Net Interest Margin (NIM).

- Less Volatility: 

The fluctuation in demand because ofcredit or business cycles is lower in retail banking compared to the corporate banking sector.

- Less Credit Risk:

 Risks in retail banking are spread across a large customer base. A large customer base implies that the loan amount per customer is very small.This reduces risks especially the risk of default or credit risk.

Disadvantages :

The disadvantages of retail banking are:

- Dependant on Information Technology: 

The activities of a retail bank are largely dependent on information technology (IT). If the IT systems are not up to the mark then the bank faces issues in managing large number of customers. Also, rapid development of products can cause complications in the systems.

. High Default Rates:

 Retail banking experiences high rates of default in unsecured retail loans and credit card receivables.

. High Costs: 

High costs have to be incurred while handling large number of low value transactions and maintaining a high number of branch networks.

. Bank Run: 

Any loss of faith in a particular bank can lead to sudden outflow of retail deposits resulting in collapse of the bank. This is called a bank run. A bank run is a scenario where retail depositors clamour to the bank for withdrawing their money as a result of panic that the bank may shut down. Many of the recessions in the United States have been attributed to such panic.

Did you Know :-

As of 201 3, savings deposit rates in India are around 4% whereas inter-bank borrowing rates are around 9%. Thus by increasing the deposit base, banks can cheapen their funding by about 5%.Th is significantly adds to their profitability. Of course the costs involved in retail expansion also need to be considered.

The WRBR 2012 :


The WRBR 2012 provides an insight into the dynamics ofthe retail banking industry. Here
are some key points ofthe report:

- Severe external challenges are making it difficult for retail banks to maintain their
competitiveness.

- The global economy is extensively threatened because of massive debt loads. The
stringent regulations that have been put in place due to the financial crisis of 2008
are restricting the flow oftraditional revenue streams as well.

- Customers are still low on trust ofthe industry and are increasingly accepting non-
bank alternatives. The social media platform is giving the customers an opportunity
to publicly explore such alternatives.


- Three models of emerging retail-ban king specialists have been identified.They are
product leader, distributor and utility/processor. Focusing on one or two of the models will give them an opportunity to stand out in today's increasingly competitive marketplace.

-The priorities of the banks should be the movement towards a long-term goal, executed simultaneously with efforts to improve customer loyalties.

-  The role of mobile banking has increased in a huge way which, in turn, has resulted
in customer satisfaction. Although the current mobile banking adoption rate is still
relatively low, it could become an extremely compelling channel for large numbers
ofcustomers.

- Banks have recorded a global average of 65% in terms of customer satisfaction, with

the North American banks having the highest average levels at 80%. Despite this outcome, only 50% of customers are confident that they will remain with their primary bank over the next six months. Further, it was seen that only 15% of customers have trust and confidence in the banking industry.

- Banks in Canada led the world in customer satisfaction at 82%, closely followed by
banks in Switzerland at 79%, United States at 78%, India at 78% and the Philippines
at 78%.

. The inability of current measures to present a coherent picture of customer expectations and behaviours is problematic, given the large number of secular changes impacting the industry. Globally, extremely high debt levels, political turmoil, regulatory change and evolving customer habits are creating an environment more difficult than any the industry has experienced in decades.  Branch channels had always been the main channels of operations but its volumes have dropped significantly over the years.

 Initially ATM's were the leaders of the pack with respect to technology but now the
Internet is driving the next force oftechnology.

- It became necessary to manage multi-channel challenges to handle in-bound
customers. Not more than 33% surveyed banks were operating with a multi-channel
common customer file. 

Retail Banking Around the World :

Retail banking has shown different evolution patterns across the world.While some economies started retail banking quite early others are late entrants in the field. Here is a background of the development of retail banking in various economies.

United Kingdom : 

In the last quarter of the 19th century, banks in the United Kingdom (UK) actively involved themselves to consolidate branch networks. As a result, they could operate in a much more integrated manner at the regional level. By creating new offices and a structure of financial
activities, they could control their customers better. There was a threefold increase in the number of offices because of the aggressive  introduction of technologies to make the system run more efficiently gained momentum. For example, the commercial introduction of the typewriter in 1873 in the UK has led to the emergence of clerks and typists and gave a new dimension to the process of division of labour. New information technology is leading
the change in banking in UK and elsewhere.

United States of America : 

Before the 1990's, the branch manager understood a local market and built strong customer relationships. The bricks-and-mortar business model was challenged post the technological developments and regulation changes in the 1990's. ATM's multiplied significantly after
the national ATM networks dropped a ban on surcharges in 1996. This led to more than 3,52,000 ATM machines in USA. In the first decade of the new millennium, virtual banking organisations enabled customers to have electronic access to their accounts. During the
period between 1994 and 2003, while the number of organisations reduced by 1/3rd, the number of organisations having branches in more than one state nearly doubled to 538.

Germany : 

Universal banks had dominated the German banking industry that combined the functions of commercial and investment banks, including the securities business. Germany has over 2,300 banks with more than 46,000 branches. Competition is intense in the German
retail banking sector. Investment in technology is very high, not only among the top-tier players but also among the smaller banks. At Postbank, for instance, over 65% of its customer base uses online banking.

Russia: 

The top 10 retail banks in Russia accounted for 63% of retail loans. Nearly 755bn roubles of retail loans were overdue. Overdue auto loans were growing at a much faster rate compared to the market. The number one retail bank in Russia was Sber bank with a market share of 37%, followed by Standard Bank with a market share of 8%.

Asia and South Pacific : 

There has been an enormous growth in personal banking in Asia fuelled by expansion in credit cards, online banking etc. Household credit in Korea accounts for nearly half of the total outstanding bank loans. Th is trend has also been quite evident in several other Asian
countries. Consumer credit and mortgage in China grew by 70% as per the Lehman Brothers report. Growth in the range of 20% in 2002 was experienced in Malaysia, Thailand, Korea, Philippines and Taiwan with respect to credit cards.

Retail Banking in India

Banking in India started towards the end of the 18th century. It has gone through several phases post independence.The 1960's saw the nationalisation of banks. The reforms that started in the 1990’s have given a big boost to private sector banks and the Indian operations of international banks.

Retail banking in India started with the entry of foreign banks in the country. Consumer banking models, with hybrid liabilities and assets products targeted at the personal segment came into existence in the late 1970's and early 1980's. Standard Chartered Bank and Grindlays Bank were the first banks to introduce these banking methods. Credit card
products were firstly introduced by Citi Bank in the early 1980's. To cater to the retail segment, public sector banks like Bank of Baroda, Bank of India, Indian Overseas Bank and State Bank of India developed and marketed assets and card products. Of late, foreign banks and new private players are trying hard to re-engineer retail strategies to penetrate into retail banking. The growth in retail banking is evident from various numbers published by RBI. With the growth in size and complexities of retail banking, banks in India started the segmented approach for segregating various activities. Let's look at RBI data on growth in retail banking and how banks have been segmenting their activities.

RBI Data on Retail Banking in India 

Indian retail banking is in a growth trajectory. There have been several recent developments in Indian retail banking. Here are a few of such developments:

- Retail assets have grown by about 10 times in the last 10 years. This significant growth
has come from several quarters—mortgage loans, auto loans, personal loans, credit
card receivables etc.


-India today has a spread of more than 99,200 ATMs across the country.

- Real Time Gross Settlement (RTGS) and National Electronic Fund Transfer (NEFT) have
increased rapidly assisting the volume and value of transactions.

- During the 2011-2012 financial year, transactions under NEFT grew by 70% in volume and
91 % in value. The growth in RTGS transactions have been about 11% in the same time.

-Mobile banking is another growth area. As of August 2012 RS354 crores have been
processed through mobile banking in 4 million transactions.Although it is a small number compared to the overall banking transactions, the growth is immense. From February 2012 to August 2012, there had been a 40% growth in monthly transactions.

Segmentation of Principal Activities of a Private Sector Bank in India :

Treasury Operations :

Treasury operations include investments in sovereign and corporate debt, equity and mutual funds, trading operations, derivatives trading and foreign exchange operations on the proprietary account and for customers and central funding.

Retail Banking : 

Retail banking constitutes lending to individuals/small businesses subject to the orientation and meeting the product and granularity criterion. It also includes low value individual exposures not exceeding the threshold limit of R55 crores as defined by RBI. Retail banking activities also include liability products, card services, Internet banking, ATM services, depository, financial advisory services and NRI services. Corporate/Wholesale Banking
Corporate/wholesale banking includes corporate relationships not included under retail banking, corporate advisory services, placements and syndication, management of public issue, project appraisals, capital Other Banking Business Other banking business includes para-ban king activities like third party product distribution and other banking transactions not covered under any of the above three segments.

Didyou Know : 

The oldest functioning bank in India is State Bank of India (SBI). It started in 1806 as Bank of CaIcutta. It was renamed Bank of Bengal  and eventually to State Bank of India. There were a couple of banks that started before SBI. However, they became defunct.

Global Retail Banking Objectives

As per the Boston Consulting Report in October 2009, retail banking
objectives are:

- Retaining customers
- Obtaining sufficient funds
- Enhancing risk management 
- Generating superior returns on assets
- Coping with increasing demands regarding product  transparency and services 
- Achieving multi-channel excellence 

Summary 

In this unit, you have learnt the following:

- 'Retail Banking' can be referred as banking services which are offered to a large group of individual customers.

-Physical and remote are the two kinds of delivery models of retail banking.

- The advantages of retail banking include:

>> a Higher risk spread due to large client base a High customer loyalty
» Less volatility in business because ofa large clientele
» High cross selling potential

- The disadvantages of retail banking include:

» Excessive dependence in information technology
» Relatively high servicing costs
>> a High default rates in unsecured retail loans and credit card receivables With the emergence of the new remote channels, the distribution paradigms of banks have changed significantly.

Check Your Knowledge

Q1. The National Bank and The Region Bank are two banks. The National Bank has a larger customer base compared to the Region Bank. This implies that the National Bank has a greater risk compared to The Region Bank. ( True/False )

Ans: ( False ) The risk of The National Bank is spread across a large number 
of customers, and is thus low.

Q2 :  A person with a total networth of Rs:2 crores opens an account with a bank. He requires several services like deposits, loans, financial advisory etc. He will be considered as a wholesale banking customer as several services are bundled and given to him.( True or False )

Ans : ( False ) Retail and wholesale banking is divided on the basis of nature of the client and not on the number of services being provided. As the client has a net worth below Rs :5 crores and is an individual, he would be considered a retail banking client. Some private banks in fact consider small companies also as clients of retail banking.

Q3 : Which of the following services does a retail bank offer?

( A ) Working capital requirements for a large MNCs
( B ) Loans to individual customers
( C ) Finance to companies or SPVs for a specific project
( D ) Salary account services to organisations

Ans : ( B )  A retail bank provides services to individual customers. Services to large
MNCs and other organisation are offered by the corporate banks.