Retail Banking

Indian Financial Sector

Reserve Bank of India (Central Bank)

Financial
Institutions
Exim Bank

-IDBI
-ICICI
-IFCI
-NHB
-NABARD

Commercial Banks
-Public Sectors
Banks/SBI/Assoc.
(25)
-Private Sector
Banks
(25 Old, 8 New)
-Foreign Banks
(44)

Investment
Institutions
-UTI
-LIC
-GIC

State Level
Financial
Corporations
/ Industrial
Development
Corporations
(SFCs 18)
(SIDCs 28)

Non Banking
Financial
Companies
(641)
Co-operative
Banks
(95,000)

Banking defined
Banking Regulation Act of India, 1949
defines Banking as
"accepting, for the purpose of lending or
investment of deposits of money from
the public, repayable on demand or
otherwise and withdrawable by cheques,
draft, order or otherwise."

The Financial Service Competitors of

Banks

Mutual Funds (Investment Companies)

Security Brokers and Dealers
Non Banking Finance Companies
Post Office Savings and Term Deposits/ Small
savings instruments
Life and Non Life Insurance Companies
How a bank is different from all other
financial institutions in one unique aspect?
4

Various Kinds of Banking/ Banks

Scheduled Banks
Non Scheduled Banks
included in the Second Schedule of Reserve Bank of
India(RBI) Act, 1934, which satisfy the criteria laid down
vide section 42 (6) (a) of the Act.

Based of different Principles and goals

Commercial Banking
Development Banking

Co-operative Banking
Investment /Merchant
Banking

Commercial Banks are functioning on commercial

basis with profit motive

The co-operative banking

to the supplement the village money lender.
Divided into 4 components

Based on principle of co-operation

State Co-operative Banks
Central Co-operative Banks
Primary Agriculture Credit Societies
State Land Development Banks
Land Development Banks
Primary Land Development Banks
Primary Agricultural Development Banks
Urban Co-operative Banks
7

DEVELOPMENT BANKING
Development of some specific sectors of economy
Industrial Finance Corporation of India (IFCI)
Industrial Development Bank of India (IDBI)
Industrial Credit and Investment Corporation of India
(ICICI)
Industrial Investment Bank of India (IIBI)
Small Industries Development Bank of India (SIDBI)
National Bank for Agriculture and Rural Development
(NABARD)
Export Import Bank of India
National Housing Bank

 Investment banks
underwrite" (guarantee the sale of) stock and
bond issues, trade for their own accounts,
, and
advise corporations on capital markets
activities such as mergers and acquisitions.
Merchant banks perform similar functions

Independent investment banks

Merill Lynch
Morgan Stanley
9

Commercial Banking Based on Geography ,

delivery channel

Branch Banking
Internet Banking

Virtual Banking
Mobile Banking

10

Virtual Banking
First fully virtual bank -mBank (POLAND)
"Internet banking services are increasingly
popular. Even though virtual banks began
operating in Poland only a few years ago,
they have already enlisted way over half a
million clients between them.

Another fully virtual bank in Poland is Inteligo,

which started operations in May 2001
11

Internet Banking

12

Narrow Banking
Banking for limited purposes/
Restricted banking
Commercial Banking activities alone
no investment banking, Advisory,
consulting etc
Accepting of deposits alone and no
Loaning Moratorium / weak banks
13

Universal Banking
provides entire range of financial services

14

 Citi Group a universal bank

Fifteen years ago, when Kundapur Vaman
Kamath, the CEO of ICICI Bank,spoke
about his ambitions to make his bank (then
called just ICICI) a universal bank, selling
every conceivable financial product, he
created flutter.
Financial sector reforms in India had just
kicked in, but even the biggest players in
financial services were confined to neatly
fenced territories.
Was Kamath ahead of his time?
15

 ICICI Bank
functions as a universal bank through itself
and its associate companies in the areas of
corporate finance,
commercial banking,
investment banking,
asset management,
non-banking finance,
investor services,
broking and insurance.
16

Indian Universal banks

new trends
entities like SBI, ICICI, HDFC
and Kotak Mahindra have all
become one-stop departmental
stores for
Wholesale banking,
Retail banking
mutual funds,
loans,
Merchant banking
or investment banking
insurance and
much else
17

Financial conglomerates

Large financial services conglomerates that

combine commercial banking and
investment banking, and sometimes
insurance and all other financial services

Citigroup
HSBC
ABN Amro
Allianz (Dresdner Kleinwort)
Bank of America (Banc of America Securities)
BNP Paribas
Barclays

18

 Central Banks

are non-commercial bodies or

government agencies often charged
with controlling interest rates and
money supply across the whole
economy.
They act as lenders of the last resort in
event of a crisis of liquidity with any
banks or all banks
19

Retail banking

Wholesale banking

20

Retail Banking is typically a mass market banking

where individual customers use local branches of larger
commercial banks. It is segment of commercial banking.
Checking Accounts
Savings Accounts
Time Deposit

Liabilities
Personal Loans
Credit Cards
Mortgage loans
Auto loans

Fee Based

Wealth
Management

Assets

21

Loan Products:
Deposit
Auto Car Loans
Products:
Loans against Securities
Savings
Personal Loans
Credit Cards
Accounts
2-Wheeler Loans
Current
Commercial Vehicles Finance
Accounts
Home Loans
Fixed
Small Ticket Personal Loans
Deposits
Retail Business Banking

Commercial Banking:
Working Capital
Credit Substitutes
Term Loans
Bill Collection
Forex & Derivatives
Wholesale Deposits
Letters of Credit
Guarantees

Retail Banking

Wholesale
Banking

Treasury

Products:

Foreign Exchange
Debt Securities
Derivatives
Equities

Other Products / Services:

POS Terminals
Debit Cards
Depository Accounts
Mutual Fund Sales
Insurance Sales
Investment Advice
Corporate Salary Account
NRI Services
Bill Payment Services

Transactional Banking:
Cash Management
Custodial Services
Clearing Bank Services
Correspondent Banking
Tax Collections
Banker to public issues

Key Segments:
Large corporate
Supply Chain
Emerging Corporates
Financial Institutions
Government
Agriculture
Commodities

Other Functions:
Asset Liability
Management
Statutory Reserve
Management

22

Business Model of Retail Banking

Strategic Business Unit SBU (MBO targets)
Pvt Banks/Foreign Banks
Department approach
- Majority of PSBs
Integrated approach
No distinction but effort to tap Retail business
potential ( Earlier approach)
Indian Banks go for Positioning platform- one of
top three among peers
Foreign Banks go by business objectives
--targets for customer, business and profits
Exit - BNP Paribas 1990 and existed later
23

What constitutes Retail Assets and

Liabilities?

Retail Liabilities
Deposits:
1. Saving Accounts and variants,
2. Current Accounts and variants
3. Retail Term deposits / Recurring Deposits
4. Combination Accounts
of Savings/ Current / Term Deposits
24

Regular Savings Accounts

ATMs./ International Debit Card

Net Banking and Mobile BankingPersonalized cheques
Bill Pay.
Funds Transfer/payment
Avail of facilities like Safe Deposit Locker,
Sweep In and Super Saver
Free Payable-at-Par cheque book,
Free Insta Alerts for all account holders for lifetime of the
account. Free Passbook facility available at home branch
for account holders (individuals).
Free Email statement facility
25

Savings Plus
All Savings Regular Benefits PLUS
Free Demand Drafts on HDFC Bank
locations, up to a limit of 25,000/- per day.
Special relationship discount on purchase of
Gold Bars
25%-off on the Locker rental for the 1st
year (only).
Intercity Banking / Multi-city Banking.
AQB Rs.10,000
26

Minimum Balance (Average Quarterly Balance)

Option 1
Rs. 10000(Urban/Semi-urban)
Option 2
NIL with a Fixed deposit of Rs. 50,000
Charges on non maintenance thereof
Option 1
AQB in the SB a/c between 5,000/- and
10,000/-: Rs. 750/- per quarter,
AQB in the SB a/c is less than 5,000/:Rs. 1,000/Option 2
In case of non maintenance of Rs.
50,000 Fixed Deposit the charges
mentioned in Option 1 would be
applicable
27

Current Accounts and Variants

HDFC Regular C/A
1. Free anywhere cheque payment
2. Free payments and collections through NEFT Free RTGS
collection. RTGS payment @ Rs.25/- per transaction
3. Inter-city Account to accounts funds transfer between HDFC
Bank accounts at a nominal charge of Rs.15/- per transactions
4. Free Demand Drafts (DD)/PO above Rs.100,000/-. Demand
drafts up to Rs.50,000/- at flat cost of Rs.40/-. DDs above
Rs.50,000/- & up to Rs.100,000/- at nominal cost of Rs.25/5. Payable at par cheque book at nominal price. HDFC Bank
offers you Doorstep Banking*,

28

Current Accounts and Variants

HDFC Trade C/A
Free Account to account funds transfer between HDFC
Free payment and collection through RTGS/NEFT
Free up to 30 Demand Drafts plus 30 Pay Orders per month
from any
Free anywhere cheque collection (clearing) within HDFC Bank
branch network up to Rs.35 lacs per month.
Convenience to withdraw & deposit cash at all our branches*
200 "At Par" cheque leaves free per month.
Free at par cheque payments across all HDFC Bank locations
for unlimited value*
Free Cash Deposit upto Rs.5 lacs per month* across all HDFC
Bank Branches in your city.
29

Current Accounts and Variants

HDFC Plus C/A
Free Account to account funds transfer between HDFC
Free payment and collection through RTGS/NEFT
Free up to 50 Demand Drafts plus 50 Pay Orders per month
from any
Free anywhere cheque collection (clearing) within HDFC Bank
branch network up to Rs.75 lacs per month.
Convenience to withdraw & deposit cash at all our branches*
300 "At Par" cheque leaves free per month.
Free at par cheque payments across all HDFC Bank locations
for unlimited value*
Free Cash Deposit upto Rs.10 lacs per month* across all HDFC
Bank Branches in your city.
HDFC Bank offers you Doorstep Banking*,
30

Flexi Current
Cash Deposit and Anywhere Transaction limits are a
multiple of the balance you maintain(AMB)in your Current
Account.
Min AMB Rs. 75,000
Transaction Dynamic Free Limits*
Cash Deposit at Home Branch Location Rs. (10 times
AMB)
Anywhere Collections & Funds Transfer (35 times AMB)
Free RTGS/NEFT Transactions.
Free 40 Demand Drafts & Free 40 Pay Orders issued from
any HDFC Bank Branch*

Apex

Max
31

Combination of Various accounts

Flexi Deposit / Sweep In
Min Balance SB 25000/50000
Any excess above minimum will be
transferred to FD at higher rate 6m -1yr
On issue of cheque in excess of balance, the
FD will be broken for excess amount and
balance FD amount will run at same
contracted interest rate.
32

1 year 16 days

8.50%

9.00%

1 year 17 days - 2 years

8.25%

8.75%

2 years 1 day - 2 years 15 days

8.50%

9.00%

2 years 16 days

9.25%

9.75%

2 years 17 days - 3 years

8.50%

9.00%

3 years 1 day - 5 years

8.25%

8.75%

5 years 1 day - 8 years

8.25%

8.75%

8 Year 1 Day - 10 Years

33

8.25%

8.75%

 Retail credit:

Housing loans
Consumer durables Loans
Credit Card loans
Auto loans
Personal loans

34

35

Factors contributing to growth

Slow down in corporate credit off take

Liberalization of lending norms
Lower risk
Enabling technology
Growing economy and income levels
Decline in interest rates
Competition among banks
Faster appraisal

36

Growth rate of retail Assets of the banking system

Sr. Type of Retail
No. Asset
1
Housing Loans

2004

2005

2006

2008

89449

Consumer
Durables Loans
Credit Card
Receivables
Auto Loans

6256

134276
(50.5)
3810
(-39.10)
8405
(36.3)
35043

Other Personal
Loans
Total Retail
Loans

87170

179165
(33.4)
4469
(17.3)
12434
(47.9)
61369
(75.1)
118355
(39.1)
375739
(40.9)

252932
(12.7)
4802
(-37.2)
27437
(49.8)
87998
(6.6)
197607
(27.5)
570776
(17.1)

3
4
5
6

6167
-

85077
(37.8)
198042 266611
(41.2)

2009

2010

200910
263235 315862 20.0
(4.1)
5431
3032
-44.2
(13.1)
29941 21565 -28.0
(9.1)
83915 78346 -6.6
(-4.6)
211294 203947 -3.5
(6.9)
593815 622752 4.9
(4.0)

37

 Percentage of Retail Assets to Total

Assets of the Banking system
Sr. Details of
No. Advances

2004

2005

2006

2008

2009

864271

1125056

1473723

2332032

2793572

21.9

23.7

25.5

24.5

21.3

23.2

19.8

Total Advance of
the Banking
System
Percentage of
Retail Assets to
Total Advances
Growth rate

38

 Share of Interest Income to Total Income

S.No.

Income Segment

200506

200607

200708

200809

Interest Income
in %

84

84.3

83.6

83.8

Non Interest
Income in %

16

15.7

16.4

16.2

39

40

 RETAIL BANKING SOME STATISTICS

12.06.07

Retail boom started around 2002-03

Citi Bank early mover -citi never sleeps
Home grown ICICI, HDFC Bank, leadership
positions
Stanchart, HSBC with clear strategy
Carpet Bombing approach
- cold calls to every one and anyone
Credit grown @30 % since 2004
Retail bank credit @40%
Booming economy , low interest rates and growing
consumer confidence
Auto loans, personal loans, credit card dues - about
50% share in total retail loans
Home loans - another50% of retail loans grew by 50%
in 2005 and 33 percent in 2006- Rs 18,00,000 cr. 41

As per Edelweiss mortgage finance

report Feb. 2007,
Indian Mortgage as % of GDP
up from 6.0 % in 2004 to 8.5% in 2006
but small in comparisons to developed
countries
US (51%)
UK (54%)
Asia (10-30%)
Mortgage loans
SBI
11% of total lending
ICICI BANK 30% (25%) of total lending
Low by international standards

42

Trends Recent past 2004-05

Banks are increasing their dominance in housing
finance and capturing the market share of the
housing finance companies.
During 2004-05, the market share of banks stood
at 62%, against the 33% by Housing finance
companies;
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%).

43

Trends Recent past 2004-05

Retail lending constitutes just 12.36% of the
Indian banking system.
Given this macroeconomic scenario, the share of
retail banking will grow dramatically and it is
expected that about 35% of the incremental
growth in net credit will come from retail banking.
In the next five years ie till 2010, retail banking is
expected to grow by a CAGR of 25% to touch the
figure of Rs575,000 crore.
44

Trends Recent past 2004-05

During 2004-05 retail contributed 42% of
overall credit growth.
Growing at the CAGR of 35% over last 5
years the retail asset size touched
Rs1,89,000 crore.

45

46

Commercial vs. consumer loans

Commercial loans

Consumer loans

Small volume, large loans

Large volume, small loans

One-by-one approval

Volume approval

Hierarchy of approvals senior

managers approve large, complex
loans

Hierarchy of approvals senior

managers approve credit product
programs

Close account management and

review on a loan-by-loan basis

Portfolio management by aggregate

performance statistics

Financial data available

Limited data available

47

 Upcoming Foreign Banks In India

By 2009 few more names is going to be added in the list of
foreign banks in India.
Reserve Bank of India paving roadmap for foreign banks
in India greater freedom in India.
Among them is the world's best private bank by
EuroMoney magazine, Switzerland's UBS.

The following are the list of foreign banks going to set

up business in India
Royal Bank of Scotland
Switzerland's UBS
US-based GE Capital
Credit Suisse Group
Industrial and Commercial Bank of China
48

Indian Banking Sector: Overview

222 commercial banks in India (of which 133

RRBs)
Operating with 68,681 branches (March 06)
Nearly 70% of branches are in rural/semi-urban
areas
Bulk of commercial bank finance is for short-term
working capital needs of industry, trade,
agriculture & personal segment.
Foray into project finance also.
Banks are supporting growth in the economy by
financing productive sectors
49

Robust economic growth

GDP growth

FY2005

FY2006

FY2007

H1-2008

Agriculture

0.7%

6.0%

2.7%

3.7%

Industry

7.4%

8.0%

11.0%

9.5%

Of which:
manufacturing

8.1%

9.1%

12.3%

10.2%

Services

10.2%

10.3%

11.0%

10.5%

Total

7.5%

9.0%

9.4%

9.1%

GDP

growth expectations at about 8.5%

50

Economic growth drivers

Favourable
demographics

Knowledge
capital

Rising disposable
income
Investment

Personal Consumption

Manufacturing

Housing

Infrastructure

Transportatio
n
Personal
credit

International
expansion

Investment and consumption cycles mutually re-enforcing

51

Changing consumer
demographics

Increasingly affluent, with bulging middle class

The youngest population in the world

Increasing literacy levels

Higher adaptability to technology

Urbanization is a continuing trend

Increasing "consumption" mindset in India

52

Changing structure of the economy

FY1991

FY2006

Services

43%

61%

Industry

25%

19%

Agriculture

32%

20%

Rapid growth of services sector

Leveraging high quality education and vast talent
pool
Sublimating Indias knowledge capital to create
economic value
53

Upward migration of incomes

(households in million)

FY1996

FY2002

FY2010
Estimate

Middle income

33

50

98

High income

10

Rising affluence and growth of the consuming class

NCAER data for top 24 cities in India shows migration to
higher income levels growing at over 40% per annum
Middle income Rs. 90,000-5,00,000 per household p.a.
High income > Rs. 5,00,000 per household p.a.
54

across rural and urban India

(households in million)

FY1996

FY2005E

FY2002

Urban

Rural

Urban

Rural

Urban

Rural

Middle income

17

16

27

23

35

28

High income

0.7

0.3

1.8

0.7

3.6

1.2

43% of households in middle and high income

groups from rural India in 2005
Their number has grown by 79% from
1996-2005
Figures for 2005 are estimated
Middle income Rs. 90,000-5,00,000 per household p.a.
High income > Rs. 5,00,000 per household p.a.

55

A Young population . . .
Per cent of population, 2003

>60
35-59

10

23

23

30

15-34

35

0-14

35

36

35

25

26

26

16

37

29

Highest proportion of population below 35 years (70%) in

India
Highest proportion of population below 35

years (70%) in India

56

. . .which means a bigger opportunity

2003

2009 E

0-14

365

15-35

365

35-59
>60

Total Population
in million

391

449

295

240

73
1,044

87

1,221

130 mn plus people get added to working population

57

700
600

53%

75%

70%
60%

54%

500

50%
34%

400

40%

300

30%
17%

200
100

80%

20%
10%

2%

0%
India

Thailand Malaysia

Taiw an

Korea

Consumer loans outstanding /

GDP
(%)

Consumer loans outstanding

(USD in billion)

Benchmarking

800

USA

Total consumer loans outstanding

Consumer loans outstanding / GDP (% )
Source: Salomon Smith Barney

The under-penetration is reflected even within the subsegments

58

Top five banking groups in the

world ranked by capital

Figures in US $ , and as at end-2005

HSBC 79 billion
CITI GROUP 75 billion
BANK OF AMERICA 73 billion
JP MORGAN CHASE 72 billion
MITSUBISHI (UJF) FINANCIAL GROUP 64
billion
59

 Top Performing Private Sector Banks

ICICI Bank
HDFC Bank
AXIS Bank

Kotak Mahindra Bank

60

HDFC Bank Limited

The Bank offers a range of
commercial and transactional banking services
and treasury products to wholesale and retail customers.
The Bank operates in three segments:
retail banking,
wholesale banking
and treasury services.
The retail banking segment serves retail customers through a
branch network and other delivery channels.
The wholesale banking segment provides loans and
transaction services to corporate and institutional customers.
The treasury services segment undertakes trading operations
on the proprietary account, foreign exchange operations and
derivatives trading.
61

International Competitiveness

According to Moodys Investor

Services:
Indian lenders have highest ROE
20.38%), (in Asia
followed by
Indonesia (20.19%),
New Zealand (18.83%),
Japan (-6.42%)
62

RELATIVE STRENGTH AND RESILIENCE OF INDIAN BANKS

IN ASIA

By Standard & Poor

-Indian banking ahead of

China,
Indonesia,
Philippines and Vietnam.
But the banking industries of Australia,
New Zealand, Singapore, Hong Kong and
Japan, and even Malaysia, South Korea,
Taiwan and Thailand are ahead of India.
63

Average gross bad loans as share of total

loans:
India (8.18%),
Phillipines (15.05%),
Thailand (13.08%),
China(11.80%)
and Malaysia (9.73%).

64

Andhra Bank

65

Andhra Bank

Value Added Services

Insurance linked savings deposits Abhaya,
Abhaya Gold, Jeevan Abhaya, Jeevan Prakash,
Jeevan Prakash plus, Arogyadaan, AB Flex etc.
offered.
Bancassurance Tied up with LIC and United
Insurance companies for sale of Life and nonlife products.
Associated for sale of Mutual Fund products
with major companies.
Introduced Depository participatory services.
Cash Management Service covered 84
customers in 123 branches. Turnover for the
year crossed Rs.1147 Crore.
66

Andhra Bank

Value Added Services

(Contd..)
* Introduced 8 a.m. to 8 p.m. and 7 day
Banking in select branches to extend the
Service hours to clientele.
* Opened a Representative Office in Dubai
to coordinate with NRIs for increasing
our NRI customer base.
* Imparting training to Agriculturists, Rural Unemployed youth on vocational courses by our 9
Rural Development Institutes
67

Andhra Bank

Business channels
As on

Branches

ECs

ATMs

Total

113

Satellite
Offices
44

31.03.03

1100

220

1477

31.03.04

1128

129

44

272

1573

31.03.05

1168

136

38

330

1672

31.03.06

1213

123

37

391

1764

Bank has presence in 21 States and 2 Union Territories.

68

ICICI Banks strategy to capture

retail potential
Strong corporate
relationships

Achieving
leadership in
retail financial
services

the core of this strategy

is our relentless focus on
the customer and crossselling of products

Brand

Technology

Operational
excellence
69

Catalyzing cross-sell

Internet Banking

Call Centers

500 Outlets

1005 ATMs

Customized cross-selling
by leveraging relationships, brand and
technology

Fixed deposits

Bonds

Life insurance

Health insurance

Power Pay

Consumer loans

Auto & home

loans

Credit & debit

cards
70

Operational excellence
Prudent credit policies

Bolstered by a
company wide 6
sigma initiative

Adequate fraud control

Rigorous collection
mechanism

These measures have ensured that we have followed a

cautious approach while maintaining high growth rates
and profitability in all segments
71

Benchmarking (contd.)
Consumer loans / Total loans

Mortgages / GDP

37.0%

58.0%
USA - 51%

36.0%
26.0%
8.0%

9.0%

13.0%

13.0%

17.0%

1.0%

India
India Thailand
Thailand

Malaysia
Taiwan
M alaysia
Taiw
an

Korea
Korea

India
India

Thailand
Thailand

Korea
M alaysia
Taiw an
Korea
Malaysia
Taiwan

Other retail loans / GDP

Credit cards / Population

41.0%

121.9%
82.4%

USA - 235%

USA - 24%
16.0%

0.4%

India
India

2.8%

Thailand
Thailand

8.0%

9.8%

Malaysia
Taiwan
M alaysia
Taiw an

17.0%

0.8%

Korea
Korea

India
India

Thailand
Taiw an
Thailand
Taiwan

M alaysia
Malaysia

Korea
Korea

Source: Salomon Smith Barney

Indias retail market is at a nascent stage and is expected

to grow rapidly on account of the current trend in upward
migration of household income levels
72

Household segment migration

No. of households
(million)
CAGR 48%

22.9

6.8

2.1

1996
Rich (> Rs. 0.5 mn p.a.)
Mass (Rs. 0.1-0.3 mn p.a.)

1999

2002

Mass affluent (Rs. 0.3-0.5 mn p.a.)

Source: 1996, 1999 data is from NCAER study for top 24

cities, 2002 data is estimated by ICICI Bank

73

Distribution Strategy

Building
Distribution

74

 After interest rates have hardened to 14%

(floating) and 12%(fixed) in 2006-07, it has
cooled the surge in retail bank loans.
average tenors increased from 150 months
in 2001 to 173 months in 2006.
In growth phase and competition, lending
norms were eased and riskier borrowers
mopped up thus possibility of higher NPAs
is there. (CRISIL)
ate 90s

75

 Liberalization, economic growth, changing

demographics, and technological advancements
have fueled the growth of retail banking in India.
The product range in retail banking includes four
broad categories: liability products, asset products,
credit cards/debit cards, and investment products.
Liability products include savings accounts, nofrills accounts, current accounts, fixed
deposit/term deposits, and recurring deposits.
Asset products include all kinds of retail loans,
such as housing loans, personal loans, education
loans, gold loans, loans to senior citizens, property
and mortgage loans, vehicle loans, and agricultural
loans. The investment products include
investments in mutual funds, insurance policies,
and pension plans. These are discussed in
subsequent chapters.
76

Indian Banking Sector

Banking in India has its origin as early as the vedic period. It is believed that
the transistion from money lending to banking must have occurred even before
Manu, the great Hindu Jurist, who has devoted a section of his work to
deposits and advances and laid down rules relating to rates of interest. During
the Mogul period, the indegenous bankers played a very important role in
lending money and financing foreign trade and commerce. During the days of
the East India Company, it was the turn of the agency houses to carry on the
banking business. The General Bank of India was the first Joint Stock Bank to
be established in the year 1786. The others which followed were the Bank of
Hindustan and the Bengal Bank. The Bank of Hindustan is reported to have
continued till 1906 while the other two failed in the meantime. In the first half
of the 19th century the East India Company established three banks; the Bank
of Bengal in 1809, the Bank of Bombay in 1840 and the Bank of Madras in
1843. These three banks also known as Presidency Banks, were independent
units and functioned well. These three banks were amalgamated in 1920 and a
new bank, the Imperial Bank of India was established on 27th January 1921.
With the passing of the State Bank of India Act in 1955 the undertaking of the
Imperial Bank of India was taken over by the newly constituted State Bank of
India. The Reserve Bank which is the Central Bank was created in 1935 by
passing Reserve Bank of India Act 1934. In the wake of the Swadeshi
Movement, a number of banks with Indian management were established in
the country namely, Punjab National Bank Ltd, Bank of India Ltd, Canara
Bank Ltd, Indian Bank Ltd, the Bank of Baroda Ltd, the Central Bank of India
Ltd. On July 19, 1969, 14 major banks of the country were nationalised and in
15th April 1980 six more commercial private sector banks were also taken
over by the government. Today the commercial banking system in India may
be distinguished into :
77

 As the bargaining power of a retail customer

is less than that of a corporate customer,
banks tend to charge the same price/interest
rate for all retail customers, with the
exception of high-value segments (HNIs and
NRIs).
Banks set the price for liability products,
without the interference of the RBI.
Asset products are priced based on the prime
lending rates set by banks for each asset
category. Overt pricing and covert pricing
are the two different approaches to pricing. 78

 The promotion of retail banking products is

done through various avenues of promotion,
such as advertising, sales promotion,
personal selling, brand building, public
relations, telemarketing, direct sales, and
direct-response advertising.
The common distribution channels in retail
banking are branches, ATMs, the Internet, 79
phone banking, and mobile banking,

Rural banking: A new growth opportunity

Opportunities for growth

Though agriculture constitutes only 20% of Indias GDP,
rural economy (agri + non-agri) constitutes about 50% of
GDP1

Rural population of about 780 million2 with limited access to

financial services

Population per bank branch: 22,793

Informal credit in India amounts to US$ 82bn3

A high proportion of agricultural lending is from informal sources3

1. Source: CERG (Consumer & Economic Research Group)
2. Source: Tata Statistical Outline
3. Source: Mckinsey Global Institute May 2006
80

However, banking in rural India is challenging

Special needs

Doorstep banking
Flexibility in timings
Low value and high volume of transactions
Limited background information and proof of
income
Require simple processes with minimum
documentation

81

 Conventional banking not suited to meet

these demands
High costs of delivery through traditional
channels
High transaction costs
Dependence on documentation and financial
history
Inflexible procedures

82

and requires a comprehensive approach

Multiple products
Low-income customers require full range of
services: credit, transaction banking, investment
and risk mitigation

Multiple channels
Branches at selected locations
Franchisees, internet kiosks, MFI partners

Deep penetration of the market

Using a combination of channels to completely
cover selected areas

Rapid-scale up
To reduce average operating costs
83

Consumption drivers
2000: Per capita
GDP US$ 500

Middle and high

35%
income
growth
population 260 mn1

2007: Per capita

GDP US$ 1,000

2015: Per capita

GDP US$ 1,500

Middle and high

70%
income
growth
population 350 mn1

Middle and high

income
population 600 mn1

From per capita GDP of US$ 1,000 to US$ 1,500:

consuming population to grow manifold

Middle income: Rs. 90,000 (US$ 2,250)-Rs. 500,000

(US$ 12,500) per household
High income: > Rs. 500,000 (US$ 12,500) per household
Source: NCAER
84

 List of State Bank of India and

its subsidiary,

State Bank of Patiala

State Bank of Bikaner and Jaipur
State Bank of Hyderabad
State Bank of Indore
(merged with SBI in 2010)
State Bank of Mysore
State Bank of Saurashtra
State Bank of Travancore

85

Old Generation Pvt

Sector Banks

New Generation Pvt

Sector Banks

1. Bank of Rajasthan Ltd.

2. ING Vysya Bank Ltd.
3. Dhanalakshmi Bank Ltd.
4. Federal Bank Ltd
5. Jammu and Kashmir
Bank Ltd.6 Karnataka Bank Ltd. 7. Karur Vysya Bank Ltd.8. Ratnakar Bank Ltd.
9. South Indian Bank Ltd.

1.
2.
3
4.
5.

ICICI Bank.
HDFC Bank
IndusInd Bank Ltd.
Axis Bank
Development Credit
Bank
6. Kotak Mahindra Bank
7. Yes Bank

86

87

Commercial Banks are functioning on

commercial basis with profit motive
Top Performing Public Sector Banks
State Bank of India
Bank of Baroda
Canara Bank
Union Bank of India
Punjab National Bank United Bank of India
Allahabad Bank
UCO Bank
Bank Of India
Vijaya Bank
Dena Bank
Bank of Maharashtra
Central Bank of India Indian Bank
Panjab and Sind Bank Indian Overseas Bank
Andhra Bank
Oriental bank of Commerce
Corporation Bank
Syndicate Bank
88