Retail Financial

Services in India

Introduced by Kebbie Sebastian

Survey of Indian Retail Finance

2008 VRL KnowledgeBank Ltd

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Print production: Patersons (www.patersons.com)
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Contents

Executive summary............................................................................................................................. 7
Chapter 1 The retail banking market................................................................................................... 13
. A growing consumer base................................................................................................................................ 13
. Figuring out the Indian consumer ................................................................................................................. 15
. Changing consumer mindset fuels retail banking growth .......................................................................... 15
. Structure of the marketplace............................................................................................................................ 15
. Public sector banks........................................................................................................................................... 16
. Private sector banks ......................................................................................................................................... 19
. Foreign banks.................................................................................................................................................... 20
. The liberalisation of Indian banking............................................................................................................... 21
. Competition in the retail banking market...................................................................................................... 22
. Saturation among the most attractive customers.......................................................................................... 22
. Big middle class, small purchasing power...................................................................................................... 23
. Diversification of product lines....................................................................................................................... 23
. Rural banking and financial inclusion............................................................................................................ 24
. Challenges for the retail finance sector........................................................................................................... 24
. Risk management.............................................................................................................................................. 24
. A paucity of talent amid an abundance of people.......................................................................................... 25
. Succeeding in the Indian retail banking market............................................................................................ 26
. Maintain a low cost basis.................................................................................................................................. 26
. Map out a distribution strategy........................................................................................................................ 27
. Capitalise on technology.................................................................................................................................. 27
. Take a long-term view....................................................................................................................................... 28
. Watch your back................................................................................................................................................ 28
. Conclusion......................................................................................................................................................... 29
Chapter 2 Mobile banking and payments............................................................................................ 31
. A cost-effective strategy.................................................................................................................................... 31
. High levels of consumer awareness................................................................................................................. 32
. Mobile banking products................................................................................................................................. 33
. ICICI................................................................................................................................................................... 34
Standard Chartered........................................................................................................................................... 34
. Barclays............................................................................................................................................................... 34
. Yes Bank............................................................................................................................................................. 35
. P2P transfers and remittances......................................................................................................................... 35
. Mobile POS payments...................................................................................................................................... 35

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Chapter 3 Self-service banking............................................................................................................ 37

. A role for self-service........................................................................................................................................ 37
. Central control over channel development.................................................................................................... 37
. Reaching out to the unbanked......................................................................................................................... 38
. Biometrics aid accessibility.............................................................................................................................. 38
. Citigroup and microfinance............................................................................................................................. 38
. ICICI Bank......................................................................................................................................................... 39
. A developing channel strategy......................................................................................................................... 39
. ATM functionality............................................................................................................................................ 40
. ING Vysya Bank................................................................................................................................................ 41
. The Self Bank concept....................................................................................................................................... 41
. A strategic building block................................................................................................................................. 42
Chapter 4: Post Office financial services.............................................................................................. 43
. The postal operator........................................................................................................................................... 43
. The Post Office network.................................................................................................................................... 44
. Payment services............................................................................................................................................... 45
. Banking services and savings schemes........................................................................................................... 46
. Postal life insurance.......................................................................................................................................... 49
Chapter 5 Banking the unbanked........................................................................................................ 57
. The unbanked population................................................................................................................................ 51
. Reasons for financial exclusion........................................................................................................................ 51
. Initiatives to bank the unbanked..................................................................................................................... 51
. Extending outreach into rural areas................................................................................................................ 51
. Government bank branching policies............................................................................................................ 52
. Non- branch distribution channels................................................................................................................. 53
. Mobile branches................................................................................................................................................ 53
. Andhra Bank...................................................................................................................................................... 53
. Doorstep banking.............................................................................................................................................. 53
. Third party intermediaries............................................................................................................................... 53
. Yes Bank............................................................................................................................................................. 54
. India Post............................................................................................................................................................ 54
. Basic accounts.................................................................................................................................................... 55
. Access to credit.................................................................................................................................................. 55
. Priority sector targets........................................................................................................................................ 55
. Strengthening rural banks and urban cooperative banks............................................................................. 55
. Supporting microfinance................................................................................................................................. 56
. Rural credit cards............................................................................................................................................... 56
. General credit cards.......................................................................................................................................... 57
. Simplified settlement of loans.......................................................................................................................... 57
. Financial education........................................................................................................................................... 57
. Case study - ICICI Bank................................................................................................................................... 57
. ICICI Banks rural internet kiosks................................................................................................................... 58
. Working with microfinance institutions........................................................................................................ 59
. Technology channels........................................................................................................................................ 60

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Chapter 6 Banking for the wealthy...................................................................................................... 61

Overview.............................................................................................................................................................. 61
Market growth...................................................................................................................................................... 61
Market segmentation.......................................................................................................................................... 63
The competition heats up.................................................................................................................................... 65
Chapter 7 The cards market................................................................................................................. 67
Market drivers...................................................................................................................................................... 67
Government policy objectives............................................................................................................................ 68
Effect of foreign players....................................................................................................................................... 68
The remittance market........................................................................................................................................ 68
Cards and the unbanked..................................................................................................................................... 69
Attracting the affluent......................................................................................................................................... 70
Co-branded and affinity cards............................................................................................................................ 70
Card spending patterns....................................................................................................................................... 70
Debit cards............................................................................................................................................................ 71
Credit cards.......................................................................................................................................................... 73
Debt concerns...................................................................................................................................................... 74
Prepaid cards........................................................................................................................................................ 75
Internet purchases............................................................................................................................................... 75
New applications for prepaid.............................................................................................................................. 76
Corporate spending............................................................................................................................................. 77
Payroll products................................................................................................................................................... 77
Key players............................................................................................................................................................ 77
ICICI Bank........................................................................................................................................................... 78
SBI Cards.............................................................................................................................................................. 78
Citibank................................................................................................................................................................ 79
HDFC Bank.......................................................................................................................................................... 79
Chapter 8 Domestic bank profiles....................................................................................................... 81
Axis Bank ............................................................................................................................................................. 81
ICICI Bank........................................................................................................................................................... 84
Kotak Mahindra Bank......................................................................................................................................... 86
Centurion Bank of Punjab.................................................................................................................................. 88
IDBI ...................................................................................................................................................................... 90
Chapter 9 Foreign bank profiles.......................................................................................................... 95
Citibank ............................................................................................................................................................... 95
Standard Chartered Bank................................................................................................................................... 96
HSBC..................................................................................................................................................................... 97
ABN AMRO Bank .............................................................................................................................................. 99
Deutsche Bank .................................................................................................................................................... 100
BNP Paribas . ....................................................................................................................................................... 102

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List of tables and figures

Table 1.1: Public sector bank income, 2006-Q108 (INR crore)..................................................................

Table 1.2: Private sector bank income, 2006-Q108 (INR crore)................................................................
Table 13: Foreign sector bank income, 2006-Q108 (INR crore)................................................................
Table 2.1: Indian mobile users interest in specific mobile banking services, 2007..................................
Table 4.1: Indiapost network and financial results, 2001-06.......................................................................
Table 4.2: Postal payments, 2001-06..............................................................................................................
Table 4.3: Small savings schemes, 2001-06....................................................................................................
Table 4.4: Postal life insurance, 2002-06.........................................................................................................
Table 5.1: Regional distribution of bank branches, end-June 2007............................................................
Table 6.1: HNW market size by household, 2012 (e)...................................................................................
Table 7.1: Key cards numbers..........................................................................................................................
Figure 1.1: Real GDP growth in India, 1988-892006-07 (%)....................................................................
Figure 1.2: Average annual household disposable income by city, 2001 (INR bn)...................................
Figure 1.3: Summary of Indias banking reform timetable..........................................................................
Figure 1.4: Indian banks operating expenses as a percentage of total assets, 2000-06.............................
Figure 6.1: HNW market sizing by segment..................................................................................................
Figure 6.2: HNWI segment profile (%)..........................................................................................................
Figure 6.3: Mass affluent segment profile (%)...............................................................................................
Figure 6.4: Typical HNW portfolio composition (%)..................................................................................
Figure 7.1: Debit card volume and value, 2003-07 .......................................................................................
Figure 7.2: Credit card volume and value, 2003-07.......................................................................................
Figure 7.3: Personal credit card outstandings, 2005-07................................................................................
Figure 7.4: Market share of credit card issuers by number of cards in issue, 2007.....................................

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Executive summary

Its hard not to get excited at the thought of India as the next big market for retail financial
services.
GDP is growing at an impressive 8.6% and as one of the BRIC countries, commentators see
India becoming the worlds third largest economy by 2050. The financial services sector is
expected to be a lynchpin of this growth along with the retail, information technology and
telecom industries.
The market for banking products is growing at an even faster rate. Retail banking in particular
has experienced an unprecedented boom, with growth rates touching 33% in the past five years
and expected to continue at 28%. By 2010 it is expected to become a $245 billion market.1
Against the backdrop of optimism and hype that surrounds India, this report examines
the ground realities of operating in the retail financial services market in India. Clearly,
India presents a huge pool of potential profit in retail financial services. It has a middle class
population (defined as households with disposable incomes from INR200,0001 million a
year) , that is estimated to grow to 41% of the population or 583 million people by 2025.2 This
segment is seeing its wealth grow dramatically and its current size is estimated at between
325 and 350 million people.3 Gross national income per capita increased by 58% between
1995 and 20034 and the financial services and insurance sector nearly doubled their GDP
growth rate in the three years from 2003 to 2006 from 5.58% to 11.18%5. However, realising
Indias great potential is not easy. From its slow and cautious banking regulator, to the fierce
competition among its aggressive domestic banks, to its highly price-sensitive consumers,
India presents a number of challenges. Finding success in this market requires a patient, longterm commitment, deep pockets and a keen understanding of the local consumer base.

A dynamic and divergent market

According to a study by McKinsey, if India can achieve a 7.3% annual growth rate over the
next 20 years, 465 million more people will exit poverty, opening up a huge market for goods
and services. The challenge for Indian banks is therefore diverse. On the one hand, there is
a growing population of increasingly rich customers, where they will have to compete for
market share with many overseas entrants. On the other, in both urban and rural areas there
1Retail Banking in India, Research and Markets Report, Jan 2008
2Tracking the Growth f Indias Middle Class. McKinsey & Co
3 US Bureau of South and Central Asian Affairs, Oct 2007
4 United Nations Global University
5 Sector Wise GDP Growth Rates, Hindu Business Line, 8 Feb, 2007

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is a mass market aspiring to a bank account, but of insufficient unit value to be cultivated
profitably through the traditional banking model.
Buoyed by optimistic predictions, many financial services firms have entered the fray in an
attempt to profit from the promise of the Indian banking market. There are now close to 300
foreign, public sector and private sector banks doing business in India up from 60 ten years
ago. Competition is more severe than ever before.
Three types of banks currently dominate the market:

Public sector banks (PSBs) government-controlled banks in which the Indian

government is the majority owner;

Private sector banks which are owned by domestic shareholders and are traded on the
stock exchange or have private equity ownership;

Foreign banks which are subsidiaries of international banking corporations.

Profiles of the major domestic and foreign players can be found in Chapters 8 and 9.

Consumer lending

Rising affluence has altered consumer attitudes and the psyche of the urban consumer has
shifted from debt averse to spend now, worry later. Mortgages and other forms of consumer
credit are natural beneficiaries of a young and increasingly affluent population. Consumer
lending in India has grown at 23% over the past five years. Auto loans have been growing at
20% and mortgages, which currently account for half of retail loans made by banks in India,
have grown at 37% in the past three years. Despite these high rates, there is still room for
further growth.
The credit card market in India has seen a rapid boom from less than 2 million cards in the
market before 2005 to 26 million cards in 2008, on the back of the rapid rise in disposable
incomes. India is the second-fastest growing cards market in the Asia-Pacific region, with an
annual growth rate of more than 30%. Indians are becoming more comfortable with the idea
of using both debit and credit cards, and merchant acceptance is on the rise. New products,
foreign participation and a booming tourism industry are combining to support this growth,
helped by product innovation and a supportive regulatory environment. It is predicted by the
Indian Banks Association that the financial cards market will increase threefold within the
next five years.
India was the largest receiver of remittance funds in 2007, with approximately $27 billion
flowing into the country from non-resident Indians working abroad. This makes it one of
the top destinations for remittances in the world. This has created opportunities for plastic
cards and other payment mechanisms. Many of the countrys major banks and financial
institutions are actively competing with each other to gain a stronghold in this potentially
lucrative market.

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Chapter 7 examines the Indian cards markets, including the potential of the prepaid
sector.

Product diversification
Retail banks are expanding their product range and moving into areas that typically have
been the bastion of traditional private and corporate banks. From the credit cards, mortgages,
auto and personal loans which were the mainstay of their profits, they are now moving into
asset management and premier banking. This is due to consumers in urban India gaining
wealth in a short period of time and requiring knowledge to manage this wealth. They have
bought homes and cars with their new earnings and now need mutual funds, stockbroking
services and investment advice.
Indias wealth management industry is at an evolutionary phase of its development. With
the liberalisation of the economy and subsequent growth and prosperity across sectors, the
wealth management industry is poised to gain greater traction in an expanding market,
where the underlying economic fundamentals and demographic profile support strong
market growth. The sector is also viewed by the banking industry as under-penetrated.
Growing numbers of wealthy individuals means that the segment is attracting considerable
attention from both domestic and foreign players. Providers, products, channels, technology,
regulation, and clients are coming together in the wealth management space to capitalise
on the growth opportunity at all levels, from the mass affluent to the ultra high net worth
individual (UHNWI). Chapter 6 looks at the prospects for the wealth management sector.
Another area which is growing is small business banking and lending. This is a segment that
was under-banked in the past. However, the combination of rising confidence and easier
access to capital is giving birth to more entrepreneurial ventures than ever before. Retail
banks are scaling up their products and services in this area to capitalise on the opportunity.
An ongoing major challenge for the Indian retail banking community is to find cost-effective
ways to widen access to its services. High-function self-service can provide such access at
fixed locations or through mobile facilities. Self-service will have a major role to play in both
underpinning the ability of the Indian banks to build a significant and profitable share of their
mass market, while much of the new functionality is also designed to meet the increasingly
sophisticated demands of the more wealthy, as well as those of the unbanked or underbanked
segment. Chapter 3 looks at the ways in which self-service is being leveraged to support and
cultivate all segments of the complex Indian marketplace.

Rural banking and financial inclusion

Of Indian households, 64.5% lack access to banking services according to the Federation
of Indian Chambers of Commerce and Industry (FICCI) 2006 Annual Banking Survey.
The Reserve Bank of India reports that in 2005 5.5% of the urban and 46.1% of the rural

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adult population over the age of 15 did not have deposit accounts of any kind in commercial
banks. These figures were 94.8% and 98.6% for current accounts, 39.8% and 61% for savings
accounts, and 70.6% and 86.4% for term deposits. 87.8% of the urban and 90.5% of the rural
adult population did not have access to credit.
The Government of India has a long track record of promoting policies and programmes
to enhance access to financial services and requires banks as a condition of their licence
to open branches in designated unbanked areas a policy that has had mixed success. In
2005 RBI began pressuring banks to make available a basic or no-frills account, with nil or
very low minimum balances and charges that would make the accounts accessible to large
sections of population. As of March 2006 about 500,000 no-frill accounts had been opened,
of which about two-thirds are with the public sector and one-third with the private sector
banks, according to the RBI.
The Government has also supported the microfinance sector, beginning in 1992 when the
National Bank for Agriculture And Rural Development (NABARD) piloted the promotion
of 500 self-help groups (SHGs). SHGs are informal groups of 15-20 members (mainly
women) who build up and loan savings amongst themselves. The Governments 2006-07
budget advised the banking sector to form links with 385,000 SHGs over the course of the
forthcoming financial year. Microfinance programmes have rapidly expanded in recent years
with annual growth rates for some institutions exceeding 200%. Chapter 5 examines the
various initiatives taken by banks to reach the unbanked population.
Realising that traditional bank branches are not the most effective way to reach this market,
a range of alternative distribution channels more suited to serving the rural population have
been adopted.
Mobile phones may offer a fast way to gain a foothold in the rural market. There is a great
incentive for banks to expand into rural areas through mobile banking channels: it is a costeffective strategy helping banks comply with central bank regulations stipulating that a
proportion of a banks business be focused on rural communities. The Reserve Bank of Indias
Institute for Development and Research in Banking Technology is working with a consortium
of mobile operators and 25 banks on an initiative to make banking services more accessible,
especially in remote areas. In April 2008, Indian achieved the milestone of having 300 million
mobile phone subscribers, many of whom live in rural areas. This offers a platform to extend
a banks distribution network into rural areas without having to bear the costs of branch
banking. Internet banking is not likely to be as effective because its penetration in India is a
mere 2%, while 26% of the population have phones. Chapter 2 looks at the market potential
for mobile banking and payments.
India operates one of the worlds largest post office networks, providing another means of
rural access to financial services. A division of India Post, the Post Office Savings Bank is the
largest savings banks in the country in terms of number of account holders and deposits held.
India Post has historically provided basic financial services including savings, money orders

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and life insurance as well as the disbursement of pensions. Chapter 4 looks at the role of the
post office network.

Conclusion
As challenging and competitive as the Indian market may be, it is possibly one of the most
exciting competitive arenas in retail banking in the world. Each year 13 million new jobs are
being created and entirely new industries are springing up. The downstream effect of this is
seen in new cars, new homes, and spending on consumer durables and luxury goods. Jobs are
being created for the tech-savvy youth and they have a lifetime of spending ahead of them.
People are suddenly seeing wealth but lack the time to manage it. This combination of high
tech sophistication, more money and less time presents a unique opportunity for financial
services firms to capitalise on. For customers, things have never been better. With banks old
and new tripping over themselves to get their business, they are spoilt for choice. Over time
they are likely to consolidate their relationships with banks that provide high-quality service,
wide distribution channels and products that are tailored to their needs.
The Indian market may have come a long way but things are just getting started. The next ten
years will see more change than the past 25 years, and with just 59% of the Indian population
reported to have a deposit account compared to 94% in the UK, there is a lot of territory yet
to be staked out for both banks and their suppliers.

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