Indian Retail Banking

What Is Retail Banking?

Retail banking, also known as consumer banking or personal banking, is
banking that provides financial services to consumers as individuals not
businesses. Retail banking is a way for individual consumers to manage their
money, have access to credit, and deposit their money in a secure manner.
Services offered by retail banks include checking and savings
accounts, mortgages, personal loans, credit cards, and certificates of
deposit (CDs).

Introduction
Retail Banking is a banking service that is geared primarily towards individual
consumers. Retail banking is usually made available by commercial banks, as
well as smaller community banks. Retail banking is unique mass-market
banking where individual customers make use of local branches of larger
commercial banks. The term Retail Banking encompasses various financial
products viz., different types of deposit accounts, housing, 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.,. It caters to diverse
customer groups and offers a host of financial services, mostly to individuals. It
takes care of the diverse banking needs of an individual. Retail banking is a
system of providing soft loans to the general public like family loans, house
loans, personal loans, loans against property, car loans, auto loans etc. The
products are backed by world-class service standards and delivered to the
customers through the growing branch network, as well as through alternative
delivery channels like ATMs, Phone Banking, Net Banking and Mobile
Banking. Customers and small businesses get benefited from increased credit
access, speedy and objective credit decisions whereas lenders get benefited
from increased consistency and compliance. Today’s retail banking sector is
characterized by three basic characteristics: Multiple products (deposits, credit
cards, insurance, investments and securities);
Multiple channels of distribution (call centre, branch, Internet and kiosk); and
Multiple customer groups (consumer, small business, and corporate).
Overview
Retail Banking as a business model is adopted by all the banks in India on
account of multiple comfort factors for the banks viz. acquisition of a huge
customer base, multiple product offerings, better pricing and profitability, scope
for cross selling and up selling financial and beyond financial products for
increased per customer revenue and of course better risk proposition. With the
changing paradigm of technology as the driver for retail banking explosion,
banks are embracing different strategies by redesigning their conventional
business silos, reengineering existing products and inventing products, services,
channels, relationships to increase the share of the customers' wallet.
History of Indian Retail banking
Evolution of retail banking in India can be traced back to the entry of
foreign banks. The conventional banking business by Public Sector Banks
(PSBs) was done on a more generalized approach and there was no specific
demarcation as retail and non retail activities. Customer and Industry
segmentation was adopted within the overall business plan of banks. Offering
products and services based on specific consumer segments was not attempted
in a focused way. Foreign banks operating in India set the trend and in the late
1970 and early 1980s and came out with their consumer banking models with
hybrid liability and asset products specifically targeted at the personal segment.
Standard Chartered Bank and Grindlays Bank were the pioneers in introducing
these types of products. Citibank created waves in the early 1980s with their
credit card products and spurred the retail banking space. State Bank of India
and some public sector banks like Indian Overseas Bank, Bank of India, Bank
of Baroda and Andhra Bank developed and marketed asset products and card
products to cater to retail segment. In fact, Bank of Baroda and Andhra Bank
were two of the early players in the credit card business in the PSB space. The
entry of new generation private sector banks in early 1990s has created a new
approach to retail banking by banks. With the advantage of technology right
from start, these banks had a clear positioning for retail banking and
aggressively strategised for creating new markets for the retail segment. In
addition, the new generation private banks have posed a threat to the retail
business of foreign banks that have by now well defined business models for
retail banking. To add to the fuel, PSBs also with technology initiatives and
redefined business model for retail have aggressively entered the market space,
creating a retail war and capture their share of the pie in the liberalized
economic environment and the resultant opportunities in retail banking.
Theretail war is in full swing now with awin - win situation for all the
playersand the focus is on capturing and improving the market share and
customer base.

PRODUCTS AND SERVICES OFFERED BY RETAIL BANKS

 VARIOUS TYPES OF DEPOSITS:

1. Savings bank account:As the name suggests this type of account is
suitable for people who have a definite income and are looking to save
money. For example, the people who get salaries or the people who work as
laborers.This type of account can be opened with a minimum initial deposit
that varies from bank to bank. Money can be deposited at any time in this
account. Withdrawals can be made either by signing a withdrawal form or
by issuing a cheque or by using an ATM card. Normally banks put some
restriction on the number of withdrawals from this account. Interest is
allowed on the balance of deposit in the account.
2. Current deposit account : Big businessmen, companies, and institutions
such as schools, colleges, and hospitals have to make payment through their
bank accounts. No restrictions on number of withdrawals. Overdraft facility
is provided.  On this deposit, the bank does not pay any interest on the
balances. Rather the account holder pays a certain amount each year as an
operational charge.
3. Fixed deposit account: This type of deposit account allows the deposit to
be made of an amount for a specified period. This period of deposit may
range from 15 days to three years or more during which no withdrawal is
allowed. However, on request, the depositor can encash the amount before
its maturity. In that case, banks give lower interest than what was agreed
upon.
4. Recurring deposit account: While opening the account a person has to
agree to deposit a fixed amount once in a month for a certain period. The
total deposit along with the interest therein is payable on maturity. However,
the depositor can also be allowed to close the account before its maturity
and get back the money along with the interest till that period. The rate of
interest allowed on the deposits is higher than that on a savings bank
deposit but lower than the rate allowed on a fixed deposit for the same
period.
 LOANS:

A loan is when you receive money from a friend, bank or financial

institution in exchange for future repayment of the principal, plus interest.
The principal is the amount you borrowed, and the interest is the amount
charged for receiving the loan. Since lenders are taking a risk that you
may not repay the loan, they have to offset that risk by charging a fee -
known as interest. Loans typically are secured or unsecured. A secured
loan involves pledging an asset (such as a car, boat or house) as collateral
for the loan. If the borrower defaults, or doesn't pay back the loan, the
lender takes possession of the asset. An unsecured loan option is
preferred, but not as common. If the borrower doesn't pay back the
unsecured loan, the lender doesn't have the right to take anything in
return. Various types of loans offered by banks are personal loans,
consumer loans, housing loans, educational loans, etc.

 ADVANCES:

1. Cash credit:Cash Credit is an arrangement by which the customer is

allowed to borrow money up to a certain limit known as the ‘cash credit
limit’. Interest is charged only for the amount withdrawn and not for the
whole amount approved.
2. Overdraft: Overdraft is an arrangement between a banker and his
customer by which the latter is allowed to withdraw over and above his
credit balance in the current account up to an agreed limit. This is only a
temporary accommodation usually granted against security.
3. Discounting of bills of exchange :Banks grant advances to their customers
by discounting bills of exchange. The net amount, after deducting the
amount of interest/discount from the amount of the instalment, is credited
in the account of the customer .In this form of lending, the interest is
received by the banker in advance.

 ATM

ATM is designed to perform the most important function of bank. It is

operated by plastic card with its special features. The plastic card is
 replacing cheques, personal attendance of the customer, banking hour’s
restrictions and paper based verification. Service charges after the free
limit are charged as Rs.20 in most banks. The free transaction is limited
to 5 in same bank ATMs and 3 transactions in other bank ATMs in
majority of banks. But it is unlimited in case of current account holders in
HDFC bank and all account holders in KVB in their own ATMs.

 CREDIT/DEBIT CARDS:

The Credit Card holder is empowered to spend wherever and whenever

he wants with his Credit Card within the limits fixed by his bank. A
Credit card is a payment card issued to users as a system of payment. It
allows the cardholder to pay for goods and services based on the holder’s
promise to pay for them. The issuer of the card creates a revolving
account and grants a line of credit to the user from which the user can
borrow money for payment to a merchant to the user.

A Debit card (also known as a Check card or Bank card) that provides the
cardholder electronic access to his or her bank account(s) at a financial
institution. The card can be used instead of cash when making purchase
when the card is accepted. Debit cards usually also allow for install
withdrawal of cash, acting as the ATM card for withdrawing cash. The
debit card transactions are routed through Visa or Master card networks
in India and overseas rather than directly via the issuing bank.

 CORE BANKING SOLUTIONS:

The platform where communication technology and information
technology are merged to suit core needs of banking is known as Core
Banking Solutions. Here computer software is developed to perform core
operations of banking like recording of transactions, passbook
maintenance, and interest calculations on loans and deposits, customer
records, balance of payments and withdrawal are done.

 ELECTRONIC FUNDS TRANSFER:

Electronic Funds Transfer (EFT) is a system of transferring money from
one bank account directly to another without any paper money changing
hands. One of the most widely-used EFT programs is direct deposit,
through which payroll is deposited straight into an employee's bank
account. NEFT AND RTGS are examples of EFT.
  MOBILE BANKING:
Mobile banking (also known as M-Banking, e-banking, SMS Banking
etc.) is a term used for performing balance checks, account transactions,
payments etc. via a mobile device such as a mobile phone.

 INTERNET BANKING:
Internet banking (or E-banking) means any user with a personal computer
and browser can get connected to his banks website to perform any of the
virtual banking functions. Internet banking refers to extension of banking
services through the network of computers. In internet banking system
the bank has a centralized database that is web-enabled. All the services
that the bank has permitted on the internet are displayed in menu. Any
service can be selected and further interaction is dictated by the nature of
service.

Risk Generated By Retail Banking

Credit Risk:
Risk that a borrower will default on Debt. Main type of risk facing retail
banking.Credit risk is most simply defined as the potential that a bank borrower
or counterparty will fail to meet its obligations in accordance with agreed terms.
The goal of credit risk management is to maximise a bank's risk-adjusted rate of
return by maintaining credit risk exposure within acceptable parameters.

Interest Rate Risk:

Arrives when the bank offers specific rates to both loan recipients(borrowers)
and Depositors (Lenders).refers to the current or prospective risk to
the bank's capital and earnings arising from adverse movements in interest
rates that affect the bank's banking book positions. When interest rates change,
the present value and timing of future cash flows change.

Business Risk:
Failure of banks business strategy. Business risk is the risk arising from a bank's
long-term business strategy. It deals with a bank not being able to keep up with
changing competition dynamics, losing market share over time, and being
closed or acquired.

Operational Risk:
Failure in quality control.Operational risk in banking is the risk of loss that
stems from inadequate or failed internal systems, internal controls, procedures,
or policies due to employee errors, breaches, fraud, or any external event that
disrupts a financial institution's processes.For example customer/employee
fraud.

Reputational Risk:
Failure in managing Intangible asset . For instance, failure to deliver on
promises made to customers and regulators.

CREDIT RISK
• Retail lending comprises home mortgages, motor-cars loans, personal
loans, credit cards, etc. that are relatively smaller in value, spread across a
large number of customers and hence does not carry the burden of
‘concentration risk’. 
• Automated Credit Scoring Model is used to evaluate and approve loans
• It helps banks to avoid risky customers and assess whether a business
product is likely to be profitable by calculating the profit margin that
remains once operating and default costs have been subtracted from gross
revenues

Credit Scoring Model

 • A credit scoring model uses statistical techniques to convert information
about a credit applicant into numbers that are then combined to form a
score.
• The higher the score, the higher the probability of repayment by the
borrower and the lower the overall risk.

A credit score is influenced by five categories—payment history, types

ofcredit, new credit, current debt and length of credit. A person needs to pay
special attention to current debt and payment history

Parameters of credit score:

 Annual Gross Income
 Age
 Debt to income ratio: monthly debt payments / monthly income
 Major credit cards
 Current residence
 Length of service in present job

KEY TAKEAWAYS
 Credit scores determine a person’s ability to borrow money for
mortgages, auto loans, and even private loans for college.
 VantageScore and FICO are both popular credit-scoring models.
 Lenders use credit scoring in risk-based pricing in which the terms of a
loan, including the interest rate, offered to borrowers are based on the
probability of repayment.
 Credit rankings apply to companies (business) and governments and
credit scoring applies to individuals.

CRR AND SLR

What is CRR?
CRR, or cash reserve ratio, is a requirement set by the Reserve Bank of India
for domestic banks to determine the minimum amount of cash reserve they need
to keep to meet payment obligations.
Under CRR, a certain percentage of total bank deposits has to be kept in a
current account with the central bank, which means banks do not have access to
that money for any purpose other than defined.
Banks can’t lend that money to corporates or individual borrowers or use it for
investment purposes. Banks also don’t earn anything on the money held in that
account.

What is SLR?
SLR, or statutory liquidity ratio, determines the amount of money a bank needs
to invest in certain specified securities, which are predominantly securities
issued by the central government and state governments. RBI fixes this limit.
Unlike CRR, money invested under the SLR window earn some interests for
banks. But they can’t access this fund for lending purposes.

How CRR and SLR helps in managing liquidity

Liquidity problem arising primarily for two reasons either

1. Through sudden/unforeseen withdrawal deposite by customers.
2. Sudden withdrawn against loan commitments by customers.

To meet this sudden outflow of funds and consequently likely adverse impact
on liquidity. When the RBI decides to increase the Cash Reserve Ratio, the
amount of money that is available with the banks reduces. This is the RBI’s way
of controlling the excess flow of money in the economy. The cash balance that
is to be maintained by scheduled banks with the RBI should not be less than 4%
of the total NDTL, which is the Net Demand and Time Liabilities. This is done
on a fortnightly basis.
NDTL refers to the total demand and time liabilities (deposits) that are held by
the banks. It includes deposits of the general public and the balances held by the
bank with other banks. Demand deposits consist of all liabilities which the bank
needs to pay on demand like current deposits, demand drafts, balances in
overdue fixed deposits and demand liabilities portion of savings bank deposits.
Time deposits consist of deposits that need to be repaid on maturity and where
the depositor can’t withdraw money immediately. Instead, he is required to wait
for a certain time period to gain access to the funds. This includes fixed
deposits, time liabilities portion of savings bank deposits and staff security
deposits. The liabilities of a bank include call money market borrowings,
certificate of deposits and investment in deposits other banks.
In short, the higher the Cash Reserve Ratio, the lesser is the amount of money
available to banks for lending and investing.
NDTL = Demand and time liabilities (deposits) with public and other banks –
deposits with other banks (liabilities).
 How does CRR affects the economy
Cash Reserve Ratio (CRR) is one of the main components of the RBI’s
monetary policy, which is used to regulate the money supply, level of inflation
and liquidity in the country. The higher the CRR, the lower is the liquidity with
the banks and vice-versa.
During high levels of inflation, attempts are made to reduce the flow of money
in the economy. For this, RBI increases the CRR, lowering the loanable funds
available with the banks. This, in turn, slows down investment and reduces the
supply of money in the economy. As a result, the growth of the economy is
negatively impacted. However, this also helps bring down inflation.
On the other hand, when the RBI needs to pump funds into the system, it lowers
CRR. which increases the loanable funds with the banks. The banks thus extend
a large number of loans to businesses and industry for different investment
purposes. It also increases the overall supply of money in the economy. This
ultimately boosts the growth rate of the economy.
For banks, profits are made by lending. In pursuit of this goal, banks may lend
out to the max to make higher profits and have very less cash with them. An
unexpected rush by customers to withdraw their deposits will lead to banks
being unable to meet all the repayment needs. Therefore, CRR is vital to ensure
that there is always a certain fraction of all the deposits in every bank, kept safe
with them. RBI curbs these issues with the help of the CRR.
While ensuring liquidity against deposits is the prime function of the CRR, it
has an equally important role in controlling interest rates in the economy. The
RBI controls the short-term volatility in the interest rates by adjusting the
amount of liquidity available in the system. Too much availability of cash leads
to the fall in rates while the scarcity of it leads to a sudden rise in rates, both of
which are unhealthy for the economy.
Thus, as a depositor, it is good for you to know of the CRR prevailing in the
market that ensures that regardless of the performance of the bank, a certain
percentage of your cash is safe with the RBI.
How does SLR works
Every bank must have a specified portion of their Net Demand and Time
Liabilities (NDTL) in the form of cash, gold, or other liquid assets by the day’s
end. The ratio of these liquid assets to the demand and time liabilities is called
the Statutory Liquidity Ratio (SLR). The Reserve Bank of India has the
authority to increase this ratio by up to 40%. An increase in the ratio constricts
the ability of the bank to inject money into the economy.
RBI is also responsible for regulating the flow of money and stability of prices
to run the Indian economy. Statutory Liquidity Ratio is one of its many
monetary policies for the same. SLR (among other tools) is instrumental in
ensuring the solvency of the banks and cash flow in the economy.
 Impact of SLR on investors
The Statutory Liquidity Ratio acts as one of the reference rates when RBI has to
determine the base rate. Base rate is nothing but the minimum lending rate. No
bank can lend funds below this rate. This rate is fixed to ensure transparency
with respect to borrowing and lending in the credit market. The Base Rate also
helps the banks to cut down on their cost of lending to be able to extend
affordable loans.
When RBI imposes a reserve requirement, it ensures that a certain portion of the
deposits are safe and are always available for customers to redeem. However,
this condition also restricts the bank’s lending capacity. In order to keep the
demand in control, the bank will have to increase its lending rates.
What happens if not maintain
In India, every bank – scheduled commercial bank, state cooperative bank,
central cooperative banks, and primary co-operative banks – is required to
maintain the SLR as per the RBI guidelines. For computation and maintenance
of SLR, banks have to report their latest net demand and time liabilities to RBI
every fortnight (Friday).
If any commercial bank fails to maintain the SLR, RBI will levy a 3% penalty
annually over the bank rate. Defaulting on the next working day too will lead to
a 5% fine. This will ensure that commercial banks do not fail to have ready cash
available when customers demand them.

HOW BANKS GENERATE INCOME

Banks basically make money by lending money at interest rates higher than the
cost of the money they borrow.  The age old fashioned “retail banking” which is
nothing but taking deposits and lending out as loans in itself is a big Business in
the banking industry.  Banks cannot make money until and unless they get
money from customers as deposits or lending to other banks at high interest
rates etc.  The interest that the banks collect on loans is more than the interest
they pay to customers with savings accounts etc., and the difference is the profit
for the banks. 

EXAMPLE
Suppose person “A” has a savings account fund of Rs. 10,000/-  that yields an
interest of 3% (APR)  the bank uses this amount of mortgage at 5.50% (APR)
student loan at 6.62% APR and credit card at 16.99% APR (APR is Annual
Percentage Rate).  The bank “A” an interest every year but at the same time the
banks earn hundreds and thousands more from the interest on the loan on ‘A’s
money.  This vary with millions of customers the banks earn manifold.Banks
making money is the above is one way but there are a myriad ways they make
money.  To name a few we shall discuss below.

Banks collect money as fees from the customer:

1)  Charging fees on certain products made available to customers in one such
lucrative Business to the banks with the tag “maintenance fee’s banks charge
fee for checking accounts, credit cards etc. Though maintaining the above
accounts costs a paltry sum to the banks, they charge the customers quite high.

2)  Banks are even ready to slap charges as penalty on customers for paying
credit card at 3.30 p.m. or slight charge in the cheque amount, or like overdrafts
fee.  All

these squeeze out the customer but the banks have a gala time by making money
out of these penalties.

3) Third such money-making operand by the banks is collecting INR 300-500

for issuing a new ATM card for loss is the old one or for any other reason.

4)  Banks collect commissions for making trades.

5)  When a customer applies for a loan, banks charge a percentage of the loan
with different heads like processing charges, application charges etc.
The interest the banks collect on a loan and in debt securities they own are paid
at low interest on deposits, CD’s and short-term borrowing. The difference in
interest is called “spread “or the net interest income. When the net interest
income is divided by earning assets it is called Net interest margin (NIM).

The ‘core deposits’ of the banks are the funds from deposits.  The account
holders entrust to the banks for their safety and only for small interest.

Credit card lending by some major banks is another lucrative business to make
money.  Rates charged for default on credit payment, interchange fee charged to
merchants for accepting the card and entering into transaction, currency
exchange, over the limit fees, fees for the card user and worst of all is the high-
end interest rates on the balances that the credit card users carry from one month
to the next.

The overall fees charges by banks are quite annoying and infuriating to the
customers.

The interest rates on lending and fees collected in the bargain on dues a
customer’s returns which are again eaten away by inflation.

So, on one hand saving money as fixed deposits or in savings bank are not so
fetching to the customers.  So just having small accounts as FD’s and in savings
other forms should be allocated to the banks.  Customers seeking to yield good
returns must expose themselves to equities etc.

The price change over time and this is inflation.  It’s a scary word for
investors.  Inflation impacts every individual who saves.  If an individual keeps
in savings the amount saved does not grow in pace with inflation. If the banks
give 0.50% interest and the cost of goods rises at 2.0% then it means a loss to
the customer.

Opportunity for retail banking

 Rise in middle to high-income group.

 Younger population is more comfortable in taking debt

  Liberal attitude towards personal debt

 Policies like Financial inclusion – Individuals have access to useful

financial products and services (Savings, credit, insurance)

 Responsible lending - Ensuring lenders only offer you a loan if it suits

your needs and circumstances.

STRATEGIES FOR INCREASING RETAIL

BANKING BUSINESS
Constant product innovation to match the requirements of the customer
segments

The customer database available with the banks is the best source of their
demographic and financial information and can be used by the banks for
targeting certain customer segments for new or modified product. The banks
should come out with new products in the area of securities, mutual funds and
insurance.

Quality service and quickness in delivery

As most of the banks are offering retail products of similar nature, the
customers can easily switchover to the one which offers better service at
comparatively lower costs. The quality of service that banks offer and the
experience that clients have, matter the most. Hence, to retain the customers,
banks have to come out with competitive products satisfying the desires of the
customers at the click of a button.

Introduction of new delivery channels

Retail customers like to interface with their bank through multiple channels.

Therefore, banks should try to give high quality service across all service
channels like branches, Internet, ATMs, etc.

Infrastructure outsourcing
This will help in lowering the cost of service channels combined with quality
and quickness

Detailed market research

Banks may go for detailed market research, which will help them in knowing
what their competitors are offering to their clients. This will enable them to
have an edge over their competitors and increase their share in retail banking
pie by offering better products and services.

Cross-selling of products

PSBs have an added advantage of having a wide network of branches, which

gives them an opportunity to sell third-party products through these branches.

Business process outsourcing

Outsourcing of requirements would not only save cost and time but would help
the banks in concentrating on the core business area. Banks can devote more
time for marketing, customer service and brand building. For example,
Management of ATMs can be outsourced. This will save the banks from dealing
with the intricacies of technology.

Tie-up arrangements

PSBs with regional concentration can reap the benefit of reaching customers
across the country by entering into strategic alliance with other such banks with
intensive presence in other regions. In the present regime of falling interest and
stiff competition, banks are aware that it is finally the retail banking which will
enable them to hold the head above water. Hence, banks should make all out
efforts to boost the retail banking by recognizing the needs of the customers.