Retail Banking: Ntroduction
Retail Banking: Ntroduction
Retail Banking: Ntroduction
1 INTRODUCTION
Retail banking is when a bank executes transactions directly with consumers, rather than corporations
or other banks. Unlike wholesale banking, retail banking focuses strictly on consumer markets. The term
retail banking encompasses various financial products viz. different types of savings and transactional
accounts, deposit accounts, housing, personal, consumer auto and other types of loan accounts, Demat
facilities, insurance, mutual funds , credit and debit cards, ATMs and other technology based services,
stock broking, payment of utility bills, reservation of railway tickets etc.
The higher growth of retail lending in emerging economies can be attributed to the rapid growth of
personal wealth, favorable demographic profile, rapid development in information technology, the
conducive macroeconomic environment, financial market reforms and small micro-level supply side
factors.
Retail banking has a huge potential considering the growing demand for its products. Retail banking
segment is continuously undergoing innovations, product re-engineering adjustments and alignments.
Retail banking remains largely untapped in India and returns from the consumer banking have proved to
be more stable during periods of financial uncertainty, helping cushion volatile wholesale return. Higher
retail focus alongside better credit selection has also helped improved profitability ratios and keep asset
quality concerns in check for domestic private banks.
The paper has kept two broad factors in mind during the studies, which are:
i. The increasing competition among a broad range of domestic and foreign institutions in
providing banking and related financial services
ii. Financial activity has become larger relative to overall economic activity in the Indian economy.
This has meant that any disruption of the financial markets or financial infrastructure has
broader economic ramifications than might not have been the case previously.
Overall we would look into the Indian urban customers and their banking preferences while analyzing
the demand side. On the supply side we would mainly focus on the PSBs such as SBI, PNB, private
players like HDFC, Axis Bank, ICICI Bank and foreign banks such as Citibank, Standard Chartered, HSBC
and others.
3 REGULATIONS
Reserve Bank of India Act was passed in 1934 and RBI was constituted as an apex body without major
government ownership. Banking Regulations Act was passed in 1949. This regulation bought RBI under
government control. Under the act, RBI got wide ranging powers for supervision and control of banks.
From the Nationalization of Banks in the 70s to the advent of linearization policies of the 90s, banks
were mostly under the government control without the large presence of private and foreign players.
As a part of the larger reform effort to promote economic openness and encourage foreign investment,
the Indian authorities are taking steps to liberalize the nations banking sector. The reform agenda has
gained renewed importance in light of the current growth slowdown. The new governor Raghuram
Rajan, has taken office by announcing measures to further liberalize and deepen domestic financial
markets and ease external financing constraints. These include steps to boost electronic banking, issue
more bank licenses and with greater regularity, ease regulatory restrictions on investments and address
asset quality issues.
RBI asked banks not to levy penal charges on customers who do not maintain minimum balance in basic
savings bank accounts. Rajan, however, said that banks, instead of levying penal charges for non-
maintenance of minimum balance in ordinary savings bank accounts, banks should limit services
available on such accounts to those available to basic savings bank deposit accounts and restore the
services when the balances improve to the minimum required level.
RBI also said that in the interest of their customers, banks should consider allowing their borrowers the
possibility of prepaying floating rate term loans without any penalty. RBI has already prohibited charging
of penalty for prepayment of housing loans of individual customers, and it now wants to extend the same
benefit to all type of floating rate term loans, which will help small and medium enterprises as well.
But the most significant step taken by RBI is to ask banks to limit the liability of customers in electronic
banking transactions in cases where banks are not able to prove customer negligence. In these days of
hacking and phishing of internet which is of common occurrence, bank customers are an easy prey and
any amount of security features are inadequate to protect the bank customers. RBI should, therefore, not
simply limit the liability, but make it a zero liability, unless banks can prove customer negligence.
However to avoid this RBI has built in several safeguards in the new banking license guidelines. To keep
non serious players at bay the guidelines says that the applicant entity/group should have a past record
of sound credentials and integrity, should be financially sound and have a successful track record of 10
years. It also underlines the importance of diversified ownership. It says that Non-operative financial
holding companies (NOFHC) should set up new banks. The NOFHC should retain their equity capital in
the bank at minimum of 40 % for five years after which they should reduce to 15 percent within 12 years.
The guideline also has criteria on financial inclusion.
3.6 SUBSIDIZATION AND REVISED NORMS ON PRIVATE LENDING AND NEW BANKING LICENSES
RBI has been very categorical in allowing foreign banks a larger role in the Indian banking system since
February 2005, when it first issued the road map for presence of foreign banks in India. Although the
process got delayed due to the global financial crisis in 2008, the regulator seems to be firm on it. RBI, in
its discussion paper issued in January 2011, expressed its intent of foreign banks operating as wholly
own subsidiary (WoS) and gradually be treated at par with their domestic peers. While it provides the
regulator with better control over these banks, these banks in turn will also be better placed to benefit
from the large banking potential in India. Moreover in May 2012, the Central Government also facilitated
the process by proposing to exempt foreign banks from the 30 percent tax on capital gains and stamp
duty while converting branches into a new entity.
In what could be termed a step to move in this direction, RBI mandated foreign bank with 20 and more
branches to achieve priority sector targets and sub targets at par with their domestic counterparts.
According to revise guidelines on priority sector lending PSL, issued in July 2012, such foreign banks
need to achieve this within maximum period of five years starting from April 1 2013. The export credit,
which earlier used to be the part of foreign banks PSL portfolio has also been excluded from their PSL
targets with the exception of the export credit given to the agriculture and small industries.
5.1 COMPETITION
The RBI has removed several artificial barriers which made the banks and non-banks companies to
penetrate into wide range of financial services. The line dividing the banking, insurance and capital
market services is disappearing and the commercial banks are offering these services under one
umbrella.
5.2 CONSOLIDATION
Consolidation is in progress, the huge monolithic organization ICICI merged with ICICI bank ltd. Public
sector giants like Punjab National Bank is spreading its tentacles and acquiring smaller banks
5.5 TECHNOLOGY
Technology is becoming the centerpiece of retail bank executives will expect their IT departments to
identify and implement technology based solutions to enhance their customer experience. Some banks
are even experimenting with quasi-internet cafes offering high-tech lounge environments with relaxing
furnishings and Wi-Fi access along with ATMs, self-service kiosks, areas for plug-in consumer devices,
tutorials for mobile and Web banking and videoconferencing for service consultations delivered by call
center staff. Furthermore the move to cash light society will trigger still more changes in how the
branches are deployed.
The number of high net individuals (HNI) are growing and increasing use of credit cards promises a
great market. Current offerings will be inadequate to capture these opportunities, leaving gap for
innovative players to fill in.
6 MARKET SCENARIO
Number of players
There are so many banks and non financial institutions fighting for the same pie.
Undifferentiated services
Almost every bank provides similar services. No differentiation exists. Every bank tries to copy each
others services and technology, which increase the level of competition
Nature of suppliers
Bank is the best place for risk adverse, interest expecting customers to deposit their surplus money.
They believe that banks are safer than other investment alternatives.
Few alternatives
Suppliers are risk averters and want regular income. So they have few alternatives available with them
to invest like Treasury bills, government bonds.
Forward integration
This is possible like mutual funds, but only few people know about this.
Undifferentiated service
Banks provide similar services. There is not much difference in services provided by different banks
which leads to increase in bargaining power of customers. They cannot be charged for differentiation.
Strong economic fundamentals, growing urban population, higher disposable incomes, rise in young
population, emergence of new customer segments and rise in mass affluent space, explosion of service
economy in addition to manufacturing space have catapulted the scope of retail banking business in
India. There is a virtual gold mine to be unearthed and even the top layer is not yet scratched fully.
7 CHALLENGES
On top of this, the spend-now-pay-later credit culture in India is just not picking up. A swift legal
procedure against consumers creating bad debt is virtually non-existent. Finally, the vast geographical
and cultural diversity of the country makes credit policy formulation a tough job.
That said over the medium to long term, a higher retail mix with greater focus on secured retail loans
augurs well for domestic private banks in India. In contrast to public sector banks, which face more
serious asset quality concerns due to larger wholesale lending exposure to stressed sectors such as
power and airlines, private banks have posted higher return on assets since the 2009 credit crisis. Chart
8. A step up in retail banking by Indian banks alongside better credit selection and underwriting have
kept asset quality concerns in check for domestic private banks in India.
Retail lending is often regarded as low risk area for money laundering because the perception of the
sums involved however completion for clients may also lead to KYC procedures being waived in bid for
new business. Banks must also consider seriously the type of identification documents they will accept
and other process to be completed.
8 PRICING MODELS
The critical success factors for retail banking would be distribution Branch, channels Branding, Units
costs cost per account, cost per transaction, Pricing risk management.
9 MARKET STRATEGY
The retail banking strategies of banks are undergoing a major transformation, as banks are beginning to
adopt a mix of strategies like organic growth acquisition and alliance formation. This has resulted in a
paradigm shift in the marketing and pricing strategies of the banks. PSBs are adopting aggressive
strategies, leveraging their branch network to garner a large share of the retail market. Retail loan is
estimated to have accounted for nearly one-fifth of all bank credit. Over the past few years housing
sector is experiencing a boom in its availability of credit. The retail loan market has decisively got
transformed from a seller's market to a buyer's market.
9.3 INFRASTRUCTURE
Retail banking now encompasses not just branches, but also anywhere that banking services can be
conveniently provided to consumers whether it means a service kiosk in a train station a mini branch in
a grocery store, a premium branch in a central business district or bank on wheels that visit corporate
workplaces, proximity to targeted customers ultimately matters more than having a traditional bank
facade. Flexibility and agility will provide a competitive edge for the bank.
10 CONCLUSIONS
There is a need of constant innovation in retail banking. In bracing for tomorrow, a paradigm shift in
bank financing through innovative products and mechanism involving constant up gradation and
revalidation of the banks internal system and process is called for. Banks now need to use retail as a
growth trigger. This requires product development and differentiation, innovation and business
process re-engineering, micro planning, marketing, prudent pricing, customization, technological up
gradation, home/electronic /mobile banking, cost reduction and cross selling.
While retail banking offers phenomenal opportunities for growth, the challenges are equally daunting.
How far the retail banking is able to lead growth of the banking industry in the future would depend
upon the capacity building of banks to meet challenges and make use of the opportunities profitably.
However the kind of technology used and the efficiency of operations would provide the much needed
competitive edge for success in retail banking business. Furthermore customers interest is of
paramount importance. So it is vital for banks to improve their customer services and cut off
predatory lending strategies, particularly in area of interest in credit cards.
The focus of the sector should remain in macroeconomic wealth creation and not increasing the per
capita indebtedness that will do little but add to the Non Performing Assets (NPA) burden. Finally we
say that retail banking is one of the most tremendous areas now days to be looked after by the
banking industry as it contributes 7% of the GDP and 14 percent to employment.