Retail Banking

Products and Services offered by Banks

• Acceptance of deposits from Public
• Lending of various types,
• Investments
• Para-banking activities including:
• Remittances
• Safe Deposit Lockers
• Safe Custody of Articles
• Collection of Negotiable Instruments
• Issuance of Letters of Credit
• Issuance of Letters of Guarantee
• Advising and Confirmation of LCs
• Dealings in Forex
• Collection of Taxes for Government
• Pension Payments

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Retail Banking
Retail banking is when a bank executes transactions directly with individual
consumers, rather than corporations or other banks

Retail Deposits Retail Loans

• Savings Bank (SB) • Home Loans

• Recurring deposit (RD) • Auto Loans
• Term / Fixed deposit (FD)/ TD • Consumer Loans
• Zero balance account • Personal Loans
• No frills a/c • Education Loans
• In addition services like • Business / Trade-related loans
lockers/ Depository services • Agricultural Loans
etc. • Credit Cards

Generally loans under retail lending range between a tenure of 5-7 years with
longer duration for home loans of 15-20 yrs
Drivers of retail banking in India

• Increased purchasing power in the hands of consumers over past two

decades
• Favorable demographics in our population
• Convenience banking through technology advancement
• Aids the bank in risk diversification
• Increased competition putting pressure to keep rates competitive
• Lower default rate leading to lower provisioning requirement
Recent trends in Retail Banking
• Booming economy and continuous per capita income will further push the living standards of people
and higher literacy levels
• Phenomenal rise in nuclear and dual income families & enhanced spending power
• Growing consumerism
• Customers’ preference to more and more alternate channels for convenience
• Higher adaptability to technology banking
• Rapid penetration of Personal Computers, Mobile phones and on-line Trading and purchase options
encouraged increased usage of technology banking
• Fee based income from remittance is shrinking due to RTGS and other technology initiatives
• Customer retention initiatives by PSU Banks
• Aggressive entry strategies of foreign banks to Retail Segment
• Higher short term interest and flatter yield curves
• Fiscal incentives to Housing loans
Current Status of Retail Banking
• Today’s retail banking sector is characterized by three basic characteristics:
• Multiple products
• Deposits
• Credit cards
• Insurance
• Investments
• Securities
• Multiple channels of distribution
• Call center
• Branch
• Internet
• Kiosk
• Mobile
• Multiple customer groups
• Individual consumer
• HNIs etc
Deposit Products
Deposit products

Types of
Deposits

Current Savings Recurring Fixed

accounts accounts deposits deposits.

• All these deposit accounts have different purposes and different features.
• A customer can choose from these based on his / her requirement.
Current accounts
• Money available on sight as the client may draw and deposit money, order or receive funds
at any time, without any restriction.
• Basically meant for business/ daily use and are not usually used for the purpose of
investment or savings.
• In terms of RBI directive banks are not allowed to pay any interest on the balances
maintained in Current accounts.
• However, legal heirs of a deceased person are paid interest at the rates applicable to Savings
bank deposit from the date of death of the account holder till the date of settlement.
• On the other hand, banks charge certain service charges depending on the level of activity in
the account.
• They are required to maintain higher minimum balance on an average per quarter than other
types of accounts.
Savings accounts
• Intended to provide an incentive for customers to save money.
• Also, an avenue for safe-keeping of the customers’ money.
• Usually pay an interest rate higher than a current account but lower than a fixed deposit.
• Among the most popular deposits for individual account holders.
• Provide a cheque facility.
• Also give holders a lot of flexibility for deposits and withdrawal of funds.
• Banks have different types of savings accounts depending on customers needs, with
different perquisites and fees.
Features of savings accounts
The main features of saving account in bank are as follows:
• No restriction on the number and amount of deposits.
• PAN (Permanent Account Number) details are required to be furnished for doing cash
transactions exceeding INR 50,000.
• Withdrawals are allowed subject to certain restrictions, in some cases.
• Money can be withdrawn either electronically, by cheque or withdrawal slip of the
respective bank.
• The rate of interest payable is very nominal on saving accounts. At present it is between
4% to 6% per annum.
Fixed deposits (FDs)
• Created by opening of a deposit account where the client deposits a certain amount
of money in the bank for a predetermined and fixed period of time.
• The bank is also obliged to pay out interest at a definite time.
• Interest paid is higher compared to that on a current account.
• Usually increases when the term of the deposit for which the contract is concluded
is enlarged.
• The depositor can ask for closing (or breaking) the fixed deposit prematurely.
• In some cases there may be a penalty charge for this facility.
• In other cases, the interest reduces if the time remaining to maturity is lower at the
time of closure.
Recurring Deposits
• A special kind of term deposit suitable for people who do not have lump
sum savings, but are ready to save a small amount every month.
• Normally, such deposits earn interest on the amount already deposited
(through monthly instalments) at the same rates as are applicable for fixed or
term deposits.
• Best if you are saving for a purpose, such as creating a fund for a child’s
higher education.
Retail Lending Products
Personal Loans
• An unsecured loan extended by banks to individuals for any purpose such as
small purchases, or household expenses.
• They are unsecured because the bank does not require any collateral against
such loans.
• Key features of personal loans are as follows:
• Interest rates on Personal Loans are very high. The interest rate may be fixed or
variable and ranges from 14% - 19% p.a.
• The usually have a fixed repayment period and early repayment would attract
prepayment penalties.
• Used for short-term requirements, ranging from 6 months to about 3 years.
• Best way to go for individuals looking to borrow relatively small amounts of money,
and who are able to repay the loan within a couple of years.
Credit Card Debt

• A small plastic card issued to users as a system of virtual payment for goods and
services.
• The user is obliged to pay the vendor for the consumed purchases at the end of the
credit period (about 1 month).
• Interest rates on credit cards are probably the highest compared to other credit
facilities, ranging from 18-36% p.a
• Debt keeps accumulating via interest and penalties.
• Interest charges are usually waived if entire outstanding amount is paid by the end
of the month but interest will be charged on the entire outstanding balance from the
date of each purchase if the payment is not made.
• The high interest charges make this product a lucrative source of income for most
banks.
Auto Loans
• Auto loans are offered by banks as a secured loan to individuals looking to purchase
vehicles.
• The purchased vehicle acts as collateral for the loan.
• Loans can be availed of for up to 90% of the value of the vehicle.
• Key features of auto loans are:
• They are relatively easy to obtain as they are secured loans, and presently there are various
financing agencies which have tie-ups with car dealers / manufacturers to help customers finance
their vehicle purchases easily.
• The interest rates on auto loans are relatively lower as compared to personal or credit card loans,
ranging from 11% - 16% p.a. depending on the nature of the car (new or resale) and the tenure.
• If there are any defaults in interest or principal repayments, the bank / financing agency may take
possession of the collateral vehicle in order to make good the loss due to default.
• Auto loan interest is typically not tax-deductible.
Home Loans
• Home loans or mortgages are loans availed of from banks and other financial institutions
for purchase of real estate like a house, or land or any other property, other than commercial
premises.
• Key features of home loans are as follows:
• Home loans are secured in nature by the property purchased against the loan.
• Loans can be obtained for about 80% – 90% of the property being purchased.
• Interest rates range from around 10% - 12% depending on the tenure of the loan and the amount
of loan.
• The tenure of these loans is usually around 15 – 20 years.
• However, for salaried employees, the tenure is capped at the retirement age of the individual in
whose name the loan is availed.
• Interest rates are usually floating in nature and are linked to the Prime Lending Rate or the Base
rate of banks.
• Home loan interest payments are tax deductible under Income Tax Act Section 24 in India.
Loan against Security
• Short-term liquidity generator when funds are otherwise tied in long-term investments.
• The bank provides an overdraft facility against various securities pledged with the bank.
• The customer may avail of the entire amount sanctioned as part of the overdraft facility, or
simply a part of it.
• Interest has to be paid only on the amount of overdraft utilized.
• Securities against which loans can be availed:
• Demat Shares
• Mutual Funds Units
• Fixed Maturity Plans (FMP)
• Exchange Traded Funds (ETF)
• Insurance Policies
• Savings Bonds
• NSC/KVP (Demat form)
• Gold
Education Loan
• Students aspiring to pursue higher studies either in India or abroad can avail of Education
Loans from most private and public sector banks in India.
• Key features of education loans are as follows:
• Education loans can be availed for amounts up to around Rs. 15 lakh from most banks.
• Average loan size of domestic education is Rs. 2-3 lakh while that for overseas education is around Rs. 7-8
lakhs.
• Some banks offer a concessional interest rate on loans availed for professional courses.
• Terms of collateral security vary for individuals.
• Collateral security can be provided in the form of liquid assets, Policies of Life Insurance Corporation, Kisan
Vikas Patra, National Saving Certificate etc. for the loan amount or amount less than it, as decided at the time
of finalization of loan.
• The maximum repayment tenure is up to 15 years post a moratorium period.
• The moratorium period is usually maximum the Number of years of the course + 1 year.
• Interest paid on education loan is eligible for a tax rebate under section 80E of the Income Tax Act 1961.
Opportunities

Retail banking has a large window of opportunity in the fast-growing Indian

market, due to:
• Rise in disposable income and thus purchasing power of average consumer.
• Liberalization of the banking system.
• Increased consumerism due to the media and Internet.
• Falling interest rates mean that people want to ‘save less, spend more’
• Rise in the nuclear and cross-border family concept, more banking services are
needed.
• Rise of the youth as an economic demographic.
• Tax benefits on some retail lending products (such as housing loan).
Challenges

However, the challenges that financial services providers must face

in the retail sector are as follows:
• Lack of customer loyalty especially in add-on services such a credit
cards
• Increasing consumerism is a double-edged sword since it also brings a
rise in indebtedness
• Technology challenges
• Large untapped rural market which is difficult to cater to
• Money laundering and fraud risks
 Transformation in retail banking

• In the past, customers were happy with moderate-yield, low-risk and low-cost
savings deposits
• New generation prefers to invest to build wealth,
• demand very high levels of convenience,
• expect better working technology,
• Require information and advice that can be acted upon, and
• Prefer wide range of alternative products
• They are highly individualistic and require customized solutions to what they
perceive to be unique needs
 Role of information Technology

• It contributed to major upheaval in wholesale banking though its

impact on retail bank is increasing.
• Technology based delivery channels such as ATMs did not differentiate
retail banks.
• Corporate clients are more familiar with automation than retail
customers in India.
• Internet banking has not taken root in India though it is growing. It still
represents a small % of banking transactions.
 Why move to retail banking?

• Downfall in the demand of credit

• Slackness in the economic activities
• To attract rich middle class with consumer finance and housing finance
products
• Increase lending business to growing number of entrepreneurs and startups
 Differences between Retail and
Corporate Banking

• Higher Interest rates

• Lower risk of NPAs
• Relationships not the sole means of growth
• Need for publicity
• Sensitivity to pricing
• Volume based strategy
• Freebies for customers
 Competition to Retail Banks

1. NBFCs
2. Post Offices
 Liability Products v/s Asset Products

Liability Products
• Savings accounts
• No – frills accounts
• Current accounts
• Fixed deposits / Term deposits
• Recurring deposits
 Liability Products v/s Asset Products

Asset Products
• Housing loans
• Personal loans
• Education loans
• Gold loans
• Loans to senior citizens
• Property and mortgage loans
• Vehicle loans
• Agricultural loans
 Other Products

• Credit cards
• Debit cards
 Investment Products

• Insurance Products
• Pension plans
• Mutual funds
 New Product Development

Generic New Products

• As per feedback received from customers
• HDFC Bank along with Visa international issued Netsafe virtual card
• Some private banks introduced pre-approved loans
• Investment in R & D for organic growth
 Banking to HNIs and NRIs

• Various deposit products

• Fund transfer facilities
 Pricing

• Identifying bank’s objectives --- profit margin and target market share
• Market analysis for understanding trends in consumer behaviour and
competition
• Cost analysis to identify all the costs associated.
 Pricing

Price Elasticity of Demand

• Price elastic
• Price inelastic
 Pricing

• Pricing of Liability Products

• Pricing of Asset Products
 Pricing for HNI and NRI segments

• Discriminatory pricing policy

• Bulk deposits and big ticket loans
 Covert and Overt Pricing

Overt Pricing --- Explicit charges that a bank recovers from a customer for its product
offerings. Flat fee on quarterly or yearly basis for using ATM network, phone banking
or internet banking.
• Penalties for non-maintenance of minimum balance

Covert Pricing --- Charges which are not explicitly charged to customers for services
used. Loss in one product is recovered by revenue from other products by charging
higher price or by paying lower dividend to shareholders.
• Example Free credit cards v/s no interest on current account.
 Promotion

Advertising
• Rational appeal --- used to provide information on product features and
their benefits --- Price appeal, quality appeal, features appeal,, competitive
advantage appeal
• Emotional appeal --- Highlight social or psychological needs --- humour
appeal, fear appeal, music appeal etc.
 Sales Promotion

• Attracting new customers by giving offers and incentives

• By giving gifts, cash back offers
 Branding

• Branding helps banks in getting widespread recognition and improving

customer loyalty.
• Celebrity endorsements.
 Personal Selling

• Product based sales approach

• Customer based sales approach
 Telemarketing

• Credit cards
• Retail loans
 Direct Mail and Direct-response
Advertising

• DirectMail --- Product information is directly mailed to target specific

customers
• Direct-response Advertising --- Product is advertise without giving full
details. Interested customers are requested to contact for more information.
 Public Relations

The objective of PR is to maintain a consistently positive image in the public.

P R Tools ---
• Annual reports
• Speeches by top management
• Seminars
• Charitable donations
• Event sponsorships
• In-house magazines,
• press releases
 Distribution Channels

• Branch Banking
• ATMs
• The Internet
• Phone and Mobile Banking
• EFTPOS --- Electronic Fund Transfer at Point of Sale
• Direct Selling Agents (DSA)
• Call Centres --- In bound for customer service and Out bound for telemarketing and tele-order
booking.
• Distribution Network of Alliance Partners
 Cross-selling

Need for Cross-selling

• Used by banks to further penetrate into existing markets
• Very effective in reducing cost of sales
• Helps in building relationship with customers
 Benefits of Cross-selling

Benefits to Banks
• Reduction in the total cost of acquiring new customers
• Improved customer retention
• Insights that help offer better suited and more customised products
• Enhanced ‘Per Customer Lifetime Profitability’
 Benefits of Cross-selling

Benefits to Customers
• Reduced Prices
• Faster and easier processing
• Customized products
 Issues in Cross-selling

• Mind set of Bank executives --- Marketing personnel v/s other departments
• Risk of causing customer dissatisfaction if wrong products are recommended.
• Excessive cross selling may be viewed buy customers as harassment and as
an intrusion into their privacy.