Wholesale Banking Meaning Products Vs Retail Banking

Wholesale Banking Meaning

There are many examples of wholesale banking products and services to large clients. For example, pension disbursement services indicate an example involving government agencies, cash management, mergers and acquisitionsMergers And AcquisitionsMergers and acquisitions (M&A) are collaborations between two or more firms. In a merger, two or more companies functioning at the same level combine to create a new business entity. In an acquisition, a larger organization buys a smaller business entity for expansion.read more, and working capital financing services are usually done for large corporate clients. Likewise, services like fund management and underwriting help large professional investors.

Key Takeaways

Wholesale banking refers to the products and services designed to serve large clients like government entities, big corporations, and other financial institutions.It is the opposite of retail banking and does not deal with individual clients and small business entities.Examples include pension disbursement services to government entities, cash management, mergers and acquisition, working capital financing services, consultancy, interbank lending, fund management, underwriting, etc.A single bank can provide wholesale and consumer banking products and services, and Federal agencies regulate and oversee both banking activities.

Wholesale Banking Explained

Wholesale banking provides vital services too big for the consumer banking sector. The wholesale sector deals with large-scale corporate customers or high-revenue institutions, managing their funds and providing other quintessential financial or non-financial services. Developing activities in the wholesale segment has led to better service to large clients. Furthermore, a single bank can provide wholesale and consumer banking products and services, and Federal agencies regulate and oversee both banking activities.

To achieve a competitive edge, they are constantly evaluating the effect of technological development on the banking business to reorganize at the current level of technology and competitiveness. In addition, information technology is being used by wholesale institutions to support specific fee-income generation techniques.

Customized services offered to large corporate clients or government entities are different as they need to have such services at their disposal. Therefore, through wholesale services, the financial institutions provide a significant discount on their services for big companies in exchange for them to deposit huge amounts in their vault. Therefore, even if they charge a small amount, it will still make a profit.

Handling wholesale functions requires special expertise. For example, to serve the customized needs of government institutions, the bank has to fulfill the requirement of additional bankers with expertise in government organization functionalities. Managing government projects and bodies demands more detailed banking than commercial activities. It is imperative to provide banking and financial solutions that do not violate government protocols or create conflicts of interest.

Example

For a better understanding, let’s look into HDFC bank’s operations.

HDFC Bank Limited is a banking and financial services company and India’s largest private sectorPrivate SectorThe private sector is a section of the national economy that the government does not own. The business conducted under this sector is carried out by companies or entrepreneurs who focus on profit maximization and customer satisfaction.read more bank by assets and the world’s 10th largest bank by market capitalization as of April 2021. The bank’s operations include treasury, retail, wholesale, and other banking operations. The HDFC bank’s wholesale banking segment provides loans, non-fund facilities, wholesale net banking, and transaction services to large corporates, emerging corporates, public sector units, government bodies, financial institutions, and medium-scale enterprises.

The firm’s strategy of a balanced combination of retail and wholesale is paying dividends brilliantly. When retail growth in the sector is a little subdued, the bank’s wholesale segment engine is blazing on all terms. Hence the combination is yielding a sustainable growth rateSustainable Growth RateSustainable Growth Rate (SGR) signifies how much a company can grow without relying on external capital infusion and is calculated using the return on equity and multiplying it by the business retention rate. Formula = retention rate * return on equityread more. From 2020 to 2021 bank’s wholesale share has increased from 49% to 53%. Loans increased by more than 20% in the wholesale category, which comprises high-rated corporates, MNCs, and PSUs, in FY20 and FY21.

Wholesale Banking vs. Retail Banking

Let’s look into some of the significant differences between them:

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Wholesale Banking

Deal with large clients such as other financial institutionsFinancial InstitutionsFinancial institutions refer to those organizations which provide business services and products related to financial or monetary transactions to their clients. Some of these are banks, NBFCs, investment companies, brokerage firms, insurance companies and trust corporations. read more, government sector entities, corporates, real estate developers, etc.Financial services provided for mergers and acquisitions, working capital financing, pension disbursement services, support bid or tender processes with bank guarantees and letters of credit, etc.Involves transactions of large amounts in low volume.Corporate-oriented banks have a higher non-performing assetNon-performing AssetNon-Performing Assets (NPA) refers to the classification of loans and advances on a lender’s records (usually banks) that have not received interest or principal payments and are considered “past due.” In the majority of cases, debt has been classified as non-performing assets (NPAs) when loan payments have been outstanding for more than 90 days.read more (NPA).

Retail Banking

Deal with individual clients and small businesses or firms.Financial services include education loansLoansA loan is a vehicle for credit in which a lender will give a sum of money to a borrower or borrowing entity in exchange for future repayment.read more, mortgages, car loans, checking and savings accounts, credit cards, etc.Involves a large volume of small transactions.Consumer-oriented banks have a lower non-performing asset (NPA).