1 CHAPTER 1: INTRODUCTION 1)Retail bankingis banking in which banking institutions execute transactions directly with consumers, rather than corporations or other banks. Services offered include: savings and transactional accounts,mortgages,personal loans,debit cards,credit cards,and so forth. Commercial bank has two meanings: Commercial bank is the term used for a normal bank to distinguish it from an investment bank. (After the great depression, the U.S. Congress required that banks only engage in banking activities, whereas investment banks were limited to capital markets activities. This separation is no longer mandatory.) Commercial bank can also refer to a bank or a division of a bank that mostly deals with deposits and loans from corporations or large businesses, as opposed to normal individual members of the public (retail banking). It is the most successful department of banking. Community development bank are regulated banks that provide financial services and credit to underserved markets or populations. Private Banks manage the assets of high net worth individuals. Offshore banks are banks located in jurisdictions with low taxation and regulation. Many offshore banks are essentially private banks. Savings banks accept savings deposits. Postal savings banks are savings banks associated with national postal systems. Retail Banking services are also termed as Personal Banking services.
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The Indian consumer is fast changing his habits, borrowing money to buythe products he wants, not content with buying what he can afford. Theresultant consumer boom is what market strategies explain as the key tosuccess of the Indian consumer finance market.
Consumer finance today is a win-win system in which everyone stands togain. For an Indian consumer, it is an opportunity to upgrade his standard ofliving right now instead of waiting for years for his savings to accumulate.For manufacturers, it stimulates demand and lowers inventory. Formiddlemen, it is a sales booting device. For players of consumer finance, itis a means of profit generation.
The buy-now-pay-later culture is still fairly nascent in India, evolvingthrough various forms like consumer lending, consumer credit, consumerloans, friendly and family borrowings, kitties, daily payment schemes, etc.the basic underpinning of consumer financing is that the consumer‟s
spending habits tend to be geared to expectations of future income. They arelosing their fear of borrowing, riding surfboards of consumer finance.
Retail banking is quiet broad in nature – it refers to the dealing incommercial banks with individual consumers, both on the liabilities andassets side of the balance sheet. Fixed/ current, Saving deposits on theliabilities side; and mortgages, loans (eg: personal, housing, auto andeducational) on the assets side are the more important products offered bythe banks. Related ancillary services include, credit cards or depositoryservices. Today‟s retail banking sector is characterized by three basic
Identifies and analyses management excellence in key dimensions such as:
Business models: Is there one best business model? Which ones haveoutperformed others? And why? Is a pure retail bank a viable model? Ifnot, why not? How does the retail function interact with other units in thesuccessful banks? How do the successful banks – especially those indiversified models – ensure that customer relationships are effectivelymanaged? What is the culture of a successful retail model? How have once-successful retail models lost their effectiveness?
Client base: With the enhanced importance of the customer post thefinancial crisis, four key dimensions of the customer base are examined:how the bank prioritizes the segments of this base; views on their clients‟
needs and behavior; how performance in serving the client is measured; andthe impact of new bank regulation, introduced since the crisis, largely to
protect the customer.
Geographic scope: How the „back to basics‟ theme from the banking crisis
is echoed in the geographic scope of bank retail strategies.
Retail distribution channels: How the four dimensions of channelmanagement are reflected in bank strategies: the theoretical role of the
branch and other channels; the challenge of integrating the channels; trendsin channel management; and unresolved issues for the future.
Retail leadership and culture: Is there a unique culture or leadership stylein successful retail banks? How might it differ from other businesses? Whatcan we learn from the management style and culture of the case studies of
excellence?
Cost base and bank operating systems: What factors drive the widedifference in perceived bank cost/income ratios? What is the relativeimportance of a bank‟s core system in contrast to other factors, such as
discipline in cost management? How are banks attempting to reduce theircost base, and what might be the likely outcome? What are the systems
issues facing a bank‟s management, and how might they be resolved?
Risk management and regulation: How bank decision-making structureshave been impacted; and the future outlook; and how effectively bankmanagement might deal with risk in the future.
The impact of the banking crisis on retail bank profitability : The driversof future profitability; and the likely outcomes in terms of bottom linereturns on equity.
Present Scenario
Indian retail banking has been showing phenomenal growth
In 2004-05, 42% of credit growth came from retail
Over the last 5 years CAGR has been over 35%
Retail credit level crossed Rs.189Crore in 2004-05
Market has transformed into a „buyer‟s market‟ from a „seller‟s market‟
Comprises of multiple products, channels of distribution and multiple
Retail banking in India is not a new phenomenon. It has always been prevalent in
India in various forms. For the last few years it has become synonymous banking
for many banks.
The typical products offered in the Indian retail banking segment are housing
loans, consumption loans for durables, auto loans, credit cards and educational
loans. The loans are marketed under attractive brand names to differentiate the
products offered by different banks. As the Report On Trend & Progress Of India.
2003-2004, has shown the loan values of these retail lending typically range
between Rs. 20,000 to Rs. 100 lakhs. The loans are generally of duration from 5 to
7 years with housing loans granted for a longer duration of 15 years. Credit card is
another rapidly growing sub- segment of this product group.
In the recent past, retail lending has turned out to be a key profit driver for banks
with retail portfolio constituting 21.5% of total outstanding advances as on March
2004. The overall impairment of the retail loan portfolio worked out much less
than the Gross NPA ratio for the entire loan portfolio.
With a jump in the Indian economy from a manufacturing sector, that never really
took off, to a nascent service sector, Banking as a whole is undergoing a change. A
larger option for the consumer is getting translated into a larger demand forfinancial products and customization of services is fast becoming the norm than a
competitive advantage. With the Retail banking sector expected to grow at a rate of
30% [ChandaKochhar, ED, ICICI Bank] players are focusing more and more on
the Retail and are waking up to the potential of this sector of banking. At the same
time, the banking sector as a whole is seeing structural changes in regulatory
frameworks and securitization and stringent NPA norms expected to be in place by
2004 means the faster one adapts to these changing dynamics, the faster is one
expected to gain the advantage. In this article, we try to study the reasons behindthe euphemism regarding the Retail-focus of the Indian banks and try to assess
how much of it is worth the attention that it is attracting.
The Indian players are bullish on the Retail business and this is not totally
unfounded. There are two main reasons behind this. Firstly, it is now undeniable
that the face of the Indian consumer is changing. This is reflected in a change inthe urban household income pattern. The direct fallout of such a change will be the
consumption patterns and hence the banking habits of Indians, which will now be
skewed towards Retail products. At the same time, India compares pretty poorly
with the other economies of the world that are now becoming comparable in terms
of spending patterns with the opening up of our economy. For instance, while the
total outstanding Retail loans in Taiwan is around 41% of GDP, the figure in India
stands at less than 5%. The comparison with the West is even more staggering.
Another comparison that is natural when comparing Retail sectors is the use of
credit cards. Here also, the potential lies in the fact that of all the consumer
expenditure in India in 2001, less than 1% was through plastic, the corresponding
US figure standing at 18%.
But how competitive are the players?
The fact that the statistics reveal a huge potential also brings with it a threat that is
true for any sector of a country that is opening up. Just how competitive are our banks? Is the threat of getting drubbed by foreign competition real? To analyze
this, one needs to get into the shoes of the foreign banks. In other words, how do
they see us? Are we good takeover targets?
Going by international standards, a large portion of the Indian population is simply
not “bankable” – taking profitability into consideration. On the other hand, the
financial services market is highly over-leveraged in India. Competition is fierce,
particularly from local private banks such as HDFC and ICICI, in the business of
home, car and consumer loans. There, precisely lie the pitfalls of such explosivegrowth. All banks are targeting the fluffiest segment i.e. the upwardly mobile
urban salaried class. Although the players are spreading their operations into
segments like self- employed and the semi-urban rich, it is an open secret that the
big city Indian yuppies form the most profitable segment. Over-dependence on this
segment is bound to bring in inflexibility in the business.
There has been a continuous decrease in interest rates over the last 5-6 years. For
instance, fixed interest rates for loans amounting to Rs. 5 lakhs for a tenure of 15years have fallen from 16% in 1997-98 to as low as 7% in 2003-04. This reduction
in interest rates coupled with increasing competition resulted in product
innovations and competitive pricing in the market.
Changes in demographic profi le:
Today the average age of borrower has declined from 40 years about 5 years ago
to, now, an estimated 30 years. In the future the average age is expected to reduce
further and hence it will augur well for the housing finance market in terms ofincreased borrowers.
Decline in average house costs:
There has been a reduction in average house costs to annual income ratio by 4-
times from high of a 11-14 a decade ago. This has also resulted in affordable EMI
as a percentage of monthly income.
Aggressive lending by banks:
Banks found a breather in housing loans as a means to deploy funds on back of lull
in credit off take by the corporate sector. To add to that the sector called for lower
risk weights, provided attractive spread and has lower level of delinquency.
Tax breaks:
The recent budgets provided for various tax and fiscal incentives for deploying
funds in the housing sector. The Reserve Bank of India (RBI) has also directed
commercial banks to allocate at least 3% of their incremental deposits in fiscal2002 to housing loans. At the same time the policy of the Reserve Bank of India
regarding the inclusion of Mortgaged backed securities as a part of priority sector
lending for banks and reducing the risk-weight on home loans from 100% to 50%
Opportunities and Challenges of Retail Banking in India
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 Reporttalking 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 delivery channels, the areas of
potential conflicts of interest tend to increase in universal banks and
financialconglomerates. 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. 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.
India's position, of course, is not comparable to that of the developed world where
household debt as a proportion of disposable income is much higher. Such a
scenario creates high uncertainty. Expressing concerns about the high growth
witnessed in the consumer credit segments the Reserve Bank has, as a temporary
measure, put in place risk containment measures and increased the risk weight
from 100 per cent to 125 per cent in the case of consumer credit including personal
loans and credit cards ( Mid-term Review of Annual Policy, 2004-05).
Third, information technology poses both opportunities and challenges. Even withATM machines and Internet Banking, many consumers still prefer the personal
touch of their neighbourhood branch bank. Technology has made it possible to
deliver services throughout the branch bank network, providing instant updates to
checking accounts and rapid movement of money for stock transfers. 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. Illustratively, ensuring that all bank
products and services are available, at all times, and across the entire organization
is essential for today‟s retails banks to generate revenues and remain competitive.
Besides, there are network management challenges, whereby keeping these
complex, distributed networks and applications operating properly in support of
business objectives becomes essential. Specific challenges include ensuring that
account transaction applications run efficiently between the branch offices and data
centers.
Fourth, KYC Issues and money laundering risks in retail banking is yet another
important issue. Retail lending is often regarded as a low risk area for moneylaundering because of the perception of the sums involved. However, competition
for clients may also lead to KYC procedures being waived in the bid for new
business. Banks must also consider seriously the type of identification documents
they will accept and other processes to be completed. The Reserve Bank has issued
details guidelines on application of KYC norms in November 2004.
HDFC Bank Limited is an Indian financial services company based in Mumbai,Maharashtra. It was incorporated in 1994. HDFC Bank is the fifth largest bank in
India by assets. It is the largest bank in India by market capitalization as of 24February 2014. As on Jan 2 2014, the market cap value of HDFC was around USD26.88B, as compared to Credit Suisse Group with USD 47.63B.The bank was
promoted by the Housing Development Finance Corporation, a premier housingfinance company (set up in 1977) of India.
As of 31 March 2013, the bank had assets of INR 4.08 trillion. For the fiscal year2012-13, the bank has reported net profit of INR 69 billion, up 31% from the
previous fiscal year. Its customer base stood at 28.7 million customers on 31March 2013.
HISTORY
HDFC Bank Limited was incorporated in August 1994. It was promoted byHousing Development Finance Corporation Limited (HDFC), India's largesthousing finance company. It was among the first companies to receive an 'in
principle' approval from the Reserve Bank of India (RBI) to set up a bank in the private sector. The Bank started operations as a scheduled commercial bank inJanuary 1995 under the RBI's liberalization policies.
On 26 February 2000, Times Bank Limited owned by The Times Group (Bennett,Coleman & Co.) was merged with HDFC Bank Ltd. This was the first merger oftwo private banks in India. Shareholders of Times Bank received 1 share of HDFCBank for every 5.75 shares of Times Bank.
On 23 May 2008, HDFC Bank acquired Centurion Bank of Punjab taking its total branches to more than 1,000. The amalgamated bank emerged with a base of aboutRs. 1,22,000 crore and net advances of about Rs. 89,000 crore. The balance sheetsize of the combined entity is more than Rs. 1,63,000 crore.
HDFC Bank provides a range of commercial and transactional banking services,including working capital finance, trade services, transactional services, cashmanagement, etc. to large, small and mid-sized corporates and agriculture-based
businesses in India. The bank is also a leading provider of these services to itscorporate customers, mutual funds, stock exchange members and banks.
Retail banking services
HDFC Bank was the first bank in India to launch an International Debit Card inassociation with VISA (Visa Electron). The bank also issues the MasterCard
Maestro debit card. The Bank launched its credit card business in late 2001. By theend of June 2013, it had a credit card base of 5.94 million. By March 2012, the
bank had a total card base (debit and credit cards) of over 19.7 million. The Bankis also one of the leading players in the "merchant acquiring" business with over240,000 point-of-sale (POS) terminals for debit / credit cards acceptance atmerchant establishments. The Bank is positioned in various net based B2Copportunities including a wide range of Internet banking services for FixedDeposits, Loans, Bill Payments, etc.
Treasury
The bank has three main product areas - Foreign Exchange and Derivatives, LocalCurrency Money Market & Debt Securities, and Equities. These services are
provided through the bank's Treasury team. To comply with statutory reserverequirements, the bank is required to hold 25% of its deposits in governmentsecurities. The Treasury business is responsible for managing the returns andmarket risk on this investment portfolio.
As of 30 September 2013, HDFC Bank has 3,251 branches and 11,177 ATMs, in2,022 cities in India, and all branches of the bank are linked on an online real-time
basis. The Bank has overseas branch operations in Bahrain and Hong Kong.[2][11]
HDFC Bank has two subsidiaries:
HDB Financial Services Limited („HDBFS‟): HDBFS is engaged in retail asset
financing. It is a non-deposit taking non-bank finance company (NBFC). Apartfrom lending to individuals, the company grants loans to micro, small and medium
business enterprises. It also runs call centers for collection services to the HDFCBank‟s retail loan products. HDFC Bank holds 97.4% shares in HDBFS. As of
March 31, 2013, HDBFS has 230 branches in 184 cities. During the FY 2012-13,
HDBFS had turnover of INR 9.6 billion and profit after tax of INR 1 billion. It has6,404 employees as of 31 March 2013.
HDFC Securities Limited („HSL‟): HSL is engaged in stock broking. As of March
31, 2013, HDBFS has 194 branches across 150 cities. HDFC Bank has 62.1%shareholding in HSL. During the FY 2012-13, HSL had turnover of INR 2.3 billionand profit after tax of INR 668 million. During the year, the Company received the“Best e-Brokerage Award - 2012” in the Outlook Money Awards in the runner upcategory.
The objective of the Retail Bank is to provide its target market customers a full
range of financial products and banking services, giving the customer a one-stop
window for all his/her banking requirements. The products are backed by world-class service and delivered to customers through the growing branch network, as
well as through alternative delivery channels like ATMs, Phone Banking, Net
Banking and Mobile Banking.
Retail banking services
HDFC Bank was the first bank in India to launch an International Debit Card in
association with VISA (Visa Electron) and issues the MasterCard Maestro debit
card as well. The Bank launched its credit card business in late 2001. By March
2009, the bank had a total card base (debit and credit cards) of over 13 million. The
Bank is also one of the leading players in the “merchant acquiring” business with
over 70,000 Point-of-sale (POS) terminals for debit / credit cards acceptance at
merchant establishments. The Bank is positioned in various net based B2C
opportunities including a wide range of internet banking services for Fixed
Deposits, Loans, Bill Payments, etc.With Finest of Technology and Best of Man
power in Banking Industry HDFC BANK's retail services have become by and
large the best in India and since the contribution to CASA i.e. total number of
current and savings account of more than 50%, HDFC BANK has full potential to
HDFC Bank is a leading Depository Participant in India with over 1.4 million
Demat Accounts.
HDFC Bank Demat Services offers you a secure and convenient way to keep trackof your securities and investments, without the hassle of handling physical
documents
Features:
No Account Opening charges
1st year waiver on Annual Folio Maintenance Charges
Transaction linked Annual Folio Maintenance charge from 2nd year
onwards (More you transact, Lesser you pay)
Why open a Demat account?
HDFC Bank is a leading Depository Participant in India with over 1.4
million Demat Accounts.
HDFC Bank Demat Services offers you a secure and convenient way to keep
track of your securities and investments, without the hassle of handling
physical documents
What are the features?
No Account Opening charges
1st year waiver on Annual Folio Maintenance Charges
Transaction linked Annual Folio Maintenance charge from 2nd year
technological upgradation and cross selling. The competitive advantage inretail banking that would help each bank to reach out and retain the
customer. The product differentiation will provide a bank with an edge over
competition. Efforts should be made to ensure customer delight, which is
essential in order to retain the customers in the open competitive business.
There should be operational transparency while dealing with the customers.
CRM must be used the make customer delight. The delivery channels
require comprehensive approach to ensure convenience and reliability. The
retail segment can survive only if it is competitive. These challenges demanda well planned and implemented strategy to cope with the changing business
environment. These challenges can be converted into opportunities by
enhancing the internal capabilities and providing the innovative products and
services fulfilling the diverse needs of the customers. The future growth of
the retail banking sector would be the outcome of the strategies of today.
Given the size advantages, diverse customer base and scope for future
expansion, there is need for evolving a systematic approach to retail
banking. Advantage of this model is the flexibility at the back-end to adapt
to new online transaction processing models facilitated by electronic