CHAPTER II RETAIL BANKING SERVICES IN INDIA

CHAPTER II RETAIL BANKING SERVICES IN INDIA 2.1. INTRODUCTION Banks play an important role in the development of a country, as reservoirs of resources necessary for the economic development. Thus the importance of commercial banks in the process of economic development has been pointed out regularly by economic thinkers and policy makers of the country. Commercial banks played an important role in the Indian economy and considered as the heart of the financial structure. This chapter is devoted to present the role of banks in economic development and an overview of the Indian Banking industry and a detailed study of working of Retail Banking in India. It also presents the various retail products and services provided by the public sector banks and private sector banks to their valuable customers. It determines the performance of retail banking in public and private sector banks. 2.2. ROLE OF BANKS IN ECONOMIC DEVELOPMENT In a developing country like India, there are many factors that hinder the development of the country. Some of them can be endorsed to the low per capita income and large group of people living below the poverty line. India is an agrarian economy where the country s potential, neither the human resource nor the natural resources are adequately utilised to the maximum extent which results in low per capita income. Thus the economy is marred with unemployment and 70

underemployment. Since the economy is basically agrarian, disguised unemployment is also unbridled among the farmer community. Besides the reasons mentioned above, the financial market was in the presence of Private Money Lenders, Landlords, etc.. They acted as bankers for centuries and amassed major wealth from the people of India that adversely affected capital formation. Thus the need for a better financial institution and credit infrastructure was felt necessary by the Planning Commission when the Five Year Plans were initiated. Banks play an important role in the development of a country, because in a modern economy, banks are to be considered not merely as dealers in money but also the traders in development. The banks are not only the stockholders of the country s wealth but also are the reservoirs of resources necessary for the economic development. Thus, the importance of commercial banks in the process of economic development has been pointed out regularly by economic thinkers and policy makers of the country. Commercial banks played an important role in the Indian economy and considered as the heart of the financial structure. The success of economic development depends on the extent of mobilization of resources and investment, the operational efficiency and economic discipline displayed by various segments of the economy. From the economic point of view, the major task of banks and other financial institutions is to act, as intermediaries, channeling savings to investment and consumption. Through them, 71

the investment requirements of savers are reconciled with the credit needs of investors and consumers. The contributions of banking to a country s economic development are Capital Formation, Monetization of Economy, Encouraging Entrepreneurial Innovations, Encouragement to Right type of Industry, Implementation of Monetary Policy, Balanced Regional Development, Promotion of Trade and Industry, Support to the government, Development of Agriculture and other neglected Sectors and Stabilization of prices. 2.3. INDIAN BANKING INDUSTRY From the Vedic period i.e. 2000 to 1400 BC the money lending activity in India could be traced back. The professional banking in India came into existence from 500 BC. Kautilya s Arthashastra of 400 BC contained references to creditors, lending and lending rates. Banking was fairly varied and catered to the credit needs of the trade, commerce, agriculture as well as individuals in the economy. W.E.Preston, Member, Royal commission on Indian currency and finance (1926) observed, It may be accepted that a system of banking that was eminently suited to science of banking because of an accomplished fact in England. 1 All cities/towns that were of commercial importance in the country are connected with an extensive network of Indian banking houses. The major forms of transactions between Indian bankers and their trans-regional connections are through their own inland bills of exchange or hundies, which were different from the banking practices in the European counterparts. Most banking systems worked on mutual trust, confidence 72

and without securities and facilities that were considered which were essential for the British Bankers. The Banking regulation also evolved along with banking in India. In fact the classic Arthashastra also had norms for banks going into liquidation. If anyone becomes bankrupt, debts owed to the state had priority over other creditors. Banks are among the main participants of the financial system in India. Banking offers several facilities and opportunities. Banking in India originated in the last decades of the 18th Century. The oldest bank in existence in India is the State Bank of India, a government owned bank that traces its origin in June 1806. It is the largest commercial bank in the country today. There are three different phases in the history of banking in India. They are 1. Pre Nationalization Era 2. Nationalization Stage 3. Post liberalization Era 2.4. RETAIL BANKING AN INTRODUCTION Banking industry includes a number of businesses such as corporate banking, investment banking, wealth management, capital market etc. Retail banking is another segment of the banking industry. It is a typical mass- market banking characterized by a large customer base and a large volume of transactions. There is a high level of co-operation between banks, retailers, customers and consumers in this segment. 73

The retail banking industry is diverse and competitive. In addition to provide loans, checking and savings account services, banks also offer underwriting, brokerage and insurance capabilities to manage all aspects of a customer s financial portfolio. Identifying and attracting profitable customers from competitors is essential for long term success. Retail banking includes deposit products, residential mortgage loans, credit cards, auto finance, personal loans, consumer durable loans, loans against equity shares, loans for subscribing to initial public offers (POs), debit cards, bill payment services, mutual funds and investment advisory services. These retail products provide an opportunity for banks to diversify the asset portfolio with high profitability and relatively low Non-Performing Assets. The categorization of retail banking services is shown in table 2.1. Today most banks have entered the retailbanking segment and have identified it as a principal growth driver. They slowly gaining market share in the retail space. Automation, Competition, Securitization and Regulation are the major forces that are driving and shaping consumer lending. Net banking, Mobile banking, ATMs and Bill payments are the new facilities that banks are using not only to lure customers but also to help them reduce their total operating costs. 74

Table 2.1 Categorization of Retail Services Core Services Facilitating Services Supporting Services Payment Services 1. Cash Foreign Currency Requirements DD/Banker s Cheque Travelers Cheque Electronic Fund Transfer *Making Payments at door step *Internet Banking *Telephone Banking Loan Products: Consumer Loans, Personal Loans, Housing Loans, Educational Loans Current Account and Savings Account 2. Current Account 3. Savings Account 4. Time Deposit Account 5. ATM card 6. Standing instructions from customers for making payments 7. Inter branch/interbank transfer of funds 8. Safety vault *Delivery of loan at promised time period *Interest Rate Option: Fixed/Floating *Flexibility in Pre- Payment of loan *Counseling on realestate markets *Legal services for documentation *ECS for Payment of Loan Installments *Credit cards *Debit cards *Services to senior citizens *Telephone banking *Internet banking *Conversion of excess balance to time deposit Insurance Products: Life Insurance Pension Schemes 9. Current Account 10. Savings Account 11. Time Deposit Account 12. Safety Vaults Source: Professional Banker, January 2003. *Additional insurance facility for family members *Counseling on Post Retirement Savings 75

The growth in retail banking has been facilitated by the growth in banking technology and automation of banking processes that enable extension of reach and rationalization of costs. ATMs have emerged as an alternative banking channel, which facilitate low-cost transactions vis-à-vis traditional branches. It also has the advantage of reducing the branch traffic and enables banks with small networks to offset the traditional disadvantages by increasing their reach and spread. 2.5. RETAIL BANKING DEFINITION The simplistic definition of the term Retail Banking encompasses mutual funds, debit cards, credit cards, retail deposit schemes, retail loans, insurance products, depository services including demat facilities and a host of other services catering to the needs of the individual customers. Retail banking can be defined as--- Retail banking is typically mass market banking where individual customers use local branches of larger commercial banks. Services offered include savings and checking accounts, mortgages, personal loans, debit cards, credit cards and so. The concept of Retail Banking is not new to banks but is now viewed as an important and attractive market segment that offers opportunities for growth and profits. Retail banking and retail lending are often used as synonyms but in fact, the later is just the part of retail banking. In retail banking all the needs of individual customers are taken care of in a well integrated manner. Retail banking in the country is characterized by multiple products, multiple channels and multiple customer groups. This multiplicity of the roles to be played 76

by the retail bankers adds to the excitement as well as the challenges faced by the bankers. 2.5.1. Multiple Products The products included in retail banking are-- Various types of deposits/accounts. Credit and Debit cards Loans (Personal, Auto, Housing etc.) Insurance, Mutual funds etc. 2.5.2. Multiple channels of distribution Internet banking Mobile banking Call centers 2.5.3. Multiple Customer Groups Individual customers Petty businesses Small and Medium Enterprises (SMEs) The Indian Banks are competing with one another to grab a pie of the retail banking sector, which has tremendous potential as retail loans constitute only 8 % of GDP in India, whereas their percentage is about 35 in other Asian economies. 2.6. FOCUS ON RETAIL BANKING Some aspects which have significantly redefined the banking strategy to focus on retail business are as follows: 77

2.6.1. Liberalization of Economy: Globalization has opened the floodgates for many new products in the market. On the one hand, it means entry of new banks in the country, which have started competing with each other for a share of the customers wallets. On the other hand, the scene also witnesses the entry of globally reputed companies offering excellent products and services to the people craving for a higher standard of living. The confluence of increased purchasing power, consumerism, competition and fortuitous surplus of resources with the banks has resulted in retail chase. There is a perceptible change in the identity of the commercial banks, from those know for their roles in development of the family and family-run businesses. 2.6.2. Disintermediation due to Globalization: For a very long time, banks have been catering to demands of economic developments. Finance for manufacturing activities had a greater priority. The reliance of commercial banks was on corporate and blue chip companies for both resources and deployment of funds on a wholesale basis. Triggered by a host of factors, this has come to a sudden halt. A scenario has emerged wherein there is lack of demand from large corporate. The near demise of working capital requirements from the blue chip companies can be partly attributed to enhancements in labels of efficiencies in productivity improved scales realizations etc. Moreover, on one hand the corporate have their own avenues like tapping public deposits directly, raising commercial papers, issuance of shares and debentures etc., and on the other hand, strategic investments, primary and 78

secondary market operations, etc., have played substantial role in reduced demand for corporate credit. 2.6.3. Mechanism of Instant Solutions: There is no doubt that any commercial bank would like to build a profitable and healthy port follow with as big a clientele base as possible so that the risks are spread. The industry is witnessing an era of thinning margins, undergoing the turmoil of non-performing advances and experiencing the warning of customer loyalty. In this backdrop, there is no wonder that retail banking with all its potential to provide a decent return through low profitability of NPAs and offering ample scope for an extended clientele base, is seen as a panacea for all the ills of the industry. 2.7. SPECIAL FEATURES OF RETAIL BANKING The retail credit ensures that the business risk is widely dispersed among a large customer base, unlike in the case of corporate ending where the risk may be concentrated on a select few clients. Ability of any bank to administer a large portfolio of retail credit products depends on some of the following factors: 1. Sound Documentation: Proper and defect free documentation is a necessary requirement for building a healthy retail credit portfolio. Similar to credit assessment sound documentation also minimizes the need to follow up at a future point of time. 79

2. Strong Credit Assessment: Once the credit assessment is carried out qualitatively, then the need for follow up in the future reduces considerably. 3. Regular and Constant Follow-up: Actually, follow-up for loan repayments is an ongoing process and it should start from the customer enquiry and continue till the loan is repaid in full. 4. Strong Processing Capability: As huge volumes of transactions are involved excellent technological support for processing day-to-day transactions and maintenance of book-ups are required for smooth delivery. 5. Appropriate Technology: Because of the large volumes of business, the need to provide instantaneous service to the customers, faster processing of large number of transactions and maintenance of database, appropriate technological support is a prerequisite for maintaining growth in retail banking. 6. Skilled Manpower: For the efficient management of a large and diverse retail credit portfolio, the most important prerequisite is skilled and well-versed employees only experienced manpower can withstand the strain of administering a diverse and complex retail credit portfolio. 80

2.8. TYPES OF RETAIL BANKING The retail banks are generally classified into 1. Commercial Bank: It is a normal bank that distinguishes from an Investment Bank. The US congress after the Great Depression required banks that are engaged only in banking activities, which is different from Investment Bank that is limited to capital market activities. Some people use the term commercial bank for a bank or a branch of bank that deals mostly with loans and deposits from corporate and large businesses. 2. Community Bank: The financial institution that operates locally and empowers the employee s to make local decisions in order to serve their customers and the other partners. 3. Community Development Bank: The regulated banks, that serves the underserved markets or population with various financial services. 4. Postal Savings Bank: The national postal system that offers services related to savings banking. 5. Private Bank: The banks that basically manage the high net worth individual s assets. 6. Offshore Bank: Banks those are located in the jurisdiction with low tax rates and regulation. Generally many offshore banks are private banks. 81

7. Savings Bank: Savings Banks have its roots into 18th or early 19th century. The basic objective of savings bank was to offer easy accessible savings products and services to all categories of public. The savings banks were created on public initiation in some parts of the world where as they were started by some socially committed individuals to put in place the necessary infrastructure. These days European savings banks started focusing on retail banking: payments, savings products, credits and insurance for individual customers, small and medium-sized enterprises. These savings banks differ from commercial banks not only in focus on retail banking but also by their decentralized distribution network, which provide local and regional outreach and by their social responsible approach to business and society. 8. Building Societies: These are the organizations which just conduct retail banking. 9. Ethical Banks: The banks that give more importance to the transparency of all the operations and that make only social-responsible investments. 2.9. RETAIL BANKING IN INDIA In India, retail banking has always been prevalent in various forms ever since the evolution of banking. Co-operative banks, which have been existence in India for over a century, have always had retail thrust. It is only since the midnineties that the term retail banking has been used as a means of reinforcing a conscious foray into this particular line of business. Retail banking today for many 82

banks is synonymous with main stream banking, with vast sums of money being invested in creating and sustaining a retail brand, further supported by requisite technological and staffing support. This era was governed by the developments in the field of information. In retail banking segment, it is the individual customer who is at the centre. Therefore, banks operating in this segment have devised innovative deliver channels, creative advertising and branding efforts along with competitive product and pricing strategies for customers with diversified background. India provides very high-level growth potential in retail banking segment for banks. Indian economy is growing at an average of 8.5%, thus providing much needed impetus to the phenomenal growth of the retail banking segment. Customers can conveniently bank these days irrespective of time and place. It has also offered services like DEMAT, Plastic Money (Credit and Debit Cards), Online Transfers, etc.. This has helped the banks to reduce their operational costs. Retail lending has become the hallmark of innovation in the commercial banking industry all over the world. Developing countries like China and India have emerged as potential markets with immense investment opportunities. This high growing segment is also dominated by foreign banks. Foreign banks are doing well and are expected to win the race in India. Though the face of the retail banking has changed the trends of the Indian banking industry as a whole, it has to improve a lot. The banking and finance sector is performing extremely well and is expected to rise exponentially in the near future. The growth of retail banking, new finance products, emergence of private sector players in finance and overall economic growth of the country depends on 83

the good quality of skilled and trained workforce for each level of operations for all corporate banks, financial or non-financial institutions. The constituents of financial sector such as banks, insurance companies, mutual funds, financial institutional investments, infrastructure finance, forex etc., are growing a phenomenal pace. 2.9.1. Customer Focused Strategies in Retail Banking: In order to benefit from the organic growth, bank authorities need to know the customer s attitude and its effect on customer behavior. To accomplish the organic growth, the banks should effectively manage and influence customers by their regular and disciplined services. To grow organically, banks must capture the opportunities and concentrate on improving advocacy and growth potential. Measures such as cross-sell, retention and acquisition of new customers, etc., help in achieving a retail banks agenda. Banks must focus on the changing customer s attitude. Internet has become a handy tool for the retail banks and for other market players, a large number of banks are offering products and services whose administrative costs have come down due to the usage of internet. Banks have to look out for the most effective methods of marketing and distributing these products/services and try to give best-of-breed services. Banks today have a stiff competition in the market. They have to cope with the challenges to gain the confidence of their customers. Having realized the importance of customer relationships as a crucial factor for their success, banks are adopting Customer Relationship Management (CRM) as a strategy to establish long-lasting relationship with them. Applying customer-focused strategies help banks to be at the top-most position keeping its share price at the maximum value. 84

The two important factors in retail banking sector are customers and information. The success of retail banking and retaining the riches payoffs of automation is a customer-driven strategy related to identification, acquisition and integration of information. The practical essence of retail banking technology is that the technology of a bank must absolutely cater to the requirements and expectations of its customers. Banks must aim to offer good products and should also serve their customers in a better way by formulating and creating new methods. This pragmatic approach helps them to serve their customers in an outstanding and innovative way. Price sensitivity is another indicator of customer loyalty in retail banking, because, today, customers have become more Price-Sensitive due to the increase in awareness levels and more number of services providers. The retail banks with a greater than average number of price-sensitive customers will lose most in a situation where they are flooded with identical products and services with competitive prices. Loyal customers also show their temptation to marketing information banks should prepare strong counter-attacks when substantially lower price-based competitors enter the markets. The table 2.2 gives India s best top10 retail players. 85

Table 2.2 Top 10 Retail Players in India S.No Bank Name Rank 1 State Bank of India 1 2 HDFC 2 3 Bank of Baroda 3 4 ICICI 4 5 Punjab National Bank 5 6 Axis Bank 6 7 Citi Bank 7 8 IDBI 8 9 Bank of India 9 10 Yes Bank 10 Source: India s Ranker.com, India s Top Services and Products, June 1, 2013. (http://indiaranker.com/banks/top.ten) 2.9.2. Reasons of Growth of Retail Banking in India: Retail banking has gained enormous momentum in the Indian Banking Scene during the last five years. The reasons are: 1. Introduction of Technology, 2. Increased competition among different types of banks, 3. Opening of new generation private banks, 4. Inviting of more foreign banks in post WTO (World Trade Organization) era, 5. Focus on productivity and profitability, 6. Deregulation of interest rates, 7. Drive towards low non-performing assets, 86

8. Tilt towards more consumerism and life style spending by working/middle class, 9. Innovation of new products and services, 10. Implementation of Prudential Norms, Risk Management and ALM Mechanisms, 11. Closure/re-locating of loss making branches, 12. Voluntary retirement of surplus staff, 13. Sourcing of cheaper funds by corporate clients from global markets and resultant excess liquidity, 14. Revival of Mutual fund market, 15. Opening up of insurance market, 16. Revitalizing of stock market, 17. Increase in the life-span expectancy due to modern health care facilities, 18. Change in Government Policy towards FDI (Foreign Direct Investment) in retail sector and 19. Thrust on infrastructure development, etc. 2.10. CHALLENGES TO REAIL BANKING IN INDIA Retail banking has vast opportunities in a growing country like India. A.T.Kearney, a global management consulting firm, named India as the second most attractive retail destination of 30 emergent markets. Indian middle class has a significant role to play in the development of retail banking sector as the percentage of middle to high income group is continuously rising. 87

Banking experts opinion that certain challenges may obstruct this new, revenue focused strategy, including The issue of money laundering is very important 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 Information Technology Department s additional responsibilities and challenges in managing, maintaining and optimizing the performance of retail banking networks. It is equally important that banks should maintain security at the advanced level to retain the faith of the customer. Difficulty and high cost of acquiring new customers in a matured market. Less options for growth via acquisition, as the banking industry continues to consolidate. A study conducted by Reichheld (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 a paramount important for the profitability of Retail banking business. So banks need to retail their customers in order to increase the market share. The issue of outsourcing has become very important in the recent past because various core activities such as hardware and software maintenance, entire ATM setup and operation (including cash, refilling), MIS and data center management, etc., are being outsourced by Indian banks. That is 88

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 customer s needs and requirements in terms of services/products, etc. 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 the coming years. 2.11. STEPS TAKEN BY BANKS TO IMPROVE RETAIL BANKING 2 All the banks are maintaining database for all their clients according to their needs so that they can launch an innovative product depending upon the needs of the clients and also promote especially in areas where it is most needed. The banks come out with new products with area of securities, mutual funds and insurance. It is most critical as most of the banks are offering similar type of products with same type facilities, what matters most is the service quality and efficiency in the area of operation. The banks with more efficiency and lower cost have become more famous. These banks try to add new additions to the existing customers which they can use without additional changes which help them to retain the clients. In order to provide quality and efficient service, the banks should have more number of branches as the single branch or limited branch banks are becoming 89

unsuccessful as the customers now desire the number of places to operate like branches, ATM s and internet etc. India a vast country and number of ATM s and fund managers and internet baking has been limited to only few of the developed areas. People living in rural areas, where these facilities are yet to be introduced are unexploited areas. There is tremendous scope in India for retail banking. In rural areas in Rural Banks are mainly concentrated on agriculture finance, the need for their consumption loan or personal loan is yet to be highlighted. Private Banks and Foreign banks are unable to compete with Public Sector Banks due to their network of branches. These banks get the benefit of promoting third party products easily through their wide network. Thus there is need to establish more number of branches and ATM in the country and provide better services in order to attract the customer. Outsourcing being an important factor in running a unit, RBI has stipulated detailed guidelines regarding the outsourcing of the activities. There are some of the activities which remain out of preview of outsourcing. Banks now contribute more time on Marketing of big clients, customer service and brand building. All banks are now aware that the margins are squeezing and customer is price sensitive they are making tie up arrangement for the customers across the country to take advantage of falling interest and stiff competition. It is a fact that SME lending and retail lending is more profitable than the corporate banking and to keep each bank to retain its portion they need to emphasize of the retail lending. Banks come out with innovative products and it is not the Survival of Fittest but it is Survival of Fastest. 90

2.12. RETAIL BANKING ACTIVITIES Banks' activities can be divided into retail banking, dealing directly with individuals; business banking, providing services to mid-size business; corporate banking dealing with large business entities; private banking, providing wealth management services to High Networth Individuals; and investment banking, relates to helping customers raise funds in the Capital Markets and advising on mergers and acquisitions. Banks are now moving towards Universal Banking, which is a combination of commercial banking, investment banking and various other activities including insurance. Technology has brought about strategic transformation in the working of banks. With years, banks are also adding services to their customers. The Indian banking industry is passing through a phase of customers market. The customers have more choices in choosing their banks. With stiff competition and advancement of technology, the service provided by banks has become more easy and convenient. 2.12.1. Internet Banking (E-Banking) Internet banking (or E-banking) means any user with a personal computer and browser can get connected to his banks website to perform any of the virtual banking functions. Internet banking refers to extension of banking services through the net work of computers. In internet banking system the bank has a centralized database that is web-enabled. All the services that the bank has permitted on the internet are displayed in menu. Any service can be selected and further interaction is dictated by the nature of service. The traditional branch model 91

of bank is now giving place to an alternative delivery channels with ATM network. Once the branch offices of bank are interconnected through satellite links, there would be no physical identity for any branch. The Reserve Bank of India constituted a working group on Internet Banking. The group divided the internet banking products in India into 3 types based on the levels of access granted. They are: 1. Information Only System General purpose information like interest rates, branch location, bank products and their features, loan and deposit calculations are provided in the banks website. 2. Fully Electronic Transactional System The system provides customer- specific information in the form of account balances, transaction details, and statement of accounts. This system allows bi- directional capabilities. Transactions can be submitted by the customer for online update. This system requires high degree of security and control. 3. Automated Teller Machine (ATM) ATM is designed to perform the most important function of bank. It is operated by plastic card with its special features. The plastic card is replacing cheques, personal attendance of the customer, banking hour s restrictions and paper based verification. Service charges after the free limit are charged as Rs.20 in most banks. The free transaction is limited to 5 in same bank ATMs and 3 transactions in other bank ATMs in majority of banks. But it is unlimited in case of current account holders in HDFC bank and all account holders in KVB in their own ATMs. 92

In case of SBI the account holder who have average monthly balance above one lakh can enjoy the benefit as free transactions in all ATMs. The list of ATMs of scheduled commercial banks as on March 2013 are shown in table 2.3 and figure 2.1 TABLE 2.3 ATMs OF SCHEDULED COMMERCIAL BANKS(MARCH 2013) SL.NO NAME OF THE BANK ATMs ON-SITE OFF-SITE TOTAL 1 SBI and its Associates 18708 13883 32591 2 Nationalised Banks 21533 15528 37061 3 Old Private Sector Banks 4054 3512 7566 4 New Private Sector Banks 11182 24353 35535 5 Foreign Banks 283 978 1261 Source: Report on Trend and Progress of Banking in India 2012-2013, Reserve Bank 2.12.2. Smart Card Banks are adding chips to their current magnetic stripe cards to enhance security and offer new service, called Smart Cards. Smart Cards allow thousands of times of information storable on magnetic stripe cards. 2.12.3. Credit Card The Credit Card holder is empowered to spend wherever and whenever he wants with his Credit Card within the limits fixed by his bank. A Credit card is a payment card issued to users as a system of payment. It allows the cardholder to pay for goods and services based on the holder s promise to pay for them. The issuer of the card creates a revolving account and grants a line of credit to the user from which the user can borrow money for payment to a merchant to the user. The 93

FIGURE 2.1 ATMs OF SCHEDULED COMMERCIAL BANKS(MARCH 2013) 40000 35000 32591 37061 35535 30000 25000 24353 21533 20000 18708 15000 13883 15528 11182 10000 7566 5000 4054 3512 0 SBI and its Associates Nationalised Banks Old Private Sector Banks New Private Sector Banks 283 978 1261 Foreign Banks ATMs ON SITE ATMs OFF SITE ATMs TOTAL 93a

concept of using a card for purchases was described in 1887 by Edward Bellamy in his utopian noval looking backward. Electronic verification systems allow merchants to verify in a few seconds that the card is valid and the cardholder has sufficient credit to cover the purchase, allowing the verification to happen at time of purchase. A credit card's grace period is the time the customer has to pay the balance before interest is assessed on the outstanding balance. Grace periods may vary, but usually range from 20 to 55 days depending on the type of credit card and the issuing bank. The list of various banks credit card transactions and their amount of transactions are shown in the table 2.4. 2.12.4. Debit Cards A Debit card (also known as a Check card or Bank card) that provides the cardholder electronic access to his or her bank account(s) at a financial institution. The card can be used instead of cash when making purchase when the card is accepted. Debit cards usually also allow for install withdrawal of cash, acting as the ATM card for withdrawing cash. The debit card transactions are routed through Visa or Master card networks in India and overseas rather than directly via the issuing bank. The list of various banks debit card transactions and their amount of transactions are shown in the table 2.5. 94

SL. No BANK NAME Table 2.4 Credit Card Statistics - October, 13 No.of outstanding cards as at the end of the month Credit Cards No. of Transactions (Actuals) Amount of transactions (Rs Million) 1 Allahabad Bank 0 3614180 9666.50 2 Andhra Bank 2476854 10296012 19371.1 3 Bank of Baroda 9043420 12366215 47778.5 4 Bank of India 12051502 16429585 38269.2 5 Bank of Maharashtra 15552641 4385922 10845.98 6 Canara Bank 4030262 15146723 40999.3 7 Central Bank of India 11976353 14269302 40752.08 8 Corporation Bank 5861748 4510199 18901.9 9 Dena Bank 5550049 2854539 9647.09 10 Indian Bank 2265157 13076721 28463.8 11 Indian Overseas Bank 10584695 4372590 14507.2 12 Oriental Bank of Commerce 4827795 4668647 17674.48 13 Punjab and Sind Bank 4621384 280542 1122.60 14 Punjab National Bank 391015 22435257 86470.80 15 Syndicate Bank 23404663 8668350 21773.68 16 UCO Bank 5945553 3783430 13959.20 17 Union Bank of India 3695416 11404851 35380.5 18 United Bank of India 10975144 2489439 8358.56 19 Vijaya Bank 2402154 3155999 9608.60 20 State Bank of India 2905930 224848000 616586.30 95

SL. No BANK NAME 21 State Bank of Bikaner & Jaipur 22 State Bank of Hyderabad 23 State Bank of Mysore 24 State Bank of Patiala 25 State Bank of Travancore Table 2.4 Credit Card Statistics - October, 13 No.of outstanding cards as at the end of the month Credit Cards No. of Transactions (Actuals) Amount of transactions (Rs Million) 124741000 8533902 23948.99 8647189 14939191 38510.10 3466929 5984271 14466.23 4289438 5008872 14960.76 7761584 8526664 25173.10 26 IDBI Ltd. 6040614 8794734 32069.52 27 Catholic Syrian Bank Ltd. 28 City Union Bank Ltd 29 Dhanalaxmi Bank Ltd. 30 Federal Bank Limited 526859 314126 835.83 1115585 1824596 5780.81 792628 502214 1704 3498244 3938827 15930.70 31 ING Vysya Bank 1251960 2668363 7413.30 32 Jammu & Kashmir Bank 33 Karnataka Bank Ltd. 34 Karur Vysya Bank Ltd 35 Lakshmi Vilas Bank Ltd. 36 Ratnakar Bank Ltd. 37 South Indian Bank Ltd 1482574 3039450 14679.91 2020487 2327778 6990.10 2606832 3741904 14685.03 439909 1584683 4961 69917 177638 489.47 2962210 2216195 7308.50 96

SL. No BANK NAME 38 Tamilnadu Mercantile Bank Ltd. 39 Development Credit Bank Ltd. Table 2.4 Credit Card Statistics - October, 13 No.of outstanding cards as at the end of the month Credit Cards No. of Transactions (Actuals) Amount of transactions (Rs Million) 610098 2185848 8551.60 166186 430912 1686.80 40 HDFC Bank Ltd. 17069491 41422588 154685.07 41 ICICI Bank Ltd. 20686662 42300560 163680.70 42 IndusInd Bank Ltd 1415118 1747760 6624.70 43 Kotak Mahindra Bank Ltd 1055966 3268495 10546.99 44 Axis Bank Ltd. 13214787 34106573 131237.06 45 Yes Bank Ltd. 520569 1401133 4535.10 46 RBS (ABN AMRO) 166864 415360 1541.51 47 American Express Bkg. Corp. 0 0 0 48 Barclays Bank 4600 1031 5.49 49 Citibank 1782605 5607200 17055.79 50 Deutsche Bank 75079 298234 1028.07 51 DBS Ltd. 14422 73785 189.90 52 HSBC 602513 642465 2778.45 53 Standard Chartered Bank 729384 2084001 6443.90 Grand Total 374192339 593165856 1830638.86 Source : Report on Trend and Progress of Banking in India 2012-13, Reserve Bank. 97

SL. No BANK NAME Table 2.5 Debit Card Statistics - October, 13 No.of outstanding cards as at the end of the month Debit Cards No. of Transactions (Actuals) Amount of transactions (Rs Million) 1 Allahabad Bank 0 0 0 2 Andhra Bank 129760 171452 450.70 3 Bank of Baroda 70478 109056 372.40 4 Bank of India 116753 128395 376.70 5 Bank of Maharashtra 22385 37113 89.62 6 Canara Bank 63651 90789 271.20 7 8 Central Bank of India 57524 61080 288.10 Corporation Bank 78684 69080 170.90 9 Dena Bank 0 0 0 10 Indian Bank 57831 89188 185.10 11 Indian Overseas Bank 12 Oriental Bank of Commerce 13 Punjab and Sind Bank 14 Punjab National Bank 45975 33868 87.50 0 0 0 0 122247 180428 388.99 15 Syndicate Bank 68048 60801 134.80 16 UCO Bank 0 0 0 17 18 Union Bank of India 50155 62053 170.00 United Bank of India 0 0 0 19 Vijaya Bank 61848 178712 404.66 20 State Bank of India 2738488 5815664 14883.08 0 0 98

SL. No 21 22 BANK NAME State Bank of Bikaner & Jaipur State Bank of Hyderabad Table 2.5 Debit Card Statistics - October, 13 No.of outstanding cards as at the end of the month Debit Cards No. of Transactions (Actuals) Amount of transactions (Rs Million) 0 0 0 0 0 0 23 State Bank of Mysore 0 0 0 24 State Bank of Patiala 0 0 0 25 State Bank of Travancore 0 0 0 26 IDBI Ltd. 0 0 0 27 Catholic Syrian Bank Ltd. 0 0 0 28 City Union Bank Ltd 0 0 0 29 Dhanalaxmi Bank Ltd. 2914 5873 14.42 30 Federal Bank Limited 0 0 0 31 ING Vysya Bank 0 0 0 32 Jammu & Kashmir Bank 35868 56921 202.96 33 Karnataka Bank Ltd. 0 0 0 34 Karur Vysya Bank Ltd 0 0 0 35 Lakshmi Vilas Bank Ltd. 0 0 0 36 Ratnakar Bank Ltd. 0 0 0 37 South Indian Bank Ltd 0 0 0 99

SL. No BANK NAME 38 Tamilnadu Mercantile Bank Ltd. 39 Development Credit Bank Ltd. Table 2.5 Debit Card Statistics - October, 13 No.of outstanding cards as at the end of the month Debit Cards No. of Transactions (Actuals) Amount of transactions (Rs Million) 6146 7216 15.55 2980 6221 15.00 40 HDFC Bank Ltd. 5078034 14217738 39691.38 41 ICICI Bank Ltd. 3042232 6440350 14727.10 42 IndusInd Bank Ltd 258438 487051 1866.20 43 Kotak Mahindra Bank Ltd 392842 703288 2288.51 44 Axis Bank Ltd. 1227538 2455575 8140.76 45 Yes Bank Ltd. 0 0 0 46 RBS (ABN AMRO) 82749 147194 442.28 47 American Express Bkg. Corp. 641210 1852427 16173.22 48 Barclays Bank 0 0 0 49 Citibank 2399652 8358844 22971.64 50 Deutsche Bank 0 0 0 51 DBS Ltd. 0 0 0 52 HSBC 500132 1101675 3350.81 53 Standard Chartered Bank 1223747 2447129 8312.60 Grand Total 18578309 45375181 136391.17 Source : Report on Trend and Progress of Banking in India 2012-13, Reserve Bank. 100

2.12.5. Core Banking Solutions Core Banking Solutions is new jargon frequently used in banking circles. The advancement in technology especially internet and information technology has led to new way of doing business in banking. The technologies have cut down time, working simultaneously on different issues and increased efficiency. The platform where communication technology and information technology are merged to suit core needs of banking is known as Core Banking Solutions. Here computer software is developed to perform core operations of banking like recording of transactions, passbook maintenance, and interest calculations on loans and deposits, customer records, balance of payments and withdrawal are done. 2.12.6. Real Time Gross Settlement (RTGS) RTGS is an electronic settlement system of Reserve Bank of India without involvement of papers. To facilitate an Efficient, Secure, Economical, Reliable and Expeditious System of Fund transfer and clearing in the Banking sector throughout India. Real time gross settlement systems (RTGS) are a funds transfer mechanism where transfer of money takes place from one bank to another on a "real time" and on "gross" basis. 2.12.7. Electronic Clearing Service Electronic Clearing Service is another technology enhancement happened in the banking industry. The customer willing to use this facility is required to fill in the mandate form from the corporate/any utility service institution for ECS mode of credit and debit. The customer needs to prepare the payment date and submit it to the sponsor Bank and after that everything happened electronically. 101

So customers can thereby make payments as well as receive all incomes electronically. 2.12.8. Mobile banking Mobile banking (also known as M-Banking, e-banking, SMS Banking etc.) is a term used for performing balance checks, account transactions, payments etc. via a mobile device such as a mobile phone. 2.13. RETAIL BANKING IN OTHER COUNTRIES The retail banking sector in the world s economy is confronting a tough time. The uncertain economy and credit crisis, prospective disturbance in pricing models and the media influence are here with new challenges for the whole industry. These challenges are dealt by banks of different countries in different ways: 1. Retail Banking in Canada: Banking in Canada is one of the most efficient and safest banking systems in the world. 3 According to the Department of Finance, Canada s banks, also called chartered banks, have over 8, 000 branches and almost 18, 000 automated banking machines (ABMs) across the country. 4 In addition, "Canada has the highest number of ABMs per capita in the world and benefits from the highest penetration levels of electronic channels such as debit cards, Internet banking and telephone banking". The two important developments in the history of Canadian Banking were the establishment of ING Bank of Canada and emergence of non-bank mortgage origination companies. 102

The banks in Canada are classified into two categories, they are 1. The five large National Banks 2. The smaller second tier banks. The five largest national banks include 1. The Royal Bank of Canada 2. The Toronto Dominion Bank 3. The Bank of Montreal 4. The Bank of Nova Scotia and 5. The Imperial Bank of Commerce Some of the smaller second tier banks include: 1. The National Bank of Canada 2. The Mouvement Desjardins (this is technically not a bank but it is a credit unions alliance) 3. HSBC Bank of Canada and 4. ING Bank of Canada. These second tier banking institutes are domestic banking organizations. Even the Insurance companies in Canada also created deposit-taking bank subsidiaries. 2. Retail Banking in Australia: Until 1980s, the Banking industry in Australia was tightly regulated. It was impossible for the foreign banks to establish their banks in Australia till that time. 103

For this reason the number of banks in Australia were very less when compared to that of United States or even Hong Kong. The banks in Australia are classified into two types 1. Savings Banks 2. Trading Banks. namely At present the Australian banking sector is dominated by four major banks 1. Australia and New Zeeland Banking Group 2. Commonwealth Bank of Australia 3. National Australia Bank 4. Westpac Banking Corporation. To prevent mergers between the four major banks the Australian government has Four Pillar policy. This policy reflects the broad political popularity of bank mergers. This policy of four pillars was built upon economic fallacies and works against the nation s better interests. 3. Retail Banking In United States: During 1781, the banking in United States was started with the act of United States Congress which established the Bank of North America in Philadelphia. Initially the private banks were printing their own currency notes backed by the gold and silver deposits, but after the American Revolutionary War, the Bank of North America was given the monopoly power on currency printing. 104

The Bank of North America was proposed as a commercial bank which would act as a fiscal agent for the government by the first Superintendent of Finance Robert Morris, who was appointed under the Articles of Confederation. 4. Banking in Switzerland: The most important features of Banking in Switzerland are stability, privacy and protection of clients assets and information. From the Middle Ages itself the country was practicing the tradition of bank secrecy and it was codified in 1934 law. The banks Switzerland are regulated by the Federal Banking Commission (FBC). Switzerland is a stable, economically advanced and rich nation, having a gross domestic product (GDP) higher than many large western European countries. Moreover, the value of the Swiss Franc has been relatively stable compared to that of other currencies. 5 Because of the neutrality and national sovereignty Swiss could foster a stable economy which enabled banking sector to develop and thrive. Even though it is near Europe's geochartical centre, Switzerland maintained neutrality through both World Wars; is not a member of the European Union or the European Economic Area; and was not even a member of the United Nations until 2002. 6, 7 At present it is estimated that one-third of the funds held outside their country are kept in Switzerland. Panama and Singapore have attracted the depositors who seek privacy and protection, with the changes in the Swiss bank secrecy regime. Singapore strengthened penalties for violators of bank secrecy in order to make its banks more 105

attractive and modified its laws on trusts and inheritance. Singapore is also now the location of Credit Suisse's international banking headquarters. 8 2.14. CONCLUSION: The fore going discussion and analysis lead to the conclusion that banking structure of India is full of potential for growth. Indian banking industry have registered considerable development with significant impact on growth of GDP, a spectacular rise in National income, increase in per capita income and expansion of financial sector of India. For future prospects retail banking has emerged as the showcase of innovation and development, through its various products like personal loan, home loans, educational loans, deposits, credit cards and depository services. Hence there is need of constant innovation of Retail banking, a paradigm shift in bank financing through innovative products and mechanism involving constant upgradation and revalidation of the banks internal system and processes. To reach global standards, Indian banks have been innovating continuously, thinking Out-of-the-box, and diversifying into various segments via expansion of branches, tie-ups with other industry players and adding additional financial services. Key features like easy accessibility, anywhere anytime banking, increased use of technology and rapid introduction of innovative customized products to meet consumer demands have changed the banking scenario in the country. For future prospects retail banking has emerged as the showcase of innovation and development, through its various products like personal loan, home loans, educational loans, deposits, credit cards and depository services. Hence there is need of constant innovation of Retail banking, a paradigm shift in bank financing 106

through innovative products and mechanism involving constant upgradation and revalidation of the banks internal system and processes. Retail banking is basically a consumer-oriented business. It helps in serving a big number of small consumers. Due to changing trends of consumers in the increasing competition world, there is a need for constant innovation in retail banking with product differentiation, customization and technological upgradation. It shows that the scope of generating profit through retail banking rather than through any of the traditional methods has become one of the attractive options in the bank. It can be stated that out of many players in the fray, only those capable of addressing the above critical success factors in the most efficient way would emerge successful. 107