RETAIL BANKING

what is banking? evolution of banking in the world evolution of banking in inida banking industry before and after nationalisation of banks banking industry befor and after liberalisation role of RBI in banking industry what is retail baking comparision of ratil banking in india and rest of the world service quality of retail banking in india and rest of the world. reasons for poor service quality of retail banking in india 1.

INTRODUCTION
BANKING EVOLUTION OF BANKING RETAIL BANKING EVOLUTION OF RETAIL BANKING SERVICE QUALITY PERCEPTION CUSTOMER SATISFACTION SERVICE QUALITY PERCEPTION AND CUSTOME SATISFACTION IN RETAILBANKING

2.

RETAIL BANKING INDUSTRY

AN OVERVIEW OF RETAIL BANKING INDUSTRY

LAWS RELATING TO RETAIL BANKING

RETAIL BANKING IN VARIOUS COUNTRIES (CHINA, INDIA..)

INTRODUCTION Banking system is significant for all the economies of the countries of the world. It is not out of place to mention that the banking institution is indispensible in modern society. It is in fact core of the money market of all countries. Under the Banking regulation Act 1949 which is basis for the regulation of banking in India under Section 5(b) of the Act defines banking as banking means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise. The commercial banking is known to be started in early eighteenth century on the establishment of the Bank of Calcutta in June 1809. This was followed by series of development like establishment of the Bank of Madras in July 1843. The historical records provide evidence that the Bank of Bombay was the last bank under the British rule in India. It will be improper to have any detailed write up about banking unless we understand the micro view of banking developed in past centuries in phases and not a sudden change in any specific period. Banking has been developed in different phases in different countries. In England after the people lost faith in goldsmiths The Bank of England was started in 1694 A.D. Till then people of England were helped by the activities of the London goldsmiths. It can be easily concluded that banking is not static rather it is dynamic concept. In Venice and Geneva, it was only in 12th century that banks in modern sense of the term were established during that time they were involved in the business of receiving the deposits and lending money. The Bank of Venice was the first Public Banking Institution in the year 1157. During the year 1401 and 1407 the Bank of Barcelona and the Bank of Geneva were established. The Public banks enabled the merchants in development of trade and commerce. One of such example is the Bank of Amsterdam established in the year 1609. Such public Banking Institutions accepted heterogeneous metallic money and credited deposits in their books which were allowed to be transferable by bank cheques (Gupta, 2006). Ref: Gupta SN (2006), The Banking Law in theory & practice, Universal Law Publishing Co. Pvt. Ltd. Delhi. The Imperial Bank of India was formed by amalgamation of three banks of Calcutta, Bombay and Madras in the year 1921. State Bank of India was established under the State Bank of

India Act 1955 and took over the business of the Imperial Bank of India. The Indian banking has been prospering significantly since inception. There have been major changes in policies since independence 1947. The first significant landmark was the establishment of The Banking Companies Act, 1949 to control the activities of the commercial banks. The Reserve Bank of India (RBI) was established in April 1935 as the Central bank of the country. The important functions of RBI are to strengthen the Indian economy. Starting from note issuing authority RBI has the responsibility of accepting money on account of Central Government and render services to the State Governments. Under the legislation of the Banking Companies Act RBI was given huge powers to control and supervision. The year 1965 is the landmark in the Indian banking system as the name of the Banking Companies Act was changed as the Banking Regulation Act 1949 by the Banking laws Act, 1965 (Varshney, 2007). Ref: Varshney, PN(2007), Banking Law & Practice, Sultan Chand & Sons, New Delhi. The first step towards nationalization of banks was taken over by the Australian Government but Indian Government nationalised the banks to promote agriculture and small scale industry by the commercial banks. The main purpose of the nationalization was to control the economy in conformity with national policy. The success of nationalization of 14 banks compelled the Government to nationalise six more banks to comply with the government commitment. As of date there are 27 nationalised banks in India which constitute Public Sector Banks engaged in commercial banking. The records of the assets of the commercial banks prior to nationalization were the evidence that the banks were reluctant to finance agriculture and small scale industry. During that era the ruling Government emphasized the commercial banks especially the nationalised banks to finance the neglected sector of the economy especially the rural areas. The reason for the nationalization was given by the Government that the prior to nationalization, the private industrial houses were favoured for the finance and it was a sort of monopoly which the Government wanted to stop to attract the attention towards the poor public and rural areas. Government was of the view that private banks before nationalization were having the concentration of economic power. The actual retail banking started after nationalization as the government sponsored different schemes for the rural and poor public for getting easy and cheaper finance. The strategy of the Government was to stop the activities of money lenders who were looting the money from the poor public who were denied finance by commercial banks. The main contribution

of this strategy was associated with poverty reduction in India. Prior to nationalization there were very few commercial banks in rural areas. The control of the central Bank of India over the Public Sector Banks changed their licensing policy on bank location choice. During 1977 and 1990 the licensing policy of 1:4 was implemented which caused the commercial banks to open more branches in rural and unbanked areas (Burgess, Pande,2004). REF: Burgess Robin, Pande Rohini (2004), Can Rural Banks Reduce Poverty? Evidence from the Indian Social Banking Experiment, article published in June 09,2004. ROLE OF RBI IN BANKING INDUSTRY RBI is the Central Bank of the country. The role is significant as it has to undertake both traditional functions of the central bank as well as number of promotional and developmental functions. The major functions of RBI linked to banking industry are having sole right to issue the Bank notes ( except for one rupee notes and coins) of our country and making adequate administrative arrangements for undertaking the distribution of the currency notes and coins. RBI helps the banks in circulation of the currency by maintaining the Currency Chests which hold stocks of new, re issuable notes along with coins. To implement the RBI Act RBI acts as a banker to Central and State Governments. It also act as banker to banks. The responsibilities are, hereby, highlighted in short but it is significant to add that based on The reserve Bank of India Act 1934 and the Banking Regulation Act 1949 there is varied relationship between the RBI and commercial banks. Some of these are highlighted as follows: a) RBI is a supervisory and controlling authority over banks under which RBI has the authority to conduct inspection of the books of the Banking Companies. No Bank in India can engage in banking activity without getting license for Banking from RBI. Existing domestic banks, cooperative banks, regional rural banks, private banks and foreign banks operating in India need to obtain license for opening even any new branch or shifting of the branch from one location to other. The public interest is the major priority for grant of license to the banking company in India. b) RBI is empowered to issue directions in the public interest and complying of banking policy. c) RBI has the power to control over the top management of banks. Prior approval from RBI is mandatory for appointment of Chairman and Managing Directors and Chief Executive Officers.

d) RBI has the authority to control the credit by issuing directions for change in Cash reserve ratio (CRR) and Statutory reserve ratio (SLR) which impact the liquidity in the banking system (Muraleedharan, 2009) REF: D. MURALEEDHARAN, Modern Banking: Theory And Practice, PHI, Leaming Pvt Ltd. RETAIL BANKING The Indian banking Industry realized very late in 1990 during liberalization of economy that the strength of the retail borrowers and retail loans is much below the expected level. It was found to be even less than 5% during 1990. The commercial banks lacked in many other business activities like treasury operations to forex markets, money markets and insurance businesses. It can be agreed with the views of Reena ray in her article on Marketing Myopia that commercial banks before 1990 failed to notice their products and services through the eyes of the customers. It was opined by her that banks did not realize the expectations of the customers from the products and services offered by them. They were not even fully aware as to whether the customers used the offered products just because they did not have any alternative choice. Taking into consideration the above facts most of the banks in India came up with various products in different areas of banking activities. The growth in retail lending also involved the growth in Information technology in the country. The customer satisfaction is dependent upon the up gradation in information technology and evolving macroeconomic environment. After the introduction of retail banking products the banks management was more concerned with the customer satisfaction aspect. This brought both innovation and variety in retail banking products. The situation was faced with strong face by Indian banking system also. The evidence is given as retail loans are now one fifth of the banks overall credit of most of the banking system in India. The portfolio increased to the extent that it reversed the position of being buyers market rather than sellers market. The public which was facing credit crunch prior to retail banking experienced a new era in banking for developing their business. Not only the volumes but the profitability angle was favourable to banks in retail banking and has become biggest profit making segments for various reasons (Shyamala Gopinath,2005). Ref Shyamala Gopinath (2005), publication accessed on 30.06.2011 and retrieved from rbi.org.in

Retail banking is becoming famous in India due to change in competitive environment, innovative technology etc. The past record show that as of date the Non Performing Assets (NPA) under this category are under control but further increase in interest rates can be harmful to the banking system. The Indian growth in retail lending is linked to boost in GDP. The commercial banks stressed upon expansion and diversification of retail products to take advantage of the emerging scenario. The change in financial sector in India is transitional with regulatory environment, increase in delivery channels, and competition from traditional and non traditional financial institutions. Retail banking includes operations both on the deposit and loans side. Retail banking products include savings bank, fixed deposit, recurring deposit and flexi deposit accounts etc. These products are for different type of customers as per their needs and requirements which provide them greater values. Important retail lending products include housing loans, white goods loans, personal loans, education loans, auto loans, gold loans, festival loans, insurance products, debit and credit cards (domestic and international). In fact the commercial banks globally are continuously innovating the retail banking products based on the consumers evolving needs and requirements including payment of insurance premiums on due dates, remittance of funds, demating of shares, bonds, debentures, mutual funds, payment of credit card bills and filing of income tax returns and payment of income tax. In broader terms the retail banking is defined as banking service which is geared primarily towards individuals consumers. The retail banking provide wide range of products like personal banking services, offering savings and checking accounts, bill paying services, as well as debit and credit cards. The majority of the customers in retail banking are individuals but the activities have become so varied that small an s medium energises are also part of the consumer segment. Retail banking is now also famous for mortgages and personal loans (Barron's, 2010). Ref.: Barron's, 2010, accessed on 12.06.2011, http://www.investorglossary.com/retail-

banking.htm#rate_definition. The innovation of financial products in retail banking is related to income fluctuations, protect savings from inflation and provide support against economic fluctuations. While implementing these products the commercial banks adhered to regulatory issues prior to introduction of these services in remote areas. The support from RBI while implementing the government policies are to reduce the poverty. The strategy initiated during 1990 to extent

the financial services to remote areas and their diversity can transform the lives of the poor. Banks introduced the products which are safe and accessible savings and investment products which provide inflation free products and help the medium class clients from the vagaries of the local economy. Familiarity and easy approachability of the Insurance products allowed the customers to overcome the misfortune due to stoppage of earning member. The products added by banks were wealth management services to enable the clients to understand what these products can do and how they interact with their existing reality. It is the technology and business models which have taken these retail banking products to remote corners of the country ( Nachiket Mor, 2010). Ref: Nachiket Mor, 2010, Universalizing Complete Access to Finance: Key Conceptual Issues, December 10, 2010, ADBI Working Paper No. 256 Indian commercial banks experienced high growth in retail outflow by using ties ups with dealers and using services of call centres. However, there have been complaints of unsatisfactory customer service by the call centres. The banks had to use the methodology of branding their products and services. The strategy of the branding was to improve the long term relationship with the customers and had competitive edge over peer group. Retail lending is linked to different industries like consumer durables and auto industries globally. The industry scenario in India was also the major factor for some of the retail lending products. In India, the consumer durable industry and auto demand increased after economic liberalization which increased the growth rate of retail banking. The scenario of these two industries along with stable GDP growth and India being amongst the top five economies increased the retail lending activities in all banks. In the last decade the housing demand has grown at a healthy rate and there are highly optimistic trend in the medium term. It is also observed that share of rural segment in consumer durable and auto is almost equal to the urban demand. Most of the Indian banks are now serious about their retail finance activities to diversify from the traditional corporate funding. In India ICICI was perhaps the first Bank to use the brand strategy. However, the same strategy was used by other Banks majorly Standard Chartered Bank, HSBC, SBI, HDFC and Axis Bank. The commercial banks used the dealers contact for consumer durables and auto industry and housing builders for home loans. The activities gained confidence in such a way that most of the public sector banks also

added special strategies and made special products for Vehicle Loan, Home Loan and Personal Loans etc. Banks also advertised and made tie ups with major brokers for stock exchange and the investments in bond, debentures and equity are conducted through banks. Banks and insurance companies joined hands and added to the profitability of Indian retail financial industry. Banks went for cross selling exercises for their existing and new products. Marketing of the new products was not difficult or expensive for the commercial banks in India. The customer relationship was carried over by adding new products and services were made efficient by adding new technology (Chary Sridhar, 2005). Ref: Chary Sridhar ( 2005), article published in ICFAI, Professional Banker magazine March 2005. In the media report daily financial daily Business Line dated Sept.11,2010, chiefs of HDFC, SBI, Indian Bank and Allahabad Bank declared that these banks are coming out with new schemes for the benefit of customers. These banks announced the special schemes to attract customers by way of interest subvention and waiver of processing fee. Indian Bank is hopeful to have 65% disbursement during FY 2011 by adding Rs1000 crores. Allahabad Bank anticipates almost 90% growth in disbursements at Rs. 1900 crores. RETAIL BANKING OVERSEAS Retail banking has been competitive since inception all over the world. To sustain the retail banking activities commercial banks plan to reduce the cost and achieve the strategic aims. In most of the developed countries abroad, the retail banking activities are outsourced for both regulated and unregulated activities. The adverse impact of outsourcing is the higher risk and banks need to have effective management of risks and ensure compliance of the regulatory directives. The concern was also thought of by Bank for International Settlement which has enacted certain principals for banks to mitigate the concerns without compromising on efficiency. This is because of the fact that outsourcing of the banking activities is becoming complex especially under the circumstances when the outsourcing activities are operating offshore. The activities of the outsourcing are influenced by many business activities which include information technology, specific operations and contract functions (BIS,2004).

Ref: Bank of International Settlement accessed 0n 30.06.2011 from www.bis.org.