The Retail Banking in India

The Retail Banking in India

To bankers struggling through the shifting sands of corporate credit, retail banking looks like a oasis. Corporate customers rely less on commercial banks every day as other fund raising avenues present them. As this dis-intermediation takes place and competition shrinks margins, retail banking has gained an irresistible allure for banks because of its apparently higher margins and potential for growth. With large branch networks, banks have secured sizeable deposits-23 percent of India‘s GDP. On the assets side, however, retail advances account for a mere seven per cent of total lending. The penetration of products like car loans or credit cards is very low. With very few focused multi-line banks, non-banks are often significant players in retail lending, as HDFC is in house loans. Yet, many non-banks lack the minimum size to make the necessary investments and address the challenges of retail banking.

A large number of banks and non-banks have launched or re-launched retail products and are attempting to grow their share of the personal financial services market. Even the term lending institutions have decided that they need to go retail to raise funds. Many banking organizations like ICICI are betting that a large part of their future growth will come from retail customers.

Retail banking is much more than as opportunity to addressing dwindling margins. It is an imperative to preserve profits and market positions. Customers now have many more personal financial options, a growing credit culture, a willingness to switch between financial services providers, and a demand for lower interest rates. As they witness these trends, banks realize that they cannot remain passive. The new private sector banks are making inroads in the markets they serve, while competition from non-banks is growing. In respect, older institutions need to revamp their distribution capabilities, customer management capabilities, operating culture, compensation system and operations processing.


For all those gurus who’ve been predicting that the net will end the business of said banks, here’s a shocker.

Even in the SILICON valley-driven USA, Internet is not expected to have a major impact in banks’ retail revenues. The reason of this is the absence of a convenient alternative at present to using cash.

According to a report by moody’s Investors service, at least in the intermediate term, the internet is not expected to impact large US banks’ core profitability or competitive position. This is despite the business being the simple-most important profit source for most American retail banks.

The core retail banking business of deposit taking will be sheltered form web-based competitors and margin shrinkage on this business.

Need for convenient access to physical locations coupled with the advantages of multiple delivery channels like branch, ATM, telephone and computers, consumers need to leave money in transactional accounts; customer inertia and the relatively limited cost savings available to consumers from net banking, are cited as the main factors supporting its view.

The rating agency is skeptical of banks ability to generate substantial incremental revenues from cross-selling financial products to existing customers via the net.

The need for customers to take frequent physical receipts, make convenient physical receipts, make convenient physical delivery of cheques using ATMs, inhibition towards paying ATM charges for using another bank’s ATM network by the consumer and time consuming, difficult and disruptive nature of switching accounts also contribute to the ‘stickiness’ of retail deposits.

With low bank fees for individual transactions and relatively small bank deposits, the opportunity cost in terms of interest income for customers is not material where the deposits are not large.

Banks offer convenience and choice and the web-based channels of banks have reported rapid growth in the number of customers by retaining current customers.

Customers prefer to use a variety of channels to conduct their banking which is why it remains to be seen whether a business model based solely on internet banking will generate adequate returns and sustain long term competition against conventional banking systems.

The advent of the internet could, however have powerful effects on banks acquisition strategies by creating uncertainty about the value of purchasing large branch networks, the study says.

For some banks, however, the Internet could facilitate an increase in fee income by generating fees from Internet service arrangements like bill presentment and clearing.

However, if smart cards or stored value cards or other electronic cash substitute gain popularity, alternatives could become more attractive to customers.

On the other hand, banks might be able to reduce costs of servicing the retail customers by moving them over into a paperless environment.


As the 1900s come to their close and we look eagerly towards the new millennium, a revolution that will change the rules and every thing we have understood of the retail market, financial products and other services. Economic boundaries are disappearing, and the global village is a reality – where the retail customer will have a choice in a manner we may have never imagined.

Providers of retail banking products and services will battle for market and market share. It is battle that will be fought at different levels and the real winner will be the customer, who will benefit from increased competition through better products, distribution, technology, pricing, and post transaction service.

The quality and range of products will expand exponentially –convenience of usage, customization to individual needs, and a host of other user-friendly add-ons will create a whole new frontier of applications. Companies will have to innovate and continuously upgrade their products. Anticipation, listening and responding to your customers needs, will be the buzz-words of this thrust.

Distribution will be the next key benchmark of success. The customer will demand (and therefore the provider will have to respond) for greater convenience of access to the product or service and all this at the best cost of delivery. Re-defined methods, the use of technology – specifically the Internet-and realigned strategies will drive this important criterion of success. Constraints of location, timing, accessibility etc will all be history. No matter how brilliant the product you have, your distribution flexibility will be the customers’ selection parameter.

Technology will perhaps be the single largest driver of this detail thrust. The entire strategy will evolve around the absolute ability of the organisation to be at the cutting as edge of technology. We will have to invest in technology far ahead of immediate needs and be able to anticipate the future direction at a pace we are perhaps not used to. Being able to keep abreast, but more importantly, being able to recognize the immense potential that technology provides at all stages in the retail chain will be of paramount importance.


There are of course, considerable risks in retail banking. They are:

(a) Databases on credit history are large.

(b) Collection mechanisms are poor.

(c) Investments in technology are large.

(d) Operating efficiency level needs to be very high.

(e) Unlike corporate banking, retail banking involves a large number of small accounts.

(f) Demands on processing capabilities are higher.

(g) Retail segment is not something you can get into overnight.

(h) The right systems and the right – architecture needs to be put in place first.

Ozg Banking Consultant

Ozg Consulting Private Limited


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