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I just overheard my big boss talking about private banking. I don't remember hearing the term before. Is this a new concept in banking? Or is it just a new phrase coined by a bank for an old service?

Dear Interested I, private banking -- as opposed to retail banking or personal banking -- is a relatively new concept in this country. It was first introduced around three years ago by ING Bank, and two other foreign banks, Banque Nationale de Paris (BNP) and Commerzbank, also offer you private banking facilities in the country today. In the past, some private banks have, unofficially, serviced rich Indians, especially those who retain large sums of foreign exchange abroad. But, obviously, they don't advertise it very much.

Globally, private banking gained currency after World War II as wealthy investors around the world searched for banks where they could safely deposit their money, and receive customised attention in return. And I'm not talking about Swiss banking either. The concept has changed dramatically over the decades, and the demand for investment-related advice and portfolio management has broadened its scope. But private banking is not a defined set of services; it is more personalised and flexible than even retail banking. It's definitely something novel for you and me.

That still doesn't tell me what I want to know. You talk of investment-related advice, but what does that mean? Do the private banks primarily manage your portfolio for you?

Dear probing I, the basic philosophy of the private banker is to help his clients make more money from her money. A client can hand over her entire asset portfolio -- which may include investments in equity, property, gold, debt instruments et al -- to the bank, with a request to reshuffle it. The bank, in turn, will analyse the assets, and evaluate the risk-return profile of the client. This profile enables the private bank to gauge the returns that the client wants, and the risks that she is willing to take.

Which helps the bank change the portfolio according to the client's requirements. A conservative, low-risk investor may want a mix that is more focused on debt and fixed income securities; a moderate investor may want a balance between equity and debt; and an adventurous, high-risk customer will, obviously, tilt towards equity. But the actual portfolio-mix will vary from bank to bank. Commerzbank, for example, advises clients to invest only in safe investments such as debentures, bonds, bills, and secured inter-corporate deposits. Sensible, if you ask me.

It would appear that the only real difference between retail and private banking is that the latter offers portfolio management services too. Why are you making such a fuss about it?

Dear Surprised I, I didn't say that, did I? All I did was to explain the meaning of investment-related advice. To answer your real question, retail banks regard customer deposits as a major source of funds with which to finance their lending activities. And they earn their profits from the spreads between the lower interest rates on deposits and the higher interest rates on the loans that they offer. And private sector banks are the banks which are owned by large entrepreneurs or big business groups as opposed to our government-owned commercial banks.

By contrast, private banks explore opportunities to maximise returns for their clients, earning their profits mainly through commissions and fees. Retail banking offers branded products, like credit cards and loan products that have fairly rigid interest rate structures, but in the case of the private banks, every deal is tailor-made for the client's requirements, and interest rates vary with the profile of the customer. Remember: it's an exclusive little club.

I still fail to understand the essential difference between retail and private banking.

Dear Unconvinced I, here is an example that may help you. Consider a (very) rich investor, whose income is high during the first quarter and declines progressively, while his expenses are evenly spread throughout the year. A private bank will efficiently use the first-quarter surplus to make more money for him. It will convert the temporary surplus into a short-term deposit while the budgeted surplus may be invested in long-term assets.

This will reduce the non-earning balance during the first quarter. A private bank also offers flexible repayment options and interest rates on its loan products. For instance, the client may want an option to prepay a loan without attracting a penalty clause, or to extend the repayment period with a floating interest rate which is closer to the prevailing prime lending rate. All this, and more, the private bank will allow.

If an individual merely wants a way of managing his, or her, portfolio, he, or she, can approach a portfolio manager. Why should I go to a private bank?

Dear reluctant I, you are right in a way. Private banks offer asset management services that are similar to the portfolio management schemes offered by stockbrokers, portfolio managers, and accountants. But the main advantage of private banking lies in the fact that all the client's banking and financial needs -- including her tax matters -- can be handled by the executive allocated to the customer.

A stockbroker, for instance, will not be able to advise you on property-related investments, and may not be able to analyse your portfolio of investments effectively. He will merely provide information about which scrips are attractive, and which are not, at the moment. Similarly, an accountant may have little knowledge about bonds and stocks. And none of them may have any idea about currency hedging, derivatives trading -- or the art market .

A private bank is a one-stop shop for all your finance-related matters. This is some of what it can do: take stock of your portfolio; suggest ways of reshuffling it; assess the returns after one of the options has been accepted and, if necessary, shuffle it again. And so on. For instance, the private bank will realise that you have not made adequate investments in tax-saving instruments. A tax advisor employed by the bank may then advise you to either put your money in, say, the equity-linked tax-saving mutual fund schemes, or to explore the public provident fund option. Not strictly banking, if you know what I mean.

If I am not mistaken, a few retail banks too offer portfolio management services now. Is that not the same as private banking?

Dear dogged I, it is true that banks such as Citibank, Deutsche Bank, and HDFC Bank also provide investment advisory services. Every bank must obtain the written approval of the Securities & Exchange Board of India (SEBI) and the Reserve Bank of India (RBI) to provide such services, but their role can only be purely advisory.

As per the law, no bank, retail or private, is allowed to promise fixed returns on portfolios -- as they used to in the heyday of Harshad Mehta -- and the customer has to make the final decision about each investment. But the private banks go further. In our country, the distinction may not be apparent as they are still not allowed to offer several services because the rupee is not convertible on the capital account. Once full convertibility is announced in 2000, private banking will become borderless, and provide you with global opportunities.

Using their networks, these banks will help their clients shift their portfolios: from Nikkei futures on the Japanese Stock Exchange to the us bond market after a hike in the interest rate by the US Federal Reserve. Or they will help you spot an opportunity to buy an island in the Bahamas -- or purchase a yacht in England. They can even help you set up paper trusts and shell companies in tax havens, such as the Virgin Islands and Mauritius, and provide information on how the FTSE Index or Dow Jones Index has moved in the last two months. Incidentally, BNP even has a team of art experts, based at its headquarters in Paris, to advise its clients on suitable purchase opportunities in the art mart. Thus, every possible investment opportunity is examined to maximise your returns.

Does this mean that private banking is like priority banking: a service that some retail bankers offer? After all, both cater only to the rich and the famous.

Dear Informed I, priority banking is offered by retail banks such as Standard Chartered Bank (for clients with a deposit base of Rs 5 lakh and above), ANZ Grindlays (Rs 10 lakh and above), and Citibank (Rs 30 lakh and above). But there is a difference between those services and that offered by the private banks. If you look at it closely, the retail banks merely repackage their services.

For instance, they may offer you a discount of 0.5 per cent on certain loan products, or provide you a higher limit on your credit card, or offer you a free ATM card. Even the service may be personalised through a relationship manager, who can provide services like telebanking and courier delivery. However, this still falls far short of the customised services that the private banks will offer you. For a private bank, there are no rules, and each customer is treated differently.

If the real benefits of private banking actually depend on the rupee becoming fully convertible, why should anybody opt for these services? By the way, do these private bankers offer any retail banking facilities?

Dear confused I, the private banks concentrate on developing relationships with their clients, and it takes years for trust to develop between the bank and the customer. They are trying to make inroads into the market now so that they can capitalise on the opportunity when the time is right. The same logic applies to their customers too, who may wish to become familiar with the advantages offered by a private bank right away.

To answer your next question, private banking is more about borderless services and, therefore, they do not offer any retail banking facilities. Internationally, clients usually have separate retail bank accounts. In India, the market has yet to mature, which is why the private bankers offer retail services as add-ons. You may not get a ATM card or a credit card -- though BNP does plan to offer its customers a Visa card -- but you can definitely open a savings account, a current account, or a fixed deposit account with the private banks. As the retail banks too try to emulate the private banks, the dividing line between the two types of banks has become even more blurred.

How much will it cost me to avail of the regular services that are offered by a private bank?

Dear sceptical I, remember: the private banks are not interested in the average millionaire. They want clients who are, possibly, desi Rockefellers since a large portfolio is vital for them to viably offer their diverse services. Therefore, customers are chosen with care. No one can walk into a private bank and become a customer. Clients are solicited by invitation, and these banks never advertise. For example, BNP accepts only clients with liquid assets of over $100,000 (Rs 40 lakh).

The bread-and-butter income of a private bank comes from its fee-based services, such as investment-related advice or moving money across borders. But what the client pays depends on the frequencies of the services he uses and the size of the portfolio. However, in this country, the commissions are generally fixed, and the private banks' fees may vary between 1 and 2.50 per cent of the value of each transaction. Either ways, don't call a private bank; they'll call you.

Dec 22, 1997- Jan 6, 1998