bank lending- retail banking

8/13/2019 Bank Lending- Retail Banking

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The voice of today’s banking customer

Foster greater loyalty and satisfaction

Offer choice and flexibility

Adapt business models

MEANING OF RETAIL BANKING

Retail banking is banking in which banking institutions execute transactions

directly with consumers, rather than corporations or other banks. Services offered

include savings and transactional accounts, mortgages, personal loans, debit cards,

and credit cards.

Commercial bank has two meanings:

Commercial bank is the term used for a normal bank to distinguish it from

an investment bank. (After the great depression, the U.S. Congress required

that banks only engage in banking activities, whereas investment banks

were limited to capital markets activities. This separation is no longer

mandatory.)

Commercial bank can also refer to a bank or a division of a bank that mostly

deals with deposits and loans from corporations or large businesses, asopposed to normal individual members of the public (retail banking). It is

the most successful department of banking.

Community development bank are regulated banks that provide financial

services and credit to underserved markets or populations.

Private Banks manage the assets of high net worth individuals.

Offshore banks are banks located in jurisdictions with low taxation and

regulation. Many offshore banks are essentially private banks.

Savings banks accept savings deposits. Postal savings banks are savings banks associated with national postal

systems.

Retail Banking services are also termed as Personal Banking services

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http://en.wikipedia.org/wiki/Banking_institution



http://en.wikipedia.org/wiki/Savings_account



http://en.wikipedia.org/wiki/Transactional_account



http://en.wikipedia.org/wiki/Mortgage_loan



http://en.wikipedia.org/wiki/Personal_loan



http://en.wikipedia.org/wiki/Debit_card



http://en.wikipedia.org/wiki/Credit_card



http://en.wikipedia.org/wiki/Commercial_bank


http://en.wikipedia.org/wiki/Community_development_bank


http://en.wikipedia.org/wiki/Private_banking


http://en.wikipedia.org/wiki/Offshore_bank


http://en.wikipedia.org/wiki/Savings_bank


http://en.wikipedia.org/wiki/Savings



http://en.wikipedia.org/wiki/Postal_savings_system
















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Typical mass-market banking in which individual customers use local branches of

larger commercial banks is called retail banking. Services offered include savings

and checking accounts, mortgages, personal loans, debit/credit cards and

certificates of deposit (CDs).

Retail banking aims to be the one-stop shop for as many financial services as

possible on behalf of retail clients. Some retail banks have even made a push into

investment services such as wealth management, brokerage accounts, private

banking and retirement planning. While some of these ancillary services are

outsourced to third parties (often for regulatory reasons), they often intertwine with

core retail banking accounts like checking and savings to allow for easier transfers

and maintenance.

RETAIL BANKING COMPREHENSIVE REPORT-GROWTH

Use this report to…

Understand how retail industry is growing

What are strategies taken by retail bank companies and their comparison thereof?and much more……

INTRODUCTION

Retail banking in India has fast emerged as one of the major drivers of the overall

banking industry and has witnessed enormous growth in the recent past. The Retail

Banking Report encompasses extensive study & analysis of this rapidly growing

sector. It primarily covers analysis of the present status, current trends, major

issues & challenges in the growth of the retail banking sector. This report helps in

Banks, financial institutions, MNC Banks, academicians, consultants and

researchers to have a better understanding of the booming opportunities in retail

banking in India.



MAJOR FINDINGS

With recession departing away from away global economy, opportunities are

slowly emerging in emerging markets. Since emerging markets, except China,

were less depending upon US for growth; are first to come out of recession eclipse.

Growth opportunities in banking, especially retail segment is set to witness fastgrowth due to high consumption. The higher growth of retail lending in

emerging economies is attributable to fast growth of personal wealth,

favourable demographic profile, rapid development in information

technology, the conducive macro-economic environment, financial market

reforms, and several micro-level supply side factors.

The retail banking strategies of banks are undergoing major transformation, as

banks adopt a mix of strategies like organic growth, acquisitions and alliances.This has resulted in a paradigm shift in the marketing strategies of the banks.

Public Sector Banks players are adopting aggressive strategies, leveraging

their rural branch network and their customer vase to earn a larger share of the

retail pie. Banks are also going in for innovative strategies like cross selling,

packaged selling of retail products and technology based banking. At the same

time, new foreign players are also entering this high growth sector

POINTS DISCUSSED

- Global retail banking vis-à-vis Indian scenario

- Indian retail banking overview

- What are the regulatory factors involved in Indian banking industry

- How interest rate risks, money laundering, and outsourcing are affecting the

performance of banking sector?

- What would be the impact of Basel-II norms in Indian banking industry?

- What are the implications of SARFESI Act on recovery of money?

- How the banking industry would combat the competition from upcoming sectors

like mutual funds?

- What are the various issues and challenges before this industry?

- What are strategies taken by retail bank companies and their comparison thereof?

PLAYERS PROFILED

The report contains major profiles of - Andhra Bank, AXIS Bank, Bank of Baroda,



Bank of India, Canara Bank, Citibank, Central Bank of India, Deutsche Bank,

HDFC Bank, HSBC, Indian Overseas Bank, ICICI Bank, I D B I (Industrial

Development Bank Of India), Indian Bank, ING Vysya Bank, Jammu & Kashmir

Bank Ltd, State Bank of India, Saraswat Co-Operative Bank Ltd, Syndicate Bank,

UCO Bank and Union Bank of India

PRODUCTS ANALYSED

- Indian retail credit

- Housing finance

- Auto finance

- Consumer durable loan

- Educational loan

- Other personal loans- Credit cards

- Bancassurance

FOR WHOM

- Banks, Financial institutions

- MNC Banks

- Academicians

- Consultants

- Researchers

RESEARCH METHODOLOGY

The data used, extensively draws from the in-house and proprietary sources

available at Cygnus as our research team regularly tracks the sector. The other

sources include Bank for International Settlements (BIS), Reserve Bank of India,

Banking related Journals, and Research papers, Industry portals, Government

Agencies, and Trade associations, monitoring of Industry News and developments

etc. The data has been cross-checked by the research team and validated to provide

the latest and unambiguous information.

ADDITIONS IN THE EDITION

Global Banking Scenario

Introduction



Global banking assets touches US$96 tn

Rising Bad debts and Provisions

Profitability plummeted

Region wise analysis

- US-- Rising defaults and slowdown affects overall credit

- Europe

-- Credit growth dips in European banks

- Asia Pacific

-- Japan find opportunity in serving baby boomers

-- Asia pacific outperforms than developed economies

Recent trends

- Housing bubble collapsedIndian Banking Industry

Current Scenario

- Monetary and liquidity position: Relatively stable

-- Bank deposits moving up

-- Credit off take slows

Housing finance

Housing loan disbursement: facing the heat from global slowdown

Major Challenges

- Managing volatility in metal and oil prices and in exchange rates

- Finding a solution to slowdown in exports and manufacturing activities

- Integrating the entire supply chain and managing inbound logistics

- Managing Poor Monsoons

- Maintaining the pace of infrastructure development

Credit cards

Key Trends

- Infrastructural challenges could soon become irrelevant

- EMV issuance is still far away

- Prepaid Cards on the horizon

- Demand for premium and co-brand cards

- Full ATM outsourcing

Techology Spend

- Spread of ATMs — primary concern for banks



- Cards being a strong alternative to cash payments

- Internet banking – emergence of new era in personal banking

Micro payment

Regulations

Consumer credit, Home Loan, Education Loan, Auto Loans and their Risk weightexposures

Credit card Norms

- Single overall limit to an individual

- KYC (know your customer) Norms

- Reporting to Credit Bureau

- Other harassment

Micro Finance

- The Micro Financial sector (Development and Regulation) Bill, 2007Foreign Exchange Regulations

Remittance Regulations

Mobile Banking

Issues and challenges

A paradigm shift from the monopolies of public sector banks to competitive

banking

Retail loan quality seen falling

Tie-Up Arrangement

Basel II Norms

Growth In Retail Electronic Funds Transfer Systems

Future outlook

Emerging trends in technology

CONCLUSION

In the world economy retail lending is a strong market; however, its rise is evident

in emerging economies like India. Asia Pacific’s vast population, combined with

high savings rates, explosive economic growth, and underdeveloped retail banking

services, provide the most significant growth opportunities for banks. To continue

to realise vast growth opportunities in the region, banks will have to effectively

serve the retail banking segment. Hence, banks need to innovate diverse range of

retail banking products and servicing in order to satisfy the customers of Asia



Pacific.

In 2008, global banks losses were US$4.1tn, of which US accounts for US$2.7tn,

European and Japanese banks losses account for US$1.3tn and rest by others.

Banking strategies are presently undergoing various transformations, as the overallscenario has changed over last year. Till the recent past, most of the banks had

adopted fierce cost-cutting measures to sustain recession. This strategy however

has become obsolete in the light of immense growth opportunities for banking

industry. Most bankers are realising that banks shall focus more on core business

i.e., lending and borrowing rather than growing on the back of investing in

complex derivative products. Banks are now confident about their high

performance in terms of organic growth and in realising high returns.

A bank’s growth strategy evolves around the customer satisfaction. Improved

customer relationship management can only lead to fulfillment of long-term, as

well as, short-term objectives of the bankers. This requires efficient and accurate

customer database management and development of well-trained sales force to

develop and sustain long-term profitable customer relationship. Japan remained the

major contributor in total bank deposits; it has experienced an increase of nearly

2%. While China’s total deposit grew by 17.90% in FY08. Relatively smaller

player like India also recorded an outstanding growth of 19% in total bank deposit

during 2008-09. Countries like India have emerged as potential market with huge

investment opportunities.

During 2008-09, gross credit extended by Indian commercial banks grew by

20.09% to touch Rs27,293 billion. Retail credit has grown by 7.8% to Rs5574

billion during the same period. Housing sector constitutes the lion’s share of about

49% in the total retail disbursement, auto loans (22%), other personal loans (18%),

educational loans (5%), credit card receivables (5%) and consumer durables (1%).

Banks continue to gather a greater share in housing loan disbursements by

outdoing Housing Finance Companies (HFCs). The Indian housing finance

industry has been growing by leaps and bounds in the past few years. Housing

loans credit by SCB and HFC grew only by 5% during May 09 compared 13.8%

growth in May 08. Credit flow to housing was lower at Rs130.28 billion during



May 09 as compared to Rs317.35 billion in May08. Low lending in housing sector

was due to tightening monetary measures, banks denial in lending funds, high

interest rates and very high non-performing assets. Despite being a late entrant in

the housing finance, the banks have overtaken the HFCs in the home loan market.

The share of the banks in total home loan disbursement has risen from 48% in2003-04 to 59% in 2008-09. Outstanding Housing loans, as a percentage of GDP,

increased in the last five years from 7.06% in 2005-06 to 8.29% in 2008-09. It is

expected to leap by double digits in the next 2-3 years. Indian housing market is

likely to grow on the lines of Malaysia and Thailand; these countries have already

reached the double digit figures as percentage of GDP.

Auto loan after experiencing 18% CAGR is last 5 years has witnessed 15% dip

during 2008-09. In Asia Pacific, India has emerged as the third largest market forcars and MUVs, after Japan and China. High interest rates, banks delay in

financing, high oil prices, delay in monsoons are main constraints of this segment.

The last few years have witnessed a high increase in students aspiring for

management and professional courses, leading to a spurt in educational loans.

Banks are now having a direct tie-up with the educational institutions to cash in on

the opportunity. Public Sector Banks (PSBs) are focussing on the educational loans

segment. During 2008-09, the outstanding for education loans increased by 35% to

Rs285.79 billion.

The credit card culture has gained immense popularity over past 5 years. The total

number of cards issued in India has gone up by nearly 22.33% in the FY09. The

total number of credit cards issued is estimated to be at around 259 million in

2008-09. The actual usage too has registered an increase both in terms of volume

and value at the rate of 13.7% and 12.7% respectively in current period. The total

spends in the payment industry for the year 2008-09 crossed Rs839 billion at the

POS. This reflects a growth of 22% over the previous year. As on March 31, 2009,

outstanding credit card receivables stood at Rs280 billion i.e., a growth of 6% over

2007-08. Almost all the categories of banks issue credit cards. Credit cards have

found greater acceptance in terms of usage in the major cities of the country, with

the four major metropolitan cities accounting for the bulk of the transactions.

The consumer durable loan outstanding as on March 31, 2009 was Rs81 billion. In



total personal loans, consumer loans account only for 1% as on March 2009. In a

tenure-wise market share of Consumer Durable loans, long-term loans leads with

59% market share and medium term loans with 41% market share. In terms of size,

consumer durables segment has maximum loans which are between Rs25,001 to

Rs0.2 million. However, outstanding amount declined by 4% during fiscal 2008-09. This is primarily due to bank’s denial in lending and postponement of

purchasing decision due to high inflation on account of high food prices.

The other personal loans market is characterised by intense competition and the

players vie with one another to get business. These loans are driven by urgent and

short-term needs, and banks have to act swiftly to cash in on that need.

Metropolitan and urban areas together constitute two thirds of total loans under this

category. Private sector banks lead in metropolitan areas, whereas in the rural areasthe nationalised banks have more pie.

Bancassurance, the much talked about channel of insurance distribution through

banks, has gained immense popularity among Indian insurance companies and

banking sector ever since its introduction in 2000-2001. Pushing the risk products

through banks is a cost-effective affair for an insurance company compared to the

agent route. While for banks, considering the falling interest rates, fee based

income coming in at a minimum cost is more than a welcome move.

Bancassurance has cleanly outperformed other alternate channels of distribution

for insurance products, with a share of almost 25-30% of the premium income

amongst the private players in FY 2008. There is huge potential in this alternative

channel, with only 4,500-5,000 bank branches currently distributing insurance

products.

In India, all the retail banking segments are expected to witness steep growth

owing to the low cost of borrowing, changing customer attitudes towards

borrowing and optimism regarding economic growth. The share of total retail

credit in bank credit has increased from 6.4% to over 25% in the past 15 years. In

the next four years, till 2010, retail banking is expected to grow at a CAGR of 20%

to reach Rs7970 bn. This requires expansion and diversification of retail product

portfolio, better penetration and faster service mechanism. Hitherto, the growth had

come from metros and tier I cities while the loan requirement from larger cities



will continue to grow, explosive growth in credit is expected to register in tier II

cities, semi-urban and rural areas.

However, there are some areas of concern like rising NPA in consumer loans

particularly, the delinquency rates in credit cards and frauds in home loans.Housing prices have grown rapidly during 2005-2008. Deflation of asset value is a

possibility in certain areas. Aggressive credit growth in retail has increased the

requirement for measuring and managing this risk. These require extremely skilled

workforce and highly evolved credit delivery and monitoring processes, so that the

banking professionals can track the market perfectly. The other concern is of

suicidal pricing by the aggressive banks. This is bringing the margins under

pressure. Though rational pricing is critical, the competitive market shall continue

to see the pricing pressure. There is also a need for database and a managementinformation system to identify the right kind of borrowers. Lack of consensus on

definition of retail and transparency in declaration by the players as well the

coverage of retail by the RBI in its reports –– all of this need a thorough re-look.

As India’s economy matures with excellent performance in terms of GDP and

other parameters like per capita income, balance of payments, inflation and

financial market, consumer spending –– all set to increase by many folds. This

positive trend will definitely fuel the growth Indian banking industry. To continue

to realise the vast growth opportunities in the country, banks will have to

effectively serve the retail banking segment. To meet the expectations and win the

hearts of the customers, the banks should innovate by developing a diverse range

of retail products, needed by the customers and servicing them efficiently.

RECOMMENDATION

Transforming Customer Experiences with Capgemini

From this Retail Banking Conference with Capgemini and The Banker, viewers

will hear about the challenges facing banks today as they try to create captivating

customer experiences across channels.



Learn from the voice of the customer and find out what 18,000 customers prefer

from their banking experience with Capgemini’s World Retail Banking Report

2012.

Report Highlights

According to the Report’s Customer Experience Index, which surveyed over

18,000 bank customers across 35 countries, 9% of customers are likely to leave

their banks in the next six months while 40% are unsure they'll stay long term. The

report shows banks have a significant opportunity to close the customer sentiment

gap and address the factors that matter most to them to increase loyalty. Quality of

service (53%), fees, (50%), ease of use (49%) and interest rates (49%) represent

the biggest impact areas to keep customers from leaving. The report also reveals

that mobile banking services have yet to be fully leveraged.

North American banks lead in customer satisfaction

Banks recorded a global average of 65% in terms of customer satisfaction, find out

how satisfied customers in other regions are in the full report. Despite general

satisfaction with their primary bank nearly 10% of customers surveyed indicated

they will leave over the next six months.

To prevent customer loss, banks must use new approaches to traditional

strategies

The Report found banks that are pursuing a traditional strategy of "do-everything"

to improve customer experience should consider differentiating on only one or two

dimensions, prioritizing investments to strengthen core competencies that address

their customers' most pressing demands. Explore three new operating models for

sustainable future performance.

While Mobile is the channel with the most potential, other channels still lead

in terms of customer preference

Banks modestly increased their levels of positive customer experience from last

year but they still are not delivering enough positive experiences. Just over 40% ofcustomers are having positive experiences through most channels today. Find out

which channels are providing the greatest positive customer experience in each

region.

http://www.capgemini.com/wrbr12




http://www.capgemini.com/insights-and-resources/by-publication/world-retail-banking-report-2012/
















The World Retail Banking Report provides insights into customer attitudes

towards retail banking using a comprehensive Voice of the Customer survey which

polled over 18,000 retail banking customers in 35 countries. The responses from

this survey provide the underlying input for our proprietary Customer Experience

Index (CEI) which measures customers’ banking experiences across 80 differenttouch points. The CEI addresses the disconnect between measures of customer

confidence, loyalty, and satisfaction by identifying the factors that are most

important to customers, and then measures satisfaction specifically along three

dimensions: products (including checking, savings and payments accounts; credit

cards; loans and mortgages); channels (including branch; internet; mobile device;

phone; and ATM), and lifecycle stage (including information gathering;

transacting; problem resolution; and account status and history).

VERY IMPORTANT- RECOMMENDATIONS

Amid sweeping regulatory change, slow economic growth and tightened

margins, banks today are increasingly focused on their most important

stakeholders — their customers.

Yet, despite their best efforts to attract and retain customers, customer

confidence levels in banks remain low.

In response, customers are changing their behavior and demanding lower feesfor higher levels of service or other improvements. If these demands are not

met, they are increasingly likely to shop around at other banks for competitive

rates for services and products.

To build on our previous global consumer banking survey in 2011, and to help

banks better understand what they must do to build and maintain customer

relationships, we surveyed 28,560 banking customers across 35 countries to

learn more about their needs and preferences. Our banking teams around the

world analyzed the responses.

We hope the data and survey findings are useful to you when planning

strategies and adapting your business models to attain greater customer

loyalty and satisfaction.

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Our survey suggests that for banks to remain competitive, they must:

Give customers the opportunity to choose by making promises and service

offers more transparent.

Rebalance fee structures to achieve the clarity and sustainability required by

regulators and investors.

Help customers shape their own banking experiences by improving how they

provide information and advice, recruiting online affinity groups and by

developing flexible loyalty programs.

Develop models around customer needs by reprioritizing spending, including

increasing the use of low-cost digital models and using more innovative

technology.

OPPORTUNIITES AND CHALLENGES- RBI

he issue of retail banking is extremely important and topical. Across the globe,

retail lending has been a spectacular innovation in the commercial banking sector

in recent years. The growth of retail lending, especially, in emerging economies, is

attributable to the rapid advances in information technology, the evolvingmacroeconomic environment, financial market reform, and several micro-level

demand and supply side factors.

India too experienced a surge in retail banking. There are various pointers towards

this. Retail loan is estimated to have accounted for nearly one-fifth of all bank

credit. Housing sector is experiencing a boom in its credit. The retail loan market

has decisively got transformed from a sellers’ market to a buyers’ market. Gone

are the days where getting a retail loan was somewhat cumbersome. All these

emphasise the momentum that retail banking is experiencing in the Indian

economy in recent years.

What is Retail Banking?



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

then 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 makeample 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.

Drivers of retail business in India

What has contributed to this retail growth? Let me briefly highlight some of the basic reasons.

First, economic prosperity and the consequent increase in purchasing power has

given a fillip to a consumer boom. Note that during the 10 years after 1992, India's

economy grew at an average rate of 6.8 percent and continues to grow at the

almost the same rate – not many countries in the world match this performance.

Second, changing consumer demographics indicate vast potential for growth in

consumption both qualitatively and quantitatively. India is one of the countrieshaving highest proportion (70%) of the population below 35 years of age (young

population). The BRIC report of the Goldman-Sachs, which predicted a bright

future for Brazil, Russia, India and China, mentioned Indian demographic

advantage as an important positive factor for India.



Third, technological factors played a major role. 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. Technological innovations

relating to increasing use of credit / debit cards, ATMs, direct debits and phone

banking has contributed to the growth of retail banking in India.

Fourth, the Treasury income of the banks, which had strengthened the bottom lines

of banks for the past few years, has been on the decline during the last two years.

In such a scenario, retail business provides a good vehicle of profit maximisation.

Considering the fact that retail’s share in impaired assets is far lower than the

overall bank loans and advances, retail loans have put comparatively less

provisioning burden on banks apart from diversifying their income streams.

Fifth, decline in interest rates have also contributed to the growth of retail credit by

generating the demand for such credit.

In this backdrop let me now come two specific domains of retail lending in India,

viz., (a) credit cards and (b) housing.

Credit Cards in India

While usage of cards by customers of banks in India has been in vogue since the

mid-1980s, it is only since the early 1990s that the market had witnessed a

quantum jump. The total number of cards issued by 42 banks and outstanding,

increased from 2.69 crore as on end December 2003 to 4.33 crore as on end

December 2004. The actual usage too has registered increases both in terms of

volume and value. Almost all the categories of banks issue credit cards. Credit

cards have found greater acceptance in terms of usage in the major cities of the

country, with the four major metropolitan cities accounting for the bulk of the

transactions.

In view of this ever increasing role of credit cards a Working Group was set up for

regulatory mechanism for cards. The terms of reference of the Working Group

were fairly broad and the Group was to look into the type of regulatory measures

that are to be introduced for plastic cards (credit, debit and smart cards) for

encouraging their growth in a safe, secure and efficient manner, as also to take care



of the best customer practices and grievances redressal mechanism for the card

users. The Reserve Bank has been receiving a number of complaints regarding

various undesirable practices by credit card issuing institutions and their agents.

Some of them are:

Unsolicited calls to members of the public by card issuing banks/ direct

selling agents pressurising them to apply for credit card.

Communicating misleading / wrong information regarding credit cards

regarding conditions for issue, amount of service charges/ waiver of fees,

gifts/prizes.

Sending credit cards to persons who have not applied for them / activating

unsolicited cards without the approval of the recipient.

Charging very high interest rates /service charges.

Lack of transparency in disclosing fees/charges/penalties. Non-disclosure of

detailed billing procedure.

The Working Group deliberated a number of major issues relating to: a) to

customer grievances and rights: a) Transparency and Disclosure, b) Customer

Rights Protection, and c) Code of Conduct. The Group recommended that the Most

Important Terms and Conditions should be highlighted and advertised and sent

separately to the prospective customer. These terms and conditions include various

issues relating to: a) fees and charges, (b) drawal limits, (c) billing, (d) default, (e)termination / revocation of card membership, (f) loss / theft / misuse of card, and

(g) disclosure.

These recommendations are being processed within the RBI and a set of guidelines

would be issued which are going to pave the path of a healthy growth in the

development of plastic money in India. The RBI is also considering bringing credit

card disputes within the ambit of the Banking Ombudsman scheme. While building

a regulatory oversight in this regard we need to ensure that neither does it reduce

the efficiency of the system nor does it hamper the credit card usage.

Housing Credit in India

In view of its backward and forward linkages with other sectors of the economy,

housing finance in developing countries is seen as a social good. In India, growth



of housing finance segment has accelerated in recent years. Several supporting

policy measures (like tax benefits) and the supervisory incentives instituted had

played a major role in this market.

Housing credit has increased substantially over last few years, but from a very low base. During the period 1993-2004, outstanding housing loans by scheduled

commercial banks and housing finance companies grew at a trend rate of 23 per

cent. The share of housing loans in total non-food credit of scheduled commercial

banks has increased from about 3 per cent in 1992-93 to about 7 per cent in 2003-

04. Recent data reveal that non-priority sector housing loans outstanding as on

February 18, 2005 were around Rs. 74 thousand crore, which is, however, only 8.0

per cent of the gross bank credit. As already pointed out, direct housing loans up to

Rs. 15 lakh irrespective of the location now qualify as priority sector lending;

housing loans are understood to form a large component of such lending. In

addition, housing credit is also being provided by housing finance companies,

which in turn are also receiving some bank finance.

Thus, from miniscule amounts, the exposure of the banking sector to housing loans

has gone up. Unlike many other countries, asset impairment on account of housing

finance constitutes a very small portion. However, with growing competition in the

housing finance market, there has been a growing concern over its likely impact on

the asset quality. While no immediate financial stability concerns exist, there is aneed to put in place appropriate risk management systems, strengthen internal

control procedures and also improve regulatory oversight in this area. Banks also

need to monitor their exposure and the credit quality. In a fiercely competitive

market, there may be some temptation to slacken the loan scrutiny procedures and

this needs to be severely checked.

Having delineated the broad contours of retail banking in India let me now come to

its opportunities and challenges.

Opportunities and Challenges of Retail Banking in India

Retail banking has immense opportunities in a growing economy like India. As the

growth story gets unfolded in India, retail banking is going to emerge a major

driver. How does the world view us? I have already referred to the BRIC Report



talking India as an economic superpower. A. T. Kearney, a global management

consulting firm, recently identified India as the 'second most attractive retail

destination' of 30 emergent markets.

The rise of the Indian middle class is an important contributory factor in thisregard. The percentage of middle to high income Indian households is expected to

continue rising. The younger population not only wields increasing purchasing

power, but as far as acquiring personal debt is concerned, they are perhaps more

comfortable than previous generations. Improving consumer purchasing power,

coupled with more liberal attitudes toward personal debt, is contributing to India's

retail banking segment.

The combination of the above factors promises substantial growth in the retail

sector, which at present is in the nascent stage. Due to bundling of services and

delivery channels, the areas of potential conflicts of interest tend to increase in

universal banks and financial conglomerates. Some of the key policy issues

relevant to the retail banking sector are: financial inclusion, responsible lending,

access to finance, long-term savings, financial capability, consumer protection,

regulation and financial crime prevention. What are the challenges for the industry

and its stakeholders?

First, retention of customers is going to be a major challenge. According to aresearch by Reichheld and Sasser in the Harvard Business Review, 5 per cent

increase in customer retention can increase profitability by 35 per cent in banking

business, 50 per cent in insurance and brokerage, and 125 per cent in the consumer

credit card market. Thus, banks need to emphasise retaining customers and

increasing market share.

Second, 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. Expressing concerns about the high growth

witnessed in the consumer credit segments the Reserve Bank has, as a temporary

measure, put in place risk containment measures and increased the risk weight

from 100 per cent to 125 per cent in the case of consumer credit including personal

loans and credit cards ( Mid-term Review of Annual Policy, 2004-05).



Third, information technology poses both opportunities and challenges. Even with

ATM machines 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. Illustratively, ensuring that all bank

products and services are available, at all times, and across the entire organization

is essential for today’s retails banks to generate revenues and remain competitive.

Besides, there are network management challenges, whereby keeping these

complex, distributed networks and applications operating properly in support of

business objectives becomes essential. Specific challenges include ensuring thataccount transaction applications run efficiently between the branch offices and data

centres.

Fourth, 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. The Reserve Bank has issued

details guidelines on application of KYC norms in November 2004.

Some Random Thoughts

How do we see the future of retail banking? What are the major attributes of the

shape of things to come in this sector? Let me share with you some of my random

thoughts.

First, customer service should be the be-all and end-all of retail banking. The other

day a document released by the British Bankers Association, entitled UK Retail

Banking Manifesto: addressing the challenges that lie ahead for the industry and

its stakeholders on September 29, 2004 came to my notice. This document

analysed 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 2005-06announced 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 thatthe banks comply with the banking codes. The codes would establish the banking

industry’s 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 forcomprehensive 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 havevarious 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 homemaker, the

retail shop keeper, the pensioners, self-employed and those employed in

unorganised sector - all need to get a place in the banks. It is in this backdrop that

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.

Conclusion

There is a need of constant innovation in retail banking. In bracing for tomorrow, a

paradigm shift in bank financing through innovative products and mechanisms

involving constant upgradation and revalidation of the banks’ internal systems and

processes is called for. Banks now need to use retail as a growth trigger. This

requires product development and differentiation, innovation and business process

reengineering, micro-planning, marketing, prudent pricing, customisation,



technological upgradation, 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 future would depend upon the capacity building of the banks to

meet the 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, in all

these customers’ interest is of paramount importance. The banking sector in India

is demonstrating this and I do hope they would continue to chart in this traded

path.

ANNEXURE

Lending and Mortgage Processing

Lately, lending and mortgage industry has been facing tremendous pressure to

maintain ever demanding customer service as the mortgage market reaches

saturation. With the advent of latest technologies, retail banking firms have been

constantly trying hard to enhance their lending and mortgage business processes by

eliminating existing inefficiencies in the process flow. The firms are today

focusing their efforts towards costs savings achieved by integration of independent business applications that interact with disparate sources of information in order to

build a single and seamless integrated solution.

In our endeavor to address these challenges faced by lending and mortgage firms,

NIIT Technologies has been providing effective technology solutions to retail

banking and financial institutions for over 10 years now. The spectrum of our

lending and mortgage services that we offer as part of our Banking and Financial

Service offerings encompasses the functional areas of loan origination, collateral

management and default management.

Our Expertise: Our team of dedicated software professionals, domain consultants

and technical architects has been instrumental in execution of custom software

development, modernization and maintenance of legacy systems for our retail

banking clients.

NIIT Technologies has developed strong expertise especially in the loan



origination and mortgage processing space that has helped us nurture long

relationships with some of the largest banks.

Credit Card Processing Solutions

Meeting the expectations of corporate customers' demands for credit card industry,

real time visibility of transactions, compliance with existing and upcomingregulations for cross border transactions, rising cost pressures because of

heterogeneous IT infrastructure and disparate IT landscapes are the burgeoning

areas of concern for the fast growing global cards industry. Though the transaction

volumes are set to grow continuously, a number of pressures and concerns will

depress revenues and in turn reduce profitability for Retail Banking Organisations.

We endeavor to provide full range of services at all levels to the Payment Systems

and Cards Market. This includes services such as migrating Business processes to

off-shore locations, re-engineering projects, Operational Support includingFeasibility, Research, Strategy, Planning, Implementation (including new

development and third party software implementation), Card Product Management,

Risk Management, Data Analytical, Compliance, Audit and Quality Assurance

(Six Sigma). Our Card Consulting Services has optimal mix of people to support

you at Business, Technologies and Operation level.

Payments

Payment industry is becoming more and more driven by the consumer demands

and the progress of the technology. IT in collaboration with the retail banking

firms is coming up with new types of payment gateways which are customer

friendly. The payment industry is also expected to become less and less profitable.

The evolving scenario's in the payments space is forcing banks to come up with

technological innovations beneficial to the customers.

We have domain expertise in emerging payments domain such as Utility Bill

Payments, Check21, Real Time Gross Settlement Systems, domestic Cash

Management and Electronic Bill Presentment and Payment (EBPP) Systems to

name a few. We offer the payment solution that should be scalable and designed to

meet the requirements of the banks due to the ever-changing payment landscape in

retail banking.

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