Cross Selling,

Para Banking,
MCLR, Base Rate,
ECGC, GIC
Updated as of AUG 2020

BANKING AWARENESS

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Cross Selling, Para Banking,

MCLR, Base Rate, ECGC, GIC

Cross Selling
• The Term cross-selling refers to Banks, Non-banking financials institutions (NBFC)
that offer or sale of more than one product or service to promote the customers with
different products & services according to their needs.

• It encourages the customers to buy a related or complementary product.

Meaning
• Cross-selling is a wide range of products to an existing customer is one of the corner
stones of customer strategy in most financial institutions or banks that provide the
financial services. It is offering the right product to the right customer at a right time.

• Cross selling earning the confidence of customers as best retailer to satisfy a

particular need of customers.

• The success of cross-selling program depends on various components such as well-

defined business strategy, effective execution, regular monitoring & effective
targeting strategy.

• It has proved itself to be effective or defining strategy for profitable growth in various
sectors.

Benefits
• Cross selling builds up the relationship between customers & financial organization.

• Cross selling offers benefit to both to customer & firm.

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For the Customer

• Offers the right product at a right place.

• Give maximum satisfaction.

• Better services & Multiples choices of product & services.

• Get effective product at lower prices.

• Reduce the Acquiring cost.

For the Firm

• Growth of new & existing customers.

• Enhance customer profitability & build the customer equity.

• Promotes diversification & innovation of a new product.

• Entries into new & competitive markets.

Process of Cross Selling

1. Identify the opportunity

2. Eligibility
3. Business strategy

4. Decision on analytics approach

5. Next best product to buy recommendation
6. Strategy implementation
7. Tracking of cross-sell campaigns.

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Para Banking
• Most well-known banks today have subsidiaries, which offer numerous financial
services, such as dealing with mutual funds, leasing equipment, or investing in
venture capital funds (VCF). These services are known as Para-Banking services.

• Banks are allowed to form subsidiaries as per Section 19(1) of the Banking
Regulation Act, 1949. Banks can invest up to 10 percent of their capital in the
subsidiaries.

• Some well-known subsidiaries of major banks in India that offer para-banking

services include SBI Pension Funds Private ltd, SBI Mutual Fund, ICICI Ventures,
ICICI Prudentials, HDFC Securities (HS), and more.

• Not only individuals, but companies too, avail the services. These financial
services help people or company to manage their assets, invest funds profitably,
etc.

• While many of the para-banking services are for individuals, banks offer financial
services to corporate as well.

• They offer consultancy services and execute banking tasks too, on behalf of the
company.

• Newbie companies, sick units, and firms planning to expand consult banks.

• These banking services are known as Merchant Banking.

• Para-banking services are all activities other than the normal banking jobs, such as
deposits and withdrawals.

• These activities are either handed over to subsidiaries or conducted by

departments.

• Some top para-banking services offered by banks to its Customers are:

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Venture Capital Funds

• Many financial institutions tie-up with banks to provide such funds to businesses
which need money to grow.

• Usually, VCF is a common tool used by startups and businesses which plan to
expand further.

• In India, there are three important groups that are managed and monitored by the
central government. These include:

• Central Government promoted firms, such as IFCI Venture Capital Funds Ltd
(IVCF) and SIDBI Venture Capital Ltd (SVCL).

• State government promoted firms, such as Gujarat Venture Finance Ltd (GVFL)
and Kerala Venture Capital Fund Pvt Ltd.

• Public Banks promoted firms Canbank Venture Capital Fund and SBI Capital
Market Ltd

• A venture capital fund is collected only when the bank subsidiary gets a certificate
of registration from SEBI. The subsidiaries are bound by SEBI Act, 1992.

• However, such investment does not have assured returns.

Equipment Leasing, Factoring, and Hire-Purchase

• Banks can get into these para-banking services through their subsidiaries.

• Although permission from the apex bank is not required, yet the banks need to
comply with certain conditions before offering these services.

• They support businesses.

Primary Dealership

• The banks can buy government securities from the government and then, resell
the same to customers.

• The SBIDFHI is a popular subsidiary of SBI which deals with this trading.

• The idea is to make the securities market strong and competitive.

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Smart and Debit Card Business

• The banks issue credit cards, smart cards, debit cards, etc to customers so that
they can buy goods with the cards.

• However, banks must take the prior approval from RBI and have at least Rs.
100 crore net worth.

Money Market Mutual Funds (MMMF) and Cheque-Writing for

MMMF Investors

• Assured SLR Investments provide low interest as compared to mutual funds.

• RBI has allowed banks to enter the MMMF trade where they tie-up with a
mutual fund provider.

• The MMMF provider opens an account with the bank.

• The bank consequently, opens a sub-account of the investor (individual).

• The investor or account holder is also issued a cheque-book to withdraw money

as per given conditions with the MMMF provider.

• So, although this money transaction takes place just like a current account or
savings account, it is different and not same.

Banking Awareness: Pension Fund Management

• Banks are allowed to work as a pension fund manager through its subsidiaries
as per notification from the Indian government in 2007.

• However, RBI must approve. The approval is based on the numerous factors,
such as net worth of the bank (at least Rs. 500 crore) and the bank should
make profits repeatedly for three years.

• As per the New Pension System, people working in the Central or State
government and those in the private sector can voluntarily contribute funds
during their working tenure.

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• After retirement, they can draw money as long as they live from this fund.

• The pension scheme is managed by the Pension Fund Regulatory and

Development Authority.

• The banks, which are into this business, can pool in money and execute the
scheme as per guidelines from the Authority.

• Banks have also got approval to conduct insurance broking services.

• However, this business must be done through a subsidiary. In other words, it

cannot be done departmentally.

Types of Loans
What are Loans?
• Foremost, you need to know the definition of a loan.

• A loan is an amount that you receive from a bank or any financial institution in
exchange of future repayment of the Principal, with Interest.

• The principal amount is what you borrowed, and the interest is the amount
charged for receiving the loan.

• Loans generally fall in 2 categories depending on the security

Secured Loans

• Loans that are protected or covered by an asset.

• It involves pledging an asset (such as a car, boat or house) as collateral for the
loan.

• They are the best way to acquire large amount of money at a time.

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• Examples of secured loans are –

 Mortgage

 Home Equity Line of Credit

 Auto Loan (New and Used)

 Boat Loan

 Recreational Vehicle Loan

Unsecured Loans
• These are the opposite of secured loans.

• If the borrower doesn’t pay back the unsecured loan, the lender doesn’t have
the right to take anything in return, which is why the interest rates are
considerably higher.

• Examples of unsecured loans are –

 Credit cards

 Personal lines of credits

 Student loans

 Personal (signature) loans

 Some house improvement loans

Commercial Loans
• This is a debt-based funding arrangement that is undertaken between a
business and a financial institution.

• Commercial loans are generally used to fund major capital expenditures.

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Subsidized Loans
• These kinds of loans are generally availed by undergraduate students who need
financial assistance for their educational expenses.

• These loans do not accrue interest while the student is studying.

Demand Loans
• This is a rare type of loan and generally availed by businesses.

• As per the agreement of this kind of loan, the lender can repay the loan
amount in full at any time.

Types of Loans— Advantages and Disadvantages

• The world of banking and loans is a great opportunity for financial institutions
like banks, but due to some isolated incidents, financial lending gets a bad
name.

• Bad loans and frauds in banks have tainted the banking profession, but by and
large, you will find that loans are a lucrative financial product for both the lender
and the borrower.

Advantages
• With bank loans, you only need to worry about making your regular instalment
payments on time.

• Banks don’t usually monitor how you use your loan as long as you make your
payments on time, so you can invest it however you want.

• Bank loans are usually the cheapest option.

• The lower interest rates of banks will definitely save you money.

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• The lower interest rates of banks will definitely save you money.

• Banks require borrowers to pay only the principal and interest amount on a loan
so that one retains all the business profits.

• When you use a bank loan for business reasons, the interest one pays on the
loan is a tax-deductible expense.

Disadvantages
• Some bank loans require some form of collateral, startups and existing
businesses without any assets can find it difficult to get their loan applications
approved.

• If these borrowers choose to go for unsecured loans, they are hit with higher
interest rates.

• Those who fall behind on payments face the prospect of having their assets
seized.

• Even if you manage to make late payments, your bank could still report you to
credit bureaus and that negatively affects your credit score.

• With a lower score, obtaining loans in the future becomes difficult.

• If you get a bank loan with a variable interest rate, the rate changes with market
conditions. This makes it difficult to determine the exact amount of future
payments.

Types of Loans— Grim Facts

• In India, loan frauds typically refer to cases where the borrower intentionally
tries to deceive the lending bank and does not repay the loan.

• Listed below are such happenings that India suffers from – India’s Liquor Czar
Vijay Mallya, owes over Rs. 9,000 crore to IDBI Bank and several other banks.

• Nirav Modi orchestrated a bank fraud by illegally obtaining.

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• Letters of Understanding (LoUs) and Foreign Letter of Credits (FLCs) from

Punjab National Bank. The fraud was to the tune of Rs. 11,300 crore and is
India’s biggest fraud ever.

• In 2015, Jain Infraprojects defrauded Central Bank of India to the tune of Rs. 2
Billion.

MCLR (Marginal Cost of Fund Based

Lending Rate
• RBI recently made its move from the historic Benchmark Prime

• Lending Rate (BPLR) to Marginal Cost of Funds Based Lending Rate (MCLR)
in April 2016 as the current rate setting method for lending money by
commercial banks.

Need for MCLR

• RBI changes the repo rates and other rates periodically but the banks are slow
in changing their interest rates according to RBI rates

• Most commercial banks do not change their lending rates to customers

• Ultimately, bank customers does not receive the benefits aimed by RBI

• Till now, RBI was verbally instructing the commercial banks to change their
lending rates with every Repo rate change

• The real benefit of repo rate change will be realised only when the customer
gets benefited

• With the New MCLR, there will be quick change in the lending rate and the
commercial banks will have to oblige with RBI at a fast pace as repo rate is
included in MCLR calculation.

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How MCLR is calculated?

• RBI has instructed all the commercial banks to calculate their marginal cost

• Novel feature of MCLR is the inclusion of repo rate along with marginal cost

• Commercial banks now must include the marginal cost components along with
the repo rate to arrive at the MCLR lending rate.

What are the Marginal cost components?

 Marginal cost weightage in MCLR – 92 %, return on net worth – 8%

 RBI has included the following main components in marginal cost

 Return on net worth (capital adequacy norms)

 Repo rate (short term borrowing rate) and long term borrowing rate

 Interest rate given by banks to various deposits including

 Savings deposit

 Term deposit

 Current deposit

 Foreign currency deposit

What are other components of MCLR?

• CRR negative carry charged on customers

• RBI does not pay any interest to banks for CRR maintained by them and hence
banks charge interest to customers for this idle money in RBI.

• Tenor premium of charging higher interest rates on long-term loans

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• Exclusion of factor minimum rate of return under MCLR

• Overall, MCLR is mainly determined by the marginal cost and the deposit rate

Benefits of MCLR
• MCLR revised on monthly basis benefiting bank customers especially borrowers

• Banks to compete with commercial paper market

• Reduces borrowing cost for companies

• Indian banking industry moves towards international standards

Pitfalls
• MCLR rule exempted for loans given to retired employees, existing employees,
government schemes etc

• Banks will be reluctant to change to MCLR rule due to cut in interest rates as
currently, it is up to the customer to exercise their loans under MCLR as an
option

Conclusion
• Bank customers will quickly get the benefit of the repo rate changes from their
respective banks

• Banks also get benefited to compete with commercial paper market

• Companies and borrowers will get benefited with the low-interest rates for short
term loans and reflection on repo on lending rates

• MCLR has to be implemented by RBI with a strong monitoring system to check

whether banks change their lending rates according to the repo rate cuts

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• The ultimate success of MCLR lies in the end user getting benefited

• Lending rates will see quick change in MCLR

• The entire economy of India will get a boost with increase in rate transparency
as a result of MCLR - A change in repo by RBI reflects on the loans borrowed
by individuals from banks

• Overall, this MCLR regime is one of the innovative measures of RBI to improve
Indian banking system to global standards.

Base Rate
• The Base rate is the minimum interest rate bank charges from their clients while
giving a loan.

• Banks can charge above the base rate.

• The base rate is used in place of Benchmark Prime Lending Rate.

• The base rate was introduced because there is no transparency in

BENCHMARK PRIME LENDING RATE. So, to make it fully transparent base
rate is introduced.

• As per RBI guidelines, banks cannot lend money below the base rate.

• The base rate is calculated taking all risk factors into consideration.

• The base rate is fixed by the individual bank, so it will differ from bank to bank.

• Banks declare their base rates on the website to make lending more
transparent.

• Banks have to revise base rate at least once every quarter or more than once a
quarter as per convenience

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Exception Case
• Banks can charge lower base rate for the three categories

 Bank's own employees

 Bank's depositors against their own deposit

 DRI allowances

What is Batch Prime Lending Rate?

• Before, Benchmark prime lending rate, the prime lending rate was used to give
a loan to customers.

• Benchmark prime lending is the rate by which banks charge their creditworthy
clients.

• Banks can decide BPLR by unanimity of board members.

• RBI's REPO rate and CRR affect the benchmark prime lending rate.

• The BPLR is not a transparent, so sometimes bank could lend below the BPLR.
And for that reason, BASE rate was introduced.

• Sometimes bank would give a loan to big companies at lower BPLR rate than
common people.

ECGC
• Export Credit Guarantee Corporation of India Ltd. (ECGC) is a Government of
India Enterprise founded on 30 July 1957.

• Its headquarters are in Mumbai, Maharashtra.

• ECGC provides export credit insurance facilities to exporters and banks in India.

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• It was established to enable exporters to expand their overseas business

without fear of loss.

• It functions under the administrative control of Ministry of Commerce & Industry,

and is managed by a Board of Directors comprising representatives of the
Government, Reserve Bank of India, banking, insurance and exporting
community.

• ECGC is the seventh largest credit insurer of the world in terms of coverage of
national exports.

What does ECGC do?

• Provides a range of credit risk insurance covers to exporters against loss in
export of goods and services.

• Offers Export Credit Insurance covers to banks and financial institutions to

enable exporters to obtain better facilities from them.

• Provides Overseas Investment Insurance to Indian companies investing in joint

ventures abroad in the form of equity or loan.

What is the need to provide export credit insurance

facilities?
• Example

• Some industrialist wants to export his material to outside country.

• The payment will not be done in advance. So there is a risk in exporting outside.

• In a view to help exporters export without taking risk ECGC was founded where
exporters can go and ask for insurance of their exports.

• Payments for exports are open to risks even at the best of times.

• An outbreak of war or civil war may block or delay payment for goods exported.

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• Economic difficulties or balance of payment problems may lead a country to

impose restrictions on either import of certain goods or on transfer of payments
for goods imported.

• At any point in time, the foreign buyer can go in state of bankruptcy or

insolvency.

• But in any of the conditions specified above, your payment is secured with
ECGC.

What other facilities does ECGC provide to

exporters?
• It provides guidance to exporters in export-related activities.

• It makes available information about different countries with its own credit
ratings, so that the exporters export their products to risk free countries.

• It also provides information on credit-worthiness of overseas buyers.

• It makes it easy to obtain export finance from other banks/financial institutions.

• It assists the exporters in recovering their bad debts.

General Insurance Corporation of India

(GIC)
• The entire general insurance business in India was nationalized by General
Insurance Business (Nationalisation) Act, 1972 (GIBNA).

• The Government of India (GOI), through Nationalisation, took over the shares
of 55 Indian insurance companies and the undertakings of 52 insurers carrying
on general insurance business.

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• General Insurance Corporation of India (GIC) was formed in pursuance of

Section 9(1) of GIBNA.

• It was incorporated on 22 November 1972 under the Companies Act, 1956 as a

private company limited by shares.

• GIC was formed for the purpose of superintending, controlling, and carrying on
the business of general insurance.

• As soon as GIC was formed, GOI transferred all the shares it held of the general
insurance companies to GIC.

• Simultaneously, the nationalized undertakings were transferred to Indian

insurance companies.

• After a process of mergers among Indian insurance companies, four companies

were left as fully owned subsidiary companies of GIC.

• The next landmark happened on 19th April 2000, when the Insurance
Regulatory and Development Authority Act.

What is the meaning of GIC?

• 1999 (IRDAA) came into force.

• GIC meaning: Its full form is General Insurance Corporation of India. This Act
also introduced an amendment to GIBNA and the Insurance Act, 1938. An
amendment to GIBNA removed the exclusive privilege of GIC and its subsidiaries
carrying on general insurance in India.

• The general insurance industry in India was nationalized and a In November

2000, GIC was renotified as the Indian Reinsurer and through administrative
instruction, government company known as General Insurance Corporation of
India (GIC). its supervisory role over the four subsidiaries was ended.

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The objective of the General Insurance Corporation

of India (GIC):

• With the General Insurance Business (Nationalisation) Amendment Act 2002 (40
of 2002) coming into force

• To carry on the general insurance business other than life, such as accident, fire
etc. from March 21, 2003; GIC ceased to be a holding company of its
subsidiaries.

• Now, To aid and achieve the subsidiaries to conduct the insurance business.
The ownership of the four erstwhile subsidiary companies and also of the
General Insurance Corporation of

• To help the conduct of investment strategies of the subsidiaries in an India was

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The function of the General Insurance Corporation of

India (GIC)
• Carrying on of any part of the general insurance, if it thinks it is desirable to do
so.

• Aiding, assisting and advising the acquiring companies in the matter of setting
up standards of conduct and sound practice in a general insurance business.

• Rendering efficient services to policyholders of general insurance.

• Advising the acquiring companies in the matter of controlling their expenses

including the payment of commission and other expenses.

• Advising the acquiring companies in the matter of investing their fund.

• Issuing directives to the acquiring companies in relation to the conduct of

general insurance business.

• Issuing directions and encouraging competition among the acquiring companies

in order to render their services more efficiently.

General insurance act 1972: general insurance

corporation of India
• The General Insurance Act 1972 was passed in 1972 to establish a general
insurance business in India. 107 insurance companies were nationalized under
the general insurance act 1972, who gave special privileges to four subsidiaries
for general insurance business transactions .

Subsidiary of General Insurance Corporation of India

 National Insurance Company Limited
 New India Assurance Company Limited
 Oriental Insurance Company Limited
 United India Insurance Company

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