INTRODUCTION. and banking sector reforms since Evidence from across the world suggests that

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1 INTRODUCTION 1.1. An Introduction India is one of the fastest growing economies in the world after a decade of financial and banking sector reforms since Evidence from across the world suggests that a sound and evolved banking system is required to sustain economic development. India has a better banking system in comparison to other developing countries. Banking revolution and growth has gone through innumerable twists and turns in the post independence era. Today banking plays an important role in the growth and development of Indian economy. The process of globalisation and liberalisation has strongly influenced the Indian banking sector. Emergence of new private sector banks and opening up of branches of foreign banks in India after banking sector reforms have changed the whole scenario of the banking function in recent years. Banks functions are more customer oriented now and banks innovate to provide new facilities that are more customer friendly. Indian banks have undergone a paradigm shift in their objectives. Maximisation of their profits has become secondary to developing long term relationships with their customers in order to achieve higher market penetration and also to survive and grow in today s cut throat competition. Today, Indian banks are trying to innovate new and better products and services and provide new ideas and techniques as well as make tailor made products available to the customers. Retail Banking or personal banking whose professed aim is Banking at your doorsteps helps to give new and better innovative products and services to the customers and thus helps the banks to improve their financial position. Retail Banking is not a new concept for the banking industry. It became popular in the 1 P a g e

2 western countries nearly two decades back. Retail banking is also growing in the Indian Commercial Banking sector in recent years. Retail banking refers to the dealings of a bank with individual customers both on the liabilities side and on the assets side of the balance sheet. On the liabilities side-fixed, current and savings accounts of individuals and, on the assets side, various loans such as personal loan, housing loan, car loan, consumption loan, education loan, marriage loan etc. are the important retail products offered by the bank. Retail banking also provides various ancillary services such as credit cards, mobile banking, internet banking, insurance, depository services etc. Retail banking segment in the banking industry is continuously undergoing innovations, product reengineering, adjustment, and alignments. Given the size, advantages, diverse customer base and scope for future expansion, there is a need for evolving a systematic approach to Retail banking. Most of the Indian banks are retail banks in their business composition. The term RETAIL BANKING encompasses various financial products like different types of deposit accounts, housing - consumer-auto and other types of loan accounts, demat facilities, insurance, mutual funds, credit and debit cards, ATM and other technology-based services, stock broking, payment of utility bills, reservation of railway tickets etc., and thus catering to diverse banking needs of an individual. Usually, the commercial banks to offer retail banking facilities. Their products and services under retail banking are geared primarily towards individual customers. These include a wide range of personal banking services like offering savings and checking accounts, bill paying services, as well as debit and credit cards facility. 2 P a g e

3 Consumers may also obtain mortgages and personal loans under retail banking. Although retail banking is mass market driven, many retail banking products may also be extended to small and medium sized businesses. Today s retail banking sector is characterised by three basic features; viz: 1) Multiple products-deposits, credit cards, insurance, investment and securities. 2) Multiple channels of distribution-call centre, branch internet. 3) Multiple customer groups- consumer, small business and corporate. Today, Retail banking is streamlined electronically via Automated Teller Machines (ATMs), or through virtual retail banking known as online banking. Across the globe, retail lending has been a spectacular innovation in the commercial banking sector in recent years. The growth of Retail lending, especially in emerging economies, is attributable to the rapid advances in information technology, the evolving macroeconomic environment, financial market reforms, and several microlevel demand and supply side factors. India too experienced a surge in retail banking. Retail loan 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 seller s market to a buyer s market. For the last few years Retail banking has become synonymous with mainstream banking for many banks. Indian retail banking segment offers products like housing loans, consumption loan for purchase of durables, auto loans, credit cards and educational loans. As the Report on Trends and Progress of India, has shown that the loan values of their retail lending range between Rs 3 P a g e

4 20000 to Rs 100 lakhs. These loans are generally for duration of five to seven years and housing loans granted for a longer duration of 15 years. The Indian banks are having cut throat competition with one another to grab a pie of the retail banking sector, which has tremendous potential as retail loans constitute only 8-9% of GDP in India, whereas the percentage is about 35% in other Asian economies. Maintaining good customer relations has become a major challenge for retail banks in the new era, though Retail banking customers are generally loyal. With increasing publicity on the services offered by competing banks, it has become tempting for the customer s to check the services in other banks. Excess of liquidity, increased dependence of corporate on capital markets, the rising income of middle class with increase in purchasing power and ability to handle debts, the increasing amount of NPA s from corporate portfolio and the future growth potentials of the credit card business has induced banks to shift from wholesale banking to Retail Banking. Retail Banking has immense opportunities in a growing economy like India. As the growth story gets unfolded in India, Retail Banking is going to emerge a major driver of economic growth. 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 credit portfolio of banking business is fast changing in India. Retail lending is becoming an important segment of bank credit. Large credit exposures are linked to bank s capital. Limits have to be fixed for single exposure in relation to the 4 P a g e

5 capital funds. A paradigm shift from corporate lending and disintegration are the reasons responsible for resurgence. Banks are facing fierce competition not only amongst themselves but also from aggressive NBFC s. As a result, interest rates on retail lending too have come down. Risk management for banks as far as retail banking goes should focus on risk and return characteristics of consumer loans, revenues from consumer loans, losses from consumer loans, collection strategies, and product structuring and lending policies Transformation to Retail Banking in India Reforms for liberalisation of Indian economy introduced in 1991 have since set in motion a process of transformation of Indian banking products and services so as to make banks internally viable and internationally competitive. The reforms provided to banks an opportunity to unlesh their potentialities to satisfy and serve the common man in addition to providing finance to trade and industry. The Indian banks have since undergone a complete makeover. The operations of the banks are increasingly being marked to cater to the financial requirements and service needs of the individual alongside those of the association of persons. Retail banking is a significant segment of banking operations which has emerged as a result of transformation of banking function in the wake of banking reforms. Retail banking has transformed the attitude of Indian banks to a significant extent. As regards lending operations, theses banks invest their resources in government papers to the hilt and then scout hitherto neglected 5 P a g e

6 retail borrowers for making loans and advances to them. RBI now welcomes the perspective of retail credit. Consumer credit is no longer considered as unproductive because it triggers demand for consumer products, which in terms help manufacturers in a period of economic slowdown. In fact, retail credit has grown tremendously. Today the ratio between retail credit and project credit extended by Indian banks stands at 3:1. The rising volume of retail credit, moreover, is the outcome of reasonably low interest rates. There is scope for further reductions in rates. The current intra-bank competition in India will further bring down the interest cost on retail lending and cause further rise in retail credit. Transformation to retail credit has also brought to fore the much needed diversification of risk. Indian banks are gradually appreciating the virtue of spreading the credit risk by financing the large number of small (retail) borrowers. It is perhaps apt to quote what Hugh Mc Culloch, Secretary of Treasury-UIL, said; Distribute your loans rather than concentrate them in a few hands, large loans to a single borrower or firm, although sometimes proper and necessary are generally injudicious and frequently unsafe. Large borrowers apt to control the bank, and when this is the relation between a bank and its customer, it is not difficult to decide which one in the end will suffer. Under retail credit banking, credit card business is growing and even government banks have started marketing cards. The interest on market card, at present 30 percent per annum refuses to 6 P a g e

7 come down. May be with the active participation of many banks in this lucrative business, the customer will eventually have the benefit of low rates. Besides consumer credit, micro finance is another area of Retail Credit which the innovative transformation process now sweeping the Indian banking institutions has made to emerge. The private banks have, in particular, displayed the creativity to finance this sector. The banks are extending micro finance, especially in rural and semi- urban areas where its potential for positive transformation of socio economic conditions is immense. On the deposit front the personal banking segment (individual deposits) has now become the centre of attraction. It is the individual deposits, and savings accounts that are actively sought after, and not mega deposits, at a rate which gets a marginal rise now and then. Banks are truly spreading their deposit net rather widely. Technological transformation process in the wake of banking reforms is also penetrating into the operations of Indian banks simultaneously with the shift in their product, services and practices. Application of technology has brought about a phenomenal makeover of banking system in India. Use of electronic gadgets has, on the one hand, resulted in computerisations of almost all the banking operations lending enhanced efficiency, accuracy and transparency in banks working and, on the other, has enabled the banks to innovate new products and newer forms of services to customers, particularly in the retail banking sector. 7 P a g e

8 On-line banking; for example, promises to let customer s carryout transaction via a direct connection to the bank s core customer account functions. Customer will review all their data, dates, cheques, credit card details, etc. Automated Teller Machines (ATMs) offer all time access to withdraws from deposits, save time, provide convenience, avoid queues and allow bank staff to have more time to deal with counter customers. Point of Sale Terminals are installed at Airports, hotels, Railways, Super bazaars and other commercial centres to enable customers not to carry cash but make payments through bank cards at these terminals which are linked to bank s host computer. Electronic Funds Transfer services provide instant transfer of money among various branches of bank throughout the country. Computerised clearing of cheques are available at metropolitan centres with their linkage to international banking communication system of SWIFT for clearing international transactions by cheques. At home, Electronic Clearing Services (ECS) introduced in 1995 transfer funds in cheques from one bank to another bank within the country with speed, safety and convenience, Credit Cards, Debit cards, Electronic Passbook, Anywhere Banking, Tele-banking, Extension Electronic counters to attract foreign exchange from NRI, and banking through internet, are other important innovative technology based products and services which are indicative of the extent and depth of transformation of Indian banking system post liberalisation and globalisation. 8 P a g e

9 1.3. Drivers of Retail Banking In India There are few factors which have contributed to the growing retail banking in India: Economic prosperity is one of the catalyst of the growth of retail banking as the consequent increase in purchasing power have given a fillip to a consumer boom. It is noteworthy that during the 10 years after 1992, India s economy grew at an average rate of 6.8 percent and continues to grow at almost the same rate- not many countries in the world match this performance. Changing consumer demographics indicate vast potential for growth in consumption both qualitatively and quantitatively. India is one of the countries which has highest youth population. Its 70% population is below 35 years of age (young population). The BRIC report of the Goldman-sachs, which predicts a bright future for Brazil, Russia, India and China, mentioned Indian demographic advantage as an important positive factor for India. Technological factors played a major role in promoting convenience banking or retail banking in the form of debit/credit cards, Internet and Home-banking, Anywhere and Anytime Banking. These products and services have attracted many new customers into the banking field. Technological innovations relating to increasing use of credit/ debit cards, ATMs, direct debit and phone banking has thus contributed to the growth of retail banking in India. Treasury income of the banks, which had strengthened the bottom-line 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 9 P a g e

10 and advances, retail loans have put comparatively less provisioning burden on banks apart from diversifying their income stream. Decline in interest rates has also contributed to the growth of retail banking by generating the demand for cheap credit Challenges Ahead: Retail banking has faced many challenges to survive in the market. First, Technological advancement has become the most important challenge for retail banking in India. Retail banking based on application of modern technology has revolutionised the range of banking products and services as well as enabled counter dealings with banks. At the same time, however, the technological developments are fraught with challenges of variegated nature to the banks and customer alike. The increasing use of ATMs and e-banking has placed enormous strain on the working of the systems and the procedures followed. This has forced the banks to strike a fine balance between speed and security. Security concerns are most important challenge that have become more serious in recent years. Fraud and prevention of fraud have led many banks to invest heavily on security and integrity of management. Second, Retention of consumers is going to be a major challenge. Technology today has stimulated innovation in banking products and services. The banks have entered into a cut throught competition to woo the customers with offer of newer forms of production services. The lure of them may shift the preference of customers for banks and, hence, customer retention is becoming a serious challenge to banks. Third, Rising indebtedness could turn out to be a cause for concern in the future. Fourth, Information technology poses both opportunities and challenges. Even 10 P a g e

11 with ATM machines and internet banking, many of the customers still prefer the personal touch of their neighbourhood branch bank. Fifth, KYC issues and money lending risks in retail banking are yet other important issues. Customer services are perhaps the most important dimension of retail banking followed by constant product innovations. Quality and pace in delivery, introduction of new channels of delivery, cross selling of products, price bundling and most important of all customers to become technology savvy, are other staring challenges to be encountered in near future. The Retail Banking environment today is changing fast. The changing customer demographics demands to create a differentiated application based on sealable technology, improved service and banking convenience. Higher penetration of technology and increase in global literacy levels has set up the expectations of the customer higher than ever before. Increasing use of modern technology has further enhanced reach and accessibility of customers to banking products and services. The market today gives us a challenge to provide multiple and innovative contemporary services to the customer through a consolidated window so as to ensure that the bank s customer gets Uniformity and Consistency of service delivery across time and at every touch point across all channels. The pace of innovation is accelerating and security threat has become prime of all electronic transactions. High cost structure rendering mass-market servicing is prohibitively expensive. Present day tech-savvy bankers are now more looking at reduction in their operating costs by adopting scalable and secure technology thereby reducing the response time to their customers so as to improve their client base and economies of 11 P a g e

12 scale. The solution lies to market demands and challenges lies in innovation of new offering with minimum dependence on branches-a multi-channel bank and to eliminate the disadvantage of an inadequate branch network. Generation of leads to cross sell and creating additional revenues with utmost satisfaction has become focal point worldwide for the success of a Bank. Traditional lending to the corporate are slow moving along with high NPA risk, treasure profits are now losing importance. Hence Retail Banking is now an alternative available for the banks for increasing their earnings. Retail Banking is an attractive market segment having a large number of varied classes of customers. Retail Banking focuses on individual and small units. Customize and wide ranging products are available. The risk is spread and the recovery is good surplus deployable funds can be put into use by the banks. Products can be designed, developed and marketed as per individual needs. All round increase in economic activity will increase the purchasing power. The rural areas have the large purchasing power at their disposal and this is an opportunity to market Retail Banking. India has 200 million households and 400 million middleclass population. More than 90% of the savings come from the house hold sector. Falling interest rates have resulted in a shift. Now People Want To Save Less And Spend More. Nuclear family concept is gaining much importance which may lead to large savings, large number of banking services to be provided are dayby-day increasing. Tax benefits are available. For example in case of housing loans the borrower can avail tax benefits for the loan repayment and the interest charged for the loan. 12 P a g e

13 Designing own and new financial products is very costly and time consuming for the bank. Customers now-a-days prefer net banking to branch banking. The banks that are slow in introducing technology-based products, are finding it difficult to retain the customers who wish to opt for net banking. Customers are attracted towards other financial products like mutual funds etc. Retail banking has immense opportunities in a growing economy like India. As the growth story gets unfolded in India, retail banking is going to emerge a major driver. The rise of 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. The younger population not only wields increasing purchasing power, but as far as acquiring personal debt is concerned, they are perhaps more comfortable than previous generations. Improving consumer purchasing power, coupled with more liberal attitudes towards personal debt, is contributing to India s retail banking segment. The combination of above factors promises substantial growth in 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 retailbanking sector are: financial inclusion, responsible lending, and access to finance, long-term savings, financial capability, consumer protection, regulation and financial crime prevention The present study has been undertaken to make a review of the evolution of Retail Banking in India. It also examines the management and working of the Retail 13 P a g e

14 Banking sector in India. The prospects and challenges of Retail Banking in India are also the focus of this study. The present work also explores as to how the Indian retail banking industry competes at global level. It also measures the comparative performance of Public Sector Banks and private Sector Banks on Service Quality dimensions. Service Quality is considered as most important instrument to measure the performance of Retail Banks. Accordingly, the yardstick of service quality is applied to assess the comparative performance of the twin sector of public and private banks in India. Collection of data and their relevant information is based on primary and secondary sources. Banks reports, journals, books and various articles about retail banking are relied upon to derive information about management and working procedures of Retail Banks. Customer satisfaction level is measured through questionnaire on Service Quality dimensions. 14 P a g e

15 References: H.S. Srivatsa and R. Srinivasan, (2007). Banking Psychographics: An Indian Empirical Study, International Journal of Business Research, New Delhi. Dey, S. and Maji, S.G. (2007). Retail Banking in Indian scheduled commercial banks A study, Banking finance, New Delhi. Bhayani, S.J., (2005). Retail Banking Awareness: An Empirical Analysis, Indian Journal of Marketing, Vol. XXXV, No. 9, pp Gopinath, S., (2005). Retail Banking Opportunities and Challenges, RBI bulletin, New Delhi, vol. LIX, No. 6, pp Kern, H.J., (2005) Global Retail Banking Changing Paradigms, Chartered Financial analyst, Hyderabad, Vol. XI, No. 10, pp Sudhir, M., (2005). Retail Banking in India The Paradigm shift, Chartered Financial Ananlyst, Hyderabad, vol. XI, No. 2, pp Chauhan, M. (2006). Banking Industry in India: The developing Trends, Monthly Commentary, New Delhi, Vol. XLVI, No. 10, pp P a g e