Introduction: Retail banking in India has seen a dramatic change over the years. It has evolved from a time when the mindset of a traditional middle class Indians used to be debt averse, which preferred managing under their thrifty means to the current mindset which doesn’t hesitate in taking loans for spending. To keep in pace, the retail banking environment today is changing fast. The changing customer demographics compel to create a differentiated platform based on latest technology, improved service and banking convenience. Indian retail banking is expanding very fast with total revenue is expected to be $20 billion.
The Retail Banking environment today is changing fast. The changing customer demographics demands to create a differentiated application based on scalable technology, improved service and banking convenience. Higher penetration of technology and increase in global literacy levels has set up the expectations of the customer higher than never before. Increasing use of modern technology has further enhanced reach and accessibility.
Present day tech-savvy bankers are now more looking at reduction in their operating costs by adopting scalable and secure technology thereby reducing the response time to their customers so as to improve their client base and economies of scale.
The solution lies to market demands and challenges lies in innovation of new offering with minimum dependence on branches – a multi-channel bank and to eliminate the disadvantage of an inadequate branch network. Generation of leads to cross sell and creating additional revenues with utmost customer satisfaction has become focal point worldwide for the success of a Bank.
Consumer Insight: Loyalty towards banks and debt shyness is typically the characteristics of Indian customers but there are different customer segments which attracts significant amount superior service .Traditional middle class and lower middle class income group customers prefers the service of large state owned bank which largest developing tech savvy generation X higher middle class customer value the service of foreign banks. Middle age group customers (30-39) showing inclination towards mortgage although the penetration is quite low(6%) as compared to Asian average(18%).Credit card penetration is low (18%) as compared to Asian average(45%) and older segment of customer(45 years and more) is the largest in number.
Wealth management segment in India is unorganized and primarily dominated by Tax Advisors and agents but has significant potential as sizable percentage of customers are willing to pay for the service. Also the adaptation of alternate delivery models of banking service like internet banking, mobile banking and ATM services are growing at a rapid rate specifically 20-29 year old age group of customer segment.
In a nut shell although loyalty towards bank is still predominant but customers are ready to judge new services and products. Also choosing decision is a guided by knowledgeable investment advice, reasonable waiting time, the quick resolution of problems and a full range of products and services.
Drivers of Retail Growth: Main reasons for growth in retail banking are
v Growing disposable incomes
v Youngest population in the world
v Increasing literacy levels
v Higher adaptability to technology
v Growing consumerism
v Fiscal incentives for home loans
v Changing mindsets-willingness to borrow/lend
v Desire to improve lifestyles
v Banks vying for higher market share
Competition: To combat the competition from upcoming sector like mutual funds, insurance and other third party products, Banks have entered into tie ups with the above mentioned companies and enjoys commission i.e. Noninterest Income. Thus banking industry should combat the competition from private and foreign banks by having a control of interest fluctuation avoiding money laundering , outsourcing agencies for verification having proper standard and qualification .The pressure to adhere to aggressive Basel II deadlines for many first – wave institutions has meant that additional business benefits such as better management of risk/ returns enhanced pricing, and more sophisticated risk management practices have lar gely been left by the wayside . Basel II implementations have been progressing for the past five years within first- wave institutions. This momentum has reached significant milestones in Europe and, to varying degrees, in the Asia – pacific region and elsewhere. The past few years have seen large–scale, resource – intensive projects deliver the new Basel framework, with firms spending on average between $ 50 - $ 100 million (or 3- 7 bps of assets) on their Basel II programs .However despite good progress towards deadlines this year for first – wave institutions many firms have focused on completing the regulatory aspects of Basel II .
Industry Response: Industry responded with flexible banking (ATM,net banking,improved processes/bundled product offerings like insurance, mutual fund ,brokerage wealth management, faster services and better process oriented operation like case manager approach of handling client started by ICICI Bank. Also some of banks try to differentiate by creating customer specific products like Doctors Loan, Loan to small trader etc. Other than this bank’ customer has replaced ‘Branch’ customer through decentralization and transfer pricing mechanism to promote products, focus on understanding customer needs/ preferences, segmentation/differentiation of customers, customer driven strategies and building relationships are the area where bank is devoting more time.
Future Of Retail Banking : The accelerated retail growth has been on a historically low base penetration continues to be significantly low compared to global bench marks share of retail credit expected to grow from 22% to 36% and retail credit expected to grow to Rs.575,000 crs by 2012 at an annual growth rate of 25%. Dramatic changes expected in the credit portfolio of Banks in the next 5 years with housing will continue to be the biggest growth segment, followed by Auto loans. Banks need to expand and diversify by focusing on non urban segment as well as varied income and demographic groups. Rural areas offer tremendous potential too which needs to be exploited.
Various issues and challenges: First retention of consumers is going to be a major challenge. According to a research by Reich help and Sesser in the Harvard Business Review, 5 percent increase in customer retention can Increase probability by 35 percent in banking business, 50 percent in insurance and brokerage, and 125 percent in the consumer credit card market. Thus, banks need to emphasize retaining customers and increasing market share. Second, rising indebtedness could turn out to be a cause for concern for the future. India’s position, of course, is not comparable to that of the developed world where household debt as a production 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 percent to 125 percent in case of consumer credit including personal loans and credit cards. Third, information technology posses both opportunities and challenges. Even with ATM machines and interest banking, many consumers still prefer the personal touch of their neighborhood 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 Department’s 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 retail banks to generate revenues and remain competitive. Besides, there are network management challenges, where by keeping these complex, distributes networks and applications operating properly in support of business objectives become essential. Specific challenges include ensuring that account transaction applications run efficiently between the branch office and data centers. 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.
Strategic prerequisites: As par one study conducted by McKinsy and IBA banks must consider following points before making a strategy
v Performance oriented leadership
v Sophisticated marketing and sales
v Efficient distribution channels
v Process efficiency and ease of scalability
v Superior credit policy, procedures and skills
Strategies for Future: With the above discussion on market dynamics, competition and challenges banks need to focus on following strategies
v Reaching to masses : Need to customize for different customer segments
v Customer segmentation/differentiation
v Data mining/CRM based campaigns
v Products per customer/loyalty
v Promoting low risk retail lending products
v Offer an array of products and financial advisory.
v Cost effective expansion
v Renewed emphasis on superior execution by front-line employees
v Grow through Alliances: Hospitality, Education, Retailers, Automobiles, Consumer Durables, Housing/Construction
v Innovation for micro lending products for Financial Inclusion
v Separate business model for lending into Microfinance Institution, Agriculture credit
v Effective IT strategy to incorporate UID based banking once UID operational
v Focus on world class risk management practices
Conclusion: There is a need of constant innovation in retail banking. In bracing for tomorrow, a paradigm shift in bank financing through innovation products and mechanisms involving constant up gradation and revalidation of the bank 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 , customization , technological up gradation, home/electronics/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 us e 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 customer interest is of paramount importance. The banking sector in India in demonstrating it very well. At the end of the day the bank that best addresses and anticipates customer’s needs, delivers consistently higher quality service and connects to the customer via their channel of choice wins.
My Opinion
It is clear from above discussion that Indian retail banking is in high growth stage. But steady focus on urban segment of customers is a continuous and dangerous trend which does not contribute to the inclusive growth of the economy. For Financial Inclusion banks need to look at the other developing countries for new business models used to reach under banked and unbanked population. Last couple of decades banks expanded their retail presence in rural areas by branch network,BC model, rural bank kiosk, partnership with retailers and mobile operators. Recently SBI tied up with Airtel to provide banking service on mobile phone.Infact Vodafone has done splendid job in Kenya by its m-peso mobile banking platform and same success story can be learned and applied into Indian context.
ICICI bank also collaborated with IIT Bombay to develop rural ATM which can significantly reduced ATM installation and maintenance charges and can be deployed successfully in rural environment. Also existing cooperative and NGO distribution channel can be effectively used for rural banking penetration. Another delivery channel is e-account collaboration between bankers and mobile service providers.WIZZKITT in South Africa, Global Telecom in Philippines applied such type of model. IT can be used to tackle some of the cost saving measures for rural retail banking and FINO has helped many banks to achieve that. Also commercial bank can help in promoting credits to small scale industries apart from SIDBI to promote rural commercial credit. Now risk management system in all banks need to be modernized to process large number of rural credit and existing processes need to be streamlined so that risk can be mitigated. Cooperatives can play a vital role in this regard. Recently Union Bank of India collaborated with GCMMF to supply credit to milk producers. This shows the success stories cooperative and bank joint initiative can increase the rural credit to substantial amount.
Another opportunity of delivery channel comes from Indian postal service network which has fairly large rural penetration. If RBI collaborate with Indian Post to deliver banking services than bank does not have to go for rural branches or third party BC network. Already various mobile customers are using postal networks for promoting their products. It will be win win situation for postal department and banks where revenue sharing model can be implemented to benefit both the stakeholders.
Innovation in delivery channel and products can help banks to take advantage of vast rural unbanked market and can make a difference in millions of life.
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