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1.0 RETAIL BANKING –An Introduction

Retail banking is, however, quite broad in nature - it refers to the dealing of
commercial banks with individual customers, both on liabilities and assets sides of the

balance sheet. Fixed, current / savings accounts on the liabilities side; and mortgages,

loans (e.g., personal, housing, auto, and educational) on the assets side, are the more

important of the products offered by banks. Related ancillary services include credit

cards, or depository services. Retail banking refers to provision of banking services to

individuals and small business where the financial institutions are dealing with large

number of low value transactions. This is in contrast to wholesale banking where the

customers are large, often multinational companies, governments and government

enterprise, and the financial institution deal in small numbers of high value


The concept is not new to banks but is now viewed as an important and

attractive market segment that offers opportunities for growth and profits. Retail

banking and retail lending are often used as synonyms but in fact, the later is just the

part of retail banking. In retail banking all the needs of individual customers are taken

care of in a well-integrated manner.


 “Retail banking is typical mass-market banking where individual customers use

local branches of larger commercial banks. Services offered include: savings and

checking accounts, mortgages, personal loans, debit cards, credit cards, and so”

 “Retail banking is a banking service that is geared primarily toward individual


 “Banking services for individual customers”

Retail banking is usually made available by commercial banks, as well as

smaller community banks. Unlike wholesale banking, retail banking focuses strictly

on consumer markets. Retail banking entities provide a wide range of personal

banking services, including offering savings and checking accounts, bill paying

services, as well as debit and credit cards. Through retail banking, consumers may

also obtain mortgages and personal loans. Although retail banking is, for the most

part, mass-market driven, many retail banking products may also extend to small and

medium sized businesses. Today much of retail banking is streamlined electronically

via Automated Teller Machines (ATMs), or through virtual retail banking known as

online banking.

1.2 Characteristics of Retail Banking

Today’s retail banking sector is characterized by three basic characteristics:

o Multiple products

o deposits, credit cards, insurance, investments and securities

o Multiple channels of distribution

o call centre, branch, internet

o Multiple customer groups

o consumer, small business, and corporate


Banks are among the main participants of the financial system in India.

Banking offers several facilities and opportunities. Banks in India were started on the

British pattern in the beginning of the 19th century. The first half of the 19th century,

The East India Company established 3 banks;

The Bank of Bengal

The Bank of Bombay and

The Bank of Madras

These three banks were known as Presidency Banks. In 1920 these three

banks were amalgamated and The Imperial Bank of India was formed. In those days,

all the banks were joint stock banks and a large number of them were small and weak.

At the time of the 2nd world war about 1500 joint stock banks were operating

in India out of which 1400 were non- scheduled banks. Due to vague and dishonest

management there were a number of bank failures. Hence the government had to step

in and the Banking Company’s Act (subsequently named as the Banking Regulation
Act) was enacted which led to the elimination of the weak banks that were not in a

position to fulfil the various requirements of the Act.

In order to strengthen their weak units and review public confidence in the

banking system, a new section 45 was enacted in the Banking Regulation Act in the

year 1960, empowering the Government of India to compulsory amalgamate weak

units with the stronger ones on the recommendation of the RBI. Today banks are

broadly classified into 2 groups namely—

(a) Scheduled banks

(b) Non-Scheduled banks



Retail banking has inherent advantages outweighing certain disadvantages.

Advantages are analyzed from the resource angle and asset angle.


 Retail deposits are stable and constitute core deposits.

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

 They constitute low cost funds for the banks.

 Effective customer relationship management with the retail customers built a
strong customer base.

 Retail banking increases the subsidiary business of the banks.


 Retail banking results in better yield and improved bottom line for a bank.

 Retail segment is a good avenue for funds deployment.

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

 Helps economic revival of the nation through increased production activity.

 Improves lifestyle and fulfils aspirations of the people through affordable


 Innovative product development credit.

 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.

 Designing own and new financial products is very costly and time consuming for

the bank.

 Customers now-a-days prefer net banking to branch banking. The banks that are

slow in introducing technology-based products, are finding it difficult to retain the

customers who wish to opt for net banking.

 Though banks are investing heavily in technology, they are not able to exploit the

same to the full extent.

 A major disadvantage is monitoring and follows up of huge volume of loan

accounts inducing banks to spend heavily in human resource department.

 Long term loans like housing loan due to its long repayment term in the absence

of proper follow-up, can become NPAs.

 The volume of amount borrowed by a single customer is very low as compared to

wholesale banking. This does not allow banks to exploit the advantage of earning

huge profits from single customer as in case of wholesale banking.


 All round increase in economic activity

 Increase in the purchasing power. The rural areas have the large purchasing

power at their disposal and this is an opportunity to market Retail Banking.

 India has 200 million households and 400 million middleclass population more
than 90% of the savings come from the house hold sector. Falling interest rates

have resulted in a shift. “Now People Want To Save Less And Spend More.”

 Nuclear family concept is gaining much importance which may lead to large

savings, large number of banking services to be provided are day-by-day


 Tax benefits are available for example in case of housing loans the borrower can
avail tax benefits for the loan repayment and the interest charged for the loan.

 Retail banking has immense opportunities in a growing economy like India. As

the growth story gets unfolded in India, retail banking is going to emerge a major


 The rise of Indian middle class is an important contributory factor in this regard.

The percentage of middle to high-income Indian households is expected to

continue rising.

 The younger population not only wields increasing purchasing power, but as far as

acquiring personal debt is concerned, they are perhaps more comfortable than

previous generations.

The combination of above factors promises substantial growth in retail sector,

which at present is in the nascent stage. Some of the key policy issues relevant to

the retail-banking sector are: financial inclusion, responsible lending, and access

to finance, long-term savings, financial capability, consumer protection, regulation

and financial crime prevention.


Keeping pace with the average 8.5 per cent growth of the Indian economy

over the past few years, the retail banking sector in India has also witnessed

phenomenal growth. It has faced up to the need of the hour and introduced anytime,

anywhere banking, for its customers through ATMs, mobile and internet banking.
It has also offered services like D-MAT, plastic money (credit and debit cards), online

transfers, etc. This has not only helped in reducing operational costs but facilitated

greater conveniences to its customers.

 High-Tech Banking

ATMs - With growing technological innovations, banks have significantly

expanded their ATM network over the past three years. According to the RBI data as

of end-June 2008, the number of ATMs in the country had climbed to 36,314

compared to 27,088 and 20,267 as at end-March 2007 and 2006, respectively.

 Loan disbursement

Technology has facilitated the growth in retail loan disbursements, making the

whole process simpler and faster. The sector has delivered a growth of around 30 per

cent per year over the past 4-5 years. As per the RBI data, although the retail portfolio

of banks saw a slowdown to 29.9 per cent during 2006-07 from 40.9 per cent in 2005-

06, the growth was faster than the overall credit portfolio of the banking sector (28.5

per cent).

 Plastic Money

Credit cards have also played an important role in promoting retail banking.

The use of credit cards has been growing significantly over the last few years. The

number of credit cards outstanding at the end- June 2008 stood at 27.02 million as

against 24.39 million in June 2007, with usage increasing by 10.73 per cent during

this period.
 Core Banking Solutions (CBS)

The concept of CBS, which allows a customer to fulfil a wide range of

banking operation online, has come alive during the past four years. The number of

bank branches providing CBS rose rapidly to 44 per cent at end- March 2007 from

28.9 per cent at end March 2006. Electronic fund transfer facilities and mobile

banking are expected to provide a further fillip to the retail banking in the coming




‘Know your Customer’ is a concept which is easier said than practiced. Banks

face several hurdles in achieving this. In order to that the product lines are targeted at

the right customers-present and prospective-it is imperative that an integrated view of

customers is available to the banks.


Retail banking calls for huge investments in technology. Whether it is setting

up of a Customer Relationship Management System or Establishing Loan Process

Automation or providing anytime, anywhere convenience to the vast number of

customers or establishing channel/product/customer profitability, technology plays a

pivotal role.

It is of utmost importance that the culture and practices of an institution

support its stated goals. Creation of a proper organization structure and business

operating models which would facilitate easy work flow are the needs of the hour.

Product innovation continues to be yet another major challenge. Even though

bank after bank is coming out with new products, not all are successful. What is of

crucial importance is the need to understand the difference between novelty and



The next challenge is to have appropriate policies in place. The industry today

is witnessing a price war, with each bank wanting to have a larger slice of the cake

that is the market, without much of a scientific study into the cost of funds involved,

margins, etc. The strategy of each player in the market seems to be: ‘under cutting

others and wooing the clients of others’. Most of the banks that use rating models for

determining the health of the retail portfolio do not use them for pricing the products.

The much needed transparency in pricing is also missing, with many hidden charges.


Business Process Re-engineering is yet another key requirement for banks to

handle the growing retail portfolio. Simplified processes and aligning them around

delivery of customer service impinging on reducing customer touch-points are of



While technology and product innovation are vital, the soft issues concerning

the human capital of the banks are more vital.


As of now, action that is taking place on the retail front is by and large

confined two metros and cities. There is still a vast market available in rural India,

which remains to be trapped.






 The issue of money laundering is very important in retail banking. This compels

all the banks to consider seriously all the documents which they accept while

approving the loans.

 The issue of outsourcing has become very important in recent past because

various core activities such as hardware and software maintenance, entire ATM

set up and operation (including cash, refilling) etc., are being outsourced by Indian


 Banks are expected to take utmost care to retain the ongoing trust of the public.
 Customer service should be at the end all in retail banking. Someone has rightly

said, “It takes months to find a good customer but only seconds to lose one.”

Thus, strategy of Knowing Your Customer (KYC) is important. So the banks are

required to adopt innovative strategies to meet customer’s needs and requirements

in terms of services/products etc.

 The dependency on technology has brought IT departments’ additional

responsibilities and challenges in managing, maintaining and optimizing the

performance of retail banking networks. It is equally important that banks should

maintain security to the advance level to keep the faith of the customer.

 The efficiency of operations would provide the competitive edge for the success in
retail banking in coming years.

 The customer retention is of paramount important for the profitability if retail

banking business, so banks need to retain their customer in order to increase the

market share.

 One of the crucial impediments for the growth of this sector is the acute shortage
of manpower talent of this specific nature, a modern banking professional, for a

modern banking sector.

If all these challenges are faced by the banks with utmost care and deliberation, the

retail banking is expected to play a very important role in coming years, as in case of

other nations.


 Constant product innovation to match the requirements of the customer


 Quality service and quickness in delivery

 Introduction of new delivery channels

 Tapping of unexploited potential and increasing the volume of business

 Infrastructure outsourcing

 Detail market research

 Cross-selling of products

 Business process outsourcing

 Tie-up arrangements


Retail banking has significant past and glorious future over the years. Indian
retail banking, according to a report, is likely to grow at a CAGR of 28 per cent till

2010 to Rs 97,00 billion. So, although the revolution in retail banking has changed the

face of the Indian banking industry as a whole, it has still miles to go.

On the whole, looking ahead, the prospects of retail banking are brighter than

ever and the bankers have to give continued thrust to this area of banking. Thus, with

the consumers ever multiplying needs there is definitely a vast scope for the

furtherance of the retail banking business. Operationally, there is a possibility that

technology go beyond merely reducing the cost & improving the quality of current

products. It may prove possible, even profitable, to combine functions in new ways.

The future of retail banking lies more in mobile banking. Mobile telephone

market is penetrating, and mobile phones are ideal to utilize Internet banking services

without customer accesses to PC. By a tacit acceptance India has around three million

mobile phone users and this number is expected to reach to eight million by 2003.

Smart card revolution will further change the face of retail banking. Smart cards can

store information; carry out local processing on the data stored and can perform

complex calculations. At present, India has around 3.4 million smart card users and it

is estimated that by the end of 2004 it will reach 14.7 million.


Retail banking is the fastest growing sector of the banking industry with the

key success by attending directly the needs of the end customers is having glorious

future in coming years.

Retail banking sector as a whole is facing a lot of competition ever since

financial sector reforms were started in the country. Walk-in business is a thing of

past and banks are now on their toes to capture business. Banks therefore, are now

competing for increasing their retail business.

There is a need for constant innovation in retail banking. This requires product

development and differentiation, micro-planning, marketing, prudent pricing,

customization, technological upgradation, home / electronic / mobile banking,

effective risk management and asset liability management techniques.

While retail banking offers phenomenal opportunities for growth, the

challenges are equally discouraging. How far the retail banking is able to lead growth

of banking industry in future would depend upon the capacity building of banks to

meet the challenges and make use of opportunities profitably.

However, the kind of technology used and the efficiency of operations would

provide the much needed competitive edge for success in retail banking business.

Furthermore, in all these customer interest is of chief importance. The banking sector

in India is representing this and I do hope they would continue to succeed in this

traded path.