Retail banking, Wholesale and International banking ADR, GDR and Participatory Notes: An Overview

Retail banking, Wholesale and International banking ADR, GDR and Participatory Notes: An Overview

Dear bankers,

As we all know that Banking regulation is very most important topic for JAIIB Exam. JAIIB exam conducted twice in a year. So, here we are providing the Retail banking, Wholesale and International banking ADR, GDR and Participatory Notes: overview from (Unit-3), Indian Financial system (Module A), Principle & Practice of Banking JAIIB Paper-1.

Retail Banking

Retail banking, also known as Consumer banking, refers to the offering of banking services to retail customers instead of institutional customers, such as companies, corporations and/or financial institutions.

Today’s Retail banking sector is characterized by three basis features:

  • Multiple products (deposits, credit cards, insurance, investments and securities)
  • Multiple channels of distribution (call centre, branch, Internet and Kiosk)
  • Multiple customer groups (Consumer, small business and corporate)

Retail Products

The Typical products offered in the Indian retail banking segment are:

Retail Deposit Products

  • Saving Bank Account
  • Recurring Deposit Account
  • Current Deposit Account
  • Term Deposit Account
  • Zero Balance Account for salaried class people
  • Basis Saving Bank Deposit Account (BSBDA) for the common man
  • Senior Citizen Deposit Account, etc.

Retail loan Products 

  • Home loans to resident Indians for purchase of land and construction of residential house/purchase of ready built house/for repairs and renovation of an existing house.
  • Home loans to Non- Resident Indians
  • Auto loans- for purchase of new/used four-wheelers and two-wheelers
  • Consumer loans- for purchase of white goods and durables
  • Personal loans- for purchase of jewels, for meeting domestic consumption etc.
  • Educational loans- for pursuing higher education both in India and abroad
  • Trade related advances to individuals- for setting up business, retail trade etc.
  • Crop loans to agricultural farmers
  • Credit cards etc.

Retail Services

  • Safe Deposit lockers
  • Depository services
  • Bancassurance Products etc.

Drives of Retail Banking in India

Appreciable Growth Rate

  • Economic prosperity and the following escalation in purchasing power have given a boost to a consumer boom. From 1992 India’s economy nurtured at an average rate of 6.8% and continue to grow at a comfortable rate.

Changes in demographic profile

  • Change in consumer demographics shows vast potential for growth in consumption both qualitatively and quantitatively. It has been forecasted that BRIC nations has bright future, in which India’s demographic advantage will have a key role.
  • Today the average age of borrower has dropped from 40 years about five years ago to, now, an estimated 30 years. In the future the average age is predicted to reduce further and hence it will indicate well for the housing finance market in terms of increased borrowers.

Decline in Average house costs

  • There has been a decline in average house cost to annual income ratio by 4-5 times from high of 11-14 a decade ago. This has also lead to an affordable EMI as a percentage of monthly income.

Aggressive Lending by Banks

  • Banks found a respite in housing loans as a means to deploy funds on back of lull in credit off take by the corporate segment. To add to that the segment called for lower risk weights, provided attractive spread and has lower level of delinquency.

Tax Breaks

  • The recent budgets provided for several tax and fiscal enticements for deploying funds in the housing sector. The Reserve Bank of India (RBI) had also addressed commercial banks to allocate at least 3 per cent of their incremental deposits in housing loans. At the same time the policy of the Reserve Bank of India about the inclusion of Mortgage backed securities as a part of priority sector lending for banks and reducing the risk-weight on home loans from 100 per cent to 50 per cent made the sector more attractive for the banks.

Others growth Drivers

  • Technological factors played a chief role. Convenience banking in the form of debit cards, internet and phone-banking, anywhere and anytime banking has attracted many new consumers into the banking field. Technological innovations connecting to increasing use of credit / debit cards, ATMs, direct debits and phone banking has added to the development of retail banking in India.
  • Treasury income of the banks, which had reinforced the bottom lines of banks for the past few years, has been on the decline during the last two years. In such a situation, retail business offers a good vehicle of profit maximization.
  • Drop in interest rates have also backed to the growth of retail credit by creating the demand for such credit.

Wholesale and International Banking

What is Wholesale Banking

  • Wholesale banking refers to the complete banking solution provided by the merchant banks to the large scale business organizations and the government agencies or institutions. To avail the facility of wholesale banking, the companies need to possess a strong financial statement and operate on a large scale. Usually, multinational companies are the clients of wholesale banking.

Wholesale Banking Product

Fund-based Services

  • Term lending
  • Short –term Finance
  • Working Capital Finance
  • Bill Discounting
  • Structured Finance
  • Export Credit

Non-fund based Services

  • Bank Guarantee
  • Letter of credit
  • Collection of Bills and Documents

Value-added services

  • Cash Management services
  • Channel Financial
  • Vendor financing
  • Real time Gross settlement
  • Corporate Salary Accounts
  • Syndication Services
  • Forex Desk
  • Money Market Desk
  • Derivatives Desk
  • Employees Trust
  • Tax collection
  • Bankers to Right/ Public Issue
  • National Electronic Funds Transfer (NEFT)
  • Electronic Clearing Service (ECS)

Internet Banking Services

  • Payment Gateway Services
  • Corporate Internet Banking
  • Supply Chain Management
  • Supply Chain Partners

What is International Banking

  • An international bank is a financial entity that offers financial services, such as payment accounts and lending opportunities, to foreign clients. These foreign clients can be individuals and companies, though every international bank has its own policies outlining with whom they do business.
  • Example: Suppose Microsoft, an American company is functioning in London. It is in need of funds to meet its working capital requirements. In such scenario, Microsoft can avail the banking services in form of loans, overdraft or any other financial service through banks in London. Here, the residential bank of London shall be giving its services to an American company.

Need of Exporters in International Banking

  • Export Packing Credit
  • Export Bill Negotiation
  • Export Bill Purchase and Discounting
  • Export Bill Collection Services
  • Bank Guarantees
  • Rupees Advance against Export Bills
  • Export Latter of Credit Advising
  • Export Latter of Credit Confirmation
  • Supplier’s Credit

Need of Importers in International Banking

  • Import Collection Bill Services
  • Direct Import Bills
  • Advance Payment towards Imports
  • Import letters of Credit
  • Arranging for Buyer’s and Supplier’s Credit
  • Bank Guarantees

Remittance Service

  • EEFC Account Service: Bank provide facilities to maintain an Exchange Earners Foreign Currency in all permitted currencies.
  • Receipt of foreign Inward Remittances Services: Banks receive from aboard and credit them to the Indian beneficiaries accounts.
  • Payment Services to Abroad (Outward Remittances): Banks as Authorised Dealers in foreign Exchange provide remittance facilities in foreign to any country for any permitted Purpose up the limits permitted by RBI.


What is a Universal bank? Definition and examples

  • A Universal bank is a bank that combines the three main services of banking under one roof. The three services are wholesale banking, retail banking, and investment banking. In other words, it is a retail bank, a wholesale bank, and also an investment bank. As well as being able to offer an all-encompassing service, universal banks can reap the synergies that exist when they operate in the three services simultaneously.
  • For example: BNP Paribas, Deutsche Bank, Morgan Stanley, and JP Morgan Chase are universal banks. Citigroup, Bank of America, UBS, Credit Suisse, HSBC, and Barclays are also universal banks.

Universal Banking in India

  • Basically Universal Banking is like a one stop shop where all financial products are available for customers. From core banking to asset management, wealth management to risk management, mutual funds to Retails, home loans and personal loans.
  • Previously RBI has encouraged universal banking in India, however, with the 2008 financial market collapse and too big too fail approach, the concept and idea of getting into different businesses which aren’t profitable is not gathering steam.
  • From an Indian perspective I would say ICICI Bank and SBI are India centered ,would be considered as universal bank operating in India.
  • American Depository Receipt and Global Depository Receipt

Definition of ADR

  • American Depository Receipt (ADR), is a negotiable certificate, issued by a US bank, denominated in US$ representing securities of a foreign company trading in the United States stock market. The receipts are a claim against the number of shares underlying. ADR’s are offered for sale to American investors. By way of ADR, the US investors can invest in non-US companies. The dividend is paid to the ADR holders, is in US dollars.

Definition of GDR

  • GDR or Global Depository Receipt is a negotiable instrument used to tap the financial markets of various countries with a single instrument. The receipts are issued by the depository bank, in more than one country representing a fixed number of shares in a foreign company. The holders of GDR can convert them into shares by surrendering the receipts to the bank.

Comparison Chart

Acronym American Depository Receipt Global Depository Receipt
Meaning ADR is a negotiable instrument issued by a US bank, representing non-US company stock, trading in the US stock exchange. GDR is a negotiable instrument issued by the international depository bank, representing foreign company’s stock trading globally.
Relevance Foreign companies can trade in US stock market. Foreign companies can trade in any country’s stock market other than the US stock market.
Issued in United States domestic capital market. European capital market.
Listed in American Stock Exchange such as NYSE or NASDAQ Non-US Stock Exchange such as London Stock Exchange or Luxemberg Stock Exchange.
Negotiation In America only. All over the world.
Disclosure Requirement Onerous Less onerous
Market Retail investor market Institutional market.

Participatory Notes

Participatory notes

  • Participatory notes also called P-Notes are offshore derivative instruments with Indian shares as underlying assets. These instruments are used for making investments in the stock markets. However, they are not used within the country. They are used outside India for making investments in shares listed in the Indian stock market. That is why they are also called offshore derivative instruments.
  • Participatory notes are issued by brokers and FIIs registered with SEBI. The investment is made on behalf of these foreign investors by the already registered brokers in India. For example, Indian-based brokerages buy India-based securities and then issue participatory notes to foreign investors. Any dividends or capital gains collected from the underlying securities go back to the investors.

Why are participatory notes used?

  • Investing through P-Notes is very simple and hence very popular amongst FIIs. Overseas investors who are not registered with SEBI have to go through a lot of scrutiny, such as know-your-customer norms, before investing in Indian shares. To avoid these hurdles, foreign investors take this route. Also, since the end beneficiary of these notes is not disclosed, many investors who want to remain anonymous use it. These instruments aid investors who do not want to register with SEBI and reveal their identities to take positions in the Indian market.

Advantages of participatory notes

  • Anonymity: Any entity investing in participatory notes is not required to register with SEBI, whereas all FIIs have to compulsorily get registered. It enables large hedge funds to carry out their operations without disclosing their identity.
  • Ease of trading: Trading through participatory notes is easy because they are like contract notes transferable by endorsement and delivery.
  • Tax saving: Some of the entities route their investment through participatory notes to take advantage of the tax laws of certain preferred countries.

Disadvantages of P-notes

  • Indian regulators are not very happy about participatory notes because they have no way to know who owns the underlying securities. It is alleged that a lot of unaccounted money made its way to the country through the participatory note route.

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