The voice of todays banking customer

Foster greater loyalty and satisfaction Offer choice and flexibility Adapt business models

MEANING OF RETAIL BANKING Retail banking is 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, and credit cards.

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

Typical mass-market banking in which individual customers use local branches of larger commercial banks is called retail banking. Services offered include savings and checking accounts, mortgages, personal loans, debit/credit cards and certificates of deposit (CDs). Retail banking aims to be the one-stop shop for as many financial services as possible on behalf of retail clients. Some retail banks have even made a push into investment services such as wealth management, brokerage accounts, private banking and retirement planning. While some of these ancillary services are outsourced to third parties (often for regulatory reasons), they often intertwine with core retail banking accounts like checking and savings to allow for easier transfers and maintenance.

RETAIL BANKING COMPREHENSIVE REPORT-GROWTH Use this report to Understand how retail industry is growing What are strategies taken by retail bank companies and their comparison thereof? and much more INTRODUCTION Retail banking in India has fast emerged as one of the major drivers of the overall banking industry and has witnessed enormous growth in the recent past. The Retail Banking Report encompasses extensive study & analysis of this rapidly growing sector. It primarily covers analysis of the present status, current trends, major issues & challenges in the growth of the retail banking sector. This report helps in Banks, financial institutions, MNC Banks, academicians, consultants and researchers to have a better understanding of the booming opportunities in retail banking in India.

MAJOR FINDINGS With recession departing away from away global economy, opportunities are slowly emerging in emerging markets. Since emerging markets, except China, were less depending upon US for growth; are first to come out of recession eclipse. Growth opportunities in banking, especially retail segment is set to witness fast growth due to high consumption. The higher growth of retail lending in emerging economies is attributable to fast growth of personal wealth, favourable demographic profile, rapid development in information technology, the conducive macro-economic environment, financial market reforms, and several micro-level supply side factors. The retail banking strategies of banks are undergoing major transformation, as banks adopt a mix of strategies like organic growth, acquisitions and alliances . This has resulted in a paradigm shift in the marketing strategies of the banks. Public Sector Banks players are adopting aggressive strategies, leveraging their rural branch network and their customer vase to earn a larger share of the retail pie. Banks are also going in for innovative strategies like cross selling, packaged selling of retail products and technology based banking. At the same time, new foreign players are also entering this high growth sector POINTS DISCUSSED - Global retail banking vis--vis Indian scenario - Indian retail banking overview - What are the regulatory factors involved in Indian banking industry - How interest rate risks, money laundering, and outsourcing are affecting the performance of banking sector? - What would be the impact of Basel-II norms in Indian banking industry? - What are the implications of SARFESI Act on recovery of money? - How the banking industry would combat the competition from upcoming sectors like mutual funds? - What are the various issues and challenges before this industry? - What are strategies taken by retail bank companies and their comparison thereof? PLAYERS PROFILED The report contains major profiles of - Andhra Bank, AXIS Bank, Bank of Baroda,

Bank of India, Canara Bank, Citibank, Central Bank of India, Deutsche Bank, HDFC Bank, HSBC, Indian Overseas Bank, ICICI Bank, I D B I (Industrial Development Bank Of India), Indian Bank, ING Vysya Bank, Jammu & Kashmir Bank Ltd, State Bank of India, Saraswat Co-Operative Bank Ltd, Syndicate Bank, UCO Bank and Union Bank of India PRODUCTS ANALYSED - Indian retail credit - Housing finance - Auto finance - Consumer durable loan - Educational loan - Other personal loans - Credit cards - Bancassurance FOR WHOM - Banks, Financial institutions - MNC Banks - Academicians - Consultants - Researchers RESEARCH METHODOLOGY The data used, extensively draws from the in-house and proprietary sources available at Cygnus as our research team regularly tracks the sector. The other sources include Bank for International Settlements (BIS), Reserve Bank of India, Banking related Journals, and Research papers, Industry portals, Government Agencies, and Trade associations, monitoring of Industry News and developments etc. The data has been cross-checked by the research team and validated to provide the latest and unambiguous information. ADDITIONS IN THE EDITION Global Banking Scenario Introduction

Global banking assets touches US$96 tn Rising Bad debts and Provisions Profitability plummeted Region wise analysis - US -- Rising defaults and slowdown affects overall credit - Europe -- Credit growth dips in European banks - Asia Pacific -- Japan find opportunity in serving baby boomers -- Asia pacific outperforms than developed economies Recent trends - Housing bubble collapsed Indian Banking Industry Current Scenario - Monetary and liquidity position: Relatively stable -- Bank deposits moving up -- Credit off take slows Housing finance Housing loan disbursement: facing the heat from global slowdown Major Challenges - Managing volatility in metal and oil prices and in exchange rates - Finding a solution to slowdown in exports and manufacturing activities - Integrating the entire supply chain and managing inbound logistics - Managing Poor Monsoons - Maintaining the pace of infrastructure development Credit cards Key Trends - Infrastructural challenges could soon become irrelevant - EMV issuance is still far away - Prepaid Cards on the horizon - Demand for premium and co-brand cards - Full ATM outsourcing Techology Spend - Spread of ATMsprimary concern for banks

- Cards being a strong alternative to cash payments - Internet banking emergence of new era in personal banking Micro payment Regulations Consumer credit, Home Loan, Education Loan, Auto Loans and their Risk weight exposures Credit card Norms - Single overall limit to an individual - KYC (know your customer) Norms - Reporting to Credit Bureau - Other harassment Micro Finance - The Micro Financial sector (Development and Regulation) Bill, 2007 Foreign Exchange Regulations Remittance Regulations Mobile Banking Issues and challenges A paradigm shift from the monopolies of public sector banks to competitive banking Retail loan quality seen falling Tie-Up Arrangement Basel II Norms Growth In Retail Electronic Funds Transfer Systems Future outlook Emerging trends in technology CONCLUSION In the world economy retail lending is a strong market; however, its rise is evident in emerging economies like India. Asia Pacifics vast population, combined with high savings rates, explosive economic growth, and underdeveloped retail banking services, provide the most significant growth opportunities for banks. To continue to realise vast growth opportunities in the region, banks will have to effectively serve the retail banking segment. Hence, banks need to innovate diverse range of retail banking products and servicing in order to satisfy the customers of Asia

Pacific. In 2008, global banks losses were US$4.1tn, of which US accounts for US$2.7tn, European and Japanese banks losses account for US$1.3tn and rest by others. Banking strategies are presently undergoing various transformations, as the overall scenario has changed over last year. Till the recent past, most of the banks had adopted fierce cost-cutting measures to sustain recession. This strategy however has become obsolete in the light of immense growth opportunities for banking industry. Most bankers are realising that banks shall focus more on core business i.e., lending and borrowing rather than growing on the back of investing in complex derivative products. Banks are now confident about their high performance in terms of organic growth and in realising high returns. A banks growth strategy evolves around the customer satisfaction. Improved customer relationship management can only lead to fulfillment of long-term, as well as, short-term objectives of the bankers. This requires efficient and accurate customer database management and development of well-trained sales force to develop and sustain long-term profitable customer relationship. Japan remained the major contributor in total bank deposits; it has experienced an increase of nearly 2%. While Chinas total deposit grew by 17.90% in FY08. Relatively smaller player like India also recorded an outstanding growth of 19% in total bank deposit during 2008-09. Countries like India have emerged as potential market with huge investment opportunities. During 2008-09, gross credit extended by Indian commercial banks grew by 20.09% to touch Rs27,293 billion. Retail credit has grown by 7.8% to Rs5574 billion during the same period. Housing sector constitutes the lions share of about 49% in the total retail disbursement, auto loans (22%), other personal loans (18%), educational loans (5%), credit card receivables (5%) and consumer durables (1%). Banks continue to gather a greater share in housing loan disbursements by outdoing Housing Finance Companies (HFCs). The Indian housing finance industry has been growing by leaps and bounds in the past few years. Housing loans credit by SCB and HFC grew only by 5% during May 09 compared 13.8% growth in May 08. Credit flow to housing was lower at Rs130.28 billion during

May 09 as compared to Rs317.35 billion in May08. Low lending in housing sector was due to tightening monetary measures, banks denial in lending funds, high interest rates and very high non-performing assets. Despite being a late entrant in the housing finance, the banks have overtaken the HFCs in the home loan market. The share of the banks in total home loan disbursement has risen from 48% in 2003-04 to 59% in 2008-09. Outstanding Housing loans, as a percentage of GDP, increased in the last five years from 7.06% in 2005-06 to 8.29% in 2008-09. It is expected to leap by double digits in the next 2-3 years. Indian housing market is likely to grow on the lines of Malaysia and Thailand; these countries have already reached the double digit figures as percentage of GDP. Auto loan after experiencing 18% CAGR is last 5 years has witnessed 15% dip during 2008-09. In Asia Pacific, India has emerged as the third largest market for cars and MUVs, after Japan and China. High interest rates, banks delay in financing, high oil prices, delay in monsoons are main constraints of this segment. The last few years have witnessed a high increase in students aspiring for management and professional courses, leading to a spurt in educational loans. Banks are now having a direct tie-up with the educational institutions to cash in on the opportunity. Public Sector Banks (PSBs) are focussing on the educational loans segment. During 2008-09, the outstanding for education loans increased by 35% to Rs285.79 billion. The credit card culture has gained immense popularity over past 5 years. The total number of cards issued in India has gone up by nearly 22.33% in the FY09. The total number of credit cards issued is estimated to be at around 259 million in 2008-09. The actual usage too has registered an increase both in terms of volume and value at the rate of 13.7% and 12.7% respectively in current period. The total spends in the payment industry for the year 2008-09 crossed Rs839 billion at the POS. This reflects a growth of 22% over the previous year. As on March 31, 2009, outstanding credit card receivables stood at Rs280 billion i.e., a growth of 6% over 2007-08. Almost all the categories of banks issue credit cards. Credit cards have found greater acceptance in terms of usage in the major cities of the country, with the four major metropolitan cities accounting for the bulk of the transactions. The consumer durable loan outstanding as on March 31, 2009 was Rs81 billion. In

total personal loans, consumer loans account only for 1% as on March 2009. In a tenure-wise market share of Consumer Durable loans, long-term loans leads with 59% market share and medium term loans with 41% market share. In terms of size, consumer durables segment has maximum loans which are between Rs25,001 to Rs0.2 million. However, outstanding amount declined by 4% during fiscal 200809. This is primarily due to banks denial in lending and postponement of purchasing decision due to high inflation on account of high food prices. The other personal loans market is characterised by intense competition and the players vie with one another to get business. These loans are driven by urgent and short-term needs, and banks have to act swiftly to cash in on that need. Metropolitan and urban areas together constitute two thirds of total loans under this category. Private sector banks lead in metropolitan areas, whereas in the rural areas the nationalised banks have more pie. Bancassurance, the much talked about channel of insurance distribution through banks, has gained immense popularity among Indian insurance companies and banking sector ever since its introduction in 2000-2001. Pushing the risk products through banks is a cost-effective affair for an insurance company compared to the agent route. While for banks, considering the falling interest rates, fee based income coming in at a minimum cost is more than a welcome move. Bancassurance has cleanly outperformed other alternate channels of distribution for insurance products, with a share of almost 25-30% of the premium income amongst the private players in FY 2008. There is huge potential in this alternative channel, with only 4,500-5,000 bank branches currently distributing insurance products. In India, all the retail banking segments are expected to witness steep growth owing to the low cost of borrowing, changing customer attitudes towards borrowing and optimism regarding economic growth. The share of total retail credit in bank credit has increased from 6.4% to over 25% in the past 15 years. In the next four years, till 2010, retail banking is expected to grow at a CAGR of 20% to reach Rs7970 bn. This requires expansion and diversification of retail product portfolio, better penetration and faster service mechanism. Hitherto, the growth had come from metros and tier I cities while the loan requirement from larger cities

will continue to grow, explosive growth in credit is expected to register in tier II cities, semi-urban and rural areas. However, there are some areas of concern like rising NPA in consumer loans particularly, the delinquency rates in credit cards and frauds in home loans. Housing prices have grown rapidly during 2005-2008. Deflation of asset value is a possibility in certain areas. Aggressive credit growth in retail has increased the requirement for measuring and managing this risk. These require extremely skilled workforce and highly evolved credit delivery and monitoring processes, so that the banking professionals can track the market perfectly. The other concern is of suicidal pricing by the aggressive banks. This is bringing the margins under pressure. Though rational pricing is critical, the competitive market shall continue to see the pricing pressure. There is also a need for database and a management information system to identify the right kind of borrowers. Lack of consensus on definition of retail and transparency in declaration by the players as well the coverage of retail by the RBI in its reportsall of this need a thorough re-look. As Indias economy matures with excellent performance in terms of GDP and other parameters like per capita income, balance of payments, inflation and financial market, consumer spendingall set to increase by many folds. This positive trend will definitely fuel the growth Indian banking industry. To continue to realise the vast growth opportunities in the country, banks will have to effectively serve the retail banking segment. To meet the expectations and win the hearts of the customers, the banks should innovate by developing a diverse range of retail products, needed by the customers and servicing them efficiently. RECOMMENDATION

Transforming Customer Experiences with Capgemini From this Retail Banking Conference with Capgemini and The Banker, viewers will hear about the challenges facing banks today as they try to create captivating customer experiences across channels.

Learn from the voice of the customer and find out what 18,000 customers prefer from their banking experience with Capgeminis World Retail Banking Report 2012. Report Highlights According to the Reports Customer Experience Index, which surveyed over 18,000 bank customers across 35 countries, 9% of customers are likely to leave their banks in the next six months while 40% are unsure they'll stay long term. The report shows banks have a significant opportunity to close the customer sentiment gap and address the factors that matter most to them to increase loyalty. Quality of service (53%), fees, (50%), ease of use (49%) and interest rates (49%) represent the biggest impact areas to keep customers from leaving. The report also reveals that mobile banking services have yet to be fully leveraged.

North American banks lead in customer satisfaction Banks recorded a global average of 65% in terms of customer satisfaction, find out how satisfied customers in other regions are in the full report. Despite general satisfaction with their primary bank nearly 10% of customers surveyed indicated they will leave over the next six months. To prevent customer loss, banks must use new approaches to traditional strategies The Report found banks that are pursuing a traditional strategy of "do-everything" to improve customer experience should consider differentiating on only one or two dimensions, prioritizing investments to strengthen core competencies that address their customers' most pressing demands. Explore three new operating models for sustainable future performance. While Mobile is the channel with the most potential, other channels still lead in terms of customer preference Banks modestly increased their levels of positive customer experience from last year but they still are not delivering enough positive experiences. Just over 40% of customers are having positive experiences through most channels today. Find out which channels are providing the greatest positive customer experience in each region.

The World Retail Banking Report provides insights into customer attitudes towards retail banking using a comprehensive Voice of the Customer survey which polled over 18,000 retail banking customers in 35 countries. The responses from this survey provide the underlying input for our proprietary Customer Experience Index (CEI) which measures customers banking experiences across 80 different touch points. The CEI addresses the disconnect between measures of customer confidence, loyalty, and satisfaction by identifying the factors that are most important to customers, and then measures satisfaction specifically along three dimensions: products (including checking, savings and payments accounts; credit cards; loans and mortgages); channels (including branch; internet; mobile device; phone; and ATM), and lifecycle stage (including information gathering; transacting; problem resolution; and account status and history). VERY IMPORTANT- RECOMMENDATIONS Amid sweeping regulatory change, slow economic growth and tightened margins, banks today are increasingly focused on their most important stakeholders their customers. Yet, despite their best efforts to attract and retain customers, customer confidence levels in banks remain low. In response, customers are changing their behavior and demanding lower fees for higher levels of service or other improvements. If these demands are not met, they are increasingly likely to shop around at other banks for competitive rates for services and products. To build on our previous global consumer banking survey in 2011, and to help banks better understand what they must do to build and maintain customer relationships, we surveyed 28,560 banking customers across 35 countries to learn more about their needs and preferences. Our banking teams around the world analyzed the responses. We hope the data and survey findings are useful to you when planning strategies and adapting your business models to attain greater customer loyalty and satisfaction.

Our survey suggests that for banks to remain competitive, they must: Give customers the opportunity to choose by making promises and service offers more transparent. Rebalance fee structures to achieve the clarity and sustainability required by regulators and investors. Help customers shape their own banking experiences by improving how they provide information and advice, recruiting online affinity groups and by developing flexible loyalty programs. Develop models around customer needs by reprioritizing spending, including increasing the use of low-cost digital models and using more innovative technology.

OPPORTUNIITES AND CHALLENGES- RBI he issue of retail banking is extremely important and topical. Across the globe, retail lending has been a spectacular innovation in the commercial banking sector in recent years. The growth of retail lending, especially, in emerging economies, is attributable to the rapid advances in information technology, the evolving macroeconomic environment, financial market reform, and several micro-level demand and supply side factors. India too experienced a surge in retail banking. There are various pointers towards this. Retail loan is estimated to have accounted for nearly one-fifth of all bank credit. Housing sector is experiencing a boom in its credit. The retail loan market has decisively got transformed from a sellers market to a buyers market. Gone are the days where getting a retail loan was somewhat cumbersome. All these emphasise the momentum that retail banking is experiencing in the Indian economy in recent years. What is Retail Banking?

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. Todays retail banking sector is characterized by three basic characteristics:

multiple products (deposits, credit cards, insurance, investments and securities); multiple channels of distribution (call centre, branch, Internet and kiosk); and multiple customer groups (consumer, small business, and corporate).

What is the nature of retail banking? In a recent book, retail banking has been described as 'hotter than vindaloo'. Considering the fact that vindaloo, the IndianEnglish innovative curry available in umpteen numbers of restaurants of London, is indeed very hot and spicy, it seems that retail banking is perceived to be the inthing in todays world of banking. Retail banking in India 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 with mainstream banking for many banks. 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. As the Report on Trend and Progress of India, 2003-04 has shown that the loan values of these retail lending typically range between Rs.20,000 to Rs.100 lakh. The loans are generally for duration of five to seven 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 recent past retail lending has turned out to be a key profit driver for banks with retail portfolio constituting 21.5 per cent of total outstanding advances as on March 2004. The overall impairment of the retail loan portfolio worked out much less then the Gross NPA ratio for the entire loan portfolio. Within the retail segment, the housing loans had the least gross asset impairment. In fact, retailing make ample business sense in the banking sector. While new generation private sector banks have been able to create a niche in this regard, the public sector banks have not lagged behind. Leveraging their vast branch network and outreach, public sector banks have aggressively forayed to garner a larger slice of the retail pie. By international standards, however, there is still much scope for retail banking in India. After all, retail loans constitute less than seven per cent of GDP in India vis--vis about 35 per cent for other Asian economies South Korea (55 per cent), Taiwan (52 per cent), Malaysia (33 per cent) and Thailand (18 per cent). As retail banking in India is still growing from modest base, there is a likelihood that the growth numbers seem to get somewhat exaggerated. One, thus, has to exercise caution is interpreting the growth of retail banking in India. 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. Convenience banking in the form of debit cards, internet and phone-banking, anywhere and anytime banking has attracted many new customers into the banking field. Technological innovations relating to increasing use of credit / debit cards, ATMs, direct debits and phone banking has 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 maximisation. Considering the fact that retails 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 have also contributed to the growth of retail credit by generating the demand for such credit. In this backdrop let me now come two specific domains of retail lending in India, viz., (a) credit cards and (b) housing. Credit Cards in India While usage of cards by customers of banks in India has been in vogue since the mid-1980s, it is only since the early 1990s that the market had witnessed a quantum jump. The total number of cards issued by 42 banks and outstanding, increased from 2.69 crore as on end December 2003 to 4.33 crore as on end December 2004. The actual usage too has registered increases both in terms of volume and value. Almost all the categories of banks issue credit cards. Credit cards have found greater acceptance in terms of usage in the major cities of the country, with the four major metropolitan cities accounting for the bulk of the transactions. In view of this ever increasing role of credit cards a Working Group was set up for regulatory mechanism for cards. The terms of reference of the Working Group were fairly broad and the Group was to look into the type of regulatory measures that are to be introduced for plastic cards (credit, debit and smart cards) for encouraging their growth in a safe, secure and efficient manner, as also to take care

of the best customer practices and grievances redressal mechanism for the card users. The Reserve Bank has been receiving a number of complaints regarding various undesirable practices by credit card issuing institutions and their agents. Some of them are:

Unsolicited calls to members of the public by card issuing banks/ direct selling agents pressurising them to apply for credit card. Communicating misleading / wrong information regarding credit cards regarding conditions for issue, amount of service charges/ waiver of fees, gifts/prizes. Sending credit cards to persons who have not applied for them / activating unsolicited cards without the approval of the recipient. Charging very high interest rates /service charges. Lack of transparency in disclosing fees/charges/penalties. Non-disclosure of detailed billing procedure.

The Working Group deliberated a number of major issues relating to: a) to customer grievances and rights: a) Transparency and Disclosure, b) Customer Rights Protection, and c) Code of Conduct. The Group recommended that the Most Important Terms and Conditions should be highlighted and advertised and sent separately to the prospective customer. These terms and conditions include various issues relating to: a) fees and charges, (b) drawal limits, (c) billing, (d) default, (e) termination / revocation of card membership, (f) loss / theft / misuse of card, and (g) disclosure. These recommendations are being processed within the RBI and a set of guidelines would be issued which are going to pave the path of a healthy growth in the development of plastic money in India. The RBI is also considering bringing credit card disputes within the ambit of the Banking Ombudsman scheme. While building a regulatory oversight in this regard we need to ensure that neither does it reduce the efficiency of the system nor does it hamper the credit card usage. Housing Credit in India In view of its backward and forward linkages with other sectors of the economy, housing finance in developing countries is seen as a social good. In India, growth

of housing finance segment has accelerated in recent years. Several supporting policy measures (like tax benefits) and the supervisory incentives instituted had played a major role in this market. Housing credit has increased substantially over last few years, but from a very low base. During the period 1993-2004, outstanding housing loans by scheduled commercial banks and housing finance companies grew at a trend rate of 23 per cent. The share of housing loans in total non-food credit of scheduled commercial banks has increased from about 3 per cent in 1992-93 to about 7 per cent in 200304. Recent data reveal that non-priority sector housing loans outstanding as on February 18, 2005 were around Rs. 74 thousand crore, which is, however, only 8.0 per cent of the gross bank credit. As already pointed out, direct housing loans up to Rs. 15 lakh irrespective of the location now qualify as priority sector lending; housing loans are understood to form a large component of such lending. In addition, housing credit is also being provided by housing finance companies, which in turn are also receiving some bank finance. Thus, from miniscule amounts, the exposure of the banking sector to housing loans has gone up. Unlike many other countries, asset impairment on account of housing finance constitutes a very small portion. However, with growing competition in the housing finance market, there has been a growing concern over its likely impact on the asset quality. While no immediate financial stability concerns exist, there is a need to put in place appropriate risk management systems, strengthen internal control procedures and also improve regulatory oversight in this area. Banks also need to monitor their exposure and the credit quality. In a fiercely competitive market, there may be some temptation to slacken the loan scrutiny procedures and this needs to be severely checked. Having delineated the broad contours of retail banking in India let me now come to its opportunities and challenges. 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 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. 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 emphasise 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 with ATM 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 todays 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 centres. 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 money laundering 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. Some Random Thoughts How do we see the future of retail banking? What are the major attributes of the shape of things to come in this sector? Let me share with you some of my random thoughts. First, customer service should be the be-all and end-all of retail banking. The other day a document released by the British Bankers Association, entitled UK Retail Banking Manifesto: addressing the challenges that lie ahead for the industry and its stakeholders on September 29, 2004 came to my notice. This document analysed the key policy issues relevant to the retail banking sector and highlighted the role of financial inclusion, responsible lending, access to finance, and

consumer protection. It is in this context that that one is reminded of the needs to develop the standards and codes for banking. The contribution of the Committee on Procedure & Performance Audit on Public Services (CPPAPS) (Chairman: Shri S.S. Tarapore) has been invaluable and has provided great insight. Based on the recommendation of the CPPAPS, the Annual Policy Statement for 2005-06 announced the decision to set up an independent Banking Codes & Standards Board of India on the model of the mechanism in the UK in order to ensure that comprehensive code of conduct for fair treatment of customers is evolved and adhered to. The codes and standards, together with the institutional mechanism to monitor them, are expected to enhance the quality of customer service, to the individual customer in particular. The codes will bring about greater transparency in the system and also tackle the issue of information asymmetry. The Board would function as an industry-wide watchdog of the banking code and ensure that the banks comply with the banking codes. The codes would establish the banking industrys key commitments and obligations to customers on standards of practice, disclosure and principles of conduct for their banking services. The Board will monitor compliance with the Codes by the affiliated banks. Second, sharing of information about the credit history of households is extremely important as far retail banking is concerned. Perhaps due the confidential nature of banker-customer, banks have a traditional resistance to share credit information on the client, not only with one another, but also across sectors. Globally, Credit Information Bureaus have, therefore, been set up to function as a repository of credit information - both current and historical data on existing and potential borrowers. The database maintained by these institutions can be accessed by the lending institutions. Credit Bureaus have been established not only in countries with developed financial systems but also in countries with relatively less developed financial markets, such as, Sri Lanka, Mexico, Bangladesh and the Philippines. In Indian case, the Credit Information Bureau (India) Limited (CIBIL), incorporated in 2000, aims at fulfilling the need of credit granting institutions for comprehensive credit information by collecting, collating and disseminating credit information pertaining to both commercial and consumer borrowers. At the same time banks must exercise due diligence before declaring a borrower as defaulter.

Third, outsourcing has become an important issue in the recent past. With the increasing market orientation of the financial system and to cope with the competition as also to benefit from the technological innovations such as, ebanking, the banks are making increasing use of 'outsourcing' as a means of both reducing costs and achieving better efficiency. While outsourcing does have various cost advantages, it has the potential to transfer risk, management and compliance to third parties who may not be regulated. A recent BIS Report on 'Outsourcing in Financial Services' developed some high-level principles. A basic requirement in this context is that a regulated entity seeking to outsource activities should have in place a comprehensive policy on outsourcing including a comprehensive outsourcing risk management programme to address the outsourced activities and the relationship with the service provider. Application of these principles in the Indian context is under consideration. Finally, retail banking does not refer to lending only. In the whole story of retailing one should not forget the role played by retail depositors. The homemaker, the retail shop keeper, the pensioners, self-employed and those employed in unorganised sector - all need to get a place in the banks. It is in this backdrop that the Annual Policy for 2005-06 pointed out issues relating to financial exclusion and had announced that the RBI would implement policies to encourage banks which provide extensive services while disincentivising those which are not responsive to the banking needs of the community, including the underprivileged. Furthermore, the nature, scope and cost of services need to be monitored to assess whether there is any denial, implicit or explicit, of basic banking services to the common person and banks have been urged to review their existing practices to align them with the objective of financial inclusion. Conclusion There is a need of constant innovation in retail banking. In bracing for tomorrow, a paradigm shift in bank financing through innovative products and mechanisms involving constant upgradation and revalidation of the banks internal systems and processes is called for. Banks now need to use retail as a growth trigger. This requires product development and differentiation, innovation and business process reengineering, micro-planning, marketing, prudent pricing, customisation,

technological upgradation, home / electronic / mobile banking, cost reduction and cross-selling. While retail banking offers phenomenal opportunities for growth, the challenges are equally daunting. How far the retail banking is able to lead growth of the banking industry in future would depend upon the capacity building of the banks to meet the challenges and make use of the opportunities profitably. However, the kind of technology used and the efficiency of operations would provide the much needed competitive edge for success in retail banking business. Furthermore, in all these customers interest is of paramount importance. The banking sector in India is demonstrating this and I do hope they would continue to chart in this traded path. ANNEXURE Lending and Mortgage Processing Lately, lending and mortgage industry has been facing tremendous pressure to maintain ever demanding customer service as the mortgage market reaches saturation. With the advent of latest technologies, retail banking firms have been constantly trying hard to enhance their lending and mortgage business processes by eliminating existing inefficiencies in the process flow. The firms are today focusing their efforts towards costs savings achieved by integration of independent business applications that interact with disparate sources of information in order to build a single and seamless integrated solution. In our endeavor to address these challenges faced by lending and mortgage firms, NIIT Technologies has been providing effective technology solutions to retail banking and financial institutions for over 10 years now. The spectrum of our lending and mortgage services that we offer as part of our Banking and Financial Service offerings encompasses the functional areas of loan origination, collateral management and default management. Our Expertise: Our team of dedicated software professionals, domain consultants and technical architects has been instrumental in execution of custom software development, modernization and maintenance of legacy systems for our retail banking clients. NIIT Technologies has developed strong expertise especially in the loan

origination and mortgage processing space that has helped us nurture long relationships with some of the largest banks. Credit Card Processing Solutions Meeting the expectations of corporate customers' demands for credit card industry, real time visibility of transactions, compliance with existing and upcoming regulations for cross border transactions, rising cost pressures because of heterogeneous IT infrastructure and disparate IT landscapes are the burgeoning areas of concern for the fast growing global cards industry. Though the transaction volumes are set to grow continuously, a number of pressures and concerns will depress revenues and in turn reduce profitability for Retail Banking Organisations. We endeavor to provide full range of services at all levels to the Payment Systems and Cards Market. This includes services such as migrating Business processes to off-shore locations, re-engineering projects, Operational Support including Feasibility, Research, Strategy, Planning, Implementation (including new development and third party software implementation), Card Product Management, Risk Management, Data Analytical, Compliance, Audit and Quality Assurance (Six Sigma). Our Card Consulting Services has optimal mix of people to support you at Business, Technologies and Operation level. Payments Payment industry is becoming more and more driven by the consumer demands and the progress of the technology. IT in collaboration with the retail banking firms is coming up with new types of payment gateways which are customer friendly. The payment industry is also expected to become less and less profitable. The evolving scenario's in the payments space is forcing banks to come up with technological innovations beneficial to the customers. We have domain expertise in emerging payments domain such as Utility Bill Payments, Check21, Real Time Gross Settlement Systems, domestic Cash Management and Electronic Bill Presentment and Payment (EBPP) Systems to name a few. We offer the payment solution that should be scalable and designed to meet the requirements of the banks due to the ever-changing payment landscape in retail banking. Related Links