Retail Banking Concepts and Models | Applicability of Retail Banking Concepts and Distinction between Retail and Corporate| Wholesale Banking | PAPER IV – RETAIL BANKING & WEALTH MANAGEMENT | Module A: Retail Banking
Retail Banking: Role, Models & Comparisons
Description
Retail Banking focuses on individual customers and provides banking services such as savings, loans, credit cards, and mortgages. It plays a significant role in overall bank operations by generating stable revenue, diversifying risk, and expanding customer base. This note covers retail banking's function, business models, and distinction from corporate/wholesale banking.
1. Role of Retail Banking in Bank Operations
- Major contributor to bank’s income through interest and service charges.
- Enhances customer reach and base via branches, ATMs, and digital platforms.
- Helps in diversifying credit risk by offering loans to a large number of small borrowers.
- Acts as a stable source of deposits through savings and term deposits.
2. Retail Banking Business Models
- Branch-based Model: Physical presence in multiple regions for face-to-face customer service.
- Digital-only Model: Online banking services without physical branches (e.g., Neo Banks).
- Hybrid Model: Combination of both digital and physical channels.
- Product-focused Model: Specialized services such as mortgages, auto loans, etc.
3. Applicability of Retail Banking Concepts
- Useful for designing customer-centric financial services.
- Guides risk management through portfolio diversification.
- Encourages cross-selling and up-selling products.
- Supports financial inclusion initiatives.
4. Retail vs Corporate/Wholesale Banking
| Aspect | Retail Banking | Corporate/Wholesale Banking |
|---|---|---|
| Target Customers | Individuals | Businesses/Corporates |
| Loan Size | Small to medium | Large |
| Risk | Diversified | Concentrated |
| Revenue | Spread-based (interest, fees) | Fee-based (syndications, services) |
| Delivery Channel | Branches, ATMs, Online | Relationship Managers |
5. Mathematical Examples
- EMI Calculation:
Loan Amount = ₹5,00,000, Rate = 10% p.a., Tenure = 5 years.
EMI = ₹10,623 approx. - Interest on Savings:
Principal = ₹1,00,000, Interest = 4% p.a., Time = 1 year
Interest = ₹1,00,000 × 4% = ₹4,000 - Fixed Deposit Maturity:
₹50,000 at 6% for 3 years compounded annually
Maturity = ₹50,000 × (1 + 0.06)3 = ₹59,541 - Credit Card Interest:
₹20,000 unpaid for 2 months at 3% monthly
Interest = ₹20,000 × (1.03)2 - ₹20,000 = ₹1,218 - Loan to Deposit Ratio:
Total Loans = ₹80 crore, Total Deposits = ₹100 crore
Ratio = (80 / 100) × 100 = 80%
6. MCQs with Answers
- Retail banking primarily serves:
a) Corporations
b) Governments
c) Individual customers
d) Exporters - Which is a key advantage of retail banking for banks?
a) Higher credit concentration
b) Diversified risk
c) Lower operating costs
d) Direct access to corporate funding - Which of the following is a retail banking product?
a) Home loan
b) Project finance
c) Trade credit
d) Commercial paper - Which model uses both branches and digital platforms?
a) Branch-only
b) Digital-only
c) Hybrid
d) Outsourced - Corporate banking focuses on:
a) Farmers
b) Large businesses
c) Students
d) Housewives - Loan size in corporate banking is generally:
a) Small
b) Large
c) Micro
d) Fixed - Retail banking generates revenue mostly through:
a) Equity sales
b) Interest and fees
c) Import duty
d) Mutual funds - EMI stands for:
a) Easy Monthly Insurance
b) Equated Monthly Installment
c) Equal Minimum Interest
d) Emergency Money Index - Which of these is a digital retail banking model?
a) Neo Bank
b) Central Bank
c) Merchant Bank
d) Investment Bank - Retail banking helps in financial inclusion by:
a) Focusing on exports
b) Providing forex services
c) Offering basic banking to individuals
d) Promoting stock trading
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