Keynote address by Ms Shyamala Gopinath, Deputy
Governor of the Reserve Bank of India, at the IBA
- Banking Frontiers International Conference on “Retail
Banking Directions: Opportunities & Challenges”,
The assistance of S/Shri P. Vijaya Bhaskar and Partha
Ray in preparing this address is gratefully acknowledged.
* * *
The issue of retail banking is extremely important
and topical. Across the globe, retail lending has
been a spectacular innovation in the commercial banking
sector in recent years. The growth of retail lending,
especially, in emerging economies, is attributable
to the rapid advances in information technology, the
evolving macroeconomic environment, financial market
reform, and several micro-level demand and supply
India too experienced a surge in retail banking.
There are various pointers towards this. Retail loan
is estimated to have accounted for nearly one-fifth
of all bank credit. Housing sector is experiencing
a boom in its credit. The retail loan market has decisively
got transformed from a sellers’ market to a
buyers’ market. Gone are the days where getting
a retail loan was somewhat cumbersome. All these emphasise
the momentum that retail banking is experiencing in
the Indian economy in recent years.
What is retail banking?
Retail banking is, however, quite broad in nature
- it refers to the dealing of commercial banks with
individual customers, both on liabilities and assets
sides of the balance sheet. Fixed, current / savings
accounts on the liabilities side; and mortgages, loans
(e.g., personal, housing, auto, and educational) on
the assets side, are the more important of the products
offered by banks. Related ancillary services include
credit cards, or depository services. Today’s
retail banking sector is characterized by three basic
==multiple products (deposits, credit cards, insurance,
investments and securities);
==multiple channels of distribution (call centre,
branch, Internet and kiosk); and
==multiple customer groups (consumer, small business,
What is the nature of retail
In a recent book, retail banking has been described
as “hotter than vindaloo”1. Considering
the fact that vindaloo, the Indian-English innovative
curry available in umpteen numbers of restaurants
of London, is indeed very hot and spicy, it seems
that retail banking is perceived to be the in-thing
in today’s world of banking.
Retail banking in India
Retail banking in India is not a new phenomenon.
It has always been prevalent in India in various forms.
For the last few years it has become synonymous with
mainstream banking for many banks.
The typical products offered in the Indian retail
banking segment are housing loans, consumption loans
for purchase of durables, auto loans, credit cards
and educational loans. The loans are marketed under
attractive brand names to differentiate the products
offered by different banks. As the Report on Trend
and Progress of India, 2003-04 has shown that the
loan values of these retail lending
typically range between Rs.20,000 to Rs.100 lakh.
The loans are generally for duration of five to seven
years with housing loans granted for a longer duration
of 15 years. Credit card is another rapidly growing
sub-segment of this product group.
In recent past retail lending has turned out to be
a key profit driver for banks with retail portfolio
constituting 21.5 per cent of total outstanding advances
as on March 2004. The overall impairment of the retail
loan portfolio worked out much less then the Gross
NPA ratio for the entire loan portfolio.
1 DiVanna, Joseph A. (2004): The Future of Retail
Banking, New York: Palgrave Macmillan.
Within the retail segment, the housing loans had
the least gross asset impairment. In fact, retailing
make ample business sense in the banking sector.
While new generation private sector banks have been
able to create a niche in this regard, the public
sector banks have not lagged behind. Leveraging their
vast branch network and outreach, public sector banks
have aggressively forayed to garner a larger slice
of the retail pie. By international standards, however,
there is still much scope for retail banking in India.
After all, retail loans constitute less than seven
per cent of GDP in India vis-à-vis about 35
per cent for other Asian economies – South Korea
(55 per cent), Taiwan (52 per cent), Malaysia (33
per cent) and Thailand (18 per cent). As retail banking
in India is still growing from modest base, there
is a likelihood that the growth numbers seem to get
somewhat exaggerated. One, thus, has to exercise caution
is interpreting the growth of retail banking in India.
Drivers of retail business
What has contributed to this retail growth? Let me
briefly highlight some of the basic reasons. First,
economic prosperity and the consequent increase in
purchasing power has given a fillip to a consumer
boom. Note that during the 10 years after 1992, India's
economy grew at an average rate of 6.8 percent and
continues to grow at the almost the same rate –
not many countries in the world
match this performance.
Second, changing consumer demographics indicate vast
potential for growth in consumption both qualitatively
and quantitatively. India is one of the countries
having highest proportion (70%) of the population
below 35 years of age (young population). The BRIC
report of the Goldman-Sachs, which predicted a bright
future for Brazil, Russia, India and China, mentioned
Indian demographic advantage as an important positive
factor for India.
Third, technological factors played a major role.
Convenience banking in the form of debit cards, internet
and phone-banking, anywhere and anytime banking has
attracted many new customers into the banking field.
Technological innovations relating to increasing use
of credit / debit cards, ATMs, direct debits and phone
banking has contributed to the growth of retail banking
Fourth, the Treasury income of the banks, which had
strengthened the bottom lines of banks for the past
few years, has been on the decline during the last
two years. In such a scenario, retail business provides
a good vehicle of profit maximisation. Considering
the fact that retail’s share in impaired assets
is far lower than the overall bank loans and advances,
retail loans have put comparatively less provisioning
burden on banks apart from diversifying their income
Fifth, decline in interest rates have also contributed
to the growth of retail credit by generating the demand
for such credit.
In this backdrop let me now come two specific domains
of retail lending in India, viz., (a) credit cards
and (b) housing.
Credit cards in India
While usage of cards by customers of banks in India
has been in vogue since the mid-1980s, it is only
since the early 1990s that the market had witnessed
a quantum jump. The total number of cards issued by
42 banks and outstanding, increased from 2.69 crore
as on end December 2003 to 4.33 crore as on end December
2004. The actual usage too has registered increases
both in terms of
volume and value. Almost all the categories of banks
issue credit cards. Credit cards have found greater
acceptance in terms of usage in the major cities of
the country, with the four major metropolitan cities
accounting for the bulk of the transactions.
In view of this ever increasing role of credit cards
a Working Group was set up for regulatory mechanism
for cards. The terms of reference of the Working Group
were fairly broad and the Group was to look into the
type of regulatory measures that are to be introduced
for plastic cards (credit, debit and smart cards)
for encouraging their growth in a safe, secure and
efficient manner, as also to take care of the best
customer practices and grievances redressal mechanism
for the card users.
The Reserve Bank has been receiving a number of complaints
regarding various undesirable practices by credit
card issuing institutions and their agents. Some of
==unsolicited calls to members of the public by card
issuing banks/ direct selling agents pressurising
them to apply for credit card.
==Communicating misleading / wrong information regarding
credit cards regarding conditions for issue, amount
of service charges/ waiver of fees, gifts/prizes.
==Sending credit cards to persons who have not applied
for them / activating unsolicited cards without the
approval of the recipient.
==Charging very high interest rates /service charges.
==Lack of transparency in disclosing fees/charges/penalties.
Non-disclosure of detailed billing procedure.
The Working Group deliberated
a number of major issues relating to customer grievances
a) Transparency and Disclosure, b) Customer Rights
Protection, and c) Code of Conduct. The Group recommended
that the Most Important Terms & conditions should
be highlighted and advertised and sent separately
to the prospective customer. These terms and conditions
include various issues relating to: a) fees and charges,
(b) drawal limits, (c) billing, (d) default, (e) termination
revocation of card membership, (f) loss / theft /
misuse of card, and (g) disclosure.
These recommendations are being processed within
the RBI and a set of guidelines would be issued which
are going to pave the path of a healthy growth in
the development of plastic money in India. The RBI
is also considering bringing credit card disputes
within the ambit of the Banking Ombudsman
scheme. While building a regulatory oversight in this
regard we need to ensure that neither does it reduce
the efficiency of the system nor does it hamper the
credit card usage.
Housing credit in India
In view of its backward and forward linkages with
other sectors of the economy, housing finance in developing
countries is seen as a social good. In India, growth
of housing finance segment has accelerated in recent
years. Several supporting policy measures (like tax
benefits) and the supervisory incentives instituted
had played a major role in this market.
Housing credit has increased substantially over last
few years, but from a very low base. During the period
1993-2004, outstanding housing loans by scheduled
commercial banks and housing finance companies grew
at a trend rate of 23 per cent.
The share of housing loans in total non-food credit
of scheduled commercial banks has increased from about
3 per cent in 1992-93 to about 7 per cent in
2003-04. Recent data reveal that non-priority sector
housing loans outstanding as on February 18, 2005
were around Rs. 74 thousand crore, which is, however,
only 8.0 per cent of the gross bank credit. As already
pointed out, direct housing loans up to Rs. 15 lakh
irrespective of the location now qualify as priority
sector lending; housing loans are understood to form
a large component of such
lending. In addition, housing credit is also being
provided by housing finance companies, which in turn
are also receiving some bank finance.
Thus, from miniscule amounts, the exposure of the
banking sector to housing loans has gone up. Unlike
many other countries, asset impairment on account
of housing finance constitutes a very small portion.
However, with growing competition in the housing finance
market, there has been a growing concern over its
likely impact on the asset quality. While no immediate
financial stability concerns exist, there is a need
to put in place appropriate risk management systems,
strengthen internal control procedures and also improve
regulatory oversight in this area. Banks also need
to monitor their exposure and the credit quality.
In a fiercely competitive market, there may be some
slacken the loan scrutiny procedures and this needs
to be severely checked.
Having delineated the broad contours of retail banking
in India let me now come to its opportunities and
Opportunities and challenges
of retail banking in India
Retail banking has immense opportunities in a growing
economy like India. As the growth story gets unfolded
in India, retail banking is going to emerge a major
driver. How does the world view us? I have already
referred to the BRIC Report talking India as an economic
superpower. A. T. Kearney, a global management consulting
firm, recently identified India as the "second
most attractive retail destination" of 30 emergent
The rise of the Indian middle class is an important
contributory factor in this regard. The percentage
of middle to high income Indian households is expected
to continue rising. The younger population not only
wields increasing purchasing power, but as far as
acquiring personal debt is concerned, they are perhaps
more comfortable than previous generations. Improving
consumer purchasing power, coupled with more liberal
attitudes toward personal debt, is contributing to
India's retail banking segment.
The combination of the above factors promises substantial
growth in the retail sector, which at present is in
the nascent stage. Due to bundling of services and
delivery channels, the areas of potential conflicts
of interest tend to increase in universal banks and
financial conglomerates. Some of the key policy issues
relevant to the retail banking sector are: financial
inclusion, responsible lending, access to finance,
long-term savings, financial capability, consumer
protection, regulation and financial crime prevention.
What are the challenges for the industry and its stakeholders?
First, retention of customers is going to be a major
challenge. According to a research by Reichheld and
Sasser in the Harvard Business Review, 5 per cent
increase in customer retention can increase profitability
by 35 per cent in banking business, 50 per cent in
insurance and brokerage, and 125 percent in the consumer
credit card market. Thus, banks need to emphasise
retaining customers and increasing market share.
Second, rising indebtedness could turn out to be a
cause for concern in the future. India's position,
of course, is not comparable to that of the developed
world where household debt as a proportion of disposable
income is much higher. Such a scenario creates high
uncertainty. Expressing concerns about the high growth
witnessed in the consumer credit segments the Reserve
Bank has, as a temporary measure, put in place risk
containment measures and increased the risk weight
from 100 per cent to 125 per cent in the case of consumer
credit including personal loans and credit cards (Mid-term
Review of Annual Policy, 2004-05).
Third, information technology poses both opportunities
and challenges. Even with ATM machines and Internet
Banking, many consumers still prefer the personal
touch of their neighbourhood branch bank.
Technology has made it possible to deliver services
throughout the branch bank network, providing instant
updates to checking accounts and rapid movement of
money for stock transfers. However, this dependency
on the network has brought IT departments additional
responsibilities and challenges in managing, maintaining
and optimizing the performance of retail banking networks.
Illustratively, ensuring that all bank products and
services are available, at all times, and across the
entire organization is essential for today’s
retails banks to generate revenues and remain competitive.
Besides, there are network management challenges,
whereby keeping these complex, distributed networks
and applications operating properly in support of
business objectives becomes essential.
Specific challenges include ensuring that account
transaction applications run efficiently between the
branch offices and data centres.
Fourth, KYC Issues and money laundering risks in retail
banking is yet another important issue. Retail lending
is often regarded as a low risk area for money laundering
because of the perception of the sums involved. However,
competition for clients may also lead to KYC procedures
being waived in the bid for new business. Banks must
also consider seriously the type of identification
documents they will accept and other processes to
be completed. The Reserve Bank has issued details
guidelines on application of KYC norms in November
Some random thoughts
How do we see the future of retail banking? What
are the major attributes of the shape of things to
come in this sector? Let me share with you some of
my random thoughts.
First, customer service should be the be-all and end-all
of retail banking. The other day a document released
by the British Bankers Association, entitled UK Retail
Banking Manifesto: addressing the challenges that
lie ahead for the industry and its stakeholders on
September 29, 2004 came to my notice. This document
analysed the key policy issues relevant to the retail
banking sector and highlighted the role of financial
inclusion, responsible lending, access to finance,
and consumer protection. It is in this context that
that one is reminded of the needs to develop the standards
and codes for banking. The contribution of the Committee
on Procedure & Performance Audit on Public Services
(CPPAPS) (Chairman: Shri S.S. Tarapore) has been invaluable
and has provided great insight. Based on the recommendation
of the CPPAPS, the Annual Policy Statement for 2005-06
announced the decision to set up an independent Banking
Codes & Standards Board of India on the model
of the mechanism in the UK in order to ensure that
comprehensive code of conduct for fair treatment of
customers is evolved and adhered to. The codes and
standards, together with the institutional mechanism
to monitor them, are expected to enhance the quality
of customer service, to the individual customer in
particular. The codes will bring about greater transparency
in the system and also tackle the issue of information
asymmetry. The Board would function as an industry-wide
watchdog of the banking code and ensure that the banks
comply with the banking codes. The codes would establish
the banking industry’s key commitments and obligations
to customers on standards of practice, disclosure
and principles of conduct for their banking services.
The Board will monitor compliance with the Codes by
the affiliated banks.
Second, sharing of information about the credit history
of households is extremely important as far retail
banking is concerned. Perhaps due the confidential
nature of banker-customer, banks have a traditional
resistance to share credit information on the client,
not only with one another, but also across sectors.
Globally, Credit Information Bureaus have, therefore,
been set up to function as a repository of credit
information - both current and historical data on
existing and potential borrowers.
The database maintained by these institutions can
be accessed by the lending institutions. Credit Bureaus
have been established not only in countries with developed
financial systems but also in countries with relatively
less developed financial markets, such as, Sri Lanka,
Mexico, Bangladesh and the Philippines. In Indian
case, the Credit Information Bureau (India) Limited
(CIBIL), incorporated in 2000, aims at fulfilling
the need of credit granting institutions for comprehensive
credit information by collecting, collating and disseminating
credit information pertaining to both commercial and
consumer borrowers. At the same time banks must exercise
due diligence before declaring a borrower as
Third, outsourcing has become an important issue in
the recent past. With the increasing market orientation
of the financial system and to cope with the competition
as also to benefit from the technological innovations
such as, e-banking, the banks are making increasing
use of "outsourcing" as a means of both
reducing costs and achieving better efficiency. While
outsourcing does have various cost advantages, it
has the potential to transfer risk, management and
compliance to third parties who may not be regulated.
A recent BIS Report on “Outsourcing in Financial
Services” developed some high-level principles.
A basic requirement in this context is that a regulated
entity seeking to outsource activities should have
in place a comprehensive policy on outsourcing including
a comprehensive outsourcing risk management programme
to address the outsourced activities and the relationship
with the service provider. Application of these principles
in the Indian context is under consideration.
Finally, retail banking does not refer to lending
only. In the whole story of retailing one should not
forget the role played by retail depositors. The homemaker,
the retail shop keeper, the pensioners, self-employed
and those employed in unorganised sector - all need
to get a place in the banks. It is in this backdrop
that the Annual Policy for 2005-06 pointed out issues
relating to financial exclusion and had announced
that the RBI would implement policies to encourage
banks which provide extensive services while disincentivising
those which are not responsive to the banking needs
of the community, including the underprivileged.
Furthermore, the nature, scope and cost of services
need to be monitored to assess whether there is any
denial, implicit or explicit, of basic banking services
to the common person and banks have been urged to
review their existing practices to align them with
the objective of financial inclusion.
There is a need of constant innovation in retail
banking. In bracing for tomorrow, a paradigm shift
in bank financing through innovative products and
mechanisms involving constant upgradation and revalidation
of the banks’ internal systems and processes
is called for. Banks now need to use retail as a growth
trigger. This requires product development and differentiation,
innovation and business process reengineering, micro-planning,
marketing, prudent pricing, customisation, technological
upgradation, home / electronic / mobile banking, cost
reduction and cross-selling.
While retail banking offers phenomenal opportunities
for growth, the challenges are equally daunting. How
far the retail banking is able to lead growth of the
banking industry in future would depend upon the capacity
building of the banks to meet the challenges and make
use of the opportunities profitably.
However, the kind of technology used and the efficiency
of operations would provide the much needed competitive
edge for success in retail banking business. Furthermore,
in all these customers’ interest is of paramount
importance. The banking sector in India is demonstrating
this and I do hope they would continue to chart in
this traded path.