RETAIL BANKING

Retail Banking is a banking service that is geared primarily towards individual consumers. Retail banking is usually made available by commercial banks, as well as smaller community banks. Unlike wholesale banking, retail banking focuses strictly on consumer markets. Retail banking is typical mass-market banking where individual customers use local branches of larger commercial banks. The term Retail Banking encompasses various financial products viz., different types of deposit accounts, housing, 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.,. It caters to diverse customer groups and offers a host of financial services, mostly to individuals. It takes care of the diverse banking needs of an individual. Retail banking is a system of providing soft loans to the general public like family loans, house loans, personal loans, loans against property, car loans, auto loans etc. The products are backed by world-class service standards and delivered to the customers through the growing branch network, as well as through alternative delivery channels like ATMs, Phone Banking, Net Banking and Mobile Banking. Customers and small businesses get benefited from increased credit access, speedy and objective credit decisions whereas lenders get benefited from increased consistency and compliance. Todays retail banking sector is characterized by three basic characteristics:

i. ii. iii.

multiple products (deposits, credit cards, insurance, investments and securities); multiple channels of distribution (call centre, branch, Internet and kiosk); and multiple customer groups (consumer, small business, and corporate).

The objective of retail banking is to provide customers a full range of financial products and banking services, give the customers a one-stop window for all their banking requirements. Retail banking segment is continuously undergoing innovations, product re-engineering, adjustments and alignments.

DRIVERS OF RETAIL BUSINESS IN INDIA

1. INCREASINGLY AFFLUENT AND BULGING MIDDLE CLASS

About 320 million people will be added in the middle-income group in a period of 15 years approximately.

2. YOUNGEST POPULATION IN THE WORLD

Changing consumer demographics indicate vast potential for growth in consumption both qualitatively and quantitatively, due to increasing affluent with bulging middle class and youngest people in the world. 70% of Indian population is below 35 years of age which means that there is tremendous opportunity of 130 million people being added to working population. The BRIC report of the Goldman-Sachs, which predicted a bright future for Brazil, Russia, India and China, mentioned Indian demographic advantage as an important positive factor for India.

3. INCREASING LITERACY LEVELS

Due to increase in the literacy ratio, people have developed a taste for latest technology and variety of products and services. It will lead to greater demand for retail activities specially retail banking activities.

4. HIGHER ADAPTABILITY TO TECHNOLOGY

Convenience banking in the form of debit cards, internet and phone-banking, anywhere and anytime banking has attracted many new customers into the banking field. Technological innovations relating to increasing use of credit / debit card, ATMs, direct debits and phone banking have contributed to the growth of retail banking in India.

5. CONTINUING TREND IN URBANIZATION

Urbanization of Indian population is also an important feature influencing the retail banking.

6. INCREASING CONSUMPTION MINDSET OF INDIANS

Economic prosperity and the consequent increase in purchasing power have given a fillip to a consumer boom. During the 10 years after 1997, India's economy grew at an average rate of 6.8 percent and continues to grow at the almost the same rate not many countries in the world match this performance. It means that Indian consumers are now shifting from the tendency of buying more and better quality to new services and products.

7. DECLINING TREASURY INCOME OF THE BANKS

The Treasury income of the banks, which had strengthened the bottom lines of banks for the past few years, has been on the decline during the last two years. In such a scenario, retail business provides a good vehicle of profit maximisation. Considering the fact that retails share in impaired assets is far lower than the overall bank loans and advances, retail loans have put comparatively less provisioning burden on banks apart from diversifying their income streams.

8. DECLINE IN INTEREST RATES

Finally, decline in interest rates has also contributed to the growth of retail credit by generating the demand for such credit.

CHALLENGES OF RETAIL BANKING FOR THE INDUSTRY AND ITS STAKEHOLDERS:

I. Retention of customers is going to be a major challenge. According to a research by Reichheld and Sasser in the Harvard Business Review, 5 per cent increase in customer retention shall increase profitability by 35 per cent in banking business, 50 per cent in insurance and brokerage, and 125 percent in the consumer credit card market. Thus, banks need to emphasise retaining customers and increasing market share.

II.

Rising indebtedness could turn out to be a cause for concern in the future. India's position, of course, is not comparable to that of the developed world where household debt as a proportion of disposable income is much higher. Such a scenario creates high uncertainty. Expressing concerns about the high growth witnessed in the consumer credit segments the Reserve Bank has, as a temporary measure, put in place risk containment measures and increased the risk weight from 100 per cent to 125 per cent in the case of consumer credit including personal loans and credit cards (Mid-term Review of Annual Policy, 2004-05).

III.

Information technology poses both opportunities and challenges. Inspite of availing the services of ATMs and Internet Banking, many consumers still prefer the personal touch of their neighbourhood branch bank. Technology has made it possible to deliver services throughout the branch bank network, providing instant updates to checking accounts and rapid movement of money for stock transfers. However, this dependency on the network has brought IT departments additional responsibilities and challenges in managing, maintaining and optimizing the performance of retail banking networks. Illustratively, ensuring that all bank products and services are available, at all times, and across the entire organization is essential for todays retails banks to generate revenues and remain competitive. Besides, there are network management challenges, whereby keeping these complex, distributed networks and applications operating properly in support of business objectives becomes essential. Specific challenges include ensuring that account transaction applications run efficiently between the branch offices and data centres.

IV.

KYC issues and money laundering risks in retail banking is yet another important issue. Retail lending is often regarded as a low risk area for money laundering because of the perception of the sums involved. However, competition for clients may also lead to KYC procedures being waived in the bid for new business. Banks must also consider seriously the type of identification documents they will accept and other processes to be completed. The most significant challenge is to devise appropriate pricing mechanism. The industry today is witnessing a price war, with each bank competing to have a large slice of the cake of the market, without much of a scientific study into the cost of funds involved, margins etc,. Most of the banks that use rating models for determining the health of the retail portfolio do not use them for pricing the products. This issue will be gaining more importance in the near future.

V.

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 future would depend upon the capacity building of the banks to meet the 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.

Importance of Retail Banking to Indian Economy

In India nowadays the retail banking sector has been the dominant element in the countrys financial system, of course including commercial banks because they are also stepping in retail banking sector. The sector has performed the key functions of providing liquidity and payment services to the real sector and has accounted for the bulk of the financial intermediation process. Besides institutionalizing savings, the banking sector has contributed to the process of economic development by serving as a major source of credit to households, government, business and to weaker sectors of the economy like village and small scale industries and agriculture. Over the years, 30-40 percent of gross household savings, have been in the form of bank deposits and around 60 percent of the assets of all financial institutions accounted for by commercial banks. An important landmark in the development of banking sector in recent years has been the initiation of reforms following the recommendations of the first Narasimham Committee on Financial System.In reviewing

the strengths and weaknesses of these banks, the committee suggested many measures to transform the Indian banking sector from a highly regulated to a more market oriented system and to enable it to compete effectively in an increasingly globalised environment. Several of the recommendations of the Committee especially those relating to Interest rate, an institution of prudential regulation and transparent accounting norms were in line with banking policy reforms implemented by a host of developing countries since 1970s. The role of banking in growth of the economy is sizeable and significant. Economic history indicates that banks have played a stellar role in supporting economic growth across a broad spectrum of countries. The key functions that the banks play in an economy are as follows:

I.

Reinforce Retail Lending

Indian economy now shows growing signs of being led by consumption which is largely bank financed. Personal loans as a percent of bank credit in India shot up significantly from about 10 percent in 1997 to about 15 percent now. What is more interesting is household balance sheets in India are still robust and household debt as a percent of gross domestic is still at a very low level of about 5 percent, which gives a lot of leg room for the retail lending to boom.

II.

Resurgence in Manufacturing:

For any economy to remain robust for long, it is important that it has a strong manufacturing base. India scores very high on the growth of service sector, but equally important is bringing back high growth in the manufacturing sector. Banks should look at this challenge with greater intensity and care. Enhancing manufacturing competence and capabilities would strengthen the growth process and also its competitiveness.

III.

Support SMUs:

SMU development is critical for any growth process to be robust and sustained. In India several attempts in the past were made to develop SMU development but the need is still large. Banks can play an important role in supporting SMU development. However, to make it a long lasting process, it is important that capital markets too complement the efforts of the banks in this regard.

IV.

Product and Service Range:

Banks should focus on a continuous development on the product side, particularly for the corporates and other major segments of the customers. Product range enables to banks to offer a wide range of on and off balance sheet services that could increase the overall reach and access, that will be of great relevance for the real economy. Banks could consider interesting collaborations and joint initiatives with institutions in India and abroad for this purpose, subject to the regulatory guidelines and compliance standards.

V.

Financing Agriculture:

Despite predominance of service sector in the Indian economy, and its rapidly growing share in the overall economy. Agriculture is the sector which will make the success of the reforms more meaningful and relevant. It is because a large proportion of people are still employed in the agriculture sector. In this background, it becomes imperative that this sector attracts large investments. Financing innovative crops and cultivation techniques also becomes very pertinent in this context. The overall focus should be in improving the both production and productivity of the agriculture sector that would be of great help for the rest of the economy to march ahead.

VI.

Employment Generation:

No doubt that if implemented cautiously the retail offers tremendous opportunities for the growth of Indian economy. If all the above challenges are tackled prudently there is a great potential that retail banks and

through its lending facilities may offer employment opportunities to millions living in small town and cities and in the process distributing the benefits of economic boom and resulting in equitable growth.

DOOMS OF INDIAN RETAIL BANKING INDUSTRY

1.

Rural/Agricultural credit

Organized Banking has failed to focus on the provision of Rural Credit or Agricultural Credit as it is very costly to finance micro units in remote areas. Technology has changed this by reducing the costs of low unit financing.

2. Technology crisis
Even though technology lends a supportive hand to the overall development of the banking sector through internet banking, phone banking, ATMs, Credit and Debit cards etc, there is increasing menace of hacking, phasing and farming through which scanners are creating havoc indulging in cyber crimes on a large scale, which is difficult to be checked.

3. Lack of apt product strategy

Indian banks have shown little or no interest in innovative tailor-made products, which is the need of the hour. The products of the West will not work out in our diversified economy anymore.

4. Absence of positive credit bureau

One of the biggest impediments in foreign players leveraging the Indian markets is the absence of positive credit bureau. In the west the risk profile can be easily mapped to things and this information can be publicly traded.

5. Credit card issues

Various undesirable practices are exercised by credit card issuing institutions and their agents, which troubles the customers. Some of them are:

i. ii. iii.

Unsolicited calls to members of the public by card issuing banks/ direct selling agents pressurising them to apply for credit card. Charging very high interest rates /service charges. Lack of transparency in disclosing fees/charges/penalties and non-disclosure of detailed billing procedure.

6. Deficiency in legal framework

A swift legal procedure against consumers creating bad debt is virtually nonexistent.

7. Unpopularity of credit culture

The spend-now-pay-later credit culture in India is just not picking up among rural population.

8. Rural exposure
Lack of proper infrastructure facilities in the rural area hinders the interest of private banks to access rural areas.

9. Absence of prompt loan repayment culture

Prompt loan repayment culture has not yet set in many sectors of society.

10. Thrust on the fluffiest segment

All banks are targeting the fluffiest segment i.e. the upwardly mobile urban salaried class. Although the players are spreading their operations into segments like self-employed and the semi-urban rich, major thrust is also given only to this segment. Over-dependence on this segment is bound to bring in inflexibility in the business.

PRE-REQUISITES FOR RETAIL BANKING

One of the prominent features of retail banking is that it is a volume driven business. Following are the prerequisites to enhance the ability of any bank to administer a large portfolio of retail banking products:-

I.

STRONG CREDIT ASSESSMENT

Once the credit assessment is carried out qualitatively, the need for follow up in the future reduces considerably.

II.

SOUND DOCUMENTATION

Proper and defect free documentation is vital for a healthy retail credit portfolio. Similar to credit assessment, sound documentation also minimizes the need to follow up at a future point of time.

III.

STRONG PROCESSING CAPABILITY

As huge volumes of transactions are involved, excellent technological support for processing day-to-day transactions and maintenance of backups are required for smooth delivery.

IV.

REGULAR AND CONSTANT FOLLOW UP

As follow up for loan repayment is an ongoing process, it should start from the customer enquiry and continue till the loan is repaid in full.

V.

SKILLED MAN-POWER

For the efficient management of a large and diverse retail credit portfolio, the most important pre-requisite is the skilled and well-versed employees. Only experienced manpower can withstand the rigour of administering a diverse and complex retail credit portfolio.

VI.

APPROPRIATE TECHNOLOGY

Due to large volumes of business, there is a need to provide instantaneous service to the customers, for quick processing of large number of transactions and for the maintenance of databases. An appropriate technological support is a pre-requisite for ensuring growth in retail banking.

SUGGESTIONS TO EXPAND THE INDIAN RETAIL MARKET

1. To enlist the unbanked segment of the society by the service providers is a method to expand the retail market. It is this underserved segment should become the focus for the banks.

2. Rural Credit or Agricultural Credit is a segment to be explored. It can be considered as an unbanked segment. It has always been looked upon as a charitable activity rather than a profitable activity. 3. Now, the time has come for the customer to demand a product that is not currently available in the Bankers kitty and the Bank has to literally create customer-specific products. Banker is expected to assume the role of a Financial Engineer. 4. Banks should lower the minimum deposit requirement for opening new accounts as announced by RBI. To achieve greater financial inclusion, all banks need to make available a basic banking no frills account either with nil or very low minimum balances as well as charges that would make such accounts accessible to vast sections of population. 5. Banks should allow the earlier facilities to sink into the culture of the customers before any new facilities are launched. Also, the earlier facilities should be embedded with services so that customers not only appreciate new technology, but are also in a position to operate. 6. For the efficient management of a large and diverse retail portfolio, the most important pre-requisite is the skilled and wellversed employees. Only experienced man power can withstand the rigour of administering a diverse and complex retail credit portfolio. 7. The benefits following out of crossselling and upselling will remain a far cry in the absence of robust data warehouse where from meaningful data about customers, their preferences, their spending patterns, etc, can be mined. Data warehouse is vital for success in retail banking. 8. A full fledged marketing department/division would help in evolving a brand strategy, address the issue of alienation from the upwardly mobile, high net worth customer group and improve the recall value of the institution and its products by arresting the trend of getting receded from public memory. 9. It is time to break the myth that public sector banks are not customer friendly. Banks should follow customer friendly approach to enhance the marketing of their retail banking products. Banks should deliver the products and services rapidly in a dynamic market. 10. Banks should leverage effectively on multiple delivery channels (internet, ATMs etc) to reduce the cost of operations. Banks should ensure innovative products to suit the needs and requirements of different types of customers.

11. With the effective usage of the cell phone technology, coupled with web developments, service providers can innovate and offer rich, user-friendly mobile banking applications. 12. Simplified processes and alignment around delivery of customer service impinging on reduced customer touch-points are of essence to enhance the sale of retail banking products. 13. Banks should build collaborative relationships to convert bank branches into financial supermarkets. 14. There is a need for constant innovation in retail banking. In bracing for tomorrow, a paradigm shift in bank financing through innovative products and mechanisms involving constant up gradation and revalidation of the banks internal systems and processes is called for. Banks now need to use retail as a growth trigger. This requires product development and differentiation, innovation and business process reengineering, micro-planning, marketing, prudent pricing, customisation, technological up gradation, home / electronic / mobile banking, cost reduction and cross-selling.

The scope of generating profit through retail banking rather than through any of the traditional methods has become one of the attractive options to the bank. However, it could be stated that while there are so many layers in the fray, only those capable of addressing the above suggestions in the most efficient way would emerge successful.

CONCLUSION
With much scope in the avenues for operations, the true challenge for the banks in the current scenario is to stand out in the midst of hard-hitting regulations of the apex body. Globalization, consolidation and want of expertise are drastically redefining the banking taxonomy. Thus the participants, be it a Indian financial player or a foreign entrant in the retail sector have to adopt a different approach in everything viz., products, services to hold the Indian market share, as a popular saying goes as variety is the spice of life.

Threats to Retail Boom

The so called retail boom is not a gift for man to accept heartily with his hands stretched out. Retail booming in banking sector has many threats like: 1. Loans to individuals for housing, car purchases, and other consumer spending more than tripled from 2001 to 2005, from $145 billion to an estimated $477 billion resulting in overcrowding traffic and consecutively hiking prices of petrol in international market simple economics rule applies here increase in demand of a product increases prices of the product.

2. Credit card skimming fraud is still a $45 million business, forcing banks to step up security at ATMs. Fraudsters and thieves are unfortunately becoming more and more sophisticated and bold in their methods. 3. Retail banking gives a handy way of transaction internet banking resulting in increased rate of online frauds. 4. Another flip side to the boom in the retail banking. It is feared that the entry of global business giants into organized retail would make redundant the old Indian banks resulting in dislocation in traditional economic structure. Also, the growth path for organized retail in India is not hurdle free. The taxation system still favours small retail business. With the intrinsic complexities of retailing such as rapid price changes, constant threat of product obsolescence and low margins there is always a threat that the venture may turn out to be a loss making one. 5. A perfect business model for retail banking is still in its evolutionary stage. Procurement is very vital cog in the retail wheel. The retailer has to fight issues like fragmented sourcing, unpredictable availability, and daily fluctuating prices as against consumer expectations of round-the-year steady prices, sorted and new products at all times. 6. Trained human resource for retail is another big challenge. The talent base is limited and with the entry of big giants there is a cat fight among them to retain this talent. This has resulted in big salary hikes at the level of upper and middle management and thereby eroding the profit margin of the business plus income disparities. All the banking companies have laid out ambitious expansion plans for themselves and they may be hampered due to lack of requisite skilled manpower. 7. Banks doing retail business always come with attractive products and services bundling with many terms and conditions applying on them which are generally for the profit maximization and risk management of the banks but they do not educate the customer about them and just sell their product and ultimately customer feels cheated and helpless, this way retail banks are fooling around the common people.

Reasons for Upswing in Retail Banking

On a broader perspective following are the main reasons which contributed to this upswing of retail banking: 1. Economic prosperity and the consequent increase in purchasing power has given a stimulus to a consumer boom. Indias economy grew at an average rate of 7-8 percent and continues to grow almost at the same rate.

2. Changing consumer demographics indicate vast potential for growth in consumption both qualitatively and quantitatively. India is one of the countries having highest proportion (70%) of the population below 35 years of age. 3. The Treasury income of the banks, which had strengthened the bottom lines of banks for the past few years, has been on the decline during the last two years. In such a scenario, retail business provides a good vehicle of profit maximisation. 4. Considering the fact that retails share in impaired assets is far lower than the overall bank loans and advances, retail loans have put comparatively less provisioning burden on banks apart from diversifying their income streams. 5. Decline in interest rates have also contributed to the growth of retail credit by generating the demand for such credit.

6. Fear of corporate defaults and NPA computation. 7. Relative safety implied by the mortgage loans. 8. Low credit off take during from the commercial and corporate sector during the period 20002003 (this trend has reversed, though, over the last year and a half). 9. Lowering of cost of consumer durables and automobiles due to competition. 10. Increasing use of credit/debit cards as plastic money. 11. Automation of stock exchange operations, dematerialization. 12. ATMs, direct debit and phone banking as convenience factors. 13. Advisory services: real estate, investments and insurance 14. Increased competition for banks on both assets as well as liabilities side. 15. Emergence of other non-bank financial intermediaries. 16. Technology-aided proliferation of different service platforms. 17. Integration of a risk management culture within the strategic framework with availability of various risk management instruments. 18. Retail banking clients are generally loyal and tend not to change from one bank to another very often. 19. Interest spreads are wide, since customers are too fragmented to bargain effectively. 20. Credit risk tends to be well diversified, as loan amounts are relatively small. 21. There is less volatility in demand and credit cycle than from large corporates 22. Large numbers of clients can facilitate marketing, mass selling and the ability to categorise/select clients using scoring systems/ data mining. 23. At the bank level, the principal attraction of retail banking seems to be the belief that its revenues are stable and thus can offset volatility in the non-retail businesses.

Other Sources of Retail Finance

In addition to banks, there are private financiers and non-banking financial companies in India providing retail finance to individuals and businesses. Industrial finance corporations, and other private public undertakings such PTC are also sources of finance in India. Sources of finance in India can be broadly classified as long term sources of finance, short-term sources of finance, and medium term sources of finance. Theoretically such classification is easy to understand, but, practically there is some overlapping of such sources of finances.In addition, nature as well as the character of the business defines what is long-term finance requirement and what is short-term finance requirement. In general, however, the term long-term assets comprise plant and machinery, buildings, etc. These assets last well over 10 years.To finance such assets long-term source of finance options would be equity, and some term loans. Share capital or equity is apparently the cheapest of sources of finance in India, but there are built in expectations of the shareholders. Monies from issue of debentures, and share premiums, as well as retained earnings are mainly used to finance such long-term assets. Banks may offer term loans, and in the same way, financial institutions may also offer long-term loans. When such sourcing is done from internal funds, such as retained earnings, and equity, then it is termed as internal finance. When such monies are raised from outside, such as banks, it becomes external financing. When it is external source of finance, then the lender may require that an asset be mortgaged, pledged or hypothecated. When it comes to medium term assets such as vehicles, a medium term source of finance becomes essential. Banks and other private financiers again offer such finance. Short-term assets are sundry debtors, stocks, investments, cash and bank balances. Attempt is made to balance these with corresponding liabilities such as sundry creditors. Any deficit is covered through working capital finance, which is generally offered by banks. Assets need to be pledged with the bank to avail such finance. In southern India, chits are also used to finance some businesses. Entrepreneurs themselves bring in share application money in limited companies. By delaying payments for supply of materials, and other purchases, businesses obtain short-term finance at cheaper rate. Generally, the suppliers are aware of such delays, and therefore, they add such margins to the sale price. As yet debt factoring is new concept, which is not very common, though something similar does exist in the working capital finance. For providing agricultural finance private financers are making further efforts.

Retail Banking Products

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13.

Locker facility Personal loan Education loan ATM, credit/debit card Home banking Tele banking Mobile banking Mutual funds Stock investment Electronic fund transfer Deposits Schemes for women, children and retired Housing finance