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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).

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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.

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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.

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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.

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What has contributed to this retail growth?

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.

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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.

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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

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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.

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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.

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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.

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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.

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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.

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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 2005-06 announced 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 that the 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.

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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 for comprehensive 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.

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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 have
various 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.

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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.

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