Retail, Wholesale and Universal Banking: Models and Facts

The correct answer is B, CASA deposits. CASA stands for current account and savings account balances. A current account earns no interest and a savings account earns a low rate, so the money a bank collects through them costs it far less than any other source, and gathering such balances from lakhs of individuals is exactly what retail banking does. Option A, certificates of deposit, are wholesale money market instruments issued in large amounts at market-linked rates, so they are costlier. Option C, bulk term deposits, are large deposits placed by companies and institutions at negotiated rates that are usually higher than the card rate. Option D, interbank borrowings, are short-term funds taken from other banks at the call money rate and are the most volatile and often the dearest source of all. A high CASA ratio is therefore treated as a sign of a strong retail franchise.

The correct answer is B, S. H. Khan. The Reserve Bank of India set up a Working Group under S. H. Khan, then chairman of IDBI, to examine the roles of development financial institutions and banks; its 1998 report recommended that the two be harmonised and that India move towards universal banking, which is why the idea is linked to his name. Option A, M. Narasimham, chaired the two committees on banking sector reform of 1991 and 1998, and although the second favoured development financial institutions converting into banks, it is not called the universal banking working group. Option C, S. S. Tarapore, chaired the committee on capital account convertibility and is remembered in this topic for the suggestion of narrow banking. Option D, R. N. Malhotra, chaired the committee on insurance sector reform that led to the setting up of the insurance regulator.

The correct answer is B, ICICI Bank. ICICI was set up as a development financial institution for long-term industrial finance, and in 2002 it merged into its own banking subsidiary ICICI Bank. Because the parent merged into the child, the deal is called a reverse merger, and the combined entity offered deposits, retail and corporate loans, project finance, insurance and capital-market services together, which made it India first universal bank. Option A, IDBI Bank, is the other famous conversion, but IDBI was turned into a banking company in 2004, two years later. Option C, HDFC Bank, was licensed as a private bank in 1994 under the first round of new bank licences and grew organically rather than by converting a development financial institution. Option D, Axis Bank, began in 1994 as UTI Bank and was renamed in 2007, so it too does not fit the description.

The correct answer is B, SEBI. Issue management, underwriting, book building and the rest of investment banking touch the securities market, which is SEBI domain, and a firm must hold a certificate of registration as a merchant banker under the SEBI (Merchant Bankers) Regulations, 1992; the lead manager to any public issue must be such a registered merchant banker. Option A, the Reserve Bank of India, regulates banking business, payment systems and monetary policy, and it permits a bank to do capital-market work through a subsidiary, but it does not register merchant bankers. Option C, IRDAI, regulates insurance companies, agents and brokers. Option D, PFRDA, regulates the National Pension System and pension funds. A useful rule for the exam is that the instrument decides the regulator: deposits mean RBI, securities mean SEBI, policies mean IRDAI and pensions mean PFRDA.

The correct answer is A, the Glass-Steagall Act. Passed in 1933 after the stock market crash and the Great Depression, it stopped a deposit-taking commercial bank from doing securities business and also brought in federal deposit insurance, because lawmakers believed that speculation with depositors money had deepened the crisis. Option B, the Gramm-Leach-Bliley Act of 1999, is the opposite: it repealed that separation and allowed financial holding companies to combine banking, securities and insurance. Option C, the Dodd-Frank Act of 2010, followed the global financial crisis and tightened supervision, derivatives trading and consumer protection rather than creating the original wall. Option D, the Sarbanes-Oxley Act of 2002, came after the Enron and WorldCom scandals and deals with corporate governance, audit committees and financial disclosure, not with the structure of banking.

The correct answer is B. Under narrow banking a bank keeps taking deposits but parks them in short-term government securities instead of lending, so no new credit risk is created while its old bad loans are recovered or written off; the Tarapore Committee of 1997 suggested this for weak Indian banks. Option A describes directed lending under priority sector norms, which is a lending obligation and not narrow banking. Option C describes a local area or single-office bank, a licensing question about the size of the network rather than about where the deposits go. Option D describes an offshore or foreign currency banking unit. The word narrow refers to the narrowness of the asset side of the balance sheet, that is to the restriction on what the bank may hold, not to the number of branches or the kind of currency it deals in.

The correct answer is C, a gold loan to a household. A gold loan is a small, standardised, secured advance given to an individual against jewellery and belongs squarely to retail banking. Option A, a letter of credit, is a trade finance instrument by which a bank undertakes to pay an exporter on behalf of its importer customer, and it is sold to business clients. Option B, cash management services, means collecting receivables and making bulk payments for a corporate customer and is a classic fee-based wholesale offering. Option D, project finance for a power plant, is a large long-term loan appraised on the cash flows of the project and is wholesale business of the highest ticket size. The test to apply in such questions is the customer: if the borrower is a household or a tiny firm the product is retail, if it is a company, a government or an institution it is wholesale.

The correct answer is B, ₹5 lakh. Under the Reserve Bank of India directions on certificates of deposit, a certificate is issued for a minimum of ₹5 lakh to a single investor and thereafter in multiples of ₹5 lakh, which keeps the instrument in the hands of companies, trusts and institutions rather than small savers; it is a negotiable, usance promissory note in dematerialised form and is issued at a discount to face value. Option A, ₹1 lakh, is too small and is the kind of figure used for retail term deposits. Option C, ₹10 lakh, and option D, ₹1 crore, are larger than the floor; a certificate may of course be issued for such amounts because they are multiples of ₹5 lakh, but the question asks for the minimum. Remember also that a bank cannot grant a loan against a certificate of deposit.

The correct answer is B. Para banking covers the financial services a bank may offer besides pure banking once the Reserve Bank of India allows it, such as distributing insurance policies and mutual fund units, equipment leasing, hire purchase, factoring, portfolio management and acting as a pension fund adviser, done departmentally or through a subsidiary. Option A describes shadow banking, credit intermediation by entities outside the regulated banking system, which is a very different idea and is not permitted business of a bank. Option C describes the business correspondent model of branchless delivery used for financial inclusion. Option D describes Islamic or interest-free banking, which works on profit and loss sharing and is not practised as banking business in India. The prefix para means alongside, so para banking is the business that runs alongside the core business of accepting deposits and lending.

The correct answer is A, bancassurance. The word joins bank and assurance and describes the arrangement by which an insurer uses a bank branch network and customer base to sell policies while the bank earns fee income as a corporate agent or broker; it is a permitted para banking activity in India. Option B, reinsurance, is insurance taken by an insurance company itself so that part of a large risk is passed on to another insurer, and it has nothing to do with bank branches. Option C, underwriting, is the undertaking given by a merchant banker to buy the unsubscribed portion of a public issue, and in insurance it means the assessment and pricing of a risk, but not its distribution. Option D, securitisation, is the pooling of loans and their conversion into tradable securities. Bancassurance is attractive to banks because it earns income without using capital.