INTRODUCTION:

Retail banking is that part of a bank that offers

products

and

services

primarily

to

individual

customers,

professional, self-employed individuals or small Businesses. The

focus is on creating products and services that meet the needs of
the target customers and are profitable for the bank as well.
The approach to retail banking products is more is
more on a mass production basis wherein 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

numbers

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 products. This would help you advice youre
Customer in a more informed manner besides making you a
more informed Consumer.

DEFINITION:

According to investopedeia.com, retail banking "is

typical mass-market banking where individual
local branches
include:

of larger

savings

and

commercial
checking

customers

use

banks. services offered

accounts,

mortgages,

personal loans, debit cards, credit cards, and so forth."

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. Today's retail banking sector is characterized
by three basic characteristics.
Multiple products (deposits, credit card, insurance,
investments and securities).
Multiple channels of distribution (call center, branch,
internet and kiosk); and
Multiple customer groups (consumer, small business, and
corporate)
NATURE OF RETAIL BANKING ?
In recent years retail banking has been described as
"hotter than vindaloo". Considering the fact that vmdaloo, the Indian
English

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 today's world of
banking.

Retail Banking In India

Retail banking in India is not a new phenomenon. It
has always been prevalent in India in various forms. For the
last few years it has become synonymous with mainstream
banking for many banks.
The typical products offered in the Indian retail
banking segment are housing loans, consumption loans for
purchase of durables, auto loans, credit cards arid educational
loans. The loans are marketed under attractive brand names to
differentiate the products offered by different banks. As the has
shown that the loan values of these retail lending typically
range between Rs.20, 000 to Rs.100 lack. The loans are
generally for duration of five to seven years with housing loans
granted for a longer duration of 15 years. Credit card is another
rapidly growing sub-segment of this product group.
In recent past retail lending has turned out to be a key
profit driver for banks with retail portfolio constituting 21.5 per
cent of total outstanding advances as on March 2004. The
overall impairment of the retail loan portfolio worked out much
less then the Gross NPA ratio for the entire loan portfolio. Within
the retail segment, the housing loans had the least gross asset
impairment. In fact, retailing make ample business sense in the
banking sector.
While new generation private sector banks have
been able to create a niche in this regard, the public sector

banks have not lagged behind. Leveraging their vast branch

network and outreach, public sector banks have aggressively
forayed to garner a larger slice of the retail pie. By
international standards, however, there is still much scope for
retail banking in India. After all, retail loans constitute less
than seven per cent of GDP in India vis-a-vis about 35 per
cent for other Asian economies South Korea (55 per cent),
Taiwan (52 per cent), Malaysia (33 per cent) and Thailand (18
per cent). As retail banking in India is still growing from
modest base, there is a likelihood that the growth numbers
seem to get somewhat exaggerated. One, thus, has to
exercise caution is interpreting the growth of retail banking in
India.

Opportunities and Challenges of Retail Banking in

India
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. How
does the world view us? I have already referred to
the BRIC Report talking India as an economic
superpower. A. T. Kearney, a global managementconsulting firm, recently identified India as the
'second most attractive retail destination' of 30
emergent markets.
The rise of the 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

toward

personal

debt,

contributing to India's retail banking segment.

is

The combination of the above factors

promises substantial growth in the 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. What are the challenges for the industry
and its stakeholders?
First, retention of customers is going to be a
major challenge. According to a research by
Reichheld and Sasser in the Harvard Business
Review, 5 per cent increase in customer retention
can increase profitability by 35 per cent in banking
business, 50 per cent in insurance and brokerage,
and 125 per cent in the consumer credit card
market. Thus, banks need to emphasize retaining
customers and increasing market share.

Second, rising indebtedness could turn out to

be a cause for concern in the future. India's position,
of course, is not comparable to that of the
developed world where household debt as a
proportion of disposable income is much higher.
Such a scenario creates high uncertainty.
Expressing concerns about the high growth
witnessed in the consumer credit segments the
Reserve Bank has, as a temporary measure, put in
place risk containment measures and increased
the risk weight from 100 per cent to 125 per cent in
the case of consumer credit including personal loans
and credit cards (Mid-term Review of Annual Policy,
2004-05).

Third, information technology poses both

opportunities and challenges. Even with ATM
machines and Internet Banking, many consumers
still prefer the personal touch of their
neighborhoods branch bank. Technology has made
it possible to deliver services throughout the branch
bank network, providing instant updates to checking
accounts and rapid movement of money for stock
transfers. However, this dependency on the network
has brought IT department's additional
responsibilities and challenges in managing,
maintaining and optimizing the performance of

retail banking networks. Illustratively, ensuring

that all bank products and services are available, at
all times, and across the entire organization is
essential for today's retails banks to generate
revenues and remain competitive. Besides, there
are network management challenges, whereby
keeping these complex, distributed networks and
applications operating properly in support of
business objectives becomes essential. Specific
challenges include ensuring that account transaction
applications run efficiently between the branch
offices and data centers.
Fourth, KYC Issues and money laundering risks
in retail banking is yet another important issue.
Retail lending is often regarded as a low risk area
for money laundering because of the perception of
the sums involved. However, competition for clients
may also lead to KYC procedures being waived in the
bid for new business. Banks must also consider
seriously the type of identification documents they
will accept and other processes to be completed.
The Reserve Bank has issued details guidelines on
application of KYC norms in November 2004.

Potential for Retail Banking in India:

While the total outstanding retail loans in Taiwan is

around 41% of its GDP, the f gure in India stands at
less than 5%. The comparison with the west is even
more daggering. Another situation that is natural
when comparing total sectors s the use of credit
cards. Here also, the potential lies in the fact that
of the consumer expenditure in India in 2001, less
than 1% was through plastic, the corresponding US
figure standing at 18%.
Hence, the Indian players are bullish on the
retail business and this in not totally unfounded. Two
primary reasons are as follows:
I: is now undeniable that the face of the Indian
consumer is changing. This is reflected adequately
in a change in the urban household income pattern.
The direct fallout of such a change will be the
consumption patterns and hence the banking habits
of Indians, which will now be skewed towards Retail
Products.
(i)

Going by international standards, a large

portion of the India population is simply not
"bankable" - taking profitability into
consideration. On the other hand, the
financial services market is highly overleveraged in India. ComOpetition is fierce,
particularly from local private banks such as
HDFC bank and ICICI banks, in the Business

of home, car and consumer loans.

DRIVES OF RETAIL BUSINNESS IN INDIA

What has contributed to this retail growth?
Let me briefly highlight some of the basic reasons.
First, economic prosperity and the consequent
increase in purchasing power have given a fillip to a
consumer doom. Note that during the 10 years
after 1992, Indias economy grew at an average
rate of 6.8 percent and continues to grow at the
almost the same rate-not many countries in the
world match this performance.
Second, changing consumer demographics
indicate vast potential for growth in consumption
both qualitatively and quantitatively. India is one of
the contries having highest proportion (70%) of the
population below 35 years of age (young
population). The BRIC report of the Goldman-Sachs,
which predicted a dright future for Brazil, Russia

India and China, mentioned Indian demographic

advantage as an impportant positive factor for
india.
Third, technological factors played a major role.
Convenience banking in the form of debit cards,
internet and phone banking, anywhere and
anytime banking has attracted many new
customers into the banking field. Technological
innovtions relating to increasing use of credit /
debit cards, ATMs,direct debits and phone banking
has contributed to the growth of retail banking in
india
Fourth, the treasury income of the banks,
which had strengthened the bottom lines of banks
for the past few years, has been on the decline
during the lasttwo years .in such a scenario, retail
business provides a good vehicle of profit

Maximization.Considering the fact that retail's

share in impaired assets is far lower the overall
bank loans and advances, retail loans have
put sradvely less provisioning burden on banks
apart from diversifying their income sreams.

Fifth, decline in interest rates have also

contributed to the growth of retail r: by generating
the demand for such credit. iis backdrop let me now
come two specific domains of retail lending in India,
Viz., (a) credit cards and (b) housing.

THE PROBLEMS OF RETAIL BANKING IN INDIA

Now, we shall try and look into the challenges

that the banking sector in India faces:

Customer Focus:
The retail banks in further will try to aggressively market
their products. To
nirket these products, there will be innovative modes
to reach customers like
MS. internet, and mobile phones. Some banks are also
engaging the services of
nreet selling agents (DSAs), franchisees, etc for
sourcing and appraisal of loan
nrosals, issue of credit cards, selling of insurance and
mutual fund products, etc.
Products Focus:
The challenge here will be to design and innovate the
financial products hich cater to the target segment
needs. In future, retail banking scenario will see a
proliferation of products. This will in turn require
devising product which is tisy to understand and at the
same time meet the financial goals of the customers.
Problem that lies ahead is to gain a mindshare for one's
products given a wide rang :: products.
Technology Focus:
Technology in India has been in India for over seven
year's now. but its renetration in the industry in general
and that in the financial most of the retail ranks are
witnessing a tremendous expansion in their customer
base; apart form this, there are many other factors that
have undermined the acceptance of customer delation

Management (CRM).

Employee Focus:
In a service base industry the value can be
delivered at the moment of reaction with the
customers. It is vivid from the above chart that there
needs to be focus on the employees and upgrading their
skills as they at the front end would be the face of the
bank. Hence, training requirement factor figures
prominently in nt case of banks due to the facts that
these banks generally came do with just the quired
amount of manpower and it is very difficult for them to
spare them. That immediately start affecting their
operations.
:ce it challenges for the banks to upgrade their existing
manpower and retain or :k in the best talents for having
competitive edge in terms of human resources.
Others:
(i)
Interest
rate risk
Interest rate risk can be defined as exposure of
bank's net interest income to adverse movements

in interest rates. A bank's balance sheet consists

mainly of rupee assets and liabilities. Any
movement in domestic interest rate is the main
source of interest rate risk.
Over the last few years the treasury departments
of banks have been responsible for a substantial
part of profits made by banks. Between July 1997
and Oct 2003, as interest rates fell, the yield on 10year government bonds (a barometer for domestic
interest rates) fell, from 13 percent to 4.9 percent.

ii) Non-performing assets:

The best indicator of the health of the banking
industry in a country is its low level of NPAs. Given
this fact, Indian banks seem to be better placed than
they were in the past. A few banks have even
managed to reduce their net NPAs to less than one
percent (before the merger of Global Trust Bank into
Oriental Bank of Commerce, OBC was a zero NPA
bank.) but as the bond yields start to raise, the
chances are the net NPAs will also start to go up. This
will happen because the banks have been making
huge provisions against the money they made on
their bond podrtfoli8os in a scenario where bond

yields were failing. Reduced NPAs generally gives the

impression that banks have strengthened their credit
appraisal process over the years. This does not seem
to be the case. With increasing bond yields, treasury
income will come down and if the banks wish to make
large provisions, the money will have to come from
their interest income, and this in turn, shall bring
down the profitability of banks. The shaping up of
newly formed Credit Information Bureau Of India Ltd.,
(CIBIL) is much desired in the years to come so that
entire MIS of banks depositors and borrowers is
available on line. Credit decision will quicker, efficient
and of quality both in respect of individuals and
institutions.
(iii) Competition
The entry of new generation privet sector banks
during mid -1990s has changed the entire scenario.
Earlier the household savings went into banks and the
banks then lent money to corporate. Now they need to
sell banking. The retail segment, which was earlier
ignored, is now the most important of the lot, with the
banks jumping over one another to give out retail loans.
The consumer has never been so lucky with so many
banks offering so

many products to choose from with varying terms and

conditions, rates of interest, etc. with supply far

exceeding demand it has been a race to the bottom,
with the banks undercutting one another. A lot of
foreign banks have already burnt their fingers in the
retail game and have now decided to get out of few
retail segments completely. Notable examples are
Banks Paribas and Oman International Bank in India.

RETAIL BANKING SERVICES

The objective of the Retail Bank is to provide its
target market customers a full range of financial
products and banking services, giving the customer a
one-stop window for all his/her banking requirements.
The products are backed by world-class service and
delivered to the customers through the growing branch
network, as well as through alternative delivery
channels like ATMs, Phone Banking, Net Banking and
Mobile Banking.
The HDFC Bank Preferred program for high net
worth individuals, the HDFC Bank Plus and the
Investment Advisory Services programs have been
designed keeping in mind needs of customers who seek
distinct financial solutions, information and advice on
various investment avenues. The Bank also has a wide
array of retail loan products including Auto Loans, Loans
against marketable securities, Personal Loans and
Loans for Two-wheelers. It is also a leading provider of
Depository Participant (DP) services for retail customers,
providing customers the facility to hold their investments
in electronic form.
HDFC Bank was the first bank in India to launch an
International Debit Card in association with VISA (VISA
Electron) and issues the MasterCard Maestro debit card
as well. The Bank launched its credit card business in
late 2001. By March 2005, the bank had a total card base

(debit and credit cards) of 4.2 million cards. The Bank is

also one of the leading players in the "merchant
acquiring" business with over 42,000 Point-of-sale (POS)
terminals for debit / credit cards acceptance at merchant
establishments. The Bank is well positioned as a leader in
various net based B2C opportunities including a wide
range of internet banking services for Fixed Deposits,
Loans, Bill Payments, etc.

CHANNELS OF RETAIL BANKING :

Consumer behavior is changing rapidly due to the
development of technology and use of financial services
is characterized by individuality, mobility,
independence of place and time and flexibility. Financial
transactions caused by purchases will more and more be
carried out by non and near banks. These facts represent
big challenges for banks as well as other providers of
financial services.
1) Automated Teller MachinesfATM):
The trend in banking has evolved from a cash
economy to cheque economy and thereon to the plastic
card economy. One of the channels of banking services
delivery is vide the ATM or the Automated Teller
Machines, whose traditional and primary use is to
dispense cash upon insertion of a plastic card and its

unique PIN or Personal Identification Number.

Current and savings account holders of a bank who
hold a certain minimum balance in their accounts
(determined by each bank as per their policy) are issued
an ATM card. The card is a plastic card with a magnetic
strip with the account number of the individual. When
the card is inserted into the ATM, the machines sensing
equipment identifies the account holder and asks for
his/her identification code number. This is referred to,
usually, as the PIN and is issued by the banks computers.
This number is unknown to the banks staff and is secret
and unique to that individual. When the person uses the
ATM and it asks for the PIN, the cardholder identifies
himself/herself by pressing the relevant number buttons
on the machine. The machine then verifies the account
number on the ATM card along with the secret code
number stored in the ATM. When the matches found, the
ATM pops a menu screen which allows the user to
transact almost all bank transaction.

A typical transaction would be that of cash

withdrawal. The bank generally restricts the zrrcinuz:
amount and the frequency with which one can withdraw
cash. The amount withdrawn is immediately debited to

the concerned account through accounting entries pre

programmed on the ATM.
Similarly, cash or cheques can be deposited
through the ATM for credit to an account. When The
menu screen appears one should indicate that he/she
wants to deposit money.
The ATM dispenses an envelope, which is to be filled
with the cheque or cash. The account number to be
credited is registered on the envelope and stored. Later
the bank staff collects the envelope to credit the account.
'
Account balance queries, fixed deposits details,
debits and credits to the account etc. can all be queried at
the ATM.
The advantages of an ATM over a personal teller are
the following:
1. ATMs can be accessed round the clock. No
employee interface is
necessary.
2. For depositors who do not have a credit card and
ATM offers cash

availability when necessaiy.

3. It eliminates the need for customers to travel to the

branch where his/her
account is held, if the ATMs are conveniently located and
networked.

4. Automatic and

instantaneous accounting is possible.

5. It offers a cost effective solution alternative to labour

cost.
6.Cash and cheques can be deposited and statement of
account requirement
transfer of funds etc. can be effected
7.Scope for frauds, robberies and misappropriation
are reduced considerably if the PIN is maintained
diligently.
2) Tele Banking: Tele banking or phone banking service offered by
banks to enable customers to access their accounts
for information or transactions. Similar to the ATM PIN,
a telephone PIN (T-PIN) is provided to each account
holder.
The customer can call the exclusive tele-banking
numbers and provide the details to identify him/her to
the automated voice. Typically, the bank account
number and the T-PIN are asked for.
Upon the respective numbers matching the
computerized systems the customer is given access
to his account to query or transact on his account.

Though cash withdrawal and deposit are not enabled

through this service many banks offer cash delivery
or collection service to certain classes of customers.

3) Credit cards:
Meaning and definition of credit card:
A barometer of maturity of an economy with a
few exceptions is the stage of development reached
by its payment systems. Cash in the form of notes and
coins make up just one form of payment system. The
development in banking brought about a second phase
in payment system, through paper instruments namely
cheques and credit transfers. The requirement for
greater flexibility and convenience and development of
technology has given rise to electronic payments and
this is where plastic cards have been provided.

During 1914, a number of oil companies in

United States issued the first credit card to their
customers for the purchase of gasoline, oil and
accessories at the companies' stations. Thereafter,
local departmental stores, air travel companies and
railway companies also started issuing credit cards.
In 1950 the Diners club Inc, was the first

company to issue an all-purpose card. The Franklin

national bank of New York was in 1951, the first bank
in the United States to adopt a credit card plan.
Around 1958, the American Express Company and
two large banks, the Bank of America and Chase
Manhattan entered in the credit card field. Some of
these companies introduced their cards into United
Kingdom, and in 1966 Barclays Bank was the first
British Bank to introduce credit cards, known as
'Barclays Cards'. In 1972 Lloyds Bank introduced
'Access' cards. Credit cards issuance by Indian banks
is a relatively recent development.

The credit card can be defined as "a small plastic

card that allows its holder to buy goods and services on
credit and to pay at fixed intervals through the card
issuing agencies".
Credit Card In India:
While usage of cards by customers of banks in India
has been in vogue since e mid-1980s it is only since
the early 1990s that the market has witnessed a
quantum jump. The total number of cards issued by 42
banks and outstanding, increased from 2.69 crore as on
end December 2003 to 4.33 crore as on end December
2004. The actual usage too has registered increases

both in terms of volume and value. Almost all the

categories of banks issue credit cards. Credit cards
have found greater acceptance in terms of usage in
the major cities of the county, with the four major
metropolitan cities accounting for the bulk of the
transactions.
In view of this ever-increasing role of credit cards, a
working group was set up for regulatory mechanism for
cards. The terms of reference of the working group
were fairly broad and the group was to look into the
type of regulatory zieasures that are to be introduced
for plastic cards (credit, debit and smart cards) for
encouraging their growth in a safe, secure and efficient
manner, as also to take care of the best customer
practices and grievances redressal mechanism for the
card users. The Reserve bank has been receiving a
number of complaints regarding

ETIOUS

undesirable

practices by credit card issuing institutions and their

agents. . me of them are:

Unsolicited call to members of the public by card

issuing banks/direct
selling agents pressurizing them to apply for credit
card.
Communicating misleading/wrong information

regarding credit cards

regarding conditions for issue, amount of service
charges/waiver of fees,
gifts/prizes.
Sending credit cards to persons who have not
applied for them/activating
unsolicited cards without the approval of the recipient.
Charging very high interest rates/service charges.
Lack of transparency in disclosing
fees/charges/penalties. Non -disclosure
of detailed billing procedure.
The working group deliberated a number of major
issues relating to customer evances and rights:
Transparency and disclosure.
Customers rights protection and
Code of conduct
The group recommended that the most
important terms and conditions should be highlighted
and advertised and sent separately to the prospective
corner. These terms and conditions include various
issues relating to.
Fees and charges.
Drawl limits.
Billing.
Default.
Termination/revocation of card membership.
Loss/theft/misuse of card and
Disclosure.

While building a reguiatory oversight in this regard we

need to ensure that neither does it reduce the efficiency
of the system nor it hamper the credit card usage
Operations of the Credit Cards
Credit cards operate quite differently from cheque
cards. A chequs card guarantees payment of a chequs,
whereas a cards guaranteesagainst a sales voyucher
signed by the credit cards holder.
Each credit card bears a speciment signature of its
holder & it`s embossed by the issuing bank with the
holder name & number . when goods or services are
supplied,the holder gives his card to the supplier who
has agreed to join the scheme.the supplier places the
card in a special imprinter machine,which record the
holder name & number on sales voucher. The particular
of the transaction are added on the voucher. The holder
signs the voucher & the supplier compares the
signature with that on the card.
He then sends the voucher to the issuing bank
which pays the amount claimed less a service charge
(normally between 3% to 7%). At the end of the month,
the bank sends the fully itemized statement to its
cardholder who must remit his cheque for the total
amount. The custmer is not required to pay any interest
upon the sum due, provided that he makes payment
within a spesified time, usually about three weeks.
Credit card may also be used for the purpose of
obtaining cash from the branches of issuing bank or

branches of certain other banks with which

arrangement have been made. Some institutions make

a specific annual charge to their cardholder.
The mechanism of operations of the credit
card can be explained with the help of the following
diagrams:

MECHANISM OF CREDIT CARD OPERATION :

BANKER

6
CUSTOMER
SELLER

MACHANISM OF CREDID CARD OPERATION

1.Customer applied & got h the credit card.

2.Arrangements are completed between the banker &
seller.
3.The customer makes the actual purchases & signs on
the sales vouchers.
4.The seller sends the detailed voucher to the bank.
5.The banks settle the claims of the seller.
6.The customers receive the intimation from the bank
in this regard.
7.The customer makes the payment for the purchases
made by him.

Advantages of credit cards

The benefit of the credit card can be grouped as follows:
a. Benefits to the bank.
b. Benefits to the customer (Cardholder).
c. Benefits to the retailer.
A. Benefits to the bank
A credit card is an integral part of bank's major
services these days. The credit card provides the
following advantages to the bank:
1) The system provides opportunity to the bank to
attract new potential
customers.
2) To the new customers bank has to employ special
trained staff. This gives
bank an opportunity to find the talent from among
existing staff that would
have been otherwise wasted.
3) The more important function of a credit card,
however, is simply to yield
direct profit for the bank. There is scope & potential
for better profitability
out of income/commission earned from the trader's
turnover.

4) This also provides additional customer services to

the existing clients. It

enhances the customer satisfaction.

5) More use by the cardholders & consequently
increased turnover improves
national business growth & consequently the growth of
banking habits in
6) Better network of cardholders & increased use of
cards means higher

regularity & image for

the banks.
7) Saving of expenses on cash holdings, i.e. stationery,
printing & manpower to handle clearing transaction will
considerably be reduced.
8) It increases customer base of the banks.
It brings high net worth customers into
the bank's folds by introducing various
types of credit cards like gold card, executive
card.
It brings in new customers from various
merchants outlets, which
accept credit card against sale of their
goods/services.
It creates a brand name & popular image or the
bank.
Large scale uses of credit cards & shops, etc.
accepting them help to
increase deposits base of the bank.
It increases interest income of the bank when
card users avail of loan facility to settle the bills.
It minimizes credit risk of the bank as most of the
cardholders availing
of credit facility must have been financially

screened by the bank.

This may be increasing the chances of
relationships banking &
thereby retaining the customers.

B. Benefits of the cardholder

The principal benefits to a cardholder are:
He can purchase goods & services at a large
number of outlets without cash or cheque. The
card is useful in emergency, can save
embarrassment.
The risk factor of carrying & storing cash is
avoided. It is convenient for him
to carry a credit card & he has trouble free travel
& makes purchases without carrying cash or
cheque.
A month's purchase can be settled with a single
remittance, thus tending to reduce bank &
handling charges.
The cardholder has a period of free credit
usually between 30-50 days of purchase.
Cash can usually be obtained with the card,
either on card account by using
it as identification when enchasing a cheque at a
bank.

 Availing credit with minimum formality.

The credit card saves trouble & paper work to
traveling businessmen.
The cardholder has the opinion of taking
extended credit up to prearranged limit without
reference to anyone, in addition to an initial
credit card interest free period. Further,
revolving credit card becomes automatically
available as the outstanding balance is reduced.
It also induces a sense of financial discipline in a
cardholder by supplied by dared organizations.
Cash expenses

are

often without record &

can, therefore, result in unplanned spending.

It provides proof of spending through banking
channels to strengthen his position in case of
disputes with sellers.
It also given him exposures to banking
operations since systematic
accounting for spending & payments is routed
through banking channels.
He has the convenience for making a single
payment for the purchases made
during the month rather than many payments by
various means.
It also allows him to delegate spending power to
ad on members (With
additional cards).
It also extends additional facilities like free
insurance coverage, discount on purchase, free

travel booking.
Credit card is considered as a status symbol.
It provides preferential rates on hotel stay,
etc., depending upon the
arrangement of the issuing bank/agency.
Thus, the credit card is a pivotal instrument to
the cardholder for his convenience, social image & for
financial credibility.

C. Benefits to the Merchant Establishments

The primary benefits of a credit card to the retailer
are:
This will carry prestigious weight to the outlets.
Increase in sales because of increased purchasing
power of the cardholder
due to unbilled credit available to the cardholders.
The retailers gain from the impulse buying &
'trading up' the tendency to
buy the bigger or better articles. This argument
has little appeal to sendee
establishments but much o sellers of goods.
He can offer credit without the both cost and
bookkeeping & bad debts.

Credit cards ensures timely 8c certainly of payments.

 Suppliers/ sellers no longer have to send reminders

of outstanding debts.
Systematic accounting since sales receipts are
routed through banking channels.
Advertising & promotional support on national scale.
Development of prestigious clientele base.
Avoids all the cost & security problems involved in
haddling cash.
Less needs for merchant establishments to provide
customers with extended credit facility which are likely
to be costly burdens on them.
The losses through bad debts are reduced & additional
liquidity is achieved.
As customers are well educated & understanding, less
customer problems.
Profitability
Profitability of the banks depends principally on the
following factors:
1. Value of theaverage transaction .
2. Rate of merchant discount.
3. Cost of the banks money.
4. Cost of processing.
5. Rate of cardholdeers services charge.
6. Average pattern of repayment.
7. Loss from bad debts & fraud.

Disadvantage of credit card

The following are the common disadvantages of the
credit card:
Only a few outlets accept the card. It is the duty of
the bank to set up or
seek many outlets to service the customers in order
to case out the difficulties.
Some credit card transaactions take longer time
than cash transaction because of variour
formalities.
The cusomer tends to overspend.
Dicounts & rebates can rarely be odtained.
The cardholder is responsible for charges due to
loss or theft of the card & bank may not be a party
for loss due to fraud or collusion of staff, etc.
customers may be denied cash discount for
payment through card. ight lead to spending habits
& cardholders may end up in big debts.
Benefits of credit cards however, far outweigh
its disadvantages. But acceptability of product mainly
comes from its usefulness. It will become more India if
large numbers of service providers accept payment
through credit card.

Other type of cards include:

Cash card : Iso known as an ATM card. This has been discussed in
detail earlier. A elastic card is used for getting

currency notes from a machine known as automated

teller machine.

Debit Cards:Debit cards allow for direct withdrawal of funds

from a customer's bank

LIT .

The spending limit is

determined by the user's bank upon available ;e in

the account of user. It is a special plastic card
connected with .agnetic identification hat one can use
to pay for things purchased directly zls bank account
Under the system, card holder's accounts are
immediately against purchase or services through the
computer network. Hence, under card the cardholder
must have adequate balance in his account. This
system :ded to replace cheque system of payment. Debit
card & smart card issuance in India should be approved
by the respective bank's board as well as by RBI. These
can be issued only for customer maintaining
satisfactory accounts & for a minimum period of six
months.
Cheque caed:
It is a card given to customer by the bank that he
must show when he writes a cheque, which promises
that the bank will pay out the money written on the

cheque. Under check card system, the card holder is

given a card & a check book. He has to use a checks,
while purchase is made & the trader gets guaranteed
payment. The customer does not get free credit, he has
to keep sufficient balance in his account or the bank will
provide overdraft up to a specific limit, of course on
interest payment basis.

Charge cards:
Usally a small plastic card provided by an
organisation with which one may buy goods from
various shops, etc. The full amount owned must then be
paid on demand. In credit card, the card holder get
credit or loan for payment of periodical bills when
sufficient balance is available in their accounts. In a
charge card such credit facility is not available. The
periodical bill amount is paid off by charging it to
customers account. A fee is also payable by the card
holder to the card issuing institution.
Smart card:
With the use of credit card, we may avail of
credit facility on our purchase of goods/services from
approved sales outlets. A smart card however, enables

the card holder to perform various other banking

functions apart from credit purchases. For example,
with smart card, we can draw cash from ATMs, we can
verify entries in our accounts, seek information
pertaining to our accounts, etc. this is possible because
the card has an integrated circuit with microprocessor
chip embedded in the card for identification purposes.
The card can also perform calculations & maintain
records.
Convenience Users:
Credit card customers are typically extended an
unsecured credit at least up :o 30 days. Beyond the
period, the bank charges interest on outstanding bills.
However, some cardholders may prefer to pay off their
full dues before the free credit period. Such cardholders
are called convenience users.

4) 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 worldwide network of computers on the
Internet. Even" bank has special firewalls & its own
security measures to protect the accounts from nonauthentic use from unauthorized users. Data are
encoded using algorithms with a 128-bit key or, in some
cases, with a 1,024-bit encryption.

Each account holder is provided a PIN similar to

that of the ATM or Phone banking PIN. The access to the
account is allowed upon a match of the account details
& PIN entered on the computer system. A higher level of
security may be reached by an electronic finger-print.
The finger print is taken before & after the Transaction.
Then both versions are compared. In case of any
difference, the Transaction is aborted.
Account querying as well as transaction is possible
on the Internet banking platform. The accounting is
instantaneous & funds transfers can be effected
immediately.
Though cash transaction is not possible at
present, the next phase of evolution in Internet banking
will allow those as well.
Internet is considered to be a "strategic weapon".
Financial services companies are using the Internet as
the new distribution channel. The advantages are:
Complex products may be offered in an equivalent
quality with lower costs
to more potential customers:
There may be contracts from any place on earth at
any time of day or night.

This means that financial institutions may enlarge

their market area without building new offices or field
services, respectively. Because, of its image as an

innovative corporation, better interacting possibilities,

the usages of rationalization potential, promotion of selfservice ideas, the improvement of its competitive
situation by development of core competencies together
with the construction of market entry barriers, it may be
possible to increase profits & market shares.
One way of exploiting rationalization potential is
the implementation of the entire transaction (from
purchase to payment) under a common user interface.
Information collected to operative databases of financial
institutions allows them to act as information broker.
Offering special information in closed user groups may
result in more intense customer commitment, as well as
customer bonding. Know-how that is built up by Internet
presence may be used to facilitate Internet presence of
smaller companies.

VARIOUS PRODUCT OF RETAIL BANKING:

1) Home Loans:
Types of Home Loans
There are a variety of home loans available:
(1) Home Purchase loans: This is basic home
loan for the purchase of a
new home.
(2) Existing home improvement
These loans are given for

loans:

implementing repair works & innovations in

home that has already been purchased by the
borrower.
(3) Home construction loan: This is a loan given
for the construction of a
new home.
(4) Home extension loan: his is given for
expanding or extending an
existing home such as adding a room or floor etc.
(5) Home conversion loan: This is loan given to
those who have financed
the present home with loan & wish to purchase
another home for which
extra funds are necessary. The home conversion

loan allows the borrower

to transfer the existing loan to the new home
loan, which includes the
extra amount required, thus doing away with
the need

TO

pre-pay the

previous loan.

(6) Land Purchase Loans: This is loan which is

provided to purchase land
either for construction of a home or for investment in
land.
(7) Bridge Loan: These are loans given to persons
who are looking to sell
their existing home & purchase another. The bridge
loan helps, finance
the purchase of the new home until the old one is
sold.
(8) Balance transfer loan: This is loan which allows
the borrower to repay
an existing loan & avail of another loan at lower
rates of interest.

(9) Refinance loans: This is a loan that is given in

order to repay debts
incurred from un-organized sourced such as
relatives, friends etc. which
may have been taken to purchase the home.

(10)

Stamp Duty Loan: This is a loan sanctioned to

pay the stamp duty
amount necessary to be paid on the purchase of a
home.

(11)

Loan to NRIs:

These are similar to loans

given to domestic
borrowers but are specifically ear-marked loans to
NRIs as the repayment
is usually from foreign currency sources.

Eligibility term for home loans

The primary concern of a housing finace is to determine
the loan amount that the borrower is comfortably able to
repay.the repayment capacity is determined by taking into
consideration factors such as income, age, qualification,
number of dependents, spouses incom, assets , liabilities,

stability and continuity of occupation and savings history.

2) Auto Loans
Types of Auto Loans
Auto loans or car loans could be of the following nature:
New car loan: This is most opted for as it
provides a simple loan for
purchasing a new car.
Used car loan: This is loan facility offered on
second hand car purchases.
This involves valuation of the car being purchased
by way or certified values
of used cars.
Auto Refinance: This is a loan facility given on an
existing car owned by the borrower provided that
the car is not hypothecated to any financier.

Eligibility term for Auto loans

Typically most financiers have similar eligibility criteria for
auto loans. The age of the borrower should be between 2-

58 years. Annual income should be above Rs.60,000.

Additional information is taken with the loan application
form.
The size of the loan amount sanctioned depends on the
cost of the vehicle, the type of car (standard or premium)
& the percentage financing. used cars get lower is offered.
A new car can get upto 90% financing. Used cars get lower
financing. Depending on the model & its resale, the
amount in used cars like the maruti 800 could go up.

3) Two wheeler & consumer durable loan:

Two wheeler loans are given for purchase of
mopeds, scooters & motorcycles.
Consumer durable loans cover purchase of
durables such as refrigerators, washing machines, Music
systems, camcorders & DVD Players.

Eligibility Terms For Two Wheelers & consumer

Durable Loans
Broadly, the eligibility criteria are:
1: between 21 years & 60 years
2. Minimum gross monthly income of Rs.4,500 for
salaried employees.
3. Minimum annual income of about Rs. 45,000 for selfemployed individuals.

The loan amount sanctioned range from Rs.

7.500 to Rs. 90'000 for two wheeler loans. Consumer
durable loans are usually of a smaller amount & vary as
per the nature of the durable being purchased.
Most of the financiers require a down payment to
be made by the borrower towards the purchase of the
two-wheeler or consumer durable.
4) Personal/Unsecured Loans
Personal loan is an all-purpose loan for which the
end use can be to meet any personal requirements of
the borrower.
Eligibility Terms for Personal/Unsecured Loans
Typically, the take home salary has to be over Rs.
8,000. The borrower should be over 21 years of age &
less than 58 years old.
Loan eligibility is determined primarily by the
borrower's capacity to repay i.e. his current earnings
are the primary determinant. The bank usually tries to
5) Educational loan
Educational loan usually cover a variety of courses.
It pays for the cost of tuition fees, hostel fess, mess

fees & examination fees. The cost of books, equipment

& other instruments required by the student are also
covered. Some financiers cover the cost of airfare if the
studies are being undertaken overseas.

Eligibility Terms for Educational Loans

The terms for eligibility for an Educational Loan
vary from bank to bank. The primary requirement is
that the student should have got admission to the
course that he is seeking the loan for. Most banks also
specify an age criteria such as 16-26 years etc. The past
academic track record of the student would also be
considered.
The maximum loan amount varies by individual
banks as well as the institution that the student would
pursue his/her academics. It could be for studies abroad.
The repayment capacity of the student & in several
cases, the parents &/or guardians is of utmost concern
to the bank. Usually no margin money is required for
loans uptoRs.4 Lakes. For loans in India & 15% for
studies in abroad, to be borne by the applicant. The
parent's income would also be considered by most
banks.

RETAIL LENDING
Everyone dreams of living a comfortable life and
does all one can to make this dream come true. Today
this has become much easier, as with higher levels of
income and multiple earning members in the family, it
is easy to avail loans to fulfill aspirations Buying a
home, car or any small household item such as TV or a
refrigerator using money borrowed from a bank or a
finance company has become the way of life today. This
has created a big business opportunity for finance
companies.
They are offering loans to all types of customers
for all types of assets. Retail lending has thus become

one of the key business verticals for finance

companies. This necessitates banks to follow processes
for conducting business profitably. There are two main
areas in lending. Loan Origination and Loan Servicing.
The process of validating customers, convincing them
that the finance company is the right source for their
loan requirement and finally offering the loan with terms
and conditions that make business sense to the finance
company is Loan Origination and once the loan is
disbursed, the process of managing the repayments
from customers and responding to the customer
requests for pre payments, early settlement,
rescheduling, etc. is Loan Servicing.
Lending has become very competitive as
customers are in the mode of shopping for loans.
Finance companies have to continuously offer new
financial products to customers and thus two of the
important aspects of the business are time-to-market
and flexibility. But as number of customers increase, the
risk of increase in the number of defaulters prevails.
Thus finance companies have to do the
balancing act. On one hand they have to acquire more
business by lending to more customers and on the other
hand they have to lend to select customers so that

the rate of delinquency is under control. To achieve

this, finance companies have to adopt or build good
loan origination processes and credit policies.

Current Scenario In Indian Retail Lending

Even though non-performing assets in the
banking industry fell from 4.4 percent in 2003 to 2.9
percent in 2004, a hike in percentage of retail lending
may also pose a risk of poor assets quality of banks
given that bad or 'impaired loans from 2.5 percent of
total loans outst6anding. Of the total retail loans
constituted 1.9 percent. The highest was in the
consumer durable segment at 6.6 percent. The retail
segment's share in total loans for the period stood at
21.5 percent, with housing loans constituting 48
percent of the retail portfolio. The share of the
housing loan portfolio out of the total loan book of
banks has grown from 3 percent in 1993 to 7 percent
in 2004.