Retail banking

Abhay Limaye
 What is retail banking
 Retail Banking refers to provisions of banking products and services offered to individual customers,
typically for non-entrepreneurial purposes. On Liability side , banking has generally been “ retail “ i.e.
the banks are raising resources generally from a large number of retail depositors through savings &
Current accounts and fixed deposits.
 In asset side also retail banking involves offering of products e.g. personal loan, housing, auto and
educational loans.
 Definition of Retail Banking
 “ Retail Banking is a banking services that is geared primarily towards individual consumers . Retail
Banking is usually made available by commercial banks . Retail Banking focuses strictly on consumer
markets. Today, much of retail banking is streamlined electronically Via Automated Teller Machines
( ATMs ) or through virtual retail banking known as online banking.
 Retail Banking refers to “ the part of a bank’s operations services as its branches for small ( in bank
terms ) account holders. “
 “ Banking services offered to individual customers such as savings accounts, retail loans , remittance
services etc.”
 Pure retail banking is generally conceived to be the provisions of mass market banking services to
private individuals, now includes services provided to small & medium sized business.
 Characteristics of retail banking

 The definitions of retail banking as discussed above bring out the following characteristics
 1. Banking facilities targeted at Individual customers.
 2. Focused towards mass market segment covering a large population of individuals
 3. Offer different liability , asset and a plethora of service products to the individual customers.
 4. The delivery model of retail banking is both physical and virtual i.e. services are extended through
branches and also through technology driven electronic off site delivery channels like ATM’s , Internet
Banking and Mobile Banking.
 5. Extended to small and medium – size business.
 6. Today’s Retail Banking encompasses multiple products , multiple customer groups and multiple
channels of distribution..
 advantages of retail banking

 1. Client base will be large and therefore risk is spread across the customer base.
 2. Customer loyalty will be wrong and customers tend not to change from one bank to another very
often.
 3.Attractive interest spreads since spreads are wide, since customers are too fragmented to bargain
effectively; Credit risk tends to be well diversified , as loan amounts are relatively small.
 4. There is less Volatility in demand and credit cycle than from large corporate.
 5. Large numbers of clients can facilitate marketing , mass selling and the ability to categorize / slect
clients using scoring systems / data mining.
 Constraints in retail banking

 Though Retail Banking as a segment has a number of embedded advantages ,the segment suffers
from constraints too. A few of the constraints are as listed below;
 1. Problems in managing large numbers of clients , especially if the available IT systems are not
sufficiently robust.
 2. Rapid evolution of products can lead to IT Complications.
 3.The costs of maintaining branch networks and handling large numbers of low value transactions tend
to be relatively high. ( For this reason , banks are encouraging clients to use cheaper distribution
channels, such as ATM’s the mobile of the internet for these transactions and reserve the branches for
higher value added transactions ).
 4. Higher delinquencies especially in unsecured retail loans and credit card receivables.
 5. Any loss in faith in a particular bank can lead to sudden outflow of retail deposits resulting in collapse
of the bank. This is called a bank run.
reasons for the growth of the retail banking segment
 A. Rise of the young Indian Professionals
 B. Growth as an Economic Super Power
 C. Increasing purchasing power of middle class
 D. Financial market reforms
 E. Engine of economic growth
 F. Mass market banking
 G. Volume driven business
 H. Automation of banking process
 I. Easy and affordable access
 J. Financial Liquidity
 K. Economic Prosperity
 L. Changing Consumer demographics
 M. Technological Innovations
 N. Increase the Bank Liquid cash
 O. Decline in Interest rates
Distinction between retail and corporate/ wholesale banking

 Retail Banking and Corporate or Wholesale Banking differs in their basic approach to banking. The
major differences between the two segments are discussed as follows :-
Sr.N Retail Banking Corporate Banking
o.
1 Retail Banking targets at the individual segment Corporate Banking deals mainly with Corporate clients

2 RB is a mass market banking model CB looks at a relatively smaller segment of business /

corporate client base
3 RB is a B2C ( Business to Customer ) CB is a B2B approach ( B2B )

4 The ticket size of loans in RB is low The ticket size is high in CB

5 Risk is widespread in RB as Customer base is The risk is more as the ticket size is big though customer
large base though customer base is relatively low
6 Returns are more in RB as the spreads are more The returns are low as corporate bargain for lower rates
for different asset in classes in RB due to higher loan amount
Sr. Retail Banking
No.
7 Monitoring and recovery in retail assets are more
laborious because of the larger customer base
8 In the Liability side also , the cost of deposits is
relatively less and mostly go along with the card
rates as the ticket size in retail deposits is small
10 The impact of NPA will be less in Retail banking
due to low ticket size.
Corporate Banking
As small / limited customer base concentrated efforts on the
small base
In Corporate banking , as the ticket sizes of deposits will be
large , the cost of deposit will be high due to pressure from
the Corporate for the higher rates and competitive forces to
garner the deposits.
The impact of NPA will be more in Corpoarte banking due to
larger ticket sizes.
 Product models in retail banking

 Retail banking is the process of selling multiple retail banking products and / or services to multiple
customers through multiple channels of distribution to earn profit. Demand is created through diverse
target markets and promotional tactics , satisfying consumers “ wants and needs “. Retail Banking in
India is characterized by and personalized to suit the needs of the various customer segments.
 The multiple products included various types of deposits / accounts , credit / debit cards , Loans
( Personal , Auto , Housing etc., Insurance , Mutual funds etc.
 The multiple channels of distribution included Internet Banking , Mobile Banking and banking outlets.
 The Multiple customer groups included Individual customers, Micro Small and Medium Enterprises
( SME”s)
 Though essentially retail assets and liability products constitute the basic structure of Retail
Banking ,the trend has been changed in the recent years and marketing of third party products has
emerged as one of the important constituents of retail banking initiatives of banks.

 Asset side

 Retail banking results in better yield / improved bottom line for a bank
 Retail segment is good avenue for funds deployment
 Consumer Loans are presumed to be of lower risk and NPA perception
 Helps economic revival of nation through increased production activity
 Improves lifestyle and fulfils aspirations of the people through affordable credit
 Innovative product development credit
 liability products
 Liability products are offered to retail banking customers basically under three spaces – Savings
accounts , Current accounts and Term Deposits accounts. Product differentiation among these
accounts is best achieved by adding different value propositions . Attempts are made by banks to
expand the scope of generic products from a plain vanilla account to a value enriched accounts. The
days of simple, functional products are gone.
 Functionally is mow perceived to include changed needs. A simple pass book and cheques have
become generic features. Internet Banking and Mobile Banking have become essential value play. The
value has extended to tagging group insurance products in the life and non life space at a very
competitive premium component. Funds kept in accounts are not allowed to stay idle and undertake
active travelling by means of sweep facilities from savings accounts to fixed deposit accounts above
certain specified level. In case of current deposits also most of the above features are built in . In
addition , in some banks an auto overdraft facility is structured as a part of the package.
 All banks offer term deposit products with provision for monthly, quarterly or cumulative interest
payment options. Fixed deposits built with units of fixed amount are also offered by the banks. This is
intended to inject an unfixed component in a fixed deposit and enable the depositors to partially
withdraw without distributing the entire amount and the resultant loss of interest. Banks also offer fixed
deposits with built in overdraft facilities so that it becomes more of a cash credit account than a fixed
deposit
 In short
 Retail deposits are stable and constitute core deposits.
 They are interest insensitive and less bargaining for additional interest.
 They constitute low cost of funds for the banks.
 Effective customer relationship management with the retail customers builds a strong base
 Retail asset products

 Retail Asset financing is a major component of retail banking model of banks. In fact retail loans are the
backbone of the revenue streams of the banks . Product, price ,process and delivery innovations are
receiving constant attention in retail asset side. The main advantage is the stability of the asset base
because of the large customer base. The main advantage is the stability of the asset base because of
the large customer base. Other important reasons are the better spreads in income, risk diversification
and scope for capturing additional revenue streams from other avenues.
 The standard retail asset products offered by banks are Housing loans, Consumer durable loans, Car
loans, Credit cards and Personal Loans. Other retail loans against retail receivables , salary overdrafts ,
loan against securities , FD / Gold , Loans to traders.
 Retail Loans are also structured by some banks to target specific professional segments like Doctors,
Architects and Advocates etc. for financing their professional requirements.
 Retail asset products

 Retail banking results in better yield / removed bottom line for a bank
 Retail segment is good revenue for funds deployment
 Consumer loans are presumed to be of lower risk and NPA perception
 Helps economic revival of nation through increased production activity
 Improves lifestyle and fulfils aspirations of the people through affordable credit
 Retail Banking involves minimum marketing efforts in demand driven economy
 Diversified portfolio due to huge customer base enables bank to reduce their dependence on few or
single borrower
 Banks can earn good profits by providing non-fund based or fee based services without deploying their
funds.
 other products and services
 Other products and services broadly cover financial service needs of customers other than those
liability products and asset products. These enhance the service experiences of the customers by
providing process and delivery efficiencies by additional service tools to the basic products.

 One of these products are Credit Cards , Debit Cards ,ATM Cards , Mobile Banking , Internet Banking ,
Depository Service and Broking Services ,Distribution of third party products like Life and Non Life
Policies , Mutual Funds , Retail Sale of Gold Coins , Bill Payment Systems , Multi City Cheques ,
Payment Gateway for Rail , Air Ticket Bookings , Wealth Management Services , Portfolio Management
Services and private banking are some of the other services offered by banks. These services are
offered with twin objectives of customer multiple need satisfaction and also to augment fee based
income.
 ATM’s are offered by almost all Banks. Most of the banks are now actively paying attention to Internet
Banking and Mobile Banking , to realize the huge potential available in this space. Depository services
are offered by some banks as also Broking Services , Corporate Agency for Life and Non – Life
Insurance Products and distribution of mutual funds are done by almost all PSBs while sale of Gold
Coins are done. Bills Payment Services are attempted by Many banks.
 distinction between retail and corporate / wholesale
banking
Sr.No RETAIL BANKING WHOLESALE / CORPORATE BANKING
.

1 Retail Banking targets at the individual segment Corporate Banking deals mainly with Corporate clients

2 Retail Banking is a mass market banking model Corporate / Wholesale banking looks at a relatively smaller segment
of business

3 Retail Banking is a B2C approach ( Business to Customer ) Corporate / Wholesale banking is a B2B approach ( Business to
Business )

4 The ticket size of loans in Retail Banking is low The ticket size of Corporate /Wholesale loans is High

5 Risk is widespread in Retail Banking as customer base is Large In Corporate / Wholesale Banking the risk is more as the ticket size
is big though customer base is relatively small

6 Returns are more in Retail Banking as the spreads are more for different asset In Corporate / Wholesale Banking the returns are low as corporate banking
classes in retail bargain for lower rates due to higher loan amount

7 Monitoring and recovery in Retail assets are more laborious because of the larger In Corporate Banking being small number hence concentrated efforts are
customer base possible

8 In the Liability side also , the cost of deposits is relatively less and mostly go along The Corporate banking as the tickets sizes of deposits will be large , the cost of
with the card will be large deposits will be high due to pressure from the Corporate for higher rates and
competitive forces to garner deposits

9 The impact of NPA will be less in Retail Banking as the ticket sizes in Retail Loans The impact of NPA will be more pronounced in corporate banking as the ticket
are smaller in size sizes in Corporate Loans are Higher