You are on page 1of 62

RETAIL: The Focus of Indian Banks

TABLE OF CONTENTS

Sr. No. Topic Page No.


1 Executive Summary 5
2 Retail Banking in India 6
2.1 The Paradigm Shift 6
2.2 Differences between Retail and Corporate Banking 8
2.3 Growth Drivers 8
3 Retail Boom 12
4 Scope for Retail Banking in India 15
5 Marketing Mix 15
5.1 Types of Retail Banking Products 15
5.2 Pricing 17
5.3 Distribution 17
5.4 Promotion 17
5.5 Cross Selling 18
6 Special Features of Retail Credit 18
7 Advantages of Retail Banking 19
8 Disadvantages of Retail Banking 21
9 Competition 22
10 Strategies for increasing Retail Banking Business 25
11 Challenges to Retail Banking in India 27
12 Emerging Issues in Handling Retail Banking 28
13 Latest Happenings 32
14 Case Study: Comparison of HDFC Bank and ICICI Bank Products 38
15 Customer Survey 45
16 Future of Retail Banking in India 53
17 Annexure 57

1
RETAIL: The Focus of Indian Banks

EXECUTIVE SUMMARY

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. 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. Liberalization, economic growth, changing demographics,
and technological advancements have fueled the growth of retail banking in India.

The product range in retail banking includes four broad categories: liability products, asset
products, credit cards/debit cards, and investment products.

Retail banking in India has fast emerged as one of the major drivers of the overall banking
industry and has witnessed enormous growth in the recent past. The Retail Banking Report would
encompass extensive study & analysis of this rapidly growing sector. It would primarily cover the
difference between retail banking and core banking, analysis of the present status, current trends,
major issues & challenges in the growth of the Indian retail banking sector vis-à-vis global
scenario. The report would also include the segments of retail lending, category wise distribution,
comparing India with the global peers, major players and their market share, etc. Also a survey
would be conducted to study the consumers’ awareness regarding banks offerings (retail
products), various factors influencing the purchase decision for the retail products, the
comparative influence of various mediums of advertisements in creating awareness, etc. along
with case studies on the major players in the market.

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 driver. Improving consumer

2
RETAIL: The Focus of Indian Banks

purchasing power, coupled with more liberal attitudes towards personal debt, will further
contribute to India’s retail banking segments.

RETAIL BANKING

“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 on.”

It is also known as High Street Banking.

A deposit of Rs.1 lakh from single customer v/s small deposits of Rs. 10,000 each from 10
different customers. The corporate and retail divide is nothing but internal segmentations and the
customer remains always a customer.

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
transactions. 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 IN INDIA

The Paradigm Shift

There were times when the corporate clientele occupied the centre stage and the retail ones were
pushed to the back seat. The slowdown of the economy, sluggish industrial growth and slump in
agricultural activities have pushed the commercial banks to look to the retail customers.

3
RETAIL: The Focus of Indian Banks

Retail banking has both pros and cons. In a situation like today, the bankers have very little
option, but to chant the “Retail Mantra”

The Retail Banking environment today is changing fast. The changing customer demographics
demands to create a differentiated application based on scalable technology, improved service and
banking convenience. Higher penetration of technology and increase in global literacy levels has
set up the expectations of the customer higher than never before. Increasing use of modern
technology has further enhanced reach and accessibility.

The market today gives us a challenge to provide multiple and innovative contemporary services
to the customer through a consolidated window so as to ensure that the bank’s customer gets
“Uniformity and Consistency” of service delivery across time and at every touch point across all
channels. The pace of innovation is accelerating and security threat has become prime of all
electronic transactions. High cost structure rendering mass-market servicing is prohibitively
expensive.

Present day tech-savvy bankers are now more looking at reduction in their operating costs by
adopting scalable and secure technology thereby reducing the response time to their customers so
as to improve their client base and economies of scale.

The solution lies to market demands and challenges lies in innovation of new offering with
minimum dependence on branches – a multi-channel bank and to eliminate the disadvantage of an
inadequate branch network. Generation of leads to cross sell and creating additional revenues
with utmost customer satisfaction has become focal point worldwide for the success of a Bank.

The domain of retail banking market has tremendous growth potential for banks and finance
companies, as at present it is largely untapped. In the past, people never believed in buying
consumer goods on credit. But today the attitude is changing. The demand for consumer
products has increased. Today, about 70% of consumer goods purchased are through finance
schemes/loans as against 40% about 6 years ago. The home loans alone account for nearly two-
third of the total retail portfolio of the bank.

4
RETAIL: The Focus of Indian Banks

The perceived stability of the income stream from the retail business is probably the most
important driver of the push into retail. From a strategic point of view, this stability is expected to
offset the inherent volatility of revenues/profits from other lines of business.

5
RETAIL: The Focus of Indian Banks

Retail Infrastructure

The second half of the 1990s was a period marked by increased emphasis on (then) new concepts
such as ATMs/Internet/on-line banking as alternative delivery channels.

The past few years, though, have seen a clear revival of the brick-and-mortar concept with the
expansion of the physical branch network, one of the major features of the retail push. It is the
costs being incurred in the creation of the retail infrastructure — not only the physical branch
network but the concomitant infrastructure which has to go with a branch — which suggests that
this retail push is here to stay and is not transitory.

Banks such as ICICI or HDFC possibly see the physical branch network as a critical requirement
in their endeavour to increase the share of retail funding also in their overall funding patterns. In
other words, while credit growth on the retail side is now working well as a business strategy, the
effort now is to expand the overall retail banking franchise itself — comprising liabilities as well
as assets.

The macroeconomic picture also suggests that retail credit business, which at present accounts for
a quarter of the total credit business, will significantly rise as a proportion of the total lending
business.

Cross-country studies clearly point to such an outcome with increasing urbanisation, rising
income levels and further development of the financial markets which will provide alternative
means of financing for the other major claimant of bank finance (the commercial/corporate
sector), all indicating that the demand for retail finance will continue to be very strong well into
the future.

6
RETAIL: The Focus of Indian Banks

Differences between Retail and Corporate Banking

Corporate Banking means financing to corporate institutions which has been declared as
Corporate entity. Corporate entity means if more than one company falls in the same line of
business, financing terms will be same to all the corporate insitution as whole.

Core banking is a centralized system and every data has been kept at the server side. So, a
costumer can open an account and use it in every branch, whenever the connection between a
branch and the core is dismissed, that branch is out of work till the connection be repaired.
In a retail banking, every branch has its own portion of accounts and the changes will be
synchronized with the center at a certain time (e.g. at the end of that day). So, a costumer can
work on his/her account just as the origin branch that he/she registered, in case of disconnecting,
that branch still can provide services to its own accounts.

Growth Drivers

The growth drivers of retail lending are analyzed as under:

Macro-economic Factors

• Shift in the pattern of GDP from hitherto agriculture and manufacturing sectors to services
sector with increase per capita income especially that of the younger generation. [India's
industrial sector accounted for about 21.8% of GDP, where as the services sector
accounted for around 56.1 of GDP in 2002-03 as per revised estimates released by Central.
Statistical Organization].

• The lower uptake in the non-retail sector has compelled banks to shift their focus on retail
assets - specially housing finance- for deployment of funds for a longer period, which is
considered as the safest within the retail portfolio. Housing loans and other retail loans are
comparatively high yielding in terms of interest spread and safer, as risk is diversified
among a large number of individuals across the geographic dimensions. The sector enjoys
a privilege of lowest NPAs amongst all categories of banks.

7
RETAIL: The Focus of Indian Banks

• Depressed stock and real estate markets as compared to those prevailing in 1992-93 to
1995-96 thereby diverting deposits to the banking sectors. Comparatively stable real estate
prices during last 4/5 years have laid to spurt in demand for housing loans.

• Keenness shown by the consumer goods/ automobile manufacturers to -push up finance


schemes through market tie-up with banks with a view to increasing their marketing share.

Demographic / Behavioral Factors

• Growing concept of nuclear families than the joint families necessitating need for housing
units as well as other items of consumer durables.

• Increased number of dual income families resulting in higher income and savings.

• Increased demand for dwelling units due to gradual shift of population from rural/semi-
urban centre to urban/metro centre for employment.

• Shift in the attitude of the Indian household from "save and buy' theory to a `buy and
repay' principle.

• Increased middle-income segment and their income levels.

• Emergence of new sectors such as Information Technology, media, etc. In the economy
that resulted in higher income opportunities and major impact on change in urban
consumption pattern.

• Awareness and sophistication in urban and semi-urban households for urban convenience.
Social security and status have also contributed to higher demand for housing units, cars,
etc.

Favorable Role of RBI

8
RETAIL: The Focus of Indian Banks

• Inclusion of housing loans within the priority sector. Direct finance up to Rs.10 -lakhs in
case of rural and semi-urban areas now form part of the priority sector advances. This
promoted banks to go for housing loans in a big way as it helped them to attain their
targets of priority sector lending.

• Reduction in risk weight age bank's extending loans for acquisition of residential house
properties to 50 per cent from 100 per cent. Reduction in Capital Adequacy Ratio
requirement has effectively doubled the credit disbursement capacity of banks.

• Banks have elongated repayment periods of retail loans years to 50/20 years besides
quoting fixed/ variable rate of interests based on their asset liability management structure
and study of behavioral pattern of demand and time deposits.

• Deregulation of interest rate with option to quote fixed/ variable interest rate.

• Continuous reduction in bank rate, which resulted in reduction in lending rates as well.

• Southward movement in CRR and SLR ratios increasing lending capacity of banks.

Catalyst-Role of Government

• Tax exemptions for payment of interest on capital borrowed for purchase/ construction of
house property and principle repayment. This made housing finance affordable and within
the reach of common man. [It is important to note that the housing sector has been
recipient of a large number of fiscal incentives in the last budgets].

• These exemptions also changed the profile of the retail segment from hitherto cash
transactions to book transactions.

• The Government could not ignore the importance of housing sector in overall
development of the economy due to the following factors:

9
RETAIL: The Focus of Indian Banks

 Housing construction activities can generate opportunities for employment. In the


present context of jobless GDP growth, this issue assumes importance as the housing
construction provides massive job opportunities for both unskilled and skilled man
power.

 Mass construction of houses will result in the benefits of the nation by the way of
healthy standard of living, motivation to save more and thereby providing sustainable
economic recovery.

 This would also lead to growth in related industries as well.

10
RETAIL: The Focus of Indian Banks

Initiatives on the part of Banks

• The growth in retail banking has been facilitated by growth in banking technology and
automation of banking processes to enable extension of reach and rationalization of
costs. ATMs have emerged as an alternative banking channels which facilitate low-cost
transactions vis-à-vis traditional branches / method of lending. It also has the advantage
of reducing the branch traffic and enables banks with small networks to offset the
traditional disadvantages by increasing their reach and spread.

• Ample liquidity in the banking system and falling global interest rates have also
compelled the domestic banks to reduce interest rates of retail lending.

• Banks could afford to quote lower rate of interest, even below PLR as low cost [saving
bank] and no cost [current account] deposits contribute more than 1/3rd of their funds
[deposits].The declining cost of incremental deposits has enabled the Banks to reduce
their interest rates on housing loans as well as other retail segments loans.

• Easy and affordable access to retails loans through a wide range of options / flexibility.
Banks even finance cost of registration, stamp duty, society charges and other
associated expenditures such as furniture and fixtures in case of housing loans and cost
of registration and insurance, etc. in case of auto loans.

• Offering retail loans for short term, 3 years and long term ranging term ranging from
15/20 years as compared to their earlier 5-7 years only.

• Making financing attractive by offering free / concessional / value added services like
issue of credit card, insurance, etc.

• Continuous waiver of processing fees / administration fees, prepayment charges, etc. by


the Banks. As of now, the cost of retail lending is restricted to the interest costs.

11
RETAIL: The Focus of Indian Banks

RETAIL BOOM

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.

12
RETAIL: The Focus of Indian Banks

• 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 years.

13
RETAIL: The Focus of Indian Banks

• Future Outlook
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.

The reasons for this shift to retail, particularly the housing finance segment, are many. The
important among these include:

- The poor credit off take to the corporate, commercial and other business sector because of
industrial slowdown.

- Risky nature of lending to corporate, given in industry recession and uncertainty prevalent in
the economy.

- High disintermediation pressure, leading many highly rated corporates to tap the domestic
and/or overseas markets directly for finance, rather than approaching the banks.

- Relatively safe nature of some of the retail credit finance with lesser incidence of loan turning
bad.

- Rising disposable income, changing lifestyles/aspirations and willingness to spend for more
luxuries of the higher middle class.

- Better availability of loans, because of the consultancy lowering interest rates, as a result of
the low interest regime followed by the regulating authorities, the housing loans interest rates
hailed to almost 7.5 – 8% in last 5 years.

- Increased government incentives in form of tax rebates etc. in the case of certain loans like
housing loans.

- Banks are aware with abundant reserve requirement by RBI, they are searching revenues for
packing the surplus funds.

14
RETAIL: The Focus of Indian Banks

SCOPE FOR RETAIL BANKING IN INDIA

• 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 increasing.

• 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.

MARKETING MIX

• Types of Retail Banking Products

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.

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

• Multiple products (deposits, credit cards, insurance, investments and securities)

• Multiple channels of distribution (call center, branch, internet)

15
RETAIL: The Focus of Indian Banks

• Multiple customer groups (consumer, small business, and corporate).

16
RETAIL: The Focus of Indian Banks

- Liability Products

Commercial banks offer a variety of "liability products" to consumers. These products are known
as "liability products" because they represent liabilities of the bank. Consumers generally know
them as "deposit" products. Typically, liability products include checking and savings accounts,
money market accounts and certificates of deposit (CDs). Bank liability products are useful to
consumers since they provide a safe place to keep their funds and give them the opportunity to
earn interest on cash that they may not immediately need. Liability products also give consumers
access to cash via checks and ATMs, and except for most checking accounts, they allow
consumers to earn interest on their deposits.

- Asset Products

Asset products are so named because they represent assets of the bank. Consumers generally
know them as "loan products." These include mortgages, car loans, personal installment loans
and credit card loans. These products allow consumers to purchase, for example, homes, cars
and merchandise which they otherwise could not immediately afford. Asset products earn
interest for the bank which is paid by the borrower.

- Credit/Debit Cards

A credit card is a card entitling its holder to buy goods and services based on the holder's
promise to pay for these goods and services. The issuer of the card grants a line of credit to
the consumer (or the user) from which the user can borrow money for payment to a merchant
or as a cash advance to the user.

A debit card provides an alternative payment method to cash when making purchases.
Functionally, it can be called an electronic cheque, as the funds are withdrawn directly from
either the bank account, or from the remaining balance on the card.

- Investment Products

17
RETAIL: The Focus of Indian Banks

Investment Products includes mutual funds, insurance, bonds and other fixed income
securities, annuities, etc.

• Pricing

As the bargaining power of a retail customer is less than that of a corporate customer, banks
tend to charge the same price/interest rate for all retail customers, with the exception of high-
value segments (HNIs and NRIs). Banks set the price for liability products, without the
interference of the RBI. Asset products are priced based on the prime lending rates set by
banks for each asset category. Overt pricing and covert pricing are the two different
approaches to pricing

PRICING DEFINITION EXAMPLE


METHOD

COVERT Hidden or implicit pricing “Free” banking (no interest).


Maintain minimum balance,
Cost to consumer may be non- notice for withdrawal of
monetary (eg time, psychic) savings

OVERT Explicit charging Transaction costs


Cost is mostly obvious and Management fees
monetary

• Promotion

The promotion of retail banking products is done through various avenues of promotion, such as
advertising, sales promotion, personal selling, brand building, public relations, telemarketing,
direct sales, and direct-response advertising.

• Distribution

The common distribution channels in retail banking are branches, ATMs, the Internet, phone
banking, and mobile banking, EFTPOS, direct selling agents (DSAs), call centres, and
distribution network of alliance partners. There are some overlaps between the promotional

18
RETAIL: The Focus of Indian Banks

avenues and distribution channels. For example, telemarketing and personal selling may be
outsourced to DSAs.

• Cross Selling

Cross-selling helps the banks to increase their sales by selling different products to existing
clients. It helps improve customer retention, reduce the cost of customer acquisition, and enhance
customer lifetime profitability. Cross-selling also helps the customers in terms of reduced prices,
faster and easier processing and customized products. However, excessive cross-selling would be
viewed by the customer as harassment.

SPECIAL FEATURES OF RETAIL CREDIT

One of the prominent features of Retail Banking products is that it is a volume driven business.
Further, Retail Credit ensures that the business is widely dispersed among a large customer base
unlike in the case of corporate lending, where the risk may be concentrated on a selected few
plans. Ability of a bank to administer a large portfolio of retail credit products depends upon such
factors :

• Strong credit assessment capability

Because of large volume good infrastructure is required. If the credit assessment itself is
qualitative, than the need for follow up in the future reduces considerably.

• Sound documentation

A latest system for credit documentation is necessary pre-requisite for healthy growth of credit
portfolio, as in the case of credit assessment, this will also minimize the need to follow up at
future point of time.

• Strong possessing capability

Since large volumes of transactions are involved, today transactions, maintenance of backups is
required

19
RETAIL: The Focus of Indian Banks

• Regular constant follow- up

Ideally, follow up for loan repayments should be an ongoing process. It should start from
customer enquiry and last till the loan is repaid fully.

• Skilled human resource

This is one of the most important pre-requisite for the efficient management of large and diverse
retail credit portfolio. Only highly skilled and experienced man power can withstand the river of
administrating a diverse and complex retail credit portfolio.

• Technological support

This is yet another vital requirement. Retail credit is highly technological intensive in nature,
because of large volumes of business, the need to provide instantaneous service to the customer
large, faster processing, maintaining database, etc.

ADVANTAGES OF RETAIL BANKING

Retail banking has inherent advantages outweighing certain disadvantages. Advantages are
analyzed from the resource angle and asset angle.

Resource Side

• 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.

20
RETAIL: The Focus of Indian Banks

Asset Side

• 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 credit.

• Innovative product development credit.

• Retail banking involves minimum marketing efforts in a 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.

The perceived stability of the income stream from the retail business is probably the most
important driver of the push into retail.

From a strategic point of view, this stability is expected to offset the inherent volatility of
revenues/profits from other lines of business, such as financial markets trading/corporate and
commercial banking. Indeed, a study of the earnings profile/balance-sheet structure of banks
such as ICICI or HDFC over the past few years does show the stability which has been
imparted to the overall revenue stream by the retail business.

This stability basically arises from the widely dispersed nature of the retail assets portfolio.
This means that banks are able to significantly diversify away specific-borrower risk and, at
the aggregate level, are exposed to the overall systematic or macroeconomic risk only. The
efforts to make retail banking a high volume and commodity-style business can be better
21
RETAIL: The Focus of Indian Banks

understood in this backdrop. Technology plays a big part here in enabling the conduct of the
retail business as a high volume game.

DISADVANTAGES OF RETAIL BANKING

• 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.

• Customers are attracted towards other financial products like mutual funds etc.

• 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 follow 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.

The retail credit explosion - particularly among the private sector banks is well established.
But what prevents this phenomenon from being labeled a retail banking expansion is the fact
that the growth so far has been restricted to the asset side only for the private sector banks.

The differences between the new private banks and public sector banks with respect to the
funding profile/retail asset profile stand out. For public sector banks, retail deposits (meaning
deposits of individuals) account for as much as 65 per cent of their overall deposit base but
22
RETAIL: The Focus of Indian Banks

retail assets form only around 25 per cent of their total credit. For the private banks, retail
deposits are much lower at around 35-40 per cent of the total deposit base but retail assets
dominate their overall asset portfolios.

Significant implications flow from this diversity in funding/asset profiles. For private sector
banks, it is imperative to increase the retail share in their funding to sustain and improve the
profitability of their retail asset business. For the public sector banks, the high share of retail
deposits points to the opportunities ahead.

COMPETITION IN THIS SEGMENT

ICICI Bank has a total loan base of around Rs 2,00,000 crore as of March 2007 has 65 per
cent or Rs 1,30,000 crore of this under the retail category — comprising housing loans, credit
card receivables, auto loans, personal loans and small business loans. The proportion of retail
loans is not much lower in the case of HDFC Bank also. The bank’s retail loans have grown
by around 35 per cent on average in the past few years and accounted for as much as 57 per
cent (Rs 28,000 crore) of its total loans of Rs 49,000 crore as of March 2007. And both the
banks have reiterated that retail banking will continue to be a key area of strategic emphasis
for them in the ensuing period.

The retail credit growth of nationalised banks does pale in comparison with that of the private
bank majors. Retail credit increased only from 10 per cent of nationalised banks’ total credit
in March 2000 to around 15 per cent of total credit in March 2007. In absolute terms, the
group of 20 nationalised banks had around Rs 1,35,000 crore of retail loans in March 2007.
The State Bank group had a higher proportion of its total loans under the retail category –
around 25 per cent in March 2007 and this share was slightly more than double (10 per cent)
of what the group had under this category in March 2000. (The public sector banks —
comprising the State Bank group and the nationalised banks — account for around 60 per cent
of total banking business.)

For the banking sector as a whole, retail credit now forms around 25 per cent of the total
credit. Total bank credit as of June 2007 is Rs 19,00,000 crore. This means that just two

23
RETAIL: The Focus of Indian Banks

banks, ICICI Bank and HDFC Bank, now account for close to one-third of the total retail
credit portfolio of the entire banking sector. And the way these two banks are going about
expanding their retail business — investing heavily in expanding their physical branch
network, continued emphasis on alternative delivery channels such as ATMs/Internet, the
technology initiatives they are undertaking to sustain the retail business as a high volume,
commodity-style business, all indicate that they could well account for a much higher share of
the total retail business in the ensuing period.

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, 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. 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. So now on, when you see a loan mela or a road show
showcasing the retail bouquet of an elite MNC giant, you know that a significant commission
earned out of any such booking gets ploughed back to our own economy. Perhaps, one of the
biggest impediments in foreign players leveraging the Indian markets is the absence of
positive credit bureaus. In the west the risk profile can be easily mapped to things like SSNs
and this information can be publicly traded. PAN is a step in this direction but lot more work
need to be done. What has been a positive step towards this is a negative file sharing started
by a consortium of 11 banks. However, as a McKinsey study points out actual write-offs on
NPAs show a strong negative correlation with sharing of positive information.

24
RETAIL: The Focus of Indian Banks

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, 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.

Though the Indian financial sector does not have a sub-prime market, retail lending has increased
by over 30 per cent year on year between March 2006 and March 2007 underscoring need for a
caution, an ASSOCHAM Eco Pulse (AEP) Study has revealed.

As per the AEP Study on `Retail Lending’, ICICI Bank’s retail advances increased by 39 per cent
at March 31, 2007, which constituted 65 per cent of advances. Punjab National Bank’s retail
credit constitutes 22.7 per cent of its net credit. Retail loans of State Bank of India, one of the
largest Banks in India constitutes 21.50 per cent of its total loan book.

Competition in the personal loans market has increased with the entry of multinationals, private
banks and NBFCs. Citi Financial and GE Money are the oldest players in this market. However,
in recent times, companies like ABN Amro, HDFC Bank, HSBC, ICICI Bank, DBS
Cholamandalam, Fullerton India and Religare have been increasingly focusing on the personal
loan. In most cases, the sub-prime market for these players constitutes somewhere between 5-20
per cent of the monthly disbursements.

Though some players like Citi Financial and Fullerton go through a personal screening of
customers, this is not a practice being followed by everyone.

Most of the commercial banks have focused on retail lending by registering an increase of about
32 per cent with a subsequent reduction of 13.75 per cent in their NPAs on a y-o-y basis during
the financial year 2006-07.

It further revealed that among the major commercial banks topped the list in extending loans in
the retail segment. The then CBOP saw a huge growth of 65 per cent in their retail business in FY

25
RETAIL: The Focus of Indian Banks

2006-07. Others in the pack doing well in this area of lucrative retail banking included ICICI
Bank (38.5 per cent), Bank of India (35 per cent), Dena Bank (33 per cent), Allahabad Bank (29.3
per cent) and HDFC Bank (22.9 per cent).

STRATEGIES FOR INCREASING RETAIL BANKING BUSINESS

• Constant product innovation to match the requirements of the customer segments

The customer database available with the banks is the best source of their demographic and
financial information and can be used by the banks for targeting certain customer segments
for new or modified product. The banks should come out with new products in the area of
securities, mutual funds and insurance.

• Quality service and quickness in delivery

As most of the banks are offering retail products of similar nature, the customers can easily
switchover to the one, which offers better service at comparatively lower costs. The quality of
service that banks offer and the experience that clients have, matter the most. Hence, to retain
the customers, banks have to come out with competitive products satisfying the desires of the
customers at the click of a button.

• Introduction of new delivery channels

Retail customers like to interface with their bank through multiple channels. Therefore, banks
should try to give high quality service across all service channels like branches, Internet,
ATMs, etc.

• Tapping of unexploited potential and increasing the volume of business

This will compensate for the thin margins. The Indian retail banking market still remains
largely untapped giving a scope for growth to the banks and financial institutions. With
changing psyche of Indian consumers, who are now comfortable with the idea of availing
loans for their personal needs, banks have tremendous potential lying in this segment.

26
RETAIL: The Focus of Indian Banks

Marketing departments of the banks be geared up and special training be imparted to them so
that banks are successful in grabbing more and more of retail business in the market.

• Infrastructure outsourcing

This will help in lowering the cost of service channels combined with quality and quickness.

• Detail market research

Banks may go for detail market research, which will help them in knowing what their
competitors are offering to their clients. This will enable them to have an edge over their
competitors and increase their share in retail banking pie by offering better products and
services.

• Cross-selling of products

PSBs have an added advantage of having a wide network of branches, which gives them an
opportunity to sell third-party products through these branches.

• Business process outsourcing

Outsourcing of requirements would not only save cost and time but would help the banks in
concentrating on the core business area. Banks can devote more time for marketing, customer
service and brand building. For example, Management of ATMs can be outsourced. This will
save the banks from dealing with the intricacies of technology.

• Tie-up arrangements

PSBs with regional concentration can reap the benefit of reaching customers across the
country by entering into strategic alliance with other such banks with intensive presence in
other regions. In the present regime of falling interest and stiff competition, banks are aware
that it is finally the retail banking which will enable them to hold the head above water.
Hence, banks should make all out efforts to boost the retail banking by recognizing the needs
of the customers. It is essential that banks would be imaginative in predicting the customers'
expectations in the ever-changing tastes and environments. It is the innovative and
competitive products coupled with high quality care for clients will only hold the key to

27
RETAIL: The Focus of Indian Banks

success in this area. In short, bankers have to run very fast even to stay where they are now. It
is the survival of the fastest now and not only survival of the fittest.

CHALLENGES TO RETAIL BANKING IN INDIA

• 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.

• 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.

28
RETAIL: The Focus of Indian Banks

• 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.

EMERGING ISSUES IN HANDLING RETAIL BANKING

• Knowing Customer

‘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. The benefits flowing out of cross-selling and up-selling will remain a far cry in the
absence of this vital input. In this regard the customer databases available with most of the public
sector banks, if not all, remain far from being enviable.

What needs to be done is setting up of a robust data warehouse where from meaningful data on
customers, their preferences, there spending patterns, etc. can be mined. Cleansing of existing
data is the first step in this direction. PSBs have a long way to go in this regard.

• Technology Issues

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. And it is a long haul.
The Issues involved include adoption of the right technology at the right time and at the same
time ensuring volumes and margins to sustain the investments.

It is pertinent to remember that Citibank, known for its deployment of technology, took nearly a
decade to make profits in credit cards. It has also to be added in the same breath that without
adequate technology support, it would be well nigh possible to administer the growing retail
portfolio without allowing its health to deteriorate. Further, the key to reduction in transaction

29
RETAIL: The Focus of Indian Banks

costs simultaneously with increase in ability to handle huge volumes of business lies only in
technology adoption.

PSBs are on their way to catch up with the technology much required for the success of retail
banking efforts. Lack of connectivity, stand alone models, concept of branch customer as against
bank customer, lack of convergence amongst available channels, absence of customer profiling,
lack of proper decision support systems, etc., are a few deficiencies that are being overcome in a
great way. However, the initiatives in this regard should include creating flexible computing
architecture amenable to changes and having scalability, a futuristic approach, networking across
channels, development of a strong Customer Information Systems (CIS) and adopting Customer
Relationship Management (CRM) models for getting a 360 degree view of the customer.

• Organizational Alignment

It is of utmost importance that the culture and practices of an institution support its stated goals.
Having decided to take a plunge into retail banking, banks need to have a well defined business
strategy based on the competitive of the bank and its potential. Creation of a proper organization
structure and business operating models which would facilitate easy work flow are the needs of
the hour. The need for building the organizational capacity needed to achieve the desired results
cannot be overstated.

This would mean a strong commitment at all levels, intensive training of the rank and file, putting
in place a proper incentive scheme, etc. As a part of organizational alignment, there is also the
need for setting up of an effective Corporate Marketing Division. Most of the public sector banks
have only publicity departments and not marketing setup. A fully fledged marketing department
or division would help in evolving a brand strategy, address the issue of alienation from the
upwardly mobile, high net worth customer group and improve the recall value of the institution
and its products by arresting the trend of getting receded from public memory. The much needed
tie-ups with manufacturers/distributors/builders will also facilitated smoothly. It is time to break
the myth PSBs are not customer friendly. The attention is to be diverted to vast databases of
customers lying with the PSBs till unexploited for marketing.

30
RETAIL: The Focus of Indian Banks

• Product Innovation

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 innovation? Peter Drucker in his path breaking
book: “Management Challenges for the 21st Century” has in fact sounded a word of caution:
“innovation that is not in tune with the strategic realities will not work; confusing novelty with
innovation (should be avoided), test of innovation is that it creates value; novelty creates only
amusement”. The days of selling the products available in the shelves are gone. Banks need to
innovate products suiting the needs and requirements of different types of customers. Revisiting
the features of the existing products to continue to keep them on demand should not also be lost
sight of.

• Pricing of Product

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. There is a tendency, at least on the part of few to camouflage the price. The
situation cannot remain his way for long. This will be one issue that will be gaining importance
in the near future.

• Process Changes

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 essence. A realization has to drawn that

31
RETAIL: The Focus of Indian Banks

automating the inefficiencies will not help anyone and continuing the old processes with new
technology would only make the organization an old expensive one. Work flow and document
management will be integral part of process changes. The documentation issues have to remain
simple both in terms of documents to be submitted by the customer at the time of loan application
and those to be executed upon sanction.

• Issue concerning Human Resources

While technology and product innovation are vital , the soft issues concerning the human capital
of the banks are more vital. The corporate initiatives need to focus on bringing around a frontline
revolution. Though the changes envisaged are seen at the frontline, the initiatives have to really
come from the ‘back end’. The top management of banks must be seen as practicing what
preaches. The initiatives should aim at improved delivery time and methods of approach. There
is an imperative need to create a perception that the banks are market-oriented.

This would mean a lot of proactive steps on the part of bank management which would include
empowering staff at various levels, devising appropriate tools for performance measurement
bringing about a transformation – ‘can’t do ‘to’ can do’ mind-set change from restrictive practices
to total flexible work place, say. By having universal tellers, bringing in managerial controlling
work place, provision of intensive training on products and processes, emphasizing, coaching
etiquette, good manners and best behavioural models, formulating objective appraisals, bringing
in transparency, putting in place good and acceptable reward and punishment system, facilitating
the placement of young /youthful staff in front-line defining a new role for front-line staff by
projecting them as sellers of products rather than clerks at work and changing the image of the
banks from a transaction provider to a solution provider.

• Rural Orientation

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.

32
RETAIL: The Focus of Indian Banks

Multinational Corporations, as manufacturers and distributors, have already taken the lead in
showing the way by coming out with exquisite products, packaging and promotions, keeping the
rural customer in mind. Washing powders and shampoos in Re.1 sachet made available through
an efficient network and testimony to the determination of the MNCs to penetrate the rural
market. In this scenario, banks cannot lack behind.

In particular PSBs, which have a strong rural presence, need to address the needs of rural
customers in a big way. These and only these will propel retail growth that is envisaged as a key
strategy for portfolio expansion by most of the banks.

LATEST HAPPENINGS

Of late banks are coming up with innovative product offerings and promotion schemes to tie up
old customers and attract new customers. Some of the innovative offerings are listed below:-

• Standard Chartered ANZ has launched the Home Saver Account. Along with the
Home Loan, your will get a FREE savings bank account into which you may deposit your
monthly salary. The EMI for the loan will be automatically reduced from your account. The
excess balance in your savings account will earn interest that will be adjusted against your
future EMI payments. The bank claims that the effective interest rate gets reduced by upto
45% because of this scheme.

• Citibank
 Offer loans with no guarantors. Most banks require that you present a guarantor who will
back you up if you default on your loan repayment. It can often be embarrassing to ask
friends to stand guarantor as most banks do not accept relatives as guarantors.
 Citibank gives home loans upto 90% of the property value, the highest from any
bank (only Tata Hsg Fin. matched this offer)
 Citibank offers a flexi-savings account to reduce your cost of borrowing. The bank
will automatically open a Saving Account from which you can give standing instructions
to deduct the EMI payments for the loan. You can then prepay the loan at any point in

33
RETAIL: The Focus of Indian Banks

time and be given instant credit for the same, in case you get a large lump-sum annual
bonus from your employer. Should you require money in an emergency at any point you
can avail of an over draft on this savings account at an interest rate that is the same as that
on your Home loan. This works out much cheaper than taking an over draft on a normal
savings account

• Dewan Housing Finance and LIC Housing Finance Ltd. offers consumer loans to their
existing Home Loan customers at a discount to market rates. The customer has to be a
housing loan borrower for the period not less than 6 month with a good repayment record
FREE DOUBLE PROTECTION PLAN in the form of Personal Accident Risk Cover and
Property Insurance

• GIC Housing Finance Ltd.


GICHFL gives Consumer loans for purchase of home equipment at the same interest rate
as the home loan to customers at rates of interest that are the lower than other consumer
loans. The total loan amount including the housing loan can be upto 90% of the value of
the home. The tenure of the consumer loan is restricted to 5 years.

 HDFC Bank Ltd


 Offer Flexible (Customized) Repayment Schemes, keeping in
mind the fact that each individual has a unique problem requiring unique solutions, HDFC
has developed various repayment options like Step Up Repayment Facility, Flexible Loan
Installment and Balloon Payment Scheme
 Pari Passu/ Second Mortgage Arrangements: HDFC has a tie-up
with a large number of Public Sector Organizations and banks which enable us to offer
loans to your employees with the flexibility of their spouse also availing a loan from
his/her own employer
 Safe Document Storage Facilities: HDFC has state of art storage
facilities, which are theft and fire proof, at various locations where loan and property

34
RETAIL: The Focus of Indian Banks

documents are stored. In this way valuable documents are stored safely over the period of
the loan and are released almost immediately after a customer repays his loan
 A customer, after availing of a loan can approach HDFC anytime thereafter to increase
the Equated Monthly Installment which will help him repay the loan faster.
 Home Conversion Loan offered to its existing customers who are interested in
moving to a new house. Through this scheme customers can apply to have their existing
loan transferred towards the purchase of the new home. Customers may also apply for an
additional loan amount for the purchase of the new house. This gives the customer the
option of selling their existing house, if they wish to, without having to repay their old loan

The fixed rate loan can be converted to floating without any penalty charges. However, you
will be charged 2% if you refinance the loan from another company

• HUDCO
 Will waive the last 2 EMI payments on the loan if the customer has a
perfect repayment record with no bounced cheques. The loan amount initially taken must
exceed Rs. 5 lacs and no prepayments where to have been made during the tenure of the
loan. This is not available for the Floating rate loan.
 There is a discounted start-up fee for Government employees. The
Administrating fees stand reduced from0.7% to 0.5% only.
 Free triple insurance - property cover, earthquake cover and personal
accident cover. given free along with the loan ( not available for the Floating rate loan)
 You can prepay the entire loan in any year without any prepayment
penalty. Each prepayment has to be at least 10% of the outstanding loan. However, the
floating rate loan has a 1% prepayment penalty.

• HSBC
 Offers flexible interest rate loans that can be reset every year
depending on the prevailing interest rates at that point. The new interest rate will be
applicable for the rolling one year

35
RETAIL: The Focus of Indian Banks

 Guarantor is required only for loans more than Rs. 10 lacs.


Else no guarantor
 You can prepay up to 25% of the outstanding loan in any
year without paying a penalty. For amounts over that, 2% penalty levied.

• ICICI
 Launches a 30 year tenure home loan, the
longest available
 ICICI also launches a variable rate loan with
a monthly rest basis versus the regular fixed rate loan that is on an annual rest basis
 No guarantors are required for loans up to 20
years in most cases
 No pre payment fees for any part payment as
long as the loan is not fully retired, else 2% charge on pre paid amount. You can repay up
to 33% of the outstanding loan in any year without paying penalty.
 Free accident death cover for the owner
 Special 100% funding for select properties
 Higher eligibility for self-employed
professionals through segment-specific schemes

• LIC Housing Finance Ltd. will lower quoted interest rate by 0.5% for loans covered by a
life insurance cover that is taken from LIC. The life cover must be taken for a minimum
period that covers the tenure of the Home Loan

• State Bank of India


 Offers Home Loans with no
start-up costs. Most banks charge as high as 2% as processing and administrative fees

36
RETAIL: The Focus of Indian Banks

 Prepayment is 2% if the entire


loan is pre paid else it is 0%. Avoid this penalty by prepaying up to 99% of your loan if
need be

37
RETAIL: The Focus of Indian Banks

• Tata Housing Finance


 Offers Home Loans up to 90% of the value of the property and 100% in some new
projects.
 Prepayment penalty of 0% for up to 4 prepayments in each year. The entire loan can
be retired without incurring any penalty.
 Free accident and property insurance. The premium payable for a Tata AIG Single
Premium Life Cover can also be included in the loan amount sanctioned.

• IDBI Bank offers balance transfer scheme. If you have taken a fixed rate loan at a high
rate of interest a few years back, then you can enter into an arrangement with IDBI bank to
transfer the loan to them at the current lower rate of interest. You will also get free gifts to
compensate you for the difference as the old and new EMI. The original EMI cheques will be
used by IDBI to recover the loan amount from you over the remaining tenure of the loan. You
will not get the benefits of any further fall in interest rates in this product.

• Canara Bank to focus on retail loan segment


 Canara Bank is looking at the retail credit segment as a thrust area, and hopes to close
the financial year with Rs 24,600 crore advances in this segment alone.
 “Our intention is to take the retail portfolio from 15 per cent of the total loan book to
20 per cent by March 2012,” Mr H.S. Upendra Kamath, Executive Director, Canara
Bank, told Business Line.
 To achieve this, the bank's focus will be on housing, trade, educational and auto loans.
 “Keeping the rapid urbanisation and increasing middle-class households in the country
in mind, we see opportunities for financing dwelling units, purchase of automobiles
and educational loans for children. These three offer immense scope for banks,” he
said. The bank recorded a 27 per cent year-on-year growth in the retail segment from
Rs 6,668 crore to Rs 8,464 crore. Mr Kamath said that the bank has seen a pick-up in

38
RETAIL: The Focus of Indian Banks

the housing loan segment, where in December 2009 there were about Rs 200 crore
disbursements.
 Asset hubs. This has been largely possible due to the concentrated effort of the retail
asset hubs that the bank set up for centralised processing of retail loans, he added. It
has so far set up 25 such centres across India. The bank has tied up with all leading
builders in each of these 25 cities. According to Mr Kamath, the bank would also give
an “in-principle loan based on the customer's income documents if he/she wants to be
sure of a home loan before going in for a home”. “During the next financial year, we
will open 15 more retail asset hubs in the country,” said Mr Kamath.

39
RETAIL: The Focus of Indian Banks

CASE STUDY

A Comparative Study

As a part of the case study, an attempt is made to compare the two giants HDFC Bank and ICICI
Bank on the retail front. The two banks have carried forward their style statement in their
approach to business. ICICI Bank thinks big, is all for growth and hungry for market share.
HDFC Bank is more conservative and cautious, grows at a measured pace, without taking any
undue risks.

ICICI Bank Overview

ICICI Bank began its retail banking venture in mid-1999. By January 2000, it had moved on to
introducing home loans, car loans, personal loans and credit cards.

Realising the need for a bigger retail deposit base, the bank started building a branch and an ATM
network. The acquisition of Bank of Madura in March 2001 added 263 branches, many of them in
cities where ICICI Bank did not have a presence.

The merger of the erstwhile financial institution ICICI Limited with the bank in April 2002 gave
it a ready-made corporate clientele. The flip side was that ICICI Bank had Rs 10,000 crore (Rs
100 billion) of restructured assets for which it had to make provisions.

40
RETAIL: The Focus of Indian Banks

Some of its accolades in the retail field

• ICICI Bank edged past foreign banking majors Citibank and Standard Chartered Bank to
emerge as the best retail bank in India, according to the latest issue of 'Asian Banker
Journal'.
• ICICI Bank was second only to HSBC, Hong Kong in the list of top five retail banks in
the Asia-Pacific region.
• ICICI Bank's success is attributed to its dynamic executive director Chanda Kochhar who
was named the retail banker of the year for 2004.

HDFC Bank Overview

HDFC Bank kick started its retail operations in 1998, a year before ICICI Bank. But in products
like credit cards, it was slow to get off the mark to which it defends itself by saying "Although
the asset yields may have been lower, we were able to cross-sell products so that the overall
returns were better. We may have grown slower than our peers, but the risks were lower."

However, HDFC Bank was handicapped because it could not sell home loans (because its parent
HDFC was in the business), though it has been originating them in the past one-and-a-half years.
Some of its accolades in the field:

• HDFC Bank bagged the award for excellence in retail risk management among all the
Asian banks

Share of Wallet

2009 HDFC Bank ICICI Bank

Branches 1725 1694

ATMs 4000 4883

Countries 18 18

Retail loans (% of gross advances) 61% 55%

41
RETAIL: The Focus of Indian Banks

Retail Deposits (% of total deposits) 47% 28.7%

Home loans (Mkt Share) 40% 25%

Credit cards (Mn) 4.5 7

Net NPA 0.6% 2.19%

Comparing HDFC Netbanking vis-à-vis ICICI Netbanking

The common do-it-from-home facilities that both these Netbankings provide to their customers
are:

• Viewing of Account summary, current balance, all historic transactions, mini and
detailed statements.
• Linking of multiple accounts like Savings, Current, Credit cards, Demat, Mutual
funds and Fixed deposit accounts to a single Netbanking ID.
• Transfer of funds (more on this in subsequent section)
• Requesting a new demand draft or cheque book at your address.
• Online payment of utility bills like Electricity, Gas, Landline and Mobile phone
bills, Insurance premiums, Credit card bills, etc.
• Applying for new Fixed Deposits online.
• Download of Account statements in Text, Excel and MS Money formats.
• Online request for a hard copy of your bank statements at your address. ICICI
charges INR 50 whereas HDFC charges INR 30 per statement request.
• Viewing status of deposited cheques or stopping the payment of a cheque.
• Both use High-grade Encryptions for secure login and transactions. ICICI uses
RC4 128 bit whereas HDFC uses AES-256 bit.
• Both have recently enabled Virtual Keyboard logins to stop any software from
recording your passwords when you type them. Virtual keyboard asks you to choose the
password letters by a mouse.

42
RETAIL: The Focus of Indian Banks

However, there are some feature- by- feature differences.

• ICICI Netbanking’s Funds Transfer facility is much more hassle-free. The facility to
transfer funds to yours or someone else’s account, at intra or inter-bank branch, comes
readily with the ICICI Netbanking subscription. That is, the facility is ready to use and
you just need to add-in the new beneficiary for making the first transfer.

However, in case of HDFC Third Party Transfer, you are required to apply to this
service by filling up a hard copy of the Third Party Transfer Application Form and
submitting it to any of their Bank branches or ATM. Moreover, user experiences say that
the application is not processed promptly if you deposit the activation form at an ATM,
and may cause further delays upto weeks. Hence, it is preferred to walk into the HDFC
bank and talk to the representative for activation

• You can initiate the opening of a variety of accounts online through ICICI Netbanking by
submitting an online request with the details. For certain accounts like the Recurring
Deposits, the request gets completed without the need for you to visit the bank, and the
newly created account is accessible at your next login upon approval. On the other hand,
in case for HDFC, this becomes possible only on visiting the bank branch. ICICI
Netbanking also offers online self-compounding accounts like Recurring Deposits and
Money Multiplier Account that HDFC Netbanking doesn’t.

• Though both ICICI and HDFC Netbanking offers the facility of receiving message
“Alerts” on your mobile to notify transactions, ICICI offers online customisation of the
alerts upto the minutest details. For e.g, you can configure the threshold amounts above
which you need an alert for, and also specify whether you need the alert by an SMS or
email. You can as well toggle on/off the Insta-alerts for one or more services, say if you
don’t want to receive the alerts for fund credits and need them only for debits.

43
RETAIL: The Focus of Indian Banks

• HDFC
Netbanking is also
lagging
behind as it
doesn’t allow
“Premature
liquidation of your Fixed Deposit” and “De-registration of Bill Pay facility “ whereas
these are enabled by ICICI Netbanking.

• HDFC offers TDS Enquiry facility by which you can instantly check how much TDS (Tax
Deduction at Source) was applicable on your current and previous taxable years.

• HDFC also allows re-generation of your IPIN (password) online in case you have
forgotten it. However in case of ICICI, you need to call up the customer care to request a
new Netbanking password and it will be delivered to you (by post!) in about 5 working
days.

• HDFC Netbanking has a slightly simpler and user-friendly interface as compared to


ICICI. The ICICI Netbanking interface on the other hand, though quite appealing
aesthetically, ends up overwhelming the user with its plethora of options. It requires some
practice by a naïve user to
master the usage of all the
options available on

44
RETAIL: The Focus of Indian Banks

ICICI Netbanking, whereas HDFC Netbanking, with its lesser options, is intuitive to use
from Day 1.
• The ICICI debit cards comes with a “Grid” feature for increased online transaction
security. The Debit cards have a table of 16 numbers at the back, and the online user is
asked to enter 3 random numbers from this grid before the funds transfer can
complete.Though the additional process results in increased security, you must possess
your debit card at all times for transferring funds (or remember the sequence of the 16
two-digit numbers).

• ICICI Netbanking is constantly upgrading and is offering more and more to their
customers every few months. It currently offers new services like smsNCash,
Bank@Home and Receive Funds, and seems to work hard to retain and grow its
customer base.

Comparing HDFC Home and Car Loans vis-à-vis ICICI Home and Car
Loans

ICICI Bank and HDFC Bank have slashed the interest rates on home and auto loans by 50 basis
points. The reduction in rates on home and auto loans will apply to new as well as existing
customers.

There has been a change in sentiments in retail segment. People are coming forward to buy
homes. Hence, more people are availing home loans. There has been some improvement
recently, though not to the level of last year. Taking the present rate cut into consideration, rates
for home loans up to Rs 30 lakh from ICICI and HDFC will be 9.25%. HDFC loans are cheaper
than ICICI loans for higher amounts.

Earlier, ICICI Bank had different slabs; rates for loans up to Rs 20 lakh, Rs 20-30 lakh, Rs 30

45
RETAIL: The Focus of Indian Banks

lakh & above were 9.75%, 10%, and 11.5%, respectively. The
first two slabs have been merged now. For loans amounting to
more than Rs 30 lakh, the rate would be between 10% and
11%, according to the profile of the customer.

Comparing HDFC Credit Cards vis-à-vis ICICI Credit Cards

HDFC Bank has introduced a new feature for all its Credit Card
Customers known as NetLimit. Using this feature, you can set
aside a part of your credit limit exclusively for online spends.

The three options of NetLimit are 25%, 50% and 100% of credit
limit and this is a percentage of your existing limit. This feature is for your added safety and
comes FREE of cost.

HDFC Bank one of the conservative banks in India which had adopted quite a laid back
approach in growing its credit card business is in a better position now. The industry reports
around 30% of credit card customers as delinquent accounts while HDFC's Cards Division
reports it to be half of it. As on Sept-30th the bank had 4.5 mn credit card customers with
average spending per active card is Rs 9,500.

ICICI Bank is the largest credit card issuer in the country and has a wide range of credit cards
designed to cater the needs of different sections of the society. The bank has classified its card
segment under different categories such as premium cards, classic cards, value for money cards,
co-branded cards, affinity cards and EMI cards.

Each credit card offered by ICICI is loaded with special offers and reward points along with bill
payment and balance transfer facility. The bank also offers specialized services on its special
cards.

46
RETAIL: The Focus of Indian Banks

Comparing HDFC Deposits vis-à-vis ICICI Deposits

ICICI bank has announced increase in the interest rates of long-term deposits by 0.25-0.50%,
with immediate effect, for two of its slabs.

ICICI announcement of hike in deposit rates, follows HDFC’s announcement. HDFC also hiked
interest rates for various slabs over one year, by 0.25%, to as high as 1.5%.

Banks are hiking deposit rates, to attract more customers, as they need funds to park at the RBI.
RBI has hiked the CRR (cash reserve ratio) by 0.75%. This is a portion of deposits that banks
are required to park at RBI. RBI hikes this portion, whenever it sees that there is enough liquidity
in the market and some money needs to be sucked back. At ICICI,

A 390 day deposit will fetch interest of 6.75%, as against 6.5% earlier.

A 590 day deposit will fetch interest of 6.75%, as against 6.25% earlier.

HDFC’s hiked interest rates shown in table below:

Deposit Term Hiked interest rate Earlier interest


(%) rate(%)

One year-one day to One-year- 6.5 6


15 days

One year-16 days 6.75 6.5

One year-17 days to Two years 6.5 6

Two years-one day to Two 7 6


years-15 days

Two years-16 days 7.25 7

Two years-17 days to Three 7 6


years

For above 3 years to 10 years 7.5 6

47
RETAIL: The Focus of Indian Banks

CUSTOMER SURVEY

RESEARCH OBJECTIVE

• Top of mind awareness of consumers for banks offering various retail products.

• Factors influencing their purchase decision.

• To study the comparative influence of various mediums of advertisements in creating


awareness amongst the consumers.

• To find the immediate competitors in the minds of consumer for every retail product.

RESEARCH METHODOLOGY

An exploratory research was conducted in order the study the consumer perception about various
banks offering retail products and the banks they opt for.

Sample Size

A random sample of 50 were administered with the questionnaire and responses collected.

Respondents’ profile

Data was collected from respondents across Age Profile

all age and income groups. Data relating to


17% 15%
age was collected. This segmentation helped 18-25 yrs

25-40 yrs
gain insights into the perception and 23% 40-55 yrs

45%
preferences across all age groups. Based on 55 yrs & above

the nature of retail banking products age


groups were identified and classified as
follows:

48
RETAIL: The Focus of Indian Banks

• Majority of the respondents belonged to the age group of 25 – 40 years.

• The reason associated with it is that this group is the highest user of retail offerings.

Income Profile

• Respondents earning Rs. 8000-


13% 15% Non- earning
15000 constitute the major chunk <5000
15%
5000-8000
of the respondents using retail 30%
8000-15000
>15000
products. 27%

• This income group qualifies


almost all eligibility criteria of
retail offerings.

• Retail products being also designed for students and retired people, they were considered
for the survey. Proffessional Profile

9 7
Students
• Salaried and businessmen being the Salaried
Businessmen
major users of retail users of retail 15
Retired
29
products.

Data Collection Tools

 Data was collected using


Questionnaires. The Questionnaire consisted of suitable combination of Rating Scale,
Ranking Scale and open ended Questions in the level of importance.

 An in depth interview was also conducted while administering the questionnaire.

49
RETAIL: The Focus of Indian Banks

Sources of Data

• Questionnaires were administered to people with experience of any retail offering,


currently using or used in the past.

DATA ANALYSIS
INFLUENCING FACTORS
The respondents were asked to rank
37
the following factors according to their 40
35
35

30
25
preferences in the extent to which they %20 15
15
10 7 6
influence their purchase decision. 5
0

Word of mouth
Goodwill

Advertisement
Processing
Interest rates

time
• Majority of the respondents
Factors
considered processing time to
be the major influencing factor
for making purchase decision
while interest rate forms a
close second. Time is the most valuable factor in today’s world of hectic schedules, that’s
the reason why processing time is considered as most valuable factor in consideration list.

• In the survey majority of the Re ta il P ro d ucts Ava ile d

Oth e r s
respondents had availed 11%
Ho u s in g
lo an
21%
Vehicle loan followed by cr e d it car d s
25%
credit cards.
V e h icle lo an
Pe r s o n al Ed u catio n 27%
lo an lo an
10% 6%

• Majority of the respondents


belong to the age group of
25-40 and majority of them
are salaried people. This is
the stage where people try to bring alive their aspirations of having their own home and

50
RETAIL: The Focus of Indian Banks

vehicle and hence these loan constitute major chunk of retail product availed by the
respondents.

BANKS CONSIDERED FOR RETIAL OFFERINGS

Respondents were asked which banks they considered for purchasing a retail offering before
selecting a specific bank. The responses for different retail products were as follows-

• Majority of the respondents


Ba nks Conside re d For Housing Loa n
considered HDFC and ICICI for
ICICI
O THE RS
availing housing loan. 28%
23%

• 25 years of superior service has S BI


12%
helped HDFC in creating goodwill HDFC
37%

in the mind of people and has helped


the bank for consideration.

• ICICI has created a place of its own


in the mind of customers by its heavy advertisement and superior service in every
category of retail offering.
Ba n ks Co n sid e re d F o r V e h icle L o a n s
• ICICI forms the major chunk in the OTHERS
16%
consideration list for vehicle loan CITI BA NK ICICI
35%
15%

followed by HDFC.

• Through aggressive advertisements HDFC


SBI
9%
25%
and superior service ICICI has
created a major place in the
consideration list.

51
RETAIL: The Focus of Indian Banks

• Majority of the Ba nks Co nside re d F or Cre d it Ca rd s

respondents considered OTHERS ICICI


11% 16%

CITI BANK for credit


STA N CHA RT
cards followed by 20%

CITI BA NK
STANDARD 35%
HSBC
18%
CHARTERED BANK
and HSBC BANK.

• Being the first bank to


launch credit cards and
through aggressive advertisements in the past CITI BANK has created awareness
amongst the customers and by providing superior service it CITI BANK still acquire
major share in the consideration list.

• SBI and HDFC form the B an ks C o n sid e red F o r E d u ca tio n a l


Loan
major chunk for DENA BA NK C OR P OR A T IO
8% N BANK

consideration in the OTHERS


21%
5%
HSB C
9%
educational loan category.
SBI


HDFC 35%
Interest rates being the 2 2%

major factor for


educational loan, PSUs
have the competitive edge
due to low interest rate.

• Also extensive presence in varied locations seems to be the primary reason for this.

52
RETAIL: The Focus of Indian Banks

AWARENESS OF BANKS THROUGH VARIOUS ADVERTISING MEDIUMS

Awareness Of ICICI Through Various


Mediums
• ICICI in general has a high level Television
Billboards / 35%
of awareness among the people Hoardings
17%

owing to its extensive


advertising. Word Of
Mouth 18%
New spapers
& Magazines
Radio 3% 27%

• Among these, awareness through


television is the highest level
followed by newspapers.

• Customer’s awareness of SBI Aw a rne ss O f S BI Throug h V a riou s M e dium

through various media was


Billboards / Televis ion 19%
measured. Hoardings 17%

Word Of Mouth


26%
SBI, being an old and New spapers &
Radio 3% Magaz ines

experienced player, has immense 35%

awareness through the word of


mouth media.

 HDFC being a player, especially


in the home finance arena, has Awareness Of HDFC Through Various
Medium
taken the print media as its
Billboards / Television
stalwart for awareness. Hoardings
22%
13%
New spapers
& Magazines
39%

 The reason for the largest pie is Word Of


Mouth 21%
that a large chunk of the TG is Radio 5%

also an avid reader of


newspapers and magazines.

53
RETAIL: The Focus of Indian Banks

• The graph reveals that close to fifty percent of the awareness is about ICICI and
HDFC.

• Customers do not seem to regard Top Of Mind Awareness For Car Loan

HSBC as a bank offering car OTHERS ICICI


10% 24%

loan owing to its limited CITI BANK


19%

advertising about this product.


SBI
KOTAK 10%
13%

HDFC HSBC
The personal loan market is a 21% 3%

relatively fragmented market


with respect to awareness

• According to the survey HDFC


is the clear market leader in the Top Of M ind Aw a re ne ss For Housing Loa n
OTHERS
awareness paradigm. 12%
ICICI
24%
CITI BA NK
13%

• This area is also being SBI


HDFC 20%

aggressively invaded by many 31%

other players owing to the


increased requirement for
homes.

• CITIBANK is also perceived to be Top Of M ind Aware ne ss For Credit Cards

a market leader, besides being OTHERS


21% ICICI
one. 19%

SBI
• A quarter share of the awareness 12%
CITI BANK
HSBC
pie of ‘Others’ can be attributed to 24% HDFC
8%
16%

a gamut of the recent new


launches as also the varied co-
branded credit cards.

54
RETAIL: The Focus of Indian Banks

Relation between basic-banking and retail-banking choices

The survey also tried to study, analyze and correlate respondents’ decision in selecting a bank for
general banking purposes and for availing retail products. The findings revealed that people
generally prefer PSU banks close to their locality to bank with whereas private banks and
foreign banks have higher preference on the retail banking front.

The reason associated with this behavior is the close proximity and long existence of PSU banks
making them safe and trustworthy. Also people have had accounts with the PSU banks as private
banks were non-existent earlier, and hence are reluctant to change their banks. However due to
efficient service, short processing time, competitive rates and a caring attitude people have started
to prefer private banks for meeting their retail needs.

Summary of Findings

• The scenario is becoming highly competitive in every sphere of banking activity- more so
in n respect of retail lending.
• Proceesing time and interest rates are major influencing factor for making purchase
decision.
• As per survey ICICI and HDFC are to major brand name considered for housing, auto and
personal loans.
• Awareness through television is the highest level followed by newspapers.
• The future of banking is dependent on technology, marketing, logistics.
• Banks have to prepare themselves for facing a soft interest regime.
• New kind of management skills are required to manage the retail lending portfolio.
• True to Infosys cult, bankers do need to understand that:
- Growth comes from repeat business
- Repeat business from relationships
- Relationship from customers
- Customers relationship based on trust
- Trust emanates from customers faiths/beliefs and,

55
RETAIL: The Focus of Indian Banks

- Lastly maintaining harmony with the environment

FUTURE OF RETAIL BANKING

The future for public sector banks, a major shift in business strategy to focus on retail may be
optimal for the long term from a returns/risk point of view — provided they can create and
improve the infrastructure in terms of technology, people, processes and pricing.

• The business marketing model, for instance, where direct marketing agents have been
employed in a systematic manner to source retail assets, has been a notable success with
private banks registering quantum growth in their retail portfolios in the past few years.

• A similar model is yet to be tried out generally by public sector banks, though one has
noticed a couple of banks beginning to employ such concepts. The funding base, in terms
of the higher proportion of retail deposits, is also much more stable for public sector banks
giving them a natural advantage on the pricing front.

• If the processes and the technology can be harnessed, retail banking could provide an ideal
combination of higher margin businesses (such as credit cards, personal loans) as well as a
fair degree of risk diversification on the entire portfolio.

• Overall, the evolving economic environment does point to retail accounting for a much
higher proportion of the balance sheets of financial intermediaries. The private sector
banks seem to be well prepared for this scenario.

Retail banking has significant past and glorious future over the years. Retail banking has proved
as an effective tool not only to improve the bottom lines of the banks concerned but also to
significantly contribute to the development of the individual consumers availing the services or
products in particular and to the overall development of the society in general with the needs of
the consumers ever multiplying. There is definitely a vast scope for the furtherance of the Retail
Banking business.

56
RETAIL: The Focus of Indian Banks

The society is made of the individuals and the environment surrounding him. As development
takes place in the society, the needs of the people grow faster than ever. The wealth creation and
its professional management are yet another distinct advantage the society or nation can derive
from Retail Banking. The depth of the untapped resources in the retail segment is not yet
measured. These resources could be channelized for nation building.

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.

CONCLUSION

One of the most prominent developments in Indian banking in the recent past has been the rapid
growth of the retail loan portfolios of private sector commercial banks.

The growth posted by some of the private sector banks has been such (a near doubling of retail
credit in around two years which shows an annual rate of growth of around 35 per cent) as to
overshadow the more modest attainments on this front by other b anks — particularly the public
sector banks. It has also created the perception that overall economic conditions have so changed
that a major shift in business strategy (such as the dominant focus on retail banking as against
wholesale banking) is quite inevitable and the future lies only in retail banking expansion.

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.

57
RETAIL: The Focus of Indian Banks

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.

58
RETAIL: The Focus of Indian Banks

ANNEXURES

BIBLIOGRAPHY

• Professional Banker
• www.hdfcbank.com
• www.icicibank.com
• www.rediffnews.com
• www.thehindubusinessline.com
• www.indiainfoline.com
• www.rbi.org
• Economic times

59
RETAIL: The Focus of Indian Banks

QUESTIONNAIRE
1. Which bank(s) do you bank with presently?

2. Rank the following factors according to the weight age in your purchase decision.

Cost _______
Processing time _______
Goodwill _______
Word of mouth _______
Advertisement ________

3. Which retail banking product have you availed?

‫ ڤ‬Housing Loan ‫ ڤ‬Car Loan


‫ ڤ‬Education Loan ‫ ڤ‬Personal Loan
‫ ڤ‬Others, Please specify ____________________________

4. Which banks did you consider in your decision making before buying this product?

a) _______________________
b) _______________________
c) _______________________
d) _______________________

60
RETAIL: The Focus of Indian Banks

5. How did you become aware of them? (tick relevant)

Banks => a) b) c) d)
Television
Newspapers & Magazines
Radio
Word of mouth
Billboards/Hoardings

6. Which bank did you choose and why?

______________________________________________________________________________
______________________________________________________________________________

7. Are you satisfied with the bank’s service?

Yes

No

8. Would you suggest any improvement?


______________________________________________________________________________

9. Which bank comes to mind when thinking about car loan


____________________________________
10. Which bank comes to mind when thinking about personal loan
____________________________________

11. Which bank comes to mind when thinking about housing loan.

61
RETAIL: The Focus of Indian Banks

____________________________________

12. Would you recommend your bank to someone else for the same product or any other
product that your bank offers?

 Yes  No

13. Please recommend a retail product, not currently available, which if offered, will be
readily availed by you.

_____________________________________

62