NAGINDAS KHANDWALA COLLEGE OF COMMERCE, ARTS AND MANAGEMENT STUDIES

PROJECT REPORT ON RETAIL BANKING IN INDIA

SUBMITTED BY NIRAJ M. NISAR SUBMITTED TO UNIVERSITY OF MUMBAI

PROJECT GUIDE Prof. IYER

ACADEMIC YEAR 2011-2012

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ACKNOWLEDGEMENT

I owe a great many thanks to a great many people who helped and supported me during the writing of this book. My deepest thanks to Lecturer. Prof. Iyer, the Guide of the project for guiding and correcting various documents of mine with attention and care. He has taken pain to go through the project and make necessary correction as and when needed. I express my thanks to the Principal of, Nagindas Khandwala College for extending her support. Thanks and appreciation to the helpful people for their support. I would also thank my Institution and my faculty members without whom this project would have been a distant reality. I also extend my heartfelt thanks to my family and well wishers.

Niraj Nisar

EXECUTIVE SUMMARY2

1.TITLE OF THE PROJECT REPORTThe title Retail Banking in India gives a detailed study about the retail banking business carried on by the banks in India, the projects offered by the retail banks, and the future perspective of retail banking business in India.

2.OBJECTIVES To understand the retail banking pattern in India.

To know the various products & services offered by the retail banks and the growth in those products along the years.

To understand and visualize the future of retail banking in India.

INTRODUCTIONRetail banking is typical mass-market banking where individual customers use local branches of larger commercial banks. Services offered include: savings and checking accounts, mortgages, personal loans, debit cards, credit cards, and so The Retail Banking environment today is changing fast. The changing customer demographics demands to create a 3

differentiated application based on scalable technology, improved service and banking convenience. Higher penetration of technology and increase in global literacy levels has set up the expectations of the customer higher than never before. Increasing use of modern technology has further enhanced reach and accessibility. The market today gives us a challenge to provide multiple and innovative contemporary services to the customer through a consolidated window as so to ensure that the banks customer gets Uniformity and Consistency of service delivery across time and at every touch point across all channels. The pace of innovation is accelerating and security threat has become prime of all electronic transactions. High cost structure rendering massmarket servicing is prohibitively expensive. Present day tech-savvy bankers are now more looking at reduction in their operating costs by adopting scalable and secure technology thereby reducing the response time to their customers so as to improve their client base and economies of scale. The solution lies to market demands and challenges lies in innovation of new offering with minimum dependence on branches a multi-channel bank and to eliminate the disadvantage of an inadequate branch network. Generation of leads to cross sell and creating additional revenues with utmost customer satisfaction has become focal point worldwide for the success of a Bank. Retail banking is a part of bank that offers product and services primarily to individual customers, professionals, self-employed individuals or small business. The focus is on creating product and services that meet the need of the target customers and are profitable for the bank as well.

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The approach to retail banking products is more on mass production basis where in all risk and operations are based on and geared to cater to a large number of customers. This is, therefore, significantly different from corporate banking or wholesale banking where focus is on large sized customer accounts rather than large number of customers. Understanding retail banking will help in servicing your customer better as it would give you a perspective and insight into how such products are structured and specific requirements for each set of product.

WHAT IS RETAIL BANKING?Retail banking is, however, quite broad in nature - it refers to the dealing of commercial banks with individual customers, both on liabilities and assets sides of the balance sheet. Fixed, current / savings accounts on the liabilities side; and mortgages, loans (e.g., personal, housing, auto, and educational) on the assets side, are the more important of the products offered by banks. Related ancillary services include credit cards, or depository services. Todays retail banking sector is characterized by three basic characteristics:

multiple products (deposits, credit cards, insurance, investments and securities); multiple channels of distribution (call centre, branch, Internet and kiosk); and multiple customer groups (consumer, small business, and corporate).

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WHAT IS THE NATURE OF RETAIL BANKING?In a recent book, retail banking has been described as 'hotter than vindaloo'. Considering the fact that vindaloo, the IndianEnglish innovative curry available in umpteen numbers of restaurants of London, is indeed very hot and spicy, it seems that retail banking is perceived to be the in-thing in todays world of banking.

SCOPE FOR RETAIL BANKING

All round increase in economic activity Increase in the purchasing power. The rural areas have the large purchasing power at their disposal and this is an opportunity to market Retail Banking.

India has 200 million households and 400 million middleclass population more than 90% of the savings come from the house hold sector. Falling interest rates have resulted in a shift. Now People Want To Save Less And Spend More.

Nuclear family concept is gaining much importance which may lead to large savings, large number of banking services to be provided are day-by-day increasing.

Tax benefits are available for example in case of housing loans the borrower can avail tax benefits for the loan repayment and the interest charged for the loan. 6

ADVANTAGES AND DISADVANTAGES OF RETAIL BANKINGADVANTAGES Retail banking has inherent advantages outweighing certain disadvantages. Advantages are analyzed from the resource angle and asset angle.

RESOURCE 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. Effective customer relationship management with the retail customers built a strong customer base. Retail banking increases the subsidiary business of the banks.

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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 fulfils 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.

DISADVANTAGES 8

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 monitoring and follows up of huge volume of loan accounts inducing banks to spend heavily in human resource department.

Long term loans like housing loan due to its long repayment term in the absence of proper follow-up, can become NPAs.

The volume of amount borrowed by a single customer is very low as compared to wholesale banking. This does not allow banks to to exploit the advantage of earning huge profits from single customer as in case of wholesale banking.

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PRODUCTS OFFERED IN RETAIL BANKING1. SAVING ACCOUNTS Introduction

A Savings bank account is the most common operating account for individuals and others for non-commercial transactions. A Savings account helps people to put through 10

day-to-day banking transactions besides earning some return on the savings made. Banks generally put some ceilings on the total number of withdrawals permitted during specific time periods. Banks also stipulate certain minimum balance to be maintained in savings accounts. Normally a higher minimum balance is stipulated in cheque operated accounts as compared to non-cheque operated accounts.

Advantages of saving account It encourages savings habit among salary earners and others.

It enables the depositor to earn income by way of interest.

It helps the depositor to make payment by way of cheque.

Growth

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2. CURRENT ACCOUNT Introduction Current accounts are cheque operated accounts maintained for mainly business purposes. Unlike savings bank account no limits are fixed by banks on the number of transactions permitted in the Account. Banks generally insist on a higher minimum balance to be maintained in current account. Considering the large number of transactions in the account and volatile nature of balances maintained overnight banks generally levy certain service charges for operating a Current account.

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Advantages of current account It enables the businessmen to conduct his business transaction smoothly. The businessmen can withdraw any amount at any time. There are no restrictions on withdrawals. The businessmen can make direct payment to their creditors with the help of cheques. The bank collects money on behalf of its customers and credits the same to their accounts. This account enables the account holder to obtain overdraft facility. The creditor of account holder can get creditworthiness information of the account holder through inter-bank connections. It facilitates the industrial progress of the country. Without the help of this account, businessman would have difficulties in running their business. It enables liquidity for the businessmen.

Growth2008 has been a roller coaster year for the Indian economy. I recall vividly the bravado of the Indian corporate leaders in Davos in January when they declared that the Indian economy had decoupled and will not be affected by the global slowdown. I had written then, that to talk of any decoupling was simply unwarranted, given the fact that external sector transactions (exports and imports of goods and services and remittances) today account for more than 50% of the GDP. Charts I and II below, give the share of the external sector in Indias GDP and brings out the 13

uncanny correlation between global and Indian economic growth rates.

Current Account as a % GDP

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GDP Growth: India & World (3-Year Moving Average)

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3.

FIXED DEPOSITES

IntroductionFixed Deposits are also known as Term Deposits. In a Fixed Deposit Account, a certain sum of money is deposited in the bank for a specified time period with a fixed rate of interest. The rate of interest for Bank Fixed Deposits depends on the maturity period. It is higher in case of longer maturity period. There is great flexibility in maturity period and it ranges from 15days to 5 years. The interest can be compounded quarterly, half-yearly or annually and varies from bank to bank. Minimum deposit amount is Rs 1000/- and there is no upper limit. Loan / overdraft facility is available against bank fixed deposits. Premature withdrawal is permissible but it involves loss of interest.

Advantages of Fixed Deposit Fixed deposits with the banks are nearly 100% safe as all the banks operating in the country, irrespective of whether they are nationalized, private, or foreign, are governed by the RBI's rules and regulations, and give due weight age to the interest of the investor. Till recently, all bank deposits were insured under the Deposit Insurance & Credit Guarantee Scheme of India, which has now been made optional. Nonetheless, bank deposits are among the safest modes of investment. 16

One can get loans up to 75- 90% of the deposit amount from banks against fixed deposit receipts. Though the interest charged will be slightly more than the interest earned by the deposit.

Growth

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Market Share: Retail Loan

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4. LOANS(HOME LOANS)

IntroductionHome loan is the one in which the borrower borrows the loan money from a financing institution by keeping his home as a collateral against it. Collateral is the real estate property that you keep with the lender as a guarantee that you will pay back the debt. If you by any reason fail to pay back the loan amount you owe to the lender, the lender can take possession of your collateral and sell it in the market to get its money back.

Advantages of Home loan It is the most hassle-free loan and the most preferred one by the borrowers. A given amount of tax is charged. A tax limit is set up to $100,000 and it is taken from the interest or from the equity value of the house whichever bears the minimal value is taken. The rate of interest is very low as compared to other consumer loans or credit cards. 19

It provides you with the facility to set a particular date to make the refund of the loan and the conditions for the usage of the money are also very lenient. Now the borrowers dont have to wait for so long and for the old fashioned time consuming home equity loan procedures as now the functions and the dealings has become online with the help of the internet. Adding to this it also saves the borrowers time and the borrower gets the approval without much delay. 5. LOANS(PERSONAL LOANS)

IntroductionA personal loan gives you the opportunity to borrow money from a financial institution, such as a bank, and gradually repay the amount borrowed in installments over an extended period of time. Personal loans can be taken out for a wide variety of reasons such as financing an extension, going on holiday, or even paying for private medical treatment. In exchange for the loan, you will be required to pay interest on the amount you have borrowed, which means that the total amount you repay will exceed the initial value of the loan.

Advantages of personal loan

While making an evaluation of the cost of the loan you need to consider the TAR (Total Amount 20

Repayable) which means that the total amount that you owe towards the bank or a lender which also includes the rate of interest on the loan and the payments need to be made on a monthly basis. A suitable deal is where you get a lower TAR. The maximum amount that you can borrow ranges up to 25,000 and the time period for the refund is up to ten years. The advantage with the personal loan is that when you take a maximum amount as a loan then you have to pay a lower rate of interest.

It is totally different from the terms and conditions for the mortgage. The unsecured personal loans are not protected for your property so if you are not able to refund the loan then you can be rest assured that your house is safe. The interest rates for the personal loans are also fixed. This makes it easy for you to make a planning for the payments that has to be made. The refunding amount also remains stagnant all the way through the time period of the loan.

With a dynamic market scenario of loans the rate of interest has seen so many ups and downs. Now to get a loan it has become simpler than ever before. The financial companies offer you loans through their telephone service. They have tollfree numbers and they guide and provide you the best deals and offers.

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6. LOANS(CAR LOANS)

IntroductionA car loan is a special type of personal loan, which allows you to spread the cost of a car over an extended period of time, rather than paying the entire sum all at once. In return for this loan, you must pay interest to the bank or building society from which you have borrowed the money, which means that the total amount you repay will be greater than the amount borrowed. Generally, you pay back a small percentage of the loan each month, plus the interest charge: this is referred to as your monthly repayment.

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Advantages of car loan The contract for the imbursements for a specific period of time permits the person in deciding the exact resources and it is better option against the dynamic variation in the interest rates. If the person is using the vehicle for the official reasons then the person can probably assert a share of the interest and decreased charges as expenditure against the persons chargeable profits. The person can also generate some stock or ownership in the asset. The reimbursements might be made straight away from the mentioned bank by the person

7. LOANS(CONSUMER LOANS)

IntroductionMoney loaned to individuals (usually on non-secured basis) for personal, family, or household purposes; as opposed to business or commercial lending. Consumer loans are monitored by government regulatory agencies for their compliance with consumer protection regulations such as the 'truth in lending' law. Also called consumer credit or consumer lending.

Advantages of consumer loan23

Loans are a relatively fast way to obtain funds for a special purchase or project, and even large amounts can be borrowed for almost any purpose. They are suitable for expensive purchases that require immediate payment, allowing you to spread the cost of the purchase and manage your short term finances more easily, especially if your loan has a fixed interest rate.

There is a high level of competition amongst lenders, which usually makes it possible for you to negotiate a cheaper interest rate than the one which you are initially quoted. It may also be worth investigating whether there is a specialist lender who can provide loans tailored to your specific purpose, for example buying a car, since they may offer you a cheaper or more suitable loan. Personal loans are often more popular than other sources of finance such as credit cards and overdrafts, because the amount you can borrow is typically greater.

Overall growth of loan

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8. DEMAT ACCOUNT

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IntroductionDemat refers to a dematerialized account. Demat account is just like a bank account where actual money is replaced by shares. Just as a bank account is required if we want to save money or make cheque payments, we need to open a demat account in order to buy or sell shares. A Demat Account holds portfolio of shares in electronic form and obviates the need to hold shares in physical form. The account offers a secure and convenient way to keep track of shares and investments without the hassle of handling physical documents that get mutilated or lost in transit. The Securities and Exchange Board of India (SEBI) mandates a demat account for share trading involving more than 500 shares

Advantages of

Demat Account

Eliminates risks associated with physical certificates

such as bad delivery, fake securities, delays, forgery, counterfeiting, thefts and loss due to fire. 26

Reduces brokerage charges Pledging/Hypothecation of shares is easier Enables quick ownership of securities on settlement Reduction in paperwork involved in transfer of Demat account obviates the need to pay stamp duty (in There is no odd lot problem. Even one share can be

thereby resulting in increased liquidity securities case of physical shares, 0.5 per cent stamp duty is payable). bought or sold.

Process of Demat account in diagrammatic form

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9.

MUTUAL FUNDS

IntroductionA Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realized is shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. The flow chart below describes broadly the working of a mutual fund:

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Advantages of mutual fund Professional Management Diversification Convenient Administration Return Potential Low Costs Liquidity Transparency Flexibility Choice of schemes 29

Tax benefits

Growth

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10.

CREDIT CARDS Introduction

Credit Card is post paid or pay later card that draws from a credit line-money made available by the card issuer (bank) and gives one a grace period to pay. If the amount is not paid full by the end of the period, one is charged interest. A credit card is nothing but a very small card containing a means of identification, such as a signature and a small photo. It authorizes the holder to change goods or services to his account, on which he is billed. The bank receives the bills from the merchants and pays on behalf of the card holder.

Advantages of credit cards31

To the bank The system provides opportunity to the bank to attract new potential customers. The more important function of a credit card, however, is simply to yield direct profit for the bank. There is scope and potential for better profitability out of income/commission earned from traders turnover. This also provides additional customer service to the existing clients. It enhances the customer satisfaction. Better network of card holder and increased use of cards means higher popularity and image for the bank.

To the cardholder He can purchase goods and services at a large number of outlets without cash or cheque. The is useful in emergency, can save embarrassment. The cardholder has a period of free credit usually between 30-50 days of purchase. The risk factor of carrying and storing cash is avoided. It is convenient for him to carry a credit cards and he has trouble free travel and make purchases without carrying cash or cheque. To the Merchant Establishment This will carry prestigious weight to the outlets.

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Increase in sales because of increased purchasing power of the cardholder due to unbilled credit available to the cardholder. He can offer credit without the botheration of cost or book-keeping and bad debts. Suppliers/sellers no longer have to send reminders of outstanding debts.

GrowthGrowthof credit cardsissued(In L akh)90 80 70 60 50 40 30 20 10 0 84.05 60.68 48.69 37.34

31/3/05

31/3/06

31/3/07

31/3/08

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AUTOMETIC TELLER MACHINES (ATM)

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IntroductionATMs has given the customers the facility of round the clock banking. The ATMs are used by banks for making the customers dealing easier. ATM card is a device that allows customer who has an ATM card to perform routine banking transaction at any time without interacting with human teller. It provides exchange services. This service helps the customer to withdraw money even when the banks ate closed. This can be done by inserting the card in the ATM and entering the Personal Identification Number and secret Password.

Advantages of ATMs To the Customers

ATMs provide 24 hrs. 7 days and 365 days a year service.

Service is quick and efficient Privacy in transaction Wider flexibility in place and time of withdrawals. To Banks Alternative to extend banking hours. Crowding at bank counters considerably reduced. 34

Alternative to new branches and to reduce operating expenses. Relieves bank employees to focus an more analytical and innovative work. Increased market penetration

Growth

CHANNELS OF RETAIL BANKING35

Consumer behavior is changing rapidly due to the development of technology and the use of financial services is characterized by individuality, mobility, independence of place and time and flexibility. Financial transaction caused by purchases will more and be carried out by non-and near-banks. These facts represent big challenges for banks as well as other providers of financial services 1. TELE BANKING Tele banking or phone banking is a banking services offered by banks to enable customers to access their accounts for information and transaction. Similar to the ATMPIN, a Telephone PIN (T-PIN) is provided to each account holder. The customer can call the executive tele-banking number and provide the detail to identify him /herself to the automated voice. Typically, the bank account number and the T-PIN are asked for. Upon the respective numbers matching the computerized system , the customers is given access to his account to query or transect on his account. Through cash withdrawal and deposit are not enabling through this service, many banks offer a cash delivery or collection service to certain classes of customers. 2. INTERNET BANKING One of the channels of service delivery to a banking customer is through the internet. The access to account information as well as transaction is offered through the world wide network of computer s on the internet. Every bank has special firewalls and its own security measures to protect the consumers from non-authentic use from unauthorized users. Data are encoded using algorithms with a 128 bit encryption. 36

Each account holder is provided a PIN similar to that of ATM or phone banking PIN. The access to the account is allowed upon a match of the account detail and PIN entered on the computer system. A higher level of security may be reached by electronic figure-print. The figure print is taken before and after the transaction. Then both versions are compared. In case of any differences, the transaction is aborted. Account querying as well as transaction are possible on the internet banking platform. Through the cash transaction are not possible at present, the next phase of evaluation in internet banking will allow those as well. Benefits of Internet Banking Reduce the transaction costs of offering several banking services and diminishes the need for longer numbers of expensive brick and mortar branches and staff. Increase convenience for customers, since they can conduct many banking transaction 24 hours a day. Increase customer loyalty. Improve customer access. Attract new customers. Easy online application for all accounts, including personal loans and mortgages

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MARKET SEGMENTATION The success of retail banking is lies on market segmentation, innovation and pricing of good service. Banks have to focus on market segmentation to identify Categorization of Retail Bank Services Core Facilitating Supporting Services Services Payment Services Services Cash Foreign currency requirement Travel cheques DD/Bankers cheque ATM cards Standing instruction from customers for making payment Interbank transfer of funds Safety vault Current account Saving account Time deposit account Making payment at door steps Internet banking Telephone banking

Current account & Saving account

Credit cards Debit cards Service to senior citizen Telephone banking Internet banking Conversion of excess balance to time deposits Delivery of loan at promised time period Interest rate option: fixed/floating Flexibility in prepayment of loan

Loan product: Consumer loan, Housing loan, Personal loan, Housing loan, Education loans

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Insurance product: Life insurance, pension schemes

Current account Saving account Time deposit

Additional insurance facilities for family members Counseling on post retirement savings.

difference between group of potential customers and to decide which product can be served to which groups. McKinsey has identified four principal segments combining personal attitude to finance and demographic data. This segmentation is suitable to all emerging Asian market. The ICIC bank in India has adopted Life Stage Segmentation Strategy. This approach aims to minimize overlap between two segments by categorizing customer into various segments based on the stage of life they have reached. The banks philosophy is to have a product ideal for every stage of individuals life from child hood to retirement and bank has wide product rang. ICIC bank is also adopting a strategy of creating a liability based product along with an asset based product and vice versa. The potential segments which many bank have not explored so far are self employed people and housewives. Selfemployed people due to lack of proper identity (i.e. salary certificate or PNR Number) are still borrowing at higher rate and banks are not assessing the credit risk premiums properly. Similarly, a suitable banking product is required, which makes the housewife to feel liberated and empowered. The survey of NCAER shows that rural India is gradually possessing variety of consumer durable goods. Banks have to design suitable products to meet 39

the requirements of rural rich and rural poor. Census of 2001 shows that India has 423 towns (Eight Metros, 19 Mini Metros, 396 Towns), and that financial products are very rare for urban poor and low salaries persons.S m eg entationfor AsianMark et22% 34%

Simplifiers21%

Simplifiers Fickle shoppers Advice seekrs

23%

SMEs LENDING (SMALL AND MEDIUM ENTERPRISES)Small and Medium Enterprises (SMEs), do not get timely bank credit in India and many region in the world. They do not strictly conform to the various credit scores of the lending banks for evaluation. Some banks adopt a one-size fits all methodology for financing SME sector. It does not work well because each SME case has its own peculiarities. Old generation privet bank in India have been financing this sector (with significant success rate) not on the basis of mere balance sheet ratio but on valuable relationships developed over a period of time. While tangible collateral is invariably insisted upon, these banks in few occasions extend unsecured finance as well.

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The story is different in public sector banks. SME finance is perceived by these banks as an integral part of priority sector credit extended to retail traders, small business enterprise, professional and self-employed ect. With this perception of mandatory lending the consequences of wilful default lax followup, non-serious credit supervision and eventual write-off happen. In short, public sector banks really do not have the skill to evaluate SME credit and they consider it as a potential risk and an unglamorous lending proposition where it is hard to build-up sizeable asset portfolios and transaction costs are estimated to be relatively higher. Absence of reliable financial data and asymmetric information add to the problems of the bank in credit assessment. Many public sector banks have been trying to finance the SME sector, outside the purview of priority credit sector. In fact special credit schemes have been devised for this purpose, with accent on provision of adequate of collateral. Credit decisions are based on the value of collateral and with little or no balance sheet study. Mostly traders are accommodated under these schemes. As bank take lenient view on end up principle, in many case diversion of loan fund has been observed. The experience of many bankers in extending this type of credit does not seem to be good. These banks are not realizing that entrepreneurship of borrower and bankability of venture are essential rather than availability of collateral. New generation private bank really do not evince any interest in financing SME sector expect in cases where the loan is for significant amounts Rs.5lakh or more, extended to say a doctor or professional for acquisition of infrastructure or a nursing home ect. SME finance the world over is invariably associated with provision of technical assistance and an element of subsidy to be 41

successful. There are dedicated funds provided by various governments for this purpose. The latest thinking is that subsidy should be passed on through banking channels but it should not reach the borrowers. The bank which performs well in extending and recovering SME loans will retain the subsidy as an incentive. While collateral is accepted, in whatever form it comes, it is not insisted upon in all cases. Banks are realizing that SME sector need not remain unglamorous. Thanks to the onset of technology, the transaction cost need not be high. Financing SMEs with efficiency could be profitable for the banks. It is potential to generate national wealth much faster than corporate sector. Citibank for example has been successfully financing SME sector particularly in ailing economies like Japan and Germany. It offers SME lending cost effectively as well. New channels like telephone and internet banking are also used to supplement the brick and mortar structure. Citigroups customer finance lending in Japan is at 1.7tn which includes substantially SME finance as well.

SME BANKING INITIATIVES IN OTHER PARTS OF THE WORLD

The Development Bank of Singapore (DBS), the largest banking group on South East Asia, ranked among the top 100 banks in the world is a major player in SME banking in Asia pacific region. Through its service called DPB Enterprise Banking it extends term finance for acquisition of fixed asset like premises and machinery, besides provision of working capital. 42

OCBC Bank, operating in Singapore also finance actively, the small and medium enterprises segment. In Hong Kong, Bank of East-Asia actively participate in the SME Business Installation and Equipment Loan Guarantee Scheme to facilitate acquisition of equipment by SME borrowers. Loan amount exceed HK $2 mn with reasonable interest rate, with a tenor up to three years. BEA assists the borrowers seeking the governments approval on guarantee. Royal Bank of Scotland offers small business services in the virtual banking mode, cost-effectively as there are no branch overheads on the borrowers.

CUSTOMER SEGMENTATION

For introducing specific products, PSBs may relate transaction history with the customer information. This will make clear as to which customer needs a credit card, a debt card or a smart card, ect. Use of technology can be made to understand the product the customer needs. Modern banking also concentrates on acquiring of customers through development of new products and distributing them through multiple delivery channels. For making effective inroads, banks have to depend heavily on technology. Banking sector is sourcing the technology from trusted technology service providers. Effective segmentation is possible only when detail knowledge of market customers and data sources are combined with appropriate data processing and proper analysis. The 43

segmentation of customers can be done on the basis of behavior, demographics, value and attitudes. This gives a sound base needed for on-to-one customer interaction by providing well rounded customer understanding instead of designing one campaign for numerous dissimilar customers, the banks break them in to finer segment and then devise for them. Banks need to have the technologies facilitating proper and consistent communication with the customer the technology should be fully functional, completely secure at the same time it should be customer friendly also. The concept of customer relationship management (CRM) as gained importance. Through crucial customer data is available with the bank this helps in customer segmentation as has been already discussed, banks can tailor new needs based product using this data to cater the requirement of various customer segments. This data can also be utilized for formulating strategies for customer retention and enhancing profitability of the bank.

CONSTRAINTS PRESENTELY FACED

Designing their own financial product is very costly forbanking involving substantial investment.

Heavy competition. This being where many players areoperating and trying to gain the maximum share, margins are under pressure.

Diminishes customer loyalty may lead to the erratic andunreliable client base. Thus banks have to be on their toes 44

and have up-to-date information about the product of their competitor.

Customers are getting attracted towards other financialproduct like mutual funds ect., especially when the retail product are designed by the banks for wooing the investor.

BENEFITS OF CUSTOMER SEGMENTATION

Customer segmentation is a powerful tool to identify theunfulfilled needs of the client. Thus, it is useful for prioritizing new product development efforts.

It helps the banks in selecting specific product future anddeveloping customized marketing program.

The banks rely on it for determining the proper productpricing and designing and optimal distribution strategy.

Customer segmentation helps in identifying customers withgreatest life time values.

A proper customers segmentation analysis would reveal thelevel of comfort the customer enjoy with the electronic environment.

Marketing by banks will be pinpointed towards the particularsegment for which a product is designed. This will save time as well as money.

COSUMER RELATIONSHIP MANAGEMENT (CRM)45

CRM process and technologies support a retail bank business strategy to build long-term profitable relationship with specific customers. Banks adopt CRM strategies in order to forge closer and deeper relationship with customers, with goal of maximizing the wallet share of a customers to the organization. To this end, CRM provides a mechanism for:

Being proactive in addressing customer need andexpectation,

Analyzing information from all channels and data source toprofile customers, predict churn, project customer profitability, and more.

From the customer perspective, CRM makes it easier for customer to do business with you. Customers today want to decide how to transact business with their bank and expect to select their preferred channels and not vice versa. There is no advantage in forcing customer to deal with a banks internal complexity and lack of flexibility. Yet this is typically what happens when bank is driven by outdated structures, legacy system, and layers of technology. From a bank perspective, CRM makes it possible to analyze customer information in order to drive more informed business decision and action, often in real time. Economically competitively, a bank is in the optimum situation when the customer starts buying from the bank rather than being sold to. CRM support this by enabling bank to better understand customer requirements, even as they evolve; differentiate between customers via market segmentation; predict the likelihood of 46

customer actions; evaluate customer loyalty, profitability and channel effectiveness; and maximize marketing campaign performance.

CUSTOMER OPTIMISATION

Customer optimization lies at the heart of CRM. It is obtained through a value exchange in which the bank makes an investment in a customer interaction in exchange for some desired behavior. If the bank wants a customer to buy more, stay longer, pay higher price, transact through different channel, and so on, then the bank must make the appropriate investment in the relationship. Measurement determines the value of exchange and the degree of optimization achieved. The great promise of CRM solution is that it can provide the process, methodology, and technology to acquire the maximum value from customer relationship across every channel, over the lifetime of the relationship.

Customer optimization in addressed along three dimensions:

Acquisition of new customers immediately profitable to thebank,

Relation of the most profitable existing customer for thelongest possible duration, and 47

Expansion of the customer relationship with the bank,encouraging more purchases while shifting less profitable customers to lower cost delivery channels.

Whereas acquisition and retention are fairly well understood, customer profitability through expansion requires some security. Because expansion present enormous untapped value, a CRM strategy must be able to identify the expansion potential for each customer.

THE PROCESS OF CRMConsumer Relationship Management has been typically viewed by both the retail banking industry and vendor community as asset of function-specific technologies designed to automate banks existing sales, marketing and services processes. However the increasing pressure of competition continues to drive bank to more imaginative and effective usage of their greatest asset the massive volume of customer information scattered throughout the enterprise. To appreciate the full business implication of true CRM and its potential impact on the banks bottom line and future performance, a more strategic view is required. CRM is essentially a new process methodology applied to an increasing scope and depth of customer information from across the enterprise and all customer touch points. Technology continues to play a critical role as successful enterprise CRM is supported by the application of a 48

variety of operational and analytical system. The application of real time technologies in CRM environment is having a genuinely revolutionary impact. Gartner research categorizes key stage of the CRM process as follows: 1. Planning 2. Information acquisition 3. Information compilation , storage, and maintenance 4. Information analysis 5. Information application 6. Information distribution

CONSUMER RELATIONSHIP MANAGEMENT (CRM) MUST HAVE

Consumer Relationship management play critical role in retail banks long-term competitive strategy, it is important to understand the robust infrastructure requirements of CRM. To be effective, CRM cannot be implemented as a point or single channel solution. Rather it must be an all encompassing process that integrates information across all bank channels. CRM solution need not replace legacy system it only has to provide them with common ground in the form of an integration framework and a single global information repository to which they can all contribute and draw from. Beyond its all49

encompassing nature, CRM solution must also possess the ability to deliver the following attributes:

REAL-TIME OPERATION AND VIEWSTodays customers have high expectation for immediate service and meaningful interactions. Bank decisions need to be based on, and customer interaction driven by, up-to-thesecond data regarding customers, their actions and demands, and their propensity for certain action. Hence CRM solution must integrate customer information in real time from across the bank and beyond and unfailingly provide real-time single truth view of customers and their actions, proclivities, and position, regardless of how and when information is accessed.

REAL-TIME DATA AGGREGATION AND CACHINGA single global information repository is at the heart of an CRM solution, and the database that support it must be capable of acting as a real-time information cache for massive volume of complex transactions and messages. Pius it must support both the real-time and batch provisioning of specialized data marts, exploratory and data warehouses, data mining and other analytic applications, and direct queries. Most important, it must do it all with equal efficiency. 50

SOPHISTICATED WORKFLOW AND CUSTOMERINTERACTION RULES This includes enabling standard processes to be quickly deployed and modified while providing for local variations.

SCALABILITY AND EXTENSIBLITYCRM solution must scale linearly for cost effectiveness while supporting growth without outages. It must also provide an extensible, standards based framework on which specialized capabilities and new service (campaign management, fraud detection, and so on) can be easily added and into which newly acquired system (including those from mergers and acquisitions) can be plugged.

CONTINUOUS AVAILABILITYCRM solutions pivotal role in driving decision and actions requires much more than normal system availability. Ultra high or even continuous availability is required to meet todays elevated customer expectation for complete and upto-date information and consistent always on service.

STRATEGIES FOR INCREASING RETAIL BANKING BUSINESS

CONSTANT PRODUCT INNOVATION TO MATCH THE51

REQUIRMENT OF THE CUSTOMER SEGMENTATION

The customer database available with the banks is the best source of their demographic and financial information and can be used by the banks for targeting certain customer segments for new or modified product. The banks should come out with new products in the area of securities, mutual funds and insurance.

QUALITY SERVICE AND QUICKNESS IN DELIVERYAs most of the banks are offering retail products of similar nature, the customers can easily switchover to the one, which offers better service at comparatively lower costs. The quality of service that banks offer and the experience that clients have, matter the most. Hence, to retain the customers, banks have to come out with competitive products satisfying the desires of the customers at the click of a button.

INTRODUCTION OF NEW DELIVERY CHANNELSRetail customers like to interface with their bank through multiple channels. Therefore, banks should try to give high quality service across all service channels like branches, Internet, ATMs, etc. 52

TAPPING OF UNEXPLOITED POTENTIAL ANDINCREASING THE VOLUME OF BUSINESS

This will compensate for the thin margins. The Indian retail banking market still remains largely untapped giving a scope for growth to the banks and financial institutions. With changing psyche of Indian consumers, who are now comfortable with the idea of availing loans for their personal needs, banks have tremendous potential lying in this segment. Marketing departments of the banks be geared up and special training be imparted to them so that banks are successful in grabbing more and more of retail business in the market.

INFRASTRUCTURE OUTSOURCINGThis will help in lowering the cost of service channels combined with quality and quickness.

DETAIL MARKET RESEARCH

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Banks may go for detail market research, which will help them in knowing what their competitors are offering to their clients. This will enable them to have an edge over their competitors and increase their share in retail banking pie by offering better products and services.

CROSS-SELLING OF PRODUCTSPSBs have an added advantage of having a wide network of branches, which gives them an opportunity to sell third-party products through these branches.

BUSINESS PROCESS OUTSOURCINGOutsourcing of requirements would not only save cost and time but would help the banks in concentrating on the core business area. Banks can devote more time for marketing, customer service and brand building. For example, Management of ATMs can be outsourced. This will save the banks from dealing with the intricacies of technology.

TIE-UP ARRANGEMENTSPSBs with regional concentration can reap the benefit of reaching customers across the country by entering into strategic alliance with other such banks with intensive presence in other regions. In the present regime of falling 54

interest and stiff competition, banks are aware that it is finally the retail banking which will enable them to hold the head above water. Hence, banks should make all out efforts to boost the retail banking by recognizing the needs of the customers. It is essential that banks would be imaginative in predicting the customers' expectations in the ever-changing tastes and environments. It is the innovative and competitive products coupled with high quality care for clients will only hold the key to success in this area. In short, bankers have to run very fast even to stay where they are now. It is the survival of the fastest now and not only survival of the fittest.

SPECIAL FEATURES OF RETAIL CREDITOne of the prominent features of Retail Banking products is that it is a volume driven business. Further, Retail Credit ensures that the business is widely dispersed among a large customer base unlike in the case of corporate lending, where the risk may be concentrated on a selected few plans. Ability of a bank to administer a large portfolio of retail credit products depends upon such factors.

STRONG CREDIT ASSESSMENT CAPABILITY55

Because of large volume good infrastructure is required. If the credit assessment itself is qualitative, than the need for follow up in the future reduces considerably.

SOUND DOCUMENTATIONA latest system for credit documentation is necessary prerequisite for healthy growth of credit portfolio, as in the case of credit assessment, this will also minimize the need to follow up at future point of time.

STRONG POSSESSING CAPABILITYSince large volumes of transactions are involved, today transactions, maintenance of backups is required

REGULAR CONSTANT FOLLOW-UPIdeally, follow up for loan repayments should be an ongoing process. It should start from customer enquiry and last till the loan is repaid fully.

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SKILLED HUMAN RESOURCEThis is one of the most important pre-requisite for the efficient management of large and diverse retail credit portfolio. Only highly skilled and experienced man power can withstand the river of administrating a diverse and complex retail credit portfolio.

TECHNOLOGICAL SUPPORTThis is yet another vital requirement. Retail credit is highly technological intensive in nature, because of large volumes of business, the need to provide instantaneous service to the customer large, faster processing, maintaining database, etc.

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ISUUES RELATED TO RETAIL BANKING

EMERGING ISSUES

KNOWING CUSTOMERSKnow your Customer is a concept which is easier said than practiced. Banks face several hurdles in achieving this. In order to that the product lines are targeted at the right customers-present and prospective-it is imperative that an integrated view of customers is available to the banks. The benefits flowing out of cross-selling and up-selling will remain a far cry in the absence of this vital input. In this regard the customer databases available with most of the public sector banks, if not all, remain far from being enviable. What needs to be done is setting up of a robust data warehouse where from meaningful data on customers, their preferences, there spending patterns, etc. can be mined. Cleansing of existing data is the first step in this direction. PSBs have a long way to go in this regard.

TECHNOLOGY ISSUE58

Retail banking calls for huge investments in technology. Whether it is setting up of a Customer Relationship Management System or Establishing Loan Process Automation or providing anytime, anywhere convenience to the vast number of customers or establishing channel/product/customer profitability, technology plays a pivotal role. And it is a long haul. The Issues involved include adoption of the right technology at the right time and at the same time ensuring volumes and margins to sustain the investments. It is pertinent to remember that Citibank, known for its deployment of technology, took nearly a decade to make profits in credit cards. It has also to be added in the same breath that without adequate technology support, it would be well nigh possible to administer the growing retail portfolio without allowing its health to deteriorate. Further, the key to reduction in transaction costs simultaneously with increase in ability to handle huge volumes of business lies only in technology adoption. PSBs are on their way to catch up with the technology much required for the success of retail banking efforts. Lack of connectivity, stand alone models, concept of branch customer as against bank customer, lack of convergence amongst available channels, absence of customer profiling, lack of proper decision support systems, etc., are a few deficiencies that are being overcome in a great way. However, the initiatives in this regard should include creating flexible computing architecture amenable to changes and having 59

scalability, a futuristic approach, networking across channels, development of a strong Customer Information Systems (CIS) and adopting Customer Relationship Management (CRM) models for getting a 360 degree view of the customer.

ORGANISATIONAL ALIGNMENTIt is of utmost importance that the culture and practices of an institution support its stated goals. Having decided to take a plunge into retail banking, banks need to have a well defined business strategy based on the competitive of the bank and its potential. Creation of a proper organization structure and business operating models which would facilitate easy work flow are the needs of the hour. The need for building the organizational capacity needed to achieve the desired results cannot be overstated.

This would mean a strong commitment at all levels, intensive training of the rank and file, putting in place a proper incentive scheme, etc. As a part of organizational alignment, there is also the need for setting up of an effective Corporate Marketing Division. Most of the public sector banks have only publicity departments and not marketing setup. A fully fledged marketing department or division would help in evolving a brand strategy, address the issue of alienation from the upwardly mobile, high net worth customer group and improve the recall value of the 60

institution and its products by arresting the trend of getting receded from public memory. The much needed tie-ups with manufacturers/distributors/builders will also facilitated smoothly.

PRODUCT INNOVATIONProduct innovation continues to be yet another major challenge. Even though bank after bank is coming out with new products, not all are successful. What is of crucial importance is the need to understand the difference between novelty and innovation? Peter Drucker in his path breaking book: Management Challenges for the 21st Century has in fact sounded a word of caution: innovation that is not in tune with the strategic realities will not work; confusing novelty with innovation (should be avoided), test of innovation is that it creates value; novelty creates only amusement. The days of selling the products available in the shelves are gone. Banks need to innovate products suiting the needs and requirements of different types of customers. Revisiting the features of the existing products to continue to keep them on demand should not also be lost sight of.

PRICING OF PRODUCT61

The next challenge is to have appropriate policies in place. The industry today is witnessing a price war, with each bank wanting to have a larger slice of the cake that is the market, without much of a scientific study into the cost of funds involved, margins, etc. The strategy of each player in the market seems to be: under cutting others and wooing the clients of others. Most of the banks that use rating models for determining the health of the retail portfolio do not use them for pricing the products. The much needed transparency in pricing is also missing, with many hidden charges. There is a tendency, at least on the part of few to camouflage the price. The situation cannot remain his way for long. This will be one issue that will be gaining importance in the near future.

PROCESS CHANGESBusiness Process Re-engineering is yet another key requirement for banks to handle the growing retail portfolio. Simplified processes and aligning them around delivery of customer service impinging on reducing customer touch-points are of essence. A realization has to drawn that automating the inefficiencies will not help anyone and continuing the old processes with new technology would only make the organization an old expensive one. Work flow and document management will be integral part of process changes. The documentation issues have to remain simple both in terms of documents to be submitted by the customer at the time of loan application and those to be executed upon sanction. 62

ISSUE CONCERNING HUMAN RESOURCESWhile technology and product innovation are vital , the soft issues concerning the human capital of the banks are more vital. The corporate initiatives need to focus on bringing around a frontline revolution. Though the changes envisaged are seen at the frontline, the initiatives have to really come from the back end. The top management of banks must be seen as practicing what preaches. The initiatives should aim at improved delivery time and methods of approach. There is an imperative need to create a perception that the banks are market-oriented.

This would mean a lot of proactive steps on the part of bank management which would include empowering staff at various levels, devising appropriate tools for performance measurement bringing about a transformation cant do to can do mind-set change from restrictive practices to total flexible work place, say. By having universal tellers, bringing in managerial controlling work place, provision of intensive training on products and processes, emphasizing, coaching etiquette, good manners and best behavioral models, formulating objective appraisals, bringing in transparency, putting in place good and acceptable reward and punishment system, facilitating the 63

placement of young /youthful staff in front-line defining a new role for front-line staff by projecting them as sellers of products rather than clerks at work and changing the image of the banks from a transaction provider to a solution provider.

RURAL ORIENTATIONAs of now, action that is taking place on the retail front is by and large confined two metros and cities. There is still a vast market available in rural India, which remains to be trapped. Multinational Corporations, as manufacturers and distributors, have already taken the lead in showing the way by coming out with exquisite products, packaging and promotions, keeping the rural customer in mind. Washing powders and shampoos in Re.1 sachet made available through an efficient network and testimony to the determination of the MNCs to penetrate the rural market. In this scenario, banks cannot lack behind. In particular PSBs, which have a strong rural presence, need to address the needs of rural customers in a big 64

way. These and only these will propel retail growth that is envisaged as a key strategy for portfolio expansion by most of the banks.

SOME CRITICAL ISUUES

CUSTOMER SERVICECustomer service is perhaps the most important dimension of retail banking. While most public sector banks offer the same range of service with similar technology/expertise, the level of customer service 65

matters the most in bringing in more business. Perhaps more than the efficiency of service, the approach and attitude towards customers will make the difference. Front line staffs have to be educated in this regard. A scheme of entrusting a group of important customers to the care of each employee/officer with a person to person knowledge and intimacy can be implemented all sundry advices/notices such as Dr. /Cr. advices. TDR maturity advices, etc. whether signed by employees or officers should be identifiable by the name of those signing, and inviting customers to contact them for further assistance in the matter. A customer centered organization has to be built up, whose ultimate goal is to "own" a customer. Focused merchandizing through effective market segmentation is the need of the hour. A first step can be the organization of the various retail branches to enter for different market segments like up market individuals, traders, common customers, etc..For the SIB (Small Industry and Business) sector banks, the focus should be on identifying efficient units and allocations of loans lo these units. These banks should try Merchant Banking services en a small scale. With agricultural output growing at a fast rate and mechanization setting in, banks should try to cater to the credit needs of the people involved in this profession. A wide network is absolutely imperative for this sector. Separate branches/divisions should be opened for traders and similar government businesses. Special facilities for cash tendered in bulk and immediate issue 66

of drafts, by extending facilities like "guarantee bond" system, will go a long way in mitigating problems faced by traders who are the major customers for drafts issue. Provision for cash counting machines in these branches will reduce the monotony of cashiers and unnecessary delays, thus resulting in better productivity and ultimately in improved customer service. The personal segment is however the most important one. With the urban segment moving away because of disintermediation and competition from foreign banks, retail banks should focus on the rural/semi-urban areas that hold the maximum potential. Innovative schemes like "paper-gold" schemes can be introduced. In the urban areas, private banking to affluent customers can be introduced, through which advisory and execution services could be provided for a fee. Foreign currency denominated accounts can also be introduced for them. Nationalized banks compare very poorly with the foreign banks when it comes to the efficiency in services. In order to improve the speed of service the bank should. Improve the rapport between the controlling offices and the branches to ensure that decisions arc communicated fast. Make sure that the officials as well as the staff are fully aware of the rules so that processing is faster.

TECHNOLOGYIn the current scenario, the importance of technology cannot be understated for retail banks which entail 67

large volumes, large queues and paperwork. But most of the banks are burdened with a large staff strength which cannot be done away with. Besides, in the rural and semi-urban areas, customers will not be at home in an automated, impersonal environment. The objective would be to ensure faster and easier customer service and more usable information, instantly, economically and easily to all those who need it -customers as well as employees. Proper management information systems can also be implemented to aid in superior decision making. Communication technology is especially needed for money transfer between the same city and also between cities. There are inordinate delays in India because of geographical and other factors. Modem technology can make it possible to clear any check anywhere in India within three days. Installation of FAX facilities at all the big branches will facilitate speedy transfer of payment advices. Computerization will be of great help in improving back-office operations. At present, 60% of India's rural branches can have PCs. These can be used for quick retrieval and report generation. This will also drastically reduce the time bank staffs spend in filling and filing returns.

PRICE BUNDING68

Price bundling is a selling arrangement where several different products are explicitly marketed together to a price that is dependent on the offer. As banks are multiproduct firms this strategy is more applicable to retail banking. Price bundling offers several economic and strategic benefits to a bank. It offers economies of, utilization of the existing capacities and reaching wider population of customers. Bank can get the benefits of information and transacting. In the process of extending variety of services, banks are acquiring enormous amount of customer information. If this information is systematically stored, banks can efficiently utilize this information in order to explore new segments and to cross-sell new services to these segments. Cross-selling opportunities and larger customer base can also be the motive for merger against usually stated advantage of cost savings. Price bundling can be used in order to lengthen the relationship with a customer. It will reduce the need of resources to be put on acquiring new customers and saves time of the bank. Among the strategic benefits, price bundling may cause less aggressive competition; it differentiates its products compared to rivals in the same market where the products are sold individually or in other kinds of bundles. Retail banking offers many services and it gives an opportunity to the bank to combine different services in different kinds of bundles. In many cases demand for one service affects the demand for another service, for example current or savings account and payment services are highly related, and here price bundling is a better alternative than individual selling. Banks have to 69

analyze the customer segment and bundle products before applying the pricing strategies.

The first step in price bundling decision is to select the customer segment. The bundle is targeted to choose a strategic objective. If there are two products (A and B) that are considered to be bundled together, the comprehensive strategic objectives for the different customer segments are,

Cross-selling to customers that only buy one of the products.

Retaining customers that already buy both of the products.

Acquiring new customers when they buy neither product for the time being.

INNOVATIONThe scope for innovation in financial services is unlimited. Although banks have introduced a variety of deposit and loan products, the basic features of all these products are almost one and the same. Among the delivery channels, ATMs have emerged as ubiquitous money centers. Almost all banks have 70

established their ATMs. India had only 400 ATMs, which increased to 3,600. Out of this 881 ATMs have Swathing connectivity. It is projected that the number of ATMs will reach up to 35,000 by the end of. The question arises is, are they cash cows? The answer is certainly no. For most of the banks the overhead costs on these ATMs are far higher than the revenue generated by them. ATM operation costs are largely fixed in nature the cost of the machine, its maintenance, replenishment of currency, and the satellite (network) connection. There should be a minimum number of transactions to cover these costs. Banks have to innovate wide range of services in addition to cash withdrawals. ATMs should allow customers to buy postal and revenue stamps, payment of bills, event tickets, sports tickets, etc. Banks can offer ATM screens for slide show advertising also. However, the advantage of the ATM has always been speed and convenience, probably on introduction of these new services customer has to spend more time at a point. ATMs can guide the customer also. For example, if a customer's account balance has reached to bare minimum the ATM can give a helpful suggestion that "we notice your balance is low, can we help with a loan?" ATMs can be either within the premises of a branch or at a remote place. On premises ATMs are highly immune to competition, but branches can reduce the staff, on installation of ATM. The scope for wider services through off-premises ATMs is very high; it provides great opportunity for fee revenue. The cost of maintenance of off-premises ATMs is higher in terms of replenishment, cash couriers, armed security etc. In the US, approximately 23 percent of ATMs are offering sale of postage stamps. It is the right time for banks to 71

question themselves whether ATM is a service channel, sales, channel, or branding opportunity. The future of retail banking lies more in mobile banking. Mobile telephone market is penetrating, and mobile phones are ideal to utilize Internet banking services without customer accesses to PC. By a tacit acceptance India has around three million mobile phone users and this number is expected to reach to eight million by 2003. Smart card revolution will further change the face of retail banking. Smart cards can store information; carry out local processing on the data stored and can perform complex calculations. At present, India has around 3.4 million smart card users and it is estimated that by the end of 2004 it will reach 14.7 million.

GROWTH DRIVERS OF RETAIL BANKING

The growth drivers of retail lending are analyzed as under: MACRO-ECONOMIC FACTORS

Shift in the pattern of GDP from hitherto agriculture andmanufacturing sectors to services sector with increase per capita income especially that of the younger generation. [India's industrial sector accounted for about 21.8% of GDP, where as the services sector accounted for around 56.1 of 72

GDP in 2002-03 as per revised estimates released by Central. Statistical Organization].

The lower uptake in the non-retail sector has compelled bansto shift their focus on retail assets - specially housing financefor deployment of funds for a longer period, which is considered as the safest within the retail portfolio. Housing loans and other retail loans are comparatively high yielding in terms of interest spread and safer, as risk is diversified among a large number of individuals across the geographic dimensions. The sector enjoys a privilege of lowest NPAs amongst all categories of banks.

Depressed stock and real estate markets as compared tothose prevailing in 1992-93 to 1995-96 thereby diverting deposits to the banking sectors.

Comparatively stable real estate prices during last 4/5years have laid to spurt in demand for housing loans.

Inflation continued to be under control.DEMOGRAPHIC / BEHAVIORAL FACTORS

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Growing concept of nuclear families than the joint familiesnecessitating need for housing units as well as other items of consumer durables.

Increased number of dual income families resulting in higherincome and savings.

Increased demand for dwelling units due to gradual shift ofpopulation from rural/semi-urban centre to urban/metro centre for employment.

Shift in the attitude of the Indian household from "save andbuy' theory to a `buy and repay' principle.

Increased middle-income segment and their income levels. Emergence of new sectors such as Information Technology,media, etc. In the economy that resulted in higher income opportunities and major impact on change in urban consumption pattern.

Awareness and sophistication in urban and semi-urbanhouseholds for urban convenience. Social security and status have also contributed to higher demand for housing units, cars, etc. 74

FAVORABLE ROLE OF RBI

Inclusion of housing loans within the priority sector. Directfinance up to Rs.10 -lakh in case of rural and semi-urban areas now form part of the priority sector advances. This promoted banks to go for housing loans in a big way as it helped them to attain their targets of priority sector lending.

Reduction in risk weight age bank's extending loans foracquisition of residential house properties to 50 per cent from 100 per cent. Reduction in Capital Adequacy Ratio requirement has effectively doubled the credit disbursement capacity of banks.

Banks have elongated repayment periods of retail loansyears to 50/20 years besides quoting fixed/ variable rate of interests based on their asset liability management structure and study of behavioral pattern of demand and time deposits.

Deregulation of interest rate with option to quote fixed/variable interest rate.

Continuous reduction in bank rate, which resulted inreduction in lending rates as well. 75

South ward movement in CRR and SLR ratios increasinglending capacity of banks.

CATALYST-ROLE OF GOVERNMENT

Tax exemptions for payment of interest on capital borrowedfor purchase/ construction of house property and principle repayment. This made housing finance affordable and within the reach of common man. [It is important to note that the housing sector has been recipient of a large number of fiscal incentives in the last 6`h budgets].

These exemptions also changed the profile of the retailsegment from hitherto cash transactions to book transactions.

The Government could not ignore the importance of housingsector in overall development of the economy due to the following factors: Housing construction activities can generate opportunities for employment. In the present context of jobless GDP growth, this issue assumes important as the housing construction provides massive job 76

opportunities for both unskilled and skilled man power. Mass construction of houses will result in the benefits of the nation by the way of healthy standard of leaving, motivation to save more and thereby providing sustainable economic recovery.

INITIATIVES ON THE PART OF BANKS

The growth in retail banking has been facilitated by growthin banking technology and automation of banking processes to enable extension of reach and rationalization of costs. ATMs have emerged as an alternative banking channels which facilitate low-cost transactions vis--vis traditional branches / method of lending. It also has the advantage of reducing the branch traffic and enables banks with small networks to offset the traditional disadvantages by increasing their reach and spread.

The interest rates on retail loans have declined from a highof 16-18%in 1995-96 to presently in the band of 7.5-9%. Ample liquidity in the banking system and falling global interest rates have also compelled the domestic banks to reduce interest rates of retail lending.

Banks could afford to quote lower rate of interest, evenbelow PLR as low cost [saving bank] and no cost [current 77

account] deposits contribute more than 1/3rd of their funds [deposits].The declining cost of incremental deposits has enabled the Banks to reduce their interest rates on housing loans as well as other retail segments loans.

Easy and affordable access to retails loans through a widerange of options / flexibility. Banks even finance cost of registration, stamp duty, society charges and other associated expenditures such as furniture and fixtures in case of housing loans and cost of registration and insurance, etc. in case of auto loans.

Offering retail loans for short term, 3 years and long termranging term ranging from 15/20 years as compared to their earlier 5-7 years only.

Making financing attractive by offering free / concessional /value added services like issue of credit card, insurance, etc.

Continuous waiver of processing fees / administration fees,prepayment charges, etc. by the Banks. As of now, the cost of retail lending is restricted to the interest costs.

OPPORTUNITIES78

Retail banking has immense opportunities in a growing economy like India. As the growth story gets unfolded in India, retail banking is going to emerge a major driver. The rise of Indian middle class is an important contributory factor in this regard. The percentage of middle to high-income Indian households is expected to continue rising. The younger population not only wields increasing purchasing power, but as far as acquiring personal debt is concerned, they are perhaps more comfortable than previous generations. Improving consumer purchasing power, coupled with more liberal attitudes towards personal debt, is contributing to Indias retail banking segment. The combination of above factors promises substantial growth in retail sector, which at present is in the nascent stage. Due to bundling of services and delivery channels, the areas of potential conflicts of interest tend to increase in universal banks and financial conglomerates. Some of the key policy issues relevant to the retail-banking sector are: financial inclusion, responsible lending, and access to finance, long-term savings, financial capability, consumer protection, regulation and financial crime prevention.

CHALLENGES TO RETAIL BANKING IN INDIA

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The issue of money laundering is very important in retailbanking. This compels all the banks to consider seriously all the documents which they accept while approving the loans.

The issue of outsourcing has become very important inrecent 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 theongoing 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 customers needs and requirements in terms of services/products etc.

The dependency on technology has brought IT departmentsadditional responsibilities and challenges 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 competitiveedge for the success in retail banking in coming years. 80

The customer retention is of paramount important for theprofitability if retail banking business, so banks need to retain their customer in order to increase the market share.

One of the crucial impediments for the growth of this sectoris the acute shortage of manpower talent of this specific nature, a modern banking professional, for a modern banking sector. If all these challenges are faced by the banks with utmost care and deliberation, the retail banking is expected to play a very important role in coming years, as in case of other nations.

RETAIL BOOMKeeping pace with the average 8.5 per cent growth of the Indian economy over the past few years, the retail banking sector in India has also witnessed phenomenal growth. It has faced up to the need of the hour and introduced anytime, anywhere banking, for its customers through ATMs, mobile and internet banking. It has also offered services like D-MAT, plastic money (credit and debit cards), online transfers, etc. This has not only helped in reducing operational costs but facilitated greater conveniences to its customers.

HIGH TECH BANKING81

ATMs - With growing technological innovations, banks have significantly expanded their ATM network over the past three years. According to the RBI data as of end-June 2008, the number of ATMs in the country had climbed to 36,314 compared to 27,088 and 20,267 as at end-March 2007 and 2006, respectively.

LOAN DISBURSEMENTTechnology has facilitated the growth in retail loan disbursements, making the whole process simpler and faster. The sector has delivered a growth of around 30 per cent per year over the past 4-5 years. As per the RBI data, although the retail portfolio of banks saw a slowdown to 29.9 per cent during 2006-07 from 40.9 per cent in 2005-06, the growth was faster than the overall credit portfolio of the banking sector (28.5 per cent).

PLASTIC MONEYCredit cards have also played an important role in promoting retail banking. The use of credit cards has been growing significantly over the last few years. The number of credit cards outstanding at the end- June 2008 stood at 27.02 million as against 24.39 million in June 2007, with usage increasing by 10.73 per cent during this period. 82

CORE BANKING SOLUTIONS (CBS)

The concept of CBS, which allows a customer to fulfill a wide range of banking operation online, has come alive during the past four years. The number of bank branches providing CBS rose rapidly to 44 per cent at end- March 2007 from 28.9 per cent at end March 2006. Electronic fund transfer facilities and mobile banking are expected to provide a further fillip to the retail banking in the coming years.

FUTURE OUTLOOK

Indian retail banking, according to a report, is likely to grow at a CAGR of 28 per cent till 2010 to Rs 97, 00 billion. So, although the revolution in retail banking has changed the face of the Indian banking industry as a whole, it has a still mile to go. The reasons for this shift to retail, particularly the housing finance segment, are many. The important among these include

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The poor credit off take to the corporate, commercial andother business sector because of industrial slowdown.

Risky nature of lending to corporate, given in industryrecession and uncertainty prevalent in the economy.

High disintermediation pressure, leading many highlyrated corporate to tap the domestic and/or overseas markets directly for finance, rather than approaching the banks.

Relatively safe nature of some of the retail credit financewith lesser incidence of loan turning bad.

Rising disposable income, changing lifestyles/aspirationsand willingness to spend for more luxuries of the higher middle class.

Increased

government incentives in form of tax rebates

etc. in the case of certain loans like housing loans.

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ICICI Bank - Asia's 2nd best retail bankHDFC Bank, the country's second-largest private bank, has moved to the top of the pile in the retail banking segment, displacing ICICI Bank as the recovery in demand and robust economic growth helped the bank to lend more to customers buying cars, homes and two-wheelers. The Mumbai-based bank has seen a record lending of Rs 4,000 crore for the month of March, which is more than double of what it had disbursed in the month of April 2009. The loan growth is spread across several segments of retail banking such as automobile loans, commercial vehicles, personal and home loans, two-wheeler loans and credit cards.

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Indias largest private sector bank and one stop financial solutions provider with a diversified and de-risked business model Large capital base Vast talent pool Low operating costs Technology focus Strong corporate relationships

ICICI Bank is well positioned to redefine the banking model by focussing on the untapped potential in the profitable retail business segments and leveraging its superior delivery capabilities and lower operating costs in the under-served corporate banking business Structured finance Corporate banking 86

Retail banking

FUTURE OF RETAIL BANKING

Retail banking has significant past and glorious future over the years. Retail banking has proved as an effective tool not only to improve the bottom lines of the banks concerned but also to significantly contribute to the development of the individual consumers availing the services or products in particular and to the overall development of the society in general with the needs of the consumers ever multiplying. There is definitely a vast scope for the furtherance of the Retail Banking business. The society is made of the individuals and the environment surrounding him. As development takes place in the society, the needs of the people grow faster than ever. The wealth creation and its professional management are yet another distinct advantage the society or nation can derive from Retail Banking. The depth of the untapped resources in the retail segment is not yet measured. These resources could be channelized for nation building. On the whole, looking ahead, the prospects of retail banking are brighter than ever and the bankers have to give continued thrust to this area of banking. Thus, with the consumers ever multiplying needs there is definitely a vast scope for the 87

furtherance of the retail banking business. Operationally, there is a possibility that technology go beyond merely reducing the cost & improving the quality of current products. It may prove possible, even profitable, to combine functions in new ways.

CONCLUSIONSRetail banking is the fastest growing sector of the banking industry with the key success by attending directly the needs of the end customers is having glorious future in coming years. Retail banking sector as a whole is facing a lot of competition ever since financial sector reforms were started in the country. Walk-in business is a thing of past and banks are now on their toes to capture business. Banks therefore, are now competing for increasing their retail business. There is a need for constant innovation in retail banking. This requires product development and differentiation, micro-planning, marketing, prudent pricing, customization, technological up gradation, home / electronic / mobile banking, effective risk management and asset liability management techniques. While retail banking offers phenomenal opportunities for growth, the challenges are equally discouraging. How far the retail 88

banking is able to lead growth of banking industry in future would depend upon the capacity building of banks to meet the challenges and make use of opportunities profitably. However, the kind of technology used and the efficiency of operations would provide the much needed competitive edge for success in retail banking business. Furthermore, in all these customer interest is of chief importance. The banking sector in India is representing this and I do hope they would continue to succeed in this traded path.

BIBLIOGRAPHY

Retail Banking vol.1- Katuri Nageshwara Rao (ICFAI University)

Management of Banks & Financial Institutions-Prof. F. Thomas (PGDBA, K.C. College)

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