Retail banking in India has experienced high growth in the past decade but now faces challenges constraining further growth. Key issues include declining net interest margins and fees as well as rising operating costs. Additional bottlenecks are customer saturation in urban areas, high numbers of inactive accounts, low customer loyalty leading to switching between banks, and competition from non-banking entities. To address these, banks need to improve delivery and experience through initiatives like relationship-based pricing and response times, 24/7 service availability, faster complaint resolution, and loyalty programs rewarding long-term customers. Banks should also explore new business models to profitably serve rural markets and redefine investment advisory services to directly advise customers.

1. Retail Banking – Challenges & Way forward (India)
Retail Banking has been the prime contributor to the high growth (CAGR of 30% +) for last
decade or so for most of the Big names in the Indian Banking industry, but post 2008 financial
crisis Banks in India are also showing signs of tiring down and many analysts are casting serious
doubts on Banks ability to showcase similar growth in the coming years. In this context it is
important to analyse and discuss various factors plaguing the growth along with few solutions
that can bring back Indian Banks back to the high growth trajectory. Below article is an attempt
at identifying the challenges & bottlenecks along with few solutions.
Retail Banking – Meaning
Retail Banking denotes banking products and services for Individuals and includes segments like
Associations, Trust, Clubs, Foundations, Small business with Proprietary / Partnership
Constitutions. Broadly all the non corporate segments (Non Manufacturers and non limited
companies) come under Retail Banking.
India -Experience
Retail banking came in to focus around last few years of 19th
century , where every bank started
to feel the importance of diversifying their business from few big corporate to mass retail
segment and as a result post liberalization the biggest reforms on ground happened in the Retail
Banking segment , which has grown at a fast pace over the years, where major brands have been
delivering a CAGR in excess of 30 % over a decade along with diversifying risks.
Retail Banking in India has been focused on 2 major activities; 1.Transaction banking 2.Credit
Products and Banks have improved their capabilities by leaps & bounds in ensuring the best
possible products with respect to both the activities. If you click through any product details of
banks like Wells Fargo or Citi Bank, you will realize that in India we have not just similar
products but even better products.
Seeing the success of new generation Banks, even the State Banks and Nationalized banks too
chipped in and now offers best in class Retail Banking services across their branches and this has
helped Retail Banking to grow geographically from Metros to Tier 1, 2, 3 cities and Towns

2. successfully and now it will be hard to find an individual at these markets without a Debit Card
of Bank or a Bank account. Thus in the last decade or so India has truly been a major success
story in Retail Banking.
Challenges:-
Retail Banking Business model implementation meant higher number of human resource, higher
investments in technology, Infrastructure and ultimately higher costs. Against these high costs
the Income streams primarily came from NIM (Difference between Interest charged and given),
Fees & Charges. Let’s analyze both in detail.
 NIM ( Net Interest Margin):-
NIMs ( Difference between Interest earned & paid) has been under pressure for each and every
bank in the last few years, specifically after 2008 global financial crisis, and in India Interest
rates have increased as RBI has been tightening the interest regime for controlling ever growing
inflation worries. Higher interests have impacted cost of borrowing heavily and it has adversely
impacted the credit off take and higher interest rates with slowing down of business meant rising
NPAs and adding to the pressure, high interest on deposits and de regulation of savings interest
rates has increased the cost of borrowing for all the banks and resulted in shrinking of NIMs
across the board and thus affecting profitability.
 Commissions & Charges: - Commissions are earned on sales of third party products and
on activities like Issuance of BG /LC, Discounting of Bills etc and Charges are applied on
non maintenance of requisite balances (AMB/AQB etc) and on maintenance of accounts,
high cash transactions, high ATM usage, branch visits etc and these varies from Bank to
Bank and customer to customer.
Over all slow down in business and investments have impacted the revenue streams of the banks
and in order to retain good customers in the fold most of the banks are now offering most of the
products and services free of charges. As a result revenues from Commission & Charges are now
moving southwards impacting the profitability.
 Ever growing Operating Cost: - Against the shrinking NIMs and Commission &
Charges, Operating cost has been rising alarmingly, whether it’s the compensation,
Infrastructure or the technological investments and maintenance cost which are fixed in
nature and are hard to control.
All the above parameters have led to a situation where cost to income ratio is all set to drain
banks profitability in the short – term and sustainability in the long term.
Bottle-necks:-
Now along with the above parameters let’s analyze the bottle necks, which are impacting the
profitability of banks.

3.  Saturation at Urban & Semi-Urban centers on acquisition of new customers and low
profitability of customers in the Rural markets:-
Most of the individuals in urban and Semi-Urban centers now have at least one bank account and
it will be hard to find a person without a debit card in his pocket. Hence acquisition of new
customers at Urban and semi urban centers is all about switching customers from one bank to
another than acquiring and this has impacted the free flow on Casa float by way of large
acquisition for banks over the last few years. And most of the banks are not keen on going to
rural markets as the scope of business not justifying the cost of operation.
 Large chunk of inoperative accounts:-
On one side the acquisition numbers have dropped drastically and on the other side large chunk
of data base is filled with in operative accounts, who are either dormant or once in a blue moon
customer and majority of customers preferring multiple accounts.
For each bank this is a big loss on their investments as every customer acquired has been an
investment for banks and when say more than 50 % of customers remain non productive it means
an investment loss to the tune of respective percentages, which is huge. And banks have been
taking solace in management mantras like 20:80, whereby 20 % provides business of 80% and
vice a versa. But that logic no more looks practical as free flow of casa from new acquisition is
drying up every day and no new customer is willing to open an account at an additional cost for
them rather new accounts which are switch from other banks are acquired at a higher cost now
by adding many free bees.
Hence every inoperative account is eating in to banks investments and thus profitability.
 Low levels of customer loyalty resulting in switching of banks:-
Customer loyalty is something Banks in India has failed to attract, notwithstanding the higher
acquisition and maintenance cost compared to pre globalization era. Reason can be attributed to
availability of same set of product and services across banks with no difference whats so ever
and inability of the banks to differentiate and highlight their service standards which means
customers generally rate services of banks based on the staff at each branch and there is no
guarantee of certain level of service with X brand or Y brand. Hence customer doesn’t feel any
loyalty to any banks and wherever they see lower charges and fees or lower interest rates, prefer
to switch their account. The logic of hooking the customer with multiple products will act as
forced loyalty for the bank but with concepts like account portability coming in, Banks will find
it difficult to retain their customers resulting high volatility of portfolios and impacting
profitability.
 Competition from non banking entities:-
Nowadays NBFCs , Mobile operators and Retail chains like Wall mart are providing various
payment products like Credit Cards , Mobile payment services etc to customers with little
requirements compared to Banks and similarly Investment advisory services offered by various

4. NBFCs have diminished Banks role as the IAS provider and further Gold Loan NBFCs , Micro
finance companies and other NBFCs providing credit have succeeded in providing easy and
quick finances to customers compared to the Banks resulting in erosion of potential business for
Banks and if the trend continues, banks will struggle to retain customers and loose them to other
businesses offering banking products & services at a better price and pace.
Even the White label ATMS (Private ATMs) around, will attract many customers to use non
Bank ATMS which will further add the cost of running Banks and dent their profitability.
Way forward:-
Keeping these risks as the base, one needs to explore future opportunities in Retail Banking,
which shall help Banks to attract more and more customers along with an active existing
customer base who will stick with Banks with high level of loyalty.
Let us explore opportunities available and draw way forward plan for Retail Banking in India.
Primary Function of Banks:-
While analyzing opportunities, it is important to analyze the roots and understand how Banks
makes money and what is the primary role that Banks are expected to do.
Banks deals in money and money is something which grows by circulation and the channel
enabling the circulation is Banks.
And primary function of Banks has been accepting deposits from the suppliers of money and
lending money to the buyers of money.
The Gap between money bought and sold is the bread and butter revenue for the Banks.
Along with the primary function banks have been specializing in distribution of own products as
well as third party products and bank earns on these services by ways of fees and commissions.
 Opportunities & New business initiatives
Keeping these basics in mind, let us explore opportunities & new business initiatives to address
various challenges & bottle-necks discussed above.
Transaction Banking Products & Credit Products has been the highlight of Retail Banking in
India and presently products & services available in India are as good or even better compared to
Global Banks.
Hence first opportunity is identified in improving the delivery and experience of Transaction
Banking Products & Services and Credit Products, let’s discuss various means by which we can
bring in improvements and make Bank more relevant to customers.

5.  Improving the Delivery & Experience
Various surveys conducted on Customers, have pointed to the fact that Customer is interested to
conduct his or her basic requirements at their convenience than testing various techno savvy and
complexed products.
Hence in order to improve the delivery & experience, Banks are suggested to implement few
initiatives as mentioned below:-
1. Relationship Pricing & TAT for all products based on Relationship value
Even though few banks have grouped their customers, based on account level profitability and
has been offering priority services to better set of customers. But going forward Banks needs to
come out with a transparent method of account level profitability and offer products and services
at better price and at pre-defined TAT ( Turn round time).
As various surveys points out, Customer is more interested in being serviced fast and not
essentially serviced lot.
Customers should be classified in to Tier one, two, three etc and Best customers of the bank
should be able to access entire Products & Services of the Bank within ½ hrs TAT.
Similarly Tier Two customers should be able to access 80 % of Products & Services within ½ hrs
and remaining 20 % say within a TAT of 2 hrs etc and so on.
Such an initiative will add a purpose in customer with respect to deal with a single Bank where
he can get the best Banding and thus products & services at best prices and within a pre-defined
TAT unlike the present situation where everybody gets everything everywhere, impacting the
logic of customer loyalty.
2. 24*7 Services, whereby Customer can avail any product & services of the Bank at
any time.
Banking cannot afford to remain within 9 am to 4 pm service any more, as competition provide
services similar to Banks provide and customer doesn’t have any incentive in buying Bank
products compared to products offered by NBFCs and others, hence Banks needs to have
technological platforms which will enable 24*7 services for all products and not just Transaction
banking products or few other products.
Banks can upgrade phone banking, Mobile banking, Internet banking products & services to
include all kinds of Banking Products & Services to be available 24*7 and 365 days.
24*7 Initiatives will give an advantage to Banks over non banking competition and unlike Banks
non banking entities will always have restrictions in offering Banking products & services with
respect to Products & Services as well as time, which will give an edge for Banks over these non
banking competitions.

6. 3.Solution Provider services to Complaint resolution services.
As an extension to the above Initiatives, one major area of concern for customers is the
Complaint resolution by Banks, many times customer doesn’t get instant solutions due to one
reason or the other. For example customer fails to complete ATM transactions but account shows
debit and customer rings up Complaint cell numbers where answer is not immediate but we shall
get back to you. For a customer it is a big nuisance and he has to wait for his complaint to be
resolved and next time around customer doesn’t take ATM granted as any time money.
Similarly many complaints take its sweet time in getting resolved, testing patience and anxiety of
customers.
Hence Banks needs to take up another initiative of Solution provider services to Complaint
management services. Whereby customer’s problems are addressed with immediate solutions
and not by lengthy process of existing complaint management.
Such initiatives are practiced by NBFC & Others where customer is still the King and Banks
needs to follow the suit to win over large number of potential customers from non banking
competition.
4.Loyalty programs for Customers based on their relationship years with the Bank.
As discussed earlier many survey points out to low levels of loyalty compared to the satisfaction
with respect to products & services. And we have identified the reason as lack of differentiation
in products & services offered by various banks in India.
Now even though various banks have been offering various free bees to customers as part of
Loyalty programs , none of it seems adding any loyalty factor for customers , there has been
Monsoon offers where Banks have been offering Umbrellas , offering Movie Tickets , Foreign
trips etc , which are free bees without adding any improvement to the goal of developing
customer loyalty.
Hence banks need to undertake loyalty programs, which will directly influence customer’s
loyalty towards the bank.
Initiative like rewarding customer for the long number of years of relationship with Bank by way
of Banding him higher ,allowing him or her access to Best products & services at best prices and
having programs availing which a customer feel privileged not just in the Bank branch premises
but even outside, like an access to executive launches like some credit cards offers in India ,
Immediate appointments at designated hospitals , special bookings , discounts , preference in
delivery of products & services at designated Multiplexes , Hotels, Restaurants , Giant retail
shops etc.
Loyalty programs should reward the number of years of relationship and it should also act as a
privilege not just within Banks but to the outside world. This will influence and improve
customer’s loyalty towards the bank.

7. 5.Branch less banking business model for taping large rural markets profitably.
Since urban and Semi-urban centers are well banked in India, the next stage of growth prospects
lies in rural India but Banks are finding it difficult to operate in rural markets due to adverse cost
to income ratio.
Here Banks needs to introduce cost effective banking model than sticking to the traditional
branch banking model. As business prospects at rural centers are in low volumes and it will not
add sense in servicing these low value customers incurring the same high value business model.
Hence Banks will have to develop a branch less business model, which can be a combination of
BC
( Banking Correspondence & work from home concepts of IT industry) where transactions
banking products should be made available through setting up more and more solar based ATMs
as well as implementing latest technologies like instant credit of cash & cheque in to account via
ATM as launched internationally by Common wealth Bank of Australia.
Mobile banking services should be used extensively in this initiative and payments, ATM
withdrawals should be possible even without issuance of dr-cards.
Similarly Banks will have to explore the possibility of tie ups with Post offices, Village offices,
Primary health centers etc to offer various Deposit, Credit, Investment products to the rural
customers.
A system where one officer for few villages and 1 BC per village kind of business model should
be worked out to service the mass low volume market in India. And banks should explore the
opportunity of earning commission by way of selling GOI products as well as various schemes
and services.
A profitable entry to rural markets will mean getting in to sea of opportunity for bankers where
criteria’s of business will be different along with style of business , hence bankers should
understand the difference and develop a new business model.
6. Improving the scope of Investment Advisory Services
Present scenario:-
Every bank has IAS ( Investment Advisory Services ) being offered to the customers and
products ranges from Mutual Funds (existing) , Insurance , E-Broking accounts , ETFs, Bonds ,
NFOs , General Insurance , Structured products specifically designed for Customer etc.
There are two channels through which Banks sells these products to customers; 1. Private
Banking Group (For HNW Customers) and Cross Sell Initiatives for ordinary customers.

8. Now Banks role in all these sales is that of a Distributor, who earns a commission on products
sold and Bank personnel’s provides advisory information on all these products to customers, so
as to enable them to make decision on investments.
Problem faced by customers:-
Now since it is a distribution process, once the selling is done the Risk of the investments
squarely falls on the customer. If product doesn’t yield the results expected customer got to
blame himself and not Bank’s advice. This is the main reason for many non banking private
players in Investment Advisory business and even though none of them owns up for the material
losses but yes owns up the quality of advice as well as they also promises a return based on their
past record to the clients.
Redefining scope of IAS
Banks needs to re work the entire IAS strategy. Objective of in house research should be direct
advice to the customers and show them specific products to be invested according to their risk
appetite and financial goals than showing them bouquet of products and putting the onus of
selection on themselves.
Banks research should highlight the success ratio of their predictions in the past, enabling
customers to take the decision on whether to buy an advice from X bank or Y bank than
following the present method of selecting products based on their understanding or
understanding of few individuals sitting in the branches.
Once Banks research ability becomes the center point in IAS, there will be more credibility to
the IAS services and thus more customers and business for the Banks.
Now under IAS, presently we are dealing only in financial products and Precious metal like
Gold, Silver and Art works.
Probably time has come for IAS to include Real estate, Entire gamut of precious metals and Art,
which may not be sold from Bank premises rather it can be done by way of referral model.
IAS should be known for its quality of advice and hence performance of IAS should be certified
with historical data. Customers should be able to decide whether X bank or Y bank is providing
better returns historically, before seeking advice and deciding on the product.
How it is going to help the Banks:-
Today very reason why various NBFCs has been doing extremely well on IAS business is based
on their quality of investment advisory services and Banks with their size and expertise are much
well prepared to offer quality IAS to its client base and since Banks are having their own
Treasury and Economic research cells along with in house investments research teams the
competency factor will always be better than small scale NBFCs. Hence banks should utilise
thier inherent strength in advising and attract all those potential customers now serviced by

9. NBFCs along with having 100% share of exisiting customers IAS requirements.This will help
banks in not just perking up fresh revenues but more hooks and loyalty on customer.
7. Introduction of Outflow Management Services
Outflow or Expenses is a subject which is important to all types of customers, hence in order to
be more relevant to customers, Banks needs to introduce a new set of services with respect to
management of outflows.
Let’s analyse various out flows or expenses that we incur in a month.
Expenses types: - Monthly grocery expenses / Utility Bills / EMIs on Loans / Children
Education / Magazines & News Papers / Entertainment expenses / Fuel / Payment to essential
services like monthly maintenance and other support activities /Payments done for parents up
keep / payments done for charity/Expenses on Garments and accessories /Expenses on vehicle
maintenance / Expenses on Purchase of vehicle / Expenses on purchase of luxury items /
Expenses on modification & repairing etc.
Bank’s role is, in between the customer and service provider, where Bank can help customer in
getting the best product and services at the best prices and at the right time.
Banks will have to work on tie-ups with various service providers and should be able to bargain
and get best products & services at best prices for its customers.
And for customer , Bank will the point of quality check and guarantor of services and thus
becoming more relevant in the customers day to day life.
And for Banks, it will be great opportunity to showcase their service quality and advertise it
along with acting as a linkage between consumer / buyer and the seller which further creates an
opportunity to earn commission, fees etc for the services from both the parties.
Hence such initiatives will be novel as well as more relevant to the customers along with it being
a win win situation for Banks, Customers and the various service providers. And every Bank
should do feasibility study on introduction of OMS (Outflow management services) and launch it
as an additional service.
8. Meaningful customer engagements, targeting customer education on new developments
in Banking and benefits.
Banks have been competing with each other, on introduction of various products and services for
servicing the ever growing customer requirements but seldom check whether customers are
aware of these launches and whether they are appreciating these efforts or not.
The answer is big NO.

10. Here is where, every Bank must work on setting up a dedicated Customer Experience research
team, who will not just do dip checks and run feedback campaigns but who will create various
interaction points between bankers and customers. It may be through social media, it may be
through door to door campaign model of FMCGs, it may be through advertisements or even
through customer meets.
But it is important that Banks must meaningfully engage with customers on educating about
Banks products & services , various way & means to bank , loyalty programs etc and these
efforts should be the PUSH efforts towards customers than the present trend of pushing products
at the customers and once knowledge is pushed through one way or the other , there will be an
understanding on products & services available with Banks and customer will be able to match
his requirements with the Bank and thus business will be more of a PULL nature to the present
PUSH.
Hence Customer Experience research teams envisage to bring in customers to the bank for
products & services than bank pushing around products & services at customers often creating
irritation than delight.
Conclusion:-
Retail banking has huge growth opportunities in India and it has to conquer many more heights
before getting exhausted like its counter parts in developed markets like US and Europe. Hence it
is important to understand challenges & bottlenecks faced, along with offering and implementing
right solutions. Above article is an attempt at highlighting the vast opportunities and various
available solutions that can be applied for reviving the animal spirits of Retail Banking in India.
Most valued comment I recieved on the above artilce is from Mr.Romesh Sobti ( MD &
CEO-INDUSIND BANK), who is considered amongst the best Bankers in India at present.
From: Romesh Sobti <Romesh.Sobti@indusind.com>
To: vijay menon <vijaymenon_2000@yahoo.com>
Sent: Friday, February 15, 2013 10:34 AM
Subject: RE: Article on " Retail Banking - Challenges & Wayforward "
Thank you ; interesting takes on retailing , especially on expense outgo management.
Regards,
Romesh Sobti
From: vijay menon [mailto:vijaymenon_2000@yahoo.com]
Sent: 15 February 2013 11:20
To: Romesh Sobti
Subject: Article on " Retail Banking - Challenges & Wayforward "