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COMPETIITIVE ADVANTAGE IN CUSTOMER SERVICE

UNIVERSITY OF MUMBAI

PROJECT ON

COMPETITIVE ADVANTAGE IN

CUSTOMER SERVICE

BACHELOR OF COMMERCEBANKING AND INSURANCE

(2011-2012)

SUBMITTED BY:

MADHURI J. BHAGCHANDANI

ROLL N0: A-05

PROJECT GUIDE:

PROF. N. K. SHREE VARAHAN

KET’s V.G.VAZE COLLEGE

OF ARTS, SCIENCE AND COMMERCE

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MITHAGAR ROAD, MULUND (EAST),

MUMBAI-400081

Project on:

COMPETITIVE ADVANTAGE IN

CUSTOMER SERVICE

Submitted in the partial fulfillment of the requirements for Award of

the Degree of Bachelor of Commerce in Banking and Insurance

Submitted by:

(Semester V) T.Y.B.com (Banking and Insurance)

Academic year 2011-2012

Under the guidance of

Submitted to University of Mumbai

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DECLARATION

I, the student of of T.Y. B.Com (Banking and Insurance) Roll No. 05 hereby

declare that I have completed the project on ‘Competitive Advantage

in Customer Service’ in the academic year 2011-2012.

This information is true and best to my research and knowledge.

Date:-

Sign of Student

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DESIGN OF STUDY

Objective:

1. To study about the various new and innovative services offered by the

banks.

2. To understand the importance of customers in the banking industry.

3. To analyze the recent trends in Indian Banking Sector.

4. To identify the constraints in the Indian Banking Sector.

Scope of the Study:

The project is limited only to the study of customer services in Indian

Banks. Customer services in foreign banks and international industries are

not disclosed in this project.

Limitations:

The researcher has conducted a survey of limited number of customers.

Therefore in order to draw a large conclusion on the study made is not

possible. The tome constraints and length & depth of the study etc. are

limited to the requirement of the Mumbai University.

Research Methodology:

The researcher has collected all the information with the help of research

methodology tools i.e. primary and secondary data.

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The primary data collected by the researcher was by preparing a

questionnaire and getting the feedback from the Manager of Axis Bank in

Mulund West Branch.

The secondary data was collected with the help of various books and

newspapers and through the internet websites.

The period of study was from 1st August to 15th September 2011.

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EXECUTIVE SUMMARY

The main highlight of this project is customer services that the banks

provide now-a-days with a focus on emerging trends in banking. Today, in

the era of competition, with the effects of globalization and liberalization,

banks have started to innovate their ways of providing services to their

customers. To survive in the competitive market conditions, banks have

started to innovate their various banking products. With latest technology

trends, the new mantra for banks is 24x7 banking, the latest style to attract

customers.

Chapter 1 deals with Evolution of Banking in India including the definition

of Banking, classification of banks, features and functions of banks.

Chapter 2 defines Customer Service and the importance of Customer

Services in the competitive baking industry.

Chapter 3 discusses various services of banks i.e. Traditional services ,

Recent Trends in the Indian Banking Sector, and Emerging Technology

Trends.

Chapter 4 deals with the various diversification of banking business.

Services include Merchant Banking, Mutual Funds, Bills of exchange,

Factoring, Venture Capital, and Forfaiting.

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Chapter 5 talks about the different Constrains in the Indian Banking Sector

such as privacy issues, Human Resource Management, and the retail baking

competition

Chapter 6 covers the case study done on Axis Bank. The primary data is

collected from Axis Bank and the study is made on services provided by the

bank.

INDEX

Chapter Topic Page no.1 Introduction

1.1 Evolution of Banking

1.2Features of Banks

1.3Classification of Banks

1.4 Functions of Banks

1-8

2

3

4-7

7-82 Customer Service

2.1 Introduction

2.2 Definition

2.3 Importance of customer service

2.3.1 Why is Customer Service Important?

9-13

10

10

10-11

12-13

3 Various Services of Banks

3.1 Traditional Services

3.2 Recent Trends in Indian Banking Sector

3.3 Emerging Technology Trends That Will

Impact Banking

14-25

15-19

19-21

21-25

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4 Diversification of Banking Services

4.1 Merchant Banking

4.2 Mutual Fund

4.3 Bills Discounting

4.4 Factoring

4.5 Venture Capital

4.6 Forfeiting

26-41

27-31

31-34

34-35

35-39

40

40-41

5 Constrains in the Indian Banking

Sector

5.1 Strains and Challenges faced by Indian

Banking Sector

- Intense Competition

- Technological Up gradation

- Privacy and Safety

- Human Resources Management

- Competition in Retail Banking

- The Urge to Merge

42-46

43

43

44

44

45

45

46

6 Case Study

AXIS Bank

Survey Report

Findings

Conclusion

47-52

48-49

49-51

51

52

Annexure

Questionnaire (Asked to Manager of the Bank)

Questionnaire (asked to Customer for survey)

53-55

54

55

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Chapter 1: Introduction

1.1 Evolution of Banking

1.2 Features of Banks

1.3 Classification of Banks

1.4 Functions of Banks

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1.1 Introduction

A bank is an institution which deals in money and credit. Thus, bank is an intermediary

which handles other people’s money both for their advantage and to its own profit. But

bank is not merely a trader in money but also an important manufacturer of money. Inother words, a bank is a factory of credit.

Definition

As per section 5(1) (b) of Banking Regulation Act, 1949, “Banking means accepting for

the purpose of lending or investment, of deposits of money from the public, repayable on

demand or otherwise and withdrawable by cheques, drafts, order or otherwise.”

Dr. L. Hart, says that the bankers are “one who in the ordinary course of business honors

cheques drawn upon him by persons from and for whom he receives money on current

accounts.”

Sir Kinley defines, a Bank is an establishment which makes to individuals such advances

of money as may be required and to which individuals entrust money when not required by

them for use.”

Prof. Sayers says that “Banks are not purveyors of money but also in an important sense,

manufacturers of money.”

The Oxford Dictionary defines a bank “as an establishment for the custody of money

which it pays on a customer order.”

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1.2 Features of Banking

i) Dealing in money:

The banks accept deposits from the public and advancing them as loans to the needy

people. The deposits may be of different types — current, fixed, savings, etc. accounts.

The deposits are accepted on various terms and conditions.

ii) Deposits must be withdrawable:

The deposits (other than fixed deposits) made by the public can be withdrawable by

cheques, draft or otherwise, i.e., the bank issue and pay cheques. The deposits are usually

withdrawable on demand.

iii) Dealing with credit:

The banks are the institutions that can create credit i.e., creation of additional money for

lending. Thus, “creation of credit” is the unique feature of banking.

iv) Commercial in nature:

Since all the banking functions are carried on with the aim of making profit, it is regarded

as a commercial institution.

v) Nature of agent:

Besides the basic functions of accepting deposits and lending money as loans, a bank

possesses the character of an agent because of its various agency services.

vii) Connecting link:

A bank act as a connecting link between borrows and lenders of money. Banks collect

money from those who have surplus money and give the same to those who are in need of

money.

viii) Banking business:

A banks main activity should be to do business of banking which should not be subsidiary

to any other business.

ix) Name identity:

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A bank should always add the word “bank” to its name to enable people to know that it is a

bank and that it is dealing in money.

x) Ever increasing function:

Banking is an evolutionary concept. There is a continuous expansion and diversification as

regards the functions, activities and services of a bank.

1.3 Classification of Banks

There are various types of banks which operate in our country to meet the financial

requirements of different categories of people engaged in agriculture, business, profession,

etc. On the basis of functions, the banking institutions in India may be divided into the

following types:

Classification of banks:

Central Bank Development Banks Specialized Banks

(RBI, in India) (EXIM Bank,

SIDBI, NABARD)

Commercial Banks Co-operative Bank

(i) Public Sector Banks (i) Primary Credit Societies

(ii) Private Sector Banks (ii) Central Co-operative Banks

(iii) Foreign Banks (iii) State Co-operative Banks

a) Central Bank:

A bank which is entrusted with the functions of guiding and regulating the banking system

of a country is known as its Central bank. Such a bank does not deal with the general

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public. It acts essentially as Government’s banker; maintain deposit accounts of all other

banks and advances money to other banks, when needed. The Central Bank provides

guidance to other banks whenever they face any problem. It is therefore known as the

banker’s bank. The Reserve Bank of India is the central bank of our country.

The Central Bank maintains record of Government revenue and expenditure under various

heads. It also advises the Government on monetary and credit policies and decides on the

interest rates for bank deposits and bank loans. In addition, foreign exchange rates are also

determined by the central bank.

Another important function of the Central Bank is the issuance of currency notes,

regulating their circulation in the country by different methods. No other bank than the

Central Bank can issue currency.

b) Commercial Banks:

Commercial Banks are banking institutions that accept deposits and grant short-term loans

and advances to their customers. In addition to giving short-term loans, commercial banks

also give medium-term and long-term loan to business enterprises. Now-a-days some of

the commercial banks are also providing housing loan on a long-term basis to individuals.

There are also many other functions of commercial banks, which are discussed later in this

lesson.

Types of Commercial banks: Commercial banks are of three types i.e., Public sector banks,

Private sector banks and Foreign banks.

(i) Public Sector Banks:

These are banks where majority stake is held by the Government of India or Reserve Bank

of India. Examples of public sector banks are: State Bank of India, Corporation Bank,

Bank of Boroda and Dena Bank, etc.

(ii) Private Sectors Banks:

In case of private sector banks majority of share capital of the bank is held by privateindividuals. These banks are registered as companies with limited liability. For example:

The Jammu and Kashmir Bank Ltd., Bank of Rajasthan Ltd., Development Credit Bank

Ltd, Lord Krishna Bank Ltd., Bharat Overseas Bank Ltd., Global Trust Bank, Vysya Bank,

etc.

(iii) Foreign Banks:

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These banks are registered and have their headquarters in a foreign country but operate

their branches in our country. Some of the foreign banks operating in our country are Hong

Kong and Shanghai Banking Corporation (HSBC), Citibank, American Express Bank,

Standard & Chartered Bank, Grind lay’s Bank, etc. The number of foreign banks operating

in our country has increased since the financial sector reforms of 1991.

c) Development Banks:

Business often requires medium and long-term capital for purchase of machinery and

equipment, for using latest technology, or for expansion and modernization. Such financial

assistance is provided by Development Banks. They also undertake other development

measures like subscribing to the shares and debentures issued by companies, in case of

under subscription of the issue by the public. Industrial Finance Corporation of India

(IFCI) and State Financial Corporation’s (SFCs) are examples of development banks in

India.

d) Co-operative Banks:

People who come together to jointly serve their common interest often form a co-operative

society under the Co-operative Societies Act. When a co-operative society engages itself in

banking business it is called a Co-operative Bank. The society has to obtain a licence from

the Reserve Bank of India before starting banking business. Any co-operative bank as a

society is to function under the overall supervision of the Registrar, Co-operative Societies

of the State. As regards banking business, the society must follow the guidelines set and

issued by the Reserve Bank of India.

Types of Co-operative Banks:

There are three types of co-operative banks operating in our country. They are primary

credit societies, central co-operative banks and state co-operative banks. These banks areorganized at three levels, village or town level, district level and state level.

(i) Primary Credit Societies:

These are formed at the village or town level with borrower and non-borrower members

residing in one locality. The operations of each society are restricted to a small area so that

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the members know each other and are able to watch over the activities of all members to

prevent frauds.

(ii) Central Co-operative Banks:

These banks operate at the district level having some of the primary credit societies

belonging to the same district as their members. These banks provide loans to their

members (i.e., primary credit societies) and function as a link between the primary credit

societies and state co-operative banks.

(iii) State Co-operative Banks:

These are the apex (highest level) co-operative banks in all the states of the country. They

mobilize funds and help in its proper channelization among various sectors. The money

reaches the individual borrowers from the state co-operative banks through the central co-

operative banks and the primary credit societies.

e) Specialized Banks:

There are some banks, which cater to the requirements and provide overall support for

setting up business in specific areas of activity. EXIM Bank, SIDBI and NABARD are

examples of such banks. They engage themselves in some specific area or activity and

thus, are called specialized banks.

Example: Export Import Bank of India (EXIM Bank), Small Industries Development Bank

of India (SIDBI), National Bank for Agricultural and Rural Development (NABARD)

1.4 Functions of Commercial Banks

The functions of commercial banks are divided into two categories:

i) Primary functions, and

ii) Secondary functions including agency functions.

i) Primary functions:

The primary functions of a commercial bank include:

a) Accepting deposits; and

b) Granting loans and advances;

a) Accepting deposits

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The most important activity of a commercial bank is to mobilize deposits from the public.

People who have surplus income and savings find it convenient to deposit the amounts

with banks. Depending upon the nature of deposits, funds deposited with bank also earn

interest. Thus, deposits with the bank grow along with the interest earned. If the rate of

interest is higher, public are motivated to deposit more funds with the bank. There is also

safety of funds deposited with the bank.

b) Grant of loans and advances

The second important function of a commercial bank is to grant loans and advances. Such

loans and advances are given to members of the public and to the business community at a

higher rate of interest than allowed by banks on various deposit accounts. The rate of

interest charged on loans and advances varies depending upon the purpose, period and the

mode of repayment. The difference between the rate of interest allowed on deposits and the

rate charged on the Loans is the main source of a bank’s income.

i) Loans:

A loan is granted for a specific time period. Generally, commercial banks grant short-term

loans. But term loans, that is, loan for more than a year, may also be granted. The borrower

may withdraw the entire amount in lumpsum or in installments. However, interest is

charged on the full amount of loan. Loans are generally granted against the security of

certain assets. A loan may be repaid either in lumpsum or in installments.

ii) Advances:

An advance is a credit facility provided by the bank to its customers. It differs from loan in

the sense that loans may be granted for longer period, but advances are normally granted

for a short period of time. Further the purpose of granting advances is to meet the day to

day requirements of business. The rate of interest charged on advances varies from bank to

bank. Interest is charged only on the amount withdrawn and not on the sanctioned amount.

i) Secondary functions:

Besides the primary functions of accepting deposits and lending money, banks perform a

number of other functions which are called secondary functions. These are as follows –

a) Issuing letters of credit, traveler’s cheques, circular notes etc.

b) Undertaking safe custody of valuables, important documents, and securities by

providing safe deposit vaults or lockers;

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c) Providing customers with facilities of foreign exchange.

d) Transferring money from one place to another; and from one branch to another branch

of the bank.

e) Standing guarantee on behalf of its customers, for making payments for purchase of

goods, machinery, vehicles etc.

f) Collecting and supplying business information;

g) Issuing demand drafts and pay orders; and,

h) Providing reports on the credit worthiness of customers.

Chapter 2: Customer

Service

2.1 Introduction

2.2 Definition

2.3 Services provided by banks to retain their

customers


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2.4.1 Why is Customer Service Important?

2.1 Introduction

Customer service in banking is one of the most important ways to keep customers coming

back. It includes responding to customers’ questions and complaints in a thorough and

timely manner and interacting with customers through face-to-face meetings, telephone,mail, fax and email. Most if not all bank employees are involved in some aspect of

customer service.

Because of increased competition, banks are required to become more and more customer-

focused, according to Washburn Financial Services. It is more costly to acquire new

customers than it is to retain existing customers. Retaining customers requires customer

service staff in banks to provide service that is quick, error-free and convenient.

2.2 Definition of Customer Services

Customer service is any contact, whether active or passive, between a customer and a

company that causes a positive or negative perception by a customer.

Customer service, like a brand, is what the customer perceives and remembers of the

service they received. Several published studies reveal that the mood of the customer has a

significant impact on the perception of the service received.

2.3 Services provided by banks to retain their customers

Bank Tellers

Bank tellers are the first point of contact for many customers. Tellers who are friendly,

quick and knowledgeable are a definite tool for customer service in banking. Many

customers make a decision on whether or not to do their banking with a particular

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institution based on the personalities and expertise of bank tellers. On-the-job

training is usually offered for bank tellers, including emphasis on customer service

skills.

Call Centers

Many banks, particularly large banks, employ customer service representatives in call

centers to be the initial point of contact for customer inquiries. Call center

representatives may try to solve problems or they may be responsible for directing

calls to specialists within the banking organization. Call center representatives

should have good communication skills, good listening skills and problem-solving

abilities.

Other Jobs in Banking

There are many other staff members who offer customer service in banking. Branch

managers may be able to soothe an irate or dissatisfied customer. Customer service

representatives are able to perform more complex transactions such as opening

accounts. Loan officers offer customer service to customers, both consumer and

commercial, who wish to borrow money.

Considerations

Good customer service is the heart of banking. Today banks have a wide variety of

competitors for business. For example, many department stores and grocery stores

offer financial services such as cashing checks and selling money orders. Because of

the amount of competition, unique products in the banking industry aren’t as

important as outstanding customer service. Banks continually strive for

improvements in this area. Examples of such techniques include taking customer

surveys and monitoring calls that come in through the call center. Incentives, such ascustomer service awards, may be offered to encourage staff members to improve the

customer support they offer.


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Customer service is the service provided in support of a bank’s core products. Customer

service often includes answering questions; handling complaints. Customer service can

occur on site (as when an onstage employee helps a customer or answers a question) or it

can occur over the phone or the Internet. Quality customer service is essential to building

cordial customer relationship.

Banking being a service industry, a lot depends on efficient and prompt customer service.

Customer service is the most important duty of the banking operations. Prompt and

efficient service with smile will develop good public relations reduce complaints and

increase business.

2.4.1Why is Customer Service Important?

Changing customer expectations:

Today the customer is more demanding and more sophisticated than he or she was thirty

years ago.

The increased importance of customer service:

With changing customer expectations, competitors are seeing customer service as a

competitive weapon with which they differentiate their products and services.

The need for a relationship strategy:

To ensure that a customer service strategy that will create a value preposition for customers

should be formulated implemented and controlled. It is necessary to give it a central role

and not one that is subsumed in the various elements of the marketing mix.

The customer is the kingpin in growth organizations like commercial banks. Only those

institutions which work according to his dictates will flourish. Quality, Consistency andDurability at low price are the final expectations of a customer. Quality will have to be

unambiguous, of world class quality. Quality cannot be of minimum acceptable standards.

Customer responsiveness must be quick and also competent. Speed, performance and cost

will be the new values “mantra” for success.

The ten key areas of customer’s services to be attended timely and regularly are:

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1. Submission of statement of A/Cs to customers

2. Updating of savings pass books.

3. Teller system efficiency.

4. Cleanliness and Upkeep of premises.

5. Intermediate Credit for institution cheques/land bills.

6. Advance intimation to customers for rewards of Term Deposits Receipts on maturity.

7. Advance for Debit/credit to accounts.

8. Punctuality of staff.

9. Handling of complaint register.

10. Maintain a complaint register.

Customer’s dissatisfaction in the banking industry is neither recent nor unknown. This is

mainly due to delays in handling transactions across the counter in collections, update of

passbooks supply of statements of accounts, etc.

Failure to provide prompt and efficient customer service is likely to lead to reduction in the

number of customers and they may have to face closure. To event such situation the

following improvements in the customer services may be carried out:

1. Personal relations of the bank employee with customers will improve customer

satisfaction. One service with smile should be the motto of every bank employee.

2. Rapid customer services should be provided through automation of work and

simplification of procedures.

3. ATM’s may be introduced in all the branches of the banks, based upon the volume

of transactions. This shall facilitate non-stop banking.

4. Credit Cards Services, Debit Card Services, which should be provided to the

customers, must a link service with all the banks and branches if possible to

facilitate the customer and the business organizations.

5. E-mail service made freely available at all banking centers.

6. Foreign Exchange transactions are to be extended to all the branches to facilitatetrade and industries.

7. All the customers are not homogenous in their needs. Hence need based schemes

may be introduced.

8. Totally deregulated interest rate structure should be there.

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9. The banking staff must be trained to understand the customer’s psychology, so they

may provide customer service in a qualified manner.

10. Educating the customers will increases better utilisation of banking services.

Chapter 3: Various Services

of Banks



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3.3 Emerging Technology Trends That Will

Impact Banking


Receiving of deposit is one of the primary functions of a commercial bank. Banks usually

accept deposits from those people who can save and cannot profitably use their surpluses.

There are three types of deposits like:

Bank deposits serve different purposes for different people. Some people cannot save

regularly; they deposit money in the bank only when they have extra income. The purpose

of deposit then is to keep money safe for future needs. Some may want to deposit money

in a bank for as long as possible to earn interest or to accumulate savings with interest so as

to buy a flat, or to meet hospital expenses in old age, etc. Some, mostly businessmen,

deposit all their income from sales in a bank account and pay all business expenses out of

the deposits. Keeping in view these differences, banks offer the facility of opening

different types of deposit accounts by people to suit their purpose and convenience.

On the basis of purpose they serve, bank deposit accounts may be classified as follows:

a. Savings Bank Account

b. Current Deposit Accountc. Fixed Deposit Account

d. Recurring Deposit Account.

a. Savings Bank Account :

If a person has limited income and wants to save money for future needs, the Saving Bank

Account is most suited for his purpose. This type of account can be opened with a

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minimum initial deposit that varies from bank to bank. Money can be deposited any time in

this account. Withdrawals can be made either by signing a withdrawal form or by issuing a

cheque or by using ATM card. Normally banks put some restriction on the number of

withdrawal from this account. Interest is allowed on the balance of deposit in the account.

The rate of interest on savings bank account varies from bank to bank and also changes

from time to time. A minimum balance has to be maintained in the account as prescribed

by the bank

b. Current Deposit Account:

Big businessmen, companies and institutions such as schools, colleges, and hospitals have

to make payment through their bank accounts. Since there are restrictions on number of

withdrawals from savings bank account, that type of account is not suitable for them. They

need to have an account from which withdrawal can be made any number of times. Banks

open current account for them. Like savings bank account, this account also requires

certain minimum amount of deposit while opening the account. On this deposit bank does

not pay any interest on the balances. Rather the accountholder pays certain amount each

year as operational charge.

For the convenience of the accountholders banks also allow withdrawal of amounts in

excess of the balance of deposit. This facility is known as overdraft facility. It is allowed to

some specific customers and upto a certain limit subject to previous agreement with the

bank concerned.

c. Fixed Deposit Account (also known as Term Deposit Account):

Many a time people want to save money for long period. If money is deposited in savings

bank account, banks allow a lower rate of interest. Therefore, money is deposited in a fixed

deposit account to earn a interest at a higher rate. This type of deposit account allows

deposit to be made of an amount for a specified period. This period of deposit may range

from 15 days to three years or more during which no withdrawal is allowed. However, on

request, the depositors can encash the amount before its maturity. In that case banks givelower interest than what was agreed upon. The interest on fixed deposit account can be

withdrawn at certain intervals of time. At the end of the period, the deposit may be

withdrawn or renewed for a further period. Banks also grant loan on the security of fixed

deposit receipt.

d. Recurring Deposit Account:

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This type of account is suitable for those who can save regularly and expect to earn a fair

return on the deposits over a period of time. While opening the account a person has to

agree to deposit a fixed amount once in a month for a certain period. The total deposit

along with the interest therein is payable on maturity. However, the depositor can also be

allowed to close the account before its maturity and get back the money along with the

interest till that period. The account can be opened by a person individually, or jointly with

another, or by the guardian in the name of a minor. The rate of interest allowed on the

deposits is higher than that on a savings bank deposit but lower than the rate allowed on a

fixed deposit for the same period.

Recurring Deposit Accounts may be of different types depending on the purpose

underlying the deposit. Some of these are as follows:

i. Home Safe Account (also known as Money Box Scheme):

Small savers find it convenient to deposit money under this scheme. For regular savings,

the bank provides a safe or box (Gullak) to the depositor. The safe or box cannot be

opened by the depositor, who can put money in it regularly, which is collected by the

bank’s representative at intervals and the amount is credited to the depositor’s account.

The deposits carry a nominal rate of interest.

ii. Cumulative-cum-Sickness Deposit Account:

Regular deposits made in this type of account serve the purpose of having money to meet

large expenses in case there is sudden illness or other unforeseen expenses. A certain fixed

sum is deposited at regular intervals in this account. The accumulated deposits over time

along with interest can be used for payment of medical expenses, hospital charges, etc.

iii. Home Construction deposit Scheme/Saving Account:

This is also a type of recurring deposit account in which money can be deposited regularly

either for the purchase or construction of a flat or house in future. The rate of interest

offered on the deposit in this case is relatively higher than in other recurring depositaccounts.

Lending loans is the second traditional service provided by a bank. A loan is a type

of debt. Like all debt instruments, a loan entails the redistribution of financial assets over

time, between the lender and the borrower .

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


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

http://en.wiktionary.org/wiki/lender

http://en.wiktionary.org/wiki/borrower



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

http://en.wiktionary.org/wiki/lender





In a loan, the borrower initially receives or borrows an amount of money, called

the principal, from the lender, and is obligated to pay back or repay an equal amount of

money to the lender at a later time. Typically, the money is paid back in

regular installments, or partial repayments; in an annuity, each installment is the same

amount.

The loan is generally provided at a cost, referred to as interest on the debt, which provides

an incentive for the lender to engage in the loan. In a legal loan, each of these obligations

and restrictions is enforced by contract, which can also place the borrower under additional

restrictions known as loan covenants. Although this article focuses on monetary loans, in

practice any material object might be lent.

Acting as a provider of loans is one of the principal tasks for financial institutions. For

other institutions, issuing of debt contracts such as bonds is a typical source of funding.

The various Loans offered by Banks in India are mentioned as under:

Secured

A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property)

as collateral for the loan.

A subsidized loan is a loan that will not gain interest before you begin to pay it. It is known

to be used at multiple colleges.

An unsubsidized loan is a loan that gains interest the day of disbursement.

A mortgage loan is a very common type of debt instrument, used by many individuals to

purchase housing. In this arrangement, the money is used to purchase the property. The

financial institution, however, is given security a lien on the title to the house until the

mortgage is paid off in full. If the borrower defaults on the loan, the bank would have the

legal right to repossess the house and sell it, to recover sums owing to it.

In some instances, a loan taken out to purchase a new or used car may be secured by the

car; in much the same way as a mortgage is secured by housing. The duration of the loan

period is considerably shorter often corresponding to the useful life of the car. There are

two types of auto loans, direct and indirect. A direct auto loan is where a bank gives the

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

http://en.wikipedia.org/wiki/Annuity_(finance_theory)

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


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

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

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


http://en.wikipedia.org/wiki/Bond_(finance)

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

http://en.wikipedia.org/wiki/Pledge_(law)

http://en.wikipedia.org/wiki/Collateral_(finance)

http://en.wikipedia.org/w/index.php?title=Subsidized_loan&action=edit&redlink=1

http://en.wikipedia.org/w/index.php?title=Unsubsidized_loan&action=edit&redlink=1

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

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

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

http://en.wikipedia.org/wiki/Default_(finance)

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

http://en.wikipedia.org/wiki/Annuity_(finance_theory)

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


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

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

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


http://en.wikipedia.org/wiki/Bond_(finance)

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

http://en.wikipedia.org/wiki/Pledge_(law)

http://en.wikipedia.org/wiki/Collateral_(finance)

http://en.wikipedia.org/w/index.php?title=Subsidized_loan&action=edit&redlink=1

http://en.wikipedia.org/w/index.php?title=Unsubsidized_loan&action=edit&redlink=1

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

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

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

http://en.wikipedia.org/wiki/Default_(finance)




loan directly to a consumer. An indirect auto loan is where a car dealership acts as an

intermediary between the bank or financial institution and the consumer.

A type of loan especially used in limited partnership agreements is the recourse note.

A stock hedge loan is a special type of securities lending whereby the stock of a borrower

is hedged by the lender against loss, using options or other hedging strategies to reduce

lender risk.

A pre-settlement loan is a non-recourse debt, this is when a monetary loan is given based

on the merit and awardable amount in a lawsuit case. Only certain types of lawsuit cases

are eligible for a pre-settlement loan. This is considered a secured non-recourse debt

because if the case reaches a verdict in favor of the defendant the loan is forgiven.

Unsecured

Unsecured loans are monetary loans that are not secured against the borrower's assets.

These may be available from financial institutions under many different guises or

marketing packages:

credit card debt

personal loans

bank overdrafts

credit facilities or lines of credit

corporate bonds (may be secured or unsecured)

The interest rates applicable to these different forms may vary depending on the lender

and the borrower. These may or may not be regulated by law.

Demand

Demand loans are short term loans (typically no more than 180 days) that are atypical in

that they do not have fixed dates for repayment and carry a floating interest rate which

varies according to the prime rate. They can be "called" for repayment by the lending

institution at any time. Demand loans may be unsecured or secured.


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


http://en.wikipedia.org/wiki/Hedge_(finance)

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


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

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

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

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

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


http://en.wikipedia.org/wiki/Hedge_(finance)


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

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

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

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

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




Today, we are having a fairly well developed banking system with different classes of

banks – public sector banks, foreign banks, private sector banks – both old and new

generation, regional rural banks and co-operative banks with the Reserve Bank of India as

the fountain Head of the system.

In the banking field, there has been an unprecedented growth and diversification of

banking industry has been so stupendous that it has no parallel in the annals of banking

anywhere in the world.

During the last 41 years since 1969, tremendous changes have taken place in the banking

industry. The banks have shed their traditional functions and have been innovating,

improving and coming out with new types of the services to cater to the emerging needs of

their customers.

Massive branch expansion in the rural and underdeveloped areas, mobilization of savings

and diversification of credit facilities to the either to neglected areas like small scale

industrial sector, agricultural and other preferred areas like export sector etc. have resulted

in the widening and deepening of the financial infrastructure and transferred the

fundamental character of class banking into mass banking.

There has been considerable innovation and diversification in the business of major

commercial banks. Some of them have engaged in the areas of consumer credit, credit

cards, merchant banking, leasing, mutual funds etc. A few banks have already set up

subsidiaries for merchant banking, leasing and mutual funds and many more are in the

process of doing so. Some banks have commenced factoring business.

The major challenges faced by banks today are as to how to cope with competitive forces

and strengthen their balance sheet. Today, banks are groaning with burden of NPA’s. It is

rightly felt that these contaminated debts, if not recovered, will eat into the very vitals of

the banks. Another major anxiety before the banking industry is the high transaction cost of

carrying Non Performing Assets in their books. The resolution of the NPA problem

requires greater accountability on the part of the corporate, greater disclosure in the case of defaults, an efficient credit information sharing system and an appropriate legal framework

pertaining to the banking system so that court procedures can be streamlined and actual

recoveries made within an acceptable time frame. The banking industry cannot afford to

sustain itself with such high levels of NPA’s thus, “lend, but lent for a purpose and with a

purpose ought to be the slogan for salvation.”

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The Indian banks are subject to tremendous pressures to perform as otherwise their very

survival would be at stake. Information technology (IT) plays an important role in the

banking sector as it would not only ensure smooth passage of interrelated transactions over

the electric medium but will also facilitate complex financial product innovation and

product development. The application of IT and e-banking is becoming the order of the day

with the banking system heading towards virtual banking.

As an extreme case of e-banking World Wide Banking (WWB) on the pattern of World

Wide Web (WWW) can be visualised. That means all banks would be interlinked and

individual bank identity, as far as the customer is concerned, does not exist. There is no

need to have large number of physical bank branches, extension counters. There is no need

of person-to-person physical interaction or dealings. Customers would be able to do all

their banking operations sitting in their offices or homes and operating through internet.

This would be the case of banking reaching the customers.

Banking landscape is changing very fast. Many new players with different muscle powers

will enter the market. The Reserve Bank in its bid to move towards the best international

banking practices will further sharpen the prudential norms and strengthen its supervisor

mechanism. There will be more transparency and disclosures.

In the days to come, banks are expected to play a very useful role in the economic

development and the emerging market will provide ample business opportunities to

harness. Human Resources Management is assuming to be of greater importance. As

banking in India will become more and more knowledge supported, human capital will

emerge as the finest assets of the banking system. Ultimately banking is people and not just

figures.

3.3 Emerging Technology Trends That Will Impact Banking

With technology, bank branches becomes only one of the many channels that are now

available to customers for performing routine banking transactions.

That the banks in India have taken to adoption of core banking system is by now the old

story. Brick and mortar banking has been given a quiet burial and emerged the new

sophisticated but snazzy, technology platform changing the face of banking drastically.

With technology, bank branches becomes only one of the many channels that are now

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http://www.mbaknol.com/business-finance/role-of-information-technology-it-in-the-banking-sector/







available to customers for performing routine banking transactions. Transition from single

channel banking to multi-channel banking has brought about tremendous customer

convenience. Having achieved tremendous growth in implementing technology driven

transaction banking systems, banks in India have upgraded their capability to handle

business volume. But the quality improvement of business, the key criteria for sustainable

growth, is yet to emerge. Besides transactional convenience, banks are hardly in a position

to leverage on their humongous technology capability in identifying potential business,

mitigating operational and business risks and improving the standards of governance.

Increasing customer expectations and regulatory pressure that has marked the post sub-

prime financial world are, in fact, posing too many questions to the business leaders to

answer. This trend has made the business leaders and technology providers sit up look deep

into the future and come with solutions that are definitely going to change the way banking

services are delivered today. Significant shifts in the business environment, economic

volatility, and changing customer expectations make it increasingly challenging for banks

to prioritize technology investments. Following trends are likely to occupy the minds pace

of business leaders and technology solution providers in the days to come. Many of the

trends are already reasonably visible.

Integration and Emergence of Real- Time Organisations:

Most of the banking solutions are now operating in silos. Even if one takes the Core

Banking, the solution is not fully integrated with all other business lines, say, treasury

operations, and card business, investment advisory business etc. Integrating, in, in its ideal

sense, would mean both system level and logical integration. For example, if we talk of

360 degree view of customer, it would imply a customer profile across products,

relationships and units. Merely system level loose coupling will not meet the requirements

unless all the systems can become intelligently interactive.

Data and Decisions:

Traditionally, banks have spent heavily on large databases and even larger data

warehouses, producing reams of output dubious or questionable value. Data and decision

tools will greatly enhance decision making both within the bank and among its customers

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and prospects Employees will be able to make instant decisions and customers will have

the right information about products services and billing, when they need it, delivered in

the way they want it. To support these function, alities, more and more emphasis will be on

a variety of sophisticated data visualization tools, which has recently entered the market,

integrated into popular business intelligence software. During the next three to five years,

banks will have significantly better data and greater intelligence about customers. It will be

available at the “fingertips” of all customer-facing functions, enabling more efficient and

effective sales and service.

Mobility:

Mobility is the new 'e'. The speed of innovation, world- wide penetration and rate of

growth, support predictions that mobile devices will augment and in many cases supplant

personal computers as the new e-business channel for employees and customers going

forward. Innovation in mobile devices continues at breakneck speed, they are becoming

full-fledged "platforms" in their own right, capable of running a wide range of third-party

applications. Mobile devices are beginning to eclipse personal computers as the electronic

channel for businesses and consumers. Nearly 70 percent of the world’s population is

mobile customers, interestingly, 75 percent of all subscribers are located in emerging

markets, where the mobile phone is often their sole means of electronic communication.

Mobility provides banks with access to new and better use of channels such as independent

financial advisors employed by banks to prospect for new clients. For employees, mobility

means using location-aware mobile devices and applications, as well as being able to

access remote data from afar to make key decisions quickly. With telecom technology

proliferating in India at a break-neck speed, and large part of population outside the

banking coverage, mobile banking innovation appears to hold a promise that is far more

inclusive than any single initiative for taking banking to all. Can there be a proper

regulatory policy environment to upgrade the mobile operators' capability to service the

basic banking needs of the vast unbanked majority.

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Convergence of collaboration, communication, community and content: The nature of

human interaction is changing, both between a bank and its customers and between

employees. Face-to face discussions are increasingly being replaced by a wide range of

technologies: social networks, wikis, blogs, telepresence, etc. Emerging into the workforce

now are a group of young people who grew up in the milieu of e-mail, mufti-player games

and the other trappings of the digital world. Their approach to IT is profoundly different,

impacting their behavior as customers and also their behavior as they join the workforce.

As the workforce is becoming more glob-ally distributed, and remote working increases,

collaboration becomes more of a necessity, forming an integral part of many organizations

and banks' workforce strategy. With innovation at a premium, more and more fresh

thinking will come from outside banks. For example, rapid expansion in the use of

collaboration tools (such as telepresence, video conference, co-browsing, etc), are

beginning to facilitate many new ways of interacting with customers.

Internet Computing & Cloud Computing:

Internet computing is what we use, as a label, to pull together a flood of seemingly

unrelated technologies as under:

1. Virtualization - enables the decoupling of hardware and software to enable economies of

scale and ease of management and systems.

2. Multi-tenancy architectures and software-as-a-service allow banks to outsource the

development and support for noncore applications. The emergence of cloud platforms, as

well as integrated online "markets" for hosted software are dramatically lowering the

barriers for software developers to develop and sell software and also significantly altering

the economics of ongoing business applications and support. These technologies, when

combined, can dramatically change the end users experience, but probably more

importantly, can fundamentally change how IT is organized and delivered within banks.

Even though India is considered to be the back office of the world in terms of providing

back-end tech services, Indian banks are far too shy of outsourcing tech services. Nor is

there a significant initiative to create a shared infrastructure, For example, all the banks are

creating their own ATM network whereas a common ATM network would have used by

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all bank customers on shared basis, Recently, on regulatory direction, ATMs have become

bank agnostic. In the same way, there are ample scopes of building up of large data centers

where smaller banks can use the facilities on rental basis to integrate their business in cost-

effective manner. There are also far too many services in banks that can be outsourced like

transaction reconciliation, settlements, customer data integration, ATM operations, Kisok

Management etc. With a little more relaxation of the regulatory stance, specialized services

can be outsourced thereby leaving the banks to focus on customer acquisition and services.

IT Security:

Cyber-crime is an ever increasing threat, becoming more organized and profit driven. We

are moving away from the era of the lone hacker try to get into a government NASA

system into something far more sinister and potentially far more costly to banks. Banks

need to look deep into the IT governance structure and organizations to prevent any type of

potential unholy collaboration to beat the system. In an integrated world, the risk of loss

could be enormous even if the reason may be too insignificant.

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Chapter 4: Diversification

of Banking Services


4.2 Mutual Fund

4.3 Bills Discounting

4.4 Factoring

4.5 Venture Capital

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4.6 Forfeiting


Merchant banking is a non-banking financial activity similar to banking. Merchant

banking is a fee based business, where the bank assumes market risk but no long-term

credit risk. These are financial institutions providing valuable solutions such as:-

• Acceptance of bills of exchange;

• Corporate finance;

• Portfolio management;

• Other non-banking services.

Definition:

According to Mr. Rosenburg “An organization that underwrites securities for

corporations, advices such clients on mergers, and is involved in the ownership of

commercial ventures”.

According to MOF, India “ Any person who is engaged in the business of issue

management either by making arrangements regarding selling, buying or subscribing to

the securities as manager; consultant adviser; or one rendering corporate advisory

services in relation to such activities in the management”.

Functions of merchant Banking:

Merchant banking functions in India is the same as merchant banks in UK and other

European countries. The following are the functions of merchant bankers in India.

• Corporate Counseling

• Project Counseling

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• Capita l Structuring

• Portfolio Management

• Issue Management

• Credit Syndication

• Working capital

• Venture Capital

• Lease Finance

• Fixed Deposits

(i) Corporate counseling:

Corporate counseling covers counseling in the form of project counseling, capital

restructuring, project management, public issue management, loan syndication, working

capital fixed deposit, lease financing, acceptance credit etc., The scope of corporate

counseling is limited to giving suggestions and opinions to the client and help taking

actions to solve their problems. It is provided to a corporate unit with a view to ensure

better performance, maintain steady growth and create better image among investors.

(ii) Project counseling:

Project counseling is a part of corporate counseling and relates to project finance. It

broadly covers the study of the project, offering advisory assistance on the viability and

procedural steps for its implementation.

a. Identification of potential investment avenues.

b. A general view of the project ideas or project profiles.

c. Advising on procedural aspects of project implementation

d. Reviewing the technical feasibility of the project

e. Assisting in the selection of TCO‘s (Technical Consultancy Organizations) for preparing

project reports

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f. Assisting in the preparation of project report

g. Assisting in obtaining approvals, licenses, grants, foreign collaboration etc., from

government

h. Capital structuring

i. Arranging and negotiating foreign collaborations, amalgamations, mergers and

takeovers.

j. Assisting clients in preparing applications for financial assistance to various national and

state level institutions banks etc.,

k. Providing assistance to entrepreneurs coming to India in seeking approvals from the

Government of India.

(iii) Capital Structure:

Here the Capital Structure is worked out i.e., the capital required, raising of the capital,

debt-equity ratio, issue of shares and debentures, working capital, fixed capital

requirements, etc.

(iv) Portfolio Management:

It refers to the effective management of Securities i.e., the merchant banker helps the

investor in matters pertaining to investment decisions. Taxation and inflation are taken into

account while advising on investment in different securities. The merchant banker also

undertakes the function of buying and selling of securities on behalf of their client

companies. Investments are done in such a way that it ensures maximum returns and

minimum risks.

(v) Issue Management:

Management of issues refers to effective marketing of corporate securities viz., equity

shares, preference shares and debentures or bonds by offering them to public. Merchant

banks act as intermediary whose main job is to transfer capital from those who own it to

those who need it.

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The issue function may be broadly divided in to pre issue and post issue management.

a. Issue through prospectus, offer for sale and private placement.

b. Marketing and underwriting

c. Pricing of issues

(vi) Credit Syndication:

Credit Syndication refers to obtaining of loans from single development finance institution

or a syndicate or consortium. Merchant Banks help corporate clients to raise syndicatedloans from commercials banks.

Merchant banks helps in identifying which financial institution should be approached for

term loans. The merchant bankers follow certain steps before assisting the clients approach

the appropriate financial institutions.

a. Merchant banker first makes an appraisal of the project to satisfy that it is viable

b. He ensures that the project adheres to the guidelines for financing industrial projects.

c. It helps in designing capital structure, determining the promoter‘s contribution and

arriving at a figure of approximate amount of term loan to be raised.

d. After verifications of the project, the Merchant Banker arranges for a preliminary

meeting with financial institution.

e. If the financial institution agrees to consider the proposal, the application is filled and

submitted along with other documents.

(vii) Working Capital:

The Companies are given Working Capital finance, depending upon their earning

capacities in relation to the interest rate prevailing in the market.

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(viii) Venture Capital:

Venture Capital is a kind of capital requirement which carries more risks and hence only

few institutions come forward to finance. The merchant banker looks in to the technical

competency of the entrepreneur for venture capital finance.

(ix) Fixed Deposit:

Merchant bankers assist the companies to raise finance by way of fixed deposits from the

public. However such companies should fulfill credit rating requirements.

(x) Other Functions:

• Treasury Management- Management of short term fund requirements by client

companies.

• Stock broking- helping the investors through a network of service units

• Servicing of issues- servicing the shareholders and debenture holders in distributing

dividends, debenture interest.

• Small Scale industry counseling- counseling SSI units on marketing and finance

• Equity research and investment counseling – merchant banker plays an important

role in providing equity research and investment counseling because the investor is not in a

position to take appropriate investment decision.

• Assistance to NRI investors - the NRI investors are brought to the notice of the

various investment opportunities in the country.

• Foreign Collaboration: Foreign collaboration arrangements are made by the

Merchant bankers.

4.2 Mutual Funds

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An investment vehicle that is made up of a pool of funds collected from many investors for

the purpose of investing in securities such as stocks, bonds, money market instruments and

similar assets. Mutual funds are operated by money managers, who invest the fund's capital

and attempt to produce capital gains and income for the fund's investors. A mutual fund's

portfolio is structured and maintained to match the investment objectives stated in its

prospectus.

Classification of Mutual Funds:

Mutual funds can be classified with a range of investment objectives. It can be classified

based on Tenor, Asset class & Position Philosophy.

Open-End Mutual Fund (Tenor based)

An Open-ended Mutual funds are those funds in which the company can issue always more

outstanding shares. It can help to add on the net assets of the company. These types of

funds do not have a fixed maturity period. Investors can buy and sell units of these funds at

Net Asset Value (NAV) related prices which are published on a daily basis. Open-end

schemes are more liquid in nature.

Close-End Mutual Fund (Tenor based)

Close Ended mutual fund or generally termed as traded mutual fund is the one that can be

bought and sold like a normal share. In it, the number of shares always stays fixed. These

funds also have commission which brokers get since the shares of these funds are traded

over the counter, like the shares are traded. Close-ended funds have a stipulated maturity

period like 5-7 years. It is open for subscription only during the time of launch. Investors

can invest in the close ended mutual funds at the time of the initial public issue and

thereafter can be brought or sold units of the scheme on the exchanges where the units are

listed. Close-ended funds give an option for the investor of selling back the units to the

mutual fund through periodic repurchase at NAV related prices. But the commissions willincur for this selling and buying.

Aggressive Growth Funds (Asset class based)

These are stock funds that primarily have one objective of maximum capital gains. Capital

gains are the increase in the value of investment. This type of mutual fund invest in many

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different kind of shares which includes risk industry stocks, small company stocks and uses

certain investment techniques like short selling of stocks, futures & options. These types of

mutual funds are most volatile also.

Growth Funds (Asset class based)

These type funds are those which invest in the stocks of well-established, blue chip

companies. Dividends and steady income are not only goal of these types of funds. But,

they are focused on increasing in capital gains.

(i) Growth and Income funds (Asset class based)

These types of mutual funds are focused on increased capital gains and steady income.

Less volatile than Aggressive Growth funds.

(ii) Equity Funds (Asset class based)

These funds allow an investor to own a portion of the company that they have invested in,

it’s like having shares of a certain company. Stocks that have proven historically to be the

best investment. Also which have already outperformed all other types of investments in

long term, but the risk is high. These funds produce a greater level of current income byinvesting in equity securities of companies with solid reputation and have a good record of

paying dividends.

Balanced Funds (Asset class based)

Balanced mutual funds have a portfolio mix of bonds, preferred stocks and common

stocks. Balanced mutual funds aim to conserve investors’ initial investment, to pay an

income and to aid in the long-term growth of both the principle and the income.

Fixed-Income Funds (Asset class based)

Fixed-income mutual funds are safer than equity funds, but as always, do not yield as high

returns as the latter do. These types of mutual funds are geared towards the investor who is

approaching old age and doesn’t have many earning years left. Many investors hope to

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draw a steady income from these types of mutual funds. Bond funds fall into the category

of fixed-income funds.

Money-Market Funds (Asset class based)

These are generally the safest and most secure of mutual fund investments. They invest in

the largest, most stable securities, including Treasury bills. The chances of your capital

being eroded are very minimal. Money-market funds are risk-free. If you invest a thousand

rupees, you will get that money back. It is simply a matter of when you get it back. When

investing in a money-market fund, you should pay attention to the interest rate that is being

offered, along with the rules regarding check-writing. Money-markets have allowed

investors to reap high yields on their deposits, and have made the entire investment process

more accessible to people.

The interest rates on money-market funds are changing nearly day to day. In times of

inflation, these funds have had high yields.

(iii) Index Funds (Position philosophy based)

They invest in the portfolio of a index such as BSE Sensitive index (SENSEX), S&P NSE

50 index (Nifty), etc. The investment is done in the securities in the same weight age

comprising of an index. You can see that the NAVs of such schemes would rise or fall inaccordance with the rise or fall in the index. It may not be exactly by the same percentage

due to “tracking errors”.

4.3 Bills of exchange

Bills of exchange that are used in the course of normal trade and commercial activities are

called commercial bills. Bill financing, is an ideal mode of short-term financing available

to business concerns. It imparts flexibility to the money market, besides providing liquidity

within the banking system. It also contributes towards the effectiveness of the monetary

policy of the central bank of a country.

According to the Indian Negotiable Instruments Act 1881, bill of exchange is an

instrument in writing containing an unconditional order, signed by the marker, directing a

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certain person to pay a certain sum of money only to, or to the order of, a certain person, or

to the bearer of that instrument. The bill of exchange is essentially a trade-related

instrument, and is used for financing genuine transactions.

Bill financing, is an ideal mode of short term financing available to business concerns. It

imparts flexibility to the money market, besides providing liquidity within the banking

system. It also contributes towards the effectiveness of the monetary policy of the central

bank of a country.

Features of Bills of Exchange:

Following are the salient features of bill discounting financing:

1. Discount charge:

The margin between advance granted by the bank and face value of the bill is called the

discount, and is calculated on the maturity value at rate a certain percentage per annum.

2. Maturity:

Maturity date of a bill is defined as the date on which payment will fall due. Normal

maturity periods are 30, 60, 90 or 120 days. However, bills maturing within 90 days are the

most popular.

3. Ready finance:

Banks discount and purchase the bills of their customers so that the customers get

immediate finance from the bank. They need not wait till the bank collects the payment of

the bill.

4. Discounting and purchasing:

The term discounting of bills is used for demand bills, where the term purchasing of bills is

used for usance bills. In both cases, the bank immediately credits the account of the

customer with the amount of the bill, less its charges. Charges are less in case of purchasing of bill because the bank can collect the payment immediately by presenting the

bill to the drawee for payment. Charges are, however, higher in the case of discounting of

bill‘ because the bank charges include not only the charges for service rendered, but also

the interest for the period from the date of discounting the bill to the date of its maturity.

In addition, there are also charges when bills are dishonored. In such circumstances, the

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bank will debit the account of the customer with the amount of the bill along with interest

and other charges.

Since the bank is granting advance to the customers in both the discounting and purchasing

of bills, bills discounted and purchased are shown as advances by a bank in its balance

sheet.

4.4 Factoring

Factoring is a financial option for the management of receivables. In simple definition it is

the conversion of credit sales into cash. In factoring, a financial institution (factor) buys the

accounts receivable of a company (Client) and pays up to 80 %( rarely up to 90%) of the

amount immediately on agreement. Factoring company pays the remaining amount to the

client when the customer pays the debt. Collection of debt from the customer is done either by the factor or the client depending upon the type of factoring.

The account receivable in factoring can either be for a product or service. Examples are

factoring against goods purchased, factoring for construction services (usually for

government contracts where the government body is capable of paying back the debt in the

stipulated period of factoring. Contractors submit invoices to get cash instantly), factoring

against medical insurance etc. Let us see how factoring is done against an invoice of goods

purchased.

Factoring is conversion of a credit sale into cash without recourse to seller. It is a

receivables management and financing service designed to improve the seller's cash flow

and cover risk. It is frequently referred to as receivables factoring or accounts receivable

financing, invoice discounting, or invoice finance. It allows businesses to sell outstanding

invoices to a factoring company, like GTF, and immediately receive cash for working

capital. The immediate injection of cash will help you in strengthening your company's

daily operations and improving your financial situation.

It should be borne in mind that factoring is not a loan. It is a financial structure in which

businesses sell outstanding invoices to a factoring company for immediate cash. Although

some may refer to this practice as accounts receivable loans or factoring loans, these are

misnomers. When your company decides to participate in accounts receivable financing,

you are taking a cash advance, not a loan, as a down payment for the sale of your

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receivables to the factor. When your client pays the final invoice, you receive the balance

after the factor deducts its advance and fees. And the best part about receivables factoring

is that it is your customer's credit, not your own that is most important in qualifying for

accounts receivable financing.

Types of Factoring:

Factors take different forms, depending upon the type of specials features attached to them.

Following are the important forms of factoring arrangements:

1. Domestic Factoring

Factoring that arises from transactions relating to domestic sales is known as Domestic

Factoring. Domestic Factoring may be of three types, as described below.

i) Disclosed factoring:

In the case of disclosed factoring the name of the proposed factor is mentioned on the face

of the invoice made out by the seller of goods. In this type of factoring, the payment has to

be made by the buyer directly to the factor named in the invoice. The arrangement for

factoring may take the form of recourse, whereby the supplier may continue to bear the

risk of non-payment by the buyer without passing it on to the Factor.

ii) Non- recourse factoring:

In the case of non-recourse factoring, Factor, assumes the risk of bad debt arising from

non-payment.

iii) Undisclosed factoring

Under undisclosed factoring, the name of the proposed Factor finds no mention on the

invoice made out by the seller of goods. Although the controls of all monies remain with

the Factor, the entire realization of the sales transaction is done in the name of the seller.

This type of factoring is quite popular in the UK.

2. Discount factoring

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Discount Factoring is a process where the Factor discounts the invoices of the seller at a

pre-agreed credit limit with the institutions providing finance. Book debts and receivables

serve as securities for obtaining financial accommodation.

3. Export Factoring

When the claims of an exporter are assigned to a banker or any financial institution, and

financial assistance is obtained on the strength of export documents and guaranteed

payments, it is called export factoring‘. An important feature of this type of factoring is

that the Factor-bank is located in the country of the exporter. If the importer does not honor

claims, exporter has to make payment to the Factor. The Factor-bank admits a usual

advance of 50 to 75 percent of the export claims as advance. Export factoring is offered

both as a re-course and as a non-recourse factoring.

4. Cross-border Factoring:

Cross-border Factoring involves the claims of an exporter which are assigned to a banker

or any financial institution in the importers country and financial assistance is obtained on

the strength of the export documents and guaranteed payments. International factoring

essentially works on a non-recourse factoring model. They handle exporter‘s overseas sales

on credit terms. Complete protection is provided to the clients (exporter against bad debt

loss on credit-approved sales. The Factors take requisite assistance and avail the facilities

provided for export promotion by the exporting country. When once documentation is

complete, and goods have been shipped, the Factor becomes the sole debtor to the exporter.

5. Full-service Factoring

Full-service factoring, also known as Old-line factoring, is a type of factoring whereby the

Factor has no recourse to the seller in the event of the failure of the buyers to make prompt

payment of their dues to the Factor, which might result from financial inability/

insolvency/bankruptcy of the buyer. It is a comprehensive form of factoring that combinesthe features of almost all factoring services, especially those of non-recourse and advance

factoring.

6. With Recourse Factoring

The salient features of the type of factoring arrangement are as follows:

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• The Factor has recourse to the client firm in the event of the book debts purchased

becoming irrecoverable.

• The Factor assumes no credit risks associated with the receivables.

• If the consumer defaults in payment, the resulting bad debts loss shall be met by the

firm.

• The Factor becomes entitled to recover dues from the amount paid in advance if the

customer commits a default on maturity.

• The Factor charges the client for services rendered to the client, such as

maintaining sales ledger, collecting customers’ debt, etc.

7. Without Recourse Factoring

The salient features of this type of factoring are as follows:• No right with the Factor to have recourse to the client

• The Factor bears the loss arising out of irrecoverable receivables

• The Factor charges higher commission called declared commission as a

compensation for the said loss.

• The Factor actively involves in the process of grant of credit and the extension of

line of credit to the customers of the client

8. Advance and Maturity Factoring

The essential features of this type of factoring are as follows:

• The Factor makes an advance payment in the range of 70 to 80 percent of the

receivables factored and approved from the client, the balance amount being payable after

collecting from customers

• The Factor collects interest on the advance payment from the client

• The Factor considers such conditions as the prevailing short-term rate, the financial

standing of the client and the volume of turnover while determining the rate of interest.

9. Bank Participation Factoring

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It is variation of advance and maturity factoring. Under this type of factoring, the Factor

arranges a part of the advance to the clients through the banker. The net Factor advance

will be calculated as follows:

(Factor Advance Percent x Bank Advance Percent)

10. Collection / Maturing Factoring

Under this type of factoring, the Factor makes no advancement of finance to the client. The

Factor makes payment either on the guaranteed payment date or on the date of collection,

the guaranteed payment date being fixed after taking into account the previous ledger

experience of the client and the date of collection being reckoned after the due date of the

invoice.

4.5 Venture Capital

It is a long term capital invested in companies which involves high risk.

The financing involves high risk but is compensated by high return.

Features of Venture CapitalThe following are the features of venture capital

1. It is the financing of capital for new companies.

2. This finance can also be loan-based or in convertible debentures

3. Providers of venture capital aim at capital gain due to the success achieved by the

borrowing concern.

4. Venture capital is always a long-term investment and made in companies which

have high growth potential.

5. The venture capital provider take part in the business of borrowing concern

simultaneously provides managerial skill.

6. Venture capital financing contains risks. But the risk is compensated with a higher

return.

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7. It involves financing mainly small and medium size firms, which are in their early

stages. When the assistance of venture capital, these firms will stabilize and later can go in

for traditional finance.

Objectives

• To finance new companies who find it difficult to go to capital market

• To provide long term finance to small and medium scale industries

• To provide managerial assistance

• To bring in rapid growth in the business

4.6 Forfaiting

Forfaiting is the purchase of a series of credit instruments such as drafts, bills of exchange,other freely negotiable instruments on a nonrecourse basis. Nonrecourse means that if the

importer does not pay, the forfeiter cannot recover payment from the exporter.

The exporter gets immediate cash on presentation of relevant documents and the importer

is the liable for the cost of the contract and receives credit for “x” years and at certain per

cent interest.

The forfaiter deducts interest at an agreed rate for credit period. The debt instruments aredrawn by the exporter, accepted by the importer, and will bear an avail or unconditional

guarantee, issue by the importer’s bank. The forfeiter takes over responsibility for claiming

the debt from the importer. The forfeiter holds the notes until maturity, or sells them to

another investor. The holder of the notes presents each note to the bank at which they are

payable, as that fall due.

Forfaiting is a high-value medium and long term financing form. It involves the purchase

of negotiable instruments for not less than $100.000 and from six month to five years

payment terms. The forfeiter needs to know some important information, such as:

• who the buyer is and his nationality

• what goods are being sold

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http://adv.edintorni.net/click/?mo=T&ky=credit+card+debt&af=4434&ct=it&rf=http%3A%2F%2Fwww.atuttascuola.it%2Fsiti%2Fagnese%2Ffactoring_and_forfaiting.htm&re=&ts=1311445215109&hs=08ccf72a50538ef623054f8e5d338e12












• date and duration of the contract

• interest rate already agreed with the buyer

• negotiable instruments used identity of the guarantor of payment

Chapter 5: Constrains in

the Indian Banking Sector

5.1 Strains and Challenges faced by Indian

Banking Sector


- Technological Up gradations

- Privacy and Safety

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- Human Resources Management


- The Urge to Merge

5.1 Strains and Challenges faced by Indian Banking Sector

Liberalisation process has increasingly exposed Indian Industry to international

competition and banking being a service industry is also not an exception. Banking Sector in India too faces same strains and challenges at local, national and international level.

Indian Banks, functionally diverse and geographically widespread, have played a crucial

role in the socio-economic progress of the country after independence. However, the

growth led to strains in the operational efficiency of banks and the accumulation of non-

performing assets (NPA’s) in their loan portfolios.

Banks face increasing pressure to stand out from the crowd. On the Internet, this means

offering your target customers an increasingly broader range of services than your

competitors and that too in unique way.

All this has resulted in a challenge to managers of banks to develop the right mix of

acquired and internally grown IT applications which suits customer’s expectations.

Banking sector reforms and liberalisation process raised many challenges before Indian

Banks and for sustainable development it has become necessary to face these challenges

effectively.


The RBI and Government of India kept banking industry open for the participants of

private sector banks and foreign banks. The foreign banks were also permitted to set up

shop on India either as branches or as subsidiaries. Due to this lowered entry barriers many

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new players have entered the market such as private banks, foreign banks, non-banking

finance companies, etc. The foreign banks and new private sector banks have spearheaded

the hi-tech revolution. Heavy weight foreign banks with huge base, latest technology

innovative and globally tested products are spreading their wings and wooing away

customers from other banks. For survival and growth in highly competitive environment

banks have to follow the new “Guru Mantra” of prompt and efficient customer service,

which calls for appropriate customer centric policies and customer friendly procedures.

- Technological Up gradations

Already electronic transfers, clearings, settlements have reduced translation times. To face

competition it is necessary for banks to absorb the technology and upgrade their services.

However use of High-Tech sophisticated technology leaves the predominantly rural, poor

and even illiterate mans in the lurch to which the level of automation and efficiency of

services are immaterial.

- Privacy and Safety:

Among the most important aspects, of savings, i.e., safety liquidity and profitability, safety

has to be accorded top most priority. The safety aspect assumes more significance in the

emerging scenario as the economic loss caused internationally by these types of crimes

might risk area and any lacunae is safety would result in erosion of confidence and the

same might possibly paralyse the entire network. The areas among other things, which

might endanger security in e-banking, can be:

• Changes in input data such as changing the amount in ledges, increasing the limits

in accounts or face value of cheque. Though these trends could be detected

consequently, prevention is a major problem with these types of crimes.• Use of stolen or falsified cards in ATM machines.

• Computer forgery could be committed by way of gaining access to other account,

deliberate damage through viruses on data stored in computers. In this case, same

criminals might gain entry into the computers and cause damage to the system.

This apart, another through which security and privacy are maintained. If a hacker

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has found out the password, he can cause havoc to the entire network. Also, if the

password is stolen money could be transferred from one account to another.

Software privacy is another area of potential danger faced by the banking industry. In this

the entire software could be stolen. If this is done, the hackers could operate a parallel

network.

- Human Resources Management:

In the recent past the human resource Policies in banks were mainly guided by the concept

of permanent employment and its necessary concomitants of creating career paths, terminal

benefits, etc. for the employees. In today’s fast-changing world of employee mobility both

horizontally and vertically and value systems, the public sector banks need to hire the right

talent at market related compensation and to shed surplus manpower/staff. Thus many

banks are going for URS schemes to reduce the burden of excessive staff. Schemes like

VRS are going to change the nature of workforce with many senior and experienced

persons opting for it.

The key elements that shall provide a competitive edge to banking sector will not be

physical assets but knowledge assets and information. Therefore, banks must understand

how to retain knowledge based employees and prevent them to migrating to some other

organisation. Banks must believe in people, customer orientation, and continuous

improvement of excellence. Therefore it becomes necessary for banks to encourage all

employees to take risks and work towards continuous improvements and breakthroughs.

Successful banks overcoming the challenges will be those that harness technology in a

customer friendly yet cost effective way. This requires enormous internal and external

management and the crux of the solution lies in blending human resources with

information technology.


The entry of new generation private sector banks has changed the entire scenario. Earlier

the household savings went into banks and the banks then lent out money to Corporate.

Now they need to sell banking. The retail segment, which was earlier ignored, is now the

most important of the lot, with the banks jumping over one another to give out loans. The

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consumer has never been so lucky with so many banks offering so many products to

choose from. With supply far exceeding demand it has been a race to the bottom, with the

banks undercutting one another. A lot of foreign banks have already burnt their fingers in

the retail game and have now decided to get out of a few retail segments completely.

The new generation private sector banks have taken a lead on this front and the public

sector banks are trying to play catch up.

The PSBs have been losing business to the private sector banks in this segment. PSBs need

to figure out the means to generate profitable business from this segment in the days to

come.

- The Urge to Merge:

In the recent past there has been a lot of talk about Indian Banks lacking in scale and size.

The State Bank of India is the only bank from India to make it to the list of Top 100 banks,

globally. Most of the PSBs are either looking to pick up a smaller bank or waiting to be

picked up by a larger bank.

The central government also seems to be game about the issue and is seen to be

encouraging PSBs to merge or acquire other banks. So in the zeal to merge with or acquire

another bank the PSBs should not let their common sense take a back seat. Before a merger

is carried out cultural issues should be looked into. A bank based primarily out of North

India might want to acquire a bank based primarily out of South India to increase its

geographical presence but their cultures might be very different. So the integration process

might become very difficult. Technological compatibility is another issue that needs to be

looked into in details before any merger or acquisition is carried out.

The banks must not just merge because everybody around them is merging. Banks should

avoid falling into this trap.

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Chapter 6: Case Study

AXIS Bank

Survey Report

FindingsConclusion

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Axis Bank

Axis Bank was the first of the new private banks to have begun operations in 1994, after

the Government of India allowed new private banks to be established. The Bank was

promoted jointly by the Administrator of the specified undertaking of the Unit Trust of

India (UTI - I), Life Insurance Corporation of India (LIC) and General Insurance

Corporation of India (GIC) and other four PSU insurance companies, i.e. National

Insurance Company Ltd., The New India Assurance Company Ltd., The Oriental Insurance

Company Ltd. and United India Insurance Company Ltd.

The Bank as on 30th June, 2011 is capitalized to the extent of Rs. 411.88 crores with the

public holding (other than promoters and GDRs) at 52.87%.

The Bank's Registered Office is at Ahmedabad and its Central Office is located at Mumbai.

The Bank has a very wide network of more than 1281 branches (including 169 Service

Branches/CPCs as on 31st March, 2011). The Bank has a network of over 6270 ATMs (as

on 31st March, 2011) providing 24 hrs a day banking convenience to its customers. This is

one of the largest ATM networks in the country.

The Bank has strengths in both retail and corporate banking and is committed to adopting

the best industry practices internationally in order to achieve excellence.

Mission and Values

Mission

• Customer Service and Product Innovation tuned to diverse needs of individual and

corporate clientele.

• Continuous technology up gradation while maintaining human values.

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• Progressive globalization and achieving international standards.

• Efficiency and effectiveness built on ethical practices.

Core Values

• Customer satisfaction through

- providing quality service effectively and efficiently

- “smile, it enhances your face value” is a service quality stressed on

- Periodic Customer Service Audits

• Maximization of Stakeholders value

• Success through Teamwork, Integrity and People

Primary Data from Axis Bank

The bank provides various services depending upon different classes of people. The key

attraction of Axis bank is the variety of services they provide to their customers. They

handle the customer’s complaints by maintaining the complaints in the register and they

usually try to solve the customer’s complaints as early as possible. Generally, all type of

customers visits the bank and the bank tackles them depending upon their needs.

Survey Report

1) Satisfaction of the customers

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Saisfaction of thecustomers

Not SatisfiedSatisfied

Out of the 25 customers, 8% i.e. only 2 customers were not satisfied with the services

offered by the bank. Rest 92% i.e. 23 customers were satisfied with the services of the

banks.

2) Complaints of the customers

Out of the 25 customers surveyed, 17 customers i.e. 68% have not made any complaint but

8 customers i.e. 32% have made complaints to their respective banks. But their complaints

were solved immediately.

3) Any changes to be made to the services

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Any changes

Changes

required

No changes

Out of the 25 customers, 12 customers i.e. 48% said that no changes are required to be

made in the services offered by the banks. But 13 customers i.e. 52% said that changes

should be made in the services offered. The changes they recommended includes ATMs to

be increased, client servicing, handling of customers complaints, efficient CRM system,

good ambience in the bank, etc.

4) Services the customers like most

Out of the 25 customers, 11 customers i.e. 44% likes ATM services, while 3 customers i.e.

12% like Loan facility. And some customers i.e. 8% each likes demat services, anywhere

banking, E banking, Insurance services, etc.

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Findings

• The key to customer retention is good customer service. All banks are realizing that

with growing competition, new technological innovations, and constantly

improving services and products, consumers are being pulled in differentdirections. It is vital to ensure that customer loyalty programs are an integral part of

every bank. Acquiring new customers is important, but holding on to existing

customers is crucial. If the existing customers are satisfied they will help in

acquiring new ones by spreading the news of outstanding customer services.

• In today’s world, market mantra is “Customer is the King”.

• A highly satisfied and delighted customer is a vital non-financial asset for the banks

in an emerging IT era. Courtesy, accuracy, and speed are important factors in the

efficient functioning of a bank.

• Technology has given birth to a new era in banking. Technology can be the key

differentiator between two banks and a major factor to attain a competitive edge.

Though slow in the beginning, Indian banks seem to have paced up in adoption of

advanced technology.

• Customer Retention and Customer Satisfaction are inter-linked. The customers may

be happy to make payments and interact with their bank through convenient and

cheaper banking channels but they will expect high standard of service from banks.

Conclusion

Customer services are the most significant part of a bank. Customers are the sole entity to

whom they provide variety of services and without whom they themselves would not have

any identity. A bank’s popularity and reputation depends upon whether they can satisfy

their customers completely by rendering efficient services.

All banks are realizing that customer retention has become more crucial than acquiring

new customers. Growing competition and technological innovations are pulling customers

in different directions. This has created tremendous awareness among customers whose

expectations are growing day by day.

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For every bank, customer service plays an important role in its growth, development,

expansion, profitability and image. Prompt and efficient customer services alone will tempt

existing customer to continue and induce new customers to try the services offered by the

bank. Thus, a bank should improve their customer services so as to retain its existing

customers for a lifetime and to continue good customer relationship. Customer service is a

vital tool for success.

It can be concluded that if any bank intends to survive in today’s competitive market it is

essential that they must treat their customers at top most priority notwithstanding any

technological development. Utmost importance should be given to the direct and or

indirect customer for the overall workings of the bank’s future.

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Annexure

Questionnaire (Asked to Manager of the Bank)

1. What are the various services provided by the bank?

2. Does the bank provide services depending upon different classes of people?

3. How do you tackle different types of customers?

4. How do you handle customers’ complaints?

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5. What do you think is the key attraction of your bank that helps you maintain a good

relationship with your customers?

6. What type of customers generally visits your bank?

7. Does the bank provide any special features for the customers’ convenience?

8. Does your bank provide 24/7 services currently? If no, then are there any plans to

reach this aim in the future?

Questionnaire (asked to Customer for survey)

1. In which bank do you hold an account?

2. What reason persuaded you to open an account with that bank?

3. Do you know the value added services offered by the bank?

4. Are you satisfied with the various services offered by the banks?

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5. Which services do you like most of that bank?

6. Have you ever made any complaint with the bank at any time?

7. If yes, was the complaint solved immediately or did it remain unsolved?

8. According to you, what changes are to be made to make bank services more

convenient?

Bibliography:

Financial Services Management- Dipak Abhyanker

Indian Banking- S. Natarajan & R. Parameshwaran

Banking & Financial Services in India Marketing Redefined- Renu Sobti

Banking & Financial Market in India- Nitin Bhasin

Webliography:

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www.nos.org

business.mapsofindia.com

www.managementparadise.com

www.wikipedia.org

http://www.nos.org/

http://www.managementparadise.com/

http://www.wikipedia.org/

http://www.nos.org/

http://www.managementparadise.com/

http://www.wikipedia.org/

competitive advantage in customer service

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