End of the road for banks?

• July 2014 report from PwC suggests that, by

2025 – 2030, a market economy could readily
exist without banks of the traditional kind
 Traditional Banking
• Branch banking: doing one's banking business
at a location that is separate from the bank's
central business location
• To extend the reach of their services to
different locations
• Unit banking: when the government restricts
or does not permit a bank to open branch
offices
 Alternative Banking
• Set of all non-traditional means of banking
• Employing alternative delivery channels
Distribution channels based on new information
& communication technologies:
Bank automation/ ATM/ Internet banking/
Mobile banking/ Telephone banking/ TV
banking/ Direct banking/ High-tech banking/
Electronic funds transfer/ cards/ plastic
money/ cyber money
 PwC/ E&Y/ Deloitte Reports
Three drivers of change
• Regulation
• Customer
• Technology
Mega trends:
• Demographic & social change
• Technological breakthroughs
• Nationalism vs globalism & shifts in power
(emerging markets)
• Resource scarcity
• Rapid urbanisation
 Trends
• According to recent research report by
Accenture, consumers still prefer branches to
websites, but the margin is narrowing
• Reasons?
 Core Banking System
• Centralized Online Real-time Exchange:
banking services provided by a group of
networked branches
 Different Types of Accounts
• Current Account
• Savings Bank/ Fund Account
• Recurring Deposit/ Account
• Fixed/ Term Deposit/ Account
• New products combining features of these
basic types
 Line of Credit
• Line of credit: limited/specified amount of money that an
individual can access as needed
• Saves the trouble of getting a loan approved each time
• Lines of credit are not intended for single one-time
purchases such as houses/ cars
• To smooth out the vagaries of variable monthly income and
expenses
• To finance projects where it may be difficult to ascertain
the amount of funds needed upfront
• More expensive than secured loans like home loans
• Complicate a bank’s earning asset management as the
outstanding balances can’t really be controlled once line of
credit has been approved
 Types of Loans
• Auto Loans
• Home Loans
• Education Loans
• Personal Loans
 Priority Sector lending
• Priority sectors?
• Priority sectors:
- Agriculture
- Micro & small enterprises (defined by inv limits
for manufacturing/ service)
(M/S/M investment limits: mfg 0.25/5/10
Service 0.1/2/5 crore)
- Education (10L India/ 20L abroad)
- Housing (25L metro: pop 10L+/ 15L others)
- Export credit
- Low income groups & weaker sections
 Priority sector targets
• Domestic commercial banks / Foreign banks
with 20+ branches: 40% of ANBC (Adjusted
Net Bank Credit: net credit plus non-SLR bond
investments or credit equivalent of off-
balance sheet exposure, whichever is higher)
sub-targets: 18% agriculture, 10% weaker
sections
• Foreign banks with less than 20 branches: 32%
 Education Loans
• Usually maximum of Rs 10 lakh for studies in India and Rs
20 lakh for studies abroad (Exceptions like IIMs: up to Rs 20
lakhs)
• Margin: amount that you have to pay, rest paid by bank,
varies from 5 to 20%
• Co-applicant: parents/ spouse/ siblings
• Collateral/ guarantor: No collateral / guarantor is required
up to Rs 4 lakhs
Rs 4 lakh to Rs 7.5 lakh: third-party guarantor is needed
Above Rs 7.5 lakh, collateral is needed
• Repayment: Usually starts 6 months (or 1 year) after the
end of the course
• 5-7 years repayment period
• Concession if interest is serviced during the study & holiday
period
 Education Loans
• Interest rates: depends on course (& its
quality rating), loan amount, tenure
Floating / Fixed rates
• Tax Benefits:
None on principal
Sec 80 E: interest is allowed as deduction
Applicable to loan taken for self-education or
education of relatives (spouse/ kids)
 Education Loans
• Priority Sector?
• Public funding of higher education vs.
education loans
(public expenditure of less than 1% of GDP on
higher education)
• Leading player: SBI (25% market share)
• Rising NPA in education loans provided
without collaterals
 Auto Loans
• Banks will take the car as security
• Typical loan amount: up to 2-3 times annual
salary/ 6 times annual income of self-
employed people
• New car: up to 90-100%
• Tenure: 5-7 years
• Prepayment penalty/ foreclosure charges