02 iintroduction to retail banking 2011

Retail Banking

1

A few things

MBA student

must know

2

What extra do you learn in a B school?

Knowledge of all functional areas , management practices, processes, risks and risk management tools and techniques of

business Develop skills to be a team player and a team leader to manage processes to analyze situations, to make decisions to communicate to make presentations

Develop right attitudes to be a successful manager

4

• Knowledge information about a subject obtained by experience or

study

When applied, Gets converted into

• Skill

A special ability to do something possessed by an individual – it is personal possessionOver the years of experience Becomes

• Competency Becomes very valuable ( given the right attitude)

5

It is It is OUR ATTITUDEOUR ATTITUDE towards Life and Work towards Life and Work that makes OUR Life 100% ! ! !that makes OUR Life 100% ! ! !

Attitude Attitude Feeling or opinion about something or someone or a way of behaving that follows from this feeling or opinion

6

Why do some people seem to reach the top of the corporate ladder easily, while others remain stuck on

the middle-management rung?

Dr. Martin Seligman, an authority on optimism discovered that

attitude was a better predictor of success than I.Q., education and most other factors.

Some positive attitudes Life is so wonderful. I have ambition in life. I will make it to the top, and I am in charge of making it

happen. (auto suggestion to computer in brain ) Hard work comes first, luck comes later. I think I can. (Confidence) I will Come forward to Go forward My opportunity monitor is never turned off.

7

• Have you ever wondered why all same IIM batch mates are not equally successful?

• Why all the batch mates of a programme get 20 different placement packages?

• All have same degree and also look so much alike with two hands, two legs, two eyes , two ears, one nose, one head etc etc

But every one differs in• What they have imbibed, internalized in mind C• What skills they have developed and how much C• What attitudes they have in mind? C • How much they are networked? PC• How much they are lucky? NC Bottomline• Forget what you can not control, Do whatever is under your control. 8

Retail Banking

9

Commercial Banks-Public Sectors Banks/SBI/Assoc. (25)-Private Sector Banks (25 Old, 8 New)-Foreign Banks (44)

InvestmentInstitutions-UTI-LIC

-GIC

Financial Institutions

-IDBI-ICICI-IFCI-NHB-NABARD

Non -BankingFinancial Companies(641)

State Level Financial Corporations/ Industrial Development Corporations(SFCs – 18)(SIDCs – 28) Co-operative

Banks(95,000)

Indian Financial Sector

Reserve Bank of India (Central Bank)

Exim BankExim Bank

10

Banking defined• Banking Regulation Act of India, 1949

defines Banking as

"accepting, for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdrawable by cheques, draft, order or otherwise."

11

The Financial Service Competitors of Banks

• Mutual Funds (Investment Companies)• Security Brokers and Dealers• Non Banking Finance Companies• Post Office Savings and Term Deposits/ Small

savings instruments• Life and Non Life Insurance Companies How a bank is different from all other

financial institutions in one unique aspect?

12

Various Kinds of Banking/ Banks Scheduled Banks Non Scheduled Banksincluded in the Second Schedule of Reserve Bank of India(RBI) Act, 1934, which satisfy the criteria laid down vide section 42 (6) (a) of the Act.

13

Based of different Principles and goals

Commercial Banking Co-operative BankingDevelopment Banking Investment /Merchant

Banking

Commercial Banks are functioning on commercial basis with profit motive

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The co-operative banking to the supplement the village money lender. Divided into 4 componentsBased on principle of co-operationState Co-operative Banks Central Co-operative Banks Primary Agriculture Credit Societies State Land Development Banks Land Development Banks Primary Land Development Banks Primary Agricultural Development Banks Urban Co-operative Banks

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DEVELOPMENT BANKINGDevelopment of some specific sectors of economyIndustrial Finance Corporation of India (IFCI) Industrial Development Bank of India (IDBI) Industrial Credit and Investment Corporation of India (ICICI) Industrial Investment Bank of India (IIBI) Small Industries Development Bank of India (SIDBI) National Bank for Agriculture and Rural Development (NABARD) Export Import Bank of India National Housing Bank

16

Independent investment banksMerill LynchMorgan Stanley

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Commercial Banking Based on Geography , delivery channel

Branch Banking Virtual Banking

Internet Banking Mobile Banking

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Virtual Banking First fully virtual bank -mBank (POLAND) "Internet banking services are increasingly popular. Even though virtual banks began operating in Poland only a few years ago, they have already enlisted way over half a million clients between them.

•Another fully virtual bank in Poland is Inteligo,

which started operations in May 200119

http://www.virtualbank.com/?r=0

Internet Banking

20

Narrow Banking

Banking for limited purposes/ Restricted banking

Commercial Banking activities alone – no investment banking, Advisory, consulting etc

Accepting of deposits alone and no

Loaning – Moratorium / weak banks

21

Universal Bankingprovides entire range of financial services

22

• Citi Group– a universal bank• Fifteen years ago, when Kundapur Vaman

Kamath, the CEO of ICICI Bank,spoke about his ambitions to make his bank (then called just ICICI) a universal bank, selling every conceivable financial product, he created flutter.

• Financial sector reforms in India had just kicked in, but even the biggest players in financial services were confined to neatly fenced territories.

• Was Kamath ahead of his time?23

• ICICI Bank• functions as a universal bank through itself

and its associate companies in the areas of corporate finance,

• commercial banking, • investment banking, • asset management, • non-banking finance, • investor services, • broking and insurance.

24

Indian Universal banks –new trends entities like SBI, ICICI, HDFC

and Kotak Mahindra have all become one-stop departmental stores for

• Wholesale banking,• Retail banking• mutual funds, • loans, • Merchant banking or investment banking• insurance and • much else

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Financial conglomerates

Large financial services conglomerates that

combine commercial banking and investment banking, and sometimes insurance and all other financial services

• Citigroup• HSBC• ABN Amro• Allianz (Dresdner Kleinwort) • Bank of America (Banc of America Securities) • BNP Paribas • Barclays

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• Central Banks

are non-commercial bodies or government agencies often charged with controlling interest rates and money supply across the whole economy.

They act as lenders of the last resort in event of a crisis of liquidity with any banks or all banks

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Retail banking Wholesale banking

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Retail Banking is typically a mass market banking where individual customers use local branches of larger commercial banks. It is segment of commercial banking.

Liabilities

Wealth Management

AssetsFee Based

Personal LoansCredit CardsMortgage loansAuto loans

Checking AccountsSavings AccountsTime Deposit

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Retail Banking

Loan Products: Auto Car Loans Loans against Securities Personal Loans Credit Cards 2-Wheeler Loans Commercial Vehicles Finance Home Loans Small Ticket Personal Loans Retail Business Banking

Other Products / Services: POS Terminals Debit Cards Depository Accounts Mutual Fund Sales Insurance Sales Investment Advice Corporate Salary Account NRI Services Bill Payment Services

WholesaleWholesaleBankingBanking

Commercial Banking: Working Capital Credit Substitutes Term Loans Bill Collection Forex & Derivatives Wholesale Deposits Letters of Credit Guarantees

Key Segments: Large corporate Supply Chain Emerging Corporates Financial Institutions Government Agriculture Commodities

TreasuryTreasury

Products: Foreign Exchange Debt Securities Derivatives Equities

Deposit Products:

Savings Accounts

Current Accounts

Fixed Deposits

Other Functions: Asset Liability

Management Statutory Reserve

Management

Transactional Banking: Cash Management Custodial Services Clearing Bank Services Correspondent Banking Tax Collections Banker to public issues

30

Business Model of Retail Banking• Strategic Business Unit SBU (MBO targets)

–Pvt Banks/Foreign Banks• Department approach

- Majority of PSBs• Integrated approach• No distinction but effort to tap Retail business

potential ( Earlier approach) • Indian Banks go for Positioning platform- one of

top three among peers• Foreign Banks go by business objectives

--targets for customer, business and profits

Exit - BNP Paribas 1990 and existed later 31

What constitutes Retail Assets and Liabilities?

Retail LiabilitiesDeposits:

1. Saving Accounts and variants, 2. Current Accounts and variants3. Retail Term deposits / Recurring Deposits4. Combination Accounts of Savings/ Current / Term Deposits

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Regular Savings Accounts• ATMs./ International Debit Card • Net Banking and Mobile Banking-• Personalized cheques • Bill Pay. • Funds Transfer/payment• Avail of facilities like Safe Deposit Locker, • Sweep In and Super Saver • Free Payable-at-Par cheque book, • Free Insta Alerts for all account holders for lifetime of the

account. Free Passbook facility available at home branch for account holders (individuals).

• Free Email statement facility

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Savings Plus• All Savings Regular Benefits PLUS

• Free Demand Drafts on HDFC Bank locations, up to a limit of 25,000/- per day.

• Special relationship discount on purchase of Gold Bars

• 25%-off on the Locker rental for the 1st year (only).

• Intercity Banking / Multi-city Banking.

• AQB Rs.10,000

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Minimum Balance (Average Quarterly Balance)Option 1 Rs. 10000(Urban/Semi-urban)Option 2 NIL with a Fixed deposit of Rs. 50,000Charges on non maintenance thereofOption 1 AQB in the SB a/c between 5,000/- and

10,000/-: Rs. 750/- per quarter,AQB in the SB a/c is less than 5,000/- :Rs. 1,000/-

Option 2 In case of non maintenance of Rs. 50,000 Fixed Deposit the charges mentioned in Option 1 would be applicable

35

Current Accounts and VariantsHDFC Regular C/A 1. Free anywhere cheque payment

2. Free payments and collections through NEFT Free RTGS collection. RTGS payment @ Rs.25/- per transaction

3. Inter-city Account to accounts funds transfer between HDFC Bank accounts at a nominal charge of Rs.15/- per transactions

4. Free Demand Drafts (DD)/PO above Rs.100,000/-. Demand drafts up to Rs.50,000/- at flat cost of Rs.40/-. DDs above Rs.50,000/- & up to Rs.100,000/- at nominal cost of Rs.25/-

5. Payable at par cheque book at nominal price. HDFC Bank offers you Doorstep Banking*,

36

Current Accounts and VariantsHDFC Trade C/A • Free Account to account funds transfer between HDFC

• Free payment and collection through RTGS/NEFT

• Free up to 30 Demand Drafts plus 30 Pay Orders per month from any

• Free anywhere cheque collection (clearing) within HDFC Bank branch network up to Rs.35 lacs per month.

• Convenience to withdraw & deposit cash at all our branches*

• 200 "At Par" cheque leaves free per month.

• Free at par cheque payments across all HDFC Bank locations for unlimited value*

• Free Cash Deposit upto Rs.5 lacs per month* across all HDFC Bank Branches in your city. 37

Current Accounts and VariantsHDFC Plus C/A • Free Account to account funds transfer between HDFC

• Free payment and collection through RTGS/NEFT

• Free up to 50 Demand Drafts plus 50 Pay Orders per month from any

• Free anywhere cheque collection (clearing) within HDFC Bank branch network up to Rs.75 lacs per month.

• Convenience to withdraw & deposit cash at all our branches*

• 300 "At Par" cheque leaves free per month.

• Free at par cheque payments across all HDFC Bank locations for unlimited value*

• Free Cash Deposit upto Rs.10 lacs per month* across all HDFC Bank Branches in your city.

• HDFC Bank offers you Doorstep Banking*, 38

Flexi Current• Cash Deposit and Anywhere Transaction limits are a

multiple of the balance you maintain(AMB)in your Current Account.Min AMB Rs. 75,000

• Transaction Dynamic Free Limits*

• Cash Deposit at Home Branch Location Rs. (10 times AMB)

• Anywhere Collections & Funds Transfer (35 times AMB)

• Free RTGS/NEFT Transactions.

• Free 40 Demand Drafts & Free 40 Pay Orders issued from any HDFC Bank Branch*

• Apex Max

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• Combination of Various accounts

• Flexi Deposit / Sweep In

• Min Balance SB 25000/50000

• Any excess above minimum will be transferred to FD at higher rate 6m -1yr

• On issue of cheque in excess of balance, the FD will be broken for excess amount and balance FD amount will run at same contracted interest rate.

40

1 year 16 days 8.50% 9.00%

1 year 17 days - 2 years 8.25% 8.75%

2 years 1 day - 2 years 15 days 8.50% 9.00%

2 years 16 days 9.25% 9.75%

2 years 17 days - 3 years 8.50% 9.00%

3 years 1 day - 5 years 8.25% 8.75%

5 years 1 day - 8 years 8.25% 8.75%

8 Year 1 Day - 10 Years 8.25% 8.75%41

• Retail credit:– Housing loans– Consumer durables Loans– Credit Card loans– Auto loans– Personal loans

42

Factors contributing to growth• Slow down in corporate credit off take• Liberalization of lending norms• Lower risk• Enabling technology• Growing economy and income levels• Decline in interest rates• Competition among banks• Faster appraisal

44

Growth rate of retail Assets of the banking system

Sr. No.

Type of Retail Asset

2004 2005 2006 2008 2009 2010 2009-10

1 Housing Loans 89449 134276(50.5)

179165 (33.4)

252932(12.7)

263235(4.1)

315862 20.0

2 Consumer Durables Loans

6256 3810(-39.10)

4469(17.3)

4802(-37.2)

5431(13.1)

3032 -44.2

3 Credit Card Receivables

6167 8405(36.3)

12434(47.9)

27437(49.8)

29941(9.1)

21565 -28.0

4 Auto Loans - 35043 61369(75.1)

87998(6.6)

83915(-4.6)

78346 -6.6

5 Other Personal Loans

87170 85077(37.8)

118355(39.1)

197607(27.5)

211294(6.9)

203947 -3.5

6 Total Retail Loans

198042 266611(41.2)

375739(40.9)

570776(17.1)

593815(4.0)

622752 4.9

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• Percentage of Retail Assets to Total Assets of the Banking system

46

Sr. No.

Details of Advances

2004 2005 2006 2008 2009

1 Total Advance of the Banking System

864271 1125056 1473723 2332032 2793572

2 Percentage of Retail Assets to Total Advances

21.9 23.7 25.5 24.5 21.3

3 Growth rate 23.2 19.8

• Share of Interest Income to Total Income

47

S.No. Income Segment 2005-06

2006-07

2007-08

2008-09

1 Interest Income in %

84 84.3 83.6 83.8

2 Non Interest Income in %

16 15.7 16.4 16.2

• RETAIL BANKING –SOME STATISTICS 12.06.07 • Retail boom started around 2002-03• Citi Bank early mover -citi never sleeps• Home grown ICICI, HDFC Bank, leadership

positions • Stanchart, HSBC with clear strategy • Carpet Bombing approach• - cold calls to every one and anyone • Credit grown @30 % since 2004• Retail bank credit @40%• Booming economy , low interest rates and growing

consumer confidence• Auto loans, personal loans, credit card dues - about

50% share in total retail loans• Home loans - another50% of retail loans grew by 50%

in 2005 and 33 percent in 2006- Rs 18,00,000 cr. 49

As per Edelweiss mortgage finance report Feb. 2007,Indian Mortgage as % of GDP

up from 6.0 % in 2004 to 8.5% in 2006 but small in comparisons to developed countriesUS (51%) UK (54%)Asia (10-30%)Mortgage loansSBI 11% of total lendingICICI BANK 30% (25%) of total lending Low by international standards

50

Trends – Recent past – 2004-05

• Banks are increasing their dominance in housing finance and capturing the market share of the housing finance companies.

• During 2004-05, the market share of banks stood at 62%, against the 33% by Housing finance companies;

• Despite this phenomenal growth in India, the housing loan as a percentage of GDP at 4.91% indicates low penetration when compared to other countries like Malaysia (17%) and Thailand (9%).

51


• Retail lending constitutes just 12.36% of the Indian banking system.

• Given this macroeconomic scenario, the share of retail banking will grow dramatically and it is expected that about 35% of the incremental growth in net credit will come from retail banking.

• In the next five years ie till 2010, retail banking is expected to grow by a CAGR of 25% to touch the figure of Rs575,000 crore.

52


• During 2004-05 retail contributed 42% of overall credit growth.

• Growing at the CAGR of 35% over last 5 years the retail asset size touched Rs1,89,000 crore.

53

Commercial vs. consumer loansCommercial loans Consumer loans

Small volume, large loans Large volume, small loans

One-by-one approval Volume approval

Hierarchy of approvals –senior managers approve large, complex loans

Hierarchy of approvals –senior managers approve credit product programs

Close account management and review on a loan-by-loan basis

Portfolio management by aggregate performance statistics

Financial data available Limited data available

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• Upcoming Foreign Banks In India

By 2009 few more names is going to be added in the list of foreign banks in India.

• Reserve Bank of India paving roadmap for foreign banks in India greater freedom in India.

• Among them is the world's best private bank by EuroMoney magazine, Switzerland's UBS.

The following are the list of foreign banks going to set up business in India

• Royal Bank of Scotland • Switzerland's UBS • US-based GE Capital • Credit Suisse Group • Industrial and Commercial Bank of China

56

Indian Banking Sector: Overview 222 commercial banks in India (of which 133

RRBs)• Operating with 68,681 branches (March 06)• Nearly 70% of branches are in rural/semi-urban

areas• Bulk of commercial bank finance is for short-term

working capital needs of industry, trade, agriculture & personal segment.

• Foray into project finance also.• Banks are supporting growth in the economy by

financing productive sectors

57

58

Robust economic growth

Agriculture

FY2005

0.7%

Industry 7.4%

Of which: manufacturing 8.1%

Services 10.2%

GDP growth

GDP growth expectations at about 8.5%

Total 7.5%

FY2006

6.0%

8.0%

9.1%

10.3%

9.0%

FY2007

2.7%

11.0%

12.3%

11.0%

9.4%

H1-2008

3.7%

9.5%

10.2%

10.5%

9.1%

Economic growth driversFavourable demograph

ics

Manufacturing

Infrastructure

Knowledge capital

International

expansion

Rising disposable

incomeInvestment Personal

Consumption

Housing

Transportation

Personal credit

Investment and consumption cycles mutually re-enforcing

59

Changing consumer demographics

Increasingly affluent, with bulging middle class

The youngest population in the world

Increasing literacy levels

Higher adaptability to technology

Urbanization is a continuing trend

Increasing "consumption" mindset in India

60

61

Changing structure of the economy

FY1991 FY2006

Services

Industry

Agriculture

43% 61%

25%

32%

19%

20%

Rapid growth of services sector Leveraging high quality education and vast

talent pool Sublimating India’s knowledge capital to

create economic value

62

Upward migration of incomes…

FY1996 FY2002

Middle income

High income

33 50

1 3

Rising affluence and growth of the consuming class NCAER data for top 24 cities in India shows

migration to higher income levels growing at over 40% per annum

FY2010Estimat

e

98

10

(households in million)

Middle income Rs. 90,000-5,00,000 per household p.a.

High income > Rs. 5,00,000 per household p.a. 62

63

…across rural and urban India

FY1996 FY2002

17 16

0.7 0.3

27

1.8

(households in million)

23

0.7

Urban RuralUrba

nRural

43% of households in middle and high income groups from rural India in 2005 Their number has grown by 79%

from 1996-2005

High income

Middle income

Figures for 2005 are estimatedMiddle income Rs. 90,000-5,00,000 per household p.a.High income > Rs. 5,00,000 per household p.a.

FY2005E

35

3.6

28

1.2

Urban

Rural

63

Highest proportion of population below 35 years (70%) in India

Per cent of population, 2003

7

23

35

35

>60

35-59

15-34

0-14

10

30

35

25

23

36

26

16

8

26

37

29

A “Young” population . . .

Highest proportion of population below 35 years (70%) in India……

64

65

. . .which means a bigger opportunity

365

240

73

3650-14

15-35

35-59

>60

2003

391

295

87

449

2009 E

Total Population in million

1,044

1,221

130 mn plus people get added to working population

Benchmarking 75%

17%

2%

54%

34%

53%

0

100

200

300

400

500

600

700

800

India Thailand Malaysia Taiwan Korea USA

0%

10%

20%

30%

40%

50%

60%

70%

80%

Total consumer loans outstanding

Consumer loans outstanding / GDP (%)

The under-penetration is reflected even within the sub-segments

Con

su

mer

loan

s

ou

tsta

nd

ing

(U

SD

in

billion

)

Con

su

mer

loan

s ou

tsta

nd

ing

/

GD

P(%

)

Source: Salomon Smith Barney

66

Top five banking groups in the world ranked by capital

• Figures in US $ , and as at end-2005• HSBC — 79 billion • CITI GROUP — 75 billion • BANK OF AMERICA — 73 billion • JP MORGAN CHASE — 72 billion • MITSUBISHI (UJF) FINANCIAL GROUP — 64

billion

67

– Top Performing Private Sector Banks

• ICICI Bank

• HDFC Bank

• AXIS Bank

• Kotak Mahindra Bank

68

HDFC Bank Limited The Bank offers a range of

commercial and transactional banking services and treasury products to wholesale and retail customers. The Bank operates in three segments:

retail banking, wholesale banking

and treasury services. The retail banking segment serves retail customers through a branch network and other delivery channels. The wholesale banking segment provides loans and transaction services to corporate and institutional customers. The treasury services segment undertakes trading operations on the proprietary account, foreign exchange operations and derivatives trading.

69

International Competitiveness• According to Moody’s Investor

Services:

• Indian lenders have highest ROE 20.38%), (in Asia

• followed by

• Indonesia (20.19%),

• New Zealand (18.83%),

• Japan (-6.42%)

70

RELATIVE STRENGTH AND RESILIENCE OF INDIAN BANKS

IN ASIA By Standard & Poor

• -Indian banking ahead of • China, • Indonesia, • Philippines and Vietnam.• But the banking industries of Australia,

New Zealand, Singapore, Hong Kong and Japan, and even Malaysia, South Korea, Taiwan and Thailand are ahead of India.

71

Average gross bad loans as share of total loans:

» India (8.18%),

» Phillipines (15.05%),

» Thailand (13.08%),

» China(11.80%)

» and Malaysia (9.73%).

72

Andhra Bank

73

Value Added Services

Insurance linked savings deposits – Abhaya, Abhaya Gold, Jeevan Abhaya, Jeevan Prakash, Jeevan Prakash plus, Arogyadaan, AB Flex etc. offered.

Bancassurance – Tied up with LIC and United Insurance companies for sale of Life and non-life products.

Associated for sale of Mutual Fund products with major companies.

Introduced Depository participatory services. Cash Management Service covered 84

customers in 123 branches. Turnover for the year crossed Rs.1147 Crore.

Andhra Bank

74

Value Added Services (Contd..)

* Introduced 8 a.m. to 8 p.m. and 7 day Banking in select branches to extend the Service hours to clientele.* Opened a Representative Office in Dubai to coordinate with NRIs for increasing our NRI customer base.* Imparting training to Agriculturists, Rural Un-

employed youth on vocational courses by our 9 Rural Development Institutes

Andhra Bank

75

Business channels

Andhra Bank

As on Branches ECs Satellite Offices

ATMs Total

31.03.03 1100 113 44 220 1477

31.03.04 1128 129 44 272 1573

31.03.05 1168 136 38 330 1672

31.03.06 1213 123 37 391 1764

Bank has presence in 21 States and 2 Union Territories.76

ICICI Bank’s strategy to capture retail potentialStrong

corporate relationships

Brand

Technology

Operational excellence

Achieving leadership in

retail financial services

… the core of this strategy is our relentless focus on the customer and cross-selling of products

77

Catalyzing cross-sell

Internet Banking

Call Centers

500 Outlets 1005 ATMs

Bonds Life insurance Health insurance

Fixed deposits

Consumer loans

Auto & home loans

Credit & debit cards

Power Pay

Customized cross-selling by leveraging relationships,

brand and technology

78

Operational excellence

These measures have ensured that we have followed a cautious approach while maintaining high growth rates and profitability in all segments

Prudent credit policies

Adequate fraud control

Rigorous collection mechanism

Bolstered by a company wide 6 sigma initiative

79

Benchmarking (contd.)

8.0% 13.0%26.0%

36.0%

58.0%

India Thailand Malaysia Taiwan Korea

Consumer loans / Total loans

9.0%13.0%

17.0%

37.0%

1.0%

India Thailand Korea Malaysia Taiwan

Mortgages / GDP

USA - 51%

2.8% 9.8%

82.4%

121.9%

0.4%


USA - 235%

0.8%

8.0%

16.0% 17.0%

41.0%

India Thailand Taiwan Malaysia Korea

Other retail loans / GDP

Credit cards / Population

USA - 24%

India’s retail market is at a nascent stage and is expected to grow rapidly on account of the current trend in upward migration of household income levels

Source: Salomon Smith Barney



India Thailand Korea Malaysia Taiwan

India Thailand Taiwan Malaysia Korea

80

Household segment migration

1996 1999 2002

Rich (> Rs. 0.5 mn p.a.) Mass affluent (Rs. 0.3-0.5 mn p.a.)Mass (Rs. 0.1-0.3 mn p.a.)

2.1

6.8

Source: 1996, 1999 data is from NCAER study for top 24 cities, 2002 data is estimated by ICICI Bank

~CAGR 48%CAGR 48%

22.9No. of households (million)

81

Distribution Strategy

Building Building DistributionDistributionBuilding Building

DistributionDistribution

82

• After interest rates have hardened to 14% (floating) and 12%(fixed) in 2006-07, it has cooled the surge in retail bank loans.

• average tenors increased from 150 months in 2001 to 173 months in 2006.

• In growth phase and competition, lending norms were eased and riskier borrowers mopped up thus possibility of higher NPAs is there. (CRISIL)

• ate 90s

83

• Liberalization, economic growth, changing demographics, and technological advancements have fueled the growth of retail banking in India. The product range in retail banking includes four broad categories: liability products, asset products, credit cards/debit cards, and investment products. Liability products include savings accounts, no-frills accounts, current accounts, fixed deposit/term deposits, and recurring deposits. Asset products include all kinds of retail loans, such as housing loans, personal loans, education loans, gold loans, loans to senior citizens, property and mortgage loans, vehicle loans, and agricultural loans. The investment products include investments in mutual funds, insurance policies, and pension plans. These are discussed in subsequent chapters.

84

• Indian Banking Sector• Banking in India has its origin as early as the vedic period. It is believed that the

transistion 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 Mogul period, the indegenous 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 19th 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 27th January 1921. 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 nationalised and in 15th April 1980 six more commercial private sector banks were also taken over by the government. Today the commercial banking system in India may be distinguished into :

85

• As the bargaining power of a retail customer is less than that of a corporate customer, banks tend to charge the same price/interest rate for all retail customers, with the exception of high-value segments (HNIs and NRIs).

• Banks set the price for liability products, without the interference of the RBI.

• Asset products are priced based on the prime lending rates set by banks for each asset category. Overt pricing and covert pricing are the two different approaches to pricing.

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• The promotion of retail banking products is done through various avenues of promotion, such as advertising, sales promotion, personal selling, brand building, public relations, telemarketing, direct sales, and direct-response advertising.

The common distribution channels in retail banking are branches, ATMs, the Internet, phone banking, and mobile banking, EFTPOS, direct selling agents (DSAs), call centers, and distribution network of alliance partners. There are some overlaps between the promotional avenues and distribution channels. For example, telemarketing and personal selling may be outsourced to DSAs.

Cross-selling helps the banks to increase their sales by selling different products to existing clients. It helps improve customer retention, reduce the cost of customer acquisition, and enhance customer lifetime profitability. Cross-selling also helps the customers in terms of reduced prices, faster and easier processing, and customized products. However, excessive cross-selling would be viewed by the customer as harassment.

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Rural banking: A new growth opportunity

1. Source: CERG (Consumer & Economic Research Group)

2. Source: Tata Statistical Outline3. Source: Mckinsey Global Institute May 2006

Opportunities for growthThough agriculture constitutes only 20% of India’s

GDP, rural economy (agri + non-agri) constitutes about 50% of GDP1

Rural population of about 780 million2 with limited access to financial services

Population per bank branch: 22,793

Informal credit in India amounts to US$ 82bn3

A high proportion of agricultural lending is from informal sources3

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• Special needs– Doorstep banking– Flexibility in timings– Low value and high volume of transactions– Limited background information and proof of

income– Require simple processes with minimum

documentation

However, banking in rural India is challenging…

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• Conventional banking not suited to meet these demands– High costs of delivery through traditional

channels– High transaction costs– Dependence on documentation and financial

history– Inflexible procedures

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…and requires a comprehensive approach• Multiple products

– Low-income customers require full range of services: credit, transaction banking, investment and risk mitigation

• Multiple channels– Branches at selected locations– Franchisees, internet kiosks, MFI partners

• Deep penetration of the market– Using a combination of channels to completely cover

selected areas

• Rapid-scale up– To reduce average operating costs

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Consumption drivers

Middle income: Rs. 90,000 (US$ 2,250)-Rs. 500,000 (US$ 12,500) per householdHigh income: > Rs. 500,000 (US$ 12,500) per householdSource: NCAER

Middle and high income population -

260 mn1


260 mn1


350 mn1


350 mn1

2000: Per capita GDP

US$ 500

2000: Per capita GDP

US$ 500

2007: Per capita GDP US$ 1,000


35% growth

From per capita GDP of US$ 1,000 to US$ 1,500: consuming population to grow manifold


600 mn1


600 mn1



70% growth

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• List of State Bank of India and its subsidiary, – State Bank of Patiala– State Bank of Bikaner and Jaipur– State Bank of Hyderabad– State Bank of Indore

(merged with SBI in 2010)– State Bank of Mysore– State Bank of Saurashtra– State Bank of Travancore

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Old Generation Pvt Sector Banks

1. Bank of Rajasthan Ltd. 2. ING Vysya Bank Ltd. 3. Dhanalakshmi Bank Ltd.

4. Federal Bank Ltd 5. Jammu and Kashmir

Bank Ltd.- 6 Karnataka Bank Ltd. - 7. Karur Vysya Bank Ltd.- 8. Ratnakar Bank Ltd.

9. South Indian Bank Ltd.

New Generation Pvt Sector Banks

1. ICICI Bank. 2. HDFC Bank

3 IndusInd Bank Ltd. 4. Axis Bank

5. Development Credit Bank

6. Kotak Mahindra Bank 7. Yes Bank

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Commercial Banks are functioning on

commercial basis with profit motive Top Performing Public Sector Banks

• State Bank of India Bank of Baroda• Canara Bank Union Bank of India• Punjab National Bank United Bank of India• Allahabad Bank UCO Bank• Bank Of India Vijaya Bank• Dena Bank Bank of Maharashtra• Central Bank of India Indian Bank• Panjab and Sind Bank Indian Overseas Bank• Andhra Bank Oriental bank of Commerce • Corporation Bank Syndicate Bank

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02 iintroduction to retail banking 2011

Economy & Finance

Transcript of 02 iintroduction to retail banking 2011