MBP

1. Origin and History of Banking in India
The origin of banking activities in India can be traced back to the Vedic period
of ancient India. At the time, money lending and borrowing were a few forms
of banking activities. Manusmriti, an ancient legal text, has mentioned about
money lending and rules regarding rates of interest.
In Modern India, banking systems emerged in the latter part of the
17th century. One of the first banks to be opened in the pre-independence
India were Bank of Hindustan and General Bank of India. Amidst the
revolutions and revolts between pre-independence and post-independence,
the largest and the oldest bank that still remains strong is the State Bank of
India. SBI started as Bank of Calcutta in 1806. The name was later changed to
Bank of Bengal. It was one of the three banks that were opened by the
presidency government ruling at that time. Bank of Bombay and Bank of
Madras were the other two banks that were launched by the presidency
government. After Independence, all of them were merged into State Bank of
India in 1955.
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2. • In the 19th century, several banks were formed across the country. However, many of these were
dissolved due to unorganized management. Reserve Bank of India was founded in 1935 to tackle
the economic issues after the First World War. It was only after the independence, RBI became
the central banking authority of India in 1949 under the Banking Regulation Act that empowered
RBI to regulate, control and inspect the banks of India.
• The 1960s witnessed the first wave of nationalization of some of the 14 largest commercial banks.
The 1980s saw the second wave wherein 6 more banks were nationalized. Things began to change
during the liberalization in the 1990s. Under the influence of liberalization, the government
provided a license to a few private banks like UTI (Axis Bank), ICICI, HDFC, and Oriental Bank of
Commerce. The markets were now opened to International banks. These banks were known as
new age banks, using tech-savvy methods to function. This shook the banking system of India.
• Meanwhile, India was preparing for the IT revolution that took the banking sector by a storm. This
created a need for Private and Public sector banks to adopt the Core Banking system, which led to
organized and comprehensive computerization of banking operations. Moving forward, the 90s
witnessed the adoption of modern payment systems, securities settlement, cheque clearing,
Electronic Funds Transfer, Cheque Truncation System, installation of Automated Teller Machines
and other modern methods of banking.
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3. Functions of Retail Banking
While retail banking in different forms has existed for a long time, it is a relatively
new concept. Over the period of time, it has emerged as an important component
of traditional and modern banking systems and an important market segment. In
simple terms, retail banking takes care of all banking needs of individual customers.
There are three primary functions of consumer banking.
Firstly, banks offer to deposit money for savings accounts, recurring deposit
accounts, fixed deposit accounts, and other financial services to safely secure the
capital for the general public.
Secondly, it offers credit in terms of interest earned on saving money and loans and
mortgage.
Thirdly, retail banks assist consumers in handling their money and managing their
money through various retail banking solutions and services. These kinds of
services help the customers in their financial matters and daily transactions.
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4. Types of Retail Banks
• These banks are often termed as people’s banks as they cater to the needs of the general public.
It is sometimes also referred to as personal banking or mass-market banking. Commonly, large
commercial banks have local branches to meet various objectives of retail banking. Some
common types of retail banks are:
• Commercial Banks: Also known as banks in general. However, this category excludes investment
banks and financial institutions. They help their clients through various banking services like
personal banking, business banking, online banking, financial services, and lending and
borrowing.
• Regional Rural Banks: RRBs are also known Gramin Banks, which have been established at a
regional level in various states of India to cater to low-income groups or people residing in
regional areas. These banks offer regular retail banking services and also include loans and
mortgages.
• Private Banks: These are usually the banks that operate in urban areas and cater to moderate to
high level income groups.
• Post Offices: In regions where people do not have access to regular banks, the National Postal
System offered basic banking services like account opening, savings, recurring deposits, and more.
For developing countries, this is a convenient and secure mode of banking in areas where
underdeveloped sections of society cannot reach the bank.
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5. Retail Banking Services Offered by Banks
• The advent of banking technology has seen a dramatic transformation in the functioning and operations of retail banking in India.
The banks have adopted the latest technology to reach out to clients, fulfill their needs and expectations, learn customer behavior,
increase productivity, staff efficiency, increase sales and manage money. Various retail banking services provided by banks include
a range of financial products that can be classified as retail deposit products, loan services, and payment services. Following are a
few retail banking solutions and services offered by banks to its consumers.
• Savings Bank Accounts: This is a type of bank account that customers can open at a bank, providing retail banking services to
deposit money and obtain interest on it.
• Current Account: Some other terms used to refer to this type of bank account at a retail bank are: checking account, transaction
account, and demand deposit account. It is made available to the account holder as per their demand. The account holder can also
make frequent transactions through it.
• Debit Card: It is a plastic payment card that is used instead of cash to make payments at ATMs and other places. Most of the banks
provide this card for each current or savings account.
• Credit Card: Just like debit cards, this is a plastic card to make payments instead of cash. Banks allow cardholders to make the
payments on credit with a promise to pay the bank the amount spent and agreed on additional charges.
• ATM Cards: These cards are restricted to withdraw and do other transactions at ATM.
• Some other products offered by retail banks to the individuals include term deposit account, fixed deposit, recurring deposit
account, zero balance salary accounts, and savings account for senior citizens at a higher rate of interest.
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6. • Loans: Banks lend money to their customers for various purposes. Loans in India through retail
banks include home loans, auto loans for new/used vehicles, consumer loans, education loans,
crop loans to farmers, business loans for small scale businesses.
• Apart from the above mentioned features of retail banking, banks allow their clients to avail safe
deposit lockers for safekeeping of their valuables at annual charges. Funds transfer, NEFT,
RTGS, Core Banking Solutions, Internet banking, mobile banking, information system, electronic
clearings service, cheque clearance, remittances, payment settlement and more are some other
important services provided by retail banks. Retail banking is a classic example of technological
revolution changing the banking system.
• Advantages of Retail Banking
• Retail banking is an alternative for banks as well as individual customers. The importance of retail
banking stresses the advantages of services offered by banks. Unlike corporate banking, retail
banking concentrates on small units and individuals for earnings. Over the years, it has proven to
have increased earnings and businesses for banks. It has reduced operational costs and has
helped banks in establishing a brand image in the market among the general public. In addition,
banks have developed customer relationship with their clients. This has increased and
strengthened the customer base.
• The retail sector is a large contributor to the revenue earned by banks as well as economic
development. It reduces the risk for banks if they depend on loans for their incomes. Additionally,
it provides a safe way to keep your savings and capital secure.
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7. Retail Banking - Opportunities
and Challenges
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8. Retail Banking – An Overview
Retail banking is the branch of banking that provides essential financial
services to individuals of the general public instead of businesses and
giant corporations. Also known as private banking or consumer
banking, it enables individual consumers to manage their funds, i.e.,
withdraw and deposit money, access credit facilities and other products
for remote banking. Essentially, a retail bank is a commercial bank
offering consumer products and services such as transactional
accounts, loans and bank cards.
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9. • Key Takeaways
• Retail Banking is the segment of banking that deals with retail customers.
• Standard retail banking products are bank accounts, lines of credit and bank cards.
• Individuals can open savings accounts, while business owners can opt for current
accounts.
• Debit card and credit card facilities are also part of the retail banking universe.
• Personal Loans, Home Loans, Auto Loans, etc., are widely availed retail banking products.
• The banking sector is divided into several branches depending on the type of services
they offer.
• For example, there are banks whose clients are corporates and large institutions, also
known as Corporate Banking. Some banks deal with high-net-worth individuals and offer
Private Banking services. Similarly, the banking sector that serves the general public is
called Retail Banking.
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10. Retail banking is, however, quite broad in nature - it refers to the
dealing of commercial banks with individual customers, both on
liabilities and assets sides of the balance sheet.
Fixed, current/savings accounts on the liabilities side; and mortgages,
loans (e.g., personal, housing, auto, and educational) on the assets
side, are the more important of the products offered by banks.
Related ancillary services include credit cards, or depository services.
The typical products offered in the Indian retail banking segment are
housing loans, consumption loans for purchase of durables, auto loans,
credit cards and educational loans. The loans are marketed under
attractive brand names to differentiate the products offered by
different banks
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11. Today’s retail banking sector is characterized by three basic
characteristics:
multiple products (deposits, credit cards, insurance, investments and
securities);
multiple channels of distribution (call center, branch, internet and
kiosk); and
multiple customer groups (consumer, small business, and corporate).
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12. Drivers of Retail Banking
Drivers of Retail Business in India What has contributed to this retail growth? Let me briefly highlight some of
the basic reasons.
First, economic prosperity and the consequent increase in purchasing power has given a fillip to a consumer
boom. Note that during the 10 years after 1992, India’s economy grew at an average rate of 6.8 percent and
continues to grow at the almost the same rate – not many countries in the world match this performance.
Second, changing consumer demographics indicate vast potential for growth in consumption both qualitatively
and quantitatively. India is one of the countries having highest proportion (70%) of the population below 35
years of age (young population). The BRIC report of the Goldman-Sachs, which predicted a bright future for
Brazil, Russia, India and China, mentioned Indian demographic advantage as an important positive factor for
India.
Third, technological factors played a major role. Technological innovations relating to increasing use of credit /
debit cards, ATMs, direct debits and internet and phone banking have contributed to the growth of retail
banking in India.
Fourth, the Treasury income of the banks, which had strengthened the bottom lines of banks for the past few
years, has been on the decline during the last two years. In such a scenario, retail business provides a good
vehicle of profit maximization. Considering the fact that retail’s share in impaired assets is far lower than the
overall bank loans and advances, retail loans have put comparatively less provisioning burden on banks apart
from diversifying their income streams.
Fifth, decline in interest rates has also contributed to the growth of retail credit by generating the demand for
such credit.
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13. Retail Banking Opportunities
Retail banking has immense opportunities in a growing economy like India. As the growth story gets
unfolded in India, retail banking is going to emerge a major driver. How does the world view us? I
have already referred to the BRIC Report talking India as an economic superpower. A. T. Kearney, a
global management consulting firm, recently identified India as the “second most attractive retail
destination” of 30 emergent markets.
The rise of the Indian middle class is an important contributory factor in this regard. The percentage
of middle to high income Indian households is expected to continue rising.
The younger population not only wields increasing purchasing power, but as far as acquiring
personal debt is concerned, they are perhaps more comfortable than previous generations.
Improving consumer purchasing power, coupled with more liberal attitudes toward personal debt,
is contributing to India’s retail banking segment.
The combination of the above factors promises substantial growth in the retail sector, which at
present is in the nascent stage.
Due to bundling of services and delivery channels, the areas of potential conflicts of interest tend to
increase in universal banks and financial conglomerates.
Some of the key policy issues relevant to the retail banking sector are: financial inclusion,
responsible lending, access to finance, long-term savings, financial capability, consumer protection,
regulation and financial crime prevention
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14. What are the challenges for the industry and
its stakeholders?
First, retention of customers is going to be a major challenge.
According to a research by Reichheld and Sasser in the Harvard
Business Review, 5 per cent increase in customer retention can increase
profitability by 35 per cent in banking business, 50 per cent in
insurance and brokerage, and 125 per cent in the consumer credit card
market. Thus, banks need to emphasize retaining customers and
increasing market share.
Second, rising indebtedness could turn out to be a cause for concern in
the future. Such a scenario creates high uncertainty. Expressing
concerns about the high growth witnessed in the consumer credit
segments.
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15. Third, information technology poses both opportunities and challenges.
Even with ATM machines and Internet Banking, many consumers still
prefer the personal touch of their neighborhood branch bank is
required. However, this dependency on the network has brought IT
departments additional responsibilities and challenges in managing,
maintaining and optimizing the performance of retail banking
networks.
Fourth, KYC issues and money laundering risks in retail banking are also
important. Retail lending is often regarded as a low risk area for money
laundering because of the perception of the sums involved.
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16. Retail Banking Trends in India
• In the past 10 years, the banking industry has undergone a major
evolution. Due to the rise of competition, the IT revolution, emergence of
Fintech and non-financial services, and changing customer demographics
and expectations have prompted banks to adopt new strategies and
techniques. Banks are moving towards the digital transformation that
offers better customer experience, reduction in operating costs and lower
cost for banking transactions. Meanwhile, internet banking and mobile
banking are the most rapidly emerging trends in the retail banking sector.
Technological innovation has made banking easy and convenient. This
trend is predicted to result in a drop in bank visits drastically in the coming
years.
• Use of artificial intelligence and voice assistants to deliver personalized and
contextualized services are technologically-forward innovations expected
to change banking systems. Adoption of biometrics authentication and KYC
systems are a few changing trends that are expected to lower risks of fraud
and fraudulent activities.
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17. The Scope of Retail Banking in India
As mentioned, retail banking has numerous advantages. This is one of
the reasons why it is a huge success for banks and customers. Today, it
is an attractive banking segment that has drawn immense attention
from investors and accelerators. Technology is constantly evolving that
makes the future of retail banking in India uncertain. Digital
transformation is just the beginning, there is much more in the pipeline
that is about to change the business of money.
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18. Wholesale Banking
• What is Wholesale Banking? Wholesale banking refers to the banking services offered
by banks to larger customers. The customers are various entities and the list is given
below.
• Mortgage banks
• Commercial Banks
• Large Corporations
• Mid-sized Companies
• Real Estate Developers and Investors
• Institutional Customers
• Government agencies
• Wholesale Banking includes currency conversions and large-scale transactions.
Wholesale banking is also called corporate banking or commercial banking, as opposed
to retail banking which involves small customers like individuals.
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19. Wholesale Banking Services
• Specialized Finance.
• Loan Syndications.
• Structured Transactions.
• Securitization.
• Credit Structuring.
• Public Sector Infrastructure financing.
• Advantages of Wholesale Banking
• There is additional safety for depositors.
• Lending to Government to carry out long term projects with heavy investments.
• Better Cash management.
• Massive working capital requirement of large businesses can be fulfilled.
• Customers of wholesale banking have the advantage of having lower transaction
fees.
• It will help companies have transactions on a large scale.
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20. The major advantage in wholesale banking is that a client can have easy and
one-place access to all its finances and their details. This makes internal
stock transfers, fund transfers, allocations and distributions simpler.
• Disadvantages of Wholesale Banking
• Interest Rates are very high.
• Processing Fees are also very high.
• Have to pay for services even if they are not availed.
• It is expensive to maintain accounts and records.
• Risk of large scale loss if the bank closes down.
• Wholesale banking increases the risk it poses to the clients as all their
funds are parked in one institution and the businesses depend on the
financial health of the bank for a smooth run.
• In cases of economic downturns, if the banks crash, all the dependent
businesses come to a standstill instantly.
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