ABSTRACT
This paper discusses the overview of retail banking in India. It further explains the scope & tremendous growth of this segment among the other segments of banking. The retail sector in India has huge potential & is expected to grow at a rapid pace when overall banking sector is expected to grow at 30% this year. The current scenario, products & services offered advantages; disadvantages, issues & challenges are also a part of this paper.

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INTRODUCTION
Today, the marketing mantra is to delight customers by offering them more than their expectations. This leads to more satisfied customers. The same is applied to the banking industry. Indian Economy is moving from manufacturing to service economy where Banking sector is undergoing a change. The demand for financial products is increasing & customization of services is becoming a necessity.
The retail banking is growing at a rapid pace. Once it was considered as forbidden by the leading foreign & domestic banks.
But today all the banks have recognized the importance of retail banking which became possible due to extensive competition, innovation & advanced technology. With the expected growth of 30% for retail banking, the banks are focusing more & more on it. They are moving up to the potential of this segmant of banking.
In terms of revenue for both public & private sector banks, Retail banking is a major contributor. PSBs are considered to be more risk averse. In comparison to the private banks, PSBs have higher exposure to the retail banking segment & lesser exposure to treasury operations, in which foreign banks holds maximum revenue.
In Public Sector Banks, SBI alone holds more than 1/4th of the revenue from retail banking operations. The PSBs have higher share in retail banking because of their rural reach in comparison to private or foreign banks. Out of the total branches of banks in rural India, PSBs have for 94.7% of them.
As on 31st march, 2008 the revenue in different segments is shown for PSBs, Private & Foreign Banks.
PSBs
Private Banks
Foreign Banks
The Indian players are confident towards the Indian Retail banking. The reason for it is that
There has been a drastic change in the urban household income pattern which has directly impacted the consumption patterns & hence the banking habits of Indians have tilted towards the Retail products & services.
The spending pattern in India is also increasing. The bullish pattern can be seen in the Retail business. The total outstanding Retail loans in India are below 5% of the Indian GDP whereas they are around 41& of the GDP in Taiwan. The figures are more surprising while comparing with the West.
Compared to Western countries, India is lagging behind in the use of credit cards.
In India the people have generally save a lot. On an average an Indian saves 35% of his income. Therefore, no. of banking services provided by banks is increasing day by day.
Also the tax benefits are available on various loans. For ex- a borrower can avail tax benefits for the loan repayment & the interest charged for the loan in case of housing loans.
Retail banking is actually a “mass market banking” where individual customers use local branches of the large commercial banks. The focus is on creating products & services that meet the needs of the target customers and in turn making profits as well.
Since retail banking products are more on a mass production basis, therefore, all risks & operations are to cater to a large number of customers & are also based on them. This approach is quite different from wholesale banking or corporate banking where target is on large sized customer accounts rather than large numbers of customers as in the case of retail banking.
For servicing your customer better it is very important to understand retail banking as it helps in structuring products and meeting specific requirements for each set of products. ATM introduced the concept of Anytime banking.
Anywhere banking became possible with the development of satellites & telecom networks across the world.
Now it is the time for Anyhow banking & the bank which will have all these 3 A’s will be the leading bank of the next century.
RETAIL BANKING
Retail banking is quite broad in nature. It refers to dealing with individual customers by commercial banks, both on liabilities & assets sides of their balance sheet. Fixed savings /current accounts come on the liabilities side & mortgages and loans come on the assets side. Various other services include credit cards or depository services. Retail banking & retail lending are often confused with each other but retail lending is only a subset of the retail banking. Individual customer’s need & requirement are accessed & approached in an integrated manner in retail banking.
Retail banking sector is consists of:
BENEFITS OF RETAIL BANKING
Retail Banking has become a better option for banks to increase their earnings as the lending to corporate is of high risk & are generally slow moving. This sector consists of a large no. of customers of varied class. This type of banking provides customized & wide range of products to individual & small units. Also the risk is spread & the recovery is very good. The products can be designed, deployed & marketed according to the individual requirements.
ANALYSIS OF RETAIL BANKING
STRENGTH
Diversified asset portfolio
Retail banking consists of a wide range of financial product & services. These include deposit product, home loan, loan against equity shares, mortgage loan, auto loan, car loan, payment of bills, credit card, debit card etc. Such a diversified asset portfolios provide banks with higher profit & relatively lower NPA (non Performing Assets).
Upcoming as a new growth driver
Over past few years, fierce competition has lowered the spread & profitability from a commercial loan. Also, with the deregulation and increase in consumer loan rate, the risk adjusted return in retail sector has exceeded beyond the return on commercial loan.
CRM tools
The customer Service & Quality implementation through use of CRM tools will help banks in acceptance of their banking product and satisfaction of customer that will eventually yield profit for them.
Innovative product development
In financial services there is an unlimited scope for development & innovation. Banks should approach the customers to find out their financial need & problem and accordingly structure their strategies towards the development of the product & services, marketing them & finally selling them to satisfy its customer.
Increase in income
With the increase in per capita income & growth in urbanization the life style of people has changed. The needs & aspirations of people have increased. Therefore, the role of retail banking has become important. By providing various products & services like personal loan, education loan, home loan etc to its customer, the retail banking helps in maintaining the changing life style of its customers through affordable credit.
Economies of scale
Through Retail Banking, Banks can get the benefits of information & transaction. Banks have access to more information through extended services. They should systematically record this customer information as it can help them in efficient utilization of this information, which in turn can be used in finding out new segmento of market & to sell their new services.
WEAKNESS
Reduces the profitability
Retail banking requires high capital investment as a huge amount is spent on managing the wide range of product & service which further requires large staff & high quality technology. All this reduces the overall banks profitability.
Avoids corporate sector
Retail banking avoids corporate sector which forms the backbone of Indian economy. Banks should properly manage their corporate clients through lower arte credit, higher amount of loan etc. Corporate clients are easily manageable as they have well defined financial policy & projects.
Changes in technology
If banks are not able to match with the latest technology it may affect their growth. Also the technology requires huge amount of capital investment & if suppose, the technology fails then it will affect the bank’s reputation & the bank may lose some of its customer.
Marketing
Retail banking requires strong internal as well as external marketing strategies to be adopted by bank. Under retail banking the management needs those employees who can introduce product properly to their customers. The employees must be aware of the products they are offering because if this is not the case then it can lead to the failure of even a very good product. Also bank should spend a lot on its marketing of product to general public. All this increases the expenses of banks in terms of time & cost required to introduce the product.
OPPORTUNITIES
1) Increase in per capita income:
There has been increase in the per capita income over the past few years & is expected to grow in the future also. Moreover, the younger population is more comfortable in taking personal debt than previous generations. Their purchasing power has also increased due to economic growth & more jobs. Also GDP of India is rising at a very good rate. Currently it is around 9% & is expected to rise in the near future.
Innovation in products & services
This segment has more scope for innovation as banks tries to provide more & more products & services to their customers as desired by them. Banks can continuously modify its products & services to match the market demand & sustain in this competitive era.
3) Growing Economy
Retail banking has enormous opportunities in a growing economy like India. A.T. Kearney, a global mgnt. consulting firm, identified India as the ‘2nd most attractive retail destination’ among the 30 emergent markets.
THREATS
Large payout of loans
The increasing competition has made the banks to disburse large no. of customer loans, auto loans, home loans, loans on credit cards, educational loans etc. on easy terms without much inquiry. Due to this the no. of case of default in loan repayment has increased. This in turn has increased the bank’s bad debts & nonperforming assets (NPA). This was one of the major reasons for recession which has affected the world.
2) Customer privacy issues
One of the major problems from customer’s point of view is that the customer service representatives of the banks ring up their customers at any time at their places of work, informing them about new products & services. This may cause inconvenience to busy customers.
Banks are also responsible for not sharing the personal information of the customers with any outside agencies like market research groups & other advertisers.
3) Information Technology
With the growth of IT, a number of frauds have aroused & are carried out with the help of technology. These frauds come under the domain of cyber crimes. The unscrupulous elements have always attacked banks. In many cases these elements have stolen credit card no., password & other confidential information relating to customer. For ex- Satyam scam.
These elements have also hacked banks website.
BANKING PRODUCT
The banking product areas which have high growth potential can be classified as follows:
• HOUSING LOANS
Housing loan comprises of 48% of all retail loans. The customer attitudes toward holding debt translated this market into a market that expanded with a rate of 35% annually from 1999 to 2004. Also the lending rates are not very high and the growing household income enables the borrower to make the payment of interests & principal amount. Banks generally have tie ups with various real estate companies. This is to reduce to efforts on the side of customer for taking loans.
• VEHICLE LOANS
Housing loan comprises of 27.2% of all retail loans. Car sales volume in 2004 increased to more than a million vehicles and annual growth in sales reached 954,354 in 2007. The sales of bikes have also increases. Banks provide various lucrative plans to finance your car or a bike.
They often come up with various schemes which increases the sales of the vehicles & help people fulfill their aspirations.
India has become the 3rd largest market for cars & MUVs. The growth drivers of this segment are easy finance, low interest rates, opening up of 2nd hand car finance & up gradation of rider to four wheelers from two wheeler.
• SME BANKING
Initially public sector banks in India focused only on big industries instead of small businesses. But today SME market in India has expanded beyond 4 million businesses. These businesses are growing, importing & exporting and demanding more & more complicated banking products and services.
• PERSONAL FINANCIAL SERVICES
Banks provided this service to boost the financial status of individuals. The banks that can establish the right combination of account mgnt & distribution infrastructure can avail the benefits from growing market for wealth management. The services can be saving income in bank accounts or investing in insurance
ISSUES TO THE RETAIL-BANKING SECTOR
The key policy issues in retail banking sector are: financial enclosure, accessibility to finance, protection of consumer & his privacy, financial capability, responsible lending, regulation & prevention of financial crime.
ADVANTAGES AND DISADVANTAGES OF RETAIL BANKING
ADVANTAGES
The advantages from the resource & asset point of view are as follows:
Resource Side
Apart from current & savings accounts, the deposits in retail banking are comparatively stable. These constitute core deposits.
Helps in increasing the subsidiary business of the banks.
They are interest insensitive in case of current & savings accounts.
The funds in this sector are the low cost funds.
Helps in building a strong customer base.
ASSETS SIDE
For funds deployment, Retail banking is a good opportunity.
When there is a high demand for banking products & services, Retail banking need not require high marketing efforts.
Consumer loans involve less amount of risk & have perception of less NPA.
Through investments in productivity activities, it helps in economic revitalization of the nation.
Through affordable credit, this segment of banking improves lifestyle of the people & fulfils the aspirations of the people.
Diversified portfolio due to huge customer base reduces risk for a bank.
DISADVANTAGES
Huge capital investment is required in designing new financial products. It requires a lot of time & cost for the bank.
Today net banking is preferable over branch banking by customers. It is not possible for banks to retain their customers if their technology is not up to the mark. The customers wishing to use net banking will switch over to the services of some other bank.
Various other financial products like mutual funds etc. attract customers towards themselves.
Banks are not able to exploit the technology to an appropriate level
Banks is spending heavily on human resource department for monitoring & following up of large no. of loan accounts.
In the absence of proper follow-up, long term loans like housing loan which involves long repayment term can become NPAs.
As compared to wholesale banking, the amount borrowed in retail banking by a single customer is very low. Therefore, the bank is not able to make huge profits from a single customer.
STRATEGIES FOR SUCCESS IN RETAIL BANKING
Banks should adopt the following strategies to achieve success in the retail banking sector.
Adoption of advanced & latest technology
Availability of skilled man power in all branches & offices
Extensive market research should be carried out in order to formulate innovative & competitive products & services
Managing relationship with customers by having an approach of customer relationship management.
There should be balanced and sustained growth in deposits & advances
More & more delivery channels should be explored
Service quality should be improved with human touch giving the customers personal experience
Proper strategic cost management should be adopted
Constant focus should be there on Universal banking and financial supermarkets
Cross Selling of Products
Public Sector Banks have a wide network of branches. This provides them with added advantage over other banks. Through these branches banks have an opportunity as they can sell third-party products.
Tie Up arrangements
Public, private & foreign banks should tie up & enter into strategic alliance with other banks to extend their reach & by having presence in various other regions. This will help them by enabling them to make benefits by reaching customers across the country.
Business Process Outsourcing
Outsourcing of various processes will save time & cost. Eventually this will help the banks in concentrating on their core business area, that is, their core competency. For ex- Managing ATMs should be outsourced, which will save banks from dealing with something which is not their core competency.
CHALLENGES TO RETAIL BANKING IN INDIA
The key challenges before the bank is to strike a balance between credit growth & quality of asset simultaneously and sustaining the profitability in the increasing interest rate scenario.
With the advancement in technology, there has been increase in the responsibilities & challenges for an IT department in managing, maintaining & optimizing the performance of retail banking networks.
According to credit rating agency CARE, in 2010-11, the non performing assets (NPAs) in the industry are expected to rise to 3.5 % of the total assets as compared to previous fiscal year’s 2.8 %. Therefore, measures should be adopted to reduce NPA.
As per the RBI’s instructions, banks are required to provide for 70% of the total bad loans on their books from Sep 2010.
The new Base rate is yet to be implemented which will ensure transparency in the lending but will reduce bank’s profits as they will then be able to lend at or above base rate & not below it. This may affect banks as they may lose their some customers to whom the loan were given at below PLR.
RBI has also asked banks to provide interest on savings accounts on daily basis. This will put pressure on margins of banks.
RBI is adopting various measures to reduce liquidity. They have increased CRR & also increased Repo & reverse repo rate. All this will impact the lending rate of banks as the interest rate will rise to reduce liquidity in market. But this will be a threat to banking sector. At this time when interest rates are higher & interest rate volatility exists, the Current Account Saving Account (CASA) deposits help banks maintaining their margins. These accounts helps in maintaining the spread between the cost of funds & interest earned in a period of high interest rates.
In recent past, the outsourcing of various activities such as software & hardware maintenance, entire ATM operation (including cash, refilling) etc. has become very important.
The banks should have innovative strategic management approach to meet its customer’s needs & requirements in terms of products or services. It is generally said that, ‘it takes months to find a good customer but only seconds to lose him’. Therefore, banks should have the strategy of Knowing Your Customer (KYC).
To retain the ongoing trust of the public & reputation, banks are supposed to meet their commitments & take utmost care while serving their customers.
In order to increase the market share & profitability in the retail banking & corporate banking, the customer loyalty is very important.
As per the government order, banks have to align their accounting practices in line with the IFRS (International Financial Reporting System) within 2 more years.
Limited no. of branches & ATMs in rural areas.
Less education or training is given to the people in rural areas who are illiterate & don’t know how to do avail the basic benefits from banking, forget about operating ATMs.
If all these challenges are faced by the banks with utmost care and deliberation, the retail banking is expected to play a very crucial role in coming years.
CONCLUSION
Since the reforms in financial sector in India, Retail banking is facing a lot of competition. Today banks are on their toes for sustaining in existing business & capturing new business. Banks are competing for increasing their retail business.
Constant innovation should be there in retail banking in areas product development & differentiation, marketing, micro-planning, prudent pricing, technological up gradation, customization, home / electronic / mobile banking, asset liability management & effective risk management and t techniques.
But in the Indian banks, there is very less little or no interest in innovative products.
Innovation should not only in terms of technology or through internet or computers but it should be such that it benefits even the rural areas. You can’t just really on technology & become a tech savvy in a country where Internet penetration is only 1.65%.
While retail banking offers exceptional growth opportunities, the challenges are equally discouraging. Therefore, banks should face the challenges optimistically & make use of opportunities to make profit.
The success in retail banking business depends on the kind of technology used & the effectiveness of operations. This provides the banks an edge over their competitors. Furthermore, customer interest should be most important for becoming a responsible bank. The focus of this sector should not only remain to just increasing the per capita indebtedness but it should be in terms of creation of wealth at macro economical level.
RECCOMENDATIONS
The retail banking sector in India should adopt knowledge banking approach which is one of the differentiating strategies of Yes Bank who is among the top 10 innovative banks of the world. The focus should be there on sun rising sectors of economy like IT, Engineering, infrastructure & logistics, food & agriculture etc. These are sectors of economy have growth prospects.
Banks should extend their operations to rural & semi urban areas & should have a responsible banking approach. This can be done by educating & training people to avail the benefits of banking services which will not only help the banks in increasing their reputation but will also help them in long term perspective to increase the profits by tapping the untapped areas.