Cover / Title Page

----TITLE OF THE PROJECT IN CAPITAL LETTERS------

A Project report submitted for the Award of Degree of

MASTER OF BUSINESS ADMINISTRATION

BY

-----NAME OF THE CANDIDATE----

(ID. No. )

Research Supervisor
--------NAME WITH DESIGNATION------

CENTRE FOR DISTANCE LEARNING GITAM

(Deemed to be University)
Estd. u/s 3 of UGC Act, 1956

VISAKHAPATNAM 2019
Retail Banking transformation in India 01
Overview
Introduction

One of the spectacular innovations in the commercial banking sector is the

retail banking. It refers to banking in which banks undergo transactions directly with

consumers rather than with corporates or other banks. Consumer credit is the heart of

retail banking. In retail banking the banks provide services to individuals and small

business concerns and the dealings are in large volumes and low values. The retail

banking portfolio encompasses deposits and assets linked products as well as other

financial services offered to individuals for personal consumption. Retail banking is

increasingly viewed by banks as an attractive market segment with opportunities for

growth and profit.1 The fastest growing division in the banking sector is the retail

sector. Retail banking is a system of providing soft loans to the general public like

family loans, house loans, personal loans, loans against property, car loans, auto loans

etc. The products are backed by world-class service standards 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. 2
Today’s

retail banking sector is characterised by three basic features; viz:

- Multiple products-deposits, credit cards, insurance, investment and securities

- Multiple channels of distribution- call centre, branch, internet

- Multiple customer groups- consumer, small business and corporate3

Retail Banking in India- an Overview

Retail Banking

Features of retail banking

Retail banking refers to the dealing of commercial banks with individual

consumers, both the liabilities and the asset side of the balance sheet.4 The important

products offered by banks in retail banking are fixed, current/ savings account on

liabilities side; and personal loans, house loans, auto loans and educational loans on

the asset side. Today’s retail banking sector is characterised by the following features:

 Retail banking aims at doing banking business in large volume of transactions

involving low value.

 The retail banking portfolio includes deposits and assets linked products as

well as other financial services provided to individuals for personal

consumption.

 Retail banking business is an attractive market segment with opportunities for

growth and profits.

 It provides an opportunity to banks to diversify their asset portfolio. Since

loans are given to a large number of consumers and transactions have very low

value, the risk of NPA is reduced because all the consumers do not make

default in making loan repayment at a time.

 Retail banking is based on the maxim “do not keep all the eggs in one basket”

 Retail banking industry is diverse and competitive. There is a large number

of retail banking products that are extremely customer-friendly and are

offered by many banks.

 Banks adopt multiple channels of distribution of retail banking products.

 Retail Banking in India- an Overview

How Retail Banks Work

Retail banks use the depositors' funds to make loans. To make a profit, banks charge higher interest
rates on loans than they pay on deposits.

The Federal Reserve, the nation's central bank, regulates most retail banks. Except for the smallest banks,
it requires all other banks to keep around 10% of their deposits in reserve each night. They are free to lend
out the rest. At the end of each day, banks that are short of the Fed's reserve requirement borrow from
other banks to make up for the shortfall. The amount borrowed is called the fed funds.

How They Affect the U.S. Economy and You

Retail banks create the supply of money in the economy. Since the Fed only requires them to keep 10% of
deposits on hand, they loan out the remaining 90%. Each dollar lent out goes to the borrower's bank
account. That bank then lends 90% of this money, which goes into another bank account. That's how a
bank creates $9 for every dollar you deposit.

As you can imagine, this is a powerful tool for economic expansion. To ensure proper conduct, the Fed
controls this as well. It sets the interest rate banks use to lend fed funds to each other. That's called the fed
funds rate. That's the most important interest rate in the world. Why? Banks set all other interest rates
against it. If the fed funds rate moves higher, so do all other rates.

Most retail banks sell their mortgages to large banks in the secondary market. They retain their large
deposits. As a result, they were spared from the worst of the 2007 banking crisis.

Retail Banking History

In the Roaring 20s, banks were unregulated. Many of them invested their depositors' savings in the stock
market without telling them. After the 1929 stock market crash, people demanded their money. Banks
didn't have enough to honor depositors' withdrawals. That helped cause the Great Depression.

In response, President Franklin D. Roosevelt created the FDIC. It guaranteed depositors' savings as part of
the New Deal.

The Federal Home Loan Bank Act of 1932 created the savings and loans banking system to promote
homeownership for the working class. They offered low mortgage rates in return for low interest rates on
deposits. They couldn't lend for commercial real estate, business expansion, or education. They didn't
even provide checking accounts.

In 1933, Congress imposed the Glass-Steagall Act. It prohibited retail banks from using deposits to fund
risky investments. They could only use their depositors' funds for lending. Banks could not operate across
state lines. They often could not raise interest rates.

In the 1970s, stagflation created double-digit inflation. Retail banks' paltry interest rates weren't enough of
a reward for people to save. They lost business as customers withdrew deposits. Banks cried out to
Congress for deregulation.

The 1980 Depository Institutions Deregulation and Monetary Control Act allowed banks to operate across
state lines. In 1982, President Ronald Reagan signed the Garn-St. Germain Depository Institutions Act.
It removed restrictions on loan-to-value ratios for savings and loan banks. It also allowed these banks to
invest in risky real estate ventures.
 Retail Banking in India- an Overview

The Fed lowered its reserve requirements. That gave banks more money to lend, but it also increased risk.
To compensate depositors, the FDIC raised its limit from $40,000 to $100,000 of savings.

Deregulation allowed banks to raise interest rates on deposits and loans. In fact, it overrode state limits on
interest rates. Banks no longer had to direct a portion of their funds toward specific industries, such as
home mortgages. They could instead use their funds in a wide range of loans, including commercial
investments.

By 1985, savings and loans assets increased by 56%. But many of their investments were bad. By 1989,
more than 1,000 had failed. The resultant S&L crisis cost $160 billion.

Large banks began gobbling up small ones. In 1998, Nations Bank bought Bank of America to become
the first nationwide bank. The other banks soon followed. That consolidation created the national banking
giants in operation today.

In 1999, the Gramm-Leach-Bliley Act repealed Glass-Steagall. It allowed banks to invest in even riskier
ventures. They promised to restrict themselves to low-risk securities. That would diversify their portfolios
and lower risk. But as competition increased, even traditional banks invested in risky derivatives to
increase profit and shareholder value.

That risk destroyed many banks during the 2008 financial crisis. That changed retail banking again.
Losses from derivatives forced many banks out of business.

In 2010, President Barack Obama signed the Dodd-Frank Wall Street Reform Act. It prevented banks
from using depositor funds for their own investments. They had to sell any hedge funds they owned. It
also required banks to verify borrowers' income to make sure they could afford loans.

All these extra factors forced banks to cut costs. They closed rural branch banks. They relied more on
ATMs and less on tellers. They focused on personal services to high net worth clients and began charging
more fees to everyone else.
 Advantages of retail banking

Retail banking is mass market banking, where individual consumer’s diverse

needs are fulfilled at the local level i.e. by providing multiple products.5 It has been

facilitated by growth of banking technology and automation of banking process. Retail

banking has the following advantages.6

 Retail deposits are stable and constitute core Retail deposits are stable and constitute core
deposits.

 They are interest insensitive and less bargaining for additional interest.

 Effective customer relationship management with retail customers builds a

strong customer base.

 Retail banking increases the subsidiary business of banks.

 Retail banking results in better yield and improved bottom line for banks.

 Retail segment is a good avenue for funds deployment.

 Consumer loans are presumed to be of lower risk and NPA perception.

 Improves lifestyle and fulfils aspirations of people through affordable credit.

 Retail banking provides an opportunity for banks to innovate banking

products as per the expectations of various classes of customers.

 Retail banking involves minimum marketing efforts in a demand-driven

economy.

 Diversified portfolio due to huge customer base enables banks to reduce their

dependence on a few or single borrower.

 Banks can earn good profits by providing non-fund based or fee based

services without deploying their funds.

 Credit risk tends to be well diversified as loan amounts are relatively small.
 Disadvantages of retail banking
 There can be problems in managing large number of clients, especially if IT

systems are not sufficiently robust.

 The cost of maintaining branch networks and handling large number of low-

value transactions tend to be relatively high.

 Designing own and new financial products is very costly and time-

consuming for the bank.

 Though banks are investing heavily in technology, they are not able to

exploit it to the maximum.

 Major disadvantages are monitoring and follow-up of huge volume of loan

accounts inducing banks to spend heavily on the human resource department.

Long term loans like housing loan, due to its long repayment term, can become NPA in the
absence of proper follow-up
 Retail banking in India

In the post independence era the evolution and growth of banking sector has

gone through innumerable twists and turns. In India banks are nationalised with the

main objective of reaching out to the unbanked masses and so retail banking is

important in India to provide banking services to unbanked masses.

Retail banking in India is not a new phenomenon. It has always been prevalent

in India in various forms ever since banking was first established here. Cooperative

banks that have been in existence in India for over a century have always had retail

thrust. It is only since the mid-nineties that the term “retail banking” has been used as

a means of reinforcing a conscious foray into this particular line of business. For the

last few years it has become synonymous with mainstream banking for many banks.7

The typical products offered in the Indian retail banking segment are housing loans,

consumption loans for purchase of durables, auto loans, credit cards and educational

loans. These loans are marketed under attractive brand names to differentiate the

products offered by different banks.

Unlike wholesale banking, retail banking has high sized business with many

banks competing for market share. Retail banks focus mainly on consumer markets.

Here the transactions of the banks are directly with consumers and not with

corporations or other banks. It refers to the dealing of commercial banks with

individual customers, both on liabilities and assets side of the balance sheet.
 Although retail banking is, for the most part, mass-market determined, many

retail banking products may also extend to small and medium sized business.

Nowadays much of retail banking is streamlined electronically via ATMs, or through

virtual retail banking known as online banking.8

The retail loan portfolio of Indian private sector banks has been growing

speedily in the recent past. The entry of new generation banks and foreign banks with

innovative technology and technology-driven products has changed the entire

scenario. The retail sector which remained unobserved earlier is now the most

important area of concern for banks. Banks are offering so many products to the

customers and they can choose the one which suits them. As the competition is

growing in retail banking, maintaining service quality in banks is becoming essential.

The Indian retail banking is expected to grow tremendously because of the changing

attitude of customers toward borrowings, low cost of borrowings and optimism

regarding economic growth.

 Drivers of retail banking in India

The growth in banking technology and automation of the banking process

facilitated retail banking. The rapid growth and spread of retail banking is due to the

technological development. The nature of products offered in retail banking is also

expanded. In a growing economy like India retail banking has vast opportunities and

challenges.

The basic reasons for which Indian banks have diversified into retail banking

are the following:

1. The retail banking products are customer oriented. Transactions with small

value may be cost ineffective in a highly competitive environment. But retail

banking eliminates market risk.9

2. In India the demand for consumer durables has increased owing to the

economic growth and prosperity and the consequent increase in the purchasing

power of the people. Major portion of the household sector in

3. India is middle class people. There is continuous rise in the percentage of

middle and the high income households in India. Indian retail banking is

facilitated by improved purchasing power of consumers and liberal attitude

towards personal debt.

4. India has the highest proportion of the population below 35 years of age

(young population). This is a positive factor for the growth of retail banking

in India. Changing consumer demographic indicates a vast potential for

growth in consumption, both quantitatively and qualitatively.

 5. Another important factor which facilitated the growth and development of

retail banking is the development of technology. Technological innovations

relating to increasing use of credit/debit cards, ATMs, internet and phone

banking etc. are attracting many new customers to the banking field.

6. The lower levels of NPA in retail lending and decrease in interest spread in

the corporate sector have encouraged the banks to shift towards retail sector.

Besides, fall in interest rates, availability of consumer goods at competitive

and reasonable prices and income tax benefits, especially in case of housing

sector, have also contributed to the growth of retail banking.

Indian banks have adopted the best international practices of accounting and

integrated risk management systems after the liberalisation of the economy. Banks

have got the opportunity to diversify their risk through the retail loan portfolio.

Besides this, the retail advances have lower defaults in repayment compared to the

overall bank loans. The comparatively lower provisioning burden on banks on retail

loans have compelled them to diversify into retail sector.

There has been dramatic operational transformation in retail banking in the

recent years. The factors which compelled banks to rethink their real strategies are

increased competition, mergers and acquisitions and new regulatory requirements.

The retail banks have adopted latest technology to maximise sales, manage

distribution channels and plan operations necessary to acquire, satisfy and retain

customers.
 Retail banking products

Retail banking includes a comprehensive range of financial products such as

deposit products, loan products and payment services. The typical products offered in

the Indian retail banking segment are:10

Retail deposit products

 Savings bank account

 Recurring deposit account

 Current deposit account

 Term deposit account

 Zero balance account for salaried people

 No frill account for common man

 Senior citizen deposit account, etc.

Retail loan products

 Home loans to resident Indians for purchase of land and construction of

residential house/ purchase of ready built house/ for repairs and renovation of

an existing house.
  Home loans to Non-Resident Indians.

 Auto loans for new/ used four-wheelers and two- wheelers

 Consumer loans for purchase of jewels, for meeting domestic consumption

etc.

 Education loans for pursuing higher education both in India and abroad.

 Trade related advances to individuals for setting up business, retail trade etc.

 Crop loan to farmers.

Retail services

 Safe deposit lockers

 Depository services

 Banc assurance products etc.

Challenges faced by Indian retail banking

A major challenge for retail banks in India is the retention of customers. In this

competitive environment the customer retention is very difficult. Profitability of retail

banks is highly effected by customer retention. According to a research by Reichheld

and Sasser11 in the Harvard Business Review, 5% increase in customer retention can

increase profitability by 35% in banking business, 50% in insurance and brokerage,

and 125% in the consumer credit card market. Thus, banks need to focus on customer

retention. They are expected to take utmost care to retain the ongoing trust of the

public. Banks are required to adopt innovative strategies to meet customers’ needs and

requirements in terms of service and products. 12 The efficiency of operations would

provide the competitive edge for success in retail banking in coming years.
 In future rising indebtedness could turn out to be a cause for concern. In

developed countries the household debt in proportion to disposable income is much

higher. India’s condition is not comparable to that of the developed countries. There

will be high uncertainty in such a scenario. There will be huge risk and high

uncertainty if there is a disproportion between debt/loan and disposable income. The

Reserve Bank has been well aware of this problem. For example, as Revathy has

pointed out, 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)13.

Another important issue in retail banking is risks in money laundering and

KYC (Know Your Customer) issues. Banks should take utmost care to retain the trust

of the public in them. Banks have to consider and verify all the documents seriously

which are accepted by them for approving the loans. As the amount of transactions

involved is lower, the risk of money laundering is less in retail banking. There is also

possibility of waiver of KYC procedures by banks in order to retain customers in this

competitive environment.

The core activities in the bank like hardware and software maintenance, ATM

setup and operation including cash refilling etc are usually outsourced by banks. So

the issue of outsourcing has become very important in recent past in Indian retail

banking.

Information technology poses both opportunities and challenges. Many

customers prefer the personal touch of their bank even though the bank has ATM and

Internet Banking services.

 Future of retail banking in India

Retail banking in India has exhibited enormous growth in the recent past and

has emerged as one of the major drivers of the overall banking industry. In fact, this

growth is attributed to the vast growth of personal wealth, favourable demographic

profile, rapid IT development, financial market reforms and micro-level supply side

factors coupled with the conducive macro- economic environment.14

There are immense opportunities for retail banking in a growing economy like

India. One of the important factors contributing to this is the rise of Indian middle

class. There will be a continuous rise in the percentage of middle to high- income

Indian households. This may lead to substantial growth in the retail sector.

Retail lending is only a part of retail banking. Retail depositors play an

important role in retail banking. The retail shopkeepers, the self employed, the

pensioners, the home makers, and the employed need to get a place in the bank. The

Government of India and the Reserve Bank of India are very particular about Financial

Inclusion now-a-days. So the entire banking industry is viewing retail banking as an

emerging business opportunity in tune with financial inclusion.

In retail banking credit history information about the households is extremely

important. Banks have a traditional resistance to share credit information of their

clients to uphold the confidentiality of banker-customer relationship. The credit

information is not passed between banks as well as bank sectors. The Credit

Information Bureau (India) Limited (CIBIL) was incorporated in 2000 in India. The

main aim of CIBIL is to provide credit information to credit granting institutions. They

collect and disseminate credit information pertaining to both commercial and

Retail Banking in India- an Overview 110

consumer borrowers. The banks must exercise due diligence before declaring a

borrower as defaulter.

The banks are using outsourcing as a means for cost reduction and achieving

efficiency in operations. To cope with the increasing market orientation, competition

and technological innovations, the banks are increasingly using outsourcing. Thus

outsourcing has become an important element in retail banking sector.

There is a glorious future for retail banking in India. It helps in the

development of individual customers who avail the products or services as well as in

the overall development of the society. Retail banking has proved to be an effective

tool to improve the bottom lines of banks. Thus there is vast scope for retail banking

business in India.

Retail Finance

Retail finance or retail lending is that segment of retail banking which offers

various loan products to the customers. Housing loans, loan for the purchase of

durables, auto loans, credit cards and educational loans are the typical products offered

in Indian retail finance segment. The loan values of retail lending ranges between Rs.

20,000 to Rs.100 lakhs. The duration of loans is generally five to seven years. Housing

loans have a longer duration of 15 to 30 years.

Retail banking results in better yield and improved bottom line for the bank

and hence retail segment is a good avenue for funds deployments. It is presumed that

consumer loans are of lower risk and NPA perception. Banks can reduce their

dependence on a few or single borrower through diversified portfolio of huge

customer base. Banks are providing non-fund based or fee-based services and can
Retail Banking in India- an Overview 111

earn good profits without deploying their funds. It is possible to improve the lifestyle

and fulfil the aspirations of the people through affordable credit in retail lending.

Further, through increased production activity, the economic revival of the nation can

be achieved. Since the evolution of banking, retail banking has been prevalent in

various forms in India.

There are vast changes in the Indian retail finance market during the last few

years. Earlier, Indians believed in the concept of saving and then spending and were

against the concept of availing credit for purchases. The overzealous lenders, who

realised the huge latent potential of the Indian consumers, came up with a variety of

customer credit products and they forced them up on consumers. This has changed

the psychology of Indian consumers who no longer consider credit as a social stigma.

They are willing to fulfill their dreams and aspirations through the credit facilities.

Penetration of retail loan products is very low in India. Home loans in India

form only about 6% of our GDP, while the same is about 60% in advanced countries.

Of every 1000 Indians, only eight own a car, whereas this number is nearly 500 in

developed countries.15 Combined with rising affluence in the country and increasing

disposable incomes, these low levels of penetration indicate that, for retail loan

providers in India, the growth story is likely to continue for a long time.

In India retail lending is becoming an important segment of bank credit. The

inclusive, comprehensive and pervasive growth of India can be obtained through it.

In future the growth of retail banking will be decided by retail lending. The credit off-

take by the under banked segments of the society needs to be improved. There is

expanding middle class persons in need of varied banking services and India is the
Retail Banking in India- an Overview 112

second largest consumer market in the world and consumers in this country are

dreaming of purchasing power.

Through the growth of consumer lending at a faster pace and making it

available at affordable rates, the aspirations of these consumers can be fulfilled.

Personal loans, also called consumer loans, are now-a-days very popular in India

because of the spurt in the income levels of middle-income segment and the growth

of consumerism. These loans are easy to arrange on the basis of fixed monthly

repayment program. Banks are facing tough competition not only amongst themselves

but also from NBFC’s.

Characteristics of retail loans

 Retail loans are small size loans.

 With well diversified portfolios the needs of a large number of customers can

be met.

 The target customers are generally individuals or small organisations.

 Standard products are offered to customers.

 Centralised operations of retail credit exist in most of the banks.

 Because of decentralisation, banks can make quick credit related decisions.

 These loans are designed to cover varied segments of risks.

 Volume of business is high.

 Number of transactions is large.

Retail Banking in India- an Overview 113

Retail exposure of banks include various types of retail credit such as

residential mortgages, credit card, automobile and personal loans etc. Retail loans

have the following features:

 Types of facilities - Retail loans are the finance facility of a fixed amount

extended to meet a one-time requirement of a customer, for a fixed tenure, to

be repaid over a period in instalments.

 Secured / Unsecured facilities - Secured loans are always secured by an

underlying asset against which funding is extended. Unsecured loans do not

have any underlying security and are purely extended based on the

creditworthiness of the borrower.

 Interest - On a loan given at a fixed rate, interest is charged throughout the

tenure of the loan at that rate which is fixed at the time of granting the loan. In

case of floating rate of interest, the rate of the loan varies from time to time

according to the movement of interest rate in the market. Loans that are fixed

in the initial years and become floating later would be considered as teaser

loans.

 Tenure - The tenure depends upon the amount of loan and repayment capacity

of the customer.

 Loan to Value ratio - Loan to Value ratio refers to the maximum percentage

of the value of the asset that is given as a loan. It varies according to the nature

of the asset and also the rate at which the asset is expected to depreciate.
Retail Banking in India- an Overview 114

Retail lending is a spectacular innovation in the commercial banking in recent

years. Rapid advancement in information technology, financial market reforms, the

evolving macroeconomic environment, and several micro level demand and supply

side factors have contributed to the growth of retail lending in developing countries.

In recent past, retail lending has turned out to be a key profit driver for banks with

retail portfolio constituting18.80% of total outstanding advances as on March 201316.

The overall impairment of the retail loan portfolio worked out much less than the gross

NPA ratio for the entire loan portfolio.

Retail loans have been a prime driver of credit growth in Indian banking sector.

Table 4.1 shows the aggregate advances and retail advances of scheduled commercial

banks in India for the period from 2004 to 2013.

Table 4.1
Aggregate advances and retail advances of scheduled Commercial banks in India-
2004 to 2013
(Amount in Rs. Crore)

Aggregate Retail
As on March 31 Percentage of (b)to (a)
advances (a) advances(b)
2004 864271 189041 21.90
2005 1105725 266611 24.10
2006 1517497 375739 24.76
2007 1949567 487860 25.02
2008 2394565 571048 23.84
2009 2857525 593816 20.78
2010 3345619 622752 18.61
2011 4076867 743972 18.25
2012 4673435 859912 18.40
2013 5369681 1009501 18.80

Source: Report on Trends and Progress of banking in India-various issues

Retail Banking in India- an Overview 115

The total amount of retail credit of scheduled commercial banks in India shows

an increasing trend during this period. But the percentage of retail advances to total

advances is decreasing during the period. The main reasons for the reduction in growth

rate of retail credit are the rise in interest rate, measures adopted by RBI for inflation

control, global financial meltdown etc.

Retail loan portfolio

The retail loan portfolio of scheduled commercial banks in India consists of

housing loan, loan for the purchase of consumer durables, credit card, auto loans and

other personal loans.

Housing loan

Housing loans are those loans provided by commercial banks directly or

indirectly for the purpose of purchase, construction, re-construction or repairing of the

house property. There are a variety of home loan schemes for each bank. They are

home purchase loan, home improvement loan, home construction loan, home

extension loan, home conversion loan, land purchase loan, balance transfer loan,

bridge loan and home loans for NRIs.

Consumer durables loan

These kinds of loans are provided for purchasing consumer durable products

like television, music system, washing machine etc. These are the unique kind of loans

that are provided by banks to attract more and more people towards them. Banks

generally provide a minimum amount of Rs. 5000 and maximum of Rs. 200,000 with

a maximum repayment period of five years as consumer durables loan.

Retail Banking in India- an Overview 116

Credit card

Credit card is 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 agency. Banks

issue credit card to selected customers depending on their income, credit worthiness,

reputation etc. Credit card receivables constitute a significant portion of retail credit

in India.

Auto loans

Auto loans/vehicle loans are those loans provided by commercial banks for

the purpose of purchase of vehicles. Auto loans may be car and two wheeler loans or

commercial vehicles loan.

Other personal loans

Personal loans are intended to meet any kind of personal expenses of the

borrower such as family functions, medical expenses, travel expenses in India and

abroad, marriage expenses of children, buying computers/laptops, festival

celebrations etc.

Table 4.2 shows the retail loan portfolio of scheduled commercial banks in

India for the period from 2004 to 2013.

Retail Banking in India- an Overview 117

Table 4.2
Retail loan portfolio of scheduled commercial banks in India
(Amount in Rs. Crore)
As on March 31
Item
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Housing 89449 134276 179116 224481 252932 263235 315862 367364 411805 475400
loan (47.32) (50.36) (47.67) (46.02) (44.25) (44.33) (50.73) (49.38) (47.89) (47.09)

Consumer 6256 3810 4469 7296 4802 5431 3032 4555 2701 3412
durables
loan (3.31) (1.43) (1.89) (1.50) (0.85) (0.92) (0.49) (0.62) (0.32) (0.34)

Credit card 6167 8405 12434 18317 27437 29941 21565 18655 22301 26788
receivables (3.26) (3.15)) (3.31) (3.75) (4.80) (5.04) (3.48) (2.51) (2.59) (2.65)

35043 61369 82562 87998 83915 78346 100155 116204 142114

Auto loan -
(13.14) (16.33) (16.92) (15.45) (14.13) (12.59) (13.46) (13.51) (14.37)

Other 87170* 85077 118351 155204 197879 211294 203647 253243 306901 361786
personal
loans (46.11) (31.97) (31.50) (31.81) (34.65) (35.58) (32.71) (34.03) (35.69) (35.84)

Total 189042 266611 375739 487860 571048 593816 622752 743972 859912 1009501
retail loan (100) (100) (100) (100) (100) (100) (100) (100) (100) (100)

Source: RBI- Report on Trends and Progress of banking in India-various issues.

Note: Figures in parentheses represent percentage to total.
*- include auto loans and other personal loans

The increase in retail credit during the period was entirely attributed to the

housing loan segment, which constituted the single largest portion of total retail loans

of Indian banks. As on 31st March 2013, housing loan constituted 47.09% of the total

retail advances followed by auto loan (14.37%), credit card receivables (2.65%) and

consumer durables loan (0.34%). Other personal loans were 35.84% of total retail

loans. During the period the proportion of credit card receivables, consumer durables

loan and personal loans to total retail loans decreased. The proportion of housing loan

and auto loan was fluctuating during the period. As the

Retail Banking in India- an Overview 118

retail sectors are rate-sensitive, credit to these sectors in future would be impacted

by the emerging interest rate environment. Figure 4.1 shows the retail loan portfolio

of scheduled commercial banks in India as on March 2013.

35.84
47.09

Housing loan
Consumer durables loan
Credit card receivables
Auto loan
Other personal loans

14.37 0.34
2.65

Figure 4.1
Retail Loan Portfolio of Scheduled Commercial Banks in India as on March
2013.

Retail lending in Kerala

The retail loan portfolio of scheduled commercial banks in Kerala includes

housing loan, vehicle loan, consumer durables loan, credit card etc. The table below

shows aggregate advances and retail advances of scheduled Commercial banks in

Kerala from 2004 to 2012.

Retail Banking in India- an Overview 119

Table 4.3
Aggregate advances and retail advances of scheduled Commercial banks in
Kerala-2004 to 2012
(Amount in Rs. Crores)

Aggregate Retail
As on March 31 Percentage of (b)to (a)
advances(a) advances(b)

2004 32536.54 10579.67 32.52

2005 39714.71 14217.63 35.79

2006 51730.13 18348.24 35.47

2007 61066.58 22646.69 37.09

2008 72944.62 25882.28 35.48

2009 81973.33 31272.75 38.15

2010 98137.84 34596.27 35.25

2011 126230.35 38930.89 30.84

2012 151849.08 43479.66 28.63

Source: Compiled from RBI- Basic Statistical Returns of Scheduled Commercial

Banks in India- Various issues.

The total retail advances of scheduled commercial banks in Kerala have

increased during the period. The percentage of retail advances to total advances was

increasing up to 2009 and is decreasing from 2010 onwards. This is in tune with the

general trend at the national level. The percentage of retail advances to total advances

shows a decreasing trend since 2010. A comparison of percentage of retail advances

to total advances of scheduled commercial banks in India and Kerala is given in Figure

4.2.
Retail Banking in India- an Overview 120

45
40
35
30
Percentage

25
20 India
15 Kerala

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Year

Figure 4.2
Retail Advances as Percentage of Aggregate Advances of Scheduled Commercial
Banks in India and Kerala

Table 4.4 shows the retail loan portfolio of scheduled commercial banks in

Kerala for the period from 2004 to 2012.

Retail Banking in India- an Overview 121

Table 4.4

Retail Banking in India- an Overview

Retail loan portfolio of scheduled commercial banks in Kerala -2004-2012
(Rs in Crores)
As on march 31
Items

2004 2005 2006 2007 2008 2009 2010 2011 2012

5559.10 8801.54 11111.02 13798.25 15688.67 18682.96 21497.947 23247.78 23949.11
Housing loan
(52.55) (61.91) (60.56) (60.93) (60.62) (59.74) (62.14) (59.71) (55.08)
200.43 323.27 508.29 616.16 320.31 192.59 363.1613 124.60 358.28
Consumer durable loan
(1.89) (2.27) (2.78) (2.72) (1.24) (0.62) (1.05) (0.32) (0.82)
2.51 1.25 1.55 51.29 75.60 53.8179 54.14 35.29
Credit card receivables
(0.02) (0.007) (0.007) (0.20) (0.24) (0.16) (0.14) (0.80)
1130.51 1109.81 1902.86 2245.419 2131.87 3773.709 3814.5886 4546.99 4887.39
Vehicle loan
(10.69) (7.80) (10.38) (9.92) (8.24) (12.07) (11.03) (11.68) (11.24)
3689.63* 3980.50 4824.81 5985.32 7690.14 8547.91 8866.7586 10957.38 14249.58
Other personal loans
(34.87) (28.00) (26.30) 26.43) (29.70) (27.33) (25.62) (28.15) (32.78)
10579.67 14217.63 18348.24 22646.69 25882.28 31272.75 34596.27 38930.89 43479.66
Total
(100) (100) (100) (100) (100) (100) (100) (100) (100)

121
Source: Compiled from RBI-Basic Statistical returns of Scheduled commercial banks in India- various issues
Note- Figures in parentheses represents percentage to total
*- includes credit card receivables
Retail Banking in India- an Overview

Housing loan constitutes the major share of retail loans in Kerala followed

by other personal loans and vehicle loan. The consumer durables loan and credit

card receivables are the least in the retail loan portfolio and are less than one

percentage of total retail advances in Kerala. This is also similar to the ratio of all

India scheduled commercial banks. The retail loan portfolio of scheduled

commercial banks in Kerala as on March 2012 is shown in figure 4.3.

Housing loan

32.78 Consumer durables loan

Credit card receivables
Auto loan
Other personal loans

55.08

11.24
0.8
0.82

Figure 4.3
Retail Loan Portfolio of Scheduled Commercial Banks in Kerala as on March
2012

Methods of charging interest

Interest is the fee which is paid by the borrower for borrowing money from

the lender. Interest on loans can be calculated either on a flat rate or reducing/

diminishing rate method. In the case of flat rate method, interest is charged on the

full amount of the loan throughout the entire period of the loan. In the case of

reducing balance method, interest is calculated only on the outstanding loan balance
Retail Banking in India- an Overview

as reduced by the monthly principal payment. The reducing balance method may be

monthly reducing or yearly reducing or even daily reducing basis. In yearly reducing

system, the principal, for which interest is paid, reduces at the end of the year. Thus,

here interest is to be paid on a certain portion of principal which had already been paid

back. The principal reduces every month in monthly reducing system. In daily

reducing system, the principal reduces from the day the EMI is paid.

Fixed rate interest

In fixed rate interest, the rate of interest remains unchanged for the entire

duration of the loan. The borrower does not benefit the drop of interest rate in the

market. Here, the rate of interest is fixed in advance when the loan is taken. So the

borrower knows the exact amount he needs to pay in future. It is beneficial for a person

who would like to know his future cash outlays in advance.

Floating rate interest

This is the rate of interest that fluctuates according to the market lending rate.

Floating interest rate is linked to Prime Lending Rate (PLR). When PLR is revised,

the interest rate also stands revised. This means the customer takes the risk of paying

more in case the lending rate goes up. Here the interest rate is not determined while

borrowing but is depend on some underlying rates. By taking a floating rate loan both

the lender and borrower are exposed to a certain degree of risk.

Teaser loans

Loans with interest that are fixed in the initial years and become floating later

would be considered as teaser loans. Interest rates, that are a mixture of fixed and

floating are called teaser rates. In October 2010, RBI had increased the standard
Retail Banking in India- an Overview

provisioning requirements five times for teaser loan products, as compared to other

categories and so it reached to 2% for such loans.

Equated Monthly Instalment (EMI)

EMI is the fixed amount payable monthly throughout the repayment period of

a loan by the borrower to the lending institution. It consists of a portion of interest as

well as principal. The EMI system is popular with the borrowers as they find it more

convenient to pay only a fixed amount per month throughout the loan period. EMI

system of loan repayment has the following features.

 Each instalment contains both components of principal repayment and

interest charges.

 Interest is calculated on reducing balance method.

 Interest component is higher in the beginning and progressively lower towards

the end. That means, the principal component of an EMI is lower during initial

periods and higher during later periods.

 The amount of EMI depends on;

1. The period of compounding i.e., whether the compounding is yearly, half

yearly, quarterly or monthly. If the compounding is more frequent, then

the amount of EMI would be higher and vice versa.

2. The rate of interest.

3. Period of repayment - if the repayment period is more, then EMI would be

lower and vice versa.

 Retail Banking in India- an Overview

p  r  1+r 
n

EMI = 

1  r   1
n



Where p = principal i.e. loan amount

r = rate of interest per month

n = no. of instalments
 Retail Banking in India- an Overview

CASE STUDY

The ongoing revolution the Fintechs are waging in unbundling the banking services
and the encroachment of tech giants into the banking world is making the
digital transformation of a retail bank a strategic imperative.

Most bank customers are willing to try a financial product from a non -banking
provider, particularly the Fintechs and the tech giants (like Amazon, Google,
et al.). The percentages increase among the younger citizenry that grew up as
digital natives.

The digital transformation of retail banking is not a quick fix or putting on a

band-aid. Typically, an outside-in and inside-out transformation requires a
multipronged approach and starts with the commitment of the C -Suite and
involves changes at culture, strategy, operating model, business models, talent,
processes, and execution.

Also, there are structural imbalances. A new generation of Fintechs does not
have legacy landscape, and many are circumventing the complex licensing and
regulatory protocols by partnering.

Hence, a digital transformation of a retail bank is a fundamental remaking or a

reincarnation, if you will. Let’s examine by taking a fictitious case study of a
bank to showcase how a retail bank can rethink, re -imagine, re-engineer, re-
platform and renew themselves for the digital age.

The fictitious bank is BankMe, a sizeable multiline bank with operations

across the United States, but a significant portion of the branch footprint on
both coasts. BankMe serves over 20 million customers. It offers general
banking products and services – deposits, loans, mortgages, commercial
lending, life insurance, and essential brokerage services.

BankMe’s chairman, and CEO is Ryan Paul, and he is a veteran of banking

with experience across the banking value chain and has built BankMe over the
years through both organic growth and acquisitions.

As with most legacy banks, BankMe is a retail banking operation replete with
convoluted processes, arcane governance norms, antiquated systems land scape,
and employees from different eras. Change is slow, the culture is rooted in
resistance to change, and everything takes an enormously long time.

Inflection Point:
The perfect storm of a new wave of startups, the eroding trust and value among
the customer base, and the potential emergence of giant technology companies
 Retail Banking in India- an Overview

into the banking realm was the impetus for embarking on a digital
transformation of the bank.

Transformation Vision for Retail Banking:

In conjunction with the board and a strategic trans formation team, Paul and
company have come up with an overarching theme for a multi -year and
comprehensive transformation of the bank. The transformation program
– MADE, which stands for Mobile and Digital Everywhere – has been a
catalyst for an invasive and intensive change across the spectrum of the
bank. The company’s tagline “Desirable bank for the Digerati” has galvanized
the team.

Retail Banking Digital Strategy Pillars:

Paul and team have come up with six vital strategic pillars to drive the
transformation program and built a roadmap anchored to these guiding
principles.

1. Digital First, Mobile First, and Cloud First approach

2. Rapid innovation matters – Do it and iterate
3. Buy where you can, Partner when you must, Build only as a last resort
4. Sacrifice short-term profits for long-term customer centric gains
5. Provide APIs based access and build an open banking platform
6. Make or Break things; the status quo is not acceptable

The Budget:
The board approved a special transformation budget of $5 billion ove r 2-years,
which is over and above the business as usual spend. The governance of the
transformation budget was simple – funding will only be given to projects that
have 90% digital quotient. The digital quotient is a measure of meeting
specific criteria – cloud-based, API-enabled, open architecture, experience-
driven and unlocking the value from data. These five guiding principles
funded projects big and small across the bank’s value chain and in a multitude
of capability areas.

BankMe leadership also has instituted a key value driver – that the digital
transformation projects will have the right of way and will be prioritized over
business as usual programs.

Cultural Change:
As the saying goes, culture eats strategy for breakfast. So, a shift in culture,
psyche, and mindset is an essential ingredient for success. Furthermore, in
most transformation programs, change management is often an afterthought
and typically under-funded and launched too late in the cycle to make any
material difference.

BankMe leadership realized the importance of culture and change management

to compete effectively against the digital natives. The banking transformation
 Retail Banking in India- an Overview

team has prioritized both the cultural aspects and the change management
aspects into a holistic change program.

In addition to the business side, the technology teams had embraced the
concept of creating an IT Strategy for the digital age.

The change management framework and the change management plan went a
long way in fostering a new ethos and approach to doing, thinking, and being.

Roadmap:
BankMe digital transformation team has come up with a roadmap that is across
the board and involved capabilities, people, process, technology, and
experience.

The transformation team has created the following key deliverables:

 A digital capabilities model to understand the depth, variety, and nuance of

digital capabilities
 A banking capabilities model that spans the critical areas of the value chain
 Customer Journey Maps to capture the current state of stakeholder workflows
 A data model that will serve as a lynchpin in unlocking the value from data
 A Target State Conceptual Architecture
 Rationalized Requirements Anchored to Business Capabilities
 Effort Estimation
 Digital Transformation Roadmap
 Implementation Sequencing and Incremental Delivery of Capabilities
 A Rollout Plan

Hiring:
BankMe’s hiring strategy was simple on paper but incredibly difficult to
execute. The bank’s digital team has come with three simple guiding
principles and guardrails.

1. For every bank or non-technologist, hire two technologists

2. Focus on hiring technologists who know banking or bankers who understood
technology
3. Acqui-hires are not an asset acquisition play or an M&A strategy per se but a
talent building strategy.

With this strategy, BankMe has been able to recruit data sc ientists, technical
architects, and software programmers and increase the technology workforce
by 20%.

Core Banking Transformation:

Account Opening:
Account opening is the gateway experience for a new client or existing client
opening a new account. BankMe revamped the account opening process and
 Retail Banking in India- an Overview

created customer journey maps to understand the nuances of how a customer

feels. Account opening transformation was a key enabler.

Deposits:
Deposits are the lifeline of any bank and BankMe is no exception. BankMe
digital transformation efforts focused on the follo wing in this core banking
area.

BankMe introduced an app to help clients ladder savings in different vehicles

to balance liquidity and yield. For example, emergency funds in checking,
short-term liquidity needs by term deposits and savings accounts, and r ainy-
day funds into various brokerage accounts, and nest egg into IRAs and other
retirement accounts. By doing so, BankMe has expanded the footprint of
clients into seldom used short-term instruments and gain the loyalty of the
clientele a simple but essential piece of advice.

BankMe partnered with a Fintech to help customers round off purchases and
save the dollars.

Also, the mobile check capture, online payroll deposit sign up, and access to a
low-cost pay advance startup are some of the steps that BankMe has taken to
advance the digital agenda.

Loans:
Personal Loans, mortgages, car loans are critical to the success of BankMe and
other retail banks. Innovations in the loans space have been few and far
between. Now, as a part of its transformation of core banking services,
BankMe has introduced a slew of changes and modified loan offerings thanks
to improved user experience and more holistic underwriting.

Non-traditional Underwriting: With the advent of big data and machine

learning, lenders are no longer limited to using traditional credit bureau
scoring. Instead, a more holistic profile of the clients – using their social,
demographic, financial and employment data to make instant credit decisions
has allowed BankMe to speed up the underwriting process an d make lending
decisions on the fly. Also, scouring through the client data has permitted
BankMe to prepopulate the loan amount and the terms to many clients upon
login and through outreach.

Also, BankMe has changed the way it collects information online a nd channels
the workflow. Many fields are pre-filled, particularly for existing customers,
and others through data aggregation technologies.

BankMe also partnered with a microloans platform to underwrite loans based

on a predetermined set of rules to fund the “unbanked” customers.
 Retail Banking in India- an Overview

Commercial Lending:
The commercial banking team has introduced several changes to make the
entire loan process smooth and easy. Leveraging machine learning and text
analytics, BankMe has introduced the spreading of financial statements
automatically. Similarly, using credit card data, business receipts, and expense
data, BankMe has been able to determine the viability and amount of working
capital a particular business needs and offer the terms online for immediate
action by the client.

Also, BankMe partnered with an ML-based lending platform and has joined a
few marketplaces to be a part of an emerging ecosystem.

Payments and Transfers:

For a CFO of a company who transferred money on a tool
like Venmo or Zelle to her daughter in a college a couple of time zones away
with ease, it has become unfathomable as to why her bank does not allow an
easy way to make transfers. To meet the expectations of the digitally savvy
customers, BankMe has introduced mobile apps for instant transfers, splitting
of bills, pooling by friends and family, and transfers with just a mobile phone
or an email. This may seem table stakes in the brave new world of payments,
but for a legacy bank such as BankMe, it is a stupendous achievement.

This is the journey of BankMe, a legacy bank with friction, inertia,

complexity, and cost built into every part of the business. However, with the
right leadership and appropriate changes to the culture and ethos, BankMe has
been able to cross a chasm and digitally transform the core banking services.
Retail Banking in India- an Overview

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