INSTITUTE OF MANAGMENT STUDIES, DAVV, INDORE

FINANCE AND ADMINISTRATION – SEMESTER IV

CREDIT MANAGEMENT AND RETAIL BANKING

INTRODUCTION TO RETAIL BANKING

What is Retail banking and its evolution in India

 Retail banking is banking service that is primarily towards individual

customers.
 Unlike wholesale banking, retail banking focuses strictly on consumer market.
 Retail Banking provides wide range of personal banking services – savings,
investment, bill payments, remittance, credit and debit cards, various loan
products etc.
 Most of the retail banking is streamlined electronically via ATM or virtual
banking known as on line banking.
 Retail banking means in which banking institutions execute transactions
directly with consumers rather than corporations or other entities.
 Retail Banking is part of banking operations providing service to small account
holders (small in bank terms)
 Thus pure banking is generally considered as – mass market banking service
to private individuals including ‘private banking’ to HNI.

Characteristics of Retail Banking

 Targeted at individual customers

 Focussed towards mass market
 Offer different asset and liability products to individuals.
 Delivery model can be physical (at branch) or virtual (technology driven
products like ATM, Internet banking and Mobile banking)
 Extended to small and medium sized business also.
 Retail banking today encompasses multiple products, multiple customer
groups and multiple channels of distribution.

Advantages of Retail Banking

 Client base is large. There is wide scope for cross selling of products.
 As the Client base is large the risk is spread across customer base.
 Customer loyalty is stronger than other models like corporate banking.
 Attractive interest spread. Deposits are taken at card rate which is
comparatively lower than offered to large corporate. Also interest is charged
at the higher rate because customers are fragmented to bargain effectively.
 Credit risk is diversified, as loan amount sanctioned is comparatively smaller
than corporate.
  Less volatility in demand and credit cycle than large corporate
 Large number of clients can facilitate marketing, mass selling. Technology
helps reaching large client base in remote areas.
 Assessment is now done through scoring system/ data mining.

Constraints in Retail Banking

 Problem in managing large number of client. Accounting aspect and reaching

to large customer base is now taken care of through development of
technology.
 Cost of maintaining branch network for handling large client base and
transactions is relatively high. Banks are therefore encouraging clients to use
cheaper distribution channels like ATM, net banking and mobile banking etc.
 Cost of serving particularly to zero balance accounts is increasing
 Higher delinquencies in personal unsecured loans and credit card
receivables.

Evolution of Retail Banking

 Historically banking in Indian scenario was lending to business and corporate

client for working capital and project financing to class customers. Current
account was most suitable product for them.
 Over a period of time customer need and wants expanded. More products
and services were needed to satisfy these wants.
 From being plain vanilla commercial functions, banks entered into new avtar
like merchant banking, portfolio management etc.
 Customer base was broadening and character changed from homogenous to
heterogeneous groups. Bank redesigned some products to suit these needs
and developed style in delivery of services due to new paradigm shift.
 Thus came retail banking for individual customers, also called consumer
banking by some.
 This includes personal banking for HNIs.
 Foreign banks operating in India set the trend in late 70s and 80s providing
hybrid liability and asset products targeted towards personal segment.
Standard Chartered Bank and Grindlays Bank was pioneer for introducing
such products. Citi Bank created waves with their credit card products.
 The entry of new generation Private Sector Banks in early 90’s after financial
reforms (Liberalization Privatization and Globalization) created a new
approach to retail banking in banks. With the advantage of technology these
banks aggressively entered in the market of Retail Banking.
 To add to the fuel, PSBs also with technology initiatives and redefined
business model had now aggressively entered the market space creating a
retail war.
 The retail war is now in full swing.
 Drivers of Retail Banking

 Economic prosperity – increase in purchasing power of individuals, standard

of living has raised. New generation quickly wants all facilities like vehicle,
house etc.
 Changing Consumer Demographics – 70% of the earning population is
between the age group of 25 to 35 years. Average income of the young
generation has increased. They do not hesitate to spend.
 Convenience in conducting Banking activities – with use of technology most of
the banking activity is now at the finger tips. Days of Long queue at branch for
banking activity are over. ATM, Debit card, Credit Card, Internet Banking,
Mobile banking etc. has made life easier and convenient for carrying out of
banking activities.
 Interest cost for loans and other charges slowly coming down,.
 Default rate – low as risk is spread due to diversified activities and mass
market.
 Rise in middle class – standard of living raised. Earning of family is on rise.
 Financial inclusion – financial inclusion in India is hardly 35%. Large number
of individuals will be added in the banking. Though it looks like un-
remunerative business today will become a big market for tomorrow.
 Sharing of information – it was very difficult for banks to get information about
loan taken by individuals as there was no system of registering anywhere.
With coming up of institutions like CIBIL, Central Registry under SARFAESI,
will be helpful to banks.
 There is less volatility in demand cycle for credit requirement by retail
customers as compared to corporates.
 With introduction of scoring model system for individuals for different retail
loans, assessment of proposal has become convenient for operating staff of
bank.
 Problem of managing large client base is almost taken care of by the support
of (IT) Information Technology for transactions as well as products.
 Pvt. Sector banks are taking support of outside agencies for marketing,
recovery etc, -Outsourcing, Kiosk etc
 BPR – Business Process Reengineering has helped operating staff of
branches by taking help of Service Branches for clearing, Retail Asset
Processing Centres for speedy disposal of loan applications

Retail banking – New Paradigm

 Post Reform Development – Liberalization, Privatisation and Globalization

(LPG) coupled with deregulation process started in 1991-92 has made sea
changes in the functioning of Indian Banking system. There has been number
of changes made by banks for attracting retail customers to their portfolio. A
few are as under:
 From totally regulated environment – banks moved to market driven
competitive environment.
 Traditionally banking approach which depends on walk in customer has given
way – marketing reached a stage of going to the door steps of customer, with
multi delivery channels. Banking is now a super market where all the financial
needs of the customer are met at one place.
 Most of the banks offered standardised products to suit their own requirement
– the banks have moved towards diversification of product, range of products
offered for various types of clients. Every bank is offering value addition
services like ATM, debit and credit cards, personal banking, mobile banking,
pre-sanctioned loans etc. to their standard products.
 Bank was happy with completing a task/ work asked by the customer for a
single product – bank is offering series of product by building relationship with
the customer and cross selling different products to him like insurance
products, mutual fund, systematic investment plans, remittance facility etc.
 Customer service was hardly any priority to bank – banks are moving to
customer satisfaction and customer delight. Customers these days are
becoming more and more demanding on price, product and convenience.
Good ambiance, proper sitting arrangement for customers, comfort, and to
ensure that customer feel he is a welcomed by bank. A number of customer
redressal systems are initiated by banks apart from Banking Ombudsman
brought out by RBI.
 Banks are now searching for newer ways to reach out to customer. Few
banks have launched door step services to customer by delivery of cash and
demand draft at his business site and home pick of cheques for collection.
 At one time customer had loyalty with the institution – customer now switch
over to banks offering better services or higher rate of interest on deposit or
lower interest rate for advance or better pricing for their services offered.
 Banks used to prefer giving loans only to businessman for productive purpose
(as the credit was considered as scarce commodity) – moved to new sectors
like retail/ individuals even for their consumption purpose or purposes like
marriage of son/ daughter, travel apart from giving car loan, vehicle loan etc.
to salaried people who have repaying capacity
 Process of work flow was manual, with low speed and many mistakes –
moved to high speed with accuracy through technology. Decisions are taken
very fast and Turn Around Time (TAT) for delivery of services for most
products have been reduced considerably. Most of the banks capture the
business with fast decision making.
 It is always costly to acquire new customer (6 times as compared to existing
customers). The banks are thereof doing relation banking to market their
products as well as providing them best of the services to retain existing
customers so that they do not switch over to other banks.
Distinction between Corporate (Wholesale Banking) and Retail Banking

Retail Banking Corporate Banking

Target customers Individual segment Corporate clients
Banking model Mass market Wholesale or corporate
banking
Approach B2C (business toB2B (business to
customer) business)
Ticket size of loans Ticket size of loan is low Ticket size is High
ranging from few depending on business
thousands for consumer requirements which may
loan to 75 lacs for be in crores
housing
Risk Widespread due to large Risk is more due to
number of clients customer base is small
sanctioned low amount. and the loan availed is
very high
Returns Interest Spread is more Returns are low due to
hence banks earn more bargaining power for
from retail customers. lower interest rates on
Interest is paid low for advances due to high
deposits and interest amount
rate is charged more for
the loan products

Monitoring and More laborious as the Not laborious due to few

recovery of loans client base is very large. customers
This is however taken
care of to some extent
due to computerization
Liability products Cost of deposit is low as High, due to large
most of the deposits are quantum and
on card rate competitive forces to
garner deposits
Impact of NPA As the loan amount Impact on total NPA is
sanctioned is Low, high even if 1 or 2
turning few accounts as accounts turn NPA.
non performing does not
have much impact on
total Non performing
assets of bank.
Challenges

 To develop multi channels for delivery.

 Repositioning of branches and remote channels with the help of technology.
 How to increase customer satisfaction.

Prepared by:
Arvind Paranjape, M.Sc. CAIIB
paranjape.arvind@yahoo.com
9425067026