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The Indian Banking industry
The Indian Banking industry, which is governed by the Banking Regulation Act of India,
1949 can be broadly classified into two major categories, non-scheduled banks and
scheduled banks. Scheduled banks comprise commercial banks and the co-operative
banks. In terms of ownership, commercial banks can be further grouped into nationalized
banks, the State Bank of India and its group banks, regional rural banks and private sector
banks (the old/ new domestic and foreign). These banks have over 67,000 branches
spread                      across                       the                      country.

The first phase of financial reforms resulted in the nationalization of 14 major banks in
1969 and resulted in a shift from Class banking to Mass banking. This in turn resulted in
a significant growth in the geographical coverage of banks. Every bank had to earmark a
minimum percentage of their loan portfolio to sectors identified as “priority sectors”. The
manufacturing sector also grew during the 1970s in protected environs and the banking
sector was a critical source. The next wave of reforms saw the nationalization of 6 more
commercial banks in 1980. Since then the number of scheduled commercial banks
increased four-fold and the number of bank branches increased eight-fold.

After the second phase of financial sector reforms and liberalization of the sector in the
early nineties, the Public Sector Banks (PSB) s found it extremely difficult to compete
with the new private sector banks and the foreign banks. The new private sector banks
first made their appearance after the guidelines permitting them were issued in January
1993. Eight new private sector banks are presently in operation. These banks due to their
late start have access to state-of-the-art technology, which in turn helps them to save on
manpower             costs           and          provide          better         services.

During the year 2000, the State Bank Of India (SBI) and its 7 associates accounted for a
25 percent share in deposits and 28.1 percent share in credit. The 20 nationalized banks
accounted for 53.2 percent of the deposits and 47.5 percent of credit during the same
period. The share of foreign banks (numbering 42), regional rural banks and other
scheduled commercial banks accounted for 5.7 percent, 3.9 percent and 12.2 percent
respectively in deposits and 8.41 percent, 3.14 percent and 12.85 percent respectively in
credit                during                 the                year               2000.

Current                                                                        Scenario

The industry is currently in a transition phase. On the one hand, the PSBs, which are the
mainstay of the Indian Banking system are in the process of shedding their flab in terms
of excessive manpower, excessive non Performing Assets (Npas) and excessive
governmental equity, while on the other hand the private sector banks are consolidating
themselves             through             mergers            and            acquisitions.

PSBs, which currently account for more than 78 percent of total banking industry assets
are saddled with NPAs (a mind-boggling Rs 830 billion in 2000), falling revenues from
traditional sources, lack of modern technology and a massive workforce while the new
private sector banks are forging ahead and rewriting the traditional banking business
model by way of their sheer innovation and service. The PSBs are of course currently
working out challenging strategies even as 20 percent of their massive employee strength
has dwindled in the wake of the successful Voluntary Retirement Schemes (VRS)

The private players however cannot match the PSB’s great reach, great size and access to
low cost deposits. Therefore one of the means for them to combat the PSBs has been
through the merger and acquisition (M& A) route. Over the last two years, the industry
has witnessed several such instances. For instance, Hdfc Bank’s merger with Times Bank
Icici Bank’s acquisition of ITC Classic, Anagram Finance and Bank of Madura.
Centurion Bank, Indusind Bank, Bank of Punjab, Vysya Bank are said to be on the
lookout. The UTI bank- Global Trust Bank merger however opened a Pandora’s box and
brought about the realization that all was not well in the functioning of many of the
private                                   sector                                 banks.

Private sector Banks have pioneered internet banking, phone banking, anywhere banking,
mobile banking, debit cards, Automatic Teller Machines (ATMs) and combined various
other services and integrated them into the mainstream banking arena, while the PSBs are
still grappling with disgruntled employees in the aftermath of successful VRS schemes.
Also, following India’s commitment to the W To agreement in respect of the services
sector, foreign banks, including both new and the existing ones, have been permitted to
open up to 12 branches a year with effect from 1998-99 as against the earlier stipulation
of                                       8                                     branches.

Talks of government diluting their equity from 51 percent to 33 percent in November
2000 have also opened up a new opportunity for the takeover of even the PSBs. The FDI

rules being more rationalized in Q1FY02 may also pave the way for foreign banks taking
the      M&       A       route    to    acquire     willing      Indian     partners.

Meanwhile the economic and corporate sector slowdown has led to an increasing number
of banks focusing on the retail segment. Many of them are also entering the new vistas of
Insurance. Banks with their phenomenal reach and a regular interface with the retail
investor are the best placed to enter into the insurance sector. Banks in India have been
allowed to provide fee-based insurance services without risk participation invest in an
insurance company for providing infrastructure and services support and set up of a
separate     joint-venture     insurance      company      with     risk     participation.

Aggregate           Performance             of       the        Banking           Industry

Aggregate deposits of scheduled commercial banks increased at a compounded annual
average growth rate (Cargo) of 17.8 percent during 1969-99, while bank credit expanded
at a Cagr of 16.3 percent per annum. Banks’ investments in government and other
approved securities recorded a Cargo of 18.8 percent per annum during the same period.

In FY01 the economic slowdown resulted in a Gross Domestic Product (GDP) growth of
only 6.0 percent as against the previous year’s 6.4 percent. The WPI Index (a measure of
inflation) increased by 7.1 percent as against 3.3 percent in FY00. Similarly, money
supply (M3) grew by around 16.2 percent as against 14.6 percent a year ago.

The growth in aggregate deposits of the scheduled commercial banks at 15.4 percent in
FY01 percent was lower than that of 19.3 percent in the previous year, while the growth
in credit by SCBs slowed down to 15.6 percent in FY01 against 23 percent a year ago.

The industrial slowdown also affected the earnings of listed banks. The net profits of 20
listed banks dropped by 34.43 percent in the quarter ended March 2001. Net profits grew
by 40.75 percent in the first quarter of 2000-2001, but dropped to 4.56 percent in the
fourth                    quarter                      of                    2000-2001.

On the Capital Adequacy Ratio (CAR) front while most banks managed to fulfill the
norms, it was a feat achieved with its own share of difficulties. The CAR, which at
present is 9.0 percent, is likely to be hiked to 12.0 percent by the year 2004 based on the
Basle Committee recommendations. Any bank that wishes to grow its assets needs to also
shore up its capital at the same time so that its capital as a percentage of the risk-weighted
assets is maintained at the stipulated rate. While the IPO route was a much-fancied one in
the early ‘90s, the current scenario doesn’t look too attractive for bank majors.

Consequently, banks have been forced to explore other avenues to shore up their capital
base. While some are wooing foreign partners to add to the capital others are employing
the M& A route. Many are also going in for right issues at prices considerably lower than
the        market         prices         to          woo            the         investors.

Interest                                   Rate                                    Scene

The two years, post the East Asian crises in 1997-98 saw a climb in the global interest
rates. It was only in the latter half of FY01 that the US Fed cut interest rates. India has
however remained more or less insulated. The past 2 years in our country was
characterized by a mounting intention of the Reserve Bank Of India (RBI) to steadily
reduce interest rates resulting in a narrowing differential between global and domestic

The RBI has been affecting bank rate and CRR cuts at regular intervals to improve
liquidity and reduce rates. The only exception was in July 2000 when the RBI increased
the Cash Reserve Ratio (CRR) to stem the fall in the rupee against the dollar. The steady
fall in the interest rates resulted in squeezed margins for the banks in general.

Governmental                                                                       Policy

After the first phase and second phase of financial reforms, in the 1980s commercial
banks began to function in a highly regulated environment, with administered interest
rate structure, quantitative restrictions on credit flows, high reserve requirements and
reservation of a significant proportion of lendable resources for the priority and the
government sectors. The restrictive regulatory norms led to the credit rationing for the
private sector and the interest rate controls led to the unproductive use of credit and low
levels of investment and growth. The resultant ‘financial repression’ led to decline in
productivity and efficiency and erosion of profitability of the banking sector in general.

This was when the need to develop a sound commercial banking system was felt. This
was worked out mainly with the help of the recommendations of the Committee on the
Financial System (Chairman: Shri M. Narasimham), 1991. The resultant financial sector
reforms called for interest rate flexibility for banks, reduction in reserve requirements,
and a number of structural measures. Interest rates have thus been steadily deregulated in
the past few years with banks being free to fix their Prime Lending Rates(PLRs) and
deposit rates for most banking products. Credit market reforms included introduction of

new instruments of credit, changes in the credit delivery system and integration of
functional roles of diverse players, such as, banks, financial institutions and non-banking
financial companies (Nifco). Domestic Private Sector Banks were allowed to be set up,
PSBs were allowed to access the markets to shore up their Cars.

Implications           Of         Some          Recent           Policy         Measures

The allowing of PSBs to shed manpower and dilution of equity are moves that will lend
greater autonomy to the industry. In order to lend more depth to the capital markets the
RBI had in November 2000 also changed the capital market exposure norms from 5
percent of bank’s incremental deposits of the previous year to 5 percent of the bank’s
total domestic credit in the previous year. But this move did not have the desired effect,
as in, while most banks kept away almost completely from the capital markets, a few
private sector banks went overboard and exceeded limits and indulged in dubious stock
market deals. The chances of seeing banks making a comeback to the stock markets are
therefore         quite         unlikely         in       the        near          future.

The move to increase Foreign Direct Investment FDI limits to 49 percent from 20 percent
during the first quarter of this fiscal came as a welcome announcement to foreign players
wanting to get a foot hold in the Indian Markets by investing in willing Indian partners
who are starved of net worth to meet CAR norms. Ceiling for FII investment in
companies was also increased from 24.0 percent to 49.0 percent and have been included
within             the             ambit           of          FDI            investment.

The abolishment of interest tax of 2.0 percent in budget 2001-02 will help banks pass on
the benefit to the borrowers on new loans leading to reduced costs and easier lending
rates. Banks will also benefit on the existing loans wherever the interest tax cost element
has already been built into the terms of the loan. The reduction of interest rates on various
small savings schemes from 11 percent to 9.5 percent in Budget 2001-02 was a much
awaited move for the banking industry and in keeping with the reducing interest rate
scenario, however the small investor is not very happy with the move.

Some of the not so good measures however like reducing the limit for tax deducted at
source (TDS) on interest income from deposits to Rs 2,500 from the earlier level of Rs
10,000, in Budget 2001-02, had met with disapproval from the banking fraternity who
feared that the move would prove counterproductive and lead to increased fragmentation
of deposits, increased volumes and transaction costs. The limit was thankfully partially
restored to Rs 5000 at the time of passing the Finance Bill in the Parliament.

April                 2001-Credit                    Policy                 Implications

The rationalization of export credit norms in will bestow greater operational flexibility on
banks, and also reduce the borrowing costs for exporters. Thus this move could trigger
exports growth in the future. Banks can also hope to earn increased revenue with the
interest paid by RBI on CRR balances being increased from 4.0 percent to 6.0 percent.

The stock market scam brought out the unholy nexus between the Cooperative banks and
stockbrokers. In order to usher in greater prudence in their operations, the RBI has barred
Urban Cooperative Banks from financing the stock market operations and is also in the
process of setting up of a new apex supervisory body for them. Meanwhile the foreign
banks have a bone to pick with the RBI. The RBI had announced that forex loans are not
to be calculated as a part of Tier-1 Capital for drawing up exposure limits to companies
effective 1 April 2002. This will force foreign banks either to infuse fresh capital to
maintain the capital adequacy ratio (CAR) or pare their asset base. Further, the RBI has
also sought to keep foreign competition away from the nascent net banking segment in
India by allowing only Indian banks with a local physical presence, to offer Internet

Crystal                                                                            Gazing

On the macro economic front, GDP is expected to grow by 6.0 to 6.5 percent while the
projected expansion in broad money (M3) for 2001-02 is about 14.5 percent. Credit and
deposits are both expected to grow by 15-16 percent in FY02. India's foreign exchange
reserves should reach US$50.0 billion in FY02 and the Indian rupee should hold steady.

The interest rates are likely to remain stable this fiscal based on an expected downward
trend in inflation rate, sluggish pace of non-oil imports and likelihood of declining global
interest rates. The domestic banking industry is forecasted to witness a higher degree of
mergers and acquisitions in the future. Banks are likely to opt for the universal banking
approach with a stronger retail approach. Technology and superior customer service will
continue      to    be      the    imperatives     for    success     in   this     industry.

Public Sector banks that imbibe new concepts in banking, turn tech savvy, leaner and
meaner post VRS and obtain more autonomy by keeping governmental stake to the
minimum can succeed in effectively taking on the private sector banks by virtue of their
sheer size. Weaker PSU banks are unlikely to survive in the long run. Consequently, they
are likely to be either acquired by stronger players or will be forced to look out for other

strategies     to      infuse       greater      capital      and       optimize       their

Retail Banking In India 2008
The annual growth in bank credit to the commercial sector is at 25.4% as on March 31,
2007 and was lower than 27.2% against previous year. Till 2010, retail banking is
expected to grow at a CAGR of 28% to touch a figure of INR9,700 billion. This requires
expansion and diversification of retail product portfolio, better penetration and faster
service                                                                      mechanism

The report on Retail Banking Industry in India covers industry segments like housing
loan, auto loan, personal loan, education loan, consumer durable loan, credit card and
regulatory frame work for retail banks is also discussed. The report gives retail banking
industry’s current performance and future outlook. Total 22 major retail banks in India
are covered in terms of their performance, strategy and outlook.

Key                                 Highlights                                     Covered

- During 2006-07, gross credit extended by Indian commercial banks grew by 34.83% to
touch                       INR19,                     495                      billion.
- Retail credit constitutes about 25% of the total credit and has grown by 28.0% to
INR4,218.3                                                                       billion
- The annual growth in bank credit to the commercial sector is at 25.4% as on March 31,
2007              and            was             lower            than           27.2%
against                                   previous                                year.
- Till 2010, retail banking is expected to grow at a CAGR of 28% to touch a figure of
INR9,                                      700                                  billion.

The            Report              will            be            beneficial             for

 Industry        analysts,        Bankers,         Other         financial        institute,
Auto loan financier, 'Booming Indian Retail Banking Sector”, the market research report
provides extensive research and rational analysis on the Indian banking industry. This
report has been made to help clients in analyzing the opportunities, challenges and drivers
critical to the growth of the retail banking industry in India.

The forecast given in this report is not based on a complex economic model, but is
intended as a rough guide to the direction in which the market is likely to move. The
future projection undertaken in this report is done on the basis of the current market
scenario, past trends, and rules and regulations laid by Reserve Bank of India (RBI).

The report provides detailed overview of the Indian banking industry by contemplating
and analyzing various parameters, like asset size, income level etc. It helps clients to
understand various products offered by the Indian banking industry and their future

The report also provides the future overview of the industry in terms of assets size,
number of financial cardholders and various other important features. The future forecast
discusses the prospects of different arms of banking industry, including rural banking,
bancassurance, financial cards, mobile banking, role of technology in rural banking,
pension funds, and the future course of action or strategies for pension fund industry to be
taken                        at                         macro                         level.

Key                 Findings                  of               the                 Report

- Pension fund industry in India grew at a CAGR of 122.44% from 1999-00 to 2006-07.
- In terms of ownership, debit cards are more in number than credit cards but in terms of
transactions, use of credit cards is more prevalent than debit cards.
- The ATM outlets in India increased at a rate of 28.09% from March 2006 to March
- Outstanding Education loan segment is expected to grow at 36.41% till March 2009
from     March     2007     onwards      to    cross   Rs.    27000      Crore      Mark.
- Two-wheeler finance industry is projected to forge ahead at a CAGR of 14.21% till
2009-10                                   from                                  2005-06.
- Indian Mutual Fund industry witnessed a growth of 49.88% from May 2006 to May
2007, and a higher 215.61% growth was recorded in closed ended schemes.
- Increasing number of millionaires in India is increasing the scope of Wealth
Management                                                                      Services.
- Bankable households in India are estimated to move up at a CAGR of 28.10% during

Key        Issues       &        Facts        Analyzed          in      the       Report

- Market analysis of different product segments in the banking industry.
-        Evaluation        of         current      market        trends.
- Basel II Accord and Capital Requirement by Indian Banking Industry.
- Factors driving he growth of Retail Banking Industry in India.
- Analysis of various challenges and opportunities for the industry.

-    Urban    vs.    rural     banking in terms of deposit  and  credit.
- Drivers and constraints for credit and debit cards industry in India.
- Pension Fund industry in India.

Key                                  Players                                    Analyzed

This section covers the key facts about the major players (including Public, Private, and
Foreign sector) in the Indian Banking Industry, including Bank of Baroda, State Bank of
India, Canara Bank, Punjab National Bank, HDFC Bank, ICICI Bank, Kotak Mahindra
Bank, Citibank, Standard Chartered Bank, HSBC Bank, ABN AMRO Bank, American
Express,                                                                              etc.

Research           Methodology              Used          Information            Sources.
Information has been sourced from books, newspapers, trade journals, and white papers,
industry portals, government agencies, trade associations, monitoring industry news and
developments, and through access to more than 3000 paid databases.

Analysis                                                                          Method

The analysis methods include ratio analysis, historical trend analysis, linear regression
analysis using software tools, judgmental forecasting, and cause and effect analysis.
-                 Housing              loan                 financier                 and
- Private financiers in general.

Booming Indian Retail Banking Sector
Indian Retail Banking Sector”, the market research report provides extensive research
and rational analysis on the Indian banking industry. This report has been made to help
clients in analyzing the opportunities, challenges and drivers critical to the growth of the
retail               banking                 industry                in               India.

The forecast given in this report is not based on a complex economic model, but is
intended as a rough guide to the direction in which the market is likely to move. The
future projection undertaken in this report is done on the basis of the current market
scenario, past trends, and rules and regulations laid by Reserve Bank of India (RBI).

The report provides detailed overview of the Indian banking industry by contemplating
and analyzing various parameters, like asset size, income level etc. It helps clients to
understand various products offered by the Indian banking industry and their future

The report also provides the future overview of the industry in terms of assets size,
number of financial cardholders and various other important features. The future forecast
discusses the prospects of different arms of banking industry, including rural banking,
bancassurance, financial cards, mobile banking, role of technology in rural banking,
pension funds, and the future course of action or strategies for pension fund industry to be
taken                        at                         macro                         level.

Key                 Findings                  of               the                 Report

- Pension fund industry in India grew at a CAGR of 122.44% from 1999-00 to 2006-07.
- In terms of ownership, debit cards are more in number than credit cards but in terms of
transactions, use of credit cards is more prevalent than debit cards.
- The ATM outlets in India increased at a rate of 28.09% from March 2006 to March
- Outstanding Education loan segment is expected to grow at 36.41% till March 2009
from     March     2007     onwards      to    cross   Rs.    27000      Crore      Mark.
- Two-wheeler finance industry is projected to forge ahead at a CAGR of 14.21% till
2009-10                                   from                                  2005-06.

India: Banking
The Indian economy has grown robustly during 2006/07 for the fourth year in succession.
Real Gross Domestic Product (GDP) growth accelerated due to an unprecedented
consumption boom which arose from improvements in income dynamics alongside
favourable demographics and spending patterns. This growth has been supported by the
momentum        in      the      services       and       manufacturing        sectors.

'India: Banking' covers the sector overview, total assets, deposits and credits, deposit and
lending interest rates, financial institutions profit and loss, capital adequacy and non-
performing            loans           in           India           banking           sector.

It also covers the market trends and outlook, mobile banking, foreign direct investment,
implementation of Basel II, industry consolidation, plus the comparative matrix and
SWOT of the industry leading players: Canara Bank, Punjab National Bank, State Bank
of India, ICICI Bank and HDFC Bank

Banking System – Introduction
The banking section will navigate through all the aspects of the Banking System in India.
It will discuss upon the matters with the birth of the banking concept in the country to
new players adding their names in the industry in coming few years.

The banker of all banks, Reserve Bank of India (RBI), the Indian Banks Association
(IBA) and top 20 banks like IDBI, HSBC, ICICI, ABN AMRO, etc. has been well
defined under three separate heads with one page dedicated to each bank.

However, in the introduction part of the entire banking cosmos, the past has been well
explained under three different heads namely:

      History of Banking in India
      Nationalization of Banks in India
      Scheduled Commercial Banks in India

The first deals with the history part since the dawn of banking system in India.
Government took major step in the 1969 to put the banking sector into systems and it
nationalized 14 private banks in the mentioned year. This has been elaborated in
Nationalization Banks in India. The last but not the least explains about the scheduled
and unscheduled banks in India. Section 42 (6) (a) of RBI Act 1934 lays down the
condition of scheduled commercial banks.

In banking, a merchant bank is a financial institution primarily engaged in offering
financial services and advice to corporations and wealthy individuals on how to use their
money. The term can also be used to describe the private equity activities of banking.

Non-bank financial companies (NBFCs) are financial institutions that provide banking
services without meeting the legal definition of a bank, i.e. one that does not hold a
banking license. Operations are, regardless of this, still exercised under bank regulation.
However this depends on the jurisdiction, as in some jurisdictions, such as New Zealand,
any company can do the business of banking, and there are no banking licenses issued.

Services Provided

Non-bank institutions frequently acts as

      suppliers of loans and credit facilities,
      supporting investments in property,
      Trading money market instruments
      funding private education,

       wealth management such as Managing portfolios of stocks and shares and
       Underwrite stock and shares, TFCs and other obligations
       retirement planning
       Advise companies in merger and acquisition
       Prepare feasibility, market or industry studies for companies
       Discounting services e.g, discounting of instruments

However they are typically not allowed to take deposits from the general public and have
to find other means of funding their operations such as issuing debt instruments


Depending upon their nature of activities, non- banking finance companies can be
classified into the following categories:

   1.   Development finance institutions
   2.   Leasing companies
   3.   Investment companies
   4.   Moradabad companies
   5.   House finance companies
   6.   Venture capital companies
   7.   Discount & guarantee houses

Activities of the Bank: the year in reviews AS many of you know, the Bank is a complex
institution, involved not only in the intermediation of central bank reserves, but also
acting as an umbrella organization for central banks and other financial authorities with a
stake in the promotion of financial and monetary stability. Against this backdrop, the
Bank's activities over the past financial year were again marked by their diversity. Before
reviewing these many activities, I would like to take this opportunity to thank the staff of
the BIS, who through commitment, flexibility and dedication to high-quality work have
enabled the Bank to accomplish the important mission with which you have entrusted us.
In particular, I should mention here those staff members who work in business areas
which are not seen by our customers and therefore do not enjoy immediate recognition,
but who contribute greatly to the success of our institution.

In my remarks today I will try to cover the Bank's activities under three distinct headings:
those involving banking operations; those related to the provision of analytical support to
the central bank community; and those in support of a number of committees and
groupings hosted by the Bank.

Banking operations

As an intermediate of central bank funds, the guiding principles of the Bank in serving its
customers have always been liquidity, security, confidentiality and return. To achieve
these goals, the Bank has applied a strategy of offering to central bank customers liquid
instruments that provide a yield pickup over qualitatively comparable alternatives for
central bank portfolio investments, and of rigorously monitoring and managing credit and
market risk.

Within the framework of this strategy, the Bank witnessed an increase in its balance sheet
over the past decade from just below USD 90 billion in the 1990/91 financial year to
nearly USD 175 billion at the end of financial year 2001/02, with over USD 20 billion of
this increase coming in the past year.

In terms of market share, the Bank intermediates about 6.5% of world international
reserves, serving almost 120 central bank customers. The growth in Asian deposits has
been especially buoyant. This region accounted for less than one quarter of total currency
deposits at the end of 1998. Right now, the region claims a share of about 45%.

Medium-Term Instruments have been a major attraction for central bank funds in recent
years. Created in late 1998 to accommodate customers' requests for longer-dated tradable
instruments, purchases of MTIs grew to a record USD 48 billion at the end of 2001.
However, expectations of rising interest rates in early 2002 led many central banks to
shorten the duration of their portfolios, also at the BIS. As a result, the MTI book
declined slightly.

In addition to intermediating central banks' reserves, the Bank is offering its customers a
number of other financial services. These include short-term credits to central banks,
usually on a collateralized basis, as well as foreign exchange and gold services. More
recently, the Bank has been marketing actively asset management services, which
constitute an area of significant potential. Several central bank portfolios are currently
under BIS management.

If the Bank is to safeguard its position in the intermediation of central bank reserves, it
will need to remain responsive to the changing needs of its customers. This will involve a
continued emphasis on providing investment instruments with an attractive blend of
yield, flexibility and security. This will also call for the exchange of technical know-how.
Last but not least, the commitment to excellence will have to remain buttressed by the
rigorous monitoring of credit exposures, liquidity, market and operational risks. In
accordance with best practice, this is currently done by a separate risk control unit
directly reporting to the Deputy General Manager, and through him to me.

Definition of Universal Banking:

Universal Banking is a multi-purpose and multi-functional financial supermarket (a
company offering a wide range of financial services e.g. stock, insurance and real-estate
brokerage) providing both banking and financial services through a single window.

As per the World Bank, "In Universal Banking, large banks operate extensive network of
branches, provide many different services, hold several claims on firms(including equity
and debt) and participate directly in the Corporate Governance of firms that rely on the
banks for funding or as insurance underwriters".

In a nutshell, a Universal Banking is a superstore for financial products under one roof.
Corporate can get loans and avail of other handy services, while can deposit and borrow.
It includes not only services related to savings and loans but also investments.

However in practice the term 'universal banking' refers to those banks that offer a wide
range of financial services, beyond the commercial banking functions like Mutual Funds,
Merchant Banking, Factoring, Credit Cards, Retail loans, Housing Finance, Auto loans,
Investment banking, Insurance etc. This is most common in European countries.

For example, in Germany commercial banks accept time deposits, lend money,
underwrite corporate stocks, and act as investment advisors to large corporations. In
Germany, there has never been any separation between commercial banks and investment
banks, as there is in the United States.


The entry of banks into the realm of financial services was followed very soon after the
introduction of liberalization in the economy. Since the early 1990s structural changes of
profound magnitude have been witnessed in global banking systems. Large scale
mergers, amalgamations and acquisitions between the banks and financial institutions
resulted in the growth in size and competitive strengths of the merged entities. Thus,
emerged new financial conglomerates that could maximize economies of scale and scope
by building the production of financial services organization called Universal Banking.

By the mid-1990s, all the restrictions on project financing were removed and banks were
allowed to undertake several in-house activities. Reforms in the insurance sector in the
late 1990s, and opening up of this field to private and foreign players also resulted in
permitting banks to undertake the sale of insurance products. At present, only an 'arm's
length relationship between a bank and an insurance entity has been allowed by the
regulatory authority, i.e. IRDA (Insurance Regulatory and Development Authority).

The phenomenon of Universal Banking as a distinct concept, as different from Narrow
Banking came to the forefront in the Indian context with the Narsimham Committee
(1998) and later the Khan Committee (1998) reports recommending consolidation of the
banking industry through mergers and integration of financial activities.


The solution of Universal Banking was having many factors to deal with, which can be
further analyzed by the pros and cons.

Advantages of Universal Banking

      Economies of Scale. The main advantage of Universal Banking is that it results in
       greater economic efficiency in the form of lower cost, higher output and better
       products. Many Committees and reports by Reserve Bank of India are in favour of
       Universal banking as it enables banks to explit economies of scale and scope.
      Profitable Diversions. By diversifying the activities, the bank can use its existing
       expertise in one type of financial service in providing other types. So, it entails
       less cost in performing all the functions by one entity instead of separate bodies.
      Resource Utilization. A bank possesses the information on the risk characteristics
       of the clients, which can be used to pursue other activities with the same clients.
       A data collection about the market trends, risk and returns associated with
       portfolios of Mutual Funds, diversifiable and non diversifiable risk analysis, etc,
       is useful for other clients and information seekers. Automatically, a bank will get
       the benefit of being involved in the researching
      Easy Marketing on the Foundation of a Brand Name. A bank's existing
       branches can act as shops of selling for selling financial products like Insurance,
       Mutual Funds without spending much efforts on marketing, as the branch will act
       here as a parent company or source. In this way, a bank can reach the client even
       in the remotest area without having to take resource to an agent.
      One-stop shopping. The idea of 'one-stop shopping' saves a lot of transaction
       costs and increases the speed of economic activities. It is beneficial for the bank
       as well as its customers.
      Investor Friendly Activities. Another manifestation of Universal Banking is bank
       holding stakes in a form : a bank's equity holding in a borrower firm, acts as a
       signal for other investor on to the health of the firm since the lending bank is in a
       better position to monitor the firm's activities.

Disadvantages of Universal Banking

      Grey Area of Universal Bank. The path of universal banking for DFIs is strewn
       with obstacles. The biggest one is overcoming the differences in regulatory
       requirement for a bank and DFI. Unlike banks, DFIs are not required to keep a
       portion of their deposits as cash reserves.
      No Expertise in Long term lending. In the case of traditional project finance, an
       area where DFIs tread carefully, becoming a bank may not make a big difference
       to a DFI. Project finance and Infrastructure finance are generally long- gestation
       projects and would require DFIs to borrow long- term. Therefore, the
       transformation into a bank may not be of great assistance in lending long-term.
      NPA Problem Remained Intact. The most serious problem that the DFIs have
       had to encounter is bad loans or Non-Performing Assets (NPAs). For the DFIs
       and Universal Banking or installation of cutting-edge-technology in operations
       are unlikely to improve the situation concerning NPAs.

UNIVERSAL                       BANKING                       IN                 INDIA

In India Development financial institutions (DFIs) and refinancing institutions (RFIs)
were meeting specific sect oral needs and also providing long-term resources at
concessional terms, while the commercial banks in general, by and large, confined
themselves to the core banking functions of accepting deposits and providing working
capital finance to industry, trade and agriculture. Consequent to the liberalisation and
deregulation of financial sector, there has been blurring of distinction between the
commercial banking and investment banking.

Reserve Bank of India constituted on December 8, 1997, a Working Group under the
Chairmanship of Shri S.H. Khan to bring about greater clarity in the respective roles of
banks and financial institutions for greater harmonization of facilities and obligations .
Also report of the Committee on Banking Sector Reforms or Narasimham Committee
(NC) has major bearing on the issues considered by the Khan Working Group.

The issue of universal banking resurfaced in Year 2000, when ICICI gave a presentation
to RBI to discuss the time frame and possible options for transforming itself into an
universal bank. Reserve Bank of India also spelt out to Parliamentary Standing
Committee on Finance, its proposed policy for universal banking, including a case-by-
case approach towards allowing domestic financial institutions to become universal

Now RBI has asked FIs, which are interested to convert itself into a universal bank, to
submit their plans for transition to a universal bank for consideration and further

discussions. FIs need to formulate a road map for the transition path and strategy for
smooth conversion into a universal bank over a specified time frame. The plan should
specifically provide for full compliance with prudential norms as applicable to banks over
the proposed period.


a) Reserve requirements. Compliance with the cash reserve ratio and statutory liquidity
ratio requirements (under Section 42 of RBI Act, 1934, and Section 24 of the Banking
Regulation Act, 1949, respectively) would be mandatory for an FI after its conversion
into a universal bank.

b) Permissible activities. Any activity of an FI currently undertaken but not permissible
for a bank under Section 6(1) of the B. R. Act, 1949, may have to be stopped or divested
after its conversion into a universal bank..

c) Disposal of non-banking assets. Any immovable property, howsoever acquired by an
FI, would, after its conversion into a universal bank, be required to be disposed of within
the maximum period of 7 years from the date of acquisition, in terms of Section 9 of the
B. R. Act.

d) Composition of the Board. Changing the composition of the Board of Directors might
become necessary for some of the FIs after their conversion into a universal bank, to
ensure compliance with the provisions of Section 10(A) of the B. R. Act, which requires
at least 51% of the total number of directors to have special knowledge and experience.

e) Prohibition on floating charge of assets. The floating charge, if created by an FI, over
its assets, would require, after its conversion into a universal bank, ratification by the
Reserve Bank of India under Section 14(A) of the B. R. Act, since a banking company is
not allowed to create a floating charge on the undertaking or any property of the company
unless duly certified by RBI as required under the Section.

f) Nature of subsidiaries. If any of the existing subsidiaries of an FI is engaged in an
activity not permitted under Section 6(1) of the B R Act , then on conversion of the FI
into a universal bank, delinking of such subsidiary / activity from the operations of the
universal bank would become necessary since Section 19 of the Act permits a bank to
have subsidiaries only for one or more of the activities permitted under Section 6(1) of B.
R. Act.

g) Restriction on investments. An FI with equity investment in companies in excess of
30 per cent of the paid up share capital of that company or 30 per cent of its own paid-up
share capital and reserves, whichever is less, on its conversion into a universal bank,
would need to divest such excess holdings to secure compliance with the provisions of
Section 19(2) of the B. R. Act, which prohibits a bank from holding shares in a company
in excess of these limits.

h) Connected lending . Section 20 of the B. R. Act prohibits grant of loans and advances
by a bank on security of its own shares or grant of loans or advances on behalf of any of
its directors or to any firm in which its director/manager or employee or guarantor is
interested. The compliance with these provisions would be mandatory after conversion
of an FI to a universal bank.

i) Licensing. An FI converting into a universal bank would be required to obtain a
banking licence from RBI under Section 22 of the B. R. Act, for carrying on banking
business in India, after complying with the applicable conditions.

j) Branch network An FI, after its conversion into a bank, would also be required to
comply with extant branch licensing policy of RBI under which the new banks are
required to allot at least 25 per cent of their total number of branches in semi-urban and
rural areas.

k) Assets in India. An FI after its conversion into a universal bank, will be required to
ensure that at the close of business on the last Friday of every quarter, its total assets held
in India are not less than 75 per cent of its total demand and time liabilities in India, as
required of a bank under Section 25 of the B R Act.

l) Format of annual reports. After converting into a universal bank, an FI will be
required to publish its annual balance sheet and profit and loss account in the forms set
out in the Third Schedule to the B R Act, as prescribed for a banking company under
Section 29 and Section 30 of the B. R. Act.

m) Managerial remuneration of the Chief Executive Officers. On conversion into a
universal bank, the appointment and remuneration of the existing Chief Executive
Officers may have to be reviewed with the approval of RBI in terms of the provisions of
Section 35 B of the B. R. Act. The Section stipulates fixation of remuneration of the
Chairman and Managing Director of a bank by Reserve Bank of India taking into account
the profitability, net NPAs and other financial parameters. Under the Section, prior
approval of RBI would also be required for appointment of Chairman and Managing

n) Deposit insurance. An FI, on conversion into a universal bank, would also be required
to comply with the requirement of compulsory deposit insurance from DICGC up to a
maximum of Rs.1 lakh per account, as applicable to the banks.

o) Authorized Dealer's License. Some of the FIs at present hold restricted AD licence
from RBI, Exchange Control Department to enable them to undertake transactions
necessary for or incidental to their prescribed functions. On conversion into a universal
bank, the new bank would normally be eligible for full-fledged authorized dealer licence
and would also attract the full rigour of the Exchange Control Regulations applicable to
the banks at present, including prohibition on raising resources through external
commercial borrowings.

p) Priority sector lending. On conversion of an FI to a universal bank, the obligation for
lending to "priority sector" up to a prescribed percentage of their 'net bank credit' would
also become applicable to it.

q) Prudential norms. After conversion of an FI in to a bank, the extant prudential norms
of RBI for the all-India financial institutions would no longer be applicable but the norms
as applicable to banks would be attracted and will need to be fully complied with.

(This list of regulatory and operational issues is only illustrative and not exhaustive).


Universal banks have long played a leading role in Germany, Switzerland, and other
Continental European countries. The principal Financial institutions in these countries
typically are universal banks offering the entire array of banking services. Continental
European banks are engaged in deposit, real estate and other forms of lending, foreign
exchange trading, as well as underwriting, securities trading, and portfolio management.
In the Anglo-Saxon countries and in Japan, by contrast, commercial and investment
banking tend to be separated. In recent years, though, most of these countries have
lowered the barriers between commercial and investment banking, but they have
refrained from adopting the Continental European system of universal banking. In the
United States, in particular, the resistance to softening the separation of banking
activities, as enshrined in the Glass-Steagall Act, continues to be stiff.

In Germany and Switzerland the importance of universal banking has grown since the
end of World War II. Will this trend continue so that universal banks could completely
overwhelm the specialized institutions in the future?

Are the specialized banks doomed to disappear? This question cannot
be answered with a simple "yes" or "no".

The German and Swiss experiences suggest that three factors will determine future
growth of universal banking.

First, universal banks no doubt will continue to play an important role. They possess a
number of advantages over specialized institutions. In particular, they are able to exploit
economies of scale and scope in banking. These economies are especially important for
banks operating on a global scale and catering to customers with a need for highly
sophisticated financial services. As we saw in the preceding section, universal banks may
also suffer from various shortcomings. However, in an increasingly competitive
environment, these defects will likely carry far less weight than in the past.

Second, although universal banks have expanded their sphere of influence, the smaller
specialized institutions have not disappeared. In both Germany and Switzerland, they are
successfully coexisting and competing with the big banks. In Switzerland, for example,
the specialized institutions are firmly entrenched in such areas as real estate lending,
securities trading, and portfolio management. The continued strong performance of many
specialized institutions suggests that universal banks do not enjoy a comparative
advantage in all areas of banking.

Third, universality of banking may be achieved in various ways. No single type of
universal banking system exists. The German and Swiss universal banking systems differ
substantially in this regard. In Germany, universality has been strengthened without
significantly increasing the market shares of the big banks. Instead, the smaller
institutions have acquired universality through cooperation. It remains to be seen whether
the cooperative approach will survive in an environment of highly competitive and
globalized banking.


Microcredit is the extension of very small loans (microloans) to the unemployed, to
poor entrepreneurs and to others living in poverty. These individuals lack collateral,
steady employment and a verifiable credit history and therefore cannot meet even the
most minimal qualifications to gain access to traditional credit. Microcredit is a part of
microfinance, which is the provision of a wider range of financial services to the very

Microcredit is a financial innovation that is generally considered to have originated with
the Grameen Bank in Bangladesh.[1] In that country, it has successfully enabled extremely

impoverished people to engage in self-employment projects that allow them to generate
an income and, in many cases, begin to build wealth and exit poverty. Due to the success
of microcredit, many in the traditional banking industry have begun to realize that these
microcredit borrowers should more correctly be categorized as pre-bankable; thus,
microcredit is increasingly gaining credibility in the mainstream finance industry, and
many traditional large finance organizations are contemplating microcredit projects as a
source of future growth, even though almost everyone in larger development
organizations discounted the likelihood of success of microcredit when it was begun. The
United Nations declared 2005 the International Year of Microcredit.


Microcredit has been practiced at various times in modern history; Jonathan Swift
inspired the Irish Loan Funds of the 18th and 19th centuries [1], in the mid-1800s,
abolitionist/legal theorist Lysander Spooner wrote about the benefits of numerous small
loans for entrepreneurial activities to the poor as a way to alleviate poverty [2], and
microcredit was included in portions of the Marshall Plan at the end of World War II.
However, in its most recent incarnation, with attention paid by economists and politicians
worldwide, it can be linked to several organizations starting in Bangladesh in the 1970s
and onward.


Microcredit is based on a separate set of principles, which are distinguished from general
financing or credit. [3] Microcredit emphasizes building capacity of a micro-
entrepreneur, [4] employment generation, trust building [5] and help to the micro-
entrepreneur on initiation and during difficult times. Microcredit is a tool for
socioeconomic development [2][3]


In the past few years, savings-led microfinance has gained recognition as an effective
way to bring very poor families low-cost financial services. For example, in India, the
National Bank for Agriculture and Rural Development (NABARD) finances more than
500 banks that on-lend funds to self-help groups (SHGs). SHGs comprise twenty or
fewer members, of whom the majorities are women from the poorest castes and tribes.
Members save small amounts of money, as little as a few rupees a month in a group fund.
Members may borrow from the group fund for a variety of purposes ranging from
household emergencies to school fees. As SHGs prove capable of managing their funds
well, they may borrow from a local bank to invest in small business or farm activities.
Banks typically lend up to four rupees for every rupee in the group fund. Groups

generally pay interest rates that range from 12% to 24% a year, based on the flat
calculation method. Nearly 1.4 million SHGs comprising approximately 20 million
women now borrow from banks, which make the Indian SHG-Bank Linkage model the
largest microfinance program in the world. Similar programs are evolving in Africa and
Southeast Asia with the assistance of organizations like Opportunity International,
Catholic Relief Services, CARE, APMAS and Oxfam. Micro financing also helps in the
development of an economy by giving everyday people the chance to establish a
sustainable means of income. Eventual increases in disposable income will lead to
economic development and growth.

Jason Cons and Kasia Paprocki of the Goldin Institute, while quite critical of some
unintended side-effects of microcredit, nonetheless acknowledge its "enormous potential
as a tool for

Microcredit and the Web

The principles of microcredit have also been applied in attempting to address several
non-poverty-related issues. Among these, multiple Internet-based organizations have
developed platforms that facilitate a modified form of peer-to-peer lending where a loan
is not made in the form of a single, direct loan, but as the aggregation of a number of
smaller loans—often at a negligible interest rate. There are several ways by which the
general public can participate in alleviating poverty using Web platforms.

Lend to micro-entrepreneurs: is the first micro-lending website that enables an individual to lend money to a
micro-entrepreneur in the developing world through a microfinance institution. As of
November 2008, over 100 field partners have collaborated with Kiva, dramatically
extending its scope and reach.

Invest in microcredit securities:, a wholly-owned subsidiary of eBay, was launched in October 2007.
With Micro place, retail investors in the US can buy securities issued by security issuers.
Therefore, Micro Place is tapping into the socially responsible investment world and can
attract larger capital to microcredit. Deutsche Bank estimates that $250 billion is needed
to raise enough capital to get it into the hands of the one billion working poor who could
benefit from microcredit. While the US gave $303 billion in charity to all causes, they
invested $2.4 trillion in socially responsible investments.

Guarantee loans to micro-entrepreneurs:

United Prosperity will enable an individual to guarantee a loan to the micro-entrepreneur
they choose to connect and support. The guarantee allows the microfinance institution to
raise funds in local currency from local banks and make a loan to micro-entrepreneurs.
Since the guarantee is only for a part of the loan amount, the guarantee allows the
guarantors to multiply the impact of their money.

Contribute to micro-entrepreneurs:

Woke(lending to China) allows contributors to contribute towards micro-entrepreneurs
they choose to connect and support. Since the contribution is a donation, contributors in
the United States may also get a tax deduction.

Ensure microcredit reaches the poorest families:

The Microcredit Summit Campaign brings together microcredit practitioners, advocates,
educational institutions, donor agencies, international financial institutions, non-
governmental organizations and others involved with microcredit to promote best
practices in the field, to stimulate the interchanging of knowledge, and to work towards
reaching the following goals:[4]

      Working to ensure that 175 million of the world's poorest families, especially the
       women of those families, are receiving credit for self-employment and other
       financial and business services by the end of 2015.

      Working to ensure that 100 million families rise above the US$1-a-day threshold
       adjusted for purchasing power parity (PPP) between 1990 and 2015.

In the developed world

Microcredit is not only provided in poor countries, but also in one of the world's richest
countries, the USA, where 37 million people (12.6%) live below the poverty line. Among
other organizations that provide microloans in the US Grameen Bank started their
operation in New York in April 2008. According to economist Jonathan Murdoch of New
York University, microloans have less appeal in the US, because people think it too
difficult to escape poverty through private enterprise.

Efforts to replicate Grameen-style solidarity lending in developed countries have
generally not succeeded. For example, the Cal meadow Foundation tested an analogous
peer-lending model in three locations in Canada, rural Nova Scotia and urban Toronto

and Vancouver, during the 1990s. It concluded that a variety of factors—including
difficulties in reaching the target market, the high risk profile of clients, their general
distaste for the joint liability requirement, and high overhead costs—made solidarity
lending unviable without subsidies. However, debates have continued about whether the
required subsidies may be justified as an alternative to other subsidies targeted to the
entrepreneurial poor, and Van City Credit Union, which took over Cal meadow’s
Vancouver operations, continues to use peer lending.


Gina Neff of the Left Business Observer has described the microcredit movement as a
privatization of public safety-net programs. Enthusiasm for microcredit among
government officials as an anti-poverty program can motivate cuts in public health,
welfare, and education spending] Neff maintains that the success of the microcredit
model has been judged disproportionately from a lender's perspective (repayment rates,
financial viability) and not from that of the borrowers. For example, the Grameen Bank's
high repayment rate does not reflect the number of women who are repeat borrowers that
have become dependent on loans for household expenditures rather than capital
investments] Studies of microcredit programs have found that women often act merely as
collection agents for their husbands and sons, such that the men spend the money
themselves while women are saddled with the credit risk. As a result, borrowers are kept
out of waged work and pushed into the informal economy. Many studies in recent years
have shown that risks like sickness, natural disaster and over indebtedness are a critical
dimension of poverty and that very poor people rely heavily on informal savings to
manage these risks (see, for example, The Microfinance Revolution: Sustainable Finance
for the Poor by Marguerite Robinson). It might be expected that microfinance institutions
would provide safe, flexible savings services to this population, but—with notable
exceptions like Grameen II—they have been very slow to do so. Some experts argue that
most microcredit institutions are overly dependent on external capital. A study of
microcredit institutions in Bolivia in 2003, for example, found that they were very slow
to deliver quality micro savings services because of easy access to cheaper forms of
external capital of funds for microcredit institutions in most developing nations.

Because field officers are in a position of power locally and are judged on repayment
rates as the primary metric of their success, they sometimes use coercive and even violent
tactics to collect installments on the microcredit loans. Some loan recipients sink into a
cycle of debt, using a microcredit loan from one organization to meet interest obligations
from another. Also, counter to the original intention of the microcredit system to
empower women, one of the effects of an infusion of cash into local economies has been
to increase dowries, with women forced at times to take microcredit loans as the only
means to pay these increased dowries for their daughters Bangladesh's former Finance

and Planning Minister M. Saifur Rahman charges that some microfinance institutions use
excessive interest rates.[9] In recent years, there has been increasing attention paid to the
problem of interest rate disclosure, as many suppliers of microcredit quote their rates to
clients using the flat calculation method, which significantly understates the true Annual
Percentage Rate.

There are other related criticisms, in the corresponding section, within the article on

Role of developing countries—a recent Forbes ranking

The US business magazine Forbes ranked the world's top 50 microfinance institutions.
Seven of the 50 were little-known institutions from India, the most of any country. They
included Kolkata-based Bandana (ranked 2nd), Microcredit Foundation of India (13th)
and Saadhana Microfin Society (15th). Those ranked above even Bangladesh-based
Grameen Bank, which, along with its founder Muhammad Yens, was awarded the Nobel
Prize in 2006. Grameen Bank ranked 17th in the list, below another Bangladesh-based
institution, ASA.

India and Bangladesh together are home to the most MFIs. Those in other countries
included five from Bosnia and Herzegovina, four each from Morocco and Peru, three
from Colombia, two each from Ecuador, Ethiopia and Serbia, and one each from 15 other
countries, including Russia, Pakistan, Mexico and Brazil.

Besides those already mentioned, other Indian MFIs include Grameen Koota (19th),
Sharada's Women's Association for Weaker Section (23rd), SKS Microfinance Private
Ltd (44th) and A smitha Micro fin Ltd (29th). Grameen Koota and SKS Microfinance use
the same model as Grameen Bank.

Forbes magazine said that "microfinance has become a buzzword of the decade, raising
the provocative notion that even philanthropy aimed at alleviating poverty can be
profitable to institutional and individual investors."

"Billionaires, global leaders and Nobel Prize recipients are hailing these direct loans to
uncollateralized would-be entrepreneurs as a way to lift them out of poverty while
creating self-sustaining businesses," it stated.

Forbes made the ranking of MRIs by using data available from the Microfinance
Information Exchange and the analysis from rating firms Micro-Credit Ratings
International Limited and Micro Rate. The ranking was based on six key variables: gross
loan portfolio, operating expense, operating expense divided by the average number of

active borrowers as a proportion of gross national income per capita, outstanding balance
of loans overdue by more than 30 days as a proportion of gross loan portfolio, return on
assets, and return on equity. "Each microfinance institution earned scores in four equally
weighted categories—scale, efficiency, portfolio risk and profitability. Rankings were
then based on the combined average score of those four categories."

See also

      Cooperative banking
      FINCA International, a major US-based, global microfinance institution
      Flat rate (finance)
      Friends of Women's World Banking, a major Indian apex Microfinance Institution
      Freedom from Hunger, US charity promoting Credit with Education
      Neo-conservatism
      Solidarity lending

The growth of consumer finance in Cambodia.

THE phenomenal economic gains made in Cambodia over the last few years has seen a
growing appetite for financial services which has led to an exponential increase in the
growth of the banking and insurance sectors. In response, Cambodian banks have
delivered to the market a range of financial services for consumers to choose from.

On the consumer financing side, options now include funding for car purchases,
household items, emergency cash, housing, financing overseas education and small
businesses. On the deposit and investment side, consumers are offered choices which
include premier banking, children's savings accounts, ATM coverage, internet banking,
insurance          and            expanded         branch           networks.
Credit cards are a convenient way to make purchases for almost any product or service
and enable payments via the internet. Most banks in Cambodia issue credit cards that
have varying features, benefits and reward programs. Some of the features include annual
fees, grace period on interest charges and reward programs on premium credit cards.

Housing loans or mortgages enable families to secure a home and provide stability to
family. These loans have terms up to 15 years and typically lower interest rates than
normal consumer loans. Repayments are monthly and composed of principal and interest.
Home loans can help individuals or families who have saved enough for a down payment
(typically 50 percent of the value of the house) but who want to move into a home to
accommodate                   their              personal               circumstances.

Offering piece of mind to the consumer, insurance products are a great way for

individuals and households to minimize the risk of having to make large payments due to
unforeseen circumstances. Insurance can be bought to provide protection against things
like a fire in your house, risk of getting sick, accidents with your car or moto, and
protection        for         your        employees           or        family.

Although there is a range of products for the consumer, the market size for consumer
financing is a fraction of that for business financing, and changing people's attitudes
towards borrowing will be the key to growing this sector. In Cambodia, there is a set of
cultural norms around borrowing that have delineated borrowing purposes into two
categories: investment and consumption.

Changing people's attitudes towards borrowing will be the key to
growing this sector

      Borrowing for consumption, such as to purchase items like furniture, TVs and
       other consumer durables is often seen in a negative light, whilst borrowing to
       invest in houses, property and businesses is viewed as being more responsible.
       Although there has been a small shift in recent years in attitudes towards
       borrowing, particularly for purchasing vehicles, it appears to be simply evidence
       of improving one's social status. Further shifts in norms towards borrowing for
       other purposes will likely change over time as newer generations have expressed
       interest in borrowing for items such as motos and household goods.

       One of the biggest shifts that needs to take place for an expanded consumer
       finance sector is the banks having greater confidence in the enforcement of loan
       contracts. The government has moved positively in this direction and has ratified
       the secured transaction law, which allows banks and other financial institutions to
       take registered security over moveable assets such as cars. Nevertheless, it will
       likely take some more time before banks fully embrace this alternative security
       structure and have confidence that courts will enforce security arrangements.

       From an investment perspective, there have been few offerings to the market as a
       suitable alternative to property. This is primarily due to the generous returns
       property has provided over the last few years and lack of market-based
       instruments such as shares. With the planned stock market, this will enable
       investors an alternative to property, but investing in stocks does come with higher

       The consumer finance sector has seen good growth over the last few years, and as

       financial literacy improves and banks expand their products, the consumer will
       ultimately benefit from the range of services they can choose from.


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