The C’s, P’s and R’s of Banking

Financial institutions like banking institutions play a crucial role in the economy of the country. They ensure the smooth flow of funds and play an intermediary role for borrowers and savers. Whether a bank customer seeking banking services or a service provider, the practices of lending are governed by standard frameworks. Understanding the frameworks and working mechanisms of banking systems is essential to the smooth allocation of resources, access to loans and services by customers, etc. Through this blog let us build a broad understanding of the various constituting elements in the banking credits frameworks, reform strategies and marketing mix that are fundamental to the banking system. 

The 5 Cs of Credit Framework

Banks employ this 5 Cs framework as a tool used by banks as lending agencies to gauge the creditworthiness of the borrowers. In the framework, five factors help banks determine loan approval to borrowers by estimating the chances of default, lender’s risk of financial loss, etc. and setting standards for lending like loan rates and duration (terms).  To put it in simple words, these 5 Cs are essential for both banks and customers to navigate the lending prospect. The 5 Cs include:

• i) Character
• ii) Capacity
• iii)Capital
• iv) Collateral
• v) Conditions

Character: It is the first factor in the credit evaluation process. This involves the borrower’s credit history which reflects their track record, reputation of repaying debts, outstanding debts, missed payments, etc. This data appears on the credit scores or reports of the borrowers and banks use this information as parameters for borrowing habits. In India, this information is rendered by four major credit information companies, namely Equifax, Transunion CIBIL, CRIF High Mark and Experian. A high credit score reflects a positive character and improves a borrower’s loan approval chances, while a low credit score reflects higher risks for the lenders. Creating a history of on-time payments and payment of monthly recurring loans/debts significantly helps in building and maintaining a good credit score. 

Capacity: Capacity is the second factor in the credit framework that assesses the borrower’s potential for loan repayment.  The assessment is based on the borrower’s employment stability, income and existing financial obligations. The evaluation is made by assessing the borrower’s DTI (debt-to-income) ratio and by comparing the borrower’s income against recurring debts. The DTI is calculated by adding the total monthly debt payments and dividing the total by the gross monthly income of the borrower. This factor is crucial for banks as lending agents to ensure borrowers have a steady income and have the potential to cover their loan payments in addition to other financial obligations. 

Capital: This factor refers to the assets that borrowers own in the form of valuable assets like real estate, investments, saving accounts, etc. which can be used as collateral for loans. These are typically relevant for large amounts of loans and not necessary for unsecured personal loans where collaterals are not needed. However, owning highly valuable assets enhances the borrower’s creditworthiness and serves as a safety net for lenders in the event of the borrower’s financial difficulties.  

Collateral: The fourth factor in the 5 Cs of Credit framework is the Collateral which serves as a security that lenders often require for large amounts of loans. It typically involves pawning or mortgaging an asset like gold, car, or property, allowing lenders to seize if the borrower fails to repay the loan. Collaterals act as risk mitigators for lenders and do not incur loss of investment. 

Conditions: The final C is Conditions which governs numerous external factors that could potentially impact the borrower’s capacity to repay loans. It may include the borrower’s purpose for the loan, potential changes in financial circumstances, current job and duration, industry performance, possibility of economic downturn, etc. To be considered eligible for a loan, lenders are required to explain the loan’s purpose and understand how it aligns with their financial goals. 

Having an in-depth grasp of these major five factors is essential for anyone seeking loans or is likely to borrow in the future. As a borrower, it’s essential to have a good credit score or be prepared to leverage their available capital, display the potential to repay and have a clear-cut understanding of the collateral requirements in case borrowers are seeking secured loans. 

The Essential P’s in Marketing Financial Services

Financial institutions today employ evolved marketing strategies to cater to the evolving demands and requirements of the customers. Tailoring services as per the market demand is key to attaining growth and a smooth flow of services and funds. The other important driver is developing an effective marketing strategy. This is where the Banking P’s or the Marketing mix comes into play. Let us outline the essential P’s of marketing banking services. 

The 4P’s serve as a foundational framework for banking or any other financial services for developing effective marketing strategies. The framework comprises:

1. Product
2. Price
3. Place
4. Promotion

P1- Product: The product segment in the 4P’s framework encompasses the diverse sets of services banking institutions/financial services offer. This includes saving accounts, investment packages, insurance, loans, etc. Banks must ensure crafting each product with careful consideration, including the quality, value and features. Insurance policies must be devised to ensure meeting the distinctive needs and demands of the customers.  Banks must ensure tailoring their products-services to meet the demand of their target market. For instance, banks may devise a product package of saving accounts with diverse features and interest rates. This strategy may fulfill the diverse customer needs starting from college-going students to retired individuals to working professionals. To ensure effective marketing for banking services or products, it’s essential for banks to focus on the following points:

• Identifying target audience and their diverse financial needs by conducting market research
• Developing unique and creative plans like investment plans, expert advice for financial management, services for personal wealth management, etc
• Clear and straightforward product offerings that are easily understandable by ordinary people
• Boosting financial products and customer experience by integrating technology 
• Transparent regulations and compliance with industry standards
• Regular updates and reviews by evaluating feedback, market trends and performance data.

P2- Price: This second P- Pricing entails banks determining how their products and services are priced or valued by comparing with competitors and devising a pricing strategy that will attract target customers without making concessions on their profit margins. The trick is to strike the right balance between maintaining their profits and offering attractive pricing. Banks must make the actual cost service meet halfway with the perceived values their products offer to the customers. The Pricing strategy entails choosing a pricing method that corresponds with the institutional goals. Some key pointers that Pricing strategy entails:

• Compare similar products with the competitors and devise features and benefits that may be of significance
• Pricing should meet the target audience and align with institutional goals
• Devise pricing based on the actual cost of the service and perceived value with a target profit margin
• offer competitive prices that might be slightly below or similar to those of the competitors

P3- Place: This strategy concerns distribution channels which serve as the conduits for customers to access the bank’s services and products. It demands meticulous planning to ensure products are made available and accessible conveniently at the right time. Modern banking practices entail leveraging digital platforms to make the bank’s services and products reach target customers directly. Banks employ both direct and indirect channels to reach their target customers. Some of the key points banks must consider for effective marketing include:

• Offering direct and seamless user experience through bank’s websites, application or banks physical branches.
• Leveraging and partnering with brokers, affiliate marketers, insurance agents, etc to dispense service and product offerings and reach more target customers. 
• Improving user experience by providing detailed information, investing in AI-powered chatbots to offer instant support, and collecting customer feedback. 

P4- Promotion: The final P in the P4 framework entails banks leveraging diverse methods of communicating and advertising their products and services. Banks today can employ content marketing, social media campaigns, PR, Ads, etc. The winning strategy is to device promotional campaigns that resonate with the right audience. Tailoring the bank’s products and services to the target customers is key in promotion. Some key strategies for promoting banks’ services and products include:

• Crafting compelling stories that reflect the benefits of the financial services the bank provides
• Developing interesting and straightforward video content to simplify complex banking concepts to reach a larger audience and enable them to watch and interact with them.
• Organizing workshops, webinars, seminars, etc, to disseminate financial education and improve the target audience’s financial literacy leading to optimized customers and aiding existing customers to understand your products better, further building more trust and confidence in your service. 
• Making your website articles rank high on socials by employing an SEO strategy
• Building impression by taking part in community engagement, and supporting charities or projects. 
• Employ a mix of channels to approach your customers and target audience.

What are the 4 R’s in the Banking System?

Public banks in India reported attaining a record profit in the financial year 2023-2024. In 2023-24, 12 government banks made a record of generating an increase in total profit of INR 1,42,129 crore. This increase in profit has been made possible by the 4R strategy adopted by the Indian government. So what does this 4R entail? Let’s discuss them here below:

The 4R is a strategic framework adopted and implemented by the Indian government to address the issue of bad loans also referred to as Non- Performing Assets within the public sector banks (PSBs). The measure is developed to improve the finances of governmental banks. 

The 4R Framework is characterised by the following factors 

• R1- Recognition 
• R2-  Resolution
• R3- recapitalization
• R4- Reforms

R1- Recognition: Under this measure, banks are required to openly acknowledge the bad loans existing in the bank’s book. This entails recognising the Non-Performing Assets that may have been understated or hidden earlier. 

R2- Resolution: Under the strategic 4R, Resolution stresses the need to identify solutions for recovering the money lost in bad loans. This measure calls for actions including debt restructuring, selling of borrower’s assets or taking legal actions.

R3- Recapitalization: In this step, the government infuses fresh capital into the Public Sector Banks suffering from bad loans to fortify their financial status. This strategy helps the PSBs to compensate for the losses caused by bad loans, thereby strengthening and improving their lending potential.

R4- Reforms: The final R entails banks implementing stringent approval processes for loans, enforcing better risk management practices and practising governance reforms within the Public sector banks. It essentially stresses banks to focus on long-term improvement to avoid bad loans in the future. 

The 4R is a comprehensive strategy that potentially strengthens banks and advocates a culture of responsible and clean banking. 

Having a solid grasp of these strategies and frameworks will improve your knowledge about the finance and banking industries extensively. Financial literacy is imperative today where there are multiple options available for customers. Knowing in-depth knowledge of these essential Cs, Ps, and Rs of banking services will give you the freedom to identify the best services for you.