chapter 4 retail banking in india- an...
Post on 19-Mar-2018
225 Views
Preview:
TRANSCRIPT
Chapter 4
RETAIL BANKING IN INDIA- AN OVERVIEW
4.1 Introduction
4.2 Retail Banking
4.3 Retail Finance
Retail Banking in India- an Overview 99
4.1 Introduction
One of the spectacular innovations in the commercial banking sector is the
retail banking. It refers to banking in which banks undergo transactions directly with
consumers rather than with corporates or other banks. Consumer credit is the heart
of retail banking. In retail banking the banks provide services to individuals and
small business concerns and the dealings are in large volumes and low values. The
retail banking portfolio encompasses deposits and assets linked products as well as
other financial services offered to individuals for personal consumption. Retail
banking is increasingly viewed by banks as an attractive market segment with
opportunities for growth and profit.1 The fastest growing division in the banking
sector is the retail sector. 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.2 Today’s retail banking sector is characterised by three basic
features; viz:
- Multiple products-deposits, credit cards, insurance, investment and securities
- Multiple channels of distribution- call centre, branch, internet
- Multiple customer groups- consumer, small business and corporate3
Retail Banking in India- an Overview 100
4.2 Retail Banking
4.2.1 Features of retail banking
Retail banking refers to the dealing of commercial banks with individual
consumers, both the liabilities and the asset side of the balance sheet.4 The important
products offered by banks in retail banking are fixed, current/ savings account on
liabilities side; and personal loans, house loans, auto loans and educational loans on
the asset side. Today’s retail banking sector is characterised by the following
features:
• Retail banking aims at doing banking business in large volume of
transactions involving low value.
• The retail banking portfolio includes deposits and assets linked products as
well as other financial services provided to individuals for personal
consumption.
• Retail banking business is an attractive market segment with opportunities
for growth and profits.
• It provides an opportunity to banks to diversify their asset portfolio. Since
loans are given to a large number of consumers and transactions have very
low value, the risk of NPA is reduced because all the consumers do not make
default in making loan repayment at a time.
• Retail banking is based on the maxim “do not keep all the eggs in one
basket”
Retail Banking in India- an Overview 101
• Retail banking industry is diverse and competitive. There is a large number
of retail banking products that are extremely customer-friendly and are
offered by many banks.
• Banks adopt multiple channels of distribution of retail banking products. The
channels include call centre, branch, internet, mobile phones, ATMs etc.
4.2.2 Advantages of retail banking
Retail banking is mass market banking, where individual consumer’s diverse
needs are fulfilled at the local level i.e. by providing multiple products.5 It has been
facilitated by growth of banking technology and automation of banking process.
Retail banking has the following advantages.6
• Retail deposits are stable and constitute core deposits.
• They are interest insensitive and less bargaining for additional interest.
• Effective customer relationship management with retail customers builds a
strong customer base.
• Retail banking increases the subsidiary business of banks.
• Retail banking results in better yield and improved bottom line for banks.
• Retail segment is a good avenue for funds deployment.
• Consumer loans are presumed to be of lower risk and NPA perception.
• Improves lifestyle and fulfils aspirations of people through affordable credit.
• Retail banking provides an opportunity for banks to innovate banking
products as per the expectations of various classes of customers.
Retail Banking in India- an Overview 102
• Retail banking involves minimum marketing efforts in a demand-driven
economy.
• Diversified portfolio due to huge customer base enables banks to reduce their
dependence on a few or single borrower.
• Banks can earn good profits by providing non-fund based or fee based
services without deploying their funds.
• Credit risk tends to be well diversified as loan amounts are relatively small.
4.2.3 Disadvantages of retail banking
• There can be problems in managing large number of clients, especially if IT
systems are not sufficiently robust.
• The cost of maintaining branch networks and handling large number of low-
value transactions tend to be relatively high.
• Designing own and new financial products is very costly and time-
consuming for the bank.
• Though banks are investing heavily in technology, they are not able to
exploit it to the maximum.
• Major disadvantages are monitoring and follow-up of huge volume of loan
accounts inducing banks to spend heavily on the human resource department.
• Long term loans like housing loan, due to its long repayment term, can
become NPA in the absence of proper follow-up.
Retail Banking in India- an Overview 103
4.2.4 Retail banking in India
In the post independence era the evolution and growth of banking sector has
gone through innumerable twists and turns. In India banks are nationalised with the
main objective of reaching out to the unbanked masses and so retail banking is
important in India to provide banking services to unbanked masses.
Retail banking in India is not a new phenomenon. It has always been
prevalent in India in various forms ever since banking was first established here.
Cooperative banks that have been in existence in India for over a century have
always had retail thrust. It is only since the mid-nineties that the term “retail
banking” has been used as a means of reinforcing a conscious foray into this
particular line of business. For the last few years it has become synonymous with
mainstream banking for many banks.7 The typical products offered in the Indian
retail banking segment are housing loans, consumption loans for purchase of
durables, auto loans, credit cards and educational loans. These loans are marketed
under attractive brand names to differentiate the products offered by different banks.
Unlike wholesale banking, retail banking has high sized business with many
banks competing for market share. Retail banks focus mainly on consumer markets.
Here the transactions of the banks are directly with consumers and not with
corporations or other banks. It refers to the dealing of commercial banks with
individual customers, both on liabilities and assets side of the balance sheet.
Although retail banking is, for the most part, mass-market determined, many
retail banking products may also extend to small and medium sized business.
Nowadays much of retail banking is streamlined electronically via ATMs, or
through virtual retail banking known as online banking.8
Retail Banking in India- an Overview 104
The retail loan portfolio of Indian private sector banks has been growing
speedily in the recent past. The entry of new generation banks and foreign banks
with innovative technology and technology-driven products has changed the entire
scenario. The retail sector which remained unobserved earlier is now the most
important area of concern for banks. Banks are offering so many products to the
customers and they can choose the one which suits them. As the competition is
growing in retail banking, maintaining service quality in banks is becoming
essential. The Indian retail banking is expected to grow tremendously because of the
changing attitude of customers toward borrowings, low cost of borrowings and
optimism regarding economic growth.
4.2.5 Drivers of retail banking in India
The growth in banking technology and automation of the banking process
facilitated retail banking. The rapid growth and spread of retail banking is due to the
technological development. The nature of products offered in retail banking is also
expanded. In a growing economy like India retail banking has vast opportunities and
challenges.
The basic reasons for which Indian banks have diversified into retail banking
are the following:
1. The retail banking products are customer oriented. Transactions with small
value may be cost ineffective in a highly competitive environment. But retail
banking eliminates market risk.9
2. In India the demand for consumer durables has increased owing to the
economic growth and prosperity and the consequent increase in the
purchasing power of the people. Major portion of the household sector in
Retail Banking in India- an Overview 105
India is middle class people. There is continuous rise in the percentage of
middle and the high income households in India. Indian retail banking is
facilitated by improved purchasing power of consumers and liberal attitude
towards personal debt.
3. India has the highest proportion of the population below 35 years of age
(young population). This is a positive factor for the growth of retail banking
in India. Changing consumer demographic indicates a vast potential for
growth in consumption, both quantitatively and qualitatively.
4. Another important factor which facilitated the growth and development of
retail banking is the development of technology. Technological innovations
relating to increasing use of credit/debit cards, ATMs, internet and phone
banking etc. are attracting many new customers to the banking field.
5. The lower levels of NPA in retail lending and decrease in interest spread in
the corporate sector have encouraged the banks to shift towards retail sector.
Besides, fall in interest rates, availability of consumer goods at competitive
and reasonable prices and income tax benefits, especially in case of housing
sector, have also contributed to the growth of retail banking.
Indian banks have adopted the best international practices of accounting and
integrated risk management systems after the liberalisation of the economy. Banks
have got the opportunity to diversify their risk through the retail loan portfolio.
Besides this, the retail advances have lower defaults in repayment compared to the
overall bank loans. The comparatively lower provisioning burden on banks on retail
loans have compelled them to diversify into retail sector.
Retail Banking in India- an Overview 106
There has been dramatic operational transformation in retail banking in the
recent years. The factors which compelled banks to rethink their real strategies are
increased competition, mergers and acquisitions and new regulatory requirements.
The retail banks have adopted latest technology to maximise sales, manage
distribution channels and plan operations necessary to acquire, satisfy and retain
customers.
4.2.6 Retail banking products
Retail banking includes a comprehensive range of financial products such as
deposit products, loan products and payment services. The typical products offered
in the Indian retail banking segment are:10
4.2.6.1 Retail deposit products
• Savings bank account
• Recurring deposit account
• Current deposit account
• Term deposit account
• Zero balance account for salaried people
• No frill account for common man
• Senior citizen deposit account, etc.
4.2.6.2 Retail loan products
• Home loans to resident Indians for purchase of land and construction of
residential house/ purchase of ready built house/ for repairs and renovation
of an existing house.
Retail Banking in India- an Overview 107
• Home loans to Non-Resident Indians.
• Auto loans for new/ used four-wheelers and two- wheelers
• Consumer loans for purchase of jewels, for meeting domestic consumption
etc.
• Education loans for pursuing higher education both in India and abroad.
• Trade related advances to individuals for setting up business, retail trade etc.
• Crop loan to farmers.
4.2.6.3 Retail services
• Safe deposit lockers
• Depository services
• Banc assurance products etc.
4.2.7 Challenges faced by Indian retail banking
A major challenge for retail banks in India is the retention of customers. In
this competitive environment the customer retention is very difficult. Profitability of
retail banks is highly effected by customer retention. According to a research by
Reichheld and Sasser11 in the Harvard Business Review, 5% increase in customer
retention can increase profitability by 35% in banking business, 50% in insurance
and brokerage, and 125% in the consumer credit card market. Thus, banks need to
focus on customer retention. They are expected to take utmost care to retain the
ongoing trust of the public. Banks are required to adopt innovative strategies to meet
customers’ needs and requirements in terms of service and products.12 The
efficiency of operations would provide the competitive edge for success in retail
banking in coming years.
Retail Banking in India- an Overview 108
In future rising indebtedness could turn out to be a cause for concern. In
developed countries the household debt in proportion to disposable income is much
higher. India’s condition is not comparable to that of the developed countries. There
will be high uncertainty in such a scenario. There will be huge risk and high
uncertainty if there is a disproportion between debt/loan and disposable income.
The Reserve Bank has been well aware of this problem. For example, as Revathy
has pointed out, 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)13.
Another important issue in retail banking is risks in money laundering and
KYC (Know Your Customer) issues. Banks should take utmost care to retain the
trust of the public in them. Banks have to consider and verify all the documents
seriously which are accepted by them for approving the loans. As the amount of
transactions involved is lower, the risk of money laundering is less in retail banking.
There is also possibility of waiver of KYC procedures by banks in order to retain
customers in this competitive environment.
The core activities in the bank like hardware and software maintenance,
ATM setup and operation including cash refilling etc are usually outsourced by
banks. So the issue of outsourcing has become very important in recent past in
Indian retail banking.
Information technology poses both opportunities and challenges. Many
customers prefer the personal touch of their bank even though the bank has ATM
and Internet Banking services.
Retail Banking in India- an Overview 109
4.2.8 Future of retail banking in India
Retail banking in India has exhibited enormous growth in the recent past and
has emerged as one of the major drivers of the overall banking industry. In fact, this
growth is attributed to the vast growth of personal wealth, favourable demographic
profile, rapid IT development, financial market reforms and micro-level supply side
factors coupled with the conducive macro- economic environment.14
There are immense opportunities for retail banking in a growing economy
like India. One of the important factors contributing to this is the rise of Indian
middle class. There will be a continuous rise in the percentage of middle to high-
income Indian households. This may lead to substantial growth in the retail sector.
Retail lending is only a part of retail banking. Retail depositors play an
important role in retail banking. The retail shopkeepers, the self employed, the
pensioners, the home makers, and the employed need to get a place in the bank. The
Government of India and the Reserve Bank of India are very particular about
Financial Inclusion now-a-days. So the entire banking industry is viewing retail
banking as an emerging business opportunity in tune with financial inclusion.
In retail banking credit history information about the households is extremely
important. Banks have a traditional resistance to share credit information of their
clients to uphold the confidentiality of banker-customer relationship. The credit
information is not passed between banks as well as bank sectors. The Credit
Information Bureau (India) Limited (CIBIL) was incorporated in 2000 in India. The
main aim of CIBIL is to provide credit information to credit granting institutions.
They collect and disseminate credit information pertaining to both commercial and
Retail Banking in India- an Overview 110
consumer borrowers. The banks must exercise due diligence before declaring a
borrower as defaulter.
The banks are using outsourcing as a means for cost reduction and achieving
efficiency in operations. To cope with the increasing market orientation, competition
and technological innovations, the banks are increasingly using outsourcing. Thus
outsourcing has become an important element in retail banking sector.
There is a glorious future for retail banking in India. It helps in the
development of individual customers who avail the products or services as well as in
the overall development of the society. Retail banking has proved to be an effective
tool to improve the bottom lines of banks. Thus there is vast scope for retail banking
business in India.
4.3 Retail Finance
Retail finance or retail lending is that segment of retail banking which offers
various loan products to the customers. Housing loans, loan for the purchase of
durables, auto loans, credit cards and educational loans are the typical products
offered in Indian retail finance segment. The loan values of retail lending ranges
between Rs. 20,000 to Rs.100 lakhs. The duration of loans is generally five to seven
years. Housing loans have a longer duration of 15 to 30 years.
Retail banking results in better yield and improved bottom line for the bank
and hence retail segment is a good avenue for funds deployments. It is presumed
that consumer loans are of lower risk and NPA perception. Banks can reduce their
dependence on a few or single borrower through diversified portfolio of huge
customer base. Banks are providing non-fund based or fee-based services and can
Retail Banking in India- an Overview 111
earn good profits without deploying their funds. It is possible to improve the
lifestyle and fulfil the aspirations of the people through affordable credit in retail
lending. Further, through increased production activity, the economic revival of the
nation can be achieved. Since the evolution of banking, retail banking has been
prevalent in various forms in India.
There are vast changes in the Indian retail finance market during the last few
years. Earlier, Indians believed in the concept of saving and then spending and were
against the concept of availing credit for purchases. The overzealous lenders, who
realised the huge latent potential of the Indian consumers, came up with a variety of
customer credit products and they forced them up on consumers. This has changed
the psychology of Indian consumers who no longer consider credit as a social
stigma. They are willing to fulfill their dreams and aspirations through the credit
facilities.
Penetration of retail loan products is very low in India. Home loans in India
form only about 6% of our GDP, while the same is about 60% in advanced
countries. Of every 1000 Indians, only eight own a car, whereas this number is
nearly 500 in developed countries.15 Combined with rising affluence in the country
and increasing disposable incomes, these low levels of penetration indicate that, for
retail loan providers in India, the growth story is likely to continue for a long time.
In India retail lending is becoming an important segment of bank credit. The
inclusive, comprehensive and pervasive growth of India can be obtained through it.
In future the growth of retail banking will be decided by retail lending. The credit
off-take by the under banked segments of the society needs to be improved. There is
expanding middle class persons in need of varied banking services and India is the
Retail Banking in India- an Overview 112
second largest consumer market in the world and consumers in this country are
dreaming of purchasing power.
Through the growth of consumer lending at a faster pace and making it
available at affordable rates, the aspirations of these consumers can be fulfilled.
Personal loans, also called consumer loans, are now-a-days very popular in India
because of the spurt in the income levels of middle-income segment and the growth
of consumerism. These loans are easy to arrange on the basis of fixed monthly
repayment program. Banks are facing tough competition not only amongst
themselves but also from NBFC’s.
4.3.1 Characteristics of retail loans
• Retail loans are small size loans.
• With well diversified portfolios the needs of a large number of customers can
be met.
• The target customers are generally individuals or small organisations.
• Standard products are offered to customers.
• Centralised operations of retail credit exist in most of the banks.
• Because of decentralisation, banks can make quick credit related decisions.
• These loans are designed to cover varied segments of risks.
• Volume of business is high.
• Number of transactions is large.
Retail Banking in India- an Overview 113
Retail exposure of banks include various types of retail credit such as
residential mortgages, credit card, automobile and personal loans etc. Retail loans
have the following features:
• Types of facilities - Retail loans are the finance facility of a fixed amount
extended to meet a one-time requirement of a customer, for a fixed tenure, to
be repaid over a period in instalments.
• Secured / Unsecured facilities - Secured loans are always secured by an
underlying asset against which funding is extended. Unsecured loans do not
have any underlying security and are purely extended based on the
creditworthiness of the borrower.
• Interest - On a loan given at a fixed rate, interest is charged throughout the
tenure of the loan at that rate which is fixed at the time of granting the loan.
In case of floating rate of interest, the rate of the loan varies from time to
time according to the movement of interest rate in the market. Loans that are
fixed in the initial years and become floating later would be considered as
teaser loans.
• Tenure - The tenure depends upon the amount of loan and repayment
capacity of the customer.
• Loan to Value ratio - Loan to Value ratio refers to the maximum percentage
of the value of the asset that is given as a loan. It varies according to the
nature of the asset and also the rate at which the asset is expected to
depreciate.
Retail Banking in India- an Overview 114
Retail lending is a spectacular innovation in the commercial banking in
recent years. Rapid advancement in information technology, financial market
reforms, the evolving macroeconomic environment, and several micro level demand
and supply side factors have contributed to the growth of retail lending in
developing countries. In recent past, retail lending has turned out to be a key profit
driver for banks with retail portfolio constituting18.80% of total outstanding
advances as on March 201316. The overall impairment of the retail loan portfolio
worked out much less than the gross NPA ratio for the entire loan portfolio.
Retail loans have been a prime driver of credit growth in Indian banking
sector. Table 4.1 shows the aggregate advances and retail advances of scheduled
commercial banks in India for the period from 2004 to 2013.
Table 4.1
Aggregate advances and retail advances of scheduled Commercial banks in India-2004 to 2013
(Amount in Rs. Crore)
As on March 31 Aggregate advances (a)
Retail advances(b)
Percentage of (b)to (a)
2004 864271 189041 21.90
2005 1105725 266611 24.10
2006 1517497 375739 24.76
2007 1949567 487860 25.02
2008 2394565 571048 23.84
2009 2857525 593816 20.78
2010 3345619 622752 18.61
2011 4076867 743972 18.25
2012 4673435 859912 18.40
2013 5369681 1009501 18.80
Source: Report on Trends and Progress of banking in India-various issues
Retail Banking in India- an Overview 115
The total amount of retail credit of scheduled commercial banks in India
shows an increasing trend during this period. But the percentage of retail advances
to total advances is decreasing during the period. The main reasons for the reduction
in growth rate of retail credit are the rise in interest rate, measures adopted by RBI
for inflation control, global financial meltdown etc.
4.3.2 Retail loan portfolio
The retail loan portfolio of scheduled commercial banks in India consists of
housing loan, loan for the purchase of consumer durables, credit card, auto loans and
other personal loans.
4.3.2.1 Housing loan
Housing loans are those loans provided by commercial banks directly or
indirectly for the purpose of purchase, construction, re-construction or repairing of
the house property. There are a variety of home loan schemes for each bank. They
are home purchase loan, home improvement loan, home construction loan, home
extension loan, home conversion loan, land purchase loan, balance transfer loan,
bridge loan and home loans for NRIs.
4.3.2.2 Consumer durables loan
These kinds of loans are provided for purchasing consumer durable products
like television, music system, washing machine etc. These are the unique kind of
loans that are provided by banks to attract more and more people towards them.
Banks generally provide a minimum amount of Rs. 5000 and maximum of Rs.
200,000 with a maximum repayment period of five years as consumer durables loan.
Retail Banking in India- an Overview 116
4.3.2.3 Credit card
Credit card is a small plastic card that allows its holder to buy goods and
services on credit and to pay at fixed intervals through the card issuing agency.
Banks issue credit card to selected customers depending on their income, credit
worthiness, reputation etc. Credit card receivables constitute a significant portion of
retail credit in India.
4.3.2.4 Auto loans
Auto loans/vehicle loans are those loans provided by commercial banks for
the purpose of purchase of vehicles. Auto loans may be car and two wheeler loans
or commercial vehicles loan.
4.3.2.5 Other personal loans
Personal loans are intended to meet any kind of personal expenses of the
borrower such as family functions, medical expenses, travel expenses in India and
abroad, marriage expenses of children, buying computers/laptops, festival
celebrations etc.
Table 4.2 shows the retail loan portfolio of scheduled commercial banks in
India for the period from 2004 to 2013.
Retail Banking in India- an Overview 117
Table 4.2
Retail loan portfolio of scheduled commercial banks in India
(Amount in Rs. Crore)
Item
As on March 31
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Housing loan
89449
(47.32)
134276
(50.36)
179116
(47.67)
224481
(46.02)
252932
(44.25)
263235
(44.33)
315862
(50.73)
367364
(49.38)
411805
(47.89)
475400
(47.09)
Consumer durables
loan
6256
(3.31)
3810
(1.43)
4469
(1.89)
7296
(1.50)
4802
(0.85)
5431
(0.92)
3032
(0.49)
4555
(0.62)
2701
(0.32)
3412
(0.34)
Credit card receivables
6167
(3.26)
8405
(3.15))
12434
(3.31)
18317
(3.75)
27437
(4.80)
29941
(5.04)
21565
(3.48)
18655
(2.51)
22301
(2.59)
26788
(2.65)
Auto loan - 35043
(13.14)
61369
(16.33)
82562
(16.92)
87998
(15.45)
83915
(14.13)
78346
(12.59)
100155
(13.46)
116204
(13.51)
142114
(14.37)
Other personal
loans
87170*
(46.11)
85077
(31.97)
118351
(31.50)
155204
(31.81)
197879
(34.65)
211294
(35.58)
203647
(32.71)
253243
(34.03)
306901
(35.69)
361786
(35.84)
Total retail loan
189042
(100)
266611
(100)
375739
(100)
487860
(100)
571048
(100)
593816
(100)
622752
(100)
743972
(100)
859912
(100)
1009501
(100)
Source: RBI- Report on Trends and Progress of banking in India-various issues.
Note: Figures in parentheses represent percentage to total.
*- include auto loans and other personal loans
The increase in retail credit during the period was entirely attributed to the
housing loan segment, which constituted the single largest portion of total retail
loans of Indian banks. As on 31st March 2013, housing loan constituted 47.09% of
the total retail advances followed by auto loan (14.37%), credit card receivables
(2.65%) and consumer durables loan (0.34%). Other personal loans were 35.84% of
total retail loans. During the period the proportion of credit card receivables,
consumer durables loan and personal loans to total retail loans decreased. The
proportion of housing loan and auto loan was fluctuating during the period. As the
Retail Banking in India-
retail sectors are rate-sensitive, credit to the
by the emerging interest rate
of scheduled commercial banks in India as on March 2013.
Figure 4.1
Retail Loan Portfolio of Sched2013.
4.3.3 Retail lending in Kerala
The retail loan portfolio of scheduled commercial banks in Kerala includes
housing loan, vehicle loan, consumer durables loan, credit card etc. The table below
shows aggregate advances and retail advances
Kerala from 2004 to 2012.
14.37
35.84
an Overview
sensitive, credit to these sectors in future would be impacted
by the emerging interest rate environment. Figure 4.1 shows the retail loan portfolio
of scheduled commercial banks in India as on March 2013.
Retail Loan Portfolio of Scheduled Commercial Banks in India
Retail lending in Kerala
The retail loan portfolio of scheduled commercial banks in Kerala includes
housing loan, vehicle loan, consumer durables loan, credit card etc. The table below
shows aggregate advances and retail advances of scheduled Commercial banks in
Kerala from 2004 to 2012.
47.09
0.342.65
Housing loan
Consumer durables loan
Credit card receivables
Auto loan
Other personal loans
118
se sectors in future would be impacted
Figure 4.1 shows the retail loan portfolio
uled Commercial Banks in India as on March
The retail loan portfolio of scheduled commercial banks in Kerala includes
housing loan, vehicle loan, consumer durables loan, credit card etc. The table below
of scheduled Commercial banks in
Housing loan
Consumer durables loan
Credit card receivables
Auto loan
Other personal loans
Retail Banking in India- an Overview 119
Table 4.3
Aggregate advances and retail advances of scheduled Commercial banks in Kerala-2004 to 2012
(Amount in Rs. Crores)
As on March 31 Aggregate
advances(a) Retail
advances(b) Percentage of (b)to (a)
2004 32536.54 10579.67 32.52
2005 39714.71 14217.63 35.79
2006 51730.13 18348.24 35.47
2007 61066.58 22646.69 37.09
2008 72944.62 25882.28 35.48
2009 81973.33 31272.75 38.15
2010 98137.84 34596.27 35.25
2011 126230.35 38930.89 30.84
2012 151849.08 43479.66 28.63
Source: Compiled from RBI- Basic Statistical Returns of Scheduled Commercial
Banks in India- Various issues.
The total retail advances of scheduled commercial banks in Kerala have
increased during the period. The percentage of retail advances to total advances was
increasing up to 2009 and is decreasing from 2010 onwards. This is in tune with the
general trend at the national level. The percentage of retail advances to total
advances shows a decreasing trend since 2010. A comparison of percentage of retail
advances to total advances of scheduled commercial banks in India and Kerala is
given in Figure 4.2.
Retail Banking in India- an Overview 120
Figure 4.2
Retail Advances as Percentage of Aggregate Advances of Scheduled Commercial Banks in India and Kerala
Table 4.4 shows the retail loan portfolio of scheduled commercial banks in
Kerala for the period from 2004 to 2012.
0
5
10
15
20
25
30
35
40
45
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Pe
rce
nta
ge
Year
India
Kerala
Ret
ail B
anki
ng in
Ind
ia-
an O
verv
iew
12
1
Tab
le 4
.4
Ret
ail l
oan
port
folio
of
sche
dule
d co
mm
erci
al b
anks
in K
eral
a -2
004-
2012
(Rs
in C
rore
s)
Item
s A
s on
mar
ch 3
1
2004
20
05
2006
20
07
2008
20
09
2010
20
11
2012
Hou
sing
loan
55
59.1
0
(52.
55)
8801
.54
(61.
91)
1111
1.02
(60.
56)
1379
8.25
(60.
93)
1568
8.67
(60.
62)
1868
2.96
(59.
74)
2149
7.94
7
(62.
14)
2324
7.78
(59.
71)
2394
9.11
(55.
08)
Con
sum
er d
urab
le lo
an 20
0.43
(1.8
9)
323.
27
(2.2
7)
508.
29
(2.7
8)
616.
16
(2.7
2)
320.
31
(1.2
4)
192.
59
(0.6
2)
363.
1613
(1.0
5)
124.
60
(0.3
2)
358.
28
(0.8
2)
Cre
dit c
ard
rece
ivab
les
2.51
(0.0
2)
1.25
(0.0
07)
1.55
(0.0
07)
51.2
9
(0.2
0)
75.6
0
(0.2
4)
53.8
179
(0.1
6)
54.1
4
(0.1
4)
35.2
9
(0.8
0)
Veh
icle
loan
11
30.5
1
(10.
69)
1109
.81
(7.8
0)
1902
.86
(10.
38)
2245
.419
(9.9
2)
2131
.87
(8.2
4)
3773
.709
(12.
07)
3814
.588
6
(11.
03)
4546
.99
(11.
68)
4887
.39
(11.
24)
Oth
er p
erso
nal
loan
s 36
89.6
3*
(34.
87)
3980
.50
(28.
00)
4824
.81
(26.
30)
5985
.32
26.4
3)
7690
.14
(29.
70)
8547
.91
(27.
33)
8866
.758
6
(25.
62)
1095
7.38
(28.
15)
1424
9.58
(32.
78)
Tot
al
1057
9.67
(100
)
1421
7.63
(100
)
1834
8.24
(100
)
2264
6.69
(100
)
2588
2.28
(100
)
3127
2.75
(100
)
3459
6.27
(100
)
3893
0.89
(100
)
4347
9.66
(100
)
Sour
ce:
Com
pile
d fr
om R
BI-
Bas
ic S
tati
stic
al r
etur
ns o
f Sch
edul
ed c
omm
erci
al b
anks
in I
ndia
- va
riou
s is
sues
Not
e- F
igur
es in
par
enth
eses
rep
rese
nts
perc
enta
ge to
tota
l
*- in
clud
es c
redi
t car
d re
ceiv
able
s
Retail Banking in India- an Overview 121
Retail Banking in India-
Housing loan constitutes the major share of retail loans in Kerala followed
by other personal loans and vehicle loan. The consumer durables loan and credit
card receivables are the least in
percentage of total retail advances in Kerala. This is also similar to the ratio of all
India scheduled commercial banks.
commercial banks in Kerala as on March 2012 is s
Figure 4.3
Retail Loan Portfolio of Scheduled Commercial Banks in Kerala as on March 2012
4.3.4 Methods of charging interest
Interest is the fee which is paid by the borrower for borrowing money from
the lender. Interest on loans can be calculated either on a flat rate or reducing/
diminishing rate method. In the case of flat rate method, interest is charged on the
full amount of the loan throughout the entire period of the loan. In the case of
reducing balance method, interest is calculated only on the outstanding loan balance
0.820.8
11.24
32.78
an Overview
Housing loan constitutes the major share of retail loans in Kerala followed
by other personal loans and vehicle loan. The consumer durables loan and credit
the least in the retail loan portfolio and are
percentage of total retail advances in Kerala. This is also similar to the ratio of all
India scheduled commercial banks. The retail loan portfolio of scheduled
commercial banks in Kerala as on March 2012 is shown in figure 4.3.
Retail Loan Portfolio of Scheduled Commercial Banks in Kerala as on March
Methods of charging interest
Interest is the fee which is paid by the borrower for borrowing money from
Interest on loans can be calculated either on a flat rate or reducing/
diminishing rate method. In the case of flat rate method, interest is charged on the
full amount of the loan throughout the entire period of the loan. In the case of
thod, interest is calculated only on the outstanding loan balance
55.08
0.82
Housing loan
Consumer durables loan
Credit card receivables
Auto loan
Other personal loans
122
Housing loan constitutes the major share of retail loans in Kerala followed
by other personal loans and vehicle loan. The consumer durables loan and credit
e retail loan portfolio and are less than one
percentage of total retail advances in Kerala. This is also similar to the ratio of all
The retail loan portfolio of scheduled
hown in figure 4.3.
Retail Loan Portfolio of Scheduled Commercial Banks in Kerala as on March
Interest is the fee which is paid by the borrower for borrowing money from
Interest on loans can be calculated either on a flat rate or reducing/
diminishing rate method. In the case of flat rate method, interest is charged on the
full amount of the loan throughout the entire period of the loan. In the case of
thod, interest is calculated only on the outstanding loan balance
Housing loan
Consumer durables loan
Credit card receivables
Auto loan
Other personal loans
Retail Banking in India- an Overview 123
as reduced by the monthly principal payment. The reducing balance method may be
monthly reducing or yearly reducing or even daily reducing basis. In yearly reducing
system, the principal, for which interest is paid, reduces at the end of the year. Thus,
here interest is to be paid on a certain portion of principal which had already been
paid back. The principal reduces every month in monthly reducing system. In daily
reducing system, the principal reduces from the day the EMI is paid.
4.3.4.1 Fixed rate interest
In fixed rate interest, the rate of interest remains unchanged for the entire
duration of the loan. The borrower does not benefit the drop of interest rate in the
market. Here, the rate of interest is fixed in advance when the loan is taken. So the
borrower knows the exact amount he needs to pay in future. It is beneficial for a
person who would like to know his future cash outlays in advance.
4.3.4.2 Floating rate interest
This is the rate of interest that fluctuates according to the market lending
rate. Floating interest rate is linked to Prime Lending Rate (PLR). When PLR is
revised, the interest rate also stands revised. This means the customer takes the risk
of paying more in case the lending rate goes up. Here the interest rate is not
determined while borrowing but is depend on some underlying rates. By taking a
floating rate loan both the lender and borrower are exposed to a certain degree of
risk.
4.3.4.3 Teaser loans
Loans with interest that are fixed in the initial years and become floating
later would be considered as teaser loans. Interest rates, that are a mixture of fixed
and floating are called teaser rates. In October 2010, RBI had increased the standard
Retail Banking in India- an Overview 124
provisioning requirements five times for teaser loan products, as compared to other
categories and so it reached to 2% for such loans.
4.3.5 Equated Monthly Instalment (EMI)
EMI is the fixed amount payable monthly throughout the repayment period
of a loan by the borrower to the lending institution. It consists of a portion of interest
as well as principal. The EMI system is popular with the borrowers as they find it
more convenient to pay only a fixed amount per month throughout the loan period.
EMI system of loan repayment has the following features.
• Each instalment contains both components of principal repayment and
interest charges.
• Interest is calculated on reducing balance method.
• Interest component is higher in the beginning and progressively lower
towards the end. That means, the principal component of an EMI is lower
during initial periods and higher during later periods.
• The amount of EMI depends on;
1. The period of compounding i.e., whether the compounding is yearly, half
yearly, quarterly or monthly. If the compounding is more frequent, then
the amount of EMI would be higher and vice versa.
2. The rate of interest.
3. Period of repayment - if the repayment period is more, then EMI would
be lower and vice versa.
Retail Banking in India- an Overview 125
( )( )
p r 1+rEMI =
1 1
n
nr
× × + −
Where p = principal i.e. loan amount
r = rate of interest per month
n = no. of instalments
Retail Banking in India- an Overview 126
References
1 Shekhar, K. C. and Lekshmy, Shekhar. (2010). Banking Theory and Practice,
Vikas Publishing House Pvt.Ltd, New Delhi, 66-67.
2 Revathy, B. (2012). Indian Retail Banking Industry: Drivers and Dooms- an
Empirical Study. International Journal of Multidisciplinary Management
Studies, 2 (1), 132-147.
3 Phanindra, Kumar K. and Parashuramulu, B. (2013). Indian Retail Banking
Industry: Opportunities and Challenges. Asian Journal of Multidimensional
Research, 2 (5), 42-47.
4 Indian Institute of Banking and Finance. (2010). Principles and Practices of
Banking. The Mac million Co. India Ltd., New Delhi, 22-23.
5 Aashish Shashikant, Jani. (2012). A Study Of Consumer Perception on The Use
of E- Technology in The Retail Banking Sector: A Comparative Study of Public
Sector and Private Sector Banks. Indian Journal of Marketing, 1 (1), 46-57.
6 Dhara, Kothari. (2011). Retail Banking. The Week Mid-Year special, 142-145
7 Shyamala, Gopinath. (2005). Retail Banking Directions: Opportunities and
Challenges. Speech at the IBA-Banking Frontiers International Conference on
Mumbai, 28 May.
8 Rana Zehra, Masood. (2009). Indian Retail Banking Industry – An Analysis.
Banking Finance, 16-21.
9 Santi Gopal, Maji and Soma, Dey. (2007). Retail Banking in Indian Scheduled
Commercial Banks – a Study. Banking Finance, XX (12), 5-10.
10 Indian Institute of Banking and Finance. (2010). Principles and practices of
banking. The Mac million Co. India Ltd., New Delhi, 22-23.
11 Reichheld, F. F. and Sasser, W E. (1990). Zero Defections: Quality Comes to
Services. Harvard Business Review, 105-111
12 Dhara, Kothari. (2011). Retail Banking .The Week Mid-Year special, 142-145.
Retail Banking in India- an Overview 127
13 Revathy, B. (2012). Indian Retail Banking Industry: Drivers and Dooms- an
Empirical Study. International Journal of Multidisciplinary Management
Studies 2 (1), 132-147.
14 Mukhopadhay, B. K. (2011). India’s Banking Sector: Heat is on. Banking
Finance, XXIV (6), 7-9.
15 Jairam, Sridharan .(2011 Dec22). It’s Opportunities Galore in Retail Loans, and
a Few Challenges. Daily News Analysis, Mumbai.
16 RBI -Report on Trends and Progress of Banking in India, 2012-2013.
top related