Banks are a prominent and vital part of the financial system in India. They are one of the biggest contributors to the growth of the economy and development of the country. Retail banking is one of the most elemental components of the commercial banking system and is of utmost importance to the general public. It is a rising trend that is considered to be a marvelous innovation in the banking sector. Emerging economies like India have benefitted spectacularly due to this emerging trend of retail lending. The ever-evolving technology is one of the main reasons for the growth of this sector.
What is Retail Banking?
Retail Banking is also termed as consumer banking. As the name suggests, it is a part of the commercial banking system associated with the general public and individual customers. Retail banking systems aim to provide banking services like checking accounts, opening accounts, savings accounts, loans, debit cards, and more to the citizens. This system targets members of the general public and their personal needs of handling money. It excludes companies, businesses, and corporations which may need more complex banking solutions.
For most of the people, banks are simply a reference to retail banking services like savings, transactions, mortgages, debit cards, credit cards and more. In India, this may not be a new phenomenon, but changes in customer demographics and technological growth have made this an integral part of day-to-day functioning. Retail banking takes place at local branches of commercial banks. It must be noted that it could simply be a department of a bank that handles individuals’ general needs of saving and spending money.
Origin and History of Banking in India
The origin of banking activities in India can be traced back to the Vedic period of ancient India. At the time, money lending and borrowing were a few forms of banking activities. Manusmriti, an ancient legal text, has mentioned about money lending and rules regarding rates of interest.
In Modern India, banking systems emerged in the latter part of the 17th century. One of the first banks to be opened in the pre-independence India were Bank of Hindustan and General Bank of India. Amidst the revolutions and revolts between pre-independence and post-independence, the largest and the oldest bank that still remains strong is the State Bank of India. SBI started as Bank of Calcutta in 1806. The name was later changed to Bank of Bengal. It was one of the three banks that were opened by the presidency government ruling at that time. Bank of Bombay and Bank of Madras were the other two banks that were launched by the presidency government. After Independence, all of them were merged into State Bank of India in 1955.
In the 19th century, several banks were formed across the country. However, many of these were dissolved due to unorganized management. Reserve Bank of India was founded in 1935 to tackle the economic issues after the First World War. It was only after the independence, RBI became the central banking authority of India in 1949 under the Banking Regulation Act that empowered RBI to regulate, control and inspect the banks of India.
The 1960s witnessed the first wave of nationalization of some of the 14 largest commercial banks. The 1980s saw the second wave wherein 6 more banks were nationalized. Things began to change during the liberalization in the 1990s. Under the influence of liberalization, the government provided a license to a few private banks like UTI (Axis Bank), ICICI, HDFC, and Oriental Bank of Commerce. The markets were now opened to International banks. These banks were known as new age banks, using tech-savvy methods to function. This shook the banking system of India.
Meanwhile, India was preparing for the IT revolution that took the banking sector by a storm. This created a need for Private and Public sector banks to adopt the Core Banking system, which led to organized and comprehensive computerization of banking operations. Moving forward, the 90s witnessed the adoption of modern payment systems, securities settlement, cheque clearing, Electronic Funds Transfer, Cheque Truncation System, installation of Automated Teller Machines and other modern methods of banking.
By 2018, India had 21 public sector banks. 19 of which are nationalized; and 40 private sector banks, 31 State Co-operative banks, and 45 foreign banks.
Functions of Retail Banking
While retail banking in different forms has existed for a long time, it is a relatively new concept. Over the period of time, it has emerged as an important component of traditional and modern banking systems and an important market segment. In simple terms, retail banking takes care of all banking needs of individual customers. There are three primary functions of consumer banking. Firstly, banks offer to deposit money for savings accounts, recurring deposit accounts, fixed deposit accounts, and other financial services to safely secure the capital for the general public. Secondly, it offers credit in terms of interest earned on saving money and loans and mortgage. Thirdly, retail banks assist consumers in handling their money and managing their money through various retail banking solutions and services. These kinds of services help the customers in their financial matters and daily transactions.
Types of Retail Banks
These banks are often termed as people’s banks as they cater to the needs of the general public. It is sometimes also referred to as personal banking or mass-market banking. Commonly, large commercial banks have local branches to meet various objectives of retail banking. Some common types of retail banks are:
- Commercial Banks: Also known as banks in general. However, this category excludes investment banks and financial institutions. They help their clients through various banking services like personal banking, business banking, online banking, financial services, and lending and borrowing.
- Regional Rural Banks: RRBs are also known Gramin Banks, which have been established at a regional level in various states of India to cater to low-income groups or people residing in regional areas. These banks offer regular retail banking services and also include loans and mortgages.
- Private Banks: These are usually the banks that operate in urban areas and cater to moderate to high level income groups.
- Post Offices: In regions where people do not have access to regular banks, the National Postal System offered basic banking services like account opening, savings, recurring deposits, and more. For developing countries, this is a convenient and secure mode of banking in areas where underdeveloped sections of society cannot reach the bank.
Retail Banking Services Offered by Banks
The advent of banking technology has seen a dramatic transformation in the functioning and operations of retail banking in India. The banks have adopted the latest technology to reach out to clients, fulfill their needs and expectations, learn customer behavior, increase productivity, staff efficiency, increase sales and manage money. Various retail banking services provided by banks include a range of financial products that can be classified as retail deposit products, loan services, and payment services. Following are a few retail banking solutions and services offered by banks to its consumers.
- Savings Bank Accounts: This is a type of bank account that customers can open at a bank, providing retail banking services to deposit money and obtain interest on it.
- Current Account: Some other terms used to refer to this type of bank account at a retail bank are: checking account, transaction account, and demand deposit account. It is made available to the account holder as per their demand. The account holder can also make frequent transactions through it.
- Debit Card: It is a plastic payment card that is used instead of cash to make payments at ATMs and other places. Most of the banks provide this card for each current or savings account.
- Credit Card: Just like debit cards, this is a plastic card to make payments instead of cash. Banks allow cardholders to make the payments on credit with a promise to pay the bank the amount spent and agreed on additional charges.
- ATM Cards: These cards are restricted to withdraw and do other transactions at ATM.
Some other products offered by retail banks to the individuals include term deposit account, fixed deposit, recurring deposit account, zero balance salary accounts, and savings account for senior citizens at a higher rate of interest.
- Loans: Banks lend money to their customers for various purposes. Loans in India through retail banks include home loans, auto loans for new/used vehicles, consumer loans, education loans, crop loans to farmers, business loans for small scale businesses.
Apart from the above mentioned features of retail banking, banks allow their clients to avail safe deposit lockers for safekeeping of their valuables at annual charges. Funds transfer, NEFT, RTGS, Core Banking Solutions, Internet banking, mobile banking, information system, electronic clearings service, cheque clearance, remittances, payment settlement and more are some other important services provided by retail banks. Retail banking is a classic example of technological revolution changing the banking system.
Advantages of Retail Banking
Retail banking is an alternative for banks as well as individual customers. The importance of retail banking stresses the advantages of services offered by banks. Unlike corporate banking, retail banking concentrates on small units and individuals for earnings. Over the years, it has proven to have increased earnings and businesses for banks. It has reduced operational costs and has helped banks in establishing a brand image in the market among the general public. In addition, banks have developed customer relationship with their clients. This has increased and strengthened the customer base.
The retail sector is a large contributor to the revenue earned by banks as well as economic development. It reduces the risk for banks if they depend on loans for their incomes. Additionally, it provides a safe way to keep your savings and capital secure.
Retail Banking Trends in India
In the past 10 years, the banking industry has undergone a major evolution. Due to the rise of competition, the IT revolution, emergence of Fintech and non-financial services, and changing customer demographics and expectations have prompted banks to adopt new strategies and techniques. Banks are moving towards the digital transformation that offers better customer experience, reduction in operating costs and lower cost for banking transactions. Meanwhile, internet banking and mobile banking are the most rapidly emerging trends in the retail banking sector. Technological innovation has made banking easy and convenient. This trend is predicted to result in a drop in bank visits drastically in the coming years. Use of artificial intelligence and voice assistants to deliver personalized and contextualized services are technologically-forward innovations expected to change banking systems. Adoption of biometrics authentication and KYC systems are a few changing trends that are expected to lower risks of fraud and fraudulent activities.
The Scope of Retail Banking in India
As mentioned, retail banking has numerous advantages. This is one of the reasons why it is a huge success for banks and customers. Today, it is an attractive banking segment that has drawn immense attention from investors and accelerators. Technology is constantly evolving that makes the future of retail banking in India uncertain. Digital transformation is just the beginning, there is much more in the pipeline that is about to change the business of money.