document 2323

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FEE BASED SERVICES OFFERED BY BANK

INDEX

CHAPTERS TOPIC

1 BANKING

2 FEE BASED SERVICES

3 FEE BASED INCOME IN INDIAN BANKING SYSTEM

4 TYPES OF FEE BASED SERVICES

5 FEE BASED SERVICES VS NON FEE BASED SERVICES

6 CONCLUSION

7 BIBLIOGRAPHY

V.E.S COLLEGE OF ARTS. COMMERCE & SCIENCE.

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CHAPTER : 1

BANKING

A bank is a financial intermediary that accepts deposits and channels those deposits into lending

activities, either directly by loaning or indirectly through capital markets. A bank links together

customers that have capital deficits and customers with capital surpluses.Due to their

importance in the financial system and influence on national economies, banks are highly

regulated in most countries. Most nations have institutionalised a system known as fractional

reserve banking. They are generally subject to minimum capital requirements based on an

international set of capital standards, known as the Basel Accords.

Banking in its modern sense evolved in the 14th century in the rich cities of

Renaissance Italy but in many ways was a continuation of ideas and concepts of credit and

lending that had its roots in the ancient world. In the history of banking, a number of banking V.E.S COLLEGE OF ARTS. COMMERCE & SCIENCE.

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dynasties—notably the Medicis, the Fuggers, the Welsers, the Berenbergs and the Rothschilds

—have played a central role over many centuries. The oldest existing retail bank is Monte dei

Paschi di Siena, while the oldest existing merchant bank is Berenberg Bank.

History of banking

The origins of modern banking can be traced to medieval and early Renaissance Italy, to the

rich cities in the north like Florence, Lucca, Siena, Venice and Genoa. The Bardi and Peruzzi

families dominated banking in 14th century Florence, establishing branches in many other parts

of Europe.

[1]One of the most famous Italian banks was the Medici Bank, set up by Giovanni di Bicci de'

Medici in 1397.

[2] The earliest known state deposit bank, Banco di San Giorgio (Bank of St. George), was

founded in 1407 at Genoa, Italy.

[3] Modern banking practice, including fractional reserve banking and the issue of banknotes,

emerged in the 17th and 18th centuries. Merchants started to store their gold with the

goldsmiths of London, who possessed private vaults, and charged a fee for that service. In

exchange for each deposit of precious metal, the goldsmiths issued receipts certifying the

quantity and purity of the metal they held as a bailee; these receipts could not be assigned, only

the original depositor could collect the stored goods. The sealing of the Bank of England

Charter (1694).Gradually the goldsmiths began to lend the money out on behalf of the

depositor, which led to the development of modern banking practices; promissory notes (which

evolved into banknotes) were issued for money deposited as a loan to the goldsmith.

[4] The goldsmith paid interest on these deposits. Since the promissory notes were payable on V.E.S COLLEGE OF ARTS. COMMERCE & SCIENCE.

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demand, and the advances (loans) to the goldsmith's customers were repayable over a longer

time period, this was an early form of fractional reserve banking. The promissory notes

developed into an assignable instrument which could circulate as a safe and convenient form of

money backed by the goldsmith's promise to pay.

[5] Allowing goldsmiths to advance loans with little risk of default.

[6] Thus, the goldsmiths of London became the forerunners of banking by creating new money

based on credit. The Bank of England was the first to begin the permanent issue of banknotes,

in 1695.

[7] The Royal Bank of Scotland established the first overdraft facility in 1728.

[8] By the beginning of the 19th century a bankers' clearing house was established in London to

allow multiple banks to clear transactions. The Rothschild's pioneered international finance on a

large scale, financing the purchase of the Suez canal for the British government. The oldest

bank still in existence is Monte dei Paschi di Siena, headquartered in Siena, Italy, which has

been operating continuously since 1472.

[9] It is followed by Beren berg Bank of Hamburg (1590)

[10] Sveriges Risk bank of Sweden (1668).

Definition

The definition of a bank varies from country to country. See the relevant country page (below)

for more information.

Under English common law, a banker is defined as a person who carries on the business of

banking, which is specified as:

1. Conducting current accounts for his customers,


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2. Paying cheques drawn on him/her, and

3. Collecting cheques for his/her customers.

4. Banco de Venezuela in Coro.

5. Branch of Nepal Bank in Pokhara, Eastern Nepal.

In most common law jurisdictions there is a Bills of Exchange Act that codifies the law in

relation to negotiable instruments, including cheques, and this Act contains a statutory

definition of the term banker: banker includes a body of persons, whether incorporated or not,

who carry on the business of banking' (Section 2, Interpretation). Although this definition seems

circular, it is actually functional, because it ensures that the legal basis for bank transactions

such as cheques does not depend on how the bank is structured or regulated.

The business of banking is in many English common law countries not defined by statute but by

common law, the definition above. In other English common law jurisdictions there are

statutory definitions of the business of banking or banking business. When looking at these

definitions it is important to keep in mind that they are defining the business of banking for the

purposes of the legislation, and not necessarily in general. In particular, most of the definitions

are from legislation that has the purpose of regulating and supervising banks rather than

regulating the actual business of banking. However, in many cases the statutory definition

closely mirrors the common law one. Examples of statutory definitions:

"Banking business" means the business of receiving money on current or deposit account,

paying and collecting cheques drawn by or paid in by customers, the making of advances to

customers, and includes such other business as the Authority may prescribe for the purposes of

this Act; (Banking Act (Singapore), Section 2, Interpretation).


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"Banking business" means the business of either or both of the following:

Receiving from the general public money on current, deposit, savings or other similar account

repayable on demand or within less than [3 months] ... or with a period of call or notice of less

than that period;

Paying or collecting checks drawn by or paid in by customers.Since the advent of EFTPOS

(Electronic Funds Transfer at Point Of Sale), direct credit, direct debit and internet banking, the

cheque has lost its primacy in most banking systems as a payment instrument. This has led legal

theorists to suggest that the cheque based definition should be broadened to include financial

institutions that conduct current accounts for customers and enable customers to pay and be

paid by third parties, even if they do not pay and collect checks.

Banking Standard activities

Banks act as payment agents by conducting checking or current accounts for customers, paying

cheques drawn by customers on the bank, and collecting cheques deposited to customers'

current accounts. Banks also enable customer payments via other payment methods such as

Automated Clearing House (ACH), Wire transfers or telegraphic transfer, EFTPOS, and

automated teller machine (ATM).

Banks borrow money by accepting funds deposited on current accounts, by accepting term

deposits, and by issuing debt securities such as banknotes and bonds. Banks lend money by

making advances to customers on current accounts, by making installment loans, and by

investing in marketable debt securities and other forms of money lending.

Banks provide different payment services, and a bank account is considered indispensable by

most businesses and individuals. Non-banks that provide payment services such as remittance


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companies are normally not considered as an adequate substitute for a bank account.

Banks can create new money when they make a loan. New loans throughout the banking system

generate new deposits elsewhere in the system. The money supply is usually increased by the

act of lending, and reduced when loans are repaid faster than new ones are generated. In the

United Kingdom between 1997 and 2007, there was a big increase in the money supply, largely

caused by much more bank lending, which served to push up property prices and increase

private debt. The amount of money in the economy as measured by M4 in the UK went from

£750 billion to £1700 billion between 1997 and 2007, much of the increase caused by bank

lending. [15] If all the banks increase their lending together, then they can expect new deposits

to return to them and the amount of money in the economy will increase. Excessive or risky

lending can cause borrowers to default, the banks then become more cautious, so there is less

lending and therefore less money so that the economy can go from boom to bust as happened in

the UK and many other Western economies after 2007.

Range of activities.

Activities undertaken by large banks include investment banking, corporate banking, private

banking, insurance, consumer finance, foreign exchange trading, commodity trading, trading in

equities, futures and options trading and money market trading.

Channels


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Banks offer many different channels to access their banking and other services:

Automated Teller Machines

A branch is a retail location

Call center

Mail: most banks accept cheque deposits via mail and use mail to communicate to their

customers, e.g. by sending out statements

Mobile banking is a method of using one's mobile phone to conduct banking transactions

Online banking is a term used for performing multiple transactions, payments etc. over the

Internet

Relationship Managers, mostly for private banking or business banking, often visiting

customers at their homes or businesses

Telephone banking is a service which allows its customers to conduct transactions over the

telephone with automated attendant or when requested with telephone operator

Video banking is a term used for performing banking transactions or professional banking

consultations via a remote video and audio connection. Video banking can be performed via

purpose built banking transaction machines (similar to an Automated teller machine), or via a

video conference enabled bank branch clarification

DSA is a Direct Selling Agent, who works for the bank based on a contract. Its main job is to

increase the customer base for the bank.


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Business model

A bank can generate revenue in a variety of different ways including interest, transaction fees

and financial advice. The main method is via charging interest on the capital it lends out to

customers.[citation needed] The bank profits from the difference between the level of interest it

pays for deposits and other sources of funds, and the level of interest it charges in its lending

activities.

This difference is referred to as the spread between the cost of funds and the loan interest rate.

Historically, profitability from lending activities has been cyclical and dependent on the needs

and strengths of loan customers and the stage of the economic cycle. Fees and financial advice

constitute a more stable revenue stream and banks have therefore placed more emphasis on

these revenue lines to smooth their financial performance. In the past 20 years American banks

have taken many measures to ensure that they remain profitable while responding to

increasingly changing market conditions.

First, this includes the Gramm-Leach-Bliley Act, which allows banks again to merge with

investment and insurance houses. Merging banking, investment, and insurance functions allows

traditional banks to respond to increasing consumer demands for "one-stop shopping" by

enabling cross-selling of products (which, the banks hope, will also increase profitability).

Second, they have expanded the use of risk-based pricing from business lending to consumer

lending, which means charging higher interest rates to those customers that are considered to be

a higher credit risk and thus increased chance of default on loans. This helps to offset the losses

from bad loans, lowers the price of loans to those who have better credit histories, and offers

credit products to high risk customers who would otherwise be denied credit.

Third, they have sought to increase the methods of payment processing available to the

general public and business clients. These products include debit cards, prepaid cards, smart V.E.S COLLEGE OF ARTS. COMMERCE & SCIENCE.

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cards, and credit cards. They make it easier for consumers to conveniently make transactions

and smooth their consumption over time (in some countries with underdeveloped financial

systems, it is still common to deal strictly in cash, including carrying suitcases filled with cash

to purchase a home).

However, with convenience of easy credit, there is also increased risk that consumers will

mismanage their financial resources and accumulate excessive debt. Banks make money from

card products through interest charges and fees charged to cardholders, and transaction fees to

retailers who accept the bank's credit and/or debit cards for payments. This helps in making

profit and facilitates economic development as a whole.

Products

Retail banking:

Checking account

Savings account

Money market account

Certificate of deposit (CD)

Individual retirement account (IRA)

Credit card

Debit card

Mortgage

Mutual fund


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Personal loan

Time deposits

ATM card

Current Accounts

Cheque books

Business (or commercial/investment) banking

Business loan

Capital raising (Equity / Debt / Hybrids)

Mezzanine finance

Project finance

Revolving credit

Risk management (FX, interest rates, commodities, derivatives)

Term loan

Cash Management Services (Lock box, Remote Deposit Capture, Merchant Processing)

credit services


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Types of banks

Banks' activities can be divided into:

Retail banking, dealing directly with individuals and small businesses;

business banking, providing services to mid-market business;

corporate banking, directed at large business entities;

private banking, providing wealth management services to high net worth individuals and

families;

investment banking, relating to activities on the financial markets.

Most banks are profit-making, private enterprises. However, some are owned by government, or

are non-profit organizations.

Types of retail banks

Commercial banks: the term used for a normal bank to distinguish it from an investment bank.


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After the Great Depression, the U.S. Congress required that banks only engage in banking

activities, whereas investment banks were limited to capital market activities. Since the two no

longer have to be under separate ownership, some use the term "commercial bank" to refer to a

bank or a division of a bank that mostly deals with deposits and loans from corporations or

large businesses.

Community banks: locally operated financial institutions that empower employees to make

local decisions to serve their customers and the partners.

Community development banks: regulated banks that provide financial services and credit to

under-served markets or populations.

Land development banks: The special banks providing Long Term Loans are called Land

Development Banks, in the short, LDB. The history of LDB is quite old. The first LDB was

started at Jhang in Punjab in 1920. The main objective of the LDBs are to promote the

development of land, agriculture and increase the agricultural production. The LDBs provide

long-term finance to members directly through their branches.

Credit unions or Co-operative Banks: not-for-profit cooperatives owned by the depositors

and often offering rates more favorable than for-profit banks. Typically, membership is

restricted to employees of a particular company, residents of a defined area, members of a

certain union or religious organizations, and their immediate families.

Postal savings banks: savings banks associated with national postal systems.

Private banks: banks that manage the assets of high net worth individuals. Historically a

minimum of USD 1 million was required to open an account, however, over the last years many

private banks have lowered their entry hurdles to USD 250,000 for private investors.[citation

needed]


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Offshore banks: banks located in jurisdictions with low taxation and regulation. Many

offshore banks are essentially private banks.

Savings bank: in Europe, savings banks took their roots in the 19th or sometimes even in the

18th century. Their original objective was to provide easily accessible savings products to all

strata of the population. In some countries, savings banks were created on public initiative; in

others, socially committed individuals created foundations to put in place the necessary

infrastructure. Nowadays, European savings banks have kept their focus on retail banking:

payments, savings products, credits and insurances for individuals or small and medium-sized

enterprises. Apart from this retail focus, they also differ from commercial banks by their

broadly decentralized distribution network, providing local and regional outreach—and by their

socially responsible approach to business and society.

Building societies and Landesbanks: institutions that conduct retail banking.

Ethical banks: banks that prioritize the transparency of all operations and make only what

they consider to be socially responsible investments.

A Direct or Internet-Only bank is a banking operation without any physical bank branches,

conceived and implemented wholly with networked computers.


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Types of investment banks

Investment banks "underwrite" (guarantee the sale of) stock and bond issues, trade for their

own accounts, make markets, provide investment management, and advise corporations on

capital market activities such as mergers and acquisitions.

Merchant banks were traditionally banks which engaged in trade finance. The modern

definition, however, refers to banks which provide capital to firms in the form of shares rather

than loans. Unlike venture capital firms, they tend not to invest in new companies.


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Both combined

Universal banks, more commonly known as financial services companies, engage in several of

these activities. These big banks are very diversified groups that, among other services, also

distribute insurance— hence the term bancassurance, a portmanteau word combining "banque

or bank" and "assurance", signifying that both banking and insurance are provided by the same

corporate entity.

Other types of banks

Central banks are normally government-owned and charged with quasi-regulatory

responsibilities, such as supervising commercial banks, or controlling the cash interest rate.

They generally provide liquidity to the banking system and act as the lender of last resort in

event of a crisis.

Islamic banks adhere to the concepts of Islamic law. This form of banking revolves around

several well-established principles based on Islamic canons. All banking activities must avoid

interest, a concept that is forbidden in Islam. Instead, the bank earns profit (markup) and fees on

the financing facilities that it extends to customers.

Difference between Credit Union and Bank

In the United States, credit unions are not-for-profit organizations that exist to serve their

members rather than to maximize corporate profits. Credit unions accept deposits and make

loans just as a bank. Credit unions focus on providing a safe place to save and borrow at

reasonable rates due to being a member-owned institution. Unlike banks, credit unions return


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surplus income to their members in the form of dividends.


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CHAPTER : 2

FEE based services

DEFINATION

A fee is the price one pays as remuneration for services. Fees usually allow for overhead,

wages, costs, and markup.

Traditionally, professionals in Great Britain received a fee in contradistinction to a payment,

salary, or wage, and would often use guineas rather than pounds as units of account. Under the

feudal system, a Knight's fee was what was given to a knight for his service, usually the usage V.E.S COLLEGE OF ARTS. COMMERCE & SCIENCE.

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of land.

A contingent fee is an attorney's fee which is reduced or not charged at all if the court case is

lost by the attorney.

A service fee, service charge, or surcharge is a fee added to a customer's bill. The purpose of a

service charge often depends on the nature of the product and corresponding service provided.

Examples of why this fee is charged are: travel time expenses, truck rental fees, liability and

workers' compensation insurance fees, and planning fees. UPS and FedEx have recently begun

surcharges for fuel.

Restaurants and banquet halls charging service charges in lieu of tips must distribute them to

their wait staff in some US states (e.g., Massachusetts, New York, Montana), but in the State of

Kentucky may keep them.

A fee may be a flat fee or a variable one, or part of a two-part tariff.

A membership fee is charged as part of a subscription business model.

Bank fees are assessed to customers for various services and as penalties. There are

unauthorised overdraft fees, ATM usage fees, and fees for having an account balance under a

required amount. Some banks charge a fee for using tellers in an effort to encourage customers

to use automated services instead.[1] The fees have come in for criticism as excessive from

consumer advocates. They have also targeted bank practices that maximize the assessment of

fees and fees that can add up to many times the amount of small transactions.

U.S. banks extract fees from automatic teller machine transactions that are made at rival banks,

even if the customer's home bank has no branch in a particular area (such as when the customer

is on vacation). Customers are sometimes charged twice, both by the bank that owns the ATM,

and again by their bank. Bank of America charges a denial fee, literally a fee for refusing


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service to the customer (if there are insufficient funds or a daily limit), and a fee to simply

check the account balance at a "foreign" (other bank's) ATM.[citation needed]

Following the 2008 financial crisis and legislation passed by Congress, banks have modified

many credit card agreements with customers sometimes increasing interest rates or reducing

credit limits.

Fee-Based Services

Fee-based services can be broadly classified into corporate and retail fee-based services.

Organizations avail of such services for meeting both their short-term and long-term financial

requirements. The common fee-based services offered to corporate clients are: cash

management services, letter of credit, bank guarantees, bill discounting, factoring/ forfaiting,

forex services, merchant banking, registrar services, underwriting services, custodial services,

lease and hire purchase, and credit rating. Retail fee-based services are availed of at large by the

retail customers for payments, money transfers, personal wealth management, online trading,

etc. While pricing of corporate fee-based services are relationship oriented and relatively

flexible, retail fee-based services have standardized pricing. Though fee-based services are not

promoted using the traditional promotion mix in a major way, their distribution is similar to that

of banking products. For corporate fee-based services, marketers use branches extensively,


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whereas their retail counterparts use advanced technology channels such as the Internet. For

wealth management services in the retail segment, relationship-based personal selling is

combined with the technology-oriented channels of distribution.

Fee based services offered to corporate clients:

Cash management services

Cash management refers to a broad area of finance involving the collection, handling, and usage

of cash. It involves assessing market liquidity, cash flow, and investments.

In banking, cash management, or treasury management, is a marketing term for certain services

related to cash flow offered primarily to larger business customers. It may be used to describe


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all bank accounts (such as checking accounts) provided to businesses of a certain size, but it is

more often used to describe specific services such as cash concentration, zero balance

accounting, and automated clearing house facilities. Sometimes, private banking customers are

given cash management services.

Letter of credit

A letter of credit is a document issued by a financial institution, or a similar party, assuring

payment to a seller of goods and/or services provided certain documents have been presented to

the bank.[1] These are documents that prove that the seller has performed the duties under an

underlying contract (e.g., sale of goods contract) and the goods (or services) have been supplied

as agreed. In return for these documents, the beneficiary receives payment from the financial

institution that issued the letter of credit. The letter of credit serves as a guarantee to the seller

that it will be paid regardless of whether the buyer ultimately fails to pay. In this way, the risk

that the buyer will fail to pay is transferred from the seller to the letter of credit's issuer. The

letter of credit can also be used to ensure that all the agreed upon standards and quality of goods

are met by the supplier, provided that these requirements are reflected in the documents

described in the letter of credit.

Letters of credit are used primarily in international trade for transactions between a supplier in

one country and a customer in another. Most letters of credit are governed by rules promulgated

by the International Chamber of Commerce known as Uniform Customs and Practice for

Documentary Credits (UCP 600 being the latest version). They are also used in the land

development process to ensure that approved public facilities (streets, sidewalks, storm water

ponds, etc.) will be built. The parties to a letter of credit are the supplier, usually called the

beneficiary, the issuing bank, of whom the buyer is a client, and sometimes an advising bank, of

whom the beneficiary is a client. Almost all letters of credit are irrevocable, i.e., cannot be

amended or canceled without the consent of the beneficiary, issuing bank, and confirming bank,


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if any. In executing a transaction, letters of credit incorporate functions common to giros and

traveler's cheques.

Bank guarantee

A guarantee from a lending institution ensuring that the liabilities of a debtor will be met. In

other words, if the debtor fails to settle a debt, the bank will cover it.

FOREX SERVICES

The market in which currencies are traded. The forex market is the largest, most liquid market

in the world with an average traded value that exceeds $1.9 trillion per day and includes all of

the currencies in the world. There is no central marketplace for currency exchange; trade is

conducted over the counter. The forex market is open 24 hours a day, five days a week and

currencies are traded worldwide among the major financial centers of London, New York,

Tokyo, Zürich, Frankfurt, Hong Kong, Singapore, Paris and Sydney.

The forex is the largest market in the world in terms of the total cash value traded, and any

person, firm or country may participate in this market.

Underwriting services

Underwriting refers to the process that a large financial service provider (bank, insurer,

investment house) uses to assess the eligibility of a customer to receive their products (equity

capital, insurance, mortgage, or credit). The name derives from the Lloyd's of London insurance

market. Financial bankers, who would accept some of the risk on a given venture (historically a

sea voyage with associated risks of shipwreck) in exchange for a premium, would literally write

their names under the risk information that was written on a Lloyd's slip created for this

purpose.


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Custodial services

A custodian is an institution or individual that can act as an agent and exercise legal authority

over the financial assets of another individual or company.

How it works/Example:

A custodian typically handles a variety of activities, including physically holding equities and

bonds, settling purchases and sales, reporting the status of assets, tax compliance and reporting,

and management of the client's accounts and transactions.

For example, a bank may act as a custodian for a customer's investment activities, moving funds

into brokerage accounts, researching investment alternatives such as companies and funds

which might be appropriate investment targets, instructing brokers to buy or sell securities,

monitoring the investment activities within the account, and reporting account activity to the

owner. The custodian may also prepare the necessary tax filings on behalf of the owner, based

on the activities within the account.

Custodians may be appointed to hold control of assets of a minor or an incapacitated adult. An

adult with legal status may act as the custodian for the accounts of a minor. For example, a

common tax strategy is to give a financial gift to a minor when their tax rate is lowest. Under

the Uniform Transfers to Minors Act (UTMA), an adult or parent establishes the account on

behalf of the minor and serves as custodian, maintaining the legal authority and direction over

the custodial account. When the minor becomes an adult, the custodian relinquishes his or her

authority over the account.

The custodian role is often held by banks, law firms, or accounting firms which usually carry

additional fees for the services.


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Why it Matters:

Custodian services are generally useful for absentee owners (i.e. owners who are not interested

or able to be involved in the day-to-day management activities of their accounts), as well as

complex transactions, management of substantial assets, timely reporting and compliance, and

tax management strategies.

Lease finance and hire purchase are the options of financing the assets. These options vary from

each other in many aspects viz. ownership of the asset, depreciation, rental payments, duration,

tax impact, repairs and maintenance of the asset and the extent of finance.

Lease Financing and Hire Purchase

Starting any business involves a lot of financial planning for acquisition of fixed assets like

land, plant and machinery etc. Most entrepreneurs are scared of capital intensive projects due to

huge financial commitments. When large capital is involved in the business, an entrepreneur

wishes to spread his cost of acquisition of fixed assets over a longer period. Longer period

would reduce per year commitment towards the cost of asset. The intention is to match the

commitment with the revenue generated per year so that the payments are easily manageable

without any cash flow mismatch.

Lease and Hire purchase is an exact solution to that kind of financial arrangement where the

cash commitment is spread over the life of the asset and on the top, lease financing does not

even require any initial capital outflow also. Hence under lease, the entrepreneur can use his

capital for other working capital requirements.


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Lease:

In simple words, Lease is a financial contract between the business customer (user) and the

equipment supplier (normally owner) for using a particular asset/equipment over a period of

time against the periodic payments called “Lease rentals”.

Lease generally involves two parties i.e. the lessor (owner) and the lessee (user). Under this

arrangement, the lessor transfers the right to use to the lessee in return of the lease rentals

agreed upon. Lease agreement can be made flexible enough to meet the financial requirements

of both the parties.

Hire Purchase:

Hire Purchase is a kind of instalment purchase where the businessman (hirer) agrees to pay the

cost of the equipment in different instalments over a period of time. This instalment covers the

principal amount and the interest cost towards the purchase of an asset for the period the asset is

utilized. The hirer gets the possession of the asset as soon as the hire purchase agreement is

signed. The hirer becomes the owner of the equipment after the last payment is made. The hirer

has the right to terminate the agreement anytime before taking the title or the ownership of the

asset.

Credit rating

A credit rating is an evaluation of the credit worthiness of a debtor, especially a business

(company) or a government, but not individual consumers. The evaluation is made by a credit

rating agency of the debtor's ability to pay back the debt and the likelihood of default.[3]

Evaluations of individuals' credit worthiness are known as credit reporting and done by credit

bureaus, or consumer credit reporting agencies, which issue credit scores.

Credit ratings are determined by credit ratings agencies. The credit rating represents the credit


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rating agency's evaluation of qualitative and quantitative information for a company or

government; including non-public information obtained by the credit rating agencies' analysts.

Credit ratings are not based on mathematical formulas.[citation needed] Instead, credit rating

agencies use their judgment and experience in determining what public and private information

should be considered in giving a rating to a particular company or government.[citation needed]

The credit rating is used by individuals and entities that purchase the bonds issued by

companies and governments to determine the likelihood that the government will pay its bond

obligations.

A poor credit rating indicates a credit rating agency's opinion that the company or government

has a high risk of defaulting, based on the agency's analysis of the entity's history and analysis

of long term economic prospects

Retail fee-based services:


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Money transfer

Money transfer generally refers to one of the following cashless modes of payment or payment

systems:

Wire transfer, an international expedited bank-to-bank funds transfer.

Electronic funds transfer, an umbrella term mostly used for bank card-based payments.

Email Money Transfer, an online banking transfer between Canadian banks.

Giro, also known as direct deposit.

Money order, transfer by postal cheque, Money Gram or others.

Paypal, transfer by email on Paypal.

FirstRemit, an international expedited bank-to-bank funds transfer.

It can also refer to the following cash-based wire transfer systems:

Al - Barakat, an informal money transfer system originating in the Arab world.

Hawala (also known as hundi), an informal system primarily used to send money to and from

the Middle East, North Africa, the Horn of Africa, and South Asia.

Remittance, transfer of money by a foreign worker to his or her home country

PERSONAL WEALTH MANAGEMENT

Private wealth delivered to high-net-worth investors. Generally this includes advice on the use

of various estate planning vehicles, business-succession or stock-option planning, and the

occasional use of hedging derivatives for large blocks of stock.

Traditionally, the wealthiest retail clients of investment firms demanded a greater level of V.E.S COLLEGE OF ARTS. COMMERCE & SCIENCE.

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service, product offering and sales personnel than that received by average clients. With an

increase in the number of affluent investors in recent years, there has been an increasing

demand for sophisticated financial solutions and expertise throughout the world.

The CFA Institute curriculum on private-wealth management indicates that two primary

factors distinguish the issues facing individual investors from those facing institutions:

Time horizons differ. Individuals face a finite life as compared to the theoretically/potentially

infinite life of institutions. This fact requires strategies for transferring assets at the end of an

individual's life. These transfers are subject to laws and regulations that vary by locality and

therefore the strategies available to address this situation vary. This is commonly known as

accumulation and decumulation.

Individuals are more likely to face a variety of taxes on investment returns that vary by locality.

Portfolio-management techniques that provide individuals with after tax returns that meet their

objectives must address such tax structures.

The term "wealth management" occurs as at least as early as 1933. It came into more general

use in the elite retail (or "Private Client") divisions of firms such as Goldman Sachs or Morgan

Stanley (before the Dean Witter Reynolds merger of 1997), to distinguish those divisions'

services from mass-market offerings, but since has spread throughout the financial-services

industry. that had formerly served just one family opened their doors to other families, and the

term Multi-family office was coined. Accounting firms and investment advisory boutiques

created multi-family offices as well. Certain larger firms (UBS, Morgan Stanley and Merrill

Lynch) have "tiered" their platforms – with separate branch systems and advisor-training

programs, distinguishing "Private Wealth Management" from "Wealth Management", with the

latter term denoting the same type of services but with a lower degree of customization and

delivered to mass affluent clients. At Morgan Stanley, the "Private Wealth Management" retail


31


division focuses on serving clients with greater than $20 million in investment assets while

"Global Wealth Management" focuses on accounts smaller than $10 million.

In the late 1980s private banks and brokerage firms began to offer seminars and client events

designed to showcase the expertise and capabilities of the sponsoring firm. Within a few years a

new business model emerged – Family Office Exchange in 1990, the Institute for Private

Investors in 1991, and CCC Alliance in 1995. These new entities aimed to educate the ultra-

wealthy investor, offer an online community as well as a network of peers for ultra-high-net-

worth individuals and their families. Their growth since the 1990s indicates a market eager to

become more informed about private wealth management with total IT spending (for example)

by the global wealth management industry predicted to reach $35bn by 2016, including heavy

investment in digital channels.

Several universities offer wealth-management education either for the professionals who advise

private investors or private investors themselves who have substantial wealth. The standards

and accrediting organization the American Academy of Financial Management (AAFN, later

rebranded as the International Academy of Financial Management or IAFM) offered the first

such program for professionals (the CWM Chartered Wealth Manager Program), followed by

the Wharton School of the University of Pennsylvania. Since 1999 over 5000 people from over

100 countries have completed the IAFM CWM Wealth Manager program. At Wharton, the first

curriculum designed exclusively for investors and family offices was offered in 1999. 730

investors from 39 countries have completed the five-day course. The five-day program is

offered twice a year and is a continuing partnership with the Institute for Private Investors. The

University of Chicago also offers a 5-day program. In 2009, Columbia University offered a

three-day program on value investing designed for high-net investors.

Wealth management can be provided by large corporate entities, independent financial advisers

or multi-licensed portfolio managers who design services to focus on high-net-worth clients.


32


Large banks and large brokerage houses create segmentation marketing-strategies to sell both

proprietary and non-proprietary products and services to investors designated as potential high-

net-worth clients. Independent wealth-managers use their experience in estate planning, risk

management, and their affiliations with tax and legal specialists, to manage the diverse holdings

of high-net-worth clients. Banks and brokerage firms use advisory talent-pools to aggregate

these same services.

The events of 2008 in the financial markets caused investors to address concerns within their

portfolios. "The past 18 months have challenged traditional thinking about investing and asset

allocation, diversification, and correlation. For individual investors, risk tolerances have been

tested, investment assumptions have been overturned, and fundamental truisms have been

questioned." For this reason wealth managers must be prepared to respond to a greater need by

clients to understand, access, and communicate with advisers regarding their current

relationship as well as the products and services that may satisfy future needs. Moreover,

advisors must have sufficient information, from objective sources, regarding all products and

services owned by their clients to answer enquiries regarding performance and degree of risk -

at the client, portfolio and individual-security levels. "This state of affairs poses a dilemma for

wealth managers, who, for a generation, have adhered to the core principles of asset allocation

and earned their keep by preaching the mantras of 'buy and hold', 'invest for the long term', and

when things get tough, 'stay the course'.”

Since 2009 many firms have promoted their adherence to the fiduciary standard in order to

regain the trust lost during the financial crisis. In addition firms now publicly embrace the code

of ethics published by the CFA Institute. As of 2013 wealth-management advisors must have

access to an objective content repository.[citation needed] This repository must contain a

current and readily available profile of the clients' holdings.


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ONLINE TRADING

The act of placing buy/sell orders for financial securities and/or currencies with the use of a

brokerage's internet-based proprietary trading platforms. The use of online trading increased

dramatically in the mid- to late-'90s with the introduction of affordable high-speed computers

and internet connections.

Stocks, bonds, options, futures and currencies can all be traded online.The use of online trades

has increased the number of discount brokerages because internet trading allows many brokers

to further cut costs and part of the savings can be past on to customers in the form of lower

commissions.

Another benefit of online trading is the improvement in the speed of which transactions can be

executed and settled, because there is no need for paper-based documents to be copied, filed


34


and entered into an electronic format.

Financial instruments involved in cash management include money market funds, treasury bills,

and certificates of deposit.

The active involvement of people is necessary for rendering fee-based services as the people

factor decides the quality of service delivery. Many of the service providers recruit candidates

from reputed colleges and institutions, and train them to handle the customer requirements.

The process factor in service delivery can be analyzed in terms of the flow of activities, the

number of steps involved in each activity, and customer involvement. Providers of fee-based

services take all these factors into account for achieving high levels of service quality.

Fee-Based Investment


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Definition of 'Fee-Based Investment'

An investment account in which the advisor's compensation is based on a set percentage of the

client's assets instead of on commissions. Contrast this to commission-based investment, in

which the advisor makes money based on the amount of trades made or the amount of assets

sold to the client.


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CHAPTER : 3

Fee based income in Indian banking system

Introduction:

A bank must achieve a sufficient income on its portfolio to pay operating costs and provide a

competitive return on capital ventured in the enterprise. In the quest for income, management

must always keep in mind the need for maintaining liquidity and solvency. In fact, it should

never subordinate the need for liquidity and solvency to the income function. While income is

definitely important, and clearly essential for the successful performance of a continuing

banking operation, the aggressive pursuit of income, without regard to these factors, could

rapidly precipitate the collapse of the bank.


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Sources of income for the Indian Banking system:

Banks generally earns money from different sources.

1 Loans and advances

2 Call money market

3 Balance with RBI

4 Investment

5 Services rendered

6 Fines

What is fee based income in Indian banking system:

In general, banks have to give certain percentage of their deposits to the Reserve bank of India

as part of CRR (Credit reserve ratio) i.e 9% of any deposit they get in their bank account. By

doing so they loose money which they can use for their own purpose of making profits by

investing. Fee based income are those income for which the banks need not have to maintain

any 9% as CRR. As, this money is not considered as a part of deposit. Rather, it is the money

which banks gets as income come from the services which a bank renders such as:

1 Funds transfer

2 Remittances

3 Custodial services


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4 Collections

5 Government business

6 Agency business

7 Opening letter of credit

8 Issuing letters of guarantee

9 Dealing in derivatives market.

Classification of fee based income:

Fee based incomes are classified into two types:

Services rendered:

It is a fee income which banks charge in general whenever they give some service (Opening

letter of credit, Funds transfer, Remittances etc). The kind of services determines the amount of

fee the bank will charge according to the type, time and the risk involved for those services.

A fairly risk-less source of bank income is advisory and management fees. Such services do not

involve commitments or contingencies on assets listed either on or off the balance sheet.

Traditional fiduciary services, including trust funds and portfolio management, remain


39


significant sources of fee income, as banks are one of the largest institutional managers of

capital funds in India.

Fine Earned:

Bank also gets the income from the fine they earn from the customers account because of these

reasons given below.

1. Insufficient funds

2. Returned cheque fee when payments are not honoured

Need of fee based income by the banks:

Banks are facing lots of competition to raise the amount for capital from the market on

continuous basis to sustain their operations in a fast growing economy. They also need to be

vigilant about maintaining their profitability in future. In recent years, it is also found that due

to competition the interest margins have come under pressure. The impact of reduced margins

on the profitability of the banks has been disguised by strong volume growth in the last few


40


years. But in order to maintain their profitability in future, therefore, banks would have look for

new non-interest sources of income.


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CHAPTER : 4

Types of fee based services

Banks offer the following services to account holders at their specified branches — multi-city /

Payable at Par (PAP) cheque facility, anywhere banking facility, trade services, phone banking

facility, internet banking facility, credit card, debit/ATM card, mobile banking and Real Time

Gross Settlement (RTGS).

Foreign banks are expanding the number of products on offer, their complexity such as

derivatives, leverage financing. Doorstep banking facilities are being offered by some of these

banks to cater to convenience lifestyle of its customers. Private banks are extending services

including wealth management and equity trading apart from credit cards.


42


How do banks price their services?

The pricing mechanism is dependent on client relationship and the nature of the transaction.

The pricing can be arrived at by profiling customers into different segments. The large

corporate segment comprises of the bulk and large value transactions.

This segment is characterised by multiple service relationships. The pricing in this segment is

transaction based and depends on the size of transactions and on the banks' relationship with the

corporate. Hence, the pricing is decided on a one to one basis and public.

The other segments comprise the brokers, small and medium enterprises (SME), other banks

and the retail segment. In each of these cases, the pricing is not made public and is determined

on the basis of the nature of the transaction and the banks' relationship with the client, on a one

to one basis.

Typically, high volumes and low value characterise the SME segment. Therefore the pricing for

this segment differs from that of the large corporates. Similarly the pricing for the banks is very

different. In the retail segment, the bank publishes its tariff.

How do services contribute to the bank's income?

Increasingly banks are witnessing a growth in their non-interest or fee-based incomes. With

interest spreads decreasing, banks have little option but to ramp up their revenues from fee-

based income.

Fee-based income constitutes a major portion of a bank's other income. The ratio of other

income to total income is an indicator of the size of fee-based income. Treasury incomes of


43


public sector banks are no longer the major revenue driver and have been coming down as a

result of rising interest rates. Volatility of interest rates are compelling banks to increase their

fee based income.

What is non-fund based income?

The non-fund based income comprises of revenues from both financial commitment and

services rendered. Financial commitment includes guarantees, letters of credit and bankers

acceptances etc.

The fees charged may vary from bank to bank and is dependant on the relationship of the bank

with the client and the size of the transaction. On the other hand, the revenues from services

rendered include fees from funds transfer and enabling services like ATM, internet banking etc.

The revenues from funds transfer come from corporate services such as cash management,

foreign exchange remittances and from retail services including drafts, pay orders etc.

FEE-BASED PRODUCTS

As discussed earlier, modern commercial banking involves a wide array of services to the

customers, many of which are fee-based. These are distinct from products and services that are

fund-based.

Fee-based products also involve a lesser degree of divergence between Islamic and

conventional practices. While Islamic banks are currently offering a wide range of such

products and services, we discuss a few that are more popular and common.

A variety of services that are offered by conventional banks may be supplied by Islamic banks


44


without any need for modification in the nature of the product, as long as, there is no debtor-

creditor relationship involved in the process.

Letter of Credit (LC)

A letter of credit is a major tool of trade finance. While a conventional letter of credit may

involve a temporary loan based on interest, an Islamic bank may extend such a facility in the

following manner using the mechanism of wakala (agency).

A letter of credit (LC) is a letter from a bank guaranteeing that a buyer’s payment to a seller

will be received on time and for the correct amount.

If the buyer does not make payment, the bank will honor any outstanding payments.

Bank also ensures that seller will not be paid until there is confirmation of goods shipment /

receipt.

A letter of credit often used in international transactions to address uncertainties owing to:

1. distance

2. differing laws in each country

3. difficulty in knowing contracting parties

LC based on wakala

1. The Client informs the Bank of his Letter of Credit requirements and requests the Bank to

provide the facility.

2. The Client appoints the Bank as its agent or wakeel for the purpose of executing the

transaction.

3. The Bank requires the Client to place a deposit to the full amount of the price of goods to be


45


purchased/ imported, which it accepts under the principle of al-wadi’a.

4. The Bank establishes the Letter of Credit and makes payment to the negotiating Bank

representing the counterpart, utilizing the Client's deposit. Subsequently the pertinent

documents are released to the

Client.

5. The Bank charges the Client fees and commissions for its services under the principle of

agency fee or ujr.

LC based on murabaha

1. Customer does not have required funds to finance purchase

2. Bank issues LC to seller

3. Bank makes full payment of purchase price to seller

4. Bank immediately sells goods to customer (actual buyer) at a mark-up for deferred payment

LC based on musharaka

1. Customer and bank agree to profit share

2. Bank issues LC to seller

3. Bank and customer contribute to the payment of the purchase price

4. Proceeds of the subsequent sale are shared based on pre-agreed profit sharing ratio


46


LC based on Salam

1. Bank agrees to buy the goods from its client under a salam contract and makes upfront

payment to him;

2. Bank assumes the role of seller to the foreign buyer.

3. Salam contract devised for this purpose should include specific delivery date and place.

Letter of Guarantee (LG)

As discussed earlier a customer often requires the bank to act as an intermediary in certain kinds

of transactions in order to ensure an atmosphere of security and confidence for both parties.

In such mediation, the bank merely acts as a guarantor of its client's liability towards a third

party. There is no cash outflow involved in the initial phase of the contract for the bank.

However, in the event of subsequent default by the client, the liability may fall on the bank as

the guarantor and the bank may be required to pay up the amount guaranteed.

The outcome is a temporary loan by the bank to its client. The banks' revenues from such

operations are represented as being commissions, in most cases, and interest, in a few other

cases involving temporary loans.

An Islamic letter of guarantee would be free from the interest-based temporary loan. Islamic

banks using the Shari’a mechanism of kafala provide such a facility, which may involve the

following steps.

The letter of guarantee may be provided in respect of the performance of a task, settlement of a

loan, etc. The client may be required to place a certain amount of deposit for this facility, which

the bank accepts under the principle of wadi’a wad-dhamana.


47


The bank charges the client a fee for the services it provides. Islamic banks have been

providing such facility in the areas of trade finance, construction, project related finance,

shipping and other activities.

You may note that guarantee or kafala is a well-known contract in fiqh and classical texts of

fiqh report a complete consensus that kafala is voluntary service and no fee can be charged for

the same. At best, the guarantor may recover or claim back the actual expenses incurred in

offering the service. The guarantee itself is a free service. The reasoning is that a person in the

Islamic scheme of things is not allowed to charge a fee or remuneration for advancing a loan. A

guarantor does not even advance any loan and merely undertakes to pay a certain amount on

behalf of the original debtor in case he defaults in payment. If the person who actually pays

money cannot charge a fee, no fee can obviously be charged for the latter activity.

However, some contemporary scholars feel that since the Qur’an or the Sunna does not

explicitly prohibit the charging of guarantee fee, it may be permitted on the grounds of

necessity or dharura. Guarantee has become a necessity, especially in international trade where

the sellers and the buyers do not know each other, and the payment of the price by the purchaser

cannot be simultaneous with the supply of the goods. Therefore, an Islamic bank can charge or

pay a fee to cover expenses incurred in the process of issuing a guarantee. In today’s world, it is

difficult to find parties willing to provide guarantee for free. A minority of jurists allow

guarantee fees since the guarantor provides a service to facilitate transaction No clear cut

prohibition

Other Fee-based Services

Banks, like their conventional counterparts, provide fee-based services, such as

1. Safe-keeping of negotiable instruments including shares and bonds and collection of

payments (based on an agreement of wakala under which the bank acts as the wakeel or agent


48


of its

client);

2. Internal (domestic) and external transfer operations; (based on an agreement of wakala under

which the Islamic bank acts as the wakeel or agent of its client),

3. Hiring storing boxes (coffers) based on an agreement of amana or ijara;

4. Administration of real estate, property and project management

5. Administration of wills

In providing all these services, the bank may act as the agent or wakeel of the client and collect

an agency fee or service charge.

However, where a loan is involved, it would be dangerous to allow the bank to receive

revenues or fees based on a percentage of the loan value - toward off suspicion of riba. But

where there is no loan involved, the fee would be based on the benefit to the customer on one

hand, and the efforts

exerted by the bank or work done, on the other. Where both these elements are present, the fee

may be determined as an absolute amount taking into account the benefit passed and costs

incurred, and certainly not as a percentage of the value of loan.


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CHAPTER: 5

Fee based services V/S Non fee based services


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CHAPTER : 6

PRIMARY DATA OF HDFC BANK

As per the views of HDFC Bank their views on “FEE BASED SERVICES OFFERED BY

BANK” their opinions are due as follows :

For different services to custom a offered by bank, the bank provide cheque facilities of 25% of

cheque list of which they charge RS 2 For preferred customer. There are three types of

categories of customer:

1. Imperia

2. Classic

3. Preferred

For imperia customer they charge nothing .

For classic customer they give 100 cheques free.

For preferred customer they give 300 free cheques.

The trade services charges are from 750-100Rs and for other customer HDFC charges 0.15-

0.25. THE DEBIT CARD may vary normal charge and the platinum and business card are of

higher charge.

NO, generally the charge does not fluctuate. It is fixed. The costing method is used to calculate

fees on different services. Yes, RBI had provided sealings of RTGS AND NEFT which decides

their own fees structure as follows:


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NEFT Payments : FREE

NEFT Collections : FREE

RTGS Payments : Rs 25 only per transaction.

RTGS Collection : FREE

YES, RBI helps and guides us in changing fees from customers. YES, our bank provides

doorstep services. For some account we provide free services. YES, we give preference to

doorstep services as it is dependent on which type of customer it is.

DOORSTEP BANKING :

Cash pickup charges (within municipal city limits )

Cash pickup upto Rs 1 lac Rs 150 only per pickup

Cash pickup beyond 1 lac and upto 2

lac

Rs 200 only per pickup

Cash pickup beyond rs 2 lacs and upto

rs 3 lacs

Rs 300 only pickup

YES, our bank charges for certain services and it depends on what type of service it is. In fee


52


based services our bank provides DSA (DIRECT SALES AGENT) which works on behalf of

bank.


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CHAPTER : 7

Conclusion

In general words, fee is the price that one pays as remuneration for services. Generally fees

usually are overhead, there are wages , cost and markup. Fee based services are those services

in which customers has to pay fees for certain services to the institution. There are two types of

fee based services:

1. Corporate

2. Retail

The fee based services offered to corporate clients are :

Letter of credit , letter of guarantee, forex services, cash management services, credit rating

case, hire purchase etc.

The retail fee based include money transfer, personal wealth management and online trading

and so on. The sources of income of fee based system in indian banking system are loans and

advances, call money market, investment and so on. The classification of fee based income are

service rendered and fine earned. So, therefore fee based services plays an important role in the

development of the bank as well as economy.


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