RETAIL BANKING

DEFINITION:
Retail banking is typical 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

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

The market today gives us a challenge to provide multiple and innovative contemporary services to the customer through a consolidated window as so to ensure that the banks customer gets Uniformity and Consistency of service delivery across time and at every touch point across all channels. The pace of innovation is accelerating and security threat has become prime of all electronic transactions. High cost structure rendering mass-market servicing is prohibitively expensive.

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.

INTRODUCTION
Retail banking is, however, quite broad in nature - it refers to the dealing of commercial banks with individual customers, both on liabilities and assets sides of the balance sheet. Fixed, current / savings accounts on the liabilities side; and mortgages, loans (e.g., personal, housing, auto, and educational) on the assets side, are the more important of the products offered by banks. Related ancillary services include credit cards, or depository services. Retail banking refers to provision of banking services to individuals and small business where the financial institutions are dealing with large number of low value transactions. This is in contrast to wholesale banking where the customers are large, often multinational companies, governments and government enterprise, and the financial institution deal in small numbers of high value transactions

The concept 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.

Todays retail banking sector is characterized by three basic characteristics:

a) Multiple products (deposits, credit cards, insurance, investments and securities) b) Multiple channels of distribution (call center, branch, internet) c) Multiple customer groups (consumer, small business, and corporate.

The future of retail banking: A global perspective

AS we have been working with our existing bank clients inside and outside the country, we have been struck by the rapid and provocative changes facing the retail sector. While the pace and direction of change seems to vary somewhat from country to country, retail banks everywhere are working vigorously to address new technological, regulatory and competitive realities. Collectively, they are trying to determine strategies and tactics needed to secure their franchises and their futures.

This project addresses three questions from a global perspective. First, what are the key factors driving the almost universal changes in retail banking? Secondly, where will these drivers take the industry in the future? Thirdly, what are the general strategies that retail banks can undertake to succeed over the next decade?

This study is not an academic exercise. Rather, it has grown out of a common thread of themes which are emerging from client assignments worldwide. These themes have been assessed and micro-economic analysis undertaken in order to understand how they operate and where they are taking the industry.

Trends underway: So what are the trends that we see in retail banking? Our core conclusion is that the retail banking industry, owing to a variety of factors, is currently not susceptible to scale economies. By this, we mean that retail banks do not seem to get anymore efficient as they get larger. If anything, the reverse appears to be the case. However, there are a number of strong reasons to suppose that this will change in the future. We believe that retail banking will increasingly be susceptible to scale economies. In turn, this will create pressure for the industry to restructure. Analogies from other industries support this train of thought. We have assessed two recently deregulated industries -- the power industry, and the telecommunications industry -- and noted that the forces which drove their restructuring, and the consequences. Modifying the driving forces for these industries to those circumstances which are particular to retail banking, we have been able to come to a vision of how the retail banking industry is likely to restructure over the coming decade. We have also looked at other trends. Technology in particular will change the retail banking industry fundamentally in the years to come. The first key consequence is that banks will lose their monopoly as centres for money transmission. In other words, the activity of transmitting money from one person or company to another will increasingly be able to be carried out be a variety of providers. As with telecommunications, vigorous cost competition will result. The second key consequence of technology will be the proliferation of distribution channels for retail

banking products. Whereas in the past, the bank branch was the only channel for distributing most financial services products, in the future a number of different channels will continue to erode the branch's predominance. Many of these we are currently familiar with -- telephone, especially Mobile phone, ATM's, email etc. In addition, however, new channels are slowly emerging from the primordial soup of the information superhighway. Although we can only guess at how they will affect the distribution of retail banking products, we are confident that these will ultimately supplement the other alternative channels and further erode bank branch's share. Consequences of these trends: The consequences of the above will be wholesale restructuring. We believe that retail banking will disaggregate into an interlinked portfolio of activities with three broad categories:s

l. Product Formulators: Within retail banking there will increasingly be divisions or stand-alone companies who focus on formulating products such as mortgage or savings, for delivery either direct to clients or to intermediaries. 2. Customer Gateways: We believe that there will be an opportunity for an intermediary to capitalise on superior customer knowledge and efficient delivery channels to sell and service a range of products to individual customers through a range of delivery channels of the customer choosing. 3. Industry Services: Increasingly the support functions which are at present woven in to the fabric of the bank will be seen as peripheral supporting activities, and spun off to either separate divisions within a bank or to third party "outsource" providers. This will eventually create an industry for bank services, with new providers offering a broad range of support activities. The evolution outlined above will vary significantly by country. This is firstly because the structure of the retail banking industry today is different in each nation -- a legacy of historical market evolution and regulation. In addition, the manner and rate at which markets will be deregulated in the future will also vary. This means that not only does the retail banking industry

in different countries start from a different point, but that its change trajectory in the future will also vary as the result of nationally-idiosyncratic deregulation.The bank of the future will not win by creating a single strategy. Rather, each of its activities within products, customer channels, and support services will be the subject of a discreet "business unit" strategy, which will be benchmarked against market-segmented customer demand and profitability, and competitors' businesses in this area. Let's site an example i.e. how many people/customer visit departmental store a day? Answer is simple, much more people visit store than the bank branch. What does it mean and who has more information in this respect? Naturally the store has much more information compare to the bank. A corollary of this evolution will be that branches will increasingly be but one of a number of channels of distribution to customers. As a result, their numbers will decline both as a percentage of all banking transactions, and in absolute numbers. Winning banks will actively address this issue, migrating their customers to alternate channels where appropriate. As with any global-oriented study, the above conclusions are broad and must be interpreted by any financial institution in the light of its unique circumstances. Nevertheless, we are confident that the answers to the questions posed will be of value to banks and to other financial industry executives as they ponder their strategic alternatives in the future.

Retail Banks: Their Structure and Function Definition :Retail banks offer a range of services to individual customers and small businesses, rather than to large companies and other banks. The services can include current accounts, savings accounts, investment advice and broking, and loans and mortgages. Retail banks perform two crucial functions for customers: firstly, they enable customers to bank their money securely, access it easily, and conduct transactions; and secondly, they provide access to additional money to fund large purchases, such as buying a home. In return for holding customers funds, which they can then invest, banks pay customers interest.

Traditionally, retail banks have provided these services directly to the customer via branches. While many still do this, retail banks now offer their services by telephone and the internet as well. Some operate solely via the internet and do not have facilities to serve customers at physical outlets. Other organizations, such as supermarkets, have now entered the banking sector and also offer a wide range of banking services. It has become more difficult to identify the traditional retail banka bank that funds itself through customer deposits and lendingbecause retail banks now often combine retail and wholesale banking. It is therefore more relevant to todays banking structure to regard retail banking as a series of processes rather than as an institution. The intermediation services offered by retail banks (such as looking after customers money and making loans) and the payment services (allowing customers to make transactions using debit cards, checks, etc.) mean that they have to make funds available to customers at very short or immediate notice. This inevitably means that a retail bank has to manage the risk that more money will be requested by customers than it has available and of customers defaulting on loans. Banks do this by holding stocks of liquid assets, maintaining a cushion of capital, lending to different types of borrower, adjusting interest rates, and screening potential borrowers (credit scoring).

Advantages
Your money is much more secure than in a box under your bed and you can buy goods, be paid, and sell things without cash changing hands. The bank you are familiar with and which knows you can also offer you a wide range of other services, such as mortgages and insurance. Your bank may be able to offer you competitive deals in return for your loyalty as a customer. Retail banks offer a variety of ways you can access your account and manage your money, most notably via internet banking. This means that you can keep a close eye on your finances and avert many potential problems.

Disadvantages
Banks are a business, and they need to make money from looking after yours. If the bank
decides to apply charges to your account (within the terms of the account), you may only find out about it afterwardsfor example if you accidentally go overdrawn without permission. If you disagree with a charge, you will need to contest it to recover the money.

Opportunities and Challenges in Indian Retail Banking

The subject matter of retail banking is of prime importance. In recent years, commercial banks have witnessed development in the form of retail lending, all over the world. The growth in the field of retail lending is primarily because of the speedy advancement in the IT sector, evolving macroeconomic environment, numerous micro level demand and supply side factors and financial market reform. This criterion is based on the market research report on retail banking. India has also experienced growth in the field of retail banking. The retail loan accounted for approximately one-fifth of the entire bank credit. The housing sector is undergoing a boom in its credit. The retail loan market has detrimentally undergone a change, from the sellers market to the buyers market. The time is no more the same, when it was difficult to get loans from the bank. This indicates that the retail loan market has shown phenomenal growth and development over recent years. The market research reports that were made exclusively for the Indian retail banking market indicated, that India offers tremendous opportunities in this field. It further indicated that retail banking market is a booming sector in India. One of the key contributors for the boom in the Indian retail banking industry is, the increasing ratio of the Indian middle class. The number of people who fall in the category of the middle class is increasing rapidly. The younger population of the country has increased not only its purchasing power; it is also comfortable acquiring personal debts as compared to their older generations. This dual combination of increased purchasing power and comfort

acquiring personal loans has contributed majorly in the development of the retail loan sector in India

If retail banking on one hand offers development opportunities, it also offers challenges on the other hand. These challenges are listed in the market research reports made on retail banking. Further growth and success of the retail market (in the banking sector) will depend upon the capacity and ability of the banks to meet with the challenges and make the best use of the opportunities. The technological base and efficiency in operations would give the retail banking market a competitive edge and will contribute in the success of the business in India. Prime importance has to be given to consumer interest. The biggest challenge faced by the Indian banks in the field of retail banking is going to be the rising indebtedness and lack of technological advancements, a report by Federation of Indian Chambers of Commerce and Industry (Ficci) pointed out. A report of Ficci, namely, Status of the Indian Banking Industry - has identified these two areas as the factors which may affect the future of retail banking in India. The study has said majority of the respondents do not anticipate any fall in demand due to hike in interest rates. On the interest rate front, 64% interviewed, foresee a rise in the interest rates in the future. Out of these, 74% expect the interest rate to increase by 0.5% and the remaining expect it to increase by 1%. The increased interest rates are likely to have an adverse impact on the corporate sector lending to some extent, especially AAA rated borrower, as highlighted by 62% of the banks. The study has also outlined other issues like customer information and distribution network, the areas banks need to address. 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, the report said. India is as the second most attractive retail destination of the most 30 emerging economies of the world with a retail market growing at a rate of 33% (compound annual growth rate). Over 50 million people of the country are now credit card holders and the sector is growing at rate of

30%. About 53% of the respondents of the study have said that they will increase their retail portfolio by more than 25% in the year 2005-06. Housing finance, one of the largest the retail component in terms of growth with a rate of 112% over the last year, is expected to continue the momentum, though 73% of the bankers interviewed felt that the lending rate for the housing sector is going to rise.

SCOPE FOR RETAIL BANKING IN INDIA

All round increase in economic activity.Increase in the purchasing power. The rural areas have the large purchasing power at their disposal and this is an opportunity to market Retail Banking.

India has 200 million households and 400 million middleclass population more than 90% of the savings come from the house hold sector. Falling interest rates have resulted in a shift. Now People Want To Save Less and Spend More.

Nuclear family concept is gaining much importance which may lead to large savings, large number of banking services to be provided are day- by-day increasing.

Tax benefits are available for example in case of housing loans the borrower can avail tax benefits for the loan repayment and the interest charged for the loan.

This document analyzed the key policy issues relevant to the retail banking sector and highlighted the role of financial inclusion, responsible lending, access to finance, and 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 2005-06 announced 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 that the banks comply with the banking codes.

The codes would establish the banking industry is 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 for comprehensive 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.

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 have various 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 home maker, the retail shop keeper, the pensioners, self-employed and those employed in unorganized sector - all need to get a place in the banks. It is in this backdrop 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.

FUTURE OF RETAIL BANKING

Retail banking has significant past and glorious future over the years. Indian retail banking, according to a report, is likely to grow at a CAGR of 28 per cent till 2010 to Rs 97,00 billion. So, although the revolution in retail banking has changed the face of the Indian banking industry as a whole, it has still miles to go. On the whole, looking ahead, the prospects of retail banking are brighter than ever and the bankers have to give continued thrust to this area of banking.Thus, with the consumers ever multiplying needs there is definitely a vast scope for the furtherance of the retail banking business.

Operationally, there is a possibility that technology go beyond merely reducing the cost & improving the quality of current products.It may prove possible, even profitable, to combine functions in new ways. The future of retail banking lies more in mobile banking. Mobile telephone market is penetrating, and mobile phones are ideal to utilize Internet banking services without customer accesses to PC. By a tacit acceptance India has around three million mobile phone users and this number is expected to reach to eight million by 2003. Smart card revolution will further change the face of retail banking. Smart cards can store information; carry out local processing on the data stored and can perform complex calculations.

At present, India has around 3.4 million smart card users and it is estimated that by the end of 2004 it will reach 14.7 million