Business Retail Banking Strategies

in the Liberalized and Globalized Era

R K Uppal*

In the present paper, an attempt has been made to analyze the trends and growth in the retail portfolio of
various bank groups. The variations have been calculated for the year 2008 over 2007. The study finds that
among the retail loans, housing loans and auto loans occupy prominent places. On the basis of certain
parameters like cash-deposit ratio, deposit pattern of scheduled commercial banks, banks’ group-wise lending
to sensitive sectors, lending to sensitive sectors by Scheduled Commercial Banks (SCBs), sectoral deployment
of gross bank credit, and retail portfolio of banks, the paper prepares some strategies to enhance retail banking
in India. Some such vital strategies are advanced technology to capture remote area customers, skilled
manpower, market research in intelligent ways, credit quality techniques, universal banking, and human factors
delivering banking services to the customers.

Introduction
The banking scenario in India is of a highly developed nature, even though it is still far
from achieving world standards in terms of size, products and services. Indian banks have
realized that along with organic growth there is a need to grow inorganically as well, in
order to be competitive with other players in the market. In this scenario, retail banking
has been the focus of attention for the banking industry. The emergence of new economies
and their rapid growth have been the most important contributing factors in the
resurgence of retail banking. Changing lifestyles, rapid improvements in information
technology and other service sectors, as well as increasing levels of income, have
contributed to the growth of retail banking in countries like India that are developing at
a good pace. The Indian banks are vying with one another to grab a pie of the retail
banking sector which has tremendous potential—retail loans constitute only 8-9% of the
GDP in India, whereas it is about 35% in other Asian economies. However, retail banking
also has its share of challenges in retaining customers, introduction of tech-savvy facilities
and investments in such facilities, security concerns, Know Your Customer (KYC) norms,
credit evaluation norms, etc.

Retail Banking Retail banking definition

The term ‘retail banking’ encompasses retail deposit schemes, retail credit, retail loans,
credit cards, debit cards, insurance products, mutual funds, and depository services,
including demand facilities and services to customers according to their needs. So, retail
banking includes 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 of the balance includes
a wide range of loan products such as housing, auto, consumption and educational loans.
The following are the features of retail banking:
* Head, Department of Economics, DAV College, Malout, Punjab, India. E-mail: rkuppal_mlt@yahoo.com

Business
© Retail
2009 IUP . AllBanking Strategies in the Liberalized and Globalized Era
Rights Reserved. 95
 • Strong credit assessment capability;
• Regular and constant follow-up;
• Strong processing capability;
• Skilled human resources;
• Technological support; and
• Sound documentation.

Review of Literature
Among the prominent studies which have been reviewed, Petersen and Rajan (1995) argue
that a bank having market power is more willing to engage in relationship lending, with
the result that the supply of credit available to young firms is higher than in a traditionally
competitive environment. Banks facing a pool of risky borrowers have an incentive to take
on riskier projects. If a bank has market power, the higher risk can be compensated for by
sharing the future profit streams of the firm, instead of increasing rates. Since a successful
firm will not be lured away by a competitor, banks will benefit from capital requirements,
taking into account the riskiness of the asset, such that more risky loans have higher
capital requirements. Therefore, if a bank wants to increase its capital-to-asset ratio, it
may shift its lending to lower risk loans such as mortgages and away from higher risk loans
such as business lending.
Boot and Thakor (2000) present a model in which banks can engage in both
relationship and transactional lending. They argue that banks may actually do more
relationship and transactional lending, the former in competitive environment. Consider
a monopoly bank that offers both types of loans. Relationship loans are offered to low and
medium quality borrowers. Since relationship loans have a high value for such borrowers,
the monopoly bank can capture part of all this value. High quality borrowers, however,
place less value on relationship, and so it is not worth the added cost to the banks to
invest in it; these borrowers are offered transactional loans. When banks’ competition
increases, the surplus value that any one bank can extract from relationship loans
decreases.
Cetorelli and Peretto (2000) develop a general equilibrium model of capital
accumulation to examine the optimal competitive structure, given this screening role.
Banks are insensitive to screen borrowers in order to differentiate between high and low
quality borrowers. However, screening is costly and to the extent that rival banks can
observe the results of the screening process, there is a free rider problem that decreases
a bank’s incentive to minimize the same problem; the optimal strategy for banks is to
screen only a segment borrower population and to lend to both safe and risky borrowers.
Another way mentioned here, for example, is for a bank to take an equity stake in the
firm. This raises a variety of other issues not discussed here, such as self-dealing.

96 The IUP Journal of Business Strategy, Vol. VI, Nos. 3 & 4, 2009
 Berger and Hannan (1989) show that concentration is associated with lower deposit
rates; Hannan and Berger (1991) find that an increase in concentration is associated
with higher loan rates. Indeed, early studies often find a positive relationship between
concentration and profits, which supports the assertion that market power is detrimental.
A major problem with most of these studies is that they do not take into account
differences in productive efficiency. A highly efficient bank may have higher profits because
it is better at maximizing returns. Success can increase concentration since such a bank
may naturally gain a larger share of the market and use success as a platform from which
to take over lesser successful banks. This is after controlling for the differences in efficiency.
Berger (1995) presents mixed results. Although he finds that market share is positively
related to profitability when efficiency is controlled for, concentration in the banking
market is usually negatively related to profit.
Punt and van Rooij (2001) also have mixed results. While they find some more support
for a positive relationship between concentration and profitability, their results are not
robust to different specifications of profitability.
Beck et al. (2003) use a dataset of developed and developing countries to examine the
effects of concentration on credit availability, while controlling for regulatory policies
such as entry, ownership structure and restrictions on bank activities. They find that firms
face higher financing obstacles in concentrated banking markets. The negative effect,
however, is mitigated by efficient legal systems, less corruption, high levels of financial and
economic development, and the presence of foreign banks. In fact, the effect is significant
for countries that have a well-developed financial system. There is growing literature on
the relationship between the structure of the banking market and the structure of the
markets into which they lend.
Uppal (2008) examines that retail credit notwithstanding, the cautionary approach
advocated by the RBI is bound to increase further. Banks need to realize that in their
enthusiasm to distribute retail credit on a very massive scale, the cardinal principles of
lending are not followed. In the present market scenario, the key to success for any bank
lies in aggravating and emphasizing the various retail marketing activities.
Kumar (2003) states that it is also necessary for banks to keep reviewing the retail
portfolio loans in a structured manner at periodical intervals, with a view to capturing the
emerging signals for the identification of risks and updating strategies for mitigation
thereof.
Gilotra (2003) analyzes that the success of any institution’s retail lending depends on
aspects such as marketing, efficiency, proper appraisal and effective follow-up. Institutions
like HDFC have excelled in individual housing finance primarily due to the long-term
view that they have taken.
Murthy (2003) analyzes Indian economy on the whole; the banking industry has
galvanized itself to match the best in the world, and will no doubt lead to increased

Business Retail Banking Strategies in the Liberalized and Globalized Era 97

competition, especially in the retail segment. This competition will bear out Charles
Darwin’s ‘the survival of the fittest’ theory. We believe that we are equipped to do well
in the future as well and we trust that our journey ahead will be as interesting and
successful as our retail journey thus far.
Almedia (2003) states that considering some of the emerging issues, particularly from
the perspective of public sector banks and what they need to do about them, it is
worthwhile to note, albeit briefly, the meaning and scope of retail banking, besides the
triggers for the current retail focus of the banks.
Although a lot of work has been done on this engrossing topic and it is only a survival
factor for many banks, there is still the need to explore some new dimensions of retail
banking.

Objectives
• To study and analyze the level of growth of retail banking in the Indian banking
industry; and
• To give some suggestions to increase the growth of retail banking.

Database
• Report on Trend and Progress of Banks in India, 2007-08.

Research Methodology
The present paper focuses mainly on the retail portfolio of all Scheduled Commercial
Banks (SCBs). The whole banking industry has been divided into four parts:
G-1 : Public Sector Banks (27);
G-II : Old Private Sector Banks (17);
G-III : New Private Sector Banks (8); and
G-IV : Foreign Banks (29).
The whole analysis is made for the time period 2006-08. Simple growth rate has been
calculated with the help of the following formula:

Current Year  Base Year

Growth Rate   100
Base Year

Parameters
To trace the growth of retail banking in India, we have focused on the four bank groups
mentioned above, namely public sector banks, old private sector banks, new private sector
banks, foreign banks, and overall SCBs, with the following parameters:

98 The IUP Journal of Business Strategy, Vol. VI, Nos. 3 & 4, 2009
 • Cash-deposit ratio;
• Deposit pattern of SCBs;
• Banks’ group-wise lending to sensitive sectors;
• Lending to sensitive sectors by SCBs;
• Sectoral deployment of gross bank credit; and
• Retail portfolio of banks.

Results and Discussion

This part of the study is related to the overall credit of banks and particularly to retail
banking.

Cash-Deposit Ratio
Banks’ group-wise analysis reveals that the cash-deposit ratio of foreign sector banks grew
at the highest rate in 2008, followed by new private sector banks, public sector banks and
old private sector banks (Table 1). The cash-deposit ratio of foreign banks shows wider
variations. This ratio is 73.3% for public sector banks in 2008, as against only 68.2%
in 2006. This shows that the cash-deposit ratio increased in 2008. The cash-deposit ratio
of the old private sector banks increased from 63.7% in 2006 to 67.4% in 2008. The
cash-deposit ratio of new private sector banks increased during 2008. The cash-deposit
ratio of new private sector banks rose from 77.2% in 2006 to 79.8% in 2008. The new
private sector banks have more cash-deposit ratio, as compared to old private sector banks.

Table 1: Cash-Deposit Ratio (Banks’ Group-Wise)

(in %)
Banks 2006 2007 2008
Public Sector Banks 68.2 72.2 73.3
Nationalized Banks 68.0 68.0 69.8
State Bank Groups 38.5 76.1 76.7
Old Private Sector Banks 63.7 67.2 67.4
New Private Sector Banks 77.2 77.8 79.8
Foreign Banks 85.8 83.8 84.3
All SCBs 70.1 73.5 74.6
Source: Report on Trend and Progress of Banks in India, 2007-08, p. 381

Deposit Pattern of SCBs

Aggregate deposits of SCBs show a low growth of 23.10% during 2007-08, as compared to
24.59% in 2006-07 (Table 2). Demand deposit is 24.56% in 2008 and 21.14% in 2007.
Demand deposit and saving deposit show the highest growth in 2008, as compared to
2007. Saving deposit increased from 16.35% to 17.79%. Several factors affect term deposit

Business Retail Banking Strategies in the Liberalized and Globalized Era 99

during 2007-08. So, the term deposit of SCBs is 24.8% in 2008, which is lower when
compared to 28.7% in 2007. Three nonresident deposits registered a higher growth except
term deposit, during 2007-08, as compared with the previous year.

Table 2: Deposit Pattern of SCBs

(Rs. in cr)
Year 2006 2007 2008
Total Deposit
Demand Deposit 292,945 354,895 442,055
Saving Deposit 542,874 631,651 744,051
Term Deposit 1,328,861 1,710,338 2,133,947
Total Deposit 2,164,681 2,696,936 3,320,054
Percentage of Total Deposit
Demand Deposit 10.5 10.3 10.2
Saving Deposit 19.5 18.3 17.2
Term Deposit 47.7 49.4 49.3
Total Deposit 77.7 78.0 76.7
Growth Rate
Demand Deposit 24.91 21.14 24.56
Saving Deposit 22.04 16.35 17.79
Term Deposit 14.74 28.71 24.76
Total Deposit 17.80 24.59 23.10
Source: Report on Trend and Progress of Banks in India, 2007-08, p. 89

Banks’ Group-Wise Lending to Sensitive Sectors

Among bank groups, lending to sensitive sectors indicates that new private sector banks
had the largest exposure, mainly on account of higher lending to the real estate sector,
followed by foreign banks, old private sector banks and public sector banks (Table 3). The
growth of public sector banks is 17.17% in 2008, as against 16.72% in 2007. New private
sector banks’ total advances to sensitive sectors are 34.11% in 2008, which is lower than
that of the previous year.
Old private sector banks’ advances to sensitive sectors is 18.89% in 2008 and 19.14%
in 2007. The growth of total advances in 2008 is less as compared to 2007. Similarly,
foreign banks’ growth of total advances to sensitive sectors is 26.42% in 2008, which is
lower than 29.48% in 2007.

Lending to Sensitive Sectors by SCBs

Lending by SCBs to sensitive sectors (capital market, real estate and commodities) shows
a significant deceleration during 2007-08, though it was marginally higher than the

100 The IUP Journal of Business Strategy, Vol. VI, Nos. 3 & 4, 2009
 Table 3: Banks’ Group-Wise Lending to Sensitive Sectors
(Rs. in cr)
Lending to Sensitive Percentage
Banks 2006-07 2007-08
Sectors Variations

Capital Market 20,620.85 32,719.20 58.67

(1.43) (1.82)

Real Estate 219,784.80 275,133.56 25.18

(15.26) (15.31)
Public Sector Banks

Commodities 351.15 734.11 109.06

(0.02) (0.04)

Total Advances 240,756.80 308,586.87 28.17

to Sensitive Sectors (16.72) (17.17)

Capital Market 1,707.83 2,267.39 32.76

(1.84) (2.03)

Real Estate 15,566.40 18,427.15 18.38

Old Private Sector (16.76) (16.5)
Banks
Commodities 500.91 403.18 –19.51
(0.54) (0.36)

Total Advances 17,755.14 21,097.72 18.69

to Sensitive Sectors (19.14) (18.89)

Capital Market 8,968.34 22,729.12 153.44

(2.79) (5.59)

Real Estate 104,092.80 116,002.43 11.44

New Private Sector (32.34) (28.52)
Banks
Commodities 0.00 0.00 0.00

Total Advances 113,061.14 138,731.55 22.7

to Sensitive Sectors (35.13) (34.11)

Capital Market 3,809.12 5,282.75 38.69

(3.02) (3.28)

Real Estate 33,430.26 37,195.17 11.26

(26.46) (23.08)
Foreign Banks
Commodities 10.36 100.53 870.37
(0.01) (0.06)

Total Advances 37,279.74 42,578.45 14.31

to Sensitive Sectors (29.48) (26.42)

Source: Report on Trend and Progress of Banks in India, 2007-08, p. 379

Business Retail Banking Strategies in the Liberalized and Globalized Era 101
overall credit growth (Table 4). While credit to real estate market in 2007 is 42.3%, it is
19.8% in 2008. This shows a significantly lower growth during 2007-08. The lending to
capital market increased during 2007-08. Exposure to commodities showed significant
growth but it remained relatively low. The overall exposure of SCBs to sensitive sectors,
as percentage of aggregate bank loans, remained low at the previous year’s level.

Table 4: Lending to Sensitive Sectors by SCBs

(Rs. in cr)
Items 2006 2007 2008
Capital Market 22,303 35,106 62,998
(40.6) (57.4) (79.5)
Real Estate Market 262,053 372,804 446,758
(80.0) (42.3) (19.8)
Commodities 1,413 862 1,237
(–40.3) (–39.0) (43.5)
Total 285,770 408,842 510,994
(74.4) (43.1) (25.0)
Source: Report on Trend and Progress of Banks in India, 2007-08, p. 99

Sectoral Deployment of Gross Bank Credit

Bank credit during 2007-08 was reflected in the flow of credit to all the major sectors,
barring the services sectors (Table 5). The declaration was more pronounced with respect
to agriculture and allied activities and personal loans, whereas credit to industry showed
a marginal slowdown. The total credit growth was lower, at 22.3%, when compared to the
previous years. Bank credit for agriculture was 18.8% in 2008 and 32.4% in 2007. Bank
Table 5: Sectoral Deployment of Gross Bank Credit
(Variations Over the Years) (Rs. in cr)
Items 2005-06 (%) 2006-07 (%) 2007-08 (%)
Agriculture and Allied Activities 49,606 39.9 56,426 32.4 43,260 18.8
Industry (Small, Medium and Large ) 126,804 30.0 146,890 26.7 174,566 25.0
– Small 16,831 22.7 25,888 28.4 27,924 32.2
Personal Loans 103,733 40.5 96,486 26.8 48,656 10.7
– Housing 51,273 38.3 45,791 24.7 24,659 10.7
Other Services 118,254 58.8 96,596 30.2 129,743 31.1
i. Wholesale Trade 8,025 25.4 10,422 26.3 4,472 8.9
ii. Real Estate Loans 13,147 97.1 18,483 69.2 17,070 37.8
iii. Non-Banking Financial Companies 11,463 50.3 14,722 42.9 26,274 53.6
Total Non-Food Gross Bank Credit 398,396 39.6 396,399 28.2 401,799 22.3
Priority Sector 135,222 36.1 123,404 24.2 104,544 16.5
Source: Report on Trend and Progress of Banks in India, 2007-08, p. 94

102 The IUP Journal of Business Strategy, Vol. VI, Nos. 3 & 4, 2009
credit for the services and non-banking financial companies increased at high rates of
31.1% and 53.6% respectively. Credit for personal loan is 10.7% in 2008, which is lower
than 26.8% in 2007.

Retail Portfolio of Banks

The growth of retail portfolio of banks decelerated further during 2007-08 to 17.1% from
29.9% in 2006-07 and 40.9% in 2005-06. It also remained lower than the growth in credit
by the banking sector (Table 6).

Table 6: Retail Portfolio of Banks

(Rs. in cr)
Outstanding (as of March End) Percentage Variations
Items 2006 2007 2008 2006-07 2007-08
Housing Loans 179,060 224,481 252,932 25.4 12.7
Consumer Durables 4,469 7,296 4,802 63.3 34.2
Credit Card Receivables 12,434 18,317 27,437 47.3 49.8
Auto Loans 61,369 82,562 87,998 34.5 6.6
Other Personal Loans 118,351 155,204 197,879 31.1 27.5
Total Retail Loans 375,683 487,860 571,048 29.9 17.1
(25.8) (24.5)
Total Loans and Advances of SCBs 1,473,723 1,893,775 2,332,490 28.5 23.2
Source: Report on Trend and Progress of Banks in India, 2007-08, p. 98

The share of retail credit in total loans and advances declined to 24.5% in 2008 from
25.8% in 2007. Within retail portfolio, credit for durables experienced the highest growth
during 2007 but it also experienced the lowest growth during 2008. However, the credit
for auto loans and other personal loans lowered when compared to previous years.
The credit for consumer durables is 4,802 cr in 2008, which is lower than 7,296 cr in 2007.
The outstanding amount under credit card receivables increased by almost 49.8% during
2007-08, reflecting the increase in the usage of credit cards for various payments.

Strategies for the Success of Retail Banking

The following are the strategies to enhance retail banking in India:

Advanced Technology
First and foremost is the adoption of the right and latest technology. Further,
• The right technology minimizes the operating cost;
• Ensures fast processing of large volumes of data and connectivity of different
branches and offices which enable the much-desired ‘anywhere banking’;
• Supports advanced credit scoring models, with the use of extensive database on
consumers’ credit history, etc;

Business Retail Banking Strategies in the Liberalized and Globalized Era 103
 • Helps to maintain the large and complex database/backups with the minimum
of duplication; and
• Provides Management Information System (MIS) support to management of all sorts.
In today’s circumstance, the influence of IT is intense in all aspects of retail banking.
IT plays a significant role in giving all modern and sophisticated services.

Skilled Manpower
As pointed out earlier, because of the most complex nature of operations involved in the
management of modern and diverse retail products, only high-skilled and experienced
manpower can handle portfolio efficiently. New private sector and foreign sector banks
have more highly techno-savvy and qualified workforce than public sector banks. Such
workforce can ensure quick delivery of services as well as quality thereof.

Balanced and Sustained Growth

Quite often, in a bid to increase market share and to attain profitability, many banks are
going for maximizing their retail business. Therefore, a huge infrastructure is required for
administering such a large portfolio in the future. The fact, however, is that a balanced
and calculated growth alone, taking into account the required infrastructure, both human
and physical, can bring the desired results in the long run. This is particularly significant
in the case of retail credit, though often forgotten by many policy makers. Profitability and
sustainable growth, rather than growth, should be the hallmark of banking operations.

Market Research and Market Intelligence

Public sector banks have to go a long way in this regard. Only a business based on robust
technology can maintain a huge and up-to-date customer database to study the customers
and to ultimately arrive at very meaningful business decisions. Such systems can provide
meaningful insights so as to launch specific products to cater to various customer
segments. Apart from using such internal information meaningfully with the help of
advanced software, banks have to go for market research/field studies either by themselves
or through outside consultants. These strategies will help banks to launch different
products to various customer groups.

Emphasis on Credit Quality and Risk Management

In an attempt to increase market share, banks have been seen to relax various credit terms
and conditions. This is particularly true with respect to housing loans, where margin
requirements are minimized, tenor is maximized, and income criteria are often softened.
While marketing of products is essential for increasing business volume, the same should
not be at the cost of credit quality. Else, the outcome might be incidence of bad loans or
even frauds. Thus, risk and marketing and risk management should go hand in hand.
Default risk can be higher with respect to retail credit, if proper care is not taken right
from the credit assessment stage. Further, if such defaults are substantial, things may
become extremely unmanageable because of the large number of accounts.

104 The IUP Journal of Business Strategy, Vol. VI, Nos. 3 & 4, 2009
Universal Banking and the Capacity to Cross-Sell
Today’s customers do not want to go to different organizations for fulfilling their banking
needs. Instead, they prefer a one-stop solution to all their needs, along with specialized
investment advices on personal finance. The concepts, ‘relationship managers’ and
‘financial super markets’, are gaining significance in India at a fast pace. The new private
sector banks and foreign banks have already made rapid strides in the direction of
providing diverse but holistic and individualized services to customers, under the same
umbrella. The public sector banks have to go a long way in this regard, though the SBI
has started a few welcome initiatives in this regard.

More Delivery Channels/Customer Touch Points

Customers of the modern day expect maximum number of delivery channels, and hence
maximum convenience. Thus, Internet banking, tele-banking, ‘anytime-anywhere’
banking, ATMs, electronic data capture, point of sales, etc., have become prerequisites for
success in retail credit.

The Human Factor in Services

Long-standing relationship and human touch in services are also equally important to the
customers, over and above the cost, speed and considerations. Thus, the services need to
have a human touch in order to be holistic and qualitative, however marvelous the
technological base or the internal administration is.

Conclusion
In the present time, the key to the success of any bank lies in aggravating and emphasizing
the various retail marketing activities. Therefore, various banks in India, since the last
decade, have started taking up the need and importance of retail banking seriously. So, all
sectors have come up with new technologies. Banks need to be more aggressive about retail
banking on account of the changing consumer needs, innovative financial products,
mergers and acquisitions, deregulations, information technology upgradations, and a
variety of delivery channels. To remain competitive in the financial services landscape,
banks are required to expand their product lines, add new delivery channels, develop more
effective marketing systems and techniques, and enhance service quality levels for the
satisfaction of the banking customers. The banks should also plan some strategies to
remove the weaknesses of retail banking. 

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106 The IUP Journal of Business Strategy, Vol. VI, Nos. 3 & 4, 2009
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