Retail
Banking – Introduction, Advantages and Disadvantages
Retail banking is a major form of commercial
banking but mainly targeted to consumers rather than corporate clients. It is
the method of banks' approach to the customers for sale of their products. The
products are consumer-oriented like offering a car loan, home loan facility,
financial assistance for purchase of consumer durables, etc. Retail banking
therefore has large customer-base and hence, large number of transactions with
small values. It may therefore be cost ineffective in a highly competitive
environment. Most of the Rural and semi-urban branches of banks, in fact, do
retail banking. In the present day situation when lending to corporate clients
lead to credit risk and market risk, retail banking may eliminate market risk.
It is one of the reasons why many a wholesale bankers like foreign banks also
prefer to go for consumer financing albeit for marginally higher net worth
individual.
Advantages
of Retail banking: Advantages of Retail Banking are given below
a) Retail
deposits are stable and constitute core deposits.
b) They are
interest insensitive and less bargaining for additional interest.
c) They
constitute low cost funds for the banks.
d) Effective
customer relationship management with the retail customers built a strong base.
e) Retail
banking increases the subsidiary business of the banks.
f) Retail
banking results in better yield and improved bottom line for a bank.
g) Retail
segment is a good avenue for funds development.
h) Consumer
loans are presumed to be of lower risk and NPA perception.
i)
Retail banking helps economic revival of the
nation through increased production activity.
j)
Retail banking improves lifestyle and fulfils
aspirations of the people through affordable credit.
k) Innovative
product development credit.
l)
Retail banking involves minimum marketing
efforts in a demand-driven economy.
Disadvantages
of Retail Banking: Disadvantages of Retail Banking are given
below:
a) Designing
own and new financial products is very costly and time consuming for the bank.
b) Customers
now-a-days prefer net banking to branch banking. The banks that are slow in
introducing technology-based products, are finding it difficult to retain the
customers who wish to opt for net banking.
c) Customers
are attracted towards other financial products like mutual funds etc.
d) Though
banks are investing heavily in technology, they are not able to exploit the
same to the full extent.
e) A major
disadvantage is monitoring and follow up of huge volume of loan accounts
inducing banks to spend heavily in human resource department
f) Long term
loans like housing loan due to its long repayment term in the absence of proper
follow-up, can become NPAs.
Wholesale
Banking
Wholesale or corporate banking refers to
dealing with limited large-sized customers. Instead of maintaining thousands of
small accounts and incurring huge transaction costs, under wholesale banking,
the banks deal with large customers and keep only large accounts. These are
mainly corporate customer. Wholesale banks are mainly engaged in financing,
underwriting, market making, consultancy, mergers and acquisitions and fund
management.
Retail Banking Vs Wholesale banking
a) Retail
banking refers to that banking which targets individuals and the main focus of
such banks is retail customer whereas wholesale banking refers to that banking
which targets corporate or big customers and their main focus is providing
services to corporate clients.
b) Ticket
size of loans given in retail banking is low and due to it impact of NPA will
be less pronounced due to diversification as compared to wholesale banking
where ticket size of loan is very high and due to it impact of NPA is more
pronounced.
c) Loans such
as car, housing, educational, personal loans are some of the examples of loans
given in retail banking whereas loans such as loan for setting industry,
machinery advance, export credit are some of the examples of loans given in
wholesale banking.
d) Monitoring
and recovery if the loan turn out to be NPA in retail banking is more difficult
because customer base is wide whereas in case of wholesale banking due to low
customer base it is easy to monitor as well recover the loan given to
customers.
e) Cost of
deposit is low in retail banking because retail customers do not have the
bargaining power due to less deposit with them whereas in case of corporate
customers banks have to offer them high interest rates in order to attract
funds from them.
f) Retail
banking requires large network of branches in order to cater to large customer
base and hence it results in high operational costs while in case of wholesale
banking small number of branches is sufficient to cater to corporate clients.