Retail Banking in India

Prospects and Challenges of Retail Banking in India

 

The retail banking industry in India has grown rapidly over the years due to the rapid advances in information technology, macroeconomic environment, financial market reforms, and several micro-level demand and supply side factors. The changes happening one after another have led to the retail segment becoming one of the most important divisions of the commercial banks. While retail banking offers phenomenal opportunities for growth, the challenges are equally daunting. This article analyzes these challenges.

Today, retail banking is being considered as one of the most innovative financial services provided by the various commercial Public Sector Banks (PSBs), private sector and foreign banks. Retail banking has a huge potential considering the growing demand for its products namely, term deposits, consumer durable loans, auto loans, debit card, credit cards, ATM facilities, insurance, online banking, etc. The growing sector of retail lending has contributed significantly to the development of the economy. Like other developed countries, India too, has a developed retail banking sector which accounts for one-fifth of all banks credit.

Retail lending across the globe has been a showcase of innovative services in the commercial banking sector. Countries, like China and India, have emerged as potential markets with changing investment opportunities. The higher growth of retail lending in emerging economies can be attributed to the rapid growth of personal wealth, favorable demographic profile, rapid development in information technology, the conducive macro economic environment, financial market reforms and small micro-level supply side factors. The retail banking strategies of banks are undergoing a major transformation, as banks are beginning to adopt a mix of strategies like organic growth acquisition and alliance formation. This has resulted in a paradigm shift in the marketing strategies of the banks. PSBs are adopting aggressive strategies, leveraging their branch network to garner a large share of the retail market. This article attempts to highlight the prospects and the future role of retail banking in India.

Retail banking is widely recognized as an important factor for the economic development of a country. Retail banking helps the Indian banking industry by providing a wide range of innovative services. Retail loan is estimated to have accounted for nearly one-fifth of all bank credit. Over the past few years housing sector is experiencing a boom in its availability of credit. The retail loan market has decisively got transformed from a seller's market to a buyer's market. The days are gone when getting a retail loan was difficult. All the above statements bring out the speed of development that retail banking is experiencing in India.

Economy in Recent Years

Retail banking is a very wide term that refers to the dealings of commercial banks with individual customers, both on liabilities and assets side. Mortgages, loans (e.g., personal/housing, auto and educational) on the asset side are the more important products offered by the banks. Related ancillary services include credit cards and depository services.

The term `retail banking' comprises various financial products, like deposit accounts, housing finances, auto finances, other types of loan accounts, demat facilities, insurance, mutual funds, credit and debit cards, ATM and other technology-based services, stock broking, payment of utility bills, reservation of railway tickets, etc. Retail banking thus, mainly deals with the diverse banking needs of retail customers. Retail banking sector is characterized by the following basic features:

• Multiple products (deposit, credit cards, insurance, investment and securities).
• Multiple channels of distribution (call centers, branch banking, and Internet).
• Multiple customer group (consumers, small businesses and corporates).

Performance of Retail Banking in India

In today's world, retail banking has created an important position for itself. Retail lending has turned out to be a key profit driver for banks, with retail portfolio constituting 21.5% of total outstanding, advances, as in March 2004. The overall retail loan portfolio worked out much less than the gross NPA ratio for the online loan portfolio in the same year. The products offered by the Indian retail banking Industry are: housing loans, personal loans for purchase of durable goods, auto loans, credit cards, and educational loans. These loans are usually marketed under attractive brand names in order to differentiate the products offered by different banks.

The "Report on Trends and Progress of India: 2003-04" has shown that the loan values of retail lending typically range between Rs. 20,000 to Rs. 100 lakh. The loans are generally for duration of five to seven years. However, housing loans are granted for a longer duration of 15 years. Credit card is another rapidly growing sub-segment of retail banking. (Refer Table 1)

According to RBI's Monetary Policy of 2005, out of the total credit flow between April and August, 2004, two-third was loans which constituted around 20% of the total portfolio. These loans are growing at a rate of 30 to 35% per annum. Housing loan constituted around 50% of the retail lending portfolio aid. This segment constituted about 42% of the total lending portfolio in 2003-04 as compared to 55% in the previous years. Private sector banks have been able to achieve commendable growth in this regard. PSBs have also aggressively forayed to garner a larger slice of the retail price. By International Standards, there is still a lot of scope for retail banking in India.

Retail loans constitute less than 7% of total GDP in India, as against about 35% in other Asian economies [South Korea (55%), Taiwan (52%), Malaysia (33%), and Thailand (8%)].

Usage of credit cards by customer of banks has been continuously increasing. The total number of such cards issued by 42 banks registered a 20% increase from December 2003 to December 2004.

The growth in retail credit by banks decelerated during 2007-08 to 17.1% from 29.1% in 2006-07 and 40.9% in 2005-06. It also remains lower than the growth in overall credit by the banking sector which was 23.2%. Also, the share of retail credit in total loans and advances declined to 24.5% at end March 2008 from 25.8% in March 2007. Deceleration in the retail portfolio of banks was due to the decline in credit for consumer durables and deceleration in the growth of auto loans, housing loans and personal loans. (Refer Table 2)

"Retail Banking in Scheduled Commercial Banks in India — A Study" in December 2007 (banking and finance) gives a detailed account of various types of retail bank deposits of schedule commercial banks in India for the period 2000-01 to 2007-08.

Except the current deposits, percentages of all other types of deposits declined during this period. Percentage of retail saving deposits to total savings deposits decreased from 76% in 2000-01 to 72% in 2007-08. On the other hand, percentage of retail term deposits declined by 13% during 2000-01 to 2007-08. Total deposits also declined by 7.8% during this period though absolute quantum of total deposits increased by Rs. 4,40,164 cr.

Prospects of Retail Banking

AT Kearney, a global management consulting firm recently identified India as the second most attractive retail destination of 30 emerging markets. The report also identified that the contribution of Indian middle class has been continuously increasing. By providing personal loan benefits to the younger generation, the banks are improving the consumer purchasing power. With the growth of various services and delivery channels, the areas of potential conflicts of interest tend to increase in universal banks.

The key policy issues relating to the retail banking sector include: financial inclusion, responsible lending, accurate finance, long-term savings, financial capability, consumer protection, regulation and financial crime prevention.

The future prospects of retail banking have been categorized into the following segments:

• Customer Focus
• Segment Focus
• Product Focus
• Technology Focus
• Employee Focus

Customer Focus

Customer are no longer being considered as customers of the branches but as the customers of the banks. The growth in technology and the advent of online banking, mobile banking and e-banking had led to anytime, anywhere, anyhow banking. More recently, the RBI has urged the banks to improve customer focus as a strategic initiative for effective management of profitability, risk and customer satisfaction.

Segment Focus

Banks generally target the High Networth Individuals (HNIs) and companies for greater profitability. Hence, they also adopt products that appeal to the targeted customers. Banks are required to cater to all segments, right from agricultural to HNIs and from corporate banking to international banking. An analysis of the current scenario indicates that, in future, each bank will cater only to selected segments, depending on their core competency, for instance, Deutsche Bank in India operates only in the corporate banking segment and is a market leader in this segment today.

Product Focus

Retail banking involves offering various asset products (loans) and liability products (deposit). Depending on the customer needs, banks offer fixed amount loans or running cash credit/overdraft account or fixed deposit as liability products. Banks now even create customer specific products.

Technology Focus

Due to technological advancements, banks face the mutually interdependent forces of competition, regulation, technology expansion and customer expectations. Technology affects the retail banks in the following ways:

• Increase in processing power
• Increase in networking
• Affects the modularity of software.

The future of the retail banking performance involves providing innovative financial services, like Internet banking, shared ATMs, outsourcing, insourcing, payment system, etc.

Employee Focus

For providing better banking facilities, the staff of the bank is usually categorized into supervisory, classical and subordinate levels to attend to various customer segments. The main emphasis in this sector has to be given to the awareness of the employees towards the concepts of productivity, customer focus and grievances/complain t redressal, in order to provide better banking services to the customers.

The retail banking sector faces numerous challenges like:

Retention of Customers

Retention of customers is going to be a major challenge for the retail sector. According to a research by Reichhold and Sasser, a 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. Hence, banks need to emphasize on retaining customers and increasing the market share.

Rising Indebtedness

Rising indebtedness could turn out to be a cause of concern in the future. India's household debt, as a proportion of disposable income, is much higher. Witnessing the growth in the consumer credit segment, RBI has introduced risk containment measures and increased the risk weight from 100% to 125% in the case of consumer credit including personal loans and credit cards (Mid-term Review of Annual Policy, 2004-05).

Information Technology

Information technology presents both opportunities and challenges. Despite the growth of ATM machines and Internet Banking, many consumers still prefer the personal touch of their neighborhood branch bank. With the help of technology, it is possible for banks to deliver services throughout their network, provide instant updates to check accounts and facilitate rapid movement of money for stock transfers. This dependency on the network has brought additional responsibilities and challenges for the banks to manage, maintain and optimize the performance of the retail banking network. These are challenges of network management, since a complex developed network of bank facilitates the application of operations.

Account Transaction

It is also a specific challenge for the bank to ensure that the account transaction applications run efficiently between the branch offices and data centers.

Know Your Customers (KYC) Issues

Retail lending was earlier considered as a low-risk business. But given the increase in the cases of money laundering, frauds, financial terrorism, etc., this no longer holds good. Banks must scrutinize the account opening documents and identification documents thoroughly before opening an account of a customer. In this regard, RBI has issued detailed guidelines on application of KYC norms, while opening the accounts.

Effects of Global Credit Crisis

The US subprime mortgage crisis has forced banks to enter 2008 in a reactive mode. TowerGroup, the world's leading research and consulting firm, focused on the global financial services industry, while examining the top retail banking trends for 2008, finds that the credit crisis will impact the banking growth on the following fronts:

• Impact on the credit portfolio of Retail banks
• Affect the competency level of Retail banks
• Impact on the information security of the customers
• Failure to start large-scale projects
• Challenge to sustain the organic growth of retail banking.

Suggestions

Improving Quality of Customer Services

The recommendations of the Committee on Produce and Performance Audit on Public seek to enhance the quality of customer service, to individual customers. These codes help to bring transparency and efficiency in the system and also tackle the issue of information flow and security. These codes establish the commitments and obligations of the banks towards the customers.

Sharing Credit Information

Banks have a traditional resistance to share credit information of the clients, not only with one another, but also across sectors. Globally, Credit Information Bureaus have been set up to function as a repository of credit information and contain both current and historical data on existing potential borrowers. Credit Information Bureaus have been established in both developed and less developed countries, such as Sri Lanka, Mexico and Bangladesh. The Credit Information Bureau (India) Limited, incorporated in 2000, aims at fulfilling the need of credit-granting institutions for comprehensive credit information by collecting and disseminating credit information pertaining to both commercial and consumer borrowers.

Outsourcing

With the increasing market orientation of the financial system and to cope with the competition and also benefit from the technological innovations such as e-banking, banks are making increasing use of "Outsourcing as a means of both reducing costs and achieving better efficiency." While outsourcing does have various cost advantages, it has the potential to transfer risk, management and compliance functions to third parties who may not be regulated. According to the recent BIS report on "Outsourcing in Financial Services", a basic requirement in this context is that a regulated entity seeking to outsource activities should have in place a comprehensive policy on outsourcing, including a Comprehensive Outsourcing Risk Management Program, to address the outsourced activities and the relationship with the service provider. Application of these principles in the Indian context is under consideration.

Financial Expansion

It means that retail banking does not refer to mere lending. The retail depositor plays a very important role. These depositors include everyone, ranging from shopkeepers, pensioners, self-employed and those employed in unorganized sectors. All these depositors must be able to access the banking services, The Annual Report of RBI for the year 2005-06 pointed out issues relating to financial exclusion and had announced that the regulator would implement policies to encourage banks which provide extensive services, while disincentivizing those which are not responsive to the banking needs of the community. The next step involves monitoring the nature, scope and cost of services to assess whether there is any denial, implicit or explicit, of basic banking services to the common person. In this regard, banks have been urged to review their existing practices to align themselves with the objective of financial inclusion.

Reallocation of Management

The credit crisis impact has undoubtedly resulted in the reallocation of management and technical resources. According to the findings of the TowerGroup, going forward banks will continue to focus efforts on a number of business drivers and technology investments that will provide long-term benefits.

For example, banks will continue their efforts around reengineering of payment processing, offering new products and pricing packages to targeted customers and developing a more flexible payment environment. Banks will focus on information technology initiatives which will reduce risks in consumer lending. The main findings of the survey are:

• Retail banks will remain in a reactive mode across this year as they reallocate resources from loan production to risk management and foreclosure processes.
• Retail banks sustaining organic growth, (i.e., growth not related to mergers and acquisitions) will continue to deal with the problem of subprime crisis.
• Concerns over disclosures of customer information will lead bank management to focus on creating enterprise centers of excellence for information security.
• As electronic payment volume continues to increase and banks introduce new delivery channels, this pressure will help drive a continued focus on streamlining payments processing.

Conclusion

It has been observed that retail banking has been a constant innovator. It has converted the financial system of banks by innovating new products and mechanisms. It has also changed the internal systems and processes of the banks. Retail banking has brought future opportunities for growth, by tackling the major challenges and making use of the opportunities. Retail banking faces many challenges, like retention of customers, rising indebtness, information technology, accounts transactions, KYC issues, etc. To overcome these challenges, retail banking in India has to improve the quality of customer services, sharing credit information, outsourcing, financial expansion, etc. Only then can retail banking move to greater heights in the country.