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Retail Banking in India

Neetu Prakash

The growth of retail banking is an important milestone in Indian Banking Sector Developments. However, the retail banking in India is very small by world standards. The retail loan constitutes less than 6-7% of the GDP vis--vis 18% to 60% for Asian Economies, and the housing loans are just 2.5% of the GDP vis--vis 25% to 60% in other nations. This reveals that retail banking in India has not reached its full potential.

he operations of any banking unit are divided into two broad categories, viz., wholesale banking or corporate banking and retail banking. The wholesale banking covers the financial needs of corporate houses, financial institutions, trusts etc., and the size of the account is quite large. Retail banking, on the other hand, is not a new phenomenon. It has always been rampant in diverse forms. But, it has become synonymous with main stream banking for many banks lately. Typically, it refers to dealing with individual consumers both on the liabilities and asset side of the balance sheet. On the liabilities side, in the form of deposits such as fixed, current, saving account. Whereas on the asset side, in the form of various loans such as personal loans, housing loan, auto loan, educational loans, etc. Besides this, the retail banking also provides various ancillary services such as mobile-banking, phone-banking, internetbanking, depository services, etc.

Growth of Retail Banking in India

This text is divided into three sub sections. Growth of Retail Deposits Growth of Retail Lending Growth of Ancillary Retail Banking Services

Growth of Retail Deposits

The Indian banks have witnessed a quantum jump in their retail deposits, as presented in Table 1.

Growth of Retail Lending in India

The emergence of retail lending has more to do with economic prosperity improving consumer purchasing power, increasing penetration of middle to high income households, changing consumer demographics (India is 2006 The ICFAI University Press. All Rights Reserved. Professional Banker
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one of the country having 70% of the population About the Author below 35 years of the age), technology Neetu Prakash is a Lecturer at advancements, developments of the software Guru Nanak Khalsa for Women, industry, increase in treasury income of the Ludhiana. The author can be reached banks, decline in interest rates, etc. A report at neetuprakash@yahoo.co.in released by AK Kearney, a global management consultant firm, which recently identified that, India as the second most attractive retail banking destination of 30 emerging markets, and in reality, India has witnessed a shift from wholesale lending to retail lending especially private sector banks, as shown in Table 2. There is still much scope for retail lending in India, after all, retail loan constitutes less than 6-7% of the GDP in India vis--vis 18% to 60% for other Asian economies (See Table 3). Table 1: Retail Deposit of Banks in India (as on March 31, 2005) (Rs. bn)
Banks Name PNB SBI (All Associate) Amount 224.00 1112.40 Growth Rate 17.0 19.4

Further, the RBI Report on 998.00 29.0 trends and progress of India, has ICICI HDFC 380.00 22.1 shown that the loan value of these 70.00 11.2 retail lending typically range IDBI Complied from the respective banks website between Rs. 20000 to Rs. 100 lakh. The loans are generally for a duration of five to seven years, with housing loan granted for a longer duration of fifteen years. The following are the growth of various retail products offered by Indian banking industry. a. Housing Loan The market for home loans is on upward swing with every bank ready to grab a pie of the market share. During the period 1993-2004, the outstanding housing loan of the scheduled commercial banks has increased from Rs. 23.1 cr in 1993 to Table 2: Size of Retail Loan Portfolio of Indian Rs. 74000 cr as on February 15, 2005 (RBI, mid-term review Banks (as on March 31, 2005) (Rs. bn) Banks Name Retail Loan % of the Total 2004-05). In fact, housing loans Loan Portfolio occupy a very prominent place and it accounts for more than ICICI 561 68 50% to 60% of the total retail SBI (All Associate) 492 22 credit of almost all the banks HDFC 394 55 (See Table 4). This is because PNB 102 19 these loans are comparatively IDBI 19 11 safer, supported by mortage of All India (Excluding property finance, and default Foreign Banks 1890.41 60.02 rate on an average is less than Source: www.banknet.india.com/506 one percent annually. www.indiainfolin.com/index/retailbanking Furthermore, attractive
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PRODUCT marketing and advertising strategies being adopted by the banks such as free insurance cover, free credit card, etc., enable to attract more and more customers especially young people (study conducted by ICICI and HDFC) towards the housing loan. Table 3: Retail Loan (as a percentage of GDP) of Asian Economies (as on March 31, 2005) Name of the Country India Thailand Singapore Korea Taiwan Malaysia Hongkong Retail Loan as a % of GDP 6-7 18 49 50 52 55 60

Source: www.rbi.org.script/speeches/htm

However, the ratio of outstanding home loan, as a percentage of GDP in India is low as compared to other nations especially developed nations, where it ranges from 25% to 60% as presented in the table 5. This is because, the retail banking in India has not reached in its full potential. However, there is much scope for its progress and growth, since India has a population of over one billion. b. Auto Loan In the market for auto loans, banks and auto mobile companies have formed alliances to offer customers a variety of auto mobile loans on attractive terms and various incentives such as zero percent surcharge on petrol, free insurance cover for auto mobiles, free accessories, etc. According to the press note, delivered by the Chairman of RBI that, 82% of all new cars, 50% bikes and 90% trucks are financed through various banks. Table 6 presents the details of automobile loans disbursed by the banks. c. Educational Loan Presently, 16000 students travel to go UK every year to join 200000 other international students. A report released by FAU (Florida Atlantic University) which identified that 81500 Indian students enrolled in US universities during 2004-05, and in New Zealand this figure was 3400. The increasing number of students opting for higher education in developed countries such as US, UK, Australia, Switzerland, etc., has given rise to the increasing demand for educational loans to finance their Table 4: Size of Housing Loan of Various Banks in India (Rs. in bn)
Banks Name SBI PNB ICICI HDFC All India Housing Loan Size of Total Housing Loan % of Total Retail Disbursed (2004-05) (as on March 31, 2005) Loan Portfolio 19.00 10.02 79.06 143.45 295.06 47.00 21.09 223.81 314.22 750.49 20.02 13.19 55.22 57.98 45.22

Source: www.bis.org.review.com, www.pubindia.com

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higher education in other countries. A Comparative Analysis of Retail Banking: Public vs. Private Bank

Table 5: Housing Loan (as a percentage of GDP) of Different Nations Name of the Nation India Housing Loan (as a percentage of GDP) 2.5

7.0 As we have seen from the China 14.0 previous text, that both Thailand the public and private Korea 21.0 sector banks have been EU 40.0 trying their best to create USA 54.0 a niche in this regard, but 57.0 the private sector banks UK Source: www.ficci/com/generalnews/ are much better than additionshousing/htm their counterparts (See Table 7). This is because of the private sector has laid more stress on virtual banking and is very keen in applying IT in their banks. But now the public sector has also realized the potential of IT, and also moving towards state of the art banking system.

Growth of Ancillary Retail Banking Services in India

The growth of related ancillary services is given below: a. ATMs The entry of foreign and private sector banks such as HDFC Bank, ICICI Bank, City bank, Standard Chartered bank, etc., led to the growth of ATMs not with their own networks but their partner banks network also whom they have got mutual understanding for sharing ATMs. By this, customers can utilize the services of ATMs of other banks where they have no account. b. Mobile Banking All over the world, mobile phones have become one of the convenient means of carrying out banking transactions. In Korea, there are 3.3 million mobile phones users. But in India, very few people use mobile even for simple banking queries inspite of having 47 million mobile users base with nearly two million being added every month. This was due Table 6: Car Loans Disbursed by Banks to low level of awareness, (during 2004-05) (Rs. bn) frauds and security Name of the Bank Car Loan Disbursed Growth Rate problems, complex process PNB 3.0 19 etc. However, the various SBI 20.9 25 banks have entered into HDFC 25.0 23 strategies tie-ups with mobile companies so that ICICI 115.0 30 customers can avail banking Compiled from the respective banks website
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PRODUCT Table 7: Retail Banking Growth Rate: Public vs. Private Sector Banks
Area Private Sector (ICICI, HDFC, ) UTI and IDBI 58.00 7.72 67.00 62.00 Public Sector (SBI, PNB, Canara Bank, Bank of Baroda and Bank of India) 50.44 (-15.00) 26.84 36.00

Home Loan Consumer Durables Personal Loan Overall Retail Loans

Source: www.knowledgeretailloans/ksin/search/htm05

services. For e.g., ICICI has signed memorandum of understanding (MoU) with Reliance India Mobile to provide services of mobile banking free of cost to those clients who have reliance handsets. c. Internet Banking ICICI Bank was the pioneer to introduce internet banking. Later on, HDFC Bank, Citi Bank, IDBI and other banks followed the suit. As per the industry estimates, there is just 0.1% of the total banking population who use the internet banking where as in Korea and Singapore nearly 10-15% of their population is banking over the internet. The biggest drawback for the use of Internet banking in India is the lack of infrastructure facilities. But now the IT Ministry is keen on expanding the internet penetration, the day is not too far when greater part of our population would be using the internet banking. Further, the banks are also in the process of setting up strategic alliances with other groups for improving the banking scenes. Recently, on November 14, 2005, SBI and Tata Consultancy Services (TCS), have formed a joint venture called C-Edge Technology Ltd., which will offer technology and consultancy services in the field of banking industry. Table 8: Numbers of ATMs of Different Banks in India
Name Dena Bank HSBC Bank of India IDBI Syndicate Bank Andhra Bank Corporation Bank UTI Bank HDFC Bank ICICI Bank Number of ATMs 119 133 382 297 147 339 669 1250 1147 2039

d.

Credit/Debit Cards

SBI and Associates 5130 Complied from the respective banks website
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While usage of cards by customers of banks in India has been in vogue since the mid-1980s, it is only since the early 1990s that the market has witnessed a quantum jump. The total number of cards issued by 42 banks, has increased from 2.69 crore from December 2003 to 4.33 crore in December 2004, and further 4.38 in July 2005. Almost, all the categories of banks issue debit/ credit cards. State Bank of India has more than 12 million card base users and it has established
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57000 POS (Point of Sale) throughout the country. The ICICI bank has 3 million credit card users where as HDFC Bank has 1.3 million credit card users and growing at a hefty rate. However, when comparison is made internationally, the consumer expenditure through plastic cards is less than 1% in India where as in the US, this figure stands at 69%. Further, in Korea there is 3.1 credit card per bankable population whereas in the India this figure stands only at 0.02. The various factors responsible for this trend are: Lack of awareness. Most of the POS are located at big Supermarkets, shopping Malls such as Ansal Plaza, Spencer etc. Most of merchants insist on minimum amount of buying in order to use the credit card. People have also unaccounted money, which makes them do shopping on cash basis.

It is very important to mention here that the debit cards are more popular than the credit cards because the money drawn from the ATMs or used at merchants outlets is limited to the balance held in their account. On the other hand, credit cards are issued on case to case basis based on the credit worthiness, age, job, annual income of the account holders. Presently, the total number of debit cards in circulation is more than 30 million where as credit cards in circulation are 13.5 million. The HDFC bank has a debit card more than 2.5 million and growing at a hefty rate. e. Depository Services ICICI Bank, Indusind Bank, Bank of Rajasthan Ltd., etc., provide depository services to their clients. f. International Presence Public as well as private sector banks are now in the process of setting up retail banks in other nations. For e.g., SBI has launched retail bank in Mauritius by acquiring Indian Ocean International Bank Ltd. in that country. It has also set up retail bank in China, and the other banks that are in the process of setting up retail banks in China are ICICI Bank, IDBI Bank, Canara Bank, PNB etc. ICICI, HDFC and SBI have established their retail banks not only in China but also in Dubai and other nations. In the nutshell, it is said that with the advent of computerization, and the use of modern software which can be called the gift of the technology, the banks have been able to provide single window system to their customers. With the use of technology, banks are trying to minimize their per customer service cost. According to industry estimates, assume teller cost Rs. 1 per transaction, ATM transaction cost Rs. 0.45,
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Public as well as private sector banks are now in the process of setting up retail banks in other nations

PRODUCT phone banking at Rs. 0.35, debit card at Rs. 0.20 and internet banking at Rs. 0.10 per transaction.

Challenges to Retail Banking in India

Although, the retail banking offers phenomenal opportunities for growth, the challenges are equally daunting. And the challenges are: A study conducted by Reichheld et. al (published in Harvard Business Review), which identified that, 5% increase in customer retention can increase profitability by 35% in banking business, 50% in insurance and brokerage and 125% in credit card market. Thus, the customer retention is of paramount important for the profitability of retail banking business, so banks need to retain their customer in order to increase the market share.

The dependency on technology has brought IT departments additional responsibilities and challenges in managing and maintaining the retail The issue of money laundering is very important banking networks
in retail banking. This compels all the banks to consider seriously all the documents which they accept while approving the loans. 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 issue of outsourcing has became very important in recent past because various core activities such as hardware and software maintenance, entire ATM set up and operation (including cash, refilling), MIS and data center management, etc., are being outsourced by Indian banks. Thats why before taking any decision on outsourcing, banks are expected to take utmost care to retain the ongoing trust of the public. Customer service should be all and end all of 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 paramount important. So the banks are required to adopt innovative strategies to meet customers needs and requirements in terms of services/products etc. Last but not least, the efficiency of operations would provide the competitive edge for the success in retail banking in coming years. If all these challenges are faced by the banks with utmost care and deliberation, the retail banking is expected to play a very important role in coming years, as in case of other nations.
Reference # 08M-2006-07-11-01 Professional Banker 65