Financial Performance of Retail Banking in India - Essay Example

?Financial Performance of Retail Banking in India Table of Contents Introduction 3 Background 7 Aims and Objective 8 Overview of Literature Review 9 Overview of Data Collection 11 Summary 12 References 14 Introduction India is a south Asian country, which stands seconds in terms of population and seventh by area in the world. The economy of the country is tenth-largest in terms of nominal GDP and third-largest in terms of purchasing power parity. Reserve Bank of India (RBI) is the Central Bank, which controls the banking system of the country, and every banking decision and norm is not valid without the approval of the RBI. According to World Bank report of 2011, the value of the Indian economy is around $1.848 trillion, which can be considered as the tenth- major economy in terms of exchange rates (World Bank, 2013). However, the major challenge that the country faces is poverty. Though the country and its government has been successful in diminishing poverty from 55 percent in the year 1973, to around 27 percent in 2004, but around 1.1 billion citizens of the country are below the poverty line (Nayak, Goldar, and Agarwal, 2010). It has been noticed that 30 percent of the rural population are below the poverty line (Rural Poverty Portal, n. d.). Financial development is an integral factor for the growth of country’s economy. It has been proved through many studies that for any well-functioning fiscal system, mobilizing saving and allocating resources support functions such as risk management, economic growth, etc. This fact proves that financial development can be achieved through savings through establishment of proper banking system in the country, which in future would lead to elimination of poverty (Kapoor, 2011). Retail banking is not a fresh phenomenon in the country. It was prevalent in different forms previously, but in the last few years a phenomenal change has been seen and demand towards mainstream banking has increased. Retail banking is mainly facilitating the rural segment of the country and assisting them with loans for durables, educational loans, auto loans, etc. In the recent past it has been seen that the retail credit has been the major source of profit for the banks, which comprises of around 21.5 percent of the total outstandings. There are certain drivers which lead to the growth and development of retail banking in the country. Firstly, consistent increase in the purchasing power of the consumers and for economic prosperity. Secondly, the changing demographics of the consumers and vast potential of quantitative and qualitative consumption of the population was another reason for the growth of retail banking in the country. Thirdly, the demand for convenience banking increased due to the usage of mobile phones, internet, etc. fourthly, retail business has become good sources for profit maximisation. Lastly, declining level of interest rates is also the cause of growth in the retail credit, though the generation of demand for credit (R. Kapila, and U. Kapila, 2007). Retail banking is however, considered as a new concept because the functions within the banking framework were not segregated as retail, wholesale or corporate banking. Retail banking in modern terms comprises of asset based services and products, financial services that are designed for individual consumption or use. The concept of retail banking has been widespread with the increasing market share of private banks in the banking sector of India. Retail banking caters to the banking needs of the individual customer (Shrivastava, Pandey, and Vidyarthi, 2007). The products that banks consider under retail banking are housing loans, education loans, car loans, personal loans, saving bank accounts, recurring deposit accounts, etc. The Indian retail banking system has seen a dramatic change over the last few years. It has evolved drastically from traditional debt averse, middle class mindset, to modern loan-taking, and risk inclined mind-set. In order to keep up with the latest trend of changing mind-set of the customers, the retail banking framework has also changed. Moreover, the changing demographics of the country are also compelling the retail banking industry to create a new technology based platform for the customers (Sharma, 2008). The Economic Times stated that around 35-40 percent of the revenue of technology based services are generated from the banking and financial services, which also includes the insurance vertical. The invasion of consumerism has affected the retail banking system in terms of an increase in the demand of the retail banking services and products such as loans, cards, and other customized services and products. It has been analysed that in the last four years the Indian economy has been seeing unprecedented growth due to the increasing opportunities in the banking sector. Most of the banks in the country have enjoyed high growth and appreciation significantly. A holistic evaluation of the banking segment is possible only through analysis of the actions, core capabilities and objectives. Assessment of contribution of the bank towards the GDP growth, maintaining financial stability, and increasing shareholders value are few positive financial performances with has been noticed in the past few years (Raj, 2008). Retail banking in India mainly depends on lending and consumer savings that has declined in terms of shares by 5.02 percent in the first quarter in the year 2010. It was found that retail banking share was around 41.06 percent of total income in 2010, which was lower than 46.08 percent in 2009. Due to the global financial crisis, the Indian government took various steps to minimise the effect of recession on the Indian banking and economic environment, which includes slashing down of interest rates for auto and housing loans that impacted the retail banking sector. Another reason was the high demands for collaterals by the banks for retail loans. However, in this scenario the private banks could register growth of 13.52 percent, and a minimal of 0.16 percent decline in retail banking (Nayak, Goldar, and Agarwal, 2010). Retail banking has not only offered better services but also improved the operational functions of the banks. Concepts like “Know your Customers” was not practiced in nationalised banks in India. Banks had to face many hurdles because they had limited information regarding their customers (Kumar, 2009). In order to develop the products and target the right set of customers, it is important that the bank has knowledge regarding the income level and other financial information of the customers. Retail banking has made it possible for the customers to opt banking services even in remote villages. Nowadays the ATMs of State Bank of India can be seen in the remote villages of the country. The customers do not reach the banks, but the banks reaches the customers by taking 360 degree feedback from them. The organisation culture in these banks has improved. Even in the nationalised banks, the focus is on the fulfilling the short-term goals, than long-term objectives. This is the way retail banking functions in Indian banking segment (Department of Applied Economics & Commerce, Patna University, 2006). When it comes to retail banking in India, it can be said that there is unlimited scope for innovation. Though the banks are already offering variety of retail loans and deposits, but the basic characteristics of every product is same. However, the star product or service of retail banking is the ATM services, through which money can be easily withdrawn. India has more than 35,000 ATMs around the country. The ATM maintenance cost for the country is far higher than the revenue generated by them. However, the ATM machines are offering multiple services such as money withdrawal, balance enquiry, etc. Smart cards are being introduced and mobile banking is regarded as the future of retail banking in India. State Bank of India has the highest number of ATM has the highest number of ATM compared to any other banks (Sarkar, 2005). The nationalised banks in the country maintained a monopoly in the banking industry of the country, so they followed traditional banking systems. With the advance and progress of private banks, customers started switching to private banks because it offered better and faster services. They introduced the concept of serving individual and corporate customers in different way, which was right because this assisted the banks to serve their customers better. This strategy was later even adopted by the nationalised banks. A more comprehensive picture of retail banking and its financial performance can be seen in the literature review chapter of this dissertation (Pradhan, 2012). Background This study is based on the theme of retail banking in India and its performance. Banking system forms the nervous system of any country’s economic system, so the financial performance of the banking system also reflects the fiscal condition of the economy and the standard of living of the citizens. A strong banking framework also signifies that poverty, which is one of the most difficult challenges of the country, can be also diminished. The increasing competition between public, private and co-operative banks for selling retail banking services and products is one of the causes for development of retail banking in India. It was also identified that retail banking services and products assisted the banking industry to reach out the individual customers and increase the profitability of the banks in terms of profit and volume of customers. Another reason being the increasing interest of banks towards retail banking is the excess deposits. Retail banking has paved the way for excellent financial performance of the banking industry in India (Sharma, 2008). India had a well-organised banking infrastructure even before the banking services were segregated into retail, wholesale or corporate sectors. However, it has been noticed that the development and growth of retail banking in India has been able to grab the attention of youth of the country towards banking. This was possible because banking was no more confined to bank branches. Services are offered to the customers at a lightning speed through internet, mobile applications, and funds can be accessed from any state, city, or bank branches of the country. Further, retail banking has also inculcated the habit of saving in the young professionals and also students, who prefer to save their pocket money in banks. Households are the major customer segment in retail banking in India. All the above discussed facts ignite a curiosity to deeply analyse the financial performance of the retail banking segment in India because analysing this segment can not only reveal the sources and cause of profitability of the Indian banking sectors, but also assist in identifying the present banking trends in India (Sharma, 2008). Aims and Objective The objective behind conducting this study is to evaluate the financial performance of the retail banking system because banking framework is a necessary part of the country’s economy. It is segment people often refer to whenever the other industries try to identify financial problems within the country. Further, banking is also considered as the most regulated businesses globally and also an important source of employment around the world. For a developing country like India, it plays a vital and dynamic role. Keeping in mind these objectives, the aim of this project has been: To understand the significance of banking system and its role in India To evaluate the operational functions of retail banking in India To analyse the importance of retail banking system in strengthening the economy of the country To include and discuss the corporate social responsibility practices of retail banking system in India Overview of Literature Review Retail banking is also known as mss banking in which the individual customers visit the local bank branches for saving money, checking their account balances, personal loans, credit cards, mortgages, debit cards, etc. There are various reasons which are responsible for the changing environment of retail banking in India. The reasons for upgraded retail banking services and improved banking environment ranges from higher infiltration of technology, increasing level of literacy, escalating expectation of customer expectations, and population. The banking industry of India have started facing the challenge of offering innovative and multiple service to customers through consolidated window, so as to guarantee that the bank’s customers get to see consistency and uniformity when services are delivered to them irrespective of time and place of banking (Sharma, 2008). This is only possible because the speed of innovation has increased. However challenges like security threat and high cost infrastructure for mass marketing are also strongly associated with retail banking in India. Retail banking in India; have been designed on the strategic framework of technology, so as to reduce the operating cost. The establishment costs are saving by reducing the number of bank branches. However, the disadvantage of insufficient bank branches is eradicated through multi-channel banks. Retail banking in India can be identified by three major characteristic, namely multiple products, multiple groups of customers, and multiple distribution channels. Retail banking in India has a significant role in the Indian economy. It has increases the overall economic activity in the country, along with the purchasing power of the people, as they are being offered the opportunity to avail funds easily (Sarkar, 2005). India has around 400 million middleclass, and about 200 million households, which shows from where most of revenue in retail banking segment come from. Around 90 percent of savings in this segment come from households of the country. Another valid reason for the increasing demand for retail banking in India is due to increasing rate of nuclear families than joint families. Individual could also avail tax benefits if they go for housing loans, car loans, etc (Sarkar, 2005). Before conducting a comprehensive analysis of the financial performance of retail banking in India, it is significant to evaluate the opportunities that retail banking can have in the country. The rising status of the Indian middle-class segment, high-net worth households and increasing youth population has lead to a tremendous increase in the purchasing power and ability to take risk and acquire debt that its previous generation (Nayak, Goldar, and Agarwal, 2010). The combination of all the above factors indicates considerable growth in the retail banking sector, but off course at a nascent stage. Every strategic framework which supports country’s economy has to face various challenges. Similarly, the retail banking system of India also has to face certain external and internal challenges, such as issues related to money laundering, and outsourcing activities, such as software and hardware maintenance, setting up ATMs and operational activities such as cash refilling, etc. Apart from this, maintaining the ongoing trust of the customers is also a challenge. Banks are adopting innovative strategies in the retail banking environment such as “Know your customers” for meeting the requirements and need of the customers by offering them customized products and services. Further, reliance on technology and brought additional challenge and responsibilities (Kumar, 2009). Overview of Data Collection The methodology of conducting the research for this dissertation has been selected keeping in mind the aim and objective of this study, the literature review, and the theme of the project, which is retail banking in India and its financial performance. This study will utilize both secondary and primary data for achieving the stated objectives. The secondary data would be collected from books, journal articles, magazines, newspapers, and electronic sources. This information would be utilized to conduct a critical analysis of the literature on retail banking in India and its present performance (Pannerselvam, 2004). Further, primary data would be collected through questionnaire survey, which would be conducted through questionnaire that would be designed for the managers working in the retail banking industry in India. The nationalized as well as the private banks would be considered for conducting the questionnaire survey, so that a balanced set of information is achieved (Srivastava, and Rego, 2011). The primary data would be analysed using qualitative research method because the aim is not only to identify financial performance of the retail banking segment of India, but also to evaluate the reasons or cause behind such a performance. Though it is the analysis is on financial performance of retail banking, but there are several non-financial reasons, which lead to such financial results (Singh, and Bajpai, 2008). For the questionnaire survey, 15 respondents would be selected and each respondent would belong to different bank. In this way data can be collected from maximum banks offering retail banking services. This will assist in eliminate the limitation of biasness of information that arises which a very small sample has been considered, which fail to represent the entire population (Coldwell, and Herbst, 2004). As far as the administration procedure are concerned, secondary data would be collected first in order to conduct a critical review of the literature. The literature review offers a theoretical support to the primary research. It also assists in validating the data collected and guarantees that the primary data is reliable and in line with the objectives of the dissertation. Since this study will include involvement of the human subjects for primary data collection, so the ethical norms would be considered in this case. The respondents would be explained in details the purpose of conducting the survey and they would be also ensured that their personal information would be kept confidential (Creswell, 1994). Summary The study was designed with the aim of identifying the causes of the growth and development of the retail banking segment of India by analyzing its financial performance. The motive behind such an aim was directed by the objective of identifying not only the increasing profitability that the banking sector of India is enjoying and contributing to the GDP of the country, but also the reasons behind such growth. It was found that increasing popularity of retail banking in India was due to factors like increasing popular of youths, increasing number of nuclear families or households in the country, etc. However, there are various challenges as far as retail banking is concerned, which needs to be considered while evaluating the financial performance of this sector. The India retail banking sector is depended on outsourcing such as software or hardware maintenance, etc. In order to conduct research in this study on the retail banking segment both secondary and primary data has been collected. The secondary data is collected for presenting a critical review of the available literature, while primary data would be collected through questionnaire survey. The sample size chosen for the study is 15, and the respondents are the managers of the banks in India handling retail banking segments. Data derived through the survey would be analysed and a discussion would be presented. 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