INDUSTRY INSIGHT

INDIAN RETAIL BANKING

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Industry Insight Indian Retail Banking

CONTENTS

1. EXECUTIVE SUMMARY............................................................................................... 7
2. GLOBAL RETAIL BANKING SCENARIO..................................................................... 9
2.1 INTRODUCTION ....................................................................................................... 9
2.2 RETAIL DRIVES THE GLOBAL BANKING ASSETS TO TOUCH US$22 TRILLION....... 9
2.3 DECLINING BAD DEBT AND PROVISIONS ............................................................. 9
2.4 PROFITABILITY IMPROVES...................................................................................... 10
2.5 INCREASED EMPHASIS FOR FEE BASED BUSINESS .............................................. 10
2.6 REGION WISE ANALYSIS........................................................................................ 10
2.6.1 US ......................................................................................................................... 10
2.6.2 EUROPE ............................................................................................................... 11
2.6.3 ASIA PACIFIC ...................................................................................................... 11
2.7 RECENT TRENDS ..................................................................................................... 12
2.7.1 NOW MORE BANKS ARE FOCUSING ON REVENUE GROWTH....................... 12
2.7.2 RISING CONSUMER DEBT CAUSING CONCERN ............................................. 12
3.INDIAN BANKING INDUSTRY .................................................................................... 13
3.1 INTRODUCTION ..................................................................................................... 13
3.2 EVOLUTION ............................................................................................................ 13
3.3 REFORMS GALORE................................................................................................ 14
3.4 CURRENT STATUS ................................................................................................... 14
3.5 GEOGRAPHIC SPREAD......................................................................................... 15
3.6 KEY BUSINESS SEGMENTS ...................................................................................... 15
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Industry Insight Indian Retail Banking

3.7 PUBLIC SECTOR BANKS ARE STILL LEADING ................................................ 16

4. RETAIL BANKING - AN INDIAN SCENARIO ............................................................ 17
4.1 INTRODUCTION ..................................................................................................... 17
4.2 CREDIT GROWTH ZOOMS..................................................................................... 17
4.3 COMPONENTS OF RETAIL LENDING.................................................................... 18
4.4 RETAIL CREDIT: GEOGRAPHICAL SPREAD (2003-04)......................................... 18
4.5 CATEGORY WISE DISTRIBUTION (2003-04) .......................................................... 19
4.6 COMPARING INDIA WITH GLOBAL PEERS (2004) .............................................. 20
4.7 MAJOR PLAYERS AND THEIR MARKET SHARE..................................................... 21
4.7.1 ICICI LEADS WITH 33 PERCENT MARKET SHARE............................................... 21
4.7.2 SBI THE BIGGEST PLAYER.................................................................................... 21
4.7.3 GEOGRAPHIC DOMINANCE (2003-04) ........................................................... 21
4.8 RECENT TRENDS ..................................................................................................... 23
4.8.1 CHANGING DEMOGRAPHIC PROFILE DRIVES THE GROWTH ....................... 23
4.8.2 PLAYERS RESPONSE AGGRESSIVELY TO THE CHANGING ENVIRONMENT.. 24
4.8.3 NPA LEVEL STILL FAVOURABLE.......................................................................... 24
5. HOUSING FINANCE ................................................................................................. 25
5.1 INTRODUCTION ..................................................................................................... 25
5.2 INDUSTRY STRUCTURE............................................................................................ 25
5.3 HOUSING LOAN DISBURSEMENT ZOOMS ........................................................... 25
5.4 LOW INTEREST RATES PUSH UP HOME LOAN DISBURSEMENT............................ 26
5.5 BANKS OVERTAKE HFCS IN HOUSING LOAN DISBURSEMENTS ......................... 27
5.6 BANKS ARE AGGRESSIVE ON REFINANCING AS WELL...................................... 27
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Industry Insight Indian Retail Banking

5.7 CHANGING AGE PROFILE OF BORROWERS ...................................................... 28

5.8 HIGHER LOAN-TO-VALUE RATIO.......................................................................... 28
5.9 SIZE OF HOME LOAN............................................................................................. 28
5.10 OUTLOOK ............................................................................................................. 29
5.10.1 HOUSING LOAN AS PERCENTAGE OF GDP WILL TOUCH 10% SOON........ 29
5.10.2 LOAN DISBURSEMENT WILL RISE UP TO THE DEMAND .................................. 29
5.10.3 BANKS DOMINANCE IN FUNDING WILL INCREASE ..................................... 30
5.10.4 RISING ASSET PRICES AND FRAUDS TO POSE CHALLENGE ......................... 30
6. AUTO FINANCE........................................................................................................ 31
6.1 INTRODUCTION ..................................................................................................... 31
6.2 COMPONENT WISE BREAK-UP ............................................................................. 32
6.3 SEGMENT WISE ANALYSIS ..................................................................................... 32
6.3.1 CARS.................................................................................................................... 32
6.3.2 MUVS ................................................................................................................... 32
6.3.3 TWO WHEELER SALES CROSSES 5 MILLIONS .................................................... 33
6.4 DRIVING FACTORS ................................................................................................ 33
6.4.1 ENTRY OF FOREIGN CAR MAKERS.................................................................... 33
6.4.2 CHEAPER LOANS................................................................................................ 33
6.4.3 REDUCTION IN TAXES & DUTIES......................................................................... 33
6.5 CHANGING BUSINESS DYNAMICS....................................................................... 34
6.6 RECENT TRENDS ..................................................................................................... 35
6.6.1 UPGRADATION IS HELPING AUTO FINANCIER............................................. 35
6.6.2 USED CAR FINANCE: CATCHING UP FAST....................................................... 35
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Industry Insight Indian Retail Banking

6.7 OUTLOOK ............................................................................................................... 35

7. CONSUMER DURABLE LOANS................................................................................ 36
7.1 INTRODUCTION ..................................................................................................... 36
7.2 CONSUMER DURABLE CREDIT.............................................................................. 36
7.2.1 GEOGRAPHICAL SPREAD AND MARKET SHARE (2003-04)............................ 36
7.2.2 CATEGORY WISE DISTRIBUTION (2003-04) ....................................................... 37
7.3 HIGH GROWTH RATE IN CONSUMER DURABLE INDUSTRY IS FUELLING CREDIT
GROWTH IN THIS SEGMENT ................................................................................... 38
7.4 INNOVATIONS IN LENDING AVENUES FOR GROWTH..................................... 38
7.5 COMMERCIAL BANKS ARE AGGRESSIVELY CAPTURING MARKET .................. 39
7.6 OUTLOOK ............................................................................................................... 39
8. EDUCATIONAL LOANS............................................................................................ 40
8.1 INTRODUCTION ..................................................................................................... 40
8.2 EDUCATIONAL LOANS DISBURSHMENT............................................................... 41
8.3 DRIVING FACTORS ................................................................................................ 41
8.4 OUTLOOK ............................................................................................................... 42
9. OTHER PERSONAL LOANS ...................................................................................... 43
9.1 INTRODUCTION ..................................................................................................... 43
9.2 PERSONAL LOANS: GEOGRAPHICAL SPREAD AND MARKET SHARE .............. 44
9.3 PERSONAL LOANS CATEGORY WISE DISTRIBUTION........................................... 45
9.4 BANK LENDING IS INCREASING ........................................................................... 45
9.5 COMPETITION PROPELS INNOVATION................................................................ 45
10. CREDIT CARDS....................................................................................................... 46
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Industry Insight Indian Retail Banking

10.1 INTRODUCTION ................................................................................................... 46

10.2 GROWTH: CARD VOLUME EXPLODES .............................................................. 46
10.3 MAJOR PLAYERS: WHO LEADS THE RALLY? ..................................................... 47
10.3.1 PRIVATE SECTOR BANKS ARE MORE AGGRESSIVE....................................... 47
10.3.2 ICICI BECOME MARKE LEDER DUE TO AGGREVNESS STRATEGY................ 48
10.4 KEY TRENDS .......................................................................................................... 49
10.5 ROLE OF ASSOCIATIONS .................................................................................... 49
10.6 OUTLOOK ............................................................................................................. 50
11. REGULATORY WATCH........................................................................................... 51
11.1 INTRODUCTION ................................................................................................... 51
11.2 RISK WEIGHT OF CONSUMER CREDIT INCREASES TO 125% ............................ 51
11.3 HOUSING FINANCE: GROWING INCIDENCE OF FRAUDS............................... 51
11.4 CREDIT CARD: NEW NORMS PRESCRIBED..................................................... 52
11.4.1 SINGLE OVERALL LIMIT FOR AN INDIVIDUAL ................................................. 52
11.4.2 PROPOSED BAN ON ISSUANCE OF CARD TO PERSON WITH NO
INDEPENDENT INCOME ......................................................................................... 52
11.4.3 REPORTING TO CREDIT BUREAU ..................................................................... 52
11.4.4 OTHER HARASSMENTS...................................................................................... 52
11.5 OUTSOURCING: DRAFT GUIDELINES ISSUED ..................................................... 53
11.6 OUTLOOK ............................................................................................................. 54
12. THE FUTURE ............................................................................................................. 55
12.1 GLOBAL: KEY DIFFERENTIATOR SHALL BE RISK MANAGEMENT AND SALES
FORCE ..................................................................................................................... 55
12.2 INDIA: NEEDS GREATER THRUST ON MARKETING............................................. 55
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Industry Insight Indian Retail Banking

12.3 AGGRESSIVE PRICING AND RISK ARE THE MAJOR CONCERNS .................... 56
12.4 THE SHAPE OF THINGS TO COME ...................................................................... 56
13. PROFILES OF MAJOR RETAIL BANKING PLAYERS .............................................. 57
13.1 STATE BANK OF INDIA ......................................................................................... 57
13.2 ICICI BANK ........................................................................................................... 59
13.3 PUNJAB NATIONAL BANK................................................................................... 61
13.4 CANARA BANK.................................................................................................... 63
13.5 BANK OF INDIA.................................................................................................... 65
13.6 BANK OF BARODA .............................................................................................. 67
13.7 UNION BANK OF INDIA ....................................................................................... 69
13.8 CENTRAL BANK OF INDIA ................................................................................... 71
13.9 HDFC BANK.......................................................................................................... 72
13.10 UTI BANK............................................................................................................. 74
13.11 CITI BANK ........................................................................................................... 76
13.12 STANDARD CHARTERED BANK (SCB).............................................................. 79

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Industry Insight Indian Retail Banking

1. EXECUTIVE SUMMARY
All around the world retail lending has been an established market; however its rise in emerging economies like
India has been of recent origin. If recent statistics on consumer finance are any indication, the last few years have
been trend setting. 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 2004-05 retail contributed 42% of overall credit growth. Growing at
the CAGR of 35% over last 5 years the retail asset touched Rs1,89,000 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 2004-05, the market share of banks stood at 62%, against the 33% by Housing finance
companies; Rs2-5 lakh margins constitutes almost a third of the loan size. 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, 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 which 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 centres 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 centres 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 focussed on the educational loans segment. In the
educational loan segment, disbursement of domestic banks has surged by 13% to Rs2249 crore in 2004-05; up from
Rs1983 crore in 2003-04. The number of students availing education loans has increased to 1,40,000 from 1,08,000
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.

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Industry Insight Indian Retail Banking

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, the share of
retail banking will grow dramatically and it is expected that about 35% of the incremental growth in net credit will
come from retail banking. In the next five years ie till 2010, retail banking is expected to grow by a CAGR of 25%
to touch the figure of Rs575,000 crore. 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 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.
Keeping pace with explosive changes will pose challenge to regulatory authorities. This will not limit only to
increase of risk weight of consumer loan by 25 basis points which the regulator announced in mid-term policy
review 2004-05. Revision of credit cards issue regulations, and recent draft guidelines on outsourcing are the steps
in the right direction. Lack of consensus on definition of retail and transparency in declaration by the players as well
the coverage of retail by the central banker in its reports; all of this needs a thorough re-look.

Cygnus Business Consulting & Research 2005