1.

Introduction:
Retail banking also known as consumer banking or personal banking, provides
banking or financial services to individual consumers rather than corporations or
businesses. Retail banks serve customers through various distribution channels in
both offline and online modes. However, changing consumer needs and preferences
coupled with growing technological innovations have led to an increase in online
mode of delivery in the last decade.
The shift from traditional retail banking delivery channels such as bank branches,
ATM channels, call-centers etc. to direct delivery channels, as witnessed in the last
decade, is a testimony to changing consumer preferences coupled with penetration
and preference of latest technology by consumers.
Concepts and Application:
Retail banking distribution channels have transformed over the last decade by
identifying opportunities presented by digital transformation of the marketplace in
order to provide a positive experience and ease-of-use to banking customers. This
change in preferences was driven by the demand for convenience offered by
technology.
The various retail banking distribution channels are explained in detail below:
1) Branches – Bank branches form the traditional channel for delivery of banking
services and remain one of the most popular methods of delivering banking
services and driving overall sales. Branches have an advantage by offering all
services from the same location and also branches serves to place trust in the
institution due to their physical presence.

2) ATMs – Automated Teller Machines or ATMs have brought 24x7 access to

customers for basic service of cash disbursal. The ease-of-use in using an
ATM can be highlighted that there is no documentation process and money
can be withdrawn in seconds. The ubiquitous ATM machine is also utilized for
other basic banking functions like utility payments.

3) Mobile Banking – The introduction of mobile phones with fast and reliable
data services have enabled a marked shift of consumption of banking
services in then online mode using a smartphone. New technology like two
factor/biometric authentication have helped the banking sector in confirming
the identity of their customer. Mobile banking can be done with or without
internet. Recently RBI has launched the scheme ‘UPI123Pay’ which utilizes
SMS technology to provide banking services. This scheme increased the
penetration of mobile banking to rural hinterlands where smartphone and
4G/5G network penetration is low.

4) Internet Banking - Internet Banking allows online transactions through

PC/laptop with an Internet connection. This requires a login and password to
 access various bank functions through a secure channel through the Internet
Banking website without the downloading any app/software.

5) Call Centre – A customer care call centre also acts as a delivery platform for
retail banks through which users can access basic banking services like issue
of cards, loans, account information by providing credentials.

6) Brokers and Agents – The most effective delivery channel is through

brokers/agents or sub-agents, known as banking correspondents. Banks have
limited staff, however through representatives, banks have been able to tap
customers from the weaker sections of the society who are unable to reach
out banking services during normal business hours. Far-flung areas with no
penetration of banking services also employ BCs to tap into the customer
base and accept deposits.

7) Payment terminals (POS) – A payment or POS terminal is a device which

interfaces with cards to make electronic payments. Such devices employed by
all service oriented business have seen exponential growth. POS terminal
operators have also been permitted by RBI to provide cash withdrawal facility
to customers.

Banking customers are demanding convenience, accessibility, personalization and

reliability across various distribution channels. Banks focus to maximize revenue
through these new channels for basic banking businesses while utilizing traditional
banking channels such as a branch network for more complex and intensive
businesses like sanctioning long-term loans.
It has been seen that technology has allowed banks to expand their business faster
while also making banking convenient for customers. At the same time, technology
has also reduced the space setup required to setup bank branches.
As a consequence, banks are discouraging customers from visiting branches for
financial transactions as the cost of servicing a client is highest at branch followed by
ATMs, online and mobile banking respectively. Banks are also discoursing direct
interface with customers for small value transactions such as cash deposit and
withdrawal and focusing more on high-value business transactions such as loans
and investment services. Financial transactions at ATMs are convenient for
customers as they do not need to visit branches but any nearby local ATM for cash
requirements, saving money and time. It is also beneficial for banks discourage
financial transactions as branch visits by customers add to the overall cost of the
bank.
The infographic below shows the steady fall in customers over the years availing
bank branch visits:
Use of online modes for financial transactions is also getting a boost due to RBIs
efforts to inculcate paperless payments thorough UPI, credit and debit cards, Internet
banking etc. Mobile banking has also been an enabler in online banking in giving
impetus to consumers to banks to avoid branch visits for financial transactions
creating a win-win situation for customers and banks alike.
Conclusion:
The retail banking distribution model is in a constant change of flux due to
technological improvements and changing customer demands. Although in-branch
banking will never go out of fashion, the setup of new (neo) banks with digital
presence and minimal physical presence pose a challenge to branch based banking.
Further, latest Artificial Intelligence (AI) based financial technology (FINTECH) based
products, various mobile innovations emanating out of RBI enabled sandboxes will
challenge the distribution ecosystem and introduce new challenges for banks to tap
and retain customer base. Banks at the forefront of creating value for consumer,
enabling efficient service, saving time and costs in distribution channels will
ultimately sustain the rapid development in distribution.
Source: [Link]
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2.
Introduction:
Credit Appraisal, also known as credit evaluation or assessment, is a comprehensive
evaluation of a borrower`s financial capacity, credit history and their ability to pay off
the loan. The primary goal of credit appraisal is to determine the credit worthiness of
the borrower and assess risks associated with extending credit to a borrower or
borrower group. Lending institutions like banks, NBFC`s etc. gather and analyze the
applicant`s financial data and credit history to make informed decisions prior to
disbursing loans.
Credit appraisal Is crucial for financial due diligence to help minimize credit risk by
identifying potential defaulters and to optimize loan terms to enhance accountability
and ultimately to prevent ‘bad loans’ and creation of Non-Performing Assets (NPA).
With help from various statistical algorithms taking account of various factors, a
credit score also helps in pricing risky loans.
Concepts an Applications:
Credit Appraisal process starts with analyzing the credit policy document which adds
structure to the credit decisions and provides risk mitigation measures. Evaluating a
customers financial status by analyzing their bank statements, income documents
and credit score. Loan disbursals also require assessment of delinquency levels that
inform the bank of the percentage of customers servicing their EMIS on time and if
needed, a revision of credit policy document based on geographical area and
patterns. The Credit Appraisal process as discussed above can be condensed as
given below:
1) Evaluating Credit History – The credit history of the applicant i.e. the credit
extended and payments made by the applicant are captured by the four major
credit bureaus such as TransUnion, CIBIL, Experian and CRIF. These reports
provide a detailed overview of borrowers credit history, past loan repayments,
credit card usage and repayments and cash flow statements to analyze any
negative instances or repetitive late payments.

2) Analysis of Financial Statements – Income statements, balance sheets and

cash-flow statements are analyzed using financial statements to help indicate
overall health of the company.

3) Credit Score - A credit score is an indicator of a person’s creditworthiness i.e..

ability to repay debt. It is assigned by a credit agency, usually expressed as a
number based on the person’s repayment history.

4) Debt to Income Ratio – Lenders calculate the DTI (Debt to Income ratio) by
dividing the borrowers total monthly debt payments by their monthly income.
A lower ratio indicates higher repayment capacity and confidence in the
overall financial position of the client.
 5) Employment – The employment status and income verification of the client
helps in understanding the repayment capacity and making a repayment
timeline for the client depending upon an individuals income and liabilities.

The credit appraisal process once successfully completed gives way to extending
credit to the borrower, if all evaluated parameters are positive. Prior to the credit
disbursal process, the basic principles of lending should be accepted by the both
lender and borrower. These basic lending principles, are:
1) Safety: Helps to ensure credit exposure involves minimal risk. The ‘safety’ is
in terms of high chances of loan repayment and minimal chances of loan
turning an NPA.
2) Liquidity: Determines how easily an asset can be converted into cash. The
primary principle is that the asset can be easily converted, in reasonable time
into liquid assets which can again be deployed by the bank.
3) Diversification of Risks: This principle ensures that the bank should diversify
risks to ensure lending in not concentrated but in different segments rather
than one segment. This helps continuous repayments through year and
maintains liquidity.
4) Profitability: This principle helps ensure a spread or margin between deposit
rates and lending rates and other sources of income for the bank to ensure
profitability and viability of the bank.
5) Purpose: Principle of purpose ensures the loan disbursed is not diverted for
any other purpose and is solely used for the purpose lent for. This will ensure
that loan is not used for trading/speculative purposes.
Role of Credit Scoring and CIBIL Score:
Credit score is uniquely assigned to an individual or a business to reflect the
credit worthiness of the entity. Credit worthiness indicates customers recent
payment habits, credit lines extended, total credit line availability etc. Credit score
helps in understanding the perceived riskiness of an entity at the time of loan
evaluation. A higher CIBIL score above 750 generally indicates good credit
behavior.
Credit score also helps the bank in pricing their risky products and ensures that a
high risk loan can be assigned higher interest. Credit scores serve as an initial
level of screening to filter out risky borrowers at the time of loan evaluation
process.
CIBIL score is a credit score published by the Credit Information Bureau (India)
Limited which uses statistical analysis to assess the following components of
individuals to arrive at a credit score:
(i) Credit History
(ii) Current Debts
(iii) Duration of Credit Mix
(iv) Credit Mix
(v) Frequency of Application
CIBIL Score helps in analyzing the following:
1) Every loan requirement requires a certain range of score. A non-collateral
based loan requires a high score range for administrative approval while a
collateral-loan may requires a medium range. CIBIL score is commonly used
towards assessment.
2) Helps determine credit worthiness i.e. whether borrower will be able to repay
their loans on time.
3) CIBIL score has become the foremost criteria to assess if loan application
should be approved. It also helps decide the rate of interest on loan
depending upon the perceived riskiness.
Conclusion:
Banking frauds, asset-liability mismatches, failure of banks and rising NPAs have
highlighted the importance of good credit appraisal prior to sanctioning of loans.
The sub-prime crisis of 2008 laid bare the fault lines in sectoral exposure of loans
and ineffective hedging. In India, most of the loans extended to customers
excluding corporates are asset-backed however in case of corporates loans are
disbursed by a consortium of banks having different exposure levels. Credit
appraisal, through the use of scores provides comprehensive assessment for
individuals, however it should be made more robust, effective and sector-specific
in case of corporate exposures.
Credit Bureaus like CIBIL, recently brought under RBI supervision, have to be
resilient and responsive to changing customer profile and business environment.
Ultimately the principles of lending and scoring methodology will be turnaround
the banking industry and help it to be profitable by bringing down NPA`s and
towards recognition as a healthy ecosystem which people can rely on,
irrespective of cooperatives, public or private banking.
3.a.
Introduction:
A ‘digital bank’ is a bank that operates online and provides services to customers
that were previously available only at a bank branch. Digital banking has brought
convenience for customers, cost savings for banks and innovation of new fintech
products. Technology has deeply pervaded banks and has increased
performance of bank operations/services, accuracy in transactions and
settlement and the overall speed of banking business. New technologies like
Artificial Intelligence and Multifactor authentication have taken the banking
ecosystem by storm leading to evolution of new products however at the same
time usage of technology brings forth various challenges.
Concepts and Applications:
Technologies, now deeply embedded in banking industry are transforming
banking products, their delivery, change in traditional consumer base and most
importantly the speed and accuracy of transactions. There are a multitude of new
technologies which have found their way into banking such as UPI, IMPS, RTGS,
Mobile applications etc. however the most transformative technologies are the
use of Artificial Intelligence AI) and Multifactor Authentication(MFA) which are
discussed below:
Importance of AI in Digital Banking:
1) Increasing Security: AI is used to help banks identify fraudulent activities,
track and rectify loopholes to increase security. Technology brings forth new
security challenges, where AI coupled with machine learning is being used to
cyber threats.
2) Reduce Costs: AI is helping save banks save on operational costs. For
example, an AI software called Robotic process automation (RPA) mimics
rule-based repetitive digital tasks to eliminate time-sensitive and error-prone
work.
3) Improving Customer Experience: Use of AI chatbots or conversational
assistants, is ubiquitous and is helping banks engage with customers to
handle standard banking tasks which otherwise would have required
employee interaction.
4) Loan and Credit Appraisal: Banks are using AI-based systems to help make
informed, safe and profitable loan and credit decisions. These systems can
look at behavioural pattern to analyze risks which can increase risk of default.
Ultimately, the customer is able to better understand the loan requirements,
leading to a lower rejection and a higher approval rate while minimizing
branch visits.
5) Data Collection: AI is helping in digital banking by sifting through the volume
of information generated globally to structure and record valuable and useful
information related to either customer experience improvements, trends in
investment or safety of online transactions.
 6) Predictive Analysis: AI is helping in digital banking transformation by helping
focus on complex transactions which ultimately helps in targeting customers
for untapped sales opportunities.
Conclusion:
The use of Artificial Intelligence in banks helps to improve customer experience,
makes processing and delivery efficient and fast and improves security and fraud
detection. It has empowered banks by automating its knowledge base as it keeps
evolving with time.
AI in digital banking has challenged the traditional brick-and-mortar branch banking
as it reduces the availability of information to fingertips. AI, going forward will be
significant in bringing mutual benefits for banks and customers alike however banks
should carefully harness AI in a responsible and ethical manner with emphasis on
compliance to regulations.
3.b
Introduction:
Multi-factor Authentication (MFA) is an authentication method that requires the user
to provide two or more verification factors to gain access to an online resource like
Email, Internet Banking or credit account. The use of additional factors instead of
one or two helps in reducing cyber-attack or compromise of sensitive information.
The rise of digital banking was synonymous with rise in data-theft risks which led to
introduction of MFA. Banks are enforcing use of MFA factors like additional
passwords, two-factor OTP system - customer phone and email etc. to increase
confidence in banking transactions and avoid online frauds.
Concepts and Application:
Passwords were the norm in protection of accounts however with rise of digital
frauds, the cyber security framework have been revamped by banks incorporating
MFA in digital banking both on online banking and mobile banking. It was observed
that expert cybercriminals were able to crack passwords and compromise other
accounts sharing common passwords which led to introduction of MFA to help
validate user identity by addition of an extra security step, requiring two or more
types of authentication to prove user identity.
The working of multifactor authentication system can be explained in the figure
below:

Step 1: User enters

Login ID and Password.

Step 2: The bank sends

an authentication code
on the users device.

Step 3: User enters the

authentication code

Step 4: User enters a

second key or a
password to gain access.

Step 5: User gets access

to the resource.
As shown above, the user requires one password (Step 1) followed by a system
generated code (or a second password) sent on the users device. The user enters
this code (Step 3). This is followed by a separate authentication key, a digital
certificate key or secret question which the user will have to provide/answer (Step 4)
to gain access to resource.
Usually the MFA methods comprise the following:
1) Knowledge factor – users have to prove themselves by revealing information
no one else knows.
2) Possession factor – users identify themselves by something they uniquely
own like physical or digital assets.
3) Inherence factor – Use information that is inherent to the user like biometric
features or a unique digital encrypted key.
Importance of multifactor authentication:
a) Provides more security than 2FA (2 factor authentication)
b) It validates the identity of the user
c) Complies with Single Sign on Solution wherein there is no requirement to
create multiple passwords for different applications. This also helps adapt to
changing workplace.
d) Helps giving a prompt to user to confirm secondary authentication even if
password is stolen hence raises any cyber security concern.
e) Help stay in compliance with local management regulations.
Conclusion:
The traditional methods of gaining access to resources through passwords gave way
to multifactor authentication. However, this method still requires a password at one
stage which can again be compromised with increasing capabilities of hackers. The
way forward seems password-less access like Microsoft authenticator or biometric
locks such as face or retina scan. Developments in cybersecurity will make strides
towards securing data through password-less methods, in future.
Source for Picture: [Link]
factor-authentication-mfa-server-on-premises-with-high-availability-ha/