RETAIL BANKING IN INDIA 

 

BANKING

A banker or bank is a financial institution whose primary activity is to act as a payment agent for customers and to borrow and lend money. It is an institution for receiving, keeping, and lending money.

CUSTOMER PERCEPTION

Customer Perception is an important component of an organization’s relationship with their customers. Customer satisfaction is a mental state which results from the customer’s comparison of expectations prior to a purchase with performance perception after a purchase. Strong customer service helps an organization to reach upto customers expectations.

Customer Perception on Service: Customer Service is the service provided in support of a company’s core products. Customer Service most often includes answering questions, taking orders, dealing with billing issues, handling complaints, and perhaps scheduling maintenance or repairs. Customer Service can occur on site, or it can occur over the phone or via the internet. Many companies operate customer service call centers, often staffed around the clock. Typically there is no charge for customer service. Quality customer service is essential to building customer relationships. It should not, however, be confused with the services provided for sale by a company. Services tend to be more intangible than manufactured products. There is a growing market for services and increasing dominance of services in economies worldwide. There are generally two types of customer expectations. The highest can be termed as desired service:  the level of service the customer hopes to receive. The threshold level of acceptable service which the customers will accept is adequate service. Yet there is hard evidence that consumers perceive lower quality of service overall and are less satisfied. Possible reasons may be:

Ø  With more companies offering tiered service based on the calculated profitability of different market segments, many customers are in fact getting less service than they have in past.

Ø  Increasing use by companies of self-service and technology-based service is perceived as less service because no human interaction or human personalization is provided.

Ø  Technology-based services (Automated Voice Systems, Internet-Based Services, and Technology Kiosks) are hard to implement, and there are many failures and poorly designed systems in place.

Ø  Customer expectations are higher because of the excellent service they receive from some companies. Thus they expect the same from all and are frequently disappointed.

Ø  Organizations have cut costs to the extent that they are too lean and are too understaffed to provide quality service.

Ø  The intensely competitive job market results in less skilled people working in frontline service jobs; talented workers soon get promoted or leave for better opportunities.

Ø  Many companies give lip service to customer focus and service quality; but they fail to provide the training, compensation, and support needed to actually deliver quality service.

Ø  Delivering consistent, high-quality service is not easy, yet many companies promise it.

The central focus of the gaps model is the customer gap, the difference between customer expectations and perceptions.

The following four provider gaps, shown below are the underlying causes behind the customer gap:

Gap 1: Not knowing what customers expect.

Gap 2: Not selecting the right service designs and standards.

Gap 3: Not delivering to service standards.

Gap 4: Not matching performance to promises.

CONCEPT OF RETAIL BANKING

The retail banking encompasses deposit and assets linked products as well as other financial services offered to individual for personal consumption. Generally, the pure retail banking is conceived to be the provision of mass banking products and services to private individuals as opposed to wholesale banking which focuses on corporate clients. Over the years, the concept of retail banking has been expanded to include in many cases the services provided to small and medium sized businesses. Some banks in Europe even include their private banking business i.e. services to high net worth individuals in their retail banking portfolio.

The concept of Retail banking is not new to banks. It is only from past few years that it is being viewed as an attractive market segment, which offers opportunities for growth with profits. The diversified portfolio characteristic of retail banking gives better comfort and spreads the essence of retail banking in individual customers. Though the term retail banking and retail lending are often used synonymously, yet the later is just one side of retail banking. In retail banking, all the banking needs of individual customers are taken care of in an integrated manner.

Today’s retail banking sector is characterized by three basic characteristics

Ø  Multiple products (deposits, credit cards, insurance, investments and securities).

Ø  Multiple channels of distribution (call centre, branch and internet).

Ø  Multiple customer groups (consumer, small business, and corporate).

IMPACT OF RETAIL BANKING:

The major impact of retail Banking is that, the customers have become the Emperors – the fulcrum of all Banking activities, both on the asset side and the liabilities front. The hitherto sellers market has transformed into buyers market the customers have multiple of choices before them now for cherry picking products and services, which suit their lifestyles and tastes and financial requirements as well. Banks now go to their customers more often than the customers go to their banks.

Ø  Retail Banking is transforming banks into one stop financial super markets.

Ø  The share of retail loans is fast increasing in the loan books of banks.

Ø  Banks can foster lasting business relationship with customers and retain the existing customers and attract new ones. There is a rise in their service as well.

Ø  Banks can cut costs and achieve economies of scale and improve their revenues and profits by robust growth in retail business. Reduction in costs offers a win win situation both for banks and the customers.

Ø  It has affected the interface of banking system through different delivery mechanism

Ø  It is not that banks are sharing the same pie of retail business; the pie itself is growing exponentially. Retail Banking has fuelled a considerable quantum of purchasing power through a slew of retail products.

Ø  Banks can diversify risks in their credit portfolio and contain the menace of NPAs. Retail banking allows bank to cross sell other products and services as it is far easier to sell other products to the same customer rather than search for absolutely new ones. Cross selling is one of the best avenues for relationship.

Ø  Banking and retention of customers. Banks can thus increase their business volume and improve their bottom-line substantially.

Ø  Re-engineering of business with sophisticated technology based products will lead to business creation, reduction in transaction costs and enhancement in efficiency of operations.

PROBLEMS FACED IN RETAIL BANKING

Ø  Retail Banking has all its attendant risks. It is highly sensitive .Banks got to move cautiously. It is easy to enter, but difficult to get out. A systematic and a calculated approach is the pre-requisite for success in the long run.

Ø  Retail Banking is being introduced with the concept of serving customer with better and innovative products with the latest technology and easy availability. It becomes so popular and widely acceptable that more and more customers had started to use it. Now it becomes a mass product. Customer database have tremendously increased and it becomes difficult to manage them.

Ø  To match the customer inflows and current customer requirements as well as service standards, banks have to set up more branches, distribution channels and new trained staff as well as improvement in back office operations also in very near future. This itself a time bounded problem and banks have to do it as early as possible.

Ø  Today’s competitive market customer has more than one option for his retail banking needs. Every bank is providing more or less similar kind of products. So an unsatisfied customer can easily switch over to another competitor’s bank. So banks need to be very careful in handling the customers. They have to continually improve their service standards.

Ø  Retail Banking is so wide accepted by the customer as well as very aggressively promoted by the bankers that if the bankers do not take adequate care in distributing and recovering advances, there are chances of increasing in NPAs in coming feature. And that would be an alarming situation.

BANKING INDUSTRY PROFILE

The Banking Regulation Act 1949 defines banking as accepting the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise and withdrawal by cheque, draft, and order otherwise. The essential function of a bank is to provide services related to the storing of value and the extending credit. The evolution of banking dates back to the earliest writing, and continues in the present where a bank is a financial institution that provides banking and other financial services. Currently the term bank is generally understood an institution that holds a banking license. Banking licenses are granted by financial supervision authorities and provide rights to conduct the most fundamental banking services such as accepting deposits and making loans. There are also financial institutions that provide certain banking services without meeting the legal definition of a bank, a so called non-bank. Banks are a subset of the financial services industry. The word “Bank” is derived from the Italian word ‘banco’ signifying a bench, which was erected in the market place, where it was customary to exchange money; the first bench having been established in Italy 808 A.D. The basic functions of banks are to accept deposits, lend money and act as collecting and paying agents. The Bank of Barcelona in Spain (1401) was perhaps the first institution that could be called a bank in this sense. The terms bankrupt and "broke" are similarly derived from banca rotta, which refers to an out of business bank, having its bench physically broken. Money lenders in Northern Italy originally did business in open areas, or big open rooms, with each lender working from his own bench or table. Typically, a bank generates profits from transaction fees on financial services or the interest spread on resources it holds in trust for clients while paying them interest on the asset.

HISTORY OF THE INDIAN BANKING SECTOR

Banking in India has its origin as early as the Vedic period. It is believed that the transition from money lending to banking must have occurred even before Manu, the great Hindu Jurist, who has devoted a section of his work to deposits and advances and laid down rules relating to rates of interest. During the Mughal period, the indigenous bankers played a very important role in lending money and financing foreign trade and commerce. During the days of the East India Company, it was the turn of the agency houses to carry on the banking business. The General Bank of India was the first Joint Stock Bank to be established in the year 1786. The others which followed were the Bank of Hindustan and the Bengal Bank.

The Bank of Hindustan is reported to have continued till 1906 while the other two failed in the meantime. In the first half of the 19^th  century the East India Company established three banks; the Bank of Bengal in 1809, the Bank of Bombay in 1840 and the Bank of Madras in 1843. These three banks also known as Presidency Banks were independent units and functioned well. These three banks were amalgamated in 1920 and a new bank, the Imperial Bank of India was established on 27^th January 1921.

Foreign banks too started to arrive, particularly in Calcutta , in the 1860s. The Comptoire d’Escompte de Paris opened a branch in Calcutta in 1860, and another in Bombay in 1862; branches in Madras and Pondicherry, then a French colony, followed. Calcutta was the most active trading port in India, mainly due to the trade of the British Empire, and so became a banking center.

With the passing of the State Bank of India Act in 1955 the undertaking of the Imperial Bank of India was taken over by the newly constituted State Bank of India.

The Reserve Bank which is the Central Bank was created in 1935 by passing Reserve Bank of India Act 1934. In the wake of the Swadeshi Movement, a number of banks with Indian Management were established in the country namely, Punjab National Bank Ltd, Bank of India Ltd, Canara Bank Ltd, Indian Bank Ltd, the Bank of Baroda Ltd, The Central Bank of India Ltd. On July 19, 1969, 14 major banks of the country were nationalized and on 15^th April 1980, six more commercial private sector banks were also taken over by the government.

Currently, India has 88 scheduled commercial banks (SCBs) - 27 public sector banks (that is with the  Govt of India holding a stake), 29 private banks (these do not have government stake; they may be publicly listed and traded on stock exchanges) and 31 foreign banks. They have a combined network of over 53,000 branches and 17,000 ATMs. According to a report by ICRA Limited, a rating agency, the public sector banks hold over 75 percent of total assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively.

From World War I to Independence:

The period during the First World War (1914-1918) through the end of the 2nd world war (1939-1945), and two years thereafter until the Independence of India were challenging for Indian banking. The years of the First World War were turbulent, and it took its toll with banks simply collapsing despite the Indian Economy gaining indirect boost due to war-related economic activities. At least 94 banks in India failed between 1913 and 1918.

Post-independence:

The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal , paralyzing banking activities for months. India's Independence marked the end of a regime of the Laissez - Faire  for the Indian banking. The Govt of India initiated measures to play an active role in the economic life of the nation, and the Industrial Policy Resolution adopted by the government in 1948 envisaged a mixed economy. This resulted into greater involvement of the state in different segments of the economy including banking and finance. The major steps to regulate banking included:

• In 1948, the Reserve Bank of India , India's central banking authority, was nationalized, and it became an institution owned by the Government of India.
• In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of India (RBI) "to regulate, control, and inspect the banks in India."
• The Banking Regulation Act also provided that no new bank or branch of an existing bank could be opened without a license from the RBI, and no two banks could have common directors.

However, despite these provisions, control and regulations, banks in India except the State Bank of India, continued to be owned and operated by private persons. This changed with the nationalization of major banks in India on 19 July, 1969.

 Nationalization:

By the 1960s, the Indian banking industry has become an important tool to facilitate the development of the  Indian Economy. At the same time, it has emerged as a large employer, and a debate has ensued about the possibility to nationalize the banking industry. Indira Gandhi, the-then Prime Minister of India expressed the intention of the Govt of  India in the annual conference of the All India Congress Meeting in a paper entitled "Stray thoughts on Bank Nationalization." The paper was received with positive enthusiasm. Thereafter, her move was swift and sudden, and the GOI issued an ordinance and Nationalized  the 14 largest commercial banks with effect from the midnight of July -19-1969. Mr.Jayaprakash Narayan , a national leader of India, described the step as a "masterstroke of political sagacity." Within two weeks of the issue of the ordinance, the Parliament passed the Banking Companies (Acquisition and Transfer of Undertaking) Bill, and it received the presidential approval on 9 August, 1969.

A second dose of nationalization of 6 more commercial banks followed in 1980. The stated reason for the nationalization was to give the government more control of credit delivery. With the second dose of nationalization, the GOI controlled around 91% of the banking business of India. Later on, in the year 1993, the government merged New Bank of India with Punjab National Bank. It was the only merger between nationalized banks and resulted in the reduction of the number of nationalized banks from 20 to 19. After this, until the 1990s, the nationalized banks grew at a pace of around 4%, closer to the average growth rate of the Indian economy.

The nationalized banks were credited by some, including Home Minister Mr. P. Chidambaram , to have helped the Indian economy withstand the global financial crisis 2007 to 2009.

Liberalization:

In the early 1990s, the then Narasimha Rao government embarked on a policy of Liberalization, licensing a small number of private banks. These came to be known as New Generation tech-savvy banks, and included Global Trust Bank (the first of such new generation banks to be set up), which later amalgamated with Oriental Bank of Commerce, UTI Bank(now re-named as Axix Bank ), ICICI Bank and HDFC Bank . This move, along with the rapid growth in the economy of India, revitalized the banking sector in India, which has seen rapid growth with strong contribution from all the three sectors of banks, namely, government banks, private banks and foreign banks.

The next stage for the Indian banking has been setup with the proposed relaxation in the norms for Foreign Direct Investment, where all Foreign Investors in banks may be given voting rights which could exceed the present cap of 10%, at present it has gone up to 49% with some restrictions.

The new policy shook the Banking sector in India completely. Bankers, till this time, were used to the 4-6-4 method (Borrow at 4%; Lend at 6%; Go home at 4) of functioning. The new wave ushered in a modern outlook and tech-savvy methods of working for traditional banks. All this led to the retail boom in India. People not just demanded more from their banks but also received more.

Currently, banking in India is generally fairly mature in terms of supply, product range and reach-even though reach in rural India still remains a challenge for the private sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies in its region. The Reserve Bank of India is an autonomous body, with minimal pressure from the government. The stated policy of the Bank on the Indian Rupee is to manage volatility but without any fixed exchange rate-and this has mostly been true.

With the growth in the Indian economy expected to be strong for quite some time-especially in its services sector-the demand for banking services, especially retail banking, mortgages and investment services are expected to be strong. One may also expect M&A’s, takeovers, and asset sales.

 INDIAN BANKING SYSTEM

Introduction

The Reserve Bank of India (RBI) is India's central bank. It is the sole authority for issuing bank notes and the supervisory body for banking operations in India. It supervises and administers exchange control and banking regulations, and administers the government's monetary policy. It is also responsible for granting licenses for new bank branches.  Though the banking industry is currently dominated by public sector banks, numerous private and foreign banks exist. India's government-owned banks dominate the market. Their performance has been mixed, with a few being consistently profitable. Several public sector banks are being restructured, and in some the government either already has or will reduce its ownership.

Private and Foreign Banks

The RBI has granted operating approval to a few privately owned domestic banks; of these many commenced banking business. Foreign Banks operate more than 150 branches in India. The entry of foreign banks is based on reciprocity, economic and political bilateral relations. An inter-departmental committee approves applications for entry and expansion.

Capital adequacy norm

Foreign banks were required to achieve an 8 percent capital adequacy norm by March 1993, while Indian banks with overseas branches had until March 1995 to meet that target. All other banks had to do so by March 1996. The banking sector is to be used as a model for opening up of India's insurance sector to private domestic and foreign participants, while keeping the national insurance companies in operation.

The banking system has three tiers.

1. Commercial banks.

2. The regional banks.

3. The cooperative banks.

Scheduled and non scheduled banks

There are approximately 80 scheduled commercial banks, Indian and foreign; almost 200 regional rural banks; more than 350 central cooperative banks, 20 land development banks; and a number of primary agricultural credit societies. In terms of business, the public sector banks, namely the State Bank of India and the nationalized banks, dominate the banking sector.

Local financing

All sources of local financing are available to foreign-participation companies incorporated in India, regardless of the extent of foreign participation. Under foreign exchange regulations, foreigners and non-residents, including foreign companies, require the permission of the Reserve Bank of India to borrow from a person or company resident in India

Regulations on Foreign Banks

Foreign banks in India are subject to the same regulations as scheduled banks. They are permitted to accept deposits and provide credit in accordance with the banking laws and RBI regulations. Currently about 25 foreign banks are licensed to operate in India. Foreign bank branches in India finance trade through their global networks.

RBI Restrictions

The Reserve Bank of India lays down restrictions on bank lending and other activities with large companies. These restrictions, popularly known as "consortium guidelines" seem to have outlived their usefulness, because they hinder the availability of credit to the non-food sector and at the same time do not foster competition between banks.

Indian vs. Foreign Banks

Most Indian banks are well behind foreign banks in the areas of customer funds transfer and clearing systems. They are hugely over-staffed and are unlikely to be able to compete with the new private banks that are now entering the market. While these new banks and foreign banks still face restrictions in their activities, they are well-capitalized, use modern equipment and attract high-caliber employees.

Government and RBI regulations

All commercial banks face stiff restrictions on the use of both their assets and liabilities Forty percent of loans must be directed to "priority sectors" and the high liquidity ratio and cash reserve requirements severely limit the availability of deposits for lending. The RBI requires that domestic Indian banks make 40 percent of their loans at confessional rates to priority sectors' selected by the government. These sectors consist largely of agriculture, exporters, and small businesses. Since July 1993, foreign banks have been required to make 32 percent of their loans to these priority sectors. Within the target of 32 percent, two sub- targets for loans to the small scale sector (minimum of 10 percent) and exports (minimum of 12 percent) have been fixed. Foreign banks, however, are not required to open branches in rural areas, or to make loans to the agricultural sector.

The urge to merge:

In the recent past there has been a lot of talk about Indian Banks lacking in scale and size. The State Bank of India is the only bank from India to make it to the list of Top 100 banks, globally. Most of the PSBs are either looking to pick up a smaller bank or waiting to be picked up by a larger bank. The central government also seems to be game about the issue and is seen to be encouraging PSBs to merge or acquire other banks. Global evidence seems to suggest that even though there is great enthusiasm when companies merge or get acquired, majority of the mergers/acquisitions do not really work. So in the zeal to merge with or acquire another bank the PSBs should not let their common sense take a back seat. Before a merger is carried out cultural issues should be looked into. A bank based primarily out of North India might want to acquire a bank based primarily out of South India to increase its geographical presence but their cultures might be very different. So the integration process might become very difficult. Technological compatibility is another issue that needs to be looked into in details before any merger or acquisition is carried out.

This blog only for reference. Please conform before share this.
The Blog maintained by Balaji B.Sc.,PGDCA, MBA.