The distribution of third-party products enables banks to diversify their revenue streams through fee-based services. In recent years, banks have evolved into comprehensive financial service providers, offering advisory and distribution services for various third-party products—commonly referred to as para-banking activities.
In the banking context, third-party products refer to financial services and investment instruments not directly originated by the bank but distributed through its channels. These products are typically developed and managed by external financial institutions or service providers and include offerings such as mutual funds, life insurance, demat accounts, and gold coins.
Below is a detailed examination of the distribution of third-party products by banks:
Investment Products
Mutual Fund Business
Banks function solely as agents for their customers, forwarding applications for the purchase or redemption of mutual fund units to the relevant Asset Management Companies (AMCs), registrars, or transfer agents. The investment risk remains entirely with the customer, and banks are not permitted to offer assured returns. Prior approval from the Reserve Bank of India (RBI) is mandatory before banks engage in mutual fund distribution.
Banks earn revenue through commissions on the mutual fund products they distribute. These commissions may be based on assets under management (AUM) or may take the form of a one-time sales load charged during fund purchases or redemptions.
Portfolio Management Services (PMS)
In a complex and dynamic financial environment, high-net-worth individuals (HNIs) often seek professional wealth management through Portfolio Management Services offered by banks. PMS enables investors to optimize returns while managing risks, guided by professional fund managers.
Banks derive income from PMS primarily through entry loads, management fees, and profit-sharing models, depending on the specific PMS plan and the bank’s fee structure.
Bond Trustee Services
A bond is a fixed-income instrument through which companies or governments raise capital from investors. Bondholders receive periodic interest (coupon payments) and the principal upon maturity. While traditionally issued in certificate form, most bonds are now held electronically.
Banks generate revenue by acting as trustees for bond issues, earning fees typically calculated as a percentage of the total bond value. These fees are paid by the bond issuer for services that include safeguarding investor interests and ensuring compliance.
Demat and Online Trading Accounts
A Demat account allows investors to hold securities electronically, eliminating the need for physical certificates. Paired with an online trading account, it enables convenient access to stock market investments via online or branch channels.
Banks profit from these services through brokerage charges, account maintenance fees, interest earned on idle funds, and value-added services such as margin trading.
Debenture Trustee Services
Banks acting as debenture trustees offer a suite of services to both issuers and investors, ensuring legal and regulatory compliance and protecting investor interests throughout the lifecycle of a debenture issuance. These services include overseeing the registration of trust deeds, managing documentation, and providing custodial services.
Revenue is generated through trustee fees, custodial service charges, and interest earned on trust accounts where a portion of the debenture proceeds may be temporarily held.
Other Investment Products
Insurance Products
Under bancassurance arrangements, banks distribute insurance products on behalf of insurance companies. Banks may operate as corporate agents under a fee-based, non-risk participation model, which does not require prior approval from the RBI. All such activities are subject to regulations established by the Insurance Regulatory and Development Authority of India (IRDAI).
Capital Market Products and Services
Banks offer various capital market-related services, including those associated with Initial Public Offerings (IPOs), Follow-on Public Offerings (FPOs), Rights Issues, and Private Placements. Acting as a ‘Banker to an Issue,’ banks provide services such as escrow account management, Sponsor Bank services, and Self-Certified Syndicate Bank (SCSB) services. They also support the Application Supported by Blocked Amount (ASBA) facility for IPO subscriptions.
Banks earn revenue by charging fees for capital market services, including trading, advisory, and capital-raising assistance for corporate clients.
Sale of Gold Coins
Many banks sell certified 24-karat (999.9 purity) gold coins to customers for investment or gifting purposes. These coins are typically sold in tamper-proof packaging and with guarantees of authenticity and purity.
Banks earn income on gold coin sales through a commission-based model, wherein profits are derived as a percentage of the sale price. This model allows banks to benefit from fluctuations in demand and pricing, especially during periods of high gold prices.
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