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| Kathmandu, Wednesday July 02, 2003 Ashadh 18, 2060. |
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Shifting focus on retail
banking
By L D MAHAT
Deregulation in the banking sector has forced
the banks to focus on cost reduction; improving the speed and quality of service to face
stiff competition and enormous challenges. Entry of more number of banks in the market has
created intense competition in the banking industry. This has led the banks to operate
under thin interest spreads, declining margins and rising costs. This was not the case
until two years ago. Banks were getting a lot of business because of expansion in the
economy. Consumer finance was not a favored subject for them. They were keen to finance
industrial and trading activities.
However, with slowdown in the economic
activities in the recent past, banks became selective in their lending operations as
lending to industrial and trading activities as working capital and term loan
requirements. Because of uncertainty in the economic environment, banks diverted their
resources to a new area called retail lending. Retail banking refers to the mobilization
of deposits by the banks mainly from individuals and lending to small business and in
retail loan markets. Retail banking consists of large volume of low value transactions.
Retail banking liabilities are mostly related to various types of deposits accounts and
the loan portfolio is dominated by the consumer loans.
Banks are now trying to reduce their risks by
diversifying their portfolio and having a thrust on short-term retail earnings rather than
blocking funds in riskier medium and long-term loans. Some banks developed consumer
finance and housing finance product to attract rich middle class people and the people
having fixed source of income and increase lending business. Consumer finance by the banks
can also help in minimising the disintermediation taking place in the form of consumer
finance offered by the consumer durable companies. Consumer and housing finance not only
helps in effective deployment of surplus funds but also diversifies the risk in the
portfolio due to large scale of operations. In the present competitive banking
environment, differentiated products are an effective method of gaining competitive
advantage.
Retail banking requires a moderate level of
customer relation. While most of the banks offer the same range of service with similar
technology, the level of customer service matters the most in bringing in more business.
Dedicated, highly professional junior and middle management supported by senior management
could contribute to the success of retail banks. In retail banking, each product to be
offered to the customers needs to be well defined, easily serviceable and potentially
profitable.
Retail banking is undergoing a
transformation. In the past, conservative savers who were content with moderate-yield,
low-cost savings deposits, dominated retail banking. However, attitudes and needs of the
people are changing now. The new generation of savers prefer to invest to build wealth
rather than save to protect wealth, demand exceptionally high levels of convenience,
expect better work technology, require information and advise that can be acted on, and
prefer a wide range of alternative products. They are highly individualistic and require
individualized solutions to what they perceive to be individual needs.
Customer service is one of the most important
dimensions of retail banking. Public sector banks compare very poorly with the private
sector banks when if comes to the efficiency in services. In order to improve the speed of
service the bank should improve the rapport between the controlling offices and the
branches to ensure that decisions are communicated fast; and make sure that the officials
as well as the staff ore fully amore of the rules so that processing is faster.
While information technology has contributed
to major upheaval in wholesale banking, its impact on retail banking has been relatively
limited. Corporate clients are more familiar with automated environments, which will
facilitate more automation and creation of paperless office. Technology-based delivery
channels such as automated teller machines (ATMs) did not fundamentally change competitive
position among banks, based on the density of traditional branch networks. So far,
Internet banking has not modified this relationship. While the number of banks with
Internet sites and offering Internet-based services is growing rapidly, it represents a
limited portion of banking transactions.
Retail banking was viewed primarily as a cost
centre and source of low cost deposit. But, these days, retail banking represents a major
source of competitive strength for the banking industry, as it is a point of direct
customers contact. Retail services are uniquely positioned to help banks develop strong
long-term relationship with targeted customers and thus differentiate themselves from
competitors. Banks look up to retail lending as a possible avenue to augment business in
the current context. Consumer financing appears to be a viable alternative to cope with
poor credit off takes.
Consumer financing encompasses extension of
loans for consumer durable goods, education loans, finance for travel, medical expenses
etc. Demand for loans for acquisition of TV, fridge, washing machine, air-conditioners,
etc., is on the rise. Banks also offer loans through tie-ups with manufacturer or
distributors of such products. Some of the factors that contribute to the growth of auto
finance are lower interest rates, poor public transport system, increasing income levels
of the people, and availability of finance for even second-hand cars. In fact on account
of liberal financing by banks, import of passenger cars, motorcycles and scooters, has
registered good growth.
Housing finance is another area which seems
to be most promising in the near future due to fall in interest rates, increase in the
salary level, changes in lifestyle, offer of various incentives in the form of lower
processing and administrative charges. There is stiff competition in the matter of
interest rates and rate cuts are announced at frequent intervals.
In retail banking, one of the major problems faced by the
banks is the queue problem. The size of queuing will differ from hour to hour and day to
day. To overcome this obstacle, banks must ensure that adequate staff is available to man
all the branches. With the aid of technology banks can provide ensure faster and efficient
customer service. Proper management information system can also be implemented to aid in
superior decision-making.
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