Retail banking is consumer banking that is the banking institution transacts directly to consumers rather than other institutions, corporations, banks etc. It serves directly to consumers. The services include: saving accounts, transactional accounts, mortgages, personal loans, debit cards, credit cards and so forth.
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In other words commercial banks dealing with individual customers, both on liabilities and assets side of balance sheet. The three basic characteristics of retail banking is
Multiple products
Multiple channels of distribution
Multiple customer groups
Retail banking works on the principle of law of large numbers and probabilistic modelling:
Law of large numbers: The average of the results obtained from a large number of people should be close to the expected value, and will tend to become closer as more people are involved in transactions
The principle is earning small profit from each individual but the numbers of such individual must be large. In other words small profit from large group of people will account large profit.
Probabilistic modelling: In situations where there is significant uncertainty, various methods are used to determine the chances of success. In other words the accuracy increasing as more people are involved.
For e.g. an average profit from an individual in a bank is `200 per annum and it has 500,000 customers then the profit will be `100,000,000 per year. While earning profit from few corporations (say 4) at an average of `25,000,000 is more uncertain.
PRACTICES IN RETAIL BANKING
Today retail banks are pioneers in deploying best in class strategy and technology to develop profitable relationship with consumers. Base for such progress is due to customer value and strategic and tactical decision making.
Today the competition between various banking corporation is very stiff and strategies tends to exhibit innovation in 'place' in the form of distribution channels or 'price' in the in the form of relationship pricing or individual product pricing.
A great sum is invested in technology and statistical analysis to develop more effective promotional skills. With creation of new channels in the past decade financial institutions have appropriately invested in delivery channel innovation.
Today banks are developing and implementing ideas to improve customer experience, with the ultimate goal of enriching the company's value proposition as seen by its current and future loyalty, retention and shareholders' return.
These ideas can be achieved in following fields:
Product
Pricing
Service
Channel
To compete successfully retail banking are offering a superior customer experience across all interactions with the bank. New self-services technologies to improve access and increase convenience while reducing expense by transactions from costly branches to lower cost telephone or web based channels are utilized. Consumers also have enthusiastically adopted the new channels that offer 24/7 access to money and account information.
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CHRONOLOGY OF RETAIL BANKING
Consumer banking market had a limited impact by product innovation, which has been characterized by commoditize products. The role of products has been limited to incremental changes in existing products.
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Because of product innovation various changes in regulation have taken place, this result in the change in the balance of market and competitive forces.
Channels have been principally been driven by advances in technology.
RETAIL BANKING IN INDIA
Retail banking has always been predominant in India in numerous forms. In past few years it has become synonymous with conventional banking for many banks. In developing country like India retailing make abundant business sense in banking sector.
HISTORY OF RETAIL BANKS IN INDIA
Banking industry in India was initiated by 'The General Bank of India' in 1786. Next were Bank of Hindustan and Bengal Bank. In 1806 East India Company established Bank of Bengal (BOBe), followed by Bank of Bombay (BOBo) in 1840 and Bank of Madras in 1843 as independent units and was also called as Presidency Bank.
In 1860 first foreign bank "Comptoire d'Escompte de Paris" was opened.
In 1865 Allahabad Bank was formed and first time exclusively by Indians, Punjab National Bank Ltd. (PNB) was established in 1894 with headquarters at Lahore. Between 1906 and 1913, Bank of India (BOI), Central Bank of India (CBI), Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were started. These three banks were integrated in 1920 and formed Imperial Bank of India (IBI). Reserve Bank of India was formed in 1935.
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After independence government took major steps in this Indian Banking Sector Reform. It nationalised the IBI with extensive banking facilities on a large scale especially in countryside and rural areas. It was renamed as State Bank of India (SBI) to act as the chief agent of RBI and to handle banking transactions of the Central and State Governments all over the nation.
Seven subsidiary banks of SBI was nationalised in 1969. Nationalisation of Indian Banking Sector Reform was approved in 1980 with 7 more banks. This step brought 80% of the banking segment in India under Government ownership.
After the nationalisation of banks, the branches of the public sector bank India rose to approximately 800% in deposits and advances took a huge jump by 11,000%.
In 1991 India became a liberal country which resulted as presently India is flooded with foreign banks and their ATM stations. Efforts are taken to give a suitable service to customers. Phone banking and net banking is introduced. The whole system became more convenient and swift. Time is given more importance than money.
DRIVERS OF RETAIL BANKING IN INDIA
Appreciable Growth Rate
Economic prosperity and the following escalation in purchasing power have given a boost to a consumer boom. From 1992 India's economy nurtured at an average rate of 6.9% and is currently growing constantly at 8-9%.
Changes in demographic profile
Change in consumer demographics shows vast potential for growth in consumption both qualitatively and quantitatively. It has been forecasted that BRIC nations has bright future, in which India's demographic advantage will have a key role.
Today the average age of borrower has dropped from 40 years about five years ago to, now, an estimated 30 years. In the future the average age is predicted to reduce further and hence it will indicate well for the housing finance market in terms of increased borrowers.
Decline in Average house costs
There has been a decline in average house cost to annual income ratio by 4-5 times from high of 11-14 a decade ago. This has also lead to an affordable EMI as a percentage of monthly income.
Aggressive Lending by Banks
Banks found a respite in housing loans as a means to deploy funds on back of lull in credit off take by the corporate segment. To add to that the segment called for lower risk weights, provided attractive spread and has lower level of delinquency.
Tax Breaks
The recent budgets provided for several tax and fiscal enticements for deploying funds in the housing sector. The Reserve Bank of India (RBI) had also addressed commercial banks to allocate at least 3 per cent of their incremental deposits in housing loans. At the same time the policy of the Reserve Bank of India about the inclusion of Mortgage backed securities as a part of priority sector lending for banks and reducing the risk-weight on home loans from 100 per cent to 50 per cent made the sector more attractive for the banks.
Others growth Drivers
Technological factors played a chief role. Convenience banking in the form of debit cards, internet and phone-banking, anywhere and anytime banking has attracted many new consumers into the banking field. Technological innovations connecting to increasing use of credit / debit cards, ATMs, direct debits and phone banking has added to the development of retail banking in India.
Treasury income of the banks, which had reinforced the bottom lines of banks for the past few years, has been on the decline during the last two years. In such a situation, retail business offers a good vehicle of profit maximization.
Drop in interest rates have also backed to the growth of retail credit by creating the demand for such credit.
SCOPE AND TRENDS
The Indian retail finance market has witnessed a sea change during the last few years. Earlier, Indians were averse to the concept of availing credit to fund their purchases and believed in the concept of saving and then spending. However, today, there are a variety of consumer credit products being literally forced upon consumers by overzealous lenders, who have realized the huge latent potential of the burgeoning Indian consumers. This has gradually led to a shift in the psychology of Indian consumers, who no longer consider credit as a social stigma and are more than willing to fulfill their aspirations through the credit mechanism.
SCOPE
Until 10 years ago, mainly non-banking finance companies (NBFCs) and housing finance companies (HFCs) catered to the nascent Indian retail finance market, while commercial banks focused on corporate lending. Commercial banks, instead of lending to retail consumers directly, would provide funds to NBFCs and HFCs, which, in turn, would lend to retail consumers. The mid '90s saw several NBFCs mushrooming to exploit the huge potential of this market. As competition intensified, many NBFCs, in order to capture a share of this retail market pie, ignored the risks associated with the retail lending business and landed up burning their fingers. Consequently, the late '90s and early 2000 witnessed a number of NBFCs either shutting shop or curtailing their operations.
This report focuses on the retail asset finance market, which comprises mainly loans for housing, cars and utility vehicles (auto finance), commercial vehicles and two-wheelers. The retail asset finance market has grown between 1998-99 and 2003-04 at an annualized rate of 35 per cent (disbursements). The high growth rate between 1998-99 and 2003-04 can be attributed to the fact that 5 years ago, the retail finance market was in its infancy, with few people availing credit to fund their purchases. Going forward, CRIS INFAC expects the retail finance market to grow at an annual rate of 18 per cent, from `1,213 billion in 2003-04 to `2,792 billion in 2008-09.
The Indian consumer is fast changing his habits, borrowing money to buy the products he wants, not content with buying what he can afford. The resultant consumer boom is what market strategists explain as the key to the success of the Indian consumer finance market.
Consumer finance today is a win-win system in which everyone stands to gain. For the Indian consumer, it is an opportunity to upgrade his standard of living right now instead of waiting for years for his savings to accumulate. For manufacturers, it stimulates demand and lowers inventory. For middlemen, it's a sales boosting device. For players of consumer finance, it's a means of profit generation.
The buy-now-pay-later culture is still fairly nascent in India, evolving through various forms like consumer lending, consumer credit, consumer loans, friendly and family borrowings, kitties, daily payment schemes etc.
The basic underpinning of consumer financing is that the consumers' present spending habits tend to be geared to expectations of future income. They are losing their fear of borrowing, riding surfboards of consumer finance.
The typical products offered in the Indian retail banking segment are housing loans, consumption loans for purchase of durables, auto loans, credit cards and educational loans. The loans are marketed under attractive brand names to differentiate the products offered by different banks. As the Report on Trend and Progress of India, 2003-04 has shown that the loan values of these retail lending typically range between Rs.20, 000 to Rs.100 lakh. The loans are generally for duration of five to seven years with housing loans granted for a longer duration of 15 years. Credit card is another rapidly growing sub-segment of this product group.
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 than 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 make ample 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.
The table below indicates Market size and CAGR of main product of retail banking in India. We can observe that Auto loans and Home loan are biggest contributor of growth in retail banking in India.
Retail thrust in India
Backdrop of poor credit take off by big corporate "Lending to big corporates and creating loan assets" is no longer the name of game.
Higher middle class with rising Disposable Income, changing life style, aspiration and willingness to spend more for luxuries
Loan interest rates and prudential norms
Lending to corporates is more risky in the view of uncertainty pertaining to economic environment
Scope for subsential development of funds which offer better return trade off and well diversify credit portfolio
High profitability and history of low NPA's
Increased Geographic presence of financers
TRENDS
The banking Industry, prior to late 1990s, mainly focused on lending to 'productive' sectors and areas like consumer finance were not catered to. NBFCs essentially filled this gap and thus had a dominant presence in this segment. But post 2000, on the back of lower credit off take from corporate sector, banks started exploring other safer investment avenue for parking their funds and this in turn led to the retail finance explosion in the economy. The equation today has turned in favour of banks, currently commanding a 30-80% market share of core retail segments and the share is increasing day by day.
