Retail

Banking

Class of 2002-04
Prepared by : PGDBA
Sachin Doshi (68)
Welingkar Institute of Management
Rukmi Ganguly (69)
Development and Research,
Shruti Kamat (70)
Mumbai.
Bijal Kapadia (71 )
Kedareshwaran S (72 )
Miheer Khandekar (73 )

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 RETAIL BANKING CONTENTS

 Introduction ………………………………………………………….. 3

 Segments in Retail Credit. ………………………………………… 6

 Some Innovative Products ……………………….……………...... 8

 Challenges Faced by Banks……………………………………..... 12

 Conclusion ………………………………………………………….. 20

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Introduction :

Role of Retail banking

Banks are major players in the Indian Financial system: Command 65% of household
investments with extensive coverage :
- 65000 branches (33000 rural and 14000 semi urban)
- Enormous retail account base of over 400 mn. deposit accounts
- Deposit base of Rs. 821000 Cr

Old economy vs. New economy Banks

Public sector or government-run banks straddle India's banking scene with a market
share of more than 80 percent.

A new breed of private banks are nibbling away at the market share of large public
sector and foreign banks in India. The new banks have started with a clean slate, with
better-paid, better-trained staff. Unlike the extra baggage of older technologies and
excess manpower carried by many foreign banks, they are better equipped.

Poor Credit Off-take

Indian banks at the backdrop of poor credit off take by big corporate, have found a
worthwhile alternative area in the form of retail banking. The increasing emphasis by
majority of the banks on retail banking is a clear indication of the state of affairs.

“Lending to big corporate and creating loan assets”, is no longer the name of the game.
Suddenly banks have realized the importance of consumer credit, which was considered
as unproductive in the past. In fact, consumer credit triggers demand for consumer
goods and services, which in turn spur the economic activity.

Thus retail lending has helped the bank in risk dispersal and in enhancing the earnings
of banks with better recovery rates.

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India vs. Rest of World
Earlier retail banking was not encouraged by Indian commercial banks because it was
thought to be inflationary and non-productive. This was in direct contrast to the situation
prevailing in the more developed western economies.

The retail banking revolution was started from countries like Germany, Sweden and
Holland in the 1950’s. The trend was replicated in other European countries in the
1960’s.The major revolution in retail lending occurred during the late 1980’s when the
most developed countries of the world realized that though the operational costs of retail
lending are higher average yield on these advances they are also higher in comparison
to industrial advances.

India compares pretty poorly with the other economies of the world that are now
becoming comparable in terms of spending patterns with the opening up of our
economy.

For instance, while the total outstanding Retail loans in Taiwan is around 41% of GDP,
the figure in India stands at less than 5%. Use of credit cards is less than 1% with the
corresponding US figure standing at 18%.

When the Indian economy was liberalized during the 1990’s, many foreign banks were
allowed to start/ expand their activities in India.

Indian Consumer Demographics :

New and Powerful customers : Huge Indian Middle class.

The latest DSP Merrill Lynch report on Indian demographics predict household
consumption spending to $510 bn. over the next 5 yrs from the current level of $250 bn.
Demographic shifts in terms of income levels and cultural shifts in terms of lifestyle
aspirations.

Retail consumers can be further sub-divided according to income, age and geographic
profiles. Agriculturists, small traders and businessmen expect banks to extend timely
and hassle-free credit even at a higher rate of interest.

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The salaried individuals represents a market for wide range of products and services -
mortgage for his house, auto-loan for his car, credit card for ongoing purchases, long-
term investment plan for his child’s higher education, pension plan for his retirement and
life insurance policy.

However pensioners and senior citizens are not getting much attention. The population
of our elderly at present estimated at 76 mn., is expected to increase to 100 mn. by
2013. Currently besides bank deposits which offer highest safety, there are not other
alternative avenues of investment.

Indian Consumer Behavior :

In India, currently there are two types of customers- one who is a multi-channel user and
the other who still relies on a branch as the anchor channel.

A retail customer selects a bank based on two criteria – convenience and relationship.
For a bank, convenience translated into channels of communication and relationship
translates into service.

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Segments
Housing finance can be raised from banks, housing finance companies. HDFC
dominates the housing finance sector with 45% market share, followed by HUDCO with
21% and LIC Housing with 16% share. Other major players include SBI Homes
promoted by SBI and Can Fin Homes Promoted by Canara Bank - Gujarat Rural
Housing Corporation promoted by HDFC. DEWAN Housing is the only major private
sector company

State Bank's home loan book was Rs 12,150 crore last year and the net growth in loan
disbursement was Rs 3,951 crore or 48.2 per cent.

However, about 23 per cent (or Rs 2,831 crore) of the book is on account loans
disbursed to its own employees.

ICICI Bank holds a home loan book of Rs 10,300 crore. Out of this Rs 8,650 crore was
generated last year. In 2002, ICICI Bank had home loan outstanding worth Rs 2,237
crore.

The fourth largest player in the home loan market LIC Housing has a portfolio of Rs
7,772 crore. Last year, it grew by 21 per cent disbursing Rs 3,190 crore worth of home
loans.

These four players collectively account for about 65 per cent of the Indian mortgage
market while 27 housing finance companies, regulated by the National Housing Board
(NHB) and countless banks — foreign, private and public sector — share the rest of the
pie

Among the banks and companies that are major players in retail car financing are ICICI
Bank, HDFC Bank, State Bank of India, ABN Amro Bank, Kotak Mahindra Primus,
Standard Chartered Bank, Sundaram Finance and Ford Credit.

The recently announced alliances by Maruti Udyog Ltd (MUL), the country's largest car
manufacturer, with State Bank of India and its associate banks is another attempt at
taking vehicle financing to the masses

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Credit cards : With banks like the State Bank of India, ICICI Bank and HDFC Bank
strengthening their hold across cities and offering lower eligibility norms, credit cards
usage has increased in the B-grade cities and among people belonging to the lower
income group,

Education Loan : SBI bank

Two- wheelers: HDFC Bank

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Innovative Products

Gift Card - IDBI Bank

This Card can be used to make purchases at over 51,000 merchant establishments in
India that accept Visa Cards.

It can also be used more than once, which means one does not have to utilize the value
on the card in one go and can keep making purchases on the card till the specified
rupee amount has been spent. This Card is available in denominations starting from Rs
1000/- to Rs 20,000 and is valid for a period of 1 year from the date of issue, which is
marked on the face of the card.

One doesn’t’ have to be an IDBI bank account holder to purchase this card. All one
needs to do is walk into an IDBI bank branch, fill out a simple application form, deposit
the amount to be loaded onto the card by paying cash or cheque and collect the Gift
Card pack instantly.

The beneficiary would present the card to the merchant after selecting his purchases,
who would then swipe it and on approval a transaction slip is generated. The beneficiary
can actually check the balance in the card at any of the bank’s ATM centers. In case of a
loss of card, no replacement cards will be issued. Any unutilized balance remaining on
the card will be returned to the original purchaser of the gift card.

Power Salute - UTI Bank:

This is a deposit account for the defense personnel catering to their typical needs. It is
absolutely free and no minimum balance is required either. It can be accessed through
the entire UTI Bank network, including 850 ATMs and 202 branches and extension
counters (and growing). It offers complete gamut of banking services (including
overdrafts, loans and zero-balance requirements) to meet all their financial needs. Here
is a list of the privileges one enjoys with the Power Salute Account.

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At par cheque facility

The job of defense personnel involves constant transfers across the country. With the At
Par Cheque facility it will no longer be necessary to set up new bank accounts with each
transfer.

Additional Debit Card

Along with a free International Debit card one also gets a free card for the joint account
holder. This ensures that one’s child or spouse also enjoy the same benefits of banking
with UTI Bank.

Eligibility

Personnel from the following forces are eligible for this account. Retired personnel can
also avail of the mentioned benefits as long as the account has been opened when in
active service.

 Personnel of Army, Navy, Air Force and the Coast Guard

 Paramilitary Services (BSF, CRPF, NSG, NCC, Territorial Army)
 Retired & Short Service Commission officers would also be eligible - provided the
accounts are opened while they are in active service.
 Civilians posted at defense establishments like training schools, canteens, etc.
on a permanent basis

Resident Foreign Currency (Domestic) account - UTI Bank

Holding foreign currency is no longer restricted to the Norris. For the first time Reserve
Bank of India has allowed Resident Indians to maintain foreign currency accounts
without any ceiling to it. This step is considered as a continuation of RBIs gradual
endeavor towards achieving 'Full Capital Convertibility'.

The Product Offerings

A Resident Foreign Currency (Domestic) Account, RFC (D), with UTI Bank entitles to
maintain non-interest bearing current account in four major currencies (USD, EURO,
GBP and Japanese Yen). There will be no ceiling on the balances held in the account.

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Chequebooks denominated in USD/GBP/EURO/YEN will be issued on these accounts.
The cheques thereby branded as RFC (Domestic) Account will not be presented in
clearing and will be payable only at the issuing branch. The min balance for such a
current account will be USD 100/- or GBP 60/- or EURO 100/- or Yen 20000/-.

RBI Regulations

According to RBI, resident individuals who have acquired foreign currency in the form of
currency notes, bank notes and travelers cheques through any of the following sources
are permitted to open such an account:

 Acquired by him while on visit to any place outside India by way of payment for
services not arising from any business in or anything done in India; or
 Acquired by him, from any person not resident in India and who is on a visit to
India, as honorarium or gift for services rendered or in settlement of any lawful
obligation; or
 Acquired by him by way of honorarium or gift while on visit to any place outside
India; or
 Represents the unspent amount of Foreign exchange acquired by him from an
authorized person for travel abroad.

Foreign exchange earned and/or gifts received from close relatives and repatriated to
India through normal banking channels.

Benefits

A RFC (D) account with UTI Bank entitles one to a hassle free and safe avenue to park
foreign currency. It saves commission charges; one otherwise would have to pay
whenever one requires foreign currency. The account facilitates payments for foreign
travel expenses, medical treatment abroad, gifts up to $5000 or equivalent, education
and purchase of books directly through the Internet. Moreover the ceiling less nature of
this account entitles one to hold any amount of funds as against USD 2000/-, which was
the maximum limit to foreign exchange holdings by Resident Indians.
In recent times, investors have witnessed a lot of turmoil in the Forex markets. The
fluctuations in the Rupee-Dollar rates have always been a cause of worry for frequent

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travelers and business class. A RFC (D) account with UTI Bank keeps your foreign
currency insulated from adversities of Rupee depreciation.

One View - HDFC BANK

If one has one or more accounts with HDFC Bank, Citibank, ICICI Bank, HSBC India,
Standard Chartered Bank and/or Global Trust Bank OneView puts it all on one screen,
so that tracking and managing ones online accounts becomes quicker and easier than
ever before. It gives a complete picture of your finances across multiple accounts.
However as the name suggests one can only view the accounts and cannot transact.

OneView benefits
 Single view of up to 5 accounts (yours and your family's) across banks.
 Complete transaction history on your accounts at-a-glance.
 Detailed summary of your fixed deposits across banks.
 Easier to decide from which account to make payments/investments.
 Makes managing your accounts so much simpler.
 Saves time and hassle of logging on to, and getting information from, different
websites.
 No charges whatsoever, it's absolutely free.

Personal Loans for Pensioners – SBI

Personal loans to meet personal expenses are offered to Central or State Government
pensioners drawing pension through one of the branches of SBI and who are not more
than 70 years of age. A loan amount of up to a maximum of 6 months pension, subject
to a ceiling of Rs.40, 000 is offered. The loan may be repaid over 2 years and will carry a
low interest rate of 1.85% above SBMTLR with present rate being13.1%.

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Challenges and Key Issues : Bank’s perspective

In trying to assess the future of retail banking one needs to analyze unbiased our
position with respect to:

 Structure
 Strategy
 Systems
 Staff
 Regulation

Structure:
Changes in structure would impact banking strategies. Banks would grow out of their
narrow focus on banking services to become financial service providers. The main
drivers of structural transformation will be consolidation and convergence. As is true in
most industries and sectors, "SIZE DOES MATTER". The consolidation process within
the industry has been restricted to a few mergers in the private sector, and strategic
alliances being formed for dispersal of services like ATM'S etc. in both the sectors. This
consolidation process could lead to the emergence of a few large banks with country
wide presence and representative offices abroad. A classic example being that of ICICI.
The importance of development of cross-border networks is seriously being looked into
by the major players. Smaller private banks and foreign banks at the same time continue
operating as niche players. The Universal Banking model has already made a mark in
the Indian market and major top players are aiming at implementation of this model.

With the steady stream of foreign players entering the market, Indian Retail
banks need to assess their competency levels. While it is true that the performance of
several foreign banks has been dismal in the retail segment, the banks are making a
comeback in other sectors and complacency on part of the indigenous banks could
prove to be extremely harmful.

Going by international standards, a large portion of the Indian population is

simply not “bankable” – taking profitability into consideration. On the other hand, the
financial services market is highly over-leveraged in India. Competition is fierce,

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particularly from local private banks such as HDFC and ICICI, in the business of home,
car and consumer loans. There, precisely lie the pitfalls of such explosive growth. All
banks are targeting the fluffiest segment i.e. the upwardly mobile urban salaried
class. Although the players are spreading their operations into segments like self-
employed and the semi-urban rich, it is an open secret that the big city Indian yuppies
form the most profitable segment. Over-dependence on this segment is bound to bring in
inflexibility in the business.

The foreign banks have identified this problem but there are certain systematic
risks involved in operating in the Retail market for them. These include regulatory
restrictions that prevent them from expanding their branch network.
So these banks often take the Direct Selling Agent (DSA) route whereby low-end jobs
like sourcing or transaction processing are outsourced to small regional layers. However,
foreign players still find several barriers in their modus operandi like;

 the spend-now-pay-later “credit culture” in India is just not picking up,

 A swift legal procedure against consumers creating bad debt is virtually non-
existent.
 Finally, the vast geographical and cultural diversity of the country makes credit
policy formulation a tough job cannot be dictated from a Wall Street or a
Singapore boardroom! All these add up to the unattractiveness of the Indian retail
market to the foreign players.

While these factors are a bane for foreign players they are a boon to the Indian
counterparts. Our banks need to pick up these opportunities and take the advantage of
their knowledge of the Indian psyche and the levels of trust they enjoy of the Indian
consumer.

So over the past few years, in spite of the entry of MNCs in many industries,
Retail Banking has seen a flurry of panicky exits. Fewer than 40 remain in India and their
share of total bank assets currently 7.2% is falling. Those that remain might be thought
to be likely buyers of Indian banks. Yet Citibank, HSBC and Standard Chartered—all in
India for more than a century, and with relatively large retail networks—seem to have no
pressing need to acquire a local bank. Established foreign banks have preferred to take
over customers or businesses from other foreign banks that want to leave. Thus HSBC,

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in recent years, has acquired customers from France's BNP, Germany's Deutsche Bank
and Japan's Bank of Tokyo-Mitsubishi. ABN Amro took over Bank of America's retail
business. This however should not be a reason to sigh in relief as it is after all a game of
market share and profitability leading to the survival of the fittest.

STRATEGY:

While formulating strategies, retail bankers must keep in mind

 marketing exercises of their products

 consumers

Like most financial services, retail banking products are highly standardized,
prices(interest rates) being competitively determined by market forces. While it is true
that volumes have been increasing, we still rank quite low on the innovation aspect. A
growing market can never be an alibi for lack of innovation. Indian banks have shown
little or no interest in innovative tailor-made products. They have often tried to copy
process designs that have been tested, albeit successfully, in the West. Each economic
culture has its own traits and one who successfully adapts those to the business is the
eventual winner.

Personalized / individual products and services of high quality and innovation

crucially important for supporting customers’ needs and aspirations is the need of the
hour. Competence in financial advice is regarded as extremely important. The most
important ancillary products and services are 24-hour service, pensions, portfolio
management, financial consultation and insurance products. However, we must
remember that CUSTOMISATION ought to be the key focus in a highly competitive
market. The customer should know that there exists a bank that caters to his particular
need that no other bank can fulfill.

Brand reputation and building stronger brands is of crucial significance to banks

planning the future of retail banking. It is extremely important to build up brand
reputation and personality to create stronger customer loyalty. A strong brand is seen as
extremely important to attracting customers, differentiating players from their competitors
and gaining trust. Bankers are of the opinion that brand reputation and personality create
stronger loyalty than physical presence on the high street.

There is a notion that customer service has improved because of the shift in

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focus to retail banking. New generation private banks today, are chasing the customers
for business, seducing them with personalized greetings to services. The customer
today is spoilt for choice in any banking product that he may wish to purchase.

Realizing the dangers in over dependence on one section of consumers, banks

have adopted customer segmentation which has helped in customizing their product
portfolio. Today's clientele are extremely aware and do not estate from exercising their
right to choose. Apart from trying to get more names on the customer database, CRM is
the core issue that banks need to deal with. Several interesting moves have been made
by banks to maintain relationships. While entering into strategic alliances to facilitate
services like mobile bill payments and refilling facilities at ATM's are smart offers, the
aim of the game is to make yourself indispensable to your customer. The concept of
'one-stop-shop’ -offering all products under a single umbrella is catching up fairly well
with the local players.

The strategy of Cross-Selling i.e. the marketing of many products to a customer

according to his various needs is becoming highly popular. The number of products sold
per customer is the cross-selling ratio. The additional cost incurred per product sale is
nominal in case of existing customers. Many banks are losing revenues by not
leveraging the cross-selling opportunities. Banks need to influence buyers purchasing
decisions while they are shopping. One technique is by effective internal marketing.

The challenge is to serve the mass-market customers profitably which involve

customer’s expectations and appetite for risk.

SYSTEMS:

The prerequisites for capitalizing on the opportunities mentioned above are

TECHNOLOGY. Technology is the key to servicing all customer segments. The
increasing sophistication, flexibility and complexity of product and service offerings
makes the use of technology critical for managing risks associated with business.
Needless to say, the early adopters of technology acquire significant competitive
advantage. In lieu of market shares being eaten into by the new age banks that have
neatly incorporated the dominant role of technology in their image, the old timers are
going for rapid internal reconstruction to keep up with the changing times.

As technology makes the dissemination of information easier, an increasing

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variety of distribution channels is starting to make the source of retail banking products
transparent. Throughout the world, financial service providers are looking towards a new
concept of `anytime, anywhere, anyhow' banking, which demands that retail banks of
the future find better ways of delivering a complete set of lifestyle-based financial
services which simplify their customers' lives and allow them more personal time — an
increasingly precious commodity.

Banks are developing alternative channels of delivery like ATM’s, Tele-banking, Mobile
banking, Internet-banking. They are a key to servicing all customer segments. Facilities
like automated teller machines (ATMs) come free with opening an account with a bank
today. The market for personal banking services, which began with the arrival of
telephone banking and the development of call centers, is now being engulfed by the
Internet. All of the major retail banks are aggressively promoting Internet banking. Some
are using the Internet as one of many distribution channels for a variety of products and
services; others have created new Internet-only banks, thereby taking advantage of
lower market entry costs to capture new customers and gain an early share of the very
large personal banking market.

IDC Forecast of Internet Users

35

30

25
Users (In Millions)

20

15

10 China
India
5 Taiwan

0
1997 1998 1999 2000 2001 2002 2003 2004

E-banking is much cheaper due to lower processing costs as is shown below.

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 Costs of banking Service

1.2

0.8

0.6

0.4

0.2

0
Teller ATM Phone Banking Debit Cards Internet Banking

To enhance the customer experience banks are developing integrated CRM

systems built on an open IT architecture. Channel architecture spend will be the biggest
growth area as renewed focus is placed on the branch and ATMs. The Chinese and
Indian markets are seen as key opportunities for technology vendors servicing the retail
banking space, as incumbent banks seek to streamline their IT infrastructures and
foreign entrant banks plan aggressive entry strategies in the wake of ongoing
deregulation. Several technology vendors have already approached leading banks with
their products.

For instance, on November 30, 2000 -- Infosys, India's leading software

company, announced that ABN AMRO Bank (India) had signed up to deploy Infosys'
new generation Enterprise Banking E-platform - Finacle*: Core Banking Solution,
BankAway: Internet Banking & Mobile Banking Solution, PayAway: EBPP Solution and
BancsConnect: Financial Middleware. Ranked among the top ten banks in the world, this
Euro 534 billion global giant is just one of the examples of a bank to join the growing
ranks of banks replacing their existing IT platforms. The reasons given for this kind of an
investment is that the continually changing business dynamics in the new age economy
requires banks to respond with a high degree of flexibility and extensibility. Technology
has become the key differentiator to gain competitive advantage and satisfy growing
customer demands.

The E-platform provides banks scalability and robustness - which is critical if IT

infrastructure is to keep pace with the ambitious growth plans, and strategic value by
enabling them to gain and retain business agility and time-to-market advantage required

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to quickly seize new business opportunities and move ahead of competition.

[Finacle* a new generation core banking solution from Infosys. it is a centralized, fully
integrated retail, corporate and trade finance solution that is designed to extend the
bank's reach to the entire enterprise in a seamless manner - from the front office to the
back office. This solution leverages Web technology to enable the bank to integrate with
surround Web applications, thus creating a powerful banker's desktop. It is multi-
currency, multi-lingual, multi-platform and workflow enabled.]

The primary challenge is to give consistent service to customers irrespective of

the kind of channel they choose to use. I.e. Seamless Integration.

Level 5 : Advanced Technology Infrastructure

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STAFF:

The ability to attract and retain talent is a key success factor for a people-
oriented business like banking. It is the people the bank employs who ensure a better
future, as the Indian Customer is still more comfortable addressing a fellow being than
be at the mercy of machines.

However the average age profile and skill sets of employees continue to remain
unfavorable to meet the challenges of change. Thus manpower planning would be a
major challenge before banks. Staff training, recruitment, productivity need to be
carefully looked into. Training needs to focus on developing cross-functional knowledge.

The banker will have to transform into a versatile., marketing-savvy professional

with sufficient knowledge about their products and services, competitor charges,
customer preferences and modes of delivery. The contribution of people, in terms of
attitudes and knowledge is vital. Staff needs to be skilled, helpful and motivated.
Motivated staff and internal communications are considered to be the most powerful
drivers to build a strong brand.
The implementation of performance standards could help to improve financial
performance.
Bankers acknowledge that it will be their staffs who secure their survival in the
next five years.

REGULATION:

Being a highly regulated industry, all the players need to follow the rules and
regulations laid down by the Monetary Authority. On the regulatory front, alignment with
global developments in banking supervision is a focus area for both regulators and
banks. The new international capital norms require a high level of sophistication in risk
management, information systems, and technology which would pose a challenge to
many of the players in the retail segment. The Central Bank is also active in its role as a
facilitator and several Acts and systems are being passed to ease the process of service
delivery.

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CONCLUSION:

Thus, we see that the opportunities are immense - to enter new businesses and
new markets, to develop new ways of working, to improve in efficiency, and to deliver
higher levels of customer service. The process of change and restructuring that must be
undergone to capitalize on these opportunities, poses a challenge for most banks today.

Indian banks should continuously seek to be aware of cutting edge practices in

banking internationally and institutionalize this across the organization. This will prepare
them for the future as Indian retail bankers become more sophisticated and integrated
into the global retail banking scene.

The winner in this sector would be players who can understand the customer,
fulfill his needs, achieve high level of customer retention, leveraging technology,
knowledge, and human resources to provide quality products and services and manage
risks and returns thereby delivering value to all stakeholders.

The focus of the sector should however, remain in macroeconomic wealth

creation and not increasing the per capita indebtedness, which will do little but add to the
NPA burden.

Retail Banking in India has to be developed in the Indian way, notwithstanding the long
queues in front of the teller counters in the Public sector banks!

BIBLIOGRAPHY

1) Indian Banking Sector Challenges and Opportunities - Vikalpa - Volume 28, July -
September 2003.
2) Survey of Retail Banking - Chartered Financial Analyst, August 2003.
3) State Bank Economic Newsletter, Volume XXXVII, No. 30, 22.9.2003
Websites: 1) Google.com 2) Askjeeves.com

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