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NEO Banking - A Future Digital Banking, Development Scope, Threat and Challenges

What is Neo Banking? NEO banks are the banks which has no physical branches. NEO Banks are digital only financial institutions that operate exclusively online through websites and mobile apps.  The financial services industry has undergone massive transformations from manual to Core Banking and now digital without any physical branch. the evolution of banking has been marked by innovations aimed at making financial services more accessible, convenient, and efficient.   NEO Banks offers services like below: Account Management: Account Opening, Checking, Savings, and Money Transfers Loan Services: Quick and seamless loan approvals Low Fees: Minimal or no fees due to lower operational costs Tech Features: Budget tools, instant payments, and real-time alerts Why Are Neo Banks becoming popular now? Convenience : 24/7 mobile banking—no waiting in lines. Lower Fees : No hidden charges, free international transfers, and zero maintenance fees. User-Friendly Apps : Seamless, f...
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RAROC (Risk Adjusted Return on Capital)

RAROC & Economic Capital -
(Risk adjusted Return on Capital)


  • RAROC helps the bank to decide whether the business with its risk profile and budget economic capital add shareholders value or not.
  • RAROC is a measure of the expected return on economic capital over the life of an investment.
  • RAROC = Risk - Adjusted Return(Income)/Economic Capital.
  • Risk Adjusted Return = Revenue - Funding Cost or TPM - Credit Provisions(for expected losses)  - Administrative Expenses  - Capital Charge on RWA 



Uses Of RAROC

  • It is an improvement over the traditional approach in that it allows one to campare two businesses with different risk(volatility of returns) profiles.
  • Using the hurdle rate (expected rate of return), a lender/financial institution can also use the RAROC principles to set the target pricing for a relationship or a transaction.


Inputs Used For Calculation Of RAROC  - 

  • PD - Probability of Default
  • LGD - Loss Given Default
  • EAD - Exposure of Default
  • M - Maturity & Correlation Factor                               
Risk Adjusted Performance Measure(RAPM) - 
Example - Forex Dealer Position -$100 m 
Volatility - 12%
Confidence land - 99% or  2.33 Standard Deviation ,
Risk Capital Required is Rs = 100000000X0.12X2.33 = $27960000

RAPM = Profit/Risk Capital.


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