Gap Analysis of Services Offered in Retail Banking

Gap Analysis of Services offered in Retail Banking

“ANALYZING THE GAP BETWEEN MANAGEMENT PERCEPTION AND CUSTOMER PERCEPTION WITH RESPECT TO THE SERVICES OFFERED IN RETAIL

BANKING”

A grand Project report submitted in Partial Fulfillment of award of MBA Degree


CONTENTS

1. Banking Industry – Introduction

2. Introduction to Retail Banking

3. Banks’ Profile

4. Research Methodology

5. Analysis

6. Suggestions

7. Future of Retail Banking

8. Bibliography


EXECUTIVE SUMMARY

The report “Analyzing the Gap between Management Perception and Customer

Perception With Respect To the Services Offered In Retail Banking” aims to assimilate

data about the various aspects of Retail banking services, to analyze the perceptions of

the management and the customers regarding the services offered in Retail banking and

to find out whether any gaps do exist between the services offered and the customer

expectations. We have taken 6 Banks which represent the Nationalized, Private and

Multinational Banks of the Banking Industry in India-

- SBI

- Corporation Bank

- HDFC Bank

- ICICI Bank

- Citibank

- Standard Chartered Bank

The criteria for selecting these banks were their deposit base. We have limited our

Service Category to the core services in Retail Banking and a few specialized services.

The report is a mixture of Secondary and Primary data, with Questionnaires being

our major instrument to collect primary data.

Major topics we have attempted to cover in this project are to: -

- Explore the services and products offered by the banks to individual customers.

- Understand the perception of the management with respect to services offered by

banks.

- Understand the perception of the customers with respect to services offered by

banks.

- Analyze whether there is a gap between the customer and management

perceptions about the services offered by the banks.


- Conclude and enumerate the recommendations that might help to reduce the gaps

that exist and foster the relationship of the customer more with the bank.

According to the survey we came to the conclusion that

The new game requires new strategies with an accent on innovation for organizational

transformation and to achieve world-class competitiveness through improved efficiency

and reduced operational cost.

An organisation-centric agenda, policy, programme and operationalising accelerating

interventions need to strengthen core competencies of Indian banks; while exploring

seeding options for future growth.

Thrust on innovation is important particularly in the present context of consolidation and

convergence both within and across segments of the financial system.


INTRODUCTION

Service with a smile: Today’s finicky banking customers will settle for nothing less. The

customer has come to realize somewhat belatedly that he is the king. The customer’s

choice of one entity over another as his principal bank is determined by considerations of

service quality rather than any other factor. He wants competitive loan rates but at the

same time also wants his loan or credit card application processed in double quick time.

He insists that he be promptly informed of changes in deposit rates and service charges

and he bristles with ‘customary rage’ if his bank is slow to redress any grievance he may

have. He cherishes the convenience of impersonal net banking but during his occasional

visits to the branch he also wants the comfort of personalized human interactions and

facilities that make his banking experience pleasurable. In short he wants financial house

that will more than just clear his cheque and updates his passbook: he wants a bank that

cares and provides great services.

So do banks meet these heightened expectations? Is there a gap that exists between the

management perception and the customer perception with reference to the services

offered in Retail Banking? To find out answers to these questions we undertook a survey

of six banks selecting two banks from each of the following:

- Private Banks

- Nationalized Banks

- Multinational Banks

A lot of surveys have been done in the past by many agencies to understand the

aspect of customer satisfaction and to find out the customer friendly banks. Our


research adds the dimension of the ‘Gap Analysis’ between The Management and the

customer perceptions regarding the services being offered.

INDUSTRY PROFILE

The Banking Regulation Act 1949 defines banking as accepting the purpose of lending or

investment, of deposits of money from the public, repayable on demand or otherwise and

wthdrawable by cheque, draft, order otherwise. The essential function of a bank is to

provide services related to the storing of value and the extending credit. The evolution of

banking dates back to the earliest writing, and continues in the present where a bank is a

financial institution that provides banking and other financial services. Currently the term

bank is generally understood an institution that holds a banking license. Banking licenses

are granted by financial supervision authorities and provide rights to conduct the most

fundamental banking services such as accepting deposits and making loans. There are

also financial institutions that provide certain banking services without meeting the legal

definition of a bank, a so called non-bank. Banks are a subset of the financial services

industry.

The word bank is derived from the Italian “banca” which is derived from German and

means bench. The terms bankrupt and "broke" are similarly derived from banca rotta,

which refers to an out of business bank, having its bench physically broken. Money

lenders in Northern Italy originally did business in open areas, or big open rooms, with

each lender working from his own bench or table.

Typically, a bank generates profits from transaction fees on financial services or the

interest spread on resources it holds in trust for clients while paying them interest on the

asset.


SERVICES TYPICALLY OFFERED BY BANKS

Although the type of services offered by a bank depends upon the type of bank and the

country, services provided usually include:

Directly take deposits from the general public and issue checking and savings

accounts

Lend out money to companies and individuals

Cash checks

Facilitate money transactions such as wire transfers and cashiers checks

Issue credit cards, ATM, and debit cards

online banking

Storage of valuables, particularly in a safe deposit box

TYPES OF BANKS

There are several different types of banks including:

Central banks usually control monetary policy and may be the lender of last resort

in the event of a crisis. They are often charged with controlling the money


supply, including printing paper money. Examples of central banks are the

European Central Bank and the US Federal Reserve Bank.

Investment banks underwrite stock and bond issues and advice on mergers.

Examples of investment banks are Goldman Sachs of the USA or Nomura

Securities of Japan.

Merchant banks were traditionally banks which engaged in trade financing. The

modern definition, however, refers to banks which provide capital to firms in

the form of shares rather than loans. Unlike Venture capital firms, they tend not

to invest in new companies.

Private Banks manage the assets of the very rich. An example of a private bank is

the Union Bank of Switzerland.

Savings banks write mortgages exclusively.

Offshore banks are banks located in jurisdictions with low taxation and

regulation, such as Switzerland or the Channel Islands. Many offshore banks

are essentially private banks.

Commercial banks primarily lend to businesses (corporate banking)

Retail banks primarily lend to individuals. An example of a retail bank is

Washington Mutual of the USA.

Universal banks engage in several of these activities. For example, Citigroup, a

large American bank, is involved in commercial and retail lending; it owns a

merchant bank (Citicorp Merchant Bank Limited) and an investment bank

(Salomon Smith Barney); it operates a private bank (Citigroup Private Bank);

finally, its subsidiaries in tax-havens offer offshore banking services to

customers in other countries.

SOME CHARACTERISTICS ASSOCIATED WITH BANKS IN GENERAL:


BANKS ARE PRONE TO CRISIS

The traditional bank has an inherent tendency to crisis. This is because the bank borrows

short term and lends leveraged long term. The sum of deposits and the bank's capital will

never equal more than a modest percentage of the loans the bank has outstanding.

Even if liquidity is not a concern, if there is no run on the bank, banks can simply choose

a bad portfolio of loans, and lose more money than they have. The US Savings and Loan

Crisis in the late 1980s and early 1990s is such an incident.

ROLE IN THE MONEY SUPPLY

A bank raises funds by attracting deposits, borrowing money in the inter-bank market, or

issuing financial instruments in the money market or a securities market. The bank then

lends out most of these funds to borrowers.

However, it would not be prudent for a bank to lend out all of its balance sheet. It must

keep a certain proportion of its funds in reserve so that it can repay depositors who

withdraw their deposits. Bank reserves are typically kept in the form of a deposit with a

central bank. This behavior is called fractional-reserve banking and it is a central issue of

monetary policy. Some governments (or their central banks) restrict the proportion of a

bank's balance sheet that can be lent out, and use this as a tool for controlling the money

supply. Even where the reserve ratio is not controlled by the government, a minimum

figure will still be set by regulatory authorities as part of banking supervision.

REGULATION

The combination of the instability of banks as well as their important facilitating role in

the economy led to banking being thoroughly regulated. The amount of capital a bank is

required to hold is a function of the amount and quality of its assets. Major Banks are


subject to the Basel Capital Accord promulgated by the Bank for International

Settlements. In addition, banks are usually required to purchase deposit insurance to

make sure smaller investors are not wiped out in the event of a bank failure.

Another reason banks are thoroughly regulated is that ultimately, no government can

allow the banking system to fail. There is almost always a lender of last resort—in the

event of a liquidity crisis (where short term obligations exceed short term assets) some

element of government will step in to lend banks enough money to avoid bankruptcy.

HOW BANKS ARE VIEWED

Banks have a long history of being characterized as heartless, rapacious creditors,

hounding honest folk down on their luck for the last dime.

In United States history, the National Bank was a major political issue during the

presidency of Andrew Jackson. Jackson fought against the bank as a symbol of greed and

profit-mongering, antithetical to the democratic ideals of the United States.

PROFITABILITY

Large banks in the United States are some of the most profitable corporations, especially

relative to the small market shares they have. This amount is even higher if one counts

the credit divisions of companies like Ford, which are responsible for a large proportion

of those company's profits. For example, the largest bank, Citigroup, which for the past 3

years has made more profit then any other company in the world, has only a 5 percent

market share. Now if Citigroup were to be as dominant in its industry as a Home Depot,

Starbucks, or Wal Mart in their respective industries, with a 30 percent market share, it

would make more money than the top ten non-banking US industries combined.


In the past 10 years in the United States, banks have taken many measures to ensure that

they remain profitable while responding to ever-changing market conditions. First, this

includes the Gramm-Leach-Bliley Act, which allows banks again to merge with

investment and insurance houses. Merging banking, investment, and insurance functions

allows traditional banks to respond to increasing consumer demands for "one stop

shopping" by enabling the crossing selling of products (which, the banks hope, will also

increase profitability). Second, they have moved toward risk based pricing on loans,

which mean charging higher interest rates for those people who they deem more risky to

default on loans. This dramatically helps to offset the losses from bad loans, lowers the

price of loans to those who have better credit histories, and extends credit products to

high risk customers who would have been denied credit under the previous system. Third,

they have sought to increase the methods of payment processing available to the general

public and business clients. These products include debit cards, pre-paid cards, smart-

cards, and credit cards. These products make it easier for consumers to conveniently

make transactions and smooth their consumption over time (in some countries with

under-developed financial systems, it is still common to deal strictly in cash, including

carrying suitcases filled with cash to purchase a home). However, with convenience there

is also increased risk that consumers will mis-manage their financial resources and

accumulate excessive debt. Banks make money from card products through interest

payments and fees charged to consumers and companies that accept the cards. The banks'

main obstacles to increasing profits are existing regulatory burdens, new government

regulation, and increasing competition from non-traditional financial institutions.

TOP TEN BANKS IN THE WORLD RANKED BY PROFIT IN 2003

1. Citigroup — 20 billion

2. Bank of America — 15 billion

3. HSBC — 10 billion

4. Royal Bank of Scotland — 8 billion

5. Wells Fargo — 7 billion


6. JP Morgan Chase — 7 billion

7. UBS AG — 6 billion

8. Wachovia — 5 billion

9. Morgan Stanley — 5 billion

10.Merrill Lynch — 4 billion

INDIAN BANKING SECTOR

Banking in India has its origin as early as the Vedic period. It is believed that the

transition from money lending to banking must have occurred even before Manu, the

great Hindu Jurist, who has devoted a section of his work to deposits and advances and

laid down rules relating to rates of interest. During the Mogul period, the indigenous

bankers played a very important role in lending money and financing foreign trade and

commerce. During the days of the East India Company, it was the turn of the agency

houses to carry on the banking business. The General Bank of India was the first Joint

Stock Bank to be established in the year 1786. The others which followed were the Bank

of Hindustan and the Bengal Bank. The Bank of Hindustan is reported to have continued

till 1906 while the other two failed in the meantime. In the first half of the 19 th century

the East India Company established three banks; the Bank of Bengal in 1809, the Bank

of Bombay in 1840 and the Bank of Madras in 1843. These three banks also known as

Presidency Banks, were independent units and functioned well. These three banks were

amalgamated in 1920 and a new bank, the Imperial Bank of India was established on

27th January 1921. With the passing of the State Bank of India Act in 1955 the

undertaking of the Imperial Bank of India was taken over by the newly constituted State

Bank of India. The Reserve Bank which is the Central Bank was created in 1935 by

passing Reserve Bank of India Act 1934. In the wake of the Swadeshi Movement, a

number of banks with Indian management were established in the country namely,

Punjab National Bank Ltd, Bank of India Ltd, Canara Bank Ltd, Indian Bank Ltd, the

Bank of Baroda Ltd, the Central Bank of India Ltd. On July 19, 1969, 14 major banks of


the country were nationalized and in 15th April 1980 six more commercial private sector

banks were also taken over by the government.

Today the commercial banking system in India may be distinguished into:

Public Sector Banks

a. State Bank of India and its associate banks called the State Bank group

b. 20 nationalized banks

c. Regional Rural Banks mainly sponsored by Public Sector Banks

Private Sector Banks

a. Old generation private banks

b. New generation private banks

c. Foreign banks in India

d. Scheduled Co-operative Banks

e. Non-scheduled Banks

Co-Operative Sector

The co-operative banking sector has been developed in the country to the suppliment the

village money lender. The co-operative banking sector in India is divided into 4

components:

1. State Co-operative Banks


2. Central Co-operative Banks

3. Primary Agriculture Credit Societies

4. Land Development Banks

5. Urban Co-operative Banks

6. Primary Agricultural Development Banks

7. Primary Land Development Banks

8. State Land Development Banks

Development Banks

1. Industrial Finance Corporation of India (IFCI)

2. Industrial Development Bank of India (IDBI)

3. Industrial Credit and Investment Corporation of India (ICICI)

4. Industrial Investment Bank of India (IIBI)

5. Small Industries Development Bank of India (SIDBI)

6. SCICI Ltd.

7. National Bank for Agriculture and Rural Development (NABARD)

8. Export Import Bank of India

9. National Housing Bank


STATUS OF INDIAN BANKING INDUSTRY

It is useful to note some telling facts about the status of the Indian banking

industry juxtaposed with other countries, recognizing the differences between the

developed and the emerging economies.

First, the structure of the industry: In the world’s top 1000 banks, there are many

more large and medium-sized domestic banks from the developed countries than from the

emerging economies. Illustratively, according to The Banker 2004, out of the top 1000

banks globally, over 200 are located in USA, just above 100 in Japan, over 80 in

Germany, over 40 in Spain and around 40 in the UK. Even China has as many as 16

banks within the top 1000, out of which, as many as 14 are in the top 500. India, on the

other hand, had 20 banks within the top 1000 out of which only 6 were within the top 500

banks. This is perhaps reflective of differences in size of economies and of the financial

sectors.

Second, the share of bank assets in the aggregate financial sector assets: In most

emerging markets, banking sector assets comprise well over 80 per cent of total financial

sector assets, whereas these figures are much lower in the developed economies.

Furthermore, deposits as a share of total bank liabilities have declined since 1990 in

many developed countries, while in developing countries public deposits continue to be

dominant in banks. In India, the share of banking assets in total financial sector assets is

around 75 per cent, as of end-March 2004. There is, no doubt, merit in recognizing the


importance of diversification in the institutional and instrument-specific aspects of

financial intermediation in the interests of wider choice, competition and stability.

However, the dominant role of banks in financial intermediation in emerging economies

and particularly in India will continue in the medium-term; and the banks will continue to

be “special” for a long time. In this regard, it is useful to emphasize the dominance of

banks in the developing countries in promoting non-bank financial intermediaries and

services including in development of debt-markets. Even where role of banks is

apparently diminishing in emerging markets, substantively, they continue to play a

leading role in non-banking financing activities, including the development of financial

markets.

Third, internationalization of banking operations : The foreign controlled

banking assets, as a proportion of total domestic banking assets, increased significantly in

several European countries (Austria, Ireland, Spain, Germany and Nordic countries), but

increases have been fairly small in some others (UK and Switzerland). Amongst the

emerging economies, while there was marked increase of foreign-controlled ownership in

several Latin American economies, the increase has, at best, been modest in the Asian

economies. Available evidence seems to indicate some correlation between the extent of

liberalization of capital account in the emerging markets and the share of assets

controlled by foreign banks. As per the evidence available, the foreign banks in India,

which are present in the form of branches, seem to enjoy greater freedom in their

operations, including retail banking, in the country on par with domestic banks, as

compared with most of the other developing countries. Furthermore, the profitability of

their operations in India is considerably higher than that of the domestically-owned banks

and, in fact, is higher than the foreign banks’ operations in most other developing

countries. India continues to grant branch licenses more liberally than the commitments

made to the WTO.

Fourth, the share of state-owned banks in total banking sector assets: Emerging

economies, with predominantly Government-owned banks, tend to have much higher

state-ownership of banks compared to their developed counterparts. While many

emerging countries chose to privatize their public sector banking industry after a process


of absorption of the overhang problems by the Government, we have encouraged state-

run banks to diversify ownership by inducting private share capital through public

offerings rather than by strategic sales and still absorb the overhang problems. The

process has helped reduce the burden on the Government, enhance transparency,

encourage market discipline and improve efficiency as reflected in stock market

valuation, promote efficient new private sector banks, while drastically reducing the

share of the wholly government owned public sector banks in a rapidly growing industry.

Our successful reform of public sector banks is a good example of a dynamic mix of

public and private ownership in banks.

A noteworthy feature of banking reforms in India is the growth of newly licensed

private sector banks, some of which have attained globally best standards in terms of

technology, services and sophistication. In many respects related to performance, these

domestically promoted banks have surpassed branches of foreign banks in India, and

could be a role model for other banks.

BANKING SYSTEM

Introduction

The Reserve Bank of India (RBI) is India's central bank. Though the banking industry is

currently dominated by public sector banks, numerous private and foreign banks exist.

India's government-owned banks dominate the market. Their performance has been

mixed, with a few being consistently profitable. Several public sector banks are being

restructured, and in some the government either already has or will reduce its ownership.

Private and foreign banks

The RBI has granted operating approval to a few privately owned domestic banks; of

these many commenced banking business. Foreign banks operate more than 150 branches

in India. The entry of foreign banks is based on reciprocity, economic and political


bilateral relations. An inter-departmental committee approves applications for entry and

expansion.

Capital adequacy norm

Foreign banks were required to achieve an 8 percent capital adequacy norm by March

1993, while Indian banks with overseas branches had until March 1995 to meet that

target. All other banks had to do so by March 1996. The banking sector is to be used as a

model for opening up of India's insurance sector to private domestic and foreign

participants, while keeping the national insurance companies in operation.

Banking

India has an extensive banking network, in both urban and rural areas. All large Indian

banks are nationalized, and all Indian financial institutions are in the public sector.

RBI banking

The Reserve Bank of India is the central banking institution. It is the sole authority for

issuing bank notes and the supervisory body for banking operations in India. It supervises

and administers exchange control and banking regulations, and administers the

government's monetary policy. It is also responsible for granting licenses for new bank

branches. 25 foreign banks operate in India with full banking licenses. Several licenses

for private banks have been approved. Despite fairly broad banking coverage nationwide,

the financial system remains inaccessible to the poorest people in India.

Indian banking system

The banking system has three tiers. These are the scheduled commercial banks; the

regional rural banks which operate in rural areas not covered by the scheduled banks; and

the cooperative and special purpose rural banks.

Scheduled and non scheduled banks

There are approximately 80 scheduled commercial banks, Indian and foreign; almost 200

regional rural banks; more than 350 central cooperative banks, 20 land development


banks; and a number of primary agricultural credit societies. In terms of business, the

public sector banks, namely the State Bank of India and the nationalized banks, dominate

the banking sector.

Local financing

All sources of local financing are available to foreign-participation companies

incorporated in India, regardless of the extent of foreign participation. Under foreign

exchange regulations, foreigners and non-residents, including foreign companies, require

the permission of the Reserve Bank of India to borrow from a person or company

resident in India.

Regulations on foreign banks

Foreign banks in India are subject to the same regulations as scheduled banks. They are

permitted to accept deposits and provide credit in accordance with the banking laws and

RBI regulations. Currently about 25 foreign banks are licensed to operate in India.

Foreign bank branches in India finance trade through their global networks.

RBI restrictions

The Reserve Bank of India lays down restrictions on bank lending and other activities

with large companies. These restrictions, popularly known as "consortium guidelines"

seem to have outlived their usefulness, because they hinder the availability of credit to

the non-food sector and at the same time do not foster competition between banks.

Indian vs. foreign banks

Most Indian banks are well behind foreign banks in the areas of customer funds transfer

and clearing systems. They are hugely over-staffed and are unlikely to be able to compete

with the new private banks that are now entering the market. While these new banks and

foreign banks still face restrictions in their activities, they are well-capitalized, use

modern equipment and attract high-caliber employees.


Government and RBI regulations

All commercial banks face stiff restrictions on the use of both their assets and liabilities.

Forty percent of loans must be directed to "priority sectors" and the high liquidity ratio

and cash reserve requirements severely limit the availability of deposits for lending. The

RBI requires that domestic Indian banks make 40 percent of their loans at confessional

rates to priority sectors' selected by the government. These sectors consist largely of

agriculture, exporters, and small businesses. Since July 1993, foreign banks have been

required to make 32 percent of their loans to these priority sector. Within the target of 32

percent, two sub-targets for loans to the small scale sector (minimum of 10 percent) and

exports (minimum of 12 percent) have been fixed.

Foreign banks, however, are not required to open branches in rural areas, or to make

loans to the agricultural sector. Commercial banks lent $ 8 billion in the Indian financial

year (IFY, April-March) 1997/98, up sharply from $ 4.4 billion in the previous year.

The deployment of gross loans was as follows:

1997-98 (April-January) percent Gross Bank Loans 100 Food Procurement 15.5 Priority Sector 31.6 Industrial Loans 29.4Loans to Trade 0.07Other Loans 23.43Source: Government of India Economic Survey

Need to Ponder

Debates on India's slowdown focus on the manufacturing sector which is dangerously

misleading: one of the biggest areas of worry about India's economic slowdown is being

ignored - the systemic flaw of India's banking sector. Stories about the real health of

Indian banks get less publicised because banks are still overwhelmingly owned,


controlled and directed by the government, i.e., the ministry of finance (MoF). Banks

have no effective mouthpiece either.

Grey future

One more reason being the opacity of the Reserve Bank of India. This does not mean a

forecast of doom for the Indian banking sector the kind that has washed out south east

Asia. And also not because Indian banks are healthy. We still have no clue about the real

non-performing assets of financial institutions and banks. Many banks are now listed.

That puts additional responsibility of sharing information. It is now clear that it was the

financial sector that caused the sensational meltdown of some Asian nations. India is not

Thailand, Indonesia and Korea. Borrowed investment in property in India is low and

property prices have already fallen, letting out steam gently. Our micro-meltdown has

already been happening.

Conclusion

Still, there are several other worries about the banking sector, mainly confusion over

ownership and control. Sometime soon India will be forced to apply the norms of

developed countries and many banks (including some of the biggest) will show very poor

return ratios and dozens of banks will be bankrupt. When that happens the two popular

reasons to defend bad banks will disappear. These are: one, to save face in the remote

hope of that fortunes will `revive' and two, some banks are too big to be allowed to fail,

fearing social upheaval.


CHALLENGES THE INDIAN BANKS FACE

India is one of the fastest growing economies in the world. Evidence from across the

world suggests that a sound and evolved banking system is required for sustained

economic development. India has a better banking system in place vis a vis other

developing countries, but there are several issues that need to be ironed out.

The challenges that the banking sector in India faces are-

INTEREST RATE RISK:

Interest rate risk can be defined as exposure of bank's net interest income to adverse

movements in interest rates. A bank's balance sheet consists mainly of rupee assets and

liabilities. Any movement in domestic interest rate is the main source of interest rate risk.

Over the last few years the treasury departments of banks have been responsible for a

substantial part of profits made by banks. Between July 1997 and Oct 2003, as interest

rates fell, the yield on 10-year government bonds (a barometer for domestic interest rates)

fell, from 13 per cent to 4.9 per cent. With yields falling the banks made huge profits on

their bond portfolios.

Now as yields go up (with the rise in inflation, bond yields go up and bond prices fall as

the debt market starts factoring a possible interest rate hike), the banks will have to set

aside funds to mark to market their investment.


This will make it difficult to show huge profits from treasury operations. This concern

becomes much stronger because a substantial percentage of bank deposits remain

invested in government bonds.

Banking in the recent years had been reduced to a trading operation in government

securities. Recent months have shown a rise in the bond yields has led to the profit from

treasury operations falling. The latest quarterly reports of banks clearly show several

banks making losses on their treasury operations. If the rise in yields continues the banks

might end up posting huge losses on their trading books. Given these facts, banks will

have to look at alternative sources of investment.

INTEREST RATES AND NON-PERFORMING ASSETS:

The best indicator of the health of the banking industry in a country is its level of NPAs.

Given this fact, Indian banks seem to be better placed than they were in the past. A few

banks have even managed to reduce their net NPAs to less than one percent (before the

merger of Global Trust Bank into Oriental Bank of Commerce, OBC was a zero NPA

bank). But as the bond yields start to rise the chances are the net NPAs will also start to

go up. This will happen because the banks have been making huge provisions against the

money they made on their bond portfolios in a scenario where bond yields were falling.

Reduced NPAs generally gives the impression that banks have strengthened their credit

appraisal processes over the years. This does not seem to be the case. With increasing

bond yields, treasury income will come down and if the banks wish to make large

provisions, the money will have to come from their interest income, and this in turn, shall

bring down the profitability of banks.

COMPETITION IN RETAIL BANKING:

The entry of new generation private sector banks has changed the entire scenario. Earlier

the household savings went into banks and the banks then lent out money to corporates.

Now they need to sell banking. The retail segment, which was earlier ignored, is now the

most important of the lot, with the banks jumping over one another to give out loans. The

consumer has never been so lucky with so many banks offering so many products to


choose from. With supply far exceeding demand it has been a race to the bottom, with the

banks undercutting one another. A lot of foreign banks have already burnt their fingers in

the retail game and have now decided to get out of a few retail segments completely.

The nimble footed new generation private sector banks have taken a lead on this front

and the public sector banks are trying to play catch up. The PSBs have been losing

business to the private sector banks in this segment. PSBs need to figure out the means to

generate profitable business from this segment in the days to come.

THE URGE TO MERGE:

In the recent past there has been a lot of talk about Indian Banks lacking in scale and size.

The State Bank of India is the only bank from India to make it to the list of Top 100

banks, globally. Most of the PSBs are either looking to pick up a smaller bank or waiting

to be picked up by a larger bank.

The central government also seems to be game about the issue and is seen to be

encouraging PSBs to merge or acquire other banks. Global evidence seems to suggest

that even though there is great enthusiasm when companies merge or get acquired,

majority of the mergers/acquisitions do not really work.

So in the zeal to merge with or acquire another bank the PSBs should not let their

common sense take a back seat. Before a merger is carried out cultural issues should be

looked into. A bank based primarily out of North India might want to acquire a bank

based primarily out of South India to increase its geographical presence but their cultures

might be very different. So the integration process might become very difficult.

Technological compatibility is another issue that needs to be looked into in details before

any merger or acquisition is carried out.

The banks must not just merge because everybody around them is merging. As Keynes

wrote,”Worldly wisdom teaches us that it's better for reputation to fail conventionally

than succeed unconventionally". Banks should avoid falling into this trap.


IMPACT OF BASEL-II NORMS:

Banking is a commodity business. The margins on the products that banks offer to its

customers are extremely thin vis a vis other businesses. As a result, for banks to earn an

adequate return of equity and compete for capital along with other industries, they need

to be highly leveraged. The primary function of the bank's capital is to absorb any losses

a bank suffers (which can be written off against bank's capital). Norms set in the Swiss

town of Basel determine the ground rules for the way banks around the world account for

loans they give out. These rules were formulated by the Bank for International

Settlements in 1988.

Essentially, these rules tell the banks how much capital the banks should have to cover up

for the risk that their loans might go bad. The rules set in 1988 led the banks to

differentiate among the customers it lent out money to. Different weight age was given to

various forms of assets, with zero percentage weightings being given to cash, deposits

with the central bank/govt etc, and 100 per cent weighting to claims on private sector,

fixed assets, real estate etc. The summation of these assets gave us the risk-weighted

assets. Against these risk weighted assets the banks had to maintain a (Tier I + Tier II)

capital of 9 per cent i.e. every Rs100 of risk assets had to be backed by Rs 9 of Tier I +

Tier II capital. To put it simply the banks had to maintain a capital adequacy ratio of 9

per cent.

The problem with these rules is that they do not distinguish within a category i.e. all

lending to private sector is assigned a 100 per cent risk weighting, be it a company with

the best credit rating or company which is in the doldrums and has a very low credit

rating. This is not an efficient use of capital. The company with the best credit rating is

more likely to repay the loan Vis a Vis the company with a low credit rating. So the bank

should be setting aside a far lesser amount of capital against the risk of a company with

the best credit rating defaulting Vis a Vis the company with a low credit rating. With the

BASEL-II norms the bank can decide on the amount of capital to set aside depending on

the credit rating of the company.


Credit risk is not the only type of risk that banks face. These days the operational risks

that banks face are huge. The various risks that come under operational risk are

competition risk, technology risk, casualty risk, crime risk etc. The original BASEL rules

did not take into account the operational risks. As per the BASEL-II norms, banks will

have to set aside 15 per cent of net income to protect themselves against operational risks.

So to be ready for the new BASEL rules the banks will have to set aside more capital

because the new rules could lead to capital adequacy ratios of the banks falling. How the

banks plan to go about meeting these requirements is something that remains to be seen.

A few banks are planning initial public offerings to have enough capital on their books to

meet these new norms.

IN CLOSING:

Over the last few years, the falling interest rates, gave banks very little incentive to lend

to projects, as the return did not compensate them for the risk involved. This led to the

banks getting into the retail segment big time. It also led to a lot of banks playing it safe

and putting in most of the deposits they collected into government bonds. Now with the

bond party over and the bond yields starting to go up, the banks will have to concentrate

on their core function of lending.

The banking sector in India needs to tackle these challenges successfully to keep growing

and strengthen the Indian financial system.

Furthermore, the interference of the central government with the functioning of PSBs

should stop. A fresh autonomy package for public sector banks is in offing. The package

seeks to provide a high degree of freedom to PSBs on operational matters. This seems to

be the right way to go for PSBs.

The growth of the banking sector will be one of the most important inputs that shall go

into making sure that India progresses and becomes a global economic super power.


CHALLENGES AHEAD

Following highlights some thoughts on certain areas which have a key bearing on the

ability of Indian banks to remain competitive and enhance soundness. Needless to state,

these are more in the nature of random thoughts, rather than any structured thinking, and

are meant to invite discussion.

First, cost management. Cost containment is a key to sustainability of bank

profits as well as their long-term viability. To highlight this point, we take recourse to

some figures. In 2003, operating costs of banks as a proportion of total average assets1[1]

in the UK were 2.12 per cent, for those in Switzerland they were 2.03 per cent, and less

than 2 per cent in major European economies like Sweden, Austria, Germany and France.

In India, however, in 2003, operating costs as proportion of total assets of scheduled

commercial banks stood at 2.24 per cent. The tasks ahead are thus clear and within reach.

Second, recovery management. This is a key to the stability of the banking

sector. There should be no hesitation in stating that Indian banks have done a remarkable

job in containment of non-performing loans (NPL) considering the overhang issues and

overall difficult environment. Let me add that for 2004, the net NPL ratio for the Indian

scheduled commercial banks at 2.9 per cent is ample testimony to the impressive efforts

being made by our banking system. In fact, recovery management is also linked to the

banks’ interest margins. We must recognize that cost and recovery management 1


supported by enabling legal framework hold the key to future health and competitiveness

of the Indian banks. No doubt, improving recovery-management in India is an area

requiring expeditious and effective actions in legal, institutional and judicial processes.

Third, technological intensity of banking: This is one area where perhaps India

needs to do significant ‘catching up’, notwithstanding the rapid strides made over the last.

Some available figures indicate that in late 1999, the percentage of customers using

online banking was less than 1 per cent in India, compared with anywhere between 6-30

per cent in developed economies like US, UK, Germany, Finland and Sweden. Even in

Latin America, these figures are much higher than for India. While admittedly the

numbers for India are likely to be much higher at present than these figures suggest, so

would be the case for these other economies as well. The issue, therefore, remains what

has been the extent of ‘catching up’ by India on this score? In fact, this seems somewhat

intriguing: India happens to be a world leader in information technology, but its usage by

our banking system is somewhat muted. It is wise for Indian banks to exploit this globally

state-of-art expertise, domestically available, to their fullest advantage.

Fourth, risk management. Banking in modern economies is all about risk

management. The successful negotiation and implementation of Basel II Accord is likely

to lead to an even sharper focus on the risk measurement and risk management at the

institutional level. Thankfully, the Basel Committee has, through its various publications,

provided useful guidelines on managing the various facets of risk. The institution of

sound risk management practices would be an important pillar for staying ahead of the

competition. Banks can, on their part, formulate ‘early warning indicators’ suited to their

own requirements, business profile and risk appetite in order to better monitor and

manage risks.


Fifth, governance. The recent irregularities involving accounting firms in the US

have amply demonstrated the importance of good corporate governance practices. The

quality of corporate governance in the banks becomes critical as competition intensifies,

banks strive to retain their client base, and regulators move out of controls and micro-

regulation. As already mentioned, banks are special in emerging markets since they take

a leading role in development of other financial intermediaries and of financial markets,

apart from having a large recourse to public deposits. No doubt, there is nothing like an

‘optimal’ level of governance for one to be satisfied with. The objective should be to

continuously strive for excellence. The RBI has, on its part, made significant efforts to

improve governance practices in banks, drawing upon international best practices. It is

heartening to note that corporate governance presently finds explicit mention in the

annual reports of several banks. The improved corporate governance practice would also

provide an opportunity to accord greater freedom to the banks’ boards and move away

from micro regulation to macro management. Banks in India are custodians of

depositors’ monies, monies of the millions of depositors who are seeking safe avenues for

their hard earned savings, and hence, banks must accept and perform an effective

fiduciary role. In this light, improvement in policy-framework, regulatory regime,

market-perceptions, and indeed, popular sentiments relating to governance in banks need

to be on the top of the agenda – to serve our society’s needs and realities while being in

harmony with the global perspective.


RETAIL BANKING

Retail banking is typical mass-market banking where individual customers use local

branches of larger commercial banks. Services offered include: savings and checking

accounts, mortgages, personal loans, debit cards, credit cards, and so forth. This is very

different from wholesale banking.

RETAIL BANKING IN INDIA:

India is poised to become the world's fourth largest economy in the span of two decades.

Economic prosperity is providing many in this populous nation with real purchasing

power; it simply is an opportunity that cannot be overlooked by global banks. Despite its

appeal, India remains a developing economy. Thus, global banks seeking a presence or

expansion in India must craft a business strategy that considers the country's attendant

challenges: long-established competitors; rudimentary infrastructure; dynamic political

environment; restrictive regulations; and developing country operational risks.

These challenges should be weighed against the potential gains from entering the

marketplace, as well as the likely cost of doing nothing. Extensive research conducted by

the IBM Institute for Business Value pinpointed four of the most promising product areas

for global banks entering the Indian market: housing loans, automobile loans, small and

medium enterprise (SME) banking and personal financial services. However, recognizing

the growth opportunities is only the beginning. Global banks targeting India as a source

of new growth will have to do much more than just "show up" - success will lie in the

details of execution.


With one of the most under penetrated retail lending markets in Asia-Pacific, India offers

great potential. India's mortgage debt in 2002 totaled only 2 percent of gross domestic

product (GDP), compared to 7 percent of Thailand's GDP, 8 percent of GDP in China and

much higher proportions in other parts of the region: Malaysia (28 percent), South Korea

(30 percent) and Hong Kong (52 percent). While India remains characterized by extreme

wealth and poverty, a middle class is beginning to emerge, with absolute demand for

products and services on the rise. To seize this opportunity, new market entrants must

exploit specific market niches and leverage best-in-class capabilities while addressing the

unique challenges of the Indian banking environment.

During the last decade, India has emerged as one of the biggest and fastest growing

economies in the world. The strengthening economy in India has been fueled by the

convergence of several key influences: liberalization policies of the government, growth

of key economic sectors, development of an English-speaking, well-educated work force

and the emergence of a middle class population.

More liberal economic policies: Opening the marketplace

India's debt crisis in the early 1990s forced the government to radically reform its

economic policies. The resulting liberalization program opened the market for foreign

investment, fostered domestic competition and spawned an era of privatization. In the 10

years after 1992, India's economy grew at an average rate of 6.8 percent . During April to

June 2004, the economy continued to show its strength and grew by 7.4 percent.

Foreign direct investment (FDI) grew more than twenty-fold, from just under US$0.13

billion in 1992 to almost US$2.86 billion in 2003. Meanwhile, privatization accelerated

between 2000 and 2002, when 13 state-owned companies were sold, while the Indian

government recently raised another US$3.41 billion by selling off stakes in six state-

owned firms. Since foreign investment and access to external markets remain critical to

the growth of the country - and specifically, it’s banking system - reform-minded

institutional and foreign investors are monitoring the early words and actions of the new


administration that took control in May 2004, uncertain whether its predecessor's

liberalization program will continue.

Booming businesses: Services, agriculture and manufacturing

Domestic industries have prospered from the development of India's capital markets and

the increased foreign trade and investment across sectors. The rapidly expanding services

sector (including telecommunications and information technology), has benefited from

government spending and explosive demand for IT and IT-enabled services (ITES), such

as call centers and back-office administration. Agriculture and core industries (such as

steel, cement and automobiles) are expected to remain strong over time because of

affordable consumer credit and the robust economy. In addition, infrastructure spending

is expected to be very strong - fueled by big-ticket projects involving national highway

systems, establishment of privatized airports, and the modernization of ports and

telecommunication networks. An estimated US$440 billion is expected to be spent in

public and private projects over the next five years.

A growing labor force: English-speaking with IT savvy

Global investors are attracted to India because of the growing number of well-educated,

English-speaking workers who are comfortable working in information technology.

India's IT work force will be augmented by a booming population of engineering

students. The number of engineering students admitted at the university level rose in

2004 to 341,649 from 310,590 in 2003. Furthermore, India's labor pool also serves as an

expanding customer base for retail bank products and services.

The emerging middle class: Managing "new money"

The development of India's economy is boosting overall consumer purchasing power.

The percentage of middle to high income Indian households is expected to continue


rising. The younger, more educated population not only wields increasing purchasing

power, but it is more comfortable than previous generations with acquiring personal debt

A view of India's banking industry

India's banking industry is one of the major beneficiaries of the country's ascendant

economic power. Improving consumer purchasing power, coupled with more liberal

attitudes toward personal debt, is fueling India's explosive banking segment. Global

banks should be encouraged further by the relatively under penetrated status of the

country's various retail lending segments. The retail market for mortgages, credit cards,

automobile loans and other consumer loans is expected to jump from its 1999 total of

US$9.7 billion to US$36.7 billion in 2004 (see Figure 3). Even with this strong

performance, significant opportunities for continued retail lending growth remain as retail

lending figures lag India's regional peers.

Unlike most rapidly-expanding, emerging markets, India's banking sector has exhibited

financial stability and a trend toward improved governance under the management of its

central bank, the Reserve Bank of India (RBI). One challenge the RBI had to contend

with was the legacy of policy-directed, corporate lending by the state-owned banks that

had produced high levels of non-performing assets (NPAs). Through structural reform,

remedial legislative actions, and favorable returns from the fixed income Treasury

Markets, Indian banks have cut gross NPA levels from 15.7 percent in 1997 to 8.8

percent in 2003. Fortunately, new entrants to the market are not subjected to the same

mandatory lending requirements as domestic banks and can therefore "cherry-pick" the

most desirable clients, allowing them to lower their own risk of NPAs through more

rigorous risk management strategies.

Global banks in India: Gaining a foothold

The competitive environment in India presents both challenges and opportunities to


global banks seeking market entry. Entrenched domestic competitors and restrictive

equity ownership ceilings imposed by the government create obstacles for banks

establishing a foothold in India. Primary challenges include tough competition and

government ceilings on foreign equity ownership. Opportunities exist because global

banks often have technological advantages, well-honed, efficient processes and appealing

products and services.

For the most part, global banks must execute on an organic growth strategy to expand

their footprint in India. Merger and acquisition activity in the banking sector remains

limited by government regulation. This is difficult news for global banks that have relied

on acquisitions as a market entry or expansion strategy. Unless the government shifts its

posture on foreign equity ownership, global banks will have to rely on organic growth to

expand their presence in India.

Crafting an India-specific retail banking strategy

As global banks have experienced in the past, successfully competing in India requires

substantially more consideration than merely choosing the right market to target. It

warrants a well-crafted strategy that addresses the numerous risks and challenges specific

to India's developing economy. The confluence of rapid economic development, elevated

consumer purchasing power levels and an underserved retail banking population position

India as a potential growth region for the 21st Century. However, India's banking history

has also seen global banks failing to establish a profitable operation in the country.

Success will truly lie in the details of execution.


REASONS FOR THE CHANGE OVER FROM CORPORATE BANKING TO

RETAIL BANKING:

The financial sector reforms undertaken by the Government since the year 1991

have accelerated the process of disintermediation which has encouraged blue chip

corporate to access cheaper funds to meet their working capital requirements

directly from investors in India and abroad through capital market instruments

and external Commercial Borrowings route thus by-passing Banks in the process.

The deregulation of markets and interest rates has lead to cut throat competition

among Banks for corporate loans making them to lend even at PLR or sub PLR

and offer other valued services at comparatively cheaper rates to big and high

value corporates. In the process, most of the banks have experienced substantial

reduction in interest spreads and drain on their profitability.

The introduction of stringent Asset Classification, Income Recognition and

provisioning norms has resulted in growing menace of NPAs in corporate loans

which has affected the asset quality, profitability and capital adequacy of banks

adversely. The risks involved in corporate loans are very high as corporates have

to keep all their eggs in one basket. The risks involved in retail Banking advances

are comparatively less and well diversified as loan amounts are relatively small

ranging from Rs. 5000 to Rs. 100 lac and repayable normally in short period of 3-

5 years except housing loans (where repayment period is long up to 15 years in

some cases) and from fixed source of income like salaries.

Whereas corporate loans give average return of just 0.5 to 1.5 percent only, the

retail advances offer attractive interest spread of 3to 4 percent, because retail


borrowers are less interest rate sensitive than the Corporates. Another reason for

large interest spreads on retail advances is that the retail customers are too

fragmented to bargain effectively.

While corporate loans are subject to ups and downs in trade frequently, retail

loans are comparatively independent of recession and continue to deliver even

during the sluggish phase of economy.

Retail Banking gives a lot of stability and public image to banks as compared to

corporate banking.

The housing loans, which form the major chunk of retail lending and where NPAs

are the least, carry risk weight of just 50% for capital adequacy purposes. This is

likely to come down further as new Basel Capital Accord or (Basel II) norms are

put in place from the year 2006. This offers added incentive to banks for lending

to this retail segment as against corporate lending where capital consumption is

higher.

The greater amount of consumerism in the country with upswing in income levels

of burgeoning middle class, which has propensity to consume to raise their

standard of living, is enlarging the retail markets. This market is growing 2 50

percent per year and boosting the demand for credit from households. The

potential is huge as present penetration level is just over 2 percent in the country.

Given the easy liquidity scenario in the country the growth rate in this sector is

likely to go up manifold in the years come. This offers great potential for banks to

enlarge their loan books.

The Indian mindset is also changing and consumers prefer to improve their

quality of life even if it means borrowing for facilities like housing, consumer

goods vehicles and vacationing etc. Borrowing and lending is no longer

considered a taboo. The peer pressure and demonstration effect is further pushing

up demand for housing loans, consumer products and automobiles. The profiles of

customers are fast changing from conservative dodos to fashionable peacocks. All

these developments give big push to Retail Banking activities.

Retail Banking clients are generally loyal and tend not to change from one Bank

to another very often.


Large numbers of Retail clients facilitate marketing, mass selling and ability to

categorize/select clients using scoring system and data mining. Banks can cut

costs and achieve economies of scale and improve their bottom-line by robust

growth in retail business volume.

Through product innovations and competitive pricing strategies Banks can foster

business relationship with customers to retain the existing clients and attract new

ones.

Innovative products like asset securitization can open new vistas in sustaining

optimal capital adequacy and asset liability management for banks.

Retail Banking offers opportunities to banks to cross sell other retail products like

credit card, insurance, mutual fund products and demat facilities etc. to depositors

and investors.


RETAIL BANKING PRODUCTS AND SERVICES

Contrary to plain vanilla mass Banking products that the Banks offered in the pre reform

era, which the customer had either to take or leave, banks, since last couple of years are

offering well researched, tech savvy, borrower friendly, attractive, value added, make

your own Sunday type customized products at most competitive rates through a host of

most modern delivery channels viz., ATM, internet, telebanking to enhance the comfort

of diverse type of customers. Wide range of products that the bank snow offer, cover both

the deposits and advances. The core banking products of deposits i.e. Saving bank,

recurring deposits and short term deposits and advances i.e. short or medium term loans

are packaged with several value additions in different permutations and combinations and

attractive brand names. They are released in the market with adequate publicity and ad.,

support banks products cater to various segments of customers like salaried persons,

traders, business men, professionals, technocrats, pensioners, housewives, children,

labourers, artisans and craftsmen etc. Banks keep on constantly reviewing their products

and services portfolio to cater to the ever escalating expectations of customers.

Retail Lending products

Major retail lending products offered by banks are the following:

- Housing loans

- Loan for consumer goods

- Personal loans for marriage, honeymoon, medical treatment and holidaying etc.

- Education loans

- Auto loans

- Gold loans

- Event loans


- Festival loans

- Insurance products

- Loan against rent receivables

- Loan against pension receivables to senior citizens

- Debit and credit cards

- Global and international cards

- Loan to doctors to set up their own clinics or for purchase of medical equipments

- Loan for women empowerment

- Loan for purchase of acoustic enclosures for diesel Gen. sets etc.

Retail banking products for depositors:

This is in various segments of customers like ; children, salaried persons, senior

citizens, professionals, technocrats, businessmen, retail traders and farmers etc. and it

includes:

- Flexi Deposit Accounts

- Savings Bank Accounts

- Recurring Bank Accounts

- Short Term deposits

- Deferred Pension Linked Deposit Schemes

Today pure deposit type products are giving way to multi- benefit, multi access generes

of banking products. Most of the innovation is taking place in savings bank accounts to

make the meager return of 3.55p.a. that they earn more attractive. Most of the banks now

offer sweep in and sweep out accounts, called 2-in-1 accounts or value added savings

bank accounts. This account is a combination of savings bank and term deposit accounts

and offers twin benefit of liquidity of a savings bank account and higher interest earning

of term deposit accounts.

Add-ons and Freebies

To make their products an services more attractive so as to woo maximum number of

customers, the banks are vying with each other with whole lot off frills, goodies, freebies,

and add-ons. A few of these add-ons. A few of these add-ons and freebies are as under:


- Free collection of specified number of outstation instruments.

- Instant credit of outstanding cheques upto Rs. 15000/-

- Concession in exchange on demand drafts and pay-orders and commission on

bills of exchange

- Issuance of free personalized cheque books

- Free accident insurance covers

- Free doorsteps opening of accounts

- Free issuance of ATM, Debit, Credit and Add-on Cards

- Free investment advisory services

- Grant of redeemable reward points on use of credit cards

- Free internet banking, phone banking and anywhere banking facilities

- Issuance of discount coupons for purchase of various products like computer

accessories, music CDs, cassettes, books, toys, garments etc.

- Issuance of free PVR, trade fair tickets etc.

- Concession in rate of interest on Group advances

- Exemption in upfront fees.

These concessions, freebies and add-ons are based on the True relationship Value (TRV)

of the customers and is calculated by the return on various products and services of the

banks availed by them. These concessions and freebies are usually offered for purchase

of consumer goods but now they have become an integral part of Retail banking products

and services also.

New delivery channels for retail banking Products and Services:

The advent of new delivery channels viz. ATM, Internet and Telebanking have

revolutionalised the retail banking activities. These channels enable Banks to deliver

Retail banking products and services in an efficient and cost effective manner. Now-a-

days the banks are under great pressure to attract new and retain old customers, as

margins are turning wafer thin. In these circumstances reducing administrative and

transaction costs has become crucial. Banks are making special offerings to customers

through these channels retail banking has been immensely benefited with the revolution


in IT and communication technology. The automation of the banking processes is

facilitating extension of their reach and rationalization of their costs as well. They are the

engine for growth of retail banking business of Banks. The networking of branches has

extended the scope of banking to anywhere and anytime 24x 7 days a week banking. It

has enabled customers to be the customer of a bank rather than the customers of a

particular branch only. Customers can transact Retail Banking transactions at any of the

networked branches without any extra cost. As a matter of fact the Retail Banking per se

has taken off because of the advent of multiple banking channels. These channels have

enabled banks to go on a massive customer acquisition mode since transaction volumes

spread over multiple channels lessen the load on the brick and mortar bank branches.


SOME ASPECTS OF RETAIL BANKING

Impact of Retail Banking:

The major impact of retail Banking is that, the customers have become the

Emperors – the fulcrum of all Banking activities, both on the asset side and the

liabilities front. The hitherto sellers market has transformed into buyers market

the customers have multiple of choices before them now for cherry picking

products and services, which suit their lifestyles and tastes and financial

requirements as well. Banks now go to their customers more often than the

customers go to their banks.

The Non-Banking finance companies which have hitherto been thriving on retail

business due to high risk and high returns thereon have been dislodged from their

profit munching citadel

Retail Banking is transforming banks into one stop financial super markets.

The share of retail loans is fast increasing in the loan books of banks.

Banks can foster lasting business relationship with customers and retain the

existing customers and attract new ones. There is a rise in their service as well.

Banks can cut costs and achieve economies of scale and improve their revenues

and profits by robust growth in retail business. Reduction in costs offers a win

win situation both for banks and the customers.

It has affected the interface of banking system through different delivery

mechanism

It is not that banks are sharing the same pie of retail business, the pie itself is

growing exponentially. Retail Banking has fuelled a considerable quantum of

purchasing power through a slew of retail products.

Banks can diversify risks in their credit portfolio and contain the menace of

NPAs. Retail banking allows bank to cross sell other products and services as it is


far more easier to sell other products to the same customer rather than search for

absolutely new ones. Cross selling is one of the best avenues for relationship

Banking and retention of customers. Banks can thus increase their business

volume and improve their bottom-line substantially.

Re-engineering of business with sophisticated technology based products will

lead to business creation, reduction in transaction costs and enhancement in

efficiency of operations.

Problems faced in Retail Banking:

Retail Banking has all it’s attendant risks. It is highly sensitive .Banks got to

move cautiously. It is easy to enter, but difficult to get out. A systematic and a

calculated approach is the pre-requisite for success in the long run.

Retail Banking is being introduced with the concept of serving customer with

better and innovative products with the latest technology and easy availability. It

becomes so popular and widely acceptable that more and more customers had

started to use it. Now it becomes a mass product. Customer database have

tremendously increased and it becomes difficult to manage them.

To match the customer inflows and current customers requirement as well as

service standards banks have to set up more branches, distribution channels and

new trained staff as well as improvement in back office operations also in very

near future. This itself a time bounded problem and banks have to do it as early as

possible.

Today’s competitive market customer has more than one options for his retail

banking needs. Every bank is providing more or less similar kind of products. So

an unsatisfied customer can easily switch over to the another competitor’s bank.

So banks need to be very careful in handling the customers. They have to

continually improve their service standards.

Retail Banking is so wide accepted by the customer as well as very aggressively

promoted by the bankers that if the bankers do not take adequate care in


distributing and recovering advances, there are chances of increasing in NPAs in

coming feature. And that would be an alarming situation.

CORE SERVICES FACILITATING SERVICES

SUPPORTING SERVICES

Payment services Cash Foreign currency

requirements Travelers cheques DD/Bankers cheque TT EFT

Making payments at doorsteps

Internet banking Telephone banking

Current a/c & savings a/c ATM Card Standing instruction

from customers for making payments

Inter branch/inter banks transfer of funds

Safety vault

Credit cards Debit cards Services to senior

citizens Telephone banking Internet banking Conversion of

excess balance to time deposit

Loan product: consumer loans, personal loans, housing loans, educational loans

Current a/c Savings a/c Time deposit a/c

Delivery of time at promised time period

Interest rate option: fixed/floating

Flexibility in prepayment of loan

Counseling on real estate markets

Legal services for documentation

ECS for payment of loan installments

Insurance products : life insurance Pension schemes

Current a/c Savings a/c Time deposits Safety vaults

Additional insurance facility for family members

Counseling on post retirement savings


BANKING PRODUCTS PORTFOLIO

A. Deposits:

There are many products in retail banking like F.D., Savings A/c, Current A/c, Recurring A/c, NRI A/c, Corporate Salary A/c, Free Demat A/c, Kid’s A/c, Senior Citizen Scheme, Cheque Facilities, Overdraft Facilities, Free Demand Draft Facilities, Locker Facilities, Cash Credit Facilities, etc. They are listed and explained as follows:

1. Fixed Deposit: The deposit with the bank for a period, which is specified at the time of making the deposit is known as fixed deposit. Such deposits are also known as F.D or term deposit .A F.D is repayable on the expiry of a specified period. The rate of interest and other terms and conditions on which the banks accepted F.D were regulated by the R.B.I. in section 21 and 35A of the Banking Regulation Act 1949. Each bank has prescribed their own rate of interest and has also permitted higher rates on deposits above a specified amount. R.B.I has also permitted the banks to formulate F.D. schemes specially meant for senior citizen with higher interest than normal.

2. Savings A/c: Saving bank A/c is meant for the people who wish to save a part of their current income to meet their future needs and they can also earn in interest on their savings. The rate of interest payable on by the banks on deposits maintained in savings account is prescribed by R.B.I. The bank should not poen a saving account in the name of :

1. Govt. Department.2. Municipal Corporation3. Panchayat Samities4. State housing Boards5. Water and Sewerage Boards

Now a days the fixed deposit is also linked with saving account. Whenever there is excess of balance in saving a/c it will automatically transfer into Fixed deposit and if there is shortfall of funds in savings a/c , by issuing cheque the money is transferred from fixed deposit to saving a/c. Different banks give different name to this product.


3. Current A/c: A current A/c is an active and running account, which may be operated upon any number of times during a working day. There is no restriction on the number and the amount of withdrawals from a current account. Current account suit the requirements of a big businessmen, joint stock companies, institutions, public authorities and public corporation etc.

4. Recurring Deposit: A variant of the saving bank a/c is the recurring deposit or cumulative deposit a/c introduced by banks in recent years. Here, a depositor is required to deposit an amount chosen by him. The rate of interest on the recurring deposit account is higher than as compared to the interest on the saving a/c. Banks open such accounts for periods ranging from 1 to 10 years. TDS is not applicable to this type of deposit. The recurring deposit account can be opened by any number of persons, more than one person jointly or severally, by a guardian in the name of a minor and even by a minor.

5. NRI Account: NRI accounts are maintained by banks in rupees as well as in foreign currency. Four types of Rupee account can be open in the names of NRI.1.Non Resident Rupee Ordinary Account (NRO)2.Non Resident External Account (NRE)3.Non Resident ( Non Repatriable Deposit Scheme ) ( NRNR)4.Non Resident ( special)Rupee Account Scheme ( NRSR)

Apart from this, foreign currency account is the account in foreign currency. The account can be open normally in US dollar , Pound Sterling , Euro. The accounts of NRIs are Indian millenium deposit, Resident foreign currency, housing finance scheme for NRI investment schemes.

6. Corporate Salary Account: Corporate Salary a/c is a new product by certain private sector

banks, foreign banks and recently by some public sector banks also. Under this

account salary is deposited in the account of the employees by debiting the

account of employer. The only thing required is the account number of the

employees and the amount to be paid them as salary. In certain cases the minimum


balance required is zero. All other facilities available in savings a/c is also

available in corporate salary a/c.

7. Demat Account: Dematerialization is a process by which physical share certificates / securities are taking back by the company or registrar and destroyed ultimately. An equivalent number of shares are credited electronically to customers depository account. Just like saving/current account with a bank one can open a securities account with the depository through a depository participant (DP).

8. Kid’s Account: ( Minor Account ) Children are invited as customer by certain banks. Under this, Account is opened in the name of kids by parents or guardians. The features of kid’s account are free personalized cheque book which can be used as a gift cheque , internet banking , investment services etc.

9. Senior Citizenship Scheme : Senior citizens can open an account and on that account they can get interest rate somewhat more than the normal rate of interest. This is due to some social responsibilities of banks towards aged persons whose earning are mainly on the interest rate.

B. Loans and Advances: The main business of the banking company is lending of funds to the constituents, mainly traders, business and industrial enterprises. The major portion of a bank’s funds is employed by way of loans and advances, which is the most profitable employment of its funds. There are three main principles of bank lending that have been followed by the commercial banks and they are safety , liquidity, and profitability.

Banks grant loans for different periods like short term, medium term, long term and also for different purpose.


1. Personal Loans: This is one of the major loans provided by the banks to the individuals. There the borrower can use for his/her personal purpose. This may be related to his/her business purpose. The amount of loan is depended on the income of the borrower and his/her capacity to repay the loan.

2. Housing Loans: NHB is the wholly own subsidiary of the RBI which control and regulate whole industry as per the guidance and information , home loan’s rates is going to be cheaper so that infrastructure sector gets motivation for development home loans rate is decline up to 7.5% EMI at declining rate so that it becomes cheaper. The purpose of loan to purchase, extension , renovation, and land development.

3. Education Loans: Loans are given for education in country as well as abroad.

4. Vehicle Loans: Loans are given for purchase of scooter, auto-rickshaw, car, bikes etc.. The market size of auto finance is RS 7500 cr. Low interest rates, increasing income levels of people are the factors for growth in this sector. Even for second hand car finance is available.

5.Professional Loans: Loans are given to doctor, C.A, Architect, Engineer or Management Consultant.

Here the loan repayment is normally done in the form of equated monthly.

6. Consumer Durable Loans: Under this,loans are given for acquisition of T.V,Cellphones,A.C,Washing Machines,Fridge and other items.

7.Loans against Shares and Securities: Finance against shares are given by banks for different uses. Now a days finance against shares are given mostly in demat shares. A margin of 50% is normally accepted by the bank on market value. For these loans the documents required are normally DP notes, letter of continuing security, pledge form, power of attorney. This loan can be used for business or personal purpose.


Services Provided By the Banks-

1. Credit Cards:A credit card is an instrument, which provides immediate credit facilities to its holder to avail a variety of goods and services at the merchant outlets. It is made of plastic and hence popularly called as Plastic Money.

Such cards are issued by bank to persons with minimum income ranging between RS 50000 and RS 100000 per annum. And are accepted by a variety of business establishments which are notified by the card issuing bank.

Some banks insist on the cardholder being their customers while others do not.

Few banks do not charge any fee for issuing credit cards while others impose an initial enrollment fee and annual fee also.

If the amount is not paid within the time duration the bank charges a flat interest of 2.5%

Leading Indian Banks such as : SBI, BOB, Canara Bank, ICICI, HDFC and a few foreign banks like CITIBANK, Standard Chartered etc are the important issuers of credit card in India.

2. DEBIT CARDS:It is a new product introduced in India by Citibank a few years ago in association with MasterCard.

A debit card facilitates purchases or payments by the cardholder .

It debits money from the a/c of the cardholder during a transaction. This implies that the cardholder can spend only if his account permits.

3. NET BANKING: This facilitates the customers to do all their banking operations from their home by using the internet facility.


With Net Banking one can carry out all banking and shopping transactions safely and with total confidentiality.

With Net Banking one can easily perform various functions:

1. Check Account Balance2. Download Account Statement3. Request for a stop payment of a cheque.4. Request for a new cheque book.5. Make a FD/TDS enquiry.6. Access DEMAT a/c7. Transfer funds.8. Facilitate bill Payments.9. Open a FD10. Pay Credit Card dues instantly.

4. Mobile Banking:To avail the mobile banking, one needs to have a savings, current and FD a/c and mobile connection.Using mobile banking facility one can –

1. Check Balance2. Check last three transactions.3. Request for a statement4. Request for a cheque book.5. Enquire on a cheque status.6. Instruct stock cheque payment.7. View FD details.8. Transfer funds.9. Pay Utility Bills.

5. Phone Banking:It helps to conduct a wide range of banking transactions from the comfort of one’s home or office.Using phone banking facility one can

1. Check Balance2. Check last three transactions.3. Request for a cheque book.4. Transfer funds.5. Enquire on a cheque status, and much more.

6. Anywhere Banking:


One can operate his roaming current a/c at one centre at any other designated of a particular across any other centre.

One can deposit or withdraw cash from any branch of a particular bank all over the country up to a prescribed limit.

One can also transfer funds.

7.Automated Teller Machines ( ATM) : ATMs features user-friendly graphic screens with easy to follow instructions. The ATMs interact with customers in their local language for increased convenience.

ATMs are generally located in commercial areas, residential localities, major petrol pumps, airports, near railway stations and other places, which are conveniently accessible to customers.

ICICI Bank’s ATM network is one of the largest and most widespread ATM network in India.

Following are the features available on ATMs which can be accessed from anywhere at anytime :

1. Cash Withdrawal2. Cash Deposit3. Balance Enquiry4. Mini A/c Statements5. Cheque Book Request6. Transaction at various merchant establishments.

9. Smart Card:The smart card, a latest additional to the world of banking and information technology has emerged as the largest volume driven end-product in the world due to its data portability, security and convenience. Smart Card is similar in size to today’s plastic payment card, it has a memory chip embedded in it. The chip stores electronic data and programmes that are protected by advanced security features. When coupled with a reader, the smart card has the processing power to serve many different applications. As an access-control device, smart cards make personal and business data available only to appropriate users.

To ensure the confidentiality of all banking service, smart cards have mechanisms offering a high degree of security. These mechanisms are based on private and public key cryptography combined with a digital certificate, one of the most advanced security techniques currently available. Infact , it is possible to connect to the web banking service without a smart card.


Banking on Retail

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 for financial 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% [Chanda Kochhar, 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.

The reasons behind the euphemism regarding the Retail-focus of the Indian banks and

how much of it is worth the attention that it is attracting are the question here..

Potential for Retail in India: Is sky the limit?

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 in the 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 explosive growth. 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.

What about the foreign giants?

The foreign banks have identified this problem but there are certain systematic risks

involved in operating in the Retail market for them. These include regulatory restrictions

that prevent them from expanding their branch network. So these banks often take the

Direct Selling Agent (DSA) route whereby low-end jobs like sourcing or transaction

processing are outsourced to small regional layers. So now on, when you see a loan mela

or a road show showcasing the retail bouquet of an elite MNC giant, you know that a

significant commission earned out of any such booking gets ploughed back to our own

economy. Perhaps, one of the biggest impediments in foreign players leveraging the

Indian markets is the absence of positive credit bureaus. In the west the risk profile can

be easily mapped to things like SSNs and this information can be publicly traded.

PAN is a step in this direction but lot more work need to be done. What has been a

positive step towards this is a negative file sharing started by a consortium of 11 banks.

However, as a McKinsey study points out actual write-offs on NPAs show a strong

negative correlation with sharing of positive information. On top of this, the spend-now-


pay-later “credit culture” in India is just not picking up. A swift legal procedure against

consumers creating bad debt is virtually non-existent. Finally, the vast geographical and

cultural diversity of the country makes credit policy formulation a tough job and it simply

cannot be dictated from a Wall Street or a Singapore boardroom! All these add up to the

unattractiveness of the Indian retail market to the foreign players.

So over the past few years, in spite of the entry of MNCs in many industries, Retail

Banking has seen a flurry of panicky exits. Fewer than 40 remain in India and their share

of total bank assets currently 7.2% is falling. Those that remain might be thought to be

likely buyers of Indian banks. Yet Citibank, HSBC and Standard Chartered—all in India

for more than a century, and with relatively large retail networks—seem to have no

pressing need to acquire a local bank. Established foreign banks have preferred to take

over customers or businesses from other foreign banks that want to leave. Thus HSBC, in

recent years, has acquired customers from France's BNP, Germany's Deutsche Bank and

Japan's Bank of Tokyo-Mitsubishi. ABN Amro took over Bank of America's retail

business.

So all for the keeping then?

This will perhaps be the most wrongful inference that can be drawn from the

above. We just cannot afford to look inwards and repeat the mistakes that were the side

effects of the Nationalization of the Banking System. A growing market can never be an

alibi for lack of innovation. Indian banks have shown little or no interest in innovative

tailor-made products. They have often tried to copy process designs that have been tested,

albeit successfully, in the West. Each economic culture has its own traits and one who

successfully adapts those to the business is the eventual winner. A case in point is the

successful implementation of micro-credit networks in Bangladesh. Positioning a bank as

a tech-savvy financial vendor in a country where Internet penetration is an abysmal

1.65% can only add to the over-leveraging as pointed out earlier. The focus of the sector

should remain in macroeconomic wealth creation and not increasing the per capita

indebtedness that will do little but add to the NPA burden. Retail Banking in India has to

be developed in the Indian way, notwithstanding the long queues in front of the teller

counters in the Public sector banks.


Company Profile

HDFC BANK

The Housing Development Finance Corporation Limited (HDFC) was amongst

the first to receive an 'in-principle' approval from the Reserve Bank of India (RBI)

to set up a bank in the private sector, as part of the RBI's liberalization of the

Indian Banking Industry in 1994. The bank was incorporated in August 1994 in

the name of 'HDFC Bank Limited', with its registered office in Mumbai, India.

HDFC Bank commenced operations as a Scheduled Commercial Bank in January

1995.

Promoter

HDFC is India's premier housing finance company and enjoys an impeccable track record

in India as well as in international markets. Since its inception in 1977, the Corporation

has maintained a consistent and healthy growth in its operations to remain a market

leader in mortgages. Its outstanding loan portfolio covers well over a million dwelling

units. HDFC has developed significant expertise in retail mortgage loans to different

market segments and also has a large corporate client base for its housing related credit

facilities. With its experience in the financial markets, a strong market reputation, large

shareholder base and unique consumer franchise, HDFC was ideally positioned to

promote a bank in the Indian environment.

Management

Mr. Jagdish Capoor took over as the bank's Chairman in July 2001. Prior to this, Mr.

Capoor was a Deputy Governor of the Reserve Bank of India.

The Managing Director, Mr. Aditya Puri, has been a professional banker for over 25

years, and before joining HDFC Bank in 1994 was heading Citibank's operations in

Malaysia.


The Bank's Board of Directors is composed of eminent individuals with a wealth of

experience in public policy, administration, industry and commercial banking. Senior

executives representing HDFC are also on the Board.

Senior banking professionals with substantial experience in India and abroad head various businesses and functions and report to the Managing Director. Given the professional expertise of the management team and the overall focus on recruiting and retaining the best talent in the industry, the bank believes that its people are a significant competitive strength.

ICICI BANK

ICICI Bank is India's second-largest bank with total assets of about Rs.132, 780 crore at

September 30, 2004 and profit after tax of Rs. 873 crore in the half year ended

September 30, 2004 (Rs. 1,637 crore in fiscal 2004). ICICI Bank has a network of about

470 branches and extension counters and over 1,800 ATMs. ICICI Bank offers a wide

range of banking products and financial services to corporate and retail customers

through a variety of delivery channels and through its specialised subsidiaries and

affiliates in the areas of investment banking, life and non-life insurance, venture capital

and asset management. ICICI Bank set up its international banking group in fiscal 2002

to cater to the cross-border needs of clients and leverage on its domestic banking

strengths to offer products internationally. ICICI Bank currently has subsidiaries in the

United Kingdom and Canada, branches in Singapore and Bahrain and representative

offices in the United States, China, United Arab Emirates and Bangladesh.

ICICI Bank's equity shares are listed in India on the Stock Exchange, Mumbai and the

National Stock Exchange of India Limited and its American Depositary Receipts

(ADRs) are listed on the New York Stock Exchange (NYSE).

ICICI Bank was originally promoted in 1994 by ICICI Limited, an Indian financial

institution, and was its wholly-owned subsidiary. ICICI's shareholding in ICICI Bank


was reduced to 46% through a public offering of shares in India in fiscal 1998, an

equity offering in the form of ADRs listed on the NYSE in fiscal 2000, ICICI Bank's

acquisition of Bank of Madura Limited in an all-stock amalgamation in fiscal 2001, and

secondary market sales by ICICI to institutional investors in fiscal 2001 and fiscal 2002.

ICICI was formed in 1955 at the initiative of the World Bank, the Government of India

and representatives of Indian industry. The principal objective was to create a

development financial institution for providing medium-term and long-term project

financing to Indian businesses. In the 1990s, ICICI transformed its business from a

development financial institution offering only project finance to a diversified financial

services group offering a wide variety of products and services, both directly and

through a number of subsidiaries and affiliates like ICICI Bank. In 1999, ICICI become

the first Indian company and the first bank or financial institution from non-Japan Asia

to be listed on the NYSE.

After consideration of various corporate structuring alternatives in the context of the

emerging competitive scenario in the Indian banking industry, and the move towards

universal banking, the managements of ICICI and ICICI Bank formed the view that the

merger of ICICI with ICICI Bank would be the optimal strategic alternative for both

entities, and would create the optimal legal structure for the ICICI group's universal

banking strategy. The merger would enhance value for ICICI shareholders through the

merged entity's access to low-cost deposits, greater opportunities for earning fee-based

income and the ability to participate in the payments system and provide transaction-

banking services. The merger would enhance value for ICICI Bank shareholders

through a large capital base and scale of operations, seamless access to ICICI's strong

corporate relationships built up over five decades, entry into new business segments,

higher market share in various business segments, particularly fee-based services, and

access to the vast talent pool of ICICI and its subsidiaries. In October 2001, the Boards

of Directors of ICICI and ICICI Bank approved the merger of ICICI and two of its

wholly-owned retail finance subsidiaries, ICICI Personal Financial Services Limited

and ICICI Capital Services Limited, with ICICI Bank. The merger was approved by

shareholders of ICICI and ICICI Bank in January 2002, by the High Court of Gujarat at

Ahmedabad in March 2002, and by the High Court of Judicature at Mumbai and the

Reserve Bank of India in April 2002. Consequent to the merger, the ICICI group's

financing and banking operations, both wholesale and retail, have been integrated in a


single entity.

Board Members

Mr. N. Vaghul, Chairman

Mr. Uday M. Chitale

Mr. P.C. Ghosh

Mr. S.B. Mathur

Mr. L. N. Mittal

Mr. Anupam Puri

Mr. Vinod Rai

Mr. Somesh R. Sathe

Mr. P.M. Sinha

Mr. M.K. Sharma

Prof. Marti G. Subrahmanyam

Mr. V. Prem Watsa

Mr. K.V. Kamath, Managing Director & Chief Executive Officer

Ms. Lalita D. Gupte, Joint Managing Director

Ms. Kalpana Morparia, Deputy Managing Director

Ms. Chanda Kochhar, Executive Director

Dr. Nachiket Mor, Executive Director


STATE BANK OF INDIA

BOARD OF DIRECTORS

Shri A.K.Purwar,

Managing DirectorsShri K.Ashok KiniShri T.S. Bhattacharya

Directors Shri K P Jhunjhunwala Shri P.R.KhannaShri Suman Kumar BeryDr I.G.PatelShri Ajay.G. PiramalShri Ananta Chandra KalitaShri Shantha Raju Shri N.S.SisodiaSmt. Shyamala GopinathShri Arun SinghShri Rajiv PandeyShri Piyush Goyal

Corporation Bank

Established in the year 1906, Corporation Bank is an organization based on the

traditional Indian values of service to the community. Corp Bank is regarded as one of

the well-run banks in the comity of Public Sector Banks in the country. The Bank has a

unique history of 98 years of successful Banking and has stood the test of time by

growing steadily, offering vast, varied and versatile services with a personal touch.

Today, its good customer service, pre-eminent track record in House Keeping,

adherence to Prudential Accounting norms, consistent profitability and adoption of

modern technology for betterment of customer service have earned the Bank a place of

pride in the Banking Community. The Bank has been richly endowed with a relatively


young, dynamic and efficient manpower, which is the key factor of the Bank’s success.

The Bank is a Public Sector Unit with 57.17% of Share Capital held by the Government

of India. The Bank came out with its Initial Public Offer (IPO) in October 1997 and

37.87% of Share Capital is presently held by the Public and Financial Institutions.

Corporation Bank is the first Public Sector Bank to publish the results under US GAAP.

The Bank has been publishing the results under the US GAAP since 1998-99. The net

profit of the Bank and its subsidiaries under US GAAP for the year 2002-03 stood at

Rs. 382.12 crore against consolidated net profit of Rs. 415.99 crore .

As on 31.03.04, the Bank has a highly dedicated team of 10,176 fulltime employees

who have made the encouraging performance of the Bank possible by extending

exemplary services to its customers. The Bank will continue its endeavours in the

development of human capital so as to provide unmatched services to its clientele.

Standard Chartered

Leading the way in Asia, Africa and the Middle East

Standard Chartered employs 30,000 people in over 500 locations in more than 50 countries in the Asia Pacific Region, South Asia, the Middle East, Africa, the United Kingdom and the Americas. It is one of the world's most international banks, with a management team comprising 70 nationalities. Standard Chartered is listed on both the London Stock Exchange and the Stock Exchange of Hong Kong and is in the top 25 FTSE-100 companies, by market capitalisation.It serves both Consumer and Wholesale Banking customers. Consumer Banking provides credit cards, personal loans, mortgages, deposit taking and wealth management services to individuals and small to medium sized enterprises. Wholesale Banking provides corporate and institutional clients with services in trade finance, cash management, lending, custody, foreign exchange, debt capital markets and corporate finance. Standard Chartered is well-established in growth markets and aims to be the right partner for its customers. The Bank combines deep local knowledge with global capability.The Bank is trusted across its network for its standard of governance and its commitment to making a difference in the communities in which it operates.


Executive Directors

Bryan Sanderson CBE

Mervyn Davies CBE

Mike DeNomaChris KeljikRichard MeddingsKai NargolwalaPeter Sands


What is Customer Service?

Customer Service is the service provided in support of a company’s core products. Customer Service most often includes answering questions, taking orders, dealing with billing issues, handling complaints, and perhaps scheduling maintenance or repairs. Customer Service can occur on site , or it can occur over the phone or via the internet. Many companies operate customer service call centers, often staffed around the clock. Typically there is no charge for customer service. Quality customer service is essential to building customer relationships. It should not, however, be confused with the services provided for sale by a company. Services tend to be more intangible than manufactured products. There is a growing market for services and increasing dominance of services in economies worldwide.

There are generally two types of customer expectations. The highest can be termed as desired service : the level of service the customer hopes to receive. The threshold level of acceptable service which the customers will accept is adequate service.

Yet there is hard evidence that consumers perceive lower quality of service overall and are less satisfied.Possible reasons might be:

With more companies offering tiered service based on the calculated profitability of different market segments, many customers are in fact getting less service than they have in past.

Increasing use by companies of self-service and technology-based service is perceived as less service because no human interaction or human personalization is provided.

Technology-based services ( Automated Voice Systems, Internet-Based Services, Technology Kiosks) are hard to implement, and there are many failures and poorly designed systems in place.

Customer expectations are higher because of the excellent service they receive from some companies. Thus they expect the same from all and are frequently disappointed.

Organizations have cut costs to the extent that they are too lean and are too understaffed to provide quality service.

The intensely competitive job market results in less skilled people working in frontline service jobs ;talented workers soon get promoted or leave for better opportunities.


Many companies give lip service to customer focus and service quality; but they fail to provide the training , compensation, and support needed to actually deliver quality service.

Delivering consistent, high-quality service is not easy, yet many companies promise it.

The gaps model positions the key concepts, strategies, and decisions in services marketing in a manner that begins with the customer and builds the organization’s tasks around what is needed to close the gap between customer expectations and perceptions. The central focus of the gaps model is the customer gap, the difference between customer expectations and perceptions. Firms need to close this gap- between what customers expect and receive – in order to satisfy their customers and build long term relationships with them. To close this all important customer gap, the model suggests that four gaps- the provider gaps- need to be closed.

The following four provider gaps, shown below are the underlying causes behind the customer gap: Gap 1: Not knowing what customers expect.Gap 2: Not selecting the right service designs and standards.Gap 3: Not delivering to service standards.Gap 4: Not matching performance to promises.


RESEARCH DESIGN

Objectives of the study:

There has been an honest attempt to –


- Identify key factors and strategies employed by individual banks to increase their

market share in retail banking.

- Understand the perception of the customers and the management with respect to

services offered by banks.

- Generate additional information to analyze the gap between the customer and

management perceptions about the services offered by banks.

- Conclude and enumerate the innovations required to reduce the gap and increase

the customer base of banks.

Scope of the Study:

Scope of the study is to understand the various services and the products offered by the

banks to the individual customers and to find out the gaps in the services being offered

and the customer expectations. An effort is also made to suggest the banks as to where

the gaps exist and what needs to be done to close the gaps. The study was done taking six

banks into consideration. They are ICICI Bank, HDFC Bank, Citibank, Standard

Chartered, SBI, Corporation Bank.

The survey was restricted to the bank customers in Ahmedabad and Gandhinagar.


Methodology:

The report “Analyzing the Gap between Management Perception and Customer

Perception With Respect To the Services Offered In Retail Banking” aims to assimilate

data about the various aspects of Retail banking services, to analyze the perceptions of

the management and the customers regarding the services offered in Retail banking and

to find out whether any gaps do exist between the services offered and the customer

expectations. We have taken 6 Banks which represent the Nationalized, Private and

Multinational Banks of the Banking Industry in India-

- SBI

- Corporation Bank

- HDFC Bank

- ICICI Bank

- Citibank

- Standard Chartered Bank

The criteria for selecting these banks were their deposit base. We have limited our

Service Category to the core services in Retail Banking and a few specialized services.

The report is a mixture of Secondary and Primary data, with Questionnaires being

our major instrument to collect primary data.

Major topics we have attempted to cover in this project are to: -


- Understand the perception of the management with respect to services offered by

banks.

- Understand the perception of the customers with respect to services offered by

banks.

- Analyze whether there is a gap between the customer and management

perceptions about the services offered by the banks.

- Conclude and enumerate the recommendations that might help to reduce the gaps

that exist and foster the relationship of the customer more with the bank.


Data collection Method:

Secondary Data:-

In order to have a proper understanding of the sector of Retail Banking an in depth study

was done from the various books, magazines, articles written on the subject. A lot of data

has also been collected from these and also from websites on the topic as also from the

websites of the six banks.

Primary Data:

The primary data was collected by means of a survey. Questionnaires were prepared and

customers of the six banks were approached to fill up these questionnaires. The filled up

information was later analyzed to obtain the required information.

Sampling Plan:

Sampling was one of the methods of data and information collection. Two types of

samples were used . One was the management to gain an understanding about their

perceptions of the services they provide. Other was the customers of these banks to gain

an idea about as to how they rate the services they obtain.

The sample size of the customers was 10 each from each of the six banks ie.60

customers. The management sample size was restricted to 1 each, namely the Branch

Manager from the six banks which is 6 managers.

Data Collection Source:

The study required the understanding of the concept of Retail Banking and of the various

products associated with it. The method used was that of secondary research and primary

research. Under secondary research a detailed study was done from the various books,

journals, magazines written on the subject of banking ad retail banking to obtain the

required information and to have a precise idea of the services of retail banking.


Field Work:

The branch managers of each of the six banks were approached and questions were put to

them as per the questionnaire, and the answers duly filled up. Appropriate probing was

done where ever necessary.

For the customers ‘cold calling’ was the approach employed. The customers coming to

the banks were approached and as per their convenience and acceptance the questions

were put to them and the answers given by them duly filled up. Here too probing was

employed where deemed necessary.

Limitations:

The sample size was restricted with in the area Ahmedabad, Gandhinagar.

Further it was a convenience sampling.

There were time and cost limitations.

The six banks selected have been considered as representatives of the banking sector.

Also the opinions have been generalized to the public.

This project has been done for academic purpose – and not done as a professional

researcher for the company.


Analysis

Q1 How do you rate the courtesy levels of your bank’s Personnel/Staff?Rate Excellent VeryGood Good Average Poor

Percentage 34 50 16 0 0

Courtesy Levels of Bank Employees(as per Mgmt)

34

50

16

0 00

102030405060

Rating

Pe

rce

nta

ge

Excellent

Very Good

Good

Average

Poor

Rate Excellent VeryGood Good Average PoorPercentage 7 60 34 0 0

Courtesy Levels of Bank Employees(as per Cust.)

6

60

34

0 00

10203040506070

Rating

Pe

rce

nta

ge Excellent

Very Good

Good

Average

Poor


Q2. Rate as to how well informed/knowledgeable you feel the bank staff is in answering/solving your questions/queries?


Knowledge Possessed by Bank Employees(as per Mgmt.)

0

66

34

0 00

10203040506070

Rating

Pe

rce

nta

ge

Excellent

Very Good

Good

Average

Poor


Knowledge Possessed by Bank Employees(as per Cust.)

20

34 36

10

005

10152025303540

Rating

Pe

rce

nta

ge

Excellent

Very Good

Good

Average

Poor


Q3. Rate the aspect as to how fast the personnel are in responding/attending to you?


Fast/Speedy Response of Bank Employees(as per Mgmt.)

50

34

16

0 00

102030405060

Rating

Pe

rce

nta

ge Excellent

Very Good

Good

Average

Poor



Fast/Speedy Response of Bank Employees(as per Cust.)

6

56

2414

00

102030405060

Rating

Pe

rce

nta

ge Excellent

Very Good

Good

Average

Poor

Q4. a. How do you rate your bank with regards to the “Transaction time” taken for cash withdrawal/deposits?


Transaction Time for Cash Withdrawal/Deposits (as per Mgmt.)

50 50

0 0 00

102030405060

Rating

Pe

rce

nta

ge Excellent

Very Good

Good

Average

Poor



Transaction Time for Cash Withdrawal/Deposits (as per Cust.)

16

54

24

60

0102030405060

Rating

Pe

rce

nta

ge Excellent

Very Good

Good

Average

Poor

4.b.Rate the bank with regards to the transaction time taken to issue DD/Cheque/Statements?


Transaction Time for DD/Cheque (as per Mgmt.)

50

34

16

0 00

102030405060

Rating

Pe

rce

nta

ge

Excellent

Very Good

Good

Average

Poor



Transaction Time for DD/Cheque (as per Cust.)

14

50

16 16

4

0102030405060

Rating

Pe

rce

nta

ge

Excellent

Very Good

Good

Average

Poor

Q 5. Rate how hasslefree it was/is for you to open an account with the bank


Hasslefree Account opening(as per Mgmt.)

34

50

16

0 00

102030405060

Rating

Pe

rce

nta

ge

Excellent

Very Good

Good

Average

Poor



Hasslefree Account Opening (as per Cust.)

15

50

1510 10

0102030405060

Rating

Pe

rce

nta

ge

Excellent

Very Good

Good

Average

Poor

Q6.How do you rate your bank’s product or service innovation in the past two years?


Product /Service Innovation By Bank (as per Mgmt.)

50 50

0 0 00

102030405060

Rating

Pe

rce

nta

ge

Excellent

Very Good

Good

Average

Poor



Product /Service Innovation By Bank (as per Cust.)

6

50

32

12

00

102030405060

Rating

Pe

rce

nta

ge

Excellent

Very Good

Good

Average

Poor

Q 7. How do you rate your bank regarding its promptness in keeping you informed of deposit rates /service charges?


Promptness in informing about Deposit/Service Charges By Bank

(as per Mgmt.)33 34 33

0 00

5

10

15

20

25

30

35

40

Rating

Pe

rc

en

tag

e

Excellent

Very Good

Good

Average

Poor

Rate Excellent VeryGood Good Average Poor



Promptness in informing about Deposit/Service Charges By Bank

(as per Cust.)

4

20

26

40

10

05

1015202530354045

Rating

Pe

rc

en

tag

e

Excellent

Very Good

Good

Average

Poor

Q8. How do you rate your banks grievance redressal system?Rate Excellent VeryGood Good Average Poor


Grievance Redressal system By Bank (as per Mgmt.)

17

83

0 0 00

102030405060708090

Rating

Pe

rc

en

tag

e

Excellent

Very Good

Good

Average

Poor



Grievance Redressal system By Bank (as per Cust.)

3

23

46

24

4

05

101520253035404550

Rating

Pe

rc

en

tag

e

Excellent

Very Good

Good

Average

Poor


Entertainment of Grievences By Bank (as per Cust.)

5

26

40

25

4

05

1015202530354045

Rating

Pe

rc

en

tag

e

Excellent

Very Good

Good

Average

Poor


Q 10. How do you rate your bank/ branch facility in terms of the comfort facilities it offers-


Infrastructure of the Bank (as per Mgmt.)

50

34

16

0 00

10

20

30

40

50

60

Rating

Pe

rc

en

tag

e

Excellent

Very Good

Good

Average

Poor



Infrastructure of the Bank (as per Cust.)

4

53

20 20

3

0

10

20

30

40

50

60

Rating

Pe

rc

en

tag

e

Excellent

Very Good

Good

Average

Poor

Q11. How do you rate the quality of ATM services provided by the bank?


Quality of ATM Services (as per Mgmt.)

50 50

0 0 00

10

20

30

40

50

60

Rating

Pe

rc

en

tag

e

Excellent

Very Good

Good

Average

Poor

Rate Excellent VeryGood Good Average Poor



Quality of ATM Services (as per Cust.)

24

36

1620

4

0

5

10

15

20

25

30

35

40

Rating

Pe

rc

en

tag

e

Excellent

Very Good

Good

Average

Poor

Q12 .a.How do you rate the Debit card services offered by your bank?


Debit Card Services (as per Mgmt.)

66

34

0 0 00

10

20

30

40

50

60

70

Rating

Pe

rc

en

tag

e

Excellent

Very Good

Good

Average

Poor



Debit Card Services (as per Cust.)

11

46

36

7

005

101520253035404550

Rating

Pe

rce

nta

ge

Excellent

Very Good

Good

Average

Poor

Q12.b. How do you rate the Credit card services offered by your bank? Rate Excellent VeryGood Good Average Poor


Credit Card Services (as per Mgmt.)

0

66

17 17

00

10

20

30

40

50

60

70

Rating

Pe

rce

nta

ge

Excellent

Very Good

Good

Average

Poor



Credit Card Services (as per Cust.)

0

66

17 17

00

10

20

30

40

50

60

70

Rating

Pe

rce

nta

ge

Excellent

Very Good

Good

Average

Poor

Q 13.a. Rate your bank as to how fast you feel it is in processing and disbursing loans.


Fastness in Processing and Disbursing Loans (as per Mgmt.)

50

34

16

0 00

10

20

30

40

50

60

Rating

Pe

rc

en

tag

e

Excellent

Very Good

Good

Average

Poor



Fastness in Processing and Disbursing Loans (as per Cust.)

6

46

36

7 5

05

101520253035404550

Rating

Pe

rc

en

tag

e

Excellent

Very Good

Good

Average

Poor

Q13b. Rate the interest rates currently being offered -


Rating of Interest Rates offered(as per Mgmt.)

17

67

0

16

00

10

20

30

40

50

60

70

80

Rating

Pe

rc

en

tag

e

Excellent

Very Good

Good

Average

Poor



Rating of Interest Rates offered(as per Cust.)

3

56

41

0 00

10

20

30

40

50

60

Rating

Pe

rce

nta

ge

Excellent

Very Good

Good

Average

Poor

Q14. a. Do you use the phone/net banking facility offered by your bank?

yes no6 0

Phone/Net Banking Whether being used (Mgmt.)

0

5

10

yes no

Response

Nu

mb

er

yes

no

yes no46 54


Phone/Net Banking Whether being used (Cust.)

40

45

50

55

yes no

Response

Nu

mb

er

yes

no

Q14.b. Rate the quality of the phone/net banking facility offered by your bank.


Quality of Phone/Net Banking Facilities (Mgmt.)

05

101520253035

Rating

Pe

rc

en

tag

e

Excellent

VeryGood

Good

Average

Poor



Quality of Phone/Net Banking Facilities (Cust.)

0

10

20

30

40

50

60

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80

Rating

Pe

rc

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tag

e

Excellent

VeryGood

Good

Average

Poor

Strategies for Increasing Retail Banking Business –

1. In the view to increase the business, bankers should undertake the risk assessment for the customers and continuously study their behavior for timely fulfillment of their needs.

2. Technology should be upgraded continuously as well as it should be customer oriented.

3. Public Sector Banks need to be more professional in their approach. They should also be more customer oriented.

4. Proper and continuous training should be provided to the staff.

5. The main concern for the bank should be to build up a IT Savvy Customer Base. Due to various reasons, the principal being Security, people have a mental block in using this technology which is otherwise very convenient and customer friendly.

6. The banks would also have to gear up to use the international standards in areas like Demat of Securities, electronic settlement system for funds and securities.


7. Banks must work out strategic plans to computerize their rural and semi-urban branch operations.

8. The inter branch and inter bank funds transfer mechanisms should be more effective.

9. The public sector banks have to adapt themselves to the growing demands of the industry.

Future of Retail Banking

The Banker asked European banks what they consider the future of retail banking to be. The results, put together with the help of Henrion Ludlow Schmidt and Enalyzer, highlight the sector’s strengths and fears as it heads into the 21st century.

What will the retail bank of the future look like, how it will operate and how will it change from the bank of today?

The Banker surveyed the top 300 banks in western Europe plus the top 100 banks in central and eastern Europe based on our rankings and asked bankers for their views. With the help of Henrion Ludlow Schmidt, one of Europe’s leading independent brand consultancies, and Enalyzer, which markets cutting edge eResearch solutions, we received detailed online responses from 58 banks across 26 countries.In brief, consumers are going to expect more in terms of accessibility, personalisation and product/service innovation and the successful retail bank of the future will be brand-led with all its activities – from recruitment to marketing, from strategy to implementation – guided by a constantly reviewed and differentiated brand vision. Such a bank will also make use of a greater degree of advanced technology, including online transactions, but will not shift to a virtual model – it will have to retain a real feel.


The key findings from the responses of the 58 banks are divided into topic areas as follows, and calibrated replies can be noted in the charts related to the 56 individual questions asked in six key question blocks.

Technology

The provision of online banking facilities and converging technologies will dominate the retail bank of the future to provide product information, give financial advice and to allow customers to access and manage their accounts online. Ninety-three percent of respondents see an increase in online transactions. Internet banking will be the norm in five years’ time – 86% selected online as one of the top three methods used to contact banks – allowing 24-hour availability. ATMs are regarded as one of the main future methods of contact with the customer (62%), which is interesting given reciprocity agreements diminishing branded experience and the discussion about the cashless society. Banks will need to develop powerful technology solutions, driven by customer demand. Bankers still expect personal callers at their branches (56%). Mobile phone contacts are not expected to be that significant (30%) but there is the question of what impact 3G technology will make in the future.

Branding

Brand reputation and building stronger brands is of crucial significance to bankers planning the future of retail banking in Europe. Ninety-six percent think it is extremely important or important to build up brand reputation and personality to create stronger customer loyalty. The majority thinks that the market will be dominated by strong brands (89%) but there is less support for the creation of ‘new’ brands (64% disagree or strongly disagree with this). A strong brand is seen as extremely important to attracting customers, differentiating players from their competitors and gaining trust. Transparency seems to be an important factor for building a strong brand (96%). Opinions drift more apart on the subject of a shift to ‘virtual’ banks (40% strongly agree or agree whereas 60% disagree or strongly disagree). Seventy-one percent strongly agree or agree over the importance of the development of cross-border networks whereas only 64% see cross-border consolidation coming. Building up brand reputation and personality is regarded as much more important (96%) than building global networks (60%). Bankers think brand reputation and personality create stronger loyalty than physical presence on the high street (83%). More than one third believes that a strong brand does not protect the retail banking business from the effects of economic slowdown and recession. Motivated staff (100%) and internal communications (95%) are considered to be the most powerful drivers to build a strong brand.

Products and services


The majority of the participants find personalised/individual products and services of high quality and innovation crucially important for supporting customers’ needs and aspirations. Competence in financial advice is regarded as extremely important or important by 96%. The product offer should be clear (86%) and the breadth of offer is also considered key (70%). The most important ancillary products and services are 24-hour service (57%), pensions (57%), portfolio management (54%), financial consultation (54%) and insurance products (52%), whereas less than 10% consider stockbroking, communication products or legal products as important. Low fees and service charges do not seem to be very significant. They are seen as extremely important or important by only 58%. However, the majority of respondents think that reducing interchange fees for card transactions are less important. Opinion is divided over the “one-stop-shop” – offering all products under a single umbrella.

Bank management and development

All respondents see the vital contribution of people, in terms of attitudes and knowledge. Bankers acknowledge that it will be their staff who secure their survival in the next five years. Staff need to be skilled, helpful and motivated. Having a company culture, a clear vision and values are important for the majority. Among the most influential tasks/ functions in the organisation for shaping the retail bank of the future, the majority clearly regards customer relationship management (89%) as most important, followed by marketing and communications as well as IT and organisation (both 59%). Sales and quality management are also expected to become more influential (52% and 51%). More than two-thirds think the influence of knowledge management will stay the same. More than one-third (38%) believe acquisitions will play a less significant role in the future. Ethics and transparency are being recognised as significant business drivers. The implementation of performance standards could help to improve financial performance (82%). Local branches are still considered as extremely important or important by 70%. Banks are likely to stay banks – free of coffee shops and gimmicks. One-stop-shop and more relaxed ambience in branches are regarded as less important. One respondent commented that the development of retail banking would depend highly on tax regulations.

Communications and marketing

Like branding, the importance of communications and marketing cannot be denied. Ninety-four percent expect marketing to be of growing importance in shaping the retail bank of the future.


Furthermore, pro-active marketing is regarded as very important to retain and foster the customer relationship (87%). The bankers questioned see a strong importance of internal communications (see also Branding).

Market and customers

Banks are becoming more customer focused. The majority agree that a stronger focus should be put on the private client sector (extremely important or important for 83%) as well as on banking for small businesses (89%). Relationships with customers will change considerably – although personal contact will still be important. The highest overall agreement is over the growing importance of customer relationship management, including attraction of customers but also building up customer loyalty. Seventy percent of bankers expect their customers to become less loyal and to transfer between banks more frequently. Seventy-seven percent believe ethical management of funds will increasingly influence customer choice. Almost all believe that it is extremely important or important to differentiate from competitors. The analysis of this data could be greatly extended given the wide range of questions and responses shown. And while the results of this survey came from 26 European countries, led by Spain with seven responses, the analysis in many instances provides critical food for thought for retail banks around the world.

Business models that focus on core competence suggest that the retail bank of the future might:

build core financial products that are highly specialised but sold to retail instructions;

commission financial products from specialised ‘manufacturers’ to be re-branded/white-labelled and combined with own products;

specialise in financial retail, only sourcing appropriate products and packaging as needed, either on demand or through long-term supplier contracts;

do everything, build, package, brand and sell own financial products and services.


Bibliography

1. Books and Magazines:

Services Marketing – By Valarie Zeithaml and Mary Jo BitnerBanking and FinanceBusiness TodayOutlook Money

2. Newspapers:

Business StandardEconomic TimesTimes of India

3. Brochures and Catalogues Provided By: State Bank Of India


Corporation Bank HDFC Bank ICICI Bank Standard Chartered Citibank

4. Internet Web-Sites: Google.com Indiainfoline.com

Gap Analysis of Services Offered in Retail Banking

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