RETAIL BANKING IN INDIA: OPPORTUNITIES AND CHALLENGES

Abstract:
The economic reforms in India started in early nineties, but their outcome is visible now. Major changes took place in the functioning of Banks in India only after liberalization, globalisation and privatisation. The issue of retail banking is extremely important and topical. Across the globe, retail lending has been a spectacular innovation in the commercial banking sector in recent years. Retail banking in India operates in a highly saturated & competitive market. Attaining the essential performance improvement which eventually helps in earning huge revenue & controlling costs is considered to be main stimulator behind the phenomenal growth of the Indian retail banking sector. The main motive of retail banking is a predicting & bringing about main drives of revenue, cost & productivity, so that corrective measures can be taken. All these emphasise the momentum that retail banking is experiencing in the Indian economy in recent years. This paper is an attempt to analyze the Opportunity & Challenges of the Retail banking Industry in India. We have used statistical tools for projection of trend.

Keywords: Commercial banking, Retail banking, controlling costs, productivity,

Economy

Introduction :
Retail Banking in India is not a new phenomenon. It has been in existence in different forms. However, in recent few years, it has emerged as an important segment of Banks portfolio. There are host of factor that compelled Indian banks to shift focus from class baking to mass and retail banking in the recent past; important amongst these are: The Government policy of liberalization, privatization and globalization leading to increased

competitiveness, financial dis-intermediation and consequent reduction in interest spreads and drain on their profitability has forced banks to go for retail business because they find that it is the activity where many major banks are making most of their money but also because of the more recurrent nature of its earnings. Retail banking segment of banks business has a very bright future prospects especially in a growing economy like India mainly because of increasing prosperity and the consequent increase in purchasing power of the people, changing demographics with young population having high propensity to consume coupled with more liberal attitudes towards personal debt. Consumers no longer automatically turn to their primary banks for additional services and most current accounts are loss-making. Besides, the core banking relationship itself is being challenged by product specialists and non-financial services players exploiting the power of retail brands. It has become very mandatory to study Retail banking Industry in India. The growth of retail lending, especially, in emerging economies, is attributable to the rapid advances in information technology, the evolving macroeconomic environment, financial market reform, and several micro level demand and supply side factors. India too experienced a surge in retail banking. Retail loan is estimated to have accounted for nearly one-fifth of all bank credit. Housing sector is experiencing a boom in its credit. The retail loan market has decisively got transformed from a sellers market to a buyers market.

Retail Banking :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. Todays retail banking sector is characterized by three basic characteristics:

Multiple products (deposits, credit cards, insurance, investments and securities); Multiple channels of distribution (call centre, branch, Internet and kiosk); & Multiple customer groups (consumer, small business, and corporate).

The typical product, which retail baking segment offering, are housing loans , consumer loans for purchase of durable, auto loans, credit cards and education loans. The loans are marketed under attractive brand names to differentiate the products offered by different banks. The loans are generally for duration of 5 to 7 years with housing loans granted for a longer duration of 15 years. Credit Card is another rapidly growing subsegment of this product group.

Retail banking in India :All around the world retail lending has been an established market; however its rise in emerging economies like India has been of recent origin. If recent statistics on consumer finance are any indication, the last few years have been trend setting. The traditional debt-averse, middle-class Indians who lived within their economical means, never to venture beyond their means, seem to have given way to a new middle-class that is free from all inhibitions regarding consumption. Unlike its predecessors, the middle-class of today has a new attitude; it attaches no social-stigma in taking loans for spending. Indian retail banking is up and kicking. During 2004-05 retail contributed 42% of overall credit growth. Growing at the CAGR (Compound Annual Growth Rate) of 35% over last 5 years the retail asset touched Rs. 1,89,000 crore. Major product segments of retail credit include housing finance, auto finance, personal loans, consumer durable loan and credit cards to name a few. Housing constitutes the biggest segment of 49% of the entire retail credit; followed by the auto loans segment which constitutes almost 27.8%. While the balance retail credit is used by consumer durables at 7.2%, educational and other personal loans take the remaining 16% (Refer Graph 1.1). Banks are increasing their dominance in housing finance and capturing the market share of the housing finance companies. During 2004-05, the market share of banks stood at 62%, against the 33% by Housing finance companies; Rs2-5 lakh margins constitutes almost a third of the loan size. All the players in this market are adopting an aggressive attitude and the housing loan availability is playing into the players hands. Despite this

phenomenal growth in India, the housing loan as a percentage of GDP at 4.91% indicates low when compared to other countries like Malaysia (17%) and Thailand (9%). But again this coupled with the population growth indicates good future prospects. Following the housing loans, it is the auto loan which is also giving the growth of retail credit the necessary boost. In Asia Pacific, India has emerged as the third largest market for cars and MUVs (Multi Utility Vehicle) i.e. only after Japan and China. Low interest rates, easy finance, up-gradation of rider from two- wheeler to 4wheelers and opening up of second hand car finance are growth drivers of this segment. The consumer durable loan follows the auto loan market in the third position, constituting approximately 7% of total credit. Metro centres continue to dominate the market with 29% of total retail credit, closely followed by the rural market at 27% of total retail market. Urban and Semi Urban centres contribute around 22% each. The rural market uprising is a recent phenomenon, which has immense growth potential. While private sector banks have dominance in metropolitan areas, nationalized banks have their hold in the urban and semi-urban areas. The rural areas are dominated by RRBs. The last few years have witnessed a high increase in students aspiring for management and professional courses, leading in educational loans. Banks are now having a direct tie-up with the educational institutions to cash in on the opportunity. Public sector banks (PSBs) are more focussed on the educational loans segment. In the educational loan segment, disbursement of domestic banks has surged by 13% to Rs2249 crore in 2004-05; up from Rs 1983 crore in 2003-04. The number of students availing education loans has increased to 1,40,000 from 1,08,000 during this period. The other personal loans market is characterized by intense competition and the players vie with one another to get business. These loans are driven by urgent and short-term needs and banks have to act swiftly to cash in on that need. Metropolitan and urban areas together constitute two third of total loans under this category. Private sector banks lead in metropolitan areas, whereas in the rural areas the nationalized banks dominate.

Market Share : Retail Loan 2005

Home Loan Cosumer Dueables Auto Other Personal Loan

In India, all the retail banking segments are expected to witness a tremendous growth owing to the low cost of borrowing, changing customer attitudes towards borrowing and optimism regarding economic growth. Retail lending constitutes just 12.36% of the Indian banking system. Given this macroeconomic scenario, the share of retail banking will grow dramatically and it is expected that about 35% of the incremental growth in net credit will come from retail banking. In the next five years i.e. till 2010, retail banking is expected to grow by a CAGR of 25% to touch the figure of Rs. 575,000 crore. This requires expansion and diversification of retail banking product portfolio, better penetration and faster service mechanism.

Drivers of retail business in India:Let me briefly highlight some of the basic reasons contributed in growth of retail business in India. First, the basic reason for growth of retail sector is economic prosperity and the consequent increase in purchasing power. From 1992 to 2002 India's economy grew at an average rate of 6.8 percent and continues to grow at the almost the same rate. This is the unique thing as not many countries in the world match this performance. Second, changing consumer demographics indicate vast potential for growth in consumption both qualitatively and quantitatively. India is one of the countrys having highest proportion (70%) of the population below 35 years of age (young population).

Third, technological factors played a major role. Technological innovations relating to increasing use of credit / debit cards, ATMs, direct debits and phone banking has contributed to the growth of retail banking in India. Fourth, the Treasury income of the banks, which had strengthened the bottom lines of banks for the past few years, has been on the decline during the last two years. In such a scenario, retail business provides a good vehicle of profit maximisation. Considering the fact that retails share in impaired assets is far lower than the overall bank loans and advances, retail loans have put comparatively less provisioning burden on banks apart from diversifying their income streams. Fifth, decline in interest rates have also contributed to the growth of retail credit by generating the demand for such credit. But the specific domains of retail banking in India are credit cards and housing.

Opportunities of Retail Banking in India:Retail banking has immense opportunities in a growing economy like India. Retail banking has a great deal of opportunities in developing economic like India. The basic reason in this regards are as under; The BRIC Report talking about India as an economic superpower. A global management consulting firm, recently identified India as the "second most attractive retail destination" of 30 emergent markets. The Indian banking sector is at an exciting point in its evolution. The opportunities are immense to enter new business & new ways of working to improve efficiency and to deliver higher level of customer service. Indian middle class is an important contributory factor in this regard. The percentage of middle to high income Indian households is expected to continue rising. So to uplift their status, they give a scope for rising trend of Retail Banking. Younger population who has various job opportunities with secured future not only yields increasing purchasing power, but acquiring personal debt more comfortably than previous generation.

 Due to increase in services by banking sector & delivery channels, the trend of retail banking has increased. Improving consumer purchasing power, coupled with more liberal attitudes toward personal debt, is contributing to India's retail banking segment. Indian economy jump in the manufacturing sector, a large option for the consumer is getting translated into a larger demand for financial products & customization of services is fast becoming the norm than competitive advantages.

Challenges of Retail Banking in India:The combination of the above factors promises substantial growth in the retail sector, which at present is in the nascent stage. Due to bundling of services and delivery channels, the areas of potential conflicts of interest tend to increase in universal banks and financial conglomerates. Some of the key policy issues relevant to the retail banking sector are: financial inclusion, responsible lending, and access to finance, long-term savings, financial capability, consumer protection, regulation and financial crime prevention. The basic challenges for the retail banking industry and its stakeholders are discussed as under; The Indian retail banking sector is faced with multiple & concurrent challenges such as increased competition, rising customer expectations & diminishing customer loyalty. The expectation of the consumer have been growing broadly, these expectations are swift service with minimal response time, efficient service delivery, tailormade & value-added product to suit specific needs, hassle-free procedures & minimum transaction costs & pleasant & personalized service. Retention of customers is going to be a major challenge. According to a research by Reichheld and Sasser in the Harvard Business Review, 5 per cent increase in customer retention can increase profitability by 35 per cent in banking business, 50 per cent in insurance and brokerage, and 125 per cent in the consumer credit

card market. Thus, banks need to emphasise retaining customers and increasing market share. Rising indebtedness could turn out to be a cause for concern in the future. In India where wants are more than source i.e. disposable income is higher than there may not be any certainty about repaying of debt. Expressing concerns about the high growth witnessed in the consumer credit segments the R.B.I. has, as a temporary measure, put in place risk containment measures and increased the risk weight from 100 per cent to 125 per cent in the case of consumer credit including personal loans and credit cards. Information technology poses both opportunities and challenges. Even with ATM machines and Internet Banking, many consumers still prefer the personal touch of their neighbourhood branch bank. Technology has made it possible to deliver services throughout the branch bank network, providing instant updates to checking accounts and rapid movement of money for stock transfers. However, this dependency on the network has brought IT departments additional responsibilities and challenges in managing, maintaining and optimizing the performance of retail banking networks. Ensuring that all bank products and services are available, at all times, and across the entire organization is essential for todays retails banks to generate revenues and remain competitive. Besides, there are network management challenges, whereby keeping these complex, distributed networks and applications operating properly in support of business objectives becomes essential. Specific challenges include ensuring that account transaction applications run efficiently between the branch offices and data centres. KYC Issues and money laundering risks in retail banking is yet another important issue. Retail lending is often regarded as a low risk area for money laundering because of the perception of the sums involved. However, competition for clients may also lead to KYC procedures being waived in the bid for new business. Banks must also consider seriously the type of identification documents they will accept and other processes to be completed. The Reserve

Bank has issued details guidelines on application of KYC norms in November 2004.

Conclusion :There is a need of constant innovation in retail banking. In future, bank must financing through innovative products and mechanisms involving constant up gradation and revalidation of the banks internal systems and processes and need to use retail as a growth trigger. This requires product development and differentiation, innovation and business process reengineering, micro-planning, marketing, prudent pricing, customisation, technological up gradation, home/electronic/mobile banking, and cost reduction and cross-selling. While retail banking offers phenomenal opportunities for growth, the challenges are equally daunting. How far the retail banking is able to lead growth of the banking industry in future would depend upon the capacity building of the banks to meet the challenges and make use of the 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 customers interest is of paramount importance. I do hope, the banking sector in India is demonstrating this and they would continue to this growth.