Banking Products &

Operations
Session 7

Session 7
Competition, Opportunities and Challenges in Retail Banking
in India
Entry of Private sectors in banking,
Increase in NBFCs business activities
Introduction of new Payment banking & Proposed launch of Small
Finance Banks Impact on existing commercial banking industry
Retention of Customers
Rising indebtedness
Opportunities and challenges due to information and technology
Security related issues verification related to transaction
internet, mobile and telephone banking Fraud Prevention
KYC Identify Theft, Money laundering related issues.
ATM related issues Maintenance, upkeep and expansion
Additional Capital requirements under Basel 3 norms

Financial Institutions in India

Banking Penetration
Though the reach and scope of banking has
thus increased, the huge demand for financial
services remains un-satiated.
It is a matter of concern that even with 150
domestic commercial banks [comprising 26
Public Sector Banks, 20 Private Sector Banks,
44 Foreign Banks, 4 Local Area Banks (LABs),
56 RRBs] and over 2,700 co-operative sector
banks operating in the country, just about 40
per cent of the adults have formal bank
accounts.

Financial Inclusion approach

Reserve Bank is aware of this aspect
and is committed to financial
inclusion and is exploring various
possibilities to foster inclusion of the
unserved and under-served
population and areas and facilitate
provision of affordable financial
services by increasing competition
among the banks and encourage
innovative approaches (including

Financial Inclusion
-approach
The Government of India and the Reserve
Bank are clear that financial inclusion is a
massive requirement and therefore all
financial sector participants will have to
put in consistent efforts in that direction.
Need for more Banks & Differentiated
Banks
entry to private, well-governed, deposittaking small finance banks be allowed
Small finance banks

What are differentiated

banks
Differentiated banks are distinct from universal
banks as they function in a niche segment.
The differentiation could be on account of
capital requirement, scope of activities or area
of operations.
some banks and non-bank financial companies
may choose to operate as a specialized niche
bank to derive the obvious advantages of
lower absolute capital requirements.

Differentiated banks: has their

time come?
There can be no two opinions on the
value of these differentiated banks to
the Indian financial system.

Differentiated banks Advantages

There are diverse opportunities in the banking and financial
landscape reflecting significant macro-economic growth potential in
India and differentiated licensing could enable unlocking potential of
these opportunities as it encourages niche banking by facilitating
specialisation thereby reducing potential non-optimal use of resources.
Very large ticket, long term infrastructure lending requires
risk management expertise that goes beyond traditional credit
appraisals at banks. There is significant space for specialized
entities in risk assessment and structuring of infrastructure
finance.
Very low ticket unsecured credit requires risk management
methodology and cost control that is not easy in the business
model of conventional banks.
Increase in competition among banks could lower costs of
transactions.

Differentiated banks Advantages

Gaps in SME finance can be filled with asset
and cash flow based lending, operating
leases, and factoring.
Issues of conflict of interest when a bank
performs multiple functions would not arise,
where differentiated licenses are issued.
Risk management systems and structure for
regulatory compliance could be customized
according to the banking type.
Customized application of supervisory
resources according to the banking type could
result in greater optimization of such scarce
resources.

Objectives of Small finance banks

The objectives of licensing small finance

banks are furthering financial inclusion by (a)
provision of savings vehicles, and (b) supply
of credit to small business units; small and
marginal farmers; micro and small industries
To achieve the stated objectives by
stipulating target segments where the credit
should be directed and by indicating the
ticket size of the advances to ensure that the
target segment is serviced.

Objectives of Payment Banks

The objectives of setting up of payments banks

are to further financial inclusion by providing
(i) small savings accounts and (ii) payments /
remittance services to migrant labour
workforce, low income households, small
businesses, other unorganised sector entities
and other users.
To achieve the stated objectives by specifying
the services that the payments bank could
undertake and by indicating the manner in
which the funds need to be deployed.

Differentiated Banks Conclusion

There is enormous unmet potential demand lying in the
rural areas and other unbanked centres which needs to
be tapped.
To tap this unmet demand for financial services, it is felt
that it is worth experimenting on new types of
institutions for financial inclusion.
However, in a country like India where there exists
differentiated markets and consumer groups, the
concept of differentiated banking will succeed and time
will only prove.
As regards the health of the differentiated banks, there
is a need for creating a balance between long term
sustainability and the financial inclusion goals

Retail Banking Segments

Coverage

Competition, Opportunities and Challenges in Retail Banking in

India

Entry of Private sectors in banking:

Bank account penetration in India increased
from 35% to 53% between 2011 and 2014, but
the country also suffers from high dormancy
rates, says a World Bank report.
India has nearly 20 crore "dormant" bank accounts:
World Bank
In August 2014 the Indian government launched
Pradhan Mantri Jan Dhan Yojana scheme for
comprehensive financial inclusion with the goal of
opening a bank account for every household.

Private Sector Banks

Public Sector Banks 27

NBFCs
Increase in NBFCs business activities
What is NBFC ?
A Non-Banking Financial Company (NBFC) is a company
registered under the Companies Act, 1956,engaged in the
business of loans and advances, acquisition of
Shares/stocks/bonds/debentures/securities issued by
Government or local authority or other marketable securities
of a like nature, leasing, hire-purchase, insurance business,
chit business but does not include any institution whose
principal business is that of agriculture activity, industrial
activity, purchase or sale of any goods (other than securities)
or providing any services and sale/purchase/construction of
immovable property.

NBFCs
A non-banking institution which is a
company and has principal business
of receiving deposits under any
scheme or arrangement in one lump
sum or in instalments by way of
contributions or in any other manner,
is also a non-banking financial
company (Residuary non-banking
company).

Top NBFCs
Housing Development Finance
Corporation Limited
Power Finance Corporation Limited
Rural Electrification Corporation Limited
National Bank of Agricultural and Rural
Development
Infrastructure Development Finance
Company Limited

 Introduction of new Payment banking

& Proposed launch of Small Finance
Banks Impact on existing
commercial banking industry
Payments Banking A way Forward
For Financial Inclusion ?

Payment Banks Not a competitor?

Payment Banks: Are we ready for them?
Payments banks are likely to add Rs 14 trillion in
incremental credit for infrastructure sector alone
Payment banks will help improve last mile
connectivity especially in the rural hinterlands.
Service standards are likely to go up and transaction
costs will come down, due to the competition in the
space.
Payment banks would mark the end of era of waiting
in queues for the pensions.
If payments banks are used in proper way, they also
have the potential of drastically reducing or even
eliminating black money from our economy.

Small Finance Banks

Small Finance Banks as part of
differentiated banking, will focus on
Priority Sector Banking
Hence the focus is on small loans,
unbanked areas like SME, education loans,
agriculture sector, small home loans and
loans up to 25 lakhs etc
Will it affect traditional banks ? Let us see
how many competition in rural areas will
help financial inclusion?

Retention of Customers

Retention of customers is going to be

a major challenge
Banks need to focus on improve
customer relationship
Reduce customer complaints
Improve quality of service time
based

Rising indebtedness

Rising indebtedness could turn out to

be a cause for concern in the future.
India's position, of course, is not
comparable to that of the developed
world where household debt as a
proportion of disposable income is
much higher.
Such a scenario creates high
uncertainty.

Opportunities and challenges due to information and technology

Information technology poses both opportunities and

challenges.
Inspite of availing the services of ATMs and Internet
Banking, many consumers still prefer the personal touch
of their neighbourhood 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 departments additional responsibilities and
challenges in managing, maintaining and optimizing the
performance of retail banking networks.

Security related issues

Security related issues verification
related to transaction internet,
mobile and telephone banking
Fraud Prevention
Identity Theft issues

KYC issues - Compliance

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.

Additional Capital due to BASEL III

implementation
Banks need to maintain additional
Capital due to BASEL III standards
Increase in Cost and reduction in
Profitability due to increase in cost of
Capital

Rural Market
Banking in India is generally fairly
mature in terms of supply, product
range and reach, even though reach
in rural India still remains a challenge
for the private sector and foreign
banks.

Employees Retention
Long-time banking employees are
becoming disenchanted with the industry
and are often resistant to perform up to
new expectations. The diminishing
employee morale results in decreased
revenue.
Due to the intrinsically close ties between
staff and clients, losing those employees
completely can mean the loss of valuable
customer relationships

Reducing Spread Profitability

Competition gradually brings down
the spreads and the profitability, the
banks have to continuously work
towards improving their productivity
and efficiency so as to maintain their
RoE.
Towards this end, technology would
be the key enabler

Banking industrys
opportunities

Banking industrys opportunities includes

A growing economy
Banking deregulation
Increased client borrowing
An increase in the number of banks
An increase in the money supply
Low government-set credit rates and
Larger customer checking account
balances

Conclusion Retail Banking

There is little to differentiate between basic products
and services offered by retail banks. Having conceded
that, packaging and branding of products and services
are going to be the key differentiator between banks.
.The banks would have to invest quite a lot in
innovation, research and product design so as to keep
their product and service offerings relevant and
contemporaneous to emerging customer needs.
Need for developing standardized products and
services for furthering the retail banking initiatives.
Quality of services offered by the banks is going to be
another key differentiator.