What, Why and How of Retail Banking: Issues and Challenges

Nice speech from Dr KC Chakrabarty of RBI.

He gets to basics of banking and how the banking system has evolved over the years:

Before we broach the subject of retail banking, let me begin by elucidating what is banking. You must be wondering why I am getting down to the basics. Believe me this has a purpose. We all understand ‘traditional’ banking as the process of financial intermediation wherein the bank acts as an intermediary between the savers and the borrowers. It accepts deposits for the purpose of making loans to the borrowers as also facilitates payments as part of the country’s payment and settlement systems. The banking industry has, however, undergone a lot of transformation over the last three decades. The banks have become a virtual marketplace offering among others, various non-banking financial products and services to the customers. Besides the traditional sense in which banking is understood, I consider banking as an activity of offering other products and services by the banks to their own customers. My emphasis on the word ‘own’ is not incidental. In developed markets, banks do not offer products and services to their customers unless they have conducted due diligence on the customer in terms of KYC/AML framework. While in the emerging markets, we have certain relaxed KYC norms for ensuring financial access to the unbanked population, if we have to give a significant push to retail (mass) banking, we would need to not only know the customers, but also their business and risks associated with their business.

In the developed markets, banking over the years has evolved through following three distinct phases. These three phases broadly coincide with the level of development in the real economy in the respective jurisdictions.

a) Initial Phase: During this phase the banks were primarily engaged in offering the basic intermediation service i.e. provision of savings facilities and credit for productive purposes and also facilitate payment services including remittances

b) Intermediate Phase: Apart from providing the services offered in the initial phase, the banks additionally moved into lending for consumption purposes. The banks also started offering certain para-banking services like insurance etc. The demand for such services arises primarily on account of a transition of the economy from an investment (production) led growth phase to a consumption led growth phase. At this stage of development of the economy and the society, retail banking becomes relevant.

c) Advanced Phase: Apart from providing the services offered in the intermediate phase, the banks have additionally started providing high-end savings & investment products, wealth management products, and structured products to both individuals and corporates. In other words, in this phase, the banking system additionally starts supporting the speculative activities over and above for the production and consumption activities. Private banking, an advanced version of retail banking for ‘classes’, becomes relevant at this stage.

Nice bit..

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