The Indian economy witnessed a decline in credit to the industrial sector from 12.8% in 2014 to 2.7% in 2016, on account of economic slowdown due to supply-side constraints. The poor growth of credit to this sector continued in FY17 as well. On the contrary, credit to retail sector has witnessed a rising trend in the last few years from 12.5% in 2014 to 19.36% in 2016. In 2017, this trend continued. This is mainly because, corporate loans are directly affected by industrial slowdown and policy level structural issues, the retail credit has not been severely hit. Further, lending to retail has some comparative advantage vis-à-vis corporate lending. These are (i) higher yield of retail loan as compared to corporate loans (ii) distribution of risk among large number of retail customers (iii) pre-qualified data bank for multi product sales including low cost deposits (iv) limited value at risk in view of lower size of the retail loan as compared with corporate loan, leading to lower quantum of NPAs and stressed assets in general.
Though retail lending has some advantages, there are challenges too. The major challenge is “customer retention”. Due to ample source of easy finance availability, retail customers are in general very vulnerable to shift. Thus, maintaining loyalty of customers is considered to be the most critical challenge. As per a research study by Reicheld and Sasser in the Harvard Business Review, a mere 5% increase in customer retention can increase profitability by 35% in the banking business, 50% in insurance and brokerage, and 125% in consumer credit-card market. Thus, banks need to put more emphasis on retaining their customers in order to increase profitability. As retention of customer is key to success in retail, banks need to adopt some exclusive strategies:
Customer segmentation: Banks need to first bifurcate all the retail customers into two segments—“mass-retail banking” and “class-retail banking”. The mass retail banking is the stage in which bank provides standardised banking products and services to its customers. While satisfying these types of customers by offering basic services at comparatively lower prices with minimum customer complaints, banks can generate stable flow of income. However, in order to maximise income, banks need to give more attention on its class-retail banking customers, by focusing solely all its niche customers though various innovative products and personalised services. Banks need to design and innovate financial products which are easy to understand and simultaneously meet the financial goal of its target customers. Through the data analytics, banks need to capture all their target customers’ consumption pattern based on consumer behavior analysis. Accordingly, they need to device some lifecycle-lifestyle product approach, which needs to be offered at various stages of customer life cycle. These measures will keep customer engaged and always loyal to the bank.
Cost-effective delivery mechanism: As retail is a volume game, where banks need to serve a large number of small value customer on pan-India basis, a cost-effective delivery mechanism needs to be developed. Though e-banking has already picked up in India, it is pertinent to note that amongst all the e-channels, “mobile banking” is the most cost-effective, fastest and widely covered delivery channel. Banks need to constantly renovate various customer-friendly mobile applications for fast, cheap and convenient mode of delivery to their customers.
Robust risk management system: As retail banking is mainly transaction and volume oriented, where banks need to deal with huge number of customers on daily basis, retail banking would be obviously prone to operational risk in the form of transaction error, accounting error, processing error, misselling, AML, business disruption and system failure, etc, to retain customer loyalty, banks need to improve their operational efficiency by mitigating operational risk through robust risk management system and processes where customer grievances have to be resolved through fast track customer grievances mechanism system. Apart from this, in order to select the target customers, banks need to customise their own scoring model, where more weightage should be given on primary information about the borrower, viz, past-track record, sources and nature of income, frequency of purchases, type of purchases, loan default history (if any), nature of liability vis-a-vis assets and degree of cash, collateral security offered for the loan.
Though retail lending has increased significantly in the past, however, the future of this sector still looks brighter considering the factors like (i) increasing per capita income (ii) growing consumerism on account of higher marginal propensity to consume (iii) demographic changes in favour of younger population (around 70% population in under 35 years of age) leading to more demand for retail loan and (iv) facilitating measures such as fiscal incentives for housing, easy access to personal loans, flexible repayment schedule of loan, increasing number of shopping malls, retail outlets and widespread eye catching innovative advertising. It is interesting to note that still aggregate retail loans constitute less than 10% of GDP in India, compared to nearly 35% in other Asian economies such as South Korea (55%), Taiwan (52%), Malaysia (33%) and Thailand (18%). There is huge untapped potential of retail lending in India. Further, the latest report also says that the outlook for 2017-18 has been brightened due to various factors like accelerated pace of re-monetisation and reduction of lending rates by banks, improvement in consumer confidence index. All these will have a favourable impact on disposable income on India’s mass population, which will boost consumption expenditure and thereby further scope for retail lending for banks. Though opportunities are ample, the competition is also stiff especially in Tier 1 locations where concentration of more banks are there.