chapter – 4: working and organization of retail banking in...

Chapter – 4: Working and organization of Retail Banking in India

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WORKING AND ORGANISATION OF RETAIL

BANKING IN INDIA

The previous chapter presented an overview of Indian Banking Industry, Its

constituent sectors and their development, progressive trends in the economic growth

and financial structure of the country. A detailed review has also been made of Retail

Banking in India, tracing its evolution progress and development and the present

status of retail banking in Indian Banking Industry.

This chapter is devoted to a detailed study of working and organization of

Retail Banking in India. It contributes to the various retail products and services

provided by the public sector banks and private sector banks to their valuable

customers. It determines the present status and performance of retail banking in public

and private sector banks..

4.1. Economic and Banking Sector Reforms

Retail banking is not an invention or innovation in itself. In India, it has been in

existence right from the time banking operations started. However, not much

emphasis was given to it since corporate banking was the preferred goal for the banks.

Right from independence up to 1990s, big corporate houses and industries depended

heavily on banks to finance their projects since a limited number of financial sources

were available to them. The capital market was not well developed and a number of

restrictions were in place on raising capital from the overseas markets. There was no

free run for joint ventures and multinational companies. In addition, government

norms earmarked priority sectors which were to be financed by the banks. Thus banks

had not much option but to finance the corporate sector. The origin of retail banking

in India can be traced to a number of developments which occurred on the economic


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front both in national and international arena. Many challenges emerged for the banks

along with many opportunities. The challenges were in the form of decline in the

traditional lines of business, heavy competition, changing economic preferences and

declining profitability. The opportunities emerged on account of many changes taking

place on the socioeconomic and also on the technological front. Thus, to face the

challenges and also to cash in on the emerging opportunities, banks operating in

public, private or foreign sector began to place a great deal of emphasis on retail

banking.

The decade of 1990s saw the implementation of economic and financial sector

reforms in a phased manner to tide over the deteriorating economic conditions of the

country. The liberalization of financial sector has widened the scope of financial

sources for the corporate. They can now go in for External Commercial Borrowing

(ECB) from any internationally recognized banks, export credit agencies,

international capital markets, suppliers of equipments etc. Corporate can raise loans

from international sources up to a predetermined amount without the need of getting

approval from either the government or the Reserve Bank. The Government has also

liberalized the norms for joint ventures which is facilitating the way for Foreign

Direct Investment (FDI) in core as well as non-core sectors of the economy. Thus, the

financial dependence of corporate on public sector banks reduced considerably.

Banking sector reforms paved the way for the entry of foreign and private

banks. The government is also allowing FDI into the banking sector. Private and

foreign banks -with their superior technology and management practices began to

give tough competition to the public sector banks. To counter dwindling profits, to

cash on the economic growth and also to diversify their operations and earn a


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productive return with their surplus cash, public sector banks joined the bandwagon of

retail banking. Public sector banks realized that the profit margins were higher and

risks were lower in retail banking when compared to corporate banking. While

foreign and private banks competed on the basis of technology and innovative

marketing and management practices, public sector banks banked heavily on their

wide network of branches spread throughout the length and breadth of the country.

The banking environment has suddenly become quite challenging after the subprime

crisis that surfaced last year and which has resulted in an unprecedented global

liquidity crunch. The flattening of the world has dramatically impacted both the

dynamics and the pace of global banking business. Mergers, acquisitions,

consolidation, expansion, diversification of lines of business, shifting customer

orientation and the changing regulatory environment are building up the pressure for

banks to explore new possibilities by abandoning the familiar and embracing the

unconventional. Competition is compelling banks to be agile and innovate every day.

In this milieu, what really enables banks to build a lasting competitive advantage is

the ability to continuously innovate, achieve differentiation and respond quickly to

dynamic business challenges.

The banking sector has witnessed wide ranging changes under the influence of

the financial Sector reforms initiated during 2008. The approach to such reforms in

India has been one of gradual and non-disruptive progress through a consultative

process. The emphasis has been on deregulation and opening up the banking sector to

market forces. The Reserve Bank has been consistently working towards the

establishment of an enabling regulatory framework with prompt and effective

supervision as well as the development of technological and institutional


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infrastructure. Persistent efforts have been made towards adoption of international

benchmarks as appropriate to Indian conditions. While certain changes in the legal

infrastructure are yet to be effected, the developments so far have brought the Indian

financial system closer to global standards.

4.2. Global Retail Banking Scenario

Retail banking across the globe has been a showcase of innovation in the commercial

banking sector. Countries like China and India have emerged as potential markets

with huge investment opportunities. The higher growth of retail lending in emerging

economies is attributable to fast growth of personal wealth, favorable demographic

profile, rapid development in information technology, the conducive macro —

economic environment, financial market reforms, and several micro level supply side

factors. The global retail banking strategies of banks are undergoing major

transformation, as banks adopt a mix of strategies like organic growth, acquisitions

and alliances. This has resulted in paradigm shift in the marketing strategies of the

banks. Public Sector Banks players are adopting aggressive strategies, leveraging their

branch network and their customer base to earn a larger share of the retail pie. Banks

are also going in for innovative strategies like cross selling and packaged selling of

retail products. At the same time, new foreign players are also entering this high

growth sector. The boom in retail banking has helped in increasing the competition

from upcoming sectors like mutual funds. The banking scenario in India is at the

crossroads and is continuously evolving, but progress has been remarkable over the

past decade. With the exponential growth of touch points and sophistication, the

frontline sales force is assuming the role of a relationship personnel which is

continuously under the microscopic observation of the customer. At a time when


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channel innovation has become the order of the day to encourage effective banking

habits among customers, a vital component of the supply chain namely, customer

interface is totally missing. With the advent of liberalization the banking industry had

made a head start towards the best banking practices at each interaction point of the

supply chain.

Banking operations are basically divided into two segments. One is the

corporate banking or wholesale banking and the other retail banking. Corporate

banking sees the financial needs of corporate houses, companies and other financial

institutions. On the other hand, retail banking is a form of mass banking where

financial needs of individuals like professionals, salaried persons, self-employed,

housewives, students etc., are met. The two things which distinguish corporate

banking and retail banking are the size of the customer account and the number of

customers. In wholesale banking or corporate banking, the customer is not a living

entity but is an association of people. The directors of the company operate the

corporate account on behalf of the shareholders. The size of the account is very big

and may sometimes run into billions of dollars. The services offered under corporate

banking include cash management, general banking and trade finance. Banks are

subjected to high risk when offering credit facility to corporate customers. Hence,

where the amount of loan is very large, banks form a consortium to finance the

projects.

On the other hand, retail banking deals directly with individual customers who

manage their accounts all by themselves. The products and services under retail

banking are designed to meet the financial needs of target customers. The size of the

account is very small but the number of such accounts is very large when compared to


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corporate accounts. The small size of the accounts is less risky and the large number

of such accounts is more profitable for the banks. The features and characteristics of

retail banking products and services are based on the customer needs and marketing

strategies adopted by banks in different countries.

4.3. Indian Retail Banking Scenario:

Retail Banking has been described as “hotter than vindaloo” considering the fact that

vindaloo, the Indian English innovative curry available in umpteen numbers of

restaurants of London, is indeed very hot and spicy. It seems that in today’s world of

Banking, Retail Banking in India has fast emerged as one of the major drivers of the

overall banking industry and has witnessed enormous growth in the recent past. The

Retail Banking Report encompasses extensive study & analysis of their growing

sector.

It primarily covers analysis of the present status, current trend, major issues &

challenges in the growth of the retail banking sector. This study helps in Banks,

Financial institutions, MNC Banks, Academicians, Consultants and researchers to

have a better understanding of the booming opportunities in retail banking in India.

The issue of retail banking is extremely important and topical. Across the globe, retail

lending has been a spectacular innovation in the commercial banking sector in recent

years. The growth of retail lending, especially, in emerging economics, is attributable

to the rapid advances in information technology, the evolving macroeconomic

environment, financial market reform, and several micro-level demand and supply

side factors. India too experienced a surge in retail banking. Retail loan is estimated to

have accounted for nearly one — fifth of all bank credit. Housing sector is

experiencing a boom in its credit. The retail loan market has decisively got


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transformed from a seller’s market to a buyer’s market. All these emphasize the

movement that retail banking is experiencing in the Indian economy in recent years.

The banking scenario in India is at the crossroad and is continuously evolving, but the

progress has been remarkable over the past decade.

Retail banking has immense opportunities in a growing economy like India.

India is recognized as the second most attractive retail destination. The rise of Indian

middle class is an important contributory factor in this regard. The percentage of

middle to high income in Indian household is expected to continue rising. The

younger population not only wields increasing purchasing power, but as far as

acquiring personal debt is concerned, they are perhaps more comfortable than

previous generations. Improving consumer purchasing power, coupled with more

liberal attitudes towards personal debt, is contributing to India’s retail banking

system. The combination of the above factors promises substantial growth in the retail

sector, which at present is in the nascent stage. Due to building of services and

delivery channels, the areas of potential conflicts of interest tend to increase in

universal banks and financial conglomerates. Some of the key policy issues relevant

to the retail banking sector are: financial inclusion, responsible lending, and access to

finance, long-term savings, financial capability, consumer protection, regulation and

financial crime prevention.

The Retail Banking Industry in India grew by a compound annual growth rate

of 30.5% between1999 to 2004. The total asset size of the Indian Retail Banking

Industry grew at a rate of 120% to reach a value of $66 billion in 2005.


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This growth of in Retail banking Sector has helped in the growth of the overall

banking sector. Retail banking is expected to grow at above 30% and retail assets are

expected to increase to $ 300 billion by 2010.

But even with this growth rate, still the potential for the growth in retail assets

looks very promising. The contribution of retail assets to Gross Domestic Product

(GDP) n India is 6% and is comparatively lesser than that of other Asian counterparts

like China (15%), Malaysia (33%), Thailand (24%) and Taiwan (52%).This indicates

the lower level of penetration of retail banking in India and strengthens the views and

strategies of the retail players.

McKinsey & Company report (2007) on ‘Emerging Challenges to the Indian

Financial System’ has highlighted the huge potential available for personal financial

services and the different spaces available for banks to encash this potential. The gist

of the observations is detailed below:

• Three forces are shaping the personal financial services (PFS) in Asia: the

continuing surge of new customers entering the banking system, the explosive

growth of consumer credit at 30 per cent per annum and the emerging need for

wealth management due to increasing affluence, These forces can dramatically

shift the current focus of banking needs from traditional banking products and

services(e.g., deposits, mortgages) to advanced investment, credit and

advisory products and services(mutual funds, unsecured personal loans).

• With rising income levels, India is becoming an increasingly attractive market

for retail financial products. India’s consumer finance boom will see revenues

rising from more than 20 to 25 per cent per annum over the next five years,

from US $3 billion today to about US $10 billion by 2010.


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• In addition to consumer credit, payment products such as credit and debit

cards will drive growth, with more than 50 million credit cards likely to be in

force by 2010,depending on issuers’ ability to penetrate second tier towns and

segments such as self employed.

• By 2010, the number of high net worth individuals (annual income greater

than US $ 1 million) will grow to 400,000.

• Current offerings will be inadequate to capture these opportunities, leaving a

gap for innovative players to fill in.

• In wealth management, local banks have primary relationships and branch

networks, but these may not be key buying factors for more sophisticated

consumers. Success in affluent/private banking will require an extensive

product range spanning debt, equities. investment funds, alternative assets and

a range of ancillary services, with a comprehensive expert advisory process.

• Global banks are at advantage since they can already provide a wider range of

products and services and have the talent and resources to deliver them well.

• To maintain leadership in the emerging sectors, Indian banks will have to

develop talent, product and advisory skills within a short time.

• Despite credit and deposits growth in India, banking access remains limited to

a few sections of the population and there is great disparity in the penetration

of banking products among the different classes. While many customers are

well served by traditional financial services providers, the unbanked segment

represents an under-penetrated opportunity.


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4.4. Role of IT in Retail Banking

The growth of Information Technology (IT) and its remarkable application to banking

and financial sector has greatly facilitated the growth of retail banking to a very large

extent. When the banking sector reforms were introduced, the public sector banks

were in advantageous position because of their wide network of physical branches in

urban and rural areas. To compete with the public sector banks, private and foreign

banks adopted IT as a major cost effective tool in their expansion drive. Since the

success rate in retail banking is measured based on the volume of customer base, IT

has made it possible for banks to reach and serve a large number of individual

customers in the shortest possible time and also reduce the cost of banking

transactions. According to ICICI bank officials, a physical transaction costs the bank

Rs.30-50, a cheque transaction Rs.13-17, while a debit transaction costs only Rs.2-5.

Therefore, riding on the technological wave, private and foreign banks tried to capture

the market in a big way. Private and foreign banks who were the pioneers of applying

IT in the banking sector have laid more stress on virtual banking when compared to

brick and mortar structure of the public sector banks. Private and foreign banks have

state-of-the-art websites which provide information to the customers (individual or

corporate), about the banking products and services and also help them to avail these

products through some easy steps.

Private and foreign banks are found to encourage their customers, to move

over to virtual banking in a big way by offering incentives and promotional schemes.

These banks discourage physical branch banking by charging extra amount. In

addition to websites, they have introduced ATMs, Internet banking.


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Phone banking, mobile banking etc. In a big way by computerizing and

networking their branches. IT has enabled the integration of ATMs, Internet, phone

banking and mobile banking such that banking transactions are reflected irrespective

of any convenient medium used by the customers. The development of software

industry in India also helped the cause of these banks. Major Banks have tie-ups with

software companies for developing the requisite software.

Public sector banks, who have realized the potential of IT, are slowly moving

towards the state-of-the-art virtual banking even though the original brick and mortar

structure is intact. In India, most people prefer banking transactions through physical

branches since the use of Internet and mobile phones is limited to a small section of

educated urban population having access to Internet.

4.5. Growth of Retail Industry

The income levels and employment opportunities for young people have risen in the

IT, ITES and BPO fields where salaries are generally higher by about 20 to 30%.

According to the officials of Standard Chartered Bank, the number of young people in

the age group of 20 to 24 who join the workforce is around three million. With a large

amount of disposable income and no financial commitments towards the family, they

form a major chunk of customers for consumer durables and FMCG. Retail industry is

the fastest growing industry in India, whose growth is attributed to ideal breeding

ground in the form of huge market, rising income levels, surplus disposable income,

increasing awareness due to growth of advertisement and cable television channels

and the entry of multinational brands. It is estimated that the retail market is about

Rs.9,00,000 cr and growing at the rate of 8.5% per annum. Based on market figures, it

is estimated that the retailing industry will grow from 2 to 10% in next five years.


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Added to this is the fact that growth in retail industry has increased employment

opportunities in this field which in turn raises the demand for retail and consumer

goods. Banks and supermarket chains have been luring customers with custom made

credit cards which promise fabulous discounts and free gifts. They are particularly

targeting young customers like employees of BPO firms who have high amount of

disposable income, who change their preferences at a rapid pace and who have very

less time at their disposal. For instance, Standard Chartered Bank has designed credit

cards whose size is 43% smaller than the normal cards, in order to make shopping

easy, convenient and hassle-free. Major Banks like HDFC, ICICI and SBI have

introduced reward points (which can be redeemed for free gifts) and cash back

schemes on the amount spent through credit cards. Banks have also developed

strategic relationship with retail businesses so that customers can pay their credit card

dues in interest free installments. The rise in retail industry has led to the spurt in

construction of shopping complexes, supermarkets, food chains and malls in almost

all the major cities of India. In addition, loans can be availed on credit cards. Banks

have been aggressively trying to lure customers to transfer their credit card loans to

their bank on attractive terms.

4.6. Growth of Education Loans

The number of students opting for higher education in developed countries is also

increasing at a steady rate. USA, Australia, New Zealand, UK, and now China are the

countries which are preferred the most. The number of Indian students enrolled in US

universities in the year 2002-03 stood at 74600. In the year 2004, the number of

Indian students in New Zealand was 3100. The reason for the growth in the number of

Indian students opting for education in other countries is the education and


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employment opportunities and also the determined effort made by universities of

these countries to attract Indian students. Thus, this growth has given rise to the

increasing demand for educational loans to finance higher education in other

countries. In India also, there is a demand for educational loans since many

educational institutions and deemed universities of repute have emerged in private

sector, providing quality education. Educational loans offered by the banks come with

tax incentives. Moreover, banks also find it convenient to provide loans to students

from professional institutions of repute due to the good track record of these

institutions in the matter of placements.

4.7. Growth of Home Loans

In the year 2003-04, the market for home loans grew by 30%. The interest rates have

been steadily decreasing in the last decade which has given an upward fillip to the

construction industry. The icing on cake is that the government has offered tax

incentives on home loans in its budget proposals (2004-05). Tax exemptions are

available both on interest repayments and also capital repayment. While an exemption

up to Rs.20, 000 is available on capital repayment, the exemption on interest

repayments is up to Rs.1, 50,000. Banks are structuring the annual repayments

schedule in such a way that it does not exceed the tax limit. Thus, the market for

home loans is on an upward swing with every bank ready to grab a pie of the market

share. Aggressive marketing and advertizing strategies are being worked out by the

banks to attract customers with a variety of home loans with added incentives like

insurance cover or a free credit card.

The demand for home loans is attributed to the rise of jobs and salary levels in

IT, ITES and service sector. Based on the study conducted by ICICI bank, it has been


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found that people are opting for home loans at a much younger age. In the last three

years, the average age of home loan seekers in the country has reduced by five years.

The availability of home loans on easy terms and the falling interest rates has

provided impetus for the growth of residential sector.

4.8. Growth of Auto Loans

The growth of economy has fuelled the demand for automobiles. Many multinational

companies have set up their subsidiaries/joint ventures and also a number of

production units. Today’s youth have a number of different brands (national and

international) to choose from. This is confirmed from the ICICI bank study which

says that the number of people opting for car loans in the age group of 21-35 years

has increased by 22% in 2004-05 compared to 2003-04. To lure youth towards auto

loans, banks and automobile companies have formed alliances to offer customers

variety of automobile loans on attractive terms. For instance, SBI has entered into

strategic relationship with Maruti Udyog and Bajaj Auto to finance four-wheelers and

two-wheelers. In addition, auto loans are also offered with incentives like free credit

cards, zero percent surcharge on petrol, free insurance for automobiles etc. Loans are

available on both new and old automobiles.

In the market for auto loans, public sector banks have an upper hand over

private and foreign banks. This is due to the large network of public sector banks in

rural areas to finance two-wheelers, tractors etc. In addition, the terms for auto loans

of public sector banks are better when compared to Non-banking Financial

Companies (NBFC) and private banks. According to the industrial data, 82% of all

new cars, 50% bikes and 90% trucks are financed.


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4.9. Growth of Government Services through computerization

Government has been increasingly focusing its attention on the computerization of its

administrative processes and procedures. One of the positive developments of this

initiative is that the citizens can interact with the government electronically. They can

pay their utility bills, taxes etc., either online through credit cards or by directly

debiting the bank accounts or through the physical branches of the banks. The utility

services and the banks have joined hands to collect the bills, fees, taxes etc., from the

customers. In this regard the website, “esevaonhine.com” launched in 200 by the

Government of Andhra Pradesh facilitates electronic payments of utility bills by

electronically debiting the bank account of the customers in an online real time basis.

This website also facilitates electronic governance (E-governance) and other online

administrative services.

In addition many companies in the field of insurance, telecommunications etc.,

have tied up with banks to collect their bills, premiums, fees etc. Customers can pay

their bills either directly through the websites of the concerned organizations wherein

customer accounts are electronically debited or standing instructions can be given to

the banks to debit their accounts on the due date. For instance, customers of BSNL

can give standing instructions to their banks to debit their account on the last day of

bill payment which is termed as Electronic Clearing System (ECS). Thus, for banks,

bill payment has become a source of fee-based income.

Many organizations in both public and private sector have been crediting

salaries to their employees directly in their bank accounts since it is difficult to store,

carry or preserve huge amount of cash. In addition, there is a risk of theft and fraud in

cash transactions. To encourage the growth of corporate salary accounts, banks have


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been giving preferential treatment to such account holders. For instance, many banks

like HDFC bank, UTI bank and others have exempted corporate salary account

holders from maintaining minimum balance in their account.

4.10. Credit and Debit Cards

The annual growth in credit/debit cards in India is more than 25%. The total number

of credit cards in the Indian banking system is about 11 million. The debit cards in

circulation are much higher at more than 20 million. The reason for this is that the

issue of credit cards is at the discretion of the bank based on the creditworthiness, age,

job and annual income of the cardholder. Hence, they are issued only on case-by-case

basis to certain applicants who satisfy bank’s eligibility norms. However, debit cards

are given to all the account holders since money drawn from ATMs through debit

cards or used at merchant outlets is limited to the balance held in the account. Unlike

credit cards, there is no need for the bank to verify the creditworthiness of the account

holder while issuing the debit card. The number of Point-of-Sale (POS) terminals

installed at merchant outlets for swiping these cards as on March 31, 2004 was 1,

06,900 compared to 97,203 at the end of 2003. The amount of money spent by the

cardholders at POS terminals was Rs.20, 555 cr when compared to Rs.16, 118 cr in

the year 2003. This showed an increase of 28%. Global card companies viz.,VISA

and Master Card have been particularly keen to increase the card usage in India

through indigenous manufacture of POS terminals so as to bring down their costs and

also increase awareness levels about the card usage through customer education and

promotional schemes. Some banks like ICICI, HDFC, Citibank, HSBC and IDBI have

been distributing POS terminals free of cost.


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However, in spite of many initiatives taken by banks and card companies, the usage of

cards in India is very low when compared to other countries. According to the study

conducted by Visa and National Council for Applied Economic Research (NACER),

the total expenditure through cards is only 1% of the total personal expenditure. There

is lack of awareness about the usage of cards. Most of the POS terminals are limited

to big supermarkets, malls and shopping complexes in big cities while villages and

towns are out of reach. Small merchant outlets cannot afford the cost of POS

terminals since most of them are imported. Many merchant outlets insist on minimum

amount of buying in order to use the card. In India, most people prefer to buy only

small amount of goods at local grocery shops where POS terminals are not many in

number. The usage of cards is also related to the growth of economy as has been

observed in developed countries.

4.11. Growth of ATMs

The entry of private and foreign banks led to the growth of ATMs because these

banks found a cost effective alternative to compete with public sector banks and also

to capture larger market share without much expenditure on physical infrastructure or

branches. Most of the major banks have a network of ATMs which are spread

throughout the country.

In the initial period, each bank had its own network of ATMs which were used

exclusively only by its account holders. But to cut costs, cover larger geographical

area and for the convenience of the customers, banks have reached an agreement

amongst themselves wherein customers can utilize the ATMs of other banks where

they have no account. For instance, SBI and ICICI have signed a Memorandum of

Understanding (MoU) wherein customers of both the banks would share the ATM


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networks of each other. This MoU will enable customers to access a total network of

3793 ATMs spread across 600 locations in the country. Another MoU, signed by

ICICI bank with Andhra Bank enables customers of both the banks to have access to a

total of 2000 ATMs. In. addition to ICICI bank and SBI, other banks have also

entered into mutual agreement in this regard, wherein customers can have access to

the ATMs of other banks by paying nominal fees. This scheme is known as Swadhan

scheme. Under this scheme, banks have also come to an understanding on the

maximum amount that account holders can withdraw from their accounts through

ATMs. However, SBI and ICICI banks have kept themselves out of this scheme.

ATMs are cost effective because a transaction conducted at an ATM would

cost only Rs.15 while the same transaction conducted at a branch would cost Rs.50.

Banks like HDFC bank and Citibank encourage their customers to use ATMs by

levying extra charges for carrying out banking transactions through physical branches.

Table4.1. Shows the number of ATMs of different banks.

Name of the Bank Number of ATMs

ICICI Bank

SBI and its Associates

HDFC Bank

Andhra Bank

Corporation Bank

Syndicate Bank

Dena Bank

UTI Bank

IDBI Bank

HSBC Bank

1,880

5,067

1,054

330

660

147

101

1,250

297

133

Source: Reserve Bank of India – Report on Trends & Progress in Banking in India

4.12. Mobile Banking

Mobile phones have become one of the convenient means of carrying out banking

transactions all over the world. In India, the penetration of mobile phones is less when

compared to other countries of the world but the market for mobile phones is growing


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at an impressive rate due to fall in cost of handsets and also tariffs. There are 47

million mobile users in India with nearly two million being added every month.

However, the use of mobile phones for banking transactions is very less due to low

levels of awareness, inadequate information and some of the complex processes that

users find difficult to understand. Customer education and awareness campaigns

would go a long way in making mobile phones an effective medium of carrying out

banking transactions. The spread of computer virus is not limited to computer systems

and Internet but is also affecting mobile phones. The privacy and security risks also

haunt potential users of mobile phones. These concerns should be addressed by both

the banks and mobile phone companies.

The potential of mobile phones for banking transactions is very high since in

future they are likely to replace credit and debit cards. Software development

companies are applying their expertise in developing software for mobile payment.

Tata Consultancy Services (TCS) Ltd., has entered into strategic alliance with C-Sam

Inc. for developing wireless payment platform. Banks have entered into strategic tie-

ups with mobile companies so as to offer the services of mobile banking. ICICI bank

has a tie-up with Reliance India mobile so that customers can avail banking services

free of cost with the help of Reliance handsets.

4.13. Working of Retail banking

1. Retail Deposits & Retail Lending

2. Ancillary Retail Banking Services

4.13.1. Retail Deposits & Retail Lending

The Indian Banks have witnessed the jump in growth of retail deposits which is

presented in Table 4.2.


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Table4. 2: Retail Deposit of Banks in India (as on March 31, 2005) (Rs. bn)

Bank’s Name Amount Growth Rate

PNB

SBJ (All Associate)

ICICI

HDFC

IDBI

224.00

1112.40

998.00

380.00

70.00

17.0

19.4

29.0

22.1

11.2


The emergence of retail lending has more to do with economic prosperity improving

consumer purchasing power, increasing penetration of middle to high income

households, changing consumer demographics (India is one of the countries having

70% of the population below 35 years of the age), technology advancements,

developments of the software industry, increase in treasury income of the banks,

decline in interest rates, etc. A report released by A T Kearney, a global management

consultant firm, which recently identified that, “India as the second most attractive

retail banking destination of 30 emerging markets”, and in reality, India has witnessed

a shift from wholesale lending to retail lending especially in private sector banks. (See

Table 4.3)

Table – 4.3: showing the type of Retail Asset

S.No Type of Retail Asset 2004 2005 2006 2008 2009

1.

2.

3.

4.

5.

6.

Housing Loans

Consumer Durables

Loans

Credit Card

Receivables

Auto Loans

Other Personal Loans

Total Retail Loans

89449

6256

6167

-

87170

189042

134276

(50.5)

3810

(39.10)

8405

(36.3)

35043

85077

(37.8)

266611

(41.2)

179165

(33.4)

4469

(17.3)

12434

(47.9)

61369

(75.1)

118355

(39.1)

375739

(40.9)

252932

(12.7)

4802.

(-34.2)

27437

(49.8)

87998

(6.6)

197607

(27.5)

570776

(17.1)

263235

(4.1)

5431

(13.1)

29941

(9.1)

83915

(-4.6)

211294

(6.9)

593815

(4.0)

Source: Reserve Bank of India – Report on Rends & Progress in Banking in India


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There is still much scope for retail lending in India. After all, retail loan

constitutes less than 7% of the GDP in India in comparison to 18% to 60% for other

Asian economies (See Table 4.4).

Table 4.4: Retail Loan (as a percentage of GDP) of Asian Economies

(as on March 31, 2005)

Name of the Country Retail Loan as a% of GDP

India

Thailand

Singapore

Korea

Taiwan

Malaysia

Hong Kong

7

18

49

50

52

55

60

Source: wwvw.rbi.org.script/speeches/html

Further, the RBI Report on trends and progress of India, has shown that the loan value

of these retail lending typically range between Rs.20000 to Rs.100 lakh. The loans

.are generally for a duration of five to seven years, with housing loan granted for a

longer duration of fifteen years. The following table 4.5 shows the growth of various

retail products offered by Indian banking industry. (see Tables 4.5)

Table4.5: Size of Retail Loan Portfolio of Indian Banks

(as on March 31, 2009) (Rs. bn)

Bank’s Name Amount Growth Rate

ICICI

SBI (All Asociate)

HDFC

PNB

IDBI

All India (Excluding Foreign Banks)

561.00

492.00

394.00

102.00

19.00

1890.41

68.00

22.00

55.00

19.00

11.00

60.02

Source: www.banknet.india.com/5O6, www. indiainfolin.com/index/retailbanking

4.13.1.1. Housing Loan

The market for home loans is on upward swing with every bank ready to grab a pie of

the market share. During the period 1993-2004, the volume of outstanding housing

loan of the scheduled commercial banks has increased from Rs.23.1 cr in 1993 to

Rs.74000 cr as on February 15, 2005 (RBI, mid-term review 2004-05). In fact,


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housing loans occupy a very prominent place and these loans account for more than

50% to 60% of the total retail credit of almost all the banks (See Table 4.6). This is

because these loans are comparatively safer, supported by mortgage of property

finance, and default rate on an average is less than one percent annually. Furthermore,

attractive marketing and advertising strategies being adopted by the banks such as free

insurance cover, free credit cards etc., enable to attract more and more customers

especially young people (study conducted by ICICI and HDFC) towards the housing

loan.

Table 4.6: Size of Housing Loan of Various Banks in India (Rs. in bn)

Bank’s Name Housing Loan

Disbursed

(2004-05)

Size of Total

Housing Loan (as

on March 31, 2005)

% of Total

Retail Loan

Portfolio

SBI

PNB

ICICI

HDFC

All India

19.00

10.02

79.06

143.45

295.06

47,00

21.09

223.81

314.22

750.49

20.02

13.19

55.22

57.98

45.22

Source: www.bis.org.reviewcorn, www.pubindia.com

However, the ratio of outstanding home loan, as a percentage of GDP in India

is low as compared to other nations especially the developed nations, where it ranges

from 25% to 60% as presented in the Table 4.7. This is because, the retail banking in

India has not reached its full potential. However, there is much scope for its progress

and growth, since India has a population of over one billion.

Table 4.7: Housing Loan (as a percentage of GDP) of Different Nations

Name of the Nation Housing Loan (as a percentage of GDP)

India

China

Thailand

Korea

EU

USA

UK

2.5

7.0

14.0

21.0

40.0

54.0

57.0

Source: www.fica7coin/generalnews/additionshousing/htin


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4.13.1.2. Auto Loan

In the market for auto loans, banks and automobile companies have formed alliances

to offer customers a variety of automobile loans on attractive terms and various

incentives such as zero percent surcharge on petrol, free insurance cover for

automobiles, free accessories, etc. According to the press note, delivered by the

Chairman of RBI that, “82% of all new cars, 50% bikes and 90% trucks are financed

through various banks.” Table 4.8 presents the details of automobile loans disbursed

by the banks.

Table 4.8: Car Loans Disbursed by Banks (during 2008-09) (Rs. bn)

Name of the Bank Car Loan Disbursed Growth Rate

PNB

SBI

HDFC

ICICI

3.0

20.9

25.0

115.0

19

25

23

30


4.13.1.3. Educational Loan

Presently, 16000 students travel to go to UK every year to join 200000 other

international students. A report released by FAU (Florida Atlantic University) which

identified that 81500 Indian students enrolled in US universities during 2004-05, and

in New Zealand this figure was 3400. The increasing number of students opting for

higher education in developed countries such as US, UK, Australia, Switzerland, etc.,

has given rise to the increasing demand for educational loans to finance their higher

education in other countries.

4.13.1.4. A Comparative Analysis of Retail Banking: Public vs. Private Bank

Public and private sector banks have been trying their best to create a niche in this

regard, but the private sector banks are much better than their counterparts (See Table

4.9). This is because the private sector has laid more stress on virtual banking and is


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very keen in applying IT in their banks. But now the public sector has also realized

the potential of IT, and also moving towards state of the art banking system.

Table 4.9: Retail Banking Growth Rate: Public vs. Private Sector Banks

Area Private Sector

( lCICl, HDFC,

UTI and IDBI)

Public Sector

(SBI, PNB, Canara

Bank, Bank of Baroda

and Bank of India)

Home Loan

Consumer Durables

Personal Loan

Overall Retail Loans

58.00

7.72

67.00

62.00

50.44

(-15.00)

26.84

36.00

Source: www.knowledgeretailloans/ksin/search/htm05

4.13.2. Growth of Ancillary Retail Banking Services in India

The growth of related ancillary services is given below:

4.13.2.1. Automated Teller Machines ( ATMs)

The entry of foreign and private sector banks such as HDFC Bank, ICICI Bank, City

Bank, Standard Chartered Bank led to growth of ATM not with their own networks

but their partner bank’s network also with whom they have got mutual understanding

for sharing ATMs. By this, customers can utilize the services of ATMs of other banks

where they have no account. (See table 4.10)

Table 4.10: Number of ATMs of Scheduled Commercial Banks (2009-10)

ATMs Numbers

Number of Onsite ATM5

Number of Offsite ATMS

Total Number of ATMs

Number of Bank Branches

ATMs as a Percentage of Bank Branches

Growth of ATM installations by Banks in 2009 over 2008

No. of Branches covered under CBS

Coverage of Branches under CBS in 2009

24645

19006

43651

64608

67%

25.4%

44304

79.4%


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4.13.2.2. Mobile Banking

All over the world, mobile phones have become one of the convenient means of

carrying out banking transactions. In Korea, there are 3.3 million mobile phones

users. But in India, very few people use mobile even for simple banking queries in

spite of having 47 million mobile users base with nearly two million being added

every month. This was .due to low level of awareness, frauds and security problems,

complex process etc. However, the various banks have entered into strategies tie- ups

with mobile companies so that customers can avail banking services. For e.g., ICICI

has signed Memorandum of Understanding (MoU) with Reliance India Mobile to

provide services of mobile banking free of cost to those clients who have reliance

handsets.

4.13.2.3. Internet Banking

ICICI Bank was the pioneer to introduce internet banking. Later on, HDFC Bank, Citi

Bank, IDBI and other banks followed it. As per the Industry estimates, there is just

0.1% of the total banking population who use the internet banking where as in Korea

and Singapore nearly 10-15% of their population is banking over the internet. The

biggest drawback for the use of Internet banking in India is the lack of infrastructure

facilities. But now the IT Ministry is keen on expanding the internet penetration, and

the day is not too far when greater part of our population would be using the internet

banking. Further, the banks are also in the process of setting up strategic alliances

with other groups for improving the banking services. Recently, on November 14,

2005, SBI and Tata Consultancy Services (TCS), have formed a joint venture called

C-Edge Technology Ltd., which will offer technology and consultancy services in the

field of banking industry.


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Table 4.11: Numbers of ATMs of Different Banks in India

Name Number of ATMs

Dena Bank

HSBC

Bank of India

IDBI

Syndicate Bank

Andhra Bank

Corporation Bank

UTI Bank

HDFC Bank

ICICI Bank

SBI and Associates

119

133

382

297

147

339

669

1250

1147

2039

5130


4.13.2.4. Credit/Debit Cards

While usage of cards by customers of banks in India has been in vogue since the mid-

1980s, it is only since the early 1990s that the market has witnessed a quantum jump.

The total number of cards issued by 42 banks, has increased from 2.69 crore from

December 2003 to 4.33 crore in December 2004, and further 4.38 in July 2005.

Almost, all the categories of banks issue debit/credit cards. State Bank of India has

more than 12 million card base users and it has established 57000 POS (Point of Sale)

throughout the country. The ICICI bank has 3 million credit card users where as

HDFC Bank has 1.3 million credit card users and growing at a faster rate.

However, when comparison is made internationally, the consumer expenditure

through plastic cards is less than 1% in India whereas in the US, this figure stands at

69%. Further, in Korea there is 3.1% credit card per bankable population whereas in

India this figure stands only at 0.02%. The various factors responsible for this trend

are:

• Lack of awareness.


105 | P a g e

• Most of the POS are located at big Supermarkets, shopping Malls such as

Ansal Plaza, Spencer etc.

• Most of merchants insist on minimum amount of buying in order to use the

credit card.

• People have also unaccounted money, which makes them do shopping on cash

basis.

It is very important to mention here that the debit cards are more popular than

the credit cards because the money drawn from the ATMs or used at merchants’

outlets is limited to the balance held in their account. On the other hand, credit cards

are issued on case to case basis based on the credit worthiness, age, job, annual

income of the account holders. Presently, the total number of debit cards in circulation

is more than 30 million where as credit cards in circulation are 13.5 million. The

HDFC bank has debit card customers numbering more than 2.5 million and growing

at a faster rate.

4.13.2.5. International Presence of Indian Retail Banking

Public as well as private sector banks are now in the process of setting up retail banks

in other nations. For e.g., SBI has launched retail bank in Mauritius by acquiring

Indian Ocean International Bank Ltd. in that country. It has also set up retail bank in

China, and the other banks that are in the process of setting up retail banks in China

are ICICI Bank, IDBI Bank, Canara Bank, PNB etc. ICICI, HDFC and SBI have

established their retail banks not only in China but also in Dubai and other nations.

In nutshell, it is to be said that with the advent of computerization, and the use of

modern software which can be called the gift of the technology, the banks have been

able to provide single window system to their customers. With the use of technology;


106 | P a g e

banks are trying to minimize their per customer service cost. According to industry

estimates, assume teller cost Re. 1 per transaction, ATM transaction cost Rs.0.45,

phone banking a Rs.0.35, debit card at Rs. 0.20 and internet banking at Rs.0.10per

transaction.

4.14. Performance of Different Segments of Retail Banking

Retail banking in general which had shown a growth of more than 30% during 2005

to 2008 was under strain during 2009. All the major segments of retail banking had

lesser growth rates in 2009 than the previous years. The deceleration of growth is

more pronounced in the retail asset segment. Financial turmoil across the globe was

the main reason for the slower growth in retail banking and the resultant defaults in

retail loans.

1. The retail asset growth which was at about 40% in 2005 and 2006 came down

to about 17% in 2008 and further sliced down to 4% in 2009.In the retail

assets, the segments which suffered most were Consumer Durable Loans and

Auto Loans. The receivables in Credit Cards were maintaining the growth rate

till 2008 but came down drastically in 2009. Similarly in Housing Loans also

there was a drastic reduction in growth.

2. The percentage of retail assets to total assets which was at 25.5% in 2006 had

came down to 21.3% in 2009. Again the growth rate of retail assets had also

come down to 19.8% in 2009.

3. The number of ATMs as on March 2009 was at 43651 as against the total

number of bank branches at 64608.The number of ATMs as a percentage of

bank branches were at 67% as on March 2009 indicating the approach of the

banks in customer migration from branches to electronic mode. To add, the


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number of onsite and offsite ATMS reflect that banks are serious in not only

making the ATMS available in the branches but also had increased the

convenience factor to enable the customer to use the ATMs in away from

branch locations also at different and convenient points.

4. The number of branches covered under CBS looks very attractive. Out of the

total 64608 branches of scheduled commercial banks, 44304 branches (69%)

are covered under CBS. i.e. offering across geography banking solutions to

customers and not restricting to the branch where the account is held. This

gives tremendous opportunities for banks to devise an integrated approach to

retail banking.

5. Retail electronic and card based payments registered a quantum jump in the

past two years mainly due to introduction of RTGS (Real Time Gross

Settlement) and NEFT (National Electronic Funds Transfer). The volume and

value of transactions through RTGS had more than doubled, though wholesale

remittances constitute a major proportion of RTGS transactions. The concept

of electronic remittance mechanism is picking up fast over the past two years

and this trend offers potential to package a remittance product as a add on in

their retail banking package to the customers.

6. The growth rate of Term Deposits of scheduled commercial banks came down

marginally during2009.(Growth of only 22.4% in 2009 as against 23.1% in

2009).If we take an average of 60% of the term deposits are from the

household segments/retail segment (percentage extrapolated based on the

historical published figure), the core deposit growth was under stress in 2009.


108 | P a g e

7. The most affected segment in the retail liabilities space was in the CASA

front. CASA refers to Current Accounts and Savings Accounts. There was a

drastic de-growth in CASA, with CASA sliding to 13.4% in 2009 from 20.2%

in 2008.The same is supported by the percentage of Term Deposits to Total

Deposits which had improved to 51.08% in 2009 from 49.3% in 2008.

8. Another important point of discussion is about the composition of income of

scheduled commercial banks. The share of interest income had almost

remained steady at about 84% and the share of non interest income also is

almost stable at around 16% .This indicates that there were no serious efforts

by banks to increase the non interest income through fee based product and

third party distribution models.

The different scenarios in retail banking indicated different dimensions of

retail banking and its impact on profitability. Retail Banking is a critical source of

revenue and profitability for most major banks around the world. According to a

research study by Boston Consulting Group, retail segment brings in nearly 60% of

the total banking revenues worldwide. It is expected that this situation will continue

and retail banking will remain the dominant source of revenue for banks worldwide

through 2015. But the fact is that retail banks are facing tougher competition and

continuously declining margins and to overcome this, banks have to develop winning

business models and requisite skills.

From the performance behavior of retail banking space across the globe it is

very clear that the segment had picked up momentum during the early 2000s and

peaked during 2006 and 2007 but was affected due to the financial turmoil across the

globe from 2008. Though India was insulated from the financial turmoil to a great


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extent due to regulatory discipline, the retail banking space suffered some setback

taking a hit in credit card, housing and consumer loans. The growth rate was lower

and the delinquencies had started moving up causing concern to the bankers. Of

course corrective steps were put in place by the Government, Reserve Bank of India

and Banks by formulating and implementing suitable restructuring and rescheduling

measures to arrest the erupting Non Performing Assets due to defaults. But the bottom

line is that retail banking as a business model is under stress.

The foregoing discussion concludes that the growth of Retail banking in

Indian Banking industry has contributed to the growth of Indian economy. All the

banks now conduct their business activities in a computerized environment, and

provide various retail banks facilities to their customers. Retail Banking has, in fact

enabled the banks to be compatible in doing the banking business with their

counterpart banks the world over. The Retail banking has been the focus of attention

for the banking industry. The emergence of new economies and their rapid growth has

been the most important contributing factor in the resurgence of retail banking.

Changing life styles, fast improvement in information technology and other service

sector, as well as increasing levels of income, have contributed to the growth of retail

banking in India. The Indian Banks are competing with one another to grab a pie of

retail banking sector which has tremendous potential. Both public sector banks and

private sector banks have cut throat competition to meet the challenges like retention

of customers, introduction of new technological facilities and investment in such

facilities security norms, KYC norms and credit evaluation.

A review of the Retail Deposits lending operation in the study provides the

evidence that working and organization of retail banking in private sector banks is


110 | P a g e

better than public sector banks as regards their banking operation such as, housing

loans, auto loans, educational loans ATMS facilities/ mobile banking, credit / debit

cards etc.

The banks are competing to take care of the interests of their customers to

their maximum satisfaction. The next chapter, accordingly tests the public sector

banks and private sector banks by eliciting the satisfaction levels of the banks

customers in India with regard to their service quality in retail banking segment.


111 | P a g e

REFERENCE:

Books

Sethuraman, J, (2010) “Retail Banking”, Indian Institute of Banking

&Finance, Macmillan India Press, Chennai, pp. 15-21.

DhandaPani Alagiri (2007), “Retail Banking – An Introduction”, ICFAI

University Press, Hyderabad, pp. 2-11.

Manoj Kumar Joshi, (2007) “Growth of Retail banking in India”, ICFAI

University Press, Hyderabad pp. 13-24.

Manoj Kumar Joshi, (2007) “Customer Services in Retail Banking in India”,

ICFAI University Press, Hyderabad. Pp. 59-63.

Journal

Natika P. Jain (2010), “Retail Banking-Hotter than Vindaloo” APJRBM,

Mumbai, Volume I, Issue 2.

Katuri Nageshwar Rao (2008) “Retail Banking Emerging Trends”, ICFAI

Publishers, Hyderabad. Volume I.

Thesis / Project

Dr. J. Sethuraman (2010) “Retails Banking – Models Strategies, Performance

and the Future – The Indian Scenario, Research Report, IIBF, Delhi.

Websites

www.cygnusindia.com

www.allbusiness.com

www.rbi.org.in

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