Retail Banking

A few things MBA student must know

What extra do you learn in a B school?

Knowledge of all functional areas , management practices, processes, risks and risk management tools and techniques of business Develop skills to be a team player and a team leader to manage processes to analyze situations, to make decisions to communicate to make presentations Develop right attitudes to be a successful manager
4

 Knowledge
information about a subject obtained by experience or study
When applied, Gets converted into Skill A special ability to do something possessed by an individual it is personal possession Over the years of experience Becomes Competency Becomes very valuable ( given the right attitude)
5

It is OUR ATTITUDE towards Life and Work that makes OUR Life 100% ! ! ! Attitude

Feeling or opinion about something or someone or a way of behaving that follows from this feeling or opinion

Why do some people seem to reach the top of the corporate ladder easily, while others remain stuck on the middle-management rung? Dr. Martin Seligman, an authority on optimism discovered that attitude was a better predictor of success than I.Q., education and most other factors. Some positive attitudes Life is so wonderful. I have ambition in life. I will make it to the top, and I am in charge of making it happen. (auto suggestion to computer in brain ) Hard work comes first, luck comes later. I think I can. (Confidence) I will Come forward to Go forward My opportunity monitor is never turned off.
7

 Have you ever wondered why all same IIM batch mates are not equally successful? Why all the batch mates of a programme get 20 different placement packages? All have same degree and also look so much alike with two hands, two legs, two eyes , two ears, one nose, one head etc etc But every one differs in What they have imbibed, internalized in mind C What skills they have developed and how much C What attitudes they have in mind? C How much they are networked? PC How much they are lucky? NC Bottomline Forget what you can not control, 8 Do whatever is under your control.

Retail Banking

Indian Financial Sector

Reserve Bank of India (Central Bank)

Financial Institutions -IDBI -ICICI -IFCI -NHB -NABARD

Exim Bank

Commercial Banks -Public Sectors Banks/SBI/Assoc. (25) -Private Sector Banks (25 Old, 8 New) -Foreign Banks (44)

Investment Institutions -UTI -LIC -GIC

State Level Financial Corporations / Industrial Development Corporations (SFCs 18) (SIDCs 28)

Non Banking Financial Companies (641) Co-operative Banks (95,000)

10

Banking defined
Banking Regulation Act of India, 1949 defines Banking as "accepting, for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdrawable by cheques, draft, order or otherwise."

11

The Financial Service Competitors of Banks Mutual Funds (Investment Companies) Security Brokers and Dealers Non Banking Finance Companies Post Office Savings and Term Deposits/ Small savings instruments Life and Non Life Insurance Companies How a bank is different from all other financial institutions in one unique aspect?
12

Various Kinds of Banking/ Banks

Scheduled Banks Non Scheduled Banks included in the Second Schedule of Reserve Bank of India(RBI) Act, 1934, which satisfy the criteria laid down vide section 42 (6) (a) of the Act.

13

Based of different Principles and goals Commercial Banking Development Banking Co-operative Banking Investment /Merchant Banking

Commercial Banks are functioning on commercial basis with profit motive

14

The co-operative banking to the supplement the village money lender. Divided into 4 components

Based on principle of co-operation

State Co-operative Banks Central Co-operative Banks Primary Agriculture Credit Societies State Land Development Banks Land Development Banks Primary Land Development Banks Primary Agricultural Development Banks Urban Co-operative Banks
15

DEVELOPMENT BANKING Development of some specific sectors of economy Industrial Finance Corporation of India (IFCI) Industrial Development Bank of India (IDBI) Industrial Credit and Investment Corporation of India (ICICI) Industrial Investment Bank of India (IIBI) Small Industries Development Bank of India (SIDBI) National Bank for Agriculture and Rural Development (NABARD) Export Import Bank of India National Housing Bank

16

 Investment banks underwrite" (guarantee the sale of) stock and

bond issues, trade for their own accounts, , and advise corporations on capital markets activities such as mergers and acquisitions. Merchant banks perform similar functions

Independent investment banks

Merill Lynch Morgan Stanley
17

Commercial Banking Based on Geography , delivery channel

Branch Banking
Internet Banking

Virtual Banking
Mobile Banking

18

Virtual Banking
First fully virtual bank -mBank (POLAND) "Internet banking services are increasingly popular. Even though virtual banks began operating in Poland only a few years ago, they have already enlisted way over half a million clients between them.

Another fully virtual bank in Poland is Inteligo, which started operations in May 2001
19

Internet Banking

20

Narrow Banking
Banking for limited purposes/ Restricted banking Commercial Banking activities alone no investment banking, Advisory, consulting etc Accepting of deposits alone and no Loaning Moratorium / weak banks
21

Universal Banking
provides entire range of financial services

22

 Citi Group a universal bank Fifteen years ago, when Kundapur Vaman Kamath, the CEO of ICICI Bank,spoke about his ambitions to make his bank (then called just ICICI) a universal bank, selling every conceivable financial product, he created flutter. Financial sector reforms in India had just kicked in, but even the biggest players in financial services were confined to neatly fenced territories. Was Kamath ahead of his time?
23

 ICICI Bank functions as a universal bank through itself and its associate companies in the areas of corporate finance, commercial banking, investment banking, asset management, non-banking finance, investor services, broking and insurance.
24

Indian Universal banks new trends entities like SBI, ICICI, HDFC and Kotak Mahindra have all become one-stop departmental stores for Wholesale banking, Retail banking mutual funds, loans, Merchant banking or investment banking insurance and much else
25

Financial conglomerates

Large financial services conglomerates that combine commercial banking and investment banking, and sometimes insurance and all other financial services
Citigroup HSBC ABN Amro Allianz (Dresdner Kleinwort) Bank of America (Banc of America Securities) BNP Paribas Barclays

26

 Central Banks

are non-commercial bodies or government agencies often charged with controlling interest rates and money supply across the whole economy. They act as lenders of the last resort in event of a crisis of liquidity with any banks or all banks
27

Retail banking

Wholesale banking

28

Retail Banking is typically a mass market banking where individual customers use local branches of larger commercial banks. It is segment of commercial banking.
Checking Accounts Savings Accounts Time Deposit

Liabilities
Personal Loans Credit Cards Mortgage loans Auto loans

Fee Based

Wealth Management

Assets

29

Retail Banking

Loan Products: Deposit Auto Car Loans Products: Loans against Securities Savings Personal Loans Credit Cards Accounts 2-Wheeler Loans Current Commercial Vehicles Finance Accounts Home Loans Fixed Small Ticket Personal Loans Deposits Retail Business Banking

Other Products / Services: POS Terminals Debit Cards Depository Accounts Mutual Fund Sales Insurance Sales Investment Advice Corporate Salary Account NRI Services Bill Payment Services

Wholesale Banking

Commercial Banking: Working Capital Credit Substitutes Term Loans Bill Collection Forex & Derivatives Wholesale Deposits Letters of Credit Guarantees

Transactional Banking: Cash Management Custodial Services Clearing Bank Services Correspondent Banking Tax Collections Banker to public issues

Key Segments: Large corporate Supply Chain Emerging Corporates Financial Institutions Government Agriculture Commodities

Products:

Treasury

Foreign Exchange Debt Securities Derivatives Equities

Other Functions: Asset Liability Management Statutory Reserve Management

30

Business Model of Retail Banking Strategic Business Unit SBU (MBO targets) Pvt Banks/Foreign Banks Department approach - Majority of PSBs Integrated approach No distinction but effort to tap Retail business potential ( Earlier approach) Indian Banks go for Positioning platform- one of top three among peers Foreign Banks go by business objectives --targets for customer, business and profits Exit - BNP Paribas 1990 and existed later
31

What constitutes Retail Assets and Liabilities?

Retail Liabilities Deposits:

1. Saving Accounts and variants, 2. Current Accounts and variants 3. Retail Term deposits / Recurring Deposits 4. Combination Accounts of Savings/ Current / Term Deposits
32

Regular Savings Accounts

ATMs./ International Debit Card Net Banking and Mobile BankingPersonalized cheques Bill Pay. Funds Transfer/payment Avail of facilities like Safe Deposit Locker, Sweep In and Super Saver Free Payable-at-Par cheque book, Free Insta Alerts for all account holders for lifetime of the account. Free Passbook facility available at home branch for account holders (individuals). Free Email statement facility
33

Savings Plus
All Savings Regular Benefits PLUS Free Demand Drafts on HDFC Bank locations, up to a limit of 25,000/- per day. Special relationship discount on purchase of Gold Bars 25%-off on the Locker rental for the 1st year (only). Intercity Banking / Multi-city Banking. AQB Rs.10,000
34

Minimum Balance (Average Quarterly Balance) Option 1 Rs. 10000(Urban/Semi-urban) Option 2 NIL with a Fixed deposit of Rs. 50,000 Charges on non maintenance thereof Option 1 AQB in the SB a/c between 5,000/- and 10,000/-: Rs. 750/- per quarter, AQB in the SB a/c is less than 5,000/:Rs. 1,000/Option 2 In case of non maintenance of Rs. 50,000 Fixed Deposit the charges mentioned in Option 1 would be applicable
35

Current Accounts and Variants

HDFC Regular C/A
1. Free anywhere cheque payment 2. Free payments and collections through NEFT Free RTGS collection. RTGS payment @ Rs.25/- per transaction 3. Inter-city Account to accounts funds transfer between HDFC Bank accounts at a nominal charge of Rs.15/- per transactions 4. Free Demand Drafts (DD)/PO above Rs.100,000/-. Demand drafts up to Rs.50,000/- at flat cost of Rs.40/-. DDs above Rs.50,000/- & up to Rs.100,000/- at nominal cost of Rs.25/5. Payable at par cheque book at nominal price. HDFC Bank offers you Doorstep Banking*,

36

Current Accounts and Variants

HDFC Trade C/A
Free Account to account funds transfer between HDFC Free payment and collection through RTGS/NEFT Free up to 30 Demand Drafts plus 30 Pay Orders per month from any Free anywhere cheque collection (clearing) within HDFC Bank branch network up to Rs.35 lacs per month. Convenience to withdraw & deposit cash at all our branches* 200 "At Par" cheque leaves free per month. Free at par cheque payments across all HDFC Bank locations for unlimited value* Free Cash Deposit upto Rs.5 lacs per month* across all HDFC Bank Branches in your city. 37

Current Accounts and Variants

HDFC Plus C/A
Free Account to account funds transfer between HDFC Free payment and collection through RTGS/NEFT Free up to 50 Demand Drafts plus 50 Pay Orders per month from any Free anywhere cheque collection (clearing) within HDFC Bank branch network up to Rs.75 lacs per month. Convenience to withdraw & deposit cash at all our branches* 300 "At Par" cheque leaves free per month. Free at par cheque payments across all HDFC Bank locations for unlimited value* Free Cash Deposit upto Rs.10 lacs per month* across all HDFC Bank Branches in your city. HDFC Bank offers you Doorstep Banking*, 38

Flexi Current
Cash Deposit and Anywhere Transaction limits are a multiple of the balance you maintain(AMB)in your Current Account. Min AMB Rs. 75,000 Transaction Dynamic Free Limits* Cash Deposit at Home Branch Location Rs. (10 times AMB) Anywhere Collections & Funds Transfer (35 times AMB) Free RTGS/NEFT Transactions. Free 40 Demand Drafts & Free 40 Pay Orders issued from any HDFC Bank Branch*

Apex

Max
39

Combination of Various accounts Flexi Deposit / Sweep In Min Balance SB 25000/50000 Any excess above minimum will be transferred to FD at higher rate 6m -1yr On issue of cheque in excess of balance, the FD will be broken for excess amount and balance FD amount will run at same contracted interest rate.
40

1 year 16 days

8.50% 8.25% 8.50% 9.25%

9.00% 8.75% 9.00% 9.75%

1 year 17 days - 2 years

2 years 1 day - 2 years 15 days

2 years 16 days

2 years 17 days - 3 years

8.50%
8.25% 8.25% 8.25%

9.00%
8.75% 8.75%
41

3 years 1 day - 5 years

5 years 1 day - 8 years

8 Year 1 Day - 10 Years

8.75%

 Retail credit:
Housing loans Consumer durables Loans Credit Card loans Auto loans Personal loans

42

43

Factors contributing to growth

Slow down in corporate credit off take Liberalization of lending norms Lower risk Enabling technology Growing economy and income levels Decline in interest rates Competition among banks Faster appraisal

44

Growth rate of retail Assets of the banking system

Sr. Type of Retail No. Asset 1 Housing Loans
2 3 4 5 6 Consumer Durables Loans Credit Card Receivables Auto Loans Other Personal Loans Total Retail Loans

2004
89449 6256 6167 87170

2005
134276 (50.5) 3810 (-39.10) 8405 (36.3) 35043

2006
179165 (33.4) 4469 (17.3) 12434 (47.9) 61369 (75.1) 118355 (39.1) 375739 (40.9)

2008
252932 (12.7) 4802 (-37.2) 27437 (49.8) 87998 (6.6) 197607 (27.5) 570776 (17.1)

2009

85077 (37.8) 198042 266611 (41.2)

200910 263235 315862 20.0 (4.1) 5431 3032 -44.2 (13.1) 29941 21565 -28.0 (9.1) 83915 78346 -6.6 (-4.6) 211294 203947 -3.5 (6.9) 593815 622752 4.9 (4.0)

2010

45

 Percentage of Retail Assets to Total Assets of the Banking system

Sr. Details of No. Advances 1 Total Advance of the Banking System Percentage of Retail Assets to Total Advances Growth rate 2004 2005 2006 2008 2009

864271

1125056

1473723

2332032

2793572

21.9

23.7

25.5

24.5

21.3

23.2

19.8

46

 Share of Interest Income to Total Income

S.No. Income Segment 200506 84 200607 84.3 200708 83.6 200809 83.8

Interest Income in % Non Interest Income in %

16

15.7

16.4

16.2

47

48

 RETAIL BANKING SOME STATISTICS

12.06.07

Retail boom started around 2002-03 Citi Bank early mover -citi never sleeps Home grown ICICI, HDFC Bank, leadership positions Stanchart, HSBC with clear strategy Carpet Bombing approach - cold calls to every one and anyone Credit grown @30 % since 2004 Retail bank credit @40% Booming economy , low interest rates and growing consumer confidence Auto loans, personal loans, credit card dues - about 50% share in total retail loans Home loans - another50% of retail loans grew by 50% in 2005 and 33 percent in 2006- Rs 18,00,000 cr. 49

As per Edelweiss mortgage finance report Feb. 2007, Indian Mortgage as % of GDP up from 6.0 % in 2004 to 8.5% in 2006 but small in comparisons to developed countries US (51%) UK (54%) Asia (10-30%) Mortgage loans SBI 11% of total lending ICICI BANK 30% (25%) of total lending Low by international standards

50

Trends Recent past 2004-05

Banks are increasing their dominance in housing finance and capturing the market share of the housing finance companies. During 2004-05, the market share of banks stood at 62%, against the 33% by Housing finance companies; Despite this phenomenal growth in India, the housing loan as a percentage of GDP at 4.91% indicates low penetration when compared to other countries like Malaysia (17%) and Thailand (9%).

51

Trends Recent past 2004-05

Retail lending constitutes just 12.36% of the Indian banking system. Given this macroeconomic scenario, the share of retail banking will grow dramatically and it is expected that about 35% of the incremental growth in net credit will come from retail banking. In the next five years ie till 2010, retail banking is expected to grow by a CAGR of 25% to touch the figure of Rs575,000 crore.
52

Trends Recent past 2004-05

During 2004-05 retail contributed 42% of overall credit growth. Growing at the CAGR of 35% over last 5 years the retail asset size touched Rs1,89,000 crore.

53

54

Commercial vs. consumer loans

Commercial loans Small volume, large loans One-by-one approval Hierarchy of approvals senior managers approve large, complex loans Close account management and review on a loan-by-loan basis Financial data available Consumer loans Large volume, small loans Volume approval Hierarchy of approvals senior managers approve credit product programs Portfolio management by aggregate performance statistics Limited data available

55

 Upcoming Foreign Banks In India By 2009 few more names is going to be added in the list of foreign banks in India. Reserve Bank of India paving roadmap for foreign banks in India greater freedom in India. Among them is the world's best private bank by EuroMoney magazine, Switzerland's UBS.
The following are the list of foreign banks going to set up business in India Royal Bank of Scotland Switzerland's UBS US-based GE Capital Credit Suisse Group Industrial and Commercial Bank of China
56

Indian Banking Sector: Overview

222 commercial banks in India (of which 133 RRBs) Operating with 68,681 branches (March 06) Nearly 70% of branches are in rural/semi-urban areas Bulk of commercial bank finance is for short-term working capital needs of industry, trade, agriculture & personal segment. Foray into project finance also. Banks are supporting growth in the economy by financing productive sectors
57

Robust economic growth

GDP growth FY2005
0.7% 7.4% 8.1%

FY2006
6.0% 8.0% 9.1%

FY2007
2.7% 11.0% 12.3%

H1-2008
3.7% 9.5% 10.2%

Agriculture
Industry Of which: manufacturing

Services
Total
GDP

10.2%
7.5%

10.3%
9.0%

11.0%
9.4%

10.5%
9.1%

growth expectations at about 8.5%

58

Economic growth drivers

Favourable demographics Knowledge capital Rising disposable income Investment Manufacturing Personal Consumption Housing Transportatio n Personal credit

Infrastructure
International expansion

Investment and consumption cycles mutually re-enforcing

59

Changing consumer demographics

Increasingly affluent, with bulging middle class The youngest population in the world Increasing literacy levels Higher adaptability to technology Urbanization is a continuing trend Increasing "consumption" mindset in India

60

Changing structure of the economy

FY1991 Services Industry 43% 25% FY2006 61% 19%

Agriculture

32%

20%

Rapid growth of services sector Leveraging high quality education and vast talent pool Sublimating Indias knowledge capital to create economic value
61

Upward migration of incomes

(households in million)

FY1996 Middle income High income

FY2002 50 3

FY2010 Estimate 98 10

33 1

Rising affluence and growth of the consuming class NCAER data for top 24 cities in India shows migration to higher income levels growing at over 40% per annum
Middle income Rs. 90,000-5,00,000 per household p.a. High income > Rs. 5,00,000 per household p.a.
62

across rural and urban India

(households in million)

FY1996 Urban Middle income High income

FY2002 Urban 27 1.8 Rural 23 0.7

FY2005E

Rural 16 0.3

Urban
35 3.6

Rural
28 1.2

17 0.7

43% of households in middle and high income groups from rural India in 2005 Their number has grown by 79% from 1996-2005
Figures for 2005 are estimated Middle income Rs. 90,000-5,00,000 per household p.a. High income > Rs. 5,00,000 per household p.a.

63

A Young population . . .
Per cent of population, 2003

>60
35-59 15-34

10

23

23

30

36

26

35

35

26

37

0-14

35

25

16

29

Highest proportion of population below 35 years (70%) in India Highest proportion of population below 35

years (70%) in India

64

. . .which means a bigger opportunity

2003 2009 E
365
391

0-14
15-35 35-59 >60
73
1,044

365

449

240

295

87

Total Population in million

1,221

130 mn plus people get added to working population

65

Consumer loans outstanding (USD in billion)

800 700 600 500 400 300 200 100 0 India 2%

Benchmarking
53% 34% 17% 54%

75%

80% 70% 60% 50% 40% 30% 20% 10% 0%

Thailand Malaysia

Taiw an

Korea

USA

Total consumer loans outstanding Consumer loans outstanding / GDP (% )

Source: Salomon Smith Barney

The under-penetration is reflected even within the subsegments

66

Consumer loans outstanding / GDP (%)

Top five banking groups in the world ranked by capital

Figures in US $ , and as at end-2005 HSBC 79 billion CITI GROUP 75 billion BANK OF AMERICA 73 billion JP MORGAN CHASE 72 billion MITSUBISHI (UJF) FINANCIAL GROUP 64 billion
67

 Top Performing Private Sector Banks

ICICI Bank HDFC Bank AXIS Bank

Kotak Mahindra Bank

68

HDFC Bank Limited The Bank offers a range of commercial and transactional banking services and treasury products to wholesale and retail customers. The Bank operates in three segments: retail banking, wholesale banking and treasury services. The retail banking segment serves retail customers through a branch network and other delivery channels. The wholesale banking segment provides loans and transaction services to corporate and institutional customers. The treasury services segment undertakes trading operations on the proprietary account, foreign exchange operations and derivatives trading.
69

International Competitiveness

According to Moodys Investor Services: Indian lenders have highest ROE 20.38%), (in Asia followed by Indonesia (20.19%), New Zealand (18.83%), Japan (-6.42%)
70

RELATIVE STRENGTH AND RESILIENCE OF INDIAN BANKS

IN ASIA

By Standard & Poor

-Indian banking ahead of China, Indonesia, Philippines and Vietnam. But the banking industries of Australia, New Zealand, Singapore, Hong Kong and Japan, and even Malaysia, South Korea, Taiwan and Thailand are ahead of India.
71

Average gross bad loans as share of total loans: India (8.18%), Phillipines (15.05%), Thailand (13.08%), China(11.80%) and Malaysia (9.73%).

72

Andhra Bank

73

Andhra Bank

Value Added Services

Insurance linked savings deposits Abhaya, Abhaya Gold, Jeevan Abhaya, Jeevan Prakash, Jeevan Prakash plus, Arogyadaan, AB Flex etc. offered. Bancassurance Tied up with LIC and United Insurance companies for sale of Life and nonlife products. Associated for sale of Mutual Fund products with major companies. Introduced Depository participatory services. Cash Management Service covered 84 customers in 123 branches. Turnover for the year crossed Rs.1147 Crore.
74

Andhra Bank

Value Added Services

(Contd..)
* Introduced 8 a.m. to 8 p.m. and 7 day Banking in select branches to extend the Service hours to clientele. * Opened a Representative Office in Dubai to coordinate with NRIs for increasing our NRI customer base. * Imparting training to Agriculturists, Rural Unemployed youth on vocational courses by our 9 Rural Development Institutes
75

Andhra Bank

Business channels
As on
31.03.03 31.03.04 31.03.05

Branches
1100 1128 1168

ECs
113 129 136

Satellite Offices 44
44 38

ATMs
220 272 330

Total
1477 1573 1672

31.03.06

1213

123

37

391

1764

Bank has presence in 21 States and 2 Union Territories.

76

ICICI Banks strategy to capture retail potential Strong corporate

relationships

Achieving leadership in retail financial services

Brand

Technology

the core of this strategy is our relentless focus on the customer and crossselling of products

Operational excellence
77

Catalyzing cross-sell

Internet Banking

Call Centers

500 Outlets

1005 ATMs

Customized cross-selling by leveraging relationships, brand and technology

Fixed deposits Power Pay

Bonds Consumer loans

Life insurance Auto & home loans

Health insurance Credit & debit cards 78

Operational excellence
Prudent credit policies

Bolstered by a company wide 6 sigma initiative

Adequate fraud control

Rigorous collection mechanism

These measures have ensured that we have followed a cautious approach while maintaining high growth rates and profitability in all segments
79

Benchmarking (contd.)
Consumer loans / Total loans
58.0%
USA - 51%

Mortgages / GDP

37.0%

36.0% 26.0% 8.0% 13.0%

1.0% 9.0% 13.0%

17.0%

India India Thailand Thailand

Malaysia Taiwan M alaysia Taiw an

Korea Korea

India India

Thailand Thailand

Korea M alaysia Taiw an Korea Malaysia Taiwan

Credit cards / Population

121.9%
USA - 235%

Other retail loans / GDP

41.0%

82.4%

USA - 24%
16.0% 17.0% 8.0% 0.8%

0.4%

2.8%

9.8%

India India

Thailand Thailand

Malaysia Taiwan M alaysia Taiw an

Korea Korea

India India

Thailand Taiw an Thailand Taiwan

M alaysia Malaysia

Korea Korea

Source: Salomon Smith Barney

Indias retail market is at a nascent stage and is expected to grow rapidly on account of the current trend in upward migration of household income levels
80

Household segment migration

No. of households (million)
CAGR 48%
6.8
22.9

2.1

1996 Rich (> Rs. 0.5 mn p.a.) Mass (Rs. 0.1-0.3 mn p.a.)

1999

2002

Mass affluent (Rs. 0.3-0.5 mn p.a.)

Source: 1996, 1999 data is from NCAER study for top 24 cities, 2002 data is estimated by ICICI Bank

81

Distribution Strategy

Building Distribution

82

 After interest rates have hardened to 14% (floating) and 12%(fixed) in 2006-07, it has cooled the surge in retail bank loans. average tenors increased from 150 months in 2001 to 173 months in 2006. In growth phase and competition, lending norms were eased and riskier borrowers mopped up thus possibility of higher NPAs is there. (CRISIL) ate 90s

83

 Liberalization, economic growth, changing demographics, and technological advancements have fueled the growth of retail banking in India. The product range in retail banking includes four broad categories: liability products, asset products, credit cards/debit cards, and investment products. Liability products include savings accounts, nofrills accounts, current accounts, fixed deposit/term deposits, and recurring deposits. Asset products include all kinds of retail loans, such as housing loans, personal loans, education loans, gold loans, loans to senior citizens, property and mortgage loans, vehicle loans, and agricultural loans. The investment products include investments in mutual funds, insurance policies, and pension plans. These are discussed in subsequent chapters.
84

Indian Banking Sector Banking in India has its origin as early as the vedic period. It is believed that the transistion from money lending to banking must have occurred even before Manu, the great Hindu Jurist, who has devoted a section of his work to deposits and advances and laid down rules relating to rates of interest. During the Mogul period, the indegenous bankers played a very important role in lending money and financing foreign trade and commerce. During the days of the East India Company, it was the turn of the agency houses to carry on the banking business. The General Bank of India was the first Joint Stock Bank to be established in the year 1786. The others which followed were the Bank of Hindustan and the Bengal Bank. The Bank of Hindustan is reported to have continued till 1906 while the other two failed in the meantime. In the first half of the 19th century the East India Company established three banks; the Bank of Bengal in 1809, the Bank of Bombay in 1840 and the Bank of Madras in 1843. These three banks also known as Presidency Banks, were independent units and functioned well. These three banks were amalgamated in 1920 and a new bank, the Imperial Bank of India was established on 27th January 1921. With the passing of the State Bank of India Act in 1955 the undertaking of the Imperial Bank of India was taken over by the newly constituted State Bank of India. The Reserve Bank which is the Central Bank was created in 1935 by passing Reserve Bank of India Act 1934. In the wake of the Swadeshi Movement, a number of banks with Indian management were established in the country namely, Punjab National Bank Ltd, Bank of India Ltd, Canara Bank Ltd, Indian Bank Ltd, the Bank of Baroda Ltd, the Central Bank of India Ltd. On July 19, 1969, 14 major banks of the country were nationalised and in 15th April 1980 six more commercial private sector banks were also taken over by the government. Today the commercial banking system in India may be distinguished into : 85

 As the bargaining power of a retail customer is less than that of a corporate customer, banks tend to charge the same price/interest rate for all retail customers, with the exception of high-value segments (HNIs and NRIs). Banks set the price for liability products, without the interference of the RBI. Asset products are priced based on the prime lending rates set by banks for each asset category. Overt pricing and covert pricing are the two different approaches to pricing. 86

 The promotion of retail banking products is done through various avenues of promotion, such as advertising, sales promotion, personal selling, brand building, public relations, telemarketing, direct sales, and direct-response advertising.
The common distribution channels in retail banking are branches, ATMs, the Internet, 87 phone banking, and mobile banking,

Rural banking: A new growth opportunity

Opportunities for growth Though agriculture constitutes only 20% of Indias GDP, rural economy (agri + non-agri) constitutes about 50% of GDP1

Rural population of about 780 million2 with limited access to financial services
Population per bank branch: 22,793 Informal credit in India amounts to US$ 82bn3 A high proportion of agricultural lending is from informal sources3
1. Source: CERG (Consumer & Economic Research Group) 2. Source: Tata Statistical Outline 3. Source: Mckinsey Global Institute May 2006 88

However, banking in rural India is challenging

Special needs
Doorstep banking Flexibility in timings Low value and high volume of transactions Limited background information and proof of income Require simple processes with minimum documentation

89

 Conventional banking not suited to meet these demands

High costs of delivery through traditional channels High transaction costs Dependence on documentation and financial history Inflexible procedures

90

and requires a comprehensive approach

Multiple products
Low-income customers require full range of services: credit, transaction banking, investment and risk mitigation

Multiple channels
Branches at selected locations Franchisees, internet kiosks, MFI partners

Deep penetration of the market

Using a combination of channels to completely cover selected areas

Rapid-scale up
To reduce average operating costs
91

Consumption drivers
2000: Per capita GDP US$ 500 2007: Per capita GDP US$ 1,000 2015: Per capita GDP US$ 1,500

Middle and high 35% income growth population 260 mn1

Middle and high 70% income growth population 350 mn1

Middle and high income population 600 mn1

From per capita GDP of US$ 1,000 to US$ 1,500: consuming population to grow manifold

Middle income: Rs. 90,000 (US$ 2,250)-Rs. 500,000 (US$ 12,500) per household High income: > Rs. 500,000 (US$ 12,500) per household Source: NCAER
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 List of State Bank of India and its subsidiary,

State Bank of Patiala State Bank of Bikaner and Jaipur State Bank of Hyderabad State Bank of Indore (merged with SBI in 2010) State Bank of Mysore State Bank of Saurashtra State Bank of Travancore

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Old Generation Pvt Sector Banks 1. Bank of Rajasthan Ltd. 2. ING Vysya Bank Ltd. 3. Dhanalakshmi Bank Ltd. 4. Federal Bank Ltd 5. Jammu and Kashmir Bank Ltd.6 Karnataka Bank Ltd. 7. Karur Vysya Bank Ltd.8. Ratnakar Bank Ltd. 9. South Indian Bank Ltd.

New Generation Pvt Sector Banks 1. 2. 3 4. 5. ICICI Bank. HDFC Bank IndusInd Bank Ltd. Axis Bank Development Credit Bank 6. Kotak Mahindra Bank 7. Yes Bank

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95

Commercial Banks are functioning on commercial basis with profit motive

Top Performing Public Sector Banks State Bank of India Bank of Baroda Canara Bank Union Bank of India Punjab National Bank United Bank of India Allahabad Bank UCO Bank Bank Of India Vijaya Bank Dena Bank Bank of Maharashtra Central Bank of India Indian Bank Panjab and Sind Bank Indian Overseas Bank Andhra Bank Oriental bank of Commerce Corporation Bank Syndicate Bank
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