Middle class Indian consumers, who were traditionally brought up on principles of restraint, are now giving wings to their dreams, using debt. They are committing a higher proportion of their future receivables to bank’s profit and loss (P&L) accounts. Retail banking consists of both sides that is asset creation as well as deposit mobilization, thus affecting both asset and liabilities side.
Retail banking segment is characterized by small accounts which majorly include individual accounts. It has small ticket business but it includes large number of customers. It includes wide-range of products for large number of products. Of Late, retail banking has become more technology based than ever before. Lastly, the business has witnessed a sea change in the way the business is being marketed i.e. the business has emphasized a lot more on marketing.
Banks now list the retail business among their top-most priorities, due to the strong growth seen in the segment. Though the concept was pioneered by private sector banks, it didn’t take long for PSU banks to toe the line. Retail advances have been widely accepted as the driver of the credit boom, which has seen credit surge in last 5 years. Retail advances are also growing growing like the wild grass in the rainy seasons, outpacing broad credit growth.
What initially began with mortgages has now spread to all categories. Today, Indian consumers are availing of financing options to fund their holidays, automobile purchases and even lifestyle accessories. For instance, credit card receivables and auto loans have posted their sharpest gains in the recent years. Lifestyle changes across consumer categories are also pushing credit demand. According to HDFC Bank executive vice-president (retail banking) Aseem Dhru due to consumers’ higher affordability levels, banks are now concentrating on introducing lifestyle-oriented financing options. And the up-market Indian consumer will continue to fuel the retail lending boom.
The other big attraction of retail is that it helps to lock in captive customers, who can be targetted for further cross-selling of products like investment advisory services or deposit products. Also, though yields for retail assets have been under pressure, they continue to be quite attractive.
Environmental Changes for Retail Banking
Retail Banking is the new weapon of banking industry to answer the changing internal and external environment. Following are some of the factors which have led to this increase in business in the field of retail banking:
• Macro-economic factors
There are number of macroeconomic factors, which have been changed in recent past to increase the prospects of retail banking business, some of them are listed below:
– India has been growing at a fast pace in 21st century, which resulted in increase in per capita income of the households and the risk apetit
– Secondly, the government has focused on housing as one of the priority sector for the banks which have led to lots of tax incentives for the housing sector
• Demographic factors
– The westernization of India has resulted in growing number of nuclear families, which created large opportunities for consumer goods and finally in the retail banking segment
– The high growth rate of GDP resulted in an increase in the middle-class population of India
• Active role of RBI
– RBI has recently reduced risk-weightage on housing loans which has led to increased credit availability for housing loans
– Of late, RBI has reduced CRR/SLR which has led to increase in credit availability in the market. Thus, Banks have more credit which they have to lend to other retail assets
• Miscellaneous factors
– The retail banking business has seen a tilt towards focusing on marketing which is majorly because of increase in media reach
– The market becomes more efficient when there are more number of players in the market and with increasing presence of multinationals the market has become far more competitive
– The consumer behavior has changed over time from “increasing preference for loan products - shift from ‘save and buy’ to ‘buy and repay’”
– Declining prices of consumer durables has led to more demand for these products and thus the banking sector has focused on this as a new opportunity.
Retail Banking: Current Status
Retail banking in India is still in very nascent stage. If we compare the Indian banks with US banks, we found that there is lot of untapped potential in Indian markets. Following are some facts which further strengthen this point.
• Productivity in payment transactions (4% of US levels)
• Productivity in loans (11% of US levels)
• Productivity in deposits (27% of US levels)
• Overall productivity of Indian banks (in retail banking) is 12% of US levels
• Potential of Indian banks 90% of US levels
• Best practice banks are already performing at 55% of US levels
The major reasons for poor productivity of Indian Banks are:
· Rural branch penalty -illiteracy forces branch staff to fill applications/challans etc
· Lack of delegation
· Inadequate automation and centralization of back office operations
· Cheque clearing mechanism
· Account opening - centralized back office
· Query handling process
· Loan processing - centralized
Indian retail banking industry has to improve the way they conduct the business. The strategy could be looked under the following heads:
• Customer – Banks need to follow a strategy while acquiring customers’ i.e. when banks look at the customers they should first decide as to what they are looking for and not what they are getting. For example, in banking business there is this convention which says that the customer that walk into your office are not the customer you are looking for.
• Cost – After the reform period, the banks have decided that the cost of funds has become a variable for the banks and similarly the return on assets is also a variable. So, now banks have to make sure that they add value while doing the business.
• Cross-sell – Banks have to indulge in cross selling of products to generate revenues and should try to make profit in terms of profit per customer because sometimes banks have to incur loss while acquiring new customers but will generate profits in subsequent transactions.
• Credit Quality – While doing business and acquiring customers the bank should ensure that the quality of credit has not been reduced because if that is not done your NPA will increase which will result in losses and also increase the risk weighted cost of capital and return.
Change in the composition of Asset side of Banks
Recent trends have shown that the Asset side of Banks has seen major changes which are described below:
- The corporate banking division includes few large customers which gives them bargaining power and in the end reduces margins for the banks and thus as a response to that retail lending as a recourse to that as here banks have the bargaining power and can derive good margins out of it which can further be used to compensate losses on account of corporate lending.
- Secondly, after the reforms in the financial sector. Equity market as emerged as a popular source of finance for the corporate sector which led to the decline of the popularity of banks as a source of finance and thus the corporate lending has not been witnessing much growth which again makes space for retail banking to fill the gap.
Challenges for Retail Lending
Some of the major challenges faced by Indian banking industry are :
• Financial inclusion - Despite making significant improvements in all the areas relating to financial viability, profitability and competitiveness, there are concerns that banks have not been able to reach and bring vast segment of the population, especially the underprivileged sections of the society, into the fold of basic banking services.
• Responsible lending – The credit rating agencies in India are not so profound , hence banks has to be extra careful in lending , so as India will not be another
• Long-term savings – Protection of saver’s interest should be the prime concern for increase in long term savings. Factors like high inflation make the consumer save less , which ultimately hurts the lending capacity of banks and future growth potential of country.
• Regulation and financial crime prevention- In India, the level of financial crime is on a rise. We have to take some strong actions to curb these wrong practices now or we would be facing Sub-Prime crisis in India.
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