Retail Banking

1 INTRODUCTION
Retail banking is when a bank executes transactions directly with consumers, rather than corporations
or other banks. Unlike wholesale banking, retail banking focuses strictly on consumer markets. The term
retail banking encompasses various financial products viz. different types of savings and transactional
accounts, deposit accounts, housing, personal, consumer auto and other types of loan accounts, Demat
facilities, insurance, mutual funds , credit and debit cards, ATMs and other technology based services,
stock broking, payment of utility bills, reservation of railway tickets etc.

The higher growth of retail lending in emerging economies can be attributed to the rapid growth of
personal wealth, favorable demographic profile, rapid development in information technology, the
conducive macroeconomic environment, financial market reforms and small micro-level supply side
factors.

Todays retail banking sector is characterized by three basic characteristics

1. Multiple products (deposits, credit cards, insurance, investments and securities)

2. Multiple channels of distribution (call center, branch, internet and kiosk) and
3. Multiple customer groups (consumer, small business and corporate)

Retail banking has a huge potential considering the growing demand for its products. Retail banking
segment is continuously undergoing innovations, product re-engineering adjustments and alignments.

Retail banking remains largely untapped in India and returns from the consumer banking have proved to
be more stable during periods of financial uncertainty, helping cushion volatile wholesale return. Higher
retail focus alongside better credit selection has also helped improved profitability ratios and keep asset
quality concerns in check for domestic private banks.

2 OBJECTIVE AND APPROACH

We would begin by looking into the role of the regulator in the Indian Banking industry, the role of
Reserve Bank of India (RBI). Our analysis would mainly focus on the private, government (Public Sector
Banks (PSBs)) as well as the foreign players in the Indian Banking Industry.

The paper has kept two broad factors in mind during the studies, which are:

i. The increasing competition among a broad range of domestic and foreign institutions in
providing banking and related financial services
ii. Financial activity has become larger relative to overall economic activity in the Indian economy.
This has meant that any disruption of the financial markets or financial infrastructure has
broader economic ramifications than might not have been the case previously.
Overall we would look into the Indian urban customers and their banking preferences while analyzing
the demand side. On the supply side we would mainly focus on the PSBs such as SBI, PNB, private
players like HDFC, Axis Bank, ICICI Bank and foreign banks such as Citibank, Standard Chartered, HSBC
and others.

3 REGULATIONS
Reserve Bank of India Act was passed in 1934 and RBI was constituted as an apex body without major
government ownership. Banking Regulations Act was passed in 1949. This regulation bought RBI under
government control. Under the act, RBI got wide ranging powers for supervision and control of banks.
From the Nationalization of Banks in the 70s to the advent of linearization policies of the 90s, banks
were mostly under the government control without the large presence of private and foreign players.

As a part of the larger reform effort to promote economic openness and encourage foreign investment,
the Indian authorities are taking steps to liberalize the nations banking sector. The reform agenda has
gained renewed importance in light of the current growth slowdown. The new governor Raghuram
Rajan, has taken office by announcing measures to further liberalize and deepen domestic financial
markets and ease external financing constraints. These include steps to boost electronic banking, issue
more bank licenses and with greater regularity, ease regulatory restrictions on investments and address
asset quality issues.

3.1 RBI INTENT

RBI Intent can be broadly attributed to three objectives

3.1.1 Financial Inclusion

RBI has mandated that commercial banks achieve financial inclusion by offering no frills saving banks
account and easy access to credit facilities through general-purpose credit cards (GCCs). KYC (Know Your
Customer) norms have also been relaxed to achieve greater financial inclusion.

3.1.2 A wider reach of financial services

For banking to be truly inclusive, banking and financial services must reach a large section of the
population. Consumer then can benefit from access to wide variety of banking-products and services.

3.1.3 Rural Banking

RBI has specified that new banks must set up 25% of their branches in unbanked rural centers (having a
population of up to 9,999). The private sector banks and foreign banks have lagged behind in terms of
providing banking services to rural areas. By issuing guidelines for setting up branches in those parts of
the country, the RBI hopes to correct this situation.

3.2 GOVERNMENT CONTROL OVER PSBS

The Indian banking sector is characterized by the dominance of PSBs which account for approximately
70% of the industry. The government through its agencies owns majority stakes in these banks and
exerts influence through its monetary policies and directives. In context of PSBs it is difficult to adhere to
public ownership and yet give near total autonomy to their boards as compared to private sector banks
where the board as compared to private sector banks has autonomy and all shareholders are treated at
par.

3.3 BANK SUBSIDIARY MODEL

In India, the bank subsidiary model is popular. Under this model, non-banking activities such as
insurance, asset management etc. are done in separately constituted subsidiaries of the bank. The
model has its own set of problem and disadvantages. Losses of subsidiary could substantially damage
the financial health of the bank and risk the safety of the deposits. Secondly since the bank will be
responsible for equity infusion in the subsidiaries and their management, having several subsidiaries
could stretch the banks finances and other resources. Thirdly the proportion of foreign holding in
holding Bank Company is not taken into account for the purpose of calculating the cap of foreign holding
in subsidiaries. And finally the subsidiary model could lead to excessive leverage by the downstream
affiliates.

3.4 PROTECTION OF CUSTOMERS

Penalty for banks that harass customers by delaying transfer of loans from one to the other, doing away
with processing fee for shifting within the same bank from one type to another and an
industry benchmark base rate for borrowers are among the measures that RBI has implemented to make
processes smoother for retail borrowers.

RBI asked banks not to levy penal charges on customers who do not maintain minimum balance in basic
savings bank accounts. Rajan, however, said that banks, instead of levying penal charges for non-
maintenance of minimum balance in ordinary savings bank accounts, banks should limit services
available on such accounts to those available to basic savings bank deposit accounts and restore the
services when the balances improve to the minimum required level.

RBI also said that in the interest of their customers, banks should consider allowing their borrowers the
possibility of prepaying floating rate term loans without any penalty. RBI has already prohibited charging
of penalty for prepayment of housing loans of individual customers, and it now wants to extend the same
benefit to all type of floating rate term loans, which will help small and medium enterprises as well.

But the most significant step taken by RBI is to ask banks to limit the liability of customers in electronic
banking transactions in cases where banks are not able to prove customer negligence. In these days of
hacking and phishing of internet which is of common occurrence, bank customers are an easy prey and
any amount of security features are inadequate to protect the bank customers. RBI should, therefore, not
simply limit the liability, but make it a zero liability, unless banks can prove customer negligence.

3.5 CORPORATE IN THE BAKING SPACE

The RBI has received 26 applications for new banking licenses. However there is still a large debate on
whether large corporate should be allowed to start a bank. International experience in this regard has
been mixed. While corporate can bring in professional management, experience and capital many
experts fear that they will use the bank as private pool of readily available funds.

However to avoid this RBI has built in several safeguards in the new banking license guidelines. To keep
non serious players at bay the guidelines says that the applicant entity/group should have a past record
of sound credentials and integrity, should be financially sound and have a successful track record of 10
years. It also underlines the importance of diversified ownership. It says that Non-operative financial
holding companies (NOFHC) should set up new banks. The NOFHC should retain their equity capital in
the bank at minimum of 40 % for five years after which they should reduce to 15 percent within 12 years.
The guideline also has criteria on financial inclusion.

3.6 SUBSIDIZATION AND REVISED NORMS ON PRIVATE LENDING AND NEW BANKING LICENSES
RBI has been very categorical in allowing foreign banks a larger role in the Indian banking system since
February 2005, when it first issued the road map for presence of foreign banks in India. Although the
process got delayed due to the global financial crisis in 2008, the regulator seems to be firm on it. RBI, in
its discussion paper issued in January 2011, expressed its intent of foreign banks operating as wholly
own subsidiary (WoS) and gradually be treated at par with their domestic peers. While it provides the
regulator with better control over these banks, these banks in turn will also be better placed to benefit
from the large banking potential in India. Moreover in May 2012, the Central Government also facilitated
the process by proposing to exempt foreign banks from the 30 percent tax on capital gains and stamp
duty while converting branches into a new entity.

In what could be termed a step to move in this direction, RBI mandated foreign bank with 20 and more
branches to achieve priority sector targets and sub targets at par with their domestic counterparts.
According to revise guidelines on priority sector lending PSL, issued in July 2012, such foreign banks
need to achieve this within maximum period of five years starting from April 1 2013. The export credit,
which earlier used to be the part of foreign banks PSL portfolio has also been excluded from their PSL
targets with the exception of the export credit given to the agriculture and small industries.

4 DRIVERS OF RETAIL BUSINESS IN INDIA

4.1 INCREASINGLY AFFLUENT AND BULGING MIDDLE CLASS

About 320 million people will be added to the middle income group in a period of 15 years
approximately.

4.2 YOUNGEST POPULATION IN THE WORLD

Changing consumer demographics indicate vast potential for growth in consumption both qualitatively
and quantitatively. 70 percent of Indian population is below 35 years of age which means there is
tremendous opportunity of 130 million people being added to working population.

4.3 INCREASING LITERACY LEVELS AND HIGHER TECHNOLOGY ADAPTABILITY

People are adaptive to technology and are quick to grasp variety of products and services. It will lead to
greater demand for retail activities specially retail banking activities. 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.

4.4 DECLINING TREASURY INCOME OF THE BANKS

The treasury income of the banks which had strengthened the bottom lines of the banks for the past
few years has been on the decline during the last three years. In such a scenario, retail business provides
a good vehicle for profit maximization.
4.5 DECLINE IN INTEREST RATES
Decline in interest rates has also contributed to growth of retail credit by generating the demand of such
credit.

5 CHANGES AND DYNAMICS IN THE INDIAN BANKING INDUSTRY

The unleashing of products and services through the net has galvanized players at all levels of the
banking and financial institutions market grid to look new at their existing portfolio offering. Further due
to exposure to global trends after information explosion led by internet, customers demand better
services from their banks. There is a shift from mass banking products to class banking with an
introduction of value added and customized products.

5.1 COMPETITION
The RBI has removed several artificial barriers which made the banks and non-banks companies to
penetrate into wide range of financial services. The line dividing the banking, insurance and capital
market services is disappearing and the commercial banks are offering these services under one
umbrella.

5.2 CONSOLIDATION
Consolidation is in progress, the huge monolithic organization ICICI merged with ICICI bank ltd. Public
sector giants like Punjab National Bank is spreading its tentacles and acquiring smaller banks

5.3 COMPUTERS AND INFORMATION TECHNOLOGY

Traditionally retail banking is bullet on the foundation of physical branch network now the technology
has emerged as perfect and effective substitute to physical branches through ATMs, Call centers, Home
banking and Internet banking. Several parallel distribution systems have emerged for delivery of services

5.4 CUSTOMER CENTRIC

Due to increased financial market products like Commercial paper and variety of financial instruments
big corporate clientele of several commercial banks have shifted their loyalty and have been raising
resources from the market directly and commercial banks have become more retail customer centric by
offering wide range of services. Banks have identified new customer segments like students, working
women and rich High net individuals (HNI) etc.

5.5 TECHNOLOGY
Technology is becoming the centerpiece of retail bank executives will expect their IT departments to
identify and implement technology based solutions to enhance their customer experience. Some banks
are even experimenting with quasi-internet cafes offering high-tech lounge environments with relaxing
furnishings and Wi-Fi access along with ATMs, self-service kiosks, areas for plug-in consumer devices,
tutorials for mobile and Web banking and videoconferencing for service consultations delivered by call
center staff. Furthermore the move to cash light society will trigger still more changes in how the
branches are deployed.
The number of high net individuals (HNI) are growing and increasing use of credit cards promises a
great market. Current offerings will be inadequate to capture these opportunities, leaving gap for
innovative players to fill in.

6 MARKET SCENARIO

6.1 PORTERS FIVE FORCE ANALYSES FOR INDIAN BANKING INDUSTRY

For this analysis we have looked at the industry profitability being determined by the competigtion in
two markets: product markets and input markets. In the product market we have looked into the
services provided by PSBs, private and foreign banks and while analyzing the input part we have mainly
looked into the government of Indias and mainly RBIs policies and regulations.

6.1.1 Industry Rivalry

Rivalry in banking industry is very high. There are so many PSBs, private, co-operative and non-financial
institutions operating in the industry. They are fighting for the same customers. Due to government
liberalization and globalization policy, banking sector became open for everybody. So newer private and
foreign firms are opening their branches in India this has intensified the competition. The factors that
have contributed to the increase in rivalry are:

Number of players
There are so many banks and non financial institutions fighting for the same pie.

High market growth rate

India is seen as one of the biggest market place and growth rate is also high. This has ignited the
competition

Undifferentiated services
Almost every bank provides similar services. No differentiation exists. Every bank tries to copy each
others services and technology, which increase the level of competition

Low Government Regulations

There are low regulations to start a new business due to the Liberalization, Privatization, and
Globalization (LPG) policy adopted by India post 1991. So sector is open for everybody

6.1.2 Low Bargaining power of suppliers

Suppliers of banks are depositors. These are those people who have excess money and prefer regular
income and safety. Following are the reasons of the low bargaining power of the suppliers:

Nature of suppliers
Bank is the best place for risk adverse, interest expecting customers to deposit their surplus money.
They believe that banks are safer than other investment alternatives.
Few alternatives
Suppliers are risk averters and want regular income. So they have few alternatives available with them
to invest like Treasury bills, government bonds.

RBI Rules and Regulations

Banks are subject to RBI rules and regulations. RBI takes all decisions relating to interest rates.

Suppliers are not concentrated

There are numerous suppliers with negligible portion to offer. So this reduces their bargaining power.

Forward integration
This is possible like mutual funds, but only few people know about this.

6.1.3 High Bargaining power of customers

Customers of the banks are those who take loans, advances and use services of banks. Following are the
reasons for high bargaining power of customers

Large number of layers

The customers have many alternatives. There are many non financial institutions which have also
jumped into this business. Competition level has increased so much in India, which not only have made
customer educated about banking but have made them more demanding for the services offered by a
bank. so in conclusion is they demand for services and if the bank is unable to serve them, it loses
revenue around 0.25% from a standalone customer which impact on its profit and assets on a large scale
if unsatisfied no of customer is increased.

Low switching cost

Cost of switching from one bank to another is low. Banks are also providing zero balance account and
other type of facilities. They are free to select any banks services. Switching costs are becoming lower
with internet banking gaining momentum and as a result consumers loyalties are harder to retain.

Undifferentiated service
Banks provide similar services. There is not much difference in services provided by different banks
which leads to increase in bargaining power of customers. They cannot be charged for differentiation.

Full information about the market

Customers have full information about the market. Internet has increased the customers access to
information. So, banks have to be more competitive and customer friendly to serve them.

6.1.4 Threat of substitutes

Competition from the non banking financial sector is increasing rapidly. The threat of substitute product
is very high. These new products include credit unions and investment houses. There are other
substitutes as well for banks like mutual funds, stocks (shares), government securities, debentures, gold,
real estate etc.
6.1.5 Threat of new entrant
Barriers to entry in banking industry no longer exist. Product differentiation is low and exit is difficult. So
every bank strives to survive in highly competitive market. So we see intense competition and mergers
and acquisitions.

6.2 MARKET POTENTIAL

Every bank tries to achieve economies of scale through the use of technology and selecting and training
manpower. The most influential factor for a new entrant to Indian Banking industry is the market
growth.

Strong economic fundamentals, growing urban population, higher disposable incomes, rise in young
population, emergence of new customer segments and rise in mass affluent space, explosion of service
economy in addition to manufacturing space have catapulted the scope of retail banking business in
India. There is a virtual gold mine to be unearthed and even the top layer is not yet scratched fully.

6.3 AN UNDER BANKED POPULATION

Retail loans constitute 7% of our economy versus 35% in other Asian countries. Retail asserts are at
only 25% of total banking assets. 41% of the Indian population is unbanked. Numbers of loan
accounts only 14% of adult population, 73% of farm households have no access to institutional credit
share.

6.4 LOW PENETRATION OF CREDIT, FINANCIAL PRODUCTS AND SERVICES

The Indian players are bullish on the Retail business and this is not totally unfounded. There are two
main reasons behind this. Firstly, it is now undeniable that the face of the Indian consumer is
changing. This is reflected in a change in the urban household income pattern. The direct fallout of
such a change will be the consumption patterns and hence the banking habits of Indians, which will
now be skewed towards Retail products. At the same time, India compares pretty poorly with the
other economies of the world that are now becoming comparable in terms of spending patterns with
the opening up of our economy. For instance, while the total outstanding Retail loans in Taiwan is
around 41% of GDP, the figure in India stands at less than 5%. The comparison with the West is even
more staggering. Another comparison that is natural when comparing Retail sectors is the use of
credit cards. Here also, the potential lies in the fact that of all the consumer expenditure in India in
2001, less than 1% was through plastic, the corresponding US figure standing at 18%.

7 CHALLENGES

7.1 RBI COMPLIANCES

Today, Retail banking is faced with stringent compliance regulations, and increasing customer
expectations demand them to achieve higher operational efficiencies by making the most of the
technological advancements.

7.2 INTENSE COMPETITION AND OVER DEPENDENCE

Going by international standards, a large portion of the Indian population is simply not bankable
taking profitability into consideration. On the other hand, the financial services market is highly over-
leveraged in India. Competition is fierce, particularly from local private banks such as HDFC and ICICI, in
the business of home, car and consumer loans. There, precisely lie the pitfalls of such explosive growth.
All banks are targeting the fluffiest segment i.e. the upwardly mobile urban salaried class. Although the
players are spreading their operations into segments like self- employed and the semi-urban rich, it is an
open secret that the big city Indian yuppies form the most profitable segment. Over-dependence on this
segment is bound to bring in inflexibility in the business.

7.3 LACK OF STRONG CREDIT BUREAUS

Perhaps, one of the biggest impediments in leveraging the Indian markets is the absence of positive
credit bureaus. In the west the risk profile can be easily mapped to things like SSNs and this information
can be publicly traded. PAN and UIDAI is a step in this direction but lot more work need to be done.
What has been a positive step towards this is a negative file sharing started by a consortium of 11 banks.
However, as a McKinsey study points out actual write-offs on NPAs show a strong negative
correlation with sharing of positive information.

On top of this, the spend-now-pay-later credit culture in India is just not picking up. A swift legal
procedure against consumers creating bad debt is virtually non-existent. Finally, the vast geographical
and cultural diversity of the country makes credit policy formulation a tough job.

7.4 BASEL III ADHERENCE AND IMPLEMENTATION

Since retail banking has a comparatively lower risk weight compared to corporate banking (except in the
case of clients who are A rated and above), the impact on higher allocation of capital will be less on
retail banking. Further in corporate banking as chances of default in short terms loans is less on an
average compared to chances of a default in long term loans, banks need to shift towards short terms /
retail loans, and take a granular approach to protect their margins under the new Basel III norms.
India figures among the very few countries which have issued final guidelines on Basel III implementation
till date. RBI has given five years for gradual achievements of Basel III norms; it seems a tall order for
many banks given their progress even on advanced approaches of Basel II till now. The challenges of
implementing Basel III in India are further accentuated by the fact that the law mandates the Central
Government to hold a majority share in public sector bank (PSB) which controls more than 70% of the
banking business in India. Further the high fiscal deficit is likely to limit the governments ability to infuse
capital in PSBs to meet Basel III guidelines, which would require approximately INR 4,050-4250 billion
over the next 5-6 years. While the chances of government reducing its stake below 51 percent in these
banks remain bleak, the sector is likely to witness some consolidation wherein some of the smaller PSBs
will be absorbed by larger PSBs. The process of SBI taking over its remaining associates could also be
hastened. PSBs will also be more focused on capital conservation strategies.

7.5 LOW CREDIT CARD USAGE

Given Indias unprecedented market credit card usage in India is among the lowest in the world chart 7
and the lack of progress of infrastructure development, domestic private banks in India have faced high
operating costs, especially during the initial years of branch expansion. Further retail slippages in the
early years were high, which in turn inflated credit costs.

That said over the medium to long term, a higher retail mix with greater focus on secured retail loans
augurs well for domestic private banks in India. In contrast to public sector banks, which face more
serious asset quality concerns due to larger wholesale lending exposure to stressed sectors such as
power and airlines, private banks have posted higher return on assets since the 2009 credit crisis. Chart
8. A step up in retail banking by Indian banks alongside better credit selection and underwriting have
kept asset quality concerns in check for domestic private banks in India.

7.6 TECHNOLOGY AS DRIVER FOR CHANGE

Product offerings and service channels are continually evolving with increasing sophistication demanded
by customers using mobiles and tablets. This leads to continuous re-evaluation of the way Retail Banking
institutions operate and deliver financial products and services including lending and financing

7.7 CUSTOMER RETENTION

Given the multiple choices the customer has when it comes to banking, the key challenge is how to
ensure a seamless, consistent and enhanced experience for the customer that result in unprecedented
levels of customer satisfaction to retain the customer base. According to research by Reichheld and
Sasser in Harvard Business review, 5 percent increase in customer retention can increase the
profitability by 35 percent in banking business, 50 percent in insurance business and brokerage and 125
percent in the consumer credit card market. Thus bank need to emphasize retaining customers and
increasing market share.

7.8 KYC AND MONEY LAUNDERING RISK

With the changing regulatory environment, retail banks operating on a global or a multi- geography
basis need to demonstrate a robust compliance framework ensuring that each territory has sufficient
oversight; adequate Know Your Customer ('KYC') measures and those Anti Money Laundering (AML)
regulatory requirements are being adhered to at both a local and global level

Retail lending is often regarded as low risk area for money laundering because the perception of the
sums involved however completion for clients may also lead to KYC procedures being waived in bid for
new business. Banks must also consider seriously the type of identification documents they will accept
and other process to be completed.

7.9 RISING INDEBTNESS

Indias position is not comparable to that of developed world, where household debt as a proportion of
disposable income is much higher. Such scenario creates high uncertainty. Expressing concerns about
the high growth witnessed in the consumer credit segments the RBI, as a temporary measure put in
place risk containment measures and increase the risk weight from 100 percent to 125 percent in case
of consumer credit including personal loans and credit cards.

7.10 NETWORK MANAGEMENT CHALLENGES

Ensuring that all bank products and services are available at all times, and across the entire organization
is essential for todays retail banks to generate revenues and remain competitive. Specific challenges
include ensuring that the account transaction applications run efficiently between the branch offices
and data centers.
7.11 PRICING MECHANISM
The most significant challenge is to devise appropriate pricing mechanism. The industry today is
witnessing a price war, with each bank, competing to have a large slice of the cake of the market,
without much of a scientific study into the cost of funds involved, margins etc. Most of the banks that
use rating models for determining the health of the retail portfolio do not use them for pricing the
products.

7.12 FAILURE OF WEAK BANKS AND WEAK CORPORATE GOVERNANCE

The cost of intermediation remains high and bank penetration is limited to only a few customer
segments and geographies. While bank lending has been a significant driver of GDP growth and
employment, periodic instance of the failure of some weak banks have threatened the stability of the
system. Structural weakness such as fragmented industry structure, restriction on capital availability and
deployment, lack of institutional support infrastructure, restrictive labor laws, weak corporate
governance and ineffective regulations beyond Scheduled Commercial Banks (SCBs) unless addressed
could seriously weaken the health of the sector.
So over the past few years, in spite of the entry of MNCs in many industries, Retail Banking has seen
a flurry of panicky exits. Fewer than 40 remain in India and their share of total bank assets currently
7.2% is falling. Those that remain might be thought to be likely buyers of Indian banks. Yet Citibank,
HSBC and Standard Charteredall in India for more than a century, and with relatively large retail
networksseem to have no pressing need to acquire a local bank. Established foreign banks have
preferred to take over customers or businesses from other foreign banks that want to leave. Thus
HSBC, in recent years, has acquired customers from France's BNP, Germany's Deutsche Bank and
Japan's Bank of Tokyo-Mitsubishi. ABN Amro took over Bank of America's retail business.

8 PRICING MODELS
The critical success factors for retail banking would be distribution Branch, channels Branding, Units
costs cost per account, cost per transaction, Pricing risk management.

8.1 PRICING OF PRODUCTS AND SERVICES

Banks develop models for pricing of products and services based on certain fundamental parameters.
Market dynamics, risk perception, return expectations, tenor / duration, resources position, asset liability
management positions and customer profile are some of the variables which are factored into the pricing
model by banks. The balancing of these various variables dynamically with changing market dynamics is
the key function for good pricing model. In addition, regulatory advices (both overt and covert) also
influence the pricing models. The fundamental concept of costing in pricing is now linked with the asset
liability management practices of banks. In Foreign banks, are always aggressive in the price front with
process efficiencies.

8.2 PRICING STRUCTURES OF PRODUCTS AND SERVICES

Price structuring for products and services is attempted by banks in many ways. Stand alone pricing for
different products and services is the basic structure. While the general structuring is basically an
outcome of the pricing models, fine tuning always happens due to different factors. Quantum and
volumes are two important determinants. Price Preferences / Price rebates based on the above also form
part of the structuring. Special quotes for high value deposits and concessional rates of interest are
examples of this structuring. Structuring also involves price bundling where a holistic pricing is offered
across a specific bundling of products and services so that the total price proposition is attractive than the
stand alone pricing for the individual products of the bundle. This structuring is a cross selling strategy to
entice the customer to avail more products so that profitability per customer is enhanced.

8.3 OTHER PRICING STRUCTURES OF PRODUCT AND SERVICES

Some banks are structuring additional models indirectly as a part of the pricing structure. In addition to or
in lieu of price rebates / discounts, alternate pricing propositions for other services are offered as
additional facilities. For example, free remittance facilities, issue of drafts, waiver of service charges,
processing charges are offered as concealed price structures and offered as tag on for quantum and
volume business.

9 MARKET STRATEGY
The retail banking strategies of banks are undergoing a major transformation, as banks are beginning to
adopt a mix of strategies like organic growth acquisition and alliance formation. This has resulted in a
paradigm shift in the marketing and pricing strategies of the banks. PSBs are adopting aggressive
strategies, leveraging their branch network to garner a large share of the retail market. Retail loan is
estimated to have accounted for nearly one-fifth of all bank credit. Over the past few years housing
sector is experiencing a boom in its availability of credit. The retail loan market has decisively got
transformed from a seller's market to a buyer's market.

9.1 MARKET SEGMENTATION

The success of retail banking lies on market segmentation, innovation and pricing of products or services.
Banks have to focus on market segmentation to identify difference between groups of potential
customers and to decide which products can be server dot which groups.

9.2 RELATIONSHIP BANKING AND CROSS SELLING TO EXISTING CUSTOMERS

The Banks have started providing Relationship managers for higher income individuals who hold
accounts in the bank and cross sell various products such as Insurance, Investment plans, mutual fund
schemes.

9.3 INFRASTRUCTURE
Retail banking now encompasses not just branches, but also anywhere that banking services can be
conveniently provided to consumers whether it means a service kiosk in a train station a mini branch in
a grocery store, a premium branch in a central business district or bank on wheels that visit corporate
workplaces, proximity to targeted customers ultimately matters more than having a traditional bank
facade. Flexibility and agility will provide a competitive edge for the bank.

10 CONCLUSIONS
There is a need of constant innovation in retail banking. In bracing for tomorrow, a paradigm shift in
bank financing through innovative products and mechanism involving constant up gradation and
revalidation of the banks internal system and process is called for. Banks now need to use retail as a
growth trigger. This requires product development and differentiation, innovation and business
process re-engineering, micro planning, marketing, prudent pricing, customization, technological up
gradation, 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 the future would depend
upon the capacity building of banks to meet 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 customers interest is of
paramount importance. So it is vital for banks to improve their customer services and cut off
predatory lending strategies, particularly in area of interest in credit cards.

The focus of the sector should remain in macroeconomic wealth creation and not increasing the per
capita indebtedness that will do little but add to the Non Performing Assets (NPA) burden. Finally we
say that retail banking is one of the most tremendous areas now days to be looked after by the
banking industry as it contributes 7% of the GDP and 14 percent to employment.