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Project Report on Retail Banking in India

MEANING OF RETAIL

Retail means sale of goods in small quantities, it is concerned with buying of goods in small quantities from the wholesaler and selling them in small quantities to the ultimate consumers as per their requirements. The person engaged in this trade is called the “retailer”. He acts as a link between the wholesaler and the customers. In retail trade goods are sold to the ultimate consumers for personal use and for the use of the business in small quantities only. The retailer does not specialize in a particular line or a particular product. Rather he maintains a large variety of goods. Generally, sales are limited to a local and on a small scale.

MEANING OF BANKING

Banking has come to occupy a pivotal position in a nation’s economy. According to the modern concept, banking is a business which not only deals with borrowings, lending and remittance of funds, but also an important instrument for fostering economic growth.

The Banking Regulation Act 1949, defines the term banking as “the accepting  for the purpose of  lending or investment of deposits of money from the public or otherwise and withdraw able by cheque, draft, order or otherwise.”  Thus, the essentials of banking are:

(1)   There should be acceptance of deposited.

(2)   Deposits should be from the public.

(3)   Deposits should be repayable on demand or expiry of a term or after a specified periods.

(4)   The purpose of deposits should be lending or investment.

“Bank” is an institution which deals in money and credit. It buys money from depositors and sell to the borrowers. It is body of persons whether    incorporated or not who carry on the business of banking. A bank may defined as a corporation or person which collects deposits from the public, repayable on demand and which supplies and facilitates all kinds of exchanges.

 

RETAIL BANKING

Retail banking means mobilizing deposit form individuals and providing loan facilities to them in the form of home loans, auto loans, credit cards, etc, is becoming popular. This used to be considered by the banks as a tough proposition because of the volume of operations involved. But during the last couple of years or so, banks seem to have realized that the only sustainable way to increase deposits is to look at small and middle class consumer retail deposit and not the price sensitive corporate depositors. With financial sector reforms gathering momentum, the banking system is facing increasing companies from non-banks and the capital market. More and more companies are tapping the capital market directly for finance. This is one of the main reasons for the banks to focus vigourously on the much ignored retail deposits. Another reason is the current liquidity the margins are 1 to 2 percent above the prime rate; in retail market they are 3to4 percent.

            It is reported that Indian retail market has the potential to be second only to the USA. National Readership Survey 5puts Indian households with monthly of over Rs. 5000 at 4.5 million. According to the survey, the category of households with annual income of Rs. 2 lakhs and above is growing at the rate of 30 per cent per annum. No winder, banks with vision and insight are trying to woo this market through a series of innovative additions to their products, services, technology and marketing methods. Fixed and unfixed Deposits, (cluster deposits which can be broken into smaller units to help meet depositors’ overdraft without breaking up entirely), centralised database for ‘any branch banking’ (whereby the customer can access his account in any of the branches irrespective of where the account is maintained), room services (whereby the customers are visited at their residences offices to enable them to open their accounts), automatic teller machines, tele banking network, extended banking time, courier pickup for cheques and documents, etc are some of the privileges extended to the customers by the banks in are eagerness to cultivate the retail market. In short, in the bold new world of retail banking the customer is crowned as king.

RETAIL BANKING-A COOL OASIS

To bankers struggling through the shifting sands of corporate credit, retail banking looks like a cool oasis. Corporate   Credit, retail banking looks like a cool oasis. Corporate customers rely less on commercial banks every day as other fund raising avenues present themselves. As this disintermediation takes place and competition shrinks margins, retail banking has gained an irresistible allure for banks because of its apparently higher margins and potential fir growth.

With their large branch networks, banks have secured sizeable deposits-23 percent of GDP. On the assets side, however, retail advances account for a mere seven per cent of total lending. The penetration of products like car loans or credit cards is very low. With very few focused multi-line banks, non banks are often significant players in retail lending, as HDFC is in house loans. Yet, many non-banks lack the minimum size to make the necessary investments and address the challenges of retail banking.

A large number of banks and non-banks have launched or relaunched retail products and are attempting to grow their share of the personal financial services market. Even the term lending institutions have decided that they need to go retail to raise funds. Many organization like ICICI are betting that a large part of their future growth will come from retail customers.

Retail banking is much more than as opportunity to addressing dwindling margins. It is an imperative to preserve profits and market positions. Customers now have many more personal financial options, a growing credit culture, a willingness to switch between financial services providers, and a demand for lower interest rates. As they witness these trends, banks realize that they cannot remain passive. The new private sector banks are making inroads in the markets they serve, while competition from non-banks is growing. In respect, older institutions need to revamp their distribution capabilities, customer management capabilities, operating culture, compensation system and operations processing.

 

WEB IMPACT ON BANKS RETAIL REVENUES:

For all those gurus who’ve been predicting that the net will end the business of said banks, here’s a shocker.

Even in the SILICON valley-driven USA, Internet is not expected to have a major impact in banks’ retail revenues.

The reason: the absence of a convenient alternative at present to using cash.

According to a report by moody’s Investors service, at least in the intermediate term, the internet is not expected to impact large US banks’ core profitability or competitive position.

This is despite the despite business being the simple-most important profit source for most American retail banks.

The core retail banking business of deposit taking will be sheltered form web-based competitors and margin shrinkage on this business.

Need for convenient access to physical locations coupled with the advantages of multiple delivery channels like branch, ATM, telephone and computers, consumers need to leave money in transactional accounts; customer inertia and the relatively limited cost savings available to consumers from net banking, are cited as the main factors supporting its view.

The moody’s report, however, cautions that other consumer business such as residential mortgages, auto loans and credit cards may be more vulnerable to web-based competitors.

However, most US banks have thin margins or low market shares in these businesses mitigating this impact, says the report made available to the Economic Times.

The rating agency is skeptical of banks ability to generate substantial incremental revenues from cross-selling financial products to existing customers via the net.
Banks have to maintain a comprehensive and effective web based capability to maintain their competitive position, cautions moody’s.

The need for customers to take frequent physical receipts, make convenient physical receipts, make convenient physical delivery of cheques using ATMs, inhibition towards paying ATM charges for using another bank’s ATM network by the consumer and time consuming, difficult and disruptive nature of switching accounts also contribute to the ‘stickiness’ of retail deposits.

With low bank fees for individual transactions and relatively small bank deposits, the opportunity cost in terms of interest income for customers is not material where the deposits are not large.

Banks offer convenience and choice and the web-based channels of banks have reported rapid growth in the number of customers by retaining current customers.

According to moody’s a survey indicated that 35 per cent of Internet banking customer disconnect because they don’t find it convenient.

Customers prefer to use a variety of channels to conduct their banking which is why it remains to be seen whether a business model based solely on internet banking will generate adequate returns and sustain long term competition against conventional banking systems.

The advent of the internet could, however have a powerful effect on banks acquisition strategies by creating uncertainty about the value of purchasing large branch networks, the study says. 

For some banks, however, the Internet could facilitate an increase in fee income by generating fees from Internet service arrangements like bill presentment and clearing.

However, if smart cards or stored value cards or other electronic cash substitute gain popularity, alternatives could become more attractive to customers.

On the other hand, banks might be able to reduce costs of servicing the retail customers by moving them over into a paperless environment.

Banks could introduce various incentives to the persuade customers to forego paper statements for the basic savings account and credit card, says moody’s. 

THE RULES HAVE CHANGED

As the 1900s come to their close and we look eagerly towards the new millennium, a revolution that will change the rules and every thing we have understood of the retail market, financial products and other services. Economic boundaries are disappearing, and the global village is a reality – where the retail customer will have a choice in a manner we may have never imagined.

Providers of retail products and services will battle for market and market share. It is battle that will be fought at different levels and the real winner will be the customer, who will benefit from increased competition through better products, distribution, technology, pricing, and post transaction service.

The quality and range of products will expand exponentially –convenience of usage, customization to individual needs, and a host of other user-friendly add-ons will create a whole new frontier of applications. Companies will have to innovate and continuously upgrade their products. Anticipation, listening and responding to your customers needs, will be the buzz-words of this thrust.

Distribution will be the next key benchmark of success. The customer will demand (and therefore the provider will have to respond) for greater convenience of access to the product or service and all this at the best cost of delivery. Re-defined methods, the use of technology – specifically the Internet-and realigned strategies will drive this important criterion of success. Constraints of location, timing, accessibility etc will all be history. No matter how brilliant the product you have, your distribution flexibility will be the customers’ selection parameter.

Again, quality of the product and responsive strategies for distribution will also have a link to price. Efficiencies on this front will be the next item on your report card. Through innovation in production and delivery and cost reduction strategies, the price to the customer will have to be at maximum benefit. The intelligent customer will be ruthless with any price distortions, which as a consequence of inefficiencies or market exploitation – his cost benefit analysis will not allow for these variables. 

Would you prefer a product, which (hopefully) is never expected to need post sale service or one which offers the best after sale service if required ? Clearly, the relationship with the customer starts with the transaction, does not and with it. Organisation we have to give equal importance to cost sale needs of customers as the pitch made prior to the sale.

Technology will perhaps be the single largest driver of this detail thrust. The entire strategy will evolve around the absolute ability of the organisation to be at the cutting as edge of technology. We will have to invest in technology far ahead of immediate needs and be able to anticipate the future direction at a pace we are perhaps not used to. Being able to keep abreast, but more importantly, being able to recognize the immense potential that technology provides at all stages in the retail chain will be of paramount importance. To leverage, exploit and link technology to your business will be the greatest challenge of the new millennium and I am convinced that the retail war will be won and lost on this one aspect, purely because technology increasingly we influence on the entire chain in a retail business cycle.

Above all these, I would list attitude towards customer as the single point basis on determining the winner of the race. Attitude to the customer will influence all the areas we have discussed and will ensure excellence in each one of them. It is an intangible, it is not prescribed in a manual nor is it a quantifiable item in the balance sheet, but an organizations attitude to the customer will be the basis determinant of success for any retail operation.

There are interesting and challenging times ahead – the future promises a lot but will also make extraordinary demands. The customer will be the most important aspect of your business and ultimately the winner of the retail war.

RISK INVOLVED IN RETAIL BUSINESS

There are of course, considerable risks in retail banking. They are :

(a)      Databases on credit history are large.

(b)      Collection mechanisms are poor.

(c)       Investments in technology are large.

(d)       Operating efficiency level needs to be very high.

(e)       Unlike corporate banking, retail banking involves a large number of small accounts.

(f)       Demands on processing capabilities are higher.

(g)       Retail segment is not something you can get into overnight.

(h)     The right systems and the right – architecture needs to be put in place first.

 

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