Growth and Development of Retail Banking in India: Drivers ...

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Growth and Development of Retail Banking in India: Drivers of Retail banking

Dr. Samiksha Ojha, Associate professor, International Management Institute, B-10, QIA,New Delhi

Vibhu Bhandari, PGDM (WM), International Management Institute, New Delhi

ABSTRACT

Retail banking in India has grown at a rapid pace in recent years as number of consumers continuously

relied upon the new banking products offered under the retail banking. Moreover, retail banking has

widened the scope of technology and internet by introducing various services related to information

technology, telecommunication and electronic data processing.

With a contribution of 14% to the national GDP and employing 7% of the country’s total workforce in

banking, the retail banking has emerged as the fastest growing banking service in India. The paper

however focuses on examining the growth and development of retail banking in the context to rural

and urban areas and how banks are using their existing business strategies to improve their market

presence. The core objective of the paper is to identify the growth drivers of consumers towards

embracing the retail banking services.

Keywords: Retail, Drivers, growth

Introduction

There has been widespread impact of globalization and liberalization in most of the emerging and

developing countries and India has been one of them, who showed dramatic economic development in

the span of last two decades. The cross border trade activities, business, import and export expanded

the scope of financial services and hence the banking sector emerged to support and strengthens the

overall banking needs of the individuals and businesses in the country.

Banking policies were reformed over the years in order to deregulate the sector and allowed private

participation to enhance the scope of banking services. Most of the banks in the past were primarily

limited to the corporations for commercial banking, lending and investment purposes. However, there

has been industrial sickness, economic downturn and always a risk exposure associated with the

business associated with the production, trade and supply chain activities. Furthermore, most of the

major banks in India reformed their banking structure in order to attract individuals, which emerged as

the biggest segments with relative saving and spending power to help the banks for further growth and

development. Thus, retail banking came into existence where most of the banks established number of

their branches across the country in an attempt to cater to the individual needs of the consumers such

as housing loan, car loan, education loan, mortgages, credit cards, investment services, and deposits in

accounts and so on.

Major Banks across India were keen to find the new opportunities in retail banking format in order to

expand their market share and therefore, new services were launched and were followed by other

banks in the name of easy accessibility to ATMs, telebanking, net banking, SMS alerts, locker

facilities among other things. Major growth drivers for retail banking remained the rising population,

education, per capita income, GDP rate, purchasing power and customer spending rate. However,

micro as well as macro-economic forces were responsible for the rapid growth and development of

retail banking segment in the country.

RESEARCH AIM & OBJECTIVES

To study the scope, relevance and emergence of effective retail banking in India.

To critically analyse the retail banking market trends, growth and development in the past


To identify the growth drivers of retail banking industry in India

To evaluate the prevailing business strategies of major banks towards developing the retail

banking concept across India.

SCOPE OF THE STUDY

The study has been carried out on five major banks in India. These are as follows:

ICICI Bank

HDFC Bank

Axis Bank

SBI

Punjab National Bank

DATA COLLECTION METHOD

Primary data has been collected by interview method. A semi-structured interview transcript that

included open and closed ended questions. Interviews were conducted on 15 selected managers using

convenience sampling.

Literature review

Gopal (2010) in his study ‘Growth Drivers and Challenges of Organised Retailing in India’ concluded

that parties involved in this growth story are the consuming public, the manufacturers, retailers and

finally the government.

Barnabas and Mekoth (2010) in their study on ‘Autonomy, Market Orientation and Performance in

Retail Banking’ cited that principal growth drivers are a rising economy, demographic changes,

consumerism etc.

Mukherjee (2011) in ‘Fuelling India's Retail Boom – What Should Be the Right Policy’ concluded that

Indian retail banking sector is one of the fastest growing sectors in India.

Malhotra and Singh, (2010) in their study on "An analysis of Internet banking offerings and its

determinants in India" concluded that Internet has become integral part of banking sector and there are

many opportunities in terms of using cloud computing in the near future.

Rao, (2011) however in his study on "E-learning in India: the role of national culture and strategic

implications", suggested that India is a multicultural place and e-learning is at the introduction stage

which eventually have significant benefits in the years ahead.

Barnabas and Mekoth, (2010) in their study on "Autonomy, market orientation and performance in

Indian retail banking" found that private banks in India have come up with new marketing orientation,

performance management systems and business strategies that are significantly different and better

than the public sector banks.

Kumar and Ganesh, (2011) on "The diffusion of ATM technology in Indian banking" concluded that

technology would dominate the banking sector in India in the coming years.

BANKING INDUSTRY IN INDIA: HISTORICAL PERSPECTIVES

Before the nationalization of large banks in 1969 and 1980, Government-owned banks dominated the

banking sector. Due to lack of competition, the use of technology was minimal and quality of service

was not considered for performance evaluation. Banks did not follow proper risk management systems

and prudential standards were weak. All these resulted in poor asset quality and low profitability of

banks. It was in this situation that wide-ranging financial sector reforms were introduced in India as an

integral part of the economic reforms initiated in the early 1990s.Thus, the principal objective of

financial sector reforms was to improve the allocative efficiency of resources and to accelerate the


growth process of the economy by removing structural deficiencies affecting the performance of

financial institutions and financial markets. Financial reforms can be examined in two phases.

The first phase began in 1991 and focused on restructuring of the balance sheets as well as the

recapitalization of banks. The second phase, which began in 1997, was characterized by the

introduction of competition from foreign banks and new private banks as well as the introduction of

technology. Volatility in the domestic economy, the emergence of consumerism, fluctuations in the

property and stock markets, interest rate deregulation, advancement of technology and competitive

market conditions have forced banks to re-formulate their marketing strategies. The stiff competition

among banks encourages bankers to adopt a stronger customer focus specifically on customers’

aspirations and level of satisfaction. Retail banking thus emerged in the last decade in order to regard

customer service as an important factor to attain competitive advantage. A few banks have established

an outstanding track record of innovation, growth and value creation. This is reflected in their market

valuation. However improved regulations, innovation, growth and value creation in the sector remain

limited to a small part of it.

A weak banking structure has been unable to fuel continued growth, which has harmed the long-term

health of their economies. However, Indian banks have compared favourably on growth, asset quality

and profitability with other regional banks over the last few years. The banking index has grown at a

compounded annual rate of over 51 per cent since April 2001 as compared to a 27 per cent growth in

the market index for the same period. Policy makers have made some notable changes in policy and

regulation to help strengthen the sector. These changes include strengthening prudential norms,

enhancing the payments system and integrating regulations between commercial and co-operative

banks.

However, the cost of intermediation remains high and bank penetration is limited to only a few

customer segments and geographies. While bank lending has been a significant driver of GDP growth

and employment, periodic instances of the “failure” of some weak banks have often threatened the

stability of the system. Structural weaknesses such as a fragmented industry structure, restrictions on

capital availability and deployment, lack of institutional support infrastructure, restrictive labour laws,

weak corporate governance and ineffective regulations beyond Scheduled Commercial Banks (SCBs),

unless addressed, could seriously weaken the health of the sector.

EMERGENCE OF RETAIL BANKING IN INDIA

All around the world retail banking which includes retail assets and retail liabilities has been an

established market; however its rise in emerging economies like India has been of recent origin. The

traditional debt-averse, middle-class Indians who lived within their thrifty means, never to venture

beyond their means, seem to have given way to a new middle-class that is free from all inhibitions

regarding conspicuous consumption. Unlike its predecessors, the middle-class of today has donned a

new attitude; it attaches no social-stigma in taking loans for spending.

Indian retail banking is up and kicking. During 2009-10 retail contributed 42% of overall credit

growth. Growing at the CAGR of 35% over last 5 years the retail asset touched Rs 2,89,000 crore.

Major product segments of retail credit include housing finance, auto finance, personal loans,

consumer durable loan and credit cards to name a few. Housing constitutes the biggest segment of

48% of the entire retail credit; followed by the auto loans segment which constitutes almost 27.8%.

While the balance retail credit is used by consumer durables at 7.2%, educational and other personal

loans take the remaining 16%.

Banks are increasing their dominance in housing finance and capturing the market share of the housing

finance companies. During 2009-10, the market share of banks stood at 62%, against the 33% by

housing finance companies. All the players in this market are adopting an aggressive attitude and the

housing loan availability is playing into the players’ hands. Despite this phenomenal growth in India,


the housing loan as a percentage of GDP at 4.91% indicates low penetration when compared to other

countries like Malaysia (17%) and Thailand (9%). But again this coupled with the population growth

indicates good future prospects.

Following the housing loans, it is the auto loan that is also giving the growth of retail credit the

necessary boost. In Asia Pacific, India has emerged as the third largest market for cars and MUVs i.e.

only after Japan and China. Low interest rates, easy finance, up-gradation of rider from two- wheeler

to 4-wheelers and opening up of second hand car finance are growth drivers of this segment.

The consumer durable loan follows the auto loan market in the third position, constituting

approximately 7% of total credit. Metro centers continue to dominate the market with 29% of total

retail credit, closely followed by the rural market at 27% of total retail market. Urban and semi urban

centers contribute around 22% each. The rural market uprising is a recent phenomenon, which has

immense growth potential. While private sector banks have dominance in metropolitan areas,

nationalized banks have their hold in the urban and semi-urban areas. The rural areas are dominated by

RRBs.

The last few years have witnessed a high increase in students aspiring for management and

professional courses, leading to a spurt in educational loans. Banks are now having a direct tie-up with

the educational institutions to cash in on the opportunity. Public sector banks (PSBs) are more focused

on the educational loans segment. In the educational loan segment, disbursement of domestic banks

has surged by 13% to Rs2249crore in 2004-05; up from Rs1983crore in 2003-04. The number of

students availing education loans has increased to 140,000 from 108,000 during this period.

The other personal loans market is characterized by intense competition and the players vie with one

another to get business. These loans are driven by urgent and short-term needs and banks have to act

swiftly to cash in on that need. Metropolitan and urban areas together constitute two third of total loans

under this category. Private sector banks lead in metropolitan areas, whereas in the rural areas the

nationalized banks dominate.

RETAIL BANKING: CONCEPT AND DEVELOPMENT

The term ‘retail banking’ encompasses various financial services and products forming a part of the

assets as well as liabilities segment of the banks. Retail banking on the assets side includes a wide

range of loan products such as housing, auto, business and educational loans. On the liabilities side

includes retail deposit schemes i.e demand deposit and term deposit, debit cards, insurance products,

mutual funds and depository services. Perhaps as per customer’s need and requirement.

Retail banking is a service industry, which is focused towards the customer’s money and its

management. A relationship of the nature of manpower is involved in this industry due to its

continuous nature. Retail banking today for many banks is synonymous with mainstream banking,

with vast sums of money being invested in creating and sustaining a retail brand, further supported by

requisite technological and staffing support.

In India, all the retail banking segments are expected to witness a tremendous growth owing to the low

cost of borrowing, changing customer attitudes towards borrowing and optimism regarding economic

growth. Retail lending constitutes just 12.36% of the Indian banking system, given this

macroeconomic scenario. Retail banking is expected to grow by a CAGR of 25% to touch the figure of

Rs 575,000crore. This requires expansion and diversification of retail banking product portfolio, better

penetration and faster service mechanism. Hitherto, the growth had come from metros and tier I cities.

While the loan requirement from larger cities will continue to grow, explosive growth in credit is

expected to register in tier II cities, semi-urban and rural areas.

However, there are some areas of concern like rising NPA in consumer loans particularly, the

delinquency rates in credit cards, and frauds in home loans. Housing prices have grown rapidly.

Deflation of asset value is a possibility in certain areas. Aggressive credit growth in retail has

increased the requirement for measuring and managing this risk. These require extremely skilled

workforce and highly evolved credit delivery and monitoring processes. The other concern is of


suicidal pricing by the aggressive banks. This is bringing the margins under pressure. Though rational

pricing is critical, the competitive market shall continue to see the pricing pressure. There is also a

need for a database and management information system to identify the right type of borrowers.

Revision of credit cards issue regulations, and recent draft guidelines on outsourcing are the steps in

the right direction..

DRIVERS OF RETAIL BANKING IN INDIA

Retail lending across the globe has been a showcase of innovation in the commercial banking

sector. Countries like China and India have emerged as potential markets with huge investment

opportunities. The higher growth of retail lending in emerging economies is attributable to fast growth

of personal wealth, favourable demographic profile, rapid development in information technology, the

conducive macro – economic environment, financial market reforms, and several micro – level supply

side factors. The retail banking strategies of banks are undergoing major transformation, as banks

adopt a mix of strategies like organic growth, acquisitions and alliances. This has resulted in paradigm

shift in the marketing strategies of the banks. Public sector bank players are adopting aggressive

strategies, leveraging their branch network and their customer vase to earn a larger share of the retail

pie. Banks are also going in for innovative strategies like cross selling, packaged selling of retail

products and at the same time, new foreign players are also entering this high growth sector.

The banking scenario in India is at the crossroads and is continuously evolving, but progress has been

remarkable over the past decade. With the exponential growth of touch points and sophistication, the

frontline sales force is assuming the role of a relationship personal is continuously under the

microscopic observation of the customer. An element that strongly drove the satisfaction of customers

in the banking sector was the conviviality factor related to the features of a bank and the attributes of

its personnel (Kumar and Natarajan, 2011). Malhotra and Singh (2007) conducted a study and put

forward that satisfaction with perceived product quality was the prime driver of growth in the retail

banking.

At a time when channel innovation has become the order of the day to encourage effective banking

habits among customers, a vital component of the supply chain namely, customer interface is totally

missing. With the advent of liberalization the banking industry had made a head start towards the best

banking practices at each interaction point of the supply chain. In India, retail banking has always

been prevalent in various forms ever since the evolution of banking. Co-operative banks that have been

existence in India for over a century have always had retail thrust. It is only since the mid-nineties that

the term retail banking has been used as a means of reinforcing a conscious foray into this particular

line of business. It is pertinent to ponder about the causes of the shift (or increase) of focus towards the

retail side.

There are several compelling reasons that have influenced this shift such as:

• Fear of corporate defaults and NPA computation

• Relative safety implied by the mortgage loans

• Low credit off take from the commercial and corporate sector during the period 2000-

2003 (this trend has reversed, though, over the last year and a half)

• Lowering cost of consumer durables and automobiles due to competition

• Increasing use of credit/debit cards as plastic money.

• Automation of stock exchange operations, dematerialization

• ATMs, direct debit and phone banking as convenience factors

• Advisory services: real estate, investments and insurance

Kumar (2010) emphasized that growth drivers for retail banking are favourable demographic and

rising income and increase in the literacy rate but however, Singh (2011) argued that there has been


relative increase in the working population in India that reached to 675 million in 2010 and this

eventually increased the scope for retail banking. Goswami and Mishra (2008) cited that projected per

capita GDP is expected to increase from US$ 380.8 in 2000–01 to US$ 2,097.5 in 2026, reflecting

higher disposable income and thus, there would be significant latent demand for retail banking services

likely with the market penetration strategy.

In the words of Sharma (2008), Retail banking is influenced by ‘anywhere’, ‘any time’ banking by

improved processes and offering bundle of products. Moreover, there is quick reimbursement of funds

on regular basis where retail banks understands the daily needs of the consumers and allow liquidity

power to those who fit into the criteria of credit facilities. However, Bhole (2009) argued that with

despite the customer driven approach of retail banks, most of the banks adopted differentiation and

segmentation strategies by offering distinct products with the different features such as variations in

the interest rates, life cycle of credit facility, additional monetary and non-monetary benefits to the

consumers. Hence, Essvale (2011) believed that prevailing competition in the retail banking sector has

undoubtedly raised the potential and opportunities for the small and medium size enterprises who felt

the absence of finances in the past.

The foreign retail banking companies assumes high potential and importance in Indian economy due to

its employment potential and regional dispersal. Sharma (2009) found that the total credit provided by

public sector banks to the retail sector in 2009 was US$ 39.8 billion, which formed 11.3 per cent of

ANBC/CEOBSE (Adjusted Net Bank Credit/Credit Equivalent Amount Off-Balance Sheet Exposure)

and 26.5 per cent of the total priority sector advances of these banks. Moreover, large amount of

money is remitted by non-resident Indians (NRIs), one of the largest Diasporas in the world. This has

eventually allowed favourable and conducive banking environment with well-capitalised banks which

are now able to provide a base to meet the growing need for banking services.

Undoubtedly, India has a well-balanced mix of public and private sector banks. While public sector

banks provide stability to the banking system in the country, private sector banks add the necessary

dynamism to it. For example private sector banks made possible the higher credit growth over the last

two decades. Retail loans have been a prime driver of credit growth in recent years, witnessing a

growth of over 40% in 2004-05 and 2005-06. As a percentage of gross advances, it increased from

22% in 2003-04 to 25.5% in 2005-06. The objective of retail banking is to increase penetration by

providing best in class services and access, by offering value added services to customers.

It consists of three elements, viz, deposit products, loan products and other products. Banks are also

offering other value added services. Cross selling of various retail products also takes place. It

represents additional services offered to existing customers with a view to expand banking business

which results in reduction of cost and enhances satisfaction level of customers. While public sector

banks have not gone deep into the concept, new generation private sector banks are embarking upon

cross selling to maximize income. The main benefit is reduction of cost as the cost of contracting a

new customer is much higher than to serve an existing customer. Cross selling enables creation of

brand value. The existing customer base of the banks is used for the purpose of cross selling. It is not a

transaction based activity but is primarily a relationship building exercise.

Thus, the theoretical analysis suggested that there are many segments that contributed to the growth of

retail banking in India and in turn boosted the economy and the country’s GDP. The following analysis

will describe the major growth drivers that influenced the retail banking in India.

DEMOGRAPHIC CHANGES

In 1985, 93% of India’s population had disposable income less than Rs.0.09 million. By 2005 the

figure was 54% (i.e.431 million people are above the line). By 2025 it will be 22 %. Again the average

disposable income will grow from Rs.0.114 million in 2006 to Rs.0.319 million by 2015. It is

estimated that India will emerge as one of the world’s youngest nations as 54 per cent of its current


population is aged 24 years and less. By 2020, the country is expected to represent 17 per cent of the

world's working age population. With the availability of easy credit cards and a rise in the aspirational

class, the major beneficiary would be the retail industry – more specifically the apparel segment of the

business.

CHART 1

ECONOMIC GROWTH

India is one of the largest economies of the world. The GDP has gone up from $600 billion in 2003 to

$ 1.25 trillion in 2008. Current estimates are that the GDP of the country has grown at 6.6 % (2009-10)

and is projected to grow at 9% in (2010-11). The growth of retailing is intrinsically linked to the

Growth Rate of a country. In terms of PPP (purchasing power parity) the country is placed 4th behind

United States, China and Japan. Germany comes behind India.

Bhole (2009) said that in Indian context major growth in retailing has developed during the last one

decade when the GDP growth picked up and grew as follows:

CHART 2

CONSUMERISM

India’s middle and high-income population has notched up an impressive growth and the country’s

middle class will grow from about 5% of the population to more than 40% and create the world’s fifth

largest consumer market. As a country with a high percentage of youth (33% below the age of 15),

consumers spending has risen sharply. Increased awareness has resulted in a perceptible change in

behaviour and they are on the lookout for convenience, speed, efficiency and a wide range of products,

simultaneously – a one-stop shopping experience.

Compared to the eighties, India has seen brand explosion in almost all categories of goods providing

ample choice to the customer. Their economic well-being, increasing aspirations for higher standards

of living and comforts are responsible for the increase in consumerism.


GROWTH OF NUCLEAR FAMILIES AND SATELLITE TOWNSHIPS

With most major cities getting overcrowded new businesses and industries are being located on the

outskirts of major cities resulting in people migrating to these areas for their livelihood. These

proliferating satellite townships provide a big opportunity for retailers who open outlets vis-à-vis bank

branches in order to target this captive consumer base. With a shift in family structure, nuclear families

have become a significant component of urban markets. Large families’ fragmenting into nuclear

families translates into increased footfalls and more shopping baskets – providing a great opportunity

for the retailers.

CHANGE IN CONSUMER BEHAVIOR AND THE IMPACT OF WORKING WOMEN

Changing income levels and occupation have resulted in a change in the consumer’s buying behaviour.

More urban women are seeking employment resulting in dual income families. This results in more

disposable income that in turn spawns consumerism. Moreover, in households with working women

there is greater work pressure and increased commuting time resulting in adjustments being made to

the food habits (cooking vs. ready to eat) as well as clothing.

The focus shifts to convenience and comfort. The size and composition of the shopping basket has

changed over time. Today’s consumers are looking for shopping convenience and want to have all

their requirements under one roof, this eventually raised the scope and importance of retail banking.

ELECTRONIC MEDIA

As against two channels in the early 90’s there is an explosion in the number of TV channels through

which retailers have access to a larger audience. Due to creative advertisements across channels and

print media, kid’s related products have registered stupendous growth. In fact media invasion has

changed the lifestyles of consumers resulting in greater demands on variety and assortment, value,

service and convenience. Media has helped in two ways; on the one hand, it has resulted in booming

sales for the retailers and on the other, by creating awareness, has ensured that the consumer gets

‘value for money’.

RISE IN THE USE OF PLASTIC MONEY

Plastic money an acronym for credit cards is an important driver of retail businesses. Indian consumers

are increasingly using credit cards for shopping as well as dining. According to Euro monitor, India is

the second fastest growing Financial Cards market in the Asia-Pacific region. In 2008, credit cards

sales are estimated to have contributed around 1.2%, which is expected to be around 1.4% of the total

retail sales in India at the end of 2010.

Retail banking especially credit card has thus increased the purchasing power and emergences of

strong middle class, development of retail market have increased the scope for retail banking in India.

The theoretical analysis suggested that retail banking in India has generally been facilitated by the

offerings of multiple products such as deposits, credit cards, insurance, investments etc. together with

using multiple delivery channels such as call centres, branch, internet, Kiosk etc. It has also been found

that retail banking cater multiple customer groups such as individual consumers, small business and

corporates.

MAJOR CHALLENGES FOR MARKET PLAYERS FOR DEVELOPMENT OF RETAIL

BANKING

With recession departing away from global economy, opportunities are slowly emerging in emerging

markets. Since India, was less depended upon US for growth; was the first to come out of recession

eclipse. Growth opportunities in banking in India, especially retail segment is set to witness fast

growth due to high consumption. The higher growth of retail lending in India is attributable to fast

growth of personal wealth, favourable demographic profile, rapid development in information

technology, the conducive macro-economic environment, financial market reforms, and several micro-


level supply side factors.

The retail banking strategies of Indian banks are undergoing major transformation, as banks adopt a

mix of strategies like organic growth, acquisitions and alliances. This has resulted in a paradigm shift

in the marketing strategies of the banks. Public sector bank players are adopting aggressive strategies,

leveraging their rural branch network and their customer vase to earn a larger share of the retail pie. At

the same time, new foreign players are also entering this high growth sector but regulatory framework

and stringent measures adopted by the planning and commerce ministry pose various challenges not

only for foreign players but also for domestic banks. With an increasingly global footprint, the Indian

banking industry has adopted certain global best practices such as International Financial Reporting

Standards (IFRS) and Basel II norms. These not only position India at an international level, but also

provide confidence to foreign players planning to establish businesses in India. But, retail banking still

has low penetration levels.

These services are not only related to the banking sector and also, to other related services such as

insurance, wealth management etc. The following factors are likely to trigger the demand for retail

products:

• Dramatic changes are expected in the credit portfolio of banks in the next five years.

• Housing is expected to continue to be the biggest growth segment followed by auto loans.

• Banks are looking to expand and diversify by focussing on the non-urban segment as well as varied

income and demographic groups.

• Rural areas also offer tremendous potential, which needs to be exploited.

The situation within retail banking today is also characterized by many other complexities and

challenges. From the bank’s perspective, there are more customer segmentation required,

channelization of products through effective channels, improvement in service level in public sector

banks. From the customer’s perspective, however, the expectation of a consistent, integrated and

quality experience with the bank has become heightened. Customers want the same service, whether it

is delivered at a branch, through a contact center, or online. Yet, only a small number have been able

to achieve that goal. Most banks deliver the best experiences in the branches and the worst online—

however, for a few, exactly the opposite is found. In both situations, technology systems and internal

processes have been an underlying cause of the challenges.

INFLUENCE OF TECHNOLOGY ON RETAIL BANKING

Recent advances in technology have created a surge in “technology-based self-service” (Dabholkar et

al. 2003). Such developments are changing the way that service firms and consumers interact, and are

raising a host of research and practice issues relating to the delivery of e-service. E-service is

becoming increasingly important not only in determining the success or failure of electronic commerce

(Yang et al., 2001), but also in providing consumers with a superior experience with respect to the

interactive flow of information.

The financial system around the world has been facing a lot of changes. Mergers and acquisitions,

deregulation, increased competition, changing information systems and technology, and human

resources with different skills are just a few ‘forces’ that are influencing the banking business (Pereira,

1995).

Technology is one leading ‘driving force’ nowadays, in different businesses (Tavares, 2000). It is

therefore important to research the investments in technology and their impact in the bank business

(Saunders and Walter, 1994; Sethi and King, 1994). It is particularly important to assess how

technology is reducing the ‘labour intensive activities, reducing service and processing cost, increasing

service levels, improving the productivity and competitiveness of the Indian financial sector.

Dabholkar (1994) claims that when the customer is in direct contact with the technology there is

greater control such as with Internet banking. However, if there is an absence of direct contact, such as

with telephone banking (since the technology itself is not visible to customers who are able only to

press numbers on their telephone keypad) it is assumed that there is less control perceived by the

www.theinternationaljournal.org > RJEBS: Volume: 02, Number: 01, November -2012 5

customer during this transaction. Bateson (2000) has conducted a number of studies on the need for

consumers to have control during service encounters. When a consumer freely chooses to use

technology as a form of service delivery the impact is high in terms of quality attributes. Some of the

quality factors that are highly important to consumers are efficiency and speed (Bateson, 2000).

The challenging business environment in the financial service market has also resulted in more

pressure on banks to develop and utilise alternative delivery channels, with a view to attracting more

customers, improving customers' perceptions, and encouraging loyalty (Bauer et al., 2005; Lee and

Lin, 2005; Parasuraman et al., 2005). Among the more recent delivery channels introduced is

electronic banking. In its simplest form, electronic banking means the provision of information about

the bank and its products via a page on the internet. A more developed service, in Daniel's (1999)

view, is one that provides the customers with the opportunity to gain access to their accounts execute

transactions or buy products online or via other electronic means such as TV, telephone or Automated

Teller Machines (ATM). The installation of customer friendly technology (such as menu driven

automated teller machines, telephone and Internet banking services) as a means of delivering

traditional banking services has become common place in recent years as a way of maintaining

customer loyalty and increasing market share. Traditional brick and mortar banks are using technology

to meet the competitive challenge posed by online banks, as well as a method of reducing the cost of

providing services that were once delivered exclusively by bank personnel (Joseph et al., 2003).

Banks have largely implemented service delivery technology as a way of augmenting the services

traditionally provided by bank personnel. Implementation results both from the need to reduce the cost

of delivering service primarily through personnel, and, the corresponding need to meet the challenge

posed by technologically innovative competitors (Byers and Lederer, 2001; Howcraft and Beckett,

1996; Kelley, 1989). Changes in the banking industry such as those resulting from deregulation, rapid

global networking, and the rise in personal wealth have thus made the implementation of sophisticated

delivery systems (e.g. online and telephone banking, remote site automated teller machines, etc.) a

strategic necessity in many cases (Lewis et al., 1994).

ROLE OF E-COMMERCE IN RETAIL BANKING

Financial services industry over time has opened to historic transformation that can be termed as e-

developments which is advancing rapidly in all areas of financial intermediation and financial markets

such as e-finance, e-money, electronic banking (e-banking), e-brokering, e-insurance, e-exchanges,

and even e-supervision. The new information technology (IT) is turning into the most important factor

in the future development of banking, influencing banks’ marketing and business strategies. In recent

years, the adoption of e-banking began to occur quite extensively as a channel of distribution for

financial services due to rapid advances in IT and intensive competitive banking markets (Mahdi and

Mehrdad, 2010; Dube, et. al., 2009). The driving forces behind the rapid transformation of banks are

influential changes in the economic environment include among others innovations in information

technology, innovations in financial products, liberalization and consolidation of financial markets,

deregulation of financial inter-mediation. These factors make it complicated to design a bank’s

strategy, which Dabholkar (1994) discusses how technology-based services have made new service

delivery options available to organizations, making customer participation more widely possible.

Customers use touch screen “kiosks” to order take-away food, whilst banks have widely distributed

automatic teller machines to withdraw, transfer funds, make deposits into accounts or conduct any

other transactions e.g. balance inquiry, movie tickets or rail tickets booking.

Technological developments have removed repetitive, time consuming tasks, reduced human error and

extended access to banking related facilities. Technology also provides customer information that it

would be much more expensive to provide on a person-to-person basis. Telephone banking facilities

allow non-cash transactions to be carried out, which would have required a visit to a branch earlier

(Prendergast and Marr, 1994).


Similarly, Internet banking allows customers to perform tasks at a time and in a place convenient to

them. Dabholkar (1996) suggests that direct contact with such technology also gives customers a

feeling of greater control. Smith (1987) is of the opinion that technology was introduced in banks

originally to reduce costs but that, by dividing front and back office operations, technology is being

targeted to enhance different functions. The dilemma still remains, however, as to how to maintain a

satisfactory number on face-to-face interactions with the customers.

Rogers (2004) identified five characteristics or attributes of innovations that affect the rate at which

innovations are adopted (and ultimately their usage patterns): their relative advantage, compatibility,

complexity, divisibility (trialability), and communicability (observability). Additional characteristics

were later added; perceived risk (Ostlund, 2005), financial and social cost (Zeithaml, 2005).

In the categorization of services in technology-based service delivery options Dabholkar (1994)

suggests there are a number of relevant classifications that will apply to industries employing

technology based service delivery. The classification analysis “who” delivers the service that is, person

to person, where the employee uses the technology or consumer to technology, such as the use of an

ATM. The next categorization looks at where the service is delivered.

Either on the service firm’s sites themselves, at the customer’s home or office or at a “neutral” site

such as an ATM located at an airport. The final categorization looks at the contact the customer has

with the service operation, either direct or indirect such as in the case of telephone banking. Dabholkar

(1994) stipulates that there should be flexibility in the design of the technology to allow customers to

make changes during the transaction and make available a customer service adviser if required, with

“minimum waiting”. This also raises the design issue of sufficient menu options for ATM/Telephone

and Internet bankers. In most cases the transaction occurs in a neutral location and the availability of

an employee may not always be feasible since these facilities often operate 24 hours a day, seven days

a week.

Continuous improvements in the information technology have enabled banks to provide their services

in a more direct manner to adjust their products better to the clienteles’ needs. Although banking has

always been an information business, until now information technology was mainly used to automate

administrative processes. The shift from automating to informating-using information and its flow to

inform managers provides opportunities to track a customer’s behaviour and respond at the right time.

By making effective use of these opportunities, banks are able to transfer a great deal of transactions

from branch offices to a call-centre (John, et al., 2005). Accessibility has been extended through

technological developments as well as the introduction of new service delivery methods that allow

consumers to do business with service firms from the home and office. Electronic banking is an

umbrella term for the process by which a customer may perform banking transactions electronically

without visiting a brick and- mortar institution. The following terms all refer to one form or another of

electronic banking: personal computer (PC) banking, Internet banking, virtual banking, online

banking, home banking, remote electronic banking and phone banking. PC banking and Internet or

online banking is the most frequently used designations in the development of retail banking in India.

It should be noted, however, that the terms used to describe the various types of electronic banking are

often used interchangeably (Dirk de Villiers, 2003). Internet banking is predicted to transform and

revolutionize traditional banking industry (Mols, 2000; Daniel, 2000; Carrington et al, 2002). Banking

services are easily digitalized and automated and, thus, from an operational perspective, lend

themselves to the internet (Elliot and Loebbecke, 2000; Daniel, 1998) the potential competitive

advantage of the internet for banks lays in the areas of cost reduction and satisfaction of consumer

needs.

ANALYSIS

The primary data has been gathered from the bank managers, relationship managers, personal bankers

and associates working at the branches of five banks stated in the research methodology, i.e. ICICI


Bank, HDFC Bank, Axis Bank, Punjab National Bank and SBI. The researcher approached used

convenience-sampling technique and approached to suitable number of target audience but could only

secure maximum of 15 interviews.

However, no distinction as made whatsoever between the participants in terms of their age, sex,

working class or ethnic group and researcher encouraged as many people to participate in the study.

Two third participants were male and most of the respondents belonged to the age group of 35-45.

The table below classified the number of respondents from each bank who participated in the study.

ICICI

Bank

HDFC

Bank

Axis

Bank

Punjab National

Bank

SBI

Branch and Senior Manager 2 2 1 1 1

Personal Bankers and

Executives 2 2 2 1 1

Total 4 4 3 2 2

1. The respondents were asked about describing the present stage of retail banking in India. Two third

of the participants stated that retail banking in India is in growth stage as it has covered most of the

major areas of banking operations in the country. 66% of the participants stated that retail banking has

reached to the Growth Stage as number of private and public sector banks got involved with various

retail banking products.

Moreover, participants believed that the retail banking is going forward from growth stage to maturity

as it has widened its scope in urban and rural areas in the country with the use of various retail

banking products.

2. On the question of why retail banking is different from traditional banking functions, the researcher

received mix response from the participants where most of the respondents that traditional banking has

limited role in terms of offering banking services such as opening bank accounts, facilitating the

liquidity in the market and encouraging savings and investments to meet their own business objectives

Whereas retail banking was considered as the revolutionary modern banking techniques which offer

housing loans, education and gold loans, auto loans, insurances apart from traditional banking

functions. In general, retail banking has been improved by the technological use in terms of providing

banking services such as ATM, online banking, money transfer, bill pay etc.

3. When respondents were asked about the existing retail banking product lines that their banks most

deals in. 80% of the participants and almost all from private banks emphasized that they have many

product lines in retail banking such as CASA (Current Account-Saving Account), Fixed Deposits

(FD), loans, insurance, credit cards, FOREX and Demat Services. However, rests of the participants

stated that they have retail products such as car loans, education and housing loans and CASA (Current

0

2

4

6

8

10

12

Introduction Growth Maturity Decline

Present Stage of Retail Banking in India

Present Stage of Retail Banking in India


Account-Saving Account).

4. On asking about the role of liberalisation in the growth and development of retail banking in India.

Participants suggested that liberalisation resulted in allowing the foreign participation in banking

services and it was evidenced that retail banking was strengthened by granting licenses to the

companies to offer banking services including retail banking products. 60% of the respondents referred

to the economic reforms that carried out in post 1991 period in terms of encouraging the foreign

participation in the country. In general, all participants agreed that liberalisation has eventually helped

to position retail banking effectively in India.

5. When participants were asked to rank the growth factors that resulted in the growth and

development of retail banking in India. The participants ranked ‘Improvement in Macro Economic

Factor’ at the first place that was followed by the ‘Demographic Changes’ and ‘Changes in

Customers’, Socio-economic conditions’. The participants placed ‘FDI’ and ‘Technology’ at fourth

and fifth place respectively. Finally, ‘Growth of Nuclear Families’ was ranked at sixth place and was

followed by ‘Electronic Media’.

6. The participants were further asked about the role of government in encouraging the participation of

foreign banks for retail banking in India. Two third of the participants emphasized that government

played a vital yet critical role in developing the retail banking by facilitating the participation of

foreign companies in the banking sector. However, 30% of the participants that government still need

to adopt several programs in terms of encouraging foreign banks to participate in the rural areas. In

general, participants believed that central and state government has equal role to play to develop the

banking structure and system using the balanced approach nationwide.

7. On asking about the new initiatives like ‘Kiosk banking’ and ‘Rural Saving Account’ would help to

promote retail banking in rural areas. Out of 15, 12 participants agreed that such services would

undoubtedly promote the retail banking in rural areas. However, 30% of the participants claimed that

unless significant changes occur in rural areas in terms of education, emergence and reliance on

banking for daily needs, no further improvement could take place for retail banking in remote and rural

areas.

Thus, in general, it can be said that initiatives to improve retail banking in rural areas could only work

if there is enthusiasm and emergence of retail banking needs among the target audience and it can be

triggered with the help of government as well as society itself.

8. The participants were asked why there has been lack of initiatives of opening retail bank branches in

rural areas. Almost all of the participants admitted that low profitability, higher cost structure, absence

of sufficient infrastructure and other financial and human resources pose major hindrances for the

rapid growth and development of retail banks’ branches in rural areas. However, 50% of the

participants also pointed that rural population is confined to use the basic services such as saving and

current account services and overdraft provisions and therefore, the current market conditions in the

0

5

10

15

Major Growth Factors of Retail Banking

Major Growth Factors of Retail Banking


rural areas offset the possibility of any potential benefits in terms of costs involved.

9. The other question asked about the scope and potential of technology to promote the retail banking

in rural areas. 40% of participants said that technology has no role to play for rural consumers as they

are not educated to use services like online banking and neither have they had interest in using any

retail banking services. However, rests of the participants suggested that technology could be used to

improve the basic facilities such as number of ATMs, updates on mobile phones, mobile banking and

so on.

10. The participants were asked to rank the technological factors according to their preferences and

potential use in the growth and development in the rural areas. The participants ranked ‘Use of ATMs’

at first place that was followed by ‘Money transfer Services’ and ‘Potential for Internet Banking’. The

participants ranked ‘SMS Alert’ and ‘Bill Pay’ at fourth and fifth places respectively. And, finally, put

‘Phone Banking’ at the last place.

11. When asked about what marketing initiatives could be helpful in promoting retail banking

nationwide. There was mix response from the participants where some mentioned that better

coordination, focused approach and dedicated staff would undoubtedly help to improve the scope of

retail banking. Whereas, most other participants discussed the potential for display of product lines in

branches such as availability of brouchers, signages and other outdoor activities could make huge

difference in promoting the retail banking products. Respondents also believed that ‘Meet and Greet’

activities by inviting public and existing customers to the banks and making them aware of the various

retail products could also make significant difference in promoting the retail banking product lines.

However, some participants also mentioned that offering customers zero balance accounts, opening

more branches and improvement in customer services and advertising would significantly improve the

market conditions in the near future.

12. Finally, the participants asked how retail banks could improve their services to promote the retail

banking. The participants admitted that improvement in soft skills, training and development of

employees and improvement in physical evidence of services such as dress code; presentation and

problem solving skills will significantly improve the customer service capacity in retail banking.

FINDINGS AND RECOMMENDATIONS

FINDINGS

The findings have been drawn upon the theoretical analysis and the data analysis carried upon the

primary data and information. The following issues and areas will raise the understanding and

knowledge upon the successful growth and development of retail banking across India.

PUBLIC VERSUS PRIVATE BANKS

A. Growth Private banks have grown retail banking services tremendously in the urban

areas largely due to their customer base, additional benefits, service capacity and quality of service

whereas public banks focused more strategically on traditional banking functions as compare to retail

banking.

0

5

10

15

Use of ATMS

Money Transfers

Internet banking

SMS Alerts Bill Pay Phone Banking

Potential Use of Technological Factors

Potential Use of Technological Factors


B. Performance Management System Private banks in the country embraced modern

performance management systems that used number of key performance indicators and thus, human

resources are more result oriented in order to attain rewards and recognition whereas such systems

give a miss in public banks’ work environment.

C. Technology Private banks spend significant funds and financial resources on making the best

use of new information technology in terms of online banking, online funds transfer, phone banking

and SMS alerts whereas only few public banks deals in such services.

D. Customer Relationship Management In the recent years, it has been found that customer

relationship management is the phenomenon that helps the businesses to improve their customer

loyalty and customer retentions. Most of the private banks in India have developed their business

model that is consistent with the practices of customer relationship management.

E. Integrated Marketing Communication Private banks have been using various online and offline

marketing strategies and marketing communication channels such as direct marketing, media

advertising and online adverts whereas public banks have been using traditional marketing functions

such as personal selling to attract new customers.

RURAL VERSUS URBAN

There has been inequality in the growth and development rate of retail banking in urban and rural areas

in the country. The banking sector has grown unexpectedly in metro cities largely due to the

demographic factors such as nature of working class, income status, population density, availability of

infrastructure, presence of business and service sector. The rural areas in the country are dominated by

the farmers and land owners who rely on conventional banking functions for their daily needs. The

other reasons in the inequality are the absence of basic infrastructure and government support,

unawareness of banking users, lack of initiatives by the public and private banks.

LIBERALISATION

Indian economy has embraced various reforms and policies that aimed to attract the foreign direct

investment from the other countries. As a result, there has been unprecedented economic development

as the GDP of the country reached to US $1.25 trillion in 2010 as compare to US $ 600 billion in 2003.

However, government still poses FDI cap for foreign institutional investors to enter into banking sector

in the country. Thus, there is emergence to strategically deal with the key issues related to liberalizing

the banking sector by allowing foreign investments and providing financial and technical assistance to

the existing market players.

PROFITABILITY

Retail banking segment profits of five major banks for last two years

(In crores)

ICICI HDFC AXIS PNB SBI

2011 8389.7 88065.88 336.6 3671.3 12679.45

2010 6578.64 71207.92 338.33 3196.62 6491.25

As the above chart suggested, there has been rapid increase in the profitability of commercial banks

and this has been possible by the development in the retail banking product lines in the last few years.

Majorly, credit demand from corporate organizations has helped maintain credit growth in the recent

years. There has been sharp growth in terms of deposits as banks rely more on these deposits than

finance advances. Growth in savings deposit is expected to increase by an increase in the amount per

account and a steady increase in the number of savings accounts as banks reach out to new markets.

RECOMMENDATIONS

Based on the findings and data analysis, following recommendations can be proposed for the effective

growth and development of retail banking in India.

1. Support from Government and Trade Commissions

Reserve Bank of India, government and other trade, commerce and planning commission must


strengthen the banking sector by identifying the opportunity and challenges of the private and public

banks and thereupon providing them the aid and assistance for their effective development.

2. Empowerment of Private and Public Banks

Public and private banks must collaborate their expertise, know-how and technological capabilities by

organising events and conference in order to unleash the equality and sustainable development in

overall sector. The various banks must also ensure to raise awareness among their potential and target

audience in order to improve their market share and thus, they can use multiple marketing

communication channels whilst raising their marketing budgets and expenditures.

3. Innovations and Technology Advancement

Public banks should ensure to develop their technical services such as mobile banking, Internet

banking, online transfers, etc. in order to increase their market share by serving the modern and

dynamic needs of banking consumers. Banks can further seek assistance and enter into strategic

collaborations with the major management service providers including McKinsey, Boston Consulting

Group, copal partners etc to develop their efficient management base.

4. Realising the Role and Scope of FDI in Retail Banking

Foreign direct investment has direct and positive impact on almost every sector in the Indian economy

and therefore, government must realise their role for the all round growth of the banking functions by

allowing investment for new functions like retail banking.

CONCLUSION

Retail banking is now graduating beyond traditional boundaries of conventional banking. The Indian

banking sector has entered into new areas of banking such as wealth management, private banking,

doorstep banking, online banking, credit cards, investment advisory services, etc. Moreover, there are

clear indications that the country will witness alternative banking like Islamic Banking in the years

ahead.

Retail banking, however, still has low penetration levels. These services are not only related to the

banking sector, but also to other related services such as insurance, wealth management adding value

to customers etc. But, despite the emergence in the rural and urban areas, there are economic,

regulatory, social and personal barriers and other challenges that stopped the banks to carry out their

functions equally in rural and urban areas.

However, dramatic changes are expected in the credit portfolio of banks in the next five years where

housing finance is expected to continue to be the biggest growth segment in retail banking followed by

auto loans. Thus, major private and public banks are looking to expand and diversify by focusing on

the non-urban segment as well as varied income and demographic groups. Rural areas also offer

tremendous potential, which needs to be exploited. Globalization and liberalization of the Indian

economy, and the interest of foreign banks to expand their presence in India, have fuelled the growth

of retail banking in the banking industry.

Information technology poses both opportunities and challenges. Even with ATM machines and

Internet Banking, many consumers still prefer the personal touch of their neighborhood branch bank.

Technology has made it possible to deliver services throughout the branch bank network, providing

instant updates to checking accounts and rapid movement of money for stock transfers.

The combination of the above factors promises substantial growth in the retail sector, which at present

is in the emerging stage. Due to bundling of services and delivery channels, the areas of potential

conflicts of interest tend to increase in universal banks and financial conglomerates. Some of the key

policy issues relevant to the retail-banking sector are: financial inclusion, responsible lending, access

to finance, long-term savings, financial capability, consumer protection, regulation and financial crime

prevention.

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