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Retail Banking – Future for Banks

Indian banking system has been progressing rapidly over the last four decades and today it is one of the strongest banking system in the world with over 2.70 lakh delivery channels (Branches 1.10 lakh and 1.60 lakh ATMs) catering to the needs of 500 million client base spread across the country. Compared to many developed nations, the size of Indian Banking is gigantic with a total business of Rs.146 lakh crore (Rs.83 lakh crore deposits and Rs.63 lakh crore advances) and has been growing steadily with double digit growth rate over the years. The ownership of liabilities and assets of the banks in India as on 31.03.2013 are furnished in table no.1.

Table no.1 – Ownership of Liabilities (Deposits) & Assets (Advances)

No Sector











Household (Individuals/Trusts/Clubs/ Associations)




Foreign (including NRIs)





Source: Basic Statistical Report-2013 & RBI – Deployment of Credit reports

Traditionally, the Household sector has been playing a lead role in the landscape of bank deposits followed by Corporate and Government sectors. The post reforms period has witnessed sharp decline in the share of house-hold sector under deposits from 71.60% in 1990 to 59.60% in 2013 due to spurt in consumption levels as well as availability of other investment options. While the share of house-hold sector in total deposits is coming down over the years, the share of retail credit is improved marginally from 14.49% in 2000 to 18.43% in 2013 which is evident from table no.2.

Table no.2 – Share of Household sector in Bank Deposits & Credit



Retail Credit













































Source: Basic Statistical Reports & Sectoral Deployment of Credit reports

Of late, Indian banking space has been witnessing intense competition with the entry of new Private Sector Banks as well as Non Banking Financial Institutions with aggressive marketing initiatives besides concentrated efforts by the existing players. Further, the expectations of the stakeholders on the rise – Depositors look for higher interest rates, Borrowers demand for lower interest rates, Shareholders look for wealth maximization by way of higher dividends & capital appreciation, employees expect improvement in pay scales and welfare activities. In order to add value to all the stake-holders, banks are necessitated to focus attention to improve profitability. Today, the survival and success of the banks crucially depend on sustainability of Net Interest Margin (NIM), which is possible only through judicious deposit mix (CASA) coupled with expansion of qualitative credit portfolio.

Hitherto, government and corporate sectors were the major source for the banks to mobilize low cost deposits but now the chances are limited due to budgetary constraints together with the increased appetite of the corporates to place their surplus funds in short term deposits or certificate of deposits for higher returns. Further, it is evident from RBI reports that the share of low cost deposits has comedown from 39.95% in 2006 to 33% in 2013. Added to this the yield on advances is under stress on account of competitive interest rates coupled with rise in Non Performing Assets as well as restructured assets over the years. This has put pressure on NIM and profitability and thus the banks are forced to pay focused attention on Retail Banking.

Retail Bankingin India is not a new phenomenon and it has always been prevalent in various forms but has attained utmost importance and gaining momentum during the recent years. It is basically a mass banking with focus on Individual customers rather than Government and Corporate sectors, both on liabilities and assets side of the balance sheet. While Savings, Current and Fixed deposits, with certain flavours, remain the prominent products on the liability side; the assets side includes products like Housing, Education, Vehicle, Clean/Personal loans. Further, banks are also extending ancillary services such as Credit/Debit cards, Depository services, Insurance products, Mutual funds etc. This segment is of heterogeneous nature as it comprises of various sets of people like Professionals, Employees, Entrepreneurs, Farmers, Workers, Students etc. It is appropriate to call Retail Banking as a Life Cycle Product package for individuals to meet all their banking needs right from childhood to silver-line age.

Retail Clientele – Demographic Trends

Gen (X) – At present,majority ofbank’s clientele belonging to this segment were born during 1960s.  They are approaching their twilight years and due for retirement in couple of years.  Slightly more forward than the senior generation, this generation prefers a more friendly rapport, status recognition and personal interaction with their bankers, rather than a normal approach.  This group looks for warmth in their business relations, catering to their position and personality, but do not dwell on long conversations.  Just like the smart phone they use, they like to be treated as smart. Today, Gen-X is the most profitable segment for the banks as they are earning members and financially disciplined providing opportunities for banks to market array of products/services.

Gen (Y) – They are presently in the age group 30 to 40 and this segment comprises the highest percentage of country’s workforce. Normally, they are not interested to step into bank premises and would like to move with cards and hassle free online banking. Competence is an absolute necessity and they prefer to gather as much information in little possible time. By and large they do not need personal interactions; rather they crave choices that give them the power to arrive at their own decisions. Gen-Y customers, who were brought up by Gen-X, are quite different from their parents in terms of spending patterns. Gen-Y prefers to maintain a certain lifestyle, laying the foundation for several opportunities in catering to their smaller, personal needs such as loans for luxury purchases or vacations. They live in the moment and want to spend for the moment. Gen-Y is more service sensitive and do not hesitate to change the service provider. In the changed scenario, the Gen-Y play important role in retail banking arena and banks need to nurture this segment with utmost care and caution.

Gen (S) – A generation that is in 60s and above, called as Silver-line segment. Today, they constitute a minor percentage of retail banking customers in number but has substantial share in bank’s business. Normally, this segment represents traditional in their behaviour and they have a conservative approach towards business, which requires the banking community to serve them respectfully. The seniors have dealt with business a certain way and are not about to change their beliefs. Majority of them prefer to visit the bank for their transactions. Thus, it is necessary for the banks to please them first and handle the nitty-gritty’s of finances later.

Gen (U)-Today, the banking has become imperative to all house-holds across the country irrespective of their social, education and financial status, and expects minimum financial services from the banking system. The recent Financial Inclusion initiatives of the Government to cover all households under Prime Minister Jan Dhan Yojana (PMJDY) either through Branch banking or Business Correspondent is likely to transform the entire banking landscape in a big way. The envisaged client expansion will lead to increase inflow of savings in to the banking system and creates demand for retail and personal banking services. As per the reports, around Rs.3 lakh crore government subsidies and welfare amounts will be routed through Gen-U accounts. This segment is likely to transform the banking space and major chunk of prospective customers are expected from unbanked/under banked population.

Retail Banking – Key Drivers


While GDP growth of many developed and developing nations are either flat or negative in the recent years, India’s GDP has been showing reasonable good performance of above 5% is an important driver for Retail Banking in India.


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 young population i.e. below 35 years of age. Improving consumer purchasing power, coupled with more liberal attitude towards personal debt, is contributing to India’s retail banking segment.


The declining dependency ratio and increased urban middle class are the triggers for the increased flow of savings to the banking system and a demand for retail and personal banking services.


Technological innovations in the areas of online banking, usage of cards (Credit / Debit / Gift) and alternate delivery channels viz., ATMs, Mobile and Internet   banking, has contributed to the growth of retail banking to a greater extent.


The distinct features of Indian population viz., Educated, Employable and Bankable, clearly signifies the abundant scope for retail banking in the ensuing years.


The rise of the Indian middle class coupled with more liberal attitude towards spending and personal debt is one of the major reasons for increased retail lending in India.


Decline in interest rates especially in corporate segment have also contributed to the growth of retail credit by generating the demand for such credit. Retail lending enables the banks to improve interest spread as the lending rates are normally higher than other segments.


Credit risk is well diversified as the retail portfolio spread into various sectors and average loan per account is relatively small. Further, there is less volatility in demand and credit cycle compared to large corporate borrowers. Thus, the share of impaired assets in retail segment is far lower than other sectors which save the banks from provisioning burden.


Increased urbanization, rising income levels, adoption of “Borrow & Buy” culture etc., are also the important factors that led to Retail Credit boom in India. The key drivers as stated above are paving the way to lay a strong foundation to augment banking business especially in the areas of retail/personal banking services like housing loans, wealth management, insurance, asset management etc.

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.

Retail Banking – Issues

  •  Adherence of Know Your Customer (KYC) norms is one of the important issues associated with this segment which needs special attention. Banks need to exercise caution while inviting the prospective customers into bank’s fold. However, the recently introduced e-KYC will address the issue to a greater extent especially with regard to small value accounts.
  • Despite adoption of technology in retail banking space, the maintenance costs of this segment are still higher comparative to corporate segment as it warrants constant follow-up.
  • Providing uninterrupted cost effective value added services to the customers is another major challenge for the banks.
  • Today, there are many players in the market to extend retail banking services and at the same time the discerning demands of customers is on the rise, which is making the banks to walk on the tight rope with utmost care and caution.

Retail Banking Vs Retail Credit

In yester years, banks used to offer core (vanilla) products such as Current, Savings and Fixed Deposit accounts to suit the immediate requirement of the customers. As the core products in the banking sector are rather homogeneous, auxiliary services are levers for differentiation against competitors. Today, banks are offering the products and services in a bundle which include Savings, Insurance and Debit Card. It helps the banks to reduce acquisition and distribution cost to a greater extent. As the various products are sold in one go instead of different steps, synergy effects can be exploited and personnel and transaction costs can be saved. The empirical studies show that the inclination to change banks by the customers decreases when he/she buy more products from the bank.

The retail banking and retail credit are often used as a synonym; in fact, the retail credit is just a part of retail banking. The contribution of retail loans to GDP stands merely at 6% in India where as it is 15% in China and 24% in Thailand which speaks the opportunities that are available to the Indian Banks.

The major segments in retail credit portfolio include Housing loans, Vehicle loans, Personal loans, Consumer durable loans, Loans against deposits etc. Until recently, retail segment was largely a private sector domain. In the earlier years loans against deposits was the major component of retail lending followed by Housing Loans and Personal loans. However, sea change is observed in the recent years, thanks to Private Sector Banks for their proactive approach in lending to retail segment which has forced the Public Sector Banks to enter into to this area in a big way since last one decade. Increased urbanization, rising income levels, adoption of “Borrow & Buy” concept etc., are the triggers that led to Retail Credit boom in India.


Table no.3 – Retail Credit Deployment (SCBs)

Major group-wise (Billion)

 Major Retail segments





1. Housing





2. Vehicle Loans





3. Deposit Loans including loans against NRE/FCNR deposits





4. Education





5. Credit Card Outstanding





6. Consumer Durables





7. Advances to individuals against share, bonds, etc.





8. Other Personal Loans





Retail Loans (1 to 8)





Non Food Credit





% Retail loans to Non Food Credit





Source: RBI Reports


Table no.3 clearly denotes that the retail credit portfolio of the banks has grown multi-fold from Rs.1786 billion in 2005 to Rs.10367 billion in 2014. Housing finance expanded rapidly because of investment demand and acute housing shortage. The penetration level in housing in India is still one of the lowest in the world. At the same time the share of retail advances to total non-food credit also increased marginally from 17.86% to 18.63% during the corresponding period which demonstrates the fact that banks are showing keen interest on this segment on account of high yield coupled with low delinquency ratio which is evident from table no.4.


Table no.4 – Sector-wise credit deployment & Gross NPA (%)



Share of credit (%)

Gross NPA (%)





















Source: Finance Stability Report – June 2014


Retail Banking & Technology

Undoubtedly, banks have made great technological advancement in implementation of Core Banking and the networked platform has enabled the banks to provide Triple “A” services viz., Any Time, Any Branch and Any Where to the customers. Core banking has changed the face of banking by offering value added services through alternate delivery channels like ATM, Internet, Mobile, Call Centre and Point of Sale (POS) terminals. ATM usage has exploded in the recent years as it is most cost effective way to reach the masses. The high penetration of mobile services in the country coupled with the initiatives of National Payments Corporation of India (NPCI) in introducing mobile money transfer mechanisms will see the rise in mobile banking operations in the ensuing years which is definitely be a win-win situation to customers, banks and service providers. However, the emerging scenario necessitates the banks to have robust technology platform to handle the unprecedented transaction volume emanating from various alternate delivery channels. These channels has potential source for other income besides cash dispensation services which is the need of the hour.

Way forward

Today, the banking has become imperative and all the house-holds across the country irrespective of their social and economic status expect financial services from the banking system. The spread of education and employment opportunities coupled with financial inclusion initiatives may usher banking habit among the masses and may likely to add another 750 million clientele in the next two decades. The account base of Indian Banking industry is likely to touch 1250 million within couple of years and major chunk of prospective customers are expected from unbanked and under banked population whose awareness towards bank products/services is relatively low to that of their urban/metro counterparts. It warrants strategic initiatives from Government and banks inviting investment in customer education through financial literacy awareness programs.

In order to provide banking services to every citizen of the country, it is imminent to increase the delivery channels manifold in the ensuing years. Further, the increasing income levels and demographic trends necessitate the banks to revisit the existing business models and adoption Next Gen Consumer Models for sustained growth rate. The adoption of new business models warrants realignment of human resources besides structural adjustments. Strategic alliances/partnerships with national and international players will be the need of the hour for business development and profit maximization. Thus, Retail Banking is the lifeline for Indian Banking industry.

The future of banking is once again under transition with newer technological innovations invading regular lives. Retail banking is gradually shifting online and customers will probably take up self-service as way to optimize their banking experience. The number of branches may become irrelevant, as digital and web-based interactions take precedence. With the advent of the biometric system for identification, personal digital devices may play a significant role in authorization.

Retail Banking is going to play a significant role in Indian Banking landscape and banksnow need to use retail banking as a growth trigger. However, handling burgeoning Gen-Y & Gen-U segments and meeting their diversified needs is really a mammoth challenge for banks. Nevertheless, it is an opportunity for Banks to improve business volumes and enhance the value of all stakeholders by adopting the strategy “High Volume – Low Margin – High Profit” leveraging Technology and Human Capital to remain competitive in the present fierce dynamic environment.


NSN Reddy

Asst General Manager

Andhra Bank

Vijayawada Zonal Office

[email protected]

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