Retail banking

01 Indian Retail Banking today

Indian Banking Sector: Brief Introduction

The Rs 64 trillion (US$ 1.22 trillion) Indian banking industry has made exceptional progress in last few
years, even during the times when the rest of the world was struggling with financial meltdown. Even
today, financial institutions across the world are facing the repercussions of the turmoil but the Indian
ones are standing stiff under the regulator's watchful eye and hence, have emerged stronger.
Ratings agency Moody's believe that strong deposit base of Indian lenders and Government's persistent
support to public sector and private banks would act as positive factors for the entire system amidst the
negative global scenario.
The sector has undergone significant developments and investments in the recent past. Some of them are
discussed hereafter along with the key statistics and Government initiatives pertaining to the same.

Indian Banking Sector: Key Statistics

According to the Reserve Bank of India (RBI)'s Quarterly Statistics on Deposits and Credit of
Scheduled Commercial Banks', March 2011, Nationalized Banks, as a group, accounted for 53.0
per cent of the aggregate deposits, while State Bank of India (SBI) and its associates accounted
for 21.6 per cent. The share of New private sector banks, Old private sector banks, Foreign
banks and Regional Rural banks in aggregate deposits was 13.4 per cent, 4.6 per cent, 4.4 per
cent and 3 per cent respectively.
With respect to gross bank credit also, nationalized banks hold the highest share of 52.8 per cent
in the total bank credit, with SBI and its associates at 22.1 per cent and New Private sector banks
at 13.2 per cent. Foreign banks, Old private sector banks and Regional Rural banks held
relatively lower shares in the total bank credit with 4.9 per cent, 4.6 per cent and 2.4 per cent
respectively.

Another statement from RBI has revealed that bank advances grew 17.08 per cent annually as on

December 16 while bank deposits rose 18.03 per cent.

RBI data shows that India raised US$ 1.6 billion through external commercial borrowings (ECBs) in
November 2011 for new projects, capital outlay , 78 companies raised US$ 1.3 billion under automatic
route and US$ 253 million was raised under the approval route (it requires case-by-case approval by the
regulator).

India's foreign exchange reserves stood at US$ 297 billion as on December 30, 2011.
In recent years, deposits under non-resident Indians (NRI) schemes have witnessed an upsurge.
There was an inflow Rs 14,763 crore (US$ 2.83 billion) under NRI deposits in 2010-11, which
was 6.5 per cent higher from 2009-10. In 2011, the total of NRI deposits was Rs 2,30,812 crore
(US$ 44.2 billion), compared to Rs 2,27,078 crore (US$ 43.5 billion) in 2010.

Is there anything to be concerned about?

More stringent capital requirements to achieve as per Basel III: Recently, the RBI released draft guidelines
for implementing Basel III. As per the proposal, banks will have to augment the minimum core capital after a
stringent deduction. The two new requirements capital conservative buffer(an extra buffer of 2.5% to reduce
risk) and a counter cyclical buffer (an extra capital buffer if possible during good times) have also been
introduced for banks. As the name indicates that the capital conservative buffer can be dipped during stressed
period to meet the minimum regulatory requirement on core capital. In this scenario, the bank would not be
supposed to use its earnings to make discretionary payouts such as dividends, shares buyback, etc. The counter
cyclical buffer, achieved through a pro-cyclical build up of the buffer in good times, is expected to protect the
banking industry from system-wide risks arising out of excessive aggregate credit growth.

The above table reveals that even under current Basel Norm II, Indian banks follow more stringent
capital adequacy requirements than their international counterparts. For Indian Banks, the minimum
common equity requirement is 3.6%, minimum tier I capital requirement is 6% and minimum total
capital adequacy requirement is 9% as against 2%, 4% and 8% respectively recommended in the Basel
II Norm. Due to this the capital adequacy position of Indian banks is at comfortable level. So, going
ahead, they should not face much problem in meeting the new norms requirements. But as we saw
earlier, private sector banks and foreign banks have considerable high capital adequacy ratio, hence are
not expected to face any problem. But, public sector banks are lagging behind. So, the Government will
have to infuse capital in public banks to meet Basel III requirements. With the higher minimum core
Tier I capital requirement of 7-9.5% and overall Tier I capital of 8.5-11%, Banks ROE is expected to
come down.
Increasing non-performing and restructured assets: Due to a slowdown in economic activity in past
couple of years and aggressive lending by banks many loans have turned non-performing. Restructuring
of assets means loans whose duration has been increased or the interest rate has been decreased. This
happens due to inability of the loan taking company/individual to pay off the debt. Both of these have
impacted the profitability of banks as they are required to have a higher provisioning amount which
directly eats into the profitability. The key challenge going forward for banks is to increase loans and
effectively manage NPAs while maintaining profitability.
Intensifying competition: Due to homogenous kind of services offered by banks, large number of
players in the banking industry and other players such as NBFCs, competition is already high. Recently,
the RBI released the new Banking License Guidelines for NBFCs. So, the number of players in the
Indian banking industry is going to increase in the coming years. This will intensify the competition in
the industry, which will decrease the market share of existing banks.
Managing Human Resources and Development: Banks have to incur a substantial employee training
cost as the attrition rate is very high. Hence, banks find it difficult manage the human resources and
development initiatives.

What is the Future Outlook for this Industry?

Currently, there are many challenges before Indian Banks such as improving capital adequacy
requirement, managing non-performing assets, enhancing branch sales & services, improving
organisation design; using innovative technology through new channels and working on lean operations.
Apart from this, frequent changes in policy rates to maintain economic stability, various regulatory
requirements, etc. are additional key concerns. Despite these concerns, we expect that the Indian
banking industry will grow through leaps and bounds looking at the huge growth potential of Indian
economy. High population base of India, mobile banking offering banking operations through mobile
phones, financial inclusion, rising disposable income, etc. will drive the growth Indian banking industry
in the long-term. The Indian economy will require additional banks and expansion of existing banks to

meet its credit needs.

Government Initiatives
Agreeing to Khandelwal Committee's recommendation, the Government has said that state-run banks
will get two Chief Executives and the large banks would get three Executive Directors (EDs) in their
management panel. Banks with a business of more than Rs 300,000 crore (US$ 57.44 billion) are
considered to be large entities. The third ED, however, would be responsible for human resource
development (HRD) and technology in the bank.
"Non-resident Indians (NRIs) are crucial investors for banks as they form 10 per cent of total personal
segment deposits," said Samir Kumar Bhattacharya, General anager (NRI), State Bank of India (SBI). In
order to encourage them, the RBI had deregulated interest rates on Non-Resident (External) Rupee
Deposits and Ordinary Non-Resident Accounts (on December 16, 2011) due to which banks are able to
offer competitive rates to NRIs. This move has further made India an attractive investment destination
for them.
Further, the Government of India has decided to infuse Rs 6,000 crore (US$ 1.15 billion) in public
sector banks during the remaining 2011-12 to ensure that the entities meet regulatory requirements. In
2010-11, the Government had provided Rs 20,157 crore (US$ 3.86 billion) as its capital support to
public sector banks.
In order to prepare public sector banks for neck-to-neck competition ahead and improve their
performance in future, the Ministry of Finance has set new benchmarks for them to achieve. The new
benchmarks, that would calculate their functional and financial capability to qualify for capital infusion,
entail three performance indicators - savings and current deposit ratio, employee-branch ratio and profit
per employee.
Road Ahead
According to Chanda Kochhar, Managing Director and Chief Executive Officer, ICICI Bank India's
banking sector has the potential to become a Rs 200 trillion (US$ 3.83 trillion) industry by 2020 if the
country's economy grows at 8 per cent per annum over a long term as the growth of any country's
banking sector depends on the growth of that country's gross domestic product (GDP).
Another report by The Boston Consulting Group (BCG) India, in association with a leading industry
organisation and Indian Banks Associations (IBA) predicts that Indian banking sector would become the
world's third largest in asset size by 2025. The report also analyses that mobile banking would become
the second largest channel of banking after ATMs. Given the positive eco-system of the industry,
regulatory and Government initiatives, mobile banking is anticipated to enhance from 0.1 per cent of
transactions in a 45 per cent financial inclusion base in 2010 to 34 per cent of the transactions with 80
per cent rural inclusion base by 2020, as per the report.

RETAIL BANKING
Retail Banking is a banking service that is geared primarily towards individual consumers. Retail banking is
usually made available by commercial banks, as well as smaller community banks. Unlike wholesale banking,
retail banking focuses strictly on consumer markets. Retail banking is typical mass-market banking where
individual customers use local branches of larger commercial banks. The term Retail Banking encompasses
various financial products viz., different types of deposit accounts, housing, consumer, auto and other types of

loan accounts, demat facilities, insurance, mutual funds, credit and debit cards, ATMs and other technologybased services, stock-broking, payment of utility bills, reservation of railway tickets, etc.,. It caters to diverse
customer groups and offers a host of financial services, mostly to individuals. It takes care of the diverse banking
needs of an individual. Retail banking is a system of providing soft loans to the general public like family loans,
house loans, personal loans, loans against property, car loans, auto loans etc. The products are backed by worldclass service standards and delivered to the customers through the growing branch network, as well as through
alternative delivery channels like ATMs, Phone Banking, Net Banking and Mobile Banking. Customers and
small businesses get benefited from increased credit access, speedy and objective credit decisions whereas
lenders get benefited from increased consistency and compliance. Todays retail banking sector is characterized
by three basic characteristics:
i.
multiple products (deposits, credit cards, insurance, investments and securities);
ii.

multiple channels of distribution (call centre, branch, Internet and kiosk); and

iii.

multiple customer groups (consumer, small business, and corporate).

The objective of retail banking is to provide customers a full range of financial products and banking services,
give the customers a one-stop window for all their banking requirements. Retail banking segment is continuously
undergoing innovations, product re-engineering, adjustments and alignments. DRIVERS OF RETAIL
BUSINESS IN INDIA The Indian players are bullish on the retail business and this is not totally unfounded. As
the face of the Indian consumer is changing, that is reflected in a change in the urban household income pattern,
the direct fallout of such change is on the consumption pattern and hence on the banking habits of Indians, which
is now skewed towards retail products. Following changing consumer demographics have led to the need for
expansion of retail banking activities in India.
1. INCREASINGLY AFFLUENT AND BULGING MIDDLE CLASS: About 320 million people will be
added in the middle-income group in a period of 15 years approximately.

2. YOUNGEST POPULATION IN THE WORLD: Changing consumer demographics indicate vast

3.

potential for growth in consumption both qualitatively and quantitatively, due to increasing affluent with
bulging middle class and youngest people in the world. 70% of Indian population is below 35 years of
age which means that there is tremendous opportunity of 130 million people being added to working
population. The BRIC report of the Goldman-Sachs, which predicted a bright future for Brazil, Russia,
India and China, mentioned Indian demographic advantage as an important positive factor for India.
INCREASING LITERACY LEVELS: Due to increase in the literacy ratio, people have developed a
taste for latest technology and variety of products and services. It will lead to greater demand for retail
activities specially retail banking activities.

4. HIGHER ADAPTABILITY TO TECHNOLOGY: Convenience banking in the form of debit cards,

internet and phone-banking, anywhere and anytime banking has attracted many new customers into the
banking field. Technological innovations relating to increasing use of credit / debit card, ATMs, direct
debits and phone banking have contributed to the growth of retail banking in India.

5. CONTINUING TREND IN URBANIZATION: Urbanization of Indian population is also an important

feature influencing the retail banking.

6. INCREASING CONSUMPTION MINDSET OF INDIANS: Economic prosperity and the consequent

increase in purchasing power have given a fillip to a consumer boom. During the 10 years after 1997,
India's economy grew at an average rate of 6.8 percent and continues to grow at the almost the same rate
not many countries in the world match this performance. It means that Indian consumers are now
shifting from the tendency of buying more and better quality to new services and products.

7. DECLINING TREASURY INCOME OF THE BANKS: 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.

8. DECLINE IN INTEREST RATES: Finally, decline in interest rates has also contributed to the growth
of retail credit by generating the demand for such credit.

Retail Banking Some Key statistics

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Retail boom started around 2002-03

Citi Bank early mover -citi never sleeps
Stanchart, HSBC with clear strategy
Home grown ICICI, HDFC Bank, leadership positions
Carpet Bombing approach- cold calls to every one and anyone
Rertail Credit growth @30 % since 2004
Retail bank credit @40% of total credit
Booming economy , low interest rates and growing consumer confidence gave Phillip to retail banking
Auto loans, personal loans, credit card dues - about 50% share in total retail loans
Home loans approx 50% of retail loans grew by 50% in 2005 and 30% in 2006- Rs 22,00,000 cr.

Instructions for individual assignments

1. Always use A4 size plain or ruled paper.
2. The first page should mention date of assignment , number , date of submission, topic name, student
name with roll number.
3. Submission of assignment will be made in the next class.

Required:
1. Vice President of the company has asked you to prepare a synopsis (executive summary) of
IndianBanking Today with special reference to growth trends in Retail Banking. You have to read the
material and write a brief report in presentable form in not more than two full A4 size handwritten
pages with following attributes:
i.
ii.
iii.
iv.
v.

It should mention most important aspects of banking with important details concerning retail
banking and its future in India as gathered from this material.
Report should be in a table form where comparative figures for different time periods or banks
or multiple parameters are to be presented so that it gives at glance feel of the contents.
Key statistics of Indian banking regarding percent share of public sector banks, private banks
etc in deposits and loans should be presented in tabular form.
Highlight the strengths of Indian banking sector as per this report.
What steps the Government of India has taken recently to strengthen banking industry?
(you may use internet for some additional information)

2. RBI, last week in September 2012, reduced CRR by 0.25% and released liquidity of Rs.17000 crores
into the banking system for lending to public. Work out the total deposit base of Indian banks based
on this information. What is the objective or impact of this policy measure on the economy?