Other Financial Services Provided by Banks | PAPER IV – RETAIL BANKING & WEALTH MANAGEMENT | Module D: Wealth Management
Other Financial Services Provided by Banks
1. Distribution of Third Party Products
Banks often act as corporate agents for selling third-party products such as mutual funds and insurance policies. This generates fee-based income and helps banks diversify their revenue.
2. Mutual Fund Business
Banks distribute mutual fund schemes of various Asset Management Companies (AMCs). They earn a commission (upfront and trail) based on the investment value.
Example: If a customer invests ₹5,00,000 in a mutual fund through a bank and the bank earns a trail commission of 0.50% per annum, the bank earns ₹2,500 yearly from that customer.
3. Insurance Business
Banks sell life, general, and health insurance products as corporate agents or brokers. Bancassurance is a key strategy here.
4. Social Security Insurance Schemes
Banks promote schemes like Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY), Pradhan Mantri Suraksha Bima Yojana (PMSBY), and Atal Pension Yojana (APY) to enhance social security penetration.
5. Cross Selling
Cross-selling involves offering additional financial products to existing customers such as credit cards, insurance, loans, and investments. This maximizes per-customer revenue.
6. Depository Services
Banks act as Depository Participants (DPs) with NSDL or CDSL. They offer demat accounts, helping customers to hold shares in electronic form.
7. Portfolio Management Services (PMS)
PMS involves personalized investment management services for high-net-worth individuals (HNIs). Banks provide these either directly or through tie-ups with AMCs or brokers.
8. Factoring Services
Banks buy receivables from companies and provide instant liquidity, charging a fee or discount. This reduces credit risk for companies.
9. Other Agency Services
Banks provide services like tax collection, pension distribution, and utility bill payment processing on behalf of the government and private entities.
Mathematical Examples (Medium-Hard)
- If a bank earns a 1.2% trail commission annually on mutual fund investments of ₹12,00,000, how much will it earn in 3 years?
Answer: ₹43,200 - A customer invests ₹10 lakhs in a PMS which charges 2% management fee and 10% profit-sharing above a 12% hurdle. If portfolio returns 18%, what is the bank’s income?
Answer: ₹20,000 (Mgmt Fee) + ₹60,000 (10% of 6% gain) = ₹80,000 - If factoring fees are 2% for an invoice worth ₹4 lakhs and discount rate is 10% p.a. for 60 days, total fee earned = ?
Answer: ₹8,000 + ₹6,575.34 = ₹14,575.34 - Commission on life insurance premium is 7.5%. If a bank sells 100 policies with ₹15,000 premium each, what is its total commission?
Answer: ₹1,12,500 - If a demat account charges ₹15 per transaction and a client does 120 trades in a year, total income is?
Answer: ₹1,800 - Under APY, if a customer contributes ₹210 per month, what’s the total annual contribution and 5-year cumulative contribution?
Answer: ₹2,520 per year; ₹12,600 over 5 years - A bank gets 0.75% upfront and 0.50% trail commission annually for MF distribution. On a ₹8 lakh investment for 3 years, what is total earning?
Answer: ₹6,000 (upfront) + ₹12,000 (trail) = ₹18,000 - Cross-selling results in 1,000 customers buying ₹2,000 insurance policy with 10% commission. Total income?
Answer: ₹2,00,000 - In a factoring deal, face value = ₹10 lakhs, fees = 1.5%, discount = 9% for 30 days. Calculate earnings.
Answer: ₹15,000 (fee) + ₹7,397.26 (discount) = ₹22,397.26 - If depository services earn ₹250 per annum per customer and bank has 10,000 active clients, total income = ?
Answer: ₹25,00,000
MCQs (Medium Level)
-
Which of the following is NOT a third-party product typically distributed by banks?
a) Mutual Funds
b) Insurance Policies
c) Fixed Deposits
d) Pension Schemes
Answer: c) Fixed Deposits -
Bancassurance refers to:
a) Banks offering banking assurance
b) Banks distributing insurance products
c) Insurance companies acting as banks
d) Banks selling gold
Answer: b) Banks distributing insurance products -
Factoring is mainly used to:
a) Increase long-term capital
b) Reduce credit exposure from receivables
c) Finance capital expenditure
d) Hedge foreign exchange
Answer: b) Reduce credit exposure from receivables -
Depository Participants operate under:
a) RBI
b) SEBI
c) IRDAI
d) SIDBI
Answer: b) SEBI -
Which of the following is a key feature of PMS?
a) Low cost index investing
b) Personalized wealth management
c) No customization
d) Retail investment only
Answer: b) Personalized wealth management -
PMJJBY offers insurance coverage for:
a) Health
b) Accidental Death
c) Natural & Accidental Death
d) Retirement Corpus
Answer: c) Natural & Accidental Death -
What is the key income for banks in cross-selling?
a) Interest
b) Fees/Commission
c) Capital gains
d) Dividend
Answer: b) Fees/Commission -
Which of the following is a service provided by banks under agency business?
a) Portfolio Management
b) Tax Collection
c) Investment Banking
d) Forex Trading
Answer: b) Tax Collection -
CDSL and NSDL are related to:
a) Mutual Fund Registration
b) Depository Services
c) Credit Rating
d) Insurance Claims
Answer: b) Depository Services -
Which type of fee is usually NOT involved in PMS?
a) Performance Fee
b) Management Fee
c) Upfront Fee
d) Exit Load
Answer: d) Exit Load
Comments