The term LoU or Letter of Undertaking has recently been in news in wake of the banking fraud concerning Punjab National Bank and Nirav Modi. A LoU is a provision of bank guarantees under which a bank can allow its customer to raise money from another Indian bank’s foreign branch in the form of a short-term credit. The LOU serves the purpose of a bank guarantee for a bank’s customer for making payment to its offshore suppliers in the foreign currency.
For raising the LOU, the customer is supposed to pay margin money to the bank that issues the LOU and accordingly, they are granted a credit limit. Once the letter of credit is acknowledged and accepted, the lender (the foreign branch of Indian bank) transfers money to the nostro account of the bank that has issued the LoU.
By Manisha Sharma
Today companies like Paytm extensively use data analytics to provide an unparalleled experience to customers by extending faster and better services. If Indian banks don’t retaliate there are many other companies waiting in the wings to take away their businesses. Today, the need to build better data-centric products is driving the Banking Industry in India. Customer-centricity, combating cyber threat, compliance and risk management and cost containment are some of the key areas where data analytics is applied.
The first instance of usage of data analytics can be traced back to 2000s when HDFC Bank invested heavily in data warehouses and used descriptive and predictive analytics to track customer’s financial habits. This move created opportunities in the area of cross-selling which is currently one of the biggest tools to retain and attract customers in the Indian banking industry. Complex neural network scoring engine is used to assign a credit score to customers and thus help in reducing money laundering. Another bank that uses Business Intelligence (BI) and analytics to identify serious delinquencies (high risk) and early delinquencies (low risk) loans is ICICI Bank. The bank is using a ‘centralized debtors’ allocation model’ to allocate the right set of delinquent cases to the most appropriate collection channel. ING Vysya Bank created a central data repository via SAP BO in order to provide accurate reports to customers. India’s biggest public sector bank, SBI, is not behind in this quest. The bank uses Social Media Analytics to identify prospective customers and to analyse high delinquencies in loans.
But all that glitters is not gold. According to a latest McKinsey survey, most banks have invested significantly in data infrastructure and advanced analytics but are yet to derive expected results from it. Few common mistakes are not asking the right questions to the algorithms, lack of planning, using analytics on a project by project basis and not deriving the full potential of the tools at a detailed level.
In order to utilize technology for their benefits, banks need to develop two assets: a transformation strategy and a vigorous analytics organization to support the usage of analytics in their day to day activities. Different departments in banks contain a huge amount of data. Complete potential can be realized if small samples of information are brought together. Creating interactive dashboards by making the technology simpler to understand can attract more people to use the tools. Usage of feedback loops can help to market faster than competitors. A deep pipeline of analytics talent should be the top priority of banks.
According to a McKinsey survey, more than 90 percent of the top 50 banks around the world are using advanced analytics. Among other things, a combination of talented pool of graduates, innovation labs, clear governance plan and robust data quality controls should be some of the significant tools that will help shape a bank’s future in the competitive banking and financial services industry of India.
- Gupta, B. (2015, February). Analytics in Indian Banking Sector – On A Right Track. Retrieved from: https://analyticsindiamag.com/analytics-in-indian-banking-sector-on-a-right-track/
By TJEF Editor Gandhali Inamdar
We are launching a new infographic series where we will tackle contemporary economic issues every week. Today we are reviewing the impact of Basel IV on credit risk for financial institutions. Take a look at this one and let us know your thoughts!
Meaning – MiFID II is a legislative framework instituted by the European Union to regulate financial markets in the bloc and improve protections for investors with the aim of restoring confidence in the industry after the financial crisis exposed weaknesses in the system. It is a revised version of the Markets in Financial Instruments Directive (MiFID) and was rolled out on January 3, 2018.
While the original MiFID only covered multi-lateral trading facilities, the previously unregulated organized trading facilities (OTFs) have also been added in the new framework. There are new safeguards for algorithmic and high-frequency trading activity. Stricter requirements for portfolio management, investment advice, and other investor protections are also included. Additional and reinforced powers of supervision of derivatives markets, coordinated with the European Securities and Markets Authority (ESMA) is also a part of the new regulations.
By TJEF Editor Kriti Kanchan Sinha
Citizens of Venezuela, both the rich and the poor alike, are increasingly turning to the world of cryptocurrency, specifically bitcoins, to salvage the value of their savings with the Bolivar, their national currency, becoming worthless as a result of massive currency inflation. Similar is the case with Zimbabwe where citizens are exchanging money in form of bitcoins as trust in their own institutions fall and hyperinflation has wiped out the Zimbabwean dollar completely. Reading these, you would probably not be wrong in feeling that cryptocurrency seems to be the go-to currency for countries in political or economic distress.
An Introduction to Cryptocurrency
So, what exactly is a cryptocurrency? Investopedia defines it as a digital or virtual currency that uses cryptography for security. This feature of cryptography makes it extremely difficult to counterfeit as it is pure mathematics and logic and the human factor is negligible. The most important aspect of cryptocurrency that makes it so alluring to many is the fact it is independent of central banks and governments. Cryptocurrency in itself has no intrinsic value which is why it has been denounced by some including Axel Weber, Chairman of the Swiss bank UBS AG, as nothing but a speculative bubble. Further, its supply is not determined by any central bank and is limited in quantity – it is one of the reasons for the price volatility of cryptocurrencies. Bitcoin is the most famous of all but there are multiple others including Ethereum, Litecoin, Tron etc. The below figure provides us with the list of top five cryptocurrencies in terms of their market capitalization.
In this article, let us take a look at the usage of cryptocurrency and its legality in different countries around the world.
– Manisha Sharma
A decade ago, visit to a bank would mean spending money on travel, waiting in long queues and missing a half day’s work. Now, with the growing usage of digital banking, the number of visits to bank branches have reduced. The latest innovation by HDFC Bank in the self-service channel is the humanoid robot, so you no longer need to wait in long queues. Banks are aggressively using digital marketing strategies to attract new customers and enhance the experiences of existing customers. However, much of the banking sector depends on investment cycle, working capital demand, monsoon, commodity prices and government spending in some sectors such as infrastructure sector.
An assessment of the current scenario indicates that the credit growth has declined to 4.4% in 2016-17 from 8% in 2015-16. The asset quality has deteriorated further in the current fiscal leading to a Gross NPA Ratio of 9.5% with Public Sector Banks contributing the most. The macroeconomic indicator – inflation has dipped to a record low in 2017 and RBI intends to keep it at ~4% by the end of 2017-2018. This, coupled with softer commodity prices induces difficulty in recovery of credit growth. Is this scenario going to change in future?
The future of the banking sector will revolve around evolving customer expectations, technological innovations, improved regulatory requirements, increased competition and change in demographics. Following is the detailed explanation of how these forces will shape the banking sector in future.
A shift from product-centric approach to customer-centric approach:
The demand from customers are evolving and banks are focusing on providing tailor-made products in order to satisfy their needs. Banks in India are also establishing their footprints in the hinterlands. With the advent of technology and deep branch penetration, agricultural loans will be delivered within 2-3 days in the future, a change from the current 3-4 days. The corporate loan portfolio’s growth rate is declining. This will lead to a shift in focus of the banks towards the retail lending. The banks will invent new loan products in the future to target the retail segment.
Evolving Technology: With the growing influence of fintech companies in India, banks will use new technologies like Artificial Intelligence, Machine Learning, Blockchain, Robotics, IOT, etc. not only to enhance customer experience but also to achieve operational efficiency.
Source: PWC Report