Growth and Development of Retail Banking in India: Drivers of Retail banking

Dr. Samiksha Ojha, Associate professor, International Management Institute, B-10, QIA,New Delhi
Vibhu Bhandari, PGDM (WM), International Management Institute, New Delhi

ABSTRACT

Retail banking in India has grown at a rapid pace in recent years as number of consumers continuously
relied upon the new banking products offered under the retail banking. Moreover, retail banking has
widened the scope of technology and internet by introducing various services related to information
technology, telecommunication and electronic data processing.
With a contribution of 14% to the national GDP and employing 7% of the country’s total workforce in
banking, the retail banking has emerged as the fastest growing banking service in India. The paper
however focuses on examining the growth and development of retail banking in the context to rural
and urban areas and how banks are using their existing business strategies to improve their market
presence. The core objective of the paper is to identify the growth drivers of consumers towards
embracing the retail banking services.

Keywords: Retail, Drivers, growth

Introduction
There has been widespread impact of globalization and liberalization in most of the emerging and
developing countries and India has been one of them, who showed dramatic economic development in
the span of last two decades. The cross border trade activities, business, import and export expanded
the scope of financial services and hence the banking sector emerged to support and strengthens the
overall banking needs of the individuals and businesses in the country.

Banking policies were reformed over the years in order to deregulate the sector and allowed private
participation to enhance the scope of banking services. Most of the banks in the past were primarily
limited to the corporations for commercial banking, lending and investment purposes. However, there
has been industrial sickness, economic downturn and always a risk exposure associated with the
business associated with the production, trade and supply chain activities. Furthermore, most of the
major banks in India reformed their banking structure in order to attract individuals, which emerged as
the biggest segments with relative saving and spending power to help the banks for further growth and
development. Thus, retail banking came into existence where most of the banks established number of
their branches across the country in an attempt to cater to the individual needs of the consumers such
as housing loan, car loan, education loan, mortgages, credit cards, investment services, and deposits in
accounts and so on.

Major Banks across India were keen to find the new opportunities in retail banking format in order to
expand their market share and therefore, new services were launched and were followed by other
banks in the name of easy accessibility to ATMs, telebanking, net banking, SMS alerts, locker
facilities among other things. Major growth drivers for retail banking remained the rising population,
education, per capita income, GDP rate, purchasing power and customer spending rate. However,
micro as well as macro-economic forces were responsible for the rapid growth and development of
retail banking segment in the country.

RESEARCH AIM & OBJECTIVES

 To study the scope, relevance and emergence of effective retail banking in India.
 To critically analyse the retail banking market trends, growth and development in the past

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 To identify the growth drivers of retail banking industry in India
 To evaluate the prevailing business strategies of major banks towards developing the retail
banking concept across India.

SCOPE OF THE STUDY

The study has been carried out on five major banks in India. These are as follows:
 ICICI Bank
 HDFC Bank
 Axis Bank
 SBI
 Punjab National Bank

DATA COLLECTION METHOD

Primary data has been collected by interview method. A semi-structured interview transcript that
included open and closed ended questions. Interviews were conducted on 15 selected managers using
convenience sampling.

Literature review
Gopal (2010) in his study ‘Growth Drivers and Challenges of Organised Retailing in India’ concluded
that parties involved in this growth story are the consuming public, the manufacturers, retailers and
finally the government.
Barnabas and Mekoth (2010) in their study on ‘Autonomy, Market Orientation and Performance in
Retail Banking’ cited that principal growth drivers are a rising economy, demographic changes,
consumerism etc.

Mukherjee (2011) in ‘Fuelling India's Retail Boom – What Should Be the Right Policy’ concluded that
Indian retail banking sector is one of the fastest growing sectors in India.

Malhotra and Singh, (2010) in their study on "An analysis of Internet banking offerings and its
determinants in India" concluded that Internet has become integral part of banking sector and there are
many opportunities in terms of using cloud computing in the near future.

Rao, (2011) however in his study on "E-learning in India: the role of national culture and strategic
implications", suggested that India is a multicultural place and e-learning is at the introduction stage
which eventually have significant benefits in the years ahead.
Barnabas and Mekoth, (2010) in their study on "Autonomy, market orientation and performance in
Indian retail banking" found that private banks in India have come up with new marketing orientation,
performance management systems and business strategies that are significantly different and better
than the public sector banks.

Kumar and Ganesh, (2011) on "The diffusion of ATM technology in Indian banking" concluded that
technology would dominate the banking sector in India in the coming years.

BANKING INDUSTRY IN INDIA: HISTORICAL PERSPECTIVES

Before the nationalization of large banks in 1969 and 1980, Government-owned banks dominated the
banking sector. Due to lack of competition, the use of technology was minimal and quality of service
was not considered for performance evaluation. Banks did not follow proper risk management systems
and prudential standards were weak. All these resulted in poor asset quality and low profitability of
banks. It was in this situation that wide-ranging financial sector reforms were introduced in India as an
integral part of the economic reforms initiated in the early 1990s.Thus, the principal objective of
financial sector reforms was to improve the allocative efficiency of resources and to accelerate the

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growth process of the economy by removing structural deficiencies affecting the performance of
financial institutions and financial markets. Financial reforms can be examined in two phases.

The first phase began in 1991 and focused on restructuring of the balance sheets as well as the
recapitalization of banks. The second phase, which began in 1997, was characterized by the
introduction of competition from foreign banks and new private banks as well as the introduction of
technology. Volatility in the domestic economy, the emergence of consumerism, fluctuations in the
property and stock markets, interest rate deregulation, advancement of technology and competitive
market conditions have forced banks to re-formulate their marketing strategies. The stiff competition
among banks encourages bankers to adopt a stronger customer focus specifically on customers’
aspirations and level of satisfaction. Retail banking thus emerged in the last decade in order to regard
customer service as an important factor to attain competitive advantage. A few banks have established
an outstanding track record of innovation, growth and value creation. This is reflected in their market
valuation. However improved regulations, innovation, growth and value creation in the sector remain
limited to a small part of it.

A weak banking structure has been unable to fuel continued growth, which has harmed the long-term
health of their economies. However, Indian banks have compared favourably on growth, asset quality
and profitability with other regional banks over the last few years. The banking index has grown at a
compounded annual rate of over 51 per cent since April 2001 as compared to a 27 per cent growth in
the market index for the same period. Policy makers have made some notable changes in policy and
regulation to help strengthen the sector. These changes include strengthening prudential norms,
enhancing the payments system and integrating regulations between commercial and co-operative
banks.

However, the cost of intermediation remains high and bank penetration is limited to only a few
customer segments and geographies. While bank lending has been a significant driver of GDP growth
and employment, periodic instances of the “failure” of some weak banks have often threatened the
stability of the system. Structural weaknesses such as a fragmented industry structure, restrictions on
capital availability and deployment, lack of institutional support infrastructure, restrictive labour laws,
weak corporate governance and ineffective regulations beyond Scheduled Commercial Banks (SCBs),
unless addressed, could seriously weaken the health of the sector.

EMERGENCE OF RETAIL BANKING IN INDIA

All around the world retail banking which includes retail assets and retail liabilities has been an
established market; however its rise in emerging economies like India has been of recent origin. The
traditional debt-averse, middle-class Indians who lived within their thrifty means, never to venture
beyond their means, seem to have given way to a new middle-class that is free from all inhibitions
regarding conspicuous consumption. Unlike its predecessors, the middle-class of today has donned a
new attitude; it attaches no social-stigma in taking loans for spending.
Indian retail banking is up and kicking. During 2009-10 retail contributed 42% of overall credit
growth. Growing at the CAGR of 35% over last 5 years the retail asset touched Rs 2,89,000 crore.
Major product segments of retail credit include housing finance, auto finance, personal loans,
consumer durable loan and credit cards to name a few. Housing constitutes the biggest segment of
48% of the entire retail credit; followed by the auto loans segment which constitutes almost 27.8%.
While the balance retail credit is used by consumer durables at 7.2%, educational and other personal
loans take the remaining 16%.

Banks are increasing their dominance in housing finance and capturing the market share of the housing
finance companies. During 2009-10, the market share of banks stood at 62%, against the 33% by
housing finance companies. All the players in this market are adopting an aggressive attitude and the
housing loan availability is playing into the players’ hands. Despite this phenomenal growth in India,

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the housing loan as a percentage of GDP at 4.91% indicates low penetration when compared to other
countries like Malaysia (17%) and Thailand (9%). But again this coupled with the population growth
indicates good future prospects.

Following the housing loans, it is the auto loan that is also giving the growth of retail credit the
necessary boost. In Asia Pacific, India has emerged as the third largest market for cars and MUVs i.e.
only after Japan and China. Low interest rates, easy finance, up-gradation of rider from two- wheeler
to 4-wheelers and opening up of second hand car finance are growth drivers of this segment.
The consumer durable loan follows the auto loan market in the third position, constituting
approximately 7% of total credit. Metro centers continue to dominate the market with 29% of total
retail credit, closely followed by the rural market at 27% of total retail market. Urban and semi urban
centers contribute around 22% each. The rural market uprising is a recent phenomenon, which has
immense growth potential. While private sector banks have dominance in metropolitan areas,
nationalized banks have their hold in the urban and semi-urban areas. The rural areas are dominated by
RRBs.
The last few years have witnessed a high increase in students aspiring for management and
professional courses, leading to a spurt in educational loans. Banks are now having a direct tie-up with
the educational institutions to cash in on the opportunity. Public sector banks (PSBs) are more focused
on the educational loans segment. In the educational loan segment, disbursement of domestic banks
has surged by 13% to Rs2249crore in 2004-05; up from Rs1983crore in 2003-04. The number of
students availing education loans has increased to 140,000 from 108,000 during this period.
The other personal loans market is characterized by intense competition and the players vie with one
another to get business. These loans are driven by urgent and short-term needs and banks have to act
swiftly to cash in on that need. Metropolitan and urban areas together constitute two third of total loans
under this category. Private sector banks lead in metropolitan areas, whereas in the rural areas the
nationalized banks dominate.

RETAIL BANKING: CONCEPT AND DEVELOPMENT

The term ‘retail banking’ encompasses various financial services and products forming a part of the
assets as well as liabilities segment of the banks. Retail banking on the assets side includes a wide
range of loan products such as housing, auto, business and educational loans. On the liabilities side
includes retail deposit schemes i.e demand deposit and term deposit, debit cards, insurance products,
mutual funds and depository services. Perhaps as per customer’s need and requirement.
Retail banking is a service industry, which is focused towards the customer’s money and its
management. A relationship of the nature of manpower is involved in this industry due to its
continuous nature. Retail banking today for many banks is synonymous with mainstream banking,
with vast sums of money being invested in creating and sustaining a retail brand, further supported by
requisite technological and staffing support.
In India, all the retail banking segments are expected to witness a tremendous growth owing to the low
cost of borrowing, changing customer attitudes towards borrowing and optimism regarding economic
growth. Retail lending constitutes just 12.36% of the Indian banking system, given this
macroeconomic scenario. Retail banking is expected to grow by a CAGR of 25% to touch the figure of
Rs 575,000crore. This requires expansion and diversification of retail banking product portfolio, better
penetration and faster service mechanism. Hitherto, the growth had come from metros and tier I cities.
While the loan requirement from larger cities will continue to grow, explosive growth in credit is
expected to register in tier II cities, semi-urban and rural areas.

However, there are some areas of concern like rising NPA in consumer loans particularly, the
delinquency rates in credit cards, and frauds in home loans. Housing prices have grown rapidly.
Deflation of asset value is a possibility in certain areas. Aggressive credit growth in retail has
increased the requirement for measuring and managing this risk. These require extremely skilled
workforce and highly evolved credit delivery and monitoring processes. The other concern is of

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suicidal pricing by the aggressive banks. This is bringing the margins under pressure. Though rational
pricing is critical, the competitive market shall continue to see the pricing pressure. There is also a
need for a database and management information system to identify the right type of borrowers.
Revision of credit cards issue regulations, and recent draft guidelines on outsourcing are the steps in
the right direction..

DRIVERS OF RETAIL BANKING IN INDIA

Retail lending across the globe has been a showcase of innovation in the commercial banking
sector. Countries like China and India have emerged as potential markets with huge investment
opportunities. The higher growth of retail lending in emerging economies is attributable to fast growth
of personal wealth, favourable demographic profile, rapid development in information technology, the
conducive macro – economic environment, financial market reforms, and several micro – level supply
side factors. The retail banking strategies of banks are undergoing major transformation, as banks
adopt a mix of strategies like organic growth, acquisitions and alliances. This has resulted in paradigm
shift in the marketing strategies of the banks. Public sector bank players are adopting aggressive
strategies, leveraging their branch network and their customer vase to earn a larger share of the retail
pie. Banks are also going in for innovative strategies like cross selling, packaged selling of retail
products and at the same time, new foreign players are also entering this high growth sector.

The banking scenario in India is at the crossroads and is continuously evolving, but progress has been
remarkable over the past decade. With the exponential growth of touch points and sophistication, the
frontline sales force is assuming the role of a relationship personal is continuously under the
microscopic observation of the customer. An element that strongly drove the satisfaction of customers
in the banking sector was the conviviality factor related to the features of a bank and the attributes of
its personnel (Kumar and Natarajan, 2011). Malhotra and Singh (2007) conducted a study and put
forward that satisfaction with perceived product quality was the prime driver of growth in the retail
banking.

At a time when channel innovation has become the order of the day to encourage effective banking
habits among customers, a vital component of the supply chain namely, customer interface is totally
missing. With the advent of liberalization the banking industry had made a head start towards the best
banking practices at each interaction point of the supply chain. In India, retail banking has always
been prevalent in various forms ever since the evolution of banking. Co-operative banks that have been
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. It is pertinent to ponder about the causes of the shift (or increase) of focus towards the
retail side.

There are several compelling reasons that have influenced this shift such as:

• Fear of corporate defaults and NPA computation

• Relative safety implied by the mortgage loans
• Low credit off take from the commercial and corporate sector during the period 2000-
2003 (this trend has reversed, though, over the last year and a half)
• Lowering cost of consumer durables and automobiles due to competition
• Increasing use of credit/debit cards as plastic money.
• Automation of stock exchange operations, dematerialization
• ATMs, direct debit and phone banking as convenience factors
• Advisory services: real estate, investments and insurance

Kumar (2010) emphasized that growth drivers for retail banking are favourable demographic and
rising income and increase in the literacy rate but however, Singh (2011) argued that there has been

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relative increase in the working population in India that reached to 675 million in 2010 and this
eventually increased the scope for retail banking. Goswami and Mishra (2008) cited that projected per
capita GDP is expected to increase from US$ 380.8 in 2000–01 to US$ 2,097.5 in 2026, reflecting
higher disposable income and thus, there would be significant latent demand for retail banking services
likely with the market penetration strategy.

In the words of Sharma (2008), Retail banking is influenced by ‘anywhere’, ‘any time’ banking by
improved processes and offering bundle of products. Moreover, there is quick reimbursement of funds
on regular basis where retail banks understands the daily needs of the consumers and allow liquidity
power to those who fit into the criteria of credit facilities. However, Bhole (2009) argued that with
despite the customer driven approach of retail banks, most of the banks adopted differentiation and
segmentation strategies by offering distinct products with the different features such as variations in
the interest rates, life cycle of credit facility, additional monetary and non-monetary benefits to the
consumers. Hence, Essvale (2011) believed that prevailing competition in the retail banking sector has
undoubtedly raised the potential and opportunities for the small and medium size enterprises who felt
the absence of finances in the past.

The foreign retail banking companies assumes high potential and importance in Indian economy due to
its employment potential and regional dispersal. Sharma (2009) found that the total credit provided by
public sector banks to the retail sector in 2009 was US$ 39.8 billion, which formed 11.3 per cent of
ANBC/CEOBSE (Adjusted Net Bank Credit/Credit Equivalent Amount Off-Balance Sheet Exposure)
and 26.5 per cent of the total priority sector advances of these banks. Moreover, large amount of
money is remitted by non-resident Indians (NRIs), one of the largest Diasporas in the world. This has
eventually allowed favourable and conducive banking environment with well-capitalised banks which
are now able to provide a base to meet the growing need for banking services.

Undoubtedly, India has a well-balanced mix of public and private sector banks. While public sector
banks provide stability to the banking system in the country, private sector banks add the necessary
dynamism to it. For example private sector banks made possible the higher credit growth over the last
two decades. Retail loans have been a prime driver of credit growth in recent years, witnessing a
growth of over 40% in 2004-05 and 2005-06. As a percentage of gross advances, it increased from
22% in 2003-04 to 25.5% in 2005-06. The objective of retail banking is to increase penetration by
providing best in class services and access, by offering value added services to customers.
It consists of three elements, viz, deposit products, loan products and other products. Banks are also
offering other value added services. Cross selling of various retail products also takes place. It
represents additional services offered to existing customers with a view to expand banking business
which results in reduction of cost and enhances satisfaction level of customers. While public sector
banks have not gone deep into the concept, new generation private sector banks are embarking upon
cross selling to maximize income. The main benefit is reduction of cost as the cost of contracting a
new customer is much higher than to serve an existing customer. Cross selling enables creation of
brand value. The existing customer base of the banks is used for the purpose of cross selling. It is not a
transaction based activity but is primarily a relationship building exercise.
Thus, the theoretical analysis suggested that there are many segments that contributed to the growth of
retail banking in India and in turn boosted the economy and the country’s GDP. The following analysis
will describe the major growth drivers that influenced the retail banking in India.

DEMOGRAPHIC CHANGES

In 1985, 93% of India’s population had disposable income less than Rs.0.09 million. By 2005 the
figure was 54% (i.e.431 million people are above the line). By 2025 it will be 22 %. Again the average
disposable income will grow from Rs.0.114 million in 2006 to Rs.0.319 million by 2015. It is
estimated that India will emerge as one of the world’s youngest nations as 54 per cent of its current

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population is aged 24 years and less. By 2020, the country is expected to represent 17 per cent of the
world's working age population. With the availability of easy credit cards and a rise in the aspirational
class, the major beneficiary would be the retail industry – more specifically the apparel segment of the
business.

CHART 1

ECONOMIC GROWTH
India is one of the largest economies of the world. The GDP has gone up from $600 billion in 2003 to
$ 1.25 trillion in 2008. Current estimates are that the GDP of the country has grown at 6.6 % (2009-10)
and is projected to grow at 9% in (2010-11). The growth of retailing is intrinsically linked to the
Growth Rate of a country. In terms of PPP (purchasing power parity) the country is placed 4th behind
United States, China and Japan. Germany comes behind India.
Bhole (2009) said that in Indian context major growth in retailing has developed during the last one
decade when the GDP growth picked up and grew as follows:

CHART 2

CONSUMERISM
India’s middle and high-income population has notched up an impressive growth and the country’s
middle class will grow from about 5% of the population to more than 40% and create the world’s fifth
largest consumer market. As a country with a high percentage of youth (33% below the age of 15),
consumers spending has risen sharply. Increased awareness has resulted in a perceptible change in
behaviour and they are on the lookout for convenience, speed, efficiency and a wide range of products,
simultaneously – a one-stop shopping experience.
Compared to the eighties, India has seen brand explosion in almost all categories of goods providing
ample choice to the customer. Their economic well-being, increasing aspirations for higher standards
of living and comforts are responsible for the increase in consumerism.

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GROWTH OF NUCLEAR FAMILIES AND SATELLITE TOWNSHIPS
With most major cities getting overcrowded new businesses and industries are being located on the
outskirts of major cities resulting in people migrating to these areas for their livelihood. These
proliferating satellite townships provide a big opportunity for retailers who open outlets vis-à-vis bank
branches in order to target this captive consumer base. With a shift in family structure, nuclear families
have become a significant component of urban markets. Large families’ fragmenting into nuclear
families translates into increased footfalls and more shopping baskets – providing a great opportunity
for the retailers.

CHANGE IN CONSUMER BEHAVIOR AND THE IMPACT OF WORKING WOMEN

Changing income levels and occupation have resulted in a change in the consumer’s buying behaviour.
More urban women are seeking employment resulting in dual income families. This results in more
disposable income that in turn spawns consumerism. Moreover, in households with working women
there is greater work pressure and increased commuting time resulting in adjustments being made to
the food habits (cooking vs. ready to eat) as well as clothing.
The focus shifts to convenience and comfort. The size and composition of the shopping basket has
changed over time. Today’s consumers are looking for shopping convenience and want to have all
their requirements under one roof, this eventually raised the scope and importance of retail banking.

ELECTRONIC MEDIA
As against two channels in the early 90’s there is an explosion in the number of TV channels through
which retailers have access to a larger audience. Due to creative advertisements across channels and
print media, kid’s related products have registered stupendous growth. In fact media invasion has
changed the lifestyles of consumers resulting in greater demands on variety and assortment, value,
service and convenience. Media has helped in two ways; on the one hand, it has resulted in booming
sales for the retailers and on the other, by creating awareness, has ensured that the consumer gets
‘value for money’.

RISE IN THE USE OF PLASTIC MONEY

Plastic money an acronym for credit cards is an important driver of retail businesses. Indian consumers
are increasingly using credit cards for shopping as well as dining. According to Euro monitor, India is
the second fastest growing Financial Cards market in the Asia-Pacific region. In 2008, credit cards
sales are estimated to have contributed around 1.2%, which is expected to be around 1.4% of the total
retail sales in India at the end of 2010.

Retail banking especially credit card has thus increased the purchasing power and emergences of
strong middle class, development of retail market have increased the scope for retail banking in India.
The theoretical analysis suggested that retail banking in India has generally been facilitated by the
offerings of multiple products such as deposits, credit cards, insurance, investments etc. together with
using multiple delivery channels such as call centres, branch, internet, Kiosk etc. It has also been found
that retail banking cater multiple customer groups such as individual consumers, small business and
corporates.

MAJOR CHALLENGES FOR MARKET PLAYERS FOR DEVELOPMENT OF RETAIL

BANKING
With recession departing away from global economy, opportunities are slowly emerging in emerging
markets. Since India, was less depended upon US for growth; was the first to come out of recession
eclipse. Growth opportunities in banking in India, especially retail segment is set to witness fast
growth due to high consumption. The higher growth of retail lending in India is attributable to fast
growth of personal wealth, favourable demographic profile, rapid development in information
technology, the conducive macro-economic environment, financial market reforms, and several micro-

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level supply side factors.
The retail banking strategies of Indian banks are undergoing major transformation, as banks adopt a
mix of strategies like organic growth, acquisitions and alliances. This has resulted in a paradigm shift
in the marketing strategies of the banks. Public sector bank players are adopting aggressive strategies,
leveraging their rural branch network and their customer vase to earn a larger share of the retail pie. At
the same time, new foreign players are also entering this high growth sector but regulatory framework
and stringent measures adopted by the planning and commerce ministry pose various challenges not
only for foreign players but also for domestic banks. With an increasingly global footprint, the Indian
banking industry has adopted certain global best practices such as International Financial Reporting
Standards (IFRS) and Basel II norms. These not only position India at an international level, but also
provide confidence to foreign players planning to establish businesses in India. But, retail banking still
has low penetration levels.
These services are not only related to the banking sector and also, to other related services such as
insurance, wealth management etc. The following factors are likely to trigger the demand for retail
products:

• Dramatic changes are expected in the credit portfolio of banks in the next five years.
• Housing is expected to continue to be the biggest growth segment followed by auto loans.
• Banks are looking to expand and diversify by focussing on the non-urban segment as well as varied
income and demographic groups.
• Rural areas also offer tremendous potential, which needs to be exploited.
The situation within retail banking today is also characterized by many other complexities and
challenges. From the bank’s perspective, there are more customer segmentation required,
channelization of products through effective channels, improvement in service level in public sector
banks. From the customer’s perspective, however, the expectation of a consistent, integrated and
quality experience with the bank has become heightened. Customers want the same service, whether it
is delivered at a branch, through a contact center, or online. Yet, only a small number have been able
to achieve that goal. Most banks deliver the best experiences in the branches and the worst online—
however, for a few, exactly the opposite is found. In both situations, technology systems and internal
processes have been an underlying cause of the challenges.

INFLUENCE OF TECHNOLOGY ON RETAIL BANKING

Recent advances in technology have created a surge in “technology-based self-service” (Dabholkar et
al. 2003). Such developments are changing the way that service firms and consumers interact, and are
raising a host of research and practice issues relating to the delivery of e-service. E-service is
becoming increasingly important not only in determining the success or failure of electronic commerce
(Yang et al., 2001), but also in providing consumers with a superior experience with respect to the
interactive flow of information.

The financial system around the world has been facing a lot of changes. Mergers and acquisitions,
deregulation, increased competition, changing information systems and technology, and human
resources with different skills are just a few ‘forces’ that are influencing the banking business (Pereira,
1995).
Technology is one leading ‘driving force’ nowadays, in different businesses (Tavares, 2000). It is
therefore important to research the investments in technology and their impact in the bank business
(Saunders and Walter, 1994; Sethi and King, 1994). It is particularly important to assess how
technology is reducing the ‘labour intensive activities, reducing service and processing cost, increasing
service levels, improving the productivity and competitiveness of the Indian financial sector.
Dabholkar (1994) claims that when the customer is in direct contact with the technology there is
greater control such as with Internet banking. However, if there is an absence of direct contact, such as
with telephone banking (since the technology itself is not visible to customers who are able only to
press numbers on their telephone keypad) it is assumed that there is less control perceived by the

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customer during this transaction. Bateson (2000) has conducted a number of studies on the need for
consumers to have control during service encounters. When a consumer freely chooses to use
technology as a form of service delivery the impact is high in terms of quality attributes. Some of the
quality factors that are highly important to consumers are efficiency and speed (Bateson, 2000).

The challenging business environment in the financial service market has also resulted in more
pressure on banks to develop and utilise alternative delivery channels, with a view to attracting more
customers, improving customers' perceptions, and encouraging loyalty (Bauer et al., 2005; Lee and
Lin, 2005; Parasuraman et al., 2005). Among the more recent delivery channels introduced is
electronic banking. In its simplest form, electronic banking means the provision of information about
the bank and its products via a page on the internet. A more developed service, in Daniel's (1999)
view, is one that provides the customers with the opportunity to gain access to their accounts execute
transactions or buy products online or via other electronic means such as TV, telephone or Automated
Teller Machines (ATM). The installation of customer friendly technology (such as menu driven
automated teller machines, telephone and Internet banking services) as a means of delivering
traditional banking services has become common place in recent years as a way of maintaining
customer loyalty and increasing market share. Traditional brick and mortar banks are using technology
to meet the competitive challenge posed by online banks, as well as a method of reducing the cost of
providing services that were once delivered exclusively by bank personnel (Joseph et al., 2003).

Banks have largely implemented service delivery technology as a way of augmenting the services
traditionally provided by bank personnel. Implementation results both from the need to reduce the cost
of delivering service primarily through personnel, and, the corresponding need to meet the challenge
posed by technologically innovative competitors (Byers and Lederer, 2001; Howcraft and Beckett,
1996; Kelley, 1989). Changes in the banking industry such as those resulting from deregulation, rapid
global networking, and the rise in personal wealth have thus made the implementation of sophisticated
delivery systems (e.g. online and telephone banking, remote site automated teller machines, etc.) a
strategic necessity in many cases (Lewis et al., 1994).

ROLE OF E-COMMERCE IN RETAIL BANKING

Financial services industry over time has opened to historic transformation that can be termed as e-
developments which is advancing rapidly in all areas of financial intermediation and financial markets
such as e-finance, e-money, electronic banking (e-banking), e-brokering, e-insurance, e-exchanges,
and even e-supervision. The new information technology (IT) is turning into the most important factor
in the future development of banking, influencing banks’ marketing and business strategies. In recent
years, the adoption of e-banking began to occur quite extensively as a channel of distribution for
financial services due to rapid advances in IT and intensive competitive banking markets (Mahdi and
Mehrdad, 2010; Dube, et. al., 2009). The driving forces behind the rapid transformation of banks are
influential changes in the economic environment include among others innovations in information
technology, innovations in financial products, liberalization and consolidation of financial markets,
deregulation of financial inter-mediation. These factors make it complicated to design a bank’s
strategy, which Dabholkar (1994) discusses how technology-based services have made new service
delivery options available to organizations, making customer participation more widely possible.
Customers use touch screen “kiosks” to order take-away food, whilst banks have widely distributed
automatic teller machines to withdraw, transfer funds, make deposits into accounts or conduct any
other transactions e.g. balance inquiry, movie tickets or rail tickets booking.
Technological developments have removed repetitive, time consuming tasks, reduced human error and
extended access to banking related facilities. Technology also provides customer information that it
would be much more expensive to provide on a person-to-person basis. Telephone banking facilities
allow non-cash transactions to be carried out, which would have required a visit to a branch earlier
(Prendergast and Marr, 1994).

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Similarly, Internet banking allows customers to perform tasks at a time and in a place convenient to
them. Dabholkar (1996) suggests that direct contact with such technology also gives customers a
feeling of greater control. Smith (1987) is of the opinion that technology was introduced in banks
originally to reduce costs but that, by dividing front and back office operations, technology is being
targeted to enhance different functions. The dilemma still remains, however, as to how to maintain a
satisfactory number on face-to-face interactions with the customers.

Rogers (2004) identified five characteristics or attributes of innovations that affect the rate at which
innovations are adopted (and ultimately their usage patterns): their relative advantage, compatibility,
complexity, divisibility (trialability), and communicability (observability). Additional characteristics
were later added; perceived risk (Ostlund, 2005), financial and social cost (Zeithaml, 2005).
In the categorization of services in technology-based service delivery options Dabholkar (1994)
suggests there are a number of relevant classifications that will apply to industries employing
technology based service delivery. The classification analysis “who” delivers the service that is, person
to person, where the employee uses the technology or consumer to technology, such as the use of an
ATM. The next categorization looks at where the service is delivered.
Either on the service firm’s sites themselves, at the customer’s home or office or at a “neutral” site
such as an ATM located at an airport. The final categorization looks at the contact the customer has
with the service operation, either direct or indirect such as in the case of telephone banking. Dabholkar
(1994) stipulates that there should be flexibility in the design of the technology to allow customers to
make changes during the transaction and make available a customer service adviser if required, with
“minimum waiting”. This also raises the design issue of sufficient menu options for ATM/Telephone
and Internet bankers. In most cases the transaction occurs in a neutral location and the availability of
an employee may not always be feasible since these facilities often operate 24 hours a day, seven days
a week.

Continuous improvements in the information technology have enabled banks to provide their services
in a more direct manner to adjust their products better to the clienteles’ needs. Although banking has
always been an information business, until now information technology was mainly used to automate
administrative processes. The shift from automating to informating-using information and its flow to
inform managers provides opportunities to track a customer’s behaviour and respond at the right time.
By making effective use of these opportunities, banks are able to transfer a great deal of transactions
from branch offices to a call-centre (John, et al., 2005). Accessibility has been extended through
technological developments as well as the introduction of new service delivery methods that allow
consumers to do business with service firms from the home and office. Electronic banking is an
umbrella term for the process by which a customer may perform banking transactions electronically
without visiting a brick and- mortar institution. The following terms all refer to one form or another of
electronic banking: personal computer (PC) banking, Internet banking, virtual banking, online
banking, home banking, remote electronic banking and phone banking. PC banking and Internet or
online banking is the most frequently used designations in the development of retail banking in India.
It should be noted, however, that the terms used to describe the various types of electronic banking are
often used interchangeably (Dirk de Villiers, 2003). Internet banking is predicted to transform and
revolutionize traditional banking industry (Mols, 2000; Daniel, 2000; Carrington et al, 2002). Banking
services are easily digitalized and automated and, thus, from an operational perspective, lend
themselves to the internet (Elliot and Loebbecke, 2000; Daniel, 1998) the potential competitive
advantage of the internet for banks lays in the areas of cost reduction and satisfaction of consumer
needs.

ANALYSIS

The primary data has been gathered from the bank managers, relationship managers, personal bankers
and associates working at the branches of five banks stated in the research methodology, i.e. ICICI

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Bank, HDFC Bank, Axis Bank, Punjab National Bank and SBI. The researcher approached used
convenience-sampling technique and approached to suitable number of target audience but could only
secure maximum of 15 interviews.
However, no distinction as made whatsoever between the participants in terms of their age, sex,
working class or ethnic group and researcher encouraged as many people to participate in the study.
Two third participants were male and most of the respondents belonged to the age group of 35-45.
The table below classified the number of respondents from each bank who participated in the study.

ICICI Axis Punjab National

HDFC
Bank Bank Bank SBI
Bank

Branch and Senior Manager 2 2 1 1 1

Personal Bankers and
2 2 2 1 1
Executives
Total 4 4 3 2 2

1. The respondents were asked about describing the present stage of retail banking in India. Two third
of the participants stated that retail banking in India is in growth stage as it has covered most of the
major areas of banking operations in the country. 66% of the participants stated that retail banking has
reached to the Growth Stage as number of private and public sector banks got involved with various
retail banking products.
Moreover, participants believed that the retail banking is going forward from growth stage to maturity
as it has widened its scope in urban and rural areas in the country with the use of various retail
banking products.

Present Stage of Retail Banking in India

12
10
8
6 Present Stage of Retail Banking
4 in India
2
0
Introduction Growth Maturity Decline

2. On the question of why retail banking is different from traditional banking functions, the researcher
received mix response from the participants where most of the respondents that traditional banking has
limited role in terms of offering banking services such as opening bank accounts, facilitating the
liquidity in the market and encouraging savings and investments to meet their own business objectives
Whereas retail banking was considered as the revolutionary modern banking techniques which offer
housing loans, education and gold loans, auto loans, insurances apart from traditional banking
functions. In general, retail banking has been improved by the technological use in terms of providing
banking services such as ATM, online banking, money transfer, bill pay etc.

3. When respondents were asked about the existing retail banking product lines that their banks most
deals in. 80% of the participants and almost all from private banks emphasized that they have many
product lines in retail banking such as CASA (Current Account-Saving Account), Fixed Deposits
(FD), loans, insurance, credit cards, FOREX and Demat Services. However, rests of the participants
stated that they have retail products such as car loans, education and housing loans and CASA (Current

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Account-Saving Account).

4. On asking about the role of liberalisation in the growth and development of retail banking in India.
Participants suggested that liberalisation resulted in allowing the foreign participation in banking
services and it was evidenced that retail banking was strengthened by granting licenses to the
companies to offer banking services including retail banking products. 60% of the respondents referred
to the economic reforms that carried out in post 1991 period in terms of encouraging the foreign
participation in the country. In general, all participants agreed that liberalisation has eventually helped
to position retail banking effectively in India.

5. When participants were asked to rank the growth factors that resulted in the growth and
development of retail banking in India. The participants ranked ‘Improvement in Macro Economic
Factor’ at the first place that was followed by the ‘Demographic Changes’ and ‘Changes in
Customers’, Socio-economic conditions’. The participants placed ‘FDI’ and ‘Technology’ at fourth
and fifth place respectively. Finally, ‘Growth of Nuclear Families’ was ranked at sixth place and was
followed by ‘Electronic Media’.

Major Growth Factors of Retail

Banking
15
10
5 Major Growth Factors of
0 Retail Banking

6. The participants were further asked about the role of government in encouraging the participation of
foreign banks for retail banking in India. Two third of the participants emphasized that government
played a vital yet critical role in developing the retail banking by facilitating the participation of
foreign companies in the banking sector. However, 30% of the participants that government still need
to adopt several programs in terms of encouraging foreign banks to participate in the rural areas. In
general, participants believed that central and state government has equal role to play to develop the
banking structure and system using the balanced approach nationwide.

7. On asking about the new initiatives like ‘Kiosk banking’ and ‘Rural Saving Account’ would help to
promote retail banking in rural areas. Out of 15, 12 participants agreed that such services would
undoubtedly promote the retail banking in rural areas. However, 30% of the participants claimed that
unless significant changes occur in rural areas in terms of education, emergence and reliance on
banking for daily needs, no further improvement could take place for retail banking in remote and rural
areas.
Thus, in general, it can be said that initiatives to improve retail banking in rural areas could only work
if there is enthusiasm and emergence of retail banking needs among the target audience and it can be
triggered with the help of government as well as society itself.
8. The participants were asked why there has been lack of initiatives of opening retail bank branches in
rural areas. Almost all of the participants admitted that low profitability, higher cost structure, absence
of sufficient infrastructure and other financial and human resources pose major hindrances for the
rapid growth and development of retail banks’ branches in rural areas. However, 50% of the
participants also pointed that rural population is confined to use the basic services such as saving and
current account services and overdraft provisions and therefore, the current market conditions in the

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rural areas offset the possibility of any potential benefits in terms of costs involved.

9. The other question asked about the scope and potential of technology to promote the retail banking
in rural areas. 40% of participants said that technology has no role to play for rural consumers as they
are not educated to use services like online banking and neither have they had interest in using any
retail banking services. However, rests of the participants suggested that technology could be used to
improve the basic facilities such as number of ATMs, updates on mobile phones, mobile banking and
so on.

10. The participants were asked to rank the technological factors according to their preferences and
potential use in the growth and development in the rural areas. The participants ranked ‘Use of ATMs’
at first place that was followed by ‘Money transfer Services’ and ‘Potential for Internet Banking’. The
participants ranked ‘SMS Alert’ and ‘Bill Pay’ at fourth and fifth places respectively. And, finally, put
‘Phone Banking’ at the last place.

Potential Use of Technological Factors

15

10

5 Potential Use of Technological

Factors
0
Use of Money Internet SMS Alerts Bill Pay Phone
ATMS Transfers banking Banking

11. When asked about what marketing initiatives could be helpful in promoting retail banking
nationwide. There was mix response from the participants where some mentioned that better
coordination, focused approach and dedicated staff would undoubtedly help to improve the scope of
retail banking. Whereas, most other participants discussed the potential for display of product lines in
branches such as availability of brouchers, signages and other outdoor activities could make huge
difference in promoting the retail banking products. Respondents also believed that ‘Meet and Greet’
activities by inviting public and existing customers to the banks and making them aware of the various
retail products could also make significant difference in promoting the retail banking product lines.
However, some participants also mentioned that offering customers zero balance accounts, opening
more branches and improvement in customer services and advertising would significantly improve the
market conditions in the near future.

12. Finally, the participants asked how retail banks could improve their services to promote the retail
banking. The participants admitted that improvement in soft skills, training and development of
employees and improvement in physical evidence of services such as dress code; presentation and
problem solving skills will significantly improve the customer service capacity in retail banking.

FINDINGS AND RECOMMENDATIONS

FINDINGS
The findings have been drawn upon the theoretical analysis and the data analysis carried upon the
primary data and information. The following issues and areas will raise the understanding and
knowledge upon the successful growth and development of retail banking across India.
PUBLIC VERSUS PRIVATE BANKS
A. Growth Private banks have grown retail banking services tremendously in the urban
areas largely due to their customer base, additional benefits, service capacity and quality of service
whereas public banks focused more strategically on traditional banking functions as compare to retail
banking.

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B. Performance Management System Private banks in the country embraced modern
performance management systems that used number of key performance indicators and thus, human
resources are more result oriented in order to attain rewards and recognition whereas such systems
give a miss in public banks’ work environment.
C. Technology Private banks spend significant funds and financial resources on making the best
use of new information technology in terms of online banking, online funds transfer, phone banking
and SMS alerts whereas only few public banks deals in such services.
D. Customer Relationship Management In the recent years, it has been found that customer
relationship management is the phenomenon that helps the businesses to improve their customer
loyalty and customer retentions. Most of the private banks in India have developed their business
model that is consistent with the practices of customer relationship management.
E. Integrated Marketing Communication Private banks have been using various online and offline
marketing strategies and marketing communication channels such as direct marketing, media
advertising and online adverts whereas public banks have been using traditional marketing functions
such as personal selling to attract new customers.
RURAL VERSUS URBAN
There has been inequality in the growth and development rate of retail banking in urban and rural areas
in the country. The banking sector has grown unexpectedly in metro cities largely due to the
demographic factors such as nature of working class, income status, population density, availability of
infrastructure, presence of business and service sector. The rural areas in the country are dominated by
the farmers and land owners who rely on conventional banking functions for their daily needs. The
other reasons in the inequality are the absence of basic infrastructure and government support,
unawareness of banking users, lack of initiatives by the public and private banks.
LIBERALISATION
Indian economy has embraced various reforms and policies that aimed to attract the foreign direct
investment from the other countries. As a result, there has been unprecedented economic development
as the GDP of the country reached to US $1.25 trillion in 2010 as compare to US $ 600 billion in 2003.
However, government still poses FDI cap for foreign institutional investors to enter into banking sector
in the country. Thus, there is emergence to strategically deal with the key issues related to liberalizing
the banking sector by allowing foreign investments and providing financial and technical assistance to
the existing market players.
PROFITABILITY
Retail banking segment profits of five major banks for last two years

(In crores)
ICICI HDFC AXIS PNB SBI

2011 8389.7 88065.88 336.6 3671.3 12679.45

2010 6578.64 71207.92 338.33 3196.62 6491.25

As the above chart suggested, there has been rapid increase in the profitability of commercial banks
and this has been possible by the development in the retail banking product lines in the last few years.
Majorly, credit demand from corporate organizations has helped maintain credit growth in the recent
years. There has been sharp growth in terms of deposits as banks rely more on these deposits than
finance advances. Growth in savings deposit is expected to increase by an increase in the amount per
account and a steady increase in the number of savings accounts as banks reach out to new markets.
RECOMMENDATIONS
Based on the findings and data analysis, following recommendations can be proposed for the effective
growth and development of retail banking in India.
1. Support from Government and Trade Commissions
Reserve Bank of India, government and other trade, commerce and planning commission must

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strengthen the banking sector by identifying the opportunity and challenges of the private and public
banks and thereupon providing them the aid and assistance for their effective development.
2. Empowerment of Private and Public Banks
Public and private banks must collaborate their expertise, know-how and technological capabilities by
organising events and conference in order to unleash the equality and sustainable development in
overall sector. The various banks must also ensure to raise awareness among their potential and target
audience in order to improve their market share and thus, they can use multiple marketing
communication channels whilst raising their marketing budgets and expenditures.
3. Innovations and Technology Advancement
Public banks should ensure to develop their technical services such as mobile banking, Internet
banking, online transfers, etc. in order to increase their market share by serving the modern and
dynamic needs of banking consumers. Banks can further seek assistance and enter into strategic
collaborations with the major management service providers including McKinsey, Boston Consulting
Group, copal partners etc to develop their efficient management base.
4. Realising the Role and Scope of FDI in Retail Banking
Foreign direct investment has direct and positive impact on almost every sector in the Indian economy
and therefore, government must realise their role for the all round growth of the banking functions by
allowing investment for new functions like retail banking.

CONCLUSION
Retail banking is now graduating beyond traditional boundaries of conventional banking. The Indian
banking sector has entered into new areas of banking such as wealth management, private banking,
doorstep banking, online banking, credit cards, investment advisory services, etc. Moreover, there are
clear indications that the country will witness alternative banking like Islamic Banking in the years
ahead.
Retail banking, however, still has low penetration levels. These services are not only related to the
banking sector, but also to other related services such as insurance, wealth management adding value
to customers etc. But, despite the emergence in the rural and urban areas, there are economic,
regulatory, social and personal barriers and other challenges that stopped the banks to carry out their
functions equally in rural and urban areas.
However, dramatic changes are expected in the credit portfolio of banks in the next five years where
housing finance is expected to continue to be the biggest growth segment in retail banking followed by
auto loans. Thus, major private and public banks are looking to expand and diversify by focusing on
the non-urban segment as well as varied income and demographic groups. Rural areas also offer
tremendous potential, which needs to be exploited. Globalization and liberalization of the Indian
economy, and the interest of foreign banks to expand their presence in India, have fuelled the growth
of retail banking in the banking industry.
Information technology poses both opportunities and challenges. Even with ATM machines and
Internet Banking, many consumers still prefer the personal touch of their neighborhood 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.
The combination of the above factors promises substantial growth in the retail sector, which at present
is in the emerging 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, access
to finance, long-term savings, financial capability, consumer protection, regulation and financial crime
prevention.

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