Para Banking refers to the various financial services and activities that banks are permitted to offer, apart from their core banking functions of accepting deposits and giving loans.
Think of it as the “side businesses” of a bank. While the main business is traditional banking, para banking includes a diverse range of fee-based services that help banks diversify their income and offer a one-stop financial solution to their customers.
To offer these services, a bank typically needs prior approval from the Reserve Bank of India (RBI).
Key Para Banking & Financial Services
1. Insurance Business
- Banks act as corporate agents for insurance companies to sell their insurance products. This is known as Bancassurance.
- They offer both life insurance and general insurance policies to their customers.
2. Mutual Funds
- Banks can set up their own Asset Management Companies (AMCs) to create and manage mutual funds.
- They also act as distributors for mutual fund schemes of other AMCs.
3. Merchant Banking
- Banks provide a range of services to corporations, including:
- Managing and underwriting public issues like IPOs.
- Providing corporate advisory services for mergers and acquisitions.
- Syndicating loans for large projects.
4. Factoring and Forfaiting
- Banks provide working capital finance to businesses by buying their accounts receivable (invoices) through factoring (for domestic trade) and forfaiting (for international trade).
5. Venture Capital Funding
- Some banks have subsidiaries that provide venture capital to fund startups and early-stage companies with high growth potential.
6. Stock Broking
- Through their subsidiaries, banks offer stockbroking services, allowing customers to buy and sell shares on the stock market.
7. Credit Cards
- Issuing credit cards is a major para-banking activity that generates significant fees and interest income for banks.
In essence, para banking allows banks to move beyond their traditional role and become comprehensive financial service providers, catering to almost every financial need of their customers, from savings and loans to investments and insurance.