EMERGING TRENDS IN RETAIL BANKING

P. Ananda Murugan
Head, Department of Commerce CA,
TERFS Academy College of Arts and Science, Tirupur
C. Raja
Lecturer, Department of Commerce CA,
TERFS Academy College of Arts and Science, Tirupur

Introduction

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.

Retail banking refers to provision of banking services to individuals and small business where the
financial institutions are dealing with large number of low value transactions. This is in contrast to wholesale
banking where the customers are large, often multinational companies, governments and government enterprise,
and the financial institution deal in small numbers of high value transactions.

With walk in business virtually being ruled out, banks are now scouting for quality consumers both for
building their resources and assets. There were times when the corporate clientele occupied the centre stage and
the retail ones were pushed to the back seat. The slowdowns of the economy, sluggish industrial growth and
slump in agricultural activities have pushed the commercial banks to look to the retail customers. Retail
banking has both pros and cons. In a situation like today, the bankers have very little option, but to chant the
“Retail Mantra”.

Benefits of Retail Banking

Traditional lending to the corporate are slow moving along with high NPA risk, treasure profits are
now loosing importance hence Retail Banking is now an alternative available for the banks for increasing their
earnings. Retail Banking is an attractive market segment having a large number of varied classes of customers.
Retail Banking focuses on individual and small units. Customize and wide ranging products are available. The
risk is spread and the recovery is good. Surplus deployable funds can be put into use by the banks. Products can
be designed, developed and marketed as per individual needs.

Opportunities

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 India’s
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

The issue of money laundering is very important in retail banking. 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 in recent past because various core activities such
as hardware and software maintenance, entire ATM set up and operation (including cash, refilling) etc.,
are being outsourced by Indian banks.
 Banks are expected to take utmost care to retain the ongoing trust of the public.
Customer service should be at the end all in retail banking. Someone has rightly said, “It takes months
to find a good customer but only seconds to lose one.” Thus, strategy of Knowing Your Customer
(KYC) is important. So the banks are required to adopt innovative strategies to meet customer’s needs
and requirements in terms of services/products etc.
The dependency on technology has brought IT departments’ additional 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 competitive edge for the success in retail banking in
coming years.
The customer retention is of paramount important for the profitability 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 sector is 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.

Strategies for Increasing Retail Banking business

Constant product innovation to match the requirements of the customer segments

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 delivery

As 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 channels

Retail 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.

Tapping of unexploited potential and increasing 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 outsourcing
This will help in lowering the cost of service channels combined with quality and quickness.

Detail market research

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.

Business process outsourcing

Outsourcing 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 arrangements
In the present regime of falling 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 Credit

One 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 Capability

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 Documentation
A latest system for credit documentation is necessary pre-requisite 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 Capability

Since large volumes of transactions are involved, today transactions, maintenance of backups is
required

Regular Constant Follow- Up

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

Skilled Human Resource

This 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 Support
This 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.

Growth drivers of Retail Banking

The growth drivers of retail lending are analyzed as under:

Macro-economic Factors
The lower uptake in the non-retail sector has compelled bans to shift their focus on retail assets -
specially housing finance for 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.

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

Inflation continued to be under control.

Keenness shown by the consumer goods/ automobile manufacturers to -push up finance schemes
through market tie-up with banks with a view to increasing their marketing share.

Demographic / Behavioral Factors

Growing concept of nuclear families than the joint families necessitating need for housing units as well
as other items of consumer durables.
 Increased number of dual income families resulting in higher income and savings.
Increased demand for dwelling units due to gradual shift of population from rural/semi-urban centre to
urban/metro centre for employment.
Shift in the attitude of the Indian household from ‘save and buy' 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-urban households for urban convenience. Social
security and status have also contributed to higher demand for housing units, cars, etc.

Favorable Role of RBI

Reduction in risk weight age bank's extending loans for acquisition 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 loans years 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 in reduction in lending rates as well.
South ward movement in CRR and SLR ratios increasing lending capacity of banks.

Catalyst-role of Government

Tax exemptions for payment of interest on capital borrowed for 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 retail segment from hitherto cash transactions to book
transactions.
The Government could not ignore the importance of housing sector 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 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.
· This would also lead to growth in related industries as well.

Initiatives on the Part of Banks

The growth in retail banking has been facilitated by growth in 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-à-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.
Banks could afford to quote lower rate of interest, even below PLR as low cost [saving bank] and no
cost [current 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 wide range 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.
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.
Retail Boom

Keeping pace with the 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 Banking
ATMs - With growing technological innovations, banks have significantly expanded their ATM
network over the past three years. According to the RBI data, the spread of ATMs has increased from 34,789 in
March 2008 to 43,651 in March 2009. The volume of ATM transactions has increased from 17,797 lakh
aggregating to Rs.4,38,151 crore during 2007-08 to 23,530 lakh aggregating to Rs.6,16,456 crore during 2008-
09.

Plastic Money
Credit 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. Presently cash withdrawal facility using plastic cards is
available only at Automatic Teller Machines (ATMs). As on May 31, 2009, number of ATMs and POS
terminals in the country stood at 44,857 and 4,70,237 respectively.

Core Banking Solutions (CBS)

The (National Electronic Clearing Service) NECS is a nationwide system leveraging on core banking
solutions (CBS) of member banks. All CBS bank branches are participants in the system, irrespective of their
location. As of March 31, 2009 as many as 114 banks with 26,275 branches participate in NECS. Local ECS
(Credit) at Mumbai was merged with NECS-Credit effective from March 24, 2009.

Future Outlook
The revolution in retail banking has changed the face of the Indian banking industry as a whole; it has
still miles to go. The reasons for this shift to retail, particularly the housing finance segment, are many. The
important among these include

The poor credit off take to the corporate, commercial and other business sector because of industrial
slowdown.
Risky nature of lending to corporate, given in industry recession and uncertainty prevalent in the economy.
Relatively safe nature of some of the retail credit finance with lesser incidence of loan turning bad.
Rising disposable income, changing lifestyles/aspirations and 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.
Banks are aware with abundant reserve requirement by RBI, they are searching revenues for packing the
surplus funds.

Future of Retail Banking

The Future of Retail Banking on current trends and technologies impacting the retail banking industry
suggests ways for banks to face the future. The future of retail banking is a complex task of transforming
traditional banking institutions into agile organizations that deliver financial services to facilitate a rising set of
emerging lifestyles. 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 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.