CHAPTER FOURTEEN

Banking System—Services and Innovations

CHAPTER STRUCTURE

Section I Commercial Banking System and Structure

Section II Case Studies of Bank

Section III Case in Detail—HSBC Bank

Chapter Summary

Test Your Understanding

Case Study

KEY TAKEAWAYS FROM THE CHAPTER

• Look at a precise picture of the modern banking system and structure.
• Examine services offered by leading banks like ICICI, HSBC and State Bank of India.
• Analyse innovations in retail and corporate products.

SECTION I

COMMERCIAL BANKING SYSTEM AND STRUCTURE

This chapter is an outcome of the effort to document the effect of globalization on commercial banking and discuss key facts based on the comparison of services offered by leading banks. Through this, an attempt has been made to highlight the business environment in which banks operate and its importance for society based on cases of ICICI Bank, HSBC and State Bank of India.

Commercial banks are the oldest and largest financial intermediaries, compared to insurance or mutual funds. They are also the most important depositories of public savings and the most important disbursers of finance. Commercial banking in India is a unique system, the likes of which exists nowhere in the world. The truth of this statement becomes clear as one studies the philosophies and approaches that have contributed to the evaluation of banking policy, programmes and operations.

Commercial banks are fractional reserve banks and they, unlike other financial institutions, can create money in certain multiples of their deposits, which is known as a money multiplier. Commercial banks ordinarily are simple businesses or commercial concerns which provide various types of financial services to the customers in return for payments in one form or another, such as interest, discount, fees and commission. Their objective is to make profits. However, what distinguishes them from other business concerns is the degree to which they have to balance the principle of profit maximization with certain other principles. Banks deal in other people’s money, a substantial part of which is repayable on demand. That is why for banks, unlike other business concerns, liquidity management is as important as profitability management.

Commercial banks are in the business of providing banking services to individuals, small businesses and large organizations. While the banking sector has been consolidating, it is worth noting that far more people are employed in the commercial banking sector than in any other part of the financial services industry.

Globalization and Innovations

The World Trade Organization (WTO) was established on 1 January 1995 when the implementation of the Uruguay round results began. Since its inception, the WTO has been moving towards becoming a universal organization. The International Monetary Fund (IMF) and the WTO have extended considerable pressure on the Indian government to undertake economic reforms towards a more liberal order. As a result, the Indian economy saw the introduction of market forces and a new era of competition. The banking sector was subject to disinvestments, deregulation of interest rates and had to accept internationally accepted norms.

All banks are now to abide by some predetermined international standards. Transparency of information and flexibility of operations is becoming increasingly necessary. Increase in the number of banks will ease the credit scenario and customers will be able to enjoy better services. The increased competition arising from the WTO entry and the introduction of new banks will only help the banking industry to mature. Since inception, public sector banks have been operating in a monopolized market, which have rendered them inefficient and subject to client complaints. It is obvious that after becoming a WTO member, the government has developed legislation and administration rules that comply with the WTO rules thus making conditions ripe for the banking industry to pursue its development.

 

Globalization has brought about structural changes in the world economy. This includes services, particularly banking and financial services. Although the service sector contributes significantly to national output, the impact of globalization on services is yet to capture the attention of researchers and policymakers in many countries.

With the entry of more and more foreign sector banks in the country, the very set-up of the banking industry has been shaken up. State-owned banks have lost their market monopolies and face stringent competition in their contention with new giants. Public sector banks have been left with no alternatives but to rise to the occasion and reform themselves.

Since the mid-1990s, there has been a big increase in the number of branches and ATMs opened by foreign banks in emerging economies. Most of this foreign entry has been through two routes—acquisition of domestic banks in the host country and strategic alliances.

Banks conduct business in foreign countries also and this business has grown slowly over time. The overseas business of banks include provision of trade-related banking services such as negotiation and collection of bills, opening of letters of credit, channelising foreign inward remittances and mobilising savings abroad. They also provide import and export finance to local businessmen, arrange for foreign currency loans, promote project exports, joint ventures and provide merchant banking services.

SECTION II

CASE STUDIES Of BANKS²

This section is designed to provide information based on the case studies of three banks based in India. The ICICI Bank, the HSBC Bank and the State Bank of India (SBI)—with a focus on innovative products of these banks. These banks were selected for case analysis to analyse the effects of recent changes on commercial banks based on the representative character, i.e., the ICICI Bank, which represents the private sector, the HSBC Bank, which is a foreign bank, and the SBI, which is a public bank. Retail banking products have been focused on in the three cases.

The ICICI Bank

The ICICI Bank was established by the ICICI in the year 1994. The bank’s activities have gained momentum with the reverse merger of the parent company, ICICI, with the bank. ICICI Bank is India’s largest private bank with about USD 21 billion in assets and the second largest Indian bank including all public enterprises. The ICICI Group comprises the ICICI Bank and various subsidiaries in the area of life insurance, general insurance, asset management, investment banking and venture capital. ICICI Bank is well known as the first Indian company to be listed on the New York Stock Exchange (NYSE). ICICI Bank has created global benchmarks through its US GAAP audit processes, the Securities and Exchange Commission (SEC) compliance practice and corporate governance standards. The bank’s business has been driven by the multichannel distribution through hundreds of branches and ATMs, mobile, telephone and Internet banking facilities. ICICI Bank pioneered Internet banking in India and more than 30 per cent of its retail customers are on the Internet. The bank has set up representative offices and branches in countries such as the United Kingdom and the UAE.

ICICI Bank has introduced a wide spectrum of innovative domestic and international banking products to facilitate trade, investment, cross-border business and foreign exchange services. The different innovative services and products offered by the bank are savings account, fixed deposit (FD), quantum optima, recurring deposit, ICICI select, roaming current account, kid-e-bank, Bank@campus, power pay and locker facility.

Features in Savings Bank Account The salient features of the savings account are given below:

• The ICICI Ncash debit card is a debit-cum-ATM card providing their customers with the convenience of acceptance at merchant establishments and cash withdrawals at ATMs. Besides this card, ICICI bank also offers a credit card.
• Internet banking is offered free of cost. Given below are some achievements by ICICI bank in this respect.
  • First bank in India to launch a Web site—1996
  • First bank in India to launch Internet banking—1997 through www.icicibank.com
  • First bank in India to launch online bill payment—1999
  • Only bank in India with million online customers
• Anywhere banking enables the customer to bank at any of their branches across India. This too is offered at no additional cost.
• Besides these features the bank also offers PhoneBanking standing instructions, and nomination facilities. In addition, ICICI Bank Demat Services boasts of an ever-growing customer base of 16.29 lacs as on 30 September 2009. This bank offers various innovative products in their endeavour to offer world-class services to its customers.

HSBC Bank

The HSBC Group is one of the world’s largest multinational banking and financial services organizations, with major commercial and investment banking and insurance businesses in Europe, the Asia-Pacific region, the USA the Middle East and Africa. The group’s name is derived from one of its founder members, the Hong Kong and Shanghai Banking Corporation Limited, which was established in Hong Kong and Shanghai in 1865. The HSBC Group, headquartered in London, has more than 5,000 offices in 80 countries and territories.

Retail Banking—Products and Services HSBC Bank offers a wide range of financial products and services, from current and savings account to term deposits, automobile and home loans, mutual funds, loans against shares, gold and silver, Master and Visa credit or debit cards. It provides latest self-service banking technology including ATMs in each branch and at off-branch locations and 24-hour telephone banking. Innovative products like Smart Money accounts have been introduced by the bank in different countries including India (a deposit product for 400 days with many add-on facilities).

Corporate Banking Being a multinational organization, HSBC Bank stands for fostering long-term relationships with corporate clients based on its global connections and extensive knowledge of Asian business. The bank provides services including working capital, term finance, syndications, import and export finance.

Treasury HSBC, through one of the most advanced systems provides a comprehensive range of services to clients, including foreign exchange, money markets and financial instruments. HSBC’s treasury is open until midnight in both Europe and North America on a real-time basis.

Investment Banking HSBC investment banking is a trade name for merchant banking, stock broking and fund management activities of the HSBC group.

HSBC Securities and Capital Markets Limited, headquartered in Mumbai, is considered a specialist in research and distribution of Indian securities to both Indian and international institutions.

The State Bank of India (SBI)

The State Bank of India (SBI) was constituted on 1 July 1955. The bank, in its drive for deployment of ATMs, had put in place a record number of over 2,000 ATMs by 2004 and the number has gone up further during the recent years. It is worth nothing that SBI did so much expansion work in the last 5 years by opening ATMs everywhere in record time. SBI was one of the first banks to create this 24-hour user-friendly banking channel across the country—from metros to small towns to remote places. The biggest gainer in this drive is the customer in small towns and remote corners—the latest technology is now made available to each and everyone.

Innovation Through Networked ATMs SBI had realized the need for more ATMs by the end of the 1990s. In order to retain customers, the bank started implementing its ATM Networking Project in 2001 and within a short period it deployed the largest number of networked ATMs. The bank has procured state-of-the-art Compaq’s Tandem Switch and ACI’s Base 24 software which enables them to scale up to meet the growing requirement.

Innovation—Depository Participant Services and Dematerialization (Demat) Depository is an organization, which holds customers’ securities in the form of electronic book entries. This is being done at the request of shareholders through a depository participant (DP). An investor has to open an account with the DP, if he wants to avail services of the depository. A depository can transfer securities as per the investor’s instructions without actually handling securities, through the electronic mode. The DP maintains the account balances of securities bought and sold by the investor from time to time. The DP also gives the investor a statement of holdings, which is similar to a passbook given to an SBI account holder. SBI introduced this facility immediately after the launch of electronic trading in securities.

Dematerialization is the process by which an investor gets his physical certificates converted into electronic form into his account with the DP. The customer has to fill in a dematerialization request form available with his DP and submit his share certificates along with the above form. If one wishes to convert his electronic shares back to physical shares at a later stage, he can still do so by applying for rematerialization through a request form available with his or her DP.

Internet Banking The Internet banking service of the SBI is being offered through the Web site http://www.onlinesbi.com. Through this site, one can

• Access information about transactions and balance status
• Request for a transfer of funds
• Ask for issue of cheque books
• Give instructions to stop payment of cheques
• Request for issue of drafts from the funds in account
• Request for issue and renewal of term deposits
• Issue-standing instructions

Portfolio Management Services SBI has set up a Portfolio Management Services (PMS) section to handle investment-related concerns of institutional investors. The PMS forms part of the integrated treasury department of the SBI, and is based at Mumbai. The officers of the PMS section are highly experienced officers of the SBI who have an in-depth knowledge of how to handle large investment portfolios.

Innovation Through STEPS State Bank Electronic Payment System (STEPS) is a highly innovative and effective payment solution developed and implemented by the SBI in selected fully computerized branches (FCBs). STEPS provides an end-to-end electronics funds transfer (EFT) with speed and efficiency. STEPS facilitates credit of funds to the beneficiary’s account at the other branch on the next day.

SECTION III

CASE IN DETAIL—HSBC BANK³

HSBC is one of the largest banking and financial services organizations in the world. HSBC is headquartered at London. Its international network comprises over 10,000 offices in more than 80 countries and territories in Europe, the Asia-Pacific region, the USA the Middle East and Africa.

HSBC is listed on the London, Hong Kong, New York, Paris and Bermuda stock exchanges; shares in HSBC Holdings Plc are held by nearly 2,00,000 shareholders in some 100 countries and territories. Shares are traded on the NYSE in the form of American Depository Receipts (ADRs).

The HSBC came into existence in India by the acquisition of the Mercantile Bank of India, Mumbai, in 1959. After the Mercantile Bank was acquired by the HSBC, the Mumbai Flora Fountain building of the bank became the head office of the HSBC Group in India. In recent years, HSBC has become a major bank and financial services provider in the world. Its strategy of ‘managing for value’ emphasizes the group’s unique balance of business and earnings between older, mature economies and faster-growing emerging markets. The first ever ATM in India was established by HSBC way back in 1987. The organization’s adaptability, resilience and commitment to its customers have further enabled it to survive through turbulent times and prosper through good times over the years.

HSBC’s governing objective is to provide a satisfactory return on shareholders’ capital. HSBC does this by having a talented and motivated staff and competitive services and products. The policy of the HSBC is not to make contributions to political parties or partisan organizations. HSBC works co-operatively with host governments and regulators while remaining politically neutral in all jurisdictions.

The HSBC Group is committed to five core business principles:

• Outstanding customer service
• Effective and efficient operations
• Strong capital and liquidity
• Prudent lending policy
• Strict expense discipline

Salient features of the retail products offered by HSBC in India are discussed in following sections.

Accounts

Savings Account The HSBC savings account offers interest at the rate fixed by the central bank, i.e., the Reserve Bank of India. As it is targeted primarily at the upper classes, a very high quarterly average balance is required.

Benefits offered to savings account holders are listed below.

• A joining fee waiver on the credit card.
• Special rates on home loans, personal loans and Assetlink (overdraft against shares).
• Automatic transfer of extra savings from savings account to a FD to enable the customer to earn a higher interest.
• Demat account services with no account opening charges.
• Free quarterly account statement.
• Free personalized cheque book.
• Insurance and mutual fund services.
• ATM access—ATMs can be used to withdraw cash, transfer funds, deposit cheques and cash, request for a bank statement, cheque book or mini-statement and check balances.
• Credit card users can withdraw cash from their HSBC current or savings accounts at any of the VISA/Master Card ATMs worldwide.

Fixed Deposit HSBC offers a FD option that provides a fixed rate of return on an amount deposited with the bank for a fixed tenure. The amount (principal + interest) is repayable (or renewable at the option of the customer) at the end of the tenure period.

The salient features of this deposit scheme are

• Free savings account
• 90 per cent overdraft facility on the amount in FD
• Internationally valid debit card

Certificate of Deposit A certificate of deposit is somewhat similar to a FD. It is a fine opportunity to earn interest in advance for funds invested from 15 days to 1 year. It is available to individuals (other than minors), corporations, banks, companies, trusts, funds and associations.

The salient features of this scheme are the following:

• Holders receive interest in advance—the certificate of deposit facility works just like a FD, with one feature being that interest is received in advance. (The minimum marketable lot for a certificate of deposit is ₹1 lakh.)
• Transfer mechanism—certificates of deposit held in a physical form are freely transferable by endorsement and delivery. Those in demat form can be transferred as per the procedure applicable to other demat securities.

Demat Accounts HSBC provides depository services where shares are held in dematerialized (demat) form. Demat is the process of converting the physical (paper) shares into electronic form. With demat trading, customers will not need to worry about forgery and duplicate or stolen share certificates. Apart from safety, transaction costs are significantly lesser too. Under demat trading, every security has an ISIN (International Security Identification Number) that uniquely identifies that particular security, and provides a convenient form of ID.

The salient features of a demat account are

• Holding statement every 3 months, showing current portfolio of shares
• Overdraft available against demat shares
• No account opening charges and no minimum balance requirements
• No stamp duty on transfers and immediate transfers possible

A total of 10 sale transactions per month are free of cost for each demat account. Further, HSBC will receive new issues, rights and bonus issues in demat form on behalf of the customer. Interest rates for loans against demat shares are lower than the rates for loans against physical scrips.

Smart Money Account Smart Money account is a unique FD linked to a savings or current account where the customer can enjoy the higher returns of a FD and yet retain the flexibility of using money through the linked account. A Smart Money account can be opened with a minimum of ₹25,000 and customers also get high returns and a free savings or current account. Access to funds is anytime through ATMs, PhoneBanking, Internet banking or personalized cheque books.

The salient features of a Smart Money account are

• Withdrawal up to 90 per cent through an overdraft facility yet continues to earn interest on 100 per cent of your FD.
• Debit card with a withdrawal limit of ₹25,000 per day (higher limits for PowerVantage and HSBC Premier).
• Interest is calculated on a daily outstanding debit balance and is charged monthly to the account. Interest is charged at 2 per cent over the interest rate being paid on the deposit. The interest is charged only for the amount utilized and for the number of days in debit. The interest rate on an overdraft limit over ₹200,000 is linked to the bank’s Prime Lending Rate (PLR). FDs will remain untouched and will continue to earn interest at the rate fixed at the time of placement. Customers get a personalized cheque book for their savings account.

Current Accounts There are three types of current accounts offered by HSBC Bank.

• Business Select
• BusinessVantage
• Business Account

Business Select: This is a premium service designed to look after business and personal needs. Financial services, wealth management solutions, personalized banking and, most importantly, the recognition that a Business Select customer deserves. HSBC provides the customer a personal relationship manager, dedicated to understanding his financial needs.

The salient features of this product are given below:

• Preferential pricing on trade services.
• HSBC offers local expertise and global reach in handling the account, including services in export and import. These include letter of credit confirmation, export bill negotiation, documentary collection and remittances.
• Preferential pricing of foreign exchange rates.
• Business centre facilities at all branches.
• Cluster deposits where idle money earns the interest rate of a FD while allowing free withdrawal any time.
• Smart Money account where the customer can take advances (overdrafts) against FDs with HSBC.
• ‘Business Select’ that ensures all cheques up to ₹2,00,000 will be honoured irrespective of the balance in the account.
• Customers can view account statements, pay bills, make drafts or transfer funds round the clock.
• PhoneBanking ensures that access to bank balances can be made 24 hours a day, 7 days a week, without actually stepping into the bank. Funds transfer, payment for suppliers, FDs and a cheque book request all can be carried out through PhoneBanking.
• Cash, cheques and drafts can be picked up from or delivered to office absolutely free of cost.
• Withdrawal up to ₹2,00,000 per day with the special Business Select ATM card.
• Preferential foreign exchange rates for all ‘Business Select’ customers, preferential rates on large volume trade services requirements, efficient processing of requests, rapid cheque clearance, faster remittances, salary accounts, investment services and much more ensure flexibility, leaving you with time and energy to focus on your business.

BusinessVantage: BusinessVantage is a current account that gives businessmen a superior service advantage. In the BusinessVantage account, an average quarterly balance of ₹1,00,000 is required. A host of benefits, such, as the ‘no bounce’ cheque protection facility, and a wide range of free services, such as ‘Business PhoneBanking’, ‘Business Doorstep Banking’ and more, are available too.

A BusinessVantage account holder is eligible for the following facilities:

• E-banking
• Complete range of services through PhoneBanking
• Free business Doorstep Banking
• No bounce cheque protection
• Free cheques payable at par
• Special ATM withdrawal limit of ₹10,00,000 per day
• Free personalized cheque book
• Preferential pricing on trade services
• Expertise and global reach in handling trade business
• Preferential pricing of foreign exchange rates
• Make payments to any part of the country with free telegraphic transfers, free auto sweeps to transfer excess cash to a FD, free standing instructions

Business Account. A Business Account is a cost-effective current account. An average quarterly balance of ₹25,000 is required in a business account.

A ‘Business Account’ holder is eligible for the following facilities:

• Free Internet banking for businesses
• Free business PhoneBanking
• Business Doorstep Banking
• Multi-branch banking
• Free special ATM card for cash withdrawal of up to ₹75,000 per day
• Fast and efficient collection services
• Up-country cheques drawn on any location across the country can be collected through the payments and cash management set-up
• Savings accounts for employees
• Simplified salary payments by using autopay to directly credit salaries to employees’ accounts

Business banking customers can also invest in mutual funds, enjoy up to 48 days’ interest-free credit on an internationally valid credit card and convert shares into electronic form with HSBC’s depository services.

Credit Cards

Classic Credit Card The classic credit card from HSBC offers much more than just credit facilities. It is designed to maximize the value of the customer’s hard-earned money through a combination of money-saving features and value-added benefits as given below.

Internet banking for credit card customers: The customer can get an instant review of his credit card transactions, know his credit card balances, opt for e-statements, redeem his bonus points online, benefit from these and more facilities with [email protected]

Comprehensive insurance: All insurance benefits other than lost card cover are for primary active classic cardholders only. A primary active classic credit cardholder for the purpose of an insurance cover claim is defined as having a classic credit card that has been utilised at least three times for the purpose of customer initiated purchase and/or cash advance transactions within 89 days of the occurrence of the event.

• Personal accident insurance upto ₹15 lakh for loss of life due to air accidents and ₹1,50,000 due to any other accident.
• Purchase protection upto ₹30,000 for 180 days from the date of purchase for items bought using your HSBC classic card.
• Zero lost card liability.
• Cover upto USD 600 for loss of checked-in baggage.
• Credit shield facility involving waiver of payments of outstandings upto ₹20,000 for accidental death.

Credit shield extension: HSBC has structured a special life insurance cover for Classic credit cardholders for ₹20,000 in association with Tata AIG Insurance Company Ltd for non-accidental death. This insurance cover is utilized, to first offset any balance remaining on the customer’s HSBC card in the event of non-accidental death, with any part of the cover remaining after that going to the cardholder’s nominee.

Standard Privileges for HSBC Card Holders

Global access to bank account: The customer can withdraw cash from his bank account with HSBC India from any VISA Plus/MasterCard Cirrus ATM in India or overseas. He can also perform banking transactions like cash withdrawal, balance enquiries and fund transfers from any HSBC ATM in the world.

Cash advance: He can avail of this facility at over 700,000 ATMs in the world.

Bonus rewards programme: For every ₹100 the customer spends on his card, he receives 1 bonus reward point. He can choose from an exciting range of redemption options including jewellery, fashion accessories, garments, cosmetics, and much more.

Global calling card: Enables the customer to make long distance calls, while travelling overseas and get billed through HSBC credit card.

Gold Card The Gold credit card from HSBC is globally recognized as a symbol of success and achievement. The holder is eligible for all the facilities offered to Classic card holders such as 0 per cent balance transfer from other credit cards and 0 per cent fuel surcharge.

In addition, the bank provides some other facilities to Gold card holders like

• 5 per cent off on all international and domestic leisure packages.
• 10 per cent off on car rentals at domestic locations.
• Upto 20 per cent off on room rack rates at premium hotels.

A Gold card holder gets superior insurance benefits as mentioned below:

• Personal accident insurance upto ₹40 lakhs for loss of life due to air accidents and ₹400,000 due to any other accident
• Purchase protection up to ₹50,000 for 180 days from the date of purchase for items bought using the HSBC Gold credit card
• Zero lost card liability for accidental death
• Cover up to USD 500 for loss of passport or travel documents
• Cover up to USD 1,200 for loss of checked-in baggage while flying.
• Credit shield facility involving waiver of payments of outstanding up to ₹40,000 for accidental death.

Loans

Home Loans—Smart Home With the Smart Home product, the customer gets a bank account. The customer then needs to put his usual savings, from other accounts, into the Smart Home account. Depending on the savings put into the Smart Home account, the customer can reduce the quantum of interest paid by up to 50 per cent. That’s because the principal on which loan interest is calculated, is the principal outstanding minus the savings deposited in the Smart Home account every month, over and above the equated monthly installment (EMI). The key benefits are as follows:

• Reduction of the tenor of loan to own the house quicker
• Flexibility to use the Smart Home account as the main account where full access to the account is given through cheque book, debit card and Internet Banking.

The Smart Home account is categorized as a PowerVantage relationship. The interest will be calculated on this debit balance in the account on a daily basis, i.e., if the customer pays an excess amount over the EMI, the excess amount will remain available for use in the Smart Home account but helps save the amount of interest cost. Loans can be repaid by depositing at least the EMI amount into the Smart Home account every month.

Loan Against Property In this scheme, the loan tenor ranges from 1 to 10 years. The customer can opt for floating interest rates and the residential property would be the collateral.

Other features are

• Loan transfer—there is an option to transfer an existing loan against residential property from another bank.
• Banking benefits—loan against property account will be categorized as a PowerVantage relationship.

Personal Loan HSBC offers its customers four ways by which they can repay a personal loan.

• Lower EMIs in the first year and after that higher EMIs can be paid.
• Interest on utilized loan amount only and not on the entire loan. It requires the customer to estimate the maximum loan amount needed. Money can then be withdrawn as and when needed.
• Last EMI waiver: This repayment option gives the benefit of getting the last EMI refunded by paying a marginally higher interest rate.
• Standard EMI repayment.

Features of the personal loan facility are

• A flexible loan tenor of up to 4 years.
• Loans available from a minimum of ₹50,000 up to a maximum of ₹6,00,000.
• Easy monthly repayment through EMIs with either post-dated cheques or direct debit to the bank account.
• Flexibility of choosing the EMI dates.
• Transfer of an existing personal loan from another bank to HSBC, at attractive interest rates.
• Existing HSBC customers are entitled to special relationship discounts on processing fees.
• No collateral or guarantor required.
• Hassle free loan based on 12 months credit card or retail loan track record.
• Special schemes for corporate salary accountholders.

Educational Loans HSBC offers comprehensive educational loans that go beyond just providing the fee. A funding ranges from a ₹50,000 to ₹25,00,000 to support education in India and abroad. There is flexibility to opt for loans up to 4 years for unsecured loans and 7 years for secured loans. HSBC offers competitive interest rates on education loans with a choice between fixed and a floating rate.

Flexi Finance This flexible overdraft facility lets the customer draw money against assets such as balance sheets, salary slips, FDs, shares and cars. Interest is paid only on what is withdrawn and for the period of withdrawal of funds. Flexi Finance is offered as a floating interest rate product, to give the benefit of changing PLRs.

Wealth Management

HSBC Premier The HSBC bank offers this product to the following individuals:

• Residents of India with a minimum relationship value of ₹25 lakhs held in a combination of deposits, investments and loans.
• Non-resident Indians with a minimum relationship value of an equivalent of ₹25 lakhs in deposits.

HSBC Premier is a global relationship banking package and has been designed for a one-to-one banking relationship. The customer enjoys the following benefits:

• Relationship management: There is a dedicated HSBC Premier relationship manager who will be ‘singlepoint’ contact with the bank.
• 24-hour banking: As an HSBC Premier customer, access to the bank is given through personal telephone banking service, 24/7.
• Investment services: These include execution of investment in mutual funds, and assessment of risk-profile.
• Broking services: Broking services are made available through HSBC Securities and Capital Markets Limited.
• HSBC Premier global services: Access to a wide range of special facilities and services while travelling across the world such as free encashment of traveller’s cheques and exchange of foreign currency, free of commission, at any branch of HSBC.
• HSBC Premier service centre: This is available in selected branches to provide confidentiality and comfort during banking and financial transactions.
• The debit card gives free, unlimited 24-hour access to all HSBC ATMs across the world and at other bank VISA ATMs in India.
• High cash withdrawals up to ₹1,00,000 per day from any HSBC ATM in India.
• HSBC Premier MasterCard credit card with a pre-approved credit limit of at least ₹2,00,000.

PowerVantage The holder of this product gets the following services from the bank:

• Unlimited free transactions at over 15,000 VISA ATMs using the PowerVantage debit card
• Dedicated service desk and teller counters
• Financial planning services
• Free cheque books with cheques payable at par in all cities where HSBC has branches
• No-bounce cheque protection
• Joining fee waiver and 50 per cent off on the annual fees of credit card
• Preferential pricing on home loans and personal loans
• Higher cash withdrawal limit of ₹50,000 and funds transfer up to ₹1,00,000 with Power Vantage debit card

GenNext Account GenNext Account is an exclusive account for children of PowerVantage and HSBC Premier customers. It helps secure a child’s future through a systematic investment plan made with the help of consultants. Pocket money can be transferred to the child’s account. The child gets a debit card which gives him the financial freedom within the spending limits controlled by the parent. This account comes to PowerVantage and HSBC Premier customers absolutely free and with no minimum balance requirement.

Financial Planning Services (FPS) HSBC has launched FPS for people who may not have the time or the expertise to plan their finances properly even for durations as long as 20 years or after retirement. This exclusive service is available free of charge to high net worth HSBC customers.

Mutual Funds These services are available for both resident and non-resident Indians. The process of investing through HSBC starts with an investor risk profile exercise. This helps HSBC understand customer’s investment goals and recommend most suitable options from a variety of carefully selected funds. HSBC provides independent performance-based rankings of funds and regular performance updates to help through selection and tracking of your portfolio.

Insurance

Unfortunately, life is full of surprises. An accident or illness could seriously impair one’s lifestyle, either temporarily or permanently. It is never too early to plan for the future considering the benefits of starting early; hence, the need for insurance.

The various insurance plans offered by HSBC are as follows:

• Health first: provides for all hospitalization needs.
• Personal injury insurance plan: provides for the medical needs of the customer and immediate family.
• Auto secure: a comprehensive auto insurance policy that provides protection in case of car damages and against third party liabilities.
• Home secure: insurance plan that protects home, from a host of natural and other calamities.
• Home loan protection plan: takes care of a home loan if something unfortunate were to happen to the loan bearer.
• Educare: provides the customer’s child with the finance for the higher education he or she desires.
• MahaLife gold: guaranteed income for the child for a lifetime.
• Golden years: plans for a long retirement living with financial independence.

Some of the insurance schemes available from HSBC are:

• Life insurance plans include Nirvana pension, loan repayment protection, Tata AIG health first
• Non-life insurance plans include auto secure, accident guard, home secure, travel guard, personal injury insurance

Special Offers

These are the offers that HSBC comes out with every now and then. Presently, the following are the special offerings of HSBC.

Lifestyle Offer There is a certain offer running in ‘Lifestyle’ stores across metros which is offering upto 50 per cent off on selected items. Producing HSBC credit cards at the counter at these stores would enable a person to get an extra 6 per cent discount.

IT Offers In partnership with various manufacturers like Dell, Zenith and BenQ, HSBC empowers its customers to get discounts on certain models.

Holiday Deals HSBC has tie-ups with several hotel chains and several big travel agents which enable an HSBC card holder to get great deals and get discounts. Some hotels and resorts have also got strategic alliance with HSBC.

Dining Offer HSBC has come out with a concept of ‘Palate’—a collection of some of the choicest restaurants across the country those serve authentic Indian and international cuisine. The customer will also enjoy a significant discount when he or she uses his or her HSBC debit or credit card at any of the selected restaurants which HSBC has tie-ups with.

Case Questions

1. Why does HSBC bank offer differentiated savings bank accounts?
2. Discuss the salient features of Business Select, BusinessVantage and Business Account. Distinguish between these three accounts.
3. Is there any difference between, the Classic Card and the Gold Card?
4. Discuss the characteristic features of loan products of HSBC bank.

CHAPTER SUMMARY

Globalization of the economy has resulted in modernization and innovations in banks. The importance of sophisticated or high technology for improving the customer service, productivity and operational efficiency of banks is well recognized. As a part of their action plans, banks have introduced many new techniques and also a considerable degree of mechanization and computerization in their operations. Banks have set up exclusive data communication network for banks known as Banknet. For this, the Reserve bank and 36 other banks have become members of the Society for Worldwide Inter-bank Financial Telecommunications (SWIFT) and have installed the SWIFT regional processor at Bombay. Through this network, any bank will be able to establish a connection with its own offices and with any other banks/offices/computers in the national and international network.

Another change taking place is the use of alternatives to cash by most of the constituents of banks. The large scale use of cards for settlement of financial transactions—whether credit cards or debit cards or even the new smart cardsproves beyond doubt that cash is slowly losing the prominence of the yesteryears. Banks are quickly adapting to provide non-cash-based services. Transactions through ATMs or through electronic mode are gaining importance.

TEST YOUR UNDERSTANDING

1. Name the first Indian bank that was listed at the New York Stock Exchange?
2. Specify the Internet banking portal of the State Bank of India.
3. Write the full form of the follows abbreviations:
   1. ATM
   2. HSBC
   3. ICICI
4. Distinguish between the following HSBC products:
   1. Business Vantage
   2. HSBC Premier
   3. Smart Money Account
5. Discuss the innovative products of HSBC.

CASE STUDY

INTEREST RATES AND PROf BOND⁴

As Prof. Bond (short for Bondop) entered the class, he found a heavy silence. ‘What’s the matter of the class? Friday morning blues?’ the professor asked in a jovial tone. Confucious (because he was always confused), a student, seemed as usual perplexed and showed the Prof. an article on interest rates, ‘I cannot figure out the fuss about interest rates and monetary policy,’ he said. Prof. Bond looked at the article in his usual manner; a frown on his face leading to a grin at the end of the article. He rolled up his sleeves and said, ‘Ok, let’s start with the basics. What are interest rates? Interest rate is simply the cost of money. Just like we need to pay a price for buying our movie tickets or burger at McDonalds, we need to pay a price for borrowing money. This is what we call cost of funds from the point of view of borrower and for the person lending, it is the price received, which we call yield on capital’.

The Boy Lost in the Back Row (BLITBR), suddenly, as if he had found what he was looking for read out aloud, ‘despite the implementation of reforms, structural rigidities remained in interest rate structure distorting the true marketdetermined rates. Rates had been kept artificially high by offering high-administered rates on small savings and provident funds. The gap between the short- and long-term rates tended to remain high on account of this’. The Prof. nodded his head. ‘You are right. But we should be aware of the linkage between interest rates, its role in banking system and other asset prices’. Sanjay (the topper of the class), who was listening silently till now, remarked, ‘But interest rates in developing countries like India and Brazil still continue to be very high relative to the rates prevailing in global markets’.

‘Can’t disagree with you Sanjay, I get what you are leading at’, the Prof. remarked. Confucious was a little dumbfounded, ‘Will you care to clarify?’ Sanjay explained, ‘Against the backdrop of a slowing Indian economy, bank rate and administered rates on small savings were cut in the 1990s. Added to this, the RBI proclaimed the policy of pursuing a lower interest rate regime. However, the recent hike in interest rates shows that the rate would go up and down depending upon the market requirements’.

It was then that Miss Dreamy Eyes decided to enter the discussion, ‘But Sir, what does the RBI have to do with interest rates? Why can’t it just let interest rates move on their own?’ Prof. Bond was now on song and explained, ‘Industrial growth is a pre-requisite for economic development. Every industry requires finance for the establishment, expansion and working capital management Bank credit is considered as the most important source of industrial finance. The dependence on bank for finance could vary according to the size of the companies and to the availability of the credit at a lower cost’.

Confucious jumped and chipped in, ‘Monetary policy aims to influence the overall level of monetary demand in the economy so that it grows broadly in line with the economy’s ability to produce goods and services’. He was proud for finally getting the linkage between interest rates, price level and monetary policy. ‘Bingo,’ said the Prof. and explained, ‘This stops output from rising too quickly or slowly. Interest rates are increased to moderate demand and inflation (an increase in the general price level in an economy).

Miss Dreamy Eyes was now in a little fix, ‘What do the interest rates have to do with demand?’ The class was now in full swing. And the Prof. enjoyed questions from his students. He calmly explained, ‘When interest rates are changed, demand can be affected in various ways. A change in the cost of borrowing affects spending decisions. Interest rates will affect the attractiveness of spending today relative to spending tomorrow’. ‘You mean that an increase in interest rates will make saving more attractive and borrowing less so. This will tend to reduce current spending, by both consumers and firms,’ said Confucious. ‘Absolutely right!’ the Prof. exclaimed and added, ‘this spending includes both spending by consumers in shops and spending by firms on new equipment, i.e., investment. Conversely, a reduction in interest rates will tend to increase spending by consumers and firms’.

Prof. Bond smiled and went on, ‘Monetary policy operates by influencing the price of money, i.e., the cost of borrowing and the income from saving. The RBI sets the bank rate. This is an interest rate for the Reserve Bank’s own market transactions with financial institutions—the rate at which the Reserve Bank will make short-term loans to banks and other financial institutions.

‘And why is this bank rate so important?’ quipped BLITR. ‘That is because changes in the bank rate affects, a whole range of interest rates set by commercial banks, and other financial institutions, for their own savers and borrowers. It will influence interest rates charged for overdrafts and mortgages, as well as savings accounts. A change in the bank rate will also tend to affect the price of financial assets such as bonds and shares’. Prof. Bond read the quizzical look on the face of his students. He went on, ‘These changes in the financial markets affect consumer and business demand and, in turn, output. Changes in demand and output then have an impact on the labour market-employment levels and wage costs—which, in turn, influence producer and consumer prices’.

‘You mean that there is a positive correlation between a cut in the bank rate and movement in the interest rate?’ asked Sanjay. ‘Precisely’, said the Prof., ‘most banks make downward adjustment in their respective lending and deposit rates following a slash in the bank rate’.

Confucious was getting to where the Prof. was trying to lead them. He chipped in excitedly, ‘and while the cut in lending rate would bring down the interest income, it is only logical that most banks would try to compensate for the loss of income by bringing down the interest out-go through adjustment in deposit rates so as to neutralize the impact on their net interest income’.

‘Exactly and to that extent, this would definitely reduce their cost of funds as also bring down the interest income’.

Miss Dreamy Eyes continued, ‘Sir, the article also mentioned something about the asset prices and exchange rates’. Sanjay looked at her teasingly and said, ‘That’s just like substitution effect of the simple law of demand. Higher interest rates increase the return on savings in banks and PPFs. This might encourage savers to invest less of their money in alternatives, such as property and company shares’.

The Prof. smiled at Miss Dreamy Eyes and continued his point, ‘And any fall in demand for these assets is likely to reduce their prices. This reduces the wealth of individuals holding these assets, which, in turn, might influence their willingness to spend. Again, lower interest rates have the opposite effect; i.e., they tend to increase asset prices. Similarly, a significant fall in interest rates can be expected to reflect in higher stock prices’. BLITBR, came out of hi reverie and pulled out some facts, ‘But Sir, long-term interest rates have declined more than 25 per cent in the last 3 years. However, a commensurate increase in stock prices has failed to happen. Why is that so?’

‘Well, a probable reason for this phenomenon can be that given the uncertainty in the Indian as well as global markets, the investors prefer to stay liquid’.

Prof. Bond decided it was time to wrap up the session. He looked at his watch and announced that the time was over.

Case Questions

1. Discuss the importance of interest rates.
2. Elucidate the learnings from this case.

SELECT REFERENCES

1. Indian Institute of Bankers, Principles of Banking. (New Delhi: Macmillan, 2005).
2. L. M. Bhole, Financial Institutions and Markets. (Tata McGraw-Hill, 2004).
3. IBA, IBA Bulletin, special issue, Indian Banking 2010. (January 2004).
4. ICFAI, Professional Banker. (May–June 2005).
5. Web site and product brochures of HSBC, ICICI and SBI.

ENDNOTES

1. Figure drawn based on the information from the book Principles of Banking, India Institute of Banking, Macmillan, 2005.
2. These cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data or illustrations of effective or ineffective management.
3. This case is developed solely as the basis for classroom discussion. This is not intended to serve as endorsements, sources of primary data or illustrations of effective or ineffective management.
4. This case was co-authored by Professor Justin Paul with Prasoon Agrawal and Srikant Rajagopal.