INSTITUTE OF MANAGMENT STUDIES, DAVV, INDORE
FINANCE AND ADMINISTRATION – SEMESTER IV
CREDIT MANAGEMENT AND RETAIL BANKING
Business Models adopted by banks for Retail Banking
Banks follow different approach for their Retail banking activities.
They adopt different models depending on importance attached to retail banking in their
overall corporate business strategies and business projections over the years for retail
banking.
Models adopted by PSBs, Private and Foreign banks are different due to approach, which
are as under:
- Strategic Business unit (SBU) approach
- Departmental approach
- Integrated approach ( part of overall business plan)
Public Sector Banks in India generally have adopted Departmental approach as business
model immaterial of their balance sheet size or geography.
New Generation Pvt. Sector banks the business model is very clear, had set up Strategic
Business unit (SBU) to have clear focus and business objective.
In old generation pvt. Sector banks, approach is more conservative and the business model
for retail is part of overall business plan.
In Foreign banks also SBU is the business model with well defined business focus.
The demarcation in SBU is more a Management by Objective (MBO) process where
business strategy is adopted to achieve targeted profit.
Business Models
Banks generally structure their retail banking model on positioning platform and to be the
best or at least top three among peer group players or across players.
PSBs generally adopt strategies as part of overall strategies based on business mix,
projections, and corporate objectives and want to be in top 3 in the peer group.
In old generation private banks, positioning platform is based on overall business plan in
line with their size and scale. But a bank in Tamil Nadu will like to position him as top 3 in
south based banks.
New generation private banks have clear vision. They want to be in the top slot across all
class of banks.
Advantages to these new generation pvt. Banks are –
- Better Technology
- Strategy
- Customer and business initiative
- Aggressive positioning
- They are clear about where they want to be in next 2/3 years, put suitable plans and
take action to achieve the goals.
Foreign Banks generally do not go by positioning objectives but have purely business
objectives.
They go by customer, business and profit arising from it.
The classic example is BNP Paribas which entered the retail segment very aggressively
during late 1990s but quit the space when they found that it was profitable to them after
some time.
American Express came out from the credit card business.
ABN Amro Bank entered the retail market in mid 1990s are still in market and are building
up retail banking franchise. They are also tough competitor to others in credit card as well.
Implementation Models
Banks adopt different models for implementation of retail banking.
Most common strategies are:
- End to end outsourcing
- Predominantly outsourcing
- Partial outsourcing
- In house sourcing
Model depends on
- Product range
- Process requirement
- Technology preparedness
- Delivery capabilities including human resource
- Regulatory requirements
Most of the Public Sector banks use in house resources except for some activities like
ATM/ Credit card etc. In which issue part is outsourced due to lack of in house technical
requirements.
In Old Generation Pvt. Sector banks – mostly in house on same patter as Public sector
banks are adopting.
In New Generation Pvt. Sector banks – model is balanced mix of outsourcing and in
house, outsourcing favoured much.
In Foreign Banks model is mostly outsourced, both back end and front end.
In some banks asset side is outsourced whereas liability side is in house, with the help of
central processing.
PRODUCT MODELS IN RETAIL BANKING
Liability Products:
Liability products offered by banks fall basically under three types – Current account,
Savings account, Recurring account and Term Deposits.
Asset products
Retail asset financing is major component of retail banking model of most banks. It has
become backbone of revenue stream.
Standard retail asset products are – Housing loan, Consumer durable loans, Vehicle loans
(car and two wheelers), Personal loans and credit card.
Other Products & Services
Credit cards, Debit Cards and ATM – offered by most of the banks.
Telephone Banking – mostly phone answering machines for general query.
Mobile Banking and Internet Banking – offered by most of the banks.
Depository service – now started offering by many banks.
Distribution of third party products like life and non life policies.
Opening Demat account and offering Mutual fund services.
Retail sale of gold coins by few banks.
Bill payment services, payment gateway for rail, air ticket booking
Wealth Management services, portfolio management services and private banking offered
by few banks.
All these services are offered with twin objectives of customer satisfaction, as well as
augment fee based income.
Revenue model from these fee based income sources is as high as 50% of total revenue in
some Pvt. Sector banks.
New generation Pvt. Banks and foreign banks offer complete bouquet of all above products
and services.
Technology models
Technology is the backbone of process and delivery now a day.
Most PSBs primarily depend on in house models and partial outsourcing, private banks use
more of outsourcing and foreign banks uses predominantly outsource models.
Most of the PSBs have now implemented Core Banking Solution (CBS) system, starting
from standalone ALPM machines.
PRODUCT DEVELOPMENT IN RETAIL BANKING
Public sector banks generally develop products in houses based on research, their
experience or market dynamics. Products can be plain vanilla or hybrid incorporating best
features of different products
Different methods adopted can be:
Purely on market conditions – bank make survey of the market and develop product for
doctors, lawyers, professionals, or Laghu Udhyami Credit Card (LUCC) for SME to
mortgage loan for shops in shopping mall. KCC or loan against WHR for agriculturist.
Follow the leader approach – big banks like SBI or ICICI/ HDFC design product after lot
of research in market, and small banks/ Co-operative banks follow schemes prepared by
these banks with minor changes as per their client requirements.
Top management instructions – products are developed according to wish of the top
bosses or their perception about the product, without sufficient market study.
Customer segmentation – NRI, HNI, Mass affluent, salaried people etc.
Products are also developed by many banks depending on type of branch, like special
housing banks, retail branches in residential areas, commercial branches or branches with
forex business.
Outsourcing – normally for technology products like ATM, net banking, mobile banking etc.
Kiosk for financial inclusion. Tie up for insurance products.
PROCESS MODELS FOR PRODUCTS AND SERVICES
Three types of approaches are adopted:
- Entire processing is done through in-house resources.
- Some products processed in-house and some for process is outsourced.
- Outsourcing is done for entire process.
PSBs and old generation Pvt. Sector banks entire process is done through in-house
resources and few outsourced.
In New generation Pvt. Sector banks outsourcing is attempted partially for some process
areas.
Foreign banks are predominantly using outsourcing models. They have dedicated back
office for entire gamut of retail banking.
Common form of process models are now Centralized Retail Asset Processing Centre,
where all the retail loans sourced by branches or through marketing teams are processed at
a single point. This may be for only housing depending on availability of loan proposals at
the centre.
Model for processing liability products is different in different banks. Some banks follow
centralized model eg. Saving bank account opening form and KYC compliance is done/
sourced at branches and rest of the process i.e. opening the account, issue of cheque
book, ATM, net banking etc. done at single centralized point. Traditionally in PSBs all the
liability products were processed at branches only.
Process time is major differentiator for retail banking operations. Process time is business
sensitive as well as customer sensitive.
Most of the banks have therefore, prescribed process time for different products ranging
from 7 days to 15 days. TAT – Turn Around time.
Business Process structure
Boston Consulting group classified process model in four categories:
- Horizontally Organised Model
- Vertically Organised Model
- Predominantly Vertically Organised Model
- Predominantly Horizontally Organised Model
Horizontal or Vertical Model depends on level of customer information available in single
platform in the data base for offering multiple product/ service across asset, liability or other
services.
In Horizontally organised model is a structure using different process model for different
products offering end to end solution product wise. Generally accepted by most PSBs.
In Vertically organised model provide functionality across products with centralised
customer data base used across all products. Adopted generally by new Pvt. Sector banks.
Foreign banks adopt mostly predominantly vertically organised model which implies that
retail banking initiatives are attempted with common customer information across products.
Business Approach (Domain specific) in Retail Banking
Most common approach are as follows:
Segmental Approach – where branches are classified based on business potential for
focussed marketing strategy. Branches can be classified as Resource centre, Profit centre,
Priority centres and General Centres to have clear business focus.
Geography based approach – retail models built based on geographies.
Classification based approach - based on type of branch like Rural, Semi urban, urban and
Metro. Products are designed for specific type of branch.
Prepared by :
Arvind Paranjape, M.Sc. CAIIB
[email protected]
9425067026
