RBP MODULE 1 (1).ppt

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Subject: Retail Banking and
Practices
Module Number: I
Module Name: Introduction

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Syllabus
Introduction
History and definition, Distinction between Retail and Corporate / Wholesale Banking, Driving
forces of Retail Banking Services in India, Components of Retail Banking in India,
Opportunities and Challenges of Retail Banking Services in India
INDIAN FINANCIAL SYSTEM

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AIM:
The course will enhance the understanding of retail banking in students and they will be able to
identify the components of retail banking. Students will have an insight about the drivers of retail
banking sector in India. Students will understand the opportunities and challenges associated
with retail banking practices in India and globally.

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Course Objectives:
1. Acquire knowledge of basic concepts of retail banking and their positioning in overall
banking sector.
2. Acquire knowledge of different retail banking products and how these differ from traditional
banking products.
3. Evaluate the different types of banking and banking channels.
4. Develop understanding of retail mortgages and loans and their importance in today's market
place.
5. To identify the different banking payment systems to improve customer experience and meet
their unique banking and financial needs.

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Course Outcomes :
CO1: Demonstrate understanding of core services of a retail bank and explain the value of these
services to customers
CO2: To apply knowledge of concepts learned to determine the key methods used to understand
customers and digital marketing opportunities by evaluating some of the latest tools and
techniques.
CO3: Demonstrate understanding of the links between customer service quality, customer
satisfaction and customer loyalty
CO4: Demonstrate understanding of the operational challenges introduced by digital disruption
across a retail bank’s front, middle and back offices.
CO5: be able to respond to the changing roles of channels in delivering effective customer
relationship management

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Table of Content:
1.History and definition
2.Distinction between Retail and Corporate / Wholesale Banking
3.Driving forces of Retail Banking Services in India
4.Components of Retail Banking in India
5.Opportunities and Challenges of Retail Banking Services in India

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History and definition of Retail Banking
•The evolution of retail banking industry in India can be traced back to the time of entry of
foreign banks. The conventional banking business was carried on by Public Sector Banks on a
more generalized approach and there wasn’t any specific demarcation.
•Customer and industry segmentation was adopted in the business plan of banks. There was no
attempt to offer products and services based on specific customer segments in a focused way.
•The entry of private sector banks in early 90s created a new approach to retail banking by
banks. They had the advantage of technology right from the start. These banks had a clear mind
with retail banking and aggressively strategized for creating new markets for the retail part.
•India prepared for the IT revolution that impacted the banking sector. It created a need for
Private sector banks as well as Public Sector Banks to adopt core banking system. It led to
organized and comprehensive computerization of operations of banks.
•Later on India witnessed the adoption of modern payments systems, securities settlement,
electronic funds transfer, cheque truncation system, ATMs and many other modern methods of
banking.

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History and definition of Retail Banking
"Retail Banking is a banking service that is geared primarily toward individual consumers. Retail
banking is usually made available by commercial banks, as well as smaller community banks.
Unlike wholesale banking, retail banking focuses strictly on consumer markets. Retail banking
entities provide a wide range of personal banking services, including offering savings and
checking accounts, bill paying services, as well as debit and credit cards. Through retail banking,
consumers may also obtain mortgages and personal loans. Although retail banking is, for the
most part, mass-market driven, many retail banking products may also extend to small and
medium sized businesses. Today much of retail banking is streamlined electronically via
Automated Teller Machines (ATMs), or through virtual retail banking known as online banking."

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Statistics relating to Retail Banking in India
Total asset size of the retail banking industry grew at a rate of 120% to reach a value of $66
billion in 2005.
Retail Banking was expected to grow at above 30% and retail assets were expected to reach $300
billion by 2010.
The contribution of retail assets to Gross Domestic Product (GDP)B India is 6% and is
comparatively lesser than that of other Asian counterparts like China (15%), Malaysia (33%),
Thailand (24%) and Taiwan (52%). This indicates the lower level of penetration of retail banking
in India.

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Delivery Channel Strategies
1. The emergence of the new remote channels has changed the distribution paradigm of banks
and strategies are to be in place to take on the multi channel challenges.
2. Traditional retail banks are including direct sales and service into their channel strategies and
continue to invest in alternative channels to keep up with market developments and customer
demand.

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Delivery Channel Strategies
3. There are two aspects in multi channel management. First to develop remote channels and
reposition branches to create more value for customer segment. Second to increase customer
satisfaction and differentiate themselves from the competition while also improving the
productivity of the multi channel model.

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Distinction between Retail and Corporate / Wholesale Banking
Retail Banking targets at the individual segment while corporate banking deals mainly with
corporate clients.
• Retail Banking is a mass market banking model whereas wholesale/corporate banking look at a
relatively smaller segment of business/corporate client base as compared to retail segment.
• Retail Banking is a B2C approach (Business to Customer) whereas corporate banking is a B2B
approach (Business to Business).
• The ticket size of loans in retail banking is low whereas the ticket size is high in corporate
loans.

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• Risk is widespread in retail banking as customer base is huge whereas in Corporate Banking,
the risk is more as the ticket size is big though customer base is relatively small.
• Returns are more in retail banking as the spreads are more for different asset classes in retail.
But in corporate banking, the returns will be low as corporates bargain for lower rates due to
higher loan amounts.
• Monitoring and recovery in retail assets are more laborious because of the larger customer base
as compared to corporate banking.

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• In the liability side also, the cost of deposits is relatively less and mostly go along with the card
rates as the ticket size in retail deposits is small. In corporate banking, as the ticket sizes of
deposits will be large, the cost of deposits will be high due to pressure from the corporates for
higher rates and competitive forces to garner the deposits.
• The impact of NPA will be more pronounced in corporate banking than retail banking as the
ticket sizes in corporate loans are higher than retail loans.

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Driving forces of Retail Banking Services in India
1. Customer Behavior
2. Digital Innovation
3. Regulatory compliance
4. Macroeconomic Environment

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Customer Behavior
Customers are looking for digital interactions that are simple yet aesthetically appealing, highly
personalized and context aware so that the need of the moment is served quickly without
cumbersome intervention from the service provider. Customer Experience (CX) is now the
decisive competitive differentiator between banks, more so than just the breadth and depth of
their products and services portfolio.

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Digital Innovation
Channels like online and mobile banking have already changed how customers engage with the
bank. Customer interaction through digital channels is also generating valuable behavioral and
transactional data. Analytics on this newly available data enables even more meaningful ways to
engage customers.
Ever since the transaction mix started favoring digital channels, most industry analysts and
technology service providers have been calling out the underlying technology imperative.
However, what is often overlooked is the operational transformation and process optimization
required to profitably support the morphing operating model.

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Regulatory compliance
Increasing regulatory pressure is one of the legacies of the recent financial crisis. The cost of
compliance as well as non-compliance continues to be on the rise. In many scenarios,
streamlined customer interaction and low-touch transaction processing made possible by the
ubiquity of digital channels will help mitigate various risks associated with regulatory
compliance. Moreover, a number of compliance initiatives can generate information and context
that can be channeled towards revenue creation.

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Macroeconomic Environment
The interest rate trends and after-effects of the financial crisis have created a tough operating
environment for banks. Return on equity remains below the cost of equity. Now, more than ever,
banks are looking to eke out incremental profitability from product and service innovation
deployed via digital channels. However, such profitability can only be achieved via efficiencies
derived from requisite operational changes and process optimization.

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Characteristics of Retail Banking
• Banking facilities targeted at individual customers.
• Focused towards mass market segment covering a large population of individuals.
• Offer different liability, asset and a plethora of service products to the individual customers.
• The delivery model of retail banking is both physical and virtual i.e. services are extended
through branches and also through technology driven electronic off site delivery channels like
ATMs, Internet Banking and Mobile Banking.
• Extended to small and medium size businesses

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Advantages of Retail Banking
• Client base will be large and therefore risk is spread across the customer base.
• Customer Loyalty will be strong and customers tend not to change from one bank to another
very often.
• Attractive interest spreads since spreads are wide, since customers are too fragmented to
bargain effectively; Credit risk tends to be well diversified, as loan amounts are relatively small.
• There is less volatility in demand and credit cycle than from large corporates.
• Large numbers of clients can facilitate marketing, mass selling and the ability to
categorize/select clients using scoring systems/data mining

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Constraints of Retail Banking
• Though retail banking as a segment has a number of embedded advantages, the segment
suffers from constraints also. A few of the constraints are listed below:
• Problems in managing large numbers of clients, especially if IT systems are not sufficiently
robust.
• Rapid evolution of products can lead to IT complications
• The costs of maintaining branch networks and handling large numbers of low value
transactions tend to be relatively high.
• Higher delinquencies especially in unsecured retail loans and credit card receivables.

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Pre requisites of effective Retail Banking
There are various factors that can subscribe to the success of retail banking in India:
• Presence of an efficient delivery mechanism
• Product appropriateness
• Pricing
• Scoring models for assessing the credit worthiness
• Consumer protection environment

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Challenges of Retail Banking
• Consumer Protection & Pricing
• Inadequacy of MIS
• Understanding of KYC/AML issues
• Managing Risk
• Effects of disruptive new technologies
• Continuing growth

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Opportunities of Retail Banking Sector
• Rise of the young Indian Professionals
• Growth as an Economic Superpower
• Increasing purchasing power of middle class people
• Financial market reforms
• Engine of economic growth

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• Mass Market banking
• Volume driven business
• Automation of banking process
• Easy and affordable access

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• Financial liquidity
• Economic prosperity
• Changing consumer demographics
• Technology innovations

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• Increase the Bank Liquid cash
• Decline in interest rates
• Declining cost of incremental deposit
• Changes of terms of loans

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Reasons for emergence of retail banking business in India:
1. Strong economic fundamentals,
2. growing urban population,
3. higher disposable incomes,
4. rise in young population,
5. emergence of new customer segments

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Reasons for emergence of retail banking business in India:
6. rise in the mass affluent space,
7. explosion of service economy in addition to manufacturing space
8. opportunities across geographies and customer segments
9. huge untapped potential for retail banking in India whereas till recently retail banking was
confined only to the top and higher middle end of the customer segment.
10. Non Banking Finance Companies (NBFCs) have also aggressively entered in this 'Bottom of
the Pyramid' segment and posing a big threat to the conventional banking players.

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Global Trends in Retail Banking
The retail banking objectives of any bank would mainly focus on the following:
1. Generating superior returns on assets.
2. Acquiring sufficient funding
3. Enhancing risk management
4. Understanding customers and regaining their trust.
5. Coping with increased demands regarding product transparency and overall service levels.
6. Achieving multi channel excellence with fully integrated banking channels.
7. Moving toward higher levels of industrialization (which is mandatory for rapid innovation and
deployment

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Self Assessment Question
1. In case of retail banking ticket size of loan will be ...... While customer base will be ...... And
Interest spread here will be ..…....
(A) Small, huge, high
(B) High, small, huge
(C) Low, small, less
(D) Small, huge, less
Answer: A

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2. Impact of Non-Performing Assets (NPAs) in case of _____ Banking will have more
pronounced effects on business?
(A) Retail
(B) Corporate
(C) Both
(D) None of these
Answer: B

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3. Which three customer segments are considered as the most important segments on whose
requirement the banks structure their products and services?
(A) Mass market, Mass affluent, High Net Worth
(B) Mass Affluent, Super High Net worth, Super Affluent
(C) Mass Affluent, Super Affluent, Mass Market
(D) Super High Net Worth, High Net Worth, Super Affluent
Answer: C

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4. Which banks are said to be pioneers in introducing Hybrid Liability and Assets
Products in India?
(A) Standard chartered bank
(B) City bank
(C) Grind lays Bank
(D) Both (A) and (C)
Answer: D

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5. The characteristics of Debit Cards are:
(A) Payments for purchases are directly debited into the account
(B) Cash withdrawals through ATMs are debited to the account immediately
(C) Payment made for purchases/usages will be debited subsequently after a certain period
(D) Both (A) and (B) are true
Answer: D

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6. Which facility by banks allows funds to be transferred from Savings Account to Fixed Deposit
Account above a certain specified level?
(A) Recurring Deposit Facility
(B) Monthly investment scheme facility
(C) Sweep Facility
(D) Both (A) and (B)
Answer: C

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7. ______ can be considered as Demand Liability and ______can be considered as time
liability:
(A) Recurring Deposit Account; Term deposit account
(B) Savings Account; Recurring Deposit Account
(C) Term Deposit Account and Current Bank Account
(D) Recurring Account and Savings Bank Account
Answer: B

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8. Withdrawal of cash from bank branch can be included under ______ of Bank:
(A) Virtual Delivery Model
(B) Physical Delivery Model
(C) Both A and B
(D) None of these
Answer: B

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9. Private Banking can be defined as:
(A) Services to Large Number of Customers with Small Deposits
(B) Services to Corporate Customer
(C) Service to High Net Worth individuals
(D) Services to Customer belonging to Rural India with Small or Nil Deposits.
Answer: C

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10. Which of the following factor catapulted the scope for retail banking business in India?
(A) Emergence of new customer segment
(B) Explosion of service economy in addition to manufacturing space
(C) Rise in young population
(D) All of the above
Answer: D

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Activity
• Write an Essay on retail banking transformations in
India
Offline/ Online
Activity
(30 min)

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Reading Assignment & Interactive brainstorming
•Do a Mini Project on the Impact
of Internet Banking system and
technology on Indian Banks .
Online/Offline
Activity
(30 min)

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•Study on customer satisfaction in
Punjab National Bank
Online/Offline
Activity
(30 min)

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•A study to evaluate the banking
service provided to rural
customers by PSU banks
Online/Offline
Activity
(30 min)

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•Comparative analysis of banks in
terms of service quality
Online/Offline
Activity
(30 min)

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Document Link
Topic URL Notes
Retail Banking in India
https://www.worldwidejournals.com/indian-journal-of-
applied-research-(IJAR)/article/retail-banking-in-
india/NzE5NQ==/
Research Paper on Introduction to
Banking sector
The future of retail
banking
https://www2.deloitte.com/cn/en/pages/financial-
services/articles/future-of-retail-banking.html
Introduction to future of Retail
Banking sector in India
Banks' profitability hit on
shrinking interest margin
amid tech adoption
burden, falling rates
https://economictimes.indiatimes.com/industry/banking/fin
ance/banking/banks-profitability-hit-on-shrinking-interest-
margin-amid-tech-adoption-burden-falling-
rates/articleshow/86077513.cms
Explanation of interest and its impact
on profitability in retail banking sector

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Video Link
Topic URL Notes
Indian Financial System https://youtu.be/Wh72Ii8NxZ0?t=69
Covers every aspect of Indian
Financial System.
2020 Commercial
Banking Trends
https://youtu.be/29cruzXCu2g?t=47
A world wide perspective of Banking
trends.
Financial and Economic
reforms
https://youtu.be/G2nQOCRB6Ro?t=238 A glimpse of reforms was discussed.

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Ebook name Chapter Page No. Notes URL
Retail Banking 1 - 14 1 - 40 Introduction to Banking sector
https://www.pdfdrive.com
/retail-banking-
e183978369.html
an assessment of
electronic banking
performance in retail
banking
1 - 23 1 - 78
Introduction to electronic banking and its
role in Banking sector
https://www.pdfdrive.com
/an-assessment-of-
electronic-banking-
performance-in-retail-
banking-e45198076.html
E- Book Link

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• Practice of Law of Banking by H. R. Suneja
• Banking Law and Practice by P. N. Varshney
• Practice of Banking Advances by Bedi and Hardikar
• Law and Practice of Banking by P. N. Varshney and Gopal Swaroop
• Banking- Theory, Law and Practice by Gordon & Natarajan
• Banks and Institutional Management by Vasant Desai
• Foreign Trade and Foreign Exchange by B. K. Chaudhari & O. P.
Agarwal
• Bank Financial Management Indian Institute of banking & Finance
References

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