The 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 evolving macroeconomic 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?
Retail banking is, however, quite broad in nature
- it refers to the dealing of commercial banks with individual customers, both
on liabilities and assets sides of the balance sheet. Fixed, current / savings
accounts on the liabilities side; and mortgages, loans (e.g., personal, housing,
auto, and educational) on the assets side, are the more important of the products
offered by banks. Related ancillary services include credit cards, or depository
services. 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).
What is the nature of retail banking? In a recent
book, retail banking has been described as "hotter than vindaloo".
Considering the fact that vindaloo, the Indian-English innovative curry
available in umpteen numbers of restaurants of London, is indeed very hot and
spicy, it seems that retail banking is perceived to be the in-thing in today’s
world of banking.
Retail banking in India
Retail banking in India is not a new phenomenon.
It has always been prevalent in India in various forms. For the last few years
it has become synonymous with mainstream banking for many banks.
The typical products offered in the Indian retail
banking segment are housing loans, consumption loans for purchase of durables,
auto loans, credit cards and educational loans. The loans are marketed under
attractive brand names to differentiate the products offered by different banks.
As the Report on Trend and Progress of India, 2003-04 has shown that
the loan values of these retail lending typically range between Rs.20,000 to
Rs.100 lakh. The loans are generally for duration of five to seven years with
housing loans granted for a longer duration of 15 years. Credit card is another
rapidly growing sub-segment of this product group.
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 make ample 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 countries having 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 a need 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 this regard. 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 a research 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.