CHAPTER 1

RETAIL BANKING - CHARACTERISTICS, ADVANTAGES AND CHALLENGES

INTRODUCTION

The issue of retail banking is extremely important and topical. Across the globe,
retail banking has seen spectacular uprising in the commercial banking sector in
recent years.

The reason for fast growth of retail market, especially, in emerging economies, is
attributable to:

a. Rapid advances in Information Technology

b. Evolving macroeconomic environment,
c. Financial market reforms ( Narasimham committee) and
d. Several micro-level demand and supply side factors.

TRANSFORMATION OF RETAIL MARKET

Retail Market has decisively got transformed from a sellers’ market to a buyers’
market. Gone are the days when getting a retail loan was difficult and
cumbersome. All this emphasizes the momentum that retail banking is
experiencing in the Indian Economy in recent years.

Retail banking is, however, quite broad in nature – it generally refers to dealings
of commercial banks with individual customers, both on liabilities and assets
sides of Balance Sheet. Fixed, Current and Savings Accounts on the liabilities side;
and loans – personal, housing, auto and educational on the assets side are more
important products offered by banks.

Additionally, related ancillary services including Credit Cards, Depository Services,

Alternate Delivery Channels, Share-broking. Online Trading, sale of gold coins, and
third party products like Mutual Funds, Life Insurance, and Non-life Insurance are
also offered by Banks under Retail Segment.
CHARACTERISTICS OF RETAIL BANKING

We can list out the characteristics of Retail Banking as under:

 Banking facilities targeted at individual customer

 The thrust is on mass market segment encompassing large population of
individuals
 On offer is plethora of products from liability, asset and service products
 Services as mentioned above are provided through various channels i.e.
both physical and virtual channels.
 Retail Banking is extended to small and medium business houses whose
average annual turnover in the last 3 years is less than Rs. 50 crores.

Retail Banking in India is perceived to be the in-thing in today’s banking. In recent

past, retail segment has turned out to be a key profit driver for banks with retail
portfolio constituting around 22% of outstanding business. The proportion of NPA
in retail segment is also lower than in other segments.

OPPORTUNITIES

 Economic prosperity and consequential increase in purchasing power

 Changing consumer demographics. India is having highest proportion (70%) of
the population below 35 years of age (young population).
 Technological Innovation like Debit cards, ATMs, Phone banking, online
banking etc.
 Diversification of Risk
 Opportunities to expand customer base by cross sell and up sell.
 Rise of Indian middle class
 Financial Inclusion

CHALLENGES

 Retention of customers – 5 per cent increase in customer retention can

increase profitability by 35 per cent, as per a study.
 Rising indebtedness could turn out to be a cause of concern.
 Information Technology on one hand provides opportunities and on the other
hand poses challenge because many customers still prefer Branch banking and
personal touch.
 KYC issues and Money Laundering Risk is very high in view of competition
among banks, as KYC norms may be compromised by Banks in a bid for new
business.
 Need to provide end-to-end solution to customers.
 Sharing information about the credit history of households.
 Need for constant Innovation in products, systems and procedures.
 Need for Credit Counselling to prospective and existing customers.

The issue of outsourcing has become very important in recent past because
various core activities such as hardware and software maintenance, entire ATM
set up and operation (including cash, refilling) etc., are being outsourced by Indian
banks.

Banks are expected to take utmost care to retain the on-going trust of the public.

Customer service should be at the end all in retail banking. Someone has rightly
said, “It takes months to find a good customer but only seconds to lose one.”

Thus, strategy of Knowing Your Customer (KYC) is important. So the banks are
required to adopt innovative strategies to meet customer’s needs and
requirements in terms of services/products etc.

The dependency on technology has imposed additional responsibilities and

challenges on IT departments in managing, maintaining and optimizing the
performance of retail banking networks. It is equally important that banks should
maintain security to the advance level to keep the faith of the customer.

The efficiency of operations would provide the competitive edge for the success
in retail banking in coming years.

One of the crucial impediments for the growth of this sector is the acute shortage
of manpower talent of this specific nature, a modern banking professional, for a
modern banking sector.
COVERAGE OF RETAIL BANKING AS PER MODIFIED BUSINESS SEGMENTATION

Liability Side

All Individuals (including staff), HUF, NRIs, Sole proprietorship firms and
Institutions permitted by RBI to open S.B. a/cs (except Clubs & Trusts).

Asset Side

 Consumptions/ Personal loans to all individuals including NRIs, irrespective of

credit limit.
 Small Business Loans to individuals and sole proprietorship firms engaged in
small business, retail trade, self-employed, professionals – rendering services
(other than agriculture & manufacturing ) – with limit up to Rs.5 crore.

ADVANTAGES OF RETAIL BANKING

Retail banking has inherent advantages outweighing certain disadvantages.

Advantages are analyzed from the resource angle and asset angle.

Resource (or Liability) Side

 Retail deposits are stable and constitute core deposits.

They are interest insensitive and less bargaining for additional interest.
They constitute low cost funds for the banks. (Eg. Deregulation of SB interest
rate)
 Effective customer relationship management with the retail customers built a
strong customer base.
 Retail banking increases the subsidiary business of the banks.

Assets Side

 Retail banking results in better yield and improved bottom line for a bank.
 Retail segment is a good avenue for funds deployment.
 Consumer loans are presumed to be of lower risk and NPA perception.
 Helps economic revival of the nation through increased production activity.
 Improves lifestyle and fulfills aspirations of the people through affordable
credit.
 Innovative product development credit.
 Retail banking involves minimum marketing efforts in a demand–driven
economy.
 Diversified portfolio due to huge customer base enables bank to reduce their
dependence on few or single borrower.
 Banks can earn good profits by providing non fund based or fee based services
without deploying their funds.

In addition to above, the following are the other advantages of Retail Banking:

 Large customer base

 Risk diversification
 Strong customer loyalty and tend to stick to one bank. Movement from one
bank to another by customers is not frequent.
 Attractive interest spreads as the range of interest is wide. Customers do not
have much bargaining power.
 Well diversified credit risks backed up by smaller quantum of loan sizes.
 Less volatility in demand and credit cycle as compared to large corporates
ensures stability in retail banking.
 Large number of customer helps in marketing, mass selling and ability to
categorise and select customers through the effective use of scoring systems
and data mining.

DISADVANTAGES OF RETAIL BANKING

 Designing own and new financial products is very costly and time consuming
for the bank.
 Customers now-a-days prefer net banking to branch banking. The banks that
are slow in introducing technology-based products, are finding it difficult to
retain the customers who wish to opt for net banking.
 Customers are attracted towards other financial products like mutual funds
etc.
 Though banks are investing heavily in technology, they are not able to exploit
the same to the full extent.
 A major disadvantage is the need to monitor and follow up of huge volume of
loan accounts, inducing banks to spend heavily on human resources.
 Long term loan, like housing loan, due to its long repayment term in the
absence of proper follow-up, can become NPAs.
 The average amount borrowed by a single customer is very low as compared
to wholesale banking. This does not allow banks to exploit the advantage of
earning huge profits from single customer as in case of wholesale banking.
CONSTRAINTS IN RETAIL BANKING

 Problems in managing large number of customers – more pronounced, if

robust and compatible IT systems are not available.
 Continuous and rapid change / evolution of products can result in IT
complications.
 High cost of maintaining branch networks and large number of low-value
transactions results in high cost of operations.
 Higher delinquencies in retail loans portfolio - especially in unsecured retail
loans and credit card receivables.

STRATEGIES FOR INCREASING RETAIL BUSINESS

 Focus area will be CASA deposits. Consistent growth in CASA will continue to
be hallmark of our growth strategy.
 Rural and Semi-urban branches to focus on Savings Bank Deposits and Urban
and Metro branches to focus on Current as well as Savings Bank Deposits.
 Branches in Residential areas to take challenging targets in Savings Bank
deposits due to their locational advantage and similarly market area branches
to canvass current accounts.
 Customers having sizeable balance in Current Accounts i.e. >Rs. 2.50 lakhs to
be contacted frequently for additional business through cross-selling, upselling
and non-fund bases business.
 Savings Bank Customers maintaining > Rs.5/- lakhs to be monitored personally
by Branch Heads.
 Branches to adopt sales and marketing as a regular activity for client
acquisition.
 Alternate Delivery Channels i.e. e-channel products to be popularized.
 Campaigns for Savings Bank and Current Accounts should be organized on
regular basis.
 Customers Meet should be regularly conducted by inviting new customers in
every meeting.
 Branches should seek referrals for new clients from existing good customers.
 Customer Satisfaction Survey to be carried out from time to time.
 Retail Festival Campaigns should be launched to increase Retail Loan portfolio.

CONCLUSION

From the above, it can be said that there is lot of scope of Retail Business in India.
However, there are many challenges as well. Hence, observance of KYC norms,
fulfilling due diligence guidelines and cautious approach in canvassing Retail
Business is considered prudent.

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