From the ancient times in India, an indigenous banking system has prevailed.

The businessmen
called Shroffs, Seths, Sahukars, Mahajans, Chettis etc. had been carrying on the business of
banking since ancient times. These indigenous bankers included very small money lenders to
shroffs with huge businesses, who carried on the large and specialized business even greater than
the business of banks. The origin of western type commercial Banking in India dates back to the
18th century. The story of banking starts from Bank of Hindusthan established in 1770 and it
was first bank at Calcutta under European management. In 1786 General Bank of India was set
up. Since Calcutta was the most active trading port in India, mainly due to the trade of the British
Empire, it became a banking center. Three Presidency banks were set up under charters from the
British East India Company- Bank of Calcutta, Bank of Bombay and the Bank of Madras. These
worked as quasi central banks in India for many years. The Bank of Calcutta established in 1806
immediately became Bank of Bengal. In 1921 these 3 banks merged with each other and
Imperial Bank of India got birth. It is today's State Bank of India. The name was changed after
India's Independence in 1955. So State bank of India is the oldest Bank of India. In 1839, there
was a fruitless effort by Indian merchants to establish a Bank called Union Bank. It failed within
a decade. Next came Allahabad Bank which was established in 1865 and working even today.
The oldest Public Sector Bank in India having branches all over India and serving the customers
for the last 145 years is Allahabad Bank. Allahabad bank is also known as one of India's Oldest
Joint Stock Bank. The Oldest Joint Stock bank of India was Bank of Upper India established in
1863 and failed in 1913. The first Bank of India with Limited Liability to be managed by Indian
Board was Oudh Commercial Bank. It was established in 1881 at Faizabad. This bank failed in
1958. The first bank purely managed by Indian was Punjab National Bank, established in Lahore
in 1895. The Punjab national Bank has not only survived till date but also is one of the largest
banks in India. However, the first Indian commercial bank which was wholly owned and
managed by Indians was Central Bank of India which was established in 1911. So this bank is
called India's First Truly Swadeshi bank.

2009-2013 http://www.gktoday.in

Banking in India
From Wikipedia, the free encyclopedia


Structure of the organised banking sector in India. Number of banks are in brackets.
Banking in India in the modern sense originated in the last decades of the 18th century. The
first banks were Bank of Hindustan (1770-1829) and The General Bank of India, established
1786 and since defunct.
The largest bank, and the oldest still in existence, is the State Bank of India, which originated in
the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This
was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of
Madras, all three of which were established under charters from the British East India Company.
The three banks merged in 1921 to form the Imperial Bank of India, which, upon India's
independence, became the State Bank of India in 1955. For many years the presidency banks
acted as quasi-central banks, as did their successors, until the Reserve Bank of India was
established in 1935.
In 1969 the Indian government nationalised all the major banks that it did not already own and
these have remained under government ownership. They are run under a structure know as
'profit-making public sector undertaking' (PSU) and are allowed to compete and operate as
commercial banks. The Indian banking sector is made up of four types of banks, as well as the
PSUs and the state banks, they have been joined since the 1990s by new private commercial
banks and a number of foreign banks.
Banking in India was generally fairly mature in terms of supply, product range and reach-even
though reach in rural India and to the poor still remains a challenge. The government has
developed initiatives to address this through the State Bank of India expanding its branch
network and through the National Bank for Agriculture and Rural Development with things like
microfinance.
Indian Banking Industry currently employes 1,175,149 employees and has a total of 109,811
branches in India and 171 branches abroad and manages an aggregate deposit of 67504.54
billion (US$1.1 trillion or 790 billion) and bank credit of 52604.59 billion (US$860 billion or
620 billion). The net profit of the banks operating in India was 1027.51 billion (US$17 billion
or 12 billion) against a turnover of 9148.59 billion (US$150 billion or 110 billion) for the
fiscal year 2012-13.
[1]

During the period of British rule merchants established the Union Bank of Calcutta in 1829, first
as a private joint stock association, then partnership. Its proprietors were the owners of the earlier
Commercial Bank and the Calcutta Bank, who by mutual consent created Union Bank to replace
these two banks. In 1840 it established an agency at Singapore, and closed the one at Mirzapore
that it had opened in the previous year. Also in 1840 the Bank revealed that it had been the
subject of a fraud by the bank's accountant. Union Bank was incorporated in 1845 but failed in
1848, having been insolvent for some time and having used new money from depositors to pay
its dividends.
[5]

The Allahabad Bank, established in 1865 and still functioning today, is the oldest Joint Stock
bank in India, it was not the first though. That honour belongs to the Bank of Upper India, which
was established in 1863, and which survived until 1913, when it failed, with some of its assets
and liabilities being transferred to the Alliance Bank of Simla.
Foreign banks too started to appear, particularly in Calcutta, in the 1860s. The Comptoir
d'Escompte de Paris opened a branch in Calcutta in 1860, and another in Bombay in 1862;
branches in Madras and Pondicherry, then a French possession, followed. HSBC established
itself in Bengal in 1869. Calcutta was the most active trading port in India, mainly due to the
trade of the British Empire, and so became a banking centre.
The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in 1881 in
Faizabad. It failed in 1958. The next was the Punjab National Bank, established in Lahore in
1895, which has survived to the present and is now one of the largest banks in India.
Around the turn of the 20th Century, the Indian economy was passing through a relative period
of stability. Around five decades had elapsed since the Indian Mutiny, and the social, industrial
and other infrastructure had improved. Indians had established small banks, most of which
served particular ethnic and religious communities.
The presidency banks dominated banking in India but there were also some exchange banks and
a number of Indian joint stock banks. All these banks operated in different segments of the
economy. The exchange banks, mostly owned by Europeans, concentrated on financing foreign
trade. Indian joint stock banks were generally under capitalised and lacked the experience and
maturity to compete with the presidency and exchange banks. This segmentation let Lord Curzon
to observe, "In respect of banking it seems we are behind the times. We are like some old
fashioned sailing ship, divided by solid wooden bulkheads into separate and cumbersome
compartments."
The period between 1906 and 1911, saw the establishment of banks inspired by the Swadeshi
movement. The Swadeshi movement inspired local businessmen and political figures to found
banks of and for the Indian community. A number of banks established then have survived to the
present such as Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank
and Central Bank of India.
The fervour of Swadeshi movement lead to establishing of many private banks in Dakshina
Kannada and Udupi district which were unified earlier and known by the name South Canara (
South Kanara ) district. Four nationalised banks started in this district and also a leading private
sector bank. Hence undivided Dakshina Kannada district is known as "Cradle of Indian
Banking".
During the First World War (19141918) through the end of the Second World War (1939
1945), and two years thereafter until the independence of India were challenging for Indian
banking. The years of the First World War were turbulent, and it took its toll with banks simply
collapsing despite the Indian economy gaining indirect boost due to war-related economic
activities. At least 94 banks in India failed between 1913 and 1918 as indicated in the following
table:
Years
Number of banks
that failed
Authorised Capital
( Lakhs)
Paid-up Capital
( Lakhs)
1913 12 274 35
1914 42 710 109
1915 11 56 5
1916 13 231 4
1917 9 76 25
1918 7 209 1
Post-Independence
The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal,
paralysing banking activities for months. India's independence marked the end of a regime of the
Laissez-faire for the Indian banking. The Government of India initiated measures to play an
active role in the economic life of the nation, and the Industrial Policy Resolution adopted by the
government in 1948 envisaged a mixed economy. This resulted into greater involvement of the
state in different segments of the economy including banking and finance. The major steps to
regulate banking included:
The Reserve Bank of India, India's central banking authority, was established in April 1935, but
was nationalised on 1 January 1949 under the terms of the Reserve Bank of India (Transfer to
Public Ownership) Act, 1948 (RBI, 2005b).
[6]

In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of India
(RBI) "to regulate, control, and inspect the banks in India".
The Banking Regulation Act also provided that no new bank or branch of an existing bank could
be opened without a license from the RBI, and no two banks could have common directors.
Nationalization in the 1960s
Despite the provisions, control and regulations of the Reserve Bank of India, banks in India
except the State Bank of India (SBI), continued to be owned and operated by private persons. By
the 1960s, the Indian banking industry had become an important tool to facilitate the
development of the Indian economy. At the same time, it had emerged as a large employer, and a
debate had ensued about the nationalization of the banking industry. Indira Gandhi, the then
Prime Minister of India, expressed the intention of the Government of India in the annual
conference of the All India Congress Meeting in a paper entitled "Stray thoughts on Bank
Nationalization."
[7]
The meeting received the paper with enthusiasm.
Thereafter, her move was swift and sudden. The Government of India issued an ordinance
('Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969') and
nationalised the 14 largest commercial banks with effect from the midnight of 19 July 1969.
These banks contained 85 percent of bank deposits in the country.
[7]
Jayaprakash Narayan, a
national leader of India, described the step as a "masterstroke of political sagacity." Within two
weeks of the issue of the ordinance, the Parliament passed the Banking Companies (Acquisition
and Transfer of Undertaking) Bill, and it received the presidential approval on 9 August 1969.
A second dose of nationalisation of 6 more commercial banks followed in 1980. The stated
reason for the nationalisation was to give the government more control of credit delivery. With
the second dose of nationalisation, the Government of India controlled around 91% of the
banking business of India. Later on, in the year 1993, the government merged New Bank of India
with Punjab National Bank. It was the only merger between nationalised banks and resulted in
the reduction of the number of nationalised banks from 20 to 19. After this, until the 1990s, the
nationalised banks grew at a pace of around 4%, closer to the average growth rate of the Indian
economy
Liberalization in the 1990s
In the early 1990s, the then government embarked on a policy of liberalization, licensing a small
number of private banks. These came to be known as New Generation tech-savvy banks, and
included Global Trust Bank (the first of such new generation banks to be set up), which later
amalgamated with Oriental Bank of Commerce, UTI Bank (since renamed Axis Bank), ICICI
Bank and HDFC Bank. This move, along with the rapid growth in the economy of India,
revitalised the banking sector in India, which has seen rapid growth with strong contribution
from all the three sectors of banks, namely, government banks, private banks and foreign banks.
The next stage for the Indian banking has been set up with the proposed relaxation in the norms
for Foreign Direct Investment, where all Foreign Investors in banks may be given voting rights
which could exceed the present cap of 10%,at present it has gone up to 74% with some
restrictions.
The new policy shook the Banking sector in India completely. Bankers, till this time, were used
to the 464 method (Borrow at 4%;Lend at 6%;Go home at 4) of functioning. The new wave
ushered in a modern outlook and tech-savvy methods of working for traditional banks. All this
led to the retail boom in India. People not just demanded more from their banks but also received
more.
Current period
All banks which are included in the Second Schedule to the Reserve Bank of India Act, 1934 are
Scheduled Banks. These banks comprise Scheduled Commercial Banks and Scheduled Co-
operative Banks. Scheduled Commercial Banks in India are categorised into five different groups
according to their ownership and/or nature of operation. These bank groups are:
State Bank of India and its Associates
Nationalised Banks
Private Sector Banks
Foreign Banks
Regional Rural Banks.
In the bank group-wise classification, IDBI Bank Ltd. is included in Nationalised Banks.
Scheduled Co-operative Banks consist of Scheduled State Co-operative Banks and Scheduled
Urban Cooperative Banks.
Growth of Banking in India of Scheduled Commercial Banks
[1]

Indicat
ors
31 March of
2005 2006 2007 2008 2009 2010 2011 2012 2013
Numbe
r of
Comm
ercial
Banks
284 218 178 169 166 163 163 169 151
Numbe
r of
70,373 72,072 74,653 78,787 82,897 88,203 94,019 102,377 109,811
Growth of Banking in India of Scheduled Commercial Banks
[1]

Indicat
ors
31 March of
2005 2006 2007 2008 2009 2010 2011 2012 2013
Branch
es
Popula
tion
per
Banks
(in
thousan
ds)
16 16 15 15 15 14 13 13 12
Aggreg
ate
Deposi
ts
17001.98
billion
(US$280
billion)
21090.49
billion
(US$340
billion)
26119.34
billion
(US$430
billion)
31969.40
billion
(US$520
billion)
38341.10
billion
(US$620
billion)
44928.26
billion
(US$730
billion)
52079.69
billion
(US$850
billion)
59090.82
billion
(US$960
billion)
67504.54
billion
(US$1.1 tr
illion)
Bank
Credit
11004.28
billion
(US$180
billion)
15070.77
billion
(US$250
billion)
19311.90
billion
(US$310
billion)
23619.13
billion
(US$380
billion)
27755.49
billion
(US$450
billion)
32447.88
billion
(US$530
billion)
39420.83
billion
(US$640
billion)
46118.52
billion
(US$750
billion)
52604.59
billion
(US$860
billion)
Deposi
t as
percen
tage to
GNP (at
factor
cost)
62.3% 64.3% 68.8% 72.8% 77.1% 78.2% 78.2% 78.0% 79.4%
Per
Capita
Deposi
t
16281
(US$270)
19130
(US$310)
23382
(US$380)
28610
(US$470)
33919
(US$550)
39107
(US$640)
45505
(US$740)
50183
(US$820)
56380
(US$920)
Per
Capita
10752 13869 17541 21218 24617 28431 34187 38874 44028
Growth of Banking in India of Scheduled Commercial Banks
[1]

Indicat
ors
31 March of
2005 2006 2007 2008 2009 2010 2011 2012 2013
Credit (US$180) (US$230) (US$290) (US$350) (US$400) (US$460) (US$560) (US$630) (US$720)
Credit
Deposi
t Ratio
62.6% 70.1% 73.5% 74.6% 73.8% 73.7% 76.5% 78.6% 79.1%
By 2010, banking in India was generally fairly mature in terms of supply, product range and
reach-even though reach in rural India still remains a challenge for the private sector and foreign
banks. In terms of quality of assets and capital adequacy, Indian banks are considered to have
clean, strong and transparent balance sheets relative to other banks in comparable economies in
its region. The Reserve Bank of India is an autonomous body, with minimal pressure from the
government.
With the growth in the Indian economy expected to be strong for quite some time-especially in
its services sector-the demand for banking services, especially retail banking, mortgages and
investment services are expected to be strong. One may also expect M&As, takeovers, and asset
sales.
In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake in Kotak
Mahindra Bank (a private sector bank) to 10%. This is the first time an investor has been allowed
to hold more than 5% in a private sector bank since the RBI announced norms in 2005 that any
stake exceeding 5% in the private sector banks would need to be vetted by them.
In recent years critics have charged that the non-government owned banks are too aggressive in
their loan recovery efforts in connexion with housing, vehicle and personal loans. There are press
reports that the banks' loan recovery efforts have driven defaulting borrowers to suicide.
[8][9][10]

Adoption of banking technology
The IT revolution has had a great impact on the Indian banking system. The use of computers
has led to the introduction of online banking in India. The use of computers in the banking sector
in India has increased many fold after the economic liberalisation of 1991 as the country's
banking sector has been exposed to the world's market. Indian banks were finding it difficult to
compete with the international banks in terms of customer service, without the use of
information technology.
The RBI set up a number of committees to define and co-ordinate banking technology. These
have included:
In 1984 was formed the Committee on Mechanisation in the Banking Industry (1984)
[11]
whose
chairman was Dr. C Rangarajan, Deputy Governor, Reserve Bank of India. The major
recommendations of this committee were introducing MICR technology in all the banks in the
metropolises in India.
[12]
This provided for the use of standardized cheque forms and encoders.
In 1988, the RBI set up the Committee on Computerisation in Banks (1988)
[13]
headed by Dr. C
Rangarajan. It emphasized that settlement operation must be computerized in the clearing
houses of RBI in Bhubaneshwar, Guwahati, Jaipur, Patna and Thiruvananthapuram. It further
stated that there should be National Clearing of inter-city cheques at Kolkata, Mumbai, Delhi,
Chennai and MICR should be made operational. It also focused on computerisation of branches
and increasing connectivity among branches through computers. It also suggested modalities for
implementing on-line banking. The committee submitted its reports in 1989 and
computerisation began from 1993 with the settlement between IBA and bank employees'
associations.
[14]

In 1994, the Committee on Technology Issues relating to Payment systems, Cheque Clearing and
Securities Settlement in the Banking Industry (1994)
[15]
was set up under Chairman W S Saraf. It
emphasized Electronic Funds Transfer (EFT) system, with the BANKNET communications
network as its carrier. It also said that MICR clearing should be set up in all branches of all those
banks with more than 100 branches.
In 1995, the Committee for proposing Legislation on Electronic Funds Transfer and other
Electronic Payments (1995)
[16]
again emphasized EFT system.
[14]

Total numbers of ATMs installed in India by various banks as on end June 2012 is 99,218.
[17]

The New Private Sector Banks in India are having the largest numbers of ATMs, which is
followed by off-site ATMs belonging to SBI and its subsidiaries and then by Nationalised banks
and Foreign banks. While on site is highest for the Nationalised banks of India.
[14]

Branches and ATMs of Scheduled Commercial Banks as on end March 2005
[14]

Bank type Number of branches On-site ATMs Off-site ATMs Total ATMs
Nationalised banks 33,627 3,205 1,567 4,772
State Bank of India 13,661 1,548 3,672 5,220
Old private sector banks 4,511 800 441 1,241
New private sector banks 1,685 1,883 3,729 5,612
Foreign banks 242 218 582 800
TOTAL 53,726 7,654 9,409 17,645
Expansion of Banking Infrastructure
As per Census 2011, 58.7% households are availing banking services in the country. There are
102,343 branches of Scheduled Commercial Banks (SCBs) in the country, out of which 37,953
(37%) bank branches are in the rural areas and 27,219 (26%) in semi-urban areas, constituting
63% of the total numbers of branches in semi-urban and rural areas of the country. However, a
significant proportion of the households, especially in rural areas, are still outside the formal fold
of the banking system. To extend the reach of banking to those outside the formal banking
system, Government and Reserve Bank of India (RBI) are taking various initiatives from time to
time some of which are enumerated below:
Opening of Bank Branches: Government had issued detailed strategy and guidelines on Financial
Inclusion in October 2011, advising banks to open branches in all habitations of 5,000 or more
population in under-banked districts and 10,000 or more population in other districts. Out of
3,925 such identified villages/habitations, branches have been opened in 3,402
villages/habitations (including 2,121 Ultra Small Branches) by end of April, 2013.
Each household to have at least one bank account: Banks have been advised to ensure service
area bank in rural areas and banks assigned the responsibility in specific wards in urban area to
ensure that every household has at least one bank account.
Business Correspondent Model: With the objective of ensuring greater financial inclusion and
increasing the outreach of the banking sector, banks were permitted by RBI in 2006 to use the
services of intermediaries in providing financial and banking services through the use of
Business Facilitators (BFs) and Business Correspondents (BCs). Business correspondents are
retail agents engaged by banks for providing banking services at locations other than a bank
branch/ATM. BCs and the BC Agents (BCAs) represent the bank concerned and enable a bank to
expand its outreach and offer limited range of banking services at low cost, particularly where
setting up a brick and mortar branch is not viable. BCs as agents of the banks, thus, are an
integral part of the business strategy for achieving greater financial inclusion. Banks had been
permitted to engage individuals/entities as BC like retired bank employees, retired teachers,
retired government employees, ex-servicemen, individual owners of kirana/medical/fair price
shops, individual Public Call Office (PCO) operators, agents of Small Savings Schemes of
Government of India, insurance companies, etc. Further, since September 2010, RBI had
permitted banks to engage "for profit" companies registered under the Indian Companies Act,
1956, excluding Non-Banking Financial Companies (NBFCs), as BCs in addition to
individuals/entities permitted earlier. According to the data maintained by RBI, as in December,
2012, there were over 152,000 BCs deployed by Banks. During 2012-13, over 183.8 million
transactions valued at 165 billion (US$2.7 billion) had been undertaken by BCs till December
2012.
Swabhimaan Campaign: Under "Swabhimaan" - the Financial Inclusion Campaign launched in
February 2011, banks had provided banking facilities by March, 2012 to over 74,000 habitations
having population in excess of 2000 using various models and technologies including branchless
banking through Business Correspondents Agents (BCAs). Further, in terms of Finance Minister's
Budget Speech 2012-13, the "Swabhimaan" campaign has been extended to habitations with
population of more than 1,000 in North Eastern and Hilly States and to habitations which have
crossed population of 1,600 as per census 2001. About 40,000 such habitations have been
identified to be covered under the extended "Swabhimaan" campaign.
Setting up of Ultra Small Branches (USBs): Considering the need for close supervision and
mentoring of the Business Correspondent Agents (BCAs) by the respective banks and to ensure
that a range of banking services are available to the residents of such villages, Ultra Small
Branches (USBs) are being set up in all villages covered through BCAs under Financial Inclusion.
A USB would comprise of a small area of 100 sq ft (9.3 m
2
) - 200 sq ft (19 m
2
) where the officer
designated by the bank would be available with a laptop on pre-determined days. While the
cash services would be offered by the BCAs, the bank officer would offer other services,
undertake field verification and follow up on the banking transactions. The periodicity and
duration of visits can be progressively enhanced depending upon business potential in the area.
A total of over 50,000 USBs have been set up in the country by March, 2013.
Banking Facilities in Unbanked Blocks: All the 129 unbanked blocks (91 in North East States and
38 in other States) identified in the country in July 2009, had been provided with banking
facilities by March 2012, either through Brick Mortar Branch or Business Correspondents or
Mobile van. As a next step it has been advised to cover all those blocks with BCA and Ultra Small
Branch which have so far been covered by mobile van only.
USSD Based Mobile Banking: National Payments Corporation of India (NPCI) worked upon a
"Common USSD Platform" for all banks and telcos who wish to offer the facility of Mobile
Banking using Unstructured Supplementary Service Data (USSD) based Mobile Banking. The
Department helped NPCI to get a common USSD Code *99# for all telcos. More than 20 banks
have joined the National Uniform USSD Platform (NUUP) of NPCI and the product has been
launched by NPCI with BSNL and MTNL. Other telcos are likely to join in the near future. USSD
based Mobile Banking offers basic Banking facilities like Money Transfer, Bill Payments, Balance
Enquiries, Merchant Payments etc. on a simple GSM based Mobile phone, without the need to
download application on a phone as required at present in the IMPS based Mobile Banking.
Steps taken by Reserve Bank of India (RBI) to strengthen the Banking Infrastructure
RBI has permitted domestic Scheduled Commercial Banks (excluding RRBs) to open branches in
tier 2 to tier 6 cities (with population up to 99,999 as per census 2001) without the need to take
permission from RBI in each case, subject to reporting.
RBI has also permitted SCBs (excluding RRBs) to open branches in rural, semi-urban and urban
centres in North Eastern States and Sikkim without having the need to take permission from RBI
in each case, subject to reporting.
Regional Rural Banks (RRBs) are also allowed to open branches in Tier 2 to Tier 6 centres (with
population up to 99,999 as per Census 2001) without the need to take permission from RBI in
each case, subject to reporting, provided they fulfill the following conditions, as per the latest
inspection report:
o CRAR of at least 9%;
o Net NPA less than 5%;
o No default in CRR / SLR for the last year;
o Net profit in the last financial year;
o CBS compliant.
Domestic SCBs have been advised that while preparing their Annual Branch Expansion Plan
(ABEP), they should allocate at least 25% of the total number of branches proposed to be
opened during the year in unbanked Tier 5 and Tier 6 centres i.e. (population up to 9,999)
centres which do not have a brick and mortar structure of any SCB for customer based banking
transactions.
RRBs have also been advised to allocate at least 25% of the total number of branches proposed
to be opened during a year in unbanked rural (Tier 5 and Tier 6) Centres).
New private sector banks are required to ensure that at least 25% of their total branches are in
semi-urban and rural centres on an ongoing basis.
RBI supports Islamic banking
By Cithara Paul - NEW DELHI
Published: 20th Oct 2013 06:50:04 AM
In its attempt to woo minority votes ahead of the 2014 General Elections, the Congress-led UPA
is making every effort to introduce Islamic Banking in India.
The idea was first mooted by Raghuram Rajan in 2008 when he was Chief Economic Advisor to
the Ministry of Finance. But the Rajan report did not get the stamp of approval from the RBI
Governor of the time, D Subbarao. Rejecting the recommendations, Subbarao conveyed to the
government that Islamic Banking was not legally feasible in the current statutory and regulatory
framework. He had also made his stand public.
With the RBI governor taking a strong public position, the government too was forced to take a
similar stand. With Rajan running the RBI, Minority Affairs Minister K Rahman Khan is now on
overdrive to make Islamic Banking a reality. The minister told The Sunday Standard that it
would not take much time before Islamic Banking becomes legal.
But the RBI did not confirm the ministrys optimism. There are no applications for any
approvals lying with us for Islamic banking. Besides, it will take an amendment of the
Regulations Act and the RBI Act to introduce Islamic Banking, a RBI spokesperson told this
paper. She said an approval given by RBI to a Kerala-based non-banking finance company that
follows Islamic principles was not a blanket permission.
But the UPA is likely to go for it. No political party, except BJP, will oppose such an
amendment in this election year, said a source in Khans office. He said there is a strong
demand to introduce Islamic Banking in the country from various quarters. Muslim political
parties, including IUML, had submitted a memorandum to the Planning Commission urging it to
promote interest-free banking in the country, he said.
In case the government fails to bring in amendments, its next option is to allow more non-
banking finance companies that adhere to Sharia principles. The government shall take
measures to permit delivery of interest-free finance on a larger scale, including through the
banking system, which is in consonance with the objectives of inclusion and growth through
innovation as recommended by Rajan, said H Abdur Raqeeb, an Islamic Banking expert.

Over the past decade the banking industry has witnessed many positive developments. The
banking industry in India compares quite well with many of its international counterparts on
metrics such as growth, NPAs, ROA, etc. Although the Indian banking industry has witnessed
significant growth in last few years, comparatively lower levels of financial inclusion remains a
concern. A large proportion of the population is still financially excluded, with the number of
bank branches per one lakh (hundred thousand) adults being low (by global standards) at 9.4
branches. Further, the progress made during past decade is limited to a small part of the industry.
While the onus for tackling the emerging challenges lie mainly with bank managements, a
facilitating policy and regulatory framework will be critical for the further development of the
banking industry. The following are some of the challenges faced by the Indian banking sector.
Increase penetration of banking in India- tackle demand supply mismatch
Primarily supply side constraints are responsible for the high levels of financial exclusion in the
country, as they have a causal effect in keeping demand low from certain factions of the
population. The demand supply mismatch, which is reflected in measures of financial exclusion,
shows the limitations on the banks ability to supply products and services.
A large proportion of the population in India, largely concentrated in rural areas is believed to be
financially excluded from formalized credit markets (implies having access to bank credit) and
payments systems (implies not having access to bank accounts). Inaccessible institutional credit
drives these people to use the services of unorganized credit markets which charge interest at
rates in the range of 35-60%. According to the Report of the Committee on Financial Inclusion
(NABARD, 2008) and NSSO, 45.9 million farmer households in India do not have access to
credit, even from noninstitutional sources. Only 27% of farmer households have loans from
institutionalized sources, two-thirds of which also borrow from the unorganized sector. Among
the urban poor class, financial exclusion level is not determined with certainty, since this
population group is highly migratory. But, clearly, north eastern, eastern and central regions
suffer more from financial exclusion than other regions of the country.
Many initiatives are being taken by the RBI and other banks in the country, notably public sector
banks, to increase supply of financial services to the unbanked areas. Introduction of no frills
account (2005) and utilizing services of NGOs and other civil organizations for providing
financial services (2006) are some steps in that direction. The ability of banks to supply products
and services is clearly reflected in the population being served by them per branch, or their
physical presence geographically.

Foreign banks committed to making a play in India will need to adopt alternative approaches to
win the race for the customer and build a value-creating customer franchise in advance of
regulations potentially opening up post 2009. At the same time, they should stay in the game for
potential acquisition opportunities as and when they appear in the near term. Maintaining a
fundamentally long-term value-creation mindset will be their greatest challenge.
Credit disbursement to the priority sector:
One of the major challenges faced by the banking system in India is to provide timely and cost
effective credit to the priority sectors especially the agriculture and Small scale industries, which
are critical in generating employment and support the growth momentum of the economy. After
witnessing robust growth between FY05-FY07, the growth in agriculture credit witnessed some
moderation in FY08. Thus banks are required to ensure availability of credit to the agriculture
sector, which forms the backbone of the Indian economy. With significant slowdown in
economic activity and exports during the latter part of FY09, the credit growth to the micro and
small experienced some moderation. While it is important for the banks to maintain the asset
quality, they also need to direct the credit flow towards small and medium enterprises which play
a critical role in Indias economic development.
Maintain asset quality:
The secured advances made by banks have shown a mild decline in FY09. The unsecured
advances of banks particularly of credit card receivables have increased substantially. In FY09,
the quality of assets of banks has come under scrutiny, as the rising interest rates started putting
pressure on the repayment by borrowers in the H1 FY09. While the interest rates began to soften
in the latter part of the fiscal, the risk of default persisted mainly due to slowdown in economic
activity. Thus a major challenge in the current economic scenario for the Indian banks is to
maintain the gains made with respect to asset quality over the past few years.
In such situations, unsecured advances possess greater risk to business. The sensitive sector
advances is an important indicator towards the quality of assets held by banks. Though this does
not in itself indicate a high risk, the higher exposure signals a greater need for monitoring by the
banks as the susceptibility increases. This is of even greater importance in the current scenario
when capital markets and real estate are extremely risky sectors. The exposures of SCBs to
sensitive sectors have increased inexplicably from less than 3.5% to over 20% within a span of
two years. New private sector banks have the highest exposure to sensitive sectors, largely due to
the exposure in real estate.
Improve risk management mechanism:
Strategies to combat the problem of high risk perception must be taken up by banks on priority
basis. Increased usage of rating services must be employed to reduce risk. Besides, SME specific
risk management procedures must be setup to make the business more viable, as the risk
perception associated with lending to small enterprises is generally very high. Further, the banks
would also be required to acquire skill for managing emerging risks resulting from innovations in
financial products as well as technological advancements.
The availability and ease access to reliable data/information to both banks and
regulators/supervisors of the banking system is a key for prudent risk management. Hence,
strengthen the existing system would be another challenge for the banking industry. More over
the recent global financial market turmoil has accentuated the need for further improvement in
the transparency and disclosure standards.
Technology adoption:
The problem of resistance from workforce has largely been neutralized over the years, but the
primary issue involved with the adoption and rapid integration of technological processes within
banks still related to human resources- the availability of technically skilled resources is scarce.
Technology is not among the core competencies of financial institutions, which necessitates
outsourcing. Banks in India are different from banks in many other countries, in ways that they
have a very large branch network and varied needs specific to regions and customers. Most off
the shelf solutions are not exactly in conformity to the needs of the banks, which makes room for
large customizations.
Besides, a serious concern in implementing complex technologies is protection against frauds
and hackings. Security concern slows down technology adoption significantly for the banking
industry. A fast pace of development of security systems is imperative to the adoption of large
scale innovations in the industry.
Another issue is that of business process reengineering, which is required after computerization.
Failure to successfully carry out BPR neutralizes the benefits that an institution wishes to
accomplish via adoption of a technological process.
Mrs. Usha Thorat, Director, Centre For Advanced Financial Research And Learning (CAFRAL); Mr. B D
W A Silva, Deputy Governor , Central Bank of Sri Lanka; CEOs of various commercial banks from across
the globe, other fellow Central Bankers ; ladies and gentleman! At the outset, I would like to extend a
warm welcome to all the delegates to this roundtable, especially the foreign delegates who have travelled
to India to be a part of this event. It is indeed a privilege for me to address this august gathering
assembled here in this picturesque lake city of Udaipur to brainstorm on a very topical subject- finding the
right model for taking retail banking to the masses. I am sure the CEOs present here, would not have
spent a minute in agreeing to be a part of this roundtable as this presents a unique opportunity for them to
learn from the experience of fellow CEOs and pick up ideas that could help in their quest for building an
optimal delivery model for their respective retail banking products and services. Likewise, I too did not
have any second thoughts on accepting Mrs. Thorats invitation to interact with this eminent group as I
viewed it as an opportunity to learn about various impediments/irritants that they face while pursuing their
brand of banking for the masses. As in-charge of the department within RBI looking after financial
inclusion initiatives in India, I have always looked forward to joining any erudite bunch of stakeholders
who are equally keen about promoting access of banking services to the people. As far as the Indian
banks go, I would say that this seminar is very appropriately timed as our banks seek to build on the
gains from the first phase of financial inclusion initiatives in India.
2. The very fact that all of you have chosen to take time out of your extremely busy schedules to attend
this event on retail banking epitomizes the significance this segment of banking has assumed, especially
in the emerging markets. I intend to commence my address by highlighting the context in which retail
banking has assumed such significance amongst the commercial bankers and the regulators/supervisors
alike. I would follow this up with discussing why the focus on this segment has sharpened now. I would
also dwell upon the key characteristics of retail banking and the pre-conditions for its success and would
conclude by sharing my perspectives on the challenges faced by retail banking segment and the way
forward.
Context
3. As you would all agree, the Global Financial Crisis has proved to be landmark event in the history of
finance. The scale of the crisis is unprecedented in the sense that it has affected all economies of the
world in some form or the other. Of course, the severity of the shock and its after-effects has been of
differing magnitude for different pockets of the world. The regulatory reforms unleashed in the wake of the
crisis globally have aimed at making the financial sector a more stable arena. The first and foremost of
these measures have sought to curb the high-risk activities undertaken by the investment/wholesale
banking divisions of the banks through structural measures for controlling systemic risks. The crisis also
highlighted a heightened need for inclusive growth as a means to ensure financial stability. There was
also massive outcry about imprudent market practices and an utter disregard for consumer protection by
the banking/financial system prompting moves by several jurisdictions to establish new
regulatory/supervisory authorities for specifically looking at customer protection issues. Over the course of
the Roundtable when you discuss the ideal model for the retail mass banking, it would be appropriate to
bear these concerns in mind. I must remind you that financial sector continues to be viewed as the least-
trusted industry by the people and hence as the main stakeholders, it is our bounden duty to aim at
restoring the lost credibility of our profession.
What is banking?
4. Before we broach the subject of retail banking, let me begin by elucidating what is banking. You must
be wondering why I am getting down to the basics. Believe me this has a purpose. We all understand
traditional banking as the process of financial intermediation wherein the bank acts as an intermediary
between the savers and the borrowers. It accepts deposits for the purpose of making loans to the
borrowers as also facilitates payments as part of the countrys payment and settlement systems. The
banking industry has, however, undergone a lot of transformation over the last three decades. The banks
have become a virtual marketplace offering among others, various non-banking financial products and
services to the customers. Besides the traditional sense in which banking is understood, I consider
banking as an activity of offering other products and services by the banks to their own customers. My
emphasis on the word own is not incidental. In developed markets, banks do not offer products and
services to their customers unless they have conducted due diligence on the customer in terms of
KYC/AML framework. While in the emerging markets, we have certain relaxed KYC norms for ensuring
financial access to the unbanked population, if we have to give a significant push to retail (mass) banking,
we would need to not only know the customers, but also their business and risks associated with their
business.
Evolution of banking
5. In the developed markets, banking over the years has evolved through following three distinct phases.
These three phases broadly coincide with the level of development in the real economy in the respective
jurisdictions.
a) Initial Phase: During this phase the banks were primarily engaged in offering the basic intermediation
service i.e. provision of savings facilities and credit for productive purposes and also facilitate payment
services including remittances
b) Intermediate Phase: Apart from providing the services offered in the initial phase, the banks
additionally moved into lending for consumption purposes. The banks also started offering certain para-
banking services like insurance etc. The demand for such services arises primarily on account of a
transition of the economy from an investment (production) led growth phase to a consumption led growth
phase. At this stage of development of the economy and the society, retail banking becomes relevant.
c) Advanced Phase: Apart from providing the services offered in the intermediate phase, the banks have
additionally started providing high-end savings & investment products, wealth management products, and
structured products to both individuals and corporates. In other words, in this phase, the banking system
additionally starts supporting the speculative activities over and above for the production and
consumption activities. Private banking, an advanced version of retail banking for classes, becomes
relevant at this stage.
What is Retail Banking?
6. Let me pose a fundamental question to you all - What is retail banking? The answer to the question
might sound all too obvious, but let me tell you, there would, perhaps, be as many different perceptions
about this as the number of participants here. Why only here? I have observed that across the globe also
there is no clear understanding about the ambit of retail banking. Therefore, before we head into the
issues proper, I would also like to define retail banking and draw an outline of its ambit to ensure that all
of us share a similar understanding of the subject that we are set to discuss this evening.
7. Retail Banking refers to provision of banking products and services offered to individual customers,
typically for non-entrepreneurial purposes. Let me make another point about banking. On the liability side,
banking has invariably always been retail i.e. the banks have raised resources from a large number of
retail depositors. In that sense when we talk about retail banking, our focus is on the asset side i.e.
lending to the retail segment. Thus, on the whole, retail banking involves offering of products both sides of
the balance sheet eg. fixed, current / savings accounts on the liability side; and mortgages, loans (e.g.,
personal, housing, auto, and educational) on the asset side. Additionally, retail banking also involves
offering of credit cards, depository services and other para-banking products and services viz. insurance
products, capital market products etc. to individuals. Thus, retail banking services broadly corresponds to
the banking services providing in the intermediate phase of evolution of banking. It is contextual to
mention here that real economies in most of the developing countries have matured enough to demand
products and services offered not only during the intermediate phase but also during the advanced phase
and hence retail banking, embracing all products and services relating to consumption and speculative
function of the economy, has become relevant in these jurisdictions.
8. Retail banking is the most visible face of banking for the general public. These services are typically
offered at the physical brick-and-mortar branches and at the ubiquitous ATMs. The delivery channel for
retail banking is now no longer restricted to branches and ATMs but also spans telephone and the fastest
growing channel i.e. internet. In fact, some retail banks in the west operate solely via the internet and do
not have facilities to serve customers at physical outlets. Generally, however, the banks that focus purely
on retail clientele are relatively few and retail banking activities are generally conducted by separate
divisions within banks.
9. Typically, retail banking services begin with a target clientele which is the common masses and it
slowly graduates through a stage which can be called as class retail banking. The mass retail banking
is the stage in which the bank provides standardized banking products and services to its customers. In
this phase the banks attempt to build a sufficiently broad customer base which can serve as a stable
source of funding . The class retail banking on the other hand, is the stage in which the bank offers
customized products and services targeted at a niche customer segment, the high net worth individuals.
Retail banking focused solely at a niche customer segment may also be termed as private banking.
10. A graphical representation of the positioning of mass retail banking vis--vis other segments of
banking is as under:

11. As I mentioned earlier, there is a lot of confusion around the ambit of retail banking. This is not really
confined only to emerging markets but is a global phenomenon. The confusion primary emanates from
whether the banking services offered for entrepreneurial purposes should be considered as part of retail
banking or not. Many of the banks include the banking services extended to small borrowers and SME
clients also as part of mass retail banking. In my view, the retail banking in its most basic form is only
about servicing the individuals (mostly the masses) for non-entrepreneurial purposes. The retail banking
over a period of time can make a transition to class banking and banking for entrepreneurial purposes for
the individuals, for agriculture or for small businesses (SMEs). This is particularly so as many aspects of
retail banking in terms of delivery of services (large number of small value transactions) and risk
management practices (scoring model, model based capital assessment) are also applicable to small
businesses run by individual entrepreneurs.
Characteristics of Retail (Mass) Banking
12. Let me now turn to the major characteristics of the retail banking. The products and services under
retail banking are supposed to be standardized. In other words, they are off-the-shelf products without
any customization for individuals. For comparison sake, I would equate them to products offered at a
branded retail store. At retail stores, you pay for what you see and what is mentioned on the price tag.
There is uniformity, transparency and non-discrimination about the products and services offered. Hence,
the products offered by retail banks also should have similar characteristics. Further, retail banking
products are offered across multiple channels and at multiple places (branch, internet, ATM, telephone).
The banks have to aim at delivering these services in the most efficient manner. As the retail (mass)
banking involves reaching out to a group of individuals, the banks also need to have appropriate systems,
structure, manpower and processes in place to deal with the group, group characteristics, group
behaviour and group dynamics for the target clientele.
Pre-conditions for success of retail banking
13. Having outlined the contours of what is retail banking and what are the typical characteristics of retail
banking; let me now turn to some of the necessary preconditions for the success of retail banking. To my
mind, the most important pre-requisite for retail banking to succeed is the presence of an efficient delivery
mechanism. What essentially binds customers to their bank is quality of services offered, the fairness and
affordability of pricing and the promptness of service. . While there is not much scope for the banks to
differentiate their product and service offerings in so far as the basic products are concerned, it is
important for the bank to enhance the customer experience by ensuring that the services are made
available whenever and wherever the customer demands them. Further, the banks can bring down their
cost of service delivery, if and only if they are able to improve operational efficiency. In a nutshell, the
banks should be able to deliver the products and services to the customers in safe, secure, prompt and
cost effective manner by leveraging technology. I have analyzed various metrics of operational
efficiencies for the banking system across the globe and I can tell you that notwithstanding the inter se
disparity between banks in respective jurisdictions, almost all the jurisdictions represented here today
need to improve their operational efficiencies by several notches to reach anywhere closer to their
counterparts in developed world. The positive factor, however, for our banks is that the downside is
limited and hence, the upside potential is tremendous.
14. The second essential pre-condition for the success of retail banking is appropriateness of product and
services for the customers. As the banks strive to bring new customers into their fold and also to retain
the existing ones, they must invest heavily into data analytics and assess what are the appropriate
products and services for the specific groups of their customers. The banks have to be sensitive about
the customers needs and requirements. Let me give an example. A migrant laborer in a metropolitan
centre and a laborer in a village may have similar balances in their bank accounts, but their requirements
would be distinct and therefore, the product offerings of banks to these sets of customers would have to
be different. In sum, rather than focusing on financial worth of the customers, the banks would have to
inculcate a habit of listening to their customers and building analytics based on this interaction.
15. The next set of essential pre-requisites relate to pricing. Our experience in India demonstrates that
the pricing of the products and services both on the liability as well as on the asset side are heavily
weighed against the retail customers as a group. In fact, we have evidences of retail customers being
paid different interest rates on their deposits for the same tenor within the same bank. Similarly, I have
seen one particular banks lending rate for automobile loan vary quite widely. I do not know why a
standardized loan product like an automobile loan should be priced differently for different customers
when it is a secured loan. Banks should in such cases upfront decide on whether the customer can be
given a loan or not and once the lending decision has been made I dont see any reason for
discrimination in the pricing of the loan. I do not understand why the banks should be looking to benefit
from information arbitrage they hold rather than pricing their products transparently. and. In contrast to the
situation in developed economies, such problems are more endemic in the developing world as here not
only the level of financial education and literacy is low, but the financial consumer activism is also pretty
much dismal.
16. Insofar as the lending decisions in retail banking business goes, I believe the banks would need to
start using scoring models for assessing the credit worthiness of borrowers to bring in greater
transparency and efficiency. Credit Scoring model is a statistical technique that combines several
financial characteristics to predict the behavior of new applicants based on the performance of previous
applicants. At least among the Indian banks, except for a couple of foreign banks and new generation
private none of the other banks seem to employ them. In fact, in my interactions with the bankers I feel
that there is lot of misgivings about the scoring models and generally people mistake it for rating model.
My firm belief is that for bringing in uniformity, transparency and fairness in the retail lending process, the
banks would need to start employing credit scoring.
17. As I briefly alluded to above, for the retail banking business to thrive in the developing markets, it is
essential that an effective consumer protection environment is created quickly. As most of you are aware,
across the globe, the regulators and supervisors are turning increasingly intolerant of unfair market
practices adopted by the market participants. We have seen large amounts of penalties levied on banks
by the regulators mainly for failing to protect consumers interests and for unfair practices. In fact, there is
a growing feeling that the banking regulators/supervisors have proved ineffective in checking these unfair
practices and failed in effectively protecting consumers. This has culminated in creation of separate
authorities for enforcing fair market conduct and for protection of financial consumers. This transformation
has happened in the Netherlands, in South Africa, in Australia, in the UK and several other jurisdictions.
Therefore, unless the banks in the developing countries are firmly committed to treating their customers
fairly and put in place appropriate systems and processes to ensure that, they would be well advised to
refrain from riding the bandwagon of retail banking.
Why the growing interest in retail banking?
18. The growing interest in the retail banking in the developing economies can be explained on account of
a few major developments. The first of them I had referred to briefly above and that is transitioning of the
economies into the intermediate phase. As I mentioned earlier, in the initial phase of evolution of banking,
the policy makers focused on ensuring the flow of bank credit to the productive sectors of the economy.
But over time, as the credit demand from the basic industrial and infrastructure sectors have waned
somewhat, the regulators have become more accommodating in allowing the banks to lend even for
consumption purposes. The second development that has provided a boost to retail banking aspiration of
banks is the availability of enabling technology. Since retail banking requires mass production techniques,
the advent of technology has enabled the banks to design appropriate technology-based delivery
channels. Retail banking has also received a thrust from the regulators/policymakers push for inclusive
growth in the wake of the global financial crisis. The Governments across the world view banks as the key
component in furthering the cause of financial inclusion. We, in India, have also been promoting a bank-
led financial inclusion model and view retail mass banking as the stepping stone towards achievement of
universal financial inclusion. The last, but not the least of the reasons for the growing interest in retail
banking is the banks quest for new sources of revenue and new channels for profit. Slowly but surely, the
banks have realized that the commerce for the poor anywhere in the world is more viable than the
commerce for the rich and hence they view the excluded masses as a potential source of profit in the
long-run. Commercial banks cannot ignore the adage that the Future of Banking is Retail Banking.
Deficiencies in/ Challenges for Retail Banking
19. Having spelt out what I consider essential pre-requisites for the success of retail banking, let me now
turn to some of the issues which pose significant challenge for retail banks. To my mind, ensuring
customer protection through transparent and appropriate pricing of product and services, curbing mis-
selling, understanding KYC in all its manifestations, managing risks, inadequacy of MIS, countering the
effects of disruptive new technologies, retaining customer loyalty, managing cost and ensuring growth are
some of the challenges that retail banks have to counter simultaneously at the present juncture. I would
elaborate on some of these deficiencies/challenges.
(a) Consumer Protection & Pricing
20. As you would have noticed by now, consumer protection has been a recurring theme in my address
today. To say that the pricing of products and services in the banking system in India is non-transparent
would be an understatement. Actually, I have several examples of pricing being discriminatory, arbitrary
and to a certain extent illogical. I do not wish to elaborate too much on how innovative the banks have
been in fleecing their customers but let me give you a flavour. There are charges for non-maintenance of
minimum balance, charges for cheque return and there are charges even where no service has been
provided customers not conducting any transactions. I can understand that you charge the customer
once for not maintaining the minimum balance that he was supposed. But, why on second, third and
fourth occasions? So much so that eventually his balance becomes negative. Why do you instead not
inform him and close his account after the first instance or convert it to a basic savings account? In fact, I
find another disquieting feature in the pricing of products and services by banks and that is poor
subsidising the rich. I have not seen banks mentioning the yields to the customers of their deposits or the
effective borrowing cost for the customers on the lending products. Why cant the banks advertise their
Annual Equivalent Rates/ Annual Percentage Rates on their deposit and credit products respectively? For
your retail banking model to be successful, your pricing should be non-discriminatory, risk-based,
competitive and value added.
21. As in-charge of customer service department in the Central Bank, everyday, I receive several
complaints about mis-selling of products to gullible consumers, some of which are quite outrageous.
Believe me, if you wish your retail banking to succeed, you would have to address this deficiency at the
earliest. Else, as I hinted earlier, the regulators/supervisors would no longer be as tolerant in imposing
penalties and issuing strictures as earlier.
(b) Inadequacy of MIS
22. A crucial import for the success of any business is the accurate, consistent and granular information
about its various components. I have highlighted this in the past and want to bring this issue up one more
time. The information system in the Indian banks continues to be rudimentary which leads to
impressionistic decision making rather than information-based decision making. The banks even lack the
basic information on how many customers they have and how many products they have. The data on
segmental revenues and segments profits are not available with any granularity. Under the
circumstances, the banks would find it very difficult to make their pricing risk-based. It is crucial, therefore,
that if the retail banking has to be rolled out successfully, the banks would need to build an appropriate
MIS.
(c) Understanding and tackling KYC/AML issues
23. I mentioned the importance of conducting KYC/AML for banking customers. As you all know the
banks in the developed countries have faced significant amount of penalties from the regulators for their
failure to conduct adequate due diligence on their customers. Even, we in India, had to impose penalties
on some of the banks for their failure to have proper due diligence on their customers. It is important to
understand and appreciate KYC requirements in all manifestations- be it for the products on the asset
side of the balance sheet or on the liability side. Banks would also need to be mindful about the KYC due
diligence for the third party products that they sell from their premises/through their delivery channel. You
have to be increasingly vigilant in the coming days as the trend of forex inflows is likely to reverse thereby
exposing the banks to more stringent KYC requirements from the host countries in the West.
(d) Managing Risk
24. The retail banking business involves dealing with a large number of customers over varied delivery
channels thereby creating significant vulnerabilities across banks systems. These vulnerabilities could be
in the form of inadequacy of internal guidelines or non-adherence by staff, inadequacy in the technology
systems supplied by vendors, fraudulent practices employed by customers, hackers etc. While the banks
have developed sufficient safeguards to deal with operational risk event associated with traditional
delivery channels, it is the emergence of non-traditional delivery channels which are likely to be the
pressure points for banks going forward. This is already evident in large number of technology-related
frauds that we have witnessed across Indian banks in the past few years. Though from a value view point
these frauds are not significant, still from an individuals stand point they are quite important. The banks
would also need to recognize and manage risks arising from mis-selling etc. besides the other business
risks like market risk, liquidity risk, interest rate risk etc. Unless, the banks address these issues quickly,
even the low-value frauds would have the potential to cause reputational risk and unwarranted litigation
for the banks. It is, therefore, absolutely important that the banks improve their risk management systems
to address these vulnerabilities.
(e) Countering the effects of disruptive new technologies
25. Retail banking has been most impacted by technology, thanks to the proliferation of alternate
channels of delivery (ATMs, internet and telephone banking). The pace with which consumers in the
developing countries have also adopted digital technologies has been quite amazing. According to
available statistics, by the end of 2011, China and India were ranked first and third respective in the
global league table for number of Internet users. Also the use of mobile platforms for accessing internet
has been staggering: in China, 65 percent of mobile-phone users regularly access the Internet via their
phones, while in India, mobile-only web browsers are expected to comprise 55 percent of the total
Internet user base by 2015. As a corollary, the use of traditional delivery channels for accessing banking
services has seen a perceptible decline. According to a McKinsey Personal Financial Services survey, in
2011, in both the emerging and developed markets in Asia, there was a significant decline (more than
25per cent) in the number of consumers visiting branches for accessing banking services than in earlier
years. Likewise, the use of digital-channel for accessing banking services also showed significant
increase (in excess of 35 per cent). While the number of bank customers in India and few other
developing countries may still be low, but the banks have to be cognizant of this emerging trend and
quickly adjust to the new paradigm where more and more of their customers move online for accessing
banking services. As the demographic changes take place the technology acceptors will soon
outnumber the technology deniers and banks have to use this short transitory period to adequately
equip themselves to manage the disruptions arising out of this alternate delivery channel. Further, since
the internet is available on a 24 by 7 basis, the banks would have to substantially invest in appropriate
technology and ensure that their service offerings are available round the clock with minimal downtime.
While the use of technology-aided delivery channels has grown multifold, so has the scope for fraudulent
transactions through impersonations and identity thefts. Banks would also need to quickly put in place
lasting technology-based solutions to thwart the efforts of fraudsters and minimize the customer
complaints. As the use of new delivery channels gets more popular, the banks would need to ensure that
their customers continue to have good experience with their service offerings and remain loyal to them.
(f) Continuing Growth
26. I dont think growth is as much a challenge for the retail banks in developing economies as in the
developed economies. Even with our concerted efforts on increasing the banking penetration and
bringing more and more adult population under the formal financial system over the last 6-7 years, more
than half of the target population remains uncovered. Of the 6 lakh plus villages in India, as on March
2013 only about 2.68 lakh villages, had access to banking service either through a branch mode, a
banking correspondent or other channels. Similarly, the credit penetration from the banking system in the
country is abysmally low at about 10%. In absence of access to formal sources of finance, the alternate
cost of funds for the people is exorbitantly high. As the pricing of loans no longer remains restricted due to
any regulatory/ government fiat, the banks are free to reasonably charge their customers. All this means
that the retail banks have a huge potential to grow in India over time . I believe that the other jurisdictions
represented here also face similar conditions in their respective countries.I would, therefore, argue that
the challenge for the retail banks is not finding new customers or new markets; it is more of a mindset
issue. The Top Management and the Board of the banks need to get convinced that financial inclusion as
a viable and profit-making business proposition and pursue that objective with a missionary zeal.
Way Forward
27. As I mentioned a little while back, there is little to differentiate between basic products and services
offered by retail banks. Having conceded that, packaging and branding of products and services are
going to be the key differentiator between banks. The banks would have to invest quite a lot in innovation,
research and product design so as to keep their product and service offerings relevant and
contemporaneous to emerging customer needs. They would have to rummage through huge amount of
customer data that gets generated every day in course of transactions and use appropriate analytics to
develop products in keeping with changing customer preferences. In this context, banks can also think in
terms of giving a dedicated platform of their webpage to the customers to solicit their views/ requirements.
28. As competition gradually brings down the spreads and the profitability, the banks have to continuously
work towards improving their productivity and efficiency so as to maintain their RoE. Towards this end,
technology would be the key enabler. Though, technology has been available and been in use in the
banking sector for more than a decade now, my belief is that it has not yet been exploited to its optimum
potential. Technology can assist in all spheres of banking activities right from planning, strategy, MIS,
processing, delivery, monitoring and follow up. I feel that the banks that can quickly conjure up a
technology based cost-efficient delivery model for their products and services would be the ultimate
winners in the long run.
29. I briefly touched upon the need for developing standardized products and services for furthering the
retail banking initiatives. 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
economies, 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. In the
context of retail lending, deployment of scoring models would minimize the subjective element and
thereby fast track the decision making process. The mass retail banks of today would also have to plan a
transit path for the class banking and gradually to entrepreneurial banking.
30. Quality of services offered by the banks is going to be another key differentiator. In ultimate analysis,
providing better service to the customers would be the key to generating larger revenue for the banks.
Conclusion
31. The retail banking space proved to be an oasis of relative calm amidst the tumult caused by the
Financial Tsunami that the world continues to grapple with even today. The customer deposit garnered by
retail banking represents an extremely important source of stable funding for most banks. In this context,
it is essential for the banks to keep pushing the frontiers of innovation and experimentation in the retail
banking space to survive and also to remain relevant. One of the most essential elements of a strong
customer bank relationship is the banks understanding of customer needs and preferences. However,
with the massive increase in their size and their customer base, the banks have slowly drifted away from
understanding their customers needs and preferences closely. Further, the proliferation of alternate
delivery channels has necessitated that banks build their presence across all channels (omni-channel
presence) to offer their services to their customers. As the banks cant probably dictate that their
customers chose specific channel, the challenges for the banks is to design products/systems which are
channel/segment agnostic.
32. While retail banking offers phenomenal opportunities for growth, the challenges are equally daunting.
The exacting regulatory requirements on the consumer protection front, risks from a slowing global
economy and increasing customer expectations mean that banks must innovate to grow. How far the
mass retail banking of the future would be able to fulfil its socio-economic objectives would in a large
measure depend upon the willingness of the banks to innovate and reform their business processes and
structures for this cause. It is in the banks own interest to be alive to the customers interests; else they
might have to face stiff regulatory sanctions. Post crisis, several jurisdictions in the developed world have
seen public demands for ethical pricing. In this Facebook and Twitter age, the banks cannot remain
oblivious to the power of the social media which wields enough clout to forcibly reform the outliers through
negative publicity. Only such retail banks, who inculcate ability to churn out innovative and differentiated
products by harnessing cutting-edge technology, greatly improve their productivity and efficiency, bring a
fair, transparent and non-discriminatory pricing and demonstrate a commitment towards fair treatment to
their customers, would be able to survive and add value to the society.
33. I once again thank Ms. Thorat and CAFRAL for inviting me to this roundtable and giving me an
opportunity to share my perspectives on a very topical subject for the banks as well as the regulators and
policy makers. I hope that over the course of next two days as you deliberate on the nuances of retail
banking, you would reflect on some of the issues that I have raised in my address today. I wish the
roundtable all success.


Current challenges in banking
After the credit crunch and numerous regulatory summits, the financial services sector has a new
focus and is renewing IT resources, says Helen Beckett.
Investment banking: Integration is key
The capital markets have embarked on a hiring spree in the past year that has seen the 30% of
staff, shed during the credit crunch, rehired. Compliance effort is sucking up a lot of the renewed
resource while the mobilisation of apps for portable devices is another focus for development
jobs and security staff.

The consumerisation of applications - making them accessible for the iPhone or iPad,
potentially from the cloud, is one of the hottest topics around, reckons Tom Millar, CEO of ITC
Global Security. However there is a lot of heavy-duty work to do to lock them down for this
security-conscious sector.
But the unpalatable fact remains that there is less client money around than pre credit crunch -
grinding out more efficiency is the unrelenting task of the IT department. Systems integration
and standardisation are two preferred methods of cutting out the fat.
Banks have to exchange data with multiple third parties and in the past, writing custom software
for a multitude of applications and protocols was a pricey way of life. Now banks are keener to
streamline by rewriting and standardising processes.
Another way of cranking up efficiency is to improve the performance of the network and
infrastructure. Network performance is measured by the microsecond in this world and lost
seconds can cost billions of pounds, confirms Chris Pickles, head of marketing, financial
markets & wholesale banking at BT.
A virtuous triangle governs the activities of IT staff in investment banks: customer service,
revenue and profits and reducing cost. If a technology person can keep all three in mind when
coding, integrating software or managing projects, then theyll be a prized asset.
Retail banking: Customer is king
More than ever before the focus is on the client relationship, specifically how to keep the good
customers explains Pickles. This is being done by gaining a better understanding of customer
behaviour though better business intelligence applications and offering improved service levels.
And, whether in the branch or on the web, retail banks are endeavouring to get closer to their
customers ways that usually involve an element of IT. It might be a better-designed branch that
offers expert advice through videoconferencing service, or a top notch internet service, says
Pickles.
Videoconferencing is being offered in braches and ultimately these will be delivered to the home
PC. Network suppliers such as Cisco are working on home conferencing, although these will
always be susceptible to quality of service issues.
On the Internet, banks are beefing up their security in line with spiralling levels of cyber crime
that have been documented in recent surveys. Customers are stepping away if they perceive
banks security provisions to be inadequate, and news of a breach can cause reputational havoc.
Theres a pull to understand the technology for any technical professional but if you want to
progress, the most important skill set is to be customer-focused yourself. The standard techie
response of show me the specification will not do, advises Pickles
Insurance industry: Compliance push
Insurance is a more conservative culture than the high-octane, champagne-fuelled world of
investment banking. This sector is picky and prefers to hire people it knows - with previous
experience in insurance. However the current dash for compliance may mean it opens its doors to
IT pros who have picked up solid compliance experience elsewhere.
The International Underwriting Association (IUA) has indicated that up to 40% of the Solvency
II implementation costs would be technology-related. Lloyd's reported a 51M spend on
Solvency II related IT this year alone for the London market
With the deadline of 2012 on the horizon, the next two years will see vast amounts of resources
thrown at compliance projects, which are taking predominance over any other IT initiative. The
C word is dominating conversations as insurers gear up to comply with Solvency II regulations.
Skill sets in demand are data management, business process re-engineering and business
analysis, advises Rob Stavrou, director of consultancy, Northdoor. Certain product skills sets
are rising to the top too. Lloyds of London named Sharepoint as its preferred tool, which may
explain the big demand for these skills.
IT budget facts and figures
4.5% - Increase in IT spend predicted for 2011. This compares favourably to the 0.3 % in 2010
and the 4.5% decline in 2009 (Source: Ovum)
2.9% - Growth in spend on IT by financial services in 2010 (Source: Celent)
4.9% - Growth in spend on IT by financial services predicted for 2012 (Source: Celent)
Read on to:
Get information about the financial sector from people in the know
Discover what IT roles are popular in the City.
See the latest compliance challenges facing the industry
Understand how the IT infrastructure is changing
Find out if you would suit a career in finance.
Related articles:
The IT landscape for graduates
Banking and finance: IT jobs, skills and qualifications
IT pros new role and purpose in financial services
Middle and back office ramp up IT capacity
Why you should work in banking finance
Tags:
applications,
banking,
client,
cloud,
financial ,
insurance,
it,
security,
standardisation,
systems integration


Art & Finance
Banking & securities
o Banking industry challenges
o Our banking & securities practice
o Our banking & securities service offering
Commerce & industry
Insurance
Investment funds & hedge funds
Healthcare & life sciences
PSF
Public sector
Real estate and private equity
Technology, media & telecommunications
Login
Register
Banking industry challenges
Our aim is to help you address key industry challenges
As the financial markets continue to evolve,
financial institutions are working to grow
and maintain profits while adjusting to ever-
changing regulations and the downturns
effects on profitability and performance.
Successful institutions will need to reassess
their operating models and address the
effects of regulatory reform, competitive
dynamics, evolving markets and increased
expectations from stakeholders. The main
challenges banking institutions face
nowadays can be categorised as follows:

Industry strategic challenges
Although not spared by the European crisis, the Luxembourg financial centre still remains a
major player in the international environment.
Banks in Luxembourg have to face significant strategic challenges. Private banking industry
professionals need to reinvent themselves in order to reinforce Luxembourg as a leading pole in
private banking services. Retail bankers also have to face a growing competition from abroad as
well as from non-traditional institutions. Asset management and investor services institutions
need to prepare themselves for significant changes in infrastructures, regulatory frameworks and
their competitive landscape.
Institutions will have to improve their understanding of their clients and re-examine the value
and promotion of their products to ensure they remain competitive in this new environment.
Industry regulatory challenges
The constant evolution of local and international regulations is a major driving force in the
banking and securities industry.
The likely introduction of Basel III standards, as an example, will have a major impact on the
way institutions run their business. There is likely to be an increased focus on capital efficiency.
The introduction of new oversight rules and bodies may also have far reaching implications for
the industry.
Implementing all these rules can be an issue, yet the real challenge is more about optimising your
regulatory investments than merely complying.
Industry operational efficiency challenges
To appropriately address strategic and regulatory challenges, impeccable execution is a must.
Constantly improving operational efficiency has to be high on the agenda of bankers. Now more
than ever, institutions have to optimise their processes, control their cost structure, and explore
new operating models using all the tools now at their disposal.
Analysing the opportunity to mutualise operations or IT systems across entities or geographies,
outsourcing non core activities, improving risk management frameworks and tools these are
some of the areas where financial institutions can find the levers to reach excellence.
Deloittes unique combination of technical expertise and practical implementation experience
will help your institution navigate this difficult environment and address key industry challenges
Scenario And Challenges Of Retail
Banking In India Finance Essay
ABSTRACT
This paper discusses the overview of retail banking in India. It further explains
the scope & tremendous growth of this segment among the other segments of
banking. The retail sector in India has huge potential & is expected to grow at
a rapid pace when overall banking sector is expected to grow at 30% this
year. The current scenario, products & services offered advantages;
disadvantages, issues & challenges are also a part of this paper.
INTRODUCTION
Today, the marketing mantra is to delight customers by offering them more
than their expectations. This leads to more satisfied customers. The same is
applied to the banking industry. Indian Economy is moving from
manufacturing to service economy where Banking sector is undergoing a
change. The demand for financial products is increasing & customization of
services is becoming a necessity.
The retail banking is growing at a rapid pace. Once it was considered as
forbidden by the leading foreign & domestic banks.
But today all the banks have recognized the importance of retail banking
which became possible due to extensive competition, innovation & advanced
technology. With the expected growth of 30% for retail banking, the banks are
focusing more & more on it. They are moving up to the potential of this
segmant of banking.
In terms of revenue for both public & private sector banks, Retail banking is a
major contributor. PSBs are considered to be more risk averse. In comparison
to the private banks, PSBs have higher exposure to the retail banking
segment & lesser exposure to treasury operations, in which foreign banks
holds maximum revenue.
In Public Sector Banks, SBI alone holds more than 1/4th of the revenue from
retail banking operations. The PSBs have higher share in retail banking
because of their rural reach in comparison to private or foreign banks. Out of
the total branches of banks in rural India, PSBs have for 94.7% of them.
As on 31st march, 2008 the revenue in different segments is shown for PSBs,
Private & Foreign Banks.
PSBs
Private Banks
Foreign Banks
The Indian players are confident towards the Indian Retail banking. The
reason for it is that
There has been a drastic change in the urban household income pattern
which has directly impacted the consumption patterns & hence the banking
habits of Indians have tilted towards the Retail products & services.
The spending pattern in India is also increasing. The bullish pattern can be
seen in the Retail business. The total outstanding Retail loans in India are
below 5% of the Indian GDP whereas they are around 41& of the GDP in
Taiwan. The figures are more surprising while comparing with the West.
Compared to Western countries, India is lagging behind in the use of credit
cards.
In India the people have generally save a lot. On an average an Indian saves
35% of his income. Therefore, no. of banking services provided by banks is
increasing day by day.
Also the tax benefits are available on various loans. For ex- a borrower can
avail tax benefits for the loan repayment & the interest charged for the loan in
case of housing loans.

Retail banking is actually a mass market banking where individual customers
use local branches of the large commercial banks. The focus is on creating
products & services that meet the needs of the target customers and in turn
making profits as well.
Since retail banking products are more on a mass production basis, therefore,
all risks & operations are to cater to a large number of customers & are also
based on them. This approach is quite different from wholesale banking or
corporate banking where target is on large sized customer accounts rather
than large numbers of customers as in the case of retail banking.
For servicing your customer better it is very important to understand retail
banking as it helps in structuring products and meeting specific requirements
for each set of products. ATM introduced the concept of Anytime banking.
Anywhere banking became possible with the development of satellites &
telecom networks across the world.
Now it is the time for Anyhow banking & the bank which will have all these 3
As will be the leading bank of the next century.
RETAIL BANKING
Retail banking is quite broad in nature. It refers to dealing with individual
customers by commercial banks, both on liabilities & assets sides of their
balance sheet. Fixed savings /current accounts come on the liabilities side &
mortgages and loans come on the assets side. Various other services include
credit cards or depository services. Retail banking & retail lending are often
confused with each other but retail lending is only a subset of the retail
banking. Individual customers need & requirement are accessed &
approached in an integrated manner in retail banking.
Retail banking sector is consists of:
BENEFITS OF RETAIL BANKING
Retail Banking has become a better option for banks to increase their
earnings as the lending to corporate is of high risk & are generally slow
moving. This sector consists of a large no. of customers of varied class. This
type of banking provides customized & wide range of products to individual &
small units. Also the risk is spread & the recovery is very good. The products
can be designed, deployed & marketed according to the individual
requirements.
ANALYSIS OF RETAIL BANKING
STRENGTH
Diversified asset portfolio
Retail banking consists of a wide range of financial product & services. These
include deposit product, home loan, loan against equity shares, mortgage
loan, auto loan, car loan, payment of bills, credit card, debit card etc. Such a
diversified asset portfolios provide banks with higher profit & relatively lower
NPA (non Performing Assets).
Upcoming as a new growth driver
Over past few years, fierce competition has lowered the spread & profitability
from a commercial loan. Also, with the deregulation and increase in consumer
loan rate, the risk adjusted return in retail sector has exceeded beyond the
return on commercial loan.
CRM tools
The customer Service & Quality implementation through use of CRM tools will
help banks in acceptance of their banking product and satisfaction of
customer that will eventually yield profit for them.
Innovative product development
In financial services there is an unlimited scope for development & innovation.
Banks should approach the customers to find out their financial need &
problem and accordingly structure their strategies towards the development of
the product & services, marketing them & finally selling them to satisfy its
customer.

Increase in income
With the increase in per capita income & growth in urbanization the life style of
people has changed. The needs & aspirations of people have increased.
Therefore, the role of retail banking has become important. By providing
various products & services like personal loan, education loan, home loan etc
to its customer, the retail banking helps in maintaining the changing life style
of its customers through affordable credit.
Economies of scale
Through Retail Banking, Banks can get the benefits of information &
transaction. Banks have access to more information through extended
services. They should systematically record this customer information as it
can help them in efficient utilization of this information, which in turn can be
used in finding out new segmento of market & to sell their new services.
WEAKNESS
Reduces the profitability
Retail banking requires high capital investment as a huge amount is spent on
managing the wide range of product & service which further requires large
staff & high quality technology. All this reduces the overall banks profitability.
Avoids corporate sector
Retail banking avoids corporate sector which forms the backbone of Indian
economy. Banks should properly manage their corporate clients through lower
arte credit, higher amount of loan etc. Corporate clients are easily
manageable as they have well defined financial policy & projects.
Changes in technology
If banks are not able to match with the latest technology it may affect their
growth. Also the technology requires huge amount of capital investment & if
suppose, the technology fails then it will affect the banks reputation & the
bank may lose some of its customer.
Marketing
Retail banking requires strong internal as well as external marketing strategies
to be adopted by bank. Under retail banking the management needs those
employees who can introduce product properly to their customers. The
employees must be aware of the products they are offering because if this is
not the case then it can lead to the failure of even a very good product. Also
bank should spend a lot on its marketing of product to general public. All this
increases the expenses of banks in terms of time & cost required to introduce
the product.
OPPORTUNITIES
1) Increase in per capita income:
There has been increase in the per capita income over the past few years & is
expected to grow in the future also. Moreover, the younger population is more
comfortable in taking personal debt than previous generations. Their
purchasing power has also increased due to economic growth & more jobs.
Also GDP of India is rising at a very good rate. Currently it is around 9% & is
expected to rise in the near future.
Innovation in products & services
This segment has more scope for innovation as banks tries to provide more &
more products & services to their customers as desired by them. Banks can
continuously modify its products & services to match the market demand &
sustain in this competitive era.
3) Growing Economy
Retail banking has enormous opportunities in a growing economy like India.
A.T. Kearney, a global mgnt. consulting firm, identified India as the '2nd most
attractive retail destination' among the 30 emergent markets.
THREATS
Large payout of loans
The increasing competition has made the banks to disburse large no. of
customer loans, auto loans, home loans, loans on credit cards, educational
loans etc. on easy terms without much inquiry. Due to this the no. of case of
default in loan repayment has increased. This in turn has increased the banks
bad debts & nonperforming assets (NPA). This was one of the major reasons
for recession which has affected the world.

2) Customer privacy issues
One of the major problems from customers point of view is that the customer
service representatives of the banks ring up their customers at any time at
their places of work, informing them about new products & services. This may
cause inconvenience to busy customers.
Banks are also responsible for not sharing the personal information of the
customers with any outside agencies like market research groups & other
advertisers.
3) Information Technology
With the growth of IT, a number of frauds have aroused & are carried out with
the help of technology. These frauds come under the domain of cyber crimes.
The unscrupulous elements have always attacked banks. In many cases
these elements have stolen credit card no., password & other confidential
information relating to customer. For ex- Satyam scam.
These elements have also hacked banks website.
BANKING PRODUCT
The banking product areas which have high growth potential can be classified
as follows:
HOUSING LOANS
Housing loan comprises of 48% of all retail loans. The customer attitudes
toward holding debt translated this market into a market that expanded with a
rate of 35% annually from 1999 to 2004. Also the lending rates are not very
high and the growing household income enables the borrower to make the
payment of interests & principal amount. Banks generally have tie ups with
various real estate companies. This is to reduce to efforts on the side of
customer for taking loans.
VEHICLE LOANS
Housing loan comprises of 27.2% of all retail loans. Car sales volume in 2004
increased to more than a million vehicles and annual growth in sales reached
954,354 in 2007. The sales of bikes have also increases. Banks provide
various lucrative plans to finance your car or a bike.
They often come up with various schemes which increases the sales of the
vehicles & help people fulfill their aspirations.
India has become the 3rd largest market for cars & MUVs. The growth drivers
of this segment are easy finance, low interest rates, opening up of 2nd hand
car finance & up gradation of rider to four wheelers from two wheeler.
SME BANKING
Initially public sector banks in India focused only on big industries instead of
small businesses. But today SME market in India has expanded beyond 4
million businesses. These businesses are growing, importing & exporting and
demanding more & more complicated banking products and services.
PERSONAL FINANCIAL SERVICES
Banks provided this service to boost the financial status of individuals. The
banks that can establish the right combination of account mgnt & distribution
infrastructure can avail the benefits from growing market for wealth
management. The services can be saving income in bank accounts or
investing in insurance
ISSUES TO THE RETAIL-BANKING SECTOR
The key policy issues in retail banking sector are: financial enclosure,
accessibility to finance, protection of consumer & his privacy, financial
capability, responsible lending, regulation & prevention of financial crime.
ADVANTAGES AND DISADVANTAGES OF RETAIL BANKING
ADVANTAGES
The advantages from the resource & asset point of view are as follows:
Resource Side
Apart from current & savings accounts, the deposits in retail banking are
comparatively stable. These constitute core deposits.
Helps in increasing the subsidiary business of the banks.

They are interest insensitive in case of current & savings accounts.
The funds in this sector are the low cost funds.
Helps in building a strong customer base.
ASSETS SIDE
For funds deployment, Retail banking is a good opportunity.
When there is a high demand for banking products & services, Retail banking
need not require high marketing efforts.
Consumer loans involve less amount of risk & have perception of less NPA.
Through investments in productivity activities, it helps in economic
revitalization of the nation.
Through affordable credit, this segment of banking improves lifestyle of the
people & fulfils the aspirations of the people.
Diversified portfolio due to huge customer base reduces risk for a bank.
DISADVANTAGES
Huge capital investment is required in designing new financial products. It
requires a lot of time & cost for the bank.
Today net banking is preferable over branch banking by customers. It is not
possible for banks to retain their customers if their technology is not up to the
mark. The customers wishing to use net banking will switch over to the
services of some other bank.
Various other financial products like mutual funds etc. attract customers
towards themselves.
Banks are not able to exploit the technology to an appropriate level
Banks is spending heavily on human resource department for monitoring &
following up of large no. of loan accounts.
In the absence of proper follow-up, long term loans like housing loan which
involves long repayment term can become NPAs.
As compared to wholesale banking, the amount borrowed in retail banking by
a single customer is very low. Therefore, the bank is not able to make huge
profits from a single customer.
STRATEGIES FOR SUCCESS IN RETAIL BANKING
Banks should adopt the following strategies to achieve success in the retail
banking sector.
Adoption of advanced & latest technology
Availability of skilled man power in all branches & offices
Extensive market research should be carried out in order to formulate
innovative & competitive products & services
Managing relationship with customers by having an approach of customer
relationship management.
There should be balanced and sustained growth in deposits & advances
More & more delivery channels should be explored
Service quality should be improved with human touch giving the customers
personal experience
Proper strategic cost management should be adopted
Constant focus should be there on Universal banking and financial
supermarkets
Cross Selling of Products
Public Sector Banks have a wide network of branches. This provides them
with added advantage over other banks. Through these branches banks have
an opportunity as they can sell third-party products.
Tie Up arrangements
Public, private & foreign banks should tie up & enter into strategic alliance with
other banks to extend their reach & by having presence in various other
regions. This will help them by enabling them to make benefits by reaching
customers across the country.
Business Process Outsourcing
Outsourcing of various processes will save time & cost. Eventually this will
help the banks in concentrating on their core business area, that is, their core
competency. For ex- Managing ATMs should be outsourced, which will save
banks from dealing with something which is not their core competency.

CHALLENGES TO RETAIL BANKING IN INDIA
The key challenges before the bank is to strike a balance between credit
growth & quality of asset simultaneously and sustaining the profitability in the
increasing interest rate scenario.
With the advancement in technology, there has been increase in the
responsibilities & challenges for an IT department in managing, maintaining &
optimizing the performance of retail banking networks.
According to credit rating agency CARE, in 2010-11, the non performing
assets (NPAs) in the industry are expected to rise to 3.5 % of the total assets
as compared to previous fiscal years 2.8 %. Therefore, measures should be
adopted to reduce NPA.
As per the RBIs instructions, banks are required to provide for 70% of the
total bad loans on their books from Sep 2010.
The new Base rate is yet to be implemented which will ensure transparency in
the lending but will reduce banks profits as they will then be able to lend at or
above base rate & not below it. This may affect banks as they may lose their
some customers to whom the loan were given at below PLR.
RBI has also asked banks to provide interest on savings accounts on daily
basis. This will put pressure on margins of banks.
RBI is adopting various measures to reduce liquidity. They have increased
CRR & also increased Repo & reverse repo rate. All this will impact the
lending rate of banks as the interest rate will rise to reduce liquidity in market.
But this will be a threat to banking sector. At this time when interest rates are
higher & interest rate volatility exists, the Current Account Saving Account
(CASA) deposits help banks maintaining their margins. These accounts helps
in maintaining the spread between the cost of funds & interest earned in a
period of high interest rates.
In recent past, the outsourcing of various activities such as software &
hardware maintenance, entire ATM operation (including cash, refilling) etc.
has become very important.
The banks should have innovative strategic management approach to meet its
customers needs & requirements in terms of products or services. It is
generally said that, it takes months to find a good customer but only seconds
to lose him. Therefore, banks should have the strategy of Knowing Your
Customer (KYC).
To retain the ongoing trust of the public & reputation, banks are supposed to
meet their commitments & take utmost care while serving their customers.
In order to increase the market share & profitability in the retail banking &
corporate banking, the customer loyalty is very important.
As per the government order, banks have to align their accounting practices in
line with the IFRS (International Financial Reporting System) within 2 more
years.
Limited no. of branches & ATMs in rural areas.
Less education or training is given to the people in rural areas who are
illiterate & dont know how to do avail the basic benefits from banking, forget
about operating ATMs.
If all these challenges are faced by the banks with utmost care and
deliberation, the retail banking is expected to play a very crucial role in coming
years.
CONCLUSION
Since the reforms in financial sector in India, Retail banking is facing a lot of
competition. Today banks are on their toes for sustaining in existing business
& capturing new business. Banks are competing for increasing their retail
business.
Constant innovation should be there in retail banking in areas product
development & differentiation, marketing, micro-planning, prudent pricing,
technological up gradation, customization, home / electronic / mobile banking,
asset liability management & effective risk management and t techniques.
But in the Indian banks, there is very less little or no interest in innovative
products.
Innovation should not only in terms of technology or through internet or
computers but it should be such that it benefits even the rural areas. You cant
just really on technology & become a tech savvy in a country where Internet
penetration is only 1.65%.
While retail banking offers exceptional growth opportunities, the challenges
are equally discouraging. Therefore, banks should face the challenges
optimistically & make use of opportunities to make profit.
The success in retail banking business depends on the kind of technology
used & the effectiveness of operations. This provides the banks an edge over
their competitors. Furthermore, customer interest should be most important for
becoming a responsible bank. The focus of this sector should not only remain
to just increasing the per capita indebtedness but it should be in terms of
creation of wealth at macro economical level.
RECCOMENDATIONS
The retail banking sector in India should adopt knowledge banking approach
which is one of the differentiating strategies of Yes Bank who is among the top
10 innovative banks of the world. The focus should be there on sun rising
sectors of economy like IT, Engineering, infrastructure & logistics, food &
agriculture etc. These are sectors of economy have growth prospects.
Banks should extend their operations to rural & semi urban areas & should
have a responsible banking approach. This can be done by educating &
training people to avail the benefits of banking services which will not only
help the banks in increasing their reputation but will also help them in long
term perspective to increase the profits by tapping the untapped areas.


Read more: http://www.ukessays.com/essays/finance/scenario-and-challenges-of-
retail-banking-in-india-finance-essay.php#ixzz2xdKJpRUa