bank lending- retail banking
TRANSCRIPT
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The voice of today’s banking customer
Foster greater loyalty and satisfaction
Offer choice and flexibility
Adapt business models
MEANING OF RETAIL BANKING
Retail banking is banking in which banking institutions execute transactions
directly with consumers, rather than corporations or other banks. Services offered
include savings and transactional accounts, mortgages, personal loans, debit cards,
and credit cards.
Commercial bank has two meanings:
Commercial bank is the term used for a normal bank to distinguish it from
an investment bank. (After the great depression, the U.S. Congress required
that banks only engage in banking activities, whereas investment banks
were limited to capital markets activities. This separation is no longer
mandatory.)
Commercial bank can also refer to a bank or a division of a bank that mostly
deals with deposits and loans from corporations or large businesses, asopposed to normal individual members of the public (retail banking). It is
the most successful department of banking.
Community development bank are regulated banks that provide financial
services and credit to underserved markets or populations.
Private Banks manage the assets of high net worth individuals.
Offshore banks are banks located in jurisdictions with low taxation and
regulation. Many offshore banks are essentially private banks.
Savings banks accept savings deposits. Postal savings banks are savings banks associated with national postal
systems.
Retail Banking services are also termed as Personal Banking services
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Typical mass-market banking in which individual customers use local branches of
larger commercial banks is called retail banking. Services offered include savings
and checking accounts, mortgages, personal loans, debit/credit cards and
certificates of deposit (CDs).
Retail banking aims to be the one-stop shop for as many financial services as
possible on behalf of retail clients. Some retail banks have even made a push into
investment services such as wealth management, brokerage accounts, private
banking and retirement planning. While some of these ancillary services are
outsourced to third parties (often for regulatory reasons), they often intertwine with
core retail banking accounts like checking and savings to allow for easier transfers
and maintenance.
RETAIL BANKING COMPREHENSIVE REPORT-GROWTH
Use this report to…
Understand how retail industry is growing
What are strategies taken by retail bank companies and their comparison thereof?and much more……
INTRODUCTION
Retail banking in India has fast emerged as one of the major drivers of the overall
banking industry and has witnessed enormous growth in the recent past. The Retail
Banking Report encompasses extensive study & analysis of this rapidly growing
sector. It primarily covers analysis of the present status, current trends, major
issues & challenges in the growth of the retail banking sector. This report helps in
Banks, financial institutions, MNC Banks, academicians, consultants and
researchers to have a better understanding of the booming opportunities in retail
banking in India.
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MAJOR FINDINGS
With recession departing away from away global economy, opportunities are
slowly emerging in emerging markets. Since emerging markets, except China,
were less depending upon US for growth; are first to come out of recession eclipse.
Growth opportunities in banking, especially retail segment is set to witness fastgrowth due to high consumption. The higher growth of retail lending in
emerging economies is attributable to fast growth of personal wealth,
favourable demographic profile, rapid development in information
technology, the conducive macro-economic environment, financial market
reforms, and several micro-level supply side factors.
The retail banking strategies of banks are undergoing major transformation, as
banks adopt a mix of strategies like organic growth, acquisitions and alliances.This has resulted in a paradigm shift in the marketing strategies of the banks.
Public Sector Banks players are adopting aggressive strategies, leveraging
their rural branch network and their customer vase to earn a larger share of the
retail pie. Banks are also going in for innovative strategies like cross selling,
packaged selling of retail products and technology based banking. At the same
time, new foreign players are also entering this high growth sector
POINTS DISCUSSED
- Global retail banking vis-à-vis Indian scenario
- Indian retail banking overview
- What are the regulatory factors involved in Indian banking industry
- How interest rate risks, money laundering, and outsourcing are affecting the
performance of banking sector?
- What would be the impact of Basel-II norms in Indian banking industry?
- What are the implications of SARFESI Act on recovery of money?
- How the banking industry would combat the competition from upcoming sectors
like mutual funds?
- What are the various issues and challenges before this industry?
- What are strategies taken by retail bank companies and their comparison thereof?
PLAYERS PROFILED
The report contains major profiles of - Andhra Bank, AXIS Bank, Bank of Baroda,
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Bank of India, Canara Bank, Citibank, Central Bank of India, Deutsche Bank,
HDFC Bank, HSBC, Indian Overseas Bank, ICICI Bank, I D B I (Industrial
Development Bank Of India), Indian Bank, ING Vysya Bank, Jammu & Kashmir
Bank Ltd, State Bank of India, Saraswat Co-Operative Bank Ltd, Syndicate Bank,
UCO Bank and Union Bank of India
PRODUCTS ANALYSED
- Indian retail credit
- Housing finance
- Auto finance
- Consumer durable loan
- Educational loan
- Other personal loans- Credit cards
- Bancassurance
FOR WHOM
- Banks, Financial institutions
- MNC Banks
- Academicians
- Consultants
- Researchers
RESEARCH METHODOLOGY
The data used, extensively draws from the in-house and proprietary sources
available at Cygnus as our research team regularly tracks the sector. The other
sources include Bank for International Settlements (BIS), Reserve Bank of India,
Banking related Journals, and Research papers, Industry portals, Government
Agencies, and Trade associations, monitoring of Industry News and developments
etc. The data has been cross-checked by the research team and validated to provide
the latest and unambiguous information.
ADDITIONS IN THE EDITION
Global Banking Scenario
Introduction
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Global banking assets touches US$96 tn
Rising Bad debts and Provisions
Profitability plummeted
Region wise analysis
- US-- Rising defaults and slowdown affects overall credit
- Europe
-- Credit growth dips in European banks
- Asia Pacific
-- Japan find opportunity in serving baby boomers
-- Asia pacific outperforms than developed economies
Recent trends
- Housing bubble collapsedIndian Banking Industry
Current Scenario
- Monetary and liquidity position: Relatively stable
-- Bank deposits moving up
-- Credit off take slows
Housing finance
Housing loan disbursement: facing the heat from global slowdown
Major Challenges
- Managing volatility in metal and oil prices and in exchange rates
- Finding a solution to slowdown in exports and manufacturing activities
- Integrating the entire supply chain and managing inbound logistics
- Managing Poor Monsoons
- Maintaining the pace of infrastructure development
Credit cards
Key Trends
- Infrastructural challenges could soon become irrelevant
- EMV issuance is still far away
- Prepaid Cards on the horizon
- Demand for premium and co-brand cards
- Full ATM outsourcing
Techology Spend
- Spread of ATMs — primary concern for banks
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- Cards being a strong alternative to cash payments
- Internet banking – emergence of new era in personal banking
Micro payment
Regulations
Consumer credit, Home Loan, Education Loan, Auto Loans and their Risk weightexposures
Credit card Norms
- Single overall limit to an individual
- KYC (know your customer) Norms
- Reporting to Credit Bureau
- Other harassment
Micro Finance
- The Micro Financial sector (Development and Regulation) Bill, 2007Foreign Exchange Regulations
Remittance Regulations
Mobile Banking
Issues and challenges
A paradigm shift from the monopolies of public sector banks to competitive
banking
Retail loan quality seen falling
Tie-Up Arrangement
Basel II Norms
Growth In Retail Electronic Funds Transfer Systems
Future outlook
Emerging trends in technology
CONCLUSION
In the world economy retail lending is a strong market; however, its rise is evident
in emerging economies like India. Asia Pacific’s vast population, combined with
high savings rates, explosive economic growth, and underdeveloped retail banking
services, provide the most significant growth opportunities for banks. To continue
to realise vast growth opportunities in the region, banks will have to effectively
serve the retail banking segment. Hence, banks need to innovate diverse range of
retail banking products and servicing in order to satisfy the customers of Asia
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Pacific.
In 2008, global banks losses were US$4.1tn, of which US accounts for US$2.7tn,
European and Japanese banks losses account for US$1.3tn and rest by others.
Banking strategies are presently undergoing various transformations, as the overallscenario has changed over last year. Till the recent past, most of the banks had
adopted fierce cost-cutting measures to sustain recession. This strategy however
has become obsolete in the light of immense growth opportunities for banking
industry. Most bankers are realising that banks shall focus more on core business
i.e., lending and borrowing rather than growing on the back of investing in
complex derivative products. Banks are now confident about their high
performance in terms of organic growth and in realising high returns.
A bank’s growth strategy evolves around the customer satisfaction. Improved
customer relationship management can only lead to fulfillment of long-term, as
well as, short-term objectives of the bankers. This requires efficient and accurate
customer database management and development of well-trained sales force to
develop and sustain long-term profitable customer relationship. Japan remained the
major contributor in total bank deposits; it has experienced an increase of nearly
2%. While China’s total deposit grew by 17.90% in FY08. Relatively smaller
player like India also recorded an outstanding growth of 19% in total bank deposit
during 2008-09. Countries like India have emerged as potential market with huge
investment opportunities.
During 2008-09, gross credit extended by Indian commercial banks grew by
20.09% to touch Rs27,293 billion. Retail credit has grown by 7.8% to Rs5574
billion during the same period. Housing sector constitutes the lion’s share of about
49% in the total retail disbursement, auto loans (22%), other personal loans (18%),
educational loans (5%), credit card receivables (5%) and consumer durables (1%).
Banks continue to gather a greater share in housing loan disbursements by
outdoing Housing Finance Companies (HFCs). The Indian housing finance
industry has been growing by leaps and bounds in the past few years. Housing
loans credit by SCB and HFC grew only by 5% during May 09 compared 13.8%
growth in May 08. Credit flow to housing was lower at Rs130.28 billion during
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May 09 as compared to Rs317.35 billion in May08. Low lending in housing sector
was due to tightening monetary measures, banks denial in lending funds, high
interest rates and very high non-performing assets. Despite being a late entrant in
the housing finance, the banks have overtaken the HFCs in the home loan market.
The share of the banks in total home loan disbursement has risen from 48% in2003-04 to 59% in 2008-09. Outstanding Housing loans, as a percentage of GDP,
increased in the last five years from 7.06% in 2005-06 to 8.29% in 2008-09. It is
expected to leap by double digits in the next 2-3 years. Indian housing market is
likely to grow on the lines of Malaysia and Thailand; these countries have already
reached the double digit figures as percentage of GDP.
Auto loan after experiencing 18% CAGR is last 5 years has witnessed 15% dip
during 2008-09. In Asia Pacific, India has emerged as the third largest market forcars and MUVs, after Japan and China. High interest rates, banks delay in
financing, high oil prices, delay in monsoons are main constraints of this segment.
The last few years have witnessed a high increase in students aspiring for
management and professional courses, leading to a spurt in educational loans.
Banks are now having a direct tie-up with the educational institutions to cash in on
the opportunity. Public Sector Banks (PSBs) are focussing on the educational loans
segment. During 2008-09, the outstanding for education loans increased by 35% to
Rs285.79 billion.
The credit card culture has gained immense popularity over past 5 years. The total
number of cards issued in India has gone up by nearly 22.33% in the FY09. The
total number of credit cards issued is estimated to be at around 259 million in
2008-09. The actual usage too has registered an increase both in terms of volume
and value at the rate of 13.7% and 12.7% respectively in current period. The total
spends in the payment industry for the year 2008-09 crossed Rs839 billion at the
POS. This reflects a growth of 22% over the previous year. As on March 31, 2009,
outstanding credit card receivables stood at Rs280 billion i.e., a growth of 6% over
2007-08. Almost all the categories of banks issue credit cards. Credit cards have
found greater acceptance in terms of usage in the major cities of the country, with
the four major metropolitan cities accounting for the bulk of the transactions.
The consumer durable loan outstanding as on March 31, 2009 was Rs81 billion. In
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total personal loans, consumer loans account only for 1% as on March 2009. In a
tenure-wise market share of Consumer Durable loans, long-term loans leads with
59% market share and medium term loans with 41% market share. In terms of size,
consumer durables segment has maximum loans which are between Rs25,001 to
Rs0.2 million. However, outstanding amount declined by 4% during fiscal 2008-09. This is primarily due to bank’s denial in lending and postponement of
purchasing decision due to high inflation on account of high food prices.
The other personal loans market is characterised by intense competition and the
players vie with one another to get business. These loans are driven by urgent and
short-term needs, and banks have to act swiftly to cash in on that need.
Metropolitan and urban areas together constitute two thirds of total loans under this
category. Private sector banks lead in metropolitan areas, whereas in the rural areasthe nationalised banks have more pie.
Bancassurance, the much talked about channel of insurance distribution through
banks, has gained immense popularity among Indian insurance companies and
banking sector ever since its introduction in 2000-2001. Pushing the risk products
through banks is a cost-effective affair for an insurance company compared to the
agent route. While for banks, considering the falling interest rates, fee based
income coming in at a minimum cost is more than a welcome move.
Bancassurance has cleanly outperformed other alternate channels of distribution
for insurance products, with a share of almost 25-30% of the premium income
amongst the private players in FY 2008. There is huge potential in this alternative
channel, with only 4,500-5,000 bank branches currently distributing insurance
products.
In India, all the retail banking segments are expected to witness steep growth
owing to the low cost of borrowing, changing customer attitudes towards
borrowing and optimism regarding economic growth. The share of total retail
credit in bank credit has increased from 6.4% to over 25% in the past 15 years. In
the next four years, till 2010, retail banking is expected to grow at a CAGR of 20%
to reach Rs7970 bn. This requires expansion and diversification of retail product
portfolio, better penetration and faster service mechanism. Hitherto, the growth had
come from metros and tier I cities while the loan requirement from larger cities
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will continue to grow, explosive growth in credit is expected to register in tier II
cities, semi-urban and rural areas.
However, there are some areas of concern like rising NPA in consumer loans
particularly, the delinquency rates in credit cards and frauds in home loans.Housing prices have grown rapidly during 2005-2008. Deflation of asset value is a
possibility in certain areas. Aggressive credit growth in retail has increased the
requirement for measuring and managing this risk. These require extremely skilled
workforce and highly evolved credit delivery and monitoring processes, so that the
banking professionals can track the market perfectly. The other concern is of
suicidal pricing by the aggressive banks. This is bringing the margins under
pressure. Though rational pricing is critical, the competitive market shall continue
to see the pricing pressure. There is also a need for database and a managementinformation system to identify the right kind of borrowers. Lack of consensus on
definition of retail and transparency in declaration by the players as well the
coverage of retail by the RBI in its reports –– all of this need a thorough re-look.
As India’s economy matures with excellent performance in terms of GDP and
other parameters like per capita income, balance of payments, inflation and
financial market, consumer spending –– all set to increase by many folds. This
positive trend will definitely fuel the growth Indian banking industry. To continue
to realise the vast growth opportunities in the country, banks will have to
effectively serve the retail banking segment. To meet the expectations and win the
hearts of the customers, the banks should innovate by developing a diverse range
of retail products, needed by the customers and servicing them efficiently.
RECOMMENDATION
Transforming Customer Experiences with Capgemini
From this Retail Banking Conference with Capgemini and The Banker, viewers
will hear about the challenges facing banks today as they try to create captivating
customer experiences across channels.
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Learn from the voice of the customer and find out what 18,000 customers prefer
from their banking experience with Capgemini’s World Retail Banking Report
2012.
Report Highlights
According to the Report’s Customer Experience Index, which surveyed over
18,000 bank customers across 35 countries, 9% of customers are likely to leave
their banks in the next six months while 40% are unsure they'll stay long term. The
report shows banks have a significant opportunity to close the customer sentiment
gap and address the factors that matter most to them to increase loyalty. Quality of
service (53%), fees, (50%), ease of use (49%) and interest rates (49%) represent
the biggest impact areas to keep customers from leaving. The report also reveals
that mobile banking services have yet to be fully leveraged.
North American banks lead in customer satisfaction
Banks recorded a global average of 65% in terms of customer satisfaction, find out
how satisfied customers in other regions are in the full report. Despite general
satisfaction with their primary bank nearly 10% of customers surveyed indicated
they will leave over the next six months.
To prevent customer loss, banks must use new approaches to traditional
strategies
The Report found banks that are pursuing a traditional strategy of "do-everything"
to improve customer experience should consider differentiating on only one or two
dimensions, prioritizing investments to strengthen core competencies that address
their customers' most pressing demands. Explore three new operating models for
sustainable future performance.
While Mobile is the channel with the most potential, other channels still lead
in terms of customer preference
Banks modestly increased their levels of positive customer experience from last
year but they still are not delivering enough positive experiences. Just over 40% ofcustomers are having positive experiences through most channels today. Find out
which channels are providing the greatest positive customer experience in each
region.
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The World Retail Banking Report provides insights into customer attitudes
towards retail banking using a comprehensive Voice of the Customer survey which
polled over 18,000 retail banking customers in 35 countries. The responses from
this survey provide the underlying input for our proprietary Customer Experience
Index (CEI) which measures customers’ banking experiences across 80 differenttouch points. The CEI addresses the disconnect between measures of customer
confidence, loyalty, and satisfaction by identifying the factors that are most
important to customers, and then measures satisfaction specifically along three
dimensions: products (including checking, savings and payments accounts; credit
cards; loans and mortgages); channels (including branch; internet; mobile device;
phone; and ATM), and lifecycle stage (including information gathering;
transacting; problem resolution; and account status and history).
VERY IMPORTANT- RECOMMENDATIONS
Amid sweeping regulatory change, slow economic growth and tightened
margins, banks today are increasingly focused on their most important
stakeholders — their customers.
Yet, despite their best efforts to attract and retain customers, customer
confidence levels in banks remain low.
In response, customers are changing their behavior and demanding lower feesfor higher levels of service or other improvements. If these demands are not
met, they are increasingly likely to shop around at other banks for competitive
rates for services and products.
To build on our previous global consumer banking survey in 2011, and to help
banks better understand what they must do to build and maintain customer
relationships, we surveyed 28,560 banking customers across 35 countries to
learn more about their needs and preferences. Our banking teams around the
world analyzed the responses.
We hope the data and survey findings are useful to you when planning
strategies and adapting your business models to attain greater customer
loyalty and satisfaction.
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Our survey suggests that for banks to remain competitive, they must:
Give customers the opportunity to choose by making promises and service
offers more transparent.
Rebalance fee structures to achieve the clarity and sustainability required by
regulators and investors.
Help customers shape their own banking experiences by improving how they
provide information and advice, recruiting online affinity groups and by
developing flexible loyalty programs.
Develop models around customer needs by reprioritizing spending, including
increasing the use of low-cost digital models and using more innovative
technology.
OPPORTUNIITES AND CHALLENGES- RBI
he issue of retail banking is extremely important and topical. 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 evolvingmacroeconomic environment, financial market reform, and several micro-level
demand and supply side factors.
India too experienced a surge in retail banking. There are various pointers towards
this. Retail loan is 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 sellers’ market to a buyers’ market. Gone
are the days where getting a retail loan was somewhat cumbersome. All these
emphasise the momentum that retail banking is experiencing in the Indian
economy in recent years.
What is Retail Banking?
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In recent past retail lending has turned out to be a key profit driver for banks with
retail portfolio constituting 21.5 per cent of total outstanding advances as on March
2004. The overall impairment of the retail loan portfolio worked out much less
then the Gross NPA ratio for the entire loan portfolio. Within the retail segment,
the housing loans had the least gross asset impairment. In fact, retailing makeample business sense in the banking sector.
While new generation private sector banks have been able to create a niche in this
regard, the public sector banks have not lagged behind. Leveraging their vast
branch network and outreach, public sector banks have aggressively forayed to
garner a larger slice of the retail pie. By international standards, however, there is
still much scope for retail banking in India. After all, retail loans constitute less
than seven per cent of GDP in India vis-à-vis about 35 per cent for other Asian
economies — South Korea (55 per cent), Taiwan (52 per cent), Malaysia (33 per
cent) and Thailand (18 per cent). As retail banking in India is still growing from
modest base, there is a likelihood that the growth numbers seem to get somewhat
exaggerated. One, thus, has to exercise caution is interpreting the growth of retail
banking in India.
Drivers of retail business in India
What has contributed to this retail growth? Let me briefly highlight some of the basic reasons.
First, economic prosperity and the consequent increase in purchasing power has
given a fillip to a consumer boom. Note that during the 10 years after 1992, India's
economy grew at an average rate of 6.8 percent and continues to grow at the
almost the same rate – not many countries in the world match this performance.
Second, changing consumer demographics indicate vast potential for growth in
consumption both qualitatively and quantitatively. India is one of the countrieshaving highest proportion (70%) of the population below 35 years of age (young
population). The BRIC report of the Goldman-Sachs, which predicted a bright
future for Brazil, Russia, India and China, mentioned Indian demographic
advantage as an important positive factor for India.
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Third, technological factors played a major role. Convenience banking in the form
of debit cards, internet and phone-banking, anywhere and anytime banking has
attracted many new customers into the banking field. Technological innovations
relating to increasing use of credit / debit cards, ATMs, direct debits and phone
banking has contributed to the growth of retail banking in India.
Fourth, the Treasury income of the banks, which had strengthened the bottom lines
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 retail’s share in impaired assets is far lower than the
overall bank loans and advances, retail loans have put comparatively less
provisioning burden on banks apart from diversifying their income streams.
Fifth, decline in interest rates have also contributed to the growth of retail credit by
generating the demand for such credit.
In this backdrop let me now come two specific domains of retail lending in India,
viz., (a) credit cards and (b) housing.
Credit Cards in India
While usage of cards by customers of banks in India has been in vogue since the
mid-1980s, it is only since the early 1990s that the market had witnessed a
quantum jump. The total number of cards issued by 42 banks and outstanding,
increased from 2.69 crore as on end December 2003 to 4.33 crore as on end
December 2004. The actual usage too has registered increases both in terms of
volume and value. Almost all the categories of banks issue credit cards. Credit
cards have found greater acceptance in terms of usage in the major cities of the
country, with the four major metropolitan cities accounting for the bulk of the
transactions.
In view of this ever increasing role of credit cards a Working Group was set up for
regulatory mechanism for cards. The terms of reference of the Working Group
were fairly broad and the Group was to look into the type of regulatory measures
that are to be introduced for plastic cards (credit, debit and smart cards) for
encouraging their growth in a safe, secure and efficient manner, as also to take care
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of the best customer practices and grievances redressal mechanism for the card
users. The Reserve Bank has been receiving a number of complaints regarding
various undesirable practices by credit card issuing institutions and their agents.
Some of them are:
Unsolicited calls to members of the public by card issuing banks/ direct
selling agents pressurising them to apply for credit card.
Communicating misleading / wrong information regarding credit cards
regarding conditions for issue, amount of service charges/ waiver of fees,
gifts/prizes.
Sending credit cards to persons who have not applied for them / activating
unsolicited cards without the approval of the recipient.
Charging very high interest rates /service charges.
Lack of transparency in disclosing fees/charges/penalties. Non-disclosure of
detailed billing procedure.
The Working Group deliberated a number of major issues relating to: a) to
customer grievances and rights: a) Transparency and Disclosure, b) Customer
Rights Protection, and c) Code of Conduct. The Group recommended that the Most
Important Terms and Conditions should be highlighted and advertised and sent
separately to the prospective customer. These terms and conditions include various
issues relating to: a) fees and charges, (b) drawal limits, (c) billing, (d) default, (e)termination / revocation of card membership, (f) loss / theft / misuse of card, and
(g) disclosure.
These recommendations are being processed within the RBI and a set of guidelines
would be issued which are going to pave the path of a healthy growth in the
development of plastic money in India. The RBI is also considering bringing credit
card disputes within the ambit of the Banking Ombudsman scheme. While building
a regulatory oversight in this regard we need to ensure that neither does it reduce
the efficiency of the system nor does it hamper the credit card usage.
Housing Credit in India
In view of its backward and forward linkages with other sectors of the economy,
housing finance in developing countries is seen as a social good. In India, growth
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of housing finance segment has accelerated in recent years. Several supporting
policy measures (like tax benefits) and the supervisory incentives instituted had
played a major role in this market.
Housing credit has increased substantially over last few years, but from a very low base. During the period 1993-2004, outstanding housing loans by scheduled
commercial banks and housing finance companies grew at a trend rate of 23 per
cent. The share of housing loans in total non-food credit of scheduled commercial
banks has increased from about 3 per cent in 1992-93 to about 7 per cent in 2003-
04. Recent data reveal that non-priority sector housing loans outstanding as on
February 18, 2005 were around Rs. 74 thousand crore, which is, however, only 8.0
per cent of the gross bank credit. As already pointed out, direct housing loans up to
Rs. 15 lakh irrespective of the location now qualify as priority sector lending;
housing loans are understood to form a large component of such lending. In
addition, housing credit is also being provided by housing finance companies,
which in turn are also receiving some bank finance.
Thus, from miniscule amounts, the exposure of the banking sector to housing loans
has gone up. Unlike many other countries, asset impairment on account of housing
finance constitutes a very small portion. However, with growing competition in the
housing finance market, there has been a growing concern over its likely impact on
the asset quality. While no immediate financial stability concerns exist, there is aneed to put in place appropriate risk management systems, strengthen internal
control procedures and also improve regulatory oversight in this area. Banks also
need to monitor their exposure and the credit quality. In a fiercely competitive
market, there may be some temptation to slacken the loan scrutiny procedures and
this needs to be severely checked.
Having delineated the broad contours of retail banking in India let me now come to
its opportunities and challenges.
Opportunities and Challenges of Retail Banking in India
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. How does the world view us? I have already referred to the BRIC Report
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talking India as an economic superpower. A. T. Kearney, a global management
consulting firm, recently identified India as the 'second most attractive retail
destination' of 30 emergent markets.
The rise of the Indian middle class is an important contributory factor in thisregard. 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 toward personal debt, is contributing to India's
retail banking segment.
The combination of the above factors promises substantial growth in the 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 retail banking sector are: financial inclusion, responsible lending,
access to finance, long-term savings, financial capability, consumer protection,
regulation and financial crime prevention. What are the challenges for the industry
and its stakeholders?
First, retention of customers is going to be a major challenge. According to aresearch by Reichheld and Sasser in the Harvard Business Review, 5 per cent
increase in customer retention can increase profitability by 35 per cent in banking
business, 50 per cent in insurance and brokerage, and 125 per cent in the consumer
credit card market. Thus, banks need to emphasise retaining customers and
increasing market share.
Second, rising indebtedness could turn out to be a cause for concern in the future.
India's position, of course, is not comparable to that of the developed world where
household debt as a proportion of disposable income is much higher. Such a
scenario creates high uncertainty. Expressing concerns about the high growth
witnessed in the consumer credit segments the Reserve Bank has, as a temporary
measure, put in place risk containment measures and increased the risk weight
from 100 per cent to 125 per cent in the case of consumer credit including personal
loans and credit cards ( Mid-term Review of Annual Policy, 2004-05).
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Third, information technology poses both opportunities and challenges. Even with
ATM machines and Internet Banking, many consumers still prefer the personal
touch of their neighbourhood branch bank. Technology has made it possible to
deliver services throughout the branch bank network, providing instant updates to
checking accounts and rapid movement of money for stock transfers. However,this dependency on the network has brought IT departments additional
responsibilities and challenges in managing, maintaining and optimizing the
performance of retail banking networks. Illustratively, ensuring that all bank
products and services are available, at all times, and across the entire organization
is essential for today’s retails banks to generate revenues and remain competitive.
Besides, there are network management challenges, whereby keeping these
complex, distributed networks and applications operating properly in support of
business objectives becomes essential. Specific challenges include ensuring thataccount transaction applications run efficiently between the branch offices and data
centres.
Fourth, KYC Issues and money laundering risks in retail banking is yet another
important issue. Retail lending is often regarded as a low risk area for money
laundering because of the perception of the sums involved. However, competition
for clients may also lead to KYC procedures being waived in the bid for new
business. Banks must also consider seriously the type of identification documents
they will accept and other processes to be completed. The Reserve Bank has issued
details guidelines on application of KYC norms in November 2004.
Some Random Thoughts
How do we see the future of retail banking? What are the major attributes of the
shape of things to come in this sector? Let me share with you some of my random
thoughts.
First, customer service should be the be-all and end-all of retail banking. The other
day a document released by the British Bankers Association, entitled UK Retail
Banking Manifesto: addressing the challenges that lie ahead for the industry and
its stakeholders on September 29, 2004 came to my notice. This document
analysed the key policy issues relevant to the retail banking sector and highlighted
the role of financial inclusion, responsible lending, access to finance, and
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consumer protection. It is in this context that that one is reminded of the needs to
develop the standards and codes for banking. The contribution of the Committee
on Procedure & Performance Audit on Public Services (CPPAPS) (Chairman: Shri
S.S. Tarapore) has been invaluable and has provided great insight. Based on the
recommendation of the CPPAPS, the Annual Policy Statement for 2005-06announced the decision to set up an independent Banking Codes & Standards
Board of India on the model of the mechanism in the UK in order to ensure that
comprehensive code of conduct for fair treatment of customers is evolved and
adhered to. The codes and standards, together with the institutional mechanism to
monitor them, are expected to enhance the quality of customer service, to the
individual customer in particular. The codes will bring about greater transparency
in the system and also tackle the issue of information asymmetry. The Board
would function as an industry-wide watchdog of the banking code and ensure thatthe banks comply with the banking codes. The codes would establish the banking
industry’s key commitments and obligations to customers on standards of practice,
disclosure and principles of conduct for their banking services. The Board will
monitor compliance with the Codes by the affiliated banks.
Second, sharing of information about the credit history of households is extremely
important as far retail banking is concerned. Perhaps due the confidential nature of
banker-customer, banks have a traditional resistance to share credit information on
the client, not only with one another, but also across sectors. Globally, Credit
Information Bureaus have, therefore, been set up to function as a repository of
credit information - both current and historical data on existing and potential
borrowers. The database maintained by these institutions can be accessed by the
lending institutions. Credit Bureaus have been established not only in countries
with developed financial systems but also in countries with relatively less
developed financial markets, such as, Sri Lanka, Mexico, Bangladesh and the
Philippines. In Indian case, the Credit Information Bureau (India) Limited (CIBIL),
incorporated in 2000, aims at fulfilling the need of credit granting institutions forcomprehensive credit information by collecting, collating and disseminating credit
information pertaining to both commercial and consumer borrowers. At the same
time banks must exercise due diligence before declaring a borrower as defaulter.
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Third, outsourcing has become an important issue in the recent past. With the
increasing market orientation of the financial system and to cope with the
competition as also to benefit from the technological innovations such as, e-
banking, the banks are making increasing use of 'outsourcing' as a means of both
reducing costs and achieving better efficiency. While outsourcing does havevarious cost advantages, it has the potential to transfer risk, management and
compliance to third parties who may not be regulated. A recent BIS Report on
'Outsourcing in Financial Services' developed some high-level principles. A basic
requirement in this context is that a regulated entity seeking to outsource activities
should have in place a comprehensive policy on outsourcing including a
comprehensive outsourcing risk management programme to address the outsourced
activities and the relationship with the service provider. Application of these
principles in the Indian context is under consideration.
Finally, retail banking does not refer to lending only. In the whole story of retailing
one should not forget the role played by retail depositors. The homemaker, the
retail shop keeper, the pensioners, self-employed and those employed in
unorganised sector - all need to get a place in the banks. It is in this backdrop that
the Annual Policy for 2005-06 pointed out issues relating to financial exclusion
and had announced that the RBI would implement policies to encourage banks
which provide extensive services while disincentivising those which are not
responsive to the banking needs of the community, including the underprivileged.
Furthermore, the nature, scope and cost of services need to be monitored to assess
whether there is any denial, implicit or explicit, of basic banking services to the
common person and banks have been urged to review their existing practices to
align them with the objective of financial inclusion.
Conclusion
There is a need of constant innovation in retail banking. In bracing for tomorrow, a
paradigm shift in bank financing through innovative products and mechanisms
involving constant upgradation and revalidation of the banks’ internal systems and
processes is called for. Banks now need to use retail as a growth trigger. This
requires product development and differentiation, innovation and business process
reengineering, micro-planning, marketing, prudent pricing, customisation,
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technological upgradation, home / electronic / mobile banking, cost reduction and
cross-selling.
While retail banking offers phenomenal opportunities for growth, the challenges
are equally daunting. How far the retail banking is able to lead growth of the banking industry in future would depend upon the capacity building of the banks to
meet the challenges and make use of the opportunities profitably. However, the
kind of technology used and the efficiency of operations would provide the much
needed competitive edge for success in retail banking business. Furthermore, in all
these customers’ interest is of paramount importance. The banking sector in India
is demonstrating this and I do hope they would continue to chart in this traded
path.
ANNEXURE
Lending and Mortgage Processing
Lately, lending and mortgage industry has been facing tremendous pressure to
maintain ever demanding customer service as the mortgage market reaches
saturation. With the advent of latest technologies, retail banking firms have been
constantly trying hard to enhance their lending and mortgage business processes by
eliminating existing inefficiencies in the process flow. The firms are today
focusing their efforts towards costs savings achieved by integration of independent business applications that interact with disparate sources of information in order to
build a single and seamless integrated solution.
In our endeavor to address these challenges faced by lending and mortgage firms,
NIIT Technologies has been providing effective technology solutions to retail
banking and financial institutions for over 10 years now. The spectrum of our
lending and mortgage services that we offer as part of our Banking and Financial
Service offerings encompasses the functional areas of loan origination, collateral
management and default management.
Our Expertise: Our team of dedicated software professionals, domain consultants
and technical architects has been instrumental in execution of custom software
development, modernization and maintenance of legacy systems for our retail
banking clients.
NIIT Technologies has developed strong expertise especially in the loan
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origination and mortgage processing space that has helped us nurture long
relationships with some of the largest banks.
Credit Card Processing Solutions
Meeting the expectations of corporate customers' demands for credit card industry,
real time visibility of transactions, compliance with existing and upcomingregulations for cross border transactions, rising cost pressures because of
heterogeneous IT infrastructure and disparate IT landscapes are the burgeoning
areas of concern for the fast growing global cards industry. Though the transaction
volumes are set to grow continuously, a number of pressures and concerns will
depress revenues and in turn reduce profitability for Retail Banking Organisations.
We endeavor to provide full range of services at all levels to the Payment Systems
and Cards Market. This includes services such as migrating Business processes to
off-shore locations, re-engineering projects, Operational Support includingFeasibility, Research, Strategy, Planning, Implementation (including new
development and third party software implementation), Card Product Management,
Risk Management, Data Analytical, Compliance, Audit and Quality Assurance
(Six Sigma). Our Card Consulting Services has optimal mix of people to support
you at Business, Technologies and Operation level.
Payments
Payment industry is becoming more and more driven by the consumer demands
and the progress of the technology. IT in collaboration with the retail banking
firms is coming up with new types of payment gateways which are customer
friendly. The payment industry is also expected to become less and less profitable.
The evolving scenario's in the payments space is forcing banks to come up with
technological innovations beneficial to the customers.
We have domain expertise in emerging payments domain such as Utility Bill
Payments, Check21, Real Time Gross Settlement Systems, domestic Cash
Management and Electronic Bill Presentment and Payment (EBPP) Systems to
name a few. We offer the payment solution that should be scalable and designed to
meet the requirements of the banks due to the ever-changing payment landscape in
retail banking.
Related Links
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