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BANKING IN INDIA.
A Dissertation submitted to the nexus integrated school of
management, Berhampur, in partial fulfillment of the Degree
of
SUBMITTED BY
ASISH PATTNAIK
Roll.No:-MF3010
Regd.No:-12467/06
DECLARATION
Date :
Place:
ACKNWOLEDGEMENT
Date :
Place:
RETAIL BANKING
INTRODUCTION:Retail banking is, however, quite broad in nature - it refers to
the
dealing of commercial banks with individual customers, both on
liabilities and assets sides of the balance sheet. Fixed, current /
savings accounts on the liabilities side; and mortgages, loans (e.g.,
personal, housing, auto, and educational) on the assets side, are the
more important of the products offered by banks. Related ancillary
services include credit cards, or depository services. Retail banking
refers to provision of banking services to individuals and small
business where the financial institutions are dealing with large
number of low value transactions. This is in contrast to wholesale
banking where the customers are large, often multinational
companies, governments and government enterprise, and the
financial institution deal in small numbers of high value transactions. The
concept is not new to banks but is now viewed as an important and attractive
market segment that offers opportunities for growth and profits. Retail banking
and retail lending are often used as synonyms but in fact, the later is just the part
of retail banking. In retail banking all the needs of individual customers are taken
care of in a well-integrated manner.
Todays retail banking sector is characterized by three basic
characteristics:
Multiple products (deposits, credit cards, insurance, investments
and
securities)
DEFINITION:
Retail banking is typical mass-market banking where
individual customers use local branches of larger commercial
banks. Services offered include: savings and checking accounts,
mortgages, personal loans, debit cards, credit cards, and so
The Retail Banking environment today is changing fast. The changing
customer demographics demands to create a differentiated
application based on scalable technology, improved service and
banking convenience. Higher penetration of technology and increase
in global literacy levels has set up the expectations of the customer
higher than never before. Increasing use of modern technology has
further enhanced reach and accessibility.
The market today gives us a challenge to provide multiple and innovative
contemporary services to the customer through a consolidated window as so to
ensure that the banks customer gets Uniformity and Consistency of service
delivery across time and at every touch point across all channels. The pace of
innovation is accelerating and security threat has become prime of all electronic
transactions. High cost structure rendering mass-market servicing is prohibitively
expensive.Present day tech-savvy bankers are now more looking at reduction in
their operating costs by adopting scalable and secure technology thereby
reducing the response time to their customers so as to improve their client base
and economies of scale.
The solution lies to market demands and challenges lies in innovation of new
offering with minimum dependence on branches a multi-channel bank and to
eliminate the disadvantage of an inadequate branch network. Generation of leads
to cross sell and creating additional revenues with utmost customer satisfaction
has become focal point worldwide for the success
ORIGIN OF BANKING:Banks are among the main participants of the financial system in India.
Banking offers several facilities and opportunities.
Banks in India were started on the British pattern in the beginning of the
19thcentury. The first half of the 19thcentury, The East India Company
established 3 banks The Bank of Bengal, The Bank of Bombay and The Bank of
Madras. These three banks were known as Presidency Banks. In 1920 these
three banks were amalgamated and The Imperial Bank of Indiawas formed. In
those days, all the banks were joint stock banks and a large number of them
were small and weak. At the time of the 2nd world
war about 1500 joint stock banks were operating in Indiaout of which 1400 were
non- scheduled banks. Bad and dishonest management managed quiet a quiet a
few of them and there were a number of bank failures. Hence the government
had to step in and the Banking Companys Act (subsequently named as the
Banking Regulation Act) was enacted which led to the elimination of the weak
banks that were not in a position to fulfil the various requirements of the Act. In
order to strengthen their weak units and review public confidence in the banking
system, a new section 45 was enacted in the Banking Regulation Act in the year
1960, empowering the Government of India to compulsory amalgamate weak
units with the stronger ones on the recommendation of the RBI. Today banks are
broadly classified into 2 groups namely
(a) Scheduled banks.
(b) Non-Scheduled banks.
Traditional lending to the corporate are slow moving along with high
NPA risk, treasure profits are now loosing importance hence Retail Banking is
now an alternative available for the banks for increasing their earnings. Retail
Banking
is
BANKING:-
ADVANTAGES :
Retail banking has inherent advantages outweighing certain
disadvantages. Advantages are analyzed from the resource angle
and asset angle.
RESOURCE SIDE
Retail deposits are stable and constitute core deposits.
They are interest insensitive and less bargaining for
additional
interest.
They constitute low cost funds for the banks.
Effective customer relationship management with the
retail customers
built a strong customer base.
Retail banking increases the subsidiary business of the
banks.
ASSETS SIDE
Retail banking results in better yield and improved bottom
line for a
bank.
Retail segment is a good avenue for funds deployment.
Consumer loans are presumed to be of lower risk and
NPA
perception.
Helps economic revival of the nation through increased
production
activity.
Improves lifestyle and fulfils aspirations of the people
through
affordable credit.
Innovative product development credit.
Retail banking involves minimum marketing efforts in a
demand
driven economy.
Diversified portfolio due to huge customer base enables
bank to
reduce their dependence on few or single borrower
Banks can earn good profits by providing non fund based
or fee
based services without deploying their funds.
funds etc.
Though banks are investing heavily in technology, they
are not able
to exploit the same to the full extent.
A major disadvantage is monitoring and follow up of
huge volume of
loan accounts inducing banks to spend heavily in human
resource
department.
Long term loans like housing loan due to its long
repayment term in
the absence of proper follow-up, can become NPAs.
very low as
Emergeamajor
driver.
Outsourcing of requirements would not only save cost and time but
would help the banks in concentrating on the core business area.
Banks can devote more time for marketing, customer service and
brand building. For example, Management of ATMs can be
outsourced. This will save the banks from dealing with the intricacies
of technology.
Tie-up arrangements
PSBs with regional concentration can reap the benefit of reaching
customers across the country by entering into strategic alliance with
other such banks with intensive presence in other regions. In the
present regime of falling interest and stiff competition, banks are
aware that it is finally the retail banking which will enable them to hold
the head above water. Hence, banks should make all out efforts to
boost the retail banking by recognizing the needs of the customers. It
is essential that banks would be imaginative in predicting the
customers' expectations in the ever-changing tastes and
environments. It is the innovative and competitive products coupled
with high quality care for clients will only hold the key to success in
this area. In short, bankers have to run very fast even to stay where
they are now. It is the survival of the fastest now and not only survival
of the fittest.
Technological support
This is yet another vital requirement. Retail credit is highly
technological intensive in nature, because of large volumes of
business, the need to provide instantaneous service to the customer
large, faster processing, maintaining database, etc.
A new report by the Boston Consulting Group looks at how the financial crisis will
affect the finance industry. It predicts that retail banking will become more customerfocused.
In its report "Creating value in banking 2009: Living with new realities", the Boston
Consulting Group looks at how the crisis will affect banks' business models.
It summarises the realities that will change the face of the industry:
Reestablishment of the universal-banking models primacy. These banks are built on
strong customer relationships and funded predominantly from their own deposit base.
The competition for deposits has already intensified.
Banks will become more focused. Large banks will still exist but they are likely to be
multilocal institutions rather than wide-ranging, highly complex global titans.
Banks will focus on their customers and not on products. Advice will need to be more
meaningful and relevant. Operations will need to be more responsive to customers.
In summary, these new realities will force many banks to refocus on core businesses.
As a result of these new realities, the Boston Consulting Group expects financial institutions
to rein in their ambitions and concentrate on the businesses they know best and focusing on
their role as financial intermediaries. Several different business models are expected to
emerge:
A group of large, vertically integrated banks will carve out top five positions in multiple
markets. But this will constrain their geographic reach with the majority of their revenues
coming from retail and commercial banking.
Emerging market champions
A few banks will continue to build meaningful positions in emerging markets (e.g. Brazil,
Russia, India, and China as well as Central and Eastern Europe). Their strategy will be
based on a long-term plan for building a competitive presence in these markets.
Global specialists
Some institutions, particularly investment banks, private banks, securities servicers, and
asset managers, will focus on a set of core businesses that give them leading positions in
markets around the world.
According to this report, there will be no room for global banking titans as they existed
before the crisis. Their size was actually a disadvantage as it made them too complex to
manage.
In summary, large banks will still exist but they will be multilocal rather than global
and they will concentrate on a smaller set of activities and probably a more limited
number of markets. Their business models will be consistent from country to country.
The report also looks more closely at different types of financial institutions, including retail
banks.
In the short term, it predicts that the performance of retail banks will suffer dramatically and
margins will shrink. These will face serious funding and profit challenges. To confront these
problems, they must go back to the basics of the business: assets, deposits, and branches.
As a result, it is expected that the battle for deposits will largely determine the winners and
losers in many markets.
With low bank fees for individual transactions and relatively small bank deposits, the
opportunity cost in terms of interest income for customers is not material where the
deposits are not large.
Banks offer convenience and choice and the web-based channels of banks have
reported rapid growth in the number of customers by retaining current customers.
According to moodys a survey indicated that 35 per cent of Internet banking
customer disconnect because they dont find it convenient.
Customers prefer to use a variety of channels to conduct their banking which is why
it remains to be seen whether a business model based solely on internet banking will
generate adequate returns and sustain long term competition against conventional
banking systems.
The advent of the internet could, however have a powerful effect on banks
acquisition strategies by creating uncertainty about the value of purchasing large
branch networks, the study says.
For some banks, however, the Internet could facilitate an increase in fee income by
generating fees from Internet service arrangements like bill presentment and clearing.
However, if smart cards or stored value cards or other electronic cash substitute gain
popularity, alternatives could become more attractive to customers.
On the other hand, banks might be able to reduce costs of servicing the retail
customers by moving them over into a paperless environment.
Banks could introduce various incentives to the persuade customers to forego paper
statements for the basic savings account and credit card, says moodys.
and the global village is a reality where the retail customer will have a choice in a
manner we may have never imagined.
Providers of retail products and services will battle for market and market share. It is
battle that will be fought at different levels and the real winner will be the customer,
who will benefit from increased competition through better products, distribution,
technology, pricing, and post transaction service.
The quality and range of products will expand exponentially convenience of usage,
customization to individual needs, and a host of other user-friendly add-ons will
create a whole new frontier of applications. Companies will have to innovate and
continuously upgrade their products. Anticipation, listening and responding to your
customers needs, will be the buzz-words of this thrust.
Distribution will be the next key benchmark of success. The customer will demand
(and therefore the provider will have to respond) for greater convenience of access to
the product or service and all this at the best cost of delivery. Re-defined methods, the
use of technology specifically the Internet-and realigned strategies will drive this
important criterion of success. Constraints of location, timing, accessibility etc will
all be history. No matter how brilliant the product you have, your distribution
flexibility will be the customers selection parameter.
Again, quality of the product and responsive strategies for distribution will also have
a link to price. Efficiencies on this front will be the next item on your report card.
Through innovation in production and delivery and cost reduction strategies, the price
to the customer will have to be at maximum benefit. The intelligent customer will be
ruthless with any price distortions, which as a consequence of inefficiencies or
market exploitation his cost benefit analysis will not allow for these variables.
Would you prefer a product, which (hopefully) is never expected to need post sale
service or one which offers the best after sale service if required ? Clearly, the
relationship with the customer starts with the transaction, does not and with it.
Organisation we have to give equal importance to cost sale needs of customers as the
pitch made prior to the sale.
Technology will perhaps be the single largest driver of this detail thrust. The entire
strategy will evolve around the absolute ability of the organisation to be at the cutting
as edge of technology. We will have to invest in technology far ahead of immediate
needs and be able to anticipate the future direction at a pace we are perhaps not used
to. Being able to keep abreast, but more importantly, being able to recognize the
immense potential that technology provides at all stages in the retail chain will be of
paramount importance. To leverage, exploit and link technology to your business will
be the greatest challenge of the new millennium and I am convinced that the retail
war will be won and lost on this one aspect, purely because technology increasingly
we influence on the entire chain in a retail business cycle.
Above all these, I would list attitude towards customer as the single point basis on
determining the winner of the race. Attitude to the customer will influence all the
areas we have discussed and will ensure excellence in each one of them. It is an
intangible, it is not prescribed in a manual nor is it a quantifiable item in the balance
sheet, but an organizations attitude to the customer will be the basis determinant of
success for any retail operation.
There are interesting and challenging times ahead the future promises a lot but will
also make extraordinary demands. The customer will be the most important aspect of
your business and ultimately the winner of the retail war.
(b)
(c)
(d)
(e)
(f)
(g)
(h)
First, what more could you be doing, and how can we work together most
effectively, to raise the level of financial capability in the UK?
Context
To begin with some context: the FSA retail agenda focuses on delivering an effective and efficient retail
market for financial services and products, and through this a fair deal for consumers. This requires:
clear, simple and understandable information provided for, and used by,
consumers;
These four pillars are closely interrelated. Our work on financial capability is complemented by our
requirements that firms provide clear information so that consumers can engage with your market,
make informed decisions and shop around; by the need for you to treat your customers fairly; and by
our risk-based supervision of individual firms, and our thematic work on particular risks and product
types.
Financial capability
Financial capability is hugely important for society more generally. Consumers are increasingly being
required to take responsibility for important personal financial decisions. These include how to make
provision for their retirement and healthcare, how to budget for day-to-day living, how to save for the
future, and what to do if they end up with high levels of debt. These decisions and money management
are made more challenging in a world of sophisticated marketing, and by the "credit culture" driven by
relatively easy access to credit both secured and unsecured - and the acceptability of high levels of
personal debt from a young age. Gone are the days when you had to make an appointment with your
bank manager to obtain a credit card.
Everyone will benefit from a more financially capable population. A society of more confident and
financially savvy consumers will be able to take better control of their money: by planning ahead,
getting general or more specific expert advice when they need it, buying products that meet their
needs, and being equipped to manage and pay back their debts.
Financially capable consumers are also a necessary element of a more efficient and effective retail
financial services market. Retail banks should benefit from lower costs as you will need to spend less
time and money selling to consumers who have become willing and well-informed buyers.
We at the FSA want to be the catalyst for delivering significant change in these areas, by providing
leadership, direction and momentum, and by coordinating the contributions from the wide range of
partners we rely on.
The major baseline survey we published earlier this year revealed in particular that people from all
sections of society are poor at planning ahead, be it for retirement or for an unexpected event; that in
addition to the half a million people already experiencing severe problems with debt, another four
million either have started to fall behind or are only just coping and could easily tip into debt repayment
problems; that many people are poor at choosing products; and that younger people, by which I mean
18-40 year olds, are less financially capable than their elders but face some of the greatest demands
on their financial capability.
Against this background, we have developed a seven-point plan to focus our efforts for delivering
change. This plan majors on improving financial capability among children and young adults to lay
strong foundations for the future; on providing employees with ready access to information in their
place of work; on targeting resources to people at critical life stages; and on the provision more
generally of relevant, user-friendly and accessible information and generic financial advice.
In schools, we want to build now on the Government's decision to give personal financial education a
prominent role in the revised National Curriculum that is to be implemented in 2008, not least by
including personal finance in the new functional maths part of GCSE Mathematics.
We want to increase the capacity of existing organisations including pfeg (the Personal Finance
Education Group), an independent charity that works with schools in England, and similar partners
elsewhere in the UK to provide teachers with help, support and advice, ahead of the curriculum
changes.
We believe that the benefits from this work will be substantial. Schools will be better able to introduce a
planned programme of personal finance education as they prepare for the revised curriculum.
Teachers will be more confident and competent in teaching personal finance education. And, most
importantly, children will leave school better equipped to manage their financial affairs. Our target is to
reach 1.8 million children in 4,000 schools over the next five years.
For young adults, the next stage of our work includes initiatives both for those in higher and further
education and for those who are not in employment, education, or training.
For those in higher education we want to roll out across the UK a very successful pilot scheme
undertaken with students at Roehampton University. We all know of the difficulties in engaging young
adults in personal finance - but all concerned with this project were encouraged to find that so many
students were willing to take part in the Roehampton 'Money Doctors' scheme, even returning early
from their holidays to attend advice sessions.
For young adults not in employment, education or training, we want to ensure that youth services
providers have appropriate materials and training to help their customers on financial matters. Working
with trusted and credible partners in government agencies and voluntary organisations, we will provide
the tools and training to deliver targeted and appropriate information to this hard to reach group of
more than one million young adults.
In the workplace, our Making the Most of Your Money programme delivers financial education through
financial information packs and seminars on issues that concern everyone, including budgeting,
borrowing, savings and planning for retirement.
Our workplace pilot work has already trialled this approach successfully. The next step is to roll out that
model to substantially more employers and their employees across the UK, beginning with large
employers in both the private and public sectors. This programme will expand during 2006/07 to
deliver materials to 200,000 employees, with 15,000 subsequently attending one-hour seminars
presented by trained personnel, mainly from financial services firms. The pilot work indicates that this
will generate considerable benefits. 90% of attendees in the pilots found the seminars useful, while
employers saw benefits in terms of increased employee satisfaction.
Over the next five years we want to deliver information packs to four million employees, and for half a
million of them to attend a seminar. Several leading banks are already active and committed members
of this programme including Lloyds TSB, HBOS and Bank of America/MBNA. They have provided
secondees to deliver the workplace initiative as well as tireless work and enthusiasm to help drive the
project forward. So many thanks to them and our other partners in these projects.
Moving on to communications, the FSA is already a major source of impartial information on financial
products and services, through our fact sheets and guides, our comparative tables, our calculators,
and a host of other web-based materials. And we have increased substantially our campaigning to
promote these materials.
Two of the most important on-line tools developed recently to assist consumers in managing their
finances are the Financial Healthcheck and the Debt Test. The Healthcheck helps consumers
understand and sort out their financial needs, while the Debt Test allows them to consider whether they
have or are likely to have any problems with their borrowing. Both tools provide useful tips for a
healthier financial lifestyle. Since their launch, the Financial Healthcheck has been used by over half a
million consumers, and the Debt Test by over a quarter of a million.
But what really matters here is not the existence of high quality tools themselves but their effective
distribution to those most in need of them. So we are investigating ways of extending these tests into
many more distribution channels. For example, although outside our remit, and not an area where we
will be making rules, would it not be a good thing if consumers applying for a personal loan or to
extend the limit on their credit card were encouraged to complete the Debt Test first?
I am pleased that HSBC and RBS already feature links to the Healthcheck and Debt Test on their
websites. The RBS Face 2 Face with Finance website has been recently launched and has made a
good start this site has driven over 2,000 extra visitors a week to our on-line tools within the first few
weeks of its launch. We are also talking to several other banks, insurance providers and other
organisations about linking to our healthcheck and debt test tools from their websites.
Helping people to understand in general terms what financial issues they need to tackle is a crucial
part of the seven point plan. We call this generic financial advice, to distinguish it from regulated or
basic advice. There is already a wide range of information and advice available, some of which, in
particular the Money Advice Trust, is heavily funded by the major retail banks. However, much of this
focuses only on those in debt. The issue here is therefore about providing more "preventative", as well
as "crisis" advice, and about encouraging people to make greater use of what is already available.
We need your expertise and support to drive forward the work on financial capability. Part of this will be
through secondees and financial support for the various initiatives that are underway. But I want to
emphasise today what you can contribute directly, through the assistance you offer your actual and
potential customers through your branches and through your websites and other consumer-facing
materials. How effectively can you deliver initiatives to promote financial capability and even to offer
generic financial advice, separately from the selling of specific products?
firms to consider for themselves how they deliver fair treatment to their customers. Ultimately, we want
to measure the success of our Treating Customers Fairly initiative by looking at the difference it makes
to your customers.
We are working towards achieving a number of outcomes for consumers. These outcomes will mean
that they:
can be confident that they are dealing with firms where the fair treatment
of customers is a key part of the corporate culture;
are sold financial services and products that have been designed to be
likely to meet their needs;
are provided with clear information and are kept appropriately informed
before, during and after the point of sale;
are provided with advice which takes account of their circumstances and
attitude to risk;
are provided with the product performance and associated service which
they have been led to expect by the firms with which they deal; and
Since the launch of our Treating Customers Fairly initiative and through our supervision of firms in the
financial services sector, including retail banks, we have seen many encouraging and positive
examples of real progress towards firms implementing a Treating Customers Fairly programme.
Most importantly, and at the highest level, the senior management of firms tell us that they recognise
the need to embed Treating Customers Fairly as a behavioural and cultural change throughout their
business, and that this is very much a senior management responsibility, not simply something to be
passed across to their compliance departments.
In many firms we have seen the establishment of clear senior management responsibilities and
project processes more generally to drive forward a decisive move towards Treating Customers
Fairly. For example, one banking group we spoke to recently has set up a Treating Customers Fairly
forum to oversee all of its Treating Customers Fairly activity. To ensure that key messages are
received at all levels of the organisation, employees are invited to sign a "Treating Customers Fairly
pledge" focused on the principles required by the firm.
In product design, we have seen a number of firms involving customer representatives and making
good use of consumer research to design simpler and better understood products. And we have seen
a general improvement in financial promotions over the last few years. Some firms have also made
good use of the results of our thematic work in areas such as equity release and payment protection
insurance to design products that can more easily be sold and advised upon in line with our
requirements. And we heard from one firm that its improved product design procedures had resulted in
three unsatisfactory new products being dropped, that would otherwise have reached the market.
We have seen more firms carrying out mystery shopping of their sales and advice processes, and
using other techniques, to assess the fair treatment of their customers and to identify areas of
customer concern.
On staff remuneration we have seen an increasing number of firms reducing the emphasis on
commissions and sales targets. They now favour including a larger element of remuneration based on
core salary, on measures of customer satisfaction, and on internal reviews of the quality of the service
provided to customers.
Staff training and internal communications also contain an increasing element of Treating Customers
Fairly. Some time ago now, I was pleased to see, while waiting for a meeting with a major banking and
insurance group, a copy of that groups in-house magazine with Treating Customers Fairly
emblazoned across the front cover. Of course, as a cynical regulator, I wondered whether that was the
only copy, placed there especially for me, and I did not have time to read what was inside. But to be
fair, I have to say that I found the front cover immensely gratifying, proving as it did not only that the
group was trying to embed the Treating Customers Fairly culture into its people, but also that it was
possible to do this using the same words that we have been using.
In the context of mortgage endowments we have seen improvements in complaints handling
procedures. We have also seen more firms analysing complaints to identify and to correct the root
causes, and thus to change procedures so as to reduce the number of complaints received in the first
place.
So there are many examples of good practice, but there is still a long way to go. We recognise the
scale of the challenge firms face in trying to embed the principle of Treating Customers Fairly within all
that they do. But in some firms there is still no clear articulation from senior management of what
Treating Customers Fairly means for the business; no allocation of responsibility within the firm for
implementing any initiatives to meet the Treating Customers Fairly requirement; and little or no staff
understanding of what the principle means in practice.
It is not just in the smaller and medium-sized firms that there is further to go. We recently visited a
major banking group and found a general air of complacency and defensiveness around the firm on
Treating Customers Fairly - even though it had no discernible Management Information to justify this
complacency. Our view of the customer experience at this firm was that it was not at all customerfriendly and less than half of client files reviewed showed clear evidence of product suitability for the
customer. Customer communications were also of a generally low standard.
Some firms have not addressed their product design procedures either, and clearly need further
encouragement before they think about either the information they provide to their distribution
channels, be they in-house or third party, or about customer testing their consumer-facing product
literature. We have found firms where staff remuneration continues to be dominated by commissions
and other volume-related incentives; and where no attempt is being made to collect any management
information on whether customers are being treated fairly or not. And there is still a long way to go
before firms develop convincing management information to show whether they are indeed treating
their customers fairly.
There can also be a disconnect between the good intentions of senior management and the behaviour
of their customer-facing staff. We continue to find a worrying number of practical examples where
customers are not treated fairly. For example, in the course of our thematic work over the last year or
so we have found: financial advisers giving poor quality advice to consumers on equity release
products; a range of issues with both the content and provision of disclosure documentation, for both
mortgage products and for the initial disclosure and menu documents following depolarisation; and
poor selling practices and a lack of proper compliance controls among a sample of firms selling
payment protection insurance, where we found firms selling policies to customers who were not
eligible to claim on them and firms that did not clearly explain the price of the policy or the main
exclusions and limitations of the policy to their customers.
Much of our thematic work and some firms have told us that our findings match the results of their
own compliance and mystery shopping reviews therefore suggests that in many firms the Treating
Customers Fairly initiatives begun by senior management have yet to deliver improvements further
down the organisation, and are therefore yet to deliver benefits to customers.
Even those firms who have made substantial progress in implementing Treating Customers Fairly
within their business would be among the first to agree that it will take time to move from the
implementation stage to the embedding of Treating Customers Fairly throughout all levels of the firm. It
takes a long time to change the culture of a firm. So we and you should be cautious before being
tempted to declare victory too early.
A final thought here. A number of retail banks have announced that they want to simplify and reduce
their product range. That is a challenge in itself! And some have told us that they are keen to explore
the possibility of introducing a more straightforward advice regime linked to simple products that will be
rolled out both in branches and on the internet. It is not for us to determine market structure, but we
are keen to facilitate innovation. And when we consulted on the basic advice regime for stakeholder
products we mentioned the possibility of extending a basic advice type of approach to a wider range of
simpler products. So if you are thinking along these lines please let us know.
processes or procedures. Indeed, the increasing emphasis we have placed on Treating Customers
Fairly over the last few years has made it one of the forerunners of our move to a more principlesbased approach to regulation.
Equally, the questions asked of our emphasis on the Treating Customers Fairly principle over recent
years reflect the questions asked of our move to a more principles-based approach more generally.
Let me address some of these questions this afternoon.
First, why do we want to be more principles-based? It is because we see real benefits for firms,
markets and consumers in shifting the balance towards a more principles-based approach. We want to
provide firms with more flexibility to decide for themselves how best to run their businesses, while
remaining compliant with our regulatory objectives. Firms who seriously commit to a set of outcome
based principles should be well placed to judge the detail of how best to deliver those outcomes in the
marketplace. We want to align good regulation more closely with good business practice. For example,
firms can deliver fair treatment to their customers in a way which is aligned to their commercial
objectives in terms of customer service and retention. And we want to provide greater clarity about the
outcomes that really matter to us and to engender a shared appreciation of the regulatory outcomes
we are seeking to achieve. So the focus shifts from the means to the end.
This in turn should benefit consumers, if firms focus more on outcomes that are consistent with our
regulatory objectives, and if they use greater flexibility to deliver these good outcomes for consumers
more effectively.
Second, in a more principles-based approach, how do we provide clarity about the minimum standards
to be met? How should firms interpret the Principles? How can we provide sufficient predictability? In
part the answer to this is that detailed rules will not disappear entirely. Some will be necessary to
address the imbalance in the retail market between a firm and a customer, and in particular to ensure
that consumers receive clear, simple and understandable information about financial products and
services. And many detailed rules will remain because we have to implement EU Directives.
Another source of predictability is to supplement the Principles through various forms of guidance to
firms what we call small g guidance sitting outside our Handbook of Rules and (big G) Guidance.
In our work on Treating Customers Fairly, firms have welcomed the statements of good practice and
the case studies we have published to illustrate our interpretation of what the Treating Customers
Fairly Principle means in practice.
We are also looking to make even greater use of industry codes and guidelines, and are revisiting how
far we can accept that a firm following such codes and guidelines meets our minimum standards in
that area. There are significant challenges to making greater use of industry solutions, and we do not
intend simply to replace FSA rules with codes and guidance issued by trade bodies, or to proceed
without input from consumers and other interested parties. However, we do see appropriately
formulated industry codes and guidance as a means to help firms understand how to comply with our
high level rules, and we want to make progress here.
We also accept that as all of this material proliferates we need to do more to bring it together in a
consistent and coherent manner so that our interpretation of the minimum standards implied by our
Principles is clear to all. This material needs to be readily accessible, so that the flexibility we want to
achieve with a more principles-based approach is not at the expense of confusion or a lack of clarity.
Third, what does being more principles-based mean for the relationship between us and those we
supervise? In large part the answer to this is that we all need to exercise more judgement. For us, this
means making informed judgements based on a good understanding of firms, their customers, and of
the markets in which they operate. And in forming judgements about outcomes, it means seeking a
broad degree of consistency in terms of the outcomes that firms deliver in particular with respect to
how they treat their customers rather than consistency in detailed requirements about processes. As
I have already mentioned, in a more principles-based approach firms will be able to adopt different
approaches to an issue but with a reasonably common outcome. We recognise the demands that
making these judgements will place on our people and we fully intend to recruit and develop the
people we require to meet these demands.
For firms, a more principles-based approach requires them to make judgements as well. It means a
greater focus on senior management responsibility to deliver outcomes in line with our Principles,
rather than a compliance department led emphasis on meeting detailed requirements. And it means a
firm being able to demonstrate that these outcomes are being delivered. I have already welcomed the
significant shift in this direction over the last year or two as firms have addressed the Treating
Customers Fairly Principle.
Fourth, what does a more principles-based approach mean for enforcement? Let me say immediately
that we are not looking to take more enforcement actions for their own sake, and we are absolutely not
looking to catch firms out by finding some aspect of their behaviour that falls short of meeting 100% of
every Principle at all times. And I should note that we can and do already take enforcement action on
the basis of our Principles alone. For a firm to be judged as having breached a Principle then, as with
any of our rules, it must be possible to predict, at the time of the action concerned, whether or not it
would be a breach. Where the requirement of predictability is met it is legitimate for consequences to
follow a breach even though the Principle is expressed in general terms.
For example, in the context of Treating Customers Fairly I have stated before that where we find that a
firm is failing to treat its customers fairly, we consider the most suitable course of action. In many
cases, we will agree with the firm a means of addressing shortfalls including, where necessary,
providing redress to consumers. In some cases, failure to treat customers fairly may lead to
enforcement action; in particular where a firm has not responded to indications of a problem, has failed
to identify shortcomings and to develop a strategy to remedy them, and has committed a serious
breach of the Principle. But we do not expect to take enforcement action if we see that firms are
making a genuine attempt to deliver on what Treating Customers Fairly means for them and there has
not been significant risk or actual detriment to consumers.
Time does not allow me to cover all aspects of moving to a more principles-based approach. But let
me assure you that we understand and appreciate your concerns about what a more principles-based
approach means. We recognise that we need to establish an environment that firms find reliable and
predictable; where communications from us are relevant, clear and timely; and where our people have
the experience, expertise and skills to make sensible, informed and proportionate judgements. We are
also clear about the opportunities and challenges for you under a more principles-based approach.
TECHNOLOGY ISSUES:
Retail banking calls for huge investments in technology. Whether it is
setting up of a Customer Relationship Management System or
Establishing Loan Process Automation or providing anytime,
to
remember
that
Citibank,
known
for
its
ORGANIZATIONAL ALIGNMENT
It is of utmost importance that the culture and practices of an
institution support its stated goals. Having decided to take a plunge
into retail banking, banks need to have a well defined business
strategy based on the competitive of the bank and its potential.
Creation of a proper organization structure and business operating
models which would facilitate easy work flow are the needs of the
hour. The need for building the organizational capacity needed to
achieve the desired results cannot be overstated.
This would mean a strong commitment at all levels, intensive
training of the rank and file, putting in place a proper incentive
scheme, etc. As a part of organizational alignment, there is also the
need for setting up of an effective Corporate Marketing Division.
Most of the public sector banks have only publicity departments and
not marketing setup. A fully fledged marketing department or division
would help in evolving a brand strategy, address the issue of
alienation from the upwardly mobile, high net worth customer group
and improve the recall value of the institution and its products by
arresting the trend of getting receded from public memory. The much
needed tie-ups with manufacturers/distributors/builders will also
facilitated smoothly. It is time to break the myth PSBs are not
PRODUCT INNOVATION
Product innovation continues to be yet another major challenge.
Even though bank after bank is coming out with new products, not all
are successful. What is of crucial importance is the need to
understand the difference between novelty and innovation? Peter
Drucker in his path breaking book: Management Challenges for the
21stCentury has in fact sounded a word of caution: innovation that
is
not in tune with the strategic realities will not work; confusing novelty
with innovation (should be avoided), test of innovation is that it
creates value; novelty creates only amusement. The days of selling
the products available in the shelves are gone. Banks need to
innovateproducts suiting the needs and requirements of different
types of customers. Revisiting the features of the existing products to
continue to keep them on demand should not also be lost sight of.
PRICING OF PRODUCT
The next challenge is to have appropriate policies in place. The
industry today is witnessing a price war, with each bank wanting to
have a larger slice of the cake that is the market, without much of a
scientific study into the cost of funds involved, margins, etc. The
customer friendly. The attention is to be diverted to vast
databases of
customers lying with the PSBs till unexploited for marketing.
PRODUCT INNOVATION
PRICING OF PRODUCT
The next challenge is to have appropriate policies in place. The
industry today is witnessing a price war, with each bank wanting to
have a larger slice of the cake that is the market, without much of a
scientific study into the cost of funds involved, margins, etc. The
strategy of each player in the market seems to be: under cutting
others and wooing the clients of others. Most of the banks that use
rating models for determining the health of the retail portfolio do not
use them for pricing the products. The much needed transparency in
pricing is also missing, with many hidden charges. There is a
tendency, at least on the part of few to camouflage the price. The
situation cannot remain his way for long. This will be one issue that
will be gaining importance in the near future.
There
is
situation cannot remain his way for long. This will be one issue that
will be gaining importance in the near future.
PROCESS CHANGES
Business Process Re-engineering is yet another key requirement for
banks to handle the growing retail portfolio. Simplified processes and
aligning them around delivery of customer service impinging on
reducing customer touch-points are of essence. A realization has to
drawn that automating the inefficiencies will not help anyone and
continuing the old processes with new technology would only make
the organization an old expensive one. Work flow and document
management will be integral part of process changes. The
documentation issues have to remain simple both in terms of
documents to be submitted by the customer at the time of loan
application and those to be executed upon sanction.
of
intensive
emphasizing,
coaching
training
on
etiquette,
products
good
and
manners
processes,
and
best
of
intensive
emphasizing,
coaching
training
on
etiquette,
products
good
and
manners
processes,
and
best
RURAL ORIENTATION
As of now, action that is taking place on the retail front is by and large
confined two metros and cities. There is still a vast market available
in
rural
India,
which
remains
to
be
trapped.
Multinational
CUSTOMER SERVICE
of
will
make
the
difference.
etc..
For the SIB (Small Industry and Business) sector banks, the focus
should be on identifying efficient units and allocations of loans lo
these units. These banks should try Merchant Banking services en a
small
scale.
sector.
traders who are the major customers for drafts issue. Provision for
cash counting machines in these branches will reduce the monotony
of cashiers and unnecessary delays, thus resulting in better
productivity
and
ultimately
in
improved
customer
service.
The personal segment is however the most important one. With the
urban segment moving away because of disintermediation and
competition from foreign banks, retail banks should focus en the
rural/semi-urban areas that hold the maximum potential. Innovative
schemes like "paper-gold" schemes can be introduced. In the urban
areas, private banking to affluent customers can be introduced,
through which advisory and execution services could be provided for
a fee. Foreign currency denominated accounts can also be
introduced
for
them.
Nationalized banks compare very poorly with the foreign banks when
it 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 arc communicated fast.
Make sure that the officials as well as the staff are fully
aware of the
rules so that processing is faster.
TECHNOLOGY
strength which cannot be done away with. Besides, in the rural and
semi-urban areas, customers will not be at home in an automated,
impersonal
environment.
decision
making.
be
put on acquiring new customers and saves time of the bank. Among
the
it
the
BIBLIOGRAPHY
www.retailbanking.com
www.google.com
www.wikipedia.com